Improving the framework for independent board members in financial institutions
The provisions regarding independent members of the Board of Directors (BOD) in the draft Law on Credit Institutions need to be studied in greater depth, supplemented, and further refined to enhance the effectiveness of this institutional framework.
Along with the development and integration into the global economy in recent years, the position and role of independent BOD members have gradually been recognized and clearly established in legal documents as well as in the operational practices of businesses, particularly public companies and credit institutions.
Although the 2010 Law on Credit Institutions (CTCTD) is not the first law to regulate independent board members within Vietnam’s legal system, it is a pioneering legal document in concretizing and implementing the framework for independent board members; consequently, the provisions in the 2010 CTCTD Law have a significant influence on how independent members are regulated in other laws.
Therefore, as a professional association of independent board members licensed by the Ministry of Home Affairs, VNIDA has put forward several proposals to provide feedback on the Draft Law on Credit Institutions (Amended).
According to the Association of Independent Board Members of Vietnamese Enterprises (VNIDA), the draft Law on Credit Institutions (Amended) lacks an important criterion regarding independence in business relationships with credit institutions.
In particular, the association emphasizes the importance of adding the following condition: “not being a person with any business relationship with a credit institution or its subsidiary; or having a related party with any business relationship with a credit institution or its subsidiary; not being a manager or executive of a credit institution or a company with a business relationship with a credit institution.”
Additionally, certain other specific conditions set by the IFC should be considered for application to enhance the independence of independent board members, such as: not being affiliated with any nonprofit organization that receives significant contributions from the company or its affiliates; not participating in any stock option or retirement plans of the company or its related parties; not serving as an executive of another company where any executive of the company serves on the Board of Directors of that company…
Second, regarding the removal or dismissal of independent board members, VNIDA believes that the draft Law on Joint Stock Companies does not stipulate a reporting obligation for independent members to the Board of Directors when they no longer meet the necessary standards and conditions.
Furthermore, the draft does not clearly stipulate that an independent board member automatically loses their status when they no longer meet the statutory independence criteria. This could lead to a situation where an independent board member who no longer meets the independence criteria may continue to serve on the Board of Directors until they are officially removed or dismissed.
Therefore, VNIDA believes it is necessary to include provisions regarding the automatic termination of an independent board member’s status and their reporting obligations in Article 34, Section 1 of this draft law.
Thirdly, the draft specifies a fixed number for increasing the number of independent BOD members rather than setting a percentage, which could lead to an increase in the total number of BOD members without a corresponding increase in the number of independent members, resulting in a gradual decline in the proportion of independent BOD members and potentially even falling below the minimum requirement stipulated in Article 137 of the 2020 Enterprise Law.
Accordingly, VNIDA proposes adding a provision requiring that independent members and non-executive members constitute at least two-thirds of the total number of Board members of a credit institution. In the case of a commercial bank that is a joint-stock company, the Board of Directors must have at least one-third of its total members as independent members; in the case of a non-bank financial institution that is a joint-stock company, the Board of Directors of the financial institution must have at least one-fifth of its total members as independent members.
On Wednesday, the draft does not specify the special, specific role of independent board members in credit institutions; therefore, it does not ensure their role in performing independent oversight and advisory functions and in limiting conflicts of interest, particularly within the boards of directors of joint-stock commercial banks.
Therefore, VNIDA proposes adding a provision stating that “the committees of the Board of Directors of a joint-stock commercial bank must have at least one member who is an independent Board member and must have a majority of members who are independent Board members and Board members who are not executive officers.” The chairperson of each committee of the Board of Directors of a joint-stock commercial bank must be an independent director and may only serve as chairperson of one committee at any given time, except in cases where the number of independent directors is fewer than the number of committees of the Board of Directors.”
Fifth, the draft lacks a contingency mechanism for cases where the Board Chair is involved in a conflict of interest or where the position of Board Chair is temporarily vacant and no Board member is currently serving in that role.
Therefore, VNIDA believes that provisions regarding an “independent Board member acting as representative” should be considered to act on behalf of and oversee the Board of Directors when the position of Board Chairman is subject to a conflict of interest or when the position of Board Chairman is temporarily vacant and no Board member is currently serving in that role.
A representative member is an independent member elected, appointed, or removed by the Board of Directors of a joint-stock credit institution from among the independent members of the Board of Directors, who exercises the rights and duties of the Chairman of the Board of Directors—who is not an independent member—during the period when that Chairman is removed, removed from office, or no longer meets the standards and conditions to serve as Chairman of the Board of Directors, until the Board of Directors elects a new person or until a conflict of interest arises with that Chairman of the Board of Directors.
Fifth, the draft addresses issues of interest and conflicts of interest in various provisions but primarily remains limited to the first level of conflict of interest—actual or potential conflicts between an independent Board member and a credit institution.
Meanwhile, there are three additional levels of conflict of interest—II, III, and IV—that are highly complex and nuanced; therefore, it would be extremely difficult and impractical to specify legal provisions for each level of conflict of interest. Instead, a legislative framework grounded in a clear philosophy and long-term vision, with specific values and objectives, is both necessary and sufficient to ensure that legal regulations on conflicts of interest and the role of independent board members are thoroughly refined.
