Why Boards Misallocate Capital: Nick Curum on Risk Modeling Gaps

In a recent LinkedIn post, Nick Curum highlights a critical disconnect in how major investment decisions are evaluated by corporate boards. Curum argues that boards often approve investments based on a “modelled version” of risk, rather than the “real risk profile,” leading to significant capital misallocation.

Curum points out that while strategy teams are often aware of significant potential exposures, these risks frequently fail to be incorporated into the financial models used for board approval.

“Most boards are not approving the real risk profile of major investments. They are approving the modelled version of it. And those are not the same thing.”

The core of Curum’s argument is that the investment case tends to focus on risks that are easily quantifiable, such as demand fluctuations, project delays, or interest rate changes. This, he contends, leaves out potentially more impactful risks that are harder to model.

The Gap Between Strategy and Financial Modeling

Curum elaborates on how strategic risks, though discussed and documented, often disappear from the approval process because they don’t directly translate into the numbers presented in financial models. He identifies common strategic exposure areas that fall into this gap:

• Tariffs
• Policy shifts
• Supply chain disruptions
• Market access constraints

As Curum notes, these issues are acknowledged during strategy discussions but are then excluded from the quantitative analysis that drives investment decisions.

“Because it never makes it into the numbers. So the investment case ends up testing what is easy to model: Demand. Delay. Rates. And leaving out what may matter most.”

This selective inclusion of risks, Curum suggests, is the primary reason for capital misallocation. It’s not a matter of unknown risks, but rather of risks that were never formally integrated into the decision-making model.

The Handoff Problem

Curum identifies the handoff between strategy, finance, and the board as a key point where this disconnect occurs. He emphasizes that any risk that has the potential to impact cost, revenue, timing, or market access should be treated as a critical input, not mere commentary.

“If a risk can move cost, revenue, timing, or access, it is not commentary. It is an input.”

To address this, Curum proposes eight checks that should be conducted before any investment is approved. While not detailed in the post, he implies these checks are designed to ensure that all significant known risks are properly accounted for in the financial projections.

A Call for Deeper Board Scrutiny

Curum concludes by posing a crucial question that boards should ask themselves before casting a vote on major investments:

“Which known strategic risk is still sitting outside the numbers?”

By forcing a consideration of risks that are currently outside the quantitative models, Curum believes boards can move towards more robust and accurate capital allocation decisions, ultimately mitigating the potential for costly missteps.