This article was written by Laxmi Prasanna Biswas, a Training program to pass the independent director exam out of Capability arbitrage.
This article was edited and published by Shashwat Kaushik.
introduction
Due to globalization, many companies face the greatest challenges as it has created a constant and complex, volatile environment and the demand for fulfilling obligations is increasing in many jurisdictions. Therefore, effective legal entity management policies and procedures are necessary to maintain corporate records and achieve better business results. Legal entity management provides certain tools and procedures to the people who effectively manage a company’s legal entities. This speeds up the process and increases the financial value. Many small, medium and even large businesses overlook the importance of legal entity management and do not have appropriate policies and procedures in place. Some companies, despite having done this, fail to comply, resulting in a lack of proper documentation and the risk of business failure. Legal entity management has a profound impact on the growth and success of a company. Companies need to understand the importance and start implementing it by becoming aware of the current shortcomings of the system and its remedies. When managing legal entities, there are many problems that most companies face, be it the hiring of tangible and intangible resources, outdated processes and technologies. When everything is aligned correctly, documentation time is reduced and the company grows and collaborates. This article highlights the importance of legal entity management, its vulnerabilities and mitigation measures.
Pain points
Jennifer Cox explains: “Mistakes in legal entity management can lead to delays, time pressures and unnecessary and often unbudgeted costs.” Therefore, it is important to understand the vulnerabilities that lead to legal entity management errors so that we can achieve better Develop a vision to address these issues.
Staffing
The number one pain point in any business is staffing. Most companies do not have sufficient human resources to manage the legal entities and corporate records, which creates challenges, creates complexity and increases in costs, and leads to business failures. Some of the companies do not even have a legal management team, and while some companies do have one, the resources are not sufficiently trained to understand the procedures and policies of legal management and innovative technologies.
technology
Some of the companies have adopted outdated technologies and processes. Yet few companies use Excel trackers and do not have annual compliance calendars. Management is not aware of innovative technologies and these need to be adapted to the company to better manage company records.
Quality audits
Most companies do not have internal quality audits. They have no protocol or procedure for internal testing. Failure to carry out proper quality checks will have a serious impact on the management of legal entities in many ways. Quality audits ensure that all procedures and processes comply with organizational standards and regulations. They provide a clear picture of all compliance gaps that lead to violations of regulatory requirements. The lack of these protocols leads to legal problems and penalties, increases costs and places a burden on the organization.
Centralized administration
Some of the companies use external resources for LEM activities without central management, which leads to coordination and cost problems. Different entities work according to their policies and laws. These variations will lead to a more sophisticated atmosphere within companies to meet all legal obligations across the company. These entities manage their finances, resulting in different financial policies and procedures within companies, making management significantly more difficult and leading to inconsistencies.
Compliance with regulatory changes
The world is volatile, systems and policies are volatile and the regulatory environment is constantly changing. Due to these rapid changes in policies and regulations, it has become very difficult for the organizations to adapt to these changes and constantly revise compliance manuals and implement new procedures, resulting in complexity in business management that poses significant cost risks brings penalties and fines, legal disputes and reputational damage.
Data protection
Data protection has become an important factor in the management of legal entities due to many issues. When data is transferred across borders, it is important to understand the requirements of those countries, which can make regulatory compliance difficult. Frequent updates to data protection regulations increase administrative burdens and lead to administrative costs. Data breaches involve numerous financial risks and penalties, as well as damaging the company’s reputation.
Damage control measures
Companies should understand the importance of legal entity management and how maintaining it effectively increases the overall growth of the company.
Staffing
To support these legal entities, an appropriate team should be put together that is adequately trained in policies and procedures as well as innovative software. They should be informed about how to track and comply with regulatory changes. Skilled employees identify and solve the problems before it is too late as they identify the problems earlier and enable quick decision making, which has a positive impact on costs. Experienced and competent employees can anticipate the problems because they have a good understanding of the laws, regulations and policies and produce reports that are more aligned with the company’s goals and requirements.
Talent development
Talent development helps create talent and combat talent shortages. Companies should invest in providing adequate training for HR to fill positions immediately when someone leaves the company. In addition, training with the new software should enable them to perform better and maintain legal entity management.
Even the top management team, which includes directors, CXOs, etc., needs to be adequately trained on the changes in regulations and policies.
Corporate administration is the joint responsibility of the legal, finance and tax departments. For effective management, proper coordination and collaboration must be created between these different teams.
technology
The use of modern cloud-based technology with AI tools will solve most problems and make the processes much smoother and faster, but the company must consider data security and various protection measures that need to be put in place. There are many innovative softwares in the market that can be integrated into businesses for a seamless process.
Centralize
Centralizing the external service providers makes the process more cost-effective and also ensures data quality and effective coordination. It helps align all policies and regulations uniformly and consistently, improving overall efficiency. It provides greater control, ensuring that all companies adhere to similar corporate governance standards and practices, thereby improving the speed and consistency of strategic decisions. Although centralization slows down the process by creating bureaucracy, these problems are mitigated by clear communication that highlights the importance and benefits to the organization, as well as the balanced approach taking into account some local needs. Overall, centralization contributes to greater consistency, efficiency and control, which has a positive impact on costs and coordination.
Data transparency
Be transparent when collecting, maintaining and sharing data. It’s not just about how the relationship with stakeholders was built, but also how transparent the data is.
Quality audits must be carried out to check the health performance of the guidelines and to continually adapt the processes if necessary for their effective implementation. It will highlight the adverse effects of these policies, constantly warning organizations that will negatively impact growth and encouraging them to make changes to the better version that will promote a better system.
planning
Due to many business issues and various changes in regulations, there is a possibility of missing deadlines. To move forward consistently, it is better to create a plan with important dates so that not a single deadline is missed and the compliance calendar is maintained and tracked efficiently.
Diploma
According to Stephen Hawking, “Intelligence is the ability to adapt to change.” One must understand that change is inevitable. One has to embrace and adapt to the changes, be it legal changes or software changes, to compete in a fast-paced environment. Tracking regulatory changes, complying with them, continually learning new software and using them to implement policies and procedures minimizes risks and effectively manages the administration of legal entities around the globe. These systems should be viewed in a broader perspective, resolving global compliance risks and providing real-time governance reporting. The legal entity management system is complex as many laws and policies to be followed are issued by the government. However, by implementing appropriate technologies, understanding policies, adapting to changes, and having a competent team, one can effectively manage and reduce cost-effective options and promote business growth and success. Most companies value the environment, society and governance. Following best practices and guidelines will help companies better manage their legal entities. Failure to do so paves the way for unethical practices such as bribery and corruption that go unnoticed until it is too late. Therefore, effective LEM practices are very important to reduce risks and cost issues and add value to the organization.
