Corporate Governance of Listed Companies in Thailand 9789812306999

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Corporate Governance of Listed Companies in Thailand

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publications, an established academic press, has issued more than 1,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publications works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world. The Southeast Asia Background Series is a major component of the Public Outreach objective of ISEAS in promoting a better awareness among the general public about trends and developments in Southeast Asia. The books published in the Southeast Asia Background Series are made possible by a generous grant from the K.S. Sandhu Memorial Fund. ii

Southeast Asia Background Series No. 3

Corporate Governance of Listed Companies in Thailand Sakulrat Montreevat

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INSTITUTE OF SOUTHEAST ASIAN STUDIES

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First published in Singapore in 2006 by ISEAS Publications Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace, Pasir Panjang Singapore 119614 E-mail: [email protected] • Website: bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2006 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the author and her interpretations do not necessarily reflect the views or the policy of the publisher or its supporters.

ISEAS Library Cataloguing-in-Publication Data Sakulrat Montreevat. Corporate governance of listed companies in Thailand. (Southeast Asia Background Series; 3) 1. Corporate governance—Thailand. 2. Business enterprises—Thailand—Management. 3. Corporations—Thailand—Management. I. Title. II. Series. HD2741 S15 2006 ISBN 981-230-266-2 Typeset by Stallion Press. Printed in Singapore by Utopia Press Pte Ltd. EL

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Contents About the Author

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Pre-crisis Corporate Governance Practices

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National Corporate Governance Committee and Role of Relevant Agencies

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Key Elements of Good Corporate Governance for Listed Companies

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Best Practice Guidelines for Audit Committee

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Code of Best Practices for Directors of Listed Companies

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Best Practice Guidelines for Shareholders

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Corporate Governance Issues for Financial Institutions

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Assessments and Challenges

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References

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About the Author Sakulrat Montreevat is a Fellow in the Regional Economic Studies Programme at the Institute of Southeast Asian Studies, Singapore. She has been Co-editor of ASEAN Economic Bulletin since 2000. She holds a doctorate degree in Economics from the University of Hawaii at Manoa. She was formerly Chief of Macroeconomics at Siam Commercial Bank Research Institute and its Vice-President from 1997 to 1999. Her main research interests are financial crises and financial reforms in East Asia, and macroeconomic management in Thailand.

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Chapter 1

Pre-crisis Corporate Governance Practices Corporate governance has become a major issue of concern in both developed and developing countries. Good corporate governance is widely accepted as a global business standard. It is an efficient tool for increasing operational efficiency and effectiveness, as it can monitor a company’s operations from the perspective of all stakeholders. In Southeast Asia extensive reforms of corporate governance practices have taken place after the 1997 Asian financial crisis and the resultant slowdown in investment. All parties in the region’s capital markets have made strong efforts to improve corporate governance practices to regain investor confidence and become competitive globally. In Thailand many corporations went bankrupt and many financial institutions were closed during the crisis. These results led all the related parties in the Thai capital market to figure out the reason behind the recession and the financial insecurity and instability. There is recognition that poor governance in the Thai corporate sector was partly responsible for the crisis. Since then, good corporate governance has been introduced and promoted in the Thai corporate sector. Listed companies on the Stock Exchange of 1

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Thailand (SET) are the first target group that must implement good corporate governance since they are partly financed by public investors. Guidelines for good governance practices of listed companies have been installed and activated. These have also triggered a process of corporate governance improvement in other business types in the Thai corporate sector.

THAI CORPORATE SECTOR The Thai corporate sector has four general types of business organization: sole proprietorships, partnerships, private limited companies, and public limited companies. A sole proprietorship is a business owned by one person with unlimited liability, while a partnership is characterized by liability of the partners. A private limited company is one whose shares are subscribed to and at least 25 per cent of the subscribed shares must be paid up. There is no established minimum level of capitalization. A private limited company is governed by the Civil and Commercial Code. A public limited company, governed by the Public Limited Company Act, is one established for the purpose of offering the sale of shares to the public. The rules and regulations concerning the procedure of offering shares for sale are governed by the Securities and Exchange Act under the control of the Securities and Exchange Commission (SEC). A public limited company with its ordinary shares listed in SET is known as a publicly listed company (hereinafter “listed company”).

LISTED COMPANIES The number of listed companies in Thailand has grown since the establishment of SET in 1975. The number increased from twentyone listed companies with a total capital of 153 million baht in

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1975 to 453 listed companies with a total capital of 4,657,437 million baht in mid-2005. Listed companies in Thailand are governed by the Public Limited Company Act and the Securities and Exchange Act. According to SET, listed companies are publicly limited companies that have: • • • •

•

• •

Paid-up capital in common shares of at least 300 million baht A minimum of 1,000 shareholders holding at least 25 per cent of the paid-up capital Public offering approved by SEC Management and control persons in line with the SEC regulations and they should not possess any characteristics as prohibited by SEC Good corporate governance practices, a qualified audit committee, effective auditing, and internal control systems as specified by SEC Financial statements prepared in accordance with the SEC rules and regulations Auditors approved by SEC

PRE-CRISIS CORPORATE GOVERNANCE ISSUES AND PRACTICES Prior to the financial crisis, listed companies were governed by the Public Limited Company Act of 1992 and the Securities and Exchange Act of 1992. The term “corporate governance” was not defined and had no equivalent in Thai, and good governance practices were not required. Nevertheless, corporate governance was not a new concept in post-crisis Thailand. In 1995 SET started a concept of good corporate governance with roles for the audit committee. The

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audit committee is perceived as an important mechanism for the board of directors to supervise the administration process as well as internal control process in preparing and reporting reliable financial reports. Setting up an audit committee was initiated at SET itself in order to set a good example of transparency, efficiency, and trustworthiness for all listed companies. In addition, setting up the audit committee within SET could help SET to understand the problems and obstacles of the audit committee clearly before introducing it to listed companies. SET realized the growing importance of good corporate governance practices in several developed capital markets, such as the United Kingdom, the United States, and Canada. SET believed that if listed companies in Thailand were to implement similar good corporate governance practices, they would gain direct benefits, such as improved internal control procedures and more effective as well as professional internal management systems, and could viably attract local and global sources of investment. To start, SET commissioned Price Waterhouse Management Consultants Ltd. to conduct a survey in mid-1996. The main objective of the survey was to assess what levels of corporate governance practices existed among the listed companies on SET. The 202 respondents were the various parties involved with SET. According to the survey, corporate governance was defined as a system or process by which organizations are directed and controlled by directors and senior management for the benefit of their stakeholders, that is, shareholders, employees, customers, bankers, and suppliers. The survey results indicate that corporate governance of listed companies was weak in the pre-crisis period and improvements should be made on corporate governance. Key findings of the

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survey are summarized as follows: •

•

•

•

Board composition and meetings: The majority of respondent companies in the study held board meetings every quarter or more frequently. Most of the respondents appreciated the value of the outside directors in making contributions to the overall management as well as bringing a balance to offset the strong influence of executives who were members of the families which owned the companies. Code of business ethics relating to corporate governance issues: Half the respondents reported that they had received some form of business ethic and corporate governance documents. There was a growing awareness on the issue of corporate governance. Board committees: Nearly 60 per cent of the respondents indicated that they had a formal internal audit department reporting directly to the chief executive officer or president/ managing director and responsible for preventing as well as detecting fraudulent activities of staff members. Corporate communications: Nearly 50 per cent of the respondents believed that their companies’ annual reports were highly transparent and exceeded the required level of disclosure regarding their companies’ activities.

In addition, the majority of the respondents stated that they would prefer an approach in corporate governance improvements that involved both SET and a system of voluntary self-regulation by the listed companies themselves. The survey report was published in January 1997, six months before the crisis started in Thailand on 2 July 1997. When the crisis came, many studies focused on governance issues in the Thai corporate sector. Based on data of listed companies for

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the period 1994–97, a study by Alba, Claessens, and Kjankov showed that pre-crisis corporate governance practices were characterized by concentrated ownership, poor protection of minority shareholders, and weak information standards. The study pointed out that the Thai corporate sector was dominated by family control over business operations. Thai firms were generally held and managed by majority (family) interests. Minority shareholders, though larger in number, held only a small portion of the total shares. Consequently, they had very little influence over management decision-making and control. In other words, concentrated ownership weakened pre-crisis corporate governance. The protection of minority shareholder and creditor rights was inadequate due to a weak judicial system. In addition, accounting and auditing practices were not yet up to international standards in the pre-crisis period. Since the onset of the financial crisis, Thai authorities have implemented various measures to promote good governance practices. Corporate governance standards and guidelines on good corporate governance have been installed and implemented to ensure accountability, responsibility, fairness, and transparency in Thai listed companies.

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Chapter 2

National Corporate Governance Committee and Role of Relevant Agencies Since the 1997 financial crisis, the Thai Government has prioritized the improving of corporate governance. It started with streamlining institutional arrangements, enhancing the reliability of financial information and disclosure, improving corporate board of directors, increasing shareholder rights, and intensifying enforcement. Measures to strengthen corporate governance include both regulatory and voluntary approaches. The terms “corporate governance” in English and “karn-kumkub-doo-lae-kij-ja-karn” in Thai were introduced to the business community as well as the public. The government and relevant agencies have conducted public campaigns to raise public awareness on the benefits of good corporate governance. They are: •

•

Increasing operational efficiency and effectiveness: Corporate governance is a tool to evaluate and monitor the internal operations of a company. It helps to create useful guidelines for improving its operation workflow. Enhancing competitiveness: An organization with good corporate governance is widely accepted as being up to 7

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•

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international standards and has a comparative advantage in terms of strategic management. Enhancing stakeholders’ confidence towards an organization: Corporate governance can ensure the transparency of business management and prevent executives and management from taking advantages for their own benefit. In other words, stakeholders would avoid an organization which does not have good corporate governance. Maximizing shareholders’ value: Good corporate governance boosts shareholders’ confidence to invest, leading to an increasing value of the company’s shares.

NATIONAL CORPORATE GOVERNANCE COMMITTEE (NCGC) In 2002 the Cabinet set up the NCGC chaired by Prime Minister Thaksin Shinawatra. The Committee comprises representatives from various private and public agencies and the Office of the Securities and Exchange Commission serves as secretary. The responsibilities of the NCGC are as follows: •

• •

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Establish policies, measures, and schemes to upgrade the level of corporate governance among institutions, associations, corporations, and government agencies in the capital market. Order the related agencies and persons, in both the private and public sectors, to testify before the NCGC. Suggest to related agencies that they improve their policy schemes and operating processes, including legal reforms, ministerial regulations, rules, and enactment, to achieve good corporate governance.

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•

•

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Promote the guidelines of good corporate governance to the public and related parties to raise confidence from international investors. Appoint sub-committees and working groups to study and assist any operations by using their authority. These group members comprise representatives from various private and public agencies. The sub-committees have to report their operating results to the NCGC within the specified period. Monitor the progress and evaluate the performance of sub-committees.

The NCGC divides its work into six areas, each of which is the responsibility of a sub-committee. The six areas are (1) law amendments and enforcement; (2) accounting standard; (3) best practices of listed companies; (4) improvement of corporate governance of commercial banks, finance companies, and insurance companies; (5) improvement of corporate governance of securities companies; and (6) investors education and public relations and corporate governance in Thailand. The establishment of the NCGC indicates that corporate governance improvement has become an item on the national agenda. In the initial stage, the NCGC emphasizes mainly on implementation of corporate governance in the Thai capital market, covering listed companies, commercial banks, finance companies, and insurance companies. At a later stage the scope of implementation may cover other (private and state) enterprises outside the capital market.

SECURITIES AND EXCHANGE COMMISSION (SEC) With the enactment of the SEC Act, the Office of the Securities and Exchange Commission was established in 1992 as an independent

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state agency under the direction and guidance of SEC. Its mission is to develop and supervise the Thai capital market, both primary and secondary markets and securities businesses. SEC spearheads the NCGC’s efforts. So far, SEC has made regulatory changes to improve corporate governance. At least three members of a company’s board of directors must be independent. Companies are required to establish an audit committee with independent directors, which reviews the financial and business practices to determine compliance with the Stock Exchange of Thailand’s (SET) rules, risk management, and disclosure. SEC raised the requirements for listed companies to disclose complete accurate information. Listed firms must now disclose to SEC and SET consolidated financial statements revealing all external liabilities as well as those not on the balance sheets. On market force, SEC has selected the Thai Rating and Information Services Co. Ltd (TRIS) to conduct the corporate governance rating service. It is believed that the corporate governance rating will help investors to differentiate good firms from the rest and the increased demand for those companies’ shares will result in a higher market value of the shares, which, in turn, acts as an incentive and reward for having good corporate governance. If a company receives high rating and is well accepted by the public, it will draw or force its competitors to follow suit in order to retain their competitive position in the business. SEC and the Thai Securities Finance Corporation (TSFC) established the Thai Investors Association in 2002 to represent retail shareholders. The association holds shares in each listed company so that it can exercise shareholders’ rights in monitoring the company’s performance and attend shareholders’ meeting.

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STOCK EXCHANGE OF THAILAND (SET) SET is a regulatory agency enacted in 1974 to serve as a center for the trading of listed securities and to provide the essential systems needed to facilitate securities trading. Listed securities include ordinary shares, preferred shares, bonds and debentures, warrants and covered warrants, and unit trusts. SET has been working on three vital areas to improve the quality of Thai business operations for capital market participants and to attract foreign investment: (1) quality of disclosure, (2) audit committee, and (3) framework for the development of good corporate governance practices in Thailand.

Quality of Disclosure •

•

A listed company must engage auditors approved by SEC to review or audit its quarterly financial statements and annual financial statements, both of which are submitted to SET. Company directors are encouraged to clearly define the scope of their responsibilities in reporting their financial statements. Company directors are responsible for the accuracy, completeness, and transparency of their company’s financial reports to encourage shareholder confidence. Thus shareholders will be assured that the board is accountable for all information presented.

Audit Committee Having studied this issue from 1995, SET announced in early 1997 that all listed companies were required to establish an audit committee by the end of 1999. The audit committee must consist of at least three outside independent directors. The committee’s

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responsibilities are to: •

•

• • • •

Review the company’s financial reports to ensure that they present true and fair value, and provide sufficient information to shareholders. Review the adequacy and effectiveness of the company’s internal controls system and internal audit functions to ensure their effectiveness and proper risk management. Review compliance with SET rules and regulations and any other relevant laws. Consider and propose the appointment of auditors. Prepare and ensure good corporate governance in the audit committee report. Handle any other pertinent needs that may develop.

Framework for Good Corporate Governance Practices SET has issued a Code of Best Practices as a reference guide for company directors. Directors are required to disclose in the company’s annual report whether they have been in compliance with the Code and to give reasons for any non-compliance. SET co-operated with SEC to set up a Committee on Good Corporate Governance, consisting of representatives from several professional organizations, to develop guidelines on good corporate governance for listed companies. The outlined framework emphasizes the following points: •

•

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The number of outside directors should be one-third of the total number of board members in order to ensure effective checks and balances. There is a need for a clear definition of the different roles, responsibilities, and accountability of directors and management. At present there is no clear distinction between these two groups.

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•

•

•

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Given that the effectiveness of internal controls and proper risk management is one of the most important issues in business nowadays, SET is working with the Institute of Certified Accountants and Auditors of Thailand to develop guidelines for directors on internal controls. Listed companies should appoint a corporate secretary who will be responsible for co-ordinating the board’s activities. This secretary will oversee the board and determine whether the board has been in compliance with SET rules and regulations. There is a need for the establishment of Codes of Ethics for directors, management, and employees.

SET has issued guidelines for listed company shareholders’ meetings. This is to make sure that shareholders have sufficient information at hand for making decisions. In addition, SET made sure that voting procedures by proxies and their required accompanying information should always be provided by companies. In early 1998 SEC and SET revisited the roles and responsibilities of boards of directors of listed companies, focusing on the roles and responsibilities of independent directors and audit committees, believing this to be a suitable starting point for bigger corporate governance reform. In addition, SET has set up the Corporate Governance Center (CG Center) which aims at helping listed companies to develop their own corporate governance system. The intended consequence will be the creation of extra value for companies on a sustainable, long-term basis, which will directly contribute to the development of the country’s overall economy.

THAI INSTITUTE OF DIRECTORS ASSOCIATION (THAI IOD) The Thai IOD was established in December 1999 with the support of SET, the Bank of Thailand, and the World Bank. Its objective is

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to promote professionalism in directorship. It offers directors certification and professional development courses, provides a variety of seminars, forums and networking events, and conducts research on board governance issues and practices. Membership consists of board members from companies, ranging from large publicly listed companies to small private firms. In addition, the Thai IOD has conducted annual surveys on the state of corporate governance of selected listed companies in Thailand since 2001. The survey reports have been used by SEC and SET in providing a roadmap for improving corporate governance. The NCGC has endorsed the survey results and recommended that the Thai IOD expand the scope of the study to cover all companies listed on SET and announce the companies’ rankings according to their corporate governance performance to recognize good governed companies and urge improvement in poorly rated ones.

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Chapter 3

Key Elements of Good Corporate Governance for Listed Companies Different companies have come up with different definitions of corporate governance due to differences in their aims and stages of growth. There has been no consensus on how corporate governance should be defined. According to the National Corporate Governance Committee (NCGC), corporate governance can be defined as follows: •

•

•

Relationship between the board of directors of a company, its management team, its shareholders, and other stakeholders, which directs the company and monitors its operations; Structure and internal process which ensure that the board of directors evaluate the performance of the management team transparently and effectively; or System having structure and process for leadership and corporate control to establish a transparent working environment and to enhance the company’s competitiveness to preserve capital and to increase shareholders’ long-term value by taking into consideration business ethics, the interests of other stakeholders, and society.

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Early assessments showed that many Thai firms were relatively deficient in professional management and governance compared to international standards. A company is normally a legal entity set up to seek profit and controlled by the board of directors — as separate from the shareholders. The board of directors is, therefore, the main driver of good corporate governance of a company. Besides, there are other parties involved in the success of a company, such as employees, creditors, debtors, competitors, and society. Therefore, good corporate governance also covers fair treatment of those stakeholders. Literally, corporate governance in the Thai context is about establishing accountability, transparency, and fairness within a company.

A LEXICON OF CORPORATE GOVERNANCE According to the Stock Exchange of Thailand (SET), the terms concerned with corporate governance issues are defined as follows: A company is an entity legally separated from its owners, and maintains its existence forever. This enables it to enter into contracts, file lawsuits, and liable to litigation. Since shareholders invest their money in a company, it is legitimate that the management acts to protect their interests. Profit is one of the measures that appraise the company’s operations. If there were no value created, there would be no dividend to pay shareholders and nothing to distribute to the stakeholders. There are stakeholders that a company should keep in mind. These include employees, customers, suppliers, communities to which it is related, and the society at large. Some may argue that these stakeholders are indeed investors too because they also bear equal or more risks than do those who invest money. These arguments have not yet been resolved, and hence there exists a

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pending question: “To what extent and how a board of directors must be held responsible, with regard to the shareholders and other stakeholders?” Principles refer to thought-provoking elements or concepts that induce people to contemplate further, or as fundamental components of the mutual responsibilities between the management and the shareholders. Companies may use common sense to apply them at their own discretion under their own circumstances and regard them as achievable “aims”. The principles deal with what the people involved should do as much as possible. Best practices are inspired by the business experiences dealing with corporate governance problems. Best practices are complementary to defining models of corporate governance, hence are more inclined to be “pragmatic” than just being principles. Best practices are the norms based on which practical alternatives are available. Best practices deal with the various options that a company might do, according to its circumstances and abilities, which could be considered as norms or merely best practices. Structure refers to the interrelations of the stakeholders in a system that provides a framework for a company to operate further in order to effectively achieve its objectives. Such a structure holds together the interrelations of the board of directors, the management, and the shareholders, as well as the groups of stakeholders mentioned earlier. The stakeholders may also be extended to include other groups of stakeholders like regulators (that is, state authorities) and external auditors. Process means a decision-making system in which functional responsibilities are defined along with the personnel in charge. It clearly states the responsibilities as “who does what”, defines the accountabilities as “who answers to whom, and how” in each particular task, as well as provides proper auditing and a balance of power.

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Leadership begins with the chairman of the board of directors. He is vested with the responsibility to extract the best out of his board. The chairman must ensure that the board provides the leadership, vision, and encouragement for the operating personnel. Success of a company rests with the leadership and effective decision-making of its executives in the company echelon: the board, the chief executive officer (CEO), his top management executives, down to the employees at all levels throughout the company. Independence is the foundation of responsibility and it is necessary to the corporate governance structure. The board should comprise a number of independent directors as a core group. These are the people whom the shareholders could trust when exercising their independent judgment, and who could push for and obstruct actions where necessary. What is needed here is a genuine independence, not just in name, which would be worthless. Management includes the CEO and his top management executives who bear an overall responsibility in developing and implementing business strategies, as well as outcomes of the operations. The CEO’s determination, coupled with his way of thinking and behaviour, definitely influence the business to a great extent. In the final stages of operation, however, high-level leadership would take a form of joint efforts to extend the corporate vision, values, and objectives from the CEO’s own leadership to other executives throughout the entire organization. Accountability is an obligation to which one is bound as a result of his deeds concerning the assigned tasks. It is unjust, inefficient, and inevitably promoting abuses of authority for someone to have authority without accountability. The board of directors demonstrates its responsibilities by reporting to the shareholders its performances. Such responsibilities must adhere to appropriate rules and regulations. In particular, the responsibilities are legally required of the board.

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To instil accountability in an organization, each company has distinctive ways of dealing with its own problems. It reflects the cultural value of an establishment that is unique and different from others, according to the structure of a corporate life cycle. Disclosure and transparency are foundations of mutual understanding and trust between a company and its stakeholders. They contribute to the effectiveness of the firm and the functioning of the capital market. In addition, disclosure and transparency provide an opportunity for the shareholders and stakeholders to scrutinize the company more cautiously. At the very least, transparency means having a provision that clearly defines roles and responsibilities of the people involved, providing an easy access to needed information for stakeholders at a low cost, having a process for planning and decision-making open to the stakeholders, and maintaining a monitoring process to ensure ethical and moral conducts of the company operations. A company should disclose every important matter, whether it is financially related or not. Disclosure should be clear, accurate, easy to understand, and timely. Business ethics is practically regarded as a series of principles. Ethics is eternal truth or the essence of values. Ethics explains code of conduct, or is a discipline on what is right and correct, wrong and corrupt, virtuous or immoral. When a code of conduct is put into practice, different people with different frames of reference with respect to ethics might exercise their judgment differently with regard to reasoning and ethics. Companies hence prefer to define ethics simply as guidelines written with or without detailed information to which employees could refer when needed. Successful companies are confident that guidelines on code of conduct are essential tools that lead to better performances.

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APPROACHES TO STRENGTHEN CORPORATE GOVERNANCE The relevant agencies have been taking three approaches to reinforce practices of good corporate governance among listed companies:

Self-Discipline 1. Issuance of principles and best practices 2. Requiring disclosure of compliance and non-compliance with principles in the annual report of listed companies 3. Setting up of the Corporate Governance Center (CG Center) to serve as an advisory and information center to listed companies 4. Providing training for directors by the Thai Institute of Directors Association (Thai IOD) and for chief financial officers by the Institute of Certified Accountants and Auditors of Thailand (ICAAT)

Market Discipline 1. Setting up the Thai Investors Association to monitor companies and help investors exercise their rights in shareholders’ meetings 2. Requiring asset management companies to disclose how good corporate governance is used in their investment decisions and voting policies 3. Promoting corporate governance rating 4. Giving incentives and recognition to companies with outstanding achievements in implementing good corporate governance

Regulatory Discipline SEC has proposed amendment to the Public Limited Company Act of 1992 as well as the Securities and Exchange Act of 1992, aiming

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at (1) empowering investors in examining the public limited companies and remedy deficiencies; (2) defining a clear scope of directors’ responsibilities; (3) empowering SEC in supervising listed companies; and (4) revising punishment provisions, enabling offences to be settled by fine or imposing administrative sanctions instead of taking criminal actions.

PRINCIPLES OF GOOD CORPORATE GOVERNANCE SET originally disseminated “The Report on Corporate Governance” in August 2001, which contained forty principles of good corporate governance that companies were expected to comply with. Subsequently, SET outlined fifteen principles of good corporate governance to act as a set of guidelines for listed companies, which they must begin implementing. Companies have to demonstrate how they have applied these fifteen principles, along with any reasons why they may have failed to comply with them, in their Annual Registration Statements (form 56-1) and annual reports. SET believes that the implementation of these principles will bring great benefits to all listed companies as it demonstrates high standards of corporate governance and helps bring greater recognition to them, both domestically and internationally. It also promotes transparency and managerial efficiency and, therefore, strengthens the confidence of all shareholders, investors, and other related parties. The principles are based on the main five principles enumerated by the Organization for Economic Co-operation and Development (OECD). They are a set of policies about good corporate governance that cover the following areas: •

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Rights and equitable treatment of shareholders and various groups of stakeholders

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•

Board structure, roles, responsibilities, accountability, and independence Disclosure and transparency Internal control and risk management Business ethics

• • •

SET’s fifteen principles are only a set of guidelines that a company should follow. SEC has asked all listed companies to comply with the fifteen principles. Since each company has a unique business operation and operates in a different environment, it should implement the principles according to its own unique situation. However, in case the company is faced with limitations that prevent it from applying any particular principle, it should disclose these reasons to the related parties.

SET’S FIFTEEN PRINCIPLES 1. Policy on Corporate Governance The board of directors should provide a report on the company’s corporate governance policy which contains principles of corporate governance such as: • • • • •

Rights and equitable treatment of shareholders and various groups of stakeholders The board: structure, roles, duties, responsibilities, and independence Information disclosure and transparency Controlling system and risk management Business ethics

The board should disclose that policy in the annual report as acknowledgement of shareholders and every group of stakeholders. The board of directors should explain in the annual report

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about its policy on corporate governance, how the company applies the recommended principles, along with a summary of situations and the reasons for not being able to apply them at the moment (if any). 2. Shareholders: Rights and Equitable Treatment The board of directors should facilitate shareholders’ meetings in such a way that they encourage equal treatments for all shareholders. There should not be any difficult procedures, excessive expenses, or denial that would lessen the access to studying company information, as well as attending shareholders’ meetings. 3. Various Groups of Stakeholders There are many groups of stakeholders within the system of corporate governance. The principal groups of stakeholders include customers, the management and employees, suppliers, shareholders or investors, external auditors, the state, and the communities in which the company’s activities are located. Other stakeholders include trade unions, competitors, creditors, etc. Each has objectives and expectations different from the company. The board of directors should consider the stakeholders’ legal rights and ensure that those rights are protected. The board should support co-operation between the company and the various groups of stakeholders in order to secure business wealth and stability. 4. Shareholders’ Meeting The chairman of the meeting should allocate appropriate time and encourage equal opportunities for shareholders to express their opinions and raise any question at the meeting, according to the agenda and the issues presented at the meeting. All directors and chairpersons of the committees should attend the shareholders’ meeting to respond to questions.

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5. Leadership and Vision At the pinnacle of a company, the board of directors should possess leadership, vision, and decision-making independence for the best interests of the company and the shareholders at large. Both the board and the management are accountable to the shareholders; hence there should be a system in which the roles and responsibilities are clearly separated between the board and the management, as well as between the board and the shareholders. 6. Conflict of Interests The board of directors, the management, and shareholders should attempt to deal with the issue of conflict of interest carefully, honestly, reasonably, and independently on a virtuous ground for the best interests of the company. 7. Business Ethics The board of directors should provide a code of ethics or statement of business conduct for all directors and employees to ensure that they are aware of, understand, and would keep monitoring the code of conduct as expected by the company and its shareholders. 8. Balance of Power for Non-Executive Directors It is the duty of the board of directors, with approval from the shareholders’ meeting, to determine the number of directors and define the proportion of executive directors and independent nonexecutive directors. However, it is proposed that one-third of the board should be independent, with three directors as the minimum. The qualifications of the independent directors should be held to the same standard as the qualifications for membership of the audit committee in accordance with Notification of the Stock Exchange of Thailand Re: Qualifications and Scope of Work of the Audit Committee (No. 1) 1999.

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In addition to the provision that the board of directors should have one-third of its members as independent directors, in case where a company has significant shareholders with dominating power, there should be a certain number of directors representing a fair proportion of each group’s investment. 9. Aggregation or Segregation of Positions The board of directors and shareholders should be entitled to freedom of choice, with regard to the most appropriate way the company would go about the matter of positions. They may combine the titles of chairman of the board and president into one position, or keep them as two separate positions. In the latter case, an independent director is eligible to be appointed chairman of the board. Whichever way they choose, there should be a clear separation of power and authorities so that no one would be granted unlimited power. 10. Remuneration for Directors and the Management •

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The scale and components of remuneration for directors should be appealing enough to attract and retain quality directors whom the board needs, but avoid excessive payments. Remuneration for non-executive directors should be comparable to the general practice in the industry, with regard to work experience and commitment, as well as the benefits each director brings. Directors who are assigned extra work (being members of a committee, for example) should be paid appropriately more. Executive directors should receive the remuneration that is linked to the performance of the company and that of the individual director. Remuneration for the CEO and top executives should be determined in accordance with the principles and policy set by the board, within the framework approved by the

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shareholders’ meeting. The board should review a committee’s recommendation (if any) and make the final decision. In the best interests of the company, the remuneration in salary, bonus, and long-term incentives should correspond to the performance of the company, as well as that of each executive. Setting remuneration is a matter that directly involves the directors. It, therefore, needs to be carried out with transparency and approved by the shareholders. Directors should not be involved in the decision-making concerning their own remuneration. The board of directors should disclose in the annual report its remuneration policy and the amounts set for directors and top executives in accordance with SEC’s rule.

11. Board of Directors’ Meeting The board of directors’ meeting should be regularly scheduled in advance. At the meeting the chairman of the board should promote prudent consideration and allocate appropriate time for the management to present adequate issues and enough time for the directors to broadly discuss important matters with care. It is the duty of directors to attend every board meeting, except with reasonable excuses. The board should disclose the total attendance of each director in the annual report. 12. Committees The board of directors should provide for committees, especially audit committee and remuneration committee, to help the board in studying various issues in detail and screen workload according to certain situations. It should be clearly provided in the policy and framework regarding qualities of members in the committees, their job responsibilities, conduct of meeting, and reporting to the board. All or most members of the committees should be nonexecutive directors, while the chairmen of the committees should be independent non-executive directors.

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13. Controlling System and Internal Audit The board of directors should provide, maintain, and review a controlling system in which financial, operations, and compliance controls are incorporated. The system should also include risk management and pay a great deal of attention to all the early warning signs and extraordinary items. The board should commence internal audit activities by setting up a separate unit within the company to handle them. 14. Directors’ Reporting The board of directors should provide a report indicating its responsibilities to prepare financial statements and be exhibited alongside the auditor’s report in the company’s annual report. The board of directors’ report should cover important topics of Code of Best Practice for Directors of Listed Companies as prescribed by SET. 15. Relations with Investors The board of directors should ensure that the company discloses important information correctly, timely, and transparently. The board should provide an Investor Relations Unit to represent the company in communication with institutional and individual investors, stock analysts in general, and state agencies concerned. The board should provide for adequate resources to help develop the knowledge and ability of company personnel in their communication and presentation of information.

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Chapter 4

Best Practice Guidelines for Audit Committee In January 1998 the Stock Exchange of Thailand (SET) began to require that newly listed companies institute audit committees; those already listed were given until the end of 1999 to establish such committees. A few large companies and banks had the potential to beat the deadline. The majority of companies, however, found the task difficult. Audit committee members must come from the board of directors, but potential committee members shied away from the new appointments, fearing personal liability. Yet despite such initial difficulties and hesitations, nearly all the listed companies met the deadline. Because of the increasing complexity of business and many rapid changes, every corporate entity needs to continuously improve its management standards to be effective and appropriate until the time when the general investors and all the related parties have accepted that the company is participating in an environment called “Good Corporate Governance”. The audit committee is now widely known as a mechanism which facilitates good corporate governance and ensures the quality, credibility, and objectivity of the financial reports. The audit committee will take a proactive role to assist the board of directors in fulfilling its responsibilities, to provide visions for the 29

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business, to maintain the objectivity on financial reporting and internal control system, and, moreover, to provide the management and external auditors a chance to manage all risks. For an audit committee to operate effectively, its composition, qualifications, mandate, methods of communicating with internal auditors, external auditors, and the board, and its functions and responsibilities must be defined clearly. To achieve the objectives of setting up the audit committee, all the related parties must understand the committee’s terms of reference, assist it in all its tasks, and provide all needed information and resources. As SET is strongly committed to the development of an audit committee in Thailand, it believes this “Best Practice Guidelines for the Audit Committee” will identify the various bodies involved in the audit committee, and will aid in the understanding of it and, finally, bring benefits to the company.

OBJECTIVES The audit committee is a committee of the board of directors, as it assists the board with its responsibilities, oversees all relevant issues, and fulfils the company’s corporate governance. The objectives for establishing an audit committee applying these guidelines are set up broadly in order to reflect its significant role. Directors, the management, external auditors, and internal auditors have a vested interest in an effective audit committee as it can help them to meet their mounting legal and professional responsibilities. The main objectives and the potential benefits of an appropriately set-up audit committee are as follows: 1. Increasing the credibility and objectivity of the financial reports.

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2. Assisting the board of directors in discharging its responsibility regarding: (a) (b) (c) (d) (e) (f) (g)

Financial reports Application of accounting policies Financial management Internal control systems and internal audit Business policies and strategies Compliance with applicable regulations and relevant laws Monitoring of and controlling business risk

3. Improving the efficiency of the board by delegating tasks to the committee, as this will provide more time for issues to be discussed in sufficient depth and for other matters to be managed adequately. 4. Improving the effectiveness of the internal and external audit functions as well as the communication between the board and the internal auditors and the external auditors. 5. Providing formal meetings for communication between the board and financial management. 6. Facilitating the maintenance of the independence and the objectivity of the internal auditors and the internal department. 7. Facilitating the maintenance of the independence and the objectivity of the external auditors. 8. Improving the quality of internal reporting. 9. Strengthening the role and influence of non-executive directors. 10. Providing the board with a clear understanding of an audit committee’s functions and responsibilities.

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SIZE AND COMPOSITION The committee consists of at least three non-executive directors who are independent of the executive directors and major shareholders. The number of members depends on the size of the company and the functions and responsibilities of the audit committee. In general, the number of members ranges from three to five. Members must have the appropriate skills. Every member is not expected to be an expert in accounting or finance, because the committee has the right to seek advice on matters from auditors and the management at the meeting and also additional information from independent professional advisors when necessary. However, an audit committee member’s experience and preparation should enable him/her to ask relevant questions and to evaluate the answers. At least one member must have significant experience in accounting or in financial matters so as to keep pace with any proposed changes in the area of financial reporting or legislation. This will be very useful to an effective audit committee in the assurance of the quality of the company’s financial information. Members must devote their time to fulfil their roles on the committee. They should consistently be given the opportunity to attend technical and professional courses to help them keep up-to-date and to increase their knowledge of relevant issues.

APPOINTMENT Members of the audit committee are appointed by the board of directors or by resolution of the shareholders’ meeting. When nominating members to the audit committee at the shareholders’ meeting, the company should disclose to all shareholders in the meeting notice: the name, the certificates, and the

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resumé of each nominated member, including statements confirming that the member has the qualifications required by SET. If the number of committee members falls below the minimum of three, the board of directors or the shareholders’ meeting is required to increase the number of the committee members to the minimum of three. They have three months to do so in order to maintain the continuity of the committee.

CHAIRMAN OF THE AUDIT COMMITTEE The selection of the chairman should be given careful consideration because this person will exercise a pivotal post in ensuring the overall effectiveness of the committee and the efficient planning and conducting of meetings. The chairman should be elected from among its members or by the board of directors.

SECRETARY OF THE AUDIT COMMITTEE A secretary should be appointed, in order to assist the committee in arranging the meetings, preparing agendas and supporting papers, circulating agendas and briefing papers, and recording all the proceedings in the minutes. The secretary may be the same person as the company secretary or the chief of the internal audit or the chief financial officer, in the case of a small business.

RETIREMENT Retirement includes ceasing to be a director, the expiration of the term of the appointment, the resignation, or the termination of services. In case a member of an audit committee wishes to retire or to resign during the term of the appointment, this member should

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give proper notice and reasons thereof to the company at least one month before leaving, in order to give the company time to fill the vacancy created. The company should submit all these matters and a copy of the notice of the termination to SET. In case a member of the audit committee is dismissed during the term of the appointment, the company should disclose all these matters and the reasons thereof to SET. Simultaneously, the dismissed member of the audit committee may inform SET about the conditions of the dismissal and the reasons thereof.

TERM OF THE APPOINTMENT The term of the audit committee should be set clearly from two to five years to ensure continuity within the committee. Members may be re-elected for another term, if the board of directors or the shareholders’ meeting deem it appropriate. Membership should not be automatically renewed. New members will bring fresh perspectives and approaches to the committee’s work.

QUALIFICATIONS Audit committee members must have the following qualifications: 1. They may not hold shares exceeding 5 per cent, including shares held by a related person, of the paid-up capital of the listed company or of an affiliated company, an associated company or a related company of the listed company. 2. They may be directors who are not involved in the day-today management of the listed company or an affiliated company, an associated company, a related company, or with the major shareholders of the listed company. They may be directors who are not employees, staff members, or advisors who receive regular salaries from the listed company, an affiliated company, an associated company, a related company,

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or the major shareholders of the listed company. For example, the company’s chief executive officer cannot be an audit committee member, since he/she is involved in the day-to-day management of the company. They must be free of any present, direct or indirect, financial or other interest in the management and business of the listed company, its subsidiaries and associated companies, or its major shareholders. They must be free of any past (for a period of at least one year), direct or indirect, financial or other interest in the management and business of the listed company, its subsidiaries and associated companies, or its major shareholders, unless the board is satisfied that such relationships will not affect the members’ independent judgement. They must not be relatives of any executive director, executive officer, or major shareholder of the listed company. They must not be acting as nominees or representatives of any director, major shareholder, or shareholders, who are relatives of any major shareholders of the listed company. They must be able to carry out their duties, exercise their judgement, and report the committee’s performance without being influenced by executive directors or major shareholders of the company, including related persons or relatives.

“Related persons” shall include persons who are involved in any kind of benefits or are related to the company’s business to a significant amount, such as suppliers, customers, creditors, and debtors. These relationships may affect the audit committee in carrying out its duties independently or conveniently.

INDEPENDENCE Independence means that the audit committee can fully exercise its judgement and fulfil the duties assigned to it by the board

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of directors. The members must not be influenced by anyone or any group of persons or any events that may affect their judgement in fulfilling their duties and in reporting as they should. Members of the audit committee may fail to fulfil their duties appropriately and may fail to exercise independent judgement, since they may be influenced by directors, executive directors, or officers of the company. These are reasons why members are not independent: 1. Members neglect to fulfil the duties assigned to them by the board of directors. 2. Members accept proposals or are involved in any improper actions that could affect the company’s and shareholders’ benefits. 3. Members do not exercise independent judgement or do not report to the board of directors or shareholders. 4. Members do not co-operate, consult, or co-ordinate with directors, executive directors, or officers of the company. The following transactions may be deemed as transactions which will not affect the independent performance and judgement of the audit committee members. 1. Transactions between an audit committee member or persons related to him/her made with the listed company, a subsidiary, or an affiliate of the listed company, or a major shareholder of the company in respect to the procurement of goods and services in the following cases: (a) The acquisition or disposition of goods or services based on the ordinary course of business and under normal commercial terms and conditions provided on a clear and open basis; and (b) The value of goods or services is comparable to the value offered to other customers.

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2. Financial assistance given to an audit committee member or persons related to him/her by the listed company, its subsidiaries or affiliates, and major shareholders in the ordinary course of business as a financial institution. 3. Any transaction which may be defined as a connected transaction and where the company has followed SET’s related regulations. 4. Any transaction so specified by SET.

FUNCTIONS, SCOPE, AND RESPONSIBILITIES Functions 1. Assigned by the board of directors and agreed upon by the audit committee. The functions should be based on the size of the business, the complexity of the business, the type of industry, and the board structure. 2. Clearly stated in the terms of reference and are disclosed to all shareholders. 3. Periodically reviewed and updated. 4. To report any changes in the functions of the audit committee to SET.

Scope 1. To review the sufficiency, credibility, and objectivity of the financial reporting by co-ordinating with the external auditors and the management responsible for preparing the quarterly and yearly financial reports. The audit committee may suggest issues or matters to be included for review or audit by the external auditors during their audit of the company. 2. To review the adequacy and effectiveness of internal control systems and internal audit functions by co-ordinating with the external auditors and internal auditors (if any).

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3. To review compliance with the Securities and Exchange Act, regulations of SET, and any other relevant laws. 4. To consider and advise the appointment of the external auditors, including the audit fee, by considering the creditability, the adequacy of the firm’s resources, its audit engagements, and the experience of its supervisory and professional staff. 5. To consider compliance with all connected transaction disclosures or the conflict-of-interests disclosures. 6. To take care of any other matters assigned to it by the board of directors, such as reviewing the company’s financial and risk management policies, reviewing compliance with the Code of Corporate Conduct of the management, and reviewing with the company’s management, all important reports which must be disclosed to the public according to the law (for example, Management Discussion and Analysis [MD&A]). 7. To report the activities of the audit committee in the company’s annual report, which must be signed by the chairman of the audit committee. The following information should be included in the report: (a) Comments on the company’s financial reporting process and the disclosure of its financial information, which must be correct, sufficient, and credible. (b) Comments on the adequacy of the company’s internal control systems. (c) Statements on whether the company’s auditor is suitable for reappointment. (d) Comments on compliance with the Securities and Exchange Act, regulations of SET, and any other relevant laws. (e) Other statements that shareholders and general investors deem to be considered under the scope of the functions and responsibilities assigned to it by the board of directors.

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The audit committee has the right to seek any information from independent professional advisors when necessary at the company’s expense.

Responsibilities The audit committee is responsible to the board of directors under the scope of the functions assigned to it by the board, whereas the whole board of directors is responsible for all the company’s activities.

AGENDA There should be a regular schedule of meetings with pre-arranged dates and agenda. Agenda and briefing papers should be well documented and circulated with sufficient time to allow members to fully review the information or to ask for additional information before the meeting. The audit committee must hold a meeting to consider the following matters: 1. To consider all financial statements and relevant financial reports, all accounting principles and accounting methods, ongoing concern statements, any changes in accounting policies, ensuring that they are in accordance with accounting standards, as well as the reasoning of the management in changing any accounting policies significantly. The audit committee should consider these matters before submitting them to the company’s board of directors for distribution to the shareholders and investors. 2. To consider the internal control system and internal audits. 3. To consider the scope of the audit plan, the degree of coordination for the respective plans, and the evaluation of the audit plan by co-ordinating with the internal auditor and the

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external auditor. The committee should inquire as to the extent to which the scope of any planned audit can be relied upon to detect fraud or weaknesses in the company’s internal controls. To consider the problems and limitations faced by any internal auditor during an audit and to review the internal auditor’s auditing work. To consider the problems and limitations faced by the external auditor during an audit and review the financial statements. To discuss with the internal auditor and external auditor any steps that are planned for a review of the company’s electronic data-processing procedures and controls, and to inquire as to the specific security programmes needed to guard against computer fraud or misuse from within or from without the company. To consider and review the transactions that may lead to any conflicts of interest, such as any connected transactions of the company. To monitor the procedures in place to ensure that the company is in compliance with the Securities and Exchange Act, the Stock Exchange Listing Rules, and any other reporting requirements or relevant legislations concerning the business. To perform any other functions assigned by the company’s board of directors. To consider developing self-assessment programmes in order to obtain feedback on the committee’s performance and any operations assigned by the board of directors.

FREQUENCY OF MEETINGS The number of meetings held will vary according to the size of the business and the complexity of its activities. The conduct of audit committee meetings will greatly influence the ability of committee members to achieve the audit committee’s objectives. Normally,

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the audit committee should meet four times a year. The chairman of the audit committee may call a special meeting if any member, the internal auditor, the external auditor, or the chairman of the board of directors should so request, to discuss the matters that require their special attention.

ATTENDANCE OF MEETINGS AND QUORUM Meetings should be arranged in such a way so that, as far as possible, all audit committee members can attend. They must meet the quorum requirements. The board of directors, the management, the internal auditor, or the external auditor may be requested to consider certain matters, such as an internal audit or an audit plan. The audit committee should meet regularly with the company’s general counsel, or with an outside counsel when necessary or appropriate. Legal matters which may have a significant impact on the company’s financial statements should be reviewed. When necessary, the general counsel and/or an outside counsel may be invited to attend audit meetings.

VOTING Members who may benefit from the matter under discussion should be identified in a document which must be presented to the committee. These members may not comment and have no voting rights on these agenda points. The secretary of the audit committee has no voting rights in any decisions made by the audit committee.

MINUTES The audit committee may appoint a secretary or assign another person to take minutes. The minutes must be presented to

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committee members and the board of directors. This will allow the board to formally report the audit committee’s activities. The minutes should also be presented to the internal auditor and the external auditor in order for the committee to inform them formally that there are areas which require its special attention.

REPORTING The audit committee has the duty and the responsibility to report the operation of the committee and any duties assigned by the board of directors. The report is essentially an informational report for the board of directors, the shareholders, and the investors, which should convey the independent opinion of the committee. The board of directors must ensure that the management is fulfilling its stewardship accountability and must consider the equitable benefit of the shareholders as a whole.

Reporting to the Board of Directors 1. To report to the board of directors regarding the committee’s performance and operations by submitting: (a) the committee’s minutes clearly identifying the recommendations on each considered matter. (b) a summary of the committee’s work and the results of the fiscal year. (c) comments on the company’s financial statements and its internal audit plan and its work programme. (d) any other major issues which the committee believes the board should be informed of. 2. To report immediately to the board of directors regarding the following matters, in order for the board to take immediate

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actions to solve the problems: (a) transactions concerning any conflicts of interest. (b) the findings of investigations into matters, of which any suspected fraud or irregularity is suspected, or any failure of the internal control system. (c) the findings of investigations into matters, of which any infringement of any regulations or laws of SET or related business laws is suspected. (d) any other major issues which the committee believes the board should be informed of.

Reporting to the Regulatory Entities If the audit committee reports to the board of directors any matter which has or is likely to have a material impact on the company’s financial status and operating results, and it has an agreement with the board of directors and the management that the matter must be resolved, but the audit committee is of the view that the matter has not been satisfactorily resolved, without reasonable cause, within the agreed time frame, the audit committee or any member of the committee has the right to report the matter to SEC and SET.

Reporting to the Shareholders and Investors The audit committee shall produce a report to be included in the company’s annual report summarizing the work performed while discharging its duties during the fiscal year. The report must be signed by the chairman of the audit committee.

ASSESSING THE AUDIT COMMITTEE’S PERFORMANCE A formal assessment process should be established in order to ensure that the audit committee is operating effectively and is fulfilling its assigned objectives.

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The assessment process should include interviews with key people who are involved with the operation of the audit committee and the self-assessment questionnaires completed by the committee members regarding the committee’s effectiveness. The audit committee should obtain the results of the assessment and any impact on the committee’s performance and operations from the external auditor, the head of the internal audit, senior financial and other management staff, and the board of directors, in order for the committee to take immediate action to improve the effectiveness of the committee’s performance and to fulfil the committee’s objectives.

INTERNAL CONTROL AND INTERNAL AUDIT Internal Control The listed company should establish and maintain a good and effective internal control system, in order for the management to operate the business efficiently and effectively, to produce correct and credible financial reports, and to comply with all the relevant requirements and laws. Internal control can be defined as the procedures, the organization plan, and the system which have been developed by the board of directors and the management in order to provide reasonable assurance of: 1. The reliability and completeness of information; 2. The compliance with policies, work plans, procedures, and all the relevant requirements and laws; 3. The safeguarding of the company’s assets against the unauthorized use or disposition; and 4. The effective and efficient use of resources in order to accomplish the company’s planned objectives.

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Internal control is a composite of five major items, according to how the management conducts business and links them together. These items are control environment, risk assessment, control activities, information and communication, and monitoring.

Internal Audit The listed company should establish an internal audit department which furnishes the members of the organization with analyses, appraisals, counsel, recommendations, and information concerning the activities reviewed. If a listed company does not have an internal audit department, it must employ one from without. Internal audit can be defined as an independent appraisal function established within the organization to examine and evaluate its activities as a service to the organization. The objectives of internal auditing are to assist members of the organization in the effective discharge of their responsibilities and to promote effective control at a reasonable cost. A listed company shall maintain the proprietary and effectiveness of its internal control system as long as it is a listed company.

RELATED AUDIT COMMITTEE’S ACTIVITIES In order to meet the audit committee’s objectives, the committee should consider if there are any activities related to its responsibilities. These could be: 01. To obtain explanations from the management for any significant variations in the company’s financial statements during the year (this review may be performed at a meeting of the board of directors). The committee should also deliberate with the management on the MD&A which is disclosed in the annual report.

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02. To inquire of the external auditor regarding the scope of its audit, to review the MD&A, and to consider the information disclosed in the MD&A and annual report to ensure that it is consistent with the information reflected in the financial statements. 03. To inquire of the management and the external auditor if there were any significant financial reporting issues discussed during the accounting period, and, if so, how they were resolved. 04. To meet privately with the external auditor to request his opinion on various matters, including the quality of the work done by the financial and accounting personnel and the internal audit staff. The committee should also ask the external auditor what his greatest concerns were and if he believes anything else, which has not been raised or covered elsewhere, should be discussed with the committee. 05. To determine with the board of directors if the external auditor should meet with the full board to discuss any matters relative to the financial statements or to answer any questions that other directors may have. 06. To request an explanation from the company’s financial management, and the external auditor, of any changes in accounting standards or rules promulgated by the relevant regulatory bodies, which will have an effect on the company’s financial statements. 07. To discuss with the management and the external auditor the substance of any significant issue raised by in-house or outside counsel concerning litigation, contingencies, claims, or assessments. The committee should determine if these issues have been disclosed in the company’s financial statements and in what manner. 08. To inquire about the existence and substance of any significant accounting accruals, reserves, estimates made by the management, or any matters that have had a material impact on the financial statements.

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09. To consider issues concerning income tax returns which are filed with the Revenue Department and whether there is anything significant that has been or might be disputed by the Revenue Department. To inquire as to the status of related tax reserves. 10. To review the management representative letter given to the external auditor and inquire whether they have encountered any difficulties in obtaining the letter or any specific representations contained therein. 11. To consider any other activities when necessary.

REPORTING TO THE STOCK EXCHANGE OF THAILAND Establishment of the Audit Committee 1. To report the board of directors’ or shareholders’ resolutions concerning the establishment of an audit committee, together with the Form for Report on Names of Members and Scope of Performance (F24-1) via facsimile and electronic system as specified by SET. 2. To submit the Certificate and Resumé of the Audit Committee’s Members (F24-2) when it reports appointments to the audit committee and the Form for Report on Names of Members and Scope of Performance. 3. To submit the Form for Accepting the Responsibilities to Report the Securities Holding within seven days from the date of its establishment. 4. To submit the Report of Securities Holding (F59-1) within thirty days from the date of establishment. 5. In case the board appoints an audit committee member who has benefited from or has had interest in the company within a period of one year before being appointed as a member of

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the audit committee, the company must submit the written document stating that this person can discharge his/her responsibilities independently.

Appointments to the Audit Committee 1. To report the board of directors’ or shareholders’ resolutions concerning the appointments to the audit committee, together with the Form for Report on Names of Members and Scope of Performance (F24-1) via facsimile and electronic system as specified by SET. 2. To submit the Certificate and Resumé of the Audit Committee’s Members (F24-2) of a new member when it reports the appointments to the audit committee and the Form for Report on Names of Members and Scope of Performance. 3. To submit the Form for Accepting the Responsibilities to Report the Securities Holding within seven days from the date of appointment. 4. To submit the Report of Securities Holding (F59-1) within thirty days from the date of appointment. 5. To report changes in the audit committee, together with the reason, if any member of the committee resigns or is dismissed during his/her term of service.

Modification of the Audit Committee’s Scope of Performance To report the board of directors’ or shareholders’ resolutions concerning the modification of the audit committee’s scope of performance, together with the Form for Report on Names of Members and Scope of Performance (F24-3) via facsimile and electronic system as specified by SET.

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Chapter 5

Code of Best Practices for Directors of Listed Companies The Stock Exchange of Thailand’s (SET) Code of Best Practice for Directors of Listed Companies is not a legal requirement but should be used as a guideline for all board members concerning their behaviour while holding such appointments. SET believes that management under this code should help ensure a high standard of best practice on behalf of the company and its shareholders. The code should also strengthen the confidence of the shareholders, investors, and other related parties in the management of the company.

BOARD COMPOSITION The board of directors should consist of executive directors and non-executive directors. Executive directors are involved in the day-to-day operations or are authorized directors. Non-executive directors are independent directors and outside directors. Independent directors are defined as directors who do not hold any position in the management and are not employees of the company. They must not be executive directors or authorized directors. They must be independent of any major shareholders, 49

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management, and any other related persons and they must have the responsibility to determine if there is anything that may affect the equitable treatment of shareholders. They are also responsible for considering any transactions that may lead to a conflict of interest between the listed company and related persons. Outside directors are defined as directors who do not hold any position in the management or are not employees of the company. They must not represent any major shareholders but they may represent stakeholders, such as customers, suppliers, or creditors. The board of directors of a listed company should include independent directors and outside directors of sufficient calibre and number for their views to carry significant weight in the board’s decisions. No one director should have unfettered powers regarding decisions made by the board of directors. In this way, everyone can reach an independent judgement. The chairman should be an independent director and should not be the same person as the managing director. The reason for this is that there should be a separation of duties in directing the company’s policies and management.

ROLES AND RESPONSIBILITIES OF DIRECTORS The directors must ensure that the company has a management team with enough competency, knowledge, and experience to run the business. They are interested in the business in which they hold a directorship. In addition, the management must have the intention to run the business continuously and conduct themselves with honesty and integrity. The directors must comply with all laws and regulations, all objects and articles of association of the company, and they must carry out their duties in line with the resolutions of the shareholders’ meetings in good faith and with care to preserve the

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interests of the company. They must ensure the management’s accountability to shareholders. The directors must implement and direct the company’s policies, as well as monitor and supervise its operations to maximize economic value and shareholders’ wealth. The directors should continuously follow and monitor the business’s performance and the operations of the company, according to its bye-laws and regulations. The board of directors should be notified by the management of any significant matters regarding the company’s business. The directors should maintain the effectiveness of the company’s internal control and internal audit. Independent directors and outside directors should bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct. They should oppose any proposal brought by other directors or the management that they consider may affect the equitable treatment of shareholders. The directors can seek independent professional advice concerning the company’s business, when considered necessary, at the company’s expense. The directors should appoint a company secretary to take care of all the directors’ activities and to help the directors and the company conduct business in full compliance with all the relevant bye-laws and regulations. The directors should implement a Code of Corporate Conduct and a Code of Ethics as guidelines for the company.

APPOINTMENTS TO THE BOARD The company should have a written and transparent policy concerning the selection and the appointment of a director. The board should precisely regulate the term of the directorship. Reappointments should not be automatic.

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The board should establish committees which can assist the board with regard to the company’s financial reports, internal control system, and in fulfilling its corporate governance. Examples of such committees are audit committee, nominating committee, and remuneration committee.

HOLDING A DIRECTOR’S POSITION A director should accept an appropriate number of company directorship, to ensure that he/she has time to attend meetings and keep up with the business performance and the operations of the company. The managing director of the listed company should hold this position in only one company in order to have time to run the business in accordance with the company’s objectives. A director should avoid any other positions or jobs that may lead to any conflicts of interest.

DIRECTORS’ REMUNERATION The company should have a written and transparent policy concerning the remuneration of directors and the management staff. The remuneration must be approved at a shareholders’ meeting. The remuneration of directors who are appointed to committees and/or are assigned any additional duties or responsibilities should reflect the duties and responsibilities assigned by the board of directors. The remuneration of directors should be disclosed fully in the company’s annual report.

BOARD AND SHAREHOLDERS’ MEETINGS The company should strive for consistent attendance at all board meetings. When the board is making decisions on any significant activities, the meeting must maintain a quorum. Examples of significant activities are: acquisitions and dispositions of assets, investment

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project expansions, the identification of power and management levels, financial management policies, and risk management. A written notice of every board meeting, which includes the date, the agenda, and any documents relating to matters about to be ratified or approved at the meeting, must be sent to every director in advance. The notice must be sent within the period specified in the company’s articles of association except in case of an emergency in order to maintain company benefits. This will allow the directors to arrange their schedules to attend all board meetings and also allow them to carefully consider all the information in order to make decisions. Every director has the right to examine all documents relating to all matters that concern the board of directors. If suspicions arise, other directors or the management must be asked to allay these suspicions. The company should follow the best practice for shareholders’ meetings of a listed company to ensure that each meeting is held in a transparent and legitimate manner and that it leads to the benefit of every shareholder. The company secretary, or another person assigned by the board, should complete the minutes for each board of directors’ and shareholders’ meeting within the period specified by the relevant bye-laws. The directors have the right to examine the minutes if they inform the company in advance.

REPORTS The board of directors is responsible for the accuracy, completeness, and transparency of the company’s financial reports and nonfinancial reports which are disclosed to shareholders and investors. The reports should include reasonable explanations and calculations to support the results of the company’s operations, policies, future trends as well as any opportunities or any threats.

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Financial Reports The board of directors should not unnecessarily intervene and should maintain full understanding regarding the objectives and professional standards of audits conducted by external auditors. If any external auditor resigns or is dismissed, the company should explain the reasons for the resignation or dismissal to the Securities and Exchange Commission (SEC) and SET. The board should present a statement of the directors’ responsibilities concerning the disclosure of the company’s financial reports. This statement should be presented in the annual report together with the audited financial statements. This statement should cover the following points: 1. The law and the requirements for directors to prepare financial statements for each financial year which present a true and fair view of the state of affairs of the company. 2. The responsibilities of the board in presenting accurate and complete financial information to maintain and safeguard the company’s assets. It should include full details in a way as to prevent any fraud or mismanagement of the company’s assets. 3. The statement must show that the company has conformed with accepted accounting standards and other reporting requirements. It must use appropriate accounting policies, and that it applies them consistently. The report should be supported by reasonable and prudent judgement and estimates. 4. The board of directors should disclose their compliance or non-compliance with the Code of Best Practice. Any areas of non-compliance should be explained and justified.

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Chapter 6

Best Practice Guidelines for Shareholders One of the main principles underlying good corporate governance is to guarantee the rights and equality of each shareholder, especially in shareholders’ meetings. The ideal meeting should have simple and transparent procedures that encourage the practice of equality for each and every shareholder. However, in some cases shareholders’ meetings in some companies were not conducted in a proper or appropriate way. In some cases the meetings did not even comply with related laws and regulations. Some companies failed to treat all their shareholders fairly and equally. Shareholders’ rights and benefits were often not given to each and every shareholder. Those transgressions may have arisen from the companies’ executives not knowing, misunderstanding, or even intentionally breaking the laws and regulations concerning conduct towards shareholders. To prevent these cases from occurring again there should be an unbiased, reliable person who takes part in the proceedings to make the whole process more transparent and fair for each and every shareholder and to comply with all related laws and regulations. The Stock Exchange of Thailand (SET) may now require listed companies to appoint a person in charge of superintending a shareholders’ meeting in accordance with the above principle. 55

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The person in charge of superintending a shareholders’ meeting may be an auditor approved by the Securities and Exchange Commission (SEC) or a financial advisor or person specified by SET and approved by SEC. These persons have the responsibility of overseeing the shareholders’ meetings to assure that they are conducted transparently and in accordance with all related laws and regulations. The responsibilities begin with the examination of the process for verifying documents of shareholders or proxies who have the right to attend the meeting. Their responsibilities also include determination of quorum, superintendence of the meeting, and examination of minutes of the meeting as well as other related documentation and evidence. Accordingly, in order to enable listed companies to better understand the duties and responsibilities of the person in charge of superintending a shareholders’ meeting and also to better standardize these practices of the person to permit better transparency, equality, and compliance with the related laws and regulations, SET has set forth a sample of duties and responsibilities of such a person as follows.

SUPERINTENDENCE PRIOR TO SHAREHOLDERS’ MEETING A person in charge of superintending a shareholders’ meeting should perform superintending function to ensure that the listed company implements proper procedures for the attendance of meeting.

Inspection of Documentation The person has to ensure the examination of documentation or evidence proving the right of the shareholders or proxies to attend a shareholders’ meeting, including a proper period of time for the examination of documentation and evidence and the registration

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as prescribed in a notice of shareholders’ meeting and under relevant laws. In case the listed company objects to the right of any shareholder or proxy to attend a shareholders’ meeting, the person in charge of superintending the meeting should examine the documentation of the shareholder or proxy to determine whether or not the refusal of his/her right to attend that meeting is proper in accordance with the method of examination of documents prescribed by the listed company.

Determination of Quorum The person in charge of superintending a shareholders’ meeting has to ascertain whether or not the number of shareholders and proxies attending the meeting forms a quorum before the commencement of the meeting. In the event that a period of one hour from the appointed time has lapsed and the number of shareholders attending the meeting is still insufficient to form a quorum, the person should ensure the implementation of the following: 1. If the meeting is convened on the requisition of the shareholders, it shall be revoked. 2. If the meeting is convened on the requisition of the directors, the listed company shall reconvene a shareholders’ meeting by sending a notice in advance not less than fourteen days prior to the date of the meeting. In that latter meeting a quorum is not compulsory. In other words, a quorum can be formed irrespective of the number of shareholders or proxies (if any) present at the meeting.

SUPERINTENDENCE OF SHAREHOLDERS’ MEETING A person in charge of superintending a shareholders’ meeting should ensure that the meeting is conducted in order, with transparency, and in accordance with relevant laws and regulations.

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Duties during the Meeting The person has to ensure that the shareholders’ meeting is transparent and in conformity with relevant laws and regulations. He has to ensure that the following acts are implemented during the meeting: • •

•

•

•

•

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An announcement to the shareholders’ meeting of the number of shareholders and proxies present. An announcement to the shareholders’ meeting of the persons who are not entitled to vote according to relevant laws and regulations, or the transferees of those persons, including the voting method prior to the voting for each agenda item. The conduct of the shareholders’ meeting in accordance with the order of the items in the agenda as specified in the notice of the meeting. Changing of such order, such as from item 2 to item 3, can be made only with an approval by the votes not less than two-thirds of the number of shareholders present at the meeting. The non-restraint in the exercise of rights by shareholders, such as to make inquiries. The shareholders’ meeting can transact any businesses other than those specified in a notice of meeting on the requisition of shareholders representing not less than one-third of the total number of shares of the company. Such requisition may not be refused. The arrangement for the shareholders’ meeting to determine the place, date, and time of the next meeting in case the shareholders’ meeting cannot completely transact all the businesses according to the order of the agenda or the businesses as proposed by the shareholders within the day of the shareholders’ meeting and such meeting needs to be adjourned. The vote casting in accordance with relevant laws and regulations.

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Action in Case of Incorrect Practice A person in charge of superintending a shareholders’ meeting should immediately notify the chairman of the meeting or the company’s executives when it is found that the listed company has done any act inconsistent with relevant laws or regulations so that it shall make a rectification. In case the listed company fails to carry out a rectification without reasonable ground, the person in charge of superintending the shareholders’ meeting shall make a counter-memo to the company and send a copy to SET promptly within the business day following the date of the shareholders’ meeting.

SUPERINTENDENCE AFTER SHAREHOLDERS’ MEETING A person in charge of superintending a shareholders’ meeting should ensure the preparation of minutes of the meeting as well as documentation and evidence that can be made available for inspection. In case it is found that any document or act related to the meeting does not conform to relevant laws or regulations, a notice asking for rectification shall be given to the company. If the company fails to carry out a rectification without reasonable ground, the person in charge of superintending the shareholders’ meeting shall make a counter-memo to the company and send a copy to SET promptly.

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Chapter 7

Corporate Governance Issues for Financial Institutions Due to the rapid changes and high volatility in the global economy, together with the complicated and harsh business competition, business operations, specifically in financial business, need to be continuously adjusted and developed. The key component in raising the standard of business operations in the financial sector is to have good corporate governance in place. In other words, financial institutions need to establish a sound management structure and controlling system, which ensure efficiency, transparency, and accountability. In fact, corporate governance is significant for Thai financial institutions to compete effectively and create value added and stability for the overall economy to grow in a sustainable way. The government has put much emphasis on urging organizations to adopt good corporate governance and encouraging every party to participate in raising the standard of corporate governance in order to boost the confidence of local and foreign investors and other stakeholders. The government appointed the National Corporate Governance Committee (NCGC) in 2002, which further appointed

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six sub-committees on 27 February 2002. One of the subcommittees is the Sub-Committee on Improvement of Corporate Governance in Commercial Banks, Finance Companies, and Insurance Companies. Responsibilities of the Sub-Committee are: 1. Set the principles for raising the standard of corporate governance of commercial banks, finance companies, and insurance companies. 2. Specify the guidelines to encourage the implementation of corporate governance in other businesses that commercial banks, finance companies, and insurance companies are related with, such as customers or companies that commercial banks, finance companies, and insurance companies invest in.

MEASURES TO PROMOTE CORPORATE GOVERNANCE IN COMMERCIAL BANKS AND FINANCE COMPANIES Lending to or Investing in Related Parties Under the Banking Law, no commercial bank shall favour any of its directors by granting credits, guaranteeing any debts, or accepting or honouring any bills which the director is a drawer, a maker, or an endorser. In addition to this provision, the Bank of Thailand has further prescribed more rules on lending and investment in enterprises which the bank, or its directors or management executives, has certain interest, or lend to the bank’s shareholders or its management executives (related parties). In particular, a commercial bank must formulate a policy with the approval from the board of directors regarding lending to its related

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parties. Banks are not allowed to lend to related parties in an “excessive amount” or lend to its related parties with conditions that are considered unusual or special from normal lending practices.

Good Practices for Directors Although good corporate governance practices are not legally binding or enforced by law, an adoption of such practices will help. On 14 March 2002 the Bank of Thailand, with the support of the World Bank and co-operation from the Thai Bankers’ Association, the Foreign Banks’ Association, the Association of Finance Companies, and other respected experts, issued the Financial Institution Directors’ Handbook. This handbook advocates the practice of good corporate governance at all levels in each financial organization and provides corresponding guidelines for directors of financial institutions in performing their roles and responsibilities. The handbook spells out the judiciary duties of directors as the leaders of an institution and the expectations of the company’s stakeholders such as shareholders and depositors. It also elaborates on the board of directors’ role in strategy and policy formulation as well as monitoring and supervision of management. The Bank of Thailand’s supervisory and regulatory roles and its expectations of the board of directors are also discussed. The annexes cover some regulations that may give rise to criminal liabilities and cases of directors’ liability arising from their breach of duty of care. A list of practical “Dos and Don’ts” is provided in the handbook.

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Dos and Don’ts for Directors Dos

Don’ts

Duty of Care • Set and enforce clear guidelines of accountability throughout the institution. • Clearly establish the scope and limit of the authority of sub-committees (especially executive committee) in order to avoid confusion as to their duties and authorized actions. • If through review any legal or regulatory violations are discovered, then an investigation into the matter must be expeditiously and seriously undertaken.

• Tolerate careless and belowstandard work within the financial institution.

• Have a clear understanding of their role, independently and objectively voice their views and dissent, and do not become subject to undue influence from the management or outside concerns.

• Act as a rubber stamp for the management concerning proposals without any understanding of the issue.

• Supervise the activities of the management. • Review with reasonable intervals the institution’s progress towards attaining its goals.

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(Continued) Dos • Establish a mechanism for the interaction and co-operation among board members (especially non-executive directors), senior management, and the auditors. • Encourage sub-committees to assist the board in matters that require in-depth review and consideration. • Ensure that intensive orientation sessions are available to new directors, which cover the liabilities, roles, and responsibilities of the board, the board’s committees, and the financial institution’s business operations, key risk areas, and compliance issues.

Don’ts • Underestimate the responsibilities of the sub-committees, especially the audit and executive committees.

• Appoint members of the sub-committees without due consideration of their abilities, qualifications, and experience.

• Communicate with the Bank of Thailand’s examiner transparently and honestly. • Proactively respond to issues of concerns that the Bank of Thailand’s examiner raises to the board. • Earnestly improve understanding and skills pertaining to issues of concerns; and in

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(Continued) Dos

Don’ts

cases where field of expertise does not match the position, then appointment to the board should be declined. • Review with reasonable interval the board’s progress towards attaining its goals. Duty of Loyalty • Perform all duties and obligations in the best interests of the institution, and ensure that conflicts of interests are handled in accordance with institutional procedure (if any) or as follows:

• Perform all duties and obligations for own personal interest. • Improperly take business opportunities away from the institution or allow others to do so.

– In case of a potential conflict of interests concerning a particular director, then that director must excuse himself from the board’s deliberation concerning the matter.

• Misuse inside information, especially for the purpose of personal gain, as this could lead to legal action taken on the basis of the misuse of power.

– If a director wishes to personally pursue a business opportunity, which could be construed as a conflict of interests, then that

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(Continued) Dos

Don’ts

particular director must first ask the chairman of the board to call a board meeting to review and decide whether or not a conflict of interests does exist. In this situation, it is the duty of the relevant director to transparently supply the board with enough information to aid the board in rendering its decision, and to abstain from the board’s deliberations on the issue. – In order to avoid conflicts of interests, the audit committee should be comprised of independent directors and nonexecutive directors. The remuneration committee should only comprise of non-executive directors. Understanding of Financial Institution’s Business • Have a good understanding of the institution’s financial status and performance, and

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(Continued) Dos

Don’ts

evaluate the institution’s balance sheet on a regular basis. • Utilize the findings of external auditors, in recognition of the important control function they provide. • Evaluate and understand the results of audits performed by regulators. • Identify key risk areas and key • Ignore warning signs that indicators of non-compliance indicate the violation of the within the institution. financial institution’s established risk policies. Obligations towards Board Deliberations • Prepare for board and other meetings by requesting and reviewing materials relating to issues that will be decided. • Attend meetings of the board and of the relevant board subcommittees.

External Auditors The Banking Law specifies that the balance sheet of a commercial bank shall be certified by an auditor who shall be a person approved

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by the Bank of Thailand in every accounting year and shall not be a director, an officer, or an employee of the bank. The Bank of Thailand has further issued a notification to spell out the requirements of an external auditor’s qualifications, approval criteria, and scope of audit work. The major requirement in this notification is a five-year rotation period of a commercial bank’s external auditor. External auditors are also required to provide an annual special report concerning an assessment of the efficiency of a bank’s internal control function and its internal auditors’ competency as well as transactions considered unusual or special from normal lending practices. This special report will be utilized for supervisory purpose.

Internal Audit The Bank of Thailand has issued a policy statement regarding the responsibilities of internal auditors, scope of audit work, and reporting lines required by the Bank of Thailand. This policy statement can also be used by a group-wide internal auditor or an outsource of such duty of a bank. Apart from following the guidance in the policy statement, the Bank of Thailand also encourages internal auditors to apply other internal control guidelines issued by related organizations, such as the Institute of Internal Auditors (IIA), the Committee of Sponsoring Organization of The Treadway Commission (COSO), the Stock Exchange of Thailand, and the Institute of Certified Accountants and Auditors of Thailand.

Information Disclosure In order to increase transparency and promote market discipline, commercial banks must disclose details of the following

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information in addition to those required by the accounting standards: •

•

Transactions relating to the management executives of the commercial bank or enterprise in which its directors or management executives have interest equal to or more than 10 per cent of the enterprise’s paid-up capital. Compensation or other benefits, both cash and non-cash, paid to directors or management executives apart from the usual compensation.

Limitation on Other Directorships To ensure that the directors of banks can devote sufficient time to effectively perform their duties at the banks, the directors and management executives of commercial banks can be chairpersons of the board of directors, executive directors, or directors with signing authority in no more than three other companies.

Board Structure of Commercial Banks On 3 December 2002 the Bank of Thailand announced a policy statement to further strengthen financial institutions’ corporate governance practices. This policy statement builds on the previously issued Financial Institution Directors’ Handbook and is designed to provide guidelines and rules for the improvement of the composition, qualifications, and responsibilities of the board of directors and its sub-committees with a view to strengthening the soundness and stability of the banking system. Under the new guidelines, the board of a commercial bank shall consist of executive directors not exceeding one-third of the board. The board shall also have at least three independent directors, or at a proportion of one independent director

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to four directors, whichever is higher. The policy statement specifies that an independent director, who plays an important role in maintaining a proper balance among board members in exercising the board’s roles and responsibilities, is a person: (1) who is neither an officer nor an employee of the bank; (2) who does not have a familial relationship with top executives or major shareholders of the bank; (3) whose direct and indirect shareholdings of the bank is not more than 0.5 per cent; and (4) who does not retain direct or indirect interest in related entities of the bank or those of its major shareholders. The Bank of Thailand issued these standards in order to better assess the board of directors’ independence and to provide greater transparency for the general public. In line with this, commercial banks must establish an audit committee comprising at least three directors, two of whom must be independent, to oversee the internal audit and compliance functions. Moreover, a risk management committee must be established, comprising at least five members from the board and/or executives to manage the overall risks of the institution and report to the audit committee. A risk management committee should be chaired by the chief executive officer. Two other sub-committees, the nomination committee and remuneration committee, should be established on the basis of institution-specific needs and resources. Whereas the nomination committee oversees the selection of directors, members of various committees, and top executives of the bank, the remuneration committee reviews compensation programmes of bank executives, directors, and members of various committees. These committees shall consist of non-executive directors whereas the chairperson should be an independent director. The release of this policy statement affirms the Bank of Thailand’s conviction to promote independent, informed, and

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responsible boards of directors and the sub-committees, which help to ensure that the banks’ stakeholders can be better served.

MEASURES TO PROMOTE CORPORATE GOVERNANCE IN INSURANCE COMPANIES The Department of Insurance, Ministry of Commerce, issued three notifications to promote corporate governance practices in the insurance sector on 29 July 2001. They are: 1. Rules and procedures to formulate policy on internal control system and investments of the insurance companies. 2. Criteria on approving external auditors of insurance companies. 3. Scope of external audit on assessing internal control and investments of insurance companies. Furthermore, the General Insurance Association has issued the Code of Best Practices for the insurance sector.

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Chapter 8

Assessments and Challenges To evaluate, international and local organizations have conducted assessments of Thailand’s corporate governance principles and compliance based on international standards. The assessments are to help the country identify vulnerabilities as well as provide a guide for further improvement along the global trend of good corporate governance.

REPORT ON THE OBSERVANCE OF STANDARDS AND CODES In 2004 Thailand registered with the World Bank to receive the evaluation known as the Corporate Governance — Report on the Observance of Standards and Codes (CG-ROSC). The CG-ROSC is a joint exercise by the World Bank and the International Monetary Fund (IMF). It aims at assisting their country members in strengthening corporate governance frameworks and providing an opportunity to identify areas for further action. To date, there are about thirty countries participating in the CG-ROSC programme. The CG-ROSC benchmarks Thailand’s observance of corporate governance against the Organization for Economic Cooperation and Development (OECD) Principles of Corporate 73

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Governance in six key areas: (1) corporate governance framework; (2) rights of shareholders; (3) equitable treatment of shareholders; (4) role of stakeholders in corporate governance; (5) disclosure and transparency; and (6) responsibilities of the board. A template for interview was developed by the World Bank and selected Thai agencies. Interviewees included regulators, institutional investors, financial institutions, and other agents such as market analysts, lawyers, accountants, and auditors. The first CG-ROSC report on Thailand was released in September 2005. It highlights that the country has made significant strides in corporate governance reforms since 1998. These include reforms in structure and function of the board of directors of listed companies, establishment of the Thai Institute of Directors Association (Thai IOD), adoption by the Stock Exchange of Thailand’s (SET) fifteen principles of good governance, and draft legislation to reinforce the rights of minority shareholders. In addition, the Securities and Exchange Commission (SEC) has improved its monitoring of financial statements of listed companies, stepped up enforcement efforts, and increased sanctions for violations. Most recently, SEC has supported the issuance of a Directors’ Handbook and the establishment of a Directors Registry System. The Institute of Certified Accountants and Auditors of Thailand (ICAAT) has intensified its efforts to improve the skills and knowledge of accountants and auditors. On the banking side, the Bank of Thailand (BOT) has issued regulations to improve the corporate governance of financial institutions; among other things, the regulations cover the number of independent directors and functions of various committees of the boards of directors. A director’s handbook for directors of banks has been issued by BOT to facilitate the implementation of the regulations. The assessment indicated that Thailand’s corporate governance reforms are towards international standards. The country “largely”

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observed twenty-two out of the total thirty-two criteria (or principles), accounting for 69 per cent, and “partially” observed the remaining ten criteria, accounting for 31 per cent of the total criteria. South Korea scored 60 per cent and India scored 70 per cent in the top two categories of “observing” or “largely” observing the thirty-two principles, compared with 43 per cent for the Philippines and 9 per cent for Indonesia (Table 8.1). Thailand was ranked relatively high compared with the selected Asian countries. Thailand has done well in the overall corporate governance framework. The country, however, faces significant challenges in improving its corporate governance. The CG-ROSC points out that basic shareholder rights are protected but concentrated control limits the influence of minority shareholders. Also, there are some constraints on shareholder participation in annual general meetings. Basic disclosure requirements are in place. But International Financial Reporting Standards (IFRS) have yet to be adopted. Thailand’s accounting standards are not yet fully consistent with international stardards. In terms of boards of directors, it appears that the directors have limited understandings of duties of care and loyalty; boards are dominated by controlling shareholders; and director independence is quite limited, particularly in smaller companies. Legal enforcement remains a major challenge in improving actual practices. Revising relevant laws, including the Public Limited Company Act and the Securities and Exchange Act, and drafting of class action lawsuit have been slow and need to be expedited. There is a lack of a range of sanctions — criminal, civil, and administrative — to facilitate effective enforcement. The private sector’s awareness of potential benefits of improved corporate governance may need to be further enhanced. Further steps need to be taken to enhance the protection of shareholder rights, including the introduction of cost-effective

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— — 100

Materially Not Observed Not Observed Total

100

—

—

40

43

17

South Korea

100

—

13

78

9

—

Indonesia

100

—

4

26

26

44

India

100

4

53

—

26

17

Philippines

Notes: “Observed” (the highest score) means all essential criteria are met without significant deficiencies; “Largely Observed” means only minor shortcomings are observed, which do not raise questions about the authorities’ ability and intent to achieve full observance in the short term; “Partially Observed” means that while the legal and regulatory framework complies with the principles, practices and enforcement diverge; “Materially Not Observed” means that, despite progress, shortcomings are sufficient to raise doubts about the authorities’ ability to achieve observance; “Not Observed” means no substantive progress towards observance has been achieved. Source:

69 31

Partially Observed

—

Observed Largely Observed

Thailand

Category

(In percentages)

TABLE 8.1 CG-ROSC Scores of Selected Asian Countries

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legal channels for shareholders seeking redress. The focus should remain on implementation and completing the legislative and regulatory agenda, improving enforcement (prosecution process), enhancing financial reporting and disclosure consistent with international standards, and promoting business ethics and best practices. Behdad Nowroozi, Regional Corporate Governance Coordinator, East Asia and Pacific Region, the World Bank, added: Improving corporate governance is a long process and requires co-operation among all market participants, including regulators, creditors, auditors, directors, shareholders, and stakeholders. But if Thailand aims to stay competitive and integrate its capital market at the regional and global levels, good governance is a priority.

CLSA ASIA-PACIFIC MARKETS AND ASIAN CORPORATE GOVERNANCE ASSOCIATION According to the Asia-wide corporate governance surveys by the CLSA Asia-Pacific Markets and the Asian Corporate Governance Association, Thailand has been ranked consistently seventh or eighth out of ten countries over the last four years, typically finishing ahead of the Philippines, China, and Indonesia. Scoring for Thailand was relatively high in areas such as rules and regulations. But the country has been let down by the perception that enforcement of corporate-governance rules is not as rigorous nor is the corporate-governance culture as deeply embedded as in some other Asian countries. Based on the above, the KPMG International has expressed the opinion that some reasons why Thailand is lagging behind some of its regional rivals in the area of corporate govenance flow from the corporate environment in which Thai firms operate. In a country where there are high concentrations of ownership of many

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of the large-sized companies, there often is a suspicion that aspects of good corporate governance policies may hinder commercial activity. Disclosure of information is often not encouraged as it is felt that it may be commercially sensitive. It is also criticized that SET’s fifteen principles cover many of the same areas as the Sarbanes-Oxley Act of the United States but in less detail in relation to areas such as disclosure requirements and internal controls. It is recommended that the most effective way of encouraging the spread of good corporate governance among Thai firms perhaps is to focus on the benefits rather than enforcement. If Thai companies feel assured of better medium- to long-term returns, they may push good corporate governance policies to the top of their agenda.

THAI INSTITUTE OF DIRECTORS ASSOCIATION (THAI IOD) The Thai IOD’s surveys on listed companies show a steady improvement in good governance practices over the period 2003–05. The latest survey report released in November 2005 indicates that listed companies in the resources, technology, and finance groups have shown the best performance, with improvements in areas of information disclosure and transparency. The ten listed companies with the highest governance scores for 2005 were Banpu Public Company Limited, Bangchak Petroleum Public Company Limited, Electricity Generating Public Company Limited, Kasikornbank Public Company Limited, Millennium Steel Public Company Limited, PTT Public Company Limited, PTT Exploration and Production Public Company Limited, Ratchaburi Electricity Generating Holding Public Company Limited, Shin Corporation Public Company Limited, and Tipco Foods (Thailand) Public Company Limited.

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According to the survey report, areas needing improvement include the role and responsibilities of board members as well as corporate environmental and social responsibility practices. A growing challenge for listed companies in the near future is finding outside directors who are sufficiently independent but still knowledgeable about and engaged in the businesses of the companies on whose boards they will sit. Independence reflects qualities of objectivity, experience, insight, and force of character. The need for directors to possess this blend of knowledge plus independence is critical, given the increased technical complexity of most business activities and the rapid pace of changes in financial markets and practices.

POLSIRI AND WIWATTANAKANTANG Polsiri and Wiwattanakantang investigated internal corporate governance mechanisms of Thai commercial banks during the period 2001–04. Their study was based on information provided in annual reports of thirteen banks during 2001–03 and an interview survey in 2004. The study concluded that Thai banks had typically fulfilled the basic requirements by the supervisory agencies but had yet to meet international standards. Polsiri and Wiwattanakantang recommended the following measures to bring the corporate governance standards of Thai banks up to international standards. First, there should be more independent directors in the board. Also the Bank of Thailand (BOT) should ensure that independent directors are well qualified and truly independent of the banks’ controlling or major shareholders. Second, BOT should demand that banks provide directors with adequate and timely information, as well as sufficient access to professional services and training at the expense of the banks. Third, the chief executive officer (CEO) nomination and removal process as well as the evaluation process of CEO

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performance should be formally supervised by the board of directors and/or the nomination and compensation committees. Fourth, BOT should encourage banks to evaluate the directors’ performance on an individual basis instead of an aggregate basis commonly used by Thai banks. Compensation to the CEO and directors may also be made more stock-based. Finally, the supervisory agencies should require more detailed information disclosure on the executive compensation, risk exposure, the extent to which the banks’ corporate governance practices conform to the established standards, and transactions with related parties.

ASSESSMENT ON SEC Thammasat University’s Research and Consultancy Institute conducted a survey involving a total of 2,400 respondents to review SEC’s performance. The respondents were derived from securities companies, commercial banks, insurance firms, asset management companies, listed companies, financial and investment advisers, custodians, accounting firms, institutional and retail investors, law firms, the media, and the general public. SEC received credit for its efforts to promote good corporate governance. It scored highest for its effectiveness in helping lift the corporate governance standards of listed companies. SEC, however, scored poorly for its regulatory performance. In recommendations, SEC needs to improve its performance as a financeindustry watchdog, be more political independent, and hold more public hearings before implementing rule changes.

FURTHER STEPS Based on the 2005 CG-ROSC assessment report, SEC and SET plan to take further steps along the World Bank’s recommendations.

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SEC has agreed to work with related agents (such as the Federation of Accounting Professionals) to move Thai accounting standards towards full consistency with the IFRS by 2006. SET, meanwhile, plans to hold public meetings to discuss corporate governance practices among listed companies and draft ways to improve existing compliance. It is expected that new corporate governance principles being drafted would increase disclosure requirements for listed companies to alert shareholders of information ahead of a meeting, give shareholders a greater voice in appointing members of independent committees, and formulate ways to protect whistle blowers of internal corporate fraud. To date, the relevant agencies have stepped forward with finetuned plans to improve the country’s corporate governance towards international standards. But more are in the works to put the principles into actual practice. Improving corporate governance takes time and incurs costs in implementing, including the appointment of independent directors, adopting a business ethical code, establishing monitoring procedures, providing information disclosure, etc. The improvement comes with the costs but pays in the long term. To ensure compliance, long-term gains and benefits of having good governance must be recognizable and outweigh the costs. Research on costs and potential benefits of implementing good governance adopted by different types (non-financial and financial) and different sizes (large, medium, and small) of firms would help them envisage the profit of implementing good governance. Listed firms would be confident that good governance is an essential system in enhancing their competitiveness and leading them to better performance.

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References Alba, Pedro, Stijn Claessens, and Simeon Djankov. “Thailand’s Corporate Financing and Governance Structures: Impact on Firms’ Competitiveness”. The World Bank, Conference on Thailand’s Dynamic Economic Recovery and Competitiveness, 20–21 May 1998, at UNCC, Bangkok. Bank of Thailand. Financial Institution Directors’ Handbook. Bangkok: Bank of Thailand, 2002. Board of Investment, Thailand. “Thailand Ranks High on Corporate Governance”. Thailand Investment Review 14, no. 10 (October 2005). Montreevat, Sakulrat. Corporate Governance in Thailand. Singapore: Institute of Southeast Asian Studies, 2006. Na-Ranong, Kittiratt. “Governance Standards: Thailand Stock Exchange”. In Annual Capital Market Review 2003. Available at . Polsiri, Piruna and Yupana Wiwattanakantang. “Corporate Governance of Banks in Thailand”. Asian Development Bank Institute, June 2005. Price Waterhouse Management Consultants Ltd. Corporate Governance in Thailand. Bangkok: Stock Exchange of Thailand, 1997. Securities and Exchange Commission. First Decade of the Thai SEC and Capital Market in Thailand (1992–2002). Bangkok: Office of Securities and Exchange Commission, Thailand, 2002. ———. Capital Thailand (various issues). Stock Exchange of Thailand. Report on Corporate Governance. Bangkok: Stock Exchange of Thailand, August 2001.

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———. The Principles of Good Corporate Governance. Bangkok: Stock Exchange of Thailand, 2001. Walden-Schertz, Jeremy. “Establishing Trust in the Principles of Corporate Governance”. Thailand Opportunities, July 2003, pp. 24–28. World Bank. “Corporate Governance Country Assessment — Kingdom of Thailand”. September 2005. Available at .

Websites Bangkok Post Bank of Thailand Corporate Governance Centre KPMG International Securities and Exchange Commission Stock Exchange of Thailand Thai Institute of Directors Association ThailandOutlook.com The Nation

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