Model change needed to improve corporate governance

Monday, Mar 09, 2020 08:49

Customers at Bao Viet's insurance branch. Bao Viet Holdings is among listed companies that had the best corporate governance reports in 2019. — VNA/VNS Photo Tran Viet

Good corporate governance often leads to good performances and improves share prices and risk management for companies.

According to the International Finance Corporation (IFC), a member of the World Bank, companies with good corporate governance report their return-on-equity (ROE) ratios are three times the ratios at worse-governed companies. The former also enjoy higher creditability ratings and are more developed.

That explains why companies with the best corporate governance results have also recorded good corporate earnings in recent years.

In 2019, insurance-finance group Bao Viet, dairy producer Vinamilk, DHG Pharmaceutical JSC, tech group FPT and HCM City Securities Corp were among the listed firms with the best corporate governance reports.

Those companies also had the best annual reports and best sustainable development reports. Their earnings were also the highest and their stocks are among the top 30 largest by market capitalisation and trading liquidity on the local market.

At those large-cap firms, the organisation of the board of directors and sub-units has been changed to improve the quality of corporate governance.

Vinamilk has eliminated its board of supervisors, which often stand independently from the board of directors. The company has set up a sub-unit for the board of directors, which is called the internal auditing commission.

The new unit will include independent board members, supervisors of the board of directors and the board of managers.

According to Phan Duc Hieu, deputy director of the Central Institute for Economic Management (CIEM), the Law on Enterprise allows a joint-stock firm to choose between two models of corporate governance.

The popular model applied by most companies in Viet Nam involves the shareholders’ meeting, the board of directors, CEO and the board of supervisors.

This model has proven old-fashioned and not suitable for modern development as directors in some cases take advantage of their power to manipulate the company while no one speaks against this.

A supervisory board is often established to make the corporate’s organisational structure look good without practical power as the board is often under the company's director at work, so it has no real power, Hieu said.

The other model, allowing a company to replace the supervisory board with an internal audit commission, is popular in the US and UK. The commission makes public announcements on corporate news so shareholders are aware of their rights, benefits and obligations. This model also helps minimise the chance of corporate leaders abusing their power. — VNS

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