Pablo Gonzalez Tapia features in the IR Global & ACC collaboration Publication “A Jurisdictional Guide of how to Manage Risk in Multinationals”

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?

Usually, the most imminent risk-related concerns for a company dealing in foreign jurisdictions have to do with: a) the unfamiliarity of the local laws; b) political risks, mostly in underdeveloped nations, or countries were the rule of law is still evolving; c) inconsistency of the judiciary or regulators (for companies operating in regulated sectors), where different decisions are taken regardless of being subjected to a similar set of facts and; d) the potential attraction for local management to do business the “local way”.

Given those potential concerns, our advice to in-house counsel of the parent company operating mostly in countries with weak law enforcement includes:

• Hiring a reputable law firm with experience of dealing with multinationals, before starting to do business in the country. This law firm should provide a summary of the basic regulations that would apply to local subsidiary and a general assessment of the country’s risk profile. The law firm should be directly hired by the parent company and not local management, to avoid the appointment of a friendly counsel.
• Setting a clear guideline where outside counsel is involved early in the decision-making process to assess the potential risks of any material business, operative or legal decision to be made.
• While giving outside counsel a certain margin to provide early advice to local management, in-house should maintain and encourage a direct line of communication with the outside counsel to prevent any local management departure from parent company guidelines.
• Sharing, instructing and enforcing parent company code of conduct and corporate governance, which should prescribe in clear language to local management the way that the parent company does business.
• Abide by the law and resist any temptation to take shortcuts to solve any legal, regulatory or Governmental problems.
• Avoiding costly litigation but exhaust all judicial stages in those cases attacking the company’s ethos or that, if it goes unchallenged, may set a harmful precedent on the company’s resolution to follow the law in that country.

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?

It is difficult to establish in the abstract the healthy degree of control that a parent company should have over its overseas subsidiaries since such control depends on the business sector and the country where the companies operate. For instance, financial entities would be subject to a much higher degree of control and oversight, while a manufacturing company may not, other than quality control. In addition, a subsidiary operating in a country with a high standard of rule of law may demand less control than one operating in an environment with significant government corruption, justice scarcity and lack of rule of law.

Therefore, the degree of control must be a combination of parent company policies and its way of doing business, along with identifying the country risks and the requirements to have a centralised chain of command or giving local management certain flexibility given their knowledge of the country’s market and culture.

Once the parent company has identified the country’s risks and the professional level of its local management, it is ready to determine the degree of control it will exercise on the operations and decisions to be made by the local subsidiary. With clear guidelines on the management of the subsidiary risks, local management should be able to determine when certain decisions must be made by the parent company, and when to involve the lawyers and the compliance officer.

Another way of exercising a certain level of control is for the parent company to appoint a compliance officer, risk manager or similar officer to ensure that policies are followed, risks are duly assessed and the legal team is early involved in the process.

QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?

In any decision in life, it is usually hard to strike the right balance between risk and reward. Therefore, companies must constantly assess the potential future loss resulting from a specific activity or event and the gains (reward) that such activity or event may bring. In the past, when dealing with overseas subsidiaries, headquarters had the luxury of providing them with ample margin to do business following the culture of the land. However, that has changed with the increase of digital communication and the arrival of social media. It is not abnormal for a parent company’s reputation to be significantly impacted by the perceived wrongdoings of the overseas subsidiary. Also, in some countries (while not the standard), the courts have even allowed plaintiffs to pursue the assets of the parent company.

Having said that, the parent company is required to implement a set of rules preventing local management from increasing risks, while having the chance to pursue a certain business that may increase the company’s profits. A right balance in that tension would be a combination of different variables, including the financial impact on the decisions to be made (with a financial threshold) and the areas where the decision is being taken. As an example, the parent company may allow local management to deal with all the employee issues but restrain them from dealing with upper management conflicts. The parent company may restrict any decision that could impact the environment, or could have a negative perception in the community, but, in turn, may allow local management to take decisions on programmes that benefit the community following the rule that “the most appropriate people to manage an issue are those who know it best.” Usually, the best advice is to find the perfect balance between doing the business, making a profit, protecting the brand and avoiding sanctions or liabilities claims.

Key consideration for multinationals operating in high-risk industries and jurisdictions:

Engage a reputable law firm with experience dealing with multinationals. Request an executive summary of the basic regulations and an assessment of the country risk profile.

Set forth a clear guideline where outside counsel is involved early in the decision-making process. Outside counsel should not be bullied by local management; instead, in-house should maintain and encourage a direct line of communication with the outside counsel to prevent any local management departure from parent company guidelines.

Show, instruct and enforce parent company code of conduct and corporate governance. Instruct local management in clear language the way that parent company does business.

Register with the local chapter of the parent company chamber of commerce and support reputable NGOs that
may fight against or report corruption within the country.

Maintain constant communication with your embassy.

To read the full publication, please click here.