1 CORPORATE GOVERNANCE IN ROMANIA Angela Ene – General Manager, Ardyan Consulting Galina Narcisa Fatu – Bostina & Associates Law Firm Ohrid, Macedonia June 10, 2004

2 Scope of the report To review the progress made in terms of corporate governance in the period 2001 – 2004, considering: 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 To make recommendations for improving the corporate governance system

3 Structure of the report / presentation I Introduction. Premises I Introduction. Premises II Key priorities 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 III Conclusions and recommendations

4 I.Introduction. Premises The main institutions of the Romanian capital market National Securities Commission (NSC) National Securities Commission (NSC) Bucharest Stock Exchange (BSE) - market cap of EUR 4.8 bill Bucharest Stock Exchange (BSE) - market cap of EUR 4.8 bill Rasdaq Electronic Market (Rasdaq) - market cap. of USD 1.8 bill Rasdaq Electronic Market (Rasdaq) - market cap. of USD 1.8 bill Financial Investment Funds (SIFs) Financial Investment Funds (SIFs) Foreign Investment Funds Foreign Investment Funds Mutual Funds, Insurance companies Mutual Funds, Insurance companies Romanian Shareholders’ Association Romanian Shareholders’ Association In Romania - no private pension funds In Romania - no private pension funds

5 I. Introduction. Premises (cont.) Main legislation governing corporate governance in the last years: Companies Law Companies Law Securities and Stock Exchanges Law Securities and Stock Exchanges Law Capital Market Law – 2002 Capital Market Law – 2002Currently: 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

6 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

7 2.1 Ownership structure - privatization Some causes for privatization delays: Some causes for privatization delays: –management’s lack of interest –pressures from the part of stakeholders Measures taken for improving corporate governance 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 Improvement in terms of corporate governance in state owned companies - below market expectations

8 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 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 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 mandatory public offers - main events in 2003 (many companies were delisted) –the consolidation process continues in 2004 but not on such a large scale

9 2.2 Enforcement & implementation – judicial system There are no specialized courts for corporate governance/capital market claims 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 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) 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

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 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 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 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 The National Securities Commission (NSC) is allowed to file lawsuits on behalf of shareholders, but the NSC never used this right

Enforcement & implementation -National Securities Commission Significant progress registered: budget stability, staff training, adequate facilities, IT infrastructure etc., transparency (monthly bulletins), increased supervision activities etc. 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 Maintained responsibilities: Rasdaq was not authorized to function as an SRO Developed exchange of expertise with similar international institutions Developed exchange of expertise with similar international institutions Elaborated the draft of the NEW Capital Market Law for EU harmonization Elaborated the draft of the NEW Capital Market Law for EU harmonization –the draft was sent to the Parliament for approval

Enforcement & implementation – Voluntary Corporate Governance Code Code of Corporate Governance – Bucharest Stock Exchange 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”

The rights and equitable treatment of shareholders – capital increases The shareholders’ general meeting must approve the share capital increase 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 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 There is no legal obligation to determine the price of new shares based on an independent assessment of the company’s value

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 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 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 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 The draft of CML allows the pre-emptive right to be eliminated even for “in cash” contributions

The rights and equitable treatment of shareholders – related party transactions There are numerous rules aiming to monitor and prevent abusive 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

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 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 Companies are often breaching the a.m. rules and the appropriate sanctions have been rarely imposed to companies/ directors

The rights and equitable treatment of shareholders – institutional investors A large scale educational and public awareness program - not initiated 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 Corporate governance issues are still unknown for the wide majority of the public Institutional investors - rarely make public their voting policies Institutional investors - rarely make public their voting policies

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 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 The minimum notification period (15 days) for GSM - not changed There are rules aiming to ease the shareholders right to participate at the GSM 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 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

The role of stakeholders - employees The new labor code: 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 existProcedures 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 protectedEmployees and others that reveal illegal or abusive practices of a company’s board and management are not enough protected

The role of stakeholders - creditors Two major improvements for protection of creditors rights: 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) 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 : New bankruptcy law : -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 Improvements made in the Civil Code (in 2002, 2003)– determined acceleration of law suites

Disclosure & transparency – accounting and audit activities The Romanian Financial Auditors Chamber (SRO) is responsible to license and watch over the financial auditors 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 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

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 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 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 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

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 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 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 The issuers are rarely providing this type of reports

Disclosure & transparency – listed companies A significant progress was registered by BSE 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 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 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

Disclosure & transparency – external auditors Auditors’ responsibilities and consequently their liabilities are not clearly stated in the legislation 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 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 So far we are not aware of any case when an auditor was found liable for some violation of the rules governing audit profession

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 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 Collectively and individual responsibilities - not clearly defined Sanctions for directors - weakly enforced in practice Sanctions for directors - weakly enforced in practice Existing redress mechanisms the minority shareholders have – taken out from the draft of the CML Existing redress mechanisms the minority shareholders have – taken out from the draft of the CML Do directors act in the best interest of shareholders ? Do directors act in the best interest of shareholders ? –very different opinions of market participants

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: 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 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 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) 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)

Responsibilities of the Board – independent directors In Romania, the concept of independent directors is new In Romania, the concept of independent directors is new The Capital Market Law and listing requirements – no provisions about independent directors 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 The concept of independent directors - introduced by the (Voluntary) Code of Corporate Governance – BSE Market participants believe that: 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 The presence of truly independent board members is still an exception

Responsibilities of the Board – specialized committees Audit, Nomination and Compensation/Remuneration Committees - not defined, not implemented Audit, Nomination and Compensation/Remuneration Committees - not defined, not implemented Hybrids of these committees exist but informally: directors delegate among themselves different responsibilities 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 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: 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

Responsibilities of the Board – nomination and remuneration of directors There is no nomination procedure established by any legislation/rules 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 In many cases shareholders are not timely, adequately and effectively informed about nominees Directors remuneration is not disclosed in the financial statements Directors remuneration is not disclosed in the financial statements Poor payment of directors - poor performance Poor payment of directors - poor performance Remuneration of directors based on performance - not implemented in Romania Remuneration of directors based on performance - not implemented in Romania

31 CORPORATE GOVERNANCE IN ROMANIA

32 III. Recommendations - privatization When privatization takes place, the privatization contract should provide minimum free float provisions 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 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 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: 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

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34 III. Recommendations – consolidation & delisting; judicial system The process of ownership consolidation and companies delisting should continue in 2004 and during the following years 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 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

35 III. Recommendations – public & private redress mechanisms The NSC shall use its right to initiate lawsuits 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 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 Awareness of investors should increase regarding the advantages of using professional arbitration mechanisms

36 III. Recommendations – National Securities Commission Training of staff in the field of corporate governance Training of staff in the field of corporate governance Authorizing Rasdaq as SRO Authorizing Rasdaq as SRO Rapid elaboration of rules for implementing the new Capital Market Law which might be soon adopted by the parliament 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 capital market specific issues for harmonizing the provisions of the new law with the Romanian legislation and existing NSC rules for harmonizing the provisions of the new law with the Romanian legislation and existing NSC rules

37 III. Recommendations – National Securities Commission (cont.) Additional technical assistance should be considered for specific actions: change of control, conflicts of interests, mandatory delisting 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; 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 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 NSC should become more active in providing sanctions to directors and managers of listed companies

38 III. Recommendations – Code of Corporate Governance BSE Corporate Governance Institute should start activity as soon as possible 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 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” After training and exchanging experiences directors would be better prepared to propose to shareholders promotion to the “Plus tier”

39 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 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 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 “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) The pre-emptive right shall be honoured for every share capital (no exclusions from exercising pre-emptive rights)

40 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 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

41 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 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 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) 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 A special attention should be paid to enforcing these rules since the number of issuers reporting related party transactions is quite significant

42 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 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 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 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) 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 Dividend payment should be made within a 60 days period from the general shareholders meeting

43 III. Recommendations - stakeholders Companies should put in place governance mechanisms to ensure familiarity and compliance with outstanding legislation related to the rights of 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: 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 BSE Corporate Governance Institute could help in drafting procedures related to stakeholders

44 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 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 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 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 Definition of “affiliated company/party / group of companies” should be included in the bankruptcy legislation

45 III. Recommendations - disclosure and transparency The institutional and organizational structure for accounting and audit should be further strengthened The institutional and organizational structure for accounting and audit should be further strengthened Rules governing the audit profession should be enforced 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 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 The efforts made to ensure the enforcement of disclosure rules should be strengthened

46 III. Recommendations - disclosure & transparency (cont.) Companies should further improve the disclosure of their ownership and control structures 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 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 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

47 III. Recommendations - disclosure and transparency (cont.) The role of directors in providing timely, accurate and complete information should be increased 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 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 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 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

48 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 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 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 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 “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) Executives should be excluded from Boards, as requested by law (only the chairman of the Board could be the general manager/CEO)

49 III. Recommendations – responsibilities of the board (cont.) Separation of the chairman from the CEO is further encouraged 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 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 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 The notion of business judgment should be introduced in the Romanian legal system

50 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 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 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 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 CVs’ of directors should be posted on the company site, for the companies listed on the first tiers of BSE and Rasdaq

51 III. Recommendations – responsibilities of the Board (cont.) Awareness regarding the concept of independent directors should increase Awareness regarding the concept of independent directors should increase Data base with independent directors should be created at the Institute 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 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 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 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 The independent directors should be included in the composition of specialized committees

52 III. Recommendations – responsibilities of the Board (cont.) Implementation of specialized committees should be made sequential 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) 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)

53 III. Recommendations – responsibilities of the Board (cont.) Procedure / rules for nomination should be developed to increase transparency (BSE) Procedure / rules for nomination should be developed to increase transparency (BSE) Remuneration of directors to be entirely paid by companies 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. 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 Companies should start considering paying performance bonus for directors External financial auditors should monitor if the remuneration of directors and management is properly disclosed External financial auditors should monitor if the remuneration of directors and management is properly disclosed

54 Other recommendations The “White paper” should be better promoted in the market by the NSC, Institute, BSE, Rasdaq, SIfs, foreign investment funds; 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 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. 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 Companies Law: a special chapter should be dedicated to listed companies

55 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) 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 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 Corporate Governance principles shall be applied by foreign investors, like in their country of origin

56 Final conclusion & recommendation OECD corporate governance recommendations were partially implemented in Romania in the period September 2001 – June 2004 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 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

57 Contact details Angela Ene: Tel: Tel: Galina Narcisa Fatu: Tel: Tel: