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. …