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.

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 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.

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.

I described this dilemma in a recent article on joint ventures (JVs):

“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.”

— Benjamin Franklin

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.

You can read the entire Keys to International Joint Ventures series by clicking here. 

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.

Until now.

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.

This story originally appeared in DBusiness:

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.

You can read the entire Keys to International Joint Ventures series by clicking here. 

This is part 1 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.

To have a great joint venture, start with a great partner. That sounds obvious, but is much easier said than done. Finding a great partner is harder than hiring a great executive, and more critical because a partner has a tremendous impact, and it’s difficult and expensive to change partners if you pick the wrong one.

Hitting it off with the prospective partner’s owner or CEO over dinner is nice, but won’t help you truly understand the prospective partner and what it will bring to – and take from – the JV. The business world is littered with the wreckage of JVs where a partner was chosen on the basis of personal chemistry, hope, or an urgent desire to get started.

Below are key questions that require research, careful analysis, and intellectually honest assessment. Use your results to choose your partner and to create a JV structure that works for both of you. Remember that you are part of “both of you,” and that you are entitled to have your interests protected.

Is the partner successful in business?

Your partner almost certainly looks successful, but we all know stories of seemingly successful businesses encountering difficulties, or even outright failing. Is your partner really successful? If so, is it successful in its own right, or does it depend on special relationships, a government franchise or monopoly that may not apply to the joint venture?

What makes your partner successful? Will these attributes contribute to a successful partnership with you? Or will the partner’s business strategies and tactics conflict with yours?

Does the partner (or an affiliate, or the owner’s sister-in-law) own other businesses that might compete with, sell to, or buy from the JV?

Will the partner’s eye be on the success of the JV, or on what the JV can do for the partner and its friends and family?

What are the partner’s goals for the joint venture?

In building a partnership, it’s critical to understand what the other party wants, and to assess whether it can, and is willing to, deliver. Many JVs have foundered due to inconsistent objectives of the partners. Here are a few key questions to consider (alongside your own objectives, which I’ll discuss in Part 2 of this series):

• What is the partner’s time horizon? Is the partner looking for long-term growth, or a quick exit? You can find clues in its track record with other ventures. If it is a one-owner or family business, how old is the leader? Is there a track record of stability across generations?

• Is the partner eager to expand beyond the original project? If so, is it willing and able to contribute capital to fund expansion? What if capital is needed to overcome early difficulties in the project? Many companies have been surprised by partners who insisted on maintaining their ownership percentage, but were unwilling to put in one dollar beyond their initial commitment.

• Is the partner more focused on profit or market share? A mismatch with your partner in this area can make life extremely difficult.

• Is the partner’s risk profile similar to yours? Understand how (and whether) the partner analyzes business and financial risk, and how much risk it is willing to take on. Does the partner expand its own businesses based on a “seat of the pants” feeling while you require a 20 year discounted cash flow analysis? Is the partner fundamentally more or less willing to roll the dice than you are?
  Understand also the partner’s view of compliance risk and whether it is compatible with your view and the legal requirements you face. In many places, you will find prospective partners that are used to evading, or even flouting, rules and regulations. With enforcement increasing around the world, you will be legally – even criminally – accountable for many of your partner’s actions. Can the partner adopt the compliance culture you need to build?

• What are the partner’s goals for control of the venture? Does it expect to be in charge, either through formal arrangements in your agreement, or by having its people on hand at the venture while your team is an ocean away?

• Does the partner have goals for your technology, your brand and other intellectual property? Does the partner expect you to contribute these to the JV for free? Or worse, is the partner’s goal to be able to use or control these itself?

• What are the partner’s human resources objectives? Does it have highly skilled people who can be deployed in the JV? If so, would that be for the long term, or only until a new project comes along? Is there a cousin of the owner who “needs” an important job? Is the cousin a strong contributor – or a disaster?

As you learn, new lines of inquiry will become evident. Vet the partner. Talk with its partners in other JVs, and with people with whom it does business. Use online search. Check carefully for compliance problems. (More on this in Part 7 of this series.)

Build a solid understanding of whether this partner can contribute to success, working with your company and your people. This understanding will help you and your team decide whether to go forward with this partner, and how.

You can read the entire Keys to International Joint Ventures series by clicking here. 

The road to successful international joint ventures is littered with wrecks, many of which were caused by wishful thinking. If you are considering or planning a joint venture (JV), consider the following points carefully and honestly.

1. Understand your partner and its goals.
Do not assume that prospective partners want the same things you do. Learn the partner’s business and what it wants from the venture. To evaluate whether its goals are truly compatible with yours, consider:

• Does the partner want to build a long-term business or to exit quickly?
• Is the partner more interested in profit or market share?
• Does the partner want expansion, and will it contribute capital to fund expansion?
• Does the partner want your technology, and what will it do with the technology it gets?
• Is the partner looking for an important post for a (possibly under-qualified) relative?

2. Understand your own objectives.
Think beyond your “big picture” wish list – growth, market entry, sharing capital requirements and risk, or local capabilities. Dig deeper with key questions, including:

• What are your objectives for invested capital, profitability and growth?
• What are your HR objectives? For example, do you have excellent people to send to the JV, or must it find its own people?
• What are your preferences on risk and control? How much control of management decisions do you need? Do you need control of intellectual property? Or customer relationships? What about whether to reinvest or distribute profits, or how to fund losses?

3. You need to form a relationship, and therefore need to be flexible and reasonable.
This conflicts with your need to need to form a basis for your relationship that can withstand change and the pressure of business, and therefore to establish your rights. It is not easy to maintain friendliness and at the same time insist on the level of power you must keep. Your prospective partner will not make it easier. Know what rights you need and study polite insistence.

4. Important things will change.
Over decades in JVs, I’ve seen many changes outside the ventures that have had important consequences inside. These include losses in the partner’s main business, causing a sudden need for cash and generational change at a family-owned partner, leading to completely new priorities. Some changes bring opportunities, and others bring obstacles – your organization needs the strength and depth to deal with change.

5. When you’re entering a new country, you don’t know much about that place.
Many companies fail to recognize that their lack of knowledge often makes the partner’s knowledge and capabilities seem greater than they are. It is easy to overestimate how much a partner will contribute. Assess the partner’s strength, depth, and commitment. 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.

6. Build your own relationships and capabilities.
Even if your partner is great at government relations, procurement, or trade associations, use the partner to build independent capabilities in your team and in the JV. The JV must not depend on the partner’s accountants, lawyers and other advisors. If your partner’s goals and yours diverge, even short of a fight, it will be critically important for you to have independent expertise and for the JV to have key capabilities in place.

7. Your partner can do things that you can’t do. Your partner can do things to you that you can’t do back.
Your partner may feel comfortable paying bribes, talking strategy with competitors, or skirting safety or environmental laws. You must figure out whether this is the case and, if it is, whether you can control your partner. In some places, enforcement becomes stricter when a foreign company shows up. Once you are in a JV, you are responsible for your partner. Your JV needs an effective approach to compliance, which will be impossible if your partner resists. If you are in a place where judges can be bribed, it may be hard to enforce your rights, no matter what your contract says.