Study looks into protecting minority shareholders in Vietnamese context

Protecting minority shareholders is a strategy to achieve sound corporate governance, promoting firm performance and economic growth. The strength of minority shareholder protection indicates the extent of conflict of interests in a firm; and it is ranked on the annual basis by the World Bank to prepare the well-known “Doing Business” reports.

Dr. Pham Nguyen Hoang of the Victoria University in Australia and researcher Nguyen Cong Minh of the State Securities Commission of Vietnam have conducted a study on this issue in the Vietnamese context. Following is a brief introduction of their study.

This study focuses on mechanisms of protecting minority shareholders (e.g. shareholders who own non-controlling amount of common equity of a firm) and their impacts on efficiency of the Vietnamese listed firm. We aim to examine this relationship and provide empirical evidence that is useful for not only investors but also regulators and the firms.

As a public firm can be viewed as a system involving different players (e.g. regulators, managers, employees, shareholders, bondholders, other stakeholders), all these players are supposed to act for the common goals. Nevertheless, more discussions and concerns are raised over the last few decades about the possible conflicts of interest among them and how the firms can overcome such conflicts.

The agency theory suggests that due to the separation of ownership and control, there are potential agency problems between controlling shareholders and minority shareholders/investors. Agency problems can also rise between managers and shareholders of the firm. Information asymmetry and differences in sensitivities to firm-specific risks are usually sources of the agency problems between shareholders and management.

Information asymmetry is a problem when one group has better or more timely information than other groups. Likewise, it is highly likely that managers have more and better information about the firm’s current situation and prospects than investors. Managers can pursue their own interests at the expense of shareholders. Such agency problems result in certain forms of agency costs, which are basically financial expenses or costs incurred by the firm. To address the conflicts of interest and agency problems, various corporate governance mechanisms can be designed, including protecting minority shareholders.

According to the World Bank (WB, 2017), protecting minority shareholders is a strategy to achieve sound corporate governance, promoting firm performance and economic growth.

The Vietnamese public firms are characterized by ownership concentration by the government or founding family members. In a non-Anglo-Saxon and code law country, ownership structure is generally more concentrated and complex, while there is less effective legal protection for investors (Brown et al., 2011, Tirole, 2006). Various cases of corporate scandals and violations of laws relating to the rights of shareholders can be observed among the Vietnamese listed firms in recent years. Protecting minority shareholders at the firm level is therefore an issue of growing concern in Vietnam. Consequently, an array of corporate governance mechanisms aiming at ensuring shareholders’ rights have come into effect in applicable laws and regulations, including the regulations and/or recommendations on the ability of shareholders to sue directors, shareholders’ rights in major corporate decisions, independence of the chairman and board of directors, and corporate transparency (Decree 71/2017/ND-CP of the government on the Guidelines of Corporate Governance for Public Companies (2017), and the Vietnam Corporate Governance Code of Best Practices (2019)) .

While such mechanisms are adapted from international best practices and recommendations, it is not clear whether they really work terms of protecting minority shareholders and improving firm performance. In addition, it is useful to understand which mechanism is stronger in protecting minority shareholders in Vietnam. Some mechanisms may not be effective in practice because minority shareholders are likely unaware of or not interested in exercising their rights.

In this study, we collect a data sample of 675 firm-year observations (135 firms over 5 years from 2014-2018 on the Vietnamese stock markets, consisting of Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE). The main explanatory variables of interest are six indicators of protecting minority investors as proposed by the World Bank (WB, 2017, 2018, 2019). The dependence variable is agency costs. The lower level of agency costs indicates better performance of the firm, and vice versa. Using data analysis and econometrics techniques, we find strong evidence that the following protection mechanisms have significant impacts on mitigating agency costs: 1) review and approval requirements for related-party transactions; 2) minority shareholder’s ability to sue and hold directors liable for their duties; 3) minority shareholders’ access to internal corporate documents; and 4) shareholders’ rights to approve major corporate investment and sales of asset decisions. Specifically, lower levels of agency costs (i.e. improved firm performance) are found for those firms having the above four protection measures clearly stated in corporate documents such as corporate charters, annual reports, company websites, or internal corporate governance rules.

On the contrary, it is found that the other two mechanisms do not play significant roles in protecting minority shareholders, namely i) separation of roles between chief executive officer (CEO) and chairman of the board of director (i.e. no dual roles by the same individual); and ii) disclosure in annual reports of salary, bonuses and other forms of remunerations to directors and the management. While the separation of CEO from Chairman role is often recommended, and hence regulated, as a good corporate governance mechanism, this study shows that there is little evidence to confirm this for the Vietnamese listed firms.

Overall, our study indicates that there is a selective set of effective mechanisms to protect minority shareholders at the firm level in Vietnam. The four indicators as mentioned above are shown to be good corporate governance mechanisms with regards to ensuring the interests of minority shareholders of the firm, mitigating agency costs and enhancing firm performance. Thus, assessing the quality of protecting minority shareholders in Vietnam’s listed firms can be made by looking into such four measures. This should be an additional step taken by investors before making decisions about buying shares of the listed firms on Vietnam’s stock markets. It is also suggested from this study that protecting minority shareholders is indeed a channel to achieve sound corporate governance and better performance of the joint-stock companies in Vietnam.

Source: Vietnam News Agency