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

FORDHAM JOURNAL OF CORPORATE & FINANCIAL LAW Fordham Journal of Corporate & Financial Law Roger M. Barker 0 Iris H-Y 0 Chiuy 0 0 DPhil (Oxford); Managing Director, Barker & Associates Ltd., Honorary Associate, Centre for Ethics and Law, University College London Copyright c 2018 by the authors. Fordham Journal of Corporate & Financial Law is produced by The Berkeley Electronic Press (bepress). https://ir.lawnet.fordham.edu/jcfl - 2018 Article 2 From 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. However, these implications may 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-centered 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. In the present context of steady internationalization and convergence in corporate governance standards in global securities markets towards a shareholder-centered 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 recognized exceptions that deviate from prevailing corporate governance standards. We further suggest as to how an exceptions-based regime can be implemented in the U.K. and U.S., comparing the rulesbased regime in the U.S. with the principles-based regime in the U.K. 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. However, these implications may 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-centered 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. In the present context of steady internationalization and convergence in corporate governance standards in global securities markets towards a shareholder-centered 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 recognized exceptions that deviate from prevailing corporate governance standards. We further suggest as to how an exceptions-based regime can be implemented in the U.K. and U.S., comparing the rules-based regime in the U.S. with the principles-based regime in the U.K. * DPhil (Oxford); Managing Director, Barker & Associates Ltd., Honorary Associate, Centre for Ethics and Law, University College London. ** Professor of Corporate Law and Financial Regulation, University College London. TABLE OF CONTENTS INTRODUCTION ............................................................................ 439 I. CONVENTIONAL CORPORATE GOVERNANCE STANDARDS AND FIRM INNOVATION........................................................ 443 II. FIRM-BASED FACTORS SUPPORTING INNOVATION AND THE RESOURCE-BASED THEORY OF CORPORATE GOVERNANCE ................................................. 456 A. ACCESS TO RESOURCES AND INCENTIVIZING THE DEVELOPMENT OF SUCH RESOURCES .............................. 457 B. BOARDS AS RESOURCES.................................................... 458 C. SHAREHOLDERS AS RESOURCES ........................................ 460 D. STAKEHOLDERS AND SOCIAL CAPITAL AS RESOURCES ..... 467 E. STRUCTURES FOR GOVERNING INNOVATION IN COMPANIES................................................................. 471 II. PROMOTING CORPORATE GOVERNANCE THAT RECONCILES VALUE PROTECTION NEEDS AND INNOVATION NEEDS FOR VALUE CREATION......................................................... 473 A. LET SHAREHOLDERS DECIDE ON A CASE-BY-CASE BASIS? .................................................... 474 B. ADJU (...truncated)