Globalisation has meant that it’s never been easier to expand into other countries than it is now, with the benefits of such expansion are greater than the costs involved in doing so.
But with expansion comes additional complexity. As organisations enter new markets and industries their structures become more labyrinth, sometimes with hundreds of different subsidiaries spread across the globe.
This can lead to governance issues. If a company has that many subsidiaries, how can the right corporate governance be extended to all of them, effectively and consistently? How can directors be expected to know what is going on in each subsidiary at any given time, and is smarter use of data the key to addressing subsidiary governance?
Governance and its role in modern business
Governance is a higher priority for businesses than it has ever been, with constant pressure to demonstrate and prove that they are well-governed. This is mostly because of the changing business and political climate in which we find ourselves.
After the 2008 financial crisis, governments all over the world set up review programmes to look at why it had occurred and what could be done to prevent it happening again – in many cases governance was found wanting.
For any organisation that does get it wrong, there are enormous financial penalties. There are also the potential long-term brand implications if those organisations are perceived to be behaving improperly or incorrectly. But the complex structure of most PLCs means it is also getting harder for them to keep track of their many entities in countries all over the world.
Managing a large group of entities is inherently complex. Many large corporations may not even be aware of all the entities they own, let alone who their directors are and whether they are being governed effectively. So it is hardly surprising when sometimes they fall foul of local compliance regulations.
The answer to this challenge is the use of a subsidiary governance framework and regular review of this policy and audits of subsidiaries to check they are compliant. This allows subsidiaries to meet their own local regulatory requirements, while still adhering to the overall principles and values.
But such a framework does not mean that the job is complete. Parent organisations, their directors and company secretaries need a deeper understanding of their entity structure, and that is best achieved via smarter use of the data held on these entities.
Using data to improve governance
The value organisations derive from data has grown exponentially over the past decade. Yet one area in which data has been less deployed, is in the governance and compliance function.
Organisations need regular and real-time access to entity information and data, such as when entities were formed, or when financial reporting is required. Sometimes entity information is simple and at other times it is highly detailed and specific – but either way, it is required almost every single day in a large organisation.
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Yet traditional entity management software is little more than a database, and the reports one is able to generate from them are not flexible enough to factor in the type of information generally required. Given that directors are personally liable for entity compliance, a lack of ability to access the required data is a significant flaw.
Entity management limitations
Many organisations deploy entity management software, but as with any application or software that relies on data, such software is only as good as the data that populates it.
Not only must entity management systems be updated regularly and efficiently – automation can play a pivotal role here – so that users have one source of truth, but data must be centralised and not siloed, and should be quick and easy to access for anyone that might need to do so.
Access to data is absolutely critical in ensuring good subsidiary governance. An effective entity management platform must allow a director or company secretary to personally remain on top of each entity, from information on its directors and partners, to any upcoming regulatory requirements.
In fact, the term ‘entity management’ is becoming outdated, with people using instead a ‘subsidiary governance system’. An enhanced system will track whether a certain entity is compliant or not, but also whether the board in that entity is operating as it should.
A director could see for example, a heat map of all that organisation’s entities, and be able to tap on each one to check compliance, whether accounts have been filed and whether board meetings have been taking place.
This digitising of all entities can have a significant impact on subsidiary governance. Such platforms are highly effective for managing large volumes of data and can present the required information in an easy-to-understand method and via an app on a user’s mobile or tablet, if required – given the penetration of smartphones and tablets this feature should not be underestimated.
In a time where politics and the economy is highly uncertain, with long-established trade alliances being dismantled and new ones eventually forged, it means subsidiary governance will become more complex than ever.
The key to achieving effective subsidiary governance is in smarter use of data, and proper access to that data. Data has transformed so many other elements of business, it is high time that it is used to greater effect in governance and compliance.
Sourced by Alister Esam, CEO, eShare