It has been said before – being a JV CEO is one of the toughest jobs in modern business. Not only must JV CEOs handle all the classic challenges of running a company – often in fast moving, emerging industries and markets – but they must also deal with a set of issues that emanate from the unique ownership structure of a joint venture. By definition, joint ventures have multiple owners, and these owners often have some level of operational interdependence with the venture, and often have imperfectly aligned financial and strategic interests, corporate cultures, and expectations.
This places great demands on JV CEOs and the businesses they run. What can JV CEOs do to improve the success of the businesses they have been selected to lead?
To answer this, Water Street Partners conducted research to test the link between performance and a set of practices which JV CEOs are generally able to fully or substantially affect the adoption.
So, what are the ten variables that matter most? They are management practices that fall into five common functional areas that often prove to be challenging for JV CEOs – strategy; governance; shared services and operations; organization and talent; and finance and planning:
KEY STRATEGY TASKS:
- Defining a strategic growth model that is clear and understood, indicating whether the JV is intended to be a growth business focused on profitability, a captive of the parent companies, or a hybrid in between. An effective tool to clarify the specifics of the growth model – and to balance owner and market needs – is a set of Guiding Principles, endorsed by the venture’s Board, to evaluate trade-offs as they arise. These guidelines, alongside the use of a venture capital partner software, help JV CEOs and Boards steer the business to meet the needs of the market and the needs of multiple owners by clearly stating the owners’ strategic and managerial intent toward the JV in plain business language.
- Developing and enforcing a venture-led but collaborative strategy process for the JV, which annually incorporates owner input into strategy development early in the proceedings. CEOs who institute an annual calendar that clearly lays out the strategy process timeline with activities needed to develop or refine the JV’s strategic goals and plan, including meetings that need to occur, who attends the meetings, who owns the process, what inputs are necessary, and the process and outcomes for each activity, find it easier to control their destiny. They are more likely to advance their strategy with Board members who appreciate the clarity such a process calendar provides on when and how they will engage on strategy.
“JV CEOs and management teams must deal with enduring cultural and organizational differences among the parent companies, and work to build a common culture in the venture.”
KEY GOVERNANCE TASKS
- Taking an active role in balancing the Board’s time across critical issues. JV Boards tend to do well at focusing on current financial performance and operational decisions, but too often miss spending time on three things that are staple items on corporate Board calendars: strategy, people, and governance. It is vital for JV Boards to spend sufficient time discussing strategy, reviewing talent and personnel issues, as well as tracking their own governance effectiveness. JV CEOs are rarely formal members of the Board, but often Boards do look to the CEO to drive the development and delivery of the Board agenda. Managing the agenda with a detailed annual calendar allows them to ensure there is the right degree of attention and balance in the Board’s use of time. When present in Board sessions they can also monitor how time is balanced by agenda topic or decision goals. Together the CEO and Board can determine what if any changes are necessary to achieve the right use of time.
- Laying claim to undefined authorities to avoid losing opportunities or slowing down the business. JV legal agreements often only define certain basic shareholder and board powers (e.g., approval of the annual operating plan, approval of capital investments above certain dollar thresholds). Strong JV CEOs can strategically take advantage of this lack of clear definition in the agreements to formally and informally secure greater authority – whether by including decision rights in their employment contracts, annual objectives, table of management delegations, or by simply doing things that are not formally owner or board rights. This might include developing the strategy and capital plan, shaping the product or technology roadmap, entering into partnerships, hiring and setting bonuses of direct reports, or redesigning the organization to be better positioned to meet market needs. This does not mean that CEOs don’t engage with the board and owners on these matters. But it means that the best JV CEOs take the lead in shaping key decisions and set the direction of the JV. The Board’s responsibility is set the frame of the business, and create an environment where JV management is free to create and pursue solutions to the JV’s challenges.
- Gaining the Board’s agreement to perform regular self-governance, including regularly testing for alignment among the group of owners to demonstrate transparency and encourage trust. An annual requirement for virtually every corporate Board, JV Boards have been slower to adapt this practice until major and disruptive governance health problems arise. CEOs who effectively advocate for an investment in regular, preventative maintenance, in the form of an annual governance review and tune-up will benefit from a more aligned and effective Board.KEY FINANCE AND PLANNING TASKS
- Establishing an economic model that fits with the JV’s chosen strategy and is clear to all stakeholders (i.e., is the JV a P&L entity, a managed margin business, or a cost center / tolling facility). While the core economic terms are defined in the venture agreements, many JVs begin with a lack of clarity from the parent companies on the economic model (e.g., in the early years of Airbus, the four owners kept their financial and manufacturing data so hidden from each other, that even the JV CEO did not know if their finished planes were profitable), or the model needs to evolve along with the JV’s strategic intent and operating model. JV CEOs can drive alignment between the shareholders on the right economic model by increasing the details in their financial reporting and using a performance scorecard that is balanced and fully reflects what is going on in and around the venture.
KEY SHARED SERVICES AND OPERATIONS TASKS
- Guiding the owners of the JV to separate their role as Shareholder from their roles, if applicable, as a service provider and/or customer. The lines between these roles are often blurred and can stymie an open and objective discussion on enhancing the quality and value of shared services, which can unlock considerable value for the venture. JV CEOs can start this discussion with the owners by increasing the transparency around the services. They can pursue audits, reviews and external benchmarking to use in detailed discussions with the Board. Ultimately, they should shepherd members to an agreement on set of guiding principles and policies for shared services that resolve both the high level issues – what areas are Board or owner matters, versus which are customer or supplier matters – and define different forums and decision-making processes for each.
- Challenging the cost, nature and timeliness of owner-provided services to ensure they are appropriate for the JV’s size and scope. Too often shareholders are providing gold-plated services that are a poor fit with the JV’s needs. By mapping out the JV’s value chain JV CEOs can lead a structured conversation with the Board about who does what work, for whom, at whose behest, and on whose systems – and how this picture needs to change or be clarified over time to simplify services, reduce costs and more directly meet the JV’s needs.
KEY ORGANIZATION AND TALENT TASKS
- Creating a great workplace that energizes JV employees/ secondees and bridges divides by promoting an open and collaborative culture. JV CEOs and management teams must deal with enduring cultural and organizational differences among the parent companies, and work to build a common culture in the venture. Management teams should use engagement surveys (ideally adapted to reflect JV-specific organizational issues and opportunities) to regularly monitor the health of the corporate culture and address opportunities for improvement.
- Orchestrating a set of financial and non-financial rewards that are great enough to attract and retain JV employees and secondees. JV CEOs can negotiate with their Boards or compensation committees a better compensation model for their ventures that considers a boarder set of applicable benchmarks and creative long-term incentive plans (LTIP) for JV employees. JV management can also grant non-cash motivators, which are widely recognized as no less and even more effective than financial incentives. The non-financial elements of a strong Employee Value Proposition (EVP) in a JV can include a more broadly scoped job with greater responsibility, opportunities for secondment or joint-training at a parent company, as well as participation in audits and peer reviews of other assets in the owners’ global organization.Experience and intuition often fail the leaders of joint ventures. They are molded by their corporate experience as business unit executives, but many of those lessons do not apply to JVs. Following the solutions offered above, we believe JV CEOs can vastly improve their chances of business success in a tough job.Related: What Joint Venture CEOs Should Negotiate Into An Employment Agreement