The Rights and Treatment of Minority Shareholders
Under the highly concentrated structure, minority shareholders have very limited influence as the owner family (majority shareholders) maintains a strict control over the entire enterprise by appointing top managers and directors.  In other words, there is no separation of control between the top management and majority shareholders.  It was also common for Thai listed companies to issue stock with limited or no voting rights to the public.  Alba, Claessens, and Djankov (1998) suggest that the ownership concentration of Thai companies has led to inefficient investments, with many improper related-party transactions and excessive diversification and risk taking.  In this situation, the wealth of minority shareholders was systematically exploited by the owner family.  In sum, this highly concentrated structure, which has been criticized by international financial institutions such as the World Bank and some scholars (Claessens, Djankov and Lang 2000), has clearly led to poor corporate governance which played an important role in bringing about the financial crisis.

To make the matter worse, the Public Company Act of 1992 and the Securities Exchange Act of 1992 did not provide adequate protection of minority shareholders because the law required relatively high percentage of voting shares (20%) to exercise certain rights such as the right to call emergency shareholders’ meeting and the right to appoint outside inspectors to examine the company’s financial statements and directors (Nikomborirak and Tangkitvanich, 1999).  Given the highly concentrated ownership among Thai companies, it is difficult for minority shareholders to gather the shares needed.  The regulations also did not require shareholders’ approval of related-party transactions.   As a result of these regulatory weaknesses, corporate decisions were made by majority shareholder with minimal involvement by small shareholders.  However, small shareholders should also bear part of the blame because their investment decisions were mainly driven by speculative motive for short-term gains during the economic boom years, and did not pay any attention to corporate governance.  These minority shareholders rarely attended the company’s annual meeting.  As long as the stock price kept appreciating, there was little incentive for minority shareholders to monitor management.  Small investors also have no incentives to sue a company and its directors because Thai laws did not allow a class-action lawsuit, and the redress, if any, shall be paid to the benefit of the company, not to suffered investors.  The weak enforcement of laws and regulations by the Thai SEC further exacerbated these corporate governance problems. 

The Structure and Responsibilities of the Board of Directors
The board of directors of most Thai companies was neither independent from top management nor accountable to minority shareholders because they were appointed by the owner family with majority votes.  Although the Securities Exchange of Thailand (SET) required at least two independent directors, the term “independent” only implied non-executive/non-employee, and did not exclude those with personal or financial ties with top executives.  As a result, the board of directors was normally staffed with family and friends of majority shareholders who do not oppose nor monitor top management.  Additionally, the Public Company Act of 1992 and the Securities Exchange Act of 1992 did not clearly define the responsibilities and fiduciary duties of the board of directors.  The law stated that directors were jointly responsible for performing their duties according to the law, the objectives and rules of the company, and the decisions made at shareholders’ meeting, with honesty to protect the interest of the company.  This vague statement made it difficult to prove “beyond reasonable doubt” whether a director had performed his/her duties adequately and in good faith.  Thai court also had very little experience with such cases, and much is subject to interpretation.   In addition, the board of directors of most Thai listed companies did not have an audit committee because the SET and the Thai SEC did not require an audit committee.  Those few companies with an audit committee usually did not have independent directors serving on this committee.  The use of a compensation committee and a nomination committee was also not widespread among Thai companies.

The Rights and Roles of Stakeholders, Institutional Investors and the Market for Corporate Control

This section covers three groups of stakeholders: creditors, employees and institutional investors.  The market for corporate control is discussed at the end.

Creditors
Important stakeholders of Thai companies are creditors such as Thai banks and finance companies.  Thai companies rely more on creditors than shareholders for additional financing.  Limpaphayom (2001) indicated that the total values of loans from financial institutions were consistently larger than the market capitalization of SET.  This heavy reliance on loans rather than equity is attributable to the highly concentrated ownership structure of Thai firms.  Majority shareholders prefer to finance with loans instead of stock in order to avoid the dilution of their ownership and control.   A negative consequence of this is that Thai firms were heavily burdened with debts.  The deregulation of capital account transactions in 1991 and the liberalization of interest rates in 1993 further stimulated a credit expansion through short-term borrowings in foreign currency.  This important role of financial institutions in providing finance and their large stake in Thai companies should make them obvious candidates to implement alternative external control and monitoring mechanisms.  However, these creditors were not actively involved in monitoring their borrowers because the high competition to extend credits made financial institutions apprehensive of losing their businesses.  Limpaphayom (2001) indicated that Thai creditors did not always require project feasibility studies or business plans in granting loans.  A company’s reputation and its long-term relationship with creditors sufficed in many instances.  In addition, not all creditors required collateral.  If collateral was required, the presence of collateral usually diminished creditors’ incentive to screen project feasibility and monitor management in implementing the project.  

Another group of creditors are bondholders.  The Thai bond market has had a relatively minor role in corporate financing.  The first bond rating agency in Thailand, the Thai Rating Information Services (TRIS) was jointly established by the Ministry of Finance and the Bank of Thailand in 1993.  TRIS was instrumental to the growth of the corporate bond market which grew from 5.1 billion baht in 1992 to 110 billion baht in 1994, one year after it was found.   In 1996, the bond market accounted for about 11% of the total value of commercial banks’ loans and 20% of total Thai equity market capitalization.  Similar to banks and because of its relatively minor role in corporate financing, bondholders were not involved in corporate governance.