As president of the Thai Institute of Directors (IOD), a question was posed to me: what would be the key governance issues for company boards in Thailand in 2013? This is not an easy question to answer, but after long and careful thought, my answer would include these three issues:
The first is compensation for company executives. This issue has been important and particularly controversial for companies in advanced markets following the global financial crisis of 2007-2009. Misaligned incentives were seen as an important factor behind governance failure, which contributed to the crisis. Executive compensation was said to have focused too much on short-term results, which encouraged management to take excessive risks for short-term gains at the cost of a firm's longer-term business viability. In the finance industry, short-termism led to serious solvency problems and eventual collapse.
In Thailand, understandably, pay and compensation has not been a major issue. This is partly because pay levels in Thai companies are more moderate, compared to companies in advanced economies. Nonetheless, as the economy continues to grow and with company performance benefiting from such growth, a question will inevitably be raised as to how management should be compensated, such that it is consistent with peer practices on the one hand while adequately providing the incentives needed for attracting and retaining capable staff and management on the other.
The IOD's own compensation survey, carried out last year to look at board compensation, shows that the increase in such compensation, which has risen by 16% since 2010, was linked to three factors: greater board responsibilities, a company's financial performance, and the need to attract or retain capable directors.
My guess is that these three factors will also be important in determining executives' pay and compensation. In addition, other factors such as linkage between pay and performance, long-term risks to a company from current performance, and the degree to which management can influence the board in setting pay policy, will also count.
The issue of executives' pay compensation, in my view, will become more prominent on the agenda of company boards in Thailand. As the economy grows and the labour market becomes more globalised, there will be more opportunity for job mobility due to increased competition for talent.
The second key issue on my list would be that as global standards for corporate governance framework and principles are becoming more complex and more demanding, Thai companies will face more pressure to keep up with these new standards and expectations. A case in point is the new Asean Corporate Governance standards that have been recently formulated to provide a common yardstick for assessing corporate governance practices of listed companies in Asean.
Currently, every year the IOD conducts a corporate governance or CG rating for Thai listed companies, based on a corporate governance framework that covers the rights of shareholders, equitable treatment of shareholders, role of stakeholders, disclosure and transparency, and the responsibilities of the board. But this year things can be more demanding as the CG standards that the IOD will use in its CG rating will converge towards the new Asean standards.
A key difference or change is the increased focus on what companies do and don't do with respect to good governance on top of the governance processes and systems they have put in place.
In short, the focus will be on both substance and form, and the challenge for Thai companies will be the requirement for companies to disclose actions on good governance as well as explanations for not taking them. In our case, while Thai companies are familiar with and have put in place the required processes and systems, the actual actions taken with regard to governance practices may not have been adequately disclosed.
This will now change and greater disclosure is now expected.
The third issue is higher expectation by investors regarding a company's adherence to good governance. This is something we are seeing at global level in which investors put more value on good governance in assessing a company's management and longer-term profitability and sustainability. In Thailand, a similar thing is also in play. There is now greater demand and expectations from both regulators, such as the Stock Exchange of Thailand and the Securities Exchange Commission, and private-sector organisations to see Thai companies adhering to higher levels of transparency and governance.
Reflecting this, investors will be more active in monitoring company actions and raising questions on performance to ensure greater transparency and accountability by boards and management.
In the Thai context, a number of questions asked by investors will be predictable and obvious. One area involves the demand for greater transparency on major decisions taken by the board that will have important long-term implications for companies. These include questions on major investment or acquisition decisions or a decision to abruptly remove management or the CEO. Here, investors may want to know the stance of each board member on these issues. Another is the board's policy on anti-corruption and whether the company pays sufficient attention to the issue. Specifically, investors will want to know what a company has done to ensure no corrupt practices. Another possible question will be about board and management compensation as earlier discusse _ in other words, whether the way board and management are being compensated or rewarded is appropriate in relation to shareholders' benefits.
These three issues reflect the current trend of a continued higher level of scrutiny of corporate actions by investors and stakeholders. This means companies need to act with greater care and accountability, and should take full account of potential ramifications of actions, which in the past may have received little attention.
Bandid Nijathaworn is President and CEO, Thai Institute of Directors.