Corporate Governance Review of Vinashin Business Group

|ASSIGNMENT COVER SHEET | |(to be completed by the student) | |AIB student ID number: |A12271 | | | | |Student name: |TRUONG PHUONG LY | | | | |Course name: |MBA Human Resource Management | | | | |Subject name: |Corporate Governance | | | | |Subject facilitator: |Ryan Galloway | | | | |Teaching Centre: |ERC Vietnam | | | | |No. f pages: |9 | | | | |Word count: |1721 words | | | | |DECLARATION | | | |I, the above named student, confirm that by submitting, or causing the attached assignment to be submitted, to AIB, I have not | |plagiarised any other person’s work in this assignment and except where appropriately acknowledged, this assignment is my own work,| |has been expressed in my own words, and has not previously been submitted for assessment. | ASSESSMENT SHEET | |(to be completed by the examiner) | |Student name: | | | | | |Course name: | | | | | |Subject name: | | | | | |Assessor/marker: | | | | | |COMMENTS | |Principles learnt (for example, number and understanding of principles referred to, their influence on the structure of this paper,| |number and correct citations of references, use of appropriate jargon)    | | |/4 | | | | |Application of principles. That is, the analysis and evaluation of the example problem based on the | | |principles, including the final recommendations and their justification | | | |/8 | | | |How well the example problem was described, including the extent and depth of information (including | | |the data) about it that was accessed | | | |/4 | | | | |Structure and presentation | | | |/2 | | | | |Style, grammar  and language | | | |/2 | | | | |Total | | |Less penalties | | |GRAND TOTAL |/20 | |General comments | | | | | | |FOR MODERATOR’S USE ONLY | | |/20 | |I agree with the assessor’s assessment | | |I disagree with the assessor’s assessment and the new mark is as follows for the following reasons: | | | | | | |Moderator: | | Title: Corporate Governance Review of VINASHIN Business Group Word count: 1721 words Executive Summary: VINASHIN is one of the biggest state-owned enterprises of Vietnam. This report conducts a review of the corporate governance of VINASHIN, including the analysis of its board structure and its board committees.

There are three problems in VINASHIN governance: members of the board were not qualified enough for the scope of the company, Chairman and CEO was one single person (Mr Binh), audit committee was not effective. Therefore, VINASHIN should consider hiring more appropriately experienced directors, separating the role of Chairman and CEO, and improving the effectiveness of its audit committee. Table of Contents 1. Introduction5 2. Discussion5 2. 1. Board structure and its effectiveness5 2. 2. Board committee and their effectiveness6 2. 3. Recomendations7 3. Conclusion9 Reference9 1. Introduction VINASHIN Business Group (abbreviated as VINASHIN) is a Vietnamese state-owned enterprise specialized in shipbuilding industry. Since it was found in 1996 based on the reorganization of Viet Nam Shipbuilding Corporation, VINASHIN had developed successfully.

The annual growth rate in the period between 1996 and 2007 was 35%-40% and the net revenue of 2008 was 29 trillion VND (about $1. 4 billion). It was undoubtedly one of the biggest Vietnamese companies in terms of investment range and capability. However, at the beginning of 2010, VINASHIN was criticised publicly for bad business performance which caused the loss of 5 trillion VND (about $238 million). Even worse, this figure which was clarified by the state inspectors was three times bigger than the loss figure reported in 2009 annual financial statements by VINASHIN. Due to the world economic crisis, a series of shipbuilding contracts were cancelled.

The company was then $4 billion in debt and sued by Elliot VIN (a Dutch hedge fund) for being unable to pay the $600 million debt. VINASHIN experienced the most difficult period of its history when the danger of debacle was very close and members of its board of directors were arrested and sued because of the severe damage they had made. The facts observed in the case of this company prove the seriously important role of corporate governance, especially in huge business corporation. This report conducts a review of the governance of VINASHIN including analysing its structure, process and effectiveness and making recommendations for appropriate improvements. 2. Discussion 1.

The board structure and its effectiveness The Board of Structure of VINASHIN consisted of nine directors who were appointed by the Prime Minister. As the enterprise was found based on the shipbuilding company, most of the directors used to be the top managers of the old company. For example, the CEO – Mr Pham Thanh Binh was initially a shipbuilding engineer. After 17 years, he became the Deputy Director of Transport Design and Engineering Institute. He was then appointed to be the CEO of VINASHIN in 1996. It can be seen that the members of the Board of Directors were appointed basically because of their experience of working in the company or in the similar field.

In one hand, they had the big advantage of the knowledge and networks in shipbuilding industry and they all had similar background and unique culture. This made strong connection among the board and lead to high agreement. In the other hand, they might not be able to manage the new company with a lot more capital and much bigger in investment range. According to Tricker (2009, pp. 122), “to formulate strategy effectively the strategic planners need to be, conceptually, above the enterprise looking down, able to see the enterprise in its strategic context”. Moreover, the strong connection might lead to the lack of objective assessment. The truth is that VINASHIN was very successful with its main function – building ship but then fell down because of 257 ineffective projects in other fields.

The next issue is that Mr Binh assumed the role of Chairman by 2008. He was then the Chief Executive and the Chairman of the company. Furthermore, he was also the Party Secretary of VINASHIN (the highest political position of the Party in a company). Some may say the combination has its advantage in the very distinctive leader and that it can avoid the conflicts due to spreading leadership between two people. However, this first violated Decree 101/2009/ND-CP of Vietnamese Government about state-owned business group. Second, the concentration of power in a single person would increases abuse potential and reduce the effectiveness of the only leader.

In fact, Mr Binh made on his own many decision which then caused serious trouble for the company. For example, he decided to buy the Lotus Ship which cost 1. 3 trillion VND ($60 million) without calling any meeting or announcing for agreement of the board. The ship then did not work but the company had to pay $4 million interest each year for the loan. 2. The Board Committees and their effectiveness: Another issue of VINASHIN governance is about its committees. All members of the board were appointed by the Prime Minister and their compensation was decided by the company policies which are also approved by the Prime Minister. As a result, there was no need for a nominating or remuneration committee.

However, the existence of audit committee was compulsory and its formulation was regulated by the Decree of State-owned business group. The audit committee consisted of three to five members. They must be independent non-executive directors. They were required to make audit report about the company operation every month, quarter of year and year. These regulations seem very cautiously and able to ensure the independence of the audit committee. In fact, the board had strong enough power to influence the audit committee. In 2009, VINASHIN disclosed that it lost 1. 7 trillion VND ($81 million). After a lot of publicly criticism, the state inspectors figured out that the true number was 5 trillion VND ($240 million).

To explain about this issue, the chairman of VINASHIN audit committee said that the company did not have clear enough policies so he just did what the CEO (Mr Binh, also the Chairman of the Board) told him to do. The question is whether the audit committee really had no idea about their responsibility and who they are liable to and whether they were really independent. 3. Recommendations Based all these above discussions, there are three problems in VINASHIN governance: Board of Directors was not qualified for the scope of the company, Chairman and CEO was one single person (Mr Binh), audit committee was not effective. For the first issue, the company should consider to use more professional “not VINASHIN employee” directors with treasured experience from big business group.

Although the current directors have advantage of the experience in shipbuilding industry and they have been working for the company for many years, their capabilities are no longer enough for the new bigger enterprise. VINASHIN is no longer a simple shipbuilding company. It has became one of the biggest business group of Viet Nam with $ billion of capital. It has invested in hundred of projects in many business fields. VINASHIN really needs the board of directors who are able to “see the enterprise in its strategic context, including the industry, the market, customers and competitors, products and services, wherever the company operates and to identify the wider political, economic, social, and technological context” (Tricker, 2009).

First, the “outside” directors would bring VINASHIN their broader knowledge about the big market and their experience in sufficient investment. This is what the current directors are lack of because their experience was only made in one industry. Second, the “outside” directors would challenge the board with their objective view about the company. They could push the board to improve the company under the consideration of different aspects. Finally, hiring “outsider” could help to prevent the board becoming a “cosy club” which only includes people who are well know to each other and share similar interest. Therefore, the board become more transparent and the decisions they make are less influenced by the interest of the board.

For the second issue, there is no solution but separating the roles of Chairman and CEO in two persons. According to the example discussed above, there is one issue behind: the Chairman and the CEO has too much power toward the board and there are not enough control to prevent them from breaking the rules and making decision irresponsibly. VINASHIN should set up and apply more policies to ensure the Chairman or CEO to present the Duty of Trust and Duty of Care constantly. For instance, the CEO should be required to have discussion with all members of the board when he wants to set up new project. After reaching the agreement, he only can sign and stamp in the contract under observation of the majority of the board.

Of course, the policies could reduce the potential of abusing power. However, the directors of companies, being managers of other people’s money, cannot be expected to watch over it with the same vigilance with which they watch over their own (Smith). Therefore, the policies can not control every issue in term of over use power, especially when the members of the board are very close to each other and having similar interest. In this case, the only shareholder, Government, should be able to audit the performance of the board and appropriately regulate the reward and punishment policies. For the last issue, VINASHIN needs to improve the effectiveness of its audit committee.

First, the audit committee should consider carefully the qualification of its members. The mechanism should encourage the selection and retention of diligent and knowledgeable committee members who are able to understand their important role in the board and willing to dedicate time and energy for their responsibility. Second, the audit committee should understand the role of each party participate in the auditing process, including the management, the internal auditors and external auditors, and the interaction among these parties. It should be able to communicate independently with each party and design the appropriate mechanism to ensure the accountability of these parties.

Finally, it needs to have frank and candid discussion with all parties to provide the board greater insight, objective judgement and appropriate recommendation. An effective audit committee, which would strengthen the Board accountability, transparency, objectivity and effectiveness, has potential benefits: • It improves the quality of financial reporting, by reviewing the financial statements on behalf of the Board; • It creates a climate of discipline, risk management awareness and control which will reduce the opportunity for fraud; • It enables the non-executive directors sitting on the Audit Committee to contribute an independent judgement and play a positive role; • It increases public confidence in the credibility and objectivity of financial statements and of the Board. 3. Conclusion

From the discussion above, this report reviewed the corporate governance of VINASHIN Business Group in terms of its board structure and its board committees. Through the review, it figured out three problems: Board of Directors was not qualified for the scope of the company, Chairman and CEO was one single person (Mr Binh), audit committee was not effective. Based on this, some recommendations were given. Reference Hongkong Society of Accountant, 2001, A guide for effective audit committee, pp. 3-6 Tricker, B 2009, Corporate Governance: Principle, Policies and Practices, Oxford New York, the United State Vietnamese Government, 2009, Decree of Establishment, Organization, Operation and Management of State-owned Business Group