A Guide to Best Practice for Joint Ventures

We at Imagination Technologies recently concluded a JV agreement with Beijing Automotive, following long-standing best practice. So what exactly does constitute good practice for getting joint ventures right and making it work successfully? Here are some thoughts based on our direct experience.

Overcoming cultural differences
When establishing a JV company, we will meet different ways of thinking and doing, so our cultural bubbles need to be overcome. The partner firms have their own national cultures and organizational cultures, while the JV will have yet another identity derived in part from the partners. These cultural traits impact negotiation of the JV agreement, day-to-day management of the JV, and later interpretation of the signed JV agreement.

Create a shared intent
If you can transact business in a straightforward way, then a JV company is not necessary. Where it is useful is in unlocking a market previously denied to you, or in creating a new one, both of which can lead to significant additional revenue. Both partners must contribute what they say they will, in terms of value and quality. They should each bring their own IP/IPR and know-how to the JV – and the resulting partnership should lead to the co-creation of something new and create a sustainable advantage over a competitor. Identify what success for the JV would look like, and a way to get there. Brand identity, name and strategy are just a few of the elements to consider.

Clear redlines on competition, ownership
There need to be clear redlines about how and where the JV competes – for example, it should not compete with one or both of the partners. The JV partners should not transfer ownership of their IP – their crown jewels – to the JV, as it could reduce their valuation and the ability of their core businesses to service customers outside of the JV. Consider licensing instead and whether this is acceptable to making a cash contribution. In China this can be a bit hit or miss with the authorities and you have to go through the whole process of an asset appraisal for any non-cash contributions.

Clear ownership of any IP created within the JV should be established so that it belongs to the JV company itself; this goes to the heart of the JV’s valuation. The half-way house of joint ownership of IP is problematic for so many reasons.

What does an exit look like?
There should be clear understanding between the partners on what the exit looks like, whether trade sale, IPO or something else. If the JV is undertaken in a jurisdiction where the government is an active legislator in business affairs, then one needs to consider more than one exit option from the outset, in case future legislation closes off one such exit route.

Relationships at all levels
Since the partners are going to be tied together for quite some time, try and understand if the partners possess a good track record in JVs, especially in that region. It helps if you understand one another. Formation of the JV is the easy bit, though the way negotiations proceed are possibly a leading indicator of how later problems will be resolved once the lawyers have been sent home. Many other challenges will arise, such as raising further funds, agreeing strategy, dealing with local/national government officials, regulators, pivoting in the face of obstacles and setbacks.

Such aspects will take time, and sometimes, delays will be used as deliberate tactics, so it is important to know when to wait – and when to walk away, without succumbing to the sunk cost fallacy. A good relationship with government is useful to speed up approvals – and to get things enforced should the JV CEO go rogue.

Corporate governance
When reading about JVs we tend to think about ownership stakes, but we need to think about rights and protections, particularly for minority shareholders. Who gets to appoint the key roles of chairman, CEO, CFO and in some jurisdictions, CHRO and CTO? How many board directors will each partner get to appoint? Does the chairman have a casting vote? Is the CEO on the board? Who appoints the auditors? How often will there be board meetings, what level of reporting is required? All partners may insist on board seats to ensure they get adequate visibility and receive appropriate management information and frequent reporting, as opposed to having to rely on the CEO.

The minority partner may demand additional protections, such as the requirement to give their consent to amendments to the articles of association or registered capital; termination and dissolution of the JV; and specific operational powers (changes to the annual operating plan, material changes to budgets, indebtedness above a certain level). Junior partners in any coalition, including JVs, are mindful of their relative status, and will understandably seek to gain veto powers to protect their position and the value of their investment.

Who is really in charge of the JV? Even in a 49:51 JV the answer is not obvious. There should only be a single chain of command, as opposed to parallel chains, with each loyal to a different partner, leading to factionalism. What is required to dismiss the CEO – a simple majority or unanimous vote? If the CEO and their team was ‘holding out’, how could the partners gain the upper hand? Could they cut licenses and other rights and services to the JV?

Incentives
The JV management should not feel conflicted between the JV’s goals and those of its partners, so incentives should be tied to JV performance and incentivize the management as a team. The JV staff should see a career path – if they only see a career path in a partner, then they will prioritize the partner’s goals over the JV’s. The JV may be composed of staff from the partners, and there should be no major disparities between the pay of staff regardless of which partner they come from, and whether they are locals or expats.

Pick a CEO you can trust
You need to pick someone you can trust, possibly from your own organization, but preferably not someone with a strong maverick streak (generally a key indicator of potential future governance issues). The JV partners may not have much practical influence over the JV due to factors including physical distance and cultural differences. If the JV is setup in a country with a weak corporate governance culture – one that may also celebrate strong, autocratic CEOs – then the partners cannot afford to fluff the appointment of the CEO and their team.

The CEO should be very good at building and managing relationships with the partners, and must build a strong executive team with a strong team identity (achieved through doing real work together), that is diverse, one that can work in a cross-cultural setting. There should be interdependence within the executive team to foster collaboration, and they should demonstrate good team dynamics – observing, listening and helping skills (to help prevent the formation of damaging silos/factions).

Do not be arrogant
As a partner, do not annoy the JV by over-charging it for corporate services, tying its hands unnecessarily, or using it to launder money, get kickbacks or deliver shady benefits to friends and family, perhaps through unnecessary consulting agreements. That state of affairs is rare. More widespread is misplaced optimism about the JV’s market fit and business forecasts. JV partners often downplay the strength of local competitors, the availability of talent and trajectory of legislation and are usually over-optimistic about their chances of success.

Know when to walk run away
As a company, we carefully consider our strategic options. A JV is just one option, alongside others, assessed against common criteria. We proceed with very few of the JV proposals we receive. Common reasons are business logic, partner quality, poor business plan and the inescapable feeling, that once started, we may not have much influence with the JV. We are never afraid to shake hands and respectfully say “goodbye, until next time we meet.”

In conclusion, JVs are a bit like marriages. They have their ups and downs. Sometimes, the partners stay together, and sometimes (sigh) they do not. Partners may mentally ‘drift apart’ while stuck, unhappily together, in the institution of a JV, while thinking of different futures for themselves – a case of “same bed, different dreams”. And that’s when plotting can begin, whether the parents or the JV itself.

Woz Ahmed is chief strategy officer and chief of staff, Imagination Technologies