Join The NonProfit Times: or Become a member

Subscribe: Print Publication or Newsletter

Stay connected.
Stay informed.

The Subsidiary

By Thomas McLaughlin - November 1, 2013

There are certain words that seem to practically cry out their message. One of those words is the term “subsidiary” as it is used to describe a particular kind of corporate structure. Here the word “subsidiary” seems to embody a subordinate position.

The phrase “take-over” is sometimes associated with the concept of a subsidiary. This offers a kind of double condemnation. In a freedom-loving culture, being a “subsidiary” of any kind reeks of lost privilege and status.

But, hold on. The story is more complicated than it seems. Subsidiary as the word is used here means a corporation that holds a certain position and is in a defined relationship with at least one other corporation. Some of that relationship is legally defined and even legally required. But a lot of it is left to the judgment of the corporations and their respective managers. This is why digging into the actual terms and requirements of subsidiary relationships may produce some surprising, counter-intuitive results.


Accountability vs. Power

Although it might seem otherwise, the subsidiary structure is more about accountability and protection than it is about power. In a corporate sense, power often refers to the ability of a person such as a CEO or a department head to compel certain behavior on the part of those who report to that person. This is the classic power imbalance that is usually muted but unmistakably underlies classic relationships in a corporation: the boss is in charge.

In a parent/subsidiary model the word “parent” refers to the corporate entity that is in charge of the subsidiaries. It might also be called a holding company or a management company. There is a power imbalance between the two entities, but it is nothing like that between boss and employee. In fact, for those employed in a subsidiary it is not unusual for the parent company to seem more like it’s located somewhere else on a cloud (and not the computer kind). The parent is a recognizable organization but employees of each corporation may well regard each other as though they are simply citizens of moderately allied countries.

The reason for this apparent estrangement is that it is a by-product of a major advantage of subsidiaries — they represent boundaries. This is one of the most compelling reasons for subsidiaries, because corporate boundaries represent a kind of firewall between the parent corporation and outsiders who might be intent on suing a subsidiary. Rarely does an aggrieved outside party succeed in attacking the parent company by first trying to go through a subsidiary. Lawyers refer to this as piercing the corporate veil and it is rarely accomplished because each corporation is expected to stand on its own in all legal proceedings.

This isn’t a corporate version of dodgeball. Different types of services have different risk patterns, and there could be dramatically negative economic consequences of treating all services in a parent-subsidiary environment alike. For example, major hospitals that co-exist in a complicated multi-corporate structure will virtually always run nursing homes or home care services as subsidiaries. This is because a successful lawsuit against a hospital could potentially bankrupt a nursing home if it were part of the same subsidiary.

Boards of directors represent a good example of subsidiary corporations’ roles in ensuring accountability. Not only will a smart parent company taking on a new subsidiary be open to the latter’s board continuing, they might insist on it. Apart from the fact that the parent company board might have to begin a crash course in running the new subsidiary, dismissing the board would destroy all institutional knowledge at a governance level.


Brand management

Well-run nonprofits know how to manage their brand(s). While it is possible to manage a brand through many different departments — even through many different corporations — it is much easier if that brand has implicit boundaries. Brand management is a top-down function, which is why parent companies will not usually meddle in the promotion of a successful subsidiary’s brand.


The Top Line, not the Bottom Line

Many nonprofit board members and some executives feel that a successful merger should save money. This is a worthy goal, but subsidiary corporations still need CEOs, audits, executive staff, and other expenses. Skeptics will ask why a nonprofit should do something like this if it doesn’t save money.

The answer is that, while the bottom line is important, in many sectors of the nonprofit field today, the top line – revenue – is even more important. Hospitals began creating numerous parent-subsidiary models two and even three decades ago. Arts groups are doing a similar version of the same thing in many locations.

Behavioral health care providers in many states are entering a new phase of consolidations that often involve parent-subsidiary models. Providers of services to developmentally delayed persons in some states are facing similar changes.

Integrated systems of care almost always have more power with funders – who themselves are often enlarging their scope as well — than individual organizations do. Larger arts groups can reach bigger audiences, etc. When parent-subsidiary models are used in these situations ‘savings’ may or may not be realized. But what often does happen is that the newly enlarged organizations, simply put, increase their power at the bargaining table.

This kind of scaling up is fairly rare in the nonprofit world, which is why subsidiary corporations are still rarely found outside of hospitals, universities, research institutes and other large entities. But forces like managed care, shifting risk management requirements and health care reform are providing fertile ground for more parent-subsidiary relationships.


What You Should Do

What should you expect if your current organization becomes a subsidiary of a larger one?  Or if you are a CEO contemplating making your organization a subsidiary, what should you attempt to achieve in the process? The key indicators are much the same for both viewpoints.


Board Integration

The parent company’s board will likely become the “sole corporate member” of the new subsidiary, giving it official control of the entity. This creates a legal tie in lieu of a “purchase” which for-profit corporations routinely carry out. In practical terms, however, this too is an accountability mechanism, not a control technique.

In practice, wise parent companies will seek board integration. Ideally the subsidiary board of directors will contribute at least one or two board members to the parent company board. This is important symbolically and it also helps build cultural compatibility. Note that this individual or individuals abruptly must do “double-duty” between the board of origin and the new parent board, but it is nearly inconceivable to create a smooth integration of parent and subsidiary any other way.


Treatment of Brand Name

In most cases this element will be an early topic of negotiations and may be especially important for the smaller organization. Brand name philosophy – and the systems that support it – should be an early topic of discussion unless the future subsidiary has a damaged brand or the parent has a far stronger one.


CEO Role in New Entity

For obvious reasons this is both a symbolic and very real indicator. While most of a subsidiary’s employees are unlikely to have intense, sustained contact with the parent company, the CEO should be deeply involved in these relations. Ideally the subsidiary CEO’s role will be articulated and important.


Same Funder Positioning

Another key indicator is the new subsidiary’s role in future relationships with a shared funder. The parent company is likely to take the lead in these negotiations, so the most important cue will be how the subsidiary CEO’s role changes. Note that this and the previous indicator is the only instance in which staff of the parent and the subsidiary play the classic boss/subordinate roles.


Money Decisions

Relatively small, ordinary financial de­ci­sions might be largely unchanged by a sub­sid­ia­ry designation. But acquiring and using capital for things like buildings or specialized equipment are almost certain to change in some fashion.  The decision-making process around major ex­penditures will often change, and some decisions will be made, or at least af­firmed, at a higher level than before.


Subsidiary prerogatives

There is a whole category of what we would call subsidiary prerogatives that could change – or remain untouched. These are things such as purchasing decisions, marketing, fundraising and development activities, and personnel management practices. The future direction of these kinds of items is a good potential clue about future relations between the two entities.

Subsidiary corporations are a valid and effective way of managing risks, distinguishing brands and other assets, and approaching consumers in different yet coordinated ways. Most nonprofits will not become part of a parent-subsidiary structure, but external demands and internal strategies are boosting the use of this time-tested option.  NPT

Thomas A. McLaughlin is the founder of the nonprofit-oriented consulting firm McLaughlin & Associates and a faculty member at the Heller School for Social Policy and Management at Brandeis University. He is the author of “Streetsmart Financial Basics for Nonprofit Managers” (3rd edition), published by Wiley & Sons. His email address is [email protected]


Sponsored Podcasts

Welcome to the Raise & Engage podcast, a filters-off series for nonprofit professionals hosted by Blackbaud's straight-shooting expert Danielle Johnson Vermenton. During this open-mic session, you’ll hear honest advice to help YOU do more for your cause.

Episode 6: The Power of ‘No’ at Work|| daniellejohnson-76

You have a job description, but on any given day, you're probably doing dozens of things outside the scope of that description. Combine that with the challenge of a fast-paced environment and the shifting priorities of funders, colleagues, and board members and it’s easy to fall short of doing your best. By being mindful of your limitations and capacity—and saying “no” when your plate is full—you can actually do more for your cause. In the sixth installment of the Raise and Engage podcast Danielle Johnson and Robin Anderson discuss the power of saying “no” at work.

Episode 5: Professional Development: Getting Un-Stuck|| daniellejohnson-76

In the most recent episode of Raise + Engage, Danielle is back with Brian Reich from little m media to discuss how nonprofit professionals can stay motivated and energized in their day-to-day roles. Brian shares his experience working with nonprofits and the lessons and tips he's learn from and shared with them over the years, including tips for avoiding a professional rut, creating forward momentum in your career and pushing yourself outside of your comfort zone. If you're considering making a career move or want to ensure you're on the right path, you won't want to miss this inspo-packed episode!

Episode 4: Apps and Hacks to Stay (Mostly) Sane || daniellejohnson-76

Episode 4: Apps and Hacks to Stay (Mostly) Sane, is all about tips, tricks and tools for sanity. Blackbaud’s own interactive product marketer, Julia Lenz, joins host Danielle Johnson to share some high tech. (and no tech.) productivity tips to help nonprofit professionals stay sane in the crazy world of philanthropy.

Tune in to hear:

  • Tips for how to spend the first 30 minutes of your day
  • The benefits of 15 minute meetings
  • Why notebooks are still relevant to a successful organization
  • Ideas for better managing your inbox
  • Why you should take lunch outside the box
  • ...and much more!
Don’t forget to visit the #NoFilterNonprofit Hub afterwards to download our newest tip sheet10 Productivity Hacks for Nonprofits.

Episode 3: Tech. Connection: Solutions, Strategy, and Staff || daniellejohnson-76

Episode 3: Tech. Connection: Solutions, Strategy, and Staff In episode 3 of the Raise + Engage podcast, Danielle Johnson is joined by Chris Geady and William DaSilva, two IT experts in the nonprofit space, to talk technology integration for NPOs: when you need it, when you don’t, and how to do it successfully.

Tune in to hear:

  • When to say NO to integration
  • How to set your strategic plan before even looking at technologies
  • Ways to get your entire team on board
  • The importance of identifying a project lead
  • The RFP process - how it should and should not go
And William shares a story about a nonprofit that may or may not have still been using a typewriter. You don't want to miss this one!

Episode 2: From Socially Awkward to Socially Awesome! || daniellejohnson-76

According to Danielle Johnson, straight-shooting host of the Raise + Engage podcast series, if your staff members aren’t the number one advocates for your cause on social media, you’re failing. In the most recent episode, Danielle is joined by Blackbaud’s own social media guru Madeline Turner to discuss overcoming social struggles and creating a social ambassador program at your organization. This entertaining and insightful duo dishes on the importance of making your social media presence human, making the case for a formal social program to leadership, how University of Michigan turned a one time social media campaign into a long term social program, and how Madeline's mom unknowingly became a social ambassador on #GivingTuesday.

Episode 1: Corporate Culture & Development: Shake It Up! || daniellejohnson-76

In the premiere episode of Raise & Engage, Danielle is joined by three straight-shooting nonprofit rock-stars: Jodi Smith of Sanford Health Systems, Veronica Brown of Chicago Public Library Foundation and Ali Burke of Southlake Regional Health Centre Foundation. The group talks organizational culture, problem employees, why its important to celebrate and how to shake things up this year and build a better more authentic team that gets stuff done!


Stay informed, catch latest trends in the nonprofit space.

Subscribe to Our Free Newsletter

No obligation, unsubscribe at anytime.

Success! Check your email inbox.

Follow Us On Twitter

NPT 2016 Buyers' Guide

Newsletter Sign-up

click here to return to the previous page