Subsidiary Governance Best Practices

Lauren Mcmenemy

The world of regulation and industry requirements seems to be in a constant state of flux. As scandals rock the world, as governments change and get tougher, and as the developed world seeks to further align its practices to make it harder to transfer profits and to hide money offshore, those responsible for subsidiary governance struggle to keep track.

Even the most experienced and confident of legal operations and compliance professionals can struggle with this, but turning to subsidiary governance best practices can help give you some peace of mind that your own entity management is headed in the right direction. While every group and entity will naturally have different processes and different regulatory requirements, the following guidelines, when considered in the context of your own operation, can help to bring clarity to subsidiary governance best practices.

Know requirements in all jurisdictions

It may seem like an oversimplification, but this can’t be stressed enough: no amount of adhering to subsidiary governance best practices will help the governance and compliance process if you don’t know what you must comply with.

If an entity is being set up in a new jurisdiction, ensure you know your requirements before starting the legal process. If a jurisdiction is more familiar, ensure you know the most recent regulations and compliance requirements before starting the legal process. These things can change quickly, and even a small failure in process or documentation can lead to increased costs or worse — unknown non-compliance.

Know your capabilities

With requirements known, turn your sights within. Every part of subsidiary governance best practices starts with an audit. Know what capabilities you have in-house, and what resources you will need to be able to fulfill the requirements above. Track your costs and expenditures to know where savings can be made without affecting effectiveness — almost 70% of parent-company boards spend significant time overseeing the business and risks of subsidiaries, according to a study by Deloitte. Compliance and subsidiary governance do not come for free, and management should allocate an appropriate budget to the legal operations and compliance teams to be able to maintain governance and compliance.

Establish a single source of truth

Managing multiple entities — especially when those entities are spread across multiple jurisdictions, each with its own unique regulatory requirements — adds complexity. Subsidiary governance best practices show that establishing a single source of truth can take away some of that burden.

By storing all entity-related data within a central repository, you help ensure all involved in entity management are looking at the most up-to-date and relevant information. This saves mistakes being made from incomplete or inaccurate data, and helps streamline the compliance and subsidiary governance process. This is where entity management and board management software come into play; these systems are built to drive good governance and adhere to subsidiary management best practices.

Stay up to date, both internally and externally

We’ve discussed the importance of knowing your compliance requirements in every jurisdiction in which you operate or have an entity — the risk of fines, reputation damage or even jail time for directors is too great otherwise — but it’s equally important to stay abreast of internal movements. If the group company secretary is not aware of a change of director in entity A and the fact that entity B hasn’t taken minutes at the last three board meetings, then that group has a major compliance risk on its hands. Again, a central repository acting as a single source of truth conforms to subsidiary management best practices and enables everyone involved in compliance to stay informed of the latest real-time data.

Create strong internal processes

The importance of policies, practices and procedures cannot be underestimated when it comes to subsidiary governance best practices. Ensure all departments, from legal and accounting to operations and HR, are aware of compliance requirements and are fulfilling their duties. Make sure those processes and policies are documented and held centrally in a place that’s easily accessible by everyone who needs to follow and refer to them, and get dates in diaries to ensure notifications and alerts are sent out when deadlines are approaching.

Break down silos and keep the lines of communication open

Operating in silos will not help your subsidiary governance best practices in any way; compliance is a whole-company obligation and it needs whole-company communication. Ensure there is communication not just within the entity, but also between the entity and the group. Some parent organizations prefer a tiered subsidiary governance model to ensure communication is seamless and nothing is missed.

Have entity lifecycle management embedded

Of course, if you have a robust entity lifecycle management process, there’s less likelihood of missing risks — but entity lifecycle management also helps to ensure every entity in play is essential to the business. Entities typically have a lifecycle following formation, activity and dissolution. Ensure you record the reasons for the formation, who requested and approved it, and who was informed or involved. This then moves into business as usual checks and balances to verify information is current and accurate. Finally, when it’s time to de-activate the entity, your central repository should help by assuring all facets of the entity, like contracts and ledgers, are properly closed.

Perform regular health checks

It starts with an audit, yes, but it continues with audits, too. Subsidiary governance best practices center around regular entity health checks to ensure compliance is still on track. This is where you can pick up any regulatory changes or director changes that went unnoticed, and get the chance to mitigate risks before they become compliance issues.

While checking entities, ask yourself why you have the number of subsidiaries you do, and how each subsidiary’s existence is essential to the group’s mission and business strategy. If it’s not required to retain a license or meet a fundamental legal requirement, if it’s not vital for carrying out the basic mission and long-term goals of the company, or if it’s not instrumental for meeting current strategic goals, then ask yourself if it’s really needed.

Subsidiary management best practices: Entity management platforms are essential tools for compliance

All of these subsidiary governance best practices rely on access to robust information, delivered in real-time to ensure up-to-date data — and yet some compliance, governance and legal operations professionals still use spreadsheets to manage their entities.

Entity management software, such as that offered by Diligent, deliver the data needed to adhere to subsidiary governance best practices, and do so from a secure central repository that can be accessed from anywhere in the world. This is especially important when subsidiary governance is happening across state or national borders. By acting as a single source of truth, the entity management software can drive subsidiary governance best practices across the company and its entities.

Get in touch and schedule a demo to see Diligent’s entity management software, and learn how it helps drive subsidiary governance best practices in the governance, compliance and legal operations space.

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Lauren McMenemy

Experienced journalist Lauren McMenemy has been writing about compliance and governance for several years, and has covered finance, professional services, healthcare, technology, energy and entertainment.