Corporate Governance in Vietnamese Credit Institutions

1. A Robust Regulatory Framework

The Vietnamese financial sector is undergoing a significant transformation, prioritizing responsible and transparent practices. Underpinning this transformation is a robust regulatory framework that sets the stage for effective corporate governance within credit institutions (CIs) – commercial banks and foreign branches operating in Vietnam. This framework establishes clear guidelines, promotes accountability, and empowers key stakeholders to play their designated roles in fostering a healthy and stable financial system.

Two key pieces of legislation form the foundation for corporate governance in Vietnamese CIs:

1. The Law on Enterprises (2020):

This law establishes the fundamental principles of corporate governance applicable to all Vietnamese businesses, including CIs. It serves as a foundational document, outlining the rights and responsibilities of the three main stakeholders in any organization:

• Shareholders: The law recognizes shareholders as the ultimate owners of a company. It grants them the right to vote on crucial matters such as electing members of the board of directors (BOD) and approving major financial decisions like mergers and acquisitions, capital increases, and dividend distributions. This ensures that the strategic direction of the CI aligns with the interests of its owners.
• Board of Directors (BOD): The Law on Enterprises defines the BOD as the governing body responsible for overseeing the management team and setting the overall strategic direction for the CI. It outlines the composition and responsibilities of the BOD, ensuring a clear separation of duties between the board and management.
• Management Team: Led by the CEO, the management team is entrusted with the day-to-day operations of the CI. The Law on Enterprises emphasizes the management team's accountability to the BOD and ultimately to the shareholders. It ensures that the management team possesses the necessary qualifications and experience to effectively execute the board's directives.

The Law on Enterprises establishes a baseline for good corporate governance practices, promoting transparency and accountability within all Vietnamese businesses. However, CIs require a more specialized framework to address the unique risks and complexities associated with the financial sector.

2. The Law on Credit Institutions (LCI, revised in July 2024):

Building upon the foundation laid by the Law on Enterprises, the revised LCI specifically strengthens corporate governance practices within CIs. This revised legislation focuses on several key areas:

• Board Composition: Recognizing the critical role of the BOD in ensuring financial stability and mitigating risk, the LCI emphasizes the importance of competent and independent boards. The law may stipulate specific qualifications for board members, particularly regarding experience in risk management and financial analysis. Additionally, it may encourage a diverse board composition with a focus on including independent directors free from conflicts of interest. This ensures that the board can provide objective oversight and make informed decisions in the best interests of the CI.
• Enhanced Disclosure Requirements: Transparency is a cornerstone of good corporate governance. The revised LCI likely mandates enhanced disclosure requirements for CIs. This may include more frequent and detailed reporting of financial information, such as income statements, balance sheets, and risk assessments. The LCI may also require disclosures on related-party transactions, governance practices, and any potential conflicts of interest within the board or management team. Increased transparency allows investors, depositors, and other stakeholders to make informed decisions and holds CIs accountable for their financial performance and adherence to regulations.
• Minority Shareholder Protection: The LCI may also include provisions specifically designed to protect the rights of minority shareholders in CIs. These provisions might encompass ensuring timely access to accurate information about the CI's financial health, the right to participate in shareholder meetings and vote on certain matters, and legal recourse to address any potential mismanagement that unfairly disadvantages minority shareholders. By safeguarding minority shareholder rights, the LCI fosters a level playing field and encourages broader participation in the Vietnamese financial sector.

Beyond Legislation: International Standards and Best Practices

The revised LCI plays a pivotal role in strengthening corporate governance within Vietnamese CIs. However, effective governance goes beyond adhering to legal requirements. The LCI likely encourages CIs to adopt international standards and best practices established by organizations like the Organization for Economic Co-operation and Development (OECD) and the Basel Committee on Banking Supervision (BCBS). These best practices delve deeper into specific areas like:

• Risk Management Frameworks: International standards emphasize the importance of robust risk management frameworks within CIs. These frameworks help CIs identify, assess, and mitigate potential risks associated with their operations, such as credit risk, market risk, and operational risk.
• Internal Controls: Effective internal controls are essential for ensuring the accuracy of financial reporting, safeguarding assets, and promoting compliance with regulations. International best practices provide guidance on establishing and maintaining robust internal controls within CIs.
• Corporate Social Responsibility (CSR): While not explicitly mandated, the LCI might encourage CIs to consider international best practices on CSR. These best practices encourage CIs to integrate environmental, social, and governance (ESG) considerations into their decision-making processes. This fosters responsible business practices, promotes sustainability, and enhances the CI's reputation among socially conscious investors and stakeholders.

2. Key Players in the Governance Arena

Effective corporate governance in Vietnamese credit institutions (CIs) is not a one-man show. It's a collaborative effort orchestrated by key players working together to ensure the institution's stability and long-term success. Let's delve into the critical roles and responsibilities of these stakeholders:

• Shareholders: The foundation of any corporation, shareholders are the ultimate owners of a CI. They hold the power to influence the institution's direction through their voting rights on crucial matters:
  • Election of the Board of Directors (BOD): Shareholders have the right to vote and elect competent individuals to the BOD. These elected directors are then responsible for overseeing the management team and setting the overall strategic direction for the CI. By electing qualified directors, shareholders can indirectly influence the institution's performance and risk profile.
  • Approval of Major Decisions: Shareholders typically vote on significant decisions impacting the CI's future, such as mergers and acquisitions, capital increases, and dividend distributions. This voting power ensures that major strategic decisions align with the long-term interests of the shareholders.

The revised Law on Credit Institutions (LCI) might have further empowered shareholders by granting them:

Enhanced Information Disclosure Rights: Shareholders may have the right to access more detailed and timely information about the CI's financial performance, risk assessments, and potential conflicts of interest. This increased transparency allows shareholders to make informed investment decisions and hold the management team accountable

Improved Mechanisms for Addressing Concerns: The LCI may provide clearer channels for shareholders to voice concerns about the CI's management or strategic direction. This empowers shareholders to participate more actively in corporate governance and potentially influence positive change within the institution.

• Board of Directors (BOD): The BOD acts as the captain of the ship, steering the CI towards its strategic goals. They hold immense responsibility, with key functions including:
  • Setting Strategic Direction: The BOD establishes the CI's long-term vision and strategic goals. They are responsible for defining the institution's risk appetite, and ensuring it operates within regulatory boundaries while pursuing growth opportunities.
  • Overseeing Management: The BOD oversees the performance of the management team led by the CEO. They review financial statements, assess risk management practices, and hold management accountable for achieving strategic objectives.
  • Ensuring Compliance: The BOD plays a crucial role in ensuring the CI adheres to all relevant laws and regulations, including the LCI, international standards, and best practices.

The revised LCI likely emphasizes the importance of independent boards. This means the BOD should be composed of qualified individuals who are free from conflicts of interest and can provide objective oversight of the management team. Additionally, the LCI might encourage diverse boards with a range of expertise to ensure well-rounded decision-making.

• Management Team: The management team, led by the CEO, is responsible for implementing the day-to-day operations of the CI. Their key duties involve:
  • Executing Board Strategies: The management team translates the BOD's strategic direction into actionable plans and ensures their effective execution. This involves developing operational processes, managing resources, and achieving set performance targets.
  • Risk Management: The management team is responsible for identifying, assessing, and mitigating potential risks that could impact the CI's financial stability. This includes credit risk, market risk, operational risk, and compliance risk.
  • Internal Controls: The management team establishes and maintains a robust system of internal controls to ensure the accuracy of financial reporting, safeguard assets, and promote compliance with regulations.
  • Communication and Reporting: The management team plays a vital role in communicating with the BOD, shareholders, and other stakeholders. They provide regular reports on the CI's performance, risk profile, and any emerging issues that might require attention.

Effective communication and transparency between the board and management are critical for achieving strategic goals and mitigating risks. The management team must keep the BOD informed about operational challenges and potential risks, while the BOD needs to provide clear direction and support for the management team's initiatives.

3. Challenges and Opportunities for the Future

The journey towards robust corporate governance within Vietnamese credit institutions (CIs) is a continuous process with both historical challenges and promising opportunities for the future.

Challenges: A Legacy of Opacity

Historically, ensuring transparency and accountability within Vietnamese CIs has faced hurdles:

• Limited Transparency: In the past, access to financial information and clear disclosure of potential risks within CIs might have been limited. This lack of transparency hindered informed decision-making by shareholders and regulators.
• Weak Accountability Mechanisms: Mechanisms for holding management and the BOD accountable for their actions might not have been as robust as desired. This could have potentially led to instances of mismanagement or reckless risk-taking behavior.

Shifting Landscape: Embracing Change

Despite these challenges, the outlook for corporate governance in Vietnamese CIs is evolving:

• Revised LCI and Regulatory Push: The revised Law on Credit Institutions (LCI) in July 2024 signifies a significant step forward. Its emphasis on enhanced disclosure requirements, independent boards, and minority shareholder protection fosters a more transparent and accountable environment.
• International Integration and Best Practices: Vietnam's growing integration with the global financial system necessitates adherence to international best practices in corporate governance. This international influence is driving positive changes within Vietnamese CIs.

Looking Ahead: Seizing the Opportunities

By embracing these positive developments, Vietnamese CIs can unlock several key opportunities:

• Improved Investor Confidence: Robust corporate governance fosters trust from domestic and foreign investors. This increased confidence can attract more capital inflows, fueling economic growth and fostering a more vibrant financial sector.
• Enhanced Risk Management: Effective oversight by the BOD and a strong risk management culture within CIs lead to better identification, assessment, and mitigation of potential risks. This contributes to a more stable and resilient financial system, safeguarding depositors' funds and promoting financial stability.
• Sustainable Practices: Integrating Environmental, Social, and Governance (ESG) considerations into decision-making is no longer a niche concern. By adopting sustainable practices, Vietnamese CIs can attract environmentally and socially conscious investors and contribute to a more sustainable financial future.

In Summary: A Collaborative Journey

The path towards robust corporate governance in Vietnamese CIs requires continuous effort from all stakeholders. Regulators need to maintain a focus on strong regulatory frameworks and international best practices. CIs must prioritize transparency, accountability, and internal controls. Shareholders should actively participate in the governance process and hold institutions accountable. Building trust and fostering collaboration between these stakeholders is crucial for navigating the challenges and seizing the opportunities that lie ahead. By embracing good corporate governance, Vietnamese CIs can position themselves for long-term success in the increasingly competitive global financial landscape.

4. Conclusion