Corporate governance seems to continue to grow in importance for organizations around the world, but perhaps none more so than those structures that have listed subsidiaries within the organization.
As regulatory pressures grow on an international level, subsidiary governance is emerging as an essential discipline in the compliance and legal operations fields. Companies are under increasing scrutiny in terms of how they run themselves, and so must seek to improve governance in subsidiary listings as much as possible.
When working on governance in subsidiary listings, a subsidiary governance manual or framework can become a go-to source of knowledge and practices. These important guidelines include aspects such as the roles and responsibilities of the board; the frequency of audits and risk assessments; how communication flows around the structure; and the company’s stance on issues such as bribery, human rights and slavery, health and safety, and diversity.
In fact, governance in subsidiary listings has taken on such importance that UK legislation now requires corporates, especially listed companies, to publicly state the governance code or approach to which they’ve adhered in the previous year. We’ll look at these requirements in more depth shortly; before we get to that, though, let’s have a quick reminder of what we mean by subsidiary, and how subsidiaries fit into the wider corporate structure.
The role of subsidiaries in corporate structures
A subsidiary in the corporate world is a company that belongs to another company. The entity at the top of the tree is usually referred to as the parent company or the holding company, and it has a controlling interest in its subsidiaries – that is, it controls more than half of its stock, though if it’s 100% owned by another firm, the subsidiary will be referred to as a “wholly owned subsidiary.”
When creating the organizational chart, subsidiaries are those entities that are set up for a specific purpose, such as entering a new market or launching a new product. They can also be created to keep brand identities separate – take the example of Procter & Gamble, which has distinct companies to handle brands including Bounty, Charmin, Pampers and Gillette – or for financial reasons, such as for tax efficiency and raising capital, and for reporting and disclosure purposes.
The UK’s corporate governance regulatory requirements
Under the UK’s Companies (Miscellaneous) Reporting Regulations 2018, any company operating in the UK, particularly those listed on the UK’s stock exchanges, are required to disclose more details about their internal governance or lack thereof.
The regulation states that any UK companies, including subsidiaries, with more than 2,000 employees or a turnover of more than £200 million and a balance sheet total of more than £2 billion, must publish and provide a governance statement to regulators.
Writes Martin Webster, partner at law firm Pinsent Masons: “This means that the company’s directors’ report must state which corporate governance code, if any, the company has applied during the year, how the code was applied, and any departures from the code and reasons behind them. If the company did not apply a named code for the year that decision must be explained, along with the governance arrangements that were applied for the year.”
With an obligation to explain governance decisions and the principles being followed, UK companies and their subsidiaries must give careful thought about how they approach governance in subsidiary listings. The options currently available include the following:
The UK Corporate Governance Code
Formerly known as the Combined Code, the UK Corporate Governance Code sets out standards of good practice and governance in subsidiary listings. It is published by the Financial Reporting Council (FRC), and tackles topics such as board composition and development, remuneration, shareholder relations, accountability and audit. The latest version, published in July 2018, applies to accounting periods beginning on or after January 1, 2019; it updates guidance on board effectiveness, too.
The Quoted Companies Alliance Code
The Quoted Companies Alliance (QCA), an independent membership organization that champions the interests of small- to mid-size quoted companies, published its own governance code in 2013, updating it last in 2018. Calling it a “practical, outcome-oriented approach to corporate governance,” the QCA Code is consistent with the London Stock Exchange’s approach to AIM. It includes 10 corporate governance principles that companies should follow, and step-by-step guidance on how to effectively apply these principles.
The Wates Principles
Also from the Financial Reporting Council of the UK (FRC), the Wates Principles are six guidelines for governance in private companies. They were launched at the end of 2018 to provide a framework for large private companies to not only meet legal requirements, but to promote long-term success. The Wates Principles encourage these companies to adopt a set of key behaviors – including the composition and responsibilities of the board; purpose and leadership; remuneration; and stakeholder relationships – to secure trust and confidence among stakeholders, and to benefit the economy and society in general.
None of the above
Of course, a UK company can choose not to apply any of these named governance codes and instead use its own approach. Under the legislation, companies can choose to explain why the existing codes are not entirely suitable for them, and instead set out the governance arrangements they did apply during the year. This can be a good option for those groups that already have well-developed internal governance structures, even if those arrangements have not always been formalized or put into an internal code or manual.
Achieving transparency in governance operations
Whichever code or approach to corporate governance a UK company chooses to adhere to, there is one thing that remains key: transparency in operations. The legislation and other relevant corporate regulations in the UK follow the global movement toward more transparency in how organizations are run and how they make decisions, driving improvements in governance in subsidiary listings.
To help enable this transparency, many organizations are turning to entity management software to establish a single source of truth for operations. Entity management systems, such as Diligent Entities, help organizations to centralize, manage and effectively structure their corporate record to improve entity governance. This, in turn, helps to better ensure compliance, mitigate risk and improve decision-making through an integrated governance solution.
Diligent Entities helps to get the right information to the right people at the right time, and allows organizations to report on governance and compliance requirements as needed by legislation and by accepted practice across jurisdictions.
Get in touch and request a demo to see how Diligent Entities and the wider Governance Cloud can help companies operating in the UK to adhere to the requirements of the Companies (Miscellaneous) Reporting Regulations 2018, and to improve governance in subsidiary listings.