6 Subsidiary Governance Best Practices

Kerie Kerstetter

Diligent’s Modern Governance Summit 2020 recently brought together more than 2,000 governance professionals, from corporate secretaries and general counsels to board administrators, clerks and executive assistants.

Across two days, the virtual event shared best practice tips and education, as well as offering networking and product training opportunities, all designed to elevate governance practices within attendees’ organizations.

In a presentation on Subsidiary Governance Best Practices, Cathy Cartieri, Diligent’s Director of Data Management, and Andy Casey, Head of Corporate Secretarial Services at alternative legal and compliance services provider Konexo, shared tips on managing governance across a range of entities. Here are some of the session’s highlights:

Why Do Companies Form Subsidiaries?

Cartieri and Casey started off by examining the reasons why forming subsidiaries may be beneficial for organizations:

1) To aid global expansion and operation

When a corporate is expanding, having local subsidiaries can help to mitigate the potential remoteness of a large, distantly headquartered organization. By putting in place subsidiaries, organizations create a structure that can take account of political, economic, social and legal factors that might come into play in each local market.

In addition, different entities in different jurisdictions can make it easier to operate on a practical level – mitigating the impact of different time zones or cultures, for instance.

2) To separate business lines and management

The creation of subsidiaries also allows firms to put in place appropriate management structures and separate brands, all of which can operate under a single overarching management structure.

3) To manage business risks and liabilities

Subsidiaries can enable the top company to be shielded from any liabilities originating at entity level, while retaining overall control across the business. This is seen particularly in certain sectors, such as the film or property management industries.

4) To increase efficiency and diversification

If your organization has a diverse range of businesses, subsidiaries can enable you to manage these separately in the best way for each one, including when it comes to geographical market issues or currency.

5) To benefit from tax regulations

Separation of commercial and non-commercial interests can have tax advantages, as can the ability to offset profit and loss across different subsidiaries.

In addition to the benefits, of course, there are also issues to consider when setting up subsidiaries. Companies should be alert to potential challenges that come with the management of multiple entities. Maintaining a proportionate approach to your obligations is one of the reasons organizations look to rank their subsidiaries.

Ranking Subsidiaries

As Casey points out, “Subsidiaries across group structures serve a variety of purposes, and therefore need to be managed accordingly.”

Particularly in regulated sectors, organizations are increasingly ranking their subsidiaries in tiers according to key criteria, which might include their risk profile, location or value. This enables companies to devote a commensurate level of corporate governance and management to each subsidiary, taking into account any local requirements, while maintaining a baseline level of governance and risk management across all.

These ranks shouldn’t be set in stone, but should be revisited regularly and be expected to change over time in response to organizational or external changes.

Best Practice Subsidiary Management: 6 Key Actions

Once you’ve established your optimal subsidiary structure, managing these entities in a way that avoids compliance breaches or governance failings is critical.

Casey has first-hand insight into best practices, and shared some steps that organizations should take:

  1. Get a clear picture of your subsidiaries and where they are. While this might sound obvious, Konexo is often asked to validate companies’ entity universes. Corporate validation provides a health check of all your entities, ensuring your entity information is on track.
  2. Maintain this knowledge and compliance rigor via annual compliance checks across all your legal entities.
  3. Keep track of corporate actions. If subsidiaries are able to change things like registered office address locally, your central entity records might not be accurate; this lack of oversight is inimical best practice governance.
  4. Putting in place a subsidiary governance framework is invaluable here, and will ensure you have clear processes and central audit-ready records of any corporate actions taken locally.
  5. Corporate simplification – or at minimum a regular review to check that your structure is optimal – is also important. Revisit it annually to see if rationalization would help to simplify your entity management.
  6. Ensure your directors are well-trained, with regular refreshers, so they understand both entity management best practice and their personal accountabilities in his regard. Have you given them the tools they need to champion best practice here?

It’s Never Too Late to Act!

Cartieri reminded attendees that it’s never too late to start improving your subsidiary governance – and that the benefits can be significant.

Large corporates should ensure their subsidiary governance is on point before they expand further. Smaller companies, particularly if looking to go public or carry out M&A activity, should get up to speed.

In both cases, organizations may end up with new subsidiaries in jurisdictions they’re not familiar with. The penalties for this lack of understanding can be significant: In India, for instance, financial penalties accrue for every day a company is late with its filings. Knowledge of these local regulations pays dividends.

The problems caused by a lack of best practice can also impact commercial success – negatively impacting the bid process, for example.

Casey stressed the importance of obtaining a clear picture of all your subsidiaries, however small; one small but remote subsidiary where you don’t have clear oversight can cause more challenges than a multitude of bigger entities closer to the head office.

Access, Accountability and Efficiency: Why Subsidiary Governance Technology Is Necessary

Creating a single source of truth can be invaluable when it comes to corporate governance, and never more so than when you’re working with a range of entities and subsidiaries.

Keeping accurate data on robust, consistent systems gives your central teams confidence that they are using the latest, most reliable information.

Or, as Casey succinctly put it, “Using tech to manage your entities is no longer an optional extra.” In recent years, compliance technology has “gone from being an enhancer to something that is business critical,” Casey continued. Using technology is no longer a differentiator but an expected baseline; the expectation for professionally run organizations.

But tech isn’t everything. In Andy’s words again, “Having the kit doesn’t guarantee you the success.” Many organizations are not using the technology they have to its full potential; his advice is that they make best use of the technology at their disposal, exploring all the ways it can help to rationalize and improve processes.

At the same time, streamline your approach. A good entity governance system will give you a single repository which is more effective, efficient and reliable than multiple sources of data. Ownership and accountability are also prerequisites. You may have teams on the ground, or third-party outsourcers managing local activity, but it’s important to make one person accountable for ensuring central governance.

You should standardize and automate as far as possible. Whether you’re managing document filings, board reports or other reporting, using your compliance software to automate their production will both save time and create a more professional, robust end result.

In short, the closing message was that technology facilitates global access, enabling local teams and central management to work together for optimal subsidiary governance.

Keep an eye out for Cathy and Andy’s presentation as it will become available within this article soon. Also, you can schedule a demo to discover how Diligent can help you to deliver best practice subsidiary governance.

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Kerie Kerstetter
Kerie Kerstetter is a former Senior Director at Diligent and the Next Gen Board Leaders. She has done extensive work into how governance and ESG technologies empower leadership to make informed, data-driven decisions while mitigating cyber risk. Kerie was one of the founding members of Boardroom Resources, the premier educational resource for board members, acquired by Diligent in 2018.