As companies continue to grow their global footprints, having strong governance policies for subsidiaries is essential in helping to manage the potential increase in risk exposure. This can start with having the right board in place for each entity, a board that can handle the local risks, implement company policies, and provide regular reports to ensure central oversight of the group.
Key elements for your board composition
Having made the decision to review the board the next step is to consider the key elements which will help you to develop the board framework for your subsidiaries.
- Skills: do certain key skills need representation at the subsidiary board level? Common skills tend to be finance and tax related. However, what are the activities of your local entities, what is their purpose and main objectives? Could other areas, such as industry expertise, be more crucial for local operations? Map what skills you consider are necessary or helpful for your entities.
- Residency requirements: although the need to have resident directors for legal reasons has reduced over recent years, there are still many countries that require this (such as India and Singapore) - this requirement needs to be built into composition considerations. Although in many countries there is no legal requirement, there could be other reasons for a resident director, for example, tax purposes (such as evidencing substance in countries like the Netherlands) or practical reasons regarding filings, and communications with local authorities; having a local director can also be beneficial for providing greater insight into the local culture and market. Ensure you are aware of the local requirements and build this into your plan.
- Practicalities: serving as a director involves a lot of practical issues that can vary by country. There may be a set number of board meetings to hold each year, the location of these may be quite prescriptive making organisation a real challenge in busy calendars. Signing documents can become time consuming, and with international appointments, the additional challenges of arranging legalisation of signatures can become a large administrative task. The pandemic has certainly lead to countries building in more flexibility, with more options on written resolutions, and electronic signatures becoming more prevalent. However, these changes may not be permanent, and some countries have still not yet fully embraced the potential technological assistance to make international board positions much easier to manage. Consider the time individuals can dedicate, the ability to attend meetings and availability for signing documents.
- Numbers: using some of the other elements in this list can assist in assessing the correct number of directors at subsidiary level. There needs to be a balance struck between having skills, practicality, flexibility, and even availability. Three to five directors is the norm at subsidiary level, with smaller boards being more agile. Think about your existing structures and sizes and what has worked best, potentially there may not be a single size to fit all entities.
- Diversity: while increasing the diversity of boards is a key issue for listed companies and large private companies, consider building this into your subsidiary boards as well, to increase and promote diversity across all levels of your group. There are many areas to consider, such as gender, ethnicity, disability, etc. and existing internal measures and targets can inform considerations for your subsidiary boards.
- Succession and pipeline: your subsidiary boards could be an ideal venue to develop your longer term plan for the future of your parent board. It can help to develop the necessary skills and experience for future executive director positions at the top level.
- The slate: based on the above items, consider whether you want a common slate across your subsidiaries. Would you have a global slate of common directors applied to all entities, with flexibility for local requirements such as residency built in? Alternatively, a regional approach could be more appropriate, where each region has a common slate. Finally, there may be the option for individual country or entity compositions, where each has its own rules. The number of entities within your group may drive this, as directors only have a finite amount of time to fulfil their roles and need to ensure they can do this effectively.
Developing your board policy
Once you have considered the elements above, and the unique areas of your business and operations, a policy can be developed and implemented. Steps to follow include:
- Information: gather the necessary information across your subsidiaries to inform your decisions. Check the current composition, consider the local requirements on numbers of directors, residency requirements, meetings, signing documents, etc. Also consider where you have faced challenges most recently, and would there have been better alternatives. Also think about where it works well already, is that a blueprint that could be followed more widely? Good and bad experiences may help in guiding the best composition.
- Policy: set your policy based on the information you have gathered. How many directors on each board, which directors will be common and across what entities, and other specifics on signature authorities, anticipated delegation and similar. The policy will likely develop and change over time to accommodate variations within the business, and regular reviews should be completed to keep it fit for purpose. Once the policy is set it is time to complete any changes necessary to reflect your new approach. This could be completed as a one off global project, aiming to complete the changes as quickly as possible, or be a phased project to complete within a set timeline across all entities that require changes. The changes could be combined into other ongoing work, or future work (such as the annual accounts approvals). Ensure there is close monitoring that all necessary changes are completed. As well as the necessary paperwork for changing directors, make sure any provisions in constitutional documents are also updated, if they include specifics on board size and composition.
- Communication: ensure you promote and embed the new policy. Once the policy is set it is key to ensure the local subsidiaries will follow and buy-in to any changes you may be implementing (or reinforcing the existing approach). It is a chance to introduce approval procedures for board changes (if not already in place) to stop any local changes being implemented that would not follow the policy, and enhance oversight from the centre, if needed.
- Support: having directors sit on international boards can be a daunting process. As part of your policy and their induction, provide material to help them understand the requirements of the local position, the key obligations they need to fulfil, options for delegation and internal support to fulfil their role.
The right board composition is individual to each company as they consider their ambitions, current challenges, the industry, and current corporate strategy. Having an established approach that is kept under review will help to keep the subsidiary boards up to date and working collaboratively to assist in managing the risks and local challenges.
If you require support regarding your subsidiary boards, please get in touch.