Boosting the boardroom: Vietnam's need for independent directors

What are the critical skills and competencies required for an independent director (ID) to perform effectively on a board?

Having relevant skills and competencies is important, but it is just as important that IDs have personal attributes such as integrity, courage, professionalism, and commitment.

They should accept directorships only for the right reasons and should ask themselves if they would be able to add value to the board and company.

As for skills and competencies, all IDs should have basic financial literacy so that they have at least a basic understanding of financial statements. They need to have or develop a good understanding of the company and business, and keep abreast of trends that may affect the business.

Each ID may bring general or specialised skills to the board, and a good board will strike a balance between generalists and specialists. Among the IDs, it is important that there be someone who has significant experience in that particular industry. Other relevant skills and competencies include traditional ones such as business, accounting, and finance, but other experiences and skills are increasingly useful, such as human capital, sustainability, technology, and innovation.

Boards need to prioritise what are 'must have' skills and competencies versus those that are 'good to have'.

One challenge IDs face is a lack of access to information, independent advice, and resources to do their jobs effectively. They may only be told what management want them to know. They will often be outnumbered by executives and major shareholders on the board. Another challenge is that if they push too hard, they may be removed by major shareholders.

What are the emerging global trends affecting the role of independent directors?

Businesses today navigate through a sea of risks that could disrupt their flow and affect their growth. These risks are diverse, ranging from the rapid advancements in digital and emerging technologies, like AI, to the ever-present threats of cybersecurity breaches and personal data privacy concerns. The impact of climate change and the importance of environmental, social, and governance (ESG) considerations add another layer of complexity. Moreover, geopolitical tensions, such as protectionism, sanctions, and wars, along with supply chain disruptions, changing consumer attitudes, industry shifts, and pandemics, are all potential hurdles that need vigilant oversight.

Therefore, IDs should keep abreast of developments and ensure that the board has regular conversations on how these developments may affect the company.

Advances in AI can disrupt the business, but they can also be helpful for independent directors in discharging their roles, as they can provide quick access to a vast amount of information in digestible form. AI can provide useful information to aid decision-making, but directors should not over-rely on it.

What lessons can Vietnam learn from Singapore's experience in ensuring the effectiveness of independent directors?

In Singapore, listing requirements mandate at least two IDs or one-third of IDs, whichever is higher. Where the chairman is not independent, the Code of Corporate Governance recommends that the majority of the board be made up of IDs. This is based on 'comply or explain' so it is not mandatory.

Singapore has been too focused on the number or proportion of IDs, and not enough on ensuring that IDs are truly independent, or that they have the appropriate competencies and personal attributes.

My recommendation for Vietnam is to not focus solely on increasing the number of IDs that each company has to appoint and neglect the quality of the directors. I would suggest keeping it at a minimum of two IDs and at least one third of independent directors for the foreseeable future. Look into improving the quality of IDs instead.

On the supply side, Vietnam can focus on developing a pool of competent IDs. Make training for first-time directors and a certain amount of continuous education mandatory. Consider making it compulsory for IDs to be certified through a robust process. IDs should be required to comply with a code of conduct, and there should be a process of decertifying or suspending those who breach the code.

On the demand side, regulators can introduce rules or guidelines for companies to apply robust search and nomination processes for independent directors. For example, companies can be asked to explain how they identified an independent director candidate and what the director would bring to the board.

What steps would you suggest taking to ensure companies are installing independent directors to improve the company's governance and performance, instead of just a box-ticking exercise?

Business owners and major shareholders have to be convinced of the value of having truly independent directors who have the right personal attributes and competencies.

IDs need to understand that while they have to monitor management and operations, and ensure that minority shareholders’ interests are protected, they are also there to help improve the value and performance of companies. They need to bring more than just a 'compliance' mindset when they join a board.

Imposing 'fit and proper' requirements, training and certification, and pushing companies to have proper search and nomination processes can also help address the issue of appointing IDs for cosmetic reasons.

What guidance would you offer to IDs to help them maintain their autonomy?

An experienced director I spoke with mentioned his litmus test for joining a board involves asking the chairman if decisions not made by consensus, such as a 6-1 vote, would be accepted. If the answer is no, he declines the offer.

Of course, IDs should not dissent just for the sake of it. They should listen to other views and be prepared to change their position. However, if they genuinely disagree, then they must be prepared to say so.

Unless a director believes a decision is illegal or unethical, they should accept the board’s decision after it has been thoroughly discussed, even if they disagree. IDs shouldn’t undermine decisions that the board has made. If the ID really feels strongly, then they should resign.

A good board chairman along with board culture and dynamics are crucial in ensuring healthy debate and effective decision-making on the board.

What recommendations would you propose to the Vietnam Independent Directors Association (VNIDA) to improve the effectiveness of independent directors?

The VNIDA has already undertaken a number of excellent initiatives that promote the role of independent directors and ensure that they have the right qualities. For example, it has developed a superb code of conduct for its members.

I also really like the competency framework for independent directors developed by the VNIDA and its plans to start an academy. This can be the basis for developing a very robust professional development scheme for independent directors, ultimately leading to some kind of certification.

The VNIDA can also help companies that are looking for IDs, through offering some kind of board search service. This may be particularly useful for small and medium-sized enterprises that may find it difficult to search for good IDs or may not be able to afford the services of professional search firms.

VNIDA conference debates future of independent directors in Vietnam Nearly 250 experts from prominently listed, unlisted, and foreign-invested firms across Vietnam and the region converged at the July Independent Directors Forum, hosted by the Vietnam Independent Directors Association (VNIDA). The conference marked a significant milestone in Vietnam's corporate governance landscape.