Moving entity management up the GC agenda

Keeping track of all a firm’s local divisions and business units, knowing the officers in charge of each one, and understanding the jurisdictional differences between them, is vital for large organisations. Yet as a legal discipline, entity management is often overlooked — an administrative function GCs can or would want to hand-off to junior staff or simply check up on at year-end.Written by Filip Corveleyn, CEO Klealegal and Kevin van Tonder, Director, Cognia

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.

What specific risks have companies faced due to poor entity management, and how were these issues resolved?

Companies have faced various risks due to inadequate entity management, including compliance failures, financial penalties, and damage to reputation. For instance, failing to comply with local regulations in different jurisdictions can lead to legal actions, fines, or even the revocation of the right to operate within certain regions. Poor entity management can also result in inaccurate reporting and governance issues, leading to a loss of investor confidence. Companies often resolve these issues by implementing robust entity management systems that ensure compliance, streamline reporting, and enhance transparency. This includes the adoption of software that automates compliance checks, maintains document trails, and facilitates easy updates to entity information across jurisdictions.

What are the specific features and tools that make entity management software effective in addressing these challenges?

Effective entity management software is characterized by several key features. These include centralized data repositories that offer a single source of truth for all entity-related information, 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 streamlines processes such as document approvals and signatures, entity formation, and dissolution, enhancing operational efficiency. Additionally, role-based access controls ensure that sensitive information is only accessible to authorized personnel, thereby enhancing security and compliance. Reporting and analytics tools provide valuable insights into entity performance, governance structures, and compliance status, supporting strategic decision-making.

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