IN MANY JOINT VENTURES – including those in semiconductors, financial services, media, healthcare, and natural resources – the owners are also the JV’s customers, channel, suppliers, users, or otherwise actively participate in the same markets as the venture (Exhibit 1).
Intel, Samsung, and AMD all own shares in semiconductor manufacturing joint ventures where, as owners, they are the JV’s major and sometimes only customers. Banks like JP Morgan Chase, HSBC, and Credit Suisse have all been part of joint ventures to develop and operate advanced technology and transaction processing platforms where success hinges upon owner adoption of the JV’s products or services. Mining companies like Rio Tinto and Anglo American routinely find themselves in JVs that are geographically proximate to their owners' wholly-owned infrastructure or operating assets, creating the potential synergies and conflicts. And oil companies like BP, Chevron, and ExxonMobil are all in JVs that are so financially material that they as shareholders have a fiduciary duty to deeply understand the venture’s strategy, market assumptions, performance, and financial controls.
Exhibit 1: Historical Examples of Joint Ventures Where Owners Actively Participate in the Same Market as the Venture
Common scenarios where JV owners have especially strong interest in Joint Venture’s strategy
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Source: Water Street Partners. All rights reserved.
In such environments, the strategy, capital investment, and product development process can deviate in meaningful ways from classic corporate strategy. Share-holders switch from being a small group engaged in polite Board-level discourse to a large, unwieldy collection of shareholder activists who want to know: “What exactly are you doing, why are you doing it, and how does it impact my related businesses?”
The purpose of this memo is to explain how some JVs are starting to use a Strategy Committee (or equivalent) as one of several mechanisms to help channel owner input and manage strategy under intense owner scrutiny.
UNDER THE WATCHFUL EYES OF YOUR OWNERS
When a JV’s owners have active market relationships with the JV, a number of things change. First, the owners’ interest in the JV will typically extend well beyond securing traditional financial returns (e.g., P&L maximization, dividends). These “other owner interests” include gaining a level of transparency, data, influence, or services from the venture that would not be possible as non-owners.1 Second, when the owners are customers, suppliers, or operate in related businesses to the JV, they can be extremely valuable to a JV – for instance, as a source of market insights, contacts, technical expertise, or operational synergies.
But this position can also complicate matters.
In such situations, the level and nature of owner scrutiny changes fundamentally. All of a sudden, scores of executives and managers inside the owners (many of whom are not on the JV Board) may become keenly interested in the JV’s strategy, investment roadmap, product slate, service level specifications, choice of technology vendors, and whether the JV should enter certain adjacent markets because it will affect their own functions and businesses. And this scrutiny is coming not only from one owner – but from multiple owners, each of whom have dynamic, detailed, and different opinions about each of these issues. Add into the mix the fact that many JVs have voting constructs that require majority or supermajority Board approval for all strategy and investment decisions, and you have a recipe for slow and suboptimal decision making.
Such scrutiny raises the bar on decision making. JV management must not only convince its Board, but also make others inside the owner companies – many of whom may have highly self-interested positions – comfortable with the JV’s plans.
How do JVs operate in such an environment – and develop a strategy, investment and product roadmap incorporating their owners’ needs as customers without becoming hostage to those divergent needs?
THE ROLE OF THE STRATEGY COMMITTEE
Over the years, we’ve seen companies put in place a number of tools, practices, structures, and other approaches to run an “engaged but efficient” strategy process in such JVs (Exhibit 2).
One of the most powerful of these tools is a Strategy Committee. By this we mean a committee, task force, or working group composed of shareholder-company employees (usually from strategy, product, marketing, or operational organizations) who provide input, analytics, or otherwise support JV Management and/or the Board in decisions related to JV strategy, investments, product development, or customer-facing operational issues.2