However, care is needed to minimize the risk of conflicts
for these “outside” directors because of the other positions
they hold within the group.
• Board’s role: The roles of the parent and the subsidiary
boards need to be clearly delineated, for example,
through the drafting of board mandates. For example,
what is the subsidiary board’s role and the parent board’s
role in relation to remuneration of executives within
the subsidiary?
• Specific policies and procedures: These can include
those relating to qualifications of key officers (e.g.
compliance and risk officers); delegations of authority;
communication between entities within the group; the
creation and dissolution of subsidiaries; the development
of materials and guidance for subsidiary directors in
the form of guidelines and directors’ handbooks; audit
requirements, code of conduct and whistle-blowing
policy. Of course, if the subsidiary is listed, its corporate
governance will have to take into account rules and codes
applicable in the jurisdiction of listing. In the case of joint
ventures and associated companies, the “owner” has to
calibrate its approach to ensuring proper governance
so that it does not breach the joint venture agreement,
violate the spirit of good governance, or, in the worst case,
break the law by over-asserting its rights. For example,
The Challenge of Governance in Company Groups
Article by Mak Yuen Teen & Christopher Bennett
Hawkamah issue02 56pages.indd 23
we have come across situations of directors representing
the “owner” of an associated company going directly to
management of the associated company to obtain detailed
operational data which is not made available to the
other shareholders of the associated company. However,
despite these difficulties, the “owner” must take steps to
ensure proper governance because it faces financial and
reputational risks.
• A focus on the behavioural incentives that exist within
the group structure relating to governance issues: How
well does the main board understand the culture of
subsidiaries and the impact of that culture on practices?
Does the main board really understand the incentives (in
the widest sense) that operate within subsidiaries? Does
the main board understand and attempt to eliminate
conflicting behavioral incentives throughout the group?
There is clearly a need for greater focus from parent
company boards and regulators on issues relating to the
governance of subsidiaries and other group entities and
for better education of those who are directors in such
entities. At the same time, companies need to expend as
much effort on the behavioral aspects of governance as
they do on the legal and accounting procedures. In some
ways, these issues are more vexing than those relating to
boards and directors of listed companies.
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