Electronic copy of this paper is available at: http://ssrn.com/abstract=965300

Revised, June 2004

Review of Corporate Governance in Asia

Corporate Governance in Thailand

Thai Institute of Directors Association

Piman Limpaphayom (Sasin Graduate Institute of Business Administration, Chulalongkorn University)

and J. Thomas Connelly

(Faculty of Commerce and Accountancy, Chulalongkorn University)

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Electronic copy of this paper is available at: http://ssrn.com/abstract=965300

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Table of Contents

1. Introduction 2. Shareholders’ Role in Corporate Governance Regulatory Framework for Shareholder Rights Description of Survey Results Assessment of Shareholder’s Role and Major Constraints 3. Effectiveness of the Board of Directors Regulatory Framework for the Board of Directors Survey Results: Evaluation of the Gap between Regulations and Practices Assessment of the Effectiveness of the Boards and Future Tasks 4. The Role of Other Stakeholders in Corporate Governance 5. Analysis of the Relationship between Corporate Governance Practices and Firm

Performance 6. Conclusion

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List of Tables

Table 1: Thailand Survey Respondents, by Industry

Table 2: Thailand Field Survey Sample Size

Table 3: Restructuring of Banks and Finance Companies in Thailand

Table 4: Scores for Shareholder Rights and Board Effectiveness

Table 5: Overall Corporate Governance Scores for Thai Firms

Table 6: Distribution of Corporate Governance Score by Subcategory

Table 7: Corporate Governance Score and Tobin’s Q

Table 8: Distribution of Firm Performance and Corporate Governance Scores

Table 9: Correlation Coefficients

Table 10: Regression Results for Tobin’s Q

Table 11: Regression Analysis Results; 2002 Benchmarking Survey

Table 12: Chronology of Changes in Rules, Laws, and Regulations Designed to Improve Corporate Governance Practices in Thailand

Table 13: Summary of Financial Accountability and Corporate Governance Reform in Thailand; Actions through December 2000

Table 14: List of Industrial Sectors and Companies Surveyed

Table 15: Protection of Shareholder Rights in Thailand

Table 16: Comparison of US Sarbanes-Oxley Law vs. Thai Laws

List of Figures

Figure 1: Tobin's Q and Governance Scores

Figure 2: Corporate Governance Score and Market Valuation (Tobin’s Q); 2002 Benchmarking Survey

Figure 3: Market Valuation (Tobin’s Q) by Corporate Governance Rating Quartile; 2002 Benchmarking Survey

Figure 4: Corporate Governance Disciplines

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Table of Abbreviations

AIMC = Association of Investment Management Companies

BoT = Bank of Thailand, the central bank of Thailand

CAAT = Certified Accountants and Auditors of Thailand

FTI = Federation of Thai Industries

GAAP = Generally accepted accounting principles

IAS = International Accounting Standards

IIA = Institutional Investor Alliance

IOD = Thai Institute of Directors Association

NVDR = Non-voting Depository Receipts

OECD = Organization for Economic Cooperation and Development

PCA = Public Company Act

SEC = Securities and Exchange Commission

SET = The Stock Exchange of Thailand

SEA = Securities Exchange Act

TBA = Thai Bankers' Association

TCC = Thai Chamber of Commerce

TFASB = Thai Financial Accounting Standards Board

TIA = Thai Investor’s Association

TTF = Thai Trust Funds

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Corporate Governance in Thailand

1. Introduction

The Financial Crisis and Major Corporate Governance Problems

The basic tenets of corporate governance are accountability, responsibility, equitable treatment, transparency, vision, and ethics. As the 1997 financial crisis broke and washed over Thailand, it became apparent that weak corporate governance practices could have intensified the severity of the problems. A close examination of corporate governance practices at many Thai firms would have revealed that local governance practices did not match international standards and expectations.

Like other Asian countries affected by the 1997 financial crisis, Thailand faced corporate governance problems at two levels. Firstly, poor governance practices at firms created many difficulties including overinvestment and over-borrowing to name but a few troubles. Much of the excess borrowing went into projects of dubious benefit as well as unneeded and ill-advised diversification efforts. At the time of the crisis, Thai public companies were largely family-owned, with family and related-party shareholders as the controlling shareholders. Much of the overinvestment and diversification efforts came at the expense of minority shareholders, with many companies in effect expropriating wealth from minority shareholders. As one consequence of poor governance practices, many firms faced financial distress, to be resolved through bankruptcy proceedings or aggressive financial restructuring.

Secondly, as a developing market, Thai companies typically relied on bank financing rather than capital market financing to secure funds for growth. Developing capital markets are often incapable of acting as an effective monitor and disciplining company managers. Banks, as the main suppliers of corporation finance, should serve a vital monitoring role with their borrowers. To compound the governance difficulties at individual firms, banks themselves were suffering from poor governance practices in many cases. In the aftermath of the crisis, the government shuttered fifty-six finance firms. Several banks closed, either taken over by the government or merged into larger rivals. Several of the remaining banks were forced to seek strategic foreign investors to speed their recovery. Again, poor governance practices played a major role in their difficulties.

For most of the basic tenets of corporate governance described above, practices by many Thai firms were relatively deficient compared to international standards (for example, the OECD guidelines) and expectations. Reform efforts since the crisis have centered on improving company practices especially in the areas of accountability, responsibility, equitable treatment, and transparency.

Review of Recent Corporate Governance Regulatory Reforms

Shortly after the financial crisis, corporate governance practices emerged from near-obscurity to slowly move closer to the forefront of discussions about reform. Within 5 years, awareness of good governance practices had leapt, culminating with the Prime Minister naming 2002 as “The Year of Good Corporate Governance”. Focusing attention on governance practices, the Prime Minister created a national corporate governance

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committee. Regulators, investors, as well as government and professional organizations have launched a blizzard of activities, such as the Board of the Year awards, conferences, seminars, company ratings, and studies to benchmark governance practices. Corporate governance is now mainstream.

In the wake of the crisis, Dr. Prasarn Trairatvorakul, then Deputy Secretary-General of the Securities and Exchange Commission (SEC) of Thailand outlined the challenges of the task to improve governance in a September 1999 speech1. He noted that a firm’s board of directors is the main force for good corporate governance practices and must be held accountable for its roles. Three specific approaches to strengthening corporate governance practices and accountability were outlined: laws and regulations, institutional set-up, and market forces. The SEC designed reform efforts to mirror the corporate governance disciplines (see Figure 4). Using regulatory discipline, market discipline, and self-discipline, good governance principles will protect investors’ rights, improve board accountability, and increase transparency and disclosure. Far from acting single-handedly, other Thai regulatory bodies and organizations joined together to act in concert to improve corporate governance practices in Thai listed companies. Organizations like the Bank of Thailand (Thailand’s central bank), the Ministries of Finance and Commerce, the SEC, the Stock Exchange of Thailand (SET), the Thai Institute of Directors Association (IOD), professional associations for accountants, auditors, and internal auditors, and investors’ associations all began to play a more direct role in creating, implementing, and enforcing corporate governance reforms.

Corporate governance reform in Thailand has been an evolution rather than a revolution. Rather than sweeping away existing pre-crisis regulations, laws, and institutions to replace them with something completely new, corporate governance reform in Thailand has concentrated on improving the existing infrastructure, institutions, and enforcement. Substantial progress has been made to improve virtually all aspects of governance, especially the protection of shareholders, the effectiveness of the board, disclosure, and transparency.

Table 12 lists a chronology of the major governance reform activities in Thailand. A brief review of some of the major reform efforts follows.

The foundations for good governance practices pre-date the 1997 financial crisis. Laws and regulations covering public companies, the securities exchange, bankruptcy, accounting and disclosure standards, and other requirements were already on the books. The key ingredients missing from wider acceptance of good governance practices were incentives and enforcement.

The aftermath of the financial crisis provided further impetus for reform. Once the immediate danger caused by the financial crisis—notably the threat to the entire Thai financial system—had been addressed, efforts began to improve corporate governance practices as part of a wider reform efforts. In rapid succession, new rules, regulations, guidelines, and profession organizations were established. These activities addressed disclosure, shareholder rights, the practice of directorship, bankruptcy reform, and accounting standards.

1 Trairatworakul, P., 1999. “Challenges of good governance: Accountability and the rule of law”, speech given at The Asian Economic Crisis and Corporate Governance meeting, 13 September 1999. Available at http://wb-cu.car.chula.ac.th/papers/corpgov/cg072.htm.

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Significant progress was visible by late 2000. In a World Bank paper, Nowroozi2 notes the progress of reform efforts as of December 2000, excerpts from which are included in Table . Thai regulators and institutions have implemented accounting / auditing reforms and standards, toughened disclosure rules, as well as strengthened the professional bodies guiding the accounting and auditing profession. Nowroozi concludes by identifying implementation as the biggest challenge when trying to improve corporate governance practices.

Another corporate governance reform landmark came in August 2001 when the SET released its report on corporate governance. The report established principles, recommendations, and best practice guidelines for directors, the board, management, shareholders, risk management and reporting, and business ethics. As one example of the changes, disclosure standards were improved and an updated law now requires firms to name suppliers that provide more than 30% of a firm’s transactions.

Efforts to improve governance practices in the financial sector gathered momentum as well, when the Bank of Thailand introduced stringent new regulations to cover banks and finance companies. The new regulations mandate internal auditing and financial statement disclosure standards and limit the number of directorships that bank directors may hold.

The Thai government named 2002 the “Year of Good Governance”, getting the year off to an auspicious start. A national corporate governance committee was established, chaired by the Prime Minister. The committee includes representatives from the Ministries of Finance and Commerce, the Bank of Thailand, and regulatory bodies such as the Securities and Exchange Commission (SEC), the Stock Exchange of Thailand (SET). Industry representatives are also included through the participation of representatives from the Thai Chamber of Commerce (TCC), the Federation of Thai Industries (FTI), the Thai Bankers' Association, the Certified Accountants and Auditors of Thailand, the Listed Companies Association, the Association of Securities Companies, the Association of Investment Management Companies (AIMC), the Thai Investors' Association, and the Thai Institute of Directors' Association. The National Committee also has several subcommittees tasked with specific responsibilities in the areas of law, accounting, banks and financial service companies, and public companies, to name a few.

Benchmarking Corporate Governance Practices in Thailand

As part of the effort to evaluate the current state of corporate governance in Thailand and set a platform from which to measure, several studies and reports document corporate governance activities of Thai firms. The standards used to benchmark corporate governance practices are based on the OECD guidelines and are directly transferable to the Principles of Good Governance established by the Stock Exchange of Thailand. The dual-use standards mean that Thai practices can be benchmarked against international standards yet also be tailored to the local situation. Results from successive annual benchmarking studies have been presented throughout the Institute of Directors network in Asia.

The Thai Institute of Directors Association and McKinsey & Company undertook the first corporate governance baselining study in 2001, in collaboration with the SEC and SET and with partial funding by the World Bank. Using data from firms’ annual reports and regulatory filings submitted in 2000, the study was the first attempt to identify the state of corporate

2 Nowroozi, B., 2000. Financial accountability and corporate governance reform in Thailand and Republic of Korea—Progress to date and challenges ahead. Unpublished monograph. Available at http://www1.oecd.org/daf/ASIAcom/pdf/Nowroozi_paper.pdf.

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governance practices among 133 of the largest Thai firms. The study notes strengths of Thai firms, pointing to good/improving corporate governance practices already in effect:

• 76% of companies surveyed had a majority of non-executive directors;

• 68% of companies had boards with 25-50% independent directors; and

• 87% of firms allowed sufficient time at shareholders’ meetings to allow shareholders to ask questions.

The study also notes examples of best practice in each of the five survey categories found at Thai companies.

Several key areas were also identified as improvement opportunities, including mechanisms to give minority shareholders easier ways to make their voices heard, improved disclosure, transparency, and communication, and greater regard for stakeholder groups including employees.

The second corporate governance baselining study was completed in 2002. Again under the sponsorship of the Thai Institute of Directors Association, in collaboration with the SEC and SET and World Bank funding, the survey was expanded to cover more than 200 listed Thai firms, representing more than 80% of the total market capitalization of the Stock Exchange of Thailand. Compared with the results from the 2001 study, the 2002 study documented significant improvements in shareholder rights, disclosure, reducing conflicts of interest, compliance with new regulatory requirements, and effectiveness of the board. However, further improvement in disclosure, transparency of ownership structure, and communication with investors was still needed.

Corporate governance practices measured against the OECD guidelines provide an excellent assessment that Thai corporate governance practices compare favorably with international standards in many respects, yet there are still areas that need further improvement.

Assessment of Reform Efforts and the Effect on Corporate Governance Practices

Compared with other countries, the pace of corporate governance reform in Thailand has been much slower. For example, reforms in Thailand have had neither the speed nor scope of drastic new legislation as in some Asian countries or like the Sarbanes-Oxley Act in the US. Thai institutions have not been radically overhauled and restructure; existing institutions have gradually changed so as not to disrupt the equilibrium too much. Though it may be easy to discount Thai reform efforts because of a lack of dramatic action, changes have been effective and comprehensive. Positive results are showing, as the balance of the report will demonstrate.

There has not been a single watershed event on the path toward corporate governance reform in Thailand. Rather, as Table shows, progress has come at a steady measured pace, through the concerted efforts of many organizations. Regulators such as the Securities and Exchange Commission (SEC) and the Stock Exchange of Thailand (SET) have expanded the legal frontiers. New and updated rules, new and revised laws, and increased regulatory oversight have been at the forefront of the push for increased corporate governance. Other organizations like the Thai Institute of Directors Association (IOD), the Thai Investor’s Association (TIA), and professional association for accountant, auditors, and internal auditing have pushed different frontiers yet shared the same wish: that Thai firms demonstrate improved corporate governance practices.

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The structure of the governance system is of prime importance. The rules governing disclosure, laws and regulations, and organizations charged with enforcement have a major influence on the effectiveness of any governance regime.

The structure required to build good corporate governance practices is largely in place. There have not been massive wholesale changes of the existing Thai governance regime. Improvements, such as will be discussed in later sections of this report, have refined the structure. While corporate governance in Thailand can rely on the structure of existing institutions, the processes of good corporate governance principles have not been completely put into practice. Enforcement is improving and awareness is improving as well. Both the SET and SEC are now tougher on enforcement of existing rules, as demonstrated by the recent cases pursued against an Internet service provider and several brokerage firms.

One piece still missing is the overall strategy for corporate governance: to what end are we improving our corporate governance practices? With a clear map for the future, the benefits from improved corporate governance practices will help achieve the long-term objectives for Thai financial markets. In addition, through increased awareness, corporate governance practices are now in the spotlight throughout the entire finance and investment community. However, small investors have not yet clearly identified the benefits accruing through good corporate governance practices.

While it is difficult to exactly know the practices in use before the spotlight turned to Thai corporate governance practices, the evidence suggests improvement. The Corporate Governance Baselining study sponsored by the Thai Institute of Directors Association is now in its third year. Since both the survey and sample size has varied during the first two years of the survey, it is not possible to have a direct comparison between companies and years. However, it can clearly be shown that Thai listed companies are making changes in their corporate governance practices. Both the 2001 and 2002 Baselining Studies made the link between good corporate governance and firm market value. Thai firms are certainly paying increased attention to corporate governance.

With respect to the structure of corporate governance, Thailand has not changed dramatically. Small incremental improvements have been made, with further enhancements to come. Other larger changes (such as new laws to allow class action suits) are also expected. The process has been improved a great deal, with improved monitoring, supervising, enforcing, and higher awareness. The government needs to continue its efforts to have all the relevant groups involved and actively participating to improve corporate governance practices in Thailand. Wide involvement will help ensure the substantial benefits accruing through improve corporate governance practices will not be overwhelmed by the costs.

A brief outline of the remainder of this report would prove helpful. After the introduction in Section 1 and a short discussion of the survey methodology, the corporate governance reform efforts in Thailand are discussed in detail in the following three sections. Section 2 examines the shareholders’ role in corporate governance; Section 3 evaluates the effectiveness of the board of directors; and Section 4 reviews the role of other stakeholders in corporate governance, with special attention on the role of banks. Section 5 summarizes the results from survey, investigating the relation between corporate governance practices and firm performance. The paper concludes with a policy implications for future reform efforts.

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Survey Methodology and Description

A field survey is the major empirical technique used for this investigation. The objective of the survey is to examine corporate practices in the areas of shareholder rights, effectiveness of boards of directors, and the role of stakeholders. Documenting and analyzing actual practice will help regulators understand the extent and effectiveness of recent reform efforts as well as direct their attention toward other areas in need of improvement. The survey results will also provide a reference so that managers, investors, and other stakeholders can examine and compare corporate governance practices among firms.

The survey undertaken in this study was conducted using a sample of Thai firms is several specific industrial sectors. The chosen sectors are: Building & Furnishing Materials, Chemicals & Plastics, Distribution & Trade, Electrical & Electronic Products, Foods & Beverages, Iron & Metal Products, Textiles & Clothes, and Transport Equipment. Table 1 shows the industry breakdown of survey respondents, while a detailed list of firms responding to the survey is in Table 14.

Firms in these eight sectors received two different types of surveys to complete: a factual survey and an opinion survey. The opinion surveys were sent to executive and independent directors for the firms. A complete set of responses from a firm would include one factual survey, one opinion survey completed by an independent director, and one opinion survey completed by an executive director. Some firms returned completed opinion surveys from more than one category of director, while other firms did not provide a complete set of responses. Eighty-six firms received surveys. Complete responses sets were received from 61 firms. Including partial responses from some firms, the response rate reached nearly 75%.

Table 2 shows a list of the sample firms and survey types received.

The factual survey covered general information about the firm, shareholders’ rights and disclosure, questions about the effectiveness of the board of directors, and human resources. The opinion survey covered questions about the effectiveness of the board and the role of stakeholders, in addition to general information about the company.

contains a summary of the ownership and control characteristics of the survey firms. As the results show, ownership in the firms in the survey is highly concentrated, with more than 50% of the sample reporting they have concentrated ownership and/or control. Less than 15% of firms report diffuse ownership. While more than half the firms are stand-alone companies, slightly more than one fourth have ties to a family group or holding company. Though very few of the companies surveyed are even partially owned by the government, many companies have a significant foreign-ownership stake. The extent of control exercised by foreign firms is approximately evenly split, however. Just under 20% of firms report they are substantially owned/controlled by foreign company, while just over 20% report that while they are substantially owned by a foreign firm(s), the foreign company has little control.

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Table 1: Thailand Survey Respondents, by Industry

Food and beverages 14

Textiles and clothes 7

Chemicals 8

Iron and metal products1 12

Electrical/electronics products 8

Transport equipment 4

Distribution and trade 8

Total Respondents 61

Note: ¹ Includes seven firms in building materials sector

Table 2: Thailand Field Survey Sample Size

Complete sets of information & director opinion 55

Factual information & executive director opinion 3

Factual information & independent director opinion 2

Factual information only 1

Subtotal 61

Executive director & independent director opinion 6

Executive director opinion only 4

Independent director opinion only 15

Total 86

Consistent with the influence of family shareholding, nearly 40% of firms have a CEO with a significant relationship to the largest shareholder or founder. In contrast, half the firms in the sample employ a CEO who is a professional manager, which implies no significant relationship with the firm’s largest owner or founder. The role of banks varies, with one fourth of the sample stating that their firm’s biggest creditor bank is government-owned. This result is not surprising, given the government-led and supported consolidation in the Thai banking sector after the financial crisis. Few firms have their largest creditor bank as part of the same business group (only 8%), but many companies use banks that are part of another business group (39%). Lastly, labor unions are represented at only 20% of sample firms.

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2. Shareholders’ Role in Corporate Governance

Regulatory Framework for Shareholder Rights

The cornerstone of shareholders' rights is disclosure and transparency. Protection of shareholders’ rights means that shareholders can participate in the decisions affecting the firm, shareholders have the right to elect directors to represent them, shareholders are treated equally, and no individual shareholder (or group of shareholders) receives preferential treatment or has influence greater than their respective share of ownership. Shareholders should also be able to exert their influence over the board of directors and hold directors liable for breaches of their fiduciary duty.

The Public Company Act, enacted in 1992 (BE 2535), contains the basis for shareholder rights in Thailand. Regulations published by the Securities Exchange Commission (SEC) and the Stock Exchange of Thailand (SET) form the regulatory standard to which public companies are expected to comply. The SET has also issued regulatory standards to serve as guide, supplementing regulations as needed.

The Public Companies Act (PCA) and the articles of association, which are specific to an individual company, bind companies. Companies are permitted to establish individual rules in their Articles of Association as long as the provisions are at least as stringent as required in the PCA. Firms must also meet the rules and regulations for listed companies established by the Stock Exchange of Thailand.

The PCA covers most aspects of shareholder participation, including rules governing the shareholders’ meeting, proxy voting, election of directors and other important matters that shareholders must confirm by vote. The PCA also outlines other rights of shareholders including rights to hold directors liable for their actions. Most aspects of disclosure, transparency, and shareholder participation are covered by the SET regulations for listed companies, including guidelines for organizing shareholder meetings, proxy solicitation and voting, disclosure, and allowable actions that shareholders may undertake against directors, including derivative suits, removal of directors, and penalties for breaches of fiduciary duty.

Table 15 summarizes some key principles designed to protect shareholders' rights, showing that shareholders are quite well protected through laws and regulations covering virtually all of the major aspects of shareholders' rights: effective participation in decision-making, election of directors, allowable shareholder actions against directors, plus disclosure and transparency. The next section will review selected principles.

Shareholders can actively make their voices heard, with advance notice of shareholders’ meetings required and no major obstacles preventing participation. Proxy voting is easily accomplished, though voting by mail is not permitted3. In practice, however, it can often be difficult for investors to receive the meeting agenda and proxy voting instructions in a timely fashion. Shareholders are allotted time at shareholders’ meetings to ask questions of the management team and the board. It is quite common for the board chairman and the top executive officer to be present at shareholders’ meetings. The share ownership requirements mandated for placing items on the agenda (1/3 of issued shares needed) or requesting an extraordinary meeting (20% of issued shares or a 25 shareholders owning 10% of issued shares) can be daunting, however, especially given the concentrated ownership prevalent at many Thai firms. Since the Thai stock market is largely a retail 3 Firms typically enclose materials to enable shareholders to name a proxy when sending meeting notices. Shareholders may name a proxy, but a person present at the shareholders’ meeting must vote the shares. Firms will often offer to have a company official or director attending the meeting serve as proxy.

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investor-driven market, institutional investors have little influence. Their voice is growing, however, as investor associations and larger institutions such as the Government Pension Fund begin to play a bigger role.

Nominee shareholders, however, are common and often do not exercise their voting rights. One other unusual feature of the Thai stock market is the presence of the Thai Trust Funds (TTFs) and Non-voting Depository Receipts (NVDRs). The Thai Securities Depository Corporation administers these two institutions, which were created to make it easier for foreign investors to own shares. Since many foreign investors must contend with foreign ownership restrictions for Thai firms, the TTFs and NVDRs make it possible for foreign investors to hold shares. However, as the name implies, shares held as NVDRs are not voted.

Another new institution promotes and protects shareholders’ rights: the Thai Investor’s Association, a private, non-profit independent organization. Since its founding in 1989, the TIA has also provided training to investors to help develop an investment culture. As part of its objectives, the TIA aims be a leading center for investor protection, helping shareholders small and minority shareholders exercise their rights. Representatives from the TIA have played a leading role in several high profile cases to help small shareholders receive recognition and help in the fight to protect minority shareholders’ rights, most recently with an Internet service provider. However, there are few other groups to help minority shareholders by collecting proxies and assisting with proxy procedures.

Though cumulative voting is rarely practice at Thai firms, investors can easily participate in the election of directors. Major corporate transactions such as mergers, sales of assets, new share issues, or amendments to the article of association, require 75% majority vote, which is a significant threshold. The SET has enacted new regulations for related-party transactions, now requiring a lower disclosure threshold and requiring firms to secure shareholder approval for transactions above a certain size. Appointment of directors requires only a 50% majority of the shareholders attending, though removal of directors require a 75% majority of the stockholders present who must own half of the shares owned by the stockholders in attendance. Appointment / removal of auditors requires only a 50% majority.

There is no active market for corporate control in Thailand. Takeovers are rare; takeover defenses are not especially common. However, while pyramid ownership is occasionally used, a number of firms employ cross-shareholdings in the ownership structure. Many firms are also part of an economic group, perhaps having a significant relation with suppliers, customers, or other related firms.

Though there is not really an effective external market for corporate control in Thailand, the legal aspects of takeover / merger transactions are carefully enumerated in the Takeover Code published by the Securities and Exchange Commission. Trigger points for mandatory bids are set at the 25%, 50%, and 75%, levels. Communication and disclosure standards are carefully outlined in the rules. Since takeovers are rare and hostile takeovers virtually unheard of, takeover defenses are also rare among Thai firms. Many companies have staggered board terms, but this has not been explicitly adopted as a takeover defense. Only the largest firms have enough of their shares actively trading in the market. Since the majority of Thai firms are family-owned and managed, shares of most firms are effectively tied up in family (company) holdings.

Thai shareholders are able to take action against directors for breaches of fiduciary duty, yet in practice this is a rare occurrence. Derivative suits are permitted, and insider trading

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penalties can be severe. There is currently no provision for class action suits, but a pending revision to the Public Company Act may include this capability.

The practical aspects of disclosure and transparency have been greatly strengthened since the financial crisis. The stockholders select the external auditors and audited financial statements must be released in a timely fashion. As part of the recent reform efforts, banks and other financial services companies are only permitted to use the same auditing firm for five years, though other companies face no similar restriction. Penalties for non-compliance with the disclosure rules are stiff, and violators are made public by the authorities.

SEC and SET laws and rules clearly spell out the penalties for violating the rules governing listed companies in the areas of inside trading and price manipulation. For example, insider trading is punishable with fines and blacklisting. The fines are on a sliding scale, depending on the size of the ill-gotten gains. Should a suspected violator refuse to pay the fine and refuse to face administrative action, the case will be turned over for judicial action. Penalties include civil liability and imprisonment for up to 2 years in addition to fines.

Perhaps the most significant changes that came in the wake of the Asian financial crisis concern disclosure and transparency. Existing rules carefully spell out the type and frequency of information that companies are required to disclose. With additional regulations and a renewed emphasis on enforcement, companies are providing more information in a more timely fashion. For example, SET regulations state that listed companies must publish their financial statements within 60 days of the end of the fiscal year and produce an annual report within 110 days. Non-compliance with disclosure rules carries significant penalties for both the firm and for directors. The company must pay fines and both the firm and directors face additional fines and blacklisting. Details of the administrative fines levied by the SEC are posted on the organization’s website.

The requirement that all firms provide financial statement audited by an external auditor is an important aspect of disclosure and transparency. Recent changes in the SET rules and guidelines are designed to encourage and ensure the promote independence of board members and especially of the audit committee. The SET established the “Best Practices Guidelines for Audit Committee” in June 1999. The Exchange also spelled out the qualifications and scope of work of the audit committee in the same month. By the end of 1999, all listed companies were required to establish an audit committee, composed of no less than three independent directors.

External auditors are nominated by the board’s audit committee and then approved by shareholders at the shareholders’ meeting. In contrast to the new provisions outlined in the US under the terms of the Sarbanes-Oxley Act, there is no time limit for the period when external auditors are allowed to serve a company (see Table 16 for a detailed comparison of the US Sarbanes-Oxley Act and Thai law). The exception for Thailand is for banks: an external auditor can serve for up to five years and then the Bank of Thailand mandates a switch.

Description of Survey Results

The study examines shareholders’ role in governance in several key areas. The first area, effective participation in decision-making, examines whether shareholders can exercise their influence. The second area centers on the rights of shareholders to elect directors, as well as the remedies open to shareholders if directors breach their fiduciary duties. The final area covers disclosure and transparency. This section presents and discusses the survey results from the shareholder rights portion of the survey.

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Facilitating Effective Participation in Decision-Making

Virtually all firms adhere to the one-share, one vote rule with the exception being a small number of firms have non-voting preferred shares. This result is no surprise because Thai law requires equitable treatment of shareholders, and prohibits firms from of offering preferential voting rights. The Public Company Act prohibits proxy voting by mail. Virtually anyone can serve as a proxy and there are no onerous restrictions to inhibit proxy voting. Most Thai firms do not have additional restrictions (such as a requirement to have the proxy notarized) placed on would-be proxy voters.

Firms agree that they are making a good effort to inform shareholders about the items on the shareholders meeting agenda and set aside adequate time for shareholders to ask questions and participate at the meeting. Meetings tend to be short, however, with about 70% of firms surveyed reporting that their shareholder meeting lasts one hour or less.

Meetings seem to be well attended. Almost 70 shareholders on average attended the shareholders’ meetings. The number of participants across the sample of companies is quite broad, ranging from 13 to over 400 attendees.

Election of Directors, Other Rights of Shareholders, and Shareholder Actions Against Directors for Breaches of Fiduciary Duties

The next section continues the analysis of how shareholder rights are protected, with special emphasis on the election of directors and the legal obligations of directors. Summaries of the survey results are in .

As dictated by the Public Companies Act, 75% of shareholders must approve amendments to the founding documents. Similarly, all firms require 75% shareholder approval for major corporate transactions like a merger, or the sale or acquisition of assets and related-party transactions. Both PCA and SET rules specify that a 75% majority is needed, but only for major transactions exceeding 50% of net tangible assets and for related-party transactions worth more than 3% of net tangible assets or 10 million baht.

Shareholders can effectively exercise their power when appointing auditors and directors. When selecting directors, appointing the external auditors, or removing the auditors, the PCA stipulates that these decisions are normal business items at an annual general meeting, and therefore require a simple majority. A 75% majority is required to remove a director, as specified in the PCA. Shareholders holding a combined total of five percent of the issued shares may request a court order to remove directors whose acting cause damage to the company.

Establishing the compensation of board members is a normal item of business at the shareholders’ meeting, and requires a simple majority.

Shareholder rights are effectively protected when firms wish to issue new shares, because a three-fourths majority is needed to approve a new share issue. Circumstances surrounding priority subscription rights are left to the individual firms, as there are no circumstances for shareholders to have preemptive rights. If a firm wishes to award priority subscription rights for a new share or bond issue, the company may have choice when setting terms of new issue.

More than 80% of firms surveyed agree or strongly agree with the statement that shareholder rights are adequately protected when issuing new shares or bonds. Related-party transactions appear to be thoroughly discussed at the shareholders’ meetings, with

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adequate information provided. However, nearly 15% of firms have no opinion or a negative opinion, suggesting the need for increased information and/or discussion. More than 85% of firms agree that it is not difficult to know the equity ownership level of the major shareholders and the companies controlled by the major shareholders. However, a number of respondents disagreed or had no opinion.

Shareholders seem to be offered sufficient opportunity to vet candidates for the board. Similarly, minority shareholders are allowed to nominate candidates either before or at the shareholders meeting at more than 80% of firms.

While a notable number of firms have introduced and even tried cumulative voting, slightly less than 70% of firms have chosen not to employ this form. Interestingly, all survey respondents noted that it would be rare or impossible for a management-proposed director to fail to be elected at a shareholders meeting.

Disclosure and Transparency

The next section deals with the survey results covering the disclosure and transparency aspects of shareholder rights. A wide range of information and events are of interest to shareholders, including related-party transactions, director share purchases/sales, director background and pay, fees paid to outsiders and related parties, contingent liabilities, company policies on risk management and governance. Stock Exchange of Thailand rules govern several of these items, such as related party transactions and director share transactions, as shown by the high proportion of firms disclosing these items to regulatory agencies. For other disclosure items, such as the directors’ backgrounds and compensation, the SET has created best practice guidelines and encourages firms to disclose the information. For most items, firms do disclose. Only the fees paid to external auditors and other related parties as well as governance structures and policies are not disclosed by a notable number of firms. Most firms choose to disclose these items in the annual report and/or regulatory reports. It is interesting to note that a small percentage of firms are regularly using the World Wide Web as a medium for disclosure. This percentage has increased rapidly over the past few years.

Thai firms have a good pattern of disclosure for financial information. All firms disclose quarterly financial statements but few provide semi-annual reports. Approximately 85% of firms also disclose consolidated financial statements, when a control relationship exists.

The World-Wide Web has grown in popularity and use as a channel of communication to shareholders and potential investors. Slightly more than half of survey firms have websites that were self-judged to be informative in both Thai and English languages.

More than eighty percent of survey respondents feel that their firms’ audit and accounting standards are virtually identical with international standards. However, international accounting standards of generally accepted accounting principles (such as US or UK GAAP or IAS) are not yet in widespread use in Thailand. While some firms did use international standards, most firms use Thai accounting standards.

Assessment of Shareholders’ Role and Major Constraints

In summary, the survey results show Thai shareholders seem to be active and involved. Firms provide many opportunities for investors to exercise their rights. However, some areas of concern remain which may act as subtle obstacles to shareholders’ fully and more easily exercising their rights. The main areas for further improvement—and constraints remaining that must be reduced or removed—concern proxy voting, timely receipt of

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materials before shareholders’ meetings, derivative suits, continued improvement in accounting standards, disclosure, and transparency.

While Thai Public Company Law does not place any significant restrictions on proxy voting, and the results show all surveyed firms allow anyone to be a proxy, in practice proxy voting can be inconvenient. The Thai Institute of Directors Association (IOD) 2002 Corporate Governance Baselining Study noted that many public companies did not make proxy voting especially easy, often failing to provide clear instructions or failing to list in the meeting notice the documents required. Company performance in this area is improving, however, and more firms are making it easier and clearer for shareholders to exercise their voting rights, either directly or through proxies. Were proxy-voting by mail to be permitted, it would be an effective way to increase shareholder participation.

The survey results show that a large majority of firms surveyed, shareholder rights are actively respected. Shareholder meetings are typically well-attended; shareholders can freely participate; shareholders are free to nominate, vet, and select directors; and companies believe that they provide sufficient information to shareholders before stockholder meetings. There do not seem to be any unusual practices that prevent shareholders from participation (such as all companies having meetings on the same day; inconvenient meeting locations and/or meeting times, etc.). The survey results confirm that firms feel they allow sufficient time for shareholder to participate as well. Thai law requires firms to give only 7 days’ notice for an annual general meeting, and 14 days’ notice for an extraordinary meeting. Firms are clearly in compliance with the law, as confirmed by the IOD Corporate Governance Baselining reports, with the vast majority of firms informing shareholders at least 7 but less than 28 days before the meeting. Some structural obstacles must be cleared in order to make it possible for firms to give greater advance notice of shareholders’ meetings. The concerted efforts of regulators and legal revisions are needed to clear the obstacles.

The PCA states that shareholders can request a shareholder meeting, place items on the agenda and the survey results confirm this. However, there are limitations and minimum requirements set by both the Public Company Law and the companies’ own articles of association. For example, minimum required shareholding needed to request a meeting is 20% of issued capital or 25 shareholders holding a total of 10% or more of the total shares. Given the concentrated ownership of many Thai firms, the shareholding requirements might prove to be a significant obstacle to minority shareholders. A draft resolution proposed by the SET, currently under administrative and legal review, would allow minority shareholders to call a shareholder meeting if their votes are greater than 5%. Minority shareholders could then more easily bring issues before shareholders.

Cumulative voting is rare, though it is the preferred method of voting described in the PCA. Firms are allowed to opt out in their articles of association and virtually all firms have adopted another form of voting.

In terms of dissenters’ rights, the survey shows that firms fee they adequately protect shareholders’ priority subscription rights. SEC regulations cover instances when shareholders have special powers in dissent. For example, when considering employee stock option or stock ownership plans, these resolutions must not have face a veto from more than greater than 5-10% of shareholders. Similarly, shareholder veto greater than 10% will scuttle plans to offer discounted securities.

Derivative suits are possible, but it takes a combined total of 5% of issued shares to bring the action. Class action lawsuits are not yet permitted though the Council of State is reviewing a draft bill.

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Despite the availability of these methods of redress, it can be very difficult for individual shareholders to bring a legal action against management. Though threshold seems low, the time and expense needed for the legal process can be prohibitive. Thai law requires the company itself to pursue these actions against the directors, for example. Should the company be successful, gains from the shareholder suit would be shared with all shareholders, serving as a further disincentive for a disgruntled shareholder. Notwithstanding the time and expense, few shareholders have the patience to see a legal action to completion. More effective moral suasion techniques have been employed, whereby the firm is pressured by outside groups (often a proxy holder, representing minority shareholders). The Thai Investors Association has enjoyed success in several cases with this technique.

While the survey shows that firms’ audit and accounting standards are virtually identical with international standards, international accounting standards of generally accepted accounting principles (such as US or UK GAAP or IAS) are not yet in widespread use in Thailand. Most firms use Thai accounting standards.

The influence of institutional investors and of activist investors is growing. Institutional investors take an active role and vote their shares. A new organization, the Institutional Investor Alliance (IIA), tries to promote good governance as well. After its start in mid-2002, the IIA encourages its members to take an active role in protecting minority shareholders as well as institutional investors.

The results show that virtually all firms surveyed feel they provide adequate time and information about related party transactions. Nonetheless, there are measures currently under view to address and enhance the requirements for shareholder approval of related party transactions, inside information, and divestiture of assets. The proposed rule changes for related party transactions and divestitures include with voting requirements based on transaction size. The SET draft regulation would require a three-fourths majority to approve transactions of this type. The survey results also show that firms feel it is not difficult to know how much equity ownership major shareholders control. In practice, however, uncovering this information can be a challenging task for some family-owned firms, due to the use of cross-shareholdings, private holding companies, and nominee shareholders.

As outlined in Table 12, there have been a flurry of new regulations and resolutions enacted and proposed designed to improve protection of shareholders’ rights through better disclosure. With further enhancements, shareholders will continue to have their rights strengthened. In summary, Thai firms are in compliance, judging from the survey results. It appears that the existing regulations and the recent changes are having a positive effect on corporate governance at firms, in terms of protection of shareholders' rights, disclosure, and transparency.

3. Effectiveness of the Board of Directors

Regulatory Framework for the Board of Directors

As shown in Table 12, many new laws, rules and regulations mentioned in the previous section are also designed to improve the effectiveness of the board. Several changes also deserve special mention. As mentioned earlier, rules and regulations were largely in place before the start of the 1997 Asian financial crisis. For example, in 1993, a revised regulation required at least two independent directors on the board of every listed company. The chief failing was not due to lack of regulations, but largely a matter of enforcement. As many of the rules and regulations were already in place before the financial crisis, there have not been

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any sweeping reform activities. Changes have come gradually, with some new rules, but many more modifications, adjustments, revisions, and extensions of existing laws. There has been an increased emphasis on enforcement and improving the practice of directorship.

Thai boards are unitary boards, with a minimum of five members and mandated minimum number of two independent directors. Boards are required to meet at least four times per year, but in practice, boards typically meet much more frequently. Foreigners or non-residents are permitted to be board members, but at least one-half of the board must be Thai residents. It is permissible for the CEO or other top operating executive to hold the board chairmanship. SET regulations also mandate that each company have an audit committee; other committees (director nominating committee or compensation committee, for example) are recommended but not required. There are no limits to the number of boards on which a director may serve, except at banks. Directors of banks are limited to five board memberships.

One major event with far-reaching consequences occurred in 1999 when the SET established the Code of Best Practices for directors. Intended as a guide for company directors, the Code set the standard for the practice of directorship and clarified the duties and responsibilities of company directors and company managers. In every annual report, firms are now required to report whether they comply with the Code and explain any non-compliance. New guidelines centered on board size (for example, recommending one-third of the board be outside directors), and internal controls. Firms are also encouraged to establish codes of good governance and ethics. The Code also required firms to establish audit committees, staffed with independent directors, before the end of 1999. This action alone was responsible for bringing more outside directors into Thai company boards.

Another major event was the creation of the Thai Institute of Directors Association (IOD) in December 1999. With its mission to “develop and support company directors to implement world class corporate governance”, the organization has played a major role in raising the level of corporate governance to international standards contributing to increased investments in Thai enterprises. The IOD offers a variety of education programs, seminars and forums such as director and chairman training classes, research on board-level issues, and information on its website, library, and newsletter. More than 800 directors have graduated from one of 36 Directors Certification Program training classes, bringing total membership to more than 1,100. Additional classes for company chairmen, company secretaries, audit committee, board performance, and board reporting have also proved popular. The IOD is also raising the profile of directorship by sponsoring the “Board of the Year” recognition awards and the Corporate Governance Baselining studies, now in its third year.

Another milestone was reached in 2001 when the SET released its report on corporate governance and the first IOD corporate governance baselining study was completed, jointly conducted by McKinsey under World Bank sponsorship. These two reports highlighted the role that the board of directors must play in corporate governance and the necessary steps needed to ensure improved board effectiveness.

A series of regulations put forth by the Bank of Thailand in 2001 spotlighted the role of the board at financial institutions. The new and revised regulations established guidelines and boundaries for directors, specifically covering related-party transactions, multiple directorships, conflicts of interest, auditing requirements, and disclosure. These reform efforts are discussed in detail in Section 4.

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Survey Results: Evaluation of the Gap between Regulations and Practices

This section of the report deals with board effectiveness and is divided into three segments. The first section addresses board composition and independence while the second section discusses the functions of the board and the activities of board committees. The final section discusses access to information, support that directors receive from the company, director compensation and liability.

Board Composition and Independence – Factual Information

The survey results show that Thai boards are large. The average number of board members in the survey sample was slightly more than 12 members, with a low of four directors and a high of 23. Almost two-thirds of the companies in the survey sample had 11 or more directors on their board. Outside directors are well represented, with over 90% of firms having 3 or more outside directors. While outside directors (board members who are not employed by the firm) can be looked toward to exercise independence, in practice, outside directors may come from affiliated companies. A truer test of the independence of the board is the presence of independent directors, board members who have no connection with the firm. All firms have independent directors in their boards, and more than 90% of sample companies have 3 or more independent directors on the board. This speaks very well to the drive by regulators and Thai firms themselves to develop independent boards. For almost sixty percent of companies, a foreign representative sits on the board. Importantly, the chief executive officer does not serve as board chairman at more than 80% of firms, which is believed to be an important step toward improving the independence of the board and improving corporate governance practices at Thai firms. This finding is consistent with the results obtained in the recent IOD study.

Thai boards also frequently contain ‘connected’ directors. The results show that boards are quite likely to contain representatives from a creditor financial institution, affiliated directors (who work at a related company), and representatives from suppliers, customers, or a professional services supplier. Labor representatives are not present on any of the boards in the survey.

These results can be difficult to interpret. On one hand, the independence of ‘connected’ directors, such as suppliers, customers, or professional service providers would have to be questioned. Creditors on the board may also create a potential conflict of interest, since credit decisions may not always be based on the merits of the firm/project, but on the relationship with the company and/or company managers. On the other hand, representatives from major stakeholders like creditor institutions, suppliers or customers could provide a broader perspective and perhaps more effective oversight, as the directors would be cognizant of firms’ wider responsibilities to a larger group of stakeholders.

The next section discusses board practices. The survey results are encouraging, as they show many firms utilizing the power of independent directors. Independent directors meet formally or informally without management to discuss company matters (65% of the firms) and half of the firms have had independent directors change the board meeting agenda set by the CEO). Independent directors are active and involved, participating in board discussions at nearly all firms. Lastly, almost 75% of firms note the positions of their independent directors in the meeting minutes. However, the portion of firms that have agenda items disapproved by independent directors is quite small. The most common tenure for an independent director is a two-year (19 firms) or a three-year term (34 firms). As a whole, these results show that independent directors for the survey firms are indeed active, engaged, and contributing during their tenure on the board.

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Board Composition and Independence – Director Opinions

The next section compares survey results taken from two different sample groups: executive directors and from independent directors of the same companies.

While both sample groups agree that the independent directors are truly independent, the level of agreement differs. While the number of positive responses (agree or strongly agree) is nearly the same for both groups, only 33% of executive directors strongly agree as opposed to almost 50% of independent directors.

Responses to the questions in the next section delve into the reasons why an independent director might not be fully independent from the CEO or controlling owner. When asked about the reasons why independent directors might not be fully independent, the responses from executive and independent directors were in general agreement. However, some differences did exist.

The survey poses a number of reasons for the lack of complete independence. One possible reason may stem from the fact that the CEO has effectively selected the board members. Responses show that over 50% of executive and independent directors in aggregate agree or strongly agree with this reason. Concern over a personal relationship with other directors is viewed as a likely reason, with almost 60% of the directors agreeing or strongly agreeing.

A third reason may be because open objection to an agenda proposed by management would be against cultural norms and thus compromise true independence. While a significantly lower amount of directors in total agreed or strongly agreed with this reason, the responses differ between groups. Only 30% of executive directors agreed or strongly agreed, while 38% of independent directors felt the same. Perhaps the sensitivity to cultural norms is more greatly felt by outsiders.

While only 30% of executive directors felt that independence might be compromised because the CEO decides the length of the independent director relationship, almost 38% of independent directors agreed with this reason. Executive directors disagreed (nearly 55%), while only 38% of independent directors disagreed. Essentially the same percentages of executive and independent directors agreed that concern of future responsibility/blame might impinge on a director’s independence (32% of executive directors and 30% of independent directors agree). However, more than 48% of executive directors disagreed, while only 38% of independent directors felt similarly.

Lastly, the lack of independence could be a result of a better-informed management team and CEO, who therefore have better judgment. Both independent and executive directors felt similarly about this possibility, with almost 57% of the executive directors and 51% of the independent directors agreeing with this statement. The sub-sample results were similar.

Overall, it seems that the executive and independent directors see the potential limits to independence in a similar fashion. There are some notable differences, however. Executive directors do not see some of the limits to independence as such a major issue, but independent directors are more acutely attuned to the factors that limit their role, especially in the areas of cultural norms, acceptance of responsibility/blame, and the role of the CEO in continuing the relationship with independent directors.

58% of executive directors felt the board/nominating committee acts autonomously in selecting and removing independent directors. However, only 42% of independent directors felt similarly. Independent directors thought the controlling owner (different than the CEO)

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would exercise a strong voice (42% of respondents), but only 29% of executive directors thought the owner would have the strongest voice. A small portion of executive and independent directors (15% of the total sample) felt that the CEO would have the strongest voice.

As for the question of who has the strongest voice in removing a CEO and selecting a replacement, both executive and independent directors alike subscribed the strongest voices solely to the board (approximately 49% of each group). Nearly 50% felt that the controlling owner does the replacement, with some input from the board. Both groups did not ascribe much influence to the management team. A notable portion of both groups felt the controlling owner made the decision solely, while a small percentage of each group felt that none of the above individuals or groups had the strongest voice in removing a poorly performing CEO. The reason for this response may be because the method used is not described in the survey. Removing a CEO for poor performance is a relatively rare event in Thailand.

Functions of the Board and the Activities of Board Committees – Factual Information

The survey results show that almost all firms surveyed have audit committees. This is a SET requirement, and preferably, the committee is staffed with independent directors. Independent directors constitute more than three-fourths of the audit committee for nearly 50% of firms surveyed. Compensation committees and nomination committees are much rarer, however. Only 36% and 14% of survey firms have compensation and nomination committees respectively. This finding is also not surprising, because the SET Best Practices guidelines encourage firms to create board nominating and compensation committees, but these committees are not required.

The board audit committee, since being mandated by the SET in 1999, has been a success story for corporate governance activities in Thailand. The audit committee is judged effective and independent, virtually all firms saying their committee contains person(s) with accounting/finance expertise, chaired by a genuine independent director, and properly records meeting minutes. However, more than half of firms do not have shareholders separately approve the compensation of audit committee members at shareholders’ meetings. Nearly all firms have written rules governing the audit function. At 66% of firms, the committee autonomously selects/recommends an external auditor then reviews his/her work. At the majority of firms, the audit committee approves the appointment of the internal auditor and supervises his/her work in the areas of risk exposure and accounting procedures.

Thai boards (or compensation committees) do not generally review the CEO’s performance. Slightly more than half of firms surveyed regularly or occasionally review the CEO, while 38% of firms never review the CEO’s performance. CEO compensation routinely reviewed by less than half of firm boards, while more than 30% of boards have never reviewed the CEO’s compensation. This is likely to change, as more firms add board compensation committees and continue to improve director responsibilities.

Thai boards are active, meeting frequently and at length to properly conduct their work. The survey results show that boards meet often (95% meet at least 4-5 times per year. Meetings can be lengthy, lasting 2-3 hours or more at more than half of firms surveyed. The meetings are well attended, with almost three-fourths of firms reporting at least 80% of the board attending on average.

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Functions of the Board and the Activities of Board Committees – Director Opinions

The next sections of the survey results deal with director’s own opinions about the roles of directors. The responses were collected from executive and independent directors as before.

Both executive and independent directors agree that the board is a forum for serious discussion about important firm matters. Executive and independent directors both disagree with the statement that board meetings are perfunctory dominated by the CEO.

As for board involvement in company matters, almost 80% of directors agree that they are actively involved in formulating long-term strategy. Interestingly, nearly 22% of executive directors had no opinion or disagreed with this statement. A small number of independent directors (nearly 10%) also disagreed. This may indicate wider variation in board practices among firms.

In the area of selecting, monitoring, and replacing the CEO, just half of the directors feel that they plan an important role. The remaining half either expressed no opinion on this statement or disagreed. Perceptions between independent and executive directors were slightly different, with slightly more independent directors observing that they did not play an important role in monitoring the CEO. Concerning the board’s role in reviewing executive and board compensation, the responses were similar between both groups. About 60% of directors agree that they seriously review compensation. A notable percentage of executive and independent directors disagreed, however. This indicates that board practice in the area of compensation review needs to be improved.

As for the effective oversight of potential conflicts of interest, more than 80% of directors agree, while the balance has no opinion or disagree. The difference of opinion may again be due to wide differences between firms in management/board practice.

Nearly all directors surveyed feel that they play an active role in ensuring the integrity of the firms’ financial reporting, ensure proper disclosure and timely communication with stakeholders, and ensure the effectiveness of governance practices at their respective firms.

Access to Information, General Support, and Director Compensation and Liability – Factual Information

The last section of the survey addresses the effectiveness of the board of directors in terms of access to information, support, compensation and liability. Firms provide some amount of education and training opportunities for directors but the practice is not uniform. Only about 20% of responding firms have active training programs, but almost 70% of firms occasionally provide more than the mandatory requirements. Companies do provide good support for their directors, with more than 73% of firms designating a specific contact person.

Turning to compensation issues, few firms grant stock options to the CEO or to outside directors. Stock option incentive compensation schemes for managers are relatively rare in Thailand. Very few firms have formal compensation mechanisms to evaluate their directors, with nearly 90% of firms reporting no performance review mechanism for directors at all. Lastly, company-paid personal liability insurance is available at just over one-fourth of firms, though most firms do not pay for any liability insurance for their directors.

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Access to Information, General Support, and Director Compensation and Liability – Director Opinion

The next set of questions examines directors’ opinions about the access that independent directors have to company information. There are some notable differences in the attitudes of executive and independent directors.

Nearly the same percentages of executive and independent directors feel that independent directors have frequent access to company managers. However, a 14% of independent directors feel that they rarely have access (12% for executive directors). Directors feel they have free access to company financial information and business records, though a higher percentage of independent directors felt they faced some restrictions (almost 28%). Directors receive enough information in time to evaluate it before each board meeting and have access to outside advisory services. However, about 41% of respondents felt that these services were only occasionally available or never available to independent directors.

A large majority of both groups of directors judged compensation as adequate. Directors consider their potential liability with great seriousness with a stark difference between attitudes of executive and independent directors. Almost 40% of independent directors are ‘very seriously’ concerned about potential liability for breaching duty of care, while only 24% of executive directors feel the same way.

The next section of the survey asks respondents about a list of tasks designed to enhance the effectiveness of the board. The tasks include :

• selecting more or better qualified independent directors;

• separating the CEO from the board chairman position;

• promoting boardroom culture that encourages constructive criticism and alternative views;

• timely provision of relevant information to directors;

• providing education programs and adopting codes of conduct for directors;

• formal annual evaluation of the board and directors;

• formal CEO evaluation by the board;

• giving independent directors better compensation and linking compensation to firm performance; and

• better disclosure of board activity.

Executive and independent directors were in general agreement on the most of the survey items listed above. Three items that received the most positive responses from both groups of directors were timely provision of relevant information, promotion of boardroom culture, and education programs/codes of conduct, with more than 90% of respondents agreed that these three categories would enhance board effectiveness. Interestingly, increased compensation was not viewed as a particularly effective way to improve board effectiveness, with less than 50% of directors agreeing with this statement.

Finally, the survey asks if a list of tasks will improve the performance of outside directors. The tasks examined are :

• Better attendance at board meetings;

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• Better preparation for and more active participation in board meetings;

• Better knowledge of the firm’s business; and

• Better knowledge of their fiduciary duties to all shareholders, including willingness to speak for minority shareholders.

Executive and independent directors were in general agreement on these tasks as well. Both groups felt that better preparation would improve performance of outside directors, as would additional knowledge of the firm’s business. Executive directors also felt strongly that better attendance of board meetings by outside directors would improve performance (96% of respondents vs. 87% of independent directors)

Assessment of the Effectiveness of the Boards and Future Tasks

The best initial assessment of the effectiveness of boards might come from the directors themselves. When asked about the view of corporate governance practices at their firm compared with other SET-listed firms, 41% of the executive directors and about 44% of the independent directors felt their practices were slightly better than other firms. Interestingly, 34% of independent directors felt their firms’ practices were much better than other firms while only 28% of executive directors shared the same high opinion. Slightly more than 20% of both groups together registered the opinion that their practices were about the same as other firms.

This high opinion, though certainly biased, does speak to the issue that corporate governance practices at Thai firms have been improving. Board members, on the frontline of the push to improve governance, can see the results of the improvement in board practices.

Thai firms have responded to the drive by regulators to develop more independent boards. For example, the survey results show that all firms have independent directors in their boards, with a large majority of sample companies having three or more independent directors on the board. The survey results also show that Thai boards are active, engaged, and take their responsibilities very seriously.

The survey results show that some areas still need extra emphasis. The priority areas for improvement are training and education and creation of additional board committees.

Directors report that education and training is one area where they would like to receive more assistance. The activities of the Thai Institute of Directors Association will certainly make a significant contribution toward board effectiveness and improved practice of directorship. Companies themselves need to continue to improve the way they work with directors, especially the independents.

While each firm is now required to have an audit committee and the results have been overwhelmingly positive, firms should go ahead and create nomination, compensation, and other board committees. Increased use of compensation committees would encourage the board to exercise its monitoring role over the performance of the senior manager(s). More widespread use of nominating committees—where the power clearly rests with the board and not the controlling shareholders or owner—would also help encourage selection of directors that were not beholden to the owners/managers. These new committees may help encourage truly independent directors to join the board and encourage an active independent role for them.

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4. The Role of Other Stakeholders in Corporate Governance

Regulatory and Other Environment for Banks

In the wake of the financial crisis, many new regulations were promulgated and put into effect. Since poor governance practices at firms overall were believed to be magnified by poor governance practices at Thai financial institutions, the financial system was singled out for additional stringent new rules aimed at improving corporate governance practices.

Banks and finance companies now face strict new regulations designed to improve governance and oversight. The heart of the improved regulations was a series of new rules issued by the central bank, the Bank of Thailand (BOT), which carries responsibility for the oversight and regulation of the financial system, together with the Ministry of Finance.

A subcommittee of the National Governance Committee is charged specifically with the job of enhancement of governance at banks, finance companies, and insurance companies. Members of the subcommittee include the governor of the Bank of Thailand Governor, the President of the Thai Bankers' Association, the President of the Association of Finance companies, and the Director-General of the Department of Insurance.

New regulations limit lending or investing in related parties4, barring loans to directors or organizations affiliated with directors. Banks are also required to formulate a policy describing their rules covering loans to related parties. In March 2002, a new handbook was released, spelling out the judiciary duties of directors of financial institutions. The book also covers the expectations of stakeholders (depositors and shareholders, for example) and is designed to serve as a guide for directors.

BOT rules set forth in 2002 (BE2545) require bank boards to have at least 9 members, with less than 1/3 of the members drawn from management. The new regulations require the presence of independent directors: at least 3 directors or one-fourth of the board, whichever is greater, must be independent. When the new rule was announced in December 2002 (BE2545), firms had one year to comply5.

Banks are now also required to set up an audit committee with at least three independent directors as well as a risk management committee. The BOT also recommended that banks establish compensation and nominating committees. Banks are also required to use an external auditing firm approved by the Bank of Thailand6, changing its external auditor every 5 years. New rules also cover internal audit7 and disclosure of director compensation and related party transactions8. New Bank of Thailand regulations also specify that bank or

4 No. FPG(21) C.147/2545 Re: Lending to or investing in related parties and loan to Commercial Banks' shareholders, and No. FPG(21) C.148/2545 Re: Lending to or investing in related parties and loan to Finance Companies and Credit Fonciers' shareholders, dated 2 August 2002. 5 No. BOT. FPG (31) C2770/2002 Re: Board Structure of a Commercial Bank to Enhance Corporate Governance, dated 3 December 2002. 6 No. FPG(31) C. 2733/2545 Re: Approval Criteria for External Auditors for Commercials Bank and No. FPG(31) C. 2734/2545 Re: Approval Criteria for External Auditors for Finance Companies and Credit Foncier, dated 26 November 2002. 7 No. FPG(21) C. 2258/2544 Re: Internal Audit of Financial Institutions, dated 15 October 2001. 8 No. FPG (02) C. 35/2544 Re: Balance Sheet and Income Statement of Commercial Banks, and No. FPG (02) C. 36/2544 Re: Balance Sheet and Income Statement of Finance Companies and Credit Fonciers, dated 24 May 2001.

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financial institution directors can serve as directors at no more than 3 other companies9. Lastly, the Bank of Thailand increased the requirement for information disclosure to cover related party transactions, and compensation or benefits paid to directors or management executives. These new regulations will go a long way toward promoting financial institutions as effective monitors, making great improvements on past practices.

As one outcome of the crisis, the Thai financial system changed significantly as shown in Table 3 below10.

Table 3: Restructuring of Banks and Finance Companies in Thailand

Before Crisis (1996)

After Crisis (July 1999)

Type of Financial Institution Number of Institutions

Share of Assets

Number of Institutions

Share of Assets

Domestic commercial banks (privately owned)

14 59% 7 39%

Finance companies (privately owned)

90 20% 22 5%

Majority state-owned commercial bank

1 8% 0 0%

State-controlled commercial banks

0 0 6 28%

State-owned specialized banks 7 7% 7 15% Branches of foreign banks 14 6% 14 12% Public finance company 1 0% 1 1%

Total 127 100% 57 100%

The trend toward greater consolidation continues, with Bank of Thailand authorities and regulators actively speaking about the desire for greater consolidation in the banking sector as a means to improve competition and strengthen the remaining firms.

The crisis showed that large corporations, large corporate groups, and even large financial institutions are not immune from financial distress, workouts, restructurings, and even bankruptcy. This graphic lesson meant that banks must be more active and aggressive, playing their roles as monitors more effectively. Changes have been underway for some time to reduce the moral hazards in lending. On top of the regulations described earlier, surviving banks have move quickly to improve lending standards and practices as well as improve operational risk and credit risk policies. Lenders are cooperating to create credit reporting bureaus for both consumer and corporate borrowers.

9 No. FPG(02) C.62/2544 Re: The Undertaking of Directorship in Other Limited Companies by Directors and Senior Manager of Commercial Banks, dated 12 September 2001. 10 Adapted from Lindgren, Carl-Johan Lindgren, Tomás J.T. Baliño, Charles Enoch, Anne-Marie Gulde, Marc Quintyn, and Leslie Teo, Financial Sector Crisis and Restructuring: Lessons from Asia, International Monetary Fund Occasional Paper 188, 1999, Appendix 5, p. 101.

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While the consolidation in the financial sector may help boost monitoring efforts and reduce the moral hazard problem, there is another side to the changes that have come to the Thai financial system. With the increased level of government ownership and/or influence in the financial sector after the crisis, monitoring and market disciplinary forces may be weakened. Strong regulatory leadership from the Bank of Thailand, regulators, and internal discipline will help negate this potential problem area.

Status of Labor Unions and Employees

In general, Thai firms are not heavily unionized nor are business decisions generally subject to labor union approval and oversight. Labor groups, whether formally organized as a union or as a looser grouping of employees, are more vocal and active in state agencies and state-owned enterprises like the Electricity Generating Authority of Thailand or the Port Authority. Nation-wide unions, representing a broad class of workers or skilled trade across an industry or a wide number of firms, are not common.

The survey results show that very few Thai firms have any sort of work council or joint labor/management committee (JLMC). It may seem that Thai firms are relatively free to neglect the needs of their employees because Thai firms do not seem to face a significant amount of pressure from organized labor. However, this would be a gross simplification and an erroneous conclusion. In fact, Thai firms seem to be quite cognizant of their commitment.

Labor relations in Thailand regulated under the terms of the Labor Relations Act, established as law in 1975 (BE 2518).11 Employer’s associations and labor unions can be established to protect the benefits of the terms and conditions of employment, as well as promote better relations between employers and workers. The union and/or employer’s associations can negotiate for agreements and conduct activities for the benefits of the associations’ members. While the rights and responsibilities of both employers’ associations and labor unions are carefully delineated in the Labor Relations Act, it is evident from a brief review of the Act that the labor force in Thailand is required to be consulted for significant company decisions. These decisions are left to management, which has the freedom to consult with or include the workforce in the decision / management process or choose not to involve the workforce or its representatives in the decision-making process.

Turning to the participation of other stakeholder groups, the 2002 Corporate Governance Benchmarking Survey found some interesting results when examining the role of employees and other stakeholder groups. Many firms, especially manufacturing companies demonstrated good awareness of environmental issues. Many companies thoroughly addressed their firm’s environmental policies, public communications activities, and compliance, while other firms at least met minimum legally mandated disclosure standard. However, few firms explicitly recognized their role and responsibility for their employees’ safety and health, often making only a superficial mention of the safety and health of their employees. The story was much the same with other stakeholder groups like suppliers, customers, creditors, or the general public. While a portion of firms did explicitly mention their responsibilities to stakeholder groups, a significant majority of firms made little or no mention of stakeholders.

Survey Results

The next sections discuss the survey results in two areas: human resources and the role of stakeholders.

11 Available at www.thailabour.org or the Department of Labor.

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Human Resources – Factual Information

Firms surveyed are large, with more than half the sample having greater than 500 employees. Firms employ a reasonable mix of managerial/supervisory employees, and college graduates. Many workers have been with their firm for more than 10 years. One-fourth of firms had increased their workforce in the past three years, possibly a result of the economic recovery coming on the heels of the financial crisis. However, the balance of firms either decreased their workforce or had no change. Some firms had downsized considerably. Firms use a wide range of job-enrichment activities, including work teams, quality circles, and job rotation, both for managers and other employees. Incentive compensation plans like stock ownership or stock option plans are rare, but profit-sharing is used at more than one third of firms.

Most firms surveyed do not have a joint labor-management committee (JLMC); only 12 firms responded positively. At firms with a JLMC, the committee has been established quite a number of years ago and meets frequently. The issues discussed with the JLMC range from strategic issues to worker safety and compensation.

Role of Stakeholders – Director Opinions

This section profiles the attitudes of directors toward the role of stakeholders in the firm. Almost 50% of directors feel that earning a profit is the only real goal for a corporation, while 40% disagree. All directors agree that a company does have responsibilities toward its various stakeholder groups.

Both groups feel that independent directors have the largest role to play in preventing controlling owners from abusing their power and pursuing their private interests. Creditor financial institutions are seen as playing a role, but clearly not the major force.

Concerning the monitoring role of creditor financial institutions, almost 90% of directors agree that banks screen loans more carefully after the financial crisis and 80% agree that banks monitor the firm more closely. Banks are seen to be more active in restructuring in the event of distress, while firms are much more interested in having a stable long-term relationship with creditor banks. Directors feel that banks could provide advice along with support during temporary liquidity shortages or financial distress. These actions are good reasons for seeking a long-term relationship with banks. However, directors would be hesitant to develop a such a relationship for a number of reasons: declining dependence on bank loans, confidentiality, concern about being ‘stuck’ with one bank, and fallout from the bank’s own financial distress.

Directors felt that equity ownership by a bank would improve the incentive for monitoring. However, directors did not overwhelmingly agree that equity ownership would appreciably lower conflicts of interest between the bank and shareholders, would avoid premature liquidation, reduce the chances of undertaking unprofitable investments, or exert a stronger influence on the firm. Directors felt that board representation would improve monitoring by the creditor bank and possibly allow the company to receive preferential treatment by the bank.

In directors’ opinions, employee participation has not increased since the financial crisis. However, some directors feel that employees may be able to exert greater influence once the economy fully recovers. Directors also feel that the major reasons for increased or anticipated employee participation are due to economic progress and the increased importance of human capital. Directors agree that greater labor participation in company decision-making would help curb potential abuse by controlling owners, improve company

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performance through better information flow, and lead to better observance of workplace laws and rules. Directors feel that increased employee involvement through activities like quality circles and work teams are a vital component to enhance productivity (95% agreement). Overall, directors are not concerned that these types of activities will encourage workers to leave the company or make labor too strong.

Finally, directors feel that professional societies and outside directors are the most important entities to improve corporate governance in Thailand. Regulators (financial supervisory agencies) and the judicial system are looked to as playing a role, while the press and shareholder activists are not seen as important forces for change. Directors feel the most effective task for better corporate governance is to make internal corporate governance mechanisms work better. Another mechanism viewed as effective would be to enhance accounting, disclosure, and auditing standards. Measures like external governance (takeovers), rigid controls on related-party transactions, reducing ownership concentration, or publicizing corporate governance ratings are viewed as being markedly less effective.

Assessment of the Role of Stakeholders and Future Tasks

Stakeholders can play a significant role in improving corporate governance, yet in Thailand, the roles vary considerably. Recent regulatory reforms described earlier are expected to greatly enhance governance at banks themselves. These improvements will in turn improve the monitoring role of banks. The survey results confirm that directors understand, accept, and would welcome an expanded monitoring role for banks.

The attitudes of directors recorded in the survey show a need to improve the awareness of the role of stakeholders in the firm. Independent directors are looked to take the leading role in preventing controlling owners from abusing their power and pursuing their private interests. Interestingly, lenders are seen to have a role to play, but will not be the major monitoring force. These observations lead to the conclusion that future efforts should center on encouraging the true independence of independent directors, so that they may serve and protect the interests of a wide group of stakeholders.

Directors agree that financial institutions now screen loans more carefully and monitor the firm more closely. Banks appear to be much more active; firms are cultivating stable long-term relationships with their bank(s). Directors remain reluctant to allow a bank to become ‘too close’, fearing conflicts or problems with confidentiality. While allowing a bank to become a board member or an equity owner were viewed as an effective ways to improve the incentive for monitoring, directors did not overwhelmingly agree that equity ownership would significantly lower conflicts of interest between the bank and shareholders. Future efforts are needed to strengthen banks’ monitoring roles, but in a context that allows some distance between the creditor and the borrowing firm.

Efforts are already underway to strengthen lending practices and risk management at banks. Banks are starting to share information about credit risk and several credit reporting agencies are in the process of getting organized. The Thai banking sector has undergone tremendous consolidation in the wake of the financial crisis, with the number of banks dropping by almost half as the government closed or consolidated weaker institutions. Other banks have sought strategic partners and several now have large foreign ownership stakes.

The role of employees seems to be weakly defined. Since the role of labor, whether organized or not, is not especially powerful in Thai firms, the best hope for improved employee oversight would be the continued increase in human capital, and job-enrichment activities created by the firms themselves.

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The final measures described above make an excellent conclusion to this section. If corporate governance in Thailand is going to improve, outside directors and professional societies are expected to play the leading roles, supplemented by efforts at financial supervisory agencies and the judiciary. Better governance would also result from improved internal corporate governance mechanisms and enhanced accounting, disclosure, and auditing standards. These opinions speak directly to the monitoring and control roles of the board of directors.

5. Analysis of the Relationship between Corporate Governance Practices and Firm Performance

Measures of the Quality of Corporate Governance and Corporate Performance

One outcome of the survey is the compilation of a corporate governance score for each firm in the survey. The survey covered two subsections: shareholders’ rights and board effectiveness, with scores for each question assigned based on the survey responses. The shareholders’ rights section was further divided into three sub-sections: effective participation in decision-making (EP); election of directors and other rights of shareholders (OR); and disclosure and transparency (DT). Survey responses for the board effectiveness section separated to consider the factual information and directors opinions separately. The board effectiveness section was also subdivided. The sub-sections were are: board composition and independence (CI); functions of the board and the activities of board committees (BF); and access to information, general support, and director compensation and liability (IS). Using the survey instrument, points were assigned to answers in selected questions. The composite corporate governance score for each firm is the sum of the scores in each subsection.

The scores for the Thai firms in the survey are quite good as Tables 4 and 5 show. Thai firms fair quite well in the area of shareholder rights, with an average score of 67 for this category. No firm scores below 51. The results support the strong protection of shareholder rights in Thailand, which is largely a function of the regulatory environment and effective firm practices. In the area of board effectiveness, the average value is 51 and the range of scores is much more widely distributed. Overall governance scores for Thai firms are distributed over a narrow range, with an average score of 59, the lowest score of 43 and a maximum of 72. Table 6 shows a breakdown of the Shareholder Rights and Board Effectiveness scores into three further sub-categories. Thai firms do very well across the three shareholder rights categories (effective participation, other rights, and disclosure & transparency). However, one score in the board effectiveness categories is clearly much lower than scores in the others. The score in the Information Access & Support category is sharply lower than the ratings in the Composition & Independence and Functions categories. Directors feel that they are not receiving the information they need nor the support desired from the firms they serve.

The next task is examination of the relation between corporate governance score and Tobin’s Q, a measure of market performance. By examining the connection between governance practices and market performance, it is possible to evaluate whether or not good corporate governance practices add value. Tobin’s Q, which is the ratio between the market value of equity plus firm debt divided by the book value of total assets, is widely used in finance research as a measure of managerial performance. Table 7 and Figure 1 show that the Tobin’s Q values for the survey firms have an unexpected distribution. Firms with scores indicating good governance practices would be expected to have higher values of Tobin’s Q. However, this is not the case. Some possible explanation for this unusual result

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Table 4: Scores for Shareholder Rights and Board Effectiveness

Scores Shareholder Rights Board Effectiveness 70-100 22 1

60-70 24 12 50-60 15 21 40-50 0 18 30-40 0 9

Less than 30 0 0 Average Score 67 51

Table 5: Overall Corporate Governance Scores for Thai Firms

Corporate Governance Score Number of Firms 70-100 6 60-70 20 50-60 29 40-50 6 30-40 0

Less than 30 0 Average 59

Note: Overall corporate governance score is the sum of scores for shareholder rights and for board effectiveness shown in Table 4.

Table 6: Distribution of Corporate Governance Score by Subcategory

Shareholder Rights Section

Effective Participation

Other Rights Disclosure & Transparency

Average Score 73.2 66.6 60.5

Effectiveness of Board of Directors Section

Composition & Independence

Functions Information Access & Support

Average Score 64.1 58.2 31.9

is the characteristics of the sample firms and the distribution of the corporate governance scores. Each possible explanation will be examined in the next section.

Analysis of the Association

Upon closer examination of the distribution corporate governance scores, it becomes apparent that the scores for Thai firms do not have much variation, which could explain the

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unusual findings. Table 8 and 9 show the distribution of firm performance variables and corporate governance scores along with the correlation coefficients for the variables.

Table 7: Corporate Governance Score and Tobin’s Q

Overall Corporate Governance Score Number of Firms Average Tobin’s Q70-100 6 1.175 60-70 20 0.997 50-60 29 0.988 40-50 6 1.356 Less than 40 0 0.000 Upper 30% 18 1.085 Middle 40% 25 0.974 Lower 30% 18 1.106 Quartile 4 (top scores) 15 1.114 Q3 15 0.971 Q2 15 0.960 Quartile 1 (bottom scores) 15 1.120

Figure 1: Tobin's Q and Governance Scores

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In an attempt to quantify the connection between corporate governance practices and firm performance, results from a multiple regression analysis is presented in Table 10. The results show the statistical relation between corporate governance and Tobin’s Q is not statistically significant.

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Discussion of the Results

Before dismissing the results of the regression analysis and concluding that there is no relation between corporate governance and firm performance, it is helpful to examine the characteristics of this sample, which might provide some insight as to why the relation was not observed. Firstly, the sample chosen for this survey represents a very narrow cross-section of Thai firms. The sample was restricted to only 61 firms across seven industrial sectors, which is a small fraction of the 300-plus companies listed on the Stock Exchange of Thailand. Secondly, in aggregate, there may be an issue with the liquidity and investor awareness of the firms chosen for the sample. The sample firms totaled only about 20 percent of the market capitalization of the stock market, with two firms in the sample together representing more than 10 percent. This means the remaining 59 sample firms constitute only ten percent of the market capitalization of the Stock Exchange of Thailand. This raises the question of whether the firms are adequately ‘covered’ by investors. While good governance practices should certainly be independent of firm size, smaller firms may simply not be widely followed by investors such that the market value of the firm is accurately gauged through trading by active investors. In addition, it is possible that shares of many of the firms lack sufficient liquidity.

The results include several firms that have high Tobin’s Q values yet low corporate governance scores. In particular, four companies are significantly different that other firms in the sample. Were these four companies excluded from the sample, the relation between governance score and Tobin’s Q would be positive and significant at the 5% level (results not shown). Why would these firms exhibit this unusual feature? Two of the firms are quite small while the two other companies are large manufacturers. It is possible that these four firms are not actively traded, as described above. For example, one company is a subsidiary of a large foreign automaker with a large and successful business in Thailand. Perhaps a limited amount of shares are available for trading, since the parent company would not be actively trading the shares it holds. The restricted supply of shares could induce buyers to

Table 8: Distribution of Firm Performance and Corporate Governance Scores Variable Description Lower

25% Middle 50%

Higher 25%

Std. Dev.

Tobin Tobin’s q 0.69 0.97 1.57 0.38

ROA Return on assets (2000-2002 average, %) -5.8 5.4 14.3 9.3

CG Overall corporate governance score (SHR+BE) 48 59 70 7.2

SHR Score for shareholder rights 57 67 77 7.8

EP Score for effective participation 64 73 83 7.5

OR Score for other rights 49 68 82 13.1

DT Score for disclosure & transparency 46 61 75 11.8

BE Score for board effectiveness 39 51 64 9.7

CI Score for composition & independence 49 65 78 11.7

BF Score for board functions 39 59 76 14.1

IS Score for information access & support 9 32 55 17.9

ED Score of opinion survey for executive directors 60 75 90 11.8

ID Score of opinion survey for independent directors 52 72 91 15.0

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Table 9: Correlation Coefficients TOBIN ROA CG SHR BE ED ID SG SIZE DEBT

ROA 0.25 1.00 CG 0.06 -0.20 1.00 SHR -0.00 -0.11 0.80 1.00 BE 0.10 -0.22 0.86 0.39 1.00 ED 0.14 0.11 -0.01 0.11 -0.11 1.00 ID 0.26 0.35 0.08 0.15 -0.00 0.36 1.00 SG 0.07 0.30 -0.08 -0.13 -0.01 -0.01 0.11 1.00 SIZE 0.09 -0.06 0.20 0.26 0.09 0.20 0.26 0.29 1.00 DEBT 0.04 -0.48 0.12 0.07 0.13 0.09 -0.18 -0.05 0.14 1.00 KS -0.07 -0.24 -0.06 0.18 -0.25 0.18 0.19 -0.12 0.14 0.05

Variable Name Variable Description TOBIN Tobin’s q ROA Return on assets (2000-2002 three year average, %) CG Overall corporate governance score (SHR+BE) SHR Score for shareholder rights BE Score for board effectiveness ED Score for the opinion of executive directors ID Score for the opinion of independent directors SG Sales growth over the 1997-2002 period: ln (2002 sales / 1997 sales) SIZE Size of the firm: ln (total assets) DEBT Debt ratio (total liability / total assets) KS Ratio of fixed capital to total sales

bid the price higher, thus inflating the implied market value of the firms and making Tobin’s Q larger.

Turning to other efforts to gauge corporate governance practices in Thailand, recent annual corporate governance benchmarking studies can be insightful. The most recent baselining survey completed in 2002 examines practices at the top 234 companies listed on the Stock Exchange of Thailand. Firms were selected based on market capitalization and trading volume. When compared with the prior year’s study, the findings in the 2002 survey documented significant improvements in the area of shareholder rights, disclosure, legal compliance with new regulations (the audit committee requirement, for example), and reducing conflicts of interest. Improved board practices were also noted because good governance and board practices are closely connected.

Though the methodologies for rating and scoring corporate governance in the baselining surveys and this research are significantly different, the results show a positive relation between corporate governance and firm performance, as shown by the graphs (Figure 2 and Figure 3) and the regression results (Table 11) taken from the 2002 benchmarking survey. In the analyses contained in the 2002 Benchmarking Survey, the empirical results in the survey show a positive relation between corporate governance rating and firm value using Tobin’s Q as proxy. The study suggesting that improving corporate governance practices can lead to high firm value and concludes: “it pays to have good governance.”

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Table 10: Regression Results for Tobin’s Q

Coefficient t-statistic

Constant 0.846 (0.99)

Debt / Assets 0.141 (0.59)

Ln (Assets) 0.028 (0.37)

Ln (Sales02/97)2 0.052 (0.44)

D (Single domestic owner)3 -0.157 (-1.22)

D (Non-family group)4 -0.237 (-1.56)

D (New firms)5 -0.501 (-1.16)

D (Industry)6 Iron & steel (+)**

CG Overall Score / 100 -0.916 (-1.11)

R2 0.227

Number of observations 60 Notes: 1 Numbers in the parenthesis are t-values; ** and * note statistical significance at the 5% and 10% level

respectively. 2 Ln (Sales02/97) = ln (2002 Sales / 1997 Sales). 3 D(Single domestic owner) is a dummy variable for firms controlled by a single domestic owner other than the government or foreigners. 4 D(Non-family group) is a dummy variable for firms belonging to a business group or holding company not controlled by families. 5 D(New firms) is a dummy variable for firms established after 1997. 6 D(Industry) is industry dummy variables (1 for relevant industry, 0 otherwise).

Figure 2: Corporate Governance Score and Market Valuation (Tobin’s Q): 2002 Benchmarking Survey

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Figure 3: Market Valuation (Tobin’s Q) by Corporate Governance Rating Quartile: 2002 Benchmarking Survey

Tobin's Q Mean Scores

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Table 11: Regression Analysis Results; 2002 Benchmarking Survey

Variables Coefficients t-values

Intercept -0.446 (-1.947) *

Firm size 0.057 (2.527) **

Debt-to-equity ratio 0.005 (0.255)

Corporate governance rating 0.285 (3.174) ***

Industry Dummy Included? Yes

Adjusted R2 0.265

F-statistic 5.000 ***

N 134 Source: “Strengthening Corporate Governance Practices in Thailand, 2002

Survey,” by the Thai Institute of Directors Association.

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6. Conclusion

The report concludes with a brief review of the major findings, summarizes the significant changes in Thailand corporate governance reform efforts, and draws some final conclusions about the future efforts required to consolidate the progress that has been made in the country to date.

Turning first to the role of shareholders, the survey results show that Thai shareholders seem to be active and involved. Firms do allow reasonable opportunities for investors to exercise their rights. However, the major areas for further improvement concern proxy voting and timely receipt of pertinent materials before shareholders’ meetings. There is also a lack of alternative mechanisms that minority shareholders can use to protect themselves against company misdeeds (e.g., derivative suits). Further, continued efforts to improve accounting standards, disclosure, and transparency are still necessary. International accounting standards of generally accepted accounting principles (such as US or UK GAAP or IAS) are not yet in widespread use in Thailand. Most firms use Thai accounting standards.

Though it seems to be easily accomplished and facilitated by companies, in practice, proxy voting can be quite inconvenient for shareholders. More firms are making it easier and clearer for shareholders to exercise their voting rights. Proxy-voting by mail would be one effective way to increase shareholder participation and ensure their rights. Further, the survey results show that shareholder rights are actively respected. Shareholder meetings are typically well attended and shareholders can freely participate in the meeting activities. Specifically, shareholders are free to nominate, vet, and select directors. In the end, companies believe that they provide sufficient information to shareholders before stockholder meetings. Some obstacles remain, however. Given the concentrated ownership of many Thai firms, the shareholding requirements might prove to be a significant obstacle to minority shareholders when they want to take actions against management. Despite the availability of various methods of legal redress, it can be very difficult for individual shareholders to bring a legal action against management. The time and expense needed for the legal process can be prohibitive. Draft regulations propose changing the relevant laws that will allow minority shareholders to bring issues before the forum in annual meetings more easily.

After the outbreak of the Asian financial crisis, the influence of institutional investors and of investor activists is growing steadily. Institutional investors are taking a more active role and exercising their voting rights more frequently. The survey results show that virtually all firms surveyed feel they provide adequate time and information about related party transactions, yet proposed regulatory changes would increase the requirements for shareholder approval of related party transactions and divestiture of assets.

Turning next to the roles and effectiveness of the board of directors, Thai firms have responded to the drive by regulators to develop more independent boards. For example, the survey results show that all firms have independent directors in their boards, with a large majority of sample companies having three or more independent directors on the board. This is partly a result of the SET requirement that all listed firms must have audit committee consisting of at least three independent directors. The survey results also show that Thai boards are active, engaged, and take their responsibilities very seriously. In spite of the progress, some areas still need additional emphasis, especially training and education as well as expanding the pool of qualified and competent directors. There is also a need to encourage the use of various types of board committees. While every Thai firm is now required by the SET to have an audit committee, firms should go ahead and create

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nomination, compensation, and other board committees to further encourage the board to exercise its monitoring role over the performance of the senior managers.

Interestingly, the directors questioned in the survey would like to receive more formal training and education. In fact, numerous resources and educational support services are available (through the Thai Institute of Directors Association, for example), yet not all companies or directors have taken advantage of the educational programs offered. Additional support and incentives for the firms are needed in order to provide more training and education to current and prospective board members.

Lastly, looking at the role of stakeholders, the roles of various stakeholder groups vary considerably. It is hoped that recent regulatory reforms described earlier will greatly enhance governance for all firms, especially commercial banks, which will then improve the effectiveness of banks’ monitoring. The survey results confirm that directors understand, accept, and would welcome an expanded monitoring role for commercial banks.

The attitudes of directors recorded in the survey show a need to improve the awareness of the role of other stakeholders in the firm. Independent directors are expected to take a leading role in preventing controlling owners from abusing their power and pursuing their private interests. Further, lenders are also seen to have a role to play, but are not seen as a major monitoring force. In the end, future reform efforts should center on encouraging the true independence of independent directors so that they can serve and protect the interests of a broad group of stakeholders.

The role of employees seems to be weakly defined in Thailand. Since the role of labor, whether organized or not, is not especially productive among Thai firms, the best hope for improved employee oversight would be to continue improvements in human capital, and job-enrichment activities created by the firms themselves.

As a summary of the survey findings, if corporate governance in Thailand is going to improve, outside directors and professional organizations are expected to play leading roles, supplemented by efforts at financial supervisory agencies and the judiciary. Better governance would also result from improved internal corporate governance mechanisms and enhanced accounting, disclosure, and auditing standards.

As earlier discussions have explained, the pace of corporate governance reform in Thailand has been much slower than the pace of reform in other Asian countries. Existing Thai institutions have proved satisfactory as reform efforts have gradually changed the systems, structure, and procedures that underpin Thailand’s corporate governance system. While Thai reform efforts have not featured dramatic action and breathtaking changes, the modifications have been effective and comprehensive. Positive results can be seen, as demonstrated by the results collected in this survey.

One useful framework for examining corporate governance reform is to examine the structure, process, and strategy of the corporate governance system. The structure of the governance system is of prime importance. The structure outlines the rules: disclosure standards, laws and regulations, and the organizations charged with enforcement have a major influence on the effectiveness of any governance regime. In Thailand, the structure required to build good corporate governance practices is largely in place.

The major changes and reform efforts have come in the area of process, especially in enforcement and disclosure. New and updated rules, new and revised laws, and increased regulatory oversight have been at the forefront of the push for increased corporate

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governance. Process-related activities like monitoring, supervising, enforcing, and higher awareness have increased. Yet enforcement remains an area for improvement.

One piece still missing is the overall strategy for corporate governance: to what end are we improving our corporate governance practices? With a clear map for the future, the benefits from improved corporate governance practices will help achieve the long-term objectives for Thai financial markets. In addition, through increased awareness, corporate governance practices are now in the spotlight throughout the entire finance and investment community. However, small investors have not yet clearly identified the benefits accruing through good corporate governance practices.

In a January 2003 road show presentation, representatives from the SEC outlined the progress made in reforming corporate governance in Thailand. There are many points worth highlighting with pride:

• Improvement of corporate governance has become part of the national agenda, due in part to the establishment of a National Corporate Governance Committee;

• Disclosure standards are now approaching international levels;

• Existing Thai laws and regulations cover most of the provisions in the US Sarbanes-Oxley act (see table for direct comparison)

• Enhanced enforcement comes together with incentives for firms to improve corporate governance practices.

In order to achieve its objectives of board accountability, transparency and the protection of shareholders’ rights, the SEC has crafted its policies based on regulatory discipline, market discipline, and company (self) discipline.

Looking first at the area of company discipline, a combination of regulations and laws have enhanced performance. For example, the SET has issued codes of best practice and a set of corporate governance principles to serve as a guide for firms. Companies are now required to disclose their compliance or non-compliance in their annual report. Active training programs are bringing principles of good corporate governance to a wider audience, such as the director training programs organized by the IOD.

To encourage market discipline, the SET and SEC have also tried to develop an increased role for institutional investors. Institutional investors are hoped to pay closer attention to firms’ corporate governance practices. New groups such as the Institutional Investor’s Club and the Investors Association are actively watching firm behavior and encouraging members to use corporate governance principles as a guide for investment. Larger institutions such as the Government Pension Fund and other asset management companies have noted their willingness to use adherence to corporate governance principles as an investment criteria.

The SET and SEC have also actively encouraged firms to improve their own corporate governance practices through a variety of activities. The “Board of the Year” awards, sponsored by the SET and IOD, recognize excellence in boardroom performance. The Thai Rating and Information Service, Thailand’s first rating agency, has been chosen by the SET to give corporate governance ratings for firms. Companies receiving a satisfactory rating will be eligible for reduced fees and other preferential treatment. The SEC awarded recognition prizes to 40 firms that have superior disclosure.

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In the area of regulatory discipline, most of the needed laws are already in place. Legal revisions helped extend provisions of several key laws. In addition, as regulators, the SEC and SET have considerable power over listed firms which helps counterbalance weaknesses in the existing laws. Further enhancements have been proposed and under consideration, such as a law permitting class action suits.

One obstacle, perversely enough, is the good economic performance and a booming stock market. These twin boons help reduce the pressure for corporate governance reforms. With the Thai stock market turning in a record-setting performance in 2003 and company profits moving up sharply as the economy recovers, investors might be not be blamed if their attention has shifted away from corporate governance practices.

What lies ahead for corporate governance reform in Thailand?

Corporate governance in Thailand is currently at a crossroads. Since the onset of the Asian financial crisis, all related parties have done all they could to promote and to enhance the awareness of corporate governance and its implications. However, the centerpiece is missing: there is no clear strategic direction understood and shared by all related parties.

Given the past and current circumstances, limitations, and constraints, participants in the governance system (e.g., companies and regulators) have achieved remarkable results and have accomplished much. The current operative strategy guiding efforts to improve corporate governance in Thailand appears to be a reactive strategy of adaptation. International practices are frequently applied blindly or perhaps subtly adjusted to fit the current situation and/or produce the desired outcome. International practices are often imposed on the current system without a clear and shared purpose. Unfortunately, this situation will rarely be productive nor beneficial because participants are proceeding in separate directions, rather than joining together toward a common objective. Complaints abound. Companies and investors grumble about too many changes while regulators and many investors feel that too little has been done. No clearly stated corporate governance strategy has been articulated. Once the strategic direction is formulated, understood, and shared, the proper structure can be designed and the implementation process can follow. The current situation is not desirable because there is no integrated system in which strategy, structure and process are systematically combined.

Many people are in search of a perfect corporate governance model for Thailand. Although there are many corporate governance models globally, researchers and practitioners alike have concluded that each governance systems has its own weaknesses; no perfect system exists that can be applied to all economies. A better question is to ask what we can realistically expect from a good corporate governance system? What are the real objectives that can be realistically achieved? These questions have not been answered; in fact, they remain untouched. Somehow, expectations are tempered by historical development, a unique national institutional setting and, most importantly, a shared cultural heritage. Consequently, historical and cultural contexts are taken for granted while external corporate governance practices are almost blindly imposed on our system in the well-intentioned hope that untested disparate parts will blend seamlessly.

As an example, consider the use of outside directors, a tool normally used in western culture. The hope is that outside directors can help monitor management and family owners. However, Thai people are non-confrontational and group-oriented. Consequently, many boards become a so-called “rubber stamp” boards not because directors are unaware or uninterested in their roles and duties but because they are being considerate and respectful of the owner’s decisions. Further, there are a limited number of individuals qualified to serve as outside directors and fewer still that can truly be considered independent. Worse, the

４１

board selection mechanism can lend itself to abusive behavior. In the end, the board of directors may not be the best and most effective means to resolve our corporate governance problems. This conclusion does not mean that we should not use outside directors or independent boards in our corporate governance system but rather we must realistically assess what can be achieved by implementing such a mechanism without a clear overall strategy. The use of outside board can be very powerful under a corporate governance system that recognizes institutional and cultural differences.

More importantly, the international corporate governance system assumes a separation of ownership and control, a questionable assumption in the Thai context. Again, there is no implication whether one context is better than another. However, one must understand the situation before taking any critical action. For example, in order to formulate a far-reaching and long-term corporate governance strategy, the unique ownership structure of Thai firms needs to be recognized formally instead of casually. Furthermore, one must realize that the current corporate governance practices in the world are based on many assumptions (e.g., legal system, ownership structure, active markets for corporate control, and nationalism) that may not apply to Thailand. Therefore, haphazard adoption of international rules and standards leads to more conflicts because when an international system is back-fit to the Thai context, loopholes and inconsistencies are bound to emerge.

Further, the current system has created many unfortunate misperceptions. For example, family owned firms are always viewed poorly by related parties. This misperception is a result of the fact that the current corporate governance system does not formally recognize the uniqueness of the circumstance. Once the special circumstances surrounding family ownership are noted and recognized, the corporate governance strategy and structure can then ensure that the interests of all parties are aligned properly and that the power of all parties are balanced. Once resolved, family owners will be more interested in working with outside shareholders to maximize firm value instead of working against one another which, in turn, leads to value destruction for all parties. Without official recognition, everyone charged with improving the Thai corporate governance system is running in circles trying to implement narrow measures to treat symptoms, while ignoring the underlying causes.

Steps to formulating an overall corporate governance strategy begins by addressing these questions:

· The locus of power – who (shareholders, regulators, firms) should have the power?

· The monitoring – who (shareholders, regulators, firms) should monitor the process?

· The enforcement – who (shareholders, regulators, firms) should enforce the rules?

The locus of power (where the power should be) must be thoroughly examined. Should the power rest with the regulators or with shareholders? One possible strategy is to empower shareholders and shift the role of the regulators more toward monitoring and being stewards of the process. The structure can then be designed around this framework. For example, the voting mechanism can be modified to enhance shareholders’ power and the ability to exercise it. Once this is done, the regulators can step back, monitor the process in order to ensure the process followed, and make sure that the balance of power is maintained.

In the end, the roles of the regulators need to be realistic and clearly defined. The magnitude of the task needs to fit the ability to execute the work. This is the critical part of the overall corporate governance strategy in defining the structure of the system.

４２

Without an overarching picture of the desired results that come from an improved governance system, Thailand runs the risk of fusing incompatible pieces of regulations and laws. The resulting quilt of regulations, grafted together with the best intentions, will actually bar Thailand from attaining higher levels of recognition and the rewards that come from improved governance. Structure follows strategy, and the change and implementation process will also be more easily visible. Once a clear, shared corporate governance strategy is put forth, structure will follow strategy and the required steps toward meaningful productive reform unfold naturally.

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Figure 4: Corporate Governance Disciplines

Source: SEC Roadshow Presentation, 2003.

Regulatory Discipline

Market Discipline

Self- Discipline

Corporate Governance

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Table 12: Chronology of Changes in Rules, Laws, and Regulations Designed to Improve Corporate Governance Practices in Thailand

Year Event Improves Shareholders'

Rights

Improves Effectiveness of the Board

Improves Stakeholders’

Rights 1993 Regulation requiring at least 2 independent directors on the board * 1999 SET establishes Code of Best Practices for directors * Audit committee required for all listed companies (must have committee formed

before the end of 1999) *

Thai Institute of Directors Association established * Market for Alternate Investment (MAI) established. Market rules required more

information disclosure as a listing criteria *

Bankruptcy Act – significant amendments made to the Bankruptcy Act, strengthening creditors’ rights

*

New law requires complete disclosure for related parties, inside information, and asset divestitures (Bor Jor 18/2542)

*

Updated law changes the definition of “financial statements” to include balance sheet, income statement, changes in equity, and cash flow statement (Bor Jor 18/2542)

*

SET issues guidelines for organizing shareholder meetings * 2000 Updated laws to require foreign listed firms to disclose at least (or more)

information than they report to their country of listing and explanation for accounting rule differences between the two countries (Bor Jor 66/2543)

*

Accounting Act passed * 2001 SET report on corporate governance released * * * First corporate governance baselining study completed, produced together with the

Thai Institute of Directors Association and McKinsey & Company, under World Bank sponsorship

* * *

New BoT regulations concerning internal audit of financial institutions *

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Year Event Improves Shareholders'

Rights

Improves Effectiveness of the Board

Improves Stakeholders’

Rights New BoT regulations for balance sheet and income statement of commercial banks

and finance companies * *

New BoT regulations concerning directorship in other limited companies by directors and senior manager of commercial banks

*

Updated law to require disclosure of the name(s) of major suppliers that have more than 30% of the firm’s transactions (Bor Jor 20/2544)

*

New law to provides exception for firms currently under rehabilitation (recovering from financial distress through debt restructuring), which must report financial statements 45 days after the semiannual accounting period (45 days quarterly ending). Firms must report restructuring progress and future obligations, if any. (Bor Jor 20/2544)

*

Ministry of Finance regulations outline issuing procedure when issuing stock for debt settlement

* *

2002 Named “Year of Good Corporate Governance” National Corporate Governance Committee established * * * Second Thai Institute of Directors Association corporate governance baselining

study completed * * *

Thai Rating and Information Services announces it will offer CG ratings * * * New BoT regulations concerning lending to or investing in related parties and loans

to shareholders of commercial banks and finance companies * *

New BoT regulation covering board structure of a commercial bank to enhance corporate governance

*

New BoT regulations concerning approval criteria for external auditors for commercials bank finance companies

* *

New laws shortens reporting time from 60 to 45 days (Bor Jor 47/2545 and Bor Jor 6/2546)

*

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Table 13: Summary of Financial Accountability and Corporate Governance Reform in Thailand; Actions through December 200012

1. Financial Reporting and Disclosure

• Cabinet approved framework for changes to Accounting Professional Act to establish Thai Financial Accounting Standards Board (TFASB) and strengthen the Accountants and Auditors of Thailand (CAAT). Amendments to Accountant’s Professional Act are pending.

• Amended Accounting Act to enhance disciplinary measures for accountants and require compliance with standards issued by CAAT.

• Issued new and improved accounting standards consistent with international standards.

• Issued exposure drafts for auditing standards fully consistent with international standards.

• Required preparation and audit of financial statements in accordance with improved standards beginning in 1999.

• Issuance of new specific rules on accounting and disclosures for banks are pending.

• Enforcement of enhanced disciplinary measures for accountants are under way.

2. Board of Directors and Shareholder rights

• Cabinet approved framework for changes to PCA and SEA to clarify duties and accountabilities of officers and directors, increase protection of shareholder rights, and improve sanctions for violation of laws.

• Amendments to PCA and SEA are pending.

• Issued revised guidelines on the code of best practices for company directors and audit committees.

• Established an Institute of Directors.

3. Regulatory framework and enforcement

• Reviewed roles and responsibilities of SET and SEC. Put in place clarified enforcement arrangements.

• Amendments to the PCA and SEA to support the arrangement are pending

12 Excerpt from Nowroozi, B., 2000. Financial accountability and corporate governance reform in Thailand and Republic of Korea—Progress to date and challenges ahead. Unpublished monograph. Available at http://www1.oecd.org/daf/ASIAcom/pdf/Nowroozi_paper.pdf.

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Table 14: List of Industrial Sectors and Companies Surveyed

Sector Firm NameBuilding & Furnishing Materials Modernform Group Pcl.

Siam City Cement Pcl. The Siam Cement Pcl. Tipco Asphalt Pcl. United Standard Terminal Pcl. Rockworth Pcl.

Vanachai Pcl. Chemicals & Plastics National Fertilizer Pcl. National Petrochemical Pcl.

The Aromatics (Thailand) Pcl. Thai Central Chemical Pcl. Thai Plastic And Chemical Pcl. Pato Chemical Industry Pcl. Vinythai Pcl. Thai Rubber Latex Corporation (Thailand) Pcl

Distribution & Trade Diana Department Store Pcl.Loxley Pcl.

Minor Corporation Pcl. O.C.C. Pcl. Saha Pathana Inter-Holding Pcl. White Group Pcl. Big C Supercenter Pcl. Berli Jucker Pcl.

Electrical & Electronic Products Hana Microelectronics Pcl.K.R. Precision Pcl.

SVI Pcl. Kang Yong Electric Pcl. Metro Systems Corporation Pcl. Singer Thailand Pcl. Kce Electronics Pcl. Kulthorn Kirby Pcl.

Foods & Beverages Agripure Holdings Pcl. Charoen Pokphand Foods Pcl. Patum Rice Mill And Granary Pcl. President Rice Products Pcl. Siam Food Products Pcl. The Thai Pineapple Pcl. Universal Food Pcl. Food And Drinks Pcl.

Malee Sampran Pcl. Thai Wah Food Products Pcl. Chumporn Palm Oil Industry Pcl. Lam Soon (Thailand) Pcl. Thai Union Frozen Products Pcl.

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Sector Firm Name Thai Agri Foods Pcl.

Iron & Metal Products Alucon Pcl. Thailand Iron Works Pcl. Millennium Steel Pcl. Sahaviriya Steel Industries Pcl. Crown Seal Pcl.

Textiles And Clothes Bata Shoe Company Of Thailand Pcl.Thai Rayon Pcl.

Union Textile Industries Pcl. Thai Wacoal Pcl. Thai Textile Industry Pcl. Castle Peak Holdings Pcl. Thanulux Pcl.

Transport Equipment Swedish Motors Corporation Pcl.Thai Rung Union Car Pcl.

S.P. Suzuki Pcl. Goodyear (Thailand) Pcl.

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Table 15: Protection of Shareholder Rights in Thailand

Regulation References to Thai Laws and Regulations

EFFECTIVE PARTICIPATION OF SHAREHOLDERS IN DECISION-MAKING Days of advance notice for shareholders meeting

7 days; 14 days for some issues e.g. employee stock option/ownership plan, offering discounted securities, delisting etc.

PCA Sec. 101; SEC and SET regulations

Any major impediments in effective participation in shareholders meeting?

None

Thresholds for requesting an extraordinary shareholders meeting

20% of issued shares; or 25 shareholders holding 10% of issued shares or more

PCA Sec. 100

Thresholds for placing items on the shareholders meeting agenda?

1/3 of issued shares PCA Sec. 105

Can shareholders vote by mail? No How active are institutional investors or minority shareholder protection groups?

Small influence, but growing (Thai Investors Association established in 1989 and the Institution Investors Alliance established in 2002)

ELECTION OF DIRECTORS AND OTHER RIGHTS OF SHAREHOLDERS Is cumulative voting for the election of directors allowed?

Yes, but most firms opt out by articles of association

PCA Sec. 70

Can shareholders inspect the firm’s account books or corporate affairs and property?

Yes Various13

Approving amendment of founding documents (articles of association)?

75% of all voting rights of attending shareholders

PCA Sec. 31

Approval of major corporate transactions such as merger, and major sale/acquisition of assets?

75% of all voting rights of attending shareholders14

PCA Sec. 107; Sec. 146; SET A35-02 onward

Approval of large related-party transactions

75% needed, when the transaction exceeds the higher of either 10 million Baht or 3% of net tangible assets

SET A35-01 onward; SET A37-03; SET A37-05

13 All shareholders have the same inspection privileges. However, disclosure rules for public companies carefully circumscribe all disclosures, including content, timing, and other aspects. PCA Chapter IX covers inspections (at the request of shareholders, using an outside inspector/auditor); PCA Sec. 63 covers the right to examine the shareholder register; PCA Sec. 126 covers the right to examine the balance sheet, profit/loss statement, and auditor’s report at any time. 14 For listed companies, the SET requires shareholder approval for the acquisition or disposal of assets whose value represents an amount exceeding 50% of total assets.

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Regulation References to Thai Laws and Regulations

Approving appointment of directors and auditors

Appointing directors: cumulative voting or other stipulated in the articles of association. Appointing auditors: 50% of all voting rights of shareholders present and vote at annual general meeting

PCA Sec. 70; 107 and 120

Approving removal of directors 75% of shareholders present who have shares totaling not less than 50%

PCA Sec. 76

Approving removal of auditors 50% of all voting rights of shareholders present and vote; ordinary item of business at AGM

PCA Sec. 107

Approval of remuneration of board members

2/3 of all voting rights of shareholders present

PCA Sec. 90

Do shareholders approve new share issues?

75% of all voting rights of attending shareholders

PCA Sec. 136

What self-dealing or related-party transactions must be disclosed to orapproved by shareholders?

Disclosure: transaction exceeding the greater of either 1 million Baht but lower than 10 million or 0.03% but less than 3% of net tangible assets Shareholders approval: transactions exceeding 10 million Baht or 3% of net tangible assets

SET A35-01 onward; SET A37-03; SET A37-05

Are priority subscription rights given to existing shareholders?

No circumstances for shareholders to have preemptive rights; company may have choice when setting terms of new issue

Threshold shares for requiring a mandatory offer for all shares

25%, 50%, 75% of issued shares

SEC Sec. 247, SEC Gor Jor 53/2545, Sec. 6

Are there takeover defenses? Not commonly used; specific items related to the board of directors exist, but not commonly used as a takeover defense

Are dissenters’ rights of shareholders honored?

Yes, some regulations exist concerning the veto rights of shareholders such as employee stock option/ownership plan (not

SEC regulations

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Regulation References to Thai Laws and Regulations

have veto from shareholders higher than 5-10%); discounted securities offering securities (not have veto from shareholders higher than 10%)

SHAREHOLDER ACTIONS AGAINST DIRECTORS FOR BREACHES OF FIDUCIARY DUTIES Maximum penalties for the offence of insider trading (civil liability and imprisonment)

Imprisonment: not exceeding 2 years Fine: two times the acquired benefits or at least THB 500,000; blacklisted. Subject to judicial process if fine is contested

SEA Sec. 296 SET A67-06; SET A67-07

Maximum administrative fine No administrative fine; civil and/or criminal fines are possible

Derivative suit Yes, for those holding at leasta combined total of 5% of issued shares

PCA Sec. 85

Class action suit No; in progress (draft bill is being reviewed by the Council of State)

Petition for dismissal of directors Yes; shareholders holding a combined total of 5% of issued shares may request a court order to remove directors whose acting cause damage to the company.

PCA Sec. 85

DISCLOSURE AND TRANSPARENCY Who nominates external auditors? Audit committee selects and

nominates external auditor, including remuneration. Approved by shareholders at AGM (upon proposition by the board); ordinary resolution, > 50%

SET A54-07

Is there a maximum period for external auditors to serve for a company?

Only for banks: up to five years

By when should the audited annual report be published after the end of business year?

Public companies: have to submit to shareholders at the AGM Listed companies: 60 days for financial statements and 110 days for annual report.

PCA Sec. 112; SEC regulation

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Regulation References to Thai Laws and Regulations

Maximum penalties for non-compliance with disclosure rules (annual, semi-annual, quarterly reporting; that of price-sensitive information, etc.)

100,000 Baht plus 3,000 Bahtper day of contravention and directors also liable to penalties; blacklisting.

SEA Sec. 274 and 300; SET A67-05

Is there a central registry for corporate information, which is readily accessible to investors?

Public companies: Ministry of Commerce is their registrar;Listed companies: the Thai Securities Depository is their registrar and company information is available on SEC and SET websites

PCA = Public Company Act, 1992 (BE 2535)

SET = Rules of the Stock Exchange of Thailand Governing Listed Company

SEA = SEC Act, 1992 (BE 2535)

SEC Notification of the Securities and Exchange Commission, No. Gor Jor. 53/2545, Re: Rules, Conditions and Procedures for the Acquisition of Securities for Business Takeovers.

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Table 16: Comparison of US Sarbanes-Oxley Law vs. Thai Laws Securities and Exchange Commission, January 2003

Sarbanes-Oxley Act Thai Situation Oversight of Auditors

- SEC approved for the auditors of listed companies - F/S of listed co. must sign by auditors in SEC’s approval list - ICAAT establishes accounting and auditing standards - SEC reviews the working papers of auditors in IPO cases, complaint cases and application to be an approved auditor - When shortcomings are found, SEC reprimands or suspends the approval in serious case

Auditor Independence - non-audit service - rotation of auditor - former employee of accounting firm

- Currently, no such provision exists. ICAAT is considering such a change.

- audit committees’ approval of services

- One of the duties of audit committee stated in Code of Best Practice is appointing auditors.

Corporate Responsibility Audit committee - Independence: under SEC & SET regulations

- Duties: under Code of Best Practice CEO/CFO - certify reports

- Authorized directors certify reports - Board of directors evaluate the internal control system

Bar unfit directors or officers SEC & SET regulations prohibit blacklisted and improper persons to be directors or executives

Disclosures - off-balance sheet transactions Follow Thai GAAP which comply with IAS

- personal loans for executives Prohibited by Public Company Act - securities holding report Report within 3 working days - internal control report Include in annual reports - rapid disclosure in plain English Most annual reports prepared in English and

disclosed promptly via electronic means e.g. website

- periodic disclosures review Financial statements: SEC review all quarterly and annual financial statements Form 56-1 (same as US SEC 10-K) and Annual Report: SEC reviews 1/3 of listed companies each year depending on high impact companies