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Madoff scandal Vietnam-style, and what it means for corporate governance and democracy

corporate governance

If you are reading Vietnamese news in the last few months, you will notice two major trials making headlines. The first is that of the executives of Vietnam National Shipping Lines (aka Vinalines) for embezzlement of funds in the millions of dollars each and mis-management leading to the collapse of the 25,000-employee state owned enterprise (SOE), the aftermath of which is the first-ever high-profile death sentence pronounced for the x-chairman of the board. The second trial is that of bankers in Vietinbank, one of the four largest and interestingly enough, remaining state-owned banks in the country, for swindling almost $200M from various individuals and … other banks.

One public comment that caught my eye is the striking resemblance between the second case and the Madoff Investment Scandal that stirred the American public in the last decade. In the Vietnamese version of the Ponzi scheme, Huyen Nhu, former deputy head of the Risk Management Department of Vietinbank, abused her authority to mobilize nearly $10M from many individuals and corporations at interest rates reaching 0.6% per day, to invest in real estate projects all over Vietnam. These interest rates exceeded the level allowed by the State Bank of Vietnam more than 10 times, but Huyen Nhu and her accomplices, in pursuit of the surreal returns offered by the real estate market at the time, simply did not care. When the tables turned and the bankers found themselves in a liquidity crisis, they mobilized even more money to make the cut-throat interest payments. The situation never reversed, the music stopped and some individuals had to leave the game without a chair to sit on. Well, they are sitting on the witnesses’ chairs today in court. But the point that I am trying to make is that, unlike the American version where JP Morgan had to pay $1.7B in settlement for failing to investigate suspicious activities and for having an inadequate compliant system, in the Vietnamese version, Vietinbank is most likely to get off the case unscathed.

Which brings me to my next point, which is that Vietnamese organizations, both public and private, have very, very weak corporate governance. There are virtually no effective systems where people are held accountable over the long run for their actions in the organization. Let’s take the example of banks again. Branches are pressured by sales targets to make as many loans as possible, and risk assessment procedures are skimmed as a result. As a salesman in banks, if you don’t make the numbers, you are fired. If the loans defaulted, well, you are fired too, but most likely much later than you would have been if you missed your sales goals. After that, you would most likely just join another bank and go through the same cycle! Of course there are background checks that prevent criminals from being hired, but they are at best a few phone calls or written recommendations that you can easily secure from x-colleagues who again, are not held accountable for their words and actions! In Vietnam, centralized personal credit rating agencies and national identification systems have not yet come into existence.

I believe that there is one condition in which the corporate governance of an organization can be improved. It is corporate democracy. I am referring to the share structure in which shareholders are numerous, small, and equally influential in terms of vote power. In the West and other developed areas of the world this may sound like a laughable proposition but the truth is that in Vietnam, corporate democracy cannot be taken for granted. SOEs are a grand example, where a dominant stake of the state has been the root causes of corruption leading to poor performances, sometimes outright bankruptcy of the organization, taking with it millions of dollars of taxpayers’ money. In the private sector this problem is less rampant, however there are many examples of dominant shareholders coercing, sometimes even deceiving minority shareholders partly thanks to a weak system of corporate governance that the former have promulgated to their interests. There are, of course, many other ways to improve the corporate governance of an organization, but when the starting base is as low as that of Vietnam, I believe these methods will not be as nearly as effective as promoting corporate democracy.

Back to the trial of Huyen Nhu and her Vietinbank colleagues, I think that if Vietinbank is deemed to have been responsible for the swindle, it will not only cause a massive applause from the public for the boldness the justice system has demonstrated, but also prompt a major overhaul of the compliant system in all major banks and possibly companies in other industries as well. Imagine being an owner of a company wherein every dollar lost by the employee is paid for by you and your fellow shareholders! Imagine how much effort you will put into creating, testing and perfecting the company’s corporate governance backbone! Of course, we are assuming that you are not the State.

And that is a topic for another article.

Danny Pham
Co-Founder, Freelensia
Reserve language interpreters for meetings, exhibitions, and seminars
Anywhere, anytime, for any language

32 Lives in Ho Chi Minh City, Vietnam FIELD Interpretation - Strategy - Finance - Data BACKGROUND Co-Founder & Interpreter at Freelensia EDUCATION CFA Charterholder (2012-present) MBA at INSEAD LANGUAGES: English - native Japanese - JLPT level N1 French - CEFR level C1 Korean

One comment

  1. Cem Veziroğlu

    thank you for a guiding article showing the Vietnamese corporate governance level. I guess you propose the social capitalism (dispersed shareholding between small investors) as a solution for corporate governance. However the institutional investors’ dominance seem to be an inevitable fact in front of it. What do you think?

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