Business Guides

Holding company managers are often pulled in multiple directions by the demands of their subsidiaries. They may have to make crucial decisions about a subsidiary without in-depth knowledge about its immediate business activities. This lack of information can result in sub-optimal decisions.

Conversely, subsidiary managers may not have enough information about the overall strategy or goals of the parent company. The interests of the two companies and its managers may not be correctly aligned. For instance, a subsidiary may wish to buy raw material from the best supplier in the market, but the parent company may want it to buy it from one of its subsidiaries. Such competing interests across management teams can result in conflict and poor business decisions.

The holding company structure provides the opportunity to create opaque business relationships. Such a framework becomes a disadvantage for the minority shareholders who might not have an accurate picture of the whole business. Majority owners can use transfer pricing or preferred supplier relationships to their advantage. This can be a particularly serious issue if ownership of the holding company and all subsidiaries is not symmetric and parties own different proportions of the subsidiaries.

Because the market doesn’t have a clear picture of the operations of all subsidiaries, it may penalize a holding company's stock price. Furthermore, if the holding company owns subsidiaries that are not performing well financially, the market may penalize the holding company disproportionately for the performance of the subsidiary while not giving the parent full credit for the financial performance of the parent company.