Corporate Governance of Groups in an Era of Regulatory Nationalism: A Focused Analysis of Financial Services Regulation

Multinational groups rely on a network of subsidiaries to conduct various aspects of their operations throughout the world. From a business perspective, strategic considerations and governance policies within a group's subsidiaries need to be aligned with those of the - oftentimes publicly listed - parent. From a legal perspective, however, the integrity and independence of subsidiaries cannot be compromised by the parent company. In practice, balancing these two perspectives can be challenging as the interests of the group and its subsidiaries as well as the applicable regulatory obligations may diverge. For example, if group management proposes a group-wide strategic direction in certain areas (e.g., investment management, procurement, IT), individual subsidiaries may favor different solutions in view of their local needs and regulations. Intra-group cash pooling arrangements or the provision of financial intra-group guarantees (upstream or downstream) are further examples whereby the group management view and the subsidiary's legal entity view may diverge. For multinational groups with operations in various countries, today's complex and shifting regulatory environment and intensified supervision has magnified the challenge of group corporate governance to balance the group management and legal entity views. In particular, financial services regulation is grappling with the conflicting push toward globalization and pull back toward de-globalization. On the one hand, there is a multitude of initiatives seeking to achieve global convergence in regulatory standards and to strengthen group supervision. On the other hand, notwithstanding the G-20's aspiration to strengthen global growth and to refrain from any protectionist measures, one can observe a trend towards national fragmentation of regulation and supervision. These conflicting regulatory trends impose various business and governance challenges for multinational financial services groups, particularly with respect to strategic planning, operational efficiency, and corporate decision-making processes. Against the backdrop of this blend of globalization and national retrenchment in financial regulation, this article proposes possible steps to best respond to the current challenges on both the industry and the regulatory level.