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The Structure and Responsibilities of the Board of Directors
The board of directors is considered by Thai regulators as the number-one mechanism in achieving good corporate governance. Three institutions have been directly involved in improving the quality of Thai board of directors: the Thai Institute of Directors Association (IOD), the SET and the SEC. The IOD, which is a professional organization established in 1999, is responsible for conducting training programs for directors of Thai listed companies. Two of the programs, Directors Certification Program (DCP) and Directors Accreditation Program (DAP), which have been subsidized by the SEC and the SET offer participants the much-needed knowledge concerning duties of directors. As of 2004, more than 50% of all listed companies’ directors have participated in these programs. The IOD also offers training classes on finance, risk management, strategic policy development, and BOD/CEO assessment program. In addition, the IOD offers Advanced Director Program to enhance skills for those who have passed the Certification Program. The IOD also offered “Board of the Year 2002 Award” to eight companies which had voluntarily participated in the IOD’s evaluation of their BOD policies, composition, practices, relations, meetings and leadership.
Since 1999, the SET has made two important corporate-governance requirements on Thai listed companies. The first one is at least one third of the board must be comprised of independent directors. The second one is requiring all listed firms to have an audit committee comprised of at least three independent directors. The definition of independent directors has also been revised to include non-employees who have material financial relationship with the company or personal relationship with its top executives. In 2000 The SET established two principles which are not legal requirements: the Code of Best Practice for Directors and the Best Practice Guidelines for Audit Committee. The Code indicates functions and responsibilities of listed company directors, while the Guidelines suggest that the audit committee reviews the reliability of financial statements, and assess the effectiveness of internal control and internal audit. The Guidelines also state that at least one audit committee member must have the knowledge, understanding or experience in accounting or finance, and being knowledgeable of events affecting changes in financial reporting process. Although the SET does not require an internal audit, its Guidelines state that a listed firm should set up an internal audit department or outsource the service.
In contrast to the U.S. SEC which utilizes mandatory approach by enforcing the Sarbanes-Oxley Act, the Thai SEC’s approach is to gradually encourage listed firms to improve their corporate governance by conducting campaign, distributing educational materials, providing 50% fee discount to companies with high corporate governance rating, and offering one-year coaching to audit committee of newly listed firms. In the fourth quarter of 2004, the SEC conducted a campaign by sending letters to all listed companies encouraging them to strengthen their corporate governance based upon the 15 principles of the SET (see Self-Restraint sub-section). In 2005, the SEC published and distributed the “Director’s Handbook” describing the roles, responsibilities and fiduciary duties of listed company’s directors under Thai law and corporate governance practices. Besides this “soft” approach, the SEC has established “Director Responsibilities Steering Committee” to monitor directors’ activities (Chantanayingyong, 2005). If there is an evidence of improper or illegal conducts, the committee may issue directors “yellow cards” or in some serious cases, “red cards” which will automatically put the directors’ names on the SEC blacklist. A blacklist person is ineligible to maintain a directorship in any listed companies. Since March 1, 2005, listed companies’ directors are also required to register with the SEC so that the SEC can impose the above administrative sanctions on directors who fail to perform their fiduciary duties. As of September 2005, no directors have been reprimanded.
The SEC has also proposed to the government an amendment to the Securities and Exchange Act of 1992 which will spell out clearly the directors’ fiduciary duty, legal responsibilities, and penalties for failure to carry out their duty (Phuvanatnaranubala, 2005). Per this proposed amendment, directors of listed firms could be sued by both the company and the shareholders to recover any gains illegally obtained thru connected transactions. This proposal has been accepted by the government, and is currently in the drafting process.
The Rights and Roles of Stakeholder, Institutional Investors and the Market for Corporate Control
Creditors
Creditors themselves must have good corporate governance before they could effectively monitor their debtors’ governance. To cope with the weaknesses in corporate governance of financial institutions, the Bank of Thailand (BOT), which has the oversight power over Thai financial institutions, has established seven measures since 2002 to promote corporate governance among commercial banks and finance companies. The first measure is prohibiting banks and finance companies from lending to related parties in an excessive amount or with favorable terms, and requiring loans to related parties to be approved by the BOD. The second measure is issuing Financial Institution Directors’ Handbook which spells out fiduciary duties of directors as well as their role in monitoring management, and discusses criminal liabilities arising from their breach of duties. The third measure is about the external auditor who must be approved by the BOT and rotated every five years. The BOT further requires auditors to fulfill specific scope of audit work, and provide the BOT an annual report assessing the efficiency of a bank’s internal control and internal auditors’ competency as well as describing any unusual lending transactions. The fourth measure is about internal auditors’ responsibilities, scope of internal audit work and reporting. The BOT also encourages a bank’s internal auditor to apply other internal control guidelines issued by Institute of Internal Auditors, COSO, the SET and the ICAAT.2 The fifth measure is the required disclosure of directors’ and top executives’ compensation, and transactions related to the bank executives or an entity in which its directors or top executives own at least 10% of the entity’s paid-up capital. The sixth measure is prohibiting a bank’s directors and top executives from serving as the board chairperson and executive directors of more than three other companies. The seventh measure is about specific guidelines regarding the BOD independence and required board committees. In particular, no more than one-third of the board of a bank can be executive directors, and the board must have at least three independent directors or at a proportion of one independent director to four directors, whichever is higher. The guidelines also provide specific definition of an independent director. Additionally, the guidelines require the board of a bank to have an audit committee with at least three directors, two of whom must be independent, and a risk management committee which reports to the audit committee and has at least five members from the board and/or the executives. The BOT has also required financial institutions to set a reserve for loan losses based upon debtors’ cash flow position and ability to pay back instead of comparing collateral value to the principle amount of debt.
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