Memo to an Incoming Joint Venture CEO
Seven matters to negotiate into an employment agreement
Where JV committees go bad, and how JV Boards and CEOs can ensure their committees contribute productively to venture performance
JUNE 2011 — That question might sound ridiculous. Committees are not known to strike fear into great leaders. Nor are they known for their speed, decisiveness, or command of real power and resources.
And that is precisely the problem in joint ventures.
Sketch out the governance and organizational structure of a joint venture, and you’ll often find at least a few – and sometimes far more – Board and other owner committees, sub-committees, and working teams operating in the never-never-world between the Board, the Shareholders, and Joint Venture Management (Exhibit 1). Most are not classic Board committees but, rather, committees charged with performing narrow roles beyond the mandated functions of the Board or mainly comprised of functional experts from the parent companies who do not sit on the Board (Exhibit 2). They are created to provide “input” to venture management, deliver an added level of “assurance and oversight” to different aspects of venture operation and new capital investments, and “advise” the Board on specific matters such as budgeting and planning, product development, vendor selection, manufacturing and operations, marketing and sales, and government affairs.
But committees can be a formidable threat to joint ventures. The purpose of this memo is to outline where JV committees go bad, and to show how JV Boards and CEOs must actively manage such groups to ensure they contribute to – rather than undermine – venture performance. To be clear, this memo is not aimed at classic Board committees;Classic Board Committees include: (1) Finance, Audit & Risk, and (2) Human Resources/Compensation. We view these two committees as needed in most JVs, although they are each present in less than … Continue reading rather, its focus is on other types of committees that tend to be spawned over time within the broader stream of joint venture governance.
Committees and working teams have a legitimate role to play in many JVs. They can help deliver expertise to a venture that lacks the scale to hold certain specialist skills in-house. They can alleviate some of the burden of governance – especially in domains where Board members lack the time or expertise to perform adequate oversight on their own. And they can provide a mechanism for operational staff within the shareholders to coordinate with each other,For example, in an emerging market power JV, the shareholders created an Economics & Risk Committee to help align their organizations on key macroeconomic assumptions (e.g., local energy demand … Continue reading or to gain a preemptive “voice” into key venture decisions (e.g., product development, sales strategy) that could have a strategic impact on the shareholders’ businesses and assets held outside the JV.
As the director of a large mining JV in the project development phase explained to us:
We’re desperately keen to keep functional experts engaged and involved in the JV. Committees are our best way to do this. We see committees as a safeguard against “rogue management” – and, more importantly, as a way for technical experts to agree on basic assumptions about the market, the geology, the technical specifications for contractors, and the integrity of the larger technical plans to exploit the resource.… And to do this before all the political bargaining at the board begins.
Committees are certainly not the only way for shareholders and management to fulfill these objectives (Exhibit 3). Secondees, peer reviews, audits, technical and administrative shared service agreements, use of parent company processes and systems, short-term rotations by shareholder engineers and staff – all are alternative means of meeting many of the same goals.
But committees often have a role to play. Our database of several hundred JVs shows that three types of JVs tend to establish non-Board committees with the greatest frequency:
Most JVs have at least a few committees and working teams, which can appear in different forms and guises (Exhibit 4).
Unfortunately, many JV committees don’t deliver on their promise – and may even introduce added costs and risks. As JV Board Chairs, Lead Directors, other Board members, and the JV CEO look at their non-Board committees, it is worth testing whether the venture is falling into any of the following five common pitfalls:
Note: this chart displays a selection of natural resource and other industry JVs from our database, chosen to highlight the high and low ends within each data set
* Classic Board committees include Finance, Audit & Risk, and HR / Compensation. In our database of hundreds of JVs, only 64% have Board-level Finance, Audit & Risk Committees, while 55% have HR / Compensation Committees
** Source: Ankura JV Database
© Ankura. All Rights Reserved.
Add all these problems up, and you’ve got some real costs: Delayed decisions, the penalty of which falls on JV management. Weakened accountabilities. Added time and resource demands on management. Missed opportunities to deliver available skills to the venture. And, well, just a perception of bureaucratic inefficiency.A decade ago, The Economist commented on the emerging structure of the Star Alliance: “Star has no fewer than 24 committees to sort out such matters as network connectivity, purchasing and customer … Continue reading
When JVs suffer from committee problems, the path usually leads to a fairly predictable cocktail of root causes. Often times, committees have ill-defined, outdated, or poorly understood mandates. In other instances, committees lack accountability – including clear objectives established by and a reporting chain back to the Board and JV Management. And, often, committees are not comprised of the right people. (For instance, they may have highly-conflicted participants trying to balance their role in parts of the business that compete for internal resources.)
Make no mistake: the blame does not always belong on the committee or its conceivers. In some cases, the JV Management sidesteps or under-leverages a valuable committee. Consider a large upstream oil JV. The JV had an immediate need to invest $50-100M in an emergency pipeline repair system to ensure integrity of supply. Management issued an RFP to three contractors. Of the two contractors that responded, one was clearly superior, and well within the range of what the Operations Committee viewed as acceptable. Management quietly held a different view: it wanted to award the contract to the third contractor that had not responded to the RFP. Rather than seeking the Operations Committee’s input, management simply reissued the RFP. When it recommended the third contractor for the work, the Operating Committee and Board rejected the proposal based on their experience with the contractor in other projects. Management’s decision not to vet its plan with the Operations Committee to reissue the RFP to give the third contractor a chance to respond caused a six-month delay in the project – and exposed the shareholders to considerable and unnecessary risk.
JV Boards have a lot to do – and actively managing non-Board committees should not be one of them. But JV Boards do have a responsibility for ensuring the integrity of the overall governance system, which includes having an up-to-date understanding of committees and working groups.
How do Boards keep tabs on – and when needed restructure – committees? It starts
with some probing questions and, depending on the answers, may flip into a more
At a minimum, Board members should periodically ask some basic questions about committee set up and activities, including:
When a Board is getting insufficient answers to such questions – or when the JV simply has a large number of committees – it may make sense to conduct a more formal review. Consider how two JVs did this:
The results were eye-opening. In what was an admittedly extreme case, it turned out that more than 400 people across the 8 shareholders were involved in 10 different working teams (Exhibit 7). A typical working team member was spending 10-30% of his or her time on “committee work” – although almost none had any individual objectives or accountability related to their participation. “In other words,” noted one of the directors, “we had a plane load of ‘joint venture tourists’ who were flying all over the place to meet and talk, but were not on the hook for anything.”
Beyond sheer numbers, the Board also discovered that most of the committees had no consistent track record of impact. Based on interviews, an online survey, and other analysis performed by their alliance managers, the Lead Directors recommended a wholesale restructuring of committee configuration, reporting, and expectations of individual committee members. This included terminating certain committees, reclassifying others into temporary task-forces or peer networks, and setting certain minimum expectations of committee Chairs and members (e.g., that Chairs would be at least 25% dedicated and would have their role of committee Chair evaluated by the Board and their owner company).
Over the years at Water Street Partners and McKinsey & Co, we’ve worked with hundreds of JVs around the world. We’ve discovered that addressing issues related to committees can be an important lever in improving JV performance and underlying health – especially decision making speed, accountability, and alignment. In many cases, cleaning up committees can fundamentally change the level of enthusiasm that management brings to the job.
Based on this experience, we’ve arrived at some hard-learned lessons about how to structure and manage committees. We would urge companies to consider these ideas when reviewing existing JVs, or negotiating and structuring a new JV. For new JVs, some of these concepts deserve to be embedded directly into terms in the JV Operating Agreement; others might be included in Day One Board Mandates. For existing JVs, these might form the basis for a section within a set of Guiding Principles.See, The Joint Venture Exchange, “Lighting the Way: Guiding Principles for Your JV,” June 2010.
The guidelines are:
JV Boards and CEOs cannot afford to take a passive approach to committees, working teams, and other governance fauna and substructures that may have grown underneath the Board. They are too valuable – and, if unmanaged, too dangerous – to be left without active supervision. So, to ask the question again: Are you tough enough to manage your committees?
Clint Eastwood, in his role as Dirty Harry, may have answered that question best: “Nothing wrong with shooting…as long as the right people get shot.”
|↑1||Classic Board Committees include: (1) Finance, Audit & Risk, and (2) Human Resources/Compensation. We view these two committees as needed in most JVs, although they are each present in less than 60% of JVs according to our database. For further details on the HR Committee, please see The Joint Venture Exchange, “Rethinking HR Committees in JVs,” April 2009.|
|↑2||For example, in an emerging market power JV, the shareholders created an Economics & Risk Committee to help align their organizations on key macroeconomic assumptions (e.g., local energy demand projections, the price curve of oil), project financing options, desirable debt ratios, and underlying risk profiles. The work of this committee – comprising of senior economists and financial analysts from each shareholder, plus one board member – was instrumental in building agreement among the shareholders on core inputs into large capital investment decisions. This proved instrumental for the JV, which recently has made significant investments in coal, gas, and wind projects that expanded the JVs megawatt capacity fourfold.|
|↑3||A decade ago, The Economist commented on the emerging structure of the Star Alliance: “Star has no fewer than 24 committees to sort out such matters as network connectivity, purchasing and customer relations. Chairmanships have been spread around to keep everyone happy. For those involved, it makes even Airbus Industrie seem a model of industrial efficiency.” The Economist, “Mergers in Mind,” September 24, 1998.|
|↑4||Committees, and the charters that define them, often overlook this concept of “fundamental objective.” We’ve found that Committee Charters tend to clinically define a committee’s roles and responsibilities in a list of 10-15 specific activities, often related to reviewing management plans and proposals or committee rights to initiate audits and reviews. Because most committees don’t regularly think about the higher-level concept of strategic intent – and specifically, whether they also exist to “help management” or to “perform work” – committees often under-deliver on their potential, serving as oversight and assurance mechanisms rather than vehicles to deliver other valuable services. As such, we’ve found it useful to define upfront 2-4 fundamental objectives that will infuse the work of the committee, to spell out those fundamental objectives at the top of the committee charter, and then for the Board to revisit and reinforce these fundamental objectives in its review of the committee. For an example of what this looks like, please contact Water Street Partners.|
|↑5||See, The Joint Venture Exchange, “Lighting the Way: Guiding Principles for Your JV,” June 2010.|
We understand that succeeding in joint ventures and partnerships requires a blend of hard facts and analysis, with an ability to align partners around a common vision and practical solutions that reflect their different interests and constraints. Our team is composed of strategy consultants, transaction attorneys, and investment bankers with significant experience on joint ventures and partnerships – reflecting the unique skillset required to design and evolve these ventures. We also bring an unrivaled database of deal terms and governance practices in joint ventures and partnerships, as well as proprietary standards, which allow us to benchmark transaction structures and existing ventures, and thus better identify and build alignment around gaps and potential solutions. Contact us to learn more about how we can help you.