Globally, the number of material new joint ventures (JVs) has more than doubled in the past two years. Across a wide range of industries, firms are using JVs and other partnerships as a way to make their businesses more sustainable and to gain access to capabilities, capital and scale.
While JVs make meaningful contributions to corporate revenue and can enable new growth strategies, they also increase their shareholders’ risk exposure, often in ways that are hard to manage; this is especially true of ventures that are not majority owned or controlled. Good governance matters. You see a clear statistical correlation between good governance and the medium-term financial and strategic performance of JVs.
For instance, joint ventures with top-quartile governance scores are four times as likely to exceed the owners’ financial and strategic expectations compared with JVs with bottom-quartile governance scores. Good governance allows joint ventures to quickly spot and respond to risks; access synergies with their owner companies; and grow, restructure and otherwise evolve in a manner that reflects the needs of the owners and the changing demands of the market.
JVs with weak governance are more likely to stagnate and suffer from swings between excessive overreach and alarming lapses in oversight. Time and again, governance fails because the partners lack a shared view of the JV’s purpose and operating model. Once the partners are aligned on the venture’s purpose and operating model, five things are key to getting the mechanics of JV governance right.
Each of The Five Pillars of JV Governance reflects unique elements of the shared ownership structure of JVs. They are separate from the general good governance practices found in public or private companies, many of which also apply to joint ventures.
1️⃣ BOARD STANCE
Any board should be involved in reviewing and approving the company’s strategy, major investments, annual plans and budgets, financial and operating performance, management compensation, succession planning and other matters.
In JVs, however, it is far from obvious how involved the board should be.
A better approach is for a JV board to start with a principles-based discussion on what type of board it wants to be. Once the board is directionally aligned on where it would like to be and how this might evolve over time, it can be valuable to go deeper.
2️⃣ BOARD COMPOSITION
Boards are only as good as the people on them. In JVs, board composition introduces a number of unique features. For starters, it is often valuable to have each shareholder designate a lead director a first among equals of its board representatives.
A lead director will spend relatively more time on the JV than fellow directors and will work with the JV CEO and the other lead director(s) between board meetings.
Another best practice in JVs is to limit the number of non directors in board meetings. The number of formal directors on JV boards tends to be fairly small, with JV boards having a median of six official directors.
3️⃣ BOARD TIME ALLOCATION AND WORKINGS
JV boards tend to do a good job and spend a substantial amount of time managing the current financial and operating performance of the JV.
But JV boards are prone to spending far too much time listening to a parade of management presentations and not enough time discussing critical issues, soliciting the input of directors, and building consensus. Because JV directors are busy shareholder executives, many use board meetings to get educated on the issues. This is not a good use of the board’s precious time.
4️⃣ BOARD COMMITTEES
In corporate boards, the purpose and use of committees is well established. Committees are generally helpful to the workings of the board, as they allow a subset of directors to review and work out the details in areas such as finance, audit, and compensation, and to make recommendations to the full board. In JVs, committees allow the board to make better use of its time and leverage the expertise of committee members.
5️⃣ INTERNAL SHAREHOLDER GOVERNANCE
Governance in JVs is not just about the board, committees, and management. The most sophisticated shareholder companies think deliberately about how they organise themselves internally to enable good governance.
The work of internal shareholder governance includes such critical activities as supporting the company’s JV board directors, managing internal approvals and audits, coordinating services and support to the JV, and ensuring that the venture is receiving the needed expertise and other help from the company to succeed.
Adapted from a study by James Bamford e Geoff Walker