Best Practice Governance for Alliances: An Independent Chair on the Alliance Leadership Team
Introduction
It’s common for the Alliance Leadership Team (ALT) on an alliance project to comprise one or more representatives of each alliance participant, and for it to be chaired by a representative of the owner participant.
By way of contrast, it is common for a joint venture company to have a Board of Directors that is chaired by a person who is independent of the company’s shareholders.
It is a common requirement on project alliances that all (or most) decisions of the ALT must be agreed unanimously between the members of the ALT. Matters requiring a unanimous decision of the ALT commonly include:
whether or not an Adjustment Event has occurred;
the adjustments required to the Target Outturn Cost (TOC) and, where relevant, the KPIs, to address an Adjustment Event;
changes to the commercial framework;
scope of delegations to the Alliance Manager.
Some alliances reserve certain decisions to the owner participant. These are sometimes called ‘reserved matters’, and commonly include any decision to materially change the project scope. While the owner participant can unilaterally decide a ‘reserved matter’, the knock-on effects of such a decision on the commercial framework is to be determined by a consensus decision of the ALT.
The need for unanimous/consensus decisions creates the risk of deadlocks when unanimity/consensus cannot be achieved. To resolve such deadlocks, many alliance contracts contain a deadlock-breaking mechanism, such as expert determination.
This article considers how the adoption of an independent chairperson on the ALT could provide an alternative best-practice governance model for an alliance.
The requirement for consensus
The requirement for most if not all ALT decisions to be made by consensus (unanimous agreement) between all alliance participants is a crucial feature of the model.
It is a crucial feature because of how the profit that each non-owner participant generates on its efforts on the project is determined.
Unlike traditional fixed price contracts, where the profit that the contractor makes depends on the costs it incurs in compliantly performing the project scope allocated to it, the profit of a non-owner participant on an alliance project is determined by:
the combined costs incurred by all participants in completing the total project scope; and
the performance of the alliance (i.e all participants, collectively) against the other KPIs that determine gainshare or painshare payments.
“We all win together, or we all lose together” is the mantra. Because of this, every participant wants an equal say in the key decisions that will significantly influence the performance of the alliance. This typically translates to the requirement for all ALT decisions to be made by consensus (including the decision to delegate certain functions/decisions to the Alliance Manager).
Deadlocks
If consensus cannot be reached, no decision is made.
The inability to make decisions in a timely fashion can cause project delays, additional costs and sub-optional performance against other KPIs, resulting in a reduction to each non-owner participant’s profit margin and contribution to corporate overheads from the project. This commercial dynamic drives the parties towards consensus, as everyone is sharing the pain caused by an inability to reach a consensus.
Many alliance contracts include a deadlock-breaking mechanism to overcome such deadlocks. The best practice is for any deadlock-breaking mechanism to be designed with a view to minimising damage to the relationship of the parties, given the need for the alliance participant to continue to collaborate effectively after the deadlock is broken.
Drawing from best practice corporate governance
A project alliance is akin in many respects to a Joint Venture Company. This is not surprising given many major projects are akin to running a business.
The participants in the alliance are akin to shareholders in the company. The return the participant receives on its investment (or resources) in the alliance, is akin to the return (dividends) that a shareholder receives on its investment in a company.
The ALT is akin to the Board of the company
The Alliance Manager is akin to the CEO;
The Alliance Management Team are akin to executive directors on the Board.
In the case of joint venture companies where no single shareholder has a controlling interest, it is best practice for the Board to be chaired by a director who is independent of all shareholders and for the chairperson to not also be the CEO. In this scenario, the functions of the independent chair are as follows. The equivalent function for an independent chair of the ALT is listed in the second column:
Dispute avoidance
The functions of an independent ALT chair could also include dispute avoidance. The independent ALT chair could deploy dispute avoidance techniques like those deployed by a dispute avoidance board, to assist the alliance participants to amicably resolve issues at ALT meetings. Such techniques could include:
running the dispute avoidance component of each ALT meeting on a ‘without prejudice’ basis;
adopting a pro-active, inquisitorial approach to the identification of risks, issues and potential problems;
educating the other ALT members on the dispute avoidance process
building positive relationships with the other ALT members to establish trust and confidence in the dispute avoidance process,
remaining familiar with the project, encouraging the ALT members to look ahead at future potential issues, getting issues ‘on the table’ early and pursuing discussions until there is consensus on the positive steps forward;
encouraging the alliance participants to jointly prepare and present reports about project progress at ALT meetings;
issue tracking in ALT minutes;
proposing issue-specific meetings or workshops in the period between ALT meetings, to identify or resolve issues before they become disputes;
facilitating or chairing such meetings and workshops; and
promoting a ‘best-for-project’ approach to avoid any retreat into self interest positions by the alliance participants.
Deadlock breaking
As mentioned above, it is common for alliance contracts to include a deadlock breaking mechanism that requires issues than cannot be resolved by consensus at an ALT meeting to be referred to an independent expert for resolution.
The adoption of an independent chair to the ALT would provide an alternative to this approach. Rather than refer such issues to an independent expert, the independent chair could have a casting vote.
This approach would effectively require the independent chairperson to vote with half of the other members of the ALT, for the resolution to be passed. While the independent chair could propose a solution at an ALT meeting for the ALT to decide upon, the independent chair would not be able to pass the resolution by itself. This approach could be less damaging to the ongoing relationship than an approach that allows an independent expert to impose its own solution upon the parties.
Board members who are appointed to the board of a joint venture company by a particular shareholder sometimes struggle with the tension between their obligation as a director to put the interest of the company ahead of the interests of the appointing shareholder. This struggle is even more problematic in the case of an ALT, as the ALT members may not be under a legally binding personal obligation to put the interests of the alliance ahead of the interests of the alliance participant they represent.
An independent chair can be expected to be more likely to put the interests of the alliance ahead of the interests of the owner or any other participant.
Conclusion
Suggested best practice governance model for an Alliance Leadership Team:
The alliance participants engage an independent chairperson to the ALT.
The independent chairperson will endeavour to bring the ALT to a consensus decision.
The independent chairperson has a casting vote in the case of deadlocks (no consensus).
The issue must be discussed and deadlocked at least two ALT meetings before the chairperson can exercise a casting vote
The independent chairperson is under a legally binding duty to each participant to exercise the casting vote in the best interests of the alliance (having regard to the alliance objectives and other terms set out in the alliance contract).
Please call Owen on +61 412 664 580 if you’d like to discuss appointing an Independent Chair to your ALT.
The contributions of Ian McIntyre and Kevin Pascoe to an earlier version of this article are gratefully acknowledged.
