SHAREHOLDER MANAGEMENT remains a quiet corner of corporate boardrooms. According to a McKinsey & Company study, corporate Boards spend less than 10% of their time managing investors and other stakeholders – and of the seven main focal points of a Board, shareholder management is the one where Directors are least interested in upping time spent (Exhibit 1).
Public company Boards tend to delegate investor relations to management, which has highly grooved processes for communicating with shareholders through investor roadshows, analyst calls, annual reports, and other corporate filings. Board interest in shareholder management certainly spikes when confronting activist investors – hedge funds, takeover firms, and other disgruntled institutional investors agitating for changes to strategy or management, or the sale of businesses and assets. Indeed, the rise of activist investors and other forces are prompting corporate Boards to better define protocols for Directors to engage directly with the shareholders they were sent to represent.
But for joint venture Boards, shareholder management is not a passing matter. Nor is it a role that can be mostly delegated to JV management. Indeed, “activist investor” would be a polite way to describe how most JV shareholders behave toward JV management and their co-owners. Unlike public companies, where shareholders are financial investors seeking to profit through dividends and share-price appreciation, joint venture shareholders have a totally different relationship to the companies in which they invest. For starters, JV shareholders almost always created the company, and defined its business purpose and authorized scope, which are memorialized in legal agreements they wrote. And they often provide technology, people, and market access to make the business go. JV shareholders also generate returns not solely – and sometimes not at all – through the JV’s P&L, but often through technology and other licensing agreements, service fees, privileged pricing and access to raw materials, services, and the like.
Our case library is full of examples of such ventures. For example, the Merck-Schering JV is a complex web of development, manufacturing, and marketing agreements and financial flows between the partners and the joint venture. Similarly, the IBM-Lenovo JV generated substantial technology and marketing fees for IBM prior to Big Blue selling its interests to its partner. And in PGT Healthcare, a multi-billion-dollar global over-the counter drug JV between Procter & Gamble and Israeli pharmaceutical powerhouse Teva, the venture depends extensively on its shareholders for support across the value chain, including thousands of people inside the shareholders supporting the venture on sales, regulatory affairs, and other functions. Seen through an artist’s eyes, a joint venture looks like Da Vinci’s Vitruvian man (Exhibit 2), with its range of motion flowing through the shareholders on its flanks.
All this makes shareholder management a central role of JV Boards. For JV Boards, shareholder management encompasses eight critical sub-roles (Exhibit 3) – stretching from defining the JV’s strategy in relation to the shareholders’ strategies; clarifying the JV’s operating model and level of independence from the shareholders; reviewing and approving service, supply, or other commercial agreements with the shareholders; and defining JV reporting, compliance, and assurance requirements vis-à-vis the shareholders.
Strangely, most JV Boards do not even consider shareholder management to be a formal responsibility. Our review of 25 JV Board charters and Shareholders’ Agreements revealed that less than one-tenth of JV Boards explicitly state a role for the Board in shareholder management matters beyond approving affiliated-party transactions (such as service agreements with one shareholder) – which is a boilerplate provision within legal agreements.
To be clear: It is not that JV Boards never deal with any aspects of shareholder management. In particular, for ventures that are highly interdependent with their shareholder organizations, it is inevitable that Boards spend some time on shareholder management issues. The issue is that Boards rarely look at shareholder management in an integrated way, and often entirely overlook certain aspects.
To understand the scope and importance of these issues, consider a global technology JV whose strategy and operations is deeply interwoven with its shareholder organizations, which interact with the JV on everything from product development to sales and customer service. Some of the shareholder management-related questions that this high-performing JV Board is currently considering include:
- How does the JV’s strategy relate to the shareholders’ strategies – and how does the JV need to adjust to reflect the shareholders’ changing strategies?
- Are there “dislocations” that the JV will experience in terms of shareholder support or customer defections in the next 1 to 2 years because the shareholders are investing in technologies and solutions adjacent to (but outside) the JV that may draw resources and revenues from the JV?
- Of the work that is today being done by shareholders “for” the JV, would some of those activities be better done “in” the JV, given the venture’s emerging competencies, cost structure, and customer proximity, etc.?
- Are the field-level sales organizations of the JV and the shareholders fully leveraging each other’s capabilities and market relationships – including consistently developing joint sales agendas for key markets, accounts, etc.?
- Is it still clear and appropriate where and how the JV should comply (or not) with the shareholders’ financial, legal, risk management, HR, and other corporate standards, reporting requirements, and controls?
- How heavy is the “governance tax” imposed by the shareholders on JV management – and what can we do to lighten the burden?
- Is the Board’s opinion and voice heard with adequate clarity and timber within the shareholder organizations?
FILLING THE GAP
How might JV Boards elevate shareholder management to its rightful place of prominence? Water Street Partners recently updated our Standards for JV Board Governance, which includes the following expectations with regard to shareholder management:
- Standing Agenda Item: The Board has established a standing item on its annual calendar (likely during the strategic offsite, if present) to review and discuss in an integrated manner issues related to shareholder management.
- Board Accountability: One or more Board Directors (e.g., the Chair, Lead Directors, Governance Committee) are accountable for ensuring this discussion is appropriately scoped, analytically supported, focused principally on issues not covered elsewhere by the Board, and for ensuring follow-up. (Note: For example, joint sales protocols and salesforce optimization might be covered in a Board discussion on the go-to-market strategy, or shareholder-provided services may have been reviewed in a Board-sponsored financial audit.)
- Operational Alliance Review: At least once every [three] years, the Board conducts a holistic review of the operational alliance and interfaces between the JV and its shareholders – and identifies hotspots and opportunities (Exhibit 4), and agrees to a plan for how to pursue and address these items.
- Strategic Dialogue: At least once every [seven] years, the Board conducts a truly strategic dialogue about the JV and its relationship with the shareholders. This strategic dialogue includes looking afresh at the JV’s continued relevance to and place within the shareholders’ strategies, the JV’s optimal level of independence from and work-sharing with the shareholders, and the structure of the legal agreements, including terms that define the JV’s authorized scope, exclusivity, shared-service and transfer pricing, etc.
- Management Support and Accountability: There is a member of the JV management team other than the CEO whose job responsibilities explicitly include shareholder management, encompassing but not limited to supporting the Board in fulfilling its duties in this area. [Note: This role is the joint venture equivalent to an investor relations function within a public company, and is likely to fall within either strategy, or the function with the greatest interaction with the shareholders (e.g., sales, product development). Due to the nature of the issues, it is not likely to be the General Counsel or CFO.]
There are many reasons why shareholder management has gotten short shrift from JV Boards. One is lack of Board time: With the average JV Board meeting four times per year for less than 20 hours total (which is one-fifth to one-half the meeting time of a corporate Board), there is not a lot of space for added topics. A second reason is the over-emphasis of JV Boards on operational matters and quarterly financial reviews – which crowd out more strategic issues, such as shareholder management. A third explanation is the novelty of these issues in JVs. When JV Directors look to the governance of public companies or internal business units for guidance, they see no comparable relationship with the shareholders, and thus no comparable role for the Board. Lacking external guidance, their attention turns elsewhere.
Fourth: JV Boards generally do not like to have difficult conversations – and thinking about the relationship with the shareholders, if not properly handled, can be time-consuming and emotional, and trigger discussions about exit, rewriting the legal agreements, perceived conflicts of interest, or unfair financial arrangements. Fifth, and related, is distributed accountability. By definition, many shareholder management issues fall partially outside the legally defined purview of the JV Board, residing inside or between the shareholders. This gives JV Boards a ready, but ultimately hollow, excuse to avoid these issues. (If the Board is not taking on these issues, who will?) Finally, JV management is often understaffed and is generally not organized to support the Board on these issues. Look at the organizational chart of a JV and try to find where the responsibility for shareholder management resides. It is usually nowhere to be found or, it is placed in the hands of the General Counsel, who is generally ill-suited to handle these strategy- and operations-oriented issues.