Corporate Governance Practices in Vietnam

1. Corporate Governance Practices in Vietnam Some initial survey findings

2. Rationale for the survey • No empirical survey has yet been conducted into CG practices in Vietnam’s corporate sector • Assess the extent to which current CG practices deviate from both domestic regulations and international norms • Provide insights and recommendations to assist CIEM in drafting the Unified Enterprise Law and implementing regulations • Serve as a baseline study to measure future progress on good CG practices in Vietnam

3. Does CG matter ? • 58% of all firms said they had been directly and adversely affected by at least one incident stemming from bad CG practices, either inside their own firm or at another company

4. Design of the survey • 70 companies interviewed over the last two months, using a detailed questionnaire • Questions spanned most CG issues, including: • rights and treatment of shareholders • role and responsibilities of the Board of Management • role and responsibilities of the Inspection Committee • role and responsibilities of senior executives • conflicts of interest and related party transactions • company disclosure and transparency • We also collected views on the regulatory and business environment as they pertain to CG

5. Sample profile • Average size of firm: • 1,140 employees • total assets of VND195bn (US$12.4m) • revenues of VND367bn (US$23.2m) • Legal form: • SOEs 44% • Equitised former SOEs 36% • Joint stock companies 16% • Listed companies 4% • Location: • 56% in and around Hanoi • 44% in and around HCM City

6. Sample profile(cont.) • Main business sectors: • construction and const. materials 13% • mechanical engineering and processing 9% • food and food processing 7% • transport 6% • power and energy 4% • fuels 4% • wood-related and handicrafts 4% • chemicals and plastics 3% • electrical and electronics 3% • telecommunications 3% • [no trading firms]

7. Caveats and potential bias • Firms willing to be interviewed tend to be those with better CG practices • SOEs were more willing (or felt more obliged) to be interviewed than private firms • Most interviews were with senior managers; not with shareholders and other stakeholders • Results relate more to formal procedures rather than informal practices • Results are preliminary

8. CG is a new concept in Vietnam • the Vietnamese equivalent term of CG (quan tri cong ty) is confusing and has yet to take hold as a popular term • just 26% of all firms thought the basic concept and principles of CG are understood by most business people in Vietnam • some confusion amongst company directors between “governance” and “management” • the joint stock legal entity is still quite new in Vietnam and firms are young

9. Formal procedures exist in most companies • more than 90% of firms had a company charter or equivalent that covers most important areas of CG • over 94% of firms have documentation that sets out the role and responsibilities of the general director, chief accountant / finance, and other senior executives • most firms hold AGMs, and shareholder rights are specified(eg. one share = one vote, and each share entitled to an equal proportion of dividend payments)

10. Formal procedures exist in most companies...(cont) • Most company charters address • the role and responsibilities of the management • company accounting and financial reporting • terms of employment • procedures for dividend payments • holding shareholder meetings and rights of shareholders • and the role and responsibilities of the BoM • … but this does not automatically mean these are followed in practice

11. Inspection committee role is relatively weak • 36% of firms completely or partly agreed with the statement that “the inspection committee has little real authority, and only exists on paper because it is required by law” • just more than 50% think Inspection Committees effectively carry out their responsibilities in practice

12. Related party transactions and potential conflicts of interest • Related party transactions and potential conflicts of interest are amongst the most serious CG problems • related party transactions and conflicts of interest ranked 2nd among the most frequent CG malpractices occurring • only 29% of all firms have written guidelines on controlling related party transactions • of these, 89% of firms claimed to completely or partly follow these guidelines in practice • 62% of SOEs agreed that “kickbacks are common”

13. SOEs: between market and hierarchy • SOEs are still very dependent on various government agencies • nearly 40% of SOEs said that business targets are imposed from above • 62% agreed that SOEs do not have “real” owners • 66% said that “ask and give” is still common • 87% rated personal relationships with government agencies important

14. SOEs: between market and hierarchy (cont.) • SOE directors complain they have many responsibilities, but not adequate authority to run their companies according to market principles • 77% said they experienced situations where the law allowed them to do something, but they could not in practice (eg. laying off workers) • one consequence: 70% agreed that the common approach of SOEs is “to make no loss, but only a little profit” • despite the strong weighting of SOEs in our sample, 64% of all firms did not think that SOEs adopt good CG practices

15. Equitised firms: still “SOE-like” • State still holds a fairly large equity stake in most of these firms • General Directors of 12 firms (55% of all equitised firms where the State still has equity) were representing the government’s remaining equity stake in the company • 33% said that the fact that the state still holds an equity stake has a negative effect on the firm • most equitised firms are still following the old (SOE) way of doing things

16. Joint stock companies: small and nascent • Joint stock firms are small, with average equity capital of VND27bn, and assets of VND157bn • of 11 firms interviewed, 4 had fewer than 10 shareholders • there was one firm with only 1 ‘real’ shareholder • General Directors of 7 out of 11 firms interviewed (64%) were also chairmen of the Board • joint stock firms seemed more open and receptive, as they seem to have learnt something from the interviews

17. Perceptions on the importance of CG • 95% rated corporate governance practices as being either important or very important for their company, relative to other tasks • 88% of all firms agreed that improving CG practices should be a high priority of the government

18. Perceptions on the regulatory environment • A majority of firms believe: • current laws and regulations do not provide adequate guidance on CG practices • current laws and regulations on CG issues are not adequately enforced • companies have insufficient information and knowledge on CG • there is insufficient legal and regulatory guidance on CG

19. Perceptions of common CG malpractices • inadequate role of the BoM and poor company disclosure • related party transactions and conflicts of interest • inadequate role of the IC • inadequate role of senior management (but bias factor) • unfair treatment of shareholders (but bias factor)

20. Respondents’ ideas on how to improve CG practices • provide more training for senior managers and company directors on CG practices • 51% of firms said it was hard to find good BoM members • stricter enforcement of existing laws and regulations pertaining to CG • reform the tax administration so that companies are more transparent about their financial situation • introduce an award system for companies that display high CG standards • government should set a good example in the way it manages the country’s economic and business affairs

21. What next …? • In a second phase of the study, we intend to focus on some key issues arising from the survey, and ‘drill down deeper’ • using a much smaller sample • interviewing multiple individuals in each firm • trying to better understand informal CG practices • Ultimate aim is to provide practical recommendations on how improved CG practices might be pursued in Vietnam

22. Thank you