Vietnam: Corporate Governance To The Fore


Nick Freeman

A recent spate of corporate scandals within some of Vietnam's most high profile corporations has served to show that the quality of corporate governance in the country is less than adequate. With preparations underway to draft a new Enterprise Law, Vietnam's policy-makers have been examining ways by which the general standard of corporate governance practice in the business community can be raised. In this context, the Ministry of Finance co-hosted a conference in Hanoi recently, in conjunction with the International Finance Corporation (IFC, part of the World Bank Group) and the OECD, on the issue of corporate governance. One of the conference presentations included the provisional findings of an on-going survey of corporate governance practices across a representative sample of some of Vietnam's larger firms, conducted by the Mekong Private Sector Development Facility (MPDF).

The survey findings are illuminating. More than half of firms surveyed indicated that they had been directly and adversely impacted by at least one incident stemming from bad corporate governance practices, either internally or at another company (such as a supplier or customer). As a consequence, almost 90 per cent of firms believed that seeking to raise the standard of corporate governance should be a high priority for the Vietnamese government. Surprisingly perhaps, the vast majority of companies surveyed seemed to already have written guidelines and other documentation on most corporate governance issues. But 'translating' these guidelines into actual good corporate governance practice seems to be the main challenge.

The two areas of greatest weakness appear to be the Inspection Committee (similar in function to the Audit Committee or Supervisory Board) and related party transactions. In the case of the Inspection Committee, over a third of firms surveyed confessed that it 'has little real authority, and only exists on paper because it is required by law'. Usually staffed by middle-ranking executives in the company, the Inspection Committee often lacks the authority to question the actions of senior management. The unrivalled authority of senior management is often exacerbated by their dominance on the company Board, with an insufficient number of non-executive Directors present. In the case of related party transactions and conflicts of interest, less than a third of firms surveyed had any guidelines as to how to control such activities, and almost two-thirds of state-owned enterprises in the survey concurred that 'kickbacks are common'.

While such weaknesses in corporate governance practices can be addressed in part by the issuance of new laws and regulations, and better enforcement, there is also a need to raise standards through other means. Of companies surveyed, just over half said they found it hard to find eligible people to serve on the Board, and 95 per cent cited the need for training of senior managers and company directors. Indeed, only a quarter of firms thought that the basic concept and principles of corporate governance were understood by most business people in Vietnam. At present, Vietnam lacks an Institute of Directors, or a similar body, that could lead an effort to raise awareness and understanding of good corporate governance practices. In many countries, the securities market regulator often takes a leading role, but Vietnam's stock market is less than five years old and has just 25 firms listed. As such, it would be difficult for it to have much of an impact on Vietnam's corporate sector as a whole, if it tried to take the lead.

On the issue of improved corporate disclosure, the extent to which Vietnamese firms commonly seek to reduce their bill by under-reporting their real income should not be under-estimated. Therefore, any attempt to radically improve current opacity in corporate disclosure would be difficult to achieve without a marked improvement in the corporate income tax regime and its enforcement. Over 90 per cent of firms in the survey said that the tax administration system needs to be reformed if companies are to become more transparent concerning their financial situation.

WATCHPOINT: Expect to see the government working with elements of the international donor community to enact various initiatives in the coming years, in a bid to raise the overall standard of corporate governance practice in Vietnam.


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AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.

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