A practical look at the questions NEDs operating in multi-national organisations should be asking about how decisions are made and how authority is delegated at the subsidiary level.
You’ve agreed to take on a role as a NED in a multi-national organisation – how do you manage your exposure to risk? We have seen, from recent corporate scandals, that it is often a decision at a subsidiary company that results in huge reputational damage or financial loss to a group and potentially liability for its directors. How embedded are the corporate governance structures, company policies, legal framework and regulatory environment for decision making throughout the organisation? These systems are likely to be in place at the top level board where the strategy is agreed but are subsidiary directors aware of and supported in fulfilling their own legal duties?
From our experience of dealing with situations where governance has gone awry, we would encourage NEDs to ask the following questions:
NEDs should also seek periodic meetings with local boards and management, and even suggest rotating parent board meetings to different locations to encourage interactions with subsidiaries.
NEDs may face resistance when raising these questions, as they can seem to run counter to the implementation of a unified top down strategy for the group.
However, good governance can help to manage risk and improve subsidiary performance. It can also increase the quantity and quality of information flow up to the parent, therefore increasing trust and enabling the parent to make informed strategic decisions and identify and resolve issues at an early stage.
Moreover, the benefits of good governance may not become apparent until things go wrong. Group governance may be scrutinised in cases of poor financial results, insolvency, bribery, fraud, negative press coverage eg, around data protection, employees, corporate social responsibility.
In these and other cases, individual directors may have exposure. Directors' & officers' insurance or qualifying third party indemnities can mitigate this exposure only to a limited extent, and they will in any case not alleviate reputational damage.
The best protection is to proactively seek healthy corporate governance practices across the group which will protect it and its directors in good times and bad.
|UK directors duties||UK penalties/exposure for breach of directors' duties|
In most jurisdictions (including the UK), directors owe their duties to the company on whose board they sit, not to a group parent or employer company.
In the UK, generally directors must:
There are additional specific obligations on directors, including in cases where the company is insolvent or at risk of being insolvent.
Directors may face:
Beatriz Araujo, partner, Baker McKenzie
Joanna Hewitt, partner, Baker McKenzie
Isabel Carty, Associate, Baker McKenzie
Corporate Governance, September 2017