The corporate center: what is the right model?

• Author: Rheault, Dennis N.

Here is a case for the Activist center - the most difficult to implement, but clearly the most effective in adding shareholder value.

One of the most prevalent business trends of the past decade has been the shrinking role of the corporate center. Reducing the size of the corporate staff and limiting the scope of its activities to basic governance functions is a fast and effective way to cut costs. It also speeds up the decisionmaking process and empowers line managers more strongly as the business units assume greater responsibility for their operations. Lean, mean, and decentralized has replaced big, bureaucratic, and interventionalist.

But the pendulum has swung too far in the opposite direction. Delayering and decentralization should be only the first steps in rebuilding the corporate center so that it can help create value throughout the organization. With relatively few but talented people, a revitalized center can act as the catalyst to build capabilities within and across business units, raise critical issues, encourage sharing of ideas, promote thinking outside the box all with the shared goal of better managing the long-term shape of the company.

We call it the Activist center, and we discovered its power as the result of talking with senior executives at 45 leading companies worldwide. What they told us about how their centers are structured, who populates them, and what kinds of activities they perform revealed that the visionary among them have moved beyond downsizing to put together small, focused corporate staffs charged with helping to drive the change necessary for profitable growth.

Role of the Center

Conventional wisdom holds that the size and scope of the corporate center are based on two related factors: the number of operating units and the degree of synergy among them. The fewer and more related the business units, the larger the center and the greater its role, and vice versa. Out of this theory came four familiar classifications:

* financial holding company (such as Berkshire Hathaway);

* diversified conglomerate (such as General Electric);

* strategically related businesses (such as Sara Lee); and,

* integrated operating company (most airlines).

This framework has a great deal of intuitive appeal but no connection whatsoever with reality. Using headcount as a proxy for the level of activity at the corporate center, we found more variation within each group than across groups. Clearly, something else is driving the role of the center.

The determining factor, we concluded, is the fundamentally different beliefs that corporations hold about how the center adds value. This difference serves as the basis for a simpler yet more compelling framework consisting of three models: the Imperialist, the Minimalist and, of course, the Activist.

The Imperialist, our term for the out-of-fashion command-and-control center, exists to check up on the operating units. It thinks its role is to substitute for capability deficiencies in the divisions, and minimizes risk by having a large staff...