Corporate Governance Practices in Vietnam

1
Corporate Governance Practices in Vietnam

• Some initial survey findings

2
Rationale for the survey

• No empirical survey has yet been conducted into
  CG practices in Vietnams corporate sector
• Assess the extent to which current CG practices
  deviate from both domestic regulations and
  international norms
• Provide insights and recommendations to assist
  CIEM in drafting the Unified Enterprise Law and
  implementing regulations
• Serve as a baseline study to measure future
  progress on good CG practices in Vietnam

3
Does CG matter ?

• 58 of all firms said they had been directly and
  adversely affected by at least one incident
  stemming from bad CG practices, either inside
  their own firm or at another company

4
Design of the survey

• 70 companies interviewed over the last two
  months, using a detailed questionnaire
• Questions spanned most CG issues, including
• rights and treatment of shareholders
• role and responsibilities of the Board of
  Management
• role and responsibilities of the Inspection
  Committee
• role and responsibilities of senior executives
• conflicts of interest and related party
  transactions
• company disclosure and transparency
• We also collected views on the regulatory and
  business environment as they pertain to CG

5
Sample profile

• Average size of firm
• 1,140 employees
• total assets of VND195bn (US12.4m)
• revenues of VND367bn (US23.2m)
• Legal form
• SOEs 44
• Equitised former SOEs 36
• Joint stock companies 16
• Listed companies 4
• Location
• 56 in and around Hanoi
• 44 in and around HCM City

6
Sample profile (cont.)

• Main business sectors
• construction and const. materials 13
• mechanical engineering and processing 9
• food and food processing 7
• transport 6
• power and energy 4
• fuels 4
• wood-related and handicrafts 4
• chemicals and plastics 3
• electrical and electronics 3
• telecommunications 3
• no trading firms

7
Caveats and potential bias

• Firms willing to be interviewed tend to be those
  with better CG practices
• SOEs were more willing (or felt more obliged) to
  be interviewed than private firms
• Most interviews were with senior managers not
  with shareholders and other stakeholders
• Results relate more to formal procedures rather
  than informal practices
• Results are preliminary

8
CG is a new concept in Vietnam

• the Vietnamese equivalent term of CG (quan tri
  cong ty) is confusing and has yet to take hold as
  a popular term
• just 26 of all firms thought the basic concept
  and principles of CG are understood by most
  business people in Vietnam
• some confusion amongst company directors between
  governance and management
• the joint stock legal entity is still quite new
  in Vietnam and firms are young

9
Formal procedures exist in most companies

• more than 90 of firms had a company charter or
  equivalent that covers most important areas of CG
• over 94 of firms have documentation that sets
  out the role and responsibilities of the general
  director, chief accountant / finance, and other
  senior executives
• most firms hold AGMs, and shareholder rights are
  specified (eg. one share one vote, and each
  share entitled to an equal proportion of dividend
  payments)

10
Formal procedures exist in most companies...(cont)

• Most company charters address
• the role and responsibilities of the management
• company accounting and financial reporting
• terms of employment
• procedures for dividend payments
• holding shareholder meetings and rights of
  shareholders
• and the role and responsibilities of the BoM
• but this does not automatically mean these are
  followed in practice

11
Inspection committee role is relatively weak

• 36 of firms completely or partly agreed with the
  statement that the inspection committee has
  little real authority, and only exists on paper
  because it is required by law
• just more than 50 think Inspection Committees
  effectively carry out their responsibilities in
  practice

12
Related party transactions and potential
conflicts of interest

• Related party transactions and potential
  conflicts of interest are amongst the most
  serious CG problems
• related party transactions and conflicts of
  interest ranked 2nd among the most frequent CG
  malpractices occurring
• only 29 of all firms have written guidelines on
  controlling related party transactions
• of these, 89 of firms claimed to completely or
  partly follow these guidelines in practice
• 62 of SOEs agreed that kickbacks are common

13
SOEs between market and hierarchy

• SOEs are still very dependent on various
  government agencies
• nearly 40 of SOEs said that business targets are
  imposed from above
• 62 agreed that SOEs do not have real owners
• 66 said that ask and give is still common
• 87 rated personal relationships with government
  agencies important

14
SOEs between market and hierarchy (cont.)

• SOE directors complain they have many
  responsibilities, but not adequate authority to
  run their companies according to market
  principles
• 77 said they experienced situations where the
  law allowed them to do something, but they could
  not in practice (eg. laying off workers)
• one consequence 70 agreed that the common
  approach of SOEs is to make no loss, but only a
  little profit
• despite the strong weighting of SOEs in our
  sample, 64 of all firms did not think that SOEs
  adopt good CG practices

15
Equitised firms still SOE-like

• State still holds a fairly large equity stake in
  most of these firms
• General Directors of 12 firms (55 of all
  equitised firms where the State still has equity)
  were representing the governments remaining
  equity stake in the company
• 33 said that the fact that the state still holds
  an equity stake has a negative effect on the firm
• most equitised firms are still following the old
  (SOE) way of doing things

16
Joint stock companies small and nascent

• Joint stock firms are small, with average equity
  capital of VND27bn, and assets of VND157bn
• of 11 firms interviewed, 4 had fewer than 10
  shareholders
• there was one firm with only 1 real shareholder
  
• General Directors of 7 out of 11 firms
  interviewed (64) were also chairmen of the Board
• joint stock firms seemed more open and receptive,
  as they seem to have learnt something from the
  interviews

17
Perceptions on the importance of CG

• 95 rated corporate governance practices as being
  either important or very important for their
  company, relative to other tasks
• 88 of all firms agreed that improving CG
  practices should be a high priority of the
  government

18
Perceptions on the regulatory environment

• A majority of firms believe
• current laws and regulations do not provide
  adequate guidance on CG practices
• current laws and regulations on CG issues are not
  adequately enforced
• companies have insufficient information and
  knowledge on CG
• there is insufficient legal and regulatory
  guidance on CG

19
Perceptions of common CG malpractices

• inadequate role of the BoM and poor company
  disclosure
• related party transactions and conflicts of
  interest
• inadequate role of the IC
• inadequate role of senior management (but bias
  factor)
• unfair treatment of shareholders (but bias
  factor)

20
Respondents ideas on how to improve CG practices

• provide more training for senior managers and
  company directors on CG practices
• 51 of firms said it was hard to find good BoM
  members
• stricter enforcement of existing laws and
  regulations pertaining to CG
• reform the tax administration so that companies
  are more transparent about their financial
  situation
• introduce an award system for companies that
  display high CG standards
• government should set a good example in the way
  it manages the countrys economic and business
  affairs

21
What next ?

• In a second phase of the study, we intend to
  focus on some key issues arising from the survey,
  and drill down deeper
• using a much smaller sample
• interviewing multiple individuals in each firm
• trying to better understand informal CG practices
• Ultimate aim is to provide practical
  recommendations on how improved CG practices
  might be pursued in Vietnam

22

• Thank you