Investors pay a premium for the shares of well-governed companies in Thailand, as they do for the shares of such companies in other emerging markets (see 'A premium for good governance," on page 20). In our study of the 100 largest companies that are listed on the Stock Exchange of Thailand (SET), we found examples of both very good and very poor corporate-governance practices. Those companies with the best overall corporate-governance performance had average market valuations that were 45 percent higher than the average for companies in the bottom quartile (Exhibit 1). Our research (1) suggests that companies with poor governance scores could boost their market valuations by improving their performance on any of the following dimensions (Exhibit 2).
* Board oversight: Thai companies, averaging 74 out of a possible 100 points, scored highest on measures of the responsibilities and structure of boards. Nearly all of these companies have a board audit committee; on three-quarters of the boards, nonexecutive directors constitute a majority; and 22 percent of the boards have independent chairs. Still, there is room for improvement, since few nonexecutive directors are truly independent most have other ties to the companies or their dominant shareholders. Furthermore, few companies have board committees that oversee executive compensation, and only 12 percent include stock options in their compensation packages for top management. Well-designed stock option programs could help align the interests of shareholders and management.
* Shareholder rights: Thai companies scored an average of 49 out of 100 points on shareholder rights. The vast majority of the companies treat all shareholders equally in such matters as share purchases and dividends and hold open annual meetings that the corporate chair attends. Yet few companies seek shareholder approval for the compensation of directors, and only 10 percent haven't implemented antitakeover defenses (controlling shareholders serve on the boards of most of the companies). Reinforcing the "market for corporate control" by reducing antitakeover defenses would help put greater pressure on companies to act in the best interests of all shareholders.
* Treatment of minority shareholders: Thai companies, averaging 43 out of 100 points, have a greater opportunity to improve the treatment of minority shareholders. Only 5 percent of these companies provide enough information to enable minority shareholders to cast informed votes, for example. Although all of the companies we surveyed permit proxy voting by shareholders, only one-third supply enough information for them to give informed instructions to their proxies. In 90 percent of Thai companies, minority shareholders have no way of influencing the composition of the board (for instance, through cumulative voting (2) or a board seat dedicated to their interests) and depend entirely on the goodwill of controlling shareholders.
* Transparency and disclosure: Thai companies, scoring an average of just 35 out of 100 points, perform worst on reporting practices. Although most of the companies have separate audit units and disclose operating risks, few report the remuneration of directors or their shareholdings. Only one-third of listed companies use means other than annual reports (such as quarterly reports and World Wide Web sites) to communicate with investors, while just 10 percent hold analyst briefings or press conferences. These shortcomings are disproportionately harmful to minority shareholders, since the controlling ones can get information from managers and directors.
The Thai government has taken significant steps to improve corporate governance in the country. However, government and regulatory authorities could further raise corporate-governance standards in several ways--for example, by setting tougher requirements for the disclosure of the remuneration and shareholdings of directors, by giving shareholders the right to approve the compensation of management and the directors, and by providing for better notification of annual meetings and proxy-voting procedures. If the rights of minority shareholders are to be strengthened, it will also be essential to implement new procedures, such as cumulative voting.
In addition, to reward companies for good corporate governance, the Thai stock exchange and government regulators are considering the introduction of financial and nonfinancial incentives, such as cutting fees for well-governed companies that issue bonds or equity, providing fast-track service for standard and recurring regulatory approvals, and publishing a list of well-governed companies. The Thai stock exchange could even consider creating a separate tier of "good-governance" companies, similar to Italy's STAR exchange, which lists only companies that meet stringent governance guidelines and have shown promising results (see "A market for the well governed," in the current issue). Education in governance practices also has a part to play, and the Thai Institute of Directors is offering a broadbased corporate-governance seminar program for directors and top managers.
Perhaps most encouraging is the fact that a number of companies in Thailand are already following best practices in many areas of corporate governance and have been rewarded by the market with higher valuations. Market incentives of this kind provide local benchmarks and encourage more companies to improve their corporate-governance practices once they come to the realization that good governance actually pays.
Good money from good governance
Market-to-book ratio of surveyed companies by corporate-governance
Average of sample = 5.47
Top quartile 6.74
Bottom quartile 4.65
Source: Joint 2002 report by the Thai Institute of Directors and
McKinsey, in conjunction with the Stock Exchange of Thailand and
Thailand's Securities and Exchange Commision (SEC)
Note: Table made from bar graph
Room for improvement
Corporate-governance scores by category
Board oversight 74
Shareholder rights 49
Treatment of minority shareholders 43
Transparency and disclosure 35
Source: Joint 2002 report by the Thai Institute of Directors and
McKinsey, in conjunction with Stock Exchange of Thailand and Thailand's
Securities and Exchange Commission (SEC)
Note: Table made from line graph
(1.) We undertook our research in collaboration with the Thai Institute of Directors, the Stock Exchange of Thailand, and Thailand's Securities and Exchange Commission (SEC), The entire report is available from the Thai Institute of Directors. Our research methods resembled those described in "A premium for good governance," on page 20. However, certain specifics of the two surveys differ; we, for example, used 54 (rather than 22) elements of good corporate governance as metrics. Thus, while the general findings of the two studies mirror each other, specific details and rating numbers do not. Companies were ranked on a scale from o to 100 percent, with 100 percent representing the best practice for each category. The views expressed in this article are the authors' own and are not necessarily held by other parties involved in the research.
(2.) Cumulative voting allows a shareholder to cast all of his or her votes for one or a few candidates. If five directors are to be elected, for example, and you hold 100 shares, you can cast 500 votes for one director rather than 100 each for every director.
Tobias Hoschka is a consultant in the Bangkok office, where Roland Villinger is a principal; George Nast is a consultant in the Shanghai office.
Copyright [C] 2002 McKinsey & Company. All rights reserved.