What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can we give?

In striking a healthy balance between risks and liabilities, it is important to understand that risks and liability can never be fully excluded. It is therefore counterproductive to go to extreme lengths trying to do so. Establishing an iron grip on the subsidiary in order to minimise all risks and liability should never be an objective.

Instead, the parent company should not shy away from taking risks by allowing the overseas subsidiary a relatively high degree of freedom. In this regard, knowledge of the local culture plays a significant role. One cannot deny the fact that the overseas subsidiary is better placed and equipped to deal with certain risks and come up with the most suited and effective approaches to them. The subsidiary possesses after all more in-house knowledge and expertise to reduce the risks of the parent company being held liable for too much direct control.

Some clients are not familiar with the local culture, customs, and practices of their overseas subsidiaries. We know from our experience that this can give rise to problems when those clients are not willing to take such ‘risks’ and only have eyes for reducing liability. Communications with overseas subsidiaries tend to be somewhat cumbersome. If the overseas subsidiary is dependent on approval by the parent company for all kinds of matters, this can negatively affect the overall efficiency of the business. For example, contracting and dealing with local business partners and customers is for the most part best left to the overseas subsidiary. This also goes for local employment contracts. The parent company should minimise its urge to approach those parties with its own way of thinking.

Concluding, when thinking of the right balance between risk and liability, our experience tells us that the parent company should leave things that can be done locally to the subsidiary.