East Asia and the Pacific Region THAILAND Report on Observance of Standards and Codes (ROSC) – Corporate Governance Country Assessment Behdad Nowroozi East Asia and the Pacific Region World Bank Bangkok, Thailand October 26, 2005

Regional Context All countries in East Asia, particularly higher income countries, are moving forward in reforming corporate governance as part of improving their competitiveness As countries move toward convergence of basic principles of corporate governance (accountability, transparency and the rule of law), it makes it easier to integrate their capital markets at the regional level

Background What is a ROSC? It is an assessment of actual practices and analysis of effectiveness of the mechanisms for ensuring compliance with international standards and best practices Corporate Governance Accounting and Auditing Creditors’ Rights and Insolvency

Background (cont’d.) The main areas of the OECD Corporate Governance Principles Effective corporate governance framework Rights of shareholders Equitable treatment of shareholders Role of stakeholders in corporate governance Disclosure and transparency Responsibilities of the Board Methodology (collaborative process)

Overall Assessment Principle-by-principle assessment using OECD principles as the benchmark is, in general, largely/partially observed Observed means all essential criteria are met without significant deficiencies Largely Observed means only minor shortcomings are observed, which do not raise questions about the authorities’ ability and intent to achieve full observance in the short term Partially Observed means that while the legal and regulatory framework complies with the principle, practices and enforcement diverge

Thailand Country Assessment Significant corporate governance reforms have been introduced in recent years Thailand continues to make progress in improving corporate governance The reform agenda, however, remains incomplete Changes in the regulatory framework need to be translated into actual practices

Key Findings Investor Protection Disclosure Basic shareholder rights are protected, but concentrated control limits the influence of minority shareholders There are some constraints on shareholder participation in the AGM There is a lack of range of sanctions to facilitate effective enforcement Disclosure Thailand accounting standards are not fully consistent with international standards

Key Findings (cont’d.) Company Oversight and the Board Limited understanding of duties of care and loyalty Boards are dominated by controlling shareholders Director independence is quite limited, particularly in smaller companies Legal enforcement remains a major challenge; more aggressive prosecution is necessary

Recommendations Legislation to strengthen minority shareholders rights should be adopted and additional reform to strengthen the corporate governance framework will be required in these areas: Cost-effective legal channels for shareholders seeking redress Dismissal of directors Cross-border voting

Recommendations (cont’d.) Regulatory and self-regulatory action is important, particularly in light of legislative uncertainty Expand the coverage of the rules on conflicts of interest and self-dealing Clarify the regulations governing the actions of institutional investors Increase the accountability of directors and management and further clarify the fiduciary duty of directors Further strengthen the Audit Committee’s role to increase its effectiveness Consider requiring the establishment of additional board committees Require codes of conduct for listed companies Require establishment of board evaluation procedures

Recommendations (cont’d.) Further improve quality and reliability of financial information and disclosure Move to full convergence with international accounting and auditing standards Encourage disclosure by custodians Establish corporate governance enforcement priorities Strengthen the independence of the SEC Improve enforcement for violation of laws Introduce administrative and civil sanctions

Conclusion Improving corporate governance is a long-term process and requires a collective effort by all market participants, including regulators, creditors, institutional investors, directors, management, accountants, and shareholders. Thank you