Subsidiary governance: an unappreciated risk that can leave companies out in the cold

January 2022 | EXPERT BRIEFING | CORPORATE GOVERNANCE

financierworldwide.com

The announcement on 19 July 2021 that Ben & Jerry’s would stop selling ice cream “in Israeli settlements in the occupied Palestinian territories” on ethical grounds caused a furore for parent company Unilever plc that highlighted just why subsidiary governance is an issue that merits greater attention. The announcement provoked such strong reactions that Americans posted images of themselves on social media dumping tubs of Ben & Jerry’s ice cream and Israeli prime minister Naftali Bennett warned Unilever of “severe consequences”, including legal action.

There were indeed severe consequences for Unilever. In September 2021, the states of New Jersey and Arizona decided to pull a combined $325m out of the consumer goods giant. A New Jersey law enacted in 2016 requires state pension funds to withdraw investments from any company that boycotts the goods, products or business of Israel or companies operating in Israel or territories occupied by Israel. Arizona also has a law that prohibits public state entities from investing in an entity that boycotts Israel. Then in October, New York’s $268bn state pension fund restricted its holdings in Unilever as did Florida’s State Board of Administration which had $139m invested in Unilever. Clearly, PwC was right on the money when it claimed in ‘Subsidiary Governance: an unappreciated risk’ in 2013 that “With regulation, risk and responsibilities for directors around the management of legal entities all increasing, having a strong global subsidiary governance framework can prevent costly financial and reputational damage”.

Media reporting of Ben & Jerry’s decision to stop selling ice cream in the West Bank and Gaza, and the ensuing backlash, highlights the very real risk that subsidiaries can create unwelcome challenges for parent companies and vice versa. In the case of Ben & Jerry’s, the matter is exacerbated by the unusual acquisition agreement established when Ben Cohen and Jerry Greenfield sold their company to Unilever in 2000. This agreement legally vested an independent board of directors for the Unilever subsidiary, with that board responsible for protecting the company’s brand and for pursuing ESG efforts. Consequently, the Ben & Jerry’s board must approve any changes to the product, licensing deals, new markets and social mission statements.

Difficulties that can arise through such arrangements are illustrated well by this case. According to media reports, the Ben & Jerry board’s had been pushing to stop selling ice cream in the occupied territories for years. When Unilever finally issued the press release about not renewing the licence in 2022 to sell ice cream in occupied Palestinian territories, the Benny & Jerry’s board took umbrage at the fact that the release stated that Ben & Jerry’s “would stay in Israel through a different arrangement. We will share an update on this as soon as we’re ready.” Ben & Jerry’s had wanted to release a different statement that made no reference to continued sales in Israel and which highlighted the company’s commitment to social justice.

Issues between the subsidiary and parent company were laid bare when Anuradha Mittal, chair of the Ben & Jerry’s board, issued an unequivocal statement saying, “We want this company to be led by values and not be dictated by the parent company”. The disagreement was further highlighted by the assertion that “The statement released by Ben & Jerry’s regarding its operation in Israel and the Occupied Palestinian Territory (the OPT) does not reflect the position of the independent board, nor was it approved by the independent board. By taking a position and publishing a statement without the approval of the independent board on an issue directly related to Ben & Jerry’s social mission and brand integrity, Unilever and its CEO at Ben & Jerry’s are in violation of the spirit and the letter of the acquisition agreement.” Such challenges spilling over into the public arena can have a very damaging impact on corporate reputation.

The Ben & Jerry’s case reveals other potential subsidiary governance pitfalls, such as those linked to cross-border issues. Ben & Jerry’s is a US company, but Naftali Bennett’s warning that “This is an action that has severe consequences, including legal, and [Israel] will take strong action against any boycott directed against its citizens” was targeted at Unilever, a UK company.

As noted, several US states have already disinvested in Unilever as a result of Ben & Jerry’s actions. This number could rise as more than 30 US states have laws which penalise companies that boycott Israel through public sector procurement. Those restrictions could apply to Unilever just as much as they might apply to Ben & Jerry’s.

The challenge around disinvestment is exacerbated by the multiple jurisdictions across which Unilever operates. Under UK company law, board members must promote the success of the company for the benefit of its members as a whole. It is not easy to see how allowing action by a subsidiary which has such a potential commercial and reputational impact on the parent aligns with this.

The situation is further complicated by the fact that the independent directors of Ben and Jerry’s are constituted to “[Preserve] and [expand] Ben & Jerry’s social mission, brand integrity and product quality, by providing social mission-mindful insight and guidance to ensure we’re making the best ice cream possible in the best way possible”. The unenviable result is two boards with what would appear to be conflicting purposes.

While the Ben & Jerry’s case is not a typical one, it does highlight why multinational companies need to have strong subsidiary governance arrangements in place. Not only do multinationals have to be sensitive to different philosophical approaches in different countries, they also have to reconcile the demands of very different legal, regulatory and political regimes and are subject to greater financial, tax, commercial and operational risk.

Subsidiary governance has an important role to play in identifying, understanding and mitigating those risks. This requires analysis of what companies are doing in the group structure on an entity-by-entity basis. Some companies split their subsidiaries into tier 1 and lower tier companies so that they can understand what risks they are carrying and for what risks local directors will be personally liable.

Directors on subsidiary boards must think very carefully about their roles and obligations in the jurisdiction in which they are located. Governance professionals have an important role to play here mapping the different laws and rules that apply and working out what the different directors need to consider when discharging their duties.

Effective subsidiary governance is about understanding where decisions need to be made given the balance of risks and opportunities and which boards need to make those decisions. Local market knowledge can be useful and people in local jurisdictions often have the knowledge that a parent company might lack. Nevertheless, local knowledge must be balanced with what regulation, both local and parent domicile, requires. A strong system of checks and balances will help to ensure that subsidiaries comply with local regulations.

Once the risks have been understood, companies should be halfway to having an appropriate governance structure.

What is clear is that the behaviour of companies and subsidiaries are increasingly under the microscope of public opinion, and it can cost dearly when misaligned. The Ben & Jerry’s case was an unusual incident, however, if it is to remain so, companies need to be ever more alert to the risks and call in the necessary expertise in subsidiary governance early.

Peter Swabey is policy and research director at The Chartered Governance Institute UK & Ireland. He can be contacted on +44 (0)20 7612 7014 or by email: pswabey@cgi.org.uk.

Peter Swabey

The Chartered Governance Institute UK & Ireland