Corporate Governance in Thailand: Glancing Behind and Looking Forward

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Corporate Governance in Thailand Glancing
Behind and Looking Forward

• CG Development in Thailand The Three
  Disciplines
• September 13, 2006
• Deunden Nikomborirak
• Thailand Development Research Institute

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Outline of presentation

• 1. The face of Thai corporate governance
• ownership structure
• corporate conduct
• governance performance
• 2.State and private sector initiatives in
  promoting good governance the 3 disciplines
• 3. Economic, political and Social Challenges
• 4. Conclusions

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1. The Face of Thai Corporate Structure
Governance
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Ownership Structure

• Concentrated ownership
• family-control was prominent particularly in
  finance and securities and property
• family-control declined in banking, finance and
  securities and property
• foreign banks share increased in both banking
  and finance

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Corporate practices

• Most common abuses were connected lending,
  connected transactions (siphoning of corporate
  funds).
• More recent abuses insider trading and share
  prices manipulations through custodian ot nominee
  accounts. According to Achavanuntakul (2006),
  21.4 of total SET market capitalization is
  accounted for by nominees.

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Doing Business in Thailand (2006) by The World
Bank
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Corporate Governance Report of Thai Listed
Companiesby Thai Institute of Directors
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2. Initiatives taken to promote Good Corporate
Governance
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3 pillars supporting corporate governance

• Regulation (SEC/SET)
• Market discipline (SRI)
• Self-restraint ( firm-level corporate conduct
  code)

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Regulations

• Many legal loopholes exist (definition of
  connected transactions, connected persons,
  definition of price manipulation, lack of
  regulatory authority to demand disclosure of
  UBOs)
• legal procedures not conducive to prosecution
  (criminal sanctions only, reliance on police
  force for investigation and attorney for to file
  a lawsuit)
• legal amendments in the pipeline.
• The SEC had resorted to preventive measures and
  administrative sanctions.

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Regulations

• Examples of preventive measures for connected
  transactions requirements for submission of
  transactions that received shareholders
  resolutions, review of connected transactions and
  auditors reports.
• For illegal operation through nominees know
  your customer (KYC) customer due diligence
  (CDD) requirement for brokers
• Example of administrative sanctions fines and
  black-listing.

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Regulations

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

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Regulations

• SET imposes many regulations governing
  disclosures and board structure -- i.e., audit
  committee, independent directors, governance
  assessment and shareholders resolution required
  for large connected transactions .
• Shortcomings of SET measures no clear penalties.

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Market-discipline

• corporate governance rating (by TRIS)
• good governance awards, disclosure awards,
  popular awards.
• reduction in fees and compensation for rating
  fees.
• But too few companies participated.
• Establishment of Institutional Investor Club and
  Investor Association.
• IIC still has no investment criteria and IA
• lacks personnel to pursue governance work

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Self-restraint

• Only a handful of Thai companies have governance
  code. According to Corporate Governance Report
  of Thai Listed Companies 2005
• 3/4 of surveyed listed companies explicitly
  mentioned obligations to shareholders
• 2/3 mentioned obligations to customers
• lt 1/3 mention safety and welfare of employees
• 1/5 mentioned environmental issues and compliance
  in their public communications

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3. Economic, political and Social Challenges

• Lack of law enforcement means CSR does NOT pay
  (although according to Corporate Governance
  Report of Thai Listed Companies 2005 firms with
  higher governance scores performed better)
• Certain government policies inconsistent with
  good corporate governance (Foreign business Act,
  Ministers Equity Share act,etc.)
• Culture of patronage contribute to widespread use
  of nominees.

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Major Obstacles to Business Growth
A Survey on Corruption and Bribery in the
Business Sector University of Thai Chamber of
Commerce, 2000
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Economic, political and Social Challenges

• Limited long-term investment and active
  institutional investors means Socially
  Responsible Investment is RARE. (12
  Institutional investor)
• Lack of regulatory independence
• government political agenda versus SECs
  regulatory agenda
• investigation in cases involving politicians or
  large companies with strong political connections

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Economic, political and Social Challenges

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

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4. Conclusion

• Independence of regulatory body and legal
  amendments are crucial for effective law
  enforcement.
• SECs authority should be broadened with respect
  to prosecution and identification of UBOs.
• soft measures can go a long way in regulation
  and in promotion of self-discipline, but has
  limited bite.
• Market-discipline requires (1) disclosures of
  corporate misconduct and abuses and (2) SRI

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4. Conclusion

• In the absence of market-discipline, the task
  will inevitably fall heavily on SEC and SET.
• SRI to be spearheaded by large state pension and
  investment funds.
• NGOs and civil society can play very important
  roles in providing social discipline where
  regulatory oversight and SRI are absent or
  ineffective.

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THANK YOU