2006 Asian Roundtable on Corporate Governance CG Development

2006 Asian Roundtable on Corporate Governance CG Development in Thailand: the Three Disciplines Regulatory Discipline Fostering Enforcement Mechanisms: The Regulatory Challenge Chalee Chantanayingyong Securities and Exchange Commission, Thailand Bangkok, Thailand September 13, 2006

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Presentation Overview Ø Overview: CG Development in Thailand Ø Enforcement: Difficulties & Measures Ø An Unfinished Agenda 3

Overview: CG Development in Thailand

CG: National Agenda in 2002 Chaired by Prime Minister Subcommittee on Law Amendments and Enforcement Subcommittee on Accounting Standard Subcommittee on Best Practices of Listed Companies Subcommittee on Improvement of Corporate Governance of Commercial Banks, Finance Companies and Insurance Companies Subcommittee on Improvement of Corporate Governance of Securities Companies Subcommittee on Investors Education and Public Relations and on Corporate Governance in Thailand 5

3 Pillars for Better Corporate Governance Regulatory Disciplines Good CG Market Disciplines Self Disciplines 6

Symptoms Ø CG culture l Family-owned business and lots of related transactions l Inadequate level of knowledge among directors Ø Investors activism l Both retail and institutional investors are not active 7

Symptoms (Cont’d) Ø Enforcement l Insufficient enforcement mechanism l Legal proceedings involve too many agencies l Lack of understanding for capital market fraud among agencies 8

International View Points Ø World Bank l Report: CG – ROSC l Published: September 2005 l Countries participated: 37 countries Ø ACGA + CLSA (Hong Kong) l Report: CG Watch l Published: annually (September-October) l Countries participated: 10 Asian countries 9

CG – ROSC Source: CG-ROSC assessment of Asian countries during 2001 -200510

CG – ROSC (cont’d) Overall 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 11

CG – ROSC (cont’d) Recommendation – law enforcement • Establish corporate governance enforcement priorities • Improve enforcement for violation of laws • Introduce administrative and civil sanctions 12

CG Watch (Oct. 2005) Countries Rules &Regulations Enforcement Political/ Regulatory environment Adoption of IGAAP Institutional mechanisms &CG culture Country score Singapore 7. 4 5. 6 7. 3 9. 5 5. 7 7. 0 (1) Hong Kong 6. 4 5. 8 7. 8 9. 1 5. 4 6. 9 (2) India 6. 6 5. 6 6. 5 7. 5 4. 3 6. 1 (3) Malaysia 5. 9 4. 9 6. 0 7. 5 3. 8 5. 6 (4) Taiwan 5. 3 4. 9 6. 5 5. 9 3. 3 5. 2 (5) Thailand 5. 8 4. 0 5. 0 7. 3 3. 5 5. 0 (6) Korea 5. 1 4. 0 4. 3 8. 2 3. 9 5. 0 (6) Philippines 5. 3 2. 2 5. 0 8. 2 3. 1 4. 6 (7) China 4. 3 4. 0 5. 0 6. 8 2. 2 4. 4 (8) Indonesia 3. 3 2. 9 3. 0 6. 8 2. 8 3. 7 (9) 13

CG Watch (cont’d) Thailand’s assessment during 2001 -2005 Year Rules& Regulations Enforcement Political/ Regulatory Environment Adoption of IGAAP CG Culture Country score 2001 7. 0 2. 0 3. 0 5. 0 4. 0 3. 7 2002 7. 5 2. 0 3. 0 5. 0 4. 0 3. 8 2003 7. 5 3. 0 4. 0 6. 0 4. 5 4. 6 2004 6. 1 3. 8 5. 0 8. 5 3. 5 5. 3 2005 5. 8 4. 0 5. 0 7. 3 3. 5 5. 0 14

Enforcement: Difficulties & Measures

Difficulties

Criminal Proceedings Ø Power of authorities SEC Police Public Prosecutor Court • SEC does not have sole authority to proceed criminal crimes 17

Criminal Proceedings (cont’d) Ø Lengthy legal process l Many steps and many agencies involved long duration of process l Frequent rotation of officials lack continuity l Complicated cases need knowledge and understanding of business activities Ø Problems in bringing offenders to justice l Difficulties in proving criminal crime need high standard of prove l Witnesses unwilling to get involved 18

Measures

3 Steps Scheme The SEC’s alternative measures to strengthen enforcement power Prevention Intervention Sanction 20

I. Prevention Ø Review financial statements l 100% review of auditors’ report (quarterly & yearly financial statements) l In-depth review for irregularities Ø Extensive monitoring of auditors l 100% review of auditors’ working papers of IPO companies l Inquiry auditors for unclear or ambiguous messages 21

I. Prevention (cont’d) Ø Stringent monitoring of audit committee’s performance Ø Updating on “connected transactions” rule Ø Closely monitoring connected transactions 22

II. Intervention Ø Re-issuance of financial statements Result: In 2004, 25 companies In 2005, 37 companies In 2006, 13 companies Ø For questionable RPT, top management needs to clarify Result: In 2004, stopped 6 inappropriate transactions worth 3, 000 million baht In 2005, stopped 1 inappropriate transactions worth 350 million baht In 2006, stopped 1 inappropriate transaction worth 180 million baht • • • 23

II. Intervention (cont’d) Ø Share price manipulation l On-site inspection of securities companies to break market rumour l If there is rumour or leakage, listed company needs to clarify l Closely monitor listed companies’ disclosure to prevent financial statement cosmetic 24

III. Sanction Besides the criminal proceedings, the SEC introduces an administrative proceedings to be an alternative tool Ø Introduction of “Director Registration System” Ø Appointment of “Directors Responsibility Committee” 25

What is Director Registry? Ø All listed + IPO companies have to register their directors and top executives in “Director Registry” through the SEC website Ø List of directors & top executives shown on the SEC website Whitelist 26

What is Director Registry? (cont’d) Ø Persons who conducted a malpractice e. g. breach of fiduciary duties or fraud or dishonest management are unqualified persons Ø SEC will “remove” such persons from whitelist to prevent any further damage to investors Blacklist 27

Director Registry: Result Whitelist ~ 8, 000 persons Blacklist 126 persons * Corporate fraud 43 * Unfair securities trading 24 * Operating securities business without license 24 * Denounced by other regulators (BOT, SET) 35 Source: Director Registry System as of Aug 31, 2006 28

Directors Responsibility Committee Ø Objective To provide check & balance mechanism Ø Duties To advise SEC on sanctioning of directors Ø Composition 9 members comprising both regulators and business leaders 29

An Unfinished Agenda

An Unfinished Agenda Ø Public’s perception & expectation on enforcement power Ø Continuous training and education among enforcing agencies Ø Modernizing the range of regulatory enforcement power Ø Empowering investors with more efficient tools 31