The Devastating Effects of Mismanaged Subsidiary Governance: How You Can Learn from The Mistakes of Large Corporations
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The document discusses major corporate governance failures related to mismanaged subsidiary governance, highlighting cases from BlackRock, Holcim, Aspro, and SNC-Lavalin. It stresses the importance of proper intercompany agreements, oversight, and a centralized management approach to mitigate risks associated with subsidiaries. The document also outlines best practices and governance frameworks aimed at ensuring compliance and reducing the risk of corporate scandals.
The Devastating Effects of Mismanaged Subsidiary Governance: How You Can Learn from The Mistakes of Large Corporations
- 1. How You Can Learn from Billion Dollar Governance Mistakes The Devastating Effects of Mismanaged Subsidiary Governance:
- 2. Adrian Camara Adrian is a Toronto based entrepreneur and lawyer. Adrian practiced corporate transactional law at a major law firm prior to founding Athennian. Meet the Hosts Paul Sutton Paul is a corporate lawyer and leading expert on corporate structures for multinational groups. He is the author of 'Intercompany Agreements for Transfer Pricing Compliance - A Practical Guide'.
- 3. About Athennian Athennian is a modern subsidiary governance platform that powers legal and business teams to be transaction, audit, and compliance ready. Transaction, Audit, & Compliance Ready
- 4. About LCN Legal LCN Legal is an international law firm which specialises in the legal implementation of transfer pricing: a fundamental part of any multinational group’s transfer pricing compliance. LCN Legal’s lawyers work alongside in-house tax and legal teams to help multinational groups avoid unnecessary fines, penalties and double taxation, by maintaining their intercompany agreements so that they aligned with their transfer pricing policies and audit ready. Specialists in intercompany agreements for multinational groups
- 5. Challenges in Corporate Governance What We Will Cover: BlackRock Transfer Pricing Case (July 2022) Holcim ISIS Scandal (2016) Aspro Transfer Pricing Mismanagement (2022) SNC- Lavalin Bribery Scandal (2019)
- 6. 01 Why is Corporate Subsidiary Management so Hard to Operationalize?
- 7. Business Entity Data Compliance Transactions KYC/AML Audit & Tax Governance Operations Registered agent, UBO, business licenses, annual reports, etc. Due diligence, integration, and execution, etc. Accelerate completion of KYC/B and AML requests Tax returns, transfer pricing, tax audits, etc Committees & board management, by-laws/shareholder rules, etc. HR, ESG, Procurement, Sales, etc. Entity management is a shared responsibility among legal, tax, and finance. 01
- 8. 96% leaders reported issues with their entity management software. of legal departments 72% 62% 02 Usage of outdated legacy software or none at all. find it difficult to keep systems updated. find it difficult to track governance activity statuses of legal departments of legal departments Ernst & Young LLP, 2021
- 9. 1984 1990s 2007 2010 2016 ICSA Releases Blueprint OneWorld More SQL Database Products Released Launches Corp Legal Ops Consortium Launches *GEMS, EnGlobe, CSC Navigator, ALF, Wolters Kluwer CT Corp Launches
- 10. As businesses grow, they tend to use a decentralized system of internal or external resources. Internally, there is often unclear responsibility to manage outside vendors resulting in ballooning costs and risk. 47% of legal departments currently operate in this decentralized model. 03 No Centralized Management of Entities DID YOU KNOW?
- 12. WANTS TALENTED, DYNAMIC INDIVIDUALS WHO CAN SEE INTO THE FUTURE & BRING ABOUT CHANGES. The BlackRock Transfer Pricing Case
- 13. 13 BlackRock At-A-Glance The Situation As expected, the UK tax authority (HMRC) challenged the arrangement and denied the deduction. The Problem In 2009, BlackRock put in place US$ 4 billion of intra-group loans, and claimed a deduction for the interest expense. The UK’s Upper Tribunal agreed with HMRC. One of the grounds was transfer pricing: a third party lender would not have made the loan without security. The Result
- 14. ● The structure was put in place on the acquisition of the North American investment management business of Barclays Global Investors. ● BlackRock lost on transfer pricing issue and ‘unallowable purpose’ issue. ● The Upper Tribunal denied whole of interest deduction on the US$ 4 billion loan. ● The decisive factor on transfer pricing issue was lack of covenants to te secure the dividend flow up to the borrower. BlackRock: Notes
- 15. 15 What are the Key Headlines? 1. This means reviewing all intercompany transactions from the perspectives of each individual entity, and asking ‘is this an arrangement which the directors can properly approve”? Consider the ‘legal entity’ perspective 2. Implement the arrangements appropriately The legal form and substance of intercompany transactions must be carefully designed so that they meet the needs of all stakeholders - including tax, regulatory, compliance etc.
- 16. Holcim Payments to ISIS in Syria
- 17. 17 Scandal At-A-Glance The Situation Holcim launched an internal investigation in 2016 after scrutinizing the Syrian business practices. It was revealed that the Syrian entity had paid $10.24 million to ISIS to maintain access to its plant there. The Problem Lafarge invested in Syria in the early 2000s. Despite the risks, Lafarge continued to operate in Syria during the conflict. In 2015 Lafarge was acquired by Holcim. In 2018 the company was indicted in France, damaging the reputation. In 2022, the organization agreed to pay a $777.8 million fine in a US Court. Parent company Holcim’s shares dropped 3% and trading ceased. The Result
- 18. 18 What are the Key Headlines? 1. Most corporate scandals and criminal activity occurs at the subsidiary level creating operational and strategic risk for parents. Governance and oversight at the subsidiary level 2. Events such as this cause buy-side capital markets to increase scrutiny in due diligence on subsidiary governance increasing the importance of strong governance and record-keeping practices. Due diligence scrutiny
- 19. WANTS TALENTED, DYNAMIC INDIVIDUALS WHO CAN SEE INTO THE FUTURE & BRING ABOUT CHANGES. Aspro Inc Transfer Pricing Mismanagement
- 20. 20 Aspro At-A-Glance The Situation The company had no intercompany agreements, and no other credible evidence to show the payments were fees rather than dividends. The Problem Over a number of years, US company Aspro, Inc had made payments to shareholders and claimed an expense deduction as service fees. The IRS denied the expense deduction. The US Court of Appeals ruled in favour of the IRS. The Result
- 21. 21 What are the Key Headlines? 1. Put in place intercompany agreements for all intercompany transactions 2. Tax audits may not arise for a number of years, by which time the relevant members of staff may no longer be available to answer questions. It’s therefore essential to maintain an appropriate audit trail, including the relevant agreements and director resolutions / board papers. Keep those agreements updated and available in a central archive, together with the relevant corporate approvals Intercompany agreements are a fundamental part of transfer pricing compliance.
- 23. 23 Scandal At-A-Glance The Situation In 2015, SNC charged by federal authorities for paying $48m to government officials between 2001-2011. The Problem SNC-Lavalin is a Montreal-based global civil engineering and construction firm with operations in the MENA. The stock price fell nearly 40% in three months and, in 2019, SNC settled for $280m with Canadian authorities. The Result
- 24. What are the Key Headlines? 1. Most corporate scandals and criminal activity occurs at the subsidiary level creating operational and strategic risk for parents. Effective ESG practices at the subsidiary level 2. Due to ESG mandates of institutional investors, capital markets will respond very negatively to ESG violations triggering severe valuation drops. Culture of accountability and transparency at the subsidiary level 24
- 25. What do all of these scandals have in common? 1. Lack of collaboration on complex transaction structures 3. Huge enterprise risk accumulates at the subsidiary level 2. ESG operations at parent often decay at the subsidiary level 4. ESG and tax risk can be inherited via M&A
- 26. 26 Investing in a system of governance, builds a culture of accountability. How can you avoid a scandal at your organization? Formalize Compliance By formalizing compliance operations with investments in technology and systems, you signal to your organization that ESG is important and not an afterthought. Increase Visibility to Corporate Structure Corporate structures have complex relationships and data. Investing entity management software and processes, enables visibility and collaboration to make better decisions. Strengthened Governance Establish clear governance frameworks, policies, and procedures to guide operations, and reduce the risk of unethical or illegal behavior.
- 27. Tier 1 Tier 2 Tier 3 Tier 4 Example of Subsidiary Governance Framework Represents a material proportion of operations and risk Principal Operating Subsidiaries Principal Operating Subsidiaries Responsible for a key function of the enterprise and subject to governmental regulatory oversight Other Operating Subsidiaries & Holding Companies Limited or no operations/risk exposure Special Purpose Entities Created to address a specific need and no operating oversight needed Less Oversight More Oversight
- 28. Ebook: Best Practices in Subsidiary Management Webinar: Leveraging Technology to Avoid Mismanagement of Corporate Subsidiaries This guide provides an overview of best practices to stand-up an effective subsidiary management operations function in your company. Get the Ebook. Learn why businesses with out-of-control legal entities lose millions of dollars, what critical pieces of data to watch for when managing your entities, and how to avoid lapses in management that leave devastating results. Watch the webinar. Article: Three Models for GCs to Outsource Legal Entity Management Coming Soon: Corporate Governance Checklist There are three main configurations to manage subsidiary entities. The appropriate configuration depends largely on the volume and complexity of your corporate structure. Read the article. Subscribe to our newsletter. HelpfulResources to Learn More…
- 29. Q&A