THE COLLAPSE OF VINASHIN AND CORPORATE GORVERNANCE PROBLEMS

After failing in December to make a $60m repayment on a $600m loan arranged by Credit Suisse, Vinashin wrote to investors in a 1,000bn Vietnam dong $48m bond in January to tell them it w

THE COLLAPSE OF VINASHIN AND CORPORATE GORVERNANCE

PROBLEMS

I Introduction to Vinashin and its collapse

a Introduction

Harmony with economic development of the country,Vinashin Kansai was established in Hai Phong city,a center forthe steel industry in the North

With the aim to contribute part of their effort into modernization and industrialization of the country,the production lines of modern steel Kansai Vinashin buil twith a capacity of 300,000tons/year

The main products are hot-rolled steel reinforced concrete with dimensions from D10-D42 international standards and Vietnam which have been registered at the General Department of Quality Measurement and Quality Vietnam Kansai Vinashin work with only the"Prestige-Quality on each steel plant"

b The collapse

When Vinashin, the now ailing Vietnamese state shipbuilder, raised about $1bn from international investors in 2007, everyone felt like a winner

The company got the cash it needed to expand, the government demonstrated that Vietnam was integrating into the global economy, the investors got some much needed yield and the bankers got their fees (chiefly at Credit Suisse and Deutsche Bank) But, with the near-bankrupt company now unable to pay its debts and creditors frustrated at the lack

of communication, Vinashin has become a case study in the perils of emerging market debt investment

After failing in December to make a $60m repayment on a $600m loan arranged by Credit Suisse, Vinashin wrote to investors in a 1,000bn Vietnam dong ($48m) bond in January to tell them it was unable

to make the latest coupon payment

Coupon payments are due on other bond tranches over the next few months, including a 3,000bn Vietnam dong bond arranged by Deutsche Bank in 2007

Vinashin, which nearly collapsed after amassing debts of more than $4bn while expanding into non-core activities, has appointed KPMG to advise

on its restructuring and told Bloomberg it will report back to creditors by May or June

But large banks like Credit Suisse and Standard Chartered, who are among the creditors of the $600m Vinashin loan, have long term business interests in Vietnam and are not quite so keen to clash with the government

II What are Corporate Governance problems in this case?

From documents of OECD (2004, page 17-25), corporate governance

included 06 basic rules:

“1 Hoạt động minh bạch theo thị trường trong khuôn khổ của luật pháp, tuân thủ trách nhiệm và nghĩa vụ qui định của Nhà nước

2 Bảo vệ và hỗ trợ quyền lợi của cổ đông/người lao động

3 Đối xử bình đẳng đối với tất cả cổ đông, kể cả nhóm cổ đông thiểu số và nước ngoài

4 Nhận thức quyền hạn của cổ đông do luật pháp xác nhận hoặc thông qua thỏa thuận giữa các bên, khuyến khích hợp tác năng động giữa các công ty

và các cổ đông

5 Đảm bảo thông báo chính xác tình hình các hoạt động liên quan của công

ty, bao gồm tình tình tài chính, kết quả hoạt động, sở hữu và quản trị doanh nghiệp

6 Duy trì định hướng chiến lược của công ty, tính hiệu quả trong điều hành của Ban Giám đốc công ty và trách nhiệm của HĐQT đối với công ty và cổ đông.”

After the collapse of Vinashin, we see that the compliance with these above governance rules was not concerned about properly The

violations are mostly from inside main managers, it affected directly to

company’s performance about investment plans, using capital or managerial ability

Source: http://www.domi.org.vn/tin-tuc-su-kien/tin-nghien-cuu/ban-in-cho-chu-de.2814.html

Actually, the leader of this corporation was assigned too much powers (Mr Pham Thanh Binh was the Party Secretary and also CEO of Vinashin) A

person who held so much powers will create an autocratic institution and uncontrollable investment A typical example is that bought Hoa Sen ship

with 1,300 billion VND to do nothing

Moreover, about poor managerial ability, shipbuilding is a major sector of

Vinashin, but focusing too much on making new ships; they ignored other things such as repairing or improving the quality of ships Therefore, they created the poor-quality new ship and could not be sold However, investment in no-experience sectors (electricity, steel, finance ) leading to low-efficient projects and could not finish because of lack of funds, therefore, causing delays, wastes and huge losses

In addition, many managers had signs of embezzlement, corruption, self-interest and concealing information but they were not detected and handled

immediately The result of inspection has shown that investing in these projects is to take advantages for personal purposes from corporation‘s assets The competence of Vinashin was not limited to, financial investments

of the State for them had no barriers while the state monitored and checked loosely CEO, BOD members, directors of Subsidiaries felt very easy to mobilize and use the corporate capital and violate state law

Besides, Central Inspection Commission (dated 05/7/2010) confirmed: "in

recent years, Vinashin has reported dishonestly about the financial

situation"

III Agency problems

Vinashin was a State-owned enterprise It’s corporate governance remained many problems and Vinashin had multiagency problems That was the main reason caused the company to collapse

Investment banker

Analysts

Investment analysts

Credit agencies

Society

Creditors

Government

Internal audit BOD

CEO

Managers Employees Vinashin Corporate mechanism

Market force

Vinashin had a complicated corporate governance mechanism.

It’s governing bodies is a Combination of the Party Committee

and the Board of Directors

Vinashin’s objective is A Combination of National Goals and Company Performance, not only profit

There were agency problems in many points of Vinashin’s corporation mechanisim:

 Conflict between the government and the BOD

The government assigned the board of directors on behalf as investors, while professional managers are hired to manage Vinashin The government is principal of the BOD but they manage and monitor the agents weakly with lack of restrictions and attention This reality caused the BOD take advantages of their power to attain their own interests through embezzlement, corruption,…In detail, they had established many subsidiaries whose operations were beyond the group’s core business, and they were too slow to build a company charter and to introduce financial and infrastructure investment management regulations and technical and economic standards The management of state-owned Vinashin group had been ineffective All their actions with lack of responsibility and consideration about the national interest For example, it was so wrong when gave too much power and authority to the group chairman Pham Thanh Binh (Mr Pham Thanh Binh was the Party Secretary and also CEO of Vinashin) He could use his power to do for his own interest, neglected in making investment decisions without an approved investment plan He did assign many of his relatives to the management systems of the company, especially the case of his son

The head of Vinashin from BOD to CEO and lower level of managers had limited capacity, irresponsible, arbitrary, dishonest in reporting, violating the law in compliance with the provisions of the State, the Prime Minister They shook hands and were just greedy for their own interests

 Conflict between management and the emloyees

Vinashin did not pay wages and salaries to employee led to many of them quitted their work at Vinashin

 Conflict between the company and the creditors

Vinashin financing mostly were debts from issuing bonds both domestically and internationally Vinashin failed to meet extended deadline to make loan payment to foreign creditors led to many conflict and legal issue

Vinashin reported the wrong number to the creditors and society to hide their poor performance

 Conflict between Vinashin to the society

Vinashin was a cheating enterprise to the society about it’s financial reports

of cooking numbers, using public money to do business unconstructively and foolishly led to significant waste of national capital

In general, Vinashin had a very bad corporate governance

The government steps in

On August 12, 2010 the Prime Minister established a steering committee to restructure Vinashin Permanent Deputy Prime Minister Nguyen Sinh Hung will be in charge of the committee while another Deputy Prime Minister, Hoang Trung Hai, was named as vice chair, demonstrating the seriousness of the situation The 14 other members are representatives from relevant ministries, branches and sectors

The committee’s task is to study the situation and propose policies and other remedies for Vinashin, as well as to organise the implementation of these policies and measures to enable it to stabilise and develop its business The committee also gives instructions to the mass media in disseminating information on Vinashin’s situation and the government’s plans

The committee is composed of two working groups and a coordinating section Working Group No 1 is in charge of organisational restructuring, development strategy, and the direction of investment, production and business lines for Vinashin Working Group No 2 is responsible for reshaping Vinashin’s financial structure to ensure that it is able to cover debts, production, business and investment activities

The government’s policy is to restructure Vinashin with the objective of reducing its debt, restoring capital and cutting losses to a minimum In particular, the government aims to prevent the Vinashin case from negatively affecting macro-economic stability and the investment environment in Vietnam The state will ensure sufficient capital to Vinashin to pay off

mature foreign debts Vinashin’s mission will be to restructure production loans and debts to suppliers while completing projects

IV Summary

The case of Vinashin was a typical example of managing loosely of Government to State-owned enterprise By giving too much power and authority to the chairman, Government has indirectly destroyed Vinashin As

a result, Vinashin has caused serious consequences affecting the country's economy Although Government has to take measures to save the situation and restructure one of the biggest state-owned corporations, this is still a memorable lesson in administrating state-owned enterprise