Codes of Corporate Governance Hungary’s Experience with a Soft Law Transplant Éva Ozsvald Institute of Economics, HAS

Proliferation of codes of good governance Source: Enrione,A.- Mazza,C.-Zerboni,F. (2006): Institutionalizing Codes of Governance American Behavioral Scientist, 49; 961

Hungary at the turn of millenium golden years of growth and restructuring transition to a full-fledged market economy completed preparation for the EU accession legal harmonization – complying with the acquis communautaire weaknesses of institutions „laws on the book” vs. enforcement and embedded norms underdeveloped capital markets bank-based finance investors’ protection and trust majority of companies are closely held – out of scope of the analysis

The main characteristics of listed companies (Budapest Stock Exchange) o wnership concentration 2001 Q Q4 (% holdings) A blockholder is defined as an owner with higher direct ownership than 5 percent

The dominance of foreign institutional investors 2007 Q4

Magyar Telekom, MOL, OTP – the big three more than 75% of BSE capitalization different ownership structures Magyar Telekom: one majority owner (Deutsche Telekom A.G. -60%) MOL: numerous blockholders OTP: widely dispersed what they share : two-tier board structure power of insiders,strong managers, friendly boards the main corporate governance problem of the Hungarian public companies: weak protection of the interest of minority shareholders and the lack of incentives for a higher degree of transparency and disclosure

Innovations in the 2006 Company Act a policy shift towards deregulation, flexibility, less bureaucratic obstacles enhanced protection of creditors, shareholders (including minority shareholders) distinction was drawn between private and public companies - different rules the possibility of choice between the Anglo-Saxon type of unitary board system and the two tier board structure explicite reference to the BSE codes of cg governance obligation to provide an annual complience report must be posted on the official website of the company

The main points of our empirical research on codes of corporate governance (Bedo,Zs.-Ozsvald,E.2008 ) the triggering force matters (Aguilera, R.V. and Cuervo- Cazurra,A 2004): endogenous demand vs. exogenous pressure Hungary was following the directives of the EU Commission external pressure  transplant of codes of best practice modifying the content to suit better country-specific needs: very little adjustment was made the quality of disclosure case-by-case examination of „comply or explain” answers  most companies do not recognize the value of providing good quality informaton

What attributes of companies can be linked to the the quality of corporate governance statements? size? debt-to-equity? liquidity? the strength of blockholders? Regression analysis: - large ownership blocks generate more inadequate answers - higher liquidity increases the quality of disclosure

Conclusion short experience so far codes of best practice in Hungary: a transplant from abroad without taking into account the local conditions form decoupled from practice high formal complience („box-ticking”) – - opacity remains - little change in corporate behaviour

on the positive side: adoption of cg codes: a signal of commitment to internationally promoted principles and values educational and awareness-raising function future research: evolutionary approach to corporate governance examining the link between the performance of companies and their adherence to good governance practices