LAST YEAR, WE wrote about
why corporate Boards of Directors should care about their portfolios of non-controlled joint ventures. In short, these portfolios tend to be more material than realized, carry underappreciated and often inappropriately managed levels of risk, and contain latent performance upside – all of which are challenges to corporate Directors increasingly exposed collectively and personally to regulatory and shareholder scrutiny.
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.
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Joshua Kwicinski
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JV BOARD1 MEETINGS are the beating heart of joint venture governance. A mélange of disparate JV owner and, management wants and needs are cast into a quarterly session that shapes the future direction of the business. Structured well, a board meeting promotes candor among Directors, enables discussions on challenging strategic issues, and allows for collective decision-making in a timely fashion.
Now imagine walking into the Board meeting and seeing not only your fellow JV Directors and the JV CEO, but also the rest of the JV management team plus a dozen other faces from across the owner organization. What was expected to be an intimate session to tackle sensitive topics suddenly takes on a very different atmosphere. Candor is replaced by caution, real discussions are hard to hold, and conversations veer from strategic to tactical as the additional shareholder participants pepper JV Management with comments and questions to resolve their own issues. Decision-making and good governance suffer accordingly.
DEALMAKERS LOVE using simple analogies to explain complex transactions. A favorite we hear is that joint ventures are like marriages. True, a strong marriage has shared decision- making and a common bank account (though we suspect modern marriages lack service agreements). But where this analogy falls flat is that while marriages are covenants intended to last forever – only 5% have prenuptial agreements – joint venture legal agreements have the terms of exit defined at the outset in 95% of the deals we see.
Unfortunately, these terms are often problematic, with critical flaws that go unaddressed by dealmakers concerned that over-engineering the exit is inviting it to happen. As one dealmaker recently told us, “I want to signal that this is a long-term partnership, not something with 10 different ways to declare it a failure and get out – which, by the way, also sounds like we don’t trust them.”
HOW DO YOU GET senior executives from five of the six largest international oil companies, a slate of mid-tier independent producers, a handful of the world’s largest chemical companies, and one of the world’s largest mining companies – representing a portfolio of over 1,000 non-controlled JVs – into a room together in London? A global conference on sustainable development or a parliamentary inquiry would not be bad guesses. But last month it was for a different occasion: Water Street Partners’ annual roundtable on joint venture portfolio governance.
This year’s agenda was structured around three topics: HSE risk management in non-operated joint ventures, defining and tracking performance as a non-operator, and conducting strategic reviews of non-operated assets.
PARTNERSHIPS HAVE COME of age in the last 20 years, becoming a central tool for corporate strategy and competitive advantage across industries and geographies. Companies as diverse as Amazon, GlaxoSmithKline, Google, IBM, Microsoft, News Corp, Philips, Siemens, Shell, Starbucks, and Uber all routinely see partnerships accounting for 20-50% of their corporate value – whether measured in terms of revenues, assets, income, or market capitalization. Meanwhile, the proliferation of partnerships continues unabated; almost 50% of CEOs surveyed in 2016 expected to enter into a new partnership within the next 12 months.
The vast majority of these collaborations are structured as non-equity alliances – i.e., purely contractual agreements where no new equity structure or separate joint venture company is created.
A CLIENT ONCE ASKED if we could make selecting transaction structures as easy as choosing the right tires for his car. He was inspired by the auto parts website TireRack.com, which offered a decision tool to narrow down all 5,000 different tire options to five choices that he could research and explore based on his unique needs. The TireRack.com tool works like this: A potential customer answers a few basic questions about vehicle make and model, local road and weather conditions, driving style and driver habits, and cost sensitivities – and based on this input, the website’s algorithm generates a short set of tire options for further consideration.
We think companies can – and many should – consider building a slightly less automated tool that identifies and narrows potential transaction structures, and in the process, radically enhances the front end of the deal process.
