Project Topic: CORPORATE GOVER

(a) Introduction

1. IntroductionCorporate governance focuses on the structures and processes forthe business direction and management of firms. It involves therelationships among company’s controlling system, roles of itsboard directors, shareholders and stakeholders. Williamson (1988)considered that the corporate governance has relation withtransaction cost and, in turn, enhances firm performance. Inaddition, weak corporate governance reduces investor confidence anddiscourages outside investment. Similarly, Bhagat and Bolton (2008)undertook a research on the endogenous relationship betweencorporate governance and firm performance and concluded thatgood corporate governance affects firm performance positively. InVietnam, the framework of corporate governance has just been in anearly stage of development. In academia,the corporate governance in Vietnam has been approached many anglesof law and legal consideration by Nguyen (2008), qualitativeconsideration by Le and Walker (2008) and quantitative approach byVo and Phan(2013a, b, c, d). Various empirical studies on corporate governanceand firm performance in Viet Namconsecutively conducted by Vo and Phan have confirmed that thisimportant issue in terms of research and practice has not attractedsignificant attention research community in Vietnam in the past.However, even though Vo and Phan’s studies have covered a widerange of issues in relation to corporate governance, theirestimation for firms performance is relatively constrained. As aresult, the importance of the topic on corporate governance and arelaxation of restriction on the measurements of firm performancehas provided key rationales to conductthis study to provide another empirical evidence on the issue for afurther debate. This study uses a sample including listed firms inHo Chi Minh City Stock Exchange (HOSE). Until 2012, HOSE has 342listed firms including 301 stocks, 3 institutional fundcertificates and 38 bonds. Total volume ofshare and listed value is more than 26.7 billion shares and 273trillion VND respectively. The HOSE isconsidered as a high liquidity market with total marketcapitalization of 678 trillion VND (32.6 billion USD) by

the end of 2012. This figure accounted for 24 percent of thenational GDP. Moreover, the average of transaction value in 2012was 890 billion VND, an increase of 39 percent compared to that in2011. The specific objective of this study is to examine therelationship between corporate governance and firm performance interm of threecomponents: duality, board composition and ownership concentrationusing The Feasible Generalized Least Square (FGLS). From thesample, bank and financial institutions are excluded.The structure of this paper includes five sections. Following thissection, section 2 is devoted for a literature review exploring thetheories explaining the mechanism of impact of corporate governanceon firm performance, as well as the relationship between them. Thenext section focuses on descriptions of data collection,measurements of model variables and regressions. Section 4discussesempirical results on the effects ofcorporate governance on firm performance in Vietnam from 2008 to2012. The final section summarizes main findings, providesimplications for firms in Vietnam on corporate governance and firmperformance

(b)  Theoretical ConsiderationsIn corporate governance, board of director is considered as themost important factor which affects an entire business and interestof owners. As such, the question of “what is the board of directorcharacteristics and how does it influence firm performance of afirm” has attracted significant attention from academia andpractitionersover the last 50 years or so. Zahra and Pearce (1989) in theirresearch approached the role of board of director on financialperformance by reviewing and synthesizing four perspectives: (i)legalistic perspective, (ii) resourcesdependence, (iii) class hegemony; and (iv) agency theory.Meanwhile, stewardship theory, which is developed by Davis,Schoorman and Donaldson (1997), explained the board’s role indifferent way.

(c) Conceptual Review and framework

Corporate governance – a concept referring to the ideal mode ofensuring firm’s accountability to its stakeholders, has ascended toits current level of importance owing to corporate level scandalsin the large economies of the world; experience gained from whichhas brought some positive changes in the less developed economies -changes that are proactive and are aimed at enhancing corporateresponsibility and performance. The objective of this study hasbeen to review this concept as is being practised, the problemsbeing faced, the schools of thought, its implication on firmvaluation and performance and lastly, to see its relevance in thecontext of Bangladesh, where the listed firms are mostly owned andmanaged by family members. Suggestions to improve corporategovernance and accountability, also in line with SEC guidelines, isto have an active board with well proportioned executive vsnon-executive members, along with representatives from all groupsof shareholders/stakeholders; separation of the role of CEO and thechairperson; creation of board committees; changing audit firmsperiodically etc, to name a few.

(d) Empirical Review

This empirical study, the first of its kind, seeks to quantifythe relationship between corporate governance and the performanceof firms in Vietnam. As part of this study, the authors undertookan intensive review of literature to identify a range of elementsthat contribute to overall corporate governance. In this study,corporate governance is considered to consist of the followingelements:(i) the size of the board;(ii) the presence of femaleboard members;(iii) the duality of the CEO;(iv) the education levelof board members;(v) the working experience of the board;(vi) thepresence of independent (outside) directors;(vii) the compensationof the board;(viii) the ownership of the board; and (ix)blockholders. Using the flexible generalized least squares (FGLS)technique on 77 listed firms trading over the period from 2006 to2011. The findings of this study indicate that elements ofcorporate governance such as the presence of female board members,the duality of the CEO, the working experience of board members,and the compensation of board members have positive effects on theperformance of firms, as measured by the return on asset (ROA).However, board size has a negative effect on the performance offirms. This study also presents that ownership of board members hasa nonlinear relationship with a firm’s performance.