Making group structures understandable to the board

The group chart fits on one page, provided the text is small enough. There are holding companies, operating businesses, joint ventures and a handful of entities that nobody in the meeting can quite explain.

Each may have had a sensible purpose when it was created. Years of acquisitions, financing arrangements and reorganisations can leave a structure whose logic lives in the memory of a few people.

For a board, that is an uncomfortable place to start the next restructuring discussion. Before adding or removing a box, directors need to understand what the current boxes actually do.

Give each entity a plain explanation

Ask for more than its name, ownership percentage and jurisdiction. What does it own? Which contracts does it sign? Does it employ people, borrow money, provide guarantees or hold intellectual property?

Include the original reason for its existence and whether that reason still applies. An entity that appears inactive may retain obligations. One that looks administrative may hold an asset on which the whole business depends.

The aim is a working account that a new director can follow without relying on the person who designed it. Supporting detail can sit behind it, ready for the questions that follow.

Trace a real decision through the structure

Take an illustrative proposal to move a service from one subsidiary to another. Follow the decisions required: who recommends it, which boards must consider it, whose consent is needed and how affected parties will be treated.

This can expose a gap between the formal arrangements and daily practice. A group executive may be used to giving instructions that a subsidiary board is expected to approve later.

Directors' duties and the treatment of group interests differ across jurisdictions. Local responsibilities need to be understood with appropriate advice. A parent company's approval should never be assumed to settle every decision elsewhere in the group.

Follow the flows between companies

Loans, service charges, guarantees and shared resources connect entities that may look separate on paper. Show the significant relationships and who monitors their terms.

Ask what would happen if one business stopped paying, needed to be sold or could no longer provide a shared service. Which other companies would feel the effect? Where would the board obtain the information needed to respond?

Conflicts deserve particular attention when directors sit on several boards or when ownership differs between entities. Record the interests involved, the process followed and the basis of each decision.

Make simplification prove its case

A shorter chart can make oversight easier, but fewer entities alone is not a sufficient objective. A proposed change should explain its business purpose, costs, dependencies, approvals and any responsibilities that will move.

After implementation, update signing authorities, reporting lines and the board's records. Otherwise, people continue operating through a structure that no longer exists.

A useful group chart helps directors follow responsibility all the way to the decision. If it cannot do that, the drawing still needs work.

Further reading: OECD, Duties and Responsibilities of Boards in Company Groups.