CORPORATE GOVERNANCE IN ROMANIA
2001 - 2004
Angela Ene – General Manager, Ardyan Consulting
Galina Narcisa Fatu – Bostina & Associates Law Firm
Ohrid, Macedonia
June 10, 2004
1
Scope of the report
• To review the progress made in terms of corporate governance in
the period 2001 – 2004, considering:
– the OECD recommendations from the “Report on Corporate
Governance – September 2001”
– the OECD recommendations from the “White paper on corporate
governance in South East Europe”
– the Romanian legislative and organizational framework
• To make recommendations for improving the corporate governance
system
2
Structure of the report / presentation
•
I Introduction. Premises
•
II Key priorities
2.1 Ownership structure
2.2 Enforcement and implementation
2.3 The rights and equitable treatment of shareholders
2.4 The role of stakeholders in corporate governance
2.5 Disclosure & transparency
2.6 The responsibilities of the board
•
III Conclusions and recommendations
3
I.
Introduction. Premises
The main institutions of the Romanian capital market
•
•
•
•
•
•
•
National Securities Commission (NSC)
Bucharest Stock Exchange (BSE) - market cap of EUR 4.8 bill
Rasdaq Electronic Market (Rasdaq) - market cap. of USD 1.8 bill
Financial Investment Funds (SIFs)
Foreign Investment Funds
Mutual Funds, Insurance companies
Romanian Shareholders’ Association
• In Romania - no private pension funds
4
I. Introduction. Premises (cont.)
Main legislation governing corporate governance in the last years:
• Companies Law
• Securities and Stock Exchanges Law - 1994
• Capital Market Law – 2002
Currently:
A NEW Capital Market Law (draft CML) was approved by Government
and was sent to Parliament for approval, in order to harmonize the
Romanian capital market legislation with the EU legislation
5
II. Key priorities
2.1 Ownership structure
2.2 Enforcement and implementation
2.3 The rights and equitable treatment of shareholders
2.4 The role of stakeholders in corporate governance
2.5 Disclosure & transparency
2.6 The responsibilities of the board
6
2.1 Ownership structure - privatization
• Some causes for privatization delays:
– management’s lack of interest
– pressures from the part of stakeholders
• Measures taken for improving corporate governance
– special administration procedure
– closer monitoring of management performance
• Improvement in terms of corporate governance in state owned
companies - below market expectations
7
2.1 Ownership structure – consolidation &
delisting
•
The shareholder holding more than 90% from the voting rights obliged to make a public offer aiming to delist the company
(Capital Market Law – 2002)
•
The price of the public offer shall be determined by an
independent valuator considering (i) the market price, (ii) the net
asset value per share and (iii) the price paid in the previous 12
months, for the same shares, by a shareholder holding more than
90% of total shares
•
The mandatory public offers - main events in 2003 (many
companies were delisted)
–
the consolidation process continues in 2004 but not on such a large
scale
8
2.2 Enforcement & implementation – judicial
system
•
There are no specialized courts for corporate governance/capital
market claims
•
Training of the judges is one of the priorities of the Ministry of
Justice
–
the court decisions on corporate governance issues reveals
that judges are not enough experienced in this field
–
there are no specialized courses on corporate governance
issues
•
Only the Romanian High Court of Justice is publishing its own
decision (with significant delays)
–
studying the courts decisions by analyzing the appropriate files
is almost impossible and time consuming
9
2.2 Enforcement & implementation –
redress mechanisms for shareholders
•
The Bucharest Stock Exchange Arbitration Court is designed to
settle down disputes between the intermediaries and their clients
•
The disputes between shareholders and companies can be solved,
as a general rule, only by the judicial courts
•
The existent Arbitration mechanisms are rarely used
•
The National Securities Commission (NSC) is allowed to file
lawsuits on behalf of shareholders, but the NSC never used this
right
10
2.2 Enforcement & implementation -National
Securities Commission
•
Significant progress registered: budget stability, staff training,
adequate facilities, IT infrastructure etc., transparency (monthly
bulletins), increased supervision activities etc.
•
Maintained responsibilities: Rasdaq was not authorized to function
as an SRO
•
Developed exchange of expertise with similar international
institutions
•
Elaborated the draft of the NEW Capital Market Law for EU
harmonization
–
the draft was sent to the Parliament for approval
11
2.2 Enforcement & implementation –
Voluntary Corporate Governance Code
• Code of Corporate Governance – Bucharest Stock Exchange
– “Plus tier” or “Transparency tier” - established in 2001
– The BSE Code of Corporate Governance is adopted voluntarily by
companies willing to be listed on the “Plus tier”
– Main corporate governance elements of the Code, referring to:
independent directors, dissemination of information,
transparency, dividends, conflicts of interest etc.
– Only one company listed by now on the “Plus tier”
12
2.3 The rights and equitable treatment of
shareholders – capital increases
• The shareholders’ general meeting must approve the share capital
increase
– however, according to current laws, the right to approve the
share capital changes can be delegated to directors; in this case
the notification of the board meeting is not publicly available
(terms of the capital change are not known by the shareholders)
• There are no specific rules requiring a minimum information content
of the shareholders’ general meeting notification
• There is no legal obligation to determine the price of new shares
based on an independent assessment of the company’s value
13
2.3 The rights and equitable treatment of
shareholders – capital increases (cont.)
• In the current legislation there are too many exceptional situations
where the “in-kind” contributions are allowed
• The draft of the CML allows the use of “in-kind” contributions
provided that special attendance and voting conditions are fulfilled
• The pre-emptive right can be eliminated if the share capital increase
is made during the privatization and post-privatization process
– a large number of companies have been privatized during last
years
• The draft of CML allows the pre-emptive right to be eliminated even
for “in cash” contributions
14
2.3 The rights and equitable treatment of
shareholders – related party transactions
• There are numerous rules aiming to monitor and prevent abusive
related party transactions
– Major transactions (valuing more than 20% of the net asset
value) have to be approved by shareholders
– Directors are obliged to disclose any potential conflict of interest
and to abstain from voting
– Certain transactions (valuing more than 10% of the net asset
value) between the company and directors & their relatives have
to be approved by the shareholders
15
2.3 The rights and equitable treatment of
shareholders – related party transactions
(cont.)
• According to current laws there is no legal obligation to disclose all
the transactions that include conflicts of interest
– currently the affiliated party transactions bigger than 50,000
EURO have to be made public
– the draft of the CML is slightly diminishing the transparency of
the affiliated party transactions (quarterly reporting, EUR
100,000)
• Companies are often breaching the a.m. rules and the appropriate
sanctions have been rarely imposed to companies/ directors
16
2.3 The rights and equitable treatment of
shareholders – institutional investors
• A large scale educational and public awareness program - not
initiated
– however, the Bucharest Stock Exchange initiated in 2004 a
program aiming to increase the public awareness about the
capital market
• Corporate governance issues are still unknown for the wide majority
of the public
• Institutional investors - rarely make public their voting policies
17
2.3 The rights and equitable treatment of
shareholders – general shareholders’
meetings
• Although extremely useful, a Best Practices Guide regarding general
shareholders meeting (GSM) does not exist yet
• The minimum notification period (15 days) for GSM - not changed
• There are rules aiming to ease the shareholders right to participate
at the GSM
– the identification documentation are included in the capital
market law in order to abolish the situations which limit the
shareholders’ right to participate at the GSM
• The general meeting deciding dividends to be distributed is obliged
to establish the dividend payment period within six months of the
date of the general meeting
– if the general meeting does not establish the payment period,
the dividends shall be paid in 60 days from the date the
resolution/decision is published in the Official Gazette
18
2.4 The role of stakeholders - employees
• The new labor code:
– inspired from EU legislation
– increases consultation and communication between employers
and employees;
– excessive decision making rights for employees (ex. working
norms)
– generates bureaucratic procedures, inefficiencies in the human
resources departments
• Procedures for communication with stakeholders – do not exist
• Employees and others that reveal illegal or abusive practices of a
company’s board and management are not enough protected
19
2.4 The role of stakeholders - creditors
•
•
•
•
Two major improvements for protection of creditors rights:
– the list of “suspect” acts/documents was extended in the new
bankruptcy law providing more power to creditors
– faster bankruptcy procedure: shorter terms, better
organization of courts, more syndic judges etc.
For a limited period, the state had priority in front of other
creditors for state budget receivables (ex. execution of a
guarantee)
New bankruptcy law - 2004:
accelerates and simplifies the juridical reorganization and the
bankruptcy procedure
– increases control on the activities of directors and liquidators
Improvements made in the Civil Code (in 2002, 2003)–
determined acceleration of law suites
20
2.5 Disclosure & transparency – accounting
and audit activities
• The Romanian Financial Auditors Chamber (SRO) is responsible to
license and watch over the financial auditors
– the Financial Auditors Chamber is overseen by the Ministry of
Public Finances
• The main tasks of the Romanian Financial Auditor’s Chamber
– testing and licensing the auditors
– assuring the relevant training
– preparing the regulations regarding the profession’s code of
ethics, the continuous training, the disciplinary procedure and
assuring the enforcement of its own rules
21
2.5 Disclosure & transparency – IFRS
implementation
• Currently, all the listed companies have to prepare the financial
statements according to the International Accounting Standards as
they were enacted by the Romanian Ministry of Finance
• The capital market institutions do not verify whether the information
provided in the financial statements and in the appropriate notes is
complete or not
• During 2003, the NSC intensified its efforts to determine the
Romanian issuers to report the financial statement
– a large number of sanctions were imposed
– as a result, more and more issuers are reporting the financial
statements
22
2.5 Disclosure & transparency – ownership
and control structures
• The shareholder/the group of shareholders holding over 5%, 10%,
33%, 50%, 75% or 90% have to disclose the holding to the
National Securities Commission within 5 business days from the
transaction date
• The changes of the significant and controlling holdings have to be
reported by shareholders and have to be made public
• The issuers are rarely providing this type of reports
23
2.5 Disclosure & transparency – listed
companies
• A significant progress was registered by BSE
– wide majority of BSE issuers comply with disclosure obligations
– the reports are most of the time complete and accurate
• Some progress was registered by RASDAQ
– during 2003, the number of reporting issuers increased three
times compared with 2002, but this number still represents
approximately 25% of the total number of issuers listed on
RASDAQ
• According to the capital market rules the issuers have to prepare
and make public
– The annual report – including the financial statements
– The half annual report – including the financial statements
– The current report – whenever an important event occurs
24
2.5 Disclosure & transparency –
external auditors
• Auditors’ responsibilities and consequently their liabilities are not
clearly stated in the legislation
• The Romanian Financial Auditors Chamber established a Disciplinary
Committee that investigates misconduct and imposes sanctions for
different violations of the legislation
• So far we are not aware of any case when an auditor was found
liable for some violation of the rules governing audit profession
25
2.6 Responsibilities of the Board – acting in
the best interest of shareholders
• OECD recommendation to introduce in the text of the law the
expression “acting in the best interest”- not implemented
• Collectively and individual responsibilities - not clearly defined
• Sanctions for directors - weakly enforced in practice
• Existing redress mechanisms the minority shareholders have – taken
out from the draft of the CML
• Do directors act in the best interest of shareholders ?
– very different opinions of market participants
26
2.6 Responsibilities of the Board – acting in
a professional and informed manner
• Corporate Governance Institute of BSE (established in August
2003); the Institute did not start its activity; the Institute should
ensure:
– the institutional framework for professional training of directors
– the conditions for sharing experience among directors
– the creation of a directors database
• The legislation is vague regarding the obligation of management to
provide full access of directors to all relevant information
• Directors are allowed to be on a maximum of three boards at the
same time
• The Parliament members, the Government members, the elected
officials and the public officers are not allowed to be simultaneously
directors or managers of commercial companies (“Anti-corruption
law” – 2003)
27
2.6 Responsibilities of the Board –
independent directors
• In Romania, the concept of independent directors is new
• The Capital Market Law and listing requirements – no provisions
about independent directors
• The concept of independent directors - introduced by the
(Voluntary) Code of Corporate Governance – BSE
• Market participants believe that:
– directors are rather not independent OR
– if they are independent they are independent from management
but not necessary from shareholders
• The presence of truly independent board members is still an
exception
28
2.6 Responsibilities of the Board –
specialized committees
• Audit, Nomination and Compensation/Remuneration Committees not defined, not implemented
• Hybrids of these committees exist but informally: directors delegate
among themselves different responsibilities
• The boards is not certifying that the financial statements provide
accurate and relevant information on the state of affairs of the
company. This certification is coming from the financial auditors
• Some of the responsibilities of censors were not transferred to
external or internal auditors. The result is:
– weaker redress mechanisms for the minority shareholders
– less control in the company regarding conflicts of interest
29
2.6 Responsibilities of the Board –
nomination and remuneration of directors
• There is no nomination procedure established by any
legislation/rules
– but the NSC rules regarding cumulative voting provide some
elements helping the nomination process
• In many cases shareholders are not timely, adequately and
effectively informed about nominees
• Directors remuneration is not disclosed in the financial statements
• Poor payment of directors - poor performance
• Remuneration of directors based on performance - not implemented
in Romania
30
CORPORATE GOVERNANCE IN ROMANIA
2001 - 2004
31
III. Recommendations - privatization
• When privatization takes place, the privatization contract should
provide minimum free float provisions
• After privatization, some of the national companies should be listed
or should remain listed on the BSE or Rasdaq
• AVAS should elaborate a special corporate governance program for
national companies; it should co-operate with NSC, BSE, Rasdaq
• Areas for future improvements – corporate governance:
– equal treatment of shareholders
– elimination through the legislation of the preferential treatment
of the state
– transparency and dissemination of information
– management performance
32
33
III. Recommendations – consolidation &
delisting; judicial system
• The process of ownership consolidation and companies delisting
should continue in 2004 and during the following years
• NSC and BSE, through the Corporate Governance Institute, should
have the initiative to establish a co-operation with the Ministry of
Justice and the National Institute for Magistrates in order to include
corporate governance/capital market issues in the training curricula
for the judges and prosecutors
34
III. Recommendations – public & private
redress mechanisms
• The NSC shall use its right to initiate lawsuits
• The Capital Market Arbitration Courts should be allowed to solve
certain litigations (excepting the disputes regarding the nullity of the
general shareholders meeting resolution) between shareholders and
companies
• Awareness of investors should increase regarding the advantages of
using professional arbitration mechanisms
35
III. Recommendations – National Securities
Commission
• Training of staff in the field of corporate governance
• Authorizing Rasdaq as SRO
• Rapid elaboration of rules for implementing the new Capital Market
Law which might be soon adopted by the parliament
– some technical assistance should be considered
• for capital market specific issues
• for harmonizing the provisions of the new law with the
Romanian legislation and existing NSC rules
36
III. Recommendations – National Securities
Commission (cont.)
• Additional technical assistance should be considered for specific
actions: change of control, conflicts of interests, mandatory delisting
• NSC should explain the rational of the changes between the current
Capital Market Law and the draft of the new CML;
– the comparison should be posted on the web site of the NSC
• The NSC should promote the White Paper
– The White Paper should also be posted on the NSC web site, in
Romanian and English
• NSC should become more active in providing sanctions to directors
and managers of listed companies
37
III. Recommendations – Code of Corporate
Governance
• BSE Corporate Governance Institute should start activity as soon as
possible
• Directors of listed companies on the first tiers of BSE and Rasdaq
should start being trained regarding
–
–
–
–
–
corporate governance
capital market rules
the role of specialized committees
the role of independent directors
the Code of Corporate Governance of the BSE etc.
• After training and exchanging experiences directors would be better
prepared to propose to shareholders promotion to the “Plus tier”
38
III. Recommendations - the rights and
equitable treatment of shareholders
• The law to clearly state that only the shareholders’ general meeting can
approve the amendments to the constitutive act, including the changes in
share capital
• The minimum data to be included in the notification for a share capital
change should be detailed by a NSC regulation applicable to all listed
companies
– only one institution should be responsible for the enforcement of these
rules
• “In-kind” contributions to share capital should not be allowed
• The pre-emptive right shall be honoured for every share capital (no
exclusions from exercising pre-emptive rights)
39
III. Recommendations - the rights and
equitable treatment of shareholders (cont.)
•
The beginning date of the subscribing period for the shareholders
having the pre-emptive rights should not be related to the
publication date of the resolution of the GSM in the Official
Gazette
–
the subscribing period shall begin at the date when the
general meeting resolution has been made public
OR
–
the general shareholders meeting should stipulate the
subscription period within the share capital increase
resolution. The beginning date for the subscription shall be
established in such a manner that the shareholders can be
aware of it and can take the appropriate actions
40
III. Recommendations - the rights and
equitable treatment of shareholders (cont.)
• Market should develop and increase the use of independent
assessments of a company’s share value
• Special regime established for the share capital increases executed
in accordance with the privatization and post-privatization law should be eliminated
• Capital market rules should impose on the issuers to disclose all the
transactions that include conflicts of interest (currently above
50,000 Euros should be disclosed)
• A special attention should be paid to enforcing these rules since the
number of issuers reporting related party transactions is quite
significant
41
III. Recommendations - the rights and
equitable treatment of shareholders (cont.)
• NSC and the other capital market institutions should contribute to
the educational programs aiming to increase the degree of the
public awareness regarding the corporate governance issues
• Assuring an unitary and harmonized corporate governance approach
requires a common program of actions acknowledged by all parties
involved; this program could be focused on the Corporate
Governance Institute but it should be enforced by joint efforts of all
the other institutions
• A Best Practice Guide aiming at explaining the rules governing the
organization of a shareholder’s meeting should be prepared and
promoted
• It should be better established the content of the shareholder’s
registry (including the name of the natural person empowered to
represent the shareholder – legal person)
• Dividend payment should be made within a 60 days period from the
general shareholders meeting
42
III. Recommendations - stakeholders
• Companies should put in place governance mechanisms to ensure
familiarity and compliance with outstanding legislation related to the
rights of stakeholders
• Directors could delegate among themselves responsibilities
regarding stakeholders. Example:
–
–
–
–
elaboration of compliance procedure
discussions with management
monitoring legislation and compliance process
relationship with the respective stakeholder
• BSE Corporate Governance Institute could help in drafting
procedures related to stakeholders
43
III. Recommendations - stakeholders
• Ministry of Labor should further discuss with employers and
unions/employees regarding the main divergent opinions they have related
to the new labor code
• Additional protection would be needed for employees and other persons in
order to encourage them to disclose illegal practices of directors and
managers
• Training of syndic judges and better organization of the bankruptcy
procedure is needed in the future
• Definition of “affiliated company/party / group of companies” should be
included in the bankruptcy legislation
44
III. Recommendations - disclosure and
transparency
• The institutional and organizational structure for accounting and
audit should be further strengthened
• Rules governing the audit profession should be enforced
• The capital market institutions must verify whether the information
provided in the financial statements and in the notes is complete or
not
– the capital market institutions should find the appropriate measures to
make sure that all missing information is provided
• The efforts made to ensure the enforcement of disclosure rules
should be strengthened
45
III. Recommendations - disclosure &
transparency (cont.)
• Companies should further improve the disclosure of their ownership
and control structures
• NSC regulation should be amended by including into the minimum
content of the annual report the shareholders or the group of
shareholders holding over 5% of the shares
• The NSC should determine whether the issuers are complying with
the requirement to have an internal audit department, and to find
the appropriate measure in order to remedy the situation. The law
shall stipulate the internal audit department responsibilities in a
clear and concrete manner
46
III. Recommendations - disclosure and
transparency (cont.)
• The role of directors in providing timely, accurate and complete
information should be increased
• NSC shall impose gradually to the obligation to post on the WEB the
information they are sending to the NSC
• A common electronically data base containing information about
issuers should be set up by the NSC, BSE, Rasdaq etc.; until this
project is implemented NSC should make available the information
on its own WEB site
• The efforts for enforcing the rules regarding the liability of external
auditors should be strengthened, and the NSC should inform the
Romanian Financial Auditors Chamber whenever considers that an
external auditor did not performed its duties in accordance with the
relevant normative deeds
47
III. Recommendations – responsibilities of
the Board
• The law should clearly stipulate in the text that Boards’ duty is to
serve the best interest of the company and of all shareholders
• Directors’ duty of loyalty – should be specifically mentioned and
sanctioned in the text of the law
• A contract between the company and its directors shall increase the
awareness of responsibilities / duties of the respective directors
• “Directors’ guideline” – should be published by the BSE Institute
• Executives should be excluded from Boards, as requested by law
(only the chairman of the Board could be the general manager/CEO)
48
III. Recommendations – responsibilities of
the board (cont.)
• Separation of the chairman from the CEO is further encouraged
• The NSC should be more active in providing sanctions to directors
and auditors of listed companies
• The collective and individual liabilities of directors should be clearly
defined in the Companies Law
• The notion of business judgment should be introduced in the
Romanian legal system
49
III. Recommendations - responsibilities of
the Board (cont.)
• The activity of the BSE Institute of Corporate Governance shall start
as soon as possible and shall be accelerated
• The Companies Law should allow directors to serve in more than 3
Boards
• The Companies Law and the new Capital Market Law/ NSC
regulations should specifically mention access of directors to all
company information
•
• CVs’ of directors should be posted on the company site, for the
companies listed on the first tiers of BSE and Rasdaq
50
III. Recommendations – responsibilities of
the Board (cont.)
• Awareness regarding the concept of independent directors should
increase
• Data base with independent directors should be created at the
Institute
• Listing requirements for the first and second tiers of BSE and
Rasdaq should require independent directors, after having
independent directors in the Institute data base
• The Institute should facilitate the training and the recruitment
process for independent directors
• The independent directors should have a crucial role in monitoring
management & conflicts of interests, in promoting corporate
governance
• The independent directors should be included in the composition of
specialized committees
51
III. Recommendations – responsibilities of
the Board (cont.)
• Implementation of specialized committees should be made sequential
– Step 1: training of directors should be made regarding the role and
responsibilities of these committees
– Step 2: database with independent directors should be developed
– Step 3: organizing & functioning rules of these committees should be elaborated,
as models, by the BSE Institute
– Step 4: Audit Committees should be implemented first (composed of at least one
independent director)
– Step 5: Nomination and Remuneration Committees should be also implemented
• Listing requirements for companies listed on the first and second tier on
BSE and Rasdaq should require the existence of an Audit Committee
composed of directors (from which at least one should be independent)
52
III. Recommendations – responsibilities
of the Board (cont.)
• Procedure / rules for nomination should be developed to increase
transparency (BSE)
• Remuneration of directors to be entirely paid by companies
• The “Board fee” could be differentiated: different directors could
have different fees; “Board fee” should be paid according to the
workload of directors, size of co. etc.
• Companies should start considering paying performance bonus for
directors
• External financial auditors should monitor if the remuneration of
•
directors and management is properly disclosed
53
Other recommendations
• The “White paper” should be better promoted in the market by the
NSC, Institute, BSE, Rasdaq, SIfs, foreign investment funds;
• Rasdaq should follow the BSE example and should promote a Code
of Corporate Governance
• The SIFs and the foreign investment funds shall also become
important “corporate governance messengers” along with NSC, BSE,
Rasdaq etc.
• Companies Law: a special chapter should be dedicated to listed
companies
54
Other recommendations (cont.)
• Minimum protection should be considered for
shareholders remaining in closed end companies, after
delisting (access to some minimum information, trading
of shares)
• The definition of the conflict of interest should be
included in the capital market legislation/rules
• Corporate Governance principles shall be applied by
foreign investors, like in their country of origin
55
Final conclusion & recommendation
• OECD corporate governance recommendations were partially
implemented in Romania in the period September 2001 – June 2004
• Main market institutions (National Securities Commission, Institute
of BSE, Bucharest Stock Exchange, Rasdaq, SIFs, foreign investment
funds etc.) should intensify their efforts and should work together
for implementing legislative and organizational measures aimed at
improving significantly the Romanian corporate governance system
56
Contact details
Angela Ene: enne@rdslink.ro
Tel: 00 40 21 232 18 37
Tel: 00 40 722 392 540
Galina Narcisa Fatu: narcisa.fatu@scpabostina.ro
Tel: 00 40 21 211 48 00
Tel: 00 40 724 245 101
57