Analyst Views & Opinions
Impatient for Patient Capital: Why We Need to Invest Now for the Future
Since Milton Friedman first published his theory of shareholder primacy in 1970, shareholder capitalism has been the dominant model in corporate governance. This model prioritizes maximizing shareholder value as the primary goal of companies, often at the expense of other stakeholders like employees, customers, communities, and the environment. While this approach has driven significant economic growth and wealth creation, it is increasingly clear that it is also contributing to a range of systemic issues, from income inequality to environmental degradation. As we grapple with these challenges, the need for a shift towards patient capital—an investment approach that prioritizes long-term value creation over immediate financial returns—has become more apparent than ever.
Growing evidence shows that incentivising short-term interests of corporate shareholders can skew management decisions away from investments in research and development, and staff training and retention.1 Over time, this can be detrimental to the shared ecosystem of innovation, as well as talent growth, both at a firm and national level. Prioritising shareholder returns also hinders entrepreneurship as social enterprises, startups and MSMEs are discouraged from seeking market-based financing, particularly in the early stages, as they may be unable or unwilling to provide the quick returns sought by investors. Further, shareholder capitalism has also played a significant role in exacerbating income inequality, as well as possible neglect of environmental and social responsibilities in the pursuit of profit.
In the Malaysian context, where more than 25% of the domestic stock market is held by the six Government-linked Investment Companies (GLICs), there is further pressure for dividend payouts as many of the GLICs have to provide guaranteed or committed fund returns.2 In fact, companies with less GLIC exposure, but contribute sizeable amounts by virtue of their market capitalisation, generally have a lower payout ratio than the GLIC-controlled companies.3 While GLICs have their respective mandates for national developmental and strategic reasons, the pressure for returns create unintended consequences that have longer-term structural impact on productivity, talent, innovation, and growth for the nation.
In light of these challenges, there is a growing recognition of the need for a different approach—one that values long-term success over short-term profits and considers the interests of all stakeholders. This is where patient capital comes in:
1. Fostering Innovation Through Long-Term Investments
Patient capital plays a critical role in fostering innovation by providing companies with the time and resources they need to develop new products, technologies, and business models. Unlike traditional investors who demand quick returns, patient capital investors are willing to wait for years or even decades for their investments to mature. This allows companies to invest in R&D, take risks, and explore new ideas without the pressure to deliver immediate financial results.
This long-term perspective is particularly important in industries like biotechnology, clean energy, and advanced manufacturing, where breakthrough innovations often require significant upfront investment and lengthy development periods. By supporting these ventures, patient capital can help drive the next wave of technological advancements and create new markets and opportunities.
2. Supporting Sustainable and Inclusive Growth
Patient capital is also crucial for supporting sustainable and inclusive growth. By focusing on long-term value creation, patient capital encourages companies to invest in their employees, build strong relationships with stakeholders, and adopt environmentally responsible practices. This not only helps to address the negative social and environmental impacts of shareholder capitalism but also positions companies for long-term success in a world where consumers, investors, and regulators are increasingly demanding greater accountability and transparency.
For example, patient capital can enable companies to develop and scale green technologies, such as renewable energy and energy-efficient products, which are essential for addressing climate change. It can also support social enterprises and impact-driven businesses that prioritize social and environmental outcomes alongside financial returns.
3. Attracting and Retaining Talent
One of the key benefits of patient capital is its ability to attract and retain top talent. In a shareholder-driven model, employees are often seen as costs to be minimized, leading to job insecurity, low morale, and high turnover. In contrast, patient capital allows companies to invest in their workforce, create a positive work environment, and offer opportunities for professional development and career advancement.
This focus on long-term employee well-being not only helps to retain valuable talent but also fosters a culture of innovation and collaboration. Employees are more likely to be engaged and motivated when they feel that their work is meaningful and that they are valued by their employer. This, in turn, leads to higher productivity, better customer service, and stronger overall performance.
As Malaysia aims to propel itself away from the middle-income trap, it has become even more critical to address these issues. Malaysia only spends 1.44% of GDP on research and development, compared to South Korea (4.55%), Taiwan (3.3%), and Japan (3.21%). However, Malaysia is currently at a juncture to harness several unique opportunities. Firstly, if all committed investments come to fruition, Malaysia is poised to be the regional next data centre hub. Secondly, recently launched incentives to attract foreign venture capital and private equity players into the country could see the presence of more diverse investors. There has also been growing recognition of the need for more impact-based investments, with the launch of Khazanah Nasional’s Dana Impak and KWAP’s Dana Pemacu funds. Finally, as the global leader in Islamic Finance, there is an increasing conversation of the need to shift from a more legal form to a more equitable substance of Islamic Finance – from Halal to Halal and Tayyib.4 All of these factors point towards potential economic growth but also a promising mindset shift that should be capitalised for long-term change as we seek to build a more resilient and equitable economy.
In a world where the challenges we face are increasingly complex and interconnected, a shift towards longer-term value creation is not just desirable—it is essential. By embracing this approach, we can create a more sustainable, inclusive, and resilient economy that benefits all stakeholders, not just shareholders.
References:
1 Centre for Strategic and International Studies (2022), “Rethinking Shareholder Primacy in the New Innovation Economy”, available at https://www.csis.org/analysis/rethinking-shareholder-primacy-new-innovation-economy
2 The Edge (20 Nov 2023), “Over 60% of GLIC funds invested in Malaysia, ranging from 15.8% to 62.7% in locally listed equities — Steven Sim”, available at https://theedgemalaysia.com/node/690571
3 The Edge (21 Mar 2024), “Less dividends seen for GLICs in 2024 as special payouts wane”, available at https://theedgemalaysia.com/node/704146
4 MIFC Leadership Council Position Paper, “Establishing Islah Through Islamic Finance” (2024), available at https://mifclc.com/main/wp-content/uploads/2024/06/MIFC_Position-Paper.pdf
Author’s Profile
Alea Nasihin
Vice President, Research and Development, ICMR