LITERATURE REVIEW
An overview of institutional investors
1.1.1 The impact of having institutional investors involved in a company’s ownership
Despite the increasing presence of institutional investors in the capital market, there is considerable controversy regarding their effect on firm performance Researchers in this area have presented various mutually exclusive viewpoints which can be synthetized into into 2 sides: the pros (benefits) and cons (the negative affects) of the institutional investors‟ involvement
Once having institutional investors as strategic shareholders, companies can get benefits both fundamentally and technically
- Increase companies‟ performance This is especially true to “dedicated” institutional investors
The above-mentioned word - “performance” - can be translated in two different referential points: 1) A company gets good earnings growth (internally) or 2) Better business results than its peers (externally)
Regarding internal earnings growth, if after a certain fiscal period, a company posts a growth rate in its earnings, such rate is easily considered as a benchmark for the company to maintain its growth in accordance with the values of investor capitalism
Regarding externally peer comparisons, that means company‟s performance can also be measured by benchmarking the organization to comparative companies If an organization‟s stock returns have previously outperformed the returns of their comparative peers, then there is a pressure to manage earnings to maintain the appearance of success
“Dedicated” institutions usually look for long-term gains from their investments
That is to say, institutions are able to seek out and invest in companies that are inherently more effective than their peers After purchasing stake in such companies, frequently large ownership, they are able to use the right of big shareholders to involve into the investee companies‟ corporate governance The large holdings of these investors provide them with an incentive to monitor investee companies‟ BoD and influence their actions, if necessary Thus, institutional investors are able to help companies to increase performance, rather than simply invest and stand aside waiting Another reason is that “dedicated” institutional investors cannot easily divest their holdings in the short run Therefore, they are interested in the companies which are potentially beneficial in the long run
Institutions may be motivated to use their “voice” to influence managerial decisions, closely involved in monitoring companies‟ managers and the strategic management with the motivation of increasing firm value, ensuring that managers targeting to maximize long-run value rather than to meet short-term earnings goals in order to make their future exit from an equity easier
Once an institutional investor establishes a large position, its next motive is typically to find ways to drive up its value This is especially true to “transient” institutional investors As they trade frequently with a view to maximizing short term gains (as mentioned above), they use their advantage of possessing superior information to other market participants, actively seek out situations in which they can exploit this informational advantage Their presence, particularly under conditions where company-level information quality is poor, is associated with both higher returns and higher subsequent company values
Institutional investors differ quite dramatically in their preferences for this characteristic, primarily because of differences in both their investment horizons and ability to collect company specific information Transient institutional investors, given their short term and high turnover appetite, are attracted to companies that perform well (in both an accounting and financial sense) but have a high level of informational uncertainty Meanwhile, institutional investors with a longer term focus (quasi-indexer and dedicated) are attracted to companies with features that facilitate oversight of managerial behavior However, the transient class of institutional investor seems to be consistently associated with higher company values
According to Berle and Means (1933) 3 , as a company‟s ownership structure becomes more diffuse, shareholders‟ ability to control management diminishes The resulting shift in power allows managers to act in their own self interest, potentially destroying shareholder value in the process This reminds of the classic principal- agent problem
- Positive effect on the stock prices
Stock prices are partially impacted by their liquidity on market trading Liquidity is understood as the ease with which an asset can be converted into cash “If a stock is not regularly traded (in the limit not traded), uncertainty about its underlying value
3 Berle, Adolf A and Means, Gardiner, C (1933), The Modern Corporation and Private Property, New York, Macmillan increases” 4 A typical characteristic of stock market is that, as investors assemble information and act upon it, the information becomes reflected into the stock price
Hence the less trading, the less opportunity for information to be timely incorporated into the price, and the more uncertainty about the stock‟s underlying value Furthermore, as liquidity decreases, fewer investors are interested in the stock, so that overall information collection tends to decline Since it is more difficult to find interested buyers, an illiquid stock is more costly to turn into cash
As a consequence, the seller of an illiquid stock will have to accept a discount on the selling price Consequently, as uncertainty about the underlying value increases, less investors are interested to buy it and as trading becomes more costly, the share price decreases
Therefore, institutional investors are considered to have a positive effect on the stock prices of the companies in which they invest This effect materializes through different mechanisms: institutional investors reduce information asymmetries between the firm and (other) investors, contribute to the liquidity of the company‟s stock and improve the firm‟scorporate governance
If firms fully understand the positive influences of institutional investors and if benefits are larger than costs, they may do efforts to involve these professional investors in their ownership
Institutional investors have advantages over individual investors in terms of their high level of information and their better technology in analysing financially relevant information They are investment specialists and are be expected to benefit from gains of divestment based on scale effects
4 Merton, R., 1987, A Simple Model of Capital Market Equilibrium with Incomplete Information, Journal of Finance 42, 483-510
To the extent that institutional investment decisions are influenced by private information, changes in the institutions’ holdings will convey information 5 Hence, once stock markets capture a “buy signal” from institutional investors, the other investors may feel more confident to follow This is due to “herd behavior” or “free- rider” effect Individual investors, especially in emerging market, put their trust much on institutional investors These institutions directly impact the behavior of other investors In the plus side, when institutions buy, the others tend to imitate
Hence, trading volume and stock price are prone to rise This facilitate the additional issuance of companies in the future
An overview of leadership and corporate governance
“There are almost as many definitions of Leadership as there are persons who have attempted to define the concept.” 16
Leadership is similar to, and different from, management In terms of similarities, they both involve influencing people and require working with people Both are concerned with the achievement of common goals But leadership and management are different on more dimensions than they are similar and mutually exclusive
Managers are concerned with doing things right (efficiency) whilst leaders are concerned with doing the right things (effectiveness) However, leaders and managers are different roles but don‟t have to be different types of people One person can carry both functions
16 Stogdill, R.M (1948) Personal factors associated with leadership: A survey of the literature Journal of Psychology, 25, 35-71
A working definition of Leadership says: “Leadership is the process of influencing others to understand and agree about what needs to be done and how to do it, and the process of facilitating individual and collective efforts to accomplish shared objectives” 17
But why leadership is necessary to companies? Drucker (1985) had the answer when he defined leadership as “the lifting of people’s vision to a higher sight, the raising of their performance to a higher standard, the building of their personality beyond its normal limitations” 18
There are some key words should be borne in mind when mentioning Leadership:
Leader:A leader is anyone who wants to help and moves into action 19
Leading:Leading involves leadership and leaders Leadership is a product of interactive dynamics and leaders are people who influence this process 20
Influencing is getting people to do what is necessary Influencing entails more than simply passing along orders
Purpose gives people the reason to act in order to achieve a desired outcome
Leaders should provide clear purposes for their followers and do that in a variety of ways which one of the best is “Vision” Vision refers to an organizational purpose that may be broader or have less immediate consequences than other purpose statements Higher-level leaders carefully consider how to communicate their vision
17 Gary Yukl,“Leadership in Organizations”, Page 202, Gary Yukl, 1994-2010
18 Drucker, P (1985), The Discipline of Innovation, Harvard Business Review, USA
19 Wheatley, M (2006) Leadership and the New Science USA, Berrett-Koehler
20 Schwandt, D R., & Szabla, D B (2007) "Systems and leadership: Coevolution or mutual evolution towards complexity?" In: J K Hazy, J A Goldstein & B B Lichtenstein (Eds.), Complexity Systems Leadership Theory Mansfield, MA: ISCE Publishing
Motivation supplies the will to do what is necessary to accomplish a mission
Motivation comes from within, but is affected by others' actions and words A leader's role in motivation is to understand the needs and desires of others, to align and elevate individual drives into team goals, and to influence others and accomplish those larger aims
This is one of the most meaningful word connecting to Leadership definition Most of the recent literature on leadership regards vision as essence of an organization
According to Kouzes & Posner 21 ,“Exemplary leaders imagine an exciting, attractive, and focused future for their organizations They dream of making a difference They have visions of what might be, and they believe they can make it happen”.Vision becomes the guide or roadmap to a better future
“Vision is a mental journey from the known to the unknown, creating the future from a montage of current facts, hopes,dreams, dangers, and opportunities” 22
Common to these conceptions of "vision" is some comprehensive butpersonal picture of a desired future that a leader conveys to members of his or her organization Once the organizational members "buy into" the vision, they join the leader in turning their shared vision into reality Implicit in this conception of vision are assumptions about leadership and change and about leadership and management Leaders are the most results-oriented individuals in the world And with vision, they know where to go and what results should be attained
21 Kouzes, J M & Posner, B Z (1984), “Getting extraordinary things done in organizations” Brochure for a program offered by Executive Development Center, Leavey School of Business and Administration, University of Santa Clara
22 Hickman, C R., and Silva, M (1984), “Creating excellence: Managing corporate culture, strategy, and change in the new age”, p 151
From vision to final outcome, it takes leaders other factors to make outcome happens
Such process can be visualized as follows, called “Leadership Causal Chain”:
Leaders inspire followers by a shared vision, then provide them with necessary training/coaching In addition, with followers‟ willingness to learn and effort, their skills will be improved to reach target
Corporate governance has been widely researched across the world to provide guidelines and advisory to apply in reality One of the best known in this field was the OECD Principles of Corporate Governance, which had key influence on the development of corporate governance globally
The latest revised version of “OECD Principles of Corporate Governance” was released in 2004 It has been supported by major international institutions like the World Bank, the Global Governance Forum, and the International Corporate Governance Network, and then has been widely applied in the international financial community The purposes of “OECD Principles of Corporate Governance” were to assist the OECD and non‐OECD countries “to evaluate and improve the legal, institutional and regulatory framework for corporate governance”, and “to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role” 23 in the corporate governance process
In the “OECD Principles of Corporate Governance”, corporate governance is defined as “one key element in improving economic efficiency and growth as well as enhancing investor confidence Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders” 24
Similarly, the Report of the Committee and the Code of Corporate Governance (Singapore), 2001 wrote about corporate governance: “Corporate governance refers to the processes and structure by which the business and affairs of the company are directed and managed, in order to enhance long term shareholder value through enhancing corporate performance and accountability, whilst taking into account the interests of other stakeholders” 25
J Wolfensohn, president of World Bank, made this concept more specific:“Corporate governance is about promoting corporate fairness, transparency and accountability” 26
Basically, “Fairness, transparency and accountability” matter to corporate governance, especially in public company, which owned by a hundred shareholders and more, because with such a huge amount of owners, it is hard for all of them to get involve in companies‟ management on a daily basis This remarkable feature raises the need for a mechanism where companies are operated by a group of certain
23 OECD, “OECD Principles of Corporate Governance”, 2004
24 OECD, “OECD Principles of Corporate Governance”, 2004
25 Report of the Committee and the Code of Corporate Governance (Singapore), 2001
26 Financial Times, June, 1999 people but conformed to the will of owners That is why nowadays, almost every public companies build their organizational chart as follow:
Figure 3: Public companies organization chart 27
Departmental level staff staff staff staff staff
Corporate governance refers to the relationships among the Board of directors, top management and shareholders The Board of directors oversees the top management, with the concurrence of the shareholders (the business owners)
ANALYSIS AND ASSESSMENT ON THE APPLICATION OF LEADERSHIP-CORPORATE GOVERNANCE PRACTICES IN VIETNAM
Business environment in Vietnam
Vietnam is a densely-populated, developing country that in the last 30 years has had to recover from the ravages of war and the rigidities of acentrally planned economy
Substantial progress was achieved from 1986 to 1997 in moving forward from an extremely low level of developmentand significantly reducing poverty After more than two decades of reform, Vietnam has made remarkable economic and social transition in recent years The achievements werethe payoff to the reforms initially launched in the 1980s Although the1997 Asian financial crisis temporarily slowed the growth, GDP growth of 8.5% in 1997 fell to 6% in 1998 and 5% in 1999, it started to grow strongly again to 7.1% in 2000-2006 even against the background ofglobal recession Since 2001, Vietnamese government has moved to implement the structural reforms needed to modernize the economy and to produce more competitive export-driven industries The reform promoted market principles while maintaining a central role for state enterprises The Government recognizes that it must integrate itself into the rest of Asia and the world, building bridges with its neighbor in itsquest for economic growth.The government makes an effort to reform state-owned enterprises (SOEs), but progress is slow There are signs that the competition law will be applied more forcefully The government considers price controls on certain goods In the coming years,more SOEs undertake reforms and are equitised (part-privatised) Progress is made on removing market distortions in terms of access to opportunities and resources
Various researches suggest Vietnam‟s economic prospects continue to brighten The economy is rapidly moving from a planned to a market-oriented economy
Vietnam is considered as one of the world‟s fastest growing economies Its average real GDP growth rate was around 7% from 2000 to 2010
Economic growth in Vietnam is expected to reach an average of 7.2% a year in 2011-2015 (forecasted by Economist Intelligence Unit), underpinned by strong growth in consumption, investment and exports Private consumption growth will be driven by an improvement in the labour market and a consequent increase in real wages As demand for Vietnamese goods strengthens in line with improving economic conditions globally, the manufacturing sector is expected to ramp up production This will require more workers, and this stronger demand for labour will in turn encourage growth in wages In addition, remittances from overseas Vietnamese will remain high, while the development of the financial services industry will make consumer credit more easily available, thus providing an investment in the form ofpurchases of capital goods for the manufacturing sector will pick up
Despite concerns about the quality of Vietnam‟s business environment and a recent decline in foreign-invested projects registration, foreign investors‟ interest remains strong in general Demand for Vietnamese goods - particularly in the US, China and Europe - will remain robust, but import expansion will also be significant, and net exports will consequently act as a drag on real GDP growth for much of the forecast period
In line with Vietnam‟s industrialization and modernization program, the country has seen a swing in concentration from agriculture to manufacturing The agricultural sector‟s share of GDP has declined from over 40% in the 1980s to 20% in 2010 40 Over the same time, the industrial and construction sector has crept up to comprise 41% of GDP (as of 2010), while the service sector has remained roughly constant at 39% 41
Inflation year on year in 2011 was dramatically as high as 20.9% 42 The government is trying to keep inflation rate in 2012 around 10%, before slowing to an average rate of 7.8% a year in 2013-2015 The acceleration this year partly reflects the fact that the domestic price level remains vulnerable to movements in international commodity prices The Economist Intelligence Unitexpects crude oil prices (dated Brent Blend) to rise by 13% this year and foodprices to rise by 27%, up from 20% previously Global commodity prices will fallin 2012, however, and are forecasted to remain relatively stable in 2013-2015, and this will help to calm supply-side price
42 GSO pressures However, strong demand – side pressures will continue to push up the overall price level Although the authorities appear intent on slowing the pace of growth in domestic credit, thetarget for this year has been lowered only slightly from 23% to below 20% The continued depreciation of the Dong against the US dollar over the next five years will also serve to make importsmore expensive
According to the Foreign Investment Agency (FIA) under Ministry of Planning and Investment, the disbursement of foreign direct investment (FDI) in Vietnam was VND 11 billion in 2011, equivalent to that of 2010
Meanwhile, the total of FDI capital attracted in 2011 was USD 20 billion, increasing USD1.4 billion year over year, whose a large proportion target at advanced technology and competitive products
In 2010, the processing and manufacturing industry sector remained the most attractive destination for foreign investors for 10 years However, the foreign investment has recently tended to pour 74.5% capital in service sector, especially real estate
Vietnam has got the high achievement of attracting FDI, but, still facing with many challenges as the country's economy currently contains many risks and competition in attracting FDI comes from other countries
In the period 2011-2012, the government loosens restrictions on foreign investment further and seeks to promote investment in listed firms Later, the government will open up more service sectors to foreign investors
For years, SOEs have trailed behind their non-state and foreign invested counterparts in industrial production growth The state sector is also known to have long enjoyed a disproportionately large share of resources and preferential banking treatment, thus contributing to the country‟s stubbornly wide trade gap and high inflation The recent decision by the government to trim public expenditure and limit state investment may encourage SOEs toimprove their efficiency so as to compete for private projects
Vietnam has been one of the fastest – growing economies in Asia over the past decade with average growth rate of 7.4% year over year
The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 22% in 2005 to 9.45% in 2010
Strong inflationary pressures, driven by sustained high oil price and trade deficit will curb growth prospects
The speed of domestic reforms, with intrusive bureaucracy and lingering corruption is likely to deter some investors
The government is more determined to restructure the Vietnamese economy, and is pushing ahead with difficult reforms to the SOE sector
At the same time, being a member of the WTO; Vietnam will assert an all-out effort to create a favorable business environment to receive new waves of foreign investment
In the short term, Vietnam must cope with a highly uncertain global environment The slow recovery of the United States and Europe has presented the global economic downturn which may lead not only to inflationary pressures but also to budget, trade deficits and unstable exchange rates In addition, the under- stress financial sector probably makes international credit-ratings agencies lower their ratings on Vietnam‟s debt
In the long term, Vietnam faces the need of new sources of growth to replace the key drivers that powered its robust growth in the past (a young, growing labor force and the transition from agriculture to manufacturing and services)
2.1.2.1 Vietnam Capital Markets: The 12-year journey
Over twelve years since the inception of Vietnam‟s first stock market, major achievements have been made, yet, there are still many challenges to meet in order to develop the capital markets of Vietnam to its full potential
Vietnam opened its first stock market in Ho Chi Minh City (HOSE, latter renamed HSX) in July 20 th , 2000, followed by a the trading centre in Hanoi (HASTC, latter renamed HNX) in 2005 Subsequently, the market for unlisted public companies (UPCOM) was launched in 2009 with an aim of streamlining the over-the-counter equity market operations From virtually a scratch, Vietnam has successfully developed its capital markets and turned them into effective fund raising channels of the economy, reducing its dependence on the traditional banking system
Leadership and corporate governance in Vietnamese listed companies
2.2.1 Organization type influences the leadership and corporate governance style
Traditionally, large Vietnamese companies were either State-owned enterprises (SOEs) or Private-owned enterprises (POEs) SOEs not only operated in the public sector, but also had their influence in energy, media, communications, financial services and other domains of the more traditional private sector The widespread image of SOEs was: large, bureaucratic, hierarchical and slow moving while that of POEs is small family businesses serving a local community clientele
The boundary between public and private sectors was often permeable in Vietnamese company There often existed an old type of network where leaders knows each other through school and military Leaders probably moved between public and private sector roles
The public sector often relied on more hierarchical, bureaucratic and political processes to govern work Success was defined through rules and regulations that create political, social and economic stability Therefore, the decision-making processes often moved slowly with safeguards built in to ensure prudent risk With stability and continuity as their goals, they often sought consistency and consultancy in how they did their work Public confidence and opinion were the ultimate measures of their success
45 World Bank: Vietnam Stock Market Needs Institutional Investors, Investment Caps, http://www.mof.gov.vn/portal/page/portal/mof_en/Search%20detail?p_persid=&p_folderid=&p_itemid'34434&p_year=
Private sector success often depended on speed and agility as decisions must be made quickly to respond to competition threats Success came from targeting and creating new market opportunities quicker than rivals Leaders in these organizations rose to the top by their ability to access and took innovative risks that differentiated their firm from their competitors With innovation and uniqueness as their goals, these leaders often encouraged diversity, debate and differentiation
Gaining marketplace success through customer share and investor money was translated into success
2.2.2 Vietnamese companies are late developers in the area of leadership development
Vietnam lags Western and many other Asian economies in terms of economic and market development Like many other Asian countries, Vietnam had a “command” and “protectionist” economy It is far behind The USA, Europe and the Asian developed countries in terms of per capita GDP Its private enterprises are generally smaller than their counterparts in the West As a result, it is understandable that Vietnam lags behind developed countries in modernising their management methods and corporate culture
Being a late developer has both side effects First, late developers have lessons to learn from the early developers, and know what to emulate and what to avoid, but taking shortcuts (meaning emulating good experience and avoiding mistakes) requires the organizing power of organizations Furthermore, backward countries or late developers lack capital, so it is not accustomed to get fund through modern channels
In America, it is very common that firms are run by professional managers who are replaced by other professional managers, either as a consequence of retirement or of replacement by the BoD of the firm Companies have sophisticated programs for developing executives within the firm, and ordinarily choose a next CEO (Chief Executive Officer) from among them American CEOs average about thirty years with their firms and own less than 4% of its shares These CEOs are driven by a money is less important to them than professional achievements However, they earn enormous compensation packages
Many American companies, especially the large ones, are more dependent on capital markets for their capital needs (equity and debt) and so pay much more attention to Wall Street than Asian companies do Large American companies are at a later stage of development than many Asian peers They have passed from founders' family leadership to professional management and to capital obtained from the capital markets (rather than obtained from government directly or indirectly or from family fortunes) In this transition they have adopted particular styles of leadership responsive to boards (often led by outside directors) and to securities market
2.2.3 A large majority of Vietnamese companies are either state-owned or family- owned
Of the 20 largest companies in VNR500 in 2011, 17 are state-owned, 2 are multinational and only one is half owned by state and half owned by a family In comparison, of the 20 largest listed companies in the United State and Europe, the number of companies which are owned by families are only 2 and 1, respectively
Unlike the Western business environment where companies rely or tap on the capital market environment, family or state-owned companies in Vietnam do not depend much on capital markets to grow their business
The political connections were very important for top business leaders in Asia, where Vietnam is a part, whether in democracies or one-party states This is quite less important in America It is a characteristic of Asian top executives that they have such connections that are important to their businesses In America, the CEO of very large companies often have virtually no direct connections to top politicians
Business is done by business people There are exceptions, and deep political involvement is still a route to business success in America, but it is much less common than in Asia
It is common in Asia generally and in Vietnam particularly that most companies obtained funding from government directly or indirectly or from family fortunes
Therefore, they may see it strange to approach a modern financing channel like institutional investors Over a decade of stock market, offshore funds still find it difficult having meetings with leaders of Vietnamese listed or unlisted companies
Those companies simply think that their companies are being run well and have no capital needs for expansion in the mean time, so what is the point they waste time with a strange group of people, not to mention the fact that they feel uneasy sharing internal information to outside parties
Family-owned companies are typically headed and run by family members There is less priority or commitment in engaging outsiders into their top management bench
There are some strong entrepreneurial business leaders among the founders of Vietnamese businesses but there are hardly enough corporate business leaders mature from the family tree Several family-owned companies have tried to professionalize their businesses but with limited success as they are not quite prepared or are reluctant to empower outsiders to run independent operations
RECOMMENDATION
Opportunities and threats to the attraction of institutional investors into
The stock market in Vietnam has been playing an important role in upgrading the national economy Since its inception, a lot of big companies, including a mass of SOEs went out for IPOs Meanwhile, the Vietnam stock market was also joining the regional market This could intensify competition and hence helps improve Vietnamese listed companies‟ competence to attract investors both domestic and foreign Moreover, the state are well aware of strengthening legal framework and conduct regulation These will lay a more solid foundation for future development
Looking forward to the further development of the Vietnam stock market, there are many opportunities for Vietnamese listed companies to attract new source of finance, as follows:
3.1.1.1 Continuing rapid development in the whole economy and in stock market
Vietnam‟s economy is still at the cross road The country‟s economic performance over the last decade has been impressive, thanks to active implementation of reforms accompanied by large inflows of foreign investment Economic growth in Vietnam is much higher than averages in the Western economies, but actually slowed down in recent years However, Vietnam has great potential to become a substantial economic power in the long-term if it can resolve existing issues in the near-term.The country is in the ending phase of“frontier” status to join the
“emerging” markets, given its 20-plus year history of trade and investment activities with the outside world, a functioning stock exchange, bilateral trade agreements and its highly-educated work force
A sound economic development will push continued development to the stock market And a more potential stock market will increase investment demand, especially from the large institutional investors Long-term prospects for sustained capital flows to Vietnam stock market is favorable
3.1.1.2 More players are coming into the markets
The strength of macroeconomic fundamentals is the key in determining the size and the sustainability of investment flows.When Vietnam stock market gets bigger and more liquid accompanied by sound macro economic conditions, investor‟s confidence will move up That makes it clear for investors to find a safe place to park their money; hence the rush to invest in an attractive haven may come And as markets grows up, investors will view that as an opportunity to buy stocks at a cheap price The world‟s investors continue to diversify their portfolios internationally Vietnam companies have more buyers of their equity
3.1.1.3 More financial products and new services are being introduced in the market
As more equity buyers join in the market, more companies are eager to get listed
The volume of companies and equity scale will grow further Market capitalization get bigger and Buy-side has more products to shop
Stiffer competition andmore players will let many securities companies provide fit products and services for such market There is a wide room for more decent financial products and services which are popular in developed markets but not yet allowed in Vietnam so far like short-selling, derivatives, etc
3.1.2.1 The fear from 2008’s global financial crisis The 2008 financial crisis and worldwide recession halted a three-decade expansion of global capital and banking markets 50 As this monetary meltdown and credit crunch continues, stock market worldwide is being corrected The problem for the Vietnam stock market is that each impositive announcement from state or from companies will comes to stock sell-offs
There is no idea how far the stock markets in the world and in Vietnam will fall or when they will reverse and bloom once again Financial world is still in unprecedented times with huge amounts of fear and uncertainties among both investors and investee companies In short-term, that might show unfavorable results but in the long-term it will most likely set the stage for another buying opportunity wave
3.1.2.2 Impacts from other markets movement
Vietnam stock market is in the process of gradual integration into the international economic system As it more closely links with the international financial system, any small changes and fluctuations in the field of international finance are likely to have a certain impact on Vietnam‟s financial market or even cause great volatility
Therefore, to continuously improve the financial system, enhance financial risk response capacity, especially in the current high oil prices, high inflation under the complex international environment, it is necessary to establish an early warning mechanism and an emergency management system
3.1.2.3 Macro fundamentals need further improvement
Market sentiment is driven by market conditions A financial market which is stable and well governed can enhance market sentiment to positive expectations Financial activities built on the basis of optimism about the future Such invisible foundation of faith maintains the financial markets‟ running Once there are non-rational expectations, coupled with the asymmetric market, it is easy to make people lose
50 McKinsey report, “Mapping global capital markets 2011” confidence Therefore, Vietnam government should resolve as soon as possible remaining major problems of economy, including high inflation, currency depreciation, high interest rate, unstable policies, etc through timely effective measures to create positive signals and eliminate adverse psychological expectations of the public
3.1.2.4 “Hot money” leads to speculation instead of investment
International hot money constantly flows in and out a market, posing a threat to national financial security Vietnam is especially preferred by the international hot money speculators as it is assessed one of the most compelling frontier market in the world The hot money speculating in the stock-property-foreign exchange market has affected the country‟s financial order in varying degrees The Vietnam‟s recent plunge and surge in the stock and property markets, is also due to international hot money speculators, which had an adverse impact on the financial security
Accordingly, stock prices go down because of speculator reactions to news, rumors and investor profit taking rather than relying on companies fundamentals.
Recommendation to identify the “right” investors
Institutional investors are nota homogeneous group but different in investment appetite and risk tolerance due to different investment objectives This is due to their responsibility to clients for income and capital growth Institutional investors used not to involve much in corporate governance but mostly buying and selling shares, relying on their judgment of the growth potential of companies and the stock price rise Institutions tended not tovote their shares regularly and to intervene directly withcompany managements, unless in case of problem The participation of institutions as major shareholders of companies brings dual impacts in both positive and negative side to the performance and the future of companies, based on their added value to companies Therefore, in cases like private placement where investee companies have the right to choose investors, they should take into considerations the following points:
3.2.1 Targeting institutional investors with long investment horizons
Investee companies should target institutional investors with long investment horizons and screen out investors who trade frequently, with the goal of achieving a stable ownership base that will not destabilize companies‟ stock price based on short-term developments They are investors whose primary concern is long-run value creation instead of the next quarter‟s earnings Ideally, managers would have farsighted investors that insulate the companies‟ operations from undue pressure for short-term performance and from excess stock price volatility which can increase riskiness to the stock, thereby raising its cost of capital and can limit companies‟ ability to raise capital for promising investment opportunities in the future
3.2.2 Institutional shareholders with positive attitude toward mutual benefits
Where an institution is committed to retaining a substantial holding in a company, it shares the BoD‟s interest in improving the company‟s performance As a result, some institutions now take amore active interest in corporate governance They can do this by voting on resolutions in Annual General Meetings and by informal dialogues with the company
Companies, in exchange, should foster open dialogues with shareholders, particularly significant ones, to help them understand the company‟s business strategy, executive compensation policies, and other corporate governance practices Shareholders can be asked to provide their opinions and thoughts on issues of concerns and even suggestions for director nominees Shareholders can articulate their investment objectives to management, can be more open with BoM in giving feedback on companies‟ strategies and performance and help improve companies‟ investor relations program as well Companies should take time to understand the corporate governance guidelines and voting dynamics of significant shareholders, including the voting decision-makers and portfolio managers
3.2.3 Institutional shareholders who have responsibility for their votes
The right to vote is an important part of the share ownership Institutions have a responsibility to their clients to make considered use of it By voting good people to participate in BoD, BoM and good resolutions for companies to go in track for the whole year, shareholders help improve corporate governance quality, increase companies‟ performance and promisingly leading to a premium in growth and stock price
In principle, investors and creditors could pressure companies to comply with new governance requirements In practice, most of them are reluctant to get involved
They invest in a company if they believe that its growth prospects and risk premium outweigh all other factors and tend to sell their holdings rather than challenge management when governance problems arise In Vietnam, institutional investors largely be prone to short-term price movements rather than long-term growth prospects.
Recommendation on how to improve institutional investment to
Companies leaders do not simply maintain the existing situation of companies but the point is that they lead to a change which is better than the current status
Without change or movement, there is no leadership To actively make positive changes to companies‟ future, leaders must make decisions about the nature of the desired state In other words, they define where companies should go to, define a comprehensive picture of how their companies will look like at some point in the future, including how they will be positioned in their environment and how they will function internally
Leadership, then, involves determining the direction of a company (vision), and then leading it in that direction (strategy) It is the existence of vision, out of which evolves strategy, that differentiates leadership from management, though some of the actual activities of the individual encompass both management and leadership
In order to reach ultimate goal in such vision, first and foremost, the vision should be strategic A strategic vision connects the reality of the present to the possibilities of the future in a personal way that is unique to the company and its leader
Strategic vision gives members of the company confidence that there is a rationale behind individual actions or decisions It guides behavior toward consistency and organizational integrity Strategic vision requires skill in managing the change process to link the present to the future It is the combination of organizational vision, future vision, and personal vision, that gives energy, meaning and a sense of purpose to a company
Stock ownership represents the involvement into company‟s future and the right to raise voice of how the company should be run In an ideal case, both companies‟ current shareholders and shareholders-to-be share vision for the company Since all of them will be on a same boat, if they row the same direction, the boat will go far ahead; otherwise, the boat will easily be in troubles
Strategies derives from future vision and is designed to overcome obstacles to achieving such vision The pursuit of sustainable, long-term shareholder value is of paramount importance
Hence, managements should prepare long-term goals in terms of shareholder return objectives as well as strategies and business plans for review by the board Then the implementation should be monitored by the board and compared with the performance of competitors If performance is anticipated to fall short of goals, early corrective measures should be considered by the board
Companies should set strategies which are able to deliver value growth of companies
Because, equity investors want to see a clear strategy for growing the value of the business Without an effective strategy, investors may feel concerned about how BoD can visualize their commitment toward the prospect drawn in the vision
Companies should create strategy with regard to the resource-based theory That means, they use traditional strategy models, such as Michael Porter's five forces model, to analyze external competitive environment Then, they look inside the company to find which resources they have and which they need for a fit between the external market juncture in which a company operates and its internal capabilities That is a way companies figure out their competitive advantages by combining all necessary resources, continuously developing existing ones and creating new ones in response to rapidly changing market conditions to outperform rivals
Strategy execution is much like sailing a boat toward a planned destination It can be defined as all the actions necessary to turn strategy into success Even a great strategic plan can be destroyed by poor implementation Therefore, in order to get faith from potential institutional investors, companies must draw an appealing picture of what it will be (vision), how they go for that destination (strategy) and actually prove that they arrive destination successfully (strategy execution)
Successful implementation requires an understanding of the "big picture," as well as all the sequential steps that lead to it A strategy is essential for success over the long-run, but in short-run, it should be translated into specific work to fulfill
Strategy execution requires the involvement of the whole companies from all levels of all departments Making and executing strategy are different, at least in who to be in charge It only takes a short time and a few people to develop a strategy A top team can formulate a strategy in a few days or weeks But it requires the whole organization in the entire business cycle or longer to execute that strategy The larger the number of people involved, the greater the challenge to execute strategy effectively; because, communication the strategy spirit down the organization or across different functions becomes a challenge Therefore, it is important to make sure that the whole organization understand and support the strategy execution
Senior executives in companies have to link strategic objectives with the day-to-day objectives at different organizational levels and locations
As mentioned earlier in Chapter 1 (Part 1.1.4.2.), investors seek companies whose BoD are capable of making the companies outperform others Another famous saying regarding strategy execution is: “First Who Then What We expected that good-to-great leaders would begin by setting a new vision and strategy We found instead that they first got the right people on the bus, the wrong people off the bus, and the right people in the right seats-and then they figured out where to drive it
The old adage "People are your most important asset" turns out to be wrong
People are not your most important asset The right people are” 51
Choose the right directors and CEO
The very first right people who companies needare directors and CEO who lead the whole organization Therefore, the selection of them is crucial Criteria should include the highest caliber in the industries where companies do business Criteria should be include their experience, independence standpoint, ethics and traits of great leaders Selection process should be designed carefully to produce the desired result without bias
According to law, BoDs are elected by AGM However, as biggest shareholders reserve the right to have higher votes commensurating with their stake, they may
51 Jim Collins, “Good to great” control this selection process and make bias appointment, especially major family shareholders of originally family-run companies usually arrange their family members to key positions Hence, in order to maintain independence which basically is a top concern of institutional investors related to agency problem, major family shareholders should not be entitled to vote on the nomination of independent directors Regarding CEO selection, if necessary, companies committees should employ external head-hunting firms for recommendation
It is a clear advantage with investors if companies‟ management teams are of proven calibre with a successful track record Institutional investors will look for a committed management team possessing all the skills necessary to grow the business to its next level of development It is also better if these calibre are spread amongst a team of many individuals rather than in just one key person
Listed companies also need to set up a board and policy framework to for a process of monitoring directors‟ performance This is usually the job of Control Committee
Action plan
3.4.1 Build the Board of Directors of high quality and professionalism
- Directors should be chosen or voted with regard to the integrity of expertise, experience and ethics who can meet their duties of care and loyalty They are able to lead the company through favourable and unfavourable business climate
- The BoDs then choose a qualified Board of Management who link the vision of BoD into reality
- Establish a relative independence between BoDs and BoM where BoDs can vote against BoM if necessary The plurality of chairman and CEO must be seriously considered
- Assure BoDs and BoM act for shareholders‟ sake instead of their own Avoid unethical and illegal actions like internal trading, huge remuneration or making over-risky decision which harm shareholders‟ interest
- The ownership of institutional investors should be tracked on a regular basis to prevent hostile merger and acquisition In the other hand, this is to assess their investment is active or passive, whether they make valuable contribution into the company‟s growth
- Build policies to prevent the case that BoDs, BoM and their family members use company assets/goodwill for their own interests or set up or have equity interest in other companies which compete with the principal company
- Have a reasonable remuneration scheme for BoDs and BoM
3.4.2 Build attractive but reasonable vision, objectives and annual business plan for the company
- BoDs establish company vision and objectives in the next one, two, five years and longer
- Then BoDs build strategies to reach such targets
- Communicate those vision, objectives and strategies to shareholders
- Carefully set reasonable annual business targets (revenues, profit, dividend, etc.) so that company can attain them, instead of making troublesome explanation in the event that company either fails to achieve targets or surpass them abnormally
- Companies should have an accounting policy which reflects the true value and true situation of the company
- Financial statements preparation and approval should be well conducted to provide trust and appropriateness of these reports
- Use independent and qualified external audits In Vietnam, the internationally recognized audit firms (such as Big 4) are of highest interest, especially by offshore funds Nevertheless, rotation of the independent external auditors is necessary, also
3.4.4 Improve the role of Internal control
- The Supervisory Board has high level of independence to voice over abnormal or under-performed activities of the company They must have no business relationships with the company, or join in BoDs or BoM
- They have their authority to attend any meetings of the Board as long as they maintain their membership and can request necessary information without having to receive approval from management
3.4.5 Improve the abilities of risk forecast and management
- Establish a specific team in charge of risk management, headed by CRO (Chief Risk Officer)
- This team performed and monitored regularly the company‟s management of risk
- Build in advance a Disaster Recovery Plan to effectively resolve crisis
- Disclosure of information must be complete, accurate and prompt in accordance with law, namely “Circular on disclosure of information on the securities market”
No 38-2007-TT-BTC In which, there are some notable points such as: o The time-limit for completion of annual financial statements shall be no later than ninety (90) days after the last day of the financial year o The annual financial statements and annual report of a public company must also be disclosed in the publication and on the electronic information site of such company and must be archived for at least ten (10) years at the head office of the company in order to enable investors to refer to such items o Extraordinary disclosure of information must be made within twenty four (24) hours or seventy two (72) hours dependant on specified cases o Quarterly financial statements shall be completed within20 days of the first month of the following quarter Quarterly financial statements need not be audited o Disclosure of information within twenty four (24) hours from the time of receipt of a request from the SSC, SE or a STC o When a member of the board of management or board of controllers, the director accountant of a listing organization or an affiliated person intends to trade shares in the listing organization (including by an assignment such as a gift or bequest outside the trading system of the SE or STC), such person must provide at least one business day's advance notice to the SSC and the SE or STC; and within three business days of completion of the transaction must provide a further notice to the listing organization, the SSC and the SE or STC about the result of the transaction including percentage shareholding after the transaction and the change in percentage shareholding on standard form CBTT-04 issued with this Circular 55
- Make annual report of good quality
- Develop and maintain good relationship with shareholders and potential investors Carry out effectively two way communication between company and investors
- Establish Investor Relations team in charge of investor communication
- Regularly hold meetings with major shareholders and analysts of securities firms or funds to share business plan, update business results, projects status and other information to raise mutual understanding between the company and the investment community
- Organize visit tours for investors and analysts to see and assess the company‟s material facilities and how projects are being carried out
- Build company‟s website as one of the main communicating channels between the company and the investment community where all necessary disclosures of company are published and all questions and suggestions from investors are well received and answered
55 “Circular on disclosure of information on the securities market” No 38-2007-TT-BTC
The formation of Vietnam stock market opened wide door for companies in raising fund to finance their business activities On this modern financial market, foreign institutions has been and should be major players who pump funds and create market liquidity Attracting this force is considered an important aim of any listed companies whenever they have got big opportunities to do The reasons stay in the continuing rapid development in the whole economy and in stock market, the willingness of more players coming into the markets and the introduction of new financial products and services into the market However, threats also exist in the fear from 2008 global financial crisis, the impacts from other markets movement, short-term unstable macro fundamental elements and the speculation instead of investment from the so-called “hot money”
In order to grasp opportunities while minimize threats, first and foremost, listed companies should pay attention to identify the so-called “right” institutional investors whose characteristics include their long investment horizons, their willingness to enter into dialogues with companies based on the mutual understanding of objectives and their responsibility in votes
Regarding the attraction of such “right” institutional investors, listed companies certainly have good prior preparation and make themselves worthy targets for investment Recommendations of the author include two parts: The first is Quality of leadership and the second is the Quality of corporate governance
Quality of leadership was represented in four main factors: 1) Quality of companies‟ vision; 2) Quality of company‟s strategy; 3) Execution of company‟s strategy and 4) Quality of leaders
Quality of corporate governance is built from 5 aspects: 1) Constituting an independent and objective board; 2) Compensation/Remuneration issue; 3)
Improve transparency; 4) Improve communication quality and 5) Improve risk management
The author also provided a suggested action plan for detailed conduction The Action Plan included six parts: Build the Board of Directors of high quality and professionalism; Build attractive but reasonable vision, objectives and annual business plan for the company; Issues related to financial statements; Improve the role of Internal control; Improve the abilities of risk forecast and management; and Disclosure policy
Leadership and corporate governance practices have made encouraging improvements in Vietnam and benefit many corporate leaders and their investors
Questionnaire to Buy-side and Securities Corporations
No Name Position Organization Location
2 Pham Tuan Anh Industry Manager Viet Fund
3 Le Le An Na Investment
4 Le Dang Khoa Analyst Bao Viet Fund HCMC
6 Hoang Xuan Chinh Director, Equity
10 Phan Thi Thuy Hien Analyst Yuki Techno Flow
12 Hoang Ho Phu Head Of Research Petrolimex Securities
13 Nguyen The An Analyst Saigon Securities
14 Nguyen Thi Yen Analyst Hochiminh Securities
16 Ton Minh Phuong Senior Analyst VietCapital Securities
18 Vo Binh Equity Analyst Sacombank Securities
19 Dang Thi Khanh Analyst Mien Nam Securities HCMC
21 Quan Diem Trang Investor Relation –
22 Nguyen Hoang Anh Head of
Investment And Trading Of Real Estate JSC
23 Nguyen Quang Huy Analyst Hoa Binh
Construction And Real Estate Corporation
24 Tran Tu Luc Deputy Head of
Hoang Quan Real Estate JSC
Ba Ria-Vung Tau House Development
Appendix 2 Questionnaire to Buy-side and Securities Corporations
1 Which position (s) do you have in your company?
2 How often do you visit/contact with listed companies?
3 Is it easy/difficult to approach listed companies in Vietnam? How is it like to get information from the companies?
- Dependent on regional culture where the companies locate
4 Do(es) leadership and/or corporate governance matter to your valuation on companies? Could you quantify this criterion into your stock price valuation model?
5 Do companies‟ vision, mission and strategy matter to your valuation on companies? Could you quantify these criteria into your stock price valuation model?
6 Does companies‟ annual plans matter to your valuation on companies? What is annual plan‟s role in your stock price valuation model?
7 Your viewpoints toward companies‟ financial reporting system
8 Your viewpoints toward companies‟ remuneration scheme for BoD and BoM
9 Your viewpoints toward companies‟ Risk Management System
10 Your viewpoints toward companies‟ Investor Relation program.
Questionnaire to Sell-side
1 Which position (s) do you have in your company? (You can chooseseveral answers)
Chairman Member of board Managing Director (CEO) Others
2 How many members of board are there in your company?
3 Is there any representative of institutional shareholder in your company‟s BoD?
4 Which criteria are used to select the member of BoD?(You could choose more than one answer)
5 How is the BoD of your company evaluated? (You couldchoose more than one answer)
- Only base on company‟s business result
- Internally mutual evaluated, base on various sides
5 How is the structure of remuneration system for the members of BoD?
6 How often is the board meeting in your company?
7 What are your viewpoint toward communicating with institutional investors?
8 Do you think your company‟s shareholders understand/not understand the company‟s vision, mission, strategy and plan?
9 Do you think your company‟s employees understand/not understand the company‟s vision, mission, strategyand plan?
10 Are the BoD under big pressure about the company‟s business result from shareholders?
11 Does your company appy any Risk Management System? What is it like?
12 How could you characterize your corporate culture? (You can choosemore than one answer)
Appendix4 List of fund management companies in Vietnam
No Company Name Website Chartered
JSC www.thepviet.com.vn 25.000.000.000
4 VIPC Fund Management JSC www.vipc.com.vn 33.000.000.000
6 An Phú Fund Management JSC 25.000.000.000
Management JSC www.gpfund.com.vn 25.000.000.000
12 SME Fund Management JSC www.smecapital.vn 25.000.000.000
13 Sabeco Fund Management JSC www.sbf.vn 25.000.000.000
JSC www.saigoncapital.com.vn 25.000.000.000
JSC www.tlmcapital.com.vn 30.000.000.000
18 Việt Nam Alliance Fund Management JSC www.vnalliance-capital.com 50.000.000.000
20 Sài Gòn - Hà Nội Fund
Management JSC www.shf.com.vn 60.000.000.000
JSC www.thanhviet.com.vn 88.000.000.000
22 PVFC CapitalManagement JSC www.pvfccapital.com.vn 100.000.000.000
Management JSC www.vinafund.com 209.600.000.000
JSC www.abt.com.vn 30.000.000.000
29 FPT Fund Management JSC www.fptcapital.com.vn 110.000.000.000
30 MB Fund Management JSC www.mbcapital.com.vn 100.000.000.000
32 Viet Capital Asset Management Joint Stock Company www.vietcapital.com.vn 150.000.000.000
JSC www.vcmc.com.vn 28.000.000.000
Management JSC http://www.bvim.com.vn 32.000.000.000
Management Company www.vcbf.com 38.000.000.000
Prudential Vietnam Fund Management Private Limited Company www.prudentialfund.com.vn 25.000.000.000
Công ty TNHH MTV Quản lý quỹ Ngân hàng TMCP Công thương Việt Nam www.vietinbankbankcapital.vn 500.000.000.000
IPA Securities Investments Fund Management Limited Company
Limited www.techcombank.com.vn 40.000.000.000
42 Manulife Asset Management (Vietnam) Company Limited www.manulifeam.com.vn 26.000.000.000
Limited Company www.baovietfund.com.vn 25.000.000.000
Company Limited www.acbcapital.com.vn 50.000.000.000
The birth and growth of institutional investors
The concept “Institutional Investor” was assumed to first come out in March, 1967, from a Montreal Stock Exchange Then, it was delivered to Wall Street-ers, fund managers and government officials 56
Institutional investors started to become important participants in the US equity markets in past three decades Over this period, both the number of institutional investors and the amount of funds they manage have grown dramatically 57
In Vietnam, institutional investors, especially foreign ones, joined as dynamic players on securities market since the birth of the two stock exchanges: Ho Chi Minh City Securities Trading Center (now it is Hochiminh Stock Exchange – HSX) and Hanoi Securities Trading Center (now it is Hanoi Stock Exchange – HNX)
If foreign institutional investors are mentioned as an integral part of the foreign indirect investment (FII), the first FII wave in Vietnam came more than 10 years ago, in the 1990s when seven large investment funds came to Vietnam, including Vietnam Lazard Fund, Templeton Vietnam, Beta Fund, etc., bringing total capital of nearly US $700 million All of them withdrew during the Asian financial crisis The second wave of FII kicked off in 2002 with Mekong Enterprise Fund, which had the total capital of US $18.5mil Since then, Vietnam has welcomed 10 others with total capital exceeding US $1bil
Together with foreign direct investment (FDI), foreign indirect investment (FII) has been making positive contribution to the economic development of Vietnam The investment of big international financial institutions in Vietnam‟s stock market has continuously grown over the past time
56 http://www.institutionalinvestor.com/Article/1356891/HISTORY-The-World-As-We-Found-It.html
57 Murat Binay,“Performance Attribution of US Institutional Investors”, 2005
Appendix 6 Definition and classification of institutional investors
“An institutional investor can be defined as a fiduciary entity established to manage client assets with full investment discretion” 58
Based on legal entity type: Institutions can be classified into five categories:
- Banks and bank trust departments: manage personal trust funds and contracted pension assets
- Insurance companies: invest their own property-casualty and life insurance funds
- Investment companies (mutual fund families): managing money on behalf of fund holders
- Investment advisors: are money management firms that exercise investment discretion on behalf of clients A significant portion of pension fund assets are managed by investment advisors In the world, Barclay's Bank PLC, Morgan Stanley Dean Witter and Goldman Sachs & Company are three of the largest
- Endowments, public and corporate pension funds and philanthropic foundations: comprises university and private endowments, philanthropic foundations, funds that are managed in-house by private and public pension funds, and law firms acting as trustees
Based on trading taste, there are three categories of institutional investors:
- “Transient” institutions: exhibit high portfolio turnover and own small stakes in portfolio companies They are attracted to companies with investor relations
58 Murat Binay,“Performance Attribution of US Institutional Investors”, 2005