More Companies to be listed on Thailand’s SET

As most Thai companies are developed from family businesses, shareholding and management structure is usually concentrated in family members or one big inside shareholder.  Investment decisions of outside investors are usually based on the confidence in these inside shareholders.

On the positive side, this ownership concentration gives major shareholders and the management flexibility to react to the rapid changing environment and tend to result in stronger commitment to the firm’s long-term values.  On the other hand, this structure is also conducive for inside shareholders to take advantage over outside investors or abuse outside shareholders’ rights.  In addition, there is also wide use of cross-shareholding structure among major shareholders and their affiliates and the use of nominees, both of which make the real shareholding and control structure of a company become opaque for outside investors.

For outside investors, which include lenders, institutional and minority shareholders, they usually play a passive role and cannot pool their force to counter-balance the major shareholders.  In addition, most of these investors, foreign, institutional or retail alike, are induced to invest in a company for short-term capital gain rather than for long-term return.  As a result, they have no interest to play the monitoring role over the management or protect their rights through attending shareholders’ meetings to exercise their voting power.  If there is any fraud or misconduct of the management, these investors usually choose to sell their shares to cut loss rather initiating a lawsuit to seek for redress.  Therefore, the legal protection for minority through required shareholders’ resolutions and voting rights has not been very effective.

Since shareholding of most companies is concentrated in the family group, directors and the management are usually the same persons who are representatives of the major shareholders.  This management pattern results in virtual control of major shareholders and makes the check-and-balance mechanism nonexistent or insufficient.  If there is an appointment of independent directors, it is usually done only to satisfy the regulatory requirement or to be an honor for or create good relationship with the appointed person rather than to utilize the person’s experiences or have the person play the monitoring role over the management. In addition, when there are conflicts in the board of directors, these directors usually choose to compromise or resign rather than to fight for what they think is right.  Therefore, their roles in the board of directors may not be very effective to safeguard shareholders’ interest.

Even though the wording in the Public Company Act (PCA) requires directors to perform their duties with care and honesty for the benefit of shareholders, there is no clear interpretation on what such duties really mean nor real enforcement either by shareholders or regulators.  There are also loopholes in the law for potential abuses.  Therefore, the spirit of the law is not well upheld by the directors.

In the case of listed public enterprises, the government (or the Ministry of Finance) is usually both the major shareholder and the person to nominate directors.  The enterprises usually have monopoly or oligopoly rights in the business and receive funding assistance from the government.  These enterprises, therefore, do not have strong incentives to improve their efficiency, competitiveness, and corporate governance.  In addition, the Memorandum of Incorporation of some enterprises can also be obstacle for the building of good corporate governance, e.g. the requirement for ex-officio members of the board of directors, the nomination of directors which does not promote accountability or responsibility of the appointed directors.