Journal of Advances in Management Research

Who makes the grade and why? Corporate governance scores in Thailand
Sutee Tantivanichanon Winai Wongsurawat Kittichai Rajchamaha
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Research, Vol. 12 Iss 3 pp. 249 - 267
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Who makes the grade and why? Corporate

governance
Corporate governance scores scores in
Thailand
in Thailand
Sutee Tantivanichanon 249
School of Management, Asian Institute of Technology, Pathumthani,
Thailand, and
Winai Wongsurawat and Kittichai Rajchamaha
College of Management, Mahidol University, Bangkok, Thailand
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Abstract
Purpose The purpose of this paper is to describe the characteristics of publically listed firms in
Thailand that have achieved superior corporate governance scores (CGSs) and their motivations.
Design/methodology/approach In-depth interviews with CFOs and directors were conducted to
gain insights into the firms motivations in increasing their CGS. Multiple regression, ANOVA and
t-tests were employed to examine the score patterns. In total, we collected a years data from 502
companies from the 2010 Thai stock market database.
Findings Interview results suggest that high CGS can: first, help reduce the cost of debt; second,
help the firm achieve incremental profitability; third, improve a firms value and stock price; and
fourth, create confidence among insiders and build trust among outsiders. The quantitative analysis
indicates that large state enterprises and widely held companies that issue bonds are significantly
more likely to obtain good CGS. Frequency of board meetings and superior financial performance are
also associated with higher governance ratings.
Originality/value This study systematically examines the characteristics of companies
achieving different corporate governance rankings and investigates possible motivations behind
their choices.
Keywords Corporate governance, Thailand
Paper type Research paper

1. Introduction
We know that corporate governance (CG) is one of the most important ingredients in
improving economic growth and efficiency, and enhancing investor confidence. The
presence of an effective CG mechanism can enhance confidence and is necessary for the
proper functioning of a market economy. In Thailand the quality of CG is particularly
significant for listed firms. These companies try to use CG as internal control
mechanisms to monitor their management, board and firm performance. By the same
token, these firms also strive to improve their corporate governance scores (CGSs) to
obtain benefits from their investments.
Claessens et al. (2000) performed an empirical study comparing ownership and
control of firms in Thailand and found that from 167 companies in 1996, 61.6 percent
were family-controlled firms and 32.8 percent of ownership was held by the largest
controlling shareholder. Claessens et al. (2000) concluded that the concentration of
corporate control was related to three issues: first, creating incentives and abilities to
Journal of Advances in
influence government policies and officials; second, stunting the growth of the Management Research
countrys legal system which consequently suppresses the rights of minority Vol. 12 No. 3, 2015
pp. 249-267
shareholders; and third, producing conflicts between the public and private interests of Emerald Group Publishing Limited
0972-7981
some individuals. DOI 10.1108/JAMR-11-2014-0063
 JAMR Suehiro and Wailerdsak (2004) and Wailerdsak (2008) find that families continue to
12,3 dominate ownership of Thai businesses, without much change since 1996 (Table I). From
a total of 419 listed companies in 2006, 50.4 percent were owned by families, 30.3 percent
were widely held, 15 percent were foreign-owned and 4.3 percent were state enterprises
(Wailerdsak, 2008). The authors suspect that the resilience of family-owned businesses in
Thailand is due to the families success in investing in human capital of their offspring. In
250 addition, Thai corporations have been very successful in lobbying for minimal
enforcement of legislation that would dilute their corporate ownership and control.
After the Asian financial crisis of 1997, The Stock Exchange of Thailand (SET)
issued guidelines on CG and requested listed companies to comply by year 2000.
Todhanakasem (2001) argued that these guidelines draw on basic principles from the
West and were applied without compromising their essence. To counter complaints
about the high cost of compliance, SET rewarded early adopters with special privileges.
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Many institutional arrangements have since been launched to reform Thailands

corporate sectors and their governance.
Kouwenberg (2006) studied voluntary adoption by using data from the CG center of
the SET in 2003 to measure the implementation of fifteen principles of CG for Thai
listed companies. The study is based on the 2002 annual reports and other statutory
documents. The results reveal that there is large cross-industry variation, with the
resource sector exhibiting outstanding results for good CG (see Table II).

1996 2000 2006

Type of shareholders Number % Number % Number %

Family owned 216 48.2 183 42.3 211 50.4

Widely held 160 35.7 145 33.5 127 30.3
Foreign-owned 59 13.2 90 20.8 63 15.0
Table I. State enterprise 13 2.9 15 3.5 18 4.3
Ownership by type Total of companies 448 100 433 100 419 100
of listed companies Source: Information in 1996 and 2000 prepared by Suehiro and Wailerdsak (2004), which 2006
in the SET updated by Wailerdsak (2008)

Industry/sector Mean Max. Min. No. of companies

Agriculture and food 72.7 (66.6) 90.1 (85.9) 43.8 (35.3) 43 (42)
Consumer products 70.5 (69.7) 87.6 (85.9) 50.7 (34.6) 40 (30)
Finance 79.4 (76.5) 94.9 (95.2) 51.7 (41.0) 58 (56)
Manufacturing 74.0 (67.9) 92.8 (92.4) 57.0 (31.9) 60 (38)
Real estate 75.0 (70.1) 92.0 (91.6) 57.2 (44.9) 76 (38)
Resources 82.1 (84.8) 95.5 (94.7) 66.3 (70.7) 21 (10)
Services 74.9 (71.4) 91.5 (88.6) 49.0 (30.6) 80 (65)
Technology 79.3 (72.2) 90.3 (89.0) 62.4 (43.3) 32 (22)
Under rehabilitation NA (57.8) NA (82.4) NA (36.2) NA (13)
a
MAI 74.9 (70.4) 83.2 (86.6) 62.5 (52.9) 38 (6)
Table II. Total 75.4 (70.8) 89.8 (95.5) 43.8 (38.0) 448 (320)
The industry-wide Note: aThe Market for Alternative Investment (MAI or mai) is an exchange established in 1998 as an
CG scores in alternative market for small and medium-sized enterprise
2008 (2002) Source: IOD Corporate Governance Report of Thai Listed Companies 2002 and 2008
 Connelly et al. (2012) has questioned the effectiveness of the new CG standards set by Corporate
the Thai regulators. They argue that the official measures are more about form than governance
substance. Using data from 2005, they demonstrate that listed companies can easily
circumvent the controls meant to protect minority shareholders. The pyramidal
scores in
ownership structures arising after the 1997 financial crisis effectively render all CG Thailand
standards and regulations ineffectual.
251
2. Previous research of firm motivations for improving CG in emerging
countries
Adopting international CG standards has been shown to significantly boost firm
valuation. Such a relationship has been confirmed in numerous emerging markets
including China (Cheung et al., 2010), Korea (Black et al., 2006a, 2009), Hong Kong
(Cheung et al., 2007, 2011) and Russia (Black et al., 2006b).
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Enhanced corporate standards can be interpreted as a compromising solution to two

types of agency conflicts (Shleifer and Vishny, 1997). In the first type of agency conflict
(Type I), insufficiently-monitored managers destroy firm value to the detriment of
owners. Family or founder owned and run firms therefore have better incentive
alignment resulting in superior performance. Anderson and Reeb (2003), Villalonga and
Amit (2006) and Perez-Gonzalez (2006) all find evidence that among American
corporations, family-owned firms show stronger financial performance. Results in Stein
(1989) and James (1999) also suggest that family-owned firms execute investment
strategies more efficiently and with longer horizons.
To the contrary, firms with concentrated ownership might suffer from a second type
of agency conflict (Type II), resulting in inferior performance compared to firms with
less-concentrated ownership. In this second type of agency conflict, majority
shareholders abuse their power to expropriate wealth from minority shareholders
(Fama and Jensen, 1983). Such entrenchment effects results in under performance
(Demsetz and Lehn, 1985). Morck et al. (1988) reports that firms with founders as
managers have lower Tobin Q ratios, on average. Johnson et al. (1985) finds that the
death of the founder-CEO is followed by an unusual increase in the companys stock
return. Among Thai firms, those whose founders have more male offspring tend to
maintain stricter control over their businesses through their sons. These firms
subsequently show weaker performance (Bertrand et al., 2008).
Different legal frameworks supply varying investor protection (La Porta et al., 2000,
2002; Mitton, 2002), with common law countries (such as the USA) tending to show greater
levels of investor protection than civil law countries (such as Thailand). Social norms in
some Asian countries encouraging ties between directors and managers can also reduce
the effectiveness of stipulated CG standards (Romano, 2005; Hwang and Kim, 2009).
Firms weigh the costs and benefits associated with different degrees of CG when
choosing their levels of compliance. A cost-benefit analysis illustrates a firms
motivations. Presently, only a few studies have focussed on the relationship between
corporate motivation and CG quality. Mak and Yuanto (2002) found a negative
relationship between the size of the board and the firms value for Singaporean and
Malaysian corporations. Hae et al. (2008) demonstrated that Korean firms with good CG
practices enjoyed lower cost of equity financing, while Hae (2008) reported similar
results for debt financing. Lowering the cost of financing could therefore be one
motivation for CG reform.
Notable efforts in constructing CG indices and relating them to firm performance
can be found in Gompers et al. (2003), Bebchuk et al. (2009) and Brown and
 JAMR Caylor (2006) for the USA and Drobetz et al. (2003) for Germany. In Thailand, a CG
12,3 index was adapted to the countrys specific economic environment. It was developed by
Ananchotikul (2006), and identified the following major determinants of CG: board
structure; board responsibility; conflict of interest; shareholder rights; and disclosure
and transparency. There are very few research studies on the relationship between the
CG index and firm motivation. We found the scope was limited to studies on firm
252 valuation. Correspondingly, the study of Lei and Song (2004) found a positive
relationship between the CG index and firm value for corporations listed in Hong Kong.
Firms with a higher CG index had a higher firm valuation than those firms with a
lower CG index.

3. Empirical studies of firm motivation for Thai listed companies seeking

optimal CG
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To empirically examine how motivation influenced listed companies seeking their best
possible CGS, we conducted interviews and applied both the case study approach and
statistical testing techniques. First, in-depth interviews at a CFOs forum were
conducted for three listed companies from November 1-30, 2009. Information on the
companies interviewed are listed:
Company Q is a real estate and land developer, in the property and construction
sector. It was registered with the SET in September 1991 (CGS in 2010 was 86.00).
Company L is in the real estate and land development business, in the property
and construction sector, and was registered with the SET in February 1989 (CGS
in 2010 was 87.00).
Company J is a cell-phone distributor, in the technology sector, and registered
with the SET in June 2009 (CGS in 2010 was 68.00).
Subsequently we collected financial information from public sources in May 2009 and
in March 2011.
Second, a case study of a listed company, company P, was conducted from July to
October 2010:
Company P is in the construction business, in the property and construction
sector, and registered with the Stock of Exchange of Thailand in December 2002
(CGS in 2010 was 71.00).
Third, we applied multiple regression analyses, ANOVA and t-testing to 502 listed
companies from the 2010 stock market database to test how a firms characteristics
affected the CGSs. The discussion below outlines the main aspects of the listed
companies that wanted to achieve optimal CG quality. We applied the Ananchotikul
index as a tool to measure CG quality, and to provide insight into the relationship
between CG scoring and firm motivations.

3.1 Why companies seek to improve CG?

CG is a tool to evaluate and monitor a companys internal operations. This can provide
a widely accepted international standard and process advantage in terms of strategic
management. Moreover, from the stakeholders perspective, it ensures the
transparency of business management and is designed to prevent executives and
managers from being tempted to take advantage of their positions. A high CGS can
also boost shareholders investment confidence, leading to the increased value of their
 portfolios. Indeed, such good practices are required to increase operational efficiency Corporate
and effectiveness, enhance competitiveness and to maximize value for shareholders. governance
Firms are motivated to maintain their CG reputation. The reasons below indicate the
significant (expectancy) factors that influence CGSs.
scores in
3.1.1 Reduction in cost of debt. Company Q believed that a higher quality of CG led Thailand
to a good corporate and bond rating and resulted in lower interest rates from finance
instruments such as debentures and bills of exchange. The 2009 CGS of 83 percent 253
(excellent level) gave the company a corporate and bond rating grade of A, at an
interest rate of 6.5 percent per annum while the market rate of bank loans was 8.0
percent per year. An interest gap of 1.5 percent of financial cost reflected a reduced cost
of debt, and this could gain on the cost savings of Baht 30 million from the investment
of debentures worth Baht 2 billion.
Company Ps 2009 CGS was 71.0 percent (good level) and its corporate and bond
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rating grade was BBB+. It could issue corporate bonds at 7.0 percent interest, and the
finance lending rate was at 8.5 percent. This resulted in savings of Baht[1] 15 million
from debentures worth Baht 1 billion in 2009. Cost savings from bond-issuing showed a
directly relevant impact on the quality of CG and corporate and bond ratings, because
the rating criteria were evaluated by applying the CG categories to appraise the
corporation in terms of a valuation rating.
3.1.2 Incremental firm profitability. Company L obtained a CGS in the range of 80 to
90 partly because of its corporate responsibilities toward shareholders and investors.
This means the company had to respond to stakeholders by performing best practices
to maintain its CGS to have a good public reputation and image. This does not imply
that firms are required to achieve a perfect CGS, but the score should be high enough to
satisfy stakeholders. The company believed the quality of its CG was directly related to
firm performance and profitability. From 2008 to 2010 both company L, and company
Q, had operational profitability that gradually continued to increase.
During the same period, company Ps CGSs were 68, 71 and 76 percent and suffered
operational losses. We also observed significant weaknesses in control mechanisms
that led to a drop in the quality of CG. In 2008-2009, the company had to be assessed
and noted in income statements of a huge loss from construction projects amounting to
Baht 1.47 billion due to a reduction in the scope of work. The effect of these losses in the
income statements alerted the board and executive committee to evaluate the CG
quality monitoring systems. It was noted that in 2008, the company obtained CGSs in
parts of role of stakeholders and board responsibilities which were 45 and 54 percent
(below satisfactory grade), as the parts of shareholders rights; equity treatment of
shareholders; and disclosure and transparency were 78, 80 and 77 percent (satisfactory
grade). Consequently, company P tried improving its quality of CG. The score became
76 percent as each part in the categories was a satisfactory grade and its turnover was
a positive figure in 2010. Gradually, CGSs of company P increased from 66 percent in
2006 to become 76 percent in 2010, which was a 15 percent jump over a five-year period.
3.1.3 Improving firm value and stock price. Investors require a satisfactory CGS to
ensure confidence in the stock price and dividend payout. In other words, a high score
indicates that the top managers are working effectively, with integrity, and are
transparent. It is obvious then that a lack of a governance mechanism shall lead to a
loss of control, subsequently it would reflect on the firms reputation and would
decrease the stock price. These mechanisms can improve firm valuation, market
capitalization and dividend payout.
 JAMR From 2008 to 2010, company L and company Q enjoyed an incremental increase in
12,3 their performance, firm valuation, stock price and dividend payout, as noted in their
annual reports and the Settrade[2] web site for 2010. Company Ls CGS was
87.0 percent. It had a turnover of Baht 18.9 billion, gained on operation of Baht
3.9 billion with a net profit margin of 20.9 percent, a market capitalization of
Baht 64.8 billion, a book value of Baht 2.62 billion, a stock price of Baht 6.45 and a
254 dividend payout of 5.2 percent. Company Qs CGS was 86 percent. Its income was Baht
14.1 billion, profitability on operations was worth Baht 2.0 billion with a net profit
margin of 14.13 percent, a market capitalization of Baht 17.8 billion, a book value of
Baht 1.53, a stock price of Baht 2.10 and a dividend payout of 5.71 percent.
Compared to company Ps performance with a CGS of 71 percent, the companys
revenue was Baht 8.1 billion, profitability on operations was worth Baht 0.2 billion with
a net profit margin of 2.84 percent, a market capitalization of Baht 1.24 billion, a book
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value of Baht 2.60, a stock price of Baht 1.53 and no dividend payouts. This suggests
that firms with a higher CGS might have better firm performance and valuation than
those firms with a lower score.
3.1.4 Creating confidence among insiders and trust among outsiders. We are
concerned here with the regulator aspects of put-in-place control on the minimum
requirements for best practices in CG, in accordance with the SET and the Securities
Exchange Commissioner, which aim to ensure that firms mostly enjoy adequate control
over their monitoring systems and conduct trust-worthy operations. Company J
registered as a listed company in May 2009. The optimal quality of CG created an
atmosphere of security in the workplace because workers felt more confident about
working effectively and there was a code of best practices that affected staff
compensation and benefit systems. Company Js reward system was based on a success
and commission fee-rate. In 2010, average success and commission fee-rates were 4.94
and 21.93 percent to those settled receivables and the average percentages from 2009 to
2010 for success and commission fee-rates were 4.02 and 21.94 percent. There was also
more investment for staff training and development courses, managers in the
organization tried motivating subordinates to behave in the right ways by creating
enthusiasm among employees to perform to the best of their abilities.
Company J also announced that there was a need for a code of business ethics and
management transparency policies because this would build up investor trust and
continue sustainable corporate growth. This encouraged officers and workers to follow
strict regulations and company rules, and included recognizing the importance of
fiduciary care, integrity and transparency. The effectiveness of compliance resulted in
enhancing the quality of CG. This concurred with results from the other three
companies, which found that one reason to seek better CG was to better control
operating systems to boost the confidence of company-insiders and the trust of
investor-outsiders.

3.2. A benefit-cost analysis of CGSs

A trade-off analysis is a powerful indicator for decision making when considering
investing in the quality of CG. Most listed companies regularly consider cost-benefit
analyses by examining the investment costs required to develop CG tools compared to
the benefits the companies receive in return. Maintaining cost effectiveness with an
optimal return from firm profitability will be ideal for any firm and a challenge for
companies complying with the control and monitoring mechanisms. We explored these
 trade-offs for listed companies by investigating the costs of issuing corporate bonds as Corporate
a result of reducing the cost of funds. These reflect those bond-issuing companies that governance
have high-mean scores of CG, and those that had a higher CG mean score compared to
the non-bond-issuing companies.
scores in
There are many things to consider in a trade-off. One interviewee claimed that Thailand
listed companies need to cover the cost of debt reduction by issuing public bonds.
There are also many aspects to consider for the motivation context. For example, an 255
executive we interviewed noted that firms that have large or very large assets need to
control and monitor their assets, and this leads the firm to want to improve the quality
of corporate governance. In another case a public company was run by a professional
board and management team, which aimed for a high return on performance. Hence
they wanted to have the best possible control and monitoring mechanism and this
influenced the quality of the CG and its score. The cost-benefit analysis, or trade-off
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approach, should consider the following determinants.

3.2.1 Size of the firm. Both the size of the firm and the size of its assets will influence
a cost-benefit analysis. We have observed in the case of large firms that CG investment
costs did not matter. It was really the intention of the corporate management and board
to search for the optimal CG to improve the firms reputation and image. A mid-size
firm might trade-off the cost and benefits of these investments against corporate
profitability. The small firm might insist on not needing to have a CG mechanism
because it would not increase productivity. So it would not be necessary to invest in
one. These results were confirmed in interviews with companies.
3.2.2 Type of ownership. We mentioned that the quality of CG is a result of a firms
motivations. Private, family-owned firms are not motivated to adopt a good CG since it
adds nothing to firm profitability in terms of either operations or valuation. However, a
manager-controlled firm, whose equity shares are widely spread, does seem to have a
reason to invest in CG. It could be argued that the three companies (company Q,
company L and company P) were all family-owned firms. Their 2010 CGSs were 86, 87
and 71 percent, respectively.
Consider the company P case. The firm is a construction company, and in 2009 and
2010 it had a turnover of Baht 10 and 8.1 billion, respectively; a net profit margin of
2.0-2.84 percent, corporate assets worth Baht 9.54 and 12.22 billion. In 2010, the company
recovered from operational losses and became profitable. Company Ps strategy was to
emphasize civil work[3] with specialty in construction and the MEP[4] system. The board
structure comprised eight members, five of whom were majority shareholders and also
were executive committees. These shareholders represented approximately 30 percent
of share-voting rights, the CEO[5] held a majority of shares and held the position of
chairman of the board and essentially controlled the company. The company was a
family-controlled firm. The board under the direction of the CEO had no intention of
implementing any CG mechanisms for the company. Company P still enjoyed using
internal financial sources to enhance the companys cash flow.
In 2006-2008 the CGS of company P were 66 and 68 percent, respectively (below
satisfactory level). There was no CG rating in 2007 due to a rating suspension.
Company P ranked 350th out of a total of 402 companies in 2006, and maintained that
position again in 2008. In 2006, company P was assessed by the IOD[6] to be weakened
in the quality of CG in three areas: shareholder rights; roles of stakeholders; and
board responsibilities. These scores were 69, 51 and 58 percent, respectively. The
quality of CG of equity treatment of shareholders and disclosure and transparency
 JAMR were 75 and 83 percent. In 2008, company P still weakened in the role of stakeholders and
12,3 board responsibilities, scoring 45 and 54 percent. In shareholder rights, equity treatment
of shareholders and disclosure and transparency company P scored 78, 80 and 77 percent.
In 2007-2008, company P faced a financial crisis and required external funds. Based
on the CG rating of 66-68 percent and its deficit performance, the company had been
evaluated by TRIS[7] for bond-issuing and its ratings results for both years were D
256 (represented as junk-bond). The company could not raise corporate bonds from the
public because of this low grade. Finally, company P had to inject cash by increasing its
capital from the existing shareholders to survive the cash shortage. Company Ps board
then reconsidered improving its CG and establishing monitoring mechanisms for
overall project management.
In 2009-2010, company P obtained CGS of 71 and 76 percent, respectively and prepared
for a corporate bond rating of BBB stable. The company tried issuing corporate bonds
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worth Baht 1 billion at 6.5 percent interest rate, as market lending rate from the financial
institutions was 8.5 percent, resulted in savings of 2.0 percent. Even the poorly motivated
company P family business decided to implement a control and monitoring mechanism,
and established a quality assurance unit and CG Committee in 2010.

3.3. Firm determinants of CG quality

We analyzed the 2010 Thai stock market database to investigate the what and how
of the determinants related to the CGS. Data were collected from 502 out of 542
companies, as described in Table III. We used the technique of data and methodological
triangulation to check the validity and reliability of the CG and financial information.
The identification of dependent variables and the proxy of firm composition were
constructed which included mean and standard deviations (Appendix I). The reliability
of the coefficient (Cronbachs [8]) for CGS and firm composition (ingredients) was
0.770, which means they were adequate and suitable for statistical testing and analysis.
3.3.1 Determinants of CGSs. The multiple regression results (Appendix I) show the
following factors were positive and statistically significant: frequency of meetings, firm
size and liquidity, firm performance, board structure, and other financial factors.
Results imply that governance mechanisms are activated by having more frequent
board/management meetings. The size of the firm was positively related to the quality
of CG. That is, companies used CG control tool to establish accountability and
reliability of assets and inventory control procedures. The very large firms tried to
spend more on improving CG quality with an efficient control application. Small firms
tried spending less after weighing the costs against the benefits of investing in CG.
In terms of board structure, a higher proportion of executive board members is
associated with higher CGSs, on average. This result casts doubt on the effectiveness of
so-called independent directors. Perhaps, the informal relationships between managers
and board members as noted by Romano (2005) and Hwang and Kim (2009) are behind
these non-standard findings.

Data collection Number of observations Number of delists Total numbers

Table III.
Data collection from Listed companies in SET 442 36 478
the 2010 stock Listed companies in MAI 60 4 64
market database Total 502 40 542
 Finally, various measures of performance (Tobins Q, ROA, net profit margin, and Corporate
dividend yield) are associated with higher governance scores. This result is consistent governance
with a number of previous studies in clouding Core et al. (2006), Cheung et al. (2007,
2010, 2011) and Black et al. (2006a, 2006b, 2009).
scores in
We were surprised to find that firm valuation had no impact on the quality of CG. Thailand
Gompers et al. (2003) argued that firm valuation had a positive relationship with the
quality of CG. We noticed that firm valuation did not reflect the quality of CG because the 257
direction of the stock price on the stock market could be influenced by other
psychological factors, whereas the firms book value may not disclose material
information and income statements might be biased according to a conservative
approach. As for the age of board members and managers, this was not related to CGS, as
there were both young and old executives and this made no difference to the CG quality.
3.3.2 How firm size affects CGSs. A multiple regression analysis found that firm size
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was positively related to the CGS. We now apply ANOVA for further insights
(Appendix II). Firms were classified into four size categories: very large, large, medium
and small. The results show significant differences in mean scores across firm sizes
(CGS mean of very large size CGS mean of large size CGS mean of medium
size CGS mean of small size). We found the CGS mean of the very large firms was the
highest; followed by the large firms, and medium firms. The CG mean score for small
firms was the lowest. These results suggest that big firms require control mechanisms
such as internal control systems to monitor and control their operations. Therefore the
very large firms are the most motivated to invest in a high-quality CG mechanism
because they receive the most return on this investment.
3.3.3 How ownership affects CGSs. We performed the ANOVA testing to verify
the differences between the mean CGSs according to four types of ownership
(Appendix III): state enterprise, public company, private company and family
business. The results show positive relationships between different ownership types.
We note that the CGS mean for a private company and family business are not
significantly different, but the CGS means across these three types of ownership are
significantly different: state enterprises, public companies, and private/family
business. The CGS mean for a state enterprise ranked highest, followed by the public
company, the private company and then the family business. State enterprises, that
are owned by the government, have strictly adhered to CG principles; the CGS mean
was very high (mean very good in Appendix V). In the private sector, we found that
the optimal CG of a public company with many public shareholders was also very
high (very good), compared to private companies and family businesses owned by
just one individual or a private group. We found that these private companies and
family businesses paid less-attention to CG.
3.3.4 CGSs of bond-issuing companies. What is the difference between the CGS
of a bond-issuing company and a non-bond-issuing company? We used a t-test to
measure the difference between CGS means. There were 23 bond-issuing companies
and the other 479 companies were non-bond-issuing companies (Appendix IV). We
explored the positive relationship to CGS and the significant differences between the
CGS means of the two groups. Here, we found that the CGS mean of bond-issuing
companies was significantly higher than those of the non-issuing companies. This
explains why those bond-issuing companies preferred interest cost savings from
debentures. The non-bond-issuing companies might trade-off the quality of CG and
cost of investment, and still enjoy their internal financial source of funds.
 JAMR 3.4 Limitations and conclusion
12,3 This research contains certain weaknesses. First, the qualitative survey of executives
were limited in number and scope. Second, data were collected over only a one year
period, and this may not be sufficient to accurately predict the relationships between
CGS and firm composition. One suggestion for future data collection could be to collect
data for more than one year. Third, the measurement tools of firm determinants are just
258 developed and drawn out in the surroundings of firms motivation, the investigation
and generalization of these tools and results are still limited. For further studies, the
conceptual framework of the firm composition should be expanded to cover other areas
of firm characteristics. Comparative research should also be conducted among
emerging and developed countries. These findings would provide more generalizations
and ensure a better quality of CG. The measurement tools for the motivation context
have to obviously be identified in order to adopt the validation measurement. This will
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contribute to more effective mechanisms for further study in various areas of business.
The results we obtained should be useful to make generalizations regarding the
motivation of Thai listed companies that apply CG practices to obtain optimal CGSs.
We can see that the motivation measurement (proxy) is presently disguised in the form
of firm determinants and behavior. Firms want to achieve an optimal CGS for many
reasons. CG reduces debt costs, incrementally improves firm profitability, encourages
an increase in firm value and creates confidence among insiders and trust among
outsiders. Moreover, based on interviews, we initially observed that firm size and
ownership types may broadly predict the quality of CG. We further performed an
empirical study to test 502 companies from the 2010 stock market databases. Multiple
regression analysis revealed that the frequency of board meetings, firm size and
various measures of financial performance were associated with higher CG sores. Firm
valuation and the size and age of board/management members did not affect
governance quality.
The motivation of a firm depended on the intentions of the board and management.
We observed that the size of the firm and type of ownership had positive relationships
with CGS. Firm size is related to the quality of CG; the more the firm grows, the higher the
optimal CGS will be. The very large firm tries to perform the very best CG practices for
effective asset and inventory control, but the smaller firm has no need for this control
system. We have noted that the CGS mean for the state enterprise was the highest,
followed by other public companies, and then private companies and finally, family
businesses ranked lowest. It is noted that state enterprises have complied with Best
Practice principles. For the private sector, however, CG decisions depend on the type of
ownership. The more shares that are spread out among shareholders, the higher the
quality of CG. We also find that the quality of CG of bond-issuing company is greater than
for non-bond-issuing companies. Bond-issuing companies enjoy lower cost of funding
from the external financial market compared to the non-bond-issuing that still use internal
sources of fund. In summary, we can conclude that these findings show that specific firm
characteristics can affect the CGS and could broadly predict the quality of CG.

Notes
1. Baht is approximately equivalent to US dollar 0.0333 in 2009.
2. Settrade is a web site of the Stock Exchange of Thailand, which announces necessary
financial information to the public.
3. Civil work is a technical term that means the construction work.
 4. MEP is a technical engineering term that stands for mechanics, electronics and pumping. Corporate
5. CEO stands for chief executive officer. governance
6. IOD is a credit rating agent which supported by the SET and its duty is to provide the scores in
assessment of the quality of CG to those listed companies and shows the CG score results in Thailand
IODs web site. IOD stands for Thai Institute of Directors.
7. TRIS is a private and credit agent who evaluates and issues corporate and bond rating to 259
the companies and public. TRIS stands for TRIS Corporation Limited.
8. Cronbachs is a tool that measures the reliability of determinants. This explained the
determination (factor) of certain relation of each factor which considered the reliability value
was greater than the acceptable value of 0.700.
9. The factor analysis is a statistical method that summarizes the initial set of data or
variables from a survey and categorizes them into an exiguous set of correlated composite
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determinants. It is used to describe variability among correlated variables, and it is to

remove the redundancy of correlated variables.
10. The varimax technique is a rotation method that attempts to simplify the columns of the
factor matrix by achieving the maximum simplification when only 1s or 0s are presented in
the column of the matrix.
11. Multicollinerity is a statistical phenomenon in which two or more variables (determinants)
in a multiple regression model are highly correlated.
12. KMO stands for the Kaiser-Meyor-Olkin, which is a statistical tool to used measure the
reliability of a variable. To test the factor analysis, the KMO should be greater than 0.5.
13. State enterprise means it is owned by the government.
14. Public company means company shares are traded publicly.
15. Private company means most shares held by private entities.
16. Family business means the shareholders are family members.

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(The Appendix follows overleaf.)

 JAMR Appendix 1. The relationship between corporate governance scores and firm
characteristics
12,3 Factor analysis[9] and the varimax technique[10] were applied to solve multicollinerity[11]
problems. The results reveal significant relationships among ten factors. The KMO[12] and

Min. Max. Mean SD N

262
Variables (proxy)
(1) Corporate governance score (log) 3.50 4.58 4.43 0.16 502
Dependent variables and determinants (proxy)
(2) Size variables:
1. Asset size (log) 4.81 14.48 8.20 1.67 502
2. Market capitalization (log) 2.39 13.72 7.73 1.79 502
(3) Valuation variables:
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1. Tobins Q 0.33 7.51 1.31 0.76 502

2. Price to book ratio 7.59 291.2 2.35 13.17 502
3. Dividend yield 0.00 6 0.04 0.03 351
4. Earnings per share 0.00 0.27 3.19 8.26 429
5. Book value 3.48 91.00 19.73 43.31 502
6. Market value 0.51 427.50 27.02 69.30 502
792.00
(4) Performance variables:
1. Return on assets 0.76 0.53 0.08 0.12 435
2. Return on equity 0.00 8.73 0.18 0.43 431
3. Net profit margin 0.00 1.01 0.11 0.09 432
4. Sales growth 0.00 45.03 0.40 2.32 369
(5) Liquidity and leverage variables:
1. Current ratio 0.04 175.42 3.07 9.26 495
2. Interest coverage 389.39 868.80 32.97 112.16 342
3. Debt to equity 0.01 234.59 2.33 13.12 496
4. Debt to assets 0.00 2.33 0.46 0.27 495
(6) Firm Age variables:
1. Average age of firm since established (log) 1.10 4.91 3.26 0.53 502
2. Average age of firm since listed (log) 0.00 3.74 2.43 0.78 502
(7) Management age variables:
1. Average age of independent directors (log) 3.64 4.37 4.10 0.12 502
2. Average age of audit committee (log) 1.39 4.35 4.10 0.17 502
3. Average age of directors (log) 3.67 4.27 4.04 0.09 502
4. Average age of the executive committee (log) 3.50 4.27 4.00 0.12 502
(8) Frequency of meeting variables:
1. Frequency of independent board meetings (log) 1.39 3.53 1.91 0.45 502
2. Frequency of board meetings (log) 1.39 3.53 1.91 0.45 502
3. Frequency of Ex Com meetings (log) 0.00 4.74 2.00 0.56 502
4. Frequency of audit committees meetings (log) 1.00 4.06 1.66 0.41 502
(9) Board structure:
1. Number of executive committee members (log) 0.69 3.50 1.77 0.48 502
2. Number of managers on the board (log) 0.69 3.93 2.04 0.46 502
3. Size of the audit committee (log) 1.10 1.61 1.15 0.11 502
4. Number of independent directors (log) 1.10 2.30 0.26 1.37 502
5. Size of the board (log) 1.61 3.04 2.31 0.25 502
6. No. of Managers/No. of directors (Log) 0.73 4.38 3.27 0.70 502
7. No. of Ex Com/No. of directors (log) 1.83 4.38 3.50 0.57 502
8. No. of independent directors/No. of directors (log) 3.00 4.38 3.67 0.20 502
Table AI. 9. No. of audit committee/No. of directors (log) 2.66 4.09 3.44 0.24 502
Descriptive statistics 10. No. of managers/No. of Ex Com (log) 2.30 4.61 4.38 0.47 502
of variables Source: Data from SETSMART (www.setsmart.com), web site of the Stock Exchange of Thailand
 Bartletts test and 2 test results were 0.681 (variance explained 68.10 percent) and 7,674.866. (435 Corporate
degrees of freedom, significant 0.000), respectively. The factor loadings and commonality of each governance
factor were greater than 0.4, and the eigenvalue was greater than 1.0. In this stage, six determinants
were excluded: price to book ratio, debt to asset ratio, no. of independent directors/no. of directors scores in
(log), no. of audit committee/no. of directors (log), no. of managers/no. of Ex Com (log). Thailand
Multiple regression results indicate ten factors that are related to CGS, with R2 0.327. The
standardized coefficients ( s) for the ten factors were in the range of 0.004 to 0.799.
The coefficients for the following factors were positive and statistically significant (italic in 263
the following table): frequency of meetings, firm size and liquidity, firm performance, board
structure, and other financial factors.

Factor grouping Determinants (proxy)

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Factor 1: Frequency of meetings 1. Frequency of independent board meetings (log)

Factor 2: Average age of firm and directors
Factor 3: Firm valuation
Factor 4: Number of executives
Factor 5: Firm size and liquidity
Factor 6: Firm performance
Factor 7: Board structure
Factor 8: Board size and ROE
Factor 9: Other financial factors
Note: Sorted by factor loading
2. Frequency of board meetings (log)
3. Frequency of executive committee meetings (log)
4. Frequency of audit committees meetings (log)
5. Average age of firm since established (log)
6. Average age of firm since listed (log)
7. Average age of independent directors (Log)
8. Average age of audit committee (log)
9. Average age of directors (log)
10. Average age of the executive committee (log)
11. Earnings per share
12. Book value
13. Market value
14. Number of executive committee members (log)
15. Number of managers (log)
16. Asset size (log)
17. Market capitalization (log)
18. Interest coverage
19. Leverage ratio
20. Tobins Q
21. Return on asset (ROA)
22. No. of managers/No. of directors (log)
23. No. of Ex Com/No. of directors (log)
24. Number of audit committee members (log)
25. Number of independent directors (log)
26. Number of directors (log)
27. Return on equity
28. Net profit margin Table AII.
29. Dividend yield Description of factor
30. Current ratio groupings from
factor analysis
 JAMR R2 R ANOVAa
12,3 F-testb Sig.
0.327 0.572 15.576 0.000
Standardized
Factors coefficientc Coefficients
Firm composition t-Test Sig. Relation
264 Constant 0.799 164.469 0.000
Factor 1: Frequency of meetings 0.034 6.966 0.000 positive
Factor 2: Average ages of directors, managers and firm 0.001 0.217 0.828
Factor 3: Firm valuation 0.004 0.832 0.406
Factor 4: Number of executives 0.005 1.090 0.277
Factor 5: Firm size and liquidity 0.034 7.058 0.000 positive
Factor 6: Firm performance 0.010 2.052 0.041 positive
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Factor 7: Board structure 0.024 4.946 0.000 positive

Factor 8: Board size and ROE 0.003 0.630 0.529
Factor 9: Other financial factors 0.016 3.294 0.001 positive
Notes: aANOVA stands for analysis of variance. Its a collection of statistical models that analyze the
differences between group means. ANOVA tests whether or not the means of several groups are equal;
Table AIII. b
F-testing is a tool used to compare factors to the total deviation; ca standardized coefficient ( ) is a
Summary of multiple statistic that analyzes independent variables that have been standardized so that their variances are
regression analysis one. It also presents the positive or negative relationship to a dependent variable
 Appendix 2 Corporate
The results of ANOVA testing indicate H0 was rejected in both the tests for homogeneity of
variance and the robust test for the equity of the CGS mean. The CG mean scores for the four governance
types (very large, large, medium and small) were significantly different (inequity), which means scores in
that very large firms had the highest CGS mean when compared to the large, medium and small Thailand
firms. The large firm had the second highest CGS mean, which was higher than medium and
small firms, but was lower than the very large firms. The medium firms had the third highest
mean scores and the smallest firms had the lowest CG mean scores. 265

Class Amount of assets Number Proportion CGS Mean SD

(assets) Baht observed (%)
1 Small:
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assets 650
million 129 25.69 70.47 12.04
2 Medium:
assets W650,
1,700 million 125 24.90 76.32 9.03
3 Large:
assets W1,700,
7,500 million 126 25.10 79.44 10.08
4 Very large:
assets W7,500
million 122 24.34 85.16 7.83
Total 502 100.00 77.75 11.21
Testing results
Test of Robust test of Asset Comparisons among firm sizes
homogeneity of equity of amounts: categorized by ANOVA (at 0.05),
variance CGS mean units in Baht Fishers LSD
(CG mean)
Levene statistic Brown Forsythe Type 4 Type 3 Type 2 Type 1
(85.16) (79.44) (76.63) (70.47)
7.552 48.583 Type 4: very W W W
( 0.000) (Sig 0.000) large (85.16)
Rejected H0 Rejected H0
Type 3: large o W W
(79.44)
Type 2: o o W
medium
(76.63) Table AIV.
Type 1: small o o o Summary of firm
(70.47) size comparisons
 JAMR Appendix 3
Types of ownership were classified into four types: state enterprise[13], public company[14],
12,3 private company[15] and family business[16] The results of ANOVA testing indicate the H0 was
rejected in both the testing of homogeneity of variance and robust test the equity of the CGS
mean. The CGS mean among three types: public company, state enterprise and group of private
company and family business were significantly different. The CGS mean of a private company
and family business was the same. This implies the state enterprise had the highest CGS mean
266 and the CGS mean was different and significantly higher than for public companies, private
companies and family businesses. It also found that the mean for the public company was the
second highest. The private companies and family businesses had the lowest CGS mean
compared to both of public companies and state enterprises.
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Type Degree of Number of Portion CGS SD

ownership observed Mean
1 Public company 91 18.13 83.82 7.57
2 State enterprise
(government) 19 3.78 89.63 4.21
3 Private company 181 36.06 76.04 12.01
4 Family business 211 42.03 75.52 10.66
Total 502 100.00 77.75 11.21
The results of testing
Test of Robust test of Types of Comparisons among types of
homogeneity of equity of CGS mean ownership ownership categorized by ANOVA
variance (CG mean) (at 0.05), Fishers LSD
Levene statistic Brown Forsythe Type 2 Type 1 Type 3 Type 4
(89.63) (83.82) (76.04) (75.52)
8.275 34.314 Type 2: state W W W
( 0.000) (Sig 0.000) enterprise (89.63)
Rejected H0 Rejected H0
Type 1: public o W W
company (83.92)
Table AV. Type 3: private o o equity
Summary of company (76.04)
comparisons among Type 4: family o o equity
types of ownership business (75.52)
 Appendix 4 Corporate
The t-testing results shows the H0 was rejected in both testing of homogeneity of variance and
the t-test of the differences between CG mean scores. There was a significantly different governance
relationship between the CGS mean for both groups of companies. This indicates the CGS mean scores in
for bond-issuing companies was significantly higher than for non-bond-issuing companies. Thailand

267
Group Types of companies Number of Portion CGS SD
observed Mean
1 Non-bond-issuing
companies 479 95.42 77.18 11.058
2 Bond-issuing
companies 23 4.58 89.57 7.076
Total 502 100.00 77.75 11.207
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The results of testing

Test of homogeneity of variance t-Test analysis Test of equality of
means ( 0.05)
Levene -Value Result t-Test -Value Result
Statistic hypothesis (2-tailed) hypothesis
5.042 0.025 H0 is rejected Equal variance 5.317 0.000 H0 is Table AVI.
assumed rejected t-Testing of
Equal variance not CGS between
assumeda 7.941 0.000 non-bond-issuing
a
Note: The result of homogeneity of variance was rejected for H0. We used the measurement tool of and bond-issuing
Equal variance not assumed for the t-testing analysis. companies

Appendix 5

CG score range Description Assessment disclosure

90-100 Excellent Excellent

80-89 Very good Very good
70-79 Good Good Table AVII.
60-69 Satisfactory Satisfactory and below CG score and
50-59 Pass assessment
Less than 50 Not applicable disclosure

Corresponding author
Winai Wongsurawat can be contacted at: winai.won@mahidol.ac.th

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