Revitalizing an underperforming unit.

• Author: Cooper, Stephen F.
• Position: Corporate governance

An otherwise healthy company may have an underperforming business unit which damages overall financial results. Since investors will not tolerate such a situation for very long, management needs a disciplined process to remedy the problem.

In today's turbulent business environment, senior management is being pressured either to require each business unit to earn a satisfactory economic return or to divest the company of a segment that dilutes the company's overall financial results. While the problem is not new, the scrutiny to which the company is subjected is more intense today, especially from institutional investors. For example, public companies are required to report financial results for each segment of the firm. Hence the underperformance of a business unit will be obvious to securities analysts, shareholders, and potential investors. Classic highly publicized examples include Viacom's problem with its underperforming Blockbuster unit, Seagram Co. with its Universal Studios business, and General Electric Co. with the acquisition and subsequent sale of its Kidder Peabody unit.

Directors have a fiduciary duty to address this issue. Senior executives must not be permitted to hide behind the overall results of the parent company, even when they appear to be outstanding. Tolerating the underperformance of a business unit fails to maximize shareholder value, and in an adversarial and litigious environment is a possible invitation for a hostile takeover bid, a class-action lawsuit, or a reduced market valuation of the company. In recent years, the large number of corporate spinoffs and sale of non-core or underperforming business units confirms the importance of ensuring that each business unit should be economically viable on a stand-alone basis.

Analyzing a business unit's viability

While it is easy to endorse the premise that business unit viability affects a company's economic value, it does not necessarily mean that the process for remedying a sub-par situation is either quick or simple. The experience of several prominent companies demonstrates that the task is frequently difficult and time-consuming. The case of General Motors exemplifies what can happen to a major corporation. It was common knowledge that underperformance of the Oldsmobile brand and vehicle division caused senior management to seriously consider whether to close down or to consolidate this business unit. The decision was made to retain the unit and to enhance its viability; but...