Why is Corporate Governance Becoming Increasingly Centralized?

Evon Chung
4 min read
Diligent partner, Law Debenture, is a leading provider of independent professional services, headquartered in London with a global footprint in subsidiary management. Their Global Entity Manager, Corporate Secretarial Services, Evon Chung, explains why multinational corporations are increasingly moving towards centralized governance and shares some tips on how to streamline the changeover process.

In the past corporate governance was often managed mainly on a localized basis, with the responsibility split geographically. However, a number of factors have precipitated a shift to a more centralized approach in recent years:

1) COOs / GCs taking the reins

The company secretarial (cosec) function is increasingly becoming the domain of the Chief Operating Officer (COO) or the General Counsel (GC). This shift of responsibility and accountability has been a catalyst for increased centralization of governance, which has proved essential to giving busy COOs or GCs the visibility they need.

Previously, collating, checking and harmonizing information from subsidiaries demanded a fair degree of work and left room for human error. With a centralized governance approach, COOs or GCs have immediate and direct access to all the information they need and much greater confidence in its accuracy.

2) Greater regulatory emphasis on corporate governance
There is increasing focus on corporate governance from regulators across the world, with failure to meet the requirements in specific jurisdictions now carrying the risk of prosecution or other liabilities.

For example, if an entity in Singapore experiences a compliance breach, the directors at HQ are considered responsible and liable for further actions against them. Alarms start to ring and the GC need to explain to CEO / CFO what went wrong. This has led to individuals becoming more cautious about taking on the responsibility of a directorship and insisting that their companies put measures in place to protect them from the risk of prosecution.

3) The trend towards increased transparency

Corporate transparency is increasingly seen as desirable, driven by Know Your Customer requirements, designed to combat money laundering, as well as pressure from savvy shareholders and consumers.

Embracing transparency and good governance can result in a meaningful boost to an organization's public image as well as improved shareholder confidence. This has also been a factor in the trend for businesses to centralize the governance function with their head office c-suite.

Consistency and control ' life after centralization

The shift to a centralized approach has led to increased consistency in the way companies across the globe approach governance.

A key element of this has been the switch to HQ taking the lead on governance of subsidiaries around the world. Naturally, this has led to improved efficiency, with each corporation applying a single set of policies and procedures globally, with occasional exceptions to allow for local nuances.

That means local staff are freed from the burden of handling regulatory requirements and there is less room for human error and corruption. By centralizing entity information and data, the head office governance team can ensure all the organization's entities around the world are up-to-date with their submissions and that all the relevant digital document trails have been completed and logged as appropriate.

Further to this, information can be reviewed and decisions made holistically across the company instead of in silos. Legal is taken out of a black hole and opened up, enabling other business functions, such as tax and finance, to collaborate and share information.

The tax team will gain a deeper understanding of the corporate structure, facilitating decisions on issues like which entities to pass tax through. And the leadership team will have greater insight to understand what the corporate structure might look like in the light of an acquisition and to inform decisions on where to create entities.

Ultimately, centralizing data and standardizing processes leads to improved data assurance and compliance and more accurate assurance reporting. When you get those right you can ask better questions and make better decisions.

The challenges of change

While the benefits are clear, businesses may encounter some challenges in the process of switching to fully centralized governance, particularly in terms of buy-in.

Local teams who have historically had ownership of in-country governance may feel disempowered and resentful about the regime being imposed by HQ. They may also feel frustration at the standardized approach, meaning that workarounds they have developed to meet local needs no longer apply.

While moving from a decentralized model may cause some friction initially, the added value will soon become clear. The key to streamlining the switchover process is to ensure local stakeholders understand that centralization is not about taking their power away but about improving overall efficiency.

While the end goal is to ensure all of an organization's entities around the world are fully compliant, effective centralized entity management demands degree of collaboration and team effort. Although governance will be owned centrally, local controllers will have a role to play and will continue to be accountable. They will still be contributing to the bigger picture and will be freed up to use their time in a more strategic way, potentially enabling them to make a greater impact.
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Evon Chung
Evon Chung is Manager, Global Corporate Secretarial Services at The Law Debenture Corporation. The Law Debenture Corporation is a leading provider of corporate secretarial services in the United Kingdom, headquartered in London.