MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOCMICS TEACHING PROGRAM DINH HOANG THANG AN ANALYSIS OF THE ROLE OF SUPERVISORY BOARDS IN STATE-OWNED JOINT-STOCK COMPANIES THE CASE OF VIETNAM CONSTRUCTION AND IMPORT-EXPORT JOINT-STOCK CORPORATION MASTER OF PUBLIC POLICY THESIS HO CHI MINH CITY, 2014 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com AN ANALYSIS OF THE ROLE OF SUPERVISORY BOARDS IN STATE-OWNED JOINT-STOCK COMPANIES THE CASE OF VIETNAM CONSTRUCTION AND IMPORT-EXPORT JOINT-STOCK CORPORATION Public policy Code: 60340402 Supervisor: Dr. Huynh The Du LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (i) CERTIFICATION I certify that the substance of the thesis has not already been submitted for any degree and is not being currently submitted for any other degree. I certify that to the best of my knowledge any help received in preparing the thesis and all sources used have been acknowledged in the thesis. The study does not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program.
Author Dinh Hoang Thang LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (ii) ACKNOWLEDGEMENTS I would like to express my deep gratitude to my parents who always encourage me in my life. I would like to express my sincere appreciation to my supervisor, Dr. Huynh The Du, who has helped me in performing the thesis. With rich knowledge, experience and enthusiasm, he has effectively contributed to my thesis.
I am graceful to Dr. Tran Thi Que Giang, Mr. Do Thien Anh Tuan, Ms. Dinh Vu Trang Ngan, Mr.
Vo Duy Minh for thoughtful and valuable comments on the very beginning of my thesis. I would like to thank all my teachers in Fulbright Economics Teaching Program, who have retransmitted their deep knowledge and experience to me as well as my classmates. Last but not least, I express my thanks to all of my friends, especially Ms. Nguyen Thi Nhung and Ms.
Do Trieu Anh, Ms. Tran Thi Loc, who help and motivate me in pursuing the study. Ho Chi Minh City - May, 2014 Dinh Hoang Thang LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (iii) ABSTRACT The role of the Supervisory Board (SB), in accordance with Vietnam’s legal regulations, is to protect shareholders’ interests by monitoring the duties of the Board of Management (BOM) and the CEO, examining the reasonableness, legitimacy, honesty and caution of management; appraising the business operation report of the CEO, management report of the BOM and financial reports of the company. However, hardly has the SB been considered as successfully fulfilling their designated jobs, especially in State-owned enterperises.
This study was done in its case study paradigm to explore the actual role of the SB in Vietnam Construction and Import-Export Joint-stock Corporation (Vinaconex), as the typical company for research purpose. Data used to perform the purposes of the thesis are widespread official information of the company, working papers, and other kinds of information related to the study. Upon applying Agency theory and experience of other countries, this study identifies that the Vinaconex’s SB does not have real power to protect shareholders’ interests, including the State and minority shareholders’ interests due to conflicts of interest and information asymmetry between the SB and shareholders, the SB and the BOM/CEO; lack of independence of the BOM/CEO in terms of personnel, finance and duty and low competency of the SB members. Thesis’s policy recommendations focus on the enhancement of those areas including: improvement in the independence of the SB’s members in term personnel, finance and duty; standardization of the framework of information provided to the SB and higher frequency of the SB’s meetings and reports; higher technical competency of the SB members.
Further, it is needed to decrease control of the Party and the Government over the company, privatize and reduce the State ownership /./ Keywords: Supervisory board, agency theory, shareholders, interest. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (iv) ABBREVIATIONS Abbreviations English Vietnamese AGM Annual General Meeting Đại hội đồng cổ đông BOD Board of Directors Hội đồng quản trị, Ban điều hành (in two-tier model) BOM Board of Management Ban điều hành, Ban Giám đốc (in two-tier model) Hội đồng quản trị (in Vietnam) CEO Chief Executive Officer Giám đốc/ Tổng giám đốc/ Giám đốc điều hành SB Supervisory Board Ban Kiểm soát SCIC State Capital Investment Tổng công ty Kinh doanh Vốn Nhà nước Corporation SOE State-owned enterprise Doanh nghiệp nhà nước Viettel Viettel group Tập đoàn Viễn thông Quân đội Vinaconex Vietnam Construction and Tổng công ty Xuất nhập khẩu và Xây dựng Import-Export Joint-stock Việt Nam Corporation LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (v) TABLE OF CONTENTS CERTIFICATION. (iv) TABLE OF CONTENTS. (v) LIST OF GRAPHS.
(vi) LIST OF TABLES. (vi) LIST OF BOXES. Research Methods, Sources of Information and Research Scope. 4 CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW.
CORPORATE GOVERNANCE AND SUPERVISORY BOARD IN VIETNAM. Supervisory board in joint-stock company. THEORETICAL FRAMEWORK AND LITERATURE REVIEW. Design a contractual relationship.
EXPERIENCE OF OTHER COUNTRIES. 15 CHAPTER 3: VINACONEX CASE. Supervisory Board of the Company. The flow of work related to the SB in Vinaconex.
Principal-Agent problem between Supervisory Board vs. the BOM/CEO. 26 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Goals/given tasks.
Current Interest alignment instruments and Information system. Principal-Agent problem between Supervisory Board vs. Goals/given tasks. Current Interest alignment instruments and Information system.
The technical competence of the Supervisory Board members. The dependence of Supervisory Board. The dependence in term of personnel, finance and duty. The real incentives of the SB, BOM members.
39 CHAPTER 4: CONCLUSION, POLICY RECOMMENDATIONS AND LIMITATIONS. Limitation of the study. REGULATION ON SB IN THE ENTERPRISES LAW 2005. REGULATION ON SB IN THE CORPORATE CHARTER.
REGULATION ON SB IN THE ORGANIZATION AND OPERATION REGULATION OF THE SB. 62 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (vi) LIST OF GRAPHS Graph 1.1: One-tier board structure and Two-tier board structure .1: Agency relationship related to the SB .2: External and Internal Categories of Interest Alignment Instruments .1: The company structure .2: The Structure of Supervisory Board in Vinaconex .3: Flow of monitoring function of the SB .4: Flow of periodical/unusual inspection function of the SB .5: Flow of creating the SB’s report .6: The mixing role of the SB members in Vinaconex and in block holders .7: The mixing role of the SB in Parent company and Subsidiaries .8: Conflict of interest between Inside and Outside members .9: Dual participating mechanism in Vinaconex. 41 LIST OF TABLES Table 3.1: Share structures of Vinaconex .2: Number of shares owned (share of parent company). 23 LIST OF BOXES Box 1: The Responsibilities of the boards of SOEs as OECD guidelines.
18 Box 2: Member of the Supervisory Board in Vinaconex Jsc. 23 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com -1- CHAPTER 1: INTRODUCTION 1. Introduction There are two common models of corporate governance around the world: one-tier and two-tier board structure (Jungmann, 2006). The difference between them is that in two-tier board structure, there is an additional board called Supervisory Board (SB) who supervises the Executive Board in managing and running the company.
The one-tier board structure is more popular in the world, especially in Anglo-Saxon countries such as the UK, the US while the two- tier board is common in continental European regions such as Germany and the Netherlands… (Kruijs, 2012; Maassen, 2002). The following outline summarizes the differences between the two corporate governance structures.1: One-tier board structure and Two-tier board structure Source: Author’s illustration based on Peij (2010) In Vietnamese corporate governance, there is also a board called Supervisory Board in joint-stock company. However, even with the same name, Vietnamese SB is different with the one in two-tier model. According to the current regulations, each joint-stock company with over 11 individual shareholders or has an organizational shareholder who owns over 50 percent of shares, must establish a SB who is independent of both the BOM and the CEO (Enterprises Law 2005).1 in page 21 for visualization.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com -2- As regulated in the Enterprises Law 2005, the SB’s role is to protect shareholders’ interests by monitoring the duties of the BOM/CEO; examining the reasonableness, legitimacy, honesty and caution of management; appraising the Business Operation Report of the CEO, the Management Report of the BOM and financial reports of the company; giving opinions and petitions to the BOM/CEO or even Annual General Meeting (AGM – Dai hoi dong co dong) about the violation of the BOM/CEO if needed. However, hardly has the SB been considered as successfully fulfilling their designated jobs, especially in state-owned joint-stock companies (Nguyen Viet Thinh & Nguyen My Hanh, 2012; Nguyen Dinh Cung, 2008). In reality, the SB has to face many difficulties in order to get the equal position compared to the BOM/CEO (Tran Minh Son, 2010). As the result of a survey conducted in Vietnam, 36 percent of the respondents believe that the SB just “exists on paper” (ton tai tren giay) and it is established to satisfy the requirement of law only (Lan, 2004 as cited in Hai & Nunoi, 2008).
There might be a lot of reasons for the ineffectiveness of the SB, namely conflict of interest, information asymmetry and dependence of the SB on other boards (Tran Minh Son, 2010). The SB seems lack of actual power to act upon interests of shareholders and the operations of the SB are formalistic only (Le Minh Toan, 2013; Tran Thanh Tung, 2009). In state-owned joint-stock company, the SB might have more responsibilities due to it has to represent and protect the interest of not only minority shareholders but also the State. Minority shareholders’ interest is that “shareholders unanimously want firms and managers to maximize share value” (Gordon, 1990, p.
Besides maximizing the share price as minority shareholders, the State prioritizes to preserve and increase the state properties’ value, including broader social interests (Voss & Xia, 2012). Additional complexities are added to the corporate governance since the state has different interests other than individual shareholders (Pande, 2012). It might pursue political or policy goals instead of maximizing shareholders’ benefit. In this case, protecting minority shareholders’ interest and determining whether an action serves policy or political goals will be more challenging (Pande, 2012).
This thesis aims to deeply understand the causes of the SB’s lack of actual power in SOEs, and give policy recommendations for this issue through the case of Vietnam Construction and Import-Export joint-stock Corporation (Vinaconex hereafter). LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com -3- The thesis chooses Vinaconex as the typical company for the research purpose because this corporation was one of the first SOEs privatized from the corporation 90 1 to take advantage of capital market potentials for its competitiveness and economies of scales. The Corporation went public on 1st Dec 2006, listed as VCG on Hanoi Stock Exchange, which marked a milestone in its history and a step towards the leading position in Vietnam (Vinaconex, 2012a). The state ownership in Vinaconex is quite large, around 79 percent, that adds more responsibilities for both the SB, the BOM and the CEO in managing and using the State resources.
Research Objective The objective of the thesis is to identify whether the SB of SOEs in general and Vinaconex in particular, have power to protect shareholders’ interests (including the State and minority shareholders) in reality or not. And then, the thesis proposes policy recommendations to increase the actual power of the SB in SOEs. Research Questions In the thesis, the research objectives were formulated as research questions. The central theme of this research is to analyze the functions and characteristics of the SB in SOEs through the case of Vinaconex and answer these three following questions: (i) How does the Supervisory Board in Vinaconex perform its work?