An annual agenda that balances operational reviews with discussions of strategy and growth will help JV Boards be as effective as possible.
JULY 2017 — EVERY YEAR, thousands of new joint ventures (JVs) are formed worldwide. Some, like the Starbucks-PepsiCo ready-to-drink coffee venture, start small and grow into extraordinary businesses. Others, such as Chevron Phillips Chemical, come of age with considerable assets, existing customers, thousands of employees, and significant capital. And some, such as the Toshiba-Western Digital flash memory JV, become embroiled in strategic or legal disputes between shareholders and rapidly move to restructuring or exit. In each of these JVs, someone is appointed to lead the company — as CEO, managing director, president, or similar title.
Meanwhile, more than one-quarter of existing JVs will experience new leadership each year either because the existing CEO assumes a different role within a shareholder company, retires, is fired, resigns, or simply collapses under the weight and sheer exhaustion of dealing with divergent, overreaching, or otherwise unruly boards and shareholder organizations.
Our data show that less than 5% of incoming JV CEOs have experience running a joint venture and most have not served as senior members of JV management teams. As such, most incoming JV CEOs are ill-prepared for the world they are about to enter and unlikely to negotiate effectively before accepting what could be the professional role of a lifetime.
Our experience serving hundreds of JVs over the last quarter century point to seven ideas that JV CEOs should seriously consider when negotiating employment terms and conditions. This advice applies to both incoming JV CEOs, and those already in role – although negotiating new terms and conditions can be challenging for existing JV CEOs who are likely to hold less leverage with the board and owner companies.
SEVEN “ASKS” BEFORE ACCEPTING THE JOB
Without doubt, leading a JV is a challenge far beyond running a similar-sized business unit or independent company. Much has been written on the unique challenges, success rates, and foreshortened lifespans of joint venturesSee: Bamford, Ernst and Fubini, “Launching a Worldclass Joint Venture,” Harvard Business Review, February 2004; James Bamford, Gerard Baynham, Peter Daniel, and Geoff Walker, “JV Management: Do … Continue reading – as well as on how being a JV CEO is a proving ground for the most senior roles in public companies.“JV CEO Transitions – Getting it Right,” Joint Venture Exchange [July 2011]
These challenges and other issues come in many forms. For starters, the role of the JV CEO is often insufficiently-defined – especially with regard to what power truly resides with the Board and owner organizations, versus is the purview of management. Second, and related, it is rarely clear how the Board and CEO will work together to develop and grow the business. Third, JV CEOs are often underpaid relative to the complexity and risks of running the company. Fourth, JV CEOs often lack sufficient formal and informal communication channels with their Board and senior sponsors within the owner companies, which prevents them from receiving and providing candid feedback on company performance.
To combat these challenges, JV CEOs should consider negotiating seven terms and conditions before accepting or renewing a job offer.
- Agreement on the JV executive compensation process, including benchmark peer group and rationale. An incoming JV CEO deserves to understand and agree with the benchmark peer group that will be used to determine his or her compensation. This includes the rationale for selecting this basket of companies and whether those comparables are independent companies or business units of larger companies. Our research with Willis Towers Watson showed that the choice of public companies vs. business units as a comparison group can make a 2× to 5× difference in JV CEO compensation. The research also revealed that the breadth, complexity, and risks associated with a JV CEO role are often greater than those of a business unit head. Unfortunately, most JV CEOs are likely to be compensated at the level of a business unit leader because the Boards do not recognize the significantly higher governance and shareholder management demands and career risks faced by JV CEOs.
For incoming JV CEOs, a solution is to negotiate upfront and specify in the employment agreement that the Board (or HR Committee) will either include public companies in the peer group or provide rationale for the peer group selection. The rationale should include an explicit analysis that legitimizes the selected mix of public, private, and business unit companies.
- A limited Year 1 “at risk” JV payment structure. JV financial and operational performance, and the levers truly within the CEO’s control to drive outcomes, are notoriously hard for outsiders and newcomers to grasp. For incoming JV CEOs, accurately judging the owners’ true commitment to the business is difficult in the early stages of operations. Similarly, key performance indicators on both the cost and revenue side may not be fully within the JV CEO’s control because of commercial agreements with one or more shareholders. Many JV agreements are structured in such a way that one shareholder is responsible for selling the JV’s products in certain markets. Other agreements might stipulate that a shareholder provides the required technical, operational, or administrative services to the venture including managing the relationship with regulators to secure approvals.
Such uncertainty can be reduced by limiting the at-risk component of Year One compensation. For example, in a Scandinavian banking joint venture, the incoming CEO and the Board pre-agreed the first year bonus, which could only be reduced in the event of failure by the CEO to perform core duties or material deterioration in venture performance. The CEO and the Board also agreed to establish metrics at the end of the year once the incoming CEO understood the business drivers and the areas under management control. These metrics were linked to the subsequent year’s JV executive compensation. Similarly, the CEO of a new U.S. bank processing JV negotiated upfront that only 25% of his compensation would be at risk for the first two years. As an industry veteran, a peer to his Board members, and someone who had seen too many ventures flounder, his rationale to the Board was clear, “If I have to work for people like you, who have shown mixed enthusiasm for this type of venture in the past, who would take risks?”
- A Board-agreed performance contract and scorecard even if the JV CEO is a secondee. An alternative or complement to limiting at-risk compensation is to establish an explicit performance contract for the JV CEO. This contract should be agreed to collectively, put in writing by the JV Board, and linked to a JV scorecard. Done well, the performance contract and scorecard will align the Board, the owners, and management on the specific and holistic expectations for the JV.While it might seem surprising that approval of the capital / project budget and over-runs on the capital / project budget are among the eight decisions where 50% or more of the ventures in our … Continue reading
- Agreement on Management’s “degree of freedom” with the JV’s scope and direction. To what extent is the CEO expected to grow and evolve the JV versus efficiently executing within the scope and direction of the owners? Most new CEOs enter the role thinking they will be the CEOs of a high-potential business, and that a core part of their job is to optimize the venture to the greatest extent possible. This may include profitable expansion into new technologies, products, and customer markets, or making astute investments.
Many CEOs are surprised to learn that the owners do not see the world the same way, viewing the JV as a narrow-purpose entity designed to fit conveniently within their broader corporate strategies. The CEO of a Middle Eastern natural resources JV vividly captured captured that disconnect: “The owners have me on such a short leash that my feet aren’t even touching the ground!” While there is no right answer for all JVs, incoming CEOs should appreciate the authorized scope of the venture agreement and the owners’ appetite for optimization that may blur existing boundaries.
- Agreement on secondee placement, reporting, and loyalty. Incoming JV CEOs should ascertain that they will administer performance reviews to their direct reports and have a level of control over their compensation (i.e., the right to allocate bonuses within a Board-agreed pool). If the JV has parent company secondees, the CEO should extend this principle to secure agreement that no secondees will be sent into the JV unless invited by the CEO, who should should have the right to reject a secondee nomination for any reason.
Furthermore, a JV CEO should seek clarity on secondee loyalty and information sharing. Secondee reporting relationships should form a direct line to the JV CEO or other supervisor within the venture, and secondees should not serve as a back-channel to the parent company unless in full view and with the explicit understanding of the JV CEO.
- A mechanism for candid feedback to and from JV Directors. JV Boards are often composed of executives one level below the senior decision-makers in the parent company – whether that be the company CEO, CFO, or regional or business unit president. Moreover, JV Boards are prone to certain challenges and shortcomings such as high turnover of Directors, committee over-reach, limited time dedication and preparation by Directors, and weak self-governance. This means that JV CEOs are well-served to gain agreement from senior sponsors to annually provide to them informal feedback on Board performance, director contributions, and owner willingness to drive future performance, growth, or improve risk management.
We recently hosted a roundtable of JV CEOs that brought this practice to life. One CEO provided an annual scorecard of each director’s performance to the senior sponsors within each owner company, which was shared during an annual catch-up conversation. Such formality and directness is, admittedly, not appropriate for every JV, and there is a fine art in talking to your boss’s boss. But this approach can increase the odds that directors will meet or exceed expectations for Board and committee attendance, preparation, the management of competing interests, and positive contribution to board culture. The approach can also stimulate an annual discussion with senior sponsors on the JV’s performance and how the owner company can better enable the JV’s success.
Similarly, JV CEOs may benefit from an independent mechanism to receive feedback from their Board of Directors. Because Boards often provide less direct feedback to JVs than to internal company structures, JV CEOs often do not hear the honest truth about how they are doing. They often think the Board is happier than they really are, or lack specific ideas about how the CEO might alter his or her style. Therefore, incoming JV CEOs can be wise to ask upfront for the ability to hire a CEO coach or other external party each year to solicit unvarnished feedback from each Board Director on the CEO’s performance and style, including strengths and areas of improvement. Doing so will help elevate performance, increase alignment, and help reduce the very real risk that a JV CEO gets blindsided by a Board that wants to make a change.
- Real agreement on Board involvement. JV legal agreements typically spell out certain decisions as reserved shareholder matters (e.g., amending foundational corporate documents, liquidating the company, bringing in new owners) and define others as matters for the Board (e.g., approving the annual operating plan and budget, hiring and firing the CEO, selecting auditors). What very few venture agreements or other governance policy documents do is define – in a practical way – the Board’s involvement in company affairs. For productive tenure, JV CEOs must have clarity on the Board’s “posture” and parent company involvement.
Time and again we witness significant misalignments between JV CEOs and Boards (or a subset of Board and committee members) as to how this relationship should work. For example, a large European energy JV suffered from fundamentally different interpretations across the governance system of how the venture would operate within the confines established in the JV agreement and other legal documents. For example, the agreements could be interpreted to mean that the JV CEO has the authority to make decisions up to Euro 5 mm with the expectation that the Board would not expect to be notified in advance. In contrast, the agreements could also be interpreted to mean that a decision at that level would be challenged by owner company functional staff – and indeed that such a challenge was a valuable way for the owners to manage costs. This interpretation would then be translated into how committees operated, including using committees to question and press for lower costs on any expenditure of substance, even if those matters were technically within the CEO’s domain.
Clarifying the Board’s role and that of the owner organizations in the governance and assurance of the JV can be done in ways that do not entail re-opening the JV legal agreements. Specifically, an incoming JV CEO should probe second-level decision making and owner input. The JV CEO should gauge the owners’ commitment to (1) establishing a set of governance framework documents including guiding principles for venture governance and management at the next practical level and, (2) at least bi-annually, revisiting the governance model and discuss whether the board and committees are operating at a level of operational detail that reflects these principles.
Beyond these seven “asks,” the emboldened JV CEO might present other suggestions not already in place. These include having each shareholder appoint a Lead Director, and ensuring up-to-date JV Director role descriptions that include explicit expectations for Director preparation, availability, and time commitments. Another suggestion is to memorialize a JV Board director confidentiality and conflict of interest disclosure policy that spells out how Directors will manage situations where their employer’s interests diverge with the interests of the JV.
|↑1||See: Bamford, Ernst and Fubini, “Launching a Worldclass Joint Venture,” Harvard Business Review, February 2004; James Bamford, Gerard Baynham, Peter Daniel, and Geoff Walker, “JV Management: Do You Have the Right Stuff?” August 2015; and “Joint Venture Lifespans,” Joint Venture Exchange [April 2014].|
|↑2||“JV CEO Transitions – Getting it Right,” Joint Venture Exchange [July 2011]|
|↑3||While it might seem surprising that approval of the capital / project budget and over-runs on the capital / project budget are among the eight decisions where 50% or more of the ventures in our sample set have a passmark of two-thirds majority or lower, we attribute it to our interpretation of the legal agreements when it was unclear whether decisions related to the work program and budget were inclusive of decisions related to capital expenditures or not. Similarly, approval of non-budgeted expenses, another among the eight decisions, is also influenced by our interpretation of the legal agreements, and includes a mix of non-budgeted capital and operating items.|