Is the era of conglomerates over? – Company / Commercial law
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Ask this question to Joe Kaeser, CEO of Siemens, and the answer would be yes – amid new technologies and chaotic geopolitics, “traditional conglomerates”, he said, “have no future.”
The division of Siemens into three separate divisions is just one example. Other large conglomerates like Philips, Maersk and Hewlett Packard have also split in recent years. At Hogan Lovells, we find that conglomerates struggling to align their corporate and reporting structures have a greater tendency to divest than others. From our perspective, well-designed and managed corporate and governance structures are particularly important for conglomerates to manage their regulatory and ethical risks responsibly.
Yet while a particular group of so-called “traditional” conglomerates might be seen by some as endangered, others around the world continue to emerge – suggesting that the pattern may evolve rather than disappear. , and that different conglomerates are simply at different points in their evolutionary life cycles. Either way, the conglomerates that thrive today appear to be those that are well suited to the increasingly rapid pace of geopolitical change and technological innovation.
Japanese trading houses (the sogo shosha), for example, have successfully recalibrated away from their traditional set of commodities and into other activities – technology, energy, shipping, financial services, consumer goods, etc. Rather than just trading, the modern sogo shosha adopted a business approach similar to that of the private equity firm: they evaluate projects from an increasingly global perspective, make direct investments, manage their subsidiaries with a return on investment perspective and divest themselves after reaching predefined deadlines or milestones.
Others, like Anglo-Canadian global asset manager Brookfield, have followed suit, while emerging market business groups – for example India, South Korea and China – have not. followed the divestment route taken by many of their Western counterparts. Each company in these groups being managed as a legally independent entity – with its own board of directors, shareholders and its own incentive structures – general management has greater autonomy and is less vulnerable, for example. example, to the militant campaigns which have so irritated the traditional conglomerates lately.
These latter groups of companies are at different stages of their life cycle, seeking to diversify rather than restrict their scope. Meanwhile, tech titans with huge piles of money are doing the same, becoming big, full-fledged conglomerates. Alphabet is now present in everything from autonomous vehicles to medical devices. A recent report from Bain confirms that, for the first time, global M&A activity has been dominated by deals bringing companies into new lines of business rather than expanding. This is also indicated by the finding that tech companies are increasingly being acquired by non-tech investors rather than competitors.
Such success stories tell a different story: a story where new organizational models, alongside the promise of digital technology and data to transform every industry, can lead to new iterations of the traditional conglomerate. Indeed, the conglomerate could in some cases be a more efficient organizational form of business given the contemporary challenges companies face today, such as climate change, digitalization and the recently more effectively demanded ethical values by companies. investors, activists and political organizations. All of these aspects require a business approach that is motivated more by the values and attitudes applied to the conduct of business as such, rather than by a single specific company in a specific industry.
Business organizations must also change rapidly. Intelligence and know-how are best drawn from a larger pool of resources, which are more likely to be available in conglomerates given their size and investments being spread across many industries and regions of the world. This is particularly the case when the distinctions between industrial sectors are flattened, as can be seen between media and technology or more recently between automobile and mobility.
While it was enough for many years to adhere to a specific industry regulatory framework, we now find that companies need to consider adopting a values framework that goes far beyond and similarly applies to from multiple industries. And it’s only a matter of time before ethical aspects turn into regulation. While companies, until recently, stumbled mainly on alleged violations of regulatory limitations on their business, we now see many examples where a fully legal project is subject to scrutiny as it is perceived as ethically questionable and not in line with current trends. Siemens recently came under scrutiny from environmental groups over their contract to provide critical rail infrastructure for a new Australian coal mine project. In this context, compliance suddenly goes beyond the regulatory framework to involve human rights and sustainability etc., regardless of the size or importance of the project to the company.
This cocktail of risks has often been referred to as political risk. The challenge is to monitor this in all its facets, to keep the core values of the company in shape and to implement them consistently and consistently in all parts of the business organization, including management. of its supply chain, its acquisition of new projects or its expansion into new areas of activity.
We frequently see these problems when we look at companies considered to be “giants”. Many of them basically have a clearly defined goal, distinct from shareholder value, often associated with a list of values that they apply to their internal culture and the way they deploy their products and services. It will be interesting to observe whether this way of doing business can be particularly well managed by large conglomerates, whether they are considered as technology giants, industrial giants or others. Such differentiations will become less visible and relevant anyway, given the overlay of digital technology in many industries.
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