CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK EXCHANGE

The aim of this research is to study the effect, if any, of corporate governance structures, particularly board size, CEO duality and board structure is based on proportion independent d

ACKNOWLEDGEMENT

First of all I would like to thank Dr Hung who has brought me this far and providing

me with strength, knowledge and vitality that has helped me to make this research work a reality

Secondly, I would wish to thank my family for moral and financial support, encouragement and their understanding when I was not there for them during the project period; I wouldn’t have made it this far without them

COPYRIGHT STATEMENT

This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author’s prior consent

© Ho Ngoc Tram / ISB-MBUS/2010-2012

ABSTRACT

Corporate governance is considered to have significant implications for the growth prospects of an economy Good corporate governance practices are regarded as important in reducing risk for investors, attracting investment capital and improving the performance of companies Numerous studies have considered the implications of corporate governance structures on company performance Although the existing literature is not unanimous in its conclusions, the weight of opinion is that there is a significant relationship between governance structures and firm performance The aim

of this research is to study the effect, if any, of corporate governance structures, particularly board size, CEO duality and board structure is based on proportion independent director on the performance of selected companies listed in Viet Nam’s Stock Exchange

Using samples of companies listed in Viet Nam Stock Exchange, this research aims to examine the relationship between board size, CEO duality and the proportion of independent directors on firm performance as measured by return on assets (ROA) and return on equity (ROE), using statistical techniques Results show that there is significant relationship between corporate governance structures and firm’s financial performance

Key words: Return on Assets, Return on Equity, CEO Duality, Independent Directors,

Board size

TABLE OF CONTENTS Abstract

Chapter 1: Introduction

1.1 Research background 08

1.2 Statement of problem 09

1.3 Research objective 09

1.4 Scope of this research 10

1.5 Research method 10

1.6 Research structure 10

Chapter 2: Literature Review and Hypotheses 2.1 Introduction 11

2.2 Literature Review 11

2.2.1 Corporate Governance 11

2.2.2 CEO Duality 17

2.2.3 Independent Directors 18

2.2.4 Board size 21

2.2.5 Financial performance 22

2.3 Hypotheses development 24

Chapter 3: Research Methodology

3.1 Introduction 29

3.2 Research design 29

3.3 Measurement scale 31

3.4 Target population 32

3.5 Sample 32

3.6 Data collection 33

3.7 Data screening 34

3.8 Analysis 34

3.8.1 Correlation analysis 34

3.8.2 Multiple regressions 35

3.8.3 Analysis of variances 37

3.9 Summary 38

Chapter 4: Results 4.1 Introduction 38

4.2 Descriptive statistic 38

4.3 Correlation analysis 40

4.4 Multiple regressions 40

4.5 Independent sample test 44

4.6 Analysis of variances 45

4.7 Further analysis 46

Chapter 5: Conclusion and Recommendations 5.1 Introduction 47

5.2 Conclusion 47

5.3 Limitation 49

5.4 Recommendation 49

References

Appendix

LIST OF TABLES

Table 1: List of firms

Table 2: Result of correlation between independent variables and dependent variables Table 3: Result of regression for independent variables with ROA

Table 4: Result of regression for independent variables with ROE

Table 5: Results of descriptive statistic of each variable

Table 6: Results of descriptive statistic of each group in variables with ROA

Table 7: Results of descriptive statistic of each group in variables with ROE

Table 8: Model summaryb

Table 9: Anovab

Table 10: Summary of Regression results

Table 11: Results of Independent sample test (D)

Table 12: Results of Test of Homogeneity of variances (ID)

Table 13: Results of Analysis of variances (ID)

Table 14: Results of Multiple comparisons (ID)

Table 15: Results of Test of Homogeneity of variances (BS)

Table 16: Results of Analysis of variances (BS)

Table 17: Results of Multiple comparisons (BS)

Table 18: Results of descriptive statistic (CEO non-duality and NED 40-82)

Table 19: Results of Independent sample test (CEO non-duality and NED 40-82)

CHAPTER I: INTRODUCTION

1.1 Research background

In today’s global business environment characterized by an increased competition, the effectiveness of corporate governance in protecting shareholders’ interests has become more vital than ever Especially, corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment The term corporate governance basically represents a set of mechanisms

by which investors protect themselves against expropriation by both managers and controlling shareholders

Corporate governance is the system by which corporations are directed and controlled The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as; boards, managers, shareholders and other stakeholders and spells out the rules and procedures and also decision making assistance on corporate affairs By doing this, it also provides the structure through which the company objectives are set and the means of obtaining those objectives and examining the value and the performance of the firms The relative effectiveness of corporate governance has a profound effect on how well a business performs

Performance, which shows if the resources of the firm are used efficiently to fulfill the goals of the firm, is crucial in evaluating the overall success of the firm For performance evaluation firms employ both financial and nonfinancial performance criteria Financial performance measures are the starting point for most organizations’ performance measures systems; such as ROA (Return on Assets) and ROE (Return on Equity) are financial performance measures that are most frequently used at academic research

1.2 Statement of problem

The International Research Journal of Finance and Economics - Issue 50 (2010) 8 term corporate governance has been identified to mean different things to different people Corporate governance has become an issue of global significance The improvement of corporate governance practices is widely recognized as one of the essential elements in strengthening the foundation for the long-term economic performance of countries and corporations The term corporate governance relates to how corporations, firms, organizations etc are owned, managed and controlled This is an issue which has been the subject of much debate in recent years However, to understand the reasons for the recent upsurge in the interest for these issues and the particular focus that the debates typically have had, one must look more closely at the particular background for these debates

Over the last two decades, Vietnam has emerged as one of Asia’s fastest growing economies and most attractive locations for foreign investment However, concerns attributed to corporate governance have evolved along with Vietnam’s growth Corporate governance is still a new concept in Vietnam, and the corporate governance framework is in the early stage of development process According to the recent IFC-MPDF survey in Vietnam, only 23% of the companies surveyed understand the basic concept of corporate governance, and there remains the confusion between

“governance” and “management” between company directors Thus, the importance of corporate governance has still not been focused on improvement of firm performance

1.3 Research objective

This study focuses on the relationship between corporate governance and performance

in organizations of Viet Nam In this paper performance of the firm will be analyzed through corporate governance Because it is said by different researchers that

performance of the firms is affected by practicing good corporate governance policies

As we all are well aware of it that corporate governance is at its initial stage in Viet Nam, so proper application and practice of corporate governance is not present at this moment in Viet Nam So, the aim behind this effort is aware the people of Viet Nam about the benefits of good corporate governance so that they can avail all opportunities

to compete not only at national level but also at international level

1.4 Scope of this research

This research focuses on firms that are listed in Viet Nam’s stock exchange and firms which have annual report in 2011

1.5 Research method

This research method based on market data from website: www.cophieu68.com.vn and something like that The SPSS software package was used to analyze the effect of corporate governance on firm performance of the top 199 listed companies

be tested in this research

Chapter 3: Research methodology: This chapter present research design, measurement scale, target population, sample, data collection and method analysis

Chapter 4: Results: This chapter show result of data analysis process, data summary

to provide the information of the sample, the multiple regression and correlation analysis were used to test the relationship of corporate governance and firm performance Independent sample test and Anova technique were used to test for significant difference of groups in the same independent variable

Chapter 5: Conclusion and Recommendations Based on results of research, this chapter will explain how corporate governance have a significant positive or negative effect on firm performance and also limitations of this research and imply how to apply this research correctly also how to develop this research further

CHAPTER 2: LITERATURE REVIEW AND HYPOTHESES

2.1 Introduction

This chapter reviews the theoretical of corporate governance, the important role of independent director, CEO duality and board size and review the theoretical relationship between them Furthermore, this chapter will show information about the model and hypothesis will be tested in this research

2.2 Literature review

2.2.1 Corporate Governance

In the past, there are many deep studies on the subject, it is important to define the concept of corporate governance The vast amount of literature available on the subject ensures that there exist innumerable definitions of corporate governance To get a fair view on the subject it would be prudent to give definition of corporate governance

Corporate governance involves a set of relationships amongst the company’s management, its board of directors, its shareholders, its auditors and other

stakeholders These relationships, which involve various rules and incentives, provide the structure through which the objectives of the company are set, and the means of attaining these objectives as well as monitoring performance are determined Thus, the key aspects of good corporate governance include transparency of corporate structures and operations; the accountability of managers and the boards to shareholders; and corporate responsibility towards stakeholders While corporate governance essentially lays down the framework for creating long-term trust between companies and the external providers of capital, it would be wrong to think that the importance of corporate governance lies solely in better access of finance

In general, corporate governance is considered as having significant implications for the growth prospects of an economy, because best practice corporate governance reduces risks for investors, attracts investment capital and improves the performance of companies (Spanos 2005) The effective corporate governance is considered as ensuring corporate accountability, enhancing the reliability and quality of financial information, and therefore enhancing the integrity and efficiency of capital markets, which in turn will improve investor confidence (Rezaee 2009)

Companies around the world are realizing that better corporate governance adds considerable value to their operational performance:

- It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas

- It rationalizes the management and monitoring of risk that a firm faces globally

- It limits the liability of top management and directors, by carefully articulating the decision making process

- It assures the integrity of financial reports

- It has long term reputational effects among key stakeholders, both internally and externally

At the policy level, there is a strong effort in designing corporate governance policies that enhance monitoring the management and transparency The policies give shareholders some mechanisms to control the Board of Directors They can vote for the Board of Directors, Board of Supervisors, and major strategic decisions of the companies However, whether the arrangements work in practice is interesting to investigate

Good Corporate Governance is of paramount importance in all organizations regardless

of their industry, size or level of growth The main corporate governance themes that are currently receiving attention are adequately separating management from the board

to ensure that the board is directing and supervising management, including separating the chairperson and chief executive roles; ensuring that the board has an effective mix

of independent and non-independent directors

Good Corporate governance aims at increasing profitability and efficiency of organizations and their enhanced ability to create wealth for shareholders, increased employment opportunities with better terms for workers and benefits to stakeholders Indicators of Good Corporate governance identified in the study include independent directors, independence of committees, board size, split chairman/CEO roles and the board meetings Thus, the main tasks of corporate governance refer to: assuring corporate efficiency and mitigating arising conflicts providing for transparency and legitimacy of corporate activity, lowering risk for investments and providing high returns for investors and delivering framework for managerial accountability

 Corporate governance in Viet Nam:

Corporate governance is of much interest for both professionals and academics, particularly following a collapse of many large companies in the U.S and U.K such as Worldcom, Enrol, In Asia, it is widely believed that weak corporate governance is one

of the main reasons for economic crisis in 1997 In Vietnam, corporate governance is now becoming hot topic in the top government official discussion, particularly since the government commits to accelerate the state sector reform

Corporate governance is still alien to Vietnam According to Freeman and Nguyen (2004), the concept of corporate governance is not yet established in Vietnam In fact, the Vietnamese equivalent term of “Corporate governance” which is broadly similar to

“Administration” is confusing and has yet to take hold as a popular term In Vietnam, corporate governance principles have been incorporated into corporate law systems The Vietnamese government issues a number of laws and regulations pertaining to listed companies Current regulations concerning corporate governance for listed companies and listed companies can be found in the Corporate Law (1999), Degree 64 CP (2002)

of the government on equitization of the SOEs, and Degree 144 CP (2003) of the government on stocks and the stock market

 Enterprise law and Joint Stock Companies in Viet Nam:

- Must have at least 3 shareholders but no maximum

- Ownership is divided into ordinary shares and several types of classes of preferential shares

- May issue securities for fund raising and go listed if satisfying listing requirements

- Each shareholder’s liability is limited to the value of its shares held in the company

- Management structure: + General Shareholders’ Meeting (GSM)

+ Board of Management / Board of Directors

+ General Director / Director (CEO)

+ Inspection Committee if there are more than 10 individual shareholders or a corporate shareholder holds more than 50% shares Its members are from 3 to 5

As it can be seen in the following regulations, corporate governance model in Vietnam

is broadly similar to German corporate governance model in that it has two tier boards: Board of Directors and Supervisory Board and Board These regulations can be briefly described as follows:

- Shareholders’ meeting is the highest decision maker of listed companies

- Shareholders’ meeting votes for (or against) member of the Board of Directors and Board of Supervisors (in case the company has more than 10 shareholders) The board of directors should not have more than 11 members There is no regulation on how many managers or outside shareholders should be on Board

- The Board of Directors appointed the CEO and other important management positions of the companies The CEO can be a member of Board of Governors

- If the company has more than 10 shareholders, it must have Board of Supervisors The Board of Supervisors should have from 3 to 5 members, of which at least one member has a background in accounting Members of the Board of Directors, CEOs, chief accountant, and their related people can not be members of the Board of

Supervisors The Board of Supervisors is not required to have outside members (not currently employees of the company)

 Corporate governance requirements in Viet Nam:

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders For a join stock company, the corporate management included the Board of Management the General Director / Director (CEO), and the Inspection Committee with certain internal control function The Board and the Inspection Committee are subordinated to the general shareholders’ meeting and the CEO is accountable to the Board The Board consists of no less than 3 (5 for listed companies, of which 1/3 must be non-executive members) and no more than 11 members Board members are elected by shareholders at general shareholders’ meeting for a term of less than 5 years

In Vietnam, the Board has a more direct role in the activities of the company, rather than the supervisory role in other countries, and is therefore much more influential in respect of the day-to-day operations of the company The Board appoints one person among its members or an outsider to act as General Director / Director which is the legal representative of the company (or this post may be held by the Chairman of the Board if the charter provides otherwise)

Under the Enterprise Law 2005, directors of a company have the duties of care, loyalty and diligence to the company and shareholders In reality, the Boards are often dominated by the majority shareholders, which are represented by the Chairman of the Board or the CEO And in general, the Inspection Committee is weak However, concept of non-executive and independent directors is new

2.2.2 CEO Duality

There are two types of leadership structure, that is, combined leadership structure and separated structure It occurs if the roles of chairman and CEO are combined The chairman of the board is responsible for managing the board, which may include tasks such as selecting new board members, monitoring the performance of the executive directors and settling any conflicts which arises within the board The CEO is responsible for the day to day management of the company, including the implementation of board decisions The companies that practices CEO duality, may have an individual who possesses too much power and might make decisions that do not maximize shareholders wealth

The relationship between CEO duality and firm performance is considered neutral/insignificant in certain studies whereby there is no link between CEO duality and firm performance (Berg and Smith 1978) No significant relationship was shown in

a different study done using Malaysian public listed companies as sample (Allen Chang 2004) Although the literature is not unanimous in its conclusions, the weight of opinion

is that there is a significant relationship between CEO duality towards firm performance

Even though the impact of the CEO duality on firm performance has been widely researched, due to the conflicting nature of theoretical underpinnings that encompasses this concept with wide variety of perspectives, determining duality-nonduality consequences solely based on firm performance has become controversial (Boyd, 1995; Finkelstein & D'Aveni, 1994) For instance, in one hand, agency theory, which advocates that separation of the CEO-Chairman positions would maximize corporate performance since the board has an unbiased authority to oversee the CEO’s functions (Gillan, 2006; Harris & Helfat, 1998; Shleifer & Vishny, 1997), dominates the corporate governance implications in this context Contrary to what agency theory

proposes, on the other hand, referring to a broad leadership, behavioral, and psychological standpoints, stewardship theory outlines that holding both positions by one person would enhance firm performance with that holding two positions by one person can monitor the firm unambiguously and can have a unique command throughout the firm (Adams, Almeida, & Ferreira, 2005) Although the notion that the CEO duality has significant corporate performance is extensive, yet the prior empirical evidence on the issue is inconsistence in either theoretical application For instance, Boyd (1995) summarized seven prominent corporate governance studies between the CEO duality and firm performance relationship, and realized that only two studies had negative impact on performance whereas five showed to be positive or no significant effect on performance Moreover, integrating those inconsistency results, Boyd found that the CEO duality has a weak negative relationship on firm performance Further, Harris and Helfat (1998) analyzed previous governance studies on the same settings and disclosed that out of thirteen researches three only had negative effects of duality on firm performance while ten found that either positive or no effects Prior literature have also supported for the CEO duality or signifies that no relationship between duality and firm performance (Benz & Frey, 2007) Consequently, even today, determination of the notions that the CEO duality- non duality based on corporate performance has been an unresolved phenomenon in corporate governance researches

2.2.3 Independent directors

Board independence is one of the key issues in corporate governance (CG) However, there are diverse opinions about the importance of board independence Some suggest incentive alignments dominate CG (Demsetz, 1983; Hart, 1983) and others argue board monitoring and advisory role are essential (Fama, 1980; Fama & Jensen, 1983) Nevertheless, most of the corporate governance codes around the world promote board

independence One important aspect of board independence is the number of independent directors on the board of directors

The role of independent directors on the board of directors is to effectively monitor and control firm activities in reducing opportunistic managerial behaviors and expropriation

of firm resources (Fama and Jensen 1983) However, independent directors face difficulties in discharging their duties as they are not directly affiliated with the management (Weisbach 1988) There is evidence to show that independent directors are valued for their ability to advise, to solidify business and personal relationships, and to send a signal that the company is doing well rather than for their ability to monitor (Mace 1986, Herman 1981) Nevertheless, a study of Singapore’s directors has indicated that most of the respondents were of the opinion that the optimum level of independent directorship is between 25% and 50% of the total size of the board and the independent directors were more convinced that strong corporate governance enhanced the board effectiveness more than executive directors (Goodwin and Seow 2000) As such, the proportion of independent directors is identified as the other independent variable in this study

 The Important Role of the Board of Directors:

The board of directors plays an important role in the operation of a company It oversees top management and is entrusted with the responsibility of monitoring and supervising the company’s resources and operation Therefore, the board is collectively seen as a team of individuals with fiduciary responsibilities of leading and directing a firm, with the primary objective of protecting the firm’s shareholders’ interests (Abdullah 2004) There are three critical board roles such as service roles, control roles and strategic roles (Zahra and Parce 1989)

Furthermore, a company’s board of directors can play an important role in determining the kind of funding a public offering receives If going public is your goal, the selection

of board members should be given especially careful consideration The board of directors serves a couple of important functions for a company that has gone public or plans to in the near future First, the selection of particular board members can send a signal to investors regarding the quality of a company and the expertise behind the scenes A board that is composed of highly-regarded experts in a field will be viewed much more favorably than a corporation with a board made up primarily of insiders Knowledgeable outside experts bring connections, expertise, and a lack of bias that cannot be obtained with insiders

The board of directors also serves as a powerful ally to stockholders, particularly when

a company’s CEO doesn’t own a controlling share of the corporation In addition to providing guidance, the board of directors may have the ability to overrule the CEO In some cases, it can even remove the CEO from the company Because all major corporate issues go through the board of directors, stockholders are wary of a company with too many insiders on the board Because the board of directors exists to oversee the corporation and preserve shareholder value, it is important that your board is perceived

as objective, if not slightly biased in favor of stockholders While appointing outsiders

is a good start, it’s also important to align the incentives of the board members with those of the shareholders Providing compensation to board members in the form of company stock is an excellent way to accomplish this If the board of directors does well when the company does well, the board of directors will be much more inclined to ensure that the company performs well

2.2.4 Board size

The two most important functions of the board of directors are those of advertising and monitoring (Adams and Ferriera, 2007) The advisory function involves the provision of expert advice to the CEO and access to critical information and resources (Fama & Jensen, 1983) This is performed by both insiders and outsiders However, Fama & Jensen note the importance of outside directors, who bring valuable expertise and potentially important connections The advantage of larger board size is the greater collective information that the board subsequently possesses and hence larger boards will lead to higher performance (Dalton Dalton, DR, Daily, CM, Ellstrand, AE & Johnson, J 1998) Secondly, the board has the responsibility to monitor, discipline, and remove ineffective management teams, to ensure that managers pursue the interests of shareholders Raheja (2005) argues that insiders are an important source of firm – specific information for the board, but may have distorted objectives due to private benefits and lack of independence from the CEO Compared to insiders, outsiders are more independent, providing better monitoring, but are less informed about the firm’s activities Furthermore, the advantage of larger board size is the greater collective information Therefore, board size increases, and increases in the number of non-executives are expected to have a more positive impact than increases in the number of executive directors

However, there are eventually disadvantages of large boards in the form of coordination costs and free rider problems Firstly, coordination and communication problems arise because it is more difficult to arrange board meetings, reach consensus, leading to slower and less-efficient decision-making (Jensen 1993) Secondly, board cohesiveness

is undermined because board members will be less likely to share a common purpose, communicate with each other clearly, and reach a consensus that builds on the director different points of view (Lipton and Lorsch, 1992) Thirdly, director free-riding

increases because the cost to any individual director of not exercising diligence falls in proportion to board size (Lipton and Lorsch, 1992) Lipton and Lorsch (1992) suggest that as board size increases beyond a certain point, these inefficiencies outweigh the initial advantages from having more directors to draw on, leading to a lower level of corporate performance Lipton and Lorsch (1992) argue that a board size of eight or nine directors is optimal, whilst Jensen (1993) argues that the optimum board size should be around seven or eight directors

Evidence from other countries is broadly consistent but less robust Eisenberg, Sundgren and Wells (1998) concluded the negative relationship between firm board size and performance measured by return on assets (ROA) for a sample of 879 small private firms in Finland In other studies beside this result that find a positive relationship between board size and firm performance Tanna, Pasiouras and Nnadi(2008) underscore the positive relation between board size and performance for English banks Belkhir (2008) finds that increasing board sizes do not undermine the firm performance and there is a positive relationship between board size and firm performance

2.2.5 Financial performance

Traditionally most of the managerial performance measures have been based on financial measures of performance (Eccles, 1991; Nanni et al., 1990) Although measuring financial performance is considered a simpler task, there is little consensus about which measurement instrument to apply Different accounting ratios are often used to measure financial performance These measures include return on assets (ROA) and return on equity (ROE) Empirical researches use either market-based measures or accounting-based measures to assess firm performance Klein (1998) uses return on assets (ROA) and return on equity (ROE) as an operating performance indicator Brown and Caylor (2005) use ROE and ROA as their two operating performance measures

We can measure the operating performance of a firm through the ROA ratio which shows the amount of earnings have generated from an invested capital assets (Epps & Cereola 2008) Managers are directly responsible for the operations of the business and

therefore the utilization of the firms’ assets Thus, ROA allows users to assess how well

a firm mechanism is in securing and motivating efficient management of the firm In the present study, ROA is defined as net income before interest expense for the fiscal period divided by total assets for that same period One of the primary reasons for operating a corporation is to generate income for the benefit of the common stockholders (Epps & Cereola 2008) ROE is a measure that shows an investor how much profit a company generates from the money invested from its shareholders In this study, ROE is defined as the income before interest expense for the fiscal period divided by total shareholder equity for that same period

It is widely acclaimed that good corporate governance enhances a firm’s performance (Byrd and Hickman, 1992; Rosenstein and Wyatt, 1990) In spite of the generally accepted notion that effective corporate governance enhances firm performance, other studies have reported negative relationship between corporate governance and firm performance (Hutchinson, 2002) or have not found any relationship (Singh and Davidson, 2003) Several explanations have been given to account for these apparent inconsistencies Some have argued that the problem lies in the use of either publicly available data or survey data as these sources are generally restricted in scope It has also been pointed out that the nature of performance measures (i.e restrictive use of accounting based measures such as return on assets (ROA), return on equity (ROE), return on capital employed (ROE) or restrictive use of market based measures (such as market value of equities) could also contribute to this inconsistency (Gani and Jermias, 2006)

2.3 Hypotheses development

The framework represents a model which concerns ascertaining the relative importance

of the known antecedents of firm’s performance Many researchers found that CEO duality, the proportion of independent director, the board size gives indirect impact towards the firm’s performance For the purpose of this study firms‟ performance is measured through valuation of Return of Equity (ROE) and Return of Assets (ROA), where profit before interest and tax will be used as denominator because it shows the real performance of a firm as the dependent variable

CEO duality: is set as the binary variable, the number of independent directors and the

board size, are the independent variables in measuring the relations to firm’s performance which is the dependent variable Past researchers applied different methods

in measuring firm performance such as stock price, dividend payable, return on assets, return on equity, gearing ratio and so on In this study, return on assets and return on equity are used as indicators for firm performance

CEO duality occurs if the roles of chairman and CEO are combined The chairman of the board is responsible for managing the board, which may include tasks such as selecting new board members, monitoring the performance of the executive directors and settling any conflicts which arises within the board The CEO is responsible for the day to day management of the company, including the implementation of board decisions The companies that practices CEO duality, may have an individual who possesses too much power and might make decisions that do not maximize shareholders wealth Interest in duality has emerged primarily because it is assumed to have significant implications for organizational performance and corporate governance The lack of separation had led to corporate board being aligned with management rather than shareholders notwithstanding the presence of independent directors (Greenspan, 2003) In this regard, Fama and Jensen (1983) also argue that concentration of decision

management and decision control in one individual hinders boards’ effectiveness in monitoring top management It is argued that there is conflict of interest and higher agency costs when a CEO doubles as board chair (Berg and Smith, 1978; Brickley et al., 1997) and this leads to the suggestion that the two positions should be occupied by two persons Nonetheless, there is also the argument that when a CEO doubles as board chair, it affords the CEO the opportunity to carry out decisions and projects without undue influence of bureaucratic structures and in this regard it is expected that CEO duality should have a positive relationship with performance (Rechner and Dalton, 1991) However, empirical evidence is not conclusive Sanda et al.(2005) show a positive relationship between firm performance and separating the functions of the CEO and board chair, while Daily and Dalton (1992) find no relationship between CEO duality and firm performance

Drawing from the literature on the relationship between a firm’s performance and CEO duality, the following hypothesis is made:

H1: CEO duality has a significant positive effect on firm performance

Independent director: many previous researchers recommended that there should be at

least three non-executive directors on the board of quoted companies Board independence is associated with the entry of outsiders into the board and they outlined the reasons for having an outside presence on the board as:

• Outside directors broaden the strategic view of boards and they widen a Company’s vision

• Outside board members ensure that boards always have their sights on the interests of the companies They are well placed to resolve conflicts

• The outside directors bring awareness of the external world and ever changing nature

of public expectations to board discussions

• Outside directors have a clear role in appointing and monitoring the executive team

The literature suggests that increases in the proportion of outside directors on the board increases firm performance as they can more effectively monitor managers (John and Senbet, 1998) say that a board is more independent if it has more non-executive directors As to how this relates to firm performance, empirical results have been inconclusive In one breadth, it is asserted that executive (inside) directors are more familiar with a firm’s activities and, therefore, are in a better position to monitor top management Some authors have also found that there is no significant relationship between proportion of non-executive directors and firm performance (Hermalin and Weisbach, 1991; Bhagat and Black, 2002) It has been shown that the effectiveness of a board depends on the optimal mix of inside and outside directors (Fama and Jensen, 1983) However, available theory is scanty on the determinants of optimal board composition (Weisbach, 2002) We measure the independence of the board by finding the ratio of non-executive directors to board size and we expect this to have a positive relationship with firm performance

Drawing from this tread in the literature on the relationship between independent directors and firm performance, the following hypothesis is made:

H2: Proportion of independent directors to board size has a significant positive effect on firm performance

Board size: boards of directors may have a difficulty communicating with each other in

a large size board, which causes great detriment to firm performance Yermack (1996), Eisenberg et al (1998) and Singh and Davidson (2003) prove that board size has a negative relation with firm performance In contrast, Jensen (1993) has indicated that a

value-relevant attribute of corporate boards is its size Lipton and Lorsch (1992) suggest

an optimal board size between six and eight directors In this respect, empirical studies have shown that the market values firms with relatively small board sizes (Lipton and Lorsch, 1992; Eisenberg et al, 1998) Hence, as board size increases board activity is expected to increase to compensate for increasing process losses (Vafeas, 1999) The argument is that large boards are less effective and are easier for a CEO to control The cost of coordination and processing problems is also high in large boards and this makes decision-taking difficult On the other hand, smaller boards reduce the possibility of free-riding and therefore have the tendency of enhancing firm performance We measure the size of the board by the number of members serving on such boards and expect this to have a negative relationship with firm performance

Based on the statement abovementioned, his paper proposes the hypotheses as follows:

H3: Board size has a significant negative effect on firm performance

The theories reviewed above focused on how corporate governance affects performance Agency theory focuses on conflicting interests between principals and agents, and maximizing shareholder returns Therefore, agency theory considers separate leadership structure, independent directors and board size as optimal monitoring devices that will maximize the value of firms This study investigated how the board structure of firms in Viet Nam could impact firm performance The variables, considered important in affecting firm performance were CEO duality, an independent directors and the size of board CEO duality refers to the separation of the position of chairman and CEO; board size refers to members in the board and independent director refer to majority of non-executive directors on the board Firm performance in this study is measured in terms of the profitability and value of a firm Since the aim of the study is to determine the impact of corporate governance mechanisms on firm performance, the measures of performance are those widely used for listed companies,

namely, ROE and ROA, which are also considered as proxies for accounting return Therefore, the variables that represent firm performance are ROA and ROE

 Conceptual framework:

The theories reviewed above focused on how corporate governance practices related to board structure affect performance Agency theory focuses on conflicting interests between principals and agents, and maximizing value of firms This study investigated how the corporate governance of firms in Viet Nam could impact firm performance The variables, considered important in affecting firm performance were CEO duality, an independent director and the size of board CEO duality refers to the position of CEO which is both chairman and CEO; independent directors independent director refers to a majority of non-executive directors on the board and board size refer to the members in board Firm performance in this study is measured in terms of the profitability and value

of a firm Since the aim of the study is to determine the impact of corporate governance mechanisms on firm performance, the measures of performance are those widely used for listed companies, namely, ROE and ROA