Corporate Governance in Lao PDR

OECD INVESTMENT POLICY REVIEWS: LAO PDR © OECD 2017 Chapter 4 Corporate governance in Lao PDR This chapter provides an overview corporate governance framework in the Lao People’s Democratic Republic (Lao PDR). It addresses ongoing reforms to the ownership and governance of state-owned enterprises and challenges in expanding the capital market. OECD INVESTMENT POLICY REVIEWS: LAO PDR © OECD 2017 133 4. CORPORATE GOVERNANCE IN LAO PDR Summary Corporate governance concerns the structure framing the relationships among a company’s executive management, board of directors, shareholders, and stakeholders. From the perspective of modernising legal and regulatory frameworks for investment, effective corporate governance critically affects individual firm behaviour as well as broader macroeconomic activity. For emerging market economies, improving corporate governance can reinforce property rights, reduce transaction costs, and lower the cost of capital, which together can improve investor confidence. The Asian financial crisis in 1997 acted as a significant catalyst for improving corporate governance frameworks in Asia with the aim of building well-functioning and stable financial markets. While the Lao authorities have made progress in recent years in the area of corporate governance, the overall legal and regulatory corporate governance framework remains challenging, with scattered inconsistencies and at times limited awareness by market participants. This section evaluates the current and evolving institutional framework for corporate governance in Lao PDR, using as a benchmark the G20/OECD Principles of Corporate Governance and the OECD Guidelines on Corporate Governance of State-owned Enterprises (Box 4.1).1 Developing a corporate governance framework Since 1986, Lao PDR has undertaken important reforms in its transition to a market economy. Under the New Economic Mechanism, reforms included liberalising domestic and foreign trade, privatising state-owned enterprises (SOEs), and devolving powers to regional and local governments. After 30 years of reforms, a number of challenges continue to face the development of a sound business environment: access to finance for firms remains challenging; the responsibilities of boards are not always clearly stated; financial disclosure remains weak; and financial reports are often not submitted in English or in a timely manner. To address some of these challenges, the Lao authorities have taken steps in recent years to establish the legal and regulatory framework for corporate governance (Table 4.1). The Law on Enterprises of 2013, which was passed as part of a legislative reform process in preparation for the ASEAN Economic Community in 2015, applies to all companies in Lao PDR and helps to establish a level playing field by subjecting SOEs to the same rules as private companies. 134 OECD INVESTMENT POLICY REVIEWS: LAO PDR © OECD 2017 4. CORPORATE GOVERNANCE IN LAO PDR Box 4.1. OECD principles and guidelines on corporate governance Good corporate governance is not an end in itself. It is a means to create market confidence and business integrity, which in turn is essential for companies that need access to equity capital for long term investment. Access to equity capital is particularly important for future oriented growth companies and to balance any increase in leveraging. The G20/OECD Principles of Corporate Governance (the Principles) therefore support investment as a powerful driver of growth. The Principles were originally developed by the OECD in 1999 and updated in 2004 and 2015. The latest review was carried out under the auspices of the OECD Corporate Governance Committee with all G20 countries invited to participate in the review on an equal footing with the OECD Member countries. The Principles provide guidance through recommendations and annotations across six chapters: i. Ensuring the basis for an effective corporate governance framework ii. The rights and equitable treatment of shareholders and key ownership functions iii. Institutional investors, stock markets and other intermediaries iv. The role of stakeholders in corporate governance v. Disclosure and transparency vi. The responsibilities of the board The Principles have a proven record as the international reference point and as an effective tool for implementation. They have been adopted as one of the Financial Stability Board’s (FSB) Key Standards for Sound Financial Systems serving FSB, G20 and OECD members. They have also been used by the World Bank Group in more than 60 country reviews worldwide. They serve as the basis for the Guidelines on corporate governance of banks issued by the Basel Committee on Banking Supervision, the OECD Guidelines on Insurer and Pension Fund Governance and as a reference for reform in individual countries. Complementing the Principles, the OECD Guidelines on Corporate Governance of State-Owned Enterprises are recommendations to governments on how to ensure that SOEs operate efficiently, transparently and with accountability. They are the internationally agreed standard for how governments should exercise the state ownership function to avoid the pitfalls of both passive ownership and excessive state intervention. They were first developed in 2005 and have been updated in 2015 to reflect a decade of implementation experience and to address new issues that have arisen concerning SOEs in the domestic and international context. OECD INVESTMENT POLICY REVIEWS: LAO PDR © OECD 2017 135 4. CORPORATE GOVERNANCE IN LAO PDR The Law on Enterprises stipulates that a limited company with assets more than LAK 50 billion (USD 6.25 million) must have a board of directors and an auditor. The voting for the selection or removal of a board director may be executed by either cumulative or straight voting, and proxy voting is allowed. Lao companies use a one-tier board system. Shareholders must be given notice of at least five working days before holding a shareholders meeting. External audit is carried out through auditors elected at the shareholders meeting. Table 4.1. Main laws and regulations relating to corporate governance in Lao PDR Name Effective Purpose Notes Law on Enterprises, No. September Replaced Law on Companies Law 46/NA, 26 December 2013 2014 Enterprises of 2005 Upgraded from Law on Securities, No. Decree on Securities March 2013 Securities Law 21/NA, 10 December 2012 and Securities Exchange of 2010 Law on Accounting, Replaced Law on No.47/NA, 26 December July 2014 Accounting Law Accounting of 2007 2013 Rules governing the Pursuant to Regulation Stock Listing Regulations of issuance of and trading in November on Stock Issuance, No. the Lao Securities equity and debts 2015 018/LSCO, 27 July Exchange (LSX) securities of listed 2015 companies The Law on Accounting of 2013, which became effective in July 2014, permits entities to use the International Financial Reporting System to prepare and maintain their financial records, subsequent to approval from the Ministry of Finance. Previously, private entities doing business in Lao PDR had to use Lao Accounting Standards. As for the institutional framework, the Lao Securities Commission Office (LSCO), which was established in 2009, oversees the Lao Securities Exchange and is governed by the Law on Securities of 2012 (Figure 4.1). LSCO has 48 staff members and reports to the 13 members of the Lao Securities Commission (LSC). LSC is chaired by the Deputy Prime Minister of Lao PDR and has two Vice Chairmen (the Governor of the Bank of Lao PDR and the Minister of Finance) as well as nine Commissioners from selected Ministries and National Committees. To complement and facilitate implementation of the Law on Securities, LSC has issued a number of decrees, decisions, manuals and guidelines. 136 OECD INVESTMENT POLICY REVIEWS: LAO PDR © OECD 2017 4. CORPORATE GOVERNANCE IN LAO PDR Figure 4.1. Financial Supervisory Structure in Lao PDR Government Ministry of Finance Bank of Lao PDR Lao Securities Commission (LSC) Lao Securities Commission Office (LSCO) Lao Securities Exchange (LSX) Securities intermediaries Auditing firms Law on Accounting Law on the Bank of Lao PDR Law on Securities Law on Auditing Decree on Commercial Banks LSC Regulations Insurance Law LSX Regulations Source: LSCO. As part of the effort to strengthen the corporate governance of listed firms, an updated Stock Listing Regulation was released by the Lao Securities Exchange in November 2015. As outlined in Section 4 Article 13, requirements for the initial listing of stock include disclosure of financial and non-financial elements. Financial elements relate to: i) operating history (three or more years needed since incorporation), ii) size of the company (capital of LAK 8 billion or approximately USD 1 million), iii) stock distribution (at least 100 minority shareholders and more than 10% of shares owned by minority shareholders), and iv) business performance (sales revenue of at least LAK 24 billion or approximately USD 3 million). Other requirements relate to the quality of corporate disclosure, corporate governance and other matters deemed “necessary for the promotion of the public interest and the protection of investors.” Even considering these reforms, some important gaps remain. In practice, financial and non-financial disclosure remains weak: company reports are commonly challenging to access online or in English; many of the skills required to implement and create a culture of good corporate governance, including accounting and auditing skills, are in high demand; and enforcement

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