JOINT VENTURES usually bring together companies from different countries and industries, of different sizes, and with different ownership structures – e.g. state-owned enterprises vs. listed companies vs. family-owned or privately-held companies. As a result, JV CEOs and Boards have to deal with enduring cultural and organizational differences among the parent companies, while also building a common culture in the venture – challenges not faced in M&A transactions or within wholly owned companies. As one CEO said, “It’s like being a peace negotiator or an arbitrator of a high-stakes legal case – except the negotiations never end.”
To be clear, cultural differences are an occupational hazard, not a fatal flaw. More than 50% of ventures are able to successfully overcome differences in cultures. But if unaddressed, cultural clash can be an insidious viper: it is usually a contributing cause in the 50% of JVs that fail. We think this is because of a scarcity of anything approaching “management science” to deal with cultural issues in JVs – perhaps because culture is typically thought of as a “soft and fuzzy” issue.
It doesn’t have to be this way.
Based on our experience and interviews with hundreds of cross-cultural JVs, we have developed a systematic approach that can be used by dealmakers, JV CEOs, and Directors to side-step cultural clash by:
- Taking action at four specific intervention points in the life of a joint venture: 1) during initial due diligence on the partner; 2) while shaping deal terms that will irrevocably affect the JV's culture; 3) at launch – the weeks just prior, and the months just after, the JV is officially started; and 4) as part of regular health-checks done every 2-3 years over the course of the relationship (Exhibit 1).
Exhibit 1: Mitigating Cultural Risks: Four Intervention Points
- Rigorously mapping culture and using that diagnostic to select tools – structures, processes, policies, or softer influencing mechanisms – that can mitigate differences between parents or help shape culture in a new JV (Exhibit 2). Note that in this article, and in our mapping, we take an expansive approach to culture – including national, company and other cultural “input,” as well as critical organization indicators and influencers of culture (such as how decisions are made).
Exhibit 2: Mapping Culture: From definition to description
FOUR INTERVENTION POINTSTiming is everything, and the best time to head off cultural problems is before they start. We have identified four intervention points across the JV lifecycle where deal makers and executives can – and should – take concrete actions to identify and address cultural issues before they become unmanageable.
Intervention 1: Partner Screening – Initial Cultural Due Diligence
“To know the road ahead, ask those coming back” – Chinese proverb
No one would consider embarking on a major transaction without checking for misstated accounting, under-maintained assets, or a flawed IP estate. Yet culture wrecks more JVs than these obvious pitfalls. One reason: few companies conduct a systematic cultural due diligence before entering into serious deal discussions. If the prospective partner is already well-known from a previous business relationship, this may not be necessary. In other situations, adding cultural assessment to the initial due diligence process is desperately needed. It is especially important when companies are from different countries, when government-owned companies venture with privately held companies, when family-owned companies venture with listed companies, or when entrepreneurial companies aim to dance with giants.
During initial discussions with an unknown partner, we believe a cultural due diligence should almost always be done, aimed at revealing if there are irreconcilable differences in culture – e.g., unacceptable ethics or incompatible decision styles – that should prompt a “no-go” decision on the overall deal. From a process point of view, the cultural due diligence effort should have a single owner, usually the lead negotiator or a senior business-unit executive involved in the deal.
Let’s look at how this played out in one promising JV situation. In this case, the companies were both well-known U.S. food manufacturing companies. Early discussions had identified a big opportunity to merge production and trucking of an entire line of products sold to grocery stores. The top executives, while wary of each other as competitors, had spent enough time together, and talked about their companies, and felt that the “chemistry” was good. But a rigorous cultural due diligence effort, including confidential interviews with suppliers and former mid-level managers, revealed that the prospective partner – despite “talking the talk” – did not have a good safety culture and appeared to be exposing its customers to risks that were unacceptable. As a result of the due diligence effort, the deal was called off, and the top management of the prospective partner company was offered help from safety experts in addressing the issues that were identified.
Intervention 2: Negotiation Phase – Shaping Culture with Key Deal Terms
“If you must play, decide on three things at the start: the rules of the game, the stakes, and the quitting time” – Chinese proverb
The second intervention point is during the negotiation and structuring phase. Because of the highly tailored nature of JVs, dealmakers have a surprising impact on the resulting culture of the JV, although this leverage is rarely fully used. The focus here should be on defining a handful of contractual deal terms that will shape the JV’s culture – or tie it irrevocably to the culture of one of the parent companies. The lead dealmaker and the P&L owner in the relevant business unit are the natural sponsors of this work, which is integral to the deal negotiations.
The main types of deal terms that affect culture – embedded in the JV legal agreements and therefore difficult to change later on – include scope and contributions; the governance setup; organization and processes; and financial arrangements, especially whether the JV is self-funding, and whether the JV must purchase services and inputs from the parent companies.
As an example, consider how opportunities to shape key deal terms, and thereby the JV’s culture, were missed in a JV between a European and a Brazilian company. Although the JV was set up with a 50-50 ownership structure and equal governance at the Board level, the scope of the JV was limited, making it hard to attract top talent, who correctly perceived that the JV CEO’s job was more one of running an asset than building a business. Moreover, the planned organization was to be highly dependent on the Brazilian partner for secondees, and for key systems including IT and finance. Finally, cultural distance from the parents was limited by physical distance: the JV was set up using offices within the same building of the local partner.
Troubles came quickly. The JV CEO was under constant pressure from the CEO of the local partner, who worked just down the hall, was the previous (and likely future) boss of the JV CEO, set the compensation of the JV CEO, and had a strong personality and in-depth knowledge of the business. With the JV running on the finance and IT systems of the local partner, there was also a powerful information asymmetry. The European partner – despite having superior technology and operating skills that were supposed to be leveraged in the partnership – knew much less about what was going on than the local partner. While the JV was operating in a new business area its culture mirrored the local partner’s culture – which stifled the innovation and external orientation that was needed for success in the new business. The venture is still struggling to recover from the initial deal set-up.
Intervention 3: Launch and Integration – Designing and Melding a New Culture
“Only the tent pitched by your own hands will stand” – Arabic proverb
The third intervention point to head off cultural problems is the “day one” launch of the new JV. Just as is the case for M&A, the integration of existing assets into a single venture – or the startup of a new company – is a defining moment. Lasting impressions and critical decisions are made. It’s a special time because of the opportunity to “pick and choose” among the parent’s approaches and to try to put in place a new JV culture. The JV CEO and head of HR are the natural owners of this process.
There are two main activities involved – design and launch.
Design for success. The design phase typically spans a few months – starting before the deal closes up to “day one,” when the new JV begins operations.
Just as is the case for a large M&A transaction, the responsibility for launch and integration requires a senior sponsor – often the future JV CEO – and a full time project leader, preferably someone who has been involved in developing the business case for the JV and who will stay with the JV after the deal is done. However, unlike an M&A transaction, where the acquirer can freely make second-level decisions after the deal, both partners must agree on design and integration issues in JVs. As a result, many design decisions should be made before the deal closes, even if they aren’t in the legal contracts.
Key issues to address typically include: 1) The metrics that will be used to evaluate the success of the venture in the first three years; 2) Detailed delegations of powers from the JV CEO downwards in the JV organization; 3) How the JV Board will actually function – agendas, role and committee composition; level of involvement in specific decisions, naming of the initial Directors, Director training, etc.; 4) Specifics of planning and operating processes; (in particular, which of those will be independent of parent companies); 5) How parent-provided services and inputs will be handled; and 6) JV organization design and HR policies (e.g., base/bonus; long-term incentive design, etc.). Naturally, the specifics of design differ according the nature of the JV – a $10 billion-dollar consolidation JV is not like a $20 million startup.
Launching the new JV and the new culture. While the initial design phase is confined to a handful of people, a totally different approach involving a large number of people, over a period of time, with multiple work streams is needed to truly establish a new culture – with a willingness to let the group take some important decisions so that there is true ownership in the new company.
Of course, the launch meeting is only part of what’s required to “imprint” a new culture. Success requires reinforcing “day one” events with hard actions like incentive design, and softer actions like top-management role modeling.
Intervention 4: Ongoing JV Management – Cultural "Health Check"
“Blame comes before swords” – Arabic proverb
“Designing” a culture when setting up a new JV is easier than trying to bridge cultural problems stemming from differences in parent culture for existing JVs. It isn’t possible to “fix” the parent cultures, though – the Board and JV CEO need to work together to manage through or around the differences. As one senior Middle Eastern oil-company executive said of a JV with a national oil company as partner, “You aren’t going to be able to change the way they work – you have to understand how they work and find where the flexibility is within that.”
As a JV evolves, there are inevitable changes in the market, the parent companies, the Board and the JV management team. These stresses on the business – and turnover in key people on the Board and management team – can turn smoldering cultural tensions into fireworks. Better to defuse tensions early than to allow them to fester. Our prescription is simple: Include a cultural assessment as part of a regular, broader health-check of the governance of a joint venture. This should be done every 2-3 years, more frequently if there are warning signs that culture problems are affecting performance.
The cultural health-check (and the broader governance assessment) should be sponsored by the JV CEO or Board Chair, done in a way that is neutral with respect to the parent companies, and performed with the close involvement of the JV head of HR. The key activities include an assessment of: 1) Board-level transparency, decisiveness, alignment, trust, and communication; 2) interviews with Board members, JV managers, and others; and 3) detailed mapping of the parent cultures, and/or the actual and desired JV culture.
Sometimes, the culture problem is within the JV organization – for example, the venture where two “warring cultures” persisted years after the deal was done, because of the extensive use of secondees. More often, though, cultural problems manifest at the Board level or between the Board and the CEO. The issues usually involve tensions over the mission of the JV, compounded by differences in communications, decision making style, and HR issues. In this case, the cultural mapping tool can be used to map key gaps and differences between the parent companies as a first step toward a solution. For example, in one French-UK JV, a diagnostic mapping revealed major differences in culture related to hierarchy, decision making, and communications.
Fortunately, there are a host of approaches that can help to address cultural differences, including changes in governance and organization structures, processes, policies, and people. In the French-UK case, the partners decided to make changes in the Board, begin biannual meetings between the two parent company CEOs to discuss the broader relationship, increase delegations of authority to the JV CEO, and increase communications from the Board to other parent company executives following important decisions. These changes have helped to defuse cultural tensions at the Board level, and get the relationship back on track.
~~~“I do not want my house to be walled in on all sides and my windows stuffed. I want the cultures of all the lands to be blown about my house as freely as possible. But I refuse to be blown off my feet by any” – Mahatma Gandhi
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