On June 6, 2017, the Prime Minister of the Government of Vietnam signed and promulgated Decree 71/2017/ND-CP providing guidance on corporate governance applicable to public companies.
Many regulations have been amended and supplemented, along with new regulations to address practical issues and reach the best governance practices. However, there are also new points that will put additional pressure on enterprises during implementation.
Permitting loans between parent-child companies and companies within the same economic group
Clause 1, Article 26 of Decree 71/2017/ND-CP stipulates that public companies are not allowed to provide loans or guarantees to individual shareholders and their related persons, except when the public company is a credit institution.
This regulation is not new compared to the content of Circular 121/2012/TT-BTC. In practice, some enterprises have encountered difficulties, especially in regulating financial resources between companies within the same system. In 2016, the Securities Commission penalized a case involving a loan transaction between a subsidiary and a parent company because this activity was not permitted, even though in reality, this transaction yielded greater economic efficiency for both parent and subsidiary companies.
However, with the same content, the new Decree has addressed these corporate challenges.
Clauses 2, 3, Article 26 stipulate the exceptions to Clause 1, which include: the public company is a credit institution, the shareholder is a subsidiary where the subsidiary does not have state-owned shares or capital contributions and has invested or purchased shares of the public company before July 1, 2015; the public company and organizations related to the shareholder are companies within the same group or companies operating as a group, including parent company - subsidiary, economic groups, and such transactions must be approved by the general meeting of shareholders or the board of directors as per the company's charter; and other cases as specified by law.
To prevent law evasion in transactions with related parties, Decree 71 also explicitly states: except when approved by the general meeting of shareholders, public companies are not allowed to provide loans or loan guarantees to members of the board of directors, controllers, directors (general directors), managers, etc.; transactions resulting in a total transaction value of 35% or more of the total assets of the public company in the most recent financial statement with these entities, shareholders owning 10% or more of common shares and their related persons; and entities that are subject to information disclosure under the Law on Enterprises.
The General Meeting of Shareholders will approve the Internal Governance Regulation
Article 7 of the new Decree requires public companies to formulate and submit an internal governance regulation to the general meeting of shareholders for approval.
Under the old regulation, the internal governance regulation had to be reviewed and publicly disclosed by the board of directors on the company’s website, but with the new regulation, the shareholders have the authority to approve this regulation.
Additionally, another new point is the introduction of the position of corporate governance officer. According to Decree 71, the corporate governance officer can concurrently act as the company secretary and must meet certain requirements such as having knowledge of the law and not working for the independent auditing firm auditing the company’s financial statements, among others.
From August 1, 2020, the Chairman of the Board of Directors cannot concurrently be the General Director
One of the highlights of this decree is stipulated in Clause 2, Article 12. The chairman of the board of directors is not allowed to concurrently hold the position of director (general director) in the same public company. This regulation will come into effect three years from the effective date of Decree 71, that is, from August 1, 2020.
According to the best governance practices guided by the Organization for Economic Co-operation and Development (OECD), the World Bank, the U.S. Securities and Exchange Commission (SEC), etc., the titles of chairman of the board of directors and general director should be held by different individuals with clearly defined roles and responsibilities for each position.
Explaining the reason for this recommendation, these organizations believe that separating the roles of chairman of the board and general director helps avoid conflicts of interest that may arise, prevents the concentration of power, and ensures impartiality in decision-making processes.
Thus, by requiring the chairman of the board to not concurrently act as the general director, public companies in Vietnam will be compelled to adhere to modern international governance standards. This standard is expected to increase transparency and efficiency in governance and operational management at public companies.
Separation of the Chairman of the Board and General Director: Achievable in 3 years?
The benefits of separating the positions of the chairman of the board and general director are undeniable. However, in practice, achieving this in Vietnamese enterprises is not easy.
In the U.S., under governance rules for public and listed companies issued by the SEC in late November 2016, separating the roles of chairman and general director is recommended but not mandatory.
A survey by Spencer Stuart of S&P 500 companies published in 2015 showed that in 2014, the proportion of companies that had separated these two positions was 48%, a strong increase from 40% in 2010 and 29% in 2005. However, Spencer Stuart's statistics also indicated that only 21 companies (equivalent to 4% of the S&P 500) had official regulations requiring the separation of these two positions.
Meanwhile, a report by Stanford University with 3,525 companies revealed that most still prefer the model where the chairman of the board concurrently serves as the general director. Specifically, 61% of these companies have the chairman holding the dual role of general director.
An interesting point in this research is that the governance model of companies has not been stable over the previous 20 years. “Only 34% of companies have retained the same governance model over the past 20 years. Among these, nearly 50% have maintained the separation of the chairman and general director roles, while over 50% have held onto the model where the chairman also serves as the general director,” the report states.
Notably, companies on average change their governance model about 1.7 times in 20 years, equivalent to a change every 12 years, with large-scale companies changing more frequently (on average about 2.2 times), while smaller companies change less frequently.
The 2016 Proxy Statement of U.S. auto company GM indicates that from January 4, 2016, the board of directors changed the model, allowing the chairman of the board to also serve as the general director.
“The board of directors believes that the re-joining of the two positions under a single individual provides GM with a clear and unified strategic vision during an unprecedented period of change in the industry. With the highest personal responsibility and deep understanding of daily operations, Mrs. Barra (chairman and general director of GM) brings effective governance and unified focus to the board of directors.”
According to Stanford's report, many benefits have been pointed out from separating the roles of chairman and general director, but actual efficiency remains uncertain. The report cites findings from several studies: “Research by Dalton, Daily, Ellstrand, and Johnson in 1998, conducted on a wide scale, shows there is no link between the governance model (separation or combination of the chairman and general director roles) and the business performance of companies.”
So, what about Vietnam? Most companies are formed from family ownership and grow up this way, and the level of professionalism in hired management is still not high. Three years to have 100% of public companies meet the requirement of separating the roles of chairman and general director will be a significant challenge for enterprises and for regulatory bodies overseeing the implementation at public companies.
Source: Dau tu Chung khoan
Address: | 19 Nguyen Gia Thieu, Vo Thi Sau Ward, District 3, Ho Chi Minh City |
Phone: | (028) 7302 2286 |
E-mail: | [email protected] |