Corporate governance and firm performance of listed companies in vietnam

CORPORATE GOVERNANCE AND FIRM PERFORMANCE OF LISTED
COMPANIES IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

By

Mr: Nguyen Thanh Tung

ID: MBA04045

International University - Vietnam National University HCMC

August 2013


CORPORATE GOVERNANCE AND FIRM PERFORMANCE OF LISTED
COMPANIES IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Fianance
by
Mr: Nguyen Thanh Tung
ID: MBA04045

International University - Vietnam National University HCMC

August 2013

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

--------------------------------------------Advisor

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

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

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

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


Acknowledge
This thesis report is about the Corporate Governance and Firm Performance would
not have been possible without valuable contribution of all teachers from school of Business.
I would like to thank to the International University, Vietnam National University –
Ho Chi Minh City for giving us a great opportunity to practice and learn more knowledge. I
especially appreciated the School of Business that helped us have good condition to do the
necessary research work and archive the results. I am deeply indebted to my thesis project
advisor Dr. Duong Nhu Hung, for his patience, guidance and advice throughout this semester.

He was always keeping his eyes on my research. This gave me the efforts which proved
valuable for the success of this thesis project. Moreover, my gratitude goes to my beloved
wife Nguyen Thi Van Anh for her love, insightful guidance, assistance, and support during
the entire process of my mater‟s study and the writing of this dissertation.
Finally, I would like to thank my parents, also my friends for supporting and
encouraging me throughout my studies. With their love, I could finish this work.
I hope this will serve as a valuable resource for whose major or carrier related to this
field.

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Plagiarism 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.

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Copyright Statement
This copy of the thesis has been supplied on condition that anyone who consults it is
understood to recognize that its copyright rests with its author and that no quotation from the
thesis and no information derived from it may be published without the author‟s prior consent.
© Nguyen Thanh Tung/ MBA04045/ 2011 - 2013

iii

Table of Contents
Chapter One - Introduction .................................................................................................... 1
1.1.

Overview: .................................................................................................................... 1

1.2.

Research objective....................................................................................................... 4

1.3.

Data and methodology ................................................................................................ 5

1.4.

Limitation .................................................................................................................... 5

1.5.

Structure of the study .................................................................................................. 6

Chapter Two - Literature Review .......................................................................................... 8
2.1.

Theories on corporate governance .............................................................................. 8

2.1.1.

Agency theory ...................................................................................................... 8

2.1.2.

Stewardship theory............................................................................................... 9

2.2.

Previous studies on corporate governance and firm performance ............................ 10

2.2.1.

Internationally empirical findings ...................................................................... 10

2.2.2.

Empirical findings from Vietnamese perspective .............................................. 12

2.3.

Determinants of firm performance and corporate governances and hypotheses ...... 14

2.3.1.

Dependent variables ........................................................................................... 14

2.3.2.

Independent and controlling variables ............................................................... 15

Chapter Three – Data and Methodology ............................................................................. 22
3.1.

Data collection........................................................................................................... 22

3.2.

Methodology ............................................................................................................. 22

Chapter Four - Descriptive Statistics and Empirical Result ............................................. 26
4.1.

Descriptive Statistics for Corporate Governance Variables in Vietnam ................... 26

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4.1.1.

Leadership Structure .......................................................................................... 27

4.1.2.

Board size........................................................................................................... 28

4.1.3.

Board composition ............................................................................................. 29

4.1.4.

ROA ................................................................................................................... 30

4.1.5.

ROE.................................................................................................................... 30

4.1.6.

Tobin‟s Q ........................................................................................................... 31

4.1.7.

Firm Size ............................................................................................................ 31

4.2.

Multi – collineartity................................................................................................... 32

4.3.

Regression result and discussion ............................................................................... 33

4.3.1.

Leadership Structure .......................................................................................... 35

4.3.2.

Board composition ............................................................................................. 36

4.3.3.

Board size........................................................................................................... 37

4.3.4.

Firm size............................................................................................................. 37

4.3.5.

Industrial business group ................................................................................... 38

4.3.6.

Business group affiliation and firm performance .............................................. 40

4.3.7.

Corporate governance culture ............................................................................ 42

Chapter Five – Conclusions and Recommendations .......................................................... 44
References ............................................................................................................................... 51
Appendix 1 ........................................................................................................................A1 - 1
Appendix 2 ........................................................................................................................A2 - 1
Appendix 3 ........................................................................................................................A3 - 1
Appendix 4 ........................................................................................................................A4 - 1

v

Appendix 5 ........................................................................................................................A5 - 1
Appendix 6 ........................................................................................................................A6 - 1

vi


List of Tables
Table 1: Summary the findings of the previous studies ........................................................... 12
Table 2: Summary of Hypotheses ............................................................................................ 21
Table 3: Description of Variables ............................................................................................ 24
Table 4: Descriptive Statistics from 2009 and 2012 ................................................................ 26
Table 5: Correlation matrix ...................................................................................................... 32
Table 6: Estimation results for the relationship of industrial groups and corporate governance
on firms‟ performances ............................................................................................................ 34
Table 7: Regression Result for the relationship of group-affiliation firm performances ........ 41
Table 8: Regression Result for the relationship of corporate governance practices between
parent companies and their subsidiaries .................................................................................. 42
Table 9: Proposition, Hypotheses, Results and Hypotheses status .......................................... 42

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List of Figures
Figure 1: Mean value of corporate governance practices ........................................................ 28
Figure 2: Mean value of ROA, ROE, Tobin‟s Q and Firm Size.............................................. 30

viii

Abstract
In this thesis, I examine three corporate governance related issues, namely, the determinants
of corporate governance (leadership structure, board composition and board size), the
relationship between corporate governance and firm performance (ROA, ROE and Tobin‟s
Q), the impact of six industrial sectors on firm performance (HEALTH, SERVICE, GOODS,
INDUSTRIAL, FINANCE and INDUSTRY), the firm performance between parent and
subsidiaries firms within a group, and the corporate governance culture of firms inside
business groups. This study employed panel data analysis by using fixed-effect estimation of
top 100 listed firms on the HOSE for a period of four years from 2009 to 2012. Empirical
result shows that board size, industrial sectors and business affiliation have positive and
significant impact on firm performance. The two corporate governance mechanisms
leadership structure and board composition are found that they are not to be significantly and
positively related to firm performance in the Vietnam context. For firms with high
performance, investors additionally notice the valuation of firms with larger boards and in
HEALTH or GOODS sectors.

Keywords: Corporate Governance, Firm Performance, Industrial Groups, Business
Group Affiliation.

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x


Chapter One - 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 governance of the corporation is now as important to the world economy as the
government of countries.”
–James D. Wolfensohn, President, World Bank Group
For emerging market countries, the enhancement of corporate governance (CG) can
serve a number of important public policy objectives. Corporate governance is
considered to have significant implications for the growth prospects of an economy.
Corporate governance refers to the structures and processes for the direction and
control of companies. It defines the role of the management, board of directors,
controlling shareholders, minority shareholders and other stakeholders. Better CG
may:
•

Enhance market stability

•

Increase investor confidence and trust

•

Lead to transparency of company activities and operations

•

Encourage investment into Vietnamese markets from local and foreign sources

•

Reduce the cost of capital for companies.

However, the way in which corporate governance is organized differs between
countries, depending on their economic, political and social contexts. In Vietnam,
after a decade of economic expansion and the growth of large corporations, corporate
governance has become an important issue for Vietnamese firms as they increasingly


interact with regulators and investors from developed markets. Vietnam‟s CG
Regulations were developed based on the Organization for Economic Co-operation
and Development (OECD) Principles of Corporate Governance. It described current
practice and provided policy recommendations in six areas:
•

Corporate governance framework;

•

Rights of shareholders;

•

Equitable treatment of shareholders;

•

Role of stakeholders in corporate governance;

•

Disclosure and transparency;

•

Responsibilities of the Board.

In Vietnam, the foundation and legislation of corporate governance system are based
on the three adoptions of:
•

The Law on Enterprises in 1999 and its replacement in 2005.

•

The Law on Securities in 2006 and its amendments in 2010.

•

The Competition Law in 2004.

Furthermore, understanding corporate governance standards and issues in Vietnam is
also important to both executives of local companies and foreign multinationals doing
business in this country.
Beside corporate governance issue, business groups are seemed to be playing an
increasingly important role in Vietnam. Large business groups in Vietnam are
characterized by significant ownership concentration. In the recent years, we have
seen a heightened interest in studying the relationship between a firm‟s business

group affiliation and its performance. Business groups are critical in emerging
economies and the ubiquity of business groups suggests that they may affect the
economic performance of group-affiliated members in these economies, either

2


generating benefits for or imposing costs upon members. Yet, in spite of their
important role, there has been no consensus reached, either on the proper way to
define them or on the effects. From an economic theory point of view, business
groups form in order to compensate for market imperfections. However, sociology
tends to regard that reason as too narrow, as they do not take into account social and
cultural factors and do not differentiate between the different types of business
groups.
In Vietnam, lack of empirical evidences, that investigate how business group
affiliation, within firm governance and economic environment affect firm
performance in emerging economies, is an issue for both academics and practitioners.
Vietnam is also absent in international analyses of business group affiliation with
corporate governance and firm performance in emerging markets. In August 2011,
there is a research about the impact of corporate governance on firm performance in
Vietnam, which is measured by obtained survey of corporate governance practices of
100 publicity listed companies on Hanoi Stock Exchange (HNX) and Ho Chi Minh
Stock Exchange (HOSE) conducted in 2009. The result showed that the score of
corporate governance practices is still low with 75% of firms are below middle score
and there is a positive relationship between company market performance and
profitability. Moreover, Dao Thi Thanh Binh and Hoang Thi Huong Giang examined
the relationship of corporate governance and performance in Vietnam commercial
banks sector conducting in August 2012. Based on their suggested models, there was
an insignificant effect of the compositions of the board and the foreign shareholders
on bank performance. This is just two recent typical empirical studies about corporate

governance and firm performance in Vietnam and they do not use external business
variable like group-affiliation firm performance factor to compare the performance

3


within those groups so that we can know which industries in Vietnam have better
performance. Moreover, there is one interesting thing is that we can test the corporate
governance culture between parent companies and subsidiary companies to see if
there is a similar culture about board structure or board composition inside each
groups.
Therefore, it is so important to study the influence of business groups on affiliated
firms‟ performances in Vietnam. Using the unique database, this study will seeks to
understand how business group affiliation, within firm governance and business
industrial environment affect firm performance in emerging economies.
1.2.

Research objective

The purpose of this thesis is to examine the relationship between corporate
governance and group-affiliation firm performance. The objectives are listed below:


Explore the impact of three corporate governance practices (including Board
leadership structure, Board composition and Board size) on firm performance.



Examine whether there is a relationship of corporate governance and firm
performance between parent companies and subsidiary companies in some

business group.

Research question:


What are the relationships between corporate governance practices (consisting
of leadership, composition and size) and performance of listed firms in Ho Chi
Minh Stock Exchange?



Does affiliation with a business group enhance a firm‟s performance and
governance?



Is there a similar culture of corporate governance between parent companies
and subsidiary companies within the given business groups?

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1.3.

Data and methodology

A highly reliable longitudinal database exists about industries and firms. This
database is four year panel data (from 2009 to 2012) and is based on a sample of top
100 largest firms listed on HOSE. We will examine the effect of group affiliation on
firm performance and corporate governance on firm performance by using ordinary

least square (OLS) regression model.
Moreover, with Eview 6 software, this quantitative research also uses descriptive
statistics and group correlations as analysis tools.
1.4.

Limitation

This study has some limitations. First, through this study, the effect of corporate
governance practices and firm performance is examined by using a sample of top 100
largest companies in the period of four year 2009 - 2012. However, because of limited
sample population and time scale, so this result cannot represent all of companies in
Vietnamese market.
Second, there are still other variables such as board committees, corporate reporting,
board‟s compensation, number of board meeting, gender diversity, education
qualification, director ownership, foreign ownership and dividend policy, etc. which
have potential impact on firm performance. The poor performance of model in
explaining firm performance is caused by the insufficient of some important variables,
which are crucial factors, in the regression model.
In sample of 100 companies, the data is not available for some variables such as board
committees, corporate reporting, average age of directors, and number of board
meeting and so on. This comes from poor corporate governance implementation on
disclosure and transparency in Vietnam.

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Lastly, another important factors effect to the result of this research is the corporate
governance theories. This research is only applied Agency and Stewardship
perspective theory as the two theory of corporate governance because they are the
most popular and has received maximum attention from academics (Jensen &

Meckling, 1976; Fama & Jensen, 1983) as well as practitioners. However, other
alternative theories of legitimacy theory, resource dependency theory, social contract
theory and stakeholder theory have become prominent over the recent times. In
further development, I will apply those theories to make this research be more
comprehensive and objective.
1.5.

Structure of the study

To achieve the research objectives, the thesis is organized in layout consists of five
chapters. The specific content of each chapter is as follows:
Chapter 1: Introduction presents the reasons for forming the subject, the urgency of
the research, then presents research objectives, identifies the object and scope of the
research as well as practical significance that researchers can achieved, finally there is
an announcement of the presentation layout of the thesis.
Chapter 2: Literature Review will present the basic theoretical concepts related to
the responsibilities of the corporate governance practices and firm performance, and
then summarize and discuss previous research related to the one in this thesis and give
recommendations research model, the research hypothesizes.
Chapter 3: Data and Methodology includes the presentation of the study process,
the definition of the variables studied and the steps to build the scale of the
independent variables, thereby the setting of the research model.
Collection methods and data processing, methods and statistical tools used to analyze
the research data will also be introduced in this chapter.

6


Chapter 4: Empirical Results of the Research particularly includes two parts: the
presentation and the discussion of the results of data analysis included descriptive

statistics, correlation analysis, and multivariate regression analysis to test the research
hypotheses.
Chapter 5: Conclusions, Recommendations and Limitations will be the
conclusions of the research results obtained and make a number of recommendations
for the relationshio between firm performance and governance within the affiliation
with a business group. The final chapter also presents the existence of limitations of
the current study and concludes with a set of recommendations for further research.

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Chapter Two - Literature Review
Chapter two provides detailed review of relevant literature. Then the chapter reviews
literature concerning firm-level and group-level corporate governance. Finally, this
chapter presents the conceptual framework and research hypotheses.
2.1.

Theories on corporate governance

Corporate governance is of growing importance, particularly with regards to the
monitoring role of the board of directors. As a result, the theoretical perspectives that
are relevant to this study are based on the governance structures and reporting
practices that affect the value of the firms. This section reviews the theoretical
perspectives of a board‟s accountability that is relevant for this study. It draws on
agency theory and stewardship theory.
2.1.1. Agency theory
Much of the research into corporate governance derives from agency theory which
provides a rational argument for the introduction of corporate governance
mechanisms. The Agency theory is based on the principal-agent framework. Jehnsen
and Meckling (1976) viewed organizations as sets of explicit and implicit contracts

with associated rights. Separation between ownership and control of corporations
characterizes the existence of agency relationship between the board who represent
the shareholders and the management who represent the board and other stakeholders.
Agency theory is concerned with ensuring that managers act in the interest of the
shareholders. In the context of corporations and issues of corporate control, agency
theory views corporate governance mechanisms especially the board of directors, as
being an essential monitoring device to try to ensure that problems that may be
brought about by the principal-agent relationships are minimized (Moldoveanu and
Martin, 2001; Mallin, 2007). The agency role of the directors refers to the governance

8


function of the board of directors in serving the shareholders by ratifying the
decisions made by the managers and monitoring the implementation of those
decisions. Because according to the perspective of agency theory, the primary
responsibility of the board of directors is towards the shareholders to ensure
maximization of shareholder value. The agency problem is how to induce the agent
(managers) to act in the best interests of the principal (shareholders) when the
separation of ownership from management can lead to managers of firms taking
action that may not maximize shareholders wealth. This solution is agency costs, for
example monitoring costs and disciplining the agent to prevent abuse. The important
governance mechanisms used for this purpose are board of directors. 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.
Various governance mechanisms have been discussed by agency theorists in relation
to protecting the shareholder interests, minimizing agency costs and ensure alignment
of the agent-principal relationship.

2.1.2. Stewardship theory
While Agency theory assumes that principals and agents have divergent interests and
that agents are essentially self-serving and self-centered, stewardship theory presents
a different model of management, where agents (directors and managers) are
essentially trustworthy and good stewards of the resources who will act in the best
interest of the owners (Donaldson 1990; Donaldson & Davis, 1991; Donaldson &
Davis, 1994; Davis et al., 1997).

9


Stewardship theory posits that not only executive managers are intrinsically
trustworthy individuals (Nicholson and Kiel, 2003, p.588) but also directors are
regarded as the stewards of the company assets and are pre-disposed to act in the best
interest of the shareholders (Mallin, 2007). According to Abdulla and Valentine
(2009), stewards are company executives and managers working for the shareholders
so that there is a strong relationship between managers and the success of the firm,
and therefore the stewards protect and maximize shareholder wealth through firm
performance. Moreover, by improved firm performance, the organization satisfies
most groups that have an interest in the organization. Thus, from the stewardship
theory perspective, stewardship theory supports the need to combine the role of the
chairman and CEO and insider-dominated boards are favored by consisting of
specialist inside (executive) directors on the board rather than majority outside (nonexecutive) directors.
2.2.

Previous studies on corporate governance and firm performance

This section discusses the relevant extant theories that attempt to link corporate
governance practices and firm financial performance.
2.2.1. Internationally empirical findings

The literature indicates mixed results regarding combined corporate governance
practices and firm performance. Yermack (1996) examines large US firms from 1984
to 1991 and finds a strong negative effect of board size on Tobin‟s Q. Boards seem
systematically too big. Moreover, this is very costly. Klein (1998), like Hermalin and
Weisbach (1991), investigate the relation between the fractions of board members
who are outsiders and Tobin‟s Q for firms during five different years (mostly in the
1970s). They find no relation between board composition and firm performance
among large US firms in the early 1990s. In addition to that, Agrawal and Knoeber

10


(1996) while conducting a study on US firms found negative relationship between
proportion of outside directors and performance of firms.
Indeed, previous studies in several other countries also find a negative relationship
between board size and firm performance. Bhagat and Black (1999) found no
significant between board independence and firm‟s performance in a long run in case
of US firms. Mak and Yuanto (2002) examine the relationship between the size of the
board and firm performance in Singapore and Malaysia, and find that board size is
negative in relation to Tobin‟s Q.
Although IFC codes recommend that the separation of the role of CEO and chairman
as a sign of good governance, previous empirical analyses do not support it. Weir et
al. (2002) find that duality has no role in enhancing firm performance in U.K firms
and this result is similar with Dalton et al. (1998), Vafeas and Theodorou (1998) and
Brickley et al. (1997). In the context of Hong Kong market, Z. Chen, Cheung,
Stouraitis, & Wong (2005) selected 412 publicly listed Hong Kong firms during
1995–1998 and found a negative relationship between CEO duality and performance
due to managerial entrenchment in companies that combine the positions of CEO and
chairman of the board. This study also show that the composition of the board of
directors (proportion of independent non-executive directors, outsider dominated

board) has little impact on firm performance.
Klein et.al (2005) conducted a study with sample of 263 Canadian firms and explored
that corporate governance does matter in Canada and size was consistently negatively
related to performance.
Also, there is international evidence suggesting this positive link on certain developed
markets. For instance, Selvaggi and Upton (2008) claimed that good CG enhances
firm‟s performance for the United Kingdom and found the presence of a strong

11


causality between the two variables. Similarly, Black (2001) reported the same
conclusions in the case of Russian firms. Besides that, Klapper and Love (2004)
found a high positive association between better governance and operating
performance using firm level data of 14 emerging stock markets with return on assets
as a proxy for operating performance, although affirming that this may vary among
countries.
2.2.2. Empirical findings from Vietnamese perspective
Nguyen Ngoc Thang (2011) examines the effects of corporate governance on firm
performance with a sample of top 100 listed Vietnamese companies in 2009. That
research found that the corporate governance in Vietnam has little impact on firm
performance.
In 2008, Tung Thanh Dao tested the relationship between corporate governance and
firm performance with 20 equitized companies and found that the role of board of
directors has positive impact on firm performance. One more interesting thing in the
result is that there is no relationship between firm size and firm performance.
Dung To Thi (2011) conduct a study with sample top 100 listed companies at the
year-end 2009 and explored that there is no significant relation between board size
and firm performance. Moreover, the dual of CEO and Chairman impacts
significantly on Tobin‟s Q of the companies, but not significant affects ROA.

The following table is to summarize some studies related to the relationship between
corporate governance and firm performance.
Table 1: Summary the findings of the previous studies
Researchers

Data

Findings

Klein (1998); Hermalin and

US firms in the

Weisbach (1991)

early 1990s

12

No relation between board composition
and firm performance


Yermack (1996)

US firms from

A strong negative effect of board size on

1984 to 1991

Tobin‟s Q
Negative relationship between

Agrawal and Knoeber (1996)

US firms

proportion of outside directors and
performance of firms

Brickley et al. (1997); Dalton
et al. (1998); Vafeas and
Theodorou (1998); Weir et al.

U.K firms

Duality has no role in enhancing firm
performance

(2002)
Bhagat and Black (1999)

US firms

Black (2001)

Russian firms

Mak and Yuanto (2002)

Klapper and Love (2004)

Z. Chen, Cheung, Stouraitis, &
Wong (2005)

No significant between board
independence and firm‟s performance
Strong relationship between CG and firm
performance

Singapore and

Board size is negative in relation to

Malaysia firms

Tobin‟s Q

14 emerging

High positive association between better

stock markets

governance and operating performance

412 Hong Kong
firms (1995–
1998)

 Composition of the board of directors
has little impact on firm performance
 Negative relationship between CEO
duality and performance

Klein et.al (2005)

263 Canadian
firms

 CG does matter with firm performance
 Size was consistently negatively related to
performance

 CG enhances firm‟s performance
Selvaggi and Upton (2008)

UK firms

 Strong causality between CG and firm‟s
performance
 The role of board of directors has

Tung Thanh Dao (2008)

20 Vietnamese

positive impact on firm performance

firms

 No relationship between firm size and
firm performance

Nguyen Ngoc Thang (2011)

100 Vietnamese  Corporate governance in Vietnam has
firms (2009)

13

little impact on firm performance