Lecture 5 Student Handout on Corporate Governance

8/8/2019 Lecture 5 Student Handout on Corporate Governance

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CorporateGovernance

The stick with the carrot at the end

Lecture 5Thai Business Management in

Globalization


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Traditionally defined as the ways in which a firm

safeguards the interests of its financiers (investors,

lenders, and creditors).

The modern definition calls it the framework ofr

ulesand practices by which a board of directors

ensures accountability, fairness, and transparency

in the firm's relationship with its all stakeholders

(financiers, customers, management, employees,government, and the community).


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This framework consists of:

(1) explicit and implicit contracts betweenthe firm and the stakeholders for

distribution of responsibilities, rights, and

rewards,

(2) procedures for reconciling the sometimesconflicting interests of stakeholders in

accordance with their duties, privileges,

and roles, and(3) procedures for proper supervision,

control, and information-flows to serve

as a system of checks-and-balances.


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Why Corporate Governance?Corporation

Enhancing firm value

Protecting interests of stakeholders includingshareholders

Create trust and integrityEconomy

Development of capital markets for sustainablegrowth

Creating righteous and respectable wealth

Maintaining fair and orderly market economy

Socio-Economic Impact

Enhancing country competitiveness

Lowering corruptions


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Corporate governance and family-owned businesses

Family-owned businesses continue to play an important role inThailand. According to research by the ADB Institute10 almost50% of listed Thai firms were predominantly or partially family-owned.

In more developed economies, stock markets view familybusinesses with suspicion (family members are often seen asplacing their own interests above those of minorityshareholders).

In emerging markets, though, family-owned firms play animportant economic role, as capital markets and bankingsystems tend to be underdeveloped and institutional investors

which play a key role in the more developed markets arefew.


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EGCO Group, recently received the Top

Corporate Governance Report Awards and

Best Shareholder Award 2008

PTT Exploration and Production Plc. or

PTTEP to receive The Asset Corporate

Governance Awards 2008.

Bangchak Petroleum Plc is one of the nine

companies with corporate governance

scores reaching excellent benchmark in

Corporate Governance Report of Thai Listed

Companies project conducted by the Thai

Institute of Directors Association (IOD).


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Do Thai companies need corporate governance?

Corporate governance is not required by law, but it is a good

concept that a company should follow.

During the economic crisis of 1997 the Thai economy slumped

into a recession. Many corporations went bankrupt. Several

financial institutions were closed as well.

These results led many shareholders, investors or relatedsupervising agencies to figure out the reason behind the

recession and the financial insecurity and instability.

People wanted to know who was responsible. Not only was the

economic crisis triggered by the carelessness or mistakes ofthe management, but also from a lack of good corporate

governance in the management team and independent

directors.


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Hence, the related parties

should realize the necessity of

improving standards ofmanagement.

The concept of good corporate

governance is needed forbusiness survival, boosting

investors' confidence and most

importantly, enhancing a

company's competitiveadvantages.


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What are the principles behind corporate governance?

Corporate governance is based on:

1. Accountability means responsibility for decisions or actions that

have already taken.F

or instance: The board of directors isaccountable towards shareholders, while the management teamis responsibility towards board of directors and shareholders.

2. Responsibility means an obligation to carry out assigned dutiesefficiently and using their full capability.

3. Equitable Treatment can be described as fairness and justice.This means that stakeholders should be treated equally withoutany bias.

4. Transparency means any operation must be processed withproper evidence, it must be auditable, and information must be

disclosed to stakeholders.5. Vision means broad view for creating added value to the

company on a long-term basis without affecting its short-termbenefits. Any value-added transactions should increase thecompany's efficiency to enhance its competitiveness.

6. Ethics means a code of conducts and business ethics promotingood corporate overnance.


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What is the role of government in corporate governance?

Since 1998, Thailand has made significant progress inimproving its corporate governance. In 2002, the National

Corporate Governance Committee was established, and theyear 2002 was officially designated as the Year of CorporateGovernance.

Six sub-committees have been established to intensify effortsto improve various aspects of corporate governance practices.

The effort has been focused on enhancing regulatoryenforcement, instituting market discipline, and promoting self-regulation.

Include:Law enforcementImprovements in accounting standards

Establishment of guidelines for listed companies

Raising standards of corporate governance in commercialbanks, finance, insurance and securities companies

Providing a proper training and public relations about

corporate governance in Thailand


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On the banking side, the Bank of Thailand(BOT) has issued regulations to improvecorporate governance of financial institutions;among other things, the regulations cover the

number of independent directors andfunctions of various committees of the boardsof directors.

A directors handbook for directors of bankshas been issued by the BOT to facilitateimplementation of the regulations.

To promote good practices, the Thai Ratingand Information Service (TRIS) has beendesignated by the authorities as the solecorporate governance rating agency for listedcompanies in Thailand.

The SET and SEC have provided incentivesto companies to be rated by the TRIS as ameans of promoting good practices. Severallisted firms have already been rated.


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Are stakeholders important to corporate governance?H

ow?

There are many parties leading to the success of a company;

employees, creditors, debtors, competitors, community

and society. Certainly, good corporate governance also

covers those stakeholders. Fair treatment to stakeholders is a

key to the company's success.


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Which type of corporations, specifically need corporate

governance?

Listed companies on the SET are the first target groupthat should implement good corporate governance, as

they are partly financed by public investors.

Listed companies with good corporate governance

attract more people to invest in the SET. The government also applies good corporate

governance to state enterprises, government

companies and agencies.

Nonetheless, good corporate governance can also beapplied to and benefit private companies as well.


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What are the 15 principles of corporate governance set by SET?

The set of policies on good corporate governance

covers the following areas:

Policy on Corporate Governance

Rights and Equitable Treatment of shareholders

Rights and Equitable Treatment of Various Groups of Stakeholders

Leadership and visionBoard Structure

Roles

Responsibilities

Accountability

Independence

DisclosureTransparency

Internal Control

Risk Management

Business Ethics

Relations with investors


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Do the listed companies need to follow the 15 principles and to do

the same as those done by other listed companies with good

corporate governance?

Not necessarily. The 15 principles are only a set ofguidelines that a company should follow.

Moreover, each company has a unique businessoperation and operates in a different environment.Therefore it should implement the principles accordingto the situation.

However, in case that the company is faced withlimitations that prevent it from applying any particularprinciple, it should disclose those reasons to therelated parties.


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What benefits will listed companies gain from a corporate

governance rating? It is worthwhile forcompanies to

apply corporate governance, especially companies withlow scores, as investors will have a negative attitude

towards the company?

Companies with a ranking score less than seven do not need to

disclose their ranking results and declare that they areparticipating in the corporate governance rating project

"Participating in this project will assist a company in pinpointing

its weaknesses and help improving its own corporate

governance.


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The Worst casecorporate governance practices

Rotnet was one of the Internet service providers thatreceived concessions from the Communication Authorityof Thailand in March 2000. Founded by Mr. KittipatYaoprukse, Roynet had three main business units:

Internet services (90% of its 2002 income)

Computer training courses (1% of its 2002 income)

Other related services (9% of its 2002 income)

(Together with homepage construction, domainregistration, hardware and software sales anddevelopment and implementation System)

The company had a registered capital of 61 million bahtand was listed on the Market for Alternative Investment(MAI), the second board of the SET on 25 October 2001.

In early 2003, the SEC found that Roynet had committedat least three offences: Accounting fraud, InsiderTrading, Disclosure of information.


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Accounting fraud

Roynet had to restate its third quarterof 2002 financial result as it booked revenuein its financial statement although no actual sales occurred. The statement offinancial result came afterRoynets auditor issued an unqualified statement.Finally, the company announced that it in fact made a loss of 13.22 million baht,and that its earlier-reported profit of 11.87 million baht was incorrect.

InsiderTrading

The Yaoprukse family, who were the majorshareholders of Roynet, had usedinternal financial information to enrich themselves. Aware that the earnings wouldbe disastrous, the family sold their60% stake in 2002, earning approximately 50million baht.

Disclosure of information

The sale of the Yaoprukse family violated two provisions of the Securities andExchange Act. One provision states that the company management needs todisclose of changes its shareholding to the public. The other is the disclosure ofchanges in shareholding of more than 5%.

So, on 24 February 2003, the SEC filed criminal complaints against Mr. KittipatYaoprukse and Roynet with the Economic Crime Investigation division of the Royal ThaiPolice.The police submitted the case to the Legal Proceeding Coordination Committeeof the Ministry of Finance. Furthermore, the SET suspended the trading of Roynetsshare since January 2003 and blacklisted Mr. Kittipat Yaoprukse, as a result of which heis barred for 10 years from holding any director or senior management position of listed

companies. Mr. Kittipat was fired as the managing director of Roynet.


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The Best Case

Electricity Generating Public Company Limited

The EGCO, the first independent power plant in

Thailand, was established on 12 May 1992through a partial shareholding of the ElectricityGenerating Authority of Thailand (EGAT).

EGCO scored 7.98 points on the full scale of 10from TRIS, which is a good-to-excellent rating.

Shareholders rights: 7.16 points. Theshareholding structure of the company is clearand not complex and no cross-holding exists.

The company allows shareholders to vote

during the annual general meeting. The agendaof the meeting is clear and shareholders aregiven sufficient time to consider the agendas.The company allows the free expression ofshareholders opinions at the meeting.


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Composition and roles of board of directors and management: 7.6points. The board of directors of the company consists of 13members, four of whom are independent directors. The directors arewell qualified, with different educational backgrounds andexperience. The directors have an important role in defining thestrategy of the company. The board has been placing emphasis onrisk management since 2000 and has formed a work group for riskmanagement. The board has also started a self-assessmentprogram.

Corporate governance culture: 8.16 points. The company has apolicy of promising good corporate governance at every level and ithas formed work groups to disseminate information and arrange fortraining programs to equip employees with a better understanding ofcorporate governance.

Information disclosure: 9.18 points. The company has an efficient

disclosure system. Its financial statement passes the auditors withoutany problem. The company also releases the information regularlythrough various channels, for example, its website, investors relationunits, securities analysts meeting. The company was one of the 40best companies in non-financial disclosure, according to SECsrating.

Lecture 5 Student Handout on Corporate Governance

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