Subsidiaries are a common feature of today's business structures, as corporations operate across multiple jurisdictions and business areas. How then are corporate governance principles cascaded, consistently and effectively, down to the subsidiaries? By establishing subsidiary governance frameworks to create sound governance practices and promote best practice.
Establishing a subsidiary governance framework - at a glance checklist
- Obtain holding company board and subsidiary boards 'buy-in'; set the tone from the top.
- Audit/diligence subsidiaries in the group and collate key information/documents on them.
- Establish/resource the team for the project.
- Set priorities, key goals and timeframes for the project.
- Clearly communicate the rationale for the project with the key people to be involved in setting up the subsidiary governance framework.
- Implement best practice corporate governance throughout the group where possible, bearing in mind the key UK legal, regulatory and best practice sources impacting on corporate governance.
- Be mindful of local laws, regulation and also local customs.
- Consider whether prescription or flexibility or a balance between the two is desirable in terms of, for example, policies and procedures; a 'one size fits all' approach may not be suitable.
- Involve and encourage subsidiary boards and management.
Key issues – subsidiary boards
- Consider the composition and effectiveness of subsidiary boards; regularly review this including after key events such as acquisitions or substantial expansion.
- Review director's service contracts at the subsidiary level to ensure they include appropriate protections.
- When reviewing remuneration policies and practices in general, consider what is appropriate for staff (particularly senior executives) of subsidiaries.
Key issues – documents, policies and procedures
- Draft or refresh group-wide policies, statements and procedures (eg.anti-bribery; ethics; health and safety; human rights; whistleblowing and more), and make them easily accessible.
- Consider overarching subsidiary board guidance or terms of reference for what is expected of subsidiary boards. This could encompass their general duties vis-à-vis the subsidiary company, their interaction with the holding company, and other matters.
- Ensure delegated authorities and decision-making procedures are carefully defined in the board guidance/terms of reference and that local constitutional documents are catered for.
- Establish clear reporting lines to the parent company and put in place measures for encouraging communication and engagement. Consider creating a communications guide.
- Draft and implement board meeting procedures guidance on matters such as the circulation and form of agendas and board papers and how meetings should be minuted and who minutes should be circulated to.
- Draft and implement a conflicts of interest policy if considered necessary and, if desired and relevant, ensure that the constitutional documents of each subsidiary company permit independent directors to authorise any conflicts.
Implementing the framework and ongoing steps
- Communicate clearly to subsidiaries and their staff the rationale and aims of best practice subsidiary corporate governance and what is expected of them.
- Consider appointing corporate governance champions at subsidiaries.
- Put in place a programme of regular training for subsidiary directors, including an induction programme at the time of their appointment.
- Advertise, and if necessary train, subsidiary personnel on, the new/refreshed subsidiary governance framework.
- Maintain close relationships with subsidiary boards and management and regularly review, and encourage regular feedback on, the operation of the subsidiary governance framework.
Discover more about subsidiary governance with our digital supplement.