The recent, second edition of the Association of Corporate Counsel (ACC) and Deloitte’s “An Inside Look at Legal Entity Management Practices” report focuses on a critical, but often overlooked business function. As regulatory requirements continue to increase around the world, the report reveals that many organizations lack policies, procedures, and processes to effectively manage their subsidiary governance, putting them at greater risk of non-compliance.
Based on a survey population of 467 organizations, the results provide a broad picture of corporate entity management structures, practices, and expectations that covers 20 industries from around the globe, including Europe, and companies of all sizes. The report aims to give a more complete view of the key challenges and concerns facing companies as they strive to remain compliant in a fast-changing world.
What are the key challenges facing counsel?
The survey found that organizations continue to struggle with formal policies and compliance related to their subsidiary governance, impacting standing with regulators and their ability to complete business transactions.
For one, the COVID-19 pandemic and resulting economic uncertainty, along with a constantly shifting and complex regulatory environment, have led to a rise in M&A activity, mounting cost containment pressures, and a slowdown in hiring, all leading to a greater focus on legal entity governance in recent years. This, together with the increasing demand to satisfy obligations across multiple jurisdictions and meeting the new standards of transparency on a global scale, is causing a re-evaluation of operating models and corporate governance structures.
Another challenge is the lack of robust subsidiary governance programs and procedures in legal teams. This shortcoming is causing significant disruptions to the efficient operation of businesses. With organizations falling out of good standing with regulators or having business transactions impacted, teams must learn to adjust to an increasingly complex regulatory framework across numerous jurisdictions.
Many organizations are facing an increasing number of pain points concerning their entity management. From addressing competing priorities, dealing with a lack of resources or bandwidth, insufficient use of technology, or outdated processes – companies are turning to customized solutions, including outsourcing, to bring about greater efficiencies in their entity management practices.
Keeping corporate records up-to-date has also been a major challenge for many international companies, with survey participants stating that they found it most difficult to maintain updated records within the Europe, Middle East, and Africa (EMEA) region. 53% of the companies surveyed found that keeping records on track in EMEA was challenging, compared to 43% that believe that the Asia-Pacific region presented the most challenges related to record keeping.
What were the key findings?
Most organizations expect no changes to their budget or staff dedicated to LEM. In fact, 79% of organizations expect their LEM staff levels to stay the same, with only 14% expecting an increase (down from 22% last year). This could result in consequences for many businesses, as the survey also found that consistent LEM policies are lacking for most companies.
Many organizations are missing the procedures and processes needed for effective LEM strategies, and 31% report that they have no processes to enable effective subsidiary governance in general. This lack of suitable LEM is having significant consequences on businesses. 26% report their corporate entities have been out of good standing with regulators, and 9% said delinquency regarding an entity’s status with regulators has impacted a business transaction. While a lack of concrete planning around LEM is a massive concern for most organizations, the survey still found legal entity governance to be a significant challenge faced by legal teams.
Legal entity governance is a top priority for most LEM teams but presents numerous pain points during attempts to implement it. Many LEM teams cited entity governance (66%) and regulatory compliance (61%) as their top two priorities, but face numerous obstacles, including too many competing priorities (62%), lack of bandwidth (49%), and inconsistent processes (37%).
Adopting the technology needed to manage LEM efficiently is another major obstacle that the majority of companies are facing, with the survey results finding that 62% feel dissatisfied or neutral with their LEM technology, and 38% are still exclusively using Excel. This use of outdated technology can make it even harder for organizations to remain on top of LEM practices.
Ensuring compliance is often the most fundamental aspect of any legal department. As multi-national corporations face an increasingly complicated patchwork of regulations, successful LEM strategies will make the process of compliance much simpler and necessary to maintain business function continuity. Legal professionals must continue to find ways to deal with the most pressing challenges facing LEM teams in order to provide even higher levels of value for companies when it comes to record-keeping and remaining within regulatory constraints.
To find out more download the full ACC “Inside Look At LEM Practices Report” here.