The risks of getting entity management wrong

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.

Managing a multinational business is a minefield of legal and regulatory worries. Transnational and national compliance, plus the complexities of local rules, languages, licenses, currencies, filing deadlines and formats — and the risk of falling afoul of any of them — poses fundamental challenges for legal teams everywhere.

Entity management is meant to address these issues, but as globalization takes businesses further into new markets and opportunities, the list of variables requiring regular oversight demands a new approach.

The basics include company names, registration numbers, dates of incorporation, current trading status, registered and main business addresses. Depending on the size and jurisdiction a local entity’s reporting might also require details about shares (numbers, values, types, capital), financial statements (period-end reporting, deadlines, filings, last date filed, etc.), financial statements from shareholders, directors, officers, board meetings, and anyone currently holding power of attorney.

Boardwalktech highlights that companies spend about 18 hours per month updating, adjusting, correcting, and consolidating data in their spreadsheets.

For a mid-size company with a handful of entities, tracking entity data can be done manually and probably updated once or twice a year. Today’s multinational organizations can have as many as 400 entities.

At that scale, manual processes and standard software tools can’t cope. That leaves a huge amount of scope for things to go wrong.

Bad data creates a cascade of problems

Lack of standard requirements between jurisdictions and the sheer volume and complexity of information that needs to be accurate and up-to-date means entity databases are often inaccurate or incomplete. Legal teams lack confidence in the information in their corporate record as a result.

Another issue that poor entity data can cause relates to M&A activity. A fast-growing company expanding through acquisition can find themselves battling competition authorities if required data isn’t readily available. Not having data in place, or having data scattered across multiple systems or geographies, makes the approvals process much more difficult.

Poor entity management practices inevitably lead to bad data. The result is operational inefficiency, higher costs for data maintenance to fix problems, loss of internal credibility, and heightened corporate risk.

Compliance risk increases

Keeping up with the latest regulatory rules, then ensuring internal policies and external obligations are in compliance gets harder as the pace of regulatory change accelerates. In a report by Thomson Reuters, compliance practitioners’ ranked their biggest challenge as dealing with regulatory change. The financial penalties can be steep and the reputational damage from a breach can lead to lost revenues, lost customers, or having to exit a large deal.

Improving entity management helps avoid those outcomes. By improving visibility of important dates and tracking accountability for the actions key individuals and teams need to take (and when), businesses can sustain their compliance standing and be confident that they’re always ‘audit ready’.

Improved entity management can also result in better control over regulatory filings. The ability to generate standard forms that are pre-filled with required statutory data increases operational efficiency and reduces the hours required to create and submit filing packages.

Creating a single source of truth

A common barrier many legal teams face is the lack of a central repository for all key documents relating to company entities. There’s no shared comprehensive database with listings of all current or historical directors and officers, organization charts, licenses and renewal dates, filings, and so on. Information is held in different places and different formats, often in Excel, Viso, or PowerPoint.

That makes the legal department a potential source of bottlenecks. When finance, HR, or compliance need access to the latest entity information, they have little choice but to submit a request to legal — and wait. There’s no option for self-service or access through a shared platform.

Entity management using basic office software simply isn’t scalable. If one person is responsible for managing and updating entity data elements without automation and a single source of information to draw from, they’re going to fall behind. Manual updates also increase the likelihood of data entry errors.

A modern approach to entity management

Today’s legal teams are being asked to do more with less and find ways to sustain output without adding headcount. A modern approach can increase capability and make the increasingly complex and time-intensive administrative tasks around entity management through automation and machine learning.

In the next installment we’ll look at what an optimal entity management solution can achieve.

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