Joint Venture Governance Excellence:
Why Governance Matters
And they don’t quite know what to do about these things.
Why are JV Boards prone to being a little off? In our view, it is not because directors are incompetent or do not care. Rather, part of the explanation lies in the fact that JV Directors, as executives of their shareholder companies, have limited time (on average 6-8 days per year) to spend on their director role.
Another explanation is that JV Directors so quickly rotate on and off boards (median tenure of just 30 months), which undermines the motivation to drive changes or take on new issues. But more fundamentally, the biggest barrier is the limited shared understanding of what “good” board governance looks like in the context of a joint venture – including how it differs from corporate or subsidiary governance – and how to have an efficient discussion with fellow board members. The result: most JV Boards seriously underinvest in proactively managing themselves and the governance of the company.
We are seeking to fix this.
Below, we make the case for why JV board governance matters, explore where it can go off-the-rails, and reinforce why individual directors should care so personally about getting board governance right. In Part 2, we introduce a tool for JV Boards to help themselves. We introduce the concept of a JV Board Governance Index (BGI) – a powerful and easy way for JV Boards to obtain an independent score of how they are doing and to engage in a process to agree on how to improve. In Part 3, we summarize Water Street’s recent research findings on JV board governance, highlighting how a set of 30 JVs from around the world perform against our new JV Board Governance Standards, how they rated on our Board Governance Index, and where key strengths and gaps emerged.
WHY JV BOARD GOVERNANCE MATTERS
As an asset class, joint ventures consistently underperform relative to shareholder expectations and to wholly-owned businesses. Our research over the last 25 years has shown that governance plays a role in this underperformance – and indeed is preventing many already successful JVs from delivering even better returns to their corporate parents. For example, our ex-post assessment of 49 large joint ventures showed that 50% of joint venture failures are the result of poor governance. Other research studies we conducted have shown a high correlation between good financial and operating performance and good governance performance – with more than 90% of JVs with strong governance also experiencing strong performance outcomes (Exhibit 1).
Similarly, JV Boards have often been slow to orchestrate needed restructuring of the companies they oversee – including addressing performance problems, agreeing to expansions in scope, adding owners, or changing the operating model. An analysis we conducted involving 150-plus client situations where we were directly involved in restructuring major joint ventures showed that, on average, JVs were 30 months delayed in addressing problems – delays that were caused by the multi-shareholding structure and the resulting need to secure alignment among the board members from different owners. Given that these restructurings routinely accounted for 10-30% improvements in annual profitability, the struggle of JV boards to gain speedy agreement on the specifics of restructuring can be linked to real money.
JV Directors have a fundamental responsibility for ensuring the Board – and the governance system generally – is performing well. This means asking the right questions on a regular basis to diagnose gaps (Exhibit 2), and addressing issues before they spiral into performance problems.
Where does JV board governance typically stumble? In our experience, there are several recurring trip wires:
Focusing on the wrong issues. Perhaps due to the limitations on time and the operational-orientation of many JV directors, JV boards have a tendency to overinvest in operational and financial performance management, and underinvest in topics like strategy, growth, and talent, which tend to be less immediate and more complex to address. Almost every JV Board that we have surveyed shows Directors want to spend more time on strategy and other long-term issues, but the Board collectively cannot seem to pull back from second- and third-level operational issues – and from ‘quizzing’ management on the latest quarterly financial and operating results, or customer or supplier contract issues. The result is that many JVs struggle to quickly identify and pursue new investment opportunities, are slow to restructure, and fail to pay enough attention to succession planning, the broader employee value proposition within the organization, or other issues that are the foundation of long-term success.
Failure to adequately define how the venture relates to the shareholders. JV boards often do not provide sufficient guidance – and intervene to address confusion or tension – on how the venture relates to the shareholders at an operational level (Exhibit 3). These interfaces might be in terms of shareholder reporting, information access, audit, or compliance needs. It is the role of the Board, for example, to ensure clear and consistent expectations regarding where the JV should fully ....