Turkish Law Blog

The Exigence of a Novel Approach to Corporate Governance

Taylan Çalışkan Taylan Çalışkan/ Menta Attorneys At Law
14 May, 2019

I. Introduction

Corporate governance has been a matter of debate especially because of the significant corporate failures such as Adelphia, Enron, WorldCom, and other high-profile scandals1. Academic studies in this regard suggest that high profile scandals mainly arise as a result of poor corporate governance models2. It is correct, from both theoretical and practical point of views that corporate governance content ties the powerful governance to efficiency, performance, and innovation3.

In line with this, companies with effective corporate governance structures are able to extend their life cycles and to stay ahead of their competitors. Furthermore, developing effective corporate governance structures have a particular prominence today, due to the 21 century’s highly innovative and competitive atmosphere. With this respect, it is important to draw an appropriate governance structure that would enable start-up companies to maintain and further develop their innovative processes so as to remain competitive throughout their life cycles, even in the post-IPO stage.

II. Why the Conventional CG Approach Fails?

It is important, to begin with explaining the current dominant understanding of corporate governance and the reasons why this understanding is unlikely to promote innovation and growth in start-up companies. With this respect, the traditional corporate governance approach mainly focuses on the protection of the shareholders and aligning the interests of shareholders to the board and management4.

However, the “one-size-fits-all” approach created by this traditional view undermines the sector, company, and country-specific circumstances, which makes the outcome of such approach unlikely to be suitable for all companies, because all companies have different cultures, as well as different legal, economic and sector-specific needs.

Therefore, while shaping an effective governance framework, researchers and policymakers have to think of the ways of creating a more flexible environment which will in turn, enable companies to be innovation and growth-oriented. Together with this, companies should also determine their goals as being successful and creating value in the long-term. This approach is crucial for both listed and unlisted companies yet, being innovative and competitive is the most distinctive feature of start-ups that has to be retained, with a view to enabling such companies to survive in the highly competitive market4.

The conventional studies tend to specify the ultimate goal of corporate governance as the protection of shareholders, instead of the promotion of innovation and growth that would add to the long-term success of companies. For instance, Maria Maher and Thomas Anderson argue in their article that “market competition alone cannot solve the market failures arising from asymmetric information, hold-up, and principal-agent problems that are at the heart of the corporate governance problem1. According to this study, the role of corporate governance is to address the agency problems, by regulating the relations between investors and managers. In fact, for many years, the literature on corporate governance has been dominated by this idea. According to this study, with an effective corporate governance framework, which plays the function of protecting shareholders with a particular focus on external investors, the agency problems deriving from the separation of ownership and control can be mitigated.

III. The Urgent Need for up-to-date Approach to CG

It is actually incorrect to limit corporate governance debates to the shareholder protection prospects by addressing agency problems. The reason for this is that the traditional approach to corporate governance results in the shaping of one-size-fits-all governance frameworks, regulations, and best practices, which leave no room for companies to focus on their innovative processes, as they are left occupied by compliance discussions.

Truly, the crisis-driven approach tends to result in inefficient governance structures which for example involve stricter disclosure requirements, formalistic shareholder rights and symbolic measures that aim to include employees in the decision-making processes, which at the end creates an environment in which the governance structures of all companies are identical to each other. This approach, therefore, leads to a box-ticking approach in companies. In other words, apart from promoting innovation and growth, this approach also remains inefficient to reach its ultimate goal of shareholder value maximization, because companies approach corporate governance as a burden to comply with, instead of considering it as a mechanism that may provide them with a significant competitive advantage. Therefore, there is an urgent need for a shift in the prevalent approach to corporate governance. In this sense, the regulations should aim to ensure that companies approach good corporate governance as a competitive advantage, by providing them with enough flexibility to adopt their unique governance structures. Such an approach will require abolishing the current traditional one-size-fits-all components of corporate governance. At the end, companies will have the opportunity to discuss how to develop their businesses so as to serve something better to the market, thereby remaining relevant, responsive and competitive5.

Together with this, due to the expansion of innovative non-listed companies; lawmakers should not only contend with regulating corporate governance principles for established and listed companies, but attention should also be paid on setting such principles suitable to non-listed companies such as start-ups to provide long-term success and to extend their efficiency to strengthen their market presence. There is a remarkable risk for the future success of the start-ups. To eliminate the risks, young and innovative companies have to adapt themselves to the necessity of the reformist approach of the corporate governance structures.

IV. Conclusion

As explained above, in today’s innovation-driven business environment, innovative start-up companies are in need of a specific focus so as to be encouraged to grow and remain successful over long time horizons. Although start-up companies make significant contributions to economic growth, they usually face with obstacles instead of encouragement, especially due to the ineffective governance structures, which hinder early-stage investment to these companies. Since the main struggle of start-up companies is the huge expenses and small revenues, attracting investors has key importance for start-up companies. Poor governance structures, however, show their effects directly by negatively affecting investors’ and venture capitalists’ investment decisions on these companies. Considering the significant contributions of start-up companies to the growth of the overall economy, developing good, effective corporate governance frameworks specifically for these companies is of utmost importance.


1-Brown,Lawrence D. Caylor Marcus L. (2004). Corporate Governance and Firm Performance. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=586423

2-Andersson Thomas, Maher Maria (2000). Corporate Governance: Effects on Firm Perfor-manceand Economic Growth., OECD, Retrieved from https://www.oecd.org/sti/ind/2090569.pdf

3-McCahery Joseph, Vermeulen Erik. (2006). Corporate Governance and Innovation Venture Capital, Joint Ventures, and Family Businesses. ECGI - Law Working Paper No. 65/2006. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=894785

4-McCahery Joseph, Vermeulen Erik (2014). Six Components of Corporate Governance That Cannot be Ignored. Lex Research Topics in Corporate Law & Economics Working Paper No. 2014-2. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2406565

5-Fenwick Mark, Vermeulen Erik (2015). The New Firm Staying Relevant, Unique & Competitive. Lex Research Topics in Corporate Law & Economics Working Paper No. 2015-5 , Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2659763

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