The risky joys of being a NED of a subsidiary during Covid

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The risky joys of being a NED of a subsidiary during Covid

  • Posted by: Jim Stafford
  • Category: Business, Uncategorized

Many people are delighted to take up a Non-Executive Directorship of a subsidiary for, say €20,000 a year. However, the unprecedented nature of Covid has substantially changed the ground rules for many NEDs, and is making some of them very nervous.

We are providing advice for an increasing number of directors of Irish Companies who are becoming concerned about their roles, and the demands being placed on them. 

Some NEDs of Irish companies that are subsidiaries are, as result of Covid, under substantial pressure to approve the granting of loans and/guarantees to other group companies in order to save those other companies from insolvency themselves. 

A balance must be struck between control of a subsidiary (essential for risk management and compliance) and the autonomy that it needs to operate as an independent legal entity. 

A duty to whom?

A subsidiary must not be seen as an extension of the parent company. Even if a subsidiary is wholly-owned it is still a separate legal entity. In making decisions which affect the subsidiary its directors can consider the interests of the parent company or the group as a whole but they have a primary duty to act in the interests of the subsidiary. Our core advice to a NED is to treat the company as if it was his own family company that must be protected. As a director of a family company, would you authorise the company to grant, say, a loan of €500,000 to an insolvent company? 

Issues can arise when the subsidiary’s interests are at odds with or conflict with those of the parent or sister companies. Where the directors of a subsidiary prefer the interests of the parent company, they risk breaching their duty to the subsidiary. This is difficult to avoid where there are common directors between parent and subsidiary companies. 

Control and management 

Although the parent entity is entitled to appoint the directors of the subsidiary, the board of the subsidiary must be allowed to manage the affairs of the subsidiary and the parent should not interfere excessively. 

Depending on the involvement of the directors of the parent company in the management of the subsidiary, they may be considered as shadow directors. Shadow directors are liable in many of the same ways as registered directors. 

Practical Steps

There are practical steps that a NED can take to protect themselves:

  •    Avoid having common directors between parent and subsidiary companies and consider appointing other independent non-executive directors to the boards;
  •   Have clear internal group policies extending to subsidiaries on matters such as conflicts, related party transactions, borrowing and the provision of guarantees;
  •  Hold separate board meetings for each group company.
  •  A parent company should carefully consider “approving” actions of the subsidiary board and avoid giving directions;
  •  Ensure that inter-group transactions are at arm’s length where possible
  •  Maintain up-to-date registers of directors’ interests;

 Directors need to ensure they keep up to date with regulations and legislation, which can prove challenging. Some of the issues we frequently come across are as follows:

  •   Board members not having sufficient time to commit to the company/ organisation to discharge their responsibilities effectively; 
  •  Directors not obtaining any formal induction training and/or ongoing training;
  •  Corporate governance documentation either not being in place and/or not accurately reflecting the actual processes.  
  •   Board not having a strong mix of skills, knowledge, experience and diversity;
  •  Information not being supplied to the board in a timely manner and/or not of an adequate standard.
  • Directors not being sceptical enough of accounts/projections.

All board meetings should be carefully minuted. The minutes should record:

·        The key points of discussion, 

·        Decisions made and, where appropriate, the reasons for them, and

·        Agreed actions, including a record of any delegated authority to act on behalf of the company. 

Conclusion

Covid has substantially increased the risks for some NEDs, and particularly for NEDs of subsidiary companies. The parent company must have the control and visibility over its subsidiary companies that is necessary to reduce operational risks, However, this control should not be used by the parent as a mandate to pressurise subsidiary directors into acting in accordance with the parent’s interests when those interests are not aligned with those of the subsidiary. Directors of a subsidiary are expected to run the subsidiary as an autonomous entity and the independence of the board of a subsidiary to make decisions on its own management, separate. 

How can we help? 

We are experts in Corporate Governance and can provide advice and guidance in the following areas: 

·        Preparation of “Fair Value” reports on the acquisitions of new companies.

·        Preparation of Independent Business Reviews.

·        Provision of Internal Audit reports on specific areas of the business.

·        Advice on trading whilst insolvent.

·        Advice on whether loans or guarantees should be provided to other Group companies.

For further guidance please contact myself, tom.murray@frielstafford.ie or andrew.hendrick@frielstafford.ie

Author: Jim Stafford