Corporate governance in vietnam

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UNIVERSITY OF MARIBOR

RESEARCH: DEVELOPMENT OF CORPORATE

GOVERNANCE IN VIETNAM

Assignment/ Seminar

Thien Trang Nguyen 11/10/2019

I Introduction:

Corporate governance has come a long way in both developed and developing

nations in the past three decades (Solomon, 2007; Tricker, 2012) and has become

one of the most important topics in many countries Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital Corporate governance has been noticed in many economies but recently corporate governance issues of

transition and developing economies have attracted a great deal of attention from

many researchers, managers, etc.（McGee,2010) Based on this point, this study is

to focus on analysis in the area of corporate governance in Vietnam

II Corporate Governance in Vietnam:

1 History of corporate governance in Vietnam:

In the mid-1980s Vietnam, had carried out an an economic reform and business liberalization in order to promote national socioeconomic development and push Vietnam to join a market economy Since then, it has caused a major change in the country's corporate sector profile Once largely dominated by SOEs (State-owned enterprises ), since the mid-1990s, a large number of state owned companies have been transformed into shareholding companies or limited liability companies

In 1999 the Enterprise Law actually came into force, the number of new firm

registrations has accelerated considerably, was enacted to replace the Company

Law 1990 and the Private Enterprise Law 1990 Relying on the previous company

statutes and increasingly borrowing corporate legal rules from Western

jurisdictions, especially Anglo‐American law, the Enterprises Law 1999 provided

for the formation of various types of business associations

Since the stock market has developed, capital raising instruments of Vietnamese companies have become diverse In order to promote the transition of state-owned

companies into shareholding companies or limited liability ones and integrate

policies, laws for all types of companies

Accordingly, the Enterprises Law 1999 was replaced by Enterprises Law 2005

after just six years The Enterprises Law 2005 is the most important corporate

legislation in Vietnam and it forms the foundation for the Vietnamese corporate governance system The law created a unique corporate governance framework for enterprises regardless of their capital ownership or economic sector Moreover, corporate governance framework that is stipulated by the law is not only clear, comprehensive but also similar to the most common practices on corporate

governance In other word, the law on enteprise provided a corporate governance framework that every enterprises would to comply with

Following will be detailed analysis of the corporate governance regulation and its implementation in the reality

2 Form of business enterprises:

According to the Vietnam Law on enterprises, there are four common types of

business entity at present: limited liability company (LLC), shareholding company (SC), partnership and private enterprises

a Limited liability company (LLC):

Limited liability companies in Vietnam are divided into two types: Limited liability company with two or more members and limited liability company with one member Limited liability company with two or more members is structured by a member‟s council, a chairman of member‟s council, general director An LLC with 11 or more members must set up a Control Board A Control Board may also be set up in a

company with less than 11 members to meet its management requirements

Next, in the case of one-member LLC in Vietnam, it is an enterprise owned by

organization or individual One member limited liability company owned by one organization concludes a member of council, general director and supervisor And one member limited liability company owned by an individual is structured by a chairman of the company and general director (Tanaka, 2009, p 98）

b Shareholding company (SC):

A shareholding company in Vietnam is a company with at least three shareholders Its management structure consists of shareholder‟s meeting, board of management, general director Supervisor committee is needed if there are more 11 individual shareholders or if the corporate shareholder owned more than 50% of shares

(Tanaka, 2009, p 101）

c Partnership:

A partnership is an enterprise in which there are at least two partners who are co- company, jointly conduct business under one common name, and are liable tor all obligations of the partnership with his/her own entire property Moreover, a

partnership can also have limited partners, who are liable for debts of the partnership only to the extent of their capital contribution

d Private enterprises:

This is the most simple business entity A private enterprises is owned by an

individual who is liable for all of its operations with his/ her property Each

individual can only establish one private enterprise

3 Corporate Governance Structure in Vietnam: legal aspect

Generally, listed companies in Vietnam follow two-tier corporate governance system, although there are some modifications making it slightly different with the typical two-tier structure of Germany Corporate governance framework is abided by the law

on enterprise (2005) and law on securities (2005) and is visualized in Figure 1

Figure 1: Corporate Governance Structure in Vietnam

3.1 Shareholder meeting:

General Meeting of Shareholders (GMS) has the power of making decision

on the most important issues of the company such as long-term strategies,

stock issue and dividend According to the Vietnamese Enterprise Law 2014,

GMS must be held at least once per within four months after the end of

financial year

Condition for proceeding the shareholder meeting depend on number of

attending shareholders The first-call shareholder meeting is entitled to open if all participating shareholders own at least 65% of total voting shares The second-call shareholder meeting is entitled to open if all participating

shareholders own at least 51% of total voting shares The third-call

shareholder meeting is always entitled to open regardless of the number of

participating shareholders as well as their voting shares This regulation aims

at enabling the shareholder meeting to be held at long last

Decision of the shareholder meeting will be adopted by at leat a number of participating shareholders owning at least 65% of total votes in regard to normal decision or a number of participating shareholders owning at least 75% of total votes in regard to more important decisions as stipulated in

article 104(3)(b) of the law on enterprise

3.2 Board of Directors (BOD):

The Board of Directors (BOD) is a management body of the company,

which is entitled to act on behalf of the company in exercising all the rights and obligations, except those falls under the authority of the Shareholders'

Meeting (article 108(1)-the law on enterprise) The BOD has the right to

appoint Executive Board, which is in charge of daily operations

The Board of Directors will consist of at least 3 members and no more than 11 members, unless otherwise provided in the company charter Members of the board of directors can be either shareholder or other Any individual

shareholder holding more than 5% of total shares is eligible for membership

of the board of director Other candidate for the membership of the board of director, including shareholder holding less than 5% of total shares, is

required to acquire certain expertise and experience in relation to business management or major business activities of the company; other qualification can be stipulated by the company charter

3.3 Chairman of BOD- Directors:

Chairman of the board of BOD is a special member Chairman of the board of BOD will be elected by either the Shareholders‟ Meeting or the Board of

Management (Article 111(1)-the law on enterprise) He plays a ”standing”role

in carrying out daily work of the board in addition to his duties as a member

of the board of BOD He will avail oneself of better position in the process of making decision in the company Ordinary meetings of the Board of Directors will be convened by the chairman at least once per quarter or at any time

when necessary

Supervisory Board is elected by the GMS and independent from both BOD

and Executive Board, with the main duty of supervising these Boards in

managing and operating the company

The Board of supervision will comprise of from 3 to 5 members who meet

following qualifications: (Articles 121 & 122 of the law on enterprise)

The Board of supervision is entitled to make use of consulting service when carrying out assigned obligations Information-accessible right of the

members of the supervision board is similar to that of the members of the board of directors

3.5 Excutive Board:

While members of Executive Board could be selected from BOD, as the

regulation, members of Supervisory Board must not hold any position in both BOD

and Executive Board, or be relatives of any member in those Boards

From legal aspect, statutory power of the Excutive Board is not significant and focuses on implementation of decisions made by the board of director Basically, this Board will carry out day-to-day business operation From aspect of human resource management, it is authorized to hire only employees

4 The code of Corporate Governance in Vietnam:

Codes of corporate governance are important sources for corporate governance in many economies ranging from advanced economies to transitional economies

Until March 2007, Vietnam lacked this source of corporate governance

regulation.On 13 March 2007, the MOF issued the Code of Corporate Governance

for Listed Companies This Code was developed under the Enterprises Law 2005 and the Securities Law 2006 It intended to implement „the best international

practice on corporate management suitable to the conditions of Vietnam to ensure

a stable development of stock market and a transparent economy in Vietnam‟ This Code is, in fact, a piece of subordinate legislation (with mandatory rules) and is therefore different from a voluntary code of corporate governance in advanced

economies such as the Organisation for Economic Co‐operation and Development (OECD), Principles of Corporate Governance, the German Corporate Governance Code, and the Chinese Code of Corporate Governance for Listed Companies

Under the Code, the term „corporate governance‟ refers to the systemic principles which ensure a listed company is managed in a way that respects the rights of shareholders and related persons More specifically, rules of corporate governance shall:

- Ensure an effective managerial structure;

- Ensure the rights of shareholders;

- Ensure fair and impartial treatment as between shareholders;

- Ensure roles of persons with related interests;

- Ensure transparency during the company‟s activities;

- Ensure that the board of management and the board of controllers lead and manage the company effectively

The main principles of corporate governance applicable to a listed company under the Code include:

(i) Rights of shareholders;

(ii) General meeting of shareholders;

(iii) Board of Management;

(iv) Control Board;

(v) Conflicts of interest and related party transactions

(vi) Information disclosure and transparency

III Conclusion:

In conclusion, Vietnam corporate governance system is charactered with two features: authority is concentrated in few persons and external supervision is not existed or very weak These weaknesses may create a large room for majority shareholders,

individual representative of state shareholder and managers to make use of the

company asset and oppurtunity to serve their own benefit

References:

1 Corporate law in Vietnam

https://en.wikipedia.org/wiki/Corporate_law_in_Vietnam#Limited_liability_comp any_(LLC)

2 See Articles 15, 16, 21, 25, 27, and 58 of the Constitution 1992

3 The Enterprises Law 2005 - 29 November 2005

4 Advantages and limitations of each type of bussniess entity in Vietnam

https://www.plf.vn/legal-articles/Advantages-and-limitations-of-each-type-of-business-entity-in-Vietnam

5 World Bank Group(2010),“Corporate Governance Manual for Vietnam- second edition” 75-77

6 Nick Freeman, Nguyen Van Lan (2006)-“Corporate Governance in Vietnam” 19-20

7 IFC（2012）, “Vietnam Corporate Governance Scorecard 2012”

8 Nham, P T & Nguyen, A T.（2013）, “Corporate Governance Agency Problems

of Public Listed Companies in Viet Nam”, VNU University of Economics and Business, 29, 1-10

9 Nguyen Dinh Cung (2004), “Corporate Governance in State Owned

Enterprises Report to the Draftting Committee of the Enterprise Law” 2005, Hanoi.