Governance in JVs: ensuring a joined-up approach

Comment03 Oct 2018 Former Member

Robust governance and clear conversations around motivation are required to get the best out of joint ventures, says Jenny Brown

Former Member

Jenny Brown: “The real risk is where dangers have not been properly identified and managed”

As external pressures continue to make it necessary for housing associations to be innovative when sourcing funds, joint ventures remain a common solution to delivering services and projects that need the involvement of third parties.

Over the years, however, there have been high-profile cases where the structure and governance of these arrangements have left housing associations open to criticism from stakeholders, and in some cases real financial losses.

Given that such structures are often designed to ringfence risks away from the housing association, a risk of commercial loss must always be acknowledged.

The real reputational risk, and regulatory risk, is where such dangers have not been properly identified and managed.

One of the many challenges we see in practice is when the initial reasoning behind setting up a joint venture has not been clearly articulated.

It may have been suggested by the third party (in order to manage their own risk) or may be seen to be the ‘done thing’, without any real clarity on the pros and cons of such an arrangement versus a more informal partnership agreement.

The management team and the board must be very clear on what the joint venture has been created to do and its strategic objectives.

The third party’s motivation must also be considered. We have seen a number of scenarios where, because the party was ‘known’ to the organisation – such as a local authority, another housing association or a regularly used supplier – it has been assumed that there is complete alignment on both their values and purpose.

This assumption should never be made and can cause issues at later stages, especially when independent legal advice is not sought by all parties.

We often see an over-reliance on local authorities’ legal advice, rather than legal advice with the best interests of the housing association in mind.

Considering who should represent the association on the joint venture’s board is also critical. Often, as with many subsidiaries, executive team members (frequently the finance director) are automatically made directors of subsidiaries.

However, the representatives put forward should be selected according to their experience, to ensure the right level of knowledge and authority is present.

For example, the chief executive or a board member may need to be involved, but the joint venture may also require the development director.

Regardless of who is appointed, it must be made clear that while they are taking on a board member role for the new entity on behalf of the association, they must act in the best interests of the new entity as a statutory director.

The administrative activity is usually undertaken by one of the two joint venture investors.

Where this is not the housing association itself, a right of access to information – including a right to perform or obtain internal audit reviews and to audit financial information – is important.

The activity being undertaken must be visible and agreed to by the housing association to help ensure that the behaviours and controls put in place are acceptable.

We have seen scenarios where such oversight has not been exercised properly, leading to reputational risk and financial challenges that could have been avoided.

The joint venture model has many advantages and can be more attractive, especially to external investors.

However, the agreement must be properly set up and managed, and associations need to ensure that not only do they have a good understanding of the business from the outset but that this is continuously maintained.

Jenny Brown, chief operating officer for not-for-profit, Grant Thornton UK