Firms urged to focus on risk management

Senior economist Le Dang Doanh

Over the last few months, a number of financial and securities firms and local branches of commercial banks have encountered bad debt. This has raised concerns over corporate management. Viet Nam News reporter Bich Ngoc spoke to senior economist Le Dang Doanh about how businesses should manage risk.

Do the present economic conditions in the country make it particularly difficult for businesses?

Macroeconomic risks have recently greatly increased. High inflation and interest rates, together with unpredictable monetary policies, have added to the risk list faced by foreign and local firms. The question is this, is Viet Nam's inflation due to the impact of global prices? To answer this question, let's compare the inflation rate in Singapore with that in Viet Nam. Singapore has to import almost all its goods, but its inflation rate is much lower than Viet Nam's. The average rate of releasing cash increases by 30 per cent per year, while in Thailand it is only 4-7 per cent, leading to higher inflation.

The State Bank has recently managed to keep foreign exchange rates stable. But while inflation climbs, it means the dong depreciates. Businesses have struggled to change their internal policies to meet changes in Government policies.

Lowering exchange rates reduces the attractiveness of the dollar, while the dong interest rate is high. That will have a significant impact on exporters because their domestic costs increase while there are inadequate supplies of foreign currencies. Only by stabilising inflation can the exchange rate be kept stable. But Viet Nam is doing it the other way around. The supply of credit is unpredictable. Therefore businesses must slow down their investment activities or put future projects on hold. Doing business in this type of credit environment is very risky.

Are local enterprises to blame for many of their problems?

Enterprises in Viet Nam are mostly fledgling. They lack professionalism and a sense of adventure. Their compliance to the law is not high. Meanwhile, the Law on Bankruptcy has not been properly implemented, which is why just a few enterprises have gone under. Bankruptcy usually means just a change in ownership while factories, machinery and workers are retained. Vietnamese firms are afraid of bankruptcy and are unwilling to dissolve and therefore hold on to bad debt.

The structure of a company's board is also at fault. In many companies, the chairman of the board is the one who holds the power, while the general director is simply an employee. Meanwhile, the supervisory board in a lot of companies is not fully functioning. The Law on Enterprises prohibits business owners from appointing their family members in managerial positions, but many businesses ignore the law. When that happens, sooner or later a company will take a huge risk. In addition to institutional reform, enterprises must comply with the law.

So what can we do to protect shareholders and investors?

Corporate governance in most companies is porous; the rights of minority shareholders have not been properly secured. There is also the issue of legislation. A judicial system that protects investors is crucial to a market economy. In the United States and some other countries, businesses have a team of skilled and experienced lawyers, while the judicial system and the quality of lawyers in Viet Nam have not developed. In other countries, if minority shareholders do not agree with a company's decision, they may request a specific action from the board of supervisors. In case the board of supervisors cannot bring about a satisfactory solution, minority shareholders have the right to sue. These regulations are not executed in Viet Nam.

Are banks more at risk than other types of financial institution?

I think the banking sector is the most notable in terms of risk management, due to the pressure of mobilising cash in the current interest rate climate. Banks provide cash to securities firms and real estate developers. These two sectors, however, are declining, and stock prices are going down. Many real estate and securities companies have encountered difficulties repaying their loans.

What can be done to get companies to improve their act?

I think the laws governing the actions of the board are not strong enough. Many corporations establish too many subsidiaries, which strains the capabilities of the management. The law should issue sanctions against establishing too many subsidiaries.

As far as I know, the amended Securities Law requires all public companies to comply with the corporate governance principles issued by the Ministry of Finance. The State Securities Commission is also drafting a code for public companies, with specific obligations towards shareholders. The establishment of a risk management committee governed by a member of the board is one of the conditions included in the draft. — VNS