Board representation in international joint ventures

• Date: 01 April 2017
• DOI: http://doi.org/10.1002/smj.2529
• Published date: 01 April 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 920–938 (2017)

Published online EarlyView 21 June 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2529

Received 30 April 2013;Final revision received29 March 2016

BOARD REPRESENTATION IN INTERNATIONAL JOINT

VENTURES

ILYA R. P. CUYPERS,1,*GOKHAN ERTUG,1JEFFREY J. REUER,2and BEN

BENSAOU3

1Lee Kong Chian School of Business, Singapore Management University,

Singapore, Singapore

2Leeds School of Business, University of Colorado, Boulder, Colorado, U.S.A.

3INSEAD, Fontainebleau, France

Research summary: Relatively little attention has been paid to boards in international joint

ventures (IJVs), and the composition of these boards in particular. We examine the determinants

of foreign partners’ representationon IJV boards in order to advance our knowledge of this facet

of IJV governance. We argue that a foreign partner’s representation on the IJV board is related

to its equity contribution. However, we hypothesize that this relationship is moderated by IJV and

host country characteristics that affectthe importance of the internal and external rolesIJV boards

serve. These resultsprovide insights into the conditions under which a partner might wish to secure

greater board representation for its level of equity, or utilize less board representation than might

be suggested by its equity level alone.

Managerial summary: The functioning and composition of corporate boards have long been seen

as critical to managers and shareholdersalike. In contrast, the boards of IJVs have been relatively

neglected. We advance our knowledge of this important facet of IJV governance. Specically,

we highlight the importance of two roles (i.e., an internal and external role) that IJV boards

and directors fulll. We nd that the importance of these internal and external roles of boards

determines whether a foreign partner might wish to secure greater board representation for its

level of equity,or utilize less board representation than might be suggested by its equity level alone.

Our results provide novel insights that can help managers structure their IJV boards. Copyright

© 2016 John Wiley & Sons, Ltd.

INTRODUCTION

A distinguishing feature of international joint ven-

tures (IJVs) compared to other types of alliances is

that they utilize a board of directors that oversees

a distinct business entity (Pisano, 1989). The

importance of these boards has been acknowledged

since the beginning of research on IJVs (e.g.,

Keywords: international joint ventures; joint venture

boards; alliance governance; surveydata; equity ownership

*Correspondence to: Ilya R. P. Cuypers, Singapore Management

University, Lee Kong Chian School of Business, 50 Stamford

Road, Singapore 178899. E-mail: ilyacuypers@smu.edu.sg

All authors contributed equally to this manuscript.

Copyright © 2016 John Wiley & Sons, Ltd.

Harrigan, 1985; Killing, 1983). As IJV boards

act as an important formal mechanism to govern

IJVs, how much representation an IJV partner gets

on the board becomes an important matter. One

factor that has often been assumed to determine the

composition of IJV boards is the equity distribution

of IJVs (e.g., Kumar and Seth, 1998: 585). How-

ever, in practice, we observe that the relationship

between equity ownership and board representation

in IJVs varies considerably. For example, Synacor

Inc. and Maxit Technology Inc. formed an IJV

in 2013 in which Synacor Inc. took a 50 percent

ownership stake while getting 60 percent of the

directors on the IJV board. As another example,

the Gas Authority of India Ltd. (GAIL) formed a

Board Representation in International Joint Ventures 921

JV in which it took only a 25 percent ownership

stake, yet GAIL got 50 percent of the directors on

the JV board. The aim of this study is to explain

deviations such as these, between allocations of

equity and board representation, by investigating

the relationship between the ownership distribution

and the representation of partners on IJV boards.

Because little research has been conducted on

IJV boards as a formal governance mechanism, we

do not have a good understanding of parent rms’

representation on these boards or their composition

more generally. This has been highlighted by

Aguilera (2011: 92– 93), who suggested that it is

“surprising that IJV boards have been understudied

for so long” and that “it is essential that scholars

and practitioners have a better sense of how these

international boards are put together.” Instead, most

research has focused on other formal governance

mechanisms, such as contractual safeguards (e.g.,

Gong et al., 2007; Ring and Van De Ven, 1992),

or has investigated IJV boards only indirectly, by

using broad indicators such as ownership stakes

to investigate IJV governance (e.g., Delios and

Beamish, 1999; Dhanaraj and Beamish, 2004;

Nakamura and Yeung, 1994). While such indirect

approaches can help researchers overcome data

constraints presented by the lack of secondary

information on IJV boards, the premise that equity

allocation is closely related to the composition

of the IJV board and to partners’ control remains

largely unexplored and unveried.

By investigating factors that drive foreign IJV

partners to take more or less board representation

for their share of equity, we address this gap in the

literature. To do so, we build on the early empirical

work on JV boards (e.g., Kriger, 1988; Kumar and

Seth, 1998; Leksell and Lindgren, 1982), which

has emphasized the importance of two roles boards

serve: their external and internal roles. This parallels

the corporative governance literature on boards,

which emphasizes the service or advice role that

directors fulll, in addition to their monitoring role

(e.g., Hillman and Dalziel, 2003). By differentiating

the internal and external roles of the IJV board,

we argue that the relationship between a foreign

partner’s equity and its board representation hinges

on the importance of these different roles that

directors appointed by the respective partners play.

In line with previous research on corporate

governance, we draw from the agency theory

and resource dependence theory literatures to

identify several contingency factors that affect the

importance of these different roles, and thereby,

inuence the representation of the foreign partner

versus the local partner on an IJV board. We reply

on asymmetries that generally exist between the

partners in IJVs wherein one partner is local, and

therefore, has better knowledge about the local

environment and relationships with local stakehold-

ers (Beamish and Banks, 1987; Blodgett, 1991),

whereas the other partner is foreign and contributes

more industry-specic knowledge and technology

to the IJV (e.g., Choi and Beamish, 2013; Hennart,

1988; Lyles and Salk, 1996; Xia, 2011). Based on

these asymmetries, we propose three contingency

factors (i.e., environmental volatility, competitive

overlap, and board monitoring effectiveness) that

inuence the importance of the internal role of the

IJV board differently for the foreign partner and

the local partner. To the extent that the internal role

of the IJV board takes on greater importance, the

foreign partner will seek greater board represen-

tation than might be suggested by its equity stake

alone. We also argue that the opposite can occur

when the external role of the IJV board takes on

more importance, leading to greater representation

by the local partner. We suggest that this will

happen when environmental uncertainty is high

or the IJV’s environment is not municent or

experiencing signicant market growth. Under

these conditions, it becomes preferable to rely on

more directors from the local partner rather than the

foreign partner. Overall, our theoretical framework

yields insights that improve our understanding of

IJV board representation and begins to explain why

we observe deviations between an IJV parent’s

equity contribution and its board representation.

By linking the literatures on corporate gover-

nance and IJVs, we make a number of contributions

to the IJV literature in general and the IJV gov-

ernance literature in particular. First, we examine

IJV board design and the determinants of foreign

partners’ representation on these boards in particu-

lar, which advances our knowledge of this impor-

tant facet of IJV governance. Second, we extend

arguments that have been used to explain corporate

boards to the IJV domain, while also incorporat-

ing factors that are unique to IJVs. This highlights

avenues for fruitful cross-fertilization between the

corporate governance and IJV literatures by adapt-

ing arguments from corporate governance literature

to the IJV setting, and in turn, by raising new ques-

tions to be studied in corporate governance research.

Finally, our ndings suggest that the role of boards

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 920–938 (2017)

DOI: 10.1002/smj