QUESTION ONE – When representing a client with significant business activities in foreign jurisdictions, what are some key risk-related concerns that arise in a cross-border context and how can a parent company minimise such risk?
The two-key risk-related concerns arising in a cross-border context are the following:
a/ do not assume that what goes in your home country can simply be transposed without adjustments. Going abroad is driven by differences and you need to adapt to different regulatory frameworks and cultures. As to the French context, the most obvious risk-related concern pertaining to local peculiarities relates to labour and employment law. Minimising this risk means you need to seek standard legal advice and, importantly, be aware of the basic features of the parent company’s own legal and cultural background. To avoid communication misunderstandings, it’s also important that you hire a local management team who are aware of the cultural differences. They can then inform the parent company’s management team of the inherent cultural issues faced in this specific market.
b/ do not trust and keep your local team on a short leash. Experience shows that one of the most repeated examples of trust abuse arises when local managers are given a blank check with little reporting and controlling pressure. As long as the business is flourishing, this does not trigger too much attention. But as soon as the subsidiary fails to deliver as planned, enquiries tend to reveal abusive practices with the company’s assets. In the French context, it is perceived as normal to have strict reporting duties. In a country where it is culturally not perceived as wrong to slightly break the rules or bend them so they fit one’s own interests, keeping a strong controlling scheme is a key factor for success.
QUESTION TWO- What degree of control should a parent company have over its overseas subsidiaries? How does the degree of control impact the risk exposure level, and how can control issues be managed to minimise liability?
The level of control is key to success in France and avoids severe disappointments and surprises. The main guiding principles should be no blind trust and simple and clear reporting and control schemes. All this is handled internally at the parent company’s level and externally, on the local market, through trusted accounting and law firms with a loyalty duty directly with the parent company.
The most common abuses relate to deceptive or manipulative presentations of the local risk context to generate false impressions due to the lack of knowledge of local regulatory constraints. This typical behaviour allows, by deceiving the parent company about the existence or reality of a risk, to trigger an approval for specifically targeted investment-related decision. Being able to double-check the accuracy of these allegations with a local council or accountant who has a direct trust and “commercial” loyalty with the parent company allows minimising this behaviour.
Another minimising factor is to contractually bind local management with strict loyalty obligations. This makes the local managing director personally liable, even criminally, for wrongdoing infringement and violations that would otherwise be born by the registered corporate officer of the legal entity, who generally sits abroad.
QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?
The most effective way to balance risk and liability and achieve this goal in the French context is to have the local management sign a proper delegation of power (power of attorney) with the executive legally declared as a representative corporate officer of the company with the register of commerce.
This local managing director should, in turn, be authorised to hand over portions of this liability to members of his local team to make sure that all are bearing a fair share of personal liability.
The right balance is to hand over what cannot be controlled from overseas, such as health and safety protection measures, to the individual employees who have direct control over these risks on the ground.
Controlling and reporting schemes including training and sporadic random control measures shall be implemented and monitored jointly by the parent company and outside local advisers. Indeed, talents need to be retained and too many constraints may deter talented managers from joining the company. But as long as the measures are perceived as legitimate, this should not be an issue or an excuse to avoid implementing these safeguarding schemes.
Key considerations for multinationals operating in highrisk industries and jurisdictions:
- Do not manage from abroad and be physically present on a regular basis to meet face to face with the teams operating the subsidiary and create a personal relationship.
- Become knowledgeable about the main cultural and behavioural local differences to avoid important communication misunderstandings.
- Avoid blind trust and make sure trust is earned through a process imposing strict reporting and control rules.
- Make sure local outside advisers do not own their “commercial loyalty” to the local management but to the parent company, their true client, to make sure they are keen to report and spontaneously red flag potential risk situations.
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