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Ethical Boardroom magazine – Four trends shaping the in-house legal industry
In an article for Ethical Boardroom’s Spring 2023 Issue, Kariem Abdellatif, Head of Mercator by Citco explains four of the biggest changes on the Entity Portfolio Management horizon in 2023 and what they mean for in-house legal teams.
The global management of a multinational’s entities has never been more important. In-house legal teams work in a challenging business environment, where regulations and reporting requirements change in a heartbeat and vary greatly across jurisdictions, with local nuances and tight deadlines. As multinationals grow in size and expand into new markets, the governance of their subsidiaries around the world becomes increasingly complex and often difficult to control.
What is entity portfolio management?
EPM is the practice of maintaining a healthy governance framework for a company’s global portfolio of entities. Improving EPM practices is a desire which many multinationals share when maintaining a large, dispersed portfolio of entities and a topic which often intensifies following the pressure of properly meeting compliance obligations in all jurisdictions.
EPM is also as much a logistics challenge as a legal one; a proper EPM framework needs to not only cover different legal regimes but also different languages, countries, time zones, internal stakeholders and other actors in the process as well as any service providers. This complexity makes EPM a potential minefield for multinational corporations.
Effective EPM goes beyond company administration and filings. Multinationals that fail to stay ahead of the governance curve not only risk losing ground to their competitors, but also face severe non-compliance penalties that can have a significant impact on their reputation and financial stability. The ability to maintain effective oversight and provide internal stakeholders with peace of mind that each entity is properly managed and compliant is of paramount importance for general counsels.
Different trends come to the fore at different times: as we close out the first quarter of 2023, below are four of the prevailing trends currently impacting in-house legal teams, when it comes to effective EPM:
1. Expanding global regulations and reporting requirements
Over the last decades, the volume of laws, procedures and guidelines has grown exponentially and 2023 has brought with it a new raft of global regulations and looming deadlines that in-house legal teams must keep pace with. At the same time, regulatory penalties for non-compliance have never looked tougher, with even the simplest of slip ups posing severe risks for multinationals.
Alongside annual corporate compliance deadlines, there are two areas in particular creating new reporting requirements and processes for in-house legal teams to navigate – Ultimate Beneficial Ownership and Environmental, Social and Governance (ESG) reporting.
Ultimate Beneficial Ownership
Increased demand for more transparency and growing regulatory scrutiny has seen many jurisdictions around the world implement regulations to monitor and maintain data of Ultimate Beneficial Owners (UBO). In total, there are now over 100 countries with some type of UBO regulation and this trend is expected to continue with Panama, Spain, and Ukraine amongst the jurisdictions to have most recently implemented changes to their UBO regulation.
The definition of who constitutes an Ultimate Beneficial Owner varies between jurisdictions, but generally, an UBO is defined as an individual who holds at least a 25% stake in the entity’s capital, at least 25% of the voting rights and is a beneficiary of at least 25% of the legal entity’s capital.
UBO is key for any institution within the scope of money laundering and terrorist financing regulation, two crucial priorities which have emerged for regulators over the past few decades.
The implications for UBO non-compliance are wide-reaching, from significant increases in risks of financial crime to reputational damage, hefty financial penalties, falling stock prices, loss of license and even criminal prosecutions. Therefore, UBO due diligence cannot be overlooked and must form a critical part of a company’s risk management.
However, diversity is a key description of UBO regulations worldwide. Whilst driven by the same principle of increasing transparency, the main definitions and applicable rules and procedures vary from jurisdiction to jurisdiction. These jurisdictional differences mean UBO procedures can range from simple one-off electronic filings to required annual communications with shareholders. In addition, many countries have very specific forms that need to be filed during a certain period. Others require companies to obtain, hold and register – where necessary – adequate, accurate, and current information on the UBO. A lack of availability of standardised documentation and reliable public registers across jurisdictions also slows the process, creating costly inefficiencies.
ESG
The introduction of environmental, social, and governance (ESG) criteria is also increasing the obligations for multinationals to meet and report on certain sustainability requirements – both at a jurisdictional and regional level. As with UBO reporting, diversity is a key description – ESG reporting is not standardised across jurisdictions and regulation is rapidly evolving.
For example, earlier this year, Germany implemented the Due Diligence Act (also known as the Supply Chain Act), which intends to prevent the violation of international human rights and environmental law breaches. The new requirements from the Act include the adoption of the policy of corporate human rights strategy, the performance of risk analysis, the anchoring of preventive measures and the establishment of a complaints procedure, documentation, and reporting requirements.
Furthermore, on the 5th of January 2023 the Corporate Sustainability Reporting Directive (CSRD) was adopted into EU law. The CSRD introduces more detailed reporting requirements and ensures that large companies and listed small and medium enterprises (SMEs) are required to report on sustainability matters such as environmental rights, social rights, human rights and governance factors. Companies will have to apply the new rules for the first time in financial year 2024, for reports published in 2025.
What does this mean for in-house legal counsel?
With such global scrutiny around compliance – particularly on these two issues – it is becoming more and more vital for in-house legal teams to adopt a forward-looking and risk-based approach when it comes to their EPM, in order to anticipate requirements in relevant jurisdictions.
However, keeping on top of the constant global and local regulatory changes to requirements and processes is an onerous undertaking and colossal task for even the most comprehensive in-house legal teams. For large companies with entities spread across the world, it is vital legal teams have oversight and advance note of all recurring annual obligations as well as event driven tasks, and it is fast becoming near impossible to navigate this without adopting technology.
2. Digital transformation of corporate governance processes
While the trend towards digitisation was already underway, the global pandemic undoubtedly accelerated the speed of this transition, and it is now hard to imagine doing business without digital tools and processes.
Findings from the Mercator Entity Management Report 2022 demonstrated that EPM has been made easier following flexible legal regulations introduced in response to the pandemic – which saw multinationals reduce the time spent on managing their entities over the past year by almost a fifth (17%). This was largely due to the adoption of new digitalised processes such as online meetings, and e-signatures.
This trend looks only set to increase as digitalisation becomes the permanent global reality and jurisdictions seek to further modernise company law to fit the digital age. For example, the implementation of the EU’s Digitalisation Directive will result in further cost efficiencies: by the 1st of August 2023, it should be possible to fully incorporate a company online without having to register physically with any authority in EU member states.
What does this mean for in-house legal counsel?
This rising complexity of regulatory compliance is putting greater pressure on in-house teams to look at ways to innovate and streamline their governance processes. Naturally technology can serve as a critical vehicle for in-house legal teams, with huge potential for driving increased efficiencies and improved risk management.
However, it is important not to confuse technology with automation in this instance and effective systems have to be operated and supported by effective teams. This means strong operational delivery capabilities with clearly defined responsibilities between in-house legal teams and service providers. Technology helps in such situations by providing transparency across an organisation about the overall obligations and workflow, tracking who is responsible for achieving different objectives.
3. Move to centralising operations
Multinational in-house legal teams – dealing with numerous entities spread across the world – need reassurance that each corporate change is actioned within the required timeline. At any one time, there can be numerous changes – the replacement of a director, a new registered address to update – as well as annual obligations to keep on top of, including approving and filing financial statements.
With all this data and documentation being changed, reviewed, and filed, there is a need to have real-time visibility of tasks and workflows. By having all the information they need on one, centralised technology platform, an in-house team can check the status of any given task at any time.
What does this mean for in-house legal counsel?
The key to harnessing technology effectively is not to use too many platforms, as this can run the risk of overwhelming teams. If you start to tot up the systems used between document management, regulatory updates, invoices and filings, you soon run out of fingers to count on. In that sense, too much technology can be as unhelpful as too little.
This is of elevated importance for multinationals with a significant global portfolio of entities, who not only have more regulatory requirements, workflows and reporting to take care of, but also the increased likelihood of entities in those jurisdictions using their own platforms.
4. Data driven decision-making
In-house legal teams undeniably play a crucial part in a multinationals’ operations and their role will continue to grow in importance over the next few years. For general counsels, compliance with global regulations is not just a case of ticking a box, but protecting a company’s reputation and, importantly, demonstrating how this best practice can enhance overall competitiveness.
Historically, for in-house legal and corporate secretarial teams, there existed significant obstacles in accessing quantitative data to frame and support portfolio-wide decision making. This lack of data also made it difficult to provide a truly accurate comprehensive and objective picture of the global governance landscape.
But with greater tech adoption comes more readily available data, which is increasingly being leveraged to help steer in-house legal teams’ strategies and decisions when it comes to EPM.
What does this mean for in-house legal counsel?
By analysing and comparing data, in-house teams can make more informed decisions on the performance of their entity portfolio, rather than depending on gut feelings and broad trends. Data-driven insights can help identify those jurisdictions where greater efficiencies can be achieved and guide decision-making for future operations.
As a way to demonstrate the potential of data-based insights in EPM, Mercator produces the annual Mercator Entity Management Report. Unlike survey-based reports, this real-life data covers 180+ jurisdictions and all major industries, allowing us to provide a benchmark for a multinational’s EPM expenditure and efficiency and track year-on-year global rankings.
This article first appeared in the Spring 2023 Issue of Ethical Boardroom Magazine – available here