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January 20, 2014

Directors’ Legal Duties and Good Corporate Governance

T-AB: Thai-American Business, Journal of the American Chamber of Commerce in Thailand

Legal duties of directors are “must do’s,” and good corporate governance (CG) principles are “should do’s.” Thus, a breach of legal duties leads to liability (civil and/or criminal), while mere noncompliance with CG principles does not.

Legal duties have been imprinted into Thailand’s company law and are compulsory for directors of all companies. For decades, they have not been materially amended or developed, except for the major amendments to the Securities and Exchange Act in 2008, which largely amplified the duties and responsibilities of directors and executives of publicly-traded companies.

Principles of Good Corporate Governance were formulated by the Stock Exchange of Thailand first in 2002, amended in 2006 to be in line with OECD principles, and then subsequently changed again in 2012. CG principles are suggested best practices that are exclusively designed for listed companies.

Directors’ Legal Duties

Company directors are chosen and appointed by the general meeting of the shareholders to manage the company on their behalf. Accordingly, the concept of trust and trustee implicitly come into play and directors are charged with fiduciary legal duties that are classified in to four types:

a) Duty of Care

Directors must act with the diligence and prudence of a person in similar circumstances. Decisions must be made on an informed basis.

b) Duty of Obedience

Directors must ensure that the company complies with the laws, objectives, Articles of Association, and resolutions of its Board of Directors and shareholders. Every company has similar standard compliance duties, such as corporate duties, tax filings, etc.

Some companies carrying on special or regulated businesses would, in addition, be subject to specific laws and regulations.

c) Duty of Loyalty

Directors must act in good faith for the best interests of the company, and they must avoid conflicts of interest.

d) Duty of Disclosure

Directors must provide accurate, adequate, truthful, and up-to-date information to shareholders in a timely manner.

Public companies, especially listed ones, are subject to a combination of company law, securities law, and market regulations; hence, fiduciary duties of their directors are far more intensive and stringent than private companies. Directors can see for themselves that most of these duties are prescribed under the laws in broad principles rather than a checklist of actions. There are neither further descriptions nor many court case precedents for reference. Complying or acceptable practices have to be interpreted on a case-by-case basis.

Breach of fiduciary duties by directors gives no one but the shareholders and creditors the right to sue the directors and hold them civilly liable for damages suffered by the company or such creditors. However, due to the major legal reform in 2008, such breach is now also criminally punishable and the shareholders or the Securities and Exchange Commission can bring a charge against the wrongdoing directors of publicly traded companies.

Good Corporate Governance

According to the Good Corporate Governance Committee set up by the Stock Exchange of Thailand (SET), corporate governance is defined as “A set of structure and process of relationships between a company’s management, its board and its shareholders to enhance its competitiveness towards business prosperity and long-term shareholder value by taking into consideration the interests of other stakeholders.” Therefore, directors are intermediaries with a key role in developing good CG in the company. In the 2012 CG principles, there are five topics and more detailed descriptions on recommended practices, as follows:

1) Rights of Shareholders

Directors should protect the fundamental rights of shareholders and encourage them to actively participate in shareholders’ meeting without restrictions. Suggestions include giving a chance to propose agendas, allowing sufficient time for Q&A at the meeting, fully detailed minutes, and disclosure of resolutions on the company’s website, for example.

2) Equitable Treatment of Shareholders

Directors should treat shareholders without discrimination. Minority shareholders should be attended to and not be taken advantage of, which means that directors should prevent self-dealing transactions or insider trading. Best practices are, for example, to allow minority shareholders to nominate a director, make notices in Thai and English, make written measures to prevent abuse of internal information and disclose the interests of directors.

3) Role of Stakeholders

Directors should respect and cooperate with stakeholders (e.g., customers, employees, trade partners, creditors, shareholders, society, government, competitors, and auditors). It is recommended to set clear policies on dealing with each group of stakeholders, to have an open channel for submission of complaints or reports of illegal or unethical activities, protect the informant, and file CSR reports.

4) Disclosure and Transparency

Directors should ensure disclosure of financial and non-financial information accurately, completely and timely with transparency. Recommended practices are to set clear disclosure policies, disclose and explain compliance and non-compliance of company’s policies, disclose information on the company’s website, and have an investor relations unit.

5) Responsibilities of the Board

The Board should consist of independent and accountable directors. Good practices are to have a total of 5-12 Board members, diversified Board composition, separate Chairman and CEO, nomination and compensation committees, an active participation, dedication to Board meetings, and a competent company secretary.

By comparison, directors may realize that the five CG principles were created based on the standard legal duties, and they go beyond their goals to build investor confidence and sustainable growth of the company. Companies with good a CG rating have proven to perform well in the stock market. Compliance with legal duties is no doubt vital, but an ability to meet and adhere to CG principles is increasingly important, and directors should make that their mission.

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