The corporate compliance disasters at Michigan State University, Uber, and Wells Fargo led to very high financial cost, and cost CEOs and other top brass their jobs. How can leaders avoid compliance fiascos? MSU’s interim president is focused on processes and rules. That’s not enough, or even the most important thing, as I explain in the following op-ed, originally published in Crain’s Detroit Business:
Michigan State University will soon get a chief compliance officer, but it still has a problem — and it starts at the top.
No new title or office will fix a culture that missed or ignored warning signs involving the behavior of gymnastics doctor Larry Nasser and Dean William Strample, both of whom were star performers at the university. MSU provides an object lesson that business owners and executives ignore at their peril.
When a top performer gets a pass for bad behavior, the organization learns. It learns not to push important people too hard on integrity. It learns cynicism. It learns how to get away with bad behavior. And MSU is hardly the only organization with this issue.
Uber. Wells Fargo. MSU.
Uber had a process for handling complaints of sexual harassment. Susan Fowler, the soon-to-be famous whistleblower invoked this process by going to the human resources department. She was told the harasser was a top performer, so nothing could be done.
Wells Fargo had multiple policies and processes to prevent improper transactions. Its process flagged employees opening fraudulent accounts, effectively stealing from customers. But that business unit was very successful, and thus its leader was a star performer. She argued that it was stealing from only a small percentage of customers and could reimburse any customers who complained. The leader was allowed to prevent reports from getting to the corporate office and the board.
Michigan State had a process for performance reviews of deans and for investigation of Title IX complaints. Numerous reports of sexual harassment by Strampel were considered in his performance review. There were investigations of reported abuse by Nasser. But Strampel was an important and successful dean, and Nasser brought renown to the university by treating elite gymnasts.
They were given the star treatment. Their misdeeds were ignored.
In each of these examples an important and powerful person became involved in a process designed to detect and prevent misbehavior. In each, the culture gave privilege to the powerful, the process was cut off and horrible things happened. And in each, the consequences for the organization, and for the CEO and several levels of top brass, were dire.
At MSU, hiring a chief compliance officer and creating an office to correct what interim MSU President John Engler called a “diffuse and disorganized” administration aren’t the most important part of the solution.
Over many years as a general counsel, building compliance programs and working through compliance problems at multinational companies, I’ve learned that more processes aren’t enough to change the result, and that hard work by leadership is the key factor for success.
Mr. Engler (or the CEO of any company) cannot simply delegate compliance to compliance people. A compliance office exists to help leadership build a culture and apply high standards of conduct, not to “do” compliance so leadership can ignore it. Compliance professionals can spot red flags, but only leadership can do something about them. Here are a few key elements of a successful compliance program, which only MSU’s top leaders can provide:
- Encourage people to report concerns, ask uncomfortable questions and prevent retaliation.
- Ensure that each employee and student knows that her or his boss, coach or teacher expects and models ethics conduct and compliance.
- Create incentives for good conduct and avoid incentives for bad conduct.
- Use the data the compliance office will generate to change the organization.
And, especially important in light of MSU’s history:
- Assure there is only one standard: Important people can’t get away with bad conduct, bad conduct is penalized appropriately, and compliance is not used as a pretext to punish people.
And how would your organization’s culture stack up? Has the CEO given a top performer a pass on an ethical or legal violation because that person is “just too important to the business right now?” Have you disciplined subordinates but not even given a public reprimand to a culpable superior? Have you let a star escape a process because he or she is “too busy” adding value? That value, and much more, can disappear very quickly.
A compliance officer can add a lot of value by helping leadership lead. But it’s up to leadership to make any compliance effort real.
The corporate compliance disasters at Michigan State University, Uber, and Wells Fargo led to very high financial cost, and cost CEOs and other top brass their jobs. How can leaders avoid compliance fiascos? I was able to provide my perspective in an article on Michigan State in The Detroit Free Press (The Free Press writer’s name is similar to mine, but it’s not my article):
It can also help to make sure the rules are being applied to everyone fairly and not waived for important people, said David Jaffe, an attorney specializing in compliance and the former vice president, general counsel and secretary of Guardian Industries Corp. of Auburn Hills, along with former partner in the law firm of Honigman Miller Schwartz and Cohn in Detroit.
“The CCO will have to help the university build a culture in which every employee — and student — understands that her or his boss, and the institution, expect ethical conduct and compliance, in which there is one standard of conduct for everyone, no matter how important, and in which asking questions and reporting possible violations are encouraged and retaliation is prevented,” Jaffe said. “This is all good to do. It will be extremely helpful if there’s also work on the culture. The devil will be in the details and in the level of independence that the office will have.”
(Photo: Robert Killips, Lansing State Journal)
This piece was originally published in the Detroit News, but has been updated to reflect recent developments.
The fiasco at Wells Fargo, where bankers opened thousands of fraudulent accounts leading to litigation, enforcement, fines and a stunning loss of reputation, is old news. The consequences, however, continue to play out for the company and its leaders. A new report released last week by the Wells Fargo Board’s independent directors shows that the company lacked key elements of effective compliance and ethics efforts. A review of the report offers important lessons for other companies.
The Board singled out John Stumpf, former CEO, and Carrie Tolstedt, former President of the Community Bank – the division where the fraud took place – for blame. It ordered them to forfeit over $100 million of compensation, it reduced 2016 executive bonuses for others by an aggregate $32 million, and fired for cause four other officers in the Community Bank. These dire consequences for individuals have set a new precedent for corporate boards to follow.
Key elements of the report highlight essential compliance and ethics principles that Wells Fargo missed, and that business leaders need to know. These principles come from the Department of Justice’s standards for compliance and ethics programs and from the accumulated experience of executives trying to keep their companies out of harm’s way.
First, the Community Bank had its own risk management department, which reported to the head of the division, not to a corporate officer, and did not have access to directors. Tolstedt, according to the report, adamantly and strictly limited communication between “her” team and the corporate level risk team (and the Board).
The critical lesson: Businesses need a compliance and ethics function that is independent of operating management, is empowered to participate in decision-making, and has direct access to the Board.
Second, Wells Fargo incorporated its compliance and ethics efforts into a Risk Department, which looked at ethics issues mainly through the lens of enterprise risk management (ERM). ERM usually focuses statistically on the potential impact of a risk on the financial statements. Wells Fargo’s risk team knew that hundreds of employees per year had been fired for violations of account opening rules; but it only saw a problem that affected fewer than one percent of the bank’s employees, and that the amounts involved in each case were quite small.
Seeing a problem involving (relatively) modest numbers of employees and sums of money, Wells Fargo saw a modest problem. A team with a focus on integrity would likely have seen a fundamental problem and appreciated the ways in which the problem could snowball.
The critical lesson: Compliance and Ethics is different from ERM, even though the two areas overlap.
Third, to the extent that it saw problems, Wells Fargo focused its efforts on firing employees who broke rules, not on requiring integrity. Management knew that some employees were opening accounts fraudulently, and that some supervisors were encouraging them. Some senior executives in the Community Bank recognized that its sales incentive system encouraged the bad conduct and argued for change. But the senior leaders “were concerned that tightening up too much on quality would risk lowering sales … [and] were reluctant to take steps that … might have a negative impact on … financial performance.” Senior leaders waited until unethical behavior blew up into a crisis.
The critical lessons: Every employee at every level must know that her boss requires ethical conduct and compliance.
Companies must create incentives for good conduct and avoid incentives for bad conduct.
Finally, Stumpf gave deference to Tolstedt and hesitated to dig deeply. The Community Bank was very profitable and Stumpf considered Tolstedt the “best banker in America.” As a result, she was not scrutinized carefully, was allowed to restrict communication, and was given deference in decision-making, even after account problems became known at the corporate level and Los Angeles County sued Wells Fargo over fraudulent accounts.
The report complains that management withheld information from the Board, but reveals that directors failed to push to get the whole story. Last Tuesday, the directors endured a humiliating annual meeting where many were barely re-elected. They will face tremendous pressure in the coming days and weeks.
The critical lessons: There must be one standard of conduct; important or successful people can’t be allowed to get away with bad conduct.
Directors can’t be passive about compliance and ethics.
For businesses – and their leaders – the cost of bad conduct can be astronomical. An investment in learning and applying essential principles of compliance and ethics programs will provide a great return by significantly reducing the risk of expensive and career-killing disasters.
On November 3, 2016, David Jaffe of Jaffe Counsel will be a panelist, along with senior French lawyers and an anticorruption official at the OECD, at a seminar on compliance sponsored by the Paris law firm CMS Bureau Francis Lefebvre. The details are below. To see the original invitation, click here.
|Anti-corruption et loi Sapin II : la nouvelle donne internationale de la compliance||Anticorruption and the Sapin II Law: The New International Situation in Compliance|
|Pour répondre aux critiques internationales, la France a décidé de se doter d’une nouvelle loi anti-corruption, la loi Sapin II. Quel est l’apport réel de cette loi ? Quels seront le rôle et les moyens de l’Agence française anticorruption ?
La France, à l’image des Etats-Unis, va-t-elle modifier sa politique de répression et mettre en œuvre des sanctions plus dissuasives ? Les nouvelles politiques de compliance sont-elles un simple outil à mettre en place ou doivent-elles faire partie de l’ADN de l’entreprise du 21e siècle ?
Nos différents intervenants, experts des relations commerciales internationales, tenteront de répondre à ces questions cruciales pour les dirigeants d’entreprise, directeurs juridiques, compliance officers et gestionnaires des risques.Dans un contexte où la France fait régulièrement l’objet de vives critiques de la part de l’OCDE, le législateur français affiche son ambition de se rapprocher des modèles anglo-saxons de lutte contre la corruption. Il s’agit notamment d’adopter une réglementation instaurant une cartographie des risques et une évaluation des intermédiaires de commerce.
En pratique, il existe des « best practices » efficaces, élaborées notamment par l’OCDE ou le Department of Justice américain, pour limiter les sanctions.
Plus de 1600 entreprises et groupes français vont devoir intégrer rapidement ces bonnes pratiques dans un cadre législatif français et international en évolution. Seront ainsi concernées : les groupes ou les entreprises françaises de 500 salariés ou plus qui réalisent un chiffre d’affaires consolidé d’au moins 100 millions d’euros. Il nous a donc paru opportun de s’interroger sur cette évolution marquée des politiques anti-corruption et de compliance.Merci de bien vouloir confirmer votre présence avant le jeudi 27 octobre 2016.
|To respond to its international critics, France has decided to develop its own new anti-corruption law, called Sapin II. What is the real significance of this law? What will be the role and methods of operation of the French anticorruption agency? Will France imitate the United States by changing its enforcement policy and putting in place stronger penalties? Are the new compliance systems a simple tool to put in place, or must they become a part of the DNA of the 21st century company?
Our speakers, each of whom has expertise in international business, will attempt to answer these questions, which are crucial for executives, legal directors, compliance officers and risk managers.
In a context in which France is regularly the object of sharp criticism from the OECD, the French legislature has attempted to reconcile itself with Anglo-Saxon models of the fight against corruption. Most notably, it has adopted a system of regulation that requires a risk assessment and evaluation of business intermediaries. In practice, there exist “best practices,” developed notably by the OECD or the American Department of Justice, as a method of reducing sanctions. More than 1,600 French companies and groups will have to integrate these best practices in a framework that is both French and international, and that is still evolving. Those who will be affected are: Groups or French companies with 500 employees or more, realizing consolidated revenues of at least €100 million. It has therefore seemed to us opportune to inquire into these significant developments in anti-corruption and compliance policy.
Please register by Thursday, October 27, 2016
► Le rôle croissant de la compliance dans les process de fusion-acquisition : Alexandra Rohmert, CMS BFL
► La mission de l’OCDE en matière d’anti-corruption et l’évolution récente de la lutte contre la corruption : France Chain, OECD
► Les mesures anti-corruption de la loi Sapin II, perspectives françaises et internationales : Stéphanie de Giovanni, CMS BFL
– élargissement du champ d’application de la loi ;
– de nouvelles entreprises concernées ;
– instauration d’un devoir de mise en conformité ;
– les sanctions et la répression.
► La place du lanceur d’alerte et l’impact social de la loi Sapin II : Alain Herrmann, CMS BFL
– lanceur d’alerte salarié et procédure à suivre ;
– distinction alerte valable et délation punissable ;
– intégration du code de bonne conduite dans le règlement
intérieur de l’entreprise et formation des salariés à ces risques.
► Les programmes de compliance : ce que les sociétés françaises peuvent apprendre de l’expérience américaine : David Jaffe, Jaffe Counsel
– similarité de la loi Sapin II avec les mesures américaines ;
– les programmes de compliance des multinationales ;
– focus sur les « best practices » ;
– comment limiter les sanctions ?
Questions / réponses
– Introduction: The expanding role of compliance in due diligence : Alexandra Rohmert, CMS BFL
– The mission of the OECD in the realm of anti-corruption. Recent developments in the fight against corruption : France Chain, OECD
– The anti-corruption measures of the Sapin II Law, French and international perspectives : Stéphanie de Giovanni, CMS BFL
Explanation of the scope of the law / New companies affected / Establishing a project of coming into compliance / Penalties and suppression
– Whistleblowers and the social impact of the Sapin II Law : Alain Herrmann, CMS BFL
Employee whistleblowers and the procedure to follow / Distinguishing between a legitimate warning and a punishable denunciation / Integrating a code of conduct in the internal rules of a company and training employees on these risks
– Compliance Programs: What French companies can learn from the American experience : David Jaffe, Jaffe Counsel
Similarities between the Sapin II law and American laws / compliance programs of multinationals / Focus on best practices / How to avoid penalties.
– Questions and AnswersThe panelists are France Chain, Senior Legal Analyst, OECD Anticorruption Department, David Jaffe, of the American law firm Jaffe Counsel plc, as well as lawyers from CMS Bureau Francis Lefebvre
Wells Fargo CEO John Stumpf will tell you his company had tone at the top. As its problems with “phantom” accounts persisted for years, it promoted its values and repeatedly urged employees to do the right thing. But the Wells Fargo board just revoked $41 million of Mr. Stumpf’s equity awards. The board set up a new independent investigation, which will further distract management, and which is so independent that Mr. Stumpf will receive no salary while it continues.
Tone is nice. Incentives aligned with ethical – and profitable – conduct could have been better. What can your business learn from Wells Fargo’s experience?
Aggressive cross-selling was an imperative from the top. Front line employees had to open accounts to meet their – and their bosses’ – sales targets and to earn their – and their bosses’ – incentive compensation.
Wells Fargo employees opened 2 million or so fake accounts. Customers lost money, endured hassle and possibly had credit scores cut. As Holman Jenkins points out in The Wall Street Journal, Wells Fargo itself lost money. It incurred the expense of opening and closing millions of accounts on which it made no profit. Like much illegal activity by employees, these “bad acts” were a dead weight loss for the bank.
Yet, when the government announced $185 million in fines, Wells Fargo initially insisted that its sales incentives had nothing to do with the bad behavior. Its manuals and memos required that accounts be opened properly. Then came press reports on sales meetings in which executives told employees not to cheat customers, immediately followed by instructions from supervisors to ignore what was said in the meeting and to do “whatever it takes” to get accounts open.
After fines, bipartisan outrage from Senators, and the opening of multiple criminal investigations, Wells Fargo is now cutting incentives and suspending much of its famous cross selling.
Is that the right response? Is it possible to align incentives with business results?
People respond to incentives. If you incentivize accounts, you get accounts. Wells Fargo evidently failed to incentivize compliance and profitable accounts, and didn’t have negative incentives, especially for executives. So manuals, memos, and visits from Corporate were its only tools to convince employees to open legitimate (and potentially profitable) accounts.
Employees don’t care what “suits” from Corporate say – they care what their bosses want. What were the bosses’ incentives? Was there a reward for managers whose teams had few unauthorized accounts? Did executives whose teams opened “bad” accounts lose compensation? In principle, the sanction for bad behavior was termination, but people were also fired for failing to meet their sales goals.
Making matters worse, employees who tried to point out the perverse incentives were branded as negative or not team players. There was evidently no channel through which Mr. Stumpf or the board could learn that the imperative of cross-selling more accounts was leading to trouble. Many new lawsuits are claiming retaliation.
To manage your company’s risks effectively, calibrate incentives for both the ends and the means. Include negative incentives. Involve and empower someone who understands compliance risks to be influential at the most senior levels. Then apply incentives consistently to compliance and other business risks — and make sure they stick all the way up the chain of command.
Finally, build a culture that welcomes and pays attention to challenges. As I’ve written elsewhere, it’s easy to deride anyone who questions imperatives from the top, thus missing chances to correct mistakes before they become disasters.
If you can do these things, you can enhance profitability and dramatically reduce your risk of quality time with regulators, prosecutors and Senators.
© 2016 David B. Jaffe
All rights reserved
Photo Credit: iStock.com/klibbor.
This is part 7 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
I’ve seen local JV partners open doors faster and better than the foreign business could have hoped to do on its own, and without compromising integrity. One partner in Spain, for example, helped the JV introduce the foreign partner’s new product, throwing the local partner’s reputation behind the product and the foreign partner very effectively. It used its knowledge and relationships legitimately and very effectively, adding substantial value to the JV.
A great local partner will steer the JV through local business culture. It will know the local market, act promptly and effectively, work constructively with the local government, and more. It will be invested in the success of the joint business. As noted in this Series, it’s important for you to understand and respect that partner.
And yet …
Carefully vetting prospective partners (as discussed in Part 1) and finding one who makes a great contribution does not guarantee a successful relationship. As we saw in Part 4, things will change. Beyond that, a local partner can do, and can feel very comfortable doing, things that will threaten the JV and your company. Even a well-intentioned partner can make serious mistakes. It’s up to you to be aware of the risks, and to manage your relationship and those risks in a respectful way.
A local partner could make local adaptations to a product, process or communications strategy that dilute your global brand and reputation or damage your intellectual property rights. Variations in your product that make sense for the local market may be great innovations that you adopt worldwide, but also could be unacceptable to multinational customers or dilute the perceived quality in the brand. Seemingly slight variations in a patented process or product can lead to a loss of patent rights. In today’s connected world, a local marketing or communications campaign can lead to global confusion. Stay close enough to the business to know what is going on.
A good partner will take good care of the expatriate employees that you send to the JV. There can be status and perks that will never be noticed back at world headquarters, which can be a great motivation for your expatriates. It can also lead those expatriates to “go native,” losing sight of their responsibility to keep you well informed and keep your objectives in mind. In extreme cases, this good treatment can amount to a payoff, and you can find your employee working toward objectives of your partner that contradict your own.
Perhaps most importantly, your partner may conduct business in ways that are acceptable and effective for a local but are not acceptable to you. Consider some examples:
- Law enforcement is relatively weak in many places, especially in areas like environmental and antitrust/competition law. But in most places enforcement is becoming more effective more quickly than some locals realize. I’ve seen examples where the local partner and local employees honestly believed that no environmental rule applied, when in fact they were doing something that was completely illegal, just as it would have been in Europe or the U.S. It was a challenge to get the partner to understand before the local inspectors arrived.
- Your partner’s business style may be challenging for some of the suppliers or customers that you bring to the JV. Or your partner’s approach may run counter to your global brand strategy. The style may be effective locally, in which case you have to balance local benefit against global detriment. Or the style has worked in other industries, but does not work in yours, in which case you have to try to convince the partner that it’s not a local issue, but rather an industry or market issue.
- If you form a partnership in or near the Middle East, your partner may be used to complying with the Arab boycott of Israel. If you’re an American company or an American national is involved, there are major civil and criminal penalties for actions that your partner may consider ordinary and necessary. Actually, it is not difficult to succeed in the region without violating the U.S. anti-boycott law, but it may take some effort to educate your local partner and local employees.
- In many places bribery is still common, and your partner might view bribing government officials (or purchasing agents of customers) as a normal way of doing business. Your company, and possibly your executives, will be responsible for your partner’s illegal payments. Anti-bribery enforcement by the U.S. and a growing list of other countries is vibrant. The cost of just being investigated is extremely high. Your partner may be astonished to learn that you object to bribery, but you are accountable for what your partner does.
These problems can occur while your partnership is strong and happy. If your partner wants to take advantage of you, or your relationship sours, the risks increase. Your partner can do things to you – things that you can’t do back.
- A local partner who controls the purchasing function can arrange kickbacks, siphoning money from the JV to the partner. (See Part 6 of this Series about watching the money.)
- In some places, most notably China, local partners often copy technology from a JV facility and use it in a competing business.
- If you want to open another business in the country, even completely unrelated to the JV, your local partner might use the government or business connections that you initially valued to slow you down until you cut him into your deal.
- If you have a dispute, your partner can sue you in local courts, even if your agreement requires international arbitration. That lawsuit might not be a winner, but the delay may give the partner leverage to extract value from you.
- People with experience in international JVs have seen local partners bribe judges and other officials in disputes with the foreign partner. It can happen to you.
Keep these risks in mind as you build a relationship with your partner; use the points discussed in this Series to help assess risks and develop risk management strategies. Remember that staying on top of a business is hard when the partner is there all the time and your contact is mostly over the phone — perhaps at inconvenient times because of time zones.
All this does not mean that you should treat your partner mainly as an object of suspicion and supervision. It does mean that you need to build your capabilities (Part 6) and your relationship with your partner. Work on making your partner a true partner and your venture a genuine joint venture. In a partnership, each partner is responsible and accountable for everything done by the other. The word “joint” means “shared,” “collective,” and “concerted.” If you and your partner work in concert, and understand that each is in many ways responsible and accountable for the actions of the other, you can build a joint venture, and not simply your partner’s business with your name on the door and your capital at risk.
If you build that plan, adapt it as things change, and invest in the human capital you need to implement the plan, you will maximize your chances of a successful relationship with your partner and a successful JV.
I wrote a book about JVs called, “Jaffe on Joint Ventures: Everything You Need to Know.” The title is longer than the book itself, which consists of a single word: “Don’t.”
Tongue-in-cheek? Sure. Flippant? Absolutely. Actually worthy of serious consideration? You bet your shareholder returns.
If you are confident that a partner in your offshore business will make a significant and unique contribution that you can’t make at a reasonable cost, then by all means find a partner. If you want to do business in a place that still requires foreign investors to have partners, then you need a partner. Use the keys in this Series to help you vet potential partners and build a sound, mutually-respectful and rewarding relationship.
But if you do the analysis and can’t develop that confidence, then you don’t need a partner; all you need is a team. Consider finding one or more consultants and a great local lawyer (who you need anyway) with experience developing business in that country. When the consultants are finished, perhaps richly paid, and gone, you will own the business and keep the rewards and the control.
Analyze your situation, compare the choices that you face in the real world, and make the best business decision you can.
I’d be pleased to send you a copy of Jaffe on Joint Ventures: Everything You Need to Know. Simply connect with me on LinkedIn or follow me on Twitter, post or tweet the link to this Series to your contacts with a nice comment, and send me an email at firstname.lastname@example.org asking for your copy.
For “Team Spirit Teamwork Euro Silhouette Businessmen” Image Pictured Above: https://pixabay.com/en/team-spirit-teamwork-euro-1544791/
© Gerd Altmann
This is part 6 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Your joint venture partner, if you choose well, will significantly strengthen the business. Your local partner will especially add value in the JV’s locale, which of course is a key reason for entering into an international JV instead of just opening up on your own.
Don’t ever take your partner or its contributions for granted. Local partners who feel (often justifiably) unappreciated are a leading cause of problems between JV partners. Nonetheless, it’s essential that you strategically build your own local relationships and capabilities.
Failing to do so has tremendous costs. The JV landscape is littered with losses of capital, reputation and strategic advantage suffered by sophisticated companies that depended too heavily on a local partner.
Some of these losses are outright fiascos; others are subtle missed opportunities or failures to achieve a JV’s potential. Some are related to topics covered in this Series: differences between the partner’s objectives (Parts 1 and 2), failure to assess accurately the character and capabilities of the partner (Part 1), changes at the partner or in the business (Part 4), underestimating the challenges of the country or overestimating the capabilities of the local partner (Part 5).
Without investment in your own capabilities and relationships, the JV, and you, will be completely reliant on your partner. If the JV misses a few opportunities, this is a problem. If the JV suffers losses, or you find yourself in a dispute with your partner, or you need to exit the JV, it can be a disaster.
How do you do it?
Start by investing in human capital at your headquarters. You need people on your team who have real knowledge of, and a real relationship with, the partner, the JV and the country. Give these people real authority at the JV. When companies try to keep all the important relationships in the C suite, they stumble. Very senior people don’t have (or make) time to develop deep knowledge of the JV or its locale. Give some key roles, including on the JV’s board, to outstanding up-and-comers, and use top executives to provide support and, when necessary, a high-ranking presence.
Insist the JV develop its own team as well and doesn’t rely mainly on the partner’s people. As noted in Part 4, if the partner drops key people in to the JV, it may eventually need to pull them out. Confirm that the JV’s personnel planning is sound.
Next, determine the most strategically important capabilities and relationships. These are usually in money and financial management, government relations, business relationships, legal, tax and communications. Send some trusted employees to the JV to build relationships, and carefully choose advisors to build more. If your JV is very substantial, or you have several JVs in one country, consider establishing a local office of your own.
Build your own continuity plan for key people. It’s not healthy when someone on your team is ready to move to the next career step and you have no one ready, and available, to move to the country to take the position.
A few areas critical to the success of the JV require special attention:
Watch the Money.
It’s most critical for you to watch the money in your JV. For this, you need a capability inside the JV and relationships beyond it.
Place a financial person of your own in the JV, ideally as the CFO. You need someone senior enough to be independent, and who has or can develop language and cultural skills to be effective. Second, engage an accounting firm independent from the JV’s accountants. You will have questions and will be thankful to have your own person to answer them. Third, depending on the size and activities of the JV, and on whether you anticipate an eventual purchase or sale transaction, you might want to have a relationship with a local financial advisor.
No matter how capable and plugged in your partner is, you need at least rudimentary relationships with the government and the local business community. Start with the commercial officers at your home country’s embassy. Meet them early in your process, and keep up that relationship.
Know officials at the government offices and ministries that are relevant to your JV, starting with business development officials and continuing as high up as you can get. Your embassy can help you. Don’t be shy – governments usually like to build relationships with foreign investors, and those relationships may be important if you have an opportunity or a problem. Get to know carefully vetted government relations advisors.
Include your partner in some of your contacts so it doesn’t feel that you are constantly working behind its back. Make your own government relations a matter-of-fact part of your approach to the JV from the beginning.
Start meeting local businesspeople as you vet potential partners. It’s not hard to meet people, even in a new country. Your embassy’s commercial office can make introductions. Join the local American Chamber of Commerce. Your auditor, insurance broker, commercial and investment bankers, and lawyers can make more introductions. Keep up relationships with potential advisors who were runners up in your selection process – you never know when they will be good friends to have.
If the JV shares multinational suppliers or customers with your other locations, build good relationships with their local teams. Know what suppliers’ and customers’ local people are telling their headquarters about your JV. Consider building relationships with important local suppliers and customers. These relationships will help you understand the market and help build the “trust but verify” posture with your partner that is discussed in Part 5 of this Series.
Legal, Tax and Communications.
Get your own in-country legal and tax advisors. They should clearly represent you, not the JV, so that they can continue to advise you if there is a dispute. Consider adding public relations professionals to your team. They will help you to know the territory and will be good to know if an issue arises. Each advisor should agree in writing that it will not take on work (for your partner or that would prevent it from representing you in a dispute with the partner or the JV.
Making it Work – At a Cost that Works
Tallying the potential cost of these relationships and capabilities can be daunting. In my experience there’s a direct correlation between JV profitability and investment in building and maintaining local relationships and capabilities. And if your relationship with your partner becomes difficult, the investment will repay itself many times over. Consider the JV’s size and risks, and utilize your assessment of your partner, its goals, and the other keys in this Series, to allocate your resources strategically.
For “Businessman Team Spirit Teamwork” Image Pictured Above:
Creative Commons license link: https://creativecommons.org/licenses/by-sa/2.0/legalcode
© George Creal
This story originally appeared in the Detroit News:
Britain’s vote to leave the European Union has unleashed market gyrations and a flood of opinions. At a practical level, U.S. businesses that have expanded, or are considering expanding, into Europe want to know where to focus.
To work through the coming changes, focus on talent, trade, and taxes.
The EU has many complicated rules. Most important for this discussion are four special privileges: free movement of goods, persons, capital, and services across the entire EU — the internal market.
If you make something in an EU country, you have the right to sell it in any other EU country. The same right applies, with exceptions, to services. Citizens of EU countries have the right to live and work in any other EU country. (And EU companies have the right to establish a business in any other EU country.) EU companies and citizens can move money around the EU without restrictions.
If Britain simply ends its membership in the EU without any special agreement, its people and companies will lose all benefits of the internal market — they will be outsiders, not insiders. A U.S. investor in Britain would see changes in:
■Talent. You would not be able to recruit freely from across Europe, and would lose the ability to freely transfer your employees to and from Europe. Instead, you would need to justify a work permit for each employee. The existing talent pool of Europeans living in Britain may dry up.
■Trade. You would have to comply with customs rules and pay duties, and meet EU safety and other rules, to get your products from Britain into Europe. You would no longer have the right to provide services across Europe from a British base.
■Taxes. One important part of free movement of capital is the right to pay dividends freely across the EU If you own your European subsidiaries through a British company, you could face withholding taxes. Intercompany loans and other transactions could become more complicated.
EU companies have advantages in legal proceedings: a British judgment will be enforced anywhere in Europe with much less effort than a judgment from outside. This right could be lost.
There will be other changes. When EU laws and regulations no longer apply, Britain may adopt new ones, and no one can predict what the new rules will say.
Today, no one knows what will change for companies when Britain exits. The key points will be negotiated in a withdrawal agreement, which will take a while. Until then, the rules don’t change, but businesses will act on their expectations. British leaders of the “Leave” campaign now say that they want to keep access to the internal market, but stop letting people from around Europe come to Britain freely. EU leaders say that’s a non-starter.
Expect conflict, drama and wide swings in sentiment as the withdrawal negotiations begin and countries jockey for position. Keep your eye on talent, trade and taxes to assess the impact of Brexit on your business, plans, and opportunities.
This is part 5 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Many businesses enter into joint ventures to gain local knowledge about a new country. You want a local partner to help you navigate and get established in its home territory. Unfortunately, in many JVs the partner fails to deliver this critical service.
Have you ever hired a guide for a vacation in a foreign country and been disappointed? The website made the guide seem like a fount of knowledge, but when you arrived he didn’t know how to get from place to place, the restaurants he recommended were awful, and he didn’t know all that much history. Worst of all, he didn’t listen to you to learn what you wanted to see, but instead took you to the places on his regular list, including merchants selling overpriced souvenirs.
It has happened to me – in vacations and in JVs.
When you plan a JV, the lack of knowledge that you’re (admirably) trying to address with a partner makes it difficult to pick the right partner. You don’t know enough to know what to ask.
To make things worse, a powerful cognitive bias leads you to act on your first impressions and makes it hard to seek information you need. In Thinking Fast and Slow, Nobel economics laureate Daniel Kahneman describes WYSIATI – “What You See Is All There Is.” He explains that “[t]he confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little. We often fail to allow for the possibility that evidence that should be critical to our judgment is missing” (Kahneman, p. 87).
If a prospective partner who knows the territory much better than you do can tell an effective story, your mind rushes to believe it. This natural tendency is enhanced by distance and by differences in language and culture, which create obstacles to seeking better information. Your lack of knowledge makes the partner’s knowledge and capabilities seem greater than they are. As Kahneman puts it, “it is easier to construct a coherent story when you know little” (p. 201).
To maximize your JV’s potential for success, you must maximize the information that goes into building your story of how the project will develop. Fight the tendency to build your narrative around whatever facts a prospective partner provides. Use multiple sources of information to test that information and add to your knowledge base.
It is also easy to overestimate how much a partner will contribute to the JV once it’s up and running. In choosing the partner, and in designing the partner’s areas of responsibility and authority, it’s important to fight your WYSIATI tendencies. Assess the partner’s strength, depth, and commitment.
For example, it’s common for a local partner to take responsibility for government relations. However, even if your partner has great relationships in government, you need to test whether those are the relationships that the JV will need, whether the partner has the substantive government relations skills in the JV’s substantive areas, and whether the partner’s team will devote the resources to the JV for the long haul. Consider whether leaving government relations in the hands of the partner creates a corruption risk. In many cases, it will be better to give the partner a defined role in helping the JV build its own government relations capability.
If the partner will provide goods or services to the JV, remember that it will be very hard to change providers if quality, service or price is bad. It is naïve, or perhaps just WYSIATI, to assume that the partner’s ownership interest ensures it will act in the best interest of the JV. Do not build your JV structure on that assumption.
As in many areas of life, there is no sound path that avoids careful and disciplined preparation. As Kahneman says, the “voice of reason may be much fainter than the loud and clear voice of an erroneous intuition, and questioning your intuitions is unpleasant when you face the stress of a big decision.” He recognizes that “little can be achieved without a considerable investment of effort” (p. 417).
If you invest effort, if you and your team are disciplined about gathering and evaluating information, and if you are prepared to verify the appealing stories of prospective partners, you will greatly enhance your chances of a successful joint venture.
Of course, time and resources are limited. Gathering and digesting information from afar is difficult. And our cognitive biases are powerful. Take all this into account as you structure your JV, and give yourself enough flexibility and authority to recover from mistakes.
This is part 4 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Imagine you’ve built a joint venture (JV) in a developing country on the strength of a relationship between your CEO and a local industrialist. The JV exports to a neighboring country, but your company decides to expand there itself, cutting out the JV. Your partner wasn’t happy that you took this opportunity, but didn’t start a fight. The incident blew over with nothing written down.
Two years later, your partner dies suddenly. His son, who your team saw – and treated – as a lightweight, is now in charge. “Junior” doesn’t like the JV and won’t support it. You start negotiating a buy-out at a modest valuation with a minority discount.
Then Junior mentions the corporate opportunity. Not an outright threat, just a subtle comment about how unfairly you treated his father. Your lawyers say he could have a claim, and a lawsuit would tie up ownership and decision-making for a long time.
At this point, you surely wish your team had not underestimated Junior, had anticipated the inevitable generational change when writing the JV contract, and had paid a bit more attention to the buy-sell mechanism. You might wish that you had confronted the corporate opportunity issue and hammered out an agreement when the partner was friendly, which probably would have cost far less than the premium you are about to pay.
Change is constant in all business. Change in joint ventures, across borders, languages, and cultures, brings extra uncertainty and impact.
Imagine: Your longtime JV partner suddenly wants a dividend. Now.
You had agreed to keep profits in the business for expansion. And dividends don’t fit into your tax planning, which your partner knows.
Why the sudden change?
There are many possible causes: from the ordinary – the partner’s investors want more cash flow or an affiliated business is in trouble, to the unknown – your partner is about to breach a covenant in a loan agreement you never knew about, to the personal — its owner is planning an expensive wedding for his daughter.
Even if the contract clearly says that there will be no dividends without your consent, you may face a relationship crisis if you refuse.
Change is especially difficult if your partner has troubles in its own business. At best your partner’s attention will be diverted from the JV, and more unpleasant outcomes are common. A partner who worked informally for years may look to the letter of your contract, or informal workarounds may now be used to claim you can’t insist on your contract rights. Your partner may stop performing functions on which the JV depends. And if it becomes insolvent, complexity and stress multiply — local bankruptcy law may be very different from the rules at home.
A state-owned partner might be privatized; a privately-held partner might go public.
Leadership succession at the partner can bring dramatic change. People you’ve worked with for years may be out and the new boss may not care about understandings you once had. Your people may face a challenge in educating the partner’s new team.
Any of these changes can dramatically increase or decrease your partner’s desire for liquidity, and can affect the overall dynamic, and ultimate success, of your JV relationship.
Some changes bring opportunities for you and your JV, while others bring obstacles. You should build your JV contract with change in mind to give your organization the strength and depth to deal with it at a moment’s notice. Be sure you consider how the following could affect your JV:
- Possible changes in control of the partner, including changes caused by bankruptcy or other legal proceedings.
- Management and ownership succession and corporate reorganizations – for both partners.
- Buy-sell provisions and transfer restrictions, including testing a variety of possible scenarios before you start drafting or negotiating.
Once the JV is in place, remember:
- Be decent to the people in the partner’s organization. You never know who will run the company, who will be promoted and be put onto the JV board.
- Before you resolve an issue with your partner informally, think through how the situation will appear if control of the partner changes, and whether it would be better to get it in writing.
- Have your own person on the ground with the JV, and be sure that person is savvy and senior enough to understand what’s going on at the partner and in the JV.
You can’t anticipate every change; but, with awareness and disciplined planning, you can be ready to deal effectively with changes that will surely come along.
For “Warning: Unintended Consequences” Image Pictured Above:
Creative Commons license link: https://creativecommons.org/licenses/by-sa/2.0/legalcode
© George Creal
An article in Friday’s New York Times describes the partnership designed to place Theranos blood testing mini-labs in Walgreens drugstores as “a promising marriage gone sour.” The article addresses the hype that surrounded the launch of Theranos, and Walgreens’s excitement about the potential for Theranos to drive customers into its stores. It describes Theranos’ penchant for secrecy and says that Walgreens “skipped its usual due diligence” to get the deal done fast.
The article asks what it will “take for Walgreens to end its troubled relationship,” and refers to unnamed legal experts who correctly say that “nearly all” agreements like this have termination clauses in case something goes wrong. The article goes on to say, “If this one doesn’t, Walgreens would have a good case for suing its lawyers for malpractice.” It states that Walgreens was repeatedly “blindsided,” learning bad news about Theranos from the press.
Although it’s always fun to blame the lawyers, this looks like a story of businesspeople falling in love with their deal, not a story of legal malpractice. Experienced lawyers seldom forget due diligence or termination clauses. When a prospective partner has many suitors, when an opportunity promises to be the deal of the century, business leaders are tempted to set aside the basics that deliver sound deals.
“If you give up too much in your early negotiations, it is nearly impossible to recover. You need to have enough power to protect yourself over the life of the JV or you will pay a high price at the most critical times. On the other hand, if you drive the partner away in the negotiations, you will never get the JV at all.”
Was it worth the risk for Walgreens to enter a venture with Theranos without due diligence and possibly with a weak termination clause? Was Walgreens’s decision based on careful analysis of a considered risk — or on wishful thinking? The Times article suggests that Walgreens was reckless, which is easy to say with hindsight.
How can businesses manage the risk of joint venture failures? My series on Keys to International Joint Ventures points out the critical importance of understanding your partner before entering a JV. The next installment in the series will focus on anticipating change, including change at your partner.
Assess your JV risks dispassionately and consider the potential returns on a risk-adjusted basis. This is a team activity, requiring a lawyer with JV experience, as well as finance, engineering or technology, tax and other professionals. I don’t think Walgreens’ general counsel forgot about termination clauses and due diligence. Did Walgreen’s management carefully consider the Theranos opportunity with its team? Or did top people make commitments based on the hype surrounding Theranos and its founder, leaving lawyers and other professionals out of the process until critical deal points were cast in stone?
We don’t know the process Walgreens used, but we can learn from its experience — you can enhance your JV story by carefully evaluating and deciding on risk.
This is part 3 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
The relationship between joint venture partners is a unique amalgam of cooperation and competition. Partners commit to a long-term relationship that inherently requires cooperation to achieve success. At the same time, each partner tries to maximize its individual net benefit from the venture, leading to competition.
Cooperation and competition begin as soon as you and a prospective partner start thinking about creating a JV together. Differences in your respective goals, discussed in part 1 and part 2 of this series, will drive competition. So will changes in the JV’s business and in the partners’ situations, which will be covered in part 4.
Balancing the need for cooperation and the reality of competition is your central challenge when building a JV. If you give up too much leverage in early negotiations, it is nearly impossible to recover. When partners are competing, and especially when they disagree, each will refer back to the joint venture agreement in order to use any advantage the contract provides. You need to have enough power to protect yourself over the life of the JV or you will pay a high price at the most critical times. On the other hand, if you drive the partner away in the negotiations, you will never get the deal.
What is the best path to this balance?
Understand and accept that your potential partner will be negotiating and seeking advantage from the very beginning. Don’t be tempted by the idea that you need to build the relationship by being very agreeable at first, and getting down to business only later. This view is naïve and dangerous. Of course you need to build a good relationship, but it should be the relationship of a respected friend, not an easy mark.
Learn to practice polite insistence. By being friendly yet firm, respectful yet respected, you can build a sound relationship for the long term. Keep the fundamentals of your proposed business in mind along with the following:
Preparation is everything. Many outstanding businesspeople want to have the first conversations with potential JV partners by themselves, to talk about “business issues” without the “complications” that lawyers and other advisors add. That often makes sense, but only with rigorous advance preparation with a business team that includes those legal, financial and tax people.
Necessary preparation includes analysis of the proposed business, the joint venture keys discussed in this series, and the basics of the business, legal and tax environment in the country. Find, vet and use trustworthy, capable local advisors to help you.
“It’s not the will to win that matters. It’s the will to prepare to win that matters.”
— Coach Paul “Bear” Bryant
Maintain healthy skepticism. Prospective partners will tell you about their goals and capabilities, and about the market, the country and their experience with foreign investors. Do not accept anything at face value, as you don’t know where your partner draws the line between acceptable “puffing” and unacceptable lying. In some cultures and for some partners, outright lies are normal and acceptable. Any time you are told something like, “everyone here always does it this way,” alarms should be blaring.
“Trust, but verify.”
— Ronald Reagan
Demonstrate respect for your partner. The concept of “saving face” is commonly associated with Asian cultures, but nobody from any culture likes to have his or her shortcomings amplified. Show respect for your potential partner by being polite in negotiations. If you are bringing technology to the JV, don’t belittle your partner’s technical efforts. Avoid NFL-style end zone celebrations when you win a point. Learn about and honor your partner’s national and business culture, but do not let them use culture to create negotiating leverage. Watch for traits that will present challenges later, and be sure to show respect in a way your partner will understand.
Regard “politeness as a sign of dignity, not subservience.”
— Theodore Roosevelt
Don’t Rush. Companies seeking international joint ventures are often in a hurry. You may be trying to beat a competitor into a particular country or region; you may want a public announcement this quarter; you may want to impress the CEO with your effectiveness. If you traveled for the discussion, you have a flight home to catch. Your potential partner may have more time, and the local culture may emphasize patience more than yours does.
When you’re inclined to rush, think about what the balance of negotiating leverage is at that moment, whether being in hurry is likely to have a cost, and whether the reasons for your impatience are really worth that cost. Be ready to delay the announcement, put off the groundbreaking, or cancel the flight home.
“He that can have patience can have what he will.”
Resist the temptation to respond to every question or argument. Emulate the best negotiators and embrace the power of silence. Sometimes, several seconds – or even minutes – of silence will speak far more powerfully than words. When silence is impossible, fall back on ambiguity. Learn from Japanese negotiators, who often respond “that’s very interesting” when they are thinking “hell no.” When you actually say “hell no” less frequently, you will find that each occasion has more power.
If you can’t say anything nice, don’t say anything at all.
— Your mother
Recognize the tension between cooperation and competition in any JV, and use polite insistence to build a solid relationship with your partner and maintain balance in your partnership. With this balance, you can build a JV agreement that will withstand a challenging and changing environment and enable the partnership and all of its partners to thrive.
Europe Moves to Require Compliance Programs – Implications for Business in Europe, the U.S. and Beyond
Businesspeople in continental Europe could be forgiven for wondering if the compliance program is an Anglo-Saxon conspiracy. The modern compliance program originated in the United States with the Federal Organizational Sentencing Guidelines, which include standards for and benefits of an “effective compliance and ethics program.” The United Kingdom picked up this theme, even providing a defense to criminal charges under its Bribery Act for companies with “adequate procedures” to prevent bribery, and a crime of failing to prevent bribery. “Adequate procedures” are a lot like a U.S. compliance program.
Continental European companies have created or enhanced compliance programs after encounters with the American criminal justice system. Siemens of Germany and Alcatel and Total of France are just three of the more (in)famous examples. But for these companies, the impetus for compliance programs has not come from home, but instead from American prosecutors enforcing U.S. law.
Last year, Spain adopted a new criminal code that includes a “compliance program” defense for certain crimes and France adopted “recommended” guidelines for anti-bribery compliance programs. In recent weeks, Spain announced guidelines for compliance programs and France began work on a new anti-corruption law that will reportedly require many companies to establish compliance programs. (The text of the proposed law has not yet been published.) Both Japan and Brazil have recently issued guidelines for anti-bribery compliance programs.
Companies should not take comfort from the “voluntary” nature of the guidelines. It’s true that there is not a legal penalty for failing to have a compliance program. But if your company is caught breaking the law, the likelihood of prosecution and the penalties assessed are much greater for companies without programs that prosecutors consider effective. Not to mention that an effective compliance program will make it less likely that your company breaks the law in the first place.
For multinational companies, wherever they are based, compliance programs become more important as more countries impose requirements. American multinationals will want to make sure that their programs comply with the requirement of each country in which they work. European companies, especially those without major U.S. activities, may have put off focusing on a compliance program because the issue seemed far away, but now find themselves needing to put more focus on developing and implementing them. Companies from other parts of the world may now increase their focus on compliance and compliance programs.
As more countries increase their enforcement efforts, companies can expect to face multiple prosecutions for the same actions. On February 19, VimpelCom, a mobile phone company based in the Netherlands, agreed to pay $397 million to the U.S. for Foreign Corrupt Practices Act violations, and an additional $397 million to the Dutch government for the same activities. In a speech on March 4, 2016, Leslie Caldwell, head of the U.S. Department of Justice’s Criminal Division, explained that prosecutors in 10 countries were directly involved or “provided significant assistance” in this case.
It is exponentially more expensive and challenging to investigate and defend allegations in multiple countries. Ms. Caldwell acknowledged that “in many cases multiple regulators each seek to prosecute companies and individuals . . ., sometimes for what essentially amounts to the same or closely related conduct. We recognize that this raises legitimate questions about fairness.” The cost of investigating and defending several investigations in several countries is itself exponentially greater than the cost of responding to one agency from one country. As Ms. Caldwell put it, “companies that voluntarily operate in multiple countries certainly know that by doing so, they subject themselves to those countries’ laws and regulatory schemes.”
The bottom line: any company that operates in multiple countries should be building or enhancing its capability in the world of compliance and its formal compliance program.
Although each country has its own spin on what makes a compliance program effective, they use complimentary concepts and, for now, there are not major contradictions among them. One critically important common element is that a compliance program must be built as a real part of the company’s culture, and not just a paper exercise.
The trend toward requiring formal compliance programs is likely to spread, just as antitrust and anti-corruption enforcement have spread around the world. As it does, the importance of building and implementing an effective compliance program will only grow.
The harm done to the residents of Flint from contaminated water will be hard to remedy. The state and federal government agencies and people involved in the decision to deliver that water — even with evidence that it was dangerous — won’t suffer from the effects of lead poisoning, but they have created major problems for themselves. The flow of criticism of the EPA, Gov. Rick Snyder and his team, the Flint City Council, and the litigation, will not be easily stanched.
Unfortunately, disasters like the Flint water crisis also strike many businesses, including companies that are well run by well-intentioned people. Much has been written about the politics of the Flint water crisis; this article will focus on the business lessons to be learned.
Typically, these stories begin with an imperative from the top. Sometimes it’s about adding functionality to a product, but usually, as in Flint, it’s about cutting costs. In many companies, employees perceive a clear message from leadership that the initiative is essential and not to be blocked. The initiative is often implemented quickly without adequate study, while leaders dismiss or ignore information suggesting potential problems.
Flint rushed to disconnect from Detroit’s water supply. In a company, it might be a
cost-cutting initiative that looks good on the surface, but once enacted, it damages your equipment, releases dangerous chemicals into the environment, or makes your product unsafe. Other initiatives can create the same effect. Sales might suggest contributions to favorite charities of influential officials. If you don’t find out whether the contributions benefit the officials, you create an expensive Foreign Corrupt Practices Act problem.
These scenarios really happen in business, and in a stunning number of cases, create a debacle that hurts people, the bottom line of the company and the careers of those involved. For example, Enbridge employees ignored alarms before its 2010 oil spill into the Kalamazoo River. BP had a culture of resisting safety concerns before the Bridgewater Horizon explosion, also in 2010. Charitable contributions were part of Stryker’s costly 2013 Foreign Corrupt Practices Act case.
Why does this happen, and how can you prevent it from happening to your company?
Don’t just do something, stand there — and think.
Business emergencies require analysis that is both careful and candid. If you as the leader insist on immediate action without rigorous and intellectually honest study, you’re sending a message that any action is sufficient — even if it causes more harm than good. Flint had never sourced water from the Flint River, yet the decision to do so was made quickly, without thinking through the risks or how to mitigate them. The leader must allow — and require — an analysis that challenges the initiative and the assumptions behind it.
Don’t shoot messengers
When leadership puts out an imperative, it takes courage to challenge proposals, especially after senior leaders express support. Once implementation has begun, it takes even more courage to point out problems. Leaders’ urgency, and their egos, can neutralize important information.
When leaders rush to try something new, they need information about potential problems quickly. Unfortunately, there’s a natural tendency in organizations to defend the initiative and dismiss challenges. In Flint’s case, people who questioned why the water was brown and smelly received “a persistent tone of scorn and derision.”
To get information where it needs to go, you need a culture in which questions and challenges are accepted and encouraged. What happens in an organization when someone challenges a leader’s initiative? If the company’s culture brands this person as “negative,” bad initiatives won’t be challenged, even if the flaws are glaring. Unless challenges are made and considered objectively, the risk of a Flint-like failure is high.
Leadership requires courage
If it takes courage to challenge an important initiative, it takes as much courage for a leader to address the challenge openly and honestly. Leadership comes with a responsibility to be the person who makes sure that business decisions are sound, especially when demands of the board, stock analysts, or the CEO are loud. The consequences of failing to respond instantly may seem dire.
But the consequences of allowing a dangerous mistake to be made and to continue uncorrected are truly disastrous. Companies needs a culture in which important decisions get analysis, and challenges are not dismissed. Leaders need the courage, commitment, and skills to build and live that culture.
This is part 2 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Conceptual goals often lead companies to seek an international joint venture (JV). They may want “to participate in growth in India, and get local knowledge to help,” or “to get into Brazil using the partner’s logistics capability,” or “to be in China because a big customer wants them there.” But many companies entering JVs fail to consider a deeper level of wants and needs from the JV.
Many expensive and infuriating JV disasters have been caused by companies failing to consider these components, even though they lie just below the surface of a partnership. In order to choose the right partner and create the right structure for your investment in a new place, consider what you want and need by analyzing the following questions:
Do you need control of decisions and risk?
- How much control do you need of the level of business risk that the JV takes day to day? Do you need a say in credit decisions? In warranties?
- Who will control sales and marketing strategy? If your company takes a new approach to global branding in five years, will you need the JV to adopt that same approach?
- Do you need to control the flow of dividends or the timing of reinvestment? What will happen if the partner wants dividends in circumstances that create a tax disadvantage for you?
- Will you have enough control of compliance risk? Failures in health and safety, environmental protection, or bribing local officials can have a huge impact on your company. Your partner may have a very different view of these risks.
Do you need to control resources?
- Who controls key personnel decisions? Can you fire a sales manager who infuriates your customer in a country far from the JV? What if that sales manager is your partner’s brother?
- Who will own patents and trademarks? If the JV has a local logo that incorporates your name and marks, will you be able to take it if the JV dissolves? If the JV’s local staff invents an improvement to your process, will the partner be able to hold you up for a big payment before you apply it to your other facilities?
What are your goals and needs for human resources?
- Who can you send to the JV? Is this an opportunity for great people inside your company to learn and grow, or do you want to enter a new market without sending first-rate people to the JV? Does your partner have capable people to assign to the JV, and if so, are they the people you want and need? In both cases, what will happen when these people return to their respective parent companies?
- Do you have a first-rate financial person to send to the JV to watch the money? Do you have a plan to always have such a person in place for the life of the JV?
- Do your senior leaders have the time and willingness to actively lead the relationship with your partner? JV relationships often become difficult when the local partner feels that it has no relationship with the people who matter in the foreign partner’s organization. If you give the responsibility to junior people, will you give them the authority they will need to have credibility with the partner and to act?
What are your real needs for investment, profitability and growth?
- Does your goal for the amount you will invest include a big enough contingency for currency fluctuations, cost overruns or startup difficulties? If more capital is needed, are you willing to invest it all, or do you need your partner to participate?
- If a big customer wants you to enter a market, are you compromising your standards on profitability? Sales personnel often say you can settle for low margins because a big global customer wants you in this place, but your shareholders and partner will quickly forget why lower margins seemed acceptable.
- Are you in a hurry to grow, or do you want to let the JV prove itself before committing additional resources? Does your partner see it the same way?
- If the JV is successful, what do you want to do with the profits? Can profits be repatriated easily, or are there high tax costs or currency controls that make this difficult? Can profits be reinvested easily? Do you have the right structure to preserve your options from corporate and tax points of view?
When entering, or considering, an international joint venture, think critically about your wants and needs and how they line up with those of your potential partner. Doing this will help you choose your partner wisely, allocate the right resources to the JV and create a sound JV structure on which to build a successful business.