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Subsidiary governance: how to reduce risk in outdated practices

4 November 2022

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For many multinational organisations, reconfiguring global entity management isn’t high on the agenda. Jonathan Scrocchi, VP – head of Mid-Atlantic and Mid-Western region, and Rogier Bronk, head of global entities solutions – Americas tell us why they should be aware of inefficiency and increased risk.

As global entity management becomes ever more complex, subsidiary governance can be costly and resource-intensive for in-house legal teams. Not only that, but an increased workload and tighter regulation can lead to more inefficiencies, higher costs and greater risks.

However, reconfiguring global entity management isn’t generally high on any legal department’s agenda. It’s viewed as a necessary inconvenience – and often organisations have been doing it the same way for a long time.

That usually means sticking to the tried-and-tested formula of combining central in-house administration with on-the-ground expertise, often through a local law firm.

Organisations see this framework as beneficial for several reasons. It keeps supervision in-house, which on the surface at least can seem a cost-effective way of working.

Central supervision is usually left to a couple of paralegals at headquarters, who consolidate information from every jurisdiction and liaise with in-house tax and finance teams.

In many jurisdictions, the company will use the expertise of a local law firm. Indeed, third-party legal support is often a regulatory requirement.

The relationship may be long-standing, and the local law firm will also advise on other matters. It seems logical to use it for entity compliance too.

This solution doesn’t seem to be broken, so nobody ever suggests fixing it. But something doesn’t have to be broken to be inefficient or even potentially risky.

A cumbersome process for subsidiary governance

To understand the problems with current subsidiary management practices, decision-makers must first evaluate their own processes.

When they do, they’ll almost certainly find the in-house approach both expensive and wasteful.

It means highly paid in-house lawyers spend part of their time overseeing repetitive administrative tasks instead of litigation or strategic planning.

It means paying local lawyers large sums for relatively minor compliance work.

In both cases, the proportion of time dedicated to subsidiary governance increases if the lawyers have to manage more complex projects, such as a change of director affecting multiple jurisdictions. Costs rise simultaneously.

When you have entities in many countries, central employees have to manage a network of providers in different time zones, each with its own processes.

Local regulations may require documents to be filed in the local language, in English, or both.

This is cumbersome and costly at the best of times – even more so when local law firms have to collaborate on cross-border projects.

Potential for error in subsidiary governance

The overall costs of all this disparate activity are significant – but many large multinationals don’t even know for sure what they are. Third-party law firms often bundle subsidiary governance fees in with more complex work, making it difficult to calculate the true cost of the service.

The whole process is inefficient, opaque and prone to error. Nobody is responsible for checking that the latest forms are being used in any jurisdiction, or for staying up to date with minor changes in local compliance regulations.

The results can be unfortunate: financial penalties for non-compliance can be high.

They can also cause serious disruption. One multinational client came to Intertrust Group after a director was stopped at Singapore airport because of non-compliance by the company’s local entity. He faced prison if he entered the country.

In fact, in this system, subsidiary governance is no one’s main interest or priority. That makes it a recipe for waste and delay.

Streamlining subsidiary governance with a single point of contact

A centralised outsourcing partner can ensure businesses never face regulatory issues over their global portfolio, and can streamline subsidiary governance so it works more effectively and costs less.

So why are many multinationals still sceptical about outsourcing this aspect of their operation? After all, many outsource other services, from accounting to manufacturing.

Centralised outsourcing has an image problem. Many of us imagine the kind of outsourced services we’ve experienced as consumers. That often means dealing with a contact centre staffed by employees reading from scripts.

But in business services, centralised outsourcing is different. Highly qualified professionals at centres of excellence can streamline operations, creating tangible business benefits.

Intertrust Group’s centre of excellence is staffed with attorneys and highly qualified certified public accountants (CPAs), backed by the latest entity management technology. It offers unparalleled depth of knowledge on all corporate governance issues.

But we know the very notion of a centre of excellence will alarm some in-house attorneys, who wonder where the essential local knowledge comes from.

In our case, the central operation is supported by regional contacts in every time zone and a network of specialists in over 130 jurisdictions.

Why Intertrust Group?

  • Our experts have many years of experience in subsidiary governance. Through our coordinated approach and processes, our clients have to deal with only a single point of contact.
  • Our powerful, tech-enabled approach through state-of-the-art reporting tools ensures clients are compliant in multiple jurisdictions.
  • Our Global Entity Solutions department provides a broad menu of corporate secretarial services and is experienced in maintaining entities within global portfolios in more than 150 jurisdictions.
  • Intertrust Group is a publicly listed company with 70 years’ experience providing world-class wealth management services to clients around the world.
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