There are several reasons for company to invest in subsidiaries / associate companies. Such investment is a mechanism to facilitate risk diversification, add income channel, and provide opportunity for sustainable growth.

Once subsidiaries / associate companies are governed or under material influence of the company, the Board (as organization leader) should recognize the significance and ensure effective performances of those companies to retain utmost benefit of the parent company as well as subsidiaries / associate companies and other relevant stakeholders.

IOD developed this guideline to reflect the significance of this matter and the necessity of the Board to have clear governance direction for subsidiaries / associate companies. Knowledge and guidelines provided in this document are not set in stone but the Board should learn from them, comprehend the differences, and apply with the company as deem appropriate.

This guideline comprises two sections including 1. Key Principles and 2. Practice Guidelines.

Key Principles:

1. The Board should understand “objectives” for the establishment or investment in subsidiaries / associate companies as well as management mechanism, legal context, and relevant risks to be able to determine effective governance direction of those companies.

2. The Board should ensure the company and other investors (if any) jointly set governance framework / policy of the subsidiaries / associate companies by maintaining appropriate “degree of control of the parent company” and “degree of autonomy of subsidiaries / associate companies” in accordance with the context and relevant regulations.

3. The Board should not focus only on building framework / rules between the company and subsidiaries / associate companies to ensure compliance.  It should also emphasize performance development of each company on the basis of existing business relationship to enhance sustainability of the whole group.

4. The Board should accommodate the establishment of “mechanism to integrate key information” to comprehend the overall picture of internal management structure, relationship between the company and subsidiaries / associate companies, organizational culture, business characteristics, and shareholding structure that may differ in each company.

5. The Board of subsidiaries / associate companies should comprise of persons who possess appropriate qualifications that will benefit business operations of respective subsidiaries/associate companies. They are tasked to steer business operations of those companies to achieve corporate objectives. The Board should appoint persons to assume the role of “representative director” in subsidiaries / associate companies in accordance with shareholding proportion and / or agreements between co-investors. (if any)

6. The Board of subsidiaries / associate companies should adhere to Fiduciary Duty for the utmost benefit of the subsidiaries / associate companies as well as all stakeholders not just of the parent or any particular group of shareholders.  Such roles, duties, and responsibilities should be stipulated clearly in written in the form of “Board Charter”

7. The Board should encourage directors or management of the subsidiaries / associate companies to discuss, opine, or present key information concerning business environment and risk factors that may be specific to particular subsidiary / associate company.  The information will be considered in reviewing strategy, policy, and long-term objectives of the whole group of companies. 

8. The Board should ensure the scope of authority between the company and subsidiaries / associate companies is clearly determined.  There should be clear indication on cases that the representative director can use own discretion to vote in the Board meeting of the subsidiaries / associate companies and cases that require prior approval from the Board meeting and/or the shareholders’ meeting of the company.

9. The Board should ensure the company and other investors (if any) jointly stipulate key policy to be enforced with subsidiaries / associate companies, which could be the enforcement of Group-Wide Policy.  The Board may need to allow the Board of subsidiaries / associate companies to use own discretion in determining certain policy that align with business context and can practically be enforced.

10. The Board should ensure availability of communication mechanism between the company and subsidiaries / associate companies and that it is clear, transparent, accurate, and timely.  It should also establish monitoring channel for the Board to see that subsidiaries / associate companies disclose operating information or significant items effectively and timely.

11. The Board should examine to ensure that subsidiaries / associate companies that it invested in have prudent and effective internal control, internal audit, compliance, and risk management mechanisms or systems.

12. In case of connected transaction between companies within the group that may trigger conflict of interest, the Board should ensure that the company and subsidiaries / associate companies comply with “connected transaction policy” as well as approval criteria and procedures on arms’ length basis by emphasizing the utmost benefit of the company.

 For full "Guideline on Board on the Governance of Subsidiaries & Associate Companies " please download below