Corporate Portfolio Management Research Articles

Turn it around – NBFC-IFC

Learning outcomes After studying and analysing this case, students would be able to evaluate and understand the importance and need of an infrastructure sector in a country, its inherent risks and scope of infrastructure investment and financing in India – National Infrastructure Pipeline and the important role of Non-Banking Finance Company’s (NBFC) vis-à-vis banks in infrastructure financing in India; critically analyse and recommend alternative decisions in a business problem situation using multi-criteria decision analysis, which is a tool used for business portfolio analysis; understand and evaluate the corporate portfolio management (CPM) tools used for an optimum portfolio mix to turn around companies; identify and suggest an optimum portfolio mix to turn around a finance company using CPM assessment applied to Pidun matrix; and recommend operational and strategic levers for successful turnaround implementation by using the integrated canvas on turnaround. Case overview/synopsis On 10 May 2020, in New Delhi, India, J. Ray took charge as a full-time director of an Indian Non-Banking Finance Company – Infrastructure Finance Company (NBFC-IFC). The NBFC-IFC of the Indian Government extended long-term financial assistance to infrastructure projects in India. During the financial year (FY) 2017–2018 till FY 2019–2020, the company suffered substantial losses to the tune of US$13.7bn, with profitability experiencing a notable decline – return on assets at a negligible 0.11% and return on equity of only 0.68%. The NBFC-IFC had a declining yield on advances at 7.05%, net interest margins (NIMs) of 2.08% against a high cost of borrowing at 7.66%, a declining loan book (by 4.35%) of US$336.27bn and a fast-deteriorating asset quality with highest ever non-performing assets (NPAs) at 19.70% of its loan book. Such financial parameters, compared with that of the industry average of banks and finance companies, meant that the NBFC-IFC Ray had taken over was fast bleeding and was on the brink of being declared a sick company. In comparison, private and other government players had profitable and much healthier financials, and Ray felt that there was a need for improvement. To make things worse, Ray got to know that the Indian Government was in the final stages of setting up a new development finance institution focused on long-term infrastructure financing in India. Ray realized the question was not only of the NBFC-IFC remaining relevant but also of its existence in the fast-evolving sector. Ray wondered what could his his integrated canvas be for a turnaround strategy that could include effective management of an optimal portfolio mix. With a healthy capital-to-risk (weighted) assets ratio of 30.85% and a satisfactorily improved net worth of US$103.1bn, in the given Reserve Bank of India regulatory provisions for the NBFC-IFC including restrictive exposure norms and NBFC-IFC’s operational mandate prescribed by the Indian Government, Ray had to shift the product and sectorial investment of the NBFC-IFC to reduce the NPAs, increase loan book size and improve the yield of advances and its NIM to effectively turn around the company’s profitability. Ray realized that he needed his team to evaluate and select a product and sector strategy for this change. Complexity academic level The present case of financing investment in infrastructure is interesting for implementation in developing economies because a lack of infrastructure is a common problem and there is a necessity of achieving a more developed infrastructure system to support accelerated economic growth in these countries. This case can be used in elective courses on corporate finance strategy and corporate portfolio management for infrastructure finance companies. This case can be taught in elective courses in post-graduate and MBA programs. This case can also be included in management development programs (MDP), executive MBA programs and executive-level courses that have subjects such as corporate finance strategy, corporate portfolio management and strategy management that focus on turnaround strategies including portfolio management for banks and finance companies. Supplementary materials Teaching notes are available for educators only. Subject code CSS 11: Strategy.

Corporate portfolio management in the public sector

PurposeAlthough corporate portfolio management (CPM) has been a popular tool for strategic management of multi-business portfolios in the private sector since the late 1960s, it has received limited attention in the public sector. Accordingly, empirical research on the use of CMP in government organizations is virtually non-existent. The purpose of this paper is to partially fill that gap in the literature by highlighting and discussing some of the key points that public sector organizations may need to consider when adopting CPM.Design/methodology/approachRather than deductively proposing and testing narrowly specified hypotheses, this study aims to answer a broad research question, namely: What are the key points that public sector organizations may need to consider when adopting CMP? Hence, the study adopts the qualitative interpretive research paradigm. The findings are based on empirical research conducted in a large Australian publicly funded research organization. Potential application of CPM was iteratively and incrementally explored with a reference group comprising 15 middle management representatives and several members of the senior leadership group over the course of one year.FindingsAssessment criteria traditionally used in CPM (e.g. growth potential and market share) are generally not applicable in public sector organizations. This paper suggests that government organizations should instead consider past performance and future potential of individual business units, which may be operationalized via capability (a function of human capital and associated resources/infrastructure) and delivery (a function of the demand for, and the impact of, relevant business units). The paper also highlights the importance of organization-wide consultation, evidence-based decision making, and contestability.Originality/valueFrom a practical perspective, the paper may assist public sector organizations with adapting and applying CPM. From a theoretical perspective, the paper highlights an important and relatively neglected research problem, and suggests several avenues for future research.

Strategic management of multi-business portfolios in the public sector

PurposeThe purpose of this paper is to adapt the traditional corporate portfolio management approach to the strategic management of multi-business portfolios in the public sector.Design/methodology/approachThe approach presented in this paper is based on a research project conducted within the Defence Science and Technology Group, Australian Department of Defence. It was developed iteratively and incrementally over the course of one year with a reference group comprising 15 middle management representatives and several members of the senior management team.FindingsThe approach developed comprises a multi-stage process and an assessment framework designed to capture the complexity of the problem space, build a strategic narrative, and facilitate senior leadership decision-making. The process is aimed at eliciting the required information, promoting contestability of the results, ensuring appropriate consultation, and ultimately achieving senior leadership consensus on priorities. The assessment framework is used to assess and visualize the balance of organizational capabilities.Originality/valueBy synthesizing and visualizing information on past performance and future potential, the approach presented in this paper may be used to facilitate strategic decision-making by senior management in the public sector.

Corporate social responsibility performance communication and portfolio management

PurposeThe purpose of this paper is to examine the relationship between corporate social responsibility (CSR) performance communication and stocks’ performance using socially responsible investment (SRI) portfolio management approach.Design/methodology/approachThe authors used the multi-factors models to examine the impact of CSR performance communication on the ex post monthly returns of three distinctly formed portfolios as well as their differential performance from 2001 to 2013 in a small economy of New Zealand.FindingsThe results show that SRS portfolio comprising of the stocks that demonstrate a relatively less proactive approach to the social and environmental concerns outperforms a stock portfolio that comprises of companies that have a relatively proactive approach to stakeholder engagement referred to as SVS portfolio. Furthermore, the authors’ findings show a positive relationship between social performance and market valuation. This indicates that the market values more stakeholder engagement in regard to social issues than environmental issues.Research limitations/implicationsThe authors’ findings imply that the SRI does make perfect financial sense in a small economy such as New Zealand. The perception of the CSR communication as an “insurance” for mitigation of social and environmental risks is one of the factors driving the valuation of SRI portfolios in New Zealand.Originality/valueThe authors collected CSR data from the publicly available sources such as the annual reports, the CSR reports and sustainability reports because a layman investor is more likely to rely on these sources in a small economy.

MERGERS AND ACQUISITIONS: EVIDENCE ON POST-ANNOUNCEMENT PERFORMANCE FROM CEE STOCK MARKETS

The paper re-examines the short-term and long-term performance following announcements of mergers and acquisitions. This is the first study that comprehensively explores this phenomenon in Central and Eastern European countries. We find strong evidence that announcement of a takeover creates value for both bidders and acquirers in the short run. Simultaneously, contrary to the stylized fact reported by a majority of U.S. based studies, after controlling for local value, size, and momentum factors the mergers and acquisitions do not destroy the value of the acquirers in the long term. The observations are important for corporate governance and portfolio management. The research is based on 109 deals in years 2001–2014. For the short-horizon event studies, we calculate average cumulative abnormal returns and we employ of the zero, index, and market models. For the long-run studies, we build equally and capitalization-weighted calendar-time portfolios and test their performances with CAPM, three-factor and four-factor models.

Corporate social performance and portfolio management

Purpose– The purpose of this paper is to assess the existence of a relationship between socially responsible behavior of companies and price trends of their stocks.Design/methodology/approach– The analysis is conducted by empirically testing data of environmental, social and governance ratings of a sample of European firms between December 2005 and December 2010. A disaggregate analysis is also performed to infer whether a specific contribution of all the different factors that make a business socially responsible can be observed in the value generation process.Findings– The results show that the application of a sustainable approach are successful in creating value, both to the investor and the issuer companies.Research limitations/implications– Findings of this work are significant with respect to portfolio management, because they suggest, on one hand, the myopia of a short-term approach (short-termism), and on the other hand, the importance of sustainable investing.Originality/value– This paper focusses on the integration that has led many international groups to explicitly include extra-financial risk factors in their decision-making processes, by applying the by the four-factor model on a brand new data set.

Application matters: how different corporate portfolio management practices impact firm performance

The advantageousness of corporate portfolio management (CPM) and particularly of CPM tools has been disputed among scholars for decades. A few studies that systematically analysed the relationship between applying CPM tools and firm performance are suggestive of proving a rather negative effect. Beyond just revisiting and reassessing prior research, this paper contributes to the strategic planning literature by empirically testing the impact of different CPM practices on corporate performance. Applying a multi-method approach of qualitative interviews, a global survey among senior executives of the world’s largest companies supplemented with additional financial data, findings show a significant positive relationship between the frequency and rigor of CPM usage and corporate performance which partly contrasts previous research. Furthermore, considerable differences of CPM implementation and practices between top-performing companies and underperformers are identified. The study advances scholarly knowledge with regard to the relevance of strategic planning processes. Implications for future research and practitioners are highlighted.

Corporate portfolio management applications: role of firm characteristics and impact on corporate processes

Corporate portfolio management (CPM) approaches emerged over 40 years ago in response to the rise of large corporations with diversified portfolios of partly unrelated business units. Their initial purpose and main application area was to support corporate management in defining the boundaries of a firm, allocating resources and assigning specific roles and targets for each business unit. Today, CPM is still regarded as highly relevant, but little is known about the application of CPM instruments in corporate practise. Based on a survey among 196 executives of the largest companies worldwide, we identified three distinct CPM user-types: corporate developers, business unit steerers and passive portfolio managers. These CPM application patterns are traced back to a set of distinct company characteristics. Moreover, it is demonstrated that the CPM user type has a significant influence on the characteristics of the implemented CPM processes and on the integration of CPM with other corporate processes.

Corporate Portfolio Management: Appraising Four Decades of Academic Research

Executive Overview Few major corporations are single business entities; rather, they are organizations that target many product-market combinations. Although academia has shown great interest in diversification and mergers and acquisitions, the management of multi-business portfolios, also known as corporate portfolio management (CPM), has received considerably less attention since the 1980s. This raises the question of why. Reviewing the scholarly literature on CPM we investigate the reasons for this disinterest and suggest a future research agenda for management scholars in this important domain.

The Three‐Factor Model: A Practitioner's Guide

The three‐factor model (3FM) has slowly but steadily become a popular alternative to the CAPM for measuring risk from the perspective of both corporate finance and portfolio management. The evidence clearly shows a negative relationship between market capitalization and returns, and a positive relationship between the book‐to‐market ratio and returns. Under the assumption that size and value are risk factors, the 3FM incorporates a market risk premium, a size premium, and a value premium into a model that aims to assess risk in a more comprehensive way, and ultimately to provide a more reliable estimation of required return. The required return produced by the 3FM has corporate finance applications (such as cost of capital estimation, project evaluation, and firm valuation) as well as portfolio management applications (such as performance evaluation). This article discusses the foundations and intuition behind the 3FM, as well as its application to the estimation of the cost of equity and excess returns.

Corporate Portfolio Management: Theory and Practice

Forty years after the introduction of the BCG growth‐share matrix, some version of corporate portfolio management (CPM) is employed by most large multibusiness companies. But little is known about the current practices of CPM. Which processes have companies adopted, and which executives in a company tend to be the main participants? What are the major corporate uses of CPM? And how satisfied are today's companies with their approaches?To answer these questions, The Boston Consulting Group, in collaboration with Freiberg University in Germany, conducted a comprehensive global survey on the practices of corporate portfolio management that involved more than 200 senior executives at the largest companies worldwide. These survey responses were supplemented by interviews with 50 senior executives of global multibusiness companies as well as a systematic review of more than 100 major client projects that BCG conducted between 2004 and 2009.One major focus of the survey was the concept of “parenting advantage.” Defined in terms of a particular company being the best possible owner of a particular business, the concept offers a clear framework for identifying the four most important ways in which management can use the principles and methods of CPM to create value for its businesses: Influencing strategy and improving performance through its distinctive capabilities and resources, including periodic evaluations of performance. Identifying and increasing synergies. Providing centralized functional leadership and cost‐efficient services. Monitoring and, when necessary, changing the composition of the portfolio of businesses. While fostering synergies and realizing advantage through centralization of functions and services were considered relevant by about half of the companies responding to the survey, the most important drivers of corporate value added by CPM were said to be the direct influence of the parents expertise and active portfolio monitoring. But even so, only 40% of recent divestiture decisions and 23% of recent acquisitions were said to be triggered by portfolio considerations, suggesting a significant gap between the effort put into CPM processes and their role in corporate‐level decision‐making.

CORPORATE PORTFOLIO MANAGEMENT APPLICATIONS: ROLE OF FIRM ATTRIBUTES & IMPACT ON CORPORATE PROCESSES

Corporate Portfolio Management (CPM) approaches emerged more than forty years ago in response to the rise of large corporations with diversified portfolios of partly unrelated business units. The initial purpose and main application area of CPM was to support corporate management in the definition of the boundaries of a firm, the allocation of resources and the assignment of specific roles and targets for each business unit. Today, CPM is still regarded as a highly relevant aspect of strategic management in the corporate landscape, but little is known about the application of CPM instruments in corporate practice. Based on a global survey among 196 senior executives of the largest companies worldwide, we identified three distinct types of CPM users: Corporate Developers, Business Unit Steerers and Passive Portfolio Managers. These different patterns of CPM application can be traced back to a set of company characteristics which include the underlying market structure, portfolio structure and portfolio siz...

Parenting Approaches in Corporate Strategy an Exploratory Study on the Impact of Portfolio Structure and Culture

We empirically analyze the parenting advantage concept’s relevance for corporate strategy, identify different types of parenting approaches, and investigate the actual application of parenting advantage in corporate portfolio management. We find that parenting advantage is considered highly relevant for corporate strategy and portfolio management; that there are distinct types of parenting approaches in corporate practice; that portfolio structure and cultural differences strongly affect a company’s choice of parenting approach; and that the main deterrent to more effectively applying the parenting advantage concept for corporate-level management is a lack of operationalization that specifies sources of parenting advantage, and which evaluates the effectiveness of different parenting approaches.

PROJECT (PPM) AND CORPORATE PORTFOLIO MANAGEMENT (CPM)

<p>The portfolio concept is suitable for both formal and project organisations, as well as competitors, clients and environment to be presented in a connected form. The project portfolio management is oriented toward three specially interesting value entities –future events, project environment and investments. Different levels of completeness of certain projects make it harder to compare the estimated investment values and real measurable organizational values. The key parameters of the dynamic process of decision making are: time, risk, value, engineering project type and implementation which determine the strategic significance of the portfolio management for evaluation and selection of engineering projects within the corporate portfolio management (CPM). In most cases, CPM consists of many mini portfolios (for business lines, regional or geographic markets, product groups, information technologies, advertising or promotion, innovations, research and development, and capital asset), which, individually optimized, can optimize the total company portfolio or the portfolio of project organization. In this work is given a clear analysis of engineering projects and project portfolio in engineering organizations.</p>

Corporate Portfolio Management Roundtable

The dean of a top ten business school, the chair of a large investment management firm, two corporate M&A leaders, a CFO, a leading M&A investment banker, and a corporate finance advisor discuss the following questions: What are today's best practices in corporate portfolio management? What roles should be played by boards, senior managers, and business unit leaders? What are the typical barriers to successful implementation and how can they be overcome? Should portfolio management be linked to financial policies such as decisions on capital structure, dividends, and share repurchase? How should all of the above be disclosed to the investor community? After acknowledging the considerable challenges to optimal portfolio management in public companies, the panelists offer suggestions that include: Companies should establish an independent group that functions like a “SWAT team” to support portfolio management. Such groups would be given access to (or produce themselves) business‐unit level data on economic returns and capital employed, and develop an “outside‐in” view of each business's standalone valuation. Boards should consider using their annual strategy “off‐sites” to explore all possible alternatives for driving share‐holder value, including organic growth, divestitures and acquisitions, as well as changes in dividends, share repurchases, and capital structure. Performance measurement and compensation frameworks need to be revamped to encourage line managers to think more like investors, not only seeking value‐creating growth but also making divestitures at the right time. CEOs and CFOs should take the lead in developing a shared value creation model that clearly articulates how capital will be allocated.

Determinants of the Relationship Between Strategic Performance and Shareholder's Value Creation: Beyond Financials

Nowadays, there is a generalized consent in relating strategy with value creation. In this zeal to define value creation there was a remarkable emphasis to associate it with financials. This work pivoted between the fields of strategy and value analysis toward the assessment of determinants of shareholders' value creation. The purpose of the study was to identify what kind of relationship links strategic performance with shareholder's value creation and what its main determinants were. The research was also focused on identifying differences between determinants within and among industries and if their relative weights were different too. The final interest of this work was to assess if determinants could work as predictors of shareholders' value creation. A sample of 919 diversified listed companies in the NYSE or NASDAQ were studied along the period 1996-2005. Strategic performance was measured through Fortunes' Corporate Reputation Report attributes: quality of management, quality of products and services, financial soundness, long-term investment value, wise use of corporate assets, innovativeness, ability to attract and retain talented people, and social responsibility to the community and the environment. Compustat database was used to extract data related to shareholders' value creation as M/B ratios and shareholders' annual and abnormal returns. Findings suggested that the relationship between strategy and value analysis, far from being conceptual, is statistically significant and therefore it could be quantified. All strategic performance variables were significantly related to M/B, shareholders' annual returns and shareholders' abnormal returns, indicating collateral value creation processes to other stakeholders different than shareholders. Findings also showed that industries present different degrees of differentiation within competitors in determinants and the same differences were accounted among sectors, industry groups and industries. When the prediction power of determinants was assessed, the portfolio of top performers companies were able to explain shareholders' abnormal returns, being this fact confirmed by the empirical evidence. Implications of this study were related to strategy modeling, corporate performance measurement, market research and portfolio management. Future research was pointed in topics like customers' value creation, social responsibility and corporate value, determinants differentiation and industries' regulation, abnormal returns as value creation measurement standard and quality of management.

Corporate portfolio management

We solve the optimal portfolio problem in continuous time from the point of view of a corporation, acting on behalf of risk neutral shareholders. Our model fits for example the case of a commercial bank. Risk aversion is generated endogenously by financial frictions, and increases when the value of the firm’s assets decrease. We find a remarkably simple investment policy: invest a multiple of the firm’s equity into the risky asset, keep the rest as cash reserves, and distribute dividends when the value of the firm exceeds some threshold. As a consequence, the firm locally behaves as a Von Neumann-Morgenstern investor with constant relative risk aversion.

Customers in sight: Supporting corporate accommodation decisions with real estate data

Information and communication technology (ICT) support of corporate accommodation processes with real estate data is not a simple subject. Insight is required into the primary processes of very different organisations, and inclusion of many aspects of portfolio management is necessary. This paper highlights possibilities for ICT support of these complex processes, although it does not explore in detail the different technology products available on the market. Instead, an overview of considerations focused at possible functionalities is provided which may contribute to sound decision making on actual development, purchase and implementation of supporting systems. To an increasing degree business support systems function in a network or are ‘webenabled’. Also transactions are frequently effected using new infrastructures (e‐commerce, business‐to‐business [B2B], etc). New technologies are also rapidly gaining ground in demand and supply chains regarding corporate accommodation, real estate and portfolio management. In many cases, though, the need for an overall and ‘future proof’ vision when applying them in a corporate real estate (CRE) environment is not thoroughly recognised. With regard to the Government Buildings Agency (GBA) in the Netherlands, it is important to bear in mind that this is not a commercial organisation. It functions in the public domain, and therefore there are aspects that must be specially treated. The paper presents a survey of important matters in GBA’s primary (and partially secondary) processes, and establishes connections with possibilities (and implications) that state‐of‐the‐art ICT support may provide. A conceptual outline of the primary processes of a CRE organisation is used as a starting point, and an overview of the data needs in these processes is given. By explicitly applying an approach aimed at (potential) data customers, who will decide for themselves what data has informative value, functional boundaries in internal processes are easily crossed. From this approach, many possibilities for added value, marketing and B2B communication become more obvious and manageable. Although this paper focuses on the primary process of the GBA in the Netherlands, many subjects may be applicable in other CRE organisations.

General Electric: Lessons in Strategic Management

GE is the ninth biggest and second most profitable company in the world. The company was revitalised by inducing self-confidence and adopting tools like workout and Change Acceleration Process (CAP) to multiple business units in different industries. GE was the first corporate to systematically apply a number of management concepts. Its success is rooted in its movements of ideas and management talent around the group. The strong performance of GE is its successful corporate portfolio management. Many of the large business units of GE differentiate their output with high quality while they simultaneously maintain low per unit cost operation. It adopted three company-wide growth initiatives: globalisation, services and Six Sigma Quality. The intensity of globalisation is reflected from the fact that GE revenues have grown 6% per year in the U.S. and 17% globally. GE dramatically adopted Six Sigma Quality in its products, which radically changed overall measures of operating efficiency. GE wants its every product and service designed for six sigma. Six Sigma for GE is embedding quality thinking, process thinking across every level and in every operation around the globe. Jack Welch, CEO of GE restructured the company through integration, diversification, mergers, strategic alliances and retrenchment. He imposed higher productivity at all levels, trimmed inventories using just-in-time technique and dismantled bureaucracies. Under him, GE is engrossed in stretch and quality performance. The future strategies of GE are globalisation, the move from manufacturing to services and the internet.