Corporate Governance in Thailand: More Done Than Talked January 2003

Current Status Enhancement of CG becomes national agenda: National CG Committee Existing laws and regulations cover most points in the US Sarbanes-Oxley Act Disclosure standards close to international levels – some language barrier exists Measures include both carrot and stick : incentives and tightening enforcement Comparison table – appendix 1

Regulatory Disciplines Policies to Go Forward CG disciplines built from 3 dimensions to achieve protection of investors’ right, board accountability and transparency Regulatory Disciplines CG Market Disciplines Self Disciplines For investors: Need more communication - preparation for assessment from international agencies

National CG Committee High powered committee Objectives & Duties: Chaired by Prime Minister Comprise government & private leaders Objectives & Duties: Study and form policies to enhance CG of listed companies and financial institutions Monitor policy implementation of relevant agencies

Measures Taken to Reinforce Practice of CG Principles

I. Self Disciplines Principle: Good CG has to come from within Issuance of principles and best practice Disclosure of compliance & non-compliance to principles in annual report Setting up of CG Center to advise listed co. Training programs: Directors: IOD - voluntary with SET sponsored, 400 directors passed 5-day course CFO: ICAAT to start training in early 2003 Other seminars

II. Market Disciplines Increasing roles of investors Investors Association : monitor companies and exercise rights in shareholders’ meeting Institutional Investors Club : declaration of members to use CG as part of investment factors to promote their own fiduciary duties to clients Government Pension Fund: active player in CG of listed co. Asset management co.: SEC to require disclosure of how CG is used in investment decision and voting policy

II. Market Disciplines: (cont.) Promotion of CG rating: first in Asia Help investors differentiate companies Peer and social pressure to enhance CG Rating done on actual practice of all CG principles Incentives for firms rated 7& up from govt. agencies 3 rated companies and 10-12 expected in 2003 Awards and Recognition: Disclosure Award : SEC awarded 40 listed companies for good disclosure Board of the Year Award : SET and IOD to award listed co. for having outstanding board of directors Q-Mark : Chamber of Commerce and Industry Federation to award logo to “good ethics” co. Rating criteria appendix 2

III. Regulatory Disciplines Regulatory power: quite flexible – can compensate weaknesses in the laws Shareholders’ rights: existing company law or SEC/ SET regulations covers most OECD principles e.g. All basic shareholders’ rights – ownership, voting, etc. Facilitation of voting by proxy – independent director as proxy, 2-way proxy, detailed disclosure of agenda Material decision requires shareholders’ resolution – new share issue, ESOP, major acquisition, takeover defense device, material connected transactions, etc. Voting power – interested shareholders be abstained, minority shareholders’ veto rights in various issues, e.g. ESOP, whitewash, share issuance below mkt price, etc. Insider trading closely monitored – lists of cases fined Class Action Law is being proposed

III. Regulatory Disciplines: (cont.) Accountability of Board of Directors Audit Committee required in all listed co. comprise at least 3 independent directors review the reliability of financial statement comment whether connected transactions are fair and in the best interest of the company prior to commitment review sufficiency of internal control system Due care and loyalty required by law – breaching can lead to derivative suit Company and securities laws are being amended to further increase accountability of director and management

III. Regulatory Disciplines: (cont.) Transparency & Disclosure Thai GAAP consistent or similar to IAS Timely disclosure of financial statement (audited annual F/S within 60 days and reviewed quarterly F/S within 45 days) – leader among Asian countries Auditors be in SEC approve list – subject to regular monitoring and serious sanctions for malpractice e.g. suspension of auditors from Big 5 Information disclosed in annual report up to international level – includes business background, risk factors, management structure and CG policies, connected transactions, MD&A Regular and stringent SEC monitoring Thai GAAP VS. IAS - appendix 2

Concerns Frequently Raised by Foreign Investors I. Thai listed companies are family-owned and managed Governance of privatized companies Lack of law enforcement

I. Thai listed companies are family-owned and managed

Facts – Family business 1. Shareholding structure Large differentiation among listed companies : average free float Overall market : 37% Large companies (SET 50) : 49% Non-SET 50 : minimum of 15% Large companies (SET 50) accounts for 75% of market cap

Facts – Family business (cont.) 2. Management structure McKinsey survey (April 2002) of top 130 companies found strong performance in board practices e.g.: 76% of surveyed companies had a board with a majority of non-executive directors 68% of companies had boards that comprised 25-50% independent directors 22% of companies had an independent chairman, compared to 15% in the US

Facts – Family business (cont.) 3. Cross shareholding & Intra-group transactions Less problems in large firms Subject to disclosure requirements Loans to directors prohibited under company law Shareholders’ approval required for transactions of over 3% of equity with view from independent financial advisor. (FA subject to SEC supervision) “unjustifiable” transactions are monitored and discouraged prior to commitment Revised connected transactions rules to be in force by Q2 2003

Governance of Privatized State-Owned Enterprises

Facts – Governance of SOEs Government as major shareholder of SOEs fully realizes that CG has direct impact on the value of its shares in SOEs. It is, therefore, in the government’s own interest to enhance CG and efficiency of these entities to maximize the long term value of its assets. Hence, in making any decision relating to listed SOEs, the government shall give high regards to impact on the share price as well as fairness to the general shareholders.

Facts – Governance of SOEs (cont.) Intervention of business policies? Sort SOEs with social objectives out of privatization programs Cabinet resolution not to intervene business policies or management of listed privatized companies e.g. PTT Require large SOEs to use electronic procurement to increase transparency and reduce cost – TOT, THAI Policy to reduce government g’tee to SOEs’ loans - needs for SOEs to improve efficiency

Facts – Governance of SOEs (cont.) Appointment of directors & CEO Clear government policy to appoint only competent and professional persons Management of appointed persons has to be transparent and subject to checking mechanism Appointment of key positions in major SOEs go through independent nomination committee Policy to have ESOP in privatized companies and large proportion of share distribution to the public to counter balance state ownership

Facts – Governance of SOEs (cont.) Information disclosure for listed SOEs Companies with share allotment to foreign investors has to issue IAS financial statement audited by independent auditing firm Annual reports prepared in Thai & English Company's website for investor information Encourage CG rating

III. Lack of Law Enforcement

Facts – Law Enforcement Enforcement was actual weakness i.e. no management of listed companies has been jailed, BUT....... Wrongdoings have been sanctioned by other means Administrative sanctions: SEC has been active and quite effective in making changes, e.g. Suspension of professionals that failed to meet their due professional standards – auditors, financial advisors Blacklisting wrongdoers from being management of listed co. or co. seeking to offer securities

Facts – Law Enforcement (cont.) Financial penalties: fines imposed on long list of important cases like insider trading. Wrongdoers included large investors, reputable businessmen in the top wealthy families, politicians, minister, etc. Criminal punishment: Takes time and involves many parties but changes are happening. Short-term: Order that decision whether to prosecute important financial cases be made collectively by police officer, public prosecutor and regulator (SEC/ BOT /MOF as the case may be) Long-term: 1. law amendment to expedite process and let a special unit/regulators have more investigative power. 2. Increase administrative and civil sanctions.

Sarbanes-Oxley VS. Thai Laws Appendix 1 Sarbanes-Oxley VS. Thai Laws

Sarbanes-Oxley Act comparing with Thai Practice SEC approved for the auditors of listed co. 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 Oversight of auditors Thai situation Sarbanes-Oxley Act

Sarbanes-Oxley Act comparing with Thai Practice - Currently, no such provision exists. ICAAT is considering such a change. - non-audit service - rotation of auditor - former employee of accounting firm - One of the duties of audit committee stated in Code of best practice is appointing auditors. - audit committees’ approval of services Auditor Independence Thai situation Sarbanes-Oxley Act

Sarbanes-Oxley Act comparing with Thai Practice SEC & SET regulations prohibit backlist and improper persons to be directors or executives Bar unfitness directors or officers - Authorized directors certify reports - Board of directors evaluate the internal control system CEO/CFO - certify reports - Independency : under SEC & SET regulations - Duties : under Code of Best Practice Corporate Responsibility Audit committee Thai situation Sarbanes-Oxley Act

Sarbanes-Oxley Act comparing with Thai Practice Most of annual reports prepared in English version and disclose promptly via electronic means e.g. website - rapid disclosure in plain English include in annual reports - internal control report report within 3 working days - securities holding report prohibited by Public Company Act - personal loans for executives follow the Thai GAAP which comply with IAS Disclosures - off B/S transactions Thai situation Sarbanes-Oxley Act

Sarbanes-Oxley Act comparing with Thai Practice F/S : SEC review all quarterly and annual F/S Form 56-1 (same as 10-K) and Annual Report : SEC review 1/3 of listed companies each year depending on high impact companies Disclosures (cont.) - periodic disclosures review Thai situation Sarbanes-Oxley Act