Corporate Governance Practices in Vietnam

Some initial survey findings

Rationale for the survey No empirical survey has yet been conducted into

CG practices in Vietnam’s 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

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

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

Sample profile Average size of firm:

1,140 employees total assets of VND195bn (US$12.4m) revenues of VND367bn (US$23.2m)

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

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]

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

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

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)

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

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

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”

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

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

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 government’s 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

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

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

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

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)

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 country’s economic and business affairs

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

Thank you