How to make joint ventures work for partners in the deal
Well governed companies perform better in commercial terms. FILE PHOTO | NMG
Joint ventures between companies, consortia or strategic alliances as some call them, have been the preferred way for many companies to leverage and enter into markets, transfer technology, procure supplies, obtain finance, share management skills, manufacture products around the world, or share risk on an international scale. Sometimes, the partners in a joint venture are competitors in other fields.
Many joint ventures involve the incorporation of a joint venture company owned by two or more partners in the joint venture. Top management of such joint venture companies are drawn from among the senior management of the partners.
The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.
Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.
The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.
Corporate governance is therefore about what the board of a company does and how it sets the values of the company, and it is to be distinguished from the day to day operational management of the company by full-time executives.
The argument that well governed companies perform better in commercial terms holds sway. Governing joint venture companies can present special challenges. Disagreements can arise between the partners that were not envisaged in the initial joint venture agreement.
Directors then face conflict of interest between their responsibilities to their joint venture company and to the partner that employs them.
Moreover, joint venture companies may be incorporated in foreign jurisdictions, with diverse and different company laws and regulation regimes, and have overseas partners with different cultural expectations.
A crucial aspect of the governance of joint venture companies is to realise that only matters concerning the joint venture can properly be handled by the joint venture company board.
Issues affecting the relationship between the joint venture partners cannot be resolved at the joint venture company level. They need to be addressed at the level of the joint venture partners, if necessary revising the joint venture agreement.
The composition of the board of joint venture companies needs to be considered carefully and written into the joint venture agreement, including how many representative directors there will be from each side and whether independent non-executive directors are desirable.
Although a host of joint ventures do appoint the managing director or the CEO of the joint venture to the board, others now appoint representative directors from the partner companies, plus the non-executive directors in some cases, with the joint venture project manager attending meetings in a non-voting, non-partisan way.
Lessons should be drawn from the Teletronic Riches Limited, a joint venture company set up between Lichfield Teletronics Limited, a UK company, and Great Riches Limited, a company based in Hong Kong, China, although incorporated in Bermuda.
Ibrahim Kitoo is Advocate of the High Court of Kenya.
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