EARLY RESULTS OF OUR recent study on how companies perform across different aspects of the JV dealmaking process has revealed fairly pedestrian performance all around, with critical gaps across key functions within core JV transaction workstreams. With respect to financial modeling, for example, we find that companies struggle to create a dynamic model of what we call “Total Venture Economics.” And since a complete picture of Total Venture Economics is needed to dynamically and deeply inform negotiations regarding partner contributions, JV valuation, service pricing, and other economically driven deal terms, it is no surprise that the dealmakers we surveyed also reported dissatisfaction with their ability to structure those terms – especially those related to partner contributions to the JV (Exhibit 1).Read More
Add to that list an emerging trend: Investors increasingly care about corporate social responsibility (CSR) issues in non-controlled JV portfolios, putting a company’s overall social license to operate – and stock price – at risk. As one client recently told us, investors and other lobby groups see his company name involved in a developing country partnership and simply assume they have some kind of responsibility or ability to intervene and should be held accountable when something goes wrong, regardless of their contractual obligations as a non-operator. Read More
RECENT STUDIES SHOW that more than 50% of outgoing public company CEOs retain a formal role on the company’s Board of Directors1. In contrast, our analysis of 112 joint venture CEO transitions reveals that 15% of outgoing JV CEOs transition to a formal role on the JV Board2.
Should more joint ventures consider giving their outgoing CEOs a role on the Board? Our view is yes, with some important caveats.
In public companies, evidence and opinions on the benefits of retaining former CEOs on the Board are mixed. Some research has concluded that companies with former CEOs on their Board perform better, while others have established the opposite 3,4. Anecdotal evidence is similarly varied. Chip-maker Intel’s CEO succession process, for example, had each outgoing CEO serving as Chairman, actively mentoring the successor, and handing-off day-to-day operational responsibilities. This process has been credited with enabling a series of orderly CEO transitions at the company from Andrew Grove to Craig Barrett to Paul Otellini.
JOINT VENTURE PARTNERSHIPS have a significant say in the structure, actions, and strategy of a venture. Management also has a voice in the direction of the joint venture. But what partners and management often fail to understand is there is another, silent party at the table influencing the outcome of key decisions: the status quo. In fact, the status quo (i.e., current state) plays a dramatic role in the life of a joint venture. It affects the deal terms the parties agree to and minimizes changes to the venture once operating (Exhibit 1).
STATUS QUO IN NEGOTIATIONS
During initial deal negotiations, the “status quo” is determined by the party who provides the first draft of a term sheet or joint venture agreement. The other partner is highly likely to “anchor” on the valuations and other contractual provisions in this initial draft.
IT MAY BE AS DRY AS unbuttered toast but chew on this: Experienced JV CEOs use a variety of seemingly mundane pre-, post-, and within-Board meeting techniques to drive real, rather than perceived, alignment across their ventures. Our research has consistently shown that misalignment – whether among the owners, between the owners and management, or even within one owner company – is the single largest challenge facing joint ventures.
Every year, Water Street Partners hosts a JV CEO Roundtable in Washington DC. In our most recent roundtable, the discussion turned to how JV CEOs structure and manage Board conversations to foster alignment. That conversation unearthed three subtle practices that hold potentially broad relevance: the use of Board concurrence rather than approval, post-meeting memos, and the restructuring of JV Board agendas to drive alignment.
TENS OF MILLIONS of people are employed in joint venture companies around the world. In many cases, these ventures are partly-owned by large national and international companies. Today, Siemens, IBM, Royal Dutch Shell, General Motors, Airbus, and Nestle each have ownership interests in joint venture companies that employ tens of thousands of people. Typically, a tiny fraction of staff are seconded, or loaned, employees from one of the shareholders, while the vast majority are direct employees of the joint venture company.
Are shareholders doing enough to steward these employees – using their considerable scope, capabilities, networks, and development opportunities to enhance the level of engagement and employee value proposition of those directly employed by joint ventures?
In our experience, the answer is no.