Corporate governance, state ownership and performance evidence from vietnamese joint stock credit institutions

CORPORATE GOVERNANCE, STATE OWNERSHIP AND PERFORMANCE: EVIDENCE FROM VIETNAMESE JOINT STOCK CREDIT INSTITUTIONS In Partial Fulfillment of the Requirements of the Degree of MASTER OF BU

CORPORATE GOVERNANCE, STATE OWNERSHIP AND

PERFORMANCE: EVIDENCE FROM VIETNAMESE JOINT STOCK CREDIT INSTITUTIONS

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

CORPORATE GOVERNANCE, STATE OWNERSHIP AND PERFORMANCE: EVIDENCE FROM VIETNAMESE JOINT STOCK CREDIT INSTITUTIONS

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance Major

by Trần Mạnh Tín ID: MBA03032 International University - Vietnam National University HCMC

STAT Status (Dummy variable list or unlisted)

Acknowledge

I would like to thank to my friend, Mr Nguyen Duc Thinh He gave advices and helped me a great deal in collecting secondary data for the research I wish to give my special thank to Assoc Prof Le Nguyen Hau, my Lecturer of Business Research Method Course, for his great support, constructive feedback and thorough understanding to teach me how to conduct a business research I wish to give my deep gratitude to Dr Le Vinh Trien, Lecturer

of Financial Markets and Institutions Course and my thesis advisor for his valuable instruction for written version of this thesis proposal And finally, I am very grateful of my classmate and my friends for their mental encouragement and practical suggestions during the draft research process

Plagiarism Statements

I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions I fully understand that any writings in this thesis contradicted to the above statement will automatically lead to the rejection from the MBA program at the International University – Vietnam National University Hochiminh City

Copyright Statement

This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author’s prior consent

© Trần Mạnh Tín / MBA03032 / 2013

Table of Contents Page

1.2 Defining the management problem / dilemma 12

1.5 Importance / significance of the research 12

2 INSTITUTIONAL BACKGROUND OF VIETNAM CIs 14

3.1.1 General International Corporate Governance 18

3.1.2 International Corporate Governance for Banking ` 20

3.1.3 General Corporate Governance in Vietnam 22

3.1.4 Corporate Governance for Vietnamese Financial Institutions 23

3.4.2 State Ownership, Corporate Governance and Performance 28

6 DISCUSSION, CONCULSION AND RECOMMENDATIONS 41

REFERENCES 47

ABSTRACT

It is generally agreed that in a joint stock credit institution, beside financial indicators; Corporate Governance and ownership play fundamental roles in JSCI operation and overall performance In Vietnam, there are several surveys about Corporate Governance in general and Corporate Governance and Firm Performance in particular However; the relationships among Corporate Governance, Ownership and Performance have not yet been explored

This research attempts to find out whether there is any relationship between Corporate State Ownership and Performance In addition, the research would investigate if Corporate Governance can mediate the relationship The research will be conducted on Vietnam joint stock credit institutions

It is revealed from the analysis of 42 JSCIs for specific period of time from 2009 to

2011 that there is a positive association between State Ownership and Performance Arguably, if State Ownership ‘‘causes’’ Performance, it should be through the channel of Corporate Governance For this reason, the study checks the robustness of this positive SO/performance finding by analyzing the role of Corporate Governance as a Mediator It can

be emerged that State Ownership in the specific context of Vietnam joint stock credit institutions may represent a strategic asset

Key works: Joint Stock Credit Institution, Corporate Governance, State Ownership, Performance, Mediator

1 INTRODUCTION

At this moment, the financial sector still generates a lot of controversy both at the regulator and the banker level The regulators have been discussing on tightening banking rules At the same time, the banks have also been strengthening their own health with very strict supervision, one of which is to reinforce management practices such as corporate governance The results of this research can be of useful reference for the credit institutions for procedure review and improvement

In this beginning chapter, readers will understand the reasons behind the choice of this research problem A brief explanation of the objectives of the study as well as research questions will then be presented Then an overview of the research approach and the structure will be discussed to conclude the chapter

1.1 Background of the Study

In a developing country like Vietnam, the financial sector is still in the development phase and many local JSCIs have not been able to establish a workable management framework in order to prevent unfavorable events This is critical when Vietnam JSCIs customer services are still in their infancy and JSCIs revenue depends heavily on lending activities and credit growth is important to any banking organization profit In addition, the controlling and monitoring action from the central bank – State Bank of Vietnam (SBV) have not yet been supportive and effective enough for JSCIs Management and Operation

This is where concern about this research topic began Instead of analyzing owned CIs that have quite comprehensive management framework built by their parent corporations, the author pays more attention to the practices in joint-stock credit institutions (JSCIs) which are always under competitive and profit pressure in an unfair banking market Sales and profit targets make them sometimes ignore what should be carefully done and this poses an extreme threat to the overall performance But it is believed that the JSCIs can compete against their big rivalries by understanding and embracing sound management policies in which strong corporate governance play fundamental roles The point is they are not strong yet in this area despite the fact that JSCIs are actively joining hands with the central bank to improve their management There are several facts of the JSCIs management framework, such as:

foreign-+ Limited experience in modern banking techniques, products, management models

+ Lack of accurate, reliable and complete data for decision making

+ Poorly developed accounting, reporting and bank supervision guidelines to deliver on time the useful information on the performance of JSCIs

+ Non-transparent legal and regulatory environment, e.g legal security over assets, recovery

of bad debts, and profitable banking activities

1.2 Defining the management problem / dilemma

It is clear that organizations operate in an ever-changing climate To be able to cope with this changing industrial world, organizations need instituted corporate governance, control This leads to the following question:

Why is strong corporate governance important for Vietnamese JSCIs?

+ How strong is Corporate Governance of Vietnamese JSCIs?

+ Is relationship between state ownership and performance is significantly positive?

+ Is relationship between state ownership and corporate governance is significantly positive? + Can corporate governance function as a mediator of the relationship between state ownership and performance?

1.5 Importance / significance of the research

The evaluation of corporate governance, state ownership and performance evaluation

is quite new in Vietnam There is no research on combination of corporate governance, state ownership and performance in Vietnam Firms in general and in JSCIs in particular

1.6 Scope / presumption of the research:

+To focus on Corporate Governance, State Ownership and Performance of Vietnam JSCIs +To get the secondary data from JSCIs Annual Reports from 2009 to 2011, the JSCIs internal documents, the State Bank of Vietnam’ s regulation database, published literature

+The performance statistics are limited Vietnamese banking sector data base is still very simple and non-transparent

1.7 Research approach

For this thesis, only secondary data are used The information collected is based predominantly on desk research Secondary data are collected from the literature (books,

journals, previous research papers, websites, etc.), the State Bank of Vietnam regulation database, the annual reports and published internal policies As an explorative and empirically oriented case research project, a quantitative approach is applied The SPSS is used as a tool to analyze the collected data

1.8 Structure of the Study

There are six chapters in the study The 1st chapter is dedicated to background information on the research problem, the motivations behind it, the study objectives and research approach The 2nd Chapter is Institutional background of Vietnam Credit Institutions The 3rd Chapter follows with an emphasis on the theories supporting this thesis The 4th Chapter will deal with quantitative research methods employed in the study The methodology is built to serve the main section: empirical study in chapter 5 The 5th chapter answers four research questions mentioned in 1.4 at a practical level of Vietnamese JSCIs Finally, the discussion, conclusions and recommendations will conclude thesis in the 6thchapter

2 INSTITUTIONAL BACKGROUND OF VIETNAM CREDIT INSTITUTIONS

CIs play a vital role in the financial industry of a country They are among the most heavily regulated of all industries due to their key roles in attracting and protecting the public’ s savings, providing credit to a wide range of borrowers, and creating money to serve

as the principal medium of exchange in a modern economy The banking sector are rapidly globalizing and experiencing intense competition in marketplace after marketplace around the world, not just only between CIs, but also involving security dealers, insurance companies, credit unions, and many other financial services competitors

From 2000, Vietnam Government launched the financial and organizational restructure of the state-owned commercial banks and joint - stock commercial banks Then on

2003, Vietnam Government started to implement the comprehensive operational restructure

of commercial banks toward in line with international standards After Vietnam joined the WTO in January 2007, to reform the banking sector and facilitate the liberalization of the commercial process, the government of Vietnam has announced the “Internationally Integrated Programme” of the Banking Industry Vietcombank (VCB) is the very first state-owned commercial banks selected by the Government to pilot equitization, the Bank for Foreign Trade of Vietnam officially has operated as a Joint Stock Commercial Bank since 02/6/2008 after successful equitization plan through the issuance of shares for the first time to the public On 30/6/2009, VCB stock was officially listed on the HCM City Stock Exchange However; until now, Vietnam has still maintained a variety of restrictions on its financial markets In addition to imposing capital controls and regulating interest rates, the government controls both the set of firms that can sell equity on the domestic or foreign stock markets, and the amount they can sell

By June 2012 according to State bank of Vietnam data, Vietnam has 35 Joint-stock credit institutions, 5 majority State-owned credit institutions (in which Vietcombank and Vietinbank are listed in Stock; BIDV is going to be listed), 5 Wholly Foreign-owned Banks and 4 Joint – Venture Banks The minimum charter capital for a bank is 3,000 billion VND Beside Commercial banks, there are also 18 Financial Companies and 8 of them are Joint stock Financial Companies in which only one JSFC (PVF) is listed The minimum charter capital for a Financial Company is 500 billion VND

Vietnam banking market is highly concentrated at the top and fragmented at the bottom The four largest CIs (VCB, CTG, BIDV, and Agribank) are majority state-owned and gain the major market share The current ceiling for a foreign shareholder and a strategic shareholder in local JSCIs are set, respectively, at 30% and 15% of the total charter capital

In Vietnam, the legal framework for corporate governance is in the initial stages of development The very first version of Law on Credit Institutions was Law No 02/1997/QH10 This Law is passed by the Xth Legislature of the National Assembly of the Socialist Republic of Vietnam in its second session on 12 December 1997 This law came into effect as of 01 October 1998 The Ordinance on Banks, Credit Cooperatives and Finance Companies dated 23 May 1990 was ceased to be effective as of the effective date of this Law

It was amended by Law No 20/2004/QH11 which was passed by the XIth Legislature of the National Assembly of the Socialist Republic of Vietnam in its fifth session on 15 June, 2004 and become effective from 1 October, 2004

On International Corporate Governance Meeting: Why Corporate Governance Matters for Vietnam; OECD/ World Bank Asia Roundtable on Corporate Governance, 2004; Mr Phung Khac Ke, Deputy Governor, State Bank of Vietnam addressed statements as below listed:

“The importance of good corporate governance for Vietnam credit institutions:

In any single economy, banks play an important and sensitive role Its performance directly affects the growth, efficiency and the stability of the economy Therefore, corporate governance is of special importance and considered the key for corporation to successfully achieve its strategy and ensure the stable development of the sector

In banking sector, international integration has brought opportunity to international exchange and co-operation, allowing Vietnam banks to have access to global funding sources and technical assistances, therefore permitting them to better meet capital need (in particular long-term capital) of the economy and serving as a stimulus for reform and modernization of Vietnam banking sector and for the enhancement of banking management capability in accordance with international standards

Effectively defining objectives and implementing corporate governance in Vietnam banks have been reducing potential obstacles with which Vietnam banking and financial sector is facing, which include:

- Our banking and financial system is underdeveloped as compare with regional and international one It is obvious that the system is expanding, but it still fails to meet the increasing and high demand of the economy for a wider range of financial products offered Offer of key financial products for private sector, especially for SOEs still remains limited

- Banks’ weak capability to protect itself against potential exposures that may be caused by customer intention or economic regime is the inevitable outcome of low infrastructure and weak human resource competence

- Vietnam accounting and auditing system still fails to become a real component of the economy’s information infrastructure and still lags behind international standards Information transparency, which is one of important factors to satisfy the need of a sound development of the market, should be considered the first priority

- Current regulation and legal framework still create barriers leading to inefficient allocation

of financial resources Financial institutions suffering high cost of operation therefore have disadvantages in terms of market competition and apply high charge on services provided to customers

- In particular, good corporate governance in Vietnam banks will bring a sound financial situation to banking sector; create chance for capital accumulation to reinvest more efficiently into the economy.”

Since Vietnam has transformed toward a market oriented economy and especially since Vietnam has became a member of the WTO in 2007, corporate governance has been set

as an urgent and essential issue in the overall development of the economy For CIs with specific business organizations related to "money" with high-risk and the high level of impact

to the emerging economy, the issue of corporate governance is even more meaningful and much more important A CI with weak corporate governance will not only damage itself, but also creates certain systematic risks to other businesses

In 2007, the Ministry of Finance has issued mandatory corporate governance

regulations Decision No 12/2007/QĐ-BTC applicable to listed companies and commercial

banks, encouraged to apply in unlisted companies On July 16, 2009, the Prime Minister signed Decree 59/2009/ND-CP, on the organization and operation of commercial banks Decree consists of six chapters, effective from the date of 15/09/2009

The latest Law on Credit Institutions No 47/2010/QH12 (2010) is specific foundation document about corporate governance in banking sector There are key articles about principle of corporate governance of credit institutions The Chapter III is about

“Organization, Governance and Administration of Credit Institutions The section 2 of Chapter III states about “General provisions applicable to Credit Institutions being Joint-stock companies and Limited Liability companies This section includes 9 articles from 43 to

51 The Section 3 of Chapter III has only specific principles about Credit Institutions being Joint-stock companies There are 13 articles being numbered from 53 to 65

There are three important principles for corporate governance for joint stock credit institutions in this Law The first principle is about the structures of Board of Directors, Members' Council, and Control Board It is stated in Articles 43, 44 and 48 The second principle is about Rights and Obligations of Board of Directors, Members' Council, and Control Board It is stated in Articles 45, 46, 47, 49 The third principle is about business ethics The Article 50 gives out the “Criteria and conditions for mangers, executives and holders of some other posts of a credit institution”

However, corporate governance in Vietnam is still a relatively new topic For the Vietnamese banking system, the fundamental problem of corporate governance (such as the relationship between the Board and the Executive Committee, the real role of the Supervisory Board, transparency, publicity, etc.) have not been fully studied Recently, the government has been beginning to implement the policy of restructuring the economy The restructuring

of the banking system is one of the three pillars in the spirit of the Resolution of the 3rd the

XIth Party Central Committee Observably, corporate governance in the Vietnamese CIs is very significant and important in the present time

3 LITERATURE REVIEW

3.1 Corporate Governance

3.1.1 General International 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 States, other relevant international organizations and the private, a set of corporate governance standards and guidelines Since the Principles were agreed in 1999, they have formed the basis for corporate governance initiatives in both OECD and non-OECD countries alike

According to The OECD’S (1999) original definition, “Corporate governance specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs By doing this, it also provides the structure through which the company objectives are set, and the means of

attaining those objectives and monitoring performance.”

On the OECD’S Principles of Corporate Governance (2004) version, the OECD principles define corporate governance as involving “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 company are set, and 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 its shareholders and should facilitate effective monitoring The presence of an effective corporate governance system, within an individual company or group and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy.” The Principles of Corporate Governance are:

+ Ensuring the Basis for an Effective Corporate Governance Framework

+ The Rights of Shareholders and Key Ownership Functions

+ The Equitable Treatment of Shareholders

+ The Role of Stakeholders in Corporate Governance

+ Disclosure and Transparency

+ The Responsibilities of the Board

Many definitions of corporate governance stress the potential conflicts of interest between insiders (managers, boards of directors, and majority shareholders) and outsiders

(minority shareholders and creditors) of the company The set of internal and external mechanisms to balance these conflicts of interest is what it is usually known as corporate governance (Urbi Garay and Maximiliano González, 2008.)

La Porta et al (1997) study a sample of 49 countries and conclude that countries with

legal systems based on Civil Law, especially the French legal system, provide less protection

to investors and have less developed capital markets, particularly when compared with countries from the Common Law origin These authors also conclude that dividend policy constitutes an essential tool to reduce agency conflicts to minority investors

These findings are consistent with the theoretical model presented in La Porta, de-Silanes, Shleifer and Vishny, (2002), where the positive effects of good corporate governance practices on firm valuation are explained by higher investor confidence This situation lowers the cost of capital and, ultimately, increases firm value Also, these results are consistent with the agency model of dividend payout in the corporate governance framework developed in La Porta, López-de-Silanes, Shleifer and Vishny (2000b)

López-Since the seminal empirical papers of La Porta et al (1997, 1998, 1999, 2000a)

showing that laws that protect investors differ significantly across countries, in part because

of differences in legal origin, the academic focus has shifted to study corporate governance in the international setting Klapper and Love (2004) was among the first and more comprehensive papers focusing on corporate governance in emerging markets Using firm-level evidence on corporate governance practices for 495 companies from 25 emerging markets, they show that better corporate governance is highly correlated with better operating performance and market valuation

Many country-studies have used a methodology that is very similar to that of Klapper and Love (2004) For example, Black, Jang and Kim (2006a) constructed a CGI for South Korea; and Black (2001) and Black, Love and Rachinsky (2006b) both studied how their CGI affects firm value in Russia The empirical evidence for Latin America has also grown rapidly in recent years Leal and Carvalhal-da-Silva (2005) studied Brazil, Chong and López-de-Silanes (2006) studied Mexico, Lefort and Walker (2005) studied Chile, and Garay and González (2005) studied Venezuela All these papers show that, on average, a good set of corporate governance practices and policies is positively related to firm value

Corporate governance usually represents strategic orientation throw set of processes, customs, polices, laws and institutions affecting the way any corporation is directed, administered and controlled Corporate governance is reliant on external factors (law, institutions, market, global situation, etc.), but internal factors (employees, strategies,

knowledge, etc.) can give opportunity to differentiate from competitor on global market

(Golja, Nizic and Paulišić; 2011) Also, corporate governance help businesses to meet global

challenges while improving organizational competitiveness and safeguarding the interests of all stakeholders (Crowther and Aras, 2009)

Corporate governance is very important because of its influence on: reputation; rights and treatments of shareholders, relations with stakeholders; transparency and openness of company, etc Corporate governance is nowadays used as managerial tool Good corporate governance should contribute to better company performance by helping a board discharge its duties in the best interests of shareholders; if it is ignored; the consequence may well be vulnerability or poor performance (FRC, Financial reporting Council, 2008) Governance needs to assure expected behavior, ethical standards, culture, and to monitor institutional changes, community and media environments But crisis has opened the old debate about the costs and benefits of regulation as opposed to market mechanisms (OECD Steering Group on Corporate Governance, 2010, 6)

Good corporate governance requires appropriate and effective legal, regulatory and institutional foundations (Basel Committee on Banking Supervision, 2006) Furthermore we can recognize eight principles of governance which underpin every system of governance (Crowther and Aras, 2009): (1) transparency; (2) rule of law; (3) participation; (4) responsiveness; (5) equity; (6) efficiency and effectiveness; (7) sustainability and (8) accountability

3.1.2 International Corporate Governance for Banking

On September 1999, Basel Committee on Banking Supervision also set up

“Enhancing Corporate Governance for Banking Organizations” After that on February 2006, Basel Committee on Banking Supervision issued “Principle for enhancing Corporate Governance” Then on October 2010, Basel Committee on Banking Supervision issued revised “Principle for enhancing Corporate Governance” With 14 principles are divided into

5 categories: (1) Board Practices, (2) Senior Management, (3) Risk management and internal controls, (4) The compensation system, (5) special guidelines for banks

In financial markets, there are various areas in which problems related to corporate governance arise like agency problems and the subsequent ethical problems that may lead to; the problems concerning insider trading; manipulation; reporting for general public; and providing information to investors (Crowther and Aras, 2009) The banking sector is not necessarily totally corporate Some part of it is, of course, but a segment of banks is mostly

State owned as statutory corporations or run as cooperatives (Addressed by Mr V Leeladhar,

Deputy Governor of the Reserve Bank of India, 2008) Although State ownership of a bank has the potential to alter the strategies and objectives of the bank, a state-owned bank may face many of the same risks associated with weak corporate governance that are faced by banks that are not state owned (Basel Committee on Banking Supervision , 2006)

A good banking system is the backbone of a sustainable economy (Maharjan, 2011) Since the market control is not sufficient to ensure proper governance in banks, the State does see reason in regulating and controlling the nature of activities, the structure of bonds, the

ownership pattern, capital adequacy norms, liquidity ratios, etc (Leeladhar, 2009) But it is

important for jurisdictions to regularly review whether their supervisory, regulatory and enforcement authorities are sufficiently resourced, independent and empowered to deal with corporate governance weaknesses that have become apparent (OECD Steering Group on Corporate Governance, 2010, 6) From banking industry perspective, corporate governance involves the manner in which the business and affairs of banks are governed by their boards

of directors and senior management, which affects how, they (Basel Committee on Banking Supervision, 2006):

+ set corporate objectives;

+ operate the bank’s business on a day – to – day basis;

+ meet the obligation of accountability to their shareholders and take into account the interests of other recognized stakeholders;

+ align corporate activities and behavior with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations, and

+ protect the interests of depositors

Banking as a sector has been unique and the interests of other stakeholders appear more important to it than in the case of non-banking and non-finance organizations the involvement of State is discernibly higher in banks due to importance of stability of financial system and the larger interests of the public (Leeladhar, 2009) So, effective corporate governance practices are essential to achieving and maintaining public trust and confidence in the banking system, which are critical to the proper functioning of the banking sector and economy as a whole (Basel Committee on Banking Supervision, 2006) On other side, poor corporate governance may contribute to bank failures, which can pose significant public costs and consequence due to their potential impact on any applicable deposit insurance systems and the possibility of broader macroeconomic implications, such as contagion risk and impact

on payment systems consequently all market can lose confidence (Basel Committee on Banking Supervision, 2006) A variety of factors, including the system of business laws and

accounting standards, can affect market integrity and overall economic performance but such factors are often outside the scope of banking supervision (Basel Committee on Banking Supervision, 2006)

There are four important forms of oversight that should be included in the organizational structure of any bank in order to ensure appropriate checks and balances (Basel Committee on Banking Supervision, 2006): (1) oversight by the board of directors or supervisory board; (2) oversight by individuals not involved in the day – to-day running of the various business areas; (3) direct line supervision of different business area and (4) independent risk management, compliance and audit functions In addition, it is important that key personnel are fit and proper for their jobs

At the end, we should highlight that the corporate governance of banks in developing

economies is important because (Arun and Turner, 2003): (1) banks have dominant position

in financial system and they are important engine of economic growth; (2) financial market is usually undeveloped and banks represent main source of finance for the majority of firms; (3) banks in developing country are usually the main depository for the economies saving’s; (4) developing economies have recently “liberalized” banking system through privatization/disinvestments and reducing the role of economic regulation

3.1.3 General Corporate Governance in Vietnam

The Law on enterprises No 60/2005/QH12 (2005) is the in foundation document about corporate governance in Vietnam The law created a unique corporate governance framework for enterprises regardless of their capital ownership or economic sector In other word, the law on enterprise provided a corporate governance framework that every enterprise has to comply with However, corporate governance framework that is stipulated by the law

is not so clear, comprehensive It needs many additional documents (Degree, Decision, Order…) to make it applicable

On 2011, Dr Nguyen Thu Hien and Research Team conducted a corporate

governance scorecard report This Corporate Governance Scorecard report was

commissioned by IFC and the Global Corporate Governance Forum (GCGF) in collaboration

with the State Securities Commission of Vietnam The Corporate Governance Scorecard is a

review and report on the corporate governance practices of the 100 largest listed companies

in Vietnam for 2010 and 2011 “It is clear that some advances have been made in CG practices in Vietnam between the Baseline Review and Report last year and this review The large number of companies with weak CG has reduced However, it is clear that CG continues to be practised more as a compliance exercise with companies appearing to address

CG from a minimalist perspective This approach will hold Vietnamese companies back from reaching best CG practices as more effort than the minimum required by law and regulation

is needed.” “Financial information is basic and most important for investors’ decisions Financial information, however, was observed as often being incomplete, late and unreliable Companies and regulators should insist on fully complete financial statements and interim information that is timely and reliable To accomplish this, development of the accounting and audit profession, plus accounting and auditing standards in line with international best practices is an important matter” “Companies have yet to receive the message that sound CG

is good for business and it can positively affect the profitability and market performance of Vietnamese companies” “It was also evident that the government and regulators are committed to improving CG practices in Vietnam The state, as a major shareholder, is in a powerful position to be a ‘champion’ of good CG and it could demand best practices in CG from its directors and boards Furthermore, regulators and government bodies can provide resources to ensure CG development, monitoring and enforcement In particular, the regulatory agencies need to demonstrate commitment to monitoring and enforcement of the application of the laws and regulations and apply skilled resources to these activities Enforcement measures need to be sufficiently strong to act as a deterrent” “Based on company financial information, firms with better-observed CG practices or scores seemed to demonstrate better profitability The study also found out that “that the larger the company, the better CG scores overall”

3.1.4 Corporate Governance in Vietnamese Financial Institutions

On 2008, Dr Tran Bao Toan did a qualitative research “Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance” and found out that the corporate governance in banking sector can be significantly improved The board members and members of top management understand the important role of Corporate Governance in Banking If the country’s corporate sector wants to avoid the repetition of scandals in the future, and wants to create efficient and competitive business entities which can compete successfully with their overseas peers, both, in international markets as well as in an increasingly liberalized domestic market, then they have to create a more robust, sustainable, larger business In order to achieve these goals, it is important to introduce and implement a modern approach to corporate governance practices

There is clear evidence that the enactment of good corporate governance can have a tangible positive impact on the following issues: (1) Company’s efficiency and operational performance; (2) Ability to access finance, particularly from investors and capital markets;

(3) The reduction of risk related to its day-to-day operations; (4) The compliance with laws and regulations; and (5) Ability to protect itself from corrupt practices (Tran 2008)

A very first study on “Governance and Firm Performance of Financial Institutions in Vietnam” (Le and Nguyen 2012) was published on Banking Technology Review No 78 (September 2012) “This study is to analyze and evaluate the corporate governance practices

in financial institutions (FI’s) in Vietnam, including 37 Commercial Joint Stock Banks, 16 Insurance Corporations and 7 Finance Joint Stock companies The empirical results show that the CGI is positively associated with ROE and ROA and the correlation is statistically significant at the 0.01 level This suggests that in Vietnam, FI’s with higher corporate governance scores have higher performance in term of ROE and ROA.”

3.2 Ownership

3.2.1 Block Ownership

There is presumption in the literature that block shareholders have power and stronger incentive to ensure shareholder value maximization (Jensen and Meckling, 1976; Waseem Anwar, 2011) The empirical evidence on corporate governance suggests that large owners have stronger incentive and better opportunities to exercise control over manager than small shareholders Claessen, 2002 finds evidence of a positive relation between shareholding concentration and firm performance

An ownership structure in which one or more shareholders own a large block of stock has the potential for disproving managers from engaging in moral hazard behaviour A block holder may also propose a person to represent him or her in the board of directors in order to ensure that the management is acting in the interests of shareholders Block-holder ownership above a certain level may lead to entrenchment of owner-mangers that expropriate the wealth

of minority shareholders (Morck et al., 1988)

La Porta et al (1997, 1998, 1999 and 2000) have shown that the countries with weak

legal environment, the original owners tries to maintain large positions in their corporations which results in concentration of ownership Equity ownership by insiders can align insider interest with those of shareholders, thereby leading to greater firm value (Klapper and Love, 2002)

3.2.2 State Ownership

State ownership of banks is a common feature in many developing economies (La Porta et al 2002) The reasons for such ownership may include solving the severe

informational problems intrinsic in developing financial systems and aiding the development process The State is more fitted to allocate capital to certain investment

There are two additional theories which have been advanced for State participation in the financial market, namely the development view and political view The development view suggests that in some countries where the economic institutions are not well developed, State ownership of strategic economic sectors such as banks is needed to jump start both financial and economic development and foster growth In political view, States acquire control of banks in order to provide employment and benefit to supporters in return for votes, contributions and bribes Such approach is greater in countries with underdeveloped financial system and poorly developed property rights Under development view, State finance projects are socially desirable Therefore, States finance projects that would not be privately financed

in both views (La Porta et al 2002) Greater State ownership of banks tends to be associated with lower bank efficiency, less saving and borrowing, lower productivity and slower growth (Barth et al 2000)

3.3 State Ownership and Corporate Governance

State ownership of publicly-traded corporations remains pervasive around the world, and has been increasing in recent years The conflict of interest stemming from the state’s dual role as both shareholder, and regulator can influence the content of corporate laws

On 2005, OECD published “OECD Guidelines on State-Owned Enterprises” The

OECD Guidelines on Corporate Governance of State-Owned Enterprises define and demonstrate ways of balancing between the State's responsibility to actively implement its ownership functions (such as selection and nomination onto supervisory boards) while at the same time resisting inappropriate political interference in the governance of these enterprises The Guidelines explain that in markets where private companies compete with state-owned companies there are equal opportunities; and also, that by the method in which the States apply their legislative and supervisory powers, they do not distort the competition The Guidelines suggest that the State should exercise its ownership function through a centralised ownership unit which needs to operate independently and in compliance with its publicly disclosed ownership policy An important element is a strict separation of ownership and legislative functions of the State In this way the State’s ownership is exercised in a professional and responsible manner, and the State holds a positive role in improving corporate governance in all sectors of the economy

The Guidelines also propose that the policy-making in regard to the State’s ownership steering should be publicly disclosed and that the State should prepare annual reports on

policy implementation as well as aggregated reports on the SOEs’ performance in order to ensure better transparency of corporate governance of SOEs An important element of good corporate governance, as emphasised in the guidelines, is the responsible conduct of SOEs’ supervisory and management bodies; the same applies to the relation between the State as the shareholder and these bodies

The Guidelines are specifically dedicated to issues characteristic of the corporate governance of SOEs, and discuss these questions from the point of view of the State as an owner while also focusing on policies that would provide good corporate governance of SOEs At the same time, the OECD Guidelines do not oppose various policies or privatisation programs carried out by the OECD countries

3.4 Hypotheses development

3.4.1 State Ownership and Performance:

Recently, transitional economies in Eastern Europe, China, Venezuela, Vietnam….have been reforming governance in the orientation to market liberalization, moving toward market-based systems Consequently, ownership structures and firm performance have been changing with transition (Djankov and Murrell 2002) From a traditional agency perspective, SO has been associated with the imposition of political objectives on firms and the exploitation of the firm’s assets through what has been called the

‘‘grabbing hand’’ of the state (Shleifer and Vishny 1998)

A large body of global evidence reports a negative impact of SO on firm performance (see surveys by Djankov and Murrell 2002; Megginson and Netter 2001) Various descriptive and analytical studies have established that private and privatised firms are generally more efficient than wholly state-owned enterprises (SOEs), particularly through corporate governance, quality-related innovation (Shleifer 1998), cost reduction and competition (Shirley and Walsh 2000) SO is also found to be negatively related to firm performance (Xu and Wang 1999)

In contrary, high SO should bring some benefits at least, and it is this balance of costs and benefits in different institutional circumstances that concerns us here Certainly, studies from China have raised the possibility of the state providing a ‘‘helping hand’’ (Shleifer and Vishny 1998), or net ‘‘beneficial effects’’ (Tian and Estrin 2005) In addition, the State very possibly uses administrative instruments for example preferential market entry regulations, favorable taxation and loans decisions to assist firms with high state ownership (Le and Chizema 2011) That is a good reason why SO may produce a net positive association with firm performance

Thus, the advantages of the ‘state factor’ which were manifested in state ownership have also been examined in strategic management literature and empirically realized at firm level (Le and Chizema 2011) For example, the state can provide firms with competitive advantages improving firm performance in partner selection for joint ventures in China (Luo, 1997; Hitt et al., 2000; Hoskisson et al., 2000) In business group studies, state is also proved

to be a strategic asset employed by firms to advance their competitive advantage for better firm performance (Guthrie, 1997; Nolan, 2001; Peng, 2002)

Thank to the positive impact of the support from State, firm performance may very possibly be attributable to the state’s administrative “push” (Le and Chizema 2011) In particular, profitable privatized firms may be used as a demonstration of the efficiency of economic reforms that enable the state to sell firms’ stock at higher prices (Green & Liu, 2005), and higher level of state ownership has also been found to be related to the manipulation of reported accounting information (Lin, 2004)

It has been suggested that this ‘‘helping hand’’ is likely to be prevalent in Chinese privatised firms (Li 1998), and SO has been found to have a positive association with firm accounting returns (Chen et al 2006; Tian and Estrin 2005) In addition, Sun et al (2002) find that SO is positively associated with firm performance 1994–1997, but the relationship has an inverted U shape Le and Buck (2009) analysis of more than 1,000 Chinese listed firms, 2003–2005, reveals a positive association between state ownership (SO) and firm performance In addition, Le and O’Brien (2010) also found that state ownership has a positive impact on firm performance in a context of high debt and equity ratio

Vietnam is similar to China in one aspect that Vietnam has transformed its economy without political change, and the state still dominates the majority of privatised firms in key industries such as banking, post office, mining, heath care, transportation, electric power, oil

& gas, national defense, major infrastructure… For year of 2011; there are 6/42 JSCIs that have SO to be equal or bigger than 60%; there are 13/42 JSCIs that have SO to be equal or bigger than 35%; the mean of SO is 23.72% It seems that such levels give the state effective control of JSCIs

In a relatively unique institutional context of Vietnam Commercial Banking sector in which the state may subjectively affect firm performance, the author therefore proposes the first hypothesis as follows:

H1: SO has a positive association with performance, i.e higher SO is associated with enhanced performance for Vietnamese JSCIs

3.4.2 State Ownership, Corporate Governance and Performance

Agency problems arise from the tendency for managers to have both the discretion and incentives to pursue strategies and practices that benefit themselves (and other employees) at the expense of shareholder value (Jensen and Meckling 1976) Indeed, the senior managers of firm with State Ownership typically acquire little or no stock ownership, but have significant controlling powers assigned by the dominant (state) shareholder In the SOEs, governance stands out to be more important than in the private sector as the board is the trustee of “public assets” and the institutions have a dual economic and social objective Effective governance in the SOEs is essential for the optimum use of resources, for improving management and service delivery, and for strengthening accountability

SOEs now face much higher pressure to improve performance Many forces have led

to a more demanding environment such as greater competition, financial sector liberalization, restructuring and privatization of state-owned banks, technological changes, international agreements, and budgetary reforms Many countries are now embarking on wide-ranging corporate governance reforms of their state-owned sector Improvements to SOE governance allow the State to better protect its assets and enhance the performance of SOEs through: (1) improved board practices, (2) a robust control environment (3) better disclosure practices

(Sunita Kikeri 2012) Conscious of the importance and benefits of good governance, the State

in its wisdom may adopt some Code of Corporate Governance, which state-owned enterprises including parastatal bodies and statutory corporations are required to follow and practice In addition, to set up specific guidelines for State-Owned FIs, Financial Systems Department - The World Bank published “Policy Research Working Paper 4321: Strengthening the

Governance and Performance of State-Owned Financial Institutions” (David H Scott 2007)

It would appear that continuing high levels of SO, and certainly effective state control through share ownership and other channels of influence, may have to be accepted as a stable feature of corporate governance in the Vietnamese banking industry context Indeed, corporate governance is not a static structure but a process (Clarke 2007) determined by many political and institutional factors (Shleifer and Vishny 1997), and the state is inevitably involved in the corporate governance process Therefore, researcher should keep an open mind on its actual role in this process, rather than asserting a static, universal relation between SO and firm performance (Le and Buck 2009)

On the theoretical strategic asset perspective, the state may give ‘‘helping hand’’ to firms, based on notions of either efficiency or state power In efficiency terms it is well-known that widely dispersed share ownership may generate free-rider and control problems

as a result of the divorce of ownership and control It is implied that the State may potentially act as a strategic block holder then protect its investments by strictly monitoring managers (Le and Buck 2009) Indeed, if the state is concerned with extracting tax revenues, based on a proportion of profit, or maximising the value of its stake for subsequent asset sales, it may press managers, just like a private block holder, to make efficient decisions that raise firm value (Buck et al 2008) In these circumstances, managers may even be recruited by the state for their ability to improve firm performance, rather than to fulfil social welfare responsibilities (Barberis et al 1996) In power terms, the state may reinforce its strategic influence with its power and the provision of financial and political resources (e.g subsidies) that may enhance reported firm performance (Shleifer and Vishny 1998) This strategic influence is well documented in Chinese SOEs and privatised firms (Gordon and Li 2003; Nolan 2001) Enterprise managers are found to exploit the strategic asset represented by their relationships with the government in order to improve competitive advantage and firm performance (Peng and Luo 2000; Park and Luo 2001)

In Vietnam, CGI also is positively associated with firm performance (Le and Nguyen 2012; Nguyen Thu Hien and IFC Research Team 2011) as other emerging economies around world In a relatively unique context of the Vietnam banking industry, where the state maintains high levels of SO in JSCIs, the author also reports a positive SO/performance association, 2009–2011, so the author delve deeper behind this relationship to check its robustness Most of governance studies are essentially ownership study, and ownership itself has no way to cause firm performance (Le and Buck 2009) Therefore, the author attempts to determine the extent to which CGI may provide the ‘‘missing link’’ in any association between Vietnamese JSCIs’ SO and performance, and whether CGI in is consistent with a positive SO/performance association It is proposed that there are causal relations between

SO, CGI and performance, hypothesising that CGI mediates the relationship between SO and performance

This study therefore examines CGI as a variable in its own right, and tests the value of this distinction It hypothesises and empirically tests the associations between SO and CGI, between CGI and performance, and examines the possibility of a mediating relationship between the three variables If there is such a relationship, it must meet the requirements for a mediation effect model (Baron and Kenny 1986) If a strategic asset perspective on the positive role of SO is correct, CGI will again be found to mediate a positive (H1) relationship between SO and performance

The study therefore also proposes second hypothesis:

H2: CGI mediate the (positive) relationship between SO and performance, i.e SO is positively associated with CGI, and higher CGI is associated with an improvement in performance

4 RESEARCH METHOD

4.1 Quantitative Method

The data set is obtained from the financial statements, annual reports, published article of Vietnam JSCIs for the year 2009 to 2011 The Ownership information is also collected from newspaper, internet

4.2 Data collection

By the end of 2011, there are 45 JSCIs including 37 Joint Stock Commercial Banks (JSCBs) and 8 Joint Stock Financial Company (JSFCs) There were listed CI’s and unlisted CI’s in Vietnam To mitigate the potential issue given small sample size in the limited time, the author increase observations by sampling in three years from 2009 to 2011

+ There are 3 observations (Bac A Commercial Joint Stock Bank, Viet Nam Thuong Tin Commercial Joint Stock Bank, Handico Finance Joint Stock Company) which lack of necessary information for 3 years

+ There are 2 observations (Global Petro Commercial Joint Stock Bank and Tienphong Bank) which lack of necessary information for 2011 They are under restructuring progress now + There is one more observation (Sai Gon Joint Stock Commercial Bank) which lack of necessary information for 2011 because it was merged with the Ficombank and TinNghiaBank

+ There is one observation (Vietnam Textile and Garment Finance Joint Stock Company) which lack of necessary information for 2009 and 2010 because it just become Joint Stock

Financial Company by end of 2010

4.3 Data variable

4.3.1 Dependent Variables: Financial Performance Variable

It is generally agreed that firm performance is measured based on two aspects: accounting and market performance ROE is widely used to measure firm accounting performance i.e Baysinger and Butler (1985) and Kiel and Nicholson (2003) In addition, ROE is included as dependent variables in the study of Le and Nguyen (2012) to measure operating performance of Financial Institutions in Vietnam” In this study ROE is Return On Equity: Annual profit to total average equity assets ratio

Another ratio for evaluating performance is return on assets (ROA) Remember that CIs are highly leveraged because they borrow a lot of capital However; a potential problem with using return on assets is that it does not take into consideration borrowed capital The success of large CIs will often depend on a combination of debt and equity financing If return on assets is decreasing, then either net income is decreasing or average total assets are increasing During the period of time 2009-2011, while the SO level of CIs was rather stable while the ROA of CIs fluctuated a lot because the CIs business boomed and grew very fast For these reasons, this study does not use ROA to test relationship with SO

Price to book value (PBV) and Tobin’s Q are commonly included in many empirical studies to measure market performance of firms, i.e Barnhart, Marr and Rosenstein (1994), Garay and González (2008), Black, Jang and Kim (2006) etc However; many Vietnamese JSCIs are unlisted so that market performance in term of price to book ratio and Tobin’s Q can not be measured; and then consequently are excluded in the study

4.3.2 Mediation Variable: Corporate Governance Index

Recently, different studies, trying to measure quantitatively the quality of corporate governance, have created indexes based on legal, accounting, and firm-level financial information

On 2008, to measure the Corporate Governance Index (CGI), Urbi Garay and Maximiliano González based on Leal and Carvalhal-da-Silva (2005)’s 24 questions to ended

up with 17 questions that are applicable to the Venezuelan setting They answered the questions themselves Each one of these 17 questions was answered using publicly available information They then grouped the questions into four sub-indexes (1) Structure, components of the Board of Directors; (2) The rights of shareholder; (3) Transparency in operations of the company; (4) The responsibility of the Board of Directors

From this questionnaire for Venezuelan setting, Le and Nguyen (2012) created the Vietnam CGI checklist consisting of 17 questions constructed on the basic of regulations and international standards on corporate governance to evaluate corporate governance practices of these FI’s Financial banking industry is the specific sector and for this reason, the government specially pays more attention to its operations to ensure a safe and stable growth of financial system as a whole, contributing to a sustainable economic growth in the country As a result, the operations of financial banking sector are stringently supervised and regulated by the government not only in Vietnam but also in many countries around the world Therefore, to set up the contents of questions regarding corporate governance in the checklist, the authors of VCGI checklist based on the main principles of Law on credit institutions in 2010, Law on enterprises, and Law on securities and Law on amendments 2010 of Law on securities, principles of OECD and Decision No 12/QĐ-BTC of the Ministry of Finance as well as other current relevant regulations of the Vietnamese government

This study uses VCGI checklist to measure quantitatively the quality of corporate governance of JSCIs The author carefully checks and gives points to either “yes” or “no” for each of JSCI’s in Vietnam on the basic of public information disclosed by JSCI’s or other public sources in the market (i.e websites of security companies, the SBV, MOF, and GSO etc.) The main documents collected for the study include financial statements, annual reports, the meeting minutes, the resolutions of the General Assembly of Shareholders, JSCI charters, etc

The collected CGI for Vietnam JSCIs is shown in Appendix 1

4.3.3 Independent Variable: State Ownership (SO)

State ownership of publicly-traded corporations remains pervasive around the world, and has been increasing in recent years State Ownership is defined as the percentage of shares owned by the state at a national, provincial level and institutions SO is included as independent variables in the study of Le and Buck (2009) to understand how SO impacts on performance of 1,000 listed firm in China for 2003-2005 In addition Yin Yeqin (2005) use also use SO on his study to surveys and analyses current status of China’s listed firms’ ownership structure and corporate governance, and study the relationship between ownership, corporate governance mechanisms and firm performance using data from 652 sample firms listed in Shanghai Stock Exchange In addition, there are also specific studies about affect of

SO on Banks The interesting results come out First of all; state ownership affect positively bank’s performance in term ROE (Sarra Ben Slama Zouari and Neila Boulila Taktak, 2012) Sencondly; the state-owned banks have higher interest margins and higher profit before taxes than commercial stock banks after adjusting for risk Whereas the higher profit before taxes

of state-owned banks is based on their lower risk-taking (Ana et al 2000); (Study on 146 banks in eight OECD countries 1990-1997)

(2) DEBT: The debt-to-total asset ratio: debt is considered to be associated with agency problems in emerging markets (Dharwadkar et al 2000) and agency problems is related to corporate governance Debt is assumed to have a positive association with state ownership (Lu et al., 2005) and thus affects firm performance (Sun et al., 2002)

(3) STAT: The author adds a dummy variable (STAT) indicating the status of which FI’s are listed or unlisted in both HOSE and HNX If FI is listed, dummy value will be 1 Otherwise, dummy value is 0