As you are probably well aware, subsidiary management falls under the umbrella of entity management. Subsidiary management involves governing a corporation and its various subsidiary entities, including franchises and standalone businesses in which the larger organization has a controlling stake.
Even if you are extremely familiar with the basic tenets of subsidiary management, it undoubtedly represents one of your in-house legal teams' most persistent pain points.
This reality is understandable, as managing auxiliary entities is quite challenging, especially if your in-house legal team is still attempting to do so with antiquated entity management tactics and technologies.
On that note, the team at Athennian created this guide to subsidiary management as part of our Back to Basics content series. During each installment, we examine a broad entity management-related topic and identify ways in which in-house legal teams can better navigate challenges associated with these concepts.
Challenges to Operationalizing Subsidiary Management
At the surface level, subsidiary management is an incredibly straightforward concept. However, the waters quickly become muddied when one attempts to operationalize subsidiary management. It can be incredibly difficult for the following reasons:
Entity Management Responsibilities Are Shared
As you can likely attest, entity management is rarely the responsibility of a single department. Instead, these responsibilities are typically divided between finance, tax, and legal departments. In some instances, other departments may be involved as well, which further complicates the process.
Dividing subsidiary management responsibilities is necessary for efficiency’s sake. However, it is critical that members of each department can effectively collaborate. Otherwise, subsidiary management will become exceedingly challenging.
Antiquated Entity Management Software Creates Data Blindspots
On-premises entity management software is notorious for creating data silos. A data silo occurs when information is stored on a particular platform but not shared with other software solutions. These silos create data blindspots which make it difficult to monitor the status of governance activities.
Replacing antiquated technology with a fully integrated, cloud-based solution is the most pragmatic way of eliminating data silos and improving information visibility. A leading-edge software platform will drastically improve subsidiary management and every other aspect of entity management.
Many Businesses Lack Centralized Management Capabilities
Businesses that are experiencing rapid growth of their subsidiary assets tend to lean toward a decentralized management strategy. This tactic makes sense because forming partnerships with local law firms can help them navigate local and state compliance requirements as they expand into new markets.
While there is nothing wrong with using this approach, businesses must maintain centralized management capabilities. They will encounter rampant cost management and collaboration issues if they do not.
Subsidiary Governance Frameworks: The Key to Effective Subsidiary Management
If organizations hope to overcome the aforementioned challenges associated with subsidiary management, they must do two things.
First, it is critical that organizations equip their in-house legal teams with the resources necessary to govern subsidiaries effectively. Accomplishing this requires investment in modern entity management software — but more on that below.
In addition to upgrading their technology stacks, corporate entities must develop Subsidiary Governance Frameworks. These frameworks facilitate synergy between finance, tax, and legal teams so that members of each department can more effectively collaborate.
A Subsidiary Governance Framework serves several purposes. Primarily, the framework must provide guidance for the following processes:
- Review and maintenance of intercompany agreements
- Compliance monitoring
- Training subsidiary officers and directors
- Conducting subsidiary board meetings
- Establishing powers of attorney, secretary’s certificates, etc.
- Composing and managing subsidiary boards
- Creating regulatory and financial controls
- Setting parent reporting frequency and content
When a corporation sets out to create or modify its Subsidiary Governance Framework, specificity is critical. The more detailed the framework, the more effective it will be at guiding departments through the process of subsidiary governance.
Once a rough draft of a framework is created, members of the legal, finance, and tax teams should thoroughly review the documents independently. During the review process, teams should note any questions that they still have regarding their responsibilities as they pertain to subsidiary governance.
If questions abound, then the framework should be revised in order to clear up any “gray areas” and enhance the teams’ ability to collaborate.
A well-composed Subsidiary Governance Framework will help businesses ease many of the pains associated with subsidiary management, especially when the framework is paired with cloud-based entity management software.
Streamline Subsidiary Management with Entity Management Software
Whether your organization is managing an entire franchise or a single subsidiary company, you are bound to encounter some of the challenges outlined above.
Fortunately, you can overcome many of these hurdles by investing in Athennian’s entity management software. Athennian’s cloud-based solutions will empower your legal team by automating every entity management workflow.
To learn more about our entity management software and how it can help you leverage established subsidiary management best practices, download our e-book Best Practices in Corporate Subsidiary Management.