Ownership structure, board characteristics and firm performance in Vietnam

Furthermore, there was no study related to therole of Board Ownership Deviation over the world and this kind of ownership isfound to have positive impact on firm performance in Vietnam..

VIETNAM NATIONAL UNIVERSITY OF HO CHI MINH CITY

UNIVERSITY OF TECHNOLOGY

NGUYỄN TIẾN THÔNG

OWNERSHIP STRUCTURE, BOARD CHARACTERISTICS AND FIRM

The Thesis was completed in University of Te chnology –VNU-HCM

Advisor 1: PhD Nguyễn Thu Hiền

Advisor 2: Assoc Prof.PhD Piman Limpaphayom

Independent examiner 1:

Independent examiner 2:

Examiner 1: PhD Dương Như Hùng

Examiner 2: Assoc Prof.PhD Nguyễn Minh Kiều

Examiner 3:

The thesis will be defended before thesis committee at

on

The thesis information can be looked at following libraries:

- General Science Library Tp HCM

- Library of University of Technology – VNU-HCM

3 Nguyen, T T (2015) Internal Governance Mechanisms and Firm Performance:

The Case of Vietnam PEOPLE: International Journal of Social Sciences,

Special Issue, 254-269

4 Nguyen, T D., Nguyen, H T and Nguyen, T T (2013) Role of Dividend Policy to Shareholders Value and Risk in Condition of Disclosure & Transparency IFMA, Indonesia, ISBN: 987-602-14716-0-9

In recent years, corporate governance research received increasing attentionbecause of scandals involving manipulation of corporate power and evenalleged criminal activities Good corporate governance would contribute to thesustainable development of the economy through the promotion of enterprisecapacity and increasing access to capital from outside the enterprise Bettercorporate governance could lead to better corporate performance and impedeexpropriation of controlling shareholders from minority shareholders.Vietnam’s Government recently implies the important role of State CapitalInvestment Corporation in equitization However, the role of State-OwnedHolding Company (SOHC) is not taken into consideration in recent globalcorporate governance studies, especially in weak regulatory environment likeVietnam Applying quantitative method on panel data of listed companies inVietnam during 2009-2013, this study found that SOHCs have positive impacts

on firm performance which is a contribution to both theory and practice incorporate governance research Furthermore, there was no study related to therole of Board Ownership Deviation over the world and this kind of ownership isfound to have positive impact on firm performance in Vietnam This findingconsolidates the principal-principal agency theory as well as contributes a newunderstanding about Board members relationships This study, further, foundthe 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 enthusiasticcorporate governance for Vietnam

CHAPTER 1 INTRODUCTION

In general, models of corporate governance are diverse across countries Thesediffers are related to the diversity of capitalism in which corporate governanceare embedded The Anglo-Saxon countries (US and U.K) emphasize theinterests of shareholders while the coordinated or multi-stakeholder modelassociated with Continental Europe (Germany and France) and Japanrecognizes the interests of workers, managers, suppliers, customers, and thecommunity (Allen and Gale, 2002) The corporate governance model of theAnglo-Saxon countries represents the “outsider” system and the model of theContinental Europe, on the other hand, is called “insider” system (Tan andWang, 2007)

The Anglo-Saxon corporate governance model has characterized with theprincipal–agent issues from the separation of ownership and control in highlydispersed ownership structure To mitigate the conflict of interest associatedwith the principal–agent problem, appropriate governance structures must beeffectively 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 shareholdersand therefore, different corporate governance mechanism approach is required

In this circumstance, internal governance mechanisms (IGMs) are expected toplay a more prevalent role in these countries in addressing the principal–principal problem (Hu et al., 2009)

Better corporate governance could lead to better corporate performance andexpropriation of controlling shareholders is supposed to be prevented.Moreover, better decision-making proceess is expected in these companies(Nam and Nam, 2004) Good corporate governance increases the market

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valuation of companies by improving their financial performance, reducing therisk that boards would make self-serving decisions, and generally raisinginvestor confidence (Newell and Wilson, 2002).

The rise of sovereign wealth funds (SWFs) and state-owned holding companies(SOHCs) and the dominance of state-owned enterprises (SOEs) in somecountries has recently raised concerns related to their governance structures, thetransparency of their investment (Chen, 2013) Several studies have beenconducted to examine the roles of government-linked companies (GLCs)including Ang and Ding (2006), Wicaksono (2009) and Chen (2013) GLCs arecompanies that partially owned by the government and proportion of ownership

of the government in these firms varies from very low to very high levels.SOEs & GLCs have a dominant role in Vietnam’s economy SOEs, besides, areclaimed with lacking of transparency (Kamal, 2010) In 2005, State CapitalInvestment Corporation (SCIC) was established in Vietnam as a state-ownedholding company (SHOC) SCIC represent the state capital interests inenterprises and invest in key sectors and essential industries and to become astrategic investor of the government that is responsible for generatingmaximum generating maximum value and sustainable returns on investments.Hochiminh-City Fianance and Investment State-Owned Company (HFIC) wascreated in 1996 with a purpose to develop a focus and effective mechanism tomobilize capital for Ho Chi Minh City SCIC/HFIC model is expected to followsimilar model of Temasek in Singapore which is ascertained as efficiency butits role in Vietnam is not demonstrated

Moreover, there was no empirical research to investigate the role of boardownership deviation in which impact of largest shareholder is excluded

Vietnam is considered as a poor corporate governance standards and there hasnot been much work published on Vietnamese corporate governance.Moreover, state ownership is not a major interest of study in all previous

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researches in Vietnam Especially, there is lacking of studies on the roles ofownership structure and board characteristics with a focus on different type ofstate ownership on firm performance Moreover, previous studies examined therelationship between internal corporate governance aspects on single factors ofIGMs without consideration the relationship between board characteristics andownership structure (Denis & Sarin, 1999; Mak & Li, 2001; Desender, 2009).

To fill this gap, this study takes into account jointly IGMs in one model toexamine for simultaneously effects of board characteristics and ownershipstrucutre on firm performance in Vietnamese market

The lack of corporate governance analysis for Vietnamese SOEs and GLCs isthe second gap that need to be fulfilled The difficulty in determining theprincipal at SOEs impedes the development of an appropriate mechanism foraligning the agent’s interest with the principal’s as explanation of agency theory(Wicaksono, 2009) SOE corporate governance are facing with three mainchallenges including multiple and conflicting objectives, excessive politicalinterference and opacity (Wong, 2004; Wicaksono, 2009) SOEs and GLCs isregulated to have dominant roles in Vietnamese economy but there has not been

an inclusive study being conducted to assess their efficiency in comparison withprivate sector’s enterprises 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 hasnot been empirical study on SOHC influence SOHC is a model in whichgovernment 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 shieldingthe SOEs from politics and government intervention while transparency can bebest improved by opening access of ownership to the public (Wicaksono,2009) Vietnam is a developing country with strong orientation fromgovernment in comparison to developed market orientation SCIC and HFICare SOHCs in Vietnam The equitization is is accelerated in recent years andthe requirement to transfer state ownership to SCIC require a detailed study of

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the effectiveness of the SOHC model The effectiveness of SOHC model inVietnam is not demonstrated and it is a research gap.

A new area that has not been explored in literature by the knowledge of theauthor is the bargaining power in the boardroom that may be rooted in deviation

of roles among board members due to the influence of some dominantmembers/groups of members, such as a major shareholder, in board discussionand board resolution The deviation of ownership among board members, or thedifference of ownership between the major shareholder’s representative and theother shareholders, could be an important factor that hinder the boardeffectiveness This argument originates from the agency theory (Jensen andMeckling, 1976) Originally, the agency theory explained the conflicts betweenshareholders and managers Recently, agency theory is developed in globalresearches and explained for conflicts between controlling shareholders andminority shareholders These relationships provide a glimpse on interestconflicts 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 entityignoring there would be potential conflicts of interest between shareholdergroups and there could be the conflict of interests between these blockholders(Earle et al., 2005) These blockholders decide the board of directors and theirpotential conflicts could impact on firm performance in which the largestshareholder is the most powerful group and other directors form acounterweight Board ownership deviation, or the deviation of ownershipamong board members, which is measured by the ownership of board ofdirectors excluding largest ownership, is to reflect the power deviation amongboard members/groups of board members is not demonstrated in boththeoretical and empirical studies The findings of board ownership deviationimpacts are expected to be a new contribution to corporate governanceliterature This study therefore also aims at filling this gap

CHAPTER 2 LITERATURE REVIEW

Agency theory models the relationship between the principal and the agent.Jensen and Meckling (1976) defined an agency relationship as “a contract underwhich one or more persons (the principal(s)) engage another person (the agent)

to perform some service on their behalf which involves delegating somedecision making authority to the agent” In the context of the firm, the agent(manager) acts on behalf of the principal (shareholder) (Eisenhardt, 1989;Jensen and Meckling, 1976)

The principal has to use agent because he does not have enough ability tomaximize value of his own property The owner also use agent when he hasresources restrictions As part of this, the principal will delegate some decision-making authority to the agent and the welfare of the principal is affected by thechoices of the agent Therefore, the major issue is the information asymmetrybetween managers (agents) and shareholders (owners) In this relationship,insiders (managers) have an information advantage The agent may takeunobservability activities to enhance his personal goals (Eisenhardt, 1989;Jensen and Meckling, 1976)

Corporate governance is a term that refers broadly to the rules, processes, orlaws by which businesses are operated, regulated, and controlled (Obi, 2009,cited Kasum and Etudaiye-Muhtar, 2014) The term can refer to internal factorsdefined 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 structureand the relationships which define corporate direction and performance Theboard of directors is naturally central to corporate governance Its relationship

to shareholders and management is critical Other participants include

employees, customers, suppliers, and creditors Corporate governance is also amechanism to reduce or eliminate agency problem (Singh, 2012).

Wong (2004) stated that problems of SOEs governance are multiple conflictingobjectives, political intervention and lack of transparency The holding structureseems to well serve the purpose of resolving the first two problems at SOEs asthe holding structure is also believed to be able to serve as a layer shielding theSOEs from politics and government intervention while transparency can beimproved by opening access of ownership to the public (Wicaksono, 2009).Placing SOEs under the control of an SOHC rather than the direct ownership ofthe state might reduce the conflict inherent in the state’s roles as bothshareholder and regulator (Chen, 2013) SOHC acts as a safety valve between aregulator and a regulated firm (Hamdani and Kamar, 2012) This would allowthe government the flexibility to deal with a particular target firm or industry,and may help avoid a dilemma in which a heavy regulatory enforcement actionharms the government’s interests as a shareholder (Chen, 2013)

Board Ownership is main area of ownership structure studies The convergence

of interest hypothesis believes managerial ownership has positive effect whilemanagerial entrenchment hypothesis has opposed view (Jensen and Meckling,1976; Hu and Izumida, 2008) Board ownership is examined as a unified entityignoring there could be potential conflicts of interest between shareholdergroups Young et al (2008) and there could be the conflict of interests betweenthese blockholders (Earle et al., 2005)

Ownership deviation in this study is defined as the opposed ownership of boardmembers other than largest shareholder Basing on the assumption of conflictsbetween blockholders and the dominant role of largest shareholder, the

ownership of members other than largest shareholder could act as constrictedentity to the role of largest shareholder.

Board members are presentative for different shareholders or group ofshareholders as board composition are strongly correlated with ownershipstructure (Li, 1994) Earle et al (2005) argued that if there is a dominantshareholder presented in a firm, the monitoring contribution of other smallblockholders is no vital However, if ownership of other members is largeenough, it could resist the dominance of largest shareholder Therefore, theboard ownership deviation could have positive role in ownership structure

2.5 Institutional Ownership Deviation

Many studies have found that state ownership does not produce superior firmperformance, but it is often linked to low efficiency (Hu et al., 2009

SOEs, on the other hand, are also institutional investors in stock exchanges.Institutional investors are found to have positive effects on firm performance aswell as enhance corporate governance in many studies (Balatbat et al., 2004;Chen et al., 2008) The ownership of state could outweigh the benefit of otherinstitutional investors Therefore, exploring the role of non-state institutionalinvestors could provide a clear understanding about the role of intuitionalinvestors

Since 1990s, conflicts between controlling shareholders and minorityshareholders have been emerged in academic researches Interests of largeshareholders could be diverged from minority shareholders’ benefits (Hu andIzumida, 2008) Controlling shareholders could exploit the interests of minorityshareholders via related party transactions as well as falsifications of financialstatements (Hu et al., 2008)

Hypothesis 1: Ownership of the largest shareholder has a negative impact on firm performance.

There is a problem of inefficient performance of SOEs Many studies havefound that state ownership is often linked to low efficiency (Bai et al., 2004;Ding et al., 2007).

Vietnam has SCIC and HFIC which are SOHCs These companies participateinto SOEs equitization to enhance efficiency of state capital utilization SOHC

is more likely to act as an active investor and push for more transparency andbetter corporate governance to earn long-term profits (Chen, 2013) andcompanies related to SOHC are found to have higher quality of corporategovernance (Chen, 2013)

Hypothesis 2: State ownership has a negative impact on firm performance Hypothesis 2a: SOHC ownership has a positive impact on firm performance.

Family ownership concentration could increase the expropriation of non-familyminority shareholders (Bloom and Van Reenen, 2006) In family companies,unqualified members could be appointed to key positions without competition(Claessens et al., 2000) Moreover, because of close relations and informallinkages, family managers are less to be monitored (Young et al, 2008)

Hypothesis 3: Family ownership has a negative impact on firm performance.

Fama and Jensen (1983), in managerial entrenchment hypothesis, argued thatmanagers with a significant equity to protect his position from outside controlwould not contribute best effort and could decrease the firm performance.Managers with insignificant ownership would be afraid of disciplines frommarket controls hence would act on behalf of shareholders’ value

Supervisory board, as regulating in laws, acts as monitor mechanism to protectbenefits for all shareholders Supervisors are expected to be active and effective

in monitoring activities of BOD & Managers

Besides, Earle et al (2005) argued that there could be the conflict of interestsbetween blockholders The ownership of other members other than largestshareholder could converge their interests with minority shareholders and they

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could act as effective monitoring mechanism as Jensen and Meckling (1976)argued that a sufficient high level of managerial ownership aligns the interests

of managers and shareholders hence improve the firm performance

Hypothesis 4: Ownership of Board of Directors has negative impact on firm performance.

Hypothesis 4a: Ownership of Supervisory Board has positive impact on firm performance.

Hypothesis 4b: Ownership of directors other than largest ownership has positive impact on firm performance

Large shareholders likely play a crucial role in monitoring and controlling.Chen et al (2008) argued that there are three benefits with institutionalownership including they are correlated with the higher proportion of theeconomic profit due to cost effectiveness, cost reduction in coordinating themanagement, and big institutions would find more difficulties and moreexpensiveness when it try to sell its big quantity of shares

SOEs, however, are also institutional investors SOEs are linked to lowefficiency (Bai et al., 2004; Ding et al., 2007) The ownership of state couldoutweigh the benefit of other institutional investors If ownership of otherinstructional investors are sufficient enough, the impact on firm performancecould be positive

Hypothesis 5: Institutional Ownership has a positive impact on firm performance.

Hypothesis 5a: Ownership of non-state institutions has a positive impact on firm performance.

Pfaffermayr and Bellak (2000) argue that affiliating with foreign firms helplocal companies have access to newer and superior technologies and lead tosuperior performance

Hypothesis 6: Foreign Ownership has a positive impact on firm performance

Although BOD acts as monitor mechanism to protect benefits for allshareholders including minority shareholders, the negative effects of havingcontrolling directors could outweigh the benefits of their presence First,controlling directors actively influence on the strategy and objectives ofcompany in line with their interest not minority shareholders’ (Claessens et al.,2000; Young et al., 2008) Second, the presence of controlling directors couldpotentially weaken the governance role of other directors, making the boardless effective (Hu et al., 2009)

Hypothesis 7: The proportion of directors related to largest shareholder on the BOD has a negative impact on firm performance.

One of the vital roles of BOD is independence The independence is to providedefense against the exploitative behavior by the controlling shareholders andother directors Independent director is a mechanism to enhance theindependence of BOD (Hu et al., 2009)

Hypothesis 8: The proportion of non-executive directors on the board has a positive impact on firm performance.

Hypothesis 8a: The proportion of independent directors on the board has a positive impact on firm performance.

Jensen (1993) argues that the BOD is often ineffective because the role ofchairperson is combined with CEO position The separation of two roles hasboth costs and benefits as there could be an implicit rivalry between two roles

as well as it is difficult to isolate responsibility for poor performance (Balabat etal., 2004)

Hypothesis 9: The nonduality has a positve impact on firm performance.