Vol 2 (2005) - Issue 2

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Risk Avoidance in Group Scenarios

You can read exhaustively about how to reduce risk in your group by improving corporate governance and there is a plethora of corporate scandals that prove the need to do so. No senior executive in a business of any size should believe that corporate governance and risk management is not their concern. In the risk-averse culture that we work in, with the costs of compliance rising constantly, we are finding that simplicity is good. Simplicity can help you manage risk, improve operational efficiencies and reduce annual costs by understanding the business purpose of each company that you have in your corporate structure and getting rid of the companies that you don’t need.

Picture your own group structure and ask yourself whether all companies, including dormant companies, are included. This may sound simple but is at times more difficult than it seems. We have spent a lot of time with our clients simply to help them identify the subsidiaries in their group and therefore to illustrate the complexity of the group structure. As an example, following a change in the boardroom of one of our FTSE 350 clients, the incoming CEO was presented with an A3 page upon which was a picture of group’s corporate structure consisting of c. 300 entities. Imagine his surprise when we produced the true picture including dormant entities on a piece of paper literally 3 metres long by 1 metre wide. There were in fact c. 1000 entities in his group, many of which were long forgotten. Although this example may seem extreme, size is not the most important issue - you could have one or 10 000 dormant companies in your group. If you don’t have visibility and control over your group structure you are exposed to risk, and company officers obviously cannot manage risk when they are not aware of its source.

Imagine a group such as the one shown at the foot of the page. This is an anonymous but real example of a FTSE 100 group, and as you can see, the subsidiaries highlighted in grey are dormant companies. Research on publicly available information shows that some 50% of the UK subsidiaries sitting within the FTSE 350 are dormant, which means that many organizations will have structures that resemble this one. It is structures such as this that can leave the group open to risk.

One of the primary goals of best practice corporate governance that is often overlooked is maintaining a transparent, simple corporate structure. Maintaining a group structure with a significant number of redundant entities - a complex structure - can pose an innumerable amount of risks to the wellbeing of the company and its stakeholders.

In a recent article, Brian Chartier, Head of Subsidiary Governance at Royal Bank of Canada, expressed the following view:

Subsidiary corporate governance needs to evolve into a tangible and measurable activity in large corporations. The risks of downstream governance failures can have a devastating impact on the company as a whole.