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Monday
Feb242014

Parental controls: Anti-corruption compliance programs for joint ventures, subsidiaries and franchisees (Part 5)  

In this fifth of an eight-part series on "parental controls," we turn from consideration of compliance programs in joint ventures (JVs) to exploring such programs in the context of other affiliated entities.

(You can read Parts One, Two, Three and Four of this Series here.)

One of these affiliated entities is holding companies, which typically are not engaged actively in the management of the companies they own. For this reason, the risk analysis is generally very similar to that of non-operated JVs, although there is obviously a different ownership interest at stake with a wholly-owned subsidiary.  

In addition, the risk of reputational harm flowing to the parent company from misconduct that occurs at the subsidiary is often greater with a wholly-owned subsidiary than with a JV. 

And, even in these types of ownership structures, the holding companies sometimes do a survey of the portfolio companies’ compliance and ethics (C&E) programs and provide guidance. Such oversight is framed usually as guidance rather than as requirements, but, depending on the company, such guidance can have a substantial impact on the way subsidiaries run their C&E programs.

Holding companies may also require some type of periodic reporting regarding compliance measures from their subsidiaries. Periodic meetings between C&E professionals at the subsidiaries and the parent are also fairly common, and they can be an extremely effective method for encouraging the sharing of good practices. 

Even in holding companies, parent companies may offer certain C&E services, such as providing helplines or web-based training courses, to the subsidiary. Codes of conduct and various compliance-related policies may also be shared with subs. Parent audits of the subsidiary may also cover compliance measures. 

In addition, there should be a clearly articulated escalation policy specifying the types of allegations and matters that must be escalated to the parent. These matters could include, for example, when high-level personnel of the subsidiary are the subject of allegations or when a dollar threshold is reached.

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Jeffrey M. Kaplan and Rebecca Walker are partners in Kaplan & Walker LLP.