Types of holding company structures | How to structure?

Holding Company Structure Overview

By Mansour Baker, PHRi, SHRM-CP
Posted 01 October 2019 | Revised 25 June 2020

Introduction

A holding company is a company that owns shares in other companies. A holding company usually does not produce goods or services, but its purpose is to own shares of other companies to form a corporate holding to allow the reduction of risk for the owners and can allow the ownership and control of several different companies.

Types of Holding Structures
There are 4 key themes of a holding company organization structures:

1. Financial Holding

Multiple partners, minority holdings
Divisional organization, no shared services

2. Strategic Holding

Some partners, cross holdings
Hybrid organization less shared services

3. Operational Holding

Partners for specific needs; JVs
Matrix organization some shared services

4. Corporate Holding

No partners, wholly owned company
Functional organization numerous shared services

Types of Operating Models
There are 4 key themes of an operating model structures:

1. Pure Portfolio Manager

Diverse portfolio
Minority to majority stakes
No operational involvement
No integration
All sectors

2. Diversified Conglomerate

Selected sectors
Majority stakes
Provide management guidance; allocate capital
Low integration

3. Industry Specific Player

Specific industries
Wholly owned subsidiaries
Higher degree of operational management
High integration

4. Competence Driven Player

Specific functions or competence
Wholly owned subsidiaries
Higher degree of operational management
High integration

Exhibit 1: Types of Holding Structures & Operating Models

How to Structure a Holding Company?

We need a strategy to guide us how to structure a holding company.

Sample Strategy
A company wants to acquire/partner with a number of businesses in an industry covering services, materials and equipment sectors so as maximize their offering to customers.

The top down (corporate) and bottom up (subsidiary) strategies must be well understood and be aligned
The subsidiaries need to have a high degree of integration and ought to work jointly so as to maximize their offering to their customers
The subsidiaries should be able to work closely sharing knowledge to be able to provide high quality products and services and be competitive to their customers
Corporate should have higher level of management and control of their subsidiaries
Corporate needs to have outright ownership of their subsidiaries or a majority stake as a minimum
Corporate should provide some shared services in Finance, HR, Public Relations, IT and Logistic Support to achieve economies of scale, increase efficiency and increase competitiveness in the marketplace

Exhibit 2: Holding Company Desired Structure

Based on the above sample strategy, the holding company is best structured around the operational holding and the operating model industry specific player.

Holding Company Parenting Strategy

The parenting strategy or the management model describes the relation between the Holding Company and the Subsidiaries, or in other cases where there is only one company and it includes multiple businesses, parenting strategy describes the relation between the head office and the subsidiaries, where each subsidiary represents a separate business or profit center, each is distinct and self-contained with its own functional hierarchy.

Investment Management

The investment management preserves a complete independence among the subsidiaries. Unlike the subsidiaries included in the operationally involved management and active management, the subsidiaries in the investment management do not share common corporate/ head office strengths, and for that, integrating devices are not developed for use by the subsidiaries.

The greatest advantage of the investment management is achieving flexibility to the head office in dealing with current subsidiaries and starting new businesses according to the profitability.

Another advantage is achieving internal competition between subsidiaries at the group, which leads to the following:

Internal competition enables the head office to identify those subsidiaries with the greatest future potential. Resources can then be allocated to those promising subsidiaries to fuel the entire organization's success.
Internal competition challenges the inertia, because subsidiaries managers know that the resources would be allocated to the most promising businesses and their positions are not completely safe.
Internal competition motivates effort. The challenge of competing against internal peers can be as great as the challenge of competing against external marketplace competitors.

Exhibit 3: Four Parenting Strategy

The differences between the four parenting strategies.

In the investment management model, organizational controls and primarily financial controls are used to emphasize and support internal competition among separate subsidiaries and as the basis for allocating head office capital based on subsidiaries' performance.

To emphasize competitiveness among subsidiaries, the head office maintains an arms-length relationship with them and does not intervene in subsidiaries affairs, except to audit operations and discipline managers whose subsidiaries perform poorly.

The head office relies on strategic controls to set rate-of-return targets and financial controls to monitor division performance relative to those targets. The head office then allocates cash flow on a competitive basis, rather than automatically returning cash to the subsidiary that produced it. Thus, the focus of the head office is on performance appraisal, resource allocation, and long-range planning to verify that the group's portfolio of businesses will lead to financial success.

The structure has the following characteristics:

Head office has a small staff.
Finance and auditing are the most prominent functions in the head office to manage cash flow and ensure the accuracy of performance data coming from subsidiaries.
The legal affairs function becomes important when the firm acquires or divests assets.
Subsidiaries are independent and separate for financial evaluation purposes.
Subsidiaries retain strategic control, but cash is managed by the head office.
Subsidiaries compete for head office resources.

Strategic Management

In the strategic management, each subsidiary is a profit center that is controlled and evaluated by the head office financially and strategically.
The structure has the following characteristics:

Structural integration among subsidiaries, but independence across subsidiaries is achieved.
Strategic planning may be the most prominent function in the head office for managing the strategic planning approval process of each subsidiary.
Each subsidiary may have its own budget for staff to foster integration.

Support functions and finance are available in each subsidiary, and similar support functions are available at the head office to serves as consulting firm to the support functions at the subsidiaries

Active Management

Different characteristics of structure are used as integrating mechanisms by the active management to facilitate cooperation between subsidiaries.

Centralization is one of these mechanisms. Centralizing some of organizational functions (human resources management, information technology, supply chain management, business development and finance) at the head office level allows the linking of activities among subsidiaries.

Frequent, direct contact between subsidiary’s managers, is another integrating mechanism that encourages and supports the cooperation and the sharing of either competencies or resources that have the possibility of being used to create new advantages. Sometimes, liaison roles are established in each subsidiary to reduce the amount of time subsidiary’s managers spend integrating and coordinating their unit's work with the work occurring in other subsidiaries.

The structure has the following characteristics:

Structural integration devices create tight links among all subsidiaries.
Head office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between subsidiaries.
Rewards are subjective and tend to emphasize overall group performance in addition to subsidiaries performance.
Culture emphasizes cooperative sharing.

Operationally Involved Management

The functions are highly centralized in operationally involved management. Most of the functions are centralized (human resources management, information technology, supply chain management, business development, finance and sales planning/ production planning) at the head office level which allows usage of same resources more efficiently and less costly.

The structure has the following characteristics:

Subsidiaries' role is mainly executing day to day tasks that aim at achieving plans developed at the head office.
Very tight links among all subsidiaries.
Head office emphasizes centralized strategic planning, human resources, marketing, finance and sales / production planning to foster maximum cooperation between subsidiaries.
Emphasize on the overall group performance.

Organization Design

The design of the target structure is after careful review of the sample strategy.

Exhibit 4: Organization Design

Subsidiary Engagement

The above organisation design enables deeper interaction between the holding company and its subsidiaries, supporting growth and collaboration.

A successful holding organisation must enable a relationship with its subsidiaries / affiliates that supports:

Alignment and shared development of business strategies
Close collaboration to maximize customer offering value and sales volume
Shared service provision, wherever this adds mutual value
Sharing of knowledge regarding business development plans, through continual close engagement
Retention and development of staff across both the holding company and the subsidiaries

The investments role must expand from having a focus largely on financial review & monitoring to being more closely engaged in operational and commercial issues.

This closer collaborative relationship can only come from more extensive communication, formal & informal, via the following key interactions driven by the above organization structure:

Mandated liaison meetings scheduled (e.g. monthly) between the holding Investment and subsidiaries, to discuss strategy, market conditions, performance, development options, and other key business issues, to enable aligned pursuit of strategies and project opportunities
Periodic workshops to discuss business development & sales enhancement options and ensure effective 2-way information flow. These should involve holding investments and business development teams, with key staff from subsidiaries management. Outputs of these workshops to be formally reported to both respective Boards
Regular informal meetings between investment team (e.g. dedicated subsidiary analyst) and with senior subsidiary staff (below CEO/GM level) to exchange detailed views on markets and subsidiary company activities
Holding company board members to be mandated to ensure that the subsidiary strategies align with the holding overall strategy. Where appropriate formal board committees with the holding company representation should be set up (e.g. business development)

Business Processes

The holding company must define their “future state” processes with the associated departments owning these processes to drive organization growth.

Define RACI roles and responsibility charts for each business process area of the holding company.

Development of interface charts for the holding organisation, using process diagrams, summarizing the nature and style of all such interactions for each business process.

Exhibit 5: Sample Holding Company Business Processes

Human Resources

The holding organization will need to develop detailed job descriptions for all positions, as well as all human resources related activities such as grading, compensation, manpower planning, recruitment, etc.

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