Corporate governance lags behind regional neighbours

Thursday, Oct 02, 2014 08:28

As the HCM City Stock Exchange illustrates, Viet Nam has made progress. However, as the country continues to open up to the region, investors' expectations will keep rising.— VNA Photo

by Chris Razook

The HCM City Stock Exchange and Vietnam Investment Review have congratulated companies for their transparency and openness during their joint seventh annual awards. The event's success shows how Government reforms in recent years have helped improve standards in the Vietnamese market.

The ceremony attracted more than 200 companies and broad coverage from local newspapers and television stations. The International Finance Corporation (IFC), which helped host the event, and the World Bank supported the push for reforms promoting transparency, such as changing laws and regulations to promote investor protection and shareholder rights. Now the IFC and World Bank have witnessed firsthand the Government's commitment to change.

However, as Viet Nam prepares for its integration with the ASEAN Economic Community in 2015, more work needs to be done. For the integration to work, goods, services and investments must flow more freely across borders.

Viet Nam needs to catch up with neighbors such as Singapore, Thailand, and Malaysia, which have all made significant reforms in corporate governance during the past decade. More than a third of Viet Nam's Gross Domestic Product (GDP) comes from State-owned enterprises – and more than 350 of about 600 listed companies have some State ownership, according to 2012 World Bank statistics.

To its credit, the Government has already looked at State ownership and is mounting a substantial push towards privatising the market. These businesses will need to adopt higher levels of transparency to attract long-term investors.

Some key challenges to reforming the market remain. High levels of cross-shareholding and concentrated ownership in the banking sector means related-party transactions, particularly lending, pose a problem. Also, studies by the IFC and the World Bank have shown that Vietnamese companies need to strengthen the abilities of directors and increase boards' independence and effectiveness.

Investors generally have more confidence in companies with good corporate governance. They feel safer contributing to markets that have sound regulatory practices. Pushing ahead on both fronts is crucial to improving Viet Nam's attractiveness for international partners, who will bring not just capital, but also new knowledge that can boost the competitiveness and sustainability of the country's companies in the long run.

According to 2013 data from the Organisation for Economic Co-operation and Development, Viet Nam has about 14 percent of ASEAN's population, but only seven per cent of ASEAN's total GDP. That is about half of Thailand's per-capita. One could argue that continued reforms in Viet Nam are important for ASEAN's overall success.

Looking forward, the public and private sectors need to work together to build on the progress made. To start, a reputable, independent group of directors should be established to promote corporate governance in Viet Nam.

The update to the Law on Enterprises represents an important change that is already underway. It will help incorporate international best practices into the market where appropriate. But the Government needs to continue making these improvements. There should be more training in best-practices, more support of shareholder rights and methods for avoiding conflicts of interest.

As the HCM City Stock Exchange illustrates, Viet Nam has made progress. However, as the country continues to open up to the region, investors' expectations will keep rising. The IFC and the World Bank Group, with support from the Swiss government, are committed to helping the country meet these expectations.

*Chris Razook, corporate governance head of the East Asia Pacific section of the International Finance Corporation

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