Shining a light on challenges of LEM

Shining a light on challenges of LEM

The Association of Corporate Counsel (ACC) released the first edition of “An inside look at legal entity management practices”, which showcases a detailed analysis of legal entity management (LEM), also known as subsidiary governance, a set of practices and tools to identify and manage corporate risk early when it is easier to handle. The results show that most of the more than 500 organisations that responded to the survey face extensive challenges regarding compliance and regulatory obligations related to subsidiary governance, resulting in higher corporate risks. Among the key findings, it showed that organisations that implemented a majority of LEM leading practices experienced more effective and efficient business outcomes than those that did not.

“While many organisations have subsidiaries, this report shines new light on the fact that most do not have solid and consistent policies and practices in place to manage their governance,” Tanya Khan, vice president and managing director of Australia and Asia-Pacific at the ACC, told Asia Business Law Journal.

“With significant risk and tax implications, often in multiple jurisdictions, ensuring a solid LEM function is a critical component for organisations to manage their risk.”

For companies doing business in all four regions covered in the analysis, 46% indicated that the Middle East and Africa proved the most challenging to keep corporate records up to date, closely followed by the Asia-Pacific (45%), and Latin America and the Caribbean (41%). Only 18% of participants found that keeping corporate records up to date in the US was challenging.

Given the heightened compliance and reputational risk landscape that organisations face, effective legal entity management has become a focal point. The report provides insights on how organisations are managing their legal entities, as well as potential opportunities on how to strengthen LEM. Additional key findings include the growing focus on LEM and the lack of consistent LEM policies.

Furthermore, 22% of participating organisations expected to increase the number of staff dedicated to LEM, while 39% reported increases in the budget for LEM in the past year. Most companies reported not having specific LEM policies and practices in place, while 56% did not conduct internal LEM-related audits or regular monitoring.

The report also highlighted that although technology to manage LEM was widely used, most of those polled were dissatisfied. Some 60% of participants reported using an electronic database to track corporate records. However, 73% said they were dissatisfied or neutral with their current technology.