The Corporate Governance (CG) workshop given by Masso Group on June 11 2008 at Rex hotel paved a new path for Vietnamese businesses. Several questions as regards what corporate governance is, what the best board composition and board process are, corporate disclosure by family firms, the link between stock prices and corporate governance quality, and so forth, put forward by the audience to the lecturer, Associate Professor Sundar Venkatesh, PhD., from AIT (Thailand), and experts in business administration, displayed their adequate extent of interest in corporate governance practice.

This paper seeks to summarize few prominent discussions in this CG workshop for those who are searching a new path for hamonizing the interests of management and shareholders. 

What is Corporate Governance? Shleifer and Vishny (1997) view corporate governance as the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. From a broad perspective, Gillan and Starks (1998) define corporate governance as the system of laws, rules, and factors that control operations at a company. However, researchers generally view corporate governance mechanisms as those internal to companies and those external to companies. The essence of this relationship is shown in the simple balance sheet model of the firm . The left side of the schema depicts the fundamentals of internal governance. Management, acting as shareholders’ agents, decides which assets to invest in, and how to finance those investments. The Board of Directors, at the zenith of internal control systems, involves in advising and monitoring management and is responsible for hiring, firing, and compensating the senior management team (Jensen, 1993). The right side of the schema portrays components of external governance arising from firm’s need to mobilize capital. Moreover, it stresses that in the publicly traded firm, there exists a separation between capital providers and those who manage the capital. This separation generates the demand for corporate governance structures. 

Figure 1. Corporate governance and the balance sheet model of the firm. Adapted from PowerPoint slides accompanying Ross et al. (2005).                                    

As implied by Shleifer and Vishny (1997), the suppliers of finance employ corporate governance to make certain that they will get a return on their investment. The schema also denotes the link between shareholders and the board. Shareholders, the residual claimants, elect board members and boards, as established in state law, owe a fiduciary obligation to shareholders.Firms, in fact, are more than just boards, managers, shareholders, and debtholders. Figure 2shows a more comprehensive perspective of the firm and its corporate governance. The figuredescribes other participants in the corporate structure in, including employees, suppliers, andcustomers. By incorporating the community in which firms operate, the political environment, laws and regulations, and more generally the markets in which firms are involved, Figure 2 also reflects a stakeholder perspective on the firm (Jensen, 2001) and the realities of the governance environment. 

Figure 2. Corporate governance: beyond the balance sheet model.   

  Corporate disclosures by family firms Firms which are managed or controlled by founding families are referred to as family firms. In their literature survey on corporate governance, Shleifer and Vishny (1997) highlight the significance of exploring the traits of such firms to better understand the economic efficiency of different corporate governance mechanisms. Compared to non-family firms, family firms in the US confront less severe agency problemsarising from the separation of ownership and management (Type I agency problems).Nevertheless, they are characterized by more severe agency problems arising betweencontrolling and non-controlling shareholders (Type II agency problems) (Gilson and Gordon, 2003). Overall they cope with less severe agency problems than non-family firms. Lesssevere agency problems lead to less manipulation of earnings for opportunistic reasons andthereby higher earnings quality (Ali et al., 2007). Ali et al. (2007) also find that compared to non-family firms, family firms make less voluntary disclosure about corporate governance practices in their regulatory filings. Family firms have incentive to reduce the transparency of corporate governance practices to facilitate getting family members on boards without interference from non-family shareholders. Another finding from Ali et al.’s (2007) research is that family firms with founder CEO, rather than family firms with descendent CEO, are chiefly responsible for family firms exhibiting better disclosure practices and disclosure-related consequences as compared to non-family firms. The authors also discover that family firms without dual class shares, rather than family firms with dual class shares, are primarily responsible for family firms exhibiting better disclosure practices and disclosure-related consequences as compared to non-family firms. Villalonga and Amit (2006) suggest that family firms with founder CEO as compared to those with descendent CEO and family firms without dual class shares as compared to those with dual class shares have less severe agency problems. Thus, the difference in the severity of agency problems is a likely reason for the difference in disclosure practices Ali et al. observe across family and non-family firms

 Do stock prices reflect the corporate governance quality? Increasing proof points to the linkage between corporate governance and firm performance. In their pioneering work, Gompers et al. (2003) demonstrate that weak shareholder rights, defined by a large number of anti-takeover provisions, significantly reduce firm value, as well as subsequent share returns. Using a broader index, Brown and Caylor (2004) confirm that corporate governance is positively correlated with operating performance, market valuation, and dividend payout for a large sample of US firms. Similar results have been documented for Europe (Beiner et al., 2006), Japan (Ahmadjian et al., 2006) and emerging markets (Klapper and Love, 2004). In addition, more specific governance attributes (e.g., CEO pay structure) can be associated with higher firm performance. Although the direction of causality remains disputed, Black et al. (2006) suggest that it likely flows from corporate governance to firm performance rather than the other way around. Contrary to the results of Gompers et al. (2003) and Drobetz et al. (2004), but in line with Core et al. (2006) and Bauer et al. (2004), Aman and Nguyen (2007) find that risk-adjusted returns are insignificant across all five governance-based portfolios. In fact, firms with lower governance ratings achieve higher returns, but this is explained by their higher exposure to the book-to-market risk factor. In other words, firms with lower governance ratings deliver higher returns essentially due to their higher risk, while firms with higher governance ratings generate lower subsequent returns because of their lower risk. 

Note nonetheless that all above notions may not apply to firms in other countries including Vietnam. There are many institutional differences across countries that need to be considered. For instance, the legal rules covering protection of shareholders and the quality of their enforcement vary considerably across countries (La Porta et al., 2000). Thus, further discussions and research are needed to shape the effective path for corporate governance practice in Vietnam.

(By Luu Trong Tuan)  

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