corporate governance of oil gas and mining companies listed on hanoi stock exchange

3.2 Overview of 24 Oil Gas and Mining Companies listed on Hanoi StockExchange...29 3.2.1 Status of the relationship between Board of Management and Board of Directors, Supervisory Board

National Economics University

Neu business school

-  

 -Nguyen Thanh Ha

CORPORATE GOVERNANCE OF OIL GAS AND MINING COMPANIES LISTED

ON HANOI STOCK EXCHANGE

Hanoi – 2013

The successful completion of this dissertation would not have been possiblewithout the support and cooperation of others I know that this project was not myindividual achievement but the result of many people to whom will be forevergrateful Of those, I would like to express my sincere gratitude to my colleagues inthe Listing Management Department, who have been working with me in HanoiStock Exchange Their role was fundamental in the getting observation for thequestionnaire designed for the study and they contributed countless hours to thecompletion of this project together with me

Thanks to The Dean of NEU’s Business School – Assoc Prof Tran Thi VanHoa, Dr Le Thi Lan Huong who helping me a lot during the time of studying thecourse in NEU’s Business School;

And especially thanks to the Committee members because of your sharingexpertise and guidance and each of you has assisted me in the review of myproposal research and development of my thesis topic I would like to express mysincere thanks to Ms Pham Thanh Hoa, and Ms Doan Minh Hanh, programcoordinator who were always available and eager to lend a helping hand

I would like to specially thank my supervisor Assoc Prof Le Thi Bich Ngocfor her on-going support and for being flexible with my work schedule while shecorrected my thesis writing

I am also thankful to Hanoi Stock Exchange giving me much support tocomplete my dissertation

Last but certainly not least, I must thank my family To my parents, whohave always taught me the importance of education and encouraged me to continue

in my post graduate studies at National Economics University Thanks to myhusband, who motivated me and shared with me when I felt so hard to keep myMBA course going and provided confidence in my ability to accomplish whatever Iset out to do To all of you, I am forever grateful

TABLE OF CONTEN

ACKNOWLEDGEMENTS i

TABLE OF CONTENT ii

ABBREVIATIONS iv

LIST OF TABLES v

LIST OF FIGURES v

EXECUTIVE SUMMARY vi

CHAPTER 1: INTRODUCTION 1

1.1 Rationale 1

1.2 Research Objectives 3

1.3 Research Questions 3

1.4 Research methodology and data 3

1.4.1 Research process: 4

1.4.2 Secondary data collection 4

1.4.3 Data analysis 5

1.4.4 Scope of research 5

1.4.5 Structure of thesis 6

CHAPTER 2 THEORETICAL FRAMEWORK ON CORPORATE GOVERNANCE 7

2.1 Nature of corporate governance 7

2.1.1 Definitions of corporate governance 7

2.1.2 Brief history of Corporate Governance 8

2.2.3 Benefits of corporate governance 10

2.2 Theories of corporate governance: 14

2.2.1 International theories: 14

2.2.2 Vietnamese Theories - the Circular No 121/2012/TT-BTC: 17

CHAPTER 3 OIL GAS AND MINING COMPANIES AND THEIR CORPORATE GOVERNANCE 26

3.1 Overview of Oil, Gas and Mineral resources in Vietnam 26

3.2 Overview of 24 Oil Gas and Mining Companies listed on Hanoi Stock

Exchange 29

3.2.1 Status of the relationship between Board of Management and Board of Directors, Supervisory Board in 24 companies listed on Hanoi Stock Exchange 30 3.2.2 Status of protecting rights and benefits of the shareholders in 24 companies 31

3.3 Status of corporate governance in 24 companies listed on HNX 31

CHAPTER 4 ASSESSING CURRENT CORPORATE GOVERNANCE IN 24 OIL GAS AND MINING COMPANIES LISTED ON HANOI STOCK EXCHANGE 33

4.1 Previous studies of corporate governance for the companies listed on Hanoi Stock Exchange in general and in 24 Oil Gas and Mining Companies in particular 33

4.2 Assessing the corporate governance of 24 Oil gas and Mining companies listed on HNX 34

4.2.1 Research methodology: 34

4.2.2 Findings of the corporate governance in the 24 companies: 36

4.3 Summary of the analysis 63

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS FOR OIL GAS AND MINING COMPANIES TO IMPROVE THEIR CORPORATE GOVERNANCE 64

5.1 Conclusions of corporate governance in 24 Oil gas and mining companies: 64

5.2 Recommendations for 24 Oil gas and Mining companies to improve the corporate governance 66

5.2.1 Specific priorities: 66

5.2.2 Specific recommendations for 24 Oil gas and mining companies: 68

CONCLUSION 71

LIST OF REFERENCE 72

APPENDICES 75

AA Articles of Association

ACGA Asian Corporate Governance Association

AFS Audited Financial Statements

AGM Annual General Meeting of Shareholders

ASEAN Association of South East Asian Nations

BOD Board of Directors, board

BOM Board of Management, management

CEO Chief Executive Officer

CG Corporate Governance

CGG Corporate Governance Guidance

CSR Corporate Social Responsibility

EGM Extraordinary General Meeting

ESG Environment, Social and Governance

FS Financial Statements

GMS General Meeting of Shareholders

HNX Hanoi Stock Exchange

HOSE Ho Chi Minh City Stock Exchange

IASB International Accounting Standards Board

ICGN International Corporate Governance Network

IFC International Finance Corporation

IFRS International Financial Reporting Standards

ISA International Standards on Auditing

MOF Ministry of Finance

N/A Not Applicable

OECD Organization for Economic Cooperation and Development

LIST OF TABLES

Table 3.1: Mineral Resources 27

Table 3.2: Reserves and potential of oil and gas in Vietnam 28

LIST OF FIGURES Figure 2.1: Some highlights in the history of corporate governance, largely from the western world and Vietnam 9

Figure 2.2: Potential Benefits of Corporate Governance 11

Figure 4.1: Rights of Shareholders 38

Figure 4.2: Equitable treatment of shareholders 42

Figure 4.3: Role of stakeholders 46

Figure 4.4: Information of company objectives and ownership structure 49

Figure 4.5: Compliance of publishing information 51

Figure 4.6: Quality of financial statement 53

Figure 4.7: Annual report (Part D) 54

Figure 4.8: Channel of publishing information of the companies 57

Figure 4.9: Responsibility of the Board and Supervisory Board 59

EXECUTIVE SUMMARY

This study was designed to investigate the corporate governance of 24 Oil gasand mining companies because like many companies in Vietnam in general and whichbeing listed on Hanoi Stock Exchange in particular, the corporate governance is veryimportant for their long-term development and sustainability as well as market stability

The objectives which covered in this study were to clarify theareas/categories of corporate governance in 24 reviewed companies, to analyze theircurrent corporate governance and to give recommendations for improving thecorporate governance in these 24 companies

The scope targeted in this study included 24 companies listed onHanoi Stock Exchange The companies are specializing in oil, gas andmining field and the corporate governance in 24 companies is veryoutstanding The time for this study was 2012.The data collection in thisstudy was gathered through the designed questionnaires The questionnaireswere to examine the aspects identified in the literature and meant to fulfill theobjectives pre-determined Secondary data is collected from the companies’annual reports, Charter of company, Audited Financial Statements, website,AGM, CG guidelines, CG report, CG policy, special reports or thecompanies’ other previous studies (if any) which mentioning about thecorporate governance or statistic of violating to disclose information by thoseoil and mining companies in 2012 done by HNX The secondary datareviewed and prepared the platform for the formulation of questionnaire

By observing the possible responses for the 59 questions in thequestionnaire, data was collected For the purpose of the study, 59 questions whichset up based on Enterprise Law in 2005, Circular No 121 and Circular No 52 andOECD’s recommendations were observed on 5 areas/categories (OECD’s principles

of corporate governance) After analyzing, the strong point and weak point of eacharea/category were discovered and clarified

With the findings of the study, it was known that which weak points in 5areas/categories should be changed or improved to enhance corporate governance in

the 24 oil gas and mining companies and which strong points in 5 areas/categoriesshould retain to maintain their current corporate governance

CHAPTER 1: INTRODUCTION

1.1 Rationale

Corporate governance is a reasonably new concept to Vietnam, introducedlargely as a result of changes to the Law on Enterprise in 2005 and with theintroduction of corporate governance Regulation for listed companies in 2007 Thepurpose of the corporate governance Regulation is to implement the “bestinternational practice on corporate management suitable to the conditions ofVietnam to ensure a stable development of stock market and a transparent economy

in Vietnam” Improvements in corporate governance can serve a number of publicpolicy objectives such as enhancing market stability, increasing investor confidenceand trust, encouraging investment into Vietnam from foreign sources and reducingthe cost of capital for companies

Recently, the overall corporate governance performance of reviewedcompanies indicates efforts to implement elements of good corporate governance

(refer to the report of corporate governance scorecard in 2009 done by International Finance Corporation (IFC) However, the results of the review would

indicate that corporate governance in Vietnam is at the rudimentary stage and ripefor improvement Corporate governance developments seem to have been led byinvestment in regulatory and legislative developments – a rule driven “top down”approach

It should be noted that besides as lack of awareness, corporate governancepractices in Vietnamese companies are more driven by compliance with regulatoryrequirements than commitment to a higher practice of sound governance Therefore,issues which are not provided for in current laws and regulations, such as onesrelating to external auditors (independence and GMS (General meeting ofshareholders of AGM) attendance… ) or stakeholders’ roles, have not been givensufficient attention by the companies Consequently companies’ scores in theseareas are low

Oil Gas & Mining stocks have always been prioritized in investors’ portfolionot only because of the amazing business performance but also because of thecrucial role of this industry in the long-term development strategy of Vietnam.

Currently, there are 24 Oil Gas & Mining companies listed on HNX Oil Gas

& mining stocks make up 20% of the total charter capital of listed organizations onthe exchange and rank 3rd in scale of charter capital, behind Banking, Real Estateand Food & Beverage It does mean that Oil and Mining stocks have a big attraction

in the market

All of Oil Gas and Mining companies have been equitized and converted

in to joint stock company in which Petrol Vietnam Oil and Mining Group is astate-owned company holding a majority interest of 51% and exercises itscontrol via the GMS and the director appointed by the State to the company’sBoard of Directors While holding structures can serve legitimate purposes,cross-shareholdings and lack of transparency have the tendency to create opaqueownership structures This could make a company difficult to understand forshareholders and investor Such structures could be used to expropriate andcircumvent the rights of individual shareholders Poor consolidates accounting,

or even the absence thereof, is a further CG issue that has yet to be tackled.Moreover, according to IFC’s report – the international financial organizationwho did their corporate governance review in 2009 of which the 100 largestpublicly listed companies on Hanoi Stock Exchange (HNX) and Ho Chi MinhStock Exchange (HOSE) being selected, the Oil and Mining companies have thelowest score of corporate governance by 39,1% amongst 09 industry sectorsbeing selected by IFC for that review

Based on the above mentioned issues, this study is carried out with the aim

of exploring the corporate governance status in the Oil Gas and Mining companiesand also helping Oil Gas and Mining companies to understand the message thatsound CG is good for their business and it can positively affect the profitability andmarket performance of them

1.2 Research Objectives

The study covers three following objectives:

1) Clarify the major categories to evaluate corporate governance of Oil Gas and Mining Companies (The major categories are rights of shareholders, equitable treatment of shareholders, role of stakeholders in corporate governance, disclosure and transparency and the responsibilities of the board).

2) Assessing the current corporate governance of Oil Gas and Mining Companies

3) Give recommendations to improve corporate governance of Oil Gas and Mining Companies

1.4 Research methodology and data

This part of writing will embrace the preview for method of datacollection in orderly manners in the aspects of how the data were collected,where the data is to be sourced and how to design and implement thequestionnaires The research methodology serves to explain and achieve theobjectives mentioned in the item

1.4.1 Research process:

Note: If the data analysis step is not clear or not enough clarified for

discussion, it is possible to do re-analyzing data.

1.4.2 Secondary data collection

Data collection is considered as the crucial stage in gathering allrequired information form the fundamental in achieving main objectives ofthe study

Secondary data is collected from the companies’ annual reports,Charter of company, Audited Financial Statements, website, AGM, CGguidelines, CG report, CG policy, special reports or the companies’ otherprevious studies (if any) which mentioning about the corporate governance

or statistic of violating to disclose information by those oil and mining

Problem identification

Generate objectives of study and scope

of study Literature review

Developing questionaires and carry out

reviewing suitable observations by the

companies in 2012 done by HNX The secondary data reviewed andprepared the platform for the formulation of questionnaire Thequestionnaires are designed based on the OECD’s good corporate

governance principles and regulations in Circular no 121 (issued by MOF regarding the corporate governance applied for the public organizations/companies) and Circular no 52 (issued by MOF regarding their guidance of disclosing information in stock market) as well as

Enterprise Law in 2005

The data collection in this study is gathered through designed questionnaires.The questionnaires to examine the aspects identified in the literature and meant tofulfill the objectives pre-determined

During the questionnaire’s preparation stage – questionnaires are designed

and are aimed to enable more objective responses rather than superfluous views thatcontained no concrete substance or justification The questionnaires are designed inorder to obtain a wider range of views towards the study They are designed in such

a way that simple and straightforward

The questionnaire structure: the questionnaires are designed to support

collecting data They consist of 59 questions which are set up based on Enterprise Law

in 2005, Circular No 121 and Circular No 52 and OECD’s princiles which aredetaited in the following chapter 4 of the thesis

b) Chapter 2: Theoretical background on corporate governance

c) Chapter 3: Oil and Mining companies and its current corporategovernance practices

d) Chapter 4: Assessing current corporate governance practices in Oil Gasand Mining Companies

e) Chapter 5: Conclusions and recommendations for Oil and MiningCompanies to improve their corporate governance

CHAPTER 2 THEORETICAL FRAMEWORK ON CORPORATE

GOVERNANCE

2.1 Nature of corporate governance

2.1.1 Definitions of corporate governance

There is no single definition if corporate governance that can be applied toall situations and jurisdictions The various definitions that exist today largelydepend on the institution or author, country and legal tradition

International Finance Corporation (IFC) defines corporate governance as

“the structures and processes for the direction and control of companies.” TheOrganization for Economic Cooperation and Development (OECD), which in 1999published its Principles of Corporate Governance, offers a more detailed definition

of corporate governance as:

“The internal means by which corporations are operated and controlled [….], which involve a set of relationships between a company’s management, its board, its shareholders and other stakeholders Corporate governance also provides the structure through which the objectives of the companies are set, the means of attaining those objectives and monitoring performance are determined Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders, and should facilitate effective monitoring; thereby encouraging firms

to use resources more efficiently”

Most definitions that center of a company itself (an internal perspective) do,however, have certain elements in common, which can be summarized as follows:

- Corporate governance is a system of relationships, defined by structuresand processes

- These relationships may involve parties with different and sometimescontrasting interests

- All parties are involved in the direction and control of the company

- All this is done to properly distribute rights and responsibilities and thusincrease long term shareholder value

2.1.2 Brief history of Corporate Governance

Corporate governance systems have evolved over centuries, often inresponse to corporate failures or systemic crises The first well-documented failure

of Governance was South Sea Bubble in the 1700s, which revolutionized businesslaws and practices in England Similarly, much of the securities law in the U.S wasput in place following the stock market crash of 1929 There has been no shortage

of other crises, such as the secondary banking crisis of the 1970s in the U.K, theU.S savings and loan debacle of the 1980s, the 1998 financial crisis in Russian, the1997-1998 financial crisis in Asia (especially in Indonesia, South Korea, andThailand) and the current global financial crisis which started in 2008 and has notshown signs of ending at the time of this book The history of corporate governancehas also been punctuated by a series of well-known company failures The early1990s saw the Maxwell Group raid the pension fund of the Mirror Group ofnewspapers and witnessed the collapse of Barings Bank The new century likewiseopened with the spectacular collapse of Enron in the U.S, the near-bankruptcy ofVivendi Universal in France, the scandal at Parmalat in Italy, the trading fraudwhich Societe General and the most recent Madoff multi-billion dollar Ponzischememake other scandals pale in comparison Each of these corporate failures, oftenoccurring as a result of incompetence or outright fraud, was swiftly met by newgovernance frameworks, most notably the many national corporate governancecodes, the Sarbanes – Oxley Act and the current trend towards imposing stricterregulatory oversight on banking and financial activities in various countries

Figure 2.1: Some highlights in the history of corporate governance, largely from the western world and Vietnam.

1600s: The East India Company introduces a Court of Directors, separating ownership and control (U.K.,

the Netherlands)

1776: Adam Smith in the “Wealth of Nations” warns of weak controls over and incentives for management

(U.K.)

1844: First Joint Stock Company Act (U.K.)

1931: Berle and Means publishes its seminal work “The Modern Corporation and Private Property” (U.S.) 1933/34: The Securities Act of 1933 is the first act to regulate the securities markets, notably registration

disclosure The 1934 Act delegates’ responsibility for enforcement to the SEC (U.S.);

1968: The EU adopts its first company law directive (EU)

1987: The Treadway Commission reports on fraudulent financial reporting, confirming the role and status

of audit committees and develops a framework for internal control, or COSO, published in 1992 (U.S.) 1987: The National Assembly of Vietnam adopts the Foreign Investment Law

1990: The National Assembly of Vietnam adopts the Company Law and the Law on Private Enterprises Early 1990s: Polly Peck (£1.3 billion in losses), BCCI and Maxwell (£480 million) business empires collapse, calling for improved corporate governance practices to protect investors (U.K.)

1992: The Cadbury Committee publishes the first code on corporate governance and in 1993; companies listed on the U.K.’s stock exchanges are required to disclose governance on a “comply or explain” basis

(U.K.)

1994: Publication of the King Report (S Africa)

1994 & 1995: Rutteman (on Internal Controls and Financial Reporting), Greenbury (on Executive

Remuneration), and Hampel (on Corporate Governance) reports are published (U.K.)

1995: Publication of the Vienot Report (France)

1995: The National Assembly of Vietnam adopts the Law on SOEs

1996: Publication of the Peters Report (the Netherlands)

1996: The National Assembly of Vietnam adopts the new Foreign Investment Law, which replaces the

Foreign Investment Law of 1987

1997: The National Assembly of Vietnam adopts the Law on State Bank and the Law on Credit

Institutions

1998: Publication of the Combined Code (U.K.)

1999: OECD publishes the first international benchmark, the OECD Principles of Corporate Governance 1999: Publication of the Turnbull guidance on internal controls (U.K.)

1999: The National Assembly of Vietnam adopts the Law on Enterprises, which replaces the Company Law

and the Law on Private Enterprises

2000: The National Assembly of Vietnam amends the Foreign Investment Law of 1996

2000: The National Assembly of Vietnam adopts the Law on Insurance Business

2001: Enron Corporation, then the seventh largest listed company in the U.S., declares bankruptcy (U.S.) 2001: The Lamfalussy Report on the Regulation of European Securities Markets (EU) is published

2002: The Government Office of Vietnam issues the first Model Charter of listed companies16

2002: Publication of the German Corporate Governance Code (Germany)

2002: The Enron collapse and other corporate scandals lead to the Sarbanes- Oxley Act (U.S.); the Winter Report on company law reform in Europe is published (EU)

2003: The Higgs Report on non-executive directors are published (U.K.)

2003: The National Assembly of Vietnam adopts the new Law on SOEs to replace the Law on SOEs of

1995

2004: The Parmalat scandal shakes Italy, with possible EU-wide repercussions (EU)

2004: The National Assembly of Vietnam adopts the Law on Competition

2004: The National Assembly of Vietnam amends the Law on State Bank of 1997 and the Law on Credit Institutions of 1997

2005: The National Assembly of Vietnam adopts the new Law on Enterprises and the Law on Investment,

which replaces (i) the Foreign Investment Law, (ii) the Law on Enterprises of 1999, and (iii) the Law on SOE

2006: The National Assembly of Vietnam adopts the Law on Securities

2007: The MOF of Vietnam adopts the CG Regulations and the Model Charter.

2010: The MOF of Vietnam adopts Circular 09/2010/TT-BTC governing the disclosure of information on

the securities market.

2010: The National Assembly of Vietnam adopts the new Law on State Bank and new Law on Credit Institutions.

It is fair to say that, although there is still plenty of room for improvement,the legal and regulatory framework on corporate governance has changed andimproved dramatically in recent years The adoption of (1) the Law on ForeignInvestment in 1987, its amendments in 2000 and its later unification with the Law

on Enterprises and Law on Investment in 2005, (ii) the Law on Enterprise in 1999,and its amendments in 2005, (iii) the law on State Bank in 1997; the Law on CreditInstitutions of 1997 and the amendments to both laws in 2003 and 2004,respectively and the replacements of both laws in June 2010, (iv) the Law onInsurance Business in 2000 and (v) the Competition Law in 2004 and (vi) the Law

on Securities in 2006, are but some examples of many positive changes to the legaland regulatory framework The adoption of the CG Regulations, although not heavy

in detail, certainly must be hailed as another positive step for Vietnam corporategovernance, providing the first ever set of corporate governance guidelines forcompanies in Vietnam, in general and listed companies, in particular

2.2.3 Benefits of corporate governance

Good corporate governance is important on a number of different levels Atthe company level, well-governed companies tend to have better and cheaper access

to capital, and tend to outperform their poorly governed peers over the long-term.Companies that insist upon the highest standards of governance reduce many of therisks inherent to an investment in a company Companies that actively promoterobust corporate governance practices need key employees who are willing and able

to devise and implement good corporate governance policies These companies willgenerally value and compensate such employees more than their competitors thatare unaware of, or ignore, the benefits of these policies and practices Suchcompanies, in turn, tend to attract more investors who are willing to provide capital

at lower cost

Generally, well-governed companies are better contributors to the nationaleconomy and society They tend to be healthier companies that add more value to

shareholders, workers, communities, and countries in contrast with poorly governedcompanies that may cause job and pension losses, and even undermine confidence

in securities markets

Source: IFC, March 2004 Figure 2.2: Potential Benefits of Corporate Governance

a Stimulating performance and improving operational efficiency:

An improvement in the company’s governance practices leads to animprovement in the accountability system, minimizing the risk of fraud or self-dealing by the company’s officers Accountable behavior, combined with effectiverisk management and internal controls, can bring potential problems to the forefrontbefore a full-blown crisis occurs Corporate governance improves the managementand oversight of executive performance, for example by linking executiveremuneration to the company’s financial results This creates favorable conditionsnot only for planning the smooth succession and continuity of the company’sexecutives, but also for sustaining the company’s long-term development

Adherence to good corporate governance standards also helps to improve thedecision-making process For example, managers, directors and shareholders are alllikely to make more informed, quicker and better decisions when the company’s

Improve

d Operatio nal Efficienc

y

Access to Capital Markets Lower Cost of Capital Better Reputation of the Company, its Directors and

Managers

governance structure allows them to clearly understand their respective roles andresponsibilities, as well as when communication processes are regulated in aneffective manner This, in turn, should significantly enhance the efficiency of thefinancial and business operations of the company at all levels High qualitycorporate governance streamlines all the company’s business processes, and thisleads to better operating performance and lower capital expenditures, which, in turn,may contribute to the growth of sales and profits with a simultaneous decrease incapital expenditures and requirements

b Improving access to the capital markets

Corporate governance practices can determine the ease with whichcompanies are able to access capital markets Well-governed firms are perceived asinvestor friendly, providing greater confidence in their ability to generate returnswithout violating shareholder rights

Good corporate governance is based on the principles of accessibility,accuracy, completeness, efficiency, timeliness and transparency of information atall levels With the enhancement of transparency in a company, investors benefitfrom being provided with an opportunity to gain insight into the company’sbusiness operations and financial data Even if the information disclosed by thecompany is negative, shareholders will benefit from the decreased risk ofuncertainty

Of particular note are the observable, if recent trends among investors toinclude corporate governance practices as a key decision-making criterion ininvestment decisions The better the corporate governance structure and practices,the more likely that assets are being used in the interest of shareholders and notbeing tunneled or otherwise misused by managers

c Lowering the company’s cost of capital and raising the value of Assets

Companies committed to high standards of corporate governance are

typically successful in obtaining reduced costs when incurring debt andfinancing for operations As a result, they are able to decrease their capital costs.The cost of capital depends upon the level of risk assigned to the company byinvestors - the higher the risk, the higher the cost of capital These risks includeinvestor rights violations If investor rights are adequately protected, the cost ofequity and debt capital may decrease It should be noted that investors providingdebt capital, i.e creditors, have recently tended to include a company’s corporategovernance practices (for example, a transparent ownership structure andappropriate financial reporting) as a key criterion in their investment decision-making process Thus, the implementation of a good corporate governancesystem should ultimately result in the company paying lower interest rates andreceiving longer maturity on loans and credits

This holds particularly true in countries such as Vietnam where the legalframework is relatively new and still being tested, and where courts do not alwaysprovide investors with effective recourse when their rights are violated This meansthat even modest improvements in corporate governance relative to other companiescan make a large difference for investors and decrease the cost of capital

d Building a better reputation

In today’s business environment, reputation has become a key element of acompany’s goodwill A company’s reputation and image effectively constitute anintegral, if intangible, part of its assets Good corporate governance practicescontribute to and improve a company’s reputation Thus, those companies thatrespect the rights of shareholders and creditors, and ensure financial transparencyand accountability, will be regarded as being an ardent advocate of investors’interests As a result, such companies will enjoy more public confidence andgoodwill

This public confidence and goodwill can lead to greater trust in the companyand its products, which in turn may lead to higher sales and, ultimately, profits Acompany’s positive image or goodwill is known to play a significant role in the

valuation of a company Goodwill in accounting terms is the amount that thepurchase price exceeds the fair value of the acquired company’s assets It is thepremium one company pays to buy another

2.2 Theories of corporate governance:

There are several well-developed theoretical perspectives that are available

to researchers to aid them in exploring the issues of corporate governance Thesetheories include: managerial hegemony theory, agency theory, stewardship theory,stakeholder theory and resource dependence theory

2.2.1 International theories:

a

The stewardship theory:

It suggests that management and board members in an organization will bemotivated by some larger force than the desire for personal wealth Drawing onorganizational psychology, it suggests that self-esteem and fulfillment loom large intheir decision making, as had suggested in Maslow’s hierarchy of needs.Stewardship Theory has its roots from psychology and sociology and its origin is

defined by Davis, Schoorman and Donaldson (1997), the stewardshop theory This

theory may help to explain why people might still want to serve on boards ofdirector of public companies, despite the risk of prosecution under local acts orcostly shareholder lawsuits so common in the litigious western world However,some directors see their roles as being stewards of particular interest group only.When a major shareholder secures a seat on the board, its appointed director willunderstandably be tied to that shareholder’s aims, whatever company law might say

b

Stakeholder theory:

The origin of the Stakeholder theory of corporate governance can be traced

to Freeman (1994) who defines stakeholders as “any group or individual who can affect, or is affected by, the achievement of a corporation’s purpose” This evolved,

in part, as a result of the recognition of the complexity of strategy and the growingrecognition that, unlike as thought previously, a company was not just a production

system where strategy was focused primarily on products and the means to producethem The focus of the stakeholder theory is articulated in two core questionsformulated by Freeman (1994) The first question is what is the purpose of the firm?And secondly, the stakeholder theory asks, what responsibility does themanagement have to stakeholders?

c

Agency theory:

The debate about corporate governance is typically traced way back to the

early 1930s and Adolf Berle and Gardiner Means (1930s), the Modern Corporation and Private Property Adolf Berle and Gardiner Means noted that with the

separation of ownership and control, and the wide dispersion of ownership, therewas effectively no check upon the executive autonomy of corporate managers Inthe 1970s these ideas were further refined in what has come to be known as AgencyTheory In a series of now classic articles writers such as Jenesen and Meckling,Fama, and Alchian and Demsetz (1970s) offered a variety of explanations of thedilemmas faced by the 'principal' who employs an 'agent' to act on his or her behalf

As applied to corporate governance the theory suggests a fundamental problem forabsent or distant owners/shareholders who employ professional executives to act ontheir behalf In line with neo-classical economics, the root assumption informingthis theory is that the agent is likely to be self-interested and opportunistic

Agency theory or agency relationship is the theory which looks at the

relationship between the owners of the company in the form of shareholders (equityinvestors) and those have been given responsibility to take charge of themanagement of the company in the form of directors Agency theory is one of thekey concepts underlying the importance of corporate governance, which has takenprominent role in business activities in the last few decades It has its roots inalmost every aspect of business activities and plays a very significant role indecision-making by directors (both executive and non-executive directors)

Agency theory is equally important as corporate governance, since it forms

the backbone of any successful corporate governance policies and regulations, (get

the agency theory framework right and the corporate governance principles willmore than likely be right) especially in the 21st century where there have been some

of the major corporate collapses and lots of talk with regards to strengthening thecorporate governance reporting by companies to make sure that it is effective andefficient in protecting the interest of shareholders and all other stakeholders

d OECD Principles of Corporate Governance:

The OECD Principles of Corporate Governance were originally developed in

response to a call by the OECD Council Meeting at Ministerial level on 27-28 April

1998, to develop, in conjunction with national governments, other relevant internationalorganizations and the private sector, a set of corporate governance standards andguidelines Since the Principles were agreed in 1999, they have formed the basis forcorporate governance initiatives in both OECD and non-OECD countries alike

The Principles are a living instrument offering non-binding standards and

good practices as well as guidance on implementation, which can be adapted to thespecific circumstances of individual countries and regions The OECD offers aforum for ongoing dialogue and exchange of experiences among member and non-member countries To stay abreast of constantly changing circumstances, the OECDwill closely follow developments in corporate governance, identifying trends andseeking remedies to new challenges The Principles are intended to assist OECDand non-OECD governments in their efforts to evaluate and improve the legal,institutional and regulatory framework for corporate governance in their countriesand to provide guidance and suggestions for stock exchanges, investors,corporations, and other parties that have a role in the process of developing goodcorporate governance The Principles focus on publicly traded companies, bothfinancial and non-financial However, to the extent they are deemed applicable, theymight also be a useful tool to improve corporate governance in non-tradedcompanies, for example, privately held and state- owned enterprises The Principlesrepresent a common basis that OECD member countries consider essential for thedevelopment of good governance practices They are intended to be concise,understandable and accessible to the international community They are not

intended to substitute for government, semi-government or private sector initiatives

to develop more detailed “best practice” in corporate governance

OECD Principles address both policymakers and businesses and focus on theentire governance framework (shareholder rights, stakeholders, and disclosure andboard practices)

The Principles presented by OECD cover the following areas: I) Ensuring thebasis for an effective corporate governance framework; II) the rights of shareholdersand key ownership functions; III) the equitable treatment of shareholders; IV) therole of stakeholders; V) Disclosure and transparency; and VI) the responsibilities ofthe board

2.2.2 The Corporate Governance Framework in Vietnam - the Circular No.

121/2012/TT-BTC:

In Vietnam, there is no individual theory of corporate governance and thelegal framework of corporate governance is the one which being applied for thecorporate governance in Vietnam; the legal frameworks can be as follows:

- Investment Law in 1987 and its amendment in 2000;

- Enterprise Law in 1999 and its amendment in 2005;

- State bank law in 1997 and Law of Credit Organizations in 1997 andtheir amendments in 2003 and 2004 accordingly

- Insurance business in 2000

- Competition law in 2004

- Law of Securities in 2006;

Those laws contributed a big positive change in the legal frameworks

However, in relation to the corporate governance, there are some certainlegal documents which are considered as a foundation of measuring the corporategovernance in the public companies They are Enterprise Law in 2005; Circular no

52 and Circular no 121/2012/TT-BTC which issued by Ministry of Finance (MOF)

regarding their guidance of disclosing information in stock market and the corporategovernance applied for the public organizations, accordingly

For this thesis, to be suitable with Vietnamese context and corporategovernance in the specific companies, the legal framework is selected to be thefoundation of thesis analysis which named the Circular no 121/2012/TT-BTCissued by MOF on 26th July 2012 to be used as main base because this Circular isbeing applied more strictly for the listed companies than the normal ones; However,compliance with the Circular 121 must be within the frame of Enterprise Law in2005; Moreover, the OECD’s principles would be used as very important referencebecause the legal frameworks of corporate governance in Vietnam are establishedbased on the OECD’s principles;

Basically, the Circular No 121 was issued to ensure the basis for an

Effective Corporate Governance Framework; this corporate governance frameworkpromotes transparent and efficient market, be consistent with the rule of law andclearly articulate the division of responsibilities among different supervisory,regulatory and enforcement authorities It was developed with a view to its impact

on overall economic performance, market integrity and the incentives it creates formarket participants and the promotion of transparent and efficient markets Itclearly stated that the division of responsibilities among different authorities in ajurisdiction should be clearly articulated and ensures that the public interest isserved It was also said that the supervisory, regulatory and enforcement authoritiesshould have the authority, integrity and resources to fulfill their duties in aprofessional and objective manner Moreover, their rulings should be timely,transparent and fully explained

The Circular No 121 also covers the following main aspects of corporate

governance like the OECD’s principles:

a.

The Rights of Shareholders and Key Ownership Functions

The corporate governance framework should protect and facilitate the

exercise of shareholders’ rights.

- Basic shareholder rights should include the right to: 1) secure methods

of ownership registration; 2) convey or transfer shares; 3) obtain relevantand material information on the corporation on a timely and regularbasis; 4) participate and vote in general shareholder meetings; 5) electand remove members of the board; and 6) share in the profits of thecorporation

- Shareholders should have the right to participate in, and to besufficiently informed on, decisions concerning fundamental corporatechanges such as: 1) amendments to the statutes, or articles ofincorporation or similar governing documents of the company; 2) theauthorization of additional shares; and 3) extraordinary transactions,including the transfer of all or substantially all assets, that in effect result

in the sale of the company

- Shareholders should have the opportunity to participate effectively andvote in general shareholder meetings and should be informed of therules, including voting procedures, that govern general shareholdermeetings:

+ Shareholders should be furnished with sufficient and timely informationconcerning the date, location and agenda of general meetings, as well asfull and timely information regarding the issues to be decided at themeeting

+ Shareholders should have the opportunity to ask questions to the board,including questions relating to the annual external audit, to place items

on the agenda of general meetings, and to propose resolutions, subject toreasonable limitations

+ Effective shareholder participation in key corporate governancedecisions, such as the nomination and election of board members, should

be facilitated Shareholders should be able to make their views known on

the remuneration policy for board members and key executives Theequity component of compensation schemes for board members andemployees should be subject to shareholder approval

+ Shareholders should be able to vote in person or in absentia, and equaleffect should be given to votes whether cast in person or in absentia

- Capital structures and arrangements that enable certain shareholders toobtain a degree of control disproportionate to their equity ownershipshould be disclosed

- Markets for corporate control should be allowed to function in anefficient and transparent manner

+ The rules and procedures governing the acquisition of corporate control

in the capital markets, and extraordinary transactions such as mergers,and sales of substantial portions of corporate assets, should be clearlyarticulated and disclosed so that investors understand their rights andrecourse Transactions should occur at transparent prices and under fairconditions that protect the rights of all shareholders according to their class.+ Anti-take-over devices should not be used to shield management and theboard from accountability

- The exercise of ownership rights by all shareholders, includinginstitutional investors, should be facilitated

+ Institutional investors acting in a fiduciary capacity should disclose theiroverall corporate governance and voting policies with respect to theirinvestments, including the procedures that they have in place fordeciding on the use of their voting rights

+ Institutional investors acting in a fiduciary capacity should disclose howthey manage material conflicts of interest that may affect the exercise ofkey ownership rights regarding their investments

- Shareholders, including institutional shareholders, should be allowed toconsult with each other on issues concerning their basic shareholder rights

as defined in the Principles, subject to exceptions to prevent abuse

b.

The Equitable Treatment of Shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders All shareholders should have the opportunity to obtain effective redress for violation of their rights.

- All shareholders of the same series of a class should be treated equally + Within any series of a class, all shares should carry the same rights Allinvestors should be able to obtain information about the rights attached

to all series and classes of shares before they purchase Any changes invoting rights should be subject to approval by those classes of shareswhich are negatively affected

+ Minority shareholders should be protected from abusive actions by, or inthe interest of, controlling shareholders acting either directly orindirectly, and should have effective means of redress

+ Votes should be cast by custodians or nominees in a manner agreed uponwith the beneficial owner of the shares

+ Impediments to cross border voting should be eliminated

+ Processes and procedures for general shareholder meetings should allowfor equitable treatment of all shareholders Company procedures shouldnot make it unduly difficult or expensive to cast votes

- Insider trading and abusive self-dealing should be prohibited

- Members of the board and key executives should be required to disclose

to the board whether they, directly, indirectly or on behalf of thirdparties, have a material interest in any transaction or matter directlyaffecting the corporation

c

The Role of Stakeholders in Corporate Governance

The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth,

jobs, and the sustainability of financially sound enterprises.

- The rights of stakeholders that are established by law or through mutualagreements are to be respected

- Where stakeholder interests are protected by law, stakeholders should havethe opportunity to obtain effective redress for violation of their rights

- Performance-enhancing mechanisms for employee participation should

be permitted to develop

- Where stakeholders participate in the corporate governance process, theyshould have access to relevant, sufficient and reliable information on atimely and regular basis

- Stakeholders, including individual employees and their representativebodies, should be able to freely communicate their concerns about illegal

or unethical practices to the board and their rights should not becompromised for doing this

- The corporate governance framework should be complemented by aneffective, efficient insolvency framework and by effective enforcement

of creditor rights

d

Disclosure and Transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

- Disclosure should include, but not be limited to, material information on:+ The financial and operating results of the company

+ Company objectives

+ Major share ownership and voting rights

+ Remuneration policy for members of the board and key executives, andinformation about board members, including their qualifications, the

selection process, other company directorships and whether they areregarded as independent by the board

+ Related party transactions

+ Foreseeable risk factors

+ Issues regarding employees and other stakeholders

+ Governance structures and policies, in particular, the content of anycorporate governance code or policy and the process by which it isimplemented

- Information should be prepared and disclosed in accordance with highquality standards of accounting and financial and non-financialdisclosure

- An annual audit should be conducted by an independent, competent andqualified, auditor in order to provide an external and objective assurance

to the board and shareholders that the financial statements fairlyrepresent the financial position and performance of the company in allmaterial respects

- External auditors should be accountable to the shareholders and owe aduty to the company to exercise due professional care in the conduct ofthe audit

- Channels for disseminating information should provide for equal, timelyand cost- efficient access to relevant information by users

- The corporate governance framework should be complemented by aneffective approach that addresses and promotes the provision of analysis

or advice by analysts, brokers, rating agencies and others, that is relevant

to decisions by investors, free from material conflicts of interest thatmight compromise the integrity of their analysis or advice

e

The Responsibilities of the Board

The corporate governance framework should ensure the strategic guidance

of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

- Board members should act on a fully informed basis, in good faith, with due

diligence and care, and in the best interest of the company and the shareholders

- Where board decisions may affect different shareholder groupsdifferently, the board should treat all shareholders fairly

- The board should apply high ethical standards It should take intoaccount the interests of stakeholders

- The board should fulfill certain key functions, including:

+ Reviewing and guiding corporate strategy, major plans of action, riskpolicy, annual budgets and business plans; setting performanceobjectives; monitoring implementation and corporate performance; andoverseeing major capital expenditures, acquisitions and divestitures + Monitoring the effectiveness of the company’s governance practices andmaking changes as needed

+ Selecting, compensating, monitoring and, when necessary, replacing keyexecutives and overseeing succession planning

+ Aligning key executive and board remuneration with the longer terminterests of the company and its shareholders

+ Ensuring a formal and transparent board nomination and electionprocess

+ Monitoring and managing potential conflicts of interest of management,board members and shareholders, including misuse of corporate assetsand abuse in related party transactions

+ Ensuring the integrity of the corporation’s accounting and financialreporting systems, including the independent audit, and that appropriatesystems of control are in place, in particular, systems for riskmanagement, financial and operational control, and compliance with the

law and relevant standards

+ Overseeing the process of disclosure and communications

- The board should be able to exercise objective independent judgment oncorporate affairs

+ Boards should consider assigning a sufficient number of non-executiveboard members capable of exercising independent judgment to taskswhere there is a potential for conflict of interest Examples of such keyresponsibilities are ensuring the integrity of financial and non-financialreporting, the review of related party transactions, nomination of boardmembers and key executives, and board remuneration

+ When committees of the board are established, their mandate,composition and working procedures should be well defined anddisclosed by the board

+ Board members should be able to commit themselves effectively to theirresponsibilities

- In order to fulfill their responsibilities, board members should haveaccess to accurate, relevant and timely information

CHAPTER 3 OIL GAS AND MINING COMPANIES AND THEIR CORPORATE GOVERNANCE

3.1 Overview of Oil, Gas and Mineral resources in Vietnam

According to the geological survey, Vietnam has discovered over 5000deposits with over 60 different types of minerals The mineral resource is one of themost important driving forces for economic development, typically in the pre-stage

of so-called “industrialization and modernization” strategy which highlyemphasizes on build up a developed industry The mineral resources of Vietnamcould be categorized into three groups as follows:

• Large reserve at the global level that could be exploited over a long time andsatisfy both domestic consumption and export, including bauxite, titanium, rareearth, limestone, white sand, building stone;

• Medium-sized reserve that could be exhausted in a limited time, includingcoal, iron, chromite, manganese, copper, zinc, lead, gold, kaolin, barite, ashlarspaving stone, etc

• Detected but not yet discovered exploitable deposits, such as platinum andlithium

According to the Ministry of Natural Resources and Environment (2009), thestatus of some surveyed and explored minerals in Vietnam is illustrated in the Table

1 below

Table 3.1: Mineral Resources

Forecasted calculations confirm that the potential of Vietnam’spetroleum is mainly located on the continental shelf and natural gas reserves aremore promising than oil reserves The oil reserve is estimated at about 6 billiontons and gas reserve at about 4,000 billion m3 (PVN, 2008), distributed insedimentary basins from north to south, such as in the Red River, Phu Khanh,Cuu Long, Nam Con Son, Malay-Tho Chu, Tu Chinh-Vung May, Hoang Saand Truong Sa islands, etc The southern continental shelf is the mostconcentrated area of exploration activities in Vietnam, including three majorsedimentary basins, namely Cuu Long, Nam Con Son and Malay - Tho Chu Todate, the southern part remains as a national center of oil and gas supply Inaddition, Red River and Phu Khanh basins are also identified as gas supplyareas, but possibly with a modest volume Results of the exploration to dateshow that the total oil and gas reserve in the entire continental shelf is about 4.3billion tons of oil equivalents Of these, gas accounts for 55-60% The provenreserve is approximately 1,208.9 million tons of oil equivalents, of which oiland gas reserves with commercial viability are around 814.7 million tons andaccount for 67% of reserves (Geology and Resources of Vietnam, 2009).Potentially discovered oil and gas is mainly concentrated in deep water andoffshore areas (in Phu Khanh, Tu Chinh, and Vung May basin, and Hoang Saand Truong Sa Island) The reserve of oil and gas is illustrated in the table 2below.

Table 3.2: Reserves and potential of oil and gas in Vietnam

According to calculations, oil and gas reserves of Vietnam can only be availablewithin next 30 years Therefore, it is necessary that Vietnam should strengthen itsexploration activities to increase the reserves for its long-term development

3.2 Overview of 24 Oil Gas and Mining Companies listed on Hanoi

Stock Exchange

These 24 companies are divided into 3 groups of which the mineral groupconsists of 10 companies, the petroleum group consists of 6 companies and the coal/mining group consists of 8 companies The petroleum and coal/mining groups areconverted from state companies to joint stock one and the Government holdgovernance with the proportion of more than 51% from the big corporations namedVietnam National Coal – Mining Industries Holding Corporation Limited; VietnamNational Oil and Gas Group and Vietnam National Chemical Group Because ofholding the governing shares, those corporations nominate most of members in theBoard of Directors, Supervisory Board under the role of state-capitalrepresentatives; some of them are Chairman of Board of Director cum GeneralDirector; they act as both manager and operator; that results in their abusing theirrights to make the decisions benefiting the big shareholders and the decisions of theBoard of Management don’t represent the minority shareholders but represent theshareholders who holding the governance rights For the mineral group, their origin

is family companies and being converted to joint stock companies in which ownersare individuals holding the governance stocks; they are acting as manager and

owner also and it results in disadvantages to the minority shareholders because thedecision made by Board of Directors and Board of Shareholders are only formal andcontrolled by the big shareholders

The capital scope of those corporations is distributed unequally Some hasmore than 1.000 billion dongs of capital but some has only several hundreds ofbillion dongs The capital scope has effects on the corporate governance because thecompanies having big capital shall enjoy the corporate governance which beingimproved much more than the companies with small capital scope

3.2.1 Status of the relationship between Board of Management and Board

of Directors, Supervisory Board in 24 companies listed on Hanoi Stock Exchange

In the companies, the rules of working, settling tasks, reporting mode,specific responsibilities, relationship between Board of Directors, SupervisoryBoard and Board of Management is forming a formal relationship amongst Board ofManagement, Board of Directors and Supervisory Board Building the relationship

is to prevent conflict between managing organs, administration and controllingorgans, reduce risks and enhance effectiveness for the companies, ensure all thementioned companies to work for their same purposes, take responsibility for theworks to be assigned and in front of General Assembly of Shareholders and Law.Hence, the coordinating principles for the three above boards are:

- Members of the Board of Directors, Board of Supervisor and Board ofManagement coordinate to promote their individual responsibilities, ensure theuniformity of management and administration amongst companies; ensureinternal association and strengthen mutual support in taking leadership orgiving directives for the whole companies’ development in accordance withLaw and Companies’ Regulations

- The Board of Directors set the layers and making-decision rights for Board ofManagement in the operating business fields of the companies; managing,

directing and supervising Managers in their managing the companies byregulations, resolutions and specific decision of the Board of Director Managerare entitled and responsible for giving directions to carry out any assignmentand deciding any matters in their scope in compliance with the Law andCompanies’ Regulations, Decisions of the Board of Directors

- General Director is responsible to recommend the Board of Directors toapprove the matters in relation to operation of the Corporation under thejurisdiction of the Board of Directors

- Supervisory Board is responsible for supervising the financial status of theCorporations; legal status of members’ operation in Board of Directors, theBoard of Management, managing staffs, coordination amongst the Board ofManagement, Board of Directors and Supervisory Board; and other duties asper the Law, Companies’ Regulations to ensure the highest rights and profitsfor the Corporations and the shareholders

3.2.2 Status of protecting rights and benefits of the shareholders in 24

companies

In overall, the rights of the shareholders as per the law and regulations areactually complied by 24 companies Thus, since being listed on Hanoi StockExchange, only 1 company in this business group was stopped being listed because

of their serious violation to corporate governance such as Vung Tau PetroleumTrading and Service JSC (VMG); they did not deliver the invitation of shareholdergeneral assembly to all shareholders and it resulted in that the small shareholdergroup requested to debut and cancel the Resolution in that year 2010; however,VMG still did not invite them for the meeting of shareholder general assembly asregulated VMG is only one case violating the rights of shareholders; besides that,there are still many violations which have not been discovered

3.3 Status of corporate governance in 24 companies listed on HNX

The legal regulation of corporate governance and operation of these 24companies are still insufficient and not integrated One fact is that the corporategovernance is in the initial development stage; the laws and regulations related tothe corporate governance are in the progress of establishing and still have a lot oflimits Most of the new laws and regulations are based on the principles withoutdefining specifically the possible circumstances and it is very difficult to evaluatethe compliance of the corporations Since the Law on Business in 2005 waspublished, the foundation of Vietnamese Corporate governance has been set; In

2007, Ministry of Finance issued the Decision ref.12/2007/QĐ-BTC regardingissuance of the corporate governance regulation applied for all companies listed onthe stock exchange center and the Decision ref 15/2007/QĐ-BTC regardingissuance of sample charter applied for the listed companies With big effort toprotect rights of the shareholders and the small shareholders in particular, Ministry

of Finance issued the Circular no 121/2012/TT-BTC regarding corporategovernance applied for public companies and sample charter for joint stockcompanies attached with the decision which become valid since 9/2012 It officiallygives the small shareholders more rights since the general assembly of shareholders

in 2013 Before the Circular no 121 was issued, only Decision no BTC without other legal documents stipulated the corporate governance for thepublic companies which have not been listed Thus, during the past years, therewere many complaints about the regulations brought by the non-listed companiesthat impacting on the rights of the shareholders and small shareholders in particular

12/2007/QĐ-Inadequacy of the role of state shareholders who participating in the corporategovernance in the group of Petroleum and Mineral still exists; In accordance with theshareholder structure of the Petrolium and Mineral Group, more than 51% of stocksare being held by PVN and Vinacomin and Vinachem who acting as governing andstate shareholders Thus, role of the Government is as a shareholder only However,

in fact, every activity and operation of the petroleum and coal and mineral industry,