Researchbackground
Intoday’sglobalbusinessenvironmentcharacterizedbyanincreasedcompetition,theeff ectivenessofcorporategovernanceinprotectingshareholders’interestshasbecomemorevit althanever.Especially, corporategovernancedealswiththewaysinwhich s u p p l i e r s o f f i n a n c e t o c o r p o r a t i o n s a s s u r e themselveso f gettinga r e t u r n o n t h e i r investment.Thetermcorporategovernance basicallyrepresentsasetofmecha nismsb y w h i c h i n v e s t o r s p r o t e c t t h e m s e l v e s a g a i n s t e x p r o p r i a t i o n b y bothmanagersandc o n t r o l l i n g shareholders.
Corporategovernanceisthesystem bywhichcorporationsaredirectedandcontrolled.Th e corporategovernancestructures pecifiesthedistributionofrightsandresponsibilitiesamongdifferentparticipa nts i nthecorporation suchas;boards,managers,shareholdersandotherstakeholders andspellsouttherulesandproceduresa n d alsodecisionmakingassistanceoncorporateaffai rs.Bydoingthis,italsoprovidest h e structurethroughwhichthecompanyobjectivesaresetand themeansofobtainingt h o s e objectivesa n d e x a m i n i n g t h e valueandt h e performa nceo f t h e firms.Therelativee f f e c t i v e n e s s o f c o r p o r a t e g o v e r n a n c e h a s a p r o f o u n d e f f e c t o n h o w w e l l a businessperforms.
Performance,whichshowsiftheresourcesofthefirmareusedefficientlytofulfillthegoalsof thefirm,iscrucialinevaluatingtheoverallsuccessofthefirm.Forperformanceevaluatio nfirmsemployb o t h f i n a n c i a l a n d n o n f i n a n c i a l p e r f o r m a n c e c r i t e r i a Financialperformancemeasuresarethestartingpointformostorganizations’perform ancemeasuressystems;suchasROA(ReturnonAssets)andROE(ReturnonE q u i t y ) arefi nancialperformancemeasuresthataremostfrequentlyusedatacademicr e s e a r c h
Statementofproblem
Corporate governance has been interpreted in various ways by different individuals, yet it has emerged as a globally significant issue Enhancing corporate governance practices is widely acknowledged as crucial for bolstering the long-term economic performance of both countries and corporations This concept encompasses the ownership, management, and control of corporations, firms, and organizations, and has sparked considerable debate in recent years To comprehend the recent surge in interest surrounding corporate governance, it is essential to examine the specific context that has shaped these discussions.
Overt h e lastt w o d e c a d e s , V i e t n a m hasemergeda s oneo f Asia’sf a s t e s t g r o w i n g economiesa n d mostattractivel o c a t i o n s f o r foreigni n v e s t m e n t However,c o n c e r n s a t t r i b u t e d t oc or po ra teg ov er na nce haveevolveda lo ng withVie tn am
’s growth.C o r p o r a t e governanceisstillanewconceptinVietnam,andthecorporategove rnanceframeworkisintheearlystageofdevelopmentprocess.AccordingtotherecentIF C-
M P D F surveyinVietnam,only23%ofthecompaniessurveyedunderstandthebasicc o n c e p t ofcorporategovernance,andthereremainstheconfusionbetween“governance
”and“management”betweencompanydirectors.Thus,theimportanceofc o r p o r a t e gov ernancehasstillnotbeenfocusedonimprovementoffirmperformance.
Researchobjective
Thisstudyfocusesontherelationshipbetweencorporategovernanceandperformanceinor ganizationsofVietNam.Inthispaperperformanceofthefirmwillbeanalyzedthroug hc o r p o r a t e governance.B e c a u s e i t i s s a i d byd i f f e r e n t r e s e a r c h e r s t h a t
10 performanceofthefirmsisaffectedbypracticinggoodcorporategovernancepolicies.Aswe allarewellawareofitthatcorporategovernanceisatitsinitialstageinVietNam,sop roperapplicationandpracticeofcorporategovernanceisnotpresentatthismomentinVi etNam.So,theaimbehindthiseffortisawarethepeopleofVietNamabout thebenefits ofgoodcorporategovernanceso that
Scopeofthisresearch
Researchmethod
Thisresearchmethodbasedonmarketdatafromwebsite:www.cophieu68.com.vn and some thingliket h a t T h e SPSSs o f t w a r e packagew a s u s e d t o a n a l y z e t h e e f f e c t o f c o r p o r a t e governanceonfirmperformanceofthetop199listedcompanies.
Researchstructure
Chapter1:Introduction.Researchintroducingwillgivetheoverviewinformationo ft h e research.
Chapter2:Literaturereviewandhypotheses:Literaturereviewwillreviewthet h e o r e t i c a l ofcorporategovernance,theimportantroleofindependentdirector,CEOd u a l i t y a n d b o a r d s i z e a n d reviewt h e t h e o r e t i c a l r e l a t i o n s h i p b e t w e e n them.F urthermore,thischapterwillshowinformationaboutthemodelandhypothesiswillbe te stedinthisresearch.
Chapter3:Researchmethodology:T h i s chapterpresentresearchdesign,measurements c a l e , targetpopulation,sample,datacollectionandmethodanalysis.
Chapter4:Results:T h i s chaptershowresultofdataanalysisprocess,datasummaryt oprovidethei n f o r m a t i o n o f t h e s a m p l e , themultipler e g r e s s i o n andc o r r e l a t i o n a n a l y s i s w e r e u s e d t o t es t t h e r e l a t i o n s h i p o f c o r p o r a t e governancea n d firmperformance.Independentsamplet e s t a n d Anovat e c h n i q u e w e r e u s e d t o t e s t f o r significantdifferenceofgroupsinthesameindependentvariable.
Chapter5:ConclusionandRecommendations.Basedonresultsofresearch,thisch apter willexplainhowcorporategovernancehaveasignificantpositiveornegativee f f e c t on firmperformance andalsolimitationsofthisresearchandimplyhowtoapplyth is researchcorrectlyalsohowtodev elopthisresearchfurther.
Introduction
Thisc h a p t e r reviewst h e t h e o r e t i c a l o f c o r p o r a t e governance,t h e importantr o l e o f i n d e p e n d e n t d i r e c t o r , C E O d u a l i t y a n d b o a r d s i z e a n d reviewthet h e o r e t i c a l rel ati o n sh i p betweenthem.Furthermore,thischapterwillshowinformationab outthemodelandhypothesiswillbetestedinthisresearch.
LiteratureReview
CorporateGovernance
Int h e p a s t , t h e r e a r e manyd e e p s t u d i es o n thesu b j e c t, i t i s importantt o d e f i n e t h e co n cep t ofcorporategovernance.Thevastamountofliteratureavailableonthe subjecte n s u r e s thatthereexistinnumerabledefinitionsofcorporategovernance.Tog etafairviewonthesubjectitwouldbeprudenttogivedefinitionofcorporategovernance.
Corporate governance encompasses the relationships among a company's management, board of directors, shareholders, auditors, and other stakeholders These relationships, governed by various rules and incentives, establish the framework for setting company objectives and determining the means to achieve and monitor performance Key aspects of effective corporate governance include transparency in corporate structures and operations, accountability of managers and boards to shareholders, and corporate responsibility towards stakeholders While corporate governance is essential for fostering long-term trust between companies and external capital providers, its significance extends beyond merely improving access to finance.
Ingeneral,corporategovernanceisconsidered ashavingsignificantimplications f ort h e growthp r o s p e c t s o f a n economy,b e c a u s e b e s t p r a c t i c e c o r p o r a t e governancer e d u c e s risksforinvestors,attractsinvest mentcapitalandimprovestheperformanceofcompanies(Spanos2 00 5) T he effectivecorp orate governanceis consideredase n s u r i n g c o r p o r a t e a c c o u n t a b i l i t y , e n h a n c i n g t h e r e l i a b i l i t y a n d qualityo f f i n a n c i a l information,and t h e r e f o r e e nhancing theintegritya n d efficiencyof c a p i t a l markets,w h i c h inturnwillimprov einvestorconfidence(Rezaee2009).
Atthepolicylevel,thereisastrongeffortindesigningcorporategovernancepoliciest h a t e n h a n c e monitoringthemanagementa n d t r a n s p a r e n c y T h e p o l i c i e s gives h a r e h o l d e r s somemechanismstocontroltheBoardofDirectors.TheycanvotefortheB o a r d ofDirectors,BoardofSupervisors,andmajorstrategicdecisionsofthecompanies.Ho wever,w h e t h e r t h e a r r a n g e m e n t s w o r k i n p r a c t i c e i s interestingtoinve stigate.
GoodCorporateGovernanceisofparamountimportance inallorganizationsregardlesso f theirindustry, size orlevelofgrowth.The maincorpor ategovernancethemesthata r e currentlyreceivingattentionareadequatelyseparatingm anagementfromtheboardt o ensurethattheboardisdirectingandsupervisingmanageme nt,includingseparatingt h e chairpersonandchiefexecutiveroles;ensuringthatthebo ardhasaneffectivemixo f independentandnon-independentdirectors.
GoodC o r p o r a t e governanceaimsa t i n c r e a s i n g p r o f i t a b i l i t y a n d e f f i c i e n c y oforganizationsa n d t h e i r e n h a n c e d a b i l i t y toc r e a t e w e a l t h f o r s h a r e h o l d e r s , i n c r e a s e d employmentopportunitieswith better termsforworkersandbe nefitstostakeholders IndicatorsofGoodC o r p o r a t e governanceidentifiedin the study includeindependent d i r e c t o r s , i n d e p e n d e n c e o f committees,b o a r d s i z e , s p l i t chairman/
CEOr o l e s a n d theb o a r d meetings.Thus,themaintasksofcorporategovernancereferto :assuringc o r p o r a t e e f f i c i e n c y a n d mitigatingarisingc o n f l i c t s p r o v i d i n g f o r t r a n s p a r e n c y a n d legitimacyo f c o r p o r a t e activity,loweringriskfori n v e s t m e n t s a n d p r o v i d i n g highr e t u r n s forinvestorsanddeliveringframeworkformana gerialaccountability.
Corporategovernanceisofmuchinterestforbothprofessionalsandacademics,p a r t i c u l a r l y followingacollapseofmanylargecompaniesintheU.S.andU.KsuchasWorld com,Enrol, InAsia,itiswidelybelievedthatweakcorporategovernanceisoneo f themainreas onsforeconomiccrisisin1997.InVietnam,corporategovernanceisn o w becominghot topic in the topgovernmentofficial discussion,particularly since thegovernmentcommitstoacceleratethestatesectorreform.
Corporategovernancei s s t i l l a l i e n t o V i e t n a m AccordingtoFreemana n d N g u y e n ( 2 0 0 4 ) , theconceptofcorporategovernanceisnotyetestablishedinVietnam.Infact ,t h e Vietnameseequivalenttermof“Corporategovernance”whichisbroadlysimilarto“Ad ministration”isconfusingandhasyettotakeholdasapopularterm.InVietnam,c o r p o r a t e governanceprincipleshavebeenincorporatedintocorporatelawsystems.TheV i e t n a m e s e governmenti s s u e s a numbero f l a w s a n d r e g u l a t i o n s p e r t a i n i n g t o l i s t e d c ompanies.Currentregulationsconcerningcorporategovernanceforlistedcompa niesa n d listedcompaniescanbefoundintheCorporateLaw(1999),Degree64CP(2002 )o f t h e governmento n e q u i t i z a t i o n oft h e S O E s , a n d D e g r e e 1 4 4 C P ( 2 0 0
- Mayi s s u e s e c u r i t i e s f o r f u n d raisinga n d gol i s t e d i f s a t i s f y i n g listingre quirements
+BoardofManagement/BoardofDirectors +GeneralDirector/Director(CEO)
+InspectionCommitteeiftherearemorethan10individ uals h a r e h o l d e r s o r a c o r p o r a t e s h a r e h o l d e r h o l d s moret h a n 5 0 % s h a r e s I t s membersarefrom3to5.
Asitcanbeseeninthefollowingregulations,corporategovernancemodelinVietnami s bro adlysimilartoGermancorporategovernancemodelinthatithastwotierboards:B o a r d ofDi rectorsandSupervisoryBoardandBoard.Theseregulationscanbebrieflyd e s c r i b e d asf ollows:
- Shareholders’meetingvotesfor(oragainst)memberoftheBoardofDirectorsa n d BoardofSupervisors(incasethecompanyhasmorethan10shareholders).Theb o a r d ofdirectorsshouldnothavemorethan11members.Thereisnoregulationonh o w ma nymanagersoroutsideshareholdersshouldbeonBoard.
- TheB o a r d o f D i r e c t o r s a p p o i n t e d t h e CEOa n d o t h e r importantmanageme ntp o s i t i o n s ofthecompanies.TheCEOcanbeamemberofBoardofGovernors.
- Ift h e companyh a s moret h a n 1 0 s h a r e h o l d e r s , i t musthaveB o a r d o f Supervis ors.TheBoardofSupervisorsshouldhavefrom3to5members,ofwhichatl e a s t o n e memberhasabackgroundinaccounting.Membersof theBoard ofDirectors,C E O s , chiefaccountant,andtheirrelatedpeoplecannotbemembersoftheBoardof
Supervisors.TheBoardofSupervisorsisnotre qu ir ed tohaveoutsidemembers(notc u r r e n t l y employeesofthecompany).
Thecorporategovernanceframeworkshouldensurethestrategicguidanceofthecompany,t heeffectivemonitoringofmanagementbytheboard,andtheboard’sa c c o u n t a b i l i t y t ot h e companya n d t h e s h a r e h o l d e r s F o r a j o i n s t o c k c o m p a n y , t h e corpo ratemanagementincludedtheBoardofManagementtheGeneralDirector/
Director(CEO), and the InspectionCommittee withcertain internal controlf u n c t i o n T h e BoardandtheInspectionCommitteearesubordinatedtothegeneralshareholde rs’meetingandtheCEOisaccountabletotheBoard.TheBoardconsistsofnolessthan3(5 f o rl is te d c o m p a n ie s , o f w hic h 1 / 3 m u s t ben o n - ex e c u t i v e members)and n o moret h a n 11members.Boardmembersareelectedbyshare holdersatgeneralshareholders’meetingforatermoflessthan5years.
InVietnam,the Boardhas a moredirectrolei n theactivitiesof thecompany,rathert h a n thesupervisoryroleinothercountries,andisthereforemuchmoreinfluentialinr espectoft he day -t o- day operations o ft he company.T h e B oar d appoints one pe rso n amongi t s members o r a n o u t s i de r t o a c t a s G e n e r a l D i r e c t o r /
D i r ec t o r w h i c h ist h e legalrepresentativeofthecompany(orthis postmaybeheldby theChairmano f theB o ar d ifthecharterprovidesotherwise).
UndertheEnterpriseLaw2005,directorsofacompanyhavethedutiesofcare,loyaltyand dil igencetothecompanyandshareholders.Inreality,theBoardsareoftendominatedbythem ajorityshareholders,whicharerepresentedbytheChairmanoftheB o a r d o r t h e C E
O Andi n general,theInspectionCommitteei s weak.However,c o n c e p t ofnon- executiveandindependentdirectorsisnew.
CEODuality
Therearetwotypesofleadershipstructure,thatis,combinedleadershipstructurea ndseparated s t r u c t u r e Ito c c u r s i f t h e r o l e s o f chairmana n d C E O a r e combi ned.T h e chairmanoftheboardisresponsibleformanagingtheboard,whichmayinclude taskss u c h a s s e l e c t i n g n e w b o a r d members,m o n i t o r i n g t h e p e r f o r m a n c e o f t h e e x e c u t i v e d i r e c t o r s andsettlinganyconflictswhichariseswithintheboard.T he CEOisresponsibleforthedaytodaymanagementofthecompany,includingtheimple mentationo f b o a r d d e c i s i o n s Thecompaniest h a t p r a c t i c e s C E O d u a l i t y , mayh aveanindividualwhopossessestoomuchpowerandmightmakedecisionsthatdonotmaximizes hareholderswealth.
TherelationshipbetweenCEOdualityandfirmperformanceisconsideredneutral / insignificantinc e r t a i n studieswherebythere is nolinkbetweenCEOduality a n d fi rmperformance (BergandSmith1978).Nosignificantrelationshipwasshownina d i f f e r e n t s t u d y d o n e u s i n g Malaysian publiclisted companies assample(AllenChang2 0 0 4 ) Althoughtheliteratureisnotunanimousinitsconclusions,thew eightofopinioni s t h a t t h e r e i s a s i g n i f i c a n t r e l a t i o n s h i p b e t w e e n C E O d u a l i t y t o w a r d s firmperformance.
Eventhought h e impacto f t h e C E O d u a l i t y o n firmp e r f o r m a n c e h a s b e e n w i d e l y r e s e a r c h e d , duetotheconflictingnatureoftheoreticalunderpinningsthatenco mpassest h i s c o n c e p t withw i d e varietyo f perspectives,d e t e r m i n i n g d u a l i t y - n o n d u a l i t y c o n s e q u e n c e s solelybasedonfirmperformancehasbecomecontrov ersial(Boyd,1995;Finkelstein&D'Aveni,1994).Forinstance,inonehand,agencytheor y,whichadvocatest h a t s e p a r a t i o n o f t h e C E O -
C h a i r m a n p o s i t i o n s w o u l d maximizec o r p o r a t e performancesincetheboardhasa nunbiasedauthoritytooverseetheCEO’sfunctions( G i l l a n , 2006;Harris&Helfat
,1998;Shleifer&Vishny,1997),dominatesthecorporategovernancei m p l i c a t i o n s i n t h i s c o n t e x t C o n t r a r y t o w h a t agencyt h e o r y proposes,o n t h e o t h e r h a n d , r e f e r r i n g t o a b r o a d l e a d e r s h i p , behavioral,a n d psychologicals t a n d p o i n t s , s t e w a r d s h i p t h e o r y o u t l i n e s t h a t h o l d i n g both positionsbyon epersonwoulden ha nce firmperformancewiththatholdingtwoposi tionsbyo ne p erson c a n monitort h e firmu n a m b i g u o u s l y a n d c a n havea u n i q u e c o m m a n d throughoutthefirm(Adams,Almeida,&Ferreira,2005).Althoughthenotiont hattheC E O dualityhassignificantcorporateperformanceisextensive,yetthepriorempir icalevidenceo n t h e i s s u e i s i n c o n s i s t e n c e i n e i t h e r t h e o r e t i c a l a p p l i c a t i o n
Boyd (1995) reviewed seven key studies on the relationship between CEO duality and firm performance, finding that only two indicated a negative impact, while five showed either a positive or no significant effect He concluded that CEO duality has a weak negative relationship with firm performance Similarly, Harris and Helfat (1998) examined previous governance studies and noted that out of thirteen research papers, only three reported negative effects of duality on performance, while ten found either positive or no effects This prior literature supports the notion that CEO duality does not significantly influence firm performance.
(Benz&Frey,2007).Consequently,eventoday,determinationofthen o t i o n s thattheCEO duality- nondualitybasedoncorporateperformancehasbeenanunresolvedphenomenonincorporate governanceresearches.
IndependentDirectors
Boardindependenceisoneofthekeyissuesincorporategovernance(CG).However,t h e r e arediverseopinionsabouttheimportanceofboardindependence Somesuggest incentivealignmentsdominate
CG(Demsetz,1983;Hart,1983)andothersargueboardm o n i t o r i n g andadvisoryroleare essential(Fama,1980;Fama&Jensen,1983).Nevertheless,mostofthecorporategoverna ncecodesaroundtheworldpromoteboard independence.O n e importanta s p e c t o f b o a r d i n d e p e n d e n c e i s thenumberofi n d e p e n d e n t directorsontheboardofdirectors.
Theroleof independentdirectors ontheboardofdirectors istoeffectivelymonitorandcontrolfirmactivitiesinreducingopportunisticmanagerialbehav iorsandexpropriationo f firmresources(FamaandJensen1983).However,independent directorsfacedifficultiesindischargingtheirdutiesastheyarenotdirectlyaffiliatedwit hthemanagement(Weisbach1988).
Independent directors are highly valued for their ability to provide advice, strengthen business and personal relationships, and signal a company's success, rather than solely for their monitoring capabilities (Mace 1986, Herman 1981) A study of directors in Singapore revealed that most respondents believe the optimal proportion of independent directors on a board should be between 25% and 50% Additionally, independent directors were more convinced than executive directors that strong corporate governance significantly enhances board effectiveness (Goodwin and Seow 2000) Consequently, the proportion of independent directors is identified as a key independent variable in this study.
Theb o a r d o f d i r e c t o r s p l a y s a n importantrolei n t h e o p e r a t i o n o f a com pany.Itoverseest o p managementa n d i s e n t r u s t e d witht h e r e s p o n s i b i l i t y o f monit oringands u p e r v i s i n g thecompany’sresourcesandoperation.Therefore,theboardiscoll ectivelys e e n asateamofindividualswithfiduciaryresponsibilitiesofleading andd irectingafirm,witht h e primary objectiveo f protecting thefirm’ss h a re h o l d e r s ’ i n t e r e s t s (Abdullah2004).Therearethreecriticalboardrolessuchasserviceroles,controlrol esandstrategicroles(ZahraandParce1989).
A company's board of directors plays a crucial role in influencing the funding a public offering receives, making the selection of board members a vital consideration for those aiming to go public The board serves important functions for companies that are public or planning to go public, as the choice of board members can signal to investors the quality and expertise behind the company A board composed of highly regarded experts is likely to be viewed more favorably than one made up primarily of insiders Knowledgeable outside experts bring valuable connections, expertise, and an unbiased perspective that insiders may lack.
The board of directors acts as a crucial ally for stockholders, especially when the CEO lacks a controlling share in the company In addition to offering guidance, the board has the authority to overrule or even remove the CEO if necessary Stockholders tend to be cautious of companies with too many insiders on the board, as all major corporate decisions pass through it To maintain shareholder value and ensure the board is viewed as objective, it is vital to include outside members and align their incentives with those of the shareholders Compensating board members with company stock is an effective strategy, as it motivates them to drive the company's success, ultimately benefiting both the board and the shareholders.
Boardsize
Thetwomostimportantfunctionsoftheboardofdirectorsarethoseofadvertisingandm o n i t o r i n g (AdamsandFerriera,2007).Theadvisoryfunctioninvolvestheprovisionofe x p e r t ad vicet o t h e C E O a n d a c c e s s t o c r i t i c a l informationa n d r e s o u r c e s (Fama& J e n s e n , 1 9 8 3 ) T h i s i s p e r f o r m e d b y bothi n s i d e r s a n d o u t s i d e r s However,Fama&
J e n s e n n o t e t h e importanceo f o u t s i d e d i r e c t o r s , w h o b r i n g valuablee x p e r t i s e andp o t e n t i a l l y i m p o r t a n t c o n n e c t i o n s T h e advantageo f largerb o a r d sizei s thegreatercollectivei n f o r m a t i o n t h a t the b o a r d subsequentlypossesses a n d h e n c e larger boards w i l l l e a d t o higherperformance( D a l t o n D a l t o n , D R ,
D a i l y , C M , E l l s t r a n d , AE& Johnson,J1998).Secondly,theboardhastherespo nsibilitytomonitor,discipline,andremoveineffectivemanagementteams,toensurethat managerspursuetheinterestsofs h a r e h o l d e r s R a h e j a ( 2 0 0 5 ) arguest h a t i n s i d e r s a r e a n importants o u r c e o f firm– s p e c i f i c informationf o r t h e b o a r d , b u t mayhaved i s t o r t e d objectivesd u e t o priva teb e n e f i t s andlackofindependencefromtheCEO.Comparedtoinsiders,outside rsaremoreindependent,providingbettermonitoring,butarelessinformedaboutthefirm
’sactivities.Furthermore,t h e advantageo f largerb o a r d sizei s t h e greaterc o l l e c t i v e information.T h e r e f o r e , b o a r d s i z e i n c r e a s e s , andi n c r e a s e s i n t h e numbero f non- executivesareexpectedtohaveamorepositiveimpactthanincreasesinthenumberofexecutiv edirectors.
Large boards can lead to disadvantages such as coordination costs and free-rider problems The difficulty in arranging meetings and reaching consensus results in lower and less efficient decision-making (Jensen, 1993) Additionally, board cohesiveness suffers as members are less likely to share a common purpose, communicate effectively, and build consensus from diverse viewpoints (Lipton and Lorsch, 1992) Furthermore, as board size increases, individual directors may feel less compelled to exercise diligence, contributing to free-riding (Lipton and Lorsch, 1992) Ultimately, Lipton and Lorsch (1992) argue that beyond a certain point, the inefficiencies of larger boards outweigh the benefits of having more directors, leading to decreased corporate performance They suggest that an optimal board size is around eight or nine directors, while Jensen (1993) advocates for a size of seven to eight directors.
Evidencefromotherc o u n t r i e s i s b r o a d l y c o n s i s t e n t b u t l e s s r o b u s t E i s e n b e r g , SundgrenandWells(1998)concludedthenegativerelationshipbetweenfirmboardsizea n d perf ormancemeasuredbyreturnonassets(ROA)forasampleof879smallprivatefirmsi n F i n l a n d Ino t h e r s t u d i e s b e s i d e thisr e s u l t thatf i n d a p o s i t i v e r e l a t i o n s h i p b e t w e e n b o a r d s i z e a n d firmp e r f o r m a n c e T a n n a , P a s i o u r a s a n d N n a d i ( 2
0 0 8 ) u nd ersco re th e posit iv e r el atio n b et ween boardsize andperformanceforEnglishbanks.Belkhir(2008) findsthat increasing boardsizes do not underminethefirmperformancea n d thereisapositiverelationshipbetweenboardsizeandfirmp erformance.
Financialperformance
Traditionallymostofthemanagerialperformancemeasureshavebeenbasedonf i n a n c i a l measuresofperformance(Eccles,1991;Nannietal.,1990).Althoughm e a s u r i n g financialperformanceisconsideredasimplertask,thereislittleconsensusa b o u t w h i c h measurementinstrumentt o a p p l y D i f f e r e n t a c c o u n t i n g r a t i o s a r e o f t e n u s e d tomeasurefinancialperformance.Thesemeasuresincludereturnonassets
(ROA)a n d returnonequity(ROE).Empiricalresearchesuseeithermarket- basedmeasuresoracco un ti ng - based measurest o a s s e s s firmp e r f o r m a n c e K l e i n ( 1 9 9 8 ) usesr e t u r n o n a ss e t s (ROA)andreturnonequity(ROE)asanoperatingperformanceindicator.BrownandCaylor(2005)useROEandROAastheirtwooperatingperformancemeasures.
Wec a n measuret h e o p e r a t i n g p e r f o r m a n c e o f a f i r m t h r o u g h t h e ROAr a t i o w hichs h o w s theamountofearningshavegeneratedfromaninvestedcapitalassets(Epps
&C e r e o l a 2008).Managersaredirectlyresponsiblefortheoperationsofthebusinessandt hereforetheutilization ofthefirms’assets.Thus,ROAallowsusers toassesshowwella firmmechanismisinsecuringand motivatingefficientmanagementofthefirm.Inthep r e s e n t s t u d y , ROAi s d e f i n e d a s n e t i n c o m e b e f o r e i n t e r e s t e x p e n s e f o r thef i s c a l p e r i od dividedb y t o t a l a s s e t s f o r t h a t samep e r i o d O n e o f t h e primaryreasonsforo p e r a t i n g a c o r p o r a t i o n i s t o generateincomef o r theb e n e f i t o f thec o m m o n stockholders( E p p s & Ce r e o l a 2 0 0 8 ) R O E i s a measuret h a t s h o w s a n investorhowmuchprofitacompanygeneratesfr omthemoneyinvestedfromits shareholders.Inthiss t u d y , R O E i s d e f i n e d a s t h e i n c o m e b e f o r e i n t e r e s t e x p e n s e f o r t h e f i s c a l p e r i o d dividedbytotalshareholderequityforthatsameperio d.
Despite the widely accepted belief that effective corporate governance improves firm performance, some studies indicate a negative relationship or fail to find any correlation Various explanations have been proposed for these inconsistencies, including the limitations of publicly available or survey data, which often restrict the scope of analysis Additionally, the nature of performance measures—such as the reliance on accounting-based metrics like return on assets (ROA) and return on equity (ROE), or market-based measures like market value of equities—may also contribute to these conflicting results.
Hypothesesdevelopment
Theframeworkrepresentsamodelwhichconcernsascertaining therelativeimportanceo f t h e knowna n t e c e d e n t s o f f i r m ’ s p e r f o r m a n c e M a n y r e s e a r c h e r s f o u n d t h a t C E O d u a l i t y , t h e p r o p o r t i o n o f i n d e p e n d e n t d i r e c t o r , t h e b o a r d s i z e givesi n d i r e c t i m p a c t t o w a r d s the firm’sperformance.For th e purposeof th is s t u d y firms‟performancei s measuredthroughvaluationofReturn ofEquity(ROE) andReturnofAssets(ROA),w h e r e profitbeforeinterestandtax willbeusedasdenominatorbecauseitshowstherealperformanceofafirmasthedependent variable.
CEOduality:issetasthebinaryvariable,thenumberofindependentdirectorsandtheboar ds i z e , a r e t h e i n d e p e n d e n t variablesi n measuringt h e r e l a t i o n s t o firm’sperform ancewhichisthedependentvariable.Pastresearchersapplieddifferentmethodsi n measuringfir mperformancesuchasstockprice,dividendpayable,returnonassets,r e t u r n onequit y,gearingratioandsoon.Inthisstudy,returnonassetsandreturnonequityareusedasi ndicatorsforfirmperformance.
CEO duality occurs when the roles of chairman and CEO are held by the same individual, leading to potential power concentration that may not prioritize shareholder wealth The chairman manages the board, including tasks such as selecting new members and monitoring executive performance, while the CEO oversees daily operations and implements board decisions This duality raises concerns about corporate governance, as it can align the board's interests more closely with management rather than shareholders, despite the presence of independent directors The implications of CEO duality on organizational performance have garnered significant interest in recent years (Greenspan, 2003).
Jensen (1983) argues that the concentration of decision management and control in one individual can hinder a board's effectiveness in monitoring top management This creates a conflict of interest and increases agency costs, particularly when a CEO also serves as board chair, as noted by Berg and Smith (1978) and Brickley et al (1997) Consequently, it is suggested that these two roles should be held by separate individuals However, there is an opposing view that CEO duality allows the CEO to make decisions and implement projects without undue bureaucratic influence, which may lead to a positive relationship between CEO duality and organizational performance.
R e c h n e r a n d D a l t o n , 1 9 9 1 ) However,empiricale v i d e n c e i s notconclusive. Sandae t al.
Drawing fromtheliteratureontherelationshipbetweenafirm’sperformanceandCEOd u a l i t y , thef ollowinghypothesisismade:
Independentdirector:many previousresearchersrecommendedthatthereshouldbeatl e a s t t h r e e non- executived i r e c t o r s o n theb o a r d o f q u o t e d companies.B o a r d i n d e p e n d e n c e isassociatedwiththeentryofoutsidersintotheboardandtheyoutlinedthereasonsfor havinganoutsidepresenceontheboardas:
• Outsideboardmembersensurethatboards alwayshavetheirsightsontheinterestsoft h e companies.Theyarewellplacedtoresolveconfl icts.
Research indicates that an increase in the proportion of outside directors on a board can enhance firm performance by improving the monitoring of management (John and Senbet, 1998) A board is considered more independent with a higher number of non-executive directors However, empirical results regarding the relationship between non-executive director proportions and firm performance have been inconclusive Some argue that inside directors possess greater familiarity with a firm's operations, enabling them to monitor top management more effectively Additionally, studies have found no significant correlation between the ratio of non-executive directors and firm performance (Hermalina and Weisbach, 1991; Bhagat and Black, 2002) The effectiveness of a board is believed to depend on an optimal mix of inside and outside directors (Fama and Jensen, 1983), yet there is limited theory on the determinants of optimal board composition (Weisbach, 2002) This study measures board independence by calculating the ratio of non-executive directors to board size, anticipating a positive relationship with firm performance.
Drawingfromt h i s treadi n thel i t e r a t u r e ont h e r e l a t i o n s h i p betweeni n d e p e n d e n t d ir ecto r s andfirmperformance,thefollowinghypothesisismade:
H2:Proportionof independentdirectorstoboard size hasasignificantpositivee f f e c t onfirmperformance.
Board size:boards of directorsmayhaveadifficultycommunicatingwith each otherinalargesizeboard,whichcausesgreatdetrimenttofirmperformance.Yermack(1996 ),E i s e n b e r g e t a l
Research indicates a negative relationship between board size and firm performance, as highlighted by studies from Eisenberg et al (1998) and Singhan and Davidson (2003) Conversely, Jensen (1993) points out that the size of corporate boards is a value-relevant attribute Lipton and Lorsch (1992) recommend an optimal board size of six to eight directors, suggesting that smaller boards are associated with higher market values As board size increases, the expected board activity rises to mitigate process losses, but larger boards tend to be less effective and easier for CEOs to control The coordination costs and processing challenges in larger boards complicate decision-making In contrast, smaller boards minimize the risk of free-riding, which can enhance firm performance Overall, the size of the board, measured by the number of members, is expected to negatively impact firm performance.
The reviewed theories emphasize the impact of corporate governance on firm performance, particularly through agency theory, which addresses the conflicts of interest between principals and agents while aiming to maximize shareholder returns Agency theory suggests that optimal leadership structures, independent directors, and board size are essential monitoring mechanisms to enhance firm value This study specifically examines how board structure influences firm performance in Vietnam, focusing on key variables such as CEO duality, the presence of independent directors, and board size CEO duality involves separating the roles of chairman and CEO, while board size pertains to the number of members, and independent directors refer to a majority of non-executive directors on the board Firm performance is evaluated based on profitability and overall value, with the goal of understanding the effects of corporate governance mechanisms on these performance measures, which are commonly used for listed companies.
Firm performance Corporate Independent director
Board Size namely,R O E a n d R O A , w h i c h a r e a l s o c o n s i d e r e d a s p r o x i e s f o r a c c o u n t i n g r eturn.Therefore,thevariablesthatrepresentfirmperformanceareROAandROE.
This study examines the impact of corporate governance practices on firm performance in Vietnam, focusing on key variables such as CEO duality, independent directors, and board size Agency theory highlights the conflicting interests between principals and agents, emphasizing the importance of maximizing firm value CEO duality occurs when an individual serves as both the chairman and CEO, while independent directors refer to a majority of non-executive members on the board The size of the board is also considered crucial Firm performance is assessed through profitability metrics, specifically Return on Equity (ROE) and Return on Assets (ROA), which are standard measures for listed companies.
Introduction
Thischapterpresentsthemethodsandproceduresusedinthisstudytotesttheresearchmodel discussedin thepreviouschapter.For thepurposeofstudy,this chapterhasbeendividedi n t o s e v e n s e c t i o n s : R e s e a r c h design,measurements c a l e , t a r g e t p o p u l a t i o n , sample,d a t a c o l l e c t i o n , d a t a screening,a n d methodso f d a t a a n a l y s i s E a c h s e c t i o n e x p l a i n s thedetailsandlogicoftheresearchdecision smadeinthisstudy.
Researchdesign
According to Bryman (2004), a research design serves as a framework for data collection and analysis This study employs a quantitative approach, focusing on the analysis of causal relationships between independent and dependent variables, as discussed in previous chapters Specifically, the research aims to examine how corporate governance influences performance, with financial performance measured through Return on Assets (ROA) and Return on Equity (ROE) as the dependent variables.
Allthevariablesutilizedweresubjectedtobeingobjectivelymeasuredandhadbeens u c c e s s f u l l y measuredi n previouse m p i r i c a l r e s e a r c h T h e r e f o r e , a quantitativ ea p p r o a c h w a s c o n s i d e r e d b e s t ( C r e s w e l l , 2 0 0 3 ; H u s s e y & H u s s e y , 1 9 9 7 ) A quantitativeapproachisalsothemainorientationintheresearchofworkcom mitment( C o h e n , 2007b).
One research approachused in thisresearch isa quasi-experimental approach basedonmarketdata.Therelationshipsbetweengovernancevariablesandfirmperformanc eoft h e top199listedcompanieswereanalyzedusingtheSPSSsoftwarepackage.De scriptivestatisticswereusedtocalculatetheFrequenciesinordertosummarizethe
30 rangeo f i n d e p e n d e n t variables.T o c o m p a r e t h e complianceb y t h e companieswith c o r p o r a t e governancebestpracticerecommendations,T- testswereconductedtodeterminet h e significanceo f t h e d i f f e r e n c e s b e t w e e n t h e d i f f e r e n t groupsofi n d e p e n d e n t variableseffecttodependentvariable.Correlation analysiswasconductedt o f i n d o u t i f t h e r e i s a n a s s o c i a t i o n b e t w e e n governancev ariablesa n d firmperformance.Finally,analysisofvariancewas conductedtofindif therearesignificanti n t e r a c t i o n s betweencorporategovernancepracticesandfirmperforman ce.
Thiss t u d y employst w o importantf i n a n c i a l ratios( R O E a n d ROA)i s u s e d a s a measuretoestimatethefirmperformance:
Accordingthe hypothesesproposedabove,thisstudy constructsaregressionmodelforcarr yi ng outempiricalanalysis.Themodelhasusedtoex plorethesignificanceofther e l a t i o n s h i p betweencorporategovernanceandfirmperfo rmance.DependentandIndependentvariablesare incorporatedin the below mentione dequationof common e f f e c t Model:
FPi=βoo+βo1Di+βo2IDi+βo3BSi+ewh e re
Measurementscale
DependentVariables:( 1 ) ROA–returnonassets, (2)ROE-returnonequity
Thisisabinaryvariablewhichhasavalueofonei f oneindividualhasthejointtitleofchair manandCEOorifoneindividualhastheexecutivepositionandthereisnoseparateCEO.Ifth epostsareseparate,itiszero.
(2) Proportiono f i n d e p e n d e n t d i r e c t o r s : T h i s measur estheproportionofnon-executive directors(isabbreviatedto“NED”)ontheboard.Wehaveconsideredthreegroupsofthisvaria ble:
Thismeasurew i l l i n c l u d e b i n a r y numbero f o n e i f theindependentdirectorsrep resentatleast 40percentsoftheboard.
From40to82(NED40-82)-Binarynumberoftwoiftheindependent directorsi s rangeofmorethan40percentsoftheboardto82percents.
(3) Boardsize:thismeasurethenumberofboardmembers(is ab breviatedto“M”).Wealsohavethreelevelsofthisvariable.
Targetpopulation
Thepopulationofinterestofthisstudywasthejointstockcompanieswhicharelistedonsto ckmarketatleasttwoyears(2010,2011).Targetpopulationcoveredindustrial,manufact uring,agricultureandservicessectors(extract:banks,realestatecompanies,s e c u r i t i e s companiesandfinancial companies) However,t h e y musthavethe annualf i n a n c i a l r e p o r t o f 2 0 1 1 a n d t h e i n f o r m a t i o n a b o u t t h e s t r u c t u r e o f t h e boardandmemberoftheexecutiveboardthatarepublishedontheVietNamstockmarket.Th esecompanieswerefirst screenedforfinancialdataavailabilityin2011.Listedcompaniest h a t didnothaveup-to- datepublishedfinancialdatawereexcludedfromthestudy.
Sample
The study analyzes a sample of 199 companies listed on the Vietnam Stock Exchange in 2011, out of a total of 712 firms The objective is to evaluate the impact of corporate governance on the financial performance of Vietnamese firms, focusing specifically on CEO duality, independent directors, and board size during this period Data for the analysis was sourced from the annual reports of the selected companies available in the stock market, as summarized in Table 1.
Datacollection
(2001)secon dary da ta i s e x i s t i n g datas e t t ha tp r e se n t s i n t e r p r e t a t i o n s, c o n c l u s i o n s or knowledgeadditionalto,ordifferent fromthatpresentedin theoriginal datasource.T h e mainsourceofsecondarydataisthroughdocumentary data.Thishas beenusedtoc o l l e c t datafortheempiricalanalysis.Thedatausedintheempiricalanalysi sistobemainlyderivedfromt h e a n n u a l r e p o r t a n d a c c o u n t s o f companiesq u o t e d o n thew e b s i t e Thisdataisknownassecondarydatasinceitisderivedfromexistingdat a.
Annual reports serve as a reliable source of data on corporate governance variables and performance metrics, primarily due to their public availability and independent audits of the financial statements Additionally, information gathered from the World Wide Web, including company announcements, offers a cost-effective method for collecting data on corporate governance aspects, such as meeting frequency These websites provide dependable information that can be utilized for analyzing both corporate governance and firm performance variables.
Analysis
Correlationanalysis
Correlationisatechniqueforinvestigatingtherelationshipbetweentwoquantitative,c o n t i n u o u s variables.Pearson'scorrelationcoefficient(r)is ameasureofthestrengt ho f t h e a s s o c i a t i o n b e t w e e n t h e t w o variables.T h e P e a r s o n c o r r e l a t i o n w a s u s e d to measurethedegreeofthelinearassociationbetweenindependentanddependentvariables.It wasusedtofindhowcloselyrelatedtwovariables.
Multipleregressions
Theprimepurposeofthisresearchwas toexaminewhethersignificantrelationships e x i s t betweentheindependentvariablesandthedependentvariables.Therefore,mul tipleregressionsw e r e primarilyemployedi n t h i s r e s e a r c h M u l t i p l e regressiona n a l y s i s i s a s t a t i s t i c a l t e c h n i q u e u s e d t o a n a l y z e t h e r e l a t i o n s h i p b e t w e e n a s i n g l e dependent variableandseveralindependentvariablesinordertous etheindependentvariablestopredictthesingledependentvariable.Themainprocedure susedtoc o n d u c t multipleregressionanalysisinthisstudyarepresentedinthefollowings ect i o n s
Therea r e t h r e e majora n a l y t i c strategiesi n multipler e g r e s s i o n s : s t a n d a r d m ultipleregression,s e q u e n t i a l ( h i e r a r c h i c a l ) r e g r e s s i o n , a n d s t a t i s t i c a l ( s t e p w i s e ) regression( T a b a c h n i c k & F i d e l l , 2 0 0 7 ) T h e mainp u r p o s e o f t h e p r e s e n t s t u d y w a s t o testr e l at i o n sh i p s a m o n g variables,t h e r e f o r e , s t a n d a r d multipleregressionstrategywasc h o s e n f o r c o n d u c t i n g m u l t i p l e r e g r e s s i o n s i n t h i s s t u d y Int h e s t a n d a r d multipleregression,a l l i n d e p e n d e n t v a r i a b l e s e n t e r intot h e r e g r e s s i o n e q u a t i o n a t o n c e , ande a c h o n e i s a s s e s s e d a s i f i t h a d e n t e r e d theregressiona f t e r a l l o t h e r i n d e p e n d e n t variableshadentered.
CollinearityisthecorrelationbetweentwoindependentvariablesandMulticollinearityi s the correlation amongthreeormoreindependentvariables.Collinearity andmulticoll inearitycanposeathreattothevalidityofmultipleregressionanalysis becausewithahighlevelofcollinearityandmulticollinearity,eachindependentvariablebec omesa d e p e n d e n t variableandi s regressedagainstt h e r e m a i n i n g i n d e p e n d e n t va riablesa n d i t i s d i f f i c u l t a n d ambiguoust o a s s e s s t h e importanceofe a c h ofindepen dentvariabletoregression.
VIFreferstotheuncertaintyofregressioncoefficients– theamountthatthevarianceo f e a c h regressionc o e f f i c i e n t i s i n c r e a s e d relativet o a s i t u a t i o n i n w h i c h a l l oft h e i n d ep e n d e n t variablesareuncorrelated AndVIFrare lyexceedstheconventionalcuto f f valueof10(Gujarati,1996).
R 2is themeasureofhowmuchofthevariabilityinthedependentvariableisaccountedf o r bythe independentvariables.ThesignificanceofR 2i s testedbasedonthep-valueo f theF- ratio.R 2i s significantifp- value