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Adapted from Corporate Practice Portfolio Series No. 103A, Corporate Compliance: Practice Tools for Your Program, by Suzanne Rich Folsom, Senior Vice President and General Counsel, Philip Morris International Inc., et al.
Subsidiaries, branch offices and joint ventures create unique challenges for a company's compliance program, particularly if the affiliate is located in a foreign jurisdiction. Many Foreign Corrupt Practices Act enforcement actions have resulted from misconduct by foreign subsidiaries or representatives of a foreign subsidiary, often without material evidence that the parent company was aware of the illegal conduct. Therefore, companies have a strong incentive to instill effective compliance programs into their subsidiaries.
Compliance should be carefully considered before a subsidiary is ever established. The newly acquired subsidiary must comply with local laws, including laws related to local ownership, capital contributions, founding documentation and management composition. The corporate form selected for the subsidiary may affect the compliance obligations of the parent.
With the subsidiary established, the parent company must ensure that the compliance culture of the parent is passed down to subsidiary employees through a well-planned code of ethics and business conduct, company policies and training. Compliance training must encourage the subsidiary's employees to embrace the parent's compliance culture. Particularly in jurisdictions without a strong rule of law, it can be difficult to ensure that the subsidiary employees incorporate compliance into their workplace culture.
One way to encourage global employee acceptance of the parent company's compliance culture is to market the compliance program on a global scale. Such marketing efforts generally begin with a companywide code of conduct establishing a core understanding of ethical business requirements across the company. The code of conduct and key compliance policies should be modified as required to comply with local laws, business requirements and customs. However, the goal should be to keep the core compliance documents as consistent as possible throughout all subsidiaries.
Another effective tool for the compliance professionals in the parent company to establish a culture of compliance within a subsidiary is to develop local employee contacts in the key departments of the subsidiary. Simple differences like sending compliance emails through a local employee, rather than from the distant parent company, can encourage employee buy-in to the program. Also, well-trained local connections can stay abreast of changes in local laws, keeping both the parent and the subsidiary in compliance.
Using the global code of conduct as a foundation, the company should develop local policies and procedures that fit the business and culture of the subsidiary. In addition, it is critical to ensure that local management incorporates compliance into its business oversight. Local employees will give more weight to the priorities and incentives of local management than they will give to mandates of a faceless parent company.
It can be difficult to ensure continued adherence to the code of conduct, employee policies, and other compliance best practices during a widespread crisis event such as a natural disaster or pandemic. Clear communication between the parent company's leadership, including participation by the Chief Compliance Officer and general counsel, and the subsidiary's will increase the alignment of changes to corporate policies, procedures and processes.
In addition to training subsidiary employees, the parent company and representative employees working within the subsidiary must become familiar with the local requirements. Compliance requirements in foreign jurisdictions can vary widely. For example, local labor and privacy laws may be more protective of employee rights. The parent company may be hamstrung in its efforts to properly manage subsidiary employees if appropriate data sharing systems and agreements are not established. Expatriate managers, trained in their home jurisdiction, may inadvertently violate local labor laws related to overtime, work hours or employee discipline if they are not properly trained and advised on local requirements.
Establishing an effective subsidiary compliance program by instilling the parent's culture of compliance, while also meeting local requirements, understanding the unique aspects of the subsidiary's business, and respecting the local employees’ culture, takes careful planning and consistent focus.