Ljubljana, September 2014 Research Centre for Economic and Regional Studies Corporate Governance in Central Eastern Europe – - a Comparative Political Economy Approach Eva Ozsvald

Outline of the presentation  The scope of research  The theoretical framework  The three factors that shaped the evolution of corporate governance in CEE-3  The role of stock exchanges  The impact of the EU regulation  Within-group similarities and differences Ljubljana, September 2014 Research Centre for Economic and Regional Studies

Ljubljana, September 2014 Research Centre for Economic and Regional Studies The scope of research  The evolution (1995 – 2013) and characteristics of corporate governance in CEE-3: Czech Republic – Hungary – Poland Czech Republic – Hungary – Poland  Focusing on public joint stock companies  Inseparably linked to the analysis: the comparision of the three exchanges: PSE – BSE -WSE PSE – BSE -WSE

The theory applied: „Varieties of Capitalism”  Short description of the original (Hall & Soskie, 2001) „Varieties of Capitalism” (VoC) model l iberal market economies vs. coordinated market economies l iberal market economies vs. coordinated market economies the principle of complementarity the principle of complementarity the place of the financial systems and corporate governance in the model the place of the financial systems and corporate governance in the model  Critiques of the classical VoC model  Central Eastern European economies: a unique variety of capitalism   Nölke and Vliegenhart (2009): dependent market economies the main distinctive features: high rates of FDI dependency heavy weight of multinational companies (MNCs) the main distinctive features: high rates of FDI dependency heavy weight of multinational companies (MNCs) Ljubljana, September 2014 Research Centre for Economic and Regional Studies

„dependent market economies ”  Capital markets and corporate governance in the „dependent market economies” concept   excessive reliance on FDI and credit from foreign-owned banks as prime means of finance   the small role of local stock markets with very few public companies (Poland is exception)   a subordinate relationship between MNCs and their local subsidiary companies   the ultimate control and chief corporate governance mechanisms stay with the home basis of the MNCs. Ljubljana, September 2014 Research Centre for Economic and Regional Studies

Factors shaping the evolution of corporate governance  The impact of privatization, capital market characteristics and EU regulation on CG  Privatization the interconnectedness of privatization, stock market development and CG regulation in post-socialist transition  the Czech experience with mass privatization a lesson on the negative consequences of the negligence of corporate governance issues and regulation in early transition Ljubljana, September 2014 Research Centre for Economic and Regional Studies

Privatisation cont’d   the Polish case slow privatization, cautios approach but good regulation and infrastructure emphasis on the development of the stock exhange   Hungary the main way: the direct sale to strategic – mostly foreign - investors. (unlike in the Czech Republic or Poland) capital markets were not considered as an essential tool in privatization techniques (unlike in the Czech Republic or Poland) Ljubljana, September 2014 Research Centre for Economic and Regional Studies

Stock exchanges in CEE-3   the bidirectional nature of the equity market-CG relationship  Financial depth : an institutional area where the CEEs are considerably lagging behind the OMS and countries on the similar level of development an institutional area where the CEEs are considerably lagging behind the OMS and countries on the similar level of development financial intermediation in CEE-3 is strongly bank-based and the banking sector is overwhelmingly foreign-owned The positive and negative consequences of highly concentrated ownership structures on corporate governance The minority shareholder problem Ljubljana, September 2014 Research Centre for Economic and Regional Studies

 The trajectory of the three stock markets (Graph. 1) the emergence and the resilience of the Warsaw Stock Exchange after the 2008 crisis the emergence and the resilience of the Warsaw Stock Exchange after the 2008 crisis  Concentrated ownership on the three exchanges (Table 1.) and the identity of owners Ljubljana, September 2014 Research Centre for Economic and Regional Studies

Ljubljana, September 2014 Research Centre for Economic and Regional Studies Stock Market Capitalization to GDP ( ) Graph.1.

Ownership structure of companies on the PSE, BSE and WSE Table 1. Czech RepublicHungaryPoland Largest block holder 3 largest block holders Foreign share holders Largest block holder 3 largest block holders Foreign share holders Largest block holder 3 largest block holders Foreign share holders , Mean SD Min Max N Ljubljana, September 2014 Research Centre for Economic and Regional Studies

The impact of the EU regulation   The Action Plan of 2003: ‘Modernising Company Law and Enhancing Corporate Governance in the EU- A Plan to Move Forward’’ areas covered: transparency and reliability of corporate information, stronger shareholder rights, distinction between executive and non-executive directors, the necessity of including independent members on the board of directors, employees’ representation on the boards.   The CEEs complience with formal recommendations laws on the book versus the effectiveness of the implementation of regulations the „box –ticking” approach Ljubljana, September 2014 Research Centre for Economic and Regional Studies

Within-group similarities and differences   The main CG characteristics of CEE-3 share : formal legal rules in accordance with the EU pattern, but weaker enforcement practice; concentrated ownership structure; weaker protection of minority shareholder rights; mostly two-tier board structure; CEO’s involvement in the selection of executive and supervisory board members; the small number of independent director; relatively low degree of transparency and information disclosure; passivity of minority shareholders in governance matters ; non-existent market for corporate control Ljubljana, September 2014 Research Centre for Economic and Regional Studies

 Why to be careful with treating CEEs as a  Why to be careful with treating CEEs as a homogenous group   Diverging pattern Poland has taken (especially since 2008) arguments supported by the development of the WSE and CG of public companies booming Warsaw Stock Exchange contrasts with the stagnant bourses in Prague and Budapest large number of IPOs on the WSE (Table 2) efforts to enhance several elements of good CG practices to internationally standards on the WSE   differences in „equity culture” and also in the quality academic research on CG issues between Poland and other CEEs Ljubljana, September 2014 Research Centre for Economic and Regional Studies

The number of IPOs in CEE-3 Table 2. Stock Exchange Warsaw Stock Exchange Prague Stock Exchange Budapest Stock Exchange Ljubljana, September 2014 Research Centre for Economic and Regional Studies Source: National Bank of Poland (2013); Meluzin et al. 2013