Ownership structure, board characteristics and firm performance in vietnam

This study, further, found the relationships between State Ownership, Institutional Ownership, Institutional Ownership Deviation, Foreign Ownership, Independent Directors, Non-executive

VIETNAM NATIONAL UNIVERSITY OF HO CHI MINH CITY

UNIVERSITY OF TECHNOLOGY

NGUYỄN TIẾN THÔNG

OWNERSHIP STRUCTURE, BOARD CHARACTERISTICS

AND FIRM PERFORMANCE IN VIETNAM

PhD THESIS

HO CHI MINH CITY, 2016

VIETNAM NATIONAL UNIVERSITY OF HO CHI MINH CITY

UNIVERSITY OF TECHNOLOGY

NGUYỄN TIẾN THÔNG

OWNERSHIP STRUCTURE, BOARD CHARACTERISTICS AND FIRM

Examiner 1: PhD Dương Như Hùng

Examiner 2: Assoc Prof.PhD Nguyễn Minh Kiều

Examiner 3:

ADVISORS

1 PhD Nguyễn Thu Hiền

2 Assoc Prof.PhD Piman Limpaphayom

STATUTORY DECLARATION

I declare that I have developed and written the enclosed Dissertation complexly by myself, and have not used sources or means without declaration in the text Any thoughts from others or literal quotations are clearly marked The Dissertation was not used in the same or in a similar version to achieve an academic grading or is being published elsewhere

Author,

Signature

Nguyễn Tiến Thông

ABSTRACT

In recent years, corporate governance research received increasing attention because of scandals involving manipulation of corporate power and even alleged criminal activities Good corporate governance would contribute to the sustainable development of the economy through the promotion of enterprise capacity and increasing access to capital from outside the enterprise Better corporate governance could lead to better corporate performance and impede expropriation of controlling shareholders from minority shareholders Vietnam’s Government recently implies the important role of State Capital Investment Corporation in equitization However, the role of State-Owned Holding Company (SOHC) is not taken into consideration in recent global corporate governance studies, especially in weak regulatory environment like Vietnam Applying quantitative method on panel data of listed companies in Vietnam during 2009-2013, this study found that SOHCs have positive impacts on firm performance which is a contribution to both theory and practice in corporate governance research Furthermore, there was no study related to the role of Board Ownership Deviation over the world and this kind of ownership is found to have positive impact on firm performance in Vietnam This finding consolidates the principal-principal agency theory as well as contributes a new understanding about Board members relationships This study, further, found the relationships between State Ownership, Institutional Ownership, Institutional Ownership Deviation, Foreign Ownership, Independent Directors, Non-executive Directors and firm performance which is an effective reference to policy makers, investors and relevant stakeholders to figure an enthusiastic corporate governance for Vietnam

ACKNOWLEDMENTS

I am grateful to my advisors, Dr Nguyen Thu Hien and Dr Piman Limpaphayom for their thoughtful guidance and insightful comments throughout my working Corporate Governance is a new research direction and their knowledge and experience are useful resources for my first step in this field

I would like to say thank to other teachers of University of Technology, The School of Industrial Management, my colleagues and my friends with their supports and encouragement during my efforts for this study

TABLE OF CONTENTS

LIST OF FIGURES vii

LIST OF TABLES viii

ABBREVIATIONS ix

CHAPTER 1 INTRODUCTION 1

1.1 Overview 1

1.1.1 Corporate Governance Systems 1

1.1.2 Corporate Governance Mechanisms 4

1.1.3 Corporate Governance and Firm Performance 5

1.1.4 State-owned Holding Company 7

1.1.5 Internal Governance Mechanisms Studies in Vietnam 9

1.2 Research Gaps 12

1.3 Research Objectives and Scopes 15

1.4 Research Methodology 16

1.5 Research Significance 17

1.6 Research Theoretical Contributions and Practical Implications 18

1.7 Research Structure 19

CHAPTER 2 LITERATURE REVIEW 20

2.1 Literature Review 20

2.1.1 Agency Theory 20

2.1.2 Agency Conflicts and Potential Conflicts 23

2.1.3 Stakeholder Theory 24

2.1.4 Corporate Governance 25

2.1.5 Corporate Governance Models 30

2.1.6 Ownership Structure 39

2.1.7 Board Characteristics 46

2.1.8 Firm Performance 47

2.1.9 State-owned Enterprises 47

2.1.10 Corporate governance of State Owned Enterprises 49

2.1.11 State-Owned Holding Company 50

2.1.12 Temasek Holdings 52

2.1.13 Board Ownership Deviation 54

2.1.14 Institutional Ownership Deviation 55

2.1.15 Corporate Governance of Vietnam 55

2.2 Previous Studies 63

2.3 Impacts of IGMs on Firm Performance 68

2.3.1 Ownership structure 68

2.3.2 The Board Characteristics 74

2.4 Conclusion 76

CHAPTER 3 DATA, MODEL AND METHODOLOGY 78

3.1 Data 78

3.2 Research Model 79

3.2.1 Research Model 80

3.2.2 Research Variables 83

3.3 Methodology 89

3.3.1 Pooled Cross Section (POLS) 90

3.3.2 Fixed Effects (FE) 90

3.3.3 Random Effects (RE) 91

3.3.4 Breusch-Pagan Lagrange Multiplier (LM) Test 91

3.3.5 Hausman Test 91

3.4 Conclusion 91

CHAPTER 4 RESULTS 92

4.1 Data Description 92

4.2 Correlation Analysis of Variables 95

4.3 Performance Comparison between SOHC and non-SOHC companies 95

4.4 Regression Results 96

4.4.1 Market performance - Tobin’s Q Regressions 98

4.4.2 Market performance - MB Regressions 103

4.4.3 Operating performance - ROE Regressions 108

4.4.4 Operating performance - ROA Regressions 113

4.4.5 Market investment performance - Annual Return Regressions 118

4.5 Robustness Checks 122

4.6 Conclusion 124

CHAPTER 5 DISCUSSIONS AND CONCLUSION 126

5.1 Introduction 126

5.2 Summary of Main Findings 126

5.3 Implications for Theory 133

5.4 Implications for Practice 136

5.5 Limitations and future research 138

LIST OF PUBLICATIONS 140

REFERENCES 141

APPENDIX 160

LIST OF FIGURES

Figure 2.1 Model of Corporate Participants 31

Figure 2.2 Vietnamese Companies by Categories Statistics Office (01/01/2012) 59

Figure 3.1 Research Model 80

Figure 3.2 Research Model with Variables 81

LIST OF TABLES

Table 1.1 Previous Studies in Vietnamese Market 10

Table 2.1 Corporate Governance Definitions 26

Table 2.2 Corporate Governance Models Comparison 38

Table 2.3 Ownership Concentration of Ten Largest Firms 43

Table 2.4 Separation of cash-flow and voting rights in East Asian corporations (largest control holder) 44

Table 2.5 Differences In Governance Between Private and SOEs Sectors 49

Table 2.6 Vietnamese Companies by Categories 59

Table 2.7 Ownership Structure of Vietnamese Companies 60

Table 2.8 Vietnamese Corporate Governance Score 61

Table 2.9 Corporate Governance Comparison 61

Table 3.1 Hypotheses 82

Table 3.2 Independent Variables and Definitions 83

Table 3.3 Performance Measurements 86

Table 3.4 Control Variables 88

Table 3.5 ICB Industries 89

Table 4.1 Descriptive Statistics 92

Table 4.2 Significant Correlation Matrix 95

Table 4.3 Mean performance measures of SOHC vs others 96

Table 4.5 Tobin’s Q Regressions 98

Table 4.6 MB Regressions 103

Table 4.7 ROE Regressions 108

Table 4.8 ROA Regressions 113

Table 4.9 Annual Return Regressions 118

Table 4.4 Robustness Check by Industry-Adjusted-Tobin’s Q 123

HFIC Hochiminh-City Finance and Investment State-Owned Company

ICB Industry Classification Benchmark

IGM Internal Governance Mechanism

LM Lagrange Multiplier

OECD Organization for Economic Co-operation and Development

OLS Ordinary least squares

SB Supervisory Board

SOE State-Owned Enterprise

SOHC State-Owned Holding Company

SCIC State Capital Investment Corporation

US United States of America

CHAPTER 1 INTRODUCTION

This chapter introduces the thesis, the reason forming the subject, objectives, significance, research scope and structure of the thesis

1.1 Overview

The separation between ownership and control in companies creates a positive impact

in raising capitals from society to expand business operations but on the other hand it also creates a conflict of interests between shareholders and agents The initiatives to minimize this conflict formed corporate governance in different countries Principles of corporate governance was introduced by Organization for Economic Co-operation and Development (OECD) in 2004 with the aim to support the governments in assessing and completing the legal framework, institutional environments for operating activities of companies in these countries, while providing the guidelines and recommendations for the stock markets, investors, companies and stakeholders involved into management activities of companies

In transition economies like Vietnam, corporate governance is new not only for companies but also for government, investors and stakeholders Corporate governance principles have been applicable for listed companies since 2007 It is necessary to have studies on impacts of the corporate governance aspects to firm performance This contributes to the theoretical system of corporate governance as well as suggestions for regulatory enhancement

1.1.1 Corporate Governance Systems

In general, models of corporate governance are diverse across countries These differs are related to the diversity of capitalism in which corporate governance are embedded The Anglo-Saxon countries (US and U.K) emphasize the interests of shareholders while the coordinated or multi-stakeholder model associated with Continental Europe (Germany and France) and Japan recognizes the interests of workers, managers, suppliers, customers, and the community (Allen and Gale, 2002) The corporate governance model of the Anglo-Saxon countries represents the “outsider” system and

the model of the Continental Europe, on the other hand, is called “insider” system (Tan and Wang, 2007)

Previous paper focused on two kinds of corporate governance models including Saxon and Continental Europe models These two models are fundamentally different

Anglo-in legal framework, board structure and the ownership structure These corporate governance models vary sturdily including differences in the context of shareholder concentration, shareholder characteristics, market liquidity, and interlocking ownership (Ooghe and Langhe, 2002) There are two common types of ownership structures in corporates including concentrated and dispersed In concentrated ownership structures (Continental Europe model), ownership and control is concentrated in a small number

of individuals, families, managers, directors, banks and other institutions These individuals or groups often manage, control or strongly affect the company that they own Therefore, they are called insiders Consequently, concentrated ownership structures are referred to as insider systems1 (Essay, UK, 2013) The other type ownership structure is dispersed ownership (Anglo-Saxon model) In this type, a large number of owners each hold a small number of company shares These small shareholders therefore have little incentive to closely monitor company that they possess and they often do not involve in management decisions They are outsiders and therefore dispersed ownership structures are considered as outsider system The Anglo-Saxon model focuses on the relationship between shareholders and managers while the Continental Europe considers the relationship between the controlling shareholders and the minority shareholders

Each system has both advantages and disadvantages For the insider system, controlling shareholders could collude with management to expropriate corporation’s assets from minority shareholders This would be more serious when minority shareholders do not have legal protection Similarly, when managers are controlling shareholders they could use their power to influence board decisions that may directly benefit them but harm the companies Controlling shareholders could use their power in approving for acquiring

1 Essays, UK (November 2013) Family Business And Corporate Governance Retrieved from

rival firms without obvious purposes or rejecting takeover offers for fear of losing control over the firm even though a takeover might improve the company’s performance The outsider system has advantage basing on transparency structures of independent board members to monitor managerial behavior and keep in checks Dispersed owners, however, preferred profit maximization in short-term Consequently, they tend to pursue short-term gains but may not necessarily promote long-term company performance and could weaken company stability Dispersed shareholders, moreover, have less financial incentive to attentively monitor boardroom decisions and

to keep directors accountable Therefore, directors could support erroneous decisions which were not based on shareholders’ interests

The Anglo-Saxon corporate governance model has characterized with the principal–agent issues from the separation of ownership and control in highly dispersed ownership structure To mitigate the conflict of interest associated with the principal–agent problem, appropriate governance structures must be effectively embedded These includes robust external mechanisms (Hu et al., 2009) Continental Europe, on the other hand, is facing with controlling-minority shareholders’ issues Emerging markets, especially Asian countries, have the same concentrated ownership structure like Continental Europe model These markets are characterized with a weak legal protection

to shareholders and therefore, different corporate governance mechanism approach is required In this circumstance, internal governance mechanisms (IGMs) are expected to play a more prevalent role in these countries in addressing the principal–principal problem (Hu et al., 2009)

Neither system is perfect Each system has its own advantages and disadvantages Therefore, recent researches tried to construct suitable corporate governance mechanisms within a specific system for each country or for several countries that have similar features Several mechanisms that help solve corporate governance problems are discovered when studying the traditional finance literature (Jensen and Meckling, 1976; Fama and Jensen, 1983; Jensen 1986; Jensen, 1993) There is an agreement on the classification of corporate governance mechanisms to two classifications: internal and

external mechanisms However, the contents of each group as well as the effectiveness

of each mechanism vary by researchers (Al-Baidhani, 2014)

1.1.2 Corporate Governance Mechanisms

There are differences in definitions of corporate governance “systems” and corporate governance “mechanism” “A corporate governance system is defined as a country-specific framework of legal, institutional and cultural factors determining the influence

of shareholders on managerial decision-making” Corporate governance mechanisms are “methods at the firm level to solve corporate governance problems”; however, the use of mechanisms could depend on the corporate governance system predominant in each country (Al-Baidhani, 2014)

Jensen (1993) criticizes the existing governance mechanisms in the US, UK, Japan and Germany and outlines four basic categories of corporate governance mechanisms: (1) legal and regulatory mechanisms; (2) internal control mechanisms; (3) external control mechanisms; and (4) product market competition

A survey of the international corporate governance using two classifications of corporate governance mechanisms, was presented by Denis and McConnell (2003) They use

“systems” as a replacement for “mechanisms” Their classification includes: (1) internal governance mechanisms including boards of directors and ownership structure and (2) external ones including the takeover market and the legal regulatory system Gillan (2006) also classified firm level governance mechanisms into two broad categories: internal and external governance mechanism

Farinha (2003) classified corporate governance mechanisms into external disciplining mechanism including takeover threats, product market competition, managerial labor market and mutual monitoring by managers, security analysts, the legal environment, and the role of reputation The second category is the internal disciplining mechanism involving large and institutional shareholders, board of directors, insider ownership, compensation packages, debt policy, and dividend policy

In general, the external mechanism relates to external factors that are away from the control of the firms, and are commonly economy-wide The internal mechanism, on the

other hand, includes factors that are internal and under control of the firms These factors include managerial efficiency, governance structure, and ownership structure (Babatunde and Olaniran, 2009)

Weir et al (2012) proved that external factor of market for corporate control is an effective governance mechanism A threat of takeover action could be a disciplining mechanism to poor company performance Furthermore, the roles of legal environment

or managerial labor market could be important in developed financial markets However, for undeveloped financial market where the ownership of companies is belonged to small group of people and where the legal protection to minority shareholders is not strong enough, the role of external factors could be distorted (Weir

et al., 2012)

1.1.3 Corporate Governance and Firm Performance

Better corporate governance could lead to better corporate performance and expropriation of controlling shareholders is supposed to be prevented Moreover, better decision-making process is expected in these companies (Nam and Nam, 2004) Good corporate governance increases the market valuation of companies by improving their financial performance, reducing the risk that boards would make self-serving decisions, and generally raising investor confidence (Newell and Wilson, 2002) Cheung et al (2011) also found that firms exhibit improvements in the quality of corporate governance display a subsequent increase in market valuation, while firms that exhibit deterioration in the quality of corporate governance practices have a propensity for a decline in market valuation In research of The McKinsey in 2002, Newell and Wilson found that institutional investors would pay as much as 28 percent more for the shares

of well-governed companies in emerging markets According to Global Investor Opinion Survey (McKinsey, 2002), 15% of European institutional investors consider corporate governance to be more important than financial issues such as profit performance or growth potential

According to agency theory, better corporate governance should lead to higher stock prices or better long-term performance as managers are better supervised and agency costs are decreased (Nam and Nam, 2004) Good governance encompasses better

monitoring, superior transparency and more disclosure between principal and agent (Luminita, 2012) Good corporate governance could increase investor trust and also decrease discretion and expropriation from managers Well-governed companies are less risk, more efficiency while reduce auditing and monitoring costs These elements are expected to improve the cost of capital and generate higher cash flows, which, as a result, create higher firm valuation and better performance (Krafft et al., 2013)

In the US, corporate governance has become important part for market specialists in the early 1990s Typical research studies examine whether different corporate governance structures have an impact on organizational performance (Krafft et al., 2013) Studies include Morck et al (1998), Shleifer and Vishny (1997), Gompers et al (2003) Up to the mid-1990s, most work on corporate governance was in the context of US firms (Krafft et al., 2013) The works of work of La Porta et al (1997, 1998, 1999, 2000), however, have stimulated the international comparison

Studies on influence of corporate governance on performance include studies of some aspects of corporate governance such as board composition, shareholder rights, executive remuneration, insider ownership, takeover defenses (Hermalin and Weisbach, 1998) Studies of country analyses include Gompers et al (2003), Nam and Nam (2004), Balatbat et al (2004), Abdullah and Page (2009), Hu et al (2009) and more These studies provide evidence that corporate governance leads to higher value and performances in both US and non-US firms

Literature on influence of internal corporate governance mechanism on performance could be classified as two main streams: The first line of research includes a huge number of studies investigating a single corporate governance variable on performance such as structure of the board, board composition, CEO compensation, board and CEO ownership structure, the existence of committee including audit committee, compensation committee and the second line includes studies that examine some corporate governance characteristics and their influence on the performance (Dao, 2008)

Corporate governance deals with the way in which suppliers of finance would like to get return on their investment (Shleifer and Vishny, 1997) Shareholders generally concern with returns on their investments and firm performance could be evaluated by stock returns However, these returns are inconstant due to price fluctuations (Abdullah and Page, 2009)

The performance, therefore, requires a measurement that covers a period of years (Abdullah and Page, 2009) It needs the value created by the directors over the lifetime

of a business, which can be measured by the ratio of the total market value of the business to the value of the net assets and it is Tobin’s Q indicator It is a more stable indicator of performance than a single year’s returns to shareholders and, it is arguably,

a measure of the success of the management of the business (Abdullah and Page, 2009) However, Krafft et al (2013) examined the relationship between stock performance and corporate performance as they argued that if corporate governance matters for firm performance then the stock price should adjust quickly to any relevant change in corporate governance Besides, they argued that firm with better corporate governance would be more profitable and would pay out higher dividends

1.1.4 State-owned Holding Company

The rise of sovereign wealth funds (SWFs) and state-owned holding companies (SOHCs) and the dominance of state-owned enterprises (SOEs) in some countries has recently raised concerns related to their governance structures, the transparency of their investment (Chen, 2013) Several studies have been conducted to examine the roles of government-linked companies (GLCs) including Ang and Ding (2006), Wicaksono (2009) and Chen (2013) GLCs are companies that partially owned by the government and proportion of ownership of the government in these firms varies from very low to very high levels

Among SWFs, Temasek Holdings is considerred as a well-known successful model (Wicaksono, 2009; Chen, 2013) with 13% compound annual return during the past 10 years (Chen, 2013) Temasek is controlled by the Singaporean government incorporated

in 1974 According to the company’s 2013 report, Temasek controls over USD167

billion portfolios with total shareholder returns reaching 9% in 2012 (Chen, 2013) These papers indicate that GLCs of Singapore have better corporate governance However, the Singaporean model is not easily copied by state-owned enterprises in other countries (Chen, 2013)

Vietnam is a developing country with an underdeveloped financial market and a shortage of regulatory principles The research of external governance mechanisms would be difficult to be conducted in asymmetric information environment of Vietnam Besides, SOEs and GLCs have a dominant role in Vietnam’s economy Before the renovation campaign in 1990s, Vietnam has a centralized economy in which assets are belonged to the State The private sector was prohibited before this period Besides, Vietnamese constitution regulated that SOEs keep key role in the economy In 2014, the Law of Enterprises changed the definition of SOE in which only 100% State-Owned Company is classified as SOE, others are called Government-Linked Companies (GLCs) with not much change in the nature Therefore, there are a large number of SOEs and GLCs in the economy As many studies point out that SOEs pursue multiple – and conflicting – objectives (Wong, 2004; Wicaksono, 2009; Kamal, 2010; Chen, 2013) and managed by politicians tending to pursue self-interests in politics SOEs, besides, are claimed with lacking of transparency (Kamal, 2010) The performance of SOEs or GLCs was considered in this study with a comparison to non-state controlled counterparts

In 2005, State Capital Investment Corporation (SCIC) was established in Vietnam as a state-owned holding company (SOHC) SCIC represents the state capital interests in enterprises and invest in key sectors and essential industries and to become a strategic investor of the government that is responsible for generating maximum value and sustainable returns on investments SOHC shareholding in companies represents the ownership of the State in these companies SOHC’s ownership in companies is maintained to perform various missions for the State and for the local economy SCIC’s missions are to be the government’s strategic investor, active shareholder and a professional financial consultant2 Similar to SCIC in terms of missions, Hochiminh-City Finance and Investment State-Owned Company (HFIC) was established in 1996

2

with a purpose to develop a focus and effective mechanism to mobilize capital for Ho Chi Minh City SCIC/HFIC model is expected to follow the model of Temasek in Singapore (JICA & SCIC, 2015; Nhan Dam, 2016; Thanh Thuy, 2016) which is ascertained as efficiency but its role in Vietnam is not demonstrated

1.1.5 Internal Governance Mechanisms Studies in Vietnam

Currently, not many studies on influence of corporate governance on Vietnamese companies have been conducted Dao (2008) created a rating index to reflect the overall level of governance practice in Vietnam’s equitized companies The paper finds that better governed companies according to index are associated with better company’s performance This study only examines the sample of equitzed firms and does not include firms established by families and other owners To (2011) conducted a study on relationship between board size, board composition, board activity, ownership concentration and corporate performance This study has used a limited sample size of one-year cross-section dataset of 100 companies in 2009 and only focused on a certain number of factors of IGMs, including board size, board composition, board activity, ownership concentration Vo and Phan (2013) investigated nine attributes including (i) the size of the board; (ii) the presence of female board members; (iii) the duality of the CEO; (iv) the education level of board members; (v) the working experience of the board; (vi) the presence of independent (outside) directors; (vii) the compensation of the board; (viii) the ownership of the board; and (ix) blockholders on the performance of Vietnamese companies This study only focuses on impact of board characteristics on firms’ perfomance Phan (2013) investigated the relationships between board structure and financial performance Like Vo and Phan (2013), Phan (2013) did not analyze for ownership structure in his study Vo and Nguyen (2014) study on corporate governance proxies of dual role of the CEO, board’s size, board independence and ownership concentration to firm performance This study considerred for two aspects of IGMs including ownership structure and board characteristics but only five factors were analyzed For above studies, the role of the state ownership was not throughly discussed and studied

Table 1.1 Previous Studies in Vietnamese Market Studies Dependent

performance

700 equitized companies in Hanoi, Hai Phong & HCMC in 2005

(Meeting), Board Diversity (Age, Female, Chairwoman), Ownership

concentration, State Ownership

100 largest listed

companies in HOSE, HNX in

Blockholders

(1) Firm size (2) Firm age (3) Leverage (4) State’s ownership (5) Industry (6) Year

companies in HOSE since 2006-2011

Government Ownership

Assets, Current Ration, Firm Age, Listing Years, Listed Stock, Big 4 Audited

1425 listed companies since 2006-2010

Ownership, Board’s Ownership

Sales, Asset Turnover, Industry effect

177 listed companies in HOSE since 2008-2012

Note: Author compiled

The studies about corporate governance in Vietnam, as reviewed, examined the relationship between internal corporate governance aspects, including board

characteristics and ownership structure, and corporate performance However, each study examined different single factors of internal governance mechanism Taking into account all the separatedly studied (IGM) factors, the study could examine simultaneously influences of jointly IGMs (Hu et al., 2009) as board characteristics and ownership structure have relationship (Desender, 2009)

So, taken together in a complete picture, how do internal governance mechanisms, including ownership structure and board characteristics, affect firm performance? Board characteristics and ownership structure are important aspects of corporate governance mechanisms (Liu & Tsai, 2015) The agency conflicts caused by seperation

of ownership and control could be mitigated by managerial and blockholder ownership (Jensen and Meckling, 1976; Kaplan and Minton, 1994) as well as board of directors is important mechanism to control managers (Fama, 1980) Corporate ownership and the board of directors are examined by many empirical studies in corprorate governance research (Mak & Li, 2001) One line examined the relationship between ownership structure and firm value while the other examined the association between board characteristics and firm performance (Mak & Li, 2001) Mak & Li (2001) found that ownership structure and board characteristics are related The result is compatible with Denis & Sarin (1999) and Desender (2009) Therefore, it is essential to take ownership structure and board characteristics into one model to examine simultaneously influences

of these IGMs

Besides, the ownership of the state in companies is not a major variable of interest As the role of state ownership in companies in creating values for firms is an interesting research question of interest for researchers around the world, such as in in studies of

Hu et al., (2009), Wicaksono (2009), Cornett et al (2010), Le (2011), Pargendler (2012) and Yu (2013), putting a question on whether state ownership is beneficial for companies in Vietnam is necessary

Performance of state-owned enterprises is not positively expected due to the conflicting interests arising in ineffective monitoring and controlling role by government institutions (Wicaksono, 2009), which may lead to redundant scandals related to SOEs

This may be also true for the case of Vietnam Therefore, to improve performance of state-owned enterprises, the government of Vietnam aims to reducing potential conflict

of interest and improve effectiveness of firms and has pushed harder for the privatization process in recent years Though SCIC/HFIC are considered as a model similar to successful Temasek Holdings model which won several awards as well as recognition

in Singapore for their corporate governance, it leads to a demand for a research testing the effectiveness of this model as to Singapore’s Temasek Holdings model in enhancing corporate governance as a key pillar for performance improvement So, does SOHC have an effective role in Vietnam?

Therefore, the author would like to provide more comprehensive analysis on the relation between internal governance mechanisms (IGMs) as a complete model to examine for simultaneously effects of board characteristics and ownership strucutre on firm performance in Vietnamese market Besides, using a sample of SOHC-owned- and non-SOHC-owned-firms will allow to develop more understandings for the role and effectiveness of state ownership in Vietnam Firm performance, moreover, is examined via firm’s operating performance, firm’s market valuation and stock annual return

1.2 Research Gaps

Good corporate governance could lead to better corporate performance in which corporate governance mechanisms are methods at the firm level to solve corporate governance problems (Al-Baidhani, 2014) In recent years, corporate governance has received increased attention and Vietnam is considered as a poor corporate governance standards and there has not been much work published on Vietnamese corporate governance Besides, IGMs are expected to play a more prevalent role in markets characterized with a weak legal protection and concentrated ownership (Hu et al., 2009) The studies of previous authors in Vietnam examined impacts of seperated factors of IGMs on firm’s performance Moreover, state ownership is not a major interest of study

in all previous researches in Vietnam (Table 1.1) Especially, there is lacking of studies

on the roles of ownership structure and board characteristics with a focus on different type of state ownership on firm performance Moreover, previous studies examined the relationship between internal corporate governance aspects on single factors of IGMs

without consideration the relationship between board characteristics and ownership structure (Denis & Sarin, 1999; Mak & Li, 2001; Desender, 2009) To fill this gap, this study takes into account jointly IGMs in one model to examine for simultaneously effects of board characteristics and ownership strucutre on firm performance in Vietnamese market

The lack of corporate governance analysis for Vietnamese SOEs and GLCs is the second gap that need to be fulfilled The difficulty in determining the principal at SOEs impedes the development of an appropriate mechanism for aligning the agent’s interest with the principal’s as explanation of agency theory (Wicaksono, 2009) With dominance of state ownership in market, the complex corporate governance issuses could be arisen (Hu et al., 2009) It requires a careful examination on this type of ownership SOE corporate governance are facing with three main challenges including multiple and conflicting objectives, excessive political interference and opacity (Wong, 2004; Wicaksono, 2009) SOEs and GLCs is regulated to have dominant roles in Vietnamese economy but there has not been an inclusive study being conducted to assess their efficiency in comparison with private sector’s enterprises in Vietnam The comphrehensive analysis

on Vietnamese SOEs and GLCs could provide clearer understanding on this kind of ownership in Vietnamese context which could be different from other markets

Many studies indicated that SOEs and GLCs are linked to low efficiency (Bai et al., 2004; Ding et al., 2007) In Vietnam, state ownership is commonly presented in listed companies beside the ownership by institutional investors It is suggested that the ownership of state could outweigh the benefit of other institutional investors Separate analysis on non-state institutional ownership has not taken place both in studies in Vietnam and other jurisdictions with predominant state ownerships This study aims at analyzing the impact of state ownership and impacts of other owners separately The result, therefore, could provide the exact impact of institutional investors on firm performance excluding possible adverse effects of state institutional investors which are prevelant in Vietnam

SOHC is a new model and its role is not demonstrated in many countries Especially for emerging countries with weak regulatory environment, there has not been empirical

study on SOHC influence SOHC is a model in which government does not directly manage the enterprises as traditionally model as as the holding structure is also believed

to be able to serve as a layer shielding the SOEs from politics and government intervention while transparency can be best improved by opening access of ownership

to the public (Wicaksono, 2009) Although SOHC has effective role and better corporate governance than private counterparts in Singapore (Ang and Ding, 2006), Vietnam could be different Vietnam is a developing country with strong orientation from government in comparison to developed market orientation of Singapore Besides, the culture and legal structure of Vietnam is also different than Singapore SCIC and HFIC are SOHCs in Vietnam The equitization is is accelerated in recent years and the requirement to transfer state ownership to SCIC3 require a detailed study of the effectiveness of the SOHC model The effectiveness of SOHC model in Vietnam is not demonstrated and it is a research gap

A new area that has not been explored in literature by the knowledge of the author is the bargaining power in the boardroom that may be rooted in deviation of roles among board members Bargainings in the board rooms is of interest of the author as there is always

a bargaining power among the board members or groups of board members due to the influence of some dominant members/groups of members, such as a major shareholder,

in board discussion and board resolution The deviation of ownership among board members, or the difference of ownership between the major shareholder’s representative and the other shareholders, could be an important factor that hinder the board effectiveness This argument originates from the agency theory (Jensen and Meckling, 1976) Originally, the agency theory explained the conflicts between shareholders and managers Recently, agency theory is developed in global researches and explained for conflicts between controlling shareholders and minority shareholders These relationships provide a glimpse on interest conflicts between directors as in Young et al (2008) and Earle et al (2005) Young et al (2008) argued that board ownership is examined as a unified entity ignoring there would be potential conflicts of interest

3 Son Ha (2016) Quyền đại diện vốn nhà nước phải về hết SCIC trong quý 1/2017 VnEconomy Retrieved from:

between shareholder groups and there could be the conflict of interests between these blockholders (Earle et al., 2005) These blockholders decide the board of directors and their potential conflicts could impact on firm performance in which the largest shareholder is the most powerful group and other directors form a counterweight Board ownership deviation, or the deviation of ownership among board members, which is measured by the ownership of board of directors excluding largest ownership, is to reflect the power deviation among board members/groups of board members is not demonstrated in both theoretical and empirical studies The findings of board ownership deviation impacts are expected to be a new contribution to corporate governance literature This study therefore also aims at filling this gap

1.3 Research Objectives and Scopes

Corporate governance is demonstrated to have impacts on firm performance Therefore, this study aims at achieving the following objectives:

 Study the impacts of all IGMs, including ownership structure and board

of characteristics, on firm performance The findings on Vietnamese factors would consolidate the theory of agency to explain for the relationship between stakeholders The findings would also contribute to

a comphrehensive understanding to develop an effective practice of IGMs corporate governance in Vietnamese market

 Study the effectiveness of SOHC model on Vietnamese market The study makes the first effort in Vietnam to assess the effectiveness of SOHC facilities such as SCIC or HFIC in investments in listed companies to demonstrate that SOHC could impact on firm performance in positive way than other state-owned morphological The workability of SOHC model

in the lack of good corporate governance environment would contribute effective solution for equitization in Vietnam which is accelerated in recent years

 Study the impact of board ownership deviation, as a measure of power deviation among board members, on firm performance This is the first

effort in literature of corporate governance to explore the influence of the major shareholder over the non-major shareholders The findings of the impacts of ownership of board members other than largest ownership on firm performance would be a new contribution to principal–principal agency theory and suggest mechanisms for increasing the active roles of board members

The scope of of this study is limited to listed companies on HOSE and HNX This study

is different from previous studies in which it classifies companies into Government-Link Companies (GLCs) & non-GLCs groups to allow comparing firms with majority state ownership and those without a majority of state ownership The data is collected for the period of 2009-2013

1.4 Research Methodology

This study applies quantitative research method and adopted and research models in previous researches to examine the relationship between internal governance mechanisms and firm performance A complete model of IGMs including (1) ownership structure and (2) board characteristics is used in the study to have a complete analysis

of IGMs’ impacts on firm performance Quantitative analysis models for panel data are used for testing the explanatory power of variables of interest in regression models There are 14 proposed hypotheses tested by 14 independent variables including largest ownership shareholder, state ownership, family ownership, board of directors ownership, deviation of largest shareholder & other members of the board, supervisory board ownership, institutional ownership, deviation between state ownership and other institutions, foreign ownership, controlled directors ratio, non-executive directors ratio, independent directors ratio, duality structure and owned by SOHC 10 hypotheses are belonged to ownership structure while the others 4 are belonged to board characteristics Corporate performance is studied via market performance including Tobin’s Q and Market to Book Ratio, operating performance including ROE and ROA and investment performance including Stock Annual Return

a comprehensive understanding of internal mechanisms as a second governance mechanism next to institutional governance would contribute to improve process which

is on the dawn of the development of corporate governance As IGMs have prevalent role in markets characterized with a weak legal protection and concentrated ownership (Hu et al., 2009), comprehensive understandings on ownership structure and board characteristics of corporate governance would contribute to improve the effectiveness

of business environment like Vietnam Although there are several researches on IGMs

in Vietnam, they are single factors analyses regardless the jointly effects of different IGMs on a complete model The study takes into consideration ownership structure and board characteristics in one model and as a result simultaneously impacts could provide more exact results with effective implications Vietnam, moreover, has a special characteristic of the dominant role of state ownership in the economy as well as the popularity of state controlled on stock exchanges The equitization process is accelerated

in Vietnam after many scandals of corruption related to SOEs in recent years Vietnam

is one of the few countries where the model of SOHC is regulated The understanding

on effectiveness of state ownership, especially on SOHC model, would contribute both theoretically and empirically to the development of corporate governance where state ownership is prevalent and contribute to solve the problems caused by state ownership corporate governance issuses Especially, this study could be the answer for the question

on effectiveness of SCIC/HFIC model The understanding of ownership deviation in the booard of directors, besides the new contribution to theory, would be a reference source for policy makers, investors and stakeholders on development of effective corporate governance These are motivations for this study

1.6 Research Theoretical Contributions and Practical Implications

The relationship between the principal and the agent in agency theory is traditional objective for studies in developed markets which is different from Asian developing countries where principal–principal conflicts have been identified as a major concern of corporate governance (Young et al., 2008)

The understandings on ownership structure and board characteristics impacts in Vietnamese context would consolidate the agency theory to explain for the relationship between the managers and shareholders and the relationship between controlling shareholders and minority shareholders The finding of board ownership deviation is a new contribution to principal–principal agency theory in which the ownership of board members excluding largest owner could be an explanation for the aligning the interests

of board members and minority shareholders The results contributed more understandings of convergence of interest hypothesis and entrenchment hypothesis of managerial ownership raised in agency theory

SOE ownership structure is a specialty under view of agency theory in which state ownership is often linked to low efficiency (Hu et al., 2009) because of conflicting objectives, politicians and bureaucrats’ self-interests and lack of transparency (Wong, 2004; Kamal, 2010) The positive correlation between SOHC ownership and firm performance is found not only in developed market but also in week corporate governance environment would contribute to the understanding of role of SOHC model

in which the holding structure seems to well serve the purpose of resolving the problems

of SOEs

The findings would have practical implications for policy makers, managers, investors and stakeholders to develop effective corporate governance Regulators could make policy adjustments on corporate governance regulations, managers could improve corporate governance at company level in order to achieve better firm performances, investors could make decisions in investments, choosing board directors, or changing corporate governance policy

1.7 Research Structure

The structure consists of five chapters:

Chapter 1: Introduction Introduction of the formation of the subject, objectives,

meaning and scope the topic of research

Chapter 2: Literature Reviews This chapter would review relevant theories for

ownership structure, board characteristics and corporate governance This chapter would also develop hypotheses to be tested

Chapter 3: Data and Methodology Presentation of methodology, research model and

forming measurement variables Regression models are also introduced with analysis methods

Chapter 4 Results This chapter demonstrates results of data analysis, descriptive

statistics of the sample, the multiple regressions were used to test the relationship of IGMs and firm performance Presenting and discussing on results of the analysis

Chapter 5: Conclusion Evaluating the obtained results from the research model, the

contributions, limitations and proposals for new research

CHAPTER 2 LITERATURE REVIEW

This chapter introduces the agency theory as the foundation for this study Besides, previous studies are also reviewed to form research model and develop hypotheses

on a market Organizational economics is one of the richest and most rapidly expanding fields in modern economics (Foss et al, 1998)

In “The Nature of the Firm”, Coase (1937) attempts to clarify why the economy is formed by large numbers of firms, instead of consisting entirely of a mass of independent, self-employed individuals who would like to make contract with other The traditional economic theory argued that, because of market efficiency, it would be more inexpensive to contract than to hire To make market transaction, there are many steps to be conducted including identifying joint parties, establishing terms and conditions, accompanying negotiations and finishing a contract After that monitoring

is required to ensure all terms and conditions are achieved If minor changes are desired, the whole transaction process needs to be started again Coase indicated that there are a number of transaction costs to use the market in which the cost of attaining a good via the market is in fact more than the good price itself Other costs such as information costs or bargaining costs as well as enforcement costs could possibly be added to the cost of obtaining something with a market (Coase, 1937)

According to Coase (1937), people initiate to establish manufacture in firms when the transaction cost of organizing production through the imperfect information market is more than within the firm By this, Coase formed transaction cost theory of the firm

This theory suggests that firms would be formed when people organize to make products

to avoid above costs More details, Coase argued that transaction costs are evaded by using the price mechanism These include determining appropriate prices including negotiating costs and lettering enforceable contracts costs Additionally, contracts would be imperfect and have to be regularly re-negotiated The costs if there is asymmetric information may be considerable (Coase, 1937)

Jensen and Meckling (1976) continued with Coase’s work suggesting that “most organizations are simply legal fictions that serve as a nexus for a set of contracting relationships among individuals” The firm is not like individual It is a “legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals are brought into equilibrium within a framework of contractual relations” (Jensen and Meckling, 1976)

Jensen and Meckling (1976) argued that agency problem occurs when collaborating parties have different goals Jensen and Meckling (1976) defined the agency relationship

“as a contract under which one party (the principal) engages another party (the agent) to perform some service on their behalf” These contracts specify agency relationships: between shareholders (principals) and managers (agents), between debt holders (principals) and managers (agents), between shareholders (principals) and directors (agents) and between the directors (principals) and various board committees and task groups (agents) These contracts could be implicit (based on unspoken mutual expectations, cultural norms, individual roles organizational ‘common law’ or ‘culture’)

or explicit (based upon written representations that are legally binding, such as corporate by-laws, shareholders’ agreements, subscription agreements and employment contracts) (Moldoveanu and Martin, 2001) As part of this, the principal would delegate some decision-making authority to the agent and the welfare of the principal is affected by the choices of the agent Agency theory focuses on the relationship and goal conflict between managers (agent) and shareholders (principal) (Eishenhardt, 1989)

The delegation of decision-making authority from principal to agent is problematic in that the principal could not perfectly and costless monitor the agent’s action and

information (Pratt and Zeckhauser, 1985) and the interests of the agent diverge from those of the principals (Jensen and Meckling, 1976, Barney and Hesterly, 1996)

In the relationship between principal and agent, the principal is fully informed about the agent and about the firm's production possibilities but the principal cannot monitor the agent's actions The principal is unable to monitor the agent (Grossman and Hart, 1983) and it is difficult for them to verify that the agent has behaved appropriately (Eishenhardt, 1989)

Agent typically knows more about their tasks than principal Asymmetric information

is a condition in which agents involved in a transaction and have dissimilar information

or when an employee would distinguish more about their ability than their employer (Amagoh, 2009) The principal-agent problem and asymmetric information can also be exposed in many situations such as the owners (shareholders) and managers of publicly listed companies, or owners (citizens) and managers of publicly owned organizations (Amagoh, 2009) The information asymmetry is simply the claim that agents possess more information than their principals (Grossman and Hart, 1983) The principal has limited observational powers and this creates an imbalance of power in transactions, which sometimes go to inclination (Walker, 1989) In 2001, the Nobel Prize in Economics was endowed to Akerlof, Spence and Stiglitz for their study about asymmetric information

The other problem in the principal-agent relationship is that often there would be a divergence between the actual decisions made by agents and the decisions that would maximize the principal’s benefits This divergence arises because, when making a decision, agents also would like to maximize their own self-interest (Soudry, 2007) Therefore, whenever the agent's activities are for benefit only of the principal (and thus donate nothing to the agent's self-interest), the agent would contribute in a lower level

of effort instead of a high level (Soudry, 2007) This is because of the different risk preferences (Eisenhardt, 1989)

2.1.2 Agency Conflicts and Potential Conflicts

Agency theory specifies an ultimate problematic in organization - self-interested behavior Personal goal of managers may conflict with maximization of shareholder wealth which is the ultimate purpose of owners Managers receive authorization from owners to manage assets and as a result, potential conflict of interest could occur between the two groups

The fundamental assumptions of agency theory are the objective of managers differ from those of the shareholders, and most managers have freedom in setting the goals of the firm which they use to maximize their own prosperity The interests of the managers include job security and firm growth, which also allows managers to achieve other subsidiary goals, such as high salaries and power (Band, 1992) The self-interest of managers is to maximize their own incomes These incomes consist of both monetary and non-monetary elements The non-monetary aspects of income can be equated at the margin with dollars; hence the managers are trying to maximize the present value of their lifetime incomes in dollar terms (Band, 1992) However, security of the job is the most important condition for the managers to achieve this goal Therefore, it is not surprising that managers would adopt financing policies and a capital structure for the firm which can help to secure their jobs (Band, 1992)

Individual shareholders are often a good deal farther from institutional shareholders from the decision making process of a company (Band, 1992) Individual shareholders have a tendency to learn about the company’s performance only ex post through official reports issued by the management As a result, individual shareholders have no reliable method in determining whether the firm is maximizing its wealth or not Their only benchmark consists of comparisons with other similar firms (Band, 1992) Even this yardstick is an imprecise one, as there is no exactly same company, and the performance

of every company is usually identified by some exclusive events applicable to itself alone (Band, 1992) As a result, individual shareholders tend to act as ‘satisfiers’ rather than ‘maximizers’ They would like to maximize, but the limitations of their ignorance and their finite capacity cause them to adopt behavior different from that of a theoretical maximizer (Band, 1992) Subsequently, if the company’s share price increases to match

minimal criterion of ‘satisfactory growth’ in their investments, together with stable dividends, individual shareholders are less likely to protest the management (Band, 1992) It is only when the performance of the firm is so poor that it cannot be accepted

by large numbers of individual shareholders that they would then act against the firm’s management (Band, 1992) Individual shareholders can express their approval or veto

of management in the annual election of the Board of Directors When shareholdings are dispersed, it requires an extraordinary effort to trigger a meeting to elect Directors who would remove or discipline managers (Band, 1992)

The extent to which managers’ behavior can diverge from value-maximizing behavior

is also mitigated by the presence of well-functioning markets for capital and labor The possibility of an outside takeover of the company is a powerful deterrent against deviations from value-maximizing behavior (Band, 1992) The market for corporate control is the arena in which alternative ownership teams compete for the right to manage corporate resources which are under-utilized The underutilization of resources

is reflected in the company’s share price being depressed (Band, 1992) An opportunity

is therefore created for another ownership team to buy enough of the shares to obtain representation on the Board of Directors and thus press for changes of policy or management so that the true potential of the company can be realized Moreover, an efficient managerial labor market would continuously reassess management by comparing its contracted and actual performance (Band, 1992)

Unfavorable deviations would be situation in which the manager’s future compensation would reflect his/her past performance Additionally, internal monitoring of managers occurs by other managers within the firm (Band, 1992)

2.1.3 Stakeholder Theory

The stakeholder theory is a complementary to the agency theory The agency theory particularly focuses on the relationship between owners and managers of the firm given the separation between the ownership and control In most countries, the stockholders are protected by laws because they are considered as owners The other stakeholders such as suppliers, employees, business partners who can be affected are not taken into

account in setting duties by the company This is the limitation of agency theory because stakeholders also contribute to the success of organizations

Stakeholders are defined as groups who are necessary to success of the company including suppliers, employees, business partners (Freeman, 1984) Stakeholders’ interests should be taken into the decision of management boards because negative actions of these people to directors for performance failure (Freeman, 2004)

Directors and Managers should take into consideration Stakeholders’ interests which go beyond the sole interests of shareholders As a result, shareholders long term interest is also benefited: increasingly consumers’ demands, trustworthy from suppliers; loyaty from employee and more investment from funds Company is unable to maximize shareholders value without a stable revenue which comes from customers, suppliers and employee (Carrillo, 2007) This stakeholders’ concern is the foundation for Corporate Social Responsibility (CSR) concept (Fontaine et al, 2006) which originates from corporate governance model of Japan and German (Mintz, 2005)

Board of Directors is a mechanism to ensure for the compliance to shareholders’ value maximization In stakeholders’ approach, the board has more responsibilities to guarantee for stakeholders’ satisfaction in order to keep the company moving forward (Pigé, 2002) However, stakeholders’ interests are not always consistent and even conflict to shareholders’ value which could be a dilemma for the board

2.1.4 Corporate Governance

In 2011, over 450 participants from 20 countries convened in Tokyo to discuss corporate governance reform efforts at the Seventh Annual Meeting of the International Corporate Governance Network Ten days later, the leaders of the G7 nations met in Genoa and, among other things, pledged to help developing nations promote corporate governance improvement as a resources of battling corruption Clearly, interest in corporate governance is now truly global, reflecting recognition by world leaders, business leaders, and investors that the quality of corporate governance is a factor in the capability

of a nation’s economy to succeed (Gregory, 2000)

In general, corporate governance is a term that refers broadly to the “rules, processes, or laws by which businesses are operated, regulated, and controlled” (Obi, 2009, in Kasum and Etudaiye-Muhtar, 2014) The definition could refer to “internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations” (Idowu et al., 2015) Corporate governance is often viewed as “both the structure and the relationships which define corporate direction and performance” The board of directors is naturally central

to corporate governance Its relationship to shareholders and management is critical Other participants include employees, customers, suppliers, and creditors4 Corporate governance is also a mechanism to reduce or eliminate agency problem (Singh, 2012)

Table 2.1 Corporate Governance Definitions Author Definition

Shleifer,

Vishny

Corporate governance deals with the ways in which suppliers

of finance to corporations assure themselves of getting a return

on their investment Sternberg (in

Aziri, 2011)

Corporate governance is the process of supervision and control intended to ensure that Strongly agree the company’s management acts in accordance with the interests of shareholders

Tricker

(in Aziri, 2011)

The governance role is not concerned with the running of the business of the company per se, but with giving overall direction to the enterprise, with overseeing and controlling the executive actions of management and with satisfying legitimate expectations of accountability and regulation by interests beyond the corporate boundaries

Hess

(in Aziri, 2011)

Corporate governance is the process of control and administration of the company’s capital and human resources

in the interest of the owners of a company

Mathiesen Corporate governance is a field in economics that investigates

how to secure/motivate efficient management of corporations

by the use of incentive mechanisms

Cadbury Corporate governance is concerned with holding the balance

between economic and social goals and between individual and communal goals

OECD Corporate governance is one key element in improving

economic efficiency and growth as well as enhancing investor confidence Corporate governance involves a set of

4

relationships between a company’s management, its board, its shareholders and other stakeholders

Note: Author compiled

Many definitions in corporate governance include Shleifer and Vishny (1997) who argues “corporate governance deals with the way suppliers of finance assure themselves

of getting a return on their investment” Besides, “corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources The aim is to align as nearly as possible the interests of individuals, corporations and society” (Cadbury, 2000)

For the Organization for Economic Cooperation and Development (OECD, 2004),

“corporate governance is 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 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” (OECD, 2004)

The definition of corporate governance varies from country to country because countries differ from each other in terms of culture, legal systems and historical developments These different definitions of corporate governance also reflect distinctive perspectives

on what corporate governance is and what problems it addresses Shleifer and Vishny’s (1997) review could be the most regularly cited paper in the corporate governance literature Shleifer and Vishny define corporate governance in terms of “the ways in which suppliers of finance to a firm assure themselves of a good return to their investment” This definition is narrow because it only emphasizes the role of suppliers

of finance and it does not recognize the relationships between stakeholders and managers The definitions of Sternberg, Tricker, Hess and Mathiesen focused on the

processes in which the relationship between shareholders and managers are emphasized and corporate governance is to find out the solutions to control this relationship However, each firm has numerous stakeholders whose different interests must be taken care of Cadbury and OECD approach the corporate governance in a different direction

in which corporate governance is considered as a balance between economic and social goals and between individual and communal goals The role of stakeholders is concerned as a vital element constructing the house of sustainable corporate governance Stakeholder is a new approach in studies of many scholars in recent years

The “presence of an effective corporate governance system helps to provide a degree of confidence that is necessary for the proper functioning of a market economy” “As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth” (OECD, 2004)

“Corporate governance is affected by the relationships among participants in the governance system Controlling shareholders, which may be individuals, family holdings, block alliances, or other corporations acting through a holding company or cross shareholdings, can significantly influence corporate behavior” “Institutional investors are increasingly demanding a voice in corporate governance in some markets Creditors play an important role in a number of governance systems and can serve as external monitors over corporate performance Employees and other stakeholders play

an important role in contributing to the long-term success and performance of the corporation” (OECD, 2004)

There is a particular relevance in the relationship between corporate governance practices and the increasingly international character of investment (Singh, 2014) International capital flows allow corporations admittance financing from many investors Good corporate governance is a gradually vital factor for investment decisions especially for companies would like attract long-term steady capital Corporate governance would also help to improve the confidence of domestic investors, reduce the cost of capital, underpin the good functioning of financial markets, and induce more stable sources of financing (OECD, 2004, Aziri, 2011, Haque, 2008) Georgia State University and MIT Sloan School of Management found that good corporate governance

benefits companies with higher returns on equity, higher profit margins, larger dividend yields, and larger stock repurchases (Aziri, 2011)

Good corporate governance would contribute to the sustainable development of the economy through the promotion of enterprise capacity and increasing access to capital from outside the enterprise (Haque, 2008) Studies indicate that good corporate governance systems would increase surplus value for the enterprise, more productive and reduce the risk of errors for the financial system of a nation (Haque, 2008)

For emerging countries, to strengthen corporate governance system to achieve public policy goals is important (World Bank, 2006) System of good corporate governance helps to reduce the vulnerability of emerging markets as the financial crisis, strengthening property rights, reducing transaction costs and capital expenditures and developing capital market Bad corporate governance system primarily to reduce the confidence of investors does not encourage the outside investors Also, as pension funds continue to invest in capital markets, corporate governance systems better ensure these retirement savings In recent years, the important role of the corporate governance system is increasingly being highlighted by a series of scientific research (World Bank, 2006)

The contribution of good corporate governance to the economy and company was empirically examined by scholars across countries From the macro level of the economy to the micro level of company’s environment, corporate governance is believed to contribute to the sustainable development of the economy through the promotion of enterprise capacity and increasing access to capital from outside (OECD, 2004) Good corporate governance, on the other hand, would decrease the cost of capital and increase the performance of company which creates value to shareholders The relationship between shareholders and managers plays an important role in corporate governance (Suchard et al., 2012)

Betch et al (2002) identified six reasons for the increased importance of corporate governance in last few decades