Ownership percentages do not determine employee loyalty, relationships do. Culture, proximity, history, and the expected future all play a bigger role in this than ownership. When we develop partnerships, joint ventures, license agreements, and other similar "partnering ventures," it is important to take steps to capture the loyalty you deserve, and be realistic about how just much loyalty you can achieve.

At some point in their careers, many managers become involved in a partnering venture with another entity. The purpose of such a relationship may be to access new geographic areas, leverage a skill or ability into a new product or market, or create a new, powerful entity to take on a tough competitor. No matter what the stated purpose, however, you can be sure there will be differences in the way the original partners see things, be it in priorities, approaches, acceptable risk levels, or simple things like who to hire. Expect each partner to attempt to influence senior management to tip the scales in their favor. In this internecine battle, loyalty is the key factor in determining who wins and who loses.

All agreements of this type will have a way of sorting out those differences, usually beginning with some kind of discussion process surrounding a board or other governance body, and culminating in a formal vote typically ruled by the largest shareholder. You would expect that since everyone knows this is the process that backstops day-to-day decision making, it would put the largest shareholder pretty much in charge of everything.

That, however, is often not the case.

I've always said that when the venture becomes so mired in conflict that the formal dispute resolution process must be invoked, the business's days are numbered. Since we don't normally resort to this legalistic formal process, day-to-day decisions are normally made by the managers working in the business. The series of day-to-day decisions, when strung together, make up the real, underlying strategy and direction of the entity. Those short-term, day-to-day decisions are, in turn, open to influence by the minority partner utilizing any combination of several key factors including: Culture, proximity, history, and expected future.

Culture

In a joint venture between a German and a Korean company, I had a front row seat for a major culture clash. In this case, I was a supplier to both companies, and was able to see both sides of the resulting, messy conflict. I watched the design responsible German firm and the Korean manufacturing entity go though a curious dance over and over again, quarter after quarter -- much to the frustration of the German engineers. At every meeting, the Germans emphasized the importance of process, procedure, and discipline during the product design and development phases of the project. The Korean representatives would agree to everything the Germans demanded, but would then go back home and do whatever they thought best. Then the process would be repeated, with the Germans becoming more agitated in each successive cycle.

Ultimately, the Korean partner ran the project exactly the way they wanted, despite the German firm holding majority ownership. The reason? They controlled what was happening on the ground at the manufacturing plant, and culturally were determined to do things their own way. Politely, I might add.

Proximity

A joint venture I started in western China was particularly vexing for me. My employer was the majority owner, but I was half a world away and the partner had their headquarters in the same city as the venture. Visiting for a board meeting once every few months became an exercise in frustration, as pretty much everything agreed to at the last meeting had been "forgotten" by the next, and activities in the joint venture reverted to the agenda of the minority share partner. This had everything to do with the amount of day-to-day contact the partner had with managers in the joint venture. Even when we appointed a board member who resided in Beijing, the situation barely improved. It wasn't until that board member spent close to fifty percent of his time at the JV, that the situation began to turn around.

Unfortunately, by then it was too late -- the venture was out of cash, and no one had a stomach for pumping more money into the frustrating business.

History

Another joint venture, this one in Brazil, provided a different lesson, this on the importance of history. My employer entered a joint venture with a local manufacturer, and a family member of the minority partner ran the business. The senior management team consisted of managers hired by the minority partner before we became involved (in fact, we were a competitor during those days). The management team had been through severe ups and downs together, including hyperinflation and a bankruptcy. Because of the shared history among this tight-knit team, I never had a chance of capturing their loyalty. And although the general manager of this operation was relatively easy to work with -- and saw things eye-to-eye with me much more often than he did not -- the lack of control still created problems on several occasions. This particularly when I was concerned about the potential of trade embargo violations.

Future

A joint venture in India also proved to be problematic, this time because of the future prospects of a key manager. In this case, the general manager of the operation had been hired from outside of the partner's organization specifically to prevent the type of problems I described in the above Brazil example. Unfortunately, the partner promised this manager would have a long term career and plenty of opportunities with them -- a promise we couldn't match. Because of his future prospects were with the minority partner and not with us, his loyalty went laid in the same direction. In this case, that loyalty went so far that he allowed the partner to divert profits from the venture into one of the partner's businesses by agreeing to a component supply contract with massively inflated prices.

As you can see from the above examples, control counts for something, but loyalty counts for more. And while capturing and retaining the loyalty of key employees is most challenging with international ventures, it happens within domestic markets, as well.

If you're contemplating a partnering arrangement, spend plenty of time assessing and designing the venture so you capture the loyalty of the key employees. If you already have such a venture, take whatever actions you can to shift the loyalty equation in your favor to the maximum degree possible. Your time and money spent will help ensure you aren't facing a disastrous difference of opinions somewhere down the road. 20.6

Where Loyalty Truly Lies

Tom Spears

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