Corporate headquarters: Misallocation of Capital

For companies that seek an opportunity for cost savings in conducting their businesses, corporate headquarters may be an area of consideration. For any given company, corporate headquarters and the people who actually work in it have distinct roles. On the one hand, corporate headquarters should consider what kind of business they are engaged in. This could involve a careful evaluation of how much of a direct influence corporate headquarters has on the day-to-day operations of the company.

In some cases, the top management of a company will conduct many functions that have nothing to do with corporate headquarters. In other instances, the top management will conduct functions that indirectly affect corporate headquarters. Even when the company’s top management is not directly tied to the workings of its corporate headquarters, there are still situations in which indirectly the activities of the top management might have an effect on the business groups that they oversee. And, of course, even the activities of the individual corporate staff can have a bearing on those business groups. All of these things lead to situations where some businesses are harmed and some businesses are helped by changes to corporate headquarters.

For many businesses, changes to corporate headquarters tend to come about when there are difficulties in doing business. These problems can be caused by many factors. Sometimes, they are caused by issues related to geography – if the headquarters is in an inconvenient geographical location, the corporation may find itself having difficulty attracting and retaining customers. Sometimes, they are caused by internal issues – sometimes, executives at corporate headquarters feel that their methods of management are flawed and inefficient, and that the corporation needs to find a way to re-establish good practices that were once proper, but have since become corrupted or lax.

The other common factor among businesses that change their corporate headquarters is a problem with regard to the management’s ability to establish and maintain competitive advantages and maintain efficient operation. Often, when the same company takes over another, synergies are ruined or lost. This occurs, because the new conglomerate tends to focus more on short term gain than long term viability. In its attempts to compensate for the loss of synergies, the conglomerate will often create discount incentives that serve only to harm the competitive position of the parent company.

Discounted corporate headquarters loans are common examples of such distortions. Corporate conglomerates often borrow large amounts of money against their corporate headquarters’ equity. Often, the debts that result are larger than the value of the parent company’s equity. When they attempt to make amends for their excessive debt by selling their own shares, some companies experience an increase in their allocation.

Another example of a distortion of the allocation comes about when a certain type of technology company decides to purchase another technology company. While it seems like a great acquisition, the new company’s management often discovers that the market is saturated with similar products. For example, the parent technology company may have discovered an innovative product that has a higher profit margin than that of its competitor. As a result, when the acquisition is made, the conglomeration discount often means that the newer company receives less value per dollar of equity. Of course, the new entity still must pay the taxes associated with being bought out.

Other types of corporate misallocation occur when business groups or labor unions determine what type of corporate governance will best benefit their organization. Sometimes, a business group will lobby to have Congress change the existing taxation structure, which often changes the incentives that give businesses an incentive to build assets within the United States or to hire workers from within the country. At other times, business groups will lobby for subsidies when they believe that they would otherwise be unable to compete with local businesses. In either case, the resulting policy may actually increase inequality in income or spending.

Misallocation of capital occurs most frequently when ownership is divided between two or more business groups. Each of the groups creates its own management team and assumes partial or full control of the business. The effect is that one of the group’s funds the operations of the other group, with each group acting as a trustee. As a result, the larger business group often controls the decision making process through its owners rather than through its own top management team.