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Corporate Governance in Thailand: Glancing Behind and Looking Forward

“CG Development in Thailand: The Three Disciplines”September 13, 2006

Deunden NikomborirakThailand Development Research Institute

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Outline of presentation

1. The face of Thai corporate governance– ownership structure– corporate conduct– governance performance

2.State and private sector initiatives in promoting good governance: the 3 disciplines

3. Economic, political and Social Challenges

4. Conclusions

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1. The Face of Thai Corporate Structure & Governance

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Ownership Structure

Concentrated ownership family-control was prominent particularly in

finance and securities and property family-control declined in banking, finance and

securities and property foreign bank’s share increased in both banking

and finance

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Corporate practices

Most common abuses were connected lending, connected transactions (siphoning of corporate funds).

More recent abuses: insider trading and share prices manipulations through custodian ot nominee accounts. According to Achavanuntakul (2006), 21.4% of total SET market capitalization is accounted for by nominees.

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Doing Business in Thailand (2006) by The World Bank

10

5.2 6.3

2

4.45

6 6.16.6 65.26

0

2

4

6

8

10

Disclosure Director Liability Shareholder Suits Investor Protection

Thailand

Regional

OECD

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Corporate Governance Report of Thai Listed

Companiesby Thai Institute of

Directors

65.8

74.5 68.883.1

53.5

0

20

40

60

80

100

Rights ofShareholders

EquitableTreatment ofShareholders

Role of Stakeholders

Disclosure andTransparency

BoardResponsibilities

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2. Initiatives taken to promote

Good Corporate Governance

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3 pillars supporting corporate governance

Regulation (SEC/SET) Market discipline (SRI) Self-restraint ( firm-level

corporate conduct code)

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Regulations Many legal loopholes exist (definition of connected

transactions, connected persons, definition of price manipulation, lack of regulatory authority to demand disclosure of UBOs)

legal procedures not conducive to prosecution (criminal sanctions only, reliance on police force for investigation and attorney for to file a lawsuit)

legal amendments in the pipeline. The SEC had resorted to preventive measures and

administrative sanctions.

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Regulations

Examples of preventive measures for connected transactions : requirements for submission of transactions that received shareholders resolutions, review of connected transactions and auditors’ reports.

For illegal operation through nominees: “know your customer (KYC) & customer due diligence (CDD) requirement for brokers”

Example of administrative sanctions: fines and black-listing.

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Regulations

Shortcomings of administrative measures: lack of transparency, social sanctions, market discipline, case precedence and prone to discriminatory treatment

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Regulations

SET imposes many regulations governing disclosures and board structure -- i.e., audit committee, independent directors, governance assessment and shareholders’ resolution required for large connected transactions .

Shortcomings of SET measures: no clear penalties.

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Market-discipline corporate governance rating (by TRIS) good governance awards, disclosure awards, popular awards. reduction in fees and compensation for rating fees.

– But too few companies participated. Establishment of Institutional Investor Club and Investor

Association.

– IIC still has no investment criteria and IA

lacks personnel to pursue governance work

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Self-restraint Only a handful of Thai companies have governance

code. According to Corporate Governance Report of Thai Listed Companies 2005”3/4 of surveyed listed companies explicitly mentioned

obligations to shareholders2/3 mentioned obligations to customers< 1/3 mention safety and welfare of employees1/5 mentioned environmental issues and compliance in

their public communications

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3. Economic, political and Social Challenges

Lack of law enforcement means CSR does NOT pay (although

according to Corporate Governance Report of Thai Listed Companies 2005 – firms with higher governance scores performed better)

Certain government policies inconsistent with good corporate governance (Foreign business Act, Minister’s Equity Share act,etc.)

Culture of patronage contribute to widespread use of nominees.

Major Obstacles to Business Growth

0 0 . 5 1 1 . 5 2 2 . 5 3 3 . 5

P r ic e u n d e r c u t

T a x a v o id a n c e

A c c e s s t o c r e d it

P r e d a t o r y p r ic in g b y M N C s

R e g u la t o r y A v o id a n c e

U n f a ir t r a d e p r a c t ic e

S u b s id ie s

A v o id la b o u r t a x e s / r e g u la t io n s

V io la t e c o p y r ig h t s

A Survey on Corruption and Bribery in the Business Sector : University of Thai Chamber of Commerce, 2000

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Economic, political and Social Challenges

Limited long-term investment and active institutional investors means Socially Responsible Investment is RARE. (12% Institutional investor)

Lack of regulatory independence– government political agenda versus SEC’s

regulatory agenda – investigation in cases involving politicians or large

companies with strong political connections

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Economic, political and Social Challenges

More recently, boycotting and social pressures, rather than SRI, are playing increasing role in fostering CSR .

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4. Conclusion

Independence of regulatory body and legal amendments are crucial for effective law enforcement.

SEC’s authority should be broadened with respect to prosecution and identification of UBOs.

“soft measures” can go a long way in regulation and in promotion of self-discipline, but has limited bite.

Market-discipline requires (1) disclosures of corporate

misconduct and abuses and (2) SRI

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4. Conclusion In the absence of market-discipline, the task will

inevitably fall heavily on SEC and SET. SRI to be spearheaded by large state pension and

investment funds. NGOs and civil society can play very important

roles in providing “social discipline” where regulatory oversight and SRI are absent or ineffective.

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THANK YOU