Independent Member of the Board of Directors: A Pillar of Corporate Governance under Vietnamese Law

In the context of economic integration and increasing demands for corporate governance, independent members of the Board of Directors (BOD) have become indispensable in ensuring transparency, objectivity, and the protection of shareholders’ interests, particularly in public and listed companies. In Vietnam, this role is strictly regulated by legal frameworks such as the Enterprise Law 2020, the Securities Law 2019, and related guiding decrees. This article, provided by [Name of Law Firm], offers an in-depth analysis of the concept, role, legal requirements, challenges, and solutions related to independent BOD members to assist enterprises in optimizing governance in line with international standards.

1. Who is an Independent Member of the Board of Directors?

According to Article 155 of the Enterprise Law 2020, an independent BOD member is an individual who meets the following criteria:

1. Is not currently employed by the company, its subsidiaries, or companies controlled by the company.
2. Has not been employed by the company or its subsidiaries within the three years prior to nomination.
3. Has no familial relationship (spouse, parents, children, siblings) with managers, executives, or major shareholders of the company.
4. Does not own or represent shareholders owning more than 1% of the company’s charter capital.
5. Has no direct financial or business interests with the company within the three years prior to appointment, except for BOD remuneration.
6. Meets additional standards as stipulated in the company’s charter or applicable laws for public/listed companies.

🔑 Key Objective: Ensure independent judgment and decision-making, avoid conflicts of interest, and enhance the effectiveness of the BOD’s oversight and strategic guidance.

2. Strategic Role of Independent BOD Members

Independent BOD members not only provide oversight but also bring strategic value to enterprises, particularly in the following areas:

2.1. Oversight and Internal Control

• Executive Oversight: Independent BOD members evaluate the reasonableness and effectiveness of executive decisions, ensuring no preferential treatment for specific individuals or interest groups.
• Financial Oversight: They participate in the Internal Audit Committee, review financial reports, and detect and prevent fraud or irregularities.
• Risk Management: They offer objective perspectives on strategic, financial, and legal risks, helping enterprises build effective risk management systems.

2.2. Protection of Shareholders’ Rights, Especially Minority Shareholders

• Independent BOD members act as neutral representatives, ensuring BOD decisions are not biased toward major shareholders or executives.
• They may oppose related-party transactions that disadvantage minority shareholders.

2.3. Enhancing Credibility and Attracting Investment

• The presence of independent BOD members signals transparent and professional corporate governance, aligning with international standards such as the OECD Principles of Corporate Governance.
• This is particularly crucial for companies seeking foreign investment or preparing to list on international stock exchanges.

2.4. Contribution to Strategic Direction

With their experience and independent perspective, independent BOD members provide strategic insights into product development, market expansion, or operational efficiency, helping enterprises adapt to competitive environments.

Independent Member of the Board of Directors: A Pillar of Corporate Governance under Vietnamese Law

3. Vietnamese Legal Framework for Independent BOD Members

Vietnam’s legal system establishes a clear framework to regulate the roles and responsibilities of independent BOD members, particularly in public and listed companies:

3.1. Requirements on Number

• According to Article 137 of the Enterprise Law 2020, public companies must have at least one-third of their BOD members as independent members.
• For companies listed on the Ho Chi Minh City Stock Exchange (HOSE), Circular 116/2020/TT-BTC requires at least one independent BOD member for companies with charter capital below VND 1,000 billion, with the number increasing proportionally to the charter capital.

3.2. Participation in Sub-Committees

• Independent BOD members are often required to participate in the Internal Audit Committee (Article 138 of the Enterprise Law 2020) to ensure independence in financial and audit oversight.
• They may also join other sub-committees, such as the Remuneration Committee, Strategy Committee, or Risk Management Committee, depending on the company’s structure.

3.3. Legal Responsibilities

• Independent BOD members share the same responsibilities as other BOD members, including:
  • Duty of Honesty and Care (Article 160 of the Enterprise Law 2020): Acting in the best interests of the company and not abusing their position for personal gain.
  • Liability for Damages: If they breach their duties, they may be liable for damages to the company or third parties (Article 165).
• Additionally, they must comply with disclosure and transaction reporting obligations under the Securities Law 2019 for public companies.

4. Challenges in Implementing Independent BOD Members in Vietnam

Despite legal recognition of their role, Vietnamese enterprises face several challenges:

4.1. Recruitment Difficulties

• Finding candidates who meet independence criteria while possessing deep expertise in finance, governance, or the company’s business sector is a significant challenge.
• Many enterprises, particularly small and medium-sized ones, lack access to high-quality candidates for this role.

4.2. Actual Independence

• In some cases, independent BOD members may still be influenced by major shareholders or executives due to informal relationships or financial pressures.
• Vietnam’s business culture, which often emphasizes personal relationships, may undermine the objectivity of independent BOD members.

4.3. Limited Awareness

• Some enterprises, especially family-owned businesses, do not fully recognize the value of independent BOD members, viewing their appointment as merely a legal requirement.
• This leads to formalistic appointments, reducing governance effectiveness.

5. Solutions to Enhance the Effectiveness of Independent BOD Members

To optimize the role of independent BOD members, enterprises can adopt the following solutions:

1. Establish Transparent Appointment Processes: Publicize criteria, nomination, and election procedures for independent BOD members, ensuring shareholder and stakeholder participation.
2. Enhance Training: Organize training programs on corporate governance, legal responsibilities, and oversight skills for independent BOD members.
3. Protect Independence: Clearly stipulate in the company’s charter measures to prevent interference from major shareholders or executives.
4. Collaborate with Legal Experts: Work with reputable law firms like HTH & Partners for advice on BOD structure, candidate eligibility verification, and drafting internal regulations.

Disclaimer:

This article is intended for informational purposes only and does not constitute legal advice from HTH & Partners. The content represents the views of HTH & Partners and is subject to change without prior notice.

The legal provisions referenced in this article were valid at the time of publication but may have been amended or repealed by the time of reading. We strongly recommend consulting a qualified legal professional before applying any information contained herein.