Lighting the Way with Guiding Principles for Your Joint Venture

   

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ThinkStock_177118745_Dark_Mine_smallIN A PREVIOUS INSIGHT we discussed the challenges of maintaining alignment in joint ventures across multiple levels and topics. In this article we will outline the how and the what. Over the last few years, we have worked with a number of JV Boards and management teams to help develop or revise Guiding Principles. We’ve learned a lot about what “good” looks like, what it takes to run a process that leads to real agreement, and the value that, when done well, such Guiding Principles create.

As mentioned in our previous article, Guiding Principles will take the form of 10-45 statements that represent the owners‟ strategic and managerial intent toward the JV. Done well, Guiding Principles provide clear guidance to management – and to individual Board members and others in the parent companies – as to how frame decisions, and how to operate and behave. Further, Guiding Principles allow those governing and managing the JV to calibrate potential proposals and actions against a set of core philosophies, rather than opening up every decision for broad-based (and not always transparent) debate. Guiding Principles should be owned by the Board, and periodically revisited, and potentially revised, as the JV confronts new challenges.

What do Guiding Principles look like? Guiding Principles are typically organized under 7-10 content headings – e.g., strategy and scope; economic and operating model; financial arrangements and investment criteria; board governance and delegations; shared services; and talent and organization (Exhibit 1). Many JVs will supplement this standard table of contents with one or two additional sections (e.g., operations, business ethics and safety, skills transfer, product development processes) to reflect recent “hotspots”
on alignment.

Exhibit 1: Guiding Principles - Table of Contents

Exhibit 1 Guiding Principles – Table Of Contents
Source: Water Street Partners
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Within each section, there will be 3-8 very sharp statements about how the shareholders expect the venture to function (Exhibit 2). These statements should be written in plain managerial language – not legalese. They should be broad enough to constitute principles that can guide numerous decisions – not so specific to prescribe a fixed strategy or individual deal terms. But they should have an “edge” to them, and not be so broad as to allow for fundamentally different interpretations. To remove ambiguity, certain Guiding Principles may include both positive and negative statements. For instance: a large oil industry JV that depended heavily on parent company secondees included one principle that stated: “Best people for all jobs – no parent company ‘slots’.” Use of positive and negative statements were present in several principles adopted by a technology JV, including: “The JV should have an independent strategy that meets the needs of the market and the shareholders – and is more than an exercise in simply brokering shareholder interests.”

Exhibit 2: Guiding Principles – Sample Language

Exhibit 2 Guiding Principles – Sample Language
Source: Water Street Partners
Click to Enlarge

In other words, the implications of the Guiding Principle should be clear. For example, a large natural resource JV developed a Guiding Principle that said: “Commercial issues should not interfere with JV operations.” The key implication of this was that commercial decisions would be made by a Commercial Committee of the shareholders – and that the JV commercial organization would only fulfill contracts.

How should my JV develop Guiding Principles? The process for developing Guiding Principles is arguably as important as the content itself. Since the objective is to create a deeper alignment, Guiding Principles can only succeed if key individuals – i.e., JV Board members, senior parent company sponsors, and JV top management – truly buy-into the proposed Principles, and understand the implications and trade-offs.

Getting that level of engagement is not easy, but can be greatly aided by fairly deliberate and collaborative process.

The first step is to engage the Board in a conversation and agree that Guiding Principles are needed (usually because JV is at a startup, inflection point, or there are performance or health issues). This conversation usually leads naturally to agreement that one or two Board members (e.g., the Chair or Lead Directors) plus the JV CEO should sponsor the effort, and a decision as to whether an independent advisor should facilitate the process. With these commitments in place, the second step is to draft 10-15 statements about JV purpose, strategy, scope, governance, director behavior, economic model, and other key aspects. Then it’s time to hold one-on-one conversations with Board members (and others, such as parent CEOs, senior parent sponsors not on the Board, and members of the JV management team) to test, refine, and deepen the draft principles.

Step four is to convene the Board (or a subset that includes at least one Board member from each shareholder) to review the revised principles and supporting materials, sharpen language, and resolve open issues. In some situations, the draft Guiding Principles will prompt a need for some deeper analytics (e.g., assessment of potential parent company synergies or costs), legal review (to ensure that the Guiding Principles do not contradict existing shareholder agreements), and further illustration (e.g., a separate appendix listing expectations of individual Board directors) to inform the decision. Throughout the process, it is critical to think through – and challenge – the potential implications of each principle. For instance, does a draft principle that says “Best
people for all jobs” create the direct implication that the CEO or CFO might not come from either of the shareholders, or that secondees into the JV will have to be interviewed by the CEO.

The fifth step is to refine again, send to all Board members, and close any final gaps. The last step is to present the proposed Guiding Principles in a formal Board session, and seek formal approval through a Board Resolution. Critically, creating a Board Resolution will confer some official status on the Principles, and make the process more than an interesting, potentially-forgotten exercise. Having done this, the Principles should be put in a Board Book, distributed to all relevant stakeholders in JV and parent companies, and revisited once per year as part of a JV Governance Review.  Click below to continue reading.

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