My interest in researching into subsidiary governance from a risk management perspective began while looking for a book I couldn’t find. I was working in an international group, and was interested in new regulatory guidance about risk, and board effectiveness. I was studying for my Masters in corporate governance and business ethics and keen to do some relevant research into what good corporate governance – with risk governance as a focus. I couldn’t find the book. So, I chose to look at the subject from two angles. First, to compile and review some of the disparate research there was around subsidiary governance and risk, then try to look at how companies deal with these challenges in the real world.
The thing that people tend to say about subsidiary governance is that it is different depending on the organisation. As a professional seeking to find out what good looks like, this is somewhat frustrating as it makes it difficult to apply any knowledge to into useful practice.
The theory says that it is essential that the subsidiary governance model is aligned with the organisational model. In other words, subsidiary governance is an organisational competency or asset and if it is not aligned, it will significantly impact the sustainability of the business. The key is to keep the internal and external environment of the group, at parent and subsidiary level under constant review.
An example of this would be if a parent company makes an acquisition which renders another subsidiary less material in the group. The financial, reputational or risk impact of this subsidiary on the group will also impact on the composition of the subsidiary board. If we think of it in value terms, the subsidiary may not have the capacity to add lots of value, but it may have the capacity to damage the value of the group. So, is it still necessary to have a separate subsidiary? If so, what board composition would be appropriate?
When we talk about corporate governance we usually think about it in terms of agency theory – in other words, in terms of control. However, stewardship theory and stakeholder theory are two other helpful ways of thinking about what good subsidiary governance might look like. They assume loyalty to the organisation, trust, underline the importance of good information flows and networks. 'Roads to Ruin', research conducted by Cass Business School for AIRMIC, underlined how these 'soft' factors such as good information flows are key in managing risks.
The challenge for businesses is how they can create networks, formal and informal, when establishing subsidiary boards which then ensures the flow of good information. For example, does the board include the country director and someone from the head office? Is the skills mix on the board one that will understand the group and subsidiary value add benefits and value risks? Do we understand enough about emerging 'licence-to-operate' risks in the subsidiary environment? This last question is one of the main reasons that businesses, especially regulated businesses, are paying more and more attention to the quality of their subsidiary governance.
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