The Protection of Minority Shareholders in Vietnam, Thailand and Malaysia [1 ed.] 9783428543496, 9783428143498

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Schriften zum Wirtschaftsrecht Band 263

The Protection of Minority Shareholders in Vietnam, Thailand and Malaysia

By

Susanne Olberg

Duncker & Humblot · Berlin

SUSANNE OLBERG

The Protection of Minority Shareholders in Vietnam, Thailand and Malaysia

Schriften zum Wirtschaftsrecht Band 263

The Protection of Minority Shareholders in Vietnam, Thailand and Malaysia

By

Susanne Olberg

Duncker & Humblot · Berlin

The Faculty of Law of the Humboldt-University of Berlin accepted this work as thesis in the year 2013.

Bibliographic information of the German national library The German national library registers this publication in the German national bibliography; specified bibliographic data are retrievable on the Internet about http://dnb.d-nb.de.

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Table of Contents A. Theoretical and Methodological Framework . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Definition of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Methodological Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Functional Comparative Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. New Institutional Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The Conflict Between Majority and Minority Shareholders . . . . . . . . . 1. The Principal-Agent Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incomplete Contracts, Information Asymmetry and Opportunism . . 3. Private Benefits of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. The Legal Protection of Minority Shareholders . . . . . . . . . . . . . . . . . . . 1. Convergence Towards the Anglo-American Model of Corporate Law? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Legal Devices Protecting Minority Shareholders . . . . . . . . . . . VI. The Factual Protection of Minority Shareholders . . . . . . . . . . . . . . . . . . 1. Incentives for the Expropriation of Minority Shareholders . . . . . . . 2. Constraints on the Expropriation of Minority Shareholders . . . . . . a) Shareholder Activism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Independent Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Gatekeepers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) External Product Market Competition . . . . . . . . . . . . . . . . . . . . e) Control by the Capital Market . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Private and Public Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . g) Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Moral and Reputational Concerns . . . . . . . . . . . . . . . . . . . . . . . . i) Internal Corporate Governance Practices . . . . . . . . . . . . . . . . . . . 3. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Empirical Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11 11 13 15 15 16 19 19 21 22 23 23 24 28 28 30 30 33 37 39 40 41 42 43 43 44 44

B. The Legal Protection of Minority Shareholders in Vietnam, Thailand and Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Sources of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. A Comparative Legal Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Minority Shareholder Appointment Rights . . . . . . . . . . . . . . . . . . . . 2. Minority Shareholder Decision and Action Rights . . . . . . . . . . . . . 3. Independent Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Equal Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48 48 49 49 52 57 59

6

Table of Contents 5. Constraints and Affiliation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Takeovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Delisting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60 63 65 65

C. The Factual Protection of Minority Shareholders in Vietnam, Thailand and Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Features of the Vietnamese Corporate Landscape . . . . . . . . . . . . . . a) Restructuring State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . b) General Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Economic Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Equitization of SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) The State Capital Investment Corporation . . . . . . . . . . . . . . . . . f) Ownership Structure and Means of Control . . . . . . . . . . . . . . . aa) Ownership Structure in Equitized Companies . . . . . . . . . . . bb) Ownership and Control in Private Shareholding Companies cc) Means of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Capital Market and Investors’ Base . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Internal Corporate Governance Practices . . . . . . . . . . . . . . . . . . . . . 4. Shareholder Activism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Gatekeepers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Public and Private Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Implications for the Legal Protection of Minority Shareholders . . . a) Minority Shareholder Appointment and Decision Rights . . . . . b) Independent Directors and Equal Treatment . . . . . . . . . . . . . . . c) Constraints and Affiliation Rights . . . . . . . . . . . . . . . . . . . . . . . . 9. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The State-Party-Business Nexus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Features of the Thai Corporate Sector . . . . . . . . . . . . . . . . . . . . . . . a) Thai Corporations and Ethnicity . . . . . . . . . . . . . . . . . . . . . . . . . b) Ownership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Control of Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Capital Market and Investors’ Base . . . . . . . . . . . . . . . . . . . . . . 4. Internal Corporate Governance Practices . . . . . . . . . . . . . . . . . . . . . 5. Shareholder Activism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Gatekeepers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Public and Private Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Implications for the Legal Protection of Minority Shareholders . .

69 69 69 71 73 76 78 84 87 87 93 95 96 102 107 110 112 114 121 121 124 125 125 127 127 135 135 138 147 151 154 161 168 173 177 180 187

Table of Contents

7

a) Minority Shareholder Appointment and Decision Rights . . . . . b) Independent Directors and Equal Treatment . . . . . . . . . . . . . . . . c) Constraints and Affiliation Rights . . . . . . . . . . . . . . . . . . . . . . . 10. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The State-Party-Business Nexus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Features of the Malaysian Corporate Sector . . . . . . . . . . . . . . . . . . . a) The State as Owner, Shareholder and Investor . . . . . . . . . . . . . . b) Ownership Structure and Means of Control . . . . . . . . . . . . . . . . 3. The Capital Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Internal Corporate Governance Practices . . . . . . . . . . . . . . . . . . . . . 5. Shareholders’ Activism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Gatekeepers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Public and Private Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Implications for the Legal Protection of Minority Shareholders . . a) Minority Shareholder Appointment and Decision Rights . . . . . . b) Independent Directors and Equal Treatment . . . . . . . . . . . . . . . . 9. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

187 188 191 193 196 196 210 210 214 220 226 231 235 237 243 243 244 247

D. Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The Case of Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Case of Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The Case of Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. General Conclusions: Monitoring as a Public Good . . . . . . . . . . . . . .

250 250 252 255 257

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288

List of Tables and Figures Table 1: Ownership Structure of Vietnamese Equitized Companies in 2001 . .

88

Table 2: Ownership Structure of Vietnamese Equitized Companies in 2004 . .

88

Table 3: Ownership Structure of Vietnamese Equitized Companies in 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

89

Table 4: Number of Vietnamese Joint Stock Companies 2000–2008 . . . . . . . .

94

Table 5: Capital of Vietnamese Joint Stock Companies in 2007 . . . . . . . . . . .

94

Table 6:

95

Number of Employees of Vietnamese Joint Stock Companies 2007 . .

Table 7: Distribution of 220 Thai Business Groups by Ethnicity and Generation, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Table 8: Cash-flow and Voting Rights in Thai Corporations in 2000 . . . . . . . 141 Table 9: Pyramidal Structures of Thai Corporations 1995–2000 . . . . . . . . . . . 142 Table 10: Cross-holdings of Thai Corporations 1995–2000 . . . . . . . . . . . . . . . . 143 Table 11: Ownership Structure of Thai Corporations in 1996 and 2000 . . . . . . 144 Table 12: Ownership Structure of Thai Corporations 1996, 2000 and 2006 . . . 145 Table 13: Cross-Shareholdings / Pyramidal Ownerships of Thai Corporations 2003–2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Table 14: Controlling Shareholders of Thai Corporations as Directors . . . . . . . 147 Table 15: Attributes of Directors on the Boards of 323 Thai Listed Companies, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Table 16: Shareholders as Top Managers of Thai Firms 1995–2000 . . . . . . . . . 149 Table 17: Board Memberships in Thai Firms 1995–2000 . . . . . . . . . . . . . . . . . . 149 Table 18: Role of CEOs and Board of Directors in Thai Corporations . . . . . . 150 Table 19: Market Value of Thai Listed SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Table 20: Stock Market Variables from 1975–2004 . . . . . . . . . . . . . . . . . . . . . . . 155 Table 21: Market Capitalization of Thai Listed Companies in Relation to GDP 2002–2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Table 22: Trading Characteristics by Type of Investor 2010 . . . . . . . . . . . . . . . 159 Table 23: Free Float of Thai Listed Corporations . . . . . . . . . . . . . . . . . . . . . . . . 160 Table 24: Perception of Thai Institutional Actors’ Role in Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

List of Tables and Figures

9

Table 25: Results of AGM Assessment Project on Thai Listed Corporations . 165 Table 26: Tasks for Better Corporate Governance in Thailand . . . . . . . . . . . . . 167 Table 27: Number of Thai Asset Management Companies and Funds 1992–2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Table 28: Net Asset Value of Thai Funds 2007–2009 . . . . . . . . . . . . . . . . . . . . . 171 Table 29: Transparency of Shareholding Structure of Thai Corporations 2003–2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Table 30: Problems Regarding Related-Party-Transactions of Thai Corporations 2003–2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 Table 31: Percentage of Thai Companies with “Conspicuous” Related-Party-Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Table 32: Malaysian Equity Held by Ethnicity . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Table 33: Shareholdings of Five Largest Shareholders in 731 KLSE Corporations in 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 Table 34: Ownership Concentration for 731 Listed Corporations in 1998 . . . . . 215 Table 35: Control in 238 Malaysian Companies in 1996 . . . . . . . . . . . . . . . . . . 216 Table 36: Concentration of Control and Company Size in Malaysian Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Table 37: Separation of Ownership and Control in Malaysian Corporations . . . 218 Table 38: Control of Malaysian Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 Table 39: Percentage Changes in Categories of Malaysian Account Holders . . 222 Table 40: Paid-Up Capital by Types of Investors (RM) . . . . . . . . . . . . . . . . . . . 222 Table 41: Substantial Shareholdings of Malaysian Key Domestic Institutional Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 Table 42: Independent Directors of 960 Malaysian Listed Companies as at December 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Figure 1: Market value of Thai SOEs 2002–2007 . . . . . . . . . . . . . . . . . . . . . . . . 152 Figure 2: Market Capitalization of SET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Figure 3: Holdings in Thai Equity by Local and Foreign Investors . . . . . . . . . . 157 Figure 4: Total (buy+sell) Trading Value (Billions of Baht) Classified by Type of Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

A. Theoretical and Methodological Framework I. Introduction The protection of minority shareholders has become a favorite subject of scholarly debate. The main reason is economic in nature: in an environment of weak protection, minority shareholders will hesitate to contribute to the funding of corporations, resulting in increases in the average cost of capital for corporations. This in turn will lessen the competitiveness of these corporations in comparison to corporations in jurisdictions with higher protection of minority shareholders. Furthermore, capital will flow from jurisdictions with weak protection to jurisdictions with stronger protection of minority shareholders. The debate on the protection of minority shareholders gained momentum after the Asian crisis in 1997 when international organizations like the World Bank called for better corporate governance in general and better protection of minority shareholders in particular.1 Johnson et al. found evidence that, rather than macroeconomic factors, “corporate governance in general, and the de facto protection of minority shareholder rights in particular, matters a great deal for the extent of exchange rate depreciation and stock market decline in 1997–98”2. The new awareness of the need for protection of minority shareholders was also reflected in a survey in December 1999 among portfolio investors in the major financial centers of Asia (excluding Japan), the U.S. and Europe, who ranked respect for minority shareholder rights as the second most important factor in assessing Southeast Asian equities.3 Asian countries responded to these increasing demands for better protection of minority shareholders by wide-ranging legal reforms that included the issuance of mandatory laws and regulations but also the drafting of voluntary codes of corporate governance. 1

See for example World Bank, East Asia: Recovery and Beyond (2000) 107–111. Johnson, Simon et al., Journal of Financial Economics 58 (2000) 141 (143). This argument is not undisputed. For other explanations, see for example Corsetti, Giancarlo et al., Japan and the World Economy 11 (1999) 305; Krugman, Paul, What happened to Asia? (1998); Radelet, Steven et al., Brookings Papers on Economic Activity 1 (1998) 1. 3 Freeman, Nick J., Foreign Portfolio Investors’ Approaches to Thailand’s Equity Market (2000) 3, 24. 2

12

A. Theoretical and Methodological Framework

However, the question is whether and to what extent in practice these legal reforms result in enhanced minority shareholders’ protection. The impact that ‘law on the books’ has in reality depends on a wide range of factors. Human behavior is not only shaped by formal rules, but also by informal rules. Furthermore, the extent to which formal and informal rules are implemented depends largely on their enforcement characteristics. These factors might be summed up by the term ‘institutions’.4 In order to shed some light on the protection of minority shareholders in Vietnam, Thailand and Malaysia, the thesis will evaluate the formal and informal rules in regard to minority shareholders’ protection and their enforcement characteristics in the three countries. To this end, the thesis will be divided into two parts. The first part will compare the law on the books, in other words, the formal rules that regulate the protection of minority shareholders, in the three jurisdictions. The second part will evaluate which informal rules and enforcement characteristics determine the protection of minority shareholders in each country and, finally, assess these factors and their impact. This comparison is based on the reasons that follow. The thesis assumes that in line with a worldwide trend of convergence in corporate law along Anglo-American concepts of corporate law, there is also a convergence of the formal rules regarding the protection of minority shareholders in these three countries. Given such a convergence of legal concepts, informal rules and enforcement characteristics largely determine the differences between the jurisdictions. A comparison of the different countries therefore highlights which informal rules and enforcement characteristics cause similar formal rules to have different impacts. It thereby exposes the importance of informal rules and enforcement characteristics. The choice of Vietnam, Thailand and Malaysia is based on two facts. First, the countries have started to rethink their formal rules roughly at the same point in time. Second, they have a totally different background inter alia in terms of different levels of economic development and completely different political systems. To start with, they have different political backgrounds ranging from a socialist to a democratic political system, and display different stages of capital market development and investors’ bases. The comparison between the three countries is therefore especially qualified to highlight the importance of the local context of legal rules aiming to protect minority shareholders. The most interesting point, however, and the 4 North, Douglass C., The American Economic Review 84 (1994) 359 (360). See also Kirchner, Christian, Comparative Law and Institutional Economics – Legal Transplants in Corporate Governance, in: Nobel, Peter / Gets, Marina (ed.), (2006) 201 (205) where institutions are defined as general rules together with the enforcement system.

II. Definition of Terms

13

main reason for the choice of these three jurisdictions is the fact that their jurisdictions have different legal origins: Malaysia belongs to the common law tradition, but also provides for sharia law. Thailand’s legal system is based on civil law, but influenced by the common law system, while Vietnam’s legal system is influenced by its socialist background and French civil law. A convergence along Anglo-American concepts of corporate law therefore highlights the difficulties in convergence and path dependencies. The objective of the thesis can therefore be summarized as illustrating the importance of context for the functioning of law, based on the example of a comparison of legal and factual protection of minority shareholders in Vietnam, Thailand and Malaysia.

II. Definition of Terms The thesis focuses solely on companies limited by shares. Other forms of associations including limited partnerships by shares are not considered. Private companies (or ‘privately held’ or ‘closed’ or ‘closely held’ companies) are also excluded from analysis. To the extent possible, the thesis will point out differences between unlisted and listed joint stock companies. Shareholders are the members of the company holding “a participation interest in its capital (equity holder), composed of relatively small units called shares”5. A starting point for the definition of minority shareholders is the differentiation from the majority shareholder. Perakis argues that “minority is a relational legal concept, whose definition needs the notion of majority”6. The definition of majority shareholder harbors its own problems. Majority is often defined by reference to the voting power or the capital prevalence. In regard to voting power at the shareholders’ meeting, majority is usually defined as the power to enact a resolution. The threshold to pass a resolution, however, depends on the kind of resolution and jurisdictions may even provide different thresholds to pass an ordinary resolution. In most jurisdictions, resolutions regarding important decisions require two-thirds or threefourths of votes whereas ordinary decisions require 50 percent of the votes although exceptions exist, such as the Vietnamese threshold of 65 percent to pass ordinary resolutions. However, the real percentage of voting power or capital prevalence that is necessary to pass a corporate resolution may differ significantly from the percentage stipulated in law. The Malaysian 5 Perakis, Evanghelos, Rights of Minority Shareholders General Report, in: Perakis, Evanghelos (ed.), (2004) 9 (16). 6 See the considerations in Perakis, Evanghelos, Rights of Minority Shareholders General Report, in: Perakis, Evanghelos (ed.), (2004) 9 (17).

14

A. Theoretical and Methodological Framework

Minority Shareholder Watchdog Group estimates that, on average, a stake of 20 percent is sufficient to control a corporation in Malaysia.7 Furthermore, majority voting power is not only exercised at the shareholders meeting, but also on the board of directors. Therefore, government-linked companies in Malaysia are inter alia defined as companies in which the Malaysian government has the ability to appoint board members.8 In fact, public corporations are often controlled by the board of directors, with the shareholders’ meeting held solely to approve decisions made by the board.9 Majority has therefore also to be defined as the shareholders who nominate board members, have inside information and are interested in influencing business affairs while minority shareholders’ only interest is financial.10 These definitions, however, do not take into account that minority and majority depend on contingency and may change over time. It is therefore preferable to define minority shareholders by addressing the special situation in which the minority is overruled by the majority. The thesis therefore relies on the approach of Falkenhausen who defines minority as follows: majority is whoever, in a specific situation, is able to control the corporation and its bodies; minority is whoever, in a specific situation, is not able to control the corporation and has to accept the measures of the majority.11 As one consequence, the terms majority shareholder and controlling shareholder will be used in an identical manner in the thesis. Finally, it is important to keep in mind that minority shareholders are not a homogeneous group but have different interests and risk aversions. Following a capital market perspective, Schiel divides shareholders into retail investors, speculative investors and strategic investors.12 The retail investor perceives the purchase of shares as investment and is only interested in receiving dividends.13 The speculative investor is interested in 7 Interview with a representative of the Malaysian Minority Shareholder Watchdog Group. 8 http: /  / www.pcg.gov.my / FAQ.asp. 9 Falkenhausen, Bernhard v., Verfassungsrechtliche Grenzen der Mehrheitsgesellschaft nach dem Recht der Kapitalgesellschaften (AG und GmbH) (1967) 21. 10 Schiel, Alexander, Aktionärsschutz zwischen Aktienrecht und Kapitalmarkt (2009) 135. 11 Falkenhausen, Bernhard v., Verfassungsrechtliche Grenzen der Mehrheitsgesellschaft nach dem Recht der Kapitalgesellschaften (AG und GmbH) (1967) 21. See also Hofmann, Christian, Der Minderheitsschutz im Gesellschaftsrecht (2011) 6 who elaborates the concept. 12 Schiel, Alexander, Aktionärsschutz zwischen Aktienrecht und Kapitalmarkt (2009) 129. 13 Schiel, Alexander, Aktionärsschutz zwischen Aktienrecht und Kapitalmarkt (2009) 129.

III. Methodological Approach

15

gains by purchasing and selling shares and profiting from the movement in share prices.14 The strategic investor tries to influence the operation of the corporation.15

III. Methodological Approach 1. Functional Comparative Law The objective of the thesis is to present the legal framework for the protection of minority shareholders as a first step and then to compare the impact of the legal rules aiming to protect minority shareholders in the different local contexts as a second step. The goal is to highlight the difference between the ‘law on the books’ and the ‘law in action’. The most common approach for comparative legal studies is the so-called ‘functional approach’. The starting points of the functional approach are the questions ‘which function does [a rule or institution] serve in present society’ and ‘does it serve this function well or would another rule serve better?’16. Although there is dispute over the exact meaning of functional comparative legal analysis, Michaels enumerates the following elements as those that functionalist comparatists agree upon. First, functionalist comparative law focuses on the effects of rules. Second, it is based on the theory that “facts must be understood in the light of their functional relation to society”17. Third, legal institutions “are comparable if they are functionally equivalent, if they fulfill similar functions in different legal systems”18. Comparatists using the functional approach therefore have to analyze the function of rules in society to obtain insights that might not be obtained by a dogmatic analysis.19 The approach is both a positive and a normative social science. On the one hand, it is used to analyze the functions of legal norms. On the other hand, the approach might be applied in order to determine so-called ‘best’ solutions to a given problem. 14 Schiel, Alexander, Aktionärsschutz zwischen Aktienrecht und Kapitalmarkt (2009) 129. 15 Schiel, Alexander, Aktionärsschutz zwischen Aktienrecht und Kapitalmarkt (2009) 129. 16 Rheinstein, Max, The University of Chicago Law Review 5 (1938) 615 (617, 618). 17 Michaels, Ralf, The Functional Method of Comparative Law, in: Reimann, Mathias / Zimmermann, Reinhard (ed.), (2006) 339 (342). 18 Michaels, Ralf, The Functional Method of Comparative Law, in: Reimann, Mathias / Zimmermann, Reinhard (ed.), (2006) 339 (342). 19 Rheinstein, Max, Einführung in die Rechtsvergleichung (1974) 15.

16

A. Theoretical and Methodological Framework

However, as a positive social science, functional comparative law faces the problem that it does not provide a methodology for the analysis of the impact of legal rules. The question is how to compare legal rules embedded in different political, economic, cultural and social contexts. A further difficulty faced by this approach is the fact that it does not deal with non-intended side effects as legal rules are compared in the light of the question of whether and how they address the problem under review.20 To give an example of these problems: two completely different rules may serve the same purpose in their respective jurisdictions because the different contexts enable the respective norms to fulfill the same functions.21 On the other hand, similar rules in different jurisdictions may have different impacts due to the different context, varying from different non-intended side effects to a wholly different functioning. 2. New Institutional Economics In order to analyze the protection of minority shareholders in the legal, economic, political, cultural and social context in Vietnam, Thailand and Malaysia, the thesis will rely on the methodological approach of new institutional economics.22 New institutional economics is a term for a variety of modern economic studies that are interested in the analysis of institutions and how they affect economic performance. The approach can be divided into two main branches, the transaction cost economics of Oliver Williamson and the new institutional economics of history of Douglass North.23 Both were developed after Coase24 and differ on the question of whether institutions are designed to reduce transaction costs and whether only efficient institutions survive.25 As functional comparative legal analysis, new 20 Kirchner, Christian, An Institutional Economics Approach for Comparative Law (2008). 21 Kirchner, Christian, Comparative Law and Institutional Economics – Legal Transplants in Corporate Governance, in: Nobel, Peter / Gets, Marina (ed.), (2006) 201 (202). 22 For an overview on New Institutional Economics, see Furubotn, Erik G. / Richter, Rudolf, Institutions and Economic Theory (2005) and Ménard, Claude / Shirley, Mary M., Handbook of New Institutional Economics (2005). For an historic overview, see Richter, Rudolf, European Business Organization Law Review 6 (2005) 161. 23 Richter, Rudolf, European Business Organization Law Review 6 (2005) 161 (173). 24 Coase, Ronald H., Economica 4 (1937) 405 and Coase, Ronald H., The Journal of Law and Economics 3 (1960) 1. 25 Ensminger, Jean, Making a Market (1992) 21. See also Richter, Rudolf, European Business Organization Law Review 6 (2005) 161 (173–174).

III. Methodological Approach

17

institutional economics is a positive as well as a normative social science. In its positive version, new institutional economics reviews the behavior of individuals under given conditions. In its normative version, it asks how institutions should be designed in order to give incentives to individuals to strive for a desired result. New institutional economics is based on the concepts and hypotheses that follow. The starting point for every analysis based on new institutional economics is the concept of methodological individualism that regards social phenomena as the result of individual decisions and focuses therefore on individuals instead of organizations or the collective.26 As individuals have different ideas, needs and aims, they decide and act according to their preferences.27 Preferences include the realization of material or immaterial benefits but may also be based on ideas about fairness and justice. To explain social phenomena it is therefore necessary to analyze the perspective and the behavior of an individual. However, every individual acts within the limits of an organization, for example, a state or a firm. As resources are limited, not all individuals may be able to realize their preferences, which results in a conflict of interest between the different individuals. Decisions of organizations are always the result of the interaction of many individuals with different preferences. Furthermore, new institutional economics assumes that individuals seek to realize their own subjective interests within the limits of the institutional structure (concept of the ‘maximand’).28 Every choice of decision makers, be they managers, bureaucrats, politicians or any other individual, will follow this pattern. In order to pursue their preferences, interests and goals, individual decision makers may also act in an opportunistic manner.29 Opportunistic behavior is related to the concept of transaction costs, information asymmetry and bounded rationality as the contract party who has more and better information may be tempted to take advantage of this fact.30 Transaction costs are another core concept of new institutional economics. Ronald Coase pointed out that the neoclassical assumption of efficient markets is based on the absence of transaction costs.31 Transaction costs are 26

Voigt, Stefan, Institutionenökonomik (2002) 28. Furubotn, Erik G. / Richter, Rudolf, Institutions and Economic Theory (2005) 3; Kirchner, Christian, Ökonomische Theorie des Rechts (1997) 18–20. 28 Furubotn, Erik G. / Richter, Rudolf, Institutions and Economic Theory (2005) 3. 29 However, the concept of the maximand does not imply that individuals generally act egoistically as subjective interests might include acting altruistically, see Kirchner, Christian, Ökonomische Theorie des Rechts (1997) 13. 30 On opportunistic behaviour, see Williamson, Oliver E., Markets and Hierarchies: Analysis and Antitrust Implications (1975) 26. 31 Coase, Ronald H., The Journal of Law and Economics 3 (1960) 1. 27

18

A. Theoretical and Methodological Framework

defined as the “costs of running the economic system”32. The term ‘transaction’ may be understood as the transfer of a good or service across a technologically separable interface.33 Transaction costs can be divided into ex ante and ex post types.34 They include search and information costs, bargaining and decision costs, policing and enforcement costs.35 More precisely, individuals who transact have to spend “contact costs (search for information), contracting costs (negotiation, formulation of contract), monitoring costs (checking of quality, quantity, prices, deadlines, secrecy), and adaptation costs (changes during the validity of agreement)”36. Institutions determine how costly it is for individuals to transact.37 Another important concept of new institutional economics is ‘bounded rationality’. The assumption of bounded rationality is the main difference from neoclassical economics that is based on the assumption of perfect rationality.38 While neoclassical economics assumes that individuals have “the ability to foresee everything that might happen and to evaluate and optimally choose among available courses of action, all in the blink of an eye and at no cost”39, contemporary new institutional economics highlights the imperfect rationality of individual decision makers. Simon introduced the term bounded rationality40 and stressed the fact that rationality faces internal and external con32 Arrow, Kenneth J., The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocation (1969) 1. For an overview of transaction costs theory see also Coase, Ronald H., Economica 4 (1937) 405; Coase, Ronald H., The Journal of Law and Economics 3 (1960) 1 and Coase, Ronald H., The firm, the market, and the law (1988) as well as Williamson, Oliver E., Transaction Cost Economics, in: Ménard, Claude / Shirley, Mary M. (ed.), (2005) 41. 33 Williamson, Oliver E., The Economic Institutions of Capitalism (1985) 1. 34 According to Williamson, Oliver E., The Economic Institutions of Capitalism (1985) 20, ex-ante transactions costs include the “costs of drafting, negotiating, and safeguarding an agreement”. Ex-post costs include “the maladaptation costs incurred when transactions drift out of alignment, the haggling costs incurred if bilateral efforts are made to correct ex-post misalignments, the setup and running costs associated with the governance structures to which disputes are referred and the bonding costs of effecting secure commitments”. 35 Dahlman, Carl C., The Journal of Law and Economics 22 (1979) 141 (148). 36 Kirchner, Christian / Picot, Arnold, Zeitschrift für die gesamte Staatswissenschaft / Journal of Institutional and Theoretical Economics 143 (1987) 62 (64). See also Voigt, Stefan, Institutionenökonomik (2002) 31. 37 North, Douglass C., Transaction Costs, Institutions and Economic Performance (1992). 38 Bounded rationality has become an issue of behavioral economics, a new subdiscipline of economics, see Kahneman, Daniel, Journal of Institutional and Theoretical Economics (JITE) 150 (1994) 18, Kirchner, Christian, Journal of Institutional and Theoretical Economics (JITE) 150 (1994) 37, Kahneman, Daniel / Tversky, Amos, Econometrica 47 (1979) 263. 39 Kreps, David M., A Course in Microeconomic Theory (1990) 745.

IV. The Conflict Between Majority and Minority Shareholders

19

straints.41 The precise meaning of the term is still open to question. As a starting point, in the light of transaction costs, it has to be assumed that individual decision makers are not completely informed because it would either be too expensive or even impossible for individuals to gather all necessary information.42 Furthermore, individuals have different abilities to understand available information and to make use of them. 40

IV. The Conflict Between Majority and Minority Shareholders 1. The Principal-Agent Approach The existing literature on the protection of minority shareholders against abusive behavior by majority shareholders often addresses the potential conflict between minority and majority shareholders by the ‘principal-agent’ approach.43 However, several reasons work against relying on this approach in order to address the problem of expropriation of minority shareholders by majority shareholders. First, the principal-agent approach assumes that the principal delegates decision-making authority to the agent. Accordingly, Jensen / Meckling define the agency relationship as a “contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent”44.

This is the case in the relationship between shareholders and managers, but not between minority and majority shareholders. In corporations, shareholders delegate some of their decision-making authority to managers. As a consequence, in widely held corporations with diffused ownership, shareholders face the problem of ensuring that managers act in the interest of the principals rather than in their own interests. As managers generally have better information on the corporation than shareholders, shareholders face the difficulty of assessing the performance of managers and determining, for example, whether disappointing gains result from underperforming managers or exogenous shocks.45 As a result, manag40

Simon, Herbert A., Models of Man (1957) 196–278. Simon, Herbert A., The Quarterly Journal of Economics 69 (1955) 99 (101). 42 Furubotn, Erik G. / Richter, Rudolf, Institutions and Economic Theory (2005) 4. 43 Probably the most prominent example is Armour, John et al., Agency Problems and Legal Strategies, in: Kraakman, Reinier H. et al. (ed.), (2009) 35 (36). 44 Jensen, Michael C. / Meckling, William H., Journal of Financial Economics 3 (1976) 305 (308). 45 Voigt, Stefan, Institutionenökonomik (2002) 104. 41

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A. Theoretical and Methodological Framework

ers have incentives to act opportunistically. Shareholders’ incentives to monitor the management are low because, on the one hand, they have to spend costs in order to do so while, on the other hand, they only benefit from the monitoring to a low extent. Incentives are further diminished by the fact that other shareholders who are not prepared to monitor the management benefit from the shareholders who do, and therefore have incentives to act as free riders. The problems of widely held corporations differ from those of corporations with a controlling shareholder. As controlling shareholders enjoy a large portion of the cash-flow rights, they have incentives to monitor the management and to prevent managers from exploiting the firm at the expense of shareholders. However, controlling shareholders usually have better inside information than minority shareholders. They have therefore incentives to act opportunistically towards minority shareholders. Nevertheless, it would be wrong to categorize this potential conflict between majority and minority shareholders as a principal-agent conflict because minority shareholders do not delegate decision-making authority to majority shareholders. This point is also reflected in the fact that corporate law jurisdictions do not mandate majority shareholders to realize the best interests of minority shareholders.46 The second objection to relying on the principal-agent-approach is of a more general nature. The principal-agent approach seeks to determine incentive and monitoring structures that ensure that the agent realizes the interests of the principal. The dilemma of this approach is that the informational edge of the agent is a precondition of the model for the division of tasks between principal and agent.47 Approaches that aim to determine the optimal incentive and monitoring structures risk increasing the costs and negating the benefits of the division of tasks.48 In other words, the principalagent approach may result in narrowing the angle of view too much and therefore overlook the costs of the monitoring and incentive structures and neglect the advantages of assigning duties to an agent.49 Monitoring measures are meaningless when the costs outweigh the advantages.50 To give an 46 Other authors therefore speak of a ‘principal-principal’-conflict, see for example Young, Michael N. et al., Journal of Management Studies 45 (2008) 196. 47 Kirchner, Christian, Corporate Governance in der Europäischen Union (2008) 4. 48 Kirchner, Christian, Corporate Governance in der Europäischen Union (2008) 4. 49 For an illustration of the advantages of the approach of incomplete contracts in analyzing corporate governance compared to the principal-agent-approach, see Kirchner, Christian, ORDO – Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft 62 (2011) 321 (326–328). 50 See Erlei, Mathias et al., Neue Institutionenökonomik (2007) 84 on monitoring costs and firm value.

IV. The Conflict Between Majority and Minority Shareholders

21

example: an analysis on the basis of the principal-agent approach should conclude that dual class shares as well as pyramidal and cross-holding structures are detrimental to the protection of minority shareholders as such structures result in a wedge of ownership and control rights and therefore raise incentives for majority shareholders to extract private benefits. However, such structures also have advantages such as efficiency gains that raise firm value and are therefore also beneficial for minority shareholders.51 2. Incomplete Contracts, Information Asymmetry and Opportunism For the above-mentioned reasons, the thesis suggests not relying on the principal-agent approach in order to address the potential conflict between majority and minority shareholders but to emphasize the contractual aspect of the relationship between minority and majority shareholders. The assumptions of new institutional economics outlined before have important implications for long-term contractual relationships. When individuals agree to establish a joint stock company, they have to negotiate the document that will regulate their future relationship. However, on the one hand, due to bounded rationality, the parties are not able to foresee all the eventualities and contingencies that may arise during their long-term relationship. On the other hand, the parties would have to dedicate high transaction costs in order to draft a comprehensive contract. A contract must necessarily be incomplete.52 Furthermore, the parties would have to renegotiate in the case of any new information.53 The parties therefore have to limit the regulation of their relationship to guidelines for the future solution of potential conflicts. In the words of Hart, “governance structure can be seen as a mechanism for making decisions that have not been specified in the initial contract. More precisely, governance structure allocates residual rights of control over the firm’s nonhuman assets”54.

Nevertheless, even in the face of governance structures, minority shareholders face several problems. Majority shareholders will benefit from information asymmetry as they are typically represented on the board and 51 For a review of the literature on the potential gains of pyramidal structures, see Morck, Randall et al., Corporate Governance, Economic Entrenchment and Growth (2004) 17–18. 52 The theory of incomplete contracts was first developed by Oliver Hart. See inter alia Hart, Oliver / Moore, John, Econometrica 56 (1988) 755 and Hart, Oliver /  Moore, John, Journal of Political Economy 98 (1990) 1119. 53 Hart, Oliver, The Economic Journal 105 (1995) 678 (680). 54 Hart, Oliver, The Economic Journal 105 (1995) 678 (680).

22

A. Theoretical and Methodological Framework

have access to inside information. The information asymmetry may result in ex-post opportunism by majority shareholders seizing the opportunity to extract private benefits from the corporation. The difference between the principal-agent approach and the incompletecontracts approach may seem to be marginal. However, an approach that focuses more on incomplete contracts may help to understand why legal orders choose not to rely on certain strategies that in theory best serve the protection of minority shareholders. Nevertheless, the principal-agent-approach is useful in order to double-check the hypotheses made on the basis of new institutional economics focusing on incomplete contracts and opportunistic behavior. In addition, the principal-agent approach is especially useful for analyzing problems within shareholder structures. Principal-agent problems in regard to shareholding companies may occur on a second level. Shareholders of corporations often display an inner structure that raises a potential principal-agency-conflict. Institutional investors who are principals of the managers who manage the corporations are at the same time agents for their beneficial members, for example, for members of retirement funds. When the state is a shareholder, state ownership rights are exercised by state authorities, which act as principals and agents at the same time. 3. Private Benefits of Control The fact that majority shareholders have incentives to extract private benefits raises the question of a more precise definition of such benefits. Coffee defines private benefits as “all of the ways in which those in control of a corporation can siphon off benefits to themselves that are not shared with the other shareholders including through (1) above-market salaries, (2) unfair self-dealing transactions with the corporation, (3) insider trading, or (4) the issuance of shares to themselves at dilutive prices”55.

Ehrhardt / Nowak state that private benefits include pecuniary as well as non-pecuniary benefits.56 Johnson et al. term the extraction of pecuniary benefits as ‘tunneling’ that can come either in the form of self-dealing transactions (asset sales and transfer pricing, excessive executive compensation, loan guarantees, expropriation of corporate opportunities), or of transactions without asset transfers (dilutive share issues, insider trading, creep55 Coffee, John C., University of Pennsylvania Law Review 149 (2000–2001) 2151 (2157–2158). 56 Ehrhardt, Olaf / Nowak, Eric, Private Benefits and Minority Shareholder Expropriation (2001) 5.

V. The Legal Protection of Minority Shareholders

23

ing acquisitions, minority freeze-out or other minority discriminatory transactions).57 Jensen and Meckling emphasize “the utility generated by various non-pecuniary aspects of (…) entrepreneurial activities such as the physical appointments of the office, the attractiveness of the office staff, the level of employee discipline, the kind and amount of charitable contributions, personal relations (‘friendship’, ‘respect’) with employees, a larger than optimal computer to play with, or purchase of production inputs from friends”58.

Demsetz and Lehn (1985) call the latter aspects ‘amenity potential’59. They are equally important as controlling shareholders may take corporate decisions that aim at achieving, preserving or maximizing such non-pecuniary benefits instead of maximizing firm value.

V. The Legal Protection of Minority Shareholders 1. Convergence Towards the Anglo-American Model of Corporate Law? Traditionally, corporate law systems have been divided into two models. The market-based, shareholder-oriented system that prevails in the UK and U.S. is characterized (at least in part) by dispersed equity, while the rulebased, stakeholder-oriented system that prevails for example in Continental Europe is characterized by concentrated ownership.60 Globalization and increasing competition have resulted in a debate over whether one system is more efficient than the other. Hansmann / Kraakman argued that, for a number of reasons, corporate systems all over the world will finally converge towards the Anglo-American model as there is already a high degree of convergence between the different legal systems.61 However, empirical results do not definitely give evidence of the superiority of one system over the other.62 Furthermore, path dependency is likely to prevent convergence 57 Johnson, Simon et al., American Economic Review Papers & Proceedings (2000) 22 (22, 23). 58 Jensen, Michael C. / Meckling, William H., Journal of Financial Economics 3 (1976) 305 (312). 59 Demsetz, Harold / Lehn, Kenneth, Journal of Political Economy 93 (1985) 1155. 60 A further model is the managerialist model associated with the U.S. during the 1950s and 1960s. See also Kirchner, Christian, Managerialismus, in: Schreyögg, Georg / Werder, Axel von (ed.), (2004) 806. 61 Hansmann, Henry / Kraakman, Reinier H., The End of History for Corporate Law, in: Gordon, Jeffery / Roe, Mark (ed.), (2010) 33. 62 For an overview of the debate and a review of the empirical literature, see Denis, Diane K. / McConnell, John J., The Journal of Financial and Quantitative Analysis 38 (2003) 1 (26–29) and Becht, Marco et al., Corporate Governance and Control (2005 [Updated]).

24

A. Theoretical and Methodological Framework

because the institutions that have evolved so far are difficult to dismantle and to transform.63 In regard to the protection of shareholders, La Porta et al. found evidence that common law systems offer better legal protection for minority shareholders and therefore have deeper capital markets and less concentrated ownership.64 However, when the accuracy of the results were doublechecked by Spamann, he found that accurate index values are neither distributed with significant differences between common and civil law countries nor correlated with stock market size and ownership dispersion.65 The study of La Porta also does not examine the degree to which legal rules aiming to protect minority shareholders are in fact implemented. Interestingly, Enriques et al. found only a weak correlation between formal law and minority shareholders’ protection in France, Germany, Italy, Japan, the UK and U.S.66 This result indicates that in order to determine the degree of protection of minority shareholders, an in-depth study is necessary, taking into account the various legal, economic, political, cultural and social conditions of any given jurisdiction. 2. The Legal Devices Protecting Minority Shareholders The aim of the thesis is to compare the impact of the legal rules aiming to protect minority shareholders in Vietnam, Thailand and Malaysia by examining their respective political, economic, cultural and social conditions. However, as a first step, it has to be determined which legal devices, at least in theory, contribute to the protection of minority shareholders. Minority rights in the narrow sense are rights that are exercised by minority shareholders, the so-called formal minority shareholder rights. They may, for example, be granted to single shareholders, to shareholders or groups of shareholders holding a certain minimum percentage of the capital or shares of a minimum nominal value.67 However, a wide range of other rights that are granted to all shareholders also contribute to protecting minority shareholders, for example the right to 63

Bebchuk, Lucian A. / Roe, Mark J., Stanford Law Review 52 (1999) 127. La Porta, Rafael et al., Journal of Political Economy 106 (1998) 1113. See also La Porta, Rafael et al., Journal of Financial Economics 58 (2000) 3. 65 Spamann, Holger, ‘Law and Finance’ Revisited (2008). 66 Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (105–110). 67 Perakis, Evanghelos, Rights of Minority Shareholders General Report, in: Perakis, Evanghelos (ed.), (2004) 9 (20). 64

V. The Legal Protection of Minority Shareholders

25

receive a mandatory dividend. Legal experts who include such individual rights usually limit their scope by requiring that these rights have an antidirector or anti-majority component. In their influential quantitative crosscountry study, La Porta et al. measured investor protection by comparing one-share-one-vote rules, an anti-director right index and the right to a mandatory dividend.68 The anti-director index asks whether proxy by mail is allowed, shares are not blocked before a meeting, cumulative voting / proportional representation is possible, a legal mechanism against perceived oppression by directors exists, a pre-emptive right to new issues is granted to shareholders and what percentage of share capital is needed to call an extraordinary shareholders’ meeting.69 The compilation of national reports on the rights of minority shareholders edited by Perakis also includes those rights that have an anti-director or anti-majority component.70 A comprehensive study of minority shareholders’ protection, however, would also have to include such legal devices that are not designed to protect minority shareholders but nevertheless indirectly contribute to their protection. “That the entire company law may be relevant to minority protection is beyond any doubt. As a matter of fact, the rules regarding the structure, the operation and the control of a limited company constitute a full set of checks and balances that, directly or indirectly, can protect minority”71.

However, it would go far beyond the scope of a thesis to consider all the individual rights granted to shareholders as a class that have an anti-director or anti-majority component and a fortiori such legal devices as indirectly contribute to the protection of minority shareholders. Furthermore, the main focus of the thesis is not to present a comprehensive picture of the legal protection of minority shareholders in Vietnam, Thailand and Malaysia but to demonstrate how a different context affects the impact of certain rules. 68

La Porta, Rafael et al., Journal of Political Economy 106 (1998) 1113. La Porta, Rafael et al., Journal of Political Economy 106 (1998) 1113 (1127– 1128). 70 Perakis, Evanghelos, Rights of Minority Shareholders General Report, in: Perakis, Evanghelos (ed.), (2004) 9 (23). The compilation includes the general legal concept (including the relationship between other corporate players and minority shareholders), special rights protecting minority shareholders including information rights, special audit, rights concerning the conduct of assemblies, right to cause the company to sue its directors, right to receive a minimum dividend, pre-emptive rights in respect of share capital increases, right to apply for dissolution, rights relating to the listing of the company’s shares, and emergency action as well as general remedial rights like derivative action and the right to challenge the validity of assembly resolutions. 71 Perakis, Evanghelos, Rights of Minority Shareholders General Report, in: Perakis, Evanghelos (ed.), (2004) 9 (24). 69

26

A. Theoretical and Methodological Framework

The thesis will therefore largely follow the approach of Kraakman et al. and focus on legal devices that specifically aim to protect minority shareholders against opportunistic behavior by majority shareholders. Although Kraakman et al. base their analysis on the principal-agent approach which has been rejected above, the legal devices filtered out by them are those that aim to prevent majority shareholders from taking advantage of information asymmetry and behaving in an opportunistic manner by extracting private benefits. The fact that legal devices protecting shareholders as a class are not included in the thesis has one consequence. Majority shareholders often sit on the board of directors or are employed by the corporation as managers. This allows them to extract benefits in their function as board member or manager, for example by granting themselves above-market salaries. This issue, however, will be excluded from the thesis and may be justified by the fact that the primary goal of the thesis is not to present a comprehensive picture of minority shareholder legal protection, but to analyze the interplay of formal and informal rules. To sum up, the thesis will focus on the points that follow. Minority shareholder appointment rights are important because the board of directors is an important – at least formal – decision-making body of the corporation. By placing nominee directors on the board, minority shareholders have access to inside information that is especially difficult to gather for outsiders. Therefore, nominee directors contribute to reducing information asymmetry, enabling minority shareholders to react to unforeseen or unregulated situations. Minority shareholder appointment rights may be adjusted by empowering minority shareholders or by limiting the power of controlling shareholders, for example by imposing voting caps.72 Because control is often achieved by dual class shares, circular shareholders or pyramidal ownership or a combination of these devices, regulating the use of such devices is also a way to constrain the voting power of controlling shareholders. Minority shareholder decision rights are another, important monitoring tool. The law may grant minority shareholders enhanced direct decision rights or dilute the decision rights of controlling shareholders.73 The first includes entrusting minority shareholders or a group of such shareholders with the power to make a corporate decision, for example, suing directors 72 Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (90). 73 Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89.

V. The Legal Protection of Minority Shareholders

27

on behalf of the corporation (derivative suit).74 Furthermore, jurisdictions may provide majority-of-the-minority approval requirements for fundamental transactions between controlling shareholders and their corporations and combine this device with supermajority approval requirements for fundamental corporate decisions.75 The lawmakers may also rely on the incentive strategy, including trusteeship in the form of independent directors and equal treatment.76 As independent directors do not benefit personally from abusive behavior by controlling shareholders, the market expects them to act more strongly on the basis of reputational concerns and conscience.77 The equal treatment of shareholders involves such sensitive points as dividends, share repurchases and share issues. Other devices to protect minority shareholders are legal constraints and affiliation and exit rights. Legal constraints usually include standards, such as the duty of loyalty, the oppression standard and abuse of majority voting.78 Mandatory disclosure as part of affiliation rights that reveals controlling shareholder structures and conflicted transactions may contribute to allowing the capital market to price in risks of expropriation by controlling shareholders.79 Another important element in the concept of minority shareholders’ protection is delisting, because it significantly affects the position of minority shareholders.80 Usually, information asymmetry between insiders and minority shareholders is balanced by the fact that minority shareholders can sell their shares when share prices drop.81 But in the case of delisting, minority shareholders do not only face difficulties in exiting the corporation after the delisting but also lose the protection offered by the capital market and the 74 Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (92, 93). 75 Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (93). 76 Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (94). 77 Enriques, Luca et al., The Interests of Shareholders as a Class, in: Kraakman, Reinier H. et al. (ed.), (2009) 55 (43). 78 Enriques, Luca et al., The Interests of Shareholders as a Class, in: Kraakman, Reinier H. et al. (ed.), (2009) 55 (99). 79 Enriques, Luca et al., The Interests of Shareholders as a Class, in: Kraakman, Reinier H. et al. (ed.), (2009) 55 (99). 80 See Heine, Joachim, Anleger- und Minderheitenschutz beim Börsenaustritt und Voluntary Delisting (2003) 103–143 on the reasons for which minority shareholders deserve protection in regard to delisting. 81 Hofmann, Christian, Der Minderheitsschutz im Gesellschaftsrecht (2011) 561.

28

A. Theoretical and Methodological Framework

securities commission. Furthermore, delisting removes various duties in regard to insider trading or ad-hoc information from the corporation.82 Controlling shareholders, however, may benefit from the cost savings. They usually have access to inside information and are able to sell shares directly to interested investors. Therefore, they would not be affected by losing the option of selling shares on the stock market.83 Voluntary delisting therefore results in a conflict between majority and minority shareholders. Lastly, takeover rules will be discussed. Controlling shareholders have the right to sell their stake like every other shareholder. Nevertheless, takeovers pose a potential threat to minority shareholders because “the acquirer, even if it does not intend to loot the company, may embark upon a different and less successful strategy; may be less respectful of the minority’s interests and rights; or may just simply use the acquired control systematically for implementing a group strategy at the expense of the new group member company and its minority shareholders”84.

In such a situation, minority shareholders can be protected by mandatory exit rights based on a public offer on the same conditions that the acquirer pays for the controlling stake. This, however, may prevent controlling shareholders from selling their stake because the acquirer is not able to offer the controlling shareholder a price that reflects the private benefits of control without overpaying the share capital as a whole.85

VI. The Factual Protection of Minority Shareholders Many factors affect the protection of minority shareholders. This chapter presents some, but not all the theories and empirical evidence that are especially important for a full understanding of the thesis. 1. Incentives for the Expropriation of Minority Shareholders Incentives for controlling shareholders to extract private benefits increase in the case of a wedge between control rights (voting rights) and ownership rights (dividend rights). Dual class shares, pyramidal structures or crossholdings enable shareholders who hold less than a majority of cash-flow rights to maintain control of the corporation.86 La Porta et al. define a py82

Hofmann, Christian, Der Minderheitsschutz im Gesellschaftsrecht (2011) 561. Hofmann, Christian, Der Minderheitsschutz im Gesellschaftsrecht (2011) 562. 84 Davies, Paul / Hopt, Klaus, Control Transactions, in: Kraakman, Reinier H. et al. (ed.), (2009) 225 (258). 85 Davies, Paul / Hopt, Klaus, Control Transactions, in: Kraakman, Reinier H. et al. (ed.), (2009) 225 (259). 83

VI. The Factual Protection of Minority Shareholders

29

ramidal ownership structure as an entity in which an ultimate owner has control of another company via publicly traded intermediate companies, that is, whose ownership structure displays a top-down chain of control.87 Crossholding structures are structures in which corporations own blocks of each others’ stocks, allowing the insiders who vote these blocks to exercise control beyond their actual ownership.88 The control exercised by these structures increases when shareholders’ participation in corporate votes is low.89 Furthermore, families can achieve even greater control by appointing family members as senior executives or board members in firms throughout the pyramidal structure.90 86

Bebchuk argues that controlling owners will use a structure of pyramids, cross-shareholdings and dual class shares when the private benefits of control are large.91 Private benefits, in turn, are said to be large in countries with lax legal systems and enforcement mechanisms. Empirical research seems to be in line with the assumption that expropriation of minority shareholders does occur in business groups whose corporations are linked by pyramidal structures.92 Bunkanwanicha / Wiwattanakantang argue that families use pyramidal structures to insulate the group from negative returns and shocks by using firms lower in the pyramid to undertake risky investments and firms higher in the pyramidal structure to undertake safer investments.93 Lower firms can be sold without losing control over the other pyramid firms.94 Another aspect of such structures may be that they increase 86 Bebchuk, Lucian A. et al., Stock Pyramids, Cross-Ownership and Dual Class Equity, in: Morck, Randall (ed.), (2000) 445. 87 La Porta, Rafael et al., The Journal of Finance 54 (1999) 471 (477 and 480). 88 Morck, Randall et al., Corporate Governance, Economic Entrenchment and Growth (2004) 3. 89 Morck, Randall et al., Corporate Governance, Economic Entrenchment and Growth (2004) 10. 90 Morck, Randall et al., Corporate Governance, Economic Entrenchment and Growth (2004) 12. 91 Bebchuk, Lucian A., A rent-protection theory of corporate ownership and control (1999). 92 See Perotti, Enrico C. / Gelfer, Stanislav, European Economic Review 45 (2001) 1601 for Russian firms; Bertrand, Marianne et al., The Quarterly Journal of Economics 117 (2002) 121 for Indian firms; Bae, Kee-Hong et al., The Journal of Finance 57 (2002) 2695 for Koran Chaebols; Baek, Jae-Seung et al., The Journal of Finance 61 (2005) 2415 for Korean Chaebols; Bany Ariffin, Amin Noordin et al., Journal of International Economic Review 3 (2010) 37 for Indonesian firms. 93 Bunkanwanicha, Pramuan / Wiwattanakantang, Yupana, Allocating Risk Across Pyramidal Tiers: Evidence from Thai Business Groups (2008). 94 Bunkanwanicha, Pramuan / Wiwattanakantang, Yupana, Allocating Risk Across Pyramidal Tiers: Evidence from Thai Business Groups (2008).

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A. Theoretical and Methodological Framework

the political influence of controlling owners. Morck et al. argue that “political influence is plausibly related to what one controls, rather than what one owns”95. This in turns helps corporate owners to maintain their corporate power.96 In theory, large blockholders should have incentives to constrain the controlling shareholders’ efforts to extract private benefits. Empirical evidence points in this direction.97 However, the type of large blockholder may also be important. Jara Bertin et al. found that the firm value of family-owned firms decreases when the second largest shareholder is a family, and increases when the second largest shareholder is an institutional investor.98 Maury / Pajuste found that, in family-controlled firms, a higher voting stake held by another family reduces firm value whereas a higher stake held by a non-family owner increases firm value.99 2. Constraints on the Expropriation of Minority Shareholders a) Shareholder Activism An important question in the protection of minority shareholders is to what extent minority shareholders themselves ensure respect for their rights. Individual shareholders who want to make use of their rights face the problem of collective action and free riding. As a first step, shareholders have to invest resources (time and money) to understand their rights. When they want to make use of their rights, they face several challenges. As they are not insiders of the corporation, there is an asymmetry of information, meaning that shareholders may lack the necessary information in order to become active. They also have to invest substantial resources to enforce their rights. This includes the problem of persuading other minority shareholders to participate. However, even if they manage to enforce their rights, they only benefit from the results to an extremely low extent. In addition, they face the problem that other shareholders benefit from their action as free riders, 95 Morck, Randall et al., Corporate Governance, Economic Entrenchment and Growth (2004) 37–55. 96 Morck, Randall et al., Corporate Governance, Economic Entrenchment and Growth (2004) 37–55. 97 Jara Bertin, Mauricio Alejandro et al., Corporate Governance: An International Review 16 (2008) 146; Maury, Benjamin / Pajuste, Anete, Journal of Banking and Finance 29 (2005) 1813. 98 Jara Bertin, Mauricio Alejandro et al., Corporate Governance: An International Review 16 (2008) 146. 99 Maury, Benjamin / Pajuste, Anete, Journal of Banking and Finance 29 (2005) 1813 (1828, 1829).

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which becomes a disincentive for minority shareholders to make the effort to enforce their rights. It can therefore be assumed that individual shareholders do not make full use of their rights and that a stock market dominated largely by retail investors faces serious problems of monitoring. Compared to individual shareholders, institutional shareholders usually have the advantage that they have more resources and more information at their disposal and often enjoy the benefit of insider talks with management. However, institutional investors themselves face a principal-agent problem. Institutional investors are agents of the investors / beneficiaries who are the principals. Investors face the same problems in monitoring the management of institutional investors that shareholders face in regard to the management of corporations. Nevertheless, institutional investors are subject to competition that may limit potential abuses. But competition also means that institutional investors try to reduce the costs of their investment strategies. Does it make sense for institutional investors to monitor managers under these conditions? Gilson / Kraakman argue that diversified investors who actively monitor the management will benefit from the increase of the portfolio value as a whole.100 Stapledon, Black and Rock agree that increasing concentration of shareholding in the hands of institutional shareholders makes shareholder activism more rational.101 However, they disagree on the extent to which agency problems limit the incentives. Black argues that institutional investors care about governance issues but are constrained by legal rules, agenda control by managers and conflicts of interests.102 However, he assumes that the collective action problem may be overcome when the legal regime facilitates shareholder activism.103 He also finds that the agency problem does not occur among institutional investors that are independent of management, especially public pension funds and mutual funds.104 Stapledon argues that institutional investors have an important role in ensuring that majority shareholders do not ignore or act against the interests of minority shareholders.105 But Stapledon, as well as Rock, finds disincentives for institutional shareholders to monitor managers. Rock argues that money managers face 100

863.

Gilson, Ronald J. / Kraakman, Reinier H., Stanford Law Review 43 (1991)

101 Stapledon, G. P., Sydney Law Review 18 (1996) 152 (178); Black, Bernhard S., Michigan Law Review 89 (1990–1991) 520 (572–573); Rock, Edward B., Georgetown Law Journal 79 (1990–1991) 445 (464). 102 Black, Bernhard S., Michigan Law Review 89 (1990–1991) 520. 103 Black, Bernhard S., Michigan Law Review 89 (1990–1991) 520 (575). 104 Black, Bernhard S., Michigan Law Review 89 (1990–1991) 520 (599–600 and 601–603). 105 Stapledon, G. P., Sydney Law Review 18 (1996) 152 (157).

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conflicts of interest and lack positive incentives to act on behalf of shareholders.106 Stapledon identifies legal, economic, practical and political barriers to shareholder activism.107 In terms of economic barriers, he finds that collective-action problems, conflicts of interest, the fact that the exit strategy will often be more advantageous than the voice-strategy and the fact that external fund managers are assessed in relation to competitors constrain shareholder activism.108 As the monitoring of management is a collective good, all shareholders benefit from the positive effects.109 In general, it is rational for a shareholder to become active when the gains from monitoring outweigh the costs.110 Since the performance of fund managers is assessed relatively rather than absolutely, it is rarely in the interests of fund managers to provide the collective good of monitoring.111 Furthermore, institutional investors may face conflicts of interest because they are affiliated with firms that provide services to listed corporations.112 Empirical evidence seems to indicate that disincentives outweigh incentives. In a survey of corporate governance activity by institutional investors in the U.S., Black found that a small number of institutional investors spend a trivial amount of money on corporate governance activism.113 This suggests that monitoring of management is a public good. Another question to consider is whether institutional shareholders in their capacity as large shareholders act in the interests of small shareholders. Rock argues that there may be a conflict between large and small shareholders and between money managers as agents of the institutional investors and small shareholders respectively.114 Another source of conflict may be differing risk aversion.115 The discussion above does not answer the question of whether institutional investor activism is desirable. Bainbridge argues that shareholder activism undermines the role of the board of directors as the central decision-making body.116 He suggests that accountability mechanisms like capi106

Rock, Edward B., Georgetown Law Journal 79 (1990–1991) 445. Stapledon, G. P., Sydney Law Review 18 (1996) 152 (153). 108 Stapledon, G. P., Sydney Law Review 18 (1996) 152 (153). 109 Stapledon, G. P., Sydney Law Review 18 (1996) 152 (177–178). 110 Stapledon, G. P., Sydney Law Review 18 (1996) 152 (178). 111 Stapledon, G. P., Sydney Law Review 18 (1996) 152(179). 112 Stapledon, G. P., Sydney Law Review 18 (1996) 152 (186). 113 Black, Bernhard S., Shareholder Activism and Corporate Governance in the United States, in: Newman, Paul (ed.), (1998) 459. 114 Rock, Edward B., Georgetown Law Journal 79 (1990–1991) 445 (466). 115 Rock, Edward B., Georgetown Law Journal 79 (1990–1991) 445 (467–468). 116 Bainbridge, Stephen, Shareholder Activism and Institutional Investors (2005) 7–9. 107

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tal and product markets, the internal and external employment markets and the market for corporate control constrain managers’ behavior.117 Furthermore, institutional investors act rationally when they remain passive in the face of costs and free riding.118 In addition, institutional investors’ activism only relocates the problem as institutional investors themselves suffer from agency problems.119 However, Bainbridge’s assumptions are related to widely held companies characterized by the potential conflict between managers and shareholders. Another important question is whether foreign investors from countries with high standards of corporate governance may contribute to improving corporate governance and monitoring of the corporation and its controlling shareholders in emerging markets. There is a clear lack of empirical evidence regarding this question. However, it would be difficult to explore whether foreign investors improve corporate governance of their investee firm or whether they target firms with better corporate governance from the beginning. On the one hand, foreign investors do not face the constraints that domestic investors may face because of their relationship with other actors in the country. On the other hand, information asymmetries and monitoring costs are higher for foreign investors than for domestic investors.120 b) Independent Directors Independent directors are thought to play a monitoring role and to act in the interests of the whole company, including minority shareholders.121 DeMott argues that even in family-influenced public companies, an effective independent director “moderates the impact of divergence between the interests of nonfamily shareholders and those of the founder and the founder’s family” and “brings a capacity for skeptical assessment to the boardroom table”122. 117

7.

Bainbridge, Stephen, Shareholder Activism and Institutional Investors (2005)

118 Bainbridge, Stephen, Shareholder Activism and Institutional Investors (2005) 12–14. 119 Bainbridge, Stephen, Shareholder Activism and Institutional Investors (2005) 17. 120 See Kang, Jun-Koo / Kim, Jin-Mo, Journal of International Business Studies 41 (2010) 1415 for an analysis of foreign investors in the US market. The theoretical implications are the same for foreign investors in emerging markets. 121 See Enriques, Luca et al., The Interests of Shareholders as a Class, in: Kraakman, Reinier H. et al. (ed.), (2009) 55 (64–66); Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (94–96) and Hermalin, Benjamin E. / Weisbach, Michael S., FRBNY Economic Policy Review (2003) 7 (10). 122 DeMott, Deborah A., Journal of Corporation Law 33 (2007–2008) 819 (863).

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A. Theoretical and Methodological Framework

The growing assumption of the importance of independent directors is reflected in a significant trend towards independent directors on the boards of large public companies in the U.S. from 1950–2005.123 However, Hermalin / Weisbach point out that the incentives of independent directors are not clear.124 While Fama and Fama / Jensen argue that independent directors, being subject to the managerial labor market, are driven by the motivation to build a reputation as experts in decision control125, Hermalin / Weisbach argue that independent directors may also benefit from the reputation of not being a troublemaker for CEOs.126 The latter point may be especially important in an environment of concentrated ownership and controlling shareholders having a strong role. In general, independent directors should have incentives to dissent from controlling shareholders if a market of independent directors existed that rewarded dissenting shareholders. However, when independent directors are chosen by controlling shareholders, adverse selection may occur. Controlling shareholders willing to extract private benefits may tend to nominate independent directors who are not likely to prevent them from expropriating minority shareholders. Controlling shareholders who do not intend to extract private benefits have incentives to nominate those independent directors whose nomination signals to the market that minority shareholders do not risk expropriation. Furthermore, as directors’ duties and responsibilities increase, independent directors have to choose carefully which boards they want to sit on. They may tend to assess the risks of accepting potential board memberships on the basis of their personal relationship with CEOs and / or major owners. This, in turn, may affect their independence. However, apart from the incentive problem, there is no strong empirical evidence that independent directors add shareholder value. Bhagat / Black, Hermalin / Weisbach and Petra found in their evaluation of the empirical literature on the link between independent directors and firm performance that the evidence is mixed.127 Some studies find a positive correlation be123

Gordon, Jeffrey N., Stanford Law Review 59 (2006–2007) 1465. Hermalin, Benjamin E. / Weisbach, Michael S., FRBNY Economic Policy Review (2003) 7 (10). 125 Fama, Eugene F., Journal of Political Economy 88 (1980) 288 (293–294) and Fama, Eugene F. / Jensen, Michael C., Journal of Law and Economics 26 (1983) 301 (315). 126 Hermalin, Benjamin E. / Weisbach, Michael S., FRBNY Economic Policy Review (2003) 7 (10). 127 Bhagat, Sanjai / Black, Bernard S., The Business Lawyer 54 (1999) 921 (see 940–944 for the evaluation of the existing empirical literature and 944–950 for their own study); Hermalin, Benjamin E. / Weisbach, Michael S., FRBNY Economic Policy Review (2003) 7 (12–13); Petra, Steven T., Corporate Governance 5 (2005) 55 124

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tween independent directors and firm performance128 while other studies find no significant link129 or even a negative correlation between the proportion of independent directors and firm performance.130 Petra concludes that “these mixed results may be reflective of a corporate culture wherein corporate boards are controlled by management and the presence of outside independent directors has no discernible impact on management decisions”131.

However, Gordon as well as Hermalin / Weisbach argue that so many factors have an impact on firm performance that the empirical results are not surprising.132 Another way to measure the impact of independent directors is to study the effect of discrete board tasks in order to evaluate how different boards behave on particular tasks. Petra and Hermalin / Weisbach conclude from their evaluation of empirical evidence on the impact of independent directors on board decisions that board independence does matter for certain board decisions.133 However, Bhagan / Black who undertook a very comprehensive survey on the empirical evidence found mixed results. Some of the (57). See also Gordon, Jeffrey N., Stanford Law Review 59 (2006–2007) 1465 (1500–1501) summarizing Bhagat / Black. 128 See for example Daily, Catherine M. / Dalton, Dan R., Journal of Business Venturing 7 (1992) 375 (381); Schellenger, Michael H. et al., Journal of Management 15 (1989) 457 (462–465). 129 See for example Barnhart, Scott W. et al., Managerial and Decision Economics 15 (1994) 329 (333–338); Hermalin, Benjamin E. / Weisbach, Michael S., Financial Management 20 (1991) 101 (111); Fosberg, Richard, Akron Business and Economic Review 20 (1989) 24; Mehran, Hamid, Journal of Financial Economics 38 (1995) 163 (180). See also Molz, Rick, Journal of Business Research 16 (1988) 235 testing whether managerial domination of the board results in superior performance. Baysinger, Barry D. / Butler, Henry N., The Journal of Law, Economics, & Organization (1985) 101 (116) found that there is no significant contemporaneous relationship between board composition and relative financial performance but also that over the interval 1970–1980, firms that first developed more independent boards performed better at the end of the period than those that lagged behind. 130 See for example Agrawal, Anup / Knoeber, Charles R., Journal of Financial and Quantitative Analysis 31 (1996) 377 (390), concluding that firms tend to have too many outside directors (393); and Yermack, David, Journal of Financial Economics 40 (1996) 185 (195) finding a negative correlation between the proportion of independent directors and Tobin’s q in an OLS regression, although finding a positive correlation in regard to a fixed effects regression. 131 Petra, Steven T., Corporate Governance 5 (2005) 55 (57). 132 Gordon, Jeffrey N., Stanford Law Review 59 (2006–2007) 1465 (1500); Hermalin, Benjamin E. / Weisbach, Michael S., FRBNY Economic Policy Review (2003) 7 (12). 133 Hermalin, Benjamin E. / Weisbach, Michael S., FRBNY Economic Policy Review (2003) 7 (17) and Petra, Steven T., Corporate Governance 5 (2005) 55 (57).

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A. Theoretical and Methodological Framework

most important examples quoted in their survey includes for example that Weisbach found some, albeit marginal, evidence that, in firms with boards dominated by outside directors, CEO turnover is more sensitive to firm performance.134 Some studies found that majority- independent boards extract higher prices from bidders in the case of takeovers.135 Byrd / Hickmann found that bidders with majority-independent boards offer lower takeover premia.136 There seems to be no significant correlation between the proportion of independent directors and takeover defenses.137 Empirical evidence also suggests that the higher the proportion of independent directors on the board, the higher the CEO compensation.138 Boards with more independent directors are also more likely to award golden parachutes.139 Although some of the studies quoted above suggest that independent directors matter, Bhagat / Black often adjust their significance in the light of methodological limitations and other contradictory studies or explanatory factors. In short, independent directors seem to be less important than commonly thought. However, Gordon argues that the interpretation that independent directors do not matter is mostly incorrect as the

134 Weisbach, Michael S., Journal of Financial Economics 20 (1988) 431 (458) found a positive, albeit weak correlation. Mikkelson, Wayne H. / Partch, M. Megan, Journal of Financial Economics 44 (1997) 205 (223) found no correlation between board composition and CEO tenure. See also the critical remarks of Bhagat, Sanjai / Black, Bernard S., The Business Lawyer 54 (1999) 921 (925–926). 135 Cotter, James F. et al., Journal of Financial Economics 43 (1997) 195; Lee, Chun I. et al., Financial Management 21 (1992) 58 (65–68). However, Bhagat, Sanjai / Black, Bernard, The Business Lawyer 54 (1999) 921 (928) argue that these studies do not enable one to conclude that majority-independent boards produce better outcomes for shareholders of potential target firms. 136 Byrd, John W. / Hickman, Kent A., Journal of Financial Economics 32 (1992) 195 (219) whereby the relationship between the fraction of independent directors on a board and the shareholder wealth effects of tender offer bids is negative when the fraction of independent directors is over 60 percent (216). See also the critical remarks of Bhagat, Sanjai / Black, Bernard S., The Business Lawyer 54 (1999) 921 (928–929). 137 Mallette, Paul / Fowler, Karen L., The Academy of Management Journal 35 (1992) 1010 (1023–1025); Wahal, Sunil et al., Financial Management 24 (1995) 22 (26–27). Sundaramurthy, Chamu et al., Journal of Management 22 (1996) 783 (793) founds that the proportion of outsiders on the board marginally decreases the rate of adoption of classified board provision. However, when outsiders’ professional and personal connections are not considered, the proportion of outsiders does not impact on the adoption of classified board provisions. 138 Core, John E. et al., Journal of Financial Economics 51 (1999) 371 (385). 139 Cochran, Philip L. et al., The Academy of Management Journal 28 (1985) 664 (667); Singh, Harbir / Harianto, Farid, The Academy of Management Journal 32 (1989) 7 (20).

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“most important effects of the move to independent directors, particularly over the long term, are systematic rather than firm specific and thus are unlikely to show up in cross-sectional studies”140.

It seems that the point where independent directors matter most is in accounting accuracy. Several studies show a positive relation between board independence and accounting accuracy141 and between independent audit committees and accounting accuracy respectively.142 Gordon concludes that the findings on the significance of independent directors are rather negative except for accounting accuracy143. Petra also sums up that “independent audit committees have the potential to strengthen corporate boards through controlling management’s reporting of financial results”144. c) Gatekeepers Gatekeeper control also plays a key part in the protection of minority shareholders. In the original sense, the concept of a gatekeeper involves the “conscription of non-corporate actors […] in policing the conduct of corporate actors”145. Kraakman defines gatekeepers as “private parties who are able to disrupt misconduct by withholding their cooperation from wrongdoers”146. Coffee, criticizing this definition as too broad, defines gatekeepers “more narrowly to mean a reputational intermediary who provides verification or certification services to investors”147. His definition includes auditors, debt rating agencies, security analysts, investment bankers, securities attorneys and underwriters.148 However, for the purpose of this thesis, 140

Gordon, Jeffrey N., Stanford Law Review 59 (2006–2007) 1465 (1505). Beasley, Mark S., The Accounting Review 71 (1996) 443 (454–455), Dechow, Patricia M. et al., Contemporary Accounting Research 13 (1996) 1 (21, 30), Klein, April, Journal of Accounting and Economics 33 (2002) 375 (398). 142 Carcello, Joseph V. / Neal, Terry L., The Accounting Review 75 (2000) 453 (459–460); Dechow, Patricia M. et al., Contemporary Accounting Research 13 (1996) 1 (21, 30); McMullen, Dorothy Ann, Auditing: A Journal of Practice and Theory 15 (1996) 87. Klein, April, Journal of Accounting and Economics 33 (2002) 375 (398) found no positive correlation between wholly independent audit committees and earnings management. 143 Gordon, Jeffrey N., Stanford Law Review 59 (2006–2007) 1465 (1501). 144 Petra, Steven T., Corporate Governance 5 (2005) 55 (58). 145 Armour, John et al., Agency Problems and Legal Strategies, in: Kraakman, Reinier H. et al. (ed.), (2009) 35 (48). 146 Kraakman, Reinier H., Journal of Law, Economics and Organization 2 (1986) 53 (53). 147 Coffee, John C., Gatekeeper Failure and Reform, in: Hopt, Klaus J. et al. (ed.), (2003) 559 (606). 148 Coffee, John C., Gatekeeper Failure and Reform, in: Hopt, Klaus J. et al. (ed.), (2003) 559 (606). 141

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A. Theoretical and Methodological Framework

the term gatekeepers also includes non-corporate players whose participation in corporate transactions is not necessary but who have the potential to exercise pressure on corporations. This includes the media and other civil society organizations. The concept of gatekeepers, however, entails its own problems. Gatekeepers are expected to participate in corporate transactions and to prevent unacceptable conduct.149 The incentives result from the fact that gatekeepers are sanctioned for “participation in corporate misbehavior, or for failure to prevent or disclose misbehavior”150. This, however, requires that sanction mechanisms work and that a market for gatekeepers exist. The importance of gatekeepers can best be illustrated by the example of auditors. External auditors play an important role in ensuring that shareholders have access to reliable financial information, but they can also contribute to exploiting the corporation by manipulating the balance sheet and tunneling assets to controlling shareholders.151 Coffee concludes that auditors in the U.S. have limited incentives to monitor management.152 They may also encounter conflicts of interest when they cross-sell consulting services to clients and have limited incentives to invest in their reputation due to limited competition.153 Coffee concludes that, because of limited incentives, regulatory reform has to ensure that gatekeepers fulfill their duties efficiently.154 Dyck / Zingales argue that the media can play a role in pressuring corporate managers to behave in what they call ‘socially acceptable’ ways.155 It is a cheap way for institutional investors to rely on media.156 However, they also emphasize that the pressure on directors to behave in “socially acceptable” ways may not always coincide with shareholders’ value maximization.157 149 Armour, John et al., Agency Problems and Legal Strategies, in: Kraakman, Reinier H. et al. (ed.), (2009) 35 (48, 49). 150 Armour, John et al., Agency Problems and Legal Strategies, in: Kraakman, Reinier H. et al. (ed.), (2009) 35 (48). 151 Coffee, John C., Gatekeepers: The Professions and Corporate Governance (2006). 152 Coffee, John C., Gatekeepers: The Professions and Corporate Governance (2006). 153 Coffee, John C., Gatekeepers: The Professions and Corporate Governance (2006). 154 Coffee, John C., Gatekeepers: The Professions and Corporate Governance (2006). 155 Dyck, Alexander / Zingales, Luigi, The Corporate Governance Role of the Media (2002). 156 Dyck, Alexander / Zingales, Luigi, The Corporate Governance Role of the Media (2002) 9–11. 157 Dyck, Alexander / Zingales, Luigi, The Corporate Governance Role of the Media (2002) 6.

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They argue that the more diffuse a press is in a country, the more companies will respect minority shareholders’ interests.158 Evidence from Russia seems to indicate that press coverage in the Anglo-American press can exercise pressure on managers.159 Nevertheless, the low number of financial journalists in emerging markets may seriously affect the media’s ability to exercise a monitoring role. When the monitoring of management is a public good, this raises the question of whether shareholder associations could be a supplier of this public good. Milhaupt argues that non-profit organizations in South Korea, Taiwan and Japan fill the gaps in the supply of public good.160 Another question is to what degree corporate governance scores published by associations may help minority shareholders to overcome information asymmetries and to exert pressure on corporations to improve corporate governance, which in turn contributes to the protection of minority shareholders. As they have to balance the need for reliable information with limited resources, the exact value of corporate governance scores must be carefully assessed for each jurisdiction. d) External Product Market Competition Shleifer / Vishny argue that “product market competition is probably the most powerful force toward economic efficiency in the world”161. Competition may therefore be an important factor in the protection of minority shareholders. Dyck / Zingales argue that more competitive markets result in more verifiable prices.162 More verifiable prices in turn limit the possibility for controlling shareholders to tunnel out resources through manipulated transfer prices.163 Moreover, the more competitive the market, the higher the risk for controlling shareholders of endangering the survival of the firm when extracting private benefits.164 There is also some empirical evidence that supports this theoretical assumption. Guadalupe / Pérez-González found 158 Dyck, Alexander / Zingales, Luigi, The Corporate Governance Role of the Media (2002) 31. 159 Dyck, Alexander et al., Journal of Finance 63 (2006) 1093. 160 Milhaupt, Curtis J., Yale Journal of International Law 29 (2004) 169. 161 Shleifer, Andrei / Vishny, Robert W., The Journal of Finance 52 (1997) 737 (738). For the theoretical foundation, see Alchian, Armen A., Journal of Political Economy 58 (1950) 211 and Stigler, George J., Journal of Law and Economics 1 (1958) 54. 162 Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537. 163 Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (576, 577). 164 Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (577).

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A. Theoretical and Methodological Framework

evidence for the assumption that higher levels of competition are correlated with statistically and economically lower estimates of private benefits of control by measuring the voting premia between shares with differential voting.165 Dyck / Zingales found that countries with more competitive product markets, measured on the basis of the World Competitiveness Report, have lower private benefits of control.166 e) Control by the Capital Market In the discussion of the conflict between shareholders as a class and managers, external control by the capital market plays an important role. The capital market includes the primary market that deals with the issuance of new securities, and the secondary market dealing with the sale and purchase of previously issued shares. The assumption that capital markets have a disciplining effect is based on the hypothesis that share prices reflect corporate managerial efficiency. According to the ‘semi-strong efficiency’ hypothesis, share prices reflect the publicly available information. The external control by capital markets is exercised on the primary as well as on the secondary market. Regarding the primary market, underperformance by corporations will be reflected in decreasing share prices and make it difficult for the corporation to sell new shares to potential investors in order to fund business activities. In regard to the secondary market, management inefficiency leads to falling share prices and therefore increases the threat of a takeover. “The lower the stock price, relative to what it could be with more efficient management, the more attractive the take-over becomes to those who believe that they can manage the company more efficiently.”167

However, this assumption is highly disputed as empirical evidence shows that well-managed firms are also targets of takeovers.168 In theory, control by the capital market should also contribute towards protecting minority shareholders as extracting private benefits by controlling shareholders minimizes firm value and results in decreasing share prices, thus lowering the costs of raising capital and increasing the threat of takeovers. However, efficient capital markets require that interaction be165 Guadalupe, Maria / Perez-Gonzalez, Francisco, Competition and Private Benefits of Control (2010). 166 Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (582). 167 Manne, Henry G., The Journal of Political Economy 73 (1965) 110 (113). 168 For a comprehensive study, see Romano, Roberta, The Yale Journal on Registration 9 (1992) 119.

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tween regulators, gatekeepers, tax authorities, courts and the media ensures that corporations publish reliable and timely information and that investors make informed decisions.169 Furthermore, concentrated ownership and illiquidity of the capital market as well as pyramidal and cross-shareholding structures may prevent hostile takeovers. Concentrated ownership may be a reason as well as a result of underdeveloped capital markets in so far as on the one hand, concentrated ownership limits the possibility of trading and the formation of prices, jeopardizing the protection of minority shareholders and making it attractive to hold controlling blocks. On the other hand, internal sources of finances render managers independent of the need to fund business activities on the stock market. Another question concerns whether the free float that is inevitably aligned to ownership structure contributes to the protection of minority shareholders. It could be argued that the larger the free float, the higher the chance that minority shareholders can reach the critical mass to make use of their rights. f) Private and Public Enforcement Enforcement is a key tool in the protection of minority shareholders. Corporate actors will abstain from violating the rules when they assume that to do so would adversely affect their position.170 When shareholders are passive, as predicted by new institutional economics, private enforcement will be low. Public enforcement is therefore all the more important, unless other devices are able to compensate for low public enforcement. Black / Kraakman drafted a self-enforcing model of corporate law that is designed to be applied in an environment of low public enforcement.171 However, their model can only reduce, not eliminate the need for public enforcement.172 Another issue is whether cross-listing contributes to the protection of minority shareholders. Coffee pointed out that corporations based in jurisdictions with low enforcement may cross-list on foreign stock exchanges with higher disclosure requirements and a greater threat of enforcement in order to compensate for low protection of minority sharehold169 For a detailed overview of the preconditions for efficient securities markets, see Black, Bernard S., UCLA Law Review 48 (2001) 781. 170 Kirchner, Christian / Koch, Stefan, Analyse & Kritik 11 (1989) 111 (116). 171 Black, Bernard S. / Kraakman, Reinier H., Harvard Law Review 109 (1996) 1911. 172 See their thoughts on the question of whether law can function without official enforcement, Black, Bernard S. / Kraakman, Reinier H., Harvard Law Review 109 (1996) 1911 (1939–1943).

42

A. Theoretical and Methodological Framework

ers.173 However, as local enforcement is still necessary, cross-listing can be only a partial solution.174 Public enforcement agencies do not only include securities commissions and the judicial system but also tax authorities, which are often a neglected factor.175 Tax authorities play an important role because they have to assess whether the value placed on transactions is adequate for corporate income tax purposes. Ideally, they should therefore be able to detect fraud and other manipulations and thereby contribute to the protection of minority shareholders. In practice, however, transfer pricing remains a challenge. g) Labor Stieglitz argues that unions have both “the information base and the incentive to exercise surveillance and control” as they have lower costs of acquiring information concerning the firm and a strong interest in its survival.176 He supposes an especially strong alignment of interests between shareholders and workers in the case of employees’ pension funds being invested in their firm or in the case of employee stock ownership programs.177 Pagano / Volpin, however, found a negative correlation between employee and investor protection.178 They argue that controlling shareholders and employees have incentives to “strike for a deal in which high employment protection is exchanged for low investor protection”179. Dyck / Zingales are also skeptical about Stieglitz’s thesis, doubting that labor has access to the information that allows controlling shareholders to extract private benefits.180 Furthermore, they also argue that labor might align itself with the controlling shareholders against outside investors.181 They found some, however statistically non-significant, evidence for their skepticism.182 173

Coffee, John C., Columbia Law Review 102 (2002) 1757. For a critical assessment, see Black, Bernard S., UCLA Law Review 48 (2001) 781 (819, 820). 175 It seems that Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 were the first to point out the relevance of tax authorities. 176 Stiglitz, Joseph E., Journal of Money, Credit and Banking 17 (1985) 133 (149). 177 Stiglitz, Joseph E., Journal of Money, Credit and Banking 17 (1985) 133 (149). 178 Pagano, Marco / Volpin, Paolo F., The Political Economy of Corporate Governance (1999). 179 Pagano, Marco / Volpin, Paolo F., The Political Economy of Corporate Governance (1999) (7). 180 Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (578). 181 Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (578). 182 Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (586). 174

VI. The Factual Protection of Minority Shareholders

43

h) Moral and Reputational Concerns New institutional economics assumes that opportunistic behavior may emerge but does not necessarily have to do so. Moral norms may have an impact on how willing controlling shareholders are to extract private benefits. This issue is probably the most complex one in the field of minority shareholder protection. Coffee, assuming that norms matter, hypothesized that crime rates and the private benefits of control are the lowest in countries having the highest level of social cohesion and the lowest level of recent social and political disruption.183 He found, however, that this theory only works for some countries, thus concluding that the impact of social norms may be greatest when the law is weakest.184 Dyck / Zingales also found evidence that countries with higher criminal rates have higher private benefits of control but this effect is statistically insignificant.185 They also found that Catholic countries have significantly higher private benefits, and Protestant ones significantly lower.186 The above-mentioned examples also highlight the difficulties in analyzing the impact of social norms. Criminal rates depend on a wide range of factors, such as job opportunities, equal distribution of wealth, enforcement and the probability of being convicted, among others. Religion might have an influence as one of the important aspects of individual identity but it is closely interwoven with a specific culture. Furthermore, the religious values of the economically dominant group may differ from the majority of the population, as in Malaysia. Therefore, although the theory is highly plausible, it is extremely difficult to verify it. i) Internal Corporate Governance Practices Corporations that aim to reduce equity costs and are willing to protect shareholders’ rights may signal this to the market by adopting good corporate governance structures. As the thesis focuses on the protection of minority shareholders, it follows the definition of Shleifer / Vishny who define corporate governance as ways in which “suppliers of finance to corporations assure themselves of getting a return on their investment”187. Internal cor183

2151. 184

2151. 185 186 187

Coffee, John C., University of Pennsylvania Law Review 149 (2000–2001) Coffee, John C., University of Pennsylvania Law Review 149 (2000–2001) Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (586). Dyck, Alexander / Zingales, Luigi, Journal of Finance 59 (2004) 537 (586). Shleifer, Andrei / Vishny, Robert W., The Journal of Finance 52 (1997) 737 (737).

44

A. Theoretical and Methodological Framework

porate governance refers to the internal checks and balances of the decisionmaking process. Many internal corporate governance mechanisms protect shareholders as a class. The thesis will focus on such mechanisms that aim to specifically protect minority shareholders. Assessment of the quality of corporate governance creates its own problems. Corporate governance rankings that are available to shareholders are necessarily a compromise between available resources and the need for in-depth screening. 3. Conclusions The assumptions of new institutional economics predict that shareholder activism is low, although the exact degree depends on other variables such as enforcement. This in turn means that minority shareholder appointment and decision rights may only partially contribute to the protection of shareholders. This raises the question of whether the public good of monitoring controlling shareholders could be performed by shareholder associations. The same assumptions of new institutional economics that predict low shareholder activism, however, also cause skepticism in regard to this issue. When independent directors also fail to bring about the desired result of minority shareholder protection, minority shareholders have to rely on the market for corporate control or public enforcement. However, many emerging markets suffer from weak enforcement and do not have deep capital markets. Nevertheless, improvements in public enforcement may increase potential and actual investors’ trust in the stock market and convince them to invest in it, thus contributing to deepening the capital market, which in turn facilitates public enforcement. These considerations lead to the final assumption of the thesis. All Asian jurisdictions have relied on addressing the private sector through corporate governance reforms in order to foster the protection of minority shareholders. However, the thesis assumes that improvements in private governance will not be sufficient without improvements in public governance. This, in consequence, means that, in order to protect minority shareholders effectively, all three jurisdictions will have to improve their public governance as well. Another consequence of the above-mentioned assumption is that the correlation between formal law and minority protection may be small in emerging markets, thus contradicting the assumption of La Porta et al. that “law matters”.

VII. Empirical Research The aim of the thesis is to evaluate how the political, economic, cultural and social context affects the legal protection of minority shareholders in

VII. Empirical Research

45

the three jurisdictions of Vietnam, Thailand and Malaysia. In order to cope with the complexity of the issue, a qualitative method of data collection was chosen. Research for the thesis was conducted by interviewing people from a wide range of sectors, including inter alia staff of corporations, regulatory and enforcement bodies, lawyers, accountants, chambers of commerce, institutional investors, NGOs, and the research sector. The selection of interviewees from a wide range of different fields allowed the issue of minority shareholders’ protection to be reviewed from an equally wide range of different perspectives, thus providing a comprehensive picture of this complex and sensitive issue. The interviews were semi-structured with openended questions, enabling interviewees to respond in greater depth about points they considered to be especially important or sensitive. The focus of the interviews varied slightly according to the interviewee. In general, the interviews included one part that was discussed with almost all interviewees and focused on corporate governance and the protection of minority shareholders and another part that included custom-tailored questions in order to benefit from the interviewee’s special expertise and knowledge of a specific issue. Some interviews, however, wholly concentrated on specific issues in order to gain in-depth insight into certain points considered to be especially relevant for the protection of minority shareholders. The method of semi-structured, open-ended qualitative interviews also allowed discussion of questions that are difficult to determine by other methods of data collection, such as the question of whether independent directors are in fact independent and if not, for what reason. For example, empirical quantitative research on this question based on questionnaires that provide several possible answers risks limiting the scope of potential answers and obtaining biased results. The chosen type of data collection also allowed interviewees to outline the complex interdependencies that other types of data collections have difficulties in identifying. The results of the impact analysis of the laws and regulation incorporating corporate governance reforms in Vietnam are based on 21 semi-structured qualitative interviews conducted in Hanoi in 2009. They include interviews with staff of the − Central Institute for Economic Management (CIEM), − a foreign portfolio investor, − a law firm, − an international accounting firm, − European Chamber of Commerce in Vietnam, − German Chamber of Industry and Commerce in Vietnam,

46

A. Theoretical and Methodological Framework

− Institute of State and Law, − Konrad-Adenauer-Stiftung, − Ministry of Justice, − National University Hanoi, − State Capital Investment Corporation (SCIC), − State Securities Commission (SSC), − Supreme People’s Court of Vietnam, − Vietnam Association of Certified Public Accountants (VACPA), − Vietnam Association of Financial Investors (VAFI), − Vietnam Chamber of Commerce and Industry, − a Vietnamese joint stock bank. In Thailand, semi-structured interviews were conducted in 2009 with staff from the following institutions: − Association of Investment Management Companies (AIMC), − Bank of Thailand, − Chulalongkorn University, − Corporate Governance Centre, − German Chamber of Industry and Commerce, − Government Pension Funds (GPF), − two Thai law firms, − Konrad-Adenauer-Stiftung, − National Institute of Development Administration, − State Enterprise Policy Office (Divison of the Ministry of Finance), − a Thai listed shareholding company, − Thai Institute of Directors (IOD), − Thai Investors Association (TIA), − Thai Listed Companies Association (TLCA), − Thailand Development Research Institute Foundation, − Thammsat University, − Securities and Exchange Commission (SEC), − Stock Exchange of Thailand (SET).

VII. Empirical Research

47

Interviews in Malaysia were conducted in 2009 with staff from the following institutions: − two Malaysian listed shareholding companies, − Bursa Malaysia, − a Malaysian law firm, − Companies Commission (CC), − Employees Provident Fund (EPF) (government-linked investment corporation), − Federation of Public Listed Companies (FPLC), − Institute of Integrity, − International Islamic University Malaysia, − Khazanah Nasional Berhad (government-linked investment corporation), − Konrad-Adenauer-Stiftung, − Minority Shareholders Watchdog Group (MSWG), − Permodalan Nasional Berhad (PNB) (government-linked investment corporation), − Malaysian Alliance of Corporate Directors (MACD), − Malaysian-German Chamber of Industry and Commerce, − University of Malaysi, − and two Malaysian lawyers. It should also be mentioned that the statements published in the thesis may not wholly reflect the result of the empirical study as many interviewees asked not to be quoted for parts of their answers, especially when they reported sensitive information or referred to case studies and singled out actors from the corporate and political sector. The thesis respects these requests. Moreover, it is unnecessary to point out that interviews are highly subjective, reflecting personal views and interests. However, some points should nevertheless be mentioned. Interviews in Thailand have to be assessed in view of the fact that the educated urban elites, including members of the bureaucracy think that in order to be legitimate, a regime must be characterized by good governance rather than by any other feature.188 They are highly skeptical of the politics of the governing party. Statements by Malaysian interviewees have to be assessed in light of the complex of problems and interests aligned to ethnicity. 188

Bünte, Marco, Südostasien 1 (2008) 85 (99).

B. The Legal Protection of Minority Shareholders in Vietnam, Thailand and Malaysia In recent times, all three jurisdictions have aimed to improve the legal protection of minority shareholders. The following chapter will analyze these developments.

I. Sources of Law Vietnam’s jurisdiction is based on civil law. Before 2005, private, stateowned and foreign invested enterprises used to be subject to different laws. The Law on Enterprises that came into effect in 2005 (Enterprise Law) created a unified legal framework for these different kinds of companies.1 Other important laws are the Law on Securities 2006. Listed corporations are further subject to “Regulations on Corporate Governance Applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre”2 and the listing requirements of the Ho Chi Minh City Stock Exchange (HoSE) or the Hanoi Securities Trading Centre (HaSTC).3 Thailand also has a civil law system. The main laws regulating shareholding companies and the protection of minority shareholders in Thailand are the Public Limited Companies Act (PCA)4, and the Thai Civil and Commercial Code, Title XXII, Partnerships and Companies (CCC). Public limited companies that are listed on the Stock Exchange of Thailand are further subject to the Security and Exchange Act 1992 (SEA), the listing and dis1

All laws and rules are enumerated in the appendix at the end of the thesis. Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007. 3 Regulations on Listing Securities on Ho Chi Minh Stock Exchange, 7 December 2007 as amended 17 April 2009; Regulations on Disclosure of Information at Ho Chi Minh City Stock Exchange, 20 March 2008 and Regulations on Listing Securities on Hanoi Securities Trading Centre, 31 December 2007; Regulations on Disclosure of Information on Hanoi Securities Trading Centre, 9 November 2007. 4 Public Limited Companies Act 1992 (B.E. 2535) as amended by the Public Limited Companies Act (No. 2) 2001 (B.E. 2544) and the Public Limited Company Act (No. 3) 2008 (B.E. 2551). For a general overview, see Asawaroj, Saowanee / Clark, Eugene, Thai Company Law, in: Tomasic, Roman (ed.), (1999) 343. 2

II. A Comparative Legal Analysis

49

closure rules of the Stock Exchange of Thailand, and other regulations under the Stock Exchange of Thailand, the Securities and Exchange Commission and the Capital Market Supervisory Board. Furthermore, in 2006, the Stock Exchange of Thailand issued “The Principles of Good Corporate Governance for Listed Companies” that provide for a ‘comply-or-explainapproach’. While the civil code is largely borrowed from Europe, the Stock Exchange of Thailand and the Thai securities regulations were mainly adopted from the U.S. model.5 Malaysia is characterized by a common law system. The main sources of company law are the Companies Act 1965 (CA) and case law. Other important laws include the Securities Commission Act 1993 (SCA), the Capital Markets and Services Act, and the Malaysian Code on Take-Overs and Mergers 2010. Listed companies are subject to Bursa Securities Listing Requirements. The corporate law stipulates that if companies do not register their articles upon incorporation, the articles of Table A are applicable.6 Most companies adopt Table A as their articles of association. The Malaysian Code on Corporate Governance that was introduced in 2000, amended in 2007 and replaced in 2012 by a new code, provides a ‘comply-or-explainapproach’.7

II. A Comparative Legal Analysis The following analysis will compare the legal protection of minority shareholders of shareholding companies in Vietnam, Thailand and Malaysia. The Vietnamese Enterprise Law provides a dual-board structure for shareholding companies with more than 11 individual shareholders or with an institutional investor holding more than 50 percent of total share capital, consisting of the board of management and the board of supervision.8 The board structure of Thai shareholding companies is left to the company’s decision but most companies choose a unitary structure. Malaysian law provides a unitary board structure for shareholding companies. 1. Minority Shareholder Appointment Rights The three jurisdictions differ significantly in regard to minority shareholder appointment rights. Although most jurisdictions do not provide for 5 6 7 8

Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (307). Sec. 30 of the Companies Act. Malaysian Code on Corporate Governance 2012, p. viii. Art. 95 of the Enterprise Law 2005.

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B. The Legal Protection of Minority Shareholders

mandatory cumulative voting9, the World Bank advocates this legal device as an effective tool to protect minority shareholders.10 Vietnamese law goes furthest by mandating cumulative voting for members of the board of management and the board of supervision.11 However, the device is subject to the restriction that only shareholders or shareholders’ groups holding more than ten percent of shares are entitled to nominate candidates.12 In theory, it is possible to stipulate a lower percentage in the company charter but it seems that no corporation has done this so far.13 Thai law provides cumulative voting as default but almost all companies avoid it through charter provision.14 Malaysian law does not include a provision for cumulative voting and some authors argue that cumulative voting would violate the ‘one-shareone-vote rule’. The Minority Shareholder Watchdog Group proposed introducing mandatory cumulative voting but so far, this proposal has not been realized.15 The Malaysian Code on Corporate Governance of 2007 that was replaced in 2012, provided for proportional representation. It recommended that, in circumstances where a company had a significant shareholder, in addition to the requirement that one-third of the board should comprise independent non-executive directors, the board should include a number of directors to fairly reflect the investment in the company by shareholders other than the significant shareholder.16 In circumstances where a shareholder held less than the majority but was still the largest shareholder, the board had to exercise its judgment in determining the appropriate number 9 See Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (90) and La Porta, Rafael et al., Journal of Political Economy 106 (1998) 1113 (1130–1131). 10 See for example World Bank, Corporate Governance Country Assessment Thailand (2005) iv. 11 Art. 104 sec. 3 lit. c of the Enterprise Law 2005. 12 Art. 79 sec. 2 lit. a, 4 lit. b of the Enterprise Law 2005. The nomination process is further regulated in Art. 29 Decree No. 102 / 2010 / ND-CP Detailing a Number of Articles on the Law on Enterprises, 01 October 2010. 13 Interview with a representative of the Business Environment and Competitiveness Department at CIEM. 14 Sec. 70 para. 1 of the Public Limited Companies Act. For information on the percentage of Thai companies using cumulative voting, see Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 72, 73. 15 Interview with a representative of Minority Shareholder Watchdog Group. 16 Part 2, AA IV Malaysian Code on Corporate Governance 2007. For this purpose, ‘significant shareholder’ is defined as a shareholder with the ability to exercise a majority of votes in the election of directors.

II. A Comparative Legal Analysis

51

of directors to fairly reflect the interests of the remaining shareholders.17 In order to contribute to the enforcement of this provision, Malaysia listing requirements mandated that familial relationships between board members and controlling shareholders had to be disclosed in the annual report.18 The new Code on Corporate Governance 2012 that superseded the Code of 2007 no longer includes such a provision. None of the jurisdictions relies on diluting the appointment powers of large shareholders in order to protect minority shareholders. Neither Vietnamese, Thai nor Malaysian law provide for voting caps. The three jurisdictions are also reluctant to fully enforce the one-share-one-vote rule that constrains controlling shareholders’ opportunities to leverage voting rights. Vietnamese law provides one vote for each ordinary share19 but allows the issuance of voting preference shares and dividend preference shares without voting rights.20 It limits, however, the issuance of voting preference shares to government-authorized organizations and founding shareholders.21 After three years, voting preference shares of founding shareholders are converted into ordinary shares.22 Thai law generally provides for one-share, one-vote, but allows preference shares to be issued with fewer voting rights than ordinary shares.23 However, multiple voting rights are not allowed. Malaysian law permits the distribution of preference shares that do not allow the holder to vote or to participate beyond a specified limit in any distribution.24 However, for public companies and their subsidiaries, it mandates that each equity share (including preference shares with voting rights25) confers the right to one vote in a poll at any general meeting.26 The rule therefore prohibits multiple voting and non-voting ordinary shares.27 Nevertheless, 17

Part 2, AA V Malaysian Code on Corporate Governance 2007. 9. 25 and Appendix 9 C, Part A (3) (f) Listing Requirements Main Market. 19 Art. 79 sec. 1 lit. a of the Enterprise Law 2005. 20 Art. 78 sec. 2 lit. a and b, art. 82 sec. 3 of the Enterprise Law 2005. 21 Art. 78 sec. 3 of the Enterprise Law 2005. 22 Art. 78 sec. 3 of the Enterprise Law 2005. 23 Sec. 102 para. 1 and sec. 33 para. 4 of the Public Limited Companies Act provides for one-share, one-vote. Sec. 102 para. 2 of the Public Limited Companies Act allows the issuance of preference shares with lower voting rights. 24 Sec. 4 of the Companies Act. 25 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (108). 26 Sec. 55 (1), (5) of the Companies Act. 27 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (108). 18

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B. The Legal Protection of Minority Shareholders

Malaysian company law allows voting on a show of hands.28 In this case, each shareholder has one vote.29 Table A provides for voting on a show of hands unless a poll is demanded.30 2. Minority Shareholder Decision and Action Rights Vietnamese as well as Thai and Malaysian law empowers individual shareholders to make certain corporate decisions. All three jurisdictions have introduced or strengthened the legal institution of derivative action against directors. The derivative action is another legal tool that the World Bank advocates strengthening or adopting.31 In Vietnam, derivative action was adopted in 2010. Vietnamese law enables one or more shareholders holding at least one percent of ordinary shares for six months to initiate a derivative suit against board members or the general director on the grounds of violation of duties, the use of insider information or abuse of position for personal benefit if the supervisory board fails to initiate a lawsuit at the request of the shareholder.32 Thai law strengthened the device of derivative action in 2008. Before the amendment of the SEA in 2008, Thai law allowed one or more shareholders holding five percent of shares to sue directors because of a breach of their duty or activities in competition with the company, but limited suits to claims on behalf of the company.33 As the initiator of the lawsuit has to bear the costs, incentives are low.34 Since the amendment of the SEA, shareholders of publicly traded companies have more incentives: they may initiate derivative suits if a breach of fiduciary duties results in undue benefits for the director / executive or a related person and the court may order the company to compensate shareholders for their expenses.35 Malaysian law has the concept of derivative action by common law. In 2007, a statutory derivative action was included in the Companies Act.36 28

Sec. 147 (1) (c) of the Companies Act. Sec. 147 (1) (c) (i) CA; 7.18 Listing Requirements Main Market. 30 Table A, art. 51. 31 See for example World Bank, Corporate Governance Country Assessment Malaysia (2005) 7. 32 Art. 25 sec. 1 Decree No. 102 / 2010 / ND-CP Detailing a Number of Articles on the Law on Enterprises, 01 October 2010. 33 Sec. 85 para. 2 of the Public Limited Companies Act. 34 Pitiyasak, Saravuth, Thai Company Laws and Good Governance Practices of Unlisted Companies, in: Montreevat, Sakulrat (ed.), (2006) 85 (92). 35 Sec. 89 / 18 para. 2 and 3 of the Securities and Exchange Act. 36 Sec. 181 A of the Companies Act. 29

II. A Comparative Legal Analysis

53

The court may require the company to reimburse the expenses of the complainant.37 All three jurisdictions also provide for some way of challenging decisions of the shareholders’ meeting. Vietnamese corporate law allows shareholders to request the courts to revoke decisions of the shareholders’ meeting.38 The request may be based on the complaint that formality and procedure for convening the shareholders’ meeting failed to comply with the Enterprise Law and the company charter or the formality and procedure for adopting decisions of the shareholders’ meeting as well as the content of such decisions are contrary to the Enterprise Law or the company charter.39 Thai company law enables a group of five shareholders or shareholders holding at least one-fifth of company shares to request the court to cancel resolutions of the shareholders’ meeting.40 Shareholders of Malaysian corporations may challenge shareholder resolutions as being beyond the powers of the meeting or as ultra vires the purposes of the company.41 Vietnamese and Malaysian law both enable shareholders to convene an extraordinary shareholder meeting under certain circumstances. Vietnamese shareholders or shareholders’ groups holding more than ten percent of shares may convene an extraordinary shareholders’ meeting if the board of management and the supervisory board fail to do so at their request.42 Nevertheless, the legal barrier is high as shareholders have to provide evidence of violations by the board of management.43 Malaysian law allows shareholders who have requested an extraordinary meeting to convene the meeting at the expense of the company if the directors fail to do so.44 In addition, two or more shareholders holding at least ten percent of shares or five percent in number may convene a meeting at their own expense.45 Thai law is stricter: shareholders holding at least one-fifth of shares or at least 25 shareholders holding at least one-tenth may request the convocation of an extraordinary meeting.46 However, Thai law entitles only the chairman of the board to convene the meeting. 37 38 39 40 41 42 43 44 45 46

Sec. 181 E para. 1 (d) of the Companies Act. Art. 107 of the Enterprise Law 2005. Art. 107 (1) and (2) of the Enterprise Law 2005. Sec. 108 para. 1 of the Public Limited Companies Act. Sec. 20 para. 2 (a) of the Companies Act. Art. 79 sec. 2 lit. c, 97 sec. 6 of the Enterprise Law 2005. Art. 79 para. 3 of the Enterprise Law 2005. Sec. 144 para. 3 of the Companies Act. Sec. 145 of the Companies Act. Sec. 100 of the Public Limited Companies Act.

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B. The Legal Protection of Minority Shareholders

In exchange, Thai law provides for another device to protect minority shareholders. Thai company law entitles shareholders who hold 20 percent of shares or one-third of shareholders to apply to the Registrar to appoint an inspector to examine the business affairs of the company.47 Nevertheless, the high threshold may prevent minority shareholders from making use of this device. All three jurisdictions have also enhanced their focus on related-party transactions and provide majority-of-the-minority approval requirements for fundamental transactions between the corporation and its controlling shareholders. Vietnamese law requires shareholder approval for all contracts and transactions between the corporations and controlling shareholders who own more than 35 percent of ordinary shares or their related persons when the contract or transaction equals 50 percent of the assets of the corporation.48 Contracts or transactions without prior shareholder approval are void.49 Listed companies may not provide financial security for their shareholders and their affiliated persons.50 Malaysian company law used to limit approval requirements to transactions between a company and its directors and with persons connected to the director respectively. Since 2007, ‘substantial shareholders’ or persons connected to them have to obtain the prior approval of the general meeting before they acquire shares or non-cash assets from the company or dispose of shares or non-cash assets to the company.51 The listing requirements impose a comprehensive framework in order to protect minority shareholders. Transactions between corporations and major shareholders with a percentage ratio of five percent or more do not only require shareholders’ approval but the company has to appoint an independent advisor who inter alia comments on whether the transaction is to the detriment of minority shareholders and advises minority shareholders on how to vote.52 If the percentage ratio is 25 percent or higher, the corporation has to appoint a principal advisor who must ensure that the transaction is carried out on fair and reasonable terms and not to the detriment of minority shareholders.53 47

Sec. 128 para. 1 of the Public Limited Companies Act. Art. 120 sec. 1 lit. a, sec. 3 of the Enterprise Law 2005. 49 Art. 120 sec. 4 of the Enterprise Law 2005. 50 Art. 24 sec. 3 Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007. 51 Sec. 132 E (1), (2) of the Companies Act. A substantial shareholder is a person who has an interest in not less than 5 percent of the nominal amount of the company’s voting shares, see sec. 69 D of the Companies Act. 52 10.08 (3) Listing Requirements Main Market. 53 10.08 (4) Listing Requirements Main Market. 48

II. A Comparative Legal Analysis

55

Thai law provides rules for publicly traded and listed companies. Transactions between a publicly traded company and persons having control over the company require prior approval of the shareholders’ meeting unless it is a transaction on general commercial terms.54 Listing requirements also require approval of the shareholders’ meeting for substantial significant assets or services transactions between listed corporations and connected persons including major shareholders.55 Such a transaction is defined as a transaction when the assets or services transaction exceeds THB 20 million or three percent of net tangible assets, whichever is higher.56 Furthermore, the company has to provide the opinion of an independent financial advisor to the shareholders prior to the meeting.57 Financial assistance transactions also require shareholders’ approval, depending on the recipient and the amount.58 All jurisdictions usually impose supermajority approval requirements for certain significant corporate decisions in order to enhance minority decision rights. Vietnamese law is unusual in that it exceeds this standard by mandating a supermajority approval requirement of 75 percent for certain key decisions and a 65 percent requirement for all other decisions that fall within the competence of the shareholders’ meeting.59 This means that Vietnamese law imposes a supermajority approval requirement for every decision of the shareholders’ meeting. This requirement is tightened even further by the fact that the law provides a 65 percent quorum requirement.60 It seems that, by 54 Sec. 89 / 12 and 89 / 1 of the Securities and Exchange Act. Control means holding of 50 percent of voting rights, or having directly or indirectly control of the majority voting rights or having control over the appointment or removal of at least half of all directors, see sec. 89 / 1 of the Securities and Exchange Act. 55 Stock Exchange of Thailand, The Listed Companies Handbook (2009) 43–64. Major shareholders are shareholders who hold more than ten percent of shares, see p. 48. 56 Stock Exchange of Thailand, The Listed Companies Handbook (2009) 53. 57 Stock Exchange of Thailand, The Listed Companies Handbook (2009) 43–64. 58 Stock Exchange of Thailand, The Listed Companies Handbook (2009) 55. 59 According to CIEM, when the Law on Enterprises 1999 was enacted, shareholding companies had only three to five shareholders, so the convocation of a shareholders’ meeting did not face any problems. This situation has thoroughly changed, especially for former state-owned enterprises which have been equitized. As a large stake of shares was sold to employees, these shareholding companies now have a very large percentage of small shareholders. It is now argued that the rule should remain in place because it protects minority shareholders as there exist many public companies in which a state-owned or private shareholder holds between 51 and 65 percent so that this rule prevents a single shareholder from being able to convene the meeting. However, the organization of shareholders’ meetings is costintensive. Public companies with dispersed shareholders face serious problems to reach the quorum and have to bear the costs in case the quorum is not reached. 60 Art. 102 sec. 1 of the Enterprise Law 2005.

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B. The Legal Protection of Minority Shareholders

introducing this device, the lawmakers intended to encourage small shareholders to buy shares in shareholding companies.61 All interviewees agreed that it is the most effective of the Vietnamese devices to protect minority shareholders.62 However, it is questionable if the rule is in accordance with Vietnam’s international obligations.63 The 75 percent approval requirement applies to decisions on share offers, charter amendments, reorganization and dissolution of the company and investments or sale of assets equal to or more than 50 percent of the corporation’s assets.64 Thai law provides for two supermajority approval requirements. Decisions on transfers or hire of important parts of the business, the purchase of other 61 Interview with a representative of the Business Environment and Competitiveness Department at CIEM. 62 Interview with an expert from the Civil Law Department of the Ministry of Justice; an expert from the legal department of the Vietnam Chamber of Commerce and Industry; and an employee of the Vietnam International Bank. 63 During negotiations concerning Vietnam’s accession to WTO, concerns were expressed on the ability of majority shareholders owning at least 51 but less than 65 percent of shares to control investment decisions as the Enterprise Law provides a quorum rule and a voting requirement for ordinary resolutions of 65 percent. A representative of Vietnam confirmed that after Vietnam’s accession to WTO, foreign investors of a joint venture would have the right to determine the quorum rule and voting requirements in the charter. See World Trade Organization, Working Party on the Accession of Viet Nam, Accession of Vietnam: Report of the Working Party on the Accession of Viet Nam (27 October 2006). With a view to art. 3 sec. 3 of the Enterprise Law 2005 that gives precedence to international treaties in which Vietnam is a member, the National Assembly enacted resolution 71 / 2006 / QH11. In case of a discrepancy between the treaty and the Enterprise Law, the resolution stipulates the direct application of Vietnam’s commitments stated in the Annex to the resolution and other WTO commitments that are adequately detailed and clear in the Protocol, attached annexes and the Report of the Working Party on the Accession of Vietnam to the Agreement Establishing the WTO. According to the appendix of resolution 71 / 2006 / QH11, the charter of a joint stock company may provide in the company’s charter the necessary quorum rule, the decision procedure of the shareholders’ meeting, the issues falling under authority of the shareholders’ meeting and the voting percentage requirements (including the percentage of 51 percent). However, such an approach seems to be problematic as, in regard to the hierarchy of norms, the resolution is inferior to the law and therefore not able to amend it. Some domestic companies have asked the State Securities Commission if they could apply the resolution. However, state management agencies have asked domestic companies not to apply it and to follow the rules of the Enterprise Law. In any case, foreign-invested shareholding companies are allowed to apply the rules of the regulation. It seems that at the moment, no domestic shareholding companies are applying the 51percent rule. In consequence, many shareholders’ meetings had to be postponed in 2009 because companies did not achieve the minimum quorum. 64 Art. 104 sec. 3 lit. b of the Enterprise Law 2005.

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businesses, changes of management, amalgamation65, issuance of debentures66, dissolution67, increases and reductions in capital68, debt-for-equity conversion plans69, amendments of the memorandum or the articles of association70 and the removal of directors71 require a supermajority approval of 75 percent. Decisions on remuneration of directors require a supermajority of two-thirds.72 For listed companies, the Capital Market Supervisory Board may impose further issues to be approved by a supermajority.73 For example, Thai regulation imposes a 75 percent requirement for certain connected transactions of listed corporations.74 Malaysian law is the most reluctant to impose supermajority approval requirements, mandating a threshold of 75 percent for amendments to the company’s articles of association75, variation of class rights76 and capital reductions77 as well as delisting.78 3. Independent Directors All three jurisdictions rely at least partly on independent directors and the norm of equal treatment as part of the incentive strategy to protect minor65

Sec. 146 para. 1 of the Public Limited Companies Act. Sec. 145 para. 2 of the Public Limited Companies Act. 67 Sec. 154 lit. 1 of the Public Limited Companies Act. 68 See sec. 136 para 2 of the Public Limited Companies Act for capital increases and sec. 139 para. 3 of the Public Limited Companies Act for capital decreases. 69 Sec. 51 para. 1 of the Public Limited Companies Act. 70 Sec. 31 para. 1 of the Public Limited Companies Act. 71 Sec. 76 of the Public Limited Companies Act. 72 Sec. 90 para. 2 of the Public Limited Companies Act. Such a decision is only allowed if the remuneration is not stipulated for in the articles of association. 73 Sec. 89 / 29 para. 1 lit. 7, para. 2 lit. 2 of the Securities and Exchange Act. 74 Art. 22 Notification No. Bor.Jor. / Por.22-01 Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Connected Transactions, 19 November 2003. 75 Sec. 31 (1) of the Companies Act. 76 When the company’s constitution sets out the procedure for varying or cancelling class rights, sec. 65 (1) of the Companies Act applies. Companies that adopted Table A articles of association will then have to comply with sec. 4 that mandates a special resolution (or the consent in writing) of the holders of the issued shares of that class. When the company’s articles do not set out a procedure, class rights would usually be stated in the Articles of Association in accordance with sec. 66 of the Companies Act, meaning that class rights might be altered by amending the articles of Association in accordance with sec. 31 (1) of the Companies Act. 77 Sec. 64 (1) of the Companies Act. 78 16.06 (b) Listing Requirements Main Market. 66

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ity shareholders’ rights. Vietnamese law on listed shareholding companies imposes the requirement that one-third of board members be non-executive independent directors.79 However, the definition of independent director is very narrow. An independent director is someone who is not the Director or the General Director, a Deputy Director or a Deputy General Director, the chief accountant or another managerial staff member appointed by the board of directors, or a major shareholder of the company.80 Thai regulation requires that one-third and at least three persons of the board of directors of listed companies be independent directors, meaning that they must not have any business or professional relationship with the head office, subsidiaries, associates, or legal persons for their own interests, whether directly or indirectly.81 More precisely, an independent director is a director who − holds less than one percent voting shares in the company, its parent company, subsidiaries or affiliates, − has not been involved in management as an employee or advisor receiving monthly wages from the company, its parent company, subsidiaries or affiliates for at least two years, − is not related, whether by blood or law, to an executive or a major shareholder of the company or its subsidiaries, − does not have a business relationship with the company, its parent company, subsidiaries or affiliates or conflicting entity, − is not a major shareholder, director or executive of a company who has a relationship with the company, its parent company, subsidiaries or affiliates for at least two years, − is not an auditor of the company, its parent company, subsidiaries or affiliates, − is not a major shareholder, director, executive or managing partner of an audit firm which employs the auditor of the company, its parent company, subsidiaries or affiliates for at least two years, − does not work as a professional advisor under specified conditions, 79 Art. 11 Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007. 80 Art. 2 sec. 1 lit. d Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007. 81 Circular No. Kor Lor Tor Kor (Wor) 11 / 2552 Re: the Amendment of the Regulation regarding the Independent Director, April 2009.

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− is not a director appointed to manage the company, to represent a major shareholder or a shareholder related to a major shareholder, − is not engaged in a business similar to or competing with the company or its subsidiaries, − is not a substantial partner of a partnership or a director involved in management, an employee or an advisor receiving monthly wages or a shareholder holding more than one percent of voting shares of a competitor, and − does not have any other characteristics that will hinder an independent view on a company’s operation.82 Malaysian listing requirements state that one-third or at least two persons of the board must be independent directors.83 Independent director means a director who is independent of management and free from any business or any other relationship that could interfere with the exercise of independent judgment or the ability to act in the best interests of the company.84 The definition excludes inter alia executive directors, officers or major shareholders and their family members or nominees or representatives, persons who have worked for the company in the last two years, and advisors.85 4. Equal Treatment The jurisdictions differ in their application of the norm of equal treatment for shares of the same class, with Vietnamese law once more granting the highest level of protection. It expressly mandates equal treatment for shares of the same class86 and applies the norm on share repurchases.87 Thai law imposes equal treatment for identical classes of shares in regard to dividends.88 In respect to share repurchases, the norm of equal treatment is applied insofar as share repurchases are not allowed except for some nar82 The summary is taken from Mayer Brown, Thai listed companies to recruit more independent directors, http: /  / www.mayerbrown.com / publications / thai-listedcompanies-to-recruit-more-independent-directors-02-05-2010 / . See also Wynne, Andrew / Luengruengtip, Poosit, Thailand, in: Millstein, Ira / Gregory, Holly (ed.), (2011) 228 (231). 83 3.04 Listing Requirements Main Market. 84 1.01 Listing Requirements Main Market. 85 1.01 Listing Requirements Main Market. 86 Art. 78 sec. 5 of the Enterprise Law 2005. 87 Art. 91 sec. 3 of the Enterprise Law 2005. 88 Sec. 115 para. 2 of the Public Limited Companies Act. The articles of association may provide the issuance of preference shares with higher dividend rights.

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rowly specified circumstances.89 Malaysian unlisted companies are generally not permitted to buy back shares.90 Listed companies may buy back shares if the companies are solvent, the purchase is made through Bursa Malaysia in accordance with the relevant rules, in good faith and in the interests of the company.91 Vietnam mandates pre-emptive rights that cannot be waived.92 Thai company law provides pre-emptive rights as a default rule but the shareholders’ meeting may decide otherwise with a majority of three-fourths of votes.93 Issuance of new shares in Malaysian companies requires shareholders’ approval but it is not mandatory to offer shares to existing shareholders. However, Malaysian listing rules provide that listed enterprises offer new shares to existing shareholders unless shareholders decide otherwise by ordinary resolution at the shareholders’ meeting.94 5. Constraints and Affiliation Rights The jurisdictions differ most in their use of constraints and affiliation rights to protect minority shareholders. In respect to legal constraints, all three jurisdictions have introduced some type of duty of loyalty. For Vietnamese law, directors’ duties are a new concept.95 Interestingly, the duty of loyalty is owed not only to the company, but also to the shareholders.96 The Thai Public Limited Companies Act does not expressly stipulate a duty of loyalty and only requires directors to comply with the laws, objects and articles of association and the shareholders’ meeting resolutions in good faith and with care to preserve the interests of the company.97 Furthermore, directors who perform any act that is approved by the shareholders’ meeting 89 Thai law bans share repurchases except for financial management purposes or in the case of a shareholder voting against a shareholders’ meeting resolution amending articles in regard of voting and dividend rights, see sec. 66 / 1 lit. 1 of the Public Limited Companies Act. Malaysian law allows share repurchases when the company is listed, solvent, the purchase is made on the stock exchange and was made bona fide, see sec. 67 A of the Companies Act. 90 Sec. 67A of the Companies Act. An unlisted company might only repurchase its own shares through the redemption of redeemable preference shares (sec. 61 of the Companies Act) or by a court order based on sec. 181 of the Companies Act. 91 Sec. 67A of the Companies Act. 92 Art. 79 sec. 1 lit. c of the Enterprise Law 2005. 93 Sec. 137 and Sec. 136 of the Public Limited Companies Act. 94 7.08 Listing Requirements Main Market. 95 Art. 119 of the Enterprise Law 2005. 96 Art. 119 sec. 1 lit. c of the Enterprise Law 2005. 97 Sec. 85 para. 1 of the Public Limited Companies Act.

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are not liable to the company.98 By contrast, Thai securities law stipulates a duty of loyalty for directors of publicly traded companies.99 Directors of Thai publicly traded companies may not be exempted from their liabilities by the shareholders’ meeting when they act in bad faith or with gross negligence.100 Shareholders holding more than five percent of shares may initiate a derivative suit if a breach of the duty of loyalty results in undue benefits for the directors / executives or related persons and the company fails to bring an action against them.101 If the action is brought in good faith, the court may order the company to compensate shareholders for their expenses.102 Furthermore, executives who violate their fiduciary duties risk a fine or imprisonment or both. The Malaysian Companies (Amendment) Act 2007 clarified directors’ duties by amending or inserting new provisions, including those regarding the duty of care, skill and diligence and the duty to avoid conflicts of interest.103 The company law now also includes a provision that codifies the common law rule that nominee directors must act in the best interests of the company and that they must not subordinate this duty to the duty to their nominator in case of a conflict between the two duties.104 Malaysian corporate law also provides for the oppression remedy in the case of oppression or disregard of interests or unfair discrimination or prejudice against a shareholder or shareholders by majority shareholders or directors.105 Malaysian common law restricts the power of the majority by the equitable limitation of majority voting power.106 Vietnamese law on listed enterprises obliges major shareholders not to abuse their advantage to cause damage to the rights and benefits of the company and other shareholders, but it does not state the consequences.107 98

Sec. 95 of the Public Limited Companies Act. Sec. 89 / 7 and 89 / 10 of the Securities and Exchange Act. 100 Sec. 89 / 21 of the Securities and Exchange Act. 101 Sec. 89 / 18 para. 2 of the Securities and Exchange Act. 102 Sec. 89 / 18 para. 3 of the Securities and Exchange Act. 103 See the compilation of amended or newly adopted sections in Legal Research Board, Companies Act 1965 (Act 125), Regulations, Rules & Order (2009) 498 and Salim, Mohammad Rizal, Company Law Reform in Malaysia: The Role and Duties of Directors (2009) for an overview on the contents. 104 Sec. 132 (1E) of the Companies Act. See Salim, Mohammad Rizal, Company Law Reform in Malaysia: The Role and Duties of Directors (2009). 105 Sec. 181 of the Companies Act. 106 Sulaiman, Aiman Nariman Mohd et al., Commercial Applications of Company Law in Malaysia (2005) 207–211. 107 Art. 5 sec. 2 Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007. 99

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Another new point of focus in all three jurisdictions is disclosure of shareholding structures and related-party transactions. Vietnamese enterprise law mandates that companies have to inform shareholders of the ownership structure 30 days prior to the shareholders’ meeting.108 Vietnamese listed companies have to regularly disclose information on major shareholders.109 Thai company law gives shareholders the right to examine the register of shareholders.110 Thai listed corporations have to disclose the top ten shareholders in the annual report.111 Malaysian companies are required to keep a register of members.112 Malaysian public companies are obliged to keep a register of substantial shareholders113 that may be inspected by members of the company without charge and by non-shareholders for a prescribed fee.114 Malaysian listing rules require listed corporations to disclose the top 30 shareholders of the corporation in the annual report.115 According to Vietnamese enterprise law, contracts and transactions between a corporation and the controlling shareholder and related persons that require board approval have to be displayed at the head office or branches of the company.116 Vietnamese listed companies have to provide information about transactions of company shares by major shareholders.117 According to Thai listing rules, every connected transaction must be disclosed in the annual report.118 Malaysian listing rules require listed corporations to disclose information on material contracts involving interests of inter alia major shareholders and related party transactions in the annual report.119 108

Art. 98 sec. 2 of the Enterprise Law 2005. Art. 29 sec. 1 Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007. 110 Sec. 63 para. 1 of the Public Limited Companies Act. 111 Notification Annual Report (Form 56-2), 13 March 2009. 112 Sec. 158 (1) of the Companies Act. 113 Sec. 69L (1) of the Companies Act. A substantial shareholder is a shareholder who holds an interest of at least 5 percent in the aggregate of the nominal amount of all voting shares in the company, see sec. 69D of the Companies Act. 114 Sec. 69L (2) of the Companies Act. 115 Appendix 9C, Part A (23) (e) Listing Requirements Main Market. 116 Art. 120 sec. 2 of the Enterprise Law 2005. 117 Art. 28 sec. 1 lit. g Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007. 118 Stock Exchange of Thailand, The Listed Companies Handbook (2009) 56. 119 Appendix 9C, Part A (21) and (22) and 10.09(2)(b) Listing Requirements Main Market and paragraph 3.1.5 of Practice Note 12. 109

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Due to the long-term character of the corporate relationship, jurisdictions seldom rely on exit rights except in unusual circumstances.120 Accordingly, all three jurisdictions provide for some form of exit strategy but limit these exit rights to special cases. Vietnamese law allows shareholders who vote against decisions of the shareholders’ meeting in regard to the reconstruction of the company or alteration of rights and obligations of shareholders stipulated in the company charter, to request the shareholding company to buy back their shares.121 Thai shareholders can request that the company buy back their shares if they vote against the amalgamation of the company.122 Malaysian law does not allow shareholders the mandatory right to request the company to buy back their shares. However, a court may order the company to buy back the shares of an oppressed minority shareholder.123 Malaysian law also allows companies to buy back shares of shareholders dissenting from schemes or contracts involving the transfer of shares.124 6. Takeovers Takeover rules of the three jurisdictions differ especially in regard to thresholds, reference time for share pricing, squeeze-out rules and the right of minority shareholders to request the acquirer to purchase their shares. Vietnamese law mandates that an acquirer who attempts to acquire 25 percent of the share capital of the target company must make a mandatory offer.125 Vietnamese law expressly mandates that the acquirer not unfairly discriminate against owners of the same class of shares.126 The price of an offer to purchase shares of a listed company must not be lower than the average reference price as announced by the Stock Exchange in the 60 days preceding the registration of the offer and not less than the highest purchase price paid to the offeror within this period.127 In the case of a non-listed company, the price must not be less than the average price of shares listed by at least two securities companies in the 60 days preceding the submission of the offer and not less than the highest purchase price paid within 120 Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (99). 121 Art. 99 sec. 1 of the Enterprise Law 2005. 122 Sec. 146 para. 2 of the Public Limited Companies Act. 123 Sulaiman, Aiman Nariman Mohd et al., Commercial Applications of Company Law in Malaysia (2005) 348–349, 351. 124 Sec. 180 of the Companies Act. 125 Art. 32 (1) (a) of the Law on Securities. 126 Art. 32 (5) (c) of the Law on Securities. 127 Art. 48 (1) (a) Decree No. 58-2012 / ND-CP Providing detailed Regulations for Implementation of a Number of Articles of the Law on Securities, 20 July 2012.

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this period.128 Minority shareholders are further protected by the fact that remaining shareholders are entitled to request an acquirer who has acquired at least 80 percent of shares to purchase their shares.129 According to Thai law, an acquirer who acquires shares triggering the 25 percent, 50 percent or 75 percent trigger point has to make a mandatory offer.130 The regulation also includes the chain principle.131 The acquirer has to pay the same price to all holders of shares of the same class132 and to offer the highest price paid for the shares of the offeree in the preceding 90 days.133 The target company has to appoint an independent financial advisor who has to advise shareholders on whether to accept or reject the takeover offer.134 Malaysian law provides that an acquirer who acquires more than 33 percent of voting shares of the target company or an acquirer who is holding between 33 percent and 50 percent of the company’s voting shares acquires or intends to acquire more than two percent of shares in any period of six months has to make a mandatory offer.135 Malaysian law also provides for the concept of ‘acting in concert’.136 The offeror has to pay the highest price paid for the shares of the offeree in the preceding six months.137 The target company has to appoint an independent advisor to advise on the transaction and to give a recommendation.138

128 Art. 48 (1) (b) Decree No. 58-2012 / ND-CP Providing detailed Regulations for Implementation of a Number of Articles of the Law on Securities, 20 July 2012. 129 Art 32 (9) of the Law on Securities. 130 Clause 4 Notification No. ThorJor. 12 / 2554 Re: Rules, Conditions and Procedures for the Acquisition of Securities for Business Takeovers, 13 May 2011. 131 Clause 6 Notification No. ThorJor. 12 / 2554 Re: Rules, Conditions and Procedures for the Acquisition of Securities for Business Takeovers, 13 May 2011. 132 Clause 35 (1) Notification No. ThorJor. 12 / 2554 Re: Rules, Conditions and Procedures for the Acquisition of Securities for Business Takeovers, 13 May 2011. 133 Clause 36 Notification No. ThorJor. 12 / 2554 Re: Rules, Conditions and Procedures for the Acquisition of Securities for Business Takeovers, 13 May 2011. 134 See Chapter 8 Stock Exchange of Thailand, Listing and Disclosure Department, Disclosure Manual (2007). 135 Sec. 9 (1) of the Malaysian Code on Take-Overs and Mergers 2010. 136 Sec. 2 (1), 4 of the Malaysian Code on Take-Overs and Mergers 2010. 137 Sec. 21 of the Malaysian Code on Take-Overs and Mergers 2010. 138 Sec. 15 of the Malaysian Code on Take-Overs and Mergers 2010.

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7. Delisting According to Vietnamese regulation, voluntary delisting of Vietnamese listed corporations requires approval by 50 percent of the voting shareholders who are not major shareholders.139 Thai regulation mandates that voluntary delisting requires that shareholders holding at least three-fourths of the total issued shares approve the delisting.140 Furthermore, the shares held by the shareholders who object to the delisting shall not exceed ten percent of the total issued shares of the listed company.141 In addition, a new amendment introduced in 2009 requires the company to appoint an independent financial advisor in order to advise shareholders on the proposal.142 Malaysian listing regulation requires that a majority, in number representing three-fourths of the value of the shareholders and holders of any other class of listed securities present at the shareholders’ meeting and voting, approve the delisting proposal.143 Furthermore, the proportion of shareholders or holders objecting to the withdrawal at the shareholders’ meeting must not be more than ten percent in value.144 As with Thai regulation, Malaysian listing rules require that the company appoint an independent advisor to make recommendations to the shareholders.145 In addition, Malaysian regulation mandates an exit offer. The company has to offer shareholders a reasonable cash alternative or other reasonable alternative.146

III. Conclusions Comparison of the legal protection of minority shareholders in Vietnam, Thailand and Malaysia shows that, despite the different backgrounds of their legal systems, a certain convergence towards Anglo-American con139 Art. 60 (2) (a) Decree No. 58-2012 / ND-CP Providing detailed Regulations for Implementation of a Number of Articles of the Law on Securities, 20 July 2012. According to Art. 4 (9) of the Law on Securities, major shareholders are shareholders owning directly or indirectly five percent or more of the voting shares. 140 Art. 5 Notification Bor.Jor. / Phor.01-00 Re: Delisting of Securities, 9 December 1999. 141 Art. 5 Notification Bor.Jor. / Phor.01-00 Re: Delisting of Securities, 9 December 1999. 142 Art. 4 (1) Notification Bor.Jor. / Phor.01-00 Re: Delisting of Securities, 9 December 1999. 143 16.06 (b) Listing Requirements Main Market. 144 16.06 (b) Listing Requirements Main Market. 145 16.06 (d) Listing Requirements Main Market. 146 16.06 (c) Listing Requirements Main Market.

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cepts has taken place. This is evident in the adoption of statutory derivative action in Vietnam and Thailand, of rules mandating independent directors, and of rules enhancing directors’ duties. The convergence is particularly marked in Thai and Malaysian listing rules and the regulation of listed companies respectively. There may be several explanations for this fact. First, perceived pressure to adapt to so-called international standards of corporate governance in order to regain investors’ trust and international competitiveness may have played a role. Second, it may be that these legal devices are in fact the most efficient tools to protect minority shareholders. One important point of convergence concerns related-party transactions between controlling shareholders and their corporations. It has been argued that related-party transactions were one of the tools most often used to expropriate minority shareholders. The literature on corporate law sees “the inability to stop controllers’self-dealing as central to developing securities markets and the means to finance large firms”147. As a result of the lessons learned or possibly because of foreign pressure also, all three jurisdictions have placed special emphasis on this point during the last few years. This factor also shows that lawmakers in the three jurisdictions take into account that the corporate sector is characterized by concentrated ownership and a potential conflict between controlling and minority shareholders. Especially interesting in its tendency to convergence is the Vietnamese rule providing the nomination of independent directors on the board of management for listed shareholding companies. As Vietnamese corporate law mandates a supervisory board, the monitoring role that independent directors are meant to exercise in jurisdictions providing one-tier boards, should be fulfilled by the supervisory board, at least in theory. However, the supervisory board has only a weak legal position, raising doubts about its ability to supervise the board of management. Neither is it legally entitled to nominate the members of the board of management or the auditor nor is it responsible for the remuneration of members of the board of management. Furthermore, the Enterprise Law does not mandate the board of management to seek approval from the board of supervision for certain fundamental transactions. Empirical research outlined later concludes that the supervisory board is a particularly weak factor in the corporate governance chain of Vietnamese corporations. The Vietnamese example illustrates how hybrid models emerge as a compromise between path dependency and increasing pressure for convergence. Another interesting fact is that Thai and Malaysian law rely more and more on independent advisors to guide shareholders in their decision-mak147 Roe, Mark J., The Institutions of Corporate Governance, in: Ménard, Claude / Shirley, Mary M. (ed.), (2005) 371 (374).

III. Conclusions

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ing. This takes into account the increasing complexity of the capital market and the high level of specialization needed to assess and value certain corporate decisions. On the one hand, this reduces the costs for minority shareholders to make informed decisions and should facilitate shareholder activism. However, this shift also means an increasing dependency on gatekeepers, requiring the lawmakers and regulatory bodies to ensure the quality and integrity of gatekeepers. A comparison with other legal jurisdictions, including those of Continental Europe, Japan, the UK and U.S., would shed light on the question of whether this is a worldwide trend or a specific local development. To sum up, it can be argued that there is a certain degree of convergence yet, some important differences remain. The most significant point regards minority shareholder appointment rights. In Vietnam, cumulative voting is mandatory. In Thailand, the Securities Commission tries to promote cumulative voting which is the statutory default but routinely excluded by charter provision. This contradicts the long-term trend away from minority empowerment observed by Kraakman et al. for some core jurisdictions.148 Another, more fundamental point concerns the quality of the laws and regulations. Vietnamese interviewees judged their quality as very poor. They criticized the lack of detail, clarity and cohesion because of their occasional contradictory nature. All interviewees noted that it would be necessary to amend laws and regulations in order to improve the protection of minority shareholders. Thai interviewees differed in their opinion of the legal framework. Some interviewees reported that the legal framework is sufficient but lacks implementation and enforcement. Other interviewees reported that they see room for improvement of the legal framework. Malaysian interviewees generally agreed that the legal framework for the protection of minority shareholders in Malaysia is sufficient but that it lacks implementation and enforcement. Some interviewees even noted that the Malaysian legal framework exceeds the United States’ Sarbanes-Oxley-Act. Another question is the extent to which the legal strategies employed by the jurisdictions to protect minority shareholders work in practice. The analysis has shown a significant convergence in formal laws along AngloAmerican guidelines, indicating that lawmakers, especially in Vietnam and Thailand, relied on legal transplants when addressing the problem of minority shareholders’ protection. However, legal transplants may have a different 148 According to Enriques, Luca et al., Minority Shareholders, in: Kraakman, Reinier H. et al. (ed.), (2009) 89 (105), the trend in the surveyed countries France, Germany, Italy, Japan, the UK and the U.S. is moving away from minority empowerment through devices such as proportional voting and strong supermajority rules.

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impact under different local conditions.149 Another factor that may lead to different results is the fact that laws and regulations are necessarily incomplete and sometimes ambiguous as the lawmakers also face the limitations set by bounded rationality and opportunism. The following chapter will evaluate the factual protection of minority shareholders and expose the divide between the law on the books and real practice.

149 See Kirchner, Christian, Comparative Law and Institutional Economics – Legal Transplants in Corporate Governance, in: Nobel, Peter / Gets, Marina (ed.), (2006) 201 (203–204).

C. The Factual Protection of Minority Shareholders in Vietnam, Thailand and Malaysia I. Vietnam 1. Features of the Vietnamese Corporate Landscape The present ownership structure of today’s Vietnamese joint-stock companies is the outcome of a reform process of the economic system that included the restructuring and equitization of state-owned enterprises (SOEs) as well as the establishment of general corporations, economic groups and the State Capital Investment Corporation. The reform process officially started in 1986 when the Sixth Party Congress agreed to shift to a multisector, market-oriented economy and officially adopted Doi Moi.1 However, Fforde / de Vylder argue that, in reality, the centrally-planned system was already more of a bargaining economy than a command economy, in which managers of SOEs used to negotiate with central planners on targets and resources.2 Both Fforde / de Vyler and Painter argue that the shift to a market economy was essentially a bottom-up process that was initiated by local actors who broke the rules and engaged in informal market activities (fence-breaking).3 Policy reforms were simply an official legalization of these already existing informal activities.4 The Sixth Party Congress was followed by a wide range of reforms including more autonomy for enterprises over business affairs.5 Fforde / de Vylder state that by 1989, the economic system could finally be considered a market economy.6 1

Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 68. Fforde, Adam / de Vylder, Stefan, From Plan to Market (1996) 58. 3 Fforde, Adam / de Vylder, Stefan, From Plan to Market (1996) and Painter, Martin, Development Studies 41 (2005) 261 (266). Fforde / de Vylder argue that, from the very early 1960s, local individuals already started to engage in illegal market activities that the authorities were unable or unwilling to prevent. These activities noticeably increased during the late 1970s when the state failed to supply state-owned enterprises with the necessary inputs and local individuals started to initiate autonomous transactions in order to acquire these inputs. When markets finally emerged during the 1980s, the gap between the formal rules that still presumed a centrally planned system and real practice resulted in a plan-market duality. 4 Painter, Martin, Development Studies 41 (2005) 261 (266). 5 This autonomy was granted by Decision No. 217 / HDBT on the Promulgation of the Policy for Reforming Planning and Business Accounting in SOEs, 14 Novem2

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The reforms loosened the central government’s administrative control over SOEs and left a power vacuum that was filled by local government officials.7 As a consequence, alliances between state and Party officials and managers of SOEs that emerged during the 1980s acquired assets and benefits and exercised pressure on the central state to pursue further reforms.8 Gainsborough emphasizes that these reforms were successful when state business interests which would benefit from the reforms were able to play off the potential losers.9 During the 1990s, the central government started to recentralize power using different tools. On the administrative level, a new law on Local Administration in 1994 treated People’s Committees at all levels as representatives of the central government.10 In 1995, the number of administrative intermediaries was reduced and distribution, allocation and taxation power was delegated to selected administrative units.11 Vasavakul argues that these measures were quite successful in reducing the vested interests of Party members and state officials in the decentralized economy.12 Furthermore, Painter assumes that the government used the process of restructuring SOEs to regain power over local actors 6

ber 1987. For a helpful summary of major reform measures after the Sixth Party Congress, see Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 72–75. 6 Fforde, Adam / de Vylder, Stefan, From Plan to Market (1996). 7 Painter, Martin, Development Studies 41 (2005) 261 (267). 8 Fforde, Adam / de Vylder, Stefan, From Plan to Market (1996) 86; Gainsborough, Martin, Communist and Post-Communist Studies 35 (2002) 353 (354); Painter, Martin, Development Studies 41 (2005) 261 (270). See also Vasavakul, Thaveeporn, Reform of state institutions, in: Leung, Suiwah (ed.), (1996) 42 (52) who quotes statistics of the Office of State Inspection on Citizens’ Complaints between 1992 and 1994. 9 Gainsborough, Martin, Communist and Post-Communist Studies 35 (2002) 353 (364, 365). Gainsborough argues that reform in Vietnam was the outcome of the struggle between various state business interests for resources and power. 10 Vasavakul, Thaveeporn, Reform of state institutions, in: Leung, Suiwah (ed.), (1996) 42 (58). Each of the municipal / provincial, precinct / district and urban quarter / rural commune levels of government had a People’s Council elected directly by Vietnamese voters and an executive People’s Committee whose members were nominated by the People’s Council. According to Vasavakul, as local units responsible for education, health care, culture, finance and labor were under the jurisdiction of both People’s Committees and central ministries, they tended to play off People’s Committees against central ministries and vice versa, see pp. 57–58. 11 Vasavakul, Thaveeporn, Reform of state institutions, in: Leung, Suiwah (ed.), (1996) 42 (60). 12 Vasavakul, Thaveeporn, Reform of state institutions, in: Leung, Suiwah (ed.), (1996) 42 (63, 64). Vasavakul argues that, in consequence, the reforms have also been successful in promoting the property rights of citizens and in alleviating administrative abuses.

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who abused state resources for personal enrichment.13 The whole transition process, including restructuring of SOEs, the establishment of general corporations, economic groups and the SCIC, equitziation and the reform of the court system, may therefore be understood as an attempt by the central government to regain power over local authorities. a) Restructuring State-Owned Enterprises Despite the reforms during the 1980s, the state business sector remained a major concern for the central government as it threatened the stability of the economic system and therefore the power of the establishment. In 1987, local authorities had been given the authority to establish new SOEs and started to make generous use of this authority as they had more freedom to use SOE resources than other state resources.14 This led to a dramatic increase in the number of SOEs established by local authorities.15 At the beginning of 1990, 12,297 SOEs existed in Vietnam, with a combined total capital of VND34,216 billion.16 Most of them were characterized by small size and low technology standards and over 50 percent of SOEs were lossmaking.17 Control of SOEs was difficult as they belonged to around 500 different ‘owning’ administrative units.18 Furthermore, control of SOEs was diffuse. The agencies that established the enterprise (called line ministries) were responsible for the administrative and economic supervision and management of the enterprise.19 At the same time, each enterprise was also 13 Painter, Martin, Contemporary Southeast Asia 25 (2003) 20 (21). However, he points out that beneficiaries of the decentralized economy were represented in the highest organs of the party-state. 14 Decision No. 217 / HDBT on the Promulgation of the Policy for Reforming Planning and Business Accounting in SOEs, 14 November 1987; Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003). 15 Nguyen, Van Huy / Tran, Van Nghia, Government Policies and State-Owned Reform, in: Ng, Chee Yuen et al. (ed.), (1997) 38 (55). 16 Nguyen, Ngoc Tuan et al., Restructuring State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (20). 17 Nguyen, Ngoc Tuan et al., Restructuring State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (20–21, 24, 26). 18 Nguyen, Ngoc Tuan et al., Restructuring State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (34). State authorities included for example the military, the police, customs offices and so on as well as the Communist Party of Vietnam and other socio-political organizations like the National Front, the Trade Union, the Youth Organization and other organizations, see Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 88–89; Gainsborough, Martin, PostCommunist Economies 14 (2002) 227 (230). 19 Vasavakul, Thaveeporn, Reform of state institutions, in: Leung, Suiwah (ed.), (1996) 42 (45).

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under the supervision of functional government agencies including for example the Ministry of Finance and its local offices for financial affairs or the Ministry of Labor and its local agencies for employment matters.20 In 1991, the government started the process of restructuring state-owned enterprises.21 All enterprises had to be re-established and registered and the authority for establishing new SOEs was limited to certain authorities.22 The first phase of restructuring lasted until 1994. During the following wave of mergers and closures, the number of SOEs dropped to 6,264 by April 1994.23 Most of the SOEs that had been merged or closed down were small in size, having fewer than 100 employees and a capital base of less than VND500 million (less than US$50,000), were mostly loss-making and run by district authorities.24 In 1994, the government started a second 20 Other agencies included the Ministry of Planning and Investment for approval of investment activities, the land administration agency, the local administration in provinces and districts, and the State Inspectorate, see Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 100. According to Vasavakul, Thaveeporn, Reform of state institutions, in: Leung, Suiwah (ed.), (1996) 42 (45), a central SOE was therefore under the direct supervision of a certain ministry and under further supervision by functional ministries while a local SOE was for example under supervision of the Provincial People’s Committee and further supervision of the functional ministries and their local bureau. According to Akiba, Mariko, MOCT-MOST: Economic Policy in Transitional Economies 8 (1998) 97, member SOEs of general corporations were under the supervision of the general corporation and also diverse functional ministries. In some cases there existed more than one establishing authority (line ministry), for example in cases where one administrative agency contributed equipment while another administrative unit contributed land and employees, see Gainsborough, Martin, Post-Communist Economies 14 (2002) 227 (233, 234). 21 For more details on SOE reform, see also for example Do, Phu Tran Tinh, Vietnam Economic Review 9 (2006) 8; Ho, Xuan Hung, Vietnam Economic Review 9 (2006) 13; Vu, Quoc Ngu, SOE Equitization in Vietnam (2003); Phan, Van Tiem / Nguyen, Van Thanh, Problems and Prospects of State Enterprise Reform, 1996–2000, in: Ng, Chee Yuen et al. (ed.), (1997) 3; Nguyen, Van Huy / Tran, Van Nghia, Government Policies and State-Owned Reform, in: Ng, Chee Yuen et al. (ed.), (1997) 38; Le, Dang Doanh, Legal Consequences of State-Owned Enterprise Reform, in: Ng, Chee Yuen et al. (ed.), (1997) 63; Nguyen, Ngoc Tuan et al., Restructuring State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19. 22 Decree No. 388-HDBT Regulating the Establishment and Dissolution of State-Owned Enterprises, 20 November 1991. 23 Phan, Van Tiem / Nguyen, Van Thanh, Problems and Prospects of State Enterprise Reform, 1996–2000, in: Ng, Chee Yuen et al. (ed.), (1997) 3. 1,956 of these 6,264 SOEs, which had a combined capital of VND53,150 billion were run by the central government and 4,308 by the local authorities, see Nguyen, Ngoc Tuan et al., Restructuring State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (20). 24 For these and further data, see Nguyen, Ngoc Tuan et al., Restructuring StateOwned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (20). See also Phan,

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phase of re-registration.25 Nevertheless, the state sector continued to play an important role. SOEs remained in control in almost all the important sectors of the economy and absorbed most of the country’s trained labor.26 By October 2009, Vietnam had restructured 5,660 enterprises, including the transformation of 379 companies into one-member limited liability companies, the equitization of 3,896 companies, the transfer of 197 and the sale of 155.27 30 companies were leased, 532 merged and 471 dissolved.28 The problems of the restructuring process were complex and exacerbated by the fact that, on the one hand, the state relinquished a great deal of its control but on the other hand, intervened too strongly in the day-to-day management of companies.29 b) General Corporations In 1994, the central government started to establish so-called ‘general corporations’ which are groups of enterprises based on pre-existing enterprise unions.30 The reason for their establishment is not totally clear. One interviewee stated that the state established general corporations in order to make them competitive on the international level.31 Arkadie / Mallon argue that besides competitiveness, the goal was to strengthen central control.32 Vasavakul believes that the aim was not only to improve efficiency but Van Tiem / Nguyen, Van Thanh, Problems and Prospects of State Enterprise Reform, 1996–2000, in: Ng, Chee Yuen et al. (ed.), (1997) 3 (5–6). 25 Nguyen, Lan, Guerilla capitalism (2009) 83. For more detailed information on size, capitalization, number of employees and so on, see Nguyen, Ngoc Tuan et al., Restructering State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (20–22). 26 Nguyen, Ngoc Tuan et al., Restructering State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (20). 27 Stepping up the SOE Reform, in: Vietnam Business Forum, January 27, 2010. 28 Stepping up the SOE Reform, in: Vietnam Business Forum, January 27, 2010. 29 Nguyen, Ngoc Tuan et al., Restructering State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (34). 30 Akiba, Mariko, MOCT-MOST: Economic Policy in Transitional Economies 8 (1998) 97. Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 104, 105 argues that general corporations have little in common with Western holding corporations and bear more resemblance to administrative units. For an example of the organizational structure, see the illustration of Vinatex in Akiba, Mariko, MOCTMOST: Economic Policy in Transitional Economies 8 (1998) 97 (106). 31 Interview with an employee of the Vietnam International Bank. Lestrange, Alexander / Richet, Xavier, MOCT-MOST 8 (1998) 77 (89) also notes that, according to some observers, the aim is to build up large enterprises similar to the Korean chaebols that will be able to compete in an international environment. 32 Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 132.

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also to combat growing nepotism and abuse in the administrative apparatus.33 Painter argues that their establishment was the outcome of a political compromise between “the need to corral local business interests under closer party-state oversight and the desire to provide a new set of structures in the name of market efficiency”34.

There are two types of general corporations. Corporations incorporated under Decision No. 90 TTg35 must have at least five subsidiaries related to each other and a legal capital of at least VND500 billion. The establishing authority appoints members of the board of management (art. 5). Corporations incorporated under Decision No. 91-TTg36 consist of a number of large corporations and companies which play a significant role in the economy (art. 1) and must comprise at least seven enterprises and have a minimum legal capital of VND1,000 billion (art. 2 sec. 3). Their establishment requires the approval of the Prime Minister (art. 5). The Prime Minister appoints the members of the board of management and, based on recommendations by the board of management, the general director, deputy general director and chief accountant (art. 2 sec. 5).37 It is unclear whether the member enterprises enjoy the status of legal entities.38 At the end of 1996, it was decided to establish 64 general corporations based on Decree 90-TTg and 18 general corporations under the direct super33 Vasavakul, Thaveeporn, Reform of state institutions, in: Leung, Suiwah (ed.), (1996) 42 (57). 34 Painter, Martin, Development Studies 41 (2005) 261 (271). See also Painter, Martin, Contemporary Southeast Asia 25 (2003) 20 (30) where he points out that the establishment of general corporations aimed to reduce the power of line ministries and reduce their profits and rents. 35 Decision No. 90-TTg on Re-Structuring of State-Owned Enterprises, 7 March 1994. 36 Decision No. 91-TTg on Establishment of Business Corporations, 7 March 1994. 37 Art. 43–48 of the Law on Enterprises 1999 provided more rules on the establishment, reorganization and dissolution of such corporations. 38 Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 106. Interviewees had different opinions regarding the legal status of general corporations. According to a representative of the Department for Enterprise Reform and Development at the CIEM, member enterprises are recognized as legal entities. According to an expert from the Civil Law Department of the Ministry of Justice, member enterprises are not legal entities as they have no own assets. The fact that general corporations have the right to transfer or raise capital among enterprises within the group conflicts with their status as a legal entity, see Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 106. However, according to the representative of the Department for Enterprise Reform and Development at the CIEM, members of the general corporation have to comply with its directives in order to realize the common interest of the general corporation.

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vision of the Prime Minister based on Decree 91-TTg, 17 of which involved a reorganization of former enterprise unions.39 These general corporations amalgamated approximately 2,000 of the 6,300 SOEs that existed at the end of 1994.40 General corporations started to establish their own subsidiaries or associated companies41 and by 2009 had already invested a total of US$7.3 billion, equal to ten percent of GDP, in fields that were not their specialty.42 From 2005, general corporations have been subject to equitization.43 In some cases, the state has maintained a majority or minority stake while in other cases, all shares have been sold, including to outsiders.44 By May 2009, 86 general corporations were operating in Vietnam.45 Although one of the aims of general corporations was to improve efficiency, there is criticism that many general corporations behave in reality like an administrative agency between the government, ministries and the member enterprises.46 Member companies of general corporations complain about state corporation officials continuing to become involved in the dayto-day-management of the member enterprises and profitable enterprises having to subsidize loss-making member enterprises.47 One interviewee mentioned the problem that general corporations are still managed by the old management.48 Another interviewee emphasized the possible risks from general corporations starting commercial activities outside their original scope and even establishing their own banks.49 It is also unclear to what degree general corporations limit competition. Sjöholm argues that competi39 Akiba, Mariko, MOCT-MOST: Economic Policy in Transitional Economies 8 (1998) 97 (104). 40 Sjöholm, Fredrick, State Owned Enterprises and Equitization in Vietnam (2006) 16. 41 Vu, Quang Viet, Vietnam’s Economic Crisis in: Singh, Daljit (ed.), (2009) 389 (406). 42 Vu, Quang Viet, Vietnam’s Economic Crisis in: Singh, Daljit (ed.), (2009) 389 (406). 43 PricewaterhouseCoopers, A Guide for Business and Investment (2008) 19. According to a representative of the Department for Enterprise Reform and Development at the CIEM, three to four general corporations have been equitized as well as member companies. 44 Interview with a representative of the Department for Enterprise Reform and Development at CIEM. 45 Interview with a representative of the Department for Enterprise Reform and Development at CIEM. 46 Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 107. 47 Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 133. 48 Interview with a representative of the Department for Enterprise Reform and Development at CIEM. 49 Interview with an employee of the Vietnam International Bank.

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tion varies from sector to sector and that in some general corporations, members do not seem to have any price agreements at the expense of consumers.50 Arkadie et al. also point out that some member enterprises face competition by private and state-owned enterprises while others are protected by natural monopolies, trade barriers and other devices.51 c) Economic Groups In 2005, the government started to trial a new model of enterprise group, so-called economic groups which were established around state corporations, but with private sector participation.52 The economic groups were established in another attempt to create internationally competitive economic players.53 Vu criticizes the conglomeration as “a legally recognized process to turn public property over to private hands” and argues that these conglomerates were established in order to personally benefit the participants.54 Until 2009 no real legal framework for their establishment existed. There were only some rules in the Law on Enterprises55 and Decree 139 / 2007.56 According to one interviewee, economic groups are meant to resemble a parent-child affiliation with subsidiaries enjoying legal status.57 A major difference between general corporations and economic groups is the larger size and greater importance of economic groups.58 Their importance is apparent in that several vice-ministers have been appointed to chair economic groups following their retirement and that CEOs of economic groups are seen as powerful figures who have the same influence as a minister.59 The Prime Minister is responsible for supervising the economic 50 Sjöholm, Fredrick, State Owned Enterprises and Equitization in Vietnam (2006) 19. 51 Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 133. 52 Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 142. 53 Vietnam needs powerful economic groups, in: VOVNews, February 28, 2006. 54 Vu, Quang Viet, Vietnam’s Economic Crisis in: Singh, Daljit (ed.), (2009) 389 (407). Vu Quang Viet points out that important shareholders of the enterprises are often relatives of managers of the conglomerates, loan providers and officials who could provide privileges. 55 Art. 146–149 of the Enterprise Law 2005. 56 Art. 26 Decree No. 139-2007-ND-CP Providing Detailed Guidelines for Implementation of a Number of Articles of the Law on Enterprises, 5 September 2007. 57 Interview with an expert from the Civil Law Department of the Ministry of Justice. 58 Corporations not enthused about becoming members of economic groups, in: VietNamNet Bridge, 19 August 2009. 59 Interview with a researcher at the Business Environment and Competitiveness Department at the CIEM.

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groups.60 By mid-2009, eight state-owned economic groups had been created by restructuring state-owned enterprises.61 Economic groups have drawn a great deal of criticism from the public and from experts, inter alia for inefficiency and ineffective investment.62 By the end of 2007, the eight state-owned economic groups and 70 stateowned general corporations, with a combined asset value of US$56 billion, almost equal to 80 percent of GDP, had an average loans / equity ratio of two, indicating risky business operations.63 Although economic groups and general corporations accounted for 60 percent of outstanding loans of the state-owned commercial banks and 70 percent of Vietnam’s foreign borrowing, they produced only 40 percent of GDP.64 Economic groups have started to invest in fields outside their core business like real estate, securities, insurance and banking.65 Technocrats complain that economic groups should focus on their main business.66 They are also concerned that most economic groups intend to establish banks.67 The authorities find it difficult to oversee the financial situation of economic groups.68 An interview60 Vu, Quang Viet, Vietnam’s Economic Crisis in: Singh, Daljit (ed.), (2009) 389 (410). 61 Legal foundation set for economic groups’ operations, in: lookatvietnam, August 13, 2009. They included the Vietnam Oil and Gas Group (PetroVietnam), Vietnam Shipbuilding Industry Group (Vinashin), Vietnam Post and Telecommunications Group (VNPT), Vietnam Coal and Mineral Industries (Vinacomin), Bao Viet, Vietnam Textile and Garment Group (Viantex) and Vietnam Rubber Group. In 2009, the plan to establish two new economic groups – the Industrial Construction Group (ICG) and the House and Urban Development Group (HUCG), both under the supervision of the Ministry of Construction- by combining many existing corporations was delayed because policy makers were not sure about the operational modus. Furthermore, managers of the state-owned corporations that were chosen to be a member of the economic groups objected to the plans, see Group Counselling, in: Vietnam Financial Review, August 26, 2009, and Corporations not enthused about becoming members of economic groups, in: VietNamNet Bridge, 19 August 2009. 62 Great expectations?, in: Vietnam Financial Review, 22 December 2008. 63 Vu, Quang Viet, Vietnam’s Economic Crisis in: Singh, Daljit (ed.), (2009) 389 (406). 64 Pincus, Jonathan / Vu, Thanh Tu Anh, Far Eastern Economic Review, May 2008. 65 Economic groups must focus on main business fields, in: VietNamNet Bridge, April 1, 2008. 66 Economic groups must focus on main business fields, in: VietNamNet Bridge, April 1, 2008. 67 Economic groups must focus on main business fields, in: VietNamNet Bridge, April 1, 2008; Worry about establishment of banks under economic groups: SBV, in: Lao Dong, September 14, 2009. 68 Vu, Quang Viet, Vietnam’s Economic Crisis in: Singh, Daljit (ed.), (2009) 389 (408).

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ee stated that economic groups are difficult to control because of their size.69 A meeting of the National Assembly in November 2008 asked for more transparency in financial reporting, independent auditing and regular government reporting on their activities.70 In response to growing concerns about economic groups, new regulations were issued in 2009 that include a definition of economic groups and direct the holding company and its subsidiaries to focus on investment and the operations of their major business lines and related fields.71 Furthermore, the controlled subsidiaries are not permitted to hold shares or contribute capital into the controlling enterprises. d) Equitization of SOEs The most characteristic feature of the Vietnamese transition to a marketoriented economy is the equitization program that started in 1990. Equitization means the incorporation of a state-owned enterprise into a shareholding or a limited liability company and the following procedure which may include the divestiture of all or a part of the shares to employees, managers and outside investors as well as the issue of additional shares.72 69 Interview with a researcher at the Business Environment and Competitiveness Department at CIEM. 70 Vu, Quang Viet, Vietnam’s Economic Crisis in: Singh, Daljit (ed.), (2009) 389 (409). 71 In April 2009, the Politburo enacted Directive No. 854-CT-TTg on Implementing Conclusion 45-KL-TW of the Politburo dated 10 April 2009 on a Pilot Model for State Economic Groups and on Amending Policy on Conversion of 100 % State Owned Enterprises into Shareholding Companies, 19 June 2009. On 5 November 2009, the Government issued Decree No. 101 / 2009 / ND-CP on Piloting the Establishment, Organization, Operation and Management of State Economic Groups, 5 November 2009. Pursuant to this Decree, a state economic group consists of a group of large-scale companies connected in the form of parent-subsidiary companies and other forms, constituting a group of enterprises attached to each other in terms of economic interests, technology, market and other services. Therefore, a state-owned corporation includes the holding company in which the state owns 100 percent of the charter capital or a controlling stake according to the decision of the Prime Minister, subsidiary companies on the first, second and subsequent levels, and associated enterprises. According to Decision No. 2079-QD-TTg on Establishing Parent Company – Military Telecom Group, 14 December 2009, subsidiaries are enterprises in which the parent company owns more than 50 percent of the charter capital, while associated enterprises are enterprises in which the parent company holds less than 50 percent of the charter capital. 72 Interview with a representative of the State Capital Investment Corporation. See also World Trade Organization, Working Party on the Accession of Viet Nam, Accession of Vietnam: Report of the Working Party on the Accession of Viet Nam (27 October 2006) No. 81.

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The objectives of the equitization process have not always been clear. According to Decree 28 of 1996, equitization aims “to mobilize capital from the employees in such enterprises, and from domestic and foreign individuals and economic organizations in order to invest in renewing technologies and for development of the enterprises [as well as] to create the conditions for the capital contributors and the employees in the enterprises to have shares, assume their role as real masters and to give a new impetus to enhancing the enterprises’ business efficiency”73.

A further advantage of equitization is the fact that state capital that is withdrawn from SOEs can be used for strategically important SOEs that are undercapitalized.74 According to the SCIC, the state aims to maximize its gains as well as to attract strategic investors but has not outlined which goal has priority.75 Painter argues that the equitization program was a de facto legalization of already existing informal ownership rights.76 He states that it was managers and employees who enjoyed informal ownership rights.77 Fforde, who defines the construct that resulted from the de facto-privatization during the 1980s as “Virtual Shares Companies with different virtual share holders having varying rights in various areas”78, by contrast emphasizes that SOEs were effectively controlled by units outside the SOEs, not by managers.79 Gainsborough, who found that property rights in many firms in Ho Chi Minh City had been effectively privatized by the late 1990s, also concludes that informal property arrangements in Ho Chi Minh City were governmentcentered rather than entrepreneur-centered.80 73 Art. 1 Decree No. 28-CP on Conversion of a Number of State Owned Enterprises into Joint Stock Companies, 7 May 1996. 74 Phan, Van Tiem / Nguyen, Van Thanh, Problems and Prospects of State Enterprise Reform, 1996–2000, in: Ng, Chee Yuen et al. (ed.), (1997) 3 (7). 75 Interview with a representative of the State Capital Investment Corporation. 76 Painter, Martin, Development Studies 41 (2005) 261 (279). 77 Painter, Martin, Development Studies 41 (2005) 261 (279). 78 Fforde, Adam, Vietnamese State Owned Enterprises: ‘Real Property’, Commercial Performance and Political Economy (2004) 10, 11. 79 Fforde, Adam, Vietnamese State Owned Enterprises: ‘Real Property’, Commercial Performance and Political Economy (2004) 14, 30. However, according to Fforde, a lack of coordination or conflicting interests among virtual shareholders could result in paralysis or in letting managers act freely, but only in limited areas, see p. 29. 80 Gainsborough, Martin, Post-Communist Economies 14 (2002) 227 (233). Gainsborough illustrates this by means of an interesting case study on the Saigon Jewellery Company. The director of the Saigon Jewellery Company, despite his reputation as a powerful figure, had no influence in the power struggle between the People’s Committee of Ho Chi Minh City and the Trade Department of Ho Chi Minh City over the corporation.

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The equitization process can be divided into a pilot phase from 1990 to 1996 and a second phase from 1996 on.81 During the first phase, only five SOEs underwent equitization.82 In May 1996, the government decided to end the pilot program and to accelerate the process, inter alia by ordering that all non-strategic small and medium-sized SOEs had to be equitized and by abolishing the right of management to veto equitization decisions.83 The number of equitized enterprises remained low until 199884, then slowly increased until 200185 and rose substantially from 2003.86 Finally, by Octo81 In May 1990, the Council of Ministers decided to equitize some SOEs that met certain criteria (Decision No. 143 / HDBT Reviewing the Implementation of Resolution 217 / HDBT, Decree 50 / HDBT and Decree 98 / HDBT and Working to Continue the Renovation of the Management of State Enterprises, 10 May 1990). In November 1991, the 7th Party Congress proposed transforming some SOEs into shareholding companies and in December, the program was approved by the Eighth National Assembly, see Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 127 and Painter, Martin, Contemporary Southeast Asia 25 (2003) 20 (29). Therefore, the Prime Minister issued Decision 202-CT in June 1992 to continue with the equitization process which aimed at small or medium-sized enterprises and excluded strategic enterprises (Decision No. 202 / CT Implementing Experiments to Convert State Enterprises into Shareholding Companies, 8 June 1992). Decision 203-TC ordered the government to equitize seven SOEs and directed that each of the ministries, provinces, and centrally run cities had to select one or two enterprises to transform into joint stock companies for a trial period (Decision No. 203 / CT on the List of State Enterprises chosen for the Conversion into Shareholding Companies, 8 June 1992). In September 1992, a Central Steering Committee for Enterprise Reform was established to oversee the equitization process, see Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 128. 82 Phan, Van Tiem / Nguyen, Van Thanh, Problems and Prospects of State Enterprise Reform, 1996–2000, in: Ng, Chee Yuen et al. (ed.), (1997) 3 (6). As it was possible for the manager to veto an equitization decision by the authorities, many of the registered SOEs withdrew from equitization because workers and managers were afraid to lose benefits after equitization, see Vu, Quoc Ngu, SOE Equitization in Vietnam (2003) 328. 83 Decree No. 28-CP on Conversion of a Number of State Owned Enterprises into Joint Stock Companies, 7 May 1996. In April 1997, the Politburo called for an acceleration of the equitization process. A resolution of the Fourth Party Plenum in December 1997 supported the request, see Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 135. In spite of the government directive instructing that 150 enterprises were to be equitized by the end of 1997 (Decision No. 548-TTg on the Establishment of the Equitization Steering Committee, 13 August 1996), only 15 enterprises were equitized by the end of the year, see Vu, Quoc Ngu, SOE Equitization in Vietnam (2003). 84 In 1998, the government enacted Decree No. 44 / 1998 / ND-CP to accelerate the equitization programme, see Decree No. 44-1998-ND-CP on Conversion of State Owned Enterprises into Shareholding Companies, 29 June 1998. 85 By the end of 1999, 370 SOES had completed equitization. The number increased to around 1,000 by the end of 2002, see Vu, Quoc Ngu, SOE Equitization in Vietnam (2003) 329.

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ber 2009, the number of equitized enterprises accounted for 3,896 companies.87 However, in 2009, Vietnam realized only eight percent of the national plan in the 2009–2010 period, mainly due to the financial crisis, but also to unsound policies related to privatization and shares sales.88 In 2010 the state still held 100 percent of equity in around 1,500 enterprises, including eight parent groups (probably holding companies of economic groups), 88 state-run corporations (general corporations), 420 member companies of parent groups and corporations, and about 1,000 independent state-run enterprises.89 Vietnam’s target is to equitize a further 1,000 SOEs by 2015.90 Companies which had not gone public by July 1, 2010 would be transformed into one-member limited liability companies operating according to the Law on Enterprises of 2005.91 In 2015, when Vietnam aims to have completed the restructuring process, only 400 companies will be wholly state-owned.92 86

Although the government made several attempts to accelerate the equitization process and provided various incentives on tax, land, investment, and treatment of redundant workers, equitization remained slow.93 There seem to have been several reasons for this, including Vietnam’s lack of experience in the process. One of the main problems was the strong resistance by managers and employees who were afraid of losing benefits.94 In addition, 86 In 2003 and 2004, the equitization process was substantially accelerated and by the middle of 2005, 2,461 SOEs had been equitized, see Tran, Tien Cuong et al., Vietnam Economic Management Review 1 (2006) 20. From 2005, equitization also included general corporations, see PricewaterhouseCoopers, A Guide for Business and Investment (2008). 87 Stepping up the SOE Reform, in: Vietnam Business Forum, January 27, 2010. 88 Foreigners Hold 6 % Stake in Vietnam Equitized Firms, in: Vietnam Business Forum, January 22, 2010. 89 Stepping up the SOE Reform, in: Vietnam Business Forum, January 27, 2010. 90 Foreigners Hold 6 % Stake in Vietnam Equitized Firms, in: Vietnam Business Forum, January 22, 2010. 91 Stepping up the SOE Reform, in: Vietnam Business Forum, January 27, 2010. 92 Stepping up the SOE Reform, in: Vietnam Business Forum, January 27, 2010. 93 Decree No. 187-2004-ND-CP on Conversion of State owned Companies into Shareholding Companies, 16 November 2004 for example provided an array of incentives for enterprises to undergo the equitization process such as tax incentives. However, according to Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (42), only around ten percent of enterprises stated that these policies played an important role in the decision. 94 Managers faced the loss of the privileges associated with the status of an SOE, including no payment for land rental, low interest credit support through staterun commercial banks and an assessment of the fixed capital below the market price, Phan, Van Tiem / Nguyen, Van Thanh, Problems and Prospects of State Enterprise Reform, 1996–2000, in: Ng, Chee Yuen et al. (ed.), (1997) 3 (7). Other favors

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Painter argues that the main obstacle was that managers and employees already enjoyed informal ownership rights.95 Gainsborough suggests that property rights had evolved so far from what was officially sanctioned that the enterprise controllers had already started to consider themselves as the effective owners and were not ready to buy shares in an enterprise that they viewed as their property.96 Furthermore, local actors were able to use the traditional perception that the state should direct the economy as an excuse to delay the process.97 One interviewee also quoted the valuation of the enterprises, the lack of buyers, land-use rights and the resistance of local authorities as the main difficulties in equitization.98 Another interviewee was critical that the government had started equitization by choosing small

were export quotas and special tax treatment, see Vu, Quoc Ngu, SOE Equitization in Vietnam (2003) 330. Employees were especially afraid of losing their jobs after equitization. Vu, Quoc Ngu, SOE Equitization in Vietnam (2003) 331–332 points out that this fear was well founded as many SOEs had a substantial surplus. He emphasizes the fact that, although official statistics reported a figure of eight percent, in reality this proportion could have been as high as 40 percent. In the beginning regulation guaranteed employment for 12 months after equitization for all employees but this regulation was later relaxed, probably because it was a negative incentive for potential investors. Furthermore, prior to equitization, employees had access to social welfare services, funds and facilities provided by SOEs, see Phan, Van Tiem / Nguyen, Van Thanh, Problems and Prospects of State Enterprise Reform, 1996–2000, in: Ng, Chee Yuen et al. (ed.), (1997) 3 (9) and Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 128. 95 Painter, Martin, Development Studies 41 (2005) 261 (271). 96 Gainsborough, Martin, Post-Communist Economies 14 (2002) 227 (234). 97 Vu, Quoc Ngu, SOE Equitization in Vietnam (2003) 330. 98 Interview with an expert of the Civil Law Department of the Ministry of Justice. According to a survey of the CIEM, 97.9 percent of equitized enterprises favored the asset method over the discounted cash flow method for valuation, see Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (42). However, valuation based on the asset method posed many problems. Valuing the property of SOES was one of the major problems. Vu, Quoc Ngu, SOE Equitization in Vietnam (2003) 331 suggests that in some cases workers and managers colluded to undervalue the property of an enterprise in order to pay lower prices for the shares that they would later acquire. Gainsborough, Martin, Post-Communist Economies 14 (2002) 227 (234) argues that valuation problems could have reflected the fact that enterprise assets had been illegally sold off and that the enterprise had engaged in new business fields so that equitization threatened to reveal these illegal practices. Besides the loss of benefits, another disincentive was in the distribution of equitization funds. Sjöholm, Fredrick, State Owned Enterprises and Equitization in Vietnam (2006) 20 notes that until the late 1990s, gains by equitization were controlled by the central government until control was transferred to local authorities as an incentive for local authorities to engage in equitization. However, as there were constant complaints about the use of funds by local authorities, the central government seized control again in late 2005.

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enterprises instead of the best ones.99 Another obstacle was the lack of integrated conditions such as a legal framework, policies and guidance on equitization.100 For example, in the beginning, it was unclear who was to represent the government in firms in which the state held shares and how government agencies should perform their regulatory function over the equitized firms.101 Regarding the sale of shares, the state decides in each equitzation case if and how many shares the state should continue to hold. In order to achieve two of the equitization goals – to establish ownership among employees and to attract strategic investors – the government regulated the sale of shares from the beginning. According to the latest regulation, Decree No. 109-2007-ND-CP, employees may purchase up to 100 shares for each year of employment in the state sector at an incentive price of 60 percent of the average auction price.102 Furthermore, 25 percent of the charter capital has to be sold to strategic and other investors.103 Up to 2009, the purchase of shares by foreign investors was limited.104 A new regulation stipulates that 99 Interview with a researcher at the Business Environment and Competitiveness Department at the CIEM. Arkadie, Brian Van / Mallon, Raymond, Vietnam: A transition tiger? (2003) 128 also criticize the fact that many SOEs were too small for a joint stock company to be economic. 100 Nguyen, Ngoc Tuan et al., Restructuring State-Owned Enterprises, in: Ng, Chee Yuen et al. (ed.), (1997) 19 (28); Le, Dang Doanh, Legal Consequences of State-Owned Enterprise Reform, in: Ng, Chee Yuen et al. (ed.), (1997) 63 (67). 101 Vu, Quoc Ngu, SOE Equitization in Vietnam (2003) (332). 102 Art. 51 sec. 1, art. 37 sec. 2 Decree No. 109-2007-ND-CP on Conversion of Enterprises with 100 % State Owned Capital into Shareholding Companies, 26 June 2007. In the past, art. 11 sec. 1 Decree No. 28-CP on Conversion of a Number of State Owned Enterprises into Joint Stock Companies, 7 May 1996; art. 14 sec. 1 Decree No. 44-1998-ND-CP on Conversion of State Owned Enterprises into Shareholding Companies, 29 June 1998; art. 27 sec. 1 Decree No. 64-2002-ND-CP on Conversion of State Owned Enterprises into Shareholding Companies, 19 June 2002 and art. 37 sec. 1 Decree No. 187-2004-ND-CP on Conversion of State owned Companies into Shareholding Companies, 16 November 2004 regulated the sale of shares to employees. 103 Art. 35 sec. 2 lit. b Decree No. 109-2007-ND-CP on Conversion of Enterprises with 100 % State Owned Capital into Shareholding Companies, 26 June 2007. Former regulations that regulated the sale of shares to outside investors include art. 23 sec. 4 Decree No. 64-2002-ND-CP on Conversion of State Owned Enterprises into Shareholding Companies, 19 June 2002 and art. 27 sec. 3 Decree No. 187-2004-ND-CP on Conversion of State Owned Companies into Shareholding Companies, 16 November 2004. 104 Art. 6 Regulations on Sales of Shares to Foreign Investors, 28 June 1999 and art. 4 Regulations on Capital Contribution and Purchase of Shares by Foreign Investors in Vietnamese Enterprises, 11 March 2003 allowed foreign investors to purchase 30 percent of the nominal capital of enterprises operating in certain business fields.

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C. The Factual Protection of Minority Shareholders

the body which approves the equitization plan sets the limits for foreign ownership in the plan.105 e) The State Capital Investment Corporation In order to solve the problem of overlapping state management, the State Capital Investment Corporation (SCIC) was established in June 2005 under the Prime Minister’s Decision No. 151 / 2005 / QD-TTg106 to manage state capital invested in certain enterprises and other domains.107 The SCIC was put into operation in August 2006 and acts as the representative of the owner of state capital invested in limited liability companies and joint stock companies.108 Before its establishment, research was conducted on models from Singapore, Malaysia and China109. Its organization and operation are regulated in the Prime Minister’s Decision No. 152 / 2005 / QD-TTg.110 The SCIC is inter alia authorized to actively trade, invest, issue bonds and take out a loan.111 The SCIC’s target group is limited to enterprises under the management of ministries, ministerial-level agencies, government-attached agencies (usually called ministries and branches) and People’s Committees of provinces and centrally run cities (usually called provincial-level People’s Committees).112 The SCIC does not exercise ownership rights in enterprises under government management or in enterprises established by the government where it has delegated the exercise of ownership rights to ministries 105 Art. 3 sec. 5 Regulations on Capital Contribution and Purchase of Shareholding by Foreign Investors in Vietnamese Enterprises, 18 June 2009. 106 Decision No. 151 / 2005 / QD-TTg Establishing the Corporation for State Capital Investment and Trading, 20 June 2005. 107 It is a special economic organization of the state with legal status operating under the State Enterprise Law (art. 2 Decision 151). According to Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 100, 101, the SCIC had a forerunner called “General Department for Management of State Capital”. But the institution did not manage to carry out its intended role as a trust agency and the Ministry of Finance shut down its sub-organizations in the provinces at the end of 1998. 108 Art. 3 Decision No. 151 / 2005 / QD-TTg Establishing the Corporation for State Capital Investment and Trading, 20 June 2005. 109 Interview with a representative of the State Capital Investment Corporation. 110 Decision No.152 / 2005 / QD-TTg approving the organization and operation charter of the State Capital Investment and Trading Corporation, 20 June 2005. 111 Art. 6, 7 Decision No.152 / 2005 / QD-TTg approving the organization and operation charter of the State Capital Investment and Trading Corporation, 20 June 2005. 112 Interview with a representative of the State Capital Investment Corporation.

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and branches or provincial-level People’s Committees.113 Furthermore, the target group only includes state-run one-member limited liability companies, limited liability companies with one or two members and joint stock companies transformed from independent state companies or newly set up ones.114 Other authorities that still control SOEs use the limited capacity of the SCIC as an excuse to further their ownership rights. The SCIC hopes to increase its capacity and to become the only institution in the future that exercises state ownership rights.115 Originally it was planned that 3,000 SOEs would be equitized with a remaining average state stake of 45–50 percent by 2005116. The SCIC was tasked with managing the stake in these companies with the goal of managing around 2,200 enterprises by the end of 2005117. However, the transfer of ownership rights was considerably delayed because of resistance by ministries and local authorities afraid to lose benefits, unclear financial statements and a slowdown of the equitization process due to the weak stock market in 2009.118 The SCIC classifies its investee companies into three groups. Group A as the strategic investor group includes enterprises operating in strategic and key branches that have an important role in economic development so that the state continues to hold a stake in them, either 100 percent or a majority stake.119 At the end of 2009, Group A included 11 companies which accounted for 43 percent of the portfolio value.120 It included 15 companies in 2011.121 Group B includes enterprises that do not operate in important fields but are operating efficiently and are probably profitable.122 As it is not considered necessary for the state to hold a stake in these enterprises, the SCIC pursues a flexible strategy with the goal of maximizing profits for 113 114 115 116

VBF. 117

VBF. 118

Interview with a representative Interview with a representative Interview with a representative T. A., State Capital Investment

of the State Capital Investment Corporation. of the State Capital Investment Corporation. of the State Capital Investment Corporation. Corporation: An end to scattered investment,

T. A., State Capital Investment Corporation: An end to scattered investment,

Interview with a representative of the State Capital Investment Corporation. Interview with a representative of the State Capital Investment Corporation. 120 http: /  / www.scic.vn / english / index.php?option=com_content&view=category& layout=blog&id=16&Itemid=8 on 27 / 11 / 2009. The portfolio value is probably even higher as the percentage stated on the website was the same when the SCIC still held stakes in 716 instead of 638 enterprises of group C. 121 http: /  / www.scic.vn / english / index.php?option=com_content&view=category& layout=blog&id=16&Itemid=8 on 28 / 06 / 2011. 122 Interview with a representative of the State Capital Investment Corporation. 119

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C. The Factual Protection of Minority Shareholders

the state.123 This group included 105 enterprises at the end of 2009 and accounted for 29 percent of the portfolio value.124 This was reduced to 86 companies in 2011.125 Group C included 638 small and medium-sized enterprises at the end of 2009 that took up 28 percent of the portfolio value.126 In June 2011, the group included 368 companies.127 The SCIC plans to reduce its stake to 100 enterprises by 2012 or 2015, depending on the development of the capital market and share prices, and to withdraw state capital completely from group C.128 However, the SCIC faces the problem that many enterprises are too small to operate effectively and should never have been equitized.129 Buyers are mostly local entrepreneurs who live in the area where the enterprise is operating and who know the enterprise130. However, the Vietnam Association of Financial Investors (VAFI) criticizes the SCIC for not publishing precise information on the time and location of the auctions as well as on the size of the stake up for sale, thereby preventing strategic investors from buying enterprises131. The organizational structure of the SCIC is based on a two-tier structure consisting of a board of management and a control board.132 However, appointment rights are not regulated in a way to guarantee independent decision-making from the government. The Prime Minister appoints members of the managing board on the recommendation of the Minister of Finance.133

123

Interview with a representative of the State Capital Investment Corporation. http: /  / www.scic.vn / english / index.php?option=com_content&view=category&l ayout=blog&id=16&Itemid=8 on 27 / 11 / 2009. 125 http: /  / www.scic.vn / english / index.php?option=com_content&view=category&l ayout=blog&id=16&Itemid=8 on 28 / 06 / 2011. 126 http: /  / www.scic.vn / english / index.php?option=com_content&view=category&l ayout=blog&id=16&Itemid=8 on 27 / 11 / 2009. 127 http: /  / www.scic.vn / english / index.php?option=com_content&view=category& layout=blog&id=16&Itemid=8 on 28 / 06 / 2011. 128 Interview with a representative of the State Capital Investment Corporation. 129 Interview with a representative of Ernst & Young Vietnam and a representative of the State Capital Investment Corporation. 130 Interview with a representative of the State Capital Investment Corporation. 131 Chin, Quynh, VBF, 24 February 2009. 132 The organizational structure is defined in the Organisation and Operation Charter of the State Capital Investment Corporation, issued together Decision No.152 / 2005 / QD-TTg approving the organization and operation charter of the State Capital Investment and Trading Corporation, 20 June 2005. 133 Art. 48 sec. 1 lit. b, art. 46 sec 2 Organisation and Operation Charter of the State Capital Investment Corporation, issued together with Decision No.152 / 2005 /  QD-TTg approving the Organization and Operation Charter of the State Capital Investment and Trading Corporation, 20 June 2005. 124

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87

Board members currently include inter alia several vice ministers.134 The Control Board that is responsible for supervising management is set up by the Managing Board135, which also decides on the expenses for the operation of the control board.136 f) Ownership Structure and Means of Control Ownership and means of control of Vietnamese corporations differ according to the character of the corporation. aa) Ownership Structure in Equitized Companies Due to insufficient data, it is difficult to evaluate to what extent the goals of equitization – to create public ownership among employees and to attract foreign investors – were achieved. However, an analysis of the following data makes it possible to draw some tentative conclusions. Two studies by the CIEM in 2002 and 2005 found that after equitization the shares of workers and the state’s stake had decreased slightly whereas the shares of managers and external investors had increased.137 In 2006, the state held an average stake of 46.5 percent and a controlling stake in 38 percent of equitized SOEs.138 The state held no shares at all in 30 percent of equitized enterprises139. However, according to the Ministry

134 http: /  / www.scic.vn / english / index.php?option=com_content&view=category&l ayout=blog&id=42%3Aleadership&Itemid=7. 135 Art. 16 sec. 1 Organisation and Operation Charter of the State Capital Investment Corporation, issued together with Decision No.152 / 2005 / QD-TTg approving the Organization and Operation Charter of the State Capital Investment and Trading Corporation, 20 June 2005. 136 Art. 16 sec. 5 Organisation and Operation Charter of the State Capital Investment Corporation, issued together with Decision No.152 / 2005 / QD-TTg approving the Organization and Operation Charter of the State Capital Investment and Trading Corporation, 20 June 2005. 137 The study in 2002 used a sample of 425 companies, see Central Institute for Economic Management (CIEM), Vietnam’s Equitized Enterprises (2002) 51. However, the response rate that was used for the qualitative analysis was only 69 percent. 28 percent of the answers were used for a quantitative analysis, see p. 22. The second study in 2005 covered more than 500 equitized companies, see Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (41). 138 Ho, Xuan Hung, Vietnam Economic Review 9 (2006) 13 (14). 139 Ho, Xuan Hung, Vietnam Economic Review 9 (2006) 13 (14).

88

C. The Factual Protection of Minority Shareholders Table 1 Ownership Structure of Vietnamese Equitized Companies in 2001

Shareholders Management

Shares at the time of equitization (%)

2001

8.9

10.1

40.0

35.5

2.0

2.1

Provincial / Local government

14.5

13.3

General Corporation

14.1

12.9

3.7

1.5

13.1

20.5

Other Vietnamese Firms / Entities

3.6

2.9

Foreigner

0.2

1.1

100.00

100.00

Workers Central government

Other SOE Other Vietnamese individuals

Total

Source: Central Institute for Economic Management (CIEM), Vietnam’s Equitized Enterprises (2002) 51.

Table 2 Ownership Structure of Vietnamese Equitized Companies in 2004 Shareholders

Shares at the time of euqitization (%)

2004

Management

17.22

18.63

Workers

44.60

43.54

2.18

2.03

Provincial / Local government

14.52

12.38

General Corporation

10.95

10.68

Other SOE

2.50

3.01

Other Vietnamese individuals

6.37

7.86

Other Vietnamese Firms / Entities

1.57

1.62

Foreigner

0.09

0.27

100.00

100.00

Central government

Total

Source: Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (48).

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Table 3 Ownership Structure of Vietnamese Equitized Companies in 2008 Shareholders

Shares in %

State

57

Staff

14

Foreign investors Other investors

6 23

Source: Foreigners Hold 6 % Stake in Vietnam Equitized Firms, in: Vietnam Business Forum, January 22, 2010.

of Finance, by the end of 2008, the state owned a combined 57 percent stake in the 3,854 Vietnamese former SOEs that had been equitized140. These data indicate that state ownership increased, probably because the SCIC – contrary to its previous plan – purchased shares to stabilize the stock market during the financial crisis. The data also highlight the fact that employee ownership decreased, although one aim of the government was to achieve dispersed ownership among employees.141 It appears that employee ownership decreased because employees sold their shares on the OTC market.142 In any case, the state is – independent of the holding of a majority or minority stake – de facto the controlling shareholder as the employees act as individual shareholders, not as a single shareholder. The fact that the state remains the major shareholder has several consequences for minority shareholders. The fact that the state is the major shareholder may result in a lack of supervision of company management. In theory, the state as a main shareholder should have incentives to supervise and monitor management. This would at the same time benefit small shareholders. However, the state suffers from a principal-agent conflict because ownership rights have to be exercised by representatives who have themselves to be monitored. In Vietnam, state ownership rights are exercised by certain agencies authorized by the government, including the prime minister, line ministers, 140 Foreigners Hold 6 % Stake in Vietnam Equitized Firms, in: Vietnam Business Forum, January 22, 2010. 141 Interview with a researcher at the Business Environment and Competitiveness Department at the CIEM. 142 Interview with a researcher at the Business Environment and Competitiveness Department at the CIEM.

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C. The Factual Protection of Minority Shareholders

presidents of provincial-level People’s Committees and boards of directors of economic groups, corporations, parent companies or enterprises which have invested capital in other enterprises.143 These organizations are called owner representatives. They appoint representatives who exercise the rights of shareholders144 and are entitled to stand as candidates for managerial and executive positions.145 Representatives have to report periodically to the state shareholder (= owner representative) and to exercise voting rights at the shareholders’ meeting or the board of management according to the directions of the state shareholder.146 In the past, owner representatives had no means of claiming damages when representatives violated their duties.147 The new regulation of 2009 provides that, if representatives cause damage to the owner representatives or abuse their tasks and powers, they will be held responsible and have to pay compensation.148 A study conducted by the CIEM in 2007 evaluated the activities of state ownership representatives. The findings provide some interesting insights.149 In 60 percent of the companies, the state was represented by one representative whereas in 40 percent, the state was represented by two or three representatives.150 63 percent of the representatives worked at the enterprises for which they concurrently exercised the rights of the state shareholder.151 Of the rest, 26 percent worked at the state body that exercised state ownership rights, while others worked on People’s Committees and in 143 Art. 2 sec. 10 Regulation on Financial Management of State Companies and Management of State Capital Invested in other Enterprises, 5 February 2009. This decree regulates the exercise of ownership rights. 144 Art. 44 sec. 1 lit. b Regulation on Financial Management of State Companies and Management of State Capital Invested in other Enterprises, 5 February 2009. 145 Art. 45 sec. 1 Regulation on Financial Management of State Companies and Management of State Capital Invested in other Enterprises, 5 February 2009. 146 See art. 44 sec. 2 lit. d and art. 45 sec. 2, 3 and 5 Regulation on Financial Management of State Companies and Management of State Capital Invested in other Enterprises, 5 February 2009. Representatives also have the duty to report to the state capital owner when they have the right to purchase additionally issued shares or convertible bonds, see art. 46 sec. 3. 147 Interview with an expert of the Civil Law Department of the Ministry of Justice. 148 Art. 45 sec 8 Regulation on Financial Management of State Companies and Management of State Capital Invested in other Enterprises, 5 February 2009. 149 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008). According to a researcher at the CIEM, the survey was conducted at the end of 2007 among 1,000 representative enterprises. Although only 150 companies responded, the researcher at the CIEM believes that the results are representative of the whole sector. 150 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 47. There were only a few companies with more than three individuals representing state ownership. 151 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 48.

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relevant provincial departments.152 SCIC representatives were also people working for enterprises or local authorities.153 One interviewee reported that normally the state representative in an equitized enterprise also retains that role after the enterprise has been transferred to the SCIC.154 According to the CIEM study, in general, 60 percent of representatives acted as chairman of the board of management, 30 percent held concurrently the position of (general) director and nine percent that of vice (general) director.155 Seven percent of the remaining representatives sat on the board of supervision and 33 percent sat on the management board.156 A change of representatives because of failure to fulfill the assigned duties were rare.157 There are several concerns regarding state ownership representatives. The CIEM survey shows that there is a lack of clear criteria on exercising state shareholder rights.158 Another point of criticism concerns the assignment of ownership rights to a group of people, each person to manage a certain portion of shares.159 However, share portions are not clearly assigned and there are no guidelines for the nomination of members of the board of management, which creates a great deal of confusion.160 A third point regards conflicts of interest. There may be problems when representatives act on their own behalf, especially in related-party transactions or conflicts of interests by voting for their own benefit or the benefit of the related per-

152

Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 48. Interview with a representative of the State Capital Investment Corporation. 154 Interview with an expert from the Civil Law Department of the Ministry of Justice. 155 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 48. 156 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 48. 157 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 48. Changes mostly occurred for reasons of retirement (81 percent) and changes of job or state shareholders. 158 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 48, 49. 159 Interestingly, companies did not agree on how many representatives of the state should be appointed, see Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (51). 160 Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (51). Nick Freeman / Nguyen Van Lan, who conducted a study on corporate governance in 2004 among 85 enterprises, also report one example of an equitized SOE being a former member of a general corporation in which the state still holds a controlling stake of 64 percent shares. The corporation assigned three people to act as representatives for the state’s equity. These three representatives first have to agree among themselves on business decisions and as a second step to obtain approval from the general corporation, leading to a slow decision-making process with negative consequences for the enterprise. See Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 36–37. 153

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C. The Factual Protection of Minority Shareholders

son.161 The state is not able to control all the representatives and all the activities.162 This may encourage representatives to act on their own behalf instead of on behalf of the state. Another problem is that owner representatives continue to intervene directly in the enterprise when they feel misrepresented by the state representative instead of replacing the representative.163 Interviewees complained that in some cases when the shareholders’ meeting nominates directors, some investors do not accept the decision and ask the local government to reject it.164 As the most important owner representative, the SCIC faces its greatest challenge in exercising its shareholder rights and supervising the representatives. The SCIC meets once a month or once per quarter with the representatives to discuss enterprise issues and also requests enterprises in which it holds shares to send financial reports not only to the representatives but also to the SCIC.165 When representatives do not vote according to the directives of the SCIC, it may ask the enterprises concerned to cancel the decision of the shareholders’ meeting, but this requires the approval of the other shareholders.166 In important cases, the SCIC sends staff to the shareholders’ meeting in order to monitor whether representatives vote according to SCIC directives.167 However, interviewees have pointed out that the SCIC needs more resources and capacity in order to fulfill its tasks effectively.168 Furthermore, general corporations and economic groups are particularly difficult to monitor because of their size and lack of transparency. It is therefore questionable whether minority shareholders of member enterprises can rely on the owner representatives to supervise the management of such 161 Interview with a legal advisor of an institutional investor. Central Institute for Economic Management (CIEM), Assessment Report on Two Years of Implementation of the Enterprise Law (2009) 45 quotes as an example that state representatives in equitized former SOEs in which the state holds a major stake (more than 35 percent) often vote against companys’ resolutions to raise equity capital for further development. The new ownership structure following such an external capitalization would diminish their power and influence by adversely affecting their interests and those of their relatives through a dilution of their shares. 162 Interview with a legal advisor of an institutional investor. 163 Interview with a researcher of the Business Environment and Competitiveness Department at CIEM. 164 Interview with an expert from the Civil Law Department of the Ministry of Justice. 165 Interview with a representative of the State Capital Investment Corporation. 166 Interview with a representative of the State Capital Investment Corporation. 167 Interview with a representative of the State Capital Investment Corporation. 168 Interview with researchers of the Department for Enterprise Reform and Development and at the Business Environment and Competitiveness Department at the CIEM.

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enterprises efficiently. In short, the fact that the state agencies that are the owner representatives find it difficult to monitor the corporations results in increased managerial discretion. This is also reflected in a survey of 2005 by the CIEM. It found that the role of workers, local authorities, central authorities and party organizations in the decision-making process of administrative decisions had declined after equitization.169 In particular, the influence of the former state agency which supervised the company decreased dramatically after equitization.170 The lack of efficient monitoring increases the risk that managers will exploit private benefits. While state agencies have difficulty monitoring corporations on the one hand, there are also complaints on the other hand that they are involved in the day-to-day-management instead of focusing on supervision of the corporation. A further problem for minority shareholders in corporations in which the state is a major shareholder is that the state may pursue policy goals rather than the maximization of the corporation’s gains. Representatives in enterprises in which the state holds dominant shares or capital contributions should direct these enterprises to follow the objectives and orientations set forth by the state and supervise their implementation.171 Given Vietnam’s history and background, it would not be surprising if state agencies pursued policy goals that may be in opposition to the economic objectives of the corporation. Finally, minority shareholders who want to enforce their rights against the will of owner representatives may face problems as public institutions in Vietnam are not independent. bb) Ownership and Control in Private Shareholding Companies After the reforms of 1988, the private sector began to flourish but most private businesses in the beginning were household businesses.172 In recent years, the nature of private business has changed. The number of limited liability companies and joint stock companies has constantly increased while the number of private enterprises has decreased, indicating that investors know how to minimize risks.173 While the number of private joint stock companies in 2000 was only slightly higher than joint stock companies with 169

(25). 170

(25).

Tran, Tien Cuong et al., Vietnam Economic Management Review 1 (2006) 20 Tran, Tien Cuong et al., Vietnam Economic Management Review 1 (2006) 20

171 Art. 45 sec. 6 Regulation on Financial Management of State Companies and Management of State Capital Invested in other Enterprises, 5 February 2009. 172 Nguyen, Lan, Guerilla capitalism (2009) 88. 173 Central Institute for Economic Management (CIEM), Assessment Report on Two Years of Implementation of the Enterprise Law (2009) 21.

94

C. The Factual Protection of Minority Shareholders

state capital (452 compared to 305), the number of private joint stock companies at the end of 2007 amounted to 20,862 compared to 1,597 joint stock companies with state capital.174 Table 4 Number of Vietnamese Joint Stock Companies 2000–2008 Joint stock companies

2000

2001

2002

2003

2004

2005

2006

2007

2008

With state capital

305

470

558

669

815

1096

1360

1597

1812

without state capital

452

1125

2272

3872

6920

10549

14801

20862

31744

Source: General Statistics Office of Vietnam, Enterprises in Vietnam during the first nine years of the 21st century: Part A. Principal indicators of enterprises by type of ownership and activities, http: /  / www.gso.gov. vn / default_en.aspx?tabid=515&idmid=5&ItemID=9775, p. 3.

However, most of the private joint stock companies are relatively small, measured in capital size as well as in number of employees.

Joint stock companies

Total

Under 0.5 billion dongs

From 0.5 to under 1 bill. dongs

From 1 to under 5 bill. dongs

From 5 to under 10 bill. dongs

From 10 to under 50 bill. dongs

From 50 to under 200 bill. dongs

From 200 to under 500 bill. dongs

From 500 bill. dongs and over

Table 5 Capital of Vietnamese Joint Stock Companies in 2007

Without state capital

20862

1336

2091

10088

3093

2931

969

214

140

1597

15

20

151

169

635

408

124

75

With state capital

Source: General Statistics Office of Vietnam: The real situation of enterprises through the results of surveys conducted from 2000 to 2008: http: /  / www.gso.gov.vn / default_en.aspx?tabid=479&idmid=4&ItemID=8722. 174 This includes only joint stock companies in which the state has a stake of less than 50 percent (companies with state capital of more than 50 percent are state enterprises), see Office of Statistics, Enterprises in Vietnam during the first nine years of the 21st century: The business results on enterprises in Vietnam a view after 9 years, p. 21 (http: /  / www.gso.gov.vn / default_en.aspx?tabid=515&idmid=5&It emID=9775).

I. Vietnam

95

300–499

500–999

1000–4999

5000 and above

14

50

344

686

154

142

117

88

2

2822

7211

7695

2333

312

238

154

93

4

5–9

200–299

Without state capital

50–199

With state capital

Less than 5

Joint stock companies

10–49

Table 6 Number of Employees of Vietnamese Joint Stock Companies 2007

Source: General Statistics Office of Vietnam: The real situation of enterprises through the results of surveys conducted from 2000 to 2008: Number of enterprises as of 31 Dec. 2007 by size of employees and by type of enterprise, http: /  / www.gso.gov.vn / default_en.aspx?tabid=479&idmid=4&ItemID=8722.

According to one interviewee, there is no separation between ownership and management.175 Vietnamese corporate leaders still lack awareness of the advantages of a separation of ownership and management.176 Smaller corporations in particular believe that ownership and management functions should not be separated.177 Private firms are usually run by family members as the controlling shareholders.178 Freeman / Nguyen found in a survey of Vietnamese companies that members of the board of management are often executives and also the owners or majority shareholders.179 In private corporations, there is therefore a risk that minority shareholders may be expropriated by the majority shareholders. cc) Means of Control The majority of listed corporations in Vietnam are closely held by families or the state, so that minority shareholders are especially vulnerable to 175 Interview with a researcher of the Business Environment and Competitiveness Department at CIEM. 176 Interview with a researcher of the Business Environment and Competitiveness Department at CIEM. 177 Interview with a researcher of the Business Environment and Competitiveness Department at CIEM. 178 Hai, Bui Xuan / Nunoi, Chihiro, Hitotsubashi Journal of Commerce and Management 42 (2008) 45 (63). 179 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 39. The authors conducted a study in 2004 among 85 enterprises. 36 percent of the 85 enterprises were SOEs, 64 percent were non-SOEs, including 25 equitized former SOEs in which the state still held a stake, 26 unlisted private joint stock companies and three listed private joint stock companies.

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corporate structures that extend the rights of controlling shareholders beyond their economic stake. The question to what extent Vietnamese corporations are connected to each other by cross-holdings or pyramidal structures is difficult to answer due to insufficient information. A survey by the International Finance Corporation, in cooperation with the Global Corporate Governance Forum and the State Securities Commission of Vietnam, on the 100 largest publicly traded corporations listed on HoSE and HNX on January 1, 2010 had difficulty identifying such structures. The report concludes that “it was difficult to get information on ultimate beneficial ownership and ownership control may often be affected through interlocking networks of public and private company subsidiaries”180.

This indicates a highly opaque corporate environment that makes it difficult for minority shareholders to monitor related-party transactions and for investors to include the risks of controller opportunism in share prices. 2. Capital Market and Investors’ Base The stock market in Vietnam consists of two securities trading centers with different listing requirements, the Ho Chi Minh City Securities Trading Center (HSTC)181 and the Hanoi Securities Trading Center (HaSTC)182, and the former unregulated OTC market. By January 2010, the number of listed companies at HoSE amounted to 289.183 In June 2011, 385 companies were listed on the HNX.184 A major characteristic of the Vietnamese stock market is the dominance of former state-owned enterprises.185 As the number of listed companies is still small, this means that only a small fraction of equitized companies have listed on the stock market. Hong / Biallas argue that equitized corporations do not 180 International Finance Corporation et al., Corporate Governance Scorecard (2011) 58. 181 In July 2000, the Ho Chi Minh City Securities Trading Center went into operation. On August 8, 2007, HSTC was converted into the Ho Chi Minh Stock Exchange (HoSE), see http: /  / www.hsx.vn / hsx_en / Modules / Gioithieu / Lichsu.aspx. 182 On March 8, 2005, HaSTC started operation. In 2009, it was converted into the Hanoi Stock Exchange, see http: /  / en.hnx.vn / lichsuphattrien.asp?actType=1&me nuup=201000&TypeGrp=1&menuid=201110&menulink=200000&menupage=Quydi nh_CocheGD01.asp&stocktype=2. 183 http: /  / www.hsx.vn / hsx_en / Modules / Danhsach / Chungkhoan.aspx. 184 http: /  / en.hnx.vn / Quymo_niemyet.asp?stocktype=2. 185 According to Tran, Tu Uyen, The Impact of Initial Public Offering (2009) 2, around 2006, former state-owned enterprises accounted for over 90 percent of all listed firms. According to Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 9, 87 out of 111 joint stock companies listed on HoSE were equitized enterprises.

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want to disclose information or are reluctant to list because of undervaluation at the time of equitization.186 Another reason for reluctance to list may be that most equitized enterprises are small in terms of size and capitalization. The Vietnamese government tried to encourage enterprises to list, inter alia by providing a two-year tax waiver incentive for those companies that listed prior to the 31st December 2006.187 As a consequence of the dominance of former state-owned enterprises, state ownership in listed companies plays an important role. In 2007, state ownership in the top 50 companies in terms of liquidity and market capitalization amounted to around 37 percent.188 In a survey of the top 100 companies listed on the Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE) in 2010, the IFC survey found that the companies with the highest corporate governance scores in 2010 had an average proportion of state ownership of 27.4 percent, the 50 companies with lesser scores had an average proportion of 34.9 percent and the 25 companies with the lowest score had an average proportion of state ownership of 32.8 percent.189 One of the negative consequences of state ownership is the resulting limitation of the free float of shares. Regarding investors in the Vietnamese market, the stock market is dominated by domestic individual investors, most of them retail investors.190 It is estimated that the equitization process created more than 300,000 small shareholders in Vietnam and that 70 to 75 percent of listed shares are held by domestic investors.191 Domestic individual investors tend to imitate the trading pattern of foreign institutional investors who therefore exercise a significant influence on market behavior.192 The participation of institu186 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 9. 187 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 2. 188 CBV Indices Research, Vietnam Equity Market Research Highlights 2007 – Fourth Quarter (2008). 189 International Finance Corporation et al., Corporate Governance Scorecard (2011) 39. 190 CBV Indices Research, Vietnam Equity Market Research Highlights 2007 – Fourth Quarter (2008) 3. 191 World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 86; Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 9. According to Balfour, Frederik, Bloomberg Businessweek, September 10, 2006, in 2005, local retail investors supposedly accounted for 95 percent of the market. 192 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 9. As domestic retail investors watch the trading patterns of foreign institutional investors, reduced activity by foreign investors in 2008 discouraged domestic retail investors from buying shares, see Biallas, Margarete O. / Dam, Kien, Vietnam – Financial Sector Diagnostic 2008 (2008) 15. Foreign investment funds

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tional investors in the Vietnamese stock market is still limited.193 One reason is the lack of pension funds. Most of the active domestic institutional investors are commercial banks, insurers, securities companies and a few state-run general corporations.194 In 2008, around 12,000 of the 450,000 accounts eligible for trading belonged to foreign investors.195 Between 800 and 1,000 of these accounts belonged to foreign institutions, the rest to foreign individuals.196 Foreign institutional investors are mainly banks, insurers, offshore closed-end investment funds, namely HSBC, ANZ, Vietnam Enterprise Investment Limited, Vietnam Growth Fund, Vietnam Dragon Fund, and Vietnam Opportunity Fund.197 About 80 percent of the foreign portfolio investors are closedend funds that have a time horizon of five to ten years.198 In 2010, foreign investors accounted for 20 percent of the market size.199 Vuong finds that foreign ownership in the top 50 listed companies (either on HoSE or HaSTC) at October 24, 2008 was 24.3 percent on average, ranging from 0.3 now also ‘surfing’, in: VietNamNet Bridge, December 10, 2009 points out that at the beginning of the decade, when there were only few companies listed on the stock exchange and few funds active in Vietnam, it was easy for small retail investors to copy the trading behavior of these foreign investors. 193 CBV Indices Research, Vietnam Equity Market Research Highlights 2007 – Fourth Quarter (2008); World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 88. 194 Vuong, Minh Giang, Vietnam’s Emerging Stock Market (2008) 5. 195 World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 87 mentions 12,535 foreign accounts; Vuong, Minh Giang, Vietnam’s Emerging Stock Market (2008) 4 speaks of 831 accounts of foreign institutions and 11,526 foreign individuals. As each investor is allowed only one account, the number of accounts gives some indication of the kind of investor in the Vietnamese stock market, World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 87. 196 Vuong, Minh Giang, Vietnam’s Emerging Stock Market (2008) 4 mentions 831 foreign institutional investors as of October 1, 2009. Vietnam’s Capital Market Review, in: Vietnam Financiel Review, January 7, 2010 quotes more than 1,000 foreign institutional investors. According to World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 88, in 2008, the stock trading code had been granted to 858 foreign finance institutions by November 2008. About 30 percent of them invested in the Vietnamese stock market. As a result of the financial crisis, their equity holdings were only US$3 billion. 197 Vuong, Minh Giang, Vietnam’s Emerging Stock Market (2008) 5. 198 World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 87. 199 Vietnam’s Capital Market Review, in: Vietnam Financial Review, January 7, 2010.

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to 48.7 percent.200 The IFC report notes that the companies with the highest corporate governance scores in 2010 had an average proportion of foreign ownership of 27.3 percent, the 50 companies with lesser scores had an average proportion of 14 percent and the 25 companies with the lowest score had an average proportion of foreign ownership of 17.4 percent.201 A continuing problem of the Vietnamese market is its high volatility.202 Two interviewees reported that share prices do not reflect the real market price.203 The domination of the market by individual investors leads to a high level of short-term and speculative trading.204 Newspaper articles complained in 2009 that even long-established funds in Vietnam had changed their investment behavior and started to invest in short-term, profit-maximizing investments.205 Vuong et al. found that during 2006 and 2008, trading on the growing stock market was accompanied by a ‘herd mentality’ and rampant rent-seeking in the form of informational, power and connection advantages.206 Even well-established firms with highly regarded entrepreneur-corporate leaders became involved in rent-seeking activities.207 Banks seem to have contributed to the heating up of the market by extending loans to investors in order to invest in securities.208 The State Bank of Vietnam therefore introduced measures to curtail this practice.209 One inter200

Vuong, Minh Giang, Vietnam’s Emerging Stock Market (2008) 25. International Finance Corporation et al., Corporate Governance Scorecard (2011) 38. 202 In their study on the Vietnamese stock market, Farber, André et al., Policy Impacts on Vietnam Stock Market (2006) found evidence for herd behavior on the Vietnamese stock market They define herd behavior as “the actions of trade by which individuals suppress their own beliefs, expectations, information, and base their investment decisions solely on the collective action of the market” (p. 16). The trend of herd behavior is stronger toward extreme positive returns of the market portfolio, p. 25. Vuong, Quang Hoang et al., Mergers and Acquisitions (2009) 26 describe that before early March 2007, speculators who acted on lack of information and on the basis of unspecified rumors and high ex ante expectations, including corporate speculators, bought any shares they were able to, resulting in enormous pressure on the stock market and creating super-abnormal profit opportunities. 203 Interview with an expert from the legal department of Vietnam Chamber of Commerce and Industry and a representative of Ernst & Young Vietnam. 204 Vietnam’s Capital Market Review, in: Vietnam Financiel Review, January 7, 2010. 205 Foreign investment funds now also ‘surfing’, in: VietNamNet Bridge, December 10, 2009. 206 Vuong, Quang Hoang et al., Mergers and Acquisitions (2009) 26. 207 Vuong, Quang Hoang et al., Mergers and Acquisitions (2009) 27. 208 Interview with an employee of the Vietnam International Bank. 209 In July 2007, the State Bank of Vietnam ordered credit institutions to curtail their lending for investment in securities to three percent of their total loans. In 201

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viewee stated that banks seem to be more cautious about lending in recent times.210 Despite the shortcomings of the Vietnamese stock market, the World Bank recognizes that it does fulfill the function of mobilizing capital, in contrast to most emerging markets where stock markets function primarily as a trading platform because family-owners are reluctant to finance business activities on the stock market.211 Additional share offerings and new listings continue even if the market is down.212 Interestingly, corporations seem to prefer to issue shares instead of bonds in order to avoid principal payment commitments.213 The reason seems to be a lack of awareness among corporations that bonds can be used as a source of financing.214 Nevertheless, certain features of the Vietnamese stock market may distort fair pricing, making it difficult for potential investors and actual minority shareholders to assess the risk of opportunism on the part of controlling shareholders. The nature of the stock market gives investors incentives to act as speculators and thus prevents shareholders from taking an interest in the affairs of the corporation and exercising pressure on management / controlling shareholders by their voice rights. The State Securities Commission of Vietnam plans to train investors in the future in order to convince them to hold shares for longer than short-term periods.215 But as long as the corporate sector continues to suffer from weak corporate governance and weak public enforcement, incentives for investors to hold their shares for longer periods are low. Alongside the regulated stock market is the OTC market. This unregulated market is an informal network, consisting of unlicensed stockbrokers January 2008, the State Bank ordered banks to restrict their lending for investment in securities to 20 percent of their charter capital. See Vuong, Minh Giang, Vietnam’s Emerging Stock Market (2008) 22. 210 Interview with an employee of the Vietnam International Bank. 211 World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4-–5, 2008 (2009) 86, 87. 212 World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 87. 213 Biallas, Margarete O. / Dam, Kien, Vietnam – Financial Sector Diagnostic 2008 (2008) 15. 214 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 7. Corporate bonds are growing steadily but are still sporadic, p. 1. As of the end of 2006, corporate bonds accounted for just 1.1 percent of GDP, p. 5. Foreign investors are the main investors in corporate bonds where they hold up to 90 percent of certain bonds, p. 10. 215 Interview with an expert of the State Securities Commission.

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and customers who deal in unlisted stocks.216 Around 300,000 to 500,000 investors (depending on estimates) invested on the OTC market in the late 2000s.217 There is no benchmark for share prices.218 Transactions are based on trust and purchasers used to pay the money after the transfer, without signing a written contract and without having a deposit.219 Nevertheless, the OTC market has boomed. The daily trade value in the unregulated market was expected to reach US$30–35 million in 2007, compared to the average daily HoSE trade value of US$59 million in May 2007.220 Market capitalization of the unregulated stock market in 2007 was estimated to be three to five times as large as the market capitalization of the HoSE.221 Trade on the unregulated market is driven by rumors and unsophisticated information.222 In an attempt to broaden the supervisory powers of the SSC on the overgrown market of unlisted stocks, the Law on Securities 2007 broadened the definition of securities and public companies. Furthermore, in 2007, the Ministry of Finance decided to regulate the organization scheme and management of securities transactions of unlisted public companies.223 In April 2009, the State Securities Commission and the Hanoi Securities Trading Center issued the necessary regulations.224 In January 2010, approximately 20 companies were traded on UPCOM while 936 companies with outside shareholders had registered with the SSC.225 Although these 936 companies are potential candidates for trading on UPCOM, they fear the high corporate 216 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 3. 217 Interview with a researcher at the Business Environment and Competitiveness Department at CIEM who mentioned 300,000 investors. Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 5 speak of 500,000 investors. 218 OTC market in disorder, in: VietNamNet Bridge, August 10, 2007. 219 Hanoi OTC market chaotic on VND 32 bil in unpaid shares, in: VietNamNet Bridge, 2009. Vietnam to regulate informally traded stocks, bolstering market, in: lookatvietnam, June 16, 2009 reports that shares are transferred on the street, in coffee houses or between friends and family members. 220 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 5. 221 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 5. 222 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 5. 223 Dang, The Duc, ALB Legal News, July 1, 2008. 224 Decision No. 159.QD-TTGDHN Promulgating Regulations on Management of Registered Market Trading (UPCoM) on Hanoi Securities Trading Centre, 27 April 2009. 225 Vietnam’s Capital Market Review, in: Vietnam Financial Review, January 7, 2010.

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governance standards and disclosure requirements of UPCOM.226 In 2010, more than 3,600 companies were still informally traded without any supervision.227 Minority shareholders who invest on the unregulated OTC market seem to be especially vulnerable. However, one interviewee argued that the approximately 300,000 small investors who invest on the OTC market have become very adept at investing.228 3. Internal Corporate Governance Practices In recent years, there have been various efforts to promote corporate governance. Interviewees from the Ministry of Justice, the Vietnamese Chamber of Commerce and Industry, and the State Securities Commission reported that their organizations organize training and educational events related to corporate governance. Several organizations and donor organizations, including the World Bank, the Asian Development Bank and the International Finance Corporation, are working to promote corporate governance. The Vietnamese Chamber of Commerce and Industry (VCCI) organizes training courses and workshops to promote corporate governance.229 However, there are complaints that the VCCI does not regard corporate governance as a priority and neglects monitoring whether corporate governance standards are implemented in corporations because it regards the improvement of the environment for business as its most important task.230 The European Chamber of Commerce in Vietnam (EuroCham) also tries to promote corporate governance, inter alia by publishing booklets on corporate governance but complained about problems in finding partners interested in a long-term strategy.231 One interviewee who worked for an institutional investor said that it has a corporate governance group that helps investee corporations to improve their corporate governance. Despite the various campaigns, interviewees complained that awareness of corporate governance is extremely low in Vietnam.232 Interviewees re226

2010. 227

2010.

Vietnam’s Capital Market Review, in: Vietnam Financial Review, January 7, Vietnam’s Capital Market Review, in: Vietnam Financial Review, January 7,

228 Interview with a researcher at the Business Environment and Competitiveness Department at CIEM. 229 Interview with an expert from the legal department of Vietnam Chamber of Commerce and Industry. 230 Interview with a representative of EuroCham Hanoi. 231 Interview with a representative of EuroCham Hanoi. 232 Interview with a representative of EuroCham Hanoi and of Duane Morris Vietnam LLC.

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ferred to disclosure practices, internal audit, related-party transactions, and the role of the board of management and board of supervision as the main concerns in corporate governance practice.233 The reasons for the lack of awareness and implementation of corporate governance are varied. First, there seems to be a lack of knowledge even among corporate actors of listed companies. For example, one interviewee reported that it is not generally known that in listed corporations, the general director is not allowed to hold concurrently the position of chairman.234 According to one interviewee, corporations are afraid to lose competitiveness when they introduce corporate governance standards.235 Furthermore, a constant point of criticism is that the board of management fails to set long-term strategies.236 Regarding disclosure, one interviewee complained that Vietnam still lacks the institutional mechanisms to ensure that information is reliable and that there are also no tools to achieve transparent accounting or enable access to reliable information.237 The board of management takes it for granted that a better position leads to better access to information and does not feel obliged to disclose information.238 According to one interviewee, around 50 percent of listed companies issue their financial statements too late because 233 Interview with a researcher at Hanoi National University, an expert from the legal department of Vietnam Chamber of Commerce and Industry and a legal advisor of an institutional investor. 234 Interview with an employee of the Vietnam International Bank. In a majority of companies, there is no separation between the positions of chairman and CEO. Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 40 says 85 percent p. 53 says 75 percent Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (51) found that in 70.64 percent of enterprises, the chairman of the board of management concurrently holds the position of the (general) director. Twenty out of thirty managing directors interviewed by Nick Freeman / Nguyen Van Lan were also chairman of the board of their enterprises, see Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 39. According to Tung, in 80 percent of enterprises, the (general) director has the concurrent position of a member of the board of management, see Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 9. Tung conducted his study between October 2005 and March 2006 for which he sent questionnaires to 700 equitized companies. 183 responses were usable. 235 Interview with a representative of EuroCham Hanoi. 236 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 60; Central Institute for Economic Management (CIEM), Assessment Report on Two Years of Implementation of the Enterprise Law (2009) 45; Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 9. 237 Interview with a researcher at Hanoi National University. 238 Interview with a researcher at Hanoi National University.

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sanctions are not effective and the state agency is not strong enough to enforce punctuality.239 As a response, the Vietnam Association of Financial Investors (VAFI) reported trying to achieve more severe punishment for a breach of the auditing rules.240 A special problem for equitized enterprises is that most board members belong to the previous generation of managers who was in charge of the management before equitization.241 About 80 to 90 percent of enterprises surveyed by the CIEM did not change the personnel in key management positions, including members of the board of management, the director, deputy directors, and chief accountant, after equitization.242 According to one interviewee, only some of the largest banks have changed management personnel while other enterprises have only changed when managers retired.243 The CIEM survey of 2005 argues that the minimal change in management slowed down changes in mindset and corporate governance.244 This concern is reflected in the statement of one interviewee that some of the managers who worked for enterprises before their equitization still expect the owners and / or owner representatives respectively to provide direction on how to manage the enterprise.245 Interestingly, interviewees and surveys differ in their judgment on the relevance and power of the board of management. Freeman / Nguyen and 239 Interview with an expert from the legal department of Vietnam Chamber of Commerce and Industry. The IFC found that 90 percent of corporations do not disclose their financial reports in a timely manner, see International Finance Corporation et al., Corporate Governance Scorecard (2011) 67. According to Problems found in corporate governance, in: Lookatvietnam, April 14, 2009, by March 31, 2009, 72 out of 177 companies listed on HaSTC (around 41 percent) and 91 out of 181 companies listed on HoSE (around 50 percent) had not submitted audited financial reports. Only 33 out of 177 companies listed on HaSTC and 32 out of 181 companies listed on HoSE had submitted their annual reports before the deadline. 240 Interview with a representative of the Vietnam Association of Financial Investors. 241 Interview with a researcher of the Department for Enterprise Reform and Development at CIEM. 242 Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (52). Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 9 even found that 100 percent had not changed their management: directors of the equitized companies were already directors in the former SOEs. 243 Interview with a researcher at the Business Environment and Competitiveness Department at CIEM. 244 Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (52). 245 Interview with a representative of the State Capital Investment Corporation.

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Nguyen both found that members of the board of management are often (senior) executives as well as the owners or majority shareholders.246 According to Nguyen, authority in the enterprise is concentrated in the board of management that can dominate both the shareholders’ meeting and the director.247 However, as members of the board of management tend to be lower-level managers in the company, they are more likely to be dominated by the chairman and other executive members, and thus play a rather passive and dependent role.248 Ultimate authority is therefore vested in the chairman who is concurrently (general) director of the enterprise.249 There is a strong possibility that the board of management in general and the chairman in particular may abuse their power.250 Nguyen concludes, in sum, that the board of management has more power than is provided in law. One interviewee agreed that the board of management is very powerful while the general director is less important in most companies, but can be very important if also the chair of the board of management or a shareholder.251 Another interviewee stated that the general director is a powerful figure in Vietnamese corporations.252 Shareholders are powerful when they hold more than 50 percent of shares.253 In 43 percent of enterprises surveyed by Freeman / Nguyen, they partly or completely agreed with the statement that “in reality, the Board of Management has little influence over how the company conducts its activities as this is basically decided by management”, while 46 percent of enterprises partly or completely disagreed with this statement.254 Equitized companies agreed slightly more with this statement than joint stock companies.255 Around 44 percent of equitized and slightly fewer than 40 percent of private joint companies surveyed by Freeman / Nguyen partly or completely agreed with the statement that “in reality, the management does what it chooses, without much need to gain prior approval of the board of management or shareholders”256. 246 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 39. Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 52 finds that a majority of members of the board of management is employed as a manager at the enterprise. 247 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 53. 248 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 53. 249 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 53. 250 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 53. 251 Interview with a legal advisor of an institutional investor. 252 Interview with the Deputy General Director of Ernst & Young Vietnam. 253 Interview with a legal advisor of an institutional investor. 254 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 41. 255 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 41. 256 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 45.

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The supervisory board seems in general to be poorly equipped to fulfill its functions. One interviewee complained that the supervisory board is weak and only acts as a figurehead to rubber-stamp decisions of the board of management.257 Nguyen states as one reason for the low performance of the board that most members are workers of the company who have a lower level of expertise than members of the board of management and managers.258 Freeman / Nguyen list other reasons, such as inadequate regulatory guidance, insufficient implementation and the lack of sufficient authority of board members to challenge senior managers and the board of management on specific issues.259 Vietnam lawmakers decided not to adopt either the Anglo-American model of a unitary board or the German model of a two-tier board with a supervisory board that nominates members of the management board. In general, it is doubtful whether emerging countries should adopt legal transplants from developed countries as their backgrounds differ. Legal solutions should always be tailor-made. However, the example of the supervisory board shows that a legal transplant may nevertheless fulfill its function better than an inadequate local solution. It can be expected that when Vietnamese corporations start to implement corporate governance in substance and not in form, they will balance the weak role of the supervisory board by nominating more independent directors and board committees. This, however, will make the supervisory board redundant. In general, most interviewees complained about the low quality of laws and regulations and proposed improving the standard of the legal framework.260 Furthermore, they suggested mandatory training for directors.261 257 Interview with a representative of the Business Environment and Competitiveness Department at CIEM. 258 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 57–58. Therefore, he concludes that the supervisory board was unlikely to fulfill its duties, instead legalizing decisions by management or the director where necessary. 259 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 43. Enterprises surveyed by Freeman / Nguyen listed different reasons for the low compliance of the supervisory boards. Some believed that members of the supervisory board lacked the necessary competition to fulfill their tasks while others thought that the board of management prevented the supervisory board from performing its job properly. Others thought that board members lacked sufficient confidence to perform their job because they were employees of the firm, see p. 42. 260 Interview with a representative of the Institute of State and Law; a representative of the Department for Enterprise Reform and Development at CIEM; an employee of the Vietnam International Bank; a representative of the Vietnam Association of Financial Investors; an expert from the legal department of Vietnam Chamber of Commerce and Industry and a legal advisor of an institutional investor. 261 Interview with a legal advisor of an institutional investor.

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Two interviewees proposed establishing a specific body for the protection of minority shareholders.262 One interviewee also suggested that corporations should focus more on investor relations and improvements to the annual report, especially financial reports.263 Other proposals that included raising shareholders’ awareness and better enforcement, are discussed in other chapters of the thesis. One of the major underlying problems seems to be that Vietnamese corporate culture is characterized by a focus on short-term interests. The complaint of an interviewee that Vietnamese managers do not develop long-term strategies is supported by the results of two surveys on Vietnamese companies. Newspapers complain that even institutional investors started to speculate for short-term profits, driven by the volatile market. The problem is aggravated by the lack of strategic investors. Nguyen argues that due to weak corporate governance standards, investors only invest for short-term profits.264 This means that they do not exercise pressure on corporations to improve their corporate governance standards. Nevertheless, one interviewee from outside Vietnam, although critical of Vietnam’s corporate governance standards, highlighted as a major advantage that a number of private equity firms that invest in Vietnamese corporations actively engage in improving their standards. This should also contribute to the improvement of corporate governance standards of listed corporations in two ways. First, such investors often exit by stock listing. Second, by raising awareness in their investee firms, they contribute to a general rise in awareness that may also have a spillover effect on listed corporations in general. 4. Shareholder Activism The Vietnamese shareholder structure is characterized by the state as the largest shareholder, with a high number of retail investors and corporation employees and increasingly by institutional investors. Until now, shareholders’ activism has been low. Minority shareholders and employees often lack the necessary knowledge, but also the interest to become involved in the affairs of the corporation.265 Their main interest focuses on divi262 Interview with a legal advisor of an institutional investor and a researcher of Hanoi National University. 263 Interview with a legal advisor of an institutional investor. 264 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 47. 265 Interview with a legal advisor of an institutional investor and an expert from the Civil Law Department of the Ministry of Justice. According to Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (49), shareholders of

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dends.266 One interviewee stated that small shareholders do not have the self-concept of being investors with rights.267 Interviewees also quoted as reasons for low shareholders’ activism a lack of trust in the director, respect for management, reluctance to confront management and the belief that their vote as a small shareholder does not count and that they cannot enforce their rights against the majority.268 Finally, the CIEM argues that the weak corporate governance framework gives incentives to investors to act as speculators rather than investors.269 Because the legal framework does not offer sufficient protection for minority shareholders, they are encouraged to exploit the company as much as possible rather than look for ways to accumulate capital for the sake of the company’s long-term and sustainable growth.270 The view that shareholders lack the knowledge and interest to be involved in corporate affairs and do not exercise influence on the activities of the company, is also shared by the enterprises. According to the CIEM survey of 2005, only 36 percent of companies stated that their shareholders had an adequate understanding of their rights and obligations and fewer than 46 percent of companies stated that shareholders made full use of shareholders’ rights and obligations.271 According to Freeman / Nguyen, 61 percent of respondents fully or partly agreed with the statement that “in reality, shareholders have little influence over how the company conducts its activities as this is basically decided by the management”.272 Just 26 percent partly or completely disagreed with this statement.273 equitized companies pay attention mainly to dividends rather than issues like capital, assets, investment, director’s income and so on. Shareholders who are workers are of course interested in salary bonuses and income issues. 266 Interview with an expert from the Civil Law Department of the Ministry of Justice. 267 Interview with an employee of the Vietnam International Bank. This agrees with the findings of Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 50 who indicates that small shareholders, mostly workers, feel like outsiders rather than owners and some even consider themselves as lenders and the enterprise as borrowers. Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (50) also emphasize that small shareholders do not become involved in discussions on important issues concerning the company. 268 Interview with an employee of the Vietnam International Bank and a legal advisor of an institutional investor. 269 Central Institute for Economic Management (CIEM), Assessment Report on Two Years of Implementation of the Enterprise Law (2009) 46. 270 Central Institute for Economic Management (CIEM), Assessment Report on Two Years of Implementation of the Enterprise Law (2009) 46. 271 Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (50, 51). 272 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 38.

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The lack of shareholder activism is also reflected in other studies. Freeman / Nguyen found that only two of the surveyed enterprises reported that shareholders had initiated an extraordinary meeting.274 New issues occur only in eight percent of shareholders’ meetings, leading Nguyen to the conclusion that shareholders, especially minority shareholders, exercise little influence on decisions by the board of management.275 Tung found that in 51 percent of enterprises, shareholders did not have an active role in appointing and dismissing members of the board of supervision.276 In 65 percent of the enterprises surveyed by Freeman / Nguyen, shareholders had never voted against proposals of the board of management at a general meeting, while 22 percent said that such an incident had happened before but was limited to minor occurrences that could be easily solved by the enterprise.277 273

Low shareholder activism is also reflected in the low number of disputes between management and shareholders.278 However, one interviewee mentioned that during the last four or five years prior to the interview which was held in 2009, the courts noticed that shareholders had started to file law suits in corporate affairs.279 This seems to indicate that shareholders are nevertheless more aware of their rights and also ready to enforce them. Furthermore, one of the main institutional investors reported that it tries to help its investee companies to improve their corporate governance.280 273

Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 38. Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 36. 275 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 41. 276 Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 8. 277 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 36. 278 The CIEM survey of 2005 also reveals that a significant proportion of shareholders does not understand the legal provisions on the rights of shareholders and on the management and supervision of the company. This results in different behavior depending on the shareholder. Some tend to intervene in the management and operation of the company while others are too hesitant to fully exercise their rights. According to the CIEM survey of 2005, seven percent of companies admitted to disputes between shareholders or groups of shareholders, 13.7 percent to disputes between management and shareholders, see Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40 (52). Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 36–37 found that less than ten percent of enterprises stated having experienced shareholders’ disputes while 87 percent explicitly said they had not. Most of the disputes seemed minor, resulting in some cases from misunderstandings among individual shareholders concerning the trade of shares. 279 Interview with an expert from the International Cooperation Department of the Supreme People’s Court. 280 Interview with a legal advisor of an institutional investor. 274

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5. Foreign Investment As corporate governance in Vietnam is still in its infancy, an important question is whether foreign investment contributes to raising standards in their investments, thereby contributing to improved corporate governance standards in the Vietnamese capital market. In a survey on equitized companies, the CIEM found a clear lack of strategic investors.281 Although one of the aims of equitization was to attract foreign investors, foreign investment in Vietnamese companies used to be restricted. Relaxations of foreign ownership limits regularly led to market rallies.282 In the beginning, foreign ownership in shares of non-listed enterprises was limited to 30 percent.283 Regarding listed companies, the limit for foreign ownership was 20 percent in the beginning and was then increased to 30 percent in 2003 and to 49 percent in 2005, except for certain fields like banking where ownership remained limited to 30 percent.284 As shares in companies traded on the OTC market were not included in this rule, foreign ownership in these companies also remained limited to 30 percent. The fields in which foreign investors were entitled to invest in non-listed non-state enterprises were enumerated in Decision 260 / 2002.285 Since June 2009, foreign investment in Vietnamese enterprises, including inter alia enterprises with 100 percent state capital conducting equitization and shareholding companies, has been regulated in Decision 88-2009.286 Re281

(49).

Tran, Tien Cuong et al., Vietnam Economic Management Review 2 (2007) 40

282 Thai, Thu Hong / Biallas, Margarete O., Vietnam – Capital Market Diagnostic Review (2007) 4. 283 Art. 6 Regulations on Sales of Shares to Foreign Investors, 28 June 1999; Art. 4 Regulations on Capital Contribution and Purchase of Shares by Foreign Investors in Vietnamese Enterprises, 11 March 2003. 284 See Art. 1 Decision No. 139-1999-QD-TTg on Percentage of Participation of Foreign Parties in Securities Market of Vietnam, 10 June 1999 and Art. 1 Decision No. 146-2003-QD-TTg on Percentage of Participation of Foreign Parties in Securities Market of Vietnam, 17 July 2003 as well as Art 4 Decree No. 69 / 2007 / ND-CP On Foreign Investors’ Purchase of Shares of Vietnamese Commercial Banks, 20 April 2007. Art. 2 sec. 1 Decision No. 55-2009-QD-TTg On Percentage Participation of Foreign Investors in Securities Market of Vietnam, 15 April 2009 allowed foreign investors to purchase up to 49 percent of shares in public shareholding companies, except for certain fields like banking, where foreign ownership remained limited to 30 percent. 285 Decision No. 260-2002-QD-BKH Issuing List of Sectors in which Foreign Investors may purchase Shares of Non-State Owned Enterprises in Accordance with Law on Promotion of Domestic Investment, 10 May 2002. 286 Art. 2 sec. 2 lit. a, b Regulations on Capital Contribution and Purchase of Shareholding by Foreign Investors in Vietnamese Enterprises, 18 June 2009.

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garding public companies, foreign investors are permitted to purchase shares at the ratios stipulated in the Law on Securities and relevant implementing guidelines. According to Decision 55-2009, foreign ownership in public shareholding companies is limited to 49 percent.287 Regarding shareholding companies operating in sectors and business lines subject to specialized branch laws, foreign investors are entitled to purchase shares at the ratios stipulated in such specialized branch laws.288 For example, in commercial banks, foreign investors may hold altogether a maximum of 30 percent of the charter capital.289 When enterprises operate in different sectors with different foreign ownership limits, foreign ownership is limited to the lowest ratio.290 Regarding enterprises with 100 percent state-owned capital converting into shareholding companies, the body that has approved the equitization plan will provide the limit for foreign ownership in the plan.291 In all other cases, there is no limit for foreign ownership.292 In practice, however, according to one interviewee, foreign investors seldom manage to acquire more than 25 percent on average in sought-after branches.293 In order to attract more foreign investors, Vietnam plans to amend its regulation and to allow strategic overseas investors to buy stakes in SOEs before the initial public offering.294 If Vietnam manages to attract more strategic foreign investors, these investors may add to enhanced corporate governance standards as well as to the protection of minority shareholders. 287 Art. 2 sec. 1 Decision No. 55-2009-QD-TTg On Percentage Participation of Foreign Investors in Securities Market of Vietnam, 15 April 2009. A public shareholding company is either a shareholding company which has made a public offer of shares or a shareholding company which has shares listed on the Stock Exchange or a Securities Trading Centre or a shareholding company which has shares owned by at least one hundred investors excluding professional securities investors, and which has a paid-up charter capital of VND10 billion, see art. 25 Law on Securities. 288 Art. 3 sec. 1, 2 Regulations on capital contribution and purchase of shareholding by foreign investors in Vietnamese enterprises, 18 June 2009. 289 Art. 4 sec. 1 Decree No. 69 / 2007 / ND-CP On Foreign Investors’ Purchase of Shares of Vietnamese Commercial Banks, 20 April 2007. The maximum percentage that a foreign investor may hold, is ten percent for foreign credit institutions, 15 percent for foreign strategic investors (in special cases up to 20 percent) and 5 percent for all other investors, see Art. 4 sec. 2–4. 290 Art. 3 sec. 4 Regulations on Capital Contribution and Purchase of Shareholding by Foreign Investors in Vietnamese Enterprises, 18 June 2009. 291 Art. 3 sec. 5 Regulations on Capital Contribution and Purchase of Shareholding by Foreign Investors in Vietnamese Enterprises, 18 June 2009. 292 Art. 3 sec. 6 Regulations on Capital Contribution and Purchase of Shareholding by Foreign Investors in Vietnamese Enterprises, 18 June 2009. 293 Interview with a representative of Duane Morris Vietnam LLC. 294 Foreigners Hold 6 % Stake in Vietnam Equitized Firms, in: Vietnam Business Forum, January 22, 2010.

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Nevertheless, the question of whether foreign investors play a role in monitoring corporations, enhancing corporate governance standards and protecting minority shareholders’ rights is difficult to answer. The IFC survey found that corporations with the highest corporate governance score displayed a significant higher foreign ownership than corporations with a lower corporate governance score.295 However, the report questions whether in fact foreign investors contribute to raising corporate governance standards or simply target corporations with already high standards.296 One institutional investor reported that they have a corporate governance group that helps investee corporations to enhance their corporate governance standards.297 One interviewee in Thailand also reported that the large funds exercise pressure on Vietnamese corporations to enhance their corporate standards.298 6. Gatekeepers The role that gatekeepers play in enhancing the corporate sector is still weak. There is no special association for the protection of small shareholders.299 The Vietnam Association of Financial Investors (VAFI) is a group of 63 Vietnamese banks and funds that represents the interests of shareholders.300 Between 2007 and 2009, the VAFI handled around 100 cases in which shareholders complained about the directors or management.301 Most complaints concern unclear information, inefficient management, unfair treatment and violation of investors’ interests.302 If management refuses to act at the request of the VAFI, the organization turns to the SSC or the media.303 The VAFI is quite active and is often quoted in the Englishspeaking press. However, one interviewee complained that the VAFI lacks 295 International Finance Corporation et al., Corporate Governance Scorecard (2011) 38. 296 International Finance Corporation et al., Corporate Governance Scorecard (2011) 38. 297 Interview with a legal advisor of an institutional investor. 298 Interview with a lawyer at Lorenz & Partners. 299 Interview with a researcher at Hanoi National University. 300 Siegel, Jordan I. / Choudhury, Prithwiraj, Review of Financial Studies 25 (2012) 1763. 301 Interview with a representative of the Vietnam Association of Financial Investors. 302 Interview with a representative of the Vietnam Association of Financial Investors. 303 Interview with a representative of the Vietnam Association of Financial Investors.

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the necessary capacity to enforce shareholders’ rights.304 In addition, another interviewee indicated that the protection of small shareholder lies outside the scope of the VAFI.305 Freeman / Nguyen argue that banks and financial institutions could play the main role in supervising corporate governance in Vietnam.306 This, however, requires that the financial sector does not suffer from corporate governance problems itself.307 The media also contribute to improving the corporate sector. According to the VAFI, it is not uncommon for shareholders to turn to the media when their rights are infringed.308 The financial press plays an increasing role in reporting on corporate matters, also in publishing criticism of government policies on economic issues. However, press freedom is still a concern in Vietnam. According to the 2010 World Press Freedom Index of “Reporters without Borders”, Vietnam was ranked 165 out of 178 in 2010.309 Another concern is the auditing industry that still lacks the capacity, the professionalism and the expertise to audit the increasing number of public companies.310 Although the Vietnam Association of Accountants and the Vietnam Association of Certified Public Accountants are in charge of promoting accounting and auditing standards, auditing suffers from problems of compliance, punctuality and reliability. There is a need to develop more auditing companies to meet increased demand.311 A further concern men304

Interview with an employee of the Vietnam International Bank. Interview with a researcher at Hanoi National University. 306 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 47. They found that 71 percent of firms think that banks do monitor their financial health to some or the full extent. 55 percent of enterprises feel that banks monitor their business operations. 307 In the late 1980s, the economy of Vietnam encountered serious problems when a nationwide chain of ‘credit cooperatives’ went bankrupt and caused a high degree of financial uncertainty in the economy. This event undermined the confidence of the population in the domestic banking sector and it has not been fully restored until today, see Vuong, Quang Hoang et al., Mergers and Acquisitions (2009) 24. According to Vietnam’s Capital Market Review, in: Vietnam Financiall Review, January 7, 2010, the financial sector in Vietnam remains weak. 308 Interview with a representative of the Vietnam Association of Financial Investors. 309 http: /  / en.rsf.org / press-freedom-index-2010,1034.html. 310 Interview with a researcher at Hanoi National University; World Bank, Capital Matters – World Bank Report to the Vietnam Consultative Group Meeting, Hanoi, December 4–5, 2008 (2009) 91. 311 Financial reports by enterprises require more consistent scrutiny, in: VietnamNet Bridge, March 4, 2009. According to a researcher at Hanoi National University, 305

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tioned by interviewees regards the independence of external auditors.312 One interviewee complained that there are often agreements between enterprises and local auditing firms.313 According to the findings of Tung, only 17 percent of companies stated that external auditors effectively fulfill their task.314 7. Public and Private Enforcement The main regulatory bodies in Vietnam are the Business Registration Office and the State Securities Commission. A study by the CIEM indicates that the Business Registration Office has difficulty in ensuring that founding shareholders pay their shares within 90 days from the day of issuing the certificate of business registration.315 Under the Enterprise Law of 1990, which was modeled on the corporate law of the civil law system, registration of the company required at least a fifth of the charter capital and all non-cash capital had to be contributed prior to registration.316 The registration authority was also entitled to allow a re-evaluation commission to control the value of the capital contribution of the founding members.317 The Enterprise Law of 2005 which is modeled on Anglo-American law, provides that the registrar only checks the file.318 Pham criticizes this law for threatening the protection of minority shareholders, arguing that preventive protection prior to registration would be a better solution for an emerging economy like Vietnam without a reliable institutional environment.319 The State Securities Commission was established in November 1996 in order to regulate securities markets.320 Since 2004, the SSC has been part 64 auditing companies are operating in Vietnam. According to a representative of Ernst & Young Vietnam, accountants are estimated to number only 300 in Vietnam. 312 Interview with a researcher at Hanoi National University. 313 Interview with a researcher at the Business Environment and Competitiveness Department at CIEM. 314 Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 10. 315 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 42–44. 316 Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 187. 317 Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 187. 318 Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 186. 319 Pham, Duy Nghia, Vietnamese Business Law in Transition (2002) 189. 320 In detail, the SSC is charged with the regulation of securities and securities markets, direct regulation and supervision of activities in securities and securities market, and management of public services in the fields of securities and securities market in accordance with applicable laws, see http: /  / www.ssc.gov.vn / portal / page /  portal / ssc_en / int / fd.

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of the Ministry of Finance under its direct management.321 One interviewee mentioned this fact as one of the shortcomings of the securities sector.322 Other shortcomings, according to interviewees, are the lack of financial resources, staff and knowledge of the SSC323. One interviewee noted that the SSC particularly needs resources to invest in technology and facilities to be able to supervise abnormal market transactions.324 There are also complaints that the agency is not specialized in the protection of shareholders325 and that it does not care about minority shareholders.326 Another problem – apart from penalties that are very vague and lack detail – is that the SSC fines the company for breaches of the law by directors / managers instead of punishing the directors / managers, with the consequence that shareholders lose money.327 Furthermore, it seems that the SSC administrative decisions are not in fact implemented as the SSC does not have enough tools to enforce corporate governance standards effectively.328 One interviewee also mentioned that the SCC has no country branches and is too centralized to supervise a country the size of Vietnam.329 In general, it has been blamed for giving priority to market development instead of enforcing existing rules and regulations.330 One interviewee also emphasized the fact that shareholders do not know which institution (the SSC or the Business Registration Office) is responsible for their protection and proposed that there should be one specific body responsible for shareholders’ protection.331 It is planned to establish a corporate governance institute under the SSC that will provide mandatory and non-compulsory training.332 At the mo321 http: /  / www.ssc.gov.vn / portal / page / portal / ssc_en / int. Before February 2004, SSC had operated as an organ directly under the Prime Minister. However, as SSC had difficulties to regulate the capital market, the task of managing SSC was handed over to the Ministry of Finance in February 2004, see Tran, Tu Uyen, The Impact of Initial Public Offering (2009) 13. 322 Interview with an employee of the Vietnam International Bank. 323 Interview with an employee of the Vietnam International Bank, a representative of the Vietnam Association of Financial Investors and an expert from the legal department of the Vietnam Chamber of Commerce and Industry. 324 Interview with an expert at the State Securities Commission. 325 Interview with a legal advisor of an institutional investor. 326 Interview with an expert from the legal department of the Vietnam Chamber of Commerce and Industry. 327 Interview with a representative of the Vietnam Association of Financial Investors. 328 Interview with an employee of the Vietnam International Bank. 329 Interview with an employee of the Vietnam International Bank. 330 Interview with a representative of Ernst & Young Vietnam. 331 Interview with a legal advisor of an institutional investor. 332 Interview with an expert at the State Securities Commission.

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ment, the Centre for Securities Training and Research of the SSC conducts training courses for members of the board of management, the secretariat (assistants to the board of directors) and staff of the department for strategy and planning.333 The SSC has identified limitations in the legal framework and institutional capacity for policy making as well as in market mechanisms, the supply of securities and the investor base as the main weaknesses.334 It focuses therefore on refining legal documents for securities and securities markets, on developing its institutional capacity for policy making as well as on improving market mechanisms and enhancing market intermediaries’ capacity. Furthermore it aims to increase both the quantity and quality of listed securities, to develop the base of both domestic and foreign individual and institutional investors as well as securities markets in relation to other sectors of the financial markets.335 During an interview, an employee of the SSC remarked that it especially focuses on investor training as a top priority.336 Additionally, the interviewee suggested that independent status for the SSC would be advisable.337 The rate of court usage in Vietnam is low. Economic cases averaged only around 600 cases per annum between 2000 and 2004.338 One of the main institutional investors reported that, when problems in an enterprise arise, it first tries to solve the problems internally and next tries to use the media. It then involves regulatory authorities like the SSC and as a last resort would use the court system, but has made use of this option only once so far.339 Some authors assume that the low court rate can be attributed to traditional patterns of behavior that have been consolidated into informal rules for the settlement of disputes.340 One interviewee stated that litigants do not want others to learn of their dispute and feel that court proceedings are too slow.341 Vietnamese companies therefore prefer arbitra333

Interview with an employee of the Vietnam International Bank. http: /  / www.ssc.gov.vn / portal / page / portal / ssc_en / int. 335 http: /  / www.ssc.gov.vn / portal / page / portal / ssc_en / int. 336 Interview with an expert at the State Securities Commission. 337 Interview with an expert at the State Securities Commission. 338 Gillespie, John, Transplanting Commercial Law Reform (2006) 194. However, one reason for the low litigation rate was the narrow range of commercial entities that were entitled to make use of economic courts. As unregistered entities are now also entitled to bring an action in these courts, the courts may have more cases in the future. 339 Interview with a legal advisor of an institutional investor. 340 Gillespie, John, Transplanting Commercial Law Reform (2006) 194; Nguyen, Hung Quang, Lawyers and Prosecutors under Legal Reform in Vietnam, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 162 (163). 334

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tion centers with faster proceedings and where information is kept secret.342 Another interviewee stated that judges of economic courts lack specific knowledge of company and securities law as the main reasons for the reluctance of investors to sue managers who violate the law.343 Other reasons may include concerns regarding the independence, professionalism and ethical standards of judges. 341

The participants in a seminar at the Konrad-Adenauer-Stiftung in 2008 agreed that the independence of the judiciary, which is guaranteed by Art. 130 of the Vietnamese constitution, is in reality non-existent.344 According to Gillespie, judges in Vietnam are still subject to pressure by party, government and judicial interference.345 Party interference seems to be especially dominant in commercial contests between private (especially foreign) and state interests.346 The most sensitive issues for the indepen341 Interview with an expert of the International Cooperation Department of the Supreme People’s Court. 342 Interview with an expert of the International Cooperation Department of the Supreme People’s Court. 343 Interview with a representative of the Vietnam Association of Financial Investors. 344 Frehner, Willibold / Beckmann, Oliver, Unabhängigkeit der Rechtsprechung (2008) 2. 345 Gillespie, John, Transplanting Commercial Law Reform (2006) 201–210. Nicholson, Penelope, Vietnamese Courts, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 178 (181, 193) and Quinn, Brian J.M., Asian-Pacific Law & Policy Journal 4 (2003) 431 both emphasize that recent court reforms do not question the leadership of the Party. The continuing position of the Party is lied down in Ordinance 01 which provides that judges must strictly obey the Constitution and law, party guidelines and state policies, see Supreme People’s Court of Vietnam, Benchbook Online 38. The most important tool however is the recruitment of judges among loyal party members. According to Nicholson, Penelope / Nguyen, Hung Quang, Pacific Rim Law & Policy Journal 14 (2005) 1 (15); Nicholson, Penelope, Vietnamese Courts, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 178 (183), 90 percent of judges are members of the CPV. A report of the Konrad-Adenauer-Stiftung even states that there are only two judges in Vietnam who are not members of the CVP, see Frehner, Willibold / Beckmann, Oliver, Unabhängigkeit der Rechtsprechung (2008) 2. The CVP also has other means to ensure the leadership of the Party. Candidates have to have a Political Theory Diploma which is awarded by the National Political Academy managed by the Communist Party which is only open to party members or candidate members, see Nicholson, Penelope / Nguyen, Hung Quang, Pacific Rim Law & Policy Journal 14 (2005) 1 (15). Furthermore, they have to have support from the collective leadership of the provincial-level People’s Court and the Head of Organization and Personnel Section of the provincial-level institution to which the applicant seeks appointment, see Nicholson, Penelope, Vietnamese Courts, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 178 (185, 186). 346 Gillespie, John, Transplanting Commercial Law Reform (2006) 204. Gillespie points out that Party leadership means two things. It sets the political and moral tone

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dence of judges are the appointment process and the fact that they are only appointed for a term of five years.347 Other factors that affect the independence of judges include the lack of qualified jurists, the low salaries, the realities of the political system, and nepotism.348 Furthermore, judges are still tempted to rely on administrative authorities to determine liability instead of deciding for themselves.349 Another concern is the professionalism of judges. Gillespie and Nicholson both argue that judges favor political over legal reasoning.350 Lawyers interviewed by Gillespie indicated that even in economic cases, judicial reasoning is low.351 In an attempt to improve the quality of judges, the reforms in 2002 also introduced the requirement of a Bachelor of Laws degree for judges. However, as judges receive only the same low salary as other civil servants352, the courts had difficulty in recruiting judges, which forced the state to waive this requirement.353 that is supposed to guide judges in their decision-making, meaning that judges should favor state benefits over private interests and national interests over foreign interests. In sensitive cases however, party officials give judges detailed instructions on how they should conduct the trial. 347 Judges of lower courts are appointed by the Chief Judge of the Supreme People’s Court on the recommendation of a Judge Selection Council, see Art. 40 sec. 3 Law on Organization of the People’s Courts, 2 April 2002. The work and function of the Judge Selection Council is provided for in the Ordinance on Judges and Jurors of People’s Courts (Ordinance No. 02 / 2002 / PL-UBTVQH11 04 / 10 / 2002 on Judges and Jurors at People’s Courts, 4 October 2002). According to the Ordinance, the Judicial Selection Court for the Supreme People’s Court is chaired by the Chief Justice of the Supreme Court and consists of representatives from the Ministry of Defense, the Ministry of Justice, the Ministry of the Interior, the Vietnam Fatherland Front Central Committee and the Vietnam Lawyers’ Association. The provincial and district Judicial Selection Councils are chaired by the Chairman or Vice-Chairman of the relevant Provincial People’s Council. They further consist of the Chief Judge of the Provincial People’s Court, representatives of the Provincial Department of Governmental Personnel, the Provincial Vietnam Fatherland Front, and Vietnam Lawyers’ Association. Therefore, although local government control has been limited, local governments still exercise a certain control by participating in the selection process of judges, see Nicholson, Penelope / Nguyen, Hung Quang, Pacific Rim Law & Policy Journal 14 (2005) 1 (19). 348 Frehner, Willibold / Beckmann, Oliver, Unabhängigkeit der Rechtsprechung (2008) 2. 349 Gillespie, John, Transplanting Commercial Law Reform (2006) 207, 208. 350 Gillespie, John, Transplanting Commercial Law Reform (2006) 210, 211. Nicholson, Penelope, Vietnamese Courts, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 178 (181). 351 Gillespie, John, Transplanting Commercial Law Reform (2006) 214. 352 Nicholson, Penelope, Vietnamese Courts, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 178 (187). 353 Nicholson, Penelope / Nguyen, Hung Quang, Pacific Rim Law & Policy Journal 14 (2005) 1 (9). The authors emphasize that 85 percent of judges and 70 percent

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A further problem is that Vietnamese judges lack access to such secondary legal sources as parliamentary debates, academic commentaries and legal cases.354 Finally, ethical standards were named as a problem by participants of the above-mentioned seminar. They stated that professional ethics and a sense of responsibility are non-existent among Vietnamese judges.355 The organizers of the seminar concluded from the questions of the participating judges that, for historical and social reasons, clientelism is deeply rooted and that Vietnamese jurists still lack the self-concept that is necessary to establish a modern judiciary system.356 They further argue that judges tend to be loyal to their family, their superior or the Party.357 Their findings support the findings of a UNDP survey where only 38 percent of respondents agreed that judgments are just and fair and only 36 percent of interviewees stated that judges are impartial and independent in making their judgments.358 Nicholson / Nguyen argue that the low salaries are not only one of the reasons for the lack of expertise, but also encourage judicial corruption and seriously compromise judicial independence.359 The lack of judicial independence is a particular problem for minority shareholders who want to enforce their rights against the will of the repreof court officers obtained legal qualifications but not bachelor degrees. Judges worked mainly as court officers, clerks, military officers, arbitrators, investigators, procurators and legal experts in government bodies before being appointed as judges, see p. 10. 354 Gillespie, John, Transplanting Commercial Law Reform (2006) 218. Gillespie points out that the Supreme People’s Court is gradually developing secondary legal sources like case guidelines and annual reports to enable judges of lower courts to became more autonomous in their decision-making, p. 198, 212, 213. According to an expert from the International Cooperation Department of the Supreme People’s Court, decisions of the judges’ council have been published since 2004. In the future, decisions of the Supreme People’s Court and perhaps also of the Provincial Peoples’ Court would be published. 355 Frehner, Willibold / Beckmann, Oliver, Unabhängigkeit der Rechtsprechung (2008) 3. 356 Frehner, Willibold / Beckmann, Oliver, Unabhängigkeit der Rechtsprechung (2008) 3. 357 Frehner, Willibold / Beckmann, Oliver, Unabhängigkeit der Rechtsprechung (2008) 2. 358 UNDP, Access to Justice in Vietnam (2004) 15. 359 Nicholson, Penelope / Nguyen, Hung Quang, Pacific Rim Law & Policy Journal 14 (2005) 1 (25). Most lawyers stated the importance of maintaining good relationships with judges and the common habit of making payments on behalf of one’s client, p. 30. Lawyers interviewed by Gillespie also see corruption as a serious problem, see Gillespie, John, Transplanting Commercial Law Reform (2006) 216. However, Gillespie argues that the tendency to refuse bribes increases when the Supreme People’s Court offers professional guidance or the legislation is relatively clear, making it difficult to justify any deviation from the law, p. 217.

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sentative of state ownership in the corporation. One interviewee indicated that judges would not decide against equitized enterprises because they are afraid of losing their job.360 However, there were also substantial improvements. Nicholson shows that the Supreme People’s Court increased its legislative activity, suggesting that the relevance of courts and the law increased after 2000 and that courts contributed more to implementing law.361 There were other important changes. While courts in the past were encouraged to turn to local authorities, especially the local party committees, the Supreme People’s Court now advises lower courts to seek advice from the Supreme People’s Court.362 Furthermore, one interviewee said that the government attempts to reduce the influence of local people’s committees, which in the future may contribute to improving judicial professionalism.363 Under the centrally planned economy, the legal system was under local control, consisting of highly decentralized courts with judges and prosecutors elected at the local level.364 The central government attempted to gain control over the judicial system in 1992, but control soon shifted back to the local level.365 In a further attempt to regain central control, in 2002 administrative control over the courts was shifted to the Supreme People’s Court, which was given power over the administration and budgets of all the courts.366 However, 360

Interview with an employee of the Vietnam International Bank. Nicholson, Penelope, Vietnamese Courts, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 178 (190). 362 Nicholson, Penelope, Vietnamese Courts, in: Balme, Stephanie / Sidel, Mark (ed.), (2007) 178 (191). Nicholson therefore argues that the Supreme People’s Court is gradually establishing itself as the guide for lower court judges. 363 Interview with an expert from the International Cooperation Department of the Supreme People’s Court. 364 Quinn, Brian J.M., Asian-Pacific Law & Policy Journal 4 (2003) 431 (435, 436). 365 Quinn, Brian J.M., Asian-Pacific Law & Policy Journal 4 (2003) 431. In 1992, the National Assembly was given the authority to nominate the Chief Judge of the Supreme Court while the State President was entitled to appoint less senior judges (p. 438). However, as the Office of the President lacked the resources to fulfill its tasks, it had to grant the authority to select judges to local governments, with the President formally approving the decision (p. 438, 439). The limited fiveyear term of judges, the reappointment procedures involving local officials and the authority of local governments over budgets for local courts contributed further to the dependence of judges at the local level (p. 440–442). 366 Quinn, Brian J. M., Asian-Pacific Law & Policy Journal 4 (2003) 431 (450). Reforms were accelerated after a major scandal regarding a mafia boss who had enjoyed the protection of high-ranking officials was covered up For more information on one of the greatest scandals in Vietnamese history to which the media gave unprecedented coverage, see Thayer, Carlyle A., Southeast Asian Affairs (2003) 313 361

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local governments still maintain some power as the chief judges and deputy chief judges are appointed with the agreement of the local People’s Councils.367 Furthermore, as another attempt to reduce the influence of the local peoples’ committees, there is a plan to reform the court system and to change the area jurisdiction of the courts so that not every district has its own court.368 In addition, there are plans to improve the advisory system and to allow lawyers to play a more important role during court proceedings.369 However, the best watchdog for the judicial system and the best tool to fight against corruption is a critical press. According to a UNDP survey conducted in 2003, 79 percent of respondents believed that the media play an important role in protecting people’s interests and 64 percent indicated that the media influence legal decisions and judgments.370 However, press freedom is necessary in order to allow the media to exercise an effective watchdog function. Finally, an interviewee from Thailand emphasized the importance of tax authorities.371 78 percent of companies surveyed by Freeman / Nguyen agreed with the statement: “It will be virtually impossible to make any major progress of financial disclosure by companies until Vietnam’s tax system and its administration is improved.”372 8. Implications for the Legal Protection of Minority Shareholders a) Minority Shareholder Appointment and Decision Rights Low shareholders’ activism and the lack of available professional directors affect minority shareholder appointment rights. Among the three juris(318–321). In January 2002, the Politburo issued Resolution 8 (Resolution No. 08 / NQ-TW on Justice Reform, 2 January 2002) which stressed the independence of the courts but nevertheless emphasized the role of the Party in the leadership of the state. The resolution was implemented by the Law on the Organization of the People’s Court 2002 and the Law on Organization of People’s Office of Supervision and Control. 367 Art. 40 sec. 4 Law on Organization of the People’s Courts, in: 2 April 2002. 368 Interview with an expert from the International Cooperation Department of the Supreme People’s Court. At the moment, every district has its own Peoples’ Court. 369 Interview with an expert from the International Cooperation Department of the Supreme People’s Court. 370 UNDP, Access to Justice in Vietnam (2004) 18. 371 Interview with a lawyer at Lorenz & Partners. 372 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 47.

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dictions, only Vietnamese law mandates cumulative voting. As board representation reduces information asymmetries, cumulative voting, at least in theory, is one of the best tools to protect minority shareholders. Nevertheless, in a survey of the top 100 companies listed on the Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE) in 2010, the IFC survey found that in fewer than 50 percent of corporations, minority shareholders were able to influence the composition of the board.373 In view of the fact that the top companies attract the largest amount of investment by institutional investors, the percentage is low. The fact that most minority shareholders are uninformed individual shareholders who are mainly interested in dividends and show no interest in other issues, also seriously affects minority shareholder decision rights. Consider the recent introduction of derivative action in Vietnam. The particular features of the judicial system act as disincentives to the filing of suits, especially when the state is the majority shareholder as judges may be inclined to decide in favor of the state shareholder. However, the main problem is not the quality of the court system but the low incentives for shareholders to make use of the court system because of high transaction costs and free rider problems. An employee of an institutional investor noted that her employer had made use of the court system only once. She emphasized the point that, even if the court system were better, her employer would use more efficient ways or mechanisms as its main focus is on efficiency and reputation. The reluctance to make use of the court system has therefore nothing to do with cultural traits, but only with efficiency. This in turn is even more the case for small shareholders with fewer resources and less information and who would benefit very little from applying to the court. Majority-of-the-minority approval requirements on fundamental transactions between controlling shareholders and their corporations not only suffer from low shareholders’ activism, but also from weak corporate governance and low enforcement. Furthermore, shareholders face the problem of identifying such transactions as information on ultimate beneficial ownership is difficult to obtain. Interviewees indicated that related-party transactions are of particular concern and one of the main goals for improving minority shareholder protection.374 One interviewee argued that it is socially acceptable that the whole family profits from the position of a family member.375 373 International Finance Corporation et al., Corporate Governance Scorecard (2011) 57. 374 Interview with a representative of the Department for Enterprise Reform and Development at the CIEM and a representative of Ernst & Young Vietnam. 375 Interview with a researcher at Hanoi National University.

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The authors of corporate governance studies on Vietnamese companies reach the same conclusion: Nguyen found a significant lack of implementation of the rules on related-party-transactions and argues that this is the most serious weakness of the corporate governance system in Vietnam.376 He reasons that shareholders and managers do not have a full understanding of the advantages and disadvantages of related-party transactions.377 The general impression of Freeman / Nguyen was that enterprises rely on regulations rather than proactively adopting internal tools to prevent these transactions.378 Tung also found that companies show little interest in discussing and overseeing related-party transactions.379 The IFC survey found that corporations have policies for dealing with these transactions but many lack a definition of ‘related party’.380 Information provided by corporations to shareholders in case shareholder approval is required was poor or incomplete.381 Disclosure on related-party transactions is low. The IFC survey found that many corporations only disclose those with a value of 20 percent of corporate assets, with the result that few transactions are reported to the market.382 Weak corporate governance and low shareholders’ activism also affect minority shareholder approval rights in significant corporate decisions. Three different surveys found that corporations generally allow shareholders to approve most important issues, with the notable exception of the appointment of the external auditor.383 However, short notice periods and inadequate meeting notices make it difficult for shareholders to prepare themselves.384 The IFC survey found that only 27 percent of corporations provide adequate AGM meeting notices to shareholders.385 One interviewee criticized the 376

Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 55. Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 55. 378 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 46. 379 Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 7–9. 380 International Finance Corporation et al., Corporate Governance Scorecard (2011) 61. 381 International Finance Corporation et al., Corporate Governance Scorecard (2011) 61. 382 International Finance Corporation et al., Corporate Governance Scorecard (2011) 73. 383 International Finance Corporation et al., Corporate Governance Scorecard (2011) 48, 52. Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 37. Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 8. 384 Freeman, Nick / Nguyen, Van Lan, Corporate Governance in Vietnam (2006) 35. 385 International Finance Corporation et al., Corporate Governance Scorecard (2011) 50. 377

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quality of financial information in particular and pointed out that financial information is sometimes not sent to the shareholders’ meeting.386 In short, minority shareholder appointment and decision rights face the problem that most minority shareholders are domestic individual shareholders who, although the most vulnerable, have no incentives to become active shareholders. b) Independent Directors and Equal Treatment Independent directors are still a new concept in Vietnam. The rule that one-third of members of the board of management of listed companies should be independent directors is often violated.387 The IFC report found that only four percent of all independent directors were clearly identified as independent and that there is a need for clarification of the concept of independent director.388 The State Securities Commission Vietnam reported difficulty in finding independent directors.389 One interviewee also saw a lack of independent directors as a problem.390 The SSC sees a need for directors to understand the role of independent directors and for shareholders to understand the benefits of independent directors.391 Another interviewee indicated that independent directors would not contradict the people who are paying their salaries.392 It is also debatable whether independent directors face fines for violation of their duties. The rule that shareholders should be treated equally is often infringed. Votes are counted by head, not by shareholding proportion; only shareholders holding a certain number of shares are allowed to attend and vote at the shareholders’ meeting; and free transfer of shares is limited in some ways.393 Majority shareholders often abuse the right to purchase newly issued shares according to their proportion and acquire more shares than they are entitled to, infringing the principle of equal treatment of all shareholders.394 This behavior often goes in parallel with dividend payment in the form of shares, calculated on share par-value rather than share market price.395 386

Interview with an employee of an institutional investor. Problems found in corporate governance, in: Lookatvietnam, April 14, 2009. 388 International Finance Corporation et al., Corporate Governance Scorecard (2011) 82 and 71. 389 Interview with an expert from the State Securities Commission. 390 Interview with a researcher at Hanoi National University. 391 Interview with an expert from the State Securities Commission. 392 Interview with a researcher at Hanoi National University. 393 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 46. 394 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 45, 46. 395 Nguyen, Dinh Cung, Corporate Governance in Vietnam (2008) 46. 387

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c) Constraints and Affiliation Rights Directors’ duties are also a new concept in Vietnam. As the duty of loyalty is a standard, it may be difficult for inexperienced judges to decide whether this duty was violated. One interviewee indicated as one of the main weaknesses that the regulation on penalties is very general, lacks detail and is, in sum, not strong enough.396 She quoted as examples the weak penalties for directors who violate their duties. Although the company is entitled to claim compensation in the case of directors violating their duties, the law does not stipulate the extent of the compensation. In regard to further disclosure that is especially relevant for minority shareholders, the results are mixed. Tung found that 84 percent of companies disclose information on ownership structure.397 The IFC found that only six percent of corporations disclose adequate information on the largest shareholdings of the corporation.398 Most corporations do not disclose current information on major shareholdings on their website.399 In regard to disclosure of group structures, the IFC survey found it possible to identify the company group structures in about 90 percent of companies.400 However, interviewees named disclosure as one of the core problems in the protection of minority shareholders. It is questionable whether domestic individual shareholders who hold a significant number of shares are able to make use of such information. 9. Summary The protection of minority shareholders in Vietnam has to be assessed in view of the fact that, although Vietnam has displayed a remarkable economic development, the Vietnamese market economy is still in an early stage. The parallel process of equitization on the one hand and the emergence of a private sector on the other hand has resulted in a large number of small shareholding companies with concentrated ownership and no separation of ownership and management, and a number of shareholding companies with a large number of employees as minority shareholders and the 396

Interview with a legal advisor of an institutional investor. Tung, Thanh Dao, Corporate Governance and Performance of the Equitized Company in Vietnam, PBFEAM 2008 (2008) 8. 398 International Finance Corporation et al., Corporate Governance Scorecard (2011) 69. 399 International Finance Corporation et al., Corporate Governance Scorecard (2011) 69. 400 International Finance Corporation et al., Corporate Governance Scorecard (2011) 58. 397

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state as controlling shareholder. The opaque environment that makes it difficult to identify ultimate beneficial ownership and weak internal control mechanisms act as incentives to extract private benefits. Constraints that limit such possibilities are still in the process of being developed. The particular features of the Vietnamese capital market suggest that share prices may not fully mirror firm value, indicating weak capital market control. Internal control mechanisms need to be improved. Although the concept of corporate governance has only recently been introduced in Vietnam, awareness of this issue is growing. Nevertheless, a lack of knowledge, a business culture focusing on short-term gains and corporate leaders’ concerns about losing competitiveness affect its implementation. On the other hand, large funds that inter alia invest in private equity and exit by listing contribute to enhancing corporate governance standards overall. As Vietnamese firms often lack access to internal sources of financing, they are subject to pressure to enhance corporate governance standards. In short, corporate governance is still in its infancy but implementation efforts seem to depend on general economic development. However, weak corporate governance reduces the incentives for minority shareholders to hold shares for a longer period, thus increasing the problem of speculative trading and distorting share prices. Minority shareholders of equitized corporations face the problem that the state shareholder on the one hand does not monitor management effectively and on the other hand intervenes too strongly in the dayto-day management of the corporation. Public enforcement remains a problem. There is also a need to ensure the quality, integrity and independence of gatekeepers. In view of these conditions, efforts by the Vietnamese State Securities Commission to persuade minority shareholders to hold their shares for a longer period and to limit speculative trading may not meet expectations. The difficulties described above highlight the need for a holistic approach to improving the situation of minority shareholders. Some positive changes are already taking place. The legal and regulatory framework, described as inadequate by all interviewees, is constantly being improved, although the constant flow of new regulations makes it difficult not to lose track. A new generation of managers with higher levels of education and training is replacing the older generation who managed state-owned enterprises before equitization. In the future, a more developed capital market will contribute to limiting expropriation possibilities. An important step could also be the establishment of an association for the protection of minority shareholders and the publication of corporate governance rankings. The main factors for developing good corporate governance in Vietnam, however, relate to the State Capital Investment Corporation and the State Securities Commission. If the former were fully independent, equipped with adequate resources,

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acting according to market principles and responsible for the handling of all state shares, it would have the potential to exert pressure on the market to ensure the protection of minority shareholders. As long as the State Capital Investment Corporation does not have the necessary resources to fulfill its tasks, other actors will use this as a pretext to prevent the further transfer of ownership rights in order to protect their vested interests. Efforts to enhance oversight by the state shareholder should also include a clarification of the relationship between state shareholders and their representatives. The State Securities Commission in turn can contribute to the protection of minority shareholders by finding the right balance between market development and enforcement.

II. Thailand 1. The State-Party-Business Nexus The development of the Thai corporate sector has been profoundly shaped by political developments after the Second World War. After the absolute monarchy was replaced by a constitutional monarchy in 1932, Thailand was ruled for the next four decades, until 1973, by an authoritarian regime based on military and state officials in which changes of power were mostly achieved through coups d’état by rival military cliques.401 From the late 1950s, relationships between Sino-Thai businessmen and the military, who protected them in exchange for material rewards and political loyalty, flourished.402 However, technocrats in the financial institutions enjoyed relatively large autonomy.403 Due to economic development, urbanization and expansion of the education system, an urban middle class emerged which was excluded from the political process.404 Doner / Ramsay argue that economic growth after 1960 was inter alia possible because new entrepreneurs were allowed to enter product markets.405 Although officials had authority over entrepreneurs’ ability to enter the 401 Muno, Wolfgang, Reformpolitik in jungen Demokratien (2005) 178; Bünte, Marco, Südostasien 1 (2008) 85 (86). Riggs, Fred Warren, Thailand: The Modernization of Bureaucratic Polity (1966) 319 calls this system dominated by military and bureaucratic figures in which other social groups were excluded from the decision processes as ‘bureaucratic polity’. See pp. 311–366 on the bureaucratic polity. 402 Muno, Wolfgang, Reformpolitik in jungen Demokratien (2005) 179. 403 Muno, Wolfgang, Reformpolitik in jungen Demokratien (2005) 179. 404 Bünte, Marco, Südostasien 1 (2008) 85 (87). 405 Doner, Richard F. / Ramsay, Ansil, Rent-seeking and Economic Development in Thailand, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 145 (153, 172).

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market, which was used by ethnic Thai politicians to sell market access to Sino-Thai entrepreneurs, intra-elite rivalries ensured that no patron was able to monopolize the provision of exclusive rights and government goods and that every aspiring entrepreneur was able to find a patron.406 These conditions created competition and enabled Thailand to achieve constant growth despite pervasive clientelism, corruption and rent-seeking.407 Wailerdsak agrees that there was a degree of competition within the Thai economic system which limited the rents that Thai firms with political connections were able to create by gaining privileged, oligopolistic positions in the market.408 Brown, however, disagrees, arguing that “the constantly changing power relations between Thai capitalists on the one hand and the state and bureaucracy on the other hand, combined with the intra-elite rivalry between these separate segments of power and money, have initiated a powerful, monopolistic, family-dominated corporate structure that even the crisis of 1997 has had difficulty in dismantling”409.

Rather than introducing competition, the liberalization of the financial sector in Thailand strengthened the traditional links between government and business.410 After 1973, the first democratic structures emerged but the political system remained dominated by the military.411 During the 1980s, political power slowly shifted from the military to the parliament and political parties.412 At the same time, the proportion of business people among parliament and cabinet members increased substantially.413 The late 1970s especially saw the rise of rural businessmen who used patronage, vote buying 406 Doner, Richard F. / Ramsay, Ansil, Rent-seeking and Economic Development in Thailand, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 145 (153–154). 407 Doner, Richard F. / Ramsay, Ansil, Rent-seeking and Economic Development in Thailand, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 145 (154). 408 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 250. 409 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 282. 410 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 252. 411 Bünte, Marco, Südostasien 1 (2008) 85 (87). 412 Bünte, Marco, Südostasien 1 (2008) 85 (87); Muno, Wolfgang, Reformpolitik in jungen Demokratien (2005) 183. 413 White, Lynn T., Political Booms (2009) 403. See also Reinecke, Gerhard / Sander, Ingvar, Thailands Demokratisierung: Ein Schauspiel in vielen Akten, in: Reinecke, Gerhard / Sander, Ingvar (ed.), (2000) 21 (29) for precise figures regarding parliament and senate and White, Lynn T., Political Booms (2009) 389 for precise figures concerning the cabinet.

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and corruption to secure power.414 The high costs of the election campaigns had to be amortized after the elections.415 Money politics and corruption became one of the major problems of the political system in which politicians replaced the military and bureaucrats as recipients of benefits.416 Parallel to this development, the Thai bureaucracy began to lose its independence and influence and became increasingly politicized.417 The political system from the beginning of the 1990s was characterized by a multitude of political parties which McCargo describes as “loose affiliations of factional interest groups with no ideological ballast to speak of”418. The highly unstable coalitions between five to seven political parties were in constant danger of breaking up because of the competition for rents between the diverse factions.419 This system was dominated by rural businessmen, big business in Bangkok, the military and the bureaucracy while other social groups were still excluded.420 A close interdependence between political and business elites emerged, driven by money politics.421 However, a political reform movement led by a “tactical alliance between liberal, progressive and conservative forces to check the power of elected politicians” emerged.422 It finally culminated in the enactment of a new 414 Bünte, Marco, Südostasien 1 (2008) 85 (87). See also Phongpaichit, Pasuk /  Baker, Chris, Chao Sua, Chao Pho, Chao Thi: Lords of Thailand’s Transition, in: McVey, Ruth (ed.), (2000) 30 (39) who point out that at each successive election in the 1980s, more of the provincial seats were occupied by local figures. 415 Bünte, Marco, Südostasien 1 (2008) 85 (89). 416 Muno, Wolfgang, Reformpolitik in jungen Demokratien (2005) 185. 417 See Doner, Richard F. / Ramsay, Ansil, Rent-seeking and Economic Development in Thailand, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 145 (173) and Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 289. Brown argues that intra-elite rivalry and competition between the various ministries, the Bank of Thailand, the Board of Investment and other state economic agencies during the 1980s, together with financial liberalization, accelerated the erosion of the independence of Thailand’s bureaucracy. Political parties secured cooperation with ministries and bureaucrats yielded to their influence. 418 McCargo, Duncan, Thailand’s January 2001 General Elections, in: McCargo, Duncan (ed.), (2002) 247 (255). When the military undertook another coup d’état in 1991 in order to regain its power, it provoked massive protests among the population who was no longer willing to tolerate a military dictatorship so that finally democratic elections were held in September 1992. 419 Muno, Wolfgang, Reformpolitik in jungen Demokratien (2005) 193–194, 197. 420 McCargo, Duncan, Understanding Political Reform in Thailand, in: McCargo, Duncan (ed.), (2002) 1 (88). 421 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 263. 422 McCargo, Duncan, Understanding Political Reform in Thailand, in: McCargo, Duncan (ed.), (2002) 1 (3).

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constitution in 1997 following the Asian crisis.423 The goal of the constitution of 1997 was to create better checks and balances on potential abuses of power and corruption.424 But one side effect of the newly introduced party list system was that it facilitated businessmen’s opportunities to enter politics.425 The decentralization of local government in the late 1990s opened up positions of local power and patronage, which were seized by local business families.426 In January 2001, the Thai Rak Thai (Thai love Thai, TRT) party under Thaksin Shinawatra won the general elections.427 Thaksin was able to gain the backing of important business groups, which is best shown by the fact that his government was dominated by seven large corporate empires, accounting for about 20 percent of the share value of the Thai stock market in 2002.428 The families of eight leading figures in the government had a controlling interest in 23 listed firms which collectively accounted for oneseventh of the market capitalization.429 In the beginning, the TRT, described by Surin Maisrikrod as an “alliance among the new domestic capitalist class, managerial / middle classes, small-business entrepreneurs, new politicians, and technocrats, with a close link to the military and the national police force”,

was also supported by the intelligentsia, NGOs, civil society groups and the media.430 In contrast to the Democrat Party, the main opposition party, 423 Maisrikrod, Surin, Learning from the 19 September Coup, in: Singh, Daljit /  Salazar, Lorraine C. (ed.), (2008) 340 (341). 424 Asawaroj, Saowanee / Clark, Eugene, Thai Company Law, in: Tomasic, Roman (ed.), (1999) 343 (344). It provided a national assembly consisting of the House of Representatives (lower house) and a Senate (upper house). Among the 500 members of the House of Representatives, 400 were elected on a constituency basis (sec. 102 Constitution 1997) and 100 on a party-list basis (sec. 99 Constitution 1997). The 200 members of the Senate were elected on a proportional basis. 425 Up to the crisis, most businessmen had relied on politicians to provide them with protection and to influence policy on their behalf. The party list system allowed businessmen to enter politics without electioneering. As a consequence, businessmen entered politics themselves or made relatives enter politics. See Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 254–255. 426 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (273). 427 The TRT controlled 339 of the 500 seats in the Lower House, see Maisrikrod, Surin, Learning from the 19 September Coup, in: Singh, Daljit / Salazar, Lorraine C. (ed.), (2008) 340 (346). Thaksin had been building up a telecommunication empire during the 1980s, became active in politics during the 1990s and founded his own party in 1998. 428 Maisrikrod, Surin, Learning from the 19 September Coup, in: Singh, Daljit /  Salazar, Lorraine C. (ed.), (2008) 340 (345). 429 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 261.

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the TRT was able to present a concrete agenda which addressed longstanding problems, especially in the countryside.431 This policy has been stigmatized as ‘populist’ as it focused on the poor rural masses and won their continued support.432 However, the regime under Thaksin was characterized by the centralization of power and the marginalizing of the parliamentary opposition, the politicization of democratic institutions, the intimidation of the media and civil society groups, and the abuse of power for the benefit of personal business interests.433 Violations of human rights increased, as in the war on drugs and the fight against violence in the Muslim- dominated southern provinces.434 Thaksin also marginalized the state economic agencies, which were dominated by technocrats, especially the Bank of Thailand and the National Economic and Social Development 430

430 Maisrikrod, Surin, Learning from the 19 September Coup, in: Singh, Daljit /  Salazar, Lorraine C. (ed.), (2008) 340 (345). McCargo, Duncan / Pathmanand, Ukrist, The Thaksinization of Thailand (2004) describe in detail how Thaksin created a new political economy network linking military, bureaucratic, political and capitalist elements. 431 Pongsudhirak, Thitinan, Thailand – Democratic Authoritarianism, in: Singh, Daljit / Chin, Kin Wah (ed.), (2004) 277 (280). TRT policy included rural debt suspension, an entrepreneurial fund of THB one million (US$23.5000) for each of the more than 70,000 villages, and a universal healthcare coverage of THB30 (less than US$1) per hospital visit (p. 280). 432 Phongpaichit, Pasuk / Baker, Chris, Journal of Contemporary Asia 38 (2008) 62. 433 Pongsudhirak, Thitinan, Thailand – Democratic Authoritarianism, in: Singh, Daljit / Chin, Kin Wah (ed.), (2004) 277 (300). The increasing pressure on Thai media and civil society groups was accompanied by investigations of the bank records of 247 Thai journalists and civil society activists by the Anti-Money-Laundering Office because of allegations of financial wrongdoing (p. 285). Mutebi, Alex M., Thailand’s Independent Agencies Under Thaksin, in: Singh, Daljit / Salazar, Lorraine C. (ed.), (2007) 303 shows how the state agencies that had been established according to the constitution of 1997 in order to ensure checks and balances, such as the State Audit Office, the National Counter Corruption Commission, the National Broadcasting Commission and the National Telecommunications Commission, became the object of manipulation by influential interests said to be aligned with the Prime Minister. 434 For an overview of the problems in the South of Thailand, see Chongkittavorn, Kavi, Southeast Asian Affairs (2004) 267. Under Thaksin, the war on drugs resulted in a high number of extra-judicial killings of suspects which were not investigated, leading to domestic and international controversies and criticism by human rights groups, see Panaspornprasit, Chookiat, Thailand – Politicized Thaksinization, in: Singh, Dajit / Chin, Kin Wah (ed.), (2005) 257 (258). The exact number of those killed is not known. While Maisrikrod, Surin, Learning from the 19 September Coup, in: Singh, Daljit / Salazar, Lorraine C. (ed.), (2008) 340 (347) speaks of 2.500, Montesano, Michael J., Thailand – A Reckoning with History Begins, in: Singh, Dajit / Salazar, Lorraine C. (ed.), (2008) 311 (329) mentions more than 2,000.

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Board.435 Wailerdsak argues that the nature of rents changed as gatekeeping rents collected by bureaucrats and ordinary politicians decreased while rents accruing to business-politicians through profits inflated by political corruption increased.436 Executive power was abused by changing government regulations concerning the promotion, protection, or regulation of the business sector, by allocating public resources to the business sector, and by giving benefits to specific firms.437 After the TRT won the general elections on 6 February 2005, an opposition movement developed which included supporters of the Democrat Party and those sympathetic to the monarchy as well as the Bangkok-based intelligentsia, middle classes and civil society groups which had been strongly opposed to the authoritarian rule of Thaksin.438 The Thai elite, meaning the military, the civil service and the aristocracy, felt their dominant position threatened by Thaksin.439 This opposition turned into a mass movement at 435 Maisrikrod, Surin, Learning from the 19 September Coup, in: Singh, Daljit /  Salazar, Lorraine C. (ed.), (2008) 340 (346). 436 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 259. She emphasizes that, as the strength and independence of the bureaucrats declined dramatically, bureaucrats had to become clients of individual politicians or the dominant party in order to participate in the distribution of rents. The position of non-business politicians also declined. Under Thaksin, decision-making power over the allocation of rents remained with the business politicians and with the bureaucrats working under their clientage (p. 259). 437 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 260. The Thaksin Regime was therefore called ‘Thaksinomics’, ‘Thaksinocracy’ and ‘Thaksinocrony’ and even characterized as ‘democratic authoritarianism’, see Maisrikrod, Surin, Learning from the 19 September Coup, in: Singh, Daljit / Salazar, Lorraine C. (ed.), (2008) 340 (344). 438 Pongsudhirak, Thitinan, Thaksin’s Political Zenith and Nadir, in: Singh, Daljit / Salazar, Lorraine C. (ed.), (2007) 285 (313); McCargo, Duncan, Thailand – State of Anxiety, in: Studies, Institute of Southeast Asian (ed.), (2008) 333 (334). In the 2005 elections which were relatively clean of vote-buying and fraud compared to former elections, the TRT won more than 75 percent of the 500 seats in the parliament and even 32 out of 37 seats in Bangkok. 439 Warr, Peter, Thailand’s Crisis Overload, in: Singh, Daljit (ed.), (2010) 334 (336). Warr argues that, in the eyes of the educated urban elites who have a certain contempt for the poorly uneducated rural people supporting Thaksin, the regime of Thaksin, although democratically elected, was not legitimate. Bünte, Marco, Südostasien 1 (2008) 85 (99) also points out that the educated urban elites think that in order to be legitimate, a regime must be characterized by good governance rather than by any other feature. The movement was led by a former ally of Thaksin, the media mogul Sondhi Limthongkul, who based his campaign against Thaksin on charges of corruption, cronyism and disloyalty to King Bhumibol Adulyadej. Presumably he acted from behalf of personal motives. See Pongsudhirak, Thitinan, Thaksin’s Political Zenith and Nadir, in: Singh, Daljit / Salazar, Lorraine C. (ed.),

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133

the beginning of 2006 when Temasek, the state investment corporation of Singapore, acquired a stake of 49 percent in the Shin Corporation telecommunications empire that was owned by the Thaksin family.440 The movement merged with other opponents of Thaksin to form the People’s Alliance for Democracy (PAD).441 They identified themselves by wearing yellow shirts, in the royal color, while supporters of Thaksin chose red as their color.442 After the third victory of the TRT in the general elections in February 2006, the Thai military used the opportunity when Thaksin was attending the annual session of the United Nations General Assembly in New York to overthrow the government.443 The junta ordered a committee to draft a new constitution to ensure that the parties would be strong enough to compete with each other and to prevent the rise of another omnipotent Prime Minister.444 In consequence, the constitution reintroduced the multi-member constituencies, which had been blamed for enhancing opportunities for small parties and producing unstable coalition governments.445 In August 2007, a referendum on the constitution was accepted by 56.69 percent of voters.446 In May 2007, the Constitutional Tribunal decided to dissolve the TRT and to ban all 111 party executives from holding office for the next five years.447 (2007) 285 (294); Ockey, James, Thailand in 2008: Democracy and Street Politics, in: Singh, Daljit (ed.), (2010) 315 (316, 317). 440 Pongsudhirak, Thitinan, Thaksin’s Political Zenith and Nadir, in: Singh, Daljit / Salazar, Lorraine C. (ed.), (2007) 285. This deal happened some days after the ownership limits for foreign entities in Thailand had been increased from 25 percent to 49 percent. It caused public anger as the deal was not only tax-free but also because an important national asset had been sold to a foreign entity (p. 296). Pongsudhirak assumes that Thaksin was afraid that his assets would be confiscated in case he lost office. 441 Ockey, James, Thailand in 2008: Democracy and Street Politics, in: Singh, Daljit (ed.), (2010) 315 (317). 442 Warr, Peter, Thailand’s Crisis Overload, in: Singh, Daljit (ed.), (2010) 334 (335). 443 Montesano, Michael J., Thailand – A Reckoning with History Begins, in: Singh, Dajit / Salazar, Lorraine C. (ed.), (2008) 311 (323). The other political parties had refused to participate and up to ten million Thai voted “no”, meaning that they gave their vote to no party what was generally understood as a vote against the TRT (p. 315). The Constitutional Court annulled the elections of 2 April 2006 (p. 315). 444 White, Lynn T., Political Booms (2009) 461. 445 McCargo, Duncan, Thailand – State of Anxiety, in: Institute of Southeast Asian Studies (ed.), (2008) 333 (337). In the multiple-member constituencies, each district has one, two or three winning candidates. 446 Bünte, Marco, Südostasien 1 (2008) 85 (94). 41,37 percent voted against the constitution. 447 McCargo, Duncan, Thailand – State of Anxiety, in: Institute of Southeast Asian Studies (ed.), (2008) 333 (335).

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C. The Factual Protection of Minority Shareholders

The former members of the TRT reacted by establishing the People Power Party (Phak Phalang Prachachon, PPP), which won the next elections in December 2007. However, violent protest by PAD continued.448 The Constitutional Court once more intervened, first by convicting Prime Minister Samak for alleged violation of the constitutional ban against outside employment and Thaksin for corruption. It then declared the dissolution of all three government coalition parties, including the PPP, on the grounds of electoral fraud, and banned their executives from political participation for the next five years.449 However, as the members of PPP had foreseen the court’s judgment, they had already prepared the Phuea Thai Party (For Thais Party, PTP) as an alternative party which all PPP members of the parliament were meant to join.450 Immense pressure was exercised on coalition members and PPP factions to defect, resulting in some PPP members finally supporting the Democrat Party-led coalition and allowing it to govern.451 Thaksin divided the country and this deep division continues to the present. The political conflict is a conflict between the traditional elite – the educated Bangkok middle class, including the civil service, the military and the aristocracy – and a new class of entrepreneurs who have the support of the majority of rural voters.452 The social divide can be explained by the different rate of economic development. While modern business and the 448 On 26 August 2008, the PAD took over the government house in order to block a cabinet meeting, and other government buildings. On 25 November 2008, PAD supporters took control of the Bangkok’s Suvarnabhumi International Airport, see Ockey, James, Thailand in 2008: Democracy and Street Politics, in: Singh, Daljit (ed.), (2010) 315 (322, 323, 326) and Warr, Peter, Thailand’s Crisis Overload, in: Singh, Daljit (ed.), (2010) 334 (336). 449 Ockey, James, Thailand in 2008: Democracy and Street Politics, in: Singh, Daljit (ed.), (2010) 315 (327); Warr, Peter, Thailand’s Crisis Overload, in: Singh, Daljit (ed.), (2010) 334 (336). Prime Minister Samak was convicted for taking part in two cooking shows on TV. McCargo, Duncan, Thailand – State of Anxiety, in: Institute of Southeast Asian Studies (ed.), (2008) 333 (336) argues that the increasing judicialization of the political process in order to solve political conflicts reflects the mistrust of political parties and elections by the conservative Thai elites. Ockey, James, Thailand in 2008: Democracy and Street Politics, in: Singh, Daljit (ed.), (2010) 315 (330) points out that, although the courts have eased up political tensions, their judgments have undermined their credibility and the confidence of the people in the justice system. 450 Ockey, James, Thailand in 2008: Democracy and Street Politics, in: Singh, Daljit (ed.), (2010) 315 (327). 451 Ockey, James, Thailand in 2008: Democracy and Street Politics, in: Singh, Daljit (ed.), (2010) 315 (327). Democrat leader Abbhisit Vejjachiwat was elected as Prime Minister. 452 Warr, Peter, Thailand’s Crisis Overload, in: Singh, Daljit (ed.), (2010) 334 (355).

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135

educated elites are concentrated in Bangkok, which has undergone impressive modernization, the rural masses in the north and northeast still represent the major voters’ group.453 The government’s poor investment in human capital development has excluded a large section of the population from the emerging modern Thai economy.454 The links between bureaucratic, political and economic stakeholders probably had several implications for the protection of minority shareholders. Brown argues that one of the results was the emergence and consolidation of corporate power among a few select families.455 One interviewee stated that market liberalization in Thailand is only conducted to the extent that it does not jeopardize the power of this elite.456 Further research on how this class used their political connections and power to influence the law-making process or bureaucratic procedures may show whether and how potential measures for the protection of minority shareholders were never realized in the past. To give one example: Brown points out that the attempts of the Stock Exchange of Thailand to exclude the major shareholder from being the chief executive were compromised by embedded businessstate links.457 A third important factor linked to this nexus is public enforcement. As will be pointed out later, there was political pressure to favor market development instead of enforcing securities regulation on the one hand and selective enforcement on the other. 2. Features of the Thai Corporate Sector a) Thai Corporations and Ethnicity Another factor that heavily shaped corporate growth in Thailand was the origin of the corporate founders. Most entrepreneurs during the boom years were of Chinese origin.458 Chinese immigration to Thailand started in the 19th century.459 The monarchy promoted Chinese immigration because Chi453

Bünte, Marco, Südostasien 1 (2008) 85 (100). Montesano, Michael J., Thailand – A Reckoning with History Begins, in: Singh, Dajit / Salazar, Lorraine C. (ed.), (2008) 311 (330). 455 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 252. 456 Interview with a researcher at the faculty of law, Thammasat University. 457 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 267. 458 White, Lynn T., Political Booms (2009) 192, 193. 459 Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (148). 454

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nese people were known for their trading expertise.460 While Thais traditionally entered the government bureaucracy, Sino-Thais focused on business.461 When the monarchy was overthrown in 1932 and replaced by several different governments in the following years, Chinese immigrants formed political connections to secure political patronage.462 Chinese immigrants became much more assimilated in Thailand than in Malaysia or Indonesia.463 Almost all the domestic firms that dominated Thai business before the Asian crisis had been founded by Chinese immigrants during the previous three generations.464 All but two of Thailand’s thirty largest corporations in the early 1990s were owned by Sino-Thais.465 Although it is not possible to state the number of ethnic Chinese in Thailand accurately, due to their successful assimilation, it was estimated that Sino-Thais numbered about eight million (= one-seventh of the population) around 2000, controlling fourfifths of the market capital.466 According to a study by Andersen Consulting in September 2000, Chinese businessmen owned 81 percent of the market capitalization although they only represented 14 percent of the population.467 Suehiro compiled a list of 220 business groups that comprised all the significant groups in modern business and whose revenue was equivalent to 62 percent of GDP.468 Of the 220 business groups, 212 were family-based groups with some Chinese origin.469 460 Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (148). 461 White, Lynn T., Political Booms (2009) 204. 462 Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (148). 463 White, Lynn T., Political Booms (2009) 198. As Thailand used the jus soli rule for citizenship, the children of a Chinese man and a Thai woman could obtain the Thai citizenship if they wished, see p. 197. The modern Thai bourgeoisie, especially those who lived outside Bangkok, emerged from the melding of Sino-Thai entrepreneurs and the sakdina class, the prestigious class that traditionally extracted land rents, see p. 193. 464 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (34). 465 White, Lynn T., Political Booms (2009) 193. 466 Dana, Leo Paul, Entrepreneurship in Pacific Asia: Past, Present & Future (1999) 180. 467 Quoted by Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (332). 468 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (40). 469 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (40).

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Table 7 Distribution of 220 Thai Business Groups by Ethnicity and Generation, 1997 470

Type of ultimate owner

Total

%

First generation470

Second generation

Third generation and over

Unknown or others

Chinese

170

77.3

80

81

6

3

24

10.9

5

11

7

1

194

88.2

85

92

13

4

12

5.5

4

6

1

1

Indian

3

1.4

0

2

1

0

European / American

3

1.4

0

2

1

0

89

102

16

5

Thai-Chinese Sub-total Chinese Thai

Sub-total family business

212

Public Enterprise

5

2.3

–

–

–

5

Unknown

3

1.4

3

0

0

0

220

100.0

92

102

16

10

Total

Source: Suehiro, Akira / Wailerdsak, Natenapha, ASEAN Economic Bulletin 21 (2004) 81 (83).

The origin of Thai businessmen is important insofar as, in the beginning, many of the Chinese businesses operated under the ‘kongsi’ system in which the patriarch has full control over the direction of the enterprise and the distribution of profits.471 As the largest non-financial companies dated back only to the 1940s and 1950s, the founders still play a very active role in day-to-day management.472 Chinese family groups combined use of the 470

The first generation is counted from the founder of the group concerned. Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (35). Under the Kongsi system, all members and branches of the family are considered part of a single enterprise. The family generally establishes a holding corporation which is fully owned by the family and which then establishes several corporations that might be listed. Senior positions are usually held by children of the patriarch and only rarely by externally recruited managers, see Alba, Pedro et al., Thailand’s Corporate Financing and Governance Structures, in: Singer, Hans et al. (ed.), (2006) 1499 (1517). These families also tend to invite other families to share ownership when setting up new ventures. 472 Alba, Pedro et al., Thailand’s Corporate Financing and Governance Structures, in: Singer, Hans et al. (ed.), (2006) 1499 (1517). 471

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stock market to obtain capital with the kongsi system. They formed one or more investment firms that were not listed and wholly owned by family members.473 These investment firms had a controlling stake in one or more holding companies listed on the market that, in turn, had stakes in several listed and non-listed enterprises.474 Wailerdsak argues that during the decades prior to the crisis, enterprises of Sino-Thai entrepreneurs could be differentiated into four types. The first were conglomerates that remained organized under the kongsi system with a dominant patriarch, limited use of professional management from outside the family and little transparency.475 The second were unreformed single businesses that retained the kongsi structure but specialized in one business.476 Another type was the modernized single business, which specialized in one single business, modernized their management and recruited top professionals while retaining ultimate family control.477 The fourth type was the modernized family conglomerate, which also improved management structures and recruited professionals while retaining family control but diversified into broad conglomerates.478 b) Ownership Structure The former remarks are important to understand current ownership structures and means of control. When asked about the ownership structure of Thai firms, interviewees claimed that changes in ownership structure as a result of the Asian crisis were limited to banks and financial institutions.479 Companies are still mostly family-owned and controlled by majority shareholders. Even in cases where the ownership structure changed and the stake of the founding families decreased, the management did not change and the corporations are still run by the family.480 473 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (41). 474 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (41). 475 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 44–46. 476 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 46–47. 477 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 47–48. 478 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 49–52. 479 Interview with employees of the Thai Listed Companies Association. 480 Interview with employees of the Thai Listed Companies Association.

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139

These impressions are confirmed by the results of several studies on the ownership structure of Thai corporations. These data collections are based on different samples and use different cut-offs to identify controlling ownership, so that it is difficult to compare them. Furthermore, one method involves tracking the ultimate owners of corporations that hold a controlling stake in other corporations while other databases only report the direct owner. The fact that many shares are held in nominee accounts makes it difficult to determine shareholder affiliation. However, on the whole, these data offer a good overview of the ownership structure of Thai corporations. A common finding of these studies is that ownership is highly concentrated in Thailand. In their cross-country study on the ownership structure of listed companies in East Asian countries in 1996, Claessens et al. evaluated a sample of 167 firms (36.78 percent of all Thai listed companies).481 Claessens et al. found that among East Asian firms, Thai firms with ultimate control at the 20 percent level displayed the lowest use of pyramidal structures (12.7 percent compared to an average of 38.7 percent in East Asia) and the lowest use of cross-holding structures (0.8 percent compared to an average of 10.1 percent in East Asia).482 Furthermore, Thai firms had the most concentrated cash-flow rights (32.8 percent compared to an average of 15.7 percent in East Asia) and the most concentrated voting rights (35.25 percent compared to an average of 19.77 percent in East Asia).483 A quarter of Thai companies had more than 40 percent of the cash-flow rights in the hands of the largest blockholder.484 The separation of ownership and control in Thai firms was the lowest in East Asia (the ratio of cash-flow rights to voting rights is 0.941 compared to an average of 0.746 in East Asia) and most pronounced among family-controlled firms.485 The largest separation occurred in the smallest firms.486 40.1 percent of companies had a single owner which was relatively low compared to the number in other East Asian countries.487 481 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81. The results are only indicative because of the small example that does not cover companies with nominee ownership only or a mixture of nominee and direct ownership with direct ownership below 50 percent. Furthermore, they only included shareholder with stakes of at least 5 percent. Therefore, the frequency of widely held firms in their sample may be overestimated. 482 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92). 483 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (100). 484 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (99). 485 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (100, 102). 486 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (102). 487 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92).

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C. The Factual Protection of Minority Shareholders

The results of the study by Khanthavit et al., who investigated the impact of the Asian crisis on ownership and board structure in all non-financial publicly traded firms in 1996 and 2000, fall overall in line with the findings of Claessens et al.488 They found that the already highly concentrated level of ownership was slightly more concentrated after the crisis. In 1996, about 78.69 percent of the firms had a controlling shareholder.489 This number increased to 79.19 percent in 2000.490 However, compared to the findings of Claessens et al., they determined a higher use of pyramidal and cross-holding structures. The use of direct ownership increased after the crisis: compared to 76.53 percent in 1996, 78.04 percent of firms in 2000 were controlled by direct shareholdings.491 The use of pyramidal and cross-holding structures in firms with controlling shareholders slightly decreased after the crisis (21.96 percent in 1996 compared to 23.47 percent in 2000, 7.22 percent in 1996 compared to 6.27 percent in 2000, respectively).492 The combination of direct shareholdings with pyramids and cross-shareholdings occurred most often in firms controlled by a group of related families.493 Khanthavit et al. assume that the results of Claessens et al. underestimate the use of cross-holding structures because of their small sample.494 Voting and cash-flow rights increased slightly after the crisis: in 2000, a controlling shareholder owned on average 45.27 percent of the cash-flow rights (compared to 44.66 percent in 1996) and 48.18 percent of the voting rights (compared to 47.75 percent in 1996).495 The deviation of control from ownership became even smaller after the crisis: the mean ratio of cash-flow rights to voting rights increased from 0.931 in 1996 to 0.939 in 2000.496 488 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247. They excluded banks and financial institutions because of ownership restrictions on banks and financial institutions by the Bank of Thailand. In contrast to the study by Claesses et al., they use a cut-off level of 25 percent. 489 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph, et al. (ed.), (2004) 247 (252). 490 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (252). 491 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (254). 492 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (255, 256). 493 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (254). 494 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (256). 495 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (257–258).

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Table 8 Cash-flow and Voting Rights in Thai Corporations in 2000 Mean of cash-flow rights in 2000

Mean of voting rights in 2000

Ratio in 2000

• A group of related families

47.11

50.41

0.926

• State

52.71

52.83

0.998

One controlling shareholder

• Domestic financial institution

34.20

40.30

0.843

• Foreign investor

44.77

46.05

0.967

• Foreign institutional investor

43.03

43.03

1.000

Group of controlling shareholders • A group of unrelated families

47.16

48.05

0.970

• Multiple controlling shareholders

36.63

40.13

0.919

Total

45.27

48.18

1.000

Source: Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (257–259).

Claessens et al. assume that the low percentage of one ultimate owner and the low use of pyramids and cross-holdings reflect the importance of informal alliances among the small number of families controlling most Thai companies.497 It is estimated that 150 families dominate Thai domestic capital.498 A list of the top 150 Thai business groups in 2000 compiled by Suehiro indicates that assets were heavily concentrated among the leading 25 groups.499 The top 15 families in Thailand held 53.3 percent of all corporate assets.500 Often, several families would jointly own a large stake in a corporation, with one family in the alliance taking the role of primary controlling shareholder.501 However, the findings of Polsiri / Wiwattanakantang show that pyramidal and cross-holding structures in group 496

496 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (259). 497 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (93, 94). 498 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 264. 499 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (55). 500 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (108). 501 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (93, 94).

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C. The Factual Protection of Minority Shareholders Table 9 Pyramidal Structures of Thai Corporations 1995–2000

502

Percentage of firms in pyramidal structures

Group firms502

Non-group firms

1995

51.65

9.57

1996

53.54

13.36

1997

55.56

15.18

1998

53.61

16.26

1999

52.33

14.46

2000

45.68

12.61

Source: Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (164).

firms are common.503 They conclude from their results that ownership of firms affiliated to a business group is concentrated in the hands of the founding family, with founding family members exercising a great deal of decision-making and monitoring power.504 All available studies highlight the importance of family ownership in Thailand. Claessens et al. found that at the 10 percent cut-off level, 56.5 percent of firms were family-controlled and at the 20 percent cut-off level, the figures were 61.6 percent.505 Khanthavit et al. found that at the 25 percent cut-off level, the percentage of firms controlled by a group of related families was 51.14 percent in 1996.506 Interestingly, even though families 502 Group firms refer to firms in which the largest shareholder is one of the families who own the top 30 business groups. 503 Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 analyzed the characteristics of the top 30 business groups prior to and after the crisis (number of listed companies, ownership and control structures, the effects of the Asian crisis on these groups and their restructuring activities after the crisis as well as the effect of restructuring). Prior to the crisis, the top 30 business groups owned 46,83 firms on average. However, on average, only 3.27 of the affiliated companies were listed. The market capitalization of these business groups accounted for 25.67 percent in 1996 but increased to 28.21 percent in 2000. 504 Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (166). 505 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (103). 506 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (252).

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Table 10 Cross-holdings of Thai Corporations 1995–2000 Percentage of firms with cross-shareholdings

Group firms

Non-group firms

1995

17.58

1.91

1996

16.16

2.43

1997

17.17

2.33

1998

16.49

3.25

1999

15.12

3.31

2000

13.58

2.10

Source: Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (164).

were still the most common owners of Thai firms, the percentage declined to 45.65 percent in 2000.507 Family ownership was replaced by foreign, state or domestic financial institution ownership.508 They therefore conclude from their study that the role of families was reduced after the Asian crisis.509 However, some years later, families in Thailand seem to have recovered much of their former position. Suehiro / Wailerdsak and Wailerdsak conclude from an analysis of companies listed on the Stock Exchange in 1996, 2000 and 2006 that, in spite of the crisis, families are still the dominant form of ownership in Thai enterprises.510 507 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (252). 508 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (252, 253). 509 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (270). 510 Suehiro, Akira / Wailerdsak, Natenapha, ASEAN Economic Bulletin 21 (2004) 81 (84); Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (44). Suehiro, Akira / Wailerdsak, Natenapha, ASEAN Economic Bulletin 21 (2004) 81 (86) present three possibilities to explain the continuing dominance of family-run firms in Thailand. The first is that companies managed to create a pool of professional managers among family members by investing in their education. Second, legislation that aimed to create dispersed ownership met resistance among the leading firms. Third, as the government promoted collaboration between local firms and multinational concerns, family businesses were able to grow without losing ownership and control.

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C. The Factual Protection of Minority Shareholders Table 11 Ownership Structure of Thai Corporations in 1996 and 2000

511

512

Type of controlling shareholder511

1996 %

2000 %

1. Firms with controlling shareholder

78.69

79.19

1.1 With one controlling shareholder

67.05

64.91

1.1.1 A group of related families512

51.14

45.65

1.1.2 State

2.27

2.80

1.1.3 Domestic financial institution

0.57

1.24

13.07

14.60

0.00

0.62

11.65

14.29

1.2.1 A group of unrelated families

5.97

5.59

1.2.2 Multiple controlling shareholders

5.68

8.70

21.31

20.81

100.00

100.00

1.1.4 Foreign investor 1.1.5 Foreign institutional investor 1.2 With a group of controlling shareholders

2. Firms with no controlling shareholder Total

Source: Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (252).

Nevertheless, the use of pyramidal and cross-holding structures seems to have decreased. The Corporate Governance Report of Thai Listed Companies 2008 found that 95.5 percent of companies did not display apparent cross-holding structures.513 Regarding apparent pyramid holdings, only 15.6 percent of listed companies received a poor score.514 The implications of these results for the protection of minority shareholders are difficult to explore. If the data of the Corporate Governance Reports are correct, Thai firms reduced cross-holdings and pyramidal structures in 511 A controlling shareholder is a shareholder who directly or indirectly owns more than 25 percent of the firm’s voting rights. 512 A group of families is defined as an individual, a family, and members of a group of families that are relatives, including in-law families. 513 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 55. 514 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 55.

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Table 12 Ownership Structure of Thai Corporations 1996, 2000 and 2006

515

516

517

518

Type of shareholder

1996

%

2000

%

2006

%

Family-owned515

216

48.2

183

42.3

211

50.4

Family-owned516

150

33.5

131

30.3

139

33.2

66

14.7

52

12.0

72

17.2

Widely held518

160

35.7

145

33.5

127

30.3

Foreign-owned

59

13.2

90

20.8

63

15.0

State or state enterprise

13

2.9

15

3.5

18

4.3

448

100.0

433

100

419

100.0

Semi-family-owned517

Total listed firms

Source: Suehiro, Akira / Wailerdsak, Natenapha, ASEAN Economic Bulletin 21 (2004) 81 (84) and Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (44).

Table 13 Cross-Shareholdings / Pyramidal Ownerships of Thai Corporations 2003–2008 2003

2005

2006

2008

No apparent cross-shareholding

81.6 %

82.5 %

96.0 %

95.5 %

No apparent pyramidal ownership

72.7 %

65.5 %

74.9 %

84.4 %

Source: Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 55; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2006 (2006) 27; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2005 (2005) 31; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2003 (2004) 26.

a relatively short time. The comparatively low use of pyramidal and crossholding structures reduces the incentives for controlling shareholders to extract private benefits. One reason for the reduction may be that major shareholders have to disclose their shareholdings to the regulatory and su515

Ownership is defined by the 20 percent-rule. Family-owned group is a firm in which one particular family owns over 20 percent of total shares. 517 The semi-family-owned group is a firm in which several members of either a single family or multiple families combined own over 20 percent of total shares. 518 A widely held firm is a firm in which no single individual or institution holds more than 20 percent of total shares. 516

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C. The Factual Protection of Minority Shareholders

pervisory bodies that started to proactively screen related-party transactions. However, the empirical findings on cross-holding and pyramidal structures contradict somewhat the importance that interviewees attached to such structures. One interviewee mentioned that a draft of an amendment of the Public Limited Companies Act that had been submitted to the cabinet for review at the time of the interview, inter alia included the regulation of such structures, mainly through a mandatory duty of disclosure.519 The interviewee expected resistance to this point because, according to her statement, a great many companies would be affected by this regulation.520 This statement indicates a higher use of such structures than the empirical data suggest. In any case, as family-owned corporations and especially group firms have a deviation above average, the incentives for controlling shareholders of such corporations to expropriate increase. Nevertheless, the low use of such structures compared to other Asian jurisdictions should result in less expropriation of minority shareholders than in the other Asian countries. On the other hand, as Thai firms display the highest cash flow and voting rights in Asian countries, controlling shareholders do not depend on pyramidal and cross-holding structures in order to exercise control. They may be interested in tunneling assets to privately held firms, although that behavior would affect their cash-flow rights in firms whose assets are expropriated. Another factor that should limit expropriation of minority shareholders is the low percentage of one ultimate owner. Each major shareholder has incentives to monitor that other major shareholders do not extract private benefits. Nevertheless, more empirical research is necessary in order to determine whether families as the second largest shareholder decrease firm value, as the empirical findings of Jara Bertin et al. and Maury / Pajuste suggest.521 Empirical results on the expropriation of minority shareholders are mixed. While Claessens et al. found that deviations from cash-flow rights and voting rights were value decreasing, Wiwattanakantang and Krishnamurti found no evidence for expropriation in the case of a control-ownership wedge.522 Wiwattanakantang found, however, that a controlling-shareholders-andmanager’s ownership at the 25 to 50 percent level had a negative impact on firm performance.523 519

Interview with a researcher at the faculty of law of Thammasat University. Interview with a researcher at the faculty of law of Thammasat University. 521 Jara Bertin, Mauricio Alejandro et al., Corporate Governance: An International Review 16 (2008) 146 and Maury, Benjamin / Pajuste, Anete, Journal of Banking and Finance 29 (2005) 1813. 522 Wiwattanakantang, Yupana, Pacific-Basin Finance Journal 9 (2001) 323; Krishnamurti, Chandrasekhar et al., Legal Environment, Firm-level Corporate Governance and Expropriation of Minority Shareholders in Asia (2003). 523 Wiwattanakantang, Yupana, Pacific-Basin Finance Journal 9 (2001) 323. 520

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c) Control of Companies Furthermore, all studies indicate the involvement of controlling shareholders in management.524 According to the findings of Claessens et al., 67.5 percent of Thai corporations that were not widely held, had the controlling owner appoint a member of top management.525 The study of Khanthavit et al. also highlights the high level of involvement in management by controlling shareholders, especially among family shareholders.526 The percentage of controlling shareholders serving as executives in familyowned firms even increased after the Asian crisis.527 Table 14 Controlling Shareholders of Thai Corporations as Directors Type of controlling shareholder

As executives in 2000

As nonexecutive in 2000

Ratio of board positions held by controlling shareholders to total number of board positions

One controlling shareholder 85.71

76.19

0.43

• State

• A group of related families

0.00

0.00

–

• Domestic financial institution

0.00

0.00

–

21.28

14.89

0.09

0.00

0.00

–

• Foreign investor • Foreign institutional investor Group of controlling shareholders • A group of unrelated families

88.89

94.44

0.50

• Multiple controlling shareholders

75.00

67.86

0.27

All firms with controlling shareholder

67.84

60.78

0.33

Source: Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (263). 524 See the data in Wiwattanakantang, Yupana, Pacific-Basin Finance Journal 9 (2001) 323 (325); Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92); Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 68; Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 130; Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph et al. (ed.), (2004) 247 (262). 525 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92). 526 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph, et al. (ed.), (2004) 247. 527 Khanthavit, Anya et al., Did Families Lose or Gain Control after the East Asian Financial Crisis?, in: Fan, P. H. Joseph, et al. (ed.), (2004) 247 (262).

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C. The Factual Protection of Minority Shareholders

Table 15 Attributes of Directors on the Boards of 323 Thai Listed Companies, 2000 Percentage of directors on the boards of 323 listed companies in 2000 Total

Percentage of directors on the boards of family-owned listed companies in 2000

100

Internally promoted • Entry after graduation

1.3

1.3

• Entry as mid-careerist

4.5

5.6

• Family major shareholders

24.1

33.8

• Major shareholders

19.2

11.3

5.5

4.8

3.7

2.8

• State / government official

15.1

10.9

• Other private companies and others

24.6

29.5

1.9

0.0

Insiders

• Related firms From other organizations • Commercial banks or finance companies

No identification

Source: Suehiro, Akira / Wailerdsak, Natenapha, ASEAN Economic Bulletin 21 (2004) 81 (87).

A study by Suehiro / Wailerdsak on 384 listed firms in 2004 found that 24 percent of directors were family members, 19 percent were other major shareholders, 24 percent were professionals recruited from other companies and 15 percent were state or government officials.528 Regarding group firms, Polsiri / Wiwattanakantang found that in only around one-third of group firms do family members hold board positions and in these firms, the average number of family board members is high.529 A possible explanation may be that the owner family of the group limits board positions to key firms. 528 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (42). 529 Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (164).

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149

Table 16 Shareholders as Top Managers of Thai Firms 1995–2000 Percentage of firms in which the largest shareholder is a top manager

Group firms

Non-group firms

1995

37.36

43.06

1996

33.33

40.65

1997

35.35

42.19

1998

38.54

43.27

1999

39.53

39.17

2000

40.74

36.53

Source: Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (164).

Table 17 Board Memberships in Thai Firms 1995–2000 Percentage of board positions held by members of the largest shareholder

Group firms

Non-group firms

1995

3.25

2.20

1996

3.32

2.21

1997

3.18

2.21

1998

3.11

2.21

1999

3.14

2.08

2000

3.14

1.96

Source: Polsiri, Piruna / Wiwattanakantang, Yupana, Thai Business Groups in: Chang, Sea-Jin (ed.), (2006) 147 (164).

These data suggest but do not prove that controlling shareholders make the fundamental decisions in Thai corporations. However, combined with the results of the following studies, they suggest that controlling owners exercise a strong voice in fundamental decisions. Interviewees emphasized that, even after the Asian crisis, control in Thai corporations is not exercised by the board of directors, but by the majority

150

C. The Factual Protection of Minority Shareholders Table 18 Role of CEOs and Board of Directors in Thai Corporations Mean (1 = strongly disagree and 5 = strongly agree)

CEO has a great deal of power

3.63

CEO does not participate much in making fundamental decisions pertaining to the company

1.64

The Board of Directors makes all the fundamental decisions

2.24

The Board of Directors acts only as a formal decision-making body

4.26

Source: Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 124.

shareholder, in listed as well as in non-listed corporations.530 Surveys on the decision-making process come to varying conclusions. According to the survey by Jongsureyapart of 160 directors of 101 listed companies in 2005, the most important decisions were made by the boards of directors (60 percent), followed by CEOs (36 percent) and only 4 percent of decisions were made by shareholders.531 However, there was strong agreement that the board of directors acted only as a formal decision-making body. Regarding the nomination of the CEO, Limpaphayom / Connelly found that 49 percent of directors thought that the board was responsible for removing the CEO and selecting a replacement, while 50 percent of directors believed that the controlling owner made the replacement decision with some input from the board.532 According to Jongsureyapart, the strongest voice in removing a CEO and selecting a new one belonged to the board of directors (87 percent), followed by shareholders (43 percent) and major shareholders (6 percent).533 In regard to the nomination of independent directors, only 29 percent of executive directors of enterprises questioned by Limpaphayom / Connelly thought that the owner would have the strongest 530

Interview with a researcher at the faculty of law, Thammasat University. Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 123. 532 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 21. 533 Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 151. 531

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151

voice.534 However, 42 percent of independent directors thought that the controlling owner would exercise a strong voice. Five percent in both groups thought that the CEO would have the strongest voice.535 According to Jongsureyapart, 52 percent of respondents said that the board of directors exercised the strongest authority in the selection of independent directors, while 47 percent said that the shareholders selected the independent directors and only one percent said that they were selected by CEOs.536 d) State-Owned Enterprises In 2007, there were 59 state-owned enterprises (SOEs) operating in nine different sectors.537 SOEs are government agencies or organizations owned by the government or enterprises in which state agencies or enterprises own more than 50 percent of the equity share.538 This ratio means that enterprises with less than 50 percent of the state’s stake are not considered as SOEs even if the state is the single largest shareholder and maintains complete corporate control. SOEs can be divided into government agencies without legal entity and incorporated SOEs, which can be further divided into public limited and limited companies. While all SOEs have to report to the State Enterprise Policy Office of the Ministry of Finance, they are also under the supervision of other ministerial bodies depending on the nature of their business.539 The market value portion of listed SOEs 534 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 20, 21. 535 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 21. 536 Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 150. 537 State Enterprise Policy Office, Ministry of Finance of the Kingdom of Thailand, Public Private Partnership (2007) 3. These sectors include energy, transportation, telecommunications, water supply and housing, industry, agriculture, service, social and technology, and finance. 538 Sec. 4 Budget Procedures Act B.E. 2502, 27 October 1959. 539 Nikomborirak, Deunden / Cheevasittiyanon, Saowaluk, Corporate Governance among State-Owned Enterprises in Thailand, in: Montreevat, Sakulrat (ed.), (2006) 54 (58); Tanlamai, Uthai, The modernization of Thai state-owned enterprises, in: Andrews, Tim G. / Siengthai, Sununta (ed.), (2009) 195 (195, 196). The Ministry of Labour and Social Welfare determines minimum employment benefits for SOE’ employees through the State Enterprise Relations Committee, the Bureau of Budget approves subsidies for SOE’s, the Office of the Auditor-General audits SOE accounts, the National Economic and Social Development Board (NESDB) is responsible for providing direction for the overall development of SOEs, approving the annual investment budget and screening new investment projects proposed by SOEs,

152

C. The Factual Protection of Minority Shareholders

30 %

6.000.000

25 %

5.000.000

20 %

4.000.000

15 %

3.000.000

10 %

2.000000

5%

1.000.000

SOEs Mkt to SET

0%

SOEs Mkt SET

0 2002

2003

2004

2005

2006

2007

Source: State Enterprise Policy Office, Ministry of Finance of the Kingdom of Thailand, Update on State Owned Enterprises in Thailand (2007) 9.

Figure 1: Market value of Thai SOEs 2002–2007

amounted to THB1.2 trillion and therefore to 23 percent of the market value of all listed companies in March 2007.540 Regarding the board of directors of listed SOEs, bureaucrats usually occupy half the seats on the board while academics and actors from the private sector present as the other half.541 Among the bureaucrats are often representatives of the Ministry of Finance, the ministries overseeing the business in which the SOE is involved, and representatives from law enforcement agencies such as the Royal Thai Police, the Council of State, or the office of the Attorney General.542 In recent times, a directors’ pool for state-owned enterprises has been established.543 Directors are chosen by a committee chaired by the Secretary of the Minister of Finance.544 The pool which has 20 specialized areas included 390 directors in 2009.545 One-third of SOE directors see State Enterprise Policy Office, Ministry of Finance of the Kingdom of Thailand, Privatization of SOEs in Thailand (2006) slide 5. 540 State Enterprise Policy Office, Ministry of Finance of the Kingdom of Thailand, Public Private Partnership (2007) 7. 541 Nikomborirak, Deunden / Cheevasittiyanon, Saowaluk, Corporate Governance among State-Owned Enterprises in Thailand, in: Montreevat, Sakulrat (ed.), (2006) 54 (60). 542 Nikomborirak, Deunden / Cheevasittiyanon, Saowaluk, Corporate Governance among State-Owned Enterprises in Thailand, in: Montreevat, Sakulrat (ed.), (2006) 54 (60, 62). 543 Interview with an employee of the State Enterprise Policy Office, Ministry of Finance. 544 Interview with an employee of the State Enterprise Policy Office, Ministry of Finance.

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153

Table 19 Market Value of Thai Listed SOEs

IPO

KTB

Thai

PTTEP

INET

PTT

AOT

MCOT

1989

1992

1993

2001

2001

2004

2004

Mkt. value (million Baht)

8.334

84.000

21.684

875

97.904

60.000

15.114

Mkt. value March 2007 (million Baht)

136.393

75.606

303.955

402

570.639

88.571

17.040

Source: State Enterprise Policy Office, Ministry of Finance of the Kingdom of Thailand, Public Private Partnership (2007) 7.

must be chosen from the directors’ pool.546 This number may be increased to two-thirds in the future. According to the Act on Qualifications for Directors and Employees of State Enterprises B.E. 2518 (1975), no government official is allowed to sit on more than three state enterprise boards.547 545

In 2009, there were no further plans to privatize SOEs. According to one interviewee, privatization is not a popular concept in Thailand.548 It is also opposed by the strong labor unions.549 Another reason is a certain nationalism that makes people oppose privatization out of fear that foreign investors may buy Thai assets.550 Furthermore, politically well-connected individuals managed to acquire large stakes when SOEs were privatized.551 545 Interview with an employee of the State Enterprise Policy Office, Ministry of Finance. 546 Interview with an employee of the State Enterprise Policy Office, Ministry of Finance. 547 Nikomborirak, Deunden / Cheevasittiyanon, Saowaluk, Corporate Governance among State-Owned Enterprises in Thailand, in: Montreevat, Sakulrat (ed.), (2006) 54 (71). 548 Interview with an employee of the State Enterprise Policy Office, Ministry of Finance. 549 Nikomborirak, Deunden / Cheevasittiyanon, Saowaluk, Corporate Governance among State-Owned Enterprises in Thailand, in: Montreevat, Sakulrat (ed.), (2006) 54 (56); Tanlamai, Uthai, The modernization of Thai state-owned enterprises, in: Andrews, Tim G. / Siengthai, Sununta (ed.), (2009) 195 (200). 550 Interview with an employee of the State Enterprise Policy Office, Ministry of Finance. 551 Interview with an employee of the State Enterprise Policy Office, Ministry of Finance and a researcher at the Thailand Development Research Institute Foundation. See also Nikomborirak, Deunden / Cheevasittiyanon, Saowaluk, Corporate Governance among State-Owned Enterprises in Thailand, in: Montreevat, Sakulrat (ed.), (2006) 54 (56).

154

C. The Factual Protection of Minority Shareholders

3. The Capital Market and Investors’ Base In 1975, the Stock Exchange of Thailand was established. When the old Public Limited Company Act of 1978 was enacted, it stipulated that at least 50 percent of the total issued shares was to be distributed to a group of shareholders holding less than 60 percent of the total.552 However, this provision prevented family businesses from listing and resulted in the underdevelopment of the local stock market.553 In 1992, the government changed its policy in order to promote the stock market.554 The amendment of the Public Company Act in 1992 provided that shareholders could now hold up to 70 percent of the total outstanding shares.555 The two markets on which companies list include the Stock Exchange of Thailand (SET) for large enterprises and the Market for Alternative Investment (MAI) for small and medium enterprises. In 1999, the SEC and SET changed to a more disclosure-based system of regulation in which the investors themselves are responsible for making conclusions on the basis of the information disclosed by companies.556 There were 543 firms listed on the SET and MAI by the end of March 2010.557 Due to the financial crisis, the total market capitalization in Thailand decreased from US$141.5 billion in 1995 to US$30.7 billion in 1998.558 Since 2003, market capitalization has increased dramatically. However, the stock market was never the primary source of corporate financing. Before the economic boom, most Thai business groups relied on internal financial resources among family members in order to finance business activities.559 When they had to look for other sources of financing 552 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (41); Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 285. 553 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (41); Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 285. 554 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 285. 555 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 285. 556 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (316). 557 http: /  / www.set.or.th / en / company / companylist.html. 558 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 256. 559 Suehiro, Akira, Family business gone wrong? Ownership patterns and corporate governance in Thailand (2001) 22.

25

38

59

66

74

77

78

85

92

93

89

104

136

170

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

879,19

386,73

284,94

207,20

134,95

142,29

134,47

123,50

106,62

124,67

149,40

257,73

181,59

82,70

84,08

SET-Index

659.493,07

223.645,24

138.155,40

75.200,01

49.456,82

47.431,85

34.793,62

29.438,95

23.471,22

25.521,81

28.384,02

33.088,28

19.231,59

7.260,13

5.394,12

Market capitalization

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

439

407

389

382

381

392

418

432

454

416

389

347

305

270

209

No. of listed companies

668,10

772,15

356,48

303,85

269,19

481,92

355,81

372,69

831,57

1.280,81

1.360,09

1.682,85

893,42

711,36

612,86

SET-Index

Source: Stock Exchange of Thailand, SET thirty year statistics (1975–2004), http: /  / www.set.or.th / en / market / market_statistics.html.

21

1975

No. of listed companies

Table 20 Stock Market Variables from 1975–2004

4.521.894,55

4.789.857,03

1.981.368,47

1.607.309,60

1.279.223,84

2.172.433,29

1.270.631,12

1.133.343,88

2.559.578,74

3.564.568,96

3.300.754,79

3.325.393,35

1.485.018,49

897.181,86

613.515,27

Market capitalization

II. Thailand 155

156

C. The Factual Protection of Minority Shareholders 200

6.000

150

5.000

100 4.000

50 0

3.000

–50

2.000

–100 1.000

–150 –200

0 1997

1998

1999

2000

2001

Market Capitalization of SET

2002

2003

2004

2005

2006

% growth of Market Capitalization

Source: Securities and Exchange Commission, download under the keyword “Relative Significant to the Economy” on the website http: /  / www.sec.or.th / infocenter / report / Content_0000000771.jsp?categoryID=CAT 0000282&lang=en.

Figure 2: Market Capitalization of SET

Table 21 Market Capitalization of Thai Listed Companies in Relation to GDP 2002–2006 2002

2003

2004

2005

2006

Market capitalization in relation to GDP

36 %

86 %

71 %

72 %

72 %

Number of listed companies

398

418

463

504

518

Source: Stock Exchange of Thailand, Equity Market Structures Indicators – Part 1: Selected Foreign Stock Exchanges (2006) 6, 10.

in order to extend their business they relied more on bank loans than on funding by the stock market. A close relationship between banks and their major corporate customers emerged that ensured that firms easily obtained loans from banks until the Asian crisis.560 In 1996, bank loans contributed to 62 percent of corporate financing, compared to financing by equities that amounted to 32 percent and financing by bonds accounting for 6 560 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (20). In many cases, bank-controlling shareholders were also insiders in finance firms, see Dhnadirek, Rachada / Tang, John, Asia Pacific Journal of Economics & Business 7 (2003) 4 (17).

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157

12,000 THB 10,000 THB 8,000 THB 6,000 THB 4,000 THB 2,000 THB 0,000 THB 1996

1997

1998

Local Retail Investors

1999

2000

2001

2002

Local Institutional Investors

2003

2004

2005

2006

Foreign Investors

Source: Thailand Securities Depository Co., Ltd. (TSD), download under the keyword “Investor” on the website http: /  / www.sec.or.th / infocenter / report / Content_0000000771.jsp?categoryID =CAT0000282&lang=en.

Figure 3: Holdings in Thai Equity by Local and Foreign Investors

percent561 Brown argues that the multiple links in Thailand between industrial groups, banks, the state and foreign capital were too complex to allow a simple shift from dependence on banks for finance to dependence on the stock market.562 A major characteristic of the investors’ base is the dominance of retail investors who are estimated to number approximately half a million.563 While the total number of foreign client accounts increased from 9,944 in 2001 to 15,562 accounts in 2006, active amounts only increased from 1,774 (= 18 percent of all foreign accounts) in 2001 to 2,740 (= 18 percent of all foreign accounts) in 2006.564 As can be seen from the following statistic, retail investors are the most active investors, followed by foreign investors.565 Domestic institutional investors play only a marginal role. 561 Nikomboriak, Deunden / Tangkitvanich, Somkiat, Corporate Governance: The Challenge Facing the Thai Econonmy, in: OECD (ed.), (2001) 407 (414). 562 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 259. 563 Interview with employees of the Corporate Governance Centre at the Stock Exchange of Thailand. 564 Download under the keyword “Investor” on the website http: /  / www.sec. or.th / infocenter / report / Content_0000000771.jsp?categoryID=CAT0000282&lang=en. 565 Polkuamdee, Nuntawun, Bangkok Post, February 25, 2010. A study by researchers at the Business School of Thammasat University found that, from January

158

C. The Factual Protection of Minority Shareholders 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0% 1998

2000 foreign investors

2002

2004

2006

local investors

Source: Securities and Exchange Commission, download under the keyword “Secondary market” on the website http: /  / www.sec.or.th / infocenter / report / Content_0000000771.jsp?categoryID=CAT00 00282&lang=en.

Figure 4: Total (buy+sell) Trading Value (Billions of Baht) Classified by Type of Investors

Although retail investors dominate the Thai market, foreign investors have an influence on market trends that goes beyond the value of their investments, probably due to their concentration in large-cap stocks, their more coordinated trading activities and their larger order sizes.566 In 2009, retail investors shared 61 percent of total trading value.567 The trading activities of foreign investors in 2009 amounted to 19.4 percent, which was a considerable fall when compared to 29.1 percent in 2008.568 In November and December 2009, securities firms’ trading activities shared over 15 percent of total trading value.569 The fact that retail investors play an important role has a significant impact at the corporate level in the form of shareholder activism that will be analyzed in more detail later. It also has, however, a significant impact 1995 to January 2006, foreign investors accounted for 31 percent of total trade on the Stock Exchange of Thailand, with local retail investors being the largest group at 60 percent and local institutional investors at 9 percent. 566 Polkuamdee, Nuntawun, Bangkok Post, February 25, 2010. 567 Stock Exchange of Thailand, Thai bourse’s operating performance in December 2009 (January 13, 2010). 568 Stock Exchange of Thailand, Thai bourse’s operating performance in December 2009 (January 13, 2010). 569 Stock Exchange of Thailand, Thai bourse’s operating performance in December 2009 (January 13, 2010).

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Table 22 Trading Characteristics by Type of Investor 2010 Investor Type

Buy

Sell

Net Value

Local Institutions

7.55

8.19

–6,917.06

Proprietary Trading

14.52

14.51

94.70

Foreign Investors

24.13

20.86

35,252.21

Local Individuals

53.80

56.44

–28,429.85

Source: Stock Exchange of Thailand, http: /  / marketdata.set.or.th / mkt / investortype. do?language=en&country=US.

on the capital market in the form of share pricing. Interviewees complained that investment by small shareholders is based on gambling rather than information.570 One interviewee estimated that 80 percent of the portfolio of small investors is speculative.571 The direct involvement of uninformed decision-makers in the capital market may result in a certain distortion of share prices and therefore make it more difficult for the capital market to price in risks of expropriation. The concentration of ownership in Thai corporations has implications for the percentage of tradable shares. The stock market in Thailand today is characterized by a low level of liquidity.572 In 2006, the average free float amounted to 38.98 percent.573 Only 36 percent of companies reached the 570 Interview with a representative of the Thai Investors Association; and the company secretary of a listed corporation. 571 Interview with a representative of the Thai Investors Association. 572 Udomsirikul, Prasit et al., Journal of Multinational Financial Management 21 (2011) 106. 573 Stock Exchange of Thailand, Equity Market Structures Indicators – Part 4: Products (2006) 6. The SEC publishes the free float of every listed company, see http: /  / capital.sec.or.th / webapp / freefloat / freefloate.php. Free float is the proportion of shares not held by strategic shareholders and not reacquired by the issuing company. Strategic shareholders are holders of shares for the purpose of company management or for business strategy. Board managers, managers or officials in the top four positions ranking down from the managers, including their related persons as well as shareholders holding shares in the proportion of more than 5 percent (with the exception of shareholders of securities companies, life-insurance companies, insurance companies, mutual funds, and contractual saving funds) and shareholders with controlling power of the company, are considered to be strategic shareholders, see http: /  / www.sec.or.th / infocenter / report / Content_0000000928.jsp?categoryID=C AT0000288&lang=en.

160

C. The Factual Protection of Minority Shareholders Table 23 Free Float of Thai Listed Corporations Free Float574

574

% of Companies

Average Free Float

7

7.61

15 = < FF < 25

14

19.89

25 = < FF < 50

54

35.27

50 = < FF < 75

18

61.08

7

86.92

100

38.98

< 15

> = 75

Source: Stock Exchange of Thailand, Equity Market Structures Indicators – Part 4: Products (2006) 6.

40 percent that is considered as the minimum percentage for non-controlling shareholders to be involved in company policies.575 One interviewee considered this to be the main reason why the securities commission is not able to exercise its monitoring function efficiently.576 In order to promote the liquidity of the stock market, the SET requires as listing requirements (LR) that a corporation must have at least 1,000 small ordinary shareholders who hold not less than 25 percent of the paidup capital or 20 percent in the case of a corporation with a paid-up capital of not less than THB3,000 million.577 Furthermore, corporations with a paid-up capital of less than THB500 million have to distribute 15 percent of the capital through a public offer, corporations with a paid-up capital of THB500 million and more 10 percent.578 In order to maintain their status as a listed company, the SET requires corporations to have not less than 150 small shareholders with a combined paid-up capital of 15 percent.579 574 Free float is estimated from the company’s shareholder register as of the latest registered book closing date for general meeting in each year and is adjusted for subsequent changes in ownership structure in case of newly issued share or treasury stocks, see Stock Exchange of Thailand, Equity Market Structures Indicators – Part 4: Products (2006) 6. 575 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 18. 576 Interview with a representative of the German-Thai Chamber of Commerce. 577 Sec. 5 (3) (a), (b) Notification Bor.Jor. / Ror. 01-00 Re: Listing of Ordinary Shares or Preferred Shares as Listed Securities, 2001, 22 January 2001. 578 Sec. 5 (3) (d) Notification Bor.Jor. / Ror. 01-00 Re: Listing of Ordinary Shares or Preferred Shares as Listed Securities, 2001, 22 January 2001.

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4. Internal Corporate Governance Practices Since the Asian crisis, corporate governance has emerged as an important issue. In 2002, the government established the National Corporate Governance Committee. The Securities and Exchange Commission and the Stock Exchange of Thailand have been very active in promoting the concept of corporate governance. Their wide-ranging initiatives have included proposals for legal amendments, tightening regulation, establishing various associations, awarding prizes, and organizing seminars and workshops. Furthermore, they have published inter alia good governance principles, guidelines on information disclosure, guidelines on arranging shareholders’ meetings, a code of conduct for auditors and a directors’ handbook. 579

The associations that have been established include the Thai Institute of Directors (IOD), the Corporate Governance Centre (CCC) and the Thai Investors Association (TIA). The Institute of Directors was established by the SEC, the SET, the Bank of Thailand and the World Bank. The IOD has been very active since its establishment and is widely quoted as the organization mainly responsible for promoting good corporate governance standards.580 The IOD offers various training programs for directors, audit committees, chairmen and other key people in listed companies, such as the Director Certification Program, the Audit Certification Program, the Financial Statement for Directors, and the Company Secretary Program.581 More than 3,500 directors have already attended one or more of the IOD training courses.582 Since 2001, the Thai Institute of Directors has conducted corporate governance surveys of Thai listed companies and published the results in reports titled “Corporate Governance Report of Thai Listed Companies”.583 The Corporate Governance Centre was established by the Stock Exchange of Thailand. It advises listed companies interested in enhancing their corporate governance system, produces and distributes information and material concerning corporate governance, educates the public, conducts training courses for directors, holds activities to educate

579 Sec. 7 Notification Bor.Jor. / Ror. 01-07 Re: Maintaining the Status of Listed Companies in the Exchange, 2001, 22 January 2001. 580 All interviewees who were asked about the institutions that contribute to improve corporate governance standards mentioned the positive role of the IOD. 581 Interview with a representative of the Thai Institute of Directors. 582 Securities and Exchange Commission Thailand, Corporate Governance Experience in the Thai Capital Market (2010) 5. 583 For a list of the reports, see http: /  / www.thai-iod.com / en / publications.asp?type =4. The surveys are based on the Principles of Corporate Governance of the OECD and compiled on the basis of public and non-confidential information.

162

C. The Factual Protection of Minority Shareholders

directors and grants rewards to companies with the best corporate governance report in the SET Awards.584 The important role that regulatory bodies in Thailand have played so far was reflected in the results of a survey by Jongsureyapart in which respondents thought that the SEC and SET were the most important organizations to promote better corporate governance.585 In accordance with Jongsureyapart’s findings that the Thai Institute of Directors also plays a significant role, several interviewees expressed the view that the Institute is a major contributor.586 Table 24 Perception of Thai Institutional Actors’ Role in Corporate Governance Organization

Yes in %

No in %

SEC

86

14

SET

81

19

Thai Institute of Directors

61

39

National Corporate Governance Committee

47

53

Federation of Accounting Professions

42

58

Thai Government Regulation Board

39

61

Institute of Internal Auditors

36

64

Corporate Governance Center

34

66

Outside directors

30

70

Professional societies accounting and audit

25

75

Civil (minority shareholders) activists

17

83

The judiciary

11

89

Source: Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 156.

http: /  / www.set.or.th / en / regulations / cg / center_p1.html. Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 156. 586 A researcher at the Sasin Graduate Institute of Business Administration of Chulalongkorn University and a representative of the Association of Investment Management Companies. All interviewees who were asked about the institutions that contribute to the improvement of corporate governance mentioned the IOD. The company secretary of a listed corporation remarked that training courses conducted by IOD are very beneficial for most directors, as many of them are not aware of their duties and responsibilities. 584 585

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163

Important legal amendments included the right of shareholders of listed companies holding at least five percent of votes to propose agenda items for the shareholders’ meeting587, the duty of listed companies to appoint a company secretary588 and a clarification of directors’ duties. In a further attempt to improve the corporate governance practices of Thai listed corporations, protection for whistleblowers was also included.589 Furthermore, the SEC proposed introducing civil penalties and presented the draft of a class action law. Another important step was the introduction of liabilities for shadow directors.590 In a further attempt to improve corporate governance standards, the SEC encourages securities analysts to disclose the CGR corporate governance score in their securities reports on companies.591 In addition, the SEC has obliged asset management companies to exercise their voting rights and to publish the exercise outcome on their website. The SEC also publishes a quarterly newsletter called “Capital Thailand” that inter alia includes corporate governance updates. Nevertheless, it seems that it was not always easy to convince corporate actors of the advantages of corporate governance regulation. Interviewees disagreed on which measures met the strongest resistance among corporations. One interviewee reported that the measure that was most strongly resisted by corporations was sec. 89 / 25 of the Securities and Exchange Act. It requires auditors to inform the audit committee of any fraud and that the audit committee then has the duty to pass on the information to the SEC.592 Because of strong resistance, the plan to introduce criminal sanctions for violations of the rules was abandoned.593 Another interviewee reported that the proposal that met most resistance was that the regulator wanted auditors to report cases of fraud directly to the SEC.594 Because of resistance by auditors, the law now stipulates that auditors have to report cases of fraud to the audit committee.595 The plan to limit the term of independent directorships also had to be dropped as corporations claimed that this would intensify the lack of independent directors.596 Furthermore, corporations 587 588 589 590 591 592 593 594 595 596

Sec. 89 / 2 Securities and Exchange Act. Sec. 89 / 15 Securities and Exchange Act. Sec. 89 / 2 Securities and Exchange Act. Sec. 89 / 1 Securities and Exchange Act. Interview with a representative of the Thai Institute of Directors. Interview with a representative of the Thai Institute of Directors. Interview with a representative of the Thai Institute of Directors. Interview with a researcher at the faculty of law, Chulalongkorn University. Interview with a researcher at the faculty of law, Chulalongkorn University. Interview with a representative of the Thai Institute of Directors.

164

C. The Factual Protection of Minority Shareholders

tried to prevent the conversion of the legal duties and responsibilities of non-independent and independent directors.597 Two interviewees pointed out that conflicts of interest and related-party transactions were the points that met most resistance.598 Another interviewee said that corporations had resisted most the separation of CEO and chairman, the duty to nominate independent directors and the limitation of the term of directorships.599 However, all interviewees agreed that awareness of corporate governance has increased among market actors.600 One interviewee pointed out that corporate governance has particularly improved since 2004.601 This was also reflected in the results of the Corporate Governance Report of Thai Listed Companies 2008, which found that the average score was 85.8 for shareholders’ rights, 79.3 for equitable treatment of shareholders, 68.1 for the role of stakeholders, 87.5 for disclosure and transparency, and 56.8 for board responsibilities. Larger firms tend to have a higher level of corporate governance (nearly all firms in the SET50 and SET100 earned a level of recognition of at least ‘good’) but some smaller sized firms also achieved good results.602 The findings of the AGM Assessment Project which was launched by the SEC, the TIA and the Association of Thai Listed Companies in early 2006 sheds a positive light on shareholders’ rights relative to the shareholders’ meeting.603 It includes inter alia an AGM assessment and the dissemination of the results.604 The AGM assessment criteria cover all AGM procedures, including procedures before and after the AGM.605 In 2008, 78 percent of 597

Interview with a representative of the Thai Institute of Directors. Interview with a representative of the Stock Exchange of Thailand and the company secretary of a listed corporation. 599 Interview with a representative of the Association of Investment Management Companies. 600 Interview with a lawyer at Lorenz & Partners and a representative of the Association of Investment Management Companies. 601 Interview with a representative of the Association of Investment Management Companies. 602 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 17. 603 The results were published on http: /  / capital.sec.or.th / webapp / agm_web / 2551 /  en / indexe.php. See also Securities and Exchange Commission Thailand, Capital Thailand Quarterly Newsletter (2006) 1. 604 See the attachment on http: /  / capital.sec.or.th / webapp / webnews / news.php?cbo Type=S&lg=en&news_no=57&news_yy=2006. 605 See the checklist at http: /  / www.sec.or.th / document_download / CG / AGM / en /  AGM_Checklist_49EN.pdf. The questions regarding procedures before the AGM include questions on delivery of the AGM notice and related documents, disclosure of information on each agenda item to facilitate shareholders’ voting decisions, dis598

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Table 25 Results of AGM Assessment Project on Thai Listed Corporations Description

Score range

No. of companies

%

Score range (accumulated)

No. of companies

%

Excellent

> = 90

183

38 %

> = 90

183

38 %

Very Good

80–89

98

20 %

> = 80

281

58 %

Good

70–79

99

20 %

> = 70

380

78 %

Fair

60–69

55

11 %

> = 60

435

90 %

0–59

51

10 %

>= 0

486

100 %

486

100 %

Need Improvement Total

Source: AGM Assessment Project, http: /  / capital.sec.or.th / webapp / agm_web / 2551 / en / tableDisp.php.

corporations received a score of at least ‘good’. The main problems concerned the procedures after the AGM, for which companies received the lowest score. Nevertheless, interviewees revealed that some reasons for concern remain. Studies indicate that corporate governance standards differ widely depending on the corporation and that there is a small group of ‘talk-only’ firms.606 semination of AGM-related documents via the company website for shareholders’ convenient access and shareholders’ opportunity to propose additional agenda items and nominate qualified directors before the AGM Notice was distributed. Questions regarding procedures during the AGM cover shareholders’ convenience for AGM attendance, attendance of directors / management for clarification / response to shareholders’ inquiries, major announcements at the beginning of the AGM or before each agenda item, compliance with company’s articles of association and the AGM agenda, opportunities for shareholders’ participation, voting transparency and independency, and vote-counting transparency. The post-AGM questions concern the timely announcements of AGM resolutions and the minutes of the meeting, covering all the key issues for shareholders’ viewing and examination. 606 Klapper, Leora F. / Love, Inessa, Journal of Corporate Finance 10 (2004) 703. Venkatesh, Sundar, Corporate Governance, in: Andrews, Tim G. / Siengthai, Sununta (ed.), (2009) 227 (233) found that Thai firms display a wide range of corporate governance scores at firm level. They draw the conclusion from these data that many Thai firms do not even comply with minimum standards of good corporate governance, whereas other companies exceed them. Ananchotikul, Nasha et al., Do Firms Decouple Corporate Governance Policy and Practice? (2010) 2 find that the adoption of formal good corporate governance policies by listed firms in 2002 is associated with a significantly lower number of violations of listing rules and laws aiming to protect shareholders in the period 2003–2006. They find, however, a small group of firms that they characterize as ‘talk-only’ firms that issue declarations on governance and business ethics but lag behind in the adoption of policies related to

166

C. The Factual Protection of Minority Shareholders

In regard to internal corporate governance, interviewees mentioned independent directors, the low awareness of corporate governance among low-level managers, internal audit, a lack of directors’ knowledge of their duties and responsibilities, and related-party transactions as points of concern. Another problem is that most AGMs in Thailand are held in April.607 This concentration of AGMs may make it difficult for institutional investors to attend all AGMs. However, several interviewees expressed the view that the governance of the private sector is better than that of the public sector.608 Interviewees quoted a lack of implementation and enforcement and low shareholder activism as reasons for continuing corporate governance concerns. One interviewee claimed that enterprises can afford to neglect corporate governance as they do not depend on foreign investment.609 This is the main difference compared to Vietnam where corporations depend on foreign investment and are therefore under pressure to implement corporate governance standards.610 Another interviewee agreed that external pressure to reform corporate governance is limited to some industries such as export, banks and insurance, but non-existent in most sectors.611 One interviewee pointed out that, in the aftermath of the Asian crisis, the corporate governance of firms in Hong Kong was rated as worse than that of Thai firms, but by 2009, this situation had been reversed.612 He concluded that, for some unknown reason, it was easier to convince firms in Hong Kong than Thai firms to adopt good corporate governance.613 This statement may indicate that some Thai corporate leaders still consider the costs of corporate governance to be higher than the benefits. Furthermore, other underlying problems may be difficult to overcome. Fagan argues that the concept of shareholder ownership of the company is not widely accepted.614 Thai companies do not regard minority shareholders as real owners and thus neglect disclosure and do not allow minority shareholders to participate in the shareholders’ rights and board independence. These firms are associated with a 96 percent increase in the propensity to commit violations and an increase in the probability of committing violations from 27 to 49 percent. 607 Interview with a lawyer at HNP Counsellors Limited. 608 Interview with employees of the Corporate Governance Centre and the Stock Exchange of Thailand and a researcher at the law faculty of Thammsat University. 609 Interview with a lawyer at Lorenz & Partners. 610 Interview with a lawyer at Lorenz & Partners. 611 Interview with a researcher at the faculty of law, Thammasat University. 612 Interview with a researcher at the Sasin Graduate Institute of Business Administration, Chulalongkorn University. 613 Interview with a researcher at the Sasin Graduate Institute of Business Administration, Chulalongkorn University. 614 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (332).

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Table 26 Tasks for Better Corporate Governance in Thailand Tasks for better corporate governance

Yes in %

No in %

Making the internal corporate governance mechanism (such as shareholder participation and the role of the board) work better

79

21

Enhancing the standards of accounting, audit and disclosure

72

28

Conducting and publishing corporate governance ratings

49

51

Reducing ownership concentration

21

79

Source: Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 157.

management of the company.615 Several interviewees indicated that the underlying problem of minority protection is that there is no concept of protection of minorities in general in Thai society.616 To sum up, Thailand has made considerable progress but some issues remain. Respondents to a survey by Jongsureyapart emphasized the important role of internal corporate governance mechanisms in improving corporate governance standards in Thailand. Interviewees differed in their opinion on the legal framework. Some interviewees complained about its quality,617 while other interviewees stated that the legal framework is adequate.618 Other proposals that included training for minority shareholders, better enforcement and implementation, are discussed in other chapters. However, several interviewees agreed that the main problems are bad governance of the public sector and political interference.619 In short, the overall impression was very positive. The discussions indicated that corporate governance problems in Thailand have been identified 615

Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (332). Interview with an a representative of the Stock Exchange of Thailand and a researcher at the faculty of law, Thammasat University. 617 Interview with a researcher at the Sasin Graduate Institute of Business Administration, Chulalongkorn University. 618 Interview with a representative of the Institute of Directors and a listed corporation. A researcher of Thammasat University said that except for overregulation, the legal framework is adequate. 619 Interview with representatives of the Stock Exchange of Thailand, the Center for Corporate Governance, and a researcher of Thammasat University. 616

168

C. The Factual Protection of Minority Shareholders

and that the various actors, especially regulators and associations, are making successful and effective efforts to enhance standards, although some factors that they are not able to influence may limit the impact of their efforts. 5. Shareholder Activism Thai regulators assume that in the future, educated retail investors will exercise enough market force to compel companies to enhance their corporate governance standards. According to a survey by the SEC on public financial literacy conducted on 966 existing and prospective investors, 60 percent of existing investors were well informed on investors’ rights.620 Traditionally, shareholders’ activism has been very low which is reflected in brief shareholders’ meetings, a low rate of attendance and only rare actions against directors for breaches of fiduciary duty.621 One interviewee complained that the few shareholders who attend the AGMs of the corporation for which he is working come mainly because of the gifts and souvenirs that are distributed at the meetings as well as for the lunch break.622 As reasons for low shareholders’ activism, interviewees reported that investors mainly focus on dividends and firm performance, avoid challenging the board of management and choose the exit strategy in the case of wrongdoing.623 Incentives to sue directors are low as it is very difficult for outside investors to prove wrongdoing.624 Furthermore, nominee shareholders who 620 Securities and Exchange Commission Thailand, Capital Thailand Quarterly Newsletter 27 (2011) 3. 621 Interview with a company secretary of a listed corporation. See also Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 12. 70 percent of firms surveyed by Piman / Connelly and 29 percent of firms surveyed by Jongsureyapart report that their meetings last one hour or less, see Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 14 and Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 148. In 48 percent of firms surveyed by Jongsureyapart, their meetings took between one and two hours and in 20 percent more than two hours. According to the Securities and Exchange Commission Thailand, Capital Thailand Quarterly Newsletter 27 (2011) 3, 61 percent of the 966 existing and prospective investors questioned who are aware of their rights do not attend annual general meetings and only 4 % of investors who do not attend the meetings resort to proxy voting. 622 Interview with the company secretary of a listed corporation. 623 Interview with a researcher from the Department of Banking and Finance, Chulalongkorn University, a representative of the Stock Exchange of Thailand, a lawyer at Lorenz & Partners, a researcher at the faculty of law, Thammasat University, and a representative of the Thai Investors Association. 624 Interview with employees of the Corporate Governance Centre at the Stock Exchange of Thailand; a researcher of the faculty of law of Thammasat University and a researcher at the Thailand Development Research Institute Foundation.

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169

are common in Thailand often do not make use of their voting rights.625 However, shareholders’ activism has increased since the Asian crisis.626 Two interviewees quoted as one example for increased shareholder activism the annual general meeting of Thai International Airways, when shareholders stood up to raise questions.627 In the future, domestic institutional investors that so far have played a passive role may become more active in supervising companies. Nikomboriak / Tangkitvanich argue however, that Thai institutional investors are illequipped to monitor corporations as they themselves do not have good corporate governance and often have a vested interest in their investee companies.628 Indeed, at the time of interviews conducted in Thailand, the Government Pension Fund (GPF), the largest institutional investor, faced allegations of insider trading. The share of domestic institutional investment in particular increased because of the growth of government pension, provident and equity investment funds.629 Thailand’s pension system consists of two mandatory schemes, the Old Age Pension Fund (OAPF) covering the private sector and the Government Pension Fund covering civil servants.630 Furthermore, pensions may be provided by provident funds on a voluntary basis.631 In addition, the concept of a retirement mutual fund 625 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 12. 626 Interview with a researcher at the faculty of law, Thammasat University and a representative of the Association of Investment Management Companies. Suehiro, Akira, Family business gone wrong? Ownership patterns and corporate governance in Thailand (2001) 13 argues that minority shareholders are often friends who are asked by the controlling shareholders to buy a certain number of shares in order to provide him with a portion of the capital needed. These friends have no intention of strictly supervising corporate interests against the interests of controlling shareholders. 627 Interview with a researcher at the faculty of law, Thammasat University, and a researcher from the Department of Banking and Finance, Chulalongkorn University. 628 Nikomboriak, Deunden / Tangkitvanich, Somkiat, Corporate Governance: The Challenge Facing the Thai Econonmy, in: OECD (ed.), (2001) 407 (418, 419). 629 Nikomborirak, Deunden, Building Good Corporate Governance After the Crisis, in: Leong, Ho Khai (ed.), (2005) 200 (218). 630 By December 2003, the OAPF had a size of THB11.39 billion and invested 2.8 percent of the assets invested in equities and 3.92 percent invested in stateowned enterprise equities, see Walter, Ingo / Sisli, Elif, The Asset Management Industry in Asia: Dynamics of Growth, Structure and Performance (2006) 9. 631 According to Kanjanaphoomin, Niwat, Pension Fund, Provident Fund and Social Security System in Thailand, International Conference on Pensions in Asia: Incentives, Compliance and Their Role in Retirement (2004) 14, provident funds covered 1.41 million employees in 5,760 enterprises with a total fund size of THB287,329.3 million (US$7,183.23 million) at the end of 2003. Walter, Ingo / Sisli,

170

C. The Factual Protection of Minority Shareholders

was established in March 2001 to provide a means of voluntary retirement saving for employees who were not in the provident fund or who wanted to make additional contributions.632 The Government Pension Fund, which was established in 1997, is the largest institutional investor in Thailand.633 As of December 31, 2009, its investment in Thai equity amounted to 9.4 percent.634 The GPF invests in around 60 companies.635 In 2008, it held a stake of over ten percent in seven companies with only one company in this group being a public limited company.636 As the largest domestic institutional investor, the GPF has the potential to exercise pressure on companies to improve corporate governance standards and to add to the protection of minority shareholders. In a first attempt, the GPF has issued proxy-voting guidelines which are published on its website.637 One of its points of focus is the quality of the board of directors.638 Until now, the GPF has not nominated directors in its investee companies but tends to vote against the nomination of directors who are family members and do not regularly attend board meetings.639 Furthermore, it encourages its investee companies to change auditors every five years.640 Other important institutional investors are the asset management companies. Since the Asian crisis, the number of asset management companies has nearly doubled. There were 22 asset management companies in 2010.641 Elif, The Asset Management Industry in Asia: Dynamics of Growth, Structure and Performance (2006) 27 mention 1.5 million workers in private companies and certain state agencies and reserves worth about THB293 billion (US$7.7 billion). 632 As of December 2003, retirement mutual funds amounted to THB8.336 million (US$208.4 million), see Kanjanaphoomin, Niwat, Pension Fund, Provident Fund and Social Security System in Thailand, International Conference on Pensions in Asia: Incentives, Compliance and Their Role in Retirement (2004) 14. 633 Walter, Ingo / Sisli, Elif, The Asset Management Industry in Asia: Dynamics of Growth, Structure and Performance (2006) 36. At the end of December 2008, the GPF had assets with a value of THB391.717 million. Investment limit for equity is 35 percent. See Government Pension Fund, Annual Report 2008 (2009) 34. 634 http: /  / www.gpf.or.th / Eng / port.asp. 635 Interview with employees of the GPF. 636 Government Pension Fund, Annual Report 2008 (2009) 40. The companies include Thai Administration Services Co., Ltd, Fitch Ratings (Thailand) Ltd., Royal Porcelain Plc, LC (Thailand) Co., Ltd., Siam Commercial Asset Management Co., Ltd., Thai Prosperity Advisory Co., Ltd., GPF Property Management Co., Ltd. 637 Interview with employees of the GPF. 638 Interview with employees of the GPF. 639 Interview with employees of the GPF. 640 Interview with employees of the GPF. 641 http: /  / www.sec.or.th / infocenter / report / Content_0000000135.jsp?categoryID= CAT0000122&lang=en.

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Table 27 Number of Thai Asset Management Companies and Funds 1992–2009 Year

Asset management companies

Funds

Year

Asset management companies

Funds

1992

8

37

2001

14

286

1993

8

65

2002

14

346

1994

8

101

2003

14

429

1995

8

143

2004

17

526

1996

8

205

2005

18

683

1997

14

175

2006

18

808

1998

14

172

2007

21

910

1999

14

198

2008

21

1105

2000

14

245

2009

20

1264

Source: Association of Investment Management Companies, http: /  / www.aimc.or.th / en / 21_overview_detail. php?nid=15&subid=0&ntype=2.

Table 28 Net Asset Value of Thai Funds 2007–2009 Asset Management

2007

2008

2009 (Q1–Q3)

Net Asset Value (USD mil.)

2,054,164

1,993,185

2,317,559

Mutual Fund

1,436,615

1,358,470

1,597,677

Private Fund

175,839

169,418

209,230

Provident Fund

441,710

465,297

510,652

Source: Securities and Exchange Commission, http: /  / www.sec.or.th / infocenter / report / Content_0000000135. jsp?categoryID=CAT0000029&lang=en.

The 21 asset management companies operating in the mutual fund business that are members of the Association of Investment Management Companies (AIMC) concentrate their investments on about 50 enterprises that have good corporate governance practices and receive the highest scores of corporate governance.642 In an effort to improve the transparency of the 642 Interview with a representative of the Association of Investment Management Companies.

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corporate market, the AIMC has worked out voting guidelines and practices at shareholders’ meetings for asset management companies to use or refer to in their consideration of issues at the meetings and to exercise voting rights on behalf of the funds under their management.643 Furthermore, since 2005, asset management companies are required to disclose the voting results on their website. The AIMC publishes the voting results of all asset management companies on its website.644 However, the scope of its activities is limited. Asset management companies usually choose the exit strategy in the case of company problems and to avoid filing suits.645 If a problematic issue were raised at an annual general meeting, they would vote against it or abstain from voting.646 One interviewee thought the shareholder structure of Thai corporations is the main reason for institutional shareholder passivism.647 Low shareholders’ activism is reflected in the fact that companies surveyed by Jongsureyapart did not perceive shareholders as taking part in the decision-making process of the company.648 Another factor that highlights limited shareholders’ involvement is that firms reported that it would be rare for a management-proposed director to fail to be elected at a shareholders’ meeting.649 Furthermore, although the SEC attempts to promote cumulative voting, the influence of minority shareholders on board composition remains weak. According to the Corporate Governance Report 2008, only 37.7 percent of enterprises had a mechanism to allow minority shareholders to influence board composition.650 Among the companies that allowed mi643 Interview with a representative of the Association of Investment Management Companies. 644 http: /  / www.aimc.or.th / en / 72_proxyvote_record.php. 645 Interview with a representative of the Association of Investment Management Companies. 646 Interview with a representative of the Association of Investment Management Companies. 647 Interview with a representative of the Thai Institute of Directors. 648 Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 123. 649 All firms surveyed by Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 15 reported that it would be rare or impossible for a management-proposed director to fail to be elected at a shareholders’ meeting. According to Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 149, 16 percent of respondents believe it unthinkable that a management’s candidate for directorship is rejected, 72 percent think it is rarely the case and 12 percent think it happens sometimes. 650 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 19, 20. According to Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 15, in 80 percent of

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nority shareholders to influence the board composition, only five companies (= 1.1 percent of the surveyed companies) provided cumulative voting.651 However, it seems that in 2009, there were around ten companies that practiced cumulative voting.652 One interviewee assumed that any promotion of cumulative voting would be useless due to a lack of directors.653 6. Foreign Investors Foreign investment has always been under legal restrictions in Thailand. In many sectors, foreign investors were only allowed to have a minority stake.654 The only exceptions were small US companies under the 1966 Thai-US Treaty of Amity and Cooperation.655 However, such limitations on foreign ownership were circumvented through the use of pyramid companies.656 After the crisis, the restrictions were partly abolished.657 Foreign firms surveyed by Piman / Connelly, minority shareholders are allowed to nominate candidates for the board of directors either before or at the meeting. 651 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 72, 73. Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 15 found that slightly less than 70 percent of companies opted not to use cumulative voting. 652 Interview with a researcher at the Sasin Graduate Institute of Business Administration, Chulalongkorn University. 653 Interview with a representative of the Association of Investment Management Companies. 654 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (20). 655 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 303. 656 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (20). This practice seems to have started in the 1970s and to have increased around 1990 when more foreign investors drifted onto the Thai market. As the authorities scrutinized only the first level of shareholding in order to detect the percentage of foreign ownership, the common practice was to set up a holding company in which the majority of the registered capital was held in Thai names, but as preference shares with conditions that limited the owners of these shares to a much smaller share of the voting rights and the dividend payments. By allowing thousands of firms to make use of this tactic, the government relaxed the restriction on foreign investment in practice while allowing it to remain in law, see p. 20, footnote 4. 657 Companies under investment promotion (mostly in manufacturing) were allowed majority or full ownership; the Alien Business Law of 1972 was replaced by the Alien Business Act 1999 and 33 additional industries were allowed foreign majority ownership, see Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (21). The rule that provided that threequarters of a commercial bank’s equity shares must be held by Thai nationals was

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investment and foreign participation in local business are now regulated by the Foreign Business Act B.E. 2542 (1999) and laws governing certain specific business sectors.658 The Foreign Business Act (FBA) enumerates which businesses are prohibited for foreigners.659 When a majority of shares in a limited company is held by Thais, it is considered to be a Thai company which is not subject to the Act.660 This means that foreigners are in general allowed to hold 49 percent of shares in companies engaged in restricted businesses. Sec. 36 forbids Thai nationals to hold shares on behalf of foreigners in any limited company in order to operate the business in avoidance or violation of the provisions of the FBA. If Thai nationals breach this provision, they are subject to a criminal penalty (sec. 36 FBA). However, the provisions have generally been by-passed.661 In regard to the stock market, foreigners have the choice of investing in the Main Board, the Foreign Board or in Non-Voting Depository Receipts temporarily relaxed to allow 100 percent foreign ownership of local banks for a period of ten years, see Nikomborirak, Deunden, Problems of Corporate Governance Reform in Thailand, in: Gul, Ferdinand A. / Tsui, Judy S. L. (ed.), (2004) 216 (219). 658 In 1999, the Foreign Business Act replaced Announcement No. 281 of the National Executive Council (NEC 281) which had been promulgated in 1972. The FBA divides businesses which are prohibited or restricted for foreigners into three lists. See Announcement No. 281 (NEC 281), 24 November B.E. 2515. 659 All businesses enumerated in List One are prohibited for foreigners (sec. 8 (1) FBA). List B contains businesses concerning security, culture and natural resources that are generally prohibited for foreigners unless permitted by the Minister (Minister of Commerce) with the approval of the cabinet (sec. 8 (2) FBA). List Three contains businesses in which Thai nationals are not ready to compete and which are prohibited unless permitted by the Director-General (of the Department of Business and Trade Development) with the approval of the Committee (Foreign Business Committee) (sec. 8 (3) FBA). 660 According to sec. 4 Foreign Business Act, foreigner means a natural person not of Thai nationality (sec. 4 (1) FBA), a juristic person not registered in Thailand (sec. 4 (2) FBA), a juristic person registered in Thailand in which foreign natural or juristic persons together hold half or more of the capital shares or have invested half or more of the total capital (sec. 4 (3)(a) FBA), a limited partnership or registered ordinary partnership which are registered in Thailand and have a foreigner as the managing partner or manager (sec. 4 (3) (b) FBA), or a juristic person registered in Thailand in which one of the above-mentioned persons holds half or more of the capital shares or has invested half or more of the total capital (sec. 4 (4) FBA). The shares of a limited company represented by share certificates that are issued to bearers are deemed to be shares of aliens unless otherwise provided for by ministerial regulations (sec. 4 FBA). 661 Chuerboonchai, Tithiphan, Governance Begins At Home (2006) 8–10 describes how the provisions were by-passed by establishing companies with 49 percent common shares having full dividend and voting rights and 51 percent of preferred shares with minimal dividend and limited voting rights, in addition to the use of pyramidal structures and Thai nominees.

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(NVDRs). Foreigners who invest in the Main Board have to register under nominee names and all benefits, such as dividends, offered by the companies are processed through their nominee account. The Foreign Board was set up in 1987 and allows foreign investors to invest in and to register shares under their own names.662 Securities traded on the Foreign Board are reserved for foreign ownership according to the foreign ownership limits set forth in the Articles of Association of each listed company.663 In general, shares have a 49 percent foreign investment restriction.664 As there are no floor or ceiling limits on the Foreign Board, share prices are freer to respond to the demand and supply situation.665 An NVDR is a new trading instrument issued by Thai NVDR Co. Ltd., a subsidiary wholly owned by the SET.666 It is a valid security as specified by the SEC and is automatically regarded as a listed security by the SET.667 NVDRs were introduced in 2001 to stimulate trading activities and help eliminate barriers in foreign investment limits. Both Thai and foreign investors can invest in them and receive the same financial benefits (dividends, rights issues or warrants), as those who invest directly in a company’s ordinary shares.668 However, as the issuer is the legal owner of the shares, NVDR holders are excluded from the decision-making process.669 The role that foreign investors played after the Asian crisis is disputed. In the ten years following the crisis, the average annual inflow of foreign direct investment, measured in proportion of GDP, doubled compared to the 662 http: /  / www.set.or.th / en / faqs / investment_p1.html#6. According Bailey, Warren / Jagtiani, Julapa, Journal of Financial Economics 36 (1994) 57 (59), the need to establish a Foreign Board resulted from an increase in foreign direct and portfolio investment in Thailand during the mid-1980s with the result that ownership limits of many Thai firms became binding. If foreigners bought shares and the foreign ownership limit was already achieved, they had to wait until other foreigners sold their shares in order to register their shares. After the Foreign Board was established, foreigners were able to submit their order to it when the foreign ownership limit was achieved. This means that foreigners can trade shares of companies that have reached their foreign ownership limits. Foreigners can also hold shares of the Main board, but as they cannot register their shares once the foreign ownership limit is reached, they lose all benefits such as dividends and voting rights. 663 http: /  / www.set.or.th / en / faqs / investment_p1.html#6. 664 Stock Exchange of Thailand, A Brief Introduction to the Stock Exchange of Thailand (2007) 6. 665 http: /  / www.set.or.th / en / faqs / investment_p1.html#6. 666 http: /  / www.set.or.th / nvdr / en / nvdr.html. 667 http: /  / www.settrade.com / brokerpage / 002 / html / document / nvdreng.pdf; http: /  / www.set.or.th / nvdr / en / about / whatis.html. 668 http: /  / www.set.or.th / nvdr / en / about / about.html. 669 http: /  / www.set.or.th / nvdr / en / about / about.html.

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boom period.670 Foreign portfolio investment was also almost double on average.671 Most of the inflow was used for acquisition, not for new investment.672 Wailerdsak estimates that one-quarter of assets owned by domestic entrepreneurs were transferred to foreign owners.673 However, Brown argues that first, corporations transferred good assets internally and left only the shell for foreign investors.674 Second, the acquisition of Thai enterprises by foreign investors following the Asian crisis was the central point in the recovery process for Thai corporations.675 Listed companies which sold equity to foreign investors reduced their debt to equity ratios, refocused on core interests and divested themselves of non-performing subsidiaries.676 According to Brown, the roles of capital became clearly divided, with multinational capital dominating export-oriented industry, and domestic capital clustered mainly in service sectors where it still enjoys forms of implicit and explicit protection.677 Foreign investors play a significant role on the Thai stock market as their stake in equity is high and their influence goes beyond the value of their investments. As foreign investors are supposed to contribute to better corporate governance, they could play a key role, but the findings on the influence of foreign investors are not expressly positive. Brown argues that foreign investment in the domestic banking sector following the crisis led to improvements in corporate governance.678 Ananchotikul, who analyzed 365 Thai firms listed on the Thai Stock Exchange, found that foreign investment did not automatically promote better corporate governance.679 Instead, it mattered if the investor became an insider or an outsider: when foreign industrial investors bought large stakes, it had no positive im670 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (22, 23). 671 Wailerdsak, Natenapha, Companies in Crisis, in: Phongpaichit, Pasuk / Baker, Chris (ed.), (2008) 17 (22, 23). 672 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 53. 673 Wailerdsak, Natenapha, Managerial Careers in Thailand and Japan (2005) 53. 674 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 302. 675 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 299. 676 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 299. 677 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006). 678 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 279. 679 Ananchotikul, Nasha, Does Foreign Investment Really Improve Corporate Governance? Evidence from Thailand (2007).

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pact.680 When foreign institutional investors bought minority stakes, it led to an improvement in corporate governance.681 Interestingly, the country of origin of the investors does not seem to have any importance.682 In his analysis of stock trading data of the Stock Exchange of Thailand during the years 1999 to 2003, Hirankasi found that foreign ownership had no positive impact on governance and disclosure.683 In short, it seems that the role that foreign investors play on the stock market is overestimated. One interviewee pointed out that foreign investors only invest in a few large companies and that the number of foreign investors is still low, thus limiting their influence.684 7. Gatekeepers Low shareholders’ activism raises the question of whether associations are a tool to overcome problems of collective action and to exercise the public good of monitoring. One interviewee emphasized that associations in Thailand are becoming stronger, indicating that they have started to play a role in monitoring.685 Nevertheless, the results seem to be mixed. The Thai Investors Association (TIA) that was established as a non-profit organization in 1983 is the formal organization for retail investors.686 It conducts a wide range of educational activities to broaden the knowledge of the general public and university students on the capital market and investments.687 TIA activities include the New Investors’ Program that teaches university students about the investment and capital market, a Thai investors’ day that is held once a month, company visits that take place every two months and the premium Investors’ Knowledge course.688 In addition, it has established a center for shareholders that processes the complaints of small sharehold680 Ananchotikul, Nasha, Does Foreign Investment Really Improve Corporate Governance? Evidence from Thailand (2007) 13–15. 681 Ananchotikul, Nasha, Does Foreign Investment Really Improve Corporate Governance? Evidence from Thailand (2007) 13–15. 682 Ananchotikul, Nasha, Does Foreign Investment Really Improve Corporate Governance? Evidence from Thailand (2007) 16–18. 683 Hirankasi, Pimnara, Foreign Capital Flows and Stock market in Developing Countries: Some Evidence from Thailand 39–41. 684 Interview with a representative of the Stock Exchange of Thailand. 685 Interview with a lawyer at Lorenz & Partners. 686 In 1983, the Thai Investors Club was founded and registered as the Thai Investors Association in 1989. In 2002, the TIA was accredited by the Ministry of Finance, the Securities and Exchange Commission and The Stock Exchange of Thailand to be the formal organization for retail investors. 687 Interview with a representative of the Thai Investors Association. 688 Interview with a representative of the Thai Investors Association.

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ers. The TIA advocates the protection of shareholders’ rights, inter alia by establishing the ‘Shareholders’ Rights Protection Volunteers’, a program that sends members and volunteer advocates assigned by the TIA to attend annual general meetings as well as extraordinary meetings of shareholders at listed companies.689 By July 2009, it had evaluated around 500 AGMs.690 However, the TIA faces the problem of obtaining proxies that would enable it to exercise shareholders’ rights, including lawsuits, on behalf of shareholders against a corporation.691 The TIA quoted the low interest of small shareholders in exercising their rights as the main reason.692 This challenge highlights the fact that shareholder associations can only partially balance low shareholders’ activism as they depend on small shareholders’ willingness to exercise their rights. Nevertheless, in several cases the TIA has been successful in exercising pressure on firms.693 Furthermore, its educational activities contribute to reducing transaction costs for potential and actual investors willing to make informed decisions. In short, although the TIA is not the sole solution to overcome the problems of transactions costs and collective action faced by small shareholders, its activities contribute to the monitoring of the capital market. A final challenge, however, remains. One interviewee questioned whether the TIA has a sufficient number of skilled personnel able to detect corporate abuse and to discover the responsible parties.694 This goes hand in hand with the general problem of emerging markets with limited resources trying to attract sufficient skilled personnel for the public service.695 The TIA reported that financial support decreased in 2009 due to the financial crisis.696 Furthermore, interviewees referred to the increasing role of the media which have started to report on shareholder complaints concerning annual general meetings and related-party transactions.697 Nevertheless, the role that the media could play in Thailand has to be assessed carefully. Factors 689

Interview with a representative of the Thai Investors Association. Interview with a representative of the Thai Investors Association. 691 Interview with a representative of the Thai Investors Association. 692 Interview with a representative of the Thai Investors Association. 693 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 17. 694 Nikomborirak, Deunden, Building Good Corporate Governance After the Crisis, in: Leong, Ho Khai (ed.), (2005) 200 (217). 695 It has to be noted, however, that, according to interviewees, Thai regulatory bodies attract ‘the crème de la the crème’ of skilled people. 696 Interview with a representative of the Thai Investors Association. 697 Interview with a researcher at the Nida Business School, an employee of the Securities and Exchange Commission, and employees of the Corporate Governance Centre at the Stock Exchange of Thailand. 690

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like the licensing requirements for newspapers and radio stations or the fact that most of them are owned by tycoons, the military, or the government may affect press freedom and result in a certain tendency in the type of media coverage.698 In the Press Freedom Index 2010 of ‘Reporters without borders’, Thailand was ranked 153 out of 178.699 Another question is whether the Corporate Governance Report of Thai Listed Companies, published by the Thai Institute of Directors since 2001, may help investors to reduce information asymmetries.700 The report scores the corporate governance of all listed companies on the Stock Exchange of Thailand.701 According to a member of the survey team, a questionnaire consisting of 132 individual questions was sent to all companies. Furthermore, the survey team collected publicly available information, such as annual reports, shareholders’ meeting announcements and minutes, company websites, articles of association and regulatory filing and other SET documents, as the basis of the scoring.702 Interviewees differ in their opinion on the informative value of the ranking. Several interviewees remarked that the ranking is based on information provided by the corporations, without a third actor verifying its accuracy.703 However, one investor reported that the ranking is matched by its internal rankings to an extent of 90 percent.704 Another interviewee pointed out that an individual screening of each company would be too expensive, indicating that the report makes the best possible compromise between limited resources and the need for reliable information.705 Another problem is that in an increasingly complex environment, minority shareholders’ dependence on reliable information and therefore on audi698

White, Lynn T., Political Booms (2009) 211. http: /  / en.rsf.org / press-freedom-index-2010,1034.html. 700 For a list of the reports, see http: /  / www.thai-iod.com / en / publications.asp?type =4. The surveys are based on the Principles of Corporate Governance of the OECD and compiled on the basis of public and non-confidential information. 701 Interestingly, according to one interviewee, regulatory bodies were at first reluctant to score corporate governance in the aftermath of the Asian crisis. However, after the withdrawal of CalPERS from the Thai capital market, a delegation with members of the SET and SEC that visited the United States took the corporate governance scores of the IOD with them. The interviewee concluded that CalPERS’ behavior resulted in a change of attitude regarding corporate governance in Thailand. 702 Interview with a researcher at the Sasin Graduate Institute of Business Administration, Chulalongkorn University. 703 Interview with a representative of the Association of Investment Management Companies. 704 Interview with employees of the GPF. However, the GPF scores only around 50 corporations in the market. 705 Interview with a representative of the Stock Exchange of Thailand. 699

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tors increases. One interviewee pointed out that, besides the poor quality of external auditors, the main problem is the lack of independence as many auditors are dependent on the company that they audit.706 The report on accounting and auditing of the World Bank 2008 found that a two-tier audit system seemed to exist in Thailand with audits of listed companies being largely undertaken by auditors from major audit firms and reviewed by the SEC, and other audits of variable and unknown quality.707 In order to enhance the independence of external auditors, Thai listed companies are now required to change auditors every five years. According to the Corporate Governance Report 2008, only 17.6 percent of listed corporations had appointed a company secretary.708 A new regulation now mandates Thai listed corporations to nominate company secretaries.709 This is intended to contribute to better corporate governance standards in general and thereby indirectly to the protection of minority shareholders. At the moment, company secretaries are recruited from junior staff.710 One interviewee noted that it therefore still has to be seen whether company secretaries will fulfill this role and be able to oppose senior executives and directors and whether the board will pay attention to their concerns.711 8. Public and Private Enforcement The main regulatory and supervisory bodies are the Securities and Exchange Commission (SEC) and the Stock Exchange of Thailand (SET).712 Until 1975, the Ministry of Commerce was the sole supervisory agent for 706 Interview with a lawyer at Lorenz & Partners. Nikomboriak, Deunden / Tangkitvanich, Somkiat, Corporate Governance: The Challenge Facing the Thai Econonmy, in: OECD (ed.), (2001) 407 (418) also highlights that auditors often do not report potentially damaging oddities because they do not want to damage their relationship with a company. 707 World Bank, Accounting and Auditing (2008) 21. They point out that the already problematic reputation of auditors was damaged when the SET temporarily withdrew its professional certification from two well-known auditors of two reputable auditing companies – one Thai, one foreign. 708 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 24. 709 Sec. 89 / 15 Securities and Exchange Act. 710 Interview with a representative of the Thai Listed Companies Association. 711 Interview with a representative the Thai Listed Companies Association. 712 Furthermore, in 2007, a capital market supervisory board (CMSB) was established. The task of the CMSB is to concentrate on the issuance of rules and regulations governing the day-to-day operational matters regarding securities business, while the SEC board is to focus on policy making regarding the supervision and development of the market. This task sharing is meant to improve the operational flexibility of the SEC.

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corporations.713 When the Stock Exchange started trading in 1975, it became the main regulator of the securities market.714 In 1992, the newly established SEC was charged with promoting and developing the securities market and with overseeing securities offerings, IPOs, investment companies, takeovers, and tender offers and with preventing market manipulations and insider trading while the SET was charged with regulating the secondary market.715 However, the SET retained responsibility for firms that had listed before 1992. Brown argues that neither institution had clearly defined responsibilities or the power to enforce the law and that separation of the primary and the secondary market created further segregation between trading in securities, clearing house functions and registration.716 This institutional structure and the regulatory framework governing its operations resulted in a lack of transparency, insufficient minority shareholders’ rights and inadequate accounting rules and methods of disclosure.717 Fagan argues that there was a great deal of political pressure on regulators to promote and deepen the Thai securities markets instead of enforcing securities regulation.718 Indeed, the composition and nomination of members of the SEC and SET board do not ensure its independence.719 Originally, the SEC board was chaired ex officio by the Minister of Finance and comprised the Governor of the Bank of Thailand, the Permanent Secretary of the Ministry of Finance, the Permanent Secretary of the Ministry of Commerce, the SEC Secretary-General and four to six experts, members appointed by the Cabinet upon the recommendation of the Minister of Finance.720 When the SEA was amended in 2007, the provisions regarding the SEC were also amended in order to enhance its independence. According to the amended SEA, the SEC board now comprises as commissioners the Chairman appoint713 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 259. 714 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (307). 715 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (307, 308). According to Fagan, two American scholars, John Fiorenz and John O’Brien assisted the team of Thai regulators in drafting the Securities and Exchange Act 1992, pp. 307, 308, which resulted in a draft that resembled the US securities regulatory system. 716 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 259, 260. 717 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 259, 260. 718 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (326, 327). 719 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (308); Nikomborirak, Deunden, Problems of Corporate Governance Reform in Thailand, in: Gul, Ferdinand A. / Tsui, Judy S. L. (ed.), (2004) 216 (233). 720 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (308).

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ed by the Cabinet upon the recommendation of the Minister of Finance, the Permanent Secretary of the Ministry of Finance, the Permanent Secretary of the Ministry of Commerce and the Governor of the Bank of Thailand, the secretary-general and four to six experts with at least one legal, one accounting and one financial expert.721. These experts are chosen by the Selection Committee based on a list compiled by the Chairman and the other ex officio commissioners of the SEC board and then proposed to the Minister for issuance of the order of appointment.722 The seven members of the Selection Committee are appointed by the Minister from among former Permanent Secretaries of the Ministry of Finance, Permanent Secretaries of the Ministry of Commerce, the Secretary-General of the Council of State, Secretary-General of the Office of the National Economic and Social Development Board, Secretary-General of the SEC Office or commissioners in the SEC.723 One interviewee therefore questioned whether the members of the Selection Committee are independent in reality.724 With regard to the independence of the SET, concerns remain. The SET board of directors725 is comprised of up to five directors appointed by the SEC, the manager of the SET as ex officio director, and up to five directors elected by SET members.726 The manager is appointed by the SET board of directors.727 Members may be removed by resolution of the SEC.728 The fact that five of the members of the SET board of directors are appointed by the SEC has been criticized as undermining the independence of the SET.729 721

Sec. 8 of the Securities and Exchange Act. Sec. 8, 31 / 7 of the Securities and Exchange Act. 723 Sec. 31 / 3 para. 1, 2 of the Securities and Exchange Act. 724 Interview with a lawyer at HNP Counsellors Limited. According to Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (335, 336), the first draft of the new SEA provided for the removal of ultimate authority over the SEC from the Minister of Finance to the Office of the SEC and to grant the Office the power to issue rules and regulations. Furthermore, it proposed to eliminate the ex-officio members of the SEC, to appoint members by the cabinet with the approval of the parliament, to ban members of any political party from holding the position of board member and to grant SEC members the right to elect board members, among them one director representing issuing companies listed on the SET and one director representing investors. The draft also aimed to remove the power to appoint directors of the SET board from the SEC. 725 The board of directors is called ‘board of governors’ on the SET website, see http: /  / www.set.or.th / en / about / overview / board_p1.html. 726 Sec. 159 para. 1 of the Securities and Exchange Act. 727 Sec. 164 para. 1 of the Securities and Exchange Act. 728 Sec. 162 para. 1 (3) of the Securities and Exchange Act. 729 Kanchanapoomi, Nisha, Southern California Interdisciplinary Law Journal 15 (2005) 165 (175). 722

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State-business links have long prevented regulatory bodies from fulfilling their tasks effectively. The Thai government failed especially to draft the legal amendments necessary to allow effective enforcement.730 However, the SEC has found different ways to cope with this situation. For example, it pursues a proactive approach in regard to related-party transactions and has started to screen such transactions before they are entered into.731 Furthermore, the SEC has adopted a very proactive approach in order to enhance corporate governance standards and the supervision of companies. Inter alia, it has supported the establishment of the Thai Investors Association, initiated the AGM assessment project together with the TIA, and also financially supports the CG Report Project by the Thai Institute of Directors Association. All directors must be registered on the SEC’s Directors and Executives Registry Database.732 Currently, the database includes around 8,500 registered directors and executives.733 Any director or executive who performs his duties improperly or dishonestly and causes damage to the company or to shareholders will be removed from the SEC database.734 The activity of the SEC was reflected in a survey in 2004 of 2,400 market actors on the performance of the SEC. It received poor scores for its regulatory performance but very good comments for its efforts to promote good corporate governance.735 Even regarding regulation, one interviewee emphasized that the practicability of laws and regulation has significantly improved since the SEC consults the private sector before drafting amendments to regulation.736 Nevertheless, the enforcement of regulation remains a concern. Regarding the SET, Brown is critical of the SET for lacking the necessary power to enforce international standards of accounting and disclosure in the form of 730 Nikomborirak, Deunden, Building Good Corporate Governance After the Crisis, in: Leong, Ho Khai (ed.), (2005) 200. 731 Interview with an employee of the Securities and Exchange Commission. 732 Securities and Exchange Commission Thailand, Capital Thailand Quarterly Newsletter 4 (2005) 1. 733 Securities and Exchange Commission Thailand, Corporate Governance Experience in the Thai Capital Market (2010) 5. 734 Securities and Exchange Commission Thailand, Capital Thailand Quarterly Newsletter 4 (2005) 1. 735 Montreevat, Sakulrat, Corporate Governance of Listed Companies in Thailand (2006) 80. The market actors included securities companies, commercial banks, insurance companies, asset management companies, listed companies, financial and investment advisers, custodians, accounting firms, institutional and retail investors, law firms, the media, and the general public. The respondents gave the highest score for the effectiveness in assisting listed companies with enhancing corporate governance standards. 736 Interview with the company secretary of a listed corporation.

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annual company reports prepared by internationally accredited accountants that it introduced in 1991.737 Fagan and Nikombrorirak assume that the SET is reluctant to make use of its powers inter alia to delist or to suspend trading because such measures tend to hurt the shareholders more than the violators.738 Although shareholders could file for damages in court, the cost and time involved in the process prevent them from pursuing a court case.739 In regard to the SEC, one interviewee pointed out that for the last six years before the interview, enforcement by the SEC had improved and some directors were punished.740 Fine settlement cases in 2006 amounted to 206, which was an increase of 67 percent.741 The total fine value reached THB44.8 million which was an increase of 193 percent compared to 2005.742 However, one interviewee noted that, despite its professionalism, the SEC is not able to exercise its tasks due to two reasons. First, the ownership structure of Thai corporations means that only a small stake of the shares is traded.743 Second, state-business links prevent any prosecution beyond a certain level.744 Another interviewee claimed that the reason is linked to Thai culture: enforcement is weak because people assume that the patriarch of the enterprises knows what he is doing.745 The current system of securities enforcement is limited to criminal and administrative sanctions. While the SEC has the primary responsibility to investigate possible offenses, the SEC, unlike the US Securities and Exchange Commission, does not enjoy the right to engage in civil litigation on its own behalf against those who violate its regulations.746 The penal provisions are provided for in chapter 12 of the Securities and Exchange Act. When it deems that a criminal violation has occurred, the SEC has to 737 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 267. 738 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (229) and Nikomborirak, Deunden, Building Good Corporate Governance After the Crisis, in: Leong, Ho Khai (ed.), (2005) 200 (215). 739 Nikomborirak, Deunden, An Assessment of the Role of Boards of Directors in Building Good Governance, The Third Asian Round Table on Corporate Governance – The Role of Boards and Stakeholders in Corporate Governance (2001) 9. 740 Interview with a researcher at the faculty of law, Thammasat University and a researcher at the Nida Business School. 741 Securities and Exchange Commission Thailand, FSAP, securities business innovations to lead 2007 plan (December 25, 2006) 3. 742 Securities and Exchange Commission Thailand, FSAP, securities business innovations to lead 2007 plan (December 25, 2006) 3. 743 Interview with a representative of the German-Thai Chamber of Commerce. 744 Interview with a representative of the German-Thai Chamber of Commerce. 745 Interview with a lawyer at Lorenz & Partners. 746 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (329).

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file a criminal complaint with the inquiry official of the Economic Crime Investigation Division (ECID), the Royal Thai Police or the special investigator of the Department of Special Investigation (DSI), Ministry of Justice.747 Offenses relating to corporate fraud, market manipulation, insider trading and unlicensed securities business are treated by the DSI, while other offenses are treated by the Economic and Cyber-Crime Division of the Royal Thai Police.748 If it is believed that a contravention has occurred, the matter will be forwarded by the ECID or DSI to the Office of the Attorney General (OAG) for criminal prosecution.749 However, under Section 317 SEA, certain offenses can incur a fine by a Settlement Committee appointed by the Minister of Finance. If the fine is fully received within a period specified by the Committee, the matter is considered settled.750 According to interviewees, criminal proceedings face various problems in Thailand. First, police officers and prosecutors lack the necessary knowledge to prosecute offenses against securities law.751 Second, there is a lack of cooperation and exchange of information between the different state agencies.752 Third, criminal proceedings take a great deal of time because of the different state agencies involved.753 Fourth, even if the case is sent to trial, it has to overcome several challenges. To begin with, it is extremely difficult to prove a violation of the law as any criminal conviction requires proof “beyond a reasonable doubt”.754 Furthermore, it is argued that judges in Thailand are not prepared to carry out prosecution effectively. Fagan argues that a major hindrance to successful prosecution is the fact that judges in Thailand’s civil law system are prohibited from basing their rulings on past decisions or applying their personal knowledge and 747 http: /  / www.sec.or.th / enforcement / Content_0000000392.jsp?categoryID=CAT 0000278&lang=en. See also the chart at Securities and Exchange Commission Thailand, Annual Report 2007 (2008) 69 or at http: /  / www.sec.or.th / enforcement /  enforcement_chart_en.pdf. A researcher at the Sasin Graduate Institute of Business Administration, Chulalongkorn University, criticized the fact that the SEC has to turn to the police or the prosecutors for a prosecution as one of the main problems. 748 http: /  / www.sec.or.th / enforcement / enforcement_chart_en.pdf. 749 http: /  / www.sec.or.th / enforcement / Content_0000000392.jsp?categoryID=CAT 0000278&lang=en. 750 http: /  / www.sec.or.th / enforcement / Content_0000000392.jsp?categoryID=CAT 0000278&lang=en. 751 Interview with a researcher of the faculty of law, Thammasat University. See also Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (328). 752 Interview with an employee of the Securities and Exchange Commission. 753 Interview with a representative of the Thai Institute of Directors, and an employee of the Securities and Exchange Commission. 754 Interview with a researcher at the the faculty of law, Thammasat University. See also Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (328).

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C. The Factual Protection of Minority Shareholders

discretion to a case.755 There is a traditional reluctance in Thailand to prosecute members of the elite classes such as important politicians and businessmen.756 The Thai public seems to have the impression that the courts are unwilling to rule in favor of them against any member of the elite class.757 Fagan argues therefore that there exists a vicious cycle. The perceived inequity in the legal system and high costs to potential plaintiffs are responsible for the low demand for public enforcement. Investors do not rely on securities law as these laws would not be enforced, so these laws remain unenforceable as investors do not rely on them.758 One interviewee expressly stated that political influence on every level of the investigation and prosecution proceedings is the main problem and that a case would be dismissed if politicians exerted their influence on those involved in a prosecution.759 Finally, one interviewee noted that, although the competence of tax authorities is increasing, they are still too weak to be relied on to discover related-party transactions and similar examples of abuse.760 Law enforcement agencies in Thailand have recognized these problems and worked to create solutions. However, political conflict and state-business links constrain their efforts. For example, the SEC has proposed the introduction of civil sanctions instead of criminal ones.761 However, the 755

Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (328). Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (332). According to Fagan, critics of the Thai legal system believe that the traditional, highly personalized and discriminatory application of justice has developed into an informal rule favoring members of the elite classes that is still applied. The Law of Civil Hierarchy, promulgated by King Borornmatrailokanat (1448–88), established a very complex hierarchy based on points which awarded royalty 100,000 points, slaves five points and to the rest of the population points between these two extremes, see p. 306. 757 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (331). 758 Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (331, 332). 759 Interview with a researcher at the faculty of law, Thammasat University. 760 Interview with a lawyer at Lorenz & Partners. It has often been said in the past that most provincial businesses still maintain two account books, one for government (tax or regulatory) officials and a second set for internal use, see Parichart, Chotiya, The Changing Role of Provincial Business in the Thai Political Economy, in: Kevin Hewison (ed.), (1997) 260–261. According to the respondents of a survey conducted by the University of the Thai Chamber of Commerce, “one of the most important factors limiting a firm’s competitiveness in the market is the competitor’s greater ability to evade tax”, see Nikomborirak, Deunden, Building Good Corporate Governance After the Crisis, in: Leong, Ho Khai (ed.), (2005) 200 (207). Independent of the validity of these statements, they indicate a certain lack of capacity to enforce tax payment. 761 Interview with a representative of the Thai Institute of Directors. 756

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draft has not yet been approved by the cabinet.762 Many innovative measures are frustrated in this way. Fagan concludes that, at the beginning of the 2000s, there was still very weak enforcement, resulting in no successful prosecutions for violations of the securities laws prohibiting fraud and insider trading.763 In the end, it should also be mentioned that one interviewee who does not work for Thai regulatory bodies highlighted the fact that the SET attracts the cream of the educated work force.764 Nevertheless, he also mentioned that it would be converted into a listed company in the future and that it plans to reduce its staff from 800 to 500 employees.765 9. Implications for the Legal Protection of Minority Shareholders a) Minority Shareholder Appointment and Decision Rights Although Thai law provides for cumulative voting as a default standard, its impact is extremely limited. The influence of minority shareholders on board composition remains weak although the SEC attempts to promote cumulative voting. According to the Corporate Governance Report 2008, only 37.7 percent of enterprises had a mechanism to allow minority shareholders to influence board composition.766 Among the companies that allowed minority shareholders to influence board composition, only five (= 1.1 percent of the surveyed companies) provided cumulative voting.767 One interviewee, who strongly advocated cumulative voting as a tool to protect minority shareholders, was very optimistic, emphasizing that in 2009, there were around ten companies that practiced cumulative voting, and hoped that this number would increase in the future.768 Another interviewee, however, assumed that 762

Interview with a representative of the Thai Institute of Directors. Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (321). 764 Interview with a representative of the Thai Investors Association. 765 Interview with a representative of the Thai Investors Association. 766 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 19, 20. According to Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 15, in 80 percent of firms surveyed by Piman / Connelly, minority shareholders are allowed to nominate candidates for the board of directors either before or at the meeting. 767 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 72, 73. Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 15 found that slightly less than 70 percent of companies have opted not to use cumulative voting. 768 Interview with a researcher at the Sasin Graduate Institute of Business Administration, Chulalongkorn University. 763

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C. The Factual Protection of Minority Shareholders

any promotion of cumulative voting would be useless due to the lack of directors.769 Furthermore, as even domestic institutional investors act very passively on the Thai capital market, generally preferring the exit strategy, it remains doubtful whether they would make use of such a right. In addition, low shareholders’ activism, that also includes institutional investors in Thailand, seriously affects the impact of minority shareholder decision rights. Interviewees, including employees of institutional investors, indicated that it was preferable not to file suits but to choose the exit strategy in case of irregularities or other problems. b) Independent Directors and Equal Treatment In regard to independent directors, it remains questionable to what extent they add to the protection of minority shareholders. Listed corporations seem to limit their practices to compliance with existing Thai regulation, according to which one-third of directors has to be independent directors. Only in 7.6 percent of enterprises were more than 50 percent of the board members independent directors in 2008.770 Companies complain that there is a lack of directors with the necessary skills.771 The Thai Institute of Directors, however, pointed out that its directors’ pool is not much used by companies and assumed that companies are simply unwilling to find independent directors because they prefer to nominate family members and friends to the board.772 In any case, one interviewee pointed out that it is more difficult for small enterprises than for large companies to find independent directors.773 Another concern is the real independence of independent directors. A definition of independence was provided by 21.9 percent of companies in 2008.774 However, interviewees doubted that all independent directors are in fact independent.775 One interviewee indicated that the Thai networking 769 Interview with a representative of the Association of Investment Management Companies. 770 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 23, 24. 771 Interview with a representative of the Association of Investment Management Companies. 772 Interview with a representative of the Thai Institute of Directors. 773 Interview with a company secretary of a listed corporation. 774 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 23, 24. 775 Interview with a lawyer at HNP Counsellors Limited, two researchers at the faculty of law, Thammasat University, the company secretary of a listed corporation, employees of the Thai Listed Companies Association.

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culture is a barrier to real independence.776 Majority shareholders are said to nominate friends as independent directors.777 One interviewee indicated that as directors are nominated because of relationships and connections, any participation in training courses or the like would not improve their chances of being nominated.778 Another interviewee also mentioned the fact that independent directors prefer to work for companies that they know and trust.779 The findings of Limpaphayom / Connelly revealed that, while almost 50 percent of independent directors believed that independent directors were independent, only 33 percent of executive directors agreed with this finding.780 Executive and independent directors agreed or strongly agreed that one of the following reasons could lead to a lack of independence for independent directors: the CEO has effectively selected the board members (over 50 percent in both groups), personal relationship with other directors (60 percent in both groups), cultural norms (30 and 38 percent respectively) the CEO decides the length of the term of the independent director (30 and almost 38 percent respectively), concern about future responsibility / blame (32 and 30 percent respectively), a better informed management team and CEO (57 and 51 percent respectively).781 Limpaphayom / Connelly also interviewed executive and independent directors on their opinion regarding the nomination of independent directors. Fifty-eight percent of executive directors, but only 42 percent of independent directors felt that the board / nominating committee acted autonomously in selecting and removing an independent director.782 Only 29 percent of executive directors thought that the owner would have the strongest voice.783 However, 42 percent of independent directors thought that the controlling owner would exercise a strong voice. Five percent in both groups thought that the CEO would have the strongest voice.784 According to Jongsurey776

Interview with a lawyer at HNP Counsellors Limited. Interview with a researcher at the faculty of law, Thammasat University. 778 Interview with the company secretary of a listed corporation. 779 Interview with employees of the Corporate Governance Centre at the Stock Exchange of Thailand. 780 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 20. 781 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 20. 782 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 20. 783 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 20, 21. 784 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 21. 777

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apart, 52 percent of respondents said that the strongest authority in the selection of independent directors belonged to the board of directors, while 47 percent of respondents said that independent directors were selected by the shareholders, and only one percent said that they were selected by CEOs.785 Another concern regarding independent directors is their expertise. One interviewee remarked critically that one of the main reasons for the Asian crisis was the fact that directors did not understand their duties and responsibilities, thinking it to be a question of prestige to sit on a board.786 Interviewees pointed out, however, that due to the efforts of regulators and the training courses offered by the IOD, directors have an increased awareness of their responsibilities and duties.787 Directors are not obliged by law to undergo training courses, but the SEC puts indirect pressure on listed companies because they are obliged to give a director’s profile in their annual filing that has to include information on whether directors took part in IOD training courses.788 However, interviewees disagreed on the question of whether the enhanced scope of responsibilities together with the introduction of criminal penalties will be an effective tool. While one interviewee thought this will force them to comply with the law even in opposition to the majority shareholder789, another argued that this provision is counterproductive as it will lead independent directors to hide information.790 Regarding the equitable treatment of shareholders, in 2008, 100 percent of all companies had a one-share, one-vote policy.791 In contrast to Malaysia, where interviewees reported voting by person at AGMs as a serious weakness, interviewees in Thailand did not mention such practices. This may mean that voting by person is no longer an issue.

785 Jongsureyapart, Chatrudee, Factors that Determine Corporate Governance in Thailand (2006) 150. 786 Interview with a representative of the Thai Institute of Directors. See also Nikomborirak, Deunden, An Assessment of the Role of Boards of Directors in Building Good Governance, The Third Asian Round Table on Corporate Governance – The Role of Boards and Stakeholders in Corporate Governance (2001) 4. 787 Interview with a company secretary of a listed corporation. 788 Interview with a representative of the Thai Institute of Directors. 789 Interview with a representative of the Thai Institute of Directors. 790 Interview with a researcher at the faculty of law, Thammasat University. 791 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 58.

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c) Constraints and Affiliation Rights Disclosure practices of information that is especially relevant for minority shareholders have significantly improved since 2003. In the past, it used to be difficult to trace real owners in the majority of firms. According to the corporate governance survey 2008, 58.7 percent of corporations had ownership records that revealed the beneficial owners of the company’s shares.792 Information on companies’ websites in regard to shareholding and corporate group structure has also dramatically improved. Nevertheless, related-party transactions seem to be still a point of concern. Siphoning off funds from a widely held public company to a familyheld private company has been described as one of the most widespread corporate abuses in Thailand.793 Interviewees reported a low awareness of the dangers of related-party transactions and of its high social acceptance.794 One interviewee indicated that this is especially the case for family-owned enterprises.795 Regulation of related-party transactions was one of the points that met most resistance from directors.796 Table 29 Transparency of Shareholding Structure of Thai Corporations 2003–2008 2003

2005

2006

2008

Breakdown of shareholding structure

98.8 %

99.7 %

97.5 %

Possibility to identify beneficial ownership

31.8 %

25.3 %

33.1 %

100 % 58.7 %

Information on company’s website on shareholding structure

19.9 %

20.8 %

39.8 %

60.7 %

Information on company’s website on corporate group structure

8.3 %

28.3 %

38.8 %

49.2 %

Source: Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2003 (2004) 38, 45; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2005 (2005) 42, 49; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2006 (2006) 38, 45; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 62, 63. 792 Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 62. 793 Nikomborirak, Deunden, Problems of Corporate Governance Reform in Thailand, in: Gul, Ferdinand A. / Tsui, Judy S. L. (ed.), (2004) 216 (224). 794 Interview with a company secretary of a listed corporation, a researcher at the faculty of law, Thammasat University, and a lawyer at Lorenz & Partners. 795 Interview with employees of the Thai Listed Companies Association. 796 Interview with an executive director of the Stock Exchange of Thailand; and the company secretary of a listed corporation.

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C. The Factual Protection of Minority Shareholders Table 30 Problems Regarding Related-Party-Transactions of Thai Corporations 2003–2008 2003

2005

2006

2008

Companies did not provide any rationale for RPTs or only incomplete information

11.9 %

2.7 %

2.2 %

0.7 %

Non-compliance with disclosure requirements regarding RPTs

0.0 %

0.5 %

0.7 %

0.0 %

37.5 %

26.4 %

17.9 %

Companies displaying RPTs that can be considered as financial assistance to non-subsidiaries

Source: Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2003 (2004) 30; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2005 (2005) 34, 35, 38; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2006 (2006) 30, 31, 60; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 58, 72.

The results of the corporate governance surveys give a mixed picture. On the one hand, disclosure in regard to related-party transactions has significantly improved since 2005. The percentage of companies that did provide only incomplete information or no information at all on related-party transactions that require shareholders’ approval was already low in 2005 and has further decreased. The same situation applies to non-compliance with disclosure requirements concerning related-party transactions. Furthermore, the percentage of companies with related-party transactions that could be construed as a means to provide financial assistance to other companies not directly considered to be subsidiaries,797 decreased from 37.5 percent in 2005 to 26.4 percent in 2006 and finally to 17.9 percent in 2008. On the other hand, the latter percentage was still high, indicating remaining concerns. Limpaphayom / Connelly also conclude from the results of their survey that there is a need for increased information and discussion on relatedparty transactions.798 As a response, the Securities and Exchange Commission started to proactively screen related-party transactions.

797 If the survey company owns less than 50 percent, the company receiving financial assistance is considered to be a non-subsidiary firm. 798 Limpaphayom, Piman / Connelly, J. Thomas, Corporate Governance in Thailand (2004) 15.

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Table 31 Percentage of Thai Companies with “Conspicuous” Related-Party-Transactions 2005

2006

2008

37.5 %

26.4 %

17.9 %

Source: Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2005 (2005) 38; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2006 (2006) 60; Thai Institute of Directors Association, Corporate Governance Report of Thai Listed Companies 2008 (2008) 72.

10. Conclusions Embedded state-business links in Thailand have contributed to the emergence of a powerful corporate elite with strong political influence. Thailand’s corporate sector is characterized by concentrated corporate ownership in the hands of families, mainly of Chinese origin, who also tend to nominate family members as executives and board members, thus intensifying their control. The use of dual-class shares, pyramidal and cross-holding structures is not as common as could be assumed, constraining incentives to extract private benefits. Nevertheless, concentrated ownership does not only constrain the role of independent directors but also results in a low free float on the capital market, weakening capital market control and limiting the possibility of regulatory bodies exercising their monitoring powers. Retail investors, the most important trading group of the capital market, tend to make uninformed decisions, thus possibly distorting fair share pricing. Although shareholders’ activism is on the rise, shareholders, including institutional investors, behave passively in general and rely on regulators and public enforcement. Thai regulatory bodies have made efforts to raise activism among institutional investors, but as these investors usually limit their investments to the major corporations, the results remain to be seen. There is no clear empirical evidence that foreign investors contribute to enhancing corporate governance standards and to the protection of minority shareholders. In short, monitoring of controlling shareholders and management remains a public good. The Thai Investors Club only partially balances low shareholders’ activism as small investors usually do not grant proxies. Nevertheless, its activities contribute to reducing information asymmetries. In combination with an increasingly active financial press, these activities may partially counter the lack of capital market control. As Thai law increasingly relies on independent financial advisors to guide small shareholders in their decision-making, it remains a task to ensure the integrity, independence and quality of market intermediaries. The main task,

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C. The Factual Protection of Minority Shareholders

however, remains to shield public enforcement from political interference. Against this background, it remains doubtful whether Thai regulators’ efforts to train and educate actual and potential investors will result in more ‘voicing’ and greater activism among shareholders. However, informed investors will make better investment and exit decisions that, in a future fully developed capital market, will be the most powerful tools to align the interests of managers, controlling and minority shareholders. Meanwhile, despite the low protection of minority shareholders, there is no clear empirical evidence whether and to what extent controlling shareholders extract private benefits. In a study on 270 companies accounting for 97.08 percent of the market value of all non-financial firms listed on the Stock Exchange in 1996, Wiwattanakantang found that the presence of controlling shareholders was associated with higher performance.799 However, the involvement of the majority shareholder in management had a negative impact on firm performance, which is more pronounced when the controlling shareholder-and-manager’s ownership is at the 25 to 50 percent level.800 Furthermore, foreign-owned firms and firms with more than one controlling shareholder display higher ROA than firms with no controlling shareholder.801 Wiwattanakantang also found that the mechanism employed to separate voting and cash-flow rights (pyramidal structures and crossholdings) did not reduce corporate value.802 Krishnamurti et al., examining expropriation arising from the separation of cash flow from voting rights in Asian firms by jointly examining ownership-control structure, firm-level governance and country-level legal protection available to external suppliers of capital, found no evidence for expropriation or a relationship between control-ownership wedge and firm value or between firm level governance and firm value as measured by Tobin’s Q.803 In contrast, Claessens et al. found that a control-ownership wedge in Thai corporations was value decreasing.804 Polsiri found that controlling shareholders with high controlling power but low ownership opposed restructuring activities, while controlling shareholders with large cash-flow rights 799 Wiwattanakantang, Yupana, Pacific-Basin Finance Journal 9 (2001) 323 (325, 349). A controlling shareholder is a shareholder who directly or indirectly owns more than 25 percent of total shares, p. 336. 800 Wiwattanakantang, Yupana, Pacific-Basin Finance Journal 9 (2001) 323 (354). 801 Wiwattanakantang, Yupana, Pacific-Basin Finance Journal 9 (2001) 323 (354). 802 Wiwattanakantang, Yupana, Pacific-Basin Finance Journal 9 (2001) 323 (352). 803 Krishnamurti, Chandrasekhar et al., Legal Environment, Firm-level Corporate Governance and Expropriation of Minority Shareholders in Asia (2003) 5, 20. 804 Claessens, Stijn et al., Expropriation of Minority Shareholders in East Asia (2000) (51).

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195

favored restructuring activities.805 Dhandirek / Tang found in their study on listed firms during the years 1994 to 1996 that firm performance in the finance industry measured by ROR (net profit after tax / revenues) as well as by ROA (net profits after tax / total assets) rose until a board ownership of 25 percent and then started to decline. They suggest that the decline may reflect directors’ incentives to increase their wealth at the expense of minority shareholders.806 In their analysis of nearly 100 of the largest business families in Thailand, Bertrand et al. found that the existence of more sons of the founder of business groups and excessive control by sons but no other family member, was associated with lower firm performance.807 They hypothesize that part of the decay of family-run business groups over time may be due in part to increased incentives between family members to tunnel resources out of the firm as control becomes more diluted among different family members.808 In any case, equity costs in Thailand have remained high since the Asian crisis. In the aftermath of the Asian crisis, a survey by McKinsey among pension funds, money managers, banks and private equity managers found that international investors would pay an average of 26 percent more for shares in Thai companies that were transparent, protected shareholder rights and generally followed the principles of good corporate governance.809 In 2010, Thailand still had one of the highest costs of equity of all Asia-Pacific markets with an overall value of 27.32 percent (compared to 13.26 percent in Malaysia), which varied considerably from 7.09 percent in diversified to 36.70 percent in basic materials.810 Thai regulatory bodies and associations, especially the Thai Institute of Directors, have responded to these demands and have made good progress in the protection of minority shareholders since the Asian crisis. Further proposals of the Securities and Exchange Commission to protect minority 805 Polsiri, Piruna, Concentrated Ownership and Firm Responses to a Crisis: Evidence from Thailand (2004) 25. 806 Dhnadirek, Rachada / Tang, John, Asia Pacific Journal of Economics & Business 7 (2003) 4 (13). 807 Bertrand, Marianne et al., Journal of Financial Economics 88 (2008) 466. 808 Bertrand, Marianne et al., Journal of Financial Economics 88 (2008) 466. 809 While Fagan, John, Columbia Journal of Asian Law 16 (2002–2003) 303 (320) mentions 26 percent, Nikomborirak, Deunden, An Assessment of the Role of Boards of Directors in Building Good Governance, The Third Asian Round Table on Corporate Governance – The Role of Boards and Stakeholders in Corporate Governance (2001) 2 speaks of 27 percent. 810 Hearn, Bruce et al., Size and Liquidity Effects in Australasian and South East Asian equity markets, “New Horizons in Finance for Asia and the Region”. Hosted by: Asian Finance Association, Hong Kong (2010) 17, 34.

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C. The Factual Protection of Minority Shareholders

shareholders include a draft for a class action law as well as an amendment of the Public Limited Companies Act (PCA) that have both already been submitted to the parliament. The PCA draft aims to ease the criteria for shareholders to request the board of directors to call an extraordinary general meeting and to simplify the process for the removal of board members prior to the expiry of their term.811 The draft of the class action law which will be part of the Civil Procedure Code provides that retail investors would not have to file a law suit in court by themselves if there are other investors whose ongoing litigation involves common questions of law and / or fact and the court orders that the cases be certified as class action cases.812 However, low shareholder activism calls for more public enforcement. In recognition of these problems, the SEC has proposed the introduction of civil sanctions but the draft has not yet been approved by the cabinet.813 Nevertheless, the underlying problems that prevent effective public enforcement are difficult to overcome. Interviewees repeatedly noted that the main problem is the public, not the private sector, and identified political interference as the largest obstacle in protecting minority shareholders. As improving public enforcement will require reforms in public governance, including transparency, accountability and the independence of state authorities, Thailand still has a long way to go.

III. Malaysia 1. The State-Party-Business Nexus The corporate sector of Malaysia has been deeply shaped by the relationship between and the interaction of the three main ethnic groups of Malaysia, the Malays, ethnic Chinese and ethnic Indians. The peninsula of Malaysia was originally inhabited by Malays, who called themselves Bumiputeras, sons of the soil, and who adopted the Islamic faith.814 In the second half of 811 Securities and Exchange Commission Thailand, Corporate Governance Experience in the Thai Capital Market (2010) 2. 812 Securities and Exchange Commission Thailand, Corporate Governance Experience in the Thai Capital Market (2010) 6. 813 Interview with a representative of the Thai Institute of Directors. 814 According to art. 160 (2) of the Constitution of Malaysia, ‘Malay’ means a person who professes the religion of Islam, habitually speaks the Malay language, conforms to Malay custom and (a) before Merdeka Day was born in the Federation or in Singapore or born of parents one of whom was born in the Federation or in Singapore, or is on that day domiciled in the Federation or in Singapore; or (b) is the issue of such a person (Merdeka Day means the date of August 31, 1957, when the independence of the Federation of Malaysia was officially promulgated). The

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the 19th century, the British colonial powers encouraged Chinese and Indian immigration in order to ensure a labor force for the tin mining sector.815 Later, the British encouraged the segregation of the ethnic groups by allowing Chinese immigrants to engage in the emerging commercial sector and by opening the public sector to the well-educated urban Malay elites.816 After the Second World War, members of the three main ethnic groups established political parties to protect their interests: the United Malays’ National Organisation (UMNO) was established in 1946, the Malayan (later on Malaysian) Indian Congress (MIC) in 1946 and the Malayan (later on Malaysian) Chinese Association (MCA) in 1949.817 They formed an alliance that would come to dominate politics for future decades.818 The most important opposition party was the Parti Islam Se-Malaysia (PAS), which aimed to establish an Islamic state and was especially successful in the north.819 In the beginning, the MCA and UMNO based their cooperation on the implicit agreement, popularly referred to as the ‘bargain’, that Malays would dominate politics and that Chinese capital would be left unfettered by the state.820 constitution provides further rules on natives from Sabah and Sarawak in art. 161 A (6) and (7). Kejamans, Lahanans, Punans, Tanjongs dan Kanowits), Lugats, Lisums, Malays, Melanos, Muruts, Penans, Sians, Tagals, Tabuns and Ukits. 815 Dana, Leo Paul, Entrepreneurship in Pacific Asia: Past, Present & Future (1999) 110; Gomez, Edmund Terence, In Search of Patrons, in: Chan, Kwok Bun (ed.), (2000) 207 (208, 209); Searle, Peter, The Riddle of Malaysian Capitalism (1999) 29. 816 See Dana, Leo Paul, Entrepreneurship in Pacific Asia: Past, Present & Future (1999) 113; Jomo, Kwame Sundaram / Gomez, Edmund Terence, The Malaysian Development Dilemma, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 274 (279); Searle, Peter, The Riddle of Malaysian Capitalism (1999) 30. Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (159); Dana, Leo Paul, Entrepreneurship in Pacific Asia: Past, Present & Future (1999) 113. 817 The UMNO was founded as a nationalistic Malay movement by Dato Onn bin Ja’afar, see Derichs, Claudia, Nationenbildung in Malaysia (2004) 74. Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 113, 116–117 argues that although UMNO aimed to promote Islam, its identity was based more on the representation of Malays’ interests than on Islamic principles and in the beginning, remained secular in substance. The MCA was founded by wealthy Chinese businessmen on the initiative of the British colonial administration who feared the influence of the Chinese-based Malayan Communist Party. The main goal of MCA was to protect the economic interests of the founders, see Gomez, Edmund Terence, In Search of Patrons, in: Chan, Kwok Bun (ed.), (2000) 207 (210). 818 This inter-ethnic coalition won 51 of the 52 seats in the first national elections in 1955, see Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 114, 118. 819 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 114–115. 820 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (160); Ufen, Andreas,

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In 1957, when Malaysia gained independence, there were around 55 percent Malays, 30 percent ethnic Chinese, 10 percent ethnic Indian and 5 percent other ethnic groups.821 Wealth and job opportunities were unequally distributed among the ethnic groups: 63.3 percent of the national wealth belonged to foreigners, mainly British, 34.3 percent to ethnic Chinese, and 2.4 percent to Malay and other indigenous groups.822 Only 15.9 percent of Malays worked in trade, compared to 66.1 percent of Chinese.823 The government undertook affirmative action to change the unequal distribution of wealth and employment opportunities among the ethnic groups, but these measures remained largely unsuccessful.824 Malays became increasingly frustrated by this situation.825 The unification of Malaysia, Singapore, Sabah and Sarawak in 1963 intensified ethnic conflicts and led to the withdrawal of Singapore in 1965.826 The politicization of ethnic conflict culminated in the riots of May following the elections in 1969.827 In the aftermath of the race riots, the alliance was able to persuade most of the opposition parties, even the PAS, to join the ruling coalition in order to prevent new ethnic conflict and called itself the National Front (BN).828 In the following decades, the BN would become a coalition of up to 14 different parties.829 All the important decisions were made by the dominant UMNO.830 A real opposition Ethnizität, Islam, Reformasi (2010) 116; Searle, Peter, The Riddle of Malaysian Capitalism (1999) 34. 821 Derichs, Claudia, Nationenbildung in Malaysia (2004) 72. 822 Derichs, Claudia, Nationenbildung in Malaysia (2004) 72. 823 Derichs, Claudia, Nationenbildung in Malaysia (2004) 73. 824 Lee, Hock Guan, Affirmative Action in Malaysia, in: Chin, Kin Wah / Singh, Daljit (ed.), (2005) 211 (213). By 1970, the household mean income disparity ratio between the Chinese who mainly lived in the urban areas, and the Malays who mainly lived in the rural areas, amounted to 2.29. Two-thirds of Malays, in comparison to 31 percent of Chinese and 49 percent of Indians, were employed in the agricultural sector. Of the total number of graduates from 1959 to 1970, Malays comprised 26 percent who mainly graduated from the arts faculty, while Chinese graduates not only comprised 60 percent of all graduates, but represented from 80 to 90 percent of the graduates in science, engineering and medicine. 825 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 122–123; Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (160). 826 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 120. 827 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 121, 122; Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (160). 828 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 122. 829 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 124. 830 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 124–125.

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only emerged during the 1978 elections after the PAS had left the coalition in 1977.831 In response to the riots, the coalition launched the New Economic Policy (NEP), which was implemented until 1999, in order to achieve more ethnic parity.832 The policy aimed to create a Malay middle class, to reduce the poverty level to 15 percent by 1990 and to accumulate capital among the Malays.833 This was to be achieved by improving Malays’ access to training, capital, and land, and by changing the education and employment patterns of Bumiputeras through ethnic quotas favoring their entry into tertiary institutions.834 Companies were further requested to ensure at least 30 percent Bumiputera ownership and funds were established to buy shares and sell them at par value or with only nominal premia to Bumiputeras.835. One of the consequences was the invention of the so-called ‘Ali-Baba’system to circumvent the requirement: ethnic Chinese entrepreneurs used Bumiputeras to register companies in their name as the major shareholder, but without real power.836 While Bumiputeras thus owned the majority of the firm, the Chinese partners retained control.837 831

Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 125. Lee, Hock Guan, Affirmative Action in Malaysia, in: Chin, Kin Wah / Singh, Daljit (ed.), (2005) 211 (213); Dana, Leo Paul, Entrepreneurship in Pacific Asia: Past, Present & Future (1999) 113. Most Malays thought the NEP was justified and necessary to prevent a further escalation of ethnic conflicts, see Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 122–123. 833 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (121). 834 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (121). 835 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (121). The Industrial Coordination Act (ICA) 1975 provided that foreign and Chinese companies should ensure a minimum of 30 percent Bumiputera ownership in all firms beyond a certain size, see Jomo, Kwame Sundaram / Gomez, Edmund Terence, The Malaysian Development Dilemma, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 274 (290). According to Lee, Hwok-Aun, Industrial Policy and Inter-Ethnic Redistribution in Malaysia: Industrial Development and Equity Ownership, 1975–79, in: Jomo, Kwame Sundaram (ed.), (2007) 222 (227), among manufacturing firms with a share capital of MR100.000 and 25 employees, Malay firms had to offer at least 30 percent of their equity to Bumiputera and foreign firms had to sell 70 percent to Malaysians, among this group at least 30 percent to Bumiputera individuals or agencies. However, firms could obtain an exemption from these requirements. 836 Dana, Leo Paul, Entrepreneurship in Pacific Asia: Past, Present & Future (1999) 115. 837 Dana, Leo Paul, Entrepreneurship in Pacific Asia: Past, Present & Future (1999) 115. 832

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Both Gomez and Searle argue that the UMNO played an important role in the expansion of Malay ownership and the promotion of Bumiputera capitalists by its corporate investments.838 When state intervention in the economy increased as a result of the implementation of the NEP, the main political parties, the UMNO, MCA and MIC, became actively involved in business from the early 1970s, leading to party ownership and control of major private and publicly listed companies.839 Political parties had been involved in business since their establishment,840 but they could now argue that their business activities were necessary to accumulate wealth on behalf of the communities they claimed to represent.841 Ufen highlights the fact that the UMNO became a non-transparent financial enterprise with leaders who used state funds for private means and that it was more and more influenced by politicians who were entrepreneurs themselves or who cooperated with entrepreneurs.842 According to Gomez, the value of shares owned by the UMNO in 1990 was conservatively estimated at RM4 billion, of which approximately RM2 billions worth were shares in listed companies.843 The property held by the party was believed to amount to some billion RM too.844

838 Searle, Peter, The Riddle of Malaysian Capitalism (1999) 244 (103–126); Gomez, Edmund Terence, Politics in Business: UMNO’s Corporate Investments (1990), Gomez, Edmund Terence, Political Business: Corporate Involvement of Malaysian Political Parties (1994). 839 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (84). 840 After being set up in 1946, UMNO engaged in various business ventures which all failed because of poor management and lack of expertise, while MIC promoted a cooperative in 1955, see Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (84). 841 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (85). 842 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 140. Ufen emphasizes that, because of NEP and the increasing authoritarianism of Mahathir, the political elites were able to bring more and more funds under their control. 843 Gomez, Edmund Terence, Political Business: Corporate Involvement of Malaysian Political Parties (1994) 158. In Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (100), Gomez points out that the channeling of funds raised in the corporate sector to fund political activities, especially elections, increased significantly. It became more and more important for politicians to have a corporate base in order to raise funds, see Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (162); Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (100). 844 Gomez, Edmund Terence, Political Business: Corporate Involvement of Malaysian Political Parties (1994) 158.

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From the mid-1980s, the government started to promote the emergence of a Malay capitalist class by selecting well-connected Malay individuals and promoting their interests.845 Prime Minister Mahathir appointed his close ally, businessman Daim Zainuddin, as chairman of Fleet Holdings Sdn Bhd., the investment corporation of the UMNO, in 1981, and as Minister of Finance in 1984.846 Daim involved the companies that he controlled, as a private businessman, government appointee and UMNO chairman, in a “myriad of interlocking business transactions”847. From the mid-1980s, Mahathir increasingly concentrated power in the office of the Prime Minister and UMNO president and reduced the bureaucracy’s influence in policy planning and implementation.848 Gomez points out that this enabled ruling politicians to distribute concessions or rents in the form of licenses, contracts, and privatized projects at will to selected businessmen.849 Banks owned or controlled by the state gave these Malay entrepreneurs funds at favorable conditions to realize the projects.850 Another important tool to create networks was the privatization of state-owned enterprises and the sale of shares at premium prices to people connected to the prime minister.851 Bumiputeras began to imitate the conglomerate growth strategy of Chinese immigrants that often included the use of a holding company as well as 845 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (120). 846 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (92, 123). 847 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (92). 848 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 138; Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (129). The concentration of power in the office of the UMNO president was achieved by consistent amendments to the party constitution and because of factionalism in the lower echelons of the party, see Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (162). Mahathir justified the concentration of power in the office of the presidency of the UMNO as a way to foster Malaysia’s transformation into a fully developed state by 2020 and to create a new Malay capitalists class able to compete internally, see Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (123). 849 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (162); Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (120). 850 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (120). 851 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 140. Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (122) also points out that the government often sold state-owned enterprises to well-connected Malay entrepreneurs without conducting a public bidding.

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pyramidal and cross-holding structures. The founder usually took the position of chairman and exercised ultimate control over all companies of the conglomerate, although he might not hold any official position.852 The main difference between Chinese and Malay entrepreneurs was that Malays funded their acquisitions by bank loans. When UMNO hegemony grew and Chinese businessmen began to realize that the MCA’s ability to protect their investments was limited, they secured influence and access to state rents by funding the political campaigns of UMNO politicians.853 Furthermore, Chinese businessmen started to recruit Malay politicians, ex-civil servants or other influential Malays as directors.854 Gomez argues that party control shifted from a direct to an indirect model.855 In the 1970s, the party directly controlled a small number of firms with relatively small paid-up capital, significant equity, significant interlocking stock ownership and interlocking directorship, extensive managerial autonomy, limited business specialization and mostly non-politicians as managers.856 In the 1990s, this had changed to indirect control covering a large number of firms with extremely large paid-up capital, sufficient equity ownership to maintain control, rather limited interlocking stock ownership and interlocking directorates, involvement of many politicians in management, and generally no separation between ownership and manage852

Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 1 (22). Gomez, Edmund Terence, In Search of Patrons, in: Chan, Kwok Bun (ed.), (2000) 207 (215); Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (86). Most leading Chinese and Indian businessmen who have emerged since the 1980s are directly or indirectly linked to powerful Malay politicians. This also meant the MCA lost influence among Chinese businessmen. 854 Gomez, Edmund Terence, In Search of Patrons, in: Chan, Kwok Bun (ed.), (2000) 207 (213, 214). These directors remained excluded from the top decisionmaking process. By the 1990s, even medium-scale Chinese companies started to appoint influential Malays as directors. From the mid-1980s, factionalism within the UMNO increased, creating the danger for Chinese businessmen of “backing the wrong horse”. Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (91) describes how after an economic recession in the mid-1980s, the government tried to develop more interethnic business ties and from the 1990s, the BN found it necessary to attract non-Bumiputera support. This meant that also non-Bumiputera were awarded rents, although they had to share a part of them with well-connected Malays. By the 1990s, there was an increase in links between Chinese and well-connected Malay businessmen that seems to be attributed to the fact that Mahathir aimed to distribute rents to those who had shown the capacity to build on these state concessions. 855 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (99). 856 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (99). 853

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ment.857 The number of companies linked to politicians or politically wellconnected businessmen was extensive by the mid-1990s.858 Gomez notes that “the need to cultivate a strong grassroots base in UMNO to secure access to state rents was reflected in the gradual change in the party’s leadership at divisional and branch levels. Since UMNO’s pioneering days in 1946, leaders at these levels were predominantly rural teachers. By 1995, almost 20 percent of UMNO’s 165 division chairmen were millionaire businessmen-cum-politicians. The rapid descent on rural areas by urban politicians to cultivate a grassroots base, usually by buying support, led to the further monetization of politics”859.

By the mid-1990s, a number of large listed companies and conglomerates, which were controlled primarily by well-connected Malays but also by some well-connected non-Malays, had emerged in the corporate sector that were all linked to Mahathir, Anwar and Daim.860 Almost all Malay and non-Malay businessmen who were among Malaysia’s leading corporate figures before the Asian crisis had enjoyed state patronage, specifically the awarding of privatized contracts.861 After the Asian crisis, a power struggle broke out between Mahathir and Anwar who was associated with IMF policies.862 The involvement of the 857 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (99). The extent of direct political party ownership diminished during the late 1980s when state ownership of companies was reduced and political control over business took on more subtle forms. From the 1990s on, the UMNO assets were transferred to individuals. One reason was that after the recession in the mid-1980s, the number of state rents that could be distributed had decreased. Furthermore, conflicts of interest were being made public, embarrassing the UMNO. In 1992, the UMNO claimed that it no longer legally controlled its assets, which had the advantage that UMNO per se would not longer be criticized for political business ties and that UMNO leaders were no longer responsible to party members for the use of party assets. 858 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (99). 859 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (98). 860 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (161); Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (123, 124). 861 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (124). 862 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 147–151. While Mahathir favored reducing interest rates and raising liquidity in the market, Anwar implemented cuts in government spending, introduced higher interest rates, and reduced liquidity, see Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (104, 105).

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IMF was regarded with skepticism as it was generally feared that the IMF would request the dismantling of the New Economic Policy.863 During the first days of September, Mahathir opted for capital controls, coupled the Ringgit to the US$ and dismissed Anwar as vice prime minister and minister of finance.864 Gomez assumes that Mahathir believed that Anwar would no longer protect the powerful vested interests that had emerged during his time as prime minister.865 He argues that, in the aftermath of the Asian crisis, good state assets were transferred to individuals while debts and debt-ridden companies owned by these same people were being taken over by the government.866 When Anwar was accused of sodomy, corruption and abuse of power and sentenced to six years in prison in a show trial in April 1999, the newly emerged middle-class lost trust in the government and state institutions.867 Until then, it had not pushed for further democratization because most middle class Bumiputeras were civil servants or employed by state-owned enterprises and saw the UMNO as the protector of their interests.868 Anwar became the leading figure of a protest movement that promoted the rule of law, democracy, economic equality, and the fight against corruption.869 The obviously unfair treatment of Anwar unified the opposition against the government.870 For the first time, a real multiethnic opposition emerged.871 While the opposition struggled during the elections in 1999 and 2004, it 863 Jomo, Kwame Sundaram / Gomez, Edmund Terence, The Malaysian Development Dilemma, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 274 (275). 864 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 150, 151. 865 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (104, 105). Anwar later stated that he had opposed to the bailout of some companies as proposed by the government. 866 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (109). After the Asian crisis, UMNO leaders relied on Chinese businessmen who had benefited from state patronage to bailout wellconnected Malay businessmen in trouble, reflecting Chinese businessmen’s capital subordination to Malay political hegemony, see p. 103, 104. 867 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 154; Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (106). 868 869 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 151–152. Anwar was released from prison in September 2004. 870 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 152, 153. 871 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 154. In April 1999, a new multi ethnic opposition party, Parti Keadilan Nasional (National Justice Party, later Barisan Alternatif) under the leadership of Anwar ’s wife, Wan Azizah, was founded, which was supported by a wide range of civil society actors.

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was remarkably successful in the 2008 elections.872 This time, more than half the Chinese and Indian population voted against the BN.873 While the BN won 140 federal seats and 307 state seats, the Opposition took 82 federal seats and 198 state seats.874 The Opposition won in five of the 13 states: Selangor, Penang, Perak, Kedah and Kelantan.875 The BN therefore lost its two-third majority in parliament. Saravanamuttu suggests that the development created a de facto two-party system.876 Today, there is a lively debate on the achievements of the New Economic Policy. It achieved its aim of producing a Malay middle class and of reducing the interethnic inequality gap: the household mean income disparity ratio between Chinese and Malay households decreased from 2.29 in 1970 to 1.74 in 1999.877 Mahathir ’s goal of establishing a class of Malay capitalists was also realized. However, after the Asian crisis that severely affected many wellconnected Malay businessmen, the question raised was whether these businessmen were real capitalists capable of surviving without political patronage or merely rent-seekers. Searle argues that the amalgam of state, party and private economy gave birth both to rent-seekers and entrepreneurs as well as many groups that fall between the two.878 He finds that more Bumiputera groups are developing greater independence from patronage.879 Searle argues 872 Despite various difficulties, the Barisan Alternatif, which included inter alia the secular DAP and the Islamic PAS, won 42 out of 193 seats in the 1999 election. While the UMNO only won 72 seats compared to 88 in 1995, many Chinese and Indians voted for the MCA and the MCI, probably because they were afraid of the Islamism of PAS. However, the BN was strengthened again when increasing discourse on Islamic policies and the introduction of sharia law forced the PAS to elaborate their vision of an Islamic state and led to the withdrawal of the secular DAP from the Barisa Alternatif in 2001 and therefore to its weakening. In June 2002, Mahathir declared his intention to resign from office and in October 2003, his deputy, Abdullah Ahmad Badawi, replaced him as prime minister. In the elections in 2004, BN that represented 14 parties won 64.4 percent of votes and 198 of the 219 seats in the national parliament. See Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 156–157, 177, 180–181. 873 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 194. 874 Saravanamuttu, Johan, Political Transformation and Intrigue in an Election Year in: Singh, Daljit (ed.), (2009) 173 (175). 875 Saravanamuttu, Johan, Political Transformation and Intrigue in an Election Year in: Singh, Daljit (ed.), (2009) 173 (176, 177). This was especially significant as even in its worst performance in the past, BN won all but two state governments (Kelantan and Terengganu in 1959 and 1999), see p. 175. 876 Saravanamuttu, Johan, Political Transformation and Intrigue in an Election Year in: Singh, Daljit (ed.), (2009) 173. 877 Lee, Hock Guan, Affirmative Action in Malaysia, in: Chin, Kin Wah / Singh, Daljit (ed.), (2005) 211 (213). 878 Searle, Peter, The Riddle of Malaysian Capitalism (1999) 246. 879 Searle, Peter, The Riddle of Malaysian Capitalism (1999) 246.

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that ethnic Chinese and Malay capital are no longer discrete entities, but have become more integrated and mutually dependent, sharing common goals.880 In contrast to Searle, Gomez expresses serious doubts on the effectiveness of the government’s policy. He concludes from the fact that government-owned enterprises and Chinese businessmen survived the Asian crisis better than well-connected Bumiputera businessmen, that the selected Malay businessmen were not independent entrepreneurs.881 He also criticizes the concentration of political power for seriously affecting property rights.882 On the one hand, the small elite of well-connected Malay businessmen, who profited from political patronage and the distribution of government concessions, abused their control over large parts of the corporate sector to squeeze out other, mainly small, shareholders.883 On the other hand, they were dependent on whether their patrons remained in power and they often had to struggle to protect their corporate interests once their patrons lost influence.884 By 2006 most businesses owned by well-connected individuals were no longer among the top 100 Malaysian firms.885 As businessmen with few links to politicians also feared expropriation, even these rather independent businessmen were forced to build connections with influential politicians.886 Furthermore, political patrons

880

Searle, Peter, The Riddle of Malaysian Capitalism (1999) 248, 249. Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (164). Although there were attempts by the government to force businessmen who had access to government concessions to compete, these attempts did not seem to have created independent entrepreneurship, see p. 179. His criticism is supported by the fact that in 2001, there were six government-owned corporations, three owned by ethnic Chinese and one with a government stake under the top 10 corporations listed on KLSE, but no Bumiputera-controlled corporations, see p. 165. Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (122) argues that most Chinese businessmen even became more competitive as they were forced to survive in an environment that discriminated against them. 882 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (129). 883 Gomez, Edmund Terence, Politics in Business: UMNO’s Corporate Investments (1990) 9. 884 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (126). When Mahathir marginalized Anwar in 1998 and Daim in 2001, the vast corporate assets owned by their allies were reallocated to government institutions or private individuals, see p. 135. 885 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (126). 886 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (163, 171). 881

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could always count on their connected businessmen to bail them out and secure control over certain interests.887 Gomez finds that “institutions and individuals who have ownership of key corporations seem to have little control over these enterprises. Control appears ultimately to be in the hands of political elites to whom these businessmen are closely linked”888.

He therefore concludes that entrepreneurs remain ultimately responsible to the prime minister and not to their shareholders.889 He also remarks that, although politicians do not interfere as much in state-owned enterprises as they do in private firms of politically well-connected owners, there is, however, some danger that the state will abuse listed government-controlled enterprises to acquire politically linked companies.890 The New Economic Policy also gave rise to other negative consequences because members of the other ethnic groups felt discriminated against, especially regarding access to the education system and employment in the public sector.891 Furthermore, the increasing intraethnic inequality gap, especially among Malays, since the late 1980s has raised questions about the ethnic preferential policy.892 While the policy used to be criticized in the past mainly by Chinese and Indians, in recent times criticism has also come from the Malay community.893 Moreover, non-Malay Bumiputeras especially have been neglected by the NEP.894 For the rest, it is highly controversial to what extent state involvement in the corporate sector contributed to enhancing corporate ownership for Bumiputeras. The government introduced various measures in order to restruc887 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (96, 97). 888 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (179). 889 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (179). 890 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (179). 891 For example, as many Chinese and Indian parents had their children educated in private primary schools and foreign universities, there is now a highly ethnic segregation in the education system, see Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 123. Only 2.1 percent and 4.3 percent of students in the national primary schools were Chinese and Indians respectively. 892 Lee, Hock Guan, Affirmative Action in Malaysia, in: Chin, Kin Wah / Singh, Daljit (ed.), (2005) 211 (220). 893 Lee, Hock Guan, Affirmative Action in Malaysia, in: Chin, Kin Wah / Singh, Daljit (ed.), (2005) 211 (225). 894 Lee, Hock Guan, Affirmative Action in Malaysia, in: Chin, Kin Wah / Singh, Daljit (ed.), (2005) 211 (220, 221). This growing class inequality contributed to the poor results for UMNO in the elections of 1999, p. 220.

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ture corporate equity as one goal of the New Economic Policy. In 1975, a government ruling provided that each listed company had to ensure that a minimum of 30 percent of its equity was allocated to Bumiputera agencies or individuals. Furthermore, it started to sell shares to Bumiputeras, but this strategy was not successful as they used to sell their shares when stock prices increased.895 Research on how to develop a strategy to restructure corporate equity led to the creation of the Bumiputera Investment Foundation (Yayasan Pelaburan Bumiputera, YPB). The YPB provides funds to subscribe to shares in companies that issue their shares to Bumiputeras according to the requirements of the New Economic Policy. On March 17, 1978, Permodalan National Berhad (PNB) was established in order to implement the NEP by promoting share ownership in the corporate sector among Bumiputeras and by developing opportunities for Bumiputera professionals to participate in the creation and management of wealth.896 In 1979, the National Unit Trust Limited (Amanah Saham Nasional Berhad, ASNB) was founded to establish and manage a National Unit Trust Scheme (Amanah Saham Nasional, ASN).897 The PNB obtains shares from four sources of investment: the open market, IPOs (the PNB has a priority right), restructuring from the Ministry of Trade and Investment, and transfer schemes from the government to Bumiputeras.898 Statistics on the distribution of corporate wealth among the different ethnic groups vary significantly depending on the method of data collection. The Economic Planning Unit normally employs the data mentioned in table 39, p. 209, according to which Bumiputeras held 18.9 percent of corporate wealth in 2009. However, an analysis by the Asian Strategy and Leadership Institute (ASLI) assumed 45 percent of Bumiputera equity.899 The publication of these findings provoked a massive reaction from UMNO politicians and led to the resignation of ASLI director, Lim Teck Ghee.900 M. Fazlah of the University of Malaysia calculated the stake as 33.7 percent in 1997.901 The Ministry of Finance stated it was 36.6 percent in 2006.902 The government figures seem to have drawn widespread criticism.903 895

Interview with an employee of the PNB. http: /  / www.pnb.com.my / about / about_us.cfm?cat=2&subcat=1. 897 Interview with an employee of the PNB. 898 Interview with an employee of the PNB. 899 Lim, Thek Ghee, Corporate Equity Distribution (2006) 18. 900 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 272. 901 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 272. 902 Ufen, Andreas, Ethnizität, Islam, Reformasi (2010) 272. 903 Gomez, Edmund Terence, Political Business in Malaysia, in: Gomez, Edmund Terence (ed.), (2002) 82 (85). 896

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209

Table 32 Malaysian Equity Held by Ethnicity

904

1969

1970

1975

1980

1985

1990

1995

1999

2004

Bumiputera individuals and trust agencies

1.5

2.4

7.8

12.5

17.8

19.3

20.6

19.1

18.9

Chinese

22.8

27.2

27.9

n.a.

n.a.

45.5

40.9

37.9

39.0

Indians

0.9

1.1

1.2

n.a.

n.a.

1.0

1.5

1.5

1.2

Others

–

–

–

–

–

0.3

1.0

0.9

0.4

Nominee companies

2.1

6.0

8.2

n.a.

n.a.

8.5

8.3

7.9

8.0

Locally controlled firms904

10.1

–

–

–

n.a.

0.3

1.0

–

–

Foreigners

62.1

63.3

54.9

42.9

25.5

25.4

27.7

32.7

32.5

Source: Second Malaysia Plan (p. 40), Third Malaysia Plan (p. 184), Fifth Malaysia Plan (p. 107), Seventh Malaysia Plan (p. 86), Eighth Malaysia Plan (p. 64), http: /  / www.epu.gov.my / previousplan.

In any case, the data give evidence for the assumption that the New Economic Policy only benefitted a small elite of politically well-connected Malays. In 2004, individual Bumiputeras held 15 percent of share capital, institutions 2,2 percent and trust agencies 1.7 percent.905 This equals 79.4 percent for Bumiputera individuals and 20.6 percent for institutions and trust agencies. One interviewee mentioned that, in the beginning, it was generally thought that as a class Malay millionaires would help to advance other Bumiputeras but this goal was not achieved.906 In the meantime, other concerns are growing. Some Malaysian policy makers are afraid that Malaysia is losing its economic competitiveness to new emerging countries, especially China and India.907 There is criticism that the ethnic preferential policy could negatively affect Malay individual and collective competitiveness.908 Prime Minister Najib abolished the re904 Locally controlled firms are companies whose ownership could not be disaggregated further and assigned to specific ethnic groups. 905 The Economic Planning Unit – Prime Minister’s Department, Malaysia, Ninth Malaysia Plan 2006–2010 (2006) http: /  / www.epu.gov.my / html / themes / epu / html /  rm9 / english / Chapter16.pdf. 906 Interview with an employee of the PNB. 907 Hew, Denis, The Malaysian Economy – Developments and Challenges, in: Singh, Daljit / Than, Tin Maung Maung (ed.), (2008) 207 (217). 908 Lee, Hock Guan, Affirmative Action in Malaysia, in: Chin, Kin Wah / Singh, Daljit (ed.), (2005) 211 (221).

210

C. The Factual Protection of Minority Shareholders

quirement that 30 percent of shares had to be sold to Bumiputeras. Instead, a new regulation of the Securities Commission provides that half the 25 percent public shareholding spread is to be reserved for Bumiputeras.909 Nevertheless, the New Economic Policy remains a highly controversial and extremely sensitive issue. Any analysis that aims to assess the political will to reform the corporate sector can only be understood in the light of this controversy. 2. Features of the Malaysian Corporate Sector a) The State as Owner, Shareholder and Investor A key feature of the business sector in general and the corporate sector in particular is the strong role of the state. The state is actively engaged in the business sector through government-linked companies and governmentlinked investment companies. Government-linked investment companies are investment companies in which the government exercises influence by appointing board members and senior management who in turn directly report to the government, and which provide funds for operations and / or guarantee capital and some income placed by unit holders.910 The current definition includes seven GLICs: Khazanah Nasional Berhad, (KNB), the Employees Provident Fund (EPF), Kumpulan Wang Persaraan (KWAP), Lembaga Tabung Angkatan Tentera (LTAT), Lembaga Tabung Haji (LTH), Ministry of Finance Inc. (MoF Inc.) and Permodalan Nasional Berhad (PNB).911 Government-linked companies are companies that have a primary commercial objective and in which the Malaysian government has a direct controlling stake. This stake is defined as the ability of the government to appoint board members and senior management and to make major decisions either directly (through Khazanah, MoF Inc., KWAP, and BNM) or through government-linked investment companies or other federal government-linked agencies.912 GLCs also include companies in which the GLCs themselves have a controlling stake, that is, subsidiaries and affiliates of GLCs.913 Today, the listed government-linked companies account for approximately 36 percent of the market capitalization of Bursa Malaysia and for 54 percent of the benchmark Kuala Lumpur Composite Index.914 909 http: /  / www.sc.com.my / main.asp?pageid=750&menuid=867&newsid=&linkid =&type=. 910 http: /  / www.pcg.gov.my / FAQ.asp. 911 http: /  / www.pcg.gov.my / FAQ.asp. 912 http: /  / www.pcg.gov.my / FAQ.asp. 913 http: /  / www.pcg.gov.my / FAQ.asp. 914 http: /  / www.pcg.gov.my / FAQ.asp.

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211

Massive state involvement in the business sector dates back to the early 1950s when the government started to establish state-owned enterprises (SOEs) for the purpose of affirmative action.915 The number grew from ten in 1957 to 22 in 1960 to 109 in 1970, then increased to 656 in 1980 and finally to 1,014 in 1985 before ceasing to grow.916 In 1983 the government introduced a privatization policy for SOEs, but which did not start in earnest before the late 1980s.917 However, privatization also included only partial divestiture where less than half the assets or shares were sold to private shareholders. In some enterprises, the government retained a golden share, which allowed it to retain control or at least veto powers even with considerably diminished minority ownership.918 Privatization often did not involve the formalities of an open tender and primarily enriched a few politically well-connected people.919 By March 1990, there were 1,158 SOES, with 396 (= 34 percent) that were fully government-owned, 429 (= 37 percent) in which the government held a majority stake, and 333 (30 percent) in which the government held a minority stake.920 SOEs were held almost equally between federal and state governments with 556 and 553 companies respectively and a few regional ones (49).921 It is estimated that, at this time, the SOE sector output accounted for around 25 percent of GDP.922 After the Asian crisis, a re-nationalization program started as the government bailed out enterprises.923 915 Jomo, Kwame Sundaram / Gomez, Edmund Terence, The Malaysian Development Dilemma, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 274 (288). 916 Jomo, Kwame Sundaram / Gomez, Edmund Terence, The Malaysian Development Dilemma, in: Khan, Mushtaq H. / Jomo, Kwame Sundaram (ed.), (2000) 274 (288). However, the accountability and performance of SOEs were low: For more than 900 identified SOEs in 1984, the Minister of Public Enterprises could report annual returns for only 269, and recorded an accumulated loss of RM137.3 million, see p. 289. 917 Jomo, Kwame Sundaram, Privatization’s Distributional Impact in Malaysia (2002) 4–5. 918 Jomo, Kwame Sundaram, Privatization’s Distributional Impact in Malaysia (2002) 15. 919 Jomo, Kwame Sundaram, Privatization’s Distributional Impact in Malaysia (2002) 19, 20. 920 Jomo, Kwame Sundaram, Privatization’s Distributional Impact in Malaysia (2002) 5. 921 Jomo, Kwame Sundaram, Privatization’s Distributional Impact in Malaysia (2002) 6. 922 Jomo, Kwame Sundaram, Privatization’s Distributional Impact in Malaysia (2002) 5. Almost half of the 1.148 enterprises made a loss, amounting to a net loss of RM1.9 billion. Some 562 companies had total losses of RM7.5 billion, see p. 5. 923 Jomo, Kwame Sundaram, Privatization’s Distributional Impact in Malaysia (2002)42. These were companies that were viewed as being owned by cronies of the government.

212

C. The Factual Protection of Minority Shareholders

Government-linked investment companies are very active actors in the Malaysian business sector. Khazanah Nasional Berhad was established in 1993 as the investment holding arm of the Malaysian government. The Khazanah board of directors is chaired by the prime minister. Except for one share owned by the federal Land Commissioner, equity in Khazanah is owned by the Ministry of Finance Inc., which is controlled by the Ministry of Finance. It has invested in over 50 companies, among them 21 listed firms, and holds a majority stake in most of its investee companies.924 Alternatively, it controls its corporations through golden shares.925. At the end of 2009, the net worth of its portfolio amounted to RM54.1 billion.926 The Employees Provident Fund (EPF), an agency of the MoF, is a social security institution that provides retirement benefits for members. Its members, who number 12.07 million, include private and non-pensionable public sector employees.927 Assets in 2008 amounted to RM346.098 million.928 From 2004 to 2007, investment in equity amounted to around 20 percent and then increased to 25.71 percent in 2008 (= RM87.948 million).929 In the past, the EPF held shares in around 500 investee companies.930 The PNB is a commercial organization that aims to promote Bumiputeras by transferring a substantial number of shares acquired in major Malaysian corporations from funds provided by the Bumiputera Investment Foundation to a trust fund and then selling smaller units of the fund to Bumiputeras.931 In 2009, the PNB had around eight million account holders932 and more than RM58 billion worth of funds under its management, comprising both proprietary and unit trust funds.933 As unit holders are 924 http: /  / www.khazanah.com.my / . The exact investment holding structure can be viewed on http: /  / www.khazanah.com.my / docs / investStruc_public_31Mac10.pdf. 925 Interview with a representative of the Federation of Public Listed Companies. 926 Tan, Yvonne, thestar online, January 15, 2010. 927 http: /  / www.kwsp.gov.my / index.php?ch=p2corporateinfo&pg=en_p2corporateinfo_geninfo&ac=1856. 5.7 million members are active and contributing members. 928 http: /  / www.kwsp.gov.my / index.php?ch=p2reports&pg=en_p2reports_statistic &ac=996. 929 http: /  / www.kwsp.gov.my / index.php?ch=p2reports&pg=en_p2reports_statistic &ac=996. Investment in equity amounted to 20 percent in 2004, 19.09 percent in 2005, 19.20 percent in 2006, 21.17 percent in 2007 and 25.71 percent in 2008 (= RM87.948 million). 930 Interview with employees of the EPF. 931 http: /  / www.pnb.com.my / about / about_us.cfm?cat=2&subcat=1. 932 http: /  / www.pnb.com.my / business / business.cfm?cat=2&subcat=2&subsub cat=1. 933 http: /  / www.pnb.com.my / business / business.cfm?cat=2&subcat=5&subsub cat=1.

III. Malaysia

213

guaranteed a fixed return and may request that their savings be distributed at any time, the structure resembles a savings account rather than a fund.934 In the same year, the PNB had investments in more than 250 listed and unlisted companies.935 These companies can be divided into two groups: core companies that it controls (meaning that it holds more than 50 percent of shares), and companies in which its role is limited to receiving dividends.936 Furthermore, the PNB had invested in 12 core companies in strategic sectors such as banking and growth areas, and intended to increase the number to 20 in different sectors during the next few years.937 This strategy aims to create employment opportunities for Bumiputeras and to promote Bumiputera professionals.938 The decision to acquire a controlling stake of more than 50 percent is made by the investment committee.939 Different departments are responsible for managing the companies in which the PNB either has a controlling or non-controlling stake.940 Lembaga Tabung Haji (LTH or TH) was founded in 1963 to help Muslims to finance their Hajj (pilgrimages to Mecca).941 It had 5.1 million depositors and total funds of RM23.6 billion in 2009.942 It was established because Muslims used to sell their property in order to be able to perform the Hajj. As it costs around RM10,000, every Muslim has to deposit this sum. The LTH invests the money deposited and also offers subsidized packages for the Hajj.943 Its investments are based on Islamic principles. As the LTH tends to pay higher dividends than other funds, even people who do not intend to perform the Hajj have started to invest in it.944 Lembaga Tabung Angkatan Tentera (LTAT) was established in 1972 as a superannuation scheme for the armed forces.945 In February 2010, its assets amounted to RM7.5 billion.946 Kumpulan Wang Persaraan (Diperbadankan) (KWAP) or the Retirement Fund (Incorporated) was established in 2007 to manage the retirement 934 935 936 937 938 939 940 941 942 943 944 945 946

Interview with an employee of the PNB. Interview with an employee of the PNB. Interview with an employee of the PNB. Interview with an employee of the PNB. Interview with an employee of the PNB. Interview with an employee of the PNB. Interview with an employee of the PNB. Jayaseelan, Risen, thestar online, February 27, 2010. Tabung Haji board defends investments, in: Daily Express, March 12, 2010. Jayaseelan, Risen, thestar online, February 27, 2010. Interview with a representative of the Federation of Public Listed Companies. http: /  / www.ltat.org.my / webltat / indexEng.html. LTAT announces payout of RM575 m, in: thestar online, February 12, 2010.

214

C. The Factual Protection of Minority Shareholders

fund.947 Generally, the KWAP’s investment in equities is divided into two broad categories: internal equity, which is managed by the internal portfolio managers of KWAP, and external equity, which is managed by external fund managers.948 Internal equity constitutes 21.9 percent of the KWAP’s fund size at market value.949 Currently, this allocation is entirely invested in the domestic market across all sectors available in Bursa Malaysia.950 In 2005, the Putrajaya Committee on GLC High Performance (PCG) was established in order to design and implement comprehensive national policies and guidelines to transform GLCs into high-performing entities, and to establish the institutional framework for program management and execution monitoring.951 It comprises the EPF, TH, LTAT, PNB and Khazanah as well as representatives of the MoF Inc. and the Prime Minister’s Office. A series of ten initiatives was launched over the course of 2005 to 2006, which are now implemented by GLICs and GLCs. The initiative for the program came mainly from the Khazanah, which in general delivered a lower performance than the other government-linked investment companies, for example, the PNB and EPF.952 In the best-case scenario, this program will not only result in higher corporate governance standards for government-linked companies but also exercise pressure on the capital market as a whole. b) Ownership Structure and Means of Control Claessens et al. found that, before the Asian crisis, ownership concentration in Malaysian listed corporations was high.953 It seems that the Asian crisis did not change this high concentration. In a study of 731 public listed companies in the KLSE in December 1998, Samad found that ownership was highly concentrated in the hands of a few shareholders, with second board companies having even more concentrated ownership than main board companies.954 The five largest shareholders owned about 58 percent of the total equity in the corporate sector.955 http: /  / www.kwap.gov.my / En / AboutKWAP / Pages / background.aspx. http: /  / www.kwap.gov.my / EN / Investments / Equity / Pages / default.aspx. 949 http: /  / www.kwap.gov.my / EN / Investments / Equity / Pages / default.aspx. 950 http: /  / www.kwap.gov.my / EN / Investments / Equity / Pages / default.aspx. 951 Putrajaya Committee on GLC High Performance, Malaysia, GLC Transformation Programme: Mid-Term Progress Review (2009) 9. 952 Interview with an employee of the Khazanah. 953 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92). 954 Samad, Fazilah Abdul, Ownership structure in the Malaysian Corporation Sector (2002) 6. 955 Samad, Fazilah Abdul, Ownership structure in the Malaysian Corporation Sector (2002) 5. 947 948

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215

Table 33 Shareholdings of Five Largest Shareholders in 731 KLSE Corporations in 1998 1st

2nd

3rd

4th

5th

Mean

30.30

12.47

7.32

5.01

3.74

58.84

Median

27.80

11.51

6.94

4.84

3.65

60.43

Statistics

Shares owned by five largest shareholders

Source: Samad, Fazilah Abdul, Ownership structure in the Malaysian Corporation Sector (2002) 5.

Table 34 Ownership Concentration for 731 Listed Corporations in 1998 Main Board

Second Board

Total

Percentage of corporations in which the five largest shareholders control more than 50 %

69.5

76.1

71.4

Percentage of corporations in which the five largest shareholders control more than 66.7 %

36.9

38.0

37.2

Percentage of corporations in which the five largest shareholders control more than 80 %

9.6

6.0

8.5

Source: Samad, Fazilah Abdul, Ownership structure in the Malaysian Corporation Sector (2002) 6.

Furthermore, in 71.4 percentage of companies, the five largest shareholders controlled more than 50 percent. According to the MSWG, in general, companies that are listed today, have less concentrated ownership than companies that were listed in the past.956 However, the MSWG estimates that a stake of 20 percent is sufficient to control a corporation.957 Compared to other East Asian countries, the number of listed companies with one ultimate controlling shareholder is small. According to Classens 956 957

Interview with a representative of the Minority Shareholder Watchdog Group. Interview with a representative of the Minority Shareholder Watchdog Group.

216

C. The Factual Protection of Minority Shareholders Table 35 Control in 238 Malaysian Companies in 1996

Cut-off

Widely held

Family

State

Widely held financial

Widely held corporation

10 %

1.0

57.5

18.2

12.1

11.2

20 %

10.3

67.2

13.4

2.3

6.7

Source: Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (103).

et al., 40.4 percent of companies that were not widely held had an ultimate owner, compared to 67.8 percent on average in East Asian companies.958 The true ownership of investment is difficult to evaluate due to the high percentage of nominee shareholders. Gomez argues that political parties and politicians use nominee companies to conceal their ownership of corporate equity.959 Several studies indicate that a large number of companies are controlled by families or by the state. Regarding family ownership, Claessens et al. found in their analysis of 238 listed companies in 1996 that, measured at the 10 percent cut-off level, 57.5 percent of companies were family-controlled.960 At the 20 percent cut-off, family control increased to 67.2 percent.961 Brown argues that families were able to maintain a high level of family ownership or control by raising funds through rights issues rather than public issues.962 However, after the Asian crisis, the importance of families declined whereas the importance of the state increased. According to surveys by the Federation of Public Listed Companies (FPLC), while familyrun businesses used to represent 50 to 55 percent of shares in the past, they 958 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92). Interestingly, the correlation between the number of years a corporation has been in operation, and the control stake of the largest owner, is 0.308, which means that older firms in Malaysia tend to have more concentrated corporate control. This contradicts conventional wisdom whereby older firms tend to have more dispersed ownership than younger firms. 959 Gomez, Edmund Terence, Politics in Business: UMNO’s Corporate Investments (1990). 960 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (103). 961 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (103). 962 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 147–149. Funds mobilized through public issues by Malaysian companies during the years 1973–1998 amounted to MR 14.681 million while funds mobilized by rights issues during the same period amounted to MR48.095 million, see p. 148.

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217

Table 36 Concentration of Control and Company Size in Malaysian Corporations Category

Widely held

Family

State

Widely held financial

Widely held corporation

All firms

10.3

67.2

13.4

2.3

6.7

Largest 20

30.0

35.0

30.0

0.0

5.0

Middle 50

12.0

69.0

10.0

4.0

5.0

Smallest 50

0.0

84.0

5.0

2.0

9.0

Source: Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (106).

now represent only 38 to 39 percent of shares.963 Government-linked companies used to represent 10 to 15 percent of the shares but now represent around 20 percent.964 An interesting fact was that family control was especially high among smaller companies while state control was higher among larger companies.965 Another significant feature of Malaysian companies is the use of pyramidal and cross-holding structures. Claessens et al. found that, among the 238 companies in which the largest controlling owner held at least five percent of the vote, 23.89 percent of cash-flow rights and 28.32 percent of voting rights were held on average by the largest shareholder.966 For 39.3 percent of Malaysian companies, ultimate control at the 20 percent level involved the use of pyramidal structures.967 For 14.9 percent of Malaysian companies, it also involved the use of cross-ownership, which was high compared to other Asian countries.968 Nevertheless, Gomez found that, in 2000, there was less interlocking ownership among Malaysia’s leading quoted firms than in the 1970s.969 Interestingly, separation between ownership and con963

nies. 964

nies. 965

Interview with a representative of the Federation of Public Listed CompaInterview with a representative of the Federation of Public Listed Compa-

Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (106). Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (100). 967 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92). 968 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92). 969 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (176). Lim, Mah Hui, Ownership and Control of the One Hundred Largest Corporations in Malaysia (1981) 114–115 found In his analysis of the top 100 listed firms on the KLSE in 966

218

C. The Factual Protection of Minority Shareholders Table 37 Separation of Ownership and Control in Malaysian Corporations

Category

Family

State

Widely held financial

Widely held corporation

All firms

0.785

0.959

1.000

0.895

Largest 20

0.942

0.871

n.a.

1.000

Middle 50

0.787

1.000

1.000

0.752

Smallest 50

0.795

0.692

1.000

0.789

Source: Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (102).

trol not only occurred in family-controlled firms but also in companies controlled by the state or widely held corporations. The ratio of cash-flow rights to voting rights was 0.853.970 According to the World Bank, due to the adoption of disclosure and stringent related-party transaction requirements, pyramidal structures disappeared in the aftermath of the Asian crisis.971 Empirical evidence, however, does not confirm this finding. Several studies that inter alia analyzed certain features of Malaysian listed corporations also found pyramidal structures. Ng et al., analyzing 84 out of the 100 largest publicly listed firms in Malaysia in 2008, found that 21 percent of family-controlled firms exhibited pyramidal ownership structures.972 Malan et al., studying the pyramidal structures of Malaysian firms from 1990 to 2010 found that, on average, the ultimate owner of pyramid firms had 22.18 percent of cash flow rights in each of the firms they controlled, and 35.94 percent of control rights.973 A further feature of Malaysian corporations is the involvement of the controlling shareholder in management. Data from Claessens et al. revealed that 85 percent of companies that were not widely held had the controlling owner appoint a member of management.974 the late 1970s significant interlocking stock ownership among a few corporate groups. 970 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (100). 971 World Bank, Corporate Governance Country Assessment Malaysia (2005) 16. 972 Ng, Sin Huei et al., Review of Integrated Business and Economic Research 1 (2012) 179 (189, 190). 973 Malan, Irfah Najihah Basir et al., Business Management Dynamics 2 (2012) 29. 974 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (92).

III. Malaysia

219

Table 38 Control of Malaysian Equity % of total value of listed corporate assets that families control in 1996 Top 1 family

7.4

Top 5 families

17.3

Top 10 families

24.8

Top 15 families

28.3

Source: Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (108).

In his analysis of the top 100 listed firms on the Kuala Lumpur Stock Exchange in the late 1970s, Kim found that control over the economy lay in the hands of a few shareholders: “Of the 1,000 shareholders in sixty-two large corporations, 797 owned 69 percent of equity in these firms. The top 1 percent of these 797 shareholders owned 29 percent of the equity, while the top 50 percent owned 97 percent and the bottom 20 percent only 0.4 percent. The Gini coefficient for this distribution is 0.847 which means that stock ownership is highly concentrated in a few investors”.975

For 1996, Claessens et al. found that the top 15 families controlled 28.3 percent of the total value of listed corporate assets.976 However, in his study on the top 100 corporations listed on the KLSE in 2001, Gomez found that there was rather wide dispersal of ownership of corporate equity instead of concentration of corporate power in the hands of an elite business class, and monopolization of economic sectors.977 Especially among the top 20 corporations, no family or individual seemed to be dominant.978 Gomez reasons that, between the early 1980s and late 1990s, although well-connected businessmen achieved a dominant presence in the corporate sector due to political patronage, they did not manage to secure control over key economic sectors because of intrapolitical elite 975 Lim, Mah Hui, Ownership and Control of the One Hundred Largest Corporations in Malaysia (1981) 114. 976 Claessens, Stijn et al., Journal of Financial Economics 58 (2000) 81 (108). 977 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (171, 178). He highlights the fact that there are no links among the top 100 firms that suggest monopolization of economic sectors, see p. 172. 978 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (171).

220

C. The Factual Protection of Minority Shareholders

conflicts over control of important corporate assets.979 Furthermore, some of the dominant and well-connected conglomerates controlled by individuals or families collapsed after the Asian crisis and some of the companies within these groups were taken over by the government.980 The impact of the change in ownership structure that resulted in more government-linked ownership and less family ownership is difficult to assess. In general, interviewees assessed the corporate governance of institutionally owned corporations as better than that of family-owned corporations, indicating that the protection of minority shareholders is better in the first. The wedge between cash flow and voting rights in family-owned corporations, combined with the nomination of family members as executives and board members, gives, at least in theory, incentives to extract private benefits. On the other hand, interviewees also pointed out that some family-run corporations have started or are in the process of becoming more professional in their management. From a capital market perspective, more institutional ownership does not seem to result in a significantly higher free float and therefore does not seem to contribute to deepening the capital market. 3. The Capital Market The number of listed companies increased only slowly between 1980 and 1990, but during the 1990s the stock market experienced a significant increase in market capitalization. Several factors were responsible for this development. During the 1980s, the government started its privatization program that involved the sale of government assets to individual Bumiputeras or the listing of government-owned corporations on the stock exchange that led to the emergence of a Bumiputera business class. In addition, from the late 1980s on, foreign capital started to flow into Malaysia. The stock market was dominated by a tiny minority of large corporations controlled by the state, Chinese or newly emerged Bumiputera businessmen and large domestic institutional investors that included SOEs, government-linked investment companies, private companies and pension-fund holders. Brown argues that, in a weak regulatory environment, these factors prevented fair share pricing and an efficient allocation of resources on the stock market, 979 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (173). For example, when Anwar and Daim, who had significant indirect control over the corporate sector, were marginalized by Mahathir, the assets owned by their allies were reallocated to individuals or the government, see p. 178. 980 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (173).

III. Malaysia

221

resulting in a highly volatile market.981 Furthermore, a wave of mergers and acquisitions among large private groups from the mid-1980s led to ‘share fever ’, which was aggravated by large foreign capital inflows.982 Today’s Malaysian stock market is characterized by domestic institutional investorship linked to the state, a growing number of nominee shareholders, an increasing number of retail investors, a highly volatile market and a low free float. The MSWG found in its Shareholdings Analysis Report 1997–2006 that nominee accounts had nearly doubled between 1997 and 2006 and were a widely used method of investment.983 According to the report, the amount of paid-up capital by nominees had increased from RM47,819,002,936 in 1997 to RM88,442,893,984 in 2006 and nominee account holders saw an increase of 110 percent between 1997 and 2006.984 The MSWG raised the question of whether the categories of account holders showing a decline had moved into the nominee categories.985 It points out that the increased use of nominee investment makes it difficult to assess the true ownership of investment, which in turn may lead to greater expropriation of wealth at the expense of minority shareholders.986 In 2006, Brown noted a growing foreign share ownership in industrial and manufacturing companies, particularly in capital-intensive, high-tech sectors.987 Foreign investors seem to have some influence on the development of the stock market: the MSWG assumes that the confidence of local investors is influenced by the decision of foreign investors to retain, increase or exit the Malaysian equity market.988 In the 1990s, with the rise of a middle class, the number of retail investors increased significantly.989 Shareholding analyses by the MSWG show 981 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 144–147. 982 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 165. 983 Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 20. 984 Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 10, 13. 985 Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 13. 986 Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 21. 987 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 145. 988 Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 18. 989 Gomez, Edmund Terence, Paradoxes of Governance, in: Gul, Ferdinand A. / Tsui, Judy S. L. (ed.), (2004) 117.

222

C. The Factual Protection of Minority Shareholders Table 39 Percentage Changes in Categories of Malaysian Account Holders Percentage change from 1997 to 2006

Total individual holders

+35 %

Total bank holders

–41 %

Total investment houses

–45 %

Total corporation holders

–31 %

Total government holders

–15 %

Total nominee holders

+110 %

Total other holders

–67 %

Source: Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 10.

Table 40 Paid-Up Capital by Types of Investors (RM) 1997

2006

15.486.198.332

44.173.144.317

Banks

7.218.109.626

7.254.818.642

Investment Houses

4.210.641.302

1.201.811.095

Corporations

30.292.677.330

48.613.061.601

Governments

9.031.131.174

21.617.794.961

47.819.002.936

88.442.893.984

3.005.601.800

1.557.596.050

117.063.362.500

212.861.120.650

Individuals

Nominees Others All

Source: Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 13.

that retail / individual investors especially had increased since 1997.990 According to a newspaper article, Malaysia intends to increase the participation of retail investors in the stock market to at least 50 percent by 990 Minority Shareholder Watchdog Group / The University of Nottingham, Shareholdings Analysis Report 1997–2006 (2007) 22.

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223

2020.991 Between 2005 and 2011, the participation of retail investors in the stock market amounted to between 24 and 37 percent.992 The last time the participation of retail investors accounted for 50 percent was in 2003.993 The behavior of minority shareholders is significantly influenced by government-linked investment companies / institutional investors.994 The most important institutional investors are the Khazanah, Ministry of Finance Incorporated, National Pension Fund, Permodalan Nasional Berhad, Employees’ Provident Fund, Lembaga Tabong Haji, RHB Nominees (Tempatan) Sdn Bhd, Petroliam Nasional Berhad, Amanah Raya Nominees (Tempatam) Sdn Bhd, and Malaysian Venture Capital Management Berhad.995 There has been a substantial increase in provident and pension funds, insurance funds and unit trusts. Insurance companies in Malaysia do not seem to play a significant role in Malaysia’s equity market.996 Government-linked investment companies often invest in the same companies, leading to large crossovers. Khazanah had investments in 16 listed firms in 2012.997 In 2009, the EPF had investments in around 150 large, main board corporations, with the lowest percentage of shares amounting to 1 percent, the highest to 65 percent.998 The EPF focuses on long-term investment, but does not hold strategic investments. The PNB holds stakes in around 36 listed companies.999 Compared to the other government-linked investment companies, the TH relies heavily on stock market gains for its profit and dividend payouts.1000 In February 2010, its stock market investments made up 43 percent of its total investments.1001 The TH has two portfolios of listed equities: its core and strategic portfolio where it takes a longer term view, gaining from dividend income, and one portfolio of companies in which it primarily invests for capital gains.1002 Unlike other institutional 991

Eu, Goh Thean, Business Time, March 25, 2011. Eu, Goh Thean, Business Time, March 25, 2011. 993 Eu, Goh Thean, Business Time, March 25, 2011. 994 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 145. 995 Bidin, Aishah, Law reform and corporate governance in Malaysia, in: Gillespie, John / Peerenboom, Randall (ed.), (2009) 296 (308). 996 Sum, Rabihah Md., Equity Participation of Insurance Company in Malaysia, Proceedings of International Symposium on Finance and Accounting 2009 (ISFA2009), 6–8 July 2009 (2009). 997 http: /  / www.khazanah.com.my / docs / 31October2012_investment_structure.pdf. 998 Interview with employees of the EPF. 999 Ng, Fintan, Thestar online, February 14, 2012. 1000 Jayaseelan, Risen, thestar online, February 27, 2010. 1001 Jayaseelan, Risen, thestar online, February 27, 2010. 1002 Jayaseelan, Risen, thestar online, February 27, 2010. 992

224

C. The Factual Protection of Minority Shareholders Table 41 Substantial Shareholdings of Malaysian Key Domestic Institutional Investors 1003

Share- 1st Board1003 holding EPF Khazanah

2nd Board LTAT

LTH

PNB

EPF

Khazanah

LTAT

LTH

PNB

5–10

40

4

9

16

22

–

–

1

4

28

10–15

10

-

3

6

10

–

–

–

–

5

15–20

2

1

–

4

3

–

–

–

–

12

20–30

2

–

4

2

2

–

–

1

–

4

30–50

–

1

1

–

5

–

–

–

–

1

> 50

–

1

2

–

2

–

–

–

–

–

Source: Thillainathan, R., Corporate Governance and Restructuring in Malaysia, in: OECD (ed.), (2001) 275 (290).

investors that focus mainly on larger companies listed on Bursa Malaysia, the TH also invests in small and medium enterprises.1004 These institutional investors have, in theory, the potential to monitor the capital market. However, an important factor that limits the impact of their monitoring is that, according to one interviewee, institutional investors only invest in the top 100 publicly listed companies that represent around ten percent of the stock market.1005 The market for corporate control in Malaysia has been described as passive.1006 This fact means that inefficient management is not subject to pressure to perform and it therefore fails to align the interests of management and shareholders in order to enhance the value of the corporation. 1003 Since August 2009, the 1st Board (authorized and paid-up capital min. RM60 million) and 2nd Board (authorized and paid-up capital min. RM40 million) have been reclassified as Main Market with no minimum required in terms of authorized and paid-up capital. 1004 Jayaseelan, Risen, thestar online, February 27, 2010; Tee, Lin Say, thestar online, February 27, 2010. 1005 Interview with a representative of the Federation of Public Listed Companies. 1006 Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 114. For data on the number of acquisitions and number of approved submissions relating to the Malaysian Code on Takeovers and Mergers, see the statistics on the website of the Malaysian Securities Commission under Client Charter / SC scorecard: http: /  / www.sc.com.my / paper.asp?pageid=709&menuid=238&newsid=&year=2012.

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225

The Malaysian stock market is characterized by its highly volatile nature. One interviewee complained about the unpredictability of share prices and the fact that, unlike stock markets overseas, there is no connection between share prices and corporate governance / firm performance.1007 When the public loses confidence in the stock market, all share prices drop, regardless of the individual performance of a corporation.1008 One reason may also be the fact that uneducated retail investors are driven more by herd behavior and rumors rather than sound information. Interviewees pointed out that many, especially Chinese, shareholders, regard the purchase of shares as a form of gambling.1009 In addition, liquidity is an issue in Malaysia as only a small percentage of shares is freely traded on the market.1010 The spread of shares is among the lowest in the world; only a few shares are available on the share market.1011 According to statements by Bursa Malaysia in 2009, the overall market had a free float of 40 to 45 percent.1012 However, the FPLC estimated that the public spread in the stock market in 2009 only amounted to 25 percent.1013 The main reason is that institutional and retail investors hold a fixed percentage of shares, limiting trade.1014 As a response, the listing requirements provide that every listed company must have a public spread of 25 percent in the hands of a minimum number of 1,000 public shareholders holding not less than 100 shares each.1015 The Index rules of the FTSE Bursa Malaysia Index Series, which covers all eligible companies listed on Bursa Malaysia Main and ACE Markets, provide that all FTSE equity index constituents are free-float adjusted.1016 Furthermore, all 1007

Interview with the company secretary of a listed corporation. Interview with the company secretary of a listed corporation. 1009 Interview with a representative of the Federation of Public Listed Companies; and a lawyer. 1010 Interview with employees of Bursa Malaysia. 1011 Interview with a representative of the Federation of Public Listed Companies. 1012 Francis, Isabelle, The Edge, July 1, 2009. 1013 Interview with a representative of the Federation of Public Listed Companies. 1014 Interview with a representative of the Federation of Public Listed Companies. 1015 3.06 (1) LR. A listed issuer must ensure that at least 25 percent of its total listed shares are in the hands of public shareholders but the Exchange may accept a lower percentage if it is satisfied that such lower percentage is sufficient for a liquid market in such shares (8.02 (1) LR).Public shareholders are shareholders holding less than 5 percent of shares and who are not related to directors of the company. However, according to an interview published in Francis, Isabelle, The Edge, July 1, 2009, there were cases whereby a shareholding of institutions (also regarded as ‘collective’ investment scheme) was regarded as a public float. 1016 http: /  / www.ftse.com / Indices / FTSE_Index_Standards / Free_Float.jsp. 1008

226

C. The Factual Protection of Minority Shareholders

companies must have a minimum percentage turnover of free-float adjusted shares dependent on the index specific in order to enter an index or to remain within an index.1017 4. Internal Corporate Governance Practices After the Asian crisis, awareness of corporate governance increased significantly and regulators initiated a series of measures and introduced incentives to enhance standards. Legal measures included amendments to the Companies Act and the Securities Commission Act as well as the consolidation of the securities, futures and fundraising laws into a single legislation for the capital market, the Capital Market Services Act. Furthermore, a Malaysian Code on Corporate Governance was introduced in 2000 and amended in 2007 and 2012. In July 2011, the Securities Commission Malaysia published the Corporate Governance Blueprint, a review of corporate governance practices and regulations in the Malaysian capital market.1018 Important legal amendments included the introduction of statutory derivative action1019 or the extension of the deadline for AGM notices from 7 to 21 days.1020 In addition, protection for whistleblowers was introduced in 2010.1021 One interviewee commented that the greatest resistance of directors to regulatory measures concerned the separation of chairman and CEO, the appointment of credible independent non-executive directors, and the establishment of an effective Risk Management Committee.1022 Other efforts included the establishment of the Malaysian Institute of Corporate Governance and the Institute of Directors. Both associations, however, were criticized for their lack of activism by one interviewee.1023 In response to the lack of activism, in 2007 the Malaysian Alliance of Corporate Directors (MACD) was founded, which aims to represent corporate directors, corporate professionals and business leaders.1024 The MACD hopes to be able in the future to evaluate training programs and courses for http: /  / www.ftse.com / Indices / FTSE_Index_Standards / Liquidity.jsp. http: /  / www.sc.com.my / main.asp?pageid=1087&menuid=&newsid=&linkid= &type=. 1019 Sec. 181 A of the Companies Act. 1020 Sec. 145 (2A) of the Companies Act. 1021 Whistleblower Protection Act 2010 (Act 711). 1022 Interview with a representative of the Malaysian Alliance of Corporate Directors. 1023 Interview with employees of Bursa Malaysia. 1024 Interview with employees of Bursa Malaysia; and a representative of the Malaysian Alliance of Corporate Directors. 1017

1018

III. Malaysia

227

corporate directors and to accredit them.1025 So far, training courses that are offered on the market are not regulated or accredited, meaning that anyone is free to offer such courses. The Securities Commission expects the MACD to contribute to the development of a pool of professional directors who are duly certified.1026 The market sees the Securities Commission as the main actor in enhancing corporate governance.1027 This indicates that there was a top-down approach to corporate governance in the past. Several interviewees pointed out that, as a consequence of increased discussion after the Asian crisis, corporate governance is in general no longer a problem. Interviewees emphasized that corporate governance of publicly listed companies is not a problem but that private companies may have weak corporate governance structures.1028 Nevertheless, other interviewees referred to continuing problems. According to Bursa Malaysia, its investigations of corporations because of suspected wrongdoing concern all types of corporations, indicating that wrongdoing is not more frequent in a specific type of company than in other types.1029 However, several interviewees found that family-run companies especially are reluctant to fully incorporate corporate governance standards.1030 One interviewee remarked that they consider the companies as “their companies”.1031 One institutional investor admitted preferring to invest in institutionally owned corporations because their corporate governance is generally better than that of family-run corporations.1032 One interviewee argued that, in order to make these companies improve their standards, it is important to convince them of the advantages because mere pressure would make them obey in form, but not in substance.1033 Other interviewees, however, expressed the view that family-run corporations have no other choice than to become professional in order to survive.1034 They pointed out that 1025

rectors.

Interview with a representative of the Malaysian Alliance of Corporate Di-

1026 Statement of former Chairman of the Securities Commission, Tan Sri Zarinah Anwar, during her opening remarks at the inauguration of the MACD. 1027 Interview with employees of Bursa Malaysia; a corporate lawyer / senior director. 1028 Interview with employees of the Institute of Integrity. 1029 Interview with employees of Bursa Malaysia. 1030 Interview with the company secretary of a listed corporation; a representative of the Minority Shareholder Watchdog Group; and a representative of the Companies Commission of Malaysia. 1031 Interview with a representative of the Minority Shareholder Watchdog Group. 1032 Interview with a representative of the Federation of Public Listed Companies. 1033 Interview with a representative of the Minority Shareholder Watchdog Group. 1034 Interview with a lawyer, a representative of the Malaysian Alliance of Corporate Directors, and a representative of the Federation of Public Listed Companies.

228

C. The Factual Protection of Minority Shareholders

some corporations have already started to employ outside managers and to invest in the education of their children, who have to prove their managerial skills before they are allowed a management role.1035 Surveys also display mixed results on corporate governance practice in Malaysia. The Corporate Governance Survey Report 2008 found a significant gap between the corporations that received the best score and corporations that received the lowest score.1036 One-half of the surveyed companies complied with less than 75 percent of the recommended best practice guidelines provided by the Listing Requirements and the Malaysian Code on Corporate Governance.1037 Rankings on the observance of shareholders’ rights related to voting at shareholders’ meetings tend to be rather negative. Institutional Shareholder Services ranked Malaysian practice on notice of shareholders’ meetings (as well as that of eight other countries out of 11 Asian countries) as ‘worst global practices’.1038 The ACGA Asian Proxy Voting Survey ranked Malaysia third among China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand, with a score of 58 percent (poor to fair).1039 One interviewee reported that directors of First Board companies are generally aware of their responsibilities and the principles of corporate governance whereas directors of Second Board companies may be less aware.1040 The points concerning internal corporate governance that interviewees criticized related particularly to independent directors and awareness of directors’ duties. A problem mentioned by one interviewee was the fact that, when they discover wrongdoing, internal auditors report to managers instead of to the independent non-executive directors.1041 Another problem is the concentration of AGMs during June: one interviewee commented that four to five AGMs take place every day in June.1042 1035

Interview with a lawyer. Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 7. 1037 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 11. 1038 Allen, Jamie / Jones, Oliver, ACGA Asian Proxy Voting Survey 2006 (2006) 35. Australia, the UK and the US were rated ‘best global practice’, Hong Kong, India, Indonesia and Thailand were rated ‘poor’ and China, Japan, Korea, Malaysia, Philippines, Singapore and Taiwan were rated ‘worst global practice’. 1039 Allen, Jamie / Jones, Oliver, ACGA Asian Proxy Voting Survey 2006 (2006) 21. 1040 Interview with a representative of the Malaysian Alliance of Corporate Directors. 1041 Interview with a corporate lawyer / senior director. 1042 Interview with the CEO of a listed corporation. 1036

III. Malaysia

229

Interviewees pointed out that the board plays the most important role in improving corporate governance standards.1043 Another interviewee stated that the chairman and the CEO are the most important factors.1044 He complained that, in most Malaysian corporations, the CEO is effectively in control because the chairman is a non-executive director who is not well informed.1045 However, if the chairman is a strong figure who is able to control the management, all the guidelines will be followed.1046 One interviewee mentioned a concern in regard to the role of company secretaries in corporate governance. In family-run businesses where the company secretary may be associated with the majority shareholder, it is possible that independent directors would not address her when they had a question but speak to another person.1047 The Malaysian Association of Chartered Companies Secretaries has been criticized by one interviewee for failing to act in cases of complaints about company secretaries.1048 The interviewee suggested that the Malaysian Institute of Chartered Secretaries and Administrators (MAICSA) should improve its monitoring and supervision and act in cases of breaches of the law.1049 In short, nearly all interviewees expressed the view that the laws and regulation are excellent.1050 One interviewee emphasized, however, that transparency is a legal transplant that is foreign to Asian countries.1051 Although all interviewees agreed that the laws and regulation provide adequate protection for minority shareholders, some doubted that minority shareholders are protected in reality. Several speakers at a conference on corporate governance in Kuala Lumpur in 2009 mentioned as an underlying problem the fact that corporate leaders lack commitment to corporate governance as 1043 Interview with an employee of Khazanah; a representative of the Minority Shareholder Watchdog Group; and a representative of the Malaysian Alliance of Corporate Directors. 1044 Interview with a corporate lawyer / senior director. Tam, Kit / Tan, Monica Guo-Sze, Corporate Governance 15 (2007) 208 found that 30 percent of the top 150 listed companies that have ultimate owners have no separation between CEO and chairman. 1045 Interview with a corporate lawyer / senior director. 1046 Interview with a corporate lawyer / senior director. 1047 Interview with a company secretary of a listed corporation. 1048 Interview with a researcher at the faculty of law, International Islamic University Malaysia. 1049 Interview with an employee of the PNB. 1050 Interview with a representative of the Federation of Public Listed Companies. 1051 Interview with a representative of the Federation of Public Listed Companies.

230

C. The Factual Protection of Minority Shareholders

they focus on short-term gains and see corporate governance as a hindrance. Participants complained that the corporate culture in Malaysia promotes greed and corruption that are difficult to combat. Several interviewees agreed that minority shareholders are not protected in Malaysia.1052 One interviewee pointed out that shareholders’ rights are abused in so far as many companies do not pay dividends.1053 In the past, the performance of government-linked companies lagged behind that of their domestic counterparts. In 2004, GLCs showed poorer returns on equity and lower productivity (profits per employee) than nonGLCs among the KLCI 100 companies.1054 In order to improve their performance, the GLC transformation program was introduced in 2004. In 2005, the Putrajaya Committee on GLC High Performance was established with the mandate to design and implement comprehensive national policies and guidelines to transform GLCs into high-performing companies. The committee designed policy guidelines and identified ten initiatives to be implemented by GLCs, including the ‘Green Book – Enhancing board effectiveness’. In a further step, in 2006, the Malaysian Directors Academy (MINDA) was established with the goal of addressing the board performance of GLCs. By October 2009, around 100 directors had received training.1055 According to the Corporate Governance Survey Report 2008, the initiatives bore fruit. At the time of the survey, the GLCs represented 3.95 percent of the surveyed listed companies but 34.90 percent of total market capitalization, 32.68 percent of total reported net profit and 39.16 percent of total liabilities.1056 Seventeen of the surveyed companies were controlled by the Khazanah, seven by the PNB, five by the LTH, four by the LTAT, three by Petronas and the remaining two by the KWSP.1057 The report found that government-linked companies performed better on average.1058 However, the report also states that GLCs of different government agencies adopted different levels of corporate governance.1059 1052 Interview with a corporate lawyer / senior director; and a representative of the Federation of Public Listed Companies. 1053 Interview with a corporate lawyer / senior director. 1054 Putrajaya Committee on GLC High Performance, Malaysia, Initiative 10 – Framework for Continuous Improvement (2006) 3. 1055 Interview with an employee of Khazanah. 1056 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 3. 1057 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 2. 1058 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 9.

III. Malaysia

231

Interviewees also reported that the quality of directors sitting on GLC boards improved. According to interviewees, in the past, directors of government-linked companies were untrained government representatives. These directors now receive training at the MINDA1060. However, one interviewee pointed out that retired government officials who are nominated as directors of GLCs are too old to change their way of thinking.1061 The transformation program also included changes of directors and in management. One interviewee reported that directors (including executives and non-executives directors) of GLCs have to rotate every five years to the board of another GLC.1062 1059

5. Shareholders’ Activism Shareholders’ activism has generally been low in Malaysia. The ACGA assumes that no more than 20 to 30 percent of the total shares held by minority shareholders are being voted in shareholders’ meetings in Asian countries.1063 Ngee argues that institutional investors prefer private briefings with the management, and that retail investors assume that their presence has no influence on the decision-making process.1064 AGMs are generally dominated by retail investors who are more attracted by the gifts and lunch offered than by an interest in the affairs of the company.1065 One interviewee who belonged to a listed corporation reported that, in the past, shareholders arrived in the morning at the beginning of the AGM, collected their gifts, left and returned in order to attend lunch.1066 Many shareholders hold only one share in order to receive the gift that is distributed at AGMs.1067 Companies that dare to abolish such practices fear a significant drop in shareholders’ attendance rate.1068 Interviewees stated that the attend1059 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 10. 1060 Interview with an employee of Khazanah. 1061 Interview with a representative of the Malaysian Alliance of Corporate Directors. 1062 Interview with the CEO of a listed corporation. 1063 Allen, Jamie / Jones, Oliver, ACGA Asian Proxy Voting Survey 2006 (2006)11. 1064 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (117). 1065 Interview with employees of the EPF. See also Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Leong, Ho Khai (ed.), (2005) 102 (122). 1066 Interview with the CEO of a listed corporation. 1067 Interview with the CEO of a listed corporation. 1068 “Lafarge Malayan Cement Bhd. saw a drastic drop in attendance of its AGM in 2004, believed to be the result of its decision not to serve food or give away food vouchers to its shareholders. Its AGM on 12 May 2004 in Petaling Jaya saw the

232

C. The Factual Protection of Minority Shareholders

ing shareholders use to limit their questions to dividends and firm performance and seldom raise questions concerning other issues.1069 In general, shareholders’ meetings last only about half an hour and only a few topics, such as the nomination of directors or appointment of auditors are discussed.1070 Satkunasingam / Shanmugam argue that respect for status and power are embedded in Malay culture and that there is an informal rule to avoid open criticism and confrontation.1071 They also argue that a collectivist culture in Malaysia prevents individuals from being assertive, especially against the will of the majority.1072 Rachagan also argues that Malays do not challenge people who are more powerful.1073 Another reason is the low interest in the management of the company, indicated by the fact that shareholders complain most about dividends and company performance.1074 Koh argues that the preference of institutional investors for private briefings deprives minority shareholders of the opportunity to understand the concerns of institutional investors and the answers of the management.1075 However, shareholders’ activism seems to have increased during the last few years. Interviewees reported that investors tend to be better educated and to raise more questions at AGMs than in the past.1076 The interviewee who complained that shareholders used to come to AGMs only for the gifts and the lunch reported that recently more shareholders remain during the meeting.1077 One interviewee thought that the more active involvement in registration of slightly over 100 shareholders and proxies compared with more than 400 last year. Last year, more than three quarters left after collecting their food vouchers without even stepping into the meeting room”. The Sun, 13 May 2004 “Lafarge Malayan Cement Sees Drastic Drop in Attendance”, quoted in Cheah, Kooi Guan, Corporate Governance Reforms in Malaysia, in: Leong, Ho Khai (ed.), (2005) 85 (99), footnote 7. 1069 Interview with employees of Bursa Malaysia. 1070 Interview with a representative of the Federation of Public Listed Companies. 1071 Satkunasingam, Elsa / Shanmugam, Bala, Journal of Applied Management Accounting Research 4 (2006) 45 (49, 50). 1072 Satkunasingam, Elsa / Shanmugam, Bala, Journal of Applied Management Accounting Research 4 (2006) 45 (50, 51). 1073 Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 1 (42–43). 1074 Interview with employees of Bursa Malaysia. 1075 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (117). 1076 Interview with a researcher of the faculty of law, International Islamic University Malaysia, and the CEO of a listed corporation. 1077 Interview with the CEO of a listed corporation.

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233

company affairs could be due to the reports that the MSWG publishes in the press.1078 Nevertheless, another interviewee pointed out that most questions still concern firm performance and that shareholders are satisfied when the company pays dividends.1079 Results in regard to private enforcement are also mixed. One interviewee commented that there are now lawsuits against majority shareholders.1080 Nevertheless, court petitions filed by minority shareholders, in round figures, are still very rare.1081 Institutional investors have so far not fulfilled the expectations that they would supervise companies and enhance corporate governance standards. One interviewee complained that institutional investors choose the exit strategy and do not make use of their rights.1082 One interviewee claimed that institutional investors do not nominate their own directors or CEOs when they invest in government-linked companies or family-run businesses.1083 Several interviewees pointed out that private institutional investors in particular are not concerned about the corporate governance standards of their investee companies.1084 Even foreign investors seem to play only a passive role.1085 However, they are more active in monitoring firm performance through research and client visits.1086 Interviewees differed in their opinion on the activism of government-linked investment corporations.1087 Several events indicate that at least some GLICs are becoming more active. For example, Bursa Malaysia reported that institutional investors requested Bursa Malaysia to limit the number of directorships on Ma1078 Interview with a researcher at the faculty of law, International Islamic University Malaysia. 1079 Interview with the company secretary of a listed corporation. 1080 Interview with a representative of the Federation of Public Listed Companies. 1081 Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 141 reports that, according to information obtained from the Registry of the Commercial Division of the High Court of Kuala Lumpur, only 45 petitions were filed by minority shareholders in the High Court of Kuala Lumpur during a period of five years prior to the publication of the article. Only 24 petitions out of the total of 45 dealt with substantive law. However, it may be that the information is not totally precise due to imperfect computerization of the Commercial Division, see footnote 153. 1082 Interview with a corporate lawyer / senior director. 1083 Interview with a representative of the Federation of Public Listed Companies. 1084 Interview with the company secretary of a listed corporation; and a representative of the Federation of Public Listed Companies. 1085 Brown, Rajeswary Ampalavanar, The Rise of the Corporate Economy in Southeast Asia (2006) 145. 1086 Thillainathan, R., Corporate Governance and Restructuring in Malaysia, in: OECD (ed.), (2001) 275 (291). 1087 Interview with the company secretary of a listed corporation; and a corporate lawyer / senior director.

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laysian boards, indicating that institutional investors have started to voice their concerns.1088 Several interviewees stated that the EPF should play a major role in enhancing corporate governance standards.1089 Bursa Malaysia encourages it to promote better corporate governance standards in its investment companies.1090 According to its own information, the EPF supervises the approximately 100 companies in which it has a stake of three percent and more.1091 Its policy includes not voting for the nomination of directors who have sat on the board for more than 12 years, or who are 80 years and older or who do not regularly take part in board meetings, especially the audit committee.1092 Other sensitive points are the number of directorships, share issues without reason and directors who are family members in family-run companies.1093 In the case of violations of the law, the EPF generally chooses the exit strategy but has started to initiate some injunctions in the past.1094 Contrary to the time before and during the Asian crisis when it did not hold significant stakes and therefore had not nominated directors to the board, by 2009, the EPF had nominated directors in eight corporations.1095 In the future, it intends to add 12 more companies to this list.1096 The PNB reported that it nominates half the board members in companies in which it has a stake of more than 50 percent and also recommends the CEO in these companies.1097 When it holds around 30 percent of shares, it tends to nominate one or two directors.1098 PNB employees attend all the AGMs and EGMs.1099 In case of suspected wrongdoing in a company, the PNB may choose the exit strategy.1100 The KWAP aims to participate in AGMs and EGMs and to make use of voting rights.1101 In most cases, it appoints two representative officers to attend the meetings and to vote on its behalf.1102 1088 1089 1090 1091 1092 1093 1094 1095 1096 1097 1098 1099 1100 1101 1102

Interview with employees of Bursa Malaysia. For example, Bursa Malaysia. Interview with employees of Bursa Malaysia. Interview with employees of the EPF. Interview with employees of the EPF. Interview with employees of the EPF. Interview with employees of the EPF. Interview with employees of the EPF. Interview with employees of the EPF. Interview with an employee of the PNB. Interview with an employee of the PNB. Interview with an employee of the PNB. Interview with an employee of the PNB. http: /  / www.kwap.gov.my / EN / Investments / Equity / Pages / default.aspx. http: /  / www.kwap.gov.my / EN / Investments / Equity / Pages / default.aspx.

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To what extent foreign institutional investors contribute to enhancing corporate governance standards is debatable. The Corporate Governance Survey Report 2008 on Malaysian corporations found that foreign-owned companies performed worse than government-linked companies and statelinked companies in relation to international best practice but better than the other corporations.1103 Nevertheless, it may be that foreign investors only invest in corporations that already have good corporate governance practices. 6. Gatekeepers As shareholders’ activism, although on the rise, is low, the question is whether the Minority Shareholder Watchdog Group (MSWG) is to exercise the public good of monitoring. The MSWG was established in 2000 as a government initiative based on a recommendation in the Report on Corporate Governance of February 1999. Its founding was a direct result of the Asian crisis. Majority shareholders who were able to anticipate the coming crisis sold their shares whereas institutional and retail investors who lacked the necessary information made losses.1104 The MSWG is an umbrella organization for institutional and retail shareholders.1105 The committee in charge of developing the concept studied institutions in Australia, the U.S. and UK as potential models.1106 The five founding members included the EPF, LTAT, PNB, LTH and Pertubuhan Keselamatan Sosial (SOCSO). The role of the MSWG is to enhance shareholders’ activism and to protect the interests of minority shareholders. After it ran out of funds in 2003, it received funding in 2005 from the Capital Market Development Fund and is currently substantially funded by the fund and by its own activities.1107 Satkunasingam / Shanmugam argue that it has to ensure that its directors and chairperson are not associated with any government or state agency in order to work effectively.1108 They propose that the composition of the board should be drawn from independent organizations and representatives

1103 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 9. 1104 Interview with a representative of the Minority Shareholder Watchdog Group. 1105 Interview with a representative of the Minority Shareholder Watchdog Group. 1106 Interview with a representative of the Minority Shareholder Watchdog Group. 1107 Satkunasingam, Elsa / Shanmugam, Bala, Journal of Applied Management Accounting Research 4 (2006) 45 (52). 1108 Satkunasingam, Elsa / Shanmugam, Bala, Journal of Applied Management Accounting Research 4 (2006) 45.

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of all groups and that the MSWG should be permitted to represent shareholders in a class action suit.1109 Before AGMs, the MSWG analyses the annual report, resolutions that the board of directors put on the agenda, directors’ profiles (attendance at meetings, involvement in related-party transactions), financial statements and auditors’ fees.1110 Based on its evaluation, it makes recommendations to its subscribers about how to vote regarding the proposed resolutions.1111 Its analysts also attend AGMs and ask questions.1112 It appears that companies have changed their attitude and are now responsive to questions from MSWG analysts.1113 The MSWG has tried to persuade companies to dismiss directors after a term of ten years, but this proposition has not been favorably received by corporations.1114 It has also initiated the Malaysian Corporate Governance Index which is the premier index to gauge corporate governance levels in Malaysia.1115 The index rates the top 100 PLCs in terms of corporate governance practices that include international best practice codes.1116 However, the effectiveness of the MWSG has been questioned by several interviewees.1117 One interviewee pointed out that the main problem is that minority shareholders do not provide it with proxy rights.1118 As the public spread in the stock market is around 25 percent, the MSWG could nominate board members if it managed to gather these proxies.1119 However, as minority shareholders lack the necessary interest to monitor the management, they do not provide the MSWG with the necessary proxies.1120 As in Thailand, the answer to these questions seems to be that shareholder associations may only partially counterbalance low shareholders’ activism. The media play an increasing role in corporate governance. They are reporting more on issues such as fraud and, as many retail investors are of 1109 Satkunasingam, Elsa / Shanmugam, Bala, Journal of Applied Management Accounting Research 4 (2006) 45 (53). 1110 Interview with a representative of the Minority Shareholder Watchdog Group. 1111 Interview with a representative of the Minority Shareholder Watchdog Group. 1112 Interview with a representative of the Minority Shareholder Watchdog Group. 1113 Interview with a representative of the Minority Shareholder Watchdog Group. 1114 Interview with a representative of the Minority Shareholder Watchdog Group. 1115 http: /  / www.mswg.org.my / web / page.php?pid=47&menu=sub. 1116 http: /  / www.mswg.org.my / web / page.php?pid=47&menu=sub. 1117 Interview with a representative of the Malaysian Alliance of Corporate Directors; a corporate lawyer / senior director. 1118 Interview with a representative of the Malaysian Alliance of Corporate Directors. 1119 Interview with a representative of the Malaysian Alliance of Corporate Directors. 1120 Interview with a representative of the Malaysian Alliance of Corporate Directors.

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Chinese origin, the Chinese media in particular have started to put questions to the MSWG.1121 However, one interviewee pointed out that the media in Malaysia are controlled more strictly than in Thailand, limiting their ability to report certain news.1122 Unlike the media, banks do not play any role in corporate governance in Malaysia.1123 Thillainathan points out that the idea that banks should play a monitoring role was rejected for Malaysian banks as they are characterized by weak corporate governance standards themselves.1124 One interviewee from outside Malaysia assessed the quality of such market intermediaries as accountants as very professional.1125 7. Public and Private Enforcement Regulators in Malaysia include the Companies Commission (CC), the Securities Commission (SC) and Bursa Malaysia. The Companies Commission of Malaysia was set up in 2002. It took over the functions and responsibilities of the Registrar of Companies and Registry of Business and provides the regulatory framework for corporate and business affairs in Malaysia.1126 In 2002, the Companies Commission started to focus more on enforcement and expects a compliance rate of 85 to 90 percent in the next few years.1127 The Companies Commission conducts a step-by-step approach to give companies time to adapt to stricter enforcement.1128 It publishes practice notes to inform people of the legal requirements that it intends to enforce more strictly.1129 It undertakes a holistic approach that includes conventional enforcement as well as education.1130 The points of focus are auditor accounts, the convocation of the AGM and the annual report.1131 1121

Interview with a representative of the Minority Shareholder Watchdog Group. Interview with a representative of the Federation of Public Listed Companies. 1123 Thillainathan, R., Corporate Governance and Restructuring in Malaysia, in: OECD (ed.), (2001) 275 (288). 1124 Thillainathan, R., Corporate Governance and Restructuring in Malaysia, in: OECD (ed.), (2001) 275 (289); Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Leong, Ho Khai (ed.), (2005) 102 (139). 1125 Interview with a representative of the Malaysian-German Chamber of Commerce and Industry. 1126 Sulaiman, Aiman Nariman Mohd et al., Commercial Applications of Company Law in Malaysia (2005) 65; Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Leong, Ho Khai (ed.), (2005) 102 (103). 1127 Interview with a representative of the Companies Commission of Malaysia. 1128 Interview with a representative of the Companies Commission of Malaysia. 1129 Interview with a representative of the Companies Commission of Malaysia. 1130 Interview with a representative of the Companies Commission of Malaysia. 1131 Interview with a representative of the Companies Commission of Malaysia. 1122

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The enforcement division was strengthened and included four divisions in 2009.1132 By October 2009, staff in the investigation division had increased from five to 50 employees.1133 The Securities Commission (SC) was established in 1993.1134 Prior to its establishment, the capital market was regulated by six government bodies, the Capital Issues Committee (Ministry of Finance), the Panel on Takeovers and Mergers (Prime Minister’s Department), the Foreign Investment Committee (Prime Minister’s Department), the Companies Commission of Malaysia, the Ministry of International Trade and Industry, and Bank Negara Malaysia.1135 In 1996 the Securities Commission decided to shift the existing merit-based regulation regime to a disclosure-based regime.1136 In a further attempt to clarify the jurisdictions of the different regulatory authorities, the SC was made the sole regulator for fund raising activities and the corporate bonds market in 2000.1137 The SC has the task of supervising and developing the capital market.1138 The ultimate mandate of the Securities Commission is to protect investors. According to sec. 4 SCA, the board consists of eight members appointed by the Minister of Finance, including an executive chairman, four members representing the government and three other persons. The term of office is not to exceed three years and members may be reappointed.1139 The appointment of any member may at any time be revoked by the Minister of Finance.1140 The Minister may from time to time give to the SC directions of a general character not inconsistent with the Securities and Exchange 1132 1133 1134

1993.

Interview with a representative of the Companies Commission of Malaysia. Interview with a representative of the Companies Commission of Malaysia. The Securities Commission is the subject of the Securities Commission Act

1135 http: /  / www.sc.com.my / main.asp?pageid=350&menuid=376&newsid=&linkid =&type=. 1136 Sulaiman, Aiman Nariman Mohd et al., Commercial Applications of Company Law in Malaysia (2005) 545. 1137 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (101). 1138 According to sec. 15 of the Securities Commission Act, the SC’s main regulatory functions include supervising exchanges, clearing houses and central depositories; registering authority for prospectuses of corporations other than unlisted recreational clubs; approving authority for corporate bond issues; regulating all matters relating to securities and futures contracts; regulating the takeover and mergers of companies; regulating all matters relating to unit trust schemes; licensing and supervising all licensed persons; encouraging self-regulation; and ensuring proper conduct of market institutions and licensed persons. 1139 Sec. 6 of the Securities Commission Act. 1140 Sec. 7 (1) of the Securities Commission Act.

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Act, relating to the Commission’s functions and such directions shall be binding on the SC.1141 After the Asian Crisis, the Securities Commission was given the authority to impose civil penalties.1142 It has been credited with devising corporate governance initiatives leading to enhanced disclosure and enhanced penalties for offenses against securities legislation.1143 Sec. 155 of the SCA enables the SC to take derivative action against officers guilty of misconduct and third parties who have caused loss and damage to the company. The Securities Commission is also responsible for supervising the Malaysian Stock Exchange named Bursa Malaysia (previously Kuala Lumpur Stock Exchange). One-third of the directors have to be public interest directors who are appointed by the Minister of Finance in consultation with the Securities Commission.1144 One-third are independent directors appointed by a nomination and remuneration committee with the concurrence of the Securities Commission.1145 The remaining directors are also appointed by the committee with the concurrence of the Securities Commission.1146 The chairman, who is a non-executive director, is appointed by the Minister of Finance from among public interest directors.1147 The powers of the KLSE were increased by the amendments in 1998 to the Securities Industry Act (SIA). The amendments strengthened its ability to take action against directors and anyone affected by its listing rules whereas it was previously confined to the listed entity.1148 Directors are now personally liable for up to RM1 million or a jail term or both.1149 Since 2007, Bursa Malaysia has shifted from punishing the companies for the wrongdoing of directors to punishing the directors themselves.1150 Although the capacity of the regulators (including the central bank) seems to be adequate, enforcement is criticized for being weak.1151 Nevertheless, 1141

Sec. 19 (1) of the Securities Commission Act. Liew, Pik, Corporate Governance 15 (2007) 724 (734). 1143 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (101). 1144 Section 10 (1) (a) of the Capital Markets and Services Act; art. 68 (2) (a) of the Company’s Articles of Association. 1145 Art. 68 (2) (b) of the Company’s Articles of Association. 1146 Art. 68 (2) (c) of the Company’s Articles of Association. 1147 Section 10 (3) of the Capital Markets and Services Act. 1148 Thillainathan, R., Corporate Governance and Restructuring in Malaysia, in: OECD (ed.), (2001) 275 (276). 1149 Liew, Pik, Corporate Governance 15 (2007) 724 (734). 1150 Interview with employees of Bursa Malaysia. 1151 Liew, Pik, Corporate Governance 15 (2007) 724 (734). 1142

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one of the concerns most often raised regarding Malaysian regulators is their lack of independence.1152 Interviewees complained that this lack of independence results in selective enforcement.1153 Politicians seems able to influence the operation and enforcement measures of the regulators and to prevent the prosecution of well-connected businessmen even in cases where corrupt practices are evident.1154 According to one interviewee, this led to situations where the SC did not enforce the law in some cases, while pursuing public enforcement in other, minor cases that should have been left to private enforcement.1155 Gomez concludes that “the relevance and effectiveness of regulatory institutions depend on the will of the government leaders to enforce corporate governance”1156 and that the regulators seem to be unable to act against corruption and corporate activities that are not in the interest of shareholders.1157 1152 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (102); Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 1 (30); Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (132); Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (180); Liew, Pik, Corporate Governance 15 (2007) 724 (734, 735); Bidin, Aishah, Law reform and corporate governance in Malaysia, in: Gillespie, John /  Peerenboom, Randall (ed.), (2009) 296 (310). 1153 Interview with a researcher of International Islamic University Malaysia, with laywers. 1154 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (102); Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 1 (28); Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (132); Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (180); Liew, Pik, Corporate Governance 15 (2007) 724 (734, 735). Interview with a representative of the Malaysian Alliance of Corporate Directors. 1155 Interview with a researcher at the faculty of law, International Islamic University Malaysia. 1156 Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (132). Gomez states that powerful politicians even abused the enforcement of corporate governance provisions to transfer corporate assets into the hands of their allies, see Gomez, Edmund Terence, Malaysian Business Groups, in: Chang, Sea-Jin (ed.), (2006) 119 (132). He concludes that thus, although selective imposition of rules and regulations helped create the impression of an increasingly well-governed corporate sector, irregularities continue to occur, p. 132. 1157 Gomez, Edmund Terence, Governance, affirmative action and enterprise development, in: Gomez, Edmund Terence (ed.), (2004) 157 (180). For an example of a case where the Securities Commission did not investigate see Satkunasingam, Elsa / Shanmugam, Bala, Journal of Applied Management Accounting Research 4 (2006) 45 (47. Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 1 (43–44) describes the bailout of politically connected businessmen with the

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Regarding the judiciary, courts are perceived as working well, with competent, well-regarded, and autonomous judges.1158 However, judicial independence has become a controversial issue in Malaysia. An interviewee expressed these concerns when he complained about judges who are politically connected.1159 The first attempts of the government to limit judicial authority started in 1978 when the government began to whittle away at the Supreme Court’s review process.1160 Mahathir not only concentrated power in the Office of the Prime Minister and curtailed the influence of the bureaucracy, but also aimed to establish executive hegemony over the courts.1161 This became especially clear in 1988 when Mahathir provoked a judicial crisis by forcing out the lord president of the Federal (Supreme) Court, Tun Sallah Abas, and replacing him with a more compliant judge.1162 The constitution was amended to remove judicial power from the courts. The new constitutional provision gave to the High Courts and Inferior Courts such jurisdictions and powers as were conferred by or under federal law. After the judicial crisis, executive interference in judicial matters increased. Arrests of political opponents of the UMNO and politicized trials such as the sodomy charge against Anwar Ibrahim further contributed to a loss of confidence in the judiciary.1163 The Lingam tape affair that implicated political-business interests in influencing the appointment of judges has further contributed to weakening judicial independence.1164 Bindin argues that the poor level of judicial independence results from judicial inability to recognize and defend constitutional supremacy and from the value system and political orientation of the predominantly Malay judges.1165 The continuing problem for judicial independence is the appointment process. The Chief Justice is appointed by the Yang di-Pertuan Agong (King) on the example of UEM and Renong. The Securities Commission and Bursa Malaysia did not prevent the acquisition. 1158 Lev, Daniel S., A Tale of Two Legal Professions, in: Alford, William P. (ed.), (2007) 383 (386). 1159 Interview with lawyers of Cheang & Ariff. 1160 Lev, Daniel S., A Tale of Two Legal Professions, in: Alford, William P. (ed.), (2007) 383 (391). 1161 Lev, Daniel S., A Tale of Two Legal Professions, in: Alford, William P. (ed.), (2007) 383 (391). 1162 Lev, Daniel S., A Tale of Two Legal Professions, in: Alford, William P. (ed.), (2007) 383 (392). 1163 Saravanamuttu, Johan, Political Transformation and Intrigue in an Election Year in: Singh, Daljit (ed.), (2009) 173 (183). 1164 Bidin, Aishah, Law reform and corporate governance in Malaysia, in: Gillespie, John / Peerenboom, Randall (ed.), (2009) 296 (309). 1165 Bidin, Aishah, Law reform and corporate governance in Malaysia, in: Gillespie, John / Peerenboom, Randall (ed.), (2009) 296 (309).

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advice of the Prime Minister after consulting the Conference of Rulers. Judges of the Federal Court, the Court of Appeal and the High Courts are appointed by the Yang di-Pertuan Agong on the advice of the Prime Minister after consulting the Conference of Rulers, the Chief Justice and the heads of the respective courts.1166 Regarding the appointment of the Chief Judge of a High Court, the Prime Minister has to consult the Chief Judge of each of the High Courts and, if the appointment is to the High Court in Sabah and Sarawak, the Chief Minister of each of the States of Sabah and Sarawak. In reaction to the Lingam tape affair, the Judicial Appointments Commission Act was made law. It provides for the establishment of a Judicial Appointments Commission. However, as the members of the commission include the Chief Justice of the Federal Court, the President of the Court of Appeal, the Chief Judges of the High Courts, a Federal Court judge appointed by the Prime Minister and four other members appointed by the Prime Minister, it is doubtful to what extent the commission acts independently. The underlying problem may be that the UMNO has no interest in establishing a judicial system with judges who are independent of the executive. Another problem cited was a certain judicial lack of sympathy for minority shareholders. One interviewee complained that judges lack a thorough understanding of the concept of ‘fairness’ in the oppression remedy and that they do not consider that what was in the interests of the company could nevertheless be unfair for minority shareholders.1167 However, interviewees pointed out that judges’ attitudes had changed in recent times and that judges tend to decide in favor of minority shareholders more often than in the past.1168 In 2009, a committee worked on a concept for alternative dispute resolution, which so far existed only in the banking sector.1169 One interviewee estimated that alternative dispute resolution would encourage minority shareholders’ protection because minority shareholders are reluctant to rely on the courts to solve their disputes.1170 Several interviewees indicated that the civil sector experiences problems in finding good civil servants due to a lack of qualified people and low public sector salaries.1171 However, the remuneration of judges has recent1166

Art. 122 (b) of the Constitution. Interview with lawyers of Cheang & Ariff. 1168 Interview with a researcher of the University of Nottingham and with a representative of the Federation of Public Listed Companies. 1169 Interview with a representative of the Minority Shareholder Watchdog Group. 1170 Interview with a representative of the Minority Shareholder Watchdog Group. 1171 Interview with a corporate lawyer / senior director; and a representative of the Federation of Public Listed Companies. It seems that individuals in the corporate 1167

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ly been increased and there is also a growing middle class of civil servants.1172 8. Implications for the Legal Protection of Minority Shareholders a) Minority Shareholder Appointment and Decision Rights Malaysian law does not provide for cumulative voting. Concentrated ownership and low shareholders’ activism seriously affect minority shareholder appointment rights. This is reflected in the weak influence of minority shareholders on board composition. The Corporate Governance Survey Report 2008 found that only 26.04 percent of 960 listed companies in 2007 asserted that the current board composition fairly reflected the investment of minority shareholders.1173 Koh states that, although 82 percent of respondents to a survey indicated that minority shareholders could nominate candidates for directorships, directors are usually nominated and appointed by the controlling shareholder.1174 His conclusion is based on the fact that most respondents in the survey indicated that it was rare or unthinkable that candidates proposed by the management would fail to be elected.1175 Although government-linked institutional investors have the potential to make use of this right, they rarely did so in the past. After all, some government institutional investors have started to nominate their own directors in investee companies in which they hold significant stakes. Minority shareholders’ decision rights may also be affected by the way that corporations hold the shareholders’ meeting. By attracting uninformed investors through presenting gifts and offering lunch and letting shareholders vote by person instead of by poll, managers can ensure that their proposals are not contested. Regarding majority-of-the-minority approval requirements for transactions between controlling shareholders and their corporations, such approval requirements may be affected by the significant use of nominee acsector earn around RM2,000 a month in the first year which increases to around RM5,000–6,000. Civil servants earn MR1,100 in the first year which increases to RM1,200–1,400. 1172 Interview with a corporate lawyer / senior director. 1173 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 14. 1174 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (108). 1175 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (108).

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counts, which makes it difficult to track down ultimate beneficial ownership. According to interviewees, related-party transactions remain a serious concern in Malaysia.1176 One interviewee stated that, although related-party transactions are heavily regulated by the law, people manage to circumvent the rules.1177 While some interviewees questioned by Liew argued that the new regulations after the Asian crisis helped in reducing insider trading and related-party transactions, other interviewees argued that fraudulent practices or errors would continue until there was a transformation in behavior and attitude among corporate leaders and participants.1178 Related-party transactions are also a focus of Bursa Malaysia1179, indicating that the problems remain. b) Independent Directors and Equal Treatment According to the Corporate Governance Survey Report 2008, around 32 percent of companies had at least one-half of board membership made up of independent non-executive directors.1180 However, for around 14 percent of companies, independent non-executive directors made up the majority of directors.1181 In general, independent non-executive directors made up 43 percent of the typical board.1182 Ninety-three companies had boards with less than one-third of independent non-executive directors.1183 Malaysian companies complain about a lack of talented independent directors.1184 The MSWG has established an independent directors’ pool and hopes that companies will rely on this pool in the future.1185 Another inter1176 Interview with a representative of the Federation of Public Listed Companies; and a representative of the Minority Shareholder Watchdog Group. 1177 Interview with a corporate lawyer / senior director. 1178 Liew, Pik Kim, Corporate Governance 15 (2007) 724 (736). 1179 Interview with employees of Bursa Malaysia. 1180 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 29. 1181 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 29. 1182 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 29. 1183 Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 13. According to Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (102, 103), in 96 percent of all companies boards, one-third are independent board members and almost half of the companies designated a senior independent director whom shareholders could directly address. 1184 Interview with a representative of the Minority Shareholder Watchdog Group.

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Table 42 Independent Directors of 960 Malaysian Listed Companies as at December 2007 Number of independent directors on the board

Percentage of listed companies in 2007

2

29.27

3

44.27

4

16.77

5

7.19

Other

2.50

Source: Minority Shareholder Watchdog Group / The University of Nottingham, Corporate Governance Survey Report 2008 (2008) 13.

viewee also expressed the view that companies pretend to have difficulties in finding independent directors because they are comfortable with the existing ones.1186 1185

However, the question remains to what extent independent directors are in fact independent. Major shareholders often nominate friends as independent directors1187 and non-executive directors are often close associates of the chairperson or the executive board members.1188 The MSWG also states that majority shareholders nominate friends as independent directors.1189 Rachagan argues that they therefore do not disagree with the decisions of executive board members.1190 The EPF reports that 50 independent directors of its approximately 150 investee companies were board members for more than 12 years.1191 This fact may also affect the independence of independent directors. Three interviewees commented that independent directors cannot be independent when they depend on the income of their directorships.1192 1185

Interview with a representative of the Minority Shareholder Watchdog Group. Interview with employees of the EPF. 1187 Interview with a representative of the Federation of Public Listed Companies. 1188 Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 1 (12–13). 1189 Interview with a representative of the Minority Shareholder Watchdog Group. 1190 Rachagan, Shanthy, The Corporate Governance Law Review 3 (2007) 1 (13). 1191 Interview with employees of the EPF. 1192 Interview with a representative of the Federation of Public Listed Companies, a researcher at the faculty of law, International Islamic University Malaysia, and a representative of the Malaysian Alliance of Corporate Directors. 1186

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Several interviewees indicated that the quality of directors remains a concern and mentioned as a problem that directors are often not aware of corporate governance in general and their duties in particular. Many directors who do not have the necessary knowledge seem to be nominated because of their name and reputation.1193 In 2008, KPMG published a survey according to which 50 percent of directors were not aware of their duties.1194 The financial literacy of directors seems to be of special concern.1195 However, one interviewee expressed the view that awareness has risen and that directors are more aware of their duties than they used to be five or ten years before the interview.1196 Another interviewee also explained that, due to increased discussion on corporate governance and conferences related to the issue, the great majority of directors should have attended an event related to corporate governance.1197 However, interviewees claimed that, in general, directors do not have enough training.1198 Bursa Malaysia requires mandatory training of new directors of listed corporations, but does not provide specifications on the type and content of the training and leaves the choice of both to the director’s discretion.1199 After the initial training, it is left to directors to decide if they wish to attend further training.1200 However, as the Code on Corporate Governance requires disclosure of directors’ training, there should be some pressure on them to attend further training. Nevertheless, interviewees reported that directors are reluctant to take part in training courses, do not take them seriously or are unwilling to lose face by admitting the need for a training program.1201 Another problem of directors’ training is the lack of regulation, meaning that any institution is able to offer training programs. Nonetheless, interviewees pointed out that directors are generally better trained and educated than in the past.1202 Interview with a corporate lawyer / senior director. Interview with a representative of the Minority Shareholder Watchdog Group. 1195 Interview with a representative of the Malaysian Alliance of Corporate Directors; and a representative of the Federation of Public Listed Companies. 1196 Interview with employees of EPF. 1197 Interview with a representative of the Malaysian Alliance of Corporate Directors. 1198 Interview with a representative of Minority Shareholder Watchdog Group; and a corporate lawyer / senior director. 1199 Interview with employees of Bursa Malaysia. 1200 Interview with employees of Bursa Malaysia. 1201 Interview with a representative of Minority Shareholder Watchdog Group; a representative of the Malaysian Alliance of Corporate Directors; and a corporate lawyer / senior director. 1202 Interview with the company secretary of a listed corporation. 1193 1194

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Another problem seems to be that the regulation gives incentives to directors to assume more directorships than they are able to handle.1203 On the other hand, as one interviewee pointed out, the lack of directors means that firms have little choice but to appoint from the same small pool. The problem that interviewees mentioned most often regarding equal treatment was connected to voting. Publicly listed companies usually appoint independent firms of chartered secretaries or accountants to conduct polls in order to ensure independence.1204 Nevertheless, the ACGA Asian Proxy Voting Survey gave Malaysian corporations a score of 56 percent (poor to fair) for voting by hand rather than by poll.1205 Interviewees reported that in many AGMs, voting is done in this way.1206 Other observers also complained that voting by poll is rare in Malaysia and only happens in the case of disputes between substantial shareholders.1207 Several interviewees reported that the management usually starts with voting by hand and only changes to voting by poll when the results are unsatisfactory.1208 One interviewee complained that corporations present gifts to attending shareholders in order to attract uneducated shareholders who would not vote against management propositions at the AGM.1209 Through voting by hand, the management can thereby ensure that its proposals are accepted.1210 9. Conclusions As a result of the New Economic Policy that aimed to redistribute equity wealth between the main Malaysian ethnic groups, Malaysia’s corporate sector is characterized by concentrated ownership, not only in the hands of mostly politically well-connected families, but also of the state. In the aftermath of the Asian crisis, the state’s stake in listed corporations even increased at the expense of family ownership. Both families and state agencies 1203

rectors.

Interview with a representative of the Malaysian Alliance of Corporate Di-

1204 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Leong, Ho Khai (ed.), (2005) 102 (120). 1205 Allen, Jamie / Jones, Oliver, ACGA Asian Proxy Voting Survey 2006 (2006)60. 1206 Interview with a representative of the Federation of Public Listed Companies. 1207 Koh, Philip Tong Ngee, Corporate Governance in Malaysia, in: Gonzalez, Eduardo T. (ed.), (2007) 92 (109). 1208 Interview with a representative of the Malaysian Alliance of Corporate Directors; the CEO of a listed corporation; and the company secretary of a listed corporation. 1209 Interview with a representative of the Federation of Public Listed Companies. 1210 Interview with a representative of the Federation of Public Listed Companies.

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use pyramidal and cross-holding structures to enhance control. Although corporate governance of government-linked corporations was in general assessed to outrank that of family-owned companies, indicating better protection of minority shareholders, some family-owned corporations started to adopt a more professional management structure. It appears, however, that in both types of corporation, independent directors do not fully exercise their expected role. It remains to be seen to what extent the GLC transformation program will contribute to enhancing the corporate governance standards of government-linked companies. A special problem in the past was the high use of nominee shareholdings, which makes it difficult to identify true ownership. As a consequence of the concentrated ownership and long-term strategic investments of government-linked institutional investors, the free float is low, reducing capital market control. The large number of retail investors, resulting from the emergence of a middle class, may contribute to a certain distortion of share prices. Government-linked institutional investors have so far not made full use of their potential to supervise and monitor their investee companies. In recent times, institutional investors have become more active but their impact may be limited since institutional investors target the top ten percent of the market. The Minority Shareholder Watchdog Group contributes to reducing information asymmetries but suffers from the fact that minority shareholders do not grant proxies. The financial press has also started to report more on corporate governance issues. In view of low shareholders’ activism, public enforcement remains a core factor. However, political interference results in pressure on the public sector, selective enforcement and the favoring of special interests. However, empirical evidence for expropriation of minority shareholders is not clear. In her study on the relationship between ownership structure and the dividend policies of Malaysian listed companies in 2002 to 2006, Ramli found that the extent of dividend disbursement increased in line with the stake of the largest shareholder.1211 The presence of a second large shareholder also had a positive impact on the extent of the dividend disbursement.1212 Claessens et al. also found no evidence for the expropriation of minority shareholders in Malaysia.1213 Malan et al. reports that pyramid firms with a low ownership in the hands of the ultimate owner (14.56 percent of cash flow rights and 35.67 percent of control rights) are associated 1211 Ramli, Nathasa Mazna, International Review of Business Research Papers 6 (2010) 170. 1212 Ramli, Nathasa Mazna, International Review of Business Research Papers 6 (2010) 170. 1213 Claessens, Stijn et al., Expropriation of Minority Shareholders in East Asia (2000) 24.

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with higher risk, larger cash, greater size, higher firm performance, higher debt ratio and lower dividend payout ratio.1214 Firms with high ownership (27.89 percent of cash flow rights and 36.78 percent of control rights) display higher capital expenditure (CAPEX) and higher dividend payout ratio.1215 Nevertheless, reform of the public sector remains a core issue. The scandal regarding Port Klang Free Zone has revealed serious shortcomings in the public sector and an institutional lack of efficient oversight. Public institutions like the Complaints Bureau and the Anti-Corruption Commission so far have not fulfilled expectations.1216 However, the current emergence of a two-party system has the potential to change the hitherto autocratic structure of the state with its close links between the executive, judicial and legislative branches and the strong hegemony of the executive as well as to foster accountability and transparency in the public sector. Other attempts and activities have emerged that may help to overcome the shortcomings of the public sector as well as lead to public discussion of such topics as corruption and integrity. Transparency International Malaysia has proposed measures to reform the financing of political parties.1217 The Freedom of Information Act passed by the state legislative assembly of Selangkor in April 2012 may act as a catalyst for the country. The Institute of Integrity, established in 2005, aims to promote the implementation of the National Integrity Plan. The greatest challenge for civil society stakeholders in changing the Malaysian state may be to overcome identifying interests by ethnicity.

1214

29. 1215

29.

Malan, Irfah Najihah Basir et al., Business Management Dynamics 2 (2012) Malan, Irfah Najihah Basir et al., Business Management Dynamics 2 (2012)

1216 The reputation of the Anti-Corruption-Commission was seriously affected by the death of a Customs Department official who had been questioned for alleged corruption and money laundering. 1217 Transparency International Malaysia, Reforming Political Financing in Malaysia (2010).

D. Summary and Conclusions I. The Case of Thailand In Thailand, incentives for majority shareholders to expropriate minority shareholders are not as obvious as might be thought. Ownership of corporate equity is concentrated in the hands of a small elite of families, many of Chinese origin, and even increased after the Asian crisis. Pyramidal and cross-holding structures were already rare before the Asian crisis, although firms affiliated with business groups owned by families displayed more of these pyramidal and cross-holding structures. Nevertheless, Thai corporations seem to have significantly reduced such structures in recent years. The reason may be that Thai regulatory and supervisory bodies have started to proactively screen related-party transactions (major shareholdings have to be disclosed to the corporation and the regulatory bodies). Nevertheless, the statements of interviewees who attached significant importance to this issue indicated that they are still a problematic issue. The percentage of one ultimate owner of Thai corporations is low, compared to other Asian corporations, raising the question of whether the second largest blockholder monitors the controlling shareholder. There is no empirical evidence known to the author of this thesis that demonstrated to what extent other large blockholders increase or reduce firm value. Nomination of family members as board members and executives is still high. However, interviewees mentioned that some family-owned corporations have already started to implement more professional structures. These factors suggest that, although incentives to extract private benefits exist, they have been reduced in recent times. Thai lawmakers adopted a wide range of formal rules after the Asian crisis in order to constrain majority shareholders’ incentives to expropriate minority shareholders. Nevertheless, the impact analysis of these formal rules exposed a gap between the ‘law on the books’ and the ‘law in action’. The legal devices that aim to protect minority shareholders mainly rely on shareholders becoming active. They include minority shareholder appointment, decision and action rights, including derivative action. Nevertheless, although shareholders are generally better informed on their rights and have started to take a more critical stance, shareholders’ activism is usually low, even among institutional investors. Thai regulatory bodies have made efforts to raise shareholders’ activism, inter alia by training small retail share-

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holders in cooperation with other associations and by mandating asset management companies to disclose their voting policies. However, the interests of individual and institutional investors focus mainly on dividends, thus making them choose the exit strategy in the event of irregularities. Shareholders’ activism seems to be especially low in regard to lawsuits. Therefore, the efforts of regulatory bodies to train and educate investors may have less impact than expected. Furthermore, efforts to increase the activism of domestic institutional investors are limited because they tend to invest only in the top corporations. There is also no clear empirical evidence that foreign investors, whose trading patterns tend to influence market participants, contribute to enhancing corporate governance standards. The Thai Investors Association that was established inter alia in the expectation of overcoming shareholder passivity, is hampered by the difficulty of obtaining the proxies of small shareholders. Nevertheless, in combination with an increasingly active financial press, its activities contribute to reducing information asymmetries. As Thai law increasingly relies on financial advisors to guide small shareholders in their decision-making, it also remains a long-term task to ensure the quality, independence and integrity of such advisors. Another legal device to protect shareholders, independent directors, also seems not to meet expectations in the Thai corporate environment of concentrated ownership. All interviewees disputed the independence of independent directors. Interestingly, in contrast to Vietnam and Malaysia, where interviewees saw dependence on salaries and therefore financial reasons as the main impediment, Thai interviewees repeatedly emphasized the networking character of Thai society, indicating the importance of personal relationships and the consequent reluctance to harm them. Interviewees’ opinions were divided on the question of whether there is in fact a lack of independent directors or whether corporations merely pretend to such a lack as they are comfortable with the existing directors. More empirical research on the directors’ market would answer the question of whether it would make sense to provide for mandatory cumulative voting. As shareholders tend to be reluctant to make use of their rights, it remains important to ensure good corporate governance standards in corporations are developed and maintained. In general, according to interviewees, corporate governance has substantially improved. Besides new laws and regulation as well as the adoption of a corporate governance code based on a ‘comply-or-explain’ approach, new associations and bodies such as the Institute of Directors, the Thai Investors Association and the Corporate Governance Center have been established. They work closely with Thai regulatory bodies and contribute to training directors and to disseminating information. Furthermore, the Corporate Governance Report of Thai Listed

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D. Summary and Conclusions

Companies, which scores and rates the corporate governance standards of Thai listed corporations, contributes to reducing information asymmetry and to exercising pressure on corporations, although the exact value of these reports was disputed by interviewees. Nevertheless, it seems to be difficult to convince a number of corporations that the benefits of enhanced corporate governance standards outweigh the costs. In view of these facts, control by the capital market seems to be an important factor. However, concentrated ownership not only reduces the risk of hostile takeovers but also constrains the available free float and thus reduces the possibility of trading activities. Furthermore, the market is dominated by the trading activities of retail investors who often act on the basis of rumors and recommendations. Therefore, share prices may not accurately mirror firm value. Thai regulatory bodies and associations are training investors in the hope that informed investors will no longer rely on rumors in the future but base their investment and exit decisions on sound information. The low level of shareholders’ activism raises the question of the role of public enforcement. According to interviewees, public enforcement in Thailand faces three problems. The first is to prove violation of the law beyond a reasonable doubt. The second is a lack of coordination between the different agencies involved. The third is a lack of knowledge among enforcement agents. However, all interviewees agreed that the main problem regarding the protection of minority shareholders is not private governance, but public governance because of political interference. Although Thai regulatory and supervisory bodies have worked on and improved their performance, political interference seems to result in pressure to develop the market instead of enforcing rules and regulations in general and applying them selectively in particular.

II. The Case of Malaysia As in Thailand, ownership in corporate equity is concentrated in Malaysia. However, in contrast to Thailand, ownership by government-linked institutions plays a dominant role in the Malaysian corporate sector, especially among larger firms, and has even increased after the Asian crisis at the expense of family ownership. Pyramidal and cross-holding structures were common before the Asian crisis and still seem to be in place, although reduced, thus still providing incentives to expropriate minority shareholders. As in Thailand, the percentage of companies with one ultimate owner is low compared to other Asian countries. Empirical evidence indicates that institutional investors as the second largest blockholder increase firm value

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253

whereas family shareholders as the second largest blockholder decrease firm value. As in Thailand, the involvement of family members in the management is high, but according to interviewees, some family-owned corporations have started to introduce more professional structures. A special problem in Malaysia is the high number of nominee accounts that makes it difficult to identify beneficial ownership. In contrast to Thailand, the Malaysian corporate sector does not display any concentration of corporate power in the hands of a small elite of businessmen. Legal devices to protect minority shareholders rely on minority shareholder decision and action rights rather than on minority shareholder appointment rights. However, shareholders’ activism, although on the rise in recent years, is still low. Retail investors whose number is growing but who do not occupy the dominant position of investors in Thailand and Vietnam, tend to be more informed and to ask more questions than in the past. Nevertheless, they continue to focus on firm performance and dividends. Private domestic and foreign institutional investors also seem to behave passively. However, interviewees disagreed on the role of government-linked institutional investors. Their strong role is a result of the New Economic Policy that aimed to redistribute corporate wealth between the different ethnic groups. However, as these institutional investors invest mainly in the top ten percent of corporations, their impact remains limited. A special problem that was repeatedly stressed by interviewees is the habit of voting by person instead of by poll. As AGMs are mainly visited by individual, uninformed shareholders who are attracted by gifts and lunch, voting by person allows managers to push through their proposals. The Minority Shareholder Watchdog Group (MSWG) plays an important role in protecting minority shareholders. It was established as an association to protect institutional as well as retail investors in their position as minority shareholders. However, since its founding members were institutional investors, statements by interviewees suggested that the association focuses more on institutional investors than small shareholders. In short, there is a need for more research to evaluate possible conflict between institutional investors and small retail investors in Malaysia. Furthermore, interviewees indicated that, as in Thailand, small shareholders lack the necessary interest to provide the MSWG with the proxies that would enable it for example, to nominate directors and to overcome shareholders’ passivity. Independent directors also may not fully exercise their intended role of protecting minority shareholders. Interviewees complained about their lack of independence and knowledge of their duties and responsibilities. Interestingly, in contrast to Thailand where interviewees highlighted the role of the networking character of Thai society, Malaysian interviewees emphasized

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D. Summary and Conclusions

the fact that dependence on salaries may affect the independence of directors. In any case, the environment of concentrated ownership seems to seriously affect the role that, in theory, independent directors could play. Further constraints on controlling shareholders vary in their impact. Internal corporate governance increased significantly but shortcomings remain. Interviewees generally agreed that the corporate governance standards of government-linked companies are better than those of family-owned corporations. The GLC High Performance program is meant to further enhance the corporate governance standards of government-linked companies. Corporate governance seems to be promoted by the regulators rather than by associations. A case in point is the establishment of the Malaysian Alliance of Corporate Directors to counter the passive role of existing associations. In short, the interviewees gave the impression that the Malaysian corporate sector is moving less dynamically towards enhanced standards than the Thai corporate sector. However, as in Thailand, the financial press plays an increasing role in reporting on fraud and other irregularities. In theory, the Malaysian stock market with its high market capitalization could play an effective role in limiting controlling shareholders’ incentives to extract private benefits. However, concentrated ownership and the strategic investments of government-linked investment companies result in a low free float and thus limit the possibility of influencing share pricing via investment and exit decisions. Although the number of retail investors significantly increased with the emergence of a middle class, they seem to play a smaller role than in Thailand and Vietnam, whereas domestic institutional investors seem to play a larger role than in the other two countries. Malaysian regulators aim to increase the percentage of retail investors. However, due to low incentives, these investors are not expected to make use of their rights. As in Thailand, because of low shareholders’ activism, public enforcement plays a key role. Interviewees stated that regulators in Malaysia are not perceived as being independent. Selective enforcement due to political interference was a repeated complaint. As a result of the New Economic Policy, political interference in the corporate sector has been blatant. When Mahathir indicated that the protection of politically linked businessmen should end, the press predicted that corporate governance standards would increase in the future. Nevertheless, change seems to be slow in Malaysia. Although, for the first time, discussions on corruption and the benefits and costs of the New Economic Policy have begun, politicians of the leading political party seem unwilling to deal seriously with these issues. However, the emergence of a two-party system has the potential to result in more accountability and transparency in the public sector.

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III. The Case of Vietnam Compared with Vietnam, the differences between Thailand and Malaysia seem to be marginal. As Vietnam’s market economy has only recently emerged, corporate governance in general and the protection of minority shareholders in particular is still in its infancy and lags significantly behind Malaysia and Thailand. Data on the Vietnamese corporate sector are slight, compared to Thailand and Malaysia. The type of risks that minority shareholders of Vietnamese corporations face depends on the character of the corporation. On the one hand, the equitization process resulted in a large number of shareholding companies in which the state is the de facto controlling shareholder, independent of the size of its stake. On the other hand, the emergence of the private sector resulted in a large number of relatively small private shareholding companies showing no separation of management and ownership. In the former, minority shareholders face the problem that the state shareholder finds it difficult to monitor and supervise the representatives that exercise the state’s rights. As these representatives are often insiders of the corporation, the lack of supervision increases their incentives to extract private benefits. On the other hand, the state shareholder tends to intervene in the day-to-day-management of the company. In private shareholding companies, incentives for controlling shareholders to extract private benefits may be enhanced by the opaque environment that makes it difficult for minority shareholders to identify beneficial ownership and to penetrate the interlocking network of public and private company subsidiaries. In such an environment, the legal protection of minority shareholders is especially important. The legal protection of minority shareholders still suffers from significant shortcomings. All interviewees agreed that shortcomings in the legal and regulatory framework are the main problem, in contrast to Thailand and Malaysia, where interviewees complained about enforcement and implementation. The framework in Vietnam is constantly being reformed, but the multitude of new laws and regulation makes it difficult to keep abreast of the changes. One interviewee therefore suggested that lawmakers should take more time in order to enact better laws instead of trying to push forward regulation. Nevertheless, even if the legal and regulatory framework were improved, the protection of minority shareholders in Vietnam would still suffer from factors similar to those in Thailand and Malaysia. As in the other two countries, low shareholders’ activism affects minority shareholder decision and action rights. A major feature of the investors’ base of the Vietnamese stock

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D. Summary and Conclusions

market is the high percentage of individual investors whereas institutional investors are still rare. Efforts by the State Securities Commission to train and educate small investors will probably not enhance incentives for them to make use of their rights. In view of the present court system, it is also questionable whether legal tools such as derivative or class action have any potential to contribute to the protection of minority shareholders. The State Capital Investment Corporation (SCIC), the main investor in Vietnam, has the potential to improve the protection of minority shareholders. This, however, would require adequate access to resources in order to allow the SCIC to effectively monitor the representatives. Furthermore, the relationship between the state shareholder and its representatives should be clarified. Independence from political interference would allow the SCIC to act according to market principles. If these conditions were met, it would also be easier to advocate the further transfer to the SCIC of ownership rights that at the moment are exercised by other state agencies. In contrast to Thailand and Malaysia, no special association for the protection of minority shareholders has been established so far. The experiences in Thailand and Malaysia show that such associations do not overcome the problem of low shareholders’ activism. Nevertheless, they are able to contribute to reducing information asymmetries for small shareholders who do not usually invest in the time and money needed to make informed decisions. This, however, raises the question of how to finance such an association, how to guarantee its independence and how to ensure its accountability in the context of Vietnam. More research is necessary in order to develop an adequate model. Although Vietnamese law provides a two-tier system, regulation for listed companies mandates independent directors, resulting in a hybrid model. Nevertheless, as in Thailand and Malaysia, independent directors do not seem to contribute effectively to the protection of minority shareholders. As independent directors are a new concept in Vietnam, there is still a lack of awareness of the benefits of such directors. Besides the continuing problem of ensuring independence, the lack of qualified independent directors seriously affects the use of this legal tool. The constraints on controlling shareholders or their representatives exercised by corporate governance are low. Corporate governance is a new concept in Vietnam and the lack of awareness and knowledge is still considerable. It seems difficult to convince corporate leaders of the advantages of corporate governance. Interviewees and empirical research indicate that one of the underlying problems is a focus on short-term gains instead of sustainable development. Nevertheless, funds that help their investee companies to enhance corporate governance standards and exit by listing con-

IV. General Conclusions: Monitoring as a Public Good

257

tribute to enhancing standards. Furthermore, as Vietnamese corporations lack the internal financial sources of their Thai counterparts, they are more susceptible to pressure by foreign investors. As in Thailand and Malaysia, the financial press is increasingly reporting on financial issues. A core issue that remains is to ensure the independence, integrity and quality of market intermediaries. Control by the capital market in Vietnam is weak as it has only recently emerged and is still developing. In contrast to the Malaysian capital market with a market capitalization of US$395,082,649,842 and the Thai capital market with a market capitalization of US$268,488,819,977, the Vietnamese capital market displays a market capitalization of US$18,316,217,1371 The high number of uninformed individual investors contributes to a highly volatile market that is driven by herd mentality and rent-seeking. The State Securities Commission plans to train investors in order to make them hold shares for longer periods than before. However, the corporate environment, characterized by weak corporate governance and weak supervision, acts as a disincentive for investors to hold shares for longer periods. Not surprisingly, as in Thailand and Malaysia, in view of low shareholders’ activism and low capital market control, public enforcement has emerged as a core issue. Vietnam is on the way to improving the capacity of its public institutions, but the lack of resources and independence remains a sensitive issue.

IV. General Conclusions: Monitoring as a Public Good The analysis of the formal rules aiming to protect minority shareholders in the three countries has shown that a convergence towards the AngloAmerican concept of corporate law is taking place. However, in all three jurisdictions, there is a gap between the ‘law on the books’ and the ‘law in action’, although the degree of this gap depends on the local context. Interestingly, although the local context is very different in the three countries, the legal devices to protect minority shareholders face similar problems in all three jurisdictions. The extent, but not the existence, of similar problems is a result of the particular local context of each jurisdiction. Consider minority shareholder decision and action rights first. They depend on the willingness of shareholders to make use of such rights. The empirical research of this thesis has found that, although shareholders’ activism is on the rise, in general it is too low to ensure effective protection 1 Data of the World Bank for 2011, to be found at http: /  / data.worldbank. org / indicator / CM.MKT.LCAP.CD.

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D. Summary and Conclusions

for minority shareholders. Retail investors in the three jurisdictions are in general better informed than in the past and have started to ask questions at shareholders’ meetings. Nevertheless, they generally limit their interest to firm performance, dividends and capital gains. This finding is in line with the assumption that retail investors have low incentives to make use of their rights because they face high transaction costs and only benefit to an extremely small degree. The efforts of regulatory and supervisory bodies in the three jurisdictions to train and educate investors will therefore probably not lead to more voicing of small shareholders. Nevertheless, such activities, in combination with minority shareholder associations and an active press, will contribute to more informed investment and exit decisions on the capital market and thus enhance its control. In regard to institutional investors, theories about their behavior vary. The empirical research of this thesis has shown that institutional investors in the three countries – to varying degrees – are not actively exercising their rights. The interviews conducted with employees of institutional investors indicate that they prefer the exit strategy. The results suggest that expectations in regard to institutional investors in emerging markets may be overestimated by a section of the corporate literature. It is therefore questionable to what extent regulatory and supervisory bodies are able to enhance shareholders’ activism by involving institutional investors, for example, through mandating asset management companies to disclose voting behavior, as is the case in Thailand. Another limiting factor is that institutional investors tend to invest in the top corporations. There is also no clear evidence that foreign investors are more active or contribute to enhancing corporate governance standards. However, by choosing to invest in corporations with better corporate governance standards, they may indirectly exercise pressure on corporations to raise their standards. As foreign investors have some influence on stock market development in all three countries, they have the potential to improve market standards. Government-linked investment companies in Malaysia as well as the State Capital Investment Corporation in Vietnam have, in theory, the potential to actively monitor their investee companies and to exercise indirect pressure on the whole market. One consideration is whether such investors, that do not face the same competition as their private counterparts, should have the task of promoting capital market development by actively monitoring corporations. This hope was, for example, expressed by Bursa Malaysia whose staff attempt to persuade the EPF to become more active. There are already signs that some Malaysian government-linked investment companies have become more active than in the past. The State Capital Investment Corpora-

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259

tion in Vietnam should, however, be better equipped with resources to undertake this task. Interestingly, Thailand also considered establishing such a state-linked investment corporation, but did not proceed with the idea. Another question is to what extent low shareholders’ activism may be overcome by minority shareholders’ associations. The empirical research of this thesis has shown that such associations face difficulties in gathering the necessary proxies. However, strong associations with enough resources to buy at least one share in any listed corporation could play a powerful role if the threshold for exercising minority shareholders’ rights were reduced and single shareholders allowed to exercise such rights. Furthermore, in order to assess the value of minority shareholders’ associations, more research on potential conflicts between minority institutional and retail investors is necessary. Consider minority shareholder appointment rights second, although only Vietnam mandates cumulative voting, ensuring minority shareholders’ representation on boards. As is the case with minority shareholder decision and action rights, such rights also suffer from low shareholders’ activism. A further question is whether a market for directors exists in the three countries, a precondition for exercising this device. The question is difficult to answer as corporate actors give different answers depending on their interests, thus not allowing a clear conclusion about this question. It can, however, be assumed that minority shareholders in smaller firms would have more problems in finding qualified directors willing to protect their interests. Another question is whether it makes sense to restrict pyramidal and cross-holding structures that are used by controlling shareholders to enhance their control and increase their incentives to extract private benefit. The case of Thailand, however, seems to show that it is possible to achieve a reduction of such structures without an outright ban. There is further need for research on what other reasons than extracting private benefits cause controlling shareholders to make use of such structures. Meanwhile, the thesis suggests that strict enforcement of disclosure rules (disclosure to the regulatory bodies) in combination with proactive screening of related-party transactions by the regulatory and supervisory bodies is a better approach than banning them by law. The empirical research of this thesis has also shown that independent directors do not fulfill expectations in an environment of concentrated ownership in which independent directors are effectively elected by the controlling shareholder. The reasons that affect the real independence of such directors are various. Interestingly, whereas interviewees in Vietnam and Malaysia pointed more to the dependence on salaries, Thai interviewees

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repeatedly emphasized the networking character of Thai society. Interviewees disagreed on the question of whether more responsibilities and stricter enforcement of duties would ensure that independent directors fulfill their duties. It also seems to be difficult to verify whether there is in fact a lack of qualified directors in the three jurisdictions. In any case, it can be assumed that smaller firms have more problems in finding qualified directors than larger ones. In short, monitoring of corporations – and thus the protection of minority shareholders – remains a public good. Control by the capital market, in turn, is also important. In this regard, for historical reasons, Vietnam as a young emerging market lags behind Thailand and Malaysia. However, capital markets in Thailand and Malaysia also suffer from the fact that concentrated ownership results in a low free float and a low number of hostile takeovers. Another feature of the three jurisdictions is the high number of retail investors participating in the stock market. The number is especially high in Vietnam and Thailand; the Malaysian regulatory bodies are attempting to persuade more retail investors to invest in the stock market. The growth of the middle class and possibly higher life expectancy that require retirement arrangements are contributing to this development. Nevertheless, it remains a long-term task to ensure that individual investors make informed decisions. Furthermore, as described above, it should not be assumed that individual investors would actively contribute to monitoring the corporation in which they invest. As long as there is no fully developed capital market, public enforcement will remain a key issue. On the one hand, public enforcement is important to ensure that the small number of minority shareholders willing to enforce their rights privately are not prevented from doing so. On the other hand, as monitoring remains a public good, public enforcement has to ensure the protection of minority shareholders. This, however, requires reforms in public governance in all three countries where political interference and the lack of independence of regulatory bodies are seen as core problems, although for very different reasons in the three countries. It can therefore be concluded that in all three countries further improvements in corporate governance require reforms in public governance. To sum up, the analysis implies that a convergence in corporate law is taking place, but that law only matters to a certain extent, at least regarding the protection of minority shareholders. An interesting point is the emergence of a hybrid solution in Vietnam that supports the assumption that path dependency prevents a full convergence towards what are assumed to be more efficient solutions.

Appendices Vietnamese Legislation Law on Organization of the People’s Courts, No. 33 / 2002 / QH10, 2002. Law on Organization of People’s Office of Supervision and Control, No. 34 / 2002 /  QH10, 2002 Law on Enterprises, No. 60-2005-QH11, 2005. Law on Securities, No. 70 / 2006 / QH11, 2006. Resolution No. 08 / NQ-TW on Justice Reform, 2 January 2002, Politburo of the Communist Party of Vietnam. Ordinance No. 02 / 2002 / PL-UBTVQH11 04 / 10 / 2002 on Judges and Jurors at People’s Courts, 4 October 2002, Standing Committee of the National Assembly. Decree No. 388-HDBT Regulating the Establishment and Dissolution of State Owned Enterprises, 20 November 1991, Council of Ministers. Decree No. 28-CP on Conversion of a Number of State Owned Enterprises into Joint Stock Companies, 7 May 1996, Government. Decree No. 44-1998-ND-CP on Conversion of State Owned Enterprises into Shareholding Companies, 29 June 1998, Government. Decree No. 64-2002-ND-CP on Conversion of State Owned Enterprises into Shareholding Companies, 19 June 2002, Government. Decree No. 187-2004-ND-CP on Conversion of State owned Companies into Shareholding Companies, 16 November 2004, Government. Decree No. 69 / 2007 / ND-CP On Foreign Investors’ Purchase of Shares of Vietnamese Commercial Banks, 20 April 2007, Government. Decree No. 139-2007-ND-CP Providing Detailed Guidelines for Implementation of a Number of Articles of the Law on Enterprises, 5 September 2007, Government. Decree No. 109-2007-ND-CP on Conversion of Enterprises with 100 % State Owned Capital into Shareholding Companies, 26 June 2007, Government. Decree No. 101 / 2009 / ND-CP on Piloting the Establishment, Organisation, Operation and Management of State Economic Groups, 5 November 2009, Government. Decree No. 102 / 2010 / ND-CP Detailing a Number of Articles on the Law on Enterprises, 01 October 2010, Government. Decree No. 58-2012 / ND-CP Providing detailed Regulations for Implementation of a Number of Articles of the Law on Securities, 20 July 2012, Government.

262

Appendices

Decision No. 217 / HDBT on the Promulgation of the Policy for Reforming Planning and Business Accounting in SOEs, 14 November 1987, Council of Ministers. Decision No. 143 / HDBT Reviewing the Implementation of Resolution 217 / HDBT, Decree 50 / HDBT and Decree 98 / HDBT and Working to Continue the Renovation of the Management of State Enterprises, 10 May 1990, Council of Ministers. Decision No. 202 / CT Implementing Experiments to Convert State Enterprises into Shareholding Companies, 8 June 1992, Prime Minister. Decision No. 203 / CT on the List of State Enterprises chosen for the Conversion into Shareholding Companies, 8 June 1992, Prime Minister. Decision No. 90-TTg on Re-Structering of State Owned Enterprises, 7 March 1994, Prime Minister. Decision No. 91-TTg on Establishment of Business Corporations, 7 March 1994, Prime Minister. Decision No. 548-TTg on the Establishment of the Equitization Steering Committee, 13 August 1996, Government. Decision No. 139-1999-QD-TTg on Percentage of Participation of Foreign Parties in Securities Market of Vietnam, 10 June 1999, Government. Decision No. 260-2002-QD-BKH Issuing List of Sectors in which Foreign Investors may purchase Shares of Non-State Owned Enterprises in Accordance with Law on Promotion of Domestic Investment, 10 May 2002, Ministry of Planning and Investment. Decision No. 146-2003-QD-TTg on Percentage of Participation of Foreign Parties in Securities Market of Vietnam, 17 July 2003, Government. Decision No.152 / 2005 / QD-TTg approving the organization and operation charter of the State Capital Investment and Trading Corporation, 20 June 2005, Prime Minister. Decision No. 151 / 2005 / QD-TTg Establishing the Corporation for State Capital Investment and Trading, 20 June 2005, Prime Minister. Decision No. 12-2007-QD-BTC on Promulgating Regulations on Corporate Governance applicable to Companies Listed on the Stock Exchange or a Securities Trading Centre, 13 March 2007, Minister of Finance. Decision No. 55-2009-QD-TTg On Percentage Participation of Foreign Investors in Securities Market of Vietnam, 15 April 2009, Prime Minister. Decision No. 159-QD-TTGDHN Promulgating Regulations on Management of Registered Market Trading (UPCoM) on Hanoi Securities Trading Centre, 27 April 2009, State Securities Commission / Hanoi Securities Trading Centre. Decision No. 2079-QD-TTg on Establishing Parent Company – Military Telecom Group, 14 December 2009, Prime Minister. Directive No. 854-CT-TTg on Implementing Conclusion 45-KL-TW of the Politburo dated 10 April 2009 on a Pilot Model for State Economic Groups and on

Appendices

263

Amending Policy on Conversion of 100 % State Owned Enterprises into Shareholding Companies, 19 June 2009, Prime Minister. Regulations on Sales of Shares to Foreign Investors, Issued with Decision 145-1999-QD-TTg of the Prime Minister dated 28 June 1999, 28 June 1999, Government. Regulations on Capital Contribution and Purchase of Shares by Foreign Investors in Vietnamese Enterprises, Issued with Decision 36-2003-QD-TTg of the Prime Minister of the Government dated 11 March 2003, 11 March 2003, Government. Regulations on Disclosure of Information on Hanoi Securities Trading Centre, Issued with Decision 322-QD-TTGDHN of the Director of Hanoi Securities Trading Centre dated 9 November 2007, 9 November 2007, Director of Hanoi Securities Trading Centre. Regulations on Listing Securities on Hanoi Securities Trading Centre, Issued with Decision 420-QD-TTgDHN of the Director of Hanoi Securities Trading Centre dated 31 December 2007, 31 December 2007, Director of Hanoi Securities Trading Centre. Regulations on Disclosure of Information at Ho Chi Minh City Stock Exchange, Issued with Decision 09-QD-SGDHCM of the General Director of HOSE dated 20 March 2008, 20 March 2008, Exchange, General Director of Ho Chi Minh City Stock. Regulation on Financial Management of State Companies and Management of State Capital Invested in other Enterprises, Promulgated together with the Government’s Decree 09 / 2009 / ND-CP of February 5, 2009, 5 February 2009, Government. Regulations on Listing Securities on Ho Chi Minh Stock Exchange, Issued with Decision 168-QD-SGDHCM of the General Director of HOSE dated 7 December 2007, 7 December 2007 as amended 17 April 2009, General Director of HOSE. Regulations on capital contribution and purchase of shareholding by foreign investors in Vietnamese enterprises, Issued with Decision No. 88-2009-QD-TTg of the Prime Minister dated 18 June 2009, 18 June 2009, Prime Minister. Thai Legislation Budget Procedures Act B.E. 2502 (1959) Act on Qualifications for Directors and Employees of State Enterprises B.E. 2518 (1975) Public Limited Companies Act B.E. 2535 (1992) Securities and Exchange Act B.E. 2535 (1992) Foreign Business Act B.E. 2542 (1999) Announcement No. 281 (NEC 281), 24 November B.E. 2515, National Executive Council

264

Appendices

Notification No. Bor.Jor. / Phor.01-00 Re: Delisting of Securities, 9 December 1999, Stock Exchange of Thailand Notification No. Bor.Jor. / Por.22-01 Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Connected Transactions, 19 Novermber 2003, Stock Exchange of Thailand Notification No. Bor.Jor. / Ror. 01-00 Re: Listing of Ordinary Shares or Preferred Shares as Listed Securities, 2001, 22 January 2001, Stock Exchange of Thailand Notification No. Bor.Jor. / Ror. 01-07 Re: Maintaining the Status of Listed Companies in the Exchange, 2001, 22 January 2001, Stock Exchange of Thailand Notification Annual Report (Form 56-2), 13 March 2009, Capital Market Supervisory Board Notification No. ThorJor. 12 / 2554 Re: Rules, Conditions and Procedures for the Acquisition of Securities for Business Takeovers, 13 May 2011, Capital Market Supervisory Board Circular No. Kor Lor Tor Kor (Wor) 11 / 2552 Re: the Amendment of the Regulation regarding the independent director, April 2009, Thai Securities and Exchange Commission Malaysian Legislation Capital Markets and Services Act 2007 (Act 671) Companies Act 1965 (Act 125) Companies Commission of Malaysia Act 2001 (Act 614) Malaysian Code on Take-overs and Mergers 2010 Securities Commission Act 1993 (Act 498) Whistleblower Protection Act 2010 (Act 711) Securities Industry Act 1983 (Act 280) Malaysian Code on Corporate Governance 2012 Bursa Malaysia Listing Requirements Main Market Freedom of Information (State of Selangor) Enactment 2010

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Subject Index adverse selection 34 affiliation rights 27, 60 agency problems – principal-agent 19, 20–22, 26, 31, 89 agenda control 31 AGM Assessment Project 164, 165 Ali-Baba system 199 annual report 51, 62, 107, 236, 237 anti-director right index 25 Anwar Ibrahim 203, 204, 206, 220, 227, 241 appointment rights 26, 49, 67, 86, 121, 253, 259 approval requirements 27, 54–57, 122, 243 arbitration 117 Asian crisis 11, 130, 136, 138, 140, 142, 143, 147, 149, 156, 161, 166, 169, 170, 175, 179, 190, 195, 203–205, 211, 214, 216, 218, 220, 226, 227, 234, 235, 244, 247, 250, 252 asset management companies 163, 170, 171, 183, 251, 258 Association of Investment Management Companies (AIMC) 46, 162, 164, 169, 171–173, 179, 188 audit committee 163, 234 auditing 78, 104, 113, 114, 180 auditors – external auditors 114, 180 – internal auditors 228 Bank of Thailand 46, 129, 131, 140, 161, 181, 265 beneficial ownership 96, 122, 126, 191, 244, 253, 255

bonds 84, 90, 100, 156, 238 bounded rationality 17, 18, 21, 68 Bumiputera Investment Foundation (YPB) 208, 212 Bumiputera ownership see ownership Bursa Malaysia 47, 60, 210, 214, 224–227, 232–234, 237, 239, 241, 244, 246, 258, 264 business groups 29, 130, 136, 141, 142, 154, 195, 250 cash-flow rights 20, 22, 28, 79, 82, 89, 90, 127, 139, 140, 141, 146, 194, 217, 256 Central Institute for Economic Management (CIEM) 45, 50, 55, 56, 74–76, 78, 82, 83, 87–93, 95, 101–104, 106, 108–110, 114, 122, 267 CEO 36, 103, 150, 164, 189, 226, 228, 229, 231–234, 247, 286 – compensation 36 – turnover 36, 286 chairman 53, 91, 103, 105, 164, 201, 226, 229, 238, 239 civil law see corporate law civil penalties 163, 239 civil sanctions 186, 196 class action 163, 196, 236, 256 collective action 30, 31, 99, 177 collective good 32 common law see corporate law Companies Commission (CC) 47, 227, 237, 238, 264 company secretaries 180, 229 competitiveness 11, 66, 73, 103, 126, 186, 209

Subject Index conflicts of interest 32, 38, 61, 91, 164, 203 control rights see voting rights controlling shareholder see shareholder convergence 12, 13, 23, 65–67, 257, 260 convocation 53, 55, 237 corporate governance 20, 32, 33, 39, 43–45, 66, 91, 97, 99, 100, 102–104, 106–113, 115, 122–124, 126, 154, 161–169, 171, 176, 179, 180, 183, 191–193, 195, 214, 220, 223, 225, 226, 227–230, 233–237, 239, 240, 241, 246, 248, 251, 25–258, 260, 267, 280, 283 Corporate Governance Blueprint 226 Corporate Governance Centre (CCC) 46, 48, 157, 161, 166, 168, 178, 189 corporate law – Anglo-American model 23, 106 – civil law 13, 24, 48, 114, 185 – common law 13, 24, 49, 52, 61 – Continental European model 23, 67 – self-enforcing model 41 cross-holdings 21, 28, 29, 41, 96, 139, 140, 141, 143–146, 193, 194, 202, 217, 248, 250, 252, 259 cross-listing 41 cumulative voting 25, 50, 67, 122, 172, 173, 187, 243, 251, 259 Daim Zainuddin 201, 203, 206, 220 decision rights 26, 44, 55, 122, 124, 188, 243 delisting 27, 57, 65 Democrat Party 131, 132, 134 derivative action see derivative suit derivative suit 25, 27, 52, 61, 66, 122, 226, 239, 250 diffused ownership see ownership directors – independent directors 27, 34–37, 44, 45, 57–59, 66, 106, 124, 150, 151, 163, 164, 166, 188–190, 193, 228,

289

229, 239, 244, 245, 248, 251, 254, 256, 259, 260, 269, 280 – nominee directors 26, 61 – non-executive directors 50, 226, 228, 244, 245 – shadow directors 163 Directors and Executives Registry Database 183 disclosure 27, 41, 49, 62, 102, 103, 121, 125, 146, 154, 161, 164, 166, 167, 177, 181, 183, 192, 218, 238, 239, 246, 259, 283 dividend rights see cash-flow rights dividends 14, 25, 27, 28, 51, 59, 60, 108, 122, 124, 168, 173–175, 213, 223, 230, 232, 233, 248, 249, 251, 253, 258, 266 Doi Moi 69 duty of loyalty 27, 60, 125 economic groups 69, 71, 76, 77, 81, 90, 92, 269, 276, 285, 287 emerging markets 33, 39, 44, 100, 178, 258 Employees Provident Fund (EPF) 47, 210, 212, 214, 223, 224, 231, 234, 235, 245, 246, 258 enforcement 12, 18, 29, 41–45, 51, 67, 100, 107, 122, 126, 127, 135, 152, 166, 167, 183–186, 193, 196, 233, 237, 239, 240, 248, 252, 254, 255, 257, 259, 260 – selective enforcement 135, 240, 248 equal treatment 27, 57, 59, 124, 247 equitization 69, 73, 75, 78–83, 85, 87, 88, 93, 97, 104, 110, 125, 126, 255, 268 European Chamber of Commerce in Vietnam 45, 102 exit rights 27, 28, 63 exit strategy 32, 63, 168, 172, 188, 233, 234, 251, 258 expropriation 19, 22, 27, 29, 34, 126, 146, 159, 194, 206, 221, 248 extraordinary meeting 53, 109

290

Subject Index

Federation of Public Listed Companies (FPLC) 47, 212, 213, 216, 217, 224, 225, 227, 229, 230, 232, 233, 237, 242, 244–247 financial crisis 81, 89, 98, 154, 178, 274 financial literacy 168, 246 financial statements 85, 103, 236 firm performance 34–36, 146, 168, 194, 195, 225, 232, 233, 249, 253, 258, 268, 273, 277 For Thais Party (PTP) 134 formal rules see rules free float 41, 97, 159, 193, 220, 221, 225, 248, 252, 254, 260, 271 free riding 20, 30, 33 FTSE Bursa Malaysia Index Series 225 functional comparative law 16 funds – fund managers 32, 214 – mutual funds 31, 159, 170 – pension funds 31, 42, 98, 195, 223 gatekeepers 37, 38, 41, 67, 112, 126 general corporations 69, 71–77, 81, 92, 98 general director 52, 74, 103, 105 German Chamber of Industry and Commerce in Vietnam 45 golden share see shares government-linked companies (GLCs) 14, 210, 214, 230, 231, 233, 235, 248, 254 government-linked investment companies (GLICs) 210, 214, 220, 223, 233, 254, 258 Government Pension Fund 46, 169, 170, 179, 272 group firms 142, 143, 146, 148, 149

independent directors see directors informal rules 186, 232 see rules information asymmetry 17, 21, 26, 27, 30, 33, 39, 122, 179, 193, 248, 251, 252, 256 insider trading 22, 28, 169, 181, 185, 187, 244 institutional investors 31, 32, 33, 38, 45, 97, 98, 107, 109, 116, 122, 157, 158, 166, 169, 170, 177, 188, 193, 220, 223, 231–233, 235, 243, 248, 250, 252–254, 256, 258 institutions 12, 15, 16, 24, 46, 47, 70, 71, 72, 74, 93, 98, 99, 111, 113, 131, 140, 161, 162, 199, 206, 209, 225, 235, 238, 240, 249, 252, 257 internal audit 103, 166 investor – domestic investors 33, 97 – foreign investors 33, 56, 83, 87, 97, 98, 110–112, 153, 157, 158, 173, 175–177, 193, 221, 233, 235, 251, 257, 258, 263 – retail investors 14, 31, 97, 98, 107, 157, 158, 168, 177, 183, 196, 221, 222, 223, 225, 231, 235, 236, 248, 252–254, 258–260, 270 – speculative investors 14 – strategic investors 14, 15, 79, 83, 85, 86, 107, 110, 111 judicial independence 119, 241 Khazanah Nasional Berhad 47, 210, 212, 214, 223, 224, 229, 230, 231, 284 kongsi system 137, 138 Konrad-Adenauer-Stiftung 46, 47, 117 Kuala Lumpur Stock Exchange 206, 214, 215, 217, 219, 239 Kumpulan Wang Persaraan (KWAP) 210, 213, 214, 234

herd mentality 99, 257 incentive strategy 27, 57 incomplete contracts 20, 21, 22

large blockholder 30 – second largest blockholder 30, 146, 250, 252, 253

Subject Index law – law in action 15, 250, 257 – law on the books 12, 15, 68, 250, 257 legal constraints 27 legal transplants 67, 106 Lembaga Tabung Angkatan Tentera (LTAT) 210, 213, 214, 224, 230, 235, 276 Lembaga Tabung Haji (LTH) 210, 213, 224, 230, 235 liquidity 97, 159, 160, 203, 225

291

methodological individualism 17 Ministry of Finance Inc. (MoF Inc.) 210, 212, 214 Minority Shareholder Watchdog Group (MSWG) 47, 215, 221, 233, 235–237, 244, 245, 253, 277 money politics 129 multiple voting rights see voting rights mutual funds see funds Najib Razak 209 National Front (BN) 198, 202, 205

Mahathir bin Mohamad 200–206, 220, 241, 254 Malaysian Alliance of Corporate Directors (MACD) 47, 226–228, 229, 231, 236, 240, 245–247, 254 Malaysian Anti-Corruption Commission 249 Malaysian Association of Chartered Companies Secretaries 229 Malaysian Chinese Association (MCA) 197, 200, 202, 205 Malaysian Complaints Bureau 249 Malaysian Indian Congress (MIC) 197, 200 Malaysian Institute of Chartered Secretaries and Administrators (MAICSA) 229 Malaysian Institute of Corporate Governance 226 Malaysian National Integrity Plan 249 managerial discretion 93 market capitalization 97, 101, 130, 136, 142, 154, 210, 220, 230, 254, 257 market for corporate control 33, 44, 224 market intermediaries 116, 193, 237, 257 maximand 17 media 38, 41, 112, 113, 116, 120, 121, 130, 131, 132, 178, 183, 236, 237

neoclassical economics 18 New Economic Policy (NEP) 199, 204, 205, 207–210, 247, 253, 254 new institutional economics 16–18, 21, 22, 41, 44 new institutional economics of history 16 nominee accounts 139, 221, 244, 253 nominee companies 216 nominee shareholders see shareholder non-executive directors see directors Non-Voting Depository Receipts 174 open tender 211 opportunistic behavior 17, 22, 26, 43, 68, 96, 100 – ex-post opportunism 22 oppression 25, 27, 61, 242 OTC market 89, 96, 100, 101, 110, 269, 273, 279 owner representatives 90, 92, 93, 104 ownership – Bumiputera ownership 199 – diffused ownership 19 – direct ownership 139, 140 – interlocking ownership 217 – ultimate owner 29, 137, 141, 146, 216, 218, 248, 250, 252

292

Subject Index

Parti Islam Se-Malaysia (PAS) 197, 198, 199, 205 path dependency 13, 23, 66, 260 patronage 128, 130, 136, 203–206, 219 pension funds see funds People Power Party (PPP) 134 Permodalan National Berhad (PNB) 47, 208–210, 212–214, 223, 224, 229, 230, 234, 235, 278 Phuea Thai Party see For Thais Party (PTP) pre-emptive rights 25, 60 preference shares see shares preferences 17 primary market 40 private benefits 21, 22, 26, 28–30, 34, 39, 40, 42, 43, 93, 126, 145, 146, 193, 194, 220, 250, 254, 255, 259 private equity 107, 126, 195 product market 39 proportional representation 25, 50, 243 proxies 178, 193, 232, 236, 248, 251, 253, 259 public good 32, 39, 44, 177, 193, 235, 260 public spread 225, 236 Putrajaya Committee on GLC High Performance (PCG) 214, 230, 281 pyramids 21, 26, 28, 29, 41, 96, 139, 140–142, 144–146, 174, 193, 194, 202, 217, 218, 248, 250, 259 regulatory bodies 41, 67, 114, 162, 168, 178, 179, 181, 183, 187, 190, 193–195, 226, 239, 240, 250–252, 254, 259, 260 related-party transactions 54, 62, 66, 91, 96, 103, 122, 146, 164, 166, 178, 183, 186, 191, 192, 236, 244, 250, 259 rent-seeking 99, 128, 205, 257 retail investors see investor ROA 194, 195 ROR 195

rules – formal rules 12, 69, 250, 257 – informal rules 12, 26, 116 second largest blockholder see large blockholder second largest shareholder see large blockholder secondary market 40, 181 Securities and Exchange Commission (SEC) 46, 49, 154, 158, 159, 161–164, 168, 171, 172, 175, 177–187, 190, 192, 195, 196, 264, 269, 282 Securities Commission (SC) 46, 49, 56, 67, 96, 100–102, 114–116, 124, 126, 127, 210, 224, 226, 227, 237–241, 256, 257, 262, 264, 273 semi-strong efficiency hypothesis 40 separation of ownership and control 139 share fever 221 share prices 15, 27, 40, 86, 96, 99, 101, 126, 159, 175, 225, 248, 252 share pricing 63, 159, 193, 220, 254 share repurchases 27, 59, 60 shareholder – controlling shareholder 14, 20, 23, 26–28, 30, 33, 34, 38–40, 42, 43, 44, 51, 54, 62, 66, 89, 95, 96, 100, 122, 126, 140, 141, 144–147, 149, 156, 160, 169, 193, 194, 215, 218, 243, 250, 254, 255, 256, 259 – definition 13 – majority 13 – minority 13 – nominee shareholder 168, 216, 221, 248 shareholder associations 39, 44, 178, 236, 258 shares – dual class shares 21, 26, 29 – golden share 211

Subject Index – one-share-one-vote 25, 50, 51 – preference shares 51, 59, 60, 173 social norms 43 speculative investors see investor State Capital Investment Corporation 46, 69, 71, 78, 79, 84–87, 89, 91, 92, 104, 126, 256, 258, 268 State Securities Commission (SSC) 46, 101, 112, 114–116, 124 Stock Exchange of Thailand (SET) 46, 48, 49, 55, 62, 64, 135, 154–162, 164, 166–168, 175, 177–184, 187, 189, 191, 264, 283 strategic investors see investor supervisory board 52, 53, 66, 106, 180 takeovers 28, 36, 40, 64, 181, 238, 252, 260, 277 Thai Institute of Directors (IOD) 46, 161, 162, 179, 190, 284 Thai Investors Association (TIA) 46, 159, 161, 164, 168, 177, 178, 183, 187, 251 Thai Listed Companies Association (TLCA) 46, 138, 180, 188, 191 Thai love Thai Party (TRT) 130, 132, 133 Thai Rak Thai see Thai love Thai Party (TRT) Thaksin Shinawatra 130–134, 278, 280 transaction costs 16–19, 21, 122, 178, 258 transfer pricing 22, 42

293

Transparency International Malaysia 249, 285 Tun Sallah Abas 241 ultimate owner see ownership United Malays’ National Organisation (UMNO) 197, 198, 200–208, 216, 241, 242, 272 Vietnam Association of Certified Public Accountants (VACPA) 46, 113 Vietnam Association of Financial Investors (VAFI) 46, 86, 104, 106, 112, 113, 115, 117 Vietnam Chamber of Commerce and Industry 46, 56, 99, 102–104, 106, 115 voice-strategy 32 volatility 99, 107, 221, 225, 257 voting – voting by hand 247 – voting by poll 247 voting caps 26, 51 voting rights 28, 51, 55, 90, 139, 140, 141, 144, 146, 163, 169, 172–175, 194, 217, 220, 234 – multiple voting rights 51 whistleblowers 163, 226 Yayasan Pelaburan Bumiputera see Bumiputera Investment Foundation (YPB)