Governing the Whole Business:
Why and How Corporate Boards Should Care about Their Diversified and Non-Controlled Entity Portfolios

Investing for growth and diversification has never been riskier for Corporate Boards and Directors
By James Bamford and David Gross

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CORPORATE BOARDS have always had a big job. But what is a Board to do when the company it is charged with overseeing holds interests in dozens, if not hundreds, of other operating entities, many of which are minority investments, joint ventures, strategic partnerships, or small acquisitions not yet integrated with the core business? When we look at companies as diverse as major internationally-scoped industrial companies like ExxonMobil and Dow Chemical to domestically-oriented healthcare companies like Aetna and United Health Group, we see portfolios filled with such diversified or non-controlled operating entities. In some cases, these entities are a core element of company operations (e.g., natural resource companies whose projects are often jointly owned), whereas in other cases they represent strategic step-outs (as in the case of U.S. health plans and providers, who diversify in reaction to an increasingly unstable core business). Moreover, in many instances these entities account for a material portion of company revenue or earnings – and represent a major growth engine of the company.

Because such entities matter to companies, they matter to their shareholders and other stakeholders. Unfortunately, few corporate boards have figured out how to engage at the right level with such portfolios. In some cases, especially in industries like US healthcare where companies are looking for growth outside core regulated businesses, such portfolios have drawn considerable attention from their Boards or from individual Directors – and the actual size or materiality of the investments may not justify such deep involvement. In other cases, Boards don’t adequately appreciate the materiality, risks, latent performance upside, or other critical features of this portfolio, and have not asked enough questions about these portfolios. If corporate boards are serious about truly fulfilling their role as overseers of management and stewards of shareholder interests, this needs to change.

In part one, we outline why corporate boards should care. In part two, we will describe how boards should get involved, recognizing that it is not the responsibility, and beyond the capacity, of a corporate board to provide front-line governance of these individual entities.


At a summary level, corporate boards should care about their diversified or non-controlled venture portfolio because they are or may become material to the business, and for three other reasons: risks, latent performance upside, and legal and regulatory requirements (Exhibit 1): 

Exhibit 1: Reasons Why Corporate Boards Should Care About Venture Products

Exhibit 1 Corporate Governance.png

Risks: Recent events have brought into focus the importance of understanding the entities within the diversified or non-controlled venture portfolio. For instance, Alcoa was temporarily blocked from pursuing a transformational corporate de-merger when its partner in a strategic venture filed suit against the company, alleging the spinoff would have a materially adverse impact on their venture. Wal-Mart, AB InBev, GlaxoSmithKline, and Halliburton have all found themselves embroiled in corruption allegations related to their ventures in India, China, and Nigeria. Meanwhile, Iconix, the parent company of Joe Boxer, found itself under the microscope after regulators launched an investigation into the company’s accounting treatment of its international joint ventures, and its share price dropped 25%.

No industry is safe from such risks. In 2013, the global pharmacy giant Walgreens-Boots Alliance formed a strategic partnership with Theranos, a multibillion blood testing startup with “revolutionary” technology purported to run dozens of tests with a few drops of blood. Theranos had a star-studded Board, and the partnership launched with much fanfare. Just a few years later, Walgreens moved swiftly to shut down 40 blood Theranos testing sites located within Walgreens stores and sued Theranos to recoup its $140 million investment, alleging breach of contract and misrepresentations by Theranos. The reputational damage to Walgreens is arguably much worse given continuous investigative reporting on Theranos, which has spanned more than 18 months and repeatedly gone viral.

What went wrong here? Plenty, as it turns out. According to reports Walgreens failed to verify Theranos’ blood testing technology prior to setting up Theranos testing centers in Walgreens stores due to the contractual, competitive, and other concerns held by Walgreens management.

A corporate board has a duty to ensure the coherence of the company’s strategy. For potential new or existing ventures that are material to the company or deviate from the existing business model, the board should have an opportunity to dig into the medium- to long-term risks and strategic implications – and not be solely focused on the 3 to 5 year gain that will likely accrue to the compensation package of the current top management from signing or renewing a venture.

Latent Performance Upside.Our analysis has also shown that in certain companies and sectors, strategic venture portfolios can possess considerable financial upside – from better performance management by their strategic owners, increased skills and capability delivery, governance improvements, and restructuring. For example, many U.S. health insurers have a set of diversified holdings outside their core health insurance business – frequently in the form of minority investments over which they have limited control and low financial returns. While the “right answer” for these ventures will vary on a case-by-case basis, changes to the scope, ownership, and/or governance of these ventures is often required. For instance, as these healthcare companies advance their management of diversified and non-controlled ventures, they are becoming more proactive on linking each venture's capabilities (e.g., telehealth, patient engagement, behavioral health) to the “mothership” health plan business. For example, one health plan’s venture arm dedicates substantial time to initiating, nurturing, and expanding relationships between the health plan and venture executive teams in order to capture anticipated synergies and identify new opportunities for collaboration.

The need to clean up strategic venture portfolios is by no means limited to the healthcare industry. For example, when the board of an industrial conglomerate asked to have the company’s strategic ventures plotted based on performance and fit, its eyes were opened in several ways. It saw that many ventures were producing middling performance with limited prospects for growth, but were consuming considerable internal resources related to governance, reporting, and compliance. It also saw that a number of ventures no longer fit well with the company’s strategy, and were candidates for restructuring or exit.

Perhaps understandably, companies do not performance manage their strategic venture portfolios with the same level of intensity as wholly-owned units. They tend to be placed at the bottom of the agenda when a business unit or corporate leadership team is conducting its annual strategic performance conversation – and are often discussed in a hurry or not at all, particularly when the accounting departments relegate them into the all-inclusive “other income and expense” line below operating income or EBITDA.

Legal, Regulatory, and Shareholder Initiatives. In markets ranging from the US, UK, and Europe to South Africa and Saudi Arabia, regulators and public shareholders are continuing to raise the bar on corporate governance. Many of these broader governance forces carry direct and important implications on strategic portfolios and the companies that have them. For example, stronger anti-bribery and corruption laws, headlined by the UK Bribery Act and US Foreign Corrupt Practices Act (FCPA), invariably lead a corporate board into a need to understand the financial controls of the company’s subsidiaries, affiliates, joint ventures, and agents operating in emerging markets. Problematically, many of the countries with the highest levels of corruption, including China, India, Russia, Brazil, and Indonesia, also receive the largest volume of foreign investment – which, by the way, is often made through strategic venture investments that the international partner does
not control.

Similarly, regulators and shareholders are demanding greater accountability of individual directors. Because strategic venture portfolios and individual ventures therein are usually structured as separate corporate entities, the representative a company appoints to represent its interests on a venture are held to the local standards of corporate directors.


Questions to Answer. Unfortunately, most corporate boards are pressed for time and tend to focus on wholly-owned operations – and thus have an extremely limited understanding of the company’s strategic portfolio, much less individual ventures, and the risks and opportunities they introduce. We believe a corporate board should, at minimum, be able to answer the following questions:  ...

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