Public Company vs. JV Governance

James Bamford is a Managing Director and Tracy Branding and Lois D’Costa are Directors at Water Street Partners LLC. This post is based on their Water Street memorandum.

The governance of public companies is profoundly important. Thirty years ago, CalPERS, a major institutional investor and leading corporate governance advocate, argued that corporate governance was “the grain in the balance that makes the difference between wallowing for long and perhaps fatal periods in the depths of the performance cycle, and responding quickly to correct the corporate course.” Time and again, research has borne out the link between good governance and strong shareholder returns.

Increasingly, public companies are entering into joint ventures—to access new markets, combine capabilities, gain scale, or share risk. The largest oil and gas companies in the world, including Shell, ExxonMobil, and BP now draw the vast majority of their current upstream production from joint ventures, with more than 50% of production coming from ventures they do not operate. Meanwhile, the largest automakers and industrial firms, including General Motors, Siemens, and Volkswagen, derive a substantial share of their revenue, profits, and risk exposure from joint ventures, especially in China. [1]

And, by almost every measure, the governance of these joint ventures is pound for pound more challenging than the governance of public companies. Far more than a “grain in the balance,” the governance of joint ventures is a “boulder on the edge” that can tip the stability and performance of these entities and, by extension, can meaningfully impact their public-company owners.

What Makes JV Governance Tougher

Water Street has written extensively on joint venture governance—including on its challenges, links between good governance and performance, and on the contractual terms and practices that drive governance excellence. [2] The aim of this note is to simply spell out why joint venture governance is so challenging compared to public company governance.

Make no mistake: public company and joint venture governance possess many similarities—some deep, some superficial. Specifically, the oversight of public companies and joint ventures feature certain common governance structures (e.g., boards, committees, and shareholder or annual general meetings), governance leadership roles (e.g., board chair, board secretary, committee chairs), board roles and responsibilities (e.g., setting direction and strategy, overseeing management, ensuring adequacy of controls, and approving major investments), board requirements (e.g., satisfying fiduciary duties, including the duty of care and the duty of loyalty), best practices (e.g., board diversity and balanced functional skills and experiences, clear board pre-reading materials sent well in advance of meetings, board time spent in in deliberative discussion rather than extensive management presentations, board action logs), and desired attributes (e.g., need for candor, transparency, and collaboration).

And yet despite these similarities, the governance of joint ventures is fundamentally different from that of public companies in many regards. These differences originate from the very number, nature, and interests of the shareholders, and then cascade into numerous other categories of divergence. Such additional differences relate to the commercial, operational, and financial relationships between the shareholders and the company, and the presence and potential of competition between the different actors on the governance stage. They also pertain to the profile and conflicts of board directors, and their relationship with management—who may have past, current, or future reporting relationships to individual directors. Similarly, the profile of directors creates notable differences in director time dedication and continuity—where joint ventures are notably disadvantaged relative to public company boards. Finally, additional differences extend into and result from the nature of the regulatory regimes—which are highly prescriptive for public companies, but much less so for joint ventures—which leads to specific differences in the nature of information communicated about and to the shareholders.

In short, the differences are vast and should not be ignored (Exhibit 1).

Exhibit 1: Key Differences in Public Company and Joint Venture Governance

Public Companies Joint Venture Companies
Nature and the Shareholders and Their Interests
Number of Shareholders 1000s 2-4 (typically)
Shareholder Collective Interests Shareholders united in simple desire to maximize total shareholder returns (i.e., dividends and share price) and manage risks Shareholders united in maximizing certain collective interests, which often include maximizing returns and managing risk, but may alternatively or additionally relate to other joint objectives not tied to JV Company profit (e.g., develop or prove a new technology for later exploitation by shareholders); common objectives are often dynamic, and not weighted equally by the shareholders
Shareholder Individual Interests Typically, none: shareholders united in desire for financial returns Many: shareholder often have separate individual objectives for the company (e.g., learn, create synergies with other shareholder assets and businesses), as well as their own financial, resource and constraints, view of the market, and risk tolerance
Role of the Board Serve as an independent agent of all shareholders to maximize their collective interests: board decisions not influenced by individual shareholder interests Varies, but includes reconciling different shareholder interests, which individual directors are at least implicitly expected to represent
Commercial, Operational, and Financial Relationship with Shareholders
Commercial Relationship None JV Company may enter into (and ultimately renew, renegotiate, or terminate) purchase, supply, and/or licensing agreements with one or more shareholders
Operational Relationship None JV Company may rely extensively on shareholder expertise, technology, administrative and technical services, assets and infrastructure, data and information, and/or people on a fee or non-fee basis
Financial Relationship No capital calls of shareholders; typical sources of funds include public or private debt and additional grants of equity Shareholders often called on to make capital contributions in addition to other forms of capital raising
Competition between and with Shareholders
Competition between Shareholders None or unknown as shareholder register is confidential except with respect to the most material of holders Shareholder may be (and often are) direct competitors and are always known to each other
Company Competition with Shareholders None or rare JV Company may be direct competitor with shareholder(s); in all cases, JV competing for resources with other shareholder businesses and opportunities
Board Director Profile
Board Composition and Independence Majority of directors are independent (non-executive); others from Management (executive) All or majority of directors are current executives of and nominated by an individual shareholder
Director Compensation Yes (average annual compensation of $250K+ for US large cap public company directors) No (except in certain situations—e.g., state-owned companies in the Middle East and Africa, JVs with public shareholders)
Director Duty of Loyalty No conflicts: singular loyalty to the company Many conflicts and competing interests: often need to balance loyalty to company with loyalty to nominating shareholder
Director Relationship to Management Management has no current, past, or future employment or reporting relationship with individual directors or their companies Management often includes current employee(s) of one or more shareholders seconded into the JV Company for several years; these members of management may have solid, dotted, or implied reporting relationship to an individual board member or others in shareholder organization, and are likely to have annual bonus, long-term incentive, and pension tied to the shareholder company performance while serving in the joint venture
Board Continuity, Dedication, and Coherence
Tenure of Directors 110 months (median) 36 months (median)
Director Time Dedication 30-35 days per year (median) 10-20 days per year (median)
National Cultural Differences among Directors Often limited: generally come from common governance tradition Often high: directors from different governance traditions, especially in cross-border JVs
Non-Board Member Role in Governance None: board committees solely composed of board directors; board contracts with independent auditors and advisors to support governance responsibilities Often extensive: functional experts from individual shareholders often serve on committees, perform assurance and audits, and attend as (often active) participants in board meetings
Legal and Regulatory Framework for Governance
Regulatory Requirements Subject to extensive and specific governance requirements (e.g., board independence, meeting requirements, required committees and composition) [3] defined by regulatory bodies (e.g., SEC) and stock exchanges (e.g., NYSE, LSE) Generally limited regulatory requirements; JV companies typically expected to follow private company (e.g., LLC) governance requirements—which are often not easily translated into JV context
Internal Governance Support Infrastructure Often significant resources in the Company to support shareholder and board requirements, requests, and communications (e.g. in house legal, investor relations, and finance) Often very limited—and distributed—resources in the JV Company to support shareholder and board requirements, requests, and communications (e.g. legal and/or finance functions may be outsourced to a shareholder and no investor relations department)
Information Regarding Shareholders Shareholders are often unknown to each other as shareholder register is not published except with respect to shareholders with highly material holdings Shareholders identities and ownership stakes are known to each other
Information Regarding the Company Information to be received by shareholders is set based on regulatory bodies or stock exchanges (e.g., under U.S. securities law, quarterly and annual reports, such as 10-K and 10-Qs, and disclosure of material contracts, typically required) with additional information shared voluntarily Information to be received by shareholders is set in joint venture agreement (which is typically quite minimally-defined) or otherwise agreed among the shareholders; information often more extensive / operational than information shared with shareholders of a public company

These differences make JV governance tougher. In short, they place more demands on board directors—demands which entail reconciling divergent interests, avoiding flow-through risks, managing operational interfaces, and managing more challenging conversations around strategy, investments, and talent. And in the absence of regulatory guidance, limited support resources, and less than optimal expectations of time-dedication and tenure, JV directors enter the role with a clear handicap.

That said, the differences also create advantages. For instance, because the shareholders have access to relationships (e.g., suppliers, customers, regulators), capital and other resources (e.g., intellectual property, expertise, adjacent assets) that are potentially valuable to the JV company, the governance of joint ventures, done right, has the potential to have more impactful than public company governance.

Key Implications

Given these pronounced differences between joint venture and public company governance, companies need to change the way they approach a number of facets of governance, including:

Director training: JV Board directors need training on how to perform their role—training which is anchored in the general principles of good governance but that also reflects the unique features of joint ventures. While many countries have well-known and highly-respected training programs for corporate directors (e.g., Stanford Law School in the U.S., the Institute of Directors and the Financial Times in the UK, the Australian Institute of Management), such trainings are not structured to address the peculiarities and challenges of governing a joint venture. While JV directors may find such corporate governance programs beneficial, such training needs to be supplemented with training and ongoing education which explores issues, risks, and best practices specific to joint ventures. For example, such training should cover topics such as managing conflicts of interest between a director’s shareholder company and the joint venture company, navigating antitrust concerns related to competitively sensitive information in joint ventures with competitors, obtaining shareholder input and approval for decisions related to the venture and coordinating and streamlining shareholder demands for information from the venture, and other matters.

Director selection and expectations: When nominating executives to serve on joint venture boards, companies should have a cleared-eye view of what competencies and personal attributes a nominee will need to do the job well. They should further seek to nominate individuals who will realistically be able to dedicate the time needed to thoughtfully govern the venture and be able to remain on the venture board for a sufficient period of time to ensure continuity of venture leadership over time. All too often, companies nominate executives to joint venture boards by virtue of their position in the shareholder company, and not also based on whether they possess the skills and experiences the JV board actually needs, nor whether they possess the boardroom temperament, or interpersonal communication and influencing skills to succeed in a misalignment-rich joint venture governance environment. Furthermore, companies underestimate the significant time it takes to be an engaged and contributing member of a JV board, nominating individuals whose plates are already overflowing. Shareholders also need to avoid replacing directors after only a year or two on the JV board, disrupting the ability of the board to develop deep, trusting relationships and continuous ways of working.

Contractual agreements and corporate governance policies: Lacking a robust regulatory framework, joint venture legal agreements and governance policies need to do more work defining how the governance of the company will actually operate. This includes being more explicit in affirming or waiving director duty of loyalty, fully delineating the authorities of the shareholders and board relative to management, defining the scope, composition, and management of committees, and establishing how shareholder audits and assurance will work, including whose standards (e.g., one or all of the shareholders, international industry guidelines) the joint venture will be audited against. Some of these issues will be resolved in the joint venture shareholders agreement (or equivalent legal document), while others are best defined in non-contractual policies, such as a governance framework or related practices.

More broadly, there are opportunities for companies in certain geographies (e.g., Europe, Saudi Arabia, China) or industries to work together to influence regulatory policy on the governance of joint ventures such that the regulatory framework is more clear with regard to the unique issues that joint ventures introduce.

* * *

Given the materiality and risks of joint ventures, isn’t it time for companies to up their game on joint venture governance—and stop pretending that governance is essentially the same as public company governance? We think so.


1The financial and strategic materiality of joint ventures, and rates of new joint venture formations, varies considerably across industries, geographies, and companies. In general, industries such as upstream oil and gas, mining, refining and chemicals, alternative energy and power, automotive, and high-tech industrial tend to be quite joint venture intensive, as do certain geographies, including China and the Middle East. At the same time, joint ventures tend to be valuable strategic vehicles in certain sub-sectors, such as autonomous vehicles, marked by technology convergence.(go back)

2See: James Bamford and David Ernst, “CalPERS Global Governance Principles: Joint Venture Governance Guidelines,” CalPERS, Updated Mar 16, 2015; Meghan McGovern, Tracy Branding, James Bamford, and Lois D’Costa, “JV Directors Duty of Loyalty,” Harvard Law School Forum on Corporate Governance and Financial Regulation, Nov. 16, 2019; James Bamford and David Ernst, “Governing Joint Ventures,” McKinsey Quarterly, 2005 Special Edition; David Ernst and James Bamford, “Your Alliances are Too Stable,” Harvard Business Review, June 2005; James Bamford, “Board Oversight of Joint Ventures”, The Corporate Board, Jan-Feb 2018; and Gerard Baynham, “How Joint Ventures Staged a Quite Comeback,” Chief Executive, Oct. 6, 2017.(go back)

3Public companies are typically required to have certain board committees (e.g., NYSE-listed companies are required to have an audit committee, a compensation committee, and a nominating/corporate governance committee), whereas joint venture companies have no such regulatory requirements and the use of committees is at the discretion of the shareholders and/or board.(go back)

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