Most corporate centers at multibusiness companies are struggling to justify their existence today. Many business-unit managers will say that group functions and group-level bosses are often more hindrance than help. As a consequence, boards and corporate-level managers are frequently unsure how best to fulfill their corporate-parenting function. Should they intervene more actively in their portfolio of businesses in order to add value? Or should they hold back and allow for more autonomy? How precisely should they organize the relationship between the center and the businesses? And which corporate activities should they focus on? In short, what should be their parenting strategy?
The stakes involved in coming up with the right answers to these questions are high. The wrong parenting strategy can undermine entrepreneurship in the business units and severely degrade their value-creation potential. By contrast, an effective parenting strategy can create a situation in which the whole really is bigger than the sum of the parts and can deliver a valuation premium for a multibusiness company. And when a company’s parenting strategy is an especially good fit with the needs of its business units and the dynamics of its competitive environment, a company can earn a parenting advantage—in which the corporate center not only adds more value to the business units in its portfolio than it destroys but also adds more value than any other potential owner of the business.
To identify successful parenting strategies of multibusiness companies, BCG has been studying the value-adding and value-destroying activities of such companies worldwide. The centerpiece of this research is a survey on the sources of corporate value creation that we sent out to CEOs, CFOs, and functional heads at approximately 900 of the largest public and privately owned diversified companies. Executives at about 150 of these companies completed our survey, a response rate of about 17 percent. These companies averaged in the neighborhood of €23 billion in revenues and represented a broad cross-section of industries and regions. (For a copy of our survey, see the Appendix.)
There are three broad conclusions that have emerged from our study:
As much as corporate parents focus on creating value, they also need to understand how they destroy it. In this respect, the ancient advice, attributed to Hippocrates, for the medical profession goes equally for corporate parents: “first, do no harm.”
Although few multibusiness companies have an explicit parenting strategy, our research identified six distinct parenting strategies that most companies implicitly follow.
By taking a few simple steps, a company can identify its implicit parenting strategy, assess the effectiveness of this strategy given the company’s industry and competitive environment, and select the most appropriate strategy on the basis of its capabilities and the needs of its portfolio of businesses.