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Asia Pacific Journal of Management, 21, 103–122, 2004 c 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.

Stakeholders, Structure and the Failure of Corporate Governance Reform Initiatives in Post-Crisis Thailand STEVEN WHITE [email protected] Asian Business and Comparative Management Area, INSEAD, Boulevard de Constance, Fontainebleau 77305, France

Abstract. This paper brings together institutional and political perspectives in a framework for mapping the process by which strategic change initiatives are introduced into a system but result in outcomes that may not be intended, expected or desired by the original architects of change. This general framework links stakeholders, structural elements and their interactions to emergent system-level phenomena. It also enables comparison across different systems undergoing change; for example, to understand why the outcomes of the “same” initiatives may very dramatically in different contexts. To illustrate the framework, we examine the process by which an initial flurry of corporate governance reforms in post-financial crisis Thailand have been largely stymied, in spite of a seemingly clear need for such reforms and the conviction of some domestic and foreign promoters of such reforms. Keywords: corporate governance reforms, Thailand, stakeholder

Introduction Crises triggered by short- or long-term changes in the external or internal environment, and the attempts to address them through various types of change and reform, are not limited to any particular type of firm, industry or region. However, recent years have seen large numbers of firms in Asia, as well as entire national economies, faced with severe challenges to their very existence, whether in the context of the Asian financial crisis or, over a longer period, China’s transition to a more market-oriented business system. The challenge for both managers and policymakers in such environments, however, has not been to identify the need to change, or even the performance objectives, but to find the way to link those stimuli to solutions, and those solutions to desired outcomes. To this is the added dimensions of origin and pace of system reforms, whether top-down shock therapy (e.g., Sachs, 1996) or incrementalism (e.g., Stiglitz, 1999), or bottom-up and emergent decentralized reform (Meyer et al., 2002). Though understanding with the intention of improving national, industrial or organizational response to such challenges is a critical issue, research in this field is hampered by lack of a general analytical framework. Such a framework is necessary in order to understand the mixed success of systems and reformers to respond to the challenges represented by environmental and organizational change. Of particular interest in the contexts like post-crisis Southeast Asia and transition economies (e.g., Russia, China) is the fit and performance of reforms that have originated from Western, primarily US, business systems and intellectual

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traditions. In this regard, one objective of this paper is to contribute to the debate taken up by scholars such as Allen and Gale (2000) and Redding (2001, 2003), and naturally extending the inquiry within comparative business systems (e.g., Whitley, 1999; Hall and Soskice, 2001; Berger and Dore, 1996). The debate centers on a fundamental difference between extreme forms of universalism and particularism in the discussion of managing change in organizational, national or even global business systems. While the prescriptions of supranational organizations such as the IMF and World Bank carry a strong sense of universalism in terms of both the objectives and means of achieving economic performance, the mixed record of reforms based on their prescriptions has called that universalism into question. More thoughtful scholars (e.g., Redding 2003) are beginning to ask (a) what alternative means of organizing economic activity may emerge from different configurations of culture, institutions and other national and contextual features, and (b) what are the most efficient means in a particular context. In terms of corporate governance, for example, O’Sullivan (2000) shows how institutional and other differences between Germany and the United States have lead to very different corporate governance systems in these two countries. Redding (2003) goes even further in his analysis of corporate governance in post-crisis Asia; namely, that alternative forms of corporate governance are not just different in how they operate, but may represent the most efficient form in the countries in which they are found due to the particular configurations of social, economic and other features in these system. The framework proposed in this paper and illustrated in the case of corporate governance reforms in Thailand is an attempt to pursue the configuration-fit argument by explicitly tracking the series of actions and reactions as changes are introduced into a system. In this emprical case, we want to understand why the initial wave of very dramatic reforms targeting change in the Thai system of corporate governance, introduced in the three years following the devalutaion of the Thai baht, has since then led to no appreciable change in corporate governance (Table 1). This is in spite of strong pressure from the IMF, World Bank and international investors, as well as the success of the elected government to introduce legal and regulatory reforms in line with foreign prescriptions in the early post-crisis years. The following section introduces this general framework, integrating relevant theoretical perspectives that allows for both choice and institutional pressures. We use the Thai experience with corporate governance reforms to illustrate the various dimensions for analyzing system change: stakeholders, external and cognitive structure, interdependence, coherence and integrity. This generates insights into the process by which initial reforms were later reversed or their impact muted. Besides insights into this specific case, we also discuss how this framework and its related constructs could help make comparisons of change processes across contexts. Such improved understanding and ability to compare not only improves theoretical discussion, but also informs policymaking and managerial practice. Stakeholder-structure interaction framework The framework we propose for studying phenomena related to system change (Figure 1) has four basic features: (1) it is an open systems model, (2) the system is comprised of stakeholders and structural elements, (3) the relationships among stakeholders and structural elements

CORPORATE GOVERNANCE REFORM INITIATIVES IN POST-CRISIS THAILAND Table 1.

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Outcomes as of late 2002.

Behaviors No change in businessmen’s attitudes; no will to modernize “rules and regulations”. Family-controlled firms ignore reform calls; wait for the improving economy to boost their performance. IPOs of state-owned enterprises (e.g., Thai Airways, Petroleum Authority of Thailand, etc.) don’t include improvements in management style, corporate governance, entrenched management, etc. Market values decrease post-IPO. State bank lending increases with no improvement in lending process or criteria. McKinsey results of a survey of 140 major Thai firms: Only 5% of listed firms give enough information, 10% have voting mechanisms supporting minority shareholders, 11% give adequate information to analyists; but 76 had a majority of non-executive directors, 68% had independent directors (25–50% of total directors), 22% of chairmen also independent. Media: Thaksin and other business families buy up cash-strapped media properties; direct ad revenues to cooperative media; launch AMLO (anti-money laundering organization) investigations into journalists critical of government and policies. Performance Public debt reaches 59% of GDP; estimates that 5% growth is necessary to service public debt. Corporates: Debt-to-equity ratios still too high for most firms to get new loans for investment; debt burden only reduced by lower rates. Increased corporate liquidity only as short-term loans converted to long-term loans; lower foreign debt. GDP in 2002 B3.06 trillion, vs. B3.12 trillion in 1997. Liquidity trap: Neither an increase in money supply nor interest-rate reduction can spur demand. Exports continue to decline from peak in 2000 (est. US$55 billion in 2002, vs. US$ 68 billion in 2000). Estimates of 9% unemployment (official statistics: 4.4%). Even after TAMC “cleaning up”, still 10–20% non-performing loans. Recovery in property sector but not elsewhere. Manufacturing utilization ratio at 60% (compared to 80% pre-crisis). “The market could plunge at any time because the private sector has yet to improve its performance” (2002).

generate system-level characteristics, and (4) system-level outcomes emerge from the complex interactions among stakeholders and structural elements. First, adopting an open systems perspective (Ashby, 1956; Scott, 1998), we explicitly recognize that interactions may take place outside, within and across organizational boundaries. This is particularly important in change initiatives such as corporate governance reforms that involve actors within and outside of firms; i.e., outcomes are affected by both. Furthermore, as Scott (1998) notes, since organizations depend on interactions with their environment for their survival, defining an organizational boundary is arbitrary. Therefore, while a particular set of changes may be implemented at the organizational level, the framework proposed here is system-level, incorporating elements of what other scholars may distinguish as firm-level or environmental factors. The second feature of the framework flows from the first; i.e., the system can be described in terms of elements and the nature of their interactions. One set of elements are the actors in the system. We draw on political perspectives on organizations and adopt the

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Response (“Solution”)

Stimulus a

b

c

d

Outcome e

f

System-level manifestation (outcome of element-level interactions)

Element-level

Stakeholders Interests, power

External structure

Cognitive structure

Laws, regulations, organizational structure, rules, routines, procedures

Values, beliefs, assumptions, identity

Organizational environment (“internal”) Ecosystem environment (“external”)

Figure 1.

General multi-level process model.

term “stakeholder” to denote the individuals or groups in the system who have a stake in an organization (Freeman, 1984) because it affects their particular interests. They are the “agents” in Beckert’s (1999) framework for understanding institutional change, and they can take action proactively or reactively. These stakeholders differ in their degree and sources of power to pursue their interests (Morgan, 1986:159); i.e., stakeholders are not created equal. To power and interests, Mitchell (1997) adds legitimacy and urgency to identify what he calls “salient” stakeholders. Our framework diverges from the stakeholder approach of most scholars who implicitly or even explicitly distinguish between “managers” and “stakeholders” (e.g., Jones, 1999; Donaldson and Preston, 1995; Jawahar and Mclaughlin, 2001). We do not designate any stakeholder as focal or central. Rather, like Calton and Kurland (1995), we see stakeholder relations as multilateral, only distinguishing among stakeholders in terms of their interests and relative power. This leads to a true multiparty, network view of stakeholders, rather than the manager-centric perspective of most management scholars who have used a stakeholder approach for such issues as corporate social responsibility and ethics (e.g., Donaldson and Preston, 1995), or some who have advocated a “network” approach to stakeholder management that still has “management” at the center (e.g., Rowley, 1997). These stakeholders, however, are not unconstrained in their options for pursuing interests and exercising power. This leads to another set of elements in our framework; namely, those that structure the actions of stakeholders by either constraining or motivating particular behaviors. Institutional theory suggests a broad range of such structural elements, including

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both formal rules and informal norms (Scott, 1995). Once we admit multiple stakeholders, however, it becomes necessary to recognize that the set of salient elements of such structure differs for each stakeholder. Of these elements, some may be relevant for more than one stakeholder, while some may be unique to a particular stakeholder. Therefore, we distinguish institutional structures as either existing independent of a particular stakeholder, what we call “external structural elements”, and those that are subjective and cognitive, including the “ideational” forces suggested by Weber (1964). Child (2000) also drew on Weber to make a similar distinction among different bases of the institutions that, in turn, constrain or enable managerial choice. As external structural elements, in addition to the economic and technical imperatives cited by Weber and Child, we add other elements that constrain or motivate particular behaviors by stakeholders, including laws, regulations, formal procedures, and precedent or accepted practice. In Child’s model, these are the structural elements generated by key institutions of the state, legal system, financial system, and family (Child, 2000:40). Cognitive structural elements, in contrast, include culture, values, beliefs, assumptions (e.g., Schein, 1985), or stakeholders’ schemas for perception and action (Weick, 1974). These cognitive elements may be implicit, even to the stakeholders themselves, and their existence discerned only indirectly based on the types of behavior that stakeholders consider natural, normal, expected or preferred. By incorporating stakeholders along with structural elements, this framework builds on the notion of institutional entrepreneurs (e.g., Dimaggio, 1988; Fligstein, 1997; Kondra and Hinings, 1998). This perspective represents a compromise between the two extremes of, on one hand, strategic choice (Child, 1972) and its “great leader” image of organizational functioning and, on the other hand, institutional theory and the impotence of actors in the face of isomorphic pressures (DiMaggio and Powell, 1983; Greenwood and Hinings, 1996). In practice, stakeholders pursue interests and exercise power, but their opportunities are constrained by the structural elements of the system in which they are acting. The structural elements may be external to a stakeholder—laws, rules, regulations, technical or economic imperatives—or cognitive and internalized by a stakeholder, such as values, assumptions, beliefs and priorities. While it is clear that external and cognitive structures interact to create, reinforce or diminish each other (to the extent that Child (2000) presents institutions as the manifestation of their interaction), we distinguish between them to provide greater richness to the description that the framework generates. These structural elements are not fixed and may be altered by stakeholder action, as represented by Gidden’s (1979) concepts of structuration and the conflation of action and structure. Archer (1995) proposes a more specific cyclic model relating structure and action, where it is not just the objectification of reality that is reconstructed, but actual structure. She proposes a process including three sequential but overlapping phases: structural conditioning, socio-cultural interaction, and structural elaboration (Friedman and Miles, 2002). In other words, stakeholders take actions subject to a socially constructed reality, and those actions may in turn alter that reality. Stakeholders may attempt to change some parts of the system’s structure, but at the same time are constrained by other structural characteristics of the system. Archer (1996) describes this interaction in terms of how the structural elements put prices and premiums on different interpretations of reality, as well as on particular actions

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by stakeholders. New structures emerge from the complex interaction among stakeholders and existing structure. The aggregate nature of the relationships among these stakeholders and structural elements in the system leads to the third feature of our framework; namely, that a system can be characterized in terms of its integrity, which is a function of the degree of interdependence and coherence among elements of the system. This builds on Archer’s (1995) attention to (a) the relative importance of relationships and (b) the compatibility between actors and social structure, which she uses to predict the type of strategic action based on different situational logics. Unlike Archer, who focuses on the element-level—particular stakeholder action and resulting changes in structure—we are using these dimensions to describe the system’s relative openness to change. A system of high integrity, in which the elements are both tightly coupled and mutually reinforcing, is highly resistant to change. As either of these characteristics weakens, however, there is greater likelihood that conflict between stakeholders, or stakeholders’ incentives to change structure, will increase and result in changes in the system (Greenwood and Hinings, 1996; Scott, 1998). These inconsistencies create opportunities for certain stakeholders, the “institutional entrepreneurs” (Beckert, 1999), to pursue their interests. The result of their actions may be relatively minor, local accommodations and adjustments in structural elements or stakeholders (particularly if interdependence is relatively low), or may be major changes in the system, as power shifts dramatically among stakeholders with different interests and they cause changes in structure that may ripple through the system or be amplified because of interdependencies. Finally, the dimensions of interdependence and coherence among stakeholders and structural elements (external and cognitive) provide the basis for describing the process by which system-level phenomena emerge. Like Archer (1995), we propose a temporal sequence of processes in which stakeholders and structure interact and recreate structure. In addition to specific changes in stakeholders, their attributes and structural elements, we are also concerned with the outcomes (changes in behavior and performance) of the change process. In our framework, there are therefore three temporal stages: stimulus generation and recognition, followed by solution generation, and finally implementation and solution outcomes. We treat them in this order because it represents the logical ordering of the stages; i.e., solutions are generated in response to a stimulus, and outcomes follow implementation of solutions. We do recognize, however, that the process is circular; specifically, behaviors and performance outcomes may in turn become a stimulus for stakeholders to generate new solutions, and so on. For descriptive purposes, we will begin with a system—comprised of stakeholders and structural elements—that is in dynamic equilibrium. This does not deny the possibility that there is tension, competition, conflict or other pressures within the system. These forces, however, are balanced and represent a status quo. Path a in Figure 1, however, represents a shift in any part of the system that could upset the equilibrium. Examples include a dominant stakeholder losing power over other stakeholders with different or competing interests; a new regulation changing the relationship between certain stakeholders or their relative power and dependence; or a new set of values emerging and challenging the legitimacy of previously dominant values. Such shifts could serve as stimuli for change within the system, whether limited to only one or a few stakeholders or structural elements, or more broadly.


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Path b represents that stimulus entering the system and the beginning of the first of the two stages proposed in our model; namely, stakeholders (but not necessarily all of them) respond to the stimulus and generate a response, which we term a “solution” (Path c). This corresponds to the constructs of perceived performance and pressures to change in Sastry’s (1997) model, although our recognizing multiple stakeholders also holds the possibility that not all of the stakeholders will sense the same problem (stimulus). Similarly, some but probably not all stakeholders will be involved in generating a response to that stimulus. Thus, at the end of Path c we have a solution, generated by a subset of stakeholders who are acting based on their interests, with some degree of power to pursue those interests, and in consideration of (but not necessarily slave to) the external and cognitive structural elements to which they are related. This is a general conceptualization of the situation in which some but not all stakeholders perceive a problem and generate a solution to that problem. The challenge to those resultling changes emerges from the fact that not all stakeholders perceive the stimulus and, of those who do, not all of them perceive it as a problem. The danger arises because the solution generated by one or more stakeholders is similarly subjective, considered either best or appropriate for those but not necessarily all stakeholders. In other words, both perceiving stimuli and generating solutions are likely to be “local” rather than global in terms of the stakeholders and structural elements. On the other hand, just because one or more stakeholders perceive a stimulus, that does not necessarily result in a solution being generated. The system of multiple stakeholders and structural elements could either dampen the impact of the stimulus so that no solution is generated, or amplify it so that the entire system backs it. For example, if only weak stakeholders perceive a stimulus for change, any initiative they attempt may be blocked by structural elements or dominant stakeholders. The process may be active—the dominant stakeholder(s) block the discourse or other action necessary to generate a solution. Alternatively, it may be passive; for example, while a stakeholder may sense a need for change, they may feel impotent in the face of either stakeholders or structural elements and view any initiative on their part as futile. How the system responds—either generating a solution or not in response to a stimulus— is also affected by the degree of interdependence and coherence among the stakeholders and structural elements of the system. If the system is high on both of these dimensions, it would work against any stimulus for change that is in opposition to the (shared) interests and consistent incentive structure of the system. On the other hand, if the stimulus coincides with those interests and incentive structures, then we would expect it to facilitate the generation of a solution. It is critical to note that there is no ex ante assumption about whether generating a solution or not is “good”; it is easy to see how an organization or other system could be crippled if it were overly receptive to stimuli and spent too much effort on generating solutions. Nor, in the case of a solution that was generated by a highly interdependent and coherent system, is that solution necessarily good or bad. These issues are discussed in more detail as implications for research and practice because they relate to the difference between objective and subjective (or stakeholder-based) analyses. Given that a system has generated a “solution”, regardless of the extent to which different stakeholders or range of structural elements were involved, there is no direct path to the outcomes resulting from that solution. Indeed, this begins the second stage of the process, in

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which solutions go back into the system (Path d), interact with stakeholders and structural elements and, if “implemented”, have consequences in terms of behavior and performance (Path e). Of course, even if a solution is generated and goes back into the system, that does not necessarily mean that the solution is implemented. As in the first stage, the solution may be squelched by dominant stakeholders whose interests would be threatened, or it may be contained or even neutralized by existing structural elements. This is the case, for example, when stakeholders are able to exploit loopholes in new laws that otherwise would have constrained their behavior or, in the US system, when the Supreme Court strikes down a law that it judges to be unconstitutional based on legal precedent. Even if a solution “survives” active or passive challenges, it is still subject to manipulation and opportunistic interpretation by stakeholders, or to contradictory existing structural elements, in the implementation stage. Even solutions that are explicit attempts to change elements of the system or the nature of the relationship among a subset of them, such as a new disclosure law for listed companies or elimination of tariffs, are often ambiguous enough for stakeholders to dampen their effects. Stakeholders may themselves be able to create new structural elements that enable them to continue to satisfy their interests; in other words, to reproduce or perpetuate the condition that served as the stimulus to generate that solution in the first place. This is the case, for example, when non-tariff barriers are erected to reduce market access, even as a government implements cuts in tariffs and “official” protectionist measures. Once the complex, cross-level interactions of elements of any system undergoing change—whether a single organization, industry or nation—is recognized, it is clear why it is difficult to predict with any certainty whether any particular solution will result in the outcomes that may have been originally used to legitimize implementation of that solution. This complexity increases exponentially as the number of salient stakeholders and structural elements increases, and is moderated by the degree of interdependence and coherence of these elements of the system. The purpose of our descriptive framework, however, is not to predict specific outcomes. Indeed, the only propositions we offer (and which we discuss in more detail as implications for research) is that a system’s responsiveness to a stimulus—whether or not it generates a solution in response to a stimulus, and whether the performance and behavioral outcomes match those that motivated the particular solution implemented—is closely related to the interdependencies and coherence among elements of the system. Rather, our framework is offered as a heuristic, an organizing device for studying complex reality in a structured way (Buck and Filatotchev, 1998). This provides a much needed conceptual base to generate more insightful analyses of change initiatives, especially those cases in which seemingly rational and well-intentioned solutions have resulted in outcomes that are far below expectations or even represent a worsening of the problems that motivated the solution in the first place. Case: Corporate governance reforms in Thailand The fate of corporate governance reform initiatives in Thailand is both an illustrative and cautionary tale about how the results of seemingly necessary and appropriate reforms (from one stakeholder perspective) can fall far short of expectations.1 The stylized chain of events,


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at the system level, begins with the Asian financial crisis of 1997. That crisis served as the stimulus for certain domestic actors to introduce a range of reforms associated with corporate governance, targeting change in both formal institutions and corporate management. In line with advice from supranational organizations—the IMF and World Bank, in particular—the government introduced changes in the legal code and regulatory oversight with the stated objective of increasing corporate transparency and accountability. These reforms, however, have not resulted in a significant change in behaviors or performance. More than five years after the crisis, and 2–4 years after these reforms were introduced, listed companies are still run by majority shareholders more like closely-held and opaque family businesses than transparent, professional or rule-based—e.g., “modern”—firms. New or enhanced regulations and formal institutions—such as bankruptcy laws and courts, debt and nonperforming loan work-out organizations, audit committees, external directors, regulatory agencies—have not proven effective as monitoring and sanctioning mechanisms promoting better corporate governance practices as defined by Western observers. Although access to foreign capital (especially unhedged foreign loans) has declined and along with it Thai firms’ exposure to foreign exchange risk that triggered the 1997 devaluation of the Thai baht and subsequent economic stagnation, firms and their management have otherwise not significantly changed. In essence, the wide range of corporate governance reforms has had essentially no impact on the management and behavior of Thai firms, private or listed. The impact of the enacted reforms actually continues to weaken as key stakeholders—in this case, the business families and their representatives who simultaneously serve as top elected officials—pursue economic pump-priming and hope for a global economic recovery as an alternative strategy to resuscitate Thai firms and the economy. This chain of events—crisis, reforms, lack of impact—is observable, but does not provide insights into the processes generating these system-level states. In the generalized terms of the analytic framework presented in the preceding section, these states represent the stimulus, solution and outcome of a change initiative (albeit a complex and multifaceted initiative). Linking those states, however, is a complex interaction process involving the actions and reactions of a set of stakeholders and their respective external and cognitive structural elements. Applying the framework allows us to identify key elements and interactions giving rise to the observable, system-level outcomes. Stimulus to solution: Introduction of corporate governance reforms The first stage of the process we describe is that linking the recognition of a stimulus to generation of a solution (Path b to c in Figure 1). The stimulus in the Thai case is the Asian financial crisis. All of the domestic stakeholders listed in Table 2 were put under extreme pressure as the Thai baht was devalued and foreign-exchange denominated loans came due and could not be repaid. Business activity, especially property development and other major investment projects, screeched to a halt. While all were affected by the fallout of the crisis, the stakeholders had very different views of the fundamental cause of the crisis. Chuan Leekpai and the Democratic Party came to power shortly after the financial crisis based on the electorate’s expectation that they would bring stability back to the Thai economy and their lives. Chuan had few alternative

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WHITE Stakeholders in Stage 1: Early post-crisis (1997–2000).

Stakeholders

Interests

Power

Business families

Maintain family control over firms; preserve their discretion over appropriation of firm assets.

Majority or controlling shareholder, often founder or founder’s family. Cross-shareholdings with other business families’ corporate interests.

Elected Party: Prime Minister Chuan and Democratic Party

Get and maintain political control; appeal to voting population. Introduce World Bank/IMF-led changes to improve Thai financial system; support export sector.

Voter desire for “change” from crisis conditions that emerged under prior government (Chavalit).

Regulatory bureaucracies; e.g., Securities Exchange Commission (SEC), Stock Exchange of Thailand (SET)

Increase control over listed companies; invigorate Thai equity market.

Formal authority over listed firms.

Minority shareholders

Capital gains and dividends.

Little formal or informal power vis-`a-vis majority shareholders.

Media

Remain financially solvent; news reporting.

Editorial power, but dependence on government for advertising revenues.

Supranational organizations (IMF, World Bank, Asian Development Bank); US Export-Import Bank

Increase stability of Thailand’s financial system; introduce “international” corporate governance practices.

Bail-out funds, loan facilities, letters of credit (e.g., IMF’s $17.2 billion loan facility). Back and direct training program content of Institute of Directors that certifies corporate directors.

Military (former PM Chavalit, other generals)

Retain influence in government after new constitution placed restrictions on power; protect business interests and illegal activities (drugs).

Military support; political party organization (Chart Thai Party), and General Chavalit had served as PM twice; prior history of military coups.

Citizens

Economic, political and social stability; return to precrisis economic conditions at the individual level.

Votes in local elections and representatives to parliament.

means for meeting those expectations; essentially, only IMF funds. At that time, the IMF made economic and other reforms the preconditions for initial and subsequent tranches of a total loan package. Those reforms had as the explicit objective to move the capital market, financial and corporate governance institutions of countries like Thailand closer to those of the developed market economies, in particular those of the US and UK. The other domestic stakeholders—in particular, the business families and military who had controlled the political and economic life of Thailand—were temporarily overwhelmed by the mandate of the newly elected Chuan government and Thailand’s dependence on


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the IMF. The Chuan government was thus able to introduce new structural elements that followed the guidance of the IMF and other supranational organizations (see Table 3(a)). These include, for example, measures to address the fall-out of the crisis; namely, nonperforming loans, insolvency of financial institutions, and corporate reorganization. They also included a broad range of IMF-advised changes in the regulatory and legal infrastructure that were intended to improve the quality of corporate governance, at least among listed firms, in order to reduce the likelihood of a repeat of the financial crisis. The interests of these two stakeholders—the Chuan government and the supranational financial organizations—overlapped and they had the power to introduce changes that struck at the interests of the business families. There was, however, no coinciding change in the cognitive structures dominating Thai society or most of the other stakeholders (Table 3(b)). Norms of paternalism, non-confrontation and relational contracting remained. The government had a mandate as long as it could deliver stability—both economic and social—and growth, as well as protect Thai’s from foreign domination. Many of these cognitive structures were—in practice and as manifest in governance and managerial behavior and expectations—contradictory to the values and assumptions underlying IMF-promoted corporate governance reforms. From solution to outcomes: Reversed and muted reforms Even as the Chuan government succeeded in introducing reforms in line with the IMF’s guidelines over the period 1997–2000, there were critical changes in the set of stakeholders and structural elements in the system (Tables 4, 5(a) and (b)). Eventually, the stakeholders and structural elements would align and bring about the systemic rejection of the reforms. First, the financial crisis had not crippled most of the leading business families in Thailand. Certainly, their wealth had diminished and the extent of their control over financial institutions had decreased, but as a group they still controlled most of the economic activity in Thailand. They continued to participate in politics directly as elected officials and in political parties. One of the wealthiest among them, telecom tycoon Thaksin Shinawatra, was able to create and lead a new political party, Thai Rak Thai (“Thai’s Love Thai”), the major opposition party to Chuan’s Democrats. Thai Rak Thai, however, was actually a coalition of the two groups who had dominated Thailand for decades; namely, the military (represented by General Chavalit who had himself served as Prime Minister) and industrialists. The victory of Thaksin’s party over that of Chuan and the Democrats has been attributed to a difference in both substance and style. They differ fundamentally in their approach to addressing Thailand’s economic crisis. Chuan promoted governance reforms as bitter but necessary medicine, in addition to a focus on export-led recovery. Thaksin, in contrast, offered populist policies based on a belief in domestic demand-led growth. In addition, while Chuan maintained a studiously modest lifestyle and public image, Thaksin was seen as a charismatic leader, bringing a top-down “CEO” management style to politics. The preference of the electorate for an alternative to the difficult changes promoted by Chuan is not surprising. While the exchange rate had stabilized and exports were expanding, the benefits of the strict fiscal policies were not yet obvious to the electorate. As far as they were concerned, the Chuan government was not able to fulfill their expectations

114 Table 3.

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Structural elements during early post-crisis (1997–2000).

(a) External Concentrated holdings by few major “business families” (60% of SET listed firms controlled by a single family); complex cross-shareholdings between their subsidiaries and affiliates. Capital and equity markets developed rapidly during 1990s, but did not play a role in corporate governance; market value only 23% of GDP (compared to 153% in USA); debt-based financial system (bank loans were 62% of corporate finance in 1996, equities 32%, bonds 6%). Banks: No formal (i.e., rule-based rather than relationship-based) lending policy or project appraisal capability; project evaluations based on personal guarantees, often without collateral; unsecured loans were a large part of those that defaulted with the 1997 crisis. Institutional investors hold relatively small share of total equity holdings (approximately 8%, vs. 31% in in USA and 59% in UK); no active association. Legal reforms: By January 2000, legislature passed and enacted 9 basic economic reform bills affecting bankruptcy and foreclosure procedures, FDI, financial supervision, privatization of state-owned enterprises, capital market development, etc. Bankruptcy: Central Bankruptcy Court established in June 1999. Bankruptcy Law does not define “insolvency”; left to court to define. Debtors could appeal and delay execution of bankruptcy rulings indefinitely. “Planners” appointed by court to reorganize an insolvent company within 5 years; powers limited compared to those in western nations. Accounting and auditing industry: Shortage of qualified accountants and auditors. No self-regulation through professional association. 3 bureaucratic agencies share regulatory authority over industry. Foreign firms’ activities restricted. Auditors often also serve as a firm’s accountant. SEC requires all listed companies to have Audit Committees by 2000; directors become legally responsible for firm conduct; blacklist directors from holding directorships or suspend licenses of auditors found irresponsible. Corporate Debt Restructuring Advisory Committee (CDRAC) formed June 1998, chaired by Bank of Thailand Governor, to monitor and facilitate workouts. Encourages banks to form voluntary creditor committees and establish debt workout units; forces creditors to choose to pursue voluntary restructuring, court-supervised reorganization or bankruptcy within 90 days of the initial meeting between main creditors and debtors. Chuan government and Bank of Thailand Governor instigate criminal investigation of executives of 56 failed financial institutions leading up to 1997 financial crisis. Small and medium-size enterprises (SMEs): little access to formal financing. Thai Rating Information Service (TRIS) founded in mid-1990s; only domestic credit rating agency. Of 27,000 corruption cases involving the government investigated by the National Counter Corruption Commission during 1998–2000, involving 40,000 people, guilt determined in 1,600 cases (4,000 people), of which 39 people in 15 cases were placed on administrative leave. (b) Cognitive Bankers and financial institutions: Business should be done based on personal relationships; lending to someone you know is less risky than lending to someone you don’t. Business families: Firms exist for the benefit of the owner/controlling family; extension of the family. Society: Open confrontation is bad; should respect others’ feelings (“face”) even when you should otherwise speak up (“kreng jai”). Mutual ties and mutual obligations within a patronage system (“hai kiat”). Foreign investors, IMF and other supranational organizations: Government should be tougher, enforce more stringent provisioning for non-performing loans (NPLs) and tougher lending criteria. (Continued on next page.)


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(Continued).

Top managers: “Good” corporate governance only necessary if you need to raise capital (especially from foreign sources). Courts: Creditors should avoid foreclosing on debtors’ land and property. Securities Exchange Commission (SEC): Market-based financial systems better, more flexible, better at risk-sharing than bank-centered systems. Definition of “insolvent”: Top managers and courts believe it should be defined by balance sheet and assets; regulatory bureaucracies believe it should be value-based; i.e., a firm’s cash flow and ability to repay debts. Citizens: Leaders (Prime Minister and cabinet) must restore economic health, help citizens recover to pre-crisis levels, and ensure social stability.

Table 4.

Changes in stakeholders during Stage 2: Late post-crisis (2001–2002).

Stakeholders

Interests

Power

Elected party: Prime Minister Thaksin and Thai Rak Thai Party

Preserve interests of business families and industrialists; reduce impact of reforms that reduce discretion of majority owners; promote domestic industries and “grass-roots” economic condition.

Nearly absolute majority in legislature; other major parties (including Chavalit with military backing) join coalition; backing of business families as well as rural electorate.

Supranational organizations (IMF, World Bank, Asian Development Bank); US Export-Import Bank

Deepen reforms (regulations, implementation) that increase transparency, accountability and shareholder rights as basis of sustained economic and financial system stability.

Reduced as Thai firms and economy recover; government not dependent on further infusion of funds (e.g., final tranche of $17.2 billion loan not taken).

International investors

Returns on investment; access to corporate information, analyses; influence on fundamental strategy decisions.

Equity positions in listed Thai firms; influence on international rating agencies for Thai corporate and national debt.

for significant improvement in their economic aspects of life. Thaksin, promising massive fund infusions to support rural villages and small and medium-size enterprises, farm debt suspension, universal health care and other direct benefits, matched their immediate interests. In addition to his populist policies, Thaksin also appealed to the Thai electorate because of his match with several deeply embedded cultural preferences related to authority and hierarchy. Thai society shares with other Asian societies a simultaneous preference for social order and acceptance of hierarchy as natural (Redding, 2001). In this system, a leader has relatively wide latitude for directive, authoritarian behavior as long as he delivers social order and economic security. Thaksin’s leadership style and success as a businessman were seen as linked and the basis for the electorate to expect that he might be able to be as successful and effective in running the country. It was also welcomed by an electorate who,

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it can be argued, have a collective emotional need for a paternalistic leader who combines benevolence and authoritarianism. Once elected, Thaksin and his supporters (industrialists and military) took actions affecting the power of other stakeholders as well as the structural elements related to corporate governance that had been put in place by the former government. First, Thaksin and the business families were able to undermine the media as a monitor of corporate, bureaucratic and political behavior. The government was one of the major buyers of advertising space, so it could put financial pressure on outlets—newspapers, magazines, television or radio stations—it considered critical. They came under even more direct control as more and more media organizations were bought by the business families. As a result, the Thai media was no longer a powerful stakeholder, and does not serve the monitoring and information dissemination functions that are critical in a corporate governance system that is supposed to result in transparency and disclosure and a checks-and-balances (the conception of a good corporate governance system based on US and UK models and values). Thaksin was also used the power of the prime ministership to alter other external structural elements that were part of the corporate governance reforms of the prior years (Table 5(a)). For example, under him the Bank of Thailand governor halts the criminal investigation of executives of financial institutions that failed during the period leading up to and shortly after the start of the financial crisis. He replaces senior bureaucratics who were critical of his domestic debt-financed economic programs, as well as leaders of major state-owned enterprises (such as the heads of Thai Airways and the Thai Asset Management Company) who had tried to implement stricter corporate governance practices in those organizations. Under his government, debtor firms and banks were given more freedom to deal with financial problems according to their own preferences for reporting and accounting, rather than the harsher conditions and criteria that had been introduced under Chuan. This more lenient approach to corporate restructuring and reforms—both in the nature of regulations and practices as well as the relaxed timing for implementation—was not only popular with the concerned firms, owners and executives, but also more appropriate in the Thai cultural context than the draconian measures and confrontational approach of Chuan and the IMF. Thaksin’s belief that the government should rely primarily in positive incentives rather than punishments to encourage firms to adopt good corporate governance practices is not only a political stratagem, but meshes well with the Thai aversion to open conflict. Thai corporate governance reforms from a system perspective The Thai experience with corporate governance reform illustrates a system that has been able to neutralize or significantly reduce the impact of changes introduced by a subset of stakeholders in the system (see Table 2). This result—essentially, non-reform in terms of true functioning of the corporate governance system characterizing Thai firms—can be attributed to two fundamental shortcomings of the reform initiative. First, the reforms did not include a fundamental change in either the power of other stakeholders satisfied with the status quo (in this case, the business families and military), or in the structural elements that could lead to changes in those stakeholders’ behavior. The reform-oriented


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Structural elements in late reform period (2001–2002).

(a) External CDRAC and work-outs lead to debt rescheduling rather than restructuring. Business families’ share of commercial banks and other financial services firms reduced; maintain shares in other sectors; cross-shareholdings reduced as families sold shares in subsidiaries and affiliates to raise capital. Thaksin and Thai Rak Thai: Leaders of other major parties (except Democrats) join coalition; large controlling majority essentially eliminates threat of censure by legislators. Major industrialists awarded major cabinet posts; defense portfolio given to General Chavilit (Prime Minister at time of 1997 financial crisis). Economic policy: Populist programs (village investment fiunds, farm debt suspension, microfinance programs, etc.) financed off-budget. Expands credit among low-income segment of society that fuels domestic demand. Deficit spending: 2002 public debt was record US$23 billion (2). State-owned banks encouraged to increase lending to SMEs and start-ups. Most GDP growth in 2001 and 2002 accounted for by increased government expenditure. Thaksin acquitted on asset concealment charges. Senior bureaucrats in key economic areas (Bank of Thailand, Commerce Ministry, etc.) who opposed Thaksin’s economic and fiscal policy measures are replaced. Anti-Money Laundering Organization (formally headed by Prime Minister Thaksin) investigates journalists who were critical of Thaksin and government policies; Thaksin and other business families acquire media properties. New 1997 constitution does not address conflict of interest for government officials (46). As of 2002, only 4,700 CPAs of whom only 2,700 are active, for 700,000 registered companies. Major corporate governance lapses in USA (Enron, Worldcom, etc.). Corporate governance rating: Only Thai Rating Information Service (TRIS) appointed to rate domestic firms (Fitch, etc. not appointed). Firms can choose whether their corporate governance rating by TRIS will be publicly disclosed. Stock Exchange of Thailand offers financial incentives for firms that undergo rating and have good corporate governance ratings. Financial Institutions Development Fund, established to take over debts of failed financial institutions: losses estimated at B 1.39 trillion. Bank of Thailand Governor halts the criminal investigation of executives of 56 failed financial institutions leading up to 1997 crisis who had been implicated by the prior administration and governor for wrongdoing; “The investigation is over because we have not got anywhere during the last four years. I do not want to get involved in the cases from the past.” Board of Supervisors of Auditing Practice adopt Accounting Standard No. 34 that allows firms to book losses related to restructuring 4 different ways; more flexibility for financial institutions to make loan-loss provisions, but less transparent for investors. Market for Alternative Investment (second board) established July 2001 for SMEs to list; encouraged to adopt standard accounting rules; less strict listing requirements than for SET. (44) Head of Thai Airways forced to resign in September 2001 after pressing for end to perks, changes in management after IPO (42). Head of Thai Asset Management Company forced to resign in July 2002. Thaksin: Some debtors had complained that the conditions of debt restructuring were too tough. (33). Foreign investors sell Thai shares; CALPERS puts Thailand on investment blacklist for low corporate governance performance in February 2002. Thaksin government and SEC/SET announces 2002 as “Year of Good Corporate Governance”. Thai government establishes Thailand Opportunity Fund in 2002 and the Government Pension Fund, Krung Thai Bank, Stock Exchange of Thailand invest B 10 billion of total B 30 billion; to invest in Thai stocks. (Continued on next page.)

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(b) Cognitive Citizens, Thai Rak Thai party: Thailand should not bow to foreigners’ (IMF, World Bank, foreign investors, etc.) pressure for internal changes in management and practices; even the USA with most developed corporate governance system suffered from major corporate governance problems (Enron, Worldcom, etc.). Citizens: Political leader should be charismatic, decision-maker, top-down “CEO style”; should protect Thailand against foreign pressure; “moral lapses” acceptable if successful (no strong negative reaction to Thaksin’s “forgetting” to report major asset holdings as required of public officials, or of conflicts of interest as Prime Minister and industrialist). Thaksin: Economic recovery depends on domestic demand-led growth (39). The economic crisis was caused by systemic problems, rather than individual fraud or financial crimes. Finance Minister: State-owned banks have to be aggressive in providing loans since commercial banks not yet fully recovered. Banks: Don’t want to restructure debts because they don’t want to book non-performing loans (NPLs). Thaksin and regulatory bureaucracies (SEC, SET): Should rely on positive incentives to encourage corporates to adopt good corporate governance practices, rather than punishments.

stakeholders were not able to consolidate enough power, nor create a new stakeholder, nor did one emerge with the power to overwhelm and sustain dominance over the embedded stakeholders, either by reducing their sources of power or changing the structural elements of the system significantly. Instead, the embedded stakeholders were only temporarily overwhelmed, and in less than three years were able to reverse or emasculate most of the significant reforms that had been introduced. Their success can be attributed to several related factors. An essential development was their ability to increase their power by coming to dominate the elected political leadership. At one level, they were successful because the reformers were not able to satisfy the electorate’s interest of demonstrable micro-economic benefit from the reforms, while the embedded stakeholders directly addressed this interest. An equally important factor, however, was that the style and approach of the embedded stakeholders—paternalistic, non-confrontational—also better matched the electorate’s implicit models of ideal social structure and dynamics. The reformers style and approach represented a break from this cognitive predisposition of the electorate. The system perspective of the framework proposed in this paper also suggests a way to interpret the Thai system’s resilience in the face of an apparent need to introduce corporate governance reforms, and in spite of one domestic stakeholder’s initial success in introducing reforms. First, the elements in this system were both highly interdependent and coherent. The interests of the most powerful stakeholders were compatible, and their combined power and action could, eventually, reverse the initiatives introduced by the reformers. Added to this, the dominant coalition’s actions were compatible with the expectations and preferences (i.e., interests) of the majority of citizens. Therefore, even though some external structural elements were altered as a result of reforms and led to a temporary reduction in some stakeholders’ power and a drop in system coherence, the dominant stakeholders had the power to reverse those changes or mute their impact on other elements of the system, so that overall coherence once again increased and the status quo was re-established.


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Implications for research and practice The general framework proposed and illustrated by the analysis of corporate governance reforms in Thailand has important implications for research and practice in contexts involving fundamental systemic change. First, it provides an explicitly system-level approach to analyzing the sources of failure or difficulty in realizing the promise of organizational reforms, whether introduced by policymakers, managers, or other stakeholders in a system. Most scholars examining the course of corporate governance reforms, for example, have focused on the level at which reforms have been attempted; i.e., either firms or (usually national) institutional structure. Features and developments at one level are treated as epiphenomena of the other. Such a distinction, however, implies that there is a clear boundary between what happens within and outside the firm. In many cases, however, it is more appropriate to discuss change in terms of what is happening across a firm’s boundaries. This is particularly so for the analysis of “organizational” change; it would be unusual for the behaviors of stakeholders within and outside a firm(s) not to have significant linkages and interdependencies with structural elements that spanned formal organizational boundaries. Such linkages should be a central focus of investigations into situations in which reform initiatives have not performed as the reformers expected or intended. Furthermore, attempting to categorize sources of failure as either “internal” to an organization or “external” in its environment does not provide a useful vocabulary for discussing the crucial linkages across organizational boundaries. Indeed, from the perspective of improving enterprise performance, are there any “systemlevel” elements that are salient but not linked with “internal” stakeholders or structure? The stakeholder-structure interaction framework also provides a useful means of structuring the analysis of the process by which a particular type of change—in the case of Thailand, the introduction of changes to its corporate governance system—emerged as the solution to a particular type of performance problem, and the ensuing process that generated unforeseen or unintended outcomes. The insights it offers are based on a systematic analysis of the particular configuration of stakeholders, their power and interests, and the structural elements affecting their actions and which they in turn affect. In the Thai case, it becomes clear that the reformers and reform measures did not make a fundamental change in any of the elements of this system. On the contrary, it stimulated already powerful stakeholders to expand their power and either reverse or mute the effect of the structural changes that reformers had introduced. The net effect has been a reduced dependence by Thai corporates and the economy overall on foreign funds, and no significant change in the nature of the corporate governance system and decision-making behavior within Thai corporations. The added value of our framework beyond offering explanations into specific cases of system change is that it provides the basis for comparing change processes and outcomes across contexts. In terms of its explanatory power, it strikes a compromise between low-context and reductionist perspectives on one hand, and high-context, thick description perspectives on the other (e.g., Child, 2000). The building blocks of the model—stakeholders with interests and power, structural elements constraining and motivating stakeholder action— are relevant to any context, whether a transition economy or developed market, Asian or western, state-owned enterprise or private firm. The derivative constructs of interdependence and coherence among these elements are also generalizable, providing the basis

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for characterizing a system’s integrity and resulting resistance or receptivity to stimuli for change (or “problems”), ability to generate responses to those stimuli (the “solutions”), and the linkage between intended and realized outcomes of those responses and solutions. The fate of change initiatives in any system can be linked to such system characteristics; for example, they fail to deliver the outcomes envisaged by reformers who initiated them because existing stakeholders or structural elements, or changes in either, could reverse, mute the effect of, or otherwise alter the changes introduced. The framework, by providing a structured approach to describing the system and its component elements, can provide insights into the actions and reactions leading to failed change initiatives. Although perhaps paradoxical at first glance, the model is based on an assumption that stakeholders behave rationally, and that this can lead to “irrational” system-level outcomes. This assumption is not contradictory, once it is accepted that rationality does not have a single form, but can vary across social bodies (Weber (1930), discussed by Redding (2002:227)). Applying this to our focus on stakeholders and interests, it is easy to see how differences in ends suggest different means (or action); even more fundamentally, there may be different beliefs in what means are most appropriate or effective. Therefore, while reformers may see particular solutions as appropriate for achieving particular ends, other stakeholders may place priority on very different ends that, as it happens, are in direct conflict with those of the reformers. The system-level outcomes—whether changes are adopted, and the results they produce if implemented—emerge from the contest among these stakeholders, all of them acting “rationally.” A view of rationality as contingent is a basic premise of our model emphasizing multiple stakeholders without specifying any particular stakeholder’s interests as focal, uniquely rational, or legitimate. Such a position is necessary for analyzing a system as an “outside” observer. We argue that it is also useful as a first step even for an interested stakeholder; i.e., to generate an “objective” view of the system to inform strategizing within that system. Indeed, it could be argued that reformers in the Thai case were guilty of a strategic error; namely, they underestimated the willingness and ability of other stakeholders to protect their interests, and they did not identify the structural elements that were critical for realizing reform objectives. Finally, although descriptive and generalizable, the framework is not predictive. Indeed, because system changes typically involve numerous stakeholders and structural elements, and complexity increases exponentially with the number of interacting elements involved, we are dubious of any attempts to derive predictive models for such contexts. On the other hand, a more comprehensive and detailed understanding of the interactions among stakeholders and structure should provide two benefits. First, it should generate more complete ex post analyses of organizational change initiatives. Second, it should enable more informed simulations ex ante of change initiatives and their nth order effects, from the point of view of either “outside” observers or stakeholders—whether managers or policymakers—with an interest in the change and its outcomes. Conclusions In this paper, we have reframed the challenges of realizing desired outcomes from change initiatives in terms of the processes linking stimuli to solutions, and solutions to outcomes.


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These processes involve a complex interaction among stakeholders and structural elements of a particular system, and that complexity makes it difficult to manage or predict outcomes. The stakeholder-structure interaction framework we have proposed in this paper is intended as an analytic tool to structure the analysis of that complexity and provide insights into emergent system-level outcomes. Applying the framework to the case of post-crisis Thailand generated insights into the process by which an initial flurry of reforms has since resulted in essentially no change in the system of corporate governance dominant in Thailand. In this case, reformers did not thwart key stakeholders, and powerful stakeholders were able to respond by reversing or muting the effect of IMF-supported changes in the external structure affecting Thai firm owners and top managers. While the framework does not have predictive power, it does provide the basis for understanding why reform outcomes did not match intentions. We can only speculate that using this model could have enabled reformers to act more strategically vis-`a-vis those stakeholders and structural elements and come closer to realizing the behavioral and performance objectives that motivated them. Acknowledgments Gordon Redding, Paul Evans, Michael Carney and participants at the Corporate Crisis and Turn-Around Conference in Bangkok, 12–14 December 2002, provided valuable feedback on early versions of this paper. Note 1. Data for this analysis and that presented in the accompanying tables draws on articles published by The Nation and the Bangkok Post, Thailand’s leading English-language newspapers, as well as analyses by Nikomborirak (1998), and Alba, Claessens and Djankov (1998).

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