For many foreign companies, setting up a subsidiary in Vietnam is a strategic decision aimed at long-term growth, market access, or regional expansion. Once operations begin, however, governance quickly becomes more than a formality. How decisions are made, who has authority, and how headquarters interacts with local management all carry legal consequences under Vietnamese law.

Vietnamese subsidiaries operate within a clearly defined legal framework that does not always align with global governance models. Problems often arise when headquarters assumes that internal policies, reporting lines, or approval processes automatically apply in Vietnam. In reality, local law determines who can act for the company and who bears responsibility when something goes wrong.

Understanding cross-border governance risks is therefore critical. When authority, oversight, and compliance are not properly aligned, foreign companies may face regulatory scrutiny, invalid transactions, or personal liability for directors. This article explains where those risks commonly arise and how foreign companies can manage them in a practical and compliant way.

Understanding Corporate Governance in the Vietnamese Context

Vietnam’s corporate governance framework is governed primarily by the Law on Enterprises. Unlike common law jurisdictions, corporate authority in Vietnam is heavily formalized and tied to specific roles defined by statute.

Key governance bodies include the Members’ Council or Board of Directors, the legal representative, and in some cases, the chief accountant. Each role carries defined powers and responsibilities that cannot be overridden by internal group policies.

Foreign parent companies often assume that governance structures used in their home jurisdiction can be replicated locally. In practice, Vietnamese subsidiaries must follow local statutory requirements, even if they differ from global governance models. Failure to respect this distinction can expose both the subsidiary and its directors to regulatory and legal risk.

Misalignment Between Group Policies and Vietnamese Law

One of the most common governance risks arises when group-wide policies conflict with Vietnamese legal requirements. Approval matrices, signing limits, and internal delegations may restrict local management in ways that are inconsistent with their statutory authority.

For example, Vietnamese law may require the legal representative to sign certain contracts or filings, even if internal policies require additional headquarters approvals. When group policies attempt to override local legal authority, transactions may become invalid or expose directors to liability.

Foreign companies should ensure that internal governance policies are reviewed and adapted to reflect Vietnamese law, rather than assuming that global rules automatically apply.

Risks Related to Legal Representative and Director Authority

The legal representative plays a central role in Vietnamese corporate governance. Under Vietnamese law, this individual has statutory authority to represent the company externally and is often personally responsible for compliance with tax, labor, environmental, and regulatory obligations.

Governance risks frequently arise when foreign parent companies misunderstand this role. In many multinational groups, titles such as CEO, managing director, or country head carry authority through internal hierarchy. In Vietnam, however, legal authority flows from formal appointment and registration, not internal seniority.

Common risk scenarios include situations where the legal representative resigns but regulatory filings are delayed, where powers of attorney are issued too broadly or without proper limits, or where multiple individuals act as decision-makers without clear authority boundaries. In these cases, contracts may be challenged, filings may be rejected, and regulators may hold individuals personally accountable.

Directors and legal representatives may also face personal liability if they approve actions that violate Vietnamese law, even when those actions are based on instructions from headquarters. This makes it critical for foreign investors to clearly define roles, document authority, and ensure timely registration of appointments and changes.

Compliance Risks When Headquarters Exercises Too Much Control

Oversight from headquarters is a natural part of operating a multinational group. However, governance risks arise when oversight turns into direct operational control. In Vietnam, this can create serious compliance concerns, particularly when decision-making bypasses the subsidiary’s formal governance bodies.

Excessive control often appears in subtle and well-intentioned ways, including:

  • Headquarters approving or negotiating contracts directly with customers or suppliers
  • Instructions from headquarters to hire, discipline, or terminate employees
  • Pricing, supplier selection, or budget decisions made outside the Board or legal representative
  • Informal approval processes that bypass documented resolutions or delegated authority

While these practices may be common in other jurisdictions, in Vietnam they can amount to de facto management.

When authorities perceive that a subsidiary is being run by foreign executives without proper local authority, several risks emerge. Contracts may be questioned for lack of proper authorization, local directors may be exposed to liability for actions they did not control, and regulators may scrutinize whether the subsidiary is complying with corporate governance requirements.

To manage this risk, foreign companies should clearly separate strategic oversight from operational execution. Headquarters should focus on high-level strategy, performance monitoring, and risk management, while day-to-day decisions remain with the subsidiary’s legally appointed management. Clear delegation frameworks and documented approval processes are essential to maintaining compliance while preserving effective group control.

Related-Party Transactions and Group Control Issues

Vietnamese subsidiaries frequently engage in related-party transactions, including management services, licensing arrangements, and intragroup loans. These transactions carry heightened governance and compliance risk.

Vietnamese law requires proper disclosure, approval, and documentation of related-party transactions. Failure to follow these procedures may result in governance violations and attract tax scrutiny under transfer pricing regulations.

Clear contractual terms, arm’s-length pricing, and documented approvals are essential to managing both governance and tax exposure.

Information Flow and Reporting Gaps Between Headquarters and Vietnam

Effective governance depends on accurate and timely information. In practice, many foreign companies rely on informal reporting from Vietnam subsidiaries rather than statutory filings and formal records.

Language barriers, differing accounting standards, and local reporting practices can create blind spots for headquarters. When information gaps exist, risks may go undetected until regulatory inspections or disputes arise.

Establishing structured reporting processes aligned with Vietnamese legal requirements helps ensure that headquarters maintains proper oversight without overstepping local authority.

Labor and Compliance Governance Risks

Labor-related decisions are a frequent source of governance risk for foreign-owned subsidiaries. Global HR policies on performance management, discipline, or termination may not align with Vietnam’s Labor Code.

Decisions made or approved by headquarters without local legal review can result in labor disputes, union challenges, or administrative penalties. Vietnamese law places significant emphasis on procedure, documentation, and employee protections.

Local management should retain authority over labor matters, with headquarters providing guidance rather than direct control.

Common Governance Failures in Foreign-Owned Vietnamese Subsidiaries

In practice, governance failures in foreign-owned subsidiaries tend to follow recurring patterns. These issues often arise gradually and may go unnoticed until an audit, inspection, or dispute occurs.

Common failures include:

  • Operating with outdated or incomplete company charters and internal regulations
  • Unclear division of authority between headquarters and local management
  • Board resolutions that are missing, inconsistent, or not properly recorded
  • Key business decisions made informally without proper documentation
  • Delayed filings for changes in directors or legal representatives

Such failures weaken the subsidiary’s legal position and significantly increase exposure during audits, disputes, or regulatory inspections. Regular governance reviews and document checks can help identify and address these weaknesses before they escalate.

How Foreign Companies Can Strengthen Governance in Vietnam

Strong governance begins with alignment. Foreign companies should ensure that group governance frameworks are adapted to Vietnamese law rather than imposed unchanged.

Clear delegation of authority, regular legal audits, training for both headquarters and local directors, and bilingual governance documents all contribute to a more resilient governance structure.

Proactive governance planning not only reduces compliance risk but also improves operational efficiency and decision-making clarity.

Conclusion

Cross-border governance risks in Vietnam are less about limiting control and more about achieving clarity and alignment. When governance structures respect local legal requirements while maintaining effective oversight, subsidiaries are better positioned to operate sustainably and compliantly.

At Corporate Counsels, we assist foreign companies in managing governance risks across their Vietnamese subsidiaries. From aligning group policies with local law to structuring authority frameworks, we provide practical legal guidance grounded in Vietnam’s regulatory environment. For support tailored to your organization, contact us at letran@corporatecounsels.vn.