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“Any intelligent fool can make things bigger and more complex. It takes a genius and a lot of courage to move in the opposite direction.” Whilst I’m sure Albert Einstein was referring to complex physics when he made this assertion, his words are true for business generally and more specifically, legal entity structures.
Many corporates (not just large multinationals) seem to excel in making things unnecessarily complex by setting up more legal entities than they know what to do with. Of course, it’s not always intended to make matters complicated. Often, they were formed for a specific operational or financial reason, or for tax structuring purposes. Alternatively, they were acquired through M&A activity.
Irrespective, it doesn’t take long for the group structure to grow and the corporate garage to get cluttered with bric-a-brac. It’s not uncommon for an organisation to have hundreds of companies in its structure. Even when these companies no longer serve an obvious purpose, groups often retain them, leaving them “as-is” rather than toying with the status quo.
Keeping such entities can be costly, risky (for the corporate itself and directors personally) and can hamper the implementation of other strategic initiatives. Consequently, ‘clearing out the garage’ is not something to continually postpone but tackle head-on in the near-term either on its own or as a component of a wider strategic transformation/reorganisation initiative.
Often, companies will initiate a defined Corporate Structure Simplification (CSS) project to tackle some of these issues. When implemented successfully, execution is well planned, quick and can provide speedy payback. By clearing out the garage, you’re not only eliminating unnecessary entities, but also managing risk and making a leaner, more agile organisation to take into the future.
So, what indicators should management look for when determining whether to progress CSS efforts? In our experience, there’s no specific criteria. If you can’t describe your own corporate structure internally, if it doesn’t match your organisational culture of transparency, if it takes up a whole wall in your office or if your employees are facing and raising day-to-day challenges caused by the complexity, those are some of the signs.
You’ll have senior executives acting as directors of companies they know nothing about, swathes of dormant companies or intermediate holding companies creating unnecessary tiers in the group structure or your finance team (and other functions) spending an inordinate amount of time supporting non-core entities.
The question then becomes whether you have the capacity and energy to clear out the garage. If you do, you’ll find lost family treasures and previously unidentified wasps nests in the process.
As the CFO/financial director, you want to avoid being challenged by the board or other senior management on the group structure and having to defend its complexities. Non-executive directors and newcomers to the senior management team may have a different perspective on what “good” looks like from working with other organisations. Furthermore, current and potential investors, finance providers, employees and other stakeholders will all value transparency and a group structure that is easily explained.
A properly planned and resourced CSS initiative can deliver a wide-range of sometimes unexpected benefits (summarised below) for your organisation. The trick then is to ensure that those benefits are sustained through making CSS business as usual, thereby facilitating long-term entity management.
The moral of this story is prioritise clearing out the garage on your ‘to-do’ list – identify where everything is, get rid of unnecessary clutter and put things where you want them. You’ll feel good about it, see the value in your achievement and be wary of letting it return to its previous state.
By Phil Duffy, managing director at finance service company Duff & Phelps
