Veto Rights in International Joint Ventures

Internal seminar for researchers

Abstract: As the apex decision-making unit, boards of directors in international joint ventures (IJVs) enable control and facilitate reciprocal adjustment when unexpected contingencies arise. However, board-level control can be misused by a partner to hijack an IJV and expropriate shared resources and profits. We investigate veto rights for board level decisions as a mechanism that limit abuse of control and prevent maladaptation. Building on Transaction Cost Economics, we argue that goal conflict between partners and environmental uncertainty can put IJV out of alignment to increase the threat of exploitation of board level control. We also argue that such a hazard is attenuated when strong institutional safeguards exist. The empirical evidence is in accord with the core proposition that these rights can help parent firms address maladaptation concerns and can make an IJV viable as a governance structure. In particular, we document that firms negotiate veto rights when partnering with foreign rivals in uncertain host countries but are less likely to do so when the IJV host country offers strong shareholder protection.