It’s natural for corporations to seek to establish new entities to fuel business growth and deal with increasingly complex regulations – but with each new entity comes an increased need for entity management and robust subsidiary governance. Globalization raises legal and corporate governance issues at the subsidiary level that need constant attention.
To deal with this, many company secretaries and legal operations professionals turn to a subsidiary governance framework template to help get things under control. Framework templates provide guidelines and ideas to ensure both downstream and upstream corporate governance flows are robust and compliance-proof.
Parents can’t be responsible for everything
It’s just not practical to assume the parent company or HQ will take care of the regulatory and compliance needs for every subsidiary. Any subsidiary governance framework template must lay out the roles and responsibilities of both the parent and each subsidiary.
A survey by Deloitte found that parent companies often take much of the governance and compliance burden:
- 68% indicated parent company boards spend significant time overseeing the business and risks of the subsidiaries
- 84% of parent companies have specific approval levels in place where the parent must approve the actions or spending of the subsidiary
The same survey also found that 78% view the governance of overseas subsidiaries to be different from that of domestic subsidiaries, yet 81% have extended their own policies and procedures, such as whistleblower policies, to the largest subsidiaries.
A subsidiary governance framework template can help to align processes while allowing wriggle room for local action. It provides the framework to allow those responsible for subsidiary governance and entity management the space to figure out what works best for them and their needs while ensuring the policies and practices generally conform to what the parent expects. It means the parent can focus on group-level requirements and issues, working to grow the business further and devise long-term strategies, and the subsidiaries can work out the part they need to play and how that works at a jurisdictional level.
In fact, the European Union has developed an Action Plan to modernize the legal framework for more engaged shareholders and sustainable companies, looking specifically at European company law and corporate governance, so the need for a subsidiary governance framework template is becoming more important and urgent.
A checklist to drive a subsidiary governance framework template
ICSA developed an “at a glance” subsidiary governance framework template checklist to help corporations operating across multiple jurisdictions and business areas. They suggest the following as a strong starting point for your subsidiary governance framework template, something you can cascade to all entities and business lines.
Get buy-in and establish processes
First things first: Set the tone from the top. You want to ensure you have the buy-in of the holding company board and all of the subsidiaries’ boards before rolling out a subsidiary governance framework template. Once you have their buy-in, perform an audit and due diligence on all subsidiaries and collate key information and documentation. Establish and resource the governance team, setting priorities, goals and time frames, and then clearly communicate the rationale behind your project to set a subsidiary governance framework template – clear communication will ensure the key people are brought along for the journey.
Build in some flexibility for local needs
The subsidiary governance framework template should be built on best practice corporate governance throughout the group where possible, but bear in mind there may be some legal or regulatory barriers to best practice. Find a way to mitigate risks and develop your template with some flexibility built-in – local laws, regulations and customs may require subsidiaries to tweak to suit the jurisdiction. A one-size-fits-all approach is unlikely to be suitable everywhere, but involve and encourage subsidiary boards and management to be involved in developing the framework – their knowledge of how the subsidiary is run and of local regulation will be invaluable.
Audits and reviews are key
The composition and effectiveness of subsidiary boards should also be audited, with plans for a regular review, especially after acquisitions or expansion. Ensure you review the service contracts for all directors at the subsidiary level to ensure they include appropriate protections, and the remuneration policies and practices in general – what is appropriate for staff, particularly senior executives, can and will differ across jurisdictions and subsidiaries, so develop remuneration policies with this in mind.
Documents, policies and procedures
Make sure all group-wide policies – such as anti-bribery policies, codes of ethics, health and safety needs, and whistleblowing procedures – are easily accessible to all staff; lack of awareness is not an excuse for non-compliance. You may need to refresh the policies to fit the subsidiary governance framework template needs. A central repository for entity information is best practice here; it ensures version control and that everyone sees the same thing. Also consider overarching subsidiary board guidance or terms of reference for what is expected of subsidiary boards – what are their duties, their interaction with the parent, and so on – and any conflicts of interest policy that may be needed. Delegating authorities and decision-making procedures must be carefully defined in any terms of reference. You’ll also need board meeting procedures guidance detailing things like the form of agendas and board papers, how meetings should be minuted, who is in circulation, etc.
Communications and training
Ensure there are clear reporting lines drawn and keep the flow of communication open between the parent and the subsidiaries. Communicate clearly the aims of the subsidiary governance framework template and what is expected of them. Encourage communication and engagement across the whole company, and keep staff and stakeholders informed of relevant changes. Regular training will be needed especially for subsidiary directors; consider how new staff and directors are onboarded. You may find that a communications guide or strategy comes in handy here, as can appointing a set of corporate governance champions.
How technology can help deliver a subsidiary governance framework template
No matter how great your policies are, or how many subsidiary governance framework templates you’ve delivered, they won’t work if those out in the subsidiaries don’t know about them – or have access to the systems that drive subsidiary governance best practices.
Entity management software helps to deliver on the promise of a subsidiary governance framework template by creating a single source of truth for all subsidiary-related information. It’s a central repository accessible by all in the business, including far-flung entities as well as the board and frontline staff. A place to store contracts, filing dates, director information and more, entity management software such as that offered by Diligent is designed for streamlined, seamless and efficient subsidiary governance.