JOINT VENTURE GOVERNANCE
Shareowners have a direct interest in the returns, risks, and governance of all wholly and partly-owned assets that make up public companies. To date, the focus of CalPERS efforts on governance, and that of regulators and investors, has been on wholly-owned business units, subsidiaries, and affiliates of public companies. CalPERS believes that ensuring the effective governance of material equity joint ventures – a key asset class with well-documented and unique performance challenges where there has been historically less transparency than for similar-sized wholly owned businesses – is also an essential part of effective corporate governance.
To enhance investor confidence and to raise performance, CalPERS believes that companies need to raise the level of transparency, accountability, and discipline in the governance of their material joint ventures. As a minimum, any joint venture accounting for 10 percent or more of a publicly-traded parent company’s total assets, invested capital, costs or revenues – or that is expected to account for 10 percent of the profit and loss of the corporation – should be viewed as material, as should smaller joint ventures that are strategically important, or that carry disproportionate risks. We believe that companies may wish to adopt a more inclusive standard for materiality, and, for instance, draw the line at joint ventures at or above $500 million in annual revenues or invested capital.
For this class of joint ventures, CalPERS believes that the Company Board – i.e., the Board of parent companies that have ownership interests in joint ventures – should ensure the
adoption of certain practices related to these joint ventures:
1. CORPORATE-LEVEL JOINT VENTURE GOVERNANCE PRACTICES
For any publicly-held company with one or more material joint ventures, that parent company should:
1.1 Require that the Audit Committee of the Company
Board annually review the governance integrity and compliance policies of the company’s material joint ventures1
1.2 Designate a Corporate Board member to be responsible
for ensuring that the Company’s corporate-level strategic business review process includes the Company’s material joint ventures, and this review process holds joint ventures to similar performance standards to one another and to similar-sized business units2
1.3 Adopt and make available to the public a set of Joint
Venture Governance Guidelines for the Company’s material joint ventures (such as those in Appendix I, co-authored by CalPERS and Water Street Partners) which define a set of minimum expectations for overseeing such ventures
1.4 Designate a Corporate Board member to be responsible
for ensuring, on an annual basis, that the Company’s material joint ventures are subject to a review of their adherence to these Joint Venture Governance Guidelines, and that the
results of the review are discussed and approved by the Corporate Board3
2. PUBLIC DISCLOSURE AND TRANSPARENCY
For any material joint venture that has at least one public company shareholder, that parent company should disclose to its public investors:4
2.1 The name, business scope and objectives, and current
financial impact of each material joint venture of the Company
2.2 A list of the Lead Director of the Joint Venture Board of
Directors of each material joint venture
2.3 Whether each material joint venture is complying with
the guidelines outlined in Appendix I; to the extent that the venture is not meeting any of these governance standards, provide an explanation for why such governance standards are not being met5
Joint Venture Governance Guidelines
“Businesses used to grow in one of two ways: from grassroots up or by acquisition. In both cases, the manager had control. Today businesses grow through alliances, all kinds of dangerous liaisons and joint ventures, which, by the way, very few people understand.”
– Peter Drucker6
Good governance matters to joint ventures – and joint ventures matter to many public companies and, therefore, their public shareowners.
Today there are more that 1000 joint ventures (JVs) with more than $1 billion in annual revenues or invested capital. The 8 largest publicly listed oil and gas companies and 6 metals and mining majors have more than $500 billion in assets in major joint ventures. More broadly, many public companies hold a dozen or more material JVs in their portfolios, and depend on JVs for 10-20 percent of total corporate revenues, assets, or income, using joint ventures as a key tool to access technology and innovation, gain scale and reduce costs, share risk, and build new businesses. In such industries as conventional petroleum, alternative energy, chemicals, basic materials, and aerospace, joint ventures account for upwards of 30-50 percent of many company’s economic activity. Likewise, joint ventures are widely used in China, India, Russia, Korea, Latin America, and the Middle East.
More than 10 years ago, CalPERS established a set of governance principles for public companies at the corporate level with the underlying tenet that fully accountable corporate governance structures produce, over the long term, the best returns to shareowners.
We believe a similar level of scrutiny and focus should be extended to the largest joint ventures of public companies, and that shareowners will benefit by the application of more consistent standards of governance. These JV Governance Guidelines, co-authored by CalPERS and Water Street Partners 7, are an effort to promote such attention and, in time, drive improved performance and reduced risk within a large but relatively less-transparent asset class.
INTRODUCTION: THE JV GOVERNANCE CHALLENGE
Any joint venture warrants good governance.8 Our focus – and that of these Guidelines – is on joint ventures that are financially large or strategically significant, and entail some degreeof joint managerial decision-making and operational interdependence between the shareowners
and the venture.9
The governance of these joint ventures introduces unique challenges. These challenges are an outgrowth of the way the corporate-parent shareholders inter-relate to the venture, most notably: shared oversight and control; significant economic and business flows between the shareholders and JV for various services, inputs or outputs; differing appetites for growth, investment, and cash returns from the shareholders (i.e., corporate parents); and changes in shareholder strategies and reactions to new market conditions that put pressure on the JV.
To understand why joint ventures are different, consider how the governance of joint ventures compare to that of public companies....