Holle Corporate Governance by Banks in Transition Economies

Transcription

1 Holle Corporate Governance by Banks in Transition Economies

2 GABLER EDITION WISSENSCHAFT

3 Arnold Holle Corporate Governance by Banks in Transition Economies The Polish Experience With apreface by Prof. Dr. Paul Bernd Spahn DeutscherUniversitäts Verlag

4 Die Deutsche Bibliothek - CIP-Einheitsaufnahme Holle, Amold: Corporate governance by banks in transition economies : the polish experience / Arnold Holle. With apreface by Paul Bernd Spahn. - Wiesbaden: Dt. Univ.-Verl. ; Wiesbaden: Gabler, 1998 (Gabler Edition Wissenschaft) Zugl.: Frankfurt (Main), Univ., Diss., 1997 ISBN ISBN (ebook) DOI / Alle Rechte vorbehalten Gabler Verlag, Deutscher Universitäts-Verlag, Wiesbaden Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, Wiesbaden 1998 Der Deutsche Universitäts-Verlag und der Gabler Verlag sind Unternehmen der Bertelsmann Fachinformation. Das Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwertung außerhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlage.~ unzulässig und strafbar. Das gilt insbesondere für Vervielfältigungen, Ubersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Höchste inhaltliche und technische Qualität unserer Produkte ist unser Ziel. Bei der Produktion und Auslieferung unserer Bücher wollen wir die Umwelt schonen: Dieses Buch ist auf säurefreiem und chlorfrei gebleichtem Papier gedruckt. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, daß solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten wären und daher von jedermann benutzt werden dürften. lektorat: Ute Wrasmann / Albrecht Driesen ISBN

5 Preface "Banks and enterprises have to be privatized!" "... the bankruptcy law must be overhauled!" "... and the legal system must guarantee the security of exchange!", ah valid, but valiant recommendations for reformers in Central and Eastem Europe at the beginning of their transition to market economies. Often, such advice was given on the basis of the simple assertion that the market will function after ah, and certainly without a thorough analysis of the political, institutional, legal and informational conditions prevailing in such countries, and hence the conditions for a successful transition process. The present book is derived from the author's doctoral dissertation presented to the Fachbereich Wirtschaftswissenschaften at the University of Frankfurt am Main. It is published some time after the early recommendations were made, but it is still a valuable contribution to the literature on transition economies and the specifics of their financial sectors as weh as corporate govemance and enterprise restructuring. The author recahs the expert advice that was given, he examines the theory and precepts that produce such advice, he considers important legal and empirical aspects, and scrutinizes the financial systems to be emulated within the specific environment of transition economies. The dissertation collstitutes an important effort of empirical firm-level research during transition. Its background material relates to one of the most ambitious reform packages in Central Europe-Poland's reform of its financial sector-which the author examines in more detail. Each country has its own corporate govemance debate, but rarely are the findings compared. Comparative corporate govemance, one of the research interests of my co-advisor Reinhard Schmidt, is a relatively young discipline, and the answers it provides are ah but hard facts. It is true, however, that, in developed economies, public opinion has turned against according banks a strong voice in the management of enterprises. The author demonstrates that such views cannot be founded on theoretical ground. In fact, most of the theoretical work would support the opposite assertion, namely that banks do and can play an effective role in corporate govemance. Based on such theory-and more specificahy the remarkable growth that the German and Japanese economies experienced after World War II-some policy makers in Central and Eastem Europe were encouraged to mould their financial systems after the German and Japanese models. In this vein, the Polish reforms of early 1993 that aimed at the restructuring of banks and enterprise were designed to emulate the German and Japanese corporate govemance systems. However, the problems to be addressed were formidable: bad debts amounting to 40 per cent of the banks' balance sheets, cross-subsidization of insolvent borrowers through high interest rates, and little incentive for neither the banks to cohect such debt, nor for enterprises to v

6 restructure their business and financing actively. Under such circurnstances, the reforms would have to collide with imperfect institutions and unsuitable attitudes that reigned the process of transition in Po land initially: a flawed credit culture, lagging legal and institutional developments, and the scarcity of skills at both banks and enterprises. Compared with the experience of most other countries, however, Poland's reforms became a remarkable success. Arguably, today Poland has the soundest banking system ofthe Visegrad countries-which is one reason more to examine it in more detail. The author discusses at length both the legal background and the track-record ofthe entire Polish bankruptcy system, and then relates it to the study's empirical findings. The bankruptcy system-both law and institutions-is shown to have been impotent and counterproductive, requiring a complete overhaul in order to become effective. But the bankruptcy system was not the only hindrance of a successful restructuring process. Further imperfections retarded the Polish reforms. In particular, the traditional tools which banks use to exert corporate govemance were faulty. Also, state-owned banks proved unable to exert corporate govemance effectively, in particular those banks that did not have to "fear" privatization in the near future. Apart from its conceptual character, the book is also pragmatic and "down to earth" as it raises succinct policy questions such as: What govemance model guides reformers in Central and Eastem Europe? What specific mechanism for credit securitization and collateral are needed in transition economies? How should an effective bankruptcy system look like? What is the reality of enterprise restructuring in Eastem Europe? And ultimately: Are banks in transition economies ready to take on corporate govemance roles in the process of restructuring enterprises? These are some of the important questions the answers to which will decide on the success of transition more generally, and the establishment of a robust financial sector and auspicious enterprise restructuring in particular. Transition needs patience: maybe this is the main lesson from the first decade of reforms. The book bears testimony ofthis wisdom as it takes the reader through the mechanics oftransition and documents the need for the detailed work which forms the bedrock for a comprehensive transformation of formerly socialist countries into vigorous market economies. Anyone with an interest in transition processes must find this book a we1come and useful addition to the literature. Paul Bernd Spahn VI

7 Acknowledgments This book is the author's doctoral dissertation presented to the Fachbereich Wirtschaftswissenschaften of the Johann-Wolfgang Goethe Universität, Frankfurt am Main. It is dedicated to the memory ofherbert L. Baer, Jr., without whom this research would never have come off the starting blocks. Both he and the author learned about the Polish reform package at roughly the same time - in the case of the author, thanks to Zanny Minton Beddoes of the IMFlEconomist. Together with Herb, the empirical work described in the third section was conceived and carried out in the framework of a study by the research department of the W orid Bank. The second major initiative at enterprise level empirical work in Poland since the Balcerowicz reforms was headed by Cheryl Gray. This research trio was destroyed on February 27, 1995, when Herb died from injuries sustained in an accident which occurred while he was cycling horne from work to the second birthday ofhis daughter. Herb's role in this research is only one smah aspect ofthe author's debt to hirn: his devotion to his family, his sense ofhumor and his sharp, yet fine intehect were exemplary. Cheryl Gray and the author carried on to produce two papers, on the contents of which this book draws and which are part of a research effort documented in "Enterprise Exit Processes in Transition Economies", a cohection of essays soon to be published by Central European University and Oxford University Press. On the ground in Poland, Anna and Leszek Krajewski bore the brunt of the work. The experience and determination of these two outstanding empirical researchers and their team produced a unique set of data, which Kenneth Xu then processed diligently at Washington headquarters. Cheryl Gray asked the key questions and conceived the structure of the empirical work. Her experience in research in Central Europe and her thorough knowledge of the theory tumed this effort into a doctoral dissertation. My thanks go the examination commission at the Johann-Wolfgang Goethe Universität Frankfurt, in particular my principal advisor Paul Bemd Spahn for his open-mindedness and his support throughout the years, to Reinhard Schmidt for pointing me in the right direction and for being my co-advisor, and to Jan Pieter Krahnen for his advice and for heading the commission. Many were involved with the manuscript over the years, and thanks is owed to ah of them, but only the efforts of Ryszard Radomski and Peter Nicholson made these pages publishable. VII

8 This piece is one milestone in the author's love affair with Poland. His interest was first kindled twenty years ago, when he took up correspondence with Eugeniusz Niedojadlo, a Tarnow resident who was in the first group of prisoners to arrive in Auschwitz. Ten years later, in December 1987, Ambassador Pfeffer, who represented West Germany in Poland at the time, hosted the author and his friends for a memorable week at his residence. Warsaw was the author's initial posting with the International Finance Corporation ofthe World Bank in The first assignment with The Boston Consulting Group in 1994 found the author in Lodz, at Poland's largest commercial bank, Powszechny Bank Gospodarczy, to advise on the work out of bad debt and corporate govemance problems. As always in consulting, the author learned much from his clients, who also became his friends: board-members Slawomir Lachowski and Jerzy Jozkowiak. BCG supported the undertaking generously throughout the years. Now with Baring Private Equity Partners in the lng Group, the author does his best to fmd and to manage investments in Poland and other places in Central Europe. No acknowledgments are complete without thanks to those nearest and dearest: My wife Denise, who showed uncommon understanding for the trials and tribulations of a German doctoral student, and my parents, whose loving encouragement has finally paid off. For the overall quality of this work, however, as weil as for any remaining errors, no one else than myself can answer. Arnold Holle vm

9 Table of Contents Index of Figures Index of Tables List of Abbreviations XIII XV XVII Part I - The Literature 13 Capital as a Control Device The Theory of Capital Structure and Corporate Govemance The Groundwork for the Theory of Corporate Govemance The finn as a network of contracts A narrow definition of corporate govemance The "irrelevancy" of capital structure Transaction costs and taxation Signaling and Infonnation Theory Agency Theory Incomplete Contracts Theory The Role ofbanks in the Theory of Corporate Govemance The Separation ofcapital and Control Features of Corporate Govemance Systems in Four Economies The Regulatory Framework Regarding Equity Ownership by Banks Capital Structure Sources ofcapital Debt financing Equity financing Concentration offinancing Equity financing Debt financing "Bank-oriented" vs. "Market-oriented" Systems? Core Aspects of Corporate Govemance by Banks in Developed Economies Corporate Govemance by Banks UK and US Gennany Japan Corporate Govemance offinns in Financial Distress US UK Gennany Japan Which model for transition economies? Conc1usion 69 2 The Role of Danks in Transition Economies Financing Growth The Initial Set of Refonns 73 IX

10 2.2.1 Creating Financial Systems for a Market Economy Dealing with Bad Debts on Bank's Balance Sheets Dealing with Insolvent Enterprises Avoiding the Next Crisis The Role ofbanks in Corporate Govemance in Transition Economies The Enviromnent for a "Main Bank Role" in Transition Economies Corporate Govemance Tasks Facing Banks in Transition Economies The Situation Today 112 Part 11- The Corporate Governance Challenge 114 x 3 The Budget Constraint in Transition Economies The Framework Budget Constraint - Empirical Research Systematization by Type ofevidence Empirical Studies During Central Planning Empirical Studies ofthe Budget Constraint during Transition Empirical Evidence ofbudget Constraint Hardening in Poland since Survey of751arge state-owned enterprises Survey of200 enterprises Summary ofthe enterprise-level survey evidence from Poland to date The Data from the Central Statistical Office Observations from the Empirical Evidence To-Date The Framework for Hardening the Budget Constraint and Corporate Governance The Bad Debt Situation at the End of The Existing Framework for Budget Constraint Hardening Collateral Enforcement The Bankruptcy Process The legal framework The process in action Earlier empirical surveys The Liquidation Process The legal framework The process in action Earlier empirical surveys The Court Conciliation Process The legal framework The process in action Earlier empirical surveys The Additional Tools Created by the Enterprise and Bank Restructuring Program The Bank-Conciliation Procedure The 'Forced' Debt-to-Equity Conversion Sale ofdebt The legal framework The process in action Addressing the Banks' Problems 178

11 Part m - The Survey Survey Results on Bankruptcy and its Alternatives The Design of the Survey The "Base Portfolio" Sampie Selection Origins of"base Portfolio" Loans DescriptionoftheSample Causes and Consequences offinancial Distress Causes offinancial distress Increasing debt Survey ofbankruptcy Cases The Process Financial and Operating Outcomes Survey of Bankruptcy Liquidation Cases The Process Financial and Operating Outcomes Survey ofcourt Conciliation Cases The Process Financial and Operational Outcomes Survey Results Regarding Other Resolution Paths Repayment Sale ofdebt Survey Results on Banks and Corporate Governanee Description of the Bank-Conciliation Procedure Sampie Causes and Consequences of Financial Distress Causes offinancial Distress Increasing Debt The Conciliation Process in Action Initiating Debt Collection Forming Creditor Groups Negotiating and Monitoring Agreements Outcomes ofbank Conciliation to Date Financial Restructuring Commercialization Restructuring Plans Operating Performance Poliey Implieations of the Polish Enterprise and Bank Restrueturing Program 238 Statistieal Annex 247 Bibliography 255 XI

12 Index of Figures Figure 3.1 Figure 3.2 Figure 3.3 Figure 4.1 Figure 4.2 Figure 4.3 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Figure 5.7 Figure 5.8 Figure 5.9 Figure 5.10 Figure 5.11 Figure 6.1 Figure 6.2 Figure 6.3 Figure 6.4 Figure 6.5 Figure 6.6 Figure 6.7 Figure 6.8 Figure 6.9 Liabilities of large Polish enterprises Liabilities of small Polish enterprises Source of changes: The budget constraint for large enterprises Bad debt as a percentage oftotal bank assets Bad loans as apercentage ofgdp Bankruptcy petitions and cases by year, Comparison universe and sampie Indicators for categorization into "weak" and "strong" banks Sampie distribution among industrial sectors Average operating profitability and number of employees Average debt by resolution path Debt as a share of total assets Debt structure by type of creditor Debt structure at year-end 1992 Average involvement ofvarious creditor groups Percentage of claims satisfied: bankruptcy versus liquidation Profit measures for firms in court conciliation Debt as a share of total assets Timing of conclusion of conciliation agreements Average involvement ofvarious creditor groups Comparison of debt-restructuring terms Average post-conciliation structure of debt Average planned and actual operating profitability Profit measures for firms in bank conciliation (57 fltms) Operating revenue (in real terms, 54 firms) Operating costs (in real terms, 54 firms) xm

13 Index of Tables Table 1.1 Structure ofliabilities ofnon-financial businesses in the United Kingdom and Gennany 33 Table 1.2 Debt-equity ratios of non-fmancial enterprises at book values 34 Table 1.3 Unweighted average net fmancing ofnon-financial enterprises ( ) 35 Table 1.4 Gross funding ofnon-financial corporations as apercentage oftotal gross Table 1.5 financing 36 Gross funding ofnon-fmancial corporations as apercentage oftotal gross financing ( ) 36 Table 1.6 Composition of companies' credit market debt, Table 1.7 Structure offinancialliabilities ofpersonal and non-financial company sectors 39 Table 1.8 Distribution of external corporate finance in Japan 40 Table 1.9 Ownership of common stock in Table 1.10 Ownership of shares issued by German enterprises (exc1uding insurance enterprises), 1984 and 1988, in % 42 Table 1.11 Share of largest equity-stakeholder of listed AGs, Table 1.12 Listed AGs owned by a single majority shareholder, by type ofmajority owner in 1983, in percentage 45 Table 1.13 Share of largest equity-stakeholder of listed PLCs in the UK, Table 1.14 Financing characteristics of corporate governance systems 49 Table 1.15 Criteria for evaluating the suitability offinancial distress system as a model for transition economies. 68 Table 3.1 Empirical work on the budget constraint before and during transition 117 Table 3.2 Working capitalloans to cost ofsales for 73 Polish manufacturing firms in percentage 121 Table 3.3 Receivables minus payables => Inter-firm lending as apercentage of sales for 73 Polish manufacturing firms in selected months 122 Table 3.4 Changing funding structure as apercentage for 25 large Polish enterprises Table 3.5 showing pre-tax losses for the first half of Ease of obtaining bank credit - Perception ofmanagers of73 Polish manufacturing firms 123 Table 3.6 Level of"bank Involvement" - Perception ofmanagers of73 Polish manufacturing firms 124 Table 3.7 Tax arrears as apercentage oftotal tax due at the end of 1993 for a sampie of 200 Polish enterprises 128 Table 3.8 Average indebtedness by ownership category for a sampie of200 Polish enterprises 129 Table 4.1 Court decision in bankruptcy procedures 153 Table 4.2 Bankruptcy petitions as apercentage ofthe total number ofbusinesses in Poland 153 Table 4.3 "Exit" processes for Polish state-owned enterprises 154 Table 4.4 Liquidation as one ownership transformation path 158 Table 4.5 Liquidations started and completed between 1990 and Table 4.6 Year process was started for conc1uded liquidation procedures 160 Table 4.7 "Overhang" of companies in liquidation 160 Table 4.8 Enterprises in bankruptcy liquidation broken down by number ofemployees as ofdecember 31, xv

14 Table 4.9 Applications for court conciliation in Poland, Table 4.10 Comparison of Poland's two most frequently used fonnal workout processes 169 Table 4.11 Debt put up for sale and debt successfully sold 176 Table 4.12 Write-off on successfully sold debt 176 Table 4.13 "Security" given in respect to debt eventually sold 177 Table 4.14 Recapitalization of Polish banks with treasury bonds 180 Table 5.1 Credit categorization according to international accounting standards 181 Table 5.2 "Base portfolio" - Loans larger than PLZ 1 billion (roughly $100,000) c1assified as doubtful or loss in seven state-owned commercial banks at year -end Table 5.3 Response to first random mailing 185 Table 5.4 Response to "cold-calling" 186 Table 5.5 Source ofenterprises in the sampie 186 Table 5.6 Comparison sample/universe in tenns ofnumbers 188 Table 5.7 Comparison sampie / universe in tenns of amount of debt to main bank 189 Table 5.8 Distribution ofbase portfolio (787) and sampie (139) 191 Table 5.9 Date of credit agreement and type of loan 193 Table 5.10 Share of debt by resolution path for all 787 EBRP finns 194 Table 5.11 Identity oflargest creditor 199 Table 5.12 Schedule of creditor satisfaction in bankruptcy cases - percentage of claims satisfied 203 Table 5.13 Reason for placing finn in liquidation rather than bankruptcynumber of cases 205 Table 5.14 Schedule ofcreditor satisfaction in liquidation cases 207 Table 5.15 What triggered court conciliation? 208 Table 5.16 Court conciliation procedure; Time elapsed 209 Table 5.17 Financial conditions in court conciliation agreements 211 Table 6.1 Distribution of bank conciliation cases (62) over nine banks 217 Table 6.2 Average debt per finn to various creditors 219 Table 6.3 Debt to various creditor groups as a share oftotal debt 220 Table 6.4 Identity oflargest creditor 220 Table 6.5 Timetable for the bank conciliation process 222 Table 6.6 What triggered bank conciliation? 223 Table 6.7 Financial conditions in conciliation agreements 227 Table 6.8 Expected ownership structure in 25 cases with debt-equity swaps 231 Table 6.9 Year of commercialization 232 Table 6.10 Breakdown of 57 finns by operating profitability, Table S.A.3.1 Liabilities of"large" Polish enterprises 247 Table S.A.3.2 Number of enterprises in database and inflation adjustrnent 248 Table S.A.3.3 Average liabilities of"large" enterprises 248 Table S.A.3.4 Liabilities of"small" Polish enterprises 249 Table S.A.3.5 Liabilities ofaverage "smali" enterprises 249 Table S.A.4.1 Bad loans in selected CEE countries 250 Table S.A.4.2 Bankruptcy petitions and cases by year, Table S.A.5.1 Data used for bank categorization (I) 251 Table S.A.5.2 Data used for bank categorization (II) 251 Table S.A.5.3 Logistic regression results 252 Table S.A.5.4 Financial restructuring conditions of court conciliation agreements 253 Table S.A.6.1 Financial restructuring conditions ofbank conciliation agreements 254 XVI

15 List of Abbreviations AEG - Allgemeine Elektrizitaets-Gesellsehaft, a eompany within the Daimler-Benz AG group AG - Aktiengesellschaft, joint stock eompany BDK - Bank Depozytowo-Kredytowy w Lublinie SA BG - Bank Gdanski SA BGZ - Bank Gospodarki Zywnosciowej BIS-ratio - ratio ofthe Bank for International Settlements (Basle) to measure the capital adequacy ofbanks, also ealled the Cooke-ratio after the person who devised it BotE - Bank of England BPH - Bank Przemyslowo-Handlowy w Krakowie SA BPU - bankowe postepowanie ugodowe, bank restructuring agreement BZ - Bank Zachodni we Wroclawiu SA CEE countries - Central and Eastern European countries CEPR - Centre for Economic Poliey Research CMEA - Council for Mutual Economic Assistance EBIT - Operating Eaming before Interest and Taxes EBRP - Enterprise and Bank Restructuring Program FSU eountries - former Soviet Union eountries GDP - Gross domestic produet GUS - Glowny Urzad Statystyczny, Central Statistical Office in Poland IAS - International Accounting Standards IMF - International Monetary Fund LDC - less developed country MoF - Ministry offinance NBP - Narodowy Bank Polski NPV - net preseent value OECD - Organisation for Economie Cooperation and Development PBG - Powszechny Bank Gospodarczy SA w Lodzi PBK - Powszeehny Bank Kredytowy SA w Warszawie PBKS-Pom i Bank Kredytowy SA w Szezeeinie Pekao SA - Bank Polska Opieki SA PKO BP - Powszeehna Kasa Oszezednosci Bank Panstwowy PIe - publicly listed eompany PLZ - Polish Zloty (Old) PPI - purehasing priee index SOCB - state-owned eommereial bank SOE - state-owned enterprise WBK - Wielkopolski Bank Kredytowy ZUS - Zaklad Ubezpieezen Spolecznyeh, Social Seeurity System XVII