Perspective - Fall 2009

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An HR Guide for Navigating JVs

By Jim McKay

JOINT VENTURES (JVs) are fast becoming an important element of many companies' business strategy. For those aiming to do business internationally, JVs are often the only feasible way to enter new markets. And with the myriad, complex human capital considerations necessary in any JV, it's important to have HR involved from the early stages when a JV is being considered.

To make a significant contribution to these discussions, HR professionals need to clearly understand the many issues and potential problems inherent in a JV and have resources for developing solutions.

Given the strategic importance of JVs in today's global business environment, one might expect to easily find guidance on tackling the complexities of a JV, based on widely used, successful methods. But that's not the case. A review of the literature on JVs shows much of it to be incomplete at best, contradictory at worst. Tactics and solutions that make sense for one JV often don't resonate for another, for reasons that aren't obvious or explained by the experts.

After helping many clients navigate the human capital issues of JV journeys, we've developed the following guidelines for HR professionals faced with the prospect of an impending JV. You'll also find the list of common JV terms, with definitions, at the end of this article to be helpful in understanding the terminology.

Arm yourself with knowledge and tools
First, the HR professional needs to learn the basics of how JVs are set up and operated, and how they differ from other types of investments, such as acquisitions, alliances, greenfield startups and minority investments. There are legal aspects to understand, as well as structural details.

A JV is formed when two or more investing partners set up a business entity. (See Figure 1 for a typical JV structure.) These partners share the rewards and risks of the JV. Both parties sign a JV agreement or shareholder agreement, which formalizes the deal and protects each partner's rights and interests.

It's also important to understand some fundamental concepts about JVs:

• Separateness. The JV is legally separate and distinct from each investing partner's organization. But separate doesn't mean independent, since the partners control the board and management committee and are the major, or only, investors in the JV.
• Fiduciary duty. A partner's leaders can form part of the JV's board and management committee. However, these individuals have a fiduciary duty to act on behalf of all JV shareholders rather than only in their own organization's interests.
• Joint control. No one partner can control the JV; control belongs to all partners together. But joint control does not necessarily mean equal control, since control is determined by several factors, including the value of each partner's contribution to the JV.
• Veto. With joint control, each partner plays an active role in the JV, at least at the strategy level. This means each partner has the power to veto highlevel strategic decisions.

 

Develop a viewpoint, define roles
During the JV journey, it's easy to lose sight of some of the issues certain to arise and the solutions that should be considered. A systematic approach can be enormously helpful. Drawing from experience in consulting on many JVs, as well as interviews with 20 JV leaders around the world, we've created a tool to help JV partners anticipate and address the major issues.

Watson Wyatt's JV tool* focuses on three key, interrelated elements, and the major factors and issues to be considered for each:

• Strategy
• Structure and Operational Details
• People

 

The strategy section highlights the businesswide issues that need to be considered first. In the strategy development phase, well-intentioned advice can be very confusing. Due to the wide variety in the types, structures and operations of JVs, the foundation on which one JV is built is not comparable to another. What works in one situation might be totally inappropriate in the next. It's vital that the HR professional develop a clear understanding of the content of this section, to place what follows in the right context for each JV.

The Structure and Operational Details section gets to the details of the working relationship, while the People section addresses the employee part of the equation, including the leadership issues discussed below. During the deal negotiations phase, these details must be worked out, not deferred to a later date. This is critical for two reasons:
1) The operational leaders need as much clarity as possible to run the JV, and
2) practically speaking, getting partners back together later to review issues that some partners might have deemed settled is not a simple process.

Using this template, HR can determine the scope of its role from a business, people and/or functional perspective. Continually reviewing the issues, questions and potential answers - within your company and with the JV partners - will help you set up a stronger business. And as the JV environment is dynamic, the solutions often change when the facts and circumstances surrounding the JV change.

Recognize the importance of leadership
People issues are at the heart of a successful JV. The skill sets of the individuals working on and leading the JV are crucial. The factors of joint control, fiduciary duties, vetoes and separateness mean that partners must collaborate to make decisions. This calls for leaders who can build trust with the partners, collaborate with them and influence their decision making, without dictating or dominating the discussions. That's why trust - important in all business dealings - is critical in a JV environment, where conflicts regarding strategy and operations are inevitable. When partners negotiate on a foundation of trust, they can more easily weather these conflicts together.

Be smart at the start
Many of the problems that arise in JVs can be traced to the early-stage negotiations: the leaders selected to represent each company in the JV, the leaders' preparation, and the advice or experience that guided them.

The following tips will help you avoid some common pitfalls early on.

• Select JV leaders with the skill sets necessary to represent your company. They'll be responsible for identifying and assessing the business partner.
• Pick the partner first, the business second - and do a comprehensive due diligence review on both.
• There's no single path to JV "nirvana", but there are universal principles you can apply to identify and resolve many of the common problems. Prepare well, understand the people and business context of each JV, and study the issues and problems related to the specific situation at hand.
• Don't automatically transfer findings and learnings from one JV to another.
• Address working relationships during the negotiation stage, and monitor them
  throughout the lifetime of the JV.
• Don't leave the process after the JV is set up. Continue to track and manage the progress and careers of the employees you expect to return to your firm.

 

The role of HR in the JV process varies according to how it positions itself within the company. You could be an integral part of the JV team, involved in selecting the leadership, or you could have no role at all (particularly if you let the other partner determine HR's role). Armed with the right information and tools, you stand a much greater chance of being a key player in your company's next joint venture.

- Jim McKay is global M&A Engagement Leader. email: jim.mckay@watsonwyatt.com

* Watson Wyatt JV tool on major issues and factors can be seen in: http://www.watsonwyatt.com/strategyatwork