Corporate Governance
State’s Role In
Corporate Governance In
South East Europe
Thomas Wels, Partner
September 21, 2001
Overview
• Importance of corporate
governance in SEE
• Barriers to improved governance
• State attempts to improve
governance
• A pan-regional response?
• Options for the State
Importance of quality of board practices when
evaluating investments
%
“In evaluating companies for potential investment in the following regions, how
important is the quality of board practices relative to financial issues?”
More
25
33
48
Same
39
44
32
Less
36
Europe
Source: McKinsey Investor Opinion Survey 1999/2000
23
20
Asia
Latin America
Average premium investors would be willing to pay for
a well-governed company
Average %
30
28
Venezuela
26
Columbia
24
22
20
Brazil
Mexico
Argentina
Chile
Indonesia
Thailand
Malaysia
Korea
Greece
Italy
Germany
Taiwan
Japan
18
0
16
Over 80% of
investors willing
to pay a
premium
France
Spain
Switzerland
Latin America
Asia
Source: McKinsey Investor Opinion Survey 1999/2000
Continental Europe
US
UK
Anglo-Saxon
Overview
• Importance of corporate
governance in SEE
• Barriers to improved governance
• State attempts to improve
governance
• A pan-regional response?
• Options for the State
The market model governance chain*
Shareholder
environment
Dispersed
ownership
Nonexecutive
majority
boards
Sophisticated
institutional
investment
Institutional
context
Aligned incentives
OECD
Principles
Active private
equity market
(incl. IPOs)
Capital market
liquidity
Independence
and performance
Active
takeover
market
Corporate
context
High
disclosure
Shareholder
equality
* Examples can be found in Australia, Canada, U.K. and U.S.
Source: McKinsey
Transparency and
accountability
The control model governance chain*
Shareholder
environment
Concentrated
ownership
‘Insider
boards’
Reliance on
family, bank and
State finance
Institutional
context
Incentives
aligned with
core shareholders
OECD
Principles
Under-developed
new issue
market
Capital market
liquidity
Independence
and performance
Limited
takeover
market
Corporate
context
Limited
disclosure
Inadequate
minority
protection
Transparency and
accountability
* Examples can be found in Asia, Latin America and many Continental and South Eastern European countries
Source: McKinsey
Importance of institutional factors when selecting
emerging market countries in which to invest
Average response
Irrelevant
1
2
Relevant
3
Highly
Relevant
5
4
Enforceability of legal rights (e.g. contracts)
4.5
Quality of economic management
4.3
Independence of judiciary/quality of legal system
4.0
Level of corruption
3.9
Predictability and level of taxation system
3.9
Quality of accounting standards
3.8
Effectiveness of regulatory system
3.8
Administrative efficiency of government
3.5
Effectiveness of banking sector
3.3
Scale and liquidity of local investment market
3.3
Source: McKinsey Emerging Market Investor Opinion Survey 2001
Importance of corporate level factors when selecting
emerging market companies in which to invest
Average response
Irrelevant
1
2
Relevant
3
Highly
Relevant
4
5
4.5
Distinctions between company and family interests
Clearly defined governance arrangements
4.4
Accuracy of financial reporting
4.4
Legally enforceable minority shareholder protection
4.3
Use of performance-related pay for top management
4.3
Timeliness of financial reporting
3.9
Coverage of financial reporting
3.9
Presence of independent (non-executive) directors
Establishment of conflicts of interests committee
Source: McKinsey Emerging Market Investor Opinion Survey 2001
3.8
3.3
Overview
• Importance of corporate
governance in SEE
• Barriers to improved governance
• State attempts to improve
governance
• A pan-regional response?
• Options for the State
A radical reduction in State involvement –
a crisis response
Economic crisis
• Large currency
devaluation
• High unemployment
• Falling stock market
capitalizations
• Increased nonperforming bank debt
• Falling corporate
profitability
Financial reform . . .
• Banking sector reform
• Public, agricultural, and social security spending
reform
• Plan to remove barriers to foreign investment
• Government asset management company to be
established
. . . coupled with significant corporate reform
• Privatization of Turkish Telecom, TUPRAS (oil
refinery), POAS (petrol distribution), TEKEL
(tobacco/alcohol), and SEKER (sugar)
• Preparations being made to facilitate further
private investment in gas, electricity generation,
and distribution rights, Petkim (petrochemicals),
Turkish Airlines, and ERDEMIR (steel)
Source: Turkish Treasury; IMF; clippings
COUNTRY EXAMPLE
Will buyers for
state-owned
enterprises be
found?
Decreasing State ownership in corporate
sector . . .
Objectives
• Attract local and foreign investors
• Boost entrepreneurship
• Encourage mergers and strategic alliances
Measures
• Undertake large scale privatization plan, incl. 12
major banks and companies in 2002 (e.g., OTE,
PPC, Agricultural Bank, Postal Savings Bank)
• Introduce tax incentives to encourage more
companies to merge
• Introduce new legal and fiscal environment to
encourage more venture capital
Source: Clippings; McKinsey analysis
Expected results
• Over 3 billion
Euros revenues
• Market
consolidation
• Boost market
confidence in
Stock Exchange
COUNTRY EXAMPLE
Challenge
Lack of interest
from international
investors. For ex:
• Prolonged
negotiations for
selling of Olympic
Airways and
Hellenic
Shipyards
• Motor Oil’s
disappointing IPO
. . . and radically reduced State influence in
specific companies
COMPANY EXAMPLE
% owned by state
Other measures planned
• Revoke trade union right to
appoint board director
• Management to be appointed by
shareholders for 5-year tenures**
• Stock options introduced – to be
open to all employees over time
100
External influences on
telecomms sector
• Deregulation
• Competition from new
market entrants
* Legislation passed enables changes
** Previously, State-appointed
Source: Clippings
51
42
33
Prior to
1996
June
2001
September
2001
Planned
in future*
Investors react favorably to improved corporate
governance
COMPANY EXAMPLE
High/low points
Spread of response
Institutional changes
Governance changes
• Liberalisation of foreign
ownership of equities and
bonds
• Strengthening of
shareholder rights
Premiums for wellgoverned companies
Percent
36
• Elimination of cross
guarantees
• Installment of transparency
and accountability
measures
• Liberalisation of the M&A
market
• Increased legal activity by
shareholders
30
• Corporate and banking
restructuring
• Accumulation of
governance knowledge
and practice
26
• More independent boards
Source: McKinsey analysis, McKinsey Investor Opinion Surveys 1999/2000
34
32
28
24
22
Before
changes
(1998)
After
changes
(1999)
Overview
• Importance of corporate
governance in SEE
• Barriers to improved governance
• State’s attempts to improve
governance
• A pan-regional response?
• Options for the State
Most capital markets – and companies listed –
in South East Europe are small…
Total market cap –
end 2000
Millions USD
Istanbul
574
Bucharest
366
Skopje
7
298
221
315
69,508
Sofia
Average company
market capitalization
Millions USD
342
102,032
Athens
London
Number of companies
listed (main and parallel
markets) – end 2000
503*
>1**
141
* 25 listed on the official market and 478 on the free market
** Estimates
Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD
1
3
115
2,612,230
WIP
2,374
1,100
…although in relative terms, ASE is quite successful
Selected examples
Value of S.E. as a percentage of GDP – end 2000
Athens
93
Istanbul
Sofia
Bucharest
Skopje
34
2
5
<1 *
London
* Estimates
Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD
185
Yet, core shareholders dominate Greece’s largest
publicly-listed companies
Shareholder structure of top 15 companies ranked by market capitalization, end 2000
Domestic shareholders > 5%
InterAmerican
Panafon
Foreign shareholders > 5%
Shareholders < 5%
ETVA
DOL
HBC
Viohalko
Intracom
Domestic shareholder’s
average holding ~33%
EFG
CBG
OTE
Titan
Alpha
NBG
Bank of Cyprus
Piraeus
Source: ASE; McKinsey analysis
Foreign shareholder’s
average holding ~13%
Two recent initiatives in South East Mediterranean
Negotiating:
• Open respective
markets to investors in
Turkey and Greece via
cross-membership of
companies on both
markets
• Common technical
application to follow
stocks on both
markets
Source: Clippings
Discussing
increased
cooperation:
• Create common
index comprising
shares of all three
stock exchanges
• JV is planned
within 2001
A more radical solution – a combined pan-regional
exchange?
Percent of total, USD millions, number of companies
Equivalent to Brussels
Stock Exchange
Skopje
Bucharest
Bulgaria
>1 172,485
>1
>1
Equivalent Toronto Stock
Exchange
1,416
10
8
Istanbul
40
36
22
Athens
59
24
Market
capitalization
Number of
companies
Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD
• While combined number of
companies is high, aggregate
market capitalization is still
relatively small
• Without more dynamic pooled
equity markets, difficult for
privatisation programs to access
(foreign) equity financing option
Requirements for pan-regional South East
Europe exchange
ILLUSTRATIVE
Requirements
Models
• Common trading platforms
• Euronext
• Coming listing/tracking
standards
• Euronext
• Common corporate
governance standards
• SEC-regulated
exchanges/OECD Principles
• Effective market
makers/traders
• SEC-regulated exchanges
• Complementary, if not
common, securities
legislation
• U.S. SEC/U.K. FSA
regulations
Overview
• Importance of corporate
governance in SEE
• Barriers to improved governance
• State attempts to improve
governance
• A pan-regional response?
• Options for the State
Moving from control model governance chain
Shareholder environment
- Attract foreign equity
capital
- Reduce State ownership
Concentrated
ownership
‘Insider
boards’
Reliance on
family, bank and
State finance
Institutional
context
Capital market liquidity
• Encourage equitybased financing
• Remove barriers to
takeovers
Source: McKinsey
Incentives
aligned with
core shareholders
OECD
Principles
Under-developed
new issue
market
Limited
takeover
market
Independence
and performance
- Encourage more
independent
boards
- Facilitate stockrelated
compensation
Corporate
context
Limited
disclosure
Inadequate
minority
protection
Transparency and
accountability
- Mandate international
accounting standards
- Create and enforce
shareholder rights
Where the State can contribute to improve Corporate
Governance
Adequate
regulatory
frameworks
Alternatives to
state shareholdings
Objective
Examples
• Create an
adequate
Institutional and
Corporate
framework to
• Internationally
accepted governance
rules (e.g.,OECD,
SEC, IAS/US-GAAP)
– attract Direct
Investment
Liquidity of
exchanges
– Indirect
Investment
• Create broad
distribution of stock in
population
• Reduce State stakes
to create market for
control
• Incentivise stock
exchange cooperations to improve
liquidity
250401LNZXC483TSMW-P1
For further information contact:
Thomas Wels: +30 (1) 3672 777
Mark Watson: +1 212 446 8021
McKinsey Investor Opinion Survey 1999/2000
can be downloaded from
www.mckinsey.com
Also, available on www.mckinseyquarterly.com,
“Corporate reform agenda in the developing
world", an article that includes findings from the
McKinsey Emerging Market Investor Opinion
Survey
24