3 Reasons Why Organizations Should Invest in Entity Governance

Neil Barlow
6 min read

At Diligent, we believe that corporate governance is the foundation for financial integrity, investor confidence and sustainable performance.

For this reason, we’ve set out on a mission to empower leaders with the technology, insights, and processes required to fuel modern governance. Ultimately, good governance practices will increase your company’s long-term viability, enhance your business’ value and pave the way for your organization’s growth.

According to Deloitte, best-in-class organizations are shifting their perception of the legal and compliance function. Previously seen as a cost-center, they are realizing that investment in the governance and compliance function, and software that helps accelerate its maturity, is associated with increased top and bottom lines in addition to lowered danger of organizational and reputational risk.

A first fundamental factor for increasing the positive impact of any governance and compliance function is a solid foundation of good data. All essential governance and compliance teams rely on an accurate corporate record. Articles of incorporation announce a corporation’s birth, and bylaws, in part, explain the rules by which they are governed. From the point of creation until the point of dissolution, merger, bankruptcy, etc., a variety of documents track each step of a company’s existence.

If documents are the lifeblood of legal entities, the brain and heart reside in a company’s legal department. Those who work in the office of the General Counsel create, track and manage a legal entity’s documents and related information.

The 3 key reasons why organizations need to invest in entity governance

Maintaining these records for tens, hundreds or even thousands of legal entities is a massive undertaking. However, the importance of this duty has never been more important than right now. Below we’ve highlighted three key external factors that are shining a bright light on the need for a more strategic approach to entity governance:

1. Managing regulatory compliance on a local and global level is becoming increasingly complex.

Tracking regulatory change and complying with regulatory requirements, internal policies and external obligations is difficult as the pace of change accelerates.

  • According to a research study commissioned by Deloitte Legal “Future Trends for Legal Services,” global compliance was perceived as a major issue for in-house lawyers, with 26% saying it was one of their biggest challenges.
  • Based on research from “Risk in Focus 2020,” a report that has sought to shed light on key business risks as identified by 528 Chief Audit Executives (CAEs) across Europe, data security and regulatory change and compliance are the two biggest risks to the future of their organizations.
  • Accenture estimates that financial services firms globally will spend 4% of total revenues, on average, for compliance-related activities with that figure expected to rise to 10% by 2021.

In today’s increasingly complex business environment, it is imperative that organizations have clear oversight and control. The risks of non-compliance are increasing, with a growing threat of fines and regulatory censure, while directors face greater personal responsibility.

2. Poor subsidiary management negatively impacts M&A outcomes.

2018 and 2019 were big years for M&A, and many organizations are still facing the challenges presented by integrating two companies’ information, processes, people and technology.

  • The value of M&A globally totaled about $3.9 trillion in 2019, making it the fourth strongest year for deal-making, according to figures published by financial data provider Refinitiv. This is only slightly lower than the $3.96 trillion in deals recorded in 2018.
  • Twenty-one deals, each worth more than $20 billion, accounted for almost a quarter of global volume in 2019.
  • Cross-border M&A, which increases complexities (i.e., has the strongest entity governance implications), totaled $1.2 trillion.

Acquisitions can become a nightmare if you do not have enough information to do adequate due diligence. This is highlighted in a particular horror story presented by Kariem Abdellatif, the Head of Global Subsidiary Governance Services at Citco.

In one case, a routine corporate health check uncovered that a multinational had acquired a portfolio containing a delinquent entity domiciled in Trinidad, which had not filed a company statement for a decade. Furthermore, as the directors of the entity could no longer be located, the only options were to dissolve the entity voluntarily by paying a fine of $165,000 or wait for Trinidad’s registry to dissolve the entity of its own accord.

Having a strategic approach to subsidiary management, along with more comprehensive due diligence during acquisition activity, will help avoid hefty penalties and allow for a smooth transition with fewer surprises.

3. In this environment, business continuity, enabled by better access to business-critical information, is essential.

Entity governance permeates across all crucial governance and compliance functions. General Counsels, Paralegals, Corporate Secretaries, Tax and Finance professionals need instant, real-time access to subsidiary-related data and documents in order to accomplish routine business processes.

According to CIO, many organizations believe they have the tools needed to allow employees to work from home seamlessly, but now that working remotely has become a mandate for many, cracks in the foundation are showing.

  • Upwork’s Future Workforce Report states that by 2028, 73% of all departments will have remote workers.
  • A recent Gartner survey revealed that 74% of CFOs are looking to make remote work and telecommuting more permanent following COVID-19.
  • According to Compliance Week, 65% of organizations are operating under “reactive” or “basic” policy management programs (as opposed to maturing or advanced).
  • Disruptions caused by remote working are costly; in an Information Technology Industry Council study, 98% of organizations report that a single hour of downtime costs them $100,000 or more.

With the current work-from-home environment, many organizations are realizing that they don’t have a real single source of truth for their corporate record. Instead, critical data is stored in various systems or physical documents, which multiple stakeholders working from remote locations cannot consistently or securely access. This is destroying operational efficiency and leading to costly disruptions and downtime.

Organizations are increasing their investment in GRC

Due to the factors above, as well as the changing landscape of regulatory issues worldwide (including those surrounding KYC and AML requirements), organizations are ramping up their investment in initiatives focused on governance, risk management, internal auditing and compliance. International Data Corporation (IDC) estimates that worldwide investment in GRC could reach as high as $11.8 billion by the year 2021.

Many organizations know they need to make these investments; however, they have trouble identifying key problems they are looking to solve within their organization that justify the cost. Ultimately, how well you define a problem determines how well you solve it. With that in mind, we believe a key to productivity is to invest time in defining the problem as opposed to jumping right into dreaming up solutions.

Read Part 2: The 4 Fundamental Challenges of Good Entity Governance

Learn more about entity management—and the tools required to centralize your corporate record.