Sunday, 24 April 2011

Big companies, stolen ideas

GOVERNANCE MATTER By SHIREEN MUHIUDEEN

Shireen Muhiudeen exposes how some big unscrupulous companies are stealing ideas from smaller companies.





IN our reviews of various public-listed companies (PLCs) across the region, one issue has cropped up again and again: The appropriating of a small company's ideas by a much bigger company.

The law protects all fruits of the human imagination from songs to sketches and sonnets but not ideas. You cannot own an idea, and this is why big companies can exploit smaller ones, which tend to be more innovative and enterprising because that is the only way they can survive.

Typically, before Company B can value a business transaction by Company A, Company B has to ask Company A to give it a Request For Proposal (RFP). Generally, Company A will do so as long as Company B signs the usual Non-Disclosure Agreement (NDA).

Now, quite often, if the company demanding information is larger than the company disclosing it, the former will keep asking for more and more data from the latter, on the pretext that it is just doing due diligence.

The smaller company will then end up giving the larger one all the ideas it has in the hope that that will seal their business deal.

In this way, the larger company gets to know all it wants about the smaller company's knowhow. Worse, the larger company claims that as its own.

This is a cheap means for the larger company to expand its own business model. In fact, when we spoke to one such large company, it said that it “reviewed” all applications by small and medium enterprises (SMEs), paying particular attention to any ideas or opportunities that the company could exploit for its own ends!

Business ethics

Legally, it is not doing anything wrong. But siphoning another's ideas under the guise of doing due diligence goes against every grain of business ethics.

Recently, we reviewed a company that had a big business plan to tap global funds, using an idea that it presented as its own. The thing is, we knew of a smaller company that had presented exactly that idea to a PLC some six years ago.

We had followed every development in that negotiation, from the signing of the NDA right up to the excuses given by the PLC as to why the evaluation process was taking so long.

That smaller company has since taken the PLC to court, alleging the breach of a condition precedent contained in a subscription and shareholders agreement, as well as a failure to fulfill its obligations.

But, in trying to get justice, it is the smaller company that suffers the most; it cannot forge ahead because it is being weighed down by long legal proceedings, to say nothing of how much it has to spend for lawyers to argue its case.

When asked about the smaller company's grievances, the PLC brushed off all queries and said, “Oh, these are just small, insignificant issues”, implying that they would not affect its own business model. Shouldn't they, though? If the PLC is selling itself with ideas siphoned off another company, what does such siphoning say of the sustainability of its business model?



This big and not so beautiful PLC goes ahead and launches its “latest” ideas while daring the smaller company that came up with these ideas to send it a cease-and-desist letter. It can be so arrogant because it knows only too well that it has much deeper pockets than the aggrieved company and so will simply push the latter over the edge with mounting legal fees.

Currently, the law gives recourse to aggrieved smaller companies based on what they have actually lost to the bigger companies. But surely it should be based on what smaller companies could have earned but for the idea-siphoning?

From this, it is evident that bigger companies are taking advantage of the current disconnect between how much the courts will make them cough up and how much smaller companies really suffer financially from someone else using their good ideas.

Stamina

This means that it is still cheaper for big companies just to use a smaller one's ideas, even if that smaller player takes them to court for doing so.

Not surprisingly, bigger companies tend to operate in this manner because smaller companies simply do not have the stamina and finances to protect their good work.

This is often the case even if the law is overwhelmingly in the smaller company's favour. The smaller company simply cannot afford the very long time taken for justice to be done.

But something, clearly, needs to be done for fairness. Now, directors of companies are required to declare in their annual reports that “they are responsible for all information and representations contained in the financial statements” and that “the financial statements have been prepared in conformity with generally accepted

accounting principles” and that “the reflected amounts are based on the best estimates and informed judgment of the management with an appropriate consideration as to materiality”.

This being the case, perhaps there should also be a statement to the effect that they have not infringed another company's intellectual property, have not settled out of court or that they have no pending legal proceedings regarding the use of another's ideas.

As Malaysia gears itself up to be a full-blown knowledge-based, or K-economy, it becomes critical to protect SMEs, especially in the telecoms sector where this is very prevalent. If the law does not ring-fence their rights, they will be forced to look beyond Malaysia to flourish.

Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance