It's surprising how often executives and boards make decisions that defy their own intuition about what creates lasting shareholder value. Market pressure, new financial engineering techniques, and misconceptions dressed as conventional wisdom all conspire against them. As the financial crisis of 2008 revealed, such misconceptions can damage companies and even the economies of entire countries.

In their new book, VALUE: The Four Cornerstones of Corporate Finance, (Wiley, $29.95) three partners at McKinsey, Tim Koller, Richard Dobbs, and Bill Huyett, provide a clear explanation of what drives corporate value creation—and what doesn't—offering Boards, CEOs and other senior executives a stable basis for making sound strategic and financial decisions, allowing them to buck current fads and pressure from various stakeholders.

VALUE draws on research from the definitive reference on corporate finance and value creation, McKinsey's Valuation: Measuring and Managing the Value of Companies which has sold over 500,000 copies around the world. In choosing to write VALUE, the authors realized there was an overwhelming need for a more accessible work to guide senior executives and board members through the quagmires of strategy formulation, business portfolio configuration, and decisions about mergers and acquisitions.

The advice presented in VALUE is based on what the authors call the Four Cornerstones of Corporate Finance:

The core of value: Companies create value by investing cash now to generate more cash in the future. And the faster they can grow their revenues and invest more capital at attractive rates of return, the higher those cash flows will be. In short, the combination of growth and return on invested capital drives value and value creation. One might expect universal agreement on how to measure and manage value, but this isn't the case - as many executives, boards, and others still focus almost obsessively on earnings and earnings growth.

The conservation of value: This is a corollary of the first cornerstone: anything that doesn't increase cash flows doesn't create value. Value is conserved, or unchanged, when a company simply shifts the ownership of claims to cash flows, such as when substituting debt for equity or issuing debt to repurchase shares. Similarly, changing the appearance of the cash flows without actually changing them, by switching accounting techniques, for example, doesn't change the value of the company.

The expectations treadmill: The third cornerstone concerns the stock market: a company's stock market performance is driven by changes in the stock market's expectations, not just the company's actual performance. In other words, the higher the stock market's expectations for a company's share price become, the better the company has to perform just to keep up. This explains why even for the extraordinary manager, it can be extremely difficult to keep beating high share-price expectations. And why managers of companies with low performance expectations might find it easy to earn a high total return to shareholders, at least for a short time.

The best owner: The fourth cornerstone states that the value of a business depends on who owns or manages it, because different owners will generate different cash flows from the same business based on their unique abilities. Some, for instance, add value through linkages with other activities in their portfolios, such as sharing sales channels or production infrastructure. Others add value by replicating such distinctive skills as operational or marketing excellence. Some owners may add value by providing better governance and incentives for the management team. These are just a few examples of the ways that the best owner increases value.

After presenting The Four Cornerstones of Corporate Finance, the authors then show how understanding these principles clarifies why, for example:

• Growth isn't always the key to value creation, despite the business world's obsession with it.
• Share repurchases, currently much in favor, rarely create value.
• Companies and investors should spend less time worrying about earnings guidance.
• The voices of a certain minority of investors should be heeded, and the rest should be ignored.
• Near-term changes in a company's market valuation - often used to assess corporate performance and management compensation - are mostly due to factors beyond executives' control.
• Earnings are inevitably variable, so trying to smooth them is a fool's game.
• Divesting high-performing businesses can create more value than retaining them.
• Predicted earnings per share accretion or dilution is no indicator of an acquisition's potential to create value.

As the authors make clear, it is their hope that VALUE will be a catalyst and concrete guide for improving how executives plan strategy, make decisions, and build the next generation of leaders. "It's one thing for a CFO to understand the mathematically based laws of valuation and apply them to the tools and processes that drive company performance. But it's more powerful still when CEOs, board members, and other non-financial executives understand the principles and practices of value," says co-author Tim Koller. "Companies dedicated to value creation are more robust and build stronger economies, higher living standards, and more opportunities for individuals."

McKINSEY & COMPANY is a global management consulting firm that helps leading private, public, and social-sector organizations make distinctive, lasting, and substantial performance improvements. With consultants deployed from more than 90 offices in over fifty countries, McKinsey advises companies on strategic, operational, organizational, financial, and technological issues.

TIM KOLLER leads the firm's research activities in valuation and capital market issues. He advises clients globally on corporate strategy, capital markets, M&A, and value-based management. Tim is a coauthor of Valuation: Measuring and Managing the Value of Companies.

RICHARD DOBBS is a director of the McKinsey Global Institute, the firm's business and economics research arm. He advises Korean and other Asian companies and governments on strategy, economics, and M&A issues. Richard is an associate fellow of University of Oxford's Said Business School.

BILL HUYETT advises clients in healthcare and other technology-intensive industries on corporate strategy, M&A, product development and commercialization, and corporate leadership. He is also a leader in the firm's corporate finance practice. Bill is active on several not-for-profit boards in basic life sciences research.