PETALING JAYA: With the growing focus on accelerating the growth of early stage businesses through Angel Investors, Private Equity (PE) and Venture Capital (VC) outlined in the Third Market Blueprint (CMP3), it is necessary to be aware of the corporate governance issues surrounding the move.
Mak Yuen Teen, professor of accounting at the National University of Singapore (NUS), stressed that corporate governance is essential for long-term sustainability. Contrary to popular belief that corporate governance hinders growth or risk taking, he believed that boards are supposed to promote entrepreneurship and innovation, not just compliance.
“But that requires selecting the right directors who can strike a balance between promoting entrepreneurship, innovation, transparency or accountability, and ensuring good risk management,” Mak told SunBiz.
In a hypothetical scenario where an entrepreneur wants to open lots of new stores quickly to increase revenue in order to capture market share before reaching profitability, he said that doesn’t mean the board shouldn’t support idea, but he needs to understand that there is a path to profitability and while there is no assurance that all stores will be successful, he should make sure that management has taken into account issues such as the different risks they may face in different markets and the proper placement of stores.
Professor NUS, who is also the author of the EquitiesFirst / Nasdaq Corporate Governance Report in Malaysia, noted that angel investors, VCs and PEs have a positive impact on corporate governance and the management of companies. corporate issuers to allow them to exit their investments to a better valuation. He said private equity investors can improve financial management and controls in these companies.
“To protect their investment, they are also likely to impose limits on authority and have certain veto rights, so they cultivate a certain discipline in the management of the company.”
However, Mak acknowledged that the interests of these investors may not be fully aligned with the interests of public investors, as they often seek to exit during the IPO or shortly thereafter.
“Thus, they are incentivized to improve evaluations, but not necessarily by improving governance and management, but by helping to increase evaluations. For example, through various rounds of funding, these investors can help push start-ups to unicorn status and beyond – and valuations can be inflated. “
The professor also cautioned companies that fill their boards with these investors – that is, people with an investment background or start-up experience – as they may lack the greater diversity of skills and experience.
He drew attention to a failed U.S. IPO of a commercial real estate company focused on shared workspaces in 2019, whose board of directors was made up exclusively of PE and VC investors. The board of directors of the company did not appear to have a required “accountant” for an audit committee; a member of the real estate sector beyond real estate investing and consulting also lacked diversity in terms of gender and international experience.
“Their boards are often formed less around corporate governance – it’s more about growth than about risk management or accountability.
Speaking from experience, Gordon Crosbie-Walsh, CEO of EquitiesFirst for Asia, believes that corporate governance is more than just a noble idea, it is all about creating long-term value. He observed that strong corporate governance can lead to real economic benefits, as it serves as the foundation for good business performance, regardless of the stage of development of the company.
“As a co-investor alongside our partners, EquitiesFirst has seen firsthand how good governance has led to successful businesses and business growth. “
To cultivate the right culture of governance, Crosbie-Walsh stressed that these early-stage investors should carefully consider the corporate governance of the companies in which they invest.
Locally, the CEO observed that Malaysia has been more progressive in driving corporate governance reforms compared to its regional peers.
Despite political activities in recent years, he pointed out that 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 developing in a positive way. The start of any meaningful development would always appear modest, but we are confident that if the momentum continues, Malaysia will fully realize the benefits of good governance in due course. “
According to Malaysia’s 2021 Corporate Governance Report by EquitiesFirst-Nasdaq, the country has made strategic decisions and is making progress in reforming its corporate governance rules.
“These are informed by regular regulatory reviews designed to address issues affecting the market. It has developed strong regulatory and market institutions, and has strengthened enforcement of capital market offenses in recent years, ”he said in the report.