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[SINGAPORE] More needs to be done by boards and regulators alike to improve the corporate governance of groups such as entities with a parent company and subsidiaries, associates or joint ventures, says a new report by corporate governance advocates Mak Yuen Teen and Chris Bennett.
They say that, with the various units not always being under the direct oversight of the parent, there is often insufficient attention paid by the board of the ultimate parent company to the governance of these group entities. Not surprisingly, then, most corporate governance failures occur within these group entities outside of the ultimate listed parent company.
Yet, the ultimate parent is inevitably financially liable for the "sins" of the group entities and also faces significant reputational damage.
"We believe that the lack of attention by group boards and management to governance issues within the wider group is an important reason for the problems faced by many multinationals today," Prof Mak said.
The report, Governance of Company Groups, published by CPA Australia and the Iclif Leadership & Governance Centre, studied 150 of the largest listed companies in Singapore, Malaysia and Australia. Prof Mak is an associate professor of accounting at the NUS Business School, while Chris Bennett runs corporate governance training and advocacy firm, BPA.
They found that most of the largest listed companies consist of many group entities. The average number of group entities in the Australian, Malaysian and Singaporean companies were 93, 90 and 47, respectively, with the largest total number being 554 (Malaysia).
They also found that, in all three countries, group entities contribute significantly to the financial performance and financial position of company groups.
"Clearly, the performance and risks of group entities which are legally separate from, but often managerially integrated with, the listed entity will have a significant impact on the performance and risk of the listed entity and the individuals holding directorships in the group entities," said Mr Bennett.
Still, the size and contribution of the group entity is not the only factor determining the magnitude of the risk it poses.
The head of audit in an unnamed Big Four accounting firm quoted in the report said: "The larger the component is, the more attention you pay to those subsidiaries. The more insignificant they are, the less attention you pay to them, and that's where the problem comes . . . it could be small, but there is a lot of risk taking. . . A good example is Barings Bank. It was not a significant operation (in Singapore), but it became a significant contributor to risk taking."
The report also found that many company groups pay attention to the governance of their group entities only after a scandal or failure has occurred. The finance director of an unnamed multinational chemicals company was quoted in the report as saying: "Bhopal (a massive gas leak at the Union Carbide India pesticide plant in Bhopal, India in 1984) was a big wake-up call to the major chemicals companies to pay more attention to subsidiaries."
Prof Mak and Mr Bennett say a pro-active approach to the governance of group entities is needed to minimise the risk of governance failures in group entities causing severe financial and reputational harm to the entire group.
They have proposed a framework in their report to guide the board and management of the ultimate parent company in considering the approach and the specific measures which should be adopted in governing group entities.
The framework includes suggestions on forming a formal group governance programme with a group-wide corporate governance framework/policy, a central database tracking all group entities and a head of group governance.
Other suggestions include having a formal training programme for subsidiary directors, site visits by directors and senior executives of the parent, having a group-wide risk management framework, code of conduct and whistleblowing policy, and so on.
The authors say groups should also improve their disclosures of key measures put in place to ensure good governance of the entire group. Boards of the ultimate parent company should also ensure the governance of group entities is discussed and well-communicated throughout the group.
Regulators also need to play their part. The report suggests regulators ought to review laws and regulations relating to the fiduciary duty of directors in groups, and consider the need to clarify it for directors of parent companies, subsidiaries and other group entities.
It also says regulators should recognise the need for laws and regulations imposing duties and responsibilities on boards of both parent companies and group entities, to be accompanied by adequate guidance to assist these boards to interpret these laws and regulations, thereby minimising inter-board conflicts.
The full report can be found on the CPA Australia website - 'http://www.cpaaustralia.com.au/documents/governance-co-groups.pdf'