Proposition

One objective of the current study is to discover the nature and extent of corporate governance in listed companies in Thailand. The Asian Development Bank (ADB) (2000) investigated the corporate governance structures of the Asian crisis economies, Indonesia, Korea, Malaysia, Thailand and the Philippines, and found that the governance structures of the crisis economies closely resembled each other. Generally, the similar elements were: high ownership concentration; bank-centric financial systems; ineffective shareholder rights laws; and low transparency. Claessens, Djankov and Lang (2000) also stated that high ownership concentration is typically both a symptom and a cause of weak corporate governance. In addition,

Alba, Clasessens and Djankov (1998) stated that factors such as the treatment of investor rights in the company, bankruptcy and securities legislation, the efficacy of legal enforcement, and the content and enforcement of capital market regulations, including listing rules and disclosure, could protect shareholders.

Poor corporate governance was one of the major contributing factors to the build-up of vulnerabilities in the countries affected by the Asian financial crisis in 1997 (Alba, Clasessens and Djankov,1998; Keong, 2002; Claessens, Djankov and Lang, 2000). Corporate governance ought to be a means for investors to monitor and control management when protection systems are weak (Alba, Claessens and Djankov, 1998). A high concentration of ownership reduces the effectiveness of some important mechanisms of investor protection, such as the system of the board of directors, shareholder participation through voting at shareholder meetings, and transparency and disclosure of financial and non-financial information.

The Thai Securities and Exchange Commission (SEC) requires every listed company in Thailand to establish an audit committee aside from the board of directors, as a body responsible for financial disclosure (SET, 2000). Under this requirement, three to five members of audit committees must be independent from management.

In the current study, it was expected that the state of the economy resulting from the financial crisis, ownership structure, and international development and acceptance of the rules of corporate governance would force Thai companies to improve the implementation of corporate governance. Accordingly, the first proposition is stated as follows:

Proposition 1: There is a relationship between corporate governance and each of: the Thai financial crisis, ownership structure, and regulation of listed companies in Thailand.

4.2.2 Proposition 2

Letza, Sun and Kirkbride (2004) stated that corporate governance is completely changeable and transformable and there is no permanent or universal principle that covers all societies, cultures and business situations. There are many corporate governance models and each governance system appears to have its own weaknesses; no perfect system appears to exist that can be applied as a ‘best practice’ model to all countries.

There are two general models of corporate governance. The first is a ‘shareholder’ or ‘equity market-based’ governance model of the Anglo-American style, under which a broad range of investors play a role through the pricing, trading and buying of the firm’s securities. The other model is a ‘bank-led’ governance model under which banks play the leading role in monitoring firms. Many researchers have suggested a mixture of the two models is appropriate for developing countries such as Thailand (Alba, Clasessens and Djankov, 1998; Keong, 2002; Khan 2004).

Western style principles and models of corporate governance, developed by the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have been proposed as preferred

theoretical models for Thailand. An objective in this study is to extend the theory in this area to include information characteristics fundamental to the share ownership and familial control patterns that exist in the Thai context. Proposition 2 is thus stated as:

Proposition 2: There will be significant differences from western models of corporate governance mechanisms in listed companies in Thailand.

4.2.3 Proposition 3

Some researchers conclude that companies with demanding governance standards show higher market valuation (Keong, 2002; Strenger, 2004). Clarke (2004) suggested that corporate governance standards and reforms will increase in future as a matter of public concern because more of the public will have more of their wealth invested in companies and will insist that companies behave responsibly. As a result, the Stock Exchange of Thailand (SET) introduced guidelines of best practice that consisted of 15 principles of good corporate governance for implementation by listed companies in Thailand.

The Asian financial crisis has shown that the economy in Thailand was weak in the area of corporate governance. Alba, Clasessens and Djankov (1998) indicate that lack of transparency and the lack of solid information regarding financial transactions as a result of this structural feature may have been critical factors contributing to the Thai crisis. It was expected that the Thai Government, the SET,

and the SEC might improve regulations related to information disclosure as part of its program to implement corporate governance. Thus Proposition 3 is generated.

Proposition 3: There will be significant improvement in information disclosure in financial reports of Thai companies resulting from the implementation of corporate governance.

4.2.4 Proposition 4

Demsetz and Villalonga (2001) used accounting profit ratios, specifically ‘return on equity’ (ROE), ‘return on assets’ (ROA) and ‘Tobin’s Q’ to measure firm performance. These measures differ in their time perspectives since the accounting profit ratios are backward-looking, whereas Tobin’s Q is forward-looking. The accounting profit ratios measure what management has accomplished whereas Tobin’s Q is an estimate of what management will accomplish. The Tobin’s Q formula is the firm’s market value of equity and book value of debt divided by the book value of total assets. Furthermore, the accounting profit ratios are not affected by investor psychology, but in contrast, Tobin’s Q is strongly influenced by investor psychology, because it pertains to forecasts of a multitude of world events that include the outcome of present business strategies. Thus, the two accounting profit ratios and Tobin’s Q reflect different perspectives of firm performance. It is of interest to understand whether these variables are useful or provide useful information in the Thai context related to corporate governance. This leads to Proposition 4.

Proposition 4: The variables ROA, ROE and Tobin’s Q will be relevant for the measurement of corporate governance performance in Thailand.

4.2.5 Proposition 5

Limpaphayom and Connelly (2004) stated that directors need to improve their awareness of the role of other stakeholders. They suggested that directors centre on encouraging the true independence of independent directors, and that they be encouraged to serve and protect the interests of a broad group of stakeholders.

The Asian Development Bank (ADB) (2000) contended that the issue of corporate governance is important, not only for protecting investors’ interests, but also for reducing systemic market risks and maintaining financial stability. The views of three different groups are of interest in this study: (1) Chief Executive Officers (CEO); (2) Executive directors; and, (3) Outside/independent directors (audit committee). Other aspects, such as the above-mentioned three study groups’ views about the problems of corporate governance and the impact of the implementation of corporate governance in Thailand, are also investigated in this study. Thus Proposition 5 is stated as:

Proposition 5: There will be significant differences in measures of responses from different groups for strengthening corporate governance in Thailand.