THE CHALLENGE OF GOVERNANCE IN COMPANY GROUPS
Public companies are often in the spotlight for fraud,
corruption, misconduct and other lapses but the truth is
that many of these problems occur within entities in the
group, not at the parent company level.
For some considerable time, we have been thinking about
part of the governance “eco-system” that has received
little attention - the issues relating to subsidiaries and
other entities within a group (including joint ventures,
associates and special purpose entities) and the problems
faced by directors in these entities.
We argue that many governance issues can be traced back
to the complexity of company groups and the difficulty
that “holding company” boards have in ensuring that they
know what’s going on deeper in the “group” and in making
sure that the intentions of the board are expressed in the
actions of employees.
Most listed and large unlisted companies are company
groups. Often, entities within these groups operate across a
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number of geographies and industries, each bringing its own
financial, operational, compliance and reputational risks.
For example, in their latest annual reports, GlaxoSmithKline
lists more than 100 “Principal Group companies” and
Singapore Telecommunications Limited (SingTel) lists 77
wholly-owned subsidiaries, 6 partly-owned subsidiaries,
24 joint ventures and 10 associated companies within its
stable of companies.
GlaxoSmithKline and SingTel are not exceptional; some
multinational companies have thousands of subsidiaries
and other group entities.
In some cases, the listed company is a pure investment
holding company and business is conducted totally within
the subsidiaries and other group entities. In many cases,
group entities account for a substantial amount of the
profits, cash flows, assets and liabilities of the groups. In
a recent study of 150 of the largest listed companies in
Australia, Malaysia and Singapore, we found that entities
The Challenge of Governance in Company Groups
Article by Mak Yuen Teen & Christopher Bennett
9/19/13 10:07 AM