Does the existing approach to corporate governance help or hinder innovation?: Opinion

When the Committee on the Future Economy issued its recommendations back in 2017, it identified innovation as key to ensuring that local companies are able to compete in today’s digital economy where industries are being disrupted by rapid advances in technology.

The government has since established several initiatives and alliances to help companies in their efforts to innovate, come up with new business ideas, and move into new markets. For example, measures were announced in Budget 2025 to aid local companies to innovate, including a S$3 billion top-up to the National Productivity Fund and S$1 billion for enhancing research and development infrastructure.

There is no disputing the need for companies to be innovative in the face of disruption. However, an important issue to consider is whether current corporate governance, with its emphasis on shareholder protection and oversight of company behaviour, can play an effective role in nurturing innovation.

The issue appears straightforward at first glance, but it is complex and challenging.

Value preservation versus value creation

During a panel discussion organised by the Securities Investors Association (Singapore), or Sias, on the subject some years ago, two very valid observations were made by the participants.

First, a senior corporate lawyer involved in many privatisation-cum-delisting exercises said she found that a major reason that companies choose to delist was the high cost of complying with existing governance requirements.

“The owner-entrepreneur typically complains of spending too much time and money on compliance, to the extent that they cannot innovate. They need to be nimble because markets are moving so fast,” she noted.

Second, another panellist said that, for many companies, observing good governance means simply “box-ticking’’ in order to keep regulators at bay.

“Don’t misbehave; just ensure you make more money. This means plenty of routine, short-term compliance instead of being customer-centric. The challenge is how to infuse the spirit of entrepreneurship and long-term thinking into the culture,” the panellist said.

Both observations are important because they underline an often ignored facet of how companies are regulated. Modern corporate governance has generally not been designed on the basis of how to create the most innovative organisations. Rather, the guiding principle has been: “How do we protect shareholders?”.

The two may not necessarily be congruent.

For protection, the focus has traditionally been on safeguarding the interests of minority shareholders. To achieve this, the main control mechanisms embodied in the codes of conduct and listing requirements usually require a strong element of independence within the board and its committees to monitor the behaviour of company insiders.

In times of conflict between majority and minority interests, sympathies tend to lie with the latter, even as disclosure rules aim for as much transparency as possible in order to address the likely information asymmetry that exists between large and small shareholders.

The starting position is therefore that insiders, sometimes founder-shareholders, need to be closely monitored.

The rules are then formulated with value protection in mind because of the unsaid guiding principle that insiders may not be wholly trustworthy, and their actions have to be scrutinised in case they indulge in value-destroying exercises.

For example, share options or share grants thus feature prominently in executive incentive schemes in order to align the interests of insiders with those of outsiders.

If value preservation and protection are important, what about value creation?

From the Sias panel discussion, founder-entrepreneurs argued that instead of wasting time on short-term box-ticking geared towards protection, their companies would be better off if they were allowed more time to take longer-term views and create value.

Moreover, innovation is inherently risky and requires a longer time horizon – a company may have to commit finances to several projects that might take years to come to fruition, while running the risk that many might fail before one succeeds. Existing rules, however, may not grant companies sufficient flexibility or nimbleness to explore such a variety of options.

Perhaps most relevant is that although academic studies into the issue started relatively recently, some appear to confirm the experience of Sias’ panellists – that the more innovative companies are not necessarily those with the greatest adherence to mainstream corporate governance guidelines.

Balance between innovation and governance

The big question confronting regulators and companies today is therefore how to balance the need to grant companies the leeway and flexibility to innovate, and simultaneously preserve the central principle of governance, namely the protection of minority rights.

This balance is critical in a world where corporate longevity is being severely shortened by technological disruption – mainly by the entrance of innovative companies and artificial intelligence.

There are no easy answers. In the course of the same panel discussion referred to earlier, remaining (or going) private was raised as the obvious solution because, then, companies can preserve the flexibility needed to innovate while avoiding the scrutiny that comes with a public listing.

Furthermore, company resources can be preserved for innovation and long-term ventures into new areas and markets. Had they remained listed, they would have been obliged to deploy funds for shorter-term uses demanded by shareholders such as paying dividends, performing share buybacks and other activities designed to boost share prices.

For companies already listed, suggestions included setting up a separate subsidiary to house the innovation function, and/or a corporate venture capital unit to look at investing in suitable startups.

Here, panellists identified a potential problem in there being a cultural mismatch between the parent and startup if attempts were made to amalgamate the latter into the former. To overcome this, the recommendation was to keep the target separate and to not try and bring it into the parent’s fold, citing Amazon’s acquisition of Zappos.com as a successful example.

Yet another recommendation was to select directors who are in tune with the company’s needs and can help facilitate innovation and transformation. This can help, but the obvious danger is that the traditional role of the board as gatekeepers gets compromised if too many sympathetic directors are appointed.

Trawling through the academic literature, there appears to be a central theme – that governance practices may need to be tweaked to allow companies the flexibility to innovate and take more risk if they are to succeed.

The writer is founder, president and chief executive officer of the Securities Investors Association (Singapore)

Source: The Business Times © SPH Media Limited. Permission required for reproduction.

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