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Related party transaction practices in need of improvement

Released at: 17:09, 18/10/2017

Related party transaction practices in need of improvement

Photo: Hong Nhung (VET)

Seminar identifies solutions for tackling conflict of interest and related party transactions.

by Khanh Chi

From regulators to international experts, a range of stakeholders came together to discuss the most effective ways to tackle conflict of interest and related party transactions (RPTs) at the Corporate Governance Forum 2017 in Ho Chi Minh City a few days ago.

This was the first annual event hosted by the Vietnam Corporate Governance Initiative (VCGI), founded in December 2016 by the International Finance Corporation (IFC), the Ho Chi Minh Stock Exchange (HSX), and the Hanoi Stock Exchange (HNX).

RPTs are common in most businesses across industries and sectors in Asia, including Vietnam. Though they do not necessarily affect a company negatively, the risk of shareholder abuse is potentially present in non-arm’s length transactions involving the sale or purchase of goods, the transfer of intangible items, and even the establishment of joint ventures.

Abusive RPTs have led to significant corporate failures destroying shareholder value and eroding investors’ confidence in the integrity of capital markets. In fact, over the last few years, abusive RPTs have become one of the biggest challenges facing Vietnam’s business landscape.

“RPTs are always viewed as situations that are open to possible conflicts of interest and should be subjected to rigorous review,” said Mr. Chris Razook, IFC’s East Asia Pacific Corporate Governance Lead. “It is a recommended practice that a company outline its RPT policy as part of its governance policy framework and ensure that any conflicts of interest inherent in RPTs are strictly addressed.”

The forum this year, entitled “Handling Conflict of Interest and Related Party Transactions”, saw the participation of relevant stakeholders, including about 100 regulators’ representatives and board members and senior management from large public and listed companies. Given the context of Vietnam’s business and corporate governance, the event addressed concerns and issues relating to best practices in governing conflict of interest and RPTs for sustainable performance and growth; the key to raising capital.

“In the absence of a strict RPT policy at the company level, RPTs can be easily abused, significantly weakening the competitive edge of many companies, thus increasingly posing a challenge to the integrity of Vietnam’s capital markets,” said Mr. Tran Van Dung, Chairman of the State Securities Commission. “Vietnamese public companies, especially listed ones, should adopt clear policies and procedures on RPTs as well as effective oversight mechanisms that comply with local laws and regulations, and follow best international practices.”

Ms. Dinh Thi Quynh Van, CEO of PwC Vietnam, pointed out that “independent directors have a central role in assisting the board to fulfil its RPTs oversight function. RPT reviews could fall on a board committee comprising independent members of the board, and others not conflicted in a transaction under discussion or a party to the transaction, or an existing board committee of independent directors, such as the audit committee.”

A healthy RPT environment and leadership “at the top” is important and empowers the internal gatekeepers of the company. Strong corporate governance is conveyed through a company’s leadership characteristics and its systems of accountability, and thorough fairness, transparency, and responsibility to the institution and its stakeholders.

“Corporate governance reform is a top priority for regulators, institutional investors, and boards of directors,” said Mr. Dominic Scriven, Chairman of Dragon Capital. “A good corporate governance function, including attracting qualified independent board directors and the transparency of related party transactions, is absolutely critical.”

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