Companies play down independent directors

Transparency has been considered the top criterion to ensure the effectiveness and sustainability of corporate governance activities and protect the stakeholders' legitimate interests. One cornerstone to enhance corporate governance transparency is improving both the role and performance of independent directors on the company's board.

In Vietnam, principles of international corporate governance codes have been increasingly adopted into local law, especially those related to independent directors. The legal framework on independent directors has been significantly updated with more detailed regulations governing board independence, transparency, and equity in corporate governance.

However, the implementation of these regulations, especially in public companies, has not been carefully considered. A recent survey conducted by VNIDA, in collaboration with FiinGroup Vietnam, indicates that the appointment of independent directors is often merely for compliance purposes rather than aiming at the actual value that independent directors could bring to the company.

“Such practice possibly results from both subjective and objective reasons, which could be, among others, a lack of clarity in the current regulations, the capacity of independent directors, and the dominance of controlling shareholders in the company,” said Nguyen Sinh Dung Thang, President of Vietnam Independent Directors Association (VNIDA).

Decree 155 requires a listed company's board to have at least one independent director if there are three to five board members in total; at least two independent directors if there are six to eight board members; or at least three independent directors if there are nine to eleven board members.

372 out of 544 surveyed companies are complying with a minimum requirement on independent directors, equivalent to an average compliance rate of 68.4 per cent. The lowest rate is 30 percent in the automobiles & parts sector while the highest rate is 100 per cent in banks.

It should be noted that the percentage of independent directors in banks is as low as 11.8 per cent. In fact, banks are pursuant to the Credit Institutions Law 2010 instead of the Enterprise Law 2020 and the Securities Law 2019. Accordingly, a credit institution established in the form of a joint stock company is required to have at least one independent director regardless of the BOD size.

Having a higher degree of foreign ownership doesn’t mean a better compliance rate of independent directors. The survey found a relatively high compliance rate among companies with foreign ownership of less than 10 per cent. Those with foreign ownership ratio of 30 per cent or above, however, have a lower compliance rate.

Large caps have a higher compliance rate of independent directors than small and mid-caps. However, boards’ awareness of requirements on independent directors is strong in mid and small caps but relatively low in large caps, with the percentage of independent directors being relatively low at 25.7 per cent. In comparison, the figures for small and mid-caps are over 27 per cent.

Also, listed companies disclose information on independent directors through their corporate governance reports and annual reports. However, most disclosures tend to be boilerplate and lack such necessary information about independent directors as the nomination and removal process, a set of measurable performance indicators, detailed biographical information of candidates, and minutes of board committee meetings.

The role of board committees such as strategy, audit, and risk committees has not yet been considered appropriately in listed companies. In total, there are 162 independent directors serving various board committees of 98 out of 544 listed companies. No independent directors took seats on IR and ESG committees. The audit committee has the largest size of 1.7 persons, or 128 independent directors per 75 companies, while the strategic committee has the lowest, with only one person.

Most independent directors have knowledge or experience in finance and management; however, merely three out of 493 independent directors have experience in risk management, which explains why there are not many independent directors sitting on risk committees, same as with labor and union/ESG/CSR.

VNIDA also highlights that low compensation suggests a non-critical role of independent directors at companies. Across all sectors, the average remuneration for independent directors in Vietnam’s listed companies is $6,600 a year, much lower than annual compensation for non-executive directors in other markets such as India ($11,000, plus $31,000 in incentives), China ($34,000), Malaysia ($43,000), Hong Kong ($64,000), and Singapore ($75,000).

“Low compensation, in general, indicates that independent directors do not play essential roles in many companies. Instead, their presence might only be intended to meet regulatory requirements,”, said VNIDA's report.

VNIDA’s experts suggest that Vietnam should further promote and strengthen the importance of corporate governance in general and the business case of having independent directors in particular.

Further enforcement of independent director regulations implementation is also highlighted. In 2022, the SSC started to enforce independent director regulations. Both HPG and POW were fined in the amount of $5,000. Even though more companies are complying purely to avoid fines and negative publicity, it is still a step in nudging them in the right direction.

The legal framework for independent directors should be improved to exercise and maximize value from their expected duties and responsibilities. The quality of and code of conduct for independent directors should be continuously enhanced so that more companies will see the benefits and follow the best practices. This includes setting and improving standards for independent directors regarding their expertise, professionalism, and performance evaluation.