Corporate Governance in Thailand: Glancing Behind and Looking Forward “CG Development in Thailand: The Three Disciplines” September 13, 2006 Deunden Nikomborirak Thailand Development Research Institute
Outline of presentation 1. The face of Thai corporate governance • ownership structure • corporate conduct • governance performance 2.State and private sector initiatives in promoting good governance: the 3 disciplines 3. Economic, political and Social Challenges 4. Conclusions
Ownership Structure • Concentrated ownership • family-control was prominent particularly in finance and securities and property • family-control declined in banking, finance and securities and property • foreign bank’s share increased in both banking and finance
Corporate practices • Most common abuses were connected lending, connected transactions (siphoning of corporate funds). • More recent abuses: insider trading and share prices manipulations through custodian ot nominee accounts. According to Achavanuntakul (2006), 21.4% of total SET market capitalization is accounted for by nominees.
Corporate Governance Report of Thai Listed Companiesby Thai Institute of Directors
3 pillars supporting corporate governance • Regulation (SEC/SET) • Market discipline (SRI) • Self-restraint ( firm-level corporate conduct code)
Regulations • Many legal loopholes exist (definition of connected transactions, connected persons, definition of price manipulation, lack of regulatory authority to demand disclosure of UBOs) • legal procedures not conducive to prosecution (criminal sanctions only, reliance on police force for investigation and attorney forto file a lawsuit) • legal amendments in the pipeline. • The SEC had resorted to preventive measures and administrative sanctions.
Regulations • Examples of preventive measures for connected transactions: requirements for submission of transactions that received shareholders resolutions, review of connected transactions and auditors’ reports. • For illegal operation through nominees: “know your customer (KYC) & customer due diligence (CDD) requirement for brokers” • Example of administrative sanctions: fines and black-listing.
Regulations • Shortcomings of administrative measures: lack of transparency, social sanctions, market discipline, case precedence and prone to discriminatory treatment
Regulations • SET imposes many regulations governing disclosures and board structure -- i.e., audit committee, independent directors, governance assessment and shareholders’ resolution required for large connected transactions . • Shortcomings of SET measures: no clear penalties.
Market-discipline • corporate governance rating (by TRIS) • good governance awards, disclosure awards, popular awards. • reduction in fees and compensation for rating fees. • But too few companies participated. • Establishment of Institutional Investor Club and Investor Association. • IIC still has no investment criteria and IA lacks personnel to pursue governance work
Self-restraint • Only a handful of Thai companies have governance code. According to Corporate Governance Report of Thai Listed Companies 2005” 3/4 of surveyed listed companies explicitly mentioned obligations to shareholders 2/3 mentioned obligations to customers < 1/3 mention safety and welfare of employees 1/5 mentioned environmental issues and compliance in their public communications
3. Economic, political and Social Challenges • Lack of law enforcement means CSR does NOT pay (although according to Corporate Governance Report of Thai Listed Companies 2005 – firms with higher governance scores performed better) • Certain government policies inconsistent with good corporate governance (Foreign business Act, Minister’s Equity Share act,etc.) • Culture of patronage contribute to widespread use of nominees.
Major Obstacles to Business Growth A Survey on Corruption and Bribery in the Business Sector : University of Thai Chamber of Commerce, 2000
Economic, political and Social Challenges • Limited long-term investment and active institutional investors means Socially Responsible Investment is RARE. (12% Institutional investor) • Lack of regulatory independence • government political agenda versus SEC’s regulatory agenda • investigation in cases involving politicians or large companies with strong political connections
Economic, political and Social Challenges • More recently, boycotting and social pressures, rather than SRI, are playing increasing role in fostering CSR .
4. Conclusion • Independence of regulatory body and legal amendments are crucial for effective law enforcement. • SEC’s authority should be broadened with respect to prosecution and identification of UBOs. • “soft measures” can go a long way in regulation and in promotion of self-discipline, but has limited bite. • Market-discipline requires (1) disclosures of corporate misconduct and abuses and (2) SRI
4. Conclusion • In the absence of market-discipline, the task will inevitably fall heavily on SEC and SET. • SRI to be spearheaded by large state pension and investment funds. • NGOs and civil society can play very important roles in providing “social discipline” where regulatory oversight and SRI are absent or ineffective.