I sometimes get asked how to make joint venture boards in China more effective. Generally there are two answers to that question:
- If the board is already in place, rather than in the process of being set up, then it is probably too late to do anything much about how it operates – live with it.
- Why are you trying to do things through the board anyway?
The board is never the total solution for corporate governance of joint ventures, and in China, it may not be part of the solution at all. There is a whole class of joint ventures which are entirely dominated by one party and the passive partner is along for the ride. These companies tend to be almost run as if they were part of the dominating company with the board meeting as infrequently and briefly as possible to meet legal “must do’s.”
But the board is never the total solution, and generally it is largely more of a ratifier than a decision maker, even for joint ventures where both parties need each other and both make material contributions. Usually the shareholder agreements say who appoints who and how many to the board and management positions. It can simply be management from the joint venture on the board, or someone from the China or even global top team of the multinational.
There is almost never an independent director role. All directors represent one or other shareholder. The exceptions to this can probably be counted on one hand and are there to create a very specific escalation in case of deadlock to a party both partners trust. However, the actual use of the escalation mechanism is very infrequent.
Other types of formal escalation mechanism do exist. There are several examples of joint ventures between a large private sector Chinese company and a large international investor that allow deadlocked decisions to go to the controlling owner of each party.
Boards that work most effectively tend to be ones where the investors know that they need each other and that they are joined at the hip indefinitely for business, not regulatory reasons. These boards tend to have members who stay for an extended period and when they roll off it is because they have been promoted into more senior positions in their corporations. Having former board members in very senior positions at headquarters is great for the long-term relationship between partners and is a characteristic of many of the more successful arrangements.
Net net, expecting to rely on board meetings as a primary forum for dispute resolution in Chinese joint ventures is likely to lead to disappointment and frustration.
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