~ Crisis underlines needs for change ~
The strong economic growth figures gave no hint of what was to come
in mid-1997. The crisis hit and rocked the nation, and now the business
community is doing what it can to rid itself of certain practices that
helped precipitate the fall.
CHAVALIT THANACHANAN
Corporate governance has suddenly come into sharp focus as a result of recent events in the
United States. While some of the issues are different, the fundamental issue confronting
Thailand is the same. It is nothing less than the creation of an environment that engenders
``trust''.
Without trust investors will not buy shares, and without access to a range of funding sources
companies cannot easily prosper.
At the heart of governance is transparency. Others might question the immediate need to
improve governance when other issues, such as debt restructuring, are more pressing.
However, governance issues are one of the biggest concerns among foreign investors looking
at the local market. If that is what international investors demand, then Thailand must meet
those expectations if it wants their investment funds.
Whether in developed or emerging markets, price multiples and governance are closely
correlated. The key lesson is that while implementing principles of good governance comes at
a certain cost, the long-term pay-offs will be greater investor interest and higher shareholder
value.
RECENT DEVELOPMENTS
Here in Thailand we have moved aggressively to put the necessary regulatory framework in
place to support good governance. In fact, the present government strongly supports the
implementation of good governance by putting good corporate governance on the national
agenda and by instigating various measures. Even before these initiatives, several actions
had been undertaken with little fanfare.
To begin with, all listed companies are required to set up audit committees of assist corporate
boards and management to meet the financial control and expectations of investors and to
ensure that management implements effective control and reporting systems to monitor a
company's performance. A Committee on Corporate Governance Development was set up to
report on the progress and make recommendations to the corporate sector to raise
governance standards. An Institute of Directors was also established to provide training to
board directors and corporate secretaries of both listed and unlisted firms.
More recently, a National Committee on Corporate Governance was set up with six subcommittees to deal with: law and enforcement, accounting standards, best practices for listed
companies, good governance in commercial banks, finance and insurance companies, the
same for securities companies, and finally, for public relations and training.
The Finance Ministry is cooperating with the Bank of Thailand to form a working unit to
provide more economic information to the foreign community.
The Securities and Exchange Commission and the Stock Exchange were assigned to
collaborate with the Finance Ministry to prepare data for this project for the capital markets.
This approach will change the way of providing information about economic conditions and
corporate governance development so it is more proactive, without having to wait for a
specific request, as in the past. This should provide local and foreign investors with accurate,
fast and timely information.
A rating system for good governance is being initiated. A pilot project is under way to rate five
companies beginning in July and this will be fully implemented by Sept 16. Furthermore,
companies with good corporate governance will receive recognition, with a list of companies
with good ratings to be published on the SEC's website. The SEC and SET also will provide
certain privileges, such as a discount on annual and underwriting fees, to these companies.
On the promotion of good corporate governance by intermediary institutions, the
Shareholders Organisation, supported by the Thai Investor Association, has been established
to provide a mechanism in support of companies' good governance behaviour by acting as
representatives of the shareholders to protect shareholders' rights and benefits, and to force
listed companies to implement good corporate governance.
There are, as well, initiatives to establish a similar club of institutional investors, such as the
Government Pension Fund, the Asset Management Funds, Social Security Funds, and the
Insurance Companies.
On June 26, the SET board approved the appointment of an advisory board to be responsible
for advising listed companies on improving their corporate governance systems, and to meet
with members of the board and executives of existing companies or those with the potential to
list so as to encourage them to develop good corporate governance.
YEAR OF GOOD GOVERNANCE
This year also saw the inauguration of ``The Good Corporate Governance Campaign''. After
the economic crisis, the SET commissioned a study on corporate governance, from which 15
principles (of the original 40) have now been set out as guidelines for companies covering the
most essential areas. A workshop has been offered on four occasions this month. It focuses
on training the directors of listed companies as they play a critical role in good governance.
Listed companies must disclose the results of the application of their policies on corporate
governance in their annual report forms and in annual reports, starting from Dec 31, 2002.
PUBLIC COMPANY ACT REVISITED
As well as these initiatives, the Public Companies Act will be revised further to strengthen
minor shareholders' rights and information disclosure requirements, and to provide the SEC
with a more effective and integrated regulatory coverage of listed companies. Proposed legal
amendments will include banning directors from using company resources for their own
benefit. Access to corporate information before shareholder's meetings is to be improved.
Individual shareholders who cannot attend meetings will be able to appoint proxies to vote on
each item.
After the law is amended, it is hoped that minor shareholders will be better protected and
good governance in public companies will be improved considerably. An investors' protection
association will be established in the next three months with financial support from the SET.
The association will educate investors on their rights and how they can monitor company
management. Legal consultancy services will also be offered.
A survey under the auspices of the Institute of Directors of the top 100 listed firms will be
conducted regularly to track Thailand's progress in improving corporate governance. This
survey, in conjunction with the SET and SEC, will focus on: shareholder rights, shareholder
treatment, stakeholder roles, disclosure and transparency, and board responsibilities. A list of
``best practices'' used by the top companies will be compiled as a database for other
companies.
A proposal has also been made to limit to 50 the number of listed companies that any auditor
may be responsible for at any one time.
PARADIGM SHIFT
Company structures in countries such as Thailand are generally based on the family. While
this structure has proved highly successful, many recognise that it is now reaching its natural
limits. It is increasingly clear that to prosper in the future, companies will need access to
multiple sources of funding, depending on the circumstances, and ordinary citizens will need
chances to develop their retirement nest eggs to allow for increasing longevity and older
populations.
Thailand, particularly since the economic crisis, has recognised the importance, if not the
necessity, of the corporate virtues of responsibility, transparency and accountability. We have
learned from experience that countries with poor corporate governance are more vulnerable
to financial crises because the checks and balances needed to prevent insider abuses are not
strong enough. If well-functioning law, regulation and business practices govern the
relationship between companies and their investors, then productivity and growth are more
likely.
It must be clear to any informed observer, however, that corporate governance is very much a
``work in progress''. Even in advanced economies it is clear there is much to be done to bring
standards abreast of changes in the economic and commercial environment.
As we move from a bank-based system of corporate fund-raising towards a more
heterogeneous system that draws more heavily on the sale of equity, we have to undertake a
paradigm shift. We are in the process of transforming family firm-based values to a different,
and in many ways, a more challenging system. However, this is not going to happen
overnight.
RATIONAL CHOICES
One of the basic assumptions of economics is that, in essence, economic behaviour is
rational. Over time, people tend to respond to the incentives of whatever marketplace they
exist in, in a generally rational way.
Behaviour usually changes in response to these incentives. There has to be a ``carrot'' and a
``stick'' approach. Reward good behaviour and most people respond positively. Clear rules
and recognised sanctions for bad behaviour reinforce this.
Here in Thailand, we still face the problem of enforcement. Paradigm shifts take time. While
many people recognise the importance of transparency and accountability in today's business
world, this is a radical departure from the past when businesses jealously guarded all
information as ``commercially sensitive'' and business relationships were personal.
Change involves cost. Too often ordinary participants fail to grasp or are not sufficiently
informed of the benefits of the changes, which they perceive as a threat to their present
comfort.
Corporate governance is thus about winning hearts and minds. Employees and management
need to ``own'' these changes, particularly in cultural terms, for these changes to be
successful and not just something that is imposed from above, or worse, from without.
CRITICAL CHANGES
Corporate governance is undoubtedly one of the critical issues in business today. For
companies, good governance means securing access to broader-based, cheaper capital,
while for investors a commitment to good governance means enhanced shareholder value.
For companies, good governance equals good business. For the Thai economy, it means
greater investor confidence.
Companies will come to realise that without the transparency that comes with good
governance, investors will be reluctant to risk their savings. The relationship is symbiotic and
of mutual benefit. Without trust in the efficacy of the relationship, nobody benefits. With good
governance, all stand to prosper.
All systems periodically face crises as they confront changes for which they were not
designed. To survive, the market structure must have the ability to reconfigure itself to meet
new challenges. With the right reforms, Thailand's capital market will emerge stronger than
before. The Thai government, the SET and the SEC are taking the necessary steps to
implement these changes. Foreign investors in particular need to be aware that this paradigm
shift is under way.
- Chavalit Thanachanan is chairman of the Stock Exchange of Thailand and the Institute of
Directors.