An analysis of the role of supervisory boards in syate owned joint stock companies

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

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



(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


(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



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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.


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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
Corporation

Tổng công ty Kinh doanh Vốn Nhà nước
SOE State-owned enterprise Doanh nghiệp nhà nước
Viettel Viettel group Tập đoàn Viễn thông Quân đội
Vinaconex Vietnam Construction and
Import-Export Joint-stock
Corporation
Tổng công ty Xuất nhập khẩu và Xây dựng
Việt Nam



(v)
TABLE OF CONTENTS
CERTIFICATION (i)
ACKNOWLEDGEMENTS (ii)
ABSTRACT (iii)
ABBREVIATIONS (iv)
TABLE OF CONTENTS (v)
LIST OF GRAPHS (vi)
LIST OF TABLES (vi)
LIST OF BOXES (vi)
CHAPTER 1: INTRODUCTION 1
1.1. Introduction 1
1.2. Research Objective 3
1.3. Research Questions 3
1.4. Research Methods, Sources of Information and Research Scope 4
1.5. Thesis structure 4
CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 5
2.1. CORPORATE GOVERNANCE AND SUPERVISORY BOARD IN VIETNAM 5
2.1.1. Corporate governance 5

2.1.2. Supervisory board in joint-stock company 6
2.2. THEORETICAL FRAMEWORK AND LITERATURE REVIEW 7
2.2.1. Agency theory 7
2.2.2. Design a contractual relationship 8
2.2.3. Literature review 11
2.3. EXPERIENCE OF OTHER COUNTRIES 15
CHAPTER 3: VINACONEX CASE 20
3.1. VINACONEX 20
3.2. Supervisory Board of the Company 21
3.3. The flow of work related to the SB in Vinaconex 24
3.4. Principal-Agent problem between Supervisory Board vs. the BOM/CEO 26


3.4.1. Goals/given tasks 26
3.4.2. Agency cost 27
3.4.3. Current Interest alignment instruments and Information system 31
3.5. Principal-Agent problem between Supervisory Board vs. Shareholders 32
3.5.1. Goals/given tasks 32
3.5.2. Agency cost 33
3.5.3. Current Interest alignment instruments and Information system 36
3.6. The technical competence of the Supervisory Board members 37
3.7. The dependence of Supervisory Board 37
3.7.1. The dependence in term of personnel, finance and duty 37
3.7.2. The real incentives of the SB, BOM members 39
CHAPTER 4: CONCLUSION, POLICY RECOMMENDATIONS AND LIMITATIONS 42
4.1. Conclusion 42
4.2. Policy recommendations 42
4.3. Limitation of the study 44
REFERENCES 45
APPENDIX I. REGULATION ON SB IN THE ENTERPRISES LAW 2005 57

APPENDIX II. REGULATION ON SB IN THE CORPORATE CHARTER 60
APPENDIX III. REGULATION ON SB IN THE ORGANIZATION AND OPERATION
REGULATION OF THE SB 62



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LIST OF GRAPHS

Graph 1.1: One-tier board structure and Two-tier board structure 1
Graph 2.1: Agency relationship related to the SB 8
Graph 2.2: External and Internal Categories of Interest Alignment Instruments 9
Graph 3.1: The company structure 21
Graph 3.2: The Structure of Supervisory Board in Vinaconex 22
Graph 3.3: Flow of monitoring function of the SB 24
Graph 3.4: Flow of periodical/unusual inspection function of the SB 25
Graph 3.5: Flow of creating the SB’s report 26
Graph 3.6: The mixing role of the SB members in Vinaconex and in block holders 28
Graph 3.7: The mixing role of the SB in Parent company and Subsidiaries 29
Graph 3.8: Conflict of interest between Inside and Outside members 34
Graph 3.9: Dual participating mechanism in Vinaconex 41


LIST OF TABLES

Table 3.1: Share structures of Vinaconex 20
Table 3.2: 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


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CHAPTER 1: INTRODUCTION
1.1. 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.
Graph 1.1: 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). See Graph 3.1 in page 21 for visualization.
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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. 1). 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).

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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 1
st
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.
1.2. 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.
1.3. 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?
(ii) What are the factors which affect the function of the Supervisory Board in Vinaconex?
(iii) Does the Supervisory Board in Vinaconex have power to protect the interests of
shareholders including the State and minority ones in reality?
Due to Vinaconex is still a state-owned joint-stock company with up to 79% of shares
belong to the State, the public policy meaning of those above questions is to identify the

problems of the Vietnamses SB, find the way to improve its actual role and protect the State's
resources and interest.

1
Corporation 90 was regulated in the Prime Minister Decision No. 90 on 7
th
Mar 1994 to continue on the
arrangement of state enterprises in which corporation 90 is the state enterprise of at least 500 billion VND legal
capital.
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1.4. Research Methods, Sources of Information and Research Scope
The thesis employs a case study for research purpose. The collected data are mainly
publicly official information of the company and its subsidiaries. Working papers and other
useful information related to this study are also included. The thesis chooses Vinaconex as the
typical company because it was one of the first SOEs privatized from state corporations.
Moreover, its chartered capital is quite large, up to VND 4,417 billion (as at 29
th
Mar 2012) and
although it went public in 2006, the company still remains 79% of the State ownership.
The research period is from 2006 to present. Subjects to be studied are both members of
the SB/BOM/CEO of the parent company (Vinaconex) and its subsidiaries (Vinaconex 1,
Vinaconex 2, Vinaconex Xuan Mai…). The scope of the research is the power of the SB of
Vinaconex in both theory and reality.
1.5. Thesis structure
The rest of the thesis is organized as follows:
Chapter 2 is about theoretical framework, literature review and experiences of other
countries.
Chapter 3 analyses the case of Vinaconex, each agency relationship and its characteristics

as well as the independence of the SB.
Chapter 4 suggests policy recommendations and conclusions. Besides, limitation of the
study will be mentioned at the end of this chapter.
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CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW
2.1. CORPORATE GOVERNANCE AND SUPERVISORY BOARD IN VIETNAM
2.1.1. Corporate governance
Corporate governance has always been discussed as a hot topic in both literature and
practice, and it plays an important role in economics, business and society (Meer, 2009). As
defined by the OECD (1999):
"Corporate governance is the system by which business corporations are directed
and controlled. The corporate governance structure specifies the distribution of
rights and responsibilities among different participants in the corporation, such
as, the board, managers, shareholders and other stakeholders, and spells out the
rules and procedures for making decisions on corporate affairs. By doing this, it
also provides the structure through which the company objectives are set and the
means of attaining those objectives and monitoring performance".
The main concern of corporate governance is the separation of ownership and control in a
company, which is first introduced by Berle & Means in 1932 (Meer, 2009). This was then
developed by Jensen & Meckling in 1976, that the separation of ownership and control in a
company might create agency cost because of the conflict of interest between owners and
managers who are hired to operate the company on behalf of the owners. The most focused point
on corporate governance is to reduce agency cost by aligning the interests of those above
stakeholders (Meer, 2009).
In Vietnam, the BOM (Hoi dong quan tri) are nominated and appointed in AGM (Dai hoi
dong co dong) to determine and execute the company policies to maximize the shareholders’s
interest. The CEO (Giam doc, Tong Giam doc) are nominated and hired by the BOM to run the
company following the defined policies. The SB is established by the shareholders through AGM

to protect the interests of shareholders by monitoring the actions of the BOM/CEO (Enterprises
Law 2005).

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2.1.2. Supervisory Board in joint-stock company in Vietnam
In Article 95 and 121 of the Enterprises Law 2005, a Vietnamese company with over 11
individual shareholders or has an organizational shareholder who owns over 50 percent of shares,
must establish a SB. All the SB members internally elect one of them to be the Head of the SB.
More than half of the SB members must be permanent residence in Vietnam. At least one SB
member must have knowledge of accounting or auditing. In a joint-stock company, the SB has
the role to examine, supervise and be the counterweight to the BOM/CEO to increase the
transparency and protect shareholders’ interests (Tran Minh Son, 2010). With 79 percent of the
State ownership, the SB of Vinaconex has more responsibilities than other companies. The SB
has to supervise the BOM/CEO not only to protect minority shareholders but also to preserve
and increase the State’s asset.
As a joint-stock company, Vinaconex also issues the Organization and Operation
Regulation of the SB (Quy che to chuc va hoat dong cua Ban Kiem soat) that officially regulates
the organization and operation of the SB. The regulation details all the rights and obligations of
the SB, the Head of the SB and each of its members, as being stated in the Enterprises Law and
the Corporate Charter (Dieu le to chuc va hoat dong cua Tong cong ty). According to those
regulations, theoretically, the SB and its members play highly important roles in the corporate
structure (Nguyen Viet Thinh & Nguyen My Hanh, 2012). See Appendix I, II and III for the
regulations related to the SB (the Enterprises Law 2005, the Corporate Charter and the
Organization and Operation Regulation of the SB of Vinaconex)
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2.2. THEORETICAL FRAMEWORK AND LITERATURE REVIEW

2.2.1. Agency theory
Principal - Agent problem
Agency problems or the principal agent theory was introduced by Jensen & Meckling in
1976, and it has become very popular in many fields of study, especially corporate governance
(Hájek, 2006). Agency relationship was defined as “a contract under which one or more persons
(the principal(s)) engage another person (the agent) to perform some service on their behalf
which involves delegating some decision making authority to the agent” (Jensen & Meckling,
1976, p. 5)
Agency cost
According to Jensen & Meckling (1976), agency costs appear due to the separation of
ownership and control. They defined that agency costs are the sum of (i) the monitoring
expenditures by the principal; (ii) the bonding expenditures by the agent and (iii) the residual
loss. Bundala (2012) summarizes that monitoring expenditures are the expense to monitor the
agents which are not only observing but also controlling the agent’s behavior by budget
limitations, compensation policies and operating rules. Bonding expenditures appear when the
principal pays the agent to expend resources to ensure that the interests of the principal will not
be harmed and this cost may be a substitute for monitoring expenditures and vice versa, the
increase of bonding costs may reduce the need for additional resources in monitoring (Bundala,
2012). The residual loss is the loss of principal’s welfare due to the divergence of the principal’s
and agent’s interests, and it mainly accounts for the agency cost. (Bundala, 2012; Suzuk, 2006)
Two inherent features of agency problem
The first inherence of an agency problem is the conflict of interest (Wright et al., 2001).
It happens since each party is perceived to maximize his own profit (Waterman & Meier, 1998).
For example, managers (as agents) may use a large amount of perquisites, which favors their
own welfare (Shleifer & Vishny, 1989).
The second inherence of an agency problem is information asymmetry (Shapiro, 2005). It
can easily occur when different persons understand different things” (Stiglitz, 2002). Information
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asymmetry contains “hidden characteristics”, “hidden action”, “hidden information” and “hidden
intentions” (Schölermann, 2003 as cited in Mitzkus, 2013).
Agency relationship related to the SB
Incorporation with the two-tier system, there are some types of principal-agent
relationship. According to discussions in previous sections, each agency relationship related to
the SB, is identified as the diagram below.
Graph 2.1: Agency relationship related to the SB

Source: Author’s illustration as described in Pirchegger and Schöndube (2006), Onetto (2007)
2.2.2. Design a contractual relationship
The main purpose of agency theory is to generate the optimal design of a contractual
relationship between principal(s) and agent(s) in the presence of conflicts of interest and
information asymmetries (Spremann, 1987)
Goals or given tasks
Goals can be simply determined by how the agent
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stated in the Enterprises Law 2005. They are also supplemented in the Corporate Charter and
the Organization and Operation Regulation of the SB.
Agency cost
As discussed above, two inherent features of agency costs are the conflict of goals
(interests) and the information asymmetry between the agent and the principal. These issues
related to the SB can be found in many forms (See Graph 2.1 above) and will be discussed in
detail in Chapter 3.
Strategy to tackle agency problems
The main topics in the literature on corporate governance are instruments to protect and
maximize shareholders’ interests in the presence of principal and agent problem (Becht et al.,
2003 as cited in Drescher, 2014).
Mechanism to reduce information asymmetries

Financial reporting and disclosure practice: OECD states the role of transparency in
financial reporting and disclosure practice, as the main corporate governance solution to decrease
the information asymmetry (Leung & Ilsever, 2013)
Mechanism to reduce conflicts of interest
According to Drescher (2014), mechanisms to align interests in agency theory can be
classified as external or internal categories. He summarizes the most important ones in the
literature as follows:
Graph 2.2: External and Internal Categories of Interest Alignment Instruments

Source: Drescher (2014), Insolvency Timing and Managerial Decision-Making, (2002)
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Laws and regulations are one of the most important interest alignment instruments
between owners and managers and they are used to determine the optimal contractual
relationship to protect each party's interests (La Porta et al, 1997 and 1998 as cited in Drescher,
2014). (Financial) disclosures and auditing align managers’ behavior by constraining them to
disclose the company performance (Eng & Mak, 2003 as cited in Drescher, 2014). Product
market competition implies the requirement for company performance to achieve or retain its
competitiveness. This forces managers to spend resources on company performance rather than
pursuing their own interests (Allen & Gale, 2000 as cited in Drescher, 2014). The market for
corporate control puts managers on the presure of replacement when the company is poorly
managed (Holmström & Kaplan, 2001 as cited in Drescher, 2014). The managerial labor market
implies the future career chances of managements outside their current position. Since their past
performances will be the main criterion to measure their management capacity, managers will
have the incentive to build their reputation by contributing to current jobs (Gibbons, 1998 as
cited in Drescher, 2014). Capital markets have the effect on behavior of the management, which
relate to the provision of capital. For instance, share price valuations refer to the expectations of
future development of shareholder value and can therefore be considered as the feedback for
actions of managers (Warner et al., 1988 as cited in Drescher, 2014). The public and media

continuously inquire about business performance taken by managers. Therefore, managerial
incentive value may increase (Deephouse, 2000 as cited in Drescher, 2014). Control systems
describe that shareholders must be informed about management actions in case their interests are
neglected (Jensen, 1993 as cited in Drescher, 2014). Balance of power and decision rights reflect
regimes to limit the discretion of managers. Managerial authority is divided and allocated to
different individuals within the company in order to reduce individual decision-making
(Westphal & Zajac, 1995; Finkelstein 1992 as cited in Drescher, 2014). Compensation helps
increase the incentives of the managers by remunerating money or other benefits for their
performance (Bebchuk & Fried, 2003; Core et al., 2003; Murphy, 1999 as cited in Drescher,
2014). Ownership structure implies that the higher ownership concentration allows controlling
shareholders to supervise the managers closely (Yermack, 1995 as cited in Drescher, 2014).
Capital structure refers to the proportion of debt in total capital. It can be considered that the free
cash flow will be reduced to finance for associated interest payments, and therefore, reduce the
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incentive of the manager to spend resources on their own interests (Bebchuk & Grinstein, 2005;
Core et al., 2003 as cited in Drescher, 2014)
2.2.3. Literature review
Although the SB in two-tier board structure is different with the Vietnamese SB, it is still
useful to review the world literature about the SB in two-tier board structure, identify some
similar types of problem and experiences to enhance the role of Vietnamese SB. Many studies
have examined the unitary board, however few papers have analyzed the SB in two-tier board
structure (Wang, 2013). Some studies find out the effectiveness of the SB, nevertheless, the real
value of this board is ranging from providing an actual contribution to being an injurious organ
(Van Hamel et al, 1998, as cited in Wang, 2013).
In Germany, when analyzing the facts that may influence the independence and the
control over the BOD of the SB in the mid to late 1990s, Tüngler (2000) summarized many
factors which could affect the SB. First of all, there is a conflict of interest, including strong
position of bank, problem of interlocking directorships, and other personal links. For strong

position of bank, the SB in German is often dominated by large banks or some individuals,
whose have close business relationships with the company, so the SB members are not
independent (Andre, 1995). Relating to the interlocking directorships, the SB members of a
company can be members of the SB or management board of other companies that would lead to
the conflict of interests (Raiser, 1996 as cited in Tüngler, 2000). To solve this problem, one
solution is that the SB candidates should disclose their mandates and employers before the
election (Tüngler, 2000). For other personal links, the close relationship between the SB
members and the management board prevent them from following their statutory requirements
(Tüngler, 2000). A solution for this is the establishment of judge to regulate the conflict of
interests (Hopt, 2000 as cited in Tüngler, 2000). Second, co-determination which means that
employees have representatives in the SB, is also a problem since they are not considered as the
substantial collaborators for supervising (Tüngler, 2000); Third, auditing process is also not
independent since de facto, the company’s auditor is selected by the BOD, not by the SB (Prigge,
1997 as cited in Tüngler, 2000). The solution is that the auditor should be hired directly by the
SB. Fourth, nomination process of new members is neither independent because CEO and head
of the SB strongly influence on the selection of the new SB members as well as the BOD
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members, after their retirement, can be selected as the SB members (Prigge, 1997 as cited in
Tüngler, 2000). Fifth, the size of the SB may affect the function of the SB, it means that the
maximum number of the SB members is twenty in large companies, which seems very high and
should be reduced (Tüngler, 2000). Sixth, current frequency of meetings of the SB is really low.
Therefore, more SB meetings should be provided (Tüngler, 2000). Seventh, communication and
flow of information from management to the SB is not enough and there is not any standard of
information provided to the SB. A solution might be that the BOD should send monthly reports
to the SB as a standard requirement (Scheffler, 1995 as cited in Tüngler, 2000). Eighth,
formation of special committees within the SB is weak and the appearance of the SB committee
is rare, so the introduction of the audit committee to support the SB is needed (Tüngler, 2000).
Ninth, the Enterprises Law does not have any limitation of tenure so that the SB members can be

re-elected for many times (Prigge, 1997 as cited in Tüngler, 2000). Tenth, contribution to the
efficiency of the SB is limited because the corporate structure of German may not provide
sufficient control that the SB has to rely on information provided by the BOD (Tüngler, 2000).
According to Tüngler (2000), in the late 1990s, some suggestions to improve the efficiency of
German SB had been made, one of the most potential one is the Law on Control and
Transparency in Enterprises 1998 (Das Gesetz zur Kontrolle und Transparenz im
Unternehmensbereich 1998). The contribution of this new law to the improvement of German
SB in reality, will be discussed in the next section of this thesis (Section 2.4. – Experience of
other countries)
In China, both in practical and academic literatures, it is commonly seen that the SB does
not have a strong role (Allen et al, 2002; Teven et al, 2002 as cited in Zhaoxia, 2008). Xiao et al.
(2004) also states that the actual power of the Chinese SB is weak and depends on many factors.
First, there is a differentiation between insider supervisors who work full-time for the company
or parent company (so they are not independent) and outsider supervisors who do not stay at the
company (so they are not provided with enough information) (Xiao et al., 2004). Second,
technical competence of the SB is low since some supervisors are not technical disciplines
(Dahya et al., 2002). Tenev et al. (2002) also indicate that the SB is unable to supervise the BOD
because of less professional experience and lower capacity. Unlike developed countries, lacking
audit committees and finance are the two other problems of the SB in China (Tenev et al., 2002).
Third, the SB has lower status than the BOD (political position and salary) and is a
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supplementary organ in the structure of the corporation (Allen et al.,2002; Dahya et al., 2002; Li,
2010). In corporation, the largest stakeholders control and dominate both shareholders and the
BOD meetings. And the role of the SB is even smaller since it seems not really to report to
shareholders, but the BOD, whom they are supervising (Xiao et al., 2004). Fourth, there is the
effect of the Party/Government in listed companies privatized from SOEs (Dahya et al., 2002).
In these companies, a dual participating mechanism is maintained through which the Chief of the
Party Committee can enter the BOD/SB and the BOD/SB members can also join the Party

committee (Xiao et al., 2004). The representation of the Party in SOEs weakens the role of the
SB because both of them follow political goals rather than interests of shareholders (Dahya et al.,
2002). Besides, Allen et al. (2002) also point out that the SB members are often chosen from
various government office levels and from parent companies. Most BOD were secretly appointed
without the participation of shareholders, so it was not easy for the SB to supervise the BOD
effectively (Allen et al., 2002). Fifth, unlike the German SB, the Chinese SB is not handed the
authority to appoint and dismiss the CEO (Dahya et al., 2003 as cited in Wang, 2013). Tenev et
al. (2002) also indicate that the SB is not involved in the selection process of the BOD, and it has
no method to discipline them. The BOD was chosen by the AGM, not by the SB, and they are
responsible to shareholders only, not the SB (Xi, 2006 as cited in Wang, 2013). Sixth, the SB
could not take the real role because of the weaknesses of the law (Tian, 2009). It does not
regulate specifically about the delivery of financial and business information about the company
to the SB. Seventh, the weaknesses of the Chinese SB also come from its horizontal position in
corporate governance. Different from the vertical two-tier model of Germany, Li (2010)
identifies that the Chinese SB is in horizontal position compared with the BOD which decreases
the original supervising power of the SB.
In order to enhance the function of the SB, Xiao et al. (2004) suggested that: first,
Chinese firms should actually operate as companies without the influence by the
Party/Government; It is needed to reduce the control of the Party/Government to enhance the
independence of the SB (Dahya et al., 2002). Second, enterprises law of China should be
improved to allow the SB to recommend the dismissal of directors and senior executives (Dahya
et al., 2002). Third, enterprises law should require the BOD to timely provide the SB sufficient
information so that the SB performs its role effectively (Xiao et al., 2004; Dahya et al., 2002).
Forth, Li (2010) suggests the betterment of independent director system as a solution for the
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issue of horizontal position. Besides, to remain the real functions of the SB, there are three things
to do: to improve legislation on the SB; to enhance the construction of the SB and to increase
supporting systems and mechanism of supervisory (Tian, 2009). To reform, the SB needs more

power to improve monitoring function (Xi, 2006 as cited in Wang, 2013). The SB needs to
participate in the appointment and determination of the management’s benefits and should have
the power to question, petition, and prevent action if needed when joining the BOD’s meetings
(Wang, 2013).
The other important issue related to the current board structure of SOEs is the non-
existence of principal. According to Mi & Wang (2000), the principals of SOEs are the State or
all citizens. The agents are the central government, the local government, the local officials, the
managements, and the employees. All of them, including the SB, are the agents and have the
obligation to act upon the interests of the State. However, no one has the incentives to pursue
profit maximization for the real principal, the State (Mi & Wang, 2000). In China, the most
suitable resolution is to give the SOE manager higher benefit (thus reduce their embezzlement)
and reform the state-owned organizational system (Mi & Wang, 2000). In order to achieve that,
privatization of Chinese SOEs is an important solution (Gan, 2009).
In Vietnam, the type and characteristics of the SB is different with the ones of other
countries who apply the two-tier model. According to the Enterprises Law 2005, its role is lower
than the power of SB in two-tier model and just similar to internal audit and internal control.
When analyzing the corporate governance, a few researchers point out some problems of the
Vietnamese SB. Even the SB members are appointed by shareholders in AGM, they seem to be
chosen by the BOM in reality due to the influence of controlling shareholders, this negatively
affect the operation of the SB members (Cung, 2008). Besides, the SB members not only have
lower expertise and skills compared with the BOM/CEO but also act as part-time job since they
are concurrently the company’s employees that prevent them from independently supervise
(Cung, 2008). The result of a survey conducted in Vietnam show that 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). In order to
enhance the activities of the SB, Minh & Walker (2008) indicate that the role of the SB should
be strengthened. Besides, the SB members should have adequate qualifications to perform their
works (Minh and Walker, 2008).
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Summarizing all experiences above, in order for the SB to have actual power to protect
the interests of shareholders (including the State and minority shareholders) as required by the
Corporate Law 2005 and the Corporate Charter, the SB must have some following important
characteristics:
First, the SB must be independent of the BOM and the CEO in term of personnel, finance
and duty.
Second, the SB must have sufficient technical competence to supervise the BOM and the
CEO.
Third, there is not any conflict of interest related to the SB. The thesis will concentrate on
those above requirement as the framework for analyzing the SB in Vietnam.
2.3. EXPERIENCE OF OTHER COUNTRIES
This part will review the experience in enhancing the function of the SB in other
countries. These practical experiences will help to identify the best solutions to improve the
effectiveness of the SB in Vietnam in general and in Vinaconex in particular. Again, although
comparing the SB in two-tier model and the SB in Vietnam is not completely reasonable, it still
provides some useful experiences to enhance the Vietnamese style SB system in some particular
point.
In European countries, according to Lieder (2010), there is a major enhancement of the
German SB in the last decade. First, the SB is now appreciably involved in the decision‐making
process of the company and fundamental important management decisions (Lieder, 2010). The
enactment of the Law on Control and Transparency of Enterprises (already mentioned in section
2.3 - Literature Review while reviewing the German SB) as at 27
th
Apr 1998 requires the SB to
observe the risk-management system established by the BOD. The new provision emphasizes the
future‐oriented monitoring duty of the SB which importantly gained during the decade (Seibert,
1997 as cited in Lieder, 2010). Second, new provisions increased the flow of information from
the BOD to the SB, and then they facilitated the monitoring effectiveness of each individual
supervisor (Lieder, 2010). The law in 1998 requires the BOD to inform the SB about every

important issue relating to corporate planning. It provides the SB with an insight into the
company’s business policy that enables the SB to quickly detect and prevent malfeasance. It also
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reinforces the advisory function of the SB (Lieder, 2010). The new law compelled the SB to
meet more often (twice times in a period of half year) and set up an appropriate number of
committees to make the supervisory role of the SB more transparent (Lieder, 2010). Third, some
significant changes enhanced the collaboration of the SB and auditors (Lieder, 2010). According
to the law in 1998, the SB is accountable for the audit assignment and directly receives the audit
report. Each SB member must receive a copy of the audit report. The auditor is required to take
part in the SB’s deliberations on the financial statements and reports on the essential results of
the audit. Besides, the Law on Transparency and Disclosure 2002 has changed the individual
right of the SB members. All supervisors are responsible for having all necessary information to
supervise the BOD appropriately (Lutter, 2009; Vetter, 2004 as cited in Lieder, 2010). Each of
them is now allowed to call for SB’s meeting (Lieder, 2010). The latest changes strengthened the
SB’s responsibility related to internal control and risk management. The 2002 amendment of law
reinforced the authority of the SB by requiring a checklist to approve for the BOM (Lieder,
2010). The 2005 amendment of the German Corporate Governance Code highlighted a
requirement for the SB to have an appropriate number of independent members (Lieder, 2010).
This regulation did not allow the former BOD to become chairman of the SB or its committees
(Lieder, 2010). A large proportion of German listed companies have followed this regulation
(Werder & Talaulicar, 2009 as cited in Lieder, 2010). The SB has the right to set up an Audit
Committee, Nomination Committee, Compensation Committee to support its work (Lieder,
2010).
In Czech Republic, the Commercial Code 1991 regulates that the SB may have the
authority to appoint and remove the BOD members (Hájek, 2006). The director of the company
may not be the SB member and vice versa (Allen & Overy LLP.,2010). Although the
Commercial Code 1991 did not work with the term minority shareholders, it allowed
shareholders who hold 10% of shares the right to request the SB to check the work of the BOD.

The Commercial Code 1996 increased the power of minority shareholders. They could request
the SB to claim the compensation for damage of the company caused by the BOD (Hájek, 2006).
In Poland, the SB has the right to inquire all documents of the company, request reports
and clarifications from the BOD, and review the company’s assets (Allen & Overy LLP., 2010).
The SB has the right to appoint and replace the BOD members (Allen & Overy LLP., 2010). The
independence of the SB is guaranteed because members of the BOD, chief accountants, legal