Family ties are, sadly, the ties that bind
July 14, 2000
IT'S easy to blame the government for all the economic problems we're facing. For sure, the government is a fat target. But it is only part of the problem. To Dr Nimit Nontapunthawat, the chief economist of Bangkok Bank, Thailand's biggest problem lies in the weakness of the corporate sector.
"I think we are suffering from a weak corporate sector. That is largely because it is still run in the traditional way under family control," he says.
Before the US stock market crash of 1929, family-style management predominated among US companies. But after the crash and the subsequent establishment of the US Securities and Exchange Commission, corporate governance and professional-style management started to take hold. The present corporate culture of Thailand was similar to the US before the Great Depression. That is why we are facing the crisis.
About 200,000 companies, controlled by more than 50 family groups, did most of the borrowings that have become today's non-performing loans (NPLs).
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Nimit cites Taiwan as a case in point. "Taiwan has been doing pretty well in the wake of the crisis because the management of its corporate sector is up to international standards. That's because it used to have a lot of its people working in the US. When the US ran into the economic difficulties years ago, these people returned to their homeland to work. They went on to introduce international standards," he says.
Typically, in Thai-style management, the family shareholders will put their members at the positions to control the finance, accounting and even the treasury departments. Corporate governance has never been recognised. Even today most families running companies cannot bring themselves to release management control and entrust it to the best professionals. The result is that we may have some financial restructuring, but we have not yet moved on to business restructuring.
What is so lacking today in the corporate sector is a self-confession. We might arrive at a point at which we have to admit that Thai managers are not that capable. "Looking around we have to admit that Thai people are mostly not capable compared to others," says Anusorn Tamchai, an economist at Salomon Smith Barney. "That's because of the poor development of human resources. I would say that if we would like to move ahead, we need to lay down a stronger education foundation. Otherwise, we'll never have a sustainable economic growth," he adds.
Most people would argue that Thailand's present economic difficulties lie in the ailing financial sector. But the banks' balance sheets simply reflect the collapse of the corporate sector's balance sheets. You cannot solve the banking problems without addressing the debts in the corporate sector, which is another side of the coin. The corporate debts are putting a drag on the entire economy. The quicker the corporate sector is restructured, the healthier the Thai banking system will be. About 200,000 companies, controlled by more than 50 family groups, did most of the borrowings that have become today's non-performing loans (NPLs).
Increasingly, Thai companies are falling under foreign ownership. The financial crisis has pushed the joint ventures into bankruptcy. Thai-Japanese joint ventures have almost all virtually come under Japanese control because only the Japanese have the fresh money to prop up the operations. The Japanese might appoint a Thai to head the management, but the real power is entrusted in their people.
The difference between the US crash and the Thai crash is that Thais are losing their corporate control to foreigners in the aftermath while the Americans managed to save their businesses for themselves.
However, a quiet restructuring is under way at export-oriented industries. Most of the fresh direct investment taking place now is related to export-led companies, which are providing the bread and butter for the economy.
With new investment in plants and equipment, they should continue to sharpen their competitiveness. But the rest of the Thai corporate sector is still saddled by indebtedness and family-style management. Moreover, most of the corporate debts have been transferred to government debt due to the government's 100 per cent guarantee of the financial system.
The wake-up call for Thai corporates is long overdue. The country cannot move ahead without change to their management and practices.
BY THANONG KHANTHONG
