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Dinh Vu


Last updated: Wednesday, May 23, 2018


Weak Corporate Governance Hinders Business Growth

Posted: Tuesday, May 09, 2017

Many business leaders are confused between corporate governance and operational management. Improper management practices and a lack of effective corporate governance are hindering Vietnamese firms’ competitiveness, making them slow to respond to changes in business environment, especially financial crisis.

This is an assessment by Vietnam Chamber of Commerce and Industry (VCCI) in the Annual Report on Vietnamese Business 2016/2017 titled “Corporate Governance” recently released in Hanoi. Governance weakness makes Vietnamese companies slow to grow, crowded in quantity but weak in quality.

The more modern a business, the better corporate governance
According to statistics, Vietnam has seen the rise of modern business models through the form of limited liability companies and joint stock companies since 2007, gradually replacing traditional family-run private company model. Especially, among 400 companies surveyed by VCCI in 2016, the more modern model a company has, the more popular governance principles it applies. Listed companies have most of these modern principles, followed by foreign invested companies, State-owned companies, unlisted joint stock companies, limited liability companies and lastly private companies.

Releasing annual reports on business and financial status is considered one of important contents of information transparency in a good corporate governance model. Among enterprises surveyed by VCCI, 69.3 per cent did this. These reports are usually published within two months.

Regarding annual business result disclosures, 40 per cent of respondents only published financial statements; only 6.5 per cent released annual reports, and nearly 23 per cent published both financial statements and annual reports. About 1 per cent announced other reports and up to 30 per cent made no public reports at all. Among companies that do not make any report, limited liability companies represented a majority (65 per cent). Meanwhile, private companies only made up 5 per cent as they tend to be private to the public.

The VCCI Report also noted that the adherence to corporate governance principles results in the superior performance of listed companies compared to the unlisted, evidenced in the share of completing and exceeding business plans.

To date, member countries of Organisation for Economic Cooperation and Development (OECD) compiled a guide to corporate governance principles in a bid to provide guidance on general corporate governance, but applying these principles to Vietnamese enterprises still faces many issues. The biggest limitation to corporate governance in Vietnam is that business leaders are actually keener on management than strategic planning and corporate development strategy monitoring, while having yet to perform the function of monitoring and balancing power among stakeholders, particularly between owners and executives. In addition, the role of the Supervisory Board is unclear, superficial and reliant on the Board of Directors and the Executive Board. The internal control capacity of companies is limited, partly because internal auditors are answerable to the Executive Board rather than the Board of Directors. Besides, the lack of publicity and transparency is a big problem of corporate governance in Vietnam today. This makes it difficult for investors and shareholders to accurately assess present and future corporate values. Shareholders' rights, despite having begun to be noticed, have not really brought about significant results.

The restructuring of State-owned enterprises (SOEs) has brought some achievements, shown in declined SOEs and improved SOE capacity and scale in addition to changes in how companies are governed. Shareholders’ and external inspection and supervision has practical significance in renovating management mode, reducing costs and improving business efficiency. However, the key to improving corporate governance in SOEs is the separation of State ownership function from state management function at administering bodies.

Improved governance to fill integration gap for business
Improving corporate governance is a prerequisite for Vietnamese enterprises to shorten the gap and catch up with businesses in the region. According to VCCI, some instruments for bettering corporate governance quality now includes establishing the Board Members Institute as in many other countries around the world, applying international accounting standards to financial reporting, honouring companies with good corporate governance, corporate governance packages of securities companies and auditors, and enhancing the role of business associations. These efforts are being undertaken by the State Securities Commission of Vietnam (SSC) in cooperation with the International Finance Corporation (IFC), VCCI and other agencies relating to the promotion of Vietnam Corporate Governance Initiative (VCGI).

According to VCCI, government agencies should continue to take drastic actions to improve the business environment; continue to study and perfect the legal system on corporate governance, with a focus on completing sanctions on enterprises that do not comply with corporate governance regulations to avoid damage and loss to the State and investors.

Businesses should necessarily understand more about the role of corporate governance in order to adopt an effective and transparent corporate governance system. In the current context of fierce competition, a good corporate governance system will help build up the trust of investors and other stakeholders and other benefits for Vietnamese enterprises when they are limited in many aspects. The joint deployment of VCGI will be a good foundation for the development of the business community.

Quynh Anh


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