Corporate Governance of Listed Companies in Thailand

7. Corporate Governance Issues for Financial Institutions

61 Chapter 7 Corporate Governance Issues for Financial Institutions Due to the rapid changes and high volatility in the global economy, together with the complicated and harsh business competition, business operations, specifically in financial business, need to be continuously adjusted and developed. The key component in raising the standard of business operations in the financial sector is to have good corporate governance in place. In other words, financial institutions need to establish a sound management structure and controlling system, which ensure efficiency, transparency, and accountability. In fact, corporate governance is significant for Thai financial institutions to compete effectively and create value added and stability for the overall economy to grow in a sustainable way. The government has put much emphasis on urging organizations to adopt good corporate governance and encouraging every party to participate in raising the standard of corporate governance in order to boost the confidence of local and foreign investors and other stakeholders. The government appointed the National Corporate Governance Committee (NCGC) in 2002, which further appointed ch07.pmd 6/3/06, 9:15 AM 61 62 Corporate Governance of Listed Companies in Thailand six sub-committees on 27 February 2002. One of the subcommittees is the Sub-Committee on Improvement of Corporate Governance in Commercial Banks, Finance Companies, and Insurance Companies. Responsibilities of the Sub-Committee are: 1. Set the principles for raising the standard of corporate governance of commercial banks, finance companies, and insurance companies. 2. Specify the guidelines to encourage the implementation of corporate governance in other businesses that commercial banks, finance companies, and insurance companies are related with, such as customers or companies that commercial banks, finance companies, and insurance companies invest in. MEASURES TO PROMOTE CORPORATE GOVERNANCE IN COMMERCIAL BANKS AND FINANCE COMPANIES Lending to or Investing in Related Parties Under the Banking Law, no commercial bank shall favour any of its directors by granting credits, guaranteeing any debts, or accepting or honouring any bills which the director is a drawer, a maker, or an endorser. In addition to this provision, the Bank of Thailand has further prescribed more rules on lending and investment in enterprises which the bank, or its directors or management executives, has certain interest, or lend to the bank’s shareholders or its management executives (related parties). In particular, a commercial bank must formulate a policy with the approval from the board of directors regarding lending to its related ch07.pmd 6/3/06, 9:15 AM 62 Corporate Governance Issues for Financial Institutions 63 parties. Banks are not allowed to lend to related parties in an “excessive amount” or lend to its related parties with conditions that are considered unusual or special from normal lending practices. Good Practices for Directors Although good corporate governance practices are not legally binding or enforced by law, an adoption of such practices will help. On 14 March 2002 the Bank of Thailand, with the support of the World Bank and co-operation from the Thai Bankers’ Association, the Foreign Banks’ Association, the Association of Finance Companies, and other respected experts, issued the Financial Institution Directors’ Handbook. This handbook advocates the practice of good corporate governance at all levels in each financial organization and provides corresponding guidelines for directors of financial institutions in performing their roles and responsibilities. The handbook spells out the judiciary duties of directors as the leaders of an institution and the expectations of the company’s stakeholders such as shareholders and depositors. It also elaborates on the board of directors’ role in strategy and policy formulation as well as monitoring and supervision of management. The Bank of Thailand’s supervisory and regulatory roles and its expectations of the board of directors are also discussed. The annexes cover some regulations that may give rise to criminal liabilities and cases of directors’ liability arising from their breach of duty of care. A list of practical “Dos and Don’ts” is provided in the handbook. ch07.pmd 6/3/06, 9:15 AM 63 64 Corporate Governance of Listed Companies in Thailand Duty of Care • Setandenforceclearguidelines of accountability throughout the institution. • Clearly establish the scope and limit of the authority of sub-committees (especially executive committee) in order to avoid confusion as to their duties and authorized actions. • If through review any legal or regulatory violations are discovered, then an investigation into the matter must be expeditiously and seriously undertaken. • Have a clear understanding of their role, independently and objectively...