Introduction
In a joint stock company, the obligations of ownership and management are reasonably well defined. The shareholders contribute capital and own the company, but the right to manage the company belongs to the Board of Directors (“BOD”) and the company’s executive personnel who control and manage the company’s day-to-day activities. A good BOD structure is vital to ensure that the BOD’s executive members (ie, members who also hold an executive position, say, a BOD member cum Chief Executive Officer) act responsibly and in the best interests of the company and its shareholders.
Let’s look more carefully. That is, let’s look at the obligations of a simple BOD member who has no executive role. The LOE 2020 provides that a BOD member has two responsibilities, among others: she must (i) exercise rights and perform assigned duties in an honest and diligent manner and in the best interests of the company and its shareholders; and (ii) be loyal to the interests of the company and its shareholders. Thus, the LOE 2020 requires that a BOD member be responsible both to the company and to its shareholders. But are the interests of the company and the shareholders the same? Are the interests of all the shareholders always the same? For example, can we equate the small shareholder who wants a stable, reliable income and the large shareholder who is more likely to take risks to grow the company. It seems that a BOD member must balance interests of all shareholders and of the company when acting. We think many will agree that it’s hard to balance the interests of shareholders and company all the time. Is the requirement always achievable; is the obligation a good working objective? This difficulty is a significant one and we cannot ignore it.
There are two common types of board structure. We discuss only the one-tier board, in which all directors form one board, a board of directors[1].
Rights and obligations of the BOD are regulated by Article 153.2 of Law no. 59/2020/QH14 on Enterprises dated 17 June 2020 (“LOE”). The BOD mostly provides medium and long-term direction to the company and decides significant company matters (say, transactions valued at more than 35% of the value of company’s assets, new investments, the hiring of key personnel, and other significant matters). The BOD, through the presence of independent directors (as discussed below) also has a supervisory function in management decisions made by the executive personnel.
Board composition
Under the LOE, the BOD in a one-tier structure includes: (i) general directors and (ii) independent directors. In a one-tier structure, at least 20% of directors must be “independent directors”. According to Article 155.2 of the LOE, an independent director is deemed “independent” if she satisfies certain requirements[2]. However, even if a director meets these statutory requirements, she may not be truly independent, meaning that she may have a personal interest in the outcome of some decisions. Independent directors should have no material personal interest in a board decision. Stated differently, while an independent director may meet all the statutory requirements, she may still have a material personal interest in a decision of the board if, say, she is the company’s banker, lawyer, vendor, or supplier which all have a commercial relationship with the company. Having those persons on the board may be good for the company and the shareholders due to their executive knowledge and experience, but in reality, they are not truly “independent” although they may meet the statutory requirements.
So why does good corporate governance encourage the use of independent directors? All directors are selected by the same shareholders. All directors owe a duty of responsibility to the company and its shareholders. Certainly, directors are expected to enhance profits, expand markets and act with sound commercial interest, but they are also expected to assure that the company obeys the law, acts in ethical ways, is prudent, and looks after important but non-commercial concerns, say, safety, employee welfare, the public interest, etc. Independent directors are expected to have a special interest in these additional considerations.
A good independent director is someone with broad business or commercial experience. She has no particular personal interest in an outcome, and is willing to freely express a minority view if necessary. She may have insights that are important to the company, say, financial, marketing, engineering and this is experience the company needs. Finding an independent director with all these qualifications can be difficult. In such case, the emphasis should be on independence.
There is another point. The independent director’s vote is an important one, especially when there are groups within the board with somewhat different interests. In these circumstances the role of the independent director is especially critical. In these circumstances, it is important–and difficult–for a director to maintain neutrality, keep company objectives in the forefront, and not simply become part of a group or faction.
Role of independent directors
The LOE does not define the statutory role of an independent director. It is not every BOD decision that will require an independent perspective or challenge from an independent director. Indeed, most board decisions can be expected to be routine or at least not controversial to independent directors. Ideally, an independent director is expected to look at the special view of the company or of minority shareholders who do not have a large voice on the BOD. She should ask questions that revolve around, say, the legality, prudence, larger interests of the company. An independent director should feel free to question and challenge executive actions to ensure that the BOD is acting responsibly and in the best interests of the company. Independent directors are expected to articulate their view on matters that may have an adverse commercial effect on the company or other key parties, say, minority shareholders or employees, even when strategies or decisions may benefit certain shareholders.
Also, an independent director may, in her special position or because of special knowledge, act as an independent voice for other BOD members. An independent director may be an expert in a particular sector and use her experience to advise the other BOD members. Her role may make her an effective arbitrator of differences among BOD members. In short, judgement, balance and facts are all important.
Key Corporate Governance Tips
To enhance the role of independent directors, good decision-making and appropriate monitoring of both compliance and performance of the BOD, the following ideas should be taken into account:
- Other than the minimum statutory regulations on independent directors, the company should provide general criteria on the selection, qualifications, independence, particular rights and responsibilities (other than general rights and obligations of all directors) of independent directors in the company’s charter or bylaws. Independent directors should have no material relationship with the company, they must also have broad knowledge and experience, and should have adequate time to discharge their duties.
- The 20% statutory ratio of independent directors, means there is more than one independent director only if the BOD is comprised of ten directors or more. Of course, the corporation can require that more than 20% of its directors be independent. The charter or internal rules of the BOD may require that certain types of resolutions can be passed only with the affirmative vote of one or more independent directors.
- The BOD could require that certain committees include at least one independent director. This will give independent directors a better knowledge of the business and a larger impact on certain decisions. This also allows their input on certain critical decisions. For example, they could be required to serve on a Nominating Committee and Corporate Governance Committee to, say, (i) consider and report periodically to the Board on matters relating to the identification, selection and qualification of Board members and executive positions and candidates for election to the Board; and (ii) advise and make recommendations to the Board with respect to corporate governance matters.
Conclusion
Regulations on the independent director in the LOE 2020 are not new. An independent director generally acts as an independent voice in the BOD to protect the company and the shareholders. In this role, she is expected to question BOD’s resolutions that may ignore, say, minority shareholders or the company. An independent director may also act as an internal moderating voice to the BOD and the company. In matters on which the independent director must vote, she should keep the well being of the company foremost in mind.
[1] Law on Enterprises no. 59/2020/QH14 dated 17 June 2020, see Article 137.1(b).
[2] Including: (i) She is not working for the company, its parent company or subsidiary; she did not work for the company, its parent company or subsidiary within the last 3 years; (ii) She does not receive any salary or allowance from the company, except for benefits for all BoD members as per regulations; (iii) Her spouse, biological parents, adoptive parents, biological children, adopted children and siblings are not major shareholders of the company, executives of the company or its subsidiary companies; (iv) She does not directly or indirectly hold 1% or more of the company’s voting shares; (v) She did not hold the position of member of the BOD or of the Supervisory Board of the company within the last 5 years or longer unless she was designated in 2 consecutive terms.
