Legal regulations on internal corporate governance structure in public companies a comparative study of international regulations and recommendations for vietnam

UNIVERSITY OF ECONOMICS AND LAW FACULTY OF ECONOMIC LAW GRADUATION THESIS LEGAL REGULATIONS ON INTERNAL CORPORATE GOVERNANCE STRUCTURE IN PUBLIC COMPANIES – A COMPARATIVE STUDY OF INT

Rationale

Vietnam's integration into the global economy has prioritized the enhancement of its legal framework, particularly in public company governance, to facilitate the influx of social capital into business activities Since the first public share issuance in 2000, the number of public joint stock companies has surged, with over 1,900 companies now listed on the Vietnamese stock market Specifically, the Ho Chi Minh City Stock Exchange (HOSE) features 404 listed companies, while the Hanoi Stock Exchange (HNX) has 343, and the UPcom Stock Exchange includes 895 registered companies These public companies play a crucial role in the economy, serving as a significant source of goods for the stock market and a vital channel for medium and long-term capital mobilization, thereby fostering domestic economic growth.

The law on public company governance enhances stock market supply while improving the oversight of management activities within public companies This legal framework fosters a healthier market environment Numerous companies have faced delisting and transaction deregistration, particularly those under special monitoring by market regulators, highlighting the importance of effective governance in maintaining market integrity.

Nguyễn Anh Việt (2021) trong bài viết "Góp phần cơ cấu hệ thống tài chính theo hướng bền vững hơn" trên báo Quân đội Nhân dân nhấn mạnh tầm quan trọng của việc cải cách hệ thống tài chính để đạt được sự phát triển bền vững Ông đề xuất các giải pháp nhằm tối ưu hóa cấu trúc tài chính, từ đó nâng cao hiệu quả và khả năng chống chịu của nền kinh tế trước những biến động Việc này không chỉ góp phần vào sự ổn định tài chính mà còn thúc đẩy tăng trưởng kinh tế lâu dài.

After 25 years of operation, Vietnam's listed companies achieved an average compliance score of only 59% in the Corporate Governance Assessment Report of 2020 This indicates that the legal provisions governing public corporate governance may not be effectively aligned with the actual conditions of these companies Factors such as financial constraints, concerns about capital costs, and the potential dilution of shares contribute to the hesitation of enterprises in going public and listing on the HNX and HOSE Therefore, it is crucial to enhance and adapt the legal framework surrounding corporate governance for public companies Improving these laws is essential for building investor confidence, ensuring the sustainable development of the stock market, and fostering a healthy economy.

The public corporate governance system in Vietnam primarily relies on an internal governance structure characterized by a concentrated equity framework This context motivates my choice of topic for my graduation thesis: “Legal Regulations on Internal Corporate Governance Structure in Public Companies – A Comparative Study of International Regulations and Recommendations for Vietnam.” This thesis aims to explore the theoretical aspects of public corporate governance law and analyze the regulations governing internal corporate governance structures in Vietnamese public companies alongside those in other countries Additionally, it evaluates the current state of Vietnamese law, identifies its shortcomings, and proposes necessary improvements.

2 Phan Đức Hiếu (2023), Doanh nghiệp vẫn ngại thực hành quản trị tốt, Vietnam Economics Times,

, accessed on 3 March 2023

In his 2019 article, Đặng Đức Thành emphasizes the importance of sustainable capital mobilization for both the economy and individual enterprises He advocates for implementing comprehensive solutions informed by lessons learned from comparative international experiences This approach aims to enhance financial stability and growth within various sectors.

Status of the topic research

Corporate governance has been extensively explored in various scientific studies by both domestic and international researchers, highlighting its significance in the academic discourse Noteworthy contributions to this field include several key studies that provide valuable insights into the principles and practices of corporate governance.

(1) Lê Minh Toàn (2010), “Quản trị công ty đại chúng, niêm yết dành cho doanh nghiệp và nhà đầu tư”, National Political Publishing House

This article provides a comprehensive overview of corporate governance in Vietnam, examining current legal provisions and the actual implementation of governance regulations It identifies factors influencing compliance with corporate governance principles and offers recommendations to enhance the effectiveness of listed companies The authors analyze specific cases of corporate governance in notable Vietnamese firms, including FPT Technology Investment Development Joint Stock Company and Vinaconex Joint Stock Company However, the proposed recommendations are now outdated in relation to the current legal framework governing corporate governance in Vietnam.

(2) Hoàng Văn Hải (2016), “Đánh giá chất lượng quản trị công ty ở Việt Nam”, Vietnam National University Hanoi Press

This study examines corporate governance content, public company theories, and assesses governance quality using the Governance QualityScore standard from the United States, based on enterprise surveys The author proposes solutions to enhance this standard; however, its foundation in the U.S context poses challenges for compatibility with Vietnam's corporate landscape.

(3) Lê Vũ Nam, Châu Quốc An, Lê Diễm Châu, Lưu Minh Sang (2018),

“Pháp luật về quản trị công ty niêm yết trên thị trường chứng khoán Việt Nam”, Vietnam National University Ho Chi Minh City Press

This book covers regulations pertaining to the stock market, listed companies, and corporate governance, while also addressing challenges in implementing these regulations It incorporates recommendations based on the OECD Principles of Corporate Governance from 2004 and discusses the overlaps and difficulties encountered by enterprises in applying securities laws.

(4) H Kent Baker, Ronald Aderson (2010), “Corporate governance: A synthesis of theory research and practice”, John Wiley & Sons, Inc

This article explores the evolution of corporate governance, providing an overview of various governance systems across different countries It examines the correlation between public corporate governance and a company's business performance, highlighting the challenges that arise from the separation of ownership and management rights Additionally, it underscores the significance of agency theory and other frameworks in understanding corporate governance dynamics.

It can be said that this work has basically studied most aspects of corporate governance systematically

(5) Bob Tricker (2015), “Corporate Governance: principles, policies and practices”, Oxford University Press

This article examines the application of public corporate governance principles through various case studies The author assesses theoretical models of corporate governance from different countries and provides evaluations and predictions regarding its future Additionally, the work offers a comprehensive analysis of corporate governance practices within the context of economic globalization and the underlying theories that inform them.

(6) Mihaela Ungureanu (2012), “Models And Practices Of Corporate Governance Worldwide,” CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, Vol 4(3a), pages 625-635

This study examines the primary corporate governance models globally, focusing on the United States, German, and Japanese systems By evaluating the strengths and weaknesses of each model, the author aims to identify the most effective governance structure and its potential for adaptation across various economic systems The research highlights the distinct approaches to corporate governance in these countries, shaped by their unique socio-economic contexts.

Recent research has thoroughly examined the theoretical foundations, legal frameworks, and global models of corporate governance, as well as the factors influencing public company governance However, much of the domestic literature on corporate governance in Vietnam primarily focuses on outdated legal documents, indicating a significant gap in studies addressing current regulations My thesis, titled “Legal Regulations on Internal Corporate Governance Structure in Public Companies – A Comparative Study of International Regulations and Recommendations for Vietnam,” aims to serve as a valuable resource on contemporary corporate governance legislation and provide a basis for potential amendments and enhancements to existing regulations in Vietnam.

Aims, objects, and scopes of the research

Research aims

This thesis aims to elucidate the concepts of "public company," "corporate governance," and "law on corporate governance," while examining their significance from both economic and legal perspectives It further analyzes and critiques the shortcomings in the existing Vietnamese regulations concerning the internal governance structure of public companies By comparing Vietnam's corporate governance regulations with those of the UK, Germany, and Japan, the thesis offers recommendations to address these deficiencies and enhance the regulatory framework for corporate governance in Vietnamese public companies.

Research objects

This thesis examines the regulations governing the internal corporate governance structure of public companies in Vietnam, the UK, Germany, and Japan By establishing a theoretical framework, it analyzes, evaluates, and compares the governance regulations and practices of public companies in these countries with Vietnam's legal framework.

Research scopes

This thesis research explores the theoretical and practical foundations for enhancing corporate governance legislation for public companies in Vietnam, drawing comparisons with the UK, Germany, and Japan The UK exemplifies the Common Law tradition with its market-oriented governance model, while Germany represents the Civil Law tradition with an internal-based approach Japan, on the other hand, showcases a hybrid governance model, providing a diverse perspective on corporate governance practices across different legal systems.

Regarding the timeline: The thesis studies in the context of reform and improvement of the law on public company governance from 2010 to present.

Research methods

The thesis used the following main research methods:

The law analysis method is employed throughout all chapters to examine the legal and practical foundations of corporate governance models, while also assessing the current Vietnamese regulations in comparison to the laws of other countries.

- Document analysis and synthesis method is used to generalize several concepts, make statements and conclusions in the thesis

The comparative law method is employed to analyze and contrast the corporate governance models of various countries, including the UK, Germany, and Japan, with those of Vietnam This thesis specifically examines the regulatory frameworks governing public companies in these nations, highlighting the similarities and differences in corporate governance practices.

Scientific significance and application value of the topic

- The topic contributes to systematically clarifying several important concepts related to public company governance law and analyzing internal governance structures of public companies in the world

- The topic has assessed the current situation and found inadequacies in the Vietnamese legal regulations governing corporate governance for public companies

This thesis analyzes and compares international laws to offer valuable recommendations for enhancing the Vietnamese legal framework governing the internal governance structure of public companies.

The research findings serve as a valuable resource for studies on corporate governance laws, specifically focusing on the legal frameworks of Vietnam, the United Kingdom, Germany, and Japan.

Structure of the thesis

Besides the Introduction, the Conclusion, the Abbreviations, the References, the thesis is structured by 03 chapters with the following contents:

Chapter 1 Several basic concepts of corporate governance law for public companies and internal corporate governance structures in public companies

Chapter 2 Legal regulations on internal corporate governance structure in public companies of the United Kingdom, Germany, and Japan

Chapter 3 Assessment of the situation of Vietnamese law on internal governance structure in public companies and recommendations

SEVERAL BASIC CONCEPTS OF CORPORATE

Definition of “public company”

As economic development progresses, enterprises increasingly require external capital to expand their business scale, leading to a heightened focus on share capital mobilization This approach allows joint stock companies to diversify their shareholder base and enhance their public presence Consequently, these companies must adhere to stricter management standards to attract capital and maintain a robust stock market Public joint stock companies, or public companies, are distinct from private joint stock companies However, the definition of "public company" may vary across different regions and countries.

In the United States, a public company is defined as a corporation whose shares are traded publicly and owned by a large number of shareholders This contrasts with a private company, which is held by a small group of shareholders or family members and does not trade its shares on the stock exchange.

A "Public Joint Stock Company" refers to a type of enterprise classified as a joint stock company under the Law on Enterprises 2014 The term "public company" has been in use since the adoption of the Law on Securities 2006 With the enactment of the Law on Enterprises 2020, this classification continues to evolve.

“public company” has become the unified and official name Basically, these two names are for the same type of company

Châu Quốc An (2022) emphasizes the need for more flexible internal management regulations for public companies in Vietnam, as outlined in his PhD thesis at the University of Economics and Law In the US, most public companies are large-cap C-corporations listed on stock exchanges, and those with total assets exceeding $10 million and a shareholder base of 2,000 or more, or 500 accredited investors, must register their public offerings with the Securities and Exchange Commission, as mandated by Section 12 of the US Securities Act of 1933.

In the United Kingdom, a public limited company (PLC) must have a name that ends with “public limited company” or “p.l.c.” and possess a minimum charter capital of £50,000, with at least 25% paid in full at registration Public companies can list their shares on the Stock Exchange or offer them through the Alternative Investment Market (AIM), but such offerings are subject to strict regulations The Companies Act 2006 specifies that public share offerings are only valid when shares are available for sale to the general public, excluding situations where shares are limited to specific recipients or involve distinct interests, such as offerings to employees.

6 Zoeanna Mayhook (2019), “Privately-Held Companies: Legislation, Regulation, and Limited Dissemination of Financial Information”, DttP: Documents to the People - Winter 2019, 47(4), pp 28-33; James Chen (2022),

“Private Company: What It Is, Types, and Pros and Cons”, Investopedia,

, accessed on 11 March 2023; Library of Congress, “U.S Private Companies”, , accessed on 11 March 2023

An accredited investor is defined as an individual whose net worth, alone or with a spouse or partner, surpasses $1,000,000, excluding their primary residence Alternatively, an individual can qualify if they have earned an annual income of over $200,000 ($300,000 for joint income) in the past two years, with a reasonable expectation of maintaining or increasing that income in the current year For organizations, the requirement is a minimum capital of $5,000,000 or ownership by accredited investors, as outlined in §230.501(D) of the US Securities Act of 1933.

Under the UK Companies Act 2006, specifically Articles 58, 91, and 763, an offer to related interests is not considered a public offer Essentially, a public company is defined as one that issues shares to the public, which are held by a significant number of external investors.

Public companies are defined not only by their capital size, as seen in the US and UK, but also by criteria such as the offering of shares and the number of participating shareholders For instance, in Singapore and Hong Kong, a minimum of 50 shareholders is required for a company to be classified as public.

In Vietnam, the regulation of public companies was first established in Article 25.1 of the Law on Securities in 2006, with amendments in 2010 To qualify as a public company, a joint stock company must fulfill one of three criteria: (i) conduct a public offering of shares, (ii) have shares listed on the Stock Exchange, or (iii) possess shares held by at least one hundred non-professional investors, with a minimum charter capital of ten billion VND.

The regulation defining public companies in Vietnam shares similarities with those in the US and UK, focusing on capital size However, the Law on Securities 2006 has notable shortcomings, particularly regarding joint stock companies that make public offerings without requiring successful share sales, which undermines the true public status of these firms Additionally, the minimum charter capital requirement of ten billion VND is relatively low, contributing to the prevalence of small-scale public companies in Vietnam.

Recognizing these shortcomings, the Law on Securities 2006 has made important changes in defining public companies According to Article 32 of Law on

9 Article 756 of the UK Companies Act 2006

10 Châu Quốc An (2022), ibid, pp 35-36

According to the Law on Securities 2019, a public company is defined as a joint stock company that meets one of two criteria: it must have a charter capital of at least 30 billion VND with a minimum of 10% of voting shares held by at least 100 non-major shareholders, or it must have successfully conducted an initial public offering registered with the State Securities Commission (SSC) Importantly, companies that meet the conditions of Article 25.1 of the Law on Securities 2006 will continue to be recognized as public companies under Article 135.4 of the Law on Securities 2019, ensuring their shares are not delisted or unregistered without a decision from the General Meetings of Shareholders Consequently, many companies that have yet to conduct a successful public offering are still classified as public companies.

A public company is defined as an organization whose shares are traded on centralized stock exchanges, allowing for a wide distribution of ownership among a significant number of shareholders, with a substantial portion being small investors.

The concept of “corporate governance”

Corporate governance is a critical focus for enterprises, particularly in developed countries In Vietnam, the term "governance" is often conflated with "management," leading to a perspective that corporate governance for public companies encompasses both state governance—characterized by its authoritative and mandatory nature—and internal governance, which pertains to internal controls However, this interpretation is not universally accepted In discussions about the relationship between the state and enterprises, the term "state management" is typically employed Conversely, "governance" is increasingly recognized in the context of internal company relations, where it is defined as a vital function that must be carried out effectively.

In the context of organizational dynamics, members collaborate to achieve shared objectives (Nguyễn Văn Chọn, 2001) Business management refers to the oversight and administration of an enterprise's production and business activities, typically executed by the Board of Directors This definition contrasts with the concept of "corporate governance," which is further explored in this thesis.

Corporate governance, a term officially introduced in 1983 by Bob Tricker in his paper “Perspectives on Corporate Governance: Intellectual Influences in the Exercise of Corporate Governance,” has roots tracing back to the 1920s in the United States It seeks to clarify the distinction between ownership and management in modern public companies, particularly following the shift from in-kind ownership to share ownership, which led to the rise of professional managers over traditional family governance.

Since the 1997 Asian financial crisis, significant corporate scandals involving companies like WorldCom in the US, Vivendi in France, and Parmalat in Italy have brought the concept of "corporate governance" to the forefront of legal and economic research This term has evolved into a critical area of study focused on reforming management control and operational models for public companies In this context, "corporate governance" specifically refers to the governance practices applicable to public enterprises.

Corporate governance is a multifaceted concept that varies in definition across national and international contexts Sir Adrian Cadbury, known for his contributions to the United Kingdom Combined Code, emphasizes the importance of establishing clear governance frameworks to enhance corporate accountability and transparency.

12 Nguyễn Thanh Hội, Nguyễn Thăng (2001), Quản trị học, Statistical Publishing House, Hanoi, p 11

13 Bob Tricker (2015), Corporate Governance: principles, policies and practices, 3 rd edition, Oxford University Press, Published in USA, p 4

Corporate governance is defined as the system through which companies are directed and controlled, a definition widely recognized since the OECD Principles of Corporate Governance were established in 1999 The International Finance Corporation (IFC) similarly describes corporate governance as the structures and processes that guide company operations At the Global Corporate Governance Forum in 2003, Sir Adrian Cadbury emphasized that corporate governance balances economic and social objectives while aligning the interests of individuals, corporations, and society This framework promotes efficient resource use and accountability, highlighting the importance of legal reforms in public corporate governance to enhance the socio-economic role of companies within each country.

Building on the research of Sir Adrian Cadbury, the Organisation for Economic Co-operation and Development (OECD) defines corporate governance as the procedures and processes that direct and control an organization This framework outlines the distribution of rights and responsibilities among various participants, including the board, managers, and shareholders, emphasizing the importance of monitoring and controlling within corporate management.

15 Committee on the Financial Aspects of Corporate Governance (1992), The Financial Aspects of Governance

17 International Finance Corporation (2010), Corporate Governance, p 4 other stakeholders – and lays down the rules and procedures for decision-making” 18

The OECD has established a framework for setting, implementing, and monitoring corporate goals, while the World Bank defines corporate governance as a system encompassing legal elements, institutions, and management practices that enable companies to attract financial and human resources and operate efficiently This approach fosters long-term economic value for shareholders while considering the interests of stakeholders and society Key characteristics of effective corporate governance include transparency in financial and business information, safeguarding the rights of all shareholders, and ensuring that Board of Directors members maintain independence in decision-making, business plan approvals, executive recruitment, and management oversight.

The perspectives of the IFC, OECD, and WB have established a foundational theoretical framework for legislative activities globally Their influence significantly shapes legislative thinking and the development of legal frameworks for public companies, particularly in OECD member nations and countries benefiting from the legislative methodologies of the World Bank.

In Vietnam, corporate governance is understood through various scientific perspectives, primarily as a framework of mechanisms that govern and manage a company This framework delineates the distribution of powers and responsibilities among shareholders, the Board of Directors (BOD), and other stakeholders.

18 OECD (2007), Glossary of statistical terms: Corporate Governance,

, p 151, accessed on 9 March 2023

19 OECD (2015), G/20/OECD, Principles of Corporate Governance, OECD Publishing, p 9

21 Phạm Duy Nghĩa (2004), Chuyên khảo Luật kinh tế, Vietnam National University Hanoi Press, p 363

Director/Director and other relevant stakeholders such as employees, suppliers, etc 22 This is an approach similar to that of the OECD

Corporate governance, in its second perspective, refers to the organization of a company's power structures and the relationships between its governing bodies, primarily aimed at safeguarding the interests of key stakeholders, especially shareholders This view emphasizes the distribution of powers and responsibilities among governance entities However, it tends to overlook the crucial regulatory role played by the control market, which is bolstered by securities market regulators and independent external auditors Consequently, this definition is more limited compared to the broader frameworks established by organizations like the OECD, World Bank, and IFC.

The concept of "public corporate governance" was first officially introduced in Vietnam through Article 2 of the Regulations on corporate governance, applicable to companies listed on the Stock Exchange or a Securities Trading Center, as outlined in Decision No 12/2007/QD-BTC issued by the Ministry of Finance on March 13, 2007 This regulation defines corporate governance as a framework of rules designed to ensure that companies operate efficiently and are managed in the best interests of shareholders and stakeholders Following the issuance of Decision No 12/2007/QD-BTC, updates to these regulations have since occurred.

Circular No 121/2012/TT-BTC prescribing the corporate governance applicable to

22 Nguyễn Ngọc Bích (2004), Luật doanh nghiệp: Vốn và quản lý trong công ty cổ phần, Tre Publishing House,

Ngô Viễn Phú (2004) trong luận án tiến sĩ của mình tại Khoa Luật, Đại học Quốc gia Việt Nam đã thực hiện nghiên cứu so sánh về quản lý Công ty cổ phần theo pháp luật của Cộng hòa xã hội chủ nghĩa Việt Nam và Cộng hòa nhân dân Trung Hoa.

Hanoi, p 1 public companies (Circular No 121/2012/TT-BTC), the concept of corporate governance is no longer mentioned in legal documents in Vietnam

In summary, corporate governance refers to the creation and execution of a framework that encompasses mechanisms, rules, and structures aimed at efficiently managing and directing a company, ultimately safeguarding the interests of shareholders and stakeholders.

The concept of “corporate governance law” and “corporate governance model”

Corporate governance is essential for public companies as it establishes mechanisms to monitor and control management behavior, delineating the rights and responsibilities of shareholders, the General Meeting of Shareholders, the Board of Directors, and other stakeholders It aims to prevent self-dealing transactions that could harm the company and its stakeholders while ensuring that decision-making processes are transparent and regulated Additionally, corporate governance outlines the roles of independent auditors and market regulators in overseeing managerial conduct These governance frameworks are grounded in various legal provisions such as the Law on Enterprises and the Law on Securities, collectively referred to as corporate governance law Furthermore, governance is shaped by the company's charter, the Code of Corporate Governance, and other informal agreements and practices, known as soft law.

The regulatory framework for corporate governance encompasses various mechanisms, including legal regulations, market adjustments, and self-regulation through cultural norms and internal rules Corporate governance law establishes a structural foundation for companies to define their objectives and effectively monitor their achievement The stock market influences corporate executives' behavior through institutional mechanisms and market pressures, while the law fosters a conducive business environment that enhances corporate control Additionally, cultural practices and standards not only shape behavior but also inform the content and implementation of corporate governance law.

Corporate governance models vary based on the level of intervention in internal regulatory mechanisms by market institutions These models are designed to establish a framework of regulations and control mechanisms for public companies, reflecting essential features such as the focus of monitoring activities and the interests that need protection from executive decisions.

24 Per Lakvall (ed.) (2014), The Nordic Corporate Governance Model, SNS Forlag, p 15; Mihaela Ungureanu

In the article "Models and Practices of Corporate Governance Worldwide" (2012), published by the Centre for European Studies at Alexandru Ioan Cuza University of Iasi, the author discusses the essential structure of corporate governance systems It identifies three primary internal corporate governance models: the shareholder model, the stakeholder model, and a hybrid model that combines elements of both These models play a crucial role in shaping corporate governance practices globally.

The shareholder model, also known as the one-tier board model or Anglo-Saxon corporate governance system, primarily focuses on maximizing shareholder benefits and is prevalent in countries like the United States and the United Kingdom This governance structure emphasizes market regulation to oversee the actions of managers and executives, supported by legal frameworks that enhance market transparency and independent audits, thereby protecting small outside shareholders In this one-tier model, the Board of Directors (BOD) assumes both management and oversight roles, promoting independent members to supervise company activities The governance laws under this model are grounded in the principles of "loyalty and prudence," ensuring market freedom while fostering creativity and sound business practices among executives.

The stakeholder model, also known as the two-tier board model, emphasizes the interests of stakeholders within a corporate governance framework, primarily focusing on the internal governance structure This model, often referred to as the bank-based public corporate governance system or Continental European corporate governance model, highlights the significant roles of employees and creditor banks in the governance of public companies Countries such as France and Germany exemplify this approach to corporate governance.

The corporate governance structure can be categorized into distinct models, including a two-tier system where the Board of Directors (BOD) and Supervisory Board operate independently, primarily seen in stakeholder-oriented countries In this model, legislation plays a significant role in internal governance, facilitating participation from employees and creditor banks while addressing conflicts between large and small shareholders Unlike the shareholder model, it places less emphasis on market regulations and oversight Additionally, a hybrid model, exemplified by countries like China and Japan, merges market institutions with internal governance This model supports an active shareholder base and recognizes the influence of blockholders, while maintaining an independent advisor on the BOD However, it falls short in promoting employee supervision and the directional influence of creditor banks on management behavior Legal responsibilities for public company executives regarding environmental and societal impacts are less stringent compared to other stakeholder models, and regulations governing external market control are also more limited than in Anglo-Saxon contexts The hybrid model offers companies the flexibility to adapt their internal structures based on cost-benefit analyses over time.

Countries design public corporate governance models by aligning them with their unique cultural and legal influences Regardless of the specific model adopted, corporate governance law serves as a framework of legal regulations that governs a company's internal organization, facilitates market oversight, and regulates the actions of managers and executives This ensures effective operation of the company while safeguarding the interests of shareholders and other stakeholders.

The role of corporate governance law

Effective corporate governance is essential for minimizing a company's exposure to financial crises, enhancing ownership, and lowering transaction and capital costs, which in turn fosters capital market and stock market development Corporate governance laws are crucial for the sustainability and growth of companies and markets, influencing not only a company's survival but also broader economic growth and social stability Public companies serve as integral components of society, providing livelihoods for employees, safeguarding shareholders' investments, and supporting the overall economy Consequently, weaknesses in corporate governance can lead to significant economic disruptions, resulting in financial, economic, and social crises, as evidenced by historical events in major economies like the United States.

Countries like the UK, France, and Italy have faced crises stemming from inadequate corporate governance systems, prompting significant reforms in corporate governance laws This highlights the crucial role of legal frameworks in regulating corporate relationships effectively.

From an economic perspective, the good corporate governance law helps to improve the decision-making process and better explain the decisions of managers

26 Lương Đình Thi (2015), Pháp luật về quản trị công ty đại chúng ở Việt Nam, LL.M Thesis, Faculty of Law, Vietnam National University, Hanoi, p 21

Effective corporate governance enhances risk management, operational efficiency, and mitigates conflicts of interest within public companies, ultimately boosting their reputation and value It facilitates access to low-cost capital, reduces capital expenses, and strengthens competitiveness Legally, corporate governance frameworks address inherent internal conflicts, such as those between owners and executives, and among various stakeholders These laws ensure that executives act in the owners' interests, protect minority shareholders, and uphold stakeholder rights Strengthening these legal frameworks is crucial for the sustainable development of public companies and the stability of the stock market.

28 H.Kent Baker & Ronald Aderson (2010), Corporate governance: A synthesis of theory, research and practice, John Wiley & Sons, Inc, pp 105-119; Lawrence D Brown and Marcus L Caylor (2006), “Corporate

The relationship between governance and firm valuation is explored in the Journal of Accounting and Public Policy, highlighting key insights on how corporate governance influences corporate value and performance A study by Jackie Krafft et al (2013) presents new empirical findings from extensive international databases, demonstrating the convergence of governance practices and their impact on firm performance.

29 Stijn Claessens and Burcin Yurtoglu (2012), 10 focus Corporate and development - on update, IFC & Glocal Corporate Governance Forum, p 5; Paul A Gomper et al (2003), “Corporate governance and equity prices”,

Journal of Economic, 118(1), pp 107-155; Lucian Bebchuk and Alma Cohen (2005), “The cost of entrenched board”, Journal of Financial Economics, (78), pp 409-433; Leora F Klapper and Inessa Love (2004),

“Corporate Governance, Investor Protection, and Performance in Emerging Markets”, Journal of Corporate Finance, 10(5), pp 703

In Chapter 1, the author focuses on researching and clarifying some concepts of

“public company”, “corporate governance”, “corporate governance law” and

The article explores the concept of a "corporate governance model," identifying three primary models used globally while highlighting the significance of public company governance laws in both economic and legal contexts This foundation supports a detailed examination of the legal regulations governing the internal governance structures of public companies in the UK, Germany, and Japan in Chapter 2, followed by a comparative analysis with Vietnamese law in Chapter 3.

LEGAL REGULATIONS ON INTERNAL CORPORATE

Legal regulations on internal corporate governance structure in public

The US and the UK both follow a Common Law tradition and utilize a one-tier board model for corporate governance in public companies, known as the Anglo-Saxon model However, their regulatory approaches differ significantly; the US employs a rule-based model with strict compliance requirements for managers and executives, while the UK adopts a principle-based model that encourages a "comply or explain" method, allowing for greater discretion in governance practices These distinctions highlight the variations in legal regulations governing internal corporate structures in public companies between the two nations.

Basically, the UK's internal governance structure is still organized according to a one-tier model - a model aimed at maximizing shareholder value Accordingly, the

The General Meeting (GM) serves as the highest decision-making authority, while the Board of Directors (BOD) acts as the exclusive management body The GM convenes annually to address shareholder proposals, including the election of new BOD members and the approval of management decisions The BOD wields significant power, overseeing daily business operations, making strategic decisions, and representing the organization externally Additionally, the BOD is tasked with conducting regular meetings that involve all directors to ensure effective governance and accountability.

The UK Corporate Governance Code 2018, alongside the UK Company Act 2006, serves as a fundamental framework for corporate governance in the UK It aims to create value for shareholders while fostering a sustainable relationship between public companies and their stakeholders, grounded in respect and mutual benefit This Code outlines key corporate governance principles and best practices that delineate the responsibilities of the Board of Directors (BOD) and the guiding rules for these principles Central to the Code are values such as accountability, transparency, honesty, and prudent executive conduct, all of which contribute to the long-term success of the company and align shareholder interests with corporate social responsibility.

Public companies are required to report their adherence to the corporate governance Code, and if they fail to comply, they must provide a valid explanation Non-compliance without reasonable justification can damage a company's reputation and lead to its removal from the stock exchange In the UK, corporate governance legislation encourages self-regulation among businesses, with shareholders playing a crucial role in electing and overseeing the Board of Directors (BOD) and auditors The BOD holds collective responsibility for setting strategic goals, demonstrating leadership for operational efficiency, and reporting to shareholders Their conduct is influenced by legal provisions, corporate charters, governance principles, market regulations, and shareholder perspectives at general meetings Currently, the securities market regulator primarily ensures that investors receive necessary information.

In the UK, public companies are governed by a Board of Directors (BOD) that possesses the necessary expertise to drive business performance The BOD is accountable to shareholders and other stakeholders, and it is essential to have a director on the board who is appointed from the workforce or has relevant experience.

Under Article 172 of the UK Companies Act 2006, shareholders holding at least 20% of the votes have the right to oppose the Board of Directors (BOD) The UK Corporate Governance Code 2018 mandates a clear division of powers and responsibilities within the BOD to prevent any individual from unduly influencing company decisions Additionally, the BOD must consist of at least half non-executive members to ensure objectivity, reflecting the principles of the Anglo-Saxon governance system In the absence of an independent supervisory board, this requirement serves to enhance the self-monitoring and control mechanisms of the BOD Furthermore, the BOD is tasked with identifying each non-executive member deemed independent in the annual report, while the Code outlines specific circumstances that may compromise their independence.

(i) is or has been an employee of the company or group within the last five years;

A person is considered to have a significant business connection with the company if they have had a material relationship within the past three years, either directly or through roles such as partner, shareholder, director, or senior employee of an affiliated entity Additionally, if they receive compensation beyond their director's fee, are involved in share options or performance-related pay schemes, or are part of the company's pension plan, this further indicates their substantial ties to the company.

(iv) has close family ties with any of the company’s advisers, directors or senior employees;

32 Provision 5 of the UK Corporate Governance Code 2018

33 Provision 4 of the UK Corporate Governance Code 2018

34 Provision 5 of the UK Corporate Governance Code 2018

35 Provision 10 of the UK Corporate Governance Code 2018

(v) holds cross-directorships or has significant links with other directors in the BOD through involvement in other companies or bodies;

(vi) represents a significant shareholder; or

(vii) has served on the BOD for more than nine years from the date of their first appointment

The Board of Directors (BOD) must establish several key committees, including a nomination committee, audit committee, and remuneration committee, all composed of independent non-executive directors The nomination committee leads the appointment process, ensures orderly succession planning for both the board and senior management, and promotes a diverse talent pipeline Meanwhile, the audit committee oversees the BOD's business management through audit assessments and financial evaluations Additionally, the remuneration committee is tasked with overseeing pay structures and incentives for senior management and the broader workforce.

The "comply or explain" approach in UK corporate governance law alleviates the strictness of legal requirements, lowers enforcement costs, and promotes operational freedom for companies This method allows for easier adaptation to the specific needs of each organization while maintaining transparency principles As a result, public companies and the stock market in the UK have become more dynamic and flexible.

Legal regulations on internal corporate governance structure in public

Germany is one of the typical countries for the two-tier board model 40 The current German corporate governance law on the internal governance structure is

36 Provision 17, Provision 24, Provision 32 of the UK Corporate Governance Code 2018

37 Provision 17 of the UK Corporate Governance Code 2018

38 Provision 25 of the UK Corporate Governance Code 2018

39 Provision 33 of the UK Corporate Governance Code 2018

The governance of German public companies is primarily regulated by the German Stock Corporation Act (Aktiengesetz) of 1965 and the German Co-determination Act (Mitbestimmungsgesetz) of 1976 This framework establishes an internal governance structure that consists of three key components: the General Meeting (Hauptversammlung), the Supervisory Board (Aufsichtsrat), and the Management Board (Vorstand), which is analogous to the Board of Directors (BOD).

The General Meeting (GM) represents shareholder interests and holds the authority to decide on crucial matters through voting For significant issues, such as changes to the Supervisory Board, modifications to the company's charter, or alterations in capital, a 75% majority is required for approval Less critical matters can be decided with over 50% of votes in favor To enhance participation, German law permits shareholders to appoint representatives or banks to vote on their behalf The Supervisory Board, mandatory for joint stock companies with 2,000 or more employees, serves as the supervisory and leading body for the Management Board, which is appointed by the Chairman of the Supervisory Board.

41 Hanoi Law University (2018), Giáo trình luật thương mại tập I, The People’s Public Security Publishing House, p 113

42 Artile 119 of the German Stock Corporation Act 1965; National Assembly 's Economics Committee (2016),

Thể chế pháp luật kinh tế một số quốc gia trên thế giới, Finance Publishing House, p 271; Trần Quỳnh Anh

(2012), “Tìm hiểu pháp luật công ty của Cộng hoà Liên ban Đức”, European Studies Review, Vol 1(136), p

In the German corporate governance system, the Supervisory Board plays a crucial role in overseeing the Management Board, which is appointed and dismissed by the Supervisory Board itself This board represents various stakeholders, including shareholders, employees, and labor unions, as well as sometimes representing the parent company and other business partners The Supervisory Board requires the Management Board to provide regular reports on company activities and can also request extraordinary reports as needed Furthermore, the German Corporate Governance Code empowers the Supervisory Board to establish specialized committees, such as the Audit Committee, which is responsible for monitoring accounting practices, reviewing financial statements, and ensuring the independence of external auditors Additionally, the Supervisory Board has the authority to nominate independent auditors and determine their remuneration.

According to the German Co-determination Act of 1976, companies with fewer than 500 employees are not required to include employee representatives on their Supervisory Board For companies with 500 to 2,000 employees, one-third of the Supervisory Board must consist of employee representatives, while joint stock companies in the same employee range must have half of their board members as employee representatives The remaining board members are elected by the General Meeting from among the company owners Notably, the voting power of owner representatives is double that of employee representatives, and decisions are made by a majority vote.

In her 2018 article, Phan Thị Thanh Thuỷ discusses the importance of transparency in corporate governance within Vietnamese joint-stock companies The piece emphasizes the need for clear and accountable management practices to enhance trust and efficiency in the corporate sector You can access the full article on the Nghien cuu Lap phap Journal website.

45 Friedrich Fubler và Jurgen Simon (1992), ibid, pp 48-49

The German legal system exemplifies democratic and social principles by granting employees specific rights to participate in corporate governance, as highlighted by the decisive vote of the Chairman in the National Assembly's Economics Committee report (2016, p 272).

In a German public company, the Management Board is appointed by the Supervisory Council and is responsible for the company's daily operations It must regularly report its activities to the Supervisory Board and provide additional reports upon request The size of the Management Board can vary, consisting of one or more members, and to prevent conflicts of interest, German law prohibits Supervisory Board members from serving on the Management Board Acting as the company's representative body, the Management Board makes decisions, exercises the company's rights and obligations, and oversees business strategy and operations.

The Works Council (Betriebsrat) plays a crucial role in supporting company management by representing employees and facilitating dialogue with business owners to resolve conflicts Elected by the workforce, excluding senior officials like Management Board members and department heads, Works Council members maintain their professional roles while taking on additional responsibilities Their primary function is to engage with the Management Board on matters concerning employee employment and income, ensuring that employee interests are addressed in company decision-making.

Bài viết của Nguyễn Vinh Hưng và Nguyễn Hoàng Yến (2021) mang tiêu đề “Cơ cấu tổ chức của công ty cổ phần theo pháp luật Việt Nam và Cộng hoà Liên bang Đức - Dưới góc độ so sánh” được đăng trên Tạp chí Nghiên cứu Viện Kiểm sát, số 1 (47), trang 97 Nghiên cứu này so sánh cơ cấu tổ chức công ty cổ phần giữa hai quốc gia, làm nổi bật những điểm tương đồng và khác biệt trong quy định pháp luật, từ đó cung cấp cái nhìn sâu sắc về cách thức quản lý và vận hành của các công ty cổ phần trong bối cảnh pháp lý khác nhau.

48 Châu Quốc An (2022), ibid, Appendix 12

49 Châu Quốc An (2022), ibid, Appendix 12

The corporate governance legal framework in Germany primarily focuses on aligning the interests of stakeholders, particularly employees While this traditional governance structure is experiencing reforms to align more closely with the Anglo-Saxon model, it continues to emphasize its internal framework This model effectively fulfills its essential role, operates efficiently due to a high concentration of shares, fosters sustainable relationships with related parties, and supports a robust internal labor market.

Legal regulations on internal corporate governance structure in public

Japan's corporate governance model uniquely blends elements from both the German and American systems while incorporating its own cultural context Governed primarily by the Japanese Companies Act No 85 of 2005 (amended in 2014) and the Corporate Governance Code introduced in 2018, Japan employs a "comply or explain" approach similar to the UK Public companies are mandated to disclose reasons for any non-compliance with the Corporate Governance Code, which includes a recommendation for a minimum of two independent directors on the Board of Directors (BOD) Companies failing to meet this guideline must provide explanations in their annual reports and general meeting documents.

Japanese public companies utilize three internal governance models, with the first being the Board of Statutory Auditors (Kansayaku Board) model This structure encompasses a General Meeting (GM), a Board of Directors (BOD), and Directors at Incorporation (Shikkoyakuin), ensuring a comprehensive oversight mechanism.

50 Reinhard H Schmidt (2003), “Corporate Governance in Germany – An Economic Perspective”, CFS Working Paper, Center for Financial Studies, Goethe University Frankfurt, (36), pp 34 – 36

Under Article 2.(x) of the Japanese Companies Act No 85 of 2005, amended in 2014, the General Meeting (GM) serves as the highest decision-making body of a company, electing the Board of Directors (BOD) to establish business strategies, oversee directors, and ensure corporate social responsibility While the Act does not mandate an Executive Member-Director at incorporation, the BOD is responsible for electing directors, led by the Chief Executive Officer (CEO), who operate under the empowerment of BOD resolutions Additionally, statutory auditors (Kansayaku), elected by the GM, audit BOD activities and have investigative rights The Board of Statutory Auditors must consist of at least three members, including one full-time auditor, with at least half being outside auditors who cannot serve on the BOD or have familial ties to controlling shareholders.

The BOD model features three specialized supervisory committees: the Nominating Committee, the Audit Committee, and the Compensation Committee, each comprising three or more members, with a majority being independent outsiders These independent members must not be affiliated with the company's operations or related to its family members, nor hold any material interests beyond their remuneration Additionally, they cannot serve as the CEO of the company or its parent company, nor have a familial relationship with controlling shareholders, ensuring a robust governance structure.

52 Article 335.3 of the Japanese Companies Act No 85 of 2005 (amended in 2014)

53 Article 2.(xvi) of the Japanese Companies Act No 85 of 2005 (amended in 2014); Principle 4, Japan's Corporate Governance Code 2018

54 Article 2.(xii) of the Japanese Companies Act No 85 of 2005 (amended in 2014)

According to Article 2.(xv) of the Japanese Companies Act No 85 of 2005, as amended in 2014, and Principle 4 of Japan's Corporate Governance Code 2018, companies are permitted to appoint one or more members or external individuals to manage daily operations, referred to as Directors at Incorporation, or Shikkoyaku Unlike Shikkoyakuin, which are not legally required to have an executive director, these directors play a crucial role in overseeing the company's executives through various committees.

In 2014, the Japanese Companies Act No 85 of 2005 was revised to introduce a third model of corporate governance, which features a Board of Directors (BOD) with an Audit and Supervisory Committee This structure includes a General Meeting (GM), the BOD, and the Audit and Supervisory Committee, with the GM and BOD maintaining their traditional roles from previous models The Audit and Supervisory Committee, composed of three or more members—primarily independent directors—is elected by the GM for a two-year term, while other BOD members serve for one year This committee is tasked with auditing the BOD's execution of duties, preparing audit reports, proposing the election or dismissal of auditors, and voicing opinions on the relief and remuneration of BOD members However, the Audit and Supervisory Committee lacks authority over the selection or remuneration of management staff.

56 Article 2.(xi-2) of the Japanese Companies Act No 85 of 2005 (amended in 2014)

57 Article 399-2 (1).3 of the Japanese Companies Act No 85 of 2005 (amended in 2014)

58 Article 399-2.4 of the Japanese Companies Act No 85 of 2005 (amended in 2014)

From the concepts outlined in Chapter 1, the author continues to study the legal provisions on the internal corporate governance structure in public companies of the

Chapter 2 focuses on the corporate governance models of the UK, Germany, and Japan, highlighting their distinct approaches By examining the specific laws of these countries alongside Vietnam, the study provides valuable insights into the operational mechanisms and unique characteristics of each internal corporate governance model This comparative analysis serves as a crucial foundation for assessing the current state of Vietnamese law and formulating recommendations to enhance the legal framework governing public companies in Vietnam, which will be discussed in Chapter 3.

CHAPTER 3 ASSESSMENT OF THE SITUATION OF VIETNAMESE LAW ON INTERNAL GOVERNANCE STRUCTURE IN PUBLIC

Overview of Vietnamese legal regulations on internal corporate governance

On 28 July 2000, the first stock trading session of the Vietnamese stock market took place, and this is also the opening milestone for the development of public companies in Vietnam Following the development of the stock market, the law on corporate governance in Vietnam has also been gradually improved Until 2007, the term “corporate governance” was officially recognized as a legal term in Decision

The regulation No 12/2007/QĐ-BTC aligns with Sir Adrian Cadbury's definition of "corporate governance," specifically for public companies Since its introduction, numerous documents have been issued, amended, and replaced to align with global standards and address challenges in Vietnam's stock market development These legal regulations have established a comprehensive framework for public companies, enabling them to enhance internal operations and attract social capital for growth.

The Law on Enterprises 2020 recognizes both one-tier and two-tier board models, allowing Vietnamese public companies to select their preferred internal corporate governance structure Companies can choose between an internal governance model that includes an Inspection Committee, comprising the General Manager, Board of Management, Inspection Committee, and General Director/Director, or an alternative governance model that operates without an Inspection Committee.

In Vietnamese joint stock companies (JSCs), the Board of Management (BOM) plays a crucial role, comprising at least 20% independent members and supported by an Auditing Committee This structure ensures effective oversight and governance, aligning with the responsibilities typically expected of a BOM in such organizations.

59 Article 137.1 of the Law on Enterprises 2020 in many respects to that of the BOD of a company incorporated under the laws of, say, the UK or the US 60

The internal corporate governance model featuring an Inspection Committee is a variation of the two-tier governance system established in Germany and other European nations This governance structure comprises the General Meeting (GM), the Board of Management (BOM), the Inspection Committee, and the General Director/Director.

The General Meeting (GM) serves as the highest decision-making authority within the company, representing shareholder power and addressing key issues such as company direction, the election and dismissal of Board of Management (BOM) members, and amendments to the company charter The BOM is tasked with managing the company and holds full authority to make decisions on matters within its jurisdiction, typically comprised of blockholders due to the cumulative voting principle, which limits participation from small shareholders The BOM consists of three to eleven members, with terms not exceeding five years Additionally, the Inspection Committee is responsible for overseeing the BOM's activities and ensuring compliance in management operations, while the General Director or Director manages the company's daily operations.

In the article "Duties and Liabilities of the Board of Management," Nguyen Duc Tri (2009) discusses the essential responsibilities and legal obligations of management boards within organizations in Vietnam The piece highlights the importance of governance and accountability, emphasizing how board members must adhere to legal standards to mitigate risks and ensure effective management For further insights, the full article can be accessed at Vietnam Law Magazine's website.

61 Article 138.2 of the Law on Enterprises 2020

62 Article 153.1 of the Law on Enterprises 2020

According to Article 170 of the Law on Enterprises 2020, companies not under the authority of the Board of Management (BOM) are still supervised by the BOM, which appoints members or other individuals to oversee operations The internal corporate governance model without an Inspection Committee adopts the Anglo-Saxon one-tier structure, comprising a General Meeting (GM), BOM (with an Auditing Committee), and a General Director/Director While the roles of the GM, BOM, and General Director/Director are akin to those in the model with an Inspection Committee, the key distinction lies in the inclusion of the Auditing Committee under the BOM, which is responsible for supervising and organizing audits of the company's management and administration.

The Board of Management (BOM) must consist of at least 20% independent members, who are responsible for overseeing and controlling the company's management To qualify as an independent BOM member, candidates must meet specific criteria and are prohibited from holding positions such as Chairman, Director, General Director, Deputy Director, Deputy General Director, or Chief Accountant Furthermore, the Law on Enterprises 2020 restricts individuals from serving as independent BOM members for more than two consecutive terms.

Vietnam's corporate governance law is evolving to align with global practices and economic growth The acknowledgment of both one-tier and two-tier internal governance structures has significantly enhanced the appeal for both domestic and foreign investors, contributing to the vibrancy of companies and the stock market.

64 Article 162 of Law on Enterprises 2020

65 Hanoi Law University (2018), ibid, pp 212 – 213

66 Article 137.1.(b) of the Law on Enterprises 2020.

Assessing the situation of Vietnamese Law

Vietnamese corporate governance regulations, as outlined in Article 40 of the Law on Securities 2019, establish key principles that guide legislative direction These principles emphasize a reasonable and effective governance structure, the accountability of the Board of Management (BOM), the protection of shareholder rights, and the roles of investors and intermediaries in enhancing corporate governance Additionally, they mandate transparent and equitable information disclosure to all shareholders Based on these principles, the corporate governance law specifies objectives and requirements for managing company operations, leading to a governance system that incorporates both internal and external adjustment mechanisms This framework promotes business freedom and self-regulation within the stock market, although current regulations predominantly focus on internal governance mechanisms.

The Law on Enterprises 2020 provides businesses with the flexibility to select either a one-tier or two-tier internal governance structure, enhancing their ability to attract foreign investments from countries with diverse legal traditions This regulatory framework, along with Decree No 155/2020/ND-CP, which elaborates on certain provisions of the Law on Securities, creates a favorable environment for enterprises seeking to expand their investment opportunities.

67 Article 41 of the Law on Securities 2019

Decree No 155/2020/ND-CP and Circular No 116/TT-BTC provide comprehensive guidelines on corporate governance in public companies, detailing the division of power among company bodies, their operational mechanisms, and the responsibilities and conditions for membership The regulations emphasize the importance of conflict of interest management, requiring executives and auditors to disclose related interests, maintain transparency in remuneration, and hold executives accountable for management breaches Shareholder rights are also reinforced, with clear definitions of their entitlements, mechanisms for participation in general meetings, and the ability to sue company executives Additionally, shareholders can access information, nominate board members, and utilize technology for online participation and voting, ensuring the protection of their legitimate interests as outlined in the Law on Enterprises 2020.

The external adjustment mechanism supports non-managerial shareholders in overseeing management by enforcing stringent information disclosure and transparency requirements Public companies are mandated to conduct independent external audits of their annual financial statements and must invite a representative from the approved auditing firm to attend the annual General Meeting if the audit report reveals significant exceptions Additionally, the mechanism outlines the responsibilities and authority of the Securities Commission in managing and sanctioning compliance.

Vietnam's corporate governance law has made significant strides since the implementation of the Law on Securities 2019 and the Law on Enterprise 2020, addressing previous shortcomings and incorporating globally recognized regulations and practices Theoretically, Vietnamese corporate governance is moving closer to the standards of countries with advanced judicial systems However, practical application still faces challenges, particularly in optimizing enforcement costs for public companies and ensuring their autonomy in business management and administration.

Vietnam's corporate governance system primarily relies on an internal governance structure due to its highly concentrated ownership The hybrid model aims to integrate the strengths of two prominent global corporate governance frameworks However, this mechanical hybridization has led to a lack of uniformity, consistency, and compatibility in the internal governance structures of public companies under Vietnamese law.

3.2.2.1 Internal governance structure with the Inspection Committee

The internal corporate governance model in Vietnam, particularly with the role of the Inspection Committee, exhibits notable differences from the German model In Germany, the Management Board (Vorstand) combines both management and executive functions, making decisions on behalf of the company In contrast, Vietnam's Board of Management (BOM) and the General Director or Director operate as separate entities, collaboratively fulfilling management functions Furthermore, the Inspection Committee in Vietnamese public companies lacks the authority and effectiveness of the German Supervisory Board (Aufsichtsrat), highlighting significant regulatory differences in their operational mechanisms.

Vietnam's internal governance model, characterized by an Inspection Committee, represents a unique blend of Continental Europe's governance framework while also incorporating elements from the Anglo-Saxon model This hybrid approach mandates a specific percentage of independent members on the Board of Management (BOM) to enhance its self-regulatory function, as outlined in Articles 276.2 and 276.3 of Decree No 155/2020/ND.

Corporate governance regulations stipulate that unlisted public companies must have at least one-third of their Board of Management (BOM) members as non-executive, while listed public companies require a minimum of one-third non-executive and between one-fifth to one-third independent members However, this mechanical approach may hinder interoperability and restrict the authority of the Inspection Committee, which operates independently from the BOM and is responsible for overseeing its activities.

68 According to Article 155.2 of the Law on Enterprises 2020, unless otherwise prescribed by securities laws, an independent BOM member shall satisfy the following requirements:

To ensure compliance with company regulations, an individual must meet several criteria: they must not currently be employed by the company or its parent or subsidiary companies, nor have worked for them in the past three years Additionally, they should not receive a salary from the company, apart from standard allowances for Board of Management (BOM) members Furthermore, their immediate family members—spouse, biological and adoptive parents, biological and adopted children, and siblings—must not be blockholders or executives of the company or its subsidiaries The individual must also not hold 1% or more of the company’s voting shares, and they should not have served as a member of the BOM or the Inspection Committee within the last five years, unless they were designated for two consecutive terms.

According to Article 3.56 of Decree No 155/2020/ND-CP, non-executive members of the Board of Management (BOM) are defined as those who are not the Director, General Director, Deputy Director, Deputy General Director, chief accountant, or other executives as specified in the company's charter.

The Inspection Committee lacks the authority to appoint or dismiss members of the Board of Management (BOM) and Directors, limiting its effectiveness in preventing poor decisions within the company According to Article 170.8 of the Law on Enterprises 2020, the Committee can only notify the BOM in writing about any violations by its members, request the violator to cease misconduct, and urge remedial actions However, if the violator ignores these requests, the Committee has no power to mitigate potential damage Additionally, the Inspection Committee cannot convene an extraordinary General Meeting (GM) without BOM approval, even when there are signs of intentional delays in addressing issues It can only call a meeting if the BOM fails to do so, and any agenda must still receive BOM approval, restricting the Committee's role in safeguarding the company’s interests.

The shortcomings in the Inspection Committee's operational mechanism can be attributed to a failure to adequately consider its position While it is required to report to the Board of Management (BOM) as a subordinate unit, the Inspection Committee also holds the responsibility of monitoring the activities of both the BOM and the General Director/Director Upon request from a shareholder or a specific group of shareholders, the Inspection Committee is obligated to conduct inspections and report on the requested issues to both the BOM and the initiating shareholders, highlighting its critical role in corporate governance.

According to Article 140.1.(d) of the Law on Enterprises 2020 and Article 288.5 of Decree No 155/2020/ND-CP, the Inspection Committee currently lacks the necessary authority to effectively fulfill its supervisory duties.

The Law on Enterprises 2020 outlines the general responsibilities of the Inspection Committee, but it does not prohibit Inspectors from advising or consulting for companies within the same sector or those connected to their own This lack of restriction can complicate the enforcement of professional ethics, particularly in cases where an Inspector may misuse their position, resources, or insider knowledge Such circumstances can undermine the objectivity essential to the Inspector's role.

Recommendations

Empowering businesses to select their internal governance model is essential for fostering efficiency To address the shortcomings in the existing internal governance framework, it is crucial for the Law on Enterprises to enhance its mandatory provisions.

75 Article 155.2.(c) of the Law on Enterprises 2020

According to Article 4.18 of the 2019 Law on Securities, a blockholder is defined as a shareholder who owns at least 5% of an issuer's voting shares This definition plays a crucial role in shaping the internal governance structure of public companies, ensuring that it aligns with the specific requirements of different organizational structures and the prevailing market conditions.

3.3.1 Enhance the position, responsibility, role and real power of the Inspection Committee

First and foremost, the Law on Enterprises 2020 needs to review the Supervisory Board's position and authority in order to advance its supervisory role

Vietnamese law could benefit from adopting elements of the German internal governance model, particularly the role of the Supervisory Board, which functions independently as the primary governing body overseeing the Management Board This independence enables the Supervisory Board to effectively supervise the Board of Management (BOM) and the General Directors/Directors, thereby enhancing the overall governance and accountability within Vietnamese companies.

The Law on Enterprises 2020 needs amendments to enhance the role and authority of the Inspection Committee, positioning it as an extension of the General Manager rather than a subordinate entity to the Board of Management Furthermore, the regulation mandating the Inspection Committee to

The Law on Enterprises should be revised to allow the Inspection Committee to report its findings on the company's management and operations directly to shareholders, while also having the option to inform the Board of Management (BOM) This change would empower the Inspection Committee to instruct violators to cease their non-compliance and address any resulting issues Additionally, the requirement for the Head of the Inspection Committee to consult the BOM before finalizing and submitting the report to the General Meeting (GM) should be eliminated Inspired by the German Supervisory Board model, the 2020 Law on Enterprises should consider granting the Inspection Committee enhanced powers to strengthen its oversight capabilities.

The authority to temporarily suspend resolutions made by the Board of Management (BOM) and General Meeting (GM) is granted when such decisions violate legal statutes or the company's charter, resulting in damage to the company This applies specifically when the violations affect 35% or more of the total value of the company's assets or lead to a reduction in the enterprise's value by 35% or greater, particularly when a GM meeting cannot convene to address these infractions.

(ii) The right to temporarily suspend the status of a BOM member who violates the obligations of an executive before being dismissed by the

GM in case that person does not stop the violation and remedy the consequences after being requested by the Inspection Committee;

(iii) The right to request the BOM to explain the risk of contract performance is subject to the approval authority of the BOM;

The right to promptly call an extraordinary General Meeting arises when the Board of Management (BOM) has been informed by the Inspection Committee but deliberately postpones or neglects to implement preventive actions against executive misconduct, resulting in significant harm to the company.

(v) The right to approve the agenda and contents of the GM’s meeting falls under the convening authority of the Inspection Committee

The 2020 Law on Enterprises enhances the authority of the Inspection Committee, which in turn increases its responsibilities It is essential to supplement regulations that clearly outline the specific rights and obligations of Inspectors Additionally, the law should prohibit Inspectors from providing consulting services or acting as advisors for other companies within the same industry, including partners or associated companies, to establish a legal basis for prosecution in cases of violations.

Additionally, to guarantee the Inspection Committee's efficient operation and the consistency of the law, the principle of the Inspection Committee's decision-

According to Article 138.2(d) of the Law on Enterprises 2020, a large asset value corresponds to the transaction value approved by the General Manager The decision-making process should incorporate objective majority voting, with the Head of the Inspection Committee casting the deciding vote in the event of a tie Additionally, individuals with interests related to the voting content are prohibited from participating in the vote.

3.3.2 Abolish the requirement on the number of independent members in the Board of Management in the internal corporate governance model with the Inspection Committee

In the internal corporate governance model featuring an Inspection Committee, there is no need to strictly regulate the proportion of independent Board of Management (BOM) members, as the Inspection Committee effectively oversees BOM activities, rendering self-monitoring unnecessary While this oversight mechanism is beneficial, it should be viewed as a supplementary tool to enhance monitoring and prevent executive misconduct rather than a primary requirement The regulations regarding independent BOM members should be flexible and contextually aligned with Vietnam's unique corporate landscape, considering factors such as company size, ownership structure, and governance costs Many Vietnamese enterprises comply with the requirement for independent BOM members, yet often this independence is merely superficial, lacking substantial effectiveness This situation complicates management costs for these enterprises Some companies have opted to transition from a model with an Inspection Committee to one without, by converting non-shareholder Inspection Committee members into independent BOM members, but the effectiveness of this change remains uncertain.

78 Gregory Jackson (2010), Understand Corporate Governance in the United States – An Historical and Theorical Reassessment, Hans-Bockler-Stiftung, Dusseldorf, pp 29 – 31; Võ Hồng Đức, Phan Bùi Gia Thuỳ

In the 2013 study published in the Journal of Economics and Development, it was highlighted that the characteristics of the Board of Directors significantly influence a company's performance in Vietnam Given the findings, the 2020 Law on Enterprises should reconsider the mandate for a specific number of independent Board of Management members in companies with an Inspection Committee Instead, this decision should be left to individual enterprises, allowing them to determine the structure through their company charters.

The "comply or explain" mechanism found in UK and Japanese corporate governance laws should be integrated into Vietnamese law, as it offers businesses the flexibility to adopt alternative approaches tailored to their functions while achieving regulatory objectives This allows companies to adjust the number of independent Board of Management (BOM) members as needed to align with market demands, guided by an appropriate Code of Corporate Governance Additionally, enterprises can explore alternative solutions regarding the number of Inspectors and implement objective voting methods within the Inspection Committee's decision-making process, thereby enhancing the material responsibility of Inspectors.

3.3.3 Improve the substantive performance of the Auditing Committee and independent members of the Board of Management in the Auditing Committee

The Law on Enterprises 2020 should recognize the Audit Committee as a vital component of the Board of Management (BOM) rather than a subordinate entity This committee is tasked with ensuring the company's adherence to laws and regulations, overseeing financial statements, managing internal audits, and monitoring risk management and related party transactions The election of the Audit Committee should occur through a "dual voting" mechanism during BOM member elections, ensuring that the list includes candidates who comply with legal requirements for independent and non-executive members Those elected as Audit Committee candidates will automatically join the committee Furthermore, the General Meeting (GM) should exclusively approve the Audit Committee's organizational structure, roles, responsibilities, and authority, with no involvement from the BOM.

137.1.(b) of Law on Enterprises 2020 should remove the possibility of empowering the BOM in stipulating the organizational structure, functions, duties and powers of the Auditing Committee

The number of independent members on the Board of Management (BOM) within the Auditing Committee should be revised in accordance with Decree No 155/2020/ND-CP This adjustment would empower the Code of Corporate Governance to set regulations based on the BOM's size, the company's scale, and its ownership structure Specifically, for unlisted public companies or listed companies with an ownership size of less than VND 120 billion and a BOM consisting of fewer than five members, tailored guidelines should be established.

(5) members, all members of the Audit Committee are required to be non-executive BOM members

For publicly listed companies with an ownership value of VND 120 billion or greater and a Board of Directors comprising more than five members, it is mandatory for the Chairman of the Auditing Committee to be an independent member of the Board Additionally, all other members of the Auditing Committee must be non-executive members of the Board.