Corporate governance model: selection and compliance

Corporate governance is a core factor determining the sustainable development of a business. In Vietnam, the law allows businesses to choose the type of governance to suit their needs as well as set regulations on the governance structure for each type of enterprise. Therefore, besides the right to choose the right type, businesses must also comply with certain legal requirements to ensure legality and transparency in business activities.

In fact, many businesses in Vietnam have not really complied with the regulations on the governance model, which can bring legal risks and sanctions from the competent authorities. Therefore, understanding and complying with the regulations on the corporate governance model is something that businesses cannot take lightly. In this article, we will analyze the regulations on the governance model of limited liability companies ("LLC") and joint stock companies ("JSC") in accordance with current laws, thereby emphasizing the importance of compliance. At the same time, we also outline the potential risks that businesses may face when they do not comply or do not fully comply with these regulations.

What management model can enterprises choose?

According to the Law on Enterprises 2020, businesses can choose one of the types of businesses allowed by law. Including limited liability companies, joint stock companies, private enterprises, partnerships. As mentioned above, this article mainly focuses on two types of equity companies, which are limited liability companies and joint stock companies.

For limited liability companies, there are two types divided into single-member limited liability companies and limited liability companies with two or more members. A one-member limited liability company can choose one of two models, including (i) the company's President, Director/General Director, or (ii) Board of Members, Director/General Director. A limited liability company with two or more members includes the Board of members, the Chairman of the Board of members, the Director/General Director or the above model plus the Control Board if it is a state-owned enterprise or other cases decided by the company).

For joint-stock companies, this type of enterprise has the right to choose one of the following two management models:

First, the General Meeting of Shareholders, the Board of Directors, the Supervisory Board and the Director/General Director. In case the Joint Stock Company has less than 11 shareholders and the shareholders are organizations that own less than 50% of the total shares of the company, it is not required to have a Supervisory Board.

Second, the General Meeting of Shareholders, the Board of Directors and the Director/General Director. In this case, at least 20% of the members of the Board of Directors must be independent members and have an Audit Committee under the Board of Directors. The organizational structure, functions and tasks of the Audit Committee are specified in the company's Charter or the operating regulations of the Audit Committee promulgated by the Board of Directors.

Compliance requirements for governance models

As mentioned above, even though enterprises are entitled to choose the appropriate governance model, they must still ensure certain legal conditions to avoid risks from non-compliance with legal regulations on governance models.

Regarding the organizational structure, enterprises need to strictly comply with the regulations on the composition and number of members of the Board of Directors, the Board of members and other management agencies. Businesses need to ensure that these parts have the right number and structure according to current regulations. In addition, in some cases, the company needs to have an additional Supervisory Board or Audit Committee.

For the Control Board, in addition to the requirements on the number of members, this agency must also meet the criteria of independence and capacity of members.

Firstly, members of the Supervisory Board must be trained in one of the following specialties: economics, finance, accounting, auditing, law, business administration or specialties suitable to the business activities of the enterprise.

Secondly, members of the Supervisory Board must not have family relations with members of the Board of Directors, Directors or General Directors and other managers and are not subject to restriction of the right to establish and manage enterprises as prescribed in Clause 2, Article 17 of the Law on Enterprises 2020.

Failure to comply with the regulations on this corporate governance model may cause businesses to be handled for violations according to regulations, causing legal disadvantages and affecting the reputation of the business in the market.

Consequences of not complying with the governance model

As mentioned above, the failure of businesses to comply or improperly comply with regulations on corporate governance models can bring many adverse consequences to businesses.

Vietnam Dairy Products Joint Stock Company (Vinamilk). Source: Financial & Monetary market review newspaper

According to Decree 155/2020/ND-CP, the number of members of the Board of Directors of a public company is at least 03 people and a maximum of 11 people, the structure of the Board of Directors of a public company must ensure that at least one-third (1/3) of the total number of members of the Board of Directors are non-executive members,  etc. In addition, there are also many other regulations regulating the number of members of management agencies in an enterprise such as the Supervisory Board or the Audit Committee. If the enterprise does not comply with the regulations on the corporate governance model, it may be sanctioned for administrative violations with a significant fine. For example, according to the provisions of Decree 156/2020/ND-CP, failing to ensure the number of members of the Board of Directors as well as meeting the conditions on the minimum number of non-executive members, independent members, the company may be sanctioned from VND 100,000,000 to VND 150,000,000.[1]

In fact, in 2024, Hoa Phat Group has been fined an amount of VND 112,500,000 for failing to ensure the structure and number of independent members of the Board of Directors.[2] As of May 2024, Hoa Phat has 9 members of the Board of Directors but only 2 independent members of the Board of Directors, not ensuring the number of independent members as prescribed. It is more noteworthy that Hoa Phat Group was also previously sanctioned for the same behavior. In 2023, Traphaco Joint Stock Company was also fined VND 125,000,000 for the same act.[3] In addition, many other large enterprises were also sanctioned for failing to ensure the number of independent board members such as Gemadept Joint Stock Company or Petrolimex Waterway Petroleum Transportation Joint Stock Company were also sanctioned 125,000,000 VND.[4] It can be seen that there are still many businesses that have not properly complied with the regulations on corporate governance structure, leading to administrative penalties and encountering other legal risks.

In addition to the risks of administrative sanctions mentioned above, non-compliance with regulations on the governance model of the enterprise may lead to disputes between shareholders, members of the Board of Directors or between the company and employees, affecting the internal stability of the enterprise. In addition, shareholders or capital contributors also have the right to complain or sue if the company's governance model is not in accordance with regulations and causes damage to them. In fact, Hoa Phat Group also had cases where shareholders questioned at the General Meeting of Shareholders about this issue in 2022 but continued to violate in 2024. It can be seen that, despite being aware of violations, some businesses continue to act instead of adjusting the governance structure accordingly. From there, it leads to obvious legal risks such as being complained about by shareholders or sanctioning violations from State agencies.

Failure to comply with these regulations also causes the reputation of the business to be underestimated by partners, directly affecting the decisions of investors in the process of exploring and making investment decisions with businesses. Other partners will also be afraid to cooperate with businesses when they do not ensure clarity and transparency in compliance with corporate governance regulations. In addition, non-compliance with these governance regulations is also very easy to lead to the possibility of enterprises being supervised and inspected more regularly and closely by competent State agencies in the process of operation. Therefore, once an enterprise has chosen a governance model, it is necessary to properly, fully and strictly comply with the provisions of the corporate law and relevant laws to avoid legal risks as well as affect the reputation of the enterprise.

The corporate governance model is not only an option but also a legal obligation that businesses need to comply with. Choosing the right model and complying with regulations not only helps businesses avoid legal risks but also creates a solid foundation for long-term development. Therefore, businesses need to regularly review and update the law on governance structure to ensure full compliance with legal requirements, avoid sanctions and protect the interests of shareholders and capital contributors. Considering appointing a manager in charge with good legal expertise or outsourcing the service of "Secretary – Corporate Administration" is also another effective solution to control risks in the process of business operations.