"Any intelligent fool can make things bigger and more complex. It takes a genius and a lot of courage to move in the opposite direction." Whilst I'm sure Albert Einstein was referring to complex physics when he made this assertion, his words are true for business generally and more specifically, legal entity structures.
Many corporates (not just large multinationals) seem to excel in making things unnecessarily complex by setting up more legal entities than they know what to do with. Of course, it's not always intended to make matters complicated. Often, they were formed for a specific operational or financial reason, or for tax structuring purposes. Alternatively, they were acquired through M&A activity.
Irrespective, it doesn't take long for the group structure to grow and the corporate garage to get cluttered with bric-a-brac.
It's not uncommon for an organization to have hundreds of companies in its structure. Even when these companies no longer serve an obvious purpose, groups often retain them, leaving them "as-is" rather than toying with the status quo.
Keeping such entities can be costly, risky (for the corporate itself and directors personally) and can hamper the implementation of other strategic initiatives. Consequently, "clearing out the garage" is not something to continually postpone but tackle head-on in the near-term either on its own or as a component of a wider strategic transformation/reorganization initiative.
Often, companies will initiate a defined Corporate
Simplification (CS) project to tackle some of these issues. When
implemented successfully, execution is well planned, quick and can
provide speedy payback. By clearing out the garage, you're not
only eliminating unnecessary entities, but also managing risk and
making a leaner, more agile organization to take into the
future.
So, what indicators should management look for when determining
whether to progress CS efforts? In our experience, there's no
specific criteria. If you can't describe your own corporate
structure internally, if it doesn't match your organizational
culture of transparency, if it takes up a whole wall in your office
or if your employees are facing and raising day-to-day challenges
caused by the complexity, those are some of the signs.
You'll have senior executives acting as directors of companies they know nothing about, swathes of dormant companies or intermediate holding companies creating unnecessary tiers in the group structure or your finance team (and other functions) spending an inordinate amount of time supporting non-core entities.
The question then becomes whether you have the capacity and
energy to clear out the garage. If you do, you'll find lost
family treasures and previously unidentified wasps' nests in
the process.
As the CFO/Financial Director, you want to avoid being challenged
by the board or other senior management on the group structure and
having to defend its complexities. Non-executive directors and
newcomers to the senior management team may have a different
perspective on what "good" looks like from working with
other organizations. Furthermore, current and potential investors,
finance providers, employees and other stakeholders will all value
transparency and a group structure that is easily explained.
Duff & Phelps has worked alongside numerous clients from mid-market to large corporates on CS initiatives. A properly planned and resourced CS initiative can deliver a wide-range of sometimes unexpected benefits (summarized below) for your organization. The trick then is to ensure that those benefits are sustained through making CS business as usual, thereby facilitating long-term entity management.
The moral of this story is prioritize clearing out the garage on your "to do" list – identify where everything is, get rid of unnecessary clutter and put things where you want them. You'll feel good about it, see the value in your achievement and be wary of letting it return to its previous state.
Corporate Simplification (CS) – Benefits Summary:
- Reduced audit, tax, regulatory and other compliance costs
- Reduced internal costs associated with maintaining unnecessary entities – Executive, Finance, Legal, Company Secretarial and Human Resources will all benefit from focusing on core activities
- Mitigation of corporate risk and director personal risk associated with compliance failings, fading or lost corporate memory and potential contingent liabilities
- Improved governance and transparency (and therefore reduced impact of disclosure requirements and corporate governance reform) – increasingly valuable in a world that is demanding it with legislation and guidance changing to improve it
- Resolution of issues resulting from unnecessary complexity such as tax inefficiency and dividend blocks
- Releasing capital tied up in balance sheets of individual entities
- Restricted scope and cost of future improvement and transformation efforts
- Synergies achieved through the alignment of the entity structure with operational activities
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.
