Getting a Grip on Your Joint Venture Committees

   

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Getting a Grip on Your Joint Venture Committees_small_squaredIN A PREVIOUS INSIGHT we outlined where Joint Venture Committees go bad. Here we will show how Joint Venture Boards and CEOs must actively manage such groups to ensure they contribute to – rather than undermine – venture performance.

JV Boards have a lot to do – and actively managing non-Board committees should not be one of them. But JV Boards do have a responsibility for ensuring the integrity of the overall governance system, which includes having an up-to-date understanding of committees and working groups.

How do Boards keep tabs on – and when needed restructure – committees? It starts
with some probing questions and, depending on the answers, may flip into a more
formal review.

Probing questions.
At a minimum, Board members should periodically ask some basic questions about committee set up and activities, including:

  • Do we really know how many committees and working teams there are today, and how many people are spending how much time?
  • To whom is each committee accountable – the Board, the CEO, or somewhere (dangerously) between the two?
  • What exactly are these committees expected to do – provide added assurance to the Board, help management to succeed, or do something else? How is each committee doing relative to its fundamental objectives?1
  • Do we have a good sense for how much – and what types of – information and other requests each of these committees is asking management to give them, and whether these requests are necessary?
  • While these committees may not have any formal decision making authority, do they have informal authority – for instance, because the Board expects the committee’s “endorsement” prior to it reviewing certain management proposals?
  • Do all committees still need to exist – or are there different mechanisms (e.g., audits, peer reviews, secondees, informal peer networks, asset managers) which would better fulfill the shareholders’ goals? What would happen if we disbanded certain committees – would we really lose some needed level of transparency, expertise, and the like?
Formal reviews. When a Board is getting insufficient answers to such questions – or when the JV simply has a large number of committees – it may make sense to conduct a more formal review. Consider how two JVs did this:

Natural Resource JV: As part of its Annual Shareholder Audit, the Board of a large downstream oil JV periodically includes an evaluation of its half-dozen or so non-board committees – operations, technical, commercial, finance, government and regulatory affairs, etc. When the Board first commissioned this analysis a few years ago, it found significant variance in how the committees were meeting basic performance and process expectations (Exhibit 1). This analysis led to a fact-based discussion and a decision to “clean-up” the committees, including combining certain committees (e.g., operations and technical), discontinuing others (e.g., commercial and government affairs), and ensuring that the remaining groups had clearer mandates, greater clarity on their roles and pre-approval powers, and a direct line to the Board, via either participation of Board members on the committees, or regular reporting from the Committee Chair and JV President on the group’s activities.

Exhibit 1: Summary Diagnostic of Joint Venture Committees - Energy JV Example 

Summary Diagnostic of Joint Venture Committees - Energy JV Example
Source: Water Street Partners
Click to Enlarge

The analysis also opened the Board’s eyes to a broader realization: that the shareholders had “bad governance posture.” As one Board member noted afterwards: “We were excessively invasive. Several of those committees saw their role as operating a parallel structure to management – but without any accountability. This was not only wasting shareholder resources – but also creating a drain on management, who had to deal with all sorts of data and information requests.” 

Global Financial Services JV: A prominent new financial services JV aimed at creating a new product and technology platform for its owners recently agreed to bring in three new equity owners, increasing its owner group to almost a dozen. In light of the venture’s growing size and complexity, the Lead Directors from each owner sponsored a review of the governance and organization, including a look at the non-Board committees and working teams.

The results were eye-opening. In what was an admittedly extreme case, it turned out that more than 400 people across the 8 shareholders were involved in 10 different working teams (Exhibit 2). A typical working team member was spending 10-30% of his or her time on “committee work” – although almost none had any individual objectives or accountability related to their participation. “In other words,” noted one of the directors, “we had a plane load of ‘joint venture tourists’ who were flying all over the place to meet and talk, but were not on the hook for anything.”

Beyond sheer numbers, the Board also discovered that most of the committees had no consistent track record of impact. Based on interviews, an online survey, and other analysis performed by their alliance managers, the Lead Directors recommended a wholesale restructuring of committee configuration, reporting, and expectations of individual committee members. This included terminating certain committees, reclassifying others into temporary task-forces or peer networks, and setting certain minimum expectations of committee Chairs and members (e.g., that Chairs would be at least 25% dedicated and would have their role of committee Chair evaluated by the Board and their owner company).

WORKING GUIDELINES

Over the years at Water Street Partners and McKinsey & Co, we’ve worked with hundreds of JVs around the world. We’ve discovered that addressing issues related to committees can be an important lever in improving JV performance and underlying health – especially decision making speed, accountability, and alignment. In many cases, cleaning up committees can fundamentally change the level of enthusiasm that management brings to the job.

Based on this experience, we’ve arrived at some hard-learned lessons about how to structure and manage committees. We would urge companies to consider these ideas when reviewing existing JVs, or negotiating and structuring a new JV. For new JVs, some of these concepts deserve to be embedded directly into terms in the JV Operating Agreement; others might be included in Day One Board Mandates. For existing JVs, these might form the basis for a section within a set of Guiding Principles.2 

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Download the article: Exhibit 2: Proposed Restructuring of Committees and  Working Teams, as well as guidelines to consider when reviewing existing JVs,  or negotiating and structuring a new JV >>