Joint Venture Director Selection: Shouldn’t the Board Have a Say?

   
Co-author(s): James Bamford and Josh Kwicinski

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JV DirectorshipVIRTUALLY ALL joint venture legal agreements provide owner companies with the unilateral right to nominate anyone they deem fit to serve as their representatives on the JV Board or equivalent body. In practice, owner companies often make these choices based on internal needs and dynamics, and often in a rush – for instance, appointing their CFO to maintain optics after the partner does the same, or using the role as a development opportunity or carrot for a younger executive.

But owner companies almost never consult with the constituency best positioned to provide advice: the JV Board itself. This leads to JV Boards that lack the mix of skills and personal attributes necessary for success – and that miss out on an opportunity for self-reflection that fosters a common culture and collective sense of self.

It doesn’t have to be this way.

We believe JV Boards need to be more proactive in viewing succession planning as a core Board responsibility, and in communicating the Director skills, competencies, and attributes they need to the owner companies periodically and when vacancies arise.

The purpose of this note is to briefly describe common gaps in how JV Directors are selected for most JV Boards, and to share what best practice looks like for JV Boards to play a proactive role in shaping their future composition.

WHERE JV DIRECTOR SELECTION FAILS

Identifying and selecting JV Directors is less thoughtful than it should be. The process itself is typically reactive – a fire drill triggered by a looming vacancy on the JV Board arising from an internal job change, departure, or retirement of an existing Director.

Too often, the job of finding a new JV Director lands on the desk of a senior company executive or a functional leader in HR or Legal as an added task to their already busy schedules. Rather than running a structured process, similar to hiring for an important job, the easiest and quickest path is to replace a departing JV Director with a like-for-like swap with an executive filling the internal role being vacated.

Once the next Director is internally identified, a company will then formally and simultaneously announce its intent to replace a Director and to nominate a new one. In too many cases, the role of the JV Board in the entire process is then reduced to formally approving the nomination without providing any challenge. Essentially, JV Director selection is a process that happens to a Board, not with a Board.

Water Street’s benchmarking of JV Boards against our proprietary Standards of Governance Excellence paints a bleak picture of how well this approach to Director selection is working (Exhibit 1). More than 60% of JV Boards lack the right mix of skills to effectively discharge their duties – in large part because only 16% of JV Boards proactively diagnose the needed functional skills and other competencies, and communicate it to their owners.


Exhibit 1: Joint Venture Selection Benchmarks

Exhibit 1 Joint Venture Director Selection Benchmarks-1

Source: Water Street Partners analysis
Click to Enlarge

The problem goes beyond skills and competencies. Each Board has its own culture and decision-making style. The personal attributes of Directors – in terms of candor, preparedness, strategic orientation, collaborative style, and communications skills – have an enormous bearing on the Board’s culture and ultimately its effectiveness. Unfortunately, very few JV Boards have defined the attributes it seeks in its Directors, and fewer still have communicated this to the owners. All too often, owners appoint a Director whose style is at odds with the culture of the JV Board, making it even more difficult to secure alignment and to create a cohesive group energized by its work.

TOWARDS A BETTER WAY

Leveraging our client experience from 500+ JVs across the last 30 years and 20 major research studies on JV governance, we believe the following actions – drawn from our Standards of Governance Excellence – represent “best practice” for the selection of Joint Venture Directors:

  1. 1.   The JV Board regularly and proactively engages in succession planning not just of management, but of itself. Specifically, the Board contemplates, at least annually, what skills and other attributes it collectively needs as a governing body to effectively oversee and support the business and the interests of the owners, what gaps it has, and how its needs may evolve to reflect new opportunities and risks.
  2. 2.   Additionally, the JV Board has an understanding of which Directors may roll off the Board in the coming 12-24 months due to changes in internal assignments or retirements.
  3. 3.   This collective view of the Board’s needs along with a sense of potential vacancies is communicated on a regular basis to each shareholder, typically via that owner’s Lead Director on the JV Board.
  4. 4.   This input actively informs the owner’s general thinking, screening, selection of new Directors and, optimally, the retention or replacement of existing Directors.
  5. 5.   Finally, and without undermining an owner’s legal right to nominate Directors, the JV Board has an opportunity, if desired, to meet potential candidates and offer an opinion on the best candidate to fill a Director vacancy

 


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At the heart of Board-led Director selection is a structured understanding of what the Board needs to successfully govern the entity and represent the owners’ interests. This can be reduced to answering four basic questions about the Directors individually and collectively (Exhibit 2).


Exhibit 2: Defining the Joint Venture Board’s Needs

Exhibit 1 Joint Venture Director Selection Benchmarks

Source: Water Street Partners
Click to Enlarge

First, what functional skills does the Board as a whole need, today and in the foreseeable future? Second, what other experiences and competencies would the Board benefit from, and where does it have gaps? These might include experience serving on other Boards or relevant experience within a specific geographic, product, or customer market. Third, what personal attributes does the Board value? These might include an ability and willingness to spend at least 20-30 days per year fulfilling the role of a Director, sufficient seniority and clout within the owner company to be able to command resources and navigate internal approvals, and freedom from competitive conflicts with the JV. Fourth, are there other characteristics the Board cares about, especially to bring a balanced and diverse perspective? These might relate to age, gender, ethnicity, or independence.

By thinking like this, a JV Board can understand and clearly communicate what it is looking for in future directors.

Each of these three branches are important – and likely benefit from a second level of analysis... Click below to continue reading.


The full version of this article, available only to members, elaborates on  certain sections and includes additional tools. To inquire about membership  email us at inquiry@waterstreetpartners.net  <mailto:inquiry@waterstreetpartners.net> or learn more by clicking here.  <https://www.waterstreetpartners.net/membership>