Professional articles

Overview of Independent Board Members

Over the past 02 years, many public companies have been sanctioned by the State Securities Commission (“SSC”).SSC”) penalty[1] due to failure to meet the required ratio of independent members (“Independent Member”) on the total number of members of the Board of Directors (“Board of Directors”). The Enterprise Law 2020, the Securities Law 2019 and the Decrees guiding their implementation have specific provisions on internal management activities of joint stock companies, especially listed companies, to protect the rights of minority shareholders and securities investors, promote fairness and transparency in corporate governance activities. This article will summarize the provisions on the structure, functions and activities of Independent Members in practice.

Requirements for Independent Member

The requirement to ensure a sufficient proportion of Independent Members in the Board of Directors applies in cases where shareholders of a joint stock company choose the one-tier board governance model. The governance structure under this model includes the General Meeting of Shareholders (“General Meeting of Shareholders”), Board of Directors (including the Audit Committee and At least 20% of members are Independent Members) and Director/General Director (“Director/General Director“)[2]. The Chairman of the Audit Committee must be an Independent Member. The Enterprise Law 2020 stipulates that the number of members of the Board of Directors is from 3 to 11 members.[3]Accordingly, the number of Independent Members must be from 3-4 people and cannot be elected for more than 02 consecutive terms.[4] to ensure the independence and objectivity of Independent Members. Limit the situation where after a period of deep participation in management, Independent Members themselves also incur related responsibilities, or incur related interests with other members of the Board of Directors and shareholders. These members must also meet the conditions of independence including:

  • Not currently working for the company, parent company/subsidiary of the company or not having worked for the company, parent company/subsidiary of the company for at least the previous 03 consecutive years;
  • Not receiving salary or remuneration from the company, except for Board of Directors allowance;
  • Not having family relationship with major shareholder of the company; being manager of the company/subsidiary of the company;
  • Not directly or indirectly own at least 01% of the voting shares;
  • Not having been a member of the Board of Directors or Board of Supervisors of the company for at least the previous 05 consecutive years, except in the case of being appointed for 02 consecutive terms.[5]

When the above conditions are no longer met, the Independent Member will automatically lose his/her status in the Board of Directors. The Board of Directors must notify the case where the Independent Member no longer meets the standards at the nearest General Meeting of Shareholders or convene a meeting to elect the Independent Member within 06 months from the date of receipt of the notice.

The regulations on Independent Members of joint stock companies are also applied to unlisted public companies that these companies can still choose between the two governance models and maintain a ratio of at least 20% of the Board of Directors as Independent Members. If the number of Board of Directors is less than 05, at least 01 Independent Member is required.[6] For listed companies, adding Independent Members to the Board of Directors is a mandatory requirement.[7], the number of Independent Members in the Board of Directors is determined based on the total number of members of the Board of Directors. Specifically, if the Board of Directors has from 03 to 05 members, there must be at least 01 Independent Member; if there are from 06 to 08 members, there must be at least 02 Independent Members; and if there are from 09 to 11 members, there must be at least 03 Independent Members.[8] For joint stock companies that are commercial banks, the Law on Credit Institutions 2024 requires a higher number of Independent Members at a rate of 2/3 of the Board of Directors (at least 02 Independent Members) and not concurrently being the manager of the credit institution.[9].

Independent Member Activities

Independent Members, in addition to the powers of members of the Board of Directors, will perform their roles through reports submitted to the General Meeting of Shareholders. For listed companies, the law has more stringent regulations on reporting responsibilities. Accordingly, at the annual meetings of the General Meeting of Shareholders, Independent Members, who are members of the Audit Committee of a listed company, must report on:

  • Remuneration, operating expenses and other benefits of the Audit Committee and each member of the Audit Committee.
  • Summary of meetings, conclusions and recommendations of the Audit Committee.
  • Monitoring results for financial reports, operating situation, company financial situation.
  • Assessment report on transactions between the company/subsidiary/company controlled by the company with 50% or more of shares and members of the Board of Directors, General Director/Director, other executives and related persons; transactions between the company and companies in which members of the Board of Directors, General Director/Director, other executives are founding members or managers within 03 years prior to the transaction date.
  • Results of assessment of internal control and risk management systems.
  • Results of supervision of the Board of Directors, CEO/Director and other executives.
  • Results of the assessment of the coordination between the Audit Committee, the Board of Directors, the CEO/Director and shareholders.

According to Decree 156/2020/ND-CP, public companies that do not ensure a sufficient number of Independent Members will be fined from VND 100.000.000 to VND 150.000.000.[10] This error for credit institutions that are joint stock companies (not yet public companies) will be from 20.000.000 VND to 30.000.000 VND.[11] And for Independent Members of listed companies, in case of not fulfilling the responsibility of reporting on the activities of the Board of Directors, they will be fined from 30.000.000 VND to 50.000.000 VND.[12].

During the period 2022-2023, more than 10 public companies were fined for violating regulations on Independent Members according to press reports, however, the actual number of violations may be much higher as stated in the survey by FiinGroup and VNIDA. Accordingly, 31,6%, or 172 out of 544 companies surveyed, violated regulations on Independent Members.[13] The main reason is believed to be the relatively low remuneration for Independent Members (average 6.600 USD/year), compared to China (34.000 USD/year) and Malaysia (43.000 USD/year).[14]. This shows that Independent Members still do not play an important role and are mainly appointed just to meet legal requirements. This leads to two consequences: 2) There is no motivation to develop this work as a professional profession; 1) When there is a shortage, it becomes more difficult for companies to find suitable members. In this situation, Association of Independent Members of the Board of Directors of Vietnamese Enterprises (VNIDA)[15] was established, on the basis of Decision 04/QD-BNV, with the expectation of being a social solution to create a job market for Independent Member candidates with a network of connections and personnel assessment as well as acting as a professional training facility for Independent Members.

[1] On this issue, refer to the articles of (VnEconmy, 2024); (Dan Tri Newspaper, 2024); (Finance Magazine, 2023); (VnEconomy, 2023); (Journal of Economics and Forecasting, 2023); (Mekong ASEAN, 2023); (Journal of Economics and Forecasting, 2022).

[2] Article 137.1, Law on Enterprises 2020.

[3] Article 154.1, Law on Enterprises 2020.

[4] Article 154.2, Law on Enterprises 2020.

[5] Article 155.2, Law on Enterprises 2020.

[6] Article 276.3 of Decree 155/2020/ND-CP.

[7] Article 276.3 of Decree 155/2020/ND-CP.

[8] Article 276.4 of Decree 155/2020/ND-CP.

[9] Article 69.1 Law on Credit Institutions 2024.

[10] Article 15.3 of Decree 156/2020/ND-CP.

[11] Article 6.1 of Decree 88/2019/ND-CP.

[12] Article 15.3 of Decree 128/2021/ND-CP.

[13] FiinGroup, VNIDA, 2023, Survey Report on Independent Board Members of Public Companies in Vietnam, p. 38, online at: https://fiingroup.vn/NewsInsights/Detail/10719364?lang=vi-vn.

[14] FiinGroup, VNIDA, cited document, p. 49, online at: https://fiingroup.vn/NewsInsights/Detail/10719364?lang=vi-vn.

[15] VNIDA homepage at: https://www.vnida.vn/.