The Impact of Corporate Governance Disclosure on the Financial Performance of SSI30 Companies

Therefore, this paper is motivated to give in further detail at what level the quality of annual reports in Vietnam is by using the Standard & Poor‟s scorecard to rate and to investigate

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY

-

Vu Thi Thu Van

THE IMPACT OF CORPORATE GOVERNANCE

DISCLOSURE ON THE FINANCIAL PERFORMANCE OF SSI30 COMPANIES

MASTER THESIS

In Banking Ology code: 60.31.12

Supervisor:

Dr Pham Huu Hong Thai

Ho Chi Minh City, 2011

Acknowledgements

Hereby, the writer would like to express her heartfelt thanks to Dr Pham Huu Hong Thai for his great instruction to complete this thesis, to the professors & the teachers for building up her understanding & her good acting and to her loved ones for their contribution to meaning of her life

Abstract

Experience in countries with large and active equity markets shows that disclosure can also be a powerful tool for influencing the behavior of companies and for protecting investors A strong disclosure regime can help to attract capital and maintain confidence in capital markets Insufficient or unclear information may hamper the ability of markets to function, may increase the cost of capital and result

in a poor allocation of resources However, in Vietnam, Corporate governance is still a new concept And The World Bank asses that investor protection is inadequate; related-party transactions are pervasive; compliance with accounting standards is insufficient; and disclosure and transparency are limited Therefore, this paper is motivated to give in further detail at what level the quality of annual reports

in Vietnam is by using the Standard & Poor‟s scorecard to rate and to investigate the impact of corporate governance disclosure on the financial performance in order

to illustrate why the pursuit of better corporate governance practices can be of genuine and practical benefit to companies themselves As a fact, the annual reports viewed in this study are mainly with introduction, advertising, financial statement, balance sheet …., not reporting about corporate during the year as it is With correlation, relationships between financial performance and corporate governance disclosure expected are not seen from the samples

Keywords: Corporate Governance, Corporate Governance disclosure score, annual reports, financial performance

Table of content

Chapter 1 Introduction 4

Chapter 2 Literature review on corporate governance in general and on disclosure of corporate governance in particular 8

2.1 Theoretical Literature Review 8

2.2 Empirical Literature Review 10

Chapter 3 Research methodology 20

3.1 The sample 20

3.2 Research methodology 20

Corporate Governance Disclosure Scorecard 20

Financial Performance 21

Correlation 22

Chapter 4 Findings & Discussion 23

4.1 Corporate governance disclosure scores 23

4.2 Financial performance 31

4.3 Correlation 32

Chapter 5 Conclusion 36

References 43

Appendix 1 CG Disclosure Scorecard (Standard & Poor's) 48

Appendix 2 List of Tables 56 Appendix 3 List of Figures 57

benefits to be gained from a well-managed disclosure policy However, in Vietnam, Corporate governance is still a new concept As per the recent International Finance Corporation – Mekong Private Sector Development Facility survey in Vietnam, only 23% of the companies surveyed understand the basic concept of Corporate Governance, and there remains confusion between “governance” and

“management” between company directors And The World Bank asses that investor protection is inadequate; related-party transactions are pervasive; compliance with accounting standards is insufficient; and disclosure and transparency are limited (Report on the Observance of Standards and Codes 2006)

And relatively little research work has been done in the area of corporate governance in Vietnam If it is widely perceived that new laws and regulations to promote better corporate governance practices just end up creating additional (and unnecessary) burdens for companies, then their effectiveness will be limited Furthermore, it is important that any drive to improve corporate governance

practices seek to illustrate why the pursuit of better corporate governance practices can be of genuine and practical benefit to companies themselves.( Freeman &

Nguyen 2006) As per the assessment of World Bank, Quality of disclosure in the

annual reports of Vietnamese listed companies is not adequate and is not in compliance with OECD non-financial disclosure requirements The quality of disclosure is low while a strong disclosure regime is an important feature of market-based monitoring of corporate conduct and is central to the ability of shareholders

to exercise their voting rights effectively Experience in countries with large and active equity markets shows that disclosure can also be a powerful tool for influencing the behavior of companies and for protecting investors A strong disclosure regime can help to attract capital and maintain confidence in capital markets Shareholders and potential investors require access to regular, reliable and comparable information in sufficient detail for them to assess the acting of management and make informed decisions about the valuation, ownership and voting of shares Insufficient or unclear information may hamper the ability of

markets to function, may increase the cost of capital and result in poor allocation of resources Disclosure also helps improve public understanding of the structure and activities of companies, their policies and performance with respect to environmental and ethical standards and their relationships with the communities in which they operate

Research Objectives

Therefore, this thesis is motivated to give in further detail at what level the quality of annual reports in Vietnam is by using the Standard & Poor‟s (S&P) scorecard to rate and one more objective is to investigate the impact of corporate governance disclosure on the financial performance, respectively as a support to

above suggestion by Freeman & Nguyen (2006) for the illustration why the

pursuit of better corporate governance practices can be of genuine and practical benefit to companies themselves

Significance of the thesis

This study gives a closer and more detailed fact of the Corporate Governance

in Vietnam instead of saying, describing it in general at starting From the figure of this research, in comparison with other countries and from the test, the readers could imagine clearer and exactly at which level Vietnam is , how far Vietnam is behind and how much work Vietnam should do This helps enhance public awareness and training on corporate governance The findings suggest direction for further research, as well as give suggestions for Companies & policymakers to consider

Hypothesis statement

And in this thesis, the following hypothesis suggested by Abdo &

Fisher, 2007: “Companies with high levels of corporate governance disclosure will

achieve higher firm valuations and more significant prospects for future growth than companies with low levels of corporate governance.” is tested

Data & Methodology

The publicly annual reports & financial ratios of some Vietnamese companies belonging to the group of largest market capital with the 30 firms updated by Saigon Securities Inc., (SSI30 Update) on 31 Dec 2009 have been taken

under method of descriptive statistics to compute the linear correlation coefficient

between the corporate governance disclosure score and the market to book value ratio, between the corporate governance disclosure score and the Price per Earnings ratio as well The study follows the ones done in some other Asian countries applying S&P scorecard to make out the scores of sample then will evaluate the financial performance with Market-to-book-value (MTBV) and Price/earnings (P/E) ratio Lastly, correlation with financial performance as dependent variable and Corporate Governance Disclosure score as independent variable is computed

The results of CG disclosure rating for the Vietnamese companies are low, even lower than the figure of neighbor Asian countries in 2004 And the result of test is not in line with the hypothesis

Organization of thesis

The thesis includes five chapters Its remainder is structured as follows: The chapter two reviews the relevant literature on corporate governance in general and disclosure of corporate governance in particular The third chapter presents research methodology The results are reported and discussed in the chapter four And the last chapter concludes the thesis

CHAPTER 2

LITERATURE REVIEW ON CORPORATE GOVERNANCE IN GENERAL AND ON DISCLOSURE OF CORPORATE GOVERNANCE IN PARTICULAR

2.1 Theoretical literature review

Corporate governance has received an increasing amount of attention in recent years Corporate scandals have brought corporate governance weaknesses to the attention of the general publics, especially in the United States But corporate governance is sometimes a problem in other countries as well (W McGee, 2008)

At UNCTAD‟s 10th

quadrennial conference, which was held in Bangkok in February 2000, member States requested it to promote increased transparency and improved corporate governance In response, the Intergovernmental Working Group

of Experts on International Standards of Accounting and Reporting (ISAR) at UNCTAD conducted a series of consultations and deliberations on corporate governance disclosure during its annual sessions with a view to assisting developing countries and countries with economies in transition in identifying and implementing good corporate governance practices This was undertaken as part of the larger goal of achieving better corporate transparency and accountability in order to facilitate investment flows and mobilize financial resources for economic development

Corporate Governance Committee of Hong Kong Society of Accountants, in March 2001, published the book “A guide to Current Requirements and Recommendations for Enhancement on Corporate Governance Disclosure in Annual Reports” which introduced that Hong Kong was able to weather the storm better than many other Asian economies because the Special Administrative Region

has on of the highest standards of corporate governance in Asia With a global economy, corporate governance standards must also be global Consequently, those Hong Kong companies whose governance systems are not compatible with international standards will lose out in terms of attracting international investment More than 70 per cent of the international capital market is made up of United States and United Kingdom pensions, funds, and the other institutional investors These investors are keen on reducing risk One of the principal ways in which they can do this is by going to markets where governance practices are comparable to those in their home markets If Hong Kong is to maintain its status as a major international finance centre and capital market, Hong Kong companies must play by global rules, particularly those relating to full and timely disclosure Corporate governance is not an optional extra for Hong Kong companies It is essential and overriding element in attracting investment and stimulating economic growth

In general, the United Nations Conference on Trade and Development‟s

“Guidance on Good Practices in Corporate Governance Disclosure (2006)” describes: “The location of CG disclosures within the Annual Report of a Corporation is not generally well-defined, and can vary substantially across-country

in practice However, some degree of harmonization of the location of CG disclosures would be desirable to make the relevant data more accessible, in the long-run.”

Related study regarding developing a governance scorecard

As per Barrier (2003), there were seven primary characteristics of good corporate governance identified by The King Committee: discipline, fairness and social responsibility – and The Committee further developed and integrated these fundamental principles into tangible guidelines for minimum standards of corporate governance

In 1997, Standard & Poor‟s developed a company Corporate Governance Score (CGS) to assess a company‟s corporate governance practices and policies with four key components: ownership structure and influence, shareholder rights & stakeholder relations, financial transparency and information disclosure, and board structure and process (Bradley, 2004)

Basing largely on King II principles and the Standard & Poors International CGS index, A Abdo and G Fisher (2007) designed and developed a broad measure

of corporate governance disclosure, the G-Score, for research on South Africa The G-Score is a composite measure of 29 governance disclosure factors, encompassing seven corporate governance categories: board effectiveness, remuneration, audit & accounting, internal audit, risk management, sustainability and ethics Scores were done on publicly available information: annual report as the first source of data and company website as a secondary source of information

For South East Asia, Standard and Poor‟s and Corporate Governance and Financial Reporting Centre – NUS Business School, National University of Singapore joint-studied on Corporate Governance Disclosure in Singapore, in Malaysia, in Thailand, in Indonesia and also one in Hong Kong Those studies used the corporate governance disclosure scorecard developed by Standard & Poor‟s and focused only on annual report disclosure This thesis will also use this scorecard to make out the score on corporate governance disclosure of the sample companies

2.2 Empirical literature review

The legal protection of investors is described as a potentially useful way of thinking about corporate governance in the paper of La Porta, Silanes, Schleifer, Vishny (2000) Empirically, strong investor protection is associated with effective corporate governance, as reflected in valuable and broad financial markets, dispersed ownership of shares, and efficient allocation of capital across firms

In a further detail, board and audit committee members with corporate of financial backgrounds are associated with firms that have smaller discretionary current accruals Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals with observations of 282 firms from S&P 500 index (Xie, Davidson III, Dadalt 2002) In another side, Ashbaugh-Skaife, Collins, LaFond (2006) document, after controlling for firm-specific risk characteristics of 2000 US companies, that credit ratings are negatively associated with the number of block holders and CEO power, and positively related to takeover defenses, accrual quality, earnings timeless, board independence, board stock ownership, and board expertise They also provide evidence that CEOs of firms with speculative-grade credit ratings are overcompensated to a greater degree than their counterparts at firms with investment-grade ratings, thus providing one explanation for why some firms operate with weak governance

In transition economies, corporate governance has become an important topic in recent years Directors, owners and corporate managers have started to realize that there are benefits that can accrue from having a good corporate governance structure Good corporate governance helps to increase share price and makes it easier to obtain capital International investors are hesitant to lend money

or buy shares in a corporation that does not subscribe to good corporate governance principles Transparency, independent directors and a separate audit committee are especially important Some international investors will no seriously consider investing in a company that does not have these things (McGee, 2008) Nevertheless, research to date on corporate governance has mainly dealt with the efficacy of various mechanisms that can protect shareholders from self-interested executives, and the focus has generally been on (Western) developed economies (Daily, Dalton, & Cannella 2003) Thus, relatively little research effort has been devoted to corporate governance issues in emerging economies & Asian countries

Anderson, Campbell II (2002) investigating external and internal corporate governance activity in Japanese banks find a significantly negative relation between

non-routine presidential turnover and bank performance measures such as stock returns or profitability in the crisis years of 1991-1996 From other perspective on the Japan‟s bank crisis, the government was unable to provide a credible penalty for imprudent bank management under competition-restricting regulations These factors are responsible for the prolonged fragility of the Japanese banking sector (Hanazaki, Horiuchi 2003)

Paper on transition in another country - the Former Soviet Union of Estrin and Wright 1999 concludes that the problems of transition there concern delays both in introducing corporate governance mechanisms and in introducing an appropriate competitive market environment Later, in 2003, Judge, Naoumova & Koutzevol suggest that effective corporate governance may be essential to firm performance in Russia from the findings of a negative relationship between

“informal” CEO duality and firm performance and findings that the more vigorously the firm pursues a retrenchment strategy, the more negative the relationship between proportion of inside directors and firm performance

In the region Vietnam belongs to, family-controlled firms, majority of the firms in East Asia face more severe internal financing constraints than non family-controlled firms (Hanazaki & Liu 2006)

It should be recognized that the concept of corporate governance is a relatively broad one, and that it often seems to mean different things to different

people One of the most important factors of corporate governance to attract

investors is corporate governance disclosure A company‟s published announcements and reports (and its general meetings) are its primary channel of communication with shareholders It is the transparency achieved through open disclosure by boards that is the most direct method of ensuring that companies are accountable for their actions

Collett and Hrasky (2005) analyzed the relationships between voluntary disclosure of CG information by the companies and their intention to raise capital in

the financial market The study found out that “only 29 Australian companies made voluntary CG disclosure, and the degree of disclosures were varied from company

to company.” Similarly, Barako et al., (2006) examined the extent of voluntary disclosure by the Kenyan companies over and above the mandatory requirements The results revealed that “the audit committee was a significant factor associated with level of voluntary disclosure, while the proportion of non-executive directors

on the board was negatively associated.”

In South Africa, The relationship between governance disclosure and corporate performance revealed a striking relationship (Abdo& Fisher 2007) Corporate governance was positively correlated with share price returns during the period under review An investment strategy that purchased shares in the highest G-Score companies (High portfolio) for each JSE sector outperformed the index for the sector Similarly an investment strategy that purchased shares in the lowest G-Score companies (Low portfolio) underperformed the index in terms of annual average return over the 3 year period The analysis suggests that investors place a premium on South African companies with good governance These findings have significant implications for companies neglecting corporate governance disclosure

In an analysis on CG disclosure practice in India (Madan, 2008), CG disclosure is stated to be a fundamental theme of the modern corporate regulatory system, which encompasses providing information by a company to the public in a variety of ways This case study on a Group in India reveals that this company has shown “very good” performance and it is apparent that there is still some scope for improvement in the level of CG standards and quality of disclosures to be practiced

in the company However, many of the areas where the Company needs to improve its CG practice are common to most of the other Indian firms

Review on Corporate Governance Disclosure in Vietnam

Nevertheless, for Vietnam, just counting the study on corporate governance

in general, it is not so much As per discussion “Corporate governance in Vietnam –

The beginning of a long journey” – Oct 2006 by Freeman & Nguyen , relatively little research work has been done in the area of corporate governance in Vietnam

As far they are aware, the only specific corporate governance project to have been undertaken in Vietnam thus far is a project by Danida of Denmark, who seeks to strengthen corporate governance practices in the local fisheries sector However, as

of yet, there has apparently been no empirical study of general corporate governance practices in Vietnam

Report on the Observance of Standards and Codes (ROSC) by World Bank - Corporate governance country assessment – Vietnam – June 2006 provides a benchmark for Vietnam‟s observance of corporate governance practices against the OECD Principles of Corporate Governance It describes current practice and provides policy recommendations in six areas: (i) corporate governance framework; (ii) rights of shareholders; (iii) equitable treatment of shareholders: (iv) role of stakeholders in corporate governance: (v) disclosure and transparency; and (vi) responsibilities of the Board The report shows that Vietnam has recently taken important steps to establish its corporate governance framework

A remarkable study of Vietnam corporate governance is done by McGee (2008) in a comparison with Indonesia, Malaysia, Thailand The paper begins with

an overview of some basic corporate governance principles as identified by the OECD, Word Bank and IMF, then proceeds to examine how these principles are being applied in Indonesia, Malaysia, Thailand and Vietnam The result shows Vietnam at the lowest overall score and has more work to do than others The author also concludes that the scores for each of these countries will likely improve with time The market provides incentives to improve and to compete in practically every area of economic activity including the realm of corporate governance

Reference of Corporate governance and shareholder returns

Due to wide difference in methodologies, in the measurement of performance and in governance standards throughout the world, there is growing

diversity of result from the growing literature linking corporate governance to company performance

In reference to the effect of corporate governance on the expected rate of return for shareholders, the expected rate of return should compensate investors for expected monitoring, auditing, and other private costs associated with different corporate governance systems In their model, stronger corporate governance mechanisms in firms reduce the expected return on equity via reducing the shareholder‟s monitoring and auditing costs (Lombardo and Pagano, 2000)

To attract investors as well as influencing what will be paid for a stock, good corporate governance can be a tool As per Agrawal, Findley, Greene, Huang, Jeddy, Lewis, and Petry (1996), investors in the US are willing to pay for good governance between about 11% and 16% It is also showed by Brown and Caylor (2004) that in Europe, better corporate governance is related to better firm performance However, results of Cornett, McNutt, Tehranian (2009) from large U.S bank holding companies indicate that more independent boards appear to constrain the earnings management that greater PPS (Pay-for-Performance Sensitivity) compels while both PPS and board independence are associated with higher earnings

For Germany, it was also concluded by Drobetz et al (2004) that a corporate governance rating is positively correlated with firm value They discovered that an investment strategy buying companies with high corporate governance ratings and selling short companies with a low rating, would have gained 12%annualised abnormal returns for the same period

In the case of developing markets, evidence for the relationship between firm‟s performance and corporate governance was also found by Klapper and Love (2003) They employed a corporate governance ranking (by Credit Lyonnais Securities Asia), using a sample of companies form developing markets to find out that a positive relationship existed between the corporate governance ranking and financial ratios

About the Asian financial crisis and with evidence from Korea, the paper of Joh (2003) finds that firms with low ownership concentration show low firm profitability, controlling for firm and industry characteristics Firms with a high disparity between control rights and ownership rights showed low profitability A more detailed research on Korean financial crisis conducted by Baek, Kang, Park (2002) find that firms with higher ownership concentration by unaffiliated foreign investors experienced a smaller reduction in their share value Firms that had higher disclosure quality and alternative sources of external financing also suffered less In contrast, chaebol firms with concentrated ownership by controlling family shareholders experienced a larger drop in the value of their equity Firms in which the controlling shareholders‟ voting rights exceeded cash flow rights and those who borrowed more from the main banks also had lower returns

On the other hand, the empirical results of Patibandla (2005) studying India‟s corporate sector show that increasing presence of foreign institutional investors has

a positive effect on corporate performance in terms of profitability Firms that depend on government financial institutions for external finance show decline in performance In the other hand, Liu & Lu (2007) document systematic differences

in earnings management across the universe of China‟s listed companies during 1999-2005 and empirically demonstrate that firms with higher corporate governance levels have lower levels of earnings management In general, in emerging markets, firm – level corporate governance and country-level shareholder protection seem to be substitutes for each other in reducing cost of equity (Chen, Chang, & Wei 2009) Their results are consistent with findings from McKinsey‟s surveys that institutional investors are willing to pay a higher premium for shares in firms with good corporate governance, especially when the firms are in countries where the legal protection of investors is weak

And closest to Vietnam, Pathan, Skully, & Wickramanayake 2006 adds to the proposition that improved bank governance is related to improved bank

performance as measured by their bank stock returns from analysis of Thailand‟s bank governance reforms after the 1997 Asian financial crisis

Reference of Corporate governance and firm value

There are some possible reasons why an increase in firm value could result from good corporate governance It is found by Fama and French (1992) that increased levels of governance lead to increased investor confidence, as there is a decreased risk of corporate mismanagement, fraud or negligence This is also supported by Black et al (2003) that even moderate increases in the quality of firm-specific corporate governance causes substantial increases in the market-to-book ratio And better shareholder protection is documented by La Porta, Lopez-de-Silanes, Shleifer and Vishny (2002) to be associated with higher valuation of firm

assets

Yermack (1996) studied on the largest U.S public firms raked in the annual Forbes magazine to illustrate that firms are more valuable when the CEO and board chair positions are separate

Sharing the same direction has Andres, Vallelado (2008), who shows that larger and not excessively independent boards might prove more efficient in monitoring and advising functions, and create more value (obtaining information from six OECD countries: Canada, the US, and the UK, Spain, France, and Italy)

By applying a corporate governance ranking of Deminor firm to various firms in Europe, Immik (2000) discovered that this ranking was positively correlated with ratios such as price-to-book value, return on assets, and return on sales while a positive relationship between a measure of corporate governance and valuation ratios are found in the case of Switzerland by Beiner et al (2004)

Shleifer and Vishny (1997) document that effective corporate governance reduces “control rights” shareholders and creditors confer on managers, increasing the probability that managers invest in positive net present value projects, and suggesting that better-governed firms will have a market premium

Well-functioning corporate governance mechanisms in emerging economies such as China and India are of crucial importance for both local firms and foreign investors that are interested in pursuing the tremendous opportunities for investment and growth that emerging economies provide From the perspective of local firms, there is evidence that firms in emerging economies (compared with their counterparts in developed countries) are discounted in financial markets because of their weak governance (LaPorta, Silanes, Shleifer, & Vishny 2000) As such, improvements in corporate governance can enhance investor confidence in firms in emerging economies and increase these firms‟ access to capital (Rajagopalan & Yan Zhang 2008) Sharing this, Bai, Lieu, Lu, Song & Zhang (2003) find that both high concentration of non-controlling shareholding and issuing shares to foreign investors have positive effects on market valuation, while a large holding by the largest shareholder, the CEO being the chairman or vice chairman of the board of directors, and the largest shareholder being the government have negative effects

In above, there are some of numerous studies examining the relation between corporate governance practices and firm performance in overseas countries This leads to hypothesis that good corporate governance of firms will give higher

evaluation of firm performance, attracting the investors more Also from some

other review related to corporate governance study in Vietnam, this thesis will

go deeper to test the hypothese drawn by Abdo& Fisher (2007) for South Africa: Companies with high levels of corporate governance disclosure will achieve higher firm valuations and more significant prospects for future growth than companies with low levels of corporate governance It follows the joint-study between Standard and Poor‟s and Corporate Governance & Financial Reporting Centre – NUS Business School, National University of Singapore which has done on the Corporate Governance Disclosure in Singapore, in Malaysia, in Thailand, in Indonesia and also one in Hong Kong It uses the corporate governance disclosure scorecard developed by Standard & Poor‟s, which was used in above joint-study to

rate Corporate Governance Disclosure of neighbor countries through the annual reports, now to rate the corporate governance disclosure of Vietnamese listed companies through the annual reports as well Abdo & Fisher (2007) also measure corporate governance disclosure, called G-score, but by assigning points to each factors viewed from the publicly available information in South Africa However, this thesis chooses the scorecard done in Singapore, in Malaysia, in Thailand, in Indonesia & Hongkong for a better view & comparison Besides, those ones are done only on the annual reports, regardless of others, which narrow down the area for research and are more suitable for Vietnam Using the same way as Abdo & Fisher (2007), this thesis will also measure the financial performance with market-to-book-value (MTBV) ratio & price/earnings (P/E) ratio, then compute the correlation with financial performance as dependent variable and Corporate Governance Disclosure score (rated above) as independent variable to check the relationship and to conclude if the above hypotheses is also supported by the sampled Vietnamese listed companies

3.2 Research methodology

Corporate governance disclosure scorecard

Firstly, each sample‟s annual report will be studied for the answer to each question of the S&P corporate governance disclosure scorecard If the answer is yes, the score is one and zero if the answer is no There are some optional questions with different scale for each option Then, the scores are summed up to make out the total score for that sample

The corporate governance disclosure scorecard stated above consists of 136 items with a maximum possible score of 140 and was designed to ensure the maximum objectivity in assessing the companies The scorecard items reflect principles and best practices embodied in corporate governance codes

The analysis is based primarily on the disclosures made in the latest available annual report (as of Jan 17, 2010) for each company Two of the 30 sample companies are listed in 2009 while one other annual report is not found Therefore, the final sample consists of 27 companies

A company will be deemed not to have followed the practice if the fact is not explicitly stated in the annual report or can be clearly inferred from other information provided in the annual report In view of this study, as the annual report

is the primary medium of communication between the company and its stakeholders, all important matters on corporate governance should be fully disclosed in it In most countries, the annual report is the primary source of information that investors use to assess the companies, and its corporate governance practices As corporate governance disclosures generally do not entail the disclosure

of commercially sensitive information, it is highly unlikely that a company will not provide information about important corporate governance that they are in fact practiced

Financial performance

After rating the corporate governance disclosure scores, the research proceeds further with measuring financial performance The first financial performance measure related to firm value Using the methodology applied by Drobetz et al (2004), the market-to-book value (MTBV) ratio was used as an indicator of firm value The MTBV ratio is derived by taking the market capitalization of the company divided by the book value of equity (total assets minus total liabilities) as per the balance sheet A value of less than 1 could mean that the firm has not been successful in creating value for shareholders, while higher ratio would indicate the firm has created significant value (Firer, Ross, Westerfield and Jordan, 2004) This ratio is used as a concern from the approach of an investors, who are studying the corporate governance of the firm and the value creation of the firm to its shareholder, to decide if they will invest on that firm or not

The second measure of variable considered is the price/earnings (P/E) ratio The P/E ratio is simply the share price divided by earnings per share (EPS) Since the P/E ratio measures how much investors are willing to pay per rand of current earnings, higher P/Es are often taken to mean the firm has significant prospects for future growth It is generally true that firms with high growth rates and lower perceived risk levels trade at high P/E ratios (Firer et al., 2004) If the investors could see how the firm has created value for shareholders with above ratio, this P/E ratio would give them the idea about prospects for future growth of the firm

sometimes referred to as the Pearson product moment correlation coefficient in

honor of its developer Karl Pearson, symbolized by the lower-case Roman letter r, which ranges in value from r = +1.0 for a perfect positive correlation to r = -1.0 for

a perfect negative correlation The midpoint of its range, r = 0.0, corresponds to a complete absence of correlation Values falling between r = 0.0 and r = +1.0 represent varying degrees of positive correlation, while those falling between r = 0.0 and r = -1.0 represent varying degrees of negative correlation While the correlation coefficient, r, can have either a positive or a negative sign and thus provide an indication of the positive or negative direction of the correlation, the coefficient of determination, r2, provides an equal interval and ratio scale measure of the strength

of the correlation (Lowry, 1999-2010) Furthermore, a significance test is also conducted

CHAPTER 4

FINDINGS & DISCUSSION

4.1 Corporate governance disclosure scores

It is found a considerable variation among the 27 companies Summary statistics on the corporate governance scores (CG scores) for the sample companies

are shown in Table 1 Figure 1 gives the distribution of scores obtained from the

From the Table 2 with scores of companies winning the Best Annual Report Prize, it is realized that the standard for a good annual report in Vietnam is

somehow not really matching with the global Even though the best one (VNM) in

the sample of this study also got the prize, it is unexplained for the one with lowest

score to be in the list as well As a fact, the annual reports viewed in this study are

mainly with introduction, advertising, financial statement, balance sheet …., not

reporting about corporate during the year as it is

Table 3: Summary statistics of CG Disclosure Scores between some Asian countries

Compared with the 2004 figure of the neighbor Asia countries, Vietnam

figure in 2008 is still lower None of the Asian companies tested get the perfect

scores of 140, which means they all have some work to do But Vietnam has much

more work to do than other In reality, only one annual report of the sample

companies with the highest scores publishes the information somehow matching

with the scorecards While, in the current regulations of Vietnam regarding

Corporate Governance, it is referred to as “company management” and with the

following information required at least:

a members and the structure of Board of directors and the Audit committee

b Activities of BOD and Audit Committee

c Activities of the members of independent BOD;

d Activities of sub-board of BOD

e Plans to increase the productivity in the activities of company management

f Salary and remuneration for the members of BOD, members of Board of Managers and members of Audit Committee

g Information regarding shares transaction of company of the BOD members, Board of Managers, Audit Committee, big shareholders and other transaction of BOD members, Board of Managers, Audit Committee

h The quantity of members of BOD, Board of Managers and Audit Committee to attend the training on company management;

i The fields not be done according to the statues

The following will report on disclosures for different areas of corporate governance structures, processes, and practices

Board-Related Matters

Three of the 27 companies in the sample do not disclose the size of the board

of directors On average, a board has 6 directors The smallest board had 3 directors and the biggest had 11

Independence of the Board

Only four companies (17%) have independent directors accounting for more

than two-thirds of the board (see Figure 2) Five companies (20%) have between

one-half and two-thirds of the board made up of independent directors In 25% of the companies, independent directors composed one-third or less of the board while the remaining 38% had between one-third and one-half independent directors

These statistics clearly show that the independence of the boards of the companies remains lacking, despite the global trend for more independent boards

Figure 2: Proportion of Independent Directors

Disclosure of Directors’ Details

Although most companies (89%) disclose the complete list of board members, only 19% of them (or 5 companies) disclosed specifically who is independent and who is not A majority of companies also give details such as previous employment, educational qualification, and other directorships for each of

their directors (see Figure 3)

Figure 3: Disclosure of Directors' Details

Details of previous employment disclosed

Educational qualifications disclosed

Other directorships disclosed

Each director classed as independent or not

CEO-Chairman Separation

The separation of the CEO and chairman roles is increasingly seen to be important because of the central role that board‟s chairman plays in the effective

functioning of the board and its oversight of management From Figure 4, it can be

seen that in 37.5%, the CEO and the board chairman positions are held by the same individual This is not encouraging at all And it is seen in 12.5% that though these positions are held by different individuals, they were related to each other However, the remaining 50%, where separate individuals held these positions, most companies did not specifically disclose whether these individuals were unrelated Even if the two individuals are unrelated, the separation of the two roles is only truly effective if the chairman is independent from management

Figure 4: Chairman-CEO Separation

Held by same person

Frequency of Board Meetings

Most of the sampled companies (70%) did not disclose the exact number of board meetings held in year Many corporate governance codes now recommend that the exact number of meetings be disclosed