What are the biggest risks in subsidiary governance?

In the intricate web of corporate structures, subsidiary governance is a critical aspect that demands meticulous attention. Subsidiaries, often operating in different jurisdictions, come with a unique set of challenges that, if not managed effectively, can pose significant risks to an organisation. In this blog, we will delve into the biggest risks associated with subsidiary governance and explore strategies for mitigating them.

Compliance

One of the foremost risks in subsidiary governance lies in navigating the complex landscape of compliance. With each jurisdiction having its own set of regulations, subsidiaries may find it challenging to ensure adherence to local laws while aligning with the overarching corporate governance framework. Failure to stay abreast of evolving compliance requirements can lead to legal repercussions, financial penalties and reputational damage. 

These challenges were illustrated when, Walmart attempted to expand into Germany in the 1990s. It struggled due to numerous differences between US and German labour laws. Meanwhile its low-cost business model was hindered by regulations surrounding the minimum costs of goods.

To avoid these issues, establish a robust compliance management system that includes regular audits, training programs and a centralised repository for tracking and updating regulatory changes across all subsidiaries.

Communication

In a multi-layered corporate structure, effective communication is paramount. The risk of miscommunication or inadequate information flow between the parent company and subsidiaries can result in strategic misalignment, operational inefficiencies and missed growth opportunities. Clear and transparent communication is crucial for maintaining unity of purpose and ensuring that the subsidiaries are aligned with the overarching corporate strategy.

A case study of a lack of communication can be seen in the Post Office Horizon scandal whereby Fujitsu executives seemed unaware of the myriad of problems going on at their UK subsidiary, ICL, which designed the system.

It is imperative to implement a structured communication framework that includes regular meetings, reporting mechanisms and the use of technology to facilitate seamless communication across all levels of the organisation.

Cybersecurity

As businesses become increasingly digital, the risk of cybersecurity threats becomes more pronounced. Subsidiaries, which often have their own IT infrastructure, may become vulnerable points of entry for cyberattacks. Breaches not only jeopardise sensitive data, but can also disrupt operations, tarnishing the organisation's reputation and eroding stakeholder trust.

Even Google’s cybersecurity specialist subsidiary Mandiant is not immune to such threats. It recently fell victim to a phishing trap that led to their X account being compromised for six hours. In order to strengthen defences, introduce robust cybersecurity protocols across all subsidiaries, conduct regular security assessments and ensure that cybersecurity policies are uniformly applied throughout the organisation.

Cultural and Ethical Variances

Diverse geographical locations bring cultural and ethical nuances that can impact subsidiary governance. Differences in business practices, ethical standards and cultural norms can lead to conflicts and hinder the establishment of a cohesive corporate culture. Managing these variations while maintaining a unified corporate identity is a delicate balancing act.

Perhaps the best example of adapting to local cultures can be seen in McDonald’s, who have long since varied their products across their global locations, reflecting different cultural attitudes to food consumption. For instance, they omit pork from menus in Muslim-majority nations and prioritise high street-based locations rather than drive-throughs in countries with lower rates of car ownership.  

Taking note of this example, create a corporate culture that values diversity and inclusion, provide cultural sensitivity training and establish a code of conduct that transcends geographical boundaries.

Financial Management

Effective financial management is essential for the success of subsidiaries. Risks such as currency fluctuations, local taxation variations and inadequate financial reporting can impede accurate decision-making at both the subsidiary and parent levels. Inconsistencies in financial management can lead to financial losses and hinder the overall financial health of the organisation.

Implementing standardised financial reporting systems, conducting regular financial audits, and providing training to subsidiary teams on the intricacies of local financial regulations are necessary to keep pace in this rapidly changing environment.

Subsidiary governance is a dynamic landscape that demands proactive and strategic management. By recognising and addressing the risks, organisations can fortify their subsidiary governance frameworks, fostering resilience and ensuring that subsidiaries operate seamlessly within the overarching corporate structure. In an era of global business complexities, effective subsidiary governance is not just good practice; it is a strategic imperative.

If you are interested in finding out more, join us for our upcoming Subsidiary Governance conference, on Tuesday 20 February 2024 at The View, Royal College of Surgeons, London.

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