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Economics Essays – Corporate Governance and Financial Markets

Corporate Governance & Financial Markets

Case study: Building Financial Market Institution in Emerging Economies: The Government Pension Fund of Thailand

In 1997 the Government Pension Fund (GPF) was established in order to strengthen the pension guarantee and benefits for officials leaving government service as well as the Participants and at the same time establish a sustainable long-term fiscal policy plan as the gratuity and pension system following the 1951 Gratuity and Pension Act had revealed some serious problems. From 1997 to 2001, under the leadership of Khun Nawaaporn Ryanskul the Fund gained many significant outcomes; however, there have been some short-comings in terms of governance issues that the GPF should focus on to improve its performance.

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The first critical issue is the qualification of members of the Board of Directors. Most of the Board members have no necessary background knowledge on pension-scheme and finance that is crucial for management and investment decision making. Hence, the Fund’s management decision making processes are too cumbersome as the GPF has in the first place to educate the Board members on respective issues.

There is too much intervention from the Board side to the Fund’s management process since innovative ideas or changes must be approved by the Board before they can be implemented. More efforts and time are definitely needed to convince the Board members due to their lack of essential knowledge and the resistance to changes or new ideas. As a result, the GPF management can not respond quickly to changes in financial markets and misses some good opportunities.

Moreover, there is no effectiveness in decision making process of the Board as it is common in Thailand that unanimous decision needs to be gained; otherwise a decision is postponed to a later meeting. The situation is getting worse when the number of Board members is increasing over the years. In other words, there is a poor incentive structure for efficiency.

Furthermore, those Board members are risk aversion people, they just simply focus on the risk itself of an investment decision in stead of how much return can bring back to the beneficiaries if the risk is taken. They are afraid of taking responsibility and of how to explain and justify decisions they support to their groups of participant. They minimize their problem by supporting investment decisions of low economic return rather than approving the ones of high returns but high risks as well. Therefore, portion of the Fund of “secure” assets has never gone under 81 percent. The Fund management and staffs can not diversify the investment portfolios and the performance of the GPF is consequently ineffective.

Political intervention is also a burning issue as many investment decisions are made based on political issue but not purely economic issue. Especially when the chairman is the Permanent Secretary of the Ministry of Finance and some other government representatives of the Board are appointed by the Government, the scenario of pension fund abuses is likely to happen.

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Lack of autonomy in investment is another matter. All the investment decisions must follow the strict investment policy determined by the Board of Directors and in accordance with the rules and criteria established by the Ministry of Finance. Hence the Fund’s management has no flexibility in making investment decisions to optimize economic results as well as to strengthen the participants’ welfare.

Although there is no restriction of cross-border investments written in Ministerial Regulations, the GPF is not allowed to invest in foreign markets. They have to focus on the Thai domestic market which is badly affected by the “Asian Crisis”, and where the limitation of choices in Thai stock market is another factor that affects the performance of the Fund.

In addition, the Thai legal framework is weak. There are poor corporate governance, unclear responsibility, poor accountability and lack of transparency. The shortage of rating agencies that can provide reliable information is another weak area of Thai bond and stock market. Therefore, the Fund faces a lot of difficulties in making effective investment decisions and providing their participants with reasonable returns.


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