Governance of Subsidiaries A survey of global companies

September 2013www.deloitte.com/in

2

Contents

Objective and Scope 3

Key Findings 4

Theory and Practice of Subsidiary Governance 5

The Survey

• SubsidiaryBoardComposition 7

• TimeSpentbytheParentBoardonOversightofSubsidiaries 10

• ApprovalsandDecision-making 11

• Domesticvs.OverseasSubsidiaryGovernance 13

• PoliciesandProcedures 14

Appendix 15

• SurveyDemographics 16

• SurveyQuestionnaire 17

Governance of subsidiaries Asurveyofglobalcompanies 3

Objective and Scope of the Survey

A survey of Deloitte’s Lead Client Service Partners helped address some of the questions commonly asked about the governance and oversight of the subsidiary companies. Subsidiariesarecreatedtoserveseveralbusinessneedsrangingfromcorporatestructuring,developingnewproductsandservices,regulatorycompliance,taxefficienciesandmergersandacquisitions,toexpandingintonewgeographicalmarkets.Ascompaniesgrowinsizeanddiversifytheiroperationsinthedomesticmarketorexpandtooverseasmarkets,thenumberofsubsidiaries tends to increase and the structures of the companiesbecomemorecomplex.Whilethereisnowafairlycomprehensiveandacceptabledefinitionofcorporategovernancewhicharticulatestheframeworkofgoodgovernance,whenitcomestogovernanceofsubsidiaries,thecompaniesfaceavarietyofchallenges.Howtoextendsoundcorporategovernancepracticesandpoliciesdownstreamtothesubsidiariesandwhatshouldbetheappropriategovernancestructuresofthesubsidiarieswhichwouldbestcontributetoaneffectivechainofoversightofthecompany,areoftenthetwocriticalquestionsaskedinthiscontext.

InJune2013,DeloitteToucheTohmatsuLimited(DTTL)’sGlobalCenterforCorporateGovernanceincollaborationwiththeGlobalManufacturingIndustrygroupconductedanonlinesurveyofDeloitte’sLeadClientServicePartners(LCSPs)servingthefirm’sselectglobalclientsinthemanufacturingindustry.ADeloitteLCSPisamemberfirmpartnerwhoholdsoverallresponsibilityfortherelationshipbetweenaclientandtheDeloittememberfirms.Theobjectiveofthesurveywastounderstandgovernanceprocessesofthesubsidiariesandhowthecompanies’boardsgovernthe

subsidiaries.Keepinginviewthequestionswhicharecommonlyaskedaboutthegovernanceofsubsidiaries,the survey addressed certain specific aspects of subsidiarygovernancesuchasthecompositionofthesubsidiaryboards,timespentbyparentcompanyboardontheoversightofsubsidiaries,theapprovalanddecision-makingprocessatthesubsidiaries,thetreatmentofdomesticvis-à-visoverseassubsidiaryandadoptionoftheparent’spoliciesandproceduresatthesubsidiaries.OfthethirtysevenLCSPswhorespondedtothesurveyquestionnaire,15werefromtheAmericas,13fromEurope,theMiddleEastandAfrica(EMEA),6fromAsiaPacificand3fromothergeographies.Amongthemselves,therespondentLCSPscoveredatotalof53globalcompanies,includingmarqueenamesfromawiderangeofindustrieslikemanufacturing,aerospace,defense,automotive,chemicals,engineering,metals,miningandindustrialproducts.Eachofthesecompanieshas,onanaverage,90subsidiariesoperatinginvariouspartsoftheworld.SomeofthesecompanieshavetheirpresenceinIndiatoo.

Thisreportsummarizesthekeyfindingsofthesurveyandalsoprovidescommentaryonsomeoftheimportantaspectsofsubsidiarygovernancementionedabove.ThoughthesurveyhasbeenconductedontheLCSPsofDeloitteandhencereflectstheopinionsoftheLCSPs,thefindingsserveasusefulpointersandaguidetothegovernanceframeworkofsubsidiariesoflargeglobalcompanies.

4

Key Findings

Thekeyfindingsfromthesurveyareintheareasofsubsidiaryboardcomposition,timespentbytheparentboardonoversightofsubsidiaries,approvalsanddecision-making,domesticvs.overseassubsidiarygovernanceandpoliciesandproceduresforsubsidiaries.

Subsidiary board composition: The survey brings out that significant subsidiaries do haveseparateboards,butvariousfactorsinfluencetheneedfortheformationofasubsidiaryboardanditscomposition,includinghavingcommondirectorsbetweentheparentandsubsidiarycompanies.

• 73percentoftheLCSPsrespondingtothesurveyindicatedthatsignificantsubsidiariesoftheirclientsgenerallyhaveseparateboardsofdirectors– Ofthesesubsidiaries(49percent)include

non-executivedirectorsontheirboards• 65percentoftherespondingLCSPssaidthat

therearecommondirectorsontheboardsofthesubsidiariesoftheirclientsandtheparentcompanies.

Time spent by the parent board on oversight of subsidiaries:

• 22percentoftherespondingLCSPsindicatedthattheirclientstakedecisionsconsultativelythroughtheirsubsidiaryboards.

Althoughmanyparentcompanyboardsviewthecompanyasoneorganizationanddonotdifferentiatedecision-makingbasedonalegalsubsidiarystructure,factorssuchasthegroupmanagementphilosophy,thesizeandholdingstructure(includinglistingonexchanges)ofsubsidiariesdeterminethetimespentbytheparentboardontheiroversight.

• 68percentoftherespondingLCSPsindicatedthattheparentcompanyboardsspendsignificanttimeoverseeingthebusinessandrisksofthesubsidiaries.

Approval levels and decision-making: Approvallevelsanddecision-makingfollowsthegrouplevelpoliciesandguidelinesandrequireapprovaloftransactionsattheparentboardlevelifthesetransactionsaresignificantenough.

• 84percentoftherespondingLCSPsindicatedthatparentcompaniesoftheirclientshavespecificapprovallevelsinplacewheretheparentmustapprove actions or the spending of the subsidiary

• 70percentrespondingLCSPsindicatedthatforsignificantaccountingissuesorjudgments,suchasonimpairments,thedecisionsaretakencentrallybytheirclients

Domestic vs. overseas subsidiary governance: Governance of an overseas subsidiary is different than thatofadomesticsubsidiary,becauseofdifferencesinlegalenvironment,taxregimesandcultures.Someboardsoftentendtoviewthecompanyasoneorganisation,evenwhilerecognisingthedifferentiators.

• 78percentoftherespondingLCSPsindicatedthattheirclientsviewedthegovernancetheoverseassubsidiariestobedifferentfromthatofthe

domesticsubsidiaries.

Policies and procedures: Generally,corporategovernancerelatedpoliciesandproceduresaredevelopedcentrallybyorganisationsandarerequiredtobeimplementedinallpartsoftheorganizationwithoutregardtothelegalsubsidiarystructure.Largerandmoreinternationalgroupstendtohaveuniformimplementationofkeypolicies,suchaswhistleblowerpolicy,acrosstheentiregroupirrespectiveofthesizeandlocationofsubsidiaries.

• 81percentofrespondingLCSPsindicatedthatparentcompaniesoftheirclientshaveextendedtheirownpoliciesandproceduressuchaswhistleblowerpoliciestotheirlargesubsidiaries.

Governance of subsidiaries Asurveyofglobalcompanies 5

The Theory and Practice of Subsidiary Governance

Thissectionbrieflydiscussestheoverallperspectiveonthe issues and concerns about subsidiary governance andthepresentlegalframeworkforsubsidiarygovernanceinIndia.Thesectiondrawsuponthelimitedavailableliteratureandresearchonthesubjectofsubsidiarygovernance,whichhasemergedasoneofthekeytopicsinthetheoryandpracticeofcorporategovernanceinthecontextofglobalisation.

Subsidiaries present an interesting set of corporate governancechallengesanddilemmas.Ontheonehandthereisthesearchfortheclassicbalancebetweenthedegreeofcontrolthatneedstobeexercisedbythe parent over its subsidiaries and the degree of independencethatneedstobeprovidedtothemandbetweenstandardisationofthesystemsandprocessesacrosstheorganisationandlocaladaptationatthesubsidiarylevels.Ontheotheristhequestionhowdotheparentandtheboardplacesystemsandprocesseswhichwillassurethemthat"downstreamgovernance"ofthesubsidiariesreflectsthesamevalues,ethics,controlsandprocessesasattheparentboardlevel.Ineffectiveoversightcanresultinsubsidiarygovernancefailures,whichposesbothreputationalandeconomicrisksfortheparentcompanies.

Someoftheissuesinsubsidiaryboardgovernanceoftenrelatetotheroleofthesubsidiaryboard,the

matterswhichthesubsidiaryboardshoulddiscuss,extenttowhichasubsidiaryboardcouldtakedecisionsindependentoftheparentboard’spolicy,forexample,inmattersofstrategyandcompensation,thecompositionofthesubsidiaryboard,thedelegationsofauthoritybytheparent,theliabilitiesofthedirectorsonthedirectorsofthesubsidiaryboards,andthelegalandtaxconsiderations,inparticularfortheoverseassubsidiaries,whichdeterminewherethe“mindandmanagement”ofthesubsidiaryboardbelocated.

Insomejurisdictionsthereisnoregulatoryrequirementforthesubsidiarytohaveseparateboards.Butwhereverthereare,companieshavefounddifferentwaystodealwiththeseissues.Whilethereappearstobenosingleanswerornoonesizewhichfitsall,clearlytheprincipleunderpinningtheeffectivesolutionstriedindifferentjurisdictionsisthatthesubsidiaryboardmustbeobjectiveaboutthemanagementofthebusinessofthesubsidiaryandatthesametimebefamiliarwiththebusinessphilosophy,cultureandstrategicdirectionoftheparent.Thekeyistodemonstratetothestakeholdersandtheregulatorsthatthecompaniesalongwiththeirsubsidiarieshavesoundgovernancepracticeswhichcanbecascadedconsistentlyandeffectively,downtothelevelofsubsidiariesandthereisan“effectivechainofoversight”andagovernancesystemthatisharmoniousthroughouttheorganization.

6

The current legal framework for subsidiary governance in IndiaInIndia,thelegalframeworkforsubsidiarygovernanceiscoveredundertheCompaniesActandClause49ofthelistingagreement.

Subsidiary Governance under the Companies Act 2013:TheCompaniesAct,2013(‘Act’),whichhasbeenpassedbytheParliamentandassentedbythePresident,hasreplacedtheoldCompaniesAct,1956.ThenewActhasseveralprovisionsongovernanceofsubsidiariesofdomesticcompaniesaswellasthoseofoverseascompaniesinIndia.

TheActdefinesasubsidiarycompanyastheoneinwhichtheholdingcompanycontrolsthecompositionoftheBoardofDirectorsandexercisesorcontrolsmorethanone-halfofthetotalsharecapitalonitsown,throughitsothersubsidiarycompanyortogetherwithoneormoreofitssubsidiarycompanies.

Thenewfilingsanddisclosurestobemadebytheholdingcompanyinrelationtoitsdomesticandoverseassubsidiarieshavebeenintroduced.Theseare:inclusionoffinancialreportsofsubsidiariesintheprospectusproposedtobeissuedtopublic;filingofannualreturncoveringdetailsofsubsidiaryandassociatecompaniestotheRegistrar;filingofoverseassubsidiaryaccountstotheRegistrar;submissionofconsolidatedfinancialstatementscoveringallsubsidiaries(includingassociatesandjoint-ventures)attheannualgeneralmeeting;andclassificationofallnon-currentinvestmentsofacompanyintobodiessuchassubsidiaries,associates,joint-venturesorspecialpurposeentities.

Inrelationtobooksofaccounts,theActrequiresthateverycompanymaintainatitsregisteredoffice,recordsofitsbooksofaccounts,includingthatofitssubsidiarycompaniesandbranchofficesinIndiaoroverseas.TheActfurtherrequiresthateveryholdingcompanyplacesauditedaccountsofeachsubsidiaryonitswebsiteandalsoprovidescopiesofsuchaccountstoanyshareholderofthecompanywhoasksforit.

Subsidiary Governance under the Clause 49 of the Listing Agreement:Undersub-clauseVoftheClause49:i.AtleastoneindependentdirectorontheBoardofDirectorsoftheholdingcompanyshallbeadirectorontheBoardofDirectorsofamaterialnonlistedIndiansubsidiarycompany.

TheminutesoftheBoardmeetingsoftheunlistedsubsidiarycompanyshallbeplacedattheBoardmeetingofthelistedholdingcompany.ThemanagementshouldperiodicallybringtotheattentionoftheBoardofDirectorsofthelistedholdingcompany,astatementofallsignificanttransactionsandarrangementsenteredintobytheunlistedsubsidiarycompany.

Explanation(i):Theterm"materialnon-listedIndiansubsidiary"shallmeananunlistedsubsidiary,incorporatedinIndia,whoseturnoverornetworth(i.e.paidupcapitalandfreereserves)intheprecedingaccountingyearexceeds20%oftheconsolidatedturnoverornetworthrespectively,ofthelistedholdingcompanyanditssubsidiariesintheimmediatelyprecedingaccountingyear.

Explanation(ii):Theterm"significanttransactionorarrangement"shallmeananyindividualtransactionorarrangementthatexceedsorislikelytoexceed10%ofthetotalrevenuesortotalexpensesortotalassetsortotalliabilities,asthecasemaybe,ofthematerialunlistedsubsidiaryfortheimmediatelyprecedingaccountingyear.

Explanation(iii):Wherealistedholdingcompanyhasalistedsubsidiarycompany,whichisitselfaholdingcompany,theaboveprovisionsshallapplytothelistedsubsidiaryinsofarasitssubsidiariesareconcerned.

Governance of subsidiaries Asurveyofglobalcompanies 7

The Survey Subsidiary Board Composition

Majority of significant subsidiaries have separate boards, which have non-executive directors and directors that are common to the parent as well as the subsidiary boards.

ofrespondingLCSPsindicatedthatthesignificantsubsidiariesoftheirclientshaveseparate boards

Animportantconsiderationinanysubsidiarygovernanceframeworkistheexistenceofaseparateboardofthesubsidiaryanditscomposition.MajorityoftherespondingLCSPsindicatedthatthesignificantsubsidiariesoftheirclientshaveseparateboards.Thoughtherearefewvariances,neverthelesshavingseparate boards for significant subsidiaries is seen as a goodgovernancepractice.

Thesurveyshowsthat73percentoftherespondingLCSPshaveindicatedthattheirclientshaveseparateboardsfortheirsignificantsubsidiaries.Thisisparticularlytrueifsubsidiariesarelistedorthereareoutsideminorityshareholders.Theboardsoftheselistedsubsidiariesperformedtheirrolesinthesamespiritasrequiredofthemunderthecorporategovernanceregulationsandprinciples.Localregulationsinmanyjurisdictionsrequirecompaniestohaveaboardofdirectors.Somejurisdictionsrequirethepresenceofthelocaldirectorsonthesubsidiaryboards.Thereareafewvariancestooandtheseoccurforunlistedsubsidiariesandifthereisnospecificrequirementunderlocallawsandregulations.Suchboardsofthesubsidiariesdidnotperformsignificantgovernanceactivities,otherthanwhatislegallyrequiredofthem.Theygenerallydependonparentcompanyboardandmanagementforguidanceandapprovals.Inafewcountries,forthesignificantjointventures,committeesofmanagementactaseffectiveboards.

Do your clients’ significant subsidiaries generally have separate boards of directors?

73%

27%

Yes

No

8

ofrespondingLCSPsindicatedthattheboards of the significant subsidiaries of their clientshavenon-executivedirectors

Thesecondimportantconsiderationinthegovernanceofasubsidiaryisthecompositionofthesubsidiaryboard.Ontheonehandthereisaneedfortheparentboardtocontrolthestrategicdirectionoftheorganizationasawhole.Ontheother,foreffectiveboardoversight,thesubsidiaryboardsalsoneedtobedoingmuchmorethanmerelyreflectingmanagementofthesubsidiary.Drawingthelinebetweentheroleoftheparentboardanditssubsidiaryboardsrequirescarefulthoughtonthedesignofthesubsidiaryboard.Appropriatedesignofthesubsidiaryboardhelpsthemtoaddconsiderablevaluetotheorganisation,paycloserattentiontothecomplianceprocesseswithinthesubsidiaryandmakesuretherearenogapsofoversight.Severaloptionsareavailableforachievingthetwinobjectivesofindependenceandcoordination,ofwhichoneisselectingdirectorsfromoutsidethemanagementofthesubsidiary,eitherfromunrelatedbusinessesorfromtheparent’sboard.Thishelpsensureconsistencyinstrategicdirectionandprovidesausefulconnectionbetweentheboardsoftheparentandsubsidiary.

Thesurveyshowsthatthereismorethanonemodelofboardcomposition.Ontheinclusionofnon-executivedirectorsinthesubsidiaryboards,thesurveydisplaysthattheclientsoftheLCSPsarealmostequallydivided.Nearly49percentoftheLCSPshaveindicatedthatthesubsidiaryboardsoftheirclientshavenon-executivedirectorswhile46percentindicatedthatitwasnotsoforthesubsidiaryboardsoftheirclients.ThecompositionoftheboardsofthesignificantsubsidiariesoftheclientsoftheLCSPsappearedtobeinfluencedbyfactorslikebusinessrequirementsviz.thecontributiontotheparent’sbusiness,compliancewithlocallawsandregulations,shareholdingofthesubsidiary,listing

onlocalstockexchangesandrequirementinsomejointventureswherebothpartnersinsistoncertaingovernancenorms.Thesubsidiaryboardisthusacombinationofexecutiveandnon-executivedirectors.Thepresenceofoutsideminorityshareholders(wherevernecessary),localrequirementsandstandardssetbytheparentcompanyalsospurtheboardsofthesubsidiariestofollowrelevantcorporategovernancenorms.

The reasons for the variances in the responses of the LCSPsreportedinthesurveyarealsoworthnoting.Insomejurisdictionsmostofthedirectorsonsubsidiaryboardsandjointventurecommitteesaretypicallyseniormanagementorrecentlyretiredseniormanagementexecutives,unlesshavingexternalmembers(i.e.workerrepresentation)isalegalrequirement.Afewjurisdictionsdonotinsistonthepresenceofnon-executivedirectors.Therearesomeinstancesofevenindependentdirectorsbeingonthesubsidiaryboard.

Are non-executive directors included on the subsidiary boards?

No. of respondent LCSPs

2

17 18

0

20

40

Blank No Yes

Governance of subsidiaries Asurveyofglobalcompanies 9

ofrespondingLCSPsindicatedthattheboards of the significant subsidiaries of their clientshavecommondirectorswiththeparents’boards

MajorityofrespondingLCSPsindicatedthatfortheirclients,therearecommondirectorsontheboardsoftheparentandthesubsidiaries.Wheretherearenocommondirectors,theheadquartersisrepresentedonthesubsidiaryboards.Oftenthecorporateexecutivesandlocalexecutives(dependingonthelocalregulatoryrequirements)alongwithprivateequitysponsors are represented on the subsidiary boards oftheclientsoftherespondentLCSPs.Inthecaseoffamilyownedbusinesses,thereisatendencytohavecommonexecutivedirectorsbetweentheparentanditssubsidiaries.Forexample,inonecasethechairmanofthesupervisoryboardisalsochairmanofthesupervisoryboardsoffourmajorsubsidiarieswhichhaveseparatesupervisoryboards.Butasexpected,itistypicalofsubsidiaries'boardstobeatalowerlevelthantheparentboards.ForafewclientsoftherespondentLCSPs,someofthelargesubsidiarieshaveaunityofsubsidiaryCEOandparentcompany'sboardmembership.

Are there common directors on the boards of the subsidiaries and the parent company?

2

11

24

0

5

10

15

20

25

30

Blank No Yes

No.ofrespondentLCSPs

10

The Survey Time Spent by the Parent Board on Oversight of Subsidiaries

Majority of boards spent significant time on the oversight of subsidiaries.

ofrespondingLCSPsindicatedthattheboardsoftheirclientsspentsubstantialamountoftimeontheoversightofthesubsidiaries

Foreffectiveoversightofthesubsidiaries,especiallyifthe subsidiary is an operating subsidiary or is of strategic importancetotheparentorcontributessignificantlytotheparent’soperations,itisimportantfortheparentcompanytodevotesufficienttimetotheoperationsofthesubsidiary.Thereisaneedtoidentifythecriticalareaswhichshouldengagetheattentionoftheparent.Itisequallyimportanttoensurethattheinformationflowbetweenthesubsidiaryandparentistimelyandcomprehensiveinthesecriticalareas.Companiesrecognisethesignificanceoftheseinterfacesbetweentheparentandthesubsidiaryandaccordinglysetupmechanisms,systemsandprocedures.Butirrespectiveofthemechanismsinvolved,thereisnogettingawayfromtheneedforaneffectiveoversightoverthesubsidiaries.Thereareenoughinstanceswhenlackofithasledtodisastrousconsequences.Someorganisationsachievethisoversightthroughinternalmanagementinteractionsandreportingrequirements,somethroughoversightoftheparentboardandsomeothersthroughamixofboth.Therisksofdownstreamgovernancefailurescanhavedevastatingimpactonthecompanyasawhole.Thereisoneschoolofthoughtwhicharguesthatamoreeffectivedirectboardoversight,drivenbyappropriatesubsidiaryboardcompositionandfunctioning,mighthaveavoidedmanyofthelargeglobalgovernancefailures.

Inthesurvey,68percentoftherespondentLCSPshaveindicatedthattheparentboardsoftheirclientcompaniesspendsignificanttimeoverseeingthebusinessandrisksofthesubsidiaries.Themanagementphilosophyattheparentcompany,thesizeandholdingstructure(includinglistingonexchanges)ofsubsidiariesdeterminethetimespentbytheparentboardontheiroversight.

Nearlyathirdoftherespondentssaidthattheirclients’boardsdidnotspendsignificanttimeoverthesubsidiariesandtheoversightmattersweredealtwithatthecorporatelevel.Manyparentcompanyboardsviewthecompanyasoneorganizationanddonotdifferentiatedecision-makingbasedonalegalsubsidiarystructure;theboardsofthesecompaniesreceivedetailedmanagementaccounts,exercisebudgetandoversightdisciplinesandhaveinternalauditinplacefortheentiregroup.However,suchsupervisionisdonewiththegrouppositioninmindratherthanthefocusonsubsidiariesasastandalonebusiness;andtheoversightisprovidedinthecontextoftheconsolidatedentity.Manyofthesecompaniesinvariablyfollowtheglobalriskprocessofthegroup,asawhole,forthesubsidiaries.

Does the parent company board spend significant time overseeing the business and risks of the subsidiary?

1

11

25

0 10 20 30 40

Blank

No

Yes

No. of respondent LCSPs

Governance of subsidiaries Asurveyofglobalcompanies 11

The Survey Approvals and Decision-making at the Subsidiary

The actions of the subsidiaries require the approval of the parent, especially on matters related to investment and expenditure and on significant accounting issues where judgement is involved.

ofrespondingLCSPsindicatedthattheirclientsspecificallyapprovetheactionsoftheirsignificantsubsidiariesespeciallyfortheirspending

Are there specific approval levels where the parent must approve actions or spending of the subsidiaries?

Companieshaveperformanceexpectationsfromitssubsidiaries,holdthemanagementofitssubsidiariesaccountableforitandmonitortheirperformance.Evenwhileallowingthesubsidiariestofunctionwithameasureofindependence,companiesputinplacepoliciesandprocedures,systemsandprocessessothatthecompanyanditssubsidiariesfunctionasoneunit.Inordertoachievethis,thecompaniesidentifythecriticalareasinwhichthecompanyanditssubsidiariesneedtofollowauniformapproachandhaveacommonpolicy.Someoftheseareasareinvestmentplans,capitalexpenditure,treasuryoperations,mergersandacquisitions,provisionofloanguaranteesandaccountingmatters.Thisuniformityhelpsincreatingaharmoniousgovernancesystemacrossthecompanyanditssubsidiaries.

Inthesurvey,84percentoftherespondentLCSPshaveindicatedthattheirclientshavespecificapprovallevelsinplacewheretheparentcompanymustapprovetheactionsorspendingplansofthesubsidiaries.Itisusuallyapartoftheregulargovernanceprocesswhichoftenincludescapitalinvestmentsabovecertainthresholdamountinaccordwiththegroupwisecapitalexpenditurepolicy,treasuryoperationsandcontracts.Theboardsoftenviewthecompanyasoneorganizationanddonotdifferentiatedecisionmakingbasedonalegalsubsidiarystructureandhencetheapprovallevelsoperatethroughouttheorganisation.Decisionsonstrategymattersaretakenatcentrallevelandoperationalmattersthroughsubsidiaryboards.

Inseveralinstancestheapprovalpoliciesfollowthegroupguidelinesandrequireapprovalofspecifictransactionsattheparentboardlevel,ifsignificantenough.Thereareotherinstanceswherecompanieshaveadelegationofauthoritypolicythatspecifiesdecisionmakingpowersatthemanagementandboardlevelsofthesubsidiariesandtheparent.Insome

countries,itisageneralpracticetoestablishacatalogofbusinessactions(e.g.spendinglimitsforacquisitions)forsubsidiarieswhereapprovalofthesupervisoryboardmembersoftheultimateparentisnecessary.SomeoftheLCSPshaveindicatedthatcertainlargeandlistedsubsidiariesmayhavetheirindependentdecisionmakingprocess,buttheparentcompany’sboardiskeptinformedofthedecisionstakenatthesubsidiary.

84%

16%

Yes

No

12

ofrespondingLCSPsindicatedthattheirclientstakedecisionscentrallyinmattersinvolvingsignificantaccountingissuesorrequirejudgements

Thesurveyalsoshowsthatfortheclientsofthe70percentoftherespondentLCSPs,significantdecisionsrelatedtoaccountingissuesorjudgments,suchasimpairments,aretakencentrallyandfollowthesamepatternastheapprovallevelsforinvestment,capitalexpenditureandspendingplans.Itoftenisthecasethatthelocalmanagementofthesubsidiaryisprimarilyresponsiblefordatagatheringandsettingthelocalstrategy,butdecisionsareformallyagreedandapprovedcentrallybyheadofficemanagementandthentheparentboard.Asinmanycompanies,theparentboardviewsthecompanyasoneorganizationanddoesnotdifferentiatedecisionmakingbasedonalegalsubsidiarystructure.Theglobalaccountingorganizationatparentpreparesdecisionscentrally,basedoncommonrulesandprocedures(globalgovernanceofaccounting).Foraboutone-fifthoftheclientsoftheLCSPs,thedecisionsinaccountingmattersaretakeninconsultationwiththeboardsofthesubsidiaries.Thekeydifferentiatorsarethelocalstatutorylawsorataxlaw,separatelistingrequirementforthesubsidiaries,whichrequiresacertainlevelofinvolvementofthesubsidiaryboard.Thepresenceofcommondirectorsfacilitatesthedecision-makingprocessandpolicycoordination.

When subsidiaries experience significant accounting issues or judgements, such as impairments, are decisions taken centrally or consultatively through the subsidiary boards?

3

8

26

0

5

10

15

20

25

30

35

Blank Throughsubsidiairy boards

Centrally

No.ofrespondentLCSPs

Governance of subsidiaries Asurveyofglobalcompanies 13

ofrespondingLCSPsindicatedthattheirclientsagreethatthegovernanceoftheoverseassubsidiariesisdifferentfromthedomesticsubsidiaries

Would you say that governance over overseas subsidiaries is different from that over domestic subsidiaries?

The Survey Domestic vs. Overseas Subsidiaries Governance

The governance of overseas subsidiaries is different from domestic subsidiaries due to differences in language, culture, legal environment and tax laws Cultureandjurisdictionalissuessignificantlyinfluencethecorporategovernanceinacompany.Forexample,followingamergeroracquisitionofinternationalcompaniesthequestionofculturesandethicsisalwaysthehardestonetodealwith.Organisationsneedtogiveduerecognitionsofthisinfluencewhilebuildingsystemsofeffectivecorporategovernance.

Theparentboardmayoftenviewthecompanyasone organization and does not differentiate decision makingbasedonalegalstructureofasubsidiary,butoverseassubsidiariesaredistinctfromdomesticones,inthatthelatterhaveadditionalbarrieroflanguage,adifferentlegalandtaxenvironment,culturaldifferencesaswellastimedifferences.Overseassubsidiariesarenaturallyconsideredtocarrygreaterrisk,particularlythoseoperatingindevelopingcountries;thereisthereforeagreateremphasisonhavingparentcompanymanagementeitherinvolvedintheoperationsofthesubsidiaryorbeinvolvedatasteeringcommitteeorsubsidiaryboardlevel.Internationalsubsidiariestypicallyhaveacountrycontroller’sofficethathandleslocalissuesandcoordinateswiththeparentcompanymanagement.However,ithasbeengenerallyobservedthattightinternalcontrols,integratedITsystems,strictcomplianceandriskmanagementrequirementsmakethegovernanceofoverseesubsidiariesmucheasiertoday.

Thedomesticsubsidiariesaretypicallyincludedintheparentgovernancepracticeprincipallybecauseitsimplyresidesinthesamecountry.Inaddition,majordecisionscaneasilybemadecentrallyunderthesamegovernancestructurefordomesticsubsidiaries.Thismaynotbeeasilysaidabouttheoverseassubsidiariesbecauseofearliermentionedareasofdifferences.

53%

32%

15%

Somewhat different

Somewhat the same

Not at all

14

The Survey Policies and Procedures

Companies often extend key policies like the whistle blower policy across subsidiaries, especially the large ones

ofrespondingLCSPsindicatedthattheirclientsextendpoliciesandprocedurestotheirlargesubsidiaries

Subsidiarycorporategovernance,tobeeffective,wouldneedtobeatangibleandmeasurableactivityincompanies.Thisdependsonsuccessfulimplementationofthegovernancepoliciessetbythecompanieseitherthroughtheinvolvementoftheparentsonthe boards of subsidiaries or through the boards and themanagementsoftheparentcompaniesdevotingsufficienttimeontheoperationsofthesignificantsubsidiariesorthroughtightinternalcontrolsandcompliancemechanisms.Italsoneedstoberecognisedthatinlargecompanieswithmultipledomesticandoverseassubsidiaries,thechallengeofimplementingagovernanceframeworkistonotcreateunnecessarybureaucracy.Oversightandcontrolwillalwaysremainthekeydriversofsuccessinbuildingeffectivesystemsofcorporategovernanceofthesubsidiariesregardlessofthecountryinwhichthesubsidiaryoperates.Theprocessandaccountabilityforinformationmanagementarenotenough,buttheeffectivenessoftheseneedtobetrackedandevaluatedandtheremustbesystemsfortheseintheparent-subsidiaryrelationship.

Implementationofpoliciesattheparentcompanyacross its subsidiaries depends on various factors such as thesizeofthegroup,therelativesizeofasubsidiarytothewholegroup,theregulatorypressuresaswellasthelevelofcompliancerisk(e.g.highanti-cartelriskinthecementindustry).Largerandmoreinternationalgroupstendtohaveuniformimplementationofkeypolicies,suchaswhistleblowerpolicy,acrosstheentiregroup.Generally,thereisatendencyforcorporategovernancerelatedpoliciesandprocedurestobedevelopedcentrallyandrequiredtobeimplementedinallpartsoftheorganization,withoutregardtothelegalsubsidiarystructure.WhistleblowerpoliciesformostoftheclientsoftheLCSPsareglobalinnatureandapplicabletoallsubsidiariesregardlessoftheirsizeandlocation.

Has your client has extended procedures such as whistleblower policies to its large subsidiaries

Yes

No

88%

12%

Governance of subsidiaries Asurveyofglobalcompanies 15

Appendix Survey Demographics

LCSPs Respondents by Region:Atotalof37LCSPsfromDeloitteparticipatedinthesurvey,with15fromAmericas,13fromEurope,theMiddleEastandAfrica(EMEA),6fromAsiaPacificand3fromothergeographies.

3

13

6

15

0

2

4

6

8

10

12

14

16

Blank EMEA Asia-Pac Americas

Companies Represented by the LCSP Respondents:Atotalof53globalcompanieswerecoveredthroughthe37LCSPsfromDeloitte.Thesecompaniesincludemanymarqueenamesfromsectorssuchasaerospace,defense,automotive,chemicals,engineering,metals,miningandindustrialproducts.Ofthese53companies,14arelistedonNewYorkStockExchange(NYSE),8arelistedonLondonStockExchange(LSE)and2companieshaveajointlistingonbothNYSEandLSE.Ofthe14NYSElistedcompanies,8areFortune500companiesand7areStandard&Poor’s(S&P)500companies.Ofthe8LSElistedcompanies,2arebothFortune500andS&P500companies.

Aerospace and Defence 6%

Automotive15%

Chemicals13%

Engineering4%

Metals and Mining9%

Industrial Products34%

Others19%

16

Appendix Survey Questionnaire

1. Subsidiary board composition:• Doyourclient’ssignificantsubsidiariesgenerallyhave

separate boards of directors?– Yes– No

• Ifso,dotheyincludenon-executivedirectorsontheirsubsidiary boards? – Yes– No

• Aretherecommondirectorsontheboardsofthesubsidiariesandtheparentcompany?– Yes– No

2. Time spent by the parent board on oversight of subsidiaries:

• Doestheparentcompanyboardspendsignificanttimeoverseeingthebusinessandrisksofthesubsidiary?–Yes– No

3. Approvals and decision making:• Aretherespecificapprovallevelsinplacewherethe

parentmustapproveactionsorspendingofthesubsidiary?–Yes– No

• Whensubsidiariesexperiencesignificantaccountingissuesorjudgments,suchasimpairments,aredecisionstakencentrallyorconsultativelythroughthesubsidiaryboards?Inotherwords,isdecision-makingpusheddown?–Decisionsaretakencentrally–Decisionsaretakenthroughthesubsidiaryboards

4. Domestic vs. overseas subsidiary governance:• Wouldyousaythatgovernanceoveroverseas

subsidiariesisdifferentfromthatoverdomesticsubsidiaries? –Notatall–Somewhatdifferent–Somewhatthesame–Notatalldifferent

5. Policies and procedures• Hasyourclientextendedproceduressuchas

whistleblowerpoliciestoitslargesubsidiaries?– Yes– No

Governance of subsidiaries Asurveyofglobalcompanies 17

About the Centre for Corporate Governance

DeloitteToucheTohmatsuIndiaPrivateLimited(Deloitte)’sCentreforCorporateGovernance(the“Centre”)bringstogethertheknowledgeandexperienceofDeloitteandleadinggovernanceorganizationsinIndiaandtheworld-overinthecriticalareasofcorporategovernance.ItsmissionistopromotedialogueinthecriticalareasofcorporategovernanceamongDeloitte,corporationsandtheirboardsofdirectors,investors,academia,andgovernment.TheCentrealsocoordinatesresearch-basedthoughtleadershiptoadvancethinkingongovernanceissuesinIndia.Itsactivitiesandprogramsinclude:

Corporate governance roundtablesThecentreconductsroundtablesacrossIndiatobringtogethertheboardofdirectors,executives,investors,andacademicianstoseekconsensusonhowgovernancepracticesandapproachesshouldchange,giventhecurrentenvironmentandparticularitiesofcorporategovernanceinIndia.

Topicscoveredintherecentroundtablesinclude:TheRiskIntelligentboard,Enhancingtheboardeffectiveness.

Thought leadershipResearchandthoughtleadershipfromthecentrefocusesonissuesofrelevancetoexecutivesandnon-executivesservingonboardsofdirectorsandotherleadersintheglobalgovernancearena.

Topicscoveredinrecentreleasesinclude:CandourintheCockpit:TheBoard-Reinvented,RiskIntelligenceMap–Boardlevel.

Tools and resourcesToolsandresourcesfromthecentrearedesignedbasedontheemergingbestpracticesandexamplesidentifiedthroughourreviewofpracticesfollowedbytheleadingorganizationsandourmarketplaceobservations.

Currenttoolsandresourcesinclude:Corporategovernancediagnostic,Corporategovernancematuritymodel,Boardorientationtemplates,ChecklistsforAuditCommittee,Boardcommitteecharters,andCEO/CFOcertification.

Facilitation servicesThecentrefacilitatesarangeofassessmentandbenchmarkingservicestohelpboardsandvarioussub-committeesingaugingtheirperformanceaswellaseffectiveness.

Examplesoftheseservicesincludeassessmentofboard’seffectiveness,assessmentandbenchmarkingofboardpractices,developmentofchartersforboardanditscommittees,developmentofdelegationpolicybetweentheboardsofparentanditssubsidiaries,educationtoboardofdirectors,assessmentofethicsandcomplianceprograms.

Collaboration through teaming and sponsorshipsThecentrefocusesonbuildingstrongrelationshipswithvariousleadingorganizationsandotherentitiesintheareaofcorporategovernance.Thecentrealsosupportsthroughsponsorships,theforumsforadvancingthedebateanddiscussionsoncriticalaspectsofcorporategovernance.

Director and executive education programsTheCentreplanstooffer,throughitsallianceswitheminentacademicandnon-academicinstitutions,executiveeducationprogramsandcourses,andguestlecturesonvarioustopicsrelatedtocorporategovernance.

Presence on the webAnyonecanaccesstheCentre’scorporategovernancewebsiteat:www.corpgov.deloitte.com/site/inThewebsiteistailoredtothegovernanceconcernsoftheboardofdirectorsanditsvariouscommittees.ItofferslatestthinkingontheseissuesfromDeloitteaswellasfromthird-partysources.

18

Abhay Gupteagupte@deloitte.com+912261854360

Sachin Paranjapesaparanjape@deloitte.com+912261854903

Sanjoy Sensanjoysen@deloitte.com+912261854350

Contacts

Governance of subsidiaries Asurveyofglobalcompanies 19

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ThissurveywascarriedoutbyDeloitteToucheTohmatsuIndiaPrivateLimited(DTTIPL)andanydataorinformationreceivedandcompiledforthissurveyismeantforgeneralpurposesonly.NoneofDTTIPLoritsaffiliateentities(DeloitteNetwork)are,bymeansofthissurveyorthesurveyresults,renderingprofessionaladviceorservices.Neitherthissurveynorthesurveyresultsisasubstituteforsuchprofessionaladviceorservices.

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