A practical look at the questions NEDs operating in multi-national organisations should be asking about how decisions are made and how authority is delegated at the subsidiary level.

Corporate governance across the group

You’ve agreed to take on a role as a NED in a multi-national organisation – how do you manage your exposure to risk? We have seen, from recent corporate scandals, that it is often a decision at a subsidiary company that results in huge reputational damage or financial loss to a group and potentially liability for its directors. How embedded are the corporate governance structures, company policies, legal framework and regulatory environment for decision making throughout the organisation? These systems are likely to be in place at the top level board where the strategy is agreed but are subsidiary directors aware of and supported in fulfilling their own legal duties?

What should NEDs be asking?

From our experience of dealing with situations where governance has gone awry, we would encourage NEDs to ask the following questions:

• global governance policies: are these followed across the group, as a minimum in key operating subsidiaries? For example, as to Board composition - are subsidiary boards diverse, independent or are they all comprised of two or three "head office" individuals whose role is reduced to acting as mere signatories?
• strategy and communication: how is group strategy and information communicated to subsidiary boards, and what guidance and expectations exist around implementation?
• decision-making process: do subsidiary boards have regular meetings, with clear agendas, papers and discussion? Or do they simply implement the parent's decisions? Often parent instructions are implemented on the basis that what is in the interests of the group is in the interests of its subsidiaries. However, parent instructions should always be tested at subsidiary level through the lens of the subsidiary's own interests and local legal requirements.
• local legal requirements: do directors of subsidiary companies understand their legal duties and to whom they owe those duties? Are they aware of their exposure should they fall short in meeting such legal requirements? These vary from country to country and it would be good practice for tailored training to be available to directors as they are appointed (see table below).
• limits of authority: is there a delegation and/or limits of authority policy in place across the group? If so, are subsidiary directors aware that they are still ultimately responsible for looking after subsidiaries' affairs? And are those named in the policies as decision makers aware that they still need the relevant board's authorisation to enter into decisions or documentation?

NEDs should also seek periodic meetings with local boards and management, and even suggest rotating parent board meetings to different locations to encourage interactions with subsidiaries.

The benefits of proactivity

NEDs may face resistance when raising these questions, as they can seem to run counter to the implementation of a unified top down strategy for the group.

However, good governance can help to manage risk and improve subsidiary performance. It can also increase the quantity and quality of information flow up to the parent, therefore increasing trust and enabling the parent to make informed strategic decisions and identify and resolve issues at an early stage.

Moreover, the benefits of good governance may not become apparent until things go wrong. Group governance may be scrutinised in cases of poor financial results, insolvency, bribery, fraud, negative press coverage eg, around data protection, employees, corporate social responsibility.

In these and other cases, individual directors may have exposure. Directors' & officers' insurance or qualifying third party indemnities can mitigate this exposure only to a limited extent, and they will in any case not alleviate reputational damage.

The best protection is to proactively seek healthy corporate governance practices across the group which will protect it and its directors in good times and bad.

UK directors duties

UK penalties/exposure for breach of directors' duties

In most jurisdictions (including the UK), directors owe their duties to the company on whose board they sit, not to a group parent or employer company. In the UK, generally directors must: act within powers promote the success of the company exercise independent judgment (and not fetter their discretion - although a director who delegates authority in accordance with the company's constitution will not be considered to have breached this duty by doing so) exercise reasonable care, skill and diligence avoid conflicts of interest ·not accept benefits from third parties declare their interest in a proposed transaction or arrangement keep company information confidential act in good faith There are additional specific obligations on directors, including in cases where the company is insolvent or at risk of being insolvent.

Directors may face: derivative claims by shareholders against directors of a company on behalf of that company damages in respect of failure to exercise reasonable care, skill and diligence liability to: repay, restore or account for misapplied money or property; or pay compensation court orders to contribute to the company's assets in certain cases disqualification criminal liability for breaches by the director or the company of certain legislation (e.g. environmental, bribery, data protection, corporate, fraud and/or market abuse).

Beatriz Araujo, partner, Baker McKenzie

Joanna Hewitt, partner, Baker McKenzie

Isabel Carty, Associate, Baker McKenzie

Corporate Governance, September 2017