Many companies concentrate their efforts on parent company governance and ignore the subsidiaries within the group.
For international groups governance can be highly complex with consideration such as economic substance legislation. International regulatory compliance and filing requirements also differ from country to country so it’s important that the individual(s) managing these obligations are sufficiently skilled in this area.
Why do organisations establish subsidiaries?
Subsidiaries are usually established to expand an organisation’s operations, move into new markets, or protect themselves against risk. Whilst the establishing of a new entity can be relatively straightforward thereafter that entity has its own ongoing corporate governance requirements and legal obligations separate to those of their parent company. Subsidiaries often have their own customers, employees, suppliers and other stakeholders independent and separate from other group entities.
Balancing oversight with control
Retaining control ‘at the top’ requires careful planning. Whilst sufficient controls should be put in place (ultimate parent company directors are equally as culpable for actions of a subsidiary as its own directors) there is a fine line between oversight and control. Without the appropriate skills and expertise in subsidiary governance parent company directors can inadvertently become shadow directors of a subsidiary.
Aligning group wide policies
Where there are multiple employing entities within a group it is also important to understand which parent company policies, such as whistleblowing, will and will not apply to each subsidiary in each country. In certain circumstances for instance, depending on where employees are based, it can be futile to expect an international group to roll our group wide policies to all its employees.
Subsidiary director conflicts of interest
Subsidiary directors can also be conflicted if they hold directorships in multiple subsidiaries. All directors must ensure they are always acting in the best interests of and in accordance with their directors’ duties in relation to the entity in which they are taking a decision. As such it is not unheard of for subsidiary directors to vote against an action proposed by its parent company. Most subsidiary directors are also employees of an entity within the group and as such can also be conflicted due to their employee status on certain matters.
Building a subsidiary governance framework
In large organisations its often not practical for the parent company to take care of the compliance and regulatory requirements of every subsidiary especially if they are international. As such building a strong subsidiary governance framework is key to successful parent company delegation. This enables an appropriate level of control to remain at ‘the centre’ or within ‘head office’.
In conclusion one size does not fit all but there are some common practices that a group can follow to ensure proper oversight and good subsidiary governance. These practices then give directors comfort and enable them to sleep easier at night.