Strengthening Corporate Governance Practices Through Baselining in Thailand

1
Strengthening Corporate Governance Practices
Through Baselining in Thailand
CONFIDENTIAL
Benchmark Committee Meeting
August 15, 2001
This report is solely for the use of client
personnel. No part of it may be circulated,
quoted, or reproduced for distribution outside
the client organization without prior written
approval from McKinsey Company. This material
was used by McKinsey Company during an oral
presentation it is not a complete record of the
discussion.
2
CONTENT

• Importance of Corporate Governance in Thailand
• Objectives of Project
• Methodology
• Progress so far/Pilot Results
• Next Steps

3
McKINSEYS INTERNATIONAL INSTITUTIONAL
INVESTORS SURVEY CONFIRMS IMPORTANCE OF GOOD
CORPORATE GOVERNANCE IN THAILAND
In evaluating Asian companies for potential
investment, how important is the quality of board
practices relative to financial issues?
More
Same
Less
Source McKinsey survey of 250 institutional
investors with aggregate assets under management
of USD3.2 trillion
4
CLSAS CG RATING PUT THAILAND IN THE BOTTOM
QUARTILE
CLSA country CG score
Singa-pore
Hong Kong
India
Taiwan
Korea
Malay-sia
Thai-land
Philip-pines
Indo-nesia
Source CLSA CG Watch, April 2001
5
WE ASKED INVESTORS VIEWS ON THE QUALITY OF
GOVERNANCE IN ASIAN COUNTRIES
Quality of corporate governanceScale
Premium investors are willing topay for a well
governed company
Verygood
Verypoor
Japan
Taiwan
Korea
Thailand
Malaysia
Indonesia
U.S. (estimate)
U.S.18
Asia24
Source McKinsey
6
LOCAL STAKEHOLDERS ALSO PAY INCREASING ATTENTION
TO GOOD CG

• SEC plans to introduce incentives for good CG
  performances
• SET introduced 36 CG guidelines and best
  practices
• In our interviews with institutional investors we
  found an increased awareness of CG issues
• The first criterion we look at when investing
  in a company is good corporate governance
• President, Large local asset management company

7
GOOD CORPORATE GOVERNANCE IMPACTS SHARE PRICE
PERFORMANCE
High
Regression results of a sample of 190 emerging
market companies confirm correlation between good
CG and share price performance
Billiton
Old Mutual
Infosys
HCB
Corporate governance level
ICICI
Legend
GMD
APP
Low
Percentage points above/below market index
Performance compared to relevant stock market
indices from January 1999 to January 2001.
Infosys vs. Nasdaq HCB, ICICI, APP vs. SP 500
Billiton, Old Mutual vs. FT 100 GMD vs. BMV
Legend vs. Hong Kong Index Source Bloomberg
Yahoo! Finance team analysis
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CONTENT

• Importance of Corporate Governance in Thailand
• Objectives of Project
• Methodology
• Progress so far/Pilot Results
• Next Steps

9
THE BASELINING PROJECT HAS AMBITIOUS OBJECTIVES
Objective
Encourage adoption of best practice corporate
governance in Thailand through a systematic
evaluation of current practices
Define a methodology/framework to assess
corporate governance practices in Thailand
Set up processes to evaluate corporate governance
of Thai companies on an annual basis
Develop specific criteria and a measurement tool
to evaluate individual companies
Source McKinsey
10
THE PROJECT COULD HAVE SIGNIFICANT BROADER
BENEFITS FOR THAILAND

• Improve domestic perceptions of Thai companies
• Develops local capital markets
• Gives local savers improved investment choices

• Improve international perceptions of Thai
  companies
• Improves visibility of Thai companies to
  international investors
• Increases access to and lowers cost of capital

• Contribute to economic development
• Improves allocation of capital towards productive
  investment

Benefits
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CONTENT

• Importance of Corporate Governance in Thailand
• Objectives of Project
• Methodology
• Progress so far/Pilot Results
• Next Steps

12
TWO-PRONGED APPROACH TO BASELINING

• Uses only publicly available information to
  determine company CG scores
• Focus on 100 Thai companies (SET 50 50
  statistically representative companies, across
  sectors and sizes)

Company survey
Baseline CG Practices in Thailand

• Focus on softer issues that cannot be easily
  derived from publicly available information
• Results will be kept anonymous
• To be sent out to 600 Thai IOD members

Directors survey
13
DESIGN OF COMPANY SURVEY FOLLOWS OECD CATEGORIES,
COMPLEMENTED BY MCKINSEYS GLOBAL SURVEY
OECD categories

• OECD is internationally recognized
• SP, McKinsey Company, WB follow similar
  approach
• SET best practices follow similar approach

A. Rights of shareholders B. Equality of
shareholders C. Role of stakeholders in
corporate governance D. Disclosure and
transparency E. Board responsibilities
Only publicly available information will be used

McKinseys Global Survey F. Financial
Framework G. Legal Framework

• McKinsey survey has shown importance of financial
  and legal issues
• Adding questions will allow benchmarking Thailand
  against 6 other emerging markets

Source McKinsey
14
ALL MAJOR COMPONENTS OF EACH OECD PRINCIPLE ARE
COMPREHENSIVELY COVERED
Survey questions
Example
Rights defined
2
Is the decision on the remuneration of Board
members or executives approved by the
shareholders annually?
Rights disclosed
1
Please assess the quality of Notice to call
Shareholders Meeting in the past one year.
A. Rights of shareholders
Participation in AGM
3
Do AGM minutes record that there was an
opportunity allowing for shareholders to ask
questions/ raise issues in the past one year?
Takeover rules
1
Does it have anti-takeover defenses?
Voting rights for shares
2
Is there any mechanism that the company has to
allow minority shareholders to influence board
composition?
Shareholders conflicts
4
Have there been any cases of insider trading
involving company directors and management in the
past two years?
B. Equitable treatment of shareholder
Proxy voting
3
Does the company facilitate voting by proxy?
AGM procedures
1
How many days in advance does the company send
out notice of general shareholder meetings?
Source McKinsey
15
ALL MAJOR COMPONENTS OF EACH OECD PRINCIPLE ARE
COMPREHENSIVELY COVERED (CONTINUED)
Survey questions
Example
Rights recognition
1
Does the company mention the role of stakeholders
( i.e., employees, creditors, suppliers,
customers, community) in the corporation?
C. Stakeholders in corporate governance
Disclosure
1
Does the company explicitly mention environmental
issues in its public communication?
Participation
1
Does the company provide an ESOP (Employee Share
Option Program) to employees?
Material information
12
Does the company offer disclosure of critical
information to public?
D. Disclosure and transparency
Audit process
3
Does the company perform an annual audit using
independent and reputable auditors?
Dissemination
3
Does it offer multiple channels of access to
information?
Source McKinsey
16
ALL MAJOR COMPONENTS OF EACH OECD PRINCIPLE ARE
COMPREHENSIVELY COVERED (CONTINUED)
Survey questions
Example
E. Board Responsibility
Source McKinsey
17
ALL MCKINSEY GLOBAL SURVEY QUESTIONS ARE
INCORPORATED
Survey questions
Example
CG framework included in section A, B, C, D, E of
Company Survey
4
Has the company listed on a financial hub
exchange and / or sold public securities ?
4. Legal/Regulatory Practices
Legal framework Included in section F
3
Does the company source debt from banks in
regional or global financial hubs?
5. Financing Practices
Financing framework Included in section G
Source McKinsey
18
ALL SET GUIDELINES ARE COVERED
SET Guidelines
Survey Questions Covered
SET1
Corporate Governance Policy
D.6
E.1
E.12
SET2
Shareholders Rights and Responsibilities
B.2
B.7
B.8
B.9
SET3
Shareholders Rights and Equitable
A.3
B.2
B.9
D.3
Treatment
SET4
Shareholder Meetings
A.4
SET5
Leadership and Vision
A.5
A.6
SET6
Leadership and Vision
E.5
SET7
Independence
E.10
SET8
Conflicts of Interest
B.4
B.5
B.6
E.5
SET9
Business Ethics
C.1
C.2
C.3
SET10
Shareholders, the Board and Management
B.3
D.8
SET11
Equality of Board Responsibility
E.5
SET12
Balance of Non-Executive Directors General
E.8
E.9
E.11
Principles
SET13
Balance of Non-Executive Directors
Director Survey
Controlling or Significant Shareholders
SET14
Board Membership Criteria
Director Survey
SET15
Remuneration of Directors and Executives
E.7ii
SET16
Remuneration of Directors and Executives
E.7ii
SET17
Remuneration of Directors and Executives
A.2
E.6
SET18
Remuneration of Directors and Executives
D.5iii
SET19
Terms and Board Membership
Director Survey
SET20
Board Meetings
Director Survey
SET21
Meetings Documents
A3
SET22
Meetings Documents
Director Survey
SET23
Access to Information
Director Survey
SET24
Access to Information
Director Survey
SET25
Management Meeting Attendance
Director Survey
SET26
Board Committee
E.7iii
SET27
Assessing Board Performance
Director Survey
SET28
Formal CEO Evaluation
Director Survey
SET29
Succession Planning
Director Survey
SET30
Control Systems
B.3
D.5iv
E.2
SET31
Board Report
D.5i
D.5ii
D.7
D.12
E.3
SET32
Internal Audits
D.10
SET33
Audit Committee
E.7i
SET34
Interaction with Investors, the Press and
D.15
Customers
SET35
Interaction with Investors, the Press and
E.13
Customers
SET36
Training and Education
E.4
Source McKinsey
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CONTENT

• Importance of Corporate Governance in Thailand
• Objectives of Project
• Methodology
• Progress so far/Pilot Results
• Next Steps

20
THE PROJECT TEAM HAS COMPLETED PHASE 1 ONE WEEK
AHEAD OF SCHEDULE
December
July
August
September
October
November
Key activities
6
13
20
24
3
10
17
24
31
7
14
21
28
5
12
19
26
2
9
16
23
30
7
14
21
28

• Interview key stakeholders
• Review governance standards from various sources
  (e.g. OECD, SET)
• Combine input to design pilot baselining
  evaluation
• Launch pilot

Develop base-line evaluation
Phase I

• Review pilot and refine survey
• Train and prepare external data collection
  service
• Rollout full baselining effort
• Send out directors survey

Roll out
Phase II

• Analyze data and prepare report on key findings
• Launch communication and PR program to
• Stakeholders
• Target companies
• General public
• International investors

Analysis, synthesis, and communications
Phase III
Key milestones

• Steering committee meetings
• Benchmark committee meeting

Source McKinsey
21
PILOT RESULTS PASS THREE KEY TESTS
Results testing by level
Outcome
International benchmarking level
1
Are the results comparable/ in line with global
survey results?
?

• Pilot objective One week process check to
  verify
• Data and collection process
• Results do distinguish companies
• Sufficient questions in various categories
• Weightings of categories

Company comparison level
2.1
Can the results help distinguish CG level between
companies?
?
2.2
Can the difference of CG between companies be
explained?
?
Individual company level
Can the results help reveal key CG strengths and
weaknesses for each company?
3
?
Source McKinsey
22
PILOT TESTED THE BASELINING METHODOLOGY ON FOUR
COMPANIES
TFB
SPI
MFG
SVI
Rights of shareholders
Equitable treatment of shareholders

• Thai Farmers Bank
• Saha Pathana Interholdings
• Minor Food Group
• Semiconductor Ventures International

Selection Criteria -Well known
company -Availability of Information -Mixture of
CG practices -Mixture of size and industry
Role of stakeholders
Disclosure and transparency
Responsibility of the Board
Total
Source McKinsey
23
PILOT RESULTS IN LINE WITH GLOBAL EMERGING MARKET
SURVEY
Total corporate levers Scale
SPI
MFG
SVI
TFB
Thailand
Score considers only questions from global survey
Average score
Korea
Taiwan
Malaysia
India
Only 4 companies TFB, SPI, MFG,
SVI Source McKinsey
24
INITIAL PILOT RESULTS INDICATE THAT THE SURVEY
WILL BE ABLE TO DISTINGUISH BETWEEN GOOD AND
POOR CG PRACTICES IN THAILAND
Pilot results
Current weighting
1. Rights of shareholders
20
Average weighting based on being 1 out of 5
dimensions
2.Equitable treatment
20
Weighting will be further refined
3. Stakeholders
10
Less important for investors
4. Disclosure/ Transparency
25
Stakeholders interviews stressed importance of
these categories in Thailand
5. Responsibility of the Board
25
SPI
SVI
MFG
TFB
Source McKinsey
25
INITIAL PILOT RESULTS APPEAR TO CONFIRM INTERVIEW
RESULTS ABOUT ISSUES SURROUNDING
RESPONSIBILITIES OF THE BOARD
Four pilot companies rank consistently low on
board responsibilities
Interview results
Responsibilities of the board (Board composition,
conflicts of interest, monitoring/control,
communications)
Truly independent directors do not exist in
Thailand
MFG
The most important CG issue in Thailand is
directors lacking knowledge
TFB
SVI
Conflicts of interest between dominant and
minority shareholders are a problem
SPI
Average of other 4 dimensions
Monitoring function is often not properly
fulfilled by the Audit Committee
Average Board report 1.88
Source Team
26
LARGER COMPANIES SEEM TO SCORE HIGHER ON
DISCLOSURE/ TRANSPARENCY
Disclosure and transparency
Preliminary hypotheses to explain results

• Larger companies seem to have more resources to
  invest in disclosure infrastructure
• Investor relations departments are more common
• Large firms tend to have greater number of
  international investors, insisting on proper
  disclosure/transparency

TFB
2.56
Large firms
SPI
2.12
MFG
1.88
Small firms
SVI
1.94
Source McKinsey
27
PILOT ALLOWS TO IDENTIFY KEY CG ISSUES WITHIN A
COMPANY
Saha Group example (SPI)

• SPI does not have Remuneration and Nomination
  Committees

Equitable treatment of share-holders
Role of stake-holders
Disclosure and trans-parency
Rights of share-holders
Responsi-bility of the Board
Source McKinsey
28
CONTENT

• Importance of Corporate Governance in Thailand
• Objectives of Project
• Methodology
• Progress so far/Pilot Results
• Next Steps

29
NEXT STEPS WILL BE ROLL-OUT OF BOTH BASELINING
AND DIRECTORS SURVEY
July
August
September
October
November
Key activities
6
13
20
24
3
10
17
24
31
7
14
21
28
5
12
19
26
2
9
16
23
30

• Interview key stakeholders
• Review governance standards from various sources
  (e.g. OECD, SET)
• Combine input to design pilot baselining
  evaluation
• Launch pilot

Develop base-line evaluation
Phase I

• Review pilot and refine survey
• Train and prepare external data collection
  service
• Rollout full baselining effort
• Send out directors survey

Roll out
Phase II

• Analyze data and prepare report on key findings
• Launch communication and PR program to
• Stakeholders
• Target companies
• General public
• International investors

Analysis, synthesis, and communications
Phase III
Key milestones

• Steering committee meetings
• Benchmark committee meeting

Source McKinsey
30
DATA COLLECTION PHASE ABOUT TO START

• Thai IOD selected Dr. Piman from Asian University
  of Science and Technology to head data collection
• Dr. Piman has extensive experience in CG surveys
• World Bank to finance data collection effort

Source McKinsey
31
OPEN ISSUES
Best process for dissemination

• Leverage Thai IODs Board and members
• Decide on communication strategy especially on
  company scores (only strengths/weaknesses to be
  communicated, no overall score)

Weightings

• Weightings to be further fine-tuned to improve
  differentiation between companies

32
EXAMPLE OF END PRODUCT OF BASELINING PROJECT
Thailand scores well on CG practices compared to
other emerging markets
Sector X has better CG practices than most
others
Thailand scores well on CG practices compared to
other emerging markets
Korea Thailand Malaysia
Sector X Banking Retail
Board responsibility Disclosure Stakeholder
Large companies score higher on CG than smaller
ones
Independent directors have More critical views
on CG practices
Key challenge is to improve Board practices
Priority
Long firms Small firms
Are you satisfied with current CG practices?
Increase number of independent directors ()
Independent Directors
Executive Directors
Increase frequency of meetings