For any business with an eye on cross-border growth, the time will soon come for setting up and establishing an international subsidiary. Just as a national business can be made up of multiple entities for different purposes, so too can an entity be established in another country or jurisdiction to further business growth.
Managing foreign subsidiary competitiveness is vital for long-term organizational growth. However, there also needs to be a strong and robust subsidiary management plan with international thinking at its core. Entity management on an international scale brings with it a very specific set of compliance and governance challenges, and HQ must keep an eye on these, control them with a subsidiary management plan internationally, and lead from the front with a global vision and mission.
Why set up an international subsidiary?
Often, as businesses eye new markets and grow beyond borders, they’ll want to test the waters before diving in. This is where a subsidiary can come in handy – it operates independently while being under the control of the parent company, adding a buffer layer between the entities. Legal protection for both the company and its directors is a good reason to create a subsidiary.
On the other hand, subsidiaries can also be created to serve a range of business needs. It may be created to launch a new product or service, to ensure regulatory compliance, to create tax efficiencies or to enable mergers or acquisitions, and, of course, for the purpose of expanding to new markets and geographies.
The subsidiary will have its own board of directors and officers to manage day-to-day operations, but the parent company has the power to modify the board. It’s generally the only stockholder, which effectively gives it control.
Governance and compliance for international subsidiary management
So you’ve decided to set up that international subsidiary and are ready to get working on a global scale – what now? Just as you would have an entity management plan for your domestic business, so should you extend that subsidiary management plan internationally. The shape of governance in the international subsidiary should be carefully considered.
A study by Deloitte found that two critical questions should be asked at this stage:
- How can sound corporate governance practices and policies be extended downstream to the subsidiaries?
- What would be an appropriate governance structure for the subsidiaries that would best contribute to an effective chain of oversight for the company as a whole?
The subsidiary, after all, is not a lone wolf; it is part of a bigger picture and the parent company must retain oversight and ultimate control, even if it lets the subsidiary run itself. For example, that Deloitte study found that while 73% of significant subsidiaries generally have a separate board of directors, and 49% of these include non-executive directors, 65% of companies have common directors on subsidiary and parent company boards. It also found that 68% of companies indicate that the parent company boards spend significant time overseeing the business and risks of subsidiaries, with 84% of parent companies having specific approval levels in place where the parent must approve the actions or spending of the subsidiary.
These decisions of chain of command, of upstream and downstream reporting, and of ultimate freedom or otherwise of the subsidiary to run its own affairs, must all form part of the international subsidiary management plan.
Global differences aren’t just cultural
While the parent company and its international subsidiaries must share a vision and a business strategy, the execution of these will inevitably differ in each jurisdiction. Even the most nuanced differences in regulation can necessitate a shift in the direction taken for governance or compliance.
The shape of the international subsidiary can also change, given that every jurisdiction has its own types of entities and businesses. The question of what entity type suits your purpose will need careful consideration from the company secretary and the legal operations team, as entity types can face restrictions. The question of foreign ownership can also prove problematic in some jurisdictions, and it may be that you need to enter into partnership with a local business in order to access the market.
The Society of Corporate Secretaries and Governance Professionals notes in its subsidiary management guide that maintaining good standing with other states and countries is vital. Failure to make timely filings, pay required fees or otherwise maintain corporate formalities can result in the authority to business being revoked. When working on a subsidiary management plan internationally, consider all local legal, tax and management or operational requirements of the local jurisdiction, and ensure your plan has all relevant milestones and deadlines plotted out.
But the differences aren’t just regulatory or simply a matter of paperwork; cross-border working also brings with it a need to be mindful of cultural differences. Do you know the correct way to receive a business card from a Chinese acquaintance? Should you expect a meeting in Latin America to start on time? Will it be a handshake or multiple kisses on the cheek to greet your new European business colleagues? How detailed should you make instructions for an Australian subsidiary? When working cross-border and developing a subsidiary management plan internationally, these cultural differences and more must be taken into consideration.
Keep international subsidiary management plans on track with entity management technology
Company structure can have a significant impact on profitability and success for both international subsidiaries and the whole group of businesses. Any parent company will want the freedom to choose to form or dissolve subsidiaries as it suits the overall business strategy and entity management plan. For this reason, the structure of a group of entities must be clear and easily visualized.
The steps to begin your international subsidiary management plan journey are simple:
- Decide on where to set up your subsidiary
- Create the new company, following local regulation and process
- Allocate assets and liabilities
- Create the subsidiary’s bylaws
- Create the board of directors
You will, of course, need to keep process and compliance tasks flowing easily, which is where entity management software comes into play. As the number of subsidiaries grows, it can become increasingly difficult to keep track of compliance.
Entity management platforms such as that from Diligent give compliance and legal operations teams access to real-time information on subsidiaries and related data and documents, all through a cloud-based platform meaning it can be accessed anytime from anywhere in the world – meaning international subsidiaries have access to the same platform as HQ. Diligent’s entity management platform brings international subsidiary management plans to life through entity diagramming, compliance calendars and a single, central source of truth for entity management that allows you to analyze data and perform the ongoing tasks of filing and management.
Schedule a demo to see how Diligent can help you build your subsidiary management plan internationally, and get your compliance growing on a global scale.