Understanding the Function of Subsidiaries in Financial Entities

‘Subsidiary’ means a subsidiary undertaking within the meaning of Article 2, point (10), and Article 22 of Directive 2013/34/EU. In the context of financial entities, subsidiaries play a vital role in the corporate structure, often involved in various operational and strategic functions.

What Is a Subsidiary?

A subsidiary is a company or legal entity that is controlled or influenced by another company, known as the parent company. According to Article 2, point (10), and Article 22 of Directive 2013/34/EU, a subsidiary is an undertaking where the parent company holds a majority of the voting rights or exercises control over the subsidiary’s decisions. This control allows the parent company to direct the subsidiary's operations and financial strategies.

Key Characteristics of a Subsidiary

Understanding the key characteristics of a subsidiary is crucial for managing and overseeing its operations effectively:

• Control and Influence: The parent company, also known as the holding company, exerts significant control over the subsidiary. This includes decisions related to management, operations, and financial policies.

• Separate Legal Entity: A subsidiary operates as a separate legal entity from its parent company. This means it has its own legal identity, which includes its own rights and obligations.

• Financial Reporting: Subsidiaries are required to prepare and submit financial statements. These statements are often consolidated with those of the parent company to provide a comprehensive view of the corporate group’s financial position.

• Governance Structure: While a subsidiary may have its own board of directors and management team, its strategic decisions and overall direction are typically influenced or determined by the parent company.

Examples of Subsidiaries

• Banking Sector: A large bank may own several subsidiary banks or financial services companies operating in different regions or offering specialized services.

• Insurance Industry: An insurance company may have subsidiaries focused on specific types of insurance, such as health, life, or property insurance.

• Technology Sector: A multinational technology company might own subsidiaries specializing in different aspects of technology, such as software development or hardware manufacturing.

• Retail Sector: A major retail corporation might have subsidiaries operating in various countries or managing different retail brands under its umbrella.

Importance of Subsidiaries in Financial Entities

Managing subsidiaries effectively is crucial for several reasons:

• Strategic Control: Allows the parent company to strategically direct operations and investments through its subsidiaries, aligning them with the overall corporate goals.

• Operational Efficiency: Enables specialization and operational efficiency by focusing subsidiaries on specific markets or services.

• Financial Management: Provides a mechanism for managing financial risk and performance by separating different business functions or geographic regions.

• Regulatory Compliance: Ensures that the parent company and its subsidiaries adhere to relevant regulations and standards in their respective areas of operation.

Strategies For Managing Subsidiaries

Effective management of subsidiaries is essential for ensuring alignment with the parent company’s goals while allowing operational autonomy:

• Governance Framework: Establish a clear governance framework that defines the relationship between the parent company and its subsidiaries. This includes setting policies and procedures for decision-making and oversight.

• Consolidated Financial Reporting: Implement consolidated financial reporting practices to combine the financial results of the parent company and its subsidiaries. This provides a comprehensive view of the corporate group’s financial health.

• Performance Monitoring: Regularly monitor the performance of subsidiaries against established benchmarks and objectives. Use performance metrics to assess their contributions to the overall corporate strategy.

• Regulatory Compliance: Ensure that subsidiaries comply with local and international regulations. Implement compliance programs and conduct regular audits to verify adherence.

• Strategic Alignment: Align the subsidiaries’ strategies with the parent company’s overall goals. This includes setting clear objectives and ensuring that subsidiaries’ activities support the broader corporate strategy.

• Risk Management: Develop risk management strategies to address potential risks associated with subsidiaries. This includes financial, operational, and regulatory risks.

Real-World Examples of Effective Subsidiary Management

• Global Banking Group: A global banking group manages several subsidiary banks in different countries. The parent company oversees the strategic direction while allowing each subsidiary to operate according to local regulations.

• Insurance Conglomerate: An insurance conglomerate uses subsidiaries to offer various types of insurance. Each subsidiary operates independently in its niche market but follows the overarching corporate strategy.

• Technology Corporation: A multinational technology corporation manages subsidiaries specializing in different technology sectors. The parent company coordinates their activities to leverage synergies and drive innovation.

Best Practices For Managing Subsidiaries

Effective management of subsidiaries requires balancing oversight with autonomy, ensuring that both the parent company and its subsidiaries operate in harmony:

• Clear Objectives: Set clear objectives for each subsidiary, ensuring they align with the parent company’s overall goals and strategies.

• Regular Communication: Maintain regular communication between the parent company and its subsidiaries. This ensures alignment and addresses any issues or challenges promptly.

• Performance Metrics: Use performance metrics to evaluate the effectiveness and contribution of each subsidiary. This helps in making informed decisions about resource allocation and strategic direction.

• Compliance Programs: Implement robust compliance programs to ensure that subsidiaries adhere to relevant regulations and standards.

• Integration and Coordination: Facilitate integration and coordination between subsidiaries to leverage synergies and enhance operational efficiency.

Conclusion

Subsidiaries are integral to the structure and operation of financial entities, allowing for specialized management and strategic control. Financial institutions can ensure operational efficiency, regulatory compliance, and alignment with corporate goals by understanding their role and implementing effective management practices. As the complexity of global operations continues to grow, the strategic management of subsidiaries will remain crucial for maintaining a resilient and successful organization.