Tác động của quản trị công ty đến hiệu quả doanh nghiệp: Nghiên cứu thực nghiệm từ thị trường chứng khoán Việt Nam

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THE IMPACT OF CORPORATE GOVERNANCE MECHANISM
ON FIRM PERFORMANCE: AN EMPIRICAL EVIDENCE
FROM VIETNAM STOCK EXCHANGE
TÁC ĐỘNG CỦA QUẢN TRỊ CÔNG TY ĐẾN HIỆU QUẢ
DOANH NGHIỆP: NGHIÊN CỨU THỰC NGHIỆM TỪ
THỊ TRƯỜNG CHỨNG KHOÁN VIỆT NAM

TS. Vũ Xuân Thủy
Trường Đại học Thương mại


Abstract

This research paper aims to exemine the impact of the corporate governance mechanism
on firm performance for public companies in Viet Nam. We use unique data on corporate gorvernance choices for 263 listed firms in Viet Nam for seven years from 2011 to 2017. We construct
index/sub-indices of corporate governance describing such aspects of corporate gorvernance
as Board of Director’s size, Non-executive directors, ownership arrangements and executive
compensation. Besides, the financial performance is measured by two different methods, which
include return on asset and return on equity. We use a set of instrumental variables coming
mainly from “trust” literature, in particular political diversity, religion and ethnic diversity,
and methods of privatisation, to tackle possible endogeneity. We employ ordinary least squares
(OLS), fixed effects (FEM), random effects (REM) to analyse the governance effects in the framework of standard production function approach. Based on a sample of Vietnamese listed firms
and using panel data regressions, the results show that CEO ownership and Government ownership have significant positive impact on the level of total Executive cash compensation. Lack
of control by ownership enables management to extract higher executive compensation. Identity
of owners has a significant influence on the level of executive compensation. Furthermore, this
study investigated the impact of other governance company (such as firm size, board size, nonexecutive directors…) determinants on the Executive compensation level for Vietnamese listed
firms. In addition, we have found that executive compensation is higher among firms with higher
growth opportunities.

Keywords: Corporate Governance, Firm Performance, Ownership Structure, Emerging
Markets.

Tóm tắt

Nghiên cứu này được thực hiện nhằm mục đích tìm hiểu tác động của cơ chế quản trị công
ty đến hiệu quả doanh nghiệp đối với các công ty đại chúng tại Việt Nam. Bằng việc sử dụng dữ
liệu về cơ chế quản trị công ty của 263 công ty niêm yết tại Việt Nam trong giai đoạn từ 2011 đến
2017, Chúng tôi xây dựng chỉ số phụ về quản trị công ty mô tả ở các khía cạnh khác nhau của
quản trị cơng ty như: Quy mô Hội đồng quản trị (Board Size), thành viên HĐQT không tham gia
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điều hành (NEDs), cấu trúc sở hữu vốn và bồi hồn ban điều hành. Bên cạnh đó, hiệu quả doanh
nghiệp được đo lường bằng lợi nhuận trên vốn chủ sở hữu (ROE). Chúng tơi sử dụng phương
pháp hồi quy bình phương nhỏ nhất thông thường (OLS), hiệu ứng tác động cố định (FEM), hiệu
ứng tác động ngẫu nhiên (REM) để phân tích các tác động của quản trị cơng ty lên hiệu quả
doanh nghiệp. Dựa trên một mẫu các doanh nghiệp niêm yết của Việt Nam và sử dụng hồi quy
dữ liệu bảng, kết quả cho thấy sở hữu CEO, sở hữu Chủ tịch HĐQT và quyền sở hữu của Chính
phủ có tác động tiêu cực đáng kể đến tỷ suất sinh lời trên vốn chủ sở hữu. Ngoài ra, kết quả cũng
chỉ ra rằng Tỷ suất sinh lời đạt mức cao hơn ở những cơng ty có mức chi trả bồi hồn cho ban
điều hành cao.
Từ khóa: Quản trị công ty, Hiệu quả hoạt động, Cấu trúc sở hữu, Thị trưởng mới nổi.
1. Introduction

According to Tricker, B. (2015), corporate governance is seen as “the way power is exercised over corporate entities”. It consists of the board activities of the enterprise and its relationships with the shareholders, with the managers as well as with other legitimate stakeholders. The
corporate governance ensures that the corporate “is running in the right direction and being run

well” (Tricker, 2015). It is defined as “the system by which business corporations are directed
and controlled” (Rankin et al,2012). It is widely believed that the implementation of a good corporate governance framework presents companies a structured path to better management practices, effective oversight and control mechanisms which lead to opportunities for growth,
financing and improved performance (Solomon, 2010).

A basic characteristic of Joint-stock companies is equity being owned by different shareholders. Accordingly, each type of ownership could has the different impact on firm performance.
Before economic reforms began in 1986, Vietnam’s State-owned Enterprises (SOEs) were solely
state-owned proprietorships directly controlled by industry-specific government agencies. The
SOE reforms decentralized business decision rights from government agencies to firm management and expanded enterprise autonomy without a fundamental change in state ownership. All
economic organizations in all sectors were state economic sectors. Therefore, executive members
in SOEs at all levels was recruited by state agencies. After 1990, Vietnam’s economy began to
enter a period of strong opening and reform with the rapid development of the financial market.
That reform process is associated with a series of divestments from SOEs, namely the equitization
process based on market rules. Therefore, researching on corporate governence in developing
countries such as Eastern European countries, China or Vietnam has its own characteristics. State
ownership in these countries often has a high proportion after the economy is transformed from
a centralized economy to a market economy.

In the past two decades attention toward issues related to corporate governance has been
increasing as a result of a series of financial and economic events occurring around the world. In
this regard, high profile financial scandals, financial crisis, and unexpected corporate failure have
driven countries to strengthen their corporate laws in order to increase the confidence in financial
markets (Solomon, 2010). As one of the most newly established financial markets in Asia, Viet
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Nam has always considered the importance of keeping its financial markets. One of these laws
is related to corporate governance.

In Viet Nam, there are few studies which examine the effect of corporate governance on
performance measures. Viet Nam is one of the fastest growing economies globally and its government is keen to support good corporate governance mechanisms to increase investor confidence and encourage market improvement.

The purpose of this paper is to examine the impact of corporate governance (ownership
structure, Board of Director Structure, Executive compensation) on firm performance. Viet Nam
considers one of most unique and attractive marketplace in the region as it provides great opportunities for more investment flows. This research is a contribution to previous studies to investigate the effect of corporate governance practices among performance measures for the entire firm
as well as propose the proper organizational structure.

The remainder of this paper is organized as follows. Section 2 discusses the relevant literature and motivates our key hypotheses. Section 3 introduces the development of our dataset and
model specifications. Section 4 presents the results on the relationship between corporate governance and performance of large private enterprises in Vietnam. Section 5 summarizes our key
findings and Section 6 concludes the paper.

2. Literature review and Hypotheses development

The impact of corporate governance variables on firm performance has been investigated
in many studies around the world. This part will review some of these studies that are related to
our study in somehow from different countries.

Studies on corporate governance and its effects on firm performance are quite well documented in the literature. This section briefly provides measurements of corporate governance
and firm performance, and it also reviews the effects of corporate governance on firm performance
commonly found in the literature. This review aids in understanding and applying measurements
of corporate governance and firm performance in the Vietnamese context in this paper. Many
variables used in previous literature for measuring corporate governance; this study took the most
relevant variables as proxies for corporate governance. All chosen variables are discussed below
for developing a good understanding:
2.1. Measure of Corporate Governance

According to Jensen and Meckling (1976), Fama and Jensen (1983), the agency problem
may exist between the owner (shareholders) and the agencies (BoD and BoE) or even among

BoD and BoE. This problem is clearly revealed when the independence and supervisory functions
of the BoD turns out to be ineffective. The solution to limit the issue between shareholders and
BoD is to increase the supervisory function of the BoD on the one hand and to complete the structure of income package for the BoE on the other hand so that the benefits of both parties could
be harmonized. The conflict arises when there is moral hazard inside the firm, which is called
the agency costs of equity. This agency problem can be solved by increasing management ownership because high management ownership aligns the interests of management and shareholders
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(Jensen, 1976). Other possibilities include monitoring of management by large shareholders
(Shleifer, 1986), and the use of debt financing to discipline managers (Jensen, 1986; Stulz, 1990).

The term “corporate governance” is initially associated with the “principal agent” problem.
At the firm level, a “principal-agent” means a person who owns a firm but is not the same person
who controls it. In this sense, If a firm has a multiple ownership, it may result in corporate governance problems. OECD (2004) provides a broader definition of corporate governance as “the
full set of relationships among a company’s management, its board, its shareholders and other
stakeholders. It provides the structure through which the objectives of the company are set, and
the means of attaining those objectives and monitoring performance determined.” This definition
presents that corporate governance is not only concerned about the internal mechanism of corporate governance structure and shareholders’ profit, but also takes into account the external
mechanism of corporate governance and stakeholders’ interests (Nguyen and Nguyen, 2016).

Another definition of corporate governance is provided by Barrett (2002) who said that
this pertained to the ways an organization deals with its various stakeholders. According to the
World Bank (1999), corporate governance can be seen from two perspectives: external and internal corporate governance. External corporate governance deals with external stakeholders such
as creditors, suppliers, and many others outside the organization, while internal corporate governance focuses on the board of director and the interests of shareholders.

Corporate governance has been proxied using different ways and variables. Most studies
on this issue use measurements that directly relate to the internal perspective of corporate governance. For example, Edward and Clough (2005) conduct a survey on measurements of corporate

governance and find that the most common proxies used in the literature and in the corporate
governance codes are as follows: (i) The size of the board of directors; (ii) Separation of Chairman
and CEO (duality); (iii) Majority of the board being comprised of nonexecutives or board dominance of independent directors; (iv) Balance of directors’ skills and competencies; and (v) Audit
and other board committees. Edward and Clough (2005) also reviewed measurements for the external perspective of corporate governance such as effective board performance evaluations, transparent appointment processes, and adequate communication with investors. Some studies (Bhagat
& Bolton, 2008) focused on median directordollar value ownership and median director-percent
value ownership as proxies for corporate governance.

The notion of the corporate governance is quite comprehensive. It is often defined as a
field in economics that investigates how to secure/motivate efficient management of corporations
by the use of incentive mechanisms, such as contracts, organizational designs and legislation
(Mathiesen, 2002). In words of Shleifer and Vishny (1997) “[c]orporate governance deals with
the ways in which suppliers of finance to corporations assure themselves of getting a return on
their investment.”

In the scope of this study, we would like to consider the characteristics of board size, Nonexecutive directors, ownership structure and executive compensation to be the most important
internal corporate governance mechanisms for further analysis within an individual country.
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2.2. Comment on Performance Measurement

Many studies have developed indicators which are used to measure the performance of
firms from different perspectives for a wide range of purposes. Richard et al.(2009) conducted a
review of measurements of performance in related papers published in the top five management
journals during 2002 and 2007, and they found little scientific debate on which measures are appropriate and how to combine measures in order to compare business performance. To investigate
the relationship between corporate performance and performance of firms, several measurements
of firm performance have been used. According to Bhagat and Bolton(2008) the most common

proxies for firm performance can be summarized as;
- Return on Equity. -It is measured as operating income (in general, operating income before
depreciation) divided by end of year total assets;

- Tobin’s Q. -This indicator is calculated based on the procedure provided by Gompers,
Ishii and Metrick(2003) and Tobin and Brainard(1968);

Because of data collection issues, many studies on this topic use only a single indicator of
firm performance. Return on Equity, after-tax profits and payment to state budget are the three
most often used performance measures.

2.3. Previous Empirical Studies about Corporate Governance and firm performance

2.3.1. Board Size and Firm performance

Based on initial studies, the number of members in BoD is also an important explanatory
variable in view of its impact on Firm performance. In specific, one important function of BoD
is to set up the income policy for BoE members as well as to supervise all of their operational activities. However, these functions might be influenced by social factors such as friendship, family
relationships and so on. Under that circumstance, a larger BoD could easily facilitate the manipulation of the BoE and it was suggested that the size of the smaller BoD would be more effective
in controlling the BoE’s actions (Jensen, 1993). This view is also shared by Lipton and Lorsch
(1992) as Yemack (1996).

When the scale of BoD reaches a certain level, unfavorable factors such as difficulty in
coordinated decision-making or the dependence in supervision would appear (Jensen, 1993;
Eisenberg et al., 1998). These difficulties are also known as barriers in surveillance. BoE are representatives for shareholders and are supposed to act for their common goals. Numerous studies
have identified various results surrounding the relationship between BoD members and their financial decision outcomes. Dalton et al. (1999) conducted an analysis on 131 companies in the
USA but found no evidence of the relationship between BoE composition and financial performance. Another study by Hermalin and Weisbach (1998) pointed out the relationship between large
BoD and company’s operations. These studies not only dealt with the question about the correlation of BoD size and company’s performance but also concerned about the number of BoD and
its influence on how to provide compensation to BoE.

In contrary with this point of view, when BoE are given more authority and become more
independent in decision-making it is likely that the supervisory ability of BoD is declining (Hermalin and Weisbach, 1998). To a certain extent, managers would use their power to put pressure
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on salary and incentive policy to limit the supervisory ability of BoD. It also means that when
the number and quality of BoD members are strong enough, they will supervise and limit the
power of BoE; thereafter, it would cut down on BoE exceeding income. As a supportive point
for this claim by Ryan and Wiggins (2004); Adams et al. (2009) concluded that BoD size negatively affected BoE income.

Thus, although there are various results that have been shown to prove the correlation between the number of BoD members and BoE incomes from previous empirical studies, this study
would suggest that in Vietnam, the number of BoD members has significant and positive impact
on the management’s remuneration policy. The next hypothesis of this study is:

Hypothesis 1: Board Size has a positive impact on firm performance

2.3.2. Non-executive Directors and firm performance

According to agency theory, board of directors is formed to monitor the management and
protect the shareholders’ interests because of the separation and management causing agency
problems and cost, which results in the conflicting interests between managers and shareholders
(Jensen and Meckling, 1976 cited in Wu and Li, 2015; Mallette and Fowler, 1992; Fama and
Jensen 1983 cited in Abdullah 2004). Non-executive Directors would decrease agency cost and
expropriation and increase effective monitoring, which results in a higher firm performance (Fama
and Jensen, 1983; Brickely et al., 1994 cited in Saibaba 2013). Therefore, Wu and Li (2015) argue
that the composition of board has a significant influence on the quality of board monitoring. Unaffiliated directors are believed to have incentive to perform their monitoring functions and not
collude with CEOs at the expense of shareholders’ wealth because they are more independent of

management and more likely to protect their reputation in the external market for their services
(Fama, 1980; Fama and Jensen 1983 cited in Wu, Li 2015; Nguyen et al., 2014).

Conyon & He (2001) and Rashid (2013) show that a high proportion of independent Board
members who do not participate in the management will positively impact the total payment to
managers. Conyon and He (2011) support the notion that companies with a higher proportion of
independent members who do not participate in the board of directors will be more likely to replace weakly operating managers and provide provide higher payments to well-run executives.
Meanwhile, Core et al. (1999) argued that non-executive board members would negatively impact
(or limit) the total amount paid to executive managers. Core research shows that the total payment
to managers will be higher when there are fewer independent members of the Board. Although
the research also shows conflicting results when the sample is in different countries, it is often in
developing countries, in the context of the operation of JSCs, it needs more transparency. In order
to limit the manipulation of the management board, a proportion of the independent Board members do not participate in what is really necessary to cut down overpayment activities for executive
managers. Therefore, the research hypothesis is set as:

Hypothesis 2: Non-executive Directors have a negative impact on firm performance

2.3.3. Ownership Structure and firm performance

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ciency of a firm, has been believed to effect financial performance for many years. According to
Jensen and Meckling (1976), managers may not always act for the interests of those who hire
them, but possibly because of their own sake in distributing benefits to stakeholders. Berle and
Means (1932) set forth that ownership dispersion implies management is distinguished from ownership, which, as Jensen and Meckling (1976) emphasize, may contribute to agency problems
between managers and shareholders or shareholders and debtors. On the other hand, Shleifer and

Vishny (1986) and Morck, Shleifer and Vishny (1988) detect the phenomenon of ownership concentration. La Porta et al. (1999) and Claessens et al. (2000) usher in the conception of ultimate
controller; they define firm ownership as voting rights, unearthing that many controlling shareholders of listed firms predominate firms by means of pyramid structure and cross holding, which
could result in central agency problem. Therefore, if managerial ownership is increased, their interests will be balanced to the interests of shareholders leading to possible remarkable reduction
of conflicts between managers and shareholders, gradual solution to agency problem and as a result, improvement of firms’ financial performance.

Hypothesis 3: Ownership structure have a significant impact on firm performance.
hManagement ownership

Morck et al. (1988) investigate the relationship between management ownership and market
valuation of the firm, as measured Tobin’s Q. In a 1980 cross-section of 371 Fortune 500 firms,
they find evidence of a significant nonmonotonic relationship. When examining the relationship
between Tobin’s Q rate and internal ownership level, they point out that within a certain extend
of internal ownership level, the Tobin’s Q rate is correlated positively with internal ownership,
while negatively in other ranges. This indicates a non-linear relationship between internal ownership and firms’ financial performance (measured by Tobin’s Q).

It also shows that a firm may achieve the best performance when choosing ownership structure at a specific ratio. In addition, Fama and Jensen (1983) prove that the increase of managerial
ownership would lead to the increase of entrenchment of managers. This means that the increase
of the shared managerial ownership will bring about the increase managers’ influence on business
performance and the decrease of investors’ influence on financial performance.

Hypothesis 3.1: Management ownership have a positive impact on firm performance.
hGovernment Ownership

The direction of the relationship between government ownership and firm performance in
prior literature was not conclusive. Overall, political connection is measured as a firm’s executive- or board-level connections with or contributions to the government (Claessens et al., 2008;
Faccio, 2010; Faccio et al., 2006; Fan et al., 2007; Khwaja and Mian, 2005). This anecdotal evidence supports Murphy’s (2013) assertion that, despite being largely ignored in the literature,
government intervention has been a major influence on firm performance over time. Government
ownership is also an important factor affecting to the firm performance of joint stock companies,
especially in the context of transition economies such as China and Vietnam. The impact of government ownership on firm performance is inconsistent in previous studies.
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Some European governments followed suit and proposed regulating executive pay in firms
that receive government aid or that are under some form of state control (Saltmarsh, 2009; Flynn
and Vinocur, 2012). Depending on different research patterns in different countries, the government ownership may be positive or negative with firm performance. While, Bos (1991) argues
that in companies where the government owns the majority of share capital, the government has
a efficient control of the company. Zhaoyang GU (2010) pointed out that with strong government
control, it was difficult to attribute firm performance to management effort as the government
participated significantly in SOEs’ operating, investing and financing activities. Managers were
measured by how they implemented government designated plans rather than firm profitability.
In contrast, Mak & Li (2001) argues that the government tends to be less proactive in controlling
its investments, and also because of easier capital mobilization, leading to the phenomenon of
companies owning houses.

Based on the above arguments, in the Viet Nam environment, the relationship between
government ownership and firm performance will have a negative direction. Because laws system
in Viet Nam like many developing country are not ensures investors protection in the Viet Nam
financial markets. Moreover, terms of transparency corporate monitoring in government’s company is very weak.

Hypothesis 3.2: Government ownership have a negative impact on firm performance.
hForeign ownership

This indicator is measured by the percentage of ordinary shares held by foreign shareholders. Earlier and recent empirical studies conclude that the foreign ownership has positive
influences on the firm’s performance. This might be true for developed countries; however,
in developing and transition economy, some findings are in contrast with earlier empirical
findings.

Nurhan Aydin et al (2007) show that the firms with foreign ownership operating in Turkey
perform better than the dosmetic owned ones in respect to ROAs. The evidence supports the hypothesis that foreign ownership participation increases performance of firms.

Besides Alan and Steve (2005) also looked at the short and long term performance
of UK corporations acquired by foreigners. The findings on 333 overseas acquisitions by
UK limited companies for the period 1984-1995 reveal significant positive returns on the firm
performance.

However, Phong Nguyen Anh et al (2018) find that the lecerage and age have positive correlation with firm performance (measured by Tobin’s Q) while the foreign ownership, size and
liquidity have negative effect on performance.
Therefore, the research hypothesis is expected to be:

Hypothesis 3.3: Foreign ownership have a positive impact on firm performance

2.3.4. Executive compensation

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proportionate, which makes it impossible for the investors to observe effort of BoM. When investing capital, shareholders try to encourage managers towards the direction of maximizing
shareholders’ benefits. However, managers may have individual goals and pursue personal motivations when running a company. According to Jensen and Murphy (1990), the main solution
to benefit conflicts was to propose shareholder’s income-based-regulations for BoM’s returns. If
payment policy is summed up based on company performance, it would encourage BoM to perform well in management role to maximize company value and shareholder benefits (Dhaouadi,
2012). Other studies have also shown that there is a positive relationship between firm performance and BoM income (Barontini & Bozzi, 2009; Andreas et al., 2010). Some relevant researches
have revealed the existence of a strong positive correlation between financial results and salary
of BoM in joint-stock companies. If in Belliveau et al. (1996) the correlation is 0.41, Finkelstein
and Boyd (1998) presented a lower correlation of 0.13 and Johnson’s (1982) shown the lowest

of 0.003.

In contrast, the study by Brick et al. (2005) pointed out that there is a strong negative correlation between management compensation and company performance. Focusing on the same
subject, Zhou (2000) also examined operations of multiple companies in Canada and found out
that CEOs salary was inversely related to firm size and the level of reimbursement was significantly relied on company performance.

In addition, Hempel and Fay (1994) concluded that there was no relationship between BoE
income and firm performance while Dogan and Smyth (2002) acknowledged an unclear relationship between executive income and business performance.

Although there are still numerous heterogeneous opinions about the influence of company
performance on BoM earnings, most conclusions from empirical studies have acknowledged the
positive effect between company performance and BoE income. Sharing the same point of view
with most of these studies, this article attempts to show the correlation between BoE earnings
and the performance of listed companies in Vietnam. The hypothesis is:

Hypothesis 4: Executive compensation has a positive impact on Firm performance.

3. Research Methodology

This study uses quantitative methods to estimate the factors that influence income of BoE.
Basing on the survey of relevant theories, data collection and regression model, random-access
model (REM) and fixed- Fixed Effects Model (FEM).

3.1. Data considerations

Secondary data on financial status, listed stocks, dividends and dividends are available at
cophieu68.vn and vietstock.vn.

Research database is manually collected from the prospectuses, financial statements and
annual reports of 228 companies listed on the Ho Chi Minh Stock Exchange (HOSE) and Ha Noi

Stock Exchange (HNX). The data for all the variables were extracted from the published annual
reports and financial statements of the listed companies in the HOSE and HNX covering the years
2010-2016. The internal financial indicators of enterprises are regularly calculated once a year.
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However, as secondary data from listed companies in Vietnam’s stock market (HOSE) is corporate
data from 2005 to 2016, actual data is inconsistent and lack of availability. Over the period of 6
years (2005 - 2009), the income of the Board of Management was not widely publicized among
companies, so the sample was reduced to 228 companies listed on HOSE and HNX period 2010
- 2016. With 1596 observations during the period from 2010 to 2016 and applying means of random analyses.

3.2. Emprical research model

In this study, in order to be able to examine the impact of ownership structure and coporate
governance on the firm performance of the listed company, this research applied regression models for data tables based on overviewed economic models. This regression analysis aims to find
the impact of variables: Ownership structure, firm size, board size, growth and financial performance of the firm to the total executive cash compensation. The objective of this study is to invesgate the influence of capital ownership structure on the level of executive compensation. The
model that was used to test the hypothesis was:

ROEt = α + β1CEO_OWNit + β2CHAIR_OWNit + β3FR_OWNit + β4GOV_OWNit +
β5TCOMit + β6FSIZEit + β7BSIZEit + β8GROWTHit + β9NEDSit + εit
Where:

- it = The value of company i at time t

i = 1, 2, 3, 4, …, 228 and t = 1, 2, 3, 4, 5, 6, 7 (2011-2017)

- ROE is the dependent variable – firm performance

- TCOMit is the dependent variable - total compensation paid to the board of executives in
the Vietnam listed company, including salaries, bonuses and other allowances.
- CEO_OWN: CEO ownership ratio

- CHAIR_OWN: Chairman ownership ratio

- FR_OWN: Foreign ownership ratio

- GOV_OWN: Government ownership ratio

- FSize, Growth, BSize are independent variables

Through the process of reviewing related studies, the study synthesized and constructed a
hypothetical framework with details about variables and the expected correlation hypotheses
among observed variables and company’s stock market prices as the following table.
Symbol

Table 1: Summary of variables

Variables

Content

Independent variables – Corporate Governance
CEO_OWN

CEO ownership ratio The percentage of capital held by the CEO

CHAIR_OWN Chairman ownership The percentage of capital held by the chairratio
man

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Correlation
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FR_OWN

Foreign ownership
ratio

The percentage of capital held by the foreign
investor

Executives compensation

Natural Log of (1+ BoE’s total income)

(+)

GOV_OWN Government ownership The percentage of capital held by the govratio
ernment

(+)

BSIZE

Total number of directions on BoD

(+)

Natural Log of (1+ BoE’s total income)

(+)
(+)

TCOM
NEDs

TCOM

BoD Size

Non-executive Directors Percentage of non-executive directors to total
number of directors on a board

Executives compensation
Others variables
GROWTH

Growth

in terms of market to book value

ROE

Firm performance

Percentage of operating profit to equity

FSIZE

Firm Size

Natural log of company market capitalization
Dependent variables – Firm performance

(-)

(+)

4. Empirical Results

After studying relevant theoretical frameworks, the next step is to build up research model,
setup the implementation of necessary tests and run model regression with the appropriate
method.

4.1. Descriptive Statistics

The basic criteria described in Table 2 and Table 3, which were used in statistics, included:
mean value, standard deviation, maximum value and minimum value.
Table 2: Details of variable

ROE
LNTCOM
LNFSIZE
BSIZE
NEDS
CEO_OWN
CHAIR_OWN
FR_OWN
GOV_OWN
GROWTH

N

1596
1596
1596
1596
1596
1596
1596
1596
1596
1596

Expected
Correlation
-7.836
18.09
21.82

3.000
1.000
0.000
1.000
0.000
0.000
0.000

Maximum
0.783
25.23
32.82
11.00
10.00
85.39
85.390
55.570
87.380
14.820

Mean

0.111
21.27
27.06
5.443
3.176
9,520
21.306
7.4088

26.702
0.9423

Std. Deviation
0.267
0.870
1.359
1.056
1.229
12.43
16.059
11.711
24.172
1.0144

Source: Author calculation results
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It could be seen from the calculated results in table 2 that:

It could be referred that the average value of LNTCOM is approximately 21,27 , the variation from the minimum value of 18.09 to the maximum of 25.23. It could be concluded that the
distribution of the variable is standard deviation (Kurtosis at 4.19 and skewness at 0.28) and positively impact on the research process.

The average CEO ownership ratio is 9.52%; The average Chairman ownership ratio is
21.3%; The average foregin ownership ratio is 7.41%, and 26.7% for state ownership.

Based on the results of statistical analysis described above, financial results of companies
in terms of ROE also present a strong variation among companies over years. In particular, The
average ROE of companies in the period 2010 to 2016 is approximately 10.9%. The average rate
of ROE is 13.5% and ranges from the minimum value of -7.836 up to the maximum value of
0.783. This indicates a large degree of volatility in terms of ROE among companies in the study
area over examined periods.

4.2. Correlation matrix

In this section, we will analyze the correlation matrix between variables in the sample to
solve the limitations of analyzing each variable by showing a more detailed view through the relationship between the dependent variable and the explanatory variables in the regression model,
while showing a preliminary picture of the correlation between explanatory variables.

After running eview, the results of correlation analyses among variables in research model
are shown in the following table:
Table 3: Correlation matrix among variables in research model

ROE

ROE

1.000

FSIZE

-0.002

TCOM

BSIZE

NEDS

0.130

1.000

0.039

0.271

0.033

CEO_OWN -0.036
CH_OWN
FR_OWN

0.017
0.101

GOV_OWN 0.032
GROWTH

TCOM FSIZE BSIZE

0.063

0.614

1.000

0.189

0.192

-0.043
-0.030
0.326
0.028
0.260

0.218

1.000

0.032

-0.064

0.019
0.235

0.543

1.000

-0.179

-0.052

0.168

-0.024 -0.166
0.173

NEDS CEO_ CH_OWN FR_OWN GOV_ GROW
OWN
OWN

0.128

-0.202

1.000

0.163

-0.035 -0.051

1.000

-0.019 0.059

0.096

-0.087
0.128

0.325 1.000
0.012 0.370

-0.084

1.000

-0.102 1.000

Source: researcher’s caculation from research data
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Table 4 below describes the correlation matrix among variables in researched samples and
aims to solve the limitation in analyzing each variable by showing a more detailed view through
the correlation among independent variables and dependent variables. Correlation coefficients
are lower than 0.8 (maximum 0.6) means that the occurrence possibility of hyperbolic phenomena
is negligible. The results of the pair correlation analysis between the explanatory variables show
that there are no pairs of variables with the correlation coefficient rij> 0.8, while the majority of
the linear relationship between The explanatory variables are just below 0.3. Thus, it can be affirmed that there is no strong autocorrelation between the explanatory variables in the model, so
the possibility of multicollinearity is very low or absent, thus does not affect the main level corpses of estimates, supporting research can use these variables to analyze linear regression models.

4.3. Heteroskedasticity Test and Serial Correlation LM Tests

Table 4: Heteroskedasticity Test and Serial Correlation LM Test

Table 4.A: White - Heteroskedasticity Test:
F-statistic

6.175372

Scaled explained SS

484.2102

Obs*R-squared

283.9300

Prob. F(54,1541)

Prob.Chi-Square(54)
Prob.Chi-Square(54)

Table 4.B: Breush-Godfrey - Serial Correlation LM Test
F-statistic

Obs*R-squared

610.2193

Prob(F-statistic)

694.5490

Prob.Chi-Square

0.0000

0.0000

0.0000

0.0000
0.0000

Source: researcher’s caculation from research data

In Table 4, the results in Table 4.A show the White test (testing the variance of the variance
error) and Table B presents the Breusch-Godfrey test - Serial Correlation LM Test (self-correlation
test of the residual) . Prob. Chi-square in both Table 4.A and Table 4.B are less than 5%. This
result shows that the model have the variance of the change error and the self-correlation of the
residual.

Thus, the least-squares POOL model is not usually appropriate to explain the regression
result because there are no variance phenomena of change error and self-correlation of error. Therefore, the study continued to run two FEM and REM models on the same research model, and
to choose one of these two models to estimate the regression model. The study will use Hausman
(1978) test with hypothetical pair as follows:
H0: REM model is suitable

H1: FEM model is suitable

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Table 5: HausmanTest

Correlated Random Effects - Hausman Test

Equation: EQ_TCOM
Test cross-section random effects
Test Summary

Cross-section random

Chi-Sq. Statistic

Chi-Sq. d.f.

50.494457

Prob.

9

0.0000

Nguồn: Kết quả xử lý dữ liệu của tác giả

The results of the test of Hausman (1978) showed that the value of Chi-Sq (10) =
100.232058 was statistically significant with Prob = 0.0000 <5%, so it rejected the hypothesis
H0 accepting hypothesis H1. Therefore, the FEM model is suitable to analyze the impact of factors on payment policies for managers of joint stock companies listed on the Vietnam Stock Market. In addition, when comparing R2 of two models FEM and REM, the coefficient R2 of the
FEM model is greater than the R2 coefficient of REM. This further shows that the FEM model
is usually appropriate to explain the regression result.

4.4. Result of Regression Executive Cash Compensation

The above test results shows that the FEM model is appropriate to explain the regression
result. The FEM model is a suitable regression model to measure and evaluate the impact of factors on the total level of payment for managers. Therefore, the author uses the estimation results

of FEM model to discuss research results, research hypotheses, thereby giving assessments of
various factors affecting the payment policy.
Table 6: Result of FEM regression

Dependent Variable: ROE
Method: Panel Least Squares
Date: 11/11/20 Time: 10:33
Sample: 2010 2016
Periods included: 7
Cross-sections included: 228
Total panel (balanced) observations: 1596
Variable

Coefficient

Std. Error

t-Statistic

FSIZE

0.065313

0.023350

2.797167

TCOM

0.059310

BSIZE

-0.005256

CEO_OWN

-0.002066

NEDS

0.000286

0.018420

Prob.

3.219872

0.0013

0.013840

-0.379795

0.7042

0.000851

-2.428171

0.010997

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CHAIR_OWN

0.001980

0.000931

2.127028

0.0336

GOV_OWN

-0.001542

0.000906

-1.701479

0.0891

C

-2.873780

0.686764

-4.184521

FR_OWN

GROWTH_MV_BV

0.001265

0.001104

-0.006475

1.145775

0.008975

-0.721528

Effects Specification

Cross-section fixed (dummy variables)
Period fixed (dummy variables)
R-squared

0.274989

S.E. of regression

0.246967

Akaike info criterion

99.19174

Hannan-Quinn criter.

Adjusted R-squared
Sum squared resid
Log likelihood
F-statistic

Prob(F-statistic)

Mean dependent var

0.145313
82.52310
2.120576
0.000000

0.2521
0.4707
0.0000

0.110701

S.D. dependent var

0.267138

Schwarz criterion

0.998624

Durbin-Watson stat

2.349512

0.180211

0.484153

Source: researcher’s caculation from research data

Notes: *, **, *** denote significance at the 1%, 5% and 10% levels, respectively
Thus, the regression model has the following results:

ROEt
=

-2.87378
+0.00198CHAIR_OWNit

–

0.002066CEO_OWNit

-

0.001542GOV_OWNit

+ 0.05931TCOMit + 0.065313FSIZEit

5. Results Discussion

Before discussing the results, the study will summarize the expectations for the relationship
between the independent variable and the dependent variable and the results of the study after
estimating the regression model of the factors influencing the firm performanc. The summary results are presented in Table 7 below:
Observative
variable

TCOM
FSIZE

BSIZE

Table 7: Result regression

Expection

Regression
result

+

+

+
+

Note

+

Match with expectation

0

No meaning

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NEDs

-

0

No meaning

+

-

Not Match with expectation

CEO__OWN

+

FR__OWN

-

0

+

0

CHAIR__OWN
GOV__OWN
GROWTH

-

-

-

Not Match with expectation
No meaning

Match with expectation
No meaning

Source: researcher’s caculation from research data

The main purpose of this study is to examine the impact of governance mechanism on firm
performance in joint-stock companies listed on centralised securities market in Vietnam.

Based on the above results, after running the regression models with 4 explanatory variables, there are 5 factors of governance mechanism that impact on the firm performance in jointstock companies listed on Ho Chi Minh Stock Exchange (HOSE) and Hanoi (HNX); in which,
there are 4 statistically significant variables (p-value <5%), including: Executive compensation
(TCOM), Firm size (FSIZE), Chair ownership and CEO ownership (CEO_OWN) and 1 variable
are statistically significant (with p-value <10%) is government ownership ratio (GOV_OWN).
The level of explanation of the three groups’ factors is recognized at approximately 25% and this
rate is considered to be not remarkable. However, it is suggested to be understandable as apart
from those mentioned above factors, there are numerous not-yet-to-be-mentioned as well other
qualitative factors that could not be quantified.

The results of the study also showed a different impact on the capital ownership ratio of
different components to the firm performance of listed companies in Vietnam.

- CEO and Chair ownership: The research results show that CEO and Chair ownership

has a negative and significant effect on firm performance with p-value <0.05. That means, the
executive board with a high percentage of ownership often has a deep right to decrease firm performance. It is suggested that the executive board holds a large percentage of shares, the salary
and bonus are also higher, and so incentive for increase firm performance.

- Government ownership: The results of the regression model show that the Beta coefficient
represents a negative correlation between Government ownership and firm performance (statistically significant with p-value<0.1). This means, companies with higher levels of ownership by
the state will reduce firm performance. Because the key executive managers of these companies
who usually represent state ownership tend to build prudent business plans, which leads to two
issues: (i) The level of bonus payment to managers will tend to be higher than the actual performance of the company; ii) The board of executives could be lack of motivation.

- Foreign ownership: The research results show that the impact of foreign ownership factors
on firm performance of listed companies is not statistically significant, but the correlation coefficient between these two variables is still positive.
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- Board Size: The research results show that the impact of foreign ownership factors on
firm performance of listed companies is not statistically significant, but the correlation coefficient
between these two variables is still positive.

- Firm Size: has positive and statistically significant correlation (+) with firm performance.
The study outcomes clarify a positive and significant effect of firm size on firm performance,
which align with the initial expectation. The larger companies, the higher firm performance. This
conclusion is consistent with Baker et al. (1988) and Darmadi (2011) arguments that large companies have more financial resources to hire senior staff for management role and pay higher reimbursement. In addition, large companies have complex business models and high level of
diversification so they pay higher salary and bonus to BoE to handle complex tasks that require
advanced skills. Moreover, the process of analysing data in research tables revealed that when
using cross section weights to examine individual conditions of each company, if managers help
increase company size in financial market it seams like there might be an increase in their income.

However, this tendency is not quite clear as it did not happen with all research targets.

- Executive compensation (TCOM) According to Kubo (2001), shareholders do not have
enough information and necessary insight to monitor BoE. Therefore, in order to increase the effectiveness of monitoring activities; shareholders, which are represented by BoD and Board of
Supervisors should supervise BoE activities and at the same time associate company benefits
(business performance) and BoM benefits (income paid). In addition, the “efficiency-based” payment model is the focal point of representative theory and thereby forming a correlative relationship between firm performance and income level which helps adjust the benefits between
shareholders and BoE (Jensen, 1993). The research results were supported by representative theory and studies by Barontini and Bozzi (2009), Darmadi (2011).

6. Conclusion

There have been many research conducted concerning firm performance in developed markets, however, not enough attention has been paid to emerging market like Viet Nam. This paper
is one of the pioneer studies on the relationship between corporate governance and performance
of firms in Vietnam. This research has provided new evidence on the relationship between corporate governance and performance of large private enterprises in Vietnam.

Using a database on all listed companies in the Vietnamese stock market, this study has
evaluated the extent and direction of impact of gorvernance on firm performance in the period
of 2010 - 2016. Furthermore, this study also examined the impact of governance factors and
executive compensation on firm performance in Vietnam. The research result shows that executive compensation tends to increase in large-scale companies and achieve higher financial
performance.

Economic reforms in Vietnam are still an ongoing process. Further decentralizing government control appears to be the direction that is likely to occur. Our results suggest that reducing
the direct involvement in firms’ business activities while allowing the government to retain the
ultimate control of SOEs is likely to lead to better firm performance, especially when substituted
with incentive pay schemes. Executive compensation in SOEs has received more stringent public
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scrutiny in recent years. Much of the controversy focuses on the rising level of compensation
and a lack of strong tie to performance. Our study suggests a possible tendency of over-compensation when government ownership is higher. What appears to be important is to strengthen the
tie between pay and performance. When setting compensation policies, the government should
consider its involvement in the firms’ business activities rather than simply issuing a “compensation limit” for all firms.

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