Corporate governance in vietnam and in state owned enterprises after equitization

Therefore, a literature review on corporategovernance and an examination of corporate governance practices in Vietnam,especially in post-equitized SOEs are necessary for improving and de

vietnam national university, HANOI

school of business

Do Lan Huong

Corporate governance in Vietnam and in state owned

enterprises after equitization

Major: Business Administration

Code: 60 34 05

Master of business administration thesis

Supervisor: Dr Can Van Luc

Hanoi – 2010

I would like to deeply thank my parents who have encouraged me in my education and their constant support through the course of studies

I also would like to thank my husband and my 2 little sons for their

encouragement to me to continue my education

Many thanks also go to my colleagues who helped me a lot in collecting data

to finish the thesis

Especially, I would like to send my sincere thanks to my helpful supervisor Dr.Can Van Luc, for his advice and support during the time I write the thesis

Corporate governance has been a prominent issue in developedmarket economies for some considerable time However, in an emerging andtransition economy like Vietnam, it is still unfamiliar and underdeveloped.Legal framework for corporate governance in Vietnam is only in the earlystage of development Awareness of market participants on corporategovernance is still limited In the meantime, the business environment and thecapital market are changing very fast and becoming more and morecomplicated, especially after the world financial crisis in 2007-09 The recentbreak up of Vinashin and the alarming inefficiency in management andoperation of state owned enterprises have also attracted attention to corporategovernance and made it become one of the current hottest issues.

In this context, this thesis provides a literature review of corporategovernance and an up-to-date evaluation of corporate governance practices inVietnam Besides, as the success of Vietnam‟s SOE reform throughequitization is significant for the country‟s future economic growth and theimprovement in corporate governance is one of the major factors forimproving efficiency in equitized state-owned enterprises (SOEs), anexamination of the changes in corporate governance of SOEs after equitization

is also conducted To conclude, the thesis provides recommendations tobuilding a sound and strong corporate governance system in Vietnam

TÓM TẮT

QUẢN TRỊ DOANH NGHIỆP Ở VIỆT NAM

VÀTẠI CÁC DOANH NGHIỆP NHÀ NƯỚC SAU CỔ PHẦN HÓA

Đỗ Lan HươngKhoa Quản trị kinh doanhGiáo viên hướng dẫn: TS Cấn Văn LựcTháng 09 năm 2010, 71 trang

Ở các nước phát triển, quản trị doanh nghiệp đã ra đời từ lâu và rấtđược quan tâm Tuy nhiên, ở các nền kinh tế mới nổi và đang trong giai đoạnchuyển đổi như Việt Nam, quản trị doanh nghiệp vẫn còn là một khái niệmmới mẻ và chưa được phát triển Khung pháp lý cho quản trị doanh nghiệp đãđược xây dựng nhưng vẫn còn ở giai đoạn ban đầu Nhận thức về quản trịdoanh nghiệp của các bên tham gia thị trường còn nhiều hạn chế Trong khi

đó, môi trường kinh doanh cũng như thị trường vốn đang thay đổi hết sứcnhanh chóng và ngày càng trở nên phức tạp đặc biệt sau cuộc khủng hoảng tàichính toàn cầu năm 2007-09 Bên cạnh đó, vụ việc Vinashin mới đây cũng như

sự thiếu hiệu quả đáng báo động trong quản lý ở các doanh nghiệp Nhà Nướccũng làm dấy lên sự chú ý của mọi người tới quản trị doanh nghiệp và khiến

nó trở thành một trong những vấn đề nóng bỏng nhất hiện nay

Trên tinh thần đó, luận văn đề cập đến hệ thống cơ sở lý luận về quảntrị doanh nghiệp và bức tranh cập nhật nhất về thực trạng quản trị doanhnghiệp ở Việt Nam Bên cạnh đó, do sự thành công trong công cuộc đổi mớidoanh nghiệp nhà nước (DNNN) thông qua quá trình cổ phần hóa có ý nghĩarất quan trọng tới sự phát triển kinh tế trong tương lai của Việt Nam, nên luậnvăn cũng sẽ trao đổi về quản trị DNNN sau cổ phần hóa Trong phần cuối, luậnvăn đưa ra một số kiến nghị nhằm góp phần xây dựng và nâng cao hiệu quảcông tác quản trị doanh nghiệp tại Việt Nam

TABLE OF CONTENTS

ACKNOWLEDGEMENT

ABSTRACT

TÓM TẮT

TABLE OF CONTENTS

LIST OF ABBREVIATIONS

LIST OF TABLES

CHAPTER 1: INTRODUCTION

1.1Background

1.2Rationale of the Thesis

1.3Purpose of the Thesis

1.4Key Research Area

1.5Methodology

1.6Contribution of the Thesis

1.7Outline

CHAPTER 2: LITERATURE REVIEW

2.1Definitions of Corporate Governance

2.1.2 What is Corporate Governance?

2.1.2 Objectives of Corporate Governance

2.1.2 Codes of Corporate Governance

2.2Models of Corporate Governance

2.2.1 Shareholder Model

2.2.1 Stakeholder Model

2.3Corporate Governance System

2.4Corporate Governance Mechanisms

2.4.1 Internal Mechanisms

2.4.2 External Mechanisms

2.5Corporate Governance in Transition Economies

2.6Chapter Summary

CHAPTER 3: CORPORATE GOVERNANCE IN VIETNAM

3.1Introduction

3.2Legal framework and law enforcement

3.2.1 Development of a legal framework for corporate governance in Vietnam

3.2.2 Current corporate governance framework in Vietnam

3.3Rights of Shareholders

3.3.1 Basic shareholder rights

3.3.2 Right to participate in or to be informed of decisions on key corporate changes

3.3.3 Rights to participate and vote in general shareholders‟ meeting

3.3.4 Markets for corporate control

3.4Equitable Treatment of Shareholders

3.4.1 Equal treatment to all shareholders

3.4.2 Minority shareholder protection

3.4.3 Insider trading and abusive self-dealing

3.4.4 Related party transactions

3.5The Role of Stakeholders in Corporate Governance

3.6.1 Information disclosure

3.6.2 Quality of accounting standards

3.6.3 Annual audit

3.6.4 External Audit

3.6.5 Channels for disseminating information

3.7 Board of Directors

3.8 Board of Supervisors

3.9 Remaining corporate governance issues in Vietnam

3.10 Chapter Summary

CHAPTER 4: CHANGES IN CORPORATE GOVERNANCE OF STATE OWNED ENTERPRISES AFTER EQUITIZATION

4.1 Introduction

4.2 Methodology and Data collection

4.3 Ownership structure after equitization

4.4 Board of Directors Composition

4.5 The Board of Supervisors

4.6 Manager orGeneral manager (CEO)

4.7 Other committees

4.8 Executive Compensation

4.9 Case Study

4.9.1 Vinamilk

4.9.2 PVFCCo

4.9.3 Performance and stock price comparison 4.10 Chapter Summary

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS

REFERENCES

LIST OF ABBREVIATIONS

BOD: Board of Directors

GSM: General Shareholders Meeting

SOE: State owned enterprises

SSC: State Securities Commission

HOSE: Ho Chi Minh Stock Exchange

HASTC: Ha Noi Stock Trading Center

HNX: Ha Noi Stock Exchange

OECD: Organization for Economic Cooperation and DevelopmentCFA: Chartered Financial Analysts

LLC: Limited Liability Company

JSC: Joint Stock Company

LIST OF TABLES

Table 4.1: Ownership structure of SOEs after equitization

Table 4.2: Composition of Board of Directors

Table 4.3: Distribution of chairperson of the BOD by different groups of shareholders

Table 4.4: Composition of the Board of Supervisors

Table 4.5: Chairperson of the Board of Supervisors by different groups of shareholders

Table 4.6: Distribution of managers of surveyed firms by different groups of shareholders

Table 4.7: Vinamilk Ownership structure in 2009

Table 4.8: PVFCCo Ownership structure in 2009

CHAPTER 1: INTRODUCTION

1.1 Background

Vietnam‟s stock market has only been established and developed for the lastten years However, it has grown very fast and now plays a more and moreimportant role to the country‟s economic development Total market capitalization

to GDP increased considerably from 3% in 2005 to 38% in 2009 Number ofcompanies listed in 2 stock exchanges (Ho Chi Minh Stock Exchange and Ha NoiStock Exchange) has also increased dramatically to 457 companies by the end of

2009 Among which, equitized state-owned enterprises (SOEs) dominate with morethan half of the listed companies and holding key industries including power, oil,chemicals, steel…etc

Like many other emerging markets, Vietnam‟s stock market is facing manyagency problems, which are the subject of corporate governance Investor protection

is inadequate, related party transactions are pervasive, compliance with accountingstandards is weak and disclosure of quality information is limited These could bemajor reasons that foreign investors hesitate to invest in Vietnam and hinder thedevelopment of the capital market

In Vietnam, corporate governance is still underdeveloped Awareness ofmarket participants on corporate governance is limited The framework forcorporate governance is only in the early stages of development with laws andregulations being established Therefore, a literature review on corporategovernance and an examination of corporate governance practices in Vietnam,especially in post-equitized SOEs are necessary for improving and developing asound corporate governance culture and framework in Vietnam The enhancement

of corporate governance would help reduce emerging market vulnerability tofinancial crisis, reinforce property rights, reduce transaction costs and the cost of

capital, and which would significantly support capital market development (WorldBank Corporate Governance Country Assessment, 2006).

1.2 Rationale of the Thesis

Corporate governance has been a prominent issue in developed marketeconomies for some considerable time However, in an emerging and transitioneconomy like Vietnam, it is still unfamiliar and underdeveloped Legal frameworkfor corporate governance in Vietnam is only in the early stage of development.Awareness of market participants on corporate governance is still limited In themeantime, the business environment and the capital market are changing very fastand become more and more complicated, especially after the world financial crisis

in 2007-09 The recent break up of Vinashin and the alarming inefficiency inmanagement and operation of state owned enterprises have also attracted attention

to corporate governance and make it become one of the current hottest issues Anup-to-date study on corporate governance in Vietnam and in State owned enterprisesafter equitization is therefore very necessary for developing a sound and healthycorporate governance system in Vietnam

1.3 Purpose of the Thesis

This thesis aims to provide a literature review of corporate governance and

an up-to-date evaluation of corporate governance practices in Vietnam Besides, asthe success of Vietnam‟s SOE reform through equitization is significant for thecountry‟s future economic growth and the improvement in corporate governance isone of the major factors for improving efficiency in equitized SOEs, an examination

of the changes in corporate governance of SOEs after equitization is also conducted.Finally, the thesis is expected to contribute to the limited literature on corporategovernance in Vietnam

1.4 Key Research Area

This thesis looks at corporate governance practices in Vietnam and focus onlisted companies In addition, an empirical analysis on changes of corporategovernance in equitized state-owned enterprises is also conducted

1.5 Methodology

This thesis provides a review of Vietnamese corporate governance that is to-date and as complete as possible by assessing corporate governance in 6 areaswhich are stated in the Organization for Economic Cooperation and Development(OECD) Corporate Governance Principles: (i) corporate governance framework;(ii) rights of shareholders; (iii) equitable treatment of shareholders; (iv) role ofstakeholders in corporate governance; (v) disclosure and transparency; and (vi)responsibility of the Board

up-Besides, as the success of Vietnam‟s SOE reform through equitization issignificant for the country future economic growth, an empirical analysis is alsoconducted to illustrate the changes in corporate governance of SOEs afterequitization The analysis is mostly based on published and readily available data

In addition, to get deeper views on this area, analysis of corporate governance in 2typical SOEs has also been made

1.6 Contribution of the Thesis

For a country which is still in the early period of building corporategovernance system like Vietnam, the thesis has considerable contributions First, itprovides a literature review on corporate governance and helps improveunderstanding on this issue Second, it provides an up-to-date evaluation onVietnam‟s corporate governance practices and contributes to a limited number ofstudies on this area in Vietnam Third, an empirical analysis and case studyconducted on changes of corporate governance in SOEs after equitization also helpunderstand the current corporate governance practices in these typical firms

Fourth, recommendations given at the end of the thesis are expected to contribute tobuilding a sound corporate governance system in Vietnam.

1.7 Outline

The thesis is divided into five chapters with an introduction in Chapter 1 andliterature review in Chapter 2 Chapter 3 analyzes corporate governance practices inVietnam, and followed by an investigation of changes in corporate governance inSOEs after equitization The thesis concludes with conclusions and severalrecommendations in Chapter 5

CHAPTER 2: LITERATURE REVIEW

2.1 Definitions of Corporate Governance

2.1.2 What is Corporate Governance?

The Organization for Economic Co-Operation and Development (“OECD”)defines corporate governance as “a set of relationships between a company‟smanagement, its board, its shareholders and other stakeholders Corporategovernance also provides the structure through which the objectives of the companyare set, and the means of attaining those objectives and monitoring performance aredetermined” (OECD Principles of Corporate Governance, 2004)

In the definition stated by Charter Financial Analyst Institute (CFA Institute),corporate governance is defined as the system of principles, policies, proceduresand clearly defined responsibilities and accountabilities, used by stakeholders toeliminate or minimize conflicts of interests

2.1.2 Objectives of Corporate Governance

The objectives of a corporate governance system are (i) to eliminate conflicts

of interests among stakeholders, particularly between managers and shareholders,and (ii) to ensure that the assets of the company are used efficiently andproductively and in the best interests of the investors and other stakeholders (CFAInstitute)

Good corporate governance enhances the quality of listed companies, forms ascientific constraint and incentive mechanism that motivates managers to maximizereturns on investment, and effectively protect the interests of investors.Furthermore, it creates fairness, transparency and accountability in companybusiness activities In short, good corporate governance is an actuator for goodcompany performance as it effectively reduces risks and decision mistakes Good

corporate governance is also a firm foundation for healthy securities markets in thelong run It reduces speculation and violations of market rules, and thereby helpsensure stability in the financial markets This heightens public confidence in firms

as well as playing an important role in attracting foreign investment (OECDPrinciples of Corporate Governance, 2004)

2.1.2 Codes of Corporate Governance

In many economies, codes of corporate governance and best practices havebeen promoted by various agencies including stock regulators, corporations,institutional investors, or associations (institutes) of directors and managers with thesupport of governments and international organizations As a rule, compliance withthese governance recommendations is not mandated by law, although the codeslinked to stock exchange listing requirements may have an enforcement effect

For instance, companies quoted on the London and Toronto Stock Exchangesformally need not follow the recommendations of their respective national codes.However, they must disclose whether they follow the recommendations in thosedocuments and, where not, they should provide explanations concerning divergentpractices Such disclosure requirements exert a significant pressure on listedcompanies for compliance

Nevertheless, among the codes of corporate governance worldwide, theOECD Principles of Corporate Governance are considered as comprehensive andwell-accepted, and deemed to contribute to the development of corporategovernance globally The latest revised version of OECD Principles of CorporateGovernance was released in 2004 The Principles are intended to assist the OECDand non‐OECD countries „to evaluate and improve the legal, institutional andregulatory framework for corporate governance‟, and „to provide guidance andsuggestions for stock exchanges, investors, corporations, and other parties that have

a role‟ in the corporate governance process (OECD Principles of Corporate

13

Governance, 2004) The Principles cover broad areas of corporate governance including the following key issues:

(i) ensuring the basis for an effective corporate governance framework;(ii) the rights of shareholders and key ownership functions;

(iii)the equitable treatment of shareholders;

(iv) the role of stakeholders in corporate governance;

(v) disclosure and transparency; and

(vi) the responsibilities of the board

Although the OECD Principles focus on corporate governance matters ofpublicly traded companies on the basis of the separation of ownership and control,

to some extent they are also useful for the improvement of corporate governance inunlisted companies, including privately held and state-owned enterprises Moreimportantly, a key reason why the Principles have been widely accepted is that theyare based on common elements of corporate governance, embracing differentcorporate governance models found in the OECD and non-OECD economies

2.2 Models of Corporate Governance

2.2.1 Shareholder Model

The identification of the separation of ownership and control as a source ofconflicting interests between owners and managers can be traced back to Berle andMean (1932) and Jensen and Meckling (1976) developed the theory in an agencycontext, where the agent (manager) acts on behalf of the principal (owner), butdiffering objectives of the owners and managers, incomplete information on themanagers‟ behavior, and incomplete contracts give rise to the principal-agentproblem Particularly, incomplete contracts as a source of agency problems have

been discussed by many authors, such as Coase (1937), Fama and Jensen (1983)and Hart (1995).

Much conventional corporate governance thinking is focused onarrangements to solve this agency problem and ensure the firm is operated in theinterests of the owners (shareholders and creditors) In line with this thinking,Shleifer and Vishny (1997) and Bech et al (2002) define corporate governance as

“dealing with the ways in which suppliers of finance to corporations assurethemselves of getting a return on their investment” This definition is too narrowand there has been a great deal of critique relating to this „conventional‟ view ofcorporate governance Firstly, this perspective overlooks the diversity of thestakeholders within the principal-agent relationship and thus ignores the gamearound an enterprise, which is performed by multiple stakeholders with varyingdegrees of conflicting interests among themselves Secondly, this perspectivefocuses too narrowly on the bilateral contract between owners and managers, andignores the interdependencies and interactions among stakeholders

Opponents of the shareholder model stress that the interests of all of thestakeholders‟ interests must be accounted for If the emphasis is solely onshareholder value maximization, there are externalities that are imposed on otherstakeholders of the corporation This critique is the foundation of the corporategovernance stakeholder model advocated by many theorists

2.2.1 Stakeholder Model

Stakeholders in a corporation include, but are not limited to, suppliers,employees, customers, governmental bodies, political groups, trade associations,trade unions, communities, associated corporations, prospective employees,prospective customers and the general public Various stakeholder models anddefinitions are advocated by scholars Allen (2005) suggests that corporategovernance concerns arrangements to ensure that firms are operated in a way thatsociety‟s resources are used efficiently, and that competition and reputation should

also be included as mechanisms to deal with in addition to the conventional ones.Allen‟s model however, is too simple to be used for analyzing complex realities,especially when the role of different stakeholders is to be considered.

Tirole (2001) advocates that corporate governance consists of institutionsthat induce or force management to internalize the welfare of stakeholders Based

on this approach, a stakeholder model is designed in which there is a broadermission of management, and management in turn is sharing control withstakeholders The former suggests that management should aim at maximizing thesum of stakeholders‟ benefits, and incentive systems should then be designed withthe purpose of achieving this aim In this model, control is shared betweenstakeholders in the form of generalized code terminations This model is moreelaborately designed, but it is based on the assumption of optimal contractingamong stakeholders This assumption is however considered unrealistic as there are

a range of institutional setting restrictions on the contracts among stakeholders, forexample, government intervention is an important factor that is prevalent in manyemerging economies

Berglof and von Thadden (1999) define corporate governance as the “set ofmechanisms that translate signals from product and input markets into firmbehavior.” Based on this approach, the authors are proposing a broader corporategovernance paradigm Firstly, the model consists of multilateral negotiations andinfluence-seeking among stakeholders, shareholders and other groups – both insideand outside the firm Secondly, the model includes different institutions providingmechanisms, and influencing the transmission of signals In addition to the legal andfinancial systems, the model also includes facets such as the product, input andlabor markets In the case of intense competition in the product and input markets,firms‟ investment decisions are under pressure from consumers and suppliers aswell as shareholders, and managers must focus on running the firm effectively inorder to remain competitive Thus, the competitive situation of the firm is of

particular significance for consumers and suppliers, as increased competition leads

to stronger protection of their interests

Employees make up another group which can monitor managers‟ decisionmaking, and the labor market Finally, stakeholders and institutions are alsoinfluenced by national and local government This model also accounts for thepolitical system and the role of government having influence on the transmission ofsignals, either directly or indirectly through the external framework it provides

However, stakeholder model also faces several objections The first is thatgiving control rights to non-investors may discourage financing in the first place.The second is that it may create inefficiencies in decision making On manydecisions, investors and natural stakeholders have conflicting interests They maynot converge to mutually agreeable policies The third is managerial accountability.The concern is that the management‟s invocation of multiple and hard-to-measuremissions may become an excuse for self-serving behavior, making managers lessaccountable

2.3 Corporate Governance System

National corporate governance systems can be distinguished in terms of thedegree of ownership concentration, and the control and identity of the controllingshareholders A widely dispersed ownership structure is a feature of outsidersystems (e.g., the US and UK), while concentrated ownership is characteristic ofinsider systems (e.g., Germany and Japan) Outsider systems are characterized byhaving independent boards, dispersed ownership, transparent informationdisclosures, well-developed stock markets, well developed legal systems, and acompetitive market for corporate control Insider systems are characterized byconcentrated ownership structure, widespread cross-shareholding, limitedinformation disclosures, and reliance on family finance or banking systems (Shleiferand Vishny 1997) The insider system emphasizes the function of banks and legalpersons, which have great influence over the firm‟s long-term development As

majority shareholders, banks and corporations play a tremendous financial role andthereby directly impact corporate governance In the insider system, it is minorityshareholders that are in the weaker position The various corporate governancesystems that exist globally have emerged in an ad-hoc manner (Sison 2000; Shleiferand Vishny 1997) Firms and economies have been shaped simply by followingconventions, or by the environment, worldview and culture, legislative and politicalframeworks in which they operate Over time they have evolved into today‟scorporate governance systems, although it is certain they continue to evolve.Besides the political and legal influence, systems have been influenced by “culture,democratic representation and accountability, the distribution of power, and theprotection of property rights and equality” (Sison 2000, p181) Other influencingfactors include the level of media freedom and the intensity of competition amongstfirms (Zingales 2000) The essential point however, is that the national corporategovernance system typically evolves in an ad-hoc manner, without being designedspecifically to achieve maximum efficiency, economic benefit, or shareholderprotection or wealth.

The assertion of the dominating political process applies to the insidersystems of Germany and Japan During the period of rapid economic development

of the late 19th century, these countries forged their systems of powerful banks withhealthy State support (Gerschenkron 1962) Furthermore, German banksdiscouraged initiatives such as disclosure rules, insider trading prohibitions andincreased minority shareholder protection These initiatives ensured that minorityshareholders never became dominant enough to protect their rights, and that thebanks maintained a powerful position These legal systems thus developed toaccommodate the banks as the predominant economic power

The evolution of national corporate governance systems thus sheds somelight on the issues involved in the process The arguments show clearly that thereare many kinds of influences behind the search for the optimum corporate

governance system These influences have also had a number of policy implications,particularly for emerging and transitional economies.

2.4 Corporate Governance Mechanisms

Corporate governance mechanisms consist of a combination of economic andlegal institutions that ensure the flow of external financing to the firm, aligns theinterests of owners (investors) with managers and other stakeholders, andguarantees a return to investors

Corporate governance mechanisms are defined and categorized by differentauthors in different ways Shleifer and Vishny (1997) identify five categories ofmechanisms which include (i) incentive contracts, (ii) reputation considerations bymanagers and investor‟s optimism, (iii) legal protection, (iv) large investors and (v)specific governance arrangements, such as the debt/equity choice, leveraged buy-outs (LBO‟s), co-operatives and state ownership

Maher and Anderson (1999), on the other hand, recognize three broadermechanisms, including (i) executive compensation plans, monitoring by boards etc.,(ii)legal protection of shareholder rights, prohibition of insider dealing etc., and (iii)indirect control over managers through capital markets, managerial labour markets,and markets for corporate control (e.g takeovers)

Liu (2005) identifies two typical governance mechanisms that address theconflicts of interest between shareholders and managers, and between majority andminority shareholders The first is an internal mechanism consisting of ownershipstructure, board of directors, executive compensation, and information disclosureand transparency The second is an external mechanism consisting of a market forcorporate control, product market competition, good legal infrastructure andrigorous law enforcement Given its comprehensiveness and applicability, thiscategorization will hereafter be used as the framework to present and discusscorporate governance mechanisms

2.4.1 Internal Mechanisms

a Ownership structure

The agency problem originates from the separation of ownership and control,which creates information asymmetry and agency costs (Fanna and Jensen 1983).Managerial behavior does not necessarily serve the best interests of shareholders(Shleifer and Vishny 1997), and management decisions can reflect the manager‟spersonal interests rather than the shareholders interests

A highly concentrated ownership may be a sign of poor investor protection

In this case, controlling shareholders have strong incentives to monitor managementand thereby maximize profits, but minority shareholders are not protected fromexpropriation by the controlling shareholders and management, but now alsobetween the controlling shareholder and minority shareholders A well designedownership structure therefore is one of the most important governance mechanisms

in terms of value maximization

In emerging and transition countries with weak legal protection, controllingshareholders are able to expropriate the firm‟s assets at the expense of minorityshareholders This phenomenon is often referred to as „tunnelling‟ Johnson et al.(2000) use the term “tunnelling” to describe the transfer of assets and profits out ofthe company for the benefit of its controlling shareholders Controlling shareholdersare easily able to transfer company‟s resources for their own benefit through self-dealing transactions Such transactions include “outright theft or fraud, which areillegal everywhere though often go undetected or unpunished, but also asset sales,contracts such as transfer pricing advantageous to the controlling shareholder,excessive executive compensation, loan guarantees, expropriation of corporateopportunities, and so on.” (Johnson et al 2000)

b The Board of Directors

The Board of Directors is a crucial internal mechanism of the overallcorporate governance system It is the critical link between owners and

management, and sets the rules of governance Solutions to corporate governanceproblems can be initiated by boards Although shareholders are the ultimate owners

of a company, they do not have the virtual power to control either the dailyoperations or the long-term policies The Board of Directors are instead the keyplayers in terms of decision-making Boards are sanctioned by the shareholders, andare responsible for providing strategic guidance, effective supervision ofmanagement and ensuring the maximization of shareholders‟ interests

Board Structure

Outsider systems (e.g the UK and US) have a one-tier board structure whileinsider systems (e.g Continental European/Japan) use a two-tier model In the two-tier structure, there are three governing bodies, the supervisory board, themanagement board, and the general shareholder meeting The difference betweenthe one-tier and two-tier structures is the absence of the supervisory board in theone-tier structure In the two-tier structure, the supervisory board has the duty ofsupervising both management and the board of directors One advantage of the two-tier structure is that the supervisory board has independence from executivedirectors However, it is often so far removed from the company business operationsthat it lacks important information necessary to carry out its function The advantage

of one-tier structure is that the board is composed of independent directors toprovide objectivity, and executive directors that are familiar with the companybusiness The disadvantage of the one-tier structure, however, is that it is easier forthe board to be manipulated internally or „captured‟

There is no definitive answer to the question of which board structure issuperior Different board structures are implemented to suit different economic andmarket systems The present trend throughout the world, however, is moving infavor on the one-tier structure (OECD Principles of Corporate Governance, 2004)

Board Composition

The composition of the board is an important aspect that helps guarantee theeffectiveness of board operations A modern board consists of individual executivedirectors (such as the finance or the marketing directors) who deal with a particularfunction within the company The board will also consist of non-executive andindependent directors

The U.S National Association of Corporate Directors (1996, pp 9-10)defines an independent director as one who (a) has not been employed by thecompany in an executive capacity within the last five years, (b) is not affiliated with

a company, that is an adviser or consultant to the company, (c) is not affiliated with

a significant customer of or supplier to the company, (d) has no personal servicescontracts with the company or with a member of the company‟s seniormanagement, (e) is not affiliated with a not-for-profit entity that receives significantcontributions from the company, (f) has not had any business relationships with thecompany other than service as a director within last five years, (g) is not employed

by a public company for which an executive officer of the company serves as adirector, (h) has not had any of the relationships described above with any affiliate

of the company, and (i) is not a member of the immediate family of any persondescribed above

Existing evidence suggests that independent directors are able to help protectthe interests of shareholders in specific circumstances when there is an agencyproblem (Byrd and Hickman 1992; Lee et al., 1992) Furthermore, independentdirectors monitor management more efficiently than executive directors

Large public companies usually set up special sub-committees under theboard For instance, a compensation committee composed of entirely independentdirectors determines the remuneration level of senior management Kesner (1988)finds that the most important board decisions result from such sub-committees.Vance (1983) further argues that the audit, executive, compensation, and

nomination committees have a great influence over company activities Particularlythe audit committee, consisting of independent directors, is generally expected to be

an effective monitoring body (Klein 1998) Davidson et al (1998) find that whileoverall board composition appears to be unrelated to company performance, thestructure of the finance and accounting committees appear to be considerably moreinfluential

Other Board Considerations

The size of the board, along with the frequency of board meetings appear to

be related to company performance The evidence on the optimum size of the board,however, is inconclusive Yermack (1996) and Eisenberg et al (1998) argue thatsmaller boards may be more functional and could provide better financial reportingsupervision, whereas larger boards may possess a greater depth of knowledge andexperience A board that meets more often should be able to devote more time tocompany issues Vafeas (1999) find that frequent board meetings can improve afirm‟s financial performance

In summary, effective board performance helps ensure that companyobjectives are realized, resources are allocated efficiently, and the interests ofshareholders are reflected in management decisions

c Executive Compensation

Providing executives with a highly contingent, long term incentive-relatedcontract is another way to influence behavior and align management interests withthose of shareholders Incentive contracts are comprised of various elements,including salary and bonuses, share ownership, stock options, and (in the case ofpoor performance) the threat of dismissal (Jensen and Meckling 1976; Fama 1980).The optimal incentive contract is determined by how well it influencesmanagement‟s performance, e.g., the degree of risk aversion and effectiveness ofdecision-making (Mirrlees 1976)

Research shows that there is a positive relationship between remunerationand performance, and thus rejects the extreme hypothesis of complete separation ofownership and control (Murphy 1985) The sensitivity of pay to performance isbroadly similar in the US, Germany and Japan.

It is important to note that excessive executive compensation is a form ofexpropriation from shareholders Further and more serious problems may arise fromhigh incentive contracts Stock option plans, as a main form of incentive contractfor executives, has become increasingly controversial The main argument in favor

of stock option plans is that they provide good incentives for managers to act in thebest interests of the shareholders The argument against them however, is that theycan create opportunities for self-dealing by management, especially if the board ofdirectors is an inefficient monitor (Shleifer and Vishny 1997) Compensation policy

is a very important tool in creating a successful company, and stock ownership is themost powerful link between executive value and shareholder value Thus, Jensenand Murphy (1990) argue the problem is not how much remuneration executivesreceive, but rather in what form it is received

d Information Disclosure and Transparency

Information disclosure is “releasing the company‟s financial and financial information completely, accurately, timely, and openly to shareholders andstakeholders for the purpose of enhancing their participation and protecting theirinterests” (OECD Principles of Corporate Governance, 2004)

non-This is a part of good governance and a key factor in emerging and transitioneconomies Reliable and timely information disclosure affects decision-makersoutside the company shareholders, investors and potential investors, andstakeholders, who decide where to place their capital Providing adequate financialreporting is one of the primary responsibilities of management Auditors should beaccountable for their audit reports Management may deliver information through

annual reports, quarterly reports, financial analysts, corporate websites, pressconferences, news releases or analyst meetings (Chen and Jian 2006).

Healy and Palepu (2001) argue that the reasons for a company to volunteerinformation are three-fold; to reduce the cost of capital, increase the liquidity oftheir shares and to increase their following by financial analysts In particular,reducing the cost of capital and operating costs, and minimizing risks are veryimportant factors Timely and comprehensive information disclosure can help easeinvestors‟ concerns over a possible risk of default The quality and amount ofinformation firms disclose affects the capital market, thus affect the firms cost ofcapital When asymmetric information exists between investors and management,moral hazard and adverse selection problems can arise Management has first-handaccess to company information, where investors do not Speculative managers maytherefore focus more on their own personal interests Improving the quality ofinformation disclosure could eliminate such asymmetry and reduce the cost ofcapital (Verrecchia 2001)

Controlling shareholders that control more seats on the board have lessincentive to disclose information at board level, and likewise may also make use oftheir information advantage to manipulate disclosure to investors in their owninterests, thus lowering the quality of information delivered (Shleifer and Vishny1997)

2.4.2 External Mechanisms

a The Market for Corporate Control

The market for corporate control is defined as the market in which managerscompete for the control rights over company resources It is often referred to the

„takeover‟ or „divestiture‟ market A takeover can enhance shareholder valuethrough mergers and acquisitions, tender offers, proxy contests, hostile takeovers,and often a combination of these are involved (Jensen and Ruback 1983)

Mergers are negotiated directly with the management and approved by theboard of directors of the target company, before being voted on by targetshareholders Mergers or tender offers occur when the bidding firm offers topurchase shares of the target firm at a price higher than the official market value.Proxy contests occur when an insurgent group, often led by dissatisfied formermanagers or large shareholders, attempts to gain enough backing to appoint amajority of board members (Jensen and Ruback 1983) A hostile takeover is a form

of takeover which runs against the wishes of the target firm‟s management andboard In a typical hostile takeover, a bidder makes a tender offer to the dispersedshareholders of the target firm, and thus can be viewed as a particular mechanismfor ownership concentration (Shleifer and Vishny 1997)

A takeover can increase the combined value of the target and acquiring firm,usually evidenced through the stock price appreciation of the target firm (around 20-30% depending on the type of transaction) after the attempted takeoverannouncement (Jensen and Ruback 1983) Takeover targets are in many casespoorly performing companies (Mørck et al 1989) If the takeover is successful,inefficient managers are usually removed (Martin and McConnell 1991) Jensen(1986) argues that takeovers solve the free cash-flow problem, as they usually lead

to the distribution of the firm‟s profits to investors over time The market forcorporate control is widely regarded in outsider countries as a critical externalcorporate governance mechanism; one in which managerial discretion is effectivelycontrolled The market for corporate control is therefore often quite dynamic, and itsfunctions are effectively displayed

b Product Market Competition

Product market competition is an important external mechanism in as itaffects management incentives, and thereby the efficiency of the firm Even in aweak governance environment, strong product market competition can act to alignmanagers‟ goals to the aim of efficient productivity (Allen and Gale 2000)

Competition encourages management to operate more efficiently and reduce costs

in order to avoid bankruptcy

However, evidence on the influence of product market competition onperformance appears inconclusive Strong product market competition may in turncreate other problems Shleifer (2004) argues that competitive pressure can lead to avariety of unethical practices, e.g., child labor, corruption, excessive executive pay,and earnings manipulation

c Legal Infrastructure and Law Enforcement

A strong corporate governance system must be supported by a functioning legal infrastructure, and law enforcement The most important legalrights of shareholders are voting on the major issues facing the firm, and theappointment of directors (Manne 1965; Easterbrook and Fischel 1983) The legalenvironment of a country has a significant effect on the size of the capital market

well-La Porta et al (1997) conclude that a good legal environment protects investorsagainst expropriation by managers, and increases their willingness to invest inequities In this way, the scope of capital markets becomes broader and morevaluable

The legal environment, measured by both the character of laws on the booksand the quality of law enforcement, plays an important role in preventing theexpropriation of minority shareholders by controlling shareholders La Porta et al.(1998) find that countries with poor legal protection of minority shareholders havemore concentrated ownership structures and smaller capital markets Measured bythe efficiency of the judicial system, the rule of law, corruption, the risk ofexpropriation and the possibility of contract repudiation by the government, lawenforcement is found to be better in richer countries than poorer countries

Improving the legal infrastructure and enforcement is the most obviousstrategy to reduce the agency conflict between controlling shareholders and

minority shareholders It is clear that legal infrastructure and law enforcement arefundamental elements of corporate governance Legal protection of investors andconcentration of ownership are also complementary approaches to the improvement

of corporate governance

The US, UK, Germany, and Japan have some of the best corporategovernance systems in the world The advanced market economies of thesecountries have solved their governance problems better than many other countries;however, this in no way implies that these systems are perfect solutions andgovernance mechanisms cannot be improved In less developed countries, corporategovernance systems are practically non-existent (Shleifer and Vishny 1997) Inemerging and transition economies, corporate governance mechanisms must bedeveloped and implemented in order to improve the overall quality of corporategovernance

2.5 Corporate Governance in Transition Economies

Corporate governance has been a prominent issue in developed marketeconomies for some considerable time In emerging and transition economies, it isstill unfamiliar and underdeveloped However, since the Asian financial crisis of1997-98 and the recent world financial crisis of 2007-09, it has become a muchmore important issue

The main area of focus for much corporate governance literature hastraditionally centred on the conflicting interests of weak, dispersed shareholders andself-interested management However, La Porta et al (1999) and Barca and Becht(1999) have shown that widely held firms are only common in countries with highlevels of investor protection such as the UK and US, and are not the norm globally.Furthermore, the assumption made by most corporate finance theory that firmsoperate under a functioning civil or common-law justice system is not the case inmany transitional economies (Berglöf and von Thadden 1999) Many of the findingsfor developed countries should therefore not be considered absolute in

relation to emerging or transition economies In transition economies there arechallenges, priorities and solutions which are different from those in developedeconomies, and this is an important consideration for transition countries seeking toimplement alternative governance models.

Important common features of transitional economies are a large dominatingsector of former SOE‟s that requires restructuring, and a need for new enterprises inunderdeveloped parts of the economy, especially the service sector (Berglöf and vonThadden 1999) In addition, transition economies commonly inherit a dysfunctionallegal system, with many other basic institutions such as capital markets typicallyhaving to be built up from scratch (Berglöf and von Thadden 1999) The limitedpower and scope of both private and public enforcement can prevent investors frombringing lawsuits and there is often great uncertainty over their rights (Berglöf andClaessens 2004) Improving investor protection is likely to be crucial for mosttransition economies (La Porta et al 1998; Berglöf and Claessens 2004)

In order to mitigate the effects of weak investor protection, transitioneconomies tend to have relatively high levels of ownership concentration (La Porta

et al 1999; Berglöf and Claessens 2004) Higher levels of ownership concentrationand poor investor protection both impair the liquidity of equity markets Equitymarkets not only provide financing to firms, but also provide owners with a marketfor „divestiture‟ and the ability to diversify systematic risks A lack of liquidity alsoeffectively nullifies the market for corporate control, which is a fundamentalproblem in many transitional economies Firms wishing to raise capital throughissuing equity may also face problems in transition countries due to poor minorityinvestor protection, even if those countries are developing rapidly (Singh 1995).Profitable investment opportunities that are foregone from lack of equity financingmay in turn lead to large social costs (Claessens et al 1999)

In terms of financing during the transition process, when legal and financialsystems and institutions are all underdeveloped, substitutes for standard corporategovernance mechanisms and financing channels play a more prominent role Theconcerns managers have for their reputation and the prospect of access to capitalmarkets help promote proper firm conduct (Shleifer and Vishny 1997), until thenecessary and formal investor protections have been established and institutionalframeworks are in place (Gomes 2000) During the economic development of thetransition process, investors depend more on the reputational concerns of managersfor their protection, whereas in the longer run legal protection takes over as thedominant form of investor protection Financing is also able to be obtained inenvironments with only weak investor protection because of investor over-optimism, where investors are excited about companies and finance them withoutmuch thought about getting their money back, instead simply counting on short-runshare appreciation (Shleifer and Vishny 1997) In short, the reputational concerns ofmanagers and investor over-optimism offer some explanation as to how firms canacquire external financing in environments that offer only limited investorprotection.

2.6 Chapter Summary

Corporate governance is a set of mechanisms, both institutional and marketbased, that deal with the conflict of interests between shareholders andmanagement, and between majority and minority shareholders In the chapter, the 2major models of corporate governance: shareholder model and stakeholder modelhave been introduced and discussed Besides, both internal and external governancemechanisms have also been reviewed including ownership structure, board ofdirectors, executive compensation, information disclosure, the market for corporatecontrol, product market competition and legal infrastructure and enforcement Allthese mechanisms were found not to be independent of each other but they areclosely interlinked making the structures fluctuating and difficult to analyse

The interaction between corporate governance and the political and legalsystems must be considered in relation to the problems faced by transitionalcountries, such as weak capital markets and the need to restructure SOE‟s This newexpanded framework provides a better foundation to analyse and understand thepolicy decisions of transitional economies in relation to corporate governance

CHAPTER 3: CORPORATE GOVERNANCE IN VIETNAM

3.1 Introduction

Vietnam‟s capital market began to develop a few years ago, when thecountry moved toward a more market-oriented economy The first stock exchange,the Ho Chi Minh City Securities Exchange (HOSE), was established in July 2000.The second one, the Hanoi Securities Trading Center (HASTC) started tradingsecurities 5 years later in 2005 From only tens of securities listed at the beginning,

up to now there are over 500 companies traded in the HOSE and HASTC (hasrecently been renamed as Hanoi Stock Exchange - HNX) As of the end of 2009,total market capitalization of HOSE and HNX was approximately VND 620,000billion (US$32.6 billion), or approximately 38 percent of 2009 GDP

However, like other emerging markets, Vietnam‟s stock market is facing allaspects of agency problems which are the subject of corporate governance They arethe moral hazard conflicts where managers lack managerial efforts or the overinvestment problem where managers act on their own benefits Increasing firm sizeand diversification is also a reality in Vietnam where managers strengthen theirindividual positions at the cost of shareholders

The framework for corporate governance in Vietnam is only in the earlystages of development with law and regulations being established Awareness ofmarket participants on corporate governance is limited

So far, only few surveys and studies on Vietnamese corporate governancehave been published Among those the “Country Corporate Governance Assessment

on Vietnam in 2006” of the World Bank is the one that described most completelycorporate governance practices in Vietnam and provided a benchmark for Vietnam‟sobservance of corporate governance practices against the OECD Principles ofCorporate Governance However, since then the World Bank has not made anotherreport whereas corporate governance in Vietnam is evolving rapidly

with the fast expansion of the stock market This chapter aims to provide anoverview of Vietnamese corporate governance that is up-to-date and as complete aspossible by assessing corporate governance in 6 areas which are stated in the OECDCorporate Governance Principles, including (i) corporate governance framework;(ii) rights of shareholders; (iii) equitable treatment of shareholders; (iv) role ofstakeholders in corporate governance; (v) disclosure and transparency; (vi)responsibility of the Board.

3.2 Legal framework and law enforcement

3.2.1 Development of a legal framework for corporate governance in Vietnam

After the launch of the economic reform (Doi Moi) in 1986, a variety of laws

were promulgated, namely the Law on Foreign Direct Investment in Vietnam 1987,the Company Law 1990, the Private Enterprise Law 1990, the Law onEncouragement of Domestic Investment 1994, the State Owned Enterprises Law

1996 and the Law on Cooperatives 1996 These provided domestic and foreigninvestors with the right to operate a business under various forms such as limitedliability companies, shareholding companies, proprietors, private enterprises,partnerships, cooperatives, and joint venture companies

In 1999, the Enterprises Law 1999 was enacted to replace the Company Law

1990 and the Private Enterprise Law 1990 Relying on the previous companystatutes and increasingly borrowing corporate legal rules from Western jurisdictions,especially Anglo-American law, the Enterprises Law 1999 provided for theformation of various types of business associations Besides, the two company typesprovided for by the Company Law 1990 (the Limited Liability Company (LLC) andthe Joint Stock Company (JSC), the Enterprises Law 1999 provided for twoadditional business association forms: (i) one organization owned LLCs and (ii)partnerships In contrast to the Company Law 1990, the compulsory governancestructure of a multiple shareholder LLC was required to have: (i) a

members‟ council consisting of all company shareholders; (ii) a chairperson of themembers‟ council (iii) the managing director; and a board of supervisors (wherethere are more than 11 shareholders) This Law provided that a JSC must have (i) ashareholders‟ meeting which comprised all shareholders who have voting rights; (ii)

a board of management led by a chairperson; (iii) a CEO (Chief Executive Officer)and (iv) a Board of Supervisors (where there are more than 11 shareholders) In thisgovernance structure, the shareholders‟ meeting is the supreme decision makingbody of the company and elects the board of management and the board ofsupervisors

There were, however, certain problems with the corporate governance regimeprovided by the Enterprises Law 1999, such as inflexible corporate governancestructures, unclear functions of the management board and the managing directorsand „poor‟ investor protection mechanisms Accordingly, the Enterprises Law 1999was replaced by the Enterprises Law 2005 after just six years The Enterprises Law

2005 is the most important corporate legislation in Vietnam and it forms thefoundation for the Vietnamese corporate governance system

Besides the Enterprises Law 2005, other statutes also provide a fewadditional rules governing companies, especially for particular business areas such

as banking, auditing, insurance and securities such as Law on Credit Organization

1997 (amended in 2004 and recently revised in June 2010 which will be effectivefrom January 1st 2011), Law in Insurance Business 2000, the Law on Accounting

2003, the Securities Law 2006 and Model Charter 2007

3.2.2 Current corporate governance framework in Vietnam

a Corporate legal framework

The Enterprises Law 2005 which was effective on July 1st 2006 is the mostimportant corporate legislation in Vietnam and it forms the foundation for theVietnamese corporate governance system It governs all corporations, regardless of

the structure of their ownership (business enterprises, state-owned enterprises,foreign-owned enterprises, limited liability companies, or joint stock companies).For a transitional period of 2 years, until June 30th 2008, Foreign InvestedEnterprises which are formally governed under the Law on Foreign Investment(FDI Law) may choose to continue to operate under the legal regime granted bytheir investment license, or shall have to re-register with the Business Register totransform into a partnership, an LLC or a JSC , as governed under the EnterprisesLaw 2005 The transitional period for SOEs formally governed under the Law onState-owned Enterprises 2003 is 4 years (until July 2010) Thereafter, SOEs willhave to conform to the provisions of the Enterprises Law 2005.

The Enterprises Law 2005 defines that a LLC is a company that has no morethan 50 shareholders A JSC must have at least 3 shareholders Only the JSC isauthorized to issue shares to the public and its shares are freely transferable, unlessotherwise stipulated by the company charter for preferred shares The transferability

of LLCs shares is subject to a right of first refusal of other company members.Partnerships, introduced in the Enterprises Law 1999, are not common

As of the end of 2009, there are approximately over 1,500 SOEs; 5,600foreign invested enterprises; over 200,000 LLCs, JSCs and sole proprietorships; and13,500 cooperatives in Vietnam (GSO 2010)

A further feature of Vietnamese listed companies is that they have adisproportionately high concentration of control in the hands of the largestshareholders (mostly the State) A high concentration of control rights is even found

in listed companies with a relatively dispersed ownership structures There are 2primary reasons for this pattern Firstly, a significant proportion of listed companiesare subsidiaries that have a parent company or group that remains in control throughextensive contractual and management ties after listing Continuing involvement inspun-off listed companies is often evidenced through the parent company‟s activecontrol of the new listed companies‟ boards, and maintaining control is often aprerequisite for the parent listing the subsidiary in the first place Secondly, therights of minority shareholders remain weak under the present political and legalsystem in Vietnam, and this is particularly true when the State remains a largeshareholder of the former SOEs

c Securities Law Framework

The Decree 144/2003/ND-CP forms the legal basis for the State SecuritiesCommission (SSC), whose role is to issue and enforce regulation governing theissuance and trading of securities by companies listed on the stock exchanges, and

to monitor the activities of securities companies, investment funds, brokers andother institutions involved in the functioning of the securities market TheEnterprises Law 2005 and the Law on Accounting 2003 have jurisdiction over listedcompanies

d Listing rules

In Vietnam, the Securities Law 2006 provides that the Stock Exchange (SE)and Stock Trading Centers (STCs) can issue listing rules once they obtain theapproval of the SSC

Under the Securities Law 2006, the major listing requirements in HOSEinclude:

Being a JSC with a minimum paid-in capital of VND 80 billion;

Having generated profits for the last two years with no losses carriedforward;

Having at least 20 percent of its equity held by more than 50 outsideinvestors;

Having a sound financial position, without any debt more than one year overdue;

A commitment by the company‟s Board of Directors, Management,and Supervisory Board to continue to hold 100% of their shares in thecompany for 6 months from the date of listing, and at least 50% for 6months later, excluding the State shareholdings for which they may beacting as proxy

Listing requirements in Ha Noi Stock Exchange (HNX) are similar to those

in HOSE except a requirement that the listed firms must have the paid-in capital ofVND 10 billion

Vietnamese auditing and accounting standards are promulgated by theMinistry of Finance (MOF) The existing standards are still incomplete Further,some of the contemporary accounting and auditing standards of Vietnam do notmeet international standards and do not promote „good‟ corporate governance ofcompanies The Vietnam Association of Accountants and the Vietnam Association

of Certified Public Accountants have a trivial role in administering accounting andauditing matters

e Courts and Enforcement

The legal infrastructure and enforcement environment in Vietnam arerelatively weak and generally under-developed to ensure transparency; and effectivecapital markets are lagging well behind the market development Privateenforcement of investor rights and public enforcement of contractual disputes areboth in an extremely weak position Under the current Vietnamese legal system

concerning securities civil compensation, it is difficult for the investors to sue incourt For instance, there are no provisions for civil compensation concerninginsider trading and the manipulation of shares prices under the Securities Law.

The courts lack jurisprudence expertise in securities market disputes andexperienced magistrates Judges are appointed for a term of 5 years They are oftenperceived to be susceptible to government pressure

f Shareholder rights groups

At present, there is only the Vietnam Association of Financial Investors(VAFI), which was established under the Decision No.74/2003/QD-BNV of theMinistry of Home Affairs dated November 5th 2003, and began operations inJanuary 2004 As of 2009, VAFI had admitted nearly 500 members, of which 63were organizations with the goal of creating a bridge between businesses, stockcompanies, investors, and management agencies One of VAFI‟s objectives is to

“protect the rights of investors, helping them to have thorough knowledge of lawsand feel secure investing in businesses” After over 6 years in operation, VAFIpartly helps contribute a voice to protect shareholder rights and improve corporategovernance in Vietnam

g Codes of Corporate Governance in Vietnam

Codes of corporate governance are important sources for corporategovernance in many economies ranging from advanced economies to transitionaleconomies Until March 2007, Vietnam lacked this source of corporate governanceregulation On 13 March 2007, the MOF issued the Code of Corporate Governancefor Listed Companies (hereinafter Code) This Code was developed under theEnterprises Law 2005 and the Securities Law 2006 It intended to adopt „the bestinternational practices on corporate management suitable to the conditions ofVietnam to ensure a stable development of stock market and a transparent economy

in Vietnam‟ This Code is, in fact, a piece of subordinate legislation (withmandatory rules) and is therefore different from a voluntary code of corporate

governance in advanced economies such as the OECD Principles of CorporateGovernance, the German Corporate Governance Code, and the Chinese Code ofCorporate Governance for Listed Companies.

Under the Code, the term „corporate governance‟ refers to the systemicprinciples which ensure a listed company is managed in a way that respects therights of shareholders and related persons More specifically, rules of corporategovernance should ensure an effective managerial structure; the rights ofshareholders; fair and impartial treatment as between shareholders; roles of personswith related interests; transparency during the company‟s activities; that the board

of directors and the board of supervisors lead and manage the company effectively

The main principles of corporate governance applicable to a listed companyunder the Code include: (i) Rights of shareholders; (ii) General meeting ofshareholders; (iii) Board of Directors; (iv) Supervisory Board; (v) Conflicts ofinterest and related party transactions and (vi) Information disclosure andtransparency

3.3 Rights of Shareholders

3.3.1 Basic shareholder rights

Under the Securities Law in 2006, basic shareholder rights includeownership registration, transferability of shares, obtaining company information,participating and voting in GSM, electing or removing board members and sharingprofit of the corporation However, in practice, in many companies, some of thosebasic rights are still violated Investors get difficulties in obtaining companyinformation or have little power in voting for key issues of the company

a Ownership registration

Under the Enterprises Law 2005, limited liability companies and joint stockcompanies (wholly or partly owned by private persons, by the State or by foreigninvestors) are registered at the Department of Planning and Investment in Provincial