As corporate structuring decisions become ever more complex and the regulatory burden on organizations brings added pressures, the demands on the modern governance organization increase. Entity and subsidiary governance requires more resources, more decisions and more transparency as the size and shape of entities get increasingly labyrinthine, taking into account services, products, tax requirements, directorships and more.
For those managing entities or subsidiaries within the legal department, the benefit of good governance throughout the group structure will be a familiar challenge. The general counsel, and the legal operations, governance and compliance professionals working with the general counsel, are well-versed in the jurisdictional requirements for their particular organization. Those requirements are the reason why the parent-subsidiary model is the structure of choice for many multinational companies today, a way to make the most of the growth potential brought about by globalization.
Entities, though, can represent a source of opportunity, but also a source of risk. The parent-subsidiary model aims to mitigate the risk by accommodating regulatory needs and protecting the business – but an increasing number of entities within the structure means those legal professionals must keep track of an increasing burden of entity information. They need to keep it secure and accessible; entity data must be able to be surfaced efficiently when any one of the organization’s stakeholders requires it, and in a way that drives insights and generates good questions.
Finding a way to do this – to both securely store and efficiently surface the right data at the right time in the right format – is the key to creating value and driving better performance.
Why Do General Counsel Opt for the Parent-Subsidiary Model?
Before we go any further, let’s clarify what we mean by “parent” and “subsidiary.”
A subsidiary company is one that is controlled by another company, better known as the parent or holding company. The control is exerted through ownership of more than 50% of the subsidiary’s voting stock, says Wall Street Mojo. Subsidiaries are either set up or acquired by the controlling company, and if the controlling company owns 100% of voting stock, then the subsidiary is known as a “wholly owned subsidiary.”
This model is attractive for general counsel, as it creates a separate legal entity from the parent company, meaning that they are independent in terms of their liabilities, taxation and governance. In terms of risk management, a subsidiary can be sued and sue other entities without involving the parent company, which makes for an attractive proposition in litigious times.
As a company grows, entering new markets or new jurisdictions, the general counsel may set up a subsidiary to ensure compliance with local regulation, to remove the risk from the parent company, or even for reasons of branding and marketing – as a way to keep things separate. The liability of the parent company is limited, management is separated and different identities are possible.
Tax and investment needs are powerful motivators for setting up a subsidiary. Different jurisdictions – be that a different country or just a different U.S. state – levy taxes on profits in different ways, and often subsidiaries will be set up in a different jurisdiction to make the most of this. In the single European market, for example, countries have been known to compete on corporate tax rates to lure businesses to form European headquarters in their jurisdiction.
The parent-subsidiary model does bring governance challenges, particularly in a time of increasingly complex regulation. While global bodies are proposing more harmony in many regulations – from the way countries share information about taxpayers to the way a company moves profit around its own structure – modern governance is a growing burden for in-house legal operations staff. Keeping track of entity information alone can be a minefield when subsidiaries can go into multiple tiers and have differing needs depending on local regulations.
The Importance of Keeping Track of Entity Information
Yet more subsidiaries and more entities, especially ones that are spread around the world, do pose a particular problem to the legal department: How can you keep track of this growing parent-subsidiary model structure?
Maintaining compliance for a parent-subsidiary model is not easy, and it requires careful planning and continued diligence to ensure entities remain in good standing. The particulars differ at every step of the governance journey, from formation through annual reporting all the way to winding down, and modern entity and subsidiary governance requires more transparency than ever before.
This makes it increasingly important to keep track of entity information. At any moment, regulators could come along asking to see evidence of compliance with a new law. An M&A opportunity may suddenly arise, but you need to check if you can legally continue the current structure or if you need to create new entities or new links to take advantage. An extraordinary board meeting may be called, and minutes of previous meetings may be needed as a reference, or a director may resign, meaning legal operations needs to update director information in the register of beneficial owners.
Without a single source of truth for all of this entity information, the modern governance organization risks corrupt data creeping into the system, in turn raising the risk of noncompliance. The company could face legal, operational or reputational damage, risking fines and even jail time for directors – yes, directors are increasingly taking on personal liabilities just by sitting on the Board.
The days of cupboards full of paperwork are long behind us; the filing cabinets must be shut one last time and a new way must be found to keep track of entity information. It must be on hand quickly and efficiently, ensuring that those surfacing the data are accessing the most up-to-date and correct version of events.
Modern Governance Demands Secure, Cloud-Based Technology
This is why the modern governance organization is increasingly turning to cloud-based technologies to fulfill the role of entity and subsidiary governance record. These technologies support the entire entity life cycle, bringing in workflows, change approvals and electronic filing capabilities to help streamline governance operations.
When using an end-to-end governance cloud platform such as Diligent’s, you are working in a robust and secure system that holds data libraries and saved filters, enabling different teams to access what they need quickly and easily. It’s about surfacing the right information at the right time in the right way and the right format for the right people – as and when they need it, as and how they like to receive it.
The parent-subsidiary model really benefits from entity management software, as the general counsel can visualize the structure through entity diagramming. These visualizations can be manipulated to accommodate different entity types and shares, and allow scenario planning to ensure the optimal structure is chosen for growth.
Diligent’s entity management platform integrates with its board platform and secure file-sharing to create that end-to-end system, enabling board operations and entity operations to have access to the same information through the same system – mitigating risk of incorrect data making its way into the decision-making process. This Governance Cloud platform also features a dashboard to surface information in an insightful way without having to dig into multiple layers of data to get the one piece you need most.
Get in touch and schedule a demo to see how Diligent’s entity and board management software can help you keep track of your parent-subsidiary model more closely, and ease the compliance burden on the modern governance operation.