Corporate Governance in Thailand: What Has Been Done Since the 1997 Financial Crisis?

Obeua S.Persons **

I. INTRODUCTION

The crisis in Thailand stemmed directly from unsound economic policies including the use of 90% of the country’s foreign exchange reserve to fruitlessly defend the pegging of Thai baht against U.S. dollar.  Given such depleted reserve, the Thai government had no choice but to adopt a floating exchange rate system in July 1997 which resulted in a substantial devaluation of Thai baht.  This sharp depreciation of the baht marked the beginning of the financial crisis which threatened the solvency of Thailand and its corporate sector which was heavily burdened with debts denominated in U.S. dollar.  However, there is now a consensus that part of this crisis is caused by weak corporate governance which resulted in reckless lending by financial institutions, overusing short-term foreign-currency-denominated loans to finance long-term investments, expropriation of company’s fund by directors, managers or large shareholders, shady and risky business deals, and poor financial reporting and audits.  The crisis brought major changes in the structure of the Thai corporate ownership/control and corporate governance. 

This study examines the changes in corporate governance since the 1997 financial crisis.  Findings and suggestions of this study should be useful for other emerging economies in their attempt to improve corporate governance.  The study finds that Thailand has made much progress in improving its corporate governance, using both mandatory and voluntary approaches.  The mandatory approach includes revising laws and regulations to enhance the rights of minority shareholders and creditors, to increase the accountability of the board of directors, to make accounting and auditing standards consistent with the international accounting standards (IAS) and international standards of auditing (ISA).  The voluntary approach includes best practice guidelines for board of directors and audit committees, and corporate governance rating.  The Thai securities exchange commission (SEC) has also strengthened its efforts to educate and protect small investors, and has increased its enforcement to enhance the transparency and reliability of financial reports.  Comparing to the U.S. Sarbanes-Oxley Act, Thai regulations place higher accountability upon the board of directors (BOD) than upon top executives.  Consequently, Thai government has established Institute of Directors to educate directors of Thai listed firms.  Regardless of much progress in the Thai corporate governance, there is still room for further improvement with respect to minority shareholder protection, the responsibilities of the BOD vs. the top management, the BOD structure of financial institutions, further amendments to the new Bankruptcy Act, a need for whistle-blower law, the valuation of certain assets, and a compliance to the Buddhist precepts.  In addition, the Thai government needs to improve the check and balance of its own governance process and its “populist” policies.  In deed, the government seems to take a step backward as evidenced by its recent curtailing of the press freedom and the increasing authoritarianism of the Prime Minister, Thaksin Shinawatra.  It is doubtful if Thailand could achieve a long-term economic prosperity without improving the governance of its public sector.

The remaining of this study is organized into four sections.  The first section provides background and governance problems in Thai corporate sector before the 1997 financial crisis.  The second section discusses improvement in Thai corporate governance after the crisis.  The first and second sections are organized according to the Organization for Economic Cooperation and Development (OECD)’s principles of corporate governance as amplified by the International Corporate Governance Network (ICGN).  The third section provides suggestions for further improvement.  The fourth section presents conclusions.  

Background and Governance Problems Before the Crisis
Thai governance problems were the results of the highly concentrated ownership and control structure of Thai companies.  Between 1990 and 1997, the top five shareholders of publicly listed companies held, on average, 56.3 percent of outstanding voting shares.¹  Also, similar to most other East Asian countries, control of the Thai companies was often in the hand of a single individual or family.  These family-run business enterprises as pioneered by Chinese merchants had prospered and built their empires that cut across many sectors including banking, finance and securities, agro-industry and telecommunications.  Although some of these businesses have become publicly listed companies, their founders managed to keep a controlling share within their family and maintain a real control over day-to-day management of their firms through the creation of cross-shareholding structure.  The top level of such structure consists of an owner family which exerts control over a number of affiliated listed companies mainly through private holding companies.  In the next four sub-sections, I will examine the impact of this highly concentrated ownership/control on the rights and treatment of minority shareholders, the structure and responsibilities of the board of directors, the rights and roles of stakeholders, institutional investors and the market for corporate control, and the financial disclosure and transparency.  

Footnotes

1. Source: Comprehensive Listed Company Information Database, Stock Exchange of Thailand.