Board characteristics, board responsibilities and firm performance evidence from vietnams stock market

BOARD CHARACTERISTICS, BOARD RESPONSIBILITIES AND
FIRM PERFORMANCE: EVIDENCE FROM VIETNAM’S STOCK
MARKET.

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In FINANCE MAJOR

By

Mr. Nguyễn Thế Hiển

ID: MBA02011

International University - Vietnam National University HCMC

September 2012


BOARD CHARACTERISTICS, BOARD RESPONSIBILITIES AND
FIRM PERFORMANCE: EVIDENCE FROM VIETNAM’S STOCK
MARKET.

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In FINANCE MAJOR
by

Mr. Nguyễn Thế Hiển
ID: MBA02011

International University - Vietnam National University HCMC
September 2012

Under the guidance and approval of the committee, and approved by all its members, this
thesis has been accepted in partial fulfillment of the requirements for the degree.

Approved:

---------------------------------------------Chairperson

--------------------------------------------Committee member

---------------------------------------------Committee member

--------------------------------------------Committee member

---------------------------------------------Committee member

--------------------------------------------Committee member


-iAcknowledge
To complete this thesis, I have been benefited from the following my Advisor. I would like
to send my sincere thanks to Ph.D. Hien Thu Nguyen who took advantage of the guidance,
impart knowledge, valuable experience for me during the time of implementation, help me
to be able to complete this thesis.
I Would like to thank all of my lecturers from the International University – Vietnam

National University Hochiminh City, guided me with valuable knowledge during the
period time of attending school of business Administration.
Finally, I would like to thank my parents, family and friends for helping, taking care and
encouragement me to complete this thesis.


-iiPlagiarism Statements
I would like to declare that, apart from the acknowledged references, this thesis either does
not use language, ideas, or other original material from anyone; or has not been previously
submitted to any other educational and research programs or institutions. I fully understand
that any writings in this thesis contradicted to the above statement will automatically lead
to the rejection from the MBA program at the International University – Vietnam National
University Hochiminh City.


-iii-

List of abbreviations
CGI: Corporate Governance Index
BR: Board ‘s responsibilities.
FI Financial Institution
GSO General Statistics Office
HNX Hanoi Stock Exchange
HOSE Ho Chi Minh Stock Exchange
LEV Financial Leverage
OECD Organization for Economic Co-operation and Development
ROA Return on Assets
ROE Return on Equity
MTBV Market to book value ratio.
Mbratio Market to book value ratio.

D/E Debt to equity ratio
CEO Chief Executive Director.
BOD Board of Director
BOUT Number of outside directors on the board (including independent
non-executive directors, non-executive directors, and honorable
directors)
BEXC Number of executive directors on the board
TOP5 Percentage of total outstanding shares held by five largest
shareholders


-ivBOARD CHARACTERISTICS, BOARD RESPONSIBILITIES AND FIRM
PERFORMANCE: EVIDENCE FROM VIETNAM’S STOCK MARKET.
ASTRACT:
This thesis examines the relationship between Responsibilities of Board and firm
performance. To examine mentioned relation, we develop an instrument to assess the
Board responsibilities practices that Based on the Asean corporate Governance Scorecard
which revised OECD Corporate Governance Principles. My sample includes 100 firms
listed on HOSE and HNX stock exchange.
Based on the extant literature, I develop a conceptual framework and a set of hypotheses to
examine the relationship between board Responsibilities and firm performance. This thesis
also follow Empirical analysis is undertaken by authors Yan-Leung Cheung, J.Thomas
Connelly, Piman Limpaphayom, Lynda Zhou from Chulalongkorn University, Thailand
and City University of Hong Kong. The findings of the study show that board
responsibilities were positively related with market based firm performance. On that
Background, the authors offer research model includes independent variables and control
variables, There is one explanatory variable which is the responsibility of the Board and
five control variables are firm size, financial leverage, board size, age of the Board of
Directors and the Number of women in the Board, All explanatory and control variables
are included in the analysis in order to determine the extent of their influence on the firm

performance through three dependent variable is ROE, ROA and MBratio.
The findings of the study show that board responsibilities were also positively related with
Market based firm performance, but there are no relation between Board responsibilities
and accounting based firm performance. The study contributes to the understanding how
important board-Responsibilities in corporate governance and its influence on firm
performance, therefore author recommend solutions to improve responsibilities of the
board as well as corporate governance practices in Vietnam. The findings of my thesis are
expected to stimulate scholars for further research to identify the Relation between board
responsibilities and firm performance.

Keywords: corporate governance, firm performance, Board responsibilities, the board of
directors ,


-vTABLE OF CONTENTS
ASTRACT………………………………………………………………………………….iv
CHAPTER 1: INTRODUCTION…………………………………………………………..1
1.1. Overview ………………………………………………………………………………1
1.2.Rationale for the thesis & Research Questions…………………………………………2
1.3.Research Objectives…………………………………………………………………….3
1.4.Research Objects & Scopes……………………………………………………………..3
1.5.Research Significance…………………………………………………………………3
1.6 Research Structure………………………………………………………………………3
 
CHAPTER 2: LITERATURE REVIEW- RESEARCH MODEL AND HYPOTHESIS…..4
2.1. Agency theory and The Responsibilities of the Board…………………………………4
2.2. Role and responsibilities of the Board of Directors in Vietnam………………………7
2.3. Firm performance……………………………………………………………………12
2.4.Factors impact on firm performance…………………………………………………12
2.5. Previous Research Summary………………………………………………………..18

2.6. Research Model and Hypothesis Development………………………………………21
CHAPTER 3: RESEARCH DESIGN AND METHODOLOGY…………………………27
3.1. Research Design………………………………………………………………………27
3.2. Sample and Data sources……………………………………………………………..27
3.3. Variables Measurement Design………………………………………………………27
3.4. Methods and Data Collection…………………………………………………………29
3.5. Data Analysis Methods................................................................................................30
3.6. Data Analysis Process...................................................................................................31
CHAPTER 4: RESULTS AND DISCUSSION …………………………………………..32
4.1. Descriptive Statistics.....................................................................................................32
4.2. Correlation Analysis.....................................................................................................35
4.3. Regression analysis and testing hypotheses..................................................................36
4.4. Testing Statistical Hypothesis.......................................................................................40
CHAPTER 5 :SUMMARY AND CONCLUSION ……………………………………….42
5.1 Summary of findings Conclusions.................................................................................43
5.2 Suggestions and Recommendations………………………...…………………………44
5.3. Limitations and Next Research…………………………...………………………….47
REFERENCES………………………………………………………...…………………..49
APPENDIX 1………………………………………………………..…………………..51


-1CHAPTER 1: INTRODUCTION
Chapter 1 presents the reasons for forming the subject, the urgency of the research,
then presents research objectives, identify the object and scope of the research as well
as practical significance that study can be achieved, finally announced the
presentation layout of the thesis.
1.1. OVERVIEW:
 The concept of Corporate Governance and responsibilities of the Board of
Directors
 

To attract capital from domestic and foreign investors in the development of the
global investment environment today, the enterprises must set up corporate
governance accordance with the provisions of the Vietnam’s issued legal framework
and the best international CG practices which are trusted by key stakeholders in the
capital market. Good corporate governance will help businesses create solid profits,
enhance development, helping businesses build credibility, attract good team work
and glue them with business. Good governance will enhance prestige and position of
the enterprise, enhance the enterprise's ability to access external capital, create a
foundation for sustainable business development.
According to corporate governance, the Board is considered a core element, plays a
crucial role in building and maintaining effective governance principles. The criteria
for assessment of corporate governance is built on the basis of the OECD corporate
governance principles, including (A) the rights of shareholders and the basic property
functions , (B) equal treatment for shareholders, (C) the role of the stakeholders, (D)
disclosure and transparency, (E) the responsibility of the board (Board), in which two
factors (D) and (E) are of crucial importance.
Worldwidely, there is evidence that the implementation of poor corporate governance
or improper performance will lead to bankruptcy and collapse, for example,
corporations names such as Enron, WorldCom (U.S.), Baring (UK), Informatics,
Citiraya (Singapore) ..., did not practice or violated true high standards of corporate
governance. Violation of corporate governance are the differences and diversity, but
its general effect potentially leads to bankruptcy and collapse. This, unfortunately, is a
practical example of corporate governance in Vietnam.


-2In Vietnam, through scandals relating to Bach Tuyet Cotton, Tuong An Vegetable Oil
... we see the role of the Board of Directors - the driver how much important to
businesses. Responsibilities of the Board of Directors is considered very important as
the members of the Board of Directors are expected to set the overall strategy for the
company, monitor risk management, monitor the results of management, ensure the

integrity of the financial statements, and train and create personnel succession plan for
senior management positions.
In general, the role and responsibilities of the Board is of paramount importance for
the future of a business. Good corporate governance and Board members have
responsibility not only to help enterprises responsible for the failures mentioned
above that make businesses grow. Research results from the Corporate Governance
Scorecard project by international financial institutions (IFC) of the World Bank
(WB), the Global Corporate Governance Forum (GCGF) and the State Securities
Commission (SSC) last published in 2010 showed that corporate governance and
evaluation of the market always correspond to each other. Accordingly, 25% of firms
with the highest corporate governance scores has high market to book value of 2.5
times. And the corporate governance of the companies with average and poor
corporate governance have on average market to book value ratios at 1.7 and 1.6
times, respectively. This is a signal that corporate governance is important and is
priced by the market.
1.2.

RATIONALE
 FOR
 THE
 STUDY
 &
 RESEARCH
 
 QUESTIONS:
 
Around the world, there are many studies about the impact of the Board of Directors
on the effectiveness of enterprise, such as Othman research (2010), which is about the
impact of the structure of the Board of Directors and published information on
enterprise performance in Africa. Study of Rashid et al (2010) explored the

composition of the board of Directors and efficiency enterprises in Bangladesh.
Bathula (2008) studied the relationship between characteristics such as the percentage
of ownership of the executive board, the board size, the part-time executive director,
the gender of the Board of directors and enterprise performance.


-3However, as per the understanding of materials collected, there has not been a study
conducted to explore the effects of the responsibilities of the Board of Directors on
firm performance in Vietnam. Therefore, the author chooses the theme "The Impact
of the responsibility of the board on firm performance: evidence from stock market of
Vietnam" to find out how is the impact of the responsibility of the Board of Directors
on the firm performance. From there, the research helps companies to have a proper
look at the role and responsibilities of the Board of Directors, be able to enhance the
role and responsibilities of the Board of Directors in order to increase firm
performance.
1.3. RESEARCH OBJECTIVES
The research aims at achieving the following objectives
-

Explore
 the
 impact
 of
 role
 and responsibilities of the Board of Directors on firm
performance.
 

-

Measure the impact of the responsibilities of the Board of Directors on firm
performance.
 

1.4. RESEARCH OBJECTS & SCOPES:
The object and scope of the study: The study was conducted on a sample of 100
companies with the largest market capitalization listed on the stock exchanges in
Vietnam including Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock
exchange (HNX) in 2011. Data is collected for the fiscal year ended in 2011.
1.5. RESEARCH SIGNIFICANE
The thesis contributes evidence on the impact of the role and responsibilities of the
Board of Directors for firm performance. Practical significance: The research results
help companies and investors better understand the role and responsibilities of the
Board of Directors in Vietnamese enterprises, and the impact of the Board's
responsibility for the firm performance.
1.6.

RESEARCH STRUCTRURE:
 
To achieve the research objectives, the thesis is organized in layout consists of five
chapters. The specific content of each chapter is as follows:


-4Chapter 1 presents the reasons for forming the subject, the urgency of the research,
then presents research objectives, identify the object and scope of the research as well
as practical significance that researchers can achieved, finally announced the
presentation layout of the thesis.
Chapter 2 presented the basic theoretical concepts related to the responsibilities of the
Board of Directors and firm performance, and then summarize and discuss previous
research related to the one in this thesis and recommendations research model, the

research hypothesizes
Chapter 3 presentation of the study process, define the variables studied, the steps to
build the scale of the independent variables, thereby setting the research model.
Collection methods and data processing, methods and tools used to analyze the
research data will also be introduced in this chapter.
Chapter 4 presentation and discussion of the results of data analysis included
descriptive statistics, correlation analysis, multivariate regression analysis to test the
research hypotheses.
Chapter 5 presents the conclusions of the research results obtained, made a number of
recommendations for corporate governance implications in policy and strategy to
increase the responsibilities of the Board of Directors. The final chapter presents
limitations exist and further research.


-5CHAPTER 2:
LITERATURE REVIEW- RESEARCH MODEL AND HYPOTHESIS
This chapter presented the basic theoretical concepts related to the responsibilities of
the Board of Directors and firm performance, and then summarize and discuss the
literature related to research in the thesis. Proposed model and research hypothesis.
2.1. AGENCY THEORY AND RESPONSIBILITIES OF THE BOARD
This section reviews some major theoretical perspectives of boards and governance
mechanisms that are considered relevant for this study
2.1.1. Agency
 theory
 
This view is based on the idea that in a modern corporation, there is separation of
ownership (principal) and management (agent), and this leads to costs associated with
resolving conflict between the owners and the agents (Berle & Means, 1932; Jensen &
Meckling, 1976; Eisenhardt, 1989). The fundamental premise of agency theory is that
the managers act out of self-interest and are self centered, thereby, giving less

attention to shareholder interests. For example, the managers may be more interested
in consuming perquisites like luxurious offices, company cars and other benefits,
since the cost is borne by the owners. The managers who possess superior knowledge
and expertise about the firm are in a position to pursue self-interests rather than
shareholders (owners) interests (Fama, 1980; Fama & Jensen, 1983). This pursuit of
self-interests increases the costs to the firm, which may include the costs of
structuring the contracts, costs of monitoring and controlling the behavior of the
agents, and loss incurred due to sub-optimal decisions being taken by the agents.
Shareholder interests can clearly be compromised if managers maximize their selfinterest at the expense of organizational profitability, i.e., the managers expropriating
shareholders interests. In essence, the managers cannot be trusted and therefore there
is a need for strict monitoring of management by the board, in order to protect
shareholder’s interest. Further, in a large corporation with widely dispersed
ownership, small shareholders do not have a sufficient payoff to expend resources for
monitoring the behavior of managers or agents. Eisenhardt (1989, p. 58) explains that
agency problem arrives when “(a) the desires or goals of the principal and agent
conflict and (b) it is difficult or expensive for the principal to verify what the agent is
actually doing”. Consequently, the monitoring of management activities is seen as a


-6fundamental duty of a board, so that agency problems can be minimised, and superior
organisational performance can be achieved.
Agency theory as posited by Jensen and Meckling (1976) assumes that agency
problems can be resolved with appropriately designed contracts by specifying the
rights belonging to agents and principals. Fama and Jensen (1983, p. 302) refer to
such contracts as “internal rules of the game which specify the rights of each agent in
the organisation, performance criteria on which agents are evaluated and the payoff
functions they face.” However, unforeseen events or circumstances require allocation
of residual rights, most of which end up with the agents (managers), giving them
discretion to allocate funds as they choose (Shleifer & Vishny, 1997). The inability or
difficulty in writing perfect contracts, therefore, leads to increased managerial

discretion which encapsulates the same agency problem. Further, when principals
monitor agents to ensure that agents act in the best interests of the principals, they
incur monitoring costs, which further reduce the value of the firm.
Given the problems in mitigating agency problems through the use of contracts,
scholars have suggested various governance mechanisms to address the agency
problems. Agency theory thus provides a basis for firm governance through the use of
internal and external mechanisms (Weir et al., 2002; Roberts et al., 2005). The
governance mechanisms are designed to “protect shareholder interests, minimise
agency costs and ensure agent-principal interest alignment” (Davis et al., 1997, p. 23).
Two important governance mechanisms used for this purpose are board of directors
and compensation schemes to align the interests of both the agent and the principal.
Fama (1980) considers the board a low-cost mechanism of management compared to
other alternatives such as, for example, takeovers. The literature on board, as a
governance team, is mainly focused on issues such as board size, inside versus outside
directors (also known as executive versus non-executive directors), separation of CEO
and Chair positions, etc (Dalton et al., 1998; Coles & Hesterly, 2000; Daily et al.,
2003) with an aim to improve the effectiveness of oversight. Executive compensation
concentrates on the degree to which managers are compensated in ways that align
their interests with those of shareholders (Davis et al., 1997; Tosi, Brownlee, Silva &
Katz, 2003). Such incentivized compensation schemes are particularly desirable when


-7the agents have a significant informational advantage and monitoring is difficult.
Many scholars have relied upon agency theory to examine the role of boards and other
related governance aspects in affecting firm performance (Cadbury, 1992; Vienot,
1995; Hampel, 1998; OECD, 1999; ICGN, 1999; King, 2002).
2.1.2. The
  Responsibilities
  of
  the

  Board
  in
  concept
  of
  OECD
  corporate
  governance
 
principles:
 
 
The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders. Board structures and procedures
vary both within and among OECD countries. Some countries have two-tier boards
that separate the supervisory function and the management function into different
bodies. Such systems typically have a “supervisory board” composed of nonexecutive board members and a “management board” composed entirely of executives.
Other countries have “unitary” boards, which bring together executive and
nonexecutive board members. In some countries there is also an additional statutory
body for audit purposes. The Principles are intended to be sufficiently general to
apply to whatever board structure is charged with the functions of governing the
enterprise and monitoring management.
Together with guiding corporate strategy, the board is chiefly responsible for
monitoring managerial performance and achieving an adequate return for
shareholders, while preventing conflicts of interest and balancing competing demands
on the corporation. In order for boards to effectively fulfill their responsibilities they
must be able to exercise objective and independent judgment. Another important
board responsibility is to oversee systems designed to ensure that the corporation
obeys applicable laws, including tax, competition, labor, environmental, equal
opportunity, health and safety laws. In some countries, companies have found it

useful to explicitly articulate the responsibilities that the board assumes and those for
which management is accountable.
The board is not only accountable to the company and its shareholders but also has a
duty to act in their best interests. In addition, boards are expected to take due regard of,


-8and deal fairly with, other stakeholder interests including those of employees,
creditors, customers, suppliers and local communities. Observance of environmental
and social standards is relevant in this context.
2.2.
  ROLE
  AND
  RESPONSIBILITIES OF THE BOARD OF DIRECTORS IN
VIETNAM:
Currently, Concepts of corporate governance practices is quite early stage so the
implementation of the corporate governance principles; Responsibilities of the Board
are not interested or incomplete implementation and still face many limits and
problems. The situation of corporate governance practices and responsibility of the
Board of Directors in Vietnam may roughly the following content:
a. Corporate

governance

principles

is

not

a

widespread

propaganda;

Responsibilities of the Board in firm not go into the standard and still arbitrary
form:
 
In Vietnam, the legal framework of corporate governance initially applied through the
Enterprise Law 2005, the Securities Act of 2006 and Decision No. 12/2007/QD-BTC
of Finance Minister on promulgating the Regulation corporate governance applicable
to listed companies. In each firm domain, most companies issued company Charter as
well as specific corporate governance regulations. In terms of the regulatory
framework for corporate governance as well as defines the responsibilities of the
board has been issued relatively complete, the form of the above provisions nearly
refer to OECD principles of corporate governance. However application documents
are incomplete, not properly applied the usual paradigm, the model according to the
international standards.
The Responsibility of the Board in corporate governance in Vietnam is still
spontaneous, many listed companies still go beyond the regulations issued and these
companies implemented corporate governance in their own way. The basics of the
board of directors in corporate governance (such as the relationship between the
Board of directors and Executive Committee, the real role of the Supervisory Board,
transparency, publicity, etc.) are not fully understood, the applied according to
international standards is inadequate. The reason of this situation is that corporate


-9governance issues are quite early stage and has not been widely propaganda by
authorities. In business, the implementation of the principles of corporate governance
have not been given proper attention.

b. Activities of the Board of Directors have been affected by state own enterprises
or by heavy family rule:
 
Practice in Vietnam showed that after equalization of state own enterprise, these
companies has not yet reached the Corporate governance principles. One of the
biggest features of corporate governance in Vietnam is the corporate governance
model of state own enterprises still dominate, especially in the enterprise that the state
still holds keep most direct and control through representatives as members of the
Board of Directors.
For non-state own enterprises, joint stock company grow from the family company
model, board structure remains the largest shareholder in the family as his wife,
father, mother, brother ... Thus, corporate governance is still heavily nepotism.
Talented personnel in the company and participate in board run away because they
can not bear how to manage a family of companies. Finally, the company also
developed to a certain extent and then stop.
c. Board activities in the direction of centralized power and exist a corporate
governance mechanism of 3 in 1:
Legally, the Board defined "business agency ", have a right in the name of the
business to exercise all the rights and obligations of the business, except under the
authority of the General Meeting of Shareholders. In fact, in most of the joint stock
companies, board members hold dominant shares or representatives of the major
shareholders in the firm. So ordinary members of the Board of Directors are directly
involved in the business operations of the business. Therefore, in the above
companies, there is no clear separation between ownership and management, and
executive management. Chairman of the Board is also Chief Executive Officer and is
usually the legal representative of the firm.


-10Board of Supervisors are often designated by the group of major shareholders and
usually should not be taken as independent, formal only. Position of the Board of

Supervisors has always been overlooked and largely fail to fulfill their duties. In many
companies, the inspectors become document staff for the dominant shareholders in
some case of necessity .
d. There is no clear demarcation between the Board of directors- Board of
management - Supervisor Board - shareholders
In some companies, the actual role of the Board and the executive are not yet clearly
distinguishable. This can lead to two possibilities: first, that the Board of directors
does not receive the main flow of information on the operation of the business to
build and monitor the strategic objectives and risk-protection decisions. Second, the
Board of directors has not fully implemented its role in corporate governance. The
director board members had to concentrate more on the administration, and little or no
attention to the role of strategic direction and oversight, ensure appropriate business
development strategies. In addition, director board members are often influenced
more by the interests of them rather than to serve the firm interests and others related.
e. Lack of independent Member of the director Board:
 
Board-quality is to ensure that fair decisions, independence be considered at meetings
of the Board of Directors and in the process of decision making. Therefore, the
presence of independent members of the Board of Directors play an important role.
Also, they can take advantage of external relations in favor of business. "There is
evidence that the higher participation rates of the independent members of the Board
of Directors, the higher director Board of the company quality has been improved."
Circular 121/2012/TT-BTC corporate governance regulations applicable to public
companies, the structure of the Board members should ensure a balance between the
operating time members and the non-executive members, of which at least one third
(1/3) of the total number of Board members must be non-executive members.
Although there are at least 1/3 of the members of the Board of Directors is
independent, non-operating participants, limited part-time board member positions in

-11the executive apparatus, but the actual survey results only 4 % of enterprises have at
least 1/3 of the members of the Board of directors are independent.
f. Capacity of director Board is not high:
In fact, the operation of the Board is not effective in the past. Activities Rule did not
follow the standard and most have not been clearly defined. For example: "For a long
time, at the meeting of the Board of Directors annually held formally and was not
quality, the early hours of the meeting, members attended the tea party and the
exchange of social stories, then heard the report about 30 minutes. Finally, party was
held at restaurant and the all members received bonus shares there.
In addition, the Corporate governance of the Board of Directors by the way of
convenience rather than scientific management has made the role of the director
Board and corporate governance capacities are more weak. Basic characteristics of
convenience governance is selected, appointed manager and assigning depend on
personal beliefs. This means that the familiar relationships and personal trust is the
basic criteria for appointment and assignment to someone. So, who was appointed as
board members usually are not professional managers, professional qualifications and
corresponding professional experience with the content and requirements of the job
they have to do. In the above management, even if professional managers are
employed, they do not promote their capabilities. Because the application of processes
and procedures to address the jobs are streamlined become unfamiliar in this case.
There are two reasons for this situation, Firstly, the business is not to evaluate the
effectiveness or results of operations of the Board of Directors. In addition, common
evaluation criteria and mechanisms for assessing the performance of the Board and
each member of the director Board is also not issued yet. Secondly, the legal system
of Vietnam is still no sanctions to penalize a public company which fails to comply
with the provisions of the structure independent members of the board, as well as
effective measures to end speed superior board performance better its functions and
obligations.
g. Status of the specialized committees and committees under the Board of director
and Current status of the internal control system in the firms:

-12In fact, the establishment of specialized committees under the Board of Directors at
the company in Vietnam has not been adequate attention and not be considered as a
really necessary model for business development. only a numbers of large scale
corporate enterprises established committees. As for small-medium enterprises, have
no concept of the committee under director Board. Particularly in the field of banking
and finance, banks have set up committees under the rules and regulations of the Law
on Credit Institutions, but the role and activities of these committees are weak and do
not effectively advice to the Board of Directors. Furthermore, the Supervisory Board
is currently inefficiencies and did not play a right role, Because many of the board of
Directors appointed chief of supervisor board, decided the rights of the Supervisory
Board, or Board of Supervisors also were nominated, and then do nothing.
Currently, Vietnamese enterprises have not realized the importance of internal
control, whether or not to build their own effective internal control system. This is
easy to understand because many firms are in transition to a new operating system or
new business activities are face with challenge of daily life in a business environment
and due to limited resources, firms are given priority to become more essential in
stead of setting up internal control system.
2.3.
 FIRM PERFORMANCE:
Empirical researches on CG use either market-based measures or accounting-based
measures to assess firm performance. Klein (1998) uses return on assets (ROA) and
Lo (2003) uses return on equity (ROE) as an operating performance indicator. Brown
and Caylor (2005) use ROE and ROA as their two operating performance measures.
We can measure the operating performance of a firm through the ROA ratio which
shows the amount of earnings have generated from an invested capital assets (Epps &
Cereola 2008). Managers are directly responsible for the operations of the company
and therefore the utilization of the firms’assets. Thus, ROA allows users to assess how
well a firms’ CG mechanism is in securing and motivating efficient management of

the firm. ROE is a measure that shows an investor how much profit a company
generates from the money invested from its shareholders.
The MTBV provides an estimate of the total value of a firm (including intangible
assets such as monopoly power, goodwill, high-quality managers, and growth


-13opportunities) and reflects firm performance (Tobin and Brainard, 1968). MTBV is
considered a better measure of firm performance than accounting measures (e.g., ROE
or ROA) because it is based on market value, not just accounting earnings and is not
affected by earnings management or accounting manipulations.

2.4.FACTORS IMPACT ON FIRM PERFORMANCE
a. Responsibility of the director Board impact on firm performance
According to agency model, the separation of ownership and control creates an
inherent conflict of interest between the shareholders (Principal) and the management
(Agent) (Aguilera et al., 2008). Although managers are said to be rational, but cannot
be trusted to remain faithful by always acting in the best interest of the principal since
they are also presumed to be self-interested (Williamson, 1975; Padilla, 2002).
Therefore, managers must be controlled to avoid “moral hazard” using some riskbearing and monitoring mechanisms that checkmate their deviant behaviors (Jensen,
1983; Filatachev et al. 2007). In order to effectively address the agency problem, the
theorists acknowledged the crucial role or responsibility of the director board as an
instrument of owners in subduing the opportunistic behavior of managers (Stiles and
Taylor 2001).
b. Firm Size and Profitability :
Economic theory prescribes that increasing firm size allows for incremental
advantages because the size of the firm enables it to raise the barriers of entry to
potential entrants as well as gain leverage on the economies of scale to attain higher
profitability. The higher the barrier to entry, the lower will be the threat of potential
competition, and the higher the profits that existing firms can earn without inducing
entry (Chrystal & Lipsey, 1997).

Much of the early works that tried to prove that size does matter was based on
markets in the U.S. and the U.K. in the early 1960s and 1970s. Among the pioneering
studies conducted in this field is attributed to Hall and Weiss (1967). Their empirical
analysis of Fortune 500 Industrial Corporations for the years 1956–1962 aimed at
testing the relationship between profit rates and other appropriate variables such as
firm size, concentration, leverage and growth. Results of the study showed that firm
size (proxies by the log of firm assets) exhibit a positive relationship with profitability


-14[represented by Return on Equity (ROE) and Return on Assets (ROA)]. They
concluded that large firms have all the options of small firms, and, in addition, the
capability of harnessing economies of scales and access to capital markets from which
small firms are excluded, thus leading to higher profit rates.
However, many of the recent studies that consider the size-profitability relationship
tend to show non significant results. In fact, in a meta-analysis conducted by Capon et
al. (1990), firm size was considered not significant and further confirmed in an
ANCOVA analysis. Poensgen and Marx (1985), for example, test the relationship
between firm size and profitability for a sample of 1,478 German manufacturing firms
in 31 industries. Results reveal weak size-profitability correlations that are unstable
over the study period. These results suggest that firm size is not the major determinant
of profitability and that profitability would depend largely on how well firms cope
with size and exploit the opportunities associated with it.
Whittington (1980) even found a negative association between firm size and
profitability for U.K. based listed manufacturing companies covering the time period
from 1960 to 1974. While no suitable reasoning can be used to explain such a link,
organizational theory may perhaps solve part of this quandary. Downs (1967)
suggests that larger firms can lead to increased coordination requirements, which in
turn, makes the managerial task more difficult leading to organizational inefficiencies
and lower profit rates. Further, it has been suggested that increased size tends to be
associated with higher bureaucratization (Ahuja & Majumdar, 1998). Larger firms

may have overly bureaucratic management structures, thereby inhibiting swift and
efficient decision-making process. It is also possible that with the additional
management layers needed to organize an increasingly large and diverse workforce,
management may be affected by the agency problems.
Based on previous literature, it is difficult to make a clear, let alone a final prediction
of the overall effects of the firm size- profitability relationship. From the studies
carried out, the association appears to differ depending on the industry under analysis.
Given this ambiguity, it seems prudent to empirically resolve, independently, the
association between firm size and profitability on a case-by-case basis and avoid the
tendency to generalize


-15c. The impact of financial leverage on firm performance:
There are studies on the relationship between leverage and corporate performance is
linked to the agency costs literature. As mentioned by Jensen and Meckling [1976],
significant agency costs can indeed arise from conflicts of interest between categories
of agents (managers, shareholders, and debt holders). These authors identify in fact
two types of conflicts that have different implications leading to opposite theories on
the link leverage-performance. Firstly, agency costs result from the conflicts of
interest between shareholders and managers. The key problem is here the moral
hazard behavior of managers that can waste firm resources or minimize their effort
rather than increasing firm value, as they have their own objectives. In this way, debt
financing raises the pressure of managers to perform (meaning to reduce their waste
of resources and to increase their effort) as it reduces “free cash-flow” at the disposal
of managers (Jensen [1986]).
Indeed, debt implies interest payment obligations that must be satisfied by managers,
under the threat of a bankruptcy if these obligations are not satisfied. Grossman and
Hart [1982] also argue that debt financing provides better incentives for managers to
perform as they aim to avoid the personal costs of bankruptcy. Consequently there
should exist a positive influence of leverage on corporate performance. Secondly,

agency costs also arise because of the conflicts of interest between shareholders and
debt holders. Indeed shareholders have incentives to take actions that benefit
themselves at the expense of debt holders, and consequently that do not necessarily
maximize firm value. This divergence of interests has two manifestations. On one
hand, it gives incentives to shareholders to invest in riskier projects than those
preferred by debt holders (Jensen and Meckling [1976]). This “asset substitution’
comes from the asymmetry of gains for shareholders: if an investment provides
returns above the debt value, gains are for shareholders. Whereas if the investment
fails, losses are shared between debt holders that do not receive the repayment and
shareholders that suffer from the loss of capital, because of limited liability for
shareholders. On the other hand, conflicts between shareholders and debt holders can
also create underinvestment, as demonstrated by Myers [1977]. As a result, the
agency costs resulting from the conflicts of interest shareholders-debt holders suggest
that a higher leverage is correlated with a lower corporate performance. To sum it up,


-16theoretical literature provides opposite arguments on the relationship between
leverage and corporate performance. Whereas theories based on signaling and the
agency costs resulting from the conflict of interests shareholders managers provide
arguments in favor of a positive relation, the stream of research analyzing the agency
costs from the diverging interests between shareholders and debt holders suggests a
negative relation.
d. The impact of board characteristics on firm performance:
There are many researches that clarify the impact of the of the Directors Board
characteristics on firm performance. Specifically the Bathula research (2008) found
the relationship between board characteristics such as board size, CEO duality ,
Gender diversity and firm performance in New Zealand. Yammeesri and Herath
Research (2010) on the characteristics of the Directors Board and firm performance in
Thailand have found a link between non-executive board members, the size of the
Board, duality CEO and firm performance. Thus the characteristics of the Board may

affect the firm performance. Through surveys of previous research related to board
characteristics affect the performance of the firm, the author outlines the
characteristics affect the firm performance and put them into control variables
impacting on the firm performance model in this research thesis.
Board size
In a research survey conducted by Hermalin and Weisbach (2003), board size is found
to have a negative relationship with firm performance. Firms with small boards are
found to perform better than firms with large boards. Kiel and Nicholson (2003)
supported the summarized arguments of Dalton et al (1999) by contradicting the
findings of Yermack (1996) and Eisenberg et al. (1998). After controlling for firm
size they found that board size is positively correlated with firm value measured as
Tobin’s Q. Interestingly, they found no correlation between board size and an
accounting-based measure of firm performance, measured as return on assets. In a
study by Coles, Daniel and Naveen (2008) the relationship between board size and
firm performance was found to be approximately “U”-shaped, with a small or large
board being optimal. This finding, however, turned out to be due to small, “simple”
firms having a negative relationship between board size and firm performance and
larger and more “complex” firms, having a positive relationship between board size


-17and firm performance. Coles et al. (ibid.) argued that CEOs of larger firms, diversified
firms and high-debt firms require more advice from the board of directors and
therefore require larger boards.
As we can see, studies on board size come to different conclusions. Some see a
positive relationship between board size and firm performance, some the opposite.
Dalton et al. (1999) therefore conducted a meta-analytical study of board size in
relationship to firm performance. A sample size of 131 samples and a total ‘n’ of
20,620 was used. The conclusion was that there was a non-zero, positive, true
population relationship between board size and firm performance. The relationship
between board size and firm performance was also found to be stronger in small firms

in comparison with large firms.
Age diversity
In a study performed by Wegge et al. (2008), the effect of age diversity upon
performance was examined. Reviewing previous studies on age and gender diversity,
they found the familiar mixed results. Based upon this they theorized that the
complexity of the task could have a moderating effect upon the influence of diversity.
Various theoretical frameworks from work psychology give reasons why diversity
could have negative as well as positive influences - the similarity-attraction and social
identification models (the desire of the individual to emulate and become part of the
group) both predict negative effects of diversity while the model for decision making
in teams make the opposite predictions. Wegge et al. (ibid.) speculate that which one
of these conflicting effects will be dominant depends upon the task complexity,
defined as strong demand for complex decision making. A field study was then
conducted by Wegge et al. (ibid.) on work groups amongst some 4000 employees in
the public sector. Age heterogeneity improved the ability of groups to solve tasks with
high complexity. For groups working on simple tasks, however, age heterogeneity
increased the number of self-reported health problems - which in turn indicates that
groups of diverse ages should be utilized particularly for innovation or solving
complex problems. We believe that these results can be extended to the board of a
public company, considering the tasks at hand involve complex decision making.
Wegge et. al (ibid.) further explain some of the positive results of age diversity as
being the result of extended job tenure of the participants. Of course, in order to


-18extend job tenure it is necessary to start early and stay around. As far as we know, the
only empirical study of the relationship between age diversity on the board of
directors and firm performance is McIntyre et al. (2007). Their review of relevant
literature on the role and function of the board particularly notes the increasing use of
organizational behavior theory to predict board function and improve board processes.
From this they argue that governance research should concentrate on “creating and

testing a theoretically sound model of Board effectiveness, rather than trying to relate
team attribute variables to firm performance” (ibid., p550).
Gender diversity
In corporate world, women representation on boards is very limited. Due to glass
ceiling, many women do not have opportunity for extensive experience in the
corporate-world, and hence they are likely to be non-executive directors. However, as
boards’ size increased steadily through 1980s and 1990s, more women got
opportunities to be represented on the boards. Further, scholars have argued that it
makes good business sense to have women on board as “60 per cent of all purchases
[in the US] are made by women” (Daily et al., 1999, p. 94).
In a recent study, Smith, Smith and Verner (2006) found that women on board of
directors have significant positive effect on firm performance. With most of them
having non-corporate background, women are far more likely to hold valuable,
unique, and rare information because they have been excluded from the traditional
development paths of corporate directorships. Letendre (2004) brings up the idea of
‘value in diversity’ and suggests that female board members will bring diverse
viewpoints to the boardroom and will provoke lively boardroom discussions.
Bilimoria and Wheeler (2000) suggest that, on an average female board member is
younger than her male counter part, and so the board benefits from infusion of new
ideas and approaches to deliberations. Women may have different views, values and
ways to express and communicate their opinions. As a result, women are more likely
to question the conventional wisdom and to speak up when concerned about an issue
or a particular managerial decision through more questioning and open discussion
(Fondas & Sassalos, 2000; Huse & Solberg, 2006). Even if gender diversity causes
disagreement, Latendre (2004) suggests such disagreements are valuable to the board
as it leads to better board dynamics and decision making.