VIETNAM
Beautifully Unscripted
Business 42108 – Corporate Governance
Winter 2017
Professor Chookaszian
3/1/2017
Final Paper
By:
"The Pho-nomenal Vietnamese Dong"
Ben Winston
Demi Chao
Amber Su
Eric Xu
Sean Lin
John Milligan
“I pledge my honor that I have not violated the Honor Code during this assignment.” BW,DC,AS,EX,SL,MD and JM
1. Prepare a chart for your country that answers the following questions
Question
Answer
Who serves as Chairman of the Board?
State-Owned Corps.: Appointed by the
State (not necessarily CEO)
Private Corps.: Typically the CEO
Who serves on the board?
An individual shareholder who owns > 5%
of total ordinary shares OR a person who
has expertise/experience in management
or any main business line of the company
Who are Shareholders?
Investors (State or foreign), employees,
creditors, suppliers, consumers, regulatory
bodies, and the local community in which a
company operates
How is capital represented?
Capital has ‘one share, one vote’ system
How is labor represented?
Inspection committees enforce work laws;
Legal system is very favorable to workers
How important are legal liabilities of
contracts?
Extremely, due to social pressures.
Vietnamese contract law is very similar to
that of Western countries. However, bribery
is common in the legal system
How are minority shareholders protected?
Experience in practicing and protecting the
rights of minority shareholders has been
insufficient in Vietnam due to the
insufficiency of a proper legal framework
How much discretionary power does the
CEO have?
In State-owned corporations, the CEO is
appointed by, and therefore under the
directive of, the State. In private corps, the
CEO has greater discretionary power
How much power do directors have?
Implementation of the business plan and
investment plan of the company, execute
decisions of the Members’ Council, appoint,
remove or discharge managers
How frequent are hostile Takeovers?
Infrequent in current market. Many hostile
takeovers and on-going private transactions
took place in 1978-1989
What is the rate of return expectation of
investors?
Stock market returned 14.8% in 2015.
However, returns inconsistent across years
How difficult is radical change?
Radical change is difficult. Change in
Vietnam is gradual and deliberate
2. Compare the favorable and unfavorable differences in the corporate
governance laws, regulations and practices of your country selection with those
of the US.
The Objective of Corporate Governance
● US: Corporate governance focuses primarily on disciplining management. The
objective of the board of directors is to make sure that the management works for
the interests of the stakeholders.
● Vietnam: The objective of board of directors is to make sure Vietnam’s corporate
law align with Organization for Economic Cooperation and Development (OECD)
principles as well as represent the best interest of the shareholders.
Director Independence & Diversity
● US: There is no requirement regarding the composition of the board of directors.
Technically, a board is allowed to have 100% independent directors. However, in
reality, about 80% of the board of directors are independent directors.
● Vietnam: Only publically listed companies must include independent members on
the management board. One-third of a listed company's management board
members must be independent.
Committee
● US: There are 3 types of committees: the Audit Committee, Nominating and
Governance Committee, and Compensation Committee. Audit and Compensation
committees consist of independent directors.
● Vietnam: There is only one (Audit Committee) and it is optional. The function is
instead served by a separate supervisory board (See Figure 1 below)
Source: Corporate Governance Manual, second edition
Law
● US: Shareholders may bring direct, derivative and class action lawsuits under both
federal and state laws. The US has a common law system which ensures
protection of shareholder rights.
● In Vietnam, modern legal framework for corporate governance is based on the Law
of Enterprises, the Law on Securities, and each company’s charter.
3. How well do your country's Corporate Governance Practices comply with the
OECD Corporate Governance principles?
OECD Principle I
Ensuring the basis for an effective corporate governance framework:
The corporate governance framework should promote transparent and fair
markets, and the efficient allocation of resources. It should be consistent with the
rule of law and support effective supervision and enforcement.
Vietnamese practices that comply well with Principle I
● The SSC (State Securities Commission of Vietnam) corporate governance norms
are mandatory for all listed and many public companies
● The SSC reports to the Ministry of Finance
Vietnamese practices that comply poorly with Principle I
● The legal framework includes significant inconsistencies
● There is no national company registrar
● The SSC has wide-ranging authority and powers but it cannot initiate civil actions
or claim damages for investors
● Supervising State Bank of Vietnam owned banks is a challenge
● The governance of many State Owned Entities is opaque
OECD Principle II
The rights and equitable treatment of shareholders and key ownership functions:
The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights and ensure the equitable treatment of all shareholders, including
minority and foreign shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights.
Vietnamese practices that comply well with Principle II
● Courts are relatively easy to use
● Shareholders freely trade their shares, and have rights to dividends, basic
information and approval of key corporate changes
● Shareholders can obtain information about share classes and are entitled to be
notified of information on the company’s activities
Vietnamese practices that comply poorly with Principle II
● Shareholder meeting notices can be incomplete
● Shareholders are not always able to ask questions
● Shareholders face limits when seeking redress from the company
● SSC cannot sue on behalf of shareholders
● Shareholders cannot file a suit against directors in the form of derivative actions
OECD Principle III
Institutional investors, stock markets, and other intermediaries:
The corporate governance framework should provide sound incentives throughout
the investment chain and provide for stock markets to function in a way that
contributes to good corporate governance
Vietnamese practices that comply well with Principle III
● Insider trading is prohibited
Vietnamese practices that comply poorly with Principle III
● Companies are not required to have internal audit or risk management functions
OECD Principle IV
The role of stakeholders in corporate governance:
The corporate governance framework should recognise the rights of stakeholders
established by law or through mutual agreements and encourage active
cooperation between corporations and stakeholders in creating wealth, jobs, and
the sustainability of financially sound enterprises.
Vietnamese practices that comply well with Principle IV
● Cumulative voting is required for board selection
Vietnamese practices that comply poorly with Principle IV
● Shareholders have the right to approve major and related party transactions but
do not always the opportunity
● Shareholders approve board, but not CEO compensation
OECD Principle V
Disclosure and transparency:
The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.
Vietnamese practices that comply well with Principle V
● Companies are required to produce audited financial statements
● Local Accounting Standards are in line with an earlier version of IFRS
● Disclosure requirements have been recently strengthened
Vietnamese practices that comply poorly with Principle V
● Disclosure on boards have been poor
● Disclosure of board composition appears minimal
● Ownership disclosures are still succinct
● RPT (Related Party Transaction) regime is still weak
● Companies do not have to disclose on risk management and do not have a clear
requirement to disclose on risk or risk factors
OECD Principle VI
The responsibilities of the board:
The corporate governance framework should ensure the strategic guidance of
the company, the effective monitoring of management by the board, and the
board’s accountability to the company and the shareholders.
Vietnamese practices that comply well with Principle VI
● The GMS (General Meeting of Shareholders) appoints the board, which in turn
selects CEO and other senior managers
● The inspection committee provides an oversight function on financial and
regulatory compliance, and is also chosen by the GMS
○ Its primary role is to supervise the work of the Board, the CEO and other
key executives
● The legal and regulatory framework promotes separation of CEO and Chairman
position. However, the law allows also companies to keep the two positions in the
hands of one individual if the GMS decides so
● Fiduciary duties of board members are present
● The inspection committee acts as a fiscal council
Vietnamese practices that comply poorly with Principle VI
● Regulations require independent members on board and subcommittees, but the
definition of independence is gray
● Board selects the executives, succession planning minimal
4. What changes does your country still have to make to achieve the OECD
principles?
● Developing an action plan to address core failings of state owned enterprise
corporate governance
● Making the state more accountable for its actions
● Providing legal consistency and clarity for market participants
● Establishing better cooperation with regulators and enhancing board powers,
resources, and independence
● Improving protection of minority shareholders by increasing redress, and
strengthening rules on RPTs (related party transactions), control changes and
shareholder meetings
● Establishing board professionalism and effectiveness
● Increasing transparency with greater auditor independence, better disclosure of
ownership and control, and convergence of accounting standards with IFRS
5. What are the risks of investing in your country?
● Business climate risk. This is the biggest risk of investing in Vietnam. Similar to
many other emerging market economies, Vietnamese businesses face a lot of
obstacles that hinder efficient growth, such as low information transparency,
inadequate law enforcement, corruption, etc.
● Financing & Capital Markets risk. The capital market and banking systems in
Vietnam are relatively opaque and under-developed, lacking the level of
sophistication and efficiency of a more market-driven economy. This could lead
to difficulties in financing (lack of liquidity) or irrational market behavior.
● Legal risk. Vietnam’s judiciary is governed directly by the state and therefore
lacks independence. It also has insufficient experience dealing with foreign
entities and commercial disputes. Multiple resources (online cases, in-person
interview) have cited that sometimes the judge might rule in favor of local parties
despite what the law supports. This could pose significant risk to foreign
investors in Vietnam, and makes having a local partner with strong connections
critical.
● Political climate risk. The political system in Vietnam has remained relatively
stable and we don’t foresee any major social changes, but such factors should
always be considered and closely monitored in foreign investments
6. What does your country need to do to make its stock market safer for
investors?
● Increase stock market size and value: A major factor deterring foreign
investors from investing in the Vietnamese stock market is size
○ As of 2016, the total market capital is around $60B, roughly 30-40% of the
country’s GDP; in comparison, the Stock Exchange of Thailand is close to
$400B, around 100% of its GDP. NYSE is about $20 Trillion.
● More liquidity: Currently the stock exchange is mostly trading equity and bonds,
and doesn’t have many of the more complex financial derivatives commonly seen
in more developed markets (credit default swaps, etc.)
● Better legal and governance structure, more transparency. Vietnamese
companies are reluctant to go public due to the increased scrutiny they face in
the public market
○ On one hand, this is a good sign that there is a minimum amount of
transparency in the stock market; on the other hand this also shows the
significant gap between public and private standards
○ The governance body should focus on promoting a standard ‘best
practice’, as well as streamlining the IPO investigation and approval
process to promote the long-term growth of a healthy and safe market.
7. For the next five years, would you prefer to invest in your country or in the US?
For the next five years, we would tentatively prefer to invest in Vietnam over the US.
Economic opportunities, growth projections, and a continuously improving corporate
governance atmosphere provide a positive outlook. The benefits of investing in Vietnam
ultimately outweigh the drawbacks, making it a more promising investment opportunity
than the US.
Benefits of investing in Vietnam over the US
● As of 2014, the country had a lower Gini coefficient (37.59) than the US (41.06) 5
● A lower standard of living (though one that is rapidly improving) translates to
lower daily costs and therefore lower wages needed to sustain laborers
● Vietnam has experienced a steady increase in GDP growth over recent years
(6.7%) whereas the US is suffering relative stagnation (2.6%)6
● In the HMC and Hanoi stock exchanges, “Pre-emptive rights” give existing
shareholders a chance to purchase shares of a new stock being issued before it
is offered to outsiders. These rights protect shareholders from dilution of value
and control when new shares are issued.
● Strong financial regulations have been put in place and appear to be consistently
enforced in both countries
○ Insider trading and market manipulation are prohibited and monitored
○ Listed companies produce relatively complete annual reports with audited
financial statements
● Real estate value can increase to 10-30%
Drawbacks of investing in Vietnam over the US
● Corruption and bribery still exist in high levels
● Environmental concerns (e.g. massive fish die-off due to factories polluting
water)
● Corporate governance of many State-Owned Enterprises remain poor
○ Poor transparency
○ Unprofessional boards
○ Opaque state ownership through economic groups
○ Limited accountability and significant cases of poor performance
○ Many large State Owned Enterprises are still not equitized or corporatized,
and several hundred that have been equitized are still not listed on either
stock exchange
● Government has regulation that every company has to have trade union, though
it is not always strictly enforced
● Recent inflation in Vietnam is much more volatile (max: 23.1% in 2008)7
compared to inflation in the US (max: 13.5% in 1980)
● Foreign investors can’t legally own land in Vietnam
○ JVs require partnership with Vietnamese citizen(s)
Bibliography
1.
PricewaterhouseCoopres, “Vietnam - A Guide for Business and Investment”, May
2008.
2.
Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, and Mark D. West,
Evolution of Corporate Law: A Cross-Country Comparison, 23 U. Pa. J. Int’l L. 791,
2002.
3.
Jeff Wheeler, International Relations Officer EJ Murtagh, International
Relations Officer Office of Trade & Labor Affairs Bureau of International Labor Affairs
(ILAB) U.S. Department of Labor (USDOL), Assessment Of Vietnam’s Labor Inspection
system, October 10, 2010
4.
Vuong, Quan Hoang and Tran, Tri Dung and Nguyen, Thi Chau Ha, Mergers and
Acquisitions in Vietnam's Emerging Market Economy: 1990-2009 (November 10, 2009).
WP-CEB No. 09/045. Available at SSRN: https://ssrn.com/abstract=1503288 or
http://dx.doi.org/10.2139/ssrn.1503288
5.
Gini Index: Coefficient, World Bank Open Data. Accessed February 26, 2017.
http://data.worldbank.org/
6.
GDP Growth: Annual %, World Bank Open Data. Accessed February 26, 2017.
http://data.worldbank.org/
7.
Inflation, Consumer Prices: Annual %, World Bank Open Data. Accessed
February 26, 2017. http://data.worldbank.org/
Additional References:
8.
International Finance Corporation, Center for Asia Private Equity Research Ltd.,
“Corporate Governance in Vietnam: Success Stories”, May 2015
9.
Bui Trong Dan, (2005), LEGAL ISSUES OF ENFORCEMENT FOR
CORPORATE GOVERNANCE IN VIETNAM: CONSTRAINTS AND
RECOMMENDATIONS, in Mark Hirschey, Kose John, Anil K. Makhija (ed.) Corporate
Governance (Advances in Financial Economics, Volume 11) Emerald Group Publishing
Limited, pp.95 - 108
10.
The National Assembly, Socialist Republic of Vietnam, “Law On Enterprise”,
November 26, 2014
11.
“The Best Investment Channels in Vietnam in 2016”, accessed February 26,
2017. http://english.vietnamnet.vn/fms/business/170666/the-best-investment-channelsin-vietnam-in-2016.html
12.
International Finance Corporation, “Corporate Governance Manual, Vietnam, 2nd
edition”, October 2010
13.
“State-owned firms dominate list of Vietnam’s top companies”, accessed
February 26, http://www.dtinews.vn/en/news/018/26573/state-owned-firms-dominatelist-of-vietnam-s-top-companies.html
13.
Yuen, Ng Chee., Nick J. Freeman, and Frank Hiep. Huynh. State-owned
enterprise reform in Vietnam: lessons from Asia. Singapore: Institute of Southeast Asian
Studies, 1997.
14.
All of the World’s Stock Exchanges by Size, accessed February 26,
http://www.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/
15.
Will Vietnam stocks resume their rally in 2015?, accessed February 26,
http://www.cnbc.com/2014/12/09/will-vietnam-stocks-resume-their-rally-in-2015.html