Subsidiary management explained: What it is & how to get it right
Worldwide markets have rapidly developed over the past 20 years. To keep up, the smartest organizations have turned to a common yet too often misunderstood tool: corporate subsidiaries and, equally importantly, subsidiary management.
The abundance of subsidiaries presents an increasingly complex landscape for corporate management, particularly regarding governance and compliance. Subsidiaries operate in the shadow of their parent company, so corporate management must try to satisfy both the demands of the parent organization’s primary mission and the goals of the individual subsidiary.
Subsidiary management means mastering this balance. Here, we’ll explain what this entails, including:
- What subsidiary management is and why it’s important
- The role of governance in subsidiary management
- A subsidiary governance framework
- How to create a subsidiary management plan
- Subsidiary management best practices
What is subsidiary management?
Subsidiary management is the strategic oversight of subsidiaries within the corporate structure. The parent or holding company owns the majority of the subsidiary’s shares, so it makes practical sense that the parent company would also manage how it operates.
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.
Corporations that get subsidiary management right will provide a framework that gives the subsidiary space to determine what works best for them and their needs while ensuring its policies and practices generally conform to the parent’s expectations. 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 its operations and jurisdictional-level requirements.
The importance of effectively managing subsidiaries
While branches can be powerful extensions of the corporation, businesses form subsidiaries for several distinct reasons: to expand globally, to separate different lines of business, to gain tax benefits, and many others. To realize those goals, however, a parent company must manage its subsidiary effectively from open to close.
Managing subsidiaries successfully is essential because it sets the stage for:
- Shared strategy: Corporations establish subsidiaries to achieve certain objectives. Management ensures subsidiaries continue to align with that objective, maximizing the corporation’s opportunities for success.
- Strategic use of resources: A group of subsidiaries can innovate faster because they can share knowledge and expertise. Effective management also reduces the chances that one subsidiary will introduce conflicts of interest with another.
- Risk management: Different markets and lines of business encounter different risks. Without subsidiary management, those risks can catch you unawares.
- Financial performance: The parent company’s finances are stronger when each subsidiary implements sound financial practices and follows relevant accounting and reporting standards.
- Governance and compliance: Subsidiaries often operate in different business landscapes than the parent or holding company. Proactive management ensures each subsidiary remains compliant with laws, regulations and standards.
Governance in subsidiary management
A subsidiary structure needs clear, robust corporate governance guidelines to ensure every entity at every level of the subsidiary structure works toward the right compliance levels in the right ways.
However, at the parent company level, it can be difficult to know for sure that your corporate governance is being upheld to an adequate level throughout the chain. It's important to get a handle on this, as regulators are increasingly saying the parent must be held responsible for the actions of entities in all parts of the subsidiary structure.
That said, it's not realistic to assume the parent company will take care of the regulatory and compliance needs of every subsidiary, so a strong subsidiary governance framework becomes an essential document and process to ensure good subsidiary governance.
Subsidiary governance aims to help corporations operating across multiple jurisdictions and business areas maintain corporate governance across the subsidiary structure.
Subsidiary governance framework
The Chartered Governance Institute (CGI) developed an at-a-glance 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
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 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.
Retain flexibility for local needs
A subsidiary governance framework template should be built on best-practice corporate governance throughout the group, but there may be legal or regulatory barriers to best practices. Mitigate risks and develop your template with built-in flexibility — 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. Instead, 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 regulations will be invaluable.
Conduct regular audits and reviews
Audit the composition and effectiveness of subsidiary boards, 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 remuneration policies and practices. What is appropriate for staff, particularly senior executives, can and will differ across jurisdictions and subsidiaries, so develop remuneration policies with this in mind.
Centralize and distribute documents, policies and procedures
Lack of awareness is not an excuse for noncompliance. Ensure staff can easily access all group-wide policies — such as anti-bribery policies, codes of ethics, health and safety needs, and whistleblowing procedures. 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, taking meeting minutes, etc.
Offer clear communication and training
Create clear reporting channels and maintain open lines of communication between the parent and the subsidiaries. Communicate the aims of the subsidiary governance framework template and what is expected of each subsidiary. 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.
8-step subsidiary management plan
While the parent company and its international subsidiaries must share a vision and a business strategy, the execution of these will inevitably differ in each jurisdiction. Even the most nuanced differences in regulation can necessitate a shift in the direction taken for governance or compliance.
The following is a strong starting point for your subsidiary management plan, something you can cascade to all entities and business lines:
- Align subsidiary and corporate strategy: The first objective of a subsidiary management plan is to align all subsidiary and corporate activities. Regularly review the subsidiary goals to ensure they align with the corporate objectives. Open lines of communication help keep subsidiary leaders abreast of any changes in direction.
- Optimize financial performance: Corporations should also have a grasp on the finances of each subsidiary. This includes implementing standard financial practices, conducting regular financial audits and verifying that the subsidiary follows relevant accounting standards.
- Enhance operations: Subsidiaries are most effective when they collaborate and share information. Create cross-functional teams to develop standard operating procedures that streamline repetitive processes. This should include setting and measuring key performance indicators (KPIs) to better understand how and why performance is improving.
- Identify and mitigate risks: Each subsidiary needs a unique risk assessment as they may all operate in different landscapes. Regularly assess the risks they face and create plans to mitigate them. Subsidiary managers also need training regarding risk management.
- Comply with laws and regulations: Subsidiaries must comply with the laws and regulations in their industry and jurisdiction. Establish a team to monitor regulations that affect the subsidiary and conduct regular compliance audits. You should also train the subsidiary’s management on key legal issues.
- Communicate clearly with the subsidiary: Parent companies should have open lines of communication with their subsidiaries. Create a communication plan that establishes reporting cadences both companies will follow. Include a meeting schedule for the subsidiary and parent company to discuss anything that emerges.
- Manage personnel: Subsidiaries may have their own employees, but subsidiary management includes overseeing human capital. That requires standardizing HR policies and procedures. Subsidiary management plan example, providing training and creating a positive and collaborative culture.
- Facilitate information sharing: All subsidiaries need a single source of truth for insights into the corporate group. Corporations need the same to ensure their subsidiary management plan is effective. Implement a platform that centralizes subsidiary insights and uses technology to enhance collaboration.
5 best practices for subsidiary management
At a recent Modern Governance Summit, governance experts shared critical insights into myriad topics, including subsidiary management.
In a presentation on Subsidiary Governance Best Practices, Cathy Cartieri, Diligent’s Director of Data Management, and Andy Casey, Head of Corporate Secretarial Services at alternative legal and compliance services provider Konexo, shared tips on managing governance across various entities.
As Andy put it, “Having the kit doesn’t guarantee you the success”, — meaning that a subsidiary management plan and the technology to enforce it must be accompanied by robust best practices to be truly effective. These include:
1. Keep track of your subsidiaries
Get a clear picture of your subsidiaries and where they are. While this might sound obvious, companies often need help verifying their entire entity universe.
As Casey points out, “Subsidiaries across group structures serve a variety of purposes, and therefore need to be managed accordingly.”
Corporate validation — which Konexo offers — provides a health check of all your entities, ensuring your entity information is on track.
2. Form separate boards for each subsidiary
When establishing subsidiary boards, corporations should pay special attention to the composition of the board, particularly regarding 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 company’s strategic direction 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.
In some jurisdictions, companies must include a certain percentage of local representation on the board, particularly when 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 on the subsidiary board or the selection of common board members who serve on both the parent company board and the subsidiary board.
3. Foster a strong parent-subsidiary relationship
Part of managing the interactions between the parent company and the subsidiary lies in understanding how each may help the other achieve more lasting success. This attitude of mutual respect can be essential to 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.
4. Centralize subsidiary data
With subsidiaries spread across the globe, it is easy for multinational companies to lose track of their 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.
5. Standardize and automate with subsidiary management technology
Creating a single source of truth can be invaluable when it comes to corporate governance, and never more so than when working with a range of entities and subsidiaries. Keeping accurate data on robust, consistent systems gives your central teams confidence that they are using the latest, most reliable information.
Or, as Casey succinctly put it, “Using tech to manage your entities is no longer an optional extra.” In recent years, compliance technology has “gone from being an enhancer to something that is business critical,” Casey continued. Using technology is no longer a differentiator but an expected baseline, the expectation for professionally run organizations.
At the same time, streamline your approach. A good governance platform will give you a single repository that is more effective, efficient and reliable than multiple sources of data. Ownership and accountability are also prerequisites. You may have teams on the ground or third-party outsourcers managing local activity, but it’s important to make one person accountable for ensuring central governance.
You should standardize and automate as far as possible. Whether you’re managing document filings, board reports, or other reporting, using your platform to automate their production will both save time and create a more professional, robust result.
Simplify subsidiary management with tech-driven entity management
A subsidiary is, in many ways, an entirely separate company to manage. Yet, subsidiary management can be infinitely complex depending on the subsidiaries you have, the jurisdictions they’re in, and the risks associated with each. While manual management may be sufficient for a single subsidiary, tech-driven entity management is the only way to scale.
Investing in entity management technology means harnessing the growth-driving potential of each subsidiary rather than checking items off of a tired subsidiary management to-do list. Download our free guide to learn common challenges of entity management and how technology helps overcome them.
