Subsidiary governance can be a complicated beast. Subsidiary companies are not just branches of the parent business. Legally separate, they have their own boards and management teams and are often answerable to regulators in different parts of the world. So, exercising due oversight and control over them can be a challenge. With consolidation continuing apace, be it on a global or regional level, having a strong global subsidiary governance framework in place is more essential than ever. Companies simply cannot afford to underestimate the reputational and financial risks that subsidiaries can bring.

If you are a board member of a parent company or the chief financial officer (CFO) of a parent company, it can be extremely difficult to know for certain that your business controls are adequate throughout the entire chain. However, increased regulatory pressures and heavier responsibilities for directors around the management of legal entities mean that companies like Lloyds Banking Group, which has Lloyds, HBOS and Bank of Scotland as subsidiaries, need to focus on the governance of all entities within their group, not just on head office arrangements.

A lack of global harmonisation

Multinationals with numerous foreign subsidiaries face greater financial, tax, commercial and operational risk. Expansion to a new country brings with it more questions than simply how to deal with risk appetite or mitigate risk throughout an organisation. A lack of global harmonisation around legislation and regulation means that companies cannot focus solely on parent company governance. The UK Corporate Governance Code, for example, only applies to listed companies and does not specifically deal with the management of subsidiaries. While the principles that underpin the Code are good, and many other corporate governance codes throughout the world are based on its premises, it is important to be fully cognisant of the local regulation.

Apr-Jun 2017 Issue

ICSA: The Governance Institute