outside of the ultimate parent company account for more
than one-third of total group equity (excluding outliers)
and more than 40 percent of total group profits. In some
cases, these percentages are much higher.
Subsidiaries and controlled entities may be significant
sources of risk.
Take the case of the BP’s Deepwater Horizon oil spill in the
Gulf of Mexico. The rig was operated by BP Exploration
and Production Inc.
As The Guardian (16 December 2010) put it:
“BP Exploration and Production Inc is a subsidiary of BP
America Production.... BP America Production is, in turn,
a subsidiary of BP Company North America, which is a
subsidiary of BP Corporation North America, which is a
subsidiary of BP America Inc, which is a subsidiary of the
parent company BP plc.”
That is, the disaster occurred many layers down from the
ultimate parent company (BP plc) but caused enormous
reputational and financial damage to it (to say nothing of
the environmental damage). As is often the case, it appears
that the directors of BP Exploration and Production Inc.
had relationships with other “group” companies and, in
some cases, line responsibilities within the subsidiary and
the group. One can only wonder about the robustness of
the risk management discussions on the subsidiary board.
It also raises questions about the oversight which BP plc
exercised, or should have exercised, over this and other
subsidiaries.
Or consider GSK’s recent problems in China, which draw
attention to the “subsidiary” problem again, this time
from a corruption perspective.
GSK’s first response to the accusation of bribery in its
Chinese operations was to issue a statement on 11 July
2013, which said, “We continuously monitor our businesses
to ensure they meet our strict compliance procedures. We
have done this in China and found no evidence of bribery or
corruption of doctors or government officials. However, if
evidence of such activity is provided, we will act swiftly on it.”
On 22 July, the new head of Glaxo’s Chinese operations
issued a statement that backtracked on the original
statement, saying, “Certain senior executives of GSK China
who know our systems well appear to have acted outside
of our processes and controls, which breaches Chinese law.”
It now appears that a number of other pharmaceutical
companies may also have paid bribes in China.
To be clear, both BP and GSK seem to be well run companies
The Challenge of Governance in Company Groups
Article by Mak Yuen Teen & Christopher Bennett
Hawkamah issue02 56pages.indd 21
and make it very clear that, as far as their “Main Boards”
are concerned, governance and safety are important
priorities that should not be compromised under any
circumstances. They write detailed corporate governance
statements, try to promulgate their values to employees
and are explicit about how their governance systems
and processes are supposed to work. The “hardware” of
governance is largely in place in both cases.
However, in both cases, something went wrong deeper
in these groups and there are many other examples in
different organizations.
The problems in these cases highlight:
1. The process and routines of governance in “groups”.
How in practice can Boards of “holding companies”
monitor the implementation of their policies in groups
with many “subsidiaries”?
2. The importance of the behavioural aspects of
governance and “incentives” within organizations.
3. The role of the “subsidiary” board in governance and
potential conflicts with the “holding company” board, and
the potential conflicts for “subsidiary directors” if they are
also employees elsewhere in the “group”
Let’s first discuss the first two problems.
Human behaviour can be thought of as being driven by
incentives (not just in the sense of financial incentives).
For example, a “Main Board” may clearly express its
view that bribery is not acceptable and promulgates this
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