It’s common for organisations to get ‘stuck’ looking for suitable directors for their subsidiary boards and often they resort to appointing senior employees and ‘badge’ it as reputation enhancing to those individuals. This is a little misleading as there are legal implications associated with being appointed and it’s important all new directors, whether they’re an employee or not, undertake the right due diligence before taking on a role to ensure they are not exposing themselves to conflicts, reputational damage and personal liability.
Concerned about reprisal for asking questions?
It is in the interests of the parent company directors that subsidiary directors take their responsibilities seriously as they also have a certain level of separate but linked liability for your actions as a director. If you face animosity when asking questions about being appointed, consider this a red flag. Those acting in this way are either anti good governance which could be a problem, or they don’t understand your liability, either way it’s a warning sign. Remember that no one can force you to become a director without your express consent (unless it’s in your employment contract or expressly part of your pre-appointment job description) and usually a signed document confirming the same is also required to officially register any appointment with the local companies registry.
What questions should you be asking as a new subsidiary director?
Basic knowledge
• What type of entity are you being appointed to?
Hint – You need to know this as your liability may differ depending on the corporate structure.
• Where in the corporate structure does the entity sit?
Hint – The higher up the group structure chart the entity you will be appointed to sits the more due diligence you will need to carry out to ensure that the entities that sit below ‘your’ subsidiary are also legally compliant.
• Does your appointment have a duration?
Hint – Some directors are only appointed for a rolling term of year with a three-year intended resignation.
• What regulatory checks will need to be carried out on you personally?
Hint – If you are joining a regulated board, for instance financial services, you will be required to have various background checks carried out on you to ensure you’re a fit and proper person and have no past convictions etc.
Background checks
• Why are you being appointed?
Hint – If someone has stepped down ask why. These might provide useful insights before you agree to be appointed.
• What skillset are you expected to bring to the role?
Hint – Is this directorship role one that your predecessor held? Are you comfortable being the expert on the board in that area?
• What director training is available internally or externally?
Hint – Training can be carried out internally or by professional service providers who have knowledge of the local laws. A lower cost option might be to suggest you review a guide to being a director in that jurisdiction. This is something that professional service providers, such as Beyond Governance, can provide or you may have something already drafted within the organisation.
• Are board meetings regular?
Hint – Check if they are they covering the right matters such as health and safety. Are the right people presenting the content to enable the directors to oversee the work?
Statutory compliance – accounts and filings
• When were the annual accounts/financial statements last approved and when are the next set due to be approved?
Hint – It can be a red flag if the annual accounts/financial statements are due to be signed and a director has resigned just before without approving them.
• Is the entity up to date on all statutory compliance filings and acting in accordance with its constitution/articles of association/by-laws?
Hint – If this is met with resistance question why this might be, perhaps systems are not in place to be able to confirm this or perhaps this is just not a priority which is a problem when you will become legally responsible (together with the rest of the board) for compliance from appointment. It is important to remember that your legal responsibility extends to all outstanding filings even if they fell due before you were appointed.
• What are the entities reporting requirements in the country of registration and when must they be completed?
Hint – You and your fellow board colleagues will be responsible for reporting so it is important you understand what is required and who within the organisation will be supporting on this.
• Through what process should the annual accounts/financial statements be approved?
Hint – Getting this wrong can lead to non-compliance and in some cases personal liability for the director(s) that signed them.
• What process should be followed for director appointments (internal and external approvals)?
Hint – You will want to know this to ensure you are correctly appointed but also for future appointments that might take place when you are a director.
Legal liability
• What are the consequences in the country of non-compliance with legislation and regulation of the entity?
• What directors and officer liability insurance is provided?
• Does the parent company issue indemnities to subsidiary directors?
Hint – Although this may be provided there are circumstances in which these have no legal value, ensure you’re confident they are effective and enforceable before relying on them. Some companies put these in to bolster confidence being unaware that they are unenforceable by the subsidiary director, don’t get caught out.
Parent company governance
• What reporting is required to the parent company (if any)?
Hint – consider if this is micromanaging or too light touch, this will give you an indicator of the level of support you will get from the parent company board and also whether you will be empowered to discharge your duties without undue influence from the parent company board.
• What group policies apply to the subsidiary, and have they been adopted formally by the subsidiary board?
Hint – It is important that the subsidiary board displays independent thought in decision making in order that the directors can discharge their duties appropriately.
What documents should you be requesting?
The entity’s articles of association or by-laws
These are the rulebook of the organisation and is it the directors’ responsibility to ensure they are complied with. For instance, they set out how board meetings should run, on what notice they can be called and the minimum number of directors that need to attend for decisions to be made.
The past year of board packs and minute books
You need to understand what has been discussed so far, what is discussed at different times of the year and confirm to yourself that the subsidiary governance is strong and will personally and professionally protect your reputation in your role.
The directors and officer liability insurance policy
You’ll want to know what is covered. You could ask for a call with the broker too to understand in more depth the details of the policy.
Your director indemnity (if one is granted)
Ensure this is appropriately granted and those that sign it are authorised to grant such an indemnity under the entity’s constitution and within group signing authorities.
The delegation of authority policy
This sets out at what level of approval can be taken by the subsidiary board and may extend or constrain its decision-making powers.
Any group policies that apply to the subsidiary
You’ll want to know what is covered. This could limit or extend the responsibilities of the subsidiary board.
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