Part I Overview of the Current Situation

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Part I Overview of the Current Situation

1.1 Necessity to Promote Good Corporate Governance of Thai Listed Companies

There are many definitions to ‘corporate governance’ but in this report, this word will be used for the managerial or internal procedures that control a company to achieve its goal, which, in principle, should be to maximize the long-term shareholders’ values.

It is widely criticized that Thai listed companies have weak corporate governance comparing to those in developed countries. It can also be explained that this weak corporate governance was one of the causes that led Thailand into the current crisis. This is because there was not enough transparency and reliable information for investors and even the management to accurately assess the relevant risks and make prudent decisions. In addition, this poor governance also caused the unconfident investors to withdraw or cancel their investment which made the crisis become even worse and take a long time to recover. Therefore, the strengthening of corporate governance of Thai companies is crucial for the country to get out of this crisis.

Even without the crisis, the need to build up good corporate governance is still undeniable. The visible trend of increased liberalization and globalization leads to higher competition both in the domestic and international markets which, in turn, forces companies to reduce costs including the financial costs. With the global investment opportunities, if a company does not have good corporate governance, investors who do not have enough confidence that their rights and investment is well protected will not choose to invest in the company or choose to invest but require high risk premium. The company, therefore, can not secure external funding at competitive cost to finance its operations and finally lose its ability to compete and survive in the market.

1.2 Shareholding and Management Structure of Thai Listed Companies

(1) Shareholding Structure

As most Thai companies are developed from family businesses, shareholding and management structure is usually concentrated in family members or one big inside shareholder. Investment decisions of outside investors are usually based on the confidence in these inside shareholders.

On the positive side, this ownership concentration gives major shareholders and the management flexibility to react to the rapid changing environment and tend to result in stronger commitment to the firm’s long-term values. On the other hand, this structure is also conducive for inside shareholders to take advantage over outside investors or abuse outside shareholders’ rights. In addition, there is also wide use of cross-shareholding structure among major shareholders and their affiliates and the use of nominees, both of which make the real shareholding and control structure of a company become opaque for outside investors.

For outside investors, which include lenders, institutional and minority shareholders, they usually play a passive role and cannot pool their force to counter-balance the major shareholders. In addition, most of these investors, foreign, institutional or retail alike, are induced to invest in a company for short-term capital gain rather than for long-term return. As a result, they have no interest to play the monitoring role over the management or protect their rights through attending shareholders’ meetings to exercise their voting power. If there is any fraud or misconduct of the management, these investors usually choose to sell their shares to cut loss rather initiating a lawsuit to seek for redress. Therefore, the legal protection for minority through required shareholders’ resolutions and voting rights has not been very effective.

(2) Management Structure

Since shareholding of most companies is concentrated in the family group, directors and the management are usually the same persons who are representatives of the major shareholders. This management pattern results in virtual control of major shareholders and makes the check-and-balance mechanism nonexistent or insufficient. If there is an appointment of independent directors, it is usually done only to satisfy the regulatory requirement or to be an honor for or create good relationship with the appointed person rather than to utilize the person’s experiences or have the person play the monitoring role over the management. In addition, when there are conflicts in the board of directors, these directors usually choose to compromise or resign rather than to fight for what they think is right. Therefore, their roles in the board of directors may not be very effective to safeguard shareholders’ interest.

Even though the wording in the Public Company Act (PCA) requires directors to perform their duties with care and honesty for the benefit of shareholders, there is

no clear interpretation on what such duties really mean nor real enforcement either by shareholders or regulators. There are also loopholes in the law for potential abuses. Therefore, the spirit of the law is not well upheld by the directors.

In the case of listed public enterprises, the government (or the Ministry of Finance) is usually both the major shareholder and the person to nominate directors. The enterprises usually have monopoly or oligopoly rights in the business and receive funding assistance from the government. These enterprises, therefore, do not have strong incentives to improve their efficiency, competitiveness, and corporate governance. In addition, the Memorandum of Incorporation of some enterprises can also be obstacle for the building of good corporate governance, e.g. the requirement for ex-officio members of the board of directors, the nomination of directors which does not promote accountability or responsibility of the appointed directors. However, the problems of state enterprises need specific remedies and will not be covered in this report.

Part II Expectation on Roles, Responsibilities and Structure of Board of Directors to PromoteGood Corporate Governance

Board of directors plays the key role in monitoring the performance of management to be in accordance with the company’s goals and have to be accountable on its own functioning to the shareholders. The building of good corporate governance is, therefore, emphasized on the roles, responsibilities and structure of board of directors.

The board of directors should play at least 2 roles, i.e. to providebusiness guidance and strategic vision to the management and to monitor the management’s performance to achieve the corporate goals. In conducting these duties, the board of directors should observe the following principles:

Fairness

The conduct of duties of the board of directors should be fair and seem to be fair to all shareholders, and not a certain group of shareholders. They should not use their position to take advantage of outside shareholders e.g. by involving the company in self-dealing transactions which are not based on prudent commercial judgement.

In addition, the board of directors should also monitor the management to respect the same principle.

Transparency

In order for outside investors to accurately evaluate risk and performance of a company, the board of directors and management should perform their duties with transparency and disclose clear, reliable, timely and sufficient information to the investors.

Accountability

The board of directors should be accountable to the shareholders on the company’s performance, including the financial results and the compliance to all related laws.

Responsibility

Each director should perform its duties with high level of responsibility. The directors should regularly attend the meeting and perform their duties to the best of their effort.

In this connection, the board structure, the means for director appointment and compensation, legal and other outside environment should also support directors to adhere to these principles and provide sufficient threat for non-compliance. However, this part will concentrate on the board structure which can be designed within the company, while the legal aspects will be discussed in Part III.

In order to fulfil the above roles, the board should be structured in such a way that there is sufficient knowledge and expertise in the business as well as check and balance mechanisms within the board. However, the majority of the boards of directors of most Thai listed companies are also management of the companies, the business judgement role of the board is usually not a problem. Therefore, in order to build good corporate governance, the discussion on the board structure will be focused on the oversight role of the board and other mechanism that will foster directors to adhere to the above principles.

2.1 Board Model

There are 2 main board models, i.e. one-tier or unitary board and two-tier or multiple board. The principles of each model are as follows:

(1) Unitary Board

This board model is found in most countries, e.g. the USA, the United Kingdom, Australia, Hong Kong and Canada. Under this model, there is only one board that is accountable for the company’s operations to outsiders. The board has both the provision of business strategy and monitoring roles. The check and balance mechanism can be achieved by the appointment of independent or non-executive directors in the board, separation of chairman and CEO roles, or the setting up of various committees, e.g. audit committee, nominating committee, compensation committee.

The advantage of this model is that every director assumes the same responsibility. However, without a good check and balance mechanism, the board may not be able to effectively conduct their monitoring role to counter-balance the power of inside management.

(2) Multiple Board

Countries that use this board model are Japan and Germany. Under this model, there are two boards, i.e. supervisory board and operating board. The supervisory board is responsible for monitoring and inspecting the operations of the management, while the operating board assists the management in making business decisions. Members of these two boards are separated and the CEO is normally not in the supervisory board so that the check and balance role can be performed without any conflict of interest. Under this model, the management and ownership can be clearly separated.

Thailand uses the one-tier board model and there is not sufficient check and balance mechanism within a board. Although the two-tier structure can alleviate this problem, the Working Group views that the model is less important than the structure within the board. If the system of non-executive directors and various committees are well in place, the weakness of this structure can be much lessened.

2.2 Check and Balance Mechanism

With the one-tier structure, there should be non-executive directors in the board to conduct the oversight role. The issues for consideration on the independent directors are as follows:

(1) Number and Roles of Independent Directors

There is no requirement in the PCA for public companies to appoint independent directors. However, the SEC and the SET require listed or publicly held companies to appoint at least 2 outside directors who are independent from the major shareholders and the management. The objective is to alleviate the problem that, in practice, retail shareholders cannot have their representation in the board. These outside or independent directors are supposed to safeguard the interest of minority shareholders against any abuses of the management. They are required to give opinions on the connected transactions and provide comments in the annual report.

However, there are still some issues for further consideration. On the number of independent directors, the requirement for 2 directors is in an absolute term regardless of the total number of the board members or the proportion of shares held by the public. Therefore, these directors cannot out vote the management assuming that the remaining of the board are related to major shareholders or management. However, the Working Group thinks that the role of outside directors is more important than the number because as a culture of most Thai companies, there is no real vote taken place in board meeting.

From the studies of practices in other countries, there are some suggestions in the code of best practice on the number of non-executive directors. (However, in these reports, more emphasis is usually given to the ratio of non-executive directors rather than the independence from the major shareholders. This may be because having equity stake in a company does not always constitute conflict of interest in monitoring the management. Shareholders who own substantial shares are also in a good position to safeguard their own interest as long as they are not inside management.) Some of the points are as follows:

- South Africa (the King Report) : The number of executive and non-executive

directors in a board should be balance. There should be at least 2 non-executive directors and 2 executive directors. Moreover, the chairman of the board should be an independent non-executive director.

- India (Desirable Corporate Governance) : If the chairman is a non-executive

director, there should be at least 30% of non-executive directors. But if the

chairman and the CEO is the same person, there should be at least 50% of

non-executive directors in the board.

- U.S.A. (Business Roundtable by Deloitte&Touche Review) : It is important

for the board of a large publicly owned corporation to have a substantial degree

of independence from the management. Therefore, the majority of directors of

such corporation should be non-executive directors and they should meet

among themselves (without presence of executive directors) at least once a

year.

- U.K. (Hampel Committee) : To be effective, non-executive directors need to

make up at least one-third of the membership of the board.

The survey of Thai listed companies conducted by Price Waterhouse Management Consultants Ltd. revealed that most companies have outside directors just to fulfill the regulatory requirement. Only 15% of the surveyed companies believed these independent directors contributed great value to their companies and appoint more than what is required.

On the roles of these directors, there is an issue of whether these directors should have the same duties and responsibilities as the rest of the board members. Actually the whole board are jointly liable to shareholders and other stakeholders.

If more responsibility is put on independent directors, it may be difficult to find a good person who accepts to be an independent director. However, so far, there is no clear guideline on the roles and responsibilities of these directors. Moreover, there is also

an issue of how independent are these independent directors which will be discussed

in section 2.3 on nomination of directors.

(2) Audit Committee

An audit committee is set up in many countries to monitor the business operations of the management. Some recommendations or requirements in other countries on this issue are as follows:

- U.S.A. (Business Roundtable by Deloitte&Touche Review) : Companies

listed in NYSE must have an audit committee as required by the NYSE.

- U.K. (Hampel Committee) : All listed companies should establish an audit

committee, which composes of at least 3 non-executive directors and most of them should be independent from the major shareholders and the management.

- South Africa (the King Report) : The board of directors of a company should appoint an audit committee whose term of references is clearly defined. The audit committee may have non-director member but there should be at least 2 non-executive directors and one of them should be the chairman of the committee.

- India (Desirable Corporate Governance) : Listed companies with turnover of over Rs.100 million or paid-up capital of over Rs.20 million should set up an audit committee but gives a 2- year grace period.

In Thailand, the SET requires that all listed companies have to set up an audit committee by the end of 1999. The requirement includes the following:

(2.1) Composition of an Audit Committee

The SET requires that an audit committee must compose of at least 3 independent directors each of whom does not directly or indirectly hold shares in the company more than 0.5% of the paid up capital.

In reviewing this requirement, the Working Group has an opinion that the requirement on the number of members is already appropriate. However, there should be some modification on the “independence” of the members of an audit committee to be as follows:

- Not a major shareholder (holding shares more than 10%) or have direct or indirect relationship with the major shareholders or the management, and not a relative or acting as a representative of those persons. However, the requirement on maximum shareholding of0.5% should be lifted as it reduces the availability of qualified candidates. The Working Group views that this increased permissible shareholding will not create potential conflict of interest of audit committee members as long as they are independent from the management.

- Free from any past (for the period of one year) direct or indirect financial or other interest in the management or the business of the company or its affiliates in such a way that the person cannot make independent judgement.

- Not an executive, employee, worker or consultant who receives salary or other regular benefit from the company or its affiliates.

- Able to perform the assigned duties independently without being influenced by any person.

(2.2) Duties of an Audit Committee

According to the present SET rules, an audit committee should be assigned with the following duties:

- Oversee that the financial report is sufficiently accurate and reliable.

- Ensure that the company has adequate and effective internal control.

- Nominate an external auditor to the financial reports.

- Ensure that the company complies with the relevant laws and regulations.

- Ensure that the company enters into transactions with no conflict of interest.

- Undertake other business as assigned by the board.

- Prepare an audit committee performance report and disclose it in the company’s annual report. The chairman of the committee must sign the audit committee report.

The Working Group has a view that the requirement for an audit committee has just been introduced and has not yet been fully implemented. Therefore, it might be too immature to assess the effectiveness of the requirement at the moment. However, the SET proposed to undertake additional endeavor on the following aspects to help increase the effectiveness of an audit committee: