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Businesses are facing greater demands for transparency and accountability, which in turn is creating the need to transform. Significant regulatory developments are a key driver for change together with advancements in digital and AI capabilities. For example, new sustainability laws and regulations are imposing new standards, triggering the need for transformation and external reporting obligations, including the activities of subsidiaries. This new environment creates opportunities for parent company and subsidiary Boards but also new risks and liabilities that need to be addressed.
As a result, many businesses may not feel comfortable that their subsidiary risk is well managed, highlighting a deficit in their subsidiary compliance and governance. Equally many are not making the best use of technology.
To manage the evolving risks, it is now an imperative to have a subsidiary governance framework that is underpinned and delivered through digital capabilities.
Organisations will need to take a risk based approach, with the Company Secretary working collaboratively on a cross functional basis to develop and implement a subsidiary governance framework that is agile and scalable.
It is also vital that Company Secretaries have clarity on their current and future digital delivery models. This will allow teams to implement a digital strategy that will enable transformation.
Building a robust subsidiary governance framework
A subsidiary governance framework should include the following building blocks and key requirements:
- Board governance
- Subsidiary management
- Board composition and structure
- Board responsibilities and training
- Data governance
- Disclosure governance
Board governance
- Subsidiary boards should have terms of reference and a schedule of reserved matters for the parent company to establish the parent/subsidiary relationship.
- A group wide sustainability committee should be established which should,
under a delegated authority, act on behalf of the subsidiaries to have oversight over subsidiary governance disclosures to ensure alignment with parent company reporting. - There should be a defined regular cadence of reporting to the ultimate parent and vice versa in respect of its sustainability risks and opportunities.
Subsidiary management
- Subsidiary boards should formally adopt the group wide delegations of authority framework to align with legal entity structure and ring fence liability.
- To demonstrate oversight, subsidiary boards should receive regular updates on how delegations are being exercised.
- Subsidiary boards should have a dedicated Company Secretary who is integrated with the business and has an informed role in decision making.
Board composition and structure
- Subsidiary directors appointment policy should be in place to guide the nomination and selection process and the skills, experience and D&I requirements.
- Subsidiary boards should comprise of, as a minimum, representation from
finance,the business and a director with sustainability expertise. - The independence of the Legal function should be retained by ensuring no board representation to avoid conflict of interests.
- Independent non-executive directors should only sit on subsidiary boards as required by regulation but the use of group non-executive directors should be considered where an element of independence is required.
- Subsidiary boards should be subject to effectiveness reviews once every three years.
Board responsibilities and training
- Subsidiary directors to be trained on appointment and refresher training should be provided every 1-2 years thereafter.
- Training to be delivered and monitored through the group wide compliance training programme.
- Training to cover the subsidiary governance expectations as set out under the subsidiary governance framework.
- Training to include local legal directors' duties requirements and local sustainability laws and regulations.
Data governance
- A subsidiary governance policy on data governance should be implemented.
- The Company Secretary should be the legal entity owner who is also responsible for legal entity data and data governance across all group wide entities utilising a legal entity database.
- Legal entity data should be reviewed and verified twice a year by the legal entity owner.
Disclosure governance
- The Company Secretary should have responsibility or at least oversight over governance disclosures for subsidiaries, including sustainability disclosures.
- The subsidiary Company Secretary is responsible for ensuring that the subsidiary is compliant with all statutory and regulatory compliance and disclosure requirements in accordance with local law and the subsidiary governance framework.
Bringing the transformative power of technology
New digital tools provide a range of opportunities to manage subsidiary governance more effectively and cohesively and it is important that Company Secretaries have clarity on their current and future digital delivery model which will help deliver on the transformation required.
The rapid advance of centralised data analytics and insight platforms, for instance, can provide subsidiaries worldwide with access to a livesource of information on regulation that affects them locally, regionally and internationally. These platforms ensure that Company Secretarial teams in any given jurisdiction have a simple means with which to stay on top of evolving legislation.
Already, artificial intelligence is helping Company Secretaries in areas such as regulatory change management.
A digital delivery model
Set out here is a digital delivery model that is human led, powered by technology which will help reduce the cost of delivery and enhance value across the organisation. The human led part of this model is as important as the technology, as there will always be a need for Company Secretaries to intervene, perform certain actions and make decisions.
There are three distinct components of the digital delivery model:
- Inputs: Ensuring the technology understands the environment in which an organisation and their subsidiaries operates in and is continuously up to date with the pace of regulatory change;
- Processes: Using the technology to operationalise the subsidiary governance framework; and
- Outputs: What the technology will produce for you.
The promise for Company Secretaries is that no deadline is missed, data is complete on a real time basis and accounted for and subsidiary governance is operated efficiently and in a streamlined way, supporting:
- Regulatory horizon scanning
- Assessment of risks and entity tiering
- Corporate document automation
- Ongoing review and reporting on compliance with local laws and the subsidiary governance framework.
How we can help
The approach that organisations take to reforming subsidiary governance structures will depend on their current approaches, levels of maturity and complexity of their legal entity structure.
In our Reframing Subsidiary Governance Thought Leadership, we explore in more detail the business case for change and how Company Secretaries and their teams can deliver a blueprint for transformation.
Please contact us to discuss further.
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Contact us
Partner - Entity Governance & Compliance, PwC United Kingdom
Tel: +44 (0)7764 235240
Partner, Entity, Governance and Compliance, PwC United Kingdom
Tel: +44 (0)7764 958130
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