Bonus: The Governance Structure of a Joint Venture (10/10)
In this post, I’m going to talk about joint ventures and alliances. They too have governance structures, and it may be the way you choose to grow your business. You can get into a joint venture for a hundred different reasons; some common ones being geographical expansion or a new product expansion or integrating a supply line.
It's the fastest-growing form of business combination in the world. Last year there were something like 12,000 new ones. And today — according to those who track these matters amongst major corporations — they've identified about 180,000 joint ventures. So it's a hugely common form of business expansion and development.
And if you get into it, you will have an agreement with your partner as to a whole pile of things, including the governance structure. Now, what we've found in the last decade by studying hundreds of these structures, is that typically the board is made up of executives from the two companies coming together. There are two big problems with that reality.
Problem #1: No one is minding the baby. The joint venture is regarded as a new entity, but the careers of the parents — the directors from the different partners — are mostly tied to the success of their respective companies, not the success of the joint venture.
Problem #2: JV directors tend to stick around on average — and this is a statistical fact — for about two years. Well, on a publicly traded board, you hope your directors stay around for eight years, giving them enough time to know the business, know the people running it and know the other people around the boardroom table. So, there's a huge churn at the director table for a joint venture.
Any joint venture involves hundreds of pages of legal agreements that you'll be bound to, that define a lot of important stuff. But to address those two common problems I just mentioned, try to build into the agreement the thought that maybe one, two or even three independent directors be assigned to the board.
That will mean that somebody is actually looking at the joint venture as an entity, worrying about it as an entity. Somebody “owns the baby.”
Joint ventures have very high failure rates especially if there's not good governance. And you can’t have good governance when you're only including directors from the operating companies, who've never been on a board to a joint venture and they last two years. So, it's absolutely vital that you create these joint venture boards so that there are independent directors who “own the baby” and who look after the future of the corporation.
One more thing: in a joint venture you are always working in very different cultures. For example, if you take an executive from an oil company that’s running itself according to a “kick ass and take names” tradition, and you stick them on a board of a Japanese company that you happen to be in a joint venture with, you’re going to be sadly, sadly disappointed. Putting that oil executive on a member of that board in Japan is like adding an improvised explosive device. Japanese boards never discuss problems — that always happen over the fourth sake drink at nine o'clock at night in the pub. And so, putting a hard-assed manager in place as a director of a Japanese company is a recipe for disaster. Cultural variations are huge in this kind of thing. You've got to think hard about the management teams that you're assigning to these projects.
Some final words: take care if you're going into a joint venture. They can offer you tremendous leverage, but they're also very difficult to manage and to govern. And if you're going to do it, commit yourself to investing a certain percentage of your time as the CEO, founder, entrepreneur, president, to making sure that the joint venture is going ahead. Do not delegate it too far down or you'll lose it.
David Beatty is an adjunct professor and Conway chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management. Over his career, he has served on more than 39 boards of directors and been chair of nine publicly traded companies. He was the founding managing director of the Canadian Coalition for Good Governance (2003 to 2008). A version of this article will also appear in the Winter 2017 edition of Rotman Management, published by the University of Toronto’s Rotman School of Management.