Part 3 in an 8 Part Series
AT WATER STREET, WE BELIEVE that in order to manage the difficult challenges associated with joint venture corporate governance, the JV Board has to focus on getting seven things right.
As the third part in an eight part series, we will analyze the second two “Rights” – Right Board Mission and Mandate as well as Right Committees and Support.
If you missed our first two posts in this series, you can find them here.
THE RIGHT BOARD MISSION AND MANDATE
Once aligned on the JV’s mission and how it will operate, the Board must agree on its own posture. By “posture,” we mean the degree to which the Board and others in the shareholder companies will be involved in the JV and the role of the Board relative to JV management. For example, will the Board define the JV’s strategy and new capital project investment slate, and deliver this to JV management for implementation? Or, will the Board react and refine or approve strategy as conceived and proposed by JV management? For a corporate Board, the answer is clear: delegate to management, and play an active role in reviewing, challenging, and approving the strategy plans as developed by management. As the saying goes, “the CEO proposes and the Board disposes.” But a JV Board has choices. In fact, fewer than 10 percent of JV Boards act as “Corporate Boards,” with the JV CEO having delegations of authority and autonomy like that of a typical corporate CEO.
Instead, most JV Boards fall somewhere between what we would call a “Board of Operators” and an “Engaged Board” (Exhibit). “Boards of Operators” are heavily involved in a broad range of strategic, investment, operating, and organizational decisions, making key decisions and handing them to the JV for execution. “Activist Boards” reach in to be directly involved in important decisions, and monitor others, while “Engaged Boards” partner with the CEO to steer overall strategy, be involved in M&A and major investments, and oversee performance and risk decisions, but leave the analytics and development of detailed plans and proposals to the CEO.
There is no absolute answer as to what a JV Board’s posture should be, and in fact, the Board’s posture often changes over the life of a JV. For example, as a JV starts up, the management team may be thin and it may be necessary for the Board to play a “Board of Operators” role. As the JV management team matures and the business or project stabilizes, JV Boards often choose to reduce their level of involvement, for example to an Engaged Board. What’s critical is that the Board discuss and agree how they will interact with the JV, and then live by that decision. Otherwise, lack of role clarity will cause friction in the Board and frustration among the management team, who may feel they are accountable without parallel authority. Lack of clarity on Board posture also is a usual culprit when JVs fail because of slow or bad decision making.
For example, in one power industry JV we worked with, the CEO of one of the shareholders got in the habit of calling the JV CEO weekly to discuss electricity prices, updates on contractor activities and schedules, and granular operating metrics. There was no bad intention – the CEO of the shareholder company was deeply familiar with the industry and interested in what was happening with the JV. But this level of involvement was perplexing to the JV CEO, who wasn’t quite sure how to interpret it and spent lots of his time – along with that of his team – pulling together information for the shareholder company CEO based on their conversations. Having an explicit conversation as to shareholder and Board posture would have made it clear to the JV team what to expect and also set expectations and rules of engagement for the shareholder company CEO and the rest of the Board.
THE RIGHT COMMITTEES AND SUPPORT
In Corporate Boards, the line-up of committees, their mandates, and their agendas is relatively predictable, and they are helpful as a way for Directors to divvy up some of the needed work and increase Board efficiency. In JV governance, committees can also be extremely useful – but are also a source of complexities. In JVs, committees can proliferate, becoming surrogate management groups lined up against most business functions, such as strategy, purchasing, marketing, and regulatory affairs. Left unmanaged, committees can seriously undermine management accountability. They become a forum for questions and discussions that do not lead to decisions. They can aggravate the insatiable desires for information that we discussed above, particularly when the members of a committee are told they are accountable for mitigating risk, but not accountable for delivering on performance objectives. More than a few JV CEOs rue the double-jeopardy situation they have landed in, when every decision has to be vetted by a committee prior to being taken to the Board. In the worst situations, committees with decision authority that do not include Board members can subvert the primacy of the Board-CEO relationship, the principle of which is that the JV CEO should report to, and only to, the JV Board.
It doesn’t have to be this way. Effective Boards are frequently distinguished by their approach to committees, in which the number, types, and scope and powers of committees are tightly managed.
Effective JV Boards will have no more than four Board committees, including Audit and Human Resources. Effective JV Boards also differentiate between Management Committees (reporting to the JV CEO) and Board Committees (which report to the Board), and ensure that all Board committees are composed of Board Directors to preserve the Board-CEO relationship. And, to avoid confusion, effective JV Boards sharply define each committee’s scope, composition, and powers in a charter that is endorsed by the full Board and shared with all Committee members.
When committees are part of the “right stuff” in well-governed JVs, they help deliver additional shareholder expertise, alleviate some of the burden of Board governance, improve the efficiency of the Board, and provide a mechanism for functional experts and operational staff within the shareholders to gain a view and voice on key JV plans, performance, and decisions.
In addition to committees, Board members of larger or more complex JVs often are supported by others within their companies. For example, particularly in natural resources JVs, a JV Manager or Asset Manager is appointed to spend a meaningful amount of time on the venture on behalf of one of the shareholders. The JV manager typically spends much more time on the JV compared to the average Board member and tends to be much more involved with the operations of the JV.