Key governance and reporting challenges for MNEs

24 June 2024 - It is no secret that international tax regulations continue to bring an array of new definitions and compliance obligations for Multinational Enterprises (MNE) to unravel. The challenge feels never ending but MNEs must navigate both local and international regulatory frameworks to ensure proper governance and oversight to achieve good legal standing.

The Global Anti-Base Erosion Model Rules (Pillar 2) is a good example of the increasing number of hurdles are MNEs confronted with. The uniqueness and complexity of MNE operations can stem from their diverse geographical reach, the nature of business, and the local tax and legal requirements per region and country, to name a few. This can lead to complex processes to obtain and prepare reporting documentation, whether it is for a GloBe Information Return, a sustainability one, or others.

Impressive amounts of data – both financial and non-financial – need to be collected, reviewed and standardized in order to produce reports that are fully compliant with local and international regulations. When this happens, MNEs often discover that, despite what they might have considered their best efforts, some of the sought-after data may not exist. Even if it does, it might be in a different format to what is required for reporting purposes, and it may originate from different locations, or may be spread across a variety of external platforms, which creates an even greater challenge for in-house teams to collate.

When closely examined, there are often gaps within a global business’ governance and reporting processes, which highlight deficiencies in team connectivity and therefore the quality of information retained.

So, for us to get a better view, let’s consider 10 key areas in which MNEs need to remain vigilant when it comes to their governance and reporting obligations:

1. Data collection and standardization: As a MNE grows in size, the process of gathering both consistent and reliable non-financial data across different business units and regions can become a tedious and onerous task.
   The challenge that follows is the standardization of the company’s data to ensure comparability of the information collected, which can become a complex task considering the different reporting requirements enforced by each of the countries in which the business has operations.
2. Scope and limits: Fundamentally, after having collated the data, it will be important for the MNE to define and understand the range of information at play, and establish parameters when determining what gets reported within their international operations, subsidiaries, branches and joint ventures. This can result in closer alignment to the overall business strategy, making transparency a fundamental element to balance when determining such a task.
3. Regulatory complexity: Having in-house professionals that are equipped with a comprehensive understanding of the local requirements is key to support adherence to the ever-evolving regulations and reporting needs. With competing priorities between internal teams, this is often overlooked and can be detrimental, potentially resulting in negative consequences such as missed deadlines and not meeting reporting requirements in their totality.
4. Cultural differences: Let’s face it, understanding and satisfying stakeholders across different regions and languages can be a daunting task. It can be a benefit to cultivate multicultural teams with localized knowledge who are better equipped to manage nuances across MNEs with a great number of offices and operations across a variety of jurisdictions.
5. Stakeholder engagement: Additionally, stakeholder engagement at all levels is essential for smooth, cohesive operations. However, it can be a challenge to achieve true business alignment when a company’s stakeholders are located across multiple jurisdictions and have differing priorities. Finding common ground within cultural contexts to ensure regular and constructive input and feedback is no easy task; this requires effective and thoughtful communication strategies which are usually dealt with at Board level.
6. Materiality assessment: Balancing out both the identification and prioritization of material issues at the local, in-country level requires a strong understanding of regional nuances. MNEs will have to consider what is of substantial relevance to comply with local regulations and governance obligations, whilst ensuring different stakeholders are in complete agreement.
7. Third party verification and quality assurance: The reliability and accuracy of reporting data that needs to go through third-party verification can be puzzling, especially if dealing with different auditing standards across countries and structural spread.
8. Technology and data management: Implementing and integrating technologies for efficient data management and reporting across a global organization can be a significant undertaking. In many cases, MNEs utilize a multiplicity of tech tools that are not interconnected, resulting in inefficiencies and the need for further investments as well as involvement from in-house teams to interface these programs with the business, and staff in operational roles.
9. Supply chain complexity: Intricate company structures which depend on the global supply chain can present challenges related to data access, transparency, and accountability which are key to sustainability practices – very in vogue these days. The bigger the supply chain, the higher the risk – there is a much larger burden on MNEs to have a strong handle on corporate governance and reporting responsibilities globally.
10. Continuous improvement: MNEs must expend rigorous efforts and commitment towards implementing processes that support a culture of constant improvement in operational practices, data storage and handling, as well as reporting procedures across diverse business units (and must be able to show those efforts too). Regular reviews of key processes can result in new efficiencies and keep MNEs aligned with international best practices.

Those global businesses that successfully navigate these challenges can enhance their performance and stakeholder trust – which is fundamental in the current globalized world, while reducing their overall expenditure.

Having a clear and comprehensive overview of the strategy to increase efficiencies and internal team connectivity can significantly contribute to lowering the impact of these governance and reporting challenges, which in turn facilitates further effective control over any potential exposure or even fines.

The next article in this new MNE insights series will look at the value of technology in corporate administration to ensure regulatory compliance.