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
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
Exhibit 2). These statements should be written in plain managerial language – not legalese. They should be broad enough to
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
The first step is to engage the Board in a conversation and
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
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.