Multi-stakeholder approach vital as firms' valuations depend more on intangibles

    In 1975, tangible assets accounted for 83 per cent of the total value of S&P 500 stocks. In 2020, tangible assets accounted for just 10 per cent

    By UMA DEVI 

    The Business Times, 14 October 2021

    Singapore

    THE shareholder-centric model of governance, which has guided boards and business leaders for decades, may be increasingly irrelevant as the nature of companies and their assets change.

    Panellists at a workshop during the Corporate Governance Week - a 6-day conference held by the Securities Investors Association (Singapore) (Sias) - noted that intangible assets account for a greater proportion of total assets than they used to, which means companies will need to re-think their metrics and strategies.

    Pru Bennett, a partner at public relations firm Brunswick Group, cited a study by financial group Ocean Tomo of the ratio of tangible to intangible assets for the S&P 500 companies over the years.

    In 1975, tangible assets accounted for 83 per cent of the total value of S&P 500 stocks. In 2020, tangible assets accounted for just 10 per cent of the index's total value.

    "Intangible assets that are not on the balance sheet are where value can be created or lost," said Bennett. She cited managing carbon emissions and decarbonisation efforts as examples of intangibles that companies should pay more attention to. These factors could eventually impact the company's market capitalisation or share price, she added.

    Adrian Chan, vice-chairman at the Singapore Institute of Directors, said that companies in the United Kingdom and the United States have started to move away from a focus on financials. Singapore, however, is still very much behind.

    "We don't look at just value within a broader sense. We look at how we can improve the balance sheet of the company, which is the bottom line," said Chan.

    "Value to a Singapore director, by law, is monetary value. So when you look at the best interests (of a company), it's really just about financial interest."

    The key to changing this, he said, is for a company to look at a "broader group of stakeholders". These would include customers, employees, suppliers, as well as the community.

    Board diversity in Singapore can also be improved upon, said Chan. Beyond gender and age, some other factors boards should look at include tenure, independence and industry or sector experience.

    Lawrence Loh, director of the Centre for Governance and Sustainability at the NUS Business School, stressed that a "well-informed" investor can play a crucial role in steering a company towards the right direction for these factors.

    His sentiments were echoed by Chan, who said that the power shareholders hold in these instances is great.

    "They are the providers of capital. They decide which director to sack, how the company is run, and they can even replace the captain at the helm (of the ship) at any time," he said.

    "We want the shareholders to choose wisely, and be ready to change the board if the board looks at just creating pure short-term financial performance."