The importance of partnering as a key driver of growth is increasing across many sectors*. Getting the right leadership in place is critical to optimising the success of any partnership. Having been involved in the creation of different types of partnership over the past few years and given multiple conversations with JV CEOs, there is no doubt that leading a strategic alliance or JV can be one of the most enriching and interesting roles in the C-suite. There are however several additional challenges a successful JV leader needs to address above and beyond a traditional CEO. These consistent four themes include:
- Double pressure at the start: running a more complex joint operation, while at the same time redesigning its strategy and set-up
- Conflicting interests: navigating a newly formed Board often with competing demands from two or more sets of shareholders
- Mismatched incentives: ensuring all incentives are aligned with the strategic objectives of the JV; especially important when leaders come from one of the incumbent organisations
- Talent attraction: attracting high-performance talent and developing a high-performance culture to retain it
As one JV CEO stated: “Being a JV CEO is probably a masterclass in navigating politics between a number of different interests”.
At KPMG, we have long-standing experience helping clients establish, improve or exit their partnerships. We are used to seeing and dealing with these challenges and their impact and discuss below examples and potential solutions.
1) Double pressure at the start
In a traditional M&A transaction, it is common for the CEO to come on board after the transaction has been completed, as part of the handover between the M&A team and operational management. This post-formation appointment model is often followed in joint ventures too, but it can be problematic.
Often, partners will naturally focus on the key topics of valuing the contributions of each party and agreeing on the profit distribution mechanism, as well as structural issues such as tax implications and legal agreements. The question of post-formation leadership can appear less urgent by comparison.
However, many JV CEOs say their first few months in the role were all about understanding the inherited JV strategy and business plan, which were not always the right strategy for the JV. As a result, they not only had to devote a significant proportion of their time to modifying both the JV strategy and associated business plan but also convincing the shareholders why the original plan was wrong and why the new plan is right.
To avoid this double pressure on the JV CEO, it is important to identify at an early stage who will steer the JV post-formation, and ensure they are involved in the design of the venture as early as feasible.
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Case study: “Set-up challenges”
A US electronic goods partner contributed advanced technology and IP to a JV with an Indian partner to target the Indian market. The Indian partner contributed a large distribution network and marketing and sales functions. On paper, the two partners had equal control and seemingly strong synergies. However, the business model had not been fully thought through.
Technically, the Indian partner and the JV were competitors in the same market segment. The JV suffered because it did not control marketing and distribution, and the Indian partner favoured its own products in marketing over the JV’s products. The CEO, who came from the Indian JV partner but was not involved in the JV set-up, had been opposed to the business model from the outset: “I had to live and work around this inherited failure in the set-up for a while before starting to bring it to the partners’ attention. The fact that I was coming from the side of the Indian partner did not help”.
Over time, it became clear that to grow its profits, the JV had to control its own marketing, sales and distribution network, but with the Indian partner unwilling to relinquish control, the partners agreed to part ways. The US party bought out the Indian party’s stake and retained the CEO.
2) Conflicting interests
Control is a complex topic for JVs, and it is common to see a misalignment between control and the legal ownership structure. We regularly see examples of a minority JV partner exercising control over certain areas of the business via an appropriate governance structure. While a typical joint venture agreement will define an overarching governance structure, the day-to-day decision-making and escalation mechanism (the ‘hidden part of an iceberg’) needs to be worked out between the JV CEO, shareholders and the Board of Directors.
This can take significant time and can be particularly challenging if shareholders disagree on some fundamental matters related to running the JV. Navigating the interaction with the Board in a normal business scenario is challenging enough; doing the same for two sets of stakeholders with potentially conflicting interests can be draining.
One of the key questions every JV CEO should clarify ahead of their appointment, therefore, is the desired level of empowerment and interplay between the JV Board, key committees and its executive. It might be in the best interests of the JV to have a Board that is very directive and involved in all key decision-making. But this kind of governance framework would not be right for an executive looking to grow and run the business with an appropriate degree of authority.
Case study: Ensuring the agility to succeed
A global oil and gas major entered into a joint venture with a local operator in the Middle East. The downstream operations of both businesses were merged with the local operator’s lubricants and logistics businesses.
The JV CEO, who had been part of the oil and gas major’s deal team, realised that complying with the oil and gas major’s governance structure and management processes would strangle the local business, complicating and lengthening the decision-making process, which required speed and agility. It also risked creating conflict with the local JV partner.
He needed and negotiated the JV to have an independent vision, and a governance structure ringfenced from the global major’s complex governance framework, yet appropriately interfaced with both partners to ensure the right level of control and clarity.
Through this customised governance structure and independent vision, the CEO was able to create an agile environment conducive to the buy-in of local stakeholders, allowing the business to flourish and increase earnings more than ten-fold.
3) Mismatched incentives
Agreeing the best way to incentivise a JV CEO can vary enormously depending on the circumstances and individuals involved. If the CEO is appointed by one of the partners and the role is seen as a stepping-stone to career enhancement at the parent company, it can be hard to ensure that the JV CEO operates as an independent executive, always prioritising the best interests of the JV (assuming the JV in question is a growth case with its own P&L).
Specifically, if the members of the JV Board are senior executives from the parent company, it is likely that a successful relationship with these stakeholders will be at the forefront of the CEO’s personal agenda. Such human and psychological aspects of the role can only be partially mitigated by an effective governance and incentives scheme. JV partners will often recognise the need for a truly independent CEO, but it can be hard to find such a candidate, and appointing an internal candidate is generally easier and more appealing.
In addition, even when in post, the JV CEO may have little say in the selection of their core team. This is often driven by the shareholders, adding to the people-related challenges facing JV CEOs. There are many creative methods companies could be looking at to ensure that the C-level roles are rightly incentivized and set-up to operate in the interest of the venture itself.
Effective incentive design can play an important role in ensuring that the management team of the JV are aligned with the investors - and with each other - in terms of their objectives. Long term incentives, linked to the JV’s business plan and potential exit objectives can help create this alignment and ensure that pay is linked to performance in line with expectations for both of the JV parties. This may be settled in the form of cash, or otherwise sometimes using equity instruments in the JV which can be sold to a purchaser on a future liquidity event, if an exit is envisaged.
Case study: Clash of cultures
A global system integrator with a strong footprint in Spanish-speaking Latin America created a joint venture with a Brazilian system integrator to create a continent-wide ICT leader.
The Spanish-speaking operations of the global system integrator had a family business culture of decentralised management. In contrast, the Brazilian business’s governance, processes and systems were centralised and more developed.
The JV partners decided to adopt best practices across all the JV’s operations. Both legacy operations had teething troubles as a result. In the Spanish speaking operations, several senior managers actively resisted the transformation. In Brazil, there was a sense that the corporate culture was being diluted by incorporation into a JV with a less formal partner. There was increased employee churn and a fall in staff morale in both businesses.
The JV CEO, who had come from the Brazilian partner, was tasked with integrating the two businesses. He explained that the main challenge he faced was the time and effort required for managing his team and preventing key talent from leaving, while at the same time managing the JV partners and overseeing the day-to-day business.
4) Talent attraction
The risk of losing talent due to either a cultural clash or a lack of clarity around the new JV culture was highlighted by every JV CEO we spoke to. When two or more companies put their assets and resources together, it’s vital to think about the people and cultural effects of the deal. Will the JV blend the existing cultures? Naturally inherit and adopt the culture of one of the partners (for example, the major resource provider)? Or create an entirely new culture? Will senior management be seconded or employed by the JV?
This latter issue can be a major obstacle to getting the best talent into the JV, if people perceive that working for the JV is a riskier path to achieving their long-term career ambitions at the parent company. To help address these issues, a JV CEO needs a very experienced HR lead who is familiar with managing and leading complex change projects.
Turning challenges into actions
Already considered to be one of the most challenging C-suite roles, a JV CEO’s job is increasingly complex due to the unprecedented pace of sector convergence and business models redefinition.
There are many successful partnerships, however, that demonstrate some of the key strategies that may help a JV dealmaker or incoming CEO to deliver the envisaged success:
- Engaging the right JV CEO early is a fundamental step to ensuring the long-term success of the JV. Encourage the participation of your preferred CEO candidate as early as possible in the process. Never underestimate the time and effort required to establish a truly open and trusting relationship with your JV partner and enable the CEO candidate to be part of that process. As one JV CEO put it: “The quality of the relationship and level of trust established can carry you though difficult questions and conflicts around technical issues”.
- Let the CEO ‘own’ and actively contribute to the JV strategy and business plan. Make them one of the architects of the business they will be leading, rather than somebody accountable for fixing the initial oversights in the design.
- If the JV is pivotal to your business’s overall corporate strategy, take time to consider and create the right incentives for the best candidates to take on key roles. Empower them to be as independent as possible and to act in the best interests of the JV. Reserve the matters where partners’ interests diverge from each other for your JV Board. Establishing an effective JV Board is crucial in setting the conditions for a successful JV.
- Where possible, seek an external candidate that has a truly neutral relationship towards JV partners and empower them with a clear mandate.
- Ensure that the CEO is supported by a highly skilled HR Director, especially in JV scenarios where the venture needs to create its own distinct culture, or two very different cultures need to be merged into a successful operation. As the JV strategy is developed the culture should support this, and people then should be attracted who are a good ‘fit’ for the culture. It’s less about complex change programs and more about being clear about the underlying cultural traits that will drive performance, and being targeted in their reinforcement, taking the time to properly embed this and reconcile differences.
- Support the CEO with a small core team who can help design the JV and develop a clear and realistic implementation plan. This needs to balance the four key elements in JV creation, with a particularly strong initial focus on the first three:
o A robust strategy with partners clearly aligned to it.
o A clear commercial proposition (how will it make its profits and what are the respective contributions and division mechanisms).
o An operational model that serves the agreed commercial model.
o Deal mechanics topics (valuation, due diligence, tax, legal issues).
*Note: Analysis of deal patterns in the aerospace and defence, or automotive industries, for example, shows the main players have increasingly engaged in non-traditional deals over the last 5 years. Based on the Top 10 players analysis we have seen a dramatic increase in a number of partnerships in both sectors.