Centralizing governance: An increasingly pertinent consideration

When global economic headlines are reading like a Greek tragedy, it’s no surprise that multinational organizations are looking to cut expenditure. One consideration for executives looking to shave costs from their bottom line, while also making sensible choices to future-proof their companies, is to look at centralizing their governance structures. John Paans, Global Leader Corporate Law - Deloitte Legal, looks at the practicalities for companies considering a centralized legal structure.

A 2019 Thomson Reuters study supports the centralizing governance observation by stating: “Within the next year, the majority of survey respondents will have centralized their statutory reporting process within a Shared Service Center: 44% already do, and 15% plan to make the transition within the next 12 months. An additional 18% say they intend to move from local to centralized reporting within two to five years. Many organizations are looking for new areas in which to drive savings and efficiencies. Statutory reporting is emerging as a strong candidate for centralization, standardization, and automation.”

Why now?

The global economic and political climate has been intensifying for some time, throwing up all kinds of complexities for multinationals including sanctions, inflation, protective measures from governments in favor of national industries, recession, and supply chain issues due to COVID-19.

Companies may want to consider a disciplinary approach to help deal with the aforementioned complexities in the global environment. If a company is aligned and flexible, able to change its model or make decisions that are necessary to adapt to specific changes in the environment, the logical step is to centralize, coordinate and align the management structures.

Moving towards the center

Historically it was common for large multinationals to have lawyers around the world. Different jurisdictions have different laws, and it is beneficial to have local specialists that are close to the business.

Things are changing, however. There are more opportunities, to outsource specific legal support– to alternative legal service providers or to create an internal shared services operation through the use of innovative legal technology, such as centralized contract and knowledge management and cloud-based workflow tools. This makes the centralization of certain legal activities such as entity management more feasible and more efficient.

The downside of a decentralized legal structure in today’s world is becoming increasingly clear. From a management perspective, it is not always easy to align business operations in a decentralized management structure. Decentralized structures have their own authority and bring with them tension between a local and global perspective.

Is it right for my legal function?

There are certain considerations and actions a General Counsel (GC) should make before centralizing their legal department.

Is it feasible from a regulatory perspective?

In certain jurisdictions, due to a more problematic regulatory environment, you may need local presence with local directors. This may also apply to having local lawyers on the ground.

Business activity

Look at the business’s activities on a macro scale and assess whether it is still reasonable to have someone taking care of legal matters in a specific country.

Change management

Employees don’t like surprises and changes need to be managed. Ensuring that the move to centralization is communicated well in advance and clearly – including the business rationale – will ensure they are more supportive and cooperative.

Business function versus location

In companies that have different businesses, with certain business concentrated in a specific country, then the argument for centralization may not be so strong.

Organizational structure

Think also about how it will impact the organizational structure of your business. If your company needs to govern from the center for general management purposes, for example, for tax purposes, then it makes sense to centralize legal too.

The task ahead

All things considered, the GC has a difficult task ahead, whether centralizing governance is appropriate or not.

If centralizing governance makes sense for your organization, it will simplify many decisions that may be needed to respond quickly to external factors. If you need advice, ensure your provider has good global coverage, with qualified and multidisciplinary staff able to help with the transition in all relevant jurisdictions.