Big Four firm, EY, is rolling out its new entity management platform, which it believes is going to play a critical role as corporates move away from the ‘complexification’ of business structures and seek to reduce risk.
This is why it matters. One could see corporate entities as the ‘legal wrappers’ that contain a business’s contracts. There has been a lot of focus on the need to find, extract, and make visible, contract data, but every contract is made in relation to these entities – and large companies may have dozens of them across the world, in some cases with giant businesses there may be hundreds.
Those entities exist in relation to the regulatory environment of the jurisdiction they are registered in. As local and international rules rapidly change, from anti-money laundering codes, to new Environmental, Social and Governance systems, to accounting and financial standards, each entity exposes the company to a different set of risks. Spread these entities across the planet and you have a lot of challenges just staying on top of your potential exposure, let alone making sure company information, e.g. changes of directorship, is kept up to date.
David Wilkins, Director at the Center on the Legal Profession at Harvard Law School, who has been working with EY on a series of market surveys, told this site that for many years corporate structures have tended toward ‘complexification’, now however the move is back toward more streamlined structures. This he added was in part because of the increasing risk companies face, not just from big regulatory moves, but also at a local level.
He mentioned how in Brazil even local municipalities were putting in place very regionally specific rules that would allow them to extract large fines from corporates operating in those cities. This makes having very complex networks of entities scattered all over the globe a challenge and exposed companies to risks that they could perhaps avoid if structured differently.
‘Business growth is mediated through legal constructs, namely contracts, but also legal entities as they are the productive parts of the company. However, risk is increasingly being legalised,’ he added.
Or, as Artificial Lawyer put it to Wilkins: if contracts are the DNA of a company, then the corporate entity is the organism, and the jurisdiction it lives within is the organism’s environment, to use a biological metaphor. And those environments are undergoing some rapid changes.
In short, you cannot really say you are on top of legal risk unless you have real-time visibility of your entities and their associated exposure to local regulations.
Wilkins also noted that there is going to be a ‘K-shaped recovery’ with some companies surviving the pandemic and expanding, and others failing. This would see more M&A – and being ready for M&A also meant having a good insight into your legal entities.
Moreover, legal teams at large companies are facing ‘an imperative on cutting costs, with 15% to 20% cost cutting coming in’ on legal spend. Given the rising risk profile of legal entities this meant companies needed to have a better way of staying on top of these time-consuming matters.
And here is where the entity management tool at EY comes in.
Mike Fry, EY Global Entity Compliance & Governance Leader, told Artificial Lawyer: ‘Our tool is home-made but the Entity Management System is built on Microsoft, and is also integrated with other technology e.g. Kim serves as the instruction, workflow and document automation functionality.
‘It also includes knowledge/content in respect of jurisdiction specific rules and requirements and has Director Training functionality, which is content we deploy in an e-learning format from a hosted learning management system.’
The idea is that this tech, combined with EY’s managed services arm and the input of EY Law, will give many law firms and older entity management systems a run for their money.
As Fry pointed out, many large corporations have enlisted dozens of law firms around the world to look after these issues, but that has led to huge costs and data silos.
He stressed that their approach is to operate with a single ‘data lake’, which connects to other digital, legal and consulting services. They have also built a partnership with Microsoft and the tool will work smoothly with the 365 suite.
And there are other signs in the market of change here, for example, Athennian, a challenger to the old tech companies in this sector, has seen a lot of attention recently.
As part of its work with Wilkins, EY has also produced a survey on this area and it found that:
- 96% of companies say they experience problems with the current technology that they use to help manage their legal entitles.
- 57% of respondents report that they are looking to shift work away from traditional law firm models.
- 89% of respondents face serious challenges managing their legal entities at a time when a large number of organisations are gearing up for major transactions.
- 68% of respondents say their business does not have up-to-date information on their entities and 66% report that they have trouble keeping up with compliance.
All in all it’s an interesting time for entity management – and yes, you read that correctly.