Renegotiation of joint venture contracts: The influence of boards of directors and prior ties as alternative governance mechanisms

Abstract

Research on alliance governance has pointed out that joint ventures (JVs) are particularly complex forms of collaboration. Partnering firms therefore often face difficulties in anticipating contingencies and collaborative behaviors at the contract negotiation stage. When initial JV contracts are incomplete, renegotiation represents a key strategic opportunity for enhancing contractual safeguards or coordination guidelines over the course of the joint venture. Costs and risks entailed by renegotiating JV arrangements at a later stage are far from trivial, however. Existing research on alliances suggests that practitioners have alternative relational and formal governance solutions at their disposal for handling possible inefficiencies caused by contractual gaps over time. Although insightful, this research does not enable a determination as to whether these alternative relational and formal mechanisms substitute for or facilitate ex post contractual renegotiation. The competing arguments found in the literature provide little guidance to JV practitioners as well. Our results show that the collaborative context within which the JV is embedded (i.e., prior inter-partner ties) obviates the need for enhancing incomplete JV contracts ex post. By contrast, ex post contractual adjustments are fostered and facilitated by the formal and administrative apparatus engaged over the course of the JV (i.e., an involved JV board of directors). Such opposing effects suggest that prior ties can "prevent" the occurrence of inefficiencies caused by contractual gaps, while an involved JV board primarily can act as a mediation and renegotiation platform to "repair" the exchange when inefficiencies occur. Our findings highlight the multidimensional nature of joint venture governance, and in particular the interplay among various formal and informal governance solutions in the execution of joint ventures. By unpacking their complex effects on the decision to renegotiate incomplete JV contracts, our study also holds important value for managers seeking to govern their JVs over time.

Beyond the decision to ally: Constraints on adapting to emergent control risks

“…This study contributes to our understanding of how alliances manage risk over time by mobilising the concept of governance inseparability to explain how and why prior control choices constrain partners' capacity to adapt to emergent risks. In finding evidence of both switching and differentiation constraints, the study enhances our understanding of the controlrisk relation and explains why ex-post control adaptation may not be as straightforward as previously thought (Ariño et al 2008;Duplat et al 2020;Reuer and Ariño 2002;. Further, by tracing adaptation episodes, we extend the theory of governance inseparability in two respects Liebeskind 1999, 2002).…”

“…However, cross-sectional empirical studies reveal that despite the governance benefits of ex-post control adaptations, many alliances do not systematically renegotiate contracts or modify alliance controls throughout their lifespan (Ariño et al 2008;Duplat et al 2020;Reuer and Ariño 2002;. This suggests that alliance partners may be more selective in modifying control arrangements than previously thought (Duplat et al 2020) and hints at the existence of some countervailing force constraining their strategic options to remedy emergent risks. This paper aims to advance the understanding of adaptation constraints in mature alliances by examining the limits created by partners' earlier control choices.…”

“…Several models of alliance dynamics that build from transaction cost economics (TCE) (Williamson 1991(Williamson , 1996 predict that the emergence of unforeseen risks will require partners to revise, transition, and adapt their controls to alleviate inefficiencies and return the alliance to a state of equilibrium (Ariño and de la Torre 1998;Doz 1996;Kamminga and Van der Meer-Kooistra 2007; Kumar and Nti 1998;Ring and Van De Ven 1994;Vélez et al 2008;Williamson 1996;Zajac and Olsen 1993). However, cross-sectional empirical studies reveal that despite the governance benefits of ex-post control adaptations, many alliances do not systematically renegotiate contracts or modify alliance controls throughout their lifespan (Ariño et al 2008;Duplat et al 2020;Reuer and Ariño 2002;. This suggests that alliance partners may be more selective in modifying control arrangements than previously thought (Duplat et al 2020) and hints at the existence of some countervailing force constraining their strategic options to remedy emergent risks.…”

A Dynamic Framework of Noneconomic Goals and Inter-Family Agency Complexities in Multi-Family Firms

“…This contention is supported by research on other types of cooperative arrangements. For instance, Ariño and Reuer (2004, p. 37) state that “contract design is an essential part of alliance structuring, and contract renegotiation may become a key element of successful alliance adaptation.” Similarly, Duplat et al (2020, p. 2) argue that “renegotiation represents a critical means to alleviate possible moral hazards and inefficiencies caused by contractual gaps.” Renegotiation effectively delineates coordination guidelines over the course of a contract (Ariño et al, 2008), and it enhances contractual safeguards, which reduce the opportunistic behaviors of partners (Carson et al, 2006). The necessity of contract renegotiations is particularly salient in MFFs because of the inter-family agency problems related to FCNE goals that are intensified by evolving family dynamics in terms of changes in the composition, resources, social capital, and other sources of asymmetric bargaining power of the owning families.…”

“…We further theorize that evolving family dynamics, such as changes in the composition, desires, or resources of the families, can upset the balance of power of MFFs and create new or more intense inter-family agency problems that must be controlled to enable their economic and cooperative survival. Thus, we illustrate in detail the mutual monitoring mechanisms in MFFs, which have been recognized as essential to their governance (Duran & Ortiz, 2020; Mukherjee et al, 2019; Pieper et al, 2015), and we introduce contract renegotiations (Ariño et al, 2008; Duplat et al, 2020) as a way to neutralize dynamic inter-family agency problems and recalibrate the monitoring mechanisms that are needed to preserve cooperation between the owning families.…”