The UK Corporate Governance Code does not necessarily apply to subsidiaries and foreign entities, but the risk of a crisis becomes great when it is not applied at these companies. Directors are personally liable for non-compliance at all subsidiaries, but, at many companies, there is little knowledge at the top of what is happening outside of the parent company. Entity Management software permit the board to stay in close touch with subsidiaries and foreign entities, to be warned of potential threats to them and to take action to avoid crises. The Company Secretary can use Entity Management software to keep a close eye on all companies in the corporate structure and to warn directors to take action when necessary.
Corporate governance at all subsidiaries and entities
Formal corporate governance in the UK, even after the recent revisions of the Corporate Governance Code, is only obligatory at listed companies and soon will be also at the largest private companies. The Code does not refer to the governance of subsidiaries and entities, but a compliance failure at one of these would revert very harmfully to the UK parent company and its board. Directors are, in fact, personally liable for compliance failures at subsidiaries and entities, so they have a serious interest in understanding the corporate structure as a whole and in getting the data they need about all operations throughout that structure.
In a crisis situation, will the controls be in place to manage all of the subsidiaries and entities? Will the correct steps be taken, as good corporate governance dictates?
“The legal risks associated with subsidiary governance include personal exposure for directors and officers, legal and regulatory compliance failure and potentially unauthorised commitments (for example, orphan companies, directors being arrested on arrival in a country or being placed under house arrest, or transactions being rendered void); in addition, multinationals with numerous foreign subsidiaries carry greater financial, tax, commercial and operational risk. Identifying, understanding and mitigating those risks is a key role for any governance function,” writes the London office of PwC in a recent report.
Even apart from times of crisis, the principles that underpin the Code are good, common sense, governance principles and should be applied throughout any group.
There is yet another risk that calls for the application of entity management: “In the UK, plc corporate governance has a well-established and embedded framework that is adhered to. However, there is a risk that groups can get complacent. If a governance framework has been in place for a number of years, it will need to be refreshed often to ensure it is always fit for purpose,” PwC points out.
Entity Management enables compliance and provides much-needed data
The answer to this challenge is the use of entity management software. These provide a subsidiary governance framework and enable regular review of this policy. Using entity management software, regular audits of subsidiaries are made possible to ensure that they are compliant, even in terms of their local regulatory climate. With entity management software, subsidiaries and foreign entities can adhere to the overall principles and values at the company while keeping up with the local regulations, as a recent article by a UK-based expert points out.
Parent organisations, their directors and Company Secretaries need a deeper understanding of their entity structure, and that is best achieved via secure and real-time access to the data required about all operations at subsidiaries and foreign entities.
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Using data to improve governance
Comprehensive reporting of data from subsidiaries and entities, in a format that is easily understandable and accessible, is what directors require in terms of entity management. The value boards can derive from such data has grown exponentially over the past decade.
Organisations need regular and real-time access to entity information and data, such as operating results, financial reporting and management performance. “Sometimes entity information is simple and at other times it is highly detailed and specific – but, in any case, it is required almost every single day in a large organisation,” the expert writes.
“Whilst there are some common themes around directors’ duties, including a duty of care, exercising independent judgement and managing conflicts of interest, many jurisdictions have key differences. For example, parent company directors may owe fiduciary duties to subsidiary companies, there may be a cap on the number of directorships an individual may hold, plus there is a wide range of personal and criminal liabilities that apply to directors,” writes PwC.
Company Secretaries can take advantage of the capabilities of an entity management system, and then ensure that they are in touch with the subsidiaries they need to know about, and that they have the correct data to make decisions about how they are operating. Company Secretaries have a critical role to play in helping directors across a group understand, and comply with, each set of local requirements.
Some boards of directors are taking action to get better control of subsidiary and foreign entity compliance. “Working with entity management software, they are adopting a tighter control of the composition of subsidiary boards and exercising greater focus on the calibre of subsidiary directors, with a ring-fenced group, or ‘slate’ of individuals being identified as being those people with the appropriate skill set to act as directors of subsidiaries. This makes the task of ensuring directors receive sufficient training, both on induction and on an ongoing, and tailored basis, far easier,” PwC says.
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