Corporate Governance in Central Europe and Russia: Framework, Dynamics, and Case Studies from Practice 3030395030, 9783030395032

Table of contents :
Corporate Governance in Central Europe and Russia
Foreword
Preface
Acknowledgments
Contents
Chapter 1: Exploring the Issue of Corporate Governance in Central Europe and Russia: An Introduction
Part I: Mechanisms and Structures
Chapter 2: Ownership Concentration and Performance of Privately-Held Firms with Multiple Owners and the Moderating Effect of M...
2.1 Introduction
2.2 Literature Review
2.3 Relationship Between Ownership Concentration and Performance
2.4 Corporate Governance and Financial Performance of Central European Countries
2.5 Relationship Between Management Ownership and Performance
2.6 Relationship Between Corporate Ownership and Performance
2.7 Hypotheses
2.8 Methods and Data
2.9 Measures
2.10 Results
2.11 Discussion
2.12 Conclusion
References
Chapter 3: Corporate Transparency and Internal Audit/Control as Investor Protection Tools in the Opaque Russian Market
3.1 Introduction
3.2 Relevant Literature Review
3.3 Corporate Transparency and Financial Performance of Russian Companies
3.4 Internal Audit/Control as an Investor Protection Tool in Russia
3.5 Summary
References
Chapter 4: Audit Committees in Supervisory Boards of Polish Public Companies: Theory, Practice and Regulations
4.1 Introduction
4.2 Audit Committees in the Corporate Governance System
4.3 Changes in Polish Regulations Regarding Audit Committees
4.4 The Results of Empirical Research on the Impact of Legal Changes on the Appointment of Audit Committees in Polish Companie...
4.4.1 Introduction of the Obligation to Appoint an Audit Committee Based on the Number of Members of Supervisory Boards (2009)
4.5 Introduction of Obligatory Audit Committees Based on Company Size (2017)
4.6 Conclusion
References
Chapter 5: Corporate Control Market: Russian Practice
5.1 Introduction
5.2 The Development of the Regional Insurance Market in Russia
5.3 Regional Dimension
5.4 The Regional Dimension of Corporate Control Market in Russia
5.4.1 Banking Sector
5.5 The Impact of Bank Lending
5.6 Conclusion
References
Part II: Best Practices and Standards
Chapter 6: Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy
6.1 Introduction
6.2 Theoretical Approaches to Stakeholder Value Assessment
6.2.1 International Studies
6.2.2 Russian Studies
6.3 Empirical Study
6.3.1 Description of the Sample
6.3.2 Description of the Received Model
6.4 Conclusion
References
Chapter 7: Evaluation of Operational Management and Corporate Governance Quality in State-Owned Enterprises in Russia
7.1 Introduction
7.2 Implementation of the Corporate Governance Code in the State-Owned Enterprises
7.3 Methods of Self-Evaluation of the Corporate Governance Quality in Russian State-Owned Enterprises
7.4 An Example of the Application of the Methodology of Self-Evaluation Corporate Governance
7.5 The System of Indicators for Evaluating the Quality of Operational Management of Public and Non-public State-Owned Enterpr...
7.6 Results of an Empirical Evaluation of the Corporate Governance Quality in the State-Owned Enterprises
7.7 Key Findings and Research Results
References
Chapter 8: Progress of the Corporate Governance Practice in Russian State-Owned Companies
8.1 Introduction
8.2 Problem Statement
8.3 Research Questions
8.4 Purpose of the Study
8.4.1 The Russian Government Instructions
8.4.2 FASPM
8.4.3 Bank of Russia
8.5 Findings
8.6 Conclusion
References
Chapter 9: Corporate Governance in Bulgaria
9.1 Introduction
9.2 Legal Framework
9.2.1 Imperative Legislation
9.2.2 Soft Law: National Code for Corporate Governance
9.3 The History of the Bulgarian Capital Market as a Fundament of Corporate Governance Development
9.4 Shareholders in Bulgarian Corporate Governance System
9.4.1 Bulgarian National Corporate Governance Committee
9.4.2 Bulgarian Stock Exchange
9.4.3 Listed Companies
9.4.4 Institutional Investors
9.4.5 Retail Shareholders
9.4.6 Model of Corporate Ownership
9.4.7 Shareholder Rights
9.5 Composition and Functions of Corporate Boards
9.5.1 Board Systems
9.5.2 Independent Directors
9.5.3 Functions and Obligations of the Corporate Boards
9.5.4 Remuneration
9.5.5 Committees to the Corporate Boards
9.6 Transparency and Disclosure of Information
9.6.1 Disclosure of Information to Financial Supervision Commission
9.7 Internal Control and Audit
9.7.1 General Description of the Internal Control and Risk Management Systems
9.7.2 Control Environment
9.7.3 Risk Valuation Process in the Public Companies
9.8 Conclusion
References
Chapter 10: Compliance with Corporate Governance Best Practice: The Evidence from Polish Listed Companies
10.1 Introduction
10.2 Corporate Governance and Best Practice
10.3 Polish Code of Corporate Governance
10.3.1 Corporate Governance Code at the Warsaw Stock Exchange
10.4 Compliance with the Best Practice: Empirical Analysis
10.4.1 Sample and Methodology
10.4.2 Results and Discussion
10.4.3 Compliance and Company Characteristics
10.5 Conclusion
References
Part III: Regulation
Chapter 11: A View on Corporate Governance in Romania: Regulation and Effects
11.1 Introduction
11.2 The Review of Corporate Governance Theories
11.3 Transition Process and Its Effect Referring to Corporate Governance System
11.4 The Shareholder Structure, Concentration of Ownership and Control
11.5 The Characteristics, Role and Functioning of the Boards
11.6 Female and Independent Directors on Board
11.7 The Role of Politics and Regulation
11.8 Transparency and Investor Protection
11.9 Future Prospects
References
Chapter 12: Corporate Sector in Russia: What Happened and What Is Ahead Analysis
12.1 Introduction
12.2 Russian Corporate Sector Before the Global Crisis of 2008
12.3 2008 World Economic Crisis
12.4 Russian Corporations After the World Economic Crisis
12.5 Current State of Russian Corporate Sector
12.6 Conclusion
References
Chapter 13: Development of Corporate Governance in Ukraine: Legislation and Practices
13.1 Introduction
13.2 Preconditions and Main Stages of Corporate Governance Development
13.3 The Features of Current Period of Corporate Governance Development
13.4 Conclusions
References
Chapter 14: The Influence of Regulations on SOEs: The Perception of Polish SOEs´ Board Members
14.1 Introduction
14.2 State-Owned Enterprises in Poland
14.3 Research Design
14.4 Regulations´ Analysis
14.4.1 The Appointment Procedure of SOEs Management and Supervisory Boards Members
14.4.2 The Policy of the Management and Supervisory Boards Members´ Remuneration
14.4.3 The Relations Among SOEs´ Management Boards, Supervisory Boards, and General Meetings in the Scope of Assets Management
14.4.4 Conclusions of Regulations´ Analysis
14.5 The Boards´ Members Perception on the Impact of the Regulations on SOEs
14.5.1 The Impact of Particular Legal Provisions on SOEs
14.5.2 Who Influences SOEs?
14.6 Analysis of Recent Significant Revision of Regulations Specific for SOEs
14.6.1 The Appointment Procedure of SOEs Management and Supervisory Boards Members
14.6.2 The Policy of the Management and Supervisory Boards Members´ Remuneration
14.6.3 The Relations Among SOEs´ Management Boards, Supervisory Boards, and General Meetings in the Scope of Assets Management
14.6.4 Conclusions of the Analysis of Recent Revision of Regulations
14.7 Conclusions
References
Chapter 15: Efficiency of Legal Framework for Corporate Governance in the Republic of Moldova
15.1 Introduction
15.2 Methodology, Purpose and Objectives
15.3 Corporate Governance Versuss Efficiency of a Company
15.4 Corporate Governance in Republic of Moldova
15.5 Corporate Governance Legislative Framework in Republic of Moldova
15.5.1 Structure and Functioning of the Board in Republic of Moldova´s Legal Framework
15.5.2 Transparency and Disclosure
15.5.3 Internal Control
15.5.4 Stakeholders and Institutions
15.6 Comparative Analysis with the Good Practices in Central Europe and Russia
15.7 Conclusions and Results
References
Index

Citation preview

CSR, Sustainability, Ethics & Governance Series Editors: Samuel O. Idowu · René Schmidpeter

Maria Aluchna Samuel O. Idowu Irina Tkachenko  Editors

Corporate Governance in Central Europe and Russia Framework, Dynamics, and Case Studies from Practice

CSR, Sustainability, Ethics & Governance Series Editors Samuel O. Idowu, London Metropolitan University, London, UK René Schmidpeter, Cologne Business School, Cologne, Germany

In recent years the discussion about the relationship between business and society has made immense progress. This has in turn led to a broad academic and practical discussion on innovative management concepts, such as Corporate Social Responsibility, Corporate Governance and Sustainability Management. This series offers a comprehensive overview of the latest theoretical and empirical research and provides sound concepts for sustainable business strategies. In order to do so, it gathers together the experience an in-depth contemplations of leading thinkers in the fields of management theory and the social sciences. It makes highly innovative management approaches accessible to academics from various disciplines, business leaders and interested students alike. Furthermore it brings together different perspectives from all over the world and thus contributes to the interdisciplinary and intercultural discussion on the role of business in society. The underlying intention of this series is to contribute to the world's most challenging problems by developing new management concepts that create value for both: business and society. It has been developed to suppose those managers and researchers who are willing to contribute to creating sustainable business approaches for our common future. CSR, Sustainability, Ethics & Governance is accepted by the Norwegian Register for Scientific Journals, Series and Publishers, maintained and operated by the Norwegian Social Science Data Services (NSD)

More information about this series at http://www.springer.com/series/11565

Maria Aluchna • Samuel O. Idowu • Irina Tkachenko Editors

Corporate Governance in Central Europe and Russia Framework, Dynamics, and Case Studies from Practice

Editors Maria Aluchna Warsaw School of Economics Warsaw, Poland

Samuel O. Idowu Guildhall Faculty of Business and Law London Metropolitan University London, United Kingdom

Irina Tkachenko Corporate Economics and Business Governance Ural State University of Economics Ekaterinburg, Russia

ISSN 2196-7075 ISSN 2196-7083 (electronic) CSR, Sustainability, Ethics & Governance ISBN 978-3-030-39503-2 ISBN 978-3-030-39504-9 (eBook) https://doi.org/10.1007/978-3-030-39504-9 © Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword

With the beginning of the twenty-first century, analysts of economic phenomena were overwhelmed not only with the numerous political, economic, and business news but also with analytical information and syntheses provided in books, diverse periodicals, blogs, and portals. As it is not possible to process all available data and information, aside from the area of my personal research engagement, I select my readings (or browsing) according to my perception of intellectual profit. In doing so I adopt simple criteria—I look for the significant development of existing knowledge and for the synthesis, or at least the collection, of empirical inputs which offers the managerial focus on new economic processes. This book lies at the intersection of these perspectives and fits both criteria. Corporate Governance in Central Europe and Russia offers the overview of critical decision mechanisms underlying the current economic debate on different capitalism models as addressed by the framework of institutional economy. The essential issues refer to the effects of the introduction of economic institutions which link ownership, supervision, and management. A given institutional environment reflects how adopted economic rules work. It also offers the opportunity to study and understand which of these rules and mechanisms are efficient in the early phase of the economic system development as compared to the mature economies. This raises research curiosity on the decision mechanisms and their outcomes in economies which undergo significant system change (called in the sequel—transition economies). The credibility of conclusions depends on theoretical frameworks adopted for the formulation of hypotheses to be empirically verified and on the diversity of empirical base used in order to reach this goal. These observations draw researchers’ attention to Central European countries which have experienced the radical redevelopment of economic systems and underwent transition from central planning to market economies recently enough to be treated as the early phase transformers and long enough to provide time series observations which enable statistical analyses. The book answers calls rooted in this interest to investigate mechanisms underlying complex decision processes. Firstly, it is split into three parts which are devoted to mechanisms and structures, best practice v

vi

Foreword

and standards, and the role of regulation in developing corporate governance. This structure follows the correct analytical frame. Secondly, the subject of analyses, i.e., so-called system transition in CEE or the breakthrough, offers, without any earlier analogy, the unique research opportunity to study institutional change of political and economic systems. Transition in Central Europe and Russia, with its 30 years of history, although investigated, still lacks the syntheses or profiled selection of analyses. Thirdly, countries analyzed in this book pioneered the unique evolution process starting from lack of corporate governance in centrally planned economies dominated by the state-controlled enterprises (SOEs) and leading to present state of governance maturity. Fourthly, although geographically close and surviving similar political oppression, Central European countries and Russia implemented the transition reforms differently. Thus, the comparison of these countries offers creative and provoking conclusions. Finally, CEE is significantly integrated with Western Europe via economic links, common roots, and willingness to join the process of forming European future and to participate in shaping this future. This makes knowledge on this region an intellectual must for wide audience. I highly recommend this book to readers—it fills gaps in knowledge on crucial issues on the development of corporate governance system and it tackles the important research topics on mechanisms, best practice, and the role of regulation. It addresses expectations of everybody who is interested in professional approach to novel economic and market phenomena. Warsaw School of Economics, Warsaw, Poland National Science Center, Kraków, Poland April 15, 2019

Tomasz Szapiro

Preface

Corporate governance is understood as a system by which organizations are directed and controlled at the board level, where the execution of rights and responsibilities among shareholders and managers, decision-making rules, and procedures are determined. In the boarder context, corporate governance indicates who governs the company, specifically how and who makes decisions about its investment, development, and expansion and in consequence about the appropriation of profits among interested stakeholders. It also represents the division of power in the company and in society indicating the purpose of the corporation and the prevalent model of doing business. Corporate governance focuses on the protection of investor rights, increasing transparency, improving financial performance, and maximizing shareholder value. Existing studies on corporate governance reflect on structures and mechanisms which are to improve the return on investment and financial performance of listed companies. Yet, with the growing social pressure and environmental shortcomings, corporate governance experiences the shifts toward a more enlightened model which empowers different groups of stakeholders. The new paradigm calls for a more holistic approach, integrating financial, social, and environmental goals, increasing transparency and disclosure; the different versions of the King Report South Africa (I–IV) come to mind here. This book aims to address these current changes in corporate governance and its tasks and functions with respect to Central Europe and Russia. The unprecedented transition which started in the region in the years 1989–1991 included the shift from socialism to democracy and from command to market economy. This radical change which ensued required a dramatic institutional transformation based on the introduction of new regulations, the emergence of new structures, and the rebuilding of the complex system of monitoring, reporting, and control. Central Europe and Russia adopted various scenarios and experienced distinct shortcomings in transforming into the market economy and rebuilding the corporate governance models. They represent a unique environment to document and explain how

vii

viii

Preface

corporate governance develops, combines monitoring and incentive mechanisms, and contributes to the social and economic development of a country. Central Europe and Russia offer a wide range of fascinating stories of successful transition, efficient privatization, emergence of new entrepreneurial spirit, and surging valuation of de novo firms. They also deliver evidence for the strength of control and ownership by large shareholders, the abuse of minority investors, the logic of interlocks of board directors, the power of oligarchs and governments, the costs of insufficient investor protection, and inefficient court system. In this book, we would like to document the development of corporate governance in Central Europe and Russia addressing the latest changes and challenges in the quest for social and economic performance. Warsaw, Poland London, UK Ekaterinburg, Russia

Maria Aluchna Samuel O. Idowu Irina Tkachenko

Acknowledgments

This book has been developed during discussions and meetings we held with our colleagues. Initiating this book, we aimed at filling the gap in the corporate governance literature providing evidence from Central and Eastern Europe and Russia. We believe that on the 30th anniversary of the Roundtable Negotiations in Poland which started the historical process of transition, the evidence from the region can deliver important insights to our understanding on the development of corporate governance. We would like to thank Professor Tomasz Szapiro for the excellent foreword to the book and to all the contributors who shared their experience and knowledge in corporate governance. We would like to express our gratitude to the President and Chief Executive Officer of the Global Corporate Governance Institute—Professor Nicholas Capaldi, Loyola University, New Orleans, USA, for his support and motivation in our studies on corporate governance. We are grateful to our families for their understanding and support while working on this book. Finally, we would also like to thank our publishing team at Springer headed by the Executive Editor, Christian Rauscher, Barbara Bethke, and other members of the publishing team who have supported this project and our other projects.

ix

Contents

1

Exploring the Issue of Corporate Governance in Central Europe and Russia: An Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maria Aluchna, Samuel O. Idowu, and Irina Tkachenko

Part I 2

3

4

5

7

Mechanisms and Structures

Ownership Concentration and Performance of Privately-Held Firms with Multiple Owners and the Moderating Effect of Managerial and Corporate Ownership: Evidence from Post-Socialist European Countries . . . . . . . . . . . . . . . . . . . . . Aleš Kubíček and Ondřej Machek

11

Corporate Transparency and Internal Audit/Control as Investor Protection Tools in the Opaque Russian Market . . . . . . . . . . . . . . . Andrei B. Ankudinov

33

Audit Committees in Supervisory Boards of Polish Public Companies: Theory, Practice and Regulations . . . . . . . . . . . . . . . . Agata Adamska, Leszek Bohdanowicz, and Jacek Gad

51

Corporate Control Market: Russian Practice . . . . . . . . . . . . . . . . . Alla Vavilina and Lidia Levanova

Part II 6

1

67

Best Practices and Standards

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Irina Tkachenko and Irina Pervukhina

89

Evaluation of Operational Management and Corporate Governance Quality in State-Owned Enterprises in Russia . . . . . . . 107 Bela Bataeva and Olga Kozhevina

xi

xii

Contents

8

Progress of the Corporate Governance Practice in Russian StateOwned Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Irina Belyaeva and Khvicha P. Kharchilava

9

Corporate Governance in Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . 143 Daniela Peeva

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish Listed Companies . . . . . . . . . . . . . . . . . . . . . 159 Maria Aluchna

Part III

Regulation

11

A View on Corporate Governance in Romania: Regulation and Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Mihaela Tofan and Elena Cigu

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 Alla Dementieva

13

Development of Corporate Governance in Ukraine: Legislation and Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 Iryna Kytsyuk

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Igor Postuła and Mateusz Kabut

15

Efficiency of Legal Framework for Corporate Governance in the Republic of Moldova . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 Olesea Plotnic, Mihaela Tofan, and Elena Ciochina

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281

Chapter 1

Exploring the Issue of Corporate Governance in Central Europe and Russia: An Introduction Maria Aluchna, Samuel O. Idowu, and Irina Tkachenko

A religious leader once argued that “Wisdom is free, but it is also the most expensive thing there is, because we tend to acquire it through failure or disappointment or grief. That’s why we share our wisdom, so that others will not have to pay the price for it that we paid”. We have cited these great words of wisdom here because, the genesis of why and how a number of many advanced Western nations took the issue of good systems of corporate governance seriously was as a result of a number of unpalatable experiences of serious lapses in the corporate governance system of some large companies, which consequently proved too expensive for stakeholders in the length and breadth of our world. These stakeholders have had to pay very high prices for these failures and scandals, many of our readers could cite several examples of these companies globally. This has meant that some countries took the initiative before others to codify their corporate governance practices. They were unconsciously trying to share their wisdom with others in this issue to ensure that stakeholders both in their own countries and those in other parts of the world would not have to pay the high price their shareholders have had to pay for such lapses again. The Cadbury Committee Report 1992 in the UK was perhaps the first serious attempt at drawing a line of demarcation between what could be termed as acceptable and unacceptable practices in corporate governance. A number of other committee reports on corporate governance came to the fore in the UK following M. Aluchna (*) Warsaw School of Economics, Warsaw, Poland e-mail: [email protected] S. O. Idowu London Metropolitan University, London, UK e-mail: [email protected] I. Tkachenko Ural State University of Economics, Ekaterinburg, Russia e-mail: [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_1

1

2

M. Aluchna et al.

Cadbury 1992. All these committee reports were then codified into what became the UK Combined Code on Corporate Governance and revised biannually since 1998; we do not intend to look at any of these here. The Organisation of Economic Cooperation and Development’s (OECD’s) six Principles on corporate governance followed Cadbury 1992, some 7 years after the Cadbury Report was released in the UK. The following issues were the main focus of the OECD’s 1999 Principles on CG before its revision in 2004: 1. 2. 3. 4. 5. 6.

Efective framework for corporate governance. Shareholders rights. Equitable treatment of shareholders. Stakeholders’ role in corporate governance. Information disclosure. The Boards’ responsibilities.

The OECD’s principles on corporate governance have also played some role in shaping the CG codes of a number of countries around the world including many of the countries in Eastern, Central Europe and Russia. It became a number that countries around the world either styled their code around the OECD’s or the UKs. Countries in Eastern and Central Europe and Russia have transitted successfully into the free market econmomy with little or no serious corporate scandals and failures of the magnitude experienced in some Western advanced democracies which led to many nations putting corporate governance codes in place. Having said this, a number of issues have come to the fore in the area of good corporate governance in some of these Eastern and Central European countries and Russia. Scholars have noted serious issues with regard to the treatment of minority shareholders, not only that, these were some cases of some fraudulent practices inflicted on foreign investors in a few of these countries. These are issues that cannot be ignored in the quest for good governance anywhere in the world. Fortunately, things are improving in many of these countries in terms of corporate govenrnace which perhaps accounts for one of the many reasons why this book is timely. It is an opportunity to share knowledge about the current practices in the governance systems of all the countries featured in the book and to document the developments that have accompanied the transsion which took place in the desire to replace the old controlled system. The book has been divided into three parts. Part I which is in four Chapters deals with the Mechanisms and Structures of corporate governance in the Czech Republic, Slovakia, Poland and Russia. Part II in five Chapters on Best Practices and Standards. The final Part of the book also in five Chapters focuses on Regulation. We will look briefly at each of the fourteen chapters that make up the book in the remainder of this introduction to the book. The very first chapter of the book from the Czech Republic entitled “Ownership and performance of privately-held firms with multiple owners and moderating effect of managerial and corporate ownership: Evidence from post-socialist European countries” by Kubicek and Machek examines the relationship between ownership concentration and performance of privately-held firms with multiple owners. These authors studied a stratified random sample of 4500 firms from three countries—Czech, Slovak

1

Exploring the Issue of Corporate Governance in Central Europe and Russia: An. . .

3

and Poland. Using hierarchical regression analysis on data from 2009–2013, the authors note the existence of an inverted U-shaped relationship between ownership concentration and performance. Corporate ownership and managerial ownership have both significant moderating effects on this relationship, they argue. Kubicek and Machek argue that if a large part of shares is held by corporate owners, firms will perform better when ownership concentration is high, and if owners strongly participate in management, firms will perform better when ownership concentration is low, an interesting addition to knowledge. Andrei B Ankudinov, a Russian scholar in the third chapter on “Corporate Transparency and Internal Audit/Control as Investor Protection Tools in Russia” looks into the problem of enhancing financial performance and efficiency of business processes of Russian companies through improved corporate transparency and efficient internal audit function. The chapter is an overview of empirical studies carried out by the author and his research associates in the field of specific determinants of shareholder value creation. The scholar adopts an empirical analysis of relation between standards of corporate governance and financial efficiency; it suggests an original corporate transparency rating tailored specifically for the Russian market. The rating used is comprised of 39 indicators reflecting the degree of disclosure of information, relevant for all major stakeholder groups. The use of econometric modeling by the author reveals positive relation between the level of corporate transparency and the market-to-book ratio for the publicly traded Russian companies. The chapter also assesss the role of internal audit in proper investor protection and shareholder value creation and investigates the determinants of existence of internal audit departments in companies’ organizational structure. The research results reveal that the existence of internal audit service in the company structure is positively related to shareholder value creation. The fourth chapter on “Audit Committee in Supervisory Boards of Polish Public Companies: Theory, Practice and Regulations” by three Polish scholars of repute— Adamska, Bohdanowicz and Gad explored the importance of audit committee has increased exponentially after a wave of fraud which took place at the turn of the twentieth century. The setting up of audit committees by corporate boards became part of good the corporate governance practice through guidelines, successively adopted in individual EU countries, codes of good practice, as well as legislative changes, they argue. These scholars note that the most important objective of establishing audit committees was to improve the efficiency of supervision of supervisory boards over financial and non-financial reporting of companies through better use of council members’ competences, better organization of its work and strengthening its position vis-à-vis the management board, shareholders and other stakeholders. The final chapter of Part I on “Corporate Control Market: Russian Practice” by Vavilina and Levanova from Russia delve into the area they describe as issues of rapid and contradictory development of the corporate control market in Russia. Their chapter describes typical features of the corporate control market development in Russian and foreign practice. Their chapter analyzes the reasons for corporations’ reorganization based on theoretical models, the motivations for mergers and

4

M. Aluchna et al.

acquisitions of companies in the West, identifies Russian specificities, as well as the factors that have influenced the trends in mergers and acquisitions in Russia, an interesting chapter to read. Chapter 6 which is the first chapter of Part II—the part that looks at Best Practices and Standards, a chapter also authored by two experienced Russian scholars— Tkachenko and Pervukhina on “Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy”. These Russian scholars discuss the issue of achieving a desired synergy from stakeholders’ interaction through assessing stakeholder contribution to the increment of the company’s value. Stakeholder value is defined using both subjective and formalized methods and models, they argue. The chapter reviews and discusses the approaches used by non-Russian and Russian authors for monetary and non-monetary judgments of stakeholder value. The chapter notes that the methods of assessment of stakeholder value integrating both quantitative and qualitative indicators are widely used. As advocates of stakeholder approach, Tkachenko and Pervukhina offer an integrated model of value-based management, aiming to increase value for all stakeholders, in order to broaden the value creation platform and balance the multiple interests of stakeholders as a condition for the choice of strategic initiatives. Bela Bataeva and Olga Kozhevina in the seventh chapter on the “Evaluation of Operations Management and Corporate Governance Quality in State Owned Russian Enterprises” examine the practice of corporate governance in Russian state-owned enterprises from the perspective of applying instructional guidelines of the Federal Agency for State Property Management in order to improve operational management and corporate governance of thes enterprises. These authors studied the documents used for strategic planning of public and non-public stateowned enterprises, recommended by the Federal Agency for State Property Management. They also looked at the system of financial and economic performance indicators (KPI) and bonus reduction indicators for companies with state participation in the research. The chapter provided the main results of these scholars study of 13 largest Russian state-owned enterprises. Chapter 8 is also Russian. Irina Belyayeva and Khvicha Kharchila used their chapter to explore the progress made in the practice of corporage governance by Russian owned enterprises. These two highly respected Russian scholars used the chapter to provide information on the practice of corporate governance in Russian state-owned companies. The paper seeks to identify the relationship between the corporate governance system and the efficiency of state-owned companies. The chapter offers some practical value adding perspectives which might be of interest to Russian companies with state participation. The impact of corporate governance on a company’s performance drives the interest in issues of management and assessment of sustainable development in Russian companies, and this interest has been steadily growing in recent times, the chapter notes. In an environment of globalization of the economic space, describing the relationship between the quality of state-owned companies’ corporate governance and their financial performance is of paramount importance to local and foreign stakeholders.

1

Exploring the Issue of Corporate Governance in Central Europe and Russia: An. . .

5

In the ninth chapter of the book from Bulgaria, Daniela Peeva delves into the area of Corporate Governance in Bulgaria. Peeva uses the chapter to explore the main characteristics and problems of the corporate governance in Bulgaria. The chapter outlines the legal framework of corporate governance in Bulgaria while simultaneously describing the historical process of corporate governance development within the transition agenda of this former Eastern Bloc nation. The chapter also talks about the works proposed by Bulgarian Corporate Governance Network and the model of corporate ownership and shareholder rights. Peeva also uses her chapter to discuss the composition and functions of corporate boards and standards of transparency and disclosure in Bulgaria. The final chapter of Part II by Aluchna; a prolific Polish scholar in corporate governance focuses her chapter on how Polish listed companies are embedding corporate governance best practices in their corporate governance practices. The chapter recounts the role thast the Cadbury Report 1992 plays in corporate governance best practices. The chapter addresses the issue of compliance with the code of corporate governance by companies listed on the Warsaw Stock Exchange. Aluchna analyses the data her study collected on board characteristics of 160 non-financial companies listed on the Warsaw Stock Exchange between 2006 and 2015 in the attempt to identify the practice of corporate governance in Poland. Her study looked at the board characteristics with respect to the adoption of corporate governance guidelines on the presence of independent and female directors as well as the forming of specialized audit and remuneration committees. The final part of the book which contains five Chapters begins with a chapter on corporate governance in Romania. Tofan and Cigu in their chapter corporate governance in Romania argue that corporate governance in Romania evolved from the model specific to a complete centralized society, in the early 1990s, when the management of business was the exclusive public authority prerogative, to one based on market economy principles, where corporate governance is not only about the respect for the rule of law, but also about finance, social economy and global sustainability objectives of the state authorities’ activity. Since the acceptance of corporate governance in Romania, Tofan and Cigu note that almost annually, a new important law has been adopted to create a coherent legislative context for public and private companies, we regard to their ownership, the management structures and the transparency of the activities they are involved in. The chapter takes a theoretical approach of the corporate governance legal framework in Romania, in terms of its evolution and its impact throughout implementation, as well as the status of its functioning today. The results of the research Tofan and Cigu carried out give some proposals for improving the Romanian legal framework in the corporate governance field. The chapter is a useful viewpoint in understanding the complex transformation of Romanian corporate governance legislation, in accordance with market economy principles, thus developing and improving the existing literature on corporate finance. Chapter 12 on Corporate Sector in Russia by Alla Dementieva gives a perspective of Russian corporations from the point of historical and economic development. Dementieva reflects on the understanding the 25 years of history of Russian large

6

M. Aluchna et al.

corporations from their emergence in the “Wild West” like 1990s to oil-rich 2000s and then into sanctions-imposed’ environment by leading Western-world countries. Dementieva argues that from 1991 to 2008 was the period known as the building of Russian large joint-stock companies and industrial groups. The professional managers emerged, then; the 2000s marked the large increase in public offerings on foreign stock markets. Russian stock markets developed after the Federal Service introduced the framework of regulation in 2006, which required 30% domestic placement for IPOs, she notes. One of the outcomes of this period she argues saw a high concentration of ownership and control together with the State ownership of companies is another feature of Russian corporations that defines its uniqueness. Dementieva argues that after the world economic crisis of 2008 new trends emerged: the role of the state grew and impacted further re-distribution of ownership. The recovery which began in 2010 showed the ‘Russian way’ of corporate stabilization, notes Dementieva. As the economic sanctions were imposed by leading Western powers, the internal shifts in Russian public corporations exhibited even more differences from the rest of the world, argues Dementieva. This builds what Dementieva refers to as foundational analysis for the discussion of the future developments. It is clear that Russian corporations are unique and in order for them to grow in the future their corporate governance and structure will be changing, Dementieva concludes. The thirteenth chapter on Corporate Governance in Ukraine by Iryna Kytsyuk notes that corporate governance is of great importance to both companies and the state. Kytsyuk argues that corporate governance helps to increase competitiveness and economic efficiency for companies by providing: proper attention to the interests of shareholders; equilibrium of influence and balance of interests of corporate relations participants; financial transparency; the introduction of rules of effective management and proper control. She argues that corporate governance is significant for the state to demonstrate through its influence on social and economic development of the country: promotion of investment processes development, ensuring confidence and increasing investor confidence; increasing the efficiency of the capital usage and the activities of companies; taking into account the interests of a wide range of stakeholders, which ensures the realization of companies’ activities to the benefit for both the society and the growth of national wealth. The chapter analyses the successes and weaknesses of the process of corporate governance development in Ukraine. In particular, it talks about the following: the main periods of this process, the primary sources of corporate governance legislation in Ukraine, the principal authorities responsible for enforcing corporate governance regulations, and the activities of the most common organizational and legal forms of corporate entities. In the penultimate chapter from Poland on the influences of regulation on State Owned Enterprises (SOEs) from the perception of Board members of Polish SOEs by Postula and Kabut State Owned Enterprises (SOEs). These two Polish scholars recollect that countries in Central and Eastern Europe (CEE) originate from the centrally planned economy, but, despite privatization that took place in the 1990s; these countries play an important role in the market economy. Moreover, after the

1

Exploring the Issue of Corporate Governance in Central Europe and Russia: An. . .

7

financial crisis of 2008 the role of the State as the shareholder has strengthened, this has been the case in most developed economies of Western Europe and the US. Nonetheless, most of the studies on SOEs in the extant literature are mainly on Chinese companies. The chapter fills this literature gap by focusing on the impact regulations have on SOEs. The study is multidisciplinary and comprises an analysis of legal regulations and a statistical analysis, based on the results of a survey conducted among Polish SOEs management and supervisory boards. Postula and Kabut’s chapter and the study they carried out aim to identify: how regulations determine SOEs’ operations, the SOEs’ stakeholders, the regulations’ influence on the agency problem in SOEs and reveal how future legislative initiatives could influence the commonly shared opinions about existing regulations. The final chapter of the book from Moldova on the efficiency of legal frameworkfor corporate governancein the Republic of Moldova by Tofan, Plotnic and Ciochina who argue that for any corporation to survive and prosper, the stability of external conditions, including legal framework, is an important condition for its successful development. Over the years, the social, economic and legal framework domestic progress in Moldova has neither been evaluated, nor appreciated and entrepreneurs did not rely on it, Tofan, Plotnic and Ciochina argue. In the last 20 years in Republic of Moldova, one of the State’s main objectives regarding the restructuring of the economy was to reform the legislative and organizational framework of corporate management. Tofan, Plotnic and Ciochina’s study shows that there is no legal framework to stimulate the creation of genuine corporate structures in the national economy. Currently, the main efforts of the Republic of Moldova are geared towards carrying out various reforms and improving the legal framework. The goal is to allow effective control of the managers’ activity in privatized enterprises (companies on stock). They believe that the research offers viable solutions to improving the Moldavian regulation in the corporate governance field, including the proposal to adopt a corporate governance code, which cannot be realized by a compliance program alone, but in line with the moral values and the national company culture, they conclude. A good read through through this introductory chapter to what we believe is the first book of its kind on how corporate governance is shaping up in Eastern, Central Europe and Russia would hopefully have demonstrated that the market economy has immensely benefited all these countries. Many of them are certainly going to emerge as greater power in the global economy and make more positive contributions to the global economy. This is what these three editors believe, watch this space! Maria Aluchna Ph.D. is an Associate Professor, Head of Department of Management Theory Warsaw School of Economics. Director of Post-graduate Studies on Products and Services Management at Department of Management Theory Warsaw School of Economics. She specializes in corporate governance, strategic management and corporate social responsibility. Fellow of Deutscher Akademischer Austauschdienst (research stay at Universität Passau), USPolish-Fulbright Commission (research stay at Columbia University), Soros Foundation, Volkswagen Foundation and Foundation for Polish Science Development. Visiting scholar at London Metropolitan Business School and Sydney University School of Business. She teaches

8

M. Aluchna et al.

Corporate Governance, Responsible Management (within the cooperation of University of Illinois, Springfield, US) and Strategic Management at MBA, postgraduate, Ph.D., MA and BA studies. Member of European Corporate Governance Institute, International Corporate Governance Society, Finance Watch, European Academy of Management, Council of Management and Finance Collegium and editorial committees of “International Journal of Corporate Social Responsibility”, “European Journal of Economics and Management”, “Journal of Knowledge Globalization”, “Przegląd Organizacji and e-Mentor”. She publishes in Poland and abroad (five monographs, including two in English, five edited books, including four in English), over 70 articles and conference papers (EURAM, AIB, ISBEE), and takes active part in international conferences. Samuel O. Idowu Ph.D. is a Senior Lecturer in Accounting and Corporate Social Responsibility at London Guildhall School of Business & Law, London Metropolitan University, UK. He researches in the fields of Corporate Social Responsibility (CSR), Corporate Governance, Business Ethics and Accounting and has published in both professional and academic journals since 1989. He is a freeman of the City of London and a Liveryman of the Worshipful Company of Chartered Secretaries and Administrators. Samuel is the Deputy CEO and First Vice President of the Global Corporate Governance Institute. He is the Editor-in-Chief of three Springer’s reference books—the Encyclopedia of Corporate Social Responsibility, the Dictionary of Corporate Social Responsibility and the Encyclopedia of Sustainable Management (forthcoming), he is an Editor-in-Chief of the International Journal of Corporate Social Responsibility (IJCSR), Editor-in-Chief of the American Journal of Economics and Business Administration (AJEBA) and an Associate Editor of the International Journal of Responsible Management in Emerging Economies (IJRMEE). He is also a Series Editor for Springer’s books on CSR, Sustainability, Ethics and Governance. One of his edited books won the most Outstanding Business Reference book Award of the American Library Association (ALA) in 2016 and another was ranked 18th in the 2010 Top 40 Sustainability Books by, Cambridge University, Sustainability Leadership Programme. Samuel is a member of the Committee of the Corporate Governance Special Interest Group of the British Academy of Management (BAM). Irina Tkachenko is a Professor at Ural State University of Economics, Ekaterinburg, Russia and Head of the Department of Corporate Economics and Business Governance. She is a Doctor of Science (Economics). Her doctorate dissertation (2002) “Institutional and Valuable Basis for Effective Development of Interfirm Corporate Relations” was devoted to the problems of corporate governance. She specialises in topics of corporate governance, corporate social responsibility and public-private partnership. She is one of the co-authors of the books: “Transforming Governance: New Values, New Systems in New Business Environment”, edited by M. Aluchna, Guler Aras, Gower Publishing limited, England, 2015; “Responsible Corporate Governance”, published in the Springer publishing house in 2017 and edited by M. Aluchna, S.O. Idowu; and “Women on Corporate Boards. An International Perspective”, ed. Aluchna, M. and Aras, G. Routledge. Abingdon, Oxon; New York, NY. 2018. Professor Tkachenko has won many grants on corporate governance issues, including international: The Fundamental Research Fund in the sphere of economic science by the Russian Ministry of Education (1999–2000, 2003–2004); RGNF Grant, (2001, 2011–2012); The Russian Foundation for Basic Research (2013–2015); Grant of Bridge partnership with Ashcroft International Business School of Anglia Ruskin University, UK (2006–2010, 2012); ACTR-RSEP fellowship, George Washington University, Washington, DC (USA, 1995); Canada-Russia Program in Corporate Governance, Schulich School of Business, Toronto, Ontario, Canada, Grant of CIDA, June–July, 2003; Erasmus Mundus Action 3: (SCEE project)—The Warsaw School of Economics (Szkoła Główna Handlowa w Warszawie, SGH) (2013). Tkachenko I. was a Visiting lecturer in Karaganda State University, Kazahstan (2012), in Poland (SGH, 2013), in Italy (Luiss Guido Carli University and Link Campus University (Rome, 2014) and Florence University (2014)).

Part I

Mechanisms and Structures

Chapter 2

Ownership Concentration and Performance of Privately-Held Firms with Multiple Owners and the Moderating Effect of Managerial and Corporate Ownership: Evidence from Post-Socialist European Countries Aleš Kubíček and Ondřej Machek

2.1

Introduction

Current knowledge of corporate governance is predominantly based on the analysis of publicly traded companies, which is due to the fact that prior research has been conducted mainly in developed countries with well-functioning capital markets and well-developed institutional framework. Publicly traded companies can be characterized by ownership that is typically dispersed among numerous owners who cannot directly supervise management activities. In these firms, the governance is mostly contractual: owners monitor management by formal and contractual agreements. However, in most countries, the main contributors to the national economies are undoubtedly privately-held companies (GEM 2002). In privately-held firms, owners act like a social group and governance becomes largely “relational” (Uhlaner 2008). Moreover, the best practice, based on understanding gained in developed countries, cannot be simply generalized, because they considerably differ in the very issues that corporate governance is supposed to address (Claessens and Yurtoglu 2013). The relationship between ownership structures and firm performance has received considerable academic attention over the past decades. One of the major topics of research has been the influence of ownership concentration on performance, especially in publicly traded firms in developed economies. Many past studies also addressed the impact of corporate ownership or managerial (insider) ownership on firm performance. However, it seems that the moderating role of these factors on the relationship between ownership concentration and performance has been neglected. The goal of this chapter is to analyze the impact of ownership concentration on performance in three post-socialist Central European countries (Czech Republic, A. Kubíček (*) · O. Machek University of Economics, Prague, Czechia e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_2

11

12

A. Kubíček and O. Machek

Slovakia, and Poland) while evaluating the possible moderating effect of corporate and managerial ownership. We specifically focus on privately-held firms with multiple owners, where corporate governance is largely relational, as opposed to the traditional contractual governance of publicly traded firms. The remainder of this chapter is organized as follows. First, we provide a review of relevant literature and articulate the research hypotheses. Then, we present the data and methods. Subsequently, we report the results. Finally, concluding remarks are presented.

2.2

Literature Review

In their seminal study, La Porta et al. (2000) discussed how investor protection guaranteed by law and institutional framework creates differences across countries in ownership concentration of publicly traded companies. In transitional and emerging markets, the weak institutional framework has resulted in increasingly concentrated ownership that may substitute the weak protection of owners’ rights (La Porta et al. 1997). It seems that a positive effect of ownership concentration on firm performance can be observed especially in countries with weak investor protection (Boubakri et al. 2005). In the last decade, a new wave of corporate governance research has examined the relationship between ownership characteristics and financial performance in these economies. A common feature of these studies has been the focus on publicly traded companies (see the reviews of Sánchez-Ballesta and García-Meca 2007; Heugens et al. 2009; Wang and Shailer 2015), which is probably due to the availability of publicly disclosed data. However, in the majority of countries, the main contributors to the national economy are privately-held companies, and it becomes essential to study their specifics in order to gain an understanding of their performance drivers. The number of studies focused on privately-held companies is still limited, although especially in these companies we may assume a significant impact of ownership concentration on performance due to the absence of the market for corporate control as an external governance mechanism providing an additional level of monitoring and disclosure (Jensen and Ruback 1983). In countries with a weak institutional framework, we may assume that this impact is even stronger. The reason is that weak institutions hinder the efficiency of contractual corporate governance mechanisms; therefore, investors have to rely on firm-level corporate governance provisions (relational mechanisms). Companies with better corporate governance in countries with such weak legal environments are perceived more positively by investors and their operating performance seems to be better (Klapper and Love 2004).

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

2.3

13

Relationship Between Ownership Concentration and Performance

The fundamental theories of corporate governance started with the principal–agent problem discussed by Berle and Means (1932). Managers (agents) may be motivated to act in their own interest rather than those of the owners (principals). This opportunistic behaviour is due to the information asymmetry between both parties; hence, owners introduce various governance mechanisms to monitor managers. These are, however, associated with agency costs that are borne by the owners in an effort to align the interests of both parties to maximize shareholder value (Jensen and Meckling 1976). The theoretical framework of the principal–agent problem is based on the study of publicly traded companies, predominantly in Anglo-American countries. In publicly traded companies, ownership is dispersed among numerous owners who cannot appropriately supervise the activities of management. With ownership concentrated in the hands of a few shareholders, we may expect that their incentives to control and monitor the management become stronger. Increased equity participation in the company allows them not to depend only on contractual mechanisms, but to become more actively involved in the form of shareholder activism. Higher ownership concentration may result in a structure with a controlling owner who can become significantly involved in company management and reduce management opportunism (Burkart et al. 1997). The principal–agent problem is minimized by the fact that the controlling owner has a strong incentive to become directly involved in the company and exercise a more intensive level of monitoring (Young et al. 2008). However, past research suggests that although the principal–agent problem is minimized by the presence of the controlling owner, the controlling owner himself may become another source of corporate governance issues. Since a high ownership concentration prevails in most countries of the world, attention has been devoted to the relationships among various owners and to the potential principal–principal problem (Young et al. 2008). One of the assumptions of agency theory is that all owners have a common interest: to maximize shareholder value. However, if the controlling owner starts to prefer selfinterests over the collective interests, he may attempt to take advantage of his control at the expense of minority owners. Private benefits of control take various forms, but they all have an impact on overall company performance (Sauerwald and Peng 2013). Sánchez-Ballesta and García-Meca (2007) performed a meta-analysis of 33 studies examining the effects of ownership structure on company performance. The authors conclude that the overall relationship is insignificant. However, according to their findings, in continental countries characterized by agency conflict between blockholders and minority owners, ownership concentration has a higher effect on performance than in Anglo-Saxon countries, which is in accordance with the claim that the relationship between ownership and financial performance is stronger in countries with lower levels of investor protection. Similar findings have been

14

A. Kubíček and O. Machek

provided by Heugens et al. (2009) in their meta-analysis of 65 studies examining the relationship in Asian countries. The authors found a small but significant positive overall effect, observable mainly in countries with weaker legal protection. In a meta-analysis of 42 studies examining the emerging markets, Wang and Shailer (2015) reported a negative relationship across countries in line with the theoretical expectations of controlling shareholder agency problem. However, the results are in contradiction with a more recent meta-analysis of 69 studies solely focused on emerging economies of CEE countries and former Soviet Union states (Iwasaki and Mizobata 2019) that found a positive correlation. According to Morck et al. (1988), ownership concentration may not only have benefits but also costs implying that the relationship between concentration and performance may be non-linear. However, the exact nature of this relationship remains unclear. A number of authors (Cho 1998; Short and Keasey 1999; Gugler et al. 2008) found that increasing ownership concentration first reduces agency costs, but subsequently, rent-seeking large investors offset positive effects. Eventually, the interests of owners and managers become better aligned, which increases performance. Such kind of relationship is known as an “up-down-up” relationship. Other authors (e.g. McConnell and Servaes 1990; Thomsen and Pedersen 2000; Arosa et al. 2010) found evidence of an inverted U-shaped relationship between ownership concentration and performance. The reduction of agency costs due to the alignment of interests of owners and managers results in better performance, but at a certain point, advantages are mitigated by exploitation of private benefits by controlling shareholders. Very high levels of ownership concentration can allow a controlling shareholder to dominate the corporation’s decision-making process, which could result in the expropriation of wealth from minority shareholders (Caixe and Krauter 2013; Hamadi and Heinen 2015). From the above discussion, it is evident that the relationship between ownership concentration and performance is influenced by two relatively conflicting problems. On the one hand, low levels of ownership concentration are associated with agency costs as managers must be monitored which negatively affects performance. On the other hand, highly concentrated ownership structures may induce controlling owners to pursue private benefits which also have a negative effect on performance.

2.4

Corporate Governance and Financial Performance of Central European Countries

Past research has been focused especially on developed economies. This fact represents one of the limitations of the current knowledge because the literature has been relatively silent on corporate governance issues in Eastern European countries with a rare exception of the period of privatization of the 1990s. A handful of studies examined privatized publicly traded companies over the period of the nineties. Claessens and Djankov (1999) found that more concentrated ownership was positively related to profitability of Czech companies over the period 1992

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

15

through 1997. Similarly, Pivovarsky (2003) found that ownership concentration was positively linearly associated with the performance of Ukrainian companies. Earle et al. (2005) reported that in Hungary the size of the largest blockholder strongly and monotonically increases profitability. These findings suggest that the concentration of ownership in the hands of a single large owner, at least over the period of institutional instability, can be associated with improved corporate performance, which can be due to the ability to monitor management and intervene into the decision-making process. However, it seems that the presence of a second significant blockholder doesn’t improve performance and may even reduce it (Earle et al. 2005; Bedo and Ács 2007). Although the second largest owner may play an important monitoring function in private family firms (Che and Zhang 2017), in the context of companies undergoing privatization process, it appears that the management control of the second largest blockholder may generate tensions between those two owners and cause additional agency costs that often exceed the benefits of control. While the presence of a controlling owner played an important role as a substitute for the lacking legal and governance mechanisms during the early stages of market and institutional development (Kalezić 2015), it is reasonable to believe that the quality of the institutional environment improved over a decade in Central and Eastern European (CEE) countries, and his/her role may have ceased to be beneficial. Highly concentrated ownership may lead to the above-mentioned conflict of interests among owners and negatively affect performance. For instance, the controlling owner may place the company into a complex pyramidal ownership structure (Morck et al. 2004) or employ various forms of rent expropriation (Bena and Hanousek 2008). The findings of Konečný and Částek (2016) who found that ownership concertation negatively affects corporate performance support this reasoning. However, according to the authors, the data do not conclusively reveal whether the effect is monotonic or not. Filatotchev et al. (2007) investigated the links between ownership structures, managerial independence and financial performance of the largest Hungarian and Polish firms. The authors suggest that managerial independence is the missing link between ownership and performance, and concentrated ownership tends to constrain managers’ independence in order to not lose control over the management. However, managers’ independence was found to be positively associated with company performance. For CEE countries, the evidence of a non-monotonic relationship has been found by multiple authors such as Džanić (2012) who argued that the existence of a blockholder owning more than 30% of the equity stake negatively affected Tobin’s q of Croatian listed companies. However, other authors found no significant influence of ownership control on productivity in CEE countries such as Slovenia (Damijan et al. 2004), or company performance of Czech (Nowak and Kubicek 2012) and Polish companies (Grosfeld and Hashi 2007). Balsmeier and Czarnitzki (2015) examined the relationship of ownership concentration and firm performance in the context of institutional environments in 28 Central and Eastern European transition countries and found an inverted U-shaped relation for non-EU and less developed countries. To sum up, the literature from CEE countries presents inconsistent results, as is also evident from the regionally-focused meta-analysis by Iwasaki and Mizobata

16

A. Kubíček and O. Machek

(2019). Furthermore, it should be noted that a vast majority of studies have been based on samples of publicly traded companies, which contribute only to a minor extent to the national economic growth in the region. Therefore, the results can be hardly generalized for the whole economy, since in CEE countries privately-held non-listed companies represent an overwhelming majority.

2.5

Relationship Between Management Ownership and Performance

Often, ownership and management overlap. The literature generally considers two effects of managerial (insider) ownership on performance and is based on the principal–agent theory similarly as mentioned above. The positive incentive effect (Jensen and Meckling 1976) assumes that a larger portion of insider capital results in better aligned interest with owners. However, there is evidence that a high level of managerial ownership results in reduced efficiency of external mechanisms, namely managerial labor market (Morck et al. 1988) and the market for corporate control (Denis et al. 1997). At certain levels of ownership, managers may reach sufficient control over the company to follow their own interests without fear of being dismissed by owners (Demsetz 1983). The negative entrenchment effect (Shleifer and Vishny 1989) is based on various adverse actions, such as managers making themselves hard to replace. The question of at which level of managerial ownership management becomes entrenched is not clear-cut. According to Short and Keasey (1999), UK firms become entrenched at different levels than US firms. They also reported that the relationship between managerial ownership and performance is non-linear. This has been further confirmed by other authors, but the actual form of this nonlinear relationship remains unclear. For instance, Enqvist (2005) found a U-shaped (non-inverted) relationship between managerial ownership and Tobin’s q. Chen (2006) reported a bell-shaped relationship. In studies from developed countries, managerial ownership is usually treated as the explanatory variable (Cheng et al. 2012). The reason is that when ownership is not concentrated, managerial ownership represents one of the mechanisms for reducing the principal–agent conflict. However, in the case of economies characterized by concentrated ownership, the effect of managerial ownership may be different. According to Ng (2005) and Cheng et al. (2012), in Hong Kong, where the market is characterized by a concentrated family ownership structure, the relationship between managerial ownership and firm performance is entrenchment-alignment-entrenchment. These findings are contradictory to those from the US and UK. The authors argue that board of directors adequately substitutes managerial ownership in mitigating potential conflict when ownership induces entrenchment. While the relationship between managerial ownership and performance seems to be country-dependent, it also seems to be firm-dependent; firms with better monitoring mechanisms will need lower levels of managerial ownership to become aligned.

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

2.6

17

Relationship Between Corporate Ownership and Performance

Another important aspect that certainly enters into the relationship between ownership concentration and performance is the ownership structure of the company. Prior studies employed various classifications of ownership structures according to their legal status or institutional type. Some studies distinguished between domestic and foreign institutions, others examined the presence of institutional investors, etc. In our chapter, we focus on corporate ownership that is typical for continental Europe. Companies frequently hold ownership stake in other companies as part of crossownership or various group (Ghemawat and Khanna 1998) and pyramidal structures (Morck et al. 2004; Almeida and Wolfenzon 2006). There are potential benefits connected with such a business arrangement. When the business scope of both companies is related, ownership may facilitate knowledge transfers (Kester 1992; Thomsen et al. 2006) or provide better access to capital from internal and external sources. Within a group structure, owners may pool resources and allocate them according to the needs of individual firms, or optimize tax using transfer pricing (Pedersen and Thomsen 2003). However, these positives may be outweighed by negatives if the dominant owner uses his power to carry out immoral or even illegal practices in order to extract wealth at the expense of other shareholders. Krivogorsky and Burton (2012) examined the impact of the dominant owner on performance and reported differences for over 1500 Western continental European listed companies. The authors found that families and individual owners in the role of dominant owners are associated with positive effects because of their shareholder activism and focus on long-term goals. On the other hand, block or industrial corporate ownership was found to negatively affect company performance indicating either insufficient monitoring or exercise of private benefits of control. The literature has been relatively silent on the relationship between ownership structure and performance in CEE countries. Prior studies focused mainly on the period of privatization of the 1990s, so the role of institutional owners is well documented (Claessens and Djankov 1999; Pivovarsky 2003; Gregoric and Vespro 2009), as well as the role of foreign investors (Djankov and Hoekman 2000; Hanousek et al. 2007; Částek 2013; Iwasaki and Mizobata 2018). However, based on a sample of Czech companies after privatization, Hanousek et al. (2007) report that the differences between various owner identities are limited. The positive effect on performance was found primarily for majority ownership and corporate ownership by foreign industrial companies. The recent meta-analysis of 34 previous studies on post-privatization performance (Iwasaki and Kočenda 2017) further supported the positive impact of foreign investors. To sum up, although some academic attention has been paid to the link between corporate ownership and financial performance, the literature provides mixed and limited results. Moreover, the findings can be generalized mostly for listed companies. Since ownership concentration is also country-dependent and varies according

18

A. Kubíček and O. Machek

to different types of business relationships, corporate ownership can act as a moderator in the relationship between ownership concentration and performance. Taking into account these facts, we assume that ownership structures dominated by controlling corporate owners in CEE countries may result in group or pyramidal structures, which may lead to expropriation of minority shareholders in accordance with the theoretical framework of the principal–principal conflict.

2.7

Hypotheses

To sum up, most of the research has been carried out in developed countries and reported conflicting results. However, there are several limitations which we address in this chapter. First, past research has seldom been based on random sampling. Second, various measures of performance have been used in the past. Since the research was focused mainly on publicly traded companies, most studies used Tobin’s q as a measure of performance (Sánchez-Ballesta and García-Meca 2007), which can’t be calculated for privately-held firms, although they are the prevailing class of firms. Almost no study focused specifically on firms with multiple owners (where two or more people participate in ownership). And as far as we know, no study dealt with the moderating effects of corporate and managerial ownership on the relationship between ownership concentration and performance, although they often overlap with ownership concentration and are also known to have effects on performance. Taking into account all the above-mentioned arguments as a whole, then, we hypothesize that: H1: There is an inverted U-shaped relationship between ownership concentration and performance. H2: Corporate ownership moderates the relationship between ownership concentration and performance. H3: Managerial ownership moderates the relationship between ownership concentration and performance.

2.8

Methods and Data

To test the hypotheses, we used hierarchical regression analysis with robust (heteroscedasticity-consistent) standard errors performed in Stata 14. This kind of analysis is suitable for studies testing curvilinear relationships and moderating relationships (Golden and Veiga 2005). Following multiple authors (Aiken and West 1991; Baron and Kenny 1986), regression is carried out in several steps. In the first step, control variables are regressed against return on assets. In the second step, the main effects are examined by adding concentration (linear and quadratic term) to the set of predictor variables.

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

19

In the third step, the moderator variable is added to the model. In the fourth step, consistently with other authors (Golden and Veiga 2005; Xie and Johns 1995), a quadratic-by-linear interaction term is added to evaluate the moderation effect. In each step, we test whether the incremental change in R2 resulting from the addition of respective variable is statistically significant (Pedhazur 1982). The basic data source was the Bureau van Dijk’s Amadeus database. We selected all limited liability firms from the Czech Republic, Slovakia and Poland. The postprivatization development of these countries has been quite similar, which is nowadays manifested by the fact that these countries occupy similar positions in the worldwide rankings of KOF Index of Globalization, UN Human Development Index or TI Corruption Perceptions Index. For each country, we exported all privately-held firms with multiple owners with available data from 2009–2013. Subsequently, we eliminated firms with incomplete data and sole proprietorships (firms with single owners). We used a proportionate random stratified sampling to obtain a sample of 4500 firms. Since according to the Amadeus database, there are 1,335,912 active companies in Poland, 467,536 in the Czech Republic, and 243,533 in Slovakia, we used the same proportions to randomly select 2936 Polish firms (65.26%), 1028 Czech firms (22.84%) and 536 Slovak firms (11.89%). As performance measures in our sample exhibit relatively high year-to-year volatility, we computed the 2009–2013 mean values of our model variables. This approach converts panel data structure to cross-sectional data, thus smoothing out the time variation. Although this may represent a potential limitation of the study, using 5-year averages in regressions has been used by many past authors (e.g. Deming and Kahn 2018; Goel and Nelson 1998; Li and Zou 1998; Machek 2017, among others).

2.9

Measures

Performance of firms was measured by return on assets, which has been one of the most frequently used measures of performance in past comparative studies (Machek et al. 2013). Consistently with past studies (e.g. Arosa et al. 2010; Tsionas et al. 2012), concentration is measured using the share of the largest owner. Since we hypothesize that concentration has an inverted U-shaped relationship with performance, we introduce both the linear and quadratic terms to the regression equation. Managerial ownership is measured by the proportion of ownership held by current managers and corporate ownership is measured by the proportion of ownership held by legal persons. To capture size and scale effects, we control for firm size as measured by ln of total assets; the values have been converted to 1000 CZK (Czech crowns). To capture maturation effects, we also included the age of firms in years since the date of incorporation. To take into account capital structure effects, we also control for the level of debt (gearing, i.e. debt over equity). Besides these variables, we also control for industry affiliation (eight dummy variables representing the broad NACE categories) and since the operating conditions are supposed to be different in individual countries, we also control for location using two dummy variables.

20

2.10

A. Kubíček and O. Machek

Results

Table 2.1 presents the descriptive statistics for all variables except of country and industry dummies. The sample contains firms of various sizes and ages (the youngest firm is 4 years old, while the oldest one 177 years old). Regarding the use of debt, the data suggest the presence of influential observations; however, since the data are real and correctly recorded, we do not exclude these cases from the analysis. Of course, the usage of debt heavily depends on industry affiliation. As to managerial and corporate ownership, the proportions vary from 0 to 100%. Table 2.2 displays the Pearson correlations for all variables excluding dummy variables (industry and country). It should be noted that correlations measure linear association between two variables; however, the relationship between performance and various kinds of ownership structures has been found to be non-linear. Size and age are significantly correlated, since both of them are associated with the maturity of firms. There is also a negative association between size and managerial ownership, and a positive association between size and corporate ownership; larger firms tend to be owned by institutions rather than individuals (these two types of ownership are significantly negatively correlated). There is also a moderate correlation between concentration and corporate ownership. Performance is negatively associated with size, age, gearing, and positively associated with managerial ownership. Table 2.3 presents the hierarchical regression results where we introduce interaction between ownership concentration and corporate ownership. Several observations stand out from the results. First, firm age negatively affects performance. We also observed a negative impact of firm size on performance. The results also show that gearing negatively affects performance (since using debt is associated with financial costs). The results support the hypothesis H1 on a quadratic relationship between performance and ownership concentration since the quadratic term is highly significant. Figure 2.1 illustrates the curvilinear relationship. The global maximum occurs at the ownership concentration of 52.5%. Corporate ownership seems not to have a clear significant impact on performance (there is no clear evidence of main effect), but the quadratic-by-linear interaction Table 2.1 Descriptive statistics Variable Size Age Gearing (debt/equity) Managerial ownership Corporate ownership Concentration Performance Source: Authors

Mean 10.816 16.984 71.001 33.099 8.383 39.96 7.649

Std. d. 1.357 8.899 85.404 34.083 23.859 26.890 9.727

Minimum 5.729 4 0 0 0 2 –51.842

Maximum 15.298 177 806.394 100 100 100 92.117

Note: *p < 0.05 Source: Authors

Variable 1. Size 2. Age 3. Gearing (debt/equity) 4. Managerial ownership 5. Corporate ownership 6. Concentration 7. Performance

Table 2.2 Correlation matrix

Mean 9.979 15.508 63.783 63.052 9.747 54.465 8.750

Std. d. 1.535 6.420 88.925 35.551 25.906 17.499 12.530

2.

–0.051* –0.096* 0.061* –0.021 –0.202*

1. 0.308* 0.120* –0.273* 0.231* 0.053* –0.196* –0.058* 0.011 0.031* –0.223*

3.

–0.515* –0.004 0.113*

4.

0.257* –0.020

5.

–0.024

6.

2 Ownership Concentration and Performance of Privately-Held Firms with Multiple. . . 21

22

A. Kubíček and O. Machek

Table 2.3 Hierarchical regression results for corporate ownership Variable Intercept Size Age Gearing Industry dummies Country dummies Concentration Concentration squared (CONSSQ) Corporate ownership Corporate ownership × CONSSQ R2 F ΔR2

Step 1 20.530*** –0.497*** –0.136*** –0.028*** Yes Yes

Step 2 18.709*** –0.481*** –0.136*** –0.028*** Yes Yes 0.080** –0.001**

Step 3 18.495*** –0.458*** –0.136*** –0.027*** Yes Yes 0.079** –0.001** –0.007

0.1338 40.72***

0.1352 3.63* 0.0014

0.1355 1.35 0.0003

Step 4 18.211*** –0.454*** –0.136*** –0.027*** Yes Yes 0.099** –0.001*** –0.033*** 0.001** 0.1365 5.62*** 0.0011

Note: ***p < 0.01, **p < 0.05, *p < 0.1 Source: Authors 10 9 8 Performance

Fig. 2.1 Curvilinear inverted U-shaped relationship between ownership concentration and performance

7 6 5 4 3 2 1 0 0

20

40

60

80

100

Ownership concentration

term is statistically significant at the 0.01 level. The effect of ownership concentration on performance is different at different values of corporate ownership. The results support the hypothesis H2 stating that corporate ownership significantly moderates the relationship between ownership concentration and performance. To facilitate the interpretation (Golden and Veiga 2005), we present a graphical inspection which reveals that everything else being equal, corporate ownership has a positive moderating effect on the curvilinear relationship between ownership concentration and performance. Figure 2.2 illustrates the moderating effects. For low level of corporate ownership, the inverted U-shaped relationship between ownership concentration and performance resembles a classical upside-down parabola centered at 52.5%. As corporate ownership increases, the peak of the parabola moves to the right, and eventually, when corporate ownership is large enough, the maximum occurs at higher ownership concentrations than 100%, which means that performance is an ever-increasing function of ownership concentration for all realistic values

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

Fig. 2.2 Moderating effect of corporate ownership on the relationship between ownership concentration and performance

23

14 12 Performance

2

10 8 6 4 2 0 0

20

40 60 Ownership concentration

80

100

Institutional ownership Low (5%)

Medium (50%)

High (90%)

(0–100%). At the same time, when corporate ownership is low, lower ownership concentration leads to best performance. For high levels of corporate ownership, high ownership concentration leads to higher performance. The effect of corporate ownership seems to be neutral when ownership concentration is about 50%. Table 2.4 displays regression results for managerial ownership being the moderating variable. In the model, we observe a similar effects of control variables; firm size has negative effect on performance, as well as firm age and use of debt. Concentration plays the same role as before; we find evidence on an inverted U-shaped relationship between ownership concentration and performance. Then, we find a significant main effect, which suggests that managerial ownership has a positive effect on performance. However, since the quadratic-by-linear interaction term is statistically significant, managerial ownership also significantly moderates the relationship between ownership concentration and performance. Figure 2.3 plots the relationship between ownership concentration and performance at three different levels of managerial ownership: low (5%), medium (50%), and high (90%). For low levels of managerial ownership, performance is an increasing function of ownership concentration. It turns out that after a certain threshold, the curve becomes inverted U-shaped. At the same time, for low levels of managerial ownership, ownership concentration increases performance, and for high level of managerial ownership, negative effects prevail. We can conclude that for low levels of managerial ownership, ownership concentration has negative effect on performance, and for high levels of managerial ownership, lower ownership concentration is preferable. The effect of managerial ownership seems to be rather neutral when ownership concentration is about 67%. To verify the robustness of our results, we ran the regression on two other random samples of firms of the same size (one proportionate stratified random sample and one disproportionate stratified random sample with 1500 Polish, 1500 Czech and 1500 Slovak firms). We also ran the regressions in the subsamples of individual countries (Poland, Czech Republic, Slovakia). In all cases, we obtained significant interaction terms supporting our hypotheses.

24

A. Kubíček and O. Machek

Table 2.4 Hierarchical regression results for managerial ownership Variable Intercept Size Age Gearing Industry dummies Country dummies Concentration Concentration squared (CONSSQ) Managerial ownership Managerial ownership × CONSSQ R2 F ΔR2

Step 1 20.530*** –0.496*** –0.137*** –0.028*** Yes Yes

Step 2 18.709*** –0.481*** –0.136*** –0.028*** Yes Yes 0.080** –0.001**

Step 3 18.309*** –0.428*** –0.137*** –0.028*** Yes Yes 0.052* –0.001* 0.018***

0.1338 40.72***

0.1352 3.63* 0.0014

0.1375 12.04*** 0.0023

Step 4 18.442*** –0.435*** –0.136*** –0.028*** Yes Yes 0.019* –0.001* 0.041*** –0.001*** 0.1389 7.13*** 0.0014

Note: ***p < 0.01, **p < 0.05, *p < 0.1 Source: Authors 12 10 Performance

Fig. 2.3 Moderating effect of corporate ownership on the relationship between ownership concentration and performance

8 6 4 2 0 0

20

40

60

80

100

Ownership concentration Managerial ownership Low (5%)

2.11

Medium (50%)

High (90%)

Discussion

The findings support the hypotheses H1, H2 and H3. As expected, we found that ownership concentration has an inverted U-shaped relationship with performance, which extends previous research findings (McConnell and Servaes 1990; Thomsen and Pedersen 2000; Arosa et al. 2010) but also suggests that the hypothesis H1 holds for privately-held firms with multiple owners in post-socialist European countries (Balsmeier and Czarnitzki 2015). Some of the past studies also suggest that the existence of a curvilinear effect may occur during the transition period (Makhija and Spiro 2000; Damijan et al. 2004). Consistently with prior findings, we suggest that

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

25

when ownership concentration increases, agency costs are reduced due to the alignment of interests of owners and managers, but at a certain point, performance starts decreasing. According to our results for Czech, Polish and Slovak privatelyheld firms, this point is about 52.5% of ownership in the hands of the largest owner. Since controlling interest is achieved with more than 50% ownership, our results suggest that companies with controlling owner are less profitable. Our findings are similar to those of Balsmeier and Czarnitzki (2015) who suggest that this turning point is about 47% of ownership in privately-held companies. The results can be explained by the presence of the principal–principal conflict. For higher ownership concentration, controlling owners tend to exploit private benefits. By contrast, some authors found the turning point to be at significantly lower ownership concentrations; for instance, Džanić (2012) reported the turning point to occur at 30% for Croatian listed firms. The differences can be explained by country specifics, as well as the fact that the relationship is different in listed and privately-held firms. According to our results, it also seems that ownership concentration is not the only predictor of performance; other factors, including corporate ownership, and the overlap of ownership and management, act as moderators of this relationship. Firms with a low level of corporate ownership will perform better when ownership concentration is low. Several reasons could explain this idea. The positive benefits of low corporate ownership can overcome the negative effects of agency costs associated with low ownership concentration. First, when a corporate owner holds only a minor part of shares, the strategic-alignment effect (adverse cooperation of managers and corporate owners, see Pound 1988) could be mitigated. Also, a corporate owner holding only a minor part of shares can be likely to have a less important business relationship with the firm; this would reduce the adverse conflictof-interest effect (Pound 1988). Taking into account that, according to our results, financial performance improves as long as there is no controlling owner, we can assume that the presence of multiple corporate owners will improve cooperation in terms of relational governance, which will improve monitoring and hence company performance. Conversely, firms with a higher level of corporate ownership will perform better if ownership concentration is high. If a company is owned by a dominant shareholder (such as parent company), the adverse conflict-of-interest and strategicalignment effects may exist, but the positive benefits of high ownership concentration could result in better performance. Our results indicate that the company can receive financial and non-financial support in the form of facilitated knowledge transfer or access to markets from the parent company. The results are consistent with those of Hanousek et al. (2007) who found that corporate ownership had a positive effect on performance of Czech firms in case of concentrated ownership structure. When there is a low overlap of ownership and management, firms will perform better if ownership is concentrated in the hands of a few owners. This result can be interpreted as evidence of principal–agent conflict between shareholders and managers. Due to the low level of managerial ownership, there is a lack of managers’ and owners’ interest alignment and it is necessary to assure that managers’ actions are

26

A. Kubíček and O. Machek

monitored in order to prevent conflicts of interest. Since these controlling activities are associated with agency costs, shareholders with small equity stakes may not have incentives to monitor the actions of the corporate management. On the other hand, a greater ownership concentration, i.e. concentration of shares in hands of one or several dominant owners, can improve monitoring and incentive alignment, thus improving performance. When managerial ownership is high (owners strongly participate in management), firms will perform better if ownership concentration is low. In other words, when insider ownership is high, the presence of a larger number of owners is preferable. This could be explained by the “entrenchment effect”, that assumes that managers owning a large part of shares tend to carry out non-value-maximizing activities, as the monitoring by shareholders is more complicated (Shleifer and Vishny 1989). Entrenchment has also been observed in transition economies (Filatotchev et al. 1999) and emerging economies (Ng 2005; Cheng et al. 2012). Our result suggests that managerial ownership serves as a substitute in mitigating the principal–agent conflict up to a certain point. However, in companies with highly concentrated ownership we observe that controlling shareholders value the possibility of running a business themselves (representing one of private benefits) over better financial performance. Therefore, the presence of blockholders can reduce the entrenchment effect, which has a positive effect on performance.

2.12

Conclusion

The relationship between ownership concentration and performance has been a subject of many studies. However, it turns out that there are also moderating factors that significantly affect the nature of such a relationship. In particular, we focused on the role of corporate ownership and managerial ownership. When a large part of shares is held by corporate owners, firms will perform better if ownership concentration is high, and when owners strongly participate in management, firms will perform better if ownership concentration is low. Besides considering the moderating effect of managerial and corporate ownership on the relationship between ownership concentration and performance, this chapter contributes to the existing literature in multiple ways. First, while most research has been devoted to publicly traded firms, we focus specifically on privately-held firms with multiple owners. These companies represent the vast majority in most economies in the world, but so far, they have not been given adequate attention. Second, we use random sampling to select firms, as opposed to most past studies focused on the relationship between corporate governance and performance. Third, we analyze post-socialist Central European countries, where the literature has been rather silent so far, except for the post-privatization period in the 1990s. However, this research also has limitations. We include only three countries in the sample: the Czech Republic, Slovakia, and Poland, and carry out only a quantitative analysis. Moreover, we don’t control for potential endogeneity of ownership

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

27

structure which would imply reverse causality. In other words, ownership structure may reflect decisions of shareholders and capital market and these decisions shape ownership structure based on company performance and share price (Demsetz and Villalonga 2001). The rare studies which controlled for endogeneity tend to suggest a positive relationship between ownership concentration and performance (CabezaGarcía and Gómez-Ansón 2011). However, this issue is most relevant in countries with liquid stock markets, where shareholders can freely trade and adjust their ownership stakes based on company share price. This limitation is thus marginal for our chapter, since we deal with the relationship between ownership concertation and performance in privately-held companies (Hall and Jörgensen 2012). Our findings suggest that companies in the hands of controlling owners perform worse than firms where the largest owner holds a non-controlling interest. Future research should be concerned not only with the influence of the largest owner, but especially with other owners, including relationships among them, since they are a social group of people who are aware of, interact with, and influence each other (Uhlaner 2008). By viewing multiple owners as a social group, researchers can consider the psychological aspects of ownership and performance.

References Aiken, L. S., & West, S. G. (1991). Multiple regression: Testing and interpreting interactions. Newbury Park, CA: Sage. Almeida, H. V., & Wolfenzon, D. (2006). A theory of pyramidal ownership and family business groups. The Journal of Finance, 61(6), 2637–2680. Arosa, B., Iturralde, T., & Maseda, A. (2010). Ownership structure and firm performance in non-listed firms: Evidence from Spain. Journal of Family Business Strategy, 1(2), 88–96. Balsmeier, B., & Czarnitzki, D. (2015). Ownership concentration, institutional development and firm performance in Central and Eastern Europe. Managerial and Decision Economics, 38(2), 178–192. Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182. Bedo, Z., & Ács, B. (2007). The impact of ownership concentration, and identity on company performance in the US and in Central and Eastern Europe. Baltic Journal of Management, 2(2), 125–139. Bena, J., & Hanousek, J. (2008). Rent extraction by large shareholders: Evidence using dividend policy in the Czech Republic. Czech Journal of Economics and Finance, 58(3–4), 106–130. Berle, A., & Means, G. (1932). The modern corporate and private property. New York, NY: McMillan. Boubakri, N., Cosset, J. C., & Guedhami, O. (2005). Postprivatization corporate governance: The role of ownership structure and investor protection. Journal of Financial Economics, 76(2), 369–399. Burkart, M., Gromb, D., & Panunzi, F. (1997). Large shareholders, monitoring, and the value of the firm. The Quarterly Journal of Economics, 693–728. Cabeza-García, L., & Gómez-Ansón, S. (2011). Post-privatisation ownership concentration: Determinants and influence on firm efficiency. Journal of Comparative Economics, 39(3), 412–430.

28

A. Kubíček and O. Machek

Caixe, D. F., & Krauter, E. (2013). The influence of the ownership and control structure on corporate market value in Brazil. Revista Contabilidade & Finanças, 24(62), 142–153. Částek, O. (2013). The effect of ownership structure on corporate financial performance in the Czech Republic. In Proceedings of the European conference on management, leadership & governance (p. 7). Che, L., & Zhang, P. (2017). The impact of family CEO’s ownership and the moderating effect of the second largest owner in private family firms. Journal of Management & Governance, 21(3), 757–784. Chen, M.-Y. (2006). Managerial ownership and firm performance: An analysis using switching simultaneous-equation models. Applied Economics, 38, 161–181. Cheng, P., Su, L. N., & Zhu, X. K. (2012). Managerial ownership, board monitoring and firm performance in a family-concentrated corporate environment. Accounting & Finance, 52(4), 1061–1081. Cho, M. H. (1998). Ownership structure, investment, and the corporate value: An empirical analysis. Journal of Financial Economics, 47(1), 103–121. Claessens, S., & Djankov, S. (1999). Ownership concentration and corporate performance in the Czech Republic. Journal of Comparative Economics, 27(3), 498–513. Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging Markets Review, 15, 1–33. Damijan, J., Gregoric, A., & Prasnikar, J. (2004). Ownership concentration and firm performance in Slovenia. LICOS Centre for Transition Economics, Discussion paper 142/2004. Deming, D., & Kahn, L. B. (2018). Skill requirements across firms and labor markets: Evidence from job postings for professionals. Journal of Labor Economics, 36(1), 337–369. Demsetz, H. (1983). Structure of ownership and the theory of the firm. Journal of Law and Economics, 26(2), 375–390. Demsetz, H., & Villalonga, B. (2001). Ownership structure and corporate performance. Journal of Corporate Finance, 7(3), 209–233. Denis, D. J., Denis, D. K., & Sarin, A. (1997). Ownership structure and top executive turnover. Journal of Financial Economics, 45(2), 193–221. Djankov, S., & Hoekman, B. (2000). Foreign investment and productivity growth in Czech enterprises. The World Bank Economic Review, 14(1), 49–64. Džanić, A. (2012). Concentration of ownership and corporate performance: Evidence from the Zagreb stock exchange. Financial Theory and Practice, 36(1), 29–52. Earle, J. S., Kucsera, C., & Telegdy, Á. (2005). Ownership concentration and corporate performance on the Budapest stock exchange: Do too many cooks spoil the goulash? Corporate Governance: An International Review, 13(2), 254–264. Enqvist, J. (2005). Managerial ownership, controlling shareholders and firm performance. University dissertation from Göteborg University. Filatotchev, I., Wright, M., & Bleaney, M. (1999). Privatization, insider control and managerial entrenchment in Russia. The Economics of Transition, 7(2), 481–504. Filatotchev, I., Isachenkova, N., & Mickiewicz, T. (2007). Ownership structure and investment finance in transition economies a survey of evidence from large firms in Hungary and Poland. The Economics of Transition, 15(3), 433–460. GEM. (2002). Global entrepreneurship monitor, 2002 executive report [online]. Retrieved February 27, 2016, from http://www.esbri.se/gemglobalreport_2002.pdf Ghemawat, P., & Khanna, T. (1998). The nature of diversified business groups: A research design and two case studies. The Journal of Industrial Economics, 46(1), 35–61. Goel, R. K., & Nelson, M. A. (1998). Corruption and government size: A disaggregated analysis. Public Choice, 97(1–2), 107–120. Golden, T. D., & Veiga, J. F. (2005). The impact of extent of telecommuting on job satisfaction: Resolving inconsistent findings. Journal of Management, 31(2), 301–318. Gregoric, A., & Vespro, C. (2009). Block trades and the benefits of control in Slovenia. The Economics of Transition, 17(1), 175–210.

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

29

Grosfeld, I., & Hashi, I. (2007). Changes in ownership concentration in mass privatised firms: Evidence from Poland and the Czech Republic. Corporate Governance: An International Review, 15(4), 520–534. Gugler, K., Mueller, D. C., & Yurtoglu, B. B. (2008). Insider ownership, ownership concentration and investment performance: An international comparison. Journal of Corporate Finance, 14 (5), 688–705. Hall, T. W., & Jörgensen, F. (2012). Ownership and performance in Europe. Forthcoming, Review of Business. Available at SSRN 2165948. Hamadi, M., & Heinen, A. (2015). Firm performance when ownership is very concentrated: Evidence from a semiparametric panel. Journal of Empirical Finance, 34, 172–194. Hanousek, J., Kočenda, E., & Svejnar, J. (2007). Origin and concentration. The Economics of Transition, 15(1), 1–31. Heugens, P. P., Van Essen, M., & van Oosterhout, J. H. (2009). Meta-analyzing ownership concentration and firm performance in Asia: Towards a more fine-grained understanding. Asia Pacific Journal of Management, 26(3), 481–512. Iwasaki, I., & Kočenda, E. (2017). Are some owners better than others in Czech privatized firms? Even meta-analysis can’t make us perfectly sure. Economic Systems, 41(4), 537–568. Iwasaki, I., & Mizobata, S. (2018). Post-privatization ownership and firm performance: A large meta-analysis of the transition literature. Annals of Public and Cooperative Economics, 89(2), 263–322. Iwasaki, I., & Mizobata, S. (2019). Ownership concentration and firm performance in European emerging economies: A meta-analysis. Emerging Markets Finance and Trade, 1–36. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics, 11(1), 5–50. Kalezić, Z. (2015). Ownership concentration and firm performance in transition economies: Evidence from Montenegro. Journal of Central Banking Theory and Practice, 4(3), 5–64. Kester, W. C. (1992). Industrial groups as systems of contractual governance. Oxford Review of Economic Policy, 8(3), 24–44. Klapper, L. F., & Love, I. (2004). Corporate governance, investor protection, and performance in emerging markets. Journal of Corporate Finance, 10(5), 703–728. Konečný, L., & Částek, L. (2016). The effect of ownership structure on corporate financial performance in the Czech Republic. Ekonomický časopis, 64(5), 477–498. Krivogorsky, V., & Burton, F. G. (2012). Dominant owners and performance of continental European firms. Journal of International Accounting Research, 11(1), 191–221. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131–1150. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58(1), 3–27. Li, H., & Zou, H. F. (1998). Income inequality is not harmful for growth: Theory and evidence. Review of Development Economics, 2(3), 318–334. Machek, O. (2017). Employee compensation and job security in family firms: Evidence from the Czech Republic. Journal of East European Management Studies, 22(3), 362–373. Machek, O., Brabec, M., & Hnilica, J. (2013). Measuring performance gaps between family and non-family businesses: A meta-analysis of existing evidence. International Academic Research Journal of Business and Management, 2(3), 17–30. Makhija, A. K., & Spiro, M. (2000). Ownership structure as a determinant of firm value: Evidence from newly privatized Czech firms. Financial Review, 35(3), 1–32. McConnell, J. J., & Servaes, H. (1990). Additional evidence on equity ownership and corporate value. Journal of Financial Economics, 27(2), 595–612. Morck, R., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293–315.

30

A. Kubíček and O. Machek

Morck, R., Wolfenzon, D., & Yeung, B. (2004). Corporate governance, economic entrenchment and growth (No. w10692). National Bureau of Economic Research. Ng, C. Y. (2005). An empirical study on the relationship between ownership and performance in a family-based corporate environment. Journal of Accounting, Auditing Finance, 20(2), 121–146. Nowak, O., & Kubicek, A. (2012). Corporate governance and company performance: Evidence from the Czech Republic. In Advances in economics, risk management, political law science (pp. 235–240). Pedersen, T., & Thomsen, S. (2003). Ownership structure and value of the largest European firms: The importance of owner identity. Journal of Management and Governance, 7(1), 27–55. Pedhazur, E. (1982). Multiple regression in behavioral research. Fort Worth, TX: Holt, Rinehart Winston. Pivovarsky, A. (2003). Ownership concentration and performance in Ukraine’s privatized enterprises. IMF Staff Papers, 10–42. Pound, J. (1988). Proxy contests and the efficiency of shareholder oversight. Journal of Financial Economics, 20, 237–265. Sánchez-Ballesta, J. P., & García-Meca, E. (2007). A meta-analytic vision of the effect of ownership structure on firm performance. Corporate Governance: An International Review, 15(5), 879–892. Sauerwald, S., & Peng, M. W. (2013). Informal institutions, shareholder coalitions, and principal– principal conflicts. Asia Pacific Journal of Management, 30(3), 853–870. Shleifer, A., & Vishny, R. W. (1989). Management entrenchment: The case of manager-specific investments. Journal of Financial Economics, 25(1), 123–139. Short, H., & Keasey, K. (1999). Managerial ownership and the performance of firms: Evidence from the UK. Journal of Corporate Finance, 5(1), 79–101. Thomsen, S., & Pedersen, T. (2000). Ownership structure and economic performance in the largest European companies. Strategic Management Journal, 21(6), 689–705. Thomsen, S., Pedersen, T., & Kvist, H. K. (2006). Blockholder ownership: Effects on firm value in market and control-based governance systems. Journal of Corporate Finance, 12(2), 246–269. Tsionas, M. G., Merikas, A. G., & Merika, A. A. (2012). Concentrated ownership and corporate performance revisited: The case of shipping. Transportation Research Part E: Logistics and Transportation Review, 48(4), 843–852. Uhlaner, L. M. (2008). The role of ownership in governance: A neglected focus in entrepreneurship and management research. Breukelen: Nyenrode business universiteit. Wang, K., & Shailer, G. (2015). Ownership concentration and firm performance in emerging markets: A meta-analysis. Journal of Economic Surveys, 29(2), 199–229. Xie, J. L., & Johns, G. (1995). Job scope and stress: Can job scope be too high? Academy of Management Journal, 38(5), 1288–1309. Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1), 196–220.

Aleš Kubíček, Ph.D. is assistant professor of strategy at University of Economics, Prague in the Department of Strategy and a member of the UOE Center for Family Businesses. He has studied at the University of Economics, Prague and Charles University in Prague. Aleš is a member of Family Firm Institute and holds an Advanced Certificate in Family Business Advising (ACFBA). His main research interests lie in the area of family business, corporate governance and strategic management. Ondřej Machek, Ph.D. is an associate professor at the University of Economics, Prague. His main research interests include family businesses, agricultural economics and measurement of productive efficiency of businesses, industries and public services. He is the former director of Research Support Center at the Faculty of Business Administration of the University of Economics, Prague and the former editor-in-chief of Central European Business Review. Ondřej Machek is also

2

Ownership Concentration and Performance of Privately-Held Firms with Multiple. . .

31

member and co-founder of the Center for Family Businesses at the University of Economics, Prague. He is serving as an ad-hoc reviewer in leading international management journals and academic conferences.

Chapter 3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools in the Opaque Russian Market Andrei B. Ankudinov

3.1

Introduction

In an opaque and informationally inefficient Russian financial market there are very few viable mechanisms of attracting investments. Against the backdrop of stagnating economy and sanctions regime it is the shareholder value creation that can act as the major driver of mobilizing long-term funds of resident savers. However, the rights of investors, especially the minority shareholders and bondholders have to be properly protected. On the other hand, in emerging markets the proper level of investor protection provided by good corporate governance is often counterbalanced by rather low level of actual profitability. The latter, in turn, is the major driver of value creation in opaque markets, characterized by rather short investment horizons. Besides, not all risks can be controlled by high standards of corporate governance; the risk of politically motivated court rulings being an example. Consequently, a thorough empirical investigation has to be carried out of relation between both general standards and specific components of corporate governance and financial efficiency as measured by shareholder value creation in emerging markets. Up until now the accumulated empirical evidence in this respect is rather incomplete and sometimes controversial.

A. B. Ankudinov (*) Kazan Federal University, Kazan, Russia e-mail: [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_3

33

34

3.2

A. B. Ankudinov

Relevant Literature Review

In recent decades a voluminous body of literature has developed on the relation between the quality of corporate governance and firms’ financial efficiency. Even a short survey of actual publications goes well beyond the possible volume of the chapter. However, the bulk of relevant publications deal with complete financial markets. When it comes to the emerging markets, the relevant studies are somewhat fewer and in many cases address some specific features of intra-corporate relations. Among the most recent examples one can cite a study carried out for the Turkish market (Ciftci et al. 2019) which emphasizes the influence of ownership concentration on firms’ performance as measured by market-based and accounting-based financial indicators. Enikolopov et al. (2014) examine how a crisis affects the relationship between transparency and firm value, and show that the decline in companies’ valuation during the financial crisis of 2007–2009 was more sensitive to firm-level transparency in countries with stronger investor protection. Connelly et al. (2017) reveal the moderating effect of financial and economic development on the relation between corporate governance and firm value in Vietnam. The results show a positive relation between corporate governance and firm value in Ho Chi Minh City but not in Hanoi. The findings suggest that financial and economic development play critical roles in enhancing the benefits of corporate governance in emerging economies. Among the most important in the context of this research are the results of Ararat et al. (2017) who assess whether firm-level governance predicts Tobin’s q and profitability, using panel data and building Turkey Corporate Governance Index (TCGI). They show that TCGI predicts higher Tobin’s q with the disclosure being the principal subindex driving these results. As for emerging economies in general, no wonder that Brazil and India are among the leaders by the number of governance-to-efficiency empirical studies, due to size and market history of their economies (Black et al. 2012; Braga-Alves and Shastri 2011; Leal and Carvalhal da Silva 2007; Balasubramanian et al. 2010; Sarkar et al. 2012; Saravanan 2012; Black and Khanna 2007). Empirical results obtained for Brazilian market generally follow the trend: for companies listed on São Paulo Stock Exchange that voluntarily commit to “good practices of corporate governance” higher scores are positively related to their market value but not to better operating performance (Braga-Alves and Shastri 2011). Black et al. (2012) argue that country characteristics strongly influence both which aspects of governance predict firm market value, and at which firms that association is found. Their constructed corporate governance index as well as subindices for ownership structure, board procedure, and minority shareholder rights, predicts higher lagged Tobin’s q. In contrast to other studies, greater board independence predicts lower Tobin’s q. According to their findings firm characteristics also matter: governance predicts market value for nonmanufacturing (but not manufacturing) firms, small (but not large) firms, and high-growth (but not low-growth) firms.

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

35

Balasubramanian et al. (2010) calculate a detailed India Corporate Governance Index (ICGI) and use an impressive set of non-governance variables for 296 private Indian firms. They find a positive and statistically significant association between ICGI and firm market value in India. At the same time they find no statistically significant relation between improved disclosure and firm value. Saravanan (2012) study the relation between corporate governance (as proxied by the number of board members and percentage of nonexecutive directors) and firm value for 1732 manufacturing companies in India for the period of 2001–2010. The dependent variable is Tobin’s q proxied by Market-to-book ratio. Positive relationship is revealed between the number of board members and firm value both for industrial and nonindustrial companies. As one can see, mainland China is notably absent from the empirical literature on governance-to-value (see the above reference to comparison between Ho Chi Minh City and Hanoi). However, Hong Kong presents ample evidence (Cheung et al. 2007, 2011; Lei and Song 2012). Cheung et al. (2007, 2011) argue that good corporate governance practices do matter in Hong Kong and the firms that exhibit improvements in the quality of corporate governance display a subsequent increase in market valuation, whereas firms that exhibit deterioration in the quality of corporate governance practices tend to encounter a decline in market valuation. They find positive and statistically significant relation between the performance measures and a corporate governance index, the empirical results being robust whether Market-to-book ratio or Return on equity is used as the performance indicator. Lei and Song (2012) emphasize the role of board structure in market valuation. The market-oriented part of Korean peninsula also offers strong evidence in favor of positive relation between corporate governance index and market value (Tobin’s q, Market-to-book ratio, Market-to-sales ratio) of the companies with board independence being a significant factor (Black et al. 2006a, 2009; Black and Kim 2012). Black et al. (2015) address not only the question Whether, but Why and How does good corporate governance increase the market value of Korean firms, and for Which firms? They single out the problem of tunnelling and related parties transactions (RPT) as the major culprits and suggest that good governance reduce cashflow tunneling and moderates the negative effect of RPTs on firm’s value. Even taking into account rather specific nature of Korean corporate capitalism, the findings are relevant for other emerging markets with weak investor protection and concentrated ownership. Finally, staying with the Korean market, Black et al. (2009) provide some evidence that better disclosure predicts higher firm value which is consistent with earlier results of Black et al. (2006b) for Russia and Cheung et al. (2007) for Hong Kong. The Thai market, dominated by family firms, was analyzed by Limpaphayom and Connelly (2004), Kouwenberg (2006), Connelly et al. (2012). Once again the general tendency of positive relation between the quality of corporate governance practices and firm value is confirmed. In the latter study special corporate governance index is developed appropriate to the Thai context.

36

A. B. Ankudinov

An accounting-based indicator—return on assets (ROA)—is used by Duc and Phan (2012) who carried out an empirical study of relation between the quality of corporate governance and operating efficiency of Vietnamese companies. Alongside standard contributors to corporate governance quality ratings like the number of board members, overlapping positions of board chairperson and senior executives, education level and working experience of the board members, the number of independent directors, etc., the authors use gender balance in corporate boards. The latter indicator is not that common in board efficiency analysis in emerging market economies. Other components of corporate governance with positive impact on economic efficiency being rather traditional, the authors somewhat unexpectedly reveal a positive relation between ROA and the number of female board members (once again not common for emerging markets—see, for example, Abdullah et al. (2016)). Sarkar et al. (2012) investigate the relation between ROA and the number of nonexecutive board members, ownership concentration, percentage of institutional investors, overlapping positions of board chairperson and senior executives and some other variables for 39 companies listed on the Kingdom of Bahrain stock exchange. The study reveals negative effect of both overlapping executive and board chairman positions and the number of nonexecutive board members on ROA. Al-Haddad et al. (2011) reveal positive relation between the quality of corporate governance and financial efficiency as measured by Market-to-book and Priceearnings ratios for Jordanian industrial companies. Improved corporate governance is also proved to be positively related to return on assets, liquidity and size of companies. Summing up the existing empirical studies covering the emerging markets one can observe that better corporate governance generally benefit firms financially through greater access to funds, lower cost of capital and better performance (see, for example, a survey by Claessens and Yurtoglu (2013)). However, the statistical analyses are often complicated by the need to develop corporate governance indices tailored specifically for particular corporate cultures and business practices. Different institutional settings, informal relations between nominally independent parties, cosy relations with the state, etc. make the operationalization of the dependent variable a rather challenging task. As for the Russian Federation, the problems common to other emerging markets are complicated here by an unwelcome legacy of long period of planned economy and very weak legal system. However, positive influence of good corporate governance was empirically confirmed in a number of studies, including that of Black (2001), Black et al. (2006b), Kuznecovs and Pal (2012). While the first paper on the basis of rather basic statistical methodology simply establishes that Russian firms characterized by poor corporate governance are grossly undervalued, the second one relies on panel data and fixed effects modeling. However, Kuznecovs and Pal (2012) argue that introduction of corporate governance codes in Russia had only limited success to improve indices of firm performance due to predatory behavior of the central and local governments. The list of empirical studies of corporate governance financial efficiency carried out for Russia is generally longer, but we confined our short review to observable

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

37

indicators of financial performance, consciously omitting the studies based on such dependent variables as economic value added, required return calculated using the CAPM model, etc. It should be also noted that in many cases empirical studies carried out for Russia and emerging markets in general rely on rather small samples, employ rather basic statistical methodology (the author of the chapter could not escape both the shortcomings) and their results are frequently published in so-called “grey literature”. It does not necessarily mean that the results are unreliable; however, they should be treated with additional caution. Besides, the Russian situation is somewhat similar to that of Thailand where on the surface, good governance practices appear to be in place but the effectiveness of these practices can be for family firms blunted (Connelly et al. 2012). The cited reasons—extra-contractual arrangements that often exist between families and board members. In the Russian companies (with the notable exception of those belonging to national minorities groups) it is not family but other kinds of ties—for example, former employment in law enforcement agencies, komsomol, etc., that can bind together formally independent sides in business and corporate relations. While Kuznecovs and Pal (2012) argued that the success of corporate governance reform (with the focus on transparency and disclosure) would, in addition, depend on whether the reforms may initiate further conflict, e.g., that between the state and the controlling owners, the anecdotal evidence suggests that the majority of Russian companies have opted (or were forced to) for cooperation and even some kind of cosy relations with the most powerful of corporate stakeholders—the state. Finally, it is the problem of causality which can be particularly acute in the opaque markets and thereby should be specially addressed. Since the regressions reflect correlation but not causality, it is not always clear whether it is the higher corporate governance index or more narrowly better disclosure that lead to the higher share price, or vice versa, the affluent businesses can afford expensive window dressing and bask in the glory of responsible behavior. A number of empirical studies do address the issue—see, for example, Ararat et al. (2017), Balasubramanian et al. (2010), Black et al. (2006a), performing “causality” tests or just discussing their endogeneity or reverse causation concerns. Anyway, the “available funding” theory should be always kept in mind while discussing the emerging markets data.

3.3

Corporate Transparency and Financial Performance of Russian Companies

For the purpose of empirical analysis of corporate governance quality we suggest a corporate transparency rating (disclosure score) tailored specifically for the Russian market. While the corporate transparency by no means covers the full scope of corporate governance concept, it is an integral part and an important characteristic of corporate governance quality due to its role in controlling information asymmetry

38

A. B. Ankudinov

and conflicts of interests thus contributing to investor protection. Accordingly, the suggested rating is by no means the first in this field, the most well-known being the Standard and Poor’s transparency rating. However, due to problems with obtaining from the existing databases the required for empirical analysis data for the selected sample of Russian companies, the painstaking work on creating our proprietary rating had to be carried out. According to the G20/OECD Principles of Corporate Governance “The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company” (OECD 2015). While in the process of working at the rating, we tried to follow the aforementioned authoritative document as closely as it was possible under the conditions of an opaque market. In the following part of this section we concentrate on developing relevant hypotheses. The straightforward logic tells us that better corporate transparency should increase the firm value because it lowers the investors’ worries about tunneling by insiders. However, the “opacity” of the emerging markets is not confined only to non-transparency and poor disclosure on the part of insiders; the outsiders themselves in many cases are poorly equipped with analytical tools and unwilling to make necessary efforts to obtain relevant information. In this case it would be hard to expect any statistically significant dependence between transparency and firm value. Finally, as Kuznecovs and Pal (2012) do point out, increased transparency make businesses easy targets for aggressive tax enforcement policy by the central government while the decentralized local governments may increase the bribe price to protect businesses from high central taxes. However questionable is this logic, it is hard to deny the tendency of many Russian businesses to conceal their actual financial performance not least because of the fear of losing their assets. Nevertheless, the straightforward approach prevailed and the following hypothesis has been developed: H1. Corporate transparency is positively related to firm value. For the opaque market the relationship is assumed to be linear while for the developed markets one might expect some kind of a nonlinear dependence due to potential existence of certain “optimal” degree of transparency. Exceeding this optimal level could mean decline in market valuation due to unwelcome revelations. In opaque markets the outsiders simply cannot see that far as to identify the optimal level of corporate transparency. H2–4. The number of board members, the number of independent directors and the presence of foreign shareholder are all positively related to firm value. A number of other hypotheses were tested in the course of statistical analysis; however they do not pertain to the key problem under consideration. The firm value was measured by Market-to-book ratio. Alongside the disclosure score a number of other independent variables were introduced including the number of board members, the number of independent directors, state ownership, strategic

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

39

foreign shareholder, financial leverage, company age as well as time and sector of economy dummy variables. The transparency index (disclosure score) was developed from analysis of the publicly available information from corporate sites, annual reports, financial and social policy statements, sustainable development reports as well as other sources containing relevant data. Thirty-nine possible attributes were divided into the following categories: general information about the company, corporate strategy, corporate governance, financial information disclosure, corporate risk management, corporate social policy and investment activities. All attributes were assigned equal weights (a number of earlier studies—Coombs and Tayib 1998; Firth 1979—indicate that the both weighted and unweighted scores produce generally the same results). In cases of formal presentation of data without substance (not infrequent in an opaque market) we had to make a judgment. Detailed description of the questionnaire is omitted for the sake of brevity; it can be provided upon request. The aggregate transparency index Dscore (disclosure score) was calculated using simple formula: Dscore ¼

X

dj ,

ð3:1Þ

j¼1

where dj ¼ 1, if information is disclosed, dj ¼ 0—otherwise. Alongside the disclosure score, two other independent variables related to corporate governance quality were introduced into the model—the number of board members and the number of independent directors. A number of control variables were also included into the model, accounting for state ownership, foreign ownership, capital structure and company age; operating efficiency was accounted for by introducing sectoral dummies. Time dummies were also introduced (two major financial crises fall on the period under consideration). Sectoral makeup of companies under consideration was as follows: electric power generation—25%, coal mining and metallurgy—15%, machinery manufacturing—12%, oil and natural gas industry—9%, telecommunications—8%, chemical and petrochemical industry—6%, food industry—6%, construction and real estate management—5%, transport—3%, retail—3%, other—8%. The sample comprised data covering 2009–2015 period for 250 largest companies representing the non-financial sector of the national economy. During this period the average disclosure score had gone up from 17 to over 25 while the maximum transparency index amounted to 37. The more detailed data for empirical sections of the chapter can be provided upon request. Besides, it should be noted that two variables related to corporate governance demonstrated little variation through the whole period under consideration: the average number of board members was nine with four independent directors. The descriptive statistics and formulas for the variables are presented in Table 3.1. The following multivariate regression equation was used to test the hypotheses.

40

A. B. Ankudinov

Table 3.1 Descriptive statistics, 2009–2015 Variable Market-to-book ratio Age Disclosure score (Dscore) Independent director (IndDir) Leverage (Lev) Foreign shareholder (ForS) State ownership (Gov) Number of board members (Dir)

Std. dev. 1.18 5.77

Mean 1.40 15.96

Min 0.11 1

Max 5.77 24

8.55

21.03

0

37

Number of independent board members

2.88

4.40

0

7

Debt to equity relation Presence of major foreign shareholder (1—yes; 0—no) Equals 1 if the state is a shareholder; 0—otherwise Total number of board members

1.35 0.50

1.18 0.53

0 0

8.89 1

0.50

0.47

0

1

2.55

8.95

0

16

Description Market capitalization/equity Number of years since the company’s official registration Aggregate transparency score

Market‐to‐book ratio ¼ α þ β1 Dscore þ β2 Age þ β3 IndDir þ β4 Lev þ β5 ForS þ β6 Gov þ β7 Dir þ p1 D Industry þ p2 D time þ ε, where: D_time—time dummy; D_Industry—sectoral dummy; ε—random error. The unbalanced panel data was analyzed using fixed effects model which was proved to be the most appropriate technique for the sample. Missing values is an inherent problem of large sets of panel data. However, estimates can still be consistent if missing data is of random character, which means that the probability of non-availability is independent of the value of missing variables. The regression analysis results are presented in Tables 3.2 and 3.3. The Hausman test (Prob. ¼ 0.0041) shows that the revealed effects are strongly correlated with the regressors. Consequently the fixed effects model is most appropriate for the analysis of the data under consideration. Table 3.4 contains the results of fixed effects model analysis. The results of statistical analysis support the first hypothesis of positive relation between transparency and firm value of Russian companies with 10% significance using single-sided t-criterion. Financial leverage has strong positive impact on firm value (most recent results for Russian companies have reversed this relation) while the presence of foreign shareholder produces no statistically significant effect. Both the number of board members and the number of independent directors have failed to demonstrate positive influence on firm value. However, while the number of independent directors is statistically irrelevant (which fits well with the largely decoratory role of boards in many Russian companies—see, for example, the KPMG report on corporate governance practice in Russia 2011), the number of board members is negatively related to firm valuation. The latter result contradicts the findings of Saravanan (2012) for Indian companies. However, the negative

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

41

Table 3.2 Random effects model Variable Transparency score Age Independent director Leverage Foreign ownership State ownership Number board members Sectoral dummies Time dummies Wald chi2 R2 (within) R2 (between) R2 (overall) Const

Market-to-book ratio Coeff. t-Stat. 0.01 1.66* 0.02 1.32 0.01 0.60 0.29 9.01*** 0.04 0.38 –0.23 –2.11** –0.06 –2.41** – + 182.11 0.27 0.12 0.17 0.90 3.04

Market-to-book ratio Coeff. t-Stat. 0.01 1.67* 0.01 0.96 0.01 0.65 0.29 8.88*** 0.06 0.62 –0.18 –1.59* –0.05 –2.23** + + 187.98 0.27 0.14 0.19 1.05 2.49

Henceforthe: *—significance at 10% level; **—significance at 5% level; ***—significance at 1% level (***p < 0.01, **p < 0.05, *p < 0.10) Table 3.3 Fixed effects model Variable Transparency score Age Independent director Leverage Foreign ownership State ownership Number board members Sectoral dummies Time dummies F (10,402) R2 (within) R2 (between) R2 (overall) Rho Corr (ui, Xit) Const.

Market-to-book ratio Coeff. 0.17 0.29 0.05 0.32 –0.19 0.01 –0.05 – + 50.85 0.31 0.02 0.02 0.90 –0.84 –3.21

t-Stat. 1.6* 15.7*** 0.65 5.81*** –1.8* 0.03 –1.44*

–7.36

relation between firm financial performance and the number of board members was confirmed by Duc and Phan (2012) for Vietnamese companies.

42

A. B. Ankudinov

Table 3.4 Fixed effects modelling results Hypotheses H1 Corporate transparency level

+

H2 Number of board members

+

H3 Number of independent board members H4 Foreign ownership

+

H5 State ownership

-

H6 Company age

+

H7 Capital structure (financial leverage)

+

+

As value driver As value driver As value driver As value driver As value driver As value driver As value driver

Results Not rejected (p < 0.1) Rejected (p < 0.1) Rejected Rejected (p < 0.1) Rejected Not rejected (p < 0.01) Not rejected (p < 0.01)

Staying with the transparency-value analysis for Russian companies, the obtained results are consistent with earlier findings by Black et al. (2006b). Black et al. (2009) also provide some evidence that better disclosure predicts higher firm value for Korean companies as do Cheung et al. (2007) for Hong Kong. However, Balasubramanian et al. (2010) find no statistically significant relation between improved disclosure and firm value for Indian companies. Aljifri (2008) for United Arab Emirates and Alsaeed (2006) for Saudi Arabia fail to establish any relation between the transparency and value of companies. Summing up the results of transparency-value empirical analysis for emerging markets in general, the positive causal relation between corporate transparency and market valuation is yet to be proved unequivocally. The accumulated empirical evidence is inconclusive and the results heavily depend on transparency and disclosure metrics and employed statistical techniques. For Russia in particular the question of causality is still open. Further statistical tests have to be carried out to take into account an increasing emphasis on administrative regulation of businesses. Our results indicate, but not conclusively prove positive relation between firm value and corporate transparency. We by no means claim that improved corporate transparency would immediately attract the much needed funds of resident savers (as opposed to speculative capital). However, without consistent policy of transparency and disclosure as part of investor protection policy as a whole, there definitely will be no long-term market-based financing. The companies would be forced to rely heavily on state funding and be subject to the arbitrary allocation of funds. In the long term only proper investor protection policy, not only declared but taken for granted would persuade Russian residents to invest their savings in national companies, thereby providing much needed stability in the event of possible financial crises.

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

3.4

43

Internal Audit/Control as an Investor Protection Tool in Russia

In this section we assess the role of internal audit in shareholder value creation and investigate the determinants of existence of internal audit departments in companies’ organizational structure. The rationale for this line of research is as follows: under the conditions of external constraints and domestic business environment problems Russian businesses have to look for internal drivers of enhancing their efficiency and competitiveness as well as local sources of funding. An efficient internal audit function might become one of the most workable tools instrumental in improving financial performance and investor protection. We also argue that as it follows from empirical and anecdotal evidence for the vast majority of Russian companies the internal audit function is combined with that of internal control. According to the definition of the Institute of Internal Auditors (2017) the internal audit provides independent, objective assurance and consulting services designed to add value and improve an organization’s operations. The internal audit activity helps the organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of governance, risk management and control processes. The exact balance between the two functions—assurance and consulting—is still debated by academics and practitioners, though the majority tend to emphasize the first one. Generally, the necessity of internal audit results from separation of ownership and management (control) and the resulting agency conflict (Christopher et al. 2009). However, unlike the developed markets with disperse ownership, firms in Russia are largely characterized by concentrated (dominant) ownership and agency costs arise because resources are diverted from the minority shareholders (and nonfinancial stakeholders). The situation is similar to that in typical Asian corporations where family members tightly hold shares (Claessens and Fan 2002). As a result the agency problem shifts from the manager-shareholder conflict to majority-minority shareholder conflict (Type II agency cost). In the controlled firms there is a great potential for manager-owners to expropriate the interests of minority shareholders (Claessens and Fan 2002). The necessity for auditing controls is based on the assumption that individuals will withhold valuable information and act opportunistically in the absence of monitoring controls. This assumption may also be sensitive to the institutional and cultural setting (Ho and Hutchinson 2010). Besides, in emerging economies, like Russian or Chinese, there is a severe problem of economic crime. According to the Russian Economic Crime Survey by PricewaterhouseCoopers (2016) the internal audit service is the most effective tool in exposing different kinds of malign practices on the part of management. It should also be noted that it is the normal practice in Russia when the functions of internal audit and internal control overlap and are exercised by the same department (Ankudinov 2017). Most likely this overlapping of functions allows internal audit departments be so effective in exposing corporate fraud, with the exception of malpractices committed at the highest managerial level. However, the latter case has

44

A. B. Ankudinov

to do with the quality of corporate governance in general and the board audit committee independence and effectiveness in particular. The cases of internal audit service reporting directly to really (not formally) independent audit committee are very rare in modern corporate Russia. The empirical research performed for developed markets also generally supports the importance of effective internal audit in preventing and discovering corporate fraud (Beasley et al. 2000; KPMG Peat Marwick 1999) though some evidence is controversial (Ege 2015). Besides, the contribution of the internal audit may substitute for some substantive external auditing processes and lower monitoring costs (Ho and Hutchinson 2010). As for the operating performance, there is empirical evidence supporting positive role of internal audit (Fadzil et al. 2005; Goodwin-Stewart and Kent 2006; Feng et al. 2015; Jiang et al. 2017). However, to the best of the author’s knowledge, with the exception of a humble piece of empirical research by Ankudinov and Markhanova (2018), there have been no attempts made to carry out a statistical study of “internal audit—firm value” relation and to investigate the determinants of implementation of internal audit service in Russian companies. A total of nine hypotheses were developed; however we will consider the only one which is relevant in the context of this chapter: H1. Existence of the internal audit service in the organizational structure of a company is positively related to shareholder value creation. The suggested effect is due to lower agency costs, reduced risk perception and improved operational efficiency. Besides, the very fact of internal audit service existence might act as a positive signal for investors promising better protection of their interests and boosting the investment appeal of the firm. As above, the shareholder value creation is measured by Market-to-book ratio. First we test the relation of Market-to-book ratio and the dummy variable of existence of the internal audit service in the organizational structure of a company. It should be noted that for the purpose of empirical analysis we had to consider all the services and departments which technically perform at least some of internal audit functions irrespective of how they are named. To obtain unbiased robust estimates we had to include as independent variables a number of financial and nonfinancial indicators as well as control variables. They included return on investment (ROI), financial leverage, fixed assets growth rate, operating risk (measured by revenue variation), size (proxied by natural logarithm of revenue) and age of the company, state ownership, foreign ownership, time and sectoral dummies. Arguments supporting the choice of independent variables are straightforward and omitted for the sake of brevity. Econometric analysis of unbalanced panel data serves as a methodological basis for the investigation. The sample comprises data covering the 2005–2015 period for 125 largest publicly traded Russian companies representing non-financial sectors of economy. Sectoral makeup of companies under consideration was as follows: electric

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

45

Table 3.5 Descriptive statistics, 2005–2015 Variable Market-to-book ratio Existence of internal audit service Return on investment Financial leverage Fixed assets growth rate Operating risk Size Age State ownership Foreign ownership Sectoral effects Electric power Mining Manufacturing Transport and communications

Mean 1.12 0.67 0.10 0.31 0.11 0.38 16.6 12.93 0.33 0.28 0.40 0.23 0.18 0.09

Std. dev. 0.89 0.47 0.15 0.25 0.28 0.30 2.10 6.05 0.47 0.45 0.49 0.42 0.39 0.29

Min 0.01 0.00 –0.29 0.00 –1.00 0.05 8.61 1.00 0.00 0.00 0.00 0.00 0.00 0.00

Max 3.99 1.00 1.27 0.97 2.73 1.82 22.19 26.00 1.00 1.00 1.00 1.00 1.00 1.00

power generation and distribution—38.4%, mining—22.4%, manufacturing—19.2%, wholesale and retail trade—11.2%, transport and communications—8.8%. The sample data was obtained from the financial statements of listed Russian companies (according to Russian accounting standards). The data was characterized by endemic for the Russian market high volatility. The descriptive statistics and formulas for the variables are presented in Table 3.5. All variables are characterized by significant volatility which indicates substantial differences in financial position of national nonfinancial companies. The statistical analysis of unbalanced panel data was carried out using fixed effects and random effects models. Table 3.6 contains the estimation results of regressions with both random and fixed effects. Testing of the key hypothesis H1 of this section results in somewhat controversial findings. The random effects model fails to establish any statistically significant relation between the existence internal audit service and firm value. However, the fixed effects model reveals significant positive relation: implementation of the internal audit services results in an increase of the Market-to-book ratio by 0.32. The latter model makes it possible to account for missing or unobservable variables reflecting individual characteristics of companies. The Hausman test confirms the appropriateness of the fixed effects model. The opacity of the Russian market inevitably raises another important question: what determines the implementation of internal audit function in Russian companies? The following hypotheses have been developed (in this case we have to provide some reasoning in support of our assumptions): Н2.1: Implementation of internal audit service is negatively related to the ROI indicator.

46

A. B. Ankudinov

Table 3.6 Fixed effects and random effects regressions

Const. Existence of internal audit service Return on investment Financial leverage Fixed assets growth rate Operating risk Size Age Time dummy_1 Time dummy_2 State ownership Foreign ownership Sectoral effects Electric power Mining Manufacturing Transport and communications R2 (within) Hausman test

Fixed effects model Coeff. Р-value 0.696 0.335 0.320 0.014** 0.697 0.001*** 0.480 0.005*** 0.075 0.366 – – 0.091 0.052* –0.086 0.000*** –1.025 0.000*** –0.401 0.000*** –0.052 0.581 0.036 0.734 – – – – – – – – 0.2114 46.96 0.000***

Random effects model Coeff. Р-value 0.991 0.009*** 0.081 0.332 1.134 0.000*** 0.636 0.000*** 0.127 0.12 0.493 0.002*** 0.042 0.088* –0.022 0.004*** –1.114 0.000*** –0.697 0.000*** –0.045 0.533 0.088 0.247 –0.465 0.007*** –0.046 0.804 –0.159 0.365 0.184 0.362

The rationale for this assumption is as follows. On the one hand, it is the low values of ROI that could necessitate establishing the internal audit service since the latter is generally aimed at improving the financial performance of business. On the other hand, high level of profitability can indicate that the company has enough resources to establish new department, not affordable for low income businesses. In this case it is more efficient companies that can afford additional expenditures. Due to generally fixed costs of supporting the internal audit function we hypothesize the first assumption. However, the “available funding” theory should not be discarded and has to be tested in future research. Н2.2: Establishment of internal audit service is positively related to financial leverage. Increased leverage is by definition associated with the increased financial risk. Since the internal audit service is by definition aimed at improving the effectiveness of risk management and control processes, its implementation should be positively related to increasing debt. Н2.3: The decision to establish internal audit service is positively influenced by the company size. Generally, with the increase in company size the agency costs go up. Since the internal audit function involves improving corporate governance, its implementation should be positively related to the company size. Н2.4: The company age is positively associated with establishment of internal audit service.

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

Table 3.7 Estimation results of internal audit service determinants

Return on investment Financial leverage Size Age Foreign ownership

Coeff. 93.879 53.373 –10.592 23.949 –57.493

47 Р-value 0.995 0.997 0.995 0.994 1.000

The rationale for this assumption is as follows. Over time businesses, in most cases, lose some of their competitive advantages which results in declining financial performance and investment attractiveness, while the likelihood of shareholdermanagement agency conflict increases. This necessitates establishing of internal audit department involved in consulting services designed to add value and improve the organization’s operations. Н2.5: Presence of foreign shareholders stimulates the establishment of internal audit service. Foreign investors are especially sensitive to corporate governance and risk management. Consequently, companies attracting foreign investments should make every effort to provide proper internal audit function. The binary nature of the dependent variable and the necessity to account for the revealed above individual effects result in application of logit fixed effect models as an appropriate statistical technique. However, application of this model is possible only in case of dependent variable variation within the statistical unit. As a result we had to reduce our sample to 19 companies. The final results of statistical modeling are presented in Table 3.7. The obtained results reveal no statistically significant determinants of establishment of internal audit service in Russian companies. However small is the sample and short is the set of variables, one can come to a preliminary conclusion that currently the establishment of internal audit service in Russian companies is dependent on rather arbitrary personal decisions of management.

3.5

Summary

The empirical research results reveal that both improved corporate transparency and establishment of internal audit service in Russian companies can be considered as value drivers, controlling information asymmetry and conflicts of interests, enhancing the efficiency of business-processes, reducing tunneling, improving risk perception and thus contributing to the attractiveness of companies for investors in general. However, for the opaque markets empirical results are not always consistent and heavily depend on metrics and operationalization of variables as well as employed statistical techniques. As for the analysis of the existence of internal audit service determinants, no statistically significant relation was found between the companies’ characteristics

48

A. B. Ankudinov

included in the model which, as may be supposed, could provide incentives for implementation of the internal audit service, and the actual existence of this service in a company structure. The absence of statistically significant determinants of the establishment of internal audit service may indicate that currently in Russian publicly traded companies this decision is largely determined by personal intention of management to have such service in the firm structure. Finally, however well do our empirical results fit into the line with the popular discourse, they are of preliminary nature and should be viewed with certain caution. The statistical analysis we rely on suffers from numerous limitations due to sample selection problems, time horizons and rather basic econometrical techniques employed. However, the main objective of this text is to encourage the development of policy concepts and support discussion. Future studies and discussions will no doubt concentrate on the quality of corporate governance in emerging markets focusing not only on formal existence of certain institutes but on the substantive issues.

References Abdullah, S. N., Ismail, K. N. I. K., & Nachum, L. (2016). Does having women on boards create value? The impact of societal perceptions and corporate governance in emerging markets. Strategic Management Journal, 37(3), 466–476. Al-Haddad, W., Alzurqan, S. T., & Al_Sufy, F. J. (2011). The effect of corporate governance on the performance of Jordanian industrial companies: An empirical study on Amman stock exchange. International Journal of Humanities and Social Science, 1(4), 55–69. Aljifri, K. (2008). Annual report disclosure in a developing country: The case of the UAE. Advances in Accounting, 24, 93–100. Alsaeed, K. (2006). The association between firm-specific characteristics and disclosure: The case of Saudi Arabia. Journal of American Academy of Business, Cambridge, 7(1), 310–321. Ankudinov, A. B. (2017). Kriterii ocenki effektivnosti sistemy vnutrennego kontrolja. Jekonomicheskij Vestnik Respubliki Tatarstan. [Efficiency criteria of internal control system. Economic bulletin of the Republic of Tatarstan] (in Russian), 1, 52–56. Ankudinov, A. B., & Markhanova, E. S. (2018). Otsenka effektivnosti vnutrennego audita v sisteme korporativnogo upravleniya: empiricheskiy analiz po dannym rossiyskih kompaniy. [Assessment of internal audit efficiency in corporate governance: An empirical analysis of the Russian Companies’ Data]. Uchet.Analiz.Audit ¼ Accounting.Analysis.Auditing, 1(5), 18–29 (in Russian). Ararat, M., Black, B. S., & Yurtoglu, B. B. (2017). The effect of corporate governance on firm value and profitability: Time-series evidence from Turkey. Emerging Markets Review, 30, 89–108. Balasubramanian, N., Black, B. S., & Khanna, V. (2010). The relation between firm-level corporate governance and market value: A case study of India. Emerging Markets Review, 11, 319–340. Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Lapides, P. D. (2000). Fraudulent financial reporting: Considerations of industry traits and corporate governance mechanisms. Accounting Horizons, 14(December), 441–454. Black, B. S. (2001). The corporate governance behavior and market value of Russian firms. Emerging Markets Review, 2, 89–108. Black, B. S., & Khanna, V. S. (2007). Can corporate governance reforms increase firms’ market values? Event study evidence from India. Journal of Empirical Legal Studies, 4, 749–796.

3

Corporate Transparency and Internal Audit/Control as Investor Protection Tools. . .

49

Black, B. S., & Kim, W. C. (2012). The effect of board structure on firm value: A multiple identification strategies approach using Korean data. Journal of Financial Economics, 104, 203–226. Black, B. S., Jang, H., & Kim, W. C. (2006a). Does corporate governance predict firms’ market values? Evidence from the Korean market. Journal of Law, Economics and Organization, 22, 366–413. Black, B. S., Love, I., & Rachinsky, A. (2006b). Corporate governance indices and firms’ market values: Time series evidence from Russia. Emerging Markets Review, 7, 361–379. Black, B. S., Woochan, K., Hasung, J., & Kyung-Suh, P. (2009). How corporate governance affects firm value: Evidence on channels from Korea. http://ssrn.com/abstract¼844744 Black, B. S., de Carvalho, A. G., & Gorga, É. C. R. (2012). What matters and for which firms for corporate governance in emerging markets?: Evidence from Brazil (and other BRIK countries). Journal of Corporate Finance, 18(18), 934–952. Black, B. S., Kim, W. C., Jang, H., & Park, K. S. (2015). How corporate governance affect firm value? Evidence on a self-dealing channel from a natural experiment in Korea. Journal of Banking & Finance, 51, 131–150. Braga-Alves, M., & Shastri, K. (2011). Corporate governance, valuation, and performance: Evidence from a voluntary market reform in Brazil. Financial Management, 40, 139–157. Cheung, Y.-L., Connelly, T. J., Limpaphayom, P., & Zhou, L. (2007). Do investors really value corporate governance? Evidence from the Hong Kong market. Journal of International Financial Management and Accounting, 18, 86–122. Cheung, Y.-L., Connelly, T., Jiang, P., Limpaphayom, P., & Zhou, L. (2011). Does corporate governance predict future performance? Evidence from Hong Kong. Financial Management, 40, 159–197. Christopher, J., Sarens, G., & Leung, P. (2009). A critical analysis of the independence of the internal audit function: Evidence from Australia. Accounting, Auditing & Accountability Journal, 22(2), 200–220. Ciftci, I., Tatoglu, E., Wood, G., Demirbag, M., & Zaim, S. (2019). Corporate governance and firm performance in emerging markets: Evidence from Turkey. International Business Review, 28, 90–103. Claessens, S., & Fan, J. (2002). Corporate governance in Asia: A survey. International Review of Finance, 3(2), 71–103. Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging Markets Review, 15, 1–33. Connelly, T., Limpaphayom, P., & Nagarajan, N. J. (2012). Form versus substance: The effect of ownership structure and corporate governance on firm value in Thailand. Journal of Banking & Finance, 36(6), 1722–1743. Connelly, T., Limpaphayom, P., Hien, T., Nguyen, T., & Tran, D. (2017). A tale of two cities: Economic development, corporate governance and firm value in Vietnam. Research in International Business and Finance, 42, 102–123. Coombs, H., & Tayib, M. (1998). Developing a disclosure index for local authority published accounts – A comparative study of local authority published financial reports between the UK and Malaysia. Paper presented at the Asian Pacific Interdisciplinary Research in Accounting Conference in Osaka, August. Duc, V., & Phan, T. (2012). Corporate governance and firm performance: Empirical evidence from Vietnam. Open University, Ho Chi Minh City, 19. Ege, M. S. (2015). Does internal audit function quality deter management misconduct? The Accounting Review, 90(2), 495–527. Enikolopov, R., Petrova, M., & Stepanov, S. (2014). Firm value in crisis: Effects of firm-level transparency and country-level institutions. Journal of Banking & Finance, 46, 72–84. Fadzil, F. H., Haron, H., & Jantan, M. (2005). Internal auditing practices and internal control system. Managerial Auditing Journal, 20(8), 844–866. Feng, M., Li, C., McVay, S., & Skaife, H. (2015). Does ineffective internal control over financial reporting affect a firm’s operations? Evidence from firms’ inventory management. The Accounting Review, 90(2), 529–557.

50

A. B. Ankudinov

Firth, M. (1979). The impact of size, stock market listing, and auditors on voluntary disclosure in corporate annual reports. Accounting and Business Research, 9(36), 273–280. Goodwin-Stewart, J., & Kent, P. (2006). Relation between external audit fees, audit committee characteristics and internal audit. Accounting and Finance, 46, 387–404. Ho, S., & Hutchinson, M. (2010). Internal audit department characteristics/activities and audit fees: Some evidence from Hong Kong firms. Journal of International Accounting, Auditing and Taxation, 19, 121–136. Jiang, L., Messier Jr., W. F., & Wood, D. A. (2017). The association between internal audit consulting services and firm performance (July 5). Retrived from https://ssrn.com/ abstract¼2882787 or https://doi.org/10.2139/ssrn.2882787 Kouwenberg, R. R. P. (2006). Does voluntary corporate governance code adoption increase firm value in emerging markets? Evidence from Thailand. Retrived from http://ssrn.com/ abstract¼958580 KPMG. (2011). Ekspertno-analititcheskii doklad “Praktiki korporativnogo upravlenija v Rossii: opredelenije granits natsionalnoi modeli” [Analytical Report “Corporate governance practices in Russia: Identification of boundaries of the national model”]: Association of managers, KPMG in Russia and CIS. (In Russian). Retrived from www.kpmg.com KPMG Peat Marwick. (1999). 1998 Fraud survey. New York: KPMG Peat Marwick. Kuznecovs, M., & Pal, S. (2012). Does corporate governance reform necessarily boost firm performance? Recent evidence from Russia. IZA Discussion Paper, 6519. Retrived from http://ssrn.com/abstract¼2051362 Leal, R. P. C., & Carvalhal da Silva, A. (2007). Corporate governance and value in Brazil (and in Chile). In A. Chong & Lopez-de-Silanes (Eds.), Investor protection and corporate governance – Firm level evidence across Latin America (pp. 213–287). Palo Alto: Stanford University Press. Lei, A. C. H., & Song, F. M. (2012). Board structure, corporate governance and firm value: Evidence from Hong Kong. Applied Financial Economics, 22, 1289–1303. Limpaphayom, P., & Connelly, J. T. (2004). Review of corporate governance in Asia: Corporate governance in Thailand. Bangkok: Thai Institute of Directors Association. OECD. (2015). G20/OECD principles of corporate governance. Paris: OECD Publishing. https:// doi.org/10.1787/9789264236882-en Rossijskij obzor jekonomicheskih prestuplenij za 2016 god [Russian Economic Crime Survey 2016], Retrived from www.pwc.ru/ru/forensic-services (in Russian). Saravanan, P. (2012). Corporate governance and company performance – Study with reference to manufacturing firms in India (pp. 1–22). Rajiv Gandhi Indian Institute of Management. Retrieved from https://ssrn.com/abstract=2063677 and https://doi.org/10.2139/ssrn.2063677 Sarkar, J., Sarkar, S., & Sen, K. (2012). A corporate governance index for large listed companies in India. Retrived from http://ssrn.com/abstract¼2055091 The Institute of Internal Auditors Research Foundation (2017) International Professional Practices Framework (IPPF), The Institute of Internal Auditors Research Foundation. Florida, USA, January 2011, 2013, 2017.

Andrei B. Ankudinov has a doctorate degree in physics and mathematics (Kazan State University) and a master’s degree in international management (Thunderbird Graduate School of International Management, Glendale, Arizona). Currently he is senior lecturer in finance at the Kazan Federal University and a research fellow at the Center of modeling and analysis of big data in finance and economics at the Innopolis University. His academic interests cover wide range of topics including corporate finance, corporate governance and social responsibility in the opaque markets, educational economics, etc. His research results have appeared in a variety of academic and practitioner journals, including the Emerging Markets Review, Post-Communist Economies, Research in International Business and Finance, Sotsiologicheskie Issledovaniia, Studies on Russian Economic Development and Oil Industry, among others.

Chapter 4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory, Practice and Regulations Agata Adamska, Leszek Bohdanowicz, and Jacek Gad

4.1

Introduction

Even the initial years of the operation of the first public limited company in the world the Dutch East India Company (Verenigde Oost-Indische Compagnie—VOC) clearly showed that control over the actions of the managers is one of the biggest problems for shareholders. In 1622, 20 years after the founding of the company, the predecessor of today’s supervisory board was created, consisting of nine shareholders who gained an insight into the annual reports and who also had the opportunity to select auditors to audit the company’s financial statements (Ferguson 2008, 132–133). Over the centuries, the composition and the manner of appointing board members evolved, as did their significance in various legal systems, but the function of supervision over financial statements was always present. With time, selected members of the board started to be appointed to this task, and the successive formalization of their activities led to the creation of audit committees. The first committees were established in Anglo-Saxon companies, with a monistic board model, as early as the nineteenth century, but their dissemination took place in the twentieth century (Spira 2003). Their popularization is connected with successive waves of crises of trust in public companies related to exposed fraud. At the turn of the twentieth and twenty-first centuries, financial scandals in the United States and European Union countries once again exposed the weakness of corporate governance mechanisms. At that time, the collapse of Enron and other companies revealed that every element of the US capital market infrastructure was

A. Adamska Warsaw School of Economics, Warsaw, Poland e-mail: [email protected] L. Bohdanowicz (*) · J. Gad University of Lodz, Lodz, Poland e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_4

51

52

A. Adamska et al.

dysfunctional: the companies’ financial statements did not contain real information, auditors looked at everything with indulgence, lawyers conspired, credit rating agencies “slept” and regulatory actions were inadequate (Collier and Zaman 2005). Individual countries have adopted various ways to protect themselves from similar cases in the future, but the issue of the professionalization of supervisory boards in the form of specialized committees, including an audit committee, has come to the fore. There was a discussion if a better way of introducing them would be a legislative path with obligations in this area, or voluntary self-regulation mechanisms in the form of good practices (De Jong et al. 2002; Du Plessis and Low 2017). In Europe, solutions in this area have gone from self-regulation to legislation. Initially, the codes of good practice recommended the appointment of audit committees, and this appointment was carried out in accordance with the principle of ‘comply or explain’. However, at the beginning of the twenty-first century, under the influence of the European Commission, these committees became a requirement of national law in individual countries, including Poland. The aim of this study is to assess the extent to which Polish companies adapt to these regulations and their changes. The text consists of three parts. The first presents the results of research on the importance of audit committees from the point of view of the efficiency of the corporate governance system. The second part is devoted to the evolution of regulations regarding audit committees in Poland. The third part contains the results of research on the reactions to the changes to these regulations of companies listed on the Warsaw Stock Exchange. All the considerations end with a summary.

4.2

Audit Committees in the Corporate Governance System

In the United States, the obligation to set up audit committees by companies listed on the New York Stock Exchange (NYSE) has existed since 1978, and the US Securities Commission has encouraged the establishment of audit committees since 1940 (Birkett 1986; Carson 2002). However, as emphasized by Burke et al. (2008), until 1967, little attention was devoted to these committees in the United States, and only then did the debate on its usefulness intensify. It is worth mentioning that in 1987, the Treadway Commission report was published, and it expressed concerns about the integrity of the reporting of US companies and emphasized the role of audit committees in its provision, but even then the effectiveness of the committees in practice was questioned (Verschoor 1990). In Great Britain, their introduction has been recommended by codes of good practice since the creation of a report issued by The Committee on the Financial Aspects of Corporate Governance (1992) chaired by Sir Adrian Cadbury (Financial Aspects of Corporate Governance). Later, the European Commission repeatedly encouraged the appointment of audit committees, starting with the Green Paper published in 1996—The Role, Position and Liability of the Statutory Auditor in the European Union, and Recommendations on the Role of (Independent)

4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory,. . .

53

Non-Executive or Supervisory Directors of Listed Companies and on the Committees of the (Supervisory) Board (2005) and Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe (Winter et al. 2002). The literature lists numerous benefits related to the appointment of audit committees. The most important of them are as follows: improving the efficiency of the regulation of supervisory boards over financial reporting of companies through the better use of board members’ competences, a better division of labor between its members and strengthening the supervisory board’s position towards management, shareholders and other stakeholders (Oplustil 2010). It is emphasized that audit committees can contribute to board members’ better use of time and expertise, because their formation makes the board members able to focus on specific matters (Colley et al. 2005). De Zoort et al. (2002) stated that the basic tasks of this committee are to ensure: adequate quality of accounting policy in the company; internal control; disclosure of high-quality information by the company in a timely manner; and that the board of directors and shareholders receive the right information. Dobija (2011) also included: supervision over accounting policy; managerial estimates and corrections in financial information; the external audit process; the internal audit process; financial risk assessment processes and tax accounting and reporting, as well as the associated risk when presenting the basic tasks of this committee. The specific tasks of the audit committee should, however, be determined by the supervisory board and the audit committee included in the regulations (Dobija 2010). The audit committees have also been the subject of numerous empirical studies which concerned, inter alia, the problems of their appointment and composition, the impact of audit committees on earnings management, as well as the relationship between the characteristics of committees and the firm performance. For example, Klein (2002) found a correlation between board and auditing independence and abnormal accruals. What is more, reducing the independence of the board or audit committee was associated with a significant increase in abnormal accruals. These results suggested that if the boards are more independent of the CEO, monitoring the financial accounting process becomes more effective. An important role in this area is also played by independent audit committees. Chan and Li (2008) confirmed that the presence of independent experts in board of directors and audit committees positively affects the company’s value. The CEOs of other companies were accepted as independent experts in this study. Saleh et al. (2007) confirmed that a fully independent audit committee limits the practice of shaping profits. Carcello et al. (2011) tried to determine whether the company’s benefits associated with having an independent and expert audit committee are reduced when the CEO is involved in the process of selecting board members. Their answer to this question was negative and, as they admitted, the benefits of audit committees participating in the monitoring of the company can only be achieved if the CEO is not formally involved in the process. In contrast, Samaha, Khlif and Hussainey (2015) conducted a meta-analysis on a sample of 64 empirical studies and found that the audit committee characteristics had a positive effect on companies’ voluntary disclosure of information.

54

A. Adamska et al.

Some research found also positive associations between audit committee independence and firm performance (Chan and Li 2008; Kallamu and Saat 2015). They suggested that independence makes this committee more focused on monitoring the transparency of financial reporting and increases its strength. But in contrast to these studies, Barka and Legendre (2017) emphasized that an audit committee which is fully independent or meets frequently is associated with lower firm performance. In view of this, they argued that it can be useful to expand audit committees’ composition by integrating other directors’ profiles. Other studies argued that audit committee members’ knowledge, skills, and experience affect committees’ effectiveness (e.g. Bedard et al. 2004). E.g. Aldamen et al. (2012) found that smaller audit committees with more experience and financial expertise are more likely to be linked with positive firm performance. They also showed that the longer audit committee is chaired by the same director, the worse accounting performance is. Moreover, according to their findings accounting performance is positively impacted when audit committees include blockholder representation, the chair of the board, whose members have more external directorships and whose chair has more years of managerial experience. Research has also been conducted on the determinants of the appointment of an audit committee. For example, Pincus et al. (1989) examined the conditions for the voluntary appointment of audit committees and pointed out that the low level of ownership of managers, a high level of indebtedness, larger scale operations, cooperation with major auditors and greater participation in the board of directors of external members, have an impact on this appointment. Collier (1993) also obtained similar results examining the conditions for the voluntary appointment of audit committees in British companies. He noted that their creation was positively influenced by a lower level of managerial ownership, a higher level of indebtedness and a larger share of outside directors. The problem of the effectiveness of audit committees is discussed at length in the literature of the subject. A detailed synthesis of research on the effectiveness of audit committees was presented by De Zoort et al. (2002) and, on that basis, it was concluded that this effectiveness depends on four factors: arrangement (i.e., financial committee, size and duality), resources (i.e., financial expertise, committee experience), authority (i.e., power enshrined in the committee), and diligence (i.e., the frequency of committee meeting). In many studies and comments, the effectiveness of audit committees was questioned. First of all, it was stated that committees are formed to support the application of corporate governance principles, but they have no clear purpose (Menon and Williams 1994). However, this weakness has been eliminated over time—since the publication of the results of the Menon and Williams study, codes of good practice and legislation clearly outlined the scope of responsibilities and goals of these committees. Issues of the dubious effectiveness of audit committees were also raised in the Bosch Report (1995), which noted that audit committees may contribute to increased bureaucracy, duplication and wasted efforts in the company, and the unnecessary creation of an additional monitoring body. Other publications warned against excessive expectations towards the committees (Beattie et al. 2000; Spira 2003). In turn, Carson (2002) emphasized that audit committees can be created

4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory,. . .

55

without care for their quality and effectiveness, if the setting up of the committee merely results from the expectations of stakeholders, and the existence of this committee is the only proof that the board takes the utmost care in fulfilling its duties. On the other hand, Beasley (1996) stated that the structure of the supervisory board may have more impact on the ability to limit the financial risk of embezzlement within a company than the appointment of an audit committee. Meanwhile, Mangana and Pike (2005) stated that company failures and financial irregularities mainly occur in those companies that do not implement recommendations on the establishment of an audit committee. De Zoort and Salterio (2001) stated that audit committee members with adequate knowledge in the field of auditing and reporting are able to assess auditors’ opinions better and support their arguments in discussions with managers than members who do not have such knowledge. Moreover, members of audit committees, if they have the appropriate knowledge, are able to detect material misstatements in financial statements. Similar conclusions were drawn by Abbott et al. (2004), who noticed that there is a statistically significant and negative relationship between the appointment of an audit committee, in which there is at least one person with experience in finance, and the need to re-present the revised financial statements (financial restatement). Conversely, Krishnan (2005) presented the results of research confirming that the presence of an audit committee, in which members are financial experts, reduces the risk of problems with internal control. Sultana (2015) also stated that audit committees are effective tools for monitoring and reducing the opportunistic behavior of managers and overstating profits. On the other hand, regulatory authorities (and other interested parties) should pay more attention to the financial knowledge, experience of its members, and the frequency of their meetings when assessing the effectiveness of audit committees. The results of the research conducted in Polish audit committees were also diverse regarding the effectiveness of their functioning as part of the mechanism of control over companies. On the one hand, there is a general conviction about the need to create audit committees in Polish companies listed on the Warsaw Stock Exchange (Jerzemowska et al. 2010). On the other hand, there is a significant discrepancy between the tasks of audit committees declared in their regulations and the tasks declared by these committees in reports on their activities (Dobija 2011). In publications concerning audit committees in Polish companies, attention is paid to the transformation of their tasks. In particular, this concerns the increase of their importance in establishing and reviewing accounting policy and the analysis of discretionary transactions, the selection of a statutory auditor, and recommending this choice to the entire supervisory board, as well as exercising supervision over risk management and internal control systems. The changing role of audit committees is also emphasized—from being purely ceremonial to becoming an active participant in the process of supervision over external audit and financial reporting (Dobija 2013). The need to provide adequate financial and accounting knowledge in resources is an important premise of the effectiveness of the audit committees’ functioning,

56

A. Adamska et al.

although Koładkiewicz (2013) emphasized that this is not a sufficient condition for their active operation. It is also necessary for its members to have adequate time resources and the willingness to get involved in the work of a committee. This is crucial, especially in the context of the increasing number and complexity of their tasks, e.g., for the supervision of the internal control system and risk management. Although there are high expectations for audit committees, none of the studies mentioned that audit committees really function as effective elements of a company’s control system, neither in relation to Polish audit committees nor other institutional ones. This may be due to both the difficulty in assessing the effectiveness of their operation because of the complexity of the matter of their activity, and that their appointment is not rooted in the corporate governance of many countries. Therefore, they have not reached their due position yet.

4.3

Changes in Polish Regulations Regarding Audit Committees

Initially, the audit committees were appointed in public companies listed on the Warsaw Stock Exchange on a voluntary basis, following the recommendations of good practice codes. The first such code was the Best Practices in Public Companies in 2002, in which there was no reference to the board committees yet. It was not until the second code, i.e., Best Practices in Public Companies in 2005, that it was indicated in art. 28 that the supervisory board should operate in accordance with its regulations which should be accessible to the public. These regulations should provide for the appointment of at least two committees, i.e., an audit committee and remuneration, and the audit committee should include at least two independent members and at least one with qualifications and experience in accounting and finance. The audit committees should submit an annual report on their activities to the supervisory board. Companies are obliged to make these reports available to shareholders. January 1, 2008, Best Practices in Public Companies in 2005 have been replaced by the Code of Best Practices for WSE Listed Companies. This code stated that at least one audit committee should function as part of a supervisory board. The committee should include at least one independent member, and the other members should have significant connections with the company and competence in accounting and finance. In companies where the supervisory board consists of the minimum number of members required by law, the committee’s tasks may be performed by the supervisory board. The Code of Best Practices for WSE Listed Companies was the last Polish code of good practice that referred to the appointment of an audit committee, as regulated by law. Later, codices included only recommendations regarding the independence of committee members and the transparency of their functioning. The Code of Best Practices for WSE Listed Companies and the Best

4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory,. . .

57

Practice for WSE Listed Companies 2016 stated that: “Annex I to the Commission’s Recommendation of 15 February 2005 on the role of non-executive or supervisory directors in listed companies and on the committees of the (supervisory) board” applies to the independence criteria of supervisory board members that apply to the tasks and the operation of the committees of the supervisory board. In the Best Practice for WSE Listed Companies 2016, it was indicated that if the company has an audit committee, it should monitor the efficiency of the systems. The functions of the committee concerned efficient internal control, risk management and compliance systems, and the internal audit function. Additionally, the chair of the audit committee should meet the independence criteria. While good practices (so-called soft regulations) encouraged companies to appoint an auditing committee, it was only the introduction of statutory guidelines that made it widely recognized in supervisory boards. The Directive of the European Parliament and Council 2006/43/EC referred to the principles of appointing audit committees in public companies and their tasks. The Polish law was finally adapted to the provisions of this directive in 2009, and the Act of 7 May 2009 (Ustawa z dnia 7 maja 2009 r. o biegłych rewidentach i ich samorządzie, podmiotach uprawnionych do badania sprawozdań finansowych oraz o nadzorze publicznym)—on statutory auditors and their self-government, entities authorized to audit financial statements and public supervision—introduced the obligation to establish an audit committee in public interest entities, including public listed companies. The Act on Statutory Auditors obliged public interest entities to establish an audit committee whose members should be appointed from among the members of the supervisory board. In units where the supervisory board consisted of no more than five members, the audit committee’s tasks could be entrusted to the entire supervisory board. The Act stipulated that an audit committee should consist of at least three persons, at least one of whom should meet the conditions of independence and be qualified in the field of accounting or financial audit. In accordance with the solution provided in the Directive of the European Parliament and the Council 2014/56/EU, in 2017, the Polish legislator decided that the number of members of the board will not be the criterion for appointing an audit committee (Ustawa z dnia 11 maja 2017 o biegłych rewidentach, firmach audytorskich oraz nadzorze publicznym). Other criteria connected with the size of a public company will be taken into account. Supervisory boards do not have to appoint an audit committee if public companies do not exceed two out of three criteria, i.e., revenues of PLN 34 million, assets worth PLN 17 million and employment of 50 employees (Article 128 of the Act of 11 May 2017 on statutory auditors, audit firms and public supervision). The new Act on Statutory Auditors of 2017 (Article 129) also tightened the requirements regarding the independence of the members of audit committees. It requires that the majority of audit committee members, including its chairman, be independent of the given public interest entity and at least one member have knowledge and skills in accounting or auditing. The new Act on Statutory Auditors also refers to the audit committee members’ knowledge of the industry. According to art. 129 section 5 of the Act on Statutory Auditors, members of audit committees

58

A. Adamska et al.

should have knowledge and skills in the industry in which the public interest entity operates. This condition is considered fulfilled if at least one member of an audit committee has knowledge and skills in the field of this industry, or individual members in specific areas have knowledge and skills in this industry. The role of an audit committee has been strengthened, especially in the external audit process. The Act on Statutory Auditors of 2009 required audit committees to control and monitor the independence of the statutory auditor and the audit firm. The Act on Statutory Auditors of 2017 (Article 130) clarified this task, indicating that control and monitoring should, in particular, relate to services other than the audit. The audit committee is required to: 1. Prepare the policy of selecting the audit firm to conduct the audit 2. Prepare the policy of providing permitted non-audit services by auditing companies conducting an audit, by entities related to those auditing companies and by a member of the auditing companies’ network, 3. Determine the procedures of selecting the audit firm by the public interest entity. In a case when an auditing company is selected by a supervisory board, the audit committee presents its recommendation, where it indicates the auditing company it suggests entrusting the audit with. Art. 130 para. 3 of the new Act on Statutory Auditors includes details from the recommendation of an audit committee in a situation where the selection of an auditing company does not require the extension of the audit contract. The recommendation should primarily include at least two auditing companies to choose from. In addition, it should be prepared according to a procedure that, inter alia, does not exclude from the selection procedure those companies that obtained less than 15% of their total remuneration for auditing from public interest entities in a given European Union country in the previous calendar year. If the decision of a supervisory board regarding the selection of an audit firm deviates from the recommendation of the audit committee, the boards must justify the reasons for non-compliance with the audit committee’s recommendation and provide such justification to the body approving the financial statements. It should be emphasized that in the Act on Statutory Auditors of 2017, the role of an audit committee as the guardian of the reliability of financial statements is highlighted. It clarified that monitoring the effectiveness of internal control and risk management systems, as well as internal audits, should include monitoring the effectiveness of these systems in the field of financial reporting. Subsequent changes in the scope of regulations regarding audit committees—firstly, recommendations in good practice codes and then in the provisions of the law—have led to the tightening of requirements for appointing these committees and specifying the scope of their operation. This creates conditions for the better fulfillment of the function of the control system over public companies. However, for this to happen, companies must fulfill their obligations in this area—the next part of the paper is devoted to this issue.

4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory,. . .

4.4

4.4.1

59

The Results of Empirical Research on the Impact of Legal Changes on the Appointment of Audit Committees in Polish Companies Listed on the Warsaw Stock Exchange Introduction of the Obligation to Appoint an Audit Committee Based on the Number of Members of Supervisory Boards (2009)

The first change in Polish law, which came into force in 2009, made the audit committee appointment dependent on the number of members of supervisory boards. Our research has shown that the introduction of the new regulation resulted in an increase in the number of audit committees in Polish companies, but it was not a radical increase. We conducted research among companies on the main market of the Warsaw Stock Exchange. We carried out the observations at the end of particular years in the period shortly before the introduction of the regulation and after its introduction. 2008 was the initial year of the research, and 2011 the final year. Table 4.1 provides data on the appointment of an audit committee. Audit committees were appointed in 523 cases throughout the period, which accounted for 38.34% of all 1364 observations. The lowest share of supervisory boards with audit committees in the surveyed companies was recorded in 2008, when the boards were still appointing committees based on the recommendations of the Best Practices of companies listed on the WSE. At that time, audit committees were appointed only in 85 boards out of 320 companies (26.56%). In 2009, after the introduction of the statutory obligation to separate audit committees when the board had more than five members, the number of audit committees increased to 135, or 40.54% of companies. By contrast, in 2010, the number of separate committees increased to 152, which accounted for 43.55% of the companies surveyed that year. This increase could also have been caused by the delay in implementing the provisions of the Act in some companies. Importantly, in 2011, the share of supervisory boards with separate audit committees in the examined companies decreased slightly to 41.71%.

Table 4.1 The presence of audit committees in supervisory boards (2008–2011)

Year 2008 2009 2010 2011 Total

Number of supervisory boards with separate audit committees 85 135 152 151 523

Source: Own study

The number of observations 320 333 349 362 1364

Share of supervisory boards with audit committees in the surveyed companies (%) 26.56 40.54 43.55 41.71 38.34

60

A. Adamska et al.

Table 4.2 Frequency of appointing audit committees depending on the number of boards in 2008–2011 Board size 5 6 7 8 and more Total

Share of supervisory boards with audit committees in the surveyed companies (%) 2008 2009 2010 2011 15.50 16.82 15.53 15.02 26.32 70.00 84.48 80.70 55.55 93.33 92.11 95.12 70.37 100.00 100.00 100.00 26.56 40.54 43.55 41.71

Source: Own study

Table 4.2 contains data showing the frequency of setting up audit committees, taking into account the different size of supervisory boards in 2008–2011. From the data, it appears that at the end of 2008, 70.37% of boards with more than eight members appointed audit committees, while from 2009, all such boards have already done so. In the audited period, there was also a tendency to appoint audit committees in six-person boards (from 26.32 at the end of 2009 to 80.70% at the end of 2011, with the highest level of 84.48% at the end of 2010) and seven-person boards (from 55.55% in 2009 to 95.12% in 2011). On the other hand, the frequency of establishing audit committees in five-person boards was at a relatively stable level (from 15.50% at the end of 2008 to 15.02% at the end of 2011, with the highest level of 16.82% at the end of 2009). Making the appointment of audit committees dependent on the number of supervisory boards in Polish law meant that the companies had different options of conduct. When the board contained five people, companies might: 1. Not appoint an audit committee; 2. Appoint an audit committee, despite the fact that the law did require it, and this was only the result of striving for a better internal organization of work; 3. Terminate the audit committee if it previously operated on the basis of a code of good practice; 4. Voluntarily have a previously functioning audit committee, although the law did not require it. Other types of proceedings were associated with a larger number of supervisory boards. Here, the analysis of the boards’ behaviour indicated three actions: they had an audit committee the way it was because it had already been set up when the board contained five people; the committees were appointed by the boards after increasing the number of members; despite the increase in the number, an audit committee was not appointed as an internal entity of the board, since all members of the board are its members. Table 4.3 contains data on the changes in the number of members of supervisory boards and the establishment of audit committees in supervisory boards which in 2008 had five members. This year was also taken as a reference point. The decreasing number of analyzed cases results from the suspension of quotations by some

4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory,. . .

61

Table 4.3 Changes in the number and establishment of audit committees (in 2009–2011) in fivemember supervisory boards at the end of 2008 Tendencies in supervisory boards Five members, no committee Five members, audit committee acting from 2008 Five members, the committee liquidated after 2008 Five members, audit committee established after 2008 Increased number of members (over five members), no committee Increased number of members (over five members), audit committee established in 2008 Increased number of members (over five members), audit committee established after 2008 Total

Year 2009 143 24 2 3 10 5

2010 123 18 7 2 7 7

2011 121 13 8 2 6 9

6

14

15

193

178

174

Source: Own study

companies previously included in the sample. In the case of five-person boards, their number was usually the same in subsequent years, and no audit committee was established in them. Among the five-person boards, which at the end of 2008 had separate audit committees, many decided to leave them as they are (24 in 2008 and 13 in 2011). Only two boards in 2009 liquidated the committees, and in 2011 there were eight such boards. Only 35-member boards from the end of 2008 established audit committees in 2009 (in 2011 there were two such boards). In comparison to 2008, some of the boards analyzed increased the number to more than five members and—as some declared—appointed audit committees in the full composition of supervisory boards or otherwise the supervisory boards performed the functions of audit committees in full composition. At the end of 2009, there were 10 such boards, in 2010—7, and in 2011—6. At the end of 2009, five supervisory boards increased (in comparison to 2008) their number, and had already established audit committees in 2008 or earlier (in 2010 there were seven such boards, and in 2011—9). On the other hand, the number of supervisory boards which had five members in 2008 grew systematically. They later increased the number of members and created separate audit committees. At the end of 2009 there were such boards 6, in 2010—14, and in 2011—15. The information in Table 4.4 is similar to the data in Table 4.3, but it concerns supervisory boards which at the end of 2008 had more than five members. Forty-four such boards had separate audit committees at the end of 2009, as in the previous year, and still more than five members (at the end of 2010 there were 41 such boards, while at the end of 2011—39). At the end of 2009, at the time when the statutory requirements began to apply, 41 of those boards with more than five members (at the end of 2008) appointed audit committees. Seventeen of these boards reduced their number and did not decide to appoint audit committees (14.17%). At the end of 2011, this number increased to 21 (18.75%). In the case of a small number of surveyed companies, there was a reduction in the number of members of the board, while preserving audit committees established in 2008 or earlier (five cases

62

A. Adamska et al.

Table 4.4 Changes in the number and appointment of audit committees (in 2009–2011) in supervisory boards of six or more members at the end of 2008 Tendencies in supervisory boards More than five members, no committee More than five members, audit committee acting from 2008 More than five members, audit committee established after 2008 Reduced number of members, audit committee acting from 2008 Reduced number of members, audit committee established after 2008 Reduced number of members (below five), committee liquidation Reduced number of members (five), lack of audit committee Total

Year 2009 9 44 41 5 1 3 17 120

2010 3 41 44 4 2 4 18 116

2011 4 39 33 5 4 6 21 112

Source: Own study Table 4.5 Establishment of audit committees in supervisory boards (2015–2017)

Year 2015 2016 2017 Total

The number of observations 411 423 414 1248

The number of boards without an audit committee 233 237 52 522

Lack of dataa 6 5 14 25

The number of boards with audit committees 172 181 348 701

Percentage of boards with audit committees in the researched companies (%) 41.85 42.79 84.06 56.17

Source: Own study No clear company declaration on the establishment of audit committees in the reports

a

at the end of 2009). At the end of 2009, there was one case of an audit committee being established after the number of members of the board had been reduced.

4.5

Introduction of Obligatory Audit Committees Based on Company Size (2017)

Another significant change in Polish law, which came into force in 2017, made the appointment of an audit committee dependent on the size of the company. The majority of supervisory boards of Polish public companies had five members (following the previous criteria), and while the size of the board could be reduced so that committees would not be appointed, the size of the company (the new criterion) is a factor that is difficult to control. Therefore, it might be expected that such a change in law would force many companies to set up an audit committee, and thus the tendency to establish one would increase. This was confirmed by our research, the results of which can be found in Table 4.5. As the table shows, at the end of 2015, audit committees existed in 172 supervisory boards from 411 observations (41.85%), and at the end of 2016, 181 from 423 observations (42.79%).

4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory,. . .

63

Comparing the results to those presented in Table 4.1 shows that the tendency to establish audit committees in the supervisory boards of Polish public companies remained at a similar level for a longer period (e.g., at the end of 2010, audit committees had been appointed in 43.55% of supervisory boards). The new regulations resulted in a rapid increase in the number of audit committees. At the end of 2017, audit committees were already present in 348 supervisory boards from 414 observations (84.06%). The data show that audit committees were additionally established that year in 167 Polish companies listed on the main market of the Warsaw Stock Exchange. This increase can be considered significant. Table 4.5 shows a large drop in the number of boards without audit committees or companies that did not explicitly declare in their reports (annual reports, reports on the application of good practice principles or supervisory board reports) that such an internal board committee has been established. In 2016, there were 242 such boards while in 2017 there were only 66 (down by 176). Out of these 66 companies, 52 declared either that an audit committee, including all members, had been established, or that the full supervisory board performed the audit function. This was dictated by the size of the company and the failure to meet the criteria that required the establishment of an audit committee. In 14 cases, however, it was not possible to determine unequivocally whether audit committees had been established as an internal unit of the board. A year earlier, it was not possible to determine whether committees were present in five companies, and, in 2015, in six companies.

4.6

Conclusion

The aim of this study was to assess the degree to which the recent changes in establishing audit committees by Polish companies had been implemented. Potentially, audit committees can be an important tool for corporate governance. Effectively functioning audit committees limit profit shaping, positively influence the scope of voluntary disclosures presented by companies, strengthen the position of the external auditor, and improve the operation of the board itself. In Poland, the obligation to establish an audit committee resulted initially from good practices; then this obligation was transferred to statutory regulations. Until 2017, companies were required to set up an audit committee when the board exceeded five members. As the research results show, in 2008, i.e., in the period when the obligation to establish an audit committee resulted from good practices, only 26.56% of companies established this committee. The requirements resulting from the “soft law” proved to be largely ineffective. Importantly, the introduction of the statutory obligation to appoint an audit committee resulted in audit committees being established in more than 40% of companies. The majority of companies maintained the size of supervisory boards at the level of five members, which relieved them of the obligation to appoint an audit committee, and its task was performed by the entire board.

64

A. Adamska et al.

The research results indicate that the share of companies in which an audit committee was appointed changed significantly in 2017—over 84% of public companies had set up an audit committee, which is twice as many as in previous years. Such a large increase is the effect of subsequent changes in the law, in force since 2017. Previous changes in regulations have resulted in companies gradually adapting to their requirements and becoming aware of the opportunities and threats posed by having a specialized body, such as an audit committee, in the supervisory board. This created a basis for the latest solutions to be adopted to a greater extent—on the one hand, the companies were already familiar with this idea, and on the other hand, the company’s responsibilities in this area were clarified. However, the increase in the prevalence of audit committees does not mean they are relevant. Further research is required on the efficiency and effectiveness of audit committees in Polish public companies. For instance, it should show how the appointment and composition of audit committees affect a firm’s performance after legal changes. This research can also scrutinize how the presence of independent directors on these committees and the quality of directors’ decisions impact on companies’ market value. It should employ econometric models, e.g. panel data analysis. However, there are high expectations for audit committees. The future research will show if they are met.

References Abbott, L., Parker, S., & Peters, G. (2004). Audit committee characteristics and restatements. A Journal of Practice and Theory, 23(1), 69–87. Aldamen, H., Duncan, H., Kelly, S., McNamara, R., & Nagel, S. (2012). Audit committee characteristics and firm performance during the global financial crisis. Accounting and Finance, 52(4), 971–1000. Barka, H. B., & Legendre, F. (2017). Effect of the board of directors and the audit committee on firm performance: A panel data analysis. Journal of Management and Governance, 21(3), 737–755. Beasley, M. (1996). An empirical analysis of the relation between the board of directors composition and financial statement fraud. The Accounting Review, 71(4), 443–465. Beattie, V., Fearnley, S., & Brandt, R. (2000). Behind the audit report: A descriptive study of discussions and negotiations between auditors and directors. International Journal of Auditing, 4, 177–202. Bedard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. A Journal of Practice and Theory, 23(2), 13–35. Best Practice for GPW Listed Companies 2016. Retrieved from http://www.ecgi.global/sites/ default/files/codes/documents/poland_best_practice_for_GPW_listed_companies_2016.pdf Best Practices in Public Companies in 2002. Retrieved from http://www.ecgi.global/code/bestpractices-public-companies-2002 Best Practices in Public Companies 2005. Retrieved from http://www.ecgi.global/code/best-prac tices-public-companies-2005 Birkett, B. S. (1986). The recent history of corporate audit committees. The Accounting Historians Journal, 13(2), 109–124.

4

Audit Committees in Supervisory Boards of Polish Public Companies: Theory,. . .

65

Bosch Report. (1995). Bosch Report: Corporate practices and conduct (3rd ed.). Sydney: Pitman Publishing. Burke, F. M., Guy, D. M., & Tatum, K. V. (2008). Audit committees: A guide for directors, management, and consultants. Chicago: Wolters Kluwer business. Carcello, V., Neal, T. L., Palmrose, Z.-V., & Scholz, S. (2011). CEO involvement in selecting board members, audit committee effectiveness, and restatements. Contemporary Accounting Research, 28(2), 396–430. Carson, E. (2002). Factors associated with the development of board sub-committees. Corporate Governance: An International Review, 10(1), 4–18. Chan, K. C., & Li, J. (2008). Audit committee and firm value: Evidence on outside top executives as expert-independent directors. Corporate Governance: An International Review, 16(1), 16–31. Code of Best Practice for WSE Listed Companies. Retrieved from http://www.ecgi.global/sites/ default/files/codes/documents/best_practice_wse_poland_nov2012_en.pdf Colley, J. L., Jr., Doyle, J. L., Logan, G. W., & Stettinius, W. (2005). What is corporate governance. New York: McGrew-Hill. Collier, P. (1993). Factors affecting the formation of audit committees in major UK companies. Accounting and Business History, 23(1), 421–430. Collier, P., & Zaman, M. (2005). Convergence in European corporate governance: The audit committee concept. Corporate Governance: An International Review, 13(6), 753–768. Committee on the Financial Aspects of Corporate Governance. The financial aspects of corporate governance (Cadbury report). London: Gee and Co. De Jong, A., De Jong, D. V., Mertens, G., & Wasley, C. E. (2002). The role of self-regulation in corporate governance: Evidence and implications from The Netherlands. Journal of Corporate Finance, 11(3), 473–503. De Zoort, F. T., & Salterio, S. (2001). The effects of corporate governance experience and financial reporting and audit knowledge on audit committee members’ judgments. A Journal of Practice and Theory, 20(2), 31–47. De Zoort, F. T., Hermanson, D. R., Archambeault, D. S., & Reed, S. A. (2002). Audit committee effectiveness: A synthesis of the empirical audit committee literature. Journal of Accounting Literature, 21, 38–75. Dobija, D. (2010). Komitet audytu a nadzór nad biegłym rewidentem. Praktyka polskich spółek giełdowych, Zeszyty Teoretyczne Rachunkowości, 59, 5–14. Dobija, D. (2011). Doświadczenia funkcjonowania komitetów audytu w Polsce. In D. Dobija, I. Koładkiewicz, I. Cieślak, & K. Klimczak (Eds.), Komitety rad nadzorczych. Warszawa: Wolters Kluwert Business. Dobija, D. (2013). Exploring audit committee practices: Oversight of financial reporting and external auditors in Poland. Journal of Management and Governance, 19(1), 113–143. Du Plessis, J. J., & Low, C. K. (2017). Corporate governance codes under the spotlight: International perspectives and critical analysis. Cham: Springer. Ferguson, N. (2008). The ascent of money: A financial history of the world. New York: Penguin. Jerzemowska, M., Campbell, K., & Najman, K. (2010). Przyczynek do oceny polskich regulacji nadzoru korporacyjnego. Master of Business Administration, 115(4), 2–15. Kallamu, B. S., & Saat, N. A. M. (2015). Audit committee attributes and firm performance: Evidence from Malaysian finance companies. Asian Review of Accounting, 23(3), 206–231. Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400. Koładkiewicz, I. (2013). Rady nadzorcze – dobre praktyki ładu korporacyjnego: Doświadczenia polskie i zagraniczne. Warszawa: Poltext. Krishnan, J. (2005). Audit committee financial expertise and internal control: An empirical analysis. The Accounting Review, 80(2), 649–675. Mangana, M., & Pike, R. (2005). The effect of audit committee shareholding, financial expertize and size on interim financial disclosures. Accounting and Business Research, 35(4), 327–349.

66

A. Adamska et al.

Menon, K., & Williams, J. D. (1994). The use of audit committees for monitoring. Journal of Accounting and Public Policy, 13(2), 121–139. Oplustil, K. (2010). Instrumenty nadzoru korporacyjnego (corporate governance) w spółce akcyjnej. Warszawa: C.H. Beck. Pincus, K., Rusbarsky, M., & Wang, J. (1989). Voluntary formation on corporate audit committees among NASDAQ firms. Journal of Accounting and Public Policy, 8(4), 239–265. Saleh, N. M., Iskandar, T. M., & Rahmat, M. M. (2007). Audit committee characteristics and earnings management: Evidence from Malaysia. Asian Review of Accounting, 15(2), 147–163. Samaha, K., Khlif, H., & Hussainey, K. (2015). The impact of board and audit committee characteristics on voluntary disclosure: A meta-analysis. The Journal of International Accounting, Auditing, and Taxation, 24, 13–28. Spira, L. F. (2003). Audit committees: Begging the question? Corporate Governance: An International Review, 11(3), 180–187. Sultana, N. (2015). Audit committee characteristics and accounting conservatism. International Journal of Auditing, 19(2), 88–102. Ustawa z dnia 7 maja 2009 r. o biegłych rewidentach i ich samorządzie, podmiotach uprawnionych do badania sprawozdań finansowych oraz o nadzorze publicznym, Dz. U. z 2009 r., nr 77, poz. 649 ze zm. Ustawa z dnia 11 maja 2017 o biegłych rewidentach, firmach audytorskich oraz nadzorze publicznym, Dz. U. z 2017, nr 0, poz. 1089. Verschoor, C. C. (1990). MiniScribe: A new example of audit committee ineffectiveness. Internal Auditing, 5(4), 13–19. Winter, J., Hopt, K. J., Rickford, J., Garrido Garcia, J. M., Rossi, G., Schans, C. J., & Simon, J. (2002). Report of the high level group of company law experts on a modern regulatory framework for company law in Europe, Brussels, 4 November.

Agata Adamska is an Associate Professor at Institute of Corporate Finance and Investments, Collegium of Business Administration, Warsaw School of Economics. She has Ph.D. and Master degree from the Collegium of Socio-Economics, Warsaw School of Economics, and also Master degree from the Faculty of Law and Administration, University of Warsaw. She’s carrying out research on ownership and governance in public companies, capital market, strategic finance and so far published its results in over 60 books and articles (as author or co-author). Besides lectures for students on all three levels of studies and on postgraduate studies she conducted many in-company training programs for corporate clients. Leszek Bohdanowicz is an Associate Professor at the Department of Strategy and Value Based Management, Faculty of Management, University of Lodz, Poland. He has MA and Ph.D. degrees from the University of Lodz. His research interests are in the areas of corporate governance and strategic management. He published his research in various Polish and international journals. Leszek Bohdanowicz carried out numerous research projects financed by the Polish Ministry of Science and Higher Education. He conducted also training and consulting activities for many Polish companies. Jacek Gad is an Assistant Professor at the Department of Accounting, Faculty of Management, University of Lodz, Poland. His research interests focus on financial reporting, business reporting, corporate governance. Currently, he is conducting research in the area of the internal control and risk management systems in relation to the process of preparing financial statements. He is the author and co-author of over 50 publications in the field of accounting and corporate governance.

Chapter 5

Corporate Control Market: Russian Practice Alla Vavilina and Lidia Levanova

5.1

Introduction

The paper deals with the issues of rapid and contradictory development of the corporate control market in Russia. It singles out and describes typical features of the corporate control market development in Russian and foreign practice. The paper analyzes the reasons for the corporations’ reorganization based on theoretical models, the motivations for mergers and acquisitions of companies in the West, identifies Russian specificities, as well as the factors that have influenced the trends in mergers and acquisitions in Russia. In the course of the analysis, the authors identified a correlation between the number of transactions in the world and Russian markets since the beginning of the corporate control market development in Russia. The analysis of the reasons for integration, the economic situation in a specific sectorial market and the general macroeconomic situation made it possible to identify the main stages of mergers and acquisitions in the Russian economy. There have been revealed structural changes in mergers and acquisitions transactions, namely the growth of domestic transactions with a parallel reduction in purchases of Russian assets by foreign companies as well as in purchases of foreign assets by Russian companies. The paper identifies the main engine of growth in the development of corporate control market, namely, the oil and gas sector due to the resource-oriented nature of Russian economy, the agricultural sector, the impetus of mergers and acquisitions in which is import substitution and growth rates, as well as the main trends of mergers in the pharmaceutical and construction industries. Opposite trends in merger

A. Vavilina (*) Peoples’ Friendship University of Russia (RUDN University), Moscow, Russia e-mail: [email protected] L. Levanova Saratov State University, Saratov, Russia © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_5

67

68

A. Vavilina and L. Levanova

transactions were identified in the banking sector, notably, the departure of foreign investors and the activity intensification of banks with public capital participation. As a result, a conclusion was made on increasing both market and capital concentration in the banking sector due to the formation of banking groups, the lack of “pure” merger mechanisms and special tools for the Central Bank to participate in these processes. The authors made a conclusion on the uneven development of M&A transactions, in contrast to their global structure, which is more differentiated. The authors described the results of the geopolitical diversification policy implemented by the Russian government and the international policy of sanctions imposed on the Russian Federation, namely, the inflow of investments from the Asian and Middle Eastern regions and the reduction in investments from European countries and the USA. Suggestions have been made concerning the further attraction of large investments from China, Asia and the Middle East.

5.2

The Development of the Regional Insurance Market in Russia

In the current context, Russia is going through an active process of production and capital concentration; today the Russian economy is the economy of large economic entities. The mechanism of concentration in Russia is the corporate control market, which is growing rapidly and faced with various contradictions. In addition, at present, mergers and acquisitions are the dominating part of foreign direct investment. Since the mid-1990s, the Russian Federation economy has been undergoing the process of mergers and acquisitions, caused by the desire to expand the scope of corporate activities. In general, until 2014, the pace of development in the Russian market was similar to the world one: market rose to its peak in 2007, and then reduced to a minimum in 2012–2013. The Pearson correlation coefficient between changes in the world and Russian markets sizes in 2002–2013 was 0.72, that is, there is a strong direct correlation between the changes under consideration. The Pearson correlation coefficient between the numbers of merges and acquisitions in the global and Russian markets in the same period was 0.56, which means that there was also a direct correlation between them (Ivanov 2017, p. 490). The analysis of the reasons for integration, the state of a specific industry market and the general macroeconomic situation made it possible to identify the main stages of mergers and acquisitions in the Russian economy (Table 5.1). Thus, the period of 2002–2007 was characterized with the largest number of M&A transactions. It was a period of high growth rates of the Russian economy (about 7% per year), which was combined with a favorable situation in world commodity markets and a macroeconomic situation conducive to the rapid development of the Russian economy. Starting from stage IV, that is, from 2008, to the present, there has been a decrease in the number of M&A transactions (Table 5.2, Figs. 5.1 and 5.2).

5

Corporate Control Market: Russian Practice

69

Table 5.1 Features of the M&A stages in market of the Russian Federation Duration Stage I: 1992– 1995

Stage name Formation of the М&А market

Stage II: 1996– 2001

Assets redistribution

Stage III: 2002– 2007

Entering global М&А market

Stage IV: From 2008 to the present

Decreasing М&А transactions

Short description of the stage Mergers and acquisitions of enterprises through privatization; Formation of financial and industrial groups; Spontaneous M&A transaction in various industries Assets redistribution after privatization; Raiding; Closed information about transactions Restructuring companies; Conducting horizontal mergers and expansion into regions; Russian companies entering foreign markets; Increasing the number of transactions involving state-owned companies; Conducting mega-deals in resourcebased industries Non-implementation of М&А deals due to the lack of credit resources and the lack of a fair assessment of the objects of M&A transactions; The implementation of quasinationalization processes (the acquisition of Russian assets by Russian state-owned companies that became unprofitable as a result of crisis)

Main reasons for integration Assets drain Political reasons

Purchasing assets at a price below market rate; Taking control over financial and administrative resources For private companies: Broadening the resource base; Entering new markets; Increasing company’s influence on the industry and entering global markets. For state-owned companies: Control over financial and industrial flows For private companies: Disposing of the assets that cause the losses as the result of economic crises; For state-owned companies: Maintaining political and Economic stability

Source: Evstratov and Ignatieva (2017, p. 26) Table 5.2 M&A market dynamics in Russia (2015–2016) Year 2010 2011 2012 2013 2014 2015 2016

Number of transaction 266 302 334 333 621 470 481

The amount of transactions (excluding megadeals), billions of USA dollars 76.7 70 79.5 100.9 79 52 75.8

Source: Arzumanov (2018)

Mega-deals (>10 billion of US dollars) 20.7 56 14.4

70

A. Vavilina and L. Levanova

100% 90%

12.4

13.6

80% 70%

31.1

16.3

18.4

12.3

4.6

7.9 10.9

21.2

13.8 5.1

15.8 15.3

60%

Purchasing foreign companies by Russian companies

50% 40% 30%

107.3 53.9

40.6

2010

2011

92.2

57.3

Purchasing Russian companies by foreign companies

36

Domestic transactions 39.3

20% 10% 0% 2012

2013

2014

2015

2016

Fig. 5.1 The amount of transactions in the Russian M&A market based on the type of transaction in 2010–2016, billions of USA dollars. Source: Arzumanov (2018) 100% 90%

52

71

73

63

74

80% 70%

71

39 53

48

65 58

54 48

41

Purchasing Russian companies by foreign companies

60% 50% 40% 30%

175

178

213

229

476

347

379

Purchasing foreign companies by Russian companies Domestic transactions

20% 10% 0% 2010

2011

2012

2013

2014

2015

2016

Fig. 5.2 The number of transactions in the Russian M&A market based on the types of transaction in 2010–2016. Source: Arzumanov (2018)

Despite the increase in the volume and numbers of transactions in the M&A market in Russia in 2016, the main drivers were three largest transactions in the oil and gas sector: the sale of a stake in “Rosneft”, the purchase of shares in Indian Essar Oil, and the privatization of “Bashneft” (Table 5.3). According to statistics from the M&A Market newsletter, in early 2017, the M&A market with the participation of Russian companies showed explosive growth. The total value of transactions in January and February reached almost USD 7 billion— 2.5 times more than in the same period last year (Kuznetsov 2016, p. 217). This result is mostly due to closing two largest transactions in this period. These are the transition

5

Corporate Control Market: Russian Practice

71

Table 5.3 The largest transactions in Russian М&А market in 2016

Object of transaction “Rosneft” Oil Company Essai Oil Limited

Industry Oil and gas industry Oil and gas industry

PJSC “Bashneft”

Oil and gas industry

Polyus Gold

Metallurgy and mining industry

PJSC “Bashneft”

Oil and gas industry

Buyer Qatar Sovereign Fund “Rosneft” Oil Company “Rosneft” Oil Company “Polyus”

“Rosneft” Oil Company

Seller OJSC “Rosneftegaz”

Acquired stake, % 20

Amount of transaction, billions of USA dollars 11,270

Essai Group

49

6328

Federal Agency for State Property Management “Polyus Gold” International; Minority shareholders Minority shareholders

50

5299

32

3735

31

3112

Source: Arzumanov (2018)

of the railway operator “UVZ-Logistic” under the control of “Trinfico property management”, estimated at USD 2.5 billion based on the size of its liabilities, and the consolidation of “Rosneft” stakes in several refineries in Germany for USD 1.52 billion. But even by deducting these transactions, the volume of the mergers and acquisitions market grew by 8% compared to the beginning of the previous year. The number of transactions also increased significantly—by 16 4% to 78 transactions versus 67 in January–February 2016. But the average value of one transaction (minus the largest ones, more than USD 1 billion) slightly decreased—by 5% to USD 39 million from USD 40.9 million in the first 2 months of the last year. In ruble terms, the market in January–February 2017 also significantly increased—2 times, to 412 billion rubles. From 206 billion rubles within the first 2 months of the previous year (Yagumova and Shogenov 2018, p. 204). Of course, the indicators are still far from the peak results of 2013, but it can be stated that the gradual recovery of the Russian M&A market is already underway, which is proved by the statistics of the “AK & M Information Agency” (Maergers and acquisitions market http://mergers.akm.ru/stats/21). Thus, in 2017 the number of M&A transactions involving Russian companies increased by 2%, to 460 transactions. At the same time the total value of transactions in 2017 was the greatest over the past 4 years—USD 51.6 billion, up 25.9% from a year earlier. In addition, the number of mega-deals (worth more than USD 1 billion) slightly increased—to 7 transactions from 6 in 2016. The purchase of the Indian Essar Oil by the consortium of “Rosneft”, the UCP fund and the Singapore-based trader Trafigura was the largest deal of 2017 in the Russian M&A market. The deal, which cost amounted to USD 9.5 billion, has been also the largest in the fuel and energy complex over the past 3.5 years.

72

A. Vavilina and L. Levanova

However, Russian companies remain fairly cheap. The total share of transactions worth up to USD 50 million in the Russian M&A market in 2017 was the largest in the last 8 years—77.6%. The share of the lowest price range (less than USD 10 million) over the year increased by 3.4 pp, to 46.1%. At the same time, the share of transactions worth USD 500 million and more has also almost doubled. Medium segment companies reduced M&A activity proportionately.

5.3

Regional Dimension

The policy of geopolitical diversification pursued by the Government of the Russian Federation is also evolving into an increase in investment inflows, primarily from the Asian and Middle Eastern regions, which accounted for more than 80% of 2016 transactions announced by foreign companies willing to buy Russian assets. The Asian and Middle Eastern regions in 2016 made investments in Russia amounting to 21.2 billion of USA dollars. The activity indicator in this case is the growth of investments from India more than three times (USD 4.3 billion) and the participation of the Qatar Sovereign Fund in the “Rosneft” transaction. In the future, it is expected not only the growth in the volume of transactions as a whole, but also the expansion of their geography, as well as an increase in the number of the most active, investment-attractive sectors. Despite the sharp decline in investments from Chinese companies abroad since October 2016, caused, among other things, by the regulations of the China’s State Council for their control, one of the incentives for China to invest in Russia is the fact that most China’s Silk Road program affects the territory of Russia. In 2016, not a single acquisition transaction of Russian assets by US strategic investors was announced, which directly reflects the geopolitical anxiety of this group of investors, as well as the current situation in the international arena. Despite the fact that the portion of transactions of purchasing Russian assets by European investors (67%) is still substantial, their total value fell to USD 1.4 billion, which is only 7% of the total amount of transactions of purchasing Russian assets by foreign investors. This situation indicates the alertness of European investors. But the Russian M&A market has considerable potential and this is confirmed by the growing interest of such Asian partners as Kazakhstan, China, Indonesia, and Korea. They were more optimistic in 2017 that in 2015–2016.

5.4

The Regional Dimension of Corporate Control Market in Russia

Many foreign investors are interested in the agricultural sector, which showed a growth of 4.8% in 2016 caused by the fact that this sector is larger than any other and benefited from the fall in the ruble exchange rate and reduced competition with

5

Corporate Control Market: Russian Practice

73

imported goods; in addition, the government called it one of the priority sectors of the Russian economy. The favorable combination of factors such as a competitive level of production costs and high crop yield allowed Russia in 2016 to become the world’s leading exporter of wheat for the first time. The growth potential of the sector was reflected in the increase in the number of transactions by almost 2/3 (Figs. 5.3 and 5.4). Russian and foreign investors announced M&A transactions in this sector totaling USD 1.5 billion in 2016, which continued the upward trend. In 2017, this sector maintained the interest in investing in it. M&A activity in agriculture at the beginning of 2017 also broke its own record in terms of growth rates. In the first 2 months of the year, the industry closed the same number of transactions as a year earlier—six transactions—but their year-on-year total value increased five times, to $ 684.3 million (9.7% of the market size), which allowed agriculture to be ranked third. The first place in the ranking of industries in January–February 2017 was taken by transport with three transactions worth USD 2.61 billion (37.4% of the market). This result was achieved primarily due to the largest transaction at the beginning of the year—the transition of “UVZ-Logistic” to Trinfico property management (Figs. 5.5 and 5.6). M&A activity in the fuel and energy complex in early 2017 sharply increased. The total value of the three transactions amounted to USD 1.71 billion (24.5% of the market size), which is 2.3 times more than over the previous year. The fuel and energy complex became the leader in terms of the M&A transactions volume among

8

6.8

6 4 2

0.9

0.8

2011

2012

1.3

1

1.3

1.5

2013

2014

2015

2016

0 2010

Fig. 5.3 The amount of M&A transactions in the agricultural sector, 2010–2016, USD billions. Source: Markov and Batyrova (2018, p. 37) 50 41

40 33

30

25

20

16

10 0

15

16

2 2010

2011

2012

2013

2014

2015

2016

Fig. 5.4 The number of M&A transactions in the agricultural sector, 2010–2016. Source: Markov and Batyrova (2018, p. 37)

74 Fig. 5.5 The ratio of industries in term of the transactions amounts in the Russian M&A market in January–February 2017, %. Source: Markov and Batyrova (2018, p. 37)

A. Vavilina and L. Levanova

16 Transport Industry 4

37

8

Fuel and Energy Complex

10

Agriculture 25

Fig. 5.6 The ratio of industries in term of the transactions numbers in the Russian M&A market in January–February 2017, %. Source: Markov and Batyrova (2018, p. 37)

Construction and Development

21

29

IT 14 8 8

10 10

Commerce Services

industries in 2017. The number of transactions in the industry in 2017 increased 2.3 times, to 23. The volume of transactions amounted to USD 15.16 billion (29.4% of the total size of the M&A market), increased 20 times compared with 2016. This is mainly due to the deal with Essar Oil. Construction and development in early 2017 also demonstrated excellent results. The number of transactions in the industry increased by 45% by January–February 2016, up to 16 transactions, and their total amount—by 64%, to $ 555.7 million (8% of market size) (Yagumova and Shogenov 2018, p. 205). Construction and development in 2017 dropped to fifth place in terms of the transactions volume, although they retained the first position in terms of the number. The industry recorded 88 transactions worth USD 3.77 billion (7.3% of the market). The largest of these deals was the consolidation of a controlling stake in the PIK group of companies for USD 625 million by the structures of Sergei Gordeyev, the group’s president. The service sector has retained the third position both in terms of volume and number of transactions, but the growth rate in the industry has increased significantly. The volume of transactions amounted to $ 6.56 billion—7 times more than in 2016, the number—46 (an increase of 18%). The market share of services in the total volume of M&A in 2017 was 12.7%. Most transactions in the service sector in 2017 accounted for catering—the main role is played by fast food and services for the door-to-door delivery of ready-to-eat food or sets of food products. Private health sector is a very attractive segment for investments. The high result of M&A activity in the service sector was mostly provided by the historically largest transaction in the industry—the purchase for USD 5 billion of Parexel Company by the investment fund Pamplona Capital Management, which provides services for pharmaceutical, medical and biotechnology companies.

5

Corporate Control Market: Russian Practice

75

In 2017, commerce retained high growth rates and ranked fourth in the industry, dropping from the third position in 2016, but maintaining market share (10.9% of the volume). At the end of the year, the number of transactions in the industry increased by 7.9%, to 68 transactions, and their total value increased by 24.4%, to USD 5.6 billion. However, it should be noted that such a high result is due to closing the largest M&A transaction in the history of Russian commerce: purchases of the Holland & Barrett chain stores by L1 Retail, which is a part of the latter Holding of Alfa Group’s shareholders, for USD 2.3 billion. In general, by the end of 2017, the growth in the number of transactions and the overall level of M&A activity was noted in metallurgy, food industry, agriculture, fuel and energy, commerce, services and insurance. In other industries, M&A activity decreased. In the pharmaceutical market of the Russian Federation, specialists have identified the multi-directional nature of mergers and acquisitions, manifested in a decrease in the M&A activity in the Russian economy as a whole, and at the same time an increase in the M&A activity in the pharmaceutical market in the Russian Federation. In 2013–2015, a significant number of mergers and acquisitions transactions in the manufacturing segment were carried out in the pharmaceutical market of the Russian Federation, and the number of transactions involving Russian companies was a record in the last few years. Projects to create new production sites were quite actively announced in the Russian Federation. As a development strategy, pharmaceutical companies demonstrate interest in conducting an initial public offering, the logical result of which is M&A processes. As an example of such a strategy implementation, it is necessary to cite “Pharmacy Chain 36.6”, which had experience in preparing and conducting initial public offerings (IPO) and secondary public offerings (SRO), which made it possible to attract additional funds for the implementation of the company’s long-term development strategy, and allowed companies to become leaders in the pharmacy segment in the Russian pharmaceutical market. As negative factors affecting the processes of mergers and acquisitions, we can name the following. At the moment, Russian manufacturers do not have their own original medicines for sale. Some domestic manufacturers are already entering the global pharmaceutical market, for example, “R-Pharm” bought manufacturing facilities in Europe in 2014, and in 2015, the anticancer drug Ixabepilonum from BristolMyersSquibb, which had lost its patent protection. This transaction amounted to about a third of the mergers and acquisitions in the pharmaceutical market of the Russian Federation in 2015. The main dynamics in the exchange of assets in 2015 was provided by the retail pharmaceutical segment (Table 5.4). In the third quarter of 2016, the global bio-pharmaceutical company Pfizer and the Russian pharmaceutical company “NovaMedica” entered into a cooperation agreement. Pfizer, in the framework of this partnership, should become an investor in the construction of a new “NovaMedica” plant, which is planned to be built in the Kaluga region in compliance with Russian and international requirements, which will allow “NovaMedica” to manufacture products for the Russian pharmaceutical

76

A. Vavilina and L. Levanova

Table 5.4 Mergers and acquisitions in the Russian Pharmaceutical Market in 2015 Asset/merger objects Pharmacies LLC “Chain pharmacies “Zabava” 25 pharamcies”

LLC “Nectar South” (26 pharmacies in Rostov and the Rostov region) “Ladushka” chain Chain “Bliznetsy” (30 pharmacies, Samara) Chain “Zhelaem Zdorovje” (20 pharmacies, Moscow) Chain “Grass Pharm” (5 pharmacies, Moscow) LLC “Medfarminvest” pharmacy chain “Drugstores in the Moscow region”, (40 pharmacies) 62.94% “А5 Pharmacy Retail” 5.81% “А5 Pharmacy Retail”

Buyer

Amount of transaction

“Medexport-North Star” (Pharmacopeiaka chain) GK “Pharmacist”

50 million rubles (estimation)

CJSC “Rosta” Chain “Melodiya Zdorovja” (Katren) PJSC “Chain pharmacies 36.6” PJSC “Chain pharmacies 36.6” PJSC “Chain pharmacies 36.6”

60–100 million rubles (assessment) 1.5–1.7 million rubles (assessment) 150–220 million rubles Reissuing lease agreements Reissuing lease agreements n/a

Concern “Rossium” PJSC “Chain pharmacies 36.6” Roman Buzdalin and Sergey Solodov

n/a n/a

Manufacturing CJSC “Biokorm”

Lupiu

OJSC “Ugrapharm”

OJSC “Pharmasintez”

OJSC “NPK Bioran” Other “VitaPortal” (portal for doctors) and “Group Eureka” (portal for patients)

Vitaly Mashitsky

860 million rubles (estimation) 125 million rubles (assessment) n/a

PJSC “Chain pharmacies 36.6”

LLC “RID” “Gorzdrav” trademark Anticancer drug “Ixabepilonum”

Merger

LLC “Pharmacy—A. V.E” CJSC “R-Pharm”

n/a

1.12 million rubles (assessment of the incorporated company) 2.153 million rubles USD 100–150 million (estimate)

Source: Evstratov and Ignatieva (2017, p. 13)

market and for export. Pfizer should also transfer licenses for the production technology of more than 30 medicines from its product portfolio to the Russian company. The medicines production by the newly established enterprise is scheduled to begin in 2020. As a result of studying the majority of mergers and acquisitions transactions in the pharmaceutical market of the Russian Federation, the reasons for companies to

5

Corporate Control Market: Russian Practice

77

implement them are: obtaining a synergistic effect on company value, obtaining competitive advantages of a newly created company as a result of sharing technological knowledge, economies of scale and saving in staff. As a result, according to experts, the specificity of mergers and acquisitions processes in the Russian pharmaceutical market is that there are no major transactions (compared to the global pharmaceutical market), which is due to the lack of original medicines at Russian companies called blockbusters in world practice.

5.4.1

Banking Sector

Since 2014, the market for Russian banking mergers and acquisitions is going through tough times. According to the National Rating Agency (NRA), the banking sector of the Russian Federation in 2016 showed a record decline in the number of classic M&A transactions over the past decade. The key players in the Russian market during this period were foreign investors, mainly from France, the United States, Norway and Cyprus. Since 2009, a massive exodus of foreign banks from the Russian market has begun, which was caused by both effective cost minimization and the overall political situation. If until 2009 the key players in the Russian banking market M&A were foreign investors, the second main group of players were and remain banks with state participation in the capital. For the period of 2005–2016, they made 14 transactions worth over USD 3.2 billion. The largest transactions are: • the purchase of the investment bank Troika Dialog by “Sberbank”, which allowed “Sberbank” to expand its investment services market; • the purchase of OJSC “Transcreditbank” by VTB Bank (PJSC); the amount of the transaction was USD 1.7 billion (Gritsenko and Rozhin 2017, p. 184). The transactions peak, both in quantitative and money terms, was obtained in 2006–2008, since this was the period when cheap loans were available to banks, while a fairly quick financial effect was derived from the effects of the purchase. The tops Russian banking M&A services in 2005–2015 include: “Otkritie” banking group—3 transactions, “BIN” group—6 transactions, “Promsvyazbank” group—6 transactions and “Gazprombank” group—5 transactions. At the present stage in the Russian banking business there is a tendency to form banking groups: in 2012, five major banking groups looked like this: “Sberbank” group, VTB group, “Gazprombank” group, “Vnesheconombank” group and Alfa bank group. In 2015, the list of the largest banks in terms of their assets was the following: PJSC “Sberbank”, VTB Bank (PJSC), VTB-24 Bank (PJSC), “Gazprombank” (JSC), PJSC “Otkritie” FC. Other banks’ share is 30% and 303 banks fail to meet the requirements of the Central Bank for the size of the authorized capital. It is in this sector that the main M&A transactions are made (Fig. 5.7).

78

A. Vavilina and L. Levanova

Fig. 5.7 The distribution of assets in the banking sector, %. Source: Gritsenko and Rozhin (2017, p. 185)

PJSC “Sberbank”

29

30

PJSC “VTB Bank” JSC “Gazprombank”

4

15

15 7

PJSC “Bank VTB 24"

In addition, at present in the Russian M&A banking market a new kind of transactions has emerged. After revocation a license from a credit institution we can witness the transfer of property rights and obligations. The Central Bank of the Russian Federation may approve a participation plan and allow transferring all liabilities, for example, overriding ones (towards depositors) from a “withdrawn” bank to a functioning one. At the same time, the Deposit Insurance Agency (DIA) does not spend money from its funds, since deposits are transferred to the “accepting” bank, even beyond the insurance coverage. The assets of the bank amounting to the sum of such liabilities are transferred to the buyer; and the buyer is given the right to choose the bank’s asset equal to these liabilities. There were two transactions of this kind: Thus, PJSC “Binbank” bought the assets from “Probusinessbank”, and the Bank “Russian Capital” (PJSC)—from OJSC “NotaBank”. One of the major projects due to mergers in 2016 was PJSC “Pochta Bank”. This organization was established thanks to the VTB banking group and the Post of Russia on the basis of PJSC “Leto Bank”, which was also founded by the decision of the management of the VTB banking group. Thus, at present, mergers and acquisitions in the banking business of Russia are carried out primarily with the aim of consolidating the indicators of a credit institution, in order to increase its financial stability. The Central Bank pursues a policy aimed at stimulating interbank transactions as a way to increase the concentration of banking capital; and the ever-increasing revocations of banking licenses makes many small and medium-sized banks think about mergers between themselves with a view to consolidation. According to experts, there are practically no “pure” bank mergers, in which both transaction parties achieve a synergistic effect. Usually, however, a large player absorbs a smaller “colleague”; we can state that there are no voluntary acquisitions in Russia. Insurance companies also belong to the financial market. For the second year in a row, the insurance market, like the banking one, has been experiencing contraction. In 2014–2015, about 150 financially unstable and insolvent companies left the insurance market. Since the moment the Central Bank started regulating the insurance market in 2013, the number of insurers in the country has decreased from 443 to 257 enterprises. A synergy is expected when combining assets, not only with other insurance companies, but also with banks or pension funds. Over the past year, three major

5

Corporate Control Market: Russian Practice

79

mergers have occurred within the leading 20 companies, which will be able to redraw the insurance map. So, “Rosgosstrakh”, which moves under the control of “Otkritie”, in June 2016, for the first time in the history of CMTPL, lost its leadership in this market, ceding to “RESO-Warranties” and VSK. The latter continues to form the insurance group, after it merged its assets with the “Safmar” group (including the “BIN” banking group) in July 2016. In June, it completed the acceptance of the CMTPL portfolio from “VTB Insurance”, in July announced the completion of the transaction for entering the group “VSK-Life Line” VSK has ambitious plans to double the volume of collected premiums by 2020. The largest transaction in the last decade involving a foreign investor in the Russian insurance market was the merger of Renaissance Insurance and “Blagosostoyanie” assets under the Renaissance brand. The Renaissance Group will have a specialized product that allows it to hedge perpetual pension plan risks. These risks in Russia are growing along with the increase in the endowment period. The combined insurance group will include LLC Renaissance Insurance Group, LLC Insurance Company Renaissance Life, JSC Insurance Company “Blagosostoyanie” “OS”, JSC NPF “Blagosostoyanie” MNC, JSC GC “SputnikCapital Management” and LLC Medical company “Medkorp”. In the merged company, 52.1% will belong to the international group Sputnik, 35.8% will be owned by “Transfingroup” Management Company (manages pension reserves of NPF “Blagosostoyanie”), 12.1% will be held by the international institutional investor “Baring Vostok” Fund (it was the only company that participated in the transaction merely with its money contributing 3.3 billion rubles; the rest contributed both assets and money). The motives for the merger are synergy, cost reduction, growth in the value of a company due to an increase in earnings per share. This merger makes it possible to get a share (more than a third) in a large diversified player. The combined Renaissance Insurance group is expected to enter the Top-10 in terms of its insurance fees and will rank third among life insurers, sixth in the motor and medical insurance markets. In 2017, the combined group’s premiums exceeded 50 billion rubles, and by the end of 2017, its profit amounted to about 3 billion rubles. Within 1 year, the combined group planned to launch the IPO (Nikulina and Berezina 2017, p. 50). VSK, which occupies the eighth position in the rating of premium insurance companies, also creates its own insurance group. As a result, in 3 years VSK plans to double in volume. The established insurance group increases the insurance business: for example, by 2020 the premium collection plan for the group is 110 billion rubles, compared to 56 billion in 2016. Assets are expected to grow to 190 billion; in 2016 they were only 56 billion. The most high-profile transaction closed from the outside world in the insurance market in 2017 became the transfer of the company “Rosgosstrakh” (RGS) under the control of “Otkritie”. The structure of the transaction has not yet been disclosed, there is not even a reliable confirmation of which assets of Roskosstrakh is acquired by Otkritie and under what conditions. The flagship of the insurance industry is on the verge of financial collapse and needs urgent rescue, either through a mechanism of financial clean-up (which has not yet been developed and agreed upon), or

80

A. Vavilina and L. Levanova

through the help of merging partners. The loss of “Rosgosstrakh” under IFRS in 2016 increased 6.6 times compared with 2015 and amounted to about 33.3 billion rubles. The market share of the former leader in the CMTPL market declined from 35% to 12%. FC “Otkritie” Bank acquired a holding of 72 million “Rosgosstrakh” shares as a part of REPO deal, increasing its stake in the insurer’s authorized capital from 4.4% to 19.8%. In the course of the transaction with “Otkritie”, deep structural changes within “Rosgosstrakh” have already begun. Based on the projection for high unprofitability in the CMTPL segment, the board of directors decided to attract grant assistance from the shareholder, namely RGS Holding, which owns 31.7% of “Rosgosstrakh”, in order to replenish the equity capital of “Rosgosstrakh”, and is supposed to invest 30 billion rubles in the property of the insurer. Experts and market actors point out the obvious non-market nature of the transaction between RGS and “Otkritie”. If the deal fails, the regulator needs to speed up the creation of the mechanism of financial clean-up, since the insurer will have no other way out. The Rostov-on-Don Department of Property and Land Relations has sold in a public auction 85.2% of the shares of OJSC IC “ENI”, which has been operating in the insurance market of the Southern Federal District and the North Caucasus Federal District since 1992. According to the official website, the winner of the auction is the Moscow company LLC “Spektr”, which is engaged in legal activities. According to the results of the auction, the winning company bought ENI’s shares at an initial price of 60.3 million rubles (Chizhikova 2017, p. 226). Players expect that consolidation will continue both in the Top-10 segment and in the group of first five players. The number of insurance companies will further reduce: if in 2016 75 players left the market, then in 2017 another 25 companies are expected to leave. At the same time, no deals with the participation of foreign investors are foreseen in the near future. Only 10% of respondents expect foreign investors from Southeast Asia to demonstrate interest to these transactions. Within the research of mergers and acquisitions, Karelina M.G. and Mkhitaryan G.K. (2018) using the decomposition of distributions in modeling the integration activity of companies from 16 sectors of the Russian economy, identified three groups of industries with different levels of integration activity. As a result, it was concluded that for the period from 2014 to 2016, the number of the Russian economy sectors with low integration activity did not change and amounted to 12.5% of the total number of sectors under study (food industry, timber industry, etc.). In 2016 compared to 2014, the number of industries in the Russian economy with an average integration activity increased from 62.5% to 68.75%, and the number of industries with a high level of integration activity decreased from 25% to 18.75% of the total number of sectors under study. The composition of the leading third strata is presented in Table 5.5. As it can be seen from the table, in 2016 compared to 2014, the banking and insurance industry moved from a stratum with high integration activity to a stratum with medium integration activity. Russia’s desire to increase food availability of domestic producers and the ban on the import of food products from Europe and the United States led to an increase in

5

Corporate Control Market: Russian Practice

81

Table 5.5 Composition of the third (leading) strata in 2014–2016 No 1 2 3 4

2014 Oil and gas industry Metallurgical and mining industry Chemical industry Banking and insurance

2016 Oil and gas industry Metallurgical and mining industry Chemical industry

Source: Khryseva and Dzhumanalieva (2017, p. 74) Fig. 5.8 Sectoral structure of M&A transactions for the period 1985–2016. Source: Khryseva and Dzhumanalieva (2017, p. 74)

2.6

5.4 5.5

Telecommunications

4.8 Manufacturing

13.9 6.9

High technology 12.9

7.2

Finance

7.9

12.2 9.7

11

Materials Consumer goods and services

production in the agricultural sector. As it can be seen from the table, in 2016 compared to 2014, the banking and insurance industry moved from a stratum with high integration activity to a stratum with medium integration activity. Note that the global industry structure of M&A transactions is more differentiated and uniform, in contrast to Russia. M&A transactions are made in more industries and more evenly (Fig. 5.8). Moreover, unlike Russian companies, the expansion of product offerings or diversification of services is among the best strategic drivers; 22% of respondents consider it the most important aspect of their mergers and acquisitions strategy. The purchasing of technological innovation is important and occupies the second position—19% of surveyed companies at the center of Deloitte share this estimate. A number of experts believe that global mergers and acquisitions will continue to be active in 2017 and will be aimed at start-ups and innovators with high growth rates.

5.5

The Impact of Bank Lending

In the modern Russian market of mergers and acquisitions, the companies to mobilize financial resources and carry out M&A are actively using the instruments of credit market. The banking sector actively finances companies that participate in mergers and acquisitions, not only through loans and borrowings, but also through their investment activities in the securities market, as well as investments in the form of direct participation. At the same time, standard financial support procedures for such transactions are constantly complicated by various combinations of financial market instruments, which creates an additional opportunity for successful M&A.

82

A. Vavilina and L. Levanova

For example, in February 2017, the well-known company “Insurance Joint Stock Company VKS” registered a program of exchange-traded bonds worth 30 billion rubles for a period of 15 years. In April of the same year, the first flotation of bonds amounting to 4 billion rubles took place. At current interest rates of 11.05% per annum, the main buyers of which were Sberbank, Alfa-Bank, Moscow Credit Bank. In so doing, VKS officially announced that the issue was carried out in order to secure financing the purchase of a new business in the insurance industry. The most famous acquisition for VKS due to the issued bonds was the purchase of the “Evroplan” construction company (Kirichenko 2018, p. 52). The banking sector in Russia actively participates in the direct financing of the process, acting as an investor. For example, in April 2017, the Federal Antimonopoly Service (FAS) approved the merger of 51% of JSC “Modus” with “SKB Geophysics”. At the same time, the companies also concluded an option contract to repurchase the controlling stake. This will allow JSC “Modus” to restructure its debt and attract additional funds from Sberbank for business expansion by merging with companies in the used car market. Considering the banking sector as a source of M&A financing, the role of the banks themselves at the current stage of development of M&A financial support should be noted. The actualization of the rehabilitation processes and license revocations from banks in Russia are of a particular importance in the development and expansion of opportunities for financing mergers and acquisitions. When launching such a mechanism in the banking sector, the Deposit Insurance Agency (DIA) acted as a special administrator. Generally, the plan of bank financial restructuring looked like the provision by the Central Bank of the Russian Federation through the mediation of the DIA preferential loans to investors—special administrators (banks) for purchasing a bank under restructuring. For example, when the Bank of Moscow was restructured, a loan was given to VTB Bank amounting to of 295 billion rubles at 0.51% for the merger and reorganization of the Bank of Moscow. At present, the Central Bank of the Russian Federation is implementing a new financing scheme aimed at the banking system rehabilitation. A specialized “Banking Sector Consolidation Fund” has been created. The merger of “Binbank” and FC “Otkritie” may serve as an example of the financial restructuring of banks financed by this institution. Thus, in the Russian mergers and acquisitions market, separate financing schemes are formed for possible mergers and acquisitions involving public finances. The process of financing M&A with the resources of the Central Bank of Russia is conditionally divided into three stages. At the first stage, in accordance with the objectives set for the rehabilitation of some commercial banks, the Central Bank of Russia transfers funds to the Banking Sector Consolidation Fund (BSCF). Further, BSCF transfers funds to banks “A” and “B” by acquiring their stakes (shares), property, granting subordinated loans, providing various financial assistance to these credit organizations. Thus, all receivables, shares (stakes), and property are transferred to the Central Bank of the Russian Federation, which then are channeled to the Fund Management Company. At the second stage, the fund management company carries out trust

5

Corporate Control Market: Russian Practice

83

management of property acquired during restructuring, shares, etc., take measures aimed at recapitalization of banks, prevention of bankruptcy and settlement of bank liabilities. Along with this, the fund finances banks mergers and the formation of a single property complex—AB Bank. At the third stage, the bank “AB” is sold by public auction. Thus, the specific features of the Russian control market include: • • • •

inseparable property and administration; opaque ownership structure of Russian companies; illegal activities of groups of persons controlling the company; widespread use of overseas profit centers and capital outflows for personal enrichment; • underdeveloped stock market: mergers and acquisitions practically do not affect stock market.

5.6

Conclusion

The Russian mergers and acquisitions expect volume and number of transactions growth due to the increased investor confidence in government actions aimed at creating favorable conditions for long-term growth, influencing more and more sectors and the economy’s recovery from recession. As a long-term source of attracting large investments, the government continues to focus on the countries in Asia and the Middle East. It is due to the lack of expectation of any major changes in the sanctions and more pragmatic relations with Western investors. At the moment, the market is gradually recovering; the volume of transactions is increasing in comparison with the previous years, which is a positive trend. More and more transactions are being made with companies engaged in agriculture, which indicates a boom in this sector of the Russian economy. The M&A market is an indicator of the state of the economy and, according to forecasts, its real recovery will begin only after the stabilization of the Russian economy. Interest is expected to increase in sectors directly related to the economy recovery from recession and the resumption of growth in household spending and personal expenditures. E-commerce is one of the high growth industries, it is expected to keep attracting investors; while logistics transport and warehousing services act as its integral parts. Investment activity in these areas is growing, ensuring their further development. In general, analysts believe that the following development trends are characteristic of the modern Russian market: • limited opportunities to purchase assets at low prices; • improving culture of mergers and acquisitions; • lower role of the oil and gas sector and bringing advanced industries to the fore, especially telecommunication; • emerging potential of investment attractiveness;

84

A. Vavilina and L. Levanova

• large pool of foreign investors who are ready to return to the Russian market after lifting anti-Russian sanctions; • greater investment activity in agriculture and high-tech industries; • active involving partially publicly-owned companies; • using subsidies and incentives to finance integration processes.

References Arzumanov, S. A. (2018). Mergers and acquisitions market of in Russia: Analysis, problems, trends and prospects. PRO – Economy, 1–9. Chizhikova, A. Y. (2017). The analysis of the mergers and acquisitions practice in Russian individual economy sectors. In Collection of scientific articles of the 7th International Scientific and Practical Conference: “Trends in the development of modern society: managerial, legal, economic and social aspects” (pp. 225–228). Evstratov, A. V., & Ignatieva, V. S. (2017). Specific features of mergers and acquisitions in the pharmaceutical market of the Russian Federation. Izvestia VSTU, 7, 25–32. Gritsenko, S. E., & Rozhin, Y. P. (2017). Mergers and acquisitions processes in the Russian banking business. Interactive science, 2, 184–188. Ivanov, A. E. (2017). Waves of mergers and acquisitions in the global and Russian markets. Economic Analysis: Theory and Practice, 3, 488–501. Karelina, M. G., & Mkhitaryan, G. K. (2018). Statistical study of the mergers and acquisitions processes of Russian companies and evaluation of their integration activity. Statistics Issues, 3, 15–24. Khryseva, A. A., & Dzhumanalieva, A. R. (2017). Analysis of the features of the modern market of mergers and acquisitions. Bulletin of the Siberian University of Consumer Cooperatives, 3, 70–76. Kirichenko, P. S. (2018). The banking sector as a source of financing mergers and acquisitions in the Russian economy. Bulletin of the Samara State University of Economics, 3, 50–55. Kuznetsov, A. (2016). Structure of direct investments. World Economy and International Economic Relations, 4, 217. Markov, M. A., & Batyrova, E. K. (2018). Mergers and acquisitions market in the Russian Federation. Banking, 3, 34–39. Nikulina, N. M., & Berezina, S. V. (2017). Approaches and methods to mergers and acquisitions in the Russian insurance market. Insurance Business, 12, 45–52. Yagumova, Z. N., & Shogenov, A. A. (2018). Mergers and acquisitions market in Russia/economy business innovations. In Collection of articles of the International Scientific and Practical Conference in 2 parts, pp. 202–205.

Alla Vavilina is an associate professor in Peoples’ Friendship University of Russia (RUDN), Moscow, Russia. She is a candidate of science (Economy). Alla Vavilina—one of coauthors of monographs: “Modern problems of the theory and corporate governance practice” Saratov, Saratov Source Publishing house of 2014; “Corporate control” Moscow, RIOR Publishing house (Scientific thought), 2017. The author of a number of articles devoted to problems of corporate social responsibility, compliance, to assessment of the board of directors, a role of corporate secretaries. Within study gives lectures for bachelors and masters the direction (Management) on disciplines “Corporate social responsibility”, “Ethics of business and anti-corruption”. The developed main educational program of the higher education “Corporate management” (master) underwent independent certification in the National center of certification of managing directors. System of voluntary certification of managing directors “Standards of the first” (2016).

5

Corporate Control Market: Russian Practice

85

Lidia Levanova Candidate in Economics, Associate Professor, Management Department, the Economics Faculty. State Federal-Funded Educational Institution of Higher Professional Training “Saratov Chernyshevsky National Research State University”. In 2000, Levanova L. defended her thesis for the degree of Candidate of Science on the topic “The dynamics of fixed capital in the conditions of the formation of the information society in Russia”. Until 2006, she dealt with the problems of market power of firms. Since 2006, Levanova L. deals with the development of corporate governance in Russia. Levanova L. has about 50 scientific publications in the field of corporate governance. Among them there are publications that reveal the problems of forming boards of directors in Russian corporations, the formation of systems for remunerating senior executives, and the specifics of becoming a corporate secretary. Levanova L. is the co-author of the collective monograph “Modern Problems of Theory and Practice of Corporate Governance in Russia” (2014), as well as the author of the monograph “Development of the Corporate Governance System in Russia” (2017). Levanova L. is also the head of the master’s program in the direction of “Management” of the profile “corporate governance”.

Part II

Best Practices and Standards

Chapter 6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy Irina Tkachenko and Irina Pervukhina

6.1

Introduction

The more effective and inclusive are social institutions, the more opportunities for promotion and protection of their own interests have stakeholders. The stakeholder concept has achieved widespread popularity among academics, media and managers (Fontaine et al. 2006) and, as a result, a new paradigm of relations between business, society and state has emerged. These facts are making the topic of stakeholder value a challenging area: in order to meet diverse stakeholder expectations and attain sustainability, the business needs to take into account not only the company ‘shareholder’ financial model, but the ‘stakeholder’ model as well. While the shareholder model is based on the dominance of owners’ interests and maximization of shareholder value, the stakeholder concept considers the interests of all groups of stakeholders who participate—directly or indirectly—in the company’s performance for the purpose of gaining some benefit. Groups of stakeholders may have diverse expectations and different degrees of responsibility, play diverse roles, and perform a variety of actions. Satisfaction of each stakeholder economic and social needs calls for a specific mechanism of the firm interaction with stakeholders. The purpose of the interaction is to make an organization sensitive to stakeholders’ interests, needs and viewpoints. Guiding stakeholder interaction involves identifying the relevant stakeholder groups for the issue being addressed, determining the stake and relevance of each group, determining how effectively the needs and expectations of each group presently are being met, and modifying corporate policies and priorities to take into consideration the differing stakeholder interests (Tantalo and Priem 2014). The stakeholder model is aimed at creating value for stakeholders, expanding the value creation platform and

I. Tkachenko (*) · I. Pervukhina Ural State University of Economics, Yekaterinburg, Russia e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_6

89

90

I. Tkachenko and I. Pervukhina

balancing multiple interests of stakeholders as a condition for the choice of strategic initiatives. What can be done to maximize the stakeholder value, if, by increasing the value for some stakeholders, the company places other stakeholder values at risk, thus acting against their interests? Even if it were possible to balance the interests and obtain the consent of stakeholders on the organization’s actions, how could a certain stakeholder group value be assessed? What is an impact of individual stakeholders on creating the company value, and what benefit do these stakeholders receive? What criteria should be used to measure stakeholder value added? This paper makes an attempt to answer at least some of the questions. Thus, the purpose of this article is to focus on the issue of stakeholder value assessment, which is a research as well as an applied task: it enables to shift from purely descriptive models that assert the importance of taking into account stakeholders’ influence in the corporate governance (CG) system to more efficient models ensuring measurement of stakeholder groups’ contribution. This work examines the approaches to defining and determining stakeholder value, described in international and Russian literature on this subject. Using the case study of the Russian banking sector, the authors propose their own technique for computing creating value for stakeholders that is based on the use of an econometric model and is applied to measuring the contribution of financial stakeholders (owners) and some non-financial stakeholders (e.g., employees) to stakeholder value. The focus of the paper on the shareholder-stakeholder and company-stakeholder relations might have a ‘delayed efficiency’ effect on the development of the Russian economy and CG. By ‘delayed efficiency’ we mean that the problems stated in the work could be resolved in the future when not only ‘blue chips’, but also an increasing number of companies will acknowledge the need for complying with norms and regulations prescribed in CG standards. In the meantime, for many Russian companies improved CG is not the priority area. This paper can roughly be divided into two parts: in Part 1, a literature review examines different approaches, theories and empirical studies that can be found in the international and Russian research, while Part 2 presents the methodology and results of the empirical study.

6.2 6.2.1

Theoretical Approaches to Stakeholder Value Assessment International Studies

Stakeholder theory development has increased in recent years, in part because of its emphasis on explaining and predicting how an organization functions with respect to the relationships and influences existing in its environment. One of the most popular trends in business and society literature is the identification and management of

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

91

stakeholders, which many scholars have used as a framework for integrating and organizing research in the field. A number of scholars in the business and society field have developed and enhanced Freeman’s work on the stakeholder concept. In his review of literature on the issue, Rowley (1997) summarized the development of stakeholder theory as centered around two related paths: (1) defining the stakeholder concept and (2) classifying stakeholders into categories that provide an understanding of individual stakeholder relationships (p. 889). He developed the theory which relies on social network constructs and argues that the current approach to the stakeholder theory has limitations as it is mostly based on the analysis of dyadic relationships. However the analysis of individual stakeholder relationships and influences does not explain how a firm reacts to its stakeholders, because each firm faces a different set of stakeholders which exerts a unique pattern of influence. For Rowley, employing social network concepts will provide a mechanism for describing the simultaneous influence of multiple stakeholders and for predicting firms’ responses. Frooman (1999) highlights three research streams of stakeholder theory (1) a stream devoted to identifying stakeholder attributes; (2) a stream focused on stakeholder interests; and (3) a stream directed toward stakeholder influence strategies (p. 193). At the same time, Frooman offers a new approach to the stakeholder theory: he combines it with the resource dependence theory whose focus is the notion that a firm’s need for resources provides opportunities for stakeholders to gain control over it. Control over a firm can be exerted in two ways: (1) in determining whether the firm gets the resources and (2) in determining whether it can use them in the way it wants. Frooman considers these control strategies to be one type of the influence strategy: the firm is more responsive to the requirements of those stakeholders who have valuable resources and, conversely, is willing to ignore those on whom it is less dependent. According to Frooman, the firm’s dependence on its stakeholders means that their well-being is dependent on the well-being of the company. The shareholder value approach attempts to determine the value of a company from the shareholders’ perspective. This approach is replacing the Value-Based Management (VBM) concept. The reason for concept shifting lies in VBM pitfalls: it focuses on short-term financial targets and disregards non-financial factors of the internal and external environment. On the other hand, there is a need for a broader scope of assessing the firm’s overall performance, a need to consider stakeholder risks. The Stakeholder Value Model can tackle this problem head on as its objective is to attain a balanced framework of capitals: intellectual, social, and financial. However, few literature exits where the tools enabling to assess the stakeholder value and evaluate stakeholder contribution to the firm market value are proposed. The analysis of the research on stakeholder value assessment allows us to conclude that, to date, the studies have been based on monetary, non-monetary and mixed valuation methods. The financial approach is adopted by Figge and Schaltegger (2000). Shareholder value can be expressed as the cash value of all the surplus funds available in future for distribution to shareholders. The shareholder value approach, therefore, attempts to determine how much a company is worth as far as the shareholders are concerned.

92

I. Tkachenko and I. Pervukhina

Stakeholder value is understood as the value of the company (How much is the business worth?) from the stakeholder’s viewpoint. At the same time stakeholder value can be interpreted as a business-oriented stakeholder valuation (What is the value contributed by a specific stakeholder?). The value created by a stakeholder for the firm is measured by the stakeholder contribution towards helping the company meet its business goals or enhancing its value. Figge and Schaltegger interpret the two perspectives of stakeholder value by explaining the process of creating value added: A voluntary exchange of resources between stakeholder and the company will occur if the benefit looks greater than the cost for both sides. Benefits and cost cover both material and immaterial assets in this case. From the company’s viewpoint, the benefit of the resources provided by the stakeholder must be greater than the costs incurred to use them. From the stakeholder’s viewpoint, the benefit the company produces for the stakeholder must be greater than the cost of supplying the resources (pp. 18–19).

Stakeholder value added is calculated by multiplying the value spread with the stakeholder costs, or expenditure items (e.g. personnel costs, interest paid, tax expenditure). The stakeholder value is therefore equivalent to the cash value of the expected surplus from the company’s or the stakeholders; perspective. The other group of researchers outline non-financial, or ‘subjective’ approach to measuring stakeholder value. Neto et al. (2018) study how value judgments of stakeholders of the Brazilian health system would affect decision-making on the incorporation of new health technologies when budgetary resources are limited. Based on a case study of the construction and operations of an over 50-year-old American highway bridge, Eskerod and Ang (2017) make an attempt to identify ways to understand, classify, and express megaproject stakeholder value, while simultaneously acknowledging that different types of stakeholders may relate to different kinds of values. The research links different stakeholder types to types of value constructs. One of the limitations of this research is the fact that the case study concerns only five specific stakeholder types (i.e., project owners, project members, local businesses and non-profit organizations, local citizens, and the general public). Castro-Martinez and Jackson (2018) address the issue of value creation from a social sustainability perspective. The authors suggest that the interaction between the firm and its external stakeholders may generate trustworthiness signals which may become factors for creating stakeholder value. They argue that the proposed model is consistent with the view of corporate sustainability as a persuasive and effective organizational management idea. Apitz et al. (2017) present the Stakeholder Values Assessment tool that was developed to quantitatively address environmental, economic and social costs and benefits based upon diverse stakeholder values. Stakeholder value is assessed mainly by surveys and expert valuation, with scores assigned to each value. Lankoski et al. (2016) adopt the instrumental perspective on stakeholder judgments of value and suggest that stakeholders judge the value created or destroyed by firms not in absolute but in relative terms: as losses and gains against a reference state that might differ across stakeholders and change over time and where losses weigh more heavily than equally sized gains. The authors highlight direct

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

93

managerial relevance of understanding stakeholder judgments of value. Managers make decisions about how to allocate resources and this affects the value that stakeholders receive. This would better enable managers to create value for stakeholders in the first place, to communicate about that value creation to stakeholders, and to anticipate stakeholder reactions when considering an activity. Susniene and Valackiene (2012) provide insights into the organization—stakeholder relationships and interrelatedness of such concepts as sustainable development, corporate social responsibility (CSR) and stakeholder management. Conceptual goals of sustainable development at a firm level can be achieved by employing stakeholder approach from the context of CSR and revealing synergy of stakeholder relationships. Krasteva (2017) interprets value co-creation as a marketing concept that has the potential to ‘unite’ consumers, suppliers, distributors, shareholders and all other stakeholders under the same vision—to work together and create value for all parties in a competitive and fast-growing market or economy. The co-creation of value actually promotes customer engagement into the product creation. The integrated approach combines both monetary and non-monetary assessment methods and is based on quantitative and qualitative indicators. Carlon and Downs (2014) assume that stakeholders have a financial value to the firm that can and should be accounted for through the firm’s financial reporting system. They propose a threestep ‘stakeholder valuing’ process which starts with codifying the firm’s identity as a stakeholder entity, moves to assessing stakeholder value consistent with that identity, and concludes with accounting for and reporting that value. Tantalo and Priem (2014) make an attempt to integrate business strategy, stakeholder theory and essential stakeholders’ multi-attribute utility functions. They develop the stakeholder synergies theory showing how top managers can create new value for two or more essential stakeholder groups simultaneously, thereby increasing the size of the utility ‘pie’ for those system members. Ramírez and Tarziján (2018) consider the distribution of stakeholder values for one group of stakeholders—employees. Stakeholder value increases in response to the impact of exogenous factors (changes in the price of the firm’s products), as well as institutional structures and types of ownership, and quality of management. Since the value generated by a firm is distributed among different stakeholders, a higher appropriation of value by employees results in lower appropriation by another party. Therefore, by changing the distribution of value, managerial decisions about location and entry could be affected. Fernández-Guadaño and Sarria-Pedroza (2018) aim to discover whether the development of CSR generates value for certain stakeholders. The results show that CSR has a negative influence on the distribution of value in favor of employees as primary stakeholder, has a positive influence on the state as secondary stakeholder and has no influence on other stakeholders. In his most recent research Fisher (2018) looks upon the creation of stakeholder value as an organizing principle for the company’s strategic planning, the need to involve stakeholders in defining what value means to them. Two consequences of the approach are that the efforts of the company are aligned to achieve targeted

94

I. Tkachenko and I. Pervukhina

external stakeholder impact, and that successful deployment of the strategic plan can be assessed explicitly in terms of external stakeholder value.

6.2.2

Russian Studies

One of the first authors who tried to put stakeholder theory into practice of strategic management was M. Petrov (2004). To analyze stakeholders and companystakeholder relationships, he used three models: Mitchell model, Rowley’s network analysis approach, and a model of balanced resource exchange. The results of the empirical research showed that the applied model allows to estimate the balance of stakeholder power, but can act as an auxiliary, additional instrument in the development of corporate strategy. In Russia most studies conducted adopt the integrated approach to stakeholder value assessment. The most significant contributor to this field is Ivashkovskaya (2008, 2009, 2012, 2016). Her approach is based on economic return (or value added) created by stakeholders. Ivashkovskaya proposes to calculate the value created by stakeholders using the stakeholder value index, which is computed as the proportion of the created economic benefit (financial indicator) to the costs related to building relationships with stakeholders. In this case the stakeholder costs are measured by applying a method of scientific approximation. Generous remuneration and bonuses to the top management do not necessary mean that they have significantly contributed to the creation of the firm’s profit and stakeholder value. However, provided that resources are utilized efficiently, this approach may be quite valid. Stakeholder value can be looked upon from two perspectives: as a contribution of the stakeholder ‘cluster’ to the overall business result and as a company contribution to satisfying interests of stakeholder groups. All participants of corporate relations, hence, should strive to achieve a balance, or to break the relationship, which will lead to instability of the system. Acting rationally, the interested parties of the firm will strive for the so-called partner advantages, to achieve the conditions that can ensure the inclusion of each participant in mutually beneficial relations with other interest groups. In Ivashkovaskaya’s viewpoint, each side contribution can be measured by considering opportunity, or alternative costs that could incur by not enjoying the benefits associated with being a member of the stakeholder network. A slightly different perspective is offered by Dolmatova (2013). She also discusses two approached to measuring value for a company and proposes to use the index of sustainable growth, where the stakeholder contribution is expressed as longterm sustainable company growth, and the index of balanced interests where value is created for strategic stakeholders. Monetary and non-monetary tools of stakeholder value assessment are suggested by Efimova (2013): in the created stakeholder value added of the company she identifies contributions of shareholders, investors, creditors, employees and other groups of stakeholders and approaches the creation of value added by analyzing the factors essential for the firm’s economic (e.g. effective marketing, economic use of

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

95

resources), social (health insurance, staff training) and environmental (environmental protection projects) sustainability. In (Samokhina 2014) a multiple regression model is used to measure stakeholder value; it combines monetary valuation of the company and non-monetary valuation of indicators and factors of stakeholder value creation, which show how satisfied (or dissatisfied) stakeholders are with their interaction with the company. Kharin and Gareev (2014) study the interaction between stakeholders working on a common managerial solution by applying the game theory. They offer a model that can help standardize the stakeholder decision-making process given that the agents will view organizational management as a dynamic game of cooperation. The value of the company shows its utility for the stakeholders and results from synergy of resources and benefits of economic and non-economic nature. In lieu of the growing number of M&A, Vashakmadze et al. (2013) present the SUN Cube stakeholder management model and show how it can be used in capturing synergies at the post-merger stage and in analyzing interaction of the firm with its stakeholders via four parameters: Run Rate, Transparency Rate, Multiplication Rate and Transmission Rate. To define synergy the authors employ valuation multiples such as the price to book ratio. The SUN Cube scorecard shows target and real values for each parameter at three stakeholder levels. The authors conclude that the higher the real value is, the more controllable and manageable the synergy effects are. An interesting practice-oriented approach to finding a balance between interests of different stakeholder groups is discussed by Abrosimova and Sedelnikova (2011). They suggest that stakeholders’ interests should be assessed in terms of their priorities, which will lead to balanced interests of different stakeholders. The aim is to identify strategically important areas of the firm by using the evaluation scale which enables to identify stakeholders whose interests are most or least satisfied. The evaluation scale also contributes to identifying priority interests. The total values of the scale then are used for calculating the ‘balancing’ average: it should be at least 50%, which indicates more or less favorable situation in the company regarding the stakeholders’ needs satisfaction. Adversely, the average below 50% signifies that the company does not seem to be too willing to meet its stakeholders’ interests, therefore the management should focus on improving the level of stakeholder balance. Another model of determining stakeholder value is described in (Novozhilova 2017). The author focuses on integrated reporting and suggests a complex valuation method based on integrated scorecard of the stakeholder influence on the firm’s created value. The model considers the mutual dependence between companies and certain social groups and is based on subjective assessments of the degree of influence of stakeholders on the company, on the one hand, and the company on its stakeholders, on the other hand. The following equation (Eq. 6.1) enables to compute the integrated index of the stakeholder impact on the company created value (I ): I¼

X

K i * bi

ð6:1Þ

96

I. Tkachenko and I. Pervukhina

where Ki is the changes of i factor characterizing the stakeholder contribution (only one factor stakeholder—monetary/quantitative); bi is the degree of significance, determined subjectively by the company (individual rank matrix for each company). Thus, the integrated index is, in fact, the sum of changes of i factor multiplied by its significance. To calculate the integrated index, it is necessary to choose which indicator is most relevant and essential for which group of stakeholders and then to determine the importance of this group. For example, for a group of shareholders, it is the cost of owners’ equity, for investors—the cost of borrowed capital; for buyers— the cost of sales; for employees—labor productivity (Novozhilova 2017, p. 46). Thus, the review of the existing literature allows us to conclude that there is an array of approaches to assessing stakeholder value. Some of them are linked to financial factors, the others focus on subjective views of those who attempt to evaluate stakeholder value. However, there are researchers who combine both monetary and non-monetary assessment tools and use integrated approach to measuring stakeholder value. Still, the term ‘total stakeholder value’ is not clearly defined. In fact, the total stakeholder value may be looked upon as the aggregation of the values of each group of stakeholders. The created stakeholder value should total stakeholder benefits (return), but the contribution to the created value may be out of proportion with the distribution of the benefits. The balance of the created and distributed stakeholder value will always be negatively affected by difficulty to take all interest groups into consideration.

6.3

Empirical Study

Unlike the reviewed literature this paper offers a mixed approach which enables to analyze—both financially and non-financially—how value created by separate groups of stakeholders contributes to the total stakeholder value. We have constructed an econometric model of assessing stakeholder value in the Russian banking sector on the basis of a snap reading method (Tkachenko and Zlygostev 2018). The authors propose an integrated value management model, aimed at attaining increased value for all stakeholders through the expansion of the value creation platform and a balance of stakeholders’ multiple interests. The model is applied in the study of the contribution of essential financial stakeholders (owners) and non-financial stakeholder groups (employees). In assessing stakeholder value, we proceeded from the following assumptions: 1. 2. 3. 4.

Stakeholder value changes overtime along with market value. Market value does not equal stakeholder value. Changes in market value reflect changes in stakeholder value. Market value is taken as a proxy for stakeholder value, as it takes into account a lot of factors dependent on people and events and is quantifiable.

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

97

Table 6.1 Stakeholders in the banking sector: benefit and contribution Stakeholder groups Shareholders and investors

Customers

Stakeholder subgroups Majority shareholders, bondholders, depositors Corporate, private

Employees

Front office, head office

The state

Regional authorities, federal authorities

Local community

Local residents, municipal authorities

Stakeholder benefit Dividends, interest on bonds and deposits

Stakeholder contribution Provide bank financing

Interest on deposits, cash back (monetary), non-cash transactions, money transfers, accounts borrowings, other (non-monetary) banking services Salary, compensation and benefits (monetary), working conditions and reasonable work time (non-monetary) Local budget taxes, investments in local infrastructure (monetary), job creation, production of goods and services, smooth functioning of the national banking system (non-monetary) Local budget taxes, investments in local infrastructure (monetary), job creation, production of goods and services (non-monetary)

Generate demand for banking services, resulting in bank profit

Create value for customers and bank

Protection of private property, creation of ‘rules for the game’, protection of rights

The source of human capital

5. The method of econometric analysis was chose for the following reasons: Econometric models enable to find mathematical dependence between variables and by using regression equations to measure how each variable contributes to the resulting quantity. The purpose of performing valuation is to identify the contribution of stakeholder groups to the total stakeholder value. We started with compiling a checklist of stakeholders and identifying the value created by the most significant groups, which is presented in Table 6.1.

6.3.1

Description of the Sample

In 2018, the banking sector of the Russian Federation included 867 licensed banks. The market is dominated by 20 major players who are predominantly banks with state participation and own 79% of the total assets of the entire banking sector (Mikhailov 2017).

98

I. Tkachenko and I. Pervukhina

Table 6.2 Profiles of sample banks, 2017 (billions of rubles) Bank Sberbank VTB MKB Rosbank

Assets 27112.2 13009.0 1888.1 1040.9

Equity 3436.0 1479.7 177.6 132.5

Net interest income 1452.1 460.2 45.2 35.0

Net profit 748.7 120.1 20.7 10.4

Staff costs 402.7 238.0 9.5 20.5

Source: Банковский сектор России. Основные показатели банковской системы [Russia’s Banking Sector], https://2016.report-sberbank.ru/ru/strategic-report/market-overview/bankingsector 200.0

6000.00 5000.00

150.0

4000.00

100.0

3000.00 2000.00

50.0

1000.00 0.00

2011

2012 VTB

2013

2014

Sberbank

2015 Rosbank

2016

2017

0.0

MKB

Fig. 6.1 Capitalization of Russian banks (2011–2017) (billions of rubles). Source: Moscow Exchange, https://www.moex.com

The sample was randomly selected from a list of top 20 Russian banks whose shares are freely traded on Moscow Exchange. The panel data were collected from publicly available financial and non-financial reports for the period 2010–2017. The sample includes the snap reading data of the following banks: Sberbank, VTB Bank, MKB (Credit Bank of Moscow) and Rosbank. In the rating of Russian banks (https:// mainfin.ru/banki/rating) these banks are ranked as follows: Sberbank: #1; VTB: #2; MKB: #7; Rosbank: #13. MKB did not have data in all the years in the period analyzed, as it was listed in 2015 only. Rosbank data after 2015 were incomplete, therefore the analyzed period for this bank was shorten (2012–2014). Thus, the final sample included 24 observations. The profiles of the sample banks are presented in Table 6.2 and their capitalization—in Fig. 6.1.

6.3.2

Description of the Received Model

The data obtained were managed with STATA 14 software package. The econometric model was tested for autocorrelation, heteroscedasticity, and multicollinearity. The regression results of the model used for calculating Sberbank stakeholder value are shown in Table 6.3.

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

99

The stakeholder value can be calculated as follows (Eq. 6.2) Stakeholder Value ¼ 0:97 × equity þ 327:43 × L – 381:47

ð6:2Þ

therefore, the projected stakeholder value comes to: 0:97 × 3436 þ 327:43 × 3:07 – 381:47 ¼ 3332:92 þ 1005:5 – 381:47 ¼ 3956:95 In order to identify created value, it is necessary to take into account the contribution of each stakeholder group: Value ¼ 0:97 × 3436 þ 327:43 × 3:07 þ 381:47 ¼ 3332:92 þ 1005:5 þ 381:47 ¼ 4719:89 We obtained the projected value and the values of its constituent factors. By dividing the value of each stakeholder group by the total value, we can work out the contribution of the stakeholder group to the total value (Fig. 6.2). Owners’ contribution ¼ 3332:92 : 4719:89 ¼ 0:71 ¼ 71% Employees’ contribution ¼ 1005:5 : 4719:89 ¼ 0:21 ¼ 21% Other groups’ contribution ¼ 381:47 : 4719:89 ¼ 0:08 ¼ 8% The same procedure is used for all other years and for all the other banks (Table 6.4).

Table 6.3 Calculation of Sberbank stakeholder value (2017) Equity (billions of rubles) Net profit/payroll budget ratio (%) Capital/labor ratio (millions of rubles per unit of labor) L (net profit/payroll budget ratio × capital/labor ratio)

Fig. 6.2 Sberbank: the structure of stakeholder value (2017)

3436 1.85

Coefficient 0.97

Calculation 3436 × 0.97 ¼ 3332.92

327.43

3.07 × 327.43 ¼ 1005.5

1.66 1.85 × 1.66 ¼ 3.07

Employees 21%

Other groups 8%

Owners 70%

100

I. Tkachenko and I. Pervukhina

Table 6.4 Contributions of different stakeholder groups to stakeholder value (%) VTB Owners’ contribution Employees’ contribution Other groups’ contribution Sberbank Owners’ contribution Employees’ contribution Other groups’ contribution MKB Owners’ contribution Employees’ contribution Other groups’ contribution Rosbank Owners’ contribution Employees’ contribution Other groups’ contribution

2011

2012

2013

2014

2015

2016

2017

44 27 29

53 20 27

59 16 25

74 0 26

78 0 21

68 13 19

74 6 20

54 30 17

59 26 14

64 23 13

70 16 14

77 11 13

72 18 10

71 21 8

– – –

– – –

– – –

– – –

8 61 32

16 26 59

14 55 31

15 35 50

15 26 59

15 40 45

19 23 58

14 41 45

19 21 60

14 44 42

Dashes indicate data not available 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2011

2012

2013

Owners’ contribution

2014

2015

Employees’ contribution

2016

2017

Other groups’ contribution

Fig. 6.3 VTB: dynamics of stakeholder value (2011–2017)

Figures 6.3, 6.4 and 6.5 demonstrate changes in the calculated stakeholder value contributed by owners, employees and other categories of stakeholders for the period from 2011 to 2017. For three banks, VTB, Sberbank and Rosbank, the impact of stakeholder value was positive.

6.4

Conclusion

Summarizing the scientific literature the conclusion can be drawn that, as Hansmann states (as cited in Fernández-Guadaño and Sarria-Pedroza 2018, p. 8), measuring stakeholder value is one of the most difficult issues in Stakeholder Theory. It is

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

2011

2012

2013

Owners’ contribution

2014

2015

Employees’ contribution

2016

101

2017

Other groups’ contribution

Fig. 6.4 Sberbank: dynamics of stakeholder value (2011–2017) 70% 60% 50% 40% 30% 20% 10% 0%

2011

2012

Owners’ contribution

2013

2014

2015

Employees’ contribution

2016

2017

Other groups’ contribution

Fig. 6.5 Rosbank: dynamics of stakeholder value (2011–2017)

known that while shareholders’ objectives are clear and quantifiable (i.e., to maximize the net present/future value of the company’s earnings), other stakeholders lack an equivalent quantifiable objective. Moreover, stakeholder value is the value created for the entire network of stakeholders rather than for a single stakeholder as “[System] Stakeholders are one more than you know about, and known stakeholders have at least one need more than you know about now” (Glib 2006, p. 1). These circumstances make the grouping of stakeholders and the stakeholder value assessment even more complex, subjective and place more responsibility and expectations on experts in terms of their professional skills, business ethics, and morals, as it is a matter of fair assessment of stakeholder value. Possible stakeholder integration is becoming a focus of the analysis of stakeholder relationships with corporations and other social networks. It is essential that each party benefits from partnership relationships thus the so-called stakeholder value can be created. In an attempt to find another possible method of measuring business value added for diverse groups of stakeholders, the authors have used an integrated approach based on the application of an econometric model and analysis of monetary and

102

I. Tkachenko and I. Pervukhina

non-monetary factors. We believe that the presented model can be universally applied in any business as an assessment tool of the value created for both financial and non-financial stakeholders of the company. Future research should explore more interdependence of relationships between organization and stakeholders. Relationships can increase organizational effectiveness and allow a firm to build on synergies that occur when positive relationships with one stakeholder group (e.g., employees ) start to have a beneficial impact on another stakeholder group (e.g., customers). However, under the conditions of de facto low efficiency reputation of institutions in Russia and other developing countries, the evidential and practical value of this study for businesses may be questioned. Skeptics would say: stagnated business is striving to survive and stay afloat and does not care about stakeholders. But researchers should look ahead, think long-term and have at hand ready methodological solutions that they are able to offer to solve the problem of assessing stakeholder value when it becomes much needed. The success of the world’s leading corporations shows that their sustainability is, to a large degree, the result of stakeholder trust. While developing corporate strategy, the Board of Directors should take interest groups, or stakeholders, into consideration when making managerial decisions; be able to assess value created by different stakeholder groups and create value for stakeholders, which will result in building long-term relationships aimed at long-term sustainability of the company. Acknowledgments The reported study was funded by RFBR and Sverdlovsk oblast, Project no 20-410-660032 р_а

References Abrosimova, E., & Sedelnikova, I. (2011). Системный анализ стейкхолдеров [System analysis of stakeholders]. Vestnik INZHEKONa: Economica, 3, 222–230. Apitz, S. E., Fitzpatrick, A. G., McNally, A., Harrison, D., Coughlin, C., & Edwards, D. A. (2017). Stakeholder value-linked sustainability assessment: Evaluating remedial alternatives for the Portland harbor superfund site, Portland, Oregon, USA. Integrated Environmental Assessment and Management, 14(1), 43–62. Retrieved September 01, 2018, from https://www.researchgate. net/publication/320675085_Translation_of_trustworthiness_signals_into_factors_for_stake holder_value_cocreation Carlon, D. M., & Downs, A. (2014). Stakeholder valuing: A process for identifying the interrelationships between firm and stakeholder attributes. Administrative Science, 4, 137–154. Retrieved September 01, 2018, from https://www.mdpi.com/2076-3387/4/2/137, https://doi. org/10.3390/admsci4020137 Castro-Martinez, M. P., & Jackson, P. R. (2018). Translation of trustworthiness signals into factors for stakeholder value cocreation. Journal of Public Affairs, 18(3), e1685. https://doi.org/10. 1002/pa.1685 Dolmatova, I. (2013). Корпоративное управление на основе стейкхолдерского подхода: опыт непубличных компаний [Corporate governance based on the stakeholder approach: Experience of nonpublic companies]. Management Sciences, 2, 18–26.

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

103

Efimova, O. (2013). Анализ устойчивого развития компании: стейкхолдерский подход. [Analysis of sustainable development of the company: Stakeholder approach]. Management Issues, 45(348), 41–51. Eskerod, P., & Ang, K. (2017). Stakeholder value constructs in megaprojects: A long-term assessment case study. Project Management Journal, 48(6), 60–75. Fernández-Guadaño, J., & Sarria-Pedroza, J. H. (2018). Impact of corporate social responsibility on value creation from a stakeholder perspective. Sustainability, MDPI, Open Access Journal, 10 (6), 1–10. Retrieved September 01, 2018, from https://www.mdpi.com/2071-1050/10/6/2062/ htm, https://doi.org/10.3390/su10062062 Figge, F., & Schaltegger, S. (2000). What is stakeholder value? Developing a catchphrase into benchmarking tool. Lüneburg: Luneburg Universitat. Fisher, N. I. (2018). Stakeholder value as an organizing principle for strategic planning. Journal of Creating Value, 4(1), 168–177. Retrieved August 10, 2018, from http://journals.sagepub.com/ doi/abs/10.1177/2394964318771251 Fontaine, C., Haarman, A., & Schmid, S. (2006). The stakeholder theory. Edlays Education, 1, 1–33. Retrieved October 01, 2018, from https://pdfs.semanticscholar.org/606a/ 828294dafd62aeda92a77bd7e5d0a39af56f.pdf Frooman, J. (1999). Stakeholder influence strategies. Academy of Management Review, 24(2), 191–205. Glib, T. (2006). Some powerful systems engineering heuristic. SE Heuristics. Ivashkovskaya, I. (2008). Стратегический мониторинг создания стоимости для всех стейкхолдеров компании [Strategic monitoring of value creation for all stakeholders of the company]. Finance: Theory and Practice, 3, 69–85. Ivashkovskaya, I. (2009). Моделирование стоимости компании. Стратегическая ответственность советов директоров. [Modeling of the company’s value. Strategic responsibility of boards of directors]. Moscow: INFRA-M. Ivashkovskaya, I. (2012). Стейкхолдерский подход к управлению, ориентированному на приращение стоимости компании. [Stakeholder approach to value based management]. Corporate Finance, 1(21), 14–23. Ivashkovskaya, I. (2016). Финансовые измерения корпоративных стратегий. Стейкхолдерский подход. [Financial measurements of corporate strategies. The stakeholder approach]. Moscow: INFRA-M. Kharin, A. G., & Gareev, T. R. (2014). Стейкхолдерский подход в управлении организациями: перспективы применения теоретико-игровых моделей. [Stakeholder approach in the management of organizations: prospects for the use of game-theoretic models]. Terra Economicus, 12(4), 105–113. Krasteva, N. (2017). Co-creation – The value based marketing. Sofia. Retrieved August 21, 2018, from https://clck.ru/EWzM6 Lankoski, L., Smith, N., & Van Wassenhove, L. (2016). Stakeholder judgments of value. Business Ethics Quarterly, 26(2), 227–256. https://doi.org/10.1017/beq.2016.28 Mikhailov, А. (2017, December 07). За чей счет банкет? Банковский сектор России в 2017 году: итоги. [At whose expense is the banquet? The banking sector in Russia to 2017: Results], Profile. Retrieved May 23, 2018, from http://www.profile.ru/economics/item/122546-za-chejschet-banket Neto, L. S., Lessa, F., Nardi, E. P., & Ferraz, M. B. (2018). Stakeholder value judgments in decision-making on the incorporation, financing, and allocation of new health technologies in limited-resource settings: A potential Brazilian approach. Revista Panamericana de Salud Pública, 42, 1–10. Retrieved September 01, 2018, from https://www.scielosp.org/article/rpsp/ 2018.v42/e102/en/ Novozhilova, Y. (2017). Информационно-аналитическое обеспечение интегрированной отчетности: оценка влияния стейкхолдеров на изменение создаваемой стоимости. [Information and analytical support of integrated reporting: Evaluation of the stakeholders influence on the change of the created value]. Economic Statistics, 14(1), 43–50.

104

I. Tkachenko and I. Pervukhina

Petrov, M. (2004). Теория заинтересованных сторон: пути практического применения. [Stakeholder theory: Ways of application]. Vestnik of St Petersburg State University, 8/2(16), 51–68. Ramírez, C., & Tarziján, J. (2018). Stakeholder value appropriation: The case of labor in the worldwide mining industry. Strategic Management Journal, 39(5), 1496–1525. Retrieved July 01, 2018, from https://www.researchgate.net/publication/322522232_Stakeholder_value_appro priation_The_case_of_labor_in_the_worldwide_mining_industry Rowley, T. J. (1997). Moving beyond dyadic ties: A network theory of stakeholder influences. Academy of Management Review, 22(4), 887–910. Samokhina, V. (2014). Выявление, отбор и анализ факторов создания стейкхолдерской стоимости фирмы. [Identification, selection and analysis of the factors of creation of stakeholder value of the firm]. Scientific Notes of Young Researchers, 3, 31–33. Susniene, D., & Valackiene, A. (2012). Synergy of stakeholder relationships in aspirations for sustainability and social responsibility of corporate management. Conference: Innovation vision 2020: Sustainable growth, entrepreneurship, and economic development. Retrieved October 10, 2018, from https://www.researchgate.net/publication/261595743_Synergy_of_Stake holder_Relationships_in_Aspirations_for_Sustainability_and_Social_Responsibility_of_Cor porate_Management Tantalo, C., & Priem, R. L. (2014). Value creation through stakeholder synergy. Strategic Management Journal, 37(2), 314–329. Retrieved September 01, 2018, from https://www. researchgate.net/publication/265690092_Value_Creation_Through_Stakeholder_Synergy, https://doi.org/10.1002/smj.2337 Tkachenko, I., & Zlygostev, A. (2018). Оценка вклада стейкхолдеров в стоимость компании: пример российского банковского сектора. [Assessing stakeholders’ contribution to enterprise value: The case of the russian banking sector]. Upravlenets, 9(4), 40–52. https://doi.org/10. 29141/2218-5003-2018-9-4-5 Vashakmadze, T., Martirosyan, E., & Sergeeva, A. (2013). Модель управления стейкхолдерами в сделках слияний и поглощений. [Stakeholder based framework for M&A management]. Journal of Corporate Finance Research, 2(26), 87–97.

Irina Tkachenko is a Professor at Ural State University of Economics, Ekaterinburg, Russia and Head of the Department of Corporate Economics and Business Governance. She is a Doctor of Science (Economics). Her doctorate dissertation (2002) “Institutional and Valuable Basis for Effective Development of Interfirm Corporate Relations” was devoted to the problems of corporate governance. She specialises in topics of corporate governance, corporate social responsibility and public-private partnership. She is one of the co-authors of the books: “Transforming Governance: New Values, New Systems in New Business Environment”, edited by M. Aluchna, Guler Aras, Gower Publishing limited, England, 2015; “Responsible Corporate Governance”, published in the Springer publishing house in 2017 and edited by M. Aluchna, S.O. Idowu; and “Women on Corporate Boards. An International Perspective”, ed. Aluchna, M. and Aras, G. Routledge. Abingdon, Oxon; New York, NY. 2018. Professor Tkachenko has won many grants on corporate governance issues, including international: The Fundamental Research Fund in the sphere of economic science by the Russian Ministry of Education (1999–2000, 2003–2004); RGNF Grant, (2001, 2011–2012); The Russian Foundation for Basic Research (2013–2015); Grant of Bridge partnership with Ashcroft International Business School of Anglia Ruskin University, UK (2006–2010, 2012); ACTR-RSEP fellowship, George Washington University, Washington, DC (USA, 1995); Canada-Russia Program in Corporate Governance, Schulich School of Business, Toronto, Ontario, Canada, Grant of CIDA, June–July, 2003; Erasmus Mundus Action 3: (SCEE project)—The Warsaw School of Economics (Szkoła Główna Handlowa w Warszawie, SGH) (2013). Tkachenko I. was a Visiting lecturer in Karaganda State University, Kazahstan (2012), in Poland (SGH, 2013), in Italy (Luiss Guido Carli University and Link Campus University (Rome, 2014) and Florence University (2014)).

6

Stakeholder Value Assessment: Attaining Company-Stakeholder Relationship Synergy

105

Irina Pervukhina is a Senior Lecturer in the Department of Business Foreign Languages, Ural State University of Economics (Ekaterinburg, Russia). She holds a MA from New Mexico State University (USA). As the department head deputy she is responsible for curriculum design and quality assurance and is a Member of the USUE Quality Assurance Board. She has both teaching and business experience. She has participated in several international educational projects, such as CHAIN-E: Creation of a Higher Academic International Network for Economists: The European (TEMPUS/TACIS); Bridge; Internationalizing Higher Education, Erasmus Mundus and Erasmus+. Her main research interests are teaching and learning, pedagogy, academic writing as well as women studies and corporate governance. She is one of the authors of English for Academics, Book 1 & 2 (CUP). Pervukhina I. is one of the co-authors of the book “Women on Corporate Boards. An international perspective”, published in the Routledge (2018) and edited by M. Aluchna, Guler Aras.

Chapter 7

Evaluation of Operational Management and Corporate Governance Quality in State-Owned Enterprises in Russia Bela Bataeva and Olga Kozhevina

7.1

Introduction

The role of state ownership in the Russian Federation determines the great attention of the federal authorities to the quality of corporate governance. In the context of achieving the goal of economic growth, the Government of the Russian Federation has repeatedly noted that the quality of corporate governance is one of the key drivers of competitive positioning of companies. Meanwhile, the level of corporate governance in Russian state-owned enterprises is heterogeneous. Different documents aimed at improving the operational management and corporate governance quality in state-owned enterprises have been developed and adopted since 2014. State-owned enterprises that are transnational corporations (TNCs) are guided by the international standards given in the OECD (Organization for Economic Co-operation and Development) Guidelines regarding the corporate governance of the state-owned enterprises (Corporate governance guidelines 2015; Corporate Governance 2014), that were developed as a supplement to the Corporate governance principles of group 20 of the OECD (2015). A large number of studies (Dolgopyatova 2012, 2015; Corporate governance 2014; Belyaeva et al. 2016a, b; Bataeva and Kozhevina 2015; Tkachenko 2016) and others, are devoted to the practice of corporate governance in Russian state-owned enterprises. A separate part of the research is related to the developing of methodological materials to improve the quality of operational management and corporate governance in state-owned enterprises (Belyaeva et al. 2016a, b; Bataeva and Cherepanova 2017; Kozhevina et al. 2015). This chapter will consider the main provisions of the documents regulating operational management and corporate B. Bataeva The Federal State-Funded Institution of Higher Education Financial University under the Government of the Russian Federation, Moscow, Russia O. Kozhevina (*) National Research University Higher School of Economics, Moscow, Russia © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_7

107

108

B. Bataeva and O. Kozhevina

governance in state-owned enterprises and the results of the implementation of the Corporate governance code in Russian state-owned enterprises.

7.2

Implementation of the Corporate Governance Code in the State-Owned Enterprises

In 2014, a new Corporate governance code was adopted in Russia, which replaced the Corporate behaviour code dated 2002. The Code was adopted on March 21, 2014 by the Board of Directors of the Central Bank of the Russian Federation (The Corporate governance code 2014). The Corporate governance code (the Code) is a tool for soft setting a “soft law”. The new code is more advanced in terms of recommendations for the corporate governance. The Government of the Russian Federation has commissioned 12 state-owned enterprises, among which only two are 100% state-owned, to introduce the Corporate governance code (Table 7.1). As follows from the data in Table 7.1, the Government of the Russian Federation has commissioned the implementation of the Corporate governance code to the stateowned enterprises, the state share in the share capital of which exceeds 50%, as well as PJSC Gazprom and PJSC Rostelecom due to their particular importance. To assist the companies in implementing the provisions of the new Code, the Federal Agency for State Property Management has developed a Method for self-evaluation of the corporate governance quality in state-owned enterprises, which was approved by the

Table 7.1 State-owned enterprises instructed by the Government of Russia to introduce the corporate governance code No 1. 2. 3. 4. 5. 6. 7. 8. 9.

Name of the state-owned enterprise PJSC Alorsa PJSC Aeroflot PJSC VTB Bank PJSC ROSSETI PJSC RusHydro PJSC Sovcomflot PJSC Transneft PJSC Gazprom OJSC Rosneft

10. 11. 12.

PJSC Rostelecom PJSC FGC UES OJSC Russian Railways

Share of the state ownership in the company, % 68.92 51.17 60.93 85.315 66.83 100.00 78.11 38.37 69.5 are owned by OJSC Rosneftegaz, which is 100% federally owned 43.07 80.13 are owned by PJSC ROSSETI 100.00

Source: L. Levina. Implementation of the Corporate governance code in the Russian Railways Holding, p. 3. Available at: http://docplayer.ru/28787003-Vnedrenie-kodeksa-korporativnogoupravleniya-v-holdinge-rossiyskie-zheleznye-dorogi.html

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

109

Order of the Federal Agency for State Property Management No 306, August 22, 2014 (Methods 1) (Levina 2014).

7.3

Methods of Self-Evaluation of the Corporate Governance Quality in Russian State-Owned Enterprises

The method of self-evaluation of the quality of corporate governance in state-owned enterprises was recommended by the Federal Agency for State Property Management for state-owned enterprises as well. The methodology of the Federal Agency for State Property Management for evaluating the quality of corporate governance in companies, whose sole shareholder is the Russian Federation, involves checking compliance of information consisting of 102 questions, and for joint-stock companies, whose share of the Russian Federation in the authorized capital is less than 100%, it requires checking compliance of information consisting of 120 questions (Methods 2014). The method of self-evaluation consists of six groups of issues about the rights of shareholders; the Board of Directors; executive management; transparency and disclosure; risk management, internal control and internal audit; corporate social responsibility and business ethics. The results of self-assessment are presented in percent, where 100% is excellent quality; and 0% is poor quality. It also contains target figures—the minimum value of the quality of corporate governance should not be lower than 65% (Methods 2014). It means that the Federal Agency for State Property Management recommends the Board of Directors of a joint-stock company to establish a permissible value of the quality of corporate governance of at least 65%. The method of self-evaluation allows to assess the significance of each component. It considers the largest number of issues related to the work of the Board of Directors, the organization of the internal control and audit system, transparency and disclosure. The main difference in the assessment of state-owned enterprises with different shares of ownership is in the number and weight of the questions in the Shareholders’ rights group. Thus, the self-assessment methodology (Methods 1) for a joint-stock company with the Russian Federation as the sole shareholder provides only five questions, while for a joint-stock company, the share of the Russian Federation in the authorized capital of which is less than 100%—22 questions. It is also applied to the weight of this group of questions for companies with different shares of ownership of the Russian Federation. In the first case—6, and in the second—14 (Tables 7.2 and 7.3) (Methods 2014). Since the Methodology of self-evaluation was approved by the Federal Agency for State Property Management before the adoption of amendments to the Civil Code of the Russian Federation dated September 1, 2014, differentiating corporations into public and non-public, this distinction was not reflected in it (Methods 2014).

B. Bataeva and O. Kozhevina

110

Table 7.2 Component weights and maximum points for evaluating corporate governance in a joint-stock company, whose sole shareholder is the Russian Federationa

Component group name/questions Shareholders’ rights Board of Directors Executive management Transparency and disclosure Risk-management, internal control and internal audit Corporate social responsibility, business ethics Overall evaluation

Evaluation Number of questions 5 55 5 15 16

Component weight in the total evaluation, % 6 41 8 26 13

Maximum score 30 200 38 126 63

6

6

31

102

100

488

Note: An actual score and level of compliance are determined for each component group of the evaluation a Compiled by the authors in accordance with the Order of the Federal Agency for State Property Management of August 22, 2014, No 306 “On Approval of the Methodology for Self-Evaluation of the Quality of Corporate Governance in State-owned Enterprises”, September 22, 2014. Available at: GARANT.RU: http://www.garant.ru/products/ipo/prime/doc/70627396/#ixzz5MYeG7pd7 Table 7.3 Component weights and maximum points for assessing the quality of corporate governance in public companies and joint-stock companies, the share of the Russian Federation in the authorized capital of which is less than 100% Name of component/question group Shareholders’ rights Board of Directors Executive management Transparency and disclosure Risk-management, internal control and internal audit Corporate social responsibility, business ethics Overall evaluation

7.4

Evaluation Number of questions 22 56 5 15 16

Weight of the component in the total evaluation, % 14 37 7 25 11

Maximum score 79 202 38 135 63

6

6

31

120

100

548

An Example of the Application of the Methodology of Self-Evaluation Corporate Governance

JSC Russian Railways (JSC RZD) is the largest railway company in Russia. The company was established on the basis of the Ministry of Railways of Russia in the process of implementing the reform of railway transport by the Russian Federation Government Decree of September 18, 2003, No 58, Moscow “The creation of the open joint-stock company Russian Railways”. The company consists of 16 railways.

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

111

Table 7.4 The results of self-evaluation of the quality of corporate governance in Russian Railways, as at the start of 2015 No Question group I Shareholders’ rights II Board of Directors III Executive management IV Transparency and disclosure V Risk-management, internal control and internal audit VI Corporate social responsibility, business ethics Overall evaluation

Match value/result 73 60 71 87 52 58 67

Levina (2014)

It employs over a million people. The infrastructure of the company includes railways and railway facilities, carriage facilities, devices for centralizing arrows and signals, railway communications, power supply and others. JSC Russian Railways has a developed locomotive complex and a large fleet of cars. The company is a monopolist in the industry, being a branched holding consisting of 123 subsidiaries and affiliates. The share of Russian Railways in the authorized capital of subsidiaries and affiliates ranges from 24% to 100%; however, the prevailing share of ownership is from 49% to 100%. The head office of the company, the main departments and directorates are located in Moscow. The Russian Railways Holding was included into the list of companies instructed by the Government of the Russian Federation to introduce the Corporate governance code. The main problem for Russian Railways was difference in levels of corporate governance in a large number of subsidiaries and affiliates. The task was to raise the quality of corporate governance to the compliance level (at least 65%) in all subsidiaries and affiliates (Table 7.4). Some features of the legal status of Russian Railways do not fully comply with the recommendations of the Code and objectively determine a lower evaluation. Thus, for example, the company charter of Russian Railways is approved by the Government of the Russian Federation, and not by a shareholders’ meeting as recommended by the Code. The sole executive body (President of the company) is appointed by the Government of the Russian Federation, not by the Board of Directors as in the recommendations of the Corporate governance code. These features are approved by the Federal Law “The Features of Management and Disposal of Railway Transport Property”. After the self-evaluation, the company conducted a detailed analysis of all 356 provisions of the Corporate governance code, taking into account the specifics of the company, and developed a Roadmap for the implementation of the recommendations of the Code in the activities of Russian Railways. This plan was agreed with the Federal Agency for State Property Management and the Ministry of Transport of the Russian Federation, and approved by the Government directive through the representatives of interests of the Russian Federation in the company’s Boards of Directors. By 2016, according to the Roadmap, the Russian Railways

112

B. Bataeva and O. Kozhevina

holding had planned to improve the quality of corporate governance to 82%. It concerned amending the company charter of Russian Railways and its subsidiaries in order to expand the powers of the Boards of Directors in accordance with the recommendations of the Code; coordination of the goals of all companies belonging to the holding, election of independent directors in the largest subsidiaries and affiliates (the Board of Directors of Russian Railways includes three independent directors) and creation of committees within the Board of Directors (Levina 2014). During 2015–2016, Russian Railways subsidiaries carried out most of the measures to implement key provisions of the Corporate Governance Code. Currently, Russian Railways have been working on implementing the provisions of the Corporate Governance Code in accordance with the action plan (roadmap). In 2017, draft amendments to the charter and to the regulation of the Board of Directors were developed, which should be approved in 2018 in order to comply with the recommendations of the Code. An itemized statement on compliance with the principles and recommendations of the Corporate governance code can be found in the company’s annual reports (Information 2016).

7.5

The System of Indicators for Evaluating the Quality of Operational Management of Public and Non-public State-Owned Enterprises (Methods 2)

A year earlier, prior to the adoption of the Corporate governance code, in the message of the President of the Russian Federation to the Federal Assembly in 2013, it was noted that all state-owned enterprises should develop long-term strategies, with clear objectives and indicators of personal responsibility of the managers. In this regard, in April 2014, the Ministry of Economic Development of the Russian Federation and the Federal Agency for State Property Management actualized an important task—development of documents on the system of strategic planning in state-owned enterprises, in order to improve their performance and management by the shareholder—the Russian Federation. To achieve this goal, the Guidelines on designing long-term development programmes for strategic open joint-stock companies and federal state unitary enterprises were approved on April 15, 2014, as well as for open joint-stock companies, the share of the Russian Federation in the authorized capital of which exceeds 50% in total (Recommendations of the Federal Agency for State Property Management for Long-Term Development Programmes, Methods 2) (Methodical recommendations 2014). The Recommendations proposed a vertical strategic planning system that included a state-owned enterprise development strategy; long-term development programme of state-owned enterprises; current (tactical) planning; audit of the implementation of the long-term development programme of the state-owned enterprise; a system of key performance indicators (KPI).

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

113

The development strategy of a joint-stock company (state-owned enterprise) is a conceptual internal document that contains clearly formulated and measurable strategic goals for the development of a state-owned enterprise (including a network of subsidiaries and affiliates), information on its current position in the industry, a targeted financial business model and strategic initiatives the organization is going to face in the next 5 years. The strategy of the joint-stock company is developed by the management of the state-owned enterprise in accordance with the current legislation of the Russian Federation and takes into account strategic, programme and other documents affecting the scope of activities of the organization, its subsidiaries and affiliates, branches and the industry as a whole, and is finally approved by the Board of Directors (supervisory board) of the state-owned enterprise. The long-term development programme of a state-owned enterprise is also an internal document, derived from the strategy of a state-owned enterprise, and is a programme document that contains lists of funds and specific measures ensuring the achievement of the organization’s strategic goals, defined by its development strategy, to the deadlines, indicating the amount and sources of their financing, and including the values of indicators of current and expected performance results of the organization, its subsidiaries and affiliates, branches for a period from 3 to 5 years. The long-term development programme (henceforth—LTDP) of the state-owned enterprise is the company’s management communication tool with representatives of the state as the main owner and stakeholder. The incorporating process of the programme (LTDP) into the system of corporate planning documents initiated linking it with the “crystallization core” of other strategic and programme documents of the company (Methodical recommendations 2014). According to the Recommendations, when developing a long-term development programme, the management of a state-owned enterprise should take into account the same strategic, programme and other documents as when developing a jointstock company’s strategy, following the algorithm presented below: 1. analysis of the current position of the company and indicators of achievement of goals set on the basis of the designing and approval of the previous strategy of the state-owned enterprise; 2. evaluation of the development prospects of the industry in the Russian Federation and in international markets with due account for the projected (expected) changes in technologies, technological and environmental regulation, flow of demand dynamics, etc.; 3. comparison of the activities of a state-owned enterprise with comparable companies, taking into account the industry and competitive environment of its activities; 4. description of the target model of the company’s development, priority areas for development and strategic initiatives; 5. identification of key risks and opportunities; 6. development of lists of specific activities to ensure the achievement of strategic goals by set deadlines (Methodical recommendations 2014).

114

B. Bataeva and O. Kozhevina

At the same time, the Federal Agency for State Property Management draws attention to the importance of establishing a long-term motivation for the company’s managers (remuneration payment depends on the achievement of key performance indicators established for the relevant period). Recommendations for the development of LTDP suggest that the draft of a longterm development programme should be developed by the management, reviewed by the strategy committee (if available) and approved by the Board of Directors (supervisory board). In the meantime, materials, containing viewpoints of the Government of the Russian Federation and coordinating federal executive authorities, are submitted to the management bodies of the state-owned enterprises for the consideration at the related meeting. Alongside the long-term development programme of the state-owned enterprise, it is also recommended to design and coordinate an investment programme of its development. Drafts of the abovementioned documents are sent for approval to the federal executive body that controls and coordinates the activities of the state-owned enterprise in the relevant industry. If there are objections from the responsible federal executive body, the draft of the long-term development programme of a state-owned enterprise is consisted with the comments and further reviewed (Methodical recommendations 2014). To improve the efficiency and quality of the program-targeted management, the Ministry of Economic Development of the Russian Federation proposed to introduce a regular audit mode of long-term development programmes implemented by the strategic enterprises and joint-stock companies. The audit of the implementation of the long-term development programme of the state-owned enterprise is the final stage in the strategic planning process of the state-owned enterprise. The implementation of the development strategy of the state-owned enterprise assumes that the organization sets tactical goals, motivates employees and allocates its resources so that the strategic goal is achieved in the most efficient and immediate way. Taking into account the peculiarities of the state-owned enterprises, in fulfilment of the orders of the President of the Russian Federation following the results of the St. Petersburg International Economic Forum 2013, the Federal Agency for State Property Management has developed Methodological guidelines on the application of key performance indicators by state corporations, state-owned enterprises, state unitary enterprises, and also business entities, in the authorized capital of which the Russian Federation or a constituent entity of the Russian Federation in total exceeds 50% (hereinafter—Methodological Guidelines for KPIs, Methods 3) (Guidelines 2013). The main goal of the implementation of KPIs is to converse the strategy and long-term development programme of a state-owned enterprise into concrete indicators of operational management, evaluate the current state of their achievement and create a basis for making management decisions in the long- and medium-term perspective. The Methodological Guidelines for KPIs (Methods 3) suggested the following division of companies into three groups:

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

115

1. joint-stock companies and limited liability companies in federal ownership, the share of direct and indirect participation of the Russian Federation or a constituent entity of the Russian Federation in the authorized capital of which exceeds 50% in total; 2. federal state unitary enterprises; 3. state corporations (Guidelines 2013). The Methodological Guidelines for KPIs suggest using the indicators of three types: financial and economic, industry-specific and cancellation of bonus for the managers of companies. The indicators are presented in Table 7.5. For the state-owned enterprises (excluding financial industry), Methods 3 recommend to provide no more than seven financial and economic indicators and their weight should be at least 30% of the total weight. Methods 3 suggest at least four sectoral indicators, and their weight is from 30% to 50% of the sum of all KPIs (Guidelines 2013). Sectoral indicators are first approved by the federal executive body performing regulation of the required area, and then approved by the Board of Directors. Financial and economic indicators are approved by the Board of Directors in the state-owned enterprises. The weight of the indicators, the target value of the indicators depreciation as well as the cancellation of bonus percentage for the managers are determined by the Board of Directors. A similar KPI system, also consisting of three groups, is used for the non-public companies. The industry and cancellation of bonus indicators coincide with the indicators provided for public companies. Only the first obligatory financial and economic indicator is different. For all entities in the financial and non-financial sectors, instead of the indicator “Shareholder Return on Investment (TSR—Total Shareholders Return) over the past year”, the indicator “Dividend Amount (dynamics of the figure compared with the average one over the last three years)” is used for non-public companies. When considering the profit distribution and remuneration to the sole executive body of the company, the Board of Directors takes into account the achieved KPI values during the reporting year. When calculating remuneration, the Methods recommend to use the integral performance indicator of the company (see Formula 7.1), calculated as a weighted sum of the KPI execution results. Result ¼ W 1 ðKPI1 , fact=KPI1 , planÞ þ W 2 ðKPI2 , fact=KPI2 , planÞ þ W n ðKPIn , fact=KPIn , planÞ,

ð7:1Þ

where W1, W2, . . ., Wn are the weights assigned to all KPIs of the joint-stock company, respectively, and (W1 + W2 + . . . + Wn ¼ 100%).1 (Formula 7.1) (Guidelines 2013).

1 For development institutions (JSC AIZHK, JSC Rosagroleasing, JSC RBC, JSC Rusnano) an increase in industry indicators of up to 70% is permissible, p. 8.

116

B. Bataeva and O. Kozhevina

Table 7.5 The system of financial and economic performance indicators (KPI) for public companies and cancellation of bonus indicatorsa Entity Financial industry entities

Type of indicators Financial and Obligatory economic

Optional

Amount 2

2–5

Name TSR—Total shareholders return, over the past year • ROIC—return on invested capital; • ROE—return on equity; The company’s Board of Directors selects one of the indicators, and also sets a target value Growth of the lending portfolio compared to the previous year (Upward trend) Increase in clients’ funds on accounts, including deposits Margin growth (the difference between the rate for attracting and issuing funds) to the previous year Growth of fee income to the previous year Indicator at the discretion of the Board of Directors

Entities (excluding financial industry)

Financial and economic

Obligatory

2

TSR—total shareholders return, over the past year ROIC or ROE chosen by the Board of Directors that also sets a target value

Weight Not less than 10% Not less than 10%

Total weight is not less than 30%

At the discretion of the Board of Directors At the discretion of the Board of Directors At the discretion of the Board of Directors

At the discretion of the Board of Directors At the discretion of the Board of Directors Not Total less weight than is not 10% less than Not 30% less than 10% (continued)

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

117

Table 7.5 (continued) Entity

Type of indicators Optional

For all public and non-public entities

Specific indicators of the industry

For all companies

Performance indicators used for cancellation of bonus for managers Performance indicators used for cancellation of bonus for managers

For financial institutions

a

Amount 2–5

No more than 4

Obligatory, approved by the relevant authority and the Board of Directors Obligatory, approved by the relevant authority and the Board of Directors

1

2

Name Changes of EBITDA to the previous year (Upward trend) EBITDA margin (growth of the figure compared with the average one over the last 3 years) Changes of the specific revenue (excluding irregular components) over a year, at the rate of one employee (growth to the previous year) Reducing the costs of purchasing goods (works, services) per unit Indicator at the discretion of the Board of Directors The indicators are approved by the Federal executive authority that regulates the relevant field, after that KPIs are approved by the Board of Directors Exceeding the limit set by the Board of Directors NetDebt/EBITDA

Exceeding the limit set by the Board of Directors NetDebt/EBITDA The deterioration of the NPL trend

Weight At the discretion of the Board of Directors At the discretion of the Board of Directors

At the discretion of the Board of Directors

At the discretion of the Board of Directors At the discretion of the Board of Directors The total weight from 30% to 50% of the sum of all KPIs of the entityb

At the discretion of the Board of Directors

At the discretion of the Board of Directors

Compiled using Table 2, Methods 3, (Guidelines 2013, p. 10, 11, 13) For development institutions (JSC AIZHK, JSC Rosagroleasing, JSC RBC, JSC Rusnano) an increase in industry indicators of up to 70% is permissible b

118

B. Bataeva and O. Kozhevina

In our opinion, this abovementioned integral performance indicator for jointstock companies (Formula 7.1) should be the basis for evaluating the effectiveness of the operational management of the state-owned enterprises. Thus, the KPI system contributes to the objective evaluation of the implementation of development programmes by the state-owned enterprises (strategies, long-term development programmes, a current plan), and also stimulates the top management to comply with the planned key performance indicators.

7.6

Results of an Empirical Evaluation of the Corporate Governance Quality in the State-Owned Enterprises

The introduction of methods of the Federal Agency for State Property Management in Russian state-owned enterprises discussed above contributed to the significant improvement of the quality of the corporate governance. In November 2017, the Expert Council under the Government of the Russian Federation assessed the implementation of the corporate governance code in state-owned enterprises (Report 2016). In September 2018, the Russian Institute of Directors presented the National corporate governance rating (NCGR) (Rating 2018). The results of these estimates are presented in Table 7.6. As it is shown in Table 7.6, a relatively developed practice of corporate governance was formed in most state-owned enterprises under consideration, which is an equivalent of seven points according to the rating scale. In the NCGR Rating, compiled in September 2018 using the NCGR method, PJSC Sberbank and PJSC RusHydro received the highest values (Rating 2018). It should be noted that they received such high values without implementing all the Code recommendations. So, PJSC RusHydro, which has the highest value of the quality of corporate governance according to the NCGR method, implemented only 6 out of 13 recommendations. Besides, there is no information on the number of the Code recommendations implemented by PJSC Sberbank. At the same time, it can be said for sure that the majority of companies from the Table applied more than half of the Code recommendations. The NCGR values only partially coincide with the experts’ opinion on the quality of the corporate governance. For reference, we shall use the results of the research of the National Research University Higher School of Economics and the Association of Professional Investors conducted in 2017—“Evaluation of corporate governance in public joint-stock companies with the participation of the Russian Federation, whose shares are traded on the established securities market” (based on surveys conducted by experts of the HSE laboratory in 2016) (Corporate governance evaluation 2017). The study selected public state-owned enterprises listed in Table 7.7. The following selection criteria were used for the state-owned enterprises:

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

119

Table 7.6 Evaluation of the corporate governance in the state-owned enterprises No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

State-owned enterprise PJSC Alrosa PJSC Aeroflot PJSC Bashneft PJSC VTB Bankc PJSC Gazprom PJSC UAC PJSC Rosneft PJSC ROSSETI PJSC Rostelecom PJSC RusHydro PJSC Sberbank PJSC Transneft PJSC FGC UES

NCGRa 7++ 7+ No data 7++

Rating of full implementation of the priority recommendations of the Corporate Governance Codeb 9 of 13 5 of 13 12 of 13 7 of 13

No data No data No data 7++

3 of 13 No data 7 of 13 9 of 13

7++

12 of 13

8

6 of 13

8

No data

No data

5 of 12

7++

6 of 13

a

Compiled using Rating (2018), http://rid.ru/nacionalnyj-rejting/rezultaty-nrku. http://open.gov.ru/ upload/iblock/131/131f73d02f7071214a16614f2a70af8f.pdf b Compiled using Report (2016), http://open.gov.ru/upload/iblock/131/ 131f73d02f7071214a16614f2a70af8f.pdf c Information on the share of distribution of the fixed and bonus parts, the type of remuneration (quarterly/annual/long-term) is not available. The VTB Annual Report discloses KPIs related to the implementation of a long-term development programme, but to what extent they are interrelated with the payments is not said (p. 99)

1. the controlling interest of the Russian Federation and (or) organizations controlled by the Russian Federation; 2. the inclusion of the company’s shares in the quotation lists of the First or Second Level of the Moscow Exchange (MOEX); 3. the infrastructure features of the company. The evaluation was carried out according to the criteria reflecting the interrelation of the level of the corporate governance with economic development factors, characteristics that determine the competitiveness and investment attractiveness of the Russian financial market, as well as the main shareholder’s position on the improvement of the corporate governance quality and its perception by the investors. The assessment was carried out by analysing public data and conducting expert meetings with the members of the Board of Directors of the companies. Survey participants among institutional and portfolio investors were asked to rate the corporate governance of each of the 13 companies under study on a scale from

120

B. Bataeva and O. Kozhevina

Table 7.7 Evaluation of the investors’ perception of the corporate governance quality in the stateowned enterprisesa No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. a

State-owned enterprises PJSC Sberbank PJSC Bashneft PJSC ALROSA PJSC Aeroflot PJSC Rostelecom PJSC RusHydro PJSC FGC UES PJSC Rosneft PJSC UAC PJSC ROSSETI PJSC VTB Bank PJSC Gazprom PJSC Transneft

Evaluation of the investors’ perception of the corporate governance quality 4.07 3.84 3.76 3.5 3.09 2.96 2.94 2.85 2.8 2.69 2.19 1.85 1.6

Compiled from Corporate governance evaluation (2017)

1 to 5 (where 1—“very bad” and 5—“very good”) (Corporate governance evaluation 2017). The results are given in Table 7.7. As shown in Table 7.7, the results of the evaluation of the corporate governance quality according to the NCGR methodology differ from the evaluation of the investors’ perception of the corporate governance quality. They coincide only in terms of PJSC Sberbank. However, as for PJSC RusHydro, there is a significant lag in the investors’ perception. The perception evaluation is a subjective assessment, based on the expert commentary. The disparity in the results of evaluations is a significant incentive for the investor relations services in building the reputation of state-owned enterprises. This result corresponds to the general attitude of the investors to the state-owned enterprises. Many investors believe that “the state control is the worst form of ownership”, “the state-owned enterprises give the lowest returns and have the lowest cost multipliers. They serve the public interest and do not care much about increasing the value for the shareholders” (Johnson 2016).

7.7

Key Findings and Research Results

Summarizing the analysis of the documents of the Federal Agency for State Property Management, that define corporate governance in the state-owned enterprises, and the application practice, the following conclusions can be drawn: 1. It is established that the Federal Agency for State Property Management consistently pursues the policy aimed at increasing performance efficiency of

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

121

companies with state participation. This confirms the content of the Methodical recommendations and Guidelines on operational and corporate governance, which were developed by the Federal property management Agency for stateowned enterprises. 2. The basic indicators for the evaluation of operational management and corporate governance of state-owned enterprises recommended by Federal Agency for State Property Management are given. Features of the methodology for evaluating the quality of the operational management of the state-owned enterprises and the differences related to KPIs for public and non-public companies are identified. Indicators of bonuses for public and non-public joint-stock companies differ in terms of obligatory financial and economic indicators. 3. As a result of the active implementation of the methods of the Federal Agency for State Property Management (Methods 1–3), state-owned enterprises significantly improved the quality of the corporate governance, both in subsidiaries and affiliates, and raised the level of the corporate governance to the recommended one. 4. An empirical study revealed the disparity in the evaluation of the quality of corporate governance in the state-owned enterprises made by the experts from the Russian Institute of Directors, who calculated the National corporate governance rating, and the investors’ evaluation. In our opinion, lower estimates of the corporate governance quality given by the investors are due to the insufficient transparency of the reporting information provided by companies and lack of trust in the state-owned enterprises.

References Bataeva, B. S., & Cherepanova, V. A. (2017). Prospects for the development of compliance as a means of improving corporate governance in Russian companies [Perspektivy razvitiya komplaensa kak sredstva uluchsheniya korporativnogo upravleniya v rossijskih kompaniyah]. Ehkonomika Nalogi Pravo, 10(5), 30–36. Bataeva, B. S., & Kozhevina, O. V. (2015). Evaluation of the effectiveness and quality of corporate governance of non-public companies [Ocenka ehffektivnosti i kachestva korporativnogo upravleniya nepublichnymi kompaniyami]. Vestnik Finansovogo universiteta, 6, 62–72. Belyaeva, I. Y., et al. (2016a). Development of methodological materials to improve the corporate governance in state-owned enterprises [Razrabotka metodicheskih materialov po sovershenstvovaniyu korporativnogo upravleniya v kompaniyah s gosudarstvennym uchastiem], (the Government of the Russian Federation). Belyaeva, I. Y., et al. (2016b). The mechanism of the aggregated quality evaluation of the management of non-public Russian state-owned enterprises: Monograph. [Mekhanizm agregirovannoj ocenki kachestva upravleniya nepublichnymi rossijskimi kompaniyami s gosudarstvennym uchastiem: monografiya] (p. 146). Moscow: Rusajns. Corporate governance evaluation of public joint-stock companies with the participation of the Russian Federation, whose shares are traded on the established securities market [Ocenka korporativnogo upravleniya publichnyh akcionernyh obshchestvah s uchastiem Rossijskoj Federacii, akcii kotoryh obrashchayutsya na organizovannom rynke cennyh bumag], HSE, 2017, p. 226. Corporate governance of state-owned enterprises. (2014). International Bank for Reconstruction and Development/The World Bank, p. 391.

122

B. Bataeva and O. Kozhevina

Dolgopyatova, T. G. (2012). State-owned enterprises: Approaches to the development of the corporate governance [Kompanii s gosudarstvennym uchastiem: podhody k razvitiyu korporativnogo upravleniya]. Menedzhment i biznes-administrirovanie, 2, 104–120. Dolgopyatova, T. G. (2015). State ownership: Privatise vs. effectively manage [Gosudarstvennaya sobstvennost’: privatizirovat’ vs. ehffektivno upravlyat’]. Zhurnal Novoj ehkonomicheskoj associacii, 1(25), 178–183. Guidelines for the key performance indicator application by the state-owned corporations, stateowned enterprises, state-owned unitary enterprises, as well as business entities, the share of the Russian Federation, a constituent entity of the Russian Federation in the authorized capital of which exceeds 50 percent in total [Metodicheskie ukazaniya po primeneniyu klyuchevyh pokazatelej ehffektivnosti gosudarstvennymi korporaciyami, gosudarstvennymi kompaniyami, gosudarstvennymi unitarnymi predpriyatiyami, a takzhe hozyajstvennymi obshchestvami, v ustavnom kapitale kotoryh dolya uchastiya Rossijskoj Federacii, sub’ekta Rossijskoj Federacii v sovokupnosti prevyshaet pyat’desyat procentov], 2013. Implementation of the corporate governance code, Report. (2016). [“Vnedrenie kodeksa korporativnogo upravleniya”]. Retrieved from http://gosinvest.open.gov.ru/upload/iblock/929/ 9299b1b02cde0b869a8ec91c1956b0f5.pdf Information on the compliance of the corporate governance system of Russian Railways with the corporate governance code. (2016). [Svedeniya o sootvetstvii sistemy korporativnogo upravleniya OAO “RZHD” Kodeksu korporativnogo upravleniya]. Retrieved from http:// ar2016.rzd.ru/download/ar/ru/pdf/additional/code-of-corporate-governance.pdf Johnson, S. (2016). State-owned enterprises are unprofitable for investors [Kompanii s uchastiem gosudarstva nevygodny dlya investorov]. Vedomosti, 09/23/2016. Retrieved from https://www. vedomosti.ru/finance/articles/2016/09/23/658291-gosudarstvennaya-sobstvennosti-hudshaya Kozhevina, O. V., Yurchenko, E. V., & Balunova, N. V. (2015). Development of management quality assessment methodology in the public sector: Problems and contradictions. Economy of Region, 3(43), 39–52. Levina, L. (2014). The introduction of the corporate governance code in the Russian Railways Holding [Vnedrenie kodeksa korporativnogo upravleniya v holdinge “Rossijskie zheleznye dorogi”]. Retrieved from http://docplayer.ru/28787003-Vnedrenie-kodeksa-korporativnogoupravleniya-v-holdinge-rossiyskie-zheleznye-dorogi.html Methodical recommendations on the development of long-term development programmes for strategic open joint-stock companies and federal state unitary enterprises, as well as open joint-stock companies, the share of the Russian Federation in the authorized capital of which exceeds 50 percent in total [Metodicheskie rekomendacii po razrabotke dolgosrochnyh programm razvitiya strategicheskih otkrytyh akcionernyh obshchestv i federal’nyh gosudarstvennyh unitarnyh predpriyatij, a takzhe otkrytyh akcionernyh obshchestv, dolya Rossijskoj Federacii v ustavnyh kapitalah kotoryh v sovokupnosti prevyshaet pyat’desyat procentov], April 15, 2014. Methods of self-assessment of the quality of corporate governance in state-owned enterprises, approved by the Order of the Federal Property Management Agency No. 306 of August 22, 2014 [Metodika samoocenki kachestva korporativnogo upravleniya v kompaniyah s gosudarstvennym uchastiem, utverzhdennoj prikazom Rosimushchestva ot 22 avgusta 2014 goda No. 306], Order of the Federal Agency for State Property Management of August 22, 2014 No. 306 “On Approval of the Methodology of Self-evaluation of the Quality of the Corporate Governance in State-owned Enterprises” [“Ob utverzhdenii Metodiki samoocenki kachestva korporativnogo upravleniya v kompaniyah s gosudarstvennym uchastiem”], September 22, 2014. Retrieved from http://www.garant.ru/products/ipo/prime/doc/70627396/#ixzz5MYeG7pd7 National corporate governance rating. (2018). [Nacional’nyj rejting korporativnogo upravleniya]. Retrieved from http://rid.ru/nacionalnyj-rejting/rezultaty-nrku OECD corporate governance guidelines for state-owned enterprises. (2015). [Rukovodyashchie principy OEHSR po korporativnomu upravleniyu dlya predpriyatij s gosudarstvennym uchastiem]. The corporate governance code. (2014). [Kodeks korporativnogo upravleniya].

7

Evaluation of Operational Management and Corporate Governance Quality in. . .

123

Tkachenko, I. N. (2016). The specifics of assessing the quality of corporate governance in mediumsized state-owned enterprises [Specifika ocenki kachestva korporativnogo upravleniya v kompaniyah srednego biznesa s gosudarstvennym uchastiem]. Ehffektivnoe antikrizisnoe upravlenie, 2(95), 58–65.

Bela Bataeva is a Professor at the Department of Corporate Finance and Corporate Governance of Financial University under the Government of the Russian Federation (Moscow), invited professor of HSE 2017–2018. Ph.D. in Economic sciences (HAC). Research interests: corporate governance, corporate social responsibility. Author of more than 100 publications (monographs and articles) on corporate governance issues, CSR, value bases of modern business, equity participation of employees and employees’ participation in governance, etc. Job experience as a member of the Board of Directors in companies with the participation of the Russian Federation. Member of the following professional associations: member of Independent Directors Association; member of the Expert board of the Institute of Economics of RAS on the issues of corporate governance in companies with state participation; member of RBEN—Russian Business Ethics Network. Member of the Editorial Board of the journal of scientific publications “Discussion”. Olga Kozhevina is a Doctor of Science (Economics) and expert Chamber of Commerce and Industry of the Russian Federation. Moscow, Russia. She is Professor at Institute of Economics and Crisis Management (Department of Crisis Management and Finance). Also, she has experience in leading universities: National Research University Higher School of Economics, Financial University and Russian Academy of National Economy and Public Administration. She was the head of the Presidential Program for Management Training “Strategic Management and Development Management” (2007–2014). Her topic of doctorate dissertation is “The impact of non-equilibrium economies on the development of the agro-industrial complex: theory and practice”. Her research interests: spatial economics and strategic planning; crisis-management; sustainable development management; quality assessment of corporate governance; introduction of the experience of OECD countries in Russian stateowned companies; state and municipal government. Olga Kozhevina has published scientific articles in leading Russian and foreign journals, including the results of joint international research; published in the Springer publishing house in 2017 (“Journal of the Knowledge Economy”). Kozhevina Olga has many grants from the Russian State Science Foundation (RSSF, 2007–2015), the Russian Foundation for Basic Research (RFBR, 2018–2019), and the Government of the Russian Federation on the subject of strategic management and effective management of state-owned companies (2014–2017). Kozhevina O. was a visiting lecturer in Semipalatinsk State University, Kazahstan (2010).

Chapter 8

Progress of the Corporate Governance Practice in Russian State-Owned Companies Irina Belyaeva and Khvicha P. Kharchilava

8.1

Introduction

The number of studies on the topic of the progress of corporate governance practice in Russian state-owned companies has been increasing recently. The impact of corporate governance on a company’s performance is what drives the interest in issues of management and assessment of sustainable development in Russian companies, and this interest has been steadily growing. A growing importance of corporate governance in Russian state-owned companies points to the importance of this issue. The main idea consists of the need to improve the corporate governance system in state-owned companies which, in turn, affects their performance. In an environment of globalization of the economic space, describing the relationship between the quality of state-owned companies’ corporate governance and their financial performance is of paramount importance. This topic is relevant for businesses seeking new approaches to ensuring their competitiveness. Corporate governance is a way to achieve this goal and to protect the interests of various stakeholder groups. Corporate governance serves as a shield for firms against future financial problems. It has been argued repeatedly that a company’s corporate governance structure affects its capacity to react to changes in business environment and may affect its financial performance. This study outlines certain

This chapter is based on the research findings generated while performing an academic project to which Financial University under the Government of the Russian Federation was assigned by the Government of the Russian Federation and whose topic was: “Developing practical recommendations for increasing the efficiency of corporate governance in Russian state-owned companies” 2017, 16.06.2016 no. 4149п-П17, UDK 338, R&D project ref. no. AAAA-A17117060110109-9. I. Belyaeva · K. P. Kharchilava (*) Federal State-Funded Educational Institution of Higher Professional Education, Moscow, Russia © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_8

125

126

I. Belyaeva and K. P. Kharchilava

theoretical principles and approaches to establishing the relationship between the quality of corporate governance and the financial performance of state-owned companies. The findings described herein are more than purely theoretical and do offer some practical value; in other words, they could be applied to construct modern business processes. Through our research, we have developed a number of proposals which pave the way towards creating a comprehensive methodology for assessing and managing the value of a company based on the principles of corporate governance in forecasting and implementing its activities. Our objective is to establish a theoretical foundation for the development of a universal methodology of building a balanced and harmonized company in terms of economic indicators and common values. Corporate governance as a term is frequently used in order to describe how a firm is managed, monitored, and held accountable. The fundamental principles of a corporate world are promotion of transparency and accountability and fulfilment of fair expectations of all stakeholders. Some authors argue that good corporate governance practices generate confidence in the company. On the other hand, companies with low level of corporate governance are not as profitable. It has been pointed out that corporate governance also helps companies get access to financial recourses, decreases their cost of capital, improves their financial performance and generates goodwill for all stakeholders (Belyaeva et al. 2018). Russia is an emerging market that has a great potential. Despite some current instability observed domestically, investment opportunities in Russia are very likely to increase in the nearest future there. In this context, corporate governance might become very important. At the same time, despite a rapid development of corporate governance, it is true that Russian companies are currently paying less attention to corporate governance than their counterparts in more developed countries like Europe or the USA. And while for some other countries the link between corporate governance and financial performance has already been established, for Russia it is not so straightforward. Federal government is a major shareholder in many Russian companies. Therefore, a certain problem may appear: SOEs (state-owned enterprises) in Russia could be less motivated to implement high corporate governance standards (Belyaeva and Kharchilava 2018).

8.2

Problem Statement

For the purpose of this study it is important to define a SOE (or a GLC—a government linked company). According to OECD Guidelines on Corporate Governance of StateOwned Enterprises, any “corporate entity in which the state exercises ownership, should be considered a SOE” (including joint stock companies, limited liability companies and partnerships limited by shares). SOEs can be fully or partially owned by the government. High level of corporate governance of SOEs is crucial not only domestically but also internationally. In many countries SOEs are among the main providers of vital public services, for instance public utilities. Russia is no exception. This is the reason why these companies directly affect the community’s everyday life and, without any doubt, the competitiveness of the country’s economy.

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

127

Moreover, SOEs are becoming increasingly eminent actors in the global arena. Here we have a problem. On the one hand, there have been numerous studies showing that corporate governance is positively linked to financial performance. On the other hand, Russian Government as a major shareholder in Russian SOEs could pursue its interests at the cost of minority shareholders. In other words, it might be that Russian SOEs do not need corporate governance. Thus the research question of this paper is the following: Is there a relationship between corporate governance and financial performance for Russian state-owned companies? This study’s distinct contribution consists of its focus on Russian state-owned companies, evaluation of their corporate governance practices, and the use of the 2014 and 2015 financial performance data. The conclusions presented herein are of particular interest, given the state of the Russian economy amidst low oil prices, devalued national currency and sanctions imposed by Western countries. Objective: to analyze the relationship between corporate governance and financial performance for Russian state-owned companies. In order to achieve this objective, several tasks will be performed (Kuznetsov et al. 2015). In our research, the following methods were used: the theoretical one (analysis, synthesis, concretization, generalization, method of analogies, modelling); the empirical one (examining the experience of foreign stock exchanges, rating agencies and companies with state participation); methods of the theory and practice of corporate governance, methods for calculating the index of corporate governance (Barton and Wiseman 2015). Review and analyze empirical and theoretical publications on: • Corporate Governance in emerging countries and in Russia, in particular, corporate governance in state-owned companies. • Relationship between corporate governance and financial performance. • Based on literature review and analysis, state a hypothesis that will be further tested. Identify proxies for financial performance and corporate governance. Evaluate selected companies using the proxies. • Subject: relationship between corporate governance and financial performance for Russian state-owned companies. The rationale for state ownership of a company is different for every country and industry. It is usually driven by a set of factors which primarily include the country’s economic, social and strategic interests (e.g. the supply of public goods, regional development, industrial policy, “natural” monopolies). Despite the trend toward privatization over the past two decades, SOEs still play a significant role in the economy. On the global scale, they account for about 20% of investments, 5% of work force, and up to 40% of GDP in some countries. SOEs today are under strong pressure to improve their performance. SOEs are often dominant in sectors like infrastructure and utilities (e.g. power industry, transport industry, telecom industry; sometimes hydrocarbons and finance as well) even in countries where they play only a small role in the economy (Аggаrwаl 2013). Over the last few decades, SOE participation in international investment and trade has increased exponentially. While in the past SOEs were mostly just providing basic infrastructure or other public services within their domestic markets, nowadays they are steadily becoming crucial players outside their home countries.

128

8.3

I. Belyaeva and K. P. Kharchilava

Research Questions

As a result, according to the Guidelines, achieving a high level of governance in SOEs is very important to guarantee their positive contribution to the economy and their overall competitiveness. Many SOEs now rank among the world’s largest companies, investors, and capital market players. In many countries, SOEs in strategic industries are increasingly viewed as tools for accelerated development and global expansion. The performance of SOEs has improved in many cases due to greater competition, exposure to capital market discipline and better governance practices. However, many SOEs continue to underperform and that entails high economic, financial and opportunity costs for the wider economy. According to the World Bank, a long history of efforts at reform shows that poor SOE performance is caused more often by fundamental problems in their governance than by some exogenous or sector-specific factors. One of the possible causes of corporate governance challenges can be a discrepancy between political interests of the owners (the national government on behalf of the public) and those in control (directors and executives who manage the organization). These challenges may involve complex and sometimes contradictory rules, a lack of clearly identified owners, boards and management impacted by politics, a lack of autonomy in day-to-day decision making, feeble financial reporting, weak transparency, poor performance monitoring and accountability systems. Where these problems are more prevalent, SOEs may also be a source of corruption (Kabir 2017). While many problems related to corporate governance are common for all companies, some challenges are common for SOEs specifically. The table below summarizes some of the major issues. International and Russian Guidelines on corporate Governance. OECD Guidelines on corporate Governance of State-Owned Enterprises (O’Kelley et al. 2017). The Guidelines include: • State ownership rationale. The main goal of state ownership should be to maximize value for general society through an efficient distribution of resources. The government should closely evaluate and disclose the goals that support the rationale for state ownership, as well as perform their review from time to time. • The role of the government as owner. As owner, the national government should act in an informed and active manner and should ensure that corporate governance of SOEs is conducted in a transparent and accountable way, with a high degree of professionalism and effectiveness. The government should also grant SOEs full operational autonomy in order to reach their defined objectives. • State-owned enterprises in the marketplace. The legal and regulatory framework for SOEs should ensure a fair competition in the marketplace. A clear segregation between the government’s ownership function and other functions is necessary, particularly when it comes to market regulation. High standards of transparency and disclosure concerning the SOEs cost and revenue structures should be sustained.

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

129

• Equitable treatment of shareholders and other investors. The state and SOEs should ensure that all shareholders are treated equally and fairly and have equal access to corporate information. In addition, it is highly recommended to follow the national corporate governance codes. • Stakeholder Relations and Responsible Business. SOEs should respect and maintain high standards of responsible business conduct. Companies should issue reports on their stakeholder relations (as regards labor, creditors and affected communities). Moreover, SOEs should not be used as a tool to finance any political activities and should not make contributions to any political campaigns. • Disclosure and transparency. SOEs should maintain high standards of transparency and disclosure, as well as be subject to the same strict accounting, compliance and auditing standards as listed companies (e.g. their annual reports and financial statements should undergo independent external audit, while their financial and non-financial information reporting must be in line with internationally recognized corporate disclosure standards). • Responsibility of the SOE boards. SOE boards should have the necessary authority, expertise and objectivity to perform their duties of strategic guidance and monitoring of management. The boards should be assigned clear responsibilities for the company’s performance and should have a well-defined role. They should act with integrity and be held accountable for their actions.

8.4

Purpose of the Study

To date, certain progress has been achieved in the development of corporate governance in Russian companies with state ownership, namely public ones. The basis for this progress has been provided by both regulatory fixation of best standards of corporate governance and requirements on information disclosure regarding their compliance. Implementation of best practices by state companies is supported with demands of the main shareholder—the state, in particular, by road maps on introduction of corporate governance code requirements. Information on realization of the governance code requirements is regularly published both in annual reports and on websites of companies (primarily public ones). Thus, nowadays, sufficient data regarding the state of corporate governance in public companies with state participation are publicly available. Moreover, the existence of a wide range of tools for assessing the quality of implemented processes is noteworthy. However, only few of them allow to conduct quantitative assessment of the effect of application of the best corporate governance practices. Implementation of a national corporate governance index will adequately address this problem. In 2015, MICEX Stock Exchange launched the calculation of the State Companies Index—composite index based on prices of deals with securities of state companies (Joint-Stock Companies in relation to which the right to determine the position of the shareholder—the Russian Federation, belongs to the Government of the Russian Federation, the Chairman or with his order the Deputy of the Chairman of the Government of the Russian Federation) accepted to trading on the Stock or

130

I. Belyaeva and K. P. Kharchilava

other securities recommended by the Ministry of Economic Development or Federal Agency For State Property Management (FASPM). The Index is considered to be the benchmarking figure for the efficiency of the managers of state companies (Wоrld Bаnk Grоuр 2014). According to the Index calculation methodology, it includes not only the information about deals made during the Stock trading, but also the amount of the paid dividends. This economic figure is used by the Ministry of Economic Development and FASPM to determine the efficiency of the management of state companies in terms of their capitalization change. Also, it is crucial for state public companies and the Government as their owner to understand the efficiency of corporate governance instruments, especially the one expressed in value terms, taking into account the significant amount of costs spent on companies’ functionality (Belyaeva and Kharchilav 2018). According to the 2015 Gazprom PJSC annual report, remuneration of corporate governance authorities was 3500 million rubles (among these, 352 million rubles was paid to the Board of Directors, 2703—to the Management Board, 13—to the Audit Committee). Taking into account a significant amount of those payments, the main owner—the Government or the shareholders may raise questions as to the relevance of such expenses and as to determining not only a way of controlling the efficiency of corporate governance authorities, but also their influence on the KPIs. Moreover, the lack of appropriate corporate governance is considered as additional significant risk by analysts and rating agencies connected with the complexity of shareholders control over the management. In the global practice there are many instruments used for corporate governance evaluation. They can differ for various types of companies in accordance with their size, shareholders’ quantity, status and main purposes of corporate governance evaluation. For non-public companies with 100% ownership of a single shareholder there are more relevant evaluation objects, such as the quality of shareholders’ control and the efficiency of decision-making systems, which can be analyzed in the process of selfevaluation. Non-public companies with significant amount of shareholders are interested in trustworthy balanced corporate governance systems. For such companies, in addition to self-evaluation, other measures become important: attraction of external independent experts and benchmarking, peer comparison. As for the public companies, which need ensuring trust not only among shareholders, but also among external investors there are special requirements to provide reports on compliance with the national corporate governance standards (as a rule, required by stocks or authorities) and numerous quality instruments implemented by investors: matrices, rankings, ratings, corporate governance indices (Dе Gаlbеrt 2015). However, none of above mentioned methods have the ability to provide a “digital” measurement figure of corporate governance in a company including public state-owned companies. International standards of corporate governance in companies with state participation are defined in OECD Principles of Corporate Governance in State Companies. In these principles, there are guidelines regarding ensuring of efficient regulatory and legal frameworks for state companies; position of government as active owner; equal treatment of shareholders and ensuring equal

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

131

access to necessary information for all shareholders; responsibilities of state companies to report on engagement with stakeholders; high level of transparency and disclosure of information; responsibility and integrity of state-owned companies’ Boards (OECD 2015). In Russian Corporate Governance Code those principles are developed and extended despite the fact that they cover not only state, but all companies. Moreover, for main regulators and state authorities on the Russian market this information about compliance with the Code recommendations has become the main benchmarking for evaluation of the quality of corporate governance and its efficiency in companies with state participation.

8.4.1

The Russian Government Instructions

Following a meeting with members of the Government Expert Council, Dmitry Medvedev issued instructions (Resolution DM-P36-46 issued on 28 May 2014) concerning the improvement of corporate governance in companies with state participation and property. Specifically, the following: • form the list of stock companies, in which the share of government is over 50% and implementation of the Code of corporate governance is primary; • for those entities plans or “road maps” shall be prepared with accent on such points as appointment and termination of the sole executive body by the Board of Directors, as well as the Board’s control over material transactions and corporate actions of affiliate parties; • develop structure of an annual report about corporate governance for above mentioned entities, including achievement of KPIs and implementation of longterm development programs.

8.4.2

FASPM

For the purposes of implementation of the above-mentioned instructions by the Government, among many other methodological documents, FASPM has developed a “Methodology of Corporate Governance quality self-evaluation in companies with state participation” (FASPM Order 36 issued on 22 August 2014) (Hugh and Mac 2018). In this document, approaches to complex Corporate Governance quality selfevaluation are introduced. Among others, those approaches take into account the compliance with the principles and recommendations of the national Code of Corporate Governance. There are following necessary requirements in terms of corporate governance set by MICEX for the first and second level issuers:

132

I. Belyaeva and K. P. Kharchilava

• Requirements to an Issuer’s corporate governance which shall be binding for listing its shares as first-level and second-level ones (items 2.18–2.19, Appendix 2 to MICEX Listing Rules) • Requirements to an Issuer’s corporate governance which shall be binding for listing its bonds as first-level ones (item 2.20, Appendix 2 to MICEX Listing Rules) • Criteria for determining the independence of the members of the Board of Directors (Supervisory Board) (Appendix 4 to Listing Rules by MICEX) Requirements for the composition and functions of the Board of Directors, the organization and functioning of its committees, the role and functions of the Corporate Secretary etc. contained in these documents, in general, fully correlate with the principles and recommendations of the Corporate Governance Code.

8.4.3

Bank of Russia

In its circular IN-06-52/8 “On disclosing in public joint-stock companies’ annual reports a statement on compliance with corporate governance principles and recommendations of the Corporate Governance Code” issued on 17 February 2016, Bank of Russia recommends a number of measures aimed at “qualitative disclosure in key areas of corporate governance (such as the Board of Directors (supervisory board), the organization of the decision-making process and the effectiveness of its work, the role of large shareholders, transactions in which there is interest (related party transactions), adopted in an entity remuneration system, risk management and internal control, etc.)”. Also, progress in implementing the recommendations of the Corporate Governance Code for companies with state participation is noted by Russian independent experts. For example, an article published on the website “The Country and the World” on June 2, 2016 (http://inklgd.com/strana-i-mir/25066) with reference to the Expert Council under the Government of the Russian Federation states that there has been a significant improvement of Russian companies with state participation in the implementation of the priority recommendations of the Corporate Governance Code. First of all, the article mentions 13 most significant and largest companies: “Rostelecom”, “Rosneft”, “Transneft”, “Alrosa”, “RusHydro”, “Aeroflot”, “Rossetti”, VTB, FGC, “Russian Railways”, “Sovcomflot”, “Gazprom” and “Sberbank” (the latter interacts on the implementation of the Code with the Bank of Russia, the implementation of the Code there has not been analyzed by experts), as well as the company “Bashneft”, which has started to implement the recommendations of the Code on its own initiative. Analysis of information on compliance with the Corporate Governance Code in the annual reports of other public companies, including the state ones, confirms the fact that despite the difficulties with introduction of corporate governance standards, overall, current level of corporate governance is already sufficiently high. Open access to information that allows to conduct analysis and measurement of the quality

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

133

of corporate management of Russian state-owned companies with the tools used in international and Russian practice, both private and public companies. As mentioned above, for public companies in the international practice exists mandatory reporting on compliance with national standards for corporate governance (usually at the request of regulators and stock exchanges) and various tools of quality assessment used by investors: the matrix, rankings, ratings, corporate governance codes (see Fig. 2). The ratings’ users are consumers, investors, and competing public companies. Indices are more limited tool designed for use by the investment community interested in assessing the potential risks to invest (Salewski and Zülch 2014).

8.5

Findings

Methodology for evaluation of the corporate governance of the International Finance Corporation (IFC) is one of the most popular tools for evaluating the quality of corporate governance. The main evaluation criteria relate to the following issues: • • • •

Management’s commitment to corporate governance principles, Practice of the Board of Directors, Disclosure and transparency, Protection of shareholders’ rights.

Currently, the methodology applied is “The conceptual basis for the development of corporate governance”—a 2011 document used by more than 30 international development institutions. This methodology allows evaluating the investment community’s expectations, including funds and portfolio investors, for specific entity. The main instruments are the focus group assessment and the detailed study of a particular situation. The evaluation results of the IFC methodology simplify the process of formation of the “road map” for further development of corporate governance in the company, as it is based on international principles of corporate governance. However, it is necessary to note that the use of this tool is quite time-consuming evaluation of a broad investment group, and, as a rule, evaluation results are not publicly disclosed or partially disclosed. A broader base for comparison is provided by another tool—the international “scoring” of the quality of corporate governance. This tool is offered, for example, by the company ISS. The system of corporate governance risks monitoring “Quick Score” is based on the analysis of companies reporting in English and the data base includes 4000 companies worldwide. This evaluation system is designed for market analysts and portfolio managers. The evaluation criteria include parameters such as the structure of the Board of Directors, compensation and remuneration, shareholder rights, supervision in the field of audit and risk management. The purpose of evaluation in accordance with this methodology is to help investors in an integrated assessment of the corporate governance risks. In accordance with the methodology, tools, offered by the ISS, are based on publicly disclosed information, covering large

134

I. Belyaeva and K. P. Kharchilava

public companies. However, the main emphasis in the analysis is on the risks of corporate governance, and the evaluation results are not available to all market participants. Corporate Governance Ratings are assigned similarly to credit ratings. The procedure for assigning a rating is carried out at the request of the company for a fee. Rating assignment, as a rule, is based not only on an analysis of publicly available information, but also internal, private data, as well as interviews with management, the findings of rating agency analysts in relation to corporate governance. Typically, the ratings only cover some of the largest companies, and not all companies disclose the results of the evaluation. In the Russian practice among those forms of self-evaluation of compliance with the national Code recommended by the Bank of Russia, the Moscow Stock Exchange and FASPM there are other applied ratings: the Russian Institute of Directors Management (RIM) (Mnatsakanyan and Kharin 2016) corporate ratings, the National Rating Agency (NRA) (Оrаzаlin 2014). Therefore, in Russia there are forms for corporate governance evaluation similar to those used in the international practice and, moreover, are tailored to the best ones. Russian Corporate Governance Code is considered to be the most objective foundation for identifying national leaders in the field of corporate governance from the viewpoint of compliance with its recommendations. Accordingly, the index in Russia is an indicator of corporate governance development in Russian companies, which determines the degree of their compliance with the principles determined by the national Code. Taken into account the other countries’ experience of applying the codes, the national index of corporate governance may contribute to the generalization of country’s best practices, improvement of the existing legislation and corporate governance standards. In addition, the existing corporate governance indexes provide the usage of not only qualitative (analysis of the company’s internal control structure; evaluation of external factors’ impact on the macroeconomic level, the usage of subjective expert methods), but also the quantitative performance indicators that demonstrate the company’s effectiveness both in the context of the whole country and individual industries, economic clusters, regions. Thus, the Russian index should be calculated according to a complex transparent quantitative and qualitative corporate governance valuation procedure. This technique has to be based on objective indicators of the company’s management effectiveness, available for evaluation through open sources of information. Index is the unified indicator that links the level of the company’s corporate governance with the stock market’s mechanisms. As investors understand these mechanisms, the calculated index helps to measure the additional companies’ created value through corporate governance. This information gives investors the opportunity to evaluate potential investment target. In turn, availability of corporate governance quality indicator for investors should stimulate companies to optimize the control systems and to improve information disclosure. At the same time, participation in the index allows companies to confirm

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

135

their compliance objectively with the applicable principles and best practices of corporate governance, which, in turn, gives a positive effect on image. At the same time, the company’s increased attention to the quality of corporate governance enhances services demand in this sector and, in general, has a positive impact on the corporate governance institute development. Open information sources have to be used while determining the index (annual and quarterly reports, the company’s website, and specialized mass media). In order to be included into the index, a company must appear in Level 1, 2 or 3 list of securities admitted to trading on Moscow Stock Exchange, as well as to be within the top 20 companies with the highest level of corporate governance on the index criteria. Evaluation criteria of potential index participants included in the questionnaire is to be annually reviewed, preferably not solely by the regulators, but also with the involvement of the Moscow Exchange issuers Committee and leading corporate governance experts. The composition criteria are listed in Table 8.1. Elimination from the index will take place in the event of the company’s delisting or a number of significant discounting factors (corporate conflicts, fraud, bankruptcy, sudden change of members of the Board and Director and General Manager, etc.). Public results of the evaluation will be regularly updated list of companies included in the index, with reference to the section of the Company’s website “for shareholders and investors” and an annual corporate governance national report about corporate governance development in Russian companies based on Corporate Governance Index, in accordance with the index methodology. Taking into account

Table 8.1 Criteria for assessing the index of corporate governance Evaluation components The Board of Directors, Remuneration, The Corporate Secretary The Board of Director’s composition, structure, functions and procedures The Board of Director’s Committee Remunerations The Corporate Secretary Risk Management and Internal Control The Internal Audit’s structure and functions Risk management and internal control system Shareholders’ Rights, Essential Corporate Actions Dividend policy Preparation, convocation and conduction of the annual general meeting Essential corporate actions Information Disclosure Annual report Internal documents Information policy

136

I. Belyaeva and K. P. Kharchilava

the issue of annual reports, the Index value may be calculated in August of the year following the reporting one. It is reasonable to introduce a quarterly monitoring and updating companies’ data included in the index, and, in this context, the quarterly adjustment index feasibility is one of the issues for further discussion. The annual survey, conducted in the process of the Corporate Governance Index content and structure renewal involves the study and synthesis of national best practice, develops recommendations for improving the corporate governance regulatory frameworks and standard norms. Available information, summarized in the results of the index calculation, can have a positive impact on the improvement of corporate governance practices and disclosure, as well as confirm the companies’ leadership included in the index calculations while implementing the best corporate governance standards. Differences in law: as the authors have highlighted, previous research focused on relationship between law and finance in the context of corporate governance has established that the laws protecting investors differ significantly across countries, some of the reasons being the differences in legal origins (Оrаzаlin 2014). Differences in laws and their enforcement have an impact on ownership structure, dividend payout, access to and cost of external financing, as well as and market valuations of a company. How binding or flexible are the provisions (and companies’ decision to accept or decline them) It is important to note that in the context of investor protection law in a country many provisions might not be binding. Therefore, companies have the flexibility to decline certain provisions or to accept additional ones not listed in their legal code. For example, in order to improve investor protection, a company could increase transparency and disclosure, elect a highly qualified and independent board of directors, impose disciplinary mechanisms to prevent management from expropriation of minority shareholders, etc. (Kharchilava 2018).

8.6

Conclusion

One way to use corporate governance scores would be to use the ones provided by a research agency, for example Russian Institute of Directors (rid.ru). They analyze corporate governance practices and rate Russian companies according to their methodology. But the problem with this approach is that Russian Institute of Directors and other agencies do not have the scores for all companies in our sample; hence, it was decided not to use corporate governance scores determined by third parties (Mnatsakanyan and Kharin 2016). Another problem is that using scores compiled by agencies would lead to a selfselection bias: rated companies seek to obtain a corporate governance score from a research agency if they think their practice is good enough. In that case only companies with higher corporate governance practices would be analyzed in this research which would lead to distorted results (Salewski and Zülch 2014).

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

137

We expect finding a positive relationship between corporate governance and financial performance, i.e. better governed companies are more likely to get better financial results and market valuation. All our hypotheses follow from the literature review. All our data were obtained from secondary sources. The sample used in the study consists of companies included in the Moscow Exchange State Owned Companies Index (MOEX SCI). In total, the sample includes 16 companies from 6 sectors: transport sector (4 companies), oil & gas (4 companies), utilities (4 companies), banking (2 companies), metals & mining (1 company), telecom (1 company). Aeroflot is the largest Russian airline. In 2015, it carried 26.1 million passengers. Founded in 1923, it is one of the world’s oldest air companies. In 2010, the Russian government decided to integrate Aeroflot with most of other state-owned air companies in the country. Aeroflot destinations span over 51 countries globally and the airline currently employs more than 30,000. In April 2006, the company joined SkyTeam international alliance (www.aeroflot.ru). Alrosa is a Russian group specialized in diamond mining. The company was founded in 1992. Alrosa accounts for 95% of all diamonds mined in Russia and almost 25% worldwide. The estimated reserves of diamonds in the company’s possession amount to approximately 1/3 of the global ones. Currently Alrosa has 27 mining fields in Russia and Central Africa and employs 40,000 (www.alrosa.ru). Bashneft is a Russian vertically integrated oil company founded in 1946. The company is currently operating over 160 oil and gas fields all over Russia, 3 oil refineries and over 100 petrol stations. The company employs more than 25,000. In addition to its core oil and gas activities, Bashneft is investing in technology development and research and is supporting BashNIPIneft research center. FGS UES (Federal Grid Company of the Unified Energy System) is a Russian power company that provides power transmission services. The company is a natural monopoly and operates in all regions in Russia, transmitting almost one half of the entire power consumed in the country. The company was founded in 2002 and currently employs 235,000. Gazprom is Russia’s largest natural gas company. The company was founded in 1989 and currently employs 4,596,000. It holds an export monopoly and other gas exporters must use Gazprom transit infrastructure. Gazprom possesses the largest natural gas reserves amounting to approximately 17% globally and 72% within Russia. The company exports gas to 30 countries (www.gazprom.com). Inter RAO, one of the largest Russian power companies, was founded in 1997 and currently employs almost 60,000. The company’s core business includes power and heat generation as well as international power trading. The company holds a power export and import monopoly within and operates in 14 countries. NCSP (Novorossiysk Commercial Sea Port) is the largest Russian seaport and the third largest commercial port in Europe. The company provides stevedoring services (ship loading/unloading). NCSP was founded in 1957 and currently employs about 4000. The port is responsible for over 20% of cargo turnover in Russian seaports and its total annual turnover exceeds 130 million tons. Rosneft is one of the largest global oil and gas companies. The company was founded in 1993 and currently employs 2,489,000. Rosneft is also a leading oil

138

I. Belyaeva and K. P. Kharchilava

refining company in Russia and operates 11 refining sites. The company is also actively developing its retail network to increase sales to the end consumers. Rosseti is the leading Russian power and distribution grid company. It was founded in 2007 and currently employs about 220,000. Rosseti is maintaining over 2.3 million km of power transmission lines (www.rosneft.ru). Rostelecom is the largest network provider in Russia with more than 500,000 km of network. The company was founded in 1993 and currently employs over 150,000. Rostelecom is providing various services including TV, internet connection, and telephony in all regions of Russia. RusHydro was founded in 2004 as a 100%-owned subsidiary of RAO UES of Russia. It operates branches, hydropower plants and subsidiaries. In 12 years of operation the company has become one of the world’s largest hydropower holdings and the Russian leader in renewable energy production (http://www.rushydro.ru/). Sberbank’s core business is banking operations: services for corporate and retail customers, as well as transactions on financial markets. The company is operating in 22 countries. Sberbank today accounts for one third of the Russian banking system: it is the key lender to the Russian economy and the biggest receiver of deposits in Russia accounting for almost 45% of all retail deposits, 38% of retail loans and 33% of corporate loans. The company has over 130 million retail clients and over 1 million corporate clients (sberbank.com). Tatneft is one of Russia’s biggest vertically integrated oil and gas companies. The company was founded in 1950 and currently employs more than 26,000. Tatneft operates 77 oil fields and has oil reserves exceeding 800 million tons. In addition to oil and gas production, the company develops petroleum refining, tire manufacturing, petrochemicals production and other activities (tatneft.ru). Transneft is a Russian monopoly in the oil and gas transit industry. The company was founded in 1993 and currently employs over 90,000. Transneft operates more than 70,000 km of pipelines and more than 500 pump stations. Transneft is present in both domestic and foreign markets, including China, Hungary, Latvia, Poland, Uzbekistan, etc. (http://www.en.transneft.ru/). United Aircraft Corporation was founded in 2006 and currently employs over 100,000. The initial goal of founding this company was to maintain and achieve further development of Russian aviation industry. Today, UAC integrates about 30 companies in Russian aviation industry and has joint ventures with foreign partners based in Italy and India. VTB Group is one of the leading Russian financial groups. The company was founded in 1990 and currently employs over 96,000. The company operates a wide retail network in Russia with more than 1800 offices, and is present in the world’s key financial markets. Currently, VTB Group banks operate in 23 countries globally (http://www.vtb.com/). It is important to note that one may draw up a corporate governance index not only for state-owned companies (as with the companies with state participation index while calculating their capitalization), but also for all public companies listed on the Moscow Stock Exchange. This may be done by calculating individual index values for selected subgroups of listed companies: separately for state-owned ones, separately for private ones, in the context of industry, etc.

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

139

It seems that the state-owned companies index will play a relatively limited role related to the support of the composite state-owned companies’ index. In our opinion, the second option which is a comprehensive approach involving index calculation for all public companies is more useful as it expands the area of corporate governance analysis over different sectors in Russia. The prospects of index development as a valuable analytical instrument are linked with the assumption that there are both direct and inverse causal relationship between the quality of corporate governance and the effective corporate activity. Index calculation involves the use of the stock market mechanism as an effective instrument of corporate governance quality assessment within the company. At the same time, the index will enable one to use a single, unified assessment of corporate governance in the interest of potential and existing investors within the companies. Groups of strategic investors indirectly take into account the company’s management and corporate strategy while making investment decisions. In addition, any strategic investor who assesses the level of a company’s corporate governance looks not for the number of implemented standards, but for the efficiency of the corporate control system in place, since that is what reduces the investor’s risks. Accordingly, the use of the index will enable investors to determine the relationship between the capital invested in the company and the capital enhanced by the company through the development of corporate governance within it. In turn, the companies that participate in the index will receive a number of benefits that can be divided into “internal” and “external” ones: • Internal benefits: obtaining analytics and benchmarking in different sections (branch, regional, peer-group), cutting their own costs on external corporate governance analysis; encouraging disclosure and optimization of corporate governance; confirming various units’ efficiency in corporate governance development; • External benefits: further implementation of statutory requirements and recommendations of the Code, the Listing Rules and other applicable rules; a positive image effect; increasing the shareholders’, the investors’, the other stakeholders’ and the state’s confidence.

References Аggаrwаl, Р. (2013). Imрасt оf соrроrаtе gоvеrnаnсе оn соrроrаtе finаnсiаl реrfоrmаnсе. Jоurnаl оf Businеss аnd Mаnаgеmеnt, 13(3), 24–31. Barton, D., & Wiseman, M. (2015). Where boards fall short. Harvard Business Review, 36–47, January–February. Retrieved from https://hbr.org/2015/01/where-boards-fall-short Belyaeva, I. Y., & Kharchilava, Kh. P. (2018). Effective corporate governance in Russian companies with state participation (pp. 57–63). Moscow: RUSAINS. Belyaeva, I. Y., Kharchilava, Kh. P., & Kozlova, N. P. (2018). Corporate governance practice development in Russian state-owned companies. Modern Journal of Language Teaching Methods, 8(7), 60–74. Dе Gаlbеrt. (2015). А уеаr оf sаnсtiоns аgаinst Russiа - Nоw whаt? А Еurореаn аssеssmеnt оf thе оutсоmе аnd futurе оf Russiа sаnсtiоns. A rероrt issued by the Сеntеr fоr Strаtеgiс &

140

I. Belyaeva and K. P. Kharchilava

Intеrnаtiоnаl Studiеs. pp. 65–78. Retrieved from httр://сsis.оrg/filеs/рubliсаtiоn/ 150929_dеGаlbеrt_SаnсtiоnsRussiа_Wеb.рdf Hugh, G., & Mac, C. (2018). Due diligence procedures and principles for financial analysis and corporate governance. Journal of Corporate Finance Research, 15(1), 79–94. Kabir, L. (2017). Is socially responsible investment: A trend or a temporary phenomenon? Economics and Management, 4, 35–41. Kharchilava, K. P. (2018). In I. Y. Belyaeva (Ed.), The development of value-oriented corporate governance in Russia: Problems and prospects (pp. 39–45). Moscow: KNORUS. Kuznetsov, M., Fedorov, O., & Mikheev, A. (2015). Long-term motivation of the members of the management bodies in companies with state participation. Best Corporate Governance Practice, 9(136), 60–75. Mnatsakanyan, A. G., & Kharin, A. G. (2016). Principles of sustainable development in the management of the company. Socio-economic Phenomena and Processes, 11(10), 41–50. ОЕСD. (2015). ОЕСD Guidеlinеs оn соrроrаtе gоvеrnаnсе оf stаtе-оwnеd еntеrрrisеs: 2015 еditiоn. pp. 65–80. Retrieved from httр://www.оесd.оrg/dаf/са/ОЕСD-Guidеlinеs-Соrроrаtе-GоvеrnаnсеSОЕs-2015.рdf O’Kelley III, R., Goodman, A., Martin, M., & Reynolds, R. (2017). Global and regional trends in corporate governance for 2018, Friday, December 29. pp. 25–38. Retrieved from https:// corpgov.law.harvard.edu/2017/12/29/global-and-regional-trends-in-corporate-governance-for2018/ Оrаzаlin, N. (2014). Соrроrаtе gоvеrnаnсе аnd firm реrfоrmаnсе in thе оil аnd gаs industrу оf Russiа. Рrосееdings оf Еurаsiа Businеss Rеsеаrсh Соnfеrеnсе, 16–18 Junе 2014, pp. 56–72. Salewski, M., & Zülch, H. (2014). The association between corporate social responsibility and earnings quality – Evidence from European blue chips. Leipzig: HHL Working Paper Series No. 112, HHL, pp. 59–73. Wоrld Bаnk Grоuр. (2014). Tооlkit: Соrроrаtе gоvеrnаnсе оf stаtе-оwnеd еntеrрrisеs. Intеrnаtiоnаl Bаnk fоr Rесоnstruсtiоn аnd Dеvеlорmеnt, 65–73.

Irina Belyaeva Doctor of Economics, Professor, Deputy Head of Research at the Department of Corporate Finance and Corporate Governance at Financial University under the Government of the Russian Federation. Winner of the Presidential Award in Education in 2000, Honored Worker of Higher Professional Education of the Russian Federation. She specialized in topics of corporate governance, corporate governance in state-owned companies, corporate social responsibility and public-private partnership etc. She is one of the co-authors of the books: Belyaeva I.Yu., Kharchilava Kh.P, Kozlova N.P. (2018). Corporate Governance Practice Development in Russian State-owned companies. ISSN: 2251-6204 Vol. 8, Issue 7. Belyaeva I.Yu, Kharchilava Kh.P. (2018). Effective corporate governance in Russian companies with state participation: monograph/call. authors; by ed. I.Yu. Belyaeva, Kh.P. Kharchilava. Moscow: RUSAINS, 155 p. Belyaeva I.Yu, Kharchilava Kh.P. (2017). Development of corporate governance in companies with state participation: monograph/call. authors; by ed. I.Yu. Belyaeva, H.P. Kharchilava. Moscow: RUSAINS, 182 p. Kharchilava Kh.P. (2018). The development of value-oriented corporate governance in Russia: problems and prospects: monograph by ed. I.Yu. Belyaeva. Moscow: KNORUS, 148. Professional Community Membership: Member of the National Register of Professional Corporate Directors; Member of the Committee on Corporate Governance and Investments and the Committee on Corporate Social Responsibility Associates and Russian Managers; Directorium Professional Community of Directors Association, Member; Russian Municipal Academy, Member; Russian Business Ethics Network, Member; Advisory Board on Russian State-Owned Companies Corporate Governance of Russian Academy of Sciences, Member. Khvicha P. Kharchilava Ph.D., Associate Professor at the Department of Corporate Finance and Corporate Governance, First Deputy Dean at the Faculty of Economics and Finance of Fuel and Energy sector at Financial University under the Government of the Russian Federation. He

8

Progress of the Corporate Governance Practice in Russian State-Owned Companies

141

specialized in topics of corporate governance, corporate governance in state-owned companies, board of directors, corporate social responsibility. He is one of the co-authors of the books: Belyaeva I.Yu., Kharchilava Kh.P, Kozlova N.P. (2018). Corporate Governance Practice Development in Russian State-owned companies. ISSN: 2251-6204 Vol. 8, Issue 7. Belyaeva I.Yu, Kharchilava Kh.P. (2018). Effective corporate governance in Russian companies with state participation: monograph/call. authors; by ed. I.Yu. Belyaeva, Kh.P. Kharchilava. Moscow: RUSAINS, 155 p. Belyaeva I.Yu, Kharchilava Kh.P. (2017). Development of corporate governance in companies with state participation: monograph/call. authors; by ed. I.Yu. Belyaeva, Kh .P. Kharchilava. Moscow: RUSAINS, 182 p. Kharchilava Kh.P. (2018). The development of value-oriented corporate governance in Russia: problems and prospects: monograph by ed. I.Yu. Belyaeva. Moscow: KNORUS, 148. Professional Community Membership: Russian Union of Industrialists and Entrepreneurs Independent Directors National Registry, Member; Free Economic Society of Russia, Member; National Association of Corporate Directors, Member; Directorium Professional Community of Directors Association, Member; Business Russia All Russia Public Organization, Moscow Regional Office, Advisory Board Member; Russian Business Ethics Network, Member; Advisory Board on Russian State-Owned Companies Corporate Governance of Russian Academy of Sciences, Member.

Chapter 9

Corporate Governance in Bulgaria Daniela Peeva

9.1

Introduction

This chapter is an attempt to present in a general forms the main characteristics and problems of the corporate governance in Bulgaria. Corporate governance is an essential part of modern business practices in Bulgaria. It is closely linked to the effective functioning of Bulgarian capital market. For a number of years Bulgarian companies have now been applying the principles and norms of corporate governance as set out in the Commerce Act and the Law on Public Offering of Securities. The corporate governance in Bulgaria is most often interpreted as governance of relationships and coordination of interests between owners (principal) and managers of corporations (agent) (Jensen and Meckling 1976; Shleifer and Vishny 1997; Dilova-Kirkowa 1999). A specific detail is the addition that corporate governance also concerns the relationships between various categories of shareholders (Blair 1995) having specific interests and, most often, unequal possibilities for exerting influence on joint-stock companies. The scope of corporate governance also includes the issues of management structure, rights and responsibilities of managing bodies of joint-stock companies as well as the inside relationships within the managing bodies (e.g. between inside and outside directors). Standing out, as a specific element of corporate governance in the transition process in Bulgaria, is the role of the state in the process of corporate governance both as being responsible for creating the common legal and regulatory and economic conditions whereon corporate governance is being implemented, and a specific subject of these relationships. In practice, the contents of the concept “corporate governance” in Bulgaria do not usually include the relationships with the stakeholders, i.e. customers, suppliers, the local communities. D. Peeva (*) Association of Bulgarian Investor Relation Directors, Sofia, Bulgaria e-mail: [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_9

143

144

D. Peeva

At the same time last 10 years Bulgarian listed companies and their corporate boards archived remarkable progress in the corporate governance field. In the Resolution published by Economic and Social Council in December 2018 Mr. Vassil Velev, a member of the ESC and the rapporteur on the resolution mentioned some positive trends in the Bulgarian Corporate Governance development: the development of good corporate practices and, in general, the enhancement of the level of corporate governance of publicly traded companies in Bulgaria. It should be emphasized that a large number of actively traded companies strive to carry out their activities, in accordance with the following principles: • Protection of the rights of all shareholders in the public company, irrespective of the ownership interest; • Ensuring fair treatment of all shareholders, irrespective of the number of shares held by them; • Recognizing the rights of stakeholders and promoting cooperation between the company and stakeholders; • Ensuring timely and accurate disclosure of information on all matters pertaining to the company, including the financial position, results, ownership and management of the company; • Supporting the strategic management of the company, control over the activity of the Board of Directors and its accountability to the company and the shareholders; • Managing companies by ensuring balance between the interests of individual shareholders, regardless of the number of shares they hold. This chapter is organized as follows. The first section outlines the legal framework of corporate governance in Bulgaria followed by the brief description of the historical process of corporate governance development within the transition agenda. Next, the chapter addresses the works proposed by Bulgarian Corporate Governance Network and the model of corporate ownership and shareholder rights. Final sections are devoted to the discussion on the composition and functions of corporate boards and standards of transparency and disclosure. The chapter finishes with conclusions.

9.2 9.2.1

Legal Framework Imperative Legislation

The legal framework with new laws and emerging administrative culture is significantly related to the transition reforms and the introduction of the rule of law (Marcheva 2013). The primary sources of corporate governance legislation in Bulgaria are the Law on Public Offering of Securities, the Law on Accountancy, the Law on Credit Institutions, the Law on the Independent Financial Audit, the Commercial Act, and specific corporate governance regulations of the for public companies issued by the Financial Supervision Commission.

9

Corporate Governance in Bulgaria

145

For several years Bulgarian companies have now been applying the principles and norms of corporate governance as set out in the Commerce Act and the Law on Public Offering of Securities.

9.2.2

Soft Law: National Code for Corporate Governance

Many Bulgarian public companies have successfully developed and implemented their own corporate governance charter, similarly to their Central and Eastern European peers (Hardi and Buti 2012). The development of the capital market, investor requirements and the experience accumulated by the Bulgarian business community has increased the need for a National Code for Corporate Governance. Considering Bulgaria’s membership in the EU and in the light of the European Commission’s policy as well as the EU Action Plan for Modernization of Company Law and Enhancement of Corporate Governance, the adoption and implementation of national codes by the Member States is an important condition for efficient free movement of goods, services, capital and people. The Bulgarian CG Code is a standard for best practice and a support for communication among businesses from different countries. The Code takes into consideration and complements the Bulgarian legislation without restating it. It guides Bulgarian companies on how to apply established best practices and principles of corporate governance. The rules and provisions of the Code constitute standard best practice that has proven effective over the years for the governance and oversight of public companies. For the purpose of this Code, corporate governance is understood as the relations between the boards, shareholders, and stakeholders of the company. Good corporate governance requires corporate boards to be accountable, loyal, responsible, transparent and independent in order to act in the best interest of the company and society. The recommended rules regarding shareholder protection, transparency, the proper functioning of the corporate boards, and the involvement of the stakeholders are to be applied by all Bulgarian public companies. The Code should also be implemented by those that are planning to become public. Considering its national scope, the Code should also be adopted and applied by Bulgarian companies with predominant State and municipal ownership. The Code is to be adopted and implemented according to the “comply or explain” principle (Aguilera and Cuervo-Cazura 2004; Tricker 2012). It means that companies should comply with the Code, yet if they do not, their corporate boards must explain and disclose the reasons for non-compliance. Companies should post information about the implementation and compliance with the Code on their web sites and include it in their annual reports.

146

9.3

D. Peeva

The History of the Bulgarian Capital Market as a Fundament of Corporate Governance Development

The first Bulgarian stock exchange was established in Sofia in 1914, and in 1933, 30 companies were listed and traded on it, the stock exchange gradually increasing its speed. In 1947 it ceased its activities. The development of Bulgarian capital market was initiated with the transition reforms and the shift from central planning towards market economy. Specifically, the Bulgarian capital market was re-established in 1991 after the National Assembly passed the Act on Commerce and thus conditions were created for the establishment and operation of companies. In the same year, the first Bulgarian stock exchange was established. In 1995 the first regulatory act governing the relations of the capital market was adopted—the Securities, Stock Exchanges and Investment Companies Act (SSEICA), creating a special supervisor of the securities market—the Securities and Stock Exchanges Commission (SSEC). In the period 1995–1996 the infrastructure of the capital market was established by creating the Bulgarian Stock Exchange, which brought together several regional stock exchanges and the “Central Depository” (CD) was established. Based on the decision for the mass privatization of state-owned enterprises the latter were transformed into joint stock companies in the period 1996–1997 more than 80 privatization funds. Were created. In 1997, the Bulgarian Stock Exchange merged with the Sofia Stock Exchange, the name of the new securities market was designated as “Bulgarian Stock Exchange—Sofia” (BSE). In the same year BSE was licensed by the SSEC and after the major amendments in 1998 in the SSEICA and the introduction of the definition of a public company (PC) all public companies were listed on the BSE, including privatized through public offering of shares state owned enterprises as well as transformed into holdings former privatization funds and six investment companies created on the basis of the transformation of the privatization funds. Until that moment there were companies that were traded on stock exchanges—in the period 1992–1996 there were about 80 companies that however did not operate under any special regulations governing their activity. The amendment of the SSEIC gave 1 month to the companies that met the definition of PC to submit documents for registration in register of public companies kept by the SEC. The main reason for the creation of PCs was the mass privatization and the legal restriction imposed on privatization funds to trade shares acquired in the process of the mass privatization only on a stock exchange (after dropping the ban on trade). The shares of approximately 1000 companies came into the possession of several millions of investors. Within 1 year about 950 PCs were entered in the Register of the Commission—almost all of them having become public companies as a result of the mass privatization. In that period licenses were issued to the first investment intermediaries which already in 1997 established its trade organization to protect their interests—the Bulgarian Association of Licensed Investment Intermediaries (BALII).

9

Corporate Governance in Bulgaria

147

As of currently, about 350 PCs are traded on the BSE, out of which about 200 are in less liquid. The shares of the public companies are dematerialized and freely transferable. The PCs legal regime is based on full transparency and accountability with regard to their activities and financial results, and various guarantees are established for the protection of the rights of the shareholders, with particular emphasis on the protection of rights and interests of minority shareholders. In the subsequent period the current Law on Public Offering of Securities (LPOS) was adopted, based on the European legislation in the field of capital market regulation and the Commission received the name Bulgarian National Securities Commission (BNSC). In 2000, BSE introduced the completely automated trading system RTS Plaza, the same year it launched the stock index SOFIX, and in 2003 the Stock Exchange set up an Internet-based application for on line access to the BSE—COBOS. Since 2007, the electronic trading system of Deutsche Boerse Xetra® is in operation, functioning as a trading platform of the BSE that creates new functionalities for the investment intermediaries and their customers. CD also introduces a new trading system, allowing the clearing and settlement of transaction in securities and it continues to function also as the primary register of transactions and ownership of dematerialized securities. Since 2003, the Financial Supervision Commission (FSC) is the capital market regulator—it is an independent body supervising and regulating the capital market, pension and insurance, which was established by means of the merger of the BNSC and the agencies for pension funds and insurance supervision. In the period 1995–2014 were adopted numerous laws and regulations that form the legal basis of the public offering and trade in financial instruments. The system is fully harmonized with the applicable European legislation. The favorable tax regime, the Bulgarian legislation synchronized with acquis communitarian of the European Union in the field of financial market regulation, the high regulatory and supervisory requirements applicable to investment intermediaries and other market participants, as well as the established state-of-the art market infrastructure of the BSE and CD create conditions for the gradual and progressive development of the Bulgarian capital market in the subsequent years.

9.4 9.4.1

Shareholders in Bulgarian Corporate Governance System Bulgarian National Corporate Governance Committee

The Bulgarian National Corporate Governance Committee is an independent institution, which monitors corporate governance in Bulgaria. The Committee meetings take place at least once every 3 months and a monthly meeting is advisory. NCGC was established for the promotion of best practices in corporate governance and the

148

D. Peeva

development of the Bulgarian National Corporate Governance Code. The Committee is a permanent independent body set up under the aegis of the Bulgarian Stock Exchange-Sofia (BSE) and the Financial Supervision Commission (FSC), with support from the World Bank and the International Finance Corporation (IFC). The Committee was established on September 3, 2009 on the principle of publicprivate partnership for consultations and cooperation at a national level on matters of corporate governance. The mission of the Committee is to promote the establishment of best practices in corporate governance, thus helping companies to raise capital and improve their market performance. NCGC is the successor of the Working Group on Corporate Governance—author of the Bulgarian National Corporate Governance Code. The main activities of the Committee, set out in the Rules for the structure and activity of the NCGC, include: • Encourage the implementation of best practices in corporate governance; • Monitor the implementation of the Bulgarian National Corporate Governance Code; • Reviewed the Code every 18 months or initiate changes where necessary; • Develop mechanisms to monitor the implementation of the Code; • Follow and comply trends of corporate governance at the national and international level; • Prepare recommendations to regulators to improve corporate governance; • Development and presentation of guidelines for best practice in specific areas of corporate governance; • Prepare and publish annual assessment of the state of corporate governance in the country; • Cooperation with similar institutions in other countries and their associations, and international organizations.

9.4.2

Bulgarian Stock Exchange

Bulgarian Stock Exchange is a public company that was officially licensed by the State Securities and Exchange Commission to operate as a stock exchange on October 9, 1997 and is currently the only functioning stock exchange in Bulgaria. Founded in 1995 by the merger of several regional exchanges Bulgarian Stock Exchange AD is the driving force that contributes to the further development of the Bulgarian capital market. BSE’s core business includes: • Operation of a cash market (equity market, bond market and other financial instruments); • Operation and maintenance of information systems for trading in securities;

9

Corporate Governance in Bulgaria

149

Table 9.1 BSE main market Market segments Bonds segment Compensatory instruments segment Exchange traded products segment Government securities segment Premium equities segment Special purpose vehicles segment Standard equities segment

Number of emissions/instruments 66 3 13 16 7 12 60

Source: BSE Table 9.2 BSE alternative market Market segments Equities segment Special purpose vehichles segment

Number of emmisions/instruments 154 45

Source: BSE

• Establishment and maintenance of a clearing system guaranteeing the obligations assumed under securities transactions executed on the Exchange. Bulgarian Stock Exchange engages in a continuous dialogue with its stakeholders, and all its activities are oriented towards their needs. BSE organizes two markets according to various quantitative and qualitative criteria. These markets are segmented according to the type of financial instruments, specific requirements to the shareholders’ structure of respective issuers, their financial results, liquidity of the issues and information disclosure requirements. BSE Markets with a short characteristics are presented in Tables 9.1 and 9.2.

9.4.3

Listed Companies

Regarding the published resolution by Bulgarian Economic and Social Council in December 2018 in Bulgaria nearly 99.8% of the listed companies are partake of the SME segment. On the Bulgarian Stock Market there are 179 listed emissions of public companies. Taking into account the development of the Bulgarian capital market as well as the analysis of the market capitalization of issuers whose financial instruments are admitted to trading on a regulated market organized and maintained by the Bulgarian Stock Exchange, it is evident that over 98% of the companies currently traded on the BSE, have a market capitalization significantly below 200 million Euros. It should be borne in mind that the market capitalization of public companies whose financial instruments were admitted to trading as of 31 December 2017, 31 December 2016 and 31 December 2015. According to BSE statistics on market

150

D. Peeva

capitalization, as of 31 December 2017 only three companies whose shares are admitted to trading on a regulated market have a market capitalization of more than 200 million Euro.1

9.4.4

Institutional Investors

The EBRD Survey of November 2017 shows that the Bulgarian capital market is dominated by a small number of institutional players on the market (pension companies through the pension funds managed by them) which is predominantly conditioned by the statutory pension insurance system in our country regulated by the Social Insurance Code (SIC). Due to this reason, the pension funds have invested a significant part of the raised pension contributions namely in issuers traded on a regulated market with good proven corporate governance (EBRD 2017). The pension Funds have a strong organization which represents their interests and rights as a main institutional investors—Bulgarian Association of Supplementary pension funds. Other institutional investors on the Bulgarian Capital market with significant influence to the Corporate Governance are: investment intermediaries, asset management companies. They both have strong organizations: • The Bulgarian Association of Asset Management Companies (BAAMC) was founded by eight asset management companies on Nov 30, 2005 as the first professional association of securities portfolio managers in Bulgaria. Currently 18 licensed asset management companies are members of the association. • The Bulgarian Association of Licensed Investment Intermediaries (BALII) is an organization of legal entities authorized to operate as an investment intermediary. The Association was established with the primary objective of protecting the interests of the guild and the imposition in the public domain as an active partner of the institutions involved in the development of the capital market in Bulgaria. The fundamental idea underlying BALII’s activity is combining the sustainable establishment of the principles of equitable trade, high standards of professional ethics, protection of the interests of investors and development of the capital market.

1

These are: Capital Corp. AD—by BGN 12.9 billion, First Investment Bank AD—by BGN 622 million and Sopharma AD—by BGN 577 million market capitalization. As of 31.12.2016 the statistics of the stock exchange operator indicate that Sopharma AD has a market capitalization amounting to BGN 401.7 million. Chimimport AD—BGN 400.2 million and “Chaika Pharm HighQuality Medicines” JSC—BGN 394.5 million As at 31 December 2015, the market capitalization by companies is as follows: Sopharma AD—BGN 450 million, Bulgartabac-Holding AD—BGN 331 million and “Monbat” AD—BGN 323 million.

9

Corporate Governance in Bulgaria

9.4.5

151

Retail Shareholders

As a result of the mass privatization program, some 3.5 million Bulgarian citizens became owners of financial instruments during the period 1996–1997. The retail shareholders they don’t have national presented organization to protect their rights and cover their interests. The interest in investing in financial instruments traded on the regulated market in Bulgaria is determined by the low interest rates on deposits of the population in banks. In the resolution of December 2018, the Bulgarian Economic and Social Council acknowledge the fact that most of the population prefers to invest their free cash in bank deposits.2 At the same time, individual investors have been refraining from investing in financial instruments due to the large drop in the stock market since the financial crisis in 2008.3

9.4.6

Model of Corporate Ownership

Most of the publicly listed companies in Bulgaria are a product of their mass transformation with a view of their upcoming privatization, and not of the natural development of market mechanisms (Tschipev 2003). This is the heart of the most serious challenge to them during the transitional period. They must establish and strengthen their corporate structure and introduce efficient mechanisms of corporate control within a short time. A considerable number of enterprises privatized under the mass privatization scheme, and former privatization funds have already been granted a status of public companies. The new model of corporate ownership with various schemes of interaction of capital (private and state) as well as the status of a public company are the ground for development of corporate governance and control in Bulgaria. The development of corporations and formation of public companies in Bulgaria is not always subordinated to the economic necessity but is subject to administrative and legal measures. This is a serious obstacle to the establishment of principles of corporate governance and control.

2

According to the BNB, the total amount of deposits continues to increase, reaching BGN 76 billion in August. http://www.bnb.bg/Statistics/StMonetaryInterestRate/StDepositsAndCredits/ StDCQuarterlyData/index.htm 3 According to BSE data, the turnover for the 9-month period of 2018 reached BGN 370 million, with a decline of 25% on an annual basis. The total market capitalization of the traded non-BSE companies in 2018 is less than BGN 10 billion.

152

9.4.7

D. Peeva

Shareholder Rights

As a result of the mass privatization program, some 3.5 million Bulgarian citizens became owners of financial instruments during the period 1996–1997. These individual shareholders are usually not quite aware of their rights and responsibilities and have not sufficient experience in their exercising. For this reason, the individual shareholders seem to be passive in most cases. The legislation and the NCG Code regulate the shareholders rights to exert influence on the management and prevent serious violations on the part of the managers. The Corporate Board of the company has to guarantee equal treatment of all company’s shareholders, including minority and foreign investors, protect their rights and facilitate their exercise within the limits permitted by applicable law and in accordance with the company’s Articles of Association. The invitation for the General Meeting of Shareholders must contain all the required information under the Commercial Act and the Law on Public Offering of Securities and additional information on exercising the right to vote and the possibility to add new items to the agenda pursuant to Art. 223a of the Commercial Act. The Corporate Boards have to provide information to all shareholders on their rights by the information posted on the company’s website, the disclosed Articles of Association of the company and the invitation for any particular general meeting of shareholders. Minority shareholders are entitled to call a general shareholders’ meeting (GSM), to add items to the agenda, and to nominate board members. Companies are also required to provide shareholders with timely notifications and materials for the GSM online. Most of the public companies have a clear procedure for realization and protection of the shareholder rights. At the same time, there are still numerous companies create organizational obstacles to the entire realization of the rights of minority shareholders—participation in the general meeting of shareholders, representation in the managing bodies, receiving dividends and so on. Fortunately, they are isolated cases.

9.5 9.5.1

Composition and Functions of Corporate Boards Board Systems

Listed companies in Bulgaria can be organized under a one-tier or two-tier board system. Physical persons and legal entities as well can be board members. Most of the Boards are generally small but they tend to perform better, provided that they have the necessary mix of skills and support. The Corporate Governance Code recommends that board members have to be qualified for their role as a board

9

Corporate Governance in Bulgaria

153

members and managers. There is a big group of companies where the members of the corporate boards are the owners (majority shareholders) of the companies. The number of members and the structure of the Corporate Boards are specified in the company’s Articles of Association. The composition of the corporate boards has to be structured in a way that ensures the professionalism, independence and impartiality of its resolutions related to the management of the company.

9.5.2

Independent Directors

Public companies are required to have at least one third of the board made up of independent directors and most of the companies comply with this requirement. According to the Law on Public Offering of Securities at least one third of the members of the Board of Directors or of the Supervisory Board of any public company must be independent persons. To qualify as independent, a member of the board may not be: (a) a person serving the public company; (b) a shareholder holding, whether directly or through connected persons, at least 25% of the votes in the General Meeting, or a person connected with the company; (c) a person who is in a sustained business relationship with the public company; (d) a member of a management body or supervisory body, a managerial agent ora person serving any commercial corporation; (e) or any other legal person referred to in Items b and c; (f) a person connected with another member of a management body or supervisory body of the public company.

9.5.3

Functions and Obligations of the Corporate Boards

Regarding to the Corporate Governance Code the Corporate Boards: • Have to direct and control the companies in a responsible and independent manner according to the vision, goals and strategies of the company and in the best interest of all shareholders; • Have to monitor the performance of the company on a quarterly and yearly basis and initiates changes in the management of its activities, when necessary; • Have to treat all shareholders equally, act in their interest and in a diligent manner; • Have to establish and control the integrated functioning of the financial and accounting systems. The Corporate boards report on its activities to the General Meeting of Shareholders by presenting for approval by the shareholders the Annual management

154

D. Peeva

Report, the Report on the Implementation of the Remuneration Policy as well as any other enclosures and documents, required by the legislation in force.

9.5.4

Remuneration

The Corporate Boards have to develop clearly defined and specific remuneration policy with regard to their members which is subject to General Meeting of Shareholders’ approval. The remuneration policy defines the principles of setting up the remunerations’ amount and structure. In accordance with the legal requirements and best corporate governance practices the amount and structure of remuneration have to account: the obligations, workload, commitment and involvement of the members in the company’s management, as well as the contribution of each member of the Corporate Board in the operations and results of the company; the possibility to select and retain qualified and loyal members of the Board; the necessity for conformity of the interests of the Board members and the long-term interests of the company.

9.5.5

Committees to the Corporate Boards

With regard to the requirements of the legislation in force and based on the criteria set by the legislation, the Corporate Boards have to propose to the company’s General Meeting of Shareholders an audit committee with a composition that meets the new legislative requirements and the company’s needs. The Audit Committee is established on the basis of written terms of reference, scope of tasks, way of operation and reporting procedures detailed in the Statute of the Audit Committee.

9.6

Transparency and Disclosure of Information

The establishment of statutory rules and a mechanism for granting a free, fast and inexpensive access to information about the state of joint-stock companies is a key condition for realization of the remaining principles of corporate governance as well. The law and the NCG Code require companies to prepare and disclose regulated and non-regulated information to the public, to the national regulator and in their websites. Most of the actively traded companies include a lot of information—financial and non-financial. Companies disclose “comply or explain” reports as a part of their annual financial reports. Some of the companies (if they apply for inclusion in the CG Index) provide a corporate governance scorecard.

9

Corporate Governance in Bulgaria

155

As a part of national regulation the Law on Public Offering of Securities requires the annual activity report to include in addition a declaration of corporate management about the corporate governance standards and practices applicable for their companies. The corporate boards report as well for: which parts of the corporate governance code is not applicable and issuer does not comply with and as to what the ground for this non-compliance are, and when the issuer has opted not to refer to any of the rules of the corporate management code—the grounds for that; description of the main characteristics of the internal control system and of the risk management system of the issuer in connection with the financial reporting process; information under Article 10, Paragraph 1, Letters “c”, “d”, “f”, “h” and “i” of Directive 2004/25/ EC of the European Parliament and of the Council of 21 April 2004 regarding takeover offers; the composition and functioning of the administrative, managerial and supervisory bodies and their committees, as well as; description of the diversity policy applied as regards the administrative, managerial and supervisory bodies of the issuer in connection with aspects such as age, gender or education and professional experience, the objectives of such diversity policy, its method of application and the results therefrom during the reporting period; when no such policy is applied, the declaration contains an explanation regarding the reasons for that. The Corporate Boards have to adopt an information disclosure policy in compliance with legal requirements and the company’s by-laws. In compliance with the adopted policy the corporate boards have to create and support an information disclosure system of the companies. The information disclosure system guarantees equal access to information to the addressees (shareholders, stakeholders and the investment community) and does not allow for any abuse of inside information. According to the Law on Public Offering of Securities Bulgarian listed companies apply the following Disclosure of information system.

9.6.1

Disclosure of Information to Financial Supervision Commission

The issuers shall be obliged to disclose information to the Commission through the integrated system for disclosure of information in an electronic way—E-Register. 1. Public disclosure of information (under the requirements of Art. 100m and 100n of Law on Public Offering of Securities) Issuers are obliged to make available to the public regulated and other types of information in a manner ensuring its prompt dissemination to the possibly widest range of persons and in a way that does not discriminate them. 2. Disclosure of information to BSE-Sofia Tto their main addressees—the FSC and the public, the issuers disclose information also to the Exchange.

156

9.7

D. Peeva

Internal Control and Audit

Companies are recommended by the Corporate Governance Code to create an internal control system. The public interest companies are required by law to establish an audit committee, which is appointed by and reporting to the general shareholders’ meeting. All the listed companies have Audit Committees included “outsiders” as independent members and “insiders” as independent board members. As a part of the corporate governance declaration the corporate boars must present description of the main characteristics of the internal control system and of the risk management system of the issuers in connection with the financial reporting process.

9.7.1

General Description of the Internal Control and Risk Management Systems

In the public companies in Bulgaria there is a functioning internal control and risk management system/the system/which ensures the effective functioning of the reporting and information disclosure systems. The system has to be build and functioned in order to identify the risks that the company might face in its operation and support their effective management. The Corporate Boards have the primary responsibility and role in terms of elaborating the internal control and risk management system. The Boards have both managing and guiding function as well as ongoing monitoring function.

9.7.2

Control Environment

The control environment has to include the general management and particular management functions as well as the attitude, awareness and operations of the corporate boards responsible for the management in a broad sense and the responsible management in terms of the internal control.

9.7.3

Risk Valuation Process in the Public Companies

The risk valuation process on the part of the Boards represents the basis regarding the way the corporate boards of the Companies specify the risks that need to be managed. The Boards have to identify the following types of risks relevant to the Companies and their operations: general (systematic) and specific (unsystematic) risks.

9

Corporate Governance in Bulgaria

157

The general plan of the company’s management for risk management have to be focused on the unpredictability of financial markets and seek to minimize potential adverse effects on the financial position of the Companies.

9.8

Conclusion

Bulgaria corporate governance system has been developing over years within the process of the country transition. In addition, the harmonization of laws and guidelines remains the element of the process of integration within the European Union. Yet, the main problems of the Bulgarian corporate system correspond with the limitations noted by Berglöf and Claessens (2006) related to ownership structure, weaker institutional environment and insufficient investor protection. The main challenges include the weaker position by the small shareholders (the holders of shares in the privatization fund) who are a very incompact group and are significantly limited to exert significant influence. Moreover, usually members of the corporate boards are the majority shareholders what may impact the quality of monitoring. Finally, there are omissions in the regulatory enactments, the regulation and infrastructure of capital market, that make possible the abuses and violations of the rights of shareholders.

References Aguilera, R., & Cuervo-Cazura, A. (2004). Codes of good governance worldwide: What is the trigger? Organization Studies, 25, 415–443. Berglöf, E., & Claessens, S. (2006). Enforcement and good corporate governance in developing countries and transition economies. World Bank Research Observer, 21(1), 123–150. Blair, M. (1995). Ownership and control: Rethinking corporate governance for the twenty-first century, Brookings Institution Bulgarian Association of Asset Management Companies. http://baud.bg/ Bulgarian Association of Licensed Investment Intermediaries. https://balip.com/en/home/ Bulgarian Stock Exchange. https://bse-sofia.bg/en/market-segmentation Commercial Act, 2018. Dilova-Kirkowa, S. (1999). Corporate governance in Bulgarian state-owned banks, 1992–1997. Post-Communist Economies, 11(2), 253–265. EBRD. (2017). Corporate governance in transition economies, Bulgaria Country Report. Hardi, P., & Buti, K. (2012). Corporate governance variables: Lessons from a holistic approach to Central-Eastern European practice. Corporate Governance, 12(1), 101–117. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. Law on Public Offering of Securities. (2018). Marcheva, D. (2013). Administrative culture in Bulgaria: Sources, foundations, and transitions. International Journal of Public Administration, 36(3), 963–971. National Corporate Governance Code. (2016). Resolution of Bulgarian Economic and Social Council. (2018, December).

158

D. Peeva

Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52, 737–783. Tricker, B. (2012). Corporate governance. In Principles, policies and practices. Oxford: Oxford University Press. Tschipev, P. (2003). Bulgarian mass privatization scheme: Implications for corporate governance. Journal of Economic Studies, 30(3/4), 351–388.

Daniela Peeva graduated in 1998 with a Master degree from the Law Faculty of Sofia University and for more than 17 years now she has been working in the field of regulation of the capital market in Bulgaria, raising the disclosure standards of exchange represented companies, applying the principles of good corporate governance and corporate social responsibility. For 15 years she has been an Investor Relations manager. For 14 years now she has had the honor to be the Chairperson of the professional organization of the Investor Relations Directors in Bulgaria—ABIRD. In her capacity of a Chairperson of the Association she is in charge of conducting and coordinating the overall activities of the organization and representing the interests of IRDs—members of the Association before the regulatory authorities and other institutions on the capital market in Bulgaria. She is a Member of the Bulgarian National Corporate Governance Committee, member of the Advisory Board to the Chairperson of the Bulgarian FSC. Since 2005 she has taken part as a lecturer and moderator at different Conferences, Round Tables, Seminars and other public event on various issues related to IR, Corporate Governance and CSR policies and practices in Bulgarian listed companies. Daniela is graduated in 1998 with a Master degree from the Law Faculty of Sofia University and for more than 17 years now she has been working in the field of regulation of the capital market in Bulgaria, raising the disclosure standards of exchange represented companies, applying the principles of good corporate governance and corporate social responsibility. For 15 years she has been an Investor Relations manager. For 14 years now she has had the honor to be the Chairperson of the professional organization of the Investor Relations Directors in Bulgaria—ABIRD. In her capacity of a Chairperson of the Association she is in charge of conducting and coordinating the overall activities of the organization and representing the interests of IRDs—members of the Association before the regulatory authorities and other institutions on the capital market in Bulgaria. She is a Member of the Bulgarian National Corporate Governance Committee, member of the Advisory Board to the Chairperson of the Bulgarian FSC. Since 2005 she has taken part as a lecturer and moderator at different Conferences, Round Tables, Seminars and other public event on various issues related to IR, Corporate Governance and CSR policies and practices in Bulgarian listed companies.

Chapter 10

Compliance with Corporate Governance Best Practice: The Evidence from Polish Listed Companies Maria Aluchna

10.1

Introduction

Corporate governance aims to protect investors, minimize risk and provide for long term sustainable value within the framework of national and international regulation and soft law recommendations. Implementing sound corporate governance at the company level requires the adoption of adequate structure of checks and balances and the conformity with the best practice guidelines. The codes of best practice are the voluntary set of principles, recommendations and standards relating to internal corporate governance and addressing the most problematic inefficiencies identified in prior corporate scandals and frauds. Despite its voluntary character the codes of best practice gained support and popularity amongst both investors and listed companies leading to the publication of best practice documents by national and regional stock exchanges and to the publication of the declaration of conformity by firms. Corporate governance codesplay an important role in emerging and posttransition countries as they set guidelines and improve standards of board independence and transparency. In the sense they help transmit corporate governance guidelines, support their evolutionary enforcement and may compensate for of weaker institutional environment. Codes of best practice offer the voluntary and evolutionary adoption of corporate governance standards, provide the opportunity for different constituencies to engage in the process of recommendation setting and enhance the dialog in the stock market. This chapter addresses the question about the compliance with the code of corporate governance, particularly with the board recommendations by companies listed on the Warsaw Stock Exchange. It aims to identify the practice of corporate

M. Aluchna (*) Warsaw School of Economics, Warsaw, Poland e-mail: [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_10

159

160

M. Aluchna

governance in Poland looking as the board characteristics with respect to the adoption of corporate governance guidelines practice on the presence of independent and female directors as well as forming specialized committees dealing with audit, remuneration and other related issues. In addition, the study reveals the practice of corporate governance disclosure delivering data on the publication and the size of the document of conformity. Analyzing the data on board characteristics of 160 non-financial companies listed on the Warsaw Stock Exchange in years 2006–2015 the chapter demonstrates the dynamics of the board structure and composition. The chapter is organized as follows. The concept of corporate governance best practice is discussed in the first section with the emphasis on the role and functions of the process of compliance. The second section addresses the development of corporate governance code at the Warsaw Stock Exchange indicating guidelines which companies are the most reluctant to adopt. The results of the empirical study are presented in section three and reveal the dynamics of the board characteristics with respect of its size, the participation of independent and female directors, the formation of specialized board committees and the practice of corporate governance disclosure in the form of the document of conformity.

10.2

Corporate Governance and Best Practice

Corporate governance is understood as a set of mechanisms, institutions and norms which, at the country level, are the product of the interplay of politics, culture norms and social constructs; this interaction determines financial market regulation, labor law and corporate law providing the rules for firms’ operation and efficiency (Stulz and Williamson 2003; Gourevitch 2003; Fligstein and Choo 2005; Fogel 2006). Corporate governance identifies numerous problems which may affect the performance and value of the company and in reactions to these problems it introduces as series of solutions to protect investors, minimize risk and assure for long term sustainable value (Monks and Minow 2004). These objectives are translated at the operational level into a set of norms and rules known as codes of best practice that guide companies in their functioning and behavior (Mallin 2004; Tricker 2012). Corporate governance codes (codes of best practice) are sets of recommendations regarding oversight and control over the firm viewed as the reaction to company mismanagement and ineffective corporate governance (Cuervo 2002). According to the “comply or explain” rule, the codes offer flexibility in adopting the guidelines and are based on voluntary decisions of firms (Tan 2018). The codes usually consist of the voluntary set of principles, recommendations and standards relating to internal corporate governance (Aguilera and Cuervo-Cazura 2004; Chizema 2008; Tricker 2012). The codes address selected dimensions of corporate governance such as functioning of the board, shareholder rights, transparency, auditing, remuneration (G20/OECD 2015) and are to provide principles and norms to assure for creating shareholder value (Mallin 2004). The codes offer widely recognized and accepted

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish. . .

161

guidelines often inspired by the international organizations such as OECD or regulatory and supervision authorities such as European Commission (e.g. the European Commission Communication 284 to the European Council and the European Parliament) or US Securities and Exchange Commission. These guidelines address composition and structure, functioning of special board committees, executive remuneration schemes, risk management and transparency. The codes of best practice are the generally recognized pattern of improving corporate governance viewed as an additional set of norms or a mechanism which increases executive accountability, mitigates the agency conflict and lowers the risk of expropriation (Dedman 2002; Hermes et al. 2007). Corporate governance best practice in terms of the content is significantly motivated by financial investors whose mobility and portfolio orientation induce competition between countries and companies to attract funds for growth (Mallin 2004; Tricker 2012). The compliance with the code increases investors’ trust (Arcot et al. 2010) and lowers the risk associated with firm operation (Bistrowa and Lace 2012). The conformity with corporate governance rules, explicitly outlined in the content of the adoption of the code guidelines, should serve as a potential opportunity to gain investors’ approval and lead to the increase of firm value (Gompers et at. 2003; Black et al. 2006; Goncharov et al. 2006; Renders et al. 2010), particularly in emerging markets (Klapper and Love 2004; Bistrowa and Lace 2012). The compliance with the code recommendation is a signal for investors that the firm, its executives and board directors aim at protecting shareholder interest and strive for enhancing shareholder value. Prior studies indicate that the compliance with best practice is positively related to performance and value. This argument “is based on the assumption that the market will monitor compliance with a code and will either (a) penalize non-compliance through lowering share prices (Easterbrook and Fischel 1996) or (b) accept for whatever reason than non-compliance is justified in the circumstances (Anand 2005)” (MacNeil and Li 2006: 487). In general, companies with poor corporate governance should be valued lower as compared with companies with effective corporate governance since investors do not tolerate higher risk of expropriation without receiving a premium for such investments (Gompers et al. 2003; Goncharov et al. 2006). The positive link between the quality of governance and performance is found in studies on European (Bauer et al. 2004; Drobetz et al. 2003; Gompers et al. 2003), Japanese (Aman and Nguyen 2007) and American (Bhagat and Bolton 2008) companies. A series of studies analyzed the dynamics of the compliance with corporate governance code and the link between the compliance and firm performance. Goncharov et al. (2006) examine the declared degree of compliance for a sample of German DAX30 and MDAX listed firms and find that “the compliance with the Code is value-relevant after controlling for endogeneity bias” Goncharov et al. (2006: 432). Research on the sample of 140 German companies for the years 2002, 2003 and 2006 reveals that companies with higher Tobin’s Q are more likely to comply with the recommendation on disclosing the individual director’s remuneration scheme (Andres and Theissen 2008). The most recent study on the large sample of 1199 observations on FTSE companies and 33,667 observations of

162

M. Aluchna

Worldscope firms (Renders et al. 2010) shows that, controlling for endogeneity by introducing instrumental variables and eliminating the sample selection bias, there is a positive link between the quality of corporate governance (measured by the rating variable) and firms’ performance. The strength of this relationship depends on the quality of the institutional environment, while “improvements in corporate governance ratings over time result in decreasing marginal benefits in terms of performance” (Renders et al. 2010: 87). Similar results are shown in the study on the impact of the corporate governance quality on stock performance on the sample of 116 firms from 10 Central and Eastern European countries for the period of 2008–2010 (Bistrowa and Lace 2012). Based on the model rating, the firms characterized by the highest corporate governance quality (top 25%) outperformed companies with the worst corporate governance quality (bottom 25%) by 0.98% on a monthly basis. Although studies document positive link between corporate governance compliance and firm value and performance, the opposite may be true (Bhagat and Black 2002). The argument of the positive link between compliance with the corporate governance code and firm performance or firm value may be constrained by a number of reasons. First, the pricing effect takes place when investors believe in the reliability of information provided by firms to the market. This may not necessarily be the case as the declaration of conformity is neither verified nor audited. The lack of enforcement mechanisms may lower the creditability of the compliance statement and weaken the positive economic consequences (Healy and Palepu 2001; Goncharov et al. 2006). The lack of the valuation effect may also be the case when the code recommendations are either relatively easy to follow or relatively useless from the investors’ point of view (Goncharov et al. 2006). The compliance with the code guidelines may be viewed as the explicit information on the corporate governance structure and standards for board functioning and investor protection. Corporate governance conformity not only aims at the development of the efficient monitoring and oversight to protect shareholder value but also to legitimize the presence of the firm on the stock market. Competition between companies to attract investors and raise funds for growth generates coercive or normative imitation (Guler et al. 2002). According to the legitimization perspective, companies implement new practices in order to enjoy the benefits of meeting social expectations. “If practices become institutionalized, their adoption brings legitimization to the adopting organization or social system” (Aguilera and Cuervo-Cazura 2004: 422). Firms are differently motivated to comply with best practice, and the conformity does not have to necessarily result in better efficiency or effectiveness. The declaration of conformity issued by listed companies may either not lead to better performance or higher firm value or be not necessarily motivated by the strategy of increasing shareholder value. Instead, the compliance may be a product of endogenously determined structure of internal firm governance or result from the isomorphic dynamics driven by firm legitimization policy. Research reveals the impact of endogeneity in the process of the board construction and monitoring (Hermalin and Weisbach 2003).

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish. . .

10.3 10.3.1

163

Polish Code of Corporate Governance Corporate Governance Code at the Warsaw Stock Exchange

The development of Polish corporate governance is heavily embedded in the transition from centrally planned to market economy, including the process of building institutions and stock market, implementation of privatization schemes as well as economy development and the expansion of de novo firms (Aluchna 2012). The integration with the EU structures and the harmonization of laws constitute the third crucial process of corporate governance development. Polish listed companies operate in a specific post-transition, post-socialist and emerging market context corresponding to the characteristics described by Berglöf and Claessens (2006). Corporate governance is based on hierarchies, while the external mechanisms still remain weak. Studies on ownership and control characteristics of companies report that WSE listed companies reveal significant ownership concentration, with the stake of the largest shareholder estimated at 40% (Aluchna and Kaminski 2017). According to WSE statistics, in terms of overall absolute investment foreign investors hold 53% of shares of all listed companies, followed by institutional investors (34%) and individuals (13%). The state is the largest shareholder in the total of 11 listed companies. Industry investors and individuals are the most frequently noted largest shareholders (Aluchna and Kaminski 2017). The predominant mechanisms adopted to increase and leverage control include the pyramids (31% of companies), shareholder agreements (32%), dual class shares (26%) and qualified majority (24%) (Adamska 2013). Due to ownership concentration the role of the role of the supervisory board in the Polish corporate governance (Oplustil 2010; Jeżak et al. 2016) is limited similarly to its peers which operating within the two-tier model are often instrumental corporate bodies controlled by the representatives of the large shareholders (Cuervo 2002). In the context of the principal-principal conflict, weak legal institutions and the civil law tradition firms are expected to “develop alternative solutions to guarantee investor protection, such as establishing good corporategovernance practices” (Renders et al. 2010: 91). In addition, significant ownership concentration reduces the monitoring function of the stock market. Within the transition reforms agenda, the Warsaw Stock Exchange (WSE) re-opened on April 12, 1991, initially hosting six companies quoted once a week. Facing the absence of the adequate regulatory framework, the government adopted the pre-war Company Act of 1934 since no laws or institutions of the command economy were of any use for the effective operation of the WSE. Over the last 29 years the WSE developed successfully into the largest Central European stock market currently hosting over 461 companies with a total capitalization of 295 billion euro. After 2004, the process of corporate governance institutionalization speeded up within the EU accession and subsequent harmonization of laws (Oplustil 2010). The process of formulating corporate governance best practice resulted in the first code of 2002, amended 2 years later. In 2007, the WSE issued new code of Best Practice of WSE Listed Companies delivering updated guidelines which emphasized

164

M. Aluchna

Table 10.1 Warsaw Stock Exchange regulations on best practice codes Resolution Best Practice of GPW Listed Companies 2016 Communication of the Management Board of the Warsaw Stock Exchange, December 17, 2015. Best Practice of GPW Listed Companies 2016—Textbook for Companies Resolution no. 27/1414/2015 of the Supervisory Board of the Warsaw Stock Exchange changing the WSE internal regulations Resolution no. 1309/2015 of the Management Board of the Warsaw Stock Exchange, December 17, 2015 on publications of the compliance with corporate governance practice by listed compa nies and the change or repeal of the resolutions on that matter European Commission recommendation 2014/208 of April 9, 2014 on the quality of corporate governance reporting (‘comply or explain’) European Commission Recommendation of December 14, 2004 fostering an appropriate regime for the remuneration of directors of listed companies (2004/913/EC) European Commission Recommendation of April 30, 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (2009/385/EC) European Commission Recommendation of February 15 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board International standards on the professional practice of internal audit as of III.Z.3 rule of the WSE Code The form of granting/ withdrawing the access to EBI system Annex no. 2 to the Resolution no. 175/2019 of the Management Board of the Warsaw Stock Exchange of March 18, 2019—Publication rules of current and periodical information in the alternative market system NewConnect and Catalyst and the publication of the compliance with corporate governance code by listed companies Source: Based on WSE materials, https://www.gpw.pl/dobre-praktyki-spolek-regulacje

the transparency standards, board responsibilities and relations amongst shareholders. The document was followed by a series of new amendments leading to new versions of the code in 2010, 2011, 2012. In 2015 the new code known as Best Practice of GPW Listed Companies was formulated and became effective on January 1th, 2016. The WSE regulation on corporate governance is presented in Table 10.1. Poland adopted the “comply or explain” rule and introduced the obligation for the publication of the declarations of conformity as a part of the Annual Report where they report the compliance or explain the reasons if they decide not to comply. Since then the WSE has issued several amendments following the rule that the code of best practice corresponds with current challenges of listed companies. Significant changes were introduced in the 2008 version of the code including increasing transparency standards, facilitating the execution of shareholder rights as well as the specifying the structure and functioning of the supervisory board (Aluchna 2012). These changes were to harmonize the code guidelines with the EU recommendations and update them in accordance with the current needs of listed companies. Historically, the most problematic guidelines refer to the structural issues of the Polish corporate governance such as transparency and information policy, functioning and structure of the supervisory board such as the lack of board committees, the absence of independent directors and the lack of board self-assessment (Aluchna 2018).

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish. . .

165

According to the Corporate Law the role of the supervisory board remains limited in Polish corporate governance system—the board neither has the right to issue orders to management broad nor represents the company (Jeżak et al. 2016). The supervisory board function is to provide oversight and counsel to executives. Companies follow the majority of the code guidelines, yet several of them constitute a major non-compliance issue representing de facto structural shortcomings of Polish corporate governance. WSE listed companies are the most reluctant to (Campbell et al. 2009; Aluchna 2012): • Appoint at least two independent directors on the supervisory board • Form audit committee within the supervisory board (this guideline was moved to hard law allowing companies of the supervisory board of five members not to form audit committee; as a result, a number of companies reduced the supervisory board to five directors) • Form remuneration/nomination and other specialized committees • Provide an interactive shareholder meeting with online voting The lowest compliance is noted in the case of guidelines on empowering shareholder via internet shareholder meeting, while the mentioned board best practice is adopted by ca. 40–50% of the WSE listed companies depending on the individual rule (Campbell et al. 2009). The currently binding 2016 document “Dobre Praktyki Spółek Notowanych na GPW 2016” (WSE 2015) consists of recommendations and detailed guidelines organized into six main sections which refer to the following areas: (1) information policy and communication with investors, (2) management and supervisory boards, (3) system and internal functions, (4) annual shareholder meeting and relations with shareholders, (5) conflict of interest and related party transactions and (6) executive remuneration. The recent study on compliance with the code principles indicates that Polish companies are the most reluctant to adopt recommendations on information policy (recording and broadcasting the ASM), setting risk management systems, reporting on executive remuneration policy, disclosing diversity management policy, identifying conflict of interest, assuring auditor independence, division of tasks and responsibilities by members of management board and independence of supervisory board directors (PWC 2017).

10.4 10.4.1

Compliance with the Best Practice: Empirical Analysis Sample and Methodology

The research aim was to identify the characteristics of supervisory boards and the disclosure of conformity with best practice by companies listed on the Warsaw Stock Exchange. The research sample covered 160 non-financial companies quoted over the whole period of 10 years between 2006 and 2015. Data on ownership structure and performance was derived from IQ Capital and Emerging Market Information

166

M. Aluchna

System (EMIS) data bases while the information on the characteristics of supervisory board and corporate governance disclosure was hand collected from annual reports of sample companies. For the purpose of the research the following questions were formulated: 1. What is the board characteristics regarding the size of the board, the presence of independent directors and the presence of female directors and how it has evolved over the analyzed period? 2. What is the board characteristics regarding the formation of audit, remuneration and other committees and how it has evolved over the analyzed period? 3. What is the disclosure practice of corporate governance compliance by sample companies and how it has evolved over the analyzed period? 4. What is the general characteristics of companies which comply with the best practice (referring to at least two independent directors on board and the formation of audit committee within the board) with respect to its size, ownership structure and financial performance? Companies which comply with these two practices were compared versus non-complying companies.

10.4.2

Results and Discussion

Table 10.2 presents the data on the board characteristics over the analyzed period 2006–2015 with respect to the selected attributes. As shown in Table 10.2 the size of the supervisory board remained stable over the analyzed period and accounts for approximately six directors. The number of independent directors reveals a significant growth—from below one director in 2006 to nearly two directors per board in 2015. Overall independent directors made for approximately 5% of board members in 2006 jumping to 29% in 2015. This represents not only the 4.5-fold increase but also indicates that the compliance with best practice has improved significantly over the analyzed period. In consequence, the number of boards with at least one independent directors increased from 29 companies in 2006 to 136 firms in 2015. In addition, the number of companies which comply with the best practice to have at least two independent directions on board rose respectively. Table 10.2 presents also data on the participation of female directors on board. The data reveals change in this category as well although the change remains significantly smaller as compared to the dynamics of independent directors. Specifically, in the analyzed period the number of female directors per board remained stable—according 0.55 in 2006 and 0.76 in 2015. Women made for 9% of board members in 2006 and 13% in 2015. Table 10.2 shows the increase of the number of companies with at least one woman on board from 70 in 2006 to 83 in 2015. Finally, the number of companies with female board chair rose from 6 firms in 2006 to 12 firms in 2015. Table 10.3 reports the breakdown by the number of independent directors per board over the analyzed period of time.

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish. . .

167

Table 10.2 Selected characteristics of supervisory boards (2006–2015) Attribute Size of supervisory board— Number of directors Independent directors— Numer of directors Independent directors—% of directors Boards with at least one independent director— Number of companies Women on boards— Average number of female directors per one board Women on boards—% of directors Boards with at least one female director—Number of companies Female chairman—Number of companies

2006

2007

6.02

6.01

2008 6.05

2009 6.11

2010 6.15

2011 6.05

2012 6.08

2013 6.05

2014 5.98

2015 5.88

0.39

0.89

1.35

1.50

1.63

1.63

1.65

1.71

1.69

1.74

5

14

22

24

26

27

27

28

28

29

29

74

103

118

138

130

125

133

133

136

0.55

0.60

0.57

0.61

0.62

0.66

0.73

0.74

0.68

0.76

9

10

9

10

10

11

12

12

11

13

70

73

68

72

75

78

81

85

79

83

6

6

8

9

12

9

12

14

10

12

Source: Own compilation

Table 10.3 Breakdown by the number of independent director (2006–2015) Number of independent directors 0 1 2 3 4 5 6

2006 99 13 33 1 4 5 3

Source: Own compilation

2007 71 12 55 5 5 8 3

2008 56 13 68 9 5 5 3

2009 47 13 78 9 5 3 5

2010 45 13 81 9 4 5 3

2011 45 11 80 11 7 4 2

2012 42 10 83 12 6 4 3

2013 41 14 79 13 4 5 3

2014 99 13 33 1 4 5 3

2015 71 12 55 5 5 8 3

168

M. Aluchna

Table 10.4 Characteristics of the formation of audit committee in the supervisory board Attribute Audit committee within the board— Number of companies No audit committee reported—Number of companies The board as audit committee—Number of companies Separate audit committee reported— Number of companies Size of audit committee—Number of directors Remuneration committee within the board—Number of companies Size of remuneration committee— Number of directors Other committees within the board— Number of companies

2006 10

2007 30

2008 65

2009 105

2010 118

2011 131

2012 132

2013 136

2014 134

2015 136

151

130

100

61

49

39

36

34

33

31

8

28

55

93

102

109

114

114

118

118

1

1

5

6

8

11

9

11

8

9

0.1

0.5

1.2

2.6

2.9

3.5

3.5

4

0.03

7

20

0.3

10

44

0.6

18

69

0.7

18

74

0.7

16

3.2

75

0.8

15

3.2

78

0.8

15

3.3

77

0.9

20

77

0.9

18

76

0.9

23

As shown in Table 10.3 the majority of supervisory boards which comply with the best practice on independent directors hire up to two directors. The companies with more than two independent directors on board make for 13% of the sample companies. Still, 71 companies did not have any independent directors in the supervisory board in 2015 and did not comply with the guideline on board independence. This data needs to be treated with cautions as the criteria of independence status are not clear (Dobija et al. 2011). Formally, the criteria follow the European Commission recommendation. However, many companies do not adopt such strict guidelines, some of them consider a person with no relation to the majority shareholder to the independent director. The vast majority of sample companies do not disclose who out of board members possess the status of independent director. Table 10.4 presents data on the characteristics of the formation of board committees in the supervisory board with respect to audit, remuneration and other committees. As reported in Table 10.4 the number of sample companies with audit committee rose significantly from 10 in 2006 to 136 in 2016, what indicates the positive trend of compliance with best practice. Interestingly this increase is partially the effect of the adopted practice which allows the whole board to serve as audit committees (such practice is provided by law in the Accounting Act by the amendments introduced in

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish. . .

169

Table 10.5 Selected practice of corporate governance disclosure (2006–2015) Attribute

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Corporate governance section— Number of companies Corporate governance section— Average number of pages Compliance with best practice of at least two independent directors on board Compliance with best practice of audit committee on board Compliance with best practice of remuneration committee on board

27

93

132

147

152

154

154

154

155

154

1.06

4.33

7.59

9.26

10.14

10.46

10.79

12.06

11.81

12.28

19

46

76

90

100

102

104

108

104

105

10

30

65

105

118

131

132

136

134

136

4

20

44

69

74

75

78

77

77

76

Source: Own compilation

2009 for boards up to five directors). There were on average three directors on audit committee in 2015. Over the analyzed period the number of companies with remuneration committees increased as well. Although this is a recommendation of the voluntary character the number of companies with compensation committee grew from 4 in 2006 to 76 in 2015. Companies tend to form other committees as well—7 companies followed this practice in 2006, while in 2015 there were 23 of them. Finally, Table 10.5 presents selected practice of corporate governance disclosure of sample companies.

10.4.3

Compliance and Company Characteristics

The data on compliance with best practice are confronted with the general characteristics of companies with respect of their size, financial performance, market capitalization and ownership structure. The general characteristics (pivot table) of companies which comply with the best practice of at least two independent directors on supervisory board is presented in Table 10.6.

170

M. Aluchna

Table 10.6 Independent directors and company characteristics (pivot table) Company attribute Assets Debt Net income ROA ROE Q The stake by the largest shareholder The stake by the second largest shareholder The stake by the financial investors The stake by the individual investors The stake by the CEO The stake by the state

Non-compliance with best practice of at least two independent directors on supervisory board 662.63 123.81 21.71 0.022 –0.23 1.09 33.70

Compliance with best practice of at least two independent directors on supervisory board 3066.04 522.48 69.30 0.021 0.11 0.69 38.59

10.91

11.59

25.10

28.15

17.02

19.22

3.13

5.42

3.45

2.26

Source: Own compilation

As shown in Table 10.6 companies which comply with the best practice of at least two independent directors on supervisory board on average: • • • • • • • •

Are larger Are performing better (measured by accounting performance) Reveal lower market capitalization Reveal higher stake by the majority shareholder in the ownership structure Reveal higher stake by financial investors in the ownership structure Reveal lower stake by individual investors in the ownership structure Reveal higher stake by CEO in the ownership structure Reveal higher stake by the state in the ownership structure

The general characteristics (pivot table) of companies which comply with the best practice of audit committee on supervisory board is presented in Table 10.7. As shown in Table 10.7 companies which comply with the best practice of the formation of audit committee in the supervisory board on average: • Are larger • Reveal lower market capitalization • Reveal higher stake by the majority shareholder in the ownership structure

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish. . .

171

Table 10.7 The formation of audit committee on supervisory board and company characteristics (pivot table)

Company attribute Assets Debt Net income ROA ROE Q The stake by the largest shareholder The stake by the second largest shareholder The stake by the financial investors The stake by the individual investors The stake by the CEO The stake by the state

Non-compliance with best practice of audit committee on board 500.55 90.65 18.86 0.01 0.02 1.15 30.45

Compliance with best practice of audit committee on supervisory board 2992.21 513.76 68.46 0.03 –0.09 0.7 40.35

11.02

11.51

24.02

28.72

20.57

16.76

4.91 1.74

4.02 3.54

Source: Own compilation

• Reveal lower stake by individual investors in the ownership structure • Reveal higher by financial investors in the ownership structure • Reveal higher stake by the state in the ownership structure

10.5

Conclusion

The best practice of corporate governance is of particular importance for corporate governance in emerging and transition countries. The specificity of corporate governance in transition and emerging markets formulates unique tasks and challenges for the best practice initiative. As long as the codes in developed markets provide fine tuning recommendations to mitigate monitoring and incentive inefficiencies, they play crucial role in emerging economies setting the agenda for their reforms and further development. While countries are suggested to implement a series of recommendations, there is a growing awareness that “one size does not fit all” and the effectiveness of best practice may differ depending on the national environment, organizational context and characteristics. This paper aimed to identify the evolution of the characteristics of the supervisory board structure with the reference to best practice recommendations. This study documents the growing compliance with corporate governance

172

M. Aluchna

guidelines to increase the number of independent and female directors, forming audit, remuneration and other specialized committees on a large sample of Polish listed companies in years 2006–2015. The analysis reveals the improvement of disclosure and reporting on corporate governance. The open question however remains on the effectiveness of compliance, whether and to what extend better corporate governance may lead to better performance.

References Adamska, A. (2013). Własność i kontrola. Perspektywa akcjonariuszy spółek publicznych. [Ownership and control. The perspective of listed companies shareholders]. Warsaw: Warsaw School of Economics Press. Aguilera, R., & Cuervo-Cazura, A. (2004). Codes of good governance worldwide: What is the trigger? Organization Studies, 25, 415–443. Aluchna, M. (2012). Dobre praktyki spółek notowanych na GPW w Warszawie. Analiza zmian wprowadzonych w latach 2010–2012 [Best practice of companies listed on the Warsaw Stock Exchnage. The analysis of code changes in years 2020–2012]. Studia i Prace Kolegium Zarządzania i Finansów, 132, 105–130. Aluchna, M. (2018). Corporate governance in Poland. The dynamics of the board characteristics. In Conference Materials НОВЫЕ ТЕНДЕНЦИИ В РАЗВИТИИ КОРПОРАТИВНОГО УПРАВЛЕНИЯ И БИЗНЕСА. Ekaterinburg: Ural State University of Economics. Aluchna, M., & Kaminski, B. (2017). Ownership structure and company performance: A panel study from Poland. Baltic Journal of Management, 12(4), 485–502. Aman, H., & Nguyen, P. (2007). Do stock prices reflect the corporate governance quality of Japanese firms? Journal of the Japanese and International Economies, 22, 647–662. Anand, A. (2005). Voluntary vs. mandatory corporate governance: Towards an optimal regulatory framework. The Delaware Journal of Corporate Law, 31, 229–252. Andres, C., & Theissen, E. (2008). Setting a Fox to keep the geese – Does the comply-or-explain principle work? Journal of Corporate Finance, 14, 289–301. Arcot, S., Bruno, V., & Faure-Grimaud, A. (2010). Corporate governance in the UK: Is the comply or explain approach working. International Review of Law and Economics, 30, 193–201. Bauer, R., Gunster, N., & Otten, R. (2004). Empirical evidence on corporate governance in Europe: The effect on stock returns, firm value and performance. Journal of Asset Management, 5, 91–104. Berglöf, E., & Claessens, S. (2006). Enforcement and good corporate governance in developing countries and transition economies. World Bank Research Observer, 21, 123–150. Bhagat, S., & Black, B. (2002). The non-correlation between board independence and long term firm performance. Journal of Corporation Law, 27, 231–274. Bhagat, S., & Bolton, J. (2008). Corporate governance and firm performance. Journal of Corporate Finance, 14, 257–273. Bistrowa, J., & Lace, N. (2012). Corporate governance best practice and stock performance: Case of CEE Companies. Systemics, Cybernetics and Informatics, 10, 63–69. Black, B., Jang, H., & Kim, W. (2006). Does corporate governance predict firms’ market value. Evidence from Korea. Journal of Law, Economics and Organization, 22, 366–413. Campbell, K., Jerzemowska, M., & Najman, K. (2009). Corporate governance challenges in Poland: Evidence from “comply or explain” disclosures. Corporate Governance: The International Journal of Business in Society, 9(5), 623–634. Chizema, A. (2008). Institutions and voluntary compliance: The disclosure of individual executive pay in Germany. Corporate Governance, 16, 359–374.

10

Compliance with Corporate Governance Best Practice: The Evidence from Polish. . .

173

Cuervo, A. (2002). Corporate governance mechanisms: A plea for less code of good governance and more market control. Corporate Governance, 10, 84–93. Dedman, E. (2002). The Cadbury Committee recommendations on corporate governance – A review of compliance and performance impacts. International Journal of Management Reviews, 4, 335–352. Dobija, D., Koładkiewicz, I., Cieślak, I., & Klimczak, K. (2011). Komitety rad nadzorczych. [Committees of supervisory boards]. Warsaw: Oficyna Wolters Kluwer. Drobetz, W., Shillhofer, A., & Zimmermann, H. (2003). Corporate governance and expected stock returns: Evidence from Germany. European Financial Management, 10, 267–293. Easterbrook, F., & Fischel, D. (1996). The economic structure of corporate law. Cambridge, MA: Harvard University Press. Fligstein, N., & Choo, J. (2005). Law and corporate governance, law and corporate governance. Annual Review of Law and Social Science, 1, 61–84. Fogel, K. (2006). Oligarchic Family control, social economic outcomes and the quality of government. Journal of International Business Studies, 37, 603–622. Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Financial Economics, 118, 107–155. Goncharov, I., Werner, J., & Zimmermann, J. (2006). Does compliance with the German corporate governance code have an impact on stock valuation? An Empirical Analysis, Corporate Governance, 14, 432–445. Gourevitch, A. (2003). The politics of corporate governance regulation. The Yale Law Journal, 112, 829–1880. Guler, I., Guillén, M., & MacPherson, J. (2002). Global competition, institutions and the diffusion of organizational practices: The international spread of ISO quality certificates. Administrative Science Quarterly, 47, 207–232. Healy, P., & Palepu, K. (2001). Information asymmetry, corporate disclosure and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440. Hermalin, B., & Weisbach, M. (2003). Boards of directors as an endogenously determined institutions: A survey of economic literature. Economic Policy Review, 9, 7–26. Hermes, N., Postma, T., & Zivkov, O. (2007). Corporate governance codes and their contents: An analysis of eastern European codes. Journal for East European Management Studies, 12, 53–74. Jeżak, J., Bohdanowicz, L. K., Kaźmierka-Jóżwiak, B., & Matyjas, Z. (2016). Rola rad nadzorczych w procesach formułowania i realizowania strategii spółek. [The role of the supervisory boards in the processes of strategy formulation and execution]. Lodz: Lodz University Press. Klapper, L., & Love, I. (2004). Corporate governance, investor protection and performance in emerging markets. Journal of Corporate Finance, 10, 703–728. MacNeil, I., & Li, X. (2006). “Comply or explain”: Market discipline and non-compliance with the combine code. Corporate Governance, 14, 486–496. Mallin, C. (2004). Corporate governance. Oxford, UK: Oxford University Press. Monks, R., & Minow, N. (2004). Corporate governance. Oxford, UK: Blackwell. OECD. (2015). G20/OECD principles of corporate governance. Retrieved January 9, 2016 from http://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf Oplustil, K. (2010). Instrumenty nadzoru korporacyjnego (corporate governance) w spółce akcyjnej. Warszawa: CH Beck. PWC. (2017). Rady nadzorcze 2017. Warszawa: PWC. Renders, A., Gaeremynck, A., & Sercu, P. (2010). Corporate-governance ratings and company performance: A cross-european study. Corporate Governance: An International Review, 18, 87–106. Stulz, R., & Williamson, R. (2003). Culture, openness and finance. Journal of Financial Economics, 70, 313–349.

174

M. Aluchna

Tan, Z. (2018). Textual construction of comparative space: How analyst corporate governance reports redefine and create “best practice”. Accounting, Auditing & Accountability Journal, 31 (6), 1794–1827. Tricker, B. (2012). Corporate governance. In Principles, policies and practices. Oxford, UK: Oxford University Press. WSE. (2015). Best practice for GPW listed companies 2016, Warsaw Stock Exchange. Retrieved January 12, 2016 from http://static.gpw.pl/pub/files/PDF/RG/DPSN2016_EN.pdf

Maria Aluchna Ph.D. is an Associate Professor, Head of Department of Management Theory Warsaw School of Economics. Director of Post-graduate Studies on Products and Services Management at Department of Management Theory Warsaw School of Economics. She specializes in corporate governance, strategic management and corporate social responsibility. Fellow of Deutscher Akademischer Austauschdienst (research stay at Universität Passau), USPolish-Fulbright Commission (research stay at Columbia University), Soros Foundation, Volkswagen Foundation and Foundation for Polish Science Development. Visiting scholar at London Metropolitan Business School and Sydney University School of Business. She teaches Corporate Governance, Responsible Management (within the cooperation of University of Illinois, Springfield, US) and Strategic Management at MBA, postgraduate, Ph.D., MA and BA studies. Member of European Corporate Governance Institute, International Corporate Governance Society, Finance Watch, European Academy of Management, Council of Management and Finance Collegium and editorial committees of “International Journal of Corporate Social Responsibility”, “European Journal of Economics and Management”, “Journal of Knowledge Globalization”, “Przegląd Organizacji and e-Mentor”. She publishes in Poland and abroad (five monographs, including two in English, five edited books, including four in English), over 70 articles and conference papers (EURAM, AIB, ISBEE), and takes active part in international conferences.

Part III

Regulation

Chapter 11

A View on Corporate Governance in Romania: Regulation and Effects Mihaela Tofan and Elena Cigu

11.1

Introduction

Corporate governance (CG) regulation in Romania was marked by major changes in legal framework since 1990, both in the general perception of the actors involved and in the public opinion. The legal framework on the topic evolved from that specific to a complete centralized society, where the management of business was based on the exclusive public authority prerogative, to a form of corporate governance based on market economy principles. The progress of regulation in Romania was slow, but constant. Almost every year a new important law was adopted to create a coherent legislative context for public and private companies, their ownership, the management structures and the transparency of the activities they are involved in. There are specific rules for companies’ typology, the steps to put up a new company, the status of founders, the types of board of directors, the remuneration for management, the record keeping and the publicity of information, the respect of the fundamental rights and the principles of EU law (i.e. gender equality, equity and ownership protection). There are specific rules for establishing and managing the activity of the shareholder company, for using public funds and for establishing and operating a business unit. Some of the efficient privatization procedures are mentioned as good practices, and some are noted as example not to follow. The role and the impact of corporate governance on merging and acquisition procedure is also analyzed, determining how difficult is to respect the legal framework in this field. The aim of this research is to offer theoretical perspective on the corporate governance legal framework in Romania, in terms of its evolution and its impact

M. Tofan (*) · E. Cigu University “Alexandru Ioan Cuza” of Iasi, Iași, Romania e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_11

177

178

M. Tofan and E. Cigu

throughout implementation, as well as the status it has reached today. This research contributes to creating a comprehensive view on the corporate governance in Romania taking into account the legal framework and its effects. The chapter is structured as follows: Sect. 11.2 provides a theoretical overview of the corporate governance theories; Sect. 11.3 describes transition processes and their effect referring to corporate governance system; Sect. 11.4 summarizes the shareholder structure, concentration of ownership and control, pyramidal structures; Sect. 11.5 provides information about ownership by financial investors, government, executives, founders; Sect. 11.6 reveals the characteristics, role and functioning of the board; Sect. 11.7 presents female and independent directors on board; Sect. 11.8 explains the role of politics and regulation; and Sect. 11.9 provides information about transparency and investor protection. The chapter ends with some proposal of improving the Romanian regulation in the corporate governance field, accordingly to the results of the research.

11.2

The Review of Corporate Governance Theories

Corporate governance can be perceived as a complex system without which the society based on the principles of market economy is not able to function, and in this regard, the Cadbury Report (1992) defined it as “the system by which companies are managed and controlled”. Shailer (2004) defines corporate governance as a collection of mechanisms, processes and relations by which corporations are controlled and directed, but the concept of corporate governance is considered deeply situated within the sphere of agency theory (Jensen and Meckling 1976; Shleifer and Vishny 1997; Nakpodia and Adegbite 2018). From the perspective of choosing the perfect model of corporate governance, literature specify that there is no one recommended model of it that works in all countries and companies (Hardi and Buti 2012; OECD 2015). In our opinion, this statement is justified in the context in which corporate governance includes the processes through which companies’ objectives are set and pursued beyond the global context of the social, regulatory and market environment, and taking into account, in particular, the country-specific economic, legal, and cultural differences. Young and Peng (2008) consider that the attempts of countries to import governance systems may be ineffective, and few of the most important vectors are the legal and fiscal system of the country, cultural issues, accounting practices, type of professional managers (Stanciu and Caratas 2015). In this context, international institutions and organizations on the field of economics as OECD (2015) establishes the main principles for corporate governance to help policymakers evaluate and improve the legal and institutional framework (for CG), being the government and private sector role to implement them and to develop more detailed mandatory or voluntary provisions that can take into account country’s particularities (social, legal status, cultural differences and market economy status).

11

A View on Corporate Governance in Romania: Regulation and Effects

11.3

179

Transition Process and Its Effect Referring to Corporate Governance System

The development of the corporate governance in Romania was created “step by step”, in the first phase using legal framework for implementing a set of economic reforms (Cărăușu et al. 2018; Onofrei 2009), but in practice the necessary reforms were accomplished much later. As Kiviaho et al. (2014) noted for all Central and Eastern European countries, including Romania, it consisted in: privatization of state-owned companies and emergence of a multitude of new private companies; liberalization of the financial sector; removing the restrictions on foreign investment; regulating the stock market trading; and creating market institutions. Some of the Central and Eastern European countries, such as Poland, Czech Republic, or Estonia applied radical reforms, the so-called “shock therapy”, especially in the early years of transition, with negative impact in the short-term because generated high unemployment and recession, but on the long-term the results were sustainable. Hungary and Slovenia preferred a more “gradualist” approach, offering time for the national enterprises and economic operators to adapt to the open market economy. In this context of the development of corporate governance, initially there were modest results in all countries of the Central and eastern European countries. Market environment in Romania has been characterized by weak trading activity, partly as a result of its short history compared to developed European equity markets, but also because of the many qualitative factors already mentioned above, and higher risks on the transition markets than on developed markets (Kiviaho et al. 2014). Kiviaho et al. (2014) consider that all the Central and Eastern European Countries are defined by some important aspects, as following: (i) substantial variation in market size; (ii) attractiveness to foreign investors; and (iii) degree of economic development. Taking into account the status of emerging markets and the financial crisis (2007–2009) as direct factor, Syllignakis and Kouretas (2011) notice that foreign investors liquidated their portfolio investments in the CEE countries in order to invest in the mature stock markets in a typical ‘flight to quality’ movement. Another characteristic that validate the status of emerging market (Claessens and Yurtoglu 2013) is less strongly defined rights of shareholders. La Porta et al. (2002) explain that legal protection of shareholders and creditors is an important determinant of the development of financial markets in a country. Claessens and Yurtoglu (2013) shown that better investors (both shareholders and creditors) rights can be associated with deeper and more developed financial markets. As a generality, all civil law families of states, such as Romania, have much smaller stock markets than those in common law countries assuming that the reason is inferior investors protection (La Porta et al. 1997). Following the transition process towards adopting the mechanisms of a market economy and the integration in the European Union, all Central and Eastern European countries, including Romania, gave new perspectives to their national legal systems creating new legal foundations for companies, including the quality of the corporate governance framework and building from ‘zero’ the framework for functioning of their capital markets (Cărăușu et al. 2018). Corporate governance law

180

M. Tofan and E. Cigu

in Romania is still under development being one of the countries that went from a very strong centralization system to the market economy based on the market rules. In the opinion of many researchers and especially of professionals, the legislative in Romania is not paying too much attention to the global business environment and its legal trends. Regulation in the field of corporate governance in all Central and Eastern European countries, including Romania, is in general characterized by soft law where participants self-regulate themselves without possessing full legislative authority (Hopt 2011). After the communist regime fall, one of the first adopted laws that established the status of companies in Romania was Law no. 31/1990 regarding companies. This law has had several amendments over time, even though it is still in place today. For the development of the legal framework contributes also Law no. 346/2004 on stimulating the establishment and development of small and medium-sized enterprises (SMEs) with subsequent amendments of Law no. 62/2014. Accounting Law no. 82/1991 is the legal framework for the organization and management of the financial accounting of commercial companies, national societies/companies, autonomous regies, national research and development institutes, cooperative societies and other legal entities. Law no. 297/2004 on the capital market regulates the establishment and functioning of the markets for financial instruments, their specific institutions and operations, as well as of collective investment undertakings, in order to mobilize financial resources through investments in financial instruments. In 2000, trading companies (“issuers”) acting on the regulated market of the Bucharest Stock Exchange (BVB) have voluntarily adopted and complied with the provisions of the Corporate Governance Code. The Code (Corporate governance codes 2015) aims at building an internationally attractive capital market in Romania, based on best practices, transparency and trust. It encourages companies to build a strong relationship with their shareholders and other stakeholders, communicate effectively and transparently and show openness towards all potential investors. Corporate governance codes in Romania may be used by companies, professional and employers’ organizations, local chambers of commerce and industry, the Chamber of Commerce and Industry of Romania, and by self-regulating bodies on the capital markets. Business associations, employers’ associations and local chambers of commerce and industry may adopt this Code in order to secure the observance of its provisions by their members for the companies admitted to trading on the regulated market of the Bucharest Stock Exchange (“issuers”). Corporate Governance Code has been changed twice so far. In the opinion of Stanciu and Caratas (2015) the real challenge for the state institutions in countries as Romania (emerging markets) is to create a functional background that enable an accurate and undertaken implementation of the corporate governance code in most companies. In 2003 the Fiscal Code (Law no. 571/2003) was adopted, which provided an integrated legal framework for the taxes and fees, specifying the taxpayers, the manner of calculating and paying the taxes and fees, the procedure for modifying taxes and fees. The legal framework for administering the taxes and fees governed by the Fiscal Code was provided by Fiscal Procedures Code (GO no. 92/2003). Fiscal Code was followed by subsequent modifications. In 2015 Fiscal Code was

11

A View on Corporate Governance in Romania: Regulation and Effects

181

Stage 4 *Go Public (IPO) Stage 3 *Few to multiple SHs

Stage 1 *Owned by a single/couple individuals;

Stage 2

*Medium - employees

*Few SHs

*Moderate complexity

*Medium - employees growing *Medium complexity growing

*Small to medium employees; *Simple/moderate complexity

*Small - employees *Simple business

Capital, Stewardship, and Control needed through to varying degrees Fig. 11.1 Corporate governance: Stages of Growth Capital, Stewardship, and Control needed through to varying degrees. Source: IFC (2013)

replaced by a the New Fiscal Code through Law no. 227/2015, which also has been amended and completed several times so far. The key factors (Tofan et al. 2015; IFC 2013) establishing the corporate governance framework are as following: (i) Establishing ownership structure/company type; (ii) Size (employees, revenue, etc.); (iii) Nature and complexity of business; and (iv) The Goals/Where the business is going (Fig. 11.1). Joint stock companies in Romania can choose between the one-tier and the two-tier system, but the practice shows that the large majority of the ten largest listed companies are organized under a one-tier system (Cigna et al. 2016). In the one-tier system there is no requirement for the CEO to be separated from the chair of the board. Boards are generally well sized in Romania. Legal entities can be board members. In banks, the law provides for qualification requirements for board members, while for companies this is only a recommendation. If the audit committee is established, it should have at least one member with experience in accounting or auditing. According to the World Bank’s Doing Business Report 2018, Romania is ranked 45th worldwide on the aggregate ease of doing business index. The ease of doing business ranking ranges from 1 to 190 (Fig. 11.2). In order to support entrepreneurs, the Romanian government has also simplified the process of opening up a business, reducing the necessary time from 29 days in 2004 to 12 days in 2018. Actually, a diligent entrepreneur is able to reduce this period to 3 working days. The DTF score for starting a business with a reference range between 0 and 100 is 89.67 for Romania in 2018.

11.4

The Shareholder Structure, Concentration of Ownership and Control

The functioning of the companies implies the existence of three categories of authorities (Tofan et al. 2015):

182

M. Tofan and E. Cigu

Fig. 11.2 Ease of doing business index in the Central and Eastern European Countries in 2018. Source: computed by authors using data provided by World Bank’s Doing Business Report 2018

Slovenia, 37 Slovakia, 39 Romania, 45 Poland, 27 Lithuania, 16 Latvia, 19 Hungary, 48 Estonia, 12

Czech Republic, 30

Croatia, 51 Bulgaria, 50

• A deliberative body to ensure that the will of the commercial company is lawfully constituted; • An executive body to implement all decisions taken by the deliberative body in practice; • A control body to verify the lawfulness of the business of the company, but also the manner in which the executive body implements what the deliberative body has decided. Metaphorically speaking, in the case of Romanian companies law, the principle of separation of powers in the state organization is observed, the three categories of companies bodies being exponents of the legislative, executive and judicial prerogatives. Of course, depending on the size of the firm, the deliberative, execution and control bodies will have more or less development. Thus, in a limited liability company, the only associate will be both the deliberative body, deciding what needs to be done for the activity of the company and the execution body, when the sole partner is the manager of the company. Moreover, as administrator he will also be responsible for the fairness of the company’s activity and the correct keeping of the accounting registers, which is confusing with the control function. The will of society is manifested through its organs, which are: the general assembly of associate members or shareholders. The decisions of the assembly are put into practice by the executive body or the managing body (the administrator) and are checked by the control body (censors). Company’s will is expressed in the meetings of the members of the deliberation body, which is the general assembly of the shareholders, respectively the shareholders, in the joint stock company. The general assembly is a collective body, to which all the associated members are invited to attend and its will is the expression of the owners’ vote. The company’s will must be transposed into practice and will be accomplished by legal acts committed by the executive body, which is represented by the administrator/manager of the company or by the board of administrators/ directors for bigger firms (Fig. 11.3). General Assembly of Associates (AGA) is the deliberative and decision-making body of the company and it is made up of all the associates of the company. Law no. 31/1990 regulates the general meeting as an organ of the company only in the

11

A View on Corporate Governance in Romania: Regulation and Effects

183

General Assembly of Associates (AGA) Board of Directors

The Steering Committee

Chairman of the Board of Directors

Executive Director (CEO)

The functional structure of the compartments

Production structure

Fig. 11.3 The hierarchical pyramid of the typology of joint stock company. Source: computed by authors

case of the joint stock company and the limited liability company. However, it is undoubtedly also the case for the other legal forms of society, decisions are also made at the general meetings of the associates. The board of directors of the joint stock company is a collegial body that brings together all the directors of a joint stock company. The Steering Committee is an executive collective body of management of the company with a deliberative character and is responsible according to the decisions made by the general meeting of the associates. The chairman of the board of directors is the person elected to this position by the members of the board of directors, among those members, or appointed by the ordinary general assembly, who appoints the council. The Executive Director, even when he is a employee of the company, is responsible for the rules governing the liability of the directors, so his liability is not a material one within the meaning of the Labor Code but a civil liability, which determines the jurisdiction of the commercial courts of law. The associates or, in some cases, a specialized body, that is the auditors of the company, do the control of administrator management achievements. The wellfunctioning and balanced work of a company necessarily implies the designation of an organ or category of organs to control the fairness of the business. The primary role of these organs is not repressive, but preventive. This control activity aims at detecting inaccuracies before deviating from the law and remedying the malfunctions in time. The control bodies at the level of the companies carry out an activity aimed at achieving the following objectives: (i) preventing situations that can lead to bankruptcy; (ii) reduction of the share capital or decrease of the patrimony; (iii) detection of violation of the constitutive act; and (iv) abuses in the activity of directors and directors, etc.

184

M. Tofan and E. Cigu

In societies with a complex organizational structure, comprising a large number of associates and performing complex commercial operations, the auditors are responsible for the control. For a Limited Liability Company (LLC) the law provides the obligation to appoint censors only if the number of associates exceeds 15. In the absence of censors, the associates as well as in the collective company will exercise the controlling function. According to the law in force, the joint stock company will have three censors and the same number of alternates, if the articles of association do not provide for a larger number. The term of the censors’ mandate is 3 years and they can be re-appointed. The law requires at least one censor to be an authorized accountant or an accountant expert. The company’s censors must lodge a security that represents the third part of the guarantee required for the administrators/directors. Law no. 31/1990 provides the following rights of censors: (i) to participate in the meetings of the administrators, without having the right to vote; and (ii) to obtain each month from the administrators a situation regarding the evolution of commercial operations; The legal obligations of censors are: (i) to oversee the management of the company; (ii) to check the balance sheet and the profit and loss account; (iii) to verify of the way the registers are kept; (iv) to verify of the assessment of the patrimony; and (v) to inspect of the cash desk monthly. The censors must bring to the attention of the administrators the findings they have made, and serious cases should be presented in the General Meeting of Shareholders. According to art. 165 of Law no. 31/1990, censors will participate on the special meetings of the shareholders to advice on their deliberations, presenting the findings made during the exercise of the mandate. The censors are jointly liable for non-compliance with their obligations, according to art. 166 of Law no. 31/1990. The civil liability action against censors is exercised under the conditions of Art. 150 of Law no. 31/1990 and the criminal liabilities of censors are regulated by art. 271, as subsequently amended. Companies whose annual financial statements are subject to audit are required to establish an internal audit function, with direct access and reporting to the board or audit committee (Cigna et al. 2016). Banks and large companies must be subject to an independent external audit. State-owned companies are required to create an audit committee made of non-executive directors/supervisory board members while other companies are recommended to do so. When established, the audit committee must include at least one independent director.

11.5

The Characteristics, Role and Functioning of the Boards

The General Assembly is the body of deliberation and decision of the company. It is made up of all the associates of society. According to the law, the general assembly expresses the social will, which decides on all the essential issues of the activity of society. As a deliberative body, the general assembly is called upon to decide both

11

A View on Corporate Governance in Romania: Regulation and Effects

185

on common problems for the life of society and on special issues that address the fundamental elements of the existence of society. The general meeting of the trading company may be an ordinary meeting or an extraordinary meeting. The Ordinary Assembly meets at least once a year, no later than 3 months after the end of the financial year, irrespective of the type of company we are analyzing. According to the law, the duties of the General Assembly are as following: (i) to discuss, approve or amend the balance sheet after hearing the report of the directors and auditors; (ii) to set the dividend to shareholders; (iii) to choose administrators and censors; (iv) to rule on administrators’ management; (v) to establish the revenue and expenditure budget and, where appropriate, the work program for the following financial year; (vi) to establish or dissolution of secondary offices, subsidiaries, agencies if the constitutive act does not provide for such. According to the provisions of Law no. 31/1990, republished in 2015, with subsequent amendments, the extraordinary meetings take place whenever a decision is needed on matters requiring amendment of the company’s articles in the association agreement. Examples of situations requiring such amendments and, implicitly, the convening of an extraordinary general meeting of the associate members are: (i) prolonging the duration of the company; (ii) increase or decrease of the share capital; (iii) changing the object or form of society; (iv) moving the headquarters; (v) merger with other companies; (vi) early dissolution of the company (Article 113 of Law 31/1990). Because the extraordinary general assembly always addresses serious problems for the existence of the respective society, the legal framework requires more rigorous voting quorum and presence. Directors and associates convene general meetings. Administrators are required to convene the Ordinary General Meeting at least once a year, no later than 4 months after the end of the accounting year, for any type of company, regardless of its organizational form. The convocation must be brought to the attention of the associates in one of the following ways, depending on the form of the company and, in particular, the number of associates: the publication of the convocation in the Official Gazette of Romania and in a large local newspaper from the company’s headquarters; or a registered letter with acknowledgment of receipt, if all company shares are nominative and the costs of direct calling for each shareholder are not excessively high. The status of associate or shareholder confers the right to participate in the general meeting. This right is exercised personally by each associate, but may also be transferred to representatives who are in possession of a special power of attorney. Meetings of ordinary and extraordinary general meetings must take place, subject to the nullity of the decisions taken by the assembly, on the day, at the time and place shown in the convocation. Associate members or shareholders will choose, from among those present, one or more secretaries who will check the presence and the minutes of the censors to ascertain that all the formalities required by the law and the statute for holding the meeting have been completed and then the participants will discuss the subjects they were invited to attend for. The shareholders exercise the right to vote in the general meeting, in proportion to the number of shares they

186

M. Tofan and E. Cigu

possess, unless the constitutive acts limited the number of votes according to the law. In the general assembly the associations must prove their quality. The exercise of the voting right is suspended for the shareholders who did not pay the matured payments. Decisions of the general assembly are taken by open vote. Secret vote is exceptionally admitted. In the case of limited liability companies, voting can also be done by correspondence if the company’s statute provided for such a voting option. The proceedings of the Assembly must be recorded in a minutes, signed by the Assembly President and secretary. Usually, the president of the assembly is the sole administrator, the executive director or the president of the executive board. The minutes of the meeting shall include the information on the fulfillment of the convening formalities, the date and place of the meeting, the type of meeting, the shareholders present, the number of shares, as well as the debates, summaries and decisions taken. The minutes will be transferred to the general meetings register. The decisions of the general assembly are binding for all the associates, according to the democratic principle of the majority in taking a mandatory decision. In order for the company’s will to be made known for all the associates, even for those who did not participate in the meeting, and to all interested and therefore opposing third parties, these decisions (more preferably extracts from the minutes of ordinary and extraordinary general assemblies) are published in the Official Gazette of Romania and are entered in the Trade Registry, if they concern acts or facts the registration of which is prescribed by law. The decisions of the general assembly adopted in violation of the law or of the constitutive acts may be annulled by court order. The request for annulment of the decision of the general meeting may be presented within 15 days from the date of its publication in the Official Gazette. The jurisdiction to resolve the request lies with the court in whose territorial jurisdiction the respective company is located. The request for annulment of the decision of the general meeting will be judged in the council chamber of the court. The final decision of cancellation must be mentioned in the Trade Register and published in the Official Gazette. From the date of its publication, the ruling becomes opposed to all shareholders. The decisions of the general assemblies are transposed in practice by the execution of certain acts by persons specifically invested for this purpose, appointed as administrators/managers/directors of the company. According to the provisions of Law no. 31/1990, one or many administrators manage any company, irrespective of its legal form. The administrators perform daily the necessary operations for accomplishing the object of activity of the society and can be both Romanian citizens and foreign citizens. They assure the effective management of a business and are responsible for the way they perform this activity. There are legal relationships specific to the mandate contract between the administrator and the company he manages. The empowerment to administer is granted to the administrator of the General Meeting of Shareholders or by the act of establishing the company and the administrator assume his position by personal signature. Company management may also be entrusted to one or more natural or legal persons. Administrators may be appointed as shareholders or third parties who will

11

A View on Corporate Governance in Romania: Regulation and Effects

187

have to meet certain conditions regarding studies, experience, practice, morality and ability. From the point of view of the legal capacity required for the status of administrator, the law is as demanding like it is for the trustee, imposing the condition of full exercise legal capacity. The term of office of administrators may be determined or undetermined. In both situations, the administrator’s assignment is terminated only at the voting date of the discharge by the extraordinary general meeting of the associates. Article 197 of Law no. 31/1990 provides for certain limitations on the cumulus of the status of administrator in limited partnerships. Thus, administrators can not receive the mandate of the administrator in other competing companies or with the same object of activity, without the authorization of the assembling of the associates, nor do the same type of business or competition on their own account or on behalf of another natural or legal person under the sanction of revocation and liability for damages. Since the administrator has the management of the entire patrimony of the company, the law stipulates that each administrator will have to deposit a guarantee whose amount is set by the General Meeting of Shareholders or by the constitutive act. This amount will be recorded in a special bank account. The administrator has the following obligations: (a) the fulfillment of the publicity formalities required by the law for the validation of the establishment of the company; (b) the general obligation to manage the company; (c) the obligation to keep up-to-date the registers required by the law and to be responsible for the correctness of the records; (d) the obligation to convene ordinary or extraordinary Assembly; (e) the obligation to draw up the balance sheet and the profit and loss account, presenting them to the General Meeting of Shareholders; this obligation may be delegated to some specialized persons (authorized accountant, accounting expert, financial-accounting director, etc.) (f) to carry out all the duties stipulated in the articles of association; and (g) to cooperate with liquidators in case of dissolution and liquidation of the company. Administrators are jointly and severally liable for: (i) the reality of the payments made by the associates; (ii) the actual existence of dividends paid; (iii) the exact fulfillment of the General Meeting of Shareholders decisions; and (iv) strict fulfillment of the duties imposed by the law and the constitutive act. According to art. 73 of the Law no. 31/1990 republished and amended, the action against administrators also belongs to the creditors of the company, but they will be able to exercise it only in case of bankruptcy. The termination of the position of the administrators can be done by revocation by the General Meeting of Shareholders and by resignation. For failing to fulfill the obligations arising from the mandate contract, depending on the committed offense, the administrator may answer civil or criminal. In companies where there are many administrators/directors, they are organized in an executive board, which is a collegial governing body. A chairman, elected from the members of the board, leads the board of directors. He may at the same time be the general manager or director of the company (Article 143, paragraph 3, of Law 31/1990). The board of directors has the same duties and prerogatives as the sole administrator in the functional structure of the company.

188

M. Tofan and E. Cigu

The Board of Directors may take valid decisions in the personal presence of at least half of the administrators. Exceptionally, for some operations, the board of directors needs General Meeting of Shareholders approval. The board of directors meets as often as necessary, but at least once every 3 months. The result of deliberations on the Board of Directors shall be recorded in the decisions of the Board of Directors, to be signed by the Chairman. According to art. 111 of Law no. 31/1990 the ordinary general meeting is competent: (a) to discuss, approve or amend the annual financial statements on the basis of the reports of the directors, auditors or financial auditors and to fix the dividend; (b) to choose the administrators and censors; (c) to set the remuneration due for the current exercise to the administrators and censors, unless it was established by the constitutive act; (d) to decide on the management of the administrators; The Board of Directors may delegate some of its powers to a steering committee, composed of elected members from among its directors. The general manager or the company director leads the steering committee. The duties of the Steering Committee are those established by the Board of Directors by means of the delegation decision adopted. Steering committee decisions may be annulled or suspended by the board of directors and, moreover, by the General Meeting of Shareholders. Ordinary execution of the company’s operations may be entrusted to one or more executive directors, employees of the company. Executive Directors will not be members of the Council of administrators of the company. They are accountable to society and third parties as administrators for failing to fulfill their duties. If an action is brought against the directors, they will be suspended from office until the sentence remains irrevocable. Company directors have the status of company employees and receive tasks through the job description. Legal relationships with the commercial company are governed by labor law norms. Depending on the size and specificity of the firm, the number of executive directors is very varied. From Financial and Accounting Director and Technical Director, Human Resources Director, Production Director, Image Director, Client Director, Advertising Director, etc. According to the provisions of Law no. 441/2006, the management of the joint stock companies can also be carried out in a dual system, i.e. by inserting in the instruments of incorporation a clause on the implementation of the management through a directorate and a supervisory board. The Directorate performs exclusively the management of the company and fulfills all the necessary and useful acts to achieve the object of activity except for those reserved by the law to the Board of Supervisors and the General Meeting of Shareholders. The Board of Directors exercises its duties under the supervision of the Supervisory Board and is made up of one or more members, always in an odd number. When there is a single member, he will be named the sole general manager. For companies for which the financial statements are subject to a statutory audit obligation, the directorate shall consist of at least three members. The Board of Supervisors will designate the members of the Board and decide which of them is the Chairperson. Members of the Board cannot be simultaneously members of the Supervisory Board due to the possibility of conflicts of interest. The

11

A View on Corporate Governance in Romania: Regulation and Effects

189

Directorate represents the company in relation to third parties and in the courts, and unless otherwise stipulated by the directors, they act together. At least once every 3 months, the Directorate shall submit a written report to the Board of Supervisors on the company’s activity. The Directorate also submits to the Supervisory Board the annual financial statements, the annual activity report and its detailed proposal on the profit of the previous year and its distribution. The Supervisory Board has between 3 and 11 members, according to the express provisions of the company’s constitutive act. They are appointed by the AGM and may be revoked at any time by a vote of 2/3 of the votes of the shareholders present in the meeting. The Supervisory Board has the following main tasks: (i) exercises permanent control over the management of the company by the management; (ii) appoints and revokes the directors; (iii) Checks the company’s operations; and (iv) report annually to the General Meeting of Shareholders (GMS) the results of the supervisory activity of the directorate that it performs. The Supervisory Board cannot have executive powers, and if the Board does not approve an operation initiated by the Executive Board, the members of the Board of Directors may convene the General Meeting of Shareholders and request permission from the owners of the capital. The Board of Supervisors may set up advisory committees consisting of at least two members of the Board and whose task is to investigate and make recommendations to the Board in areas such as auditing, remuneration of directors and supervisory boards and staff, or appointing candidates for posts driving. The Board of Supervisors shall meet at least every 3 months. The president convenes the council and directs the meeting. The change of society takes place, in principle, in the same way as it was established. Thus, the social will (expressed by an extraordinary general meeting of the company members) in the sense of the change of society will be recorded in the General Meeting of Shareholders decision, which will be the basis of the drafting of an addendum to the company contract concluded for the establishment of the respective company. By the care of the administrator or General Meeting of Shareholders secretary, this addendum will be filed with the Trade Registry Office attached to the county court that ordered the company to be set up. At least theoretically, each extraordinary general meeting of the associates may entail a change of status that will not become operational before the supplementary act is drawn up and registered with the Trade Register, followed by the publication in the Official Gazette. Every amendment must be brought to the attention of all those interested, including the associates who could not attend the meeting that took the decision to change, and it is therefore obligatory to publish the additional acts in the extract. Modifications to companies must take place in accordance with the law. Thus, the transformation of a Limited Liability Company into a joint stock company can only take place if the number of associate members is at least two and the share capital at least the equivalent in lei of 25,000 euro (the precise amount in national currency at the accession to the EU was 90,000 and it was not updated since, although the exchange for euro modified abruptly).

190

M. Tofan and E. Cigu

Of the modalities of modification, the most spectacular, in terms of the effects they produce, are mergers and divisions. The merger is the union of two companies that will function as a single legal professional businessman. Merging can be by absorption (when a stronger society embraces a smaller society) or by merging (when two societies, comparable in power, unite to give rise to a new law subject). Divide involves breaking a company into two or more other companies that acquire decision-making and financial autonomy. Merger and division of companies are expressly regulated in Law no. 31/1990 republished, from art. 238 to art. 251 and have been considerably modified by the express provisions of Law no. 441/2006. Thus, according to the law, the merger or division can also take place between societies of different forms. Companies in liquidation may merge or be divisive only if they did not start distributing the parties to the liquidation. The merger or division is decided by each individual company, under the conditions set for the modification of the company’s constitutive act. If, merger or division establishes a new company established, it is constituted under the conditions provided by this law for the agreed form of company. The merger or division has the effect of dissolving, without liquidation, the company which ceases to exist and the universal transfer of its assets to the recipient company(s) in the state in which it is at the time of the merger or the division in exchange for the award of shares or shares social benefits to the members of the company which cease and, where appropriate, to a sum in cash which may not exceed 10% of the nominal value of the shares or shares attributed. Based on the decision of the general meeting of the shareholders of each of the companies involved in the merger or division, their directors prepare a draft merger or division, which will include: (a) The form, name and registered office of all companies participating in the operation; (b) The foundation and conditions of the merger or division; (c) The determination and measurement of the assets and liabilities to be transferred to the beneficiary companies; (d) The arrangements for the surrender of shares or shares and the date from which they give the right to dividends; (e) The share exchange ratio of shares or shares and, where appropriate, the amount of the fine; the shares of the absorbed company whose owner is, directly or through interconnected persons, the acquiring company or the company itself absorbed can not be exchanged for shares issued by the absorbing company; (f) The amount of the merger or division premium; (g) The rights granted to the bondholders and any other special advantages; (h) The date of the merger/division financial situation, which will be the same for all participating companies; (i) Any other data of interest to the operation. The merger or division plan, signed by the representatives of the participating companies, shall be filed at the trade registry where each company is registered, together with a statement of the company that ceases to exist after the merger or

11

A View on Corporate Governance in Romania: Regulation and Effects

191

division, of how it decided to terminate its liability. The merger or division project, referred to by a specialized judge, shall be published in the Official Gazette of Romania at the expense of the parties. Any creditor of the merging or divesting company having a claim prior to the publication of the draft terms of merger or division may object and the execution of the merger or division shall be suspended until the date on which the judgment becomes irrevocable. The directors of the merging or dividing companies shall make available to the shareholders at the registered office at least 1 month before the date of the extraordinary general meeting: (a) the merger/division project; (b) the administrators’ report, in which the necessity of the merger/division will be economically and legally justified and the exchange of shares/shares will be established; (c) the financial statements together with the management reports for the last 3 financial years, as well as 3 months before the date of the merger/division project; (d) the auditors ‘report and, as the case may be, the auditors’ report; (e) the report of one or more experts, natural or legal persons, on the fairness of the exchange ratio of the shares/shares, in the case of joint stock companies, in limited partnerships or with limited liability. The report will include: (i) the methods used to reach the proposed exchange rate; (ii) assessing whether those methods were appropriate, mentioning the values reached by each method, and an appreciation of the importance of these methods between those to reach those values; and (iii) any difficulties encountered during the evaluation exercise; (f) records of contracts with values exceeding 100,000,000 lei in execution and their distribution in the case of division of companies. The general meeting of the company or companies that cease to exist shall approve the instruments of incorporation of newly created companies by merger or division. The amending act of the constitutive act of the absorbing company shall be registered in the trade register in whose constituency the company has its headquarters and, by the delegated judge, shall be forwarded ex officio to the Official Gazette of Romania for publication. Merger or division occurs at the following dates: (a) in the case of the incorporation of one or more new companies, on the date of incorporation of the new company or the last of them in the trade registry; (b) in other cases, on the date of entry in the Trade Register of the mention of the increase of the share capital of the absorbing company. In the case of a merger by absorption, the acquiring company acquires the rights and is held by the obligations of the company it absorbs, and in the case of merger by merging, the rights and obligations of the companies that cease to exist pass over to the newly created company.

192

M. Tofan and E. Cigu

Companies acquiring goods through the effect of division are liable to creditors for the obligations of the company that has ceased to exist by division, in proportion to the value of the acquired assets, unless other proportions have been set by the act of division (Capital 2017).

11.6

Female and Independent Directors on Board

International Labour Organization (2015) considers that promoting gender equality at the workplace is not only the right thing to do, but also the smart thing to do. Women now hold over 40% of jobs worldwide and there are definitely more female role models as leaders than a decade ago. Gender equality in Romania is governed by an entire package of laws as well as empowered institutions. Thus, the legal framework is constituted as following: Law no. 202/2002 on equal opportunities and treatment of women and men republished, GD no. 365/2018 on National Strategy of 24 May 2018 on the Promotion of Equal Opportunities and Treatment for Women and Men and on the Prevention and Combating of Domestic Violence for the Period 2018–2021, Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin, Council Directive 2000/78/EC of 27 November 2000 establishing a general framework for equal treatment in employment and occupation, etc. One of the most important institutions in Romania implicated in implementing the principle of equal treatment between persons is National Council for Combating Discrimination that was established by GD no. 1194/2001. The Corporate Governance Code (2006) recommends “the board and its committees should have an appropriate balance of skills, experience, gender diversity, knowledge and independence to enable them to effectively perform their respective duties and responsibilities”. The survey of the International Labor Organization in 2012 revealed that 31.4% of managers in Romania are women, ranking 53 out of 126 states analyzed. Thus, Romania is ahead of Germany, where the share of female managers is 31.1%, Austria (30%), the Netherlands (29%) and Denmark (28.4%). The same survey found that for Central and Eastern Europe women’s representation was highest in Lithuania (44%), followed by Bulgaria (43%), Estonia (37%), Hungary (33%), Poland (30%), Slovakia (30%) and the Czech Republic (27%). Over the period of time 2000–2012, the increases for women as managers in Romania were more than 5%. According to the World Bank Enterprise Surveys, the percentage of firms in Romania with a female top manager is 20.1%. The European Commission’s database on women in decision-making provides data on the CEOs (Chief Executive Officer) of the largest publicly listed companies. The largest companies are taken to be the members (max. 50) of the primary blue-chip index. Nineteen countries had no women CEOs amongst these largest public companies. Serbia had the highest proportion of women CEOs, at 17%, followed by Romania, the Netherlands and Slovakia, with 10%, and the United Kingdom with 6%.

11

A View on Corporate Governance in Romania: Regulation and Effects

11.7

193

The Role of Politics and Regulation

The national legislation represents the support for building corporate governance profiles and capital market efficiency. Romania is a member of the European Union and can be considered an attractive country for investors. It is important that the political climate to be one reliable to attract large investments. The Romanian regulations pocket on corporate governance developed under different ideologies of governments (e.g. social democratic, liberal, etc.) is a complex one consisting the Companies Law (Law 31/1990R, as amended), specific legislation (e.g. applicable law on public enterprises), regulation on capital market such as the Capital Market Law (Law 297/2004, amended). Also, to complete the legal framework, we can include in the pocket the Regulations of the National Securities Commission (CNVM), Code of Corporate Governance of The Bucharest Stock Exchange and Civil Code (Tofan et al. 2015). Between 2015 and 2018, Romania’s economy was characterized by a sustained economic growth that coincided with a significant increase in company profitability. In the period 2015–2018, extensive legislative changes were introduced regarding the Romanian companies’ tax regime. Annual revenue ceiling up to which a firm is included in the micro enterprise category was increased by over 15 times, rising from 65,000 euros in 2015 to 100,000 euro in 2016, 500,000 euros in 2017, and 1,000,000 euro in 2018. As for the quotas taxation applied to the income of microenterprises, they were reduced and differentiated according to the number employed since 2016. From the 3% single rate of the year 2015, it was reached in 2016 to apply the 3% quota for companies without employees, 2% for companies with 1 employee and 1% for firms with 1 employee at least 2 employees. In 2017, the number of tax rates was reduced to two: 1% for firms with employees and 3% for firms without employees. Moreover, small companies have been facilitated the possibility to opt for the payment of income tax or a profit tax, capital requirements necessary to be able to exercising this option being significantly diminished, respectively to the equivalent of 25,000 euro in 2015 and 2016 to 45,000 lei starting with the year 2017. At the same time, starting January 1, 2017, the companies that were active in the tourism, restaurants and food sector publishes and was paying tax on profits become paying a specific tax, the new tax having the characteristics of a flat tax.

11.8

Transparency and Investor Protection

In order to provide investors with the possibility of evaluating investment risk, the market is regulated under strict supervision by the regulatory and controlling authority, including investor protection conditions. Law no. 297/2004 on the capital market does not expressly specify the principle of investor protection, but this law is governed by two principles, underlying the idea of investor protection: equality between investors and market transparency.

194

M. Tofan and E. Cigu

Transparency is a fundamental principle of the securities market. Transparency rules target issuers, their major shareholders, managers, but also public or private institutions involved in securities trading. Market transparency is the main means of protecting investors. The principle of transparency results in investors’ right to information. Market transparency is necessary to ensure investor equality, strengthen investor confidence in capital market products in general, and securities in which they invest, in particular, to stimulate investment in securities and protect investors against fraud. Transparency of the market is also a principle of the European common regulations regarding the capital markets. In Romania, all companies and banks have to prepare and publish an annual report that includes financial and non-financial information. Listed companies are required by Order of the Ministry of Finance to include in their annual reports a chapter dedicated to corporate governance, with a “comply or explain” statement (Cigna et al. 2016). The principle of equality implies that investment risk is equally shared among investors and that the rights (whether patrimonial or non-property) related to securities are non-discriminatory. That is why market manipulation and insider trading are forbidden, and in the case of threshold overruns, the public offer or, as the case may be, the withdrawal from the market of all the securities issued by the company in question are mandatory. The provisions of art. 46 of Law no. 297/2004, regarding the Investor Compensation Fund, ensure the protection of small investors. Through this fund, small investors are, to a reasonable extent, compensated for the damage they may have suffered as a result of the incorrect, incompetent or fraudulent way in which their money was used to intermediaries. However, an intermediary may be liable for securities transactions to the investor. The intermediary’s liability is, in principle, the legal regime under common law.

11.9

Future Prospects

Governmental Strategy for the Small and Medium Enterprises Sector Development and the Improvement of the Romanian Business Environment—Horizon 2020 approved by GD no. 859/2014, published in the Official Gazette on 14 October 2014, aiming at “Romania—The country with the most attractive business environment for small and medium enterprises in the region in 2020”. The directions of action mentioned are as following: (i) Support and promote entrepreneurship; (ii) SME access to adequate funding; (iii) Innovative SMEs; (iv) Access to markets and the internationalization of SMEs; and (v) Reaction of public administration to the needs of SMEs. The strategic targets by 2020 are: (a) 670,000—number of active SMEs (increase by 41.23%); (b) 36.45—number of active SMEs per 1000 inhabitants (increase by 51.50%); and (c) 3,233,000—total number of employees in active SMEs (increase by 23.23%).

11

A View on Corporate Governance in Romania: Regulation and Effects

195

The National Strategy for Competitiveness 2015–2020 adopted by Decision no. 775/2015 published in the Official Gazette on 13 October 2015, with the objective of supporting the key national sectors in the field of competitiveness. The document identifies the 10 economic sectors with a competitive potential, namely: tourism and ecotourism, textiles and leather, wood and furniture, creative industries, automotive and component industries, information and communication technology, food and beverage processing, health and pharmaceuticals, energy and environmental management, bio-economy (agriculture, forestry, fisheries, aquaculture), biopharmaceuticals and biotechnology. The objectives of the National Competitiveness Strategy are: (i) Reduce taxation; (ii) Supporting partner actions between the public and private environments; and (iii) Supporting support factors and services.

References Alexandru, S. (2017). Femeile ajunse în funcții de conducere promovează femei mai mult decât bărbații. Capital. Cărăuşu, D. N., Filip, B. F., Cigu, E., & Toderaşcu, C. (2018). Contagion of capital markets in CEE countries: Evidence from wavelet analysis. Emerging Markets Finance and Trade, 54(3), 618–641. https://doi.org/10.1080/1540496X.2017.1410129 Cigna, G. P., Kobel, Y., & Sigheartau, A. (2016). Corporate governance in transition economies Romania country report. European Bank for Reconstruction and Development. Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging Markets Review, 15, 1–33. https://doi.org/10.1016/j.ememar.2012.03.002. Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd. (1992). Cadbury Report - Report of the Committee on the Financial Aspects of Corporate Governance. Corporate Governance Code of The Bucharest Stock Exchange, 2008. (2015). http://www.bvb.ro/ Corporate Governance Code of The Bucharest Stock Exchange, 2006, 2008, 2015, on http://www. bvb.ro/. Romania: Bucharest. Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin. Council Directive 2000/78/EC of 27 November 2000 establishing a general framework for equal treatment in employment and occupation, etc. One of the most important institutions in Romania implicated in implementing the principle of equal treatment between persons is National Council for Combating Discrimination that was established by DG no. 1194/2001. Decision no. 775/2015 regarding The National Strategy for Competitiveness 2015–2020. Government Decision no. 365/2018 on National Strategy of 24 May 2018 on the Promotion of Equal Opportunities and Treatment for Women and Men and on the Prevention and Combating of Domestic Violence for the Period 2018–2021. Government Decision no. 859/2014 on Governmental Strategy for the Small and Medium Enterprises Sector Development and the Improvement of the Romanian Business Environment Horizon 2020. Hardi, P., & Buti, K. (2012). Corporate governance variables: Lessons from a holistic approach to Eastern-European practice. Corporate Governance, 12(1), 101–117. Hopt, K. (2011). Comparative corporate governance: The state of the art and international regulation. The American Journal of Comparative Law, 59(1), 1–73.

196

M. Tofan and E. Cigu

International Finance Corporation. (2013 January). Corporate governance case study: Mobinets. Retrieved from http://www.gcgf.org/wps/wcm/connect/topics_ext_content/ifc_external_corpo rate_site/corporate+governance/publications/focus_case+studies/cg+case+study+-+mobinets International Labour Organization. (2015). Women in business and management – gaining momentum, global report. Geneva: ILO. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. Kiviaho, J., Nikkinen, J., Piljak, V., & Rothovius, T. (2014). The comovement dynamics of European frontier stockmarkets. European Financial Management, 20(3), 574–595. https:// doi.org/10.1111/j.1468-036X.2012.00646.x Law no. 82/1991 on accounting, with subsequent amendments. Law no. 31/1990 regarding companies with subsequent amendments. Law no. 202/2002 on equal opportunities and treatment of women and men republished. Law no. 297/2004 on the capital market. Law no. 346/2004 on stimulating the establishment and development of small and medium-sized enterprises (SMEs), with subsequent amendments. Law no. 571/2003 on Fiscal Code replaced by Law no. 227/2015. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131–1150. https://doi.org/10.1111/j.1540-6261. 1997.tb02727.x. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2002). Investor protection and corporate valuation. Journal of Finance, 57(3), 1147–1170. https://doi.org/10.1111/1540-6261. 00457. Nakpodia, F., & Adegbite, E. (2018). Corporate governance and elites. Accounting Forum, 42(1), 17–31. https://doi.org/10.1016/j.accfor.2017.11.002 OECD. (2015). G20/OECD principles of corporate governance. Onofrei, M. (2009). Corporate governance. Bucharest: Wolters Kluwer. Regulations of the National Securities Commission (CNVM), http://www.cnvmr.ro/ Shailer, G. (2004). An introduction to corporate governance in Australia. Sydney: Pearson Education Australia. Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783. Stanciu, V., & Caratas, M. A. (2015). Which is the pulse of Romanian corporate governance? – An empirical study. Procedia Economics and Finance, 20, 586–594. Syllignakis, M. N., & Kouretas, G. P. (2011). Dynamic correlation analysis of financial contagion: Evidence from the central and eastern European markets. International Review of Economics and Finance, 20(4), 717–732. https://doi.org/10.1016/j.iref.2011.01.006. Tofan, M., Bercu, A.-M., & Cigu, E. (2015). Corporate governance framework in Romanian companies. Procedia Economics and Finance, 20, 629–636. https://doi.org/10.1016/S22125671(15)00117-3 World Bank. (2018). Doing business report. Young, M., & Peng, M. (2008). Corporate governance in emerging economies: A review of principal-principal perspective. Journal of Management Studies, 45(1). issn 0022-2380. Mihaela Tofan is full professor at “Alexandru Ioan Cuza” University of Iasi, Faculty of Economics and Business Administration, Department of Finance, Money and Public Administration and litigant lawyer. She has Ph.D. in Legal Sciences (University of Bucharest) and Hab. in Administrative Science (University Babes-Bolyai of Cluj-Napoca). She is director of the Jean Monnet Chair European Financial Regulation EUFIRE (www.EUFIRE.uaic.ro) and ERASMUS Professor at the University of Perugia, Italy (2010), Arel University Istanbul, Turkey (2012), Ca’Foscari University, Venice—Italy (2014), CDA College Larnaca—Cyprus (2016), University of Coimbra (2015), invited professor at La Sapienza University, Rome (2001), Britannia School of Business, London

11

A View on Corporate Governance in Romania: Regulation and Effects

197

(2008), Universitat Catalunya, Barcelona (2009), Universite Paris XIII (2010), University of Economics Warsaw (2010), University of Economics, Prague (2011), Universite Paris II Sorbonne (2011), University of Thesaloniki (2012), National Academy of Kiev-Mohyla (2012), University of Parma (2015), Bifrost University, Iceland (2016), University of Bologna (2017), Tel Aviv University (2018), Michigan-Flint University (2018). She is author or coauthor of 11 specialized volumes, more than 30 articles published in journals/reviews indexed in international databases. Elena Cigu has a Ph.D. in Finance and is Associate Professor at the Faculty of Economics and Business Administration of Alexandru Ioan Cuza University of Iasi, Romania. She attended more than 10 internships at international universities (Bolton, Plymouth, Parma, Madrid, Budapesta, Azores, Murcia, Larnaca, Vilnius, Rijeka). Her research activity is reflected in 7 published books (2 as author and 5 as co-author), along with over 30 articles published in journals indexed in international databases, 51 articles published in conference proceedings, and attended over 66 international conferences, as well as director and membership in the national and international research projects. Her teaching and research activities have focused so far on local public finance and public administration.

Chapter 12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis Alla Dementieva

12.1

Introduction

Russian system of corporate governance reflects the unique development path of the Russian economy. Russian corporate sector includes large number of industrial joint-stock companies, financial-industrial groups many of which have highly concentrated structural ownership. State plays a significant role in the corporate sector, acting as a shareholder and regulator at the same time. The presently corporations face significant problems, some of them due to sanctions imposed by the West in 2014, others due failure to develop business model that is competitive and innovative, thus leaving them lagging behind their international competitors. This actually led to the reduction of the number of joint stock companies of Russian ownership. The problem of forming an effective corporate sector in Russia cannot be solved just by companies. The task of the state is to create incentives for the development of the corporate sector in all parts of the economy and incentivize large effective corporate structures. The foundation for the development of the Russian corporate sector will largely be determined by the economic, political and institutional conditions that are being developed at the macro level.

A. Dementieva (*) Moscow State Institute of International Relations, Moscow, Russia © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_12

199

200

12.2

A. Dementieva

Russian Corporate Sector Before the Global Crisis of 2008

The transformation of the Russian economy, which began in the 1990s, brought the issue of creation and regulation of corporate sector to the fore. The privatization of state property led to the emergence of thousands of joint stock companies led by professional managers. At the same time, joint-stock companies were granted a fairly high degree of freedom in the implementation of corporate associations and the formation of companies and enterprises. The Russian corporate sectorincluding large industrial joint-stock companies, financial-industrial groups, holding companies and multinational entities emerged and started to function as a part of the market economy. It is necessary to highlight the main trends of this period: • State regulation of business grew; • Assets of state-owned companies also grew, increasing the share of the public sector; • The scale of business increased and its organization forms became more complex influenced by tough competition from the global market; • Foreign borrowings increased, leading to the growth of the corporate sector’s external debt. The first public company in Russia in the post-Soviet period appeared in 1996, after IPO of Vimpelkom(telecommunications, VIP) on the New York Stock Exchange (NYSE). By 2002 IPO procedures on the Russian stock exchanges RTS and MICEX started. But during this period the main companies’ strategies to attract resources in the stock market were issuance of corporate Eurobonds. In the 2000s, they were issued by about 170 companies. Russian stock markets developed after the Federal Service introduced the framework of regulation in 2006, which required 30% domestic placement for IPOs.1 Thus, 49 companies having core business in Russia went through IPO in 2006–2007. In 2006–2007 IPO’s were lead by oil and metals companies, but other sectors (banking, retail, food processing, information technology, transportation, construction, chemicals) also became active especially as medium-sized players. The 2000s marked the large increase of public offerings on foreign stock markets. The share value of shares traded on foreign exchanges, was higher than on local market. Approximately 2/3 from 80 companies went through IPO or SPO in the period up to 2008 used foreign stock exchanges.2 In IPO dominated European exchanges, mainly the London Stock Exchange. According to the Central Bank of Russia (CBR) survey, by the end of 2008 borrowings from foreign banks reached 1

The order of Federal Service for Financial Markets No. 06–5/PZ-n of 12.01.06. URL: http://base. garant.ru/12145165 2 Dolgopyatova T. Corporate governance in Russian companies: the role of globalization and crisis. Economic Issues. 2009, # 6, pp. 83–96.

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

201

Table 12.1 IPO in Russia in 2007–2008 Indicator Number of IPO Number of SPO Foreign corporations with Russian assets Total

Large corporation 7 7 3 17

Medium-sized corporations 6 7 0 13

Note: analysts of the Journal “Expert” include large Russian companies with sales of $ 1 billion in the oil and gas industry and more than $ 500 million a year in other industries (see Expert. #36(625). 15.09.2008. URL: http://www.raexpert.ru/ratings/) Source: Danilov Y. A. IPO in Russia: results of 2008: analytical report WPCMD. M., 2009. 20 p. URL: http://www.crfr.ru/files/ipo_v_russia__itogi_2008.pdf

510 billion (40% were short-term loans).3 The volume of corporate debts decreased at the beginning of 2009 by approximately 15%.4 In this period a segment of successful medium-sized firms began to take shape. These companies, having limited access to external financial resources, were characterized by greater efficiency and lower levels of debt (relative to revenues) compared to large players. Their fairly steady growth in the 2000s shows their efficiency, ability to use favorable market factors and implement new ideas. In 2006–2008 they started significant activity on the Russian stock market (see Table 12.1). Prior to the world economic crisis of 2008, the value of the Russian corporate market grew steadily every year. The cost of M&A in Russia in 2007 (in US dollars), increased by 61% compared to 2006. The number of international transactions with foreign investments, increased by 10% in 2007 and amounted to 206 transactions compared with 186 in the previous year.5 In the mid-2000s the further corporate integration had a major impact on ownership and control of corporate market. The high concentration of ownership and control became the main feature of Russian business for nearly all industries. The level of capital concentration had been growing every year. According to Standard & Poor’s survey, the controlling shareholder owned on average 58% of shares in 2007. In companies with international ownership largest stake amounted to 50%.6 The main reason for that phenomenon was the necessity to increase the value of the stock for it sale on the Russian corporate market (Korkunoff (confectionary industry), Wimm-Bill-Dann (food industry) or IPO RBC (TV channel), AFK Systema (diversified financials), Pyaterochka (food & drug store), The Seventh continent (food& drug store).

3

Data from the news agency Sbonds.ru. URL: www.cbonds.ru Dolgopyatova T. Corporate governance in Russian companies: the role of globalization and crisis. Economic Issues. 2009, #6, pp. 83–96. 5 National Report on Corporate Governance. Vol. 1. M.: NACG, 2008. 6 Portrait of the Board of Directors of Russian companies as a reflection of the concentrated ownershipstructure of companies and obstacles to the corporate governance development. Moscow: Standard & Poor’s, Service on Corporate Governance Ratings. 16.03.2007. 4

202

A. Dementieva

Table 12.2 State acquisition of controlling stakes in large companies Company with state ownership Rosneft (oil&gaz) Gazprom (oil&gaz) Rosoboronexport (airospace&defence) RAO UES of Russia (energy) Gazprombank (banking) Gazprom Rosoboronexport Gazprom

Purchase of a controlling stake Yuganskneftegaz (oil&gaz) Sibneft (renamed Gazpromneft) (oil&gaz) Autovaz (automobile) Power Machines (metal and power engineering, machinery) OMZ (engineering and production research) NOVATEK (gaz) VSMPO-AVISMA (matals) SUEK (energy)

The year of the transaction 2004 2005 2005 2005 2005–2006 2006 2006 2007

Source: National Report on Corporate Governance. Vol.3. M., 2010. p.97

The role of state grew through its support of the major investment and national projects, infrastructure programs (at the expense of the investment Fund and Vnesheconombank) and by active stimulation of demand for the procurement for public needs. This led to the orientation of the largest corporations on public resources and the acquisition for this purpose of specialized foreign assets. On the basis of the restructuring of state ownership, new joint-stock companies with state capital were formed and the assets of state-owned companies were significantly increased. Also the importance of informal business ties with the state was enhanced. During the same period, the government strengthened its control over the business by increasing its stake in a number of large companies (see Table 12.2) and by formation of special holdings to run groups of companies with state participation. 3997 joint stock companies with state ownership were registered in 2007, including 1702 companies with 100% ownership, 368 with state capital for more than 50%, and in another 181 companies state had a special right to participate in the management, so called “golden share”.7 These companies are the largest players in the market and impact the development of corporate governance in Russia. Special attention should be paid to state corporations, which by 2007 became one of the central institutions of state economic policy. State corporation is non-commercial organization, a type of legal entity in Russia introduced in 1999. Each Corporation is created by a separate Russian Federal Law and wholly owned by the Russian Federation.8 These companies in the classical sense do not belong to joint-stock companies, since their activities are regulated by a special regulatory 7

The forecast plan (program) of privatization of Federal property for 2008 and the main directions of privatization of Federal property for 2008–2010: approved by the order of the Government of the Russian Federation of 29.04.2007 #543-p. 8 Deposit Insurance Agency of Russia, Vnesheconombank, Olympstroy, Fund of Housing and Communal Services Development Cooperation, Rostec, Rosatom, Roscosmos, Rosnano (in 2011 was re-registrated as Open Joint Stock company).

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

203

framework. However, their creation had a significant impact on the development of the domestic economy and the corporate sector. The main feature of the Russian state corporations is their diversity. They have considerable resources and were established to address various economic policy issues. The expenses for the activities of the group of companies are significant and a large portion of public spending is devoted to this. For example, 760 billion rubles were allocated for financing the activities of corporations in 2007, which amounted to about 7% of the total consolidated budget.9 In some sectors of the economy, these corporations play a decisive role. For instance, Fund of Housing and Communal Services Development Cooperation is the main investor in the housing and utilities sector. These companies are characterized by a complex, often cumbersome structure. The group of companies, being fully owned by the state, is experiencing the consequences of a conflict of commercial and non-commercial interests. Despite the fact that the status of the state corporation does not provide for profit and distribution of dividends, it needs sufficient funds to refinance the activities and build a self-supporting capital structure. The subsidiaries, which in turn are commercial organizations (joint stock companies or Federal state unitary enterprises), need financing from the head company. Apart from this, there is low interest of the Corporation’s managers in its profitability, since their remuneration is not tied to the financial results of the company. During the period under review, the largest Russian international companies began to form and some of them (Gazprom (oil&gaz), LUKOIL (oil&gaz), Rosneft (oil&gaz)) were included in the Global 500 list of the “Fortune” magazine. In 2004–2005 foreign assets of the 25 largest Russian international companies increased 2.5 times and reached $59 billion. The volume of their sales to foreign buyers (including exports) reached $200 billion and at the beginning of 2008 the value of their foreign assets amounted to more than $77 billion.10 According to the Central Bank of Russia survey, during the period from 2001 to 2008 the accumulated foreign direct investment of Russian companies increased from $20 billion to more than $370 billion.11 At the same time the adoption of the Law on investments in strategic enterprises introduced restrictions for foreign investors and shareholders. However, the leading Russian companies despite their rapid growth lagged far behind the leading western companies in terms of sales (see Table 12.3), capitalization and the degree of transnationalization of operations. In 2005 foreign assets of the 25 largest Russian companies accounted for only 1.4% of the value of foreign assets of the 25 largest world companies (most are based

9

Simachev Yu. V. Creation of state corporations as an important element of institutional policy in 2007. Yu. V. Simachev, M. G. Kuzyk. Russian Economy in 2007: Trends and Prospects: Vol. 29. M.: IEPP, 2008. pp. 505–534. 10 Foreign purchases. URL: www.fd.ru/reader2.htm?id¼332 11 Bulletin Of The Bank of Russia. 2009. URL: http://www.cbr.ru/publ/main.asp?Prtid¼Vestnik& Y¼2009

204

A. Dementieva

Table 12.3 Comparative efficiency of Russian and foreign companies (2007) Industry Oil-gas

Metallurgical

Chemical

Auto

Sales billion$ 54.1 378.6

Number of employees (thousand people) 150 79.9

Russia Luxembourg Japan China

87.5 81.2 89.0 12.8 163.9 36.4 14.5

68 330 31 100 311 14 32

Brazil Russia Germany Japan

21.2 0.85 86 4.1

41 17 109 66

Russia Japan

6.8 26.9

153 14

Company Lukoil ExxonMobil Petrobras Gazprom StatoilHydro

Country Russia USA

Severstal ArcelorMittal Nippon Steel Shanghai Boasteel Group Corp Gerdau S.A. Uralkali BASF Mitsubishi Gas Chemical Autovaz Suzuki Motor

Russia Norway

Source: Kondratyev V. Corporate sector and the state in the strategy of global competitiveness. World economy and international relations. 2009, #3, pp. 24–25; the website of the Global 500. URL: www.global500.com

in the United States).12 The transnationalization index for the 25 largest Russian companies was only 25%, compared to 57% of the world’s largest TNCs and 34% of the 25 largest companies from developing countries.13 For the main inputs of this index Russian companies had the high share only in foreign sales (including exports from Russia). In comparison with the companies from developed countries the backlog in production and economic activities of Russian companies abroad looks significant. For example, the “LUKOIL” company in 2008 extracted abroad only 6% of oil, “Gazprom”—0.2%, and Exxon Mobil, BP, RoyalDutchShell—82.7%, 82.1% and 70.5%, respectively.14 Besides, foreign assets of large Russian companies are characterized by low efficiency and frequent acquisitions of dubious enterprises. For example, in 2008 12

Bereznoy A. Transnationalization of Russian business. World Economy and International Relations. 2008, #11, pp. 32–43. 13 World investment report 2006: FDI from developing countries and countries with economies in transition: implications for development. UNCTAD. New York, Geneva, 2006. 372 p. URL: http:// unctad.org/en/Docs/wir2006_en.pdf 14 World investment report 2007: transnational corporations, extractive industries and development. New York, Geneva: UNP, 2007. 323 p. URL: http://unctad.org/en/docs/wir2007_en.pdf

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

205

Severstal bought a number of plants in the USA (Esmark for $1.24 billion) and WCI Steel for $140 billion.). Percentage of foreign assets reached 60%, but the plants had a significant debt burden and were not profitable.15 Therefore, these foreign enterprises had to be supported by Russian divisions. The low competitiveness of Russian companies was also due to the low labor productivity and technological sophistication. As can be seen from Table 12.3, though Gazprom has large labor force, it lags behind the ExxonMobil and the Norwegian company StatoilHydro. Similar situation can be found in the other industries. There were almost no high-tech companies in the structure of the Russian corporate sector. According to the survey of the Organization for Economic Cooperation and Development in 2007 there were only 7 companies (out of 56 domestic technological companies) which accounted for 3% of the total corporate capitalization of this industry. Most of the companies were from metallurgical and metalworking industries, that accounted for 50% of all companies in technological sectors and about 80% of capitalization.16 Thus, the development of the Russian corporate sector during this period was characterized by a significant lag from developed countries in business efficiency and innovation. The rapid expansion of the business was accompanied by the complexity in its organization and, as a result, by decrease in efficiency and manageability for owners.

12.3

2008 World Economic Crisis

The world economic crisis of 2008 dramatically affected the Russian economy. In September–October of that year, amid the collapse of Russian stock prices, serious problems arose in the banking sector. A massive outflow of capital began, and the government was forced to devalue the ruble. Foreign direct investment declined from 4.2% of GDP in 2007 to 3.0% in 2009 and 2.8% in 2010.17 In less than six months, the Central Bank of Russia had to infuse $200 billion to support the currency.18 The economic crisis led to significant decline in M&As. In 2008 the M&As represented about 7% of Russian GDP (from 10% in 2007). From May 2008 to 15 Spivakov D. Hero of both hemispheres. D. Spivakov, A. Gorbunov. Expert. #21(610). 26.05.2008. URL: http://expert.ru/expert/2008/21/geroi_oboih_polushariy/ 16 OECD Science, Technology and Industry Scoreboard 2007:Innovation and Performance in the Global Economy. Paris: OECD, 2007, 228 p. 17 Analysis of the corporate governance infrastructure in Russia: will the desire to reform corporate governance continue and will it bear fruit? O. Shvyrkov, E. Marushkevich; Standard&Poor’s Country Governance Study. May 26, 2011 p. 14. 18 Yakovlev A. the Russian Corporation: patterns of behavior under of crisis. A. Yakovlev, Y. Simachev, Daniel F. Economic Issues. 2009, #. 6, pp. 70–82.

206

A. Dementieva

February 2009 the capitalization of the Russian stock market decreased four times— from 1.5 trillion to $370 billion.19 The maintrend was the substitution of private capital by state capital. A distinctive feature of the crisis was the active participation of the state and its under-controlled economic entities in the process of re-distribution of ownership. Anti-crisis measures to support the corporate sector included the following20: • state loans to major Russian companies and banks for servicing foreign loans (Rosneft(oil&gaz), RUSAL (metals), VimpelCom (telecommunications), Evraz (metals)); • direct intervention of the state on the stock market by allocation of funds from the National Welfare Fund for the acquisition of shares of Russian companies which amounted to 350 billion rubles($12.7 bln); • acquisition of preferred shares and convertible bonds new issues from issuers which were of state interest. Thus, the state had further strengthened its role in the economy by allocating its fundsto increase its share in the corporate sector. At that time, the laws of the Russian government aimed to elevate the crisis, but corporate governance problems of strategic and global nature were not adequately addressed. The enforcement of legislative norms was not effective and functional. The control was effectively exercised over a rather narrow range of the largest companies, despite the fact that by the beginning of 2010 there were 196,000 joint stock companies in Russia (of which more than 300 public joint stock companies)21 and 3.2 million limited liability companies.22 Measures of industrial policy during this period were focused on helping large companies and banks. The result was inefficiency of administrative regulation in overcoming the crisis asperceived bybusiness. During the world economic crisis, Russia suffered the greatest losses among the BRICS countries.23 Most of the government’s anti-crisis measures were aimed at compensating the losses of large companies in the system-forming sectors of the economy (such as the auto, mechanical engineering, military, agriculture, housing). At the same time, there was a shortage of measures and resources to stimulate innovation and technological modernization, support high-tech industries and develop a competitive environment. There were no measures to improve the efficiency of natural monopolies, no support for medium-sized companies for further development and entry into new markets.

19 Radygin A. Russian market of mergers and acquisitions: stages, features, prospects. Economic Issues. 2009, #10, pp. 14–27. 20 Radygin A. Russian market of mergers and acquisitions: stages, features, prospects. Economic Issues. 2009, #10, pp. 14–27. 21 Information transparency study of Russian companies in 2010: moderate growth of transparency at the expense of electric power sector companies. Standard & Poor’s;—November 19, 2010, 26 p. 22 National Report on Corporate Governance: Vol. 3. M., 2010. 312 p. 23 National Report on Corporate Governance: Vol. 3. M., 2010. 312 p.

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

207

They faced the uncertainty of the external environment and were forced to limit their activities. These factors aggravated the crisis in the Russian economy. Despite the fact that the companies experienced serious problems and lack of financial resources, the pre-crisis high level of ownership concentration did not change. According to the Standard & Poor’s survey of the 90 largest Russian joint-stock companies,24 54 companies had major shareholders, 24 companies had one or several blocking shareholders (owners of more than 25% of voting shares). Only 12 companies had dispersed ownership structure, but even in these cases there could be hidden consolidated packages and shareholder agreements that actually served as a source of implicit consolidated influence. The high concentration of ownership was accompanied by “insider” control of the major shareholder (or group of owners), the level of which was usually higher than the concentration of ownership. The boards of directors in such companies usually represented the interests of majority shareholders and managed the business in their interests. During the crisis the number of joint stock companies controlled by the state increased from 46 to 51. In nine companies the state owned large blocking stakes (give the list). Since the state-owned companies were among the largest, their market value was 54% of the total market capitalization of 90 companies.25 In 2007–2010 several state-owned companies carried out an additional public offering. But in most cases (with the exception of some subsidiaries of RAO UESof Russia (energy) this did not lead to the transition of control to private investors. In practice, these IPOs helped to increase state participation in the economy, as they allowed state-owned companies to expand the scope. The world economic crisis certainly adjusted the functioning of the corporate sector. In Russia public offerings disappeared. The role of state grew and impacted further re-distribution of ownership.

12.4

Russian Corporations After the World Economic Crisis

The recovery which began in 2010 contributed to the revival of the stock market (see Fig. 12.1) and many Russian companies returned to the IPO plans. Seven Russian companies held IPOs on the domestic market and attracted $1.1 bn. At the same

24

Information transparency study of Russian companies in 2010: moderate growth of transparency at the expense of electric power sector companies. Standard & Poor’s;—November 19, 2010, 26 p. 25 Information transparency study of Russian companies in 2010: moderate growth of transparency at the expense of electric power sector companies. Standard & Poor’s;—November 19, 2010, 26 p.

208

A. Dementieva

Fig. 12.1 The volume of financial resources through public offerings and the number of offerings (2004–2010). Source: Novik I. V. Russian joint-stock companies: profile and development. I. V. Novik. Сorporate Finance Management—2011, #2, p. 114

time, five Russian companies held international IPOs on $4.3 bn. The biggest one was Rusal (metals) IPO, held in Hong Kong, resulting in $2.2 bn.26 The 26 offerings in 2010 was the number as in 2007 on the Russian market of IPO/SPO/PO, and volume more than 6.7 billion dollars was significantly lower. There was a lot of small-size offerings at the same period. In 2010, the Russian market M&A grew by 27% to about $52.09 billion against $41 billion in 2009. But still the market lagged behind by about 25–30% the results of 2007.27 The main source of growth of the Russian market of mergers and acquisitions were large cross-border transactions which amounted to $24.6 billion (about 44% of the Russian M&A market). At the same time 93% of the total volume of Russian assets acquisition by foreign companies fell on three major transactions. The share of acquisitions of foreign assets by Russian companies was 14.8% of volume and 25.2% of the number of transactions.28 In 2011 activity of M&A among medium-sized companies increased. However, the interest of foreign investors in Russian assets continued to be relatively low. According to the HSE survey in this period foreign investors owned in the industrial sector about 4% of the shares of public companies and in the telecommunications sector—22%.29 Foreign shareholders were presented more

26

Novikov A. S. Hong Kong Stock Exchange—the gateway to the treasures of the Celestial Empire. Economics. 2010, Vol. 66, №5, pp. 198–212. 27 Public offerings in Russia: with the hope of growth. Public and Private share offerings. Offerings. ru; ReDeal. URL: http://www.offerings.ru/market/placement/review/review_34.html 28 Results of the M&A market 2010—The threshold of $ 70 billion could not be achieved. AK&M. URL: http://akm.ru/eng/ma/stat/2010/12.htm 29 Anikanov S. I. The Russian M&A market in 2010. S.I. Anikanov, A.S. Matyushin. URL: http:// www.fbk.ru/upload/contents/561/Mergers_and_aguisitons_2010d.pdf

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

209

often in business groups, holdings and in large public companies with shares and bonds on stock exchanges.30 The most important trend in the development of large corporate structures was the formation of holding companies as a special type of integrated economic structures. At present most domestic industrial companies are part of holding structures, and almost all major Russian companies are organized as holdings, which play a significant role in the Russian economy. However, the Russian corporate legislation does not sufficiently address the regulation of holding structures (determination of interconnection of companies, introduction of the institution of a consolidated taxpayer, etc). As a result, holding relations remain non-transparent both for investors and for the State, which significantly reduces their efficiency and investment attractiveness. The number of official financial industrial groups was reduced during this period both by voluntary decision of the founders and by the initiative of the Government of the Russian Federation. The industrial policy of the State, effective incentives for the concentration of industrial and banking capital, the instability of the relevant legislation determines the current situation in this field. Portion of the major corporations in Russia represents ‘family’ companies, when families own and manage the business. It is difficult to carry out the detailed study of such companies in Russia due to their low degree of transparency. The periodical “Finance” presented some data as of 2010: 122 people were included the list (69 of them were in the list of 500 richest people in Russia). The total wealth of the 50 largest families amounted to $42.4 billion. The first ten in the list was 17.6 times richer than the last one.31 The world economic crisis revealed serious problems in the Government sector, primarily, related to inefficient management, which exacerbated the need for privatization. At the same time, the State continued to pursue the policy of control over the business by indirect instruments: the support of banks, strategic enterprises, statecontrolled holdings, by nationalization of problematic assets and increasing the business activity of the state corporations (for example, Rostekhnologii (Airspace&Defend) introduced pharmaceutical branch). The costs of supporting these companies were significant. For example, in 2010 146 billion rubles were allocated for financing the State corporation “Rosnano”(diversified financials),32 for the programs related major repairs of infrastructure in 2011—about of 282.5 billion rubles.33 With a huge amount of debt of state corporations (e.g. at the beginning of

30 Dolgopyatova T. Corporate Governance in Russian Companies: the Role of Globalization and Crisis. Issues of Economics. 2009, № 6, pp. 83–96. 31 Shkolin A. “At home”. The largest family businesses. Finans. 05/23/2011, № 17, pp. 8–12. 32 We create innovative businesses. Annual report for 2010 of GC “Rosnano”. URL: http://rusnano. com/Document.aspx/Download/31669 33 Housing Fund again squandered, but does not sit down. Gazeta.ru. URL: http://www.gazeta.ru/ business/2011/09/30/3786702.shtml

210

A. Dementieva

2009 the debt of the Corporation “Rostekhnologii” amounted to 600 billion rubles34) the first task was to take them out of the crisis. The state-owned companies required funds State did not have. Russia launched its privatization plan and related modernization plan at the end of 2009.35 The state privatization plan for the 2010–2013 was approved and launched in 2010 and in 2013 it was further expanded. The far-reaching strategy to modernize and expand the state companies while attracting massive investments was one of the central objectives. The modernization program was launched to update and expand strategic sectors of the economy: energy, military, space, information technology, telecommunications, transit and nanotechnology. Six largest companies were being considered for privatization, namely national airline Aeroflot, shipping company Sovkomflot, banking group VTB, train and infrastructure company Russian Railways, and oil and gas giants Rosneft and Bashneft. Privatization of companies through corporatization and sale of stakes of the assets from state to private investors allows business to focus on market value and profitability, attract additional funds from commercial structures in the form of bonds and additional issue of stock. It becomes possible to use the potential of foreign partners and investors, the mechanism of mutual participation in the authorized capital with the most attractive foreign companies. This could promote the exchange of technologies, create joint ventures and develop common projects. Privatization leads to the creation of an even larger number of joint-stock companies, the competitiveness of which to the greatest extent will be determined by the efficiency of the corporate governance system. But privatization plans were mooted and repeatedly stalled as a result of State’s unwillingness to give away control over its strategic assets. As for large Russian multinational companies, despite the state measures to support them, they continued to be of low efficiency compared to their competitors in foreign markets, including developing countries. In the 2014 list Global 2000 of the American magazine “Forbes”, the number of Russian companies was 28 (in 2011–2026)36—this is much less than the number of companies from other BRICS countries or developed countries. Russian companies are experiencing huge investment needs due to the significant level of depreciation of fixed assets, as well as the predominance of capital-intensive industries in the structure of the economy. During the period of 2010–2014 30 IPOs on Russian and foreign stock markets were carried out. In the period 2005–2014 the highest number IPOs/SPOs was by the Metals and Mining industry (15), Oil and Gas (14), and financial companies (14). Actually a limited number of Russian companies issued domestic stock, most of the Sunnary of the speech of the General Director of the State Corporation “Rostechnologii” within the “government hour” in the State Duma of the Russian Federation on February 25, 2009. URL: http://www.roe.ru/news/pr_rel/pr_rel_eng/pr_rus_09_ 35 Privatization of federal property. Ministry of Economic Development. URL: http://www.econ omy.gov.ru/minec/activity/sections/govproperty/index 36 A Regional Look At The Forbes Global 2000. URL: http://www.forbes.com/sites/scottdecarlo/ 2011/04/20/a-regional-look-at-the-forbes-global-2000-2/ 34

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

211

Table 12.4 Top Russian joint stock companies 2014 Issuer Gazprom Rosneftgaz Lukoil oil company Novatek Norilsk Nikel Sberbank Magnit VTB Group Surgutnaftegaz Gazpromneft Total: Total capitalization MOEX

Capitalization (bln.rub.) 3112.6 2071.4 1886.1 1323.8 1291.6 1163.8 931.8 856.0 850.6 668.0 14,155.8 23,155.6

Share in total capitalization (%) 13.4 8.9 8.1 5.7 5.6 5.0 4.0 3.7 3.7 2.9 61.1 100.0

Source: Moscow Exchange http://moex.com/s1606

companies were listed on the London Stock Exchange (67).37 Turnover of Russian shares on foreign exchanges in 2012–2014 reached 48% of the total turnover (as in the form of depositary receipts as well as shares of de facto Russian companies registered in foreign jurisdictions).38 The development of the Russian economy enabled the creation and development of the corporate sector: private joint-stock companies, including family business, private companies with foreign shareholders, private-state companies and state corporations. According to the National Association of Stock Market the number of public companies in Russia at the beginning of 2014 reached 313,405, but only less than 2%, namely 557 were presented on the stock exchanges,39 and this figure remained virtually unchanged over the last 10 years. They were mainly (more than half) from oil and gas industry. 63% of the Russian domestic stock market capitalization came from only ten most capitalized issuers (see Table 12.4). After the world economic crisis of 2008 new trends emerged: the role of state grew and impacted further re-distribution of ownership. The recovery which began in 2010 showed the ‘Russian way’ of corporate stabilization. The key features of the Russian corporations is the dominant role of the state as a regulator and entrepreneur, high concentration of ownership and control and the fairly marginal relevance of external market mechanisms were shaped even more.

37

PWC Survey of IPO of Russian Companies 2005–2014. URL.: www.pwc.ru/ru/capital-markets Russian Stock Market: 2014. Events and Facts. M.:National Association of Stock Market 2015, p.10 39 Russian Stock Market: the first half of 2014. Events and Facts. M.:National Association of Stock Market 2014, p.7 38

212

12.5

A. Dementieva

Current State of Russian Corporate Sector

Sanctions imposed by western countries in 2014 and instability of the oil market have restrained Russian companies from entering the stock exchanges. A number of companies left the stock markets, others chose to postpone their IPOs. The difficult financial situation of Russian issuers in 2014 contributed to the departure of a number of listed companies from foreign exchanges. So, on the London Stock Exchange, Russian development companies Gals Development and Rose Group delisted.40 But despite the difficult economic and political situation, several Russian companies managed to attract capital. In 2015, successful IPOs were conducted by OVK (the leading Russian manufacturer of freight cars), Moscow Credit Bank, TNS Energo. In total, for the period 2014–2015, 14 IPO/SPO offerings were made on the Moscow Stock Exchange, which indicates that investor interest in Russian assets remained.41 However, the level of capitalization of Russian companies in 2014 declined by half (to $517 billion) compared with 2013, which turned out to be less than the capitalization of the world’s largest company Apple Inc. ($724.7 billion).42 In 2014 there was an active withdrawal of foreign capital from the Russian market and crisis phenomena manifested in the Russian economy, which was reflected in the stock market—IPO volumes were declining in 2014–2015 by 70.4% and 46.4%, respectively.43 2016 was characterized by an increase in IPO by 47.1%, but the volume of transactions amounted to only 1.76% of 2007. In 2017, the growth of attracted funds through IPO amounted to 162.4%, though compared to 2007 the volume of transactions amounted to only 4%, but still there was a clear upward trend in the IPO market of Russian companies.44 According to the National Association of Stock Market Participants, the number of public joint-stock companies in 2016 compared to 2015 decreased by almost 15% (from 26,870 to 23,041).45 Of these, less than 1% was represented on stock exchanges. Moreover, the number of issuers of shares represented on the Russian stock market decreased from 254 in 2015 to 246 companies in 2016.46 IPO of Russian issuers in 2016 and in 2017 were represented by four companies each year (Moscow Exchange). Most successful placements were made by Russneft

40

Gerashchenko E. The state developers fell out of love with London. Kommersant, November 21, 2014. 41 The data of the Moscow exchange http://www.ifru.ru/workdir/files/File/25_11_2015/2.pdf 42 Rating FT Global 5002015. 43 Database IPO / SPO [Electronic resource]. Access mode: http://www.preqveca.ru/placements/ (circulation date 05.01.2018). 44 E.V., Krutko V.V., Mankov V.V. Analysis of the public offering of shares in Russian companies. Young scientist. 2018, №4, pp. 100–104. URL https://moluch.ru/archive/190/48003/ (appeal date: 10/15/2018). 45 “Russian stock market first half of 2016: events and facts”, URL https://www.naufor.rг, p. 9. 46 “Russian stock market first half of 2016: events and facts”, URL https://www.naufor.rг, p. 9

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

213

Table 12.5 Top Russian joint stock companies 2018 Issuer Sberbank Rosneft Lukoil Gazprom Novatek Norilsk Nikel Tatneft Gazprom Neft Surgutnaftegaz NLMK Total Total capitalization ME

Capitalization (bln.rub) 76.4 65.9 57.9 52.5 41.2 28.2 24.1 24.0 19.9 14.4 404.4 615.8

Share in total capitalization (%) 12.4 10.7 9.4 8.5 6.7 4.6 3.9 3.9 3.2 2.3 65.7 100.0

Source: Moscow Exchange http://moex.com/s1606

(oil&gas industry, capitalization of $2.7 billion) and “Future” (financial group, capitalization of $981 million).47 However, the number of public joint-stock companies continued to decline reaching 15,843 in 2018. The number of issuers of shares represented on the organized domestic market from 2017 to June 2018 also decreased from 230 to 225 companies. The share of the ten most capitalized issuers compared to the previous year grew by almost 5 to 65.7%48(see Table 12.5). More than a half of the market is occupied by the companies in the oil and gas industry. Seven out of ten most capitalized companies represent the oil and gas sector (Rosneft, Lukoil, Gazprom, Novatek, Tatneft, Gazprom Neft, Surgutnaftegaz). The rest are represented one bank (Sberbank), two metallurgical companies (Norilsk Nikel, NLMK) (see Table 12.5). In the leading European economies, the share of capitalization of a similar number of top corporations on average does not exceed 30% (about 20% in Germany, about 30% in France). On the Russian market half of the exchange trade turnover remains with the three state companies Rosneft (oil and gas), Gazprom (oil and gas) and Sberbank of Russia and two private ones—Novatek (gas production, gas processing), Lukoil (oil and gas), and the list of the most liquid issuers does not change. 2018 list of the 2000 largest public companies in the world by the American magazine Forbes included 25 Russian companies (down 5 from 2013), which is significantly less than the number of companies from other developed and BRICS countries. In the 2018 Fortune Global 500 Russia also lags behind these countries (see Table 12.6).

47 48

RIA Rating http://riarating.ru/corporate_sector/20170131/630054698.html “Russian stock market first half of 2018: events and facts”. URL https://www.naufor.r p. 1

214 Table 12.6 The number of companies from different countries included in the lists of Forbes and Fortune magazines (2018)

A. Dementieva

Country USA Japan China India Germany Russia

Number of companies Forbes 560 229 291 58 54 25

Fortune 126 52 120 7 20 4

Sources: A Regional Look At The Forbes Global 2000. Forbes. com. URL:https://www.forbes.com/global2000/list/ CNNMoney. URL:http://beta.fortune.com/global500/

In 2016, the capitalization of the Russian corporate sector began to rise. This was facilitated by the strengthening of the ruble, the growing attractiveness of Russian securities and the positive financial performance of many Russian companies. According to the RIA Rating agency, the capitalization of the 100 largest companies increased by 58% (by 233 billion dollars). The leader in terms of capitalization was Rosneft, the capitalization of which increased by 90% compared with 2015.In the first half of 2018 this trend continued, and the capitalization of the Russian corporate sector increased by 18.8% compared to a year earlier and reached 38.9 trillion rubles. The upward trend was also demonstrated by the volume of transactions with shares in the domestic exchange market (excluding initial offerings). At the beginning of 2018 it increased by 20.1% to 5.5 trillion rubles from the previous period.49 There are positive changes in the dividend policy of Russian companies. In the last decade, for large companies, the payment of real dividends to shareholders had become the rule. The number of companies making the dividend policy more open and predictable for investors is increasing. Practically all Russian corporations in the dividend practice use the method of setting the maximum dividend level relative to the company’s net profit, usually at 5–10%.50 The impetus to these changes was the amendments to the shareholder legislation adopted in 2010, which established a mandatory single period of dividend payments. The most important trend in the development of large Russian corporate structures is the formation of holding companies as a special type of integrated economic structures. Currently, the majority of domestic industrial companies are part of holding structures, and almost all the largest Russian companies are organized as holding companies and play a significant role in the development of the economy. A persistent distinctive feature of Russian joint-stock companies is an excessively high concentration of ownership, and in most companies the level of ownership concentration is so high that the owner performs all management functions, including operational activities. The high transaction costs on the Russian capital market lead to the fact that the ownership structure changes slowly, only an insignificant

49 50

“Russian stock market first half of 2018: events and facts”. URL https://www.naufor.r p.7. National Report on Corporate Governance: Vol. 10. M., 2018.

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

215

share of Russian companies securities is quoted in the stock market. IPO for Russian companies is a tool to increase market capitalization. Additional issues of securities intended to attract investments in business do not lead to significant changes in the ownership structure. The plan for the privatization of state property was adopted and gradually began to be implemented. Privatization of state-owned companies through the incorporation and sale of shares to private investors will allow them to focus on capitalization and profitability, to expand the possibilities for attracting additional funds from commercial structures in the form of bond loans and an additional issue of shares. It will be possible to use the potential of foreign partners, the mechanism of mutual participation in authorized capitals with the most attractive foreign companies, which will allow exchange of technical knowledge, create joint ventures and develop common projects. The largest transaction carried out at the end of 2016 on the sale of shares of state-owned companies was the sale of 19.5% stake in Rosneft to Qatari sovereign wealth fund QIA and Swiss trader Glencore for 10.5 billion euros.51 Currently, at the state level, active work is underway to develop policies aimed at creating an innovative, socially oriented model for the development of the Russian economy, which will be based on an efficient corporate sector. Creating an innovative economy for Russia is a priority, so to solve it requires active cooperation of the state, scientific and educational institutions, the commercial and banking sectors. In organizing innovation activity and its financing in Russia, the largest domestic corporations that are interested in implementing innovation projects and using the results of scientific research, creating and producing competitive high-tech products should play an important role. The main issue that needs to be taken into account is the degree of state participation in corporate governance, which will depend on the effectiveness of the of privatization programs, economic and political conditions, as well as on the degree of diversification of the Russian economy. Provided that the state pursues a policy to stimulate competition, it will be able to implement a program to privatize state property and establish an effective system of market incentives. Companies struggling for the necessary financial resources will need to create an effective corporate governance system with a high level of business transparency. The problem of increasing the efficiency of the corporate sector in Russia cannot be solved at the company level. This is a problem of all stakeholders, primarily those acting on the part of the state, who must realize the difference between their own short-term interests and long-term priorities for increasing the competitiveness of Russian companies and the country as a whole.

51

Financial Times 12/08/2016. URL: https://www.ft.com/content/2700b2aa-bcb3-11e6-8b45b8b81dd5d080

216

12.6

A. Dementieva

Conclusion

The Russian corporate sector is gradually beginning to draw positive lessons from the crisis. However, there are still a lot of unresolved problems. First of all, the need to diversify the Russian economy, implement the import substitution program, reduce the burden on the public sector, complete the privatization program, improve the efficiency of private finance management, improve financial institutions, create equal competitive conditions for public and private companies, strengthen the private corporate sector, which will not only reduce the impact of sanctions on the Russian economy, but also increase its competitiveness in the global market. The development of the Russian economy and the system of regulation of the corporate sector led to the formation of Russian corporations, characterized by the following features: • high level of concentration of ownership and control; • a large share in the corporate sector of state-owned companies and companies with state participation; • high level of corporate integration and major role of integrated business groups in the Russian economy; • low efficiency of foreign assets of the largest companies; • personal management of the company-owner; • the decisive value of informal relationships in business. The formation and development of the corporate sector in any economy opens up broad opportunities: attracts financial capital and concentrates intellectual capital. It allows state to solve complex scientific, technical, economic and social problems. As international experience shows, the spread of the corporate form of entrepreneurship depends primarily on favorable institutional conditions, and therefore the mechanism for regulating joint-stock companies in Russia should be continually improved.

References A Regional Look At The Forbes Global 2000. Forbes. Retrieved October 11, 2018, from http:// www.forbes.com/sites/scottdecarlo/2015/04/20/a-regional-look-at-the-forbes-global-2000-2 Dementieva, A. G. (2014). Decision making in global business. Moscow: Magister Publishing House. Dolgopyatova, T. (2009). Corporate governance in Russian companies: The role of globalization and crisis. Voprosy Ekonomiki, 6, 83–96. FT Global 500 2018 rating. CNN Money. Retrieved October 10, 2018, from http://www.money.cnn. com/magazines/fortune/global500/2015full_list/ Gerashchenko, E. (2014). The state developers fell out of love with London, Kommersant., November 21. Litvinova, A. (2011). Experts criticize the Strategy for the Innovative Development of Russia until 2020. RBC Daily. Retrieved October 12, 2015, from http://www.rbcdaily.ru/2011/01/11/focus/ 562949979523546/ Moscow Exchange Data. (2018, October 10). Retrieved August 12, 2015, from http://www.ifru.ru/ workdir/files/File/25_11_2015/2.pdf

12

Corporate Sector in Russia: What Happened and What Is Ahead Analysis

217

National Corporate Governance Report. (2018). Vol. 10. Moscow, NSCU. Novik, I. V. (2011). Russian public companies: profile and development. Corporate Finance Management, 2, 111–116. Novikov, A. S. (2010). Hong Kong Stock Exchange - Gateway to the Treasures of the Middle Kingdom. Economic Sciences, 66(5), 198–212. On approval of the Regulation on the issuance by the Federal Service for Financial Markets of a permit to place and (or) issue securities of Russian issuers outside the Russian Federation: Order of the Federal Service for Financial Markets № 06–5 / pz-n of 12.01.06. Retrieved June 12, 2015, from http://base.garant.ru/12145165 Portrait of the Board of Directors of Russian companies as a reflection of the concentrated ownership structure of companies and obstacles to the development of corporate governance. 2007. Moscow, Standard & Poor’s, Corporate Governance Rating Service. 16.03. Privatization of federal property. Ministry of Economic Development. Retrieved October 09, 2018, from http://www.economy.gov.ru/minec/activity/sections/govproperty/index Public offerings in Russia: with the hope of growth. Public and private offerings of shares/ Offerings.ru; Redeal. Retrieved July 10, 2018, from http://www.offerings.ru/market/place ment/review/review_34.html PWC. IPO review of Russian companies for 2005–2014. Retrieved August 12, 2015, from www. pwc.ru/ru/capital-markets Radygin, A. (2009). The Russian market of mergers and acquisitions: stages, features, prospects. Questions of Economy, 10, 14–27. Russian stock market in 2016: events and facts. 2017, NAUFOR. Retrieved from http://www. naufor.ru/download/pdf/factbook/ru/RFR2016.pdf Russian stock market in 2018: events and facts. 2018, NAUFOR. Retrieved from http://www. naufor.ru/download/pdf/factbook/ru/RFR2018.pdf

Alla Dementieva is Full Professor at the Department of Management, Marketing and International Economics, MGIMO University, Moscow, Russia and leading russian scholar in corporate governance, as well as award winning educator in her field. She is visiting professor at the Joint Master Program of MGIMO University and University of St.Anrew’s (UK), the Hautes Études Commerciales (HEC) School (France, Paris), MIEX Master’s Program “Master in Management/ Master in International Executive Management”, Russian Academy of International Trade and a number of other Management Programs at various prestigious Moscow universities. Dr. Dementieva is a highly sought lecturer for professional development management programs for top Russian corporations, including RosNeft, Russian Grids, TransNeft, Rostec. She has been Editor in Chief of the “Corporate Finance” journal by Publishing House “Grebennikov” for almost 10 years. Dr. Dementieva is sitting on the Board of Directors of several Russian corporations.

Chapter 13

Development of Corporate Governance in Ukraine: Legislation and Practices Iryna Kytsyuk

13.1

Introduction

One of the main factors influencing on the company’s successful activities is the possibility of its access to investment resources. At the same time, the company will not be able to rely on investor confidence and external financing if it does not take steps to introduce effective corporate governance, namely, the proper protection of investors’ rights, reliable governance and control mechanisms, openness and transparency in their activities. Corporate governance is a system of relations between the company’s bodies, shareholders and other stakeholders. It is one of the key elements of the company’s growing, investors’ confidence increasing. Corporate governance defines the tasks of the company, the ways of carrying out appropriate tasks, and the monitoring of the company’s activities. The availability of an effective corporate governance system increases the cost of capital; the companies are encouraged to make more efficient use of resources, which creates a base for growth (NSSMC 2014). In Ukraine, most of companies chose the joint-stock legal structure, therefore the implementation of the best corporate governance standards by them is of great importance for the national investment attractiveness (NSSMCa 2018). Nowadays, on a global scale, there is a process of fundamental reform of corporate governance and, in particular, corporate law. The main vector in the implementation of reforms is reducing the regulatory burden on companies, creating the most favorable environment for them. The improvement of corporate governance at the national level has become an important direction of efforts of many countries. One of the tools used to achieve the

I. Kytsyuk (*) Department of International Economic Relations and the Project Management, Lesya Ukrainka Eastern European National University, Lutsk, Ukraine © Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_13

219

220

I. Kytsyuk

goal mentioned above is the introduction of national corporate governance principles (codes) (NSSMC 2014). The most priority direction in the area of corporate governance is the implementation of measures for fulfill the commitments undertaken by Ukraine in accordance with the Association Agreement between Ukraine and the European Union. The National Securities and Stock Market Commission is taking measures for implementation of an European Union legal acts provisions in the field of corporate governance and financial services into the national legislation, as it is provided for under the Agreement.

13.2

Preconditions and Main Stages of Corporate Governance Development

In transition economies, corporate governance began to form with the appearance of the first joint stock companies. The methods of privatization in these countries had a decisive influence on the formation of the share capital structure, which, in turn, together with the existing imperfect institutional environment, has affected the quality of corporate governance (Yemelyanova 2009: 32). According to privatization methods, CEE countries and post-Soviet countries are divided into two main groups (Mordacq 2001: 385–386): 1. the countries that carried out a rapid mass privatization (Czech Republic, Slovakia, Slovenia, Latvia, Lithuania, Romania, as well as Ukraine); 2. the countries in which privatization was conducted more gradually. In the first case, ownership rights were distributed among the population through voucher schemes at the low or symbolic prices or were redeemed by representatives of enterprises. The stock market of these countries was characterized by high volatility and was exposed to financial crises (Mordacq 2001: 3). As a result, companies in these countries eventually have gotten into property mainly to insiders-managers, dispersed workers shareholders and outsiders. In many cases, the state saved a significant share of ownership (Yemelyanova 2009: 33). That’s why the corporate governance systems in the vast majority of CEE countries are far from ideal. The joint stock companies of these countries are controlled mainly by internal owners (insiders), and protection of investors’ interests is quite limited (Yemelyanova 2009: 32). In the second case, privatization has been more gradual and has followed simultaneously several mechanisms: the sale of shares to managers and employees, the sale to strategic investors, as well as public offering. These countries include, in particular, Poland and Hungary. Such a process has allowed a coherent construction of the centralized stock market in these countries, which has acquired gradually the appropriate technical tools necessary to function properly. The number of shares listed on the Polish and Hungarian markets at the initial stage was rather limited.

13

Development of Corporate Governance in Ukraine: Legislation and Practices

221

Compartments with more flexible listing requirements were created on stock exchanges of these countries somewhat later (Mordacq 2001: 386). We believe that the relevant achievements are due to the favorable initial method of privatization (corporatization), as well as it is direct indication of the desire of these countries to maximally approximate the quality of corporate governance to the standards of the EU developed countries Ukraine has undergone a difficult path of formation of the corporate sector of the economy, which, unfortunately, has not became an example of qualitative reforms and results. Conduct of radical economic reforms since the early 90’s of the XXth century did not lead to the introduction of a progressive and balanced model of socio-economic development. Market institutes that are operating effectively in the Western countries has proven to be ineffective in terms of Ukrainian conditions, and old inefficient economic institutes has adapted to new behind-the-scenes private interests (Redzyuk 2019). In Ukraine economic partnerships came up as a result of the great state privatization, which was carried out through the establishment of joint-stock companies based on state-owned enterprises. The process of corporate governance development in Ukraine can be divided into several stages. During the first period (1991–1993), it was adopted the basic laws related to corporate governance, in particular the Law of Ukraine “On Enterprises in Ukraine” No. 887-XII dated 27 March 1991 [the law have lost of force on the basis of the Economic Code of Ukraine No. 435-IV dated 16 January 2003 (The Economic Code 2003)] and the Law of Ukraine “On Business Companies” No. 1576-XII dated 19 September 1991 (The Law 1991). This period is characterised by the formation of an entrepreneurial environment, mainly through the creation of small-sized entrepreneurial structures (Frolova 2012). The second period (1993–1997) is the period of mass privatization in Ukraine which was aimed at forming not only the corporate sector, but also the stock market and its infrastructure. The privatization of large and medium-sized state-owned enterprises was carried out mainly through the sale of shares of open joint-stock companies, created on the basis of the property of these objects. The main participants of the corporatization were employees of enterprises and their management, which used significant priorities during the purchase of shares. At the same time, the insufficient development of the stock market and stock infrastructure, the lack of mechanisms for control by the state and shareholders, and the lack of an effective disclosure system by joint stock companies did not create an institutional basis for the effective development of the system of protection of shareholders’ rights (Frolova 2012). The third period (1997–2007) is characterised by the following features (Frolova 2012): • active sale by the state of large blocks of shares of large enterprises; • concentration of ownership through active buying up of shares in the population, strengthening the struggle for control over joint stock companies;

222

I. Kytsyuk

• appearance of a large number of financial intermediaries; • expansion of both exchange shares turnover and over-the-counter shares turnover; • participation in the privatization process of great external institutional and private investors; • formation of permanent governing bodies in most joint-stock companies; • the gradual formation of a system and mechanisms of shareholders’ rights protection; • intensification of the state authorities’ control for the activities of joint-stock companies. The fourth period (2008–2014) is related with adoption of the Law of Ukraine “On Joint Stock Companies” No.514-VI dated 17 September 2008. The law identifies the procedure for setting up, operating, terminating, and separating joint stock companies, their legal status, as well as rights and obligations of shareholders. Moreover, the law is aimed at protecting the rights of shareholders from possible violations. The fifth period (since 2015) is characterised as a new stages in the process of corporate governance development in Ukraine. It is related with adoption of a number of laws regarding to the area of corporate governance. Thus, the evolution of corporate governance systems in Ukraine is directly determined by the institutional environment, state regulation and the current state of market relations, which are in our country at the beginning stage or even destructive functioning (Redzyuk 2019). Besides, it can be argued that the process of corporate governance development in Ukraine is closely related to the development of legislation on corporate governance. The primary sources of corporate governance legislation in Ukraine are the Law on Joint Stock Companies dated 17 September 2008; the Law on Banks and Banking Activity dated 7 December 2000; the Law on Accounting and Financial Reporting in Ukraine dated 16 July 1999 (The Law 1999); the Law on State Regulation of the Securities Market in Ukraine dated 30 October 1996; Law on Business Companies dated 19 September 1991; the Civil Code of Ukraine dated 16 January 2003; the Economic Code of Ukraine dated 16 January 2003; and the Law on Financial Services and State Regulation of Financial Service Market dated 12 July 2001 (EBRD 2017; Nechayev et al. 2018). The principal authorities responsible for enforcing corporate governance regulations are the (Nechayev et al. 2018): • National Securities and Stock Market Commission (NSSMC). This is the state regulator responsible for supervising the stock market and activities of joint stock companies. In pursuance of the functions assigned, the Commission shall: provide methodological support for the introduction and development of the corporate governance principles according to legislation; inspect issuers’ activities regarding the corporate governance; generalize the case law on the corporate governance (NSSMCa 2018).

13

Development of Corporate Governance in Ukraine: Legislation and Practices

223

• National Bank of Ukraine (NBU). This is the state regulator responsible for banks supervision (NBU 2018). • National Commission for State Regulation of Financial Services Markets. This is the state regulator responsible for creation of conditions for the proper and efficient functioning of non-banking financial services markets, strengthening of systemic stability in these markets, ensuring consumer rights protection for non-banking financial services, as well as integration into the global financial space without threats to the national interests and economic security of Ukraine (The National Commission 2018). • Ministry of Justice of Ukraine. This is the state regulator responsible for registering all corporate entities and holding corporate registers (Minjust 2018). Besides, Joint Stock Companies (JSCs) in Ukraine may form the corporate governance system according to the globally accepted Corporate Governance Principles of the Organization for Economic Cooperation and Development (OECD) (NSSMCa 2018). The Ukrainian Corporate Governance Principles (i.e., the Ukrainian Corporate Governance Code) were first released by the National Commission on Securities and Stock Market in 2003 and then revised in 2008 and 2014. They are based on the OECD Principles of Corporate Governance and consist of six main chapters with Basic Principles and annotations, defining and explaining the Basic Principles. The Principles are addressed to public joint stock companies, whose shares are traded on the stock market. Compliance with the Principles is a mandatory listing requirement in accordance with the NCSSM Regulation No. 1688, but in practice there is no evidence that they are taken as a reference. The Principles recommend companies to voluntarily apply their recommendations in their operations, include Principles’ provisions into their by-laws; and disclose information on the observance of the Principles in their annual report, or explain the reasons for not following the recommendations provided in the Principles (so-called “comply or explain” approach) (EBRD 2017). The Principles of Corporate Governance includes the following (NSSMC 2014): 1. 2. 3. 4. 5. 6.

The aim of a company. The rights of the shareholders. The supervisory board and the executive body. Disclosure of information and transparency. Control over the financial and economic activity of the company. Stakeholders.

Besides, there are the Methodical recommendations on improvement of corporate governance in banks of Ukraine, approved by the Resolution of the Board of the National Bank of Ukraine of 28 March 2007 No. 98 (with changes and amendments, brought in by Resolution of the Board of the National Bank of Ukraine of 21 June 2012 No. 255), as well as Corporate governance principles for banks (NBU 2015), which are also non-binding recommendations. Ukrainian legislation provides for five different forms of companies (Nechayev et al. 2018):

224

• • • • •

I. Kytsyuk

Joint stock companies (JSCs) (both public and private). Limited liability companies (LLCs). Additional liability companies (companies limited by guarantee). Full partnerships. Limited partnerships.

Number of corporate entities in the Unified State Register of Enterprises and Organizations of Ukraine (EDRPOU) by organizational and legal forms of governance is presented in Table 13.1 (State Statistics 2018). It is necessary to admit, that the most common organizational and legal forms of corporate entities are JSCs and LLCs. The share of appropriate corporate entities in the EDRPOU by organizational forms of the total number of legal entities in Ukraine is presented in Fig. 13.1 (State Statistics 2018). The data indicate growth of the LLCs share of the total number of corporate entities in Ukraine, while the JSCs share decreases annually over the analyzed period. In general, there has been a tendency towards a gradual decrease in the total number of joint-stock companies in recent years. In particular, this trend is explained by: • the gradual reorganization of joint-stock companies into the other organizational and legal forms (mainly into limited liability companies) (Sarnavska 2016: 98); • the inability of enterprises, established within the process of privatization and corporatization, to support this the most complicated form of business organization (Sarnavska 2016: 98); • legislative changes; • as well as regulation without a strategic vision in the domestic corporate sector (Redzyuk 2019). Moreover, when choosing between an LLC and a private JSC to establish a wholly-owned subsidiary, the LLC is more popular because it is easier to set up (Nechayev et al. 2018: 4). Besides, starting from 6 January 2018 a public joint stock company is a joint stock company whose shares are publicly offered and/or listed on a stock exchange (according to the amendments to the Law of Ukraine “On Joint Stock Companies”) (The Law 2008). It, as result, increases the requirements for activities of appropriate companies. Article 5 of the present Law of Ukraine “On Joint Stock Companies” (The Law 2008) identifies that joint stock companies are divided in terms of their tipes into public joint stock companies and private joint stock companies. The key differences between public and private JSCs are presented in the Table 13.2. A number of Joint Stock Companies in the period of 2013–2018 are presented in the Fig. 13.2 (State Statistics 2018). The data of the Fig. 13.2 demonstrate the decreasing a number of public jointstock companies while growing a number of private joint-stock companies during

2013 25,531 488,781 1539 2074 638 1,341,781

2014 24,813 515,371 1583 2062 629 1,372,177

2015a 23,110 519,607 1589 1941 595 1,331,230

2016a 15,571 488,205 1336 1361 387 1,121,347

Source: based on State Statistics Service of Ukraine data available at: http://www.ukrstat.gov.ua/ a Excluding the temporarily occupied territory of the Autonomous Republic of Crimea and the city of Sevastopol

Organizational forms of corporate entities Joint Stock Companies Limited Liability Companies Additional Liability Companies Full Partnerships Limited Partnerships Total number

2017a 15,206 532,401 1392 1378 384 1,185,071

2018a 14,710 576,554 1453 1344 377 1,235,024

Table 13.1 Entities in the Unified State Register of Enterprises and Organizations of Ukraine, by organizational forms, 2013–2018 (number of corporate entities, at the beginning of the year)

13 Development of Corporate Governance in Ukraine: Legislation and Practices 225

226

I. Kytsyuk 50 45 40

36.428

37.559

39.032

1.903

1.808

1.736

2013

2014

43.537

44.926

1.389

1.283

46.684

35 30 25 20 15 10 5

1.191

0 2015*

Joint Stock Companies

2016*

2017*

2018*

Limited Liability Companies

Fig. 13.1 Entities in the Unified State Register of Enterprises and Organizations of Ukraine, by organizational forms, 2013–2018 (% share of corporate entities of the total number). Asterisk, Excluding the temporarily occupied territory of the Autonomous Republic of Crimea and the city of Sevastopol. Source: based on State Statistics Service of Ukraine data available at: http://www. ukrstat.gov.ua/

the last 3 years. It could be related to the adoption of the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Facilitation of Business and Investment Attraction by Securities Issuers”. The main provisions of the law are described below.

13.3

The Features of Current Period of Corporate Governance Development

Over the past few years, Ukrainian parliament has adopted a number of laws regarding to the area of corporate governance. The most important of them are the following: 1. The Law of Ukraine “On Amendments to Some Legislative Acts of Ukraine on Protection of Investors Rights” No. 289-VIII dated 7 April 2015 (the law came into force on 1 May 2016). The law aimed at adjustment of economic activity of joint stock companies and introduces high requirements for public joint-stock companies whose shares are listed on stock exchanges. The law introduces a number of important improvements including (Nechayev et al. 2018: 2–3): • • • •

A derivative claims mechanism. An institute of independent directors. More flexible mechanisms for appointment and removal of directors. Enhanced regulation of directors’ and officers’ liability.

13

Development of Corporate Governance in Ukraine: Legislation and Practices

227

Table 13.2 Key differences between public and private Joint Stock Companies Criterion Public offering

Public JSC Has exclusive right to carry out public offering of its own shares

Trading on stock exchange

Is required to perform the procedure of including its shares to the list of, at least, one stock exchange of Ukraine Shareholders may alienate of shares belonging thereto without the agreement of other shareholders of the company

Alienate of shares

Payment of dididends

Supervisory Board

Committees of Supervisory Board

In accordance with the procedure established by the NSSMC, carries out the payment of dividends through the depositary system of Ukraine The establishment of a supervisory board is mandatory. At least one-third of the total number of directors, but not less than two directors, must be independent directors The formation of an audit committee, the remuneration committee and the nomination committee is mandatory

Private JSC The general meeting of such a company, together with the decision to make a public offering of its own shares, must decide to change the type of company from a private to a public one Shares of a private joint-stock company can be purchased and sold on a stock exchange

The pre-emptive right of the shareholders to purchase shares of Private JSC offered by their holder for alienation to a third party may be provided by the Charter of the JSC, if as of the date of such decision the number of shareholders does not exceed 100 persons. Shareholders of a Private JSC company have the pre-emptive right to purchase shares that are sold by other shareholders of appropriate JSC at a price and on terms and conditions offered by such a shareholder to a third party in proportion to the number of shares belonging to each of them. The pre-emptive right of shareholders to purchase shares that are sold by other shareholders of appropriate JSC shall be valid within two months from the date when appropriate jJSC receives a notification of such a shareholder of their intention to sell shares, unless a shorter deadline is specified in the Charter of appropriate JSC In accordance with the procedure established by the NSSMC, carries out the payment of dividends either through the depository system of Ukraine or directly to shareholders. The method of payment of dividends is determined by an appropriate decision of the general meeting of shareholders The establishment of a supervisory board is mandatory if number of shareholders is 10 or more. The formation of supervisory board is not obligatory if 10 or more shareholders are affiliated with each other and its functions are usually exercised by the general shareholders’ meeting. There is no requirement to have independent members of the supervisory board There is no requirement for the creation of the supervisory board committees

Source: based on The Law of Ukraine “On Joint Stock Companies” No.514-VI dated 17 September 2008

228

I. Kytsyuk 30,000 25,000 20,000 15,000 10,000 5,000 0 2013

2014

2015

2016*

2017*

2018*

Public joint-stock company

Companies, that change the ownership form

Private joint stock company

Total number

Fig. 13.2 The number of Joint Stock Companies, 2013–2018 (at the beginning of the year). Asterisk, Excluding the temporarily occupied territory of the Autonomous Republic of Crimea and the city of Sevastopol. Source: based on State Statistics Service of Ukraine data available at: http://www.ukrstat.gov.ua/

2. The Laws of Ukraine “On Amendments to Some Legislative Acts on the Management of State and Municipal Property Objects” No. 1405-VIII dated 02 June 2016 (the law became effective from 25 June 2016). The law implements corporate governance reform in state-owned enterprises. This new law brings Ukraine into line with the Organisation for Economic Co-operation and Development Principles of Corporate Governance (Nechayev et al. 2018). 3. The Resolution of National Securities and Stock Market Commission “On Amending Certain Regulations of the Commission (regarding debt-to-equity swaps)” No. 950 dated 27 September 2016 (the resolution became effective from 25 November 2016). The resolution aimed to establish the procedure of conversion the debts or obligations of the joint-stock company into equity of this company (by way of an increase of the JSC’s share capital). The resolution also introduces some other changes to the Procedure of registering shares issue while changing the size of the share capital of a joint-stock company. 4. The Law of Ukraine “On Amendments to Certain Legislation Acts of Ukraine on the Improvement of the Level of Corporate Governance in Joint Stock Companies“No. 1983-VIII dated 23 March 2017 (the law came into force on 6 June 2017). The law is aimed at improving corporate governance in joint stock companies, in particular through the implementation into the national legislation of the norms of EU Directive 2004/25 / EC of 21 April 2004 on takeover bids., that will promote to protect the rights and interests of investors. In accordance with the best

13

Development of Corporate Governance in Ukraine: Legislation and Practices

229

European standards the law contains provisions relating to squeeze-out and sellout procedures (NSSMCb 2018): • the person (or group of persons acting jointly), who owns 95% and more of the shares of a public joint-stock company, has the right to demand a compulsory sale of shares from other shareholders of a public joint-stock company (the so called “squeeze-out right”); • the minority shareholders have right to require the majority shareholder (who owns 95% and more of the shares of a public company) to purchase their shares at a fair price (“sell-out right”). The law also provides for the improvement of the mechanisms of making settlements for purchased shares through introducing a conditional account storage (escrow), as well as changes to the number of legislative acts in order to solve the problem of reissuing of documents of permissive character during the changing of the joint-stock company name (in connection with the changing of its type) or during the transformation of the joint stock company into the other companies (NSSMCb 2018). 5. The Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Related to Corporate Agreements” No. 1984-VIII dated 23 March 2017 (the law became effective from 18 February 2018). The law is aimed at the implementation into the national legislation the best world’s experience of corporate governance, namely, the practice of corporate agreements usage in the company’s activities. The main aim of the law is bringing legal certainty into conclusion of shareholder agreements (Khort 2018: 182). 6. The Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Facilitation of Business and Investment Attraction by Securities Issuers” No. 2210-VIII dated 16 November 2017 (the law became effective from 8 January 2018). The law implements the provisions of a number of EU acts in the area of financial services and corporate governance. The law aimed at the approximation of the activity regulation in the national capital markets and the requirements regarding corporate governancy with European standards. It provides (NSSMCb 2018): • improvement of the procedure of securities issue and the requirements regarding prospectus for the public offering of securities and their admission to trading on a regulated capital market; • improvement of requirements regarding disclosure of information in the capital market and introduction of a differentiated approach to the volume and periodicity of information disclosure by the issuer on the capital market; • expansion of the list of possible ways of information disclosure in the capital market, including through the services of authorized persons engaged in the provision of information services in the stock market, as well as the abolishment of obligation of publications in printed edition;

230

I. Kytsyuk

• introduction of the issuer’s obligation to draw up a report on the corporate governance and leadership report as part of the annual information about the issuer; • introduction of the duties and procedures of information disclosure regarding the change in possession of a block of shares (5% and more), and introduction of the mechanisms of such information disclosure by the issuer and the other participants in the capital market; • a comprehensive settlement of the issue regarding introducing a mechanism of not using the pre-emptive right of shareholders to purchase shares of additional emission; • improvement of the requirements for an independent member of the supervisory board of the company (independent director) in terms of expanding the requirements for candidates, which should correspond to the status of an independent member; • improvement of the norms governing the competence of the general meeting and the supervisory board, including with the aim of increasing the transparency of the supervisory board activity, introduction of norms governing the issues of formation and activities of the joint stock companies’ supervisory board committees, determination of their competence. Besides, in accordance with the Law, the amendments were passed to the Law of Ukraine “On Joint Stock Companies” No. 514-VI dated 17 September 2018 (the last edition from 6 February 2018), the Law of Ukraine “On Securities and the Stock Market” No. 3480-IV dated 23 February 2006 (revision on 1 July 2018), the Law of Ukraine “On State Regulation of the Securities Market in Ukraine” No. 448/96-VR dated 30 October 1996 (revision on 1 October 2018), the Law of Ukraine “On Banks and Banking” No. 2121-III dated 7 December 2000 revision on 1 October 2018) and other normative legal acts. In particular, amendments to the Law of Ukraine “On Joint Stock Companies” can be divided into the following main blocks (Saad Legal 2018): • changing the approach to the concept of a public and private company; • strengthening the requirements for public companies and simplification for private companies; • admission of shares of private companies to trade on the stock exchange; • abolition of the publications necessity in the official printed publication of the Commission; • changing the procedure for convening and holding the General Meetings of shareholders; • changing the order of formation and competencies of the Supervisory Board; • restriction of shareholders’ rights; • redistribution of authority between the bodies of the company; • eliminating contradictions in squeeze-out, sell-out & takeover procedures. 7. the Law of Ukraine “On Privatization of State-Owned and Municipal Property” No. 2269-VIII dated 18 January 2018 (the law became effective from 7 March

13

Development of Corporate Governance in Ukraine: Legislation and Practices

231

2018). The new law improves and simplifies the regulation of privatization of state and municipal assets in Ukraine, as well as makes this process more transparent in order to enhance the overall protection of investor rights. 8. The Law of Ukraine “On Limited and Additional Liability Companies” No. 2275-VIII dated 6 February 2018 (the law came into effect on 17 June 2018, with the exception of some specific provisions related to inheritance that take effect on 17 June 2019). The new law replaces the outdated provisions of the Law of Ukraine “On Business Companies” that regulated the operation of limited liability and additional liability companies (LLCs and ALCs). The new Law is aimed to create flexible and civilized conditions for the activity of LLC; to introduce into Ukrainian legal system the instruments of corporate governance recognized by international practice; to give participants more opportunities for the realization of their corporate rights and business development; as well as to improve the investment attractiveness of Ukraine and to bring the domestic terms of business conducting closer to European ones. Key changes to The Law: limitation of maximum number of participants has been cancelled (any joint stock company may now be transformed into an LLC); simplified equity financing and new instruments for debt restructuring; introduction of a shareholders’ agreement institute (corporate governance made more flexible); structuring of transactions with Ukrainian LLCs is simplified; material transactions and transactions with interest in LLCs; improved enforcement procedure for participatory interest pledge; transitional period for existing LLCs. 9. In addition, on 18 October 2018, the Verkhovna Rada passed the Code of Bankruptcy Procedures of Ukraine, that should contribute to improving the Ukraine’s position in the Doing Business ranking (Verkhovna Rada 2018) The Code establishes the conditions and procedure for restoring solvency of a corporate entity debtor or recognizing it as a bankrupter in order to satisfy the claims of creditors, as well as restoring solvency of an individual. The Code of Bankruptcy Procedures of Ukraine: • minimizes the possibility of fictitious bankruptcy, that will have a positive effect on the creditors’ rights protection and, as a result, it will promote the restoring lending; • the sale of bankrupt enterprises’ property will take place exclusively through electronic auctions; • the period of the bankruptcy procedure will be considerably reduced. In general, the adoption of a new Bankruptcy Code will resolve the following issues: • proper financial accounting; • wasteful spendings reduction for debts repayment and cost reduction of the sale of troubled assets; • promotion of responsible borrowing; • negative external effects reducing caused by inaccurate risks assessment;

232

• • • • •

I. Kytsyuk

reducing the social costs of illness, crime and unemployment; increasing of taxable income; maximizing of economic activity; promotion of entrepreneurship; improving the stability and the predictability in the financial system and economy (Verkhovna Rada 2018).

In accordance with the Law of Ukraine “On Joint Stock Companies“a JSC can have following levels of corporate governance: • the general shareholders’ meeting; • the supervisory board (in the case of establishment); • the executive body (management board). The competence of the governing bodies of the company is clearly defined in the company’s charter in accordance with the tasks of the company’s bodies and taking into account the requirements of the current legislation. The general shareholders’ meeting is the supreme governance body of a jointstock company. A joint stock company is obliged to convene an annual general meeting. A joint stock company must hold an annual general meeting no later than 30 April following the reporting year. All the other general meetings except the annual one are considered extraordinary. The general meeting is carried out at the expense of the joint-stock company. If the extraordinary general meeting is held on the initiative of the shareholder (shareholders), this shareholder (shareholders) will pay the expenses for the organization, preparation and holding of such general meetings. A general meeting may decide on any issues of the company’s activities, except those that are assigned to the exclusive competence of a supervisory board by law or by the charter. The charter of a private joint stock company (except for JSCs that is at least 50% state-owned, as well as, if at least 50% of a joint-stock company shares are in the share capital of the economic partnerships with 100% state ownership) may provide that the general meeting may decide on any issues, including those that fall under the exclusive competence of the supervisory board. If the number of shareholders in a private joint stock company exceeds 100, the decision to include into the charter of such private joint stock company the appropriate provision should be adopted by the shareholders (more than 95 percent of shareholders’ votes of their total number). A supervisory board of a joint stock company is a collegial body that protects the rights of the shareholders of the company and, within the limits of its competence defined by the Charter and the Law of Ukraine “On Joint Stock Companies” governs a joint stock company, as well as controls and regulates the activities of the executive body. In public joint stock companies and banks, the establishment of a supervisory board is mandatory. The establishment of a supervisory board is also mandatory in private joint stock companies with more than ten shareholders. At the same time, in private joint stock

13

Development of Corporate Governance in Ukraine: Legislation and Practices

233

companies with more than ten shareholders, which are affiliated with one another, the establishment of a supervisory board is not required and its functions are usually exercised by the general shareholders‘meeting. Members of a supervisory board of a joint stock company are appointed by the shareholders in the general meeting for a term not exceeding 3 years. Only individual can be appointed as member of a supervisory board of a jointstock company. A member of a supervisory board couldn’t be a member of the executive body and/or a member of the revision committee (auditor) of the company at the same time. A supervisory board consists of shareholders or persons representing their interests (shareholders’ representatives) and/or independent directors. A supervisory board of public joint-stock company (and if a joint stock company is at least 50% state-owned, as well as, if at least 50% of a joint-stock company shares are in the share capital of the economic partnerships with 100% state ownership) should consist of not less than one third of the independent directors, herewith the number of independent directors can not be less than two persons. The authority of the members of the supervisory board and the procedure of remuneration payment are determined by the Law of Ukraine “On Joint Stock Companies”, the company’s charter, the regulations on the supervisory board of a joint-stock company, as well as a civil law or employment contract, which concludes with a member of the supervisory board. Such contract on behalf of the company should be signed by the chairman of the executive body or other person authorized by the general meeting according to the conditions approved by the decision of the general meeting. In the case of the conclusion of a civil law contract with a member of the supervisory board of the company, such contract may be paid or unpaid. The supervisory board of a public joint stock company and a bank must prepare a report on their work each year. The report of the supervisory board of a public joint stock company and a bank is a separate part of the annual report of the company and should be promulgated in accordance with the requirements of the legislation. Besides, in a public joint-stock company (and if a joint stock company is at least 50% state-owned, as well as, if at least 50 % of a joint-stock company shares are in the share capital of the economic partnerships with 100% state ownership), the formation of an audit committee, a committee on the determination of remuneration of officials of the company (the remuneration committee) and the nomination committee is mandatory. Herewith, the remuneration committee and the nomination committee may be united. An audit committee, the remuneration committee and the nomination committee are chaired by the members of the supervisory board of the company, which are the independent directors. Most members of these committees should be the independent directors. The executive body of a joint stock company manages the current activities of the company. The general meeting may appoint a revision commission (auditor) in order to conduct an audit of the financial and economic activities of a private joint stock company.

234

I. Kytsyuk

In private joint-stock companies with a number of shareholders not exceeding 100 persons, an auditor’s position may be introduced or an revision commission may be appointed. In a company with more than 100 shareholders, only a revision commission may be appointed. The annual financial statements of a public joint stock company is subject to mandatory audit by an independent auditor (audit firm). There are no general restrictions or requirements on gender. Women in Ukraine have remain disproportionately represented in the sphere of decision-making, have in average lower income than men, and perform the vast majority of unpaid work on family responsibilities performance in the households (Kurii 2017). However, today, implementation of measures to ensure the rights and empowerment of women in the direction of reducing gender discrimination in the workplace and the development of a modern gender policy is an integral part of the processes of European integration and modernization of the business sector and corporate governance in Ukraine. Strengthening the participation of women in the management of enterprises of different levels is a significant part of a set of measures for the implementation of international standards of the protection of women’s rights within the framework of the implementation of the Association Agreement between Ukraine and the EU (Sect. 5, Chap. 21, Annex XL to Chap. 21 of the Association Agreement between Ukraine and the EU) (Association Agreement). Rights and Duties of Shareholders Shareholders-holders of ordinary shares have the following rights: 1. participation in the governance of a joint-stock company; 2. receiving dividends; 3. receiving in case of liquidation of a company the part of its property or the cost of the part of a company’s property; 4. obtaining information on the economic activities of the joint-stock company. One ordinary share gives shareholder one vote to resolve each issue in the general meeting, except for cumulative voting. Shareholders-owners of ordinary shares of the company may have the other rights provided for by legislative acts and the charter of a joint-stock company. The charter of a joint stock company defines the rights of the shareholder-owner of each class of preference shares, including: 1. the amount and the order of dividends’ payment; 2. the liquidation value and the order of payment in case of liquidation of the company; 3. cases and conditions for the conversion of preference shares of this class into preference shares of another class, ordinary shares or into other securities; 4. the procedure of obtaining information. One preference share gives shareholder one vote to resolve each issue.

13

Development of Corporate Governance in Ukraine: Legislation and Practices

235

Shareholders-owners of preference shares of a certain class have the right to vote in the general meeting of a joint stock company during resolving the following issues: 1. the termination of a company that provides for the conversion of preference shares of this class into preference shares of another class, ordinary shares or into other securities; 2. making amendments to the charter of the company, that provides for the restriction of the rights of the shareholders-owners of this class of preference shares; 3. making amendments to the charter of a company that provides for the placement of a new class of preference shares whose owners will have privilege regarding the order of receiving dividends or payments in the case of the company’s liquidation, or increasing of the rights of shareholders-owners of placed classes of preference shares that have privilege regarding the order of receiving dividends or payments in the case of company’s liquidation; 4. reduction of the share capital of a joint-stock company. A shareholder-owner of a preference shares may have got the right to vote on the other issues according to the charter of a private company. Shareholders are required to: • adhere to the charter, other internal documents of the joint-stock company; • to fulfill its obligations to the company, including related with property participation; • to pay a set amount for the shares according to the charter of a joint-stock company; • non-disclosure the commercial secret and the confidential information about the activities of the company. According to the Law of Ukraine “On Limited and Additional Liability Companies” has following corporate governing bodies: • the general participants’ meeting; • the supervisory board (in the case of establishment); • the executive body. Current level of Corporate Governance development in the CEECs, as well as Ukraine and Russian Federation according to WEF methodology (score on the extent of shareholder governance index, which measures shareholders’ rights in corporate governance) is presented in Fig. 13.3 The index assesses three dimensions of good governance: (1) shareholders’ rights and role in major corporate decisions, (2) governance safeguards protecting shareholders from undue board control and entrenchment, and (3) corporate transparency on ownership stakes, compensation, audits and financial prospects (WEF 2018). Ukraine is located at the penultimate position in comparison with the countries of the region. Thus, despite the adoption of a rather broad regulatory framework, many problems have not yet been resolved. Corporate governance generally has remained at a

236

I. Kytsyuk 80

69

70 56

60

56

56

56

45

50 40

56

32

32

32

32

30 20 10

15

15 5

0

Fig. 13.3 Current level of Corporate Governance development in the CEECs, as well as Ukraine and Russian Federation, 2018 (according to WEF methodology). Source: based on data and information from “The Global Competitiveness Report 2018” WEF available at: https://www. weforum.org/reports/the-global-competitveness-report-2018

rather low level. Among the most important problems and tasks for its improvement are the following (LDaily 2017): • low level of shareholders rights protection; • the problems of information disclosure and the problems of activity transparency in general; • the problems of corporate governance in state enterprises; • gradual narrowing of stock market volumes and reducing the number of companies that can be listed on an exchange because of increasingly stringent requirements for such companies; • the absence of normative assignment of obligatory position of corporate secretary; • the inability and reluctance of corporations management to take into account the interests and to assess the influence of the stakeholders (both internal and external); • the lack of a balanced risk management system, as well as the legislation and state regulation are still imperfect (Velyka 2018: 283). The Ukrainian corporate governance model is developed not enough. The model of corporate governance in domestic enterprises is in the formation stage. It includes the principles and basis of different models (Rodionova 2017: 321). In particular, the Ukrainian corporate governance model is a combination of Anglo-American and German models and is characterized by a two-tier board system (NBU 2018). Besides, the Ukrainian corporate governance model contains the features of both outsider (relatively scattered ownership, undeveloped stock market) and insider models (tendency to increasing concentration of ownership, formation of elements

13

Development of Corporate Governance in Ukraine: Legislation and Practices

237

of insider control, introducing of cross-ownership schemes and the formation of complex corporate structures of different types). In May 2016 rating agency IBI-Rating conducted a research on corporate governance in the real sector companies of Ukraine (IBI Rating 2016). The results of research show that сompanies whose shares are listed on international exchanges demonstrate the highest level of corporate governance standards. These companies have ratified and adhere to the standards and principles of corporate governance established by the Warsaw and London Stock Exchanges. The level of corporate governance standards in the companies whose shares are traded on national stock exchanges meets the moderate level of risk and indicates a significant risk for shareholders, investors and stakeholders. The most companies whose shares are admitted to trading on national stock exchanges adhere to the mandatory requirements of the legislation related to corporate governance; however, indicators which represent the state of corporate governance in the national corporate sector, characterize the level of protection of minority shareholders and stakeholders (investors) as insufficient. In general, strengthening (over the last few years) of regulatory requirements has lead to the improvement of corporate governance. However, a small number of companies adhere to the best practices of corporate governance. Thus, most of the analyzed companies of real sector do not publish information on the end-beneficiaries, there are no independent members in the structure of the supervisory boards, there are no corporate secretaries and the code of corporate governance; at the same time, the most of analyzed entities adhere to the requirements of the mandatory information disclosure, as well as publish key information about activities, financial results and governing composition on their own web-sites. It is necessary to admit, that most companies fulfill only mandatory requirements of the legislation on issues related to corporate governance, while official recommendations are partly implemented.

13.4

Conclusions

Analyzing the process of corporate governance development in Ukraine, it should be noted, that Ukrainian corporate governance system has all features of transition type and is on the transformation stage. The problem of the formation of internal institutions, in particular corporate culture, corporate governance code, which would meet the international principles of corporate governance and take into account Ukrainian mentality, remains relevant for Ukrainian companies. The insufficient level of corporate governance development in Ukraine significantly worsens of the investment climate, promotes the national capital outflow and, as a result, weakens the competitive positions of Ukrainian companies on a global scale.

238

I. Kytsyuk

Ukraine should study foreign knowledge in regulating corporate relations and benefit from the best world experience in this area.

References Association Agreement between Ukraine, on the one part, and the European Union and its member states, on the other part [in Ukrainian]. Retrieved February 1, 2019, from http://comeuroint.rada. gov.ua/komevroint/doccatalog/document?id¼56219 EBRD. (2017). Corporate governance in transition economies. Ukraine Country Report. Retrieved July 15, 2018, from https://www.ebrd.com/cs/Satellite?c¼Content&cid¼1395252637530& pagename¼EBRD%2FContent%2FDownloadDocument Frolova, T. O. (2012). Development of the national corporate governance system [in Ukrainian]. Agrosvit, 9. Retreived September 17, 2018, from http://www.agrosvit.info/pdf/9_2012/9.pdf IBI Rating Agency. (2016). Results of the research “Corporate Governance in the Real Sector Companies” [in Ukrainian]. Retrieved October 12, 2018, from http://ibi.com.ua/UK/ratingsresearch-and-analytics/korporativne-upravlinnya-v-kompaniyakh-realnogo-sektoru-ukrajni2016.html Khort Yu, V. (2018). Company law in Ukraine: recent regulatory developments [in Ukrainian]. Retrieved October 24, 2018, from http://www.apdp.in.ua/v80/one.pdf Kurii, L. O. (2017). Gender equality as an integral part of corporate social responsibility of enterprises [in Ukrainian]. Development Economics, 4(84), 90–99. Daily, L. (2017). The formation of corporate governance in Ukraine [in Ukrainian]. Retrieved February 10, 2019, from https://ldaily.ua/stanovlennya-korporativnogo-upravlinnya-v-ukrayini. html Ministry of Justice of Ukraine. (2018). Retrieved October 17, 2018, from https://minjust.gov.ua/ NBU. (2015). Corporate governance principles for banks. Basel Committee on Banking Supervision dated 8 July 2015 [in Ukrainian]. Retrieved September 10, 2018, from https://bank.gov.ua/ document/download?docId¼64199632 Mordacq, P. (2001). Stock markets in Central and Eastern Europe and their environment: the unachieved transition. Revue d'Économie Financière, 6(1), 383–390. Retrieved January 20, 2019, from http://econpapers.repec.org/article/prsrecofi/ecofi_5f1767-4603_5f2001_ 5fhos_5f6_5f1_5f4569.htm. NBU. (2018). Retrieved October 17, 2018, from https://bank.gov.ua Nechayev, Y., Romanchuk, A., Gumenchuk A. (2018). Corporate governance and directors’ duties in Ukraine: overview, Practical Law. Thomson Reuters. Retrieved September 17, 2018, from https://uk.practicallaw.thomsonreuters.com/1-506-7476?transitionType¼Default& contextData¼(sc.Default)&firstPage¼true&comp¼pluk&bhcp¼1 NSSMC. (2014). The resolution of National Securities and stock market commission “on approval of the principles of corporate governance” No. 955 dated 22 July 2014 [in Ukrainian]. Retrieved October 17, 2018, from http://zakon.rada.gov.ua/rada/show/vr955863-14#n13 NSSMCa. (2018). Сorporate governance. Retrieved July 7, 2018, from https://www.nssmc.gov.ua/ NSSMCb. (2018). NSSMC Annual Report 2017 [in Ukrainian]. Retrieved from July 7, 2018, https:// www.nssmc.gov.ua/ Redzyuk, E. (2019). State and corporate governance – The way to European values or nowhere? [in Ukrainian]. Mirror Weekly, 7. Retrieved February 23, 2019, from https://dt.ua/macrolevel/ derzhava-i-korporativne-upravlinnya-shlyah-do-yevropeyskih-cinnostey-chi-v-nikudi303670_.html Rodionova, I. V. (2017). The world experience using of a corporate management of industrial enterprises [in Ukrainian]. Economy and Society, 12, 319–323. Retrieved February 2, 2019, from http://economyandsociety.in.ua/journal/12_ukr/12_2017.pdf.

13

Development of Corporate Governance in Ukraine: Legislation and Practices

239

Sarnavska, M. I. (2016). Peculiarities of forming corporative sector in Ukraine [in Ukrainian]. Juridical Scientific and Electronic Journal, 6, 96–99. Retrieved October 23, 2018, from http:// lsej.org.ua/6_2016/28.pdf. Saad Legal. (2018). Changes in the activities of joint stock companies—facilitating business or attracting investment? [in Ukrainian]. Retrieved September 23, 2018, from https://protocol.ua/ ua/zmini_u_diyalnosti_aktsionernih_tovaristv_sproshchennya_vedennya_biznesu_chi_ zaluchennya_investitsiy/ Sayenko, V., & Nikolaichyk, O. (2018). 2018 Corporate Law Handbook. Revealing new opportunities for business in Ukraine. Retrieved September 27, 2018, from https://sk.ua/ CorporateLawHandbook_web.pdf State Statistics Service of Ukraine. (2018). Retrieved October 5, 2018, from http://www.ukrstat. gov.ua/ The Civil Code of Ukraine No. 435-IV dated 16 January 2003 [in Ukrainian]. Retrieved September 10, 2018, from http://zakon.rada.gov.ua/laws/show/435-15 The Economic Code of Ukraine No. 435-IV dated 16 January 2003 [in Ukrainian]. Retrieved September 10, 2018, from http://zakon.rada.gov.ua/laws/show/436-15 The Law of Ukraine “On Accounting and Financial Reporting in Ukraine” No. 996-XIV dated 16 July 1999 [in Ukrainian]. Retrieved September 15, 2018, from http://zakon.rada.gov.ua/laws/ show/996-14 The Law of Ukraine “On Amendments to Certain Legislation Acts of Ukraine on the Improvement of the Level of Corporate Governance in Joint Stock Companies” No. 1983-VIII dated 23 March 2017 [in Ukrainian]. Retrieved July 19, 2018, from http://zakon.rada.gov.ua/laws/show/ 1983-19 The Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Facilitation of Business and Investment Attraction by Securities Issuers” No. 2210-VIII dated 16 November 2017 [in Ukrainian]. Retrieved July 22, 2018, from http://zakon.rada.gov.ua/laws/show/ 2210-19 The Law of Ukraine “On Amendments to Some Legislative Acts of Ukraine on Protection of Investors Rights” No. 289-VIII dated 7 April 2015 [in Ukrainian]. Retrieved August 7, 2018, from http://zakon.rada.gov.ua/laws/show/289-19 The Laws of Ukraine “On Amendments to Some Legislative Acts on the Management of State and Municipal Property Objects” No. 1405-VIII dated 02 June 2016 [in Ukrainian]. Retrieved July 17, 2018, from http://zakon.rada.gov.ua/laws/show/1405-viii The Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Related to Corporate Agreements” No. 1984-VIII dated 23 March 2017 [in Ukrainian]. Retrieved July 20, 2018, from http://zakon.rada.gov.ua/laws/show/1984-19 The Law of Ukraine “On Banks and Banking Activity” No. 2121-III dated 7 December 2000 [in Ukrainian]. Retrieved September 15, 2018, from http://zakon.rada.gov.ua/laws/show/2121-14 The Law of Ukraine “On Business Companies” No. 1576-XII dated 19 September 1991 [in Ukrainian]. Retrieved September 17, 2018, from http://zakon.rada.gov.ua/laws/show/1576-12 The Law of Ukraine “On Financial Services and State Regulation of Financial Service Market” No. 2664-III dated 12 July 2001 [in Ukrainian]. Retrieved September 10, 2018, from http:// zakon.rada.gov.ua/laws/show/2664-14 The Law of Ukraine “On Joint Stock Companies” No.514-VI dated 17 September 2008 [in Ukrainian]. Retrieved August 11, 2018, from http://zakon.rada.gov.ua/laws/show/514-17 The Law of Ukraine “On Limited and Additional Liability Companies” No. 2275-VIII dated 6 February 2018 [in Ukrainian]. Retrieved August 4, 2018, from http://zakon.rada.gov.ua/ laws/show/2275-19 The Law of Ukraine “On Privatization of State-Owned and Municipal Property” No. 2269-VIII dated 18 January 2018 [in Ukrainian]. Retrieved August 2, 2018, from http://zakon.rada.gov.ua/ laws/show/2269-19

240

I. Kytsyuk

The Law of Ukraine “On State Regulation of the Securities Market in Ukraine” No. 448/96-VR dated 30 October 1996 [in Ukrainian]. Retrieved September 15, 2018., from http://zakon.rada. gov.ua/laws/show/448/96-%D0%B2%D1%80 The National Commission for State Regulation of Financial Services Markets. (2018). Retrieved October 17, 2018, from https://www.nfp.gov.ua/ The Resolution of National Securities and Stock Market Commission. “On Amending Certain Regulations of the National Securities and Stock Market Commission (regarding debt-to-equity swaps)” No. 950 dated 27 September 2016 [in Ukrainian]. Retrieved July 19, 2018, from http:// zakon.rada.gov.ua/laws/show/z1399-16 Velyka, O. Yu. (2018). Features of modern corporate governance in Ukraine [in Ukrainian], Global and National Problems of the Economy, 22, 282–286, Retrieved February 12, 2019, from http:// global-national.in.ua/archive/22-2018/56.pdf Verkhovna Rada of Ukraine. (2018). Official web portal. Retrieved October 23, 2018, from http:// iportal.rada.gov.ua/ World Economic Forum. (2018). The Global Competitiveness Report 2018. Retrieved January 28, 2019, from https://www.weforum.org/reports/the-global-competitveness-report-2018 Yemelyanova, L. O. (2009). The quality of corporate governance of joint stock companies in central and Eastern Europe [in Ukrainian]. Visnyk of Lviv Commercial Academy, 30, 31–35.

Iryna Kytsyuk is Associate Professor at the Department of International Economic Relations and the Project Management, Lesya Ukrainka Eastern European National University (EENU), Lutsk, Ukraine. She was awarded the Cabinet of Ministers of Ukraine scholarship for young scientists (2014) and the Government of the Republic of Poland scholarship for research stay at the Warsaw School of Economics (2017/2018). She also is a winner of a Contest for young scientists from the Eastern Partnership countries for participation in the Eastern Europe Initiatives Congress 2016 (2016). Since 2008, she has been working at the Department of International Economic Relations and the Project Management, at the Lesya Ukrainka Eastern European National University obtaining PhD degree (2013). She teached “International Business” (in both Ukrainian and English). She gave lectures during the International short-term certified programme «Business Leadership», which was realised at Lesya Ukrainka Eastern European National University with the support of the Ukrainian Social Academy and The Pontifical University of Saint Thomas Aquinas (Angelicum) in Rome, Italy (2016). She participated on development of the state budget research theme: «Innovative forms of business activation in the conditions of European integration» (2014–2016). Currently, Iryna Kytsyuk works on habilitation thesis. She is a Member of Council of young scientists of Lesya Ukrainka Eastern European National University. She is the team member of Jean Monnet Module «EU Project Management» realization (European Union Programme Erasmus+ Jean Monnet Activity, № 575124-EPP-1-2016-1-UAEPPJMO-MODULE). She also is a Co-Founder and Vice-Chairman of the Volyn Center of Ukrainian Association of International Economics.

Chapter 14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board Members Igor Postuła and Mateusz Kabut

14.1

Introduction

State-Owned Enterprises (SOEs) are an essential part of the economic landscape in many countries. It is estimated that SOEs generate approximately 10% of global Gross Domestic Product (GDP) and that more than one-tenth of the world’s largest companies are state-owned (Bruton et al. 2015, p. 92). SOEs’ significance in the economy depends on a country—for example, in China central government is a sole or majority owner of more than 51,000 enterprises valued at 29.2 trillion dollars. In contrast, in Switzerland, there are only four such enterprises valued at 44.7 billion dollars (OECD 2017). By cross countries comparison, it has to be taken into consideration that no universal definition of SOE exists.1 Even OECD’s definition (2015, p. 14) bases to some extent on internal legislation of each country. It is agreed that SOE is any enterprise (or other autonomous entity that is engaged in economic activities and charge significant prices) in which “the central level of government exercises ownership and control” (OECD 2017, p. 11). Despite the significant role of SOEs in the global economy, the SOE-related literature is relatively scarce (Daiser et al. 2017, p. 448). The most common topics raised in that field include privatization (e.g., Filatotchev et al. 2000; Arocena, Oliveros 2012) and SOEs profitability (e.g., Aluchna and Kaminski 2017). Studies and discussions about the nature of a SOE are less common. There is also a relatively small number of papers related to the challenges of corporate governance in SOEs (Kowalski et al. 2013). That is not surprising when we take into consideration that 1 The variety of SOE’s definitions used in OCED countries are presented in Christiansen (2011, pp. 80–98).

I. Postuła (*) · M. Kabut University of Warsaw, Warsaw, Poland e-mail: [email protected]

© Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_14

241

242

I. Postuła and M. Kabut

the most influential theories of the firm do not recognize the uniqueness of the SOEs’ nature (Peng et al. 2016). Our study aims to fill this knowledge gap and improve our understanding of SOEs’ corporate governance, that, according to OECD (2015, p. 9), concerns relations between management, board, shareholder and other stakeholders and determines the structure through which company sets its goals, specifies actions required for achieving them and defines how performance will be monitored. In our study, we concentrate on formal corporate governance institutions, yet we realize that corporate governance is shaped both by formal and informal institutions (Postuła and Wąsowska 2018). The influence of formal institutions on corporate governance was already analyzed in literature from different perspectives. For example, Doidge et al. (2007) found that the country’s characteristics, such as the legal environment, is crucial determinant of a company’s governance. Jungmann (2007) tried to determine which system of corporate governance is more efficient. The results obtained by them suggest that it is not possible to assign superiority to neither the German two-tier system nor the British one-tier system. Our study aims to: • identify how regulations determine SOEs’ operations, • identify SOEs’ stakeholders, identify the regulations’ influence on the agency problem in SOEs and • reveal how commonly shared opinions about existing regulations could have influenced future legislative initiatives.

14.2

State-Owned Enterprises in Poland

In Poland, SOEs operate as joint-stock companies and limited liability companies2, according to the Code of Commercial Companies (CCC). CCC is a general regulation that is applied to all companies in Poland, regardless of their ownership type and their ownership structure. According to CCC, in all joint-stock and some of the limited liability companies, shareholders transfer their rights to run the company to the management board, which is, in turn, supervised by the supervisory board. According to this assumption, supervisory board members should exercise their duty in line with legal, economic, and financial rules, and they also should take into consideration shareholders’ private interests. That, in turn, should diminish the agency costs. That dualism of a management board, and separate supervisory board, is a distinctive feature of the two-tier system, which dominates in the majority of the

2

With one exception of so-called state enterprises (pol. Przedsiębiorstwa państwowe) which were a dominant form of SOEs in Poland just after 1989. Nonetheless, due to years of commercialization of state enterprises currently their play a marginal role in the Polish economy. According to the government, there were only 19 operating state enterprises at the end of 2015 (Ministry of Treasury 2016).

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

243

post-communist countries.3 Apart from general regulations, there are also regulations designed precisely for SOEs. Most of them have been included in the Act on rules of state property management from 16th December 2016.4 In the present study, our research sample consists of companies in which a central government is the sole owner. This means that 100% of such company’s shares belong to the Treasury, abstractive legal entity constituting state as an owner. The Prime Minister represents Treasury as a SOEs’ shareholder.5 The Prime Minister can transfer this competence to the other minister, who is a member of the government. The Minister who represents Treasury at the general meeting of shareholders, plays the same role as a private shareholder in a privately owned companies. Nevertheless, there is an essential difference between a private shareholder and the Minister in this matter. The former represents his interest, while the latter represents the interest defined by the government, which has to be consistent with the public interest. Therefore political factors may determine the Minister’s decisions.

14.3

Research Design

Our research was conducted in Poland—the seventh country in terms of the number of SOEs in the OECD (OECD 2017, p. 8). Even though there are more than 100 SOEs in Poland, there are only a few studies devoted to that subject in extant literature. Poland is a member of the OECD and EU, and it follows guidelines regarding the legal environment for SOEs issued by those international institutions. This fact means that we may expect at least some resemblance between regulations affecting SOEs in Poland and other OECD countries. Therefore, despite local specificities, our conclusions expand our knowledge about SOEs as a global phenomenon. In our research, we apply two dominant theories in the field of corporate governance: the agency theory and the stakeholder theory. The agency theory is about relations between two parties: a principal and an agent. The agent acts in the name of the principal, who, in turn, applies proper incentives for the agent. The most critical problem in that relationship is that the goals of the agent and the principal tend to be contradictory (Jensen and Meckling 1976). This type of relationship is ordinary in companies, as board members should act in the shareholders’ interest, but their goals usually differ. That is the reason the agency theory is so commonly used in corporate governance literature. Nevertheless, when we think about SOEs, a typical relationship between the agent and the principal becomes even more complicated, as politicians act at the same time as the principal for a board member and as the

3

In the same time it is also relatively less studied in the extant literature. This regulation replaced law which was applicable before, i.e. the Act of 8 August 1996 on Rules of Performance of Powers by the Treasury. 5 Formerly it was Minister of Treasury. 4

244

I. Postuła and M. Kabut

agent for the society (or voters). As a consequence, SOEs suffer from a dual agency problem (Cuervo-Cazurra et al. 2014, p. 931). The agency theory is the most frequently used in corporate governance literature (e.g., Cuomo et al. 2016; Schiehll and Martins 2016), yet it also has some limitations. For example, the agency theory ignores stakeholders and focus almost exclusively on shareholders’ interest. This problem is the reason why we also apply the stakeholders’ theory, which offers a broader view of a company and admits that a company should take into consideration the interests of all stakeholders. The present study is multidisciplinary and comprises an analysis of legal regulations and a statistical analysis based on the results of a survey conducted among SOEs management and supervisory boards in 2011–2013. The data was collected when the Polish government consisted of the liberal-conservative and the agrarian parties. Since 2015, Poland has been governed by the right-populist party, and in 2017 the new government decided to change regulations that applied to SOEs’ corporate governance system significantly. Despite this significant reform and the passage of time, our findings are still valid because the mechanisms we discovered are relatively universal for companies where politicians and government officials exercise shareholders’ rights. Moreover, such a time perspective allows us to study how commonly shared opinions about regulations could affect future legislative initiatives. Such research design allows defining the aims of this study broadly. Firstly, we want to identify how regulations determine SOEs’ operations. In order to do that, we conducted a thorough analysis of legal regulations concerning SOEs’ corporate governance and identified legal provisions that may significantly affect SOEs operations. In the survey, we asked board members about how the regulations influence SOEs. Secondly, we want to identify SOEs’ stakeholders, as they may also have a significant impact on SOEs’ operations. Moreover, we want to identify the regulations’ influence on the agency problem in SOEs. Lastly, the study should also reveal how commonly shared opinions about existing regulations could impact future legislative initiatives.

14.4

Regulations’ Analysis

The main goal of the regulations’ analysis is to point out potential problems concerning SOEs’ operations, which may be caused by SOEs’ specific regulations. The subject of the analysis is limited to provisions which concern only SOEs and distinguish them from privately own companies, i.e., appointment procedure of SOEs’ management and supervisory boards members, the policy of the management and supervisory boards members’ remuneration and relations among SOEs’ management boards, supervisory boards and general meetings related to assets management. Thanks to this analysis, we should be able to identify how those regulations affect SOEs’ operations. Later in this chapter, we will confront our findings with the opinions of SOEs boards members. Moreover, as a result of an analysis of

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

245

regulations, we should be able to identify who influences SOEs. This identification will help in determining who is a stakeholder of SOEs. Furthermore, we should be able to find provisions which may have an impact on agency problem in SOEs. In this section of the chapter, we focus on regulations that were in charge in 2011–2013, when the survey among SOEs board members was conducted.

14.4.1

The Appointment Procedure of SOEs Management and Supervisory Boards Members

SOEs’ employees and the general meetings of shareholders nominate the members of SOEs’ supervisory boards. All supervisory board members should fulfill legal requirements, which consider knowledge, skills, and experience eligible to act on the board. Employees nominate at least 2/5 of the board members. General meeting approves candidates nominated by employees. The participation of employees’ representatives in supervisory boards strengthens their power as a company’s stakeholders and constitutes the instrument to control the management board. This power, coming from regulations, distinguishes SOEs’ employees from their counterparts in private companies. At the time the research was conducted, the general meeting nominated the majority of board members following the results of the competition procedure. The competition procedure was organized and conducted by the commission appointed by the Minister of Treasury and composed of the ministry officials. The procedure consisted of two stages. At the first stage, the commission created the shortlist of candidates from among all candidates who applied. At the second stage, the minister decided which candidates from the shortlist were appointed to the supervisory board. The role of the ministry officials in the appointment procedure was crucial since they created the shortlist of candidates for supervisory board members. The Minister took the final decision, however, was not able to appoint someone who was not mentioned on the shortlist. In practice, the Minister, as the ministry officials’ superior, could have an impact on the shortlist. Since the appointment procedure had to be repeated every 3 years, the supervisory board members were highly dependent on the ministry officials. Acting in a way that was not accepted by ministry officials, was diminishing chances for reelection. Thus, ministry officials were able to control supervisory board members indirectly. Therefore, the dependence of supervisory board members from the ministry officials could have entailed SOEs’ management boards to be supervised not according to the objective principle of business rationality, the company’s interest or interest of the shareholder, but according to the opinions of ministry officials. Considering that the Minister of Treasury was a political authority, a member of the government supported by political parties that formed government, his decisions in the appointment procedure were also determined by political factors. The minister was able to appoint to the boards’ individuals who ensure that SOEs would be supervised following the goals defined by the government or by the coalition parties.

246

I. Postuła and M. Kabut

These goals could have been inconsistent with business rationality or the company’s interest. Moreover, it was likely that the Minister appointed not the best candidates to the boards but candidates with particular political support. The supervisory board appoints the management board members in the majority voting. However, members chosen by general meetings occupy most of the seats in SOEs’ supervisory board. Therefore, we may assume that ministry officials and the Minister of Treasury, who played an essential role in appointing members of the supervisory board, were also able to indirectly influence the composition of the management board. Political influence on SOEs’ board memberships may explain why after each parliamentary election so many board members are exchanged. The dependence of SOEs’ board memberships and SOEs’ strategies on parliamentary election outcomes may be observed in Poland, irrespective of which parties form a new governmental coalition. Changes to SOEs’ board memberships are possible after the election regardless of board members’ term of office. Minister may decide that, due to particular circumstances, changes in boards’ memberships are necessary in a particular moment. The particular circumstance might be, for instance, a new strategy adopted by the general meeting, which is consistent with the economic policy of a new coalition that formed the government.

14.4.2

The Policy of the Management and Supervisory Boards Members’ Remuneration

The Minister of Treasury sets the remuneration of SOEs’ board members according to legal rules. That remuneration could not exceed the levels defined by the regulation and could not consist of any variable elements. The management board members’ remuneration could not exceed six average wages. In 2013 it was about 5300 Euro per month. The remuneration was fixed and could not consist of any incentive-based or equitybased elements such as bonuses related to the company performance or share options. However, the Minister of Treasury was able to grant an annual bonus that could not exceed three monthly remunerations. The level of supervisory board members’ remuneration could not exceed the average wage in Poland, which was about 900 Euro. The remuneration was also fixed and could not consist of any variable elements. To sum up, the Minister of Treasury, who sets board members’ remuneration was in this capacity restrained by the rules mentioned above. Therefore, the remuneration could not be an instrument diminishing the agency costs of management. Managers could not earn more than fixed limits and could not be enticed by the incentive-based or equity-based remuneration elements. Their remuneration did not depend on their performance. It was likely that in such a situation, managers would take care of their interest and look for extra profits. Moreover, it could discourage the best managers, who expected to earn adequately to their skills, from working in SOEs. Instead, they would choose the private sector.

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

14.4.3

247

The Relations Among SOEs’ Management Boards, Supervisory Boards, and General Meetings in the Scope of Assets Management

Considering the fact that the Minister of Treasury represented the sole shareholder, i.e., the Treasury, at the general meeting, he was able to interpose the same provisions in each SOE’s status. Thus all SOEs’ statuses included the same requirements for general meetings’ or supervisory boards’ approval for SOEs’ assets management. According to these provisions, the approval of the supervisory board was required for the purchase of the company’s real estate, which was worth no more than 30,000 Euro and for the purchase of other kinds of assets, which were worth more than 30,000 Euro and not more than 50,000 Euro. Moreover, the purchase of the real estate, which was worth more than 30,000 Euro and other assets, worth more than 50,000 Euro required general meeting’s approval. The requirement of supervisory boards’ or general meeting’s approval for the purchase of SOE’s assets should reduce agency costs because the managers are controlled directly by the shareholder or by the supervisory board, which operates in the shareholder’s interest. The problem was that shareholder’s interest was defined by the Minister of Treasury, whose decisions were politically determined. The political influence on the SOEs’ assets management could be caused by the government’s economic policy, political parties’ programs, or other particular factors. Such determinants of business decisions were dangerous and could render them irrational and ineffective. Moreover, the requirement for the general meeting’s acceptance demanded time to organize and summon the general meeting’s assembly. If too much time was taken, the purchase of companies’ assets could become impossible because of the investors’ disinterest or changes in other circumstances that determine the transaction. The requirement for the general meeting’s acceptance also enabled the influence of ministry officials on the meeting’s decisions. The officials were preparing information for the Minister, who used to decide on particular transactions on behalf of the shareholder. Officials’ information and comments constituted the basis of the minister’s decisions.

14.4.4

Conclusions of Regulations’ Analysis

Having analyzed SOEs’ regulations, we may conclude that the regulations could have influenced SOEs directly and generated particular problems that determine SOEs’ operations. The main problems here were: • the requirement for the general meeting’s acceptance for a significant part of the management board’s decisions,

248

• • • • • •

I. Postuła and M. Kabut

the influence of political factors on the general meeting’s decisions, the influence of political factors on SOEs’ boards’ memberships, the influence of ministry officials on SOEs, the influence of election outcomes on boards’ memberships in SOEs, the influence of election outcomes on SOEs’ strategies, the limitation of SOEs’ board members’ remuneration.

Another feature that distinguishes SOEs from privately-owned companies is that they are influenced not only by their boards and general meetings but also by the parties that do not operate within the companies, i.e., the Minister and ministry officials. Moreover, by the fact that the Minister is a politician, a member of the government, SOEs’ performance may be determined by political factors. The performance of privately-owned companies is not determined by such factors but by the private shareholders’ interest. Regulations also influence the agency problem within the SOEs. On the one hand, the agency costs in such companies may be reduced by the requirement of general meeting’s or supervisory board’s approval for assets management, while on the other hand regulation on remuneration does not provide the instruments to reduce agency costs by performance reliant remuneration levels, incentive or equity-based remuneration’s elements.

14.5

The Boards’ Members Perception on the Impact of the Regulations on SOEs

The regulations’ analysis provided us with exciting findings that had to be verified in the field. In order to that, we surveyed SOEs management and supervisory board members. Collected data were analyzed using descriptive statistics. The first goal of the statistical analysis was to verify the influence of particular provisions of regulations specific for SOEs as well as problems that are generated by them. The second aim was to indicate which entities influence SOEs’ operations and to decide if their impact is direct or indirect. It is an important issue, as the structure of power in SOEs is also an effect of regulations. The objectives mentioned above were achieved by analyzing the opinion of SOEs’ supervisory and management board members expressed through answers to questions enclosed in a survey questionnaires. The research was conducted in 2011–2013. Questionnaires were sent to all members of supervisory boards and management boards of all operational SOEs, i.e., 296 corporations. Those companies had a total of 451 management board members and 956 supervisory board members. The rate of return of survey questionnaires was relatively high—for management board members, it was equal to 37.25%, while for supervisory board members 25.1%.

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

14.5.1

249

The Impact of Particular Legal Provisions on SOEs

Opinions of supervisory and management board members concerning the regulation of SOEs were expressed through answers to questions concerning both the fundamental issue, i.e., the general extent to which legislation affected SOEs, as well as specific issues, i.e., particular solutions adopted by the legal regulations and problems which stem from those solutions. Respondents could evaluate the effect of specific legal solutions and problems deriving from legal regulations as negative, neutral, or positive for SOE’s operations. They could also claim that the issues specified in the questionnaire had not occurred at all. According to respondents, the general influence legal regulations have had on operations of companies was negative. It was indicated by 38% of supervisory board members and 42% of management board members. Slightly fewer respondents opted for a neutral influence of regulation (25% and 30%), while 22% of supervisory board members and 16% of management board members indicated a negative influence. Very few respondents indicated the lack of influence of regulations on SOEs (3% and 2% respectively). The remaining respondents had no view on the matter. Opinions of SOEs’ management and supervisory boards are indicative of legal regulations being essential determinants of SOEs’ operations; unfortunately, they are negative ones, as recognized by the most numerous group of respondents. This may suggest that legal regulations are hampering the effective functioning of SOEs. Respondents were also asked to evaluate how particular legal solutions and problems generated by them impact SOEs’ operations. The subjects of the evaluation were those legal provisions that were pointed out at the first stage of research, i.e., the analysis of regulations. Respondent’s answers are presented in Table 14.1. The requirement of the general meeting’s approval of the management board’s decisions stem from the status of SOEs. The first part of the article demonstrated that such requirement, irrespectively of its potential to cut agency costs, impedes managing corporations, constrains flexibility required in business, and extends the process of making business decisions. Members of management boards identified that this requirement harms SOEs’ operations. Such an opinion of management board members confirms that this requirement hampers managing SOEs through restricting their independence. Making the management board’s decisions contingent upon the general meeting’s approval, however, was evaluated as positive by supervisory board members. It seems understandable since supervisory boards are obliged to supervise corporations for stakeholders’ interests. The requirement of the management board’s decisions to be approved by the general meeting significantly constrains the possibility of management boards to act against stakeholder’s interests, which not only cuts agency costs but also facilitates supervising management boards by supervisory boards. Analysis of legal regulations indicated that general meeting’s decisions could be politically biased because the Treasury, as the sole shareholder, was represented by the Minister of Treasury, who was a political body and a member of the government,

All values are expressed as percentages (%) The highest values for each question are represented in bold Source: own research

Provisions of SOEs’ regulations and problems that are generated by these regulations The requirement for the general meeting’s acceptance for the management board’s decisions The influence of political factors on the general meeting’s decisions The influence of ministry officials on SOEs The influence of election outcomes on SOEs’ board memberships The influence of election outcomes on SOEs’ strategy The influence of political factors on SOEs’ board memberships The limitation of SOEs’ board members remuneration 0 4 5 2 2 9

3 10 6 5 2 21

Positive impact on SOEs’ operations SBM MBM opinions opinions 45 19

17

11 12

28 12

10

18

18 13

31 10

15

Neutral impact on SOEs’ operations SBM MBM opinions Opinion 16 22

48

75 74

44 72

73

64

72 73

52 78

69

Negative impact on SOEs’ operations SBM MBM opinions opinions 27 53

5

3 2

10 3

2

5

2 2

6 1

2

No impact on SOEs’ operations SBM MBM opinions opinions 1 0

Table 14.1 Evaluation of influence particular legal solutions have on SOEs’ operations according to supervisory board members (SBM) and management boardmembers (MBM)

250 I. Postuła and M. Kabut

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

251

supported by particular political parties. The negative influence of political factors on the general meeting’s decisions was unequivocally confirmed both by members of supervisory and management boards. From politically biased decisions of the general meeting may arise negative consequences for SOEs since the rationale behind business decisions—economic prudence—is displaced with the government’s economic policy objectives or interests of political parties, which do not necessarily have to be in line with the SOEs’ interest. Ministry officials could have influenced SOEs’ operations in three fundamental ways. Firstly, they prepared information and opinions, which has given grounds for decisions of the Minister of Treasury on the general meeting. Secondly, officials were deciding about the shortlist of candidates, from among whom the minister was appointing particular individuals to supervisory boards. Thirdly, officials remained in direct relationships with SOEs’ supervisory board members, who were obligated to inform them about the state of affairs within those companies. Those competencies of officials have proven to be sufficient for the absolute majority of SOEs’ management and supervisory board members to recognize officials’ influence on SOEs as a considerable problem, which according to the lion’s share of respondents, affects SOEs negatively. Such evaluation can be justified by the sense of dependence of SOEs’ supervisory boards’ members on ministry officials. Supervisory board members were aware that officials could have exerted a particular influence over outcomes of competition for supervisory board members, which had to take place every 3 years upon the end of the term of the board. While holding the position, board members might have been guided by acceptance of their actions by ministry officials, which did not necessarily have to conform to objective premises of supervision such as, e.g., economic rationality. Management board members, in turn, were aware that a decision of the general meeting concerning the SOEs under their management could have been dependent on the opinion of officials. Opinions of SOEs’ governing bodies members indicated that the fact that the general meeting was dependent on election outcomes had a significant, yet harmful influence on SOEs’ operations. As it was indicated in the previous part of this paper, Minister of Treasury had multiple ways to influence SOEs, and as an administrative body, his decisions were tied with the election calendar. In practice, one can observe the phenomenon, where after parliamentary elections, the composition of supervisory and management boards of SOEs change in tandem with strategies set out by their general meetings. This phenomenon could be observed in the aftermath of every election. Political parties across the board, regardless of officially held views, are following the suit. The composition of governing bodies and actions taken by the SOEs depends on election outcomes because the government appoints supervisory board members and then supervisory board appoints management board members. After parliamentary elections, a new panoply of political parties emerges, which constitutes the new government. The Minister, who represents the Treasury at general meetings, can dismiss the supervisory board at any given moment and replace him with new board members. A new board can, in turn, appoint a new management board. Such politically driven changes harm productivity and profitability (Kuzman et al. 2018).

252

I. Postuła and M. Kabut

The dependence of SOEs’ strategies on parliamentary elections outcomes stems from the fact that strategies are being passed by their general meetings, where the governmental body represents the sole shareholder, i.e., the Treasury. Hence, the strategies can be determined by political factors, among which may reside in particular economic policy objectives of the new government, which in turn are determined by the political agenda of parties constituting the government coalition. Dependence of SOEs’ strategies on election outcomes comes as a threat to these companies because the processes taking place in the economy and addressing them SOEs’ strategies do not coincide with elections-determined periods. Processes taking place in the economy are cyclical, but economic cycles are independent of election dates. Strategies adopted by SOEs should be long-term, and their alteration should not be dependent on election outcomes but should constitute a reaction to processes taking place in the economy. Delivering the strategy also requires the relative stability of personnel composition of governing bodies. Moreover, changes in the composition of governing bodies should be justified on merit, as opposed to parliamentary elections outcomes. Dependence of SOEs’ governing bodies’ composition on political factors was pointed towards as a general problem, not connected solely to parliamentary elections outcomes. Changes in the composition of governing bodies could be made at all times, provided the Minister deems the changes indispensable. SOEs’ supervisory and management board members pointed out that this issue has a negative influence on SOEs. Negatively evaluated by SOEs’ governing bodies were also imposed by regulation caps on remuneration. On the one hand, such evaluation comes as no surprise, because they were evaluating their remuneration. On the other hand, they were not asked about how adequate their remuneration was, but how remuneration caps influence SOEs’ operations. Remuneration caps mean that the amount of remuneration cannot be an instrument restricting agency costs, because, despite good work, the remuneration could not exceed the amount stipulated by the cap. Such a state of affairs can generate more negative phenomena, like managers searching for additional perks, e.g., a company car, high official entertainment expenses, and best managers may leave SOEs in search of higher wage. It should be pointed out, that the influence of remuneration caps was evaluated as more negative by management board members than by supervisory board members. It might stem from the fact that discrepancy between remunerations of SOEs’ and private companies’ supervisory board members were not as significant as in the case of management board members’ remunerations. Thus supervisory board members were not feeling disadvantaged in that respect compared to their counterparts in private companies to the extent management board members did. Moreover, supervisory boards are not managing companies but supervising them, and therefore a motivational function of their remuneration may be not as significant as for management boards’ members.

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

14.5.2

253

Who Influences SOEs?

The analysis of the presented research findings indicates a strong, negative influence on SOEs of legal regulations specific to them. That negative influence is possible through actions of certain entities operating both within SOEs, and outside them. Therefore it is vital to recognize which entities are influencing operations of SOEs and concluding whether the influence is direct or indirect. Direct influence is exercised by making decisions about operations of SOEs, whereas indirect influence by determining the content of decisions made by other parties. In order to resolve the issue, SOEs’ management and supervisory board members were asked a question about how they evaluate the impact that individual entities have on SOEs, both entities operating within SOEs as well as outside them, and whether they see those entities’ influence as direct or indirect. Answers to the question posed in that manner are presented in Table 14.2. Research findings revealed that management boards exerted more substantial influence on SOEs than general meetings and supervisory boards. Those findings come as no surprise. The essence of a company’s legal construct is the assumption that decisions concerning day-by-day operations are made by the management board, whereas the general meeting makes decisions concerning fundamental issues. Research findings confirm that the management board has a definite and direct influence on the operations of SOEs. However, half of the supervisory board members and almost half of management board members pointed out that the general meeting has a direct influence on SOEs, what can be conclusive of the fact, general meetings make Table 14.2 Influence evaluation of individual entities on SOEs’ operations according to SOEs’ supervisory board members (SBM) and management board members (MBM)

Party Management boards General meetings Supervisory boards Minister of Treasury Deputy ministers that operate on behalf of the Minister of Treasury Political parties that formed the government Ministry officials SOEs’ employees Trade unions

Influence/s directly SBM MBM opinions opinions 84 91 50 46 42 43 31 26 27 23

Influence/s indirectly SBM MBM opinions opinions 7 4 34 34 45 43 30 29 37 33

Do/does not influence SBM MBM opinions opinions 6 4 10 13 7 10 29 34 25 39

14

5

26

14

46

70

10 17 15

12 18 14

35 37 47

35 40 45

46 39 31

42 36 39

All values are expressed as percentages (%) The highest values for each question are represented in bold Source: own research

254

I. Postuła and M. Kabut

decisions concerning fundamental issues. General meetings are not only making fundamental decisions at SOEs but also approve of the management board’s decisions concerning the management of assets exceeding values stipulated by the status. This competence of the general meeting could have been recognized by respondents both as direct or indirect influences on the SOEs. In line with SOEs’ statuses, management boards’ decisions about assets management lacking general meeting’s approval have no legal force, meaning the general meeting’s influence on that matter can be acknowledged as direct. Supervisory boards’ influence on SOEs was evaluated as direct and indirect by about the same number of respondents in both studied groups. Such evaluation can potentially stem from supervisory boards’ competencies stipulated by legal regulations and status, but also from practical experiences of boards’ operations of SOEs. On the one hand, the supervisory board is supposed to supervise the SOE, and is devoid of decisional competences and also cannot issue binding orders to management boards. On the other hand, though, a supervisory board at SOE validates management boards’ decisions in the capacity of managing assets not exceeding in value stipulated by the status thresholds and appoints management board members. Moreover, management board members might act in line with the supervisory board’s recommendations to remain in the management board after their term of office. They realize that the competition for the management board members is carried out by the supervisory board. To summarize, despite legal regulations do not grant to supervisory boards competencies in a capacity of making decisions concerning SOEs’ operations, their practical influence on these companies is so strong, that respondents could have recognized it as direct. A distinctive feature of SOEs compared to private companies is undoubtedly the strong position of the Minister and deputy ministers operating on behalf of the Minister concerning SOEs. The Minister’s strong position stems first and foremost from the fact that he represents the sole shareholder, the Treasury, during the general meeting, appoints SOEs’ supervisory board members, and thus has an indirect impact also on appointing the management board by the supervisory board members. There are so many SOEs that the Minister was not capable of holding singlehandedly effectively his function concerning all of these companies. Therefore in practice, deputy ministers played an essential role as they undertake particular actions concerning SOEs on behalf of the minister, having been authorized by him to do so. As the research findings have shown, deputy ministers had virtually the same influence on SOEs as the minister did, and their indirect impact was evaluated as stronger than the minister’s. Such a strong position of deputy ministers can be brought down to their competences being limited exclusively to relations with SOEs, whereas competences of the Minister of Treasury were far broader, and also comprised other issues concerning state assets. Furthermore, deputy ministers did not attend government meetings, contrary to obligations of the Minister of Treasury. Deputy ministers, who were not burdened with additional responsibilities, could, therefore, remain in a closer relationship with SOEs than the minister himself, and following from that could have more significant influence.

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

255

One should remember that the Minister of Treasury and deputy ministers were politicians, supported by particular political parties. Customarily, when a government coalition includes several political parties, each of them has got their representative in governing bodies of each ministry, who acts in the capacity of a minister or deputy minister. Therefore, political parties could exert influence over SOEs in that manner. Deputy ministers operating on behalf of the minister were appointing supervisory board members at SOEs, which created an opportunity to fill supervisory boards with individuals who had the support of political parties. Bearing that in mind, it is interesting how respondents evaluated the influence of political parties, which form government coalition exerted over SOEs. The majority of supervisory board members and the vast majority of management board members declared that parties have no impact on SOEs at all. That opinion is astonishing when we take into account profoundly negative evaluation of the influence political factors had on SOEs, and the relatively significant impact the minister and deputy ministers had on SOEs. Respondents were probably not linking political factors to parties but to bodies of authority, i.e., to the government and ministry’s executives. It should be brought to one’s attention that, despite the influence of political parties on SOEs was rarely indicated, it was indicated much more frequently by supervisory board members than by management board members. It might stem from the fact that supervisory board members were, to a greater extent, dependent on political factors. They are appointed directly by the minister or deputy ministers, who may be driven by political agenda, i.e., be subject to political influences. Management board members, who were appointed by supervisory boards, were more distant from the direct influence of political factors. The number of respondents who either stated that there was an influence of ministry officials on SOEs and those who thought there was not any, is almost identical. Among those, who recognized that officials influence SOEs, the vast majority deemed the influence indirect. Supervisory and management board members made a similar indication. Bearing in mind that while answering the previous question, respondents considered officials’ influence on SOEs negative, and subsequently, almost half of the respondents confirmed that officials are influencing SOEs, one can ascertain that if there were an impact of officials on SOEs, it would be negative. More common indications towards indirect, as opposed to direct influence of officials on SOEs, stem from their competences. Officials did not issue decisions concerning SOEs. They could, however, influence SOEs by preparing information and opinions for the general meeting, based on which SOEs make fundamental decisions. Officials could have also influenced SOEs through specifying shortlists of candidates for supervisory board members during the procedure of their appointment. Supervisory board members who realized what role officials were playing in that process, can, while performing their functions, follow recommendations, even presumed ones, of officials, because they could indirectly decide about the selection of supervisory board members for the next term of office. Indirect impact officials had on SOEs was challenging to control, and bearing in mind that it was somewhat negative—it was equally challenging to eliminate.

256

I. Postuła and M. Kabut

About 2/3 of supervisory and management board members indicated that employees influenced the operations of SOEs. However, the vast majority from amongst them pointed out that the influence was indirect. Employees did not have at their disposal any instruments of direct influence on the companies. However, they can influence decisions concerning SOEs indirectly through guaranteed vacancies for their representatives on supervisory boards and trade unions. Furthermore, employee rights were strongly protected by legal provisions, which management boards were obliged to take into consideration. The influence of trade unions was evaluated similarly to employees’ influence; however, supervisory and management board members deemed it indirect. Trade unions did not make decisions concerning SOEs’ operations, but they can significantly determine decisions made by SOEs’ governing bodies through their actions. Management boards were obliged to consult with trade unions decisions concerning legal work, including remuneration policy.

14.6

Analysis of Recent Significant Revision of Regulations Specific for SOEs

During the last few years, Polish lawmakers have introduced new regulations concerning SOEs. In this section, we try to find out if the new legal solutions might solve some problems identified in our research. Before that, it is necessary to write down a few general remarks. On the first of January 2017, the Ministry of Treasury had been liquidated. All competencies towards SOEs previously belonging to the Minister of Treasury had been moved to the Prime Minister, who, in turn, may delegate them to other Ministers or plenipotentiaries. Of course, the Prime Minister is not able to directly control all SOEs. Therefore, despite the significant change in the system of SOEs supervision by political bodies, its nature stayed the same, there are still government officials who are in direct contact with SOEs. Moreover, the person who directly exercises the ownership and control over SOEs (the Prime Minister or his delegates) is a politician who has his agenda, but at the same time is a member of the government.

14.6.1

The Appointment Procedure of SOEs Management and Supervisory Boards Members

The Act on rules of state property management from 16th December 2016 introduced considerable changes in the appointment procedure in SOEs. The competition procedure has been liquidated, and instead, the Prime Minister or his delegates have full discretion in that matter. We may assume that this change has somewhat deepened the negative impact of political factors on SOEs. The increased pace of

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

257

board turnover in Poland6 may be proof of that. However, without competition, the ministry officials’ influence on the supervisory board members became weaker. Of course, they still prepare information about SOEs, but they no longer have a direct impact on the appointment procedure.

14.6.2

The Policy of the Management and Supervisory Boards Members’ Remuneration

General principles of remuneration of board members in SOEs also have been subject to significant changes in the recent few years. Currently, remuneration limits depend on the size of the company. In the case of the biggest companies, existing limits are much higher in comparison with the previous regulations. However, in smaller companies, new limits are lower. Moreover, remuneration should have a significant variable element. These new principles of remuneration seem to address main concerns regarding previous regulation. Introducing a variable element to the remuneration should diminish agency costs what should increase SOEs’ financial performance.

14.6.3

The Relations Among SOEs’ Management Boards, Supervisory Boards, and General Meetings in the Scope of Assets Management

Significant changes also affected asset management in SOEs. According to new regulations, the general meeting should approve acquiring assets which value exceeds 100 million zł (~23 million Euro) or 5% of total assets. This change also should have a positive impact on SOEs, as it allows for greater flexibility.

14.6.4

Conclusions of the Analysis of Recent Revision of Regulations

Summing up, recent legal changes regarding remuneration and asset management should positively affect SOEs. Nonetheless, new regulations regarding the appointment procedure disturb to an even higher degree the power structure in SOEs and therefore, makes them more susceptible to the influence of political factors.

6

According to Graniszewska and Mayer (2018) CEOs in SOEs are currently exchanged much more frequently than it was before.

258

14.7

I. Postuła and M. Kabut

Conclusions

The main contribution of this paper is indicating that regulations applicable only to SOEs might have a negative influence on their performance. We identified seven aspects of SOEs’ corporate governance, which are affected by regulations. According to supervisory and management board members, all identified regulations hamper SOEs’ operations. This conclusion is unsettling because it may suggest that in the pursuit of transparency and better control over SOEs, we introduce regulations that harm SOEs’ operations and therefore put them at a disadvantage. Another critical factor that makes SOEs ineffective is a specific power structure within SOEs. As our study shows, SOEs have a group of particular stakeholders. Political bodies and government officials having a significant impact on SOEs operations not only limit their effectiveness but also expose them to a particular dependence from political factors. Our study also sheds light on the problem of agency costs in SOEs. First of all, SOEs’ specific regulations strongly affect existing agency problems. Here we can mention limitations to board members’ remunerations. Moreover, we believe that a dominant position of the Minister and ministry officials over supervisory board members lead to limitation of their effectiveness. What is interesting, even though opinions about previous regulations specific for SOEs were quite well-established and unequivocal among board members, Polish lawmakers only partially takes them into account in the recent significant revision of the SOEs’ legislative framework. Nonetheless, the fundamental principles constituting specific power structure in SOEs that make them highly dependent on political factors, are still present. The results of this natural experiment may suggest that it is not natural for the government to decrease SOEs’ dependency on political factors. The study was conducted in Poland; however our findings are significant for SOEs in other countries, as most of the identified SOEs’ specific regulations are present in all legal systems to some extent. It might be an exciting direction for further research to find out if differences in SOEs’ specific regulations between countries imply differences in the financial performance of SOEs.

References Aluchna, M., & Kaminski, B. (2017). Ownership structure and company performance: A panel study from Poland. Baltic Journal of Management, 12(4), 485–502. Arocena, P., & Oliveros, D. (2012). The efficiency of state-owned and privatized firms: Does ownership make a difference? International Journal of Production Economics, 140(1), 457–465. Bruton, G., Peng, M., Ahlstrom, D., Stan, C., & Xu, K. (2015). State-owned enterprises around the world as hybrid organizations. Academy of Management Perspectives, 29(1), 92–114. Christiansen, H. (2011). The size and composition of the SOE sector in OECD countries, OECD Corporate Governance Working Papers, No. 5. Paris: OECD Publishing. Cuervo-Cazurra, A., Inkpen, A., Musacchio, A., & Ramaswamy, K. (2014). Governments as owners: State-owned multinational companies. Journal of International Business Studies, 45 (8), 919–942.

14

The Influence of Regulations on SOEs: The Perception of Polish SOEs’ Board. . .

259

Cuomo, F., Mallin, C., & Zattoni, A. (2016). Corporate governance codes: A review and research agenda. Corporate Governance An International Review, 24(3), 222–241. Daiser, P., Ysa, T., & Schmitt, D. (2017). Corporate governance of state-owned enterprises: A systematic analysis of empirical literature. International Journal of Public Sector Management, 30(5), 447–466. Doidge, C., Karolyi, A., & Stultz, R. (2007). Why do countries matter so much for corporate governance? Journal of Financial Economics, 86(1), 1–39. Filatotchev, I., Buck, T., & Zhukov, V. (2000). Downsizing in privatized firms in Russia, Ukraine, and Belarus. Academy of Management Journal, 43(3), 286–304. Graniszewska, M., & Mayer, B. (2018). Nowy szef co dwadzieścia dni. Retrieved October 28, 2018, from https://www.pb.pl/nowy-szef-co-dwadziescia-dni-910355 Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. Jungmann, C. (2007). The effectiveness of corporate governance in one-tier and two-tier board systems – Evidence from the UK and Germany. European Company and Financial Law Review, 3(4), 427–473. Kowalski, P., Büge, M., Sztajerowska, M., & Egeland, M. (2013). State-owned enterprises: trade effects and policy implications, OECD Trade Policy Paper No. 147. Paris: OECD Publishing. Kuzman, T., Talavera, O., & Bellos, S. K. (2018). Politically induced board turnover, ownership arrangements, and performance of SOEs. Corporate Governance: An International Review, 26 (3), 160–179. Ministry of Treasury. (2016). Przekształcenia własnościowe przedsiębiorstw państwowych. Retrieved October 28, 2018, from https://bip.msp.gov.pl/bip/raporty-analizy/przeksztalceniawlasnos/10245,stan-na-dzien-31-grudnia-2015-roku.html OECD. (2015). OECD guidelines on corporate governance of state-owned enterprises. 2015 Edition. Paris: OECD Publishing. OECD. (2017). The size and sectoral distribution of state-owned enterprises. Paris: OECD Publishing. Peng, M., Bruton, G., Stan, C., & Huang, Y. (2016). Theories of the (state-owned) firm. Asia Pacific Journal of Management, 33(2), 293–317. Postuła, I., & Wąsowska, A. (2018). Formal and informal governance mechanisms in state-owned enterprises. Evidence from post-transitional Poland. Baltic Journal of Management, 13(4), 410–432. Schiehll, E., & Martins, H. (2016). Cross-national governance research: A systematic review and assessment. Corporate Governance An International Review, 24(3), 181–199.

Igor Postuła is an Associate Professor of Business Law and Corporate Governance at the Faculty of Management, University of Warsaw, where he obtained his Ph.D. in Organisation Studies. His scientific interests focus on corporate governance and university governance. In particular, he puts his interests on the issue of division of formal and informal power in organizations, agency problems, stakeholder management, and transformation of state-owned enterprises. Dean for Administrative Affairs and chief of the Department of Civil Law at the Faculty of Management, University of Warsaw. Visiting professor at Universidad Rey Juan Carlos in Madrid, Universidad Pablo de Olavide in Seville, University of Valencia, Polytechnic Institute of Bragança, University College Ghent and Lisbon Polytechnic Institute of Lisbon. Igor Postuła is also an attorney at law with a specialization in business law. He has also been involved in consulting activities for business, public administration, Polish Parliament, and National Center for Research and Development. He is also the author of more than 50 books and articles. Mateusz Kabut is a Ph.D. student at Faculty of Management, University of Warsaw, an associate of Centre for Entrepreneurship at Faculty of Management, University of Warsaw. His main scientific interest is in corporate governance and entrepreneurship. He is an author of scientific articles and book chapters concerning civil law, entrepreneurship, and corporate governance.

Chapter 15

Efficiency of Legal Framework for Corporate Governance in the Republic of Moldova Olesea Plotnic, Mihaela Tofan, and Elena Ciochina

15.1

Introduction

Concern about the ways in which companies are managed, about the rights and duties of shareholders and administrators has been present for long time in the field of management research. Adam Smith’s ‘Wealth of Nations’ (Smith 1776) is the major driving force for several modern economists, acting to develop new aspects of organizational theory. Among other things, Smith predicted that if a firm is controlled by a person or a group of persons, other than the firm’s owners, the objectives of the owners are more likely to be diluted than ideally fulfilled. The work of Berle and Means (1932) who deals with the separation of ownership and control, also has shed new light on the subject. The authors considered Smith’s concern to specifically examine the organizational and public policy ramifications of ownership and control separation in large firms. They argue that, when different individuals increasingly hold ownership, the industry becomes consolidated and hence the rules to limit the use of power tend to disappear. Numerous researchers and economists, including J.K. Galbrait, have defined the industrial system as part of the economy that is characterized by the activity of some structures large corporations (Burlacu and Poloz 2004). When presenting agency theory, Michael and Jensen (1976) broadened the discussion, providing a theoretical basis for corporate governance studies. Corporate governance is commonly defined as the structures and processes for the direction and control of corporations, specifying the distribution of rights and

O. Plotnic (*) · E. Ciochina Academy of Economic Studies of Moldova, Chisinau, Moldova M. Tofan University Alexandru Ioan Cuza, Iași, Romania e-mail: [email protected]

© Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9_15

261

262

O. Plotnic et al.

responsibilities among the main participants in the corporation and spelling-out the rules and procedures for making decisions on corporate affairs (OECD 2004). For the first time, the Cadbury code1 established the basic rules of governing a company, in which the corporate governance was defined as the system by which companies are directed and controlled. Corporate governance is the mode in which a company is managed and controlled. The corporate governance regulates the distribution of rights and responsibilities between different categories of persons involved in the company, such as: the board of the company, its directors, the shareholders and other categories. It establishes the rules and procedures for decision making regarding the company’s activity. This system sets the structure and the decision making authority with respect to the company’s objectives, the means to achieve them and the system for performance monitoring.

Later on, the White Charter, OECD Principles, Preamble, 1999 defines the corporate governance as “a set of relationships between the management of an entity, its board, the shareholders and other associated parties. This also provides the structure which sets up the company’s objectives, as well as the means for achieving the objectives and for monitoring its performance. A good governance of corporations should provide the motivation for achieving the objectives which are in company’s interests and in the interests of the shareholders and for promoting an efficient monitoring, thus encouraging the companies to use their resources in an efficient manner.” Until recently, few researchers and practitioners were concerned with the problems of corporate governance, being generally perceived as an important issue only for the companies listed on the Stock Exchange and Securities Exchange. On the other hand, the small companies, which are not listed on the exchange although they make up a large share of the total companies, doubt the need for introducing standards for corporate governance in their activity, arguing that small companies have a limited number of shareholders and the respect of corporate governance principles is expensive. This is the reason why developing countries pay inadequate attention to the problems dealing with the quality of corporate governance, while the implementation of such respective principles is carried out reluctantly. Although the financial crises of 1997–2000 in Asia, Russia and Latin America have shown convincingly the need for strict corporate governance, few developing countries maintain this issue in a focus of the decision makers. It should be mentioned that the inefficient procedures for corporate governance are a great danger not only for individual corporations, but also for the society as a whole (Pânzari and Spinei 2004, p. 3). Corporate governance is defined by Organization for Economic Co-operation and Development (OECD) as a set of relationships among company’s management, its board, its shareholders and other stakeholders, providing the structure through which

1 A UK code of best practice concerning appropriate senior management remuneration, produced by the 1992 Cadbury Committee on the financial aspects of corporate governance.

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

263

the objectives of the company are set, while the means of attaining those objectives and monitoring performance are determined. In Notes of Corporate Governance Manual, written by the International Finance Corporation, corporate governance “includes legal norms, normative acts and activity practices in the private sector which allow the corporations to attract funds and human resources, to effectively exercise entrepreneurship activity and, finally, to assure the continuity of their operation by increasing their long term value and observing the interests of the shareholders and of the society as a whole.” Good corporate governance should provide proper incentives for the board and management, in order to pursue objectives that are in the interests of the company and shareholders and to facilitate effective monitoring, thereby encouraging firms to use resources more efficiently (OECD 1999). The basic principles of the OECD on corporate governance were recognized in 1999 by the Financial Stability Forum as one of the 12 basic conditions for the stability of financial systems. Studies have shown that good corporate governance practices have led to significant increases in economic value-added of firms, higher productivity, and lower risk of systemic financial failures for countries. Essence of corporate governance as science can be deduced from its definition: corporate governance is the study of the mechanism and procedures of planning, organization, motivation and decision-making control over them as well as processes, links in the cumulative capital-based enterprises (Burlea 2011a, b). Studying the literature, we find out that the authors conclude that in the Republic of Moldova, there is no normative act so far that would regulate the concept of “Corporation”, although in the legislative and normative acts starting with 1991 this notion is used (Burlea 2011a, b). The only definition so far was adopted by Government Decision no. 22 of 16.01.2003 (Government Decision 2003), thus repealed later on, which stated “Corporation is an enterprise registered in the form of an open-ended joint stock company, which has executed or envisages the issue of shares. More broadly under the notion of corporation is meant the totality of enterprises and organizations linked to each other through property and (or) production relations in order to achieve a common purpose (holdings, financial-industrial groups)” and the corporate governance “is a set of relationships between the owners of the corporation and the employed managers, as well as other stakeholders—employees, partners, creditors, and local authorities, through which the balance of their interests is achieved using a certain model of corporate governance established by the law.” The notion of corporate governance, as it is stipulated above, included a multitude of relationships between the management of companies and stakeholders and it determines the balance of their interests. The present aspect, also indirectly related to the corporation, is provided in par. 2, art. 55 of The Civil Code of the Republic of Moldova (The Civil Code of RM 2002), namely: the legal person can be organized in a corporate way or as membership, may be dependent or independent of one number of members, may have a lucrative or non-lucrative purpose (Burlea and Spînu 2012). Therefore, it seems that there is in fact a deficiency of proper legal framework to stimulate creation of genuine corporate structures in the national economy.

264

O. Plotnic et al.

Currently, the main efforts of The Republic of Moldova legislator is geared towards making various reforms and creating regulative conditions, but with all the significance of these measures, on corporate governance—the internal factors of economic success remain outside the attention of governmental managers. The founders of corporate governance, considered to be the most important economists and also a number of classics of economic science (Drucker P., Eucken W., Keynes J.M., Lambin J.J., Hall A., Porter M.E., Samuelson P.A.) dedicated a great deal of research regarding this aspect of economic science, of major importance. Further, their research has been developed in the studies of foreign well-knows scholars such as Ansoff I., Brealy R., Dunning J., Prahalad C.K., Shleifer A., Stiglitz J.E. and others. Both in theory and in practice, corporate governance is a relatively new theme in the Republic of Moldova. Many Contemporary national authors (such as Burlacu N., Ţurcanu G., Poloz A., Rău A., Balanuţă V., and Vulcan) have focused their research either on the general aspects of corporate activity or on the analysis of their financial activity. Therefore, the authors regard the conceptual approach to the corporate governance as insufficient, which leads to the lack of an instrument for assessing the efficiency of corporate governance, and they are proposing ways to make it more efficient, based on the research on this topic before and on the situation in Moldova nowadays. There are many companies in the Republic of Moldova that were privatized or are still state owned, in which the control over the management is inconsistent or almost nonexistent. In such conditions the introduction of the corporate governance principles (Business Principles), and implementation of an adequate control system is an urgent need. In order to encourage foreign investments, the Republic of Moldova needs to develop a business environment capable of assuring a high level of corporate governance (Pânzari and Spinei 2004, p. 3). The paper presents the information on corporate governance practice both in the international and the regional context, specifically to identify the current situation of corporate governance in the Republic of Moldova. The applicative value of the work lies in the proposition to adopt the Corporate Governance Code, which would ensure managers’ accountability, management argumentation, increased transparency of information, increased confidence from business partners, and improved corporate governance.

15.2

Methodology, Purpose and Objectives

Research position of the authors related to this topic was formed on the basis of the local and foreign scholars publications on the theory of corporate management, general and strategic management, company theory, business valuation and investment projects, accounting and economic analysis, as well as the literature on the concept of value-oriented management entity. Following the documentation on the most important authors who contributed to the theoretical and methodological

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

265

research, the authors used research methods such as deduction; induction; analysis and synthesis; graphic methods (to illustrate certain results); methods of comparative analysis (which allowed the dynamic comparison of several entities depending on a particular indicator); methods of mathematical modeling, etc. The purpose of this article is to investigate the particularities in organizing corporate governance in Republic of Moldova, taking into account the international experience of introduction and application of corporate governance at national level, scientific design of methods identifying the particularities of corporate governance organization in Republic of Moldova, identification of the existing organizational and management problems in Moldova’s enterprises and with establishing solutions to critical issues to be able to proceed with the development of the issues methodological and applicative aspects of company management renovation in Moldova.

15.3

Corporate Governance Versuss Efficiency of a Company

According to Leal (2004), there is a strong desire of executives and institutions to promote good corporate governance practices, and in that way they lead to higher firm value. The study points out the importance of corporate governance in developed markets and emergence and suggest empirical relationships between investors and value of the company they own. Rivals Silveira (Saito et al. 2008), searched for evidence of the relationship between mechanisms of governance and performance, how it varies according to the econometric approach, if the mechanisms of governance are exogenous or endogenous and what type of the causal relationship exists. For Bohren and Odegard (Bohren and Odegaard 2003), almost all of the corporate governance studies employ an econometric approach, which assumes that governance mechanisms are exogenous variables, causality presents a unique sense of corporate governance for performance and the regressions are run by means of isolated equations using some of the mechanisms of governance. There are, according to the same authors, studies that assume that the mechanisms are endogenous variables, analyzing the causal relationship also in a single sense, going from the structure of property for performance. There are a large number of researches whose main objective is the search for an empirical relationship between corporate governance and performance. In fact, studies try to demonstrate that there are no other major factors to justify the adoption of a corporate governance structure to demonstrate that transparency, fairness, accountability and social responsibility have relation to the company’s financial results. Studies carried out by Silveira (2004), Silva (2004), Leal (2004) and Srour (2007) present revisions of a large number of empirical researches that aims to establish a relationship between mechanisms of corporate governance and performance.

266

O. Plotnic et al.

Through a variety of analytical researched in this area, it is certain that the studies aim to demonstrate a relationship between corporate governance and corporate performance, using accounting indicators and indicators of analysis of joint actions with the use of econometric methods. However, depending on the relevance of the relationship between governance and performance, there are suggestions in the literature to establish alternative performance measures, with the use of non-parametric analyze one of the proposals (Nanka-Bruce 2006). Lehmann, Warning and Weigand (2004) tested the hypothesis that firms with more efficient structures of corporate governance have high profitability. The analysis was carried out with data from 361 German companies covering the period from 1991 to 1996. The results showed that the efficiency scores of the governance structures contribute significantly to explaining the differences between of profitability between companies. The differences by type of control are not statistically significant. Efficiency, on the other hand, explains both the type of control and the concentration of ownership.

15.4

Corporate Governance in Republic of Moldova

Most economists and specialists in the field of economy and administration, native and foreign, believe that the stable processes of the recent crisis that affected the economy are linked, in many respects, with the problems of forming the new appropriate type of economic, managerial, administrative and state governance that are modified by the economic reality—corporate relations. Most convincing manifestations of this situation: the existence of numerous contradictions that prevent the dynamic development of the economy and the creation of new organizational and legal forms—have not determined the creation of efficient owners in most corporations. The strengthening of the private property regulation, and the development of new types of business organizations have accompanied rapid economic reform (Love 2010). At present, corporations in Moldova are mostly small and medium size joint stock companies, in which substantial financial and material assets are concentrated. Such companies comprise 2.6% of all companies, employ 25.7% of the total number of employees, and generate 34.8% of net sales. The company’s structure is characterized by an enhanced concentration of share capital. Corporations make an essential contribution to the revenues of the budget, promote the exports of goods and services, and have a positive impact on economic policy (IMF Country Report No. 04/395, 2004, p. 64). Although reforms in the economy of the Republic of Moldova have lasted more than 20 years, the market has not yet formed professional managers who may be employed in economic entities. There is missing the effective control over the management and the methods of the management of corporations by the founders; this is also, in the opinion of many foreign investors, an impediment to integration of the Moldovan companies within the market where the foreign companies compete,

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

267

in order to attract foreign investments and to exit to international markets, etc. In this way, the evolution of the forms of interaction between founders and the hired managers not only did not solve the problem of increasing the efficiency of the economic activity of the entities, but vice versa, it has aggravated the problems that existed (Burlea and Spînu 2012, p. 112). In our opinion, we need to make sure first that corporate governance exists within the entity, in order to be able, by various manners, to influence the process of making corporate management more efficient. Therefore, if it does not exist (which is very often the case within the entities of the Republic of Moldova), it must be implemented. Corporate governance is a relatively new theme for legal science and practice entrepreneurship in the Republic of Moldova. The vast majority of contemporary national authors, studying large structural organizations, have focused their attention on studying the financial and banking groups, while corporations are divided into members of the financial and non-financial sectors. Another part of the local economists, few in number, has focused their research on studying the specifics of financial management in administration corporate sector and in the non-financial sector, their work having an applicative character, basically examining only on the general aspects of corporate managerial activity (Burlacu and Poloz 2004; Ţurcanu and Rău 2013; Poloz 2005; Ţurcanu 2000) or analyzing the financial activity of joint stock companies (V. Balanuţa, A. Caraganciu, A. Poloz). The local managers interviewed within the social research carried out by Transparency International Moldova in the city of Chisinau view the range of corporate relationships in the same aspect. Referring to the frequency of some corporate relationships, the respondent managers stated that relationships manager—employees prevail in the company (82%), while the relationships manager—supplier amount to 55%. The Moldovan managers place the manager–shareholder relationships, which are extremely significant in the context of corporate governance, in the third place (48%) on their agenda (Pânzari and Spinei 2004, p. 6).

15.5

Corporate Governance Legislative Framework in Republic of Moldova

Corporate governance in Moldova is mainly governed by the Law on Joint Stock Companies (No. 1134-XIII of 2 April 1997); the Law on Securities Market (No. 199-XIV of 18 November 1998), the Law on Business Investment (No. 81-XV of 18 March 2004) and the Law on Entrepreneurship and Enterprises (No. 845-XII of 1 January 1992), all as amended. In general, the quality of legislation and its effectiveness show serious weaknesses that should be targeted by authorities as a matter of priority. The 2007 EBRD Corporate Governance Assessment showed “medium compliance” of the quality of the corporate governance legislative framework in Moldova compared to the OECD Principles of Corporate Governance, with lowest

268

O. Plotnic et al.

compliance in the area of disclosure and transparency, responsibility of the board and the rights of shareholders. The assessment of the practical implementation of the framework indicated suboptimal compliance in the areas of enforceability, speed, simplicity and institutional environment in redress, as well as superficiality and speed in disclosure. The Law on Joint Stock Companies regulates the setting up and the functioning of the joint stock companies and sets out most of the corporate governance rules in Moldova; the Law on Securities Market establishes detailed disclosure requirements for the issuers, conflicts of interest rules and transactions with affiliated parties; the Law on Business Investment sets out the rights and obligations of investors and provides them with guarantees and the Law on Entrepreneurship and Enterprises provides guarantees for the respect of investors’ rights, protection against expropriation, and payment of damages in the event investors’ rights are violated. The Law on Financial Institutions (No. 550-XIII of 21 July 1995) and the Law on the National Bank of Moldova (No. 548-XIII of 21 July 1995), both as amended (Pânzari and Spinei 2004) set out the regulation for corporate governance of banks. For comparison, a research carried out by Economist Intelligence Unit Limited, funded by KPMG International, has revealed that 46% of the interviewed mangers placed the problems related to corporate governance among the first three priority issues on their agendas, while 14% place them as first priority. The fact that these relationships currently are considered by the Moldovan managers to be important does not mean that they are solved in practice. In the Republic of Moldova, both in some companies with local or foreign investors and in some state own companies, the control over the management is inconsistent or almost nonexistent. In these conditions, the introduction of corporate governance principles for improvement of economic performance of companies and the implementation of an adequate system for control over the management is an urgent need (Pânzari and Spinei 2004). On June 1st, 2007, a Corporate Governance Code was issued by the NCFM.2 The Code includes a voluntary set of rules on corporate governance recommending the “comply or explain” rule. In order to ensure and protect the rights and legitimate interests of shareholders, there is the need to comply the corporate governance legal requirements from the regulatory framework in force for joint-stock companies with international corporate governance standards. So, the paragraph 27 (1) (c) of the National Plan of actions for the implementation of the Moldova—European Union Association Agreement for the years 2014–2016, approved by the Government Decision of the Republic of Moldova no. 808 of 7 October, established the need for the Code to rule on good corporate governance, which has been published and implemented starting with the 24.12.2015. The main objectives of corporate governance are to create an efficient system to ensure the safety of shareholders’ funds and their effective use, to reduce the risks that investors are not able to anticipate and/or unwilling to accept, and to avoid the

2

The Code is available at: http://www.ebrd.com/downloads/legal/corporate/moldova_code.pdf

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

269

reduction of the company’s investment attractiveness and the value of its shares caused by the investors long-term management. According to the code, corporate governance provides the way in which the objectives of the company are established and determined, as well as the means to achieve these objectives and the procedures for monitoring the performance of the company. The Code reflects the corporate governance framework that ensures fair treatment (in strict compliance with the law) for all shareholders of the company, including minority and/or foreign shareholders holding ordinary and/or preferential shares, and represents a set of governance standards for the management and shareholders of the company in the effective management of a company, adopted for: 1. protecting and promoting the rights of shareholders and other relevant stakeholders; 2. clarifying the governing roles of the governing bodies; 3. ensuring the functioning of joint stock companies in an environment without corruption; 4. promoting the interests of managers, employees and shareholders by harmonizing the regulatory framework, as well as by other measures. The corporate governance framework should ensure fair treatment (in strict compliance with the law) for all shareholders of the company, including minority and/or foreign shareholders holding ordinary and/or preferential shares. The structure of the management authorities of companies varies from one country to another. Some countries, such as Germany and the Netherlands have developed a two-headed structure for company management. There is a distinct difference between the Administrative Board composed of investors, creditors, and employees, which is responsible for the supervision of the company’s activity and the Executive Board or the management that is responsible for the day-to-day operation. In other highly developed countries, such as, in Great Britain and in Canada, there is only one Administrative Board in which independent members (having no executive responsibilities) hold a significant share. The basic requirements are their non-affiliation and non-involvement in day-to-day operations of the company. In Republic of Moldova, the model that is based on high capital concentration prevails from the three known models for corporate governance. The management bodies of a company include: • The general meeting of shareholders; • The Board of the company; • The company’s executive body. The responsibilities and obligations of the management bodies are clearly stipulated along with the mode for convening and election of such bodies, in Title IV of the Law on Joint Stock Companies No. 1134-XIII of April 02, 1997. The default rule provided by law is that the general meeting of shareholders appoints the supervisory board, the CEO and also the executive board. This means that in the event the general meeting of shareholders decides to keep the default rule and retain the

270

O. Plotnic et al.

authority to appoint the CEO and the executive board, the supervisory board has no real advantage for the meaningful oversight over senior management. Further, in most local companies there is no effective separation between ownership and control. Often, supervisory boards are dominated by the controlling shareholder(s), with few—if any—real independent non-executive directors. The whole concept of an independent director is underdeveloped in Moldova. Transparency is at a low level, due to critical disclosure weaknesses vis-à-vis the International Financial Reporting Standards (IFRS). Significant shareholder rights protection mechanisms are not in place at the companies’ level, in particular regarding the related party transactions. The law does not guarantee a level playing field with respect to the division of powers among corporate bodies; in particular, the default rule on appointment/removal of the supervisory board and executive board members provide little leverage to the supervisory board for its oversight functions (Tofan et al. 2015a, b). The public disclosure of information in a secure, honest and transparent manner allows interested parties (employees, creditors, and investors, suppliers) to be informed about the company’s situation. In this context, adhering to corporate governance recommendations is vital and essential from the point of view of stakeholders. It is in society’s interest to promote long-term cooperation between stakeholders, which will lead to the prosperity of society and stakeholders will benefit from good management and protection of the company’s capital. Corporate governance requires stakeholder interests to be taken into account, in line with the recommendations of transparency, accountability and business ethics. If the rights of the interested parties are violated, there should be mechanisms to redress the situation, including addressing the competent public bodies and courts. The company must provide protection to interested parties acting to disclose the illegal actions taken by its management. Furthermore, Moldovan company law requires companies (and banks) to have an audit commission, which is not a board committee but a separate body appointed by the general meeting of shareholders, whose members cannot be supervisory board members. The Regulation on related party transaction and disclosure of beneficial ownership are detailed but there are doubts about their effectiveness. When it comes to banks, risk governance frameworks, risk management, compliance and internal audit remain under-resourced and not well structured. The audit commission, which is a separate body appointed by the general meeting of shareholders and mandatory for banks, is generally perceived as a dormant body or another layer of internal control reporting directly to the shareholders. The legislation in force does not establish clear mechanisms to ensure the disclosure of beneficial ownership and affiliated parties disclosures (EBRD 2014, p. 21).

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

15.5.1

271

Structure and Functioning of the Board in Republic of Moldova’s Legal Framework

Large companies are organized under a two-tier board system, while in companies with fewer than 50 shareholders; the general shareholders meeting can directly exercise the supervisory board’s powers. The legislation in force and the practices of the ten largest listed companies show a framework on the structure and functioning of the board in need of reform. A major shortcoming is the lack of clarity in law in assigning key responsibilities to the board. We could not find any evidence that the board is playing a strategic role within companies. Furthermore, listed companies are not required to have independent board members. Only boards of banks are required to be made up of a majority of “non-affiliated” persons, but there is no evidence of the presence of independent directors. Board committees are non-existent and the only requirement is for an auditing commission—made of non-board members and accountable to the general shareholders’ meeting. We have doubts about the effectiveness of this mechanism. There is no legal requirement regarding board members’ qualification (except for banks), and boards appear to lack a diversified mix of skills. Boards are generally small and gender diversity is limited, while there is no established practice of board evaluation and a corporate secretary supports the board. Law regulates liability of board members and conflict of interest; however little case law exists until the moment of the research (Cigna et al. 2017).

15.5.2

Transparency and Disclosure

Non-financial information disclosure requirements for companies and banks are quite detailed. For banks, selected information must be made available on their website. In general, banks’ websites appear to be informative; however, some key information does not appear to be systematically disclosed (e.g. transactions in company shares, minutes of the general shareholders’ meeting). The law requires public interest entities to disclose their financial statements, which must be prepared in line with IFRS. All ten largest listed companies comply with this requirement. Reporting to the market and shareholders appears to be detailed by law, but in some cases it does not appear to be well implemented. The law is fairly detailed concerning disclosure on the external auditor and appears to be well implemented in this respect (Cigna et al. 2017).

272

15.5.3

O. Plotnic et al.

Internal Control

All entities are requiredto establish a system of internal control, but the internal audit function is regulated only for banks. Internal audit often lacks independence, with unclear reporting lines between management, the board and the audit commission. Internal audit does not seem to meet often with board members in the absence of management. Banks do not seem to be required to have a standalone compliance function. Audit committees are non-existent and the only requirement is for an auditing commission that is not a board committee. There is no requirement for companies to adopt a code of ethics. There is no specific whistle blowing legislation in the Republic of Moldova. The external audit function is well regulated but how the independence requirements are properly implemented remains a non-answer question. Regulation on related party transactions and conflict of interest appears to be comprehensive.

15.5.4

Stakeholders and Institutions

The Moldovan securities market is undeveloped and its stock exchange is very small, listing less than a dozen companies. The volume of transactions is low and some days there are no transactions at all. The stock exchange also operates as a platform for trading of non-listed issuers’ securities, which do not need to comply with the listing requirements. The stock exchange’s website does not provide any corporate governance information on issuers. The National Commission on Financial Markets (NCFM) approved a Corporate Governance Code in 2007, which has never been reviewed. It seems that the Commission has enacted a new code in March 2016. Listed companies and banks are required to dedicate a special chapter of their management report to corporate governance, covering information on the corporate governance adopted by the entity and extent to which it complies with it. Banks are expressly required to have their own code of corporate governance based on the NCFM’s Corporate Governance Code and banks seem to comply with this obligation; however, information on the extent of compliance with the code is generally incomplete or inexistent. There are inconsistencies in corporate governance legislation. International organizations indicators reveal that competitiveness and corruption in Moldova are serious problems that need to be addressed (Cigna et al. 2017).

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

15.6

273

Comparative Analysis with the Good Practices in Central Europe and Russia

In the last 20 years, Central and East European (CEE) economies have undergone large economic transformations. These changes were not straightforward and particular countries have achieved their transformation with varying degrees of success. Transition economies had to experience a transformation process in which institutional environment had to be created in a relatively short period. Hence, some elements of the environment are missing or underdeveloped. This pertains mostly to legal systems, capital markets, banking sector and human resources. The problem of corporate governance in CEE countries is closely associated with privatization process. The progress of appropriate corporate governance mechanisms has taken a different path in CEE in comparison to Western economies. Corporate governance legislation in most of CEE countries is already in place but its efficiency varies considerably and thus requires further development. The important question in the investigation of formed structures and models of corporate governance is whether to accept one of the models that have evolved over time within matured market economies or it is preferably to suggest another model for CEE countries, which is adapted to specific conditions of transition economies. The core of the problem is to be found in the fundamental orientation of two corporate governance models belonging to developed market economies. On one hand, the Anglo-American model is based on the market that controls companies and presumes capital markets have high liquidity, publicly traded capital and a large number of publicly traded companies. On the other hand, the Continental-European model presumes effective functioning of the banking sector and its monitoring role that substitutes the control function of capital markets. Unfortunately, neither the banking sector, nor capital markets are well established within transition economies (Franek 2016, p. 123). In the comparative analysis of corporate governance systems, made by Jiri Franek in 2016 (Franek 2016), it was established that the post-privatization period for CEE countries encountered problems in regard with an insufficient system of corporate governance and moral hazard issues. The critical question for these transition economies was how to cope with the period of simultaneous existence of the older system of state enterprise and control over resources and the new system of private ownership control, because privatization process and creation of new institutions in these particular countries have taken a long time to develop (Tofan et al. 2015a, b). The road from the older system to the new one was complicated and transformation processes that could not have been copied from the models of developed countries, because disposable time and primary conditions were very different. Furthermore, the transformation process took place at the background of significant economic, cultural and social differences in CEE economies that were essential for the whole course of changes in these national economies. It was noted in the research that after privatization was completed, CEE countries could be considered representatives of the inside controlled systems that are dependent on banks, according to the corporate governance system in force. The absence of functional capital markets is apparent.

274

O. Plotnic et al.

The underdeveloped capital markets do not supply the necessary flow of new capital to businesses; their low liquidity does not allow indirect ownership control over the behavior of managerial boards through the market for corporate control. From the economic performance perspective, credit markets in CEE countries are potentially more efficient. Comparative analysis (Franek 2016), suggests that corporate governance systems operate on the basis that it has been inspired by Continental-European model (German model). Some differences that occurred are not considered significant, though the Codes of Best Practice based on the OECD Principles of Corporate Governance coming from Anglo-American environment has no influence. However, some scandals in Germany have weakened the up to now solid reputation of German model and its dominant influence that has spread into all CEE countries. Participants of international capital markets will still demand a good level of company corporate governance while considering investment opportunities and those companies, which do not pay sufficient attention to corporate governance practices, will discourage them. There are differences in the levels of corporate governance among CEE countries due to the history of legal tradition, social habits and political framework that prevails in a particular country. Transition economies will continue to learn from corporate governance practices of historically successful companies. In recent years, there has been a significant step forward in CEE regarding specific aspects of institutional reform; however the situation varies in particular countries (Franek 2016, p. 132). When comparing the development of corporate governance in Central Europe and Russia we can identify some similarities and differences. On one hand, the countries of Central Europe and Russia have much in common: they all have been involved in the two major economic periods of the twentieth century: the communist experiment with a command economy, and the subsequent transition from plan to market (Mogilevskyi 2001). The latter still continues, and it has yielded different results in different countries. For example, between 1990 and 1999, GDP in Poland grew by more than 40%, while in Russia it fell by 40% (Oman 2001). The awareness of the interrelation between the successes of reforms and the quality of corporate governance brought forward the issue of corporate governance improvement. The Bank of Russia Financial Market Service notes that the purpose of corporate governance is to give shareholders opportunity of effective control and monitoring of management’s activity and all that should help for increasing company’s capitalization (Osipova 2013). Comparative analysis of certain corporate governance institutions in Russia and major EU countries also shows that they have much in common. For example, boards of directors in France, Germany or Italy, as well as in Russia, are not particularly active and there are mainly ‘insiders’ affiliated with the owners and management of the companies. Minority shareholders are clearly in the minority. In the UK and the United States, boards of directors are vigorously active and include mainly independent directors. According to the Merit Research Corporate Governance Risk Survey (Owen 1997) the countries of Central Europe show similar weak and strong points in corporate governance. Thus, the law enforcement

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

275

is their weakest point, while regulatory framework is the strongest. Slowness of courts, inefficiency of arbitrage, as well as evasion of the final verdict are the most commonly observed problems. At the same time, it is admitted that regulatory institutions are independent and well functioning. In Hungary and Poland, the quality of the regulatory framework is defined as approaching the standards of economically developed countries. Company laws in all these countries are good quality in regards to shareholder rights, but creditor rights and laws dealing with bankruptcies, quality of contracts and conflicts of interests remain less pronounced. According to the opinion of the European Commission (Porshakov 2006) harmonization of the rules relating to EU company law and corporate governance is essential for creating a Single Market for EU legal Services. In the fields of company law and corporate governance, objectives include providing equivalent protection for shareholders and other parties concerned with companies, ensuring freedom of establishment for companies throughout the EU, fostering efficiency and competitiveness of business, promoting cross-border cooperation between companies in different Member States, and stimulating discussions among Member States on the modernization of company law and corporate governance. EU laws and codes set the standards for good and responsible management of companies. They are meant to ensure that a company’s management remains focused on the long-term interests of their shareholders. As part of a wider reform of EU corporate law, the EU Commission is now examining how to strengthen the rules and make them less dependent on selfregulation. Managers and boards of directors would be held more accountable for their decisions (Pistor 2000). On the other hand, corporate governance practices in the EU and in Russia differ considerably. There are certain objective and subjective factors that allow comparisons and analogies to be made. Furthermore, even within the euro zone, corporate governance institutions differ in the levels of their maturity. These differences became evident especially in the context of the EU enlargement with a large number of East European states, although several ‘old’ EU members (e.g., Portugal or Greece) are only slightly ahead of Russia in the development of such institutions (Shitkina 2008). In Europe, the state is in charge in reforming corporate governance. The business community, not only in Russia, but also in many European countries, is not yet selforganized and self-sufficient enough to influence the respect of corporate governance principles. The prevalence of concentrated ownership in Russian and the majority of European companies have a substantial impact on the essential aspects of their activity, such as relations between shareholders and management of a company, transparency, and the status of independent directors. In addition, the comparison of development of corporate governance in Russia with Central Europe helps to reveal the factors that influence its poor performance. In the paper “Factors influencing corporate governance in post-socialist companies: an analytical framework” (Stiglitz 1999) the author indicates that “in summary, there are four factors which can influence corporate governance performance, in the form of pressure exerted by: majority shareholders; outside minority shareholders; internationalization/globalization and the state (via legal regulation)”. Although in the process of reforms all those

276

O. Plotnic et al.

countries have encountered similar problems, such as insider-dealing, violation of shareholders’ rights, residual state property in enterprises and others, (Tofan et al. 2015a, b) it seems that the initial conditions in a country as well as its characteristics and implemented policy reforms play a key role in shaping the performance of a national system of corporate governance.

15.7

Conclusions and Results

Making a thought analysis base on the definition of corporate governance given by different organization at different times, we may conclude that the notion of corporate governance is viewed through the aspect of an economic entity’s (company’s) operation, and the relationships between the governing bodies and different stakeholders such as shareholders, employees, creditors, suppliers, as well as local authorities and the civil society. One of the areas in need of improvement in corporate governance is the development of the securities market; that became an important sector of the economy, as it is the sector where the sale-purchase of shares takes place and investments are attracted for restructuring and renovation of companies. The investors become increasingly demanding in respect to the quality of corporate information, channels of their disclosure and implementation of standards for corporate governance in companies in which they intend to invest capital. In the Republic of Moldova legal framework, the promotion of efficient steps in corporate governance, the implementation of business principles recently developed by the representatives of the private sector, nongovernmental organizations and the Union of Trade are efficient actions for the prevention and fighting of corrupt acts. There are a series of constraints to the further development of corporations, including: • a low ratio of foreign investments in the capital structure of companies, investing in Moldova companies is perceived as risky • lack of banking resources in the financial structure, due to the weak legislation and the inefficiency of corporate management • lack of protection of minority shareholders’ rights • weak management responsibility and the lack of a corporate administration code • weak mobilization of domestic saving for investments • insufficient protection of investors, lack of transparency and insufficient objective information regarding corporations and the stock exchange market In addition to the above there are a number of organizational problems including: • lack of information and incentives for good corporate administration management • legal, judicial and public entities personnel are not sufficiently familiar with the role and regulatory methods of the activities of the corporations • the absence of a traditions in corporate behavior • an insufficient analysis of the problems of the corporate sector

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

277

To conclude on our analysis, the objectives of corporate management policy in Moldova are: • the promotions of efficient corporate management through the elimination of administrative restrictions • the creation of transparent and stable relations, which are understood and accepted by all parties and are based on the rules of corporate culture • the strengthening of the competitiveness of Moldovan corporations and of competition among them • the creation of a domestic corporate structure which is compatible with international corporate systems • the input in the eliminations of corruption In our opinion, to reach the above-mentioned objectives, the legislative actions should be focus on: • preparing the Corporate Administration Code in compliance with international and European principles • improving the present legal framework and the mechanism for its implementation • assuring the coherence of the legal and procedural framework with the judicial branches • creating a competitive market environment • undertaking a constructive dialogue between the public and the private sectors in order to achieve balance between the interests of the Government and the business community, including the participants in corporate relations. Going forward the European path, Moldova should continue to bring its commercial laws in line with international standards and make those laws fully effective, particularly by strengthening the court system, tackling corruption and implementing appropriate measures to strengthen the rule of law. Compliance with the corporate governance requirements set out in the current legislation of Republic of Moldova is the best mechanism to protect the rights of shareholders. The regulated market urges to use internal measures to protect shareholders’ rights and promote good corporate governance.

References Berle, A., & Means, G. (1932). The modern corporation and private property. Piscataway, NJ: Transaction Publishers. Bohren, O., & Odegaard, B. (2003). Governance and performance revisited. ECGI, working paper no. 28. Burlacu, N., & Poloz, A. (2004). In Analele ASEM (Ed.), Evoluţia managementului corporativ. Tendinţele şi perspectivele pentru Republica Moldova (Vol. II, pp. 131–136). Chişinău: ASEM. Burlea, E. (2011a). Analiza veniturilor din activitatea operațională. Revista ştiinţifică “Studii Economice”, 5(1–2), 437–441.

278

O. Plotnic et al.

Burlea, E. (2011b). Riscul de faliment – modalități de apreciere în baza bilanțului contabil. In Materialele Conferinţei ştiinţifice internaţionale: Strategii de dezvoltare socio-economică a societăţii în condiţiile globalizării (pp. 82–90). Chişinău: ULIM, 15–17 octombrie 2012. Burlea, E., & Spînu, A. (2012). Consecinţele managementului corporativ deficient. Studii Economice VI, 3–4, 149–152. Cigna, G. P., Kobel, Y., & Sigheartau, A. (2017). European Bank for reconstruction and development, corporate governance in transition economies Moldova country report. Civil code of the Republic of Moldova of June 6, 2002. No. 1107-XV. EBRD. (2014). Commercial laws of Moldova, pp. 20–22. Franek, J. (2016). Coporate governance development in Central and Eastern Europe. Actual Problems of Economics, 5, 122–133. Hotărârea Guvernului Republicii Moldova cu privire la adoptarea Concepţiei administrării corporative a întreprinderilor din economia naţională nr. 22 din 16.01.2003 (Resolution of the Government of the Republic of Moldova on Adoption of Concept for Corporate Governance of national economy companies No. 22 of January 16, 2003), Monitorul Oficial al Republicii Moldova No. 3–5 of January 21, 2003. International Finance Corporation. (2004). Notes of corporate governance manual. Leal, R. P. C. (2004). Práticas de governança e valor corporativo: uma recente revisão de literatura. Revista de Administração, 39(4), 327–337. Lehmann, E., Warning, S., & Weigand, J. (2004). Governance structures, multidimensional efficiency and firm profitability. Journal of Management and Governance, 8, 279–304. Love, I. (2010). Corporate governance and performance around the world: What we know and what we don’t. Washington, DC: World Bank. Michael, C., & Jensen, A. (1976). Theory of the firm: Governance, residual claims and organizational forms. Journal of Financial Economics (JFE), 3, 4. Mogilevskyi, S. (2001). Controls business entities. Legal aspect, PhD thesis, Moscow. Nanka-Bruce, D. (2006). Corporate governance, capacity utilisation and growth. Barcelona: Universitat Autònoma de Barcelona. Oman, C. P. (2001). Corporate governance and national development. In An outgrowth of the OECD development centres experts workshop in 2000 and informal policy dialogue in 2001 sponsored in part by CIPE. Osipova, V. (2013). The problems of development of corporate governance in Russia: Comparison with Central Europe and China. Gold Coast: Bond Law Review. Owen, T. (1997). Autocracy and the rule in Russian economic history. In J. Sachs & K. Pistor (Eds.), The rule of law and economic reform in Russia. Boulder, CO: Westview Press. Pânzari, S., & Spinei, I. (2004). Corporate governance – A component of transparency and corruption prevention (pp. 3–6). Chisinau: Transparency International Moldova. Pistor, K. (2000). Patterns of legal change: Shareholder and creditor rights in transition economies in European business organization law review. Princeton, NJ: Cambridge University Press. Poloz, A. (2005). Aspecte financiare în administrarea corporativă (pp. 155–156). Chișinău: ASEM. Porshakov, S. (2006). Improving corporate governance in Russia and the EU. Moscow: Russia in global affairs. Republic of Moldova: Poverty reduction strategy paper, December 2004, IMF country report no. 04/395, pp. 64–65. Saito, R., Silveira, A., & Di, M. (2008). Governança corporativa: custos de agência e estrutura de propriedade. Revista de Administração de Empresas, 48(2), 79–86. Shitkina, I. (2008). Corporate law, a textbook for university students. Moscow. Silva, A. L. C. (2004). Governança corporativa, valor, alavancagem e política de dividendos das empresas brasileiras. Revista de Administração de Empresas, 39(4), 348–361. Silveira, A. (2004). Governança corporativa e estrutura de propriedade: determinantes e relação com o desempenho das empresas no Brasil. São Paulo: Universidade de São Paulo. Smith, A. (1776, March 9). In W. Strahan & T. Cadell (Eds.), The wealth of nations. London.

15

Efficiency of Legal Framework for Corporate Governance in the Republic of. . .

279

Srour, G. (2007). Práticas diferenciadas de governança corporativa: um estudo sobre a conduta e a performance das firmas brasileiras. In A. L. Carvalhal da Silva & R. P. C. Leal (Eds.), Governança corporativa: evidências empíricas na Brasil (pp. 149–186). São Paulo: Atlas. Stiglitz, J. (1999). Corporate governance failures in the transition. In The annual bank conference on development, economics-Europe (pp. 21–23). Paris. The Organization for Economic Cooperation and Development (OECD): OECD Principles of Corporate Governance. (1999). Visit at http://www.oecd.org/corporate/principles-corporategovernance/ The Organization for Economic Cooperation and Development. (2004). OECD principles of corporate governance. Tofan, M., Bercu, A., & Cigu, E. (2015a). Corporate governance framework in Romanian companies. Procedia Economics and Finance, 10, 629–636. Tofan, M., Cigu, E., & Bercu, A. (2015b). New challenges concerning sustainable local development: Romanian case. Procedia Economics and Finance, 10, 65–71. Ţurcanu, G. (2000). Metodica elaborării strategiei în managementul corporative (pp. 24–25). Chişinău: ASEM. Ţurcanu, G., & Rău, A. (2013). Evoluţia dezvoltării corporaţiilor şi a uniunilor corporative. In Revista “Economica”, 4(86), 22–27. Olesea Plotnic Dr. Hab. Olesea Plotnic is a Professor Jean Monnet and Coordinator of the Jean Monnet project in EU Policies for the Protection of Consumer Economic Interests/EU4CONS. Ms. Plotnic Olesea holds a lawyer license and she is a CEDR mediator, specializing as an expert in Intellectual Property, European Business Law, Consumer Law and Private International Law. She has more than 15 years of experience and she is teaching at Bachelor, Master and Doctorate level, in Romanian, Russian, English and French. She is a scientific coordinator of 3 Ph.D. thesis (since accreditation—2015) and she has published about 60 scientific publications, including 2 monographs and 2 lectures courses in the field of law. She is a member of the International Laboratory and European Law of the University of Nice Sophia Antipolis (France), a member of the Center for the Investigation of Tort, Contracts and Consumer Law of the University of Savoie Mont Blanc (France), she is the General Secretary of the Legal Culture Association “Henri Capitant”. Winner of municipal science youth in the field of consumer law (2013); Diploma of laureate of the Academy of Sciences of Moldova for the promotion of the research of national jurisprudence in France (March 2014); Diploma of the Academy of Sciences of Moldova Young Researcher of the Year 2014 (2015). Mihaela Tofan is full professor at “Alexandru Ioan Cuza” University of Iasi, Faculty of Economics and Business Administration, Department of Finance, Money and Public Administration and litigant lawyer. She has Ph.D. in Legal Sciences (University of Bucharest) and Hab. in Administrative Science (University Babes-Bolyai of Cluj-Napoca). She is director of the Jean Monnet Chair European Financial Regulation EUFIRE (www.EUFIRE.uaic.ro) and ERASMUS Professor at the University of Perugia, Italy (2010), Arel University Istanbul, Turkey (2012), Ca’Foscari University, Venice—Italy (2014), CDA College Larnaca—Cyprus (2016), University of Coimbra (2015), invited professor at La Sapienza University, Rome (2001), Britannia School of Business, London (2008), Universitat Catalunya, Barcelona (2009), Universite Paris XIII (2010), University of Economics Warsaw (2010), University of Economics, Prague (2011), Universite Paris II Sorbonne (2011), University of Thesaloniki (2012), National Academy of Kiev-Mohyla (2012), University of Parma (2015), Bifrost University, Iceland (2016), University of Bologna (2017), Tel Aviv University (2018), Michigan-Flint University (2018). She is author or coauthor of 11 specialized volumes, more than 30 articles published in journals/reviews indexed in international databases.

280

O. Plotnic et al.

Elena Ciochina is an assistant in Jean Monnet project on EU policies for the protection of consumers’ economic interests/EU4CONS, magistrate in economics, Ph.D. candidate in the field of private law. Mrs. Ciochina works as a university assistant at the private law department of the Academy of Economic Studies of Moldova and at the National College of Commerce, specialized in professional ethics. Author of more than 10 scientific articles both in national and international journals. Research activities mainly concern European business law and consumer protection in the healthcare system. She is the holder of the Government Excellence Scholarship for 2019 for remarkable performances in doctoral studies. Graduate of Erasmus + Doctoral Mobility Program (Spain, Pamplona, UPNA). Censor at the Association of Legal Culture “Henri Capitant” Moldavian branch. English Teacher, holder of the TOEFL IBT International Certificate.

Index

A Accountability principle, 126, 145 Accounting, 39, 45, 53–57, 93, 129, 138, 153, 168, 170, 178, 180–182, 185, 187, 188, 222, 231, 264, 266 Administrators, 82, 182–189, 191, 261 Agency costs, 13–15, 25, 26, 43, 44, 46, 242, 246–249, 252, 257, 258 Agency problem, 7, 14, 43, 242, 244, 245, 248, 258 Agency theory, 13, 178, 243, 261 Alignment, 14, 25 Analysis of motives of integration, 68 Analysis of regulations, 244, 249 Annual reports, 39, 51, 56, 63, 112, 119, 129– 132, 136, 145, 164, 166, 194, 209, 223, 233 Anti-crisis measures, 206 Anti-Russian sanctions, 84 Appointment procedure, 244, 245, 256, 257 Assets management, 150, 257 Autonomous legal person, 19 “Available funding” theory, 37, 46

B Bankruptcy, 135, 183, 187, 231, 275 Board members, 35, 36, 38–41, 51, 53, 57, 152, 156, 166, 168, 181, 184, 250, 253, 254, 270, 271 Board of directors, 16, 53, 54, 80, 102, 108, 109, 111–115, 119, 130–133, 136, 144, 153, 177, 183, 187–189, 201

Board of Supervisors, 188, 189 Bucharest Stock Exchange (BVB), 180, 193 Bulgaria, 5, 143–157, 192

C Capital concentration, 68, 201, 269 Capital market, 11, 27, 51, 128, 143, 145–147, 157, 179, 180, 193, 194, 214, 229, 230, 273 Causality problem, 37 Censors, 182, 184, 185, 188 Central and Eastern Europe (CEE), 6, 14, 15, 17, 18, 145, 162, 179, 180, 182, 192, 220, 273 Central Bank of Russia (CBR), 200, 203, 205 CG standards, 90 Co-creation of value, 93 Commercial companies, 180 Companies, 3, 11, 34, 35, 67, 90, 108, 126, 143, 159, 177, 200, 219, 241, 261 Competitiveness, 6, 43, 119, 125, 126, 128, 195, 205, 210, 215, 216, 272, 275 Compliance, 7, 57, 75, 109–112, 129–132, 134, 135, 159–172, 223, 267, 269, 270, 272 Concentrated ownership, 12, 14–16, 25, 35, 201 Concentration of banking capital, 78 Concentration of ownership and control, 6, 178, 181–184, 201, 211, 216 Construction and development, 74 Controlling owners, 13–15, 27, 37 Cooperative societies, 180 Corporate entities, 6, 126, 223, 224, 231

© Springer Nature Switzerland AG 2020 M. Aluchna et al. (eds.), Corporate Governance in Central Europe and Russia, CSR, Sustainability, Ethics & Governance, https://doi.org/10.1007/978-3-030-39504-9

281

282 Corporate fraud, 43 Corporate governance (CG), vii, 54, 107, 118, 120, 125, 160–163, 177–195, 201, 219–237, 262, 265–273, 143–157 Corporate governance codes, 2, 7, 36, 108, 111, 112, 118, 129, 131, 132, 134, 148, 152, 153, 155, 156, 159–161, 163–165, 180, 223, 237, 264, 268, 272 Corporate governance principles, 107, 132, 220, 222, 223, 262, 264, 268, 275 Corporate governance ratings, 134, 201 Corporate governance reform, 228 Corporate governance systems, 1, 4, 52, 125, 130, 147–152, 157, 165, 178–181, 210, 215, 219, 220, 222, 223, 244, 273 Corporate law, 160, 165, 219, 275 Corporate ownership, 2, 3, 5, 11–27, 144, 151 Corporate policies, 89 Corporate sector, 5, 199–216, 221, 224, 237, 267 Corporate social responsibility (CSR), 109 Corporate transparency, 3, 33–48 Culture, 7, 36, 83, 144, 160, 237 Culture of merges and absorption, 83 Czech Republic, 2, 11, 19, 23, 26, 179, 192, 220

D Decrease of the activity of transactions М&А, 68, 75 Direct foreign investments, 47, 68, 163, 179, 201, 203, 205, 264, 267 Disclosure and transparency, vii, 5, 37, 39, 42, 109, 110, 128, 129, 131, 133, 136, 144, 154–155, 223, 268, 270, 271 Disclosure score, 37–39 Division, vii, 53, 114, 165, 190, 191, 205, 270 Dynamics of the M&A market in Russia, 69, 71, 78, 208

E Economic efficiency, 6, 36 Economic indicators and common values, 126 Emerging markets, 12, 14, 33, 35–38, 42, 48, 126, 161, 163, 165, 171, 179, 180 Employees, 57, 90, 93, 94, 96, 102, 114, 181, 183, 188, 193, 194, 220, 221, 245, 266, 269, 270, 276 Entrenchment, 16, 26, 235 Entrepreneurs, 7, 181, 211 Executive body, 111, 114, 115, 131, 182, 223, 232, 233, 235, 269

Index Executive director (CEO), 53, 170, 181, 183, 186, 188, 270 Expropriation, 14, 15, 18, 136, 161, 268

F Financial performance, vii, 3, 4, 12–17, 25, 26, 37, 38, 41, 43, 46, 125–127, 137, 166, 169, 214, 257, 258 Financial stability, 78, 263 Financial stakeholders, 90, 96 Fiscal code, 180 Fixed effects model, 36, 40, 41, 45 Foreign exchanges, 200, 211, 212 Foreign investors, 17, 47, 68, 72, 73, 77, 79, 80, 84, 152, 163, 179, 203, 208, 266, 268

G General assembly of associates (AGA), 182 General shareholders' meeting (GSM), 152, 156, 232, 233, 271 Global market, 200, 216 Governance systems, 2, 4, 52, 125, 130, 154–155, 157, 178, 210, 215, 219, 220, 222, 223, 237, 244, 273 Governance-to-efficiency empirical analysis, 34, 36, 265 Government, viii, 36, 38, 68, 72, 73, 83, 107, 108, 110, 111, 114, 118, 126, 128–132, 137, 163, 178, 181, 193, 202, 205, 206, 209, 210, 241–245, 248, 249, 251, 255, 256, 258, 263, 268 Governmental coalition, 245, 252, 255 Groups of stakeholders, 89, 94, 96, 101

I Independent directors, 36, 38–40, 64, 112, 153, 164, 166, 168, 178, 184, 192, 226, 230, 233, 270, 274 Index of sustainable growth, 94 Initial/secondary public offerings (IPO/SPO), 75, 200, 208, 210, 212 Insider capitalism, 16 Insider ownership, 11, 16, 26 Institutional environments, 15, 157, 159, 162, 220, 222, 268, 273 Institutional ownership, 12, 17, 36 Insurance companies, 78–80 Integrated index, 95 Integration, 67, 68, 80, 84, 101, 157, 163, 179, 201, 216, 223, 234, 266

Index Integration activity, 80, 81 Integration of indicators of credit institution, 78 Interaction terms, 19, 20, 23 Interbank transactions, 78 Internal audit, 3, 33–48, 57, 58, 109, 156–157, 184, 270, 272 Internal control, 33–48, 53, 55, 57, 58, 109, 132, 134, 155–157, 270, 272 International companies, 203 International transactions, 201 Inverted U-shaped relationship, 3, 14, 15, 18, 19, 22–24 Investor protection, viii, 12, 13, 33, 136, 157, 162, 163, 178, 193–194 Investors, 2, 12, 44, 72, 96, 118, 128, 150, 159, 178, 208, 219, 247, 265

J Joint stock companies (JSC), 6, 79, 82, 109, 110, 112, 114, 115, 117, 118, 121, 126, 129, 132, 143, 146, 150, 154, 181, 188, 191, 199, 202, 203, 206–208, 210–212, 214, 216, 220, 221, 223, 224, 226, 228, 230, 232, 233, 242, 266–269

K Key performance indicator (KPI) system, 4, 112, 115, 118

L Legal, 5, 14, 36, 80, 111, 128, 143, 163, 177, 202, 219, 242, 263 environments, 12, 178, 242, 243 requirements, 154, 155, 245, 268 solutions, 249, 256 systems, 36, 51, 179, 258, 273 Legislation, 5, 6, 52, 54, 113, 134, 144, 145, 147, 152, 154, 193, 209, 214, 219–238, 241, 249, 267, 270–272 Legislators, 57, 264 Limited liability companies (LLC), 79, 80, 115, 126, 182–184, 186, 189, 206, 224, 231, 242 London Stock Exchange, 200, 211, 212, 237 Long-term development programmes, 112–114, 118

M M&A-activity in agriculture, 73, 75 М&А-activity in fuel and energy complex, 71, 73

283 M&A market, 69, 74 М&А market formation, 69 Majority-minority shareholder conflict, 43 Management boards, 3, 130, 165, 232, 242, 245–258 Managerial ownership, 3, 12, 16, 18–20, 23, 26, 54 Managers, vii, 6, 7, 13–16, 19, 25, 26, 51, 54, 55, 89, 93, 112, 114, 115, 130, 133, 135, 143, 150, 152, 153, 178, 182, 186, 188, 192, 200, 203, 246, 247, 252, 263, 264, 266–269, 275 Market economies, vii, 5–7, 36, 146, 163, 177–180, 200, 273 Market of corporate control, 3, 12, 16, 67–84, 274 Market of merges and absorption, 69–71, 73, 74, 83, 208 Markets, 2, 12, 37, 80, 91, 113, 128, 143, 159, 177, 200, 220, 265 Market-to-book ratio, 3, 35, 38, 44, 45 Measures, 18, 19, 33–36, 38, 44, 90, 92, 94, 95, 97, 112, 113, 130, 132, 134, 151, 162, 170, 206, 220, 234, 235, 264, 266, 269 Medium-sized firms, 201 Mergers, 3, 67, 68, 71, 75, 76, 78–83, 147, 148, 185, 190, 191, 208 Mergers and acquisitions (M&A), 3, 67–71, 73–78, 80–83, 95, 177, 201, 205, 208 Methodical recommendations, 112–114, 121, 223 Minister of Treasury, 243, 245–247, 249, 251, 254, 255 Ministry of Economic Development or Federal Agency For State Property Management (FASPM), 130, 131, 134 Mixed valuation methods, 91 Model of corporate management, 5, 144, 151, 178, 236, 263 Moderating effects, 2, 3, 11–27, 34 Moldova, 7, 261–277 Monetary valuation method, 91, 95 Monitoring, vii, 11–17, 25, 43, 44, 53–55, 57, 58, 126, 128, 129, 133, 136, 147, 148, 153, 156, 157, 161–163, 171, 219, 242, 262, 263, 269, 273, 274 Multiple regression model, 95

N National and international code, 148, 159 Non-financial stakeholders, 43, 90, 96, 102 Non-monetary (subjective) approach/valuation method, 91, 93 Non-monotonic relationship, 15 Non-public joint-stock companies, 121

284 O OECD Principles of Corporate Governance, 2, 38, 130, 178, 223, 262, 263 Officials, 185, 186, 189, 191, 194, 195, 209, 230, 237, 244, 245, 247, 248, 251, 252, 255–258 Oil and gas sector, 67, 70, 83, 137, 138, 201, 210, 211, 213 One-tier system, 152, 181, 242 Operational management, 4, 107–121 Ordinary shares, 234, 235 Organization, 3, 78, 89, 109, 132, 146, 161, 178, 180, 205, 223, 262 Organisation for Economic Cooperation and Development (OECD), 2, 38, 126, 128, 131, 160, 178, 205, 223, 241, 243, 262, 267, 274 Outsider model, 236 Ownership, 2, 13–14, 38, 54, 83, 93, 109, 126, 144, 163, 199, 220, 242, 261 Ownership concentration, 2, 3, 11–27, 34, 36, 163, 207, 214 Ownership rights, 220 Ownership structures, 11, 13–18, 20, 25, 34, 83, 136, 157, 165, 166, 169, 170, 181, 201, 207, 214, 242

P Panel data, 19, 34, 36, 40, 44, 45, 64, 98 Parliamentary elections, 246, 251, 252 Poland, 2, 3, 5, 6, 12, 19, 23, 26, 52, 63, 160, 164, 179, 192, 220, 242–244, 257, 258, 274 Policy of geopolitical diversification, 72 Political factors, 243, 245, 248, 251, 255–258 Politics, 128, 160, 178, 193 Potential of investment attractiveness, 83 Preconditions, 220–228 Preference shares, 234, 235 Principal-agent conflict, 16, 25, 26 Principles of corporate governance, 38, 126, 130, 133, 145, 151, 154, 223, 228, 237, 267, 274 Privately-held firms, 2, 11–27 Private sector, 178, 246, 263 Privatization, viii, 6, 14, 17, 70, 146, 151, 152, 157, 163, 177, 179, 202, 209, 210, 215, 216, 220–222, 224, 230, 241, 273 Privatization of state property, 200, 215

Index Profitability, 14, 33, 34, 193, 203, 210, 215, 241, 251, 266 Public companies (PC), 3, 51–64, 110, 116, 129, 130, 132, 134, 138, 144–149, 151–153, 156, 192, 200, 208, 211, 213, 229, 230 Public joint stock companies, 118, 132, 212, 224, 226, 229 Public offerings, 6, 75, 143, 144, 146, 147, 152, 153, 155, 200, 207, 208, 212, 229 Public sector, 200, 216 Purchase of assets at low prices, 83

Q Quality evaluation of corporate governance, 107–121

R Random effects models, 41, 45 Regulation, 2, 52, 112, 128, 147, 164, 177, 200, 222, 242, 268 Regulatory framework, 53, 128, 136, 163, 202, 235, 268, 269, 275 Remuneration, 5, 56, 58, 94, 114, 115, 119, 130, 132, 133, 154, 160, 161, 165, 168, 169, 172, 177, 188, 189, 203, 233, 244, 246, 248, 252, 256–258, 262 Reorganization, 3, 67, 82, 224 Resource dependence theory, 91 Return on assets (ROA), 18, 19, 36 Romania, 5, 177–195 Russian banking market М&А, 77 Russian banking sector, 90, 96 Russian Corporate Governance Code, 131, 134 Russian economy, 67, 68, 73, 75, 80, 83, 90, 127, 138, 199, 200, 203, 205, 207, 209, 211, 212, 215, 216 Russian state-owned companies, 4, 125–139 Russian state-owned enterprises, 4, 107–109, 118

S Self-evaluation corporate governance, 110–112 Sell-out right, 229 Share capital, 108, 183, 185, 189, 191, 220, 228, 232, 233, 235, 266 Shareholder-management agency conflict, 47

Index Shareholders, 1, 13, 33, 75, 89, 109, 126, 143, 160, 177, 203, 219, 242, 261 Shareholder-stakeholder relations, 90 Shareholder value creation, 3, 33, 43, 44 Slovakia, 2, 11, 19, 23, 26, 192 Squeeze-out right, 229 Stability, 7, 42, 78, 223, 232, 252 Stakeholder, 1, 37, 89, 113, 125, 143, 180, 215, 219, 242, 262 concept, 89, 91 costs, 92, 94 expectations, 89 influence, 91, 95 interests, 89, 91, 270 management, 95 risks, 91 synergies theory, 93 theory, 90, 91, 93, 94, 100, 243 value assessment, 4, 89–102 value model, 91 State, 4, 14, 36, 51, 68, 89, 108, 126, 143, 163, 179, 199, 220, 243, 264 corporations, 114, 115, 202, 203, 209, 211 ownership, 6, 38, 39, 44, 107, 127–129, 202, 232, 233 property management, 4, 108, 109, 111, 112, 114, 118, 120, 121, 243, 256 regulation, 200, 222, 230, 236 State Companies Index, 129 State corporations, 203, 210 State-owned companies, 4, 125, 127, 130, 133, 138, 179, 184, 200, 202, 207, 210, 215, 216 State owned enterprises (SOEs), 6, 107–121, 146, 253 Steering committee, 183, 188 Stimulation of interbank transactions, 78 Stock companies, 222 Stock markets, 6, 27, 83, 134, 139, 149, 151, 159, 162, 163, 179, 200, 201, 206, 207, 210–212, 214, 215, 220–223, 228, 229, 236 Strategic foreign shareholder, 38

285 Strategies, 39, 75, 81, 91, 93, 94, 102, 112–114, 118, 139, 153, 162, 194, 195, 200, 204, 210, 246, 248, 252 Supervisory board, 51, 113, 114, 132, 153, 163, 188, 223, 242, 269 Sustainable development, 39, 93, 125 Synergistic effect, 77, 78

T Trade Registry Office, 189 Trade unions, 253, 256 Transaction cost theory, 214 Transition countries, 15, 171 Transition economies, 26, 220, 273, 274 Transparency rating, 37 Tunneling, 35, 38, 47 Two-tier system, 181, 242

U Ukraine, 6, 219–237 Unweighted scores, 39 Use of subsidies and privileges for financing of integration processes, 84

V Value based management (VBM) concept, 4, 91 Value creation, 3, 4, 33, 43, 44, 89, 92, 95, 96 Value of the Russian corporate market, 201

W Western companies, 203 Western countries sanctions 2014, 212 World economic crisis of 2008, 6, 201, 205–211 World industry structure of transactions, 81 World industry structure of transactions M&A, 81