Veto rights in international joint venture boards

Abstract

We investigate the determinants of partners’ veto rights in international joint ventures (IJVs) and study the scope of such rights. IJVs are complex exchanges subject to misalignments, and responses to them often cannot be conceived at the outset. The IJV board is a powerful device to facilitate mutual adjustment between partners. This adaptive capacity that the board endows an IJV can also give rise to a different set of concerns, however: its opportunistic use by a partner in control of the board. Such behavior, we argue, can be reined in by veto rights. Building on transaction cost economics, we posit that goal conflicts owing to partner competition and environmental uncertainty prompt the allocation of veto rights to partners. Concerns surrounding the maladaptive use of board control weaken when institutional safeguards are strong, reducing the need for veto rights. Findings from a survey of IJVs furnish evidence in support of the core proposition that veto rights can help parent firms address maladaptation. We conclude that veto rights can be an important element of partners’ arsenal when designing and governing IJVs based on comparative efficiency considerations