Corporate governance in Vietnam and in state owned enterprises after equitization = Quản trị doanh nghiệp ở Việt Nam và tại các doanh nghiệp nhà nước sau cổ phần hóa. Luận văn ThS. Kinh doanh và quản lý: 60 34 05

vietnam national university, HANOI school of business Do Lan Huong Corporate governance in Vietnam and in state owned enterprises after equitization Major: Business Administration Code: 60 34 05 Master of business administration thesis Supervisor: Dr Can Van Luc Hanoi – 2010 ACKNOWLEDGEMENT I would like to deeply thank my parents who have encouraged me in my education and their constant support through the course of studies I also would like to thank my husband and my little sons for their encouragement to me to continue my education Many thanks also go to my colleagues who helped me a lot in collecting data to finish the thesis Especially, I would like to send my sincere thanks to my helpful supervisor Dr Can Van Luc, for his advice and support during the time I write the thesis i ABSTRACT CORPORATE GOVERNANCE IN VIETNAM AND IN STATE OWNED ENTERPRISES AFTER EQUITIZATION Do Lan Huong Hanoi School of Business Supervisor: Dr Can Van Luc September 2010, 85 pages Corporate governance has been a prominent issue in developed market economies for some considerable time However, in an emerging and transition economy like Vietnam, it is still unfamiliar and underdeveloped Legal framework for corporate governance in Vietnam is only in the early stage of development Awareness of market participants on corporate governance is still limited In the meantime, the business environment and the capital market are changing very fast and becoming more and more complicated, especially after the world financial crisis in 2007-09 The recent break up of Vinashin and the alarming inefficiency in management and operation of state owned enterprises have also attracted attention to corporate governance and made it become one of the current hottest issues In this context, this thesis provides a literature review of corporate governance and an up-to-date evaluation of corporate governance practices in Vietnam Besides, as the success of Vietnam‟s SOE reform through equitization is significant for the country‟s future economic growth and the improvement in corporate governance is one of the major factors for improving efficiency in equitized state-owned enterprises (SOEs), an examination of the changes in corporate governance of SOEs after equitization is also conducted To conclude, the thesis provides recommendations to building a sound and strong corporate governance system in Vietnam ii TÓM TẮT QUẢN TRỊ DOANH NGHIỆP Ở VIỆT NAM VÀ TẠI CÁC DOANH NGHIỆP NHÀ NƯỚC SAU CỔ PHẦN HÓA Đỗ Lan Hương Khoa Quản trị kinh doanh Giáo viên hướng dẫn: TS Cấn Văn Lực Tháng 09 năm 2010, 71 trang Ở nước phát triển, quản trị doanh nghiệp đời từ lâu quan tâm Tuy nhiên, kinh tế giai đoạn chuyển đổi Việt Nam, quản trị doanh nghiệp khái niệm mẻ chưa phát triển Khung pháp lý cho quản trị doanh nghiệp xây dựng giai đoạn ban đầu Nhận thức quản trị doanh nghiệp bên tham gia thị trường nhiều hạn chế Trong đó, mơi trường kinh doanh thị trường vốn thay đổi nhanh chóng ngày trở nên phức tạp đặc biệt sau khủng hoảng tài tồn cầu năm 2007-09 Bên cạnh đó, vụ việc Vinashin thiếu hiệu đáng báo động quản lý doanh nghiệp Nhà Nước làm dấy lên ý người tới quản trị doanh nghiệp khiến trở thành vấn đề nóng bỏng Trên tinh thần đó, luận văn đề cập đến hệ thống sở lý luận quản trị doanh nghiệp tranh cập nhật thực trạng quản trị doanh nghiệp Việt Nam Bên cạnh đó, thành cơng cơng đổi doanh nghiệp nhà nước (DNNN) thông qua q trình cổ phần hóa có ý nghĩa quan trọng tới phát triển kinh tế tương lai Việt Nam, nên luận văn trao đổi quản trị DNNN sau cổ phần hóa Trong phần cuối, luận văn đưa số kiến nghị nhằm góp phần xây dựng nâng cao hiệu cơng tác quản trị doanh nghiệp Việt Nam iii TABLE OF CONTENTS ACKNOWLEDGEMENT i ABSTRACT ii TÓM TẮT iii TABLE OF CONTENTS iv LIST OF ABBREVIATIONS vi LIST OF TABLES vii CHAPTER 1: INTRODUCTION 1.1 Background 1.2 Rationale of the Thesis 1.3 Purpose of the Thesis 1.4 Key Research Area 10 1.5 Methodology 10 1.6 Contribution of the Thesis 10 1.7 Outline 11 CHAPTER 2: LITERATURE REVIEW 12 2.1 Definitions of Corporate Governance 12 2.1.2 What is Corporate Governance? 12 2.1.2 Objectives of Corporate Governance 12 2.1.2 Codes of Corporate Governance 13 2.2 Models of Corporate Governance 14 2.2.1 Shareholder Model 14 2.2.1 Stakeholder Model 15 2.3 Corporate Governance System 17 2.4 Corporate Governance Mechanisms 19 2.4.1 Internal Mechanisms 20 2.4.2 External Mechanisms 25 2.5 Corporate Governance in Transition Economies 28 2.6 Chapter Summary 31 CHAPTER 3: CORPORATE GOVERNANCE IN VIETNAM 32 3.1 Introduction 32 3.2 Legal framework and law enforcement 33 3.2.1 Development of a legal framework for corporate governance in Vietnam 33 3.2.2 Current corporate governance framework in Vietnam 34 3.3 Rights of Shareholders 39 3.3.1 Basic shareholder rights 39 3.3.2 Right to participate in or to be informed of decisions on key corporate changes 42 3.3.3 Rights to participate and vote in general shareholders‟ meeting 43 3.3.4 Markets for corporate control 44 3.4 Equitable Treatment of Shareholders 45 3.4.1 Equal treatment to all shareholders 45 3.4.2 Minority shareholder protection 46 3.4.3 Insider trading and abusive self-dealing 48 3.4.4 Related party transactions 48 3.5 The Role of Stakeholders in Corporate Governance 49 3.6 Disclosure and Transparency 49 iv 3.6.1 Information disclosure 50 3.6.2 Quality of accounting standards 52 3.6.3 Annual audit 53 3.6.4 External Audit 55 3.6.5 Channels for disseminating information 56 3.7 Board of Directors 57 3.8 Board of Supervisors 62 3.9 Remaining corporate governance issues in Vietnam 63 3.10 Chapter Summary 64 CHAPTER 4: CHANGES IN CORPORATE GOVERNANCE OF STATE OWNED ENTERPRISES AFTER EQUITIZATION 66 4.1 Introduction 66 4.2 Methodology and Data collection 67 4.3 Ownership structure after equitization 68 4.4 Board of Directors Composition 69 4.5 The Board of Supervisors 70 4.6 Manager orGeneral manager (CEO) 72 4.7 Other committees 73 4.8 Executive Compensation 73 4.9 Case Study 73 4.9.1 Vinamilk 74 4.9.2 PVFCCo 77 4.9.3 Performance and stock price comparison 80 4.10 Chapter Summary 81 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 82 REFERENCES 85 v LIST OF ABBREVIATIONS BOD: Board of Directors GSM: General Shareholders Meeting SOE: State owned enterprises SSC: State Securities Commission HOSE: Ho Chi Minh Stock Exchange HASTC: Ha Noi Stock Trading Center HNX: Ha Noi Stock Exchange OECD: Organization for Economic Cooperation and Development CFA: Chartered Financial Analysts LLC: Limited Liability Company JSC: Joint Stock Company vi LIST OF TABLES Table 4.1: Ownership structure of SOEs after equitization Table 4.2: Composition of Board of Directors Table 4.3: Distribution of chairperson of the BOD by different groups of shareholders Table 4.4: Composition of the Board of Supervisors Table 4.5: Chairperson of the Board of Supervisors by different groups of shareholders Table 4.6: Distribution of managers of surveyed firms by different groups of shareholders Table 4.7: Vinamilk Ownership structure in 2009 Table 4.8: PVFCCo Ownership structure in 2009 vii CHAPTER 1: INTRODUCTION 1.1 Background Vietnam‟s stock market has only been established and developed for the last ten years However, it has grown very fast and now plays a more and more important role to the country‟s economic development Total market capitalization to GDP increased considerably from 3% in 2005 to 38% in 2009 Number of companies listed in stock exchanges (Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange) has also increased dramatically to 457 companies by the end of 2009 Among which, equitized state-owned enterprises (SOEs) dominate with more than half of the listed companies and holding key industries including power, oil, chemicals, steel…etc Like many other emerging markets, Vietnam‟s stock market is facing many agency problems, which are the subject of corporate governance Investor protection is inadequate, related party transactions are pervasive, compliance with accounting standards is weak and disclosure of quality information is limited These could be major reasons that foreign investors hesitate to invest in Vietnam and hinder the development of the capital market In Vietnam, corporate governance is still underdeveloped Awareness of market participants on corporate governance is limited The framework for corporate governance is only in the early stages of development with laws and regulations being established Therefore, a literature review on corporate governance and an examination of corporate governance practices in Vietnam, especially in post-equitized SOEs are necessary for improving and developing a sound corporate governance culture and framework in Vietnam The enhancement of corporate governance would help reduce emerging market vulnerability to financial crisis, reinforce property rights, reduce transaction costs and the cost of capital, and which would significantly support capital market development (World Bank Corporate Governance Country Assessment, 2006) 1.2 Rationale of the Thesis Corporate governance has been a prominent issue in developed market economies for some considerable time However, in an emerging and transition economy like Vietnam, it is still unfamiliar and underdeveloped Legal framework for corporate governance in Vietnam is only in the early stage of development Awareness of market participants on corporate governance is still limited In the meantime, the business environment and the capital market are changing very fast and become more and more complicated, especially after the world financial crisis in 2007-09 The recent break up of Vinashin and the alarming inefficiency in management and operation of state owned enterprises have also attracted attention to corporate governance and make it become one of the current hottest issues An up-to-date study on corporate governance in Vietnam and in State owned enterprises after equitization is therefore very necessary for developing a sound and healthy corporate governance system in Vietnam 1.3 Purpose of the Thesis This thesis aims to provide a literature review of corporate governance and an up-to-date evaluation of corporate governance practices in Vietnam Besides, as the success of Vietnam‟s SOE reform through equitization is significant for the country‟s future economic growth and the improvement in corporate governance is one of the major factors for improving efficiency in equitized SOEs, an examination of the changes in corporate governance of SOEs after equitization is also conducted Finally, the thesis is expected to contribute to the limited literature on corporate governance in Vietnam  Term of appointment The Board‟s members have a maximum term of years The list of the board members is submitted to the Shareholders‟ Meeting for re-election and reappointment or at least once every years The company‟s charter also requires that one-third of the Board members should be re-appointed on each annual Shareholders‟ meeting  Access to Information Board members are provided with adequate and timely information related to the Company on an on-going basis to enable them to perform their duties The Board has separated and independent access to Vinamilk‟s information from senior management and secretary if they have any queries on the operation of Vinamilk With that balanced structure and characteristics, the Board works very efficiently, has strong power and contributes significantly to the success of Vinamilk after equitization c Board of Supervisors Vinamilk Board of Supervisors (also called the Inspection Committee) has members who are appointed at the Shareholders‟ Meeting for a term of years In the current term, all the members of the Inspection Committee are not employees of Vinamilk and they all have professional qualifications and experiences on accounting and financial management They are not forced or influenced by the management Moreover, they have the authority to investigate any matters within their responsibilities, have full access to and work with the Company‟s management as well as full discretion to invite any director or executive officer to attend its meetings With such characteristics, the Board of Supervisors has real power and discharges its oversight function properly 75 d Other Committees Vinamilk is one of the very few equitized SOEs which have other Board committees such as nominating committee, remuneration committee and audit committee These committees consist of non-executive members and operate very efficiently They actively help the Board fulfill its tasks and exercise the best corporate governance practices for the company e Management Team Vinamilk Management Team consists of members, of whom are from the management team before equitization and are newly hired ones All management executives are well educated and experienced in their fields The Chairwoman, Ms Mai Kieu Lien, the representative of State in the company also serves as the CEO This appointment is approved by the GSM f Executive Remuneration Executive Remuneration policy is reviewed and recommended to the Board of Directors by the Remuneration Committee The committee consists of independent and non-executive members The company‟s remuneration policy is very transparent and attractive to keep and motivate talented people in the Board of Directors and Management who lead the company to success A portion of performance based remuneration is also applied The salary and bonus of Vinamilk for executives are among the best in Vietnamese companies and comparable to foreign companies in the same industry Therefore, over the past few years, the company has attracted talents and managers from well-known multinational companies such as Pepsi, Kimberly Clark to join its management team The remuneration for the Board of Directors and Management members is disclosed annually This enables investors to understand the relation between remuneration of Directors and key executives and their performance 76 g Investor Relations Vinamilk regularly communicates with its shareholders and commits for the timeliness and transparency in its disclosure to the shareholders and the public The company also holds many meetings and dialogues with investors, analysts, investment funds and presses When material information of the company is sent to HOSE, such information is simultaneously posted on the Company‟s website The company also encourages its shareholders to participate actively at the annual GSM and gives its shareholders opportunities to express their views on issues affecting Vinamilk The minority shareholders are also respected and not discriminated from large shareholders 4.9.2 PVFCCo PVFCCo is a leading urea producer in Vietnam with the capacity of 740,000 tons/year The company dominates the local market with a 40% market share and a nationwide distribution network PVFCCo was equitized in 2007 and has VND3800 billion in share capital Petro Vietnam is currently a major shareholder with 61% of total shares After equitization, its corporate governance does not change much and still act as a SOE This case is typical example of “a new tout in an old horn” corporate governance of the equitized SOEs a Ownership structure The ownership structure of PVFCCo at the end of 2009 is as follows Table 4.8: Ownership structure of PVFCCo Shareholders % of total shares State (represented by Petro Vietnam) 61.37% Local investors 21.63% Foreign investors 17% Sources: PVFCCo’s annual report 2009 77 As the State represented by Petro Vietnam still holds a controlling share in the company, it takes a decisive role in most of major issues The participation of outside investors in the company is quite limited b Board of Directors The Board of Directors of the Company consists of members All of them are from Petro Vietnam and holding management positions in the company The lack of participation from outside investors and real non-executive members in the Board makes it biased and highly influenced by Petro Vietnam, the parent company of PVFCCo The unbalanced structure of the Board also creates discrimination between the State shareholder and other shareholders The Board directors are elected by the shareholders at the GSM for a term of years However, during the year the directors may be changed according to the arrangement of Petro Vietnam, the largest shareholder, and other minority shareholders have no voice in that For example, in 2008, 4/5 members of the Board were changed as guided by Petro Vietnam This shows that the Board is not representative for all shareholders but only the major shareholder In fact, the company still acts as if it were a SOE c Board of Supervisors The Board of Supervisors (BOS) consists of members All of them are employees of the company and originally from Petro Vietnam Like the Board of Directors, as the members of the BOS are not independent, its tasks and functions are not properly fulfilled and its real power is quite limited d Management Team The Management team consists of members All of them are the same managers of the company before equitization or newly appointed by Petro Vietnam No outsider is newly hired As a rule, the Management executives are normally chosen and appointed by the BOD However, for PVFCCo,, the selection and 78 appointment of management executives are largely influenced by the parent company, Petro Vietnam This structure also creates a conflict of interest between the management team and minority shareholders e Other committees There is no sub-committee under the BOD in the company f Executive Remuneration The remuneration package for the Board directors and management team is rather high compared to that of other companies in the industry However, the remuneration is not performance-based In the GSM normally held at the beginning of the year, the company managers always set a very conservative profit target for the year and a percentage of profit after tax (PAT) bonus for the management if the company exceeds the target Normally, the company has no difficulties in meeting the targets at the end of the year and the managers easily take large bonuses Minority shareholders not agree with this type of bonus to executive members but as Petro Vietnam holds the controlling vote, the scheme was passed g Investor Relations The communication of the company with outside investors is quite poor It is difficult for minority shareholders, even the institutional shareholders to get information on new projects of the company or to meet the company management to update the company‟s situation The web information of the company is limited Recommendations and suggestions of the shareholders at the GSM are also not considered and respected by the company 79 4.9.3 Performance and stock price comparison a Performance comparison Performance Vinamilk PVFCCo ROA 28% 21% ROE 37% 24% Income growth (average years) 55% 2% Source: Vinamilk and PVFCCo financial statements As PVFCCo has many advantages and large support from the parent company (Petro Vietnam), its performance is rather good with ROA and ROE are 21% and 24% respectively However, the performance of Vinamilk is much better with ROA and ROE increase year by year with more and more efficient management Vinamilk‟s income grew impressively over the last years with the average growth rate of 55% whereas PVFCCo‟s income was quite stable with the modest growth of 2% Corporate governance has contributed to the difference in these companies‟ performance b Stock price vs VNIndex Due to transparency, timely information and efficient management, Vinamilk is the favorite stock of both local investors and foreign investors It outperform VNIndex, DPM (PVFCCo sticker in HOSE) and many other stocks especially during the crisis period 2008-2009 Source: Bloomberg 80 4.10 Chapter Summary The SOEs are themselves strategically very important to the Vietnamese economy Many key industries such as power, oil, chemicals, steel, coal…etc are controlled by the SOE‟s The success of Vietnam‟s SOE reform through equitization is therefore a significant factor in the country‟s future economic growth An empirical research in 125 listed SOEs equitized companies has been conducted to examine the changes in corporate governance in these companies after equitization The research shows that, State still holds majority shares in these companies and the management composition and style are still highly influenced by the State Sub-committees rarely exist in these companies Executives are generally underpaid compared with foreign peers Companies mostly use fixed salary plus bonus link to companies‟ performance There is still lack of strong performance link incentive mechanisms Only few of the equitized SOEs get significantly improved in corporate governance after equitization Two case studies has also been conducted in large SOES: Vinamilk and PVFCCo These companies are typical for types of corporate governance of SOEs after equitization: Vinamilk represent for minority that have strong improvement in corporate governance after equitization with the active participation of foreign and institution investors and PVFFCo represent for the majority with “a new tout in an old horn” style The case studies also show that company who has good corporate governance will have better performance and better share price 81 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS Along with the rapid expansion of the capital market, corporate governance in Vietnam has evolved considerably The legal framework for the capital markets and corporate governance has been established, but still in the early stage of development Investor protection is inadequate, related party transactions are pervasive, compliance with accounting standards is insufficient and disclosure of quality information limited Corporate governance of listed companies is more driven by compliance with regulatory requirements than by the dedication of the managers So far, there has been no specific code of practice or recommendations for the treatment of stakeholders and the stakeholders‟ special access to information is not regulated by law Overdue financial reports and low quality of information are quite popular in the market Vietnamese boards are relatively weak with the lack of independent directors Supervisory board usually lacks necessary skills and experience to perform oversight function The road ahead is still long and further improvements are required The study on the changes of corporate governance in SOEs after equitization also shows State still holds majority shares in these companies and the management composition and style are still highly influenced by the State Sub-committees rarely exist in these companies Executives are generally underpaid compared with foreign peers Companies mostly use fixed salary plus bonus link to companies‟ performance There is still lack of strong performance link incentive mechanisms Only few of the equitized SOEs get significantly improved in corporate governance after equitization Two case studies in large SOES: Vinamilk and PVFCCo show that company who has good corporate governance will have better performance and better share price 82 To strengthen corporate governance in Vietnam in the coming time; several action plans should be made First, the SSC should give clear guidance or requirements on non-executive directors in the BOD of listed companies In addition, there should be regulations on the independence and qualifications of the Supervisory Board‟s members to strengthen their role Second, there should be regulations on trading on material non-public information; and the sanctions on violations of insider trading, market manipulation or information disclosure should be heavier Third, firms should promote using performance-enhancing mechanisms Such mechanisms align the interests of senior executives and management of the company with those of their shareholders, and provide incentives for the former to perform their tasks Such schemes should be approved by the shareholders No member of the BOD or the CEO should be involved in deciding on his/her own remuneration A remuneration committee comprising non executive members under the BOD should be set up Fourth, companies should encourage more shareholders‟ participation in General Shareholders‟ Meetings Voting by proxy should be encouraged, and shareholders should be allowed to elect proxies through electronic devices Fifth, it is recommended that a high level committee consisting of relevant institutions be set up to promote corporate governance practices in Vietnam Sixth, the awareness of corporate governance should be increased A priority should be to promote and expand training programs on corporate governance for directors and managers of listed companies Directors and mangers of listed companies should be required to attend and complete the training courses 83 Seventh, more efforts should be required to 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