vietnam national university, HANOI
school of business
Do Lan Huong
Corporate governance in Vietnam and in state owned
enterprises after equitization
Major: Business Administration
Code: 60 34 05
Master of business administration thesis
Supervisor: Dr Can Van Luc
Hanoi – 2010
ACKNOWLEDGEMENT
I would like to deeply thank my parents who have encouraged me in my
education and their constant support through the course of studies.
I also would like to thank my husband and my 2 little sons for their
encouragement to me to continue my education.
Many thanks also go to my colleagues who helped me a lot in collecting data
to finish the thesis.
Especially, I would like to send my sincere thanks to my helpful supervisor
Dr. Can Van Luc, for his advice and support during the time I write the thesis.
i
ABSTRACT
CORPORATE GOVERNANCE IN VIETNAM
AND
IN STATE OWNED ENTERPRISES AFTER EQUITIZATION
Do Lan Huong
Hanoi School of Business
Supervisor: Dr. Can Van Luc
September 2010, 85 pages
Corporate governance has been a prominent issue in developed
market economies for some considerable time. However, in an emerging and
transition economy like Vietnam, it is still unfamiliar and underdeveloped.
Legal framework for corporate governance in Vietnam is only in the early
stage of development. Awareness of market participants on corporate
governance is still limited. In the meantime, the business environment and the
capital market are changing very fast and becoming more and more
complicated, especially after the world financial crisis in 2007-09. The recent
break up of Vinashin and the alarming inefficiency in management and
operation of state owned enterprises have also attracted attention to corporate
governance and made it become one of the current hottest issues.
In this context, this thesis provides a literature review of corporate
governance and an up-to-date evaluation of corporate governance practices in
Vietnam. Besides, as the success of Vietnam‟s SOE reform through
equitization is significant for the country‟s future economic growth and the
improvement in corporate governance is one of the major factors for
improving efficiency in equitized state-owned enterprises (SOEs), an
examination of the changes in corporate governance of SOEs after equitization
is also conducted. To conclude, the thesis provides recommendations to
building a sound and strong corporate governance system in Vietnam.
ii
TÓM TẮT
QUẢN TRỊ DOANH NGHIỆP Ở VIỆT NAM
VÀ
TẠI CÁC DOANH NGHIỆP NHÀ NƯỚC SAU CỔ PHẦN HÓA
Đỗ Lan Hương
Khoa Quản trị kinh doanh
Giáo viên hướng dẫn: TS. Cấn Văn Lực
Tháng 09 năm 2010, 71 trang
Ở các nước phát triển, quản trị doanh nghiệp đã ra đời từ lâu và rất
được quan tâm. Tuy nhiên, ở các nền kinh tế mới nổi và đang trong giai đoạn
chuyển đổi như Việt Nam, quản trị doanh nghiệp vẫn còn là một khái niệm
mới mẻ và chưa được phát triển. Khung pháp lý cho quản trị doanh nghiệp đã
được xây dựng nhưng vẫn còn ở giai đoạn ban đầu. Nhận thức về quản trị
doanh nghiệp của các bên tham gia thị trường còn nhiều hạn chế. Trong khi
đó, môi trường kinh doanh cũng như thị trường vốn đang thay đổi hết sức
nhanh chóng và ngày càng trở nên phức tạp đặc biệt sau cuộc khủng hoảng tài
chính toàn cầu năm 2007-09. Bên cạnh đó, vụ việc Vinashin mới đây cũng
như sự thiếu hiệu quả đáng báo động trong quản lý ở các doanh nghiệp Nhà
Nước cũng làm dấy lên sự chú ý của mọi người tới quản trị doanh nghiệp và
khiến nó trở thành một trong những vấn đề nóng bỏng nhất hiện nay.
Trên tinh thần đó, luận văn đề cập đến hệ thống cơ sở lý luận về quản
trị doanh nghiệp và bức tranh cập nhật nhất về thực trạng quản trị doanh
nghiệp ở Việt Nam. Bên cạnh đó, do sự thành công trong công cuộc đổi mới
doanh nghiệp nhà nước (DNNN) thông qua quá trình cổ phần hóa có ý nghĩa
rất quan trọng tới sự phát triển kinh tế trong tương lai của Việt Nam, nên luận
văn cũng sẽ trao đổi về quản trị DNNN sau cổ phần hóa. Trong phần cuối,
luận văn đưa ra một số kiến nghị nhằm góp phần xây dựng và nâng cao hiệu
quả công tác quản trị doanh nghiệp tại Việt Nam.
iii
TABLE OF CONTENTS
ACKNOWLEDGEMENT ............................................................................................ i
ABSTRACT ................................................................................................................. ii
TÓM TẮT ................................................................................................................... iii
TABLE OF CONTENTS ............................................................................................ iv
LIST OF ABBREVIATIONS ..................................................................................... vi
LIST OF TABLES ..................................................................................................... vii
CHAPTER 1: INTRODUCTION ................................................................................ 8
1.1 Background ........................................................................................................ 8
1.2 Rationale of the Thesis ....................................................................................... 9
1.3 Purpose of the Thesis ......................................................................................... 9
1.4 Key Research Area ........................................................................................... 10
1.5 Methodology .................................................................................................... 10
1.6 Contribution of the Thesis................................................................................ 10
1.7 Outline .............................................................................................................. 11
CHAPTER 2: LITERATURE REVIEW ................................................................... 12
2.1 Definitions of Corporate Governance .............................................................. 12
2.1.2 What is Corporate Governance? ............................................................... 12
2.1.2 Objectives of Corporate Governance ........................................................ 12
2.1.2 Codes of Corporate Governance ............................................................... 13
2.2 Models of Corporate Governance .................................................................... 14
2.2.1 Shareholder Model .................................................................................... 14
2.2.1 Stakeholder Model .................................................................................... 15
2.3 Corporate Governance System ......................................................................... 17
2.4 Corporate Governance Mechanisms ................................................................ 19
2.4.1 Internal Mechanisms ................................................................................. 20
2.4.2 External Mechanisms ................................................................................ 25
2.5 Corporate Governance in Transition Economies ............................................. 28
2.6 Chapter Summary............................................................................................. 31
CHAPTER 3: CORPORATE GOVERNANCE IN VIETNAM ............................... 32
3.1 Introduction ...................................................................................................... 32
3.2 Legal framework and law enforcement............................................................ 33
3.2.1 Development of a legal framework for corporate governance in Vietnam
............................................................................................................................ 33
3.2.2 Current corporate governance framework in Vietnam.............................. 34
3.3 Rights of Shareholders ..................................................................................... 39
3.3.1 Basic shareholder rights ............................................................................ 39
3.3.2 Right to participate in or to be informed of decisions on key corporate
changes ............................................................................................................... 42
3.3.3 Rights to participate and vote in general shareholders‟ meeting .............. 43
3.3.4 Markets for corporate control.................................................................... 44
3.4 Equitable Treatment of Shareholders ............................................................... 45
3.4.1 Equal treatment to all shareholders ........................................................... 45
3.4.2 Minority shareholder protection ................................................................ 46
3.4.3 Insider trading and abusive self-dealing ................................................... 48
3.4.4 Related party transactions ......................................................................... 48
3.5 The Role of Stakeholders in Corporate Governance........................................ 49
3.6 Disclosure and Transparency ........................................................................... 49
iv
3.6.1 Information disclosure .............................................................................. 50
3.6.2 Quality of accounting standards ................................................................ 52
3.6.3 Annual audit .............................................................................................. 53
3.6.4 External Audit ........................................................................................... 55
3.6.5 Channels for disseminating information ................................................... 56
3.7 Board of Directors ............................................................................................ 57
3.8 Board of Supervisors ........................................................................................ 62
3.9 Remaining corporate governance issues in Vietnam ....................................... 63
3.10
Chapter Summary .................................................................................... 64
CHAPTER 4: CHANGES IN CORPORATE GOVERNANCE OF STATE OWNED
ENTERPRISES AFTER EQUITIZATION ............................................................... 66
4.1 Introduction ...................................................................................................... 66
4.2 Methodology and Data collection .................................................................. 67
4.3 Ownership structure after equitization ............................................................. 68
4.4 Board of Directors Composition ...................................................................... 69
4.5 The Board of Supervisors................................................................................. 70
4.6 Manager orGeneral manager (CEO) ................................................................ 72
4.7 Other committees ............................................................................................. 73
4.8 Executive Compensation.................................................................................. 73
4.9 Case Study........................................................................................................ 73
4.9.1 Vinamilk.................................................................................................... 74
4.9.2 PVFCCo .................................................................................................... 77
4.9.3 Performance and stock price comparison ................................................ 80
4.10 Chapter Summary........................................................................................... 81
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS ............................. 82
REFERENCES........................................................................................................... 85
v
LIST OF ABBREVIATIONS
BOD: Board of Directors
GSM: General Shareholders Meeting
SOE: State owned enterprises
SSC: State Securities Commission
HOSE: Ho Chi Minh Stock Exchange
HASTC: Ha Noi Stock Trading Center
HNX: Ha Noi Stock Exchange
OECD: Organization for Economic Cooperation and Development
CFA: Chartered Financial Analysts
LLC: Limited Liability Company
JSC: Joint Stock Company
vi
LIST OF TABLES
Table 4.1: Ownership structure of SOEs after equitization
Table 4.2: Composition of Board of Directors
Table 4.3: Distribution of chairperson of the BOD by different groups of
shareholders
Table 4.4: Composition of the Board of Supervisors
Table 4.5: Chairperson of the Board of Supervisors by different groups of
shareholders
Table 4.6: Distribution of managers of surveyed firms by different groups of
shareholders
Table 4.7: Vinamilk Ownership structure in 2009
Table 4.8: PVFCCo Ownership structure in 2009.
vii
CHAPTER 1: INTRODUCTION
1.1 Background
Vietnam‟s stock market has only been established and developed for the last
ten years. However, it has grown very fast and now plays a more and more
important role to the country‟s economic development. Total market capitalization
to GDP increased considerably from 3% in 2005 to 38% in 2009. Number of
companies listed in 2 stock exchanges (Ho Chi Minh Stock Exchange and Ha Noi
Stock Exchange) has also increased dramatically to 457 companies by the end of
2009. Among which, equitized state-owned enterprises (SOEs) dominate with more
than half of the listed companies and holding key industries including power, oil,
chemicals, steel…etc.
Like many other emerging markets, Vietnam‟s stock market is facing many
agency problems, which are the subject of corporate governance. Investor
protection is inadequate, related party transactions are pervasive, compliance with
accounting standards is weak and disclosure of quality information is limited. These
could be major reasons that foreign investors hesitate to invest in Vietnam and
hinder the development of the capital market.
In Vietnam, corporate governance is still underdeveloped. Awareness of
market participants on corporate governance is limited. The framework for
corporate governance is only in the early stages of development with laws and
regulations being established. Therefore, a literature review on corporate
governance and an examination of corporate governance practices in Vietnam,
especially in post-equitized SOEs are necessary for improving and developing a
sound corporate governance culture and framework in Vietnam. The enhancement
of corporate governance would help reduce emerging market vulnerability to
financial crisis, reinforce property rights, reduce transaction costs and the cost of
8
capital, and which would significantly support capital market development (World
Bank Corporate Governance Country Assessment, 2006).
1.2 Rationale of the Thesis
Corporate governance has been a prominent issue in developed market
economies for some considerable time. However, in an emerging and transition
economy like Vietnam, it is still unfamiliar and underdeveloped. Legal framework
for corporate governance in Vietnam is only in the early stage of development.
Awareness of market participants on corporate governance is still limited. In the
meantime, the business environment and the capital market are changing very fast
and become more and more complicated, especially after the world financial crisis
in 2007-09. The recent break up of Vinashin and the alarming inefficiency in
management and operation of state owned enterprises have also attracted attention
to corporate governance and make it become one of the current hottest issues. An
up-to-date study on corporate governance in Vietnam and in State owned
enterprises after equitization is therefore very necessary for developing a sound and
healthy corporate governance system in Vietnam.
1.3 Purpose of the Thesis
This thesis aims to provide a literature review of corporate governance and
an up-to-date evaluation of corporate governance practices in Vietnam. Besides, as
the success of Vietnam‟s SOE reform through equitization is significant for the
country‟s future economic growth and the improvement in corporate governance is
one of the major factors for
improving efficiency in equitized SOEs, an
examination of the changes in corporate governance of SOEs after equitization is
also conducted. Finally, the thesis is expected to contribute to the limited literature
on corporate governance in Vietnam.
9
1.4 Key Research Area
This thesis looks at corporate governance practices in Vietnam and focus on
listed companies. In addition, an empirical analysis on changes of corporate
governance in equitized state-owned enterprises is also conducted.
1.5 Methodology
This thesis provides a review of Vietnamese corporate governance that is upto-date and as complete as possible by assessing corporate governance in 6 areas
which are stated in the Organization for Economic Cooperation and Development
(OECD) Corporate Governance Principles: (i) corporate governance framework;
(ii) rights of shareholders; (iii) equitable treatment of shareholders; (iv) role of
stakeholders in corporate governance; (v) disclosure and transparency; and (vi)
responsibility of the Board.
Besides, as the success of Vietnam‟s SOE reform through equitization is
significant for the country future economic growth, an empirical analysis is also
conducted to illustrate the changes in corporate governance of SOEs after
equitization. The analysis is mostly based on published and readily available data.
In addition, to get deeper views on this area, analysis of corporate governance in 2
typical SOEs has also been made.
1.6 Contribution of the Thesis
For a country which is still in the early period of building corporate
governance system like Vietnam, the thesis has considerable contributions. First, it
provides a literature review on corporate governance and helps improve
understanding on this issue. Second, it provides an up-to-date evaluation on
Vietnam‟s corporate governance practices and contributes to a limited number of
studies on this area in Vietnam. Third, an empirical analysis and case study
conducted on changes of corporate governance in SOEs after equitization also help
understand the current corporate governance practices in these typical firms.
10
Fourth, recommendations given at the end of the thesis are expected to contribute to
building a sound corporate governance system in Vietnam.
1.7 Outline
The thesis is divided into five chapters with an introduction in Chapter 1 and
literature review in Chapter 2. Chapter 3 analyzes corporate governance practices in
Vietnam, and followed by an investigation of changes in corporate governance in
SOEs after equitization. The thesis concludes with conclusions and several
recommendations in Chapter 5.
11
CHAPTER 2: LITERATURE REVIEW
2.1 Definitions of Corporate Governance
2.1.2 What is Corporate Governance?
The Organization for Economic Co-Operation and Development (“OECD”)
defines corporate governance as “a set of relationships between a company‟s
management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the company
are set, and the means of attaining those objectives and monitoring performance are
determined” (OECD Principles of Corporate Governance, 2004).
In the definition stated by Charter Financial Analyst Institute (CFA Institute),
corporate governance is defined as the system of principles, policies, procedures
and clearly defined responsibilities and accountabilities, used by stakeholders to
eliminate or minimize conflicts of interests.
2.1.2 Objectives of Corporate Governance
The objectives of a corporate governance system are
(i) to eliminate
conflicts of interests among stakeholders, particularly between managers and
shareholders, and (ii) to ensure that the assets of the company are used efficiently
and productively and in the best interests of the investors and other stakeholders
(CFA Institute).
Good corporate governance enhances the quality of listed companies, forms
a scientific constraint and incentive mechanism that motivates managers to
maximize returns on investment, and effectively protect the interests of investors.
Furthermore, it creates fairness, transparency and accountability in company
business activities. In short, good corporate governance is an actuator for good
company performance as it effectively reduces risks and decision mistakes. Good
12
corporate governance is also a firm foundation for healthy securities markets in the
long run. It reduces speculation and violations of market rules, and thereby helps
ensure stability in the financial markets. This heightens public confidence in firms
as well as playing an important role in attracting foreign investment (OECD
Principles of Corporate Governance, 2004).
2.1.2 Codes of Corporate Governance
In many economies, codes of corporate governance and best practices have
been promoted by various agencies including stock regulators, corporations,
institutional investors, or associations (institutes) of directors and managers with the
support of governments and international organizations. As a rule, compliance with
these governance recommendations is not mandated by law, although the codes
linked to stock exchange listing requirements may have an enforcement effect.
For instance, companies quoted on the London and Toronto Stock Exchanges
formally need not follow the recommendations of their respective national codes.
However, they must disclose whether they follow the recommendations in those
documents and, where not, they should provide explanations concerning divergent
practices. Such disclosure requirements exert a significant pressure on listed
companies for compliance.
Nevertheless, among the codes of corporate governance worldwide, the
OECD Principles of Corporate Governance are considered as comprehensive and
well-accepted, and deemed to contribute to
the development of corporate
governance globally. The latest revised version of OECD Principles of Corporate
Governance was released in 2004. The Principles are intended to assist the OECD
and non‐OECD countries „to evaluate and improve the legal, institutional and
regulatory framework for corporate governance‟, and „to provide guidance and
suggestions for stock exchanges, investors, corporations, and other parties that have
a role‟ in the corporate governance process (OECD Principles of Corporate
13
Governance, 2004). The Principles cover broad areas of corporate governance
including the following key issues:
(i) ensuring the basis for an effective corporate governance framework;
(ii) the rights of shareholders and key ownership functions;
(iii) the equitable treatment of shareholders;
(iv) the role of stakeholders in corporate governance;
(v) disclosure and transparency; and
(vi) the responsibilities of the board.
Although the OECD Principles focus on corporate governance matters of
publicly traded companies on the basis of the separation of ownership and control,
to some extent they are also useful for the improvement of corporate governance in
unlisted companies, including privately held and state-owned enterprises. More
importantly, a key reason why the Principles have been widely accepted is that they
are based on common elements of corporate governance, embracing different
corporate governance models found in the OECD and non-OECD economies.
2.2 Models of Corporate Governance
2.2.1 Shareholder Model
The identification of the separation of ownership and control as a source of
conflicting interests between owners and managers can be traced back to Berle and
Mean (1932) and Jensen and Meckling (1976) developed the theory in an agency
context, where the agent (manager) acts on behalf of the principal (owner), but
differing objectives of the owners and managers, incomplete information on the
managers‟ behavior, and incomplete contracts give rise to the principal-agent
problem. Particularly, incomplete contracts as a source of agency problems have
14
been discussed by many authors, such as Coase (1937), Fama and Jensen (1983)
and Hart (1995).
Much
conventional
corporate
governance
thinking
is
focused
on
arrangements to solve this agency problem and ensure the firm is operated in the
interests of the owners (shareholders and creditors). In line with this thinking,
Shleifer and Vishny (1997) and Bech et al. (2002) define corporate governance as
“dealing with the ways in which suppliers of finance to corporations assure
themselves of getting a return on their investment”. This definition is too narrow
and there has been a great deal of critique relating to this „conventional‟ view of
corporate governance. Firstly, this perspective overlooks the diversity of the
stakeholders within the principal-agent relationship and thus ignores the game
around an enterprise, which is performed by multiple stakeholders with varying
degrees of conflicting interests among themselves. Secondly, this perspective
focuses too narrowly on the bilateral contract between owners and managers, and
ignores the interdependencies and interactions among stakeholders.
Opponents of the shareholder model stress that the interests of all of the
stakeholders‟ interests must be accounted for. If the emphasis is solely on
shareholder value maximization, there are externalities that are imposed on other
stakeholders of the corporation. This critique is the foundation of the corporate
governance stakeholder model advocated by many theorists.
2.2.1 Stakeholder Model
Stakeholders in a corporation include, but are not limited to, suppliers,
employees, customers, governmental bodies, political groups, trade associations,
trade unions, communities, associated corporations, prospective employees,
prospective customers and the general public. Various stakeholder models and
definitions are advocated by scholars. Allen (2005) suggests that corporate
governance concerns arrangements to ensure that firms are operated in a way that
society‟s resources are used efficiently, and that competition and reputation should
15
also be included as mechanisms to deal with in addition to the conventional ones.
Allen‟s model however, is too simple to be used for analyzing complex realities,
especially when the role of different stakeholders is to be considered.
Tirole (2001) advocates that corporate governance consists of institutions
that induce or force management to internalize the welfare of stakeholders. Based
on this approach, a stakeholder model is designed in which there is a broader
mission of management, and management in turn is sharing control with
stakeholders. The former suggests that management should aim at maximizing the
sum of stakeholders‟ benefits, and incentive systems should then be designed with
the purpose of achieving this aim. In this model, control is shared between
stakeholders in the form of generalized code terminations. This model is more
elaborately designed, but it is based on the assumption of optimal contracting
among stakeholders. This assumption is however considered unrealistic as there are
a range of institutional setting restrictions on the contracts among stakeholders, for
example, government intervention is an important factor that is prevalent in many
emerging economies.
Berglof and von Thadden (1999) define corporate governance as the “set of
mechanisms that translate signals from product and input markets into firm
behavior.” Based on this approach, the authors are proposing a broader corporate
governance paradigm. Firstly, the model consists of multilateral negotiations and
influence-seeking among stakeholders, shareholders and other groups – both inside
and outside the firm. Secondly, the model includes different institutions providing
mechanisms, and influencing the transmission of signals. In addition to the legal
and financial systems, the model also includes facets such as the product, input and
labor markets. In the case of intense competition in the product and input markets,
firms‟ investment decisions are under pressure from consumers and suppliers as
well as shareholders, and managers must focus on running the firm effectively in
order to remain competitive. Thus, the competitive situation of the firm is of
16
particular significance for consumers and suppliers, as increased competition leads
to stronger protection of their interests.
Employees make up another group which can monitor managers‟ decision
making, and the labor market. Finally, stakeholders and institutions are also
influenced by national and local government. This model also accounts for the
political system and the role of government having influence on the transmission of
signals, either directly or indirectly through the external framework it provides.
However, stakeholder model also faces several objections. The first is that
giving control rights to non-investors may discourage financing in the first place.
The second is that it may create inefficiencies in decision making. On many
decisions, investors and natural stakeholders have conflicting interests. They may
not converge to mutually agreeable policies. The third is managerial accountability.
The concern is that the management‟s invocation of multiple and hard-to-measure
missions may become an excuse for self-serving behavior, making managers less
accountable.
2.3 Corporate Governance System
National corporate governance systems can be distinguished in terms of the
degree of ownership concentration, and the control and identity of the controlling
shareholders. A widely dispersed ownership structure is a feature of outsider
systems (e.g., the US and UK), while concentrated ownership is characteristic of
insider systems (e.g., Germany and Japan). Outsider systems are characterized by
having independent boards, dispersed ownership, transparent information
disclosures, well-developed stock markets, well developed legal systems, and a
competitive market for corporate control. Insider systems are characterized by
concentrated
ownership
structure,
widespread
cross-shareholding,
limited
information disclosures, and reliance on family finance or banking systems (Shleifer
and Vishny 1997). The insider system emphasizes the function of banks and legal
persons, which have great influence over the firm‟s long-term development. As
17
majority shareholders, banks and corporations play a tremendous financial role and
thereby directly impact corporate governance. In the insider system, it is minority
shareholders that are in the weaker position. The various corporate governance
systems that exist globally have emerged in an ad-hoc manner (Sison 2000; Shleifer
and Vishny 1997). Firms and economies have been shaped simply by following
conventions, or by the environment, worldview and culture, legislative and political
frameworks in which they operate. Over time they have evolved into today‟s
corporate governance systems, although it is certain they continue to evolve.
Besides the political and legal influence, systems have been influenced by “culture,
democratic representation and accountability, the distribution of power, and the
protection of property rights and equality” (Sison 2000, p181). Other influencing
factors include the level of media freedom and the intensity of competition amongst
firms (Zingales 2000). The essential point however, is that the national corporate
governance system typically evolves in an ad-hoc manner, without being designed
specifically to achieve maximum efficiency, economic benefit, or shareholder
protection or wealth.
The assertion of the dominating political process applies to the insider
systems of Germany and Japan. During the period of rapid economic development
of the late 19th century, these countries forged their systems of powerful banks with
healthy State support (Gerschenkron 1962). Furthermore, German banks
discouraged initiatives such as disclosure rules, insider trading prohibitions and
increased minority shareholder protection. These initiatives ensured that minority
shareholders never became dominant enough to protect their rights, and that the
banks maintained a powerful position. These legal systems thus developed to
accommodate the banks as the predominant economic power.
The evolution of national corporate governance systems thus sheds some
light on the issues involved in the process. The arguments show clearly that there
are many kinds of influences behind the search for the optimum corporate
18
governance system. These influences have also had a number of policy
implications, particularly for emerging and transitional economies.
2.4 Corporate Governance Mechanisms
Corporate governance mechanisms consist of a combination of economic and
legal institutions that ensure the flow of external financing to the firm, aligns the
interests of owners (investors) with managers and other stakeholders, and
guarantees a return to investors.
Corporate governance mechanisms are defined and categorized by different
authors in different ways. Shleifer and Vishny (1997) identify five categories of
mechanisms which include (i) incentive contracts, (ii) reputation considerations by
managers and investor‟s optimism, (iii) legal protection, (iv) large investors and (v)
specific governance arrangements, such as the debt/equity choice, leveraged buyouts (LBO‟s), co-operatives and state ownership.
Maher and Anderson (1999), on the other hand, recognize three broader
mechanisms, including (i) executive compensation plans, monitoring by boards etc.,
(ii) legal protection of shareholder rights, prohibition of insider dealing etc., and (iii)
indirect control over managers through capital markets, managerial labour markets,
and markets for corporate control (e.g. takeovers).
Liu (2005) identifies two typical governance mechanisms that address the
conflicts of interest between shareholders and managers, and between majority and
minority shareholders. The first is an internal mechanism consisting of ownership
structure, board of directors, executive compensation, and information disclosure
and transparency. The second is an external mechanism consisting of a market for
corporate control, product market competition, good legal infrastructure and
rigorous law enforcement. Given its comprehensiveness and applicability, this
categorization will hereafter be used as the framework to present and discuss
corporate governance mechanisms.
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