Managing compliance and maintaining a company's 'good standing' is increasingly complicated as global firms are subject to multiple jurisdictions
Every firm wants to be in ‘good standing’ with all jurisdictions in which it operates. The more subsidiaries and entities a company has around the world, however, the more challenging it is to manage governance compliance obligations and filing deadlines.
The nature and frequency of subsidiary and entity compliance reporting varies – and changes regularly. In general, host jurisdictions may expect companies to maintain accurate records of the subsidiaries and entities within their localities, including entity names, ownership structure, directors and officers, signing authorities, records of board meetings and annual meetings, as well as make timely annual report and tax filings. Failure to meet these requirements could create financial and other risks, and signal an internal control situation warranting independent auditor review.
For firms with multiple entities in various jurisdictions, keeping in good standing entails ongoing vigilance. ‘One of the deep, dark secrets of global entity management is that many large multinationals have information that is out-of-date and incomplete, and they struggle to improve their data quality,’ says Rudy Escalante, CEO of ICSA Software North America.
Sophisticated data applications have emerged to help companies stay current with global entity formations/dissolutions, director and officer changes, filing deadlines and any data critical to compliance. Intelligent technology automates compliance calendars for entities around the world, generates forms and even makes electronic filings. Email and BlackBerry alerts, triggered by various programs, help governance officers stay on top of the complicated matrix of compliance deadlines.
Curiously, regulations are spurring the use of technology. ‘The regulators, secretaries of state or equivalent bodies are slowly but surely moving to more technology-driven platforms to allow corporations to file their returns and pay taxes and fees,’ says Andrew Moore, head of Computershare Governance Services for North America and Asia-Pacific. ‘What they’ve found is that electronic filing doesn’t need human intervention once it’s set up. It’s faster – so they get their money faster.’
Moore describes the electronic filing of annual reports as a ‘seamless, quick, end-to-end’ solution. It also enables companies to become more efficient and save money by cutting out the agents or lawyers they typically pay to file these forms.
To learn what and when to file in foreign jurisdictions where they don’t have a corporate secretary on site, some companies turn to service providers that function as an extension of their legal department. ‘Corporate law regulations are changing and penalties for non-compliance increasing,’ notes John Traynor, Americas regional director of the corporate secretarial team at TMF Group, which has a network of professionals who provide corporate secretarial services to firms worldwide. ‘Failure to keep on top of such matters can lead to financial penalties and reputational risk.’
According to Traynor, one outcome of globalization is that international businesses represent a greater portion of a company’s value chain so it is important for firms not to expose the value of their foreign assets to any governance or compliance risks. ‘There’s a greater emphasis on the importance of corporate governance for international subsidiaries,’ he adds. ‘Active risk management has attained a greater profile.’
It is, therefore, crucial for companies to strengthen their ability to manage and monitor entity compliance. ‘There needs to be a regular review process for your entities,’ comments Escalante. ‘If you can’t produce an accurate organization chart, how can you say your books are good?’
Data processing
Increasingly, global companies are prevailing upon their technology partners for processes to ensure data in the entity management system are current. Moore sees a strong similarity emerging between the financial control processes supporting compliance with Sarbanes-Oxley Section 404 and workflow processes implemented for entity management. ‘A growing trend, especially at global companies, is a regular premeditated verification or certification that their entity data are accurate,’ he says.
A weak link in entity management oversight could suggest further weaknesses. ‘If the government detects inadequate controls or inaccurate books and records, the company’s auditors are going to have a difficult time limiting it to just that one issue,’ says Philip Urofsky, partner in the law firm of Shearman & Sterling. ‘They’re going to have to insist the company does a broader search of its controls, books and records before they will sign off on an audit.’
Fortunately, the technology supporting entity management has already evolved. ‘It’s gone from something sitting on a PC for a single user to something shared across an enterprise,’ says Escalante. Today, technology platforms may serve several functions within a company. Although each function operates from its own secured application and manages the information for which it is responsible, the applications can send timely alerts to other functions whenever changes of interest occur. For example, should a company name change, the compliance database can automatically disseminate notifications to other functions needing that information.
How global companies choose to manage their entity database varies. Often, corporate culture influences the information firms keep in the system and the level of access they provide to employees outside the corporate secretary’s office. ‘We have some clients that just want to have a few people in the corporate secretary’s office update the system,’ says Karlam Johansen, group product manager of CT Governance Solutions. ‘But we also have many global organizations that want to decentralize and delegate some of the ownership of managing the data to their subsidiaries.’
Whatever systems and processes global companies implement, Johansen believes it is critical they maintain accurate and up-to-date entity and subsidiary information in a centralized system. ‘Corporate secretaries need to make sure the entities do not fall out of good standing,’ she adds. She advises corporate secretaries to ‘find and invest in a proven entity management solution’ and work with a vendor that has ‘demonstrated success’ in helping global companies with their entity management and compliance needs. ‘It’s not just about the technology,’ she concludes. ‘It’s about the process, procedures and services that solution providers can give you.’
