Minding Thailand's business

Pranom Kowinwipat never missed any of the 60 general meetings during her five years on the audit committee at Bangchak Petroleum Plc.

Colleagues describe the 71-year-old associate professor as honest, straightforward and with expertise in accounting and finance: “Someone who the organisation needs at this time.” That is, until she was replaced in April 2011 by former deputy army chief Dapong Rattanasuwan in an abrupt decision by the nomination committee.

Gen Dapong was side by side with junta chief Gen Prayuth Chan-ocha in the 2006 coup and the 2010 crackdown on red-shirt demonstrators who protested against the Democrat Party-led government. A year later, the Abhisit Vejjajiva government granted him a handsome reward — a seat on the board of Bangchak, a majority state-owned oil refiner listed on the Stock Exchange of Thailand (SET), which gave him remuneration of 2.64 million baht last year.

After the military takeover on May 22, changes at state enterprise boards had been highly anticipated. On June 16, the military-led National Council for Peace and Order announced its plan to overhaul the management of state enterprises, taking aim at the board of directors of 56 state enterprises and state-owned public organisations.

Now that the army has seized power and pledged to fight corruption, should the Thai military reduce its role in business?

FRIENDS WITH BENEFITS

In 2011, three independent board directors at Bangchak were to be replaced; two had resigned, while one — Ms Pranom, a former deputy dean of Thammasat University’s Faculty of Commerce and Accountancy — had just completed her three-year term. The nomination and remuneration committee is tasked with appointing new directors, whose names are approved by shareholders at their monthly meeting.

Shareholders appoint board directors to define the company’s policy and monitor and supervise management so they can maximise economic value and shareholder wealth.

Independent directors take no part in the administration and hold no more than 0.5% of the overall shares in the company and its subsidiaries, as well as not having a business connection.

Ms Pranom’s second term extension was initially approved by the nomination committee, according to an independent director familiar with the issue. But a few weeks later, the committee replaced her name with Gen Dapong’s and submitted the candidate list for shareholder approval.

“At that time, board members were asking among each other how [Gen Dapong] was able to get a seat,” said the source, who requested anonymity for fear of retribution.

Bangchak’s policy allows minority shareholders to propose suitable candidates for board directors, but it rarely occurs because the selection is conducted through majority voting, with each shareholder holding one vote per share held.

Although Bangchak is not a state-owned enterprise according to the Finance Ministry’s official definition, which identifies state enterprises as having a government share of more than 50%, the government is still the largest shareholder, albeit indirectly through the oil and gas giant PTT Plc.

Of Bangchak’s total shares, 9.98% are held by the Finance Ministry and 27.22% by PTT. In May, PTT, which is 51.11% owned by the Finance Ministry, announced a plan to dilute its shareholding in Bangchak as part of a restructure to focus more on overseas and petrochemical investments.

At the time of the incident, deputy Democrat Party leader Korn Chatikavanij headed the Finance Ministry, while Wannarat Channukul was Energy Minister. The latter heads the Chart Pattana Puea Pandin Party, which formed a coalition with the Democrats before the 2011 general election.

Bangchak’s board consists of six directors (two from the Finance Ministry and four from PTT), a secretary, six independent directors and board chairman Pichai Chunhavajira, who is known to have close ties with ousted prime minister Thaksin Shinawatra and Suwat Liptapanlop, the de facto leader of the Chart Pattana Party.

Gen Dapong is among the directors who have authority to sign on behalf of the company, jointly with either the board chairman or secretary. In 2012, he became chairman of Bangchak’s Corporate Governance Committee.

The 60-year-old, often called “Big Nui” by local media, is believed to have drafted the 2014 coup plan, with the help of legal expert Visanu Krue-ngam. He is a former classmate of Gen Prayuth at the Armed Forces Academies Preparatory School, and is currently an adviser to the NCPO. In 2010, Gen Dapong was the secretary-general of the Internal Security Operations Command, which is now headed by Gen Prayuth.

“You can’t sit on the board if you don’t have close ties with someone; it’s just a question of whether or not you’re a professional,” said the source from Bangchak. “And the appointment has to be conducted in line with the company’s process, which in this [Gen Dapong’s] case, it was.”

But the source said Gen Dapong did not abuse his power, which could have been done in the form of colluding in auctions or trading stocks through a nominee.

“Politicians have always appointed some board members of state enterprises as a reward for their loyalty, and I believe the NCPO will do the same for their close friends,” said the source. “If we want true reform, we need good and talented people.”

THE PURGE

The military has held a vast majority of positions as board members of state enterprises ever since the 1932 Revolution, which saw the country’s ruling system change from an absolute to a constitutional monarchy, although the extent has eased in the past 30 years.

Several chairmen and heads of state enterprises have stepped down since the most recent coup, bringing a general understanding that some kind of purge is going on. Gen Prayuth’s supporters include the People’s Democratic Reform Committee and its allies as well as the yellow shirts who want the NCPO to root out the so-called Thaksin regime.

The previously anticipated resignation of air force commander ACM Prajin Jantong as Thai Airways International (THAI) board chairman was also thought to be a “signal” for board members of other state enterprises who had been appointed by the previous administration to follow in his footsteps, thus paving the way for a reshuffle. ACM Prajin is also the deputy chief of the NCPO overseeing economic affairs.

A total of 31 board members have resigned as of Friday, including former deputy Pheu Thai leader Parnpree Bahiddha-Nukara, chairman of PTT. Sqn Ldr Sita Divari, known to be close to the Shinawatra family, stepped down as chairman of the Airports of Thailand (AoT) last month, while former Budget Bureau director Voravidh Champeeratana quit as Krungthai Bank’s (KTB) chairman. Mr Voravidh is a close aide to the Pheu Thai Party and helped seek funding sources for the two-trillion-baht infrastructure plans.

Other resignations include the chairman and three directors of state-run broadcaster Mcot Plc. The chairman, Sutham Saengpratoom, and directors Chakraphan Yomchinda, Tongthong Chandransu and Pol Gen Krisna Polananta, were widely known to have close ties to Thaksin.

Pavida Pananond, an associate professor of international business at Thammasat Business School, said there has not yet been a clear change of direction in the way state enterprises are run, but rather a replacement of board members.

“We have seen pretty clearly that this is a purge of the Thaksin-related regime,” she said. “Let’s hope now there is some kind of clear mechanism to enhance corporate governance in state enterprises to ensure Thailand will not return to the 1970s when men in uniform used to dominate the boards.”

One indication of the NCPO’s influence is the order for state enterprises to seek approval from the junta before undertaking any project worth more than 100 million baht.

Some 78% of Thailand’s state-enterprise revenue is in the energy business. Six state enterprises are listed on the SET, namely PTT and its subsidiary PTT Exploration and Production (PTTEP), Mcot, THAI, KTB and AoT. Their combined market capitalisation as of April is 16.85% of the SET’s total value of 12.5 billion baht.

To be fair, Thai listed companies maintained their foothold as the best performer in corporate governance against five Asean peers, according to a recent survey under the Asean Capital Markets Forum. The Asean CG Scorecard, initiated by a group of Asean capital market regulators, is part of a regional programme to promote good corporate governance.

The six Asean stock markets in the survey are Indonesia, Malaysia, the Philippines, Singapore, Vietnam and Thailand. Of the 529 Asean listed companies participating in the survey, four Thai firms are ranked among the top 10. AoT, Bangchak, PTT, PTTEP and Mcot received scores of 90 and above on a 100-point scale.

According to the State Enterprise Policy Office (Sepo), the net profit of 46 non-state financial institutions totalled 222.10 billion baht in 2013, compared to 235.05 billion in 2012 and 177.84 billion in 2011. The net profit of 10 state financial institutions totalled 73.18 billion baht in 2013, 53.73 billion in 2012 and 49.04 billion in 2011.

But debt-ridden enterprises such as the State Railway of Thailand, the Bangkok Mass Transit Authority and THAI have been plagued with losses, bringing into question whether or not board directors are carrying out their duties properly or whether they were qualified in the first place.

Anusorn Tamajai, dean of the Faculty of Economics at Rangsit University, stressed continuity as an important aspect in increasing the efficiency of state enterprises and to help achieve their goals.

This is because even under the same government, a change in minister could result in changes to a state enterprise board.

He said the qualifications and expertise of state enterprise directors has always been an issue of concern in Thai society.

“Board directors are appointed as a reward for their loyalty towards politicians, which might not result in a person who is qualified or has the appropriate skills [to direct a company], while some even abuse their position to seek benefits,” Mr Anusorn said.

MILITARY INTERVENTION

In his weekly address broadcast on June 20, Gen Prayuth stressed the need for the management of state enterprise boards to be more transparent, efficient and accountable.

The general himself resigned as a board member of the SET-listed Thai Military Bank on June 26. The army holds a 1.25% stake in the bank, with the Finance Ministry the major shareholder at 26.02%.

But academics like Mr Anusorn said transparency cannot occur if there is no true democracy in the country. Others, such as former Finance Minister Korn, suggested that in order to prove accountability and transparency, the NCPO should set up a “super holding” — an organisation responsible for setting policies and investment plans of all state enterprises.

On June 27, the NCPO created the State Enterprise Policy Commission to supervise state enterprises in order to ensure efficiency and unity and encourage private-sector investment in these agencies.

The “super board” will supervise board appointments in all state enterprises to ensure they are aligned in the same direction.

“In a while we will see an appointment of new board members, which might be good and talented people. But in the end it will probably revolve around the old system, which is appointing those close to the authorities who hold power,” Mr Korn wrote on his Facebook page.

Areepong Bhoocha-oom, secretary-general of the Office of the Public Sector Development Commission and a former finance permanent secretary, was appointed chairman of KTB’s board of directors on June 27. He was reshuffled from the Finance Ministry under the previous government.

PTT also appointed six new board members, including Piyasvasti Amranand and Gen Paiboon Khumchaya. Mr Piyasvasti was axed as THAI’s president and chief executive under the previous government in 2012 in a move he described as politically motivated. He is now facing pressure from activists to resign because he is believed to be pushing for the privatisation of state-owned enterprises. Gen Paiboon is the deputy army chief and the junta’s head of justice and legal affairs.

Deunden Nikomborirak, a research director for economic governance at the Thailand Development Research Institute, a think tank, said civil servants, whether it be soldiers, judges or police, should not be involved in business management as it would result in a conflict of interest.

On the one hand, their duties as board directors require them to protect the interests of the company, while on the other hand, a government official is required to protect the interests of the public.

Ms Deunden said board members of large companies should include those with expertise in five areas: law, finance, investment, marketing and governance.

Lae Dilokvidhyarat, an associate professor at Chulalongkorn University’s Faculty of Economics, agrees that in the past, the appointments of state enterprise board members were not based on expertise but were given as a “reward” by politicians who came into power, which undermined the organisations’ efficiency.

“Thais have a perception that the airport is related to the air force and therefore they it should be chaired by the air force. The same thing goes for ports, which should be taken care of by the navy,” Mr Lae said. “Only if the soldier is an expert in communications can he sit on a communications board.”

The Bangkok Post earlier reported a Finance Ministry source saying the NCPO has told the ministry to give it comprehensive details of all board members, such as educational backgrounds and work experience. It also wanted to know during which governments they were appointed or who named them to the boards.

Sepo has a directors’ pool, a list of hundreds of experts divided according to different criteria as a guideline for companies to choose directors from. But politicians usually do not go by the list as it is not mandatory.

Anusorn Sangnimnuan, a former Bangchak president, argued that soldiers are needed on boards of energy-related state enterprises.

“We like to look at this issue in a commercial sense, but we forget the national security issue,” said Mr Anusorn, who turned the company around from a long-term loss.

Gen Dapong, for instance, played a crucial role in mitigating the impact of the 2011 floods by sending hundreds of soldiers to help build earthen dykes at Bangchak’s Bangpa-in oil terminal and refinery on Sukhumvit Road.

Mr Anusorn said the appointment of board members with close ties to politicians are unavoidable as they want someone who they can trust, but the appointees should not be incompetent. He suggested greater public participation in energy-related decisions would prevent politicians from taking advantage of issues related to the national interest.

“In the past, Bangchak would select a mix of people [to sit on the board],” said Mr Anusorn, who has worked with Bangchak for 28 years and stepped down in December 2012 after eight years at the helm.

“Ever since I came in, the mix of board directors was not really in line with the company’s demand.”

POPULISM IN DISGUISE

The junta’s campaign is also taking aim at unreasonable perks and fringe benefits paid to board members, executives and employees, ordering state enterprises and state-owned public organisations to review their compensation and other privileges in line with performances.

In 2013, Bangchak paid 39.44 million baht in remuneration (which includes meeting allowances and bonuses) to its 14 directors, up from 32.7 million in 2012 and 28.98 million in 2011. THAI, which was among the first to slash perks for its members, scrapping generous free-flight benefits, paid 21.34 million baht to 21 directors.

Board directors at Bangchak are given monthly remuneration of 30,000 baht per person and meeting allowances of 30,000 baht per person per meeting for directors who attended them. The bonus for each director is set at 1% of net profit.

Since Gen Dapong assumed his position on April 5, 2011, he received annual remuneration of 350,000 baht, 1.82 million and 2.64 million baht in 2011, 2012 and 2013 respectively. But he failed to attend many general meetings, with the lowest attendance in a three-year period among all board members, according to Bangchak’s annual reports. While he was appointed by the Democrat-led administration, for most of his time on the board he was under the former Pheu Thai government.

Directors of state enterprises that are not SET-listed get a maximum bonus of seven months’ annual salary, while a loss-making agency gets none.

Rangsit University’s Mr Anusorn said many board directors receive very low remuneration, which does not reflect their role, responsibilities and risks in the company. The state enterprises with higher remuneration are those listed on the SET.

“That is why a certain number of people with knowledge do not become government board members. Or even worse, they abuse their power to seek personal benefits,” he said. “If you don’t pay a competitive salary, they [state enterprises] will not be able to compete with the private sector.”

Chuwat Rerksirisuk, an executive editor at the non-profit online newspaper Prachatai, said the NCPO is trying to create legitimacy by lowering benefits, which is designed to appeal to the public and to justify the appointment of their own people.

“In the end, it will be only their [the NCPO’s] people in the seats. Now they are just changing the directors and justify that by lowering the bonuses,” he said, adding that the NCPO does not truly represent the Thai people, as they were not elected.

Real change will occur once there is increased transparency in the selection of board members and lowering the interference of the government, Mr Chuwat said.

“Soldiers do not have the expertise and will make things that are already effective become worse,” he said.

But the State Enterprises Workers’ Relations Confederation (Serc), which consists of about 200,000 members from 44 labour unions, applauded the NCPO’s move, saying the restructuring of state enterprises is long overdue.

Former Serc secretary-general Sawit Kaewvarn said most board directors of state enterprises are political appointees without the expertise to manage the particular organisation.

“Most of them are in the form of ‘rewards’. For instance, it could be a politician who failed to become a minister and was appointed as a board director instead,” Mr Sawit told Spectrum at the Serc office. “But state enterprises operate from people’s taxes and they should not be used as a ‘reward.’ ”

Mr Sawit proposed that board directors must include government officials (by law), experts, representatives from the consumer sector and representatives from labour unions.

The National Anti-Corruption Commission (NACC), which has the power to investigate civil servants and politicians suspected of corruption, has proposed to successive governments that government officials and public prosecutors not sit on the boards of state enterprises.

This is because when corruption is alleged, prosecution becomes extremely difficult, said Sirilaksana Khoman, who chairs the NACC’s task force on economic sector corruption.

Although the law says that prosecutors cannot sit on state enterprise boards, there is a clause that allows exemption from the law if permission is granted by the Prosecutors Council. This was supposed to apply only to exceptional cases, but the exception has proven to be the rule. Regulations also say that board directors cannot sit on the board of more than three state enterprises, but again, exception has always been the rule.

“The NCPO, however, needs to take care that they are not replacing one group of cronies with another group of cronies,” Ms Sirilaksana said.

In addition to the composition of the board, Ms Sirilaksana said there needs to be a fundamental overhaul of all state enterprises and public organisations to determine which should be privatised and which services can be contracted out. However, this would involve long-term restructuring which would not be possible under the time frame announced by the NCPO, which plans to hold an election within the next 14 months after national unity is achieved and national reforms are complete.

“We will definitely monitor their [the NCPO’s] projects. They did not repeal the NACC law, and so we will continue our duties of monitoring activities to prevent corruption and propose measures to enhance transparency.”

A WARM WELCOME

Foreign businesses have secretly hailed the military takeover, and it seems as though the sector is high on the junta’s priority list. The NCPO intends to revive the economy through various measures and handouts to stimulate private consumption and public spending, prompting a warm welcome from the private sector as stability seems to have returned to Thailand after six to seven months of street protests.

The evidence is favourable so far.

SET president Kesara Munchusree last week expressed confidence that trading volume will continue to be brisk for another 12 months in the wake of the economic recovery following restoration of political stability.

The local stock market’s average turnover for the five months through to May amounted to 31.8 billion baht a day, while the trading volume from June 2-25 was 47.9 billion baht a day.

The SET index closed on Friday at 1,495.83 points, up compared to 1,415.73 at the end of May and 1,485.75 at the end of June.

For the first five months of this year, foreign direct investment (FDI) declined by 10% year-on-year to 230 billion baht from 334 projects, according to the Board of Investment (BoI). But analysts say the trend of FDI flows was expected to improve thanks to the appointment of BoI executive board members, including Gen Prayuth as chairman, and better foreign investor understanding of the domestic situation.

“This is really encouraging. They [the NCPO] have moved with extraordinary speed and decisiveness, with a shopping list from day one,” said Adrian Dunn, the chief executive of Brooker Dunn Asset Advisory. “The NCPO policies are targeting investment; the missing element in the Thai economy since the [1997] baht crisis.”

Some of the first people the army met with were foreign diplomats. One day after the coup, Gen Prayuth was seen mingling and shaking hands with foreign diplomats in the lobby of the Army Club, some even asking to take pictures with him. Those who were there described him as very laid-back; surprisingly so for someone in his position, so recently after the coup.

Sources who attended the briefing told Spectrum that Gen Dapong was quite vague on many things (“Just see what happens,” was among one of the responses).

But Angus Kent, managing director of Macquarie Securities (Thailand), described at the Foreign Correspondents’ Club of Thailand his impression of the general at a separate meeting as “decisive”, having a “very clearly articulated vision planned” and having a “sincerity of the desire to get it right this time”.

From the business perspective, it’s a unique opportunity to deal with one person, without the pain of bureaucracy and going through various committees under normal government.

The NCPO’s second briefing on June 24 with about 20 heads of the largest foreign companies in Thailand headed by Songsak Saicheua, director-general of the American and South Pacific Affairs Department, was aimed at getting proposals from business leaders on what they want the administration to do.

“They [the NCPO] basically said just do it [make proposals before September]. It’s a window. Then the window would close,” said Michael (not his real name), a source from a major foreign business consultancy who also attended the NCPO’s second foreign business briefing on June 24. “They [the NCPO] can just snap their finger, and it happens.”

He said foreign companies, especially in the construction, pharmaceutical and tobacco industries, are trying to rush through these proposals, such as getting rid of government monopolies and restrictions.

“There are two short-term indicators of whether businesses are happy or not. One, the stock market is up. Two, the Thai baht is up, which suggests international confidence and the government is not propping up the economy by printing money,” said Michael, who requested anonymity because he was not authorised to talk to the press. “It’s a serious junta. It’s not 2006 [the 2006 military coup]. They’re not screwing around.”

But when governments change, and especially when there is a coup, then there is risk. Companies may lose access to government contracts, warned Michael, or have their boards investigated or replaced.

At the more extreme end, the government can retroactively investigate their taxes or contracts signed under the previous government, with the overall intention of eliminating links to Thaksin or the red shirts.

“There have been some clients asking whether their local partners will be affected, as there are some Thai companies that are viewed as high risk because of possible links to Thaksin,” Michael said, adding that some sensitive state and quasi-state enterprises that often have political appointees will certainly be affected. “Dealing business with someone with a political contact is like a double-edged sword. There is less red tape, but it also means you’re married to that contract. It is a risk factor. If they go down, you go down. Business goes in the opposite direction of democracy. They like stability, which is a euphemism for having one authority. Despite what they say, I don’t think businesses are unhappy.”

In the short term, perhaps businesses have been happy. But Ms Pavida from Thammasat Business School questioned whether the NCPO’s legitimacy might be eroded in the medium to long term by forms of nepotism and hypocrisy due to the lack of checks and balances for those who are brought in.

She also expressed concern at a rise in right-wing economic policies focusing more on Thai economic nationalism. This includes interference in market mechanisms, price controls, scrutiny of foreign joint ventures and the boycotting of foreign products.

“This is dangerous and increases the cost of doing business in Thailand,” she said. “But I hope I’m wrong.”