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III. Regulatory Framework of Corporate Governance in Family Controlled companies in Hong Kong and Thailand: Can they learn from each other?
This part will be a comparative study of the corporate governance in the family controlled companies between Hong Kong and Thailand with an aim to examine whether and what they can learn from each other.
A. Meaning and System Corporate Governance
Different people, companies, organizations or countries may have different definitions of "corporate governance". One gives it a simplest definition as "the management of an activity by some means, such that a range of desired outcomes is attained ".28 Another refers it to system by which the company is directed and controlled.29 Another takes the narrow view by focusing upon maximization of wealth of the shareholders.30 Another focuses it on the effectiveness of mechanisms that minimize agency conflicts involving managers, with particular emphasis on the legal mechanisms that prevent managers from expropriating minority shareholders.31 Another views it broader to cover the question of the stakeholders and the social responsibility of a company.32 The other defines it wider not only as the arrangements among the shareholders, the board and the management team but also as the mechanisms directly influences the economic decisions for the firms.33
Hong Kong follows the view of the Cadbury Report by referring corporate governance to the process by which the board of directors supervise and control the management of companies on behalf of the shareholders.34 The board of directors in Hong Kong is responsible to maximize the benefits of the shareholders. It must not be responsible to other stakeholders. In this regard, the Hong Kong Standing Committee argued on company law reform against stakeholder theory. It reasoned that a board of directors that is responsible to different interest groups is a board accountable to no one.35
Unlike Hong Kong approach, Thailand takes the broader definition of corporate governance by meaning it to encompass the responsibility of a company for the stakeholders and the community. According to Dr.Prasarn Trairatvorakul, the Deputy Secretary-General, Securities and Exchange Commission of Thailand, corporate governance means the internal mechanism within a company that respect the three following principles.36
The first principle is fairness.37 Rights of shareholders and other stakeholders should be observed, respected and treated fairly. All shareholders, both insiders and outsiders, should be entitled to receive equitable treatment.
The second principle is transparency.38 The operations of a company should be transparent both in terms of decision-making process and the disclosure of information. Timely, accurate and sufficient information should be disclosed for decision making of investors and other stakeholders.
The third principle is accountability.39 The board of directors and the management should have accountability on their performance to not only shareholders but also other stakeholders and the community.
Companies should not be only places to do business for the benefit of their shareholders. On the wider sense, because of their economic power, companies should be places to be responsible and accountable to other stakeholders i.e. creditors, employees, consumers, environmental groups, and community. Furthermore, establishing a board of directors which is accountable to different interest groups does not mean that the board will be responsible to no one. On the contrary, it means that the board will be much aware of its duty and therefore render management more accountable and more effective.
The system of Hong Kong corporate governance, however, is derived from that of United Kingdom. Its philosophy is to maximize the profit for the shareholders. This may be suitable for the business culture in Hong Kong. Corporate governance is a part of business culture, which reflects a society through its language, beliefs and customs.40 A system of corporate governance suitable for one country may not work well in another. As a result, the system of corporate governance that imposes duty on a board of directors on the stakeholders might not work well in Hong Kong.
B. Board of Directors
The board of directors is supposed to be accountable to shareholders by properly monitoring management. Since monitoring requires an arm's length relationship, directors should be independent from management. In order to promote independent of the board of directors, the Cadbury Codes of the United Kingdom recommend at least three non-executive directors.41
In Hong Kong, since 1993 the Stock Exchange of Hong Kong (SEHK) has incorporated the Code of Best Practices as an appendix to the Exchange Listing Rules with an intention to increase the accountability of the directors to shareholders and to improve shareholders' access to information. However, the Code is a set of voluntary guidelines for boards of directors.42 Thus, all publicly listed companies in the SEHK are only required to explain in their interim and annual reports whether or not they comply with the Code and give reasons for non-compliance.43
In 1994, the SEHK Listing Rules required listed companies to appoint at least two independent non-executive directors on the board in an attempt to improve corporate governance.44 Besides, in December 1995 and in January 1997, the Hong Kong Society of Accountants in its reports of the working group on corporate governance made a recommend that as a self-regulatory good practice, that listed companies should try not to have members of the same family making up more than half of the members of the boards.45 It believes that this measure will help to increase the effectiveness of the independent directors and tackle the domination of the board in the Hong Kong companies more effectively.46
Further, in 1999, the SEHK has established GEM (Growth Enterprise Market or Hong Kong's second board) to encourage listings by smaller companies with short track records.47 The GEM Listing Rules are less strict than the main board. For example, companies do not need to show three years of clear profit.48 However, like listed companies in the main board, the companies in GEM must have at least two independent directors.49
A study by Bikki Jaggi and Charles Chen, however, shows that in Hong Kong, most listed companies are family owned companies controlled by a few groups of families.50 The recent study by the Hong Kong Society of Accountants finds that almost 90% of listed companies have a major shareholder who by himself or with family members owns 25% of the share capital.51 As a result, independent non-executive directors would have little or no impact on improving corporate disclosures for family owned companies since these families are likely to appoint their friends, relatives and associates who are their supporters of management as independent non-executive directors. This device seems to be ineffective in family owned companies. Moreover, the SEHK is silent on the issue of quality of the independent non-executive directors.52
In Thailand, the Stock Exchange of Thailand (SET) first published 'Code of Best Practice for Directors of Listed Companies' in December 1997.53 However, most of the listed companies in Thailand are controlled by majority shareholders. The majority shareholders can appoint board members without approval of other minority shareholders through the majority vote.54 Therefore, the board of directors is often neither independent from management nor accountable to small shareholders. To tackle this problem, the SET requires that there must be at least two independent non-executive directors on the board in order to monitor the management of the company.
The term 'independent non-executive director', however, excludes only employees of the company. In the Thai family-controlling companies, the boards of directors are often composed of independent non-executive directors who are friends and family of the majority shareholders rather than qualified professionals who would monitor the management of the companies. As a consequence, the majority shareholders continue to control the companies.
In order to further enhance the independence and effectiveness of the board structure, at present Thailand is considering the appropriateness of a requirement for the two-tier board structure, which consists of the main board or supervisory board and the executive board.55 The supervisory board which should contain a sufficient number of independent non-executive directors will be responsible for selecting, evaluating and compensating the executive board; formulating overall corporate strategy and monitoring corporate performance, while the executive board will execute corporate strategy and manage daily operations of the business.56
(28) Corporate Leadership and Governance the Challenge Brief: World Business Council for Sustainable Development, UN 1997, cited in Corporate Governance: In search of the correct frame of reference, Corporate Governance: Class materials in Corporate Governance and Shareholder Remedies, CGSR.3/900(ACa), Faculty of Law, University of Hong Kong, 3 October 2000, at 2 [hereinafter CGSR.3/900(ACa)]
(29) The Cadbury Report para 2.5, cited in CGSR 3/900(ACa), note 28
(30) Schleifer and Vishney, 'A Survey of Corporate Governance', cited in Corporate Governance and the Duties of Company Directors, Ed Ian Ramsey, The Center for Corporate Law and Securities Regulation, Melbourne 1997, at 2
(31) Johnson, Simon., Peter Boone, Alasdair Breach, and Eric Friedman, (1999) 'Corporate Governance in the Asian Financial Crisis' The World Bank Group <http://www.worldbank.org/html/prddr/trans/janfeb00/phs26-27.htm>
(32) Monks and Minnow, cited in Ian Ramsay Ed, Corporate Governance and the Duties of Company Directors, note 30
(33) Gordon, Jeffrey, (1999). 'The shaping Force of Corporate Law in the New Economic Order' 31 U Rich Law Review, at 1474
(34) Wong, Daniel W.K., and Peggy S.L. Yeung (2000). 'Corporate Governance in Hong Kong' The Business Environment in Hong Kong
(35) Corporate Governance, Class materials in Corporate Governance and Shareholder Remedies, CGSR.5/1000(ACa), Faculty of Law, University of Hong Kong, 10 October 2000, at 7 [hereinafter CGSR.5/1000(ACa)]
(36) Trairatvorakul, Prasarn., (September 13, 1999). 'Challenges of Good Governance: Accountability and Rule of Law' The Asian Economic Crisis and Corporate Governance <http://wb-cu.car.chula.ac.th/papers/corpgov/cg072.htm>
(40) Tricker, Robert., (1994). International Corporate Governance: Text, Readings and Cases Prentice Hall
(41) According to the Cadbury Codes, the non-executive directors are ones who are not executive directors. Normally, these directors are not employees of the company and therefore do not hold any other office in the company in conjunction with their office as directors and have no management responsibility.
(42) For example, the Code suggests that companies hold full board meetings no less than every six months.
(43) Tsui, Alec, 'Corporate Governance - A Shared Objective of Main Board and GEM', News & Library <wysiwyg:main.150/http://www.sehk.com.hk/CCD/sp 0806.htm>
(44) Under the SEHK Listing Rules, a non-executive director is a director who has no executive or management responsibility in the company on whose board he sits. He is deemed independent if he is independent of management and does not receive any benefits from the company other than his director's fee. See in The Hong Kong Institute of Directors' Guide for Independent Non-Executive Directors, at 3, in Corporate Governance, Class materials in Corporate Governance and Shareholder Remedies, CGSR.13/1100(ACa), Faculty of Law, University of Hong Kong, 28 November 2000 [Hereinafter CGSR.13/1100(ACa)]
(45) Hong Kong Society of Accountants, Report of the Working Group on Corporate Governance (December 1995), in the Reading Materials of Corporate Governance Course, Directors' Duties and the Hong Kong model, CGSR.7/1000(ACa), Faculty of Law, University of Hong Kong, (17 October 2000) [hereinafter CGSR.7/1000(ACa)]
(47) Asian Corporate Governance Association, note 27, at 10
(50) Jaggi, Bikki., and Charles Chen., 'Association between Independent Non-Executive Directors, Family Control and Financial Disclosures', Journal of Accounting and Public Policy, cited in Tsui, Judy., and Ferdinand A. Gul, note 26, at 13
(51) The Hong Kong Society of Accountants, Second Report of the Corporate Governance Working Group 1997, at 12
(52) Tsui, Judy., and Ferdinand A. Gul, note 26, at 15
(53) Asian Corporate Governance Association, note 27, at 39
(54) Nikomborirak, Deunden., and Tangkitvanich, Somkiat., (1999). 'Corporate Governance: The Challenge Facing the Thai Economy' Conference on Corporate Governance in Asia: A Comparative Perspective, Organization for Economic Co-operation and Development
(55) Trairatvorakul, Prasarn., (November 10, 1998). 'Placing safety mechanisms in Thai finance' The Nation (Thailand)