Entity Management: The Key to Better Governance

In many organizations, it’s unclear who holds the ultimate responsibility for maintaining proper records: is it Finance, Legal, or the local subsidiary management board? While this uncertainty persisted for a long time, recent trends show that UK companies are dedicating more time and resources to entity management. According to Deloitte, 70% of British boards are now required to focus on managing risks at the subsidiary level.

Why Is Entity Management Becoming a Board-Level Concern?

The shift in focus to entity management stems from one central idea: so much can go wrong if entities are not properly managed. Regulatory pressure, such as the UK’s Senior Managers’ Regime, places significant responsibility on corporate officers for governance failures at the subsidiary level. With hundreds of subsidiaries spread across multiple geographies, time zones, and languages, overseeing local management and ensuring compliance becomes a daunting challenge.

What Risks Are Associated with Poor Entity Management?

Globalization has compounded the challenges of entity management. Large firms maintain numerous subsidiaries, joint ventures, and country offices, all of which must comply with local laws, regulations, and corporate governance standards. Managing this sprawling network involves many mundane yet critical tasks, such as tracking license expirations, ensuring accurate reporting, and updating officer contact information. Failing to complete these tasks correctly or on time can result in penalties and business disruption.

Furthermore, jurisdictional differences between the home company and its subsidiaries—ranging from language barriers to differing legal practices—add complexity. The sheer volume of data, with hundreds of entities each requiring up-to-date and accurate information, significantly increases the risk of manual error.

How Can Language and Jurisdictional Differences Complicate Entity Management?

Each jurisdiction requires its own reporting templates and has unique complexities, even when the same products or services are sold across borders. This makes finding efficiencies in managing data nearly impossible. Language differences alone can prevent consistent use of data across multiple entities. As a result, current processes and a lack of visibility at the parent level make it difficult to address these challenges effectively. Moreover, changes at the local level often fail to reach the parent company in a timely or accurate manner.

How Do Increasing Mergers and Acquisitions Affect Entity Management?

As industry consolidation and M&A activity continue to rise, the number of entities under a single corporate umbrella will grow. This increase in complexity heightens financial and compliance risks, which could potentially jeopardize major corporate transactions if not properly managed.

What Specific Risks Have Companies Faced Due to Poor Entity Management, and How Were They Resolved?

Companies have faced a range of risks from poor entity management, including compliance failures, financial penalties, and reputational damage. Non-compliance with local regulations can result in legal actions, fines, or even the revocation of a company’s operating rights in certain jurisdictions. Additionally, inaccurate reporting or governance failures can erode investor confidence. To resolve these issues, companies are turning to robust entity management systems that automate compliance checks, track regulatory deadlines, and maintain accurate records across jurisdictions. These solutions streamline reporting, improve transparency, and ensure continuous updates to entity information.

What Features Make Entity Management Software Effective?

Effective entity management software is equipped with several key features that address these challenges. Centralized data repositories serve as a single source of truth, ensuring consistency and accuracy across the organization. Compliance management tools automate the tracking of regulatory deadlines and filing requirements, reducing the risk of non-compliance. Workflow automation simplifies processes like document approvals, entity formation, and dissolution, increasing operational efficiency. Role-based access controls ensure that sensitive information is only accessible to authorized personnel, bolstering security and compliance. Additionally, reporting and analytics tools provide valuable insights into entity performance, governance structures, and compliance status, supporting informed strategic decision-making.

If you’re intrigued by the potential of digital transformation in the legal world, be sure to dive into our other blog post, Transforming Entity Management to Be the Competitive Edge You Need, where we explore more innovative strategies and tools that can revolutionize the way legal teams work!