Tìm hiểu vai trò của các thông lệ tốt về lãnh đạo và quản trị doanh nghiệp trong việc cải thiện đầu tư tổ chức đối với các công ty niêm yết trên thị trường chứng khoán tại Việt Nam

24 1.3 Why good leadership and corporate governance practices can help companies in general and Vietnamese listed companies in particular to improve institutional investment .... 81 3.3

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TABLE OF CONTENTS

ACKNOWLEDGMENT i

ABSTRACT ii

TÓM TẮT v

TABLE OF CONTENTS viii

LIST OF FIGURES xii

LIST OF ACRONYMS xiii

INTRODUCTION 1

CHAPTER 1: LITERATURE REVIEW 6

1.1 An overview of institutional investors 6

1.1.1 The impact of having institutional investors involved in a company‟s ownership 6

1.1.2 What influences the investment decision of institutional investors (Determinants of institutional ownership) 13

1.2 An overview of leadership and corporate governance 21

1.2.1 Leadership 21

1.2.2 Corporate Governance 24

1.3 Why good leadership and corporate governance practices can help companies in general and Vietnamese listed companies in particular to improve institutional investment 31

1.3.1 They become “an increasingly important factor for investment decisions” 31

1.3.2 Mitigate agency problems 31

1.3.3 Create greater value for companies 32

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1.3.4 Institutional investors would pay a good premium for well led and governed

companies 33

Chapter summary: 33

CHAPTER 2: ANALYSIS AND ASSESSMENT ON THE APPLICATION OF LEADERSHIP-CORPORATE GOVERNANCE PRACTICES IN VIETNAM LISTED COMPANIES 34

2.1 Business environment in Vietnam 34

2.1.1 Vietnam Economic Outlook 34

2.1.2 Vietnam Stock Market 39

2.2 Leadership and corporate governance in Vietnamese listed companies 46

2.2.1 Organization type influences the leadership and corporate governance style 46 2.2.2 Vietnamese companies are late developers in the area of leadership development 47 2.2.3 A large majority of Vietnamese companies are either state-owned or family-owned 48

2.2.4 Board of Directors, committees and CEOs issues 50

2.2.5 Ambiguous disclosure practice and weak transparency 52

2.2.6 Weak regulation to protect minority shareholders 53

2.2.7 Weak risk management 54

2.2.8 Remuneration/Compensation 57

2.2.9 Communication (Investor Relation) 59

2.3 Three cases of most attracted Stocks – ABC, FPT and VNM 62

2.3.1 The case of ACB 63

2.3.2 The case of FPT 67

2.3.3 The case of VNM 70

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Chapter summary 74

CHAPTER 3: RECOMMENDATION 76

3.1 Opportunities and threats to the attraction of institutional investors into Vietnamese listed companies 76

3.1.1 Opportunities 76

3.1.2 Threats 77

3.2 Recommendation to identify the “right” investors 79

3.2.1 Targeting institutional investors with long investment horizons 80

3.2.2 Institutional shareholders with positive attitude toward mutual benefits 80

3.2.3 Institutional shareholders who have responsibility for their votes 81

3.3 Recommendation on how to improve institutional investment to Vietnamese listed companies through good leadership and corporate governance practices 81

3.3.1 Quality of leadership 81

3.3.2 Quality of corporate governance 87

3.4 Action plan 101

3.4.1 Build the Board of Directors of high quality and professionalism 101

3.4.2 Build attractive but reasonable vision, objectives and annual business plan for the company 102

3.4.3 Make reliable financial statements 102

3.4.4 Improve the role of Internal control 102

3.4.5 Improve the abilities of risk forecast and management 103

3.4.6 Disclosure policy 103

Chapter summary: 105

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CONCLUSION 107

REFERENCES 108

APPENDIX 112

Appendix1 Interviewees list 112

Appendix 2 Questionnaire to Buy-side and Securities Corporations 115

Appendix 3 Questionnaire to Sell-side 116

Appendix4 List of fund management companies in Vietnam 118

Appendix 5 The birth and growth of institutional investors 121

Appendix 6 Definition and classification of institutional investors 122

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LIST OF FIGURES

Figure 1: Determinants of institutional ownership 21

Figure 2:Leadership Causal Chain 24

Figure 3: Public companies organization chart 26

Figure 4: Corporate Governance Practices and Firm Performance 28

Figure 5: Vietnam GDP growth 2000-2011 35

Figure 6: Market trading volume (Unit: share) 40

Figure 7:Market Trading Value (Unit: VND million) 41

Figure 8: General organizational structure of listed companies in Vietnam 55

Figure 9: Comparison between Chairman and CEO‟s responsibility and duties 88

Figure 10: The “three lines of defense model” 100

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LIST OF ACRONYMS

BoDs Board of Directors

FII Foreign Indirect Investment

IR Investor Relation

OECD Organization for Economic Cooperation and Development

POEs Private-owned enterprises

SSC State Securities Commission

SOEs State-owned enterprises

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INTRODUCTION

Background of the study

“A key element in modern capital markets is the interplay between firms that increasingly raise capital internationally, and institutional investors that manage growing pools of assets”.1

Capital is an essential input for any business The bigger the business expansion is, the more importance of additional capital Funding plan always plays an utmost crucial role throughout the companies‟ growth path Long time ago, companies mostly relied on state or individual/internal capital when they need a fund raise In modern economy, they have a new and more efficient capital pipeline channel to facilitate this demand which is the stock market

This special market has their own main players, including Sell-side and Buy-side Sell-side basically consists of investment banks and listed companies, who create stocks and bonds, and sell these securities to investors Meanwhile, Buy-side consists of individual investors and institutional investors who are asset managers, pension funds, insurance firms, hedge funds, etc

Institutional investors are very crucial forces and receive warm welcome from almost every stock exchange in the world On emerging markets like Vietnam, institutional investors, especially foreign ones, are being needed due to their positive contribution to the development of local financial markets

In Vietnam, stock market was born when the country‟s first official trading floor –

Ho Chi Minh Stock Exchange Center (HOSE, latter renamed HSX) – opened on July 20th, 2000, followed by the Hanoi Securities Trading Center (HASTC, latter renamed HNX) half a decade later Since inception, the scale of both trading

1 Miguel A Ferreira,The Colors of Investors‟ Money: Which Firms Attract Institutional Investors From Around the World, 2006

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floorshave been growing strongly and gradually becoming a significant capital channel in medium and long term, positively contributing to the country‟s industrialization and modernization During the period of 2000-2005, market capitalization stayed only around 1% of GDP In 2006, it had a strong leap up to account for 22.7% of GDP and continues to grow at over 43%of GDP in 2007 By

30th August 2012, the total market capitalization of HSX and HNX was US

$35.4billion, equivalent to approximately 32% of 2011‟s nominalGDP (US $110 billion).According to the strategies to develop the local securities market during 2010-2020of State Securities Commission (SSC),Vietnam targets to raise its stock market capitalization to 65%-70% of its GDP in 2015 and to 90%-100% of the GDP

in 2020

The number of companies listed on the Vietnam stockmarket has been increasing rapidly, even in the worst time It went from the first 2 companies in July2000 to more than 600 ones at the end of 2010 Shares issuance activity to raise capital via the stock market started to take off since 2006 when 44 listed companies successfully made new issuance of more than 203 million shares In 2007, it reached the extremely high level where 192 companies and four banks made 200 issuances with total capital up to nearly VND 40,000 billion

The number of investors participating in the stock market increasedstrongly, too, regarding all individual investors and domestic and foreign institutions In 2000, there are approximately 3,000 trading accounts Steadily, this number increased to 12,000.Of which, there are 1,300 institutional accounts The number of fund management companies grew from a few in the 1990s to 47 in 2010, accordingly Foreign investors quickly showed their major role, especially in creating market liquidity

That is to say, together with foreign direct investment (FDI), foreign indirect investment (FII) has become an important source of foreign funds to support Vietnam‟s growing economy Likewise, the successful economic reform also made

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Vietnam an attractive frontier - emerging market for many foreign institutional investors

During the past decade, business cycles has been going on from the stability,

recessions and boomsand profound inflation.“Many new industries that have revolutionized society, such as technology, biotechnology, and communications, etc And through it all, the need for capital has relentlessly grown, and the role of investment attraction has grown, which has led to competition for capital”2

And one of the best ways to win the competition for capital is lying in the companies‟ leadership and corporate governance practices

Statement of the problem

A century ago, companies in the world and in Vietnam almost did not know or care who their major shareholders were Today, upon realizing the significance of institutional investors, companies started to change attitude toward attracting and keeping institutional investment In response to shareholder desires, companies are paying more attention to their leadership and corporate governance

A common thought of almost Vietnamese listed companies half decade ago was

that: “A company’s record will speak for itself”, say, if companies work well

enough, institutional investors certainly be aware of and come for further discussions However, how to attain good and better performance with better business results, becoming a good and better company in order to be discovered and welcomed by investment community are an open question

The answer largely comes from the good leadership and corporate governance practices Various former study did research on leadership, corporate governance alone or in relation with companies performance, but very few studies have examined the dynamic interactions between the good leadership and corporate

2 The Nasdaq Stock Market, The Strategy and Practice of Investor Relations, p.112

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governance practices and the attraction of institutional investors Therefore, the role

of leadership and corporate governance and their relationship to corporate performance in successful investment is in need of further research

Purpose of the study

From own experience in working with both Buy-side and Sell-side during career, the author has felt the need for specific pointers on implementing good leadership and corporate governance practices in Vietnamese listed companies This study therefore investigates the impact of good leadership and corporate governance practices on investor decision-making and the extent to which they are leading indicators of future financial performance It also aims to serve as a guide for those who wish to strengthen leadership and corporate governance practices in their organizations

This aim drives into two objectives The first objective is to show why good leadership and corporate governance practices are important in terms of a means to achieve better corporate performance to help Vietnamese companies attract institutional investment The second objective is to provide guidance on how to perform this function efficiently and effectively to add value to companies, including but not limited to two parts: The first is Quality of leadership and the second is the Quality of corporate governance

Quality of leadership was represented in four main factors: 1) Quality of companies‟ vision; 2) Quality of company‟s strategy; 3) Execution of company‟s strategy and 4) Quality of leaders

Quality of corporate governance is built from 5 aspects: 1) Constituting an independent and objective board; 2) Compensation/Remuneration issue; 3) Improve transparency; 4) Improve communication quality and 5) Improve risk management

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Methodology

At this time, little is known about the processes that Vietnamese listed companies‟ leaders use in order to lead their companies to success Therefore, a variety of data collection methods, interviews, observations and case study method were used This technique provided a comprehensive illustration of the effectiveness and necessity

of good leadership and corporate governance practices in association with successful attraction to institutional investors

Scope and limitations of the study

Scope:

The study looked at companies listed on HSX and HNX in Vietnam only as they are the most public companies in terms of information disclosure The author then picked up 3 listed stocks for making observations and conclusions on the topic

Limitations:

 The study is mostly based on available public information and discussions with a group of ten analysts from ten securities companies and investment funds and three Investor Relations specialists from three listed companies as the author did not have the opportunities to discuss with BODs and BOM in persons

 Vietnam is a new emerging country with young stock market, lacking industry practices and no standardized corporate governance norms Therefore, some recommendations may be customized for suitable purposes

Due to above mentioned limitations, the recommendations might not cover all necessary aspect and may not bring readers a convincing conclusion, but it opens a question to other students in examining the leadership and corporate governance application in Vietnam

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CHAPTER 1: LITERATURE REVIEW

Chapter 1 provides an economic rationale for why leadership and corporate governance matters to the institutional investment It explored the relationship between good corporate leadership-governance practices, corporate performance and the improvement of investment from institutional investors

1.1 An overview of institutional investors

1.1.1 The impact of having institutional investors involved in a company’s

ownership

Despite the increasing presence of institutional investors in the capital market, there

is considerable controversy regarding their effect on firm performance Researchers

in this area have presented various mutually exclusive viewpoints which can be synthetized into into 2 sides: the pros (benefits) and cons (the negative affects) of

the institutional investors‟ involvement

1.1.1.1 The pros (benefits)

Once having institutional investors as strategic shareholders, companies can get benefits both fundamentally and technically

 Fundamentally

- Increase companies‟ performance

This is especially true to “dedicated” institutional investors

The above-mentioned word - “performance” - can be translated in two different referential points: 1) A company gets good earnings growth (internally) or 2) Better business results than its peers (externally)

Regarding internal earnings growth, if after a certain fiscal period, a company posts

a growth rate in its earnings, such rate is easily considered as a benchmark for the company to maintain its growth in accordance with the values of investor capitalism

“Dedicated” institutions usually look for long-term gains from their investments That is to say, institutions are able to seek out and invest in companies that are inherently more effective than their peers After purchasing stake in such companies, frequently large ownership, they are able to use the right of big shareholders to involve into the investee companies‟ corporate governance The large holdings of these investors provide them with an incentive to monitor investee companies‟ BoD and influence their actions, if necessary Thus, institutional investors are able to help companies to increase performance, rather than simply invest and stand aside waiting Another reason is that “dedicated” institutional investors cannot easily divest their holdings in the short run Therefore, they are interested in the companies which are potentially beneficial in the long run Institutions may be motivated to use their “voice” to influence managerial decisions, closely involved in monitoring companies‟ managers and the strategic management with the motivation of increasing firm value, ensuring that managers targeting to maximize long-run value rather than to meet short-term earnings goals

in order to make their future exit from an equity easier

- Increase companies‟ value

Once an institutional investor establishes a large position, its next motive is typically to find ways to drive up its value This is especially true to “transient” institutional investors As they trade frequently with a view to maximizing short term gains (as mentioned above), they use their advantage of possessing superior information to other market participants, actively seek out situations in which they can exploit this informational advantage Their presence, particularly under

According to Berle and Means (1933)3, as a company‟s ownership structure becomes more diffuse, shareholders‟ ability to control management diminishes The resulting shift in power allows managers to act in their own self interest, potentially destroying shareholder value in the process This reminds of the classic principal-agent problem

 Technically:

- Positive effect on the stock prices

Stock prices are partially impacted by their liquidity on market trading Liquidity is

understood as the ease with which an asset can be converted into cash “If a stock is not regularly traded (in the limit not traded), uncertainty about its underlying value

3 Berle, Adolf A and Means, Gardiner, C (1933), The Modern Corporation and Private Property, New York, Macmillan

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increases”4 A typical characteristic of stock market is that, as investors assemble information and act upon it, the information becomes reflected into the stock price Hence the less trading, the less opportunity for information to be timely incorporated into the price, and the more uncertainty about the stock‟s underlying value Furthermore, as liquidity decreases, fewer investors are interested in the stock, so that overall information collection tends to decline Since it is more difficult to find interested buyers, an illiquid stock is more costly to turn into cash

As a consequence, the seller of an illiquid stock will have to accept a discount on the selling price Consequently, as uncertainty about the underlying value increases, less investors are interested to buy it and as trading becomes more costly, the share price decreases

Therefore, institutional investors are considered to have a positive effect on the stock prices of the companies in which they invest This effect materializes through different mechanisms: institutional investors reduce information asymmetries between the firm and (other) investors, contribute to the liquidity of the company‟s stock and improve the firm‟scorporate governance

If firms fully understand the positive influences of institutional investors and if benefits are larger than costs, they may do efforts to involve these professional investors in their ownership

- Enhance market sentiment

Institutional investors have advantages over individual investors in terms of their high level of information and their better technology in analysing financially relevant information They are investment specialists and are be expected to benefit from gains of divestment based on scale effects

4 Merton, R., 1987, A Simple Model of Capital Market Equilibrium with Incomplete Information,

Journal of Finance 42, 483-510

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To the extent that institutional investment decisions are influenced by private information, changes in the institutions’ holdings will convey information5

Hence, once stock markets capture a “buy signal” from institutional investors, the other investors may feel more confident to follow This is due to “herd behavior” or “free-rider” effect Individual investors, especially in emerging market, put their trust much on institutional investors These institutions directly impact the behavior of other investors In the plus side, when institutions buy, the others tend to imitate Hence, trading volume and stock price are prone to rise This facilitate the additional issuance of companies in the future

1.1.1.2 The cons (negative affects)

 The “myopia” affects

There are some institutional investors look mainly for short-term gains from their

equity investments, called “myopia investment behavior” (or "managerial myopia")6 Rather than looking for long-term value creation from their investments, these institutions may prefer to profit from portfolio shuffling when there are increases or decreases in stock prices, even if those changes are temporary The resulting

“myopia” has often been blamed for being one of the primary causes of the decline in the competitiveness of listed companies (Graves, 1988; Graves and Waddock, 1990; Hill, Hitt and Hoskisson, 1988; Porter, 1992)7 The reasons are, the frequent trading and short-term focus of institutional investors encourages companies‟ managers to engage in myopic investment behaviors, such as to reduce investment intangible projects such as research and development (R&D), advertising, and employee training for the purposes of meeting short-term earnings goals

5 Chakravarty, Stealth-trading: Which traders' trades move stock prices? Journal of Financial Economics

6 Brian J Bushee, “The Influence of Institutional Investors on Myopic R&D Investment Behavior”, 1998

7 Rahul Kochhar, Parthiban David, “Strategic Management Journal”, Volum 17, Issue 1 (Jan, 1996), 73-84

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By acting as "traders" rather than "owners”, such institutional investors place excessive focus on short-term developments, leading managers to fear that an earnings disappointment will trigger large-scale institutional investor selling and result in a temporary undervaluation of the company's stock price

 “Herd behavior”

The negative side of “herd behavior” shows when institutions dispose some stocks

or all of their portfolio The sale of large blocks of equity often leads to substantial drops in the stock price, potentially making the sale unattractive and their actions affect the market8 Also, even if they do manage to liquidate their investment in a company, new profitable opportunities will be scarce as the institution's portfolio already tends to be well diversified

Institutional investors influence on “herd behavior” by increasing the tendency of investors to ignore economic fundamentals Instead, they observe and follow the behavior of others The reason stems from the fact that most fund managers are evaluated primarily on the basis of “relative performance”; that is, they are penalized for underperformance in relation to the median fund while, at the same time, are not proportionately rewarded for overperformance This leads to trend-chasing behavior because: fund managers will follow the investment decisions of

other fund managers in order to show clients that they know what they are doing If they follow other fund managers' decisions and the investment turns out to be unprofitable, they are more likely to be thought of as unlucky than as unskilled, since other fund managers will have made the same mistake9 Another reason is relating tothe costs and difficulties associated with the collection and analysis of

8 Rahul Kochhar and Parthiban David, “Institutional Investors and Firm Innovation: A Test of Competing Hypotheses”, 1996 Strategic Management Journal

9 Adam Harmes,“Institutional Investors and Polanyi's Double Movement: A Model of Contemporary Currency”, 2001

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fundamental information As a result, observing the choices of others is often a cheap and helpful alternative to analysing economic fundamentals Accordingly, fund managers may buy and sell securities on the basis of price movements without assessing whether or not they are in response to underlying fundamentals

Therefore, in the event that an investor is just accidentally successful but all others follow his decisions, then the whole market imitates decisions that are not based on fundamentally relevant information In addition, herding may characterise a situation in which all investors similarly react on a non-informative signal, possibly due to psychological forces The result is that institutional investors do not rely on their own fundamental information and do not exploit all available information, but,

be more dependent on the less informed judgment and evaluate stocks only by their short-term and medium-term performance

 The take-over risk

Another negative disadvantage of institutional ownership is the risk of being

acquired This is also an unintended consequence of “myopia” and “herd” affects If institutions dispose of their large holdings in a poorly performing firm, the stock price is likely to decline further, making the company an attractive takeover target for potential acquirers10 Moreover, institutions may sell their holdings in case of a takeover offer with a premium, even though the firm may be performing well

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term investments, such as expenditures on innovative activities11 According to the

“myopic investor” viewpoint, institutional holding and company innovation will be negatively correlated

1.1.2 What influences the investment decision of institutional investors

(Determinants of institutional ownership)

Generally, each institutional investor has its own investment policy or investment theory specifying which element is the highest priority In other words, they have

different investment appetite, different trading and investing strategies.“Different institutional investors have different trading behaviours and this can impact their incentive to monitor management Some institutional investors require short-term returns and thus have no incentive to expend resources to monitor management Other institutional investors have a long-term ownership preference and are oriented towards longer-term performance, e.g dividend income or stock price appreciation”12

Zahra (1996)13 classified mutual, pension, and retirement funds as long duration institutional owners while investment banks and private funds as short-term investors Based on such characteristics, each segment pursues different kind of stocks A hedge fund usually invests aggressively and looks for companies of market‟s favor and prices rise rapidly Banks, whose portfolios are often so large, tend to prefer the liquid stocks Growth fund looks for substantial growth with long-term Meanwhile, pension fund looks for companies that will not only grow steadily

13 Zahra, S A 1996 Governance, ownership, and corporate entrepreneurship: The moderatingimpact of

industry technological opportunities Academy of Management Journal, 39

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and appreciate over the longer period of time, but have a measure of safety within the fund‟s definition of needed return

Essentially, the institutional investors are convinced by the success and potential of

a company These are factors that attempt to demonstrate to the investors the ability

of a company to succeed in the future, say, to increase the value of its equity and to use its capital effectively These factors can be synthezied into four basic points,

prospect, Financial data, Management and Plans

1.1.2.1 Industry prospect

The prospect of an industry is important because it will determine whether a company operating in that industry can stay well or be in troubles due to the common conditions of the industry An economy is comprised of various industries with different characteristics Each of them has a unique combination of inputs and outputs condition, supplies and demands, and business characteristics Accordingly, investors consider carefully an industry outlook to evaluate whether an investment

in a company today can bring big return in the future or not

Institutional investors to Vietnam are usually be recommended to hold a concentrated portfolio of stocks in the consumer goods, utility and export-driven agricultural industries The reason for selecting consumer good stocks is mainly based on the fact that Vietnamese consumers have been gaining increasing purchasing power Urban residents are prone to upgrade their expenditure habits to resemble those in developed countries, and spend more on entertainment, automobiles, travel and luxury goods Meanwhile, rural residents will adopt urban consumption patterns as they migrate to cities Such demand growth will help boost industries like fast moving consumer goods (FMCG), wholesale or retail with strong brand names

In terms of utility industry, Vietnam‟s rapid industrialization and urbanization create big potentials for it The utility industry is essential and has wide room to

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grow in developing countries like Vietnam It enjoys fast growth over the last decade Demand for electricity by civil, industrial, commercial and services will continue to increase, nurturing the growth in sales, return and expansion prospect of the companies operating in electric-power generation, transmission and distribution, natural gas distribution, water supplies, etc

Regarding agriculture export sector,Vietnam has abundant resources given the country‟s long coastline, extensive network of rivers and lakes, cheap labour and the agricultural base For the last decades, exporting agricultural products like rice, seafood, rubber, garment and textile, etc has experienced high growth which generates steady cash flow and fosters stable operation of companies in the sectors Those companies accordingly are considered safe and sound investment shelters

1.1.2.2 Financial data

Overall, investors looks at companies‟ financial data to measure their financial health Basic financial data is embodied in the company‟s audited and non-audited financial statements, its governance filings, including its board of management meeting minutes, annual general meeting‟s resolution, decision, annual and interim reports and others They are released over the internet, on web sites of companies, state securities commission and financial media From financial statements, institutional investors will translate them into popular criteria or ratio to find whether they meet their requirements, including but not limited to:

 Growth

Certainly, investor of all types are interested in investing in growing companies A company with high potential to grow always grasp investors‟ attention as it can promise them a good return Furthermore, when a company is in growing phase, expansion is nearly a must and therefore it needs to source for additional capital This opens the investment opportunities for institutional investors who are ample of cash Therefore, institutional investors are attracted by companies with stronger investment opportunities and in need for external financing

 Return on equity (ROE)

ROE ratio measures return in relation with stockholders‟ investment (owner‟s equity) A company which get higher ROE will be favored as it utilized the shareholders‟ equity efficiently

 Dividend yield

Dividends are of prime importance to some stockholders, but a secondary factor to others Some investors invest primarily to receive regular dividend income, while others expect of rising market prices If a company is profitable and retains its earnings for expansion of the business, the expanded operations should produce an increase in the net income of the company and thus tend to make each share of stock more valuable

Dividends per share divided by market price per share determine the yield rate of a company‟s stock Dividend yield is especially important to those investors whose first objective is to maximize the dividend revenue from their investment

 Liquidity

Liquidity is a very important factor to determine whether to trade and invest in a

stock market or a certain stock “Essentially, liquidity represents the ease with which financial instruments like stocks and options can be traded Liquidity is the

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volume of trading activity that allows a trader to buy or sell a security or derivative and receive fair value for it” 14

When there is high volume of people active in a

particular market, it provides the trader with an opportunity to move in and out of positions without difficulty

Institutions demand more liquidity in their investments than individual investors because they trade in large volume As a result, they prefer stocks that have a deeper market, where they can enter and exit easily

 Risks

Certainly, institutional investors are subject to “risk adverse” With the same level

of returns, they choose to invest in lower risk stocks One of a common factor to weigh riskof the company is its “Leverage” Institutions invest in companies with less debt Most of the cases there are quite rare institutional ownership in companies that have high levels of debt, and where managers actions are strictly monitored by major debt-holders Especially, in the event that bank interest rate rises, companies with high debt/equity ratio are in worse trouble and their bottom line are hard injured The other internal risks may be related to the management quality

External risks vary from the macro changes, natural environment issues, demographic changes, etc which are hard to predict but have big impacts on companies operation

In short, regarding financial data, institutional investors would like to know all basic financial factors such as revenue, profit, profit margin, various kind of ratios, cost of capital and the likes to understand the past performance and the future prospect of a company

1.1.2.3 Management

14 Jeff Neal, “Back to Basics: The Importance of Liquidity”, November 14, 2005, http://www.optionetics.com/market/articles/13652

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Many great companies of today started as small companies But not all small companies can grow to large ones Many of them even go bankrupt within the first five years The difference between two companies that started small, and of which only one thrived, partly, thanks to capitalization The other and major part is management, in other words, is leadership and corporate governance, which, to be more exact, is the management‟s role in raising capital and utilize successfully that capital Good leadership and corporate governance lead companies into success

A survey of investors by McKinsey15 reported that 80 percent of global investors said they would pay a premium for a company that was visibly well governed 63 percent said that governance considerations might lead them to avoid certain individual companies

Assessment of leadership talent and skills can be difficult, not only because they are intangible and qualitative than quantitative, but because they are highly subjective They can be seen and felt, but hard to configurate into business results When business grows complicatedly, the requirements on management become more complex, too Accordingly, the analysis and assessment of management in most cases are speculative

Generally, when shareholders invest in a company, they entrust their capital to the directors of that company, as the BoD are representatives for all shareholders and were voted by the previous Annual General Meeting to help run the company in the best way it should be Shareholders are the company‟s owners and theoretically have voices in how that company is run In fact, they are too many and most of them are of the minority shareholders which their single voices less matter Therefore, it is better to express their right through votes a competent BoD at the company‟s Annual General Meeting and Extraordinary General Meetings Through

15 Dominic Barton, Paul Coombes, and Simon Chiu-Yin Wong, “Asia's governance challenge”, 2004, McKinsey Quarterly

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their votes, shareholders play a vital role in electing the most qualified and ethical BoD who then appoint the company‟s management That is the common way in which leadership and corporate governance are created in a public company

In exchange, good leadership and good corporate governance result in better performing stocks Investors seek outperforming stock to earn the highest return possible Then, they seek the companies whose Board of Directors are capable of making the companies be outperform When institutional investors have large portion of a company‟s ownership, they may choose to participate into the BoD to become responsible owners of the businesses which they are invested in Because, intelligent investors are responsible owners It is in their interest to ensure the long-term performance of the company Investors who make the effort to improve governance in the companies they invest will eventually make them be good over the long-term

That is to say, the relationship between the institutional investors and corporate governance is mutual Institutional investors are attracted by good governed companies where they are quite sure their capital is seeded in the right land for growth and mutually, when they invest and engage in corporate governance,they have the right and duty to have a voice in the companies‟ operation Institutional investors are crucial to the encouragement of good governance They help ensure management accountability for financial and ethical actions This point shapes a significant part in this study and therefore is discussed deeper in next parts

1.1.2.4 Plans

As mentioned earlier, investors invest in a company with expectation to collect good profit in the future They always look at a certain company to see its prospect and potential Money has its own time value Investors choose to invest in where they believe to generate the biggest profit Companies‟ plans are a vital channel for them to derive their assumption, valuation and decision The future of a company is, after all, what investors are concerned with

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In stock valuation process, a crucial factor to count in is companies‟ short-term and long-term plans On one hand, the Buy-side and securities corporations rely on companies‟ plans to weigh the blueprint and road map of company policy for continued profitability, expansion, and growth They may find the management of a company to be sincere, professional, visionary, highly motivated, ambitious, trustworthy, etc But as analysts, they must make an assessment of how these virtues are going to be applied to add shareholder value Hence, the BoD, via their business plans, must convince investorsof the fascination and the feasibility of them On the other hand, analysts and institutional investors will take the companies‟plan into consideration as assumptions in their valuation modeling to generate the fair value for the companies‟ stock and make decision whether buy or sell or hold the stocks Investors generally expect to see five years of projections Certainly, nobody can see five years into the future, but they want to see howthe companies‟ long-term projections look like

When companies show their plan, one of two scenarios can happen: (a) if plan target is too high, investors may show their suspicion; or (b) plan target is too low, and investors will suspect, too Both are not good to the stock valuation

The purpose of the business plan is to tell the company‟s story in the most compelling manner possible so that investors would go to the next step The business plan is very often the first impression which potential investors get about a company

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Figure 1: Determinants of institutional ownership

1.2 An overview of leadership and corporate governance

16 Stogdill, R.M (1948) Personal factors associated with leadership: A survey of the literature Journal of Psychology, 25, 35-71

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A working definition of Leadership says: “Leadership is the process of influencing others to understand and agree about what needs to be done and how to do it, and the process of facilitating individual and collective efforts to accomplish shared objectives” 17

But why leadership is necessary to companies? Drucker (1985) had the answer

when he defined leadership as “the lifting of people’s vision to a higher sight, the raising of their performance to a higher standard, the building of their personality beyond its normal limitations”18

There are some key words should be borne in mind when mentioning Leadership:

Leader:A leader is anyone who wants to help and moves into action19

Leading:Leading involves leadership and leaders Leadership is a product of

interactive dynamics and leaders are people who influence this process20

Influencing is getting people to do what is necessary Influencing entails more than

simply passing along orders

Purpose gives people the reason to act in order to achieve a desired outcome

Leaders should provide clear purposes for their followers and do that in a variety of ways which one of the best is “Vision” Vision refers to an organizational purpose that may be broader or have less immediate consequences than other purpose statements Higher-level leaders carefully consider how to communicate their vision

Wheatley, M (2006) Leadership and the New Science USA, Berrett-Koehler

20 Schwandt, D R., & Szabla, D B (2007) "Systems and leadership: Coevolution or mutual evolution towards complexity?" In: J K Hazy, J A Goldstein & B B Lichtenstein (Eds.), Complexity Systems Leadership Theory Mansfield, MA: ISCE Publishing

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Motivation supplies the will to do what is necessary to accomplish a mission

Motivation comes from within, but is affected by others' actions and words A leader's role in motivation is to understand the needs and desires of others, to align and elevate individual drives into team goals, and to influence others and accomplish those larger aims

Vision

This is one of the most meaningful word connecting to Leadership definition Most

of the recent literature on leadership regards vision as essence of an organization According to Kouzes & Posner21,“Exemplary leaders imagine an exciting, attractive, and focused future for their organizations They dream of making a difference They have visions of what might be, and they believe they can make it happen”.Vision becomes the guide or roadmap to a better future

“Vision is a mental journey from the known to the unknown, creating the future from a montage of current facts, hopes,dreams, dangers, and opportunities” 22

Common to these conceptions of "vision" is some comprehensive butpersonal picture of a desired future that a leader conveys to members of his or her organization Once the organizational members "buy into" the vision, they join the leader in turning their shared vision into reality Implicit in this conception of vision are assumptions about leadership and change and about leadership and management Leaders are the most results-oriented individuals in the world And with vision, they know where to go and what results should be attained

21 Kouzes, J M & Posner, B Z (1984), “Getting extraordinary things done in organizations” Brochure for a program offered by Executive Development Center, Leavey School of Business and Administration, University of Santa Clara

22 Hickman, C R., and Silva, M (1984), “Creating excellence: Managing corporate culture, strategy, and change in the new age”, p 151

Follower Skills

Quality + Productivity Unit profits

Leaders inspire followers by a shared vision, then provide them with necessary training/coaching In addition, with followers‟ willingness to learn and effort, their skills will be improved to reach target

1.2.2 Corporate Governance

1.2.2.1 Corporate Governance concept

Corporate governance has been widely researched across the world to provide guidelines and advisory to apply in reality One of the best known in this field was the OECD Principles of Corporate Governance, which had key influence on the development of corporate governance globally

The latest revised version of “OECD Principles of Corporate Governance” was released in 2004 It has been supported by major international institutions like the World Bank, the Global Governance Forum, and the International Corporate Governance Network, and then has been widely applied in the international financial community The purposes of “OECD Principles of Corporate Governance” were to assist the OECD and non‐OECD countries “to evaluate and improve the

legal, institutional and regulatory framework for corporate governance”, and “to

25

provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role”23 in the corporate governance process

In the “OECD Principles of Corporate Governance”, corporate governance is

defined as “one key element in improving economic efficiency and growth as well

as enhancing investor confidence Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders” 24

Similarly, the Report of the Committee and the Code of Corporate Governance

(Singapore), 2001 wrote about corporate governance: “Corporate governance refers

to the processes and structure by which the business and affairs of the company are directed and managed, in order to enhance long term shareholder value through enhancing corporate performance and accountability, whilst taking into account the interests of other stakeholders” 25

J Wolfensohn, president of World Bank, made this concept more

specific:“Corporate governance is about promoting corporate fairness, transparency and accountability” 26

Basically, “Fairness, transparency and accountability” matter to corporate

governance, especially in public company, which owned by a hundred shareholders and more, because with such a huge amount of owners, it is hard for all of them to get involve in companies‟ management on a daily basis This remarkable feature raises the need for a mechanism where companies are operated by a group of certain

23 OECD, “OECD Principles of Corporate Governance”, 2004

24 OECD, “OECD Principles of Corporate Governance”, 2004

25 Report of the Committee and the Code of Corporate Governance (Singapore), 2001

26 Financial Times, June, 1999

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people but conformed to the will of owners That is why nowadays, almost every public companies build their organizational chart as follow:

Figure 3: Public companies organization chart 27

General Shareholder‟s Meeting

Departmental level

Departmental level

MANAGEMENT LEVEL

GOVERNANCE LEVEL

Corporate governance refers to the relationships among the Board of directors, top management and shareholders The Board of directors oversees the top management, with the concurrence of the shareholders (the business owners)

As illustrated in Figure 3 above, the Board of directors provides oversight to management The Board also hires and evaluates the firm‟s Chief Executive Officer (CEO), normally also called the President The CEO serves as a connecting link between the Board, or Governance Level, and management team In effect, the

27 Thomas Frisenberg, Mads Svendsen, and Roger H Ford, “An Introduction to Corporate Governance: A Global Concept for Vietnamese Enterprises”

In brief, corporate governance is the relationship between corporate managers, directors and providers of equity, people and institutions who save and invest their

capital to earn a return And overall, corporate governance help “enhance long term shareholder value” 28 which is one of the biggest concern of long-term investors 1.2.2.2 The impacts of good corporate governance to listed companies

According to the International Finance Corporation in “The tangible benefits

of good governance”, there are several benefits result from good governance practices Among them:

 Improved top level decision-making processes

 Better control environments

 Reduction in firms‟ cost of capital

According to the “OECD Principles of Corporate Governance”, the good corporate governance practices will:

 Help improve the confidence of domestic investors

 Reduce the cost of capital

28 Report of the Committee and the Code of Corporate Governance (Singapore), 2001

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 Underpin the good functioning of financial markets

 Induce more stable sources of financing

According to the International Finance Corporation in “The tangible benefits

of good governance”, good corporate governance can help:

 Strengthens competitiveness for both companies and economies

“Since the adoption of better corporate governance practices can improve the top level decision making processes and reduce the cost of capital, there

is a good probability that better-governed companies can create more shareholder value through better operational result” 29

Figure 4: Corporate Governance Practices and Firm Performance30

 Brings stability to stock markets

For companies listed on a stock exchange, the most commonly discussed benefit of good governance is the effect on share value, liquidity and investor portfolio composition31

29

International Finance Corporation, The tangible benefits of good governance, 2009

30 K Heenetigala and A Armstrong, The Impact of Corporate Governance on firm performance in an

unstable economic and political environment: Evidence from Sri Lanka”, Victoria University, Australia

31 International Finance Corporation, The tangible benefits of good governance, 2009

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1.2.2.3 Indicators of good governed companies

“There is no single model of corporate governance Governance practices vary not only across countries but also across firms and industry sectors”32

There are various indicators of a good governed company but after all, they concern with the commitment to company values and good governance standards In this area, The OECD Principles of Corporate Governance made clear direction when they build indicators of good governed companies embracing six parts:

 Ensuring the basis for an effective corporate governance framework

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities33

 The rights of shareholders and key ownership functions

The corporate governance framework should protect and facilitate the exercise of shareholders‟ rights34

 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

32 Maria Maher and Thomas Andersson, “Corporate governance: Effects on firm performance and economic growth”, OECD, 1999

33 OECD, “OECD Principles of Corporate Governance”, 2004

34 OECD, “OECD Principles of Corporate Governance”, 2004

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 The role of stakeholders in corporate governance

The corporate governance framework should recognise 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 enterprises35

 Disclosure and transparency

The corporate governance framework should ensure that timely and accurate disclosure ismade on all material matters regarding the companies, including the financial situation, performance, ownership, and governance of the company, especially in abnormal events

 The responsibilities of the Board

A good corporate governance framework ensures the companies are guided under best suitable BoDs who give effective monitoring of management and show their accountability to the companies and the shareholders Moreover, there is a sound relationship among Board of Directors, Board of Management and Shareholders Just as democratic political system cannot work without involved citizens, corporate governance cannot work without the involvement of three critical groups: Board of Directors, Board of Management and Shareholders These three parties are necessary in improving the decision making quality of companies That means, decisions should be made right, at right time, be able to avoid or minimize the possibility of mistakes and in case of mistakes, they are corrected timely The directors show clear goals and direction to help managers make the best possible decisions, and shareholders have chance to voice their expectation or concerns The interaction is encouraged for companies benefits‟ sake

35 OECD, “OECD Principles of Corporate Governance”, 2004

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The corporate governance, accordingly, has to create a clear framework which promotes transparency and efficiency, and clearly articulates the division of responsibilities among different supervisory, regulatory and enforcement

authorities

1.3 Why good leadership and corporate governance practices can help companies in general and Vietnamese listed companies in particular to improve institutional investment

The OECD has proven the relevance between corporate governance practices and the increasingly international character of investment When a company applies good corporate governance practices, it will have the confidence of both individual and especially institutional investors, and ultimately attract and increase stable sources of financing from them

1.3.2 Mitigate agency problems

“Corporate governance has traditionally been associated with the agent” or “agency problem” 37

“principal-

“The separation of ownership and control to be an inevitable attribute of public corporations”38 The consequences of such separation are generally referred to as agency costs, and agency theory has been the predominant paradigm for understanding and explaining corporate governance issues

36

OECD, “OECD Principles of Corporate Governance”, 2004

37 Maria Maher and Thomas Andersson, “Corporate governance: Effects on firm performance and economic growth”, OECD, 1999

38 Stephen M Bainbridge, „The Politics of Corporate Governance‟ (1995)

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One of the biggest central problems of the capital suppliers is how to create mechanisms to effectively monitor the agents (boards and managers) that will reduce the possible losses due to the separation of ownership and control The BoDs

is the corporate instrument designed to hold managers accountable and is the linchpin in the system of monitoring39

To minimize such losses, the capital suppliers review the investee companies to find whether they have sound management, transparency in the conduct of public affairs, accountability on the part of public officials, obedience to the laws of the marketplace which are aspects of good corporate governance Furthermore, good corporate governance stems from the ethical leadership of the company That means, (1) The moral character of the leader; (2) The ethical values embedded in the leader‟s vision, articulation, and program which followers either embrace or reject, and(3) The morality of the processes of social ethical choice and action that leaders and followers engage in and collectively pursue

When the company can show to the insiders and outsiders their good leadership and corporate governance, it can raise trust from them, especially the investment community who always concerned with agency problem

1.3.3 Create greater value for companies

A well led and governed company creates a sense of belonging among group members It gives an identity, brings them together and enables them to do more than they could as individuals It turns the group into cohesive energy source and helps them fort externally with their environment Such company encourages equal participation in decision making, supports risktaking, confronts changes and develops a sense of strong emotional conviction, conveys passion and instills values that generates self-confidence and belief and purpose incollective goals and

39 Hambrick D.C., Jackson E.M (2000) „Outside directors with a stake: The linchpin in improving governance‟, California Management Review, No 42, issue 4, s 108-127

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objectives Values are enduring belief and if in place, it is likely that the group would endure hardships of any kind including “ups & downs” Similarly, if acompany has good leadership and corporate governance practices; it will be able to outperform itself, its rivals and survive through hard time to ultimately create wealth to its shareholders

1.3.4 Institutional investors would pay a good premium for well led and governed companies

Well led and governed companies easily receive a premium pay as they are believed

to perform well over time As aresult, they bring higher returns, reduce the likelihood of bad things happening and even if they do happen, these companies would rebound more easily That said, good leadership and governance made a difference for stocks in terms of price

Chapter summary:

Chapter 1 provides an economic rationale for why leadership and corporate governance matters to the institutional investment It explored the relationship between good corporate leadership-governance practices, corporate performance and the improvement of investment from institutional investors

Generally, determinants of institutional ownership include: (1) Industry prospect, (2) Companies‟ financial data, (3) Management and (4) Plans These are factors that attempt to demonstrate to investors the ability of a company to succeed in the future, to increase the value of its equity and to use its capital effectively

Meanwhile, good leadership and corporate governance practices could help companies enhance investors‟ confidence as they mitigate agency problems, create greater value for companies and therefore institutional investors in most cases are willing to make investment decision and pay a good premium for well led and governed companies

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CHAPTER 2: ANALYSIS AND ASSESSMENT ON THE

APPLICATION OF LEADERSHIP-CORPORATE GOVERNANCE

PRACTICES IN VIETNAM LISTED COMPANIES

This chapter provides a snapshot on Vietnam economic outlook and securities market, makes assessment on the application of leadership and corporate governance practices in Vietnam and show three examples of Asia Commercial Bank (ACB), FPT Corporation (FPT) and Vinamilk (VNM) which have the ability

to keep quality institutional ownership over years

2.1 Business environment in Vietnam

2.1.1 Vietnam Economic Outlook

2.1.1.1 General

Vietnam is a densely-populated, developing country that in the last 30 years has had

to recover from the ravages of war and the rigidities of acentrally planned economy Substantial progress was achieved from 1986 to 1997 in moving forward from an extremely low level of developmentand significantly reducing poverty After more than two decades of reform, Vietnam has made remarkable economic and social transition in recent years The achievements werethe payoff to the reforms initially launched in the 1980s Although the1997 Asian financial crisis temporarily slowed the growth, GDP growth of 8.5% in 1997 fell to 6% in 1998 and 5% in 1999, it started to grow strongly again to 7.1% in 2000-2006 even against the background ofglobal recession Since 2001, Vietnamese government has moved to implement the structural reforms needed to modernize the economy and to produce more competitive export-driven industries The reform promoted market principles while maintaining a central role for state enterprises The Government recognizes that it must integrate itself into the rest of Asia and the world, building bridges with its neighbor in itsquest for economic growth.The government makes an effort to reform state-owned enterprises (SOEs), but progress is slow There are signs that the competition law will be applied more forcefully The government considers