JV governance: navigating challenges and opportunities

May 2025  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

May 2025 Issue

The act of governance is a multifaceted occupation. This complex undertaking encompasses the processes and structures by which decisions are made and enforced within any business organisation.

This complexity is compounded in the case of a joint venture (JV), where two or more parties agree to pool their resources for the purpose of accomplishing an intended project or other business activity (a JV may be for a designated period or for a continuing business relationship).

As defined by LexisNexis, a JV describes many different types of situations that range from structural arrangements that create or change the economic control of a legal entity, such as JV companies or partnerships, non-structural arrangements such as contractual joint projects and informal (undocumented) collaborations.

“JVs have become a common feature of the corporate landscape,” affirms Stephen Glover, a partner at Gibson Dunn. “Although they are used more frequently in some industries than others, large companies in virtually every sector form JVs to drive their business forward.

“For example, a company that wishes to enter a new geographic market will often partner with a local business that can provide local insights, contacts and support,” he continues. “In some foreign markets, partnering with a local company may be required by regulation. Similarly, companies that want to enter a new business market may conclude that formation of a JV with a partner that has relevant expertise can be the best path to success.”

However, while the pursuit of JV deal opportunities can be lucrative for those that choose to undertake them, they also carry significant risk, often involving activities which require optimum operational excellence and performance on the part of the strategic alliance concerned.

For example, JVs generally require careful deal structure planning, transfer pricing, regulatory approval requirements, supply chain integration, repatriation of profits, foreign tax implications, exit and buyout provisions, intellectual property (IP) arrangements and technology development, incentives maximisation, management and governance, and cultural considerations.

Understandably, keeping track of this wide variety of elements, as well as many other aspects when aligning interests, is a major challenge – one that highlights the fine line between success and failure.

Setting up a JV

When setting up a JV, key governance aspects include defining roles and responsibilities at both the JV and shareholder levels, establishing decision-making processes, information rights, fairness and transparency, majority requirements, and conflict resolution and exit mechanisms.

“Effective governance mitigates risk, improves accountability and fosters a collaborative environment,” says Karsten Kühnle, a partner at Norton Rose Fulbright. “It is essential to establish and maintain robust communication channels and regular performance reviews to keep JV partners aligned and to address issues promptly.”

In its ‘Joint Venture Governance: Managing Power and Collaboration’ analysis, the Directors Institute highlights a number of best practices, outlined below, that parties should consider when setting up governance for a JV.

First, establish a comprehensive JV agreement. A JV agreement is the foundation of governance in any JV. It should clearly outline the objectives of the venture, the roles and responsibilities of each partner, decision-making processes, financial contributions and profit-sharing mechanisms. The agreement should also address how conflicts will be resolved and include provisions for dissolving the JV if necessary.

Second, create a clear decision-making framework. A well-defined decision-making framework is essential for the smooth operation of a JV. This framework should outline who has the authority to make decisions, what types of decisions require unanimous consent and how deadlocks will be resolved. It is also important to establish decision-making protocols that allow for timely and efficient resolution of issues without unnecessary delays.

Third, ensure regular communication. Regular communication between partner companies is critical to the success of a JV. Governance structures should facilitate open and transparent communication channels between partners, allowing them to share updates, raise concerns and discuss potential challenges. Regular board meetings, status reports and informal check-ins can help maintain alignment between partners.

Fourth, promote transparency and accountability. Transparency is key to building trust in a JV. Governance structures should include mechanisms for tracking the performance of the JV, sharing financial data and holding partners accountable for their contributions. By promoting transparency, governance can help prevent misunderstandings and ensure that all partners remain committed to the success of the venture.

Fifth, plan for flexibility. While it is important to have a solid governance structure in place, flexibility is also key in JVs. As the business landscape evolves and the JV progresses, partners may need to adjust their governance model to accommodate new realities. Governance structures should be flexible enough to evolve as needed, allowing the JV to remain agile and responsive to changing conditions.

Lastly, establish risk management protocols. JVs inherently involve risk, especially when operating across different markets or industries. Effective governance should include robust risk management protocols that identify potential risks and outline strategies for mitigating them. This could include financial audits, legal compliance reviews and contingency plans for potential disruptions.

“There is a very strong correlation between JV governance and JV performance,” adds Mr Glover. “Governance systems should be designed to ensure that the partners have a voice in the decisions that they view as most important, that they are incentivised to resolve disputes, and that JV management has sufficient flexibility to respond to changing business conditions.”

Challenges and pitfalls

As one would expect when two or more, often large-scale entities, join forces, significant governance challenges and pitfalls present themselves – areas of disagreement that require JV partners to establish effective communication channels and identify opportunities for realignment and compromise.

In its comprehensive, though not exhaustive, list, the Directors Institute outlines the main challenges and pitfalls JV partners should be aware of when entering into an alliance, along with their most appropriate solutions.

Power imbalances often arise in many JVs, where one partner may be larger, financially stronger or more experienced than the other. This can create a dynamic where the larger partner has more influence over decision making, potentially sidelining the smaller partner. If not properly managed, power imbalances can lead to frustrations, distrust and eventually the failure of the venture.

Aligning objectives is another critical challenge. Each partner in a JV typically has its own set of goals and reasons for entering the partnership. While there may be a common objective driving the JV, each partner’s internal priorities can sometimes diverge. Governance structures need to account for these differences and create mechanisms for aligning the companies’ goals within the JV. As Mr Glover concurs, “Difficult issues arise when the partners’ business goals are not aligned. For example, if one partner wants to expand the JV to address new geographic markets, and the other partner wants to develop those markets itself, tensions can arise. Even when the partners’ goals are aligned at the outset, they can become significantly misaligned if the partners’ respective strategies change or if the JV does not perform as expected.”

Cultural differences also pose significant challenges. Companies often have different corporate cultures, leadership styles and approaches to risk. Cultural mismatches can cause breakdowns in communication, hinder decision making and make it difficult for partners to work toward a common goal. Governance structures need to promote cross-company understanding and ensure that cultural differences do not impede the venture’s progress.

Decision-making authority is another area requiring careful consideration. Typically, decision making in a JV is shared, but determining how decisions are made, who has veto power and how deadlocks are resolved is crucial. Without clear decision-making protocols, the JV can suffer from delays, disagreements and even paralysis.

Exit strategies are essential for JVs, which are usually designed with an end date in mind or a specific objective to achieve, after which the partnership may dissolve. However, disagreements over when and how to exit the venture can arise if not addressed in the governance framework. Effective governance should include clearly defined exit strategies, outlining how partners can disengage from the venture without causing disruption or conflict.

Finally, IP and confidentiality concerns must be addressed. Each partner may bring valuable IP, trade secrets or other proprietary assets to the JV, which are essential for the venture’s success. However, the collaborative nature of JVs makes it challenging to ensure that this sensitive information is not misused or unintentionally shared with the other partner’s competitors.

“To avoid such pitfalls, JV partners must conduct thorough due diligence, including partner fit criteria, establish clear governance frameworks and reporting obligations, and maintain open communication,” summarises Mr Kühnle. “Regular reviews and adjustments to the governance model can help mitigate risks and ensure that both the JV itself and the JV partners remain aligned on their respective strategic objectives.”

Structuring the board

In a JV, the board of directors plays a crucial role. Typically responsible for strategic direction, major decisions and aligning objectives, the board’s ultimate role is to maintain balance and ensure effective governance.

“The structure of a JV board is predominantly determined by factors such as the JV’s size and scope, required expertise and business acumen, and balance of power between JV partners,” asserts Mr Kühnle. “A well-defined governance framework helps to align partners and teams, manage turnover by providing clear roles, responsibilities and decision-making processes, and provide continuity and stability during changes in management or board composition, and helps maintain strategic focus and operational efficiency.”

Additionally, conflicts of interest are relevant at JV board level and can arise in many different instances. In this eventuality, the board can (and should) tackle any conflicts of interest head-on, for example where a shareholder has other interests in the project as a subcontractor.

“Ensuring that the board members are sufficiently senior, have relevant expertise in the JV business and have decision-making authority greatly increases the likelihood of success,” notes Mr Glover. “Similarly, if the chief executive responsible for the JV’s day to day operations is sufficiently empowered and informed, and not subject to micro-management and second guessing, the odds that the JV will succeed are greatly increased.”

Future governance

The basic architecture of JV governance has changed little over the last 50 years. However, nothing is set in stone. Legal and regulatory issues such as artificial intelligence (AI), data protection and environmental, social and governance regulations, along with changes to antitrust policy and enforcement, particularly following major policy shifts, are expected to hold sway.

“Although big changes to the basic governance structure are unlikely, legal and regulatory developments will have a continuing impact on JV governance and operations, at least at the margins,” suggests Mr Glover. “For example, antitrust laws are continually evolving and may have an impact on what ventures can be formed, how they do business and what information the JV may share with its partners.”

For Mr Kühnle, technology – particularly AI – as well as transformation and disruption across various industries will impact the evolution of JV governance. “The rise of AI will influence governance and JVs will need to consider how to adapt their structures and processes to address and manage these complexities effectively,” he concludes. “Technological advances and changing market dynamics have made JVs more important, as they allow corporations to pool resources, share risks and innovate collaboratively.”

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Fraser Tennant