Often, the focus placed on boards by regulators and those who oversee governance and compliance revolves around the main board — that is, the parent or holding company’s board, the one that theoretically sets the scene and calls the shots.
However, the entity managers and corporate secretaries in these larger legal structures could have several boards under their purview — and those boards may be subject to very different regulations, depending on the jurisdiction in which the entity is incorporated. Certainly, the compliance and governance fates of every entity in the structure will inevitably impact on the parent board, with any compliance failings or regulatory issues causing a ripple effect that could affect the whole structure regardless of how closely tied each entity is.
This means that the corporate secretaries and entity managers within a structure must work together to closely examine board composition and entity management. They must be aware of the unique requirements of each jurisdiction in which entities are incorporated, as well as how global movements and regulatory trends are enacted locally wherever the structure operates.
The nuances of the parent-subsidiary relationship
Before we dive further into board composition and entity management, though, let’s quickly remind ourselves of the nuances of that all-important parent-subsidiary relationship.
According to Investopedia: “A subsidiary may either be a preexisting corporation that a parent company acquires, or it may be an entity that a parent company creates anew, in order to broaden its consumer base…Subsidiaries function as independent legal entities, rather than as divisions of a parent company.”
This is, of course, distinct to a sister company, which is where subsidiaries are “related to one another by virtue of the fact that they share a common parent entity,” advises Investopedia. “Each sister company operates independently from the others, and in most cases they produce unrelated product lines.”
So, the way a parent or holding company chooses to set up its various entities — from wholly owned subsidiaries through to sister companies or joint ventures — impacts the way it handles entity management across the group. In some cases, the parent company could file a consolidated tax return to simplify corporate tax calculations, and it may be able to offset losses and gains between subsidiaries to lower overall taxable revenue.
However, regulators around the world are cracking down on base erosion and profit sharing; the OECD’s BEPS project was specifically set up to analyze the relationships between entities within a structure to ensure there is no tax avoidance or other dodgy dealings going on. That’s one reason why board composition and entity management is so important — there must be transparency across the structure, and it’s essential that the parent’s general counsel and legal operations teams can access and have full visibility over entity management throughout the group, especially when it comes to directorships and the relationships between entities.
Pay attention to diversity when it comes to board composition and entity management
While some jurisdictions will set parameters and restrictions on board composition and entity management — such as whether the subsidiary can share board members with its parent, and whether there needs to be any local representation on the board — there are growing global trends to which parents and subsidiaries should pay close attention. Some of these trends are becoming formalized in local regulation, so it’s worth keeping an eye on local market sentiment, too.
Let’s take the UK, for example, and its push for diversity when it comes to board composition and entity management. The 2018 revision of the UK Corporate Governance Code puts the relationships between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy, said the Financial Reporting Council as it released the new code.
“This code places emphasis on businesses building trust by forging strong relationships with key stakeholders,” the FRC wrote. “It calls for companies to establish a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.”
It is those final two points that we should home in on here: promoting integrity and valuing diversity. The corporate world has long been criticized for being “pale, male and stale” — that is, that there is a severe lack of women and people of color when you look at board composition across the world. Recent research by recruitment consultancy Green Park, as quoted in The Guardian, found that the total number of BAME board members, both executive and non-executive, decreased to 7.4% at the end of 2019, down from nearly 9% in 2018, while the number of chairs, chief executives and finance directors remained at 3.3%.
The government’s Parker Review set a target for the FTSE 100 to appoint at least one board-level director from a BAME background by 2021. Another government review, the Hampton-Alexander Review, has set similar targets for women on boards; its target for 33% of boards being female in the FTSE 100 has been met, and the attention has now turned to achieving the same target in leadership teams of the FTSE 350 companies by the end of this year (2020).
But just promoting for the sake of diversity won’t cut it; stakeholders, and particularly investors, seek reassurance that their boards have the necessary skills and experience to ensure the long-term success of the company and to build a positive culture. While the boards of subsidiaries won’t require the same level of experience and knowledge that a parent board will need, the skillset still needs to be considered, as does the local sentiment toward trends such as diversity and sustainability.
Companies should be considering the recommendations of these reviews when looking at board composition, and making plans to drive improvements to ensure those targets are not just met, but exceeded.
Using technology to monitor board composition
Many jurisdictions now require organizations to report on board composition, which is why there is renewed attention on how boards look, feel and act globally. But to be able to report accurately on board composition and entity management, organizations must have an up-to-date and real-time picture of the status of all subsidiaries and other entities across the legal structure. This can be near impossible — unless the organization subscribes to a legal tech solution that creates a single source of truth for the corporate record.
Diligent Entities is one such solution. Helping organizations to centralize, manage and effectively structure their corporate record to improve entity governance, Diligent Entities also seamlessly integrates with the Diligent Boards portal and a secure file-sharing platform, among other cloud-based solutions, to create an all-in-one ecosystem of cloud-based governance.
By using an integrated technology stack to track and monitor entity data, entity managers can ensure board composition and entity management remain top of mind. They can surface the right information to the right people at the right time to complete routine business processes, and get both the board and the regulators the information they need.
Get in touch and request a demo to see how Diligent’s suite of governance and compliance technology can help your organization to monitor board composition and entity management.