Time to upgrade corporate governance in Vietnam

Corporate governance rules in Vietnam need an upgrade. Vietnam’s ambitious program of developing smart cities and installing climate change-resilient infrastructure requires complex public–private partnerships (PPPs) that challenge the worldview of some policymakers. 

Vietnam’s corporate governance rules do not meet international standards and are not yet capable of dealing with the next generation of government–business relationships that problems like climate change demand.

The doi moi (renovation) reforms undertaken in Vietnam since 1986 sought to create a socialist-oriented market economy. This involved the gradual injection of market mechanisms into what was previously a centrally-controlled command economy. Reform entailed a shift from total government ownership to a partially privately-owned economy, starting in 1992 with the demutualisation of state-owned enterprises (SOEs) and their transformation into new forms of shareholding or limited liability companies.

In 1999, restrictions on business licensing were removed to enable private investment. Ideological and political disagreements during this period were intense, with extraordinary individuals placing their careers and their liberty at risk by publicly calling on government officials to stop dragging their heels and implement the needed reforms. That battle was won but the 2021 Party Congress suggested that the war might be revived.

The government added the Vietnam Enterprise Law and Securities Law in 2005. The law provided basic corporate governance mechanisms to regulate the new relationship between owners and managers of privately-owned firms. These rules were necessary because the owner is the manager in SOEs. Large numbers of SOEs are being transformed into shareholding or limited liability companies through the equitisation program.

The relative newness of corporate governance rules in Vietnam partly explains why they are still regarded as lower in quality when compared to those of regional peers, despite several revisions to the Enterprise and Securities Laws. The weakness of the current corporate governance system in Vietnam has detrimental effects on the depth and behaviour of securities markets, investment opportunities for individual and savings organisations, the ability to structure an efficient pension system, the attractiveness of foreign direct investment and firm performance.

But there are encouraging signs that regulators recognise the need to strengthen corporate governance rules. The State Securities Commission in 2019 overhauled the Code of Corporate Governance in line with international practice and these rules are becoming supplemented by codes of conduct. There is the prospect of Vietnam reaching standards of international best practice in the medium term.

Six years after announcing the Doi Moi reforms, the government launched the Equitisation Programme. The sustained operational and financial inefficiencies of SOEs had become apparent and the continuing ability of SOEs to accumulate capital and favourable treatment appeared to hinder the growth of private enterprises. Transferring ownership of SOEs to the private sector was framed as a policy to support market efficiency and fair competition.

Vietnam’s establishment of the Committee for State Capital Management (nicknamed the regulatory ‘super committee’) in 2018 signals an ambition to strengthen state presence in certain arenas by consolidating the capital and expertise necessary to compete with foreign players. Movement towards the creation of larger state conglomerates also reflects the political ideal of state-led marketisation, promoting leading SOEs while simultaneously embracing market reform.

Vinatex illustrates the policy. The textile conglomerate was formed in 1995 with a mission to implement the state’s master plan in the textile and garment industries. The government had full ownership and managed the company like a government entity. Vinatex subsequently became a federation of 53 amalgamated companies and the government provided them with a host of privileges. There have been a number of corruption cases involving some high-profile SOE executives. The relationship between state and business remains complex and it is not yet clear how this will change after the party congress.

The average SOE registers higher profits than its privately-owned counterpart, although this is likely because they face lower competition in the sectors they operate in. Examples of this are Vietnam Electricity and the mobile telecoms oligopoly composed of Viettel, Mobifone and Vinaphone. These SOEs are highly profitable. The government retains ownership because they are deemed strategic to the development or national security of the country. Historically, governments tend to retain ownership of highly capital-intensive industries such as telecoms, airlines or railways as private enterprises rarely obtain access to the large financial resources required to start and maintain them.

Numerous joint ventures have now been signed in line with the government’s smart cities concept. Vietnamese partners will need to press ahead with digitalisation as well as adapting to new governance systems.

By John Walsh, Trung Quang Nguyen & Burkhard Schrage – East Asia Forum – May 27, 2021