PETALING JAYA: With the rising focus on accelerating companies in early stage growth through angel investors, private equity (PE) and venture capital (VC) outlined in the third Capital Market Masterplan (CMP3), there is a need to be cognisant of the corporate governance issues surrounding the move.
National University of Singapore (NUS) accounting professor Mak Yuen Teen stressed that corporate governance is essential for long-term sustainability. Contrary to popular belief that corporate governance hinders growth or risk-taking, he opined that boards are supposed to promote entrepreneurship and innovation, not just compliance.
“But this requires selecting the right directors who can strike the balance between promoting entrepreneurship, innovation, transparency or accountability, and ensuring proper risk management,” Mak told SunBiz.
In a hypothetical scenario where an entrepreneur wants to open up many new stores quickly to grow revenue in order to capture market share before achieving profitability, he said this does not mean the board should not support the idea but it needs to understand that there is a path to profitability and while there may be no assurance that all stores will succeed, it should ensure that management has considered issues such as different risks they may face in different markets and right placement of the stores.
The NUS professor, who also authored EquitiesFirst/Nasdaq’s Malaysia corporate governance report, noted that angel, VC and PE investors positively impact corporate governance and management of investee companies to allow them to exit their investments at better valuation. He stated that PE investors may improve the financial management and controls in these firms.
“To protect their investment, they are also likely to put in authority limits and have certain veto rights, so they are cultivating some discipline in how the firm is run.”
However, Mak acknowledged the interests of these investors may not be fully aligned with the interests of public investors as they are often looking to exit at the IPO or shortly after.
“Thus they have an incentive to improve valuations, but not necessarily through improving governance and management but by helping to hype up the valuations. For example, through various series of funding, these investors may help push startup firms into unicorn status and beyond – and the valuations may be inflated.”
The professor also offered caution for companies filling their board with these investors, that is, individuals with investment backgrounds, or startup experience – as they may lack the broader diversity in skills and experience.
He brought the attention of an aborted American initial public offering of a commercial real estate company focused on shared workspaces in 2019, which had a board made up exclusively of PE and VC investors. The company’s board did not appear to have an “accounting expert” required for an audit committee; a member with real estate industry beyond investing in real estate and the board also lacked diversity in gender and international experience.
“Their boards are often built not so much with corporate governance in mind – it’s more about growth than risk management or accountability.”
Speaking from experience, EquitiesFirst’s Asia CEO Gordon Crosbie-Walsh believes corporate governance is more than just a noble idea, at its core it is about creating long-term value. He observed that strong corporate governance can lead to actual economic benefit as it serves as the foundation for good business performance regardless of the development stage of the company.
“As a co-investor alongside our partners, EquitiesFirst has seen first-hand how good governance has led to successful businesses and driven business growth.”
To cultivate the right governance culture, Crosbie-Walsh pointed out these early investors should carefully consider the corporate governance of the companies in which they invest.
On the local front, the CEO observed that Malaysia has been more progressive in driving corporate governance reforms compared to its regional peers.
Despite political activities over recent years, he pointed out research suggests that the regulatory framework and corporate governance for issuers listed on the local stock exchange are better than previous assumptions.
“We are optimistic that Malaysia is evolving in a positive manner. The start of any meaningful evolution would always look modest but we are confident that if the momentum continues, Malaysia will fully realise the benefits of good governance in due course.”
According to Malaysia’s corporate governance report 2021 by EquitiesFirst-Nasdaq, the country has made strategic decisions and is progressive in making reforms to its corporate governance rules.
“These are informed by regular regulatory reviews designed to address problems that ail the market. It has developed strong regulatory and market institutions, and ratcheted-up enforcement for capital market breaches in the past few years,” it said in the report.