CG Fund: New Investment Tool to Boost Governance Standard

Most people now accept that good governance is a basis for long-term business success and sustainability. When it comes to investing in stocks, firms with good governance should be seen as relatively safe bets. Wouldn’t it be great if there were funds that handpicked stocks with such desirable qualifications for you?

Thailand’s investment community took a proactive role by introducing mutual funds that limit its investment portfolio to stocks of companies with proven track records of high governance standards and established internal graft-prevention mechanisms.

Some 11 asset management companies, controlling over 90% of the domestic market share, made a joint announcement in August 2017 that they will separately introduce the so-called corporate governance or “CG funds.” So far, 10 funds have been set up, raising over THB 4 billion orUS$125 million from investors.

One unique element of the Thai CG funds is that all 11 asset management companies agreed to contribute 40% of their fund management fees to organizations that promote corporate governance and anti-corruption. This is one of the world’s first initiatives that clearly demonstrates that investors are not only seeking maximum returns but also value good governance and ethical business practices.

“The establishment of CG funds is based on the belief that companies adhering to good corporate governance principles will generate decent returns in the long run…For companies to remain attractive in the eyes of investors, they need to deliver a more than healthy bottom line. They also need to comply with CG code and anti-corruption policies,” said Voravan Tarapoom, Chairwoman of the Association of Investment Management Companies (AIMC).

The 11 asset management companies agreed to invest in CG funds that meet two key criteria. Companies must earn at least a four-star (out of five) Corporate Governance Rating score updated annually by the Thai Institute of Directors. Companies must also get certified by Thailand’s Private Sector Collective Action Coalition against Corruption (CAC) that they have put in place anti-corruption policies and high compliance standards.

The introduction of CG funds has created many benefits. The performance of CG funds will provide concrete evidence of how companies with high governance standards perform in comparison with the overall market. It gives investors opportunities to show their support to companies with high integrity and at the same time provide incentives to companies to upgrade their governance standards and anti-corruption practices in order to be included in the basket of CG funds.

The successful launches of Thai CG funds demonstrates how the investment community can contribute to the creation of transparent and bribe-free ecosystems within the Thai business sector.

CAC is one of the world’s most advanced collective action initiatives with a uniquely robust certification system. To date, 881 companies from all types of industries have signed up, half of which are listed companies accounting for over 80% of total market capitalization. Some 283 companies have also been certified as having put internal anti-corruption mechanisms in place that align with CAC requirements.

Foreign markets might consider replicating Thailand’s corporate governance incentives to promote a stronger and more sustainable economy.

Phisanu Phromchanya is an advisor for Thailand’s Private Sector Collective Action Coalition against Corruption