97219 ©123RF.com Corporate Governance in Vietnam SUCCESS STORIES In partnership with Prepared by Contents Introduction ����������������������������������������������������������������������������������������������������������������������������������������������� p. 1 Executive Summary���������������������������������������������������������������������������������������������������������������������������������� p. 2 Ho Chi Minh Securities Corp. �������������������������������������������������������������������������������������������������������������� p. 3 - 5 Mobile World Investment Corp. ����������������������������������������������������������������������������������������������������������� p. 6 - 8 Foreword Corporate Governance Success Stories in Vietnam was prepared by Centre for Asia Private Equity Research Ltd. under the auspices of the International Finance Corporation (IFC), in partnership with the Swiss government’s State Secretariat for Economic Affairs (SECO). The active participation and support of the IFC, Dragon Capital and Mekong Capital were central to the preparation and completion of this report. This report is a testament of their commitment to champion for best corporate governance practices in Vietnam. About IFC About Asia PE Research IFC, a member of the World Bank Group, is the largest global development The Centre for Asia Private Equity Research Ltd. (‘Asia PE Research’), institution focused exclusively on the private sector. Working with private established in 1991, is an independent Hong Kong-based organisation enterprises in about 100 countries, we use our capital, expertise, and that focuses on providing information of the Asian private equity influence to help eliminate extreme poverty and boost shared prosperity. investment industry. 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This report was commissioned by IFC. financial, accounting or investment advice. The conclusions and judgments contained in this report should not be attributed to, and do not This report is compiled with the aim of ensuring accuracy and reliability of information provided. necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Asia PE Research cannot be held legally responsible for inaccuracies reported therein. Asia PE Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy Research accepts no responsibilities or liabilities (whether in tort or contract or otherwise) for of the data in this publication and accept no responsibility for any consequences of their use. any loss or damage arising from any inaccuracies or omissions in this report. Objective Corporate Governance Success Stories in Vietnam is part best corporate governance practices. In ensuring absolute of the International Finance Corp.’s ongoing efforts to raise alignment of their interest with shareholders, the boards of greater awareness of the merits of corporate governance. These these two companies instituted a series of measures such success stories in Vietnam can serve as a guiding light for the as management control, board effectiveness and high level immediate benefit and long-term value of corporate governance of transparency that can serve as model templates for other to corporate development. companies to follow. Ho Chi Minh City Securities Corp. and Mobile World The extensive and positive impact felt by both Ho Chi Minh Investment Corp. stand out as exemplary models of corporate City Securities Corp. and Mobile World Investment Corp. after governance, among portfolio companies managed by private implementing best corporate governance practices can serve as equity investment firms in Vietnam. The managements a valuable reference for all those who seek sustainable business of both have demonstrated their commitment to pursuing development. Introduction Corporate Governance in Vietnam The Law on Enterprise 2005, implemented in July 2006, marked CG practice in Vietnam is expected to undergo sweeping the first introduction of a formal legal framework on corporate changes when the revised Law on Enterprise 2014 (‘LOE governance (‘CG’) in Vietnam. Currently, listed companies in 2014’) comes into effect on 1st July 2015. The revised LOE Vietnam are under the framework of the following principal laws 2014 ensures independence of the Board of Directors, seeks and regulations – to eliminate conflict of interest and to improve accountability Law on Enterprise 2005, with the revised Law on Enterprise • as part of Vietnamese government’s drive to ensure better CG. 2014 effective from 1 July 2015 st Law of Securities of 2006 •  The following are the key changes of the revised LOE 2014, Corporate governance code 2007 and Amendments 2012 •  largely applicable to joint stock companies (‘JSCs’), compared Disclosure Rule 2012 • with the Law of Enterprise 2005. Listing rules of the Ho Chi Minh and Hanoi stock exchanges •  Law on Enterprise 2014 (effective from 1st July 2015) Law of Enterprise 2005 Terms of Management No such a restriction. A maximum 10-year tenure in total for someone who can serve as Chairman, members of Board of Directors, Supervisory Board members and other key management roles. Management & Operation Models Only model a) was applicable for JSCs may select either one of the following models – JSCs. A General Shareholders Meeting, a Board of Directors, a Supervisory Board and a CEO. a)  A General Shareholders Meeting, a Board of Directors, and a CEO with the following b)  caveats applicable to Board of Directors – i. A t least 20% of the members must be independent to oversee and organise implementation of control over management and operation of the company. ii. An Audit Committee under it. Reduced Quorum and Voting Requirements R equired Quorum: 65% and • Required quorum for a General Shareholders Meeting (‘GSM’) of a JSC for the first and second • 51% for first and second attempt, attempts are reduced to 51% and 33% respectively. respectively • GSM requires a 51% vote for ordinary matters and 65% for certain key matters. Voting Requirement: 65% and • The reduction of both quorum and voting requirements bring Vietnam’s Law on Enterprise • 75% approval required for ordinary more in line with many established jurisdictions. and key matters, respectively. Public Disclosure on Related Persons’ Holdings The required percentage for Chairman, CEO, legal representative, Supervisory Board members and other management disclosure was a 35% ownership personnel must notify the company if he/she owns interest in other companies and if their for related persons. related persons hold 10% or more in other companies. Reduced Large Transaction Threshold Large transactions that command For JSCs, investment decisions or asset disposals that value at 35% or more of the company’s 50% of the company’s assets total value of assets, approval by GSM is needed. needed GSM’s approval. M&A Activities Only among corporate entities of Enterprises of different legal entities may enter into a merger, that encourages more flexibility the same type of companies may in acquisition activities. be merged. Simplified Administrative Procedures •Amendment of BRC is needed for Business lines are no longer required to be stated on the Business Registration Certificate • business change. (‘BRC’), thus no amendment is required when a company needs to change its business activities. • Only one legal representative. Multiple legal representatives are allowed which brings more flexibility to companies. • Based on the latest corporate governance assessment made marked improvement with corporate governance. It is conducted by Asian Development Bank in 2013, which surveyed encouraging that the CG mean score for Vietnam in 2013 has 529 companies in Southeast Asia, it noted that Vietnam has risen by 19.2%, compared to that scored in 2012. 1 Executive Summary Ho Chi Minh City Securities Corp. (‘HSC’) “As the securities sector is Mr Johan Nyvene, Business Brokerage & Corporate Finance Services a relatively new industry in CEO of Ho Chi Minh City Vietnam... and with a “trial Securities Corp., Private Equity Investor Dragon Capital and error” legal framework, it 11th Feb 2015 remains challenging to instill Major CG Changes • Expanded board with an increase in both the number of the concept of best corporate independent directors and non-executive directors to ensure governance practice in the objectivity and independence of the board. face of unfair competition.” A formal risk management department has been established • with the appointment of chief risk officer; and a professional firm “Primary objective of many Mr Le Anh Minh, has been invited to undertake an Enterprise Risk Management companies is to focus on profit Director of Dragon Capital, project. rather than best CG practice ... 11th Feb 2015 Active communication with all stratum of management being • CG practice may not be encouraged. getting sufficient attention Standalone internal audit which is headed by a director who • from companies in Vietnam.” is closely involved in the management’s investment decision has been formed. “... remedies and enforcements Decision making is guided by Limit of Authority guideline to • (of CG) have not been ensure approval process is in alignment with the company’s strong enough to discourage policy. lack of compliances.” Market share from the lowest quartile in 2007 to being the second Impact of Improved CG •  largest securities firm in Vietnam. •Increased awareness of risk management. •Improved ability to retain talents and reports one of the lowest turnover rate among its peers. •Among the best performing stocks in Vietnam’s securities industry. Mobile World Investment Corp. (‘MWG’) “MWG continually refined Mr Anh Nguyen, Business Mobile Phone Retailing its execution during its Analyst of CIMB Securities, 10-year life. The knowledge 11th Jan 2015 Private Equity Investor Mekong Capital the company accumulated, and its orientation to Major CG Changes • Enhanced and diversified board with regular monthly meetings continuously improve are and clear agenda; introduction of an independent director with its primary advantages retail industry expertise. over the other chains.” Conflict of interest eliminated with founders divested from most • side businesses. “There ought to be quarterly Mr Chris Freund, Monthly revenue and gross profit report and store information • corporate governance Partner of Mekong Capital, has been developed that provides operational transparency. checklist undertaken by 12th Feb 2015 New human resources director was recruited to develop • private equity investors. corporate culture. If warning signs reach a certain point, investors must Market position improved from 3% market share in 2007 to Impact of Improved CG •  follow up and escalate the 30% by 2014. issue to first board and then •Easier access to bank loans at lower interest rate. shareholder meetings.” •Improved operational efficiency and achieve milestones earlier than target date. •Substantial revenue and net profit growth. 2 Business : Provides brokerage, margin lending and corporate finance services in Vietnam Location : Ho Chi Minh City Sector : Brokerage and securities 2014 Revenue (Yr Growth) : VND831.1 billion (US$39.3 million)(+30.9%) Type : Publicly-traded (Vietnam) # Employees – 2014 : 382 # Branches & Transaction Offices – 2014 : 8 Ownership Profile (Dec/2013) Ho Chi Minh City Securities Corp.  Dragon Capital: 30.9% Ho Chi Minh City Finance and Investment State-owned Company (‘HFIC’): 29.5% Other shareholders – domestic: 21.5% Ho Chi Minh City Securities Corp. (‘HSC’), founded in 2003, is a Other shareholders – foreign: 18.1% leading securities brokerage firm based in Vietnam. It provides a wide range of financial services to both retail and institutional investors. Since 2009, HSC has been listed on the Ho Chi Minh City Stock Exchange (‘HOSE’). HSC counted the state-owned Ho Chi Minh City Finance and Investment State-owned Company (‘HFIC’) as its founder. At HSC’s inception, it had an initial capital base of VND50 billion (US$3.3 million). Dragon Capital, which is among the oldest and most committed investment firms in Vietnam, became HSC’s investor in 2005. In 2007, at the advent of the global financial crisis, HSC underwent Why Change? extensive structural overhaul. A new chief executive officer and Despite having HFIC as a founding shareholder and a name that a number of managing directors, with specific responsibilities is representative of the country, in 2007 HSC was ranked 26th assigned to each of them, were appointed. By 2010, HSC’s out of around 30 securities companies in Vietnam, with a market unfaltering advocacy to corporate governance was rewarded. It share of only 3.5%. When Mr Johan Nyvene took office as the ranked third in Vietnam’s brokerage market and by 2012, HSC new CEO in 2007, HSC was not only losing its market share but ascended to be the number one securities firm in Vietnam and was also unable to retain its employees. held that position for two years in 2012 and 2013. HSC’s market share ranking fell to the number two position in 2014. It is now HSC encountered a major setback during the global finance crisis one of the leading brokerage firms on both HOSE and Hanoi in 2008. In that year, it reported the first plunge in profit after tax Stock Exchange (‘HNX’) with a combined 10.6% market share since its inception, from VND132.1 billion (US$8.4 million) in for 2014. Its 2014 profit after tax, which reached VND376.2 billion 2007 to VND23.5 billion (US$1.4 million) in 2008, more than an (US$17.8 million) is the highest since its inception. 80% drop. The adverse macro business environment coupled with difficulties facing its own operation, have thus led HSC’s management to implement comprehensive changes. The goals went beyond just to improve HSC’s risk management, but also to implement leading corporate governance practices. What did they change? The changes in HSC were extensive. The number of board members has increased to 7, from 5 before and the number of independent directors has also increased. The most significant changes included a formal risk management committee, a standalone audit committee that reports direct to the board as well as active and constant communications with all level of management. 3 Summary of Key Changes: HSC Key Challenges Key Changes Board Composition & Independence: 5 members with 1 Composition & Independence: The board was expanded Effectiveness independent member, and the board mainly comprised from 5 to 7 members and the number of independent representatives from two largest shareholders, Ho Chi directors has increased from 1 to 2; while non-executive Minh City Finance and Investment State-owned Co. and members have increased from 4 to 5 to ensure objectivity Dragon Capital. and independence. In addition, a previous director at HSC was appointed to head the board as an independent and non-executive chairman. Management Risk Management: No dedicated department to focus on risk Risk Management: A series of risk management Control management, which was managed without formal procedures procedures have been adopted since 2009 with the chief to factor in inherent risks facing the securities industry including operating officer focusing primarily on risk management market, liquidity, credit, operational and regulatory risks. and operational enhancement. By 2012 and 2013, HSC had established a formal risk management department, and appointed a chief risk officer at the managing director level. HSC also set up the Risk Management Committee at the board level, and invited a consultant to undertake a firm-initiated Enterprise Risk Management (‘ERM’) project. The ERM project has evolved into the Business Process Improvement project and ultimately led to the initiation of the Business Process Management project. Communication & Operational Transparency: The diversity Communication & Operational Transparency: Active of HSC’s staff body created communication problems, communication promoted with all stratum of management, especially with foreign nationality employees. with monthly meetings among the senior management, weekly meetings among middle ranking managers (conducted by the CEO and/or the COO), and quarterly briefing sessions with the rest of the employees. In particular, the CEO conducts monthly lunch with employees. Internal Audit: The Internal Audit Committee did not have Internal Audit: Formed standalone Internal Audit and a clear reporting procedure to the board and there was no headed by a newly hired director level person. Internal standalone Internal Audit Department. Audit engages the CEO on findings and occurrences in policies and procedures, as well as progress of internal audit projects. Decision Making: Lack of a formal approval process in the Decision Making: Established Limit of Authority guideline investment process of company. to address the issue. Incentives to Employees/Talent: Difficult to maintain Incentives to Employees/Talent: New CEO proposed a talents as HSC followed a SOE-based salary framework. 100% increase of salary for a large number of employees at that time. In addition, a recurring Employee Share Option Program was launched that led to a relatively low turnover rate. Disclosure & Information Transparency: Lack of formal procedures Information Transparency: Set up formal procedures Transparency with regard to investor relations activities and disclosure to ensure timely and accurate update in website, investor schedule. relations, and holds quarterly analyst conferences to update and discuss business results. HSC has also established various channels to provide information directly to shareholders via a regularly updated database system. 4 Impact Report: HSC In the eight years since HSC’s new management team took office in 2007, with the goals to implement leading corporate governance practices, HSC has been able to demonstrate the following positive results – HSC’s market share increased and has advanced to become •  HSC’s ability to retain talents has improved substantially. The •  the leader in its industry. When Dragon Capital first invested in Employee Stock Ownership Plan programme that was launched HSC in 2005, the company was ranked 26 out of 30 securitiesth in 2007 has been an effective tool to retain talents and enhance companies in Vietnam and was losing its market share. employee engagement. HSC’s stellar reputation as the number Following appointment of a new CEO in 2007 and substantially one securities house along with this programme have helped improved its corporate governance, by the beginning of 2012, retain talents and reported one of the lowest turnover rates HSC was the leading brokerage firm in both Ho Chi Minh City among its peers. Stock Exchange and Hanoi Stock Exchange, with 12.1% market share in the country. It is now ranked as the number two firm HSC’s shares outperform VN-Index. In the six years since •  in Vietnam’s securities industry. HSC was listed in May 2009, HSC’s share price has consistently outperformed the VN-Index by a far margin. While the VN- Sharply increased awareness of risk management. The •  Index has risen by around 48%, that for HSC has surged by Enterprise Risk Management Project, initiated in 2012 has around 130%. helped HSC to formulate standard corporate risk management structure to address various kinds of risks. As a result, HSC’s ROE leads its peers. In 2014, HSC reported a 16.3% •  awareness of risk management has improved substantially return on equity (‘ROE’) and 10.8% return on asset (‘ROA’), across all business lines. both ranked top among HSC’s peers in the securities industry. In fact, HSC’s ROE and ROA ratios improved substantially in the five years from 2010 to 2014. Impact Scoreboard l ia e at nt ng or er ta in ro od bs M Qualitative Indicators St Su M Board Effectiveness Organizational Efficiency Management Control Access to Capital Quantitative Indicators 2006 2007 2010  2011  2012  2013 2014 Revenue 119.7 230.5 470.8 480.5 562.4 634.8 831.1 Net Profit 91 132.1 182.3 194.4 246.4 282.2 376.2 Reputation (Market Share) 3.5% 12.2% 10.6% Share Price Performance (48%) (53.2%) 54.3% 13.4% 27.3% Company Valuation (Year-end) 1,794 1,398 2,178.3 3,117.8 3,970.4 All amounts in VND billion except market share and share price performance. 5 Business : Mobile phone retailing Location : Ho Chi Minh City Sector : Consumer goods 2014 Revenue (YR Growth) : VND 15,756.7 billion (US$735.6 million)(+65.9%) Type : Publicly-traded (Vietnam) # Employees – Feb/2015 : 9,822 # Branches – Feb/2015 : 369 Thegioididong.com stores and 22 Dienmay.com stores Ownership Profile (2006, Mobile World Investment Corp. before Mekong Capital’s Investment) Founding Shareholders: 100% Mobile World Investment Corp. (‘MWG’) was founded by five entrepreneurs in 2004 and is a mobile phone retail chain. Within three years, in 2007, MWG had established five stores in Ho Chi Minh City and chalked up a sale record of 10,000 phones per month. In order to accelerate growth, MWG invited Mekong Capital as a financial partner which has invested US$3.5 million in MWG for approximately 32.5% stake. In July 2014, MWG was listed on the Ho Chi Minh Stock Exchange. Ownership Profile (Feb/2015) Founding Shareholders: 40.6% CDH Investments Ltd.: 12.2% Since enlisting Mekong Capital as a financial partner, MWG has Mekong Capital : 11.6% Mutual Fund Elite: 6.9% worked closely with Mekong Capital and implemented a series of NT Asia: 5.5% Employees & Other Shareholders: 23.2% measures to improve management reporting and bonus systems, among others. MWG’s financial results are testimonials to the benefits of corporate governance. When Mekong Capital invested in MWG, the company only held less than 3% market share of Vietnam’s mobile phone retail market. By 2011, MWG has firmly established itself as the leader in its home market. In the years since Mekong Capital invested in MWG, from 2006 What Did They Change? and 2014, the company’s net revenue has increased by more Since Mekong Capital invested in MWG in 2007, the corporate than 45 times to VND15.8 trillion (US$735.6 million) while its governance structure began to take shape. The ad hoc meetings net profit surged by more than hundred times to VND668 billion among the founders of MWG changed into regular monthly (US$31.5 million). When MWG was listed in mid-2014, its market meetings, with clear meeting agenda and active participation by value stood at VND4.3 trillion (US$201.1 million); and it reached other members was encouraged. To eliminate conflict of interest, the US$500 million mark in September 2014, ahead of 2015 founders had all divested their side businesses (1). At the same target stipulated by Mekong Capital. time, family members of the founders were no longer employed without adhering to a set of guidelines and strict restrictions on Why Change? relatives not reporting to each other. The most significant change Despite the fact that MWG was a profitable company before was the introduction of an outside expert. In 2012, an international Mekong Capital invested in 2007, the company has always set expert from a leading multi-national technology retail company the high goal to position itself as a value-added retailer. The was brought in, not only as an independent board member, but company aims at moving from a traditional retail structure, which also to provide retail expertise. is organized around core functions (Merchandising, Supply Chain and Stores), to an integrated model built around the customer. Founded by five entrepreneurs who were used to having constant dialogues with each other, prior to Mekong Capital’s investment, these founders represented the board. There were no third party and/or independent directors to provide third party opinions. The governance of the board was therefore loose. For MWG to move forward to be a key player in the market, changes were (1)  ne of the five co-founders continued to invest in start-ups. Eventually he stepped down O from the board of MWG and is the only one of the five co-founders who is not currently on critically important. the board or Inspection Committee. 6 Summary of Key Changes: MWG Key Challenges Key Changes Board Composition: Comprised six board members, one from Composition: Representative of Mekong Capital became a Effectiveness Mekong Capital and five founding shareholders. No member of MWG’s board. The changes were most extensive independent board member to provide third party opinions in 2013, with the number of board members increased from on the management of the company. six to nine. making the board much more diversified. Of the nine, four were founding shareholders, two non-founding executives; and three independent directors. In the latter, it included a retail expert and representatives from both Mekong Capital and CDH Investments. Procedures: There were unstructured board meetings, which Procedures: Five meetings per year were held since lacked focused, in-depth discussions of strategic issues. Mekong Capital invested in the company, with active participation from a range of members. The board meetings have a clear agenda. Conflict of Interest: Some of the founders, who sat on Conflict of Interest: Founders divested from most side the board, had side businesses. Family members of the businesses. One of the board members, who decided to founders were employed. focus on its other businesses, resigned from the board of MWG. Management Management Structure: No third party representatives and Management Structure: A retail expert was brought in Control instead the five founders represented the management. as a consultant and non-executive director to provide international best industry practices in all the major business activities. Financial Management: No structured process. Financial Management: Monthly revenue and gross profit report by region/category as well as store information, subsequently to include brand and category, management reporting template was developed, with strategically- important operational KPIs and provided to the board monthly. Human Resources: No human resource director. Human Resources: Recruited key managers to support the growth of company. Apart from managers in sales development, and marketing, a new human resource director was recruited to develop corporate culture. He is also a member of the board. Key Person Risk: The five founders were sole decision Key Person Risk: All independent directors, and makers on MWG’s corporate strategy and operations. representatives from Mekong Capital and CDH Investments also participate in strategic decisions. Disclosure & Disclosure: Meetings were held on ad hoc basis, Disclosure: Monthly meetings, thorough background notes Transparency unstructured and no real discussions. with clear agenda. Family Family Governance: Family members of the founders were Family Governance: A clear set of compliance regulations Governance employed in the company and there was no compliance with respect to employment of staff relatives was introduced. regulation regarding this. 7 Impact Report: MWG The year 2015 marked Mekong Capital’s 8th year of partnership with MWG. After a period of gradual adaptation of corporate governance code, MWG recognises the benefits – MWG’s market shares has increased and advanced to be •  Board discussions and decision-making is significantly •  among the leaders in its industry. When Mekong Capital improved. The board now meets five times per year with active invested in MWG in 2007, the company held less than 3% participations by a range of members. The meeting agenda is market share of mobile phone retail in Vietnam. By December clear with thorough background notes, that lead to open and 2014, according to GfK’s report, MWG’s market share has candid deliberations before decisions are made. reached 30% by December 2014. Its largest competitors in 2007 have both subsequently disappeared. MWG was able to report envious growth, in both revenue •  and net profit. In particular, MWG’s net profit has been able to MWG’s access to bank loans was easier and at a lower •  grow at a faster rate than its revenue, suggesting the company interest rate than that incurred by other local private is generating profit more efficiently. companies, thanks to its strong business performance over the years, resultant from an effective Board of Directors and MWG boasts operational efficiency. In 2008, Mekong Capital •  effective management control, and regular auditing by a set a goal for MWG to open 50 stores and to reach a US$100 Big-4 auditor. million valuation by 2013. MWG achieved the goals by 2011, two years ahead of schedule. The goal was then lifted to reach Enhanced management control of the company through •  US$500 million by 2015 and MWG was able to achieve this a disciplined management reporting process. The goal post by September 2014, well before the target date. monthly report that tracks key strategic and operational metric developed in 2011 has helped MWG’s data-driven decision- making process. With a much more efficient tracking system, MWG’s inventory days have been reduced from 55 days to 43 days in the period 2012 – 2014. Impact Scoreboard l ia e at nt ng or er ta in ro od bs M Qualitative Indicators St Su M Board Effectiveness Organizational Efficiency Management Control Quantitative Indicators 2006 2007 2010  2011  2012  2013 2014 Access to Capital   • Total Borrowing 299.4 391.3 513.2 618.7   • Interest Expense/ Total Borrowing 9.3% 14.4% 5.2% 3.4% Net Revenue 348.0 2,817.0 5,387.5 7,375.0 9,498.8 15,756.7 Net Profit 5.6 110.0 158.6 125.1 255.6 668.1 Reputation (Market Share) <3.0% 30.0%(1) Share Price Growth 127.4%(2) Company Valuation 171.5(3) 2,103.9(3) 12,202.9(4) All amounts in VND billion, unless otherwise specified. (1) According to GfK’s report. (2) Share price change from IPO date, 14th July 2014, to 31th December 2014. (3) Based on private equity transaction took place in that year. (4) As of 31st December 2014. 8 URL: www.asiape.com East Asia and the Pacific Vietnam J. Christopher Razook Nguyen Nguyet Anh Tel: + 852-2509-8512 Tel: +844 3937 8741 Email: crazook@ifc.org Email: Nanh2@ifc.org URL: www.ifc.org/corporategovernance URL: www.ifc.org/vietnamcg Prepared in May 2015