Worldwide: The Hidden Costs Of Global Subsidiary Compliance

Last Updated: 17 February 2016
Article by Matthew A. Eckford

It is possible to cut the cost of corporate subsidiary compliance without cutting corners.

Global growth is generally viewed as the holy grail of commercial enterprises. But while burgeoning market share and brand growth steal the limelight, expanding beyond domestic borders brings the significant – yet often underestimated – cost burden of subsidiary legal compliance.

Tighter budgets. Tougher compliance targets.

While no multinational corporation (MNC) can afford to neglect compliance issues, general counsel is typically faced with two opposing challenges.

On one hand is the need to demonstrate sound governance, manage risk and meet subsidiary statutory obligations. On the other hand is an ever-shrinking corporate secretarial budget.

It is an 'oil and water' mix as the cost of subsidiary compliance can be substantial. We've found that carrying costs of foreign subsidiaries amount to an average of US50,000 per entity, per annum.

Clearly there is scope to trim a bill of this size. But it's not simply a matter of tightening budgets where there may be limited fat to trim. A more effective approach is to recognise the overlooked costs of legal administration to see where, and how, costs can be contained without compromising compliance.

With this in mind, let's take a look at four 'hidden' costs MNCs face when it comes to managing subsidiary secretarial functions.

Hidden cost # 1 Multiple advisory services – are you receiving value?

Many MNCs use external providers for corporate secretarial functions, and it makes sense in terms of cross-border requirements. The problem lies when company secretarial obligations are across a number of jurisdictions. Under these circumstances cost comparisons become difficult and inefficiencies harder to identify.

Advisory fees may be costed in different currencies. Varying descriptions may be used to describe similar, or quite different, advisory services. Costing methods may range from fixed fee through to chargeable hours.

For time-poor general counsel, it can be hard to know whether or not the multinational is receiving value for money, or indeed, where professional services could be trimmed to enjoy cost savings.

Hidden cost # 2 Inefficiencies within corporate secretarial teams

Head office compliance teams may not have a clear idea of what is required by law across various jurisdictions. This often results in services being provided and paid for, which are above and beyond the legal essentials.

We have seen situations where multinationals have paid tens of thousands of dollars (US) annually for the lease of a registered office, when in fact a basic registered office costing around $US250 annually would have ticked all the necessary boxes.

The above example may raise questions around 'how could this happen?'. However, the day-to-day reality for corporate secretarial teams is that due to the expansive nature of their role, there is little time to go into extreme detail.

A 'tick and flick' approach to expense approval may be time-friendly for the head office team involved, but it comes at a larger cost to the MNC.

Hidden cost # 3 Lack of head office expertise

Adding to the hidden costs of subsidiary compliance, corporate secretarial functions can be blighted by a poor internal profile, and it is not uncommon for related activities to be undertaken by a patchwork of people. It means compliance activities can be riddled with inefficiencies bought on by lack of structure and uniformity as well as lack of expertise.

Secretarial activities may be poorly performed. Documents may need to be re-worked, deadlines missed, and as a result, local lodgement penalties may be incurred. The end result is not just unnecessary costs, but a heightened risk of compliance errors.

Hidden cost # 4 The opportunity cost of labour deployment

Many of the 'hidden' costs discussed to this point are at least measurable. A less quantifiable expense is the opportunity cost of diverting teams of people away from critical legal matters to relatively routine secretarial compliance obligations.

By way of example, the process of submitting annual financial statements to various regulatory authorities can involve a convoluted process of confirming when accounts were approved by the Board, gathering resolutions and signed accounts, and finally submitting them to the local authorities – often across numerous jurisdictions.

It is an inefficient and highly labour-intensive approach, yielding little direct value for shareholders. The human capital involved could be more productively deployed across other compliance functions.

Cutting costs without compromising compliance

There is a solution to limited back-office and in-house resources, and it can provide a consistent approach to governance and compliance across countries – using an external global business services provider.

Yes, this option can mean disrupting the status quo, and it is by no means the most suitable strategy for every multinational. Nevertheless, the possible efficiency gains combined with an increasingly complex matrix of legal and compliance issue makes it worthwhile investigating a single global solution.

Download our latest Global Complexity Index here >

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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