Corporate Control Framework: How Do Your Corporate Standards Map Into Your Joint Ventures?
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).
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:
“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
“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
We think there is a better way.