In 2003, a World Bank team completed an assessment of corporate governance in the Slovak Republic. This article reviews:

Size: px

Start display at page:

Download "In 2003, a World Bank team completed an assessment of corporate governance in the Slovak Republic. This article reviews:"

Lambert Lambert
5 years ago
Views:

1 In 2003, a World Bank team completed an assessment of corporate governance in the Slovak Republic. This article reviews: Why the World Bank carries out corporate governance assessments; An overview of the assessment process ; A review of the assessment in the Slovak Republic; A list of key issues and policy recommendations. Background: Why Corporate Governance? Over the past several years, corporate governance reform has been added as the newest pillar of the post-cold War economic architecture. In 1998, following the Asian financial crisis and the Russian debt default, the leaders of the G7 nations announced a new focus on corporate behavior and incentives. By mid-1999, the Organization for Economic Cooperation and Development (OECD) adopted a set of basic principles. The international financial institutions (IFIs) all view improved governance practices as a key to spurring prosperity and jobs by strengthening corporations' ability to compete for global capital. In response, many World Bank client countries have initiated legal, regulatory and institutional corporate governance reform projects. Numerous studies agree that better corporate frameworks benefit firms through greater access to financing, lower cost of capital, better firm performance, and more favorable treatment of all stakeholders. Given the importance of monitoring corporate governance reform, the World Bank has undertaken an institutional commitment to carry out assessments of corporate governance. These assessments are carried out under the overall program of Reports on the Observance of Standards and Codes (ROSC). The Corporate Governance ROSC Assessments Selecting a benchmark The first step in developing a methodology to assess a country s corporate governance system was the identification of a benchmark. Fortunately, an internationally accepted standard had been in place since The OECD Principles of Corporate Governance were agreed upon by a large number of countries of varied legal, economic and cultural traditions and after extensive consultation with the World Bank, the IMF, the Bank of International Settlements, and representatives of the business community from Japan, Germany, France, UK and the U.S., as well as emerging market governments, international investors, trade unions and other interested parties. As such, the OECD Principles represent the minimum standard that countries with different traditions could agree upon, without being unduly prescriptive. They are equally applicable to countries with civil and common law traditions, different levels of ownership concentration, and various models of board representation.

2 The OECD Principles are primarily concerned with corporate governance of listed companies. They are organized into five sections: (1) the rights of shareholders; (2) the equitable treatment of shareholders; (3) the role of stakeholders in corporate governance; (4) disclosure and transparency, and (5) the responsibilities of the board. The OECD Principles are non-binding. They provide a framework for dialogue on country experience and identification of policy reform without prejudice to the prerogative of each nation to find its own path to better corporate governance. The aim is a common framework under which good practices can develop, in consistency with national regulations and traditions. 1 The Principles currently under revision, and the revised Principles should be available in June The assessment process Countries voluntarily participate in a ROSC. (In Slovakia, the World Bank was invited to carry out the assessment by the Ministry of Finance). After receiving an invitation, the World Bank commissions a local consultant to complete a template (questionnaire) designed to capture a country s corporate governance legal and regulatory framework, and information on corporate governance practices. World Bank experts then typically visit a country to meet with government officials, market participants, investors, and issuers, and draft an assessment report. The assessment is divided into four parts: (i) executive summary; (ii) capital market overview and institutional framework; (iii) principle by principle review, including policy recommendations and, (iv) summary of recommendations highlighting areas for legislative reform, institutional strengthening and voluntary/private initiatives. The assessments attempt to differentiate between compliance with the legal and regulatory framework and actual practices of market participants, and include a chapter on institutional strengthening. Hence, each OECD Principle is evaluated according to quantitative and qualitative standards. Most countries then agree to the publication of the results of the assessment on the World Bank website. (Corporate governance ROSC assessments are published at Assessments to date To date, the World Bank has completed, 32 assessments, and six more are in the final stages of completion. Seven of these assessments are assessment updates Brazil Georgia Mauritius Egypt update Croatia Czech Rep. update Brazil update Slovenia Czech Rep. Lithuania Hungary Russia Egypt Bulgaria Ukraine India update India Latvia Korea Peru 1 OECD Principles of Corporate Governance are available at

3 Malaysia Morocco Hong Kong Romania update Philippines Romania Chile Indonesia Poland South Africa Mexico Jordan Turkey Slovakia Thailand Zimbabwe Colombia Panama Notes: Assessments in bold are in process. Assessments in italics have not been published. A Summary of the Corporate Governance Assessment in Slovakia The assessment for Slovakia was carried out in early March 2003, and was published in October The assessment indicated that Slovakia has made considerable progress in modernizing its corporate governance framework over the past few years: Large amount of reform activity over the past three years. The legislative and regulatory framework dealing with corporate governance issues has improved, including the new Commercial Code, Act on Securities, implementation of UFT, and the drafting of the Corporate Governance Code. Lowered thresholds for shareholder action. Minority shareholders now have greater rights and more ability to influence decision-making at the company. More active regulators and exchanges. The Bratislava Stock Exchange the Financial Market Authority (FMA) have both become aware of the importance of corporate governance and its role in building capital markets. The assessment against the OECD Principles was generally favorable: 1 principle was Observed 9 principles were Largely Observed 9 principles were Partially Observed 4 principles were Materially Not Observed No principle was Not Observed However, the assessment also raised a number of concerns: Compliance with many rules (e.g. disclosure requirements) changing more slowly than rules. The supervisory board remains generally weak. Concerns remain about shareholder rights protection in the Free Market companies. The FMA may not have adequate authority and institutional capacity to address key corporate governance issues. Many laws remain untested or rarely used (e.g. director liability suits, shareholder redress) The following table specifies some key issues and policy recommendations.

4 Key issues and policy recommendations 1. Create a Director Training Organization 2. Establish Central Depository 3. Introduce mandatory Audit Committee 4. Increase disclosure standards A strong director training organization (Institute of Directors) is now considered essential to upgrading a country s corporate governance over the long term. Director training provides directors with an understanding of their role and responsibilities, and educate independent directors in financial, business, and industry practices. Support should come from the BSSE, government, and especially private sector. An active and efficient central depository / registry is a key corporate governance institution. Central depository / registry has impact on: o Safety of ownership registration o Efficiency of share transfer o Effective ownership disclosure o Insider trading enforcement o Ownership disclosure o Identification of related party transactions o International portfolio investment (through work with international custodians and sub-custodians) The (independent) audit committee is a key element of corporate governance reform. In many countries the audit committee: o Ensures that the audit is independent o Monitors other conflicts of interest (related party transactions) Many non-financial disclosures in OECD Principles not mandatory. No detailed annual report requirement. Compliance with corporate governance code could be included. Disclosure content (and not form) should be reviewed, especially nonfinancial disclosure. Sanctions (fines and civil liability) for non-disclosure should be reviewed. 5. Review board structure Current board structure limits accountability or oversight because shareholders appoint both boards. Management (or the controlling shareholder) effectively: o Appoints itself and sets its own remuneration o Nominates its own overseers (supervisory board) o sets their remuneration o hires the auditor o takes a large number of discretionary actions. German-style boards may result in stronger, oversight and protection of minority shareholders 6. Review board function The supervisory board should: o nominate board o set board remuneration o provide overall management of the governance of the company. 7. Refocus Code and involve private sector The Corporate Governance Code is a good start. A concerted effort should be made to involve the Slovak corporate sector, including major issuers. We would recommend that the Code be refocused on Principle 1 (the board issues), and that the recommendations clearly relate to the supervisory board (instead of saying the board ) 8. Board independence Clear independence requirements should be developed for the supervisory boards of listed companies. The 100 percent independence recommendation included in the Code is

5 9. Fair & timely dissemination 10. Enforcement of insider trading probably too ambitious; instead a minimum of 25 percent of the supervisory board should be independent. The auditor should be appointed by majority-independent audit committee of the board. The FMA and the BSSE should work together to develop an integrated electronic information system for statutory and public information disclosure. This system should: o gradually replace statutory paper filing o allow issuers to make one disclosure that is then sent to the BSSE, the FMA, and also disclosed to the public. Enforcement is key to establishment of effective deterrence. Key is administrative enforcement with sufficient sanctions Insider transactions should be disclosed. Inquiries into the corporate governance programs of the World Bank should be directed to Susan Rutledge, Regional Coordinator for Corporate Governance (srutledge@worldbank.org) or Alexander Berg (aberg2@worldbank.org). Alexander Berg Senior Private Sector Development Specialist Corporate Governance Group of the World Bank, Washington DC.

Corporate Governance Department World Bank Group

Corporate Governance Department World Bank Group Global Good Practices in Corporate Governance Alex Berg Corporate Governance Department The World Bank December 19, 2006 Outline Presentation Outline What