There is never a bad time for management teams to get the house in order and to look for easy ways to reduce costs. An often untapped area in this pursuit is the corporate structure. McGrathNicol Advisory estimates that, even for the simplest group, it can cost between $2,500 and $8,000 per entity per year in carrying costs, with the costs even higher for listed groups where the corporate governance burden is greater.
This may not sound like a lot in isolation but when you consider the number of dormant or unnecessary entities that exist, the cost quickly adds up. In a significant number of cases, entities are part of the commercial baggage that come with acquisitions, restructurings or operational changes, but are then forgotten as management teams get on with the important job of running the business.
How do the costs arise?
The preparation of financial statements, annual solvency resolutions, income tax returns and business activity statements often need to be considered, even if no trading takes place. In some cases, audits are required as well. These activities add cost. There is also the opportunity cost of management time being diverted away from doing other more meaningful things.
In addition, dormant or non-trading entities add risk to an organisation. We were recently involved with a client where record keeping for its non-trading entities was poor and statutory lodgements had been missed, resulting in penalties.
In another example, one of our clients had a dormant entity served with a substantial tax assessment arising from legacy joint venture arrangements that were not exited properly. Dealing with this issue required significant management time and professional costs to resolve.
In both scenarios, there was a lack of discipline surrounding regular review of the corporate structure. Full knowledge of the assets and liabilities for some entities had been lost as management had moved on, or records had not been adequately passed on or maintained after an acquisition. Following the issues identified, the Boards of both organisations became nervous about what they were signing off on, and ultimately more time was being spent by management on trying to close the information gaps.
How can a corporate streamlining exercise help?
The short answer is simplification. A well-planned streamlining exercise can simplify an organisation’s structure by taking out entities that are not needed or wanted. It can assist with identifying unknown assets and liabilities, and help unravel complex intercompany transactions and loans that had previously been put in the ‘too hard basket’. Best practice for corporates is to systemise the review of their organisational structure on an annual basis to remove the baggage of unnecessary entities.
In terms of costs and efficiencies, a streamlined corporate structure can remove statutory accounting and taxation requirements, minimise the corporate secretariat function, improve month end processes, and simplify consolidation entries for financial reporting purposes. At a more strategic level, it can remove any noise around a business’ story and make it easier to articulate to the market and potential new investors.
Ultimately, it reduces corporate governance risk, which for all Boards is a key priority.