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CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EVIDENCE

FROM FINANCIAL INSTITUTIONS IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

by

Mr. Nguyen Duc Thinh

ID: MBA02036

International University - Vietnam National University HCMC

September 2012

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CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EVIDENCE FROM

FINANCIAL INSTITUTIONS IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

by

Mr. Nguyen Duc Thinh

ID: MBA02036

International University - Vietnam National University HCMC

September 2012

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 Committee member

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Committee member Committee member

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Committee member Committee member

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i

List of abbreviations

CGI Corporate Governance Index

DPR Dividend Payout Ratio

FI Financial Institution

GROW Growth Rate

GSO General Statistics Office

HNX Hanoi Stock Exchange

HOSE Ho Chi Minh Stock Exchange

LEVR Financial Leverage

MOF The Ministry of Finance

OECD Organization for Economic Co-operation and Development

RISK Business volatility

ROA Return on Assets

ROE Return on Equity

SBV The State Bank of Vietnam

STAT Status (Dummy variable)

VCGI Vietnam Corporate Governance Index

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ii

Acknowledgements

First of all, I am very grateful to my advisor - Dr. L Vnh Trin for his great support and helpful

guidance during the time we conduct this thesis.

We also would like to say thanks to all teachers in MBA Faculty and the Managing Board of

Directors of Ho Chi Minh International University for all your kind support to facilitate our best

to implement and complete this thesis.

Ho Chi Minh City, September 2012

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iii

Plagiarism Statements

I would like to declare that I am strictly complied with the regulations of Ho Chi Minh

International University with regard to plagiarism. Honestly, this thesis was conducted by me. I

am conscious that this thesis is my own work and does not contain or use any materials, ideas,

languages previously published by other person. In this paper, any published and unpublished

sources or references were clearly quoted and acknowledged. Otherwise, it will be treated as

plagiarism and I am totally responsible for the discipline in accordance with guidelines of Ho

Chi Minh International University Vietnam National University Ho Chi Minh City. I also

would like to commit that this thesis has not been submitted to any other MBA programs or other

school of business at any levels.

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iv

Table of Contents

List of abbreviations ........................................................................................................................ i

Acknowledgements ......................................................................................................................... ii

Plagiarism Statements .................................................................................................................... iii

Table of Contents ........................................................................................................................... iv

Abstract......................................................................................................................................... vii

CHAPTER ONE: INTRODUCTION ............................................................................................ 1

1.1. Introduction .......................................................................................................................... 1

1.2. Rationale .............................................................................................................................. 3

1.3. Problem statement ................................................................................................................ 5

1.4. Research objective ............................................................................................................... 9

1.5. Scope and limitation ............................................................................................................ 9

1.6. Implications of the study .................................................................................................... 11

1.7. Structure of the study ......................................................................................................... 12

CHAPTER TWO: LITERATURE REVIEW ............................................................................... 14

2.1. Corporate governance: a theoretical review ...................................................................... 14

2.2. Results of empirical research ............................................................................................. 17

2.3. Hypotheses ......................................................................................................................... 21

CHAPTER THREE: RESEARCH METHODOLOGY .............................................................. 25

3.1. Data collection ................................................................................................................... 25

3.2. Research Methodology ...................................................................................................... 25

3.3. Model to measure and variables ........................................................................................ 29

3.3.1. Model to measure variables ........................................................................................ 29

3.3.2. Dependent variables ................................................................................................... 30

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v

3.3.3. Independent variables ................................................................................................. 31

3.3.3.1. Company size (SIZE) .......................................................................................... 31

3.3.3.2. Company growth (GROW) ................................................................................. 32

3.3.3.3. Company leverage (LEVR) ................................................................................. 33

3.3.3.4. Business volatility (RISK) .................................................................................. 33

3.3.3.5. Capital intensity ratio (CAIR) ............................................................................. 34

3.3.3.6. Industry dummy variable (STAT) ....................................................................... 34

3.3.4. Variable definitions .................................................................................................... 35

3.3.5. Analysis process ......................................................................................................... 35

CHAPTER FOUR: DATA ANALYSIS AND FINDINGS ......................................................... 36

4.1. Descriptive statistics .......................................................................................................... 36

4.1.1. The VCGI ................................................................................................................... 36

4.1.2. The dependent variables and independent variables .................................................. 46

4.1.3. The correlation matrix of variables in the model ....................................................... 50

4.1.4.1. The VCGI ............................................................................................................ 52

4.1.4.2. Firm size (SIZE) .................................................................................................. 52

4.1.4.3. Financial leverage (LEVR) ................................................................................. 52

4.1.4.4. Total asset growth rate (GROW) ........................................................................ 53

4.1.4.5. Business volatility (RISK) .................................................................................. 53

4.1.4.6. Capital intensity ratio (CAIR) ............................................................................. 53

4.1.4.7. Industry dummy variable (STAT) ....................................................................... 54

4.1.4. The sub-indices correlation matrix ............................................................................. 54

4.2. The results of regression analysis ...................................................................................... 56

4.2.1. The association between the VCGI and ROE (Model 1) ........................................... 56

4.2.2. The relationship between the VCGI and ROA (Model 2) .......................................... 58

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vi

4.2.3. The relationship between the VCGI and DPR (Model 3) .......................................... 61

4.2.4. ROE, ROA and dividend payout regressions ............................................................. 64

4.2.5. Regression with four sub-indices and dependent variables ROE, ROA, DPR........... 65

4.2.6. Regression with dummy variable (STAT).................................................................. 67

CHAPTER FIVE: CONCLUSIONS AND RECOMMENDATIONS ......................................... 70

5.1. Conclusions ........................................................................................................................ 70

5.2. Recommendations .............................................................................................................. 73

References ..................................................................................................................................... 76

Appendices .................................................................................................................................... 81

List of Tables ............................................................................................................................. 81

List of Figures ........................................................................................................................... 93

The VCGI in details .................................................................................................................. 98

List of Financial Institutions included in this study ................................................................ 101

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vii

Corporate Governance and Firm Performance: Evidence from Financial Institutions

in Vietnam

Abstract

This study is to analyze and evaluate the corporate governance practices in financial institutions

(FIs) in Vietnam, including 37 Commercial Joint Stock Banks, 16 Insurance Corporations and

7 Finance Joint Stock companies. Of the 60 financial institutions, 17 are listed. Using a similar

approach with Garay and Gonzlez (2008) with considering specific characteristics of Vietnam

economy, we have established the Vietnam Corporate Governance Index (VCGI) for 60

financial institutions on the basic of publicly disclosed information. We use multiple regressions

to test and investigate the association between corporate governance practices and performance

of FIs in Vietnam.

The empirical results show that the VCGI is positively associated with ROE and ROA and the

correlation is statistically significant at the 0.01 level. This suggests that in Vietnam, FIs with

higher corporate governance scores have higher performance in term of ROE and ROA. The

results also indicate that the VCGI is positively related to dividend payout ratio (DPR) and its

correlation coefficient is statistically significant at the 0.01 level. That is, financial institutions

with better corporate governance practice tend to allocate more cash earnings to shareholders,

reflected by a higher dividend payout ratio.

Keywords: Financial institutions, corporate governance index, firm performance, the board of

directors, the executive board, Vietnam.

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Corporate Governance and Firm Performance: Evidence from FIs in Vietnam

1

CHAPTER ONE: INTRODUCTION

In this chapter, we commence with corporate governance issues not only in Vietnam but also

around the world. We come up with the reason why corporate governance is so important for

FIs in Vietnam and why corporate governance practices attract more attention from investors,

shareholders, and the government etc. in recent years. The necessity for conducting this study

is also discussed in the context of Vietnam. We then present the structure of this study.

1.1. Introduction

In recent years, corporate governance has been widely researched in respect of process

of decision making of the company especially after the sudden increase in the number of

scandals. For the sake of investors and firms themselves, many firms have started paying

more close attention to corporate governance. According to Claessens, Djankov, Fan and

Lang (2002), firms with good corporate governance practices were in a better position to

approach external funding, save cost of capital and increase their operating performance.

They found that a stronger operating performance of a firm was reflected by the effective use

of capital resource on the basic of better operation control. The above authors also showed

that effective corporate governance practices could mitigate risks and strengthen shareholders

connection with firm. Therefore, good and transparent corporate governance practices are

essential for firms in general and financial institutions in particular.

There are many studies undertaken not only in developed countries but also in

developing countries. For example, Black (2001) did a research in Russia, and Chong, Lpez-

de-Silanes (2006) examined the case of Mexico. Lefort and Walker (2005) conducted a

research in Chile while Garay and Gonzlez (2005) studied firms in Venezuela. These studies

argued that firm corporate governance practices were positively related to firm market value

as well as firm accounting performance. In the recent study, Garay and Gonzlez (2008)

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established a corporate governance index (CGI) based on information of 46 listed firms in the

Caracas Stock Exchange in Venezuela and investigated the relationship between corporate

governance and company performance. They provided strong evidence arguing for the

association between corporate governance quality and share market price and dividend payout

of listed companies in the context of a developing market (i.e. Venezuela). They found that

corporate governance performance was positively associated with market price to book value,

Tobin Q and dividend payout ratio. The result is consistent with theoretical models

previously proposed by La Porta, Lopez-de-Silanes, Shleifer and Vishny (2002) and La Porta,

Lopez-de-Silanes, Shleifer and Vishny (2000b). Moreover, Klapper and Love (2004)

examined corporate governance practices in merging countries and argued that there was a

positive relationship between corporate governance score and firm market performance. The

authors implied that companies with higher corporate governance scores could have stronger

efficiency in operation compared to firms with lower corporate governance scores.

In addition, Durnev and Kim (2005) accessed the sample sizes of 859 big companies in

27 countries to investigate whether corporate governance score could predict firm market

price or firm market value. Empirically, they demonstrated that corporate governance with

regard to disclosure score was positively related to Tobins Q.

In the context of Vietnam, however, there is a lack of quantitative studies on the

relationship between corporate governance practices and firm share market price or firm

performance. Instead, the studies mainly use qualitative method to describe, evaluate and

analyze corporate governance practices of listed companies and consider whether the quality

of corporate governance practices to be improved in comparison with previous time and how

corporate governance practice is complied with international standards prescribed in

Organization for Economic Co-operation and Development (OECD) principles of corporate

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governance. Following the approach of Garay and Gonzlez (2008), this study collects data

and builds the Corporate Governance Index (CGI) for 60 financial institutions in Vietnam and

uses Ordinary Least Squares (OLS) to investigate the association between corporate

governance practices and performance of FIs in Vietnam in terms of return on equity (ROE),

return on assets (ROA) and dividend payout ratio (DPR).

1.2. Rationale

Since joining the World Trade Organization (WTO) in 2006, companies of Vietnam

have officially entered the global play-ground where they compete not only with Vietnamese

enterprises from all sectors of the economy such as state owned companies, private companies

but also with foreign companies in various industries such as service, production, trade,

finance, insurance etc. Competitive pressures to survive and develop are forcing Vietnamese

enterprises ceaselessly improve and strengthen themselves to meet the changes and rapid

development of the world economy. Recently, improving corporate governance performance

has emerged as an important means for firms in Vietnam and around the world to compete.

Good corporate governance helps firm to attract capital at the lower cost and use its capital

source more efficiently (Gompers, Ishii, and Metrick, 2003). In particular, effective corporate

governance increases market confidence in firms and therefore helps them to obtain lower

cost of capital from investors in the market. As a result, firms have many opportunities to

obtain more long term capital both in domestic and in international markets. Better corporate

governance also promotes market discipline on the basic of proper disclosure and the

transparency of the firm. Moreover, effective corporate governance assures firms to develop

steadily, to decrease potential risks arising in their operations and to facilitate their sustainable

growth (Claessens, 2002).

In addition, Black, Jang and Kim (2006) showed that firms had effective corporate

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governance practices were in a better position to attract lower cost of capital. In financial

banking industry, corporate governance matters have become more stringent to be supervised.

Especially, since the global financial crisis happened in 2008, corporate governance practices

have become an issue of serious concern for enterprises in general and FIs in particular.

Shareholders, debt holders, government are supervising, implementing corporate governance

practices in firms and requesting modifications in corporate governance practices to

strengthen the disclosure process. The transparency, accountability and efficiency of firms

have become firms objectives. Moreover, financial industry is a special sector in the

economy having an intimate connection with the rest of the economy of the country.

Corporate governance practices in FIs, therefore, play an important role for a stable operation

and safe growth, contributing to stable financial banking system and the whole economy of

the country.

Therefore, this study is to investigate corporate governance practices of FIs in Vietnam,

including 37 commercial banks, 16 insurance companies and 7 financial joint stock

corporations both listed and unlisted companies. The main objective of the study is to analyze

and evaluate the corporate governance practices of FIs in Vietnam. In particular, this study

attempts to examine the interaction between corporate governance practices and performance

of FIs in Vietnam. Based on the findings obtained by data, the study furnishes useful

implications to managers, directors of those companies, policy makers for appropriate actions.

In this study, we would like to answer the following questions:

1.

Do corporate governance practices impact on perf ormance of f inancial i nstituti ons in

Vietnam?

2. How can eff ective corporate governance practices help f inancial insti tuti ons to improve

their perf ormance?

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1.3. Problem statement

Since 1986, Vietnam has implemented a new policy recognizing the economy with

multiple business sectors. The changes have facilitated business growing in Vietnam. A

number of enterprises from various industries, including productions and services have

developed and become large companies, groups, financial groups such as Hoa Phat Group,

Hoang Anh Gia Lai Group, Asia Commercial Joint Stock Bank - ACB, Sai Gon Thuong Tin

Bank - Sacombank, Vietnam Technological and Commercial Joint Stock Bank -

Techcombank. Indispensably, corporate governance of firms in Vietnam has to be upgraded

to match with the international standards because almost all economies are interrelated.

On the other hand, FIs play an important role in the economy of Vietnam. With the role

as intermediaries, FIs furnish a series of financial services in the financial markets,

connecting capital suppliers to capital users. Indeed, FIs, as span of bridge, connect investors

who need capital with capital suppliers such as depositors, funds in the financial market.

Based on capital allocation to the economy, investors can use source of capital to invest,

produce goods or trade commodities. As a result, FIs become a very important part in

developing the economy of Vietnam.Due to their specific characteristics, FIs may cause a

serious impact on the economy and the failure of FIs can lead to the collapse of the whole

financial system and even the economy. Asymmetric information may cause problems to

firms irrespective of financial or non-financial industries. However, Furfine (2001) found that

asymmetric information in banks was more serious than in other business sectors in the

economy. More specifically, credit lending is the main activity and this activity generates

more earnings in total income of commercial banks. The quality of bank loan, however, is not

easy to monitor and credit risk is potentially concealed in a long time. In the case of high bad

debt ratio, a commercial bank may significantly face with difficulties in term of solvency and

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liquidity and even may be failed or collapsed in the case of bankruptcy. And the failure or

collapse of a bank may cause a domino effect and lead to the collapse of a financial system of

a country. Then, the consequence is to become more serious for the whole economy of the

country. As a result, the financial banking industry often draws closer attention from the

government, investors, shareholders and all stakeholders in general.

In recent years, the collapse of big financial companies in the world such as Enron

Group, WorldCom and more recently Lehman Brothers, Bear Stearns etc. in the 2008 global

financial crisis has shown why corporate governance has drawn more attention from many

firms, shareholders, debt holders, employees and policy makers in many countries around the

world.

To protect the rights and interest of investors or shareholders properly, many countries

have issued guidelines with regard to corporate governance to direct firms. To adapt with the

business environment and to create a legal corridor for enterprises to implement accordingly,

Vietnam has also built the legal framework underlying corporate governance regulations in

accordance with the requirements in the context of Vietnam and principles of corporate

governance under international standards of OECD.

Currently, besides the Law on Enterprise in 2005 with effect from the 1st July 2006,

Decision No. 12/2007/Q-BTC of the Ministry of Finance on 13th March 2007 was

promulgated to govern corporate governance activities of listed companies in Vietnam. The

Ministry of Finance prescribes regulations in accordance with the Law on Enterprises, Law on

Securities as well as applies international practices of corporate governance in the context of

Vietnam appropriately, ensuring a sustainable development of the stock market and a healthy

economy as well.

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Decision No. 12/2007/Q-BTC comprises of a list of basic principles with regard to

corporate governance practices to protect the rights and interest of investors, shareholders and

related people. Besides, Decision 12 also sets the codes of conduct and ethics of related

members who have rights and interest to manage listed companies in Ho Chi Minh Stock

Exchange (HOSE) and Hanoi Stock Exchange (HNX). In particular, related members are

included as the board of directors, the executive board, the control board and managers or

directors who directly involve in the companies. Under the current regulation, unlisted

companies also refer to this as a guideline on corporate governance to enhance the quality of

corporate governance and ensure companies to be operated in safe and stable ways and attract

more investors.

However, like other developing countries where investor right protection legal is rather

weak, corporate governance practices of firms in Vietnam generally are still limited and weak

compared to the international standards (IFC, 2010).

In financial banking industry, there is a lack of studies on the relationship between

corporate governance and performance or market value of FIs both in Vietnam and around

the world. In the context of Vietnam, the recent study carried out by IFC (2010) to make a

survey for 100 listed companies in both Ho Chi Minh Stock Exchange (HOSE) and Hanoi

Stock Exchange (HNX) found that corporate governance scores in respect of the

responsibilities of the board of directors and information disclosure and transparency of listed

companies were rather low1, with 36.1% and 43.2% respectively. The survey also pointed out

1 According to Vietnam Scorecard project 2011 (IFC), page 14, corporate governance score in respect of

responsibilities of the Board and information disclosure and transparency were 36.1% and 43.2% respectively.

The survey also reported the average corporate governance score of financial firms was 44.7%, a decrease of 1%

compared to the year 2009.

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that many listed firms should tend to be complied with regulations rather to voluntarily

enhance their corporate governance practices.

Of the 100 listed companies both in HOSE and HNX, 35 financial firms were to be

included in the survey. The survey showed that the average corporate governance score of

financial firms was 44.7%, a decrease of 1% compared to the previous year. This survey

indicated that corporate governance practices of Vietnamese companies, especially regarding

the responsibilities of the board of directors and information disclosure and the transparency

in operations were rather low. However, this study is to evaluate how corporate governance

practices in Vietnamese companies are consistent to international practices. The most recent

related study has been conducted by Le Vinh Trien and Nguyen Duc Thinh (2012) on

corporate governance in 60 financial institutions in Vietnam (i.e. our work has just been

accepted for publication). This research is one of the very few first empirical studies on

corporate governance in financial institutions in Vietnam.

Besides, there is also limited study examining the association between corporate

governance practices and FIs operating performance or market value. Empirical studies

undertaken in recent years on corporate governance of FIs around the world mainly focus on

the regulators by conducting a survey (Umer Chapra and Habib Ahmed, 2002) or addressing

to bank failure issue (Desrochers and Fischer, 2002). The other studies were conducted on the

effects of laws, regulations, and monitoring policies on corporate governance of banks in

developing countries (Ross Levine, 2003), or theories of the company and its corporate

governance (Christian Harm, 2007), corporate governance practices after financial crisis 2008

(Peter O. Mlbert, 2010) etc.

In sum, there is a dearth of studies exploring the relationship between FI corporate

governance and its performance in terms of share market value, ROE or ROA not only in

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Vietnam but also around the world. Moreover, in a qualitative piece of research conducted by

Millar, Eldomiaty, Choi and Hilton (2005), these authors suggest a further quantitative study

on the factors with regard to the transparency of the financial institution and its association

with performance or market value. Based on this gap, the study attempts to investigate the

association between corporate governance practices and performance of FIs in Vietnam on

the basic of collecting firm data.

1.4. Research objective

This study is to investigate the impact of corporate governance practices on almost all

Joint Stock FIs both unlisted and listed in HOSE and HNX in Vietnam, including 37

Commercial Banks, 16 Insurance Corporations and 7 Finance Companies. The main objective

of this study is to analyze and evaluate corporate governance practices of FI in Vietnam and

its relationship with performance. More specifically, this study investigates the impact of

corporate governance on performance of FIs in Vietnam and attempts to propose measures to

improve performance of these FIs in terms of corporate governance practices.

1.5.

Scope and limitation

The scope of this study includes 60 Joint Stock Financial Institutions in Vietnam. This

study selects almost all Joint Stock FIs both unlisted and listed in HOSE and HNX in

Vietnam, including 37 Commercial Banks, 16 Insurance Corporations and 7 Finance

Companies. Time for sampling is defined for the year 2009 as the beginning time and 2011

as the year end of this study. In 2011, the number of commercial banks was decreased to 37

commercial banks from 39 commercial banks due to the merging of First bank and Vietnam

Tin Nghia bank to Saigon Commercial Joint Stock Bank.

As a result, an unavoidable issue of this study is the sample size. The sample size for

the study is not large, in which 60 FIs in Vietnam are included and 56 FIs are satisfactory

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10

with the study (4 FIs are excluded due to lack of information). Given the small sample size,

this is potentially caused to less power in explanatory variables in the model, exhibiting a

small adjusted R-Square. On the other hand, the results and findings of the study may be

different when a larger sample size is included to test the impact of corporate governance on

performance of FIs in Vietnam.

Another issue is information collection. Because Vietnam's stock market is still rather

young2and due to the specific characteristics of Vietnam economy, the information provided

is still limited3. The study therefore will not avoid the defects because in some cases

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limitation for this study.

Finally, there are only 17 listed companies among the sample of 60 FIs both in HOSE

and HNX. Therefore, this study could not get enough information regarding FI share market

price or FI market value to apply TobinsQ as dependent variable for the study to evaluate

the association between the CGI and the stock price or firm market value more

comprehensively and objectively. Market price may reflect firm performance more

accurately while accounting performance can be subjectively influenced by firms by using

techniques to report. Thus, further studies are recommended to include Tobins Q as

dependent variable to have a deeper and comprehensive analysis on the relationship between

corporate governance performance and the market price or market value of FIs in Vietnam.

1.6. Implications of the study

Due to the limitation of studies on corporate governance and FIs performance in

Vietnam as well as in other developing countries, we address Vietnam is a useful case to

conduct to investigate how corporate governance practices impact on FIs performance and

dividend payout ratio. The results of this study show the impact of corporate governance

practices on performance in term of ROE and ROA and dividend payout of FIs in the context

of Vietnam where investor right protection is still weak. Empirically, our findings furnish

evidence that FIswith good corporate governance practices have better performance in term

of ROE, ROA and dividends paid to shareholders are also higher in such a weak legal

environment.

The findings support the theoretical models, in which effective corporate governance is

associated with better performance. The finding of this study is also in agreement with the

outcome of agency problems and dividend policies proposed by La Porta et al. (2000b), in

which firms with good corporate governance should allocate more dividends to shareholders.

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Therefore, our study result may be applicable to corporate governance practices of FIs not

only in Vietnam but also in other developing countries with weak investor right protection.

This study implies that from the perspective of directors, policy makers of FIs in

Vietnam, they should voluntarily enhance their guidelines or policies on corporate governance

to ensure FIs are effectively governed. In such weak investor right environment, improving

corporate governance practices become more important for firms to strengthen investor

confidence (Klapper and Love, 2004). Thus, by adopting effective corporate governance it

may help FIs to be clearly recognized in an unstable environment like Vietnam to save cost

of capital and increase their operating performance significantly. Besides, this study also

suggests a quantitative method for investors, shareholders as well as other related persons to

keep it as useful reference for entering FIs in Vietnam.

1.7. Structure of the study

This study consists of five Chapters. Starting with Chapter one, we begin with the

research topic on corporate governance and its relation to firm performance. We come up with

the reason why corporate governance is so important for FIs in Vietnam and the reason why

corporate governance practices attract more attention from investors, shareholders, and the

government etc. especially in recent years. The necessity for conducting this study is also

discussed in the context of Vietnam.

In Chapter two, we present the theoretical basis about the concept Corporate

Governance and report the results of the studies previously conducted by the authors in many

countries around the world. Based on the theoretical models and the findings of empirical

studies, combining with the assessment of the context of Vietnam, we establish hypotheses to

test and investigate the association between corporate governance practices and performance

of FIs in Vietnam.

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In Chapter three, we present how data and research methodologies used for this study.

This study approaches not only in quantitative but also in qualitative method. We present how

to collect and process data and test the association between corporate governance practices

and FIs performance. We also show steps and contents to establish the VCGI for 60 financial

institutions in Vietnam.

In Chapter four, after running test we report the descriptive statistics of variables in the

model and the results of multiple regressions. Based on the results we analyze, evaluate the

correlations between dependent variables and independent variables. Finally, we report the

findings obtained from the data.

In the last Chapter, we summarize the key contents discussed in the study as well as the

findings obtained by the data and we then conclude the study. Based on the findings

supported by the data, we suggest recommendations to managers or directors of FIs in

Vietnam and related parties for their consideration and implementation to improve corporate

governance practices of their FIs in Vietnam. Moreover, future research is also recommended

to conduct regarding corporate governance in general and the relationship between corporate

governance and firm performance in particular.

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CHAPTER TWO: LITERATURE REVIEW

In this chapter, we present the theoretical basis about the concept Corporate Governance

and report the results of the studies previously conducted by the authors in many countries

around the world. Based on the theoretical models and the findings of empirical studies,

combining with the assessment in the context of Vietnam, we establish hypotheses to test and

investigate the association between corporate governance practices and performance of FIs in

Vietnam.

2.1. Corporate governance: a theoretical review

In recent years, the concept of Corporate Governance has become more popular in

many nations all over the world, especially after the sudden increase in the number of

scandals. More recently, the 2008 financial crisis4 caused the falling down of many big

companies, especially many big financial companies such as Lehman brothers, Bear Stearns

in USA and in other countries. For this reason, corporate governance henceforth is to become

more popular and toattract more attention from related people who have rights and interest of

the company. They are both inside and outside parties, including shareholders of the

company, employees, debt holders, suppliers, customers as well etc.

There are numerous definitions on corporate governance. According to Andrei Shleifer

and Robert Vishny (1997, p. 737), corporate governance refers to a process in which investors

make sure to collect money back after making their investments. In addition, Caramanolis-

Ctelli (1995) suggests that corporate governance is identified through the equity allocation

between one party as insiders and other party as outsiders.

4 The global financial crisis was taken placed in the U.S derived from sub-prime lending and then spread to

Europe and the world. The financial crisis in 2008 has caused difficulties and even bankruptcy of financial

institutions in general as well as oldest giant financial institutions in particular such as Lehman Brothers, Morgan

Stanley, Citigroup, and AIG etc.

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Cadbury Committee (1992) denotes that corporate governance is a set of rules used to

direct and manage firms effectively while Zingale (1997) interprets that corporate governance

includes a series of restrictions that form the ex-post bargaining over the quasi-rents

created by a company.

Furthermore, La Porta et al. (2000) suggest that corporate governance practices consist

of mechanisms in which outside parties attempt to save themselves from the expropriation of

inside parties. The inside parties are referred as the controlling shareholders, directors or the

board of directors of the company. The expropriation can be undertaken by selling the assets

or properties of the company that insiders have controlling rights to the other firms under their

ownership with lower price. The expropriation is also conducted through sending their family

members to manage the firm.

According to OECD principles of corporate governance (2004), corporate governance

consists of a series of interactions of related people who have rights and interest in the

company. These interactions are relationships between inside parties of the company,

including the board of directors, the board of managements, the control board, employees,

shareholders and the other outside parties such as suppliers, creditors, investors. In other

words, corporate governance is a process in which a company manages to protect

shareholders and investors from the conflicts of interest caused in decision making of the

executive board in the operations of the company.

To be in accordance with international standards on corporate governance practices, the

authorities in Vietnam have issued guidelines regarding corporate governance to direct firms,

in which listed firms are directly governed to apply corporate governance practices in

accordance with the regulations prescribed in Decision No. 12/2007/Q-BTC dated 13 March

2007 of the Ministry of Finance. In particular, Decision No. 12/2007/Q-BTC defines that

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corporate governance comprises of a series of rules to ensure the company to be operated and

managed safely and effectively as well as to assure shareholders and related people of the

company to be properly protected in term of rights and benefits. The key principles5 of

corporate governance include the following contents:

i) The rights of shareholders of the company are guaranteed to be executed (e.g.

shareholders are freely to transfer their shares, the company should reserve for

shareholders to vote effectively in the general meeting etc.).

ii) Shareholders are equally treated in the company (e.g. common share should be

treated as one share one vote, minor shareholders are properly protected from the

appropriation of larger shareholders etc.).

iii) The role of related people in the company (e.g. suppliers, creditors, employees etc.

are created conditions to access firms properly. They also have rights to receive

necessary information promptly and in a good manner etc.).

iv) An effective governance structure of the company (e.g. the number of the board

members, the number of independent members in the board compositions, number

of non-executive board members or a balanced board etc.).

v) An effective management and control of the board, the executive board and the

control board of the firm (e.g. how rights and obligations of the board members are

clearly described by firms, how often members participate in the meetings etc.).

vi) Transparency in operations of the company (e.g. firms are required to disclose

information in respect of finance, the board members, the remuneration of the

board, transactions related to the board members, directors of firms etc.).

5 According to Article 2, Decision No. 12/2007/Q-BTC dated 13 March 2007 of the Ministry of Finance of

Vietnam promulgating the regulation on corporate governance for listed companies in Stock Exchange.

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Despite numerous definitions on corporate governance in studies conducted around the

world, there are some common points to be addressed. Accordingly, the authors mainly point

out that there are the conflicts of interest between involved parties in the company, which are

between insiders and outsiders. Therefore, corporate governance is a tool set by firm to

mitigate the conflicts of interest between involved parties in the firm.

In sum, corporate governance emphasizes the latent conflicts between people who are in

the company such as the board of managements with the boards of directors or employees, or

the conflicts of interest between majority shareholders with minority shareholders or the

conflicts of interest between the outside such as suppliers, debt holders and inside party. In

other words, corporate governance is the process of managements ruled by the firm to ensure

the equilibrium for latent conflicts of interest between related parties (insiders and outsiders),

directing toward an efficient and stable management of the firm.

2.2. Results of empirical research

Good corporate governance brings about many benefits to firms. Claessens et al. (2002)

demonstrated that good corporate governance practices would help firms in term of easier

approach to external financing and enjoying cheaper capital. Saving cost of capital contributes

to better firm performance. In addition, good corporate governance practices would help firms

to control risks more effectively. Claessens et al. (2002) also assumed that corporate

governance of a company had a positive relationship with its performance. In other words, the

more the corporate governance scores are the better the return firm gains. Claessens et al.

(2000a, 2000b) examined the link between ownership structures and market price of East

Asian firms.These authors demonstrated that cash-flow rights were positively related to firm

market value. Accordingly, the results of these authors showed that there were conflicts of

interest between minority shareholders and controlling shareholders.In the firms where there

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were the controlling ownerships, small shareholders were unfavorably affected by policies

causing from decision making of large investors.

Recent researchers have attempted to build the CGI on the basic of information on

finance, accountability and laws to evaluate and analyze corporate governance and its

association with firm performance not only in developed countries but also developing

countries. Among of them, Gompers, Ishii and Metrick (2003) built the CGI to investigate the

relationship between the CGI and firm performance on the basic of 24 governance provisions

for 1,500 huge companies in USA. They argued that there was a strongly positive interaction

between the quality of corporate governance and company performance. In other words,

companies with good corporate governance had better performance compared to the other

companies in USA. Some other studies were carried out to examine the relationship between

corporate governance and company value or share market price. In particularly, Black, Jang

and Kim (2006) conducted a research for 525 of the 560 listed companies in Korea. These

authors concluded that corporate governance was a vital element reflecting the market price of

Korean firms. Basically, they argued that there was a significant relationship between Korea

Corporate Governance Index and company market price. Moreover, results of studies in

Russia conducted by Black (2001) and Black, Love and Rachinsky (2006b) demonstrated that

CGI was positively related to the market price of Russian companies.

Nevertheless, these studies have mainly undertaken in developed nations. In addition,

some studies draw attentions tocorporate governance issues with regard to the structure or the

compositions of the board of directors of firms, the exercise of shareholder s rights as well .In

particular, Klapper and Love (2004) examined corporate governance practices in 14 merging

countries and concluded that there was a positive relationship between corporate governance

score and firm market performance. The findings of the empirical study of these authors

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Metrick (2003). The studies conducted in Latin America are of Chong and Lpez-de-Silanes

(2006), Lefort and Walker (2005), Garay and Gonzlez (2005) and Leal and Carvalhal-da-

Silva (2005). These authors conducted the researches to examine corporate governance

practices in Mexico, Chile, Venezuela and Brazil respectively. They came to the conclusion

that firm performance had the same related direction with the CGI. In other words, there was

a positive association between firm performance and corporate governance score of listed

companies in Latin America.

In the further study carried out in Venezuela, Garay and Gonzlez (2008) established the

CGI based on the information of 46 listed firms in the Caracas Stock Exchange to investigate

the association between corporate governance practices and company performance.

Empirically, these authors provided a strong evidence to conclude that corporate governance

performance was significantly interacted with share market price and dividend payout of

listed companies in the context of Venezuela. The result of these authors is compatible with

theoretical models previously proved by not only La Porta, Lopez-de-Silanes, Shleifer and

Vishny (2002) but also La Porta, Lopez-de-Silanes, Shleifer and Vishny (2000b). According

to the theoretical model presented by La Porta, Lopez-de-Silanes, Shleifer and Vishny (2002),

firms with effective and more transparent corporate governance practices is interpreted by the

stronger investor confidence. The findings of La Porta, Lopez-de-Silanes, Shleifer and Vishny

(2000b) also indicated that firms in countries with developed legal system to protect investors

had higher Tobins Q than firms in countries with under-developed legal system. The

outcome agency model regarding dividend payment policy of La Porta et al. (2000b)

showed that firms with stronger corporate governance practices should allocate more earnings

to shareholders, reflected a higher cash dividend payout than firms with lower corporate

governance performance.

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2.3. Hypotheses

According to the results of the studies conducted by Klapper and Love (2004) as well as

Durnev and Kim (2005), corporate governa

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information on mergers and acquisitions of commercial banks. Furthermore, the price of other

banks such as Sacombank, Eximbank was continuously increased in the market with the same

reason. In the context of the increase of bank shares price, the market created a certain

momentum to investors. However, rumors have negatively affected shares price of companies

in the banking industry. Hence, the rights and interest of investors in financial banking

industry are significantly affected.

In the context of weak shareholder protection legal environment like Vietnam,

asymmetric information problems are more pronounced. Therefore, firms in general and FIs

in particular perceive that good corporate governance practices help firms to overcome

challenges in the environment of Vietnam economy where the reputation of firms in general

and FIs in particular as well as the psychology of investors is important to raise funds. In

Vietnam, FIs specially pay attention to enhance the quality of corporate governance, in part

because of their natural characteristics which are essential and sensitive for the economy.

Therefore, they are more closely supervised by the government and they also get more public

attention (i.e. investors, shareholders, creditors etc.).

On the other hand, FIs attempt to enhance their corporate governance to increase the

efficiency in operations, reduce risk to grow stably and safely as well as increase the investor

confidence. Good corporate governance practices strongly support to strengthen the image of

FIs in the awareness of investors, customers as well as partners in the market. Indeed, FIs

with effective corporate governance and transparency in operation may be more highly

appreciated by creditors and investors. Hence they are easier to access capital market and

attract cheaper capital, then use this source of capital in an effective way on the basis of a

tight monitoring mechanism and generate more profits.

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Based on the above arguments and the characteristics of Vietnam economy, we would

like to hypothesize that:

H1: corporate governance perf ormance wil l be positi vely associated with return on

equi ty and return on assets of f inancial i nstitut ions in Vi etnam.

In overall, there is unclear association between corporate governance and dividends paid

to shareholders of the firm in studies around the world. Representatively, the studies

examined by Black, Jang and Kim (2006), Garay and Gonzlez (2008) gave different results

for the relation between corporate governance and dividend payout of the firm. Empirically,

the former authors argued that they had not enough evidence to conclude that firms with

higher corporate governance should pay more dividends to shareholders than firms with less

effective corporate governance score in the context of Korea. Latter authors reached the

conclusion that the CGI had a positive relationship with dividend payout ratio of firms (e.g. in

the context of Venezuela). This result is consistent with the findings of the study performed in

Brazil by Leal and Carvalhal-Da-Silva (2003). That is, firms which have good quality of

corporate governance practices normally define to contribute more earnings to shareholders

by setting a higher dividend payout ratio in their dividend policies. Besides, La Porta et al.

(2000b) also found that firms in countries with strong legal protection system to investors or

shareholders set a higher dividend payout ratio compared to firms in countries with weak

legal protection system. In addition, Johnson and Shleifer (2001) demonstrated that firms set

higher dividend payout in their policies as the way to properly protect minority investors or

shareholders from the expropriation of the controlling shareholders.According to the agency

model and dividend payment policy developed by La Porta et al. (2000b), the board decides

to disburse cash dividends to shareholders as the way they treat minor investors with respect

because by doing this way they may fund equity easier from shareholders afterwards.

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Due to unaffordable conditions from wars, Vietnam switched to oriented market

economy only from 1986. Besides, Vietnam capital market has been developing. The stock

market in Vietnam is rather young in comparison with other developed countries. The number

of enterprises joined as members is limited and the value of market is still modest. In the

context of Vietnam where legal system is still not enough strong to protect investors or

shareholders, the rights of shareholders especially small investors are not protected as they are

in developed countries and agency problems as well as asymmetric information become more

serious. More specifically, due to an under-developed capital market, this should easily lead

to an unfair competition between large investors and small investors, in whichsmall investors

are vulnerable to price pressure, rumors or insider trading while the punishments for these

kinds of behaviors are still not strictly executed.Therefore, better corporate governance firms

in general and FIs in particular tend to use dividend policy as an important method to

decrease agency problems and asymmetric information to protect minority shareholders from

the expropriation of large shareholders and increase investors confidence as well.

Thus, setting higher dividend payout is of the effective mean to ensure the interest of

minority shareholders to be appropriately protected. This is also one of the means that FIs in

Vietnam use to make them clearly recognized in the market to attract more shareholders and

investors. By maintaining higher dividend payout, FIs in Vietnam confidently send a good

message to the market that they potentially grow and may gain higher return in the future.

Paying higher dividend is also the way they treat their small investors with respect to increase

investors confidence then they are in a better position to fund equity afterward. Therefore,

the second hypothesis is:

H2: corporate governance performance will be positively associated with dividend

payout ratio of f inancial instituti ons in Vietnam.

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CHAPTER THREE: RESEARCHMETHODOLOGY

In this chapter, we present how data and research methodologies used for this study. This

study approaches not only in quantitative but also in qualitative method. We present how to

collect and process data and test the association between corporate governance practices and

FIs performance. We also show steps and contents to establish the VCGI for 60 financial

institutions in Vietnam.

3.1. Data collection

Our sample of 60 financial institutions includes both listed FIs and unlisted FIs in

Vietnam. Due to the limitation of the board size as well as other relevant information, limited

entities or sole member limited FIs are not applicable and excluded from this study. Hence

we only focus on Joint Stock financial entities accordingly. Therefore, our sample does not

consist of either limited FIs or sole member limited FIs as well as FIs which lack of

necessary information. To mitigate the potential issue given small sample size in the limited

time, we attempt to increase observations by sampling in three years from 2009 to 2011. On

the other hand, of the total sample of 60 FIs in Vietnam 56 FIs or 168 observations are

satisfactory to be included, accounting for up to 93.33%. This percentage is rather high to be

representative for the whole population of FIs in Vietnam.

We collect data based on publicly available information disclosed by FIs on their

websites as well as other relevant websites (i.e. websites of security companies, the State

Bank of Vietnam (SBV), the Ministry of Finance (MOF), and General Statistics Office etc.).

3.2.

Research Methodology

This study approaches both quantitative and qualitative method to analyze and evaluate

corporate governance practices of FIs in Vietnam.

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For quantitative method, we collect data based on the publicly available information

disclosed by FIs on their websites or information delivered by security companies to access

FIs information. The main documents collected for the study include financial statements,

annual reports, the meeting minutes, the resolutions of the General Assembly of Shareholders,

FI charters, the profit distribution plans etc. Based on the firm level data obtained, then, we

use OLS to test and examine the relationship between corporate governance scores and

performance of FIs in Vietnam. Based on the regression results, we conduct to analyze,

evaluate and draw conclusions about the association between the CGI and performance of

FIs in Vietnam.

In qualitative approach, we design a list of 17 questions to set up the Vietnam corporate

governance index (VCGI) for 60 FIs from 2009 to at the end of 2011. In the similar spirit of

Leal and Carvalhal-Da-Silva (2005) and Garay and Gonzlez (2008), this study borrows the

ways of these authors to establish the VCGI for 60 FIs, in which we create the checklist

consisting of 17 questions constructed on the basic of regulations and international standards

on corporate governance to evaluate corporate governance practices of these FIs. More

concisely, we carefully checks and gives points to either yes or no for each of FIs in

Vietnam on the basic of public information disclosed by FIs or other public sources in the

market (i.e. websites of security companies, the SBV, MOF, and GSO etc.).

Financial banking industry is the specific sector and for this reason, the government

specially pays more attention to its operations to ensure a safe and stable growth of financial

system as a whole, contributing to a sustainable economic growth in the country. As a result,

the operations of financial banking sector are stringently supervised and regulated by the

government not only in Vietnam but also in many countries around the world. Therefore, the

contents of questions regarding corporate governance in the checklist are established also

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based on the main principles of Law on credit institutions in 2010, Law on enterprises, and

Law on securities and Law on amendments 2010 of Law on securities, principles of OECD

and Decision No. 12/Q-BTC of the Ministry of Finance as well as other current relevant

regulations of the Vietnamese government.

Basically, this study separates the VCGI into 4 sub key indices as prescribed in Decision

12/2007/Q-BTC of the Ministry of Finance and in OECD principles as well to build the

VCGI for 60 FIs in Vietnam.

The four sub-indices are as follows:

Sub-indices The VCGI

Sub-index 1 The structure, components of the board of directors

Sub-index 2 The rights of shareholders

Sub-index 3 The transparency in operations of the company

Sub-index 4 The responsibility of the board of directors

The study measures the VCGI as an average of all four sub-indices. The contents of 17

questions are detailed as follows:

THE CHECKLIST TO CONSTRUCT THE VCGI

We ourselves carefully check and give points to either ye o r n o fo r eac o f FI in

Vietnam. In particular fo r ye an s we we g i ve 1. O h e w i s e 0 i s added fo r n o an s w e .

To obtain necessary information in establishing the VCGI, we refer to the main documents

such as the meeting minutes, the resolutions of the General Assembly of Shareholders, annual

reports, financial statements, the board reports, the profit distribution plans, FI charters,

internal regulations etc. di s cl o s ed by FI or other public sources (i.e. websites of security

companies, the SBV, MOF, and GSO etc.).

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The questionnaire to establish the VCGI

No. ContentsAffirmativepercentage

Yes No

VCGISub-index

1The structure, components of the board ofdirectors

1 Does firm have the board independent member?

2 Does firm have an "independent chairman"?6

3 Is there any the standing committee of the board or

the permanent member of the board of directors in

the firm?

4 Does firm hire an outside CEO?

5 Does firm have any foreign members of the board of

directors?

Sub-index2

The rights of shareholders

1 Is a clear report presented to the General Assembly

of Shareholders to describe performance of the

board?

2 Does firm post any regulations or guidelines to

organize the General Assembly of Shareholders?

3 Does firm reserve for shareholders to vote efficiently

in the meeting? (E.g. information, time to access

relevant contents such as financial evaluation report,

profit distribution plan, the B.O.D remuneration,

delegation etc.)

4 Is there foreign strategic ownership in firm?

Sub-index3

Transparency in operations

1 Do shareholders gain access to full information onfirm website?

6We based on principle VI in OECD (2004), current relevant regulations (Decision 12/2007/ Q-BTC, Law on

credit institution in 2010, Law on securities etc.) to check and find the evidence of independence. According to

these documents, independent chairman is not either a large shareholder or a representative for large

shareholder who owns at least 5% stakes and has not any close relationship with the firm.

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2 Did the firm deliver or post quarterly and semi-

annual reports of the previous years on firm website?

3 Does firm deliver audited financial statement reports

promptly?7

4 Does firm hire highly internationally recognized

audit company?8

5 Did firm disclose any transactions related to the

board members, managers etc.?

Sub-index4

The responsibility of the board of directors

1 Is there any evidence that firm has a balanced board

of directors?9

2 Is there any mechanism for evaluating the board

members?

3 Are the board members of the firm totally non-

executive managers?

Total questions: 17

3.3. Model to measure and variables

3.3.1.

Model to measure variables

Y= 0 + nXn+ e

Where:

Y: denotes the dependent variable

X: denotes the independent variable

e: denotes the random error

7 Firms are requested to disclose information in accordance with Circular 09/2010/TT-BTC and other relevant

regulations (Law on accountant, Law on credit institutions in 2010 etc.)

8We referred to the list of audit companies annually approved by the State Securities Commission of Vietnam to

check and find the evidence of highly internationally recognized audit company.

9A balanced board of directors: A balanced between the executive and non-executive board members in the

board of directors (OECD, 2004).

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0: denotes constant

n: denotes the coefficient of the explanatory variable.

3.3.2. Dependent variables

Dependent variables are particularly included and denoted as follows:

Return on equity (ROE), return on assets (ROA) and dividend payout ratio (DPR)

represent as Vietnam FIs performance. In many studies carried out around the world, firm

performance is measured based on two categories, which are accounting and market

performance. ROE and ROA are widely used to measure firm accounting performance i.e.

Baysinger and Butler (1985) and Kiel and Nicholson (2003). In addition, ROE and ROA are

included as dependent variables in the study of Chong, Lpez-de-Silanes (2006) to measure

operating performance of firms in Mexico. Price to book value (PBV) and Tobins Q are

commonly included in many empirical studies to measure market performance of firms, i.e.

Barnhart, Marr and Rosenstein (1994), Garay and Gonzlez (2008), Black, Jang and Kim

(2006) etc. Dividend payout ratio is also used as performance indicator in empirical studies,

e.g. Black et al.(2006), Garay and Gonzlez (2008) and Chong and Lpez-de-Silanes (2006).

Latter authors both found that better corporate governance was associated with higher

dividends paid to shareholders in Venezuela and Mexico respectively. This find is consistent

with the outcome agency model of the authors La Porta et al (2000b) regarding dividend

payment policy, in which firms with stronger corporate governance should allocate more

dividends to shareholders. However, former authors did not have strong evidence to show that

firms with good corporate governance paid more dividends to investors in the context of

Korea. Due to market information limitation of many FIs in Vietnam, market performance in

term of price to book ratio and Tobins Q could not be included in the study.

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3.3.3. Independent variables

Independent variables consist of the VCGI and other control variables. Control variables

used in the study are company size (SIZE), company growth (GROW), company leverage

(LEVR), business risk (RISK), capital intensity ratio (CAIR) and dummy variable (STAT)

indicating the status of which FIsare listed or unlisted. These control variables might impact

the dependent variables and these variables were formerly recognized and chosen in the

previous studies. More specifically, Klapper and Love (2004) tested the link between the CGI

and firm performance by including control variables such as firm size, growth and capital

intensity ratio etc. Similarly, Black, Jang and Kim (2006) also dealt with the solution with

firm size, leverage, growth and other variables included in their study. Moreover, Leal and

Carvalhal-da-silva (2005) also used control variables such as size, leverage, growth, and risk

and current assets/total assets ratio as firm liquidity to run the test on corporate governance

and its relation to firm performance in their research. Garay and Gonzlez (2005) included

control variables i.e. size, leverage, growth, ROA and business volatility in their study while

Garay and Gonzlez (2008) also for Venezuela employed size, leverage, ROA as control

variables to conduct a test.

3.3.3.1. Company size (SIZE)

SIZE variable is measured as the logarithm of the book value of assets at the end of

period.

Firm size might influence its corporate governance practices because larger firms are

more intricate and thus they often get more public attention. Because of their large scale of

business, larger firms also may cause serious problems than smaller firms in the market. As a

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With regard to the firm size, Leal and Carvalhal-da-silva (2005) as well as Garay and

Gonzlez (2008) identified that the firm size was positively related to the CGI. That is, larger

firms normally trend to improve their performance in term of corporate governance in

comparison with the smaller firms. Thus, larger firms have stronger corporate governance

performance than smaller firms. The results of Garay and Gonzlez (2008) indicated that

although firm size was negatively interacted with price to book ratio and Tobins Q,

correlation coefficients were not statistically significant at any level. The result also indicated

that the relationship between size and dividend payout was not statistically significant.

Whereas, the results reported by Garay and Gonzlez (2005) showed that size was negatively

associated with price to book value. Moreover, the study of Leal and Carvalhal-da-silva

(2005) also showed that there was a positive relationship between size and the firm market

valuation in Brazil. In other words, larger firms had higher market performance in the context

of Brazil.

3.3.3.2.

Company growth (GROW)

GROW variable is calculated as the percentage of change of total assets.

Firm growth might impact firm performance and its corporate governance practices.

Durnev and Kim (2005) demonstrated that firm with faster growth should tend to seek for

more external capital to finance its growth. Thus, effective corporate governance practices

could help firm to increase its image in the market, and then firm might approach external

capital more easily. Therefore, faster growth firm could reflect its image through better

corporate governance performance to attract outside funds to finance its growth. The results

presented by Garay and Gonzlez (2005) showed that growth was negatively related to three

performance measures (e.g. Tobins Q, price to book value and dividend payout), but not

statistically significant at any level.

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3.3.3.3. Company leverage (LEVR)

LEVR variable is calculated as total debts divided by total assets.

Leverage might impact not only on firm performance but also on firm corporate

governance. However, the relationship between leverage and firm performance is not

consistent in the literature. Jensen and Meckling (1976) and Myers (1977) found that leverage

was negatively related to firm performance. They argued that firms with higher financial

leverage could face with higher agency costs because shareholders and debt holders might

have different interests. Whereas, Jensen (1986) implied that firms with higher debt

proportion in their capital structure should encourage strengthening their performance.

Leverage was included as control variable in the study conducted by Leal and

Carvalhal-da-silva (2005) in Brazil and in Chile. These authors showed that leverage was

positively interacted with firm corporate governance practices. They reported that firms with

better corporate governance performance would finance with more debts because debts might

decrease agency problems. Similarly, Black, Jang and Kim (2006) found that firm leverage

was positively related to the CGI of listed firms in the context of Korea. According to Garay

and Gonzlez (2005), leverage was significantly positively related to price to book value.

However, there was no statistical evidence to show that leverage was statistically significant

at any level with Tobins and dividend payout.

3.3.3.4.

Business volatility (RISK)

RISK variable is calculated as the quotient between the percentage change of EBT and

the percentage change of net sale.

The theory of financial distress demonstrates that firms with higher business risk have

higher probability of financial distress. Empirically, Black, Jang and Kim (2006)

demonstrated that firm risk was positively related to the CGI. That is, the riskier a firm is the

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stronger it is governed. On the contrary, Leal and Carvalhal-da-silva (2005) found that

business risk was negatively associated with the CGI. They demonstrated that higher risk

firms exhibited lower corporate governance quality. According to Garay and Gonzlez

(2005), although the coefficient of business volatility was positive to firm market performance

(i.e. Price to book ratio and Tobin Q) and negative to firm dividend payout ratio, the results

were not statistically significant at any level.

3.3.3.5. Capital intensity ratio (CAIR)

CAIR variable is calculated as the quotient between total assets and net sale.

Klapper and Love (2004) tested the relationship between the CGI and firm performance

by including capital intensity ratio besides other control variables such as firm size, growth

etc. Empirically, Klapper and Love (2004) found that capital intensity ratio was negatively

interacted with firm performance. In other words, firms with lower capital intensity ratio

reflected by higher intangible assets hadbetter Tobins Q in 25 emerging countries.

3.3.3.6.

Industry dummy variable (STAT)

We add a dummy variable (STAT) indicating the status of which FIs are listed or

unlisted in both HOSE and HNX. If FI is listed, dummy value will be 1. Otherwise, dummy

value is 0.

Models to measure variables:

Model 1:

ROE = 0 + 1.VCGI + 2.LEVR + 3.GROW+ 4.SIZE + 5.RISK + 6.CAIR + 7.STAT + e

Model 2:

ROA = 0 + 1.VCGI + 2.LEVR + 3.GROW+ 4.SIZE + 5.RISK + 6.CAIR + 7.STAT + e

Model 3:

DPR = 0 + 1.VCGI + 2.LEVR + 3.GROW+ 4.SIZE + 5.RISK + 6.CAIR + 7.STAT + e

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CHAPTER FOUR: DATA ANALYSIS AND FINDINGS

In this chapter, after running test we report the descriptive statistics of variables in the model

and the results of multiple regressions. Based on the results we analyze, evaluate the

correlations between dependent variables and independent variables as well as dummy

variable in the model. Finally, we report the findings obtained from the data.

4.1. Descriptive statistics

4.1.1. The VCGI

Table 1: The VCGI and its sub-indices 2009 - 2011

No Contents 2009 2010 2011

VCGI 41.67% 45.05% 48.74%

Sub-

index1

The structure, components of the board of

directors

20.71% 24.64% 32.86%

1 Does firm have the board independent member? 19.64% 26.79% 51.79%

2 Does firm have an "independent chairman"? 3.57% 3.57% 3.57%

3 Is there any standing committee of the board or the

permanent member of the board of directors in the

firm?

46.43% 39.29% 42.86%

4 Does firm hire an outside CEO? 12.50% 25.00% 32.14%

5 Does firm have any foreign members of the board

of directors?

21.43% 28.57% 33.93%

Sub-

index2

The rights of shareholders 53.13% 52.23% 56.25%

1 Is a clear report presented to the General Assembly

of Shareholders to describe performance of the

board?

73.21% 64.29% 67.86%

2 Does firm post any regulations or guidelines to

organize the General Assembly of Shareholders?

42.86% 41.07% 44.64%

3 Does firm reserve for shareholders to vote

efficiently in the meeting? (E.g. information, time

to access relevant contents such as financial

evaluation report, profit distribution plan, the

71.43% 73.21% 76.79%

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B.O.D remuneration, delegation etc.)

4 Is there foreign strategic ownership in firm? 25.00% 30.36% 35.71%

Sub-

index3

Transparency in operations 50.00% 52.14% 52.86%

1 Do shareholders gain access to full information on

firm website?

26.79% 23.21% 26.79%

2 Did the firm deliver or post quarterly and semi-

annual reports of the previous years on website?

48.21% 48.21% 46.43%

3 Does firm deliver audited financial statement

reports promptly?

71.43% 80.36% 78.57%

4 Does firm hire highly internationally recognized

audit company?

76.79% 80.36% 82.14%

5 Did firm disclose any transactions related to the

board members, managers etc.?

26.79% 28.57% 30.36%

Sub-

index4

The responsibility of the board of directors 42.86% 51.19% 52.98%

1 Is there any evidence that firm has a balanced

board of directors?

69.64% 76.79% 78.57%

2 Is there any mechanism for evaluating the board

members?

53.57% 57.14% 53.57%

3 Are the board members of the firm totally non-

executive managers?

5.36% 19.64% 26.79%

Source: the author calculates based on publicly available information. Following the

approach of Garay and Gonzlez (2008) t h e q u e t i o n n ai r e was c n s t r u ct ed fo r FI i n

Vietnam.

The VCGI was established on the basic of publicly available information in Vietnam. Of

the 60 FIs surveyed, 56 FIs were satisfactory to be checked and pointed, accounting for

93.33%. Four FIs were excluded due to lack of information. The results of the VCGI are

reported as follows:

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The results (Table 1) showed that the overall VCGI score was gradually increased over

the year from 2009 to 2011 with 41.67%, 45.05% and 48.74% respectively. This demonstrates

that FIs are incessantly improving their corporate governance practices to adapt with the

business environment. Once the 2008 financial crisis was broken out, the Vietnamese

government and investors have paid a close attention to firms especially banking financial

firms due to the important role of these firms to the economy. These firms, therefore, should

improve their quality of corporate governance practices to meet the requirements of both the

authorities and related parties such as investors or shareholders, creditors, suppliers etc.

However, some of FIs have ameliorated to comply with regulations rather to increase their

corporate governance practices voluntarily. Obviously, regarding the independent members in

sub-index1 (the structure, components of the board), there were only 1110

firms which had

independent members in 2009, accounting for only 19.64%. The CGI concerning this question

was positively increased over the years with 26.79% and 51.79% in 2010 and 2011

respectively. Almost all of firms that employed independent board members were commercial

banks. This is reasonable because commercial banks are heavily regulated by the government

due to their specific characteristics as well as their sensitive role in the economy of Vietnam.

In addition, Credit Institutions are required11

to have at least one independent member in the

board structure to comply with Law on Credit Institutions in 2010, with effect from the 1st

February 2011. Besides, the "independent chairman" is rather new for FIs in Vietnam

where there were 3.57% of FIs had the "independent chairman" and this score remained

10Please see appendices for more details.

11According to paragraph 1, Article 62, Law on Credit Institutions in 2010, Credit Institutions are required to

meet the requirement that at least one independent board member should be included in the board of directors.

The conditions and standards for the board members are prescribed in Article 50 of Law on Credit Institutions in

2010. Law on Credit Institutions in 2010 invalidates Decision No. 59/2009/N-CP on the organization and

operation of commercial banks.

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unchanged over the years from 2009 to 2011. In respect of hiring outside CEO, FIs still

hesitate to follow the strategy. The sub-index1 showed that there were only 12.50%, 25% and

32.14% of FIs which hired outside CEO in 2009, 2010 and 2011 respectively. On average,

the sub-index1 was 20.71%, 24.64% and 32.86% in 2009, 2010 and 2011 respectively. The

scores in this area were far less than an average of 50%.

With regard to the right of shareholders in sub-index2, we showed that the right of

shareholders in overall was positively cared and executed by FI

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