Slides CG1-Đã G P

Corporate Governance
Dao Thanh Tung,

PhD, FBM
2023 Faculty of Business Management

Course Overview
• Why we study corporate governance?

• Relationship between CG and other subjects in business
management
• Course materials
• Grading and requirements
• Course objective
Why Corporate Governance?
Do Anh Dung
Chairman Tan Hoang Minh
Đinh La Thăng
Chairman PVN
Nguyen Duc Chung

Chairman
People’s Committee of Hanoi
Trinh Van Quyet
Chairman FLC
Why governance?, Why now?
Why study corporate governance
• Collapse of many giant companies in US and other part
of the world such as Worldcom, Enron, Lehman
Brothers, Vinashin,
• The Asian financial crisis and 2008 global crisis
• CG has become of great interest to both practitioners and
academics in the last decades
• Good CG encourages investor confidence, creates
competitive advantage and improves company
performance
• CG lies at the heart of organisational theory and
economic analysis
Relationship with other subject
Corporate governance
Strategic
Management
Management
Operation Management
Logistics and Supply Chain
Corporate Finance
Course textbook and materials
• Corporate Governance (2020),
2nd Edition, Oxford University
Press.
• Edited Reading Materials
• Case studies provided
• Other materials as advised
Gradings and Requirements
• Requirements:
Students are required to attend all
class sessions and to participate
actively in discussions. For
participation to be meaningful,
students should read assigned
material before coming to class.
• Gradings:
- Attendance and Participation: 10%
- Discussion paper and presentation:
40%
- Final exam: 50%
Course objectives
At the conclusion of this course you will
• know about the characteristics and the importance of
corporations in modern economies;
• be familiar with working definitions of Corporate Governance;
its theories, models and mechanisms
• know how Corporate Governance relates to Corporate Finance;
• have a general understanding of the key role of Governance in
achieving (or not) company goals.
• Understand contemporary issues of CG in Vietnam
Course Content
Course consists of the following main topics:
1. Characteristics and importance of corporation

2. History and Emergence of Corporate Governance
3. Main Corporate Governance Theories
4. Corporate Governance Systems and Models
5. Approaches to Corporate Governance
6. Board of Directors
7. CEO Compensation
8. Contemporary Issues on Corporate Governance
What is Corporation?
Different Perspectives, Different Answers
• Lawyers: “A corporation is a legal business structure

that establishes the business as being a separate entity
from the owners”
• Economics: “A bundle of contracts”

Essential Characteristics of a Corporation According
to Prof. Robert Clark (HLS)
1. Limited liability for investors
– Individual members of a corporation are not liable in case of
bankruptcy
– Limited liability and limited control
2. Free transferability of investor interests
– Low control is only acceptable given the ease of transferability
(“vote with the feet”)
3. Legal personality
– Right of ownership, but different consequences for unlawful
behavior
– Endless life given existence of capital
4. Centralized Management
– Managers (and not owners) decide on day-to-day operations
Corporation Forms in Vietnam
• According to Corporate Law (2005), there are 4 types of
corporations
Private company
Limited liability company
Joint stock company
Partnership
Comparison of Private and Public Joint Stock
Companies
Introductory lecture
Consider the following pairs:

(a) (b)
Patient ↔ Doctor
Client ↔ Lawyer
Citizen ↔ Government
Student ↔ Professor
Shareholder ↔ Board of Directors
What do they have in common?
Introductory lecture
Consider the following pairs:

(a) (b)
Shareholder ↔ Board of Directors
Discussion
How to solve the problems?
- Rules and regulations
- Compensation
- Disclosure and transparency
- Oversight or monitoring from third party: regulators

and policy makers, independent auditors, financial
institutions, banks
“Why Governance?, Why now?”
• International deregulation of financial markets

• Increasing scale and activity of corporations
• Growth of investment institutions
• Effective monitoring necessary for security of
investments
• Recognition that governance matters for accountability,
performance and attracting capital.
• A general trend in society towards openness,
transparency and disclosure.
Emergence of Corporate governance
• CG is not new concept.
• Since the early 1990s, technological developmenet and
market expansion have increased the scale and
complexity of enterprise
• Forcing business firm to seek more effective form of
economic organisation
• Traditional firms that entirely owned by a single
entrepreneur or family owner are insufficient for need of
increasing capital
• Emergence of limited liability company 🡪 separation of
ownership from control.
• The owners do not manage but delegate their right to
managers
Emergence of CG
• Adam Smith (1776):
“The director of such joint-stock companies, however,

being the managers rather of other people’s money than
of their own, it can not well be expected that they should
watch over it with the same anxious vigilance with which
the partners in a private copartnery frequently watch
over their own” (p.700)
Emergence of CG
• There is a concern:
How the suppliers of finance ensure that capital being

used in their best interest?
• The aim of CG is to ensure that managers of delegated

finance work in the best interest of shareholders
Corporate Governance System
Definitions of CG
• Most popular definition is given by Cadbury Report (1992) and
OECD (1999)
“CG is a system by which companies are directed and controlled”
• Narrow CG definition:
“CG deals with the ways in which suppliers of finance to corporation
assure themselves of getting a return on their investment”
(Shleifer and Vishny, 1997)
• Broader CG definition:
“CG involves the relationship among various participants in
determining the direction and performance of corporation. They
include not only shareholders but also long term employees,
suppliers, customers and others who make specialised investment
and those who direct and manage its business (BoD and
managers)” (Monks and Minow, 1996)
Berle and Means Model of Ownership and
Control
Mandatory and voluntary governing
bodies
CG relationships
Banks
Shareholders Creditors
Financial
governance
Work
Customers Management
Management Employees
Governance
Contractual
governance
Competitors Suppliers
Problems when there is a separation between
ownership and management
1. Shield actual information or provide fault information

to shareholders. Eg: Enron, WorldCom, Lehman
Brothers and BBT.
2. Management uses company’s resources for their
personal interest other than shareholders’ interest. Eg:
high salary paid to management despite poor company
performance.
3. Management may have wrongdoing that shareholder
and community do not expect. Eg. Toyota management
do not inform customers about the safety fault
🡪 Corporate governance emerges to ensure that
managers of delegated finance work in the best interest
of shareholders
Governance vs. Management
Distinguish between Mgmt. and CG
• Business management • Corporate governance
concerns with daily concerns with the
operations of the company relationship between
shareholders and
and is conducted by
management teams and is
executive managers (CEO or conducted by Board of
executive managers) directors
• Main duties of managers: • Main duties of BoD: set a

Planning, Organising, long term plan for the
Coordinating to run the company, make strategic
company decision, oversee and
support the activities of
executive management to
meet the expectation of
shareholders
Main themes in CG
• Information disclosure and transparency
• Dispute of interest between shareholders and
management
• Dispute of interest between large shareholders and small
shareholders
• Roles of independent directors and auditors
• Compensation
• Private property rights
• Law enforcement
The Legal and Regulatory Framework
• In International Standard:
– OECD Principles of Corporate Governance
• In Vietnam:
– Law on Enterprise (2014)
– Decree 71/2017 on Corporate Governance for listed
Companies in Vietnam
– Company Charter
31
Roles of corporate governance
• McKinsey & Company and WB researches found that
there is a strong relationship between good CG policies
and practices and high stock price and good company
performance.
• In contrast, weak CG results in negative company

performance, even collapse of the whole company such
as Enron and WorldCom
• Lower the cost of capital and raise the value of assets
• Attract investment capital
• Minimise corruption and self interest behaviour

Case study
Main theories of CG
• Agency theory
• Stewardship theory
Agency theory
Agency theory is concerned with the “agency problem”
that exists when there is an agency relationship.
Agency Relationship:
Owners and Managers
Shareholders
(Principals)
• Firm owners
Managers
• Decision makers
(Agents)
• Risk bearing specialist (principal)

pays compensation to An Agency
Relationship
• A managerial decision-making
specialist (agent)
Agency Problem
• The agency problem occurs when:

the desires or goals of the principal and agent conflict
and it is difficult or expensive for the principal to verify
that the agent has behaved inappropriately
Agency problems (cont’)
• Difference in risk aversion
• Difference in retaining dividend: Management prefer

paying less proportion of dividend to shareholder while
shareholders expect high dividend
• Difference in vision: Shareholders expect management

to make a long term decision, whereas management
prefers making short term decision
Agency theory
• Assumption: Agents are self-interested, risk-adverse and rational actor
• Two problems could arise:
- Monitoring problem arises when principal can not verify if agent
behaved appropriately
- The problem of risk-sharing that arises when the principal and the
agent have different attitudes toward risks
• Solution:
- Information disclosure
- Good compensation and incentive schemes
- Separation between oversight and management function
- Enforcement mechanisms such as the managerial labour market to
mitigate the agency problem
Agency Theory Conflicts
• Principals may engage in monitoring behavior to assess

the activities and decisions of managers
• However, dispersed shareholding makes it difficult and
inefficient to monitor management’s behavior
• Boards of Directors have a fiduciary duty to
shareholders to monitor management
• However, Boards of Directors are often accused of being
lax in performing this function
Stewardship theory
Assumptions:
- Managers are good stewards of the company

- They are trustworthy and work diligently to attain high
corporate profits and shareholders’ returns
- Instead of focusing on “goal conflict”, stewardship
theory proposes that the principal and the steward can
cooperate with each other and achieve a “goal
alignment”
Stewardship theory
• Thus, stewardship theory focuses on developing mutual trust
and cooperation between principals and stewards
- First, trust and cooperation can be enhanced by having effective
information sharing mechanisms. Information systems are
primarily for the principal to share but not necessarily to
monitor - the stewards.
- Second, arrangements that foster understanding and
identification between principals and stewards will increase the
degree of trust between them 🡪 better firm performance.
- While agency theory focuses on the independence of different
groups, stewardship theory underlines understanding and
identification between them.
Two perspectives in corporate governance
Agency theory Stewardship theory
Assumptions of Agents are opportunistic and Trustworthy and work for the
human behavior self-serving benefit of the corporate
Primary role of Board members are to control Board members provide

supervisory board and monitor managers managers with resources,
expertise, network and power
General advices Arrangements that enhance Arrangements that enhance
principals’ control and trust and cooperation between
monitoring of agents have principals and stewards have
positive impacts on firm positive impacts on firm
performance performance
CEO-chairperson Negatively related to firm Positively related to firm
duality role performance performance
Large shareholders Positively related to firm Positively related to firm
performance (strong control and performance (provide expertise
monitoring) and resources)
Development of the Positively related to firm Negatively related to firm
job market for performance (easier to replace performance (lost expertise,
managers managers) experience, and bonding)
Limitations of the two theories
• Confined ourselves to one form of financial claim issued

by the firm, ie. equity
• Issuing debt can also generate agency costs, depending
on whether we examine the conflict of interest between
debt holders and the owner-manager
• External lenders may act as monitors of management.
• This potential monitoring role is reflected in the
difference between ‘insider’ and ‘outsider’ system of
corporate governance
Review Section
1. But what problem does this separation create? (Agency
problem)
2. In an efficient separation between shareholder and
managerial control, what roles do shareholders and top
managers play?
3. According to agency theory, how would you describe
basic human nature?
4. How does this basic human nature contribute to agency
cost?
Discussion
Agency Theory and Stewardship theory: CEO Governance

and Shareholder Returns
1. What mechanisms are used to control agency problem?

2. What is popular board structure for both theories?
3. Which theory is more supported in explaining the
situation?
Systems of Corporate Governance
• The dispersed or outsider CG system, which is

characterised by dispersed ownership and shareholder
protection and is prevalent in UK and US
• The concentrated or insider CG system, which is

characterised by concentrated ownership and weaker
shareholder protection, and is associated with European
systems of governance
Outsider CG System
Main Ideology:
1. CG is treated as the relationship among three primary participants:
shareholders, executive management and board of directors
2. This system sees shareholders as the ultimate owners so the prime
objective of companies is to maximise shareholders’ interests.
MANAGEMENT SHAREHOLDERS
BOARD OF
DIRECTORS
Outsider CG System
Characteristics:
• Shares are widely held and concentrated shareholding is
non-existent
• Managers are relatively free from control by the board
since the supervisory role of the board and the
management role of executive managers is often united.
• Outside disciplines such as capital market, market for
corporate control and hostile takeover play a leading role
in practicing CG and disciplining poor management.
• Banks only have a credit function and are prevented
from holding large blocks of shares
Outsider CG System
Characteristics (cont.):
• Antitrust laws are hostile to cross holding of shares between
large companies
• Relationships with workers are also market-based and
competitive
• Long-term job security is low
• Top managers tend to be externally appointed and managerial
compensation is much higher than average employees’
compensation scheme.
Requirements:
• A strict and reliable information disclosure and transparency
• Large capital market, efficiency of the stock market, well
developed financial institutions and highly growth managerial
labour market
Mechanisms
External Governance Mechanisms
• Market for Corporate Control
the purchase of a firm that is
underperforming relative to industry
rivals in order to improve its strategic
competitiveness
• Managerial Labour Market
• Financial Institutions
• Competition Market
• Stock Market
• Legal system
Insider CG System
Ideology:
• The insider CG system defines the firm as ‘a shared-fate
community of company people’.
• Objectives of companies not only enhance shareholders’
interest but also other stakeholders such as banks,
employees, suppliers and communities at large
Key players in insider CG system
Shareholders
Board of Stakeholder
Directors
Banks
Management
Insider CG System
Characteristics:
• Corporate ownership is concentrated among a stable
network of strategically oriented banks and other
industrial firms, rather than fragmented among
individuals investors
• Market for corporate control is largely non-existent
and hostile takeover is exception
• Stakeholders’ interests are presented on the
supervisory board, which exerts a strong monitoring
role on management
Insider CG System
Characteristics (cont.):
• Banks play a central role in providing financial services
and monitoring in times of financial distress
• Employee rights are recognised in exercising corporate
governance. Thus employees often a close connection
with company through long-term employment and
on-the-job training
• Top managements tend to be internally promoted and
managerial compensation is much closer to average
employees’ scheme so they are less finance-oriented and
focus more on long-term product strategy
Mechanisms
Internal Governance Mechanisms
Ownership Concentration
relative amounts of stock owned by
individual shareholders and institutional
investors
Board of Directors
individuals responsible for representing
the firm’s owners by monitoring
top-level managers’ strategic decisions
Strategic Investors
Internal Auditors
Mechanisms
Internal Governance Mechanisms
Executive Compensation
use of salary, bonuses, and long-term
incentives to align managers’ interests
with shareholders’ interests
Monitoring by top-level managers
they may obtain Board seats (not in
financial institutions)
they may elect Board representatives
Discussion Question 5
How do governance devices (shareholder concentration,

institutional shareholders, boards of directors and managerial
compensation, and market for corporate control) relate to
controlling the agency problem? Are there tradeoffs among these
devices?
Governance Mechanisms
Ownership • Large block shareholders (often

Concentration institutional owners) have a strong
incentive to monitor management
closely
• Their large stakes make it worth
their while to spend time, effort and
expense to monitor closely
• They may also obtain Board seats
which enhances their ability to
monitor effectively (although
financial institutions are legally
forbidden from directly holding
board seats)
Ownership Insiders
Concentration • The firm’s CEO and other top-level
managers
Board of Related Outsiders
Directors • Individuals not involved with
day-to-day operations, but who
have a relationship with the
company
Outsiders
• Individuals who are independent of
the firm’s day-to-day operations and
other relationships
Ownership Recommendations for more effective

Concentration Board Governance:
• Increase diversity of board
Board of members’ backgrounds
Directors • Strengthen internal management
and accounting control systems
• Establish formal processes for
evaluation of the board’s
performance
Ownership • Salary, bonuses, long term incentive

Concentration compensation
• Executive decisions are complex and
Board of non-routine
• Many factors intervene making it
Directors difficult to establish how managerial
decisions are directly responsible for
Executive outcomes
Compensation
Ownership • Stock ownership (long-term

incentive compensation) makes
Concentration managers more susceptible to market
changes which are partially beyond
Board of their control
Directors • Incentive systems do not guarantee
that managers make the “right”
Executive decisions, but do increase the
Compensation likelihood that managers will do the
things for which they are rewarded
Ownership • Firms face the risk of takeover

Concentration when they are operated inefficiently
• Many firms begin to operate more
Board of efficiently as a result of the “threat”
Directors of takeover, even though the actual
incidence of hostile takeovers is
Executive relatively small
• Changes in regulations have made
Compensation
hostile takeovers difficult
Market for • Acts as an important source of
discipline over managerial
Corporate Control incompetence and waste
Characteristics of insider CG system and outsider
CG system
Characteristics Outsider CG system Insider CG system
Financial system Capital market Banks
Corporate control Market based Insider-based
Mainstream ideology Shareholder value Social-oriented market
economy and job
security
Mechanism of corporate External takeovers Banks and Internal
control coalitions
Market for corporate control Developed Largely non-existent
Role of bank Prevented from holding Plays central role
large blocks of shares
Role of cross shareholding Very low High
Commitment of employee Rather short term Medium and long term
Lay off worker Have a free hand to lay Rarely lay off workers
off workers
Managerial Defense Tactics
• Designed to fend off the takeover attempt

• Increase the costs of making the acquisitions
• Causes incumbent management to become entrenched
while reducing the chances of introducing a new
management team
• May require asset restructuring
• Institutional investors oppose the use of defense tactics
Discussion Questions
1. What are the basic mechanisms that corporate

shareholders employ to exercise corporate governance?
2. How does the agency problem relate specifically to
diversification strategy? How does it relate to
managerial risk taking in general?
3. How do governance devices (shareholder concentration,
institutional shareholders, boards of directors and
managerial compensation, and market for corporate
control) relate to controlling the agency problem? Are
there tradeoffs among these devices?
Dao Thanh Tung

FBM

Anglo-US model of CG
• Anglo-US model is characterised by share ownership of
individual and institutional investors not affiliated with
the company (outside shareholders)
• Equity financing is a common method of raising capital
for companies in US and UK. US and UK are the largest
and third largest capital market in the world,
respectively.
• The US companies have dispersed ownership structure.
• Publicly listed companies are a pivotal feature in US
Key players in the Anglo-US model
• Players in US model include managers, directors,
shareholders, government agencies, stock exchanges, of
which three major players are managers, directors and
shareholders
MANAGEMENT SHAREHOLDERS
BOARD OF DIRECTORS
Composition of BoD in US model
(One tier board)
Corporate Structure
Stock
General Meeting
Corporate Structure Markets
General Meeting
appoints members of
governs confirms
BoardSupervisory
of Directors
Board
discipline dispose of
and control shares
CEO/President
appoints and
supervises reports to
Management
intervene
Board
Bầu ra and Shareholders
Inside in distress
manages
Outside Directors
Corporation
sở hữu
Banks
manages and monitors
pr provide loans to
Corporations
own
One tier model of CG
• The most important feature of the one-tier model of
governance is the combination of the monitoring and the
managing bodies of the corporation.
• Advantages:
Quick decision making process
• Disadvantage:
- Over power on CEO
Regulatory Framework in US model
• In the UK and US, a wide range of laws and regulatory

codes define relationship among management, directors
and shareholders
• In comparison with other capital market, the US has the
most comprehensive disclosure requirements and a
complex, well-regulated system for shareholder
communication
• Stock exchanges plays an important role in the US
model by establishing listing, disclosure and other
requirements.
Disclosure Requirement in US model
• The US has the most comprehensive disclosure

requirements, compared to other countries
• US companies are required to disclose a wide range of
information: corporate financial data (on quarterly
basis), changes in the company’s capital structure,
background information on each nominee to the BoD,
compensation paid to all executive officers, all
shareholders holding more than 5% of the company’s
total share capital
Apple là công ty công nghệ có mức lương cao thứ 2 với
113.319,21 USD.
Features of the Japanese enterprises system
1) Long-term management strategy
2) Japanese employment system: Lifetime employment, seniority
system (length-of-service-based promotion and wages),
enterprise unionism, and cooperative labour-management
relations, OJT (on the job training), QC circle
3) Japanese financial system: main bank system and mutual share
holdings
4) Long-term transaction relationship
In 1992, 76% of firms utilized the long-term transaction (more
than 80% of all the transactions). Then, USA indicated 37.5%.
5) Weak control of shareholders
The Japanese Model
• The Japanese model is characterised by a high level of
stock ownership by affiliated banks and a network of
affiliate companies (keiretsu).
• Equity financing is important for Japanese companies.
However, insiders and their affiliates are the major
shareholders in most Japanese companies.
• The interests of outside shareholders are marginal
• The percentage of foreign ownership of Japanese stocks
is small
Keiretsu in Japan
Keiretsu is a set of companies with interlocking business
relationships and shareholdings
Yasuda
Tokyo Tatemono Co.
(insurance)
(real estate)
Yasuda Trust and
Banking Co. OKI Electric
Industrial Co.
Fuji
SA PPORO
Breweries Bank Nissan Motor Co.
Hitachi Ltd.
Canon
NNK Steel Corp.
Key players in Japnese model
Shareholders Government
Management Banks
Board structure of Japanese companies
Two tier board structure
Corporate Structure
General Meeting
Corporate Structure govern Banks
General Meeting Banks
appoints members of confer
appoints members and chairman of
proxies on
Supervisory Board
Supervisory
appoint Shareholders
Board
appoints and
supervises reports torepresentatives
appoints Management
Board
and supervises reports to Employees
Management
manages
Board
Corporation
Keiretsu
manages
Corporation own
provide loans to
Shareholders in Listed Companies (End of March, %)
1990 1997 2002 2007
Total market price of listed companies
insider 62.8 56.3 41.4 33.9
banks and insurance 31.4 29.8 18.9 12.2
business corporations 29.5 25.6 21.8 20.7
outsider 34.9 42.5 57.9 64.0
foreigners 4.2 11.9 18.3 28.0
domestic institutional 10.2 11.2 19.9 17.9
Top listed companies 500 in market price
Financial and business 32.7 31.8 23.4 19.5
Oversea institutional 4.3 13.2 17.4 28.7
Domestic institutional - - 24.4 21.4
Bottom listed companies 500 in market price
Financial and business 37.9 37.8 31.3 25.9
Oversea institutional 2.6 3.8 2.1 6.9
Domestic institutional - - 8.7 12.2

Some characteristics of BoDs in Japan
• Most of the directors are promoted from within the

company.
• Large.
60% of large companies (capital greater than 500 billion
yen) in 1995 had board with more than 30 directors. It was
not uncommon to see a board with 40 directors or 50
directors.
• Many directors are also employees of the company. They
are typically the top managers of departments within the
company.
Advantages of the Japanese board of
directors system
• Since it is large, and most of the directors are promoted
from within 🡪 greater chances for employees to be
promoted to the position of a director 🡪 positive incentive
effects.
• Greater change of promotion also provides incentive for
employees to acquire skills that are specific to the
company. This also reduces turnover rate.
• Since most of the directors are also employees of the
company, this makes it possible to utilize information from
actual workplace.
Some problems of the Japanese board of
directors system
1. It is large. Therefore, it is difficult to make speedy

decision.
2. Many directors are also the top managers of
departments within the company. They tend to place a
priority to the interest of his/her department. Conflict
of interests among directors make difficult to come up
with a unified decision.
Some problems of the Japanese board of
directors system (Contd)
3. Many directors are also employees of the company
who report to the president. Thus, although the board if
directors is required to monitor the management
(president, etc), it is impossible to effectively monitor
the management.
4. Similarly, since the elected managers are also the
members of the board, this system is a
‘self-monitoring’ system, which reduces the
effectiveness of monitoring.
Recent trend
• The problems of the Japanese board of directors system

began to be recognized in the late 1990s, and some company
began to reform the system. In particular, several companies
began to introduce US style Chief-Officer System
• The first company to introduce such a system was Sony.
Sony introduced Chief-Officer system in 1997. At the same
time, it reduces the size of the board from 38 to 10, and
increased the number of outside directors.
Ownership structure
• The Japanese companies have concentrated ownership
structure
• Financial institutions and industrial companies are key
shareholder and develop strong relationships with
company
• Financial institutions (banks and insurance companies)
held approximately 43% of the Japanese equity market,
corporations held 25%.
• Foreigner currently own approximately three percent
Two tier board structure
• Shareholder meeting appoints the members of the
supervisory board. The supervisory board then appoints
the management board, whose principal function is to
manage the corporation.
Disclosure requirements in the Japanese model
• Disclosure requirement in Japan is not as strict as in US
• Corporations are required to disclose a wide range of
information in the annual report including: financial data
(required on a semi-annual basis), data on the corporation’s
capital structure, aggregate data on compensation
• Japan’s disclosure requirements differ from US
- Semi-annual disclosure of financial data vs. quarterly
disclosure in the US
- Aggregate disclosure of executive and board compensation
compared to individual data as in US
- Disclosure of company’s 10 largest shareholders,
compared with US requirement to disclose all
shareholders holding more than 5% of total share
German model of CG
• The German CG model is basically similar to Japanese
model in that board structure is two tier and banks play a
central role in CG
• However, the German CG model has some difference
compared to the Japanese model
- Unlike the situation in Japan where bank
representative are elected to a corporate board only in
times of financial distress, this representative is
constant in German corporation
- The size of supervisory board is regulated by law and
shareholders are not allowed to change
Board structure of Vietnam companies
Corporate Structure
reports to
General Meeting
Corporate Structure
General Meeting
appoints members of
Supervisory
appoints members and chairman of board
Supervisory Board
Board of monitors
directors
appoints and
supervises reports to
appoints Management
Board
and supervises reports to
Management
manages
monitors
Board
Corporation
manages Banks
Corporation
provide loans to
Whether there is a convergence of CG systems?
• Justification for the convergence:

- Globalisation of capital market
- Growing competition
- Increased power of US companies
• Justification againts the convergence:
- Differences in economic, legal and culture ground
- There is a substantial variation in governance structures
across different countries and across companies.
Transitions of Japanese-style management
1960s ・・・1980s 1990s 2000～
High-growth period Economic bubbles Lost decade New corporate governance
(Limitation of Japanese-style governance)

Japanese-style management
Mutual dependence among
companies
Change of capital market Reform of the
Crossholding of shares,
board
Era of Japanese-style corporate governance
main financing bank system,

Governance by management, bank and
company groups, etc. of directors

Indirect financing → Direct financing
Introduction of
economic agencies of state
Japanese-style employment
practice Shift to borderless economy US-style
Lifetime employment, Global economization Independent
seniority system, Trade and capital liberalization board
company union, etc. Big ban, IT revolution members
System
selectivity
Industrial policy Enhancement
Administrative control, of auditor's
public-private cooperation framework, Corporate scandal
authority
coordination in a industry group, etc. Executive
officers
Ambiguous corporate ・ Shareholder
accounting value
practice ・
Limited disclosure of corporate ・
information
Request for establishment of corporate governance
with emphasis on shareholders
Fund-raising of the companies has consistently depended on indirect financing centered on banks since the
World War II. It is now shifted to direct financing-oriented fund-raising after experiencing financial Big Bang
and collapse of bubble economy.
Change of company's fund raising

Corporate
Main financing
Loan
Individual
・Financial crisis
・Big Bang
stock
bank
・Deregulation of stock
Crossholdi market
ngs Credit
of shares
＜Indirect financing＞＜Direct financing＞
Transition of
shareholding ratio by
％ holder
70.0
Financial institutions
Individual shareholders
60.0
Increase of individual shareholders
50.0
The total number of individual
40.0 shareholders
Business corporations
30.0 increased 250, 000 to 33,770,000.
It has been increasing for 7 years in a row.
20.0
Foreign shareholders Annuity trust
10.0 Investment trust National stock exchange 2002
0.0
1950 55 60 65 70 75 80 85 90 95 2000 02
‘One size fits all’ model?
• Each country has its own history, culture and stage

of development
• However, most countries tend to have a
convergence on core aspects of CG: disclosure and
transparency, important contribution that
independent directors can make.
Models of CG
Each model has its own distinct competitive advantage.
The outsider model of corporate governance encourages
radical innovation and cost competition, whereas the
insider model of corporate governance facilitates
incremental innovation and quality competition.
Discussion
• How does corporate governance impact the internal

functions of corporation?
• Does the corporate governance model have an impact on
investment?
What are main characteristics
of US and Japan enterprise system
Comparative study of Canon, Toyota and Xrox, GM:
Key stakeholders
Board structures
Value and culture
Strategy
Dao Thanh Tung

FBM

Key Features of CG Models
FEATURES Anglo-US Japanese-Ge Vietnamese

Model rman Model Model
Key players
Share Ownership Pattern
Composition of Board
Regulatory Framework
Disclosure Requirements
Approaches to Corporate
Governance
a. Rules-based approach
b.Principle-based approach
Rules-based Approach to CG
• Rooted in the US: emphasis is placed on law

enforcement to control unethical behaviour
• Rules-based approach mandatory compliance with
regulations and rules via bureaucratic measures that
normally exists outside of firm in the form of legitimised
institutions.
• In doing so, opportunistic behaviour is controlled
through compliance to pre-established rules that seek to
anticipate future contingencies
Rules-based Approach to CG
a. Has to be more detailed

b. Prescribed set of requirements for companies to
follow
c. Leaves little room for interpretation
d. Can be implemented quickly
e. Encompasses all companies regardless of size
and sector
f. Flexibility reduced
5
Advantages
• With a focus on legal and regulatory controls to modify
the behaviour, the cost of compliance is lower than that
associated with monitoring and controlling in an
imperfect market and efficiency gains are expected to
the extent that relatively simple rules can be applied
universally
• Provide precise application for implementation, thus

curbing self-interested behaviour that suits the narrow
purposes of management but not shareholders
Disadvantages
• It can only address the circumstances known or
anticipated by the legislator at the time of implementation
• While the rules are in place, the opportunistic behaviour
may still prevail to the extent that the rules encourage
behaviour to bypass rules by any possible means
• Pre-designed rules may not cover all unintentional or
unforeseen consequences in the application of rules.
• In forcing firms to conform to the letter of the law, the
spirit or principles of the law may be undermined
• Overshadow other essential elements of good CG, thus
creates a culture of dependency
Principles-based Approach
• Principles-based approach relies on societal principles or

norms of acceptable conduct and establishment of trust
between corporate and affected stakeholders to guide
corporate behaviour
• Principles-based approach is oriented toward voluntary

compliance with principles, norms and traditions that are
commonly understood and respected in society such as
the suggested ‘best practice’
Principles-based Approach
a. Alternative to legislation
b. Less detailed
c. Soft law approach
d. Manifest in ‘voluntary codes’-UK and Singapore
e. Demonstrated through indices- competitive.
f. Avoidance of ‘tick-box’ compliance-flexibility.
g. Changes implemented quickly since not rule of law
9
Advantages
• Principles-based approach gives companies the
flexibility to tailor its CG practices to fit its specific
circumstance
• By requiring companies to simply disclose whether or
not they has complied with the ‘best practice’, the
principles based approach allows the capital markets
and ultimately the shareholders to judge the
effectiveness of the CG practice rather than rely on the
premise that government already has all regulations
and shareholders are free from playing their role
Disadvantages
• Allowing the market and investors to evaluate the

effectiveness of a company’s CG policies and practices
requires investors to have strong power, motivation and
enough information and expertise. In practice, many
investors are uninformed and lack of competence to
judge a company’s CG policies and practices.
• Without effective investor’s monitoring and controlling

of CG policies and practices, the principles-based
approach results in company complying with best
practice that suit the narrow purpose of management, not
shareholders
The ASX Principles of Good CG
A company should:
1. Lay solid foundations for management and oversight
Recognise and publish the respective roles and responsibilities of board and
management
2. Structure the board to add value
Have a board of an effective composition, size and commitment to adequately discharge
its responsibilities and duties
3. Promote ethical and responsible decision-making
Actively promote ethical and responsible decision-making
4. Safeguard integrity in financial reporting
Having a structure to independently verify and safeguard the integrity of the
company’s financial reporting
5. Make timely and balanced disclosure
Promote timely and balanced disclosure of all material matters concerning the company
6. Respect the rights of shareholders
Respect the rights of shareholders and facilitate the effective exercise of those rights
7. Recognise and manage risk
Establish a sound system of risk oversight and management and internal control
8. Encourage enhanced performance
Fairly review and actively encourage enhanced board and management effectiveness
9. Remunerate fairly and responsibly
Ensure that the level and composition of remuneration is sufficient and responsible and
that its relationship to corporate and individual performance is defined
10. Recognise the legitimate interests of stakeholders
Recognise legal and other obligations to all legitimate stakeholders
Corporate Governance Best Practices
• In 1999, the Organization for Economic Co-operation

and Development (OECD) adopted a set of principles of
corporate governance.
• This set of principles forms the basis of

setting corporate governance practices in developed
countries.
13
Corporate Governance Best Practices
The common goal of best governance practices is universal,

the specific set of codes of practice in each individual
countries should be modified to suit the local
circumstances, such as:
- Culture,
- Legal system, and
- Institutional setting of capital markets.
A code of practice is meaningful only if:

- it is consistent with the local economic system,
- accepted and adopted by corporations.
14
Key characteristics of rules-based and
principles-based approach
Rules based approach Principles-based approach
Complies with a specific set of Emphasizes ‘doing a right thing’ by
procedural requirements (e.g. a appropriate means
check list of ‘yes’ or ‘no’)
Follows the letter of the law Follows the spirit of the law
Represents the minimum of ethical Includes and extends the legal
standards domain to issues that law does not
address
Emphasises details and Emphasises communication
enforceability
Tends towards the quantitative, Tends towards the qualitative,
objective end of spectrum subjective end of the spectrum
Necessary condition for effective Sufficient condition for effective
governance governance
Requires constant monitoring Develops over a longer term
Focus on detection Focuses on prevention
More explicit, detailed, prescriptive More implicit, broad
Promotes blind obedience Promote alignment with values
Mandatory Discretionary
Easier to implement More difficult to implement
Rules and Principles of CG in Vietnam
• Vietnam adopts a combination of the principles-based

approach and rules-based approach to CG
• Rules and Principles of CG in Vietnam can be found in:
- The Corporate Law (2005)
- Model Charter (2007)
- The Code of CG Practice for the Listed Companies in
the Vietnam’s Stock Trading Centres (2012)
Rules and Principles of CG in Vietnam
•Shareholders meeting is the highest decision maker of and
equitised or listed companies
•Shareholders’ meeting votes for or against members of the Board
of Directors and Supervisory Board (in case the company has
more than 10 shareholders). The Board of Directors should not
have more than 11 members. There is no regulation on how many
outside shareholders should be on the Board.
•The Board of Directors appoints the CEO and other important
management positions of the company. The CEO can be a member of
the Board of Directors.
•If a company has more than 10 shareholders, it must have a
Supervisory Board. The Supervisory Board should have from 3 to
5 members of which at least 1 member is accountant or auditor.
Members of Board of Directors, executive managers, chief
accountant and their ‘related people’ must not be members of the
Supervisory Board. The Supervisory Board is not required to
have outside members.
(Source: Corporate Law, 2005)
.
Corporate Law (2005)

Limited Liability Company (“LLCs”)
Governance of LLCs with two or more members
Governance of one-member LLCs
Shareholding Companies (“SCs”)
Governance of Shareholding Companies
Required corporate documents
24
.
Model Charter
for Public Companies
2007
Model Charter for Public Companies
• Issued as Decision No. 15/2007/QD-BTC by the

Ministry of Finance
• Only applicable for listed companies on the stock
exchange or securities trading companies
• Sets out a standard regime of corporate governance.
• The charter of public companies must contain the
provisions of the Model Charter, but may also include
other provisions.
.
Code of Corporate Governance for

Public Companies (2012)
Listed Companies
▪ The Code was developed under the Corporate Law and

the Law on Securities
▪ Main principles of corporate governance under the Code

to ensure:
▪ an effective managerial structure;

▪ rights of shareholders’
▪ fair and impartial treatment as between shareholders’
▪ roles of persons with related interests;
▪ transparency during the company’s activities, and
▪ the BOM and the IC lead and manage the company effectively.
28
Listed Companies
▪ The Code provides some protective mechanisms
to protect the interest of minority shareholders,
including:
▪ Mandatory supervision
▪ Request for a GMS by minority shareholders
▪ Controlling conflicts of interest and related
party transaction
▪ Mandatory disclosure and transparency.
29
Listed Companies
▪ Stricter rules introduced by the Code:
▪ Art. 11 - …At least 1/3 of board members are non executive
directors
▪ Art. 19 - …Chairman of the board are not allowed to hold
CEO position (if not approved by the Shareholder meeting)
▪ Art. 32 - …BoD needs to establish Board Committee
(Nomination Committee, Audit Committee and Compensation
Committee). Those committees must be chaired by
independent director
Board of Directors
Dao Thanh Tung

FBM

Board Duties: The legal framework
• Duty of loyalty: means that director must demonstrate

undivided loyalty to the company’s shareholders.
• Duty of care: means that a director must exercise due

diligence in making decisions: discover as much
information as possible on the question at issue and be
able to show that, in reaching a decision, he has
considered all reasonable alternatives.
Board Functions
• Set long term strategy for company
• Manage risks
• Select, regularly evaluate, fix the compensation of, and
replace the senior executives
• Oversee the conduct of the corporation’s business to
evaluate whether the business is being properly managed
• Review and approve the corporation’s financial
objectives and major corporate plans and actions
• Review and approve major changes in, and
determinations of other questions of choice with respect
to the appropriate auditing and accounting principles and
practice
Board Composition
• Depending on the assumption on management, there are
different kinds of board composition.
• Agency theory claims that adequate monitoring and
controlling need to be established to protect shareholders
from management’s conflict of interest.
• Agency theory suggest that:
- Board should have a majority of independent directors
- Chairman of the board should not concurrently be the
company’s CEO.
Justification for separation
• Clarke (1998) says that shareholders and company’s
benefit will be protected by the board that can exercise
independent judgment
• NEDs are often considered not only to provide objective
supervision over company’s management but also bring
external business experience which can contribute to
success of a company.
• Empirical research findings have supported the view that
non executive director positively influence on firm
performance (Young, 2000; Bowman et. al., 2001)
Board Composition
• In contrast, stewardship theory claims that senior
managers are trustworthy and collaborative individuals.
• Their main objectives are identification and credibility
so they will not disadvantage shareholders for fear of
influencing their reputation and recognition
• Stewardship theory argues that:
- Board should have a significant proportion of inside
directors
- CEO should hold chairperson position to ensure more
effective decision making.
- The explanations is that the managers and CEO are more
knowledgeable and trustworthy about their companies
and practice.
Justification againts separation
• Slow decision making process
• Non-executive directors do not always add value to firm

performance.
- Limited time that non-executive directors spend on board
- Lack of detailed knowledge of the company’s business
- Too few non-executive directors on board are major obstacles
to the board to practice its role
- The quality of information they receive from management.
What does the board of directors actually do
in practice?
• Mace (2001) reveals that the role of the board is largely advisory
but not making decision and too much time is being spent on
compliance and not enough time to matter of strategy.
• The role of the board is circumscribed by excessive CEO power.
Important decisions are made beforehand by the CEO and
passed to the board to be certified. (Chiu and Lewis, 2006).
• Pound (1995) attributes the trivial role of the board of directors
to the lack of information and no direct contact with product
market. Without the sufficient information and evidence, the
board tends to agree with management and is reluctant to speak
up for being afraid of damaging reputation.
• Only when the company gets into the trouble, the board starts
actively practicing their role (Chiu and Lewis, 2006).
Board Qualities
• Board qualities include:
- Competence
- Attitude of directors
- Knowledge
- And practical experience that contributes to their
implementation of corporate governance
• Zahra (2000) assumes that senior managers with
experience only in former SOEs operating in planned
economy are unlikely to effectively manage a market
oriented organization.
• Therefore, senior managers in transition economies have
to upgrade their knowledge and capabilities to meet
increasing the demand of the market.
Board Committees
• Nomination Committee
• Remuneration Committee
• Audit Committee
• Corporate Governance Commitee
Nomination Committee
• Identifying individuals qualified to be board members,
• Recommending or selecting director nominees for the
next annual meeting of shareholders;
• Addressing director qualification standards, director
responsibilities, director access to management, director
compensation, director orientation and continuing
education, management succession and annual
performance evaluation.
• The nomination committee is normally composed of
independent directors.
CG Committee
• An increasing number of companies create a corporate
governance committee in recent years, particularly after
highly publicised case of misgovernance.
• Corporate governance committee performs the following
tasks:
- Develop and recommend to the board a set of corporate
governance principles applicable to the company
- Monitor the CG practices by the board
- Clarify the duties and responsibilities of the board
- Evaluate board structure and composition.
Audit Committee
• The main roles of the audit committee cover:
- Oversight of the financial reporting process, selection of
the independent auditors, pre-approval of all audit and
non-audit service
- Review of the results of work performed by the internal
and external auditors
- Guarantee of transparency and accuracy of disclosed
information
• The audit committee normally comprises a majority of
outside members and is chaired by independent,
non-executive directors.
Remuneration Committee
• The role of the remuneration committee is that of
separating those determining top management pay and
those receiving the pay.
• Without this separation, there exists an opportunity for
senior executives to reward themselves pay raises that
are not congruent with shareholders’ interest.
• The role of this committee includes determining top
management pay that are optimal to both company’s
shareholders and senior management
• Remuneration committee would normally have a
majority of independent non-executive directors.
Review Questions
• What are the basic duties of the board and individual
directors in the governance of a corporation
• What are the advantages and disadvantages of having
one person hold the offices of chairman of the board and
CEO?
• How does the board uses committees to further its work?
• What is the role of independence in directors carrying
out their duties?
• How does a CEO gain control over the board?
Discussion
• Read Agency and Stewardship Theory and Board
Composition and answer the following question:
1. Which theory is more suitable to influence on

performance?
Managerial Compensation
• Effective measures to reduce the conflict of interest between
absent shareholders and insightful management are to link
company performance to managerial compensation.
• Managerial compensation can be structured to motivate

management on the short term, medium term and long term
Objective Compensation Package
Short-term Base salary and cash bonus tied to

accounting earnings
Medium-term Stock Options
Long-term Pension Benifits

Accounting earning related
compensation scheme
• Managers are compensated by base salary plus bonuses
which is usually paid based on a specific year’s
accounting performance such as ROA, ROE, EPS.
• Advantage:
It encourages the management to work diligently toward
to the company’s interest since they have more direct
control of the outcome.
• Disadvantage:
It is strongly affected by policies made by managers that
affect company performance in the short-term at the
expense of the company’s benefit in the long term.
Stock Option
• Management is given right to buy a share of stock at a
pre-specified ‘exercise’ price for a pre-specified term
(Murphy, 1999).
• Advantages:
- Link management’s decision to company performance in
medium term
- Manager has right not to buy the shares if the share price falls
• Disadvantages:
- Excessive powerful manager can influence on the stock option
repricing
- The managers can time stock options to their advantage as
evidence show that stock options are granted just before the
announcement of good news and tend to be delayed until after
bad new announcement
Pension and other benefits
• To encourage the management in the long term,
management pay will be paid according to accumulated
3-5 year company performance
• Good pension package
• Other personal benefits
Most companies uses some or all the three salary

packages for the management
Google’s Managerial Compensation
• 03 CEO: Schmidt, Brin and Page and 04 Vice Presidents

• Schmidt: base salary: 01$/year + stock managerial
ownership: $31,5 billion + private jet…
• Brin: base salary: 400,000 USD/year
• Page: base salary: 360,000 USD/year
• 04 Vice Presidence: 250,000 USD/year
Discussion
• Read paper on Stock Option
Dao Thanh Tung

FBM

Corporate Governance and
Financial Crisis
Why corporate governance matters in the
financial crisis?
• Since the financial crisis started to unfold in US, there

are debates around the causes of the crisis. Many
attribute the causes to high leverage, falling real-estate
price, bad mortgages and market illiquidity...
• However, these are only manifestations of the

financial crisis. There is much deeper cause: Weak
Why corporate governance matters?
• A modern company is characterised by the separation

between management and ownership. The owners who
own finance do not manage but delegate their rights to
managers
• The main role is played by professional management

who needs to receive incentives to fulfil their delegated
tasks and when this fails is forced to do so through
market disciplines.
Corporate governance systems
Outsider-based system Insider-based system
- Shares are widely held - Shares are concentrated

among stable network of
- Managers are relatively free strategically oriented banks
from control by board and industrial firms
- Market for corporate control
is largely non-existent and
- Outside disciplines such as
hostile takeover is exception
capital market, market for
corporate control and hostile - Banks play a central role in
takeover play a leading role in providing financial services
practicing CG and monitoring in times of
financial distress.
- Managerial compensation is
- Managerial compensation is
much closer to average
much higher than average
employees’ scheme so they
employees’ compensation
are less finance-oriented and
scheme
5
Corporate governance and the financial
crisis
▪ In fact, the financial crisis highlights many
corporate governance failures:
- Imperfection of market economy
- Risk management systems have failed in many financial
services companies such as Lehman Brothers, Bear
Stearns.
- Board of directors failed to provide the checks and
balances that companies need in order to promote sound
business practices
- Weakness in board composition and competence have
been found in many companies
- Incentive systems have favoured risk taking decision
(stock option)
Imperfection of market economy
• Free markets often cause anomalies

• If not regulated, firms can operate with ‘self
interest’
• Speaking before Congress, Allan Greenspan, former
Federal Reserve Chairman admitted flaw in his
market ideology and acknowledge: “financial
institutions didn’t protect shareholders and investment
as well as he expected”
Severe weaknesses in risk management
• Despite the importance given to risk management by
regulators and CG principles, the financial crisis has
revealed severe shortcomings in internal management
and in the role of the board in overseeing risk
management systems at a number of banks
• The 11 major banks reviewed failed to anticipate fully
the severity and nature of recent market stress.
• The banks were able to identify the sources of
significant risk as early as mid 2006 when the housing
market in US started to correct and to take measures to
mitigate the risk.
• In a number of cases, boards were not aware of such
strategic decisions and had not put control mechanisms
in place to oversee their risk appetite – a board
responsibility
• Some boards has not put in place mechanisms to monitor
the implementation of strategic decisions such as
contingent liquidity risk- major causes of the collapses
of both Bear Stearns and Northern Rock
• Both have argued that the risk of liquidity was not
foreseen and that they had adequate capital
• Directors of Northern Rock acknowledged that they had
read the Bank’s Report which showed the liquidity risks
year no adequate emergency lending lines were put in
place.
• In a number of cases, board were not aware of such

strategic decisions and had not put control mechanisms
in place to oversee their risk appetite – a board
responsibility.
• This is a clear corporate governance weakness since the

board is responsible for reviewing and guiding corporate
strategy and risk policy and for ensuring that appropriate
systems for risk management are in place.
Poor Performance of BoDs
• In monitoring and supporting the executive management
• After crisis happened, many board of financial
enterprises were quite active with a number of CEO’s at
problem banks being replaced.
• Both Citybank and UBS replaced old board of directors
and introduce new directors with ‘finance and
investment expertise’
• UBS eliminated the chairman of the board that has been
criticised by shareholders
• Citybank also restructured the board, eliminating the
executive committee
• Shareholders have also become more active
Poor Performance of BoDs
• Why boards were not effective in the years before the
crisis?
• Pound (1995) attributes the trivial role of the board of
directors to the lack of information and no direct contact
with product market. Without the sufficient information
and evidence, the board tends to agree with management
and is reluctant to speak up for being afraid of damaging
reputation.
• Only when the company gets into the trouble, the board
starts actively practicing their role (Chiu and Lewis,
2006).
Weak Board Composition
• A number of financial institutions do not have a separate
risk committee but rather have made it a matter for audit
committee
• One Survey reports that audit committees feel that their
effectiveness may be negative impacted by overloaded
agendas and compliance activities
• The legal requirement in the US for audit committees to
have only independent directors distorts the information
content
Weak Board Competence
• Boards of the influenced banks was lack of banking and
financial experience
• At 8 US major financial institutions, two thirds of
directors had no banking experience
• Many of directors without a financial background sit on
audit and risk committees.
• However, banking experience is not enough: Northern
Rock had two board members with banking experience
while at Bear Stearns 7/13 directors had a banking
background
• At Lehman Brothers, 4/10 board members were over 75
years of age and only 1 had current financial sector
knowledge
Risk Management Failure
• One of the greatest shocks from the financial crisis has
been the widespread failure of risk management.
• In many cases risk was not managed on an enterprise basis

and not adjusted to corporate strategy.
• Boards were in a number of cases ignorant of the risks

facing the company.
• Risk managers were often separated from management and

not regarded as an essential part of implementing the
company’s strategy
• Reflecting the lack of adequate standards, disclosure of

foreseeable risks was often poor and mechanical and boiler
plate in nature (e.g. a list of umpteen possible risks).
Board Structure and Practices :
Key Findings
• Large number of cases to boards of financial companies
that were ineffective and certainly not capable of objective,
independent judgment .
• Boards in many cases appeared captured by management

so that they have been reactive rather than proactive.
• Emphasis on “independence” of board members has
reduced attention to competence, but these objectives
shouldn’t require a tradeoff.
• Nevertheless, length of board and CEO tenure raises
serious questions about effective independence.
• Very close relationships within the director community and
diffused interlocking directorships hampered independence
Misleading Rating Agencies
• Poor credit assessments by CRA have contributed both

to the unfolding of recent events
• CRAs assigned high ratings to complex structured
subprime debt based on inadequate historical data and in
some cases flawed models
• When investors discover this, they lost confidence in
rating and securitised products
Incentive Problem
• In most of the companies that failed in 2008 financial crisis
(Bear Stearn, City Group, Goldman Sachs), the majority of
compensation packages were provided in the form of stock
option.
• Problem with stock option is that executives rewarded with
stock option benefit when stock price rises but experience no
reduction in real wealth if stock price decline
• Stock option leads to excessive risk taking because it has no
penalty for the managers nor damage their wealth in the case
of collapse.
• This is the main reason why companies like Lehman
Brothers, Fannie Mae, Freddie Mac get involved in very risky
venture like mortgage securities
Incentive Problem
• Exit package call Golden Parachutes

• A golden parachutes is a clause in an executive’s
employment contract specifying that he/she will receive
a certain benefits in the event that employment relation
is terminated (due to acquisition, bankruptcy or simply
termination of the contract)
• Eg: Former CEO Hewlett Packard, Carly Fiorina
received a compensation of 21 million USD when he
was sacked in 2005.
Implications
• Boards have to be clear about the strategy and risk
appetite of the company and to respond in a timely
manner
• They also need to oversee risk management and
remuneration system compatible with their objectives
and risk appetite.
• Compensation need to align with shareholders’ benefits
Discussion
• Read paper on Stock Option
Corporate Social Responsibility
• The concept of social responsibility

- Proposes that a private firm has responsibilities to
society that extend beyond making a profit
- Obligation of firm decision makers to make decisions
& act in ways that recognize the interrelatedness of
business & society.
- It recognizes the existence of various stakeholders
and firms deal with them
Corporate Social Responsibility
• Two Views of “who” are firms responsible to?
(1) Traditional View (Milton Friedman)

“There is one and only one social responsibility of
business – to use its resources and engage in activities
designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open
and free competition without deception or fraud”
(M. Friedman, “The Social Responsibility of Business is

to Increase Profits”, New York Times, (September 13,
1970: pp. 126-127)
Two Views of “Who” Firms are
Responsible to
Traditional View (continued):
• By taking on the burden of social cost, the business

becomes less efficient:
- Prices go up to pay for increased costs; or
- Investment in new activities & research is postponed
• Firms are responsible to only their shareholders

- Purely economic reasoning
Responsible to
• (2) Modern View (Archie Carroll)
Social Responsibilities
Economic Legal Ethical Discretionary

(Must Do) (Have to Do) (Should Do) (Might Do)
Responsible to
(2) Modern View (Archie Carroll)
Business firms have four responsibilities

(a) Economic
• Produce goods & services of value to
society so that the firm may repay its
creditors and stockholders
(b) Legal
• Defined by governments in laws that
management is expected to obey
Responsible to
• Modern View (Continued)
(c) Ethical
• Follow generally held beliefs about how one
should act in society
• Work with employees & community in planning for
layoffs, though no laws requiring this
• Many people expect firms to do these things
(d) Discretionary
• Purely voluntary obligations a firm assumes
• Charitable contributions, training unemployed,
providing day-care centers, etc.
• Many people do not expect firms to do these things
Who are the Stakeholders of Firms?
• Stakeholders are individuals, groups or institutions who

have a stake in or are significantly influenced by an
organization’s decisions and actions
- Shareholders
- Governments
- Political & social action groups
- Employees
- Customers
- Communities
- Suppliers
- Trade Associations
Dao Thanh Tung

FBM

Corporate Governance in Vietnam
Content:
● Popular understanding of corporate governance in
Vietnam
● Current policies of CG in Vietnam
● Current status of CG in Vietnam
● Roadblocks to understanding and implementing
corporate governance in Vietnam.
● Vietnam CG Balance Scorecard
I. Popular Understanding of
Corporate Governance in Vietnam
I. Popular Understanding of CG
“Not so long ago, the concept of corporate governance in

Vietnam was unfamiliar to the general Vietnamese business
community. Many people confused the terms of ‘corporate
governance’ and ‘corporate management’ or thought that
both terms referred to either lower level decision making or
executive control of a company’s business operations.”
-Dr. Vu Thi Kim Lien,

Vice Chairwoman, State Securities Commission
4
“Although basic corporate governance principles are

prescribed by the Law on Enterprises, Vietnam is still
learning what governance is. The separation of
ownership and management…appears to be ignored by
Vietnamese entrepreneurs, who are often
shareholder-managers of companies”
-Bui Xuan Hai,

Dean of Commercial Law Faculty,
Ho Chi Minh City University of Law
5
“Less than 25% of large Vietnamese companies surveyed by

IFC-MPDF believed that business people in Vietnam
understand the basic concepts and principles of corporate
governance. There is still some confusion over the difference
between corporate governance and operational
management.”
-Vietnam Chamber of Commerce and Industry
6
Corporate governance means a system of rules to ensure that a

company is effectively operated and controlled in the interests of
shareholders and related persons. Rules of corporate governance
shall ensure:
• an effective managerial structure;
• the rights of shareholders;
• fair and impartial treatment as between shareholders;
• roles of persons with related interests;
• transparency during the company’s activities;
• that the board of management and the board of controllers lead and
manage the company effectively.
-Circular No. 121/2012/QD-BTC
Code on Corporate Governance for
7
Listed Companies
8
.
II. Current Policies of Corporate

Governance in Vietnam
Current Policies on CG in Vietnam
• Corporate Law (2014)

• Decree 71/2017/ND-CP on Code of CG for listed
companies
• Company Charter
.
III. Current Status of Corporate

II. Current Status of CG in Vietnam
A. Disparity between Policy and Actual Compliance
IFC Survey:
•Inclusion of provisions in the charter did not necessarily mean

that they provided guidance or conform to relevant existing
regulations.
B. Limited concept of shareholder rights

Shareholders at most companies are generally able to vote at
General Shareholder Meetings, BUT:
C. Unclear role and responsibilities of Board of

Management (“BOM”)
Companies have BOMs with an average size of six members,

as required, and almost all have written document on the
precise functions and responsibilities of the Board. BUT:
NOTE:
78% of firms believe BOMs are effective in monitoring the

actions and performance of senior management.
87% believe BOMs act in the interest of shareholders.
WHY?
In most cases, BOM = senior management = majority

shareholders
D. Insufficient role and responsibilities of

Supervisory Board (“SBs”)
Almost all firms which are required to have Supervisory Board

have such Board, BUT:
• A substantial number of SBs do not perform the role as
intended by the Corporate Law
• Tension between the BOM and SBs - if the SC does too much,
the BOM will remove them;
• Only in about 1/3 of firms have SCs found fault with some
aspect of the company’s operations.
E. Weak Internal Controls over Senior Management
Large majority of companies have written documentation on the

precise role and responsibilities of General Director, chief
accountant, and other senior executives, BUT:
F. Low Standards for Company Disclosure and

Transparency
G. Consensus on Need to Improve Corporate

Governance Practices in Vietnam
Examples of corporate governance failures

in Petro Vietnam:
PVN, a high-profile company was
accused of financial irregularities and
misreporting.
PVN is subject to stricter auditing

requirements than other companies. It
was stated that PVN's 2006 and 2007
financial accounts were incorrect.
Former Chairman of PVN – Dinh La
Thang was put into jail for his
wrongdoing.
PetroVietnam (Petroleum Technical Service

Company)
In 2004, it was reported that police have

recommended that five officials and two company
executives be prosecuted in a US$2.9 million
corruption scandal, in one of several graft cases.
The scam centered on the construction of
workers housing units at an oil rig off Vietnam’s
southern coast and the repair of another oil rig
from 2000-2002. The investigation report alleged
Nguyen Quang Thuong, director of state-owned
Petroleum Technical Service Co., along with staff
member Tran Quang, collaborated with five
others to create bogus documents to embezzle
the money.
Vinashin
International investors are growing concerned

about Vietnam’s state-owned shipbuilding
conglomerate Vinashin, which is on the verge of
bankruptcy. It has run up debts of about $4.4bn,
equivalent to almost 5% of gross national product
in 2009. At the end of last month Vinashin failed
to pay its first $60m installment to Crédit Suisse,
and the Vietnamese government announced an
interest-free loan to enable the company to pay
wages to its workforce.
Vinashin is in such deep trouble that it threatens
the country's economy. Moody's, and Standard &
Poor's, have already downgraded Vietnam's
overall credit rating.
. Roadblocks to Understanding
and Implementing Corporate
III. Roadblocks to Implementation
A. Mandatory CG Systems which are Inflexible

and Inefficient
- The Corporate Law provides for different mandatory internal

governance structures based on company type - e.g. for LLCs
v. SCs; multiple member LLC vs. single member LLCs; local
vs. FIE
• As a company changes form, it has to change its CG
system, which is costly and inflexible
• A company’s CG system is limited by its structure; e.g.
an LLC cannot set up a BOM even if it wanted to making
CG of even smaller companies complex and inefficient
B. Deficiencies in the Corporate Law
Whether through inadvertence or defective design, the

Corporate Law has certain deficiencies that seriously impact
CG:
- Supervisory Board is required only when a SC has more than
11 individual shareholders holding more than 50% of equity
capital
• A SC might have 500 individual shareholders and no
Supervisory Board would be required
-The BOM, whose actions are supervised by the Supervisor
Board, has the power to convene a meeting to call for the
dismissal of an Supervisory Board member
B. Concentration of Shareholdings in One Individual or
Group
- Private firms are largely run by family members as

controlling shareholders
• 2/3 of listed companies and a substantial number of
private companies are family-run
- Thus groups of “insides” may act together to control
management and the company, and minority shareholders
may not be able to enjoy the protection provided by law
- There is little incentive for majority shareholders to create
and maintain systems that lessen their control
E. Lack of Strong Judicial Mechanisms to Enforce

Shareholder Rights
Although rights may be provided in the law, formal dispute

resolution and enforcement will continue to be a problem for
shareholders and investors:
• The independence of the judiciary is not guaranteed;
• Vietnamese courts and arbitration centres have only
recently been legislated for and are still undeveloped in
many respects;
• Judges and arbitrators have little experience dealing with
complicated disputes; and
• The actual enforcement process is uncertain, expensive,
and time consuming.
D. Lack of Corporate Governance in State Owned

Enterprises
-SOEs still account for 38-39% of the GDP of Vietnam. However:

• SOE managers often lack relevant qualifications, e.g.
when officials with no business background are appointed
to managerial positions in SOEs
• There is lack of distinction between state administration
and company management
• SOEs are generally poorly governed; 7 out of 10 of the
most serious corruption cases from 1994 to 2004 are
related to SOEs
V. Implementing Corporate
Governance
Content
.
A. Suggested means for improving

corporate governance in Vietnam
B. Corporate governance initiatives in

Vietnam
C. Score card reports on corporate

governance practices of Vietnamese
companies
A. Suggestions for improving
corporate governance in Vietnam
1. Recommendations for small companies
2. Recommendations for large companies
3. SOE reform
Suggested means for improving CG in Vietnam
1. Suggestions for small companies

• A large majority of enterprises in Vietnam are small
enterprises.
• Their impetus for improved governance is for their
future growth, potential for foreign investment and
their sustainable development.
• A large majority of enterprises in Vietnam are small

enterprises.
- These are non-listed, private family owned
businesses where the shareholders and managers
are the same people.
• Their impetus for improved governance is for their
future growth, potential for foreign investment and
their sustainable development.
• Even small firms should have eyes on the four pillars

of corporate governance:
– Accountability
– Fairness
– Transparency
– Independence
Accountability
• In larger corporations this would mean:
– Management is accountable to the Board; and
– The Board is accountable to the shareholders.
• For smaller companies, accountability is external:
– Creditors
– Suppliers
– Regulations
– Potential investors
Fairness
• In larger corporations this would mean:
– Protection of shareholder rights;
– Treating all shareholders, including minority
shareholders, equally
– Providing effective redress for violation of rights
• For smaller companies, fairness means the same
thing:
– Similar problems could arise, i.e. the oppression
of minority shareholders
Transparency
• The same for large and small companies, i.e. to
ensure timely and accurate disclosure on all material
matters, including:
– Financial situation;
– Corporate performance;
– Ownership; and
– Corporate governance
Independence
• Procedures and structures are in place to minimize or
completely avoid conflicts of interest, e.g.
– Comply with approval requirements of the Law on
Enterprises for related party transactions
• Independent directors and advisers may not be
relevant to smaller companies
2. Large companies in Vietnam
• For large companies, apart from self-governance,

changes in legislation are necessary.
• Suggestions:
– Strengthening the overall legal regime in Vietnam -
the rule of law, enforcement of judicial decisions,
expertise of courts;
– Resolving regulatory deficiencies in the Law on
Enterprises, Model Code, Code of Corporate
Governance for Public Companies;
– Introduction of regulations that promote
performance-based remuneration schemes such
as stock options.
3. State-owned enterprises
• Larger business entities in Vietnam tend to be
state-owned enterprises.
– Therefore, efforts to improve governance
standards should have large focus on SOEs
• SOEs in Vietnam:
– Production and activities account for as much as
39% of GDP
– As private sector in Vietnam matures, more SOEs
will develop into large corporate entities
State-owned enterprises
• Encouraging the equitization of SOEs:
– Equitized SOEs, including those which are
destined for equitization, are introducing and
implementing more good corporate governance
practices
– Investors will be willing to buy shares of partially
equitizing SOEs at valuations acceptable to the
government only if there are improved corporate
governance standards that better protect the
interest of minority shareholders
– Equitization is a vehicle for advanced good
corporate governance standards within SOEs
State-owned enterprises
• Need to clarify and separate the regulatory and
ownership functions of the state:
– SOEs continue to enjoy preferences that private
companies do not enjoy;
– There is a need to clarify and delineate the roles
and responsibilities of government agencies that
are involved in the governance of SOEs
– Ideal - same laws and regulations relate to both
SOEs and non-state firms
C. Scorecard reports on
practices of Vietnamese
companies
- What is the current level of compliance?

C. Scorecard on CG in Vietnam
Scorecard report
• The IFC and the SSC conducted a survey of 100
largest companies listed on the Hanoi and Ho Chi
Minh Stock exchanges, which together represent
some 90% of the total market capitalization of these
exchanges.
B. Corporate Governance Initiatives in Vietnam
The results:
• Overall compliance – 42.5%
• Shareholder rights - compliance at 47%
– Strong area of compliance - rights to vote, to
receive dividends, equal treatment for share
repurchases
– Weak areas - appointment of external auditors
The results:
• Equal treatment of shareholders – 57.8%
– Strong area of compliance - requirement for
directors to be re-nominated and re-elected at
regular intervals
– Weak areas - facilitation of cross-border
shareholder voting
The results:
• Role of stakeholders - compliance at 22.7%
– This area is not well understood in Vietnam
• Disclosure and transparency - compliance at 39.4%
– Strong area of compliance - annual audit
undertaken by external auditors
– Weak compliance - identifying independent
directors, no disclosure on remuneration of board
and executives, no CG report
The results:
• Responsibilities of the board - compliance at 35.9%
– Strong area of compliance - existence of
guidance for the board on material transactions
that must be approved by the board
– Weak areas - lack of induction policy and
program to orient new board members,
company records on supervisory board do not
include consideration of and reporting of
supervisory board’s performance
• Conclusions
– Vietnam is in the early stages of a long journey
towards improving corporate governance
– Extensive training is needed for directors,
shareholders, regulators on laws, regulations and their
responsibilities
– Training is needed as well for the media

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Corporate Governance

Dao Thanh Tung,

2023 Faculty of Business Management

• Why we study corporate governance?

Nguyen Duc Chung

1. Characteristics and importance of corporation

• Lawyers: “A corporation is a legal business structure

• Economics: “A bundle of contracts”

Consider the following pairs:

Consider the following pairs:

- Rules and regulations

- Oversight or monitoring from third party: regulators

• International deregulation of financial markets

“The director of such joint-stock companies, however,

How the suppliers of finance ensure that capital being

• The aim of CG is to ensure that managers of delegated

1. Shield actual information or provide fault information

• Main duties of managers: • Main duties of BoD: set a

• In contrast, weak CG results in negative company

• Lower the cost of capital and raise the value of assets

• Attract investment capital

• Minimise corruption and self interest behaviour

• Risk bearing specialist (principal)

• The agency problem occurs when:

• Difference in risk aversion

• Difference in retaining dividend: Management prefer

• Difference in vision: Shareholders expect management

• Principals may engage in monitoring behavior to assess

- Managers are good stewards of the company

Primary role of Board members are to control Board members provide

• Confined ourselves to one form of financial claim issued

Agency Theory and Stewardship theory: CEO Governance

1. What mechanisms are used to control agency problem?

• The dispersed or outsider CG system, which is

• The concentrated or insider CG system, which is

How do governance devices (shareholder concentration,

Ownership • Large block shareholders (often

Ownership Recommendations for more effective

Ownership • Salary, bonuses, long term incentive

Ownership • Stock ownership (long-term

Ownership • Firms face the risk of takeover

Commitment of employee Rather short term Medium and long term

• Designed to fend off the takeover attempt

1. What are the basic mechanisms that corporate

Dao Thanh Tung

2023 Faculty of Business Management

• In the UK and US, a wide range of laws and regulatory

• The US has the most comprehensive disclosure

insider 62.8 56.3 41.4 33.9

banks and insurance 31.4 29.8 18.9 12.2

business corporations 29.5 25.6 21.8 20.7

outsider 34.9 42.5 57.9 64.0

foreigners 4.2 11.9 18.3 28.0

domestic institutional 10.2 11.2 19.9 17.9

Top listed companies 500 in market price

Financial and business 32.7 31.8 23.4 19.5

Oversea institutional 4.3 13.2 17.4 28.7

Domestic institutional - - 24.4 21.4

Bottom listed companies 500 in market price

Financial and business 37.9 37.8 31.3 25.9

Oversea institutional 2.6 3.8 2.1 6.9

Domestic institutional - - 8.7 12.2

• Most of the directors are promoted from within the