Strong legal entity management ­practices lead to better business

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In a globalised and interconnected economy, companies large and small face the challenges of complying with obligations in multiple jurisdictions, heightened and more diverse reputational risks, and reevaluating operating models and complex governance structures.

As such, legal entity management (LEM) is becoming a salient topic in the increased regulatory environment in which organisations all over the world must operate.

To learn more about how legal entity management is handled from the perspective of the legal department, the Association of Corporate Counsel (ACC), in collaboration with Deloitte Tax LLP, recently published the report An Inside Look at Legal Entity Management Practices. This comprehensive report studied LEM team structures, policies, procedures, and practices that organisations employ to manage corporate entities and regulatory obligations.

The report covered 520 organisations across twenty industries in 48 countries, including global multinationals. 46 percent of participating companies reported having operations in Europe, offering a comprehensive overview of the current trends on the continent.

One of the report’s key findings is that organisations that implement a series of key leading LEM practices experience better business outcomes than those that do not.

LEM leading practices score

ACC identified eight leading practices that constitute a solid approach for European companies to adopt in order to effectively manage corporate entity governance:

  1. Centralised, dedicated LEM team is in place
  2. Written LEM policies and procedures are in place and followed
  3. There is a single compliance calendar across the organisation
  4. Organisational chart is updated at least quarterly
  5. LEM testing, monitoring, and auditing are conducted regularly
  6. LEM training and educational programmes are provided
  7. Corporate records are tracked electronically
  8. Legal department uses a LEM technology platform

By combining the scores for each of these eight practices, we calculated an overall “LEM Leading Practices Score” for each survey participant ranging from zero (none of the leading practices are followed) to eight (all eight practices are followed).

The distribution of LEM Leading Practices scores shows a normal distribution, with most participating organisations following some, but not all, of the leading practices. Both the mean and median of the survey population were four, resulting in the average legal department following roughly half of the eight leading practices listed.

ACC then evaluated whether there were differences in business outputs between those organisations with a high number of leading practices in place and those that have fewer procedures in place, and the differences were remarkable.

Implementing LEM leading practices results in better business outcomes

Corporate entity management leaders were overwhelmingly confident about their organisation’s ability to stay in compliance with regulations, and they were also more likely to be satisfied with their company’s leadership and stakeholders being sufficiently attuned to subsidiary management processes from a governance perspective.

While most participants were at least somewhat confident that their organisation would have the ability to stay in compliance both in Europe and every country they operate in, the differences based on the company’s Leading Practices Score are relevant: 90 percent of those on the upper end of the score range were very or somewhat confident, compared with just 64 percent of those with two or fewer leading practices in place.

The results are also truly clear when looking at the satisfaction with company stakeholders’ awareness of corporate governance processes. Seven in ten of those with a high score were very satisfied or satisfied with the company’s leadership role in LEM, while less than half of those with a medium score were satisfied, and only 31 percent of those with a score of up to two points.

In addition, those who implemented at least seven of the eight leading practices were less likely to experience delays in updating their corporate records and were less likely to have their entities be out of good standing with regulators.

Companies not following LEM leading practices experience more pain points

Similarly, companies that do not follow LEM leading practices tend to experience pain points to a larger extent. The following tile chart shows the percentage of respondents that selected each of six different pain points related to corporate entity management based on whether they have each of the eight leading practices in place or not.

Darker tiles indicate a larger percentage of respondents selecting the pain points listed on the vertical axis, while lighter tiles indicate a lower percentage of incidence for a particular pain point. Competing priorities is the main pain point experienced by all participants, while lack of talent resources does not concern most participating organisations.

The incidence of not having leading practices in place across the remaining options provided is noticeable. Those who do not have leading practices in place are more likely to say that lack of bandwidth is an issue. More specifically, those who do not have written policies and a single compliance calendar are more likely to select antiquated and inconsistent processes and lack of technology as pain points compared to participants that do have written policies and a single compliance calendar.

Also, respondents who do not track corporate records electronically report antiquated processes and lack of technology as two pain points that they experience to a significantly larger extent than participants in organisations that use technology to track corporate records. These results further showcase the importance for European companies to adopt technology to operate more efficiently.

Learn more about legal entity management

The full survey report contains more detailed insights on the positive impact that implementing LEM leading practices has on other business outcomes for global and European organisations alike.

Other relevant key findings relate to the growing focus on LEM based on staffing numbers and budgeting, the worrying discontent of survey participants with the LEM technology platforms available, and the struggles that many companies face in terms of establishing solid LEM policies and practices.

To learn more about this topic, these ACC resources might have the solution you are looking for:

  • How to build a data-backed ethical and compliant culture? In-house teams are providing strategic counsel and risk management, and a top priority in 2022 and beyond should be ethics and compliance. The reason? Establishing (or enhancing) a value-based ethical and compliant culture can help limit legal exposure and improve financial results, boost employees’ happiness, and sharpen a brand’s image. Are you ready to measure performance in the areas of compliance, ethics, and risk? Get started!

 

b.garcia@acc.com

g.marletta@acc.com

teegler@acc.com

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