In many cases, it is also not always clear who has the end responsibility for maintaining proper records: is it Finance, Legal, the local subsidiary management board?
That perception is fading rapidly, however, as UK corporates devote more time to entity management. Numbers from Deloitte suggest that 70 per cent of British boards are now compelled to focus on managing risks that arise at the subsidiary level.
There are good reasons why it’s become central to board-level governance. All of them revolve around the simple fact that so much can go wrong if entities aren’t carefully overseen.
Regulatory pressure is an important part of the picture. The UK’s Senior Managers’ Regime, for example, holds corporate officers liable for misdeeds and governance failures at the subsidiary level. Yet when the entities controlled by a large business number in the hundreds — and are spread across geographies, languages, currencies, and time zones — how are boards supposed to oversee what’s happening, know who’s in charge locally, and know what the rules are?
A rising tide of risk
Globalisation has made entity management a serious challenge fraught with business and legal risk. The numerous subsidiaries, country offices, business units, joint-ventures, and acquisitions large firms maintain all must be managed to ensure they comply with local laws, regulations and requirements for corporate governance.
Doing it effectively involves a lot of mundane but necessary tasks like managing license expirations, reporting, and updating the contact details of new company officers. None of that is likely to excite a high-performing legal team, but any failure to tick these boxes on time and exactly as prescribed can lead to penalties and business disruption.
Jurisdictional differences between a ‘home’ and subsidiary entity and ensuing language requirements alongside differences in the ways national laws are administered, can cause huge complexity. Data accuracy is another challenge. A single entity can have more than 100 fields of information that need to be accurate and current at all times. Multiply that by 100, 200, even 400 entities and the risk of manual error increases exponentially.
Another complicating factor is that entities can require different data extracts from country to country — even when the same products and services are being sold. Every jurisdiction has its own reporting templates and practical complexitiesso there is little opportunity to copy and paste. Finding efficiencies by leveraging data in consistent ways across the board is almost impossible. Language differences alone stop that from happening.
Current processes and insufficient visibility at the parent level make those issues difficult to surmount. It’s also true that changes at the local level often aren’t always communicated back up the chain accurately or in a timely fashion.
With increasing industry consolidation and M&A activity, the number of entities under any group umbrella is going to grow. That could intensify financial and compliance risks — and potentially jeopardise big corporate deals.
Is more headcount the answer?
As global businesses push for growth and expand into more jurisdictions, establishing effective and reliable entity management processes become increasingly important. As the Georgetown 2021 report on the state of the legal market confirmed, legal departments remain under intense pressure to do more with less by improving operating efficiencies. One of these efficiencies could be found in handling work like entity management in a completely different way.
Some legal tasks lend themselves to management via software. But the data and knowledge required for effective entity management can’t be so easily automated.
There are just too many nuances between countries and cultures, too many changes to regulatory rule-books, and too much change happening at the entity level. Faced with other highly complex legal matters, even highly skilled and efficient in-house teams struggle to stay on top of it all.
In the next instalment of this 3-part series we’ll explain why current entity management processes aren’t up to the job.