South China Morning Post
Joseph Ngai
October 13, 2008

From their scrappy entrepreneurial roots, Asia's multibusiness conglomerates have leveraged off a combination of well-timed decisions, privileged relationships, and a good dose of hard work in their rise to power.

Today, these titans of industry wield enormous control over key industries that drive the region's economies, from manufacturing to shipping to banking.

Yet increasing competition, leadership succession issues in family-owned businesses, and uncertainty in the global economy are casting a shadow over their prospects. At the heart of the matter is the corporate center responsible for tying together all the disparate pieces.

Traditionally designed to exercise financial and legal oversight over the group, most corporate centers today lack the authority and managerial expertise needed to provide meaningful strategic direction to the subsidiaries. For instance, while most conglomerates have pursued acquisitions during various stages of their development, few have the ability or mandate to make strategic decisions regarding their business portfolio. Many corporate centers take the current mix of businesses in their portfolio as a given.

Few actively determine how much of the group's profits should be generated by their "cash cows" against less profitable but faster-growing businesses with greater medium- and long-term potential, and what strategic moves they need to make in the short term to reach their goals.

Without more active management of the portfolio firms, most conglomerates end up with a business mix that is the result of past decisions rather than a strategic choice that makes sense for long-term success.

For example, many conglomerates still hold on to underperforming subsidiaries, preferring to subsidize their losses rather than scrapping them entirely from their portfolio. Corporate centers also come up short in depth and breadth of management experience. Compared with the management teams at the subsidiaries, executives at the center often lack the industry-specific knowledge and managerial experience to exercise meaningful oversight. Without a proper dialogue with the subsidiaries, it is no wonder that most centers end up as simply consolidators of financial data and public relations managers.

There are a number of initiatives that Asia's conglomerates can take to maximize the value of the group.

First, the corporate center needs to move from playing a largely passive accounting and legal function to assuming a much more active, strategic role. This includes managing the portfolios of subsidiaries in a more strategic manner, including pursuing complementary acquisitions as well as divestitures at the right time.

In this, we believe that conglomerates can learn a lot from private equity firms.

Private equity firms have proved to be a lot more savvy in managing their portfolios (mostly with regard to the entry and exit of portfolio companies) as well as in driving value as active owners.

Second, corporate centers need to invest in recruiting and rewarding top-flight talent at the holding level. Most Asian conglomerates' corporate centers today do not have the right caliber of talent to properly manage their sprawling subsidiaries. There are some signs of change, though.

For example, Temasek Holdings recruits industry-specific experts and former bankers to a "value-management team" and deploys personnel on the boards of each of the company's subsidiaries.

Third, and perhaps most critical, centers need to gear their culture toward managing the performance of their subsidiaries. This includes defining and achieving clearly defined performance targets as well as aligning the compensation and consequence for management for achieving or missing performance targets. The most successful corporate centers maintain a tough dialogue with their subsidiaries to make sure they meet their targets.

Joseph Ngai is a partner in McKinsey's Hong Kong office.