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GOOD CORPORATE GOVERNANCE:
A prerequisite for sustainable business
Put
simply, corporate governance (CG) is the internal system that
organizes the direction and control of a corporation. Corporate
governance specifies the rights and responsibilities of different
stakeholders in a company when there is separation between ownership
and control, including its shareholders, managers, Board of
Management1 and Supervisory Board.2 Corporate governance also sets
the rules and procedures for making and implementing decisions
within a company; its ultimate aim is to ensure that the company is
being managed in the interests of the shareholders. This means it
will minimize abuse and reduce unforeseen risks, such as those
arising from related party transactions, conflicts of interest and
inadequate disclosure and transparency standards. As Vietnam's
business environment continues to develop rapidly and larger
corporations emerge, both the business community and policymakers
are increasingly interested in CG as a tool to differentiate between
ownership and management functions. This bulletin discusses the
current state of CG in Vietnam.
1. Good
CG practices increase access to capital and enhance company
performance
Recent studies by McKinsey
& Company, Credit Lyonnais Securities Asia, and the World Bank have
all shown that a strong correlation exists between good CG practices
and: 1) higher share price valuations, and 2) improved performance
ratios. This in turn means a higher rate of return for shareholders
and greater benefits for other stakeholders. As a result, investors
are often willing to pay a 'CG premium' (i.e., a higher price for
shares of companies with good CG procedures). Banks are also more
willing to lend funds and may charge a lower interest rate, because
good CG practices: 1) decrease the chances of loan misuse, and 2)
increase the likelihood that the loan will be repaid in full. In
contrast, poor CG practices can lead to undesirable consequences,
such as bankruptcy or even company collapse. Recent corporate
scandals at a number of large multinational firms–including Enron,
Tyco International, Daewoo, and WorldCom–are good examples of the
dangers that can stem from poor CG . Closer to home, recent
difficulties at enterprises such as PetroVietnam, VNPT and Seaprodex
have stemmed in part from inadequate CG practices.
2.
Vietnamese firms should improve their knowledge and practice of CG
Corporate governance is
still a new concept in Vietnam. In a recent IFC-MPDF study of 85
large Vietnamese companies, less than 25% believed that
businesspeople in Vietnam understand the basic concepts and
principles of CG. In-depth interviews with company directors
revealed that there is still some confusion over the difference
between corporate governance and operational management. As a
result, few Vietnamese companies have good CG systems. A large
majority of the directors interviewed in the study concurred that
Vietnamese firms should improve their CG practices, particularly in
the following areas:
-
The role and
functions of the Supervisory Board: At present, in most
companies these are unclear and/or ineffective.
-
Financial disclosure
and corporate transparency: In Vietnam, it is difficult to
obtain reliable information regarding corporate performance and
practices. Since tax policies can be applied inconsistently and
arbitrarily, companies tend to obscure results. To the extent
data is available, its quality is often poor. The lack of
clarity and openness ultimately impedes companies' growth
potential. For example, when there has been a "closed" share
sale in some equitized companies, interested investors have had
limited access to timely and accurate information. Consequently,
such companies have often failed to attract the kind of
strategic investors that can contribute significantly to their
development.
-
Ambiguous roles of
state shareholders in equitized companies: When state
shareholders "interfere unduly", companies can experience
internal conflicts and may also face political interventions
that favor state management agencies. In other cases, such
investors can be overly passive, and their lack of engagement
may stall necessary changes or prolong inefficiencies.3
-
Related party
transactions: A related party transaction occurs when two or
more of the involved participants have had a special
relationship prior to the transaction taking place. Related
party transactions are quite common in many Vietnamese
state-owned enterprises (SOEs), especially for big procurement
contracts like machinery and equipment. Such transactions can
reduce a company's performance, thereby preventing shareholders
from receiving their share of the firm's real income. In
Vietnam, government enforcement against related party
transactions is still very limited.
3.
Vietnam needs a uniform CG framework
At present three laws
govern enterprises in Vietnam, depending primarily on their
ownership profile and legal status: 1) the Enterprise Law of 1999
for domestic private enterprises, 2) the revised State-owned
Enterprises Law for SOEs, and 3) the Foreign Investment Law for
foreign-invested enterprises (FIEs). Because each law addresses CG
differently, overall corporate governance across Vietnam's business
community lacks consistency.
One of the main objectives of the upcoming Unified Enterprise Law (UEL)
is to improve and reconcile the legal framework governing CG
practices in Vietnam. However, debate continues on whether the law
should:
1) either provide detailed regulations on CG practices (such as
specifying compensations for the management team) or just give a
general CG framework (with each enterprise specifying its own CG
rules in its Company Charter); and
2) detail the kinds of sanctions and penalties that may be imposed
on firms and individuals found guilty of violating CG regulations.
Regardless of how these issues are resolved, the uniform application
of the new law is expected to encourage and facilitate better CG
practices among companies in Vietnam.
(1) The equivalent of the Board of
Directors in other countries.
(2) Also known in Vietnam as the Inspection Committee, the
Supervisory Board performs the internal audit function within a
company.
(3) Dau Anh Tuan, VCCI, Presentation entitled "Some Corporate
Governance issues in Vietnamese equitized companies" at a workshop
on "Comparing CG practices in Vietnam with OECD principles," April
5, 2005. |
