chapter  4
27 Pages

The controls configuration

As its name clearly implies, the focus of the corporate centre in the controls configuration is on establishing excellent control processes that add value to the businesses within the group.This means that the dominant skills at the relatively small, indirectly involved centre will be financial management so that stretching, but not completely unrealistic, targets can be set and appropriately tailored, but primarily financial, performance measures established. The best examples of this shareholder style of corporate centre develop world leading expertise in this area of governance so that the costs incurred at the centre are easily outweighed by the improved performance of the underlying businesses.These issues are re-shown in Figure 4.1. A classic characterisation of the controls configuration is therefore

a small, financially focused corporate centre controlling a portfolio of relatively independent business units. The centre exercises tight financial control despite its indirect involvement in these autonomous units and is normally only concerned with the end results (both promised and achieved) rather than with the detailed competitive strategies implemented by each business. The only common benefit holding this type of group together is that all the individual business units can improve their financial performance by applying the disciplines, processes and controls that have been identified or developed by the corporate centre. This means that highly successful groups in this configuration can contain a very diverse range of businesses. Consequently an additional key role for the corporate centre can

be to alter the composition of the group through both acquisitions and divestment. Divestments can be an essential component of the

development of these groups as is clarifiedbelowanddeveloped later in this chapter. Quite often, the majority of the potential value added by groupmembership is generated very rapidly after the business becomes part of the group and the corporate centre imposes its financial disciplines through its planning and control system. This involves tight financial controls over expenditures and stretching performance targets, which are closely aligned to the incentive schemes of senior business unit managers. The business unit’s managers rapidly become very focused on delivering what their new corporate centre wants, or they leave the group. This may cause the new business unit to modify its existing competi-

tive strategy and this can include divesting itself of, or closing down, any under-performing elements of its own portfolio. As the focus of the shareholder style corporate centre often tends to be on the shortterm financial performance of its businesses, this can lead to new business units refocusing away from any major investments in longer-term growth where the expected financial return will be deferred and the risk profile is relatively high. Thus there can be a significant step change improvement in the

financial performance, often in terms of both profits and cash flow generation, quite soon after acquisition. This is particularly the case if the corporate centre had identified perceived flaws in the existing competitive strategy of the target prior to the acquisition. Of course, many of these corporate centres are therefore actively searching for businesses where they believe that they can add value through their governance expertise.