An Application of the Scorecard Tool to Measure Corporate Governance Quality: Empirical Study in a transition country

The term “corporate governance” is defined as the mechanisms by which stakeholders of a corporation exercise control over corporate insiders and management, such that their interests are protected (John and Senbet, 1998). According to OECD (2004), CG involves a set of relationships between a company’s management, its board, shareholders and other stakeholders. CG also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance are determined.

CG aims to enhance prosperity and accountability to realize long-term value for shareholders and other stakeholders (Keasey, et al., 1997; De Nicolo, et al., 2008). It defines the role of the management, BoD, controlling shareholders, minority shareholders, and other stakeholders (Bollaert and Dilé, 2009). Furthermore, CG is designed to cultivate a conducive investment climate and establish a secure financial condition in capital markets by improving the dependability, transparency, and responsibility at the company level. The CG approach defines the interaction between several parties involved in the organization, such as the business management, shareholders and other stakeholders (Chan, et al., 2014; Almagtome, et al., 2020). To optimize stakeholder value, BoD must comprehend the social and environmental ramifications arising from the company’s operations. Moreover, the enterprises can be regarded as functioning within a society based on a contractual agreement that permits them to employ societal resources for their operations to provide products and services, without possessing an inherent entitlement to these resources (Ettredge, et al., 2011; Siva, et al., 2016).

Effective CG enhances the performance of companies, increases access to outside capital, and contributes to sustainable economic development (Minh and Walker, 2008; Almagtome, 2020). Thus, CG focuses on principles, accountability, transparency, fairness, and responsibility in company management. CG mechanisms attempt to ensure the separation of ownership and control, which often leads to conflicts in CG (Byrnes, et al., 2003; Ehikioya, 2009).

CGQ is a broad concept that requires different indices to measure. Researchers have put much effort into identifying the components of CGQ and developing a CG index (CGI) to measure CGQ. Nevertheless, various results of how to measure CGQ still exist in the literature review.

Klapper and Love (2004) indicate three main potential determinants of CGQ at the firm level: the utility of CG, the nature of the firm’s operations and the firm’s size. The main goal of CG is to reduce the firm’s cost of capital by improving investors’ confidence about earning a proper return on their investment. Therefore, we should expect that firms in greater need of future funding or with better future growth prospects will perceive a greater utility in adopting better CG practices than firms with poor prospects for raising money from external investors.

Similarly, Barucci and Falini (2005) take the composition of BoD, selection of directors, and the activity of BoD and the board of audit ors as the three fundamental attributes of CGQ. Durnev and Kim (2005), in their study of 344 companies in 27 countries, insisted that the quality of CG included composite index, investor protection, and social awareness. They measured CGQ by a simple average of six categories of CG, such as discipline (managerial incentives and discipline toward value-maximizing actions), transparency (timely and accurate disclosure), independence (board independence), accountability (board accountability), responsibility (enforcement and management accountability), and protection (minority shareholder protection).

So far, three popular dimensions have been considered necessary in the assessment of CGQ, including (1) disclosure, board structure, and operation; (2) ethics and conflicts of interest; and (3) shareholder rights. It is recognized from existing literature that most of the researchers developed the self-structured CGI and few researchers used the CGI provided by rating agencies (Rahman and Khatun, 2017). Thus, there is no uniform basis to measure the CGQ and observe the variation in terms of overall and individual attributes of CG, subindices of CG, scoring system, weighted and unweighted methods, statistical methods, period, financial and nonfinancial companies, code of CG, listing requirement, disclosure practices, legal environment, firms’ characteristics, and country perspective (Rahman and Khatun, 2017).

CGQ assessment has evolved for nearly three decades worldwide with many national and corporate-level assessment systems. To evaluate the CGQ of a business or professional rating organization, researchers have set up different sets of indicators, including quantitative and qualitative measurements.

The popular CGIs are G-Index, developed by the GIM group in 2003, CGI, published by Financial Times Stock Exchange (FTSE) and Institutional Shareholder Services Inc. (ISS) in 2004, and Gov-Score, developed by Lawrence D. Brown and Marcus L. Caylor. The most recent is the South East Europe Corporate Governance Academic Network (SEECGAN) index created in 2014 by the South East Europe Corporate Governance Academic Network; in other words, the 15 recent years have witnessed the emergence and development of a series of CG evaluation/rating schemes and the latter ones were built on the previous ones.

Standard & Poor’s (S&P) CG rating system is the first CG rating system globally. This system ranks CGQ based on four categories of criteria, including ownership structure and its impact, relationships and rights of financial stakeholders, financial transparency and information disclosure, and structure and process of BoD. Each item in this set of criteria is measured with a scaled scoring from 0 to 10 points. The Institutional Shareholder Service (ISS) ranks governance performance using the CGQ index, which uses scores from 0 to 100 with eight groups of criteria related to CG.

The Deminor rating system uses a rating model of 300 governance variables and rates each criterion based on internationally accepted CG guidelines. The set of criteria includes seven groups of quantitative and qualitative indicators that were applied by Governance Metrics International (GMI). In 2004, FTSE and ISS co-established a CGI with 40-60 criteria that might change with different countries and regions. Gompers and Metrick (2003) developed the G-index with 24 criteria based on information of the Investor Responsibility Research Center (IRRC) (Gompers, Ishii and Metrick, 2003).

Despite the variety of CGQ rating systems, they mainly focus on the company’s financial aspect. Moreover, the information to evaluate some specific criteria is not published. Thus, the assessment is based on the intuition of the professional assessors.

The uniqueness of the ACGS is that it assesses CGQ using public information on the principle of ensuring an effective CG mechanism. This effective CG mechanism maintains shareholder rights and fair treatment to shareholders, investors, stock markets, and intermediaries. It also take into consideration other issues such as the role of stakeholders; information disclosure and transparency and responsibility of the BoD. The ACGS was designed and the trial implemented in 2010 and then officially used to evaluate the listed companies in 2011. It is the initiative of ASEAN in the master plan of the ACMF established with support from the Asia Development Bank (ADB). There are four groups of criteria in the rating system, including (a) rights of shareholders and equitable treatment of shareholders, (b) role of stakeholders, (c) disclosure and transparency, and (d) responsibilities of the board.

To evaluate the CGQ of state-owned joint-stock companies in Vietnam, we adopted two assessment systems, which are the ACGS and the Vietnamese CG Scorecard (VCGS) developed for listed companies. The first version of the ACGS was issued in 2011 and first revised in 2017. Then, on October 16, 2023, the new revision of ACGS was endorsed by the ACMF Chairs in response to the updated G20/OECD Principles of CG and considers the recent developments in capital markets and CG policies and practices. The ACGS is divided into two levels. Level 1 includes 179 indicators corresponding to OECD principles. Level 2 includes bonuses and penalties for companies that meet or fail to meet OECD principles. Using this tool will help businesses identify specific weaknesses/issues in CG from the detailed set of questions in the scorecard, thereby identifying points for immediately improving businesses and charting out long-term plans to reach higher standards.

We also refer to the VCGS to choose the CG evaluation criteria. The contents and sequences in the scorecard are built based on international standards set out in the OECD Principles on CG, including five main assessment areas: (1) shareholder rights, (2) fair treatment to the shareholders, (3) roles of stakeholders, (4) transparency and information disclosure, and (5) responsibilities of the BoD. The scorecard does more than reviewing compliance with Vietnam’s regulatory documents because it is actually the job of Vietnamese regulators and is a minimal approach to CG. Information on CG will be evaluated based on a combination of best practices according to OECD recommendations, Vietnamese laws and regulations as of December 31, 2010, and other relevant regulations. In the context of laws and regulations on CG being changed and good CG practices being introduced more and more widely in Vietnam, it is obvious that building a scorecard based on these information is important.

Then, we fine-tuned the assessment items following the decrees and regulations issued by the Vietnamese government to fit in the context of SOEs. The scorecard we used in this study has 77 items divided into two levels. Level 1 includes the fundamental criteria for evaluating compliance with current Vietnamese laws on CG for public joint-stock companies. This level includes regulatory and normative measures. Level 2 includes advanced criteria for assessing the satisfaction of good CG practices based on the 2015 OECD G20 governance principles. The level 2 group contains criteria that are encouraged to comply with and also the key violation that needs to be prevented. The rating score for each assessment item is based on the OECD guidelines. The level 1 category has 69 items, which are evaluated with three options: “good compliance” = 2 points, “partial compliance” = 1 point, and “ineffective compliance/no compliance/not applicable” = 0 point. If we cannot collect information about a specific compliance item, we treat it as a “no compliance observed.” For some items where the options are “Yes” or “No,” each “Yes” the answer will get 2 points and the “No” option will get 0 points. The level 2 category has eight items, of which two items about good practices will get bonus scores and six penalty items will lead to the deduction of the total CGQ score. At this level, each compliance item will get 1 point and the opposite will get 0 point. In addition, for each good practice question, if the company achieves it, 2 points will be scored. The violating company will be deducted 1–3 points from the total CGQ score for the penalty items, depending on the seriousness of the violation. Table 1 summarizes the assessment tool in this study.

As of June 2022, the total number of equitized state-owned companies was 495. However, many ineffective equitized companies have dissolved. Thus, the population of this study includes 375 state-owned joint-stock companies which are still running business. However, 117 out of 375 companies are doing business in the military and national defense field. Thus, they are strictly governed by the Ministry of Military and cannot be accessed due to the rules of the government. As a result, we aim to access 258 equitized state-owned companies.

Our evaluation process has two phases. In the first phase, we designed a questionnaire to evaluate the CGQ of the state-owned joint-stock companies. We contacted the companies with support from the Party Committee of the Central Business Sector to introduce our study and asked for their participation. After 2 months, 258 companies agreed to participate in our research. Then we sent the questionnaires to the selected companies for self-evaluation with a detailed explanation of key terms and assessment items. An in-depth interview with the managers of each company was conducted when the companies returned the filled questionnaires to us. After 6 months, we collected 256 questionnaires and 228 recordings of interviews.

In the second phase, we collected information for CGQ evaluation from the company’s official reports released to stakeholders, including the annual report, sustainability report, company charter, and resolutions of the general meeting of shareholders. Moreover, we also used information from related websites, the National Securities Commission, and the Securities Exchange. The collected data were used for crossevaluation and checking after collecting data from selfevaluation questionnaires and semi-structured interviews with managers at selected companies. We removed questionnaires of which the self-evaluation results were not consistent with our evaluation based on interviews and secondary data collected from reports and other reliable sources. After double-checking the data, 220 questionnaires were filtered and selected for further analysis.

Among the 220 companies in the sample, 115 companies were listed on the stock exchange and 105 companies were not listed on the stock exchange. The sample profiles are presented in Table 2.

Statistical analysis in this study showed that the average score for CGQ of state-owned joint-stock companies was 52.62 points. There was a difference in the CGQ scores of listed and unlisted companies. The average score of listed companies was 56.43 points, while that of the unlisted group was 50.93 points. Meanwhile, the average score of the companies with international transactions had the highest score ranging from 65 to 82 points. Figure 1 shows the distribution of companies in the sample according to the CGQ score.

Figure 1.

Distribution of companies according to the corporate governance quality score

As shown in Figure 1, with the rating scale ranging from 0 to 100 points, most companies scored between 40 and 70 points, accounting for 67.72%. Twenty-six companies scored above 70 points (11.81%). Moreover, findings from the CGQ score revealed that 88 companies were recognized to have basic CGQ (40%), 64 companies achieved the encouraging level (29.09%), 42 companies gained the commendable level (19.09%), and the rest included 26 leading companies (11.81%).

In this study, we also found that implementing CG practices of state-owned joint-stock companies according to the scorecard standards was still a significant challenge. Forty percent of the surveyed companies had a rating score of less than 50 points. Notably, the majority of companies with high CGQ scores were listed companies. These companies have fully met most of the compliance criteria and have applied some of the best practices criteria. However, these companies focus on sustainable development and annually publish sustainability reports. They also focus on information transparency and disclosure.

Furthermore, this study revealed the differences in CGQ scores among fields of business (see Figure 2).

Figure 2.

CGQ score of state-owned joint-stock companies according to the field of business

The range of CGQ scores of 10 company groups in this study is 48–62 points. Our analysis showed that the pharmaceutical and healthcare sector was recognized as the best CGQ group, with an average CGQ score of 61.3 points. This group includes well-known companies such as Hau Giang Pharmaceutical (75/100 points), and Imexpharm Pharmaceutical (81/100 points).

This is followed by the banking and finance sector. The information technology group (including software and information technology companies) achieved the lowest quality of CG practices. As a result, the companies in this group need much improvement to enhance their competitiveness to attract foreign investment capital, especially in the technology sector’s rapid growth. In this study, we also realized that state-owned joint-stock companies have been very slow in innovation due to inflexible management thinking. Thus, they are facing significant barriers to growth. Meanwhile, the technology boom requires businesses to adapt and improve their competitiveness, especially in the technology sector. The research results also showed that most companies had not paid enough attention to satisfying the good practices criteria. These criteria achieved a modest score that met 27%-55% of the requirements.

Regarding the CGQ evaluation based on each group of criteria, the results show that the highest score can be achieved in group A and the highest percentage of compliance is also recorded in group A (see Table 3).

As found in Table 3, while evaluating CGQ by each category, we found that the best company scored 25 points for Category A, while the best one in Category D gained 31 points. Notably, among the four categories, category A recorded the highest percentage of criteria satisfaction (78.74%) and also ranked number one in terms of the average percentage of criteria satisfaction (62.20%). This result implies that the CG issues related to the shareholders have drawn much attention from state-owned jointstock companies in Vietnam.

Regarding the independence of board members, as mentioned in Article 13, Item 5 of Decree No. 71, about the guidelines on CG of public companies issued by the Vietnamese government, a BoD should have at least one-third of the board as independent members. This requirement aims to ensure objectivity and independence for adequate supervision, prevention of conflicts, and the company’s competitiveness enhancement. However, our research results in this study showed that only 27% of surveyed companies satisfy the requirement. As Decree No. 71 has become effective since August 2017, this is an unsatisfactory result after more than 3 years of execution. Several reasons for ineffective CG have been listed, such as the bureaucratic BoD, dependence on the state’s control, and reluctance to innovate.

In most surveyed companies, the chairman of the board represents the state capital. Although there are no mandatory regulations on the independence of the chairman of the BoD, this is considered good practice to ensure objectivity. In Vietnam, the chairman of the BoD often represents the state capital, and independence of the chairman is low. Even though most surveyed companies are large in size, only seven companies in this sample have an independent chairman. Consequently, the decisionmaking process in companies without an independent chairman might be ineffective due to the direction and control of the government which would distort the information and lack objectivity.

A BoD with diverse experiences, expertise, and ages will allow the board to have multidimensional perspectives on a problem, to be able to offer viewpoints and propose solutions to diverse issues from a comprehensive and multidimensional view. Furthermore, each board member with expertise and experience in different fields will perform well the functions of BoD through the role of directing and supervising the activities of the business.

In this study, the average proportion of enterprises meeting the requirements of the diversity of expertise and occupations of the board members is 49%. Meanwhile, this figure is 92% in large enterprises, higher than that of the small and medium enterprise groups. The research results also show that enterprises with a diverse, knowledgeable, and experienced BoD, particularly those companies with board members specialized in law, finance, and business, have a higher CGQ score.

Gender equality is a good criterion of CGQ that is being promoted in many countries. Unfortunately, the participation of females in the BoD is still very limited in Vietnam. Our research showed that only 38% of the surveyed companies had females in the BoD.

In state-owned joint-stock companies, the situation of holding the position of chairman and general director concurrently still exists. Of the 105 unlisted joint-stock companies, 73 companies are still holding concurrent positions. In 2019, the rate of separation of these two titles had increased since the issuance of Decree No. 71, of which provisions in Article 2, Clause 12 must be applied to public companies. This also contributed to the improvement of CGQ compared to previous years when Decree No. 71 had not yet been issued.

In addition, this study showed that only 34 enterprises in the sample, which are mainly big enterprises, set up subcommittees on issues such as human resources, remuneration, or business development strategy. The CGQ score of enterprises with specialized subcommittees was higher than those of others, of which 26 firms had CG scores of over 70 points. The BoD with specialized subcommittees allows members to clearly divide responsibilities and be able to perform roles on specific aspects of CG, thereby helping to improve the CGQ.

The analysis also showed that 87% of companies organize the Annual General Meeting within 4 or 6 months as they have applications for deferral permission. Thirty-six enterprises had applications to postpone the General Meeting of Shareholders at the end of March and early April 2022 because of the social distancing period due to coronavirus disease 2019 (COVID-19) in Vietnam; the remaining 13% of enterprises had the general meeting after 4-6 months. Sixty-two percent of businesses have public health, safety, and welfare policies and practices for their employees. However, these policies are still sketchy, focusing primarily on employee welfare, which seem to be not very encouraging for the employees.

Only 68 companies fully disclosed their health, safety, and welfare policies and practices. Also, 92% of enterprises provided information on the direct shareholding of members of the BoD, Supervisory Board, General Director, and Board of Managers. Forty-six percent of corporate websites published updated information on the latest quarterly and annual financial statements. The remaining 54% of businesses either did not provide financial statements or, if so, only provided annual financial statements. Also, 51% of enterprises published periodical CG reports every 6 months and every year on time. The rest only published annual CG reports. Ninety-eight percent of surveyed companies announced internal trading of company shares, and 92% of CG reports addressed future business plans. Most reports of the BoD included content on the leadership of the board, monitoring, and implementing the company’s strategy (96%).

However, the analysis also showed many points that need improvements, such as the need to timely provide details about the documents for shareholders, especially candidates for the BoD and the Supervisory Board, as well as the percentage of shares, independence, and the number of jointstock companies they attend as members of the BoD before the deadline. In accordance with the Law on Enterprises and other regulations, at least 10 days before the date of the General Meeting of Shareholders, such information should be provided to shareholders to review and vote. In our study, only 8% of enterprises met this requirement.

Besides, it is necessary to publish the reports, invitation letters to the General Meeting, and other related documents in English because when companies are listed or start initial public offerings, to attract capital from the market, especially foreign capital, the provision of clear and transparent documents in English will be more appealing to foreign investors. Unfortunately, only 9% of the surveyed companies had issued English documents, while the majority seemed to neglect this issue.

A weakness of CG in state-owned joint-stock companies found in this study is the control of transactions with stakeholders. However, most companies announced to the public their internal regulations on trading shares before the deadline; only 3% of companies provided full information about the transactions following the regulations of the government.

Regarding compliance with environmental regulations, it was shown in this study that only 47% of enterprises published ecological protection policies and practices in the production process to promote sustainable development. Besides, the proportion of firms that published policies and procedures to protect customers’ rights, train and develop employees, the contact information on the website, or annual reports that can be used by stakeholders to complain about violations was 14%, 28%, and 0.5%, respectively.

Most companies include all required contents that comply with current regulations in the annual report. However, the annual report still lacks some standard practices in the region and fails to analyze the weaknesses and reasons for incomplete compliance issues. The disclosure of information on remuneration and bonuses of the BoD and the Supervisory Board is still sketchy, usually only announcing the total compensation. Only eight enterprises in the sample announced the number of board members that participated in CG training courses in the past year, and 4% of enterprises appointed a person in charge of CG issues.

The CG scorecard can be used as a tool to measure the health of a joint-stock company. The evaluation results reflect the current situation of CGQ, thereby showing the shortcomings and implications for improving CG practices. In this study, our evaluation of CG practices at Vietnamese state-owned jointstock companies indicated that they have met the basic legal requirements and their CGQ achieved an encouraging level. The average CGQ score of Vietnamese companies ranges from 50 to 70 points, and the most popular range is from 50 to 55 points. Our finding aligns with the survey results of Vietnamese joint-stock companies in the 2018 Vietnam Listed Company Awards.

Regarding the shortcomings of CG practices in Vietnam, we found several critical issues, including the lack of independent board members, lack of gender equality and age diversity in the BoD and Supervisory Board, lack of information disclosure, inadequate analysis of weaknesses in CG practices and BoD action plan, incomplete biography of members being elected into the BoD and Supervisory Board, and the unclear role of the independent board member. Our findings align with several studies (John and Senbet, 1998; Minh and Walker, 2008; Okpara, 2011; Abbadi, Hijazi and Al-Rahahleh, 2016).

Our findings imply that Vietnamese state-owned joint-stock companies have to change to improve CG practices. Most companies must comply with the regulations and apply common international CG practices daily. Companies need to quickly complete, supplement, and publish full information about CG practices on their website in both Vietnamese and English. Companies should also have guidelines on CG and ethics and the company’s Code of Conduct (CoC), which are available to every stakeholder. Information about stock transactions, environmental protection policies, and practices should be published widely. These activities are critical to improving CGQ for better firm performance (Brown and Caylor, 2006) and help to reduce the cost of equity for SOEs, as it has been confirmed that CG has a negative and significant effect on the rate of capital cost in the study of Bozec and Bozec, 2011.

In addition, the company needs to improve employee health, safety, and welfare policies, employee training, and development programs. The reward policy should be tied to the company’s long-term performance and needs to be more specific. It is also implied from our evaluation that the company should announce its policy to protect customers’ rights and release contact information on its website or annual report, so that stakeholders such as customers, suppliers, and the community may use it to raise their concerns or take action against possible violations of their interests.

Finally, to improve CG rating scores, companies need to enhance and apply international practices in CG, such as the preparation and publication of assessment reports related to environmental and social responsibility according to Global Reporting Initiatives (GRI) standards or an integrated report to increase information transparency and disclosure.