The governance of corporate groups presents a number of special issues if the ambition is to integrate the group’s activities to some extent, either by coordinating the activities of the companies in the group, or by facilitating intra-group transactions in the form of trade in goods and services or sharing resources, including financial facilities. Group governance will involve balancing the interests of the group against the interests of its constituent companies. Finding the right balance between these two is not always easy, which is confirmed by the Commission’s intention to facilitate an EU-wide move towards the recognition and harmonisation of the concept of ‘group interest’ (see COM(2012)740, p. 15). The backdrop for this initiative is that it may not be clear to the members of the board of the subsidiary, nor to those of the parent company, how the interests of the group should be balanced against the interests of individual subsidiaries.
While we are still waiting for the Commission’s initiative, it is reasonable to expect that these issues are addressed in corporate governance codes. On this assumption, we set out to investigate how the issue is dealt with in different corporate governance codes. In our paper we initially examined 48 codes, but selected 16 codes (those most likely to have recommendations on group governance based on the number of group-specific terms we found in our initial screening) for detailed analysis. Despite this selection process, the recommendations we found were most often fragmented and superficial. Also, we had to use a functional approach as many recommendations likely to affect group governance did not address groups specifically. With these reservations, however, we were able to synthesise some recommendations for group governance. To do so it was necessary to distinguish between situations where the listed company is a subsidiary, and situations where the listed company is a parent with one or more subsidiaries, due to the different challenges inherent in these situations.
In listed subsidiaries, the board may find it difficult to prioritise interests in case of a conflict between the listed company and its parent company (or another part of the group). Though most codes address the duties of the board, they most often do so in general terms and only a few address directly how to deal with potential conflicts in groups. Even these few tend to recommend very different solutions without much subtlety, e.g. either that the board should prioritise the interest of the listed subsidiary or alternatively prioritise the interests of the group.
We also analysed how the recommendations on independent directors may affect group governance. Several codes recommend a number of independent directors on the board, the presence of whom, even if they are only a minority, may help to keep the interest of the listed subsidiary in focus when there is a need to balance the interest of that company with the interest of the group. In short, these recommendations may influence how far a listed subsidiary can be integrated into the group.
Finally, we analysed how the rules on related-party transactions may affect group governance. Recommendations about related-party transactions are numerous, but while we see ample references to group situations, this does not appear to be the result of the codes’ increased attention to the issue of listed subsidiaries. The codes, for the most part, appear to be much more concerned with the mismanagement of corporate assets by corporate boards and officers, than with the losses minority shareholders of listed subsidiaries can suffer if the subsidiaries’ assets and/or profits are relocated within the group. The codes rarely suggest that shareholders be given any formal influence in approving related-party transactions.
Whereas it is less common that the listed company is a subsidiary in a group, it is very common that it is a parent company with one or more subsidiaries. Even so, only a few codes take the starting point that the board is responsible for managing the company and its subsidiaries. Nevertheless, we found that there are provisions in several codes pointing in this direction. For instance, some codes recommend that the listed parent company’s board should adopt group policies or have the responsibility to supervise the subsidiaries, for instance by collecting information from them or by overseeing certain decisions taken by them. But overall, less than half of the codes address how the board of the listed parent company should engage in group governance and none of them do so comprehensively. We also examined how the codes recommended that transactions within the group should be treated and concluded that in some cases the recommendations on related-party transactions may affect transactions between the listed parent companies and their subsidiaries.
In conclusion, we found some recommendations for how groups of companies should be governed, but they are often found in different codes, often apply to a broader category of situations, not specifically group situations, and in some cases, recommend opposing solutions. Since we analysed those codes that were most likely to contain recommendations on group governance, recommendations in other codes are expected to be even more fragmented or non-existent. This suggests a need for more clarity on group governance and that the Commission’s intention to address the issue of group interest should be welcomed. However, since there is little consensus on what the best practices for group governance are, considering the often opposing strategies underlying the recommendations in the analysed codes, the Commission has a difficult task in operationalising the recognition of group interests.
Dániel Gergely Szabó is a former post-doctoral research fellow at the Department of Law, Aarhus University.
Karsten Engsig Sørensen is a Professor of Law at Aarhus University.