This article has been written by Laxmi Prasanna Biswas pursuing a Training Program to Crack the Independent Directors’ Exam from Skill Arbitrage.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
Introduction
Due to globalisation many companies are facing the toughest challenges due to the constant and complex volatile environment it created and the increase in demand to satisfy obligations across many jurisdictions. Hence, effective legal entity management policies and procedures are required to maintain company records, bringing better business outcomes. Legal entity management provides certain tools and procedures for the people who are handling the legal entities of a corporation effectively. It will speed up the process and increase the financial value. Many small, middle, and even large companies overlook the importance of legal entity management and don’t have proper policies and procedures. Some companies, even though they have, are not being followed, resulting in failing in appropriate documentation and creating the risks for the business failure. Legal entity management creates a profound effect on a company’s growth and success. Companies need to understand the importance of it and start implementing it by realising the current shortcomings of the system and its mitigation measures. There are many pain points in legal entity management that most companies are facing, be it hiring resources both tangible and intangible, outdated processes, and technology. If all are aligned properly, it will reduce documentation time and will enhance the company’s growth and collaboration. This article emphasises the importance of legal entity management, its pain points, and the mitigation measures.
Pain points
Jennifer Cox states, “Failures in legal entity management can lead to delays, timeline pressures, and unnecessary and often unbudgeted costs.” Hence, it is essential to understand the pain points that are causing failures in legal entity management so that we can have a better vision to mitigate these.
Staffing
The most important pain point in every company is staffing. Most companies do not have enough human resources to manage the legal entities and corporate records piling up challenges, creating complexities and increases in cost resulting in business failures. Some of the companies do not even have a legal management team and some companies, even though they have, the resources are not trained enough to understand the procedures and policies of legal entity management and the innovative technologies.
Technology
Outdated technologies and processes have been followed by some of the companies. Still, few companies use Excel trackers and they don’t have annual compliance calendars. Management is not aware of innovative technologies and these need to be adapted to the corporate for the better handling of company records.
Quality audits
Most of the companies do not have internal quality audits. They do not have any protocol or procedures for internal testing. Not having proper quality audits will severely impact legal entity management in many ways. Quality audits will make sure that all the operations and processes comply with the organisational standards and regulations. They will give a clear picture of any gaps in compliance that lead to violations of any regulatory requirements. Not having these protocols will result in legal issues and penalties and will increase the cost and become a burden on the organisation.
Centralised management
Some of the companies use external resources for LEM activities with no centralised management, which will create coordination and cost challenges. Different units operate according to their policies and laws. These variations will create a more challenging atmosphere within corporations to meet all the legal obligations consistent across the company. These units operate at their finances, leading to variations in financial policies and procedures across the companies and much more complicated to manage and lead to inconsistencies.
Compliance of regulatory changes
The world is volatile, and the systems and policies are volatile, and the regulatory environment is constantly changing. Due to these fast-paced changes in the policies and regulations, it has become very difficult for the organisations to adapt to these changes and maintain revising the compliance manuals and implementing new procedures, resulting in complexity in entity management, which will have significant cost risks, penalties, and fines, legal disputed and also reputational damage.
Data privacy
Data privacy has become a significant factor in legal entity management due to many issues. When the data is getting transferred across borders, one needs to understand the requirements of those countries, which may complicate legal compliance. Frequent updates in data privacy regulations will add to the administrative burden and will lead to administrative costs. Data breaches will cause a lot of financial risks and penalties and also cause damage to the company’s reputation.
Mitigation measures
Companies should understand the importance of legal entity management and how maintaining it effectively boosts the company’s overall growth.
Staffing
A proper team should be created to maintain these legal entities and they should be trained enough with the policies and procedures and innovative software. They should be made aware of how to track and comply with the regulatory changes. Skilled staff will identify and resolve the issues prior before it is too late as they identify the problems earlier and provide quick decision-making, which will have a positive impact on costs. Experienced and competent staff will foresee the problems as they have a good understanding of the laws, regulations, and policies and will do reporting that will better align with corporate goals and requirements.
Talent development
Talent development helps to create talent and combat talent shortages. Companies should invest in providing proper training to the human resources to fill the positions immediately if anyone quits the company and also training them with the new software will make them perform better to maintain legal entity management.
Even the top leadership team, which includes directors, CXOs, etc., needs to be trained well enough about the changes in the regulations and policies.
Entity management is a shared responsibility between legal, finance, and tax departments. Proper coordination and collaboration are to be created among these different teams for effective management.
Technology
Using modern cloud-based technology with AI tools will resolve most of the issues and make the processes much smoother and faster but the company needs to keep in mind the data security and various protection measures to be introduced. There are many innovative software on the market that can be incorporated into corporations for a seamless process.
Centralising
Centralising the outside service providers will make the process cost-effective and also provide data quality and effective coordination. It helps to align all the policies and regulations to be uniform and consistent, which will improve overall efficiency. It provides more control, ensuring all the entities are adhering to similar corporate governance standards and practices and thus improving the speed and consistency of strategic decisions. Though centralising will slow down the process as it creates bureaucracy, clear communication emphasising the importance and how it will benefit the organisation and the balanced approach by retaining some local needs will mitigate these issues. Overall, centralising helps in terms of consistency, efficiency, and control, which will have a positive impact on costs and coordination.
Data transparency
Be transparent in collecting, maintaining, and sharing the data. It not only matters how the rapport has been built with the stakeholders but also matters how transparent the data is.
Quality audits are to be implemented to check the health record of policies and constantly amend the processes if required for their effective implementation. It will bring out the adverse effects of those policies, constantly warning the organisations that will pose a negative impact on the growth and encouraging them to amend for the better version, which will foster a better system.
Planning
Due to many business issues and various changes in regulations, there will be a chance to miss the deadlines. To move forward consistently, it’s better to make a plan with the important dates so that not even a single deadline will be missed and the compliance calendar to be maintained and tracked efficiently.
Conclusion
According to Stephen Hawking, “Intelligence is the ability to adapt to changes.” One has to understand that changes are inevitable. One has to embrace the changes and adapt to them, be it legal changes or any software change, to compete with a fast-paced environment. Tracking regulatory changes complying with them, consistently learning new software and leveraging them for implementing the policies and procedures will minimise the risks and effectively manage legal entity management around the globe. These systems should be seen in a wider horizon which solves global compliance risks and provides real-time governance reporting. The legal entity management system is complex, as many laws and policies to be followed are issued by the government, but by implementing proper technologies, understanding the policies, adapting to the changes, and having a competent team, one can manage effectively and provide cost-effective options and foster the company’s growth and success. Most of the companies are giving importance to the environment, society, and governance. Following the best practices and policies will help the corporations have better management of legal entities. Failing those will pave the way for unethical practices like bribery and corruption and it will go unnoticed until it is too late. Hence, effective LEM practices are very important to reduce risks and cost issues and add value to the organisation.
