12 Jul Governance: Structured, Not Standardized
Gov·er·nance. The oversight needed to make and implement decisions important to the success of an alliance or joint venture.
Governance has four primary dimensions:
- Stewardship – setting strategic direction and keeping the effort on course, which requires monitoring performance and understanding changes in partners’ strategic priorities.
- Resource allocation – deploying capital and people to make the effort succeed, including redirecting resources as priorities change.
- Decision facilitation – making decisions and resolving issues at appropriate levels.
- Culture management – allowing disparate organizations to work as one, committed to acting in the best interests of the venture.
Governance is not a difficult concept but is a major source of alliance and JV underperformance. Why?
One Size Does Not Fit All
According to our cross-industry research, the root of the problem is the sad fact that most companies don’t think much about governance. They have a tried-and-true approach and never question its applicability to the next situation. Or a select group creates a ‘RACI Chart’ and Risk Log in a back room to present to the alliance team.
Small and mid-sized companies typically wing it, sending occasional senior management updates, or they confuse governance with project management, creating a complex and detailed Gantt chart to present to the Board every week, or a steering committee that amounts to a discussion forum. Neither approach positions them to make critical decisions, like whether to invest in new technology, prioritize new opportunities or invite a new partner into the venture.
Even large companies can fail to create robust governance structures. They forget the importance of crystal clarity around three deceptively simple questions:
- Who decides what?
- What happens when things change [or] How will we know when things change, and how to react to that change?
- How will the venture manage the inevitable need to escalate decisions?
Large companies often have difficulty remembering that employees dedicated to an alliance or JV must focus on the interests of the venture, not its parents. As one savvy alliance management executive put it, “When our alliance managers see a conflict, I want them to protect the venture. It’s my job to run interference for them with corporate.”
More and more company portfolios contain alliances and JVs that differ dramatically in their goals, duration, resource requirements, and value. Obviously, one governance model is many models too few.
Perhaps even more important in understanding why one size cannot fit all is the trend for alliances and JVs to tap the core capabilities of each corporate parent. These partnerships force the parents to manage all sorts of exposure and risk, as well as a much freer exchange of resources, especially skilled people and intellectual property.
These circumstances generally preclude governance by a single person or ad hoc committee. The flow of activity and information is simply too complex and important for narrow ownership.
A better model is a governance structure where decisions happen at various levels. Done well, such governance is not bureaucratic. It actually speeds decision-making by involving the right people, building personal accountability, improving communication, and eliminating missteps and misunderstandings.
To ensure that governance fits the individual circumstances, the parents need to build an adaptable governance structure predicated on four principles.
- Tailor governance to the attributes of the partnership
For example, a short-term co-marketing alliance needs a very different governance model than a long-term research joint venture.
Many forces should shape a governance structure, including venture goals, number of partners, and past relationships. But two forces loom especially large: anticipated value and complexity of resource contributions. How these forces intersect should lead companies to adopt very different approaches to governance.
- Assign clear roles and responsibilities
When a governance structure is hazy in assigning responsibilities, internal conflict and slow decision-making are inevitable. To forestall poisoning the relationship, the parents should define:
- What decisions each governance level will make.
- Who, specifically, will make that decision.
- How levels will participate in the overall decision-making process.
Too often sensible decisions on these issues fall victim to power politics – the company that is contributing the lion’s share of critical resources owns critical decisions. Effective assignment of decision-making roles and responsibilities requires an objective assessment of three dimensions of the decision:
- Expertise – What must the decision-maker know to make a good decision?
- Information – What data, analysis and perspectives are needed to make a good decision?
- Timing – three aspects, each important:
- How frequently is a decision is required?
- How predictable is the need for a decision?
- How quickly must a decision be rendered?
- Organize information flows
Most information relevant to the venture is not numerical and passes through many hands. Result: information that is slow and hard to transfer, easy to misinterpret, and, frankly, prone to disappear.
To ensure informed decision-making, the parents need to define what information each governance level will require, determine the sources of that information, and monitor its timely flow.
- Set clear, telling performance measures
While every governance structure must be unique, it need not be so unique that its performance defies measurement. Measurement is essential to course correction and sustained success.
One useful gauge is pass-ups—decisions that one group had the power to make but instead referred to a more senior group. This is a symptom of dysfunctional governance – indicating that decision-making rights were assigned inappropriately or, more often, that fear of making a mistake is undermining the governance structure.
Other helpful measures of governance effectiveness include:
- Speed in making major decisions
- Member turnover rates, especially at the board level
- Director participation levels (percent of members attending meetings)
- Performance ratings of individual board members
- Degree of alliance expansion (changes in scope indicating effective governance).
Prospective partners that can sit together and plan a governance structure that reflects these four principles stand an excellent chance of building an effective working relationship.
Gov·er·nance. Easier to parse than to execute. But these guidelines can go far toward changing that.