Corporate Governance and Firm Innovation - Are Conventional Corporate Governance Standards a Hindrance?
Posted: 7 Dec 2017
Date Written: December 1, 2017
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 there may be a need to cater for the position of important stakeholders vis a vis a company. 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 pf 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. These needs may require deviation from prevailing corporate governance standards, and 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. This incremental 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.
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