Corporate Governance

Dao Thanh Tung

FBM

2021 Faculty of Business Management

 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
 I. Popular Understanding of CG

“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
 I. Popular Understanding of CG

“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
 I. Popular Understanding of CG

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
Listed Companies 

7
I. Popular Understanding of CG

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

Governance in Vietnam
 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.
 II. Current Status of CG in Vietnam

B. Limited concept of shareholder rights

Shareholders at most companies are generally able to vote at General Shareholder Meetings, BUT:
 II. Current Status of CG in Vietnam

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:
 II. Current Status of CG in Vietnam

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

 II. Current Status of CG in Vietnam

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.
 II. Current Status of CG in Vietnam

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:
 II. Current Status of CG in Vietnam

F. Low Standards for Company Disclosure and

Transparency
 II. Current Status of CG in Vietnam

G. Consensus on Need to Improve Corporate

Governance Practices in Vietnam
 II. Current Status of CG 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.
 II. Current Status of CG in Vietnam

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.
 II. Current Status of CG in Vietnam

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 Governance

in Vietnam
 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

 
 III. Roadblocks to Implementation

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

 
 III. Roadblocks to Implementation

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

 
 III. Roadblocks to Implementation

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.

 
 III. Roadblocks to Implementation

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.

 
 Suggested means for improving CG in Vietnam

1. Suggestions for small companies

• 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.
 Suggested means for improving CG in Vietnam

1. Suggestions for small companies

• Even small firms should have eyes on the four pillars of

corporate governance:
– Accountability
– Fairness
– Transparency
– Independence
 
 Suggested means for improving CG in Vietnam

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
 Suggested means for improving CG in Vietnam

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
 Suggested means for improving CG in Vietnam

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
 Suggested means for improving CG in Vietnam

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
 
 Suggested means for improving CG in Vietnam

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.
 Suggested means for improving CG in Vietnam

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
 
 Suggested means for improving CG in Vietnam

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
 Suggested means for improving CG in Vietnam

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
corporate governance
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

 
 B. Corporate Governance Initiatives in Vietnam

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

 
 B. Corporate Governance Initiatives in Vietnam

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
 B. Corporate Governance Initiatives in Vietnam

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

 
 B. Corporate Governance Initiatives in Vietnam

• 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