Regarding the management model of a joint stock company, the Enterprise Law 2014 made some changes compared to the Enterprise Law 2015, in which a joint stock company may choose either two mangement model, unless otherwise prescribed by Law on securities:
- Model 1: General Meeting of Shareholders, Board of Directors, Control Board and Director(General Director). In case a joint stock company has less than 11 shareholders and the shareholders being organizations hold less than 50% of total shares of the company, the Control Board is not of necessity (Model 1);
Model 1:
- Model 2: General Meeting of Shareholders, Board of Directors and Director (General Director). In this case, at least 20% of the members of the Board of Directors must be Independent Members and there is an internal audit committee under the Board of Directors. Independent Members carry out the supervision function and control over the management and administration of the company (Model 2).
Model 2:
Model 2 is an additional “choice” for joint stock companies under the Law on Enterprise 2014, the implementation of this model in fact requires high quality in “source” and “capacity” of the Independent Members.
The term “Independent Board Members” is defined in previous legal documents as Circular No. 121/2012 /TT-BTC dated July 26, 2012 by the Ministry of Finance. However, the Law on Enterprise 2014 replaced it by the phrase “Independent Members”. The rearrangement of the aforementioned phrase is not merely a change in words but also aims to emphasize the “independence” of this members to the Board of Directors. This help create a clear legal basis, affirms the independence and role of the Independent Members in joint stock companies in general, and public companies in particular.
Although Independent Members have been the subject of recent researchers’ attention, this concept has been used far early. Independent Members were introduced as an effective measure to improve corporate governance in the United States in the 1950s before being mandated by law. After that, under persistent efforts of the Delaware Court and the Stock Exchange in delaying the decisions of the independent board of directors, the Independent Members became more prominent. Moreover, after Enron cohort of scandals, the law also made recognition for Independent Members. In recent years, this trend is also developing in the United Kingdom. This requirement was initiated by the Cadbury Report 1992. With this development, board independence has been strengthened and maintained in countries such as the United States and the United Kingdom. The years of transition between the 20th and 21st centuries witnessed the spread of this concept around the world. The Cadbury Report has developed corporate governance practices in several countries such as Canada, Hong Kong, South Africa, Australia, France, Japan, Malaysia and India.
According to corporate governance practices around the world, Independent Members may contribute to important company decisions, especially in evaluating corporate performance, setting remuneration for executive officers and board members, review financial statements and play a fundamental role in resolving internal conflicts. In shareholders perspective, Independent Members shall ensure that the decisions made by the Board are impartial. In fact, the board members in public companies are mainly those being dependent of the major shareholders and controlling shareholders, the decisions of the board may be of benefit to the interests of these shareholders. This situation often results in decisions made by the Board of Directors that can infringe the rights and legitimate interests of minority shareholders and other entities such as creditors, workers, customers ….
Therefore, due to the nature of independence of interests, not having a personal relationship with the business manager, executive officer, major shareholders or controlling shareholders, opinions and decisions made by the Independent Members should be regared as impartial and objective. Many corporate governance rules around the world have recommended that the Board of Directors should be constituted by a majority of independent members who can provide objective and impartial judgments, coupled with useful experiences and relationships.
The participation of Independent Members maintains transparency in the organization and operation of public companies, prevents misrepresentation, self-interest transactions which may lead to losses or damages of related entities. Furthermore, these members will improve the overall performance of the board and more importantly enhance the governance quality at public companies.