Taking good governance to global subsidiaries
BP realised too late that it should have improved its governance of foreign subsidiaries. Funds must not make the same mistake.
Recent scandals, such as BP’s Deepwater Horizon oil spill in the Gulf of Mexico, clearly demonstrate that entities which operate across multiple jurisdictions and business areas must ensure that their subsidiaries in these regions are adequately governed. The alternative may be that, as in BP’s case, a failure in one regional entity comes to have a disproportionate impact on the group as a whole.
Global subsidiary governance, as a subset of the much broader subject of corporate governance, is becoming more important to multinational organisations of all kinds, not just corporate giants such as BP. Issues such as alignment with group goals and objectives; efficiencies; information flow; regulatory compliance; companies act compliance and risk management apply to many private equity funds and family offices.
Yet despite the apparent importance of all of these issues, the approach by parent organisations to global subsidiary governance appears to have been mostly ad hoc and underfunded; just as the approach to corporate governance has been.
In particular, pressure on costs means that boards are loath to spend more than the absolute minimum on the internal departments needed to exercise proper governance.
Implications for funds and family offices
Cross border management can be particularly problematic in the financial sector. Private equity funds, for example, often create hundreds of entities around the world that are used as investment vehicles, structuring entities, finance companies and the like. All these entities need to be governed and maintained in good legal standing if the fund is to meet its compliance obligations to its investors. The same can also be said of family trusts. They may not often have external investors to manage, but they nevertheless find themselves investing over a range of geographies and jurisdictions.
Furthermore, private equity houses and family offices are even less likely than corporations to want to invest in the administration capacity needed to support their governance requirements.
Developing a comprehensive group-wide subsidiary governance strategy is often difficult because subsidiaries are established for a variety of reasons.
Subsidiary entities are also diverse in terms of the activities they conduct. These range from sales offices and distribution centres to companies with regional or local strategic mandates.
Clearly, when specifying a governance framework the result should reflect the differing nature of the subsidiaries.
Furthermore, entities can be corporations (companies – listed and non-listed), cooperatives, partnerships, limited liability companies, branches, representative offices or entities that are specific to a particular jurisdiction.
Working toward best practice
Crucially, and despite the diversity noted above, the direction of legislation and best practice in global subsidiary governance is absolutely clear.
Corporate headquarters, private equity funds and family offices cannot and should not attempt to build fire walls around their subsidiary entities. Instead, they must build appropriate governance structures that give adequate assurance that subsidiaries are properly governed by a headquarters.
As a service provider, Citco Global Subsidiary Governance Services (GSGS) recognises this essential fact of modern business life and seeks to assist multinational organisations – whether corporate, private equity or family – in building their subsidiary governance structures across borders, industries and regulators.
27th February 2014