Governance of Subsidiary Companies

Governance of Company Subsidiaries

Derek Hendrikz Consulting

derek hendrikz

http://www.derekhendrikz.com/



A subsidiary company is a company

controlled by a holding company.

The word subsidiary refers to

‘supplementary’





“…it is no longer appropriate for groups to

focus only on parent company

governance.”

Jonathan Gibson





You will only understand the risk

attached to subsidiaries when

something goes wrong.





Legal Risks…

• Personal exposure for directors and officers

• Legal and regulatory compliance failure

• Potentially unauthorised commitments

• Greater financial, tax, commercial and

operational risk



Good Subsidiary Governance Practice…

• The establishment of a subsidiary board

(subsidiaries will still have their respective

boards);

• Explicit group management philosophy;

• Group decision-making policies and guidelines;

• Central governance policy stipulating subsidiary

governance framework;



Good Subsidiary Governance Practice (cont)…

• Clearly defined relationship between parent and

subsidiary;

• Clear reporting structure between subsidiaries and

parent company;

• Clarifying the rights and responsibilities of the

subsidiary’s board and management;

• Independent audit committee.



Subsidiary is a separate legal entity…

• Directors of the subsidiary are responsible for the affairs of a

wholly-owned subsidiary;

• The directors of the subsidiary must act in the best interests of

the subsidiary - even where in conflict with the parent company;

• The directors of a subsidiary are subject to the statutory and

regulatory duties under applicable local laws;

• Governance practices for the subsidiary need to be consistent

with the purpose for which the subsidiary was established.



Typical subsidiary governance problems…

• Regulatory conflicts;

• Commercial or managerial conflicts;

• Conflicts between the interests of subsidiaries;

• Conflicts between the organisational and

national cultures of the parent and the

subsidiary.



The Primary Aspects of Subsidiary Management…

• Separate Entities;

• Management;

• Liabilities; and

• Independence.



Standardize the following questions…

• Do we have common governance principles in place?

• What is the process for creating new subsidiaries?

• Who can approve them & what is the criteria?

• How is a subsidiary’s life cycle tracked?

• Who is responsible for dissolving unnecessary subsidiaries?

• How are the directors selected for subsidiary boards?

• Who are the corporate secretaries?





Governance of Subsidiary Companies

Leadership & Management