How to strike the right balance in subsidiary oversight

Giles Peel

Earlier this year we published a post written by McCann FitzGerald, on  ‘practical steps to avoid an over-controlling parent company’.

Giles Peel, Head of Governance Advisory Practice at DCO Partners Ltd and our expert speaker at ICSA’s Subsidiary Governance Conference 2018, offers his perspective on the matter and valuable advice on how to develop an effective approach to subsidiary oversight. 

Supervision and oversight of subsidiaries is a current hot potato in the field of corporate governance.  For many large complex businesses, their current structure of subsidiaries is an accident of corporate history, reflecting acquisitions, mergers and disposals over time. It can be hard to seek out the logic in many such structures, but it is important, because where a subsidiary has substance it must have directors that observe their duties under the Companies Act 2006, and in particular s172. In other words, the entity must be real and managed to promote the success of that entity. In cases where there is more than one subsidiary, companies find it more sensible to prioritise them in order of importance, and allocate more complex governance mechanisms for their safe operation. If the subsidiary is also regulated separately, and it is not unusual to find cases where the corresponding parent is not, then UK Regulators look hard for appropriate evidence that the regulated entity is able to exercise appropriate independence. One answer can be the appointment of independent non-executive presence on the subsidiary's board but it is also fair to say that this needs to be properly administered so that the business of that board is distinct, with appropriate minutes, papers and of course accounts.

Some regulatory regimes, including the soon to be introduced Senior Managers and Certification Regime (SMCR), also demand that clear accountability is shown in the form of a Responsibility Map, where the company sets out who manages what, in the context of the overall corporate structure of committees and meetings. The creation of these maps will often reveal just how effective (and real!) a subsidiary structure is, and which directors are exercising supervision and oversight. So is this a recipe for a form of "federated anarchy"? Not really, because companies will still need to create appropriate structures for policies and procedures, to create a recognisable and workable culture that conforms to legislation and regulation, protecting the reputation of the parent.  It is therefore common sense for subsidiaries to be part of this framework. Confused yet? Well the reason there is so much regulatory interest in the supervision of subsidiaries, is because of concerns that a dominant parent might not always act in the interest in the subsidiary, which in turn could then be detrimental to UK consumers. For example, subsidiary directors can sometimes have little input to strategy or be given clear direction on using the resources of the parent, and this worries our Regulators.  

In summary therefore, the key word is "alignment". Both parent and subsidiary directors need to maintain a watching brief in this complex area, with subsidiaries conforming to corporate norms when safe and appropriate to do so, but also speaking up when the interests of the two entities begin to diverge. Oh yes, and maintaining an audit trail when this happens, to demonstrate that directors observed their duties and acted in good faith, which is an essential component of modern corporate governance.

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