How Do Your Corporate Standards Map Into Your Joint Ventures?

Corporate Control Framework: How Do Your Corporate Standards Map Into Your Joint Ventures?

Corporate Controllers, General Counsel, and Heads of Risk and Internal Audit should take a closer look at what is actually happening in non- controlled ventures. The reality on the ground is ugly, but fixable.
Originally published in August 2013
By James Bamford and Joshua Kwicinski
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A LARGE COMPANY may have hundreds of corporate standards – with thousands of embedded requirements – on topics ranging from health, safety, and ethical conduct, to hiring, travel and expense reimbursement, manufacturing plant design, and contractor management. Such corporate standards, and the system of assurance surrounding them, operate on the assumption that the company has the ability to drive its standards into its operations.

But what happens when the company is a non- controlling partner in a joint venture, investment, or affiliate? Lacking control, do those standards inevitably fall by the wayside? Take it one step further: What happens when the company holds a
portfolio of dozens of such non-controlled ventures, collectively accounting for a quarter or half of its total assets, revenues, or income? Or, what happens when investors get spooked by the Macondo oil spill (or more muscular enforcement of anti-bribery and corruption regulations) and start asking about the company’s risk exposure in its non-controlled joint venture portfolio?

Now, all of a sudden, an innocuous issue becomes a big concern.

Such matters are now on the minds of many companies, especially those with business models built on minority positions, as is the case with many companies in the oil and gas, alternative energy, metals and mining, aerospace and defense, and telecom industries. Recently, BHP Billiton, Royal Dutch Shell, Procter & Gamble, BAE Systems, and others have inserted statements in their public filings that acknowledge that such ventures may not comply with their corporate standards (Exhibit 1).

IS “BEST EFFORTS” GOOD ENOUGH?

Water Street Partners recently benchmarked how 40 large natural resource companies manage their portfolio of joint ventures. As part of this analysis, we looked at how companies have designed their corporate control environments to meet the needs of non-controlled ventures. Our work shows that 65% of surveyed companies have taken a minimalist approach. While the minimalist approach creates no mandated requirements, it often comes with implicit expectations for compliance and explicit demands for reporting. Its philosophy is summed up as follows:

1.  There are no formal expectations for a non-operated venture to meetany Company standard or policy

But...

2.  Company employees involved with a non-controlled venture, including those appointed to serve on the venture Board, its committees, or in an internal governance and compliance role, should use “best efforts” to evaluate the venture against Company or international standards, and to influence the venture or Operator to address identified gaps

3.  While recognizing that the Company’s information from a non- controlled venture may be imperfect, the Company shall nonetheless complete a standard business assurance process, including completing a long-form governance assessment, and providing a signed annual assurance letter from a senior accountable executive attesting to the adequacy of internal controls in the JV or Operator.

Sounds reasonable. But now listen to what people on the front line – the non- operated venture Asset Managers and Lead Directors – actually say about the minimalist approach:


It’s a charade. The Company Controller asks us to complete some 220 line-item governance assessment checklist designed to evaluate the control environments
of our own businesses, which we do. But the questions don’t match the venture’s operating environment, and our access to information is extremely limited.”

Lead Director, non-operated JV at a Major Oil Company

“Our demand for information has made us a complete nuisance to the Operator. Yes, our various functional organizations know the venture is not required to meet our standards, but they’ve turned ‘best efforts’ into an Olympic sport. I’ve got all these internal experts and standard owners demanding information from the Operator to evaluate the venture against almost every one of our standards, including ones where we have identified no risk.”

Asset Manager, non-operated JV at a Major Mining Company

“Do we really believe that a non-controlled venture should meet no Company standard? Are there not things – such as health, safety and ethical conduct – that we hold so dear that we should require any business in which we participate to meet standards that are at least as good as our own? It strikes me that to not do this is legally permissible, but morally and ethically bankrupt.

–CFO, Global Chemical Company

The obvious alternative is a maximalist approach. Adopted by 15% of benchmarked companies, this approach is built on the philosophy that all of the Company’s standards and policies – as well as all of its business assurance processes and reporting – should fully apply to all ventures, including non- controlled entities. It is simple, high-minded, and deeply flawed. Consider an indicative comment from another executive:


“We have 15 to 20 joint ventures – most of which are 50:50, but some are minority positions where we own a 40 to 49% interest. Onto the management teams of each of these ventures, we have unleashed the full force of our functional organizations to drive compliance. It is corporate overkill at an extreme. Let’s say I am running a JV – which, by the way, is supposed to have its own corporate control structure overseen by its Board of Directors and Audit Committee. If I am that poor sucker, I am literally hit by 800 additional corporate requirements telling me ‘thou shalt do this’ or ‘please ensure the presence of that.’ Pardon me, but have we lost our minds?”

–SVP Corporate Development, Global Specialty Chemical Company


Paradoxically, the minimalist and maximalist approaches actually create many of the same questions and problems. Each is prone to creating excessive information requests, confusing the company’s messages, and harming the company’s ability to influence the venture or Operator. And because each approach leaves company employees believing it is far easier to check the box declaring that a standard or requirement appears to be met rather than dig into the issues in a venture where access is limited, each approach tends to provide a false sense of security, under-reports risks, and mutes accountability.

Our sense is that the keepers of the corporate standards – that is, the corporate secretaries, controllers, and general counsel – may not fully appreciate the costs of the current approach. More than 100 conversations with Asset Managers overseeing their company’s non-operated ventures bring such costs into sharp and personal relief. Our data shows that the median JV Asset Manager spends 22% of his or her time performing assurance-related activities – twice as much time as the median JV Asset Manager spends performing value-creating activities such as influencing the Operator. For an Asset Manager, this assurance- related work, including all those hours on the phone, filling out corporate checklists, and coordinating with functional organizations who want access to the asset, is draining, and can create an unnecessary annoyance to the Operator. And despite the effort, many Asset Managers feel like they are being asked to do the impossible, and are getting dinged for outcomes over which they have no control. It is no wonder that attracting and retaining top talent into the Asset Manager roles of non-operated ventures is so tough.


We think there is a better way.

A NEW STANDARD FOR STANDARDS

We believe that companies should update their corporate control frameworks to clarify the approach to non-controlled ventures. As part of this effort, we encourage companies to take dead aim at their corporate standards and better define how these policies and procedures do or do not apply in non-controlled ventures. We acknowledge that this is hard work, and that there may be other, better ways to accomplish the same end. That said, our interviews and analysis point to some hallmarks of excellence, and we suggest companies adhere to three guidelines...

 

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