What is subsidiary governance?

What is subsidiary governance? A thorough guide to take you through the essentials if you’re unfamiliar with the concept. 

Subsidiary governance has gained far more relevance over the last few decades, as businesses have found it easier to grow and expand beyond the borders of the state or country in which they started. 

Nowadays, keeping track of all this diverse activity, from a director’s perspective, can be extremely challenging if not approached correctly: hence the increased importance of subsidiary governance to many modern boardrooms.

Subsidiary governance means any corporate governance processes that link a parent company with any other legal entities then owns. Often, but not always, this will involve some kind of overseas link. 

Without distinction, the term “corporate governance” usually refers to directors making decisions for just one company, but there’s a whole other layer involved when that company owns several others. Here, there’s also a requirement for the company to ensure its core strategic elements transcend across its entire network. This, in itself, is a major task.

Most mechanisms specifically associated with subsidiary governance are designed to bring strategy from the parent boardroom into the network in a way that drives practical, long-lasting success. 

Common examples include:

• Delegation of authority (DoA) frameworks, which set out limits for subsidiary decision-making. It’s very common to use this mechanism to set upper limits on subsidiary purchasing power. Any purchase/investment beyond that limit would require the parent company’s sign-off. 
• Policies for standardised board composition to bring a harmonised structure. These policies often set requirements for the number of executive vs. non-executive directors.  
• Intercompany agreements, which are formal contracts governing the relationship between the parent and the subsidiary in specific areas. For example, vital services like IT, HR or intellectual property rights may need to be governed across a corporate network and not just within a parent and subsidiaries.  
• Entity management systems (EMS) – digital solutions allowing directors of parents and subsidiaries to keep track of any common governance matters, including the concepts above. 

Subsidiary governance is important because corporate networks (parents and subsidiaries) need to be run with the same standards as individual companies. If the last few decades have taught us anything, it’s that these standards are only getting tougher.

Practically, stakeholders view the following issues as crucial if a company is being run successfully. 

• Integrated risk management: Not every subsidiary will have the same risk profile, and this needs to be respected in parents’ management, to avoid being “blindsided” by hurdles that emerge on a local level but cause trouble across a network. 
• Reputation. Nowadays, it’s incredibly easy for journalists, regulators and members of the public to link subsidiaries with their parent company. If one of these suffers a reputational disaster, the others will get caught in the fallout. Good subsidiary governance is a crucial way to safeguard against the worst effects of this. 
• It eliminates the need to “reinvent the wheel” across different boardrooms. 
• Ultimately, it ensures proper fiduciary responsibility across the network of related companies. The existence of parent companies and subsidiaries should never detract from the importance of that duty, however easy it might be to let each entity fall into siloed leadership.

The most important thing is that with subsidiary governance, there is a huge temptation to simply “set it and forget it” – come up with generalised rules and structures which won’t be re-visited for years on end. This is a mistake. 

Good subsidiary governance means constant adaptation because, after all, there are far more moving parts than you might expect to find in a standalone business entity. 

Bad subsidiary governance will quickly lead to gaps, as strategic goals fail to translate from one entity to the next. This will put stakeholder expectations at risk. 

To get proactive, boards should quickly accept just how much information there is to process in subsidiary governance, and then explore the best solutions for managing it. Technology will undoubtedly play a part, not to mention top-class communication between different boards. All of it should combine to ensure that business decisions make sense at a local level and at that of the parent company.