The Consequences of Mismanaged Subsidiary Governance

Sometimes, it isn’t what you know, it’s what you don’t know that hurts you. As big companies become big multinationals and delegate more responsibility to local subsidiaries, the parent company can sometimes lose oversight of what is happening in the farthest reaches of their corporate structure.

Building Walls with ISIS: Lafarge Cement

In 2022, Lafarge S.A. and its subsidiary Lafarge Cement Syria (LCS) pleaded guilty in a U.S. court to conspiring to provide material support to foreign terrorist organizations. The corporation was sentenced to pay $777.78 million dollars in criminal penalties, fines, and forfeitures for providing money and support to the Islamic State of Iraq and al-Sham (ISIS) and the al-Nusrah Front (ANF). 

The Cost of Doing Business

In 2011, Lafarge S.A. operated a cement factory in northern Syria under its subsidiary Lafarge Cement Syria. As with most subsidiaries, LCS was under local operation, and the parent company checked in only periodically.

When civil war broke out between Syrian forces and ISIS (then ISIL), the cement plant came under attack by extremist soldiers. The managers of the plant paid off ISIS and ANF to keep operating during the conflict. A later French inquiry found that between 2012 and 2014, LCS paid the insurgents about $17.5 million U.S. (€13 million). In 2014, ISIS captured the plant, and it was closed.

In 2015, Lafarge S.A. was acquired by Holcim, and merged into The Holcim Group. During the merger process, in 2016, a French court began an investigation into LCS and Lafarge S.A. following news reports in French newspapers about meetings between Lafarge representatives and the insurgents.

Lafarge officials claimed that the payoffs had been solely to keep the plant operating and had never been in support of the terrorists; nevertheless, French and U.S. courts have held that Lafarge could have and should have closed the plant immediately. The net profit to the company during the period 2012-2014 was about $70 million US, or about a tenth of what was eventually levied in fines and penalties.

The discovery of Lafarge’s entanglement with terrorists happened about midway through the merger with Holcim. It is difficult to know how much Holcim knew about the scandal before the merger was finalized in 2021 or whether it would have changed the outcome. Still, better transparency and more openness with both Holcim and shareholders would have given greater weight to Lafarge’s claims that this was only about plant operations. The secrecy and denials hurt them in the public eye and in the courts.

Environmental, Social, Governance: When Honesty is Expected

More and more consumers, investors, and NGO watchdogs are monitoring companies for environmental, social, and governance (ESG) behaviors today. Companies are expected to be open and transparent about the impact their operations will have on the people where their subsidiaries operate, the land where their operations exist, and the governments with whom they interact.

It is no longer sufficient for a parent company to sit back in America or Britain and shrug when their subsidiary trashes a third-world city or poisons a slum full of workers. ESG requirements demand that parent companies be accountable for their subsidiaries, know what they are doing, and explain how and why disasters happen.

Learn More

When your company is ready for top-tier data management, call Athennian for a customized demo. Their database management system will give you the continuity and control you need to keep your company protected. Athennian provides big and growing companies with the best of data management systems to prevent scandals from destroying their futures. Learn more about the effects of mismanaged corporate governance in our webinar, "The Devastating Effects of Mismanaged Subsidiary Governance: How You Can Learn from The Mistakes of Large Corporations."

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