What is subsidiary governance? An introduction to subsidiary governance frameworks

Over the past century, the world has become increasingly globalised, which has meant that companies need to be flexible to exist in the ever-changing international landscape. Therefore, large groups set up subsidiaries which stand as independent legal entities with their own customers, staff, supply chains and stakeholders. The challenge for governance professionals is how to ensure that the core principles of good governance are upheld across the parent and its various subsidiaries, despite varying jurisdictional differences. 

How to create a subsidiary governance framework

To navigate the complexities of differences in local laws and cultures, organisations need a way for governance principles to be cascaded, consistently and effectively, down to the subsidiaries. By establishing subsidiary governance frameworks, sound governance practices can be created and good practice reinforced.

Key considerations

  • Implement good practice corporate governance throughout the group, bearing in mind the key UK legal and regulatory sources impacting on corporate governance.
  • Be mindful of local laws, regulation and customs.
  • Consider whether prescription or flexibility or a balance between the two is desirable in terms of policies and procedures; a 'one size fits all' approach may not be suitable.
  • Involve and encourage subsidiary boards and management to engage with the wider organisation.

Key issues – subsidiary boards

  • Consider the composition and effectiveness of subsidiary boards; regularly review this, including after key events such as acquisitions or substantial expansion.
  • Review directors’ service contracts at the subsidiary level to ensure they include appropriate protections.

Key issues – documents, policies and procedures

  • Draft or review group-wide policies, statements and procedures (eg. anti-bribery; ethics; health and safety; human rights; whistleblowing and more) and make them easily accessible.
  • Consider overarching subsidiary board guidance or terms of reference for what is expected of subsidiary boards. This could encompass their general duties vis-à-vis the subsidiary company, their interaction with the holding company and other matters.
  • Ensure delegated authorities and decision-making procedures are carefully defined in the board guidance/terms of reference and that local constitutional documents are catered for.
  • Establish clear reporting lines to the parent company and put in place measures for encouraging communication and engagement. Consider creating a communications guide.
  • Draft and implement board meeting procedures guidance on matters such as the circulation and form of agendas and board papers, how meetings should be minuted and who minutes should be circulated to.
  • Draft and implement a conflict-of-interest policy if necessary and, if desired and relevant, ensure that the constitutional documents of each subsidiary company permit independent directors to authorise any conflicts.

Implementing the framework and ongoing steps

  • Communicate clearly to subsidiaries and their staff the rationale and aims of good practice subsidiary corporate governance and what is expected of them.
  • Consider appointing corporate governance champions at subsidiaries.
  • Put in place a programme of regular training for subsidiary directors, including an induction programme at the time of their appointment.
  • Advertise, and, if necessary, train subsidiary personnel on the new/refreshed subsidiary governance framework.
  • Maintain close relationships with subsidiary boards and management and regularly review, and encourage regular feedback on, the operation of the subsidiary governance framework.

Subsidiary Governance Conference 2024

The summit will be held in person at The View, 38-43 Lincoln's Inn Fields, London, WC2A 3PE on the 20 February 2024 with a comprehensive programme of keynote presentations, insightful panel discussions, interactive workshops, and networking opportunities. Tickets are available for purchase.

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