Many developing nations around the world have adopted corporate governance structures similar to those used in Western nations, but due to cultural differences, they don’t always work as intended.
According to several new studies into the challenges of appointing independent directors to company boards in Vietnam, the lack of clarity around their roles and responsibilities and the importance of transparency is a key issue in maintaining the nation’s corporate governance standards.
“When independent directors are adopted in developing countries, there are more and more challenges for them to be effective,” said Dr Mai Nguyen, lecturer in accounting auditing and accountability at the Tasmanian School of Business and Economics.
The reasons include a lack of understanding about their roles, functions, and responsibilities for newly appointed directors, and also differences in institutional settings between Anglo-American countries where the concept of independent directors originated, and other nations.
Last year, a team led by Dr Nguyen published a paper in the Pacific Accounting Review that was the first study of its kind to provide robust evidence for the relationship between independent directors and the performance of firms in Vietnam.
In theory, having independent directors on boards makes companies run more effectively and transparently. First adopted in the US in the 1970s, the practice was intended to prevent companies from being run in a way that’s driven by the whims and desires of internal management and CEOs, rather than in the best interests of its shareholders.
Today, more than 70 per cent of S&P 500 company boards in the US have independent directors.
The role of independent directors includes monitoring the performance of companies, as well as offering advice on areas of their particular expertise.
In many countries, independent directors have become part of the mandatory legislation around corporate governance, to make sure that companies are run in the interests of the shareholders, instead of in the interests of management.
One major challenge to implementing this model in Vietnam is related to cultural differences between Eastern and Western nations.
“The concept of independence is mainly adopted from Western cultures. But in Eastern cultures, they don’t put a lot of emphasis on the individual – they put more emphasis on groups, on collectivism,” Dr Nguyen explains.
Another difference she’s found is that so-called ‘independent’ directors in Vietnam are often not truly independent, having close ties with the staff of the company or controlling shareholders.
Many companies in Vietnam – still a one-party socialist republic – are not fully privatised, with the State often being the largest shareholder, and owning a controlling stake in the business.
In some situations, independent directors may effectively be political appointees. They might, for example, be more likely to vote for the company to invest in government-run infrastructure projects and utility companies, which may not be in the best interests of the firm and its minority shareholders.
In an upcoming paper in the Asian Review of Accounting, Dr Nguyen points to the need for clear, published guidelines on the roles and responsibilities of independent directors in Vietnam’s corporate governance codes.
She also recommends that incoming independent directors on the South-East Asian nation’s corporate boards undergo training courses that clearly lay out their roles and responsibilities.
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