In the past 20 years, the rapid development of communication technology and shifts in worldwide markets have combined to create the perfect scenario for a fully globalized economy. Organizations have been keenly aware of these conditions, and have responded by expanding their operations overseas, resulting in a proliferation of corporate subsidiaries around the world. In addition to these offshore ventures, corporations establish domestic subsidiaries through mergers and acquisitions or to take advantage of the considerable tax savings a subsidiary can provide.
This abundance of subsidiaries presents an increasingly complex landscape for corporate management, particularly in regard to governance and compliance. Subsidiaries operate in the shadow of their parent company, and so corporate management must try to satisfy both the demands of the parent organization’s primary mission and the goals of the individual subsidiary.
Acquiring this balance is often more difficult than it sounds. Corporations want to establish governance principles that reflect the parent company’s business ethos while respecting the individual intricacies of each subsidiary, including the regulatory requirements of its particular jurisdiction and the cultural factors that may affect its operation.
Below we detail three strategies employed by successful corporations to rein in the task of effective subsidiary management.
Strategy #1: Formation of Separate Boards for Subsidiaries
One initial decision a corporation must make when establishing a subsidiary is whether or not to form a board separate from that of the parent company. Sometimes, local laws and regulations mandate this decision from the beginning. For example, in many jurisdictions, all companies must have a board of directors, and in some cases, companies are required to people those boards with at least some local directors.
Though these boards provide some measure of localized control over the workings of the company, board actions are expected to follow the same overall governance principles established by the parent company, and board members should perform their roles in the same spirit as required under overall corporate regulations.
When establishing subsidiary boards, corporations should pay special attention to the composition of the board, particularly in regard to the mix of parent company and local directors. In making these decisions, organizations must find a balance between two often-competing obligations. On the one hand, the parent company must maintain executive control over the strategic direction of the company as a whole. On the other, for effective board oversight, the subsidiary boards need to do more than just reflect the general will of the parent company.
As noted before, in some jurisdictions, companies are required to include a certain percentage of local representation on the board, particularly in the case of establishing overseas subsidiaries. But even in domestic subsidiaries, a healthy mix of local and parent company representatives seems to be advantageous for both the individual subsidiary and the organization as a whole. Common solutions to this challenge include the inclusion of non-executive board members to the subsidiary board, or the selection of common board members, who serve on both the parent company board and the subsidiary board.
Strategy #2: Foster a Mutually Beneficial Parent-Subsidiary Relationship
Part of managing the interactions between the parent company and the subsidiary lies in understanding the ways that each may help the other to achieve more lasting success. The first step in this process is to identify and consider the parent subsidiary matrix from their respective perspectives. This recognition can facilitate discussion and create an environment of shared understanding and acknowledgement.
This attitude of mutual respect can be essential to the process of defining or redefining the role of the subsidiary so that it aligns with the parent company’s overall business strategy. A key element to this realignment is to recognize and evaluate the possible contribution and capabilities of the subsidiary. A subsidiary’s role within the parent group can greatly depend upon the parent-subsidiary relationship, the subsidiary’s initiative and acumen, and the parent company’s recognition of the subsidiary’s ability to contribute. It is also important to recognize that the subsidiary’s role in an organization is not static, and often changes as the overall corporation continues to grow and develop.
Strategy #3: Ensure Consistent, Quality Subsidiary Information With Entity Management Technology
In order to meet the many needs of parent companies and all of their affiliated subsidiaries, corporations need access to reliable, accurate entity information. Entity management technology helps coordinate details such as tracking entity life cycle, officer/director appointments, ownership, registration requirements and the ever-expanding landscape of regulatory measures.
Successfully implemented entity management platforms can facilitate all of these functions across time zones, languages and departments. Specifically, entity management technology provides the parent-subsidiary partnership with these essential advantages:
- Centralized Data Source for Entity Information: With subsidiaries spread across the globe, it is easy for multinational companies to lose track of their own vital entity information. Without a single repository, individual subsidiaries, or even individual departments, begin to silo their company data, leaving the parent company with a fragmented and incomplete vision of their overall holdings. Entity management technology provides a single source of truth for entity information by creating a repository for all allied documents that can be maintained and updated continuously.
- Compliance Obligations Management: Multinational corporations continually struggle to stay abreast of compliance initiatives. The wide array of distinct jurisdictions and regulatory demands makes navigating these requirements more challenging than ever. Failing to meet these obligations could result in slowdowns, fines or other legal action. Entity management technology helps to mitigate these issues, creating an array of automated alerts to make sure the right team members have the information they need to meet regulatory demands. These efforts are made easier by streamlined and automated information updating, assuring that compliance efforts are kept verifiable and complete.
- Collaboration Across the Organization: Once a corporation adopts a robust entity management system, it is easy to build out the necessary functions to allow for collaboration between subsidiaries. Authorized access points allow members of each subsidiary to communicate and to share vital information no matter where they are in relation to the parent company. In addition, information will also be available to core applications. Entity ownership information synchronizes among all applications to ensure accuracy.
Meeting the challenge of successful subsidiary governance
Market trends all point to the continuing increase of multinational corporations presiding over vast arrays of subsidiary companies. To meet the challenges of managing these endeavors, corporations need firm, able boards of directors, strong parent-subsidiary relationships and effective entity management technology.
To find out more about successful subsidiary governance, contact a Blueprint representative.