A one-size-fits-all approach to corporate governance is poorly conceived

Published October 19, 2015

First published in Business Times on October 9, 2015

Adam Epstein

IN the United States financial markets, investor, media and regulatory focus is predominantly upon the largest listed companies. The large-cap bias in the US, and other global markets, belies a poignant capital markets fact: the overwhelming majority of listed companies are comparatively small.

For example, in the US, nearly seven out of every 10 listed companies have a market capitalisation of less than US$1 billion. Approximately 47 per cent of listed companies have market capitalisation below US$300 million.

According to Mak Yuen Teen, an associate professor of the NUS Business School and corporate governance expert, the proportion of small to large listed companies is even more dramatic in Singapore. Approximately 85 per cent of Singapore’s listed companies have market capitalisation of less than S$1 billion, and nearly 70 per cent have market capitalisation below S$300 million.

Prof Mak added that approximately one-third of listed companies have market capitalisation of less than S$50 million.


While the large-cap bias is understandable (e.g., they are large employers and well-known brands, and institutional investors such as pension funds tend to invest in them), this myopia has a hidden cost.

Until quite recently, the global corporate governance dialogue has been exclusively focused on issues faced by directors of large-cap companies. This is a mistake for two reasons: (i) boards of directors of listed small and medium enterprises (SMEs) are regularly beset by unique governance challenges without relevant resources to help them; and (ii) SMEs are invaluable sources of job growth and innovation.

Why is governing listed SMEs so different from governing larger listed companies?

Robust balance sheets and cash flow provide larger public companies with, among other things, strategic alternatives, financial flexibility and material margins for business error. But the opposite is true for SMEs. Boards of SMEs frequently govern companies where even seemingly basic daily decision-making can have business-ending consequences.

Conventional wisdom notwithstanding, governing Apple is nothing like governing a fledgling software company. There are myriad reasons why one-size-fits-all corporate governance is poorly conceived – consider the following three.

  • Governance resources

It’s not uncommon for large-cap boards to have many non-executive directors (NEDs) in addition to extensive governance staff. SME boards of directors, on the other hand, typically can only afford a handful of NEDs and often have little additional governance support.

Large-cap boards can also hire battalions of expert third-party advisers to assist with strategy optimisation, compliance, training and risk management, while SMEs often must simply rely on existing employees.

Some SMEs might have insufficient resources to comply with the form and the substance of governance standards. For example, Prof Mak believes that “when regulators impose one-size-fits-all corporate governance on SMEs, SMEs forced to comply end up using valuable resources while attaining only governance in form. Even in Singapore, where a ‘comply or explain’ approach is used for most corporate governance prescriptions, most companies would rather comply in form rather than explain non-compliance”.

  • Management and board experience

Large listed companies are often managed and governed by those with extensive relevant experience. But it’s not uncommon for management and board members of SMEs to occupy their roles for the first time.

Most would agree that a board comprising industry icons overseeing a CEO like Tim Cook is a fundamentally different setting from a board with predominantly novice directors governing a nascent listed company run by a first-time CEO. Moreover, consider that the under-resourced, possibly less experienced, management and board must often navigate daily existential business threats commonplace to SMEs.

Prof Mak added that research has shown that in Singapore “listed SMEs often end up with either novice independent directors (especially family companies, presumably recruiting family friends as directors) or very busy directors, who presumably are willing to accept the lower director fees that SMEs are prepared to pay”.

  • Capital markets and corporate finance

Large-cap companies typically access capital markets electively from positions of strength due to their financial health. Meanwhile, SMEs must regularly access capital markets to augment cash flow that is insufficient to fund growth objectives. Doing so at inopportune times and often with insufficient capital markets experience in boardrooms, SMEs routinely undertake highly dilutive financings.

Even worse, insufficient trading volume or encumbered capitalisation can foreclose SME access to the capital markets altogether, resulting in insolvency.

In the US market, recent attention on the unique challenges faced by boards of directors of listed SMEs has predominantly been educative as opposed to legislative or regulatory. That is, magazine articles, online discussion forums and new SME-focused corporate governance continuing education programming are beginning to appear. Similarly, in Singapore, the Securities Investors Association (Singapore), or SIAS, has since 2014 introduced sessions in its annual corporate governance conference on corporate governance of SMEs.

It’s certainly possible that increased attention on SME governance could result in more scrutiny from legislators and regulators. In Singapore, SIAS, together with the Singapore Association of the Institute of Chartered Secretaries and Administrators (SAICSA), Handshakes and Prof Mak, has developed a new governance evaluation methodology for listed SMEs, called GEMS.

Prof Mak explains that GEMS “evaluates the governance of listed SMEs not by the number of principles and guidelines in the Singapore Code of Corporate Governance that have been ticked, but by governance practices and indicators that are considered most important for listed SMEs”.

Importantly, listed SMEs are evaluated under GEMS relative to their peers, and not against larger listed companies.

Whether in the US, Singapore or other highly developed capital markets, recognition of the unique challenges faced by boards of directors of listed SMEs is critical. The mistaken reliance upon a one-size-fits-all approach to SME corporate governance hurts economies and shareholders alike.

  • The writer is the founder of Third Creek Advisors, LLC, a California-based firm that advises the boards of directors of SMEs. He is the author of The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies (New York: McGraw Hill, 2012).


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