Subsidiary Governance 

Every incorporated entity must have a board of directors. However, when the entity is a subsidiary of a parent company with a board, the subsidiary may either have its own board or be governed by the parent board. This Director FAQ explores three common scenarios for subsidiary governance and highlights the key legal issues for each scenario.

Q: I am a director on the boards of a parent company and one of its subsidiaries. How common is this approach, what are the alternative governance structures, and what guidance do you have for subsidiary governance?

A: This memo discusses the governance of subsidiaries in four sections:

1. Definition of subsidiaries
2. Prevalence of subsidiaries and their boards
3. Three basic scenarios for the structure of subsidiary boards
4. Guidance for the scenarios

1. Definition of subsidiaries

Subsidiaries are defined as corporations that are controlled by parent companies. Depending on the jurisdiction and situation, there are different thresholds for “control” in determining whether an entity is or is not a subsidiary. (See “Subsidiary Control: A Matter of Definition,” on page 2.) The determination is important because parent companies are generally considered to be responsible for the actions of their subsidiaries, including foreign subsidiaries.