WHEN A JOINT VENTURE is formed, the strategy, scope, governance, and underlying deal logic can feel overwhelmingly clear. But fast forward a few months or years, and partner differences are likely to emerge. Not necessarily irreconcilable differences about deal rationale, venture economics, or competitive positioning, but subtle, natural differences in interpretation about how to build, manage, and evolve the venture – e.g., how involved parent staff should be in prioritizing the JV product development slate, whether contracts should be sole or competitively sourced, or how information sharing protocols should work when the venture sells into a parent company customer.
Leave these issues unresolved, and a slow torture awaits. JV CEOs find themselves doubling or tripling the amount of time they spend “working” the shareholders, rather than running the operations or outmaneuvering competitors. Acquisitions and capital improvements get stalled, as the shareholders, facing an investment decision, wrestle with different investment appetites and views about where the JV should grow. The joint venture’s processes start to get gummed up, as functional executives in parent companies seek to impose parent processes and policies. And individual Board Directors find themselves sitting on top of JVs that are clearly not being optimized from a parent point of view – creating personal exposures.
Any tool that helps manage shareholder alignment, and does so in an efficient way, is extraordinarily valuable. The purpose of this memo is to outline one such tool: Board-endorsed Guiding Principles.
A FULL CONTACT SPORT
Maintaining alignment is a full contact sport in JVs (Exhibit 1) – played across multiple levels and topics.
On the one hand, alignment must be built on different structural levels: between the shareholders, who often have different financial and strategic objectives; within the Board, often composed of very different personalities; between the Board and JV management, who may hold conflicting views on growth and delegations of power; within the venture, which often contains staff from each shareholder and outside hires; between the venture and parent operational staff interacting with the venture (e.g., on product development, planning, engineering, marketing and sales, and services); and within individual shareholder companies.
At the same time, alignment must be built and maintained across many different substantive topics – from strategy and scope issues, to issues on ownership, operating model, governance, financial arrangements, and organizational processes.
Exhibit 1: Driving Alignment in Joint Ventures 
Source: Water Street Partners
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A number of practices and tools can help foster alignment (Exhibit 2). For instance, prior to deal close, the partners are often well-served to pre-agree on the Year 1 budget and a 3-year capital program. During the launch phase, alignment can be enhanced by designating Lead Directors and, potentially, JV Representatives from each shareholder. During ongoing management, alignment can be increased through such practices as a JV CEO Performance Contract, Strategy Offsites, and an Annual Partner Planning Process.
Guiding Principles are among the most valuable of such practices.
Exhibit 2: Tools to Foster Alignment in Joint Ventures
Source: Water Street Partners
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By Guiding Principles, we mean a set of 10-45 statements developed by the shareholders and formally endorsed by the Board that express the owners’ strategic and managerial intent toward the JV. Guiding Principles are meant to deepen and extend – not over-ride – the Joint Venture Agreement, ancillary agreements (e.g., secondee agreement), mission and core values statements, business plan, etc. (Exhibit 3). While it is possible to create Guiding Principles during the deal phase, the work is usually done during early launch phase or once the venture is up and running.1
Irrespective of when developed (or revised), our client work across industries and venture types suggests that Guiding Principles can be a simple yet powerful way to enhance alignment. Unfortunately, only 20-30% of JVs have a robust set of Guiding Principles in place.2
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