From Value Protection to Value Creation- Rethinking Corporate Governance Standards for Firm Innovation

A company’s pro-innovation needs are often met by the exploitation of its resources, widely defined. The resource-based theory of the firm provides immense empirical insights into how a firm’s corporate governance factors can contribute to promoting innovation. These implications may however conflict with the prevailing standards of corporate governance imposed on many securities markets for listed companies, which have developed based on theoretical models supporting a shareholder-centred and agency-based theory of the firm. Although prevailing corporate governance standards can to an extent support firm innovation, tensions are created in some circumstances where companies pit their corporate governance compliance against resource-based needs that promote innovation. Such tensions have arisen in controversies surrounding listed companies that issue dual class stock that protect founder-members’ innovative visions for the company, or in companies with influential controlling shareholders, or where stakeholders may be important for corporate success. In our paper (forthcoming in the Fordham Journal of Corporate and Financial Law, 2018), we argue that what is at the heart of many of these controversies is a contest between a resource-based perspective of the firm that seeks to maximise innovation and enterprise opportunities as a collective endeavour, and the agency-based perspective of the firm that seeks to mitigate the power of influential constituents such as directors or controlling shareholders in order to protect minority investors.

In the present context of steady internationalisation and convergence in corporate governance standards in global securities markets towards a shareholder-centred agency-based model, we argue that there is a need to provide some room for accommodating the resource-based needs for companies in relation to promoting innovation. We explore a number of options and suggest that the most practicable option would be the development of recognised exceptions that deviate from prevailing corporate governance standards. We propose a structured, coherent and formalised regime for such exceptions to occur in a way that would be subject to adequate investor scrutiny and market governance. We compare the rules-based regime in the US with the principles-based regime in the UK for corporate governance standards and suggest how such an exceptions regime would work in either regime and the likely achievements and drawbacks. We believe this approach is likely to be more acceptable and constructive in today’s securities markets and is able to advance the importance of the resource-based theory of the firm that promotes long-term success of the corporate sector.

Roger M Barker is Managing Director, Barker and Associates Consulting

Iris H-Y Chiu is Professor of Corporate Law and Financial Regulation, University College London