The Role of Institutional Investors in Corporate Governance Case of Romania Cristina Hodea, MBA THE THIRD SOUTH EASTERN EUROPE CORPORATE GOVERNANCE ROUNDTABLE Zagreb, November 2002

Institutional investors universe þdomestic financial investment companies - most important and diversified portfolios (5 players) þforeign portfolio investors (7 players out of which 4 have important investments on Romanian capital market) þventure capitalists (10 players, invest mainly in private equity, but have few participation in listed companies; one of the envisaged exit strategies is listing the company) þdomestic mutual funds (7 portfolio management companies; mainly invest in money market; tend to increase the investment in capital market)

Institutional investors universe þinsurance companies -most of them invest mainly in Romanian T-bills and bank deposits -international players prefer to invest in international capital markets -some examples of : -Nederlanden has investments in stock of companies listed on BSE -Unita invests in listed and unlisted tourism companies -Asirom invests mainly in companies where controlling shareholder has control

Institutional investors universe þPrivatisation institutions –special institutional investors –majority, controlling but also minority shareholders; –goal: preserve/increase the value of the company; restructure it in order to become more appealing to strategic/portfolio investors) –should implement and promote OECD corporate governance principles where are stakeholders þInternational institutions (IFC, EBRD, EBRD) þBanks prefer less riskier investments þNo pension fund

Survey respondents Privatisation institutions, insurance companies, international institutions were not subject to the survey Questionnaires were sent only to managers of institutional investors 70% response rate, over 80% for Romanian financial companies and foreign portfolio investors and only 43% for mutual funds 68% of respondents invest for capital growth, only 28% investing for income generation 76% of institutional investors have an active investment policy

Main findings The priority in order to strengthen corporate governance should be enforcement of existing laws and regulation while improving legal framework 74% of respondents consider lack of experience and precedent in judicial system as well as corruption the main obstacles in enforcing legal framework; half of respondents consider insufficient training and expertise of SEC’s staff to deter law enforcement

Main findings Respondents consider that the auditors of the company have a moderate contribution in increasing transparency of financial information On a scale 1 to 5 (1 - poor, 5 -excellent) the institutional investor evaluate: –representation in the board of directors2.88 –existing accounting standards2.59 –disclosure of information2.53 –fairness in formation of governing bodies2.53 –regulatory framework on investment2.35

Main findings All respondents are mainly minority shareholders, although some have also control and majority participation Exit strategies preferred by institutional investors seem to be direct negotiations with other investors and capital market in similar percentages 93% of respondents the most important factors in selecting a target are the quality of management and financial issues; payment of dividends is regarded as less important. The most important perceived risks are protection of shareholder rights and management competence.

Main findings 65% of institutional investors declare to have an investor relation unit able to provide: –financial statements for last semester/quarter, –information for next shareholders’ assembly, –inform on material events from last assembly, –minutes of the assemblies over 70% of the institutional investors disclose information about their portfolio monthly or at shorter periods, using traditional communication means or company web site all managers have access to the balance sheet and income statement of the institutional investor they work for, but only 84% to the statement at cash flow and shareholders’ equity

Main findings 75% of respondents consider that the board should include representatives of majority shareholder, institutional investors and minority shareholders, but also independent experts from the industry. 75% know remuneration of board members of institutional investor, in most cases from annual budget 86% know the other occupations of board members from CVs presented when they were elected; less than 25% have more current information although 77% of respondents have detailed internal rules to avoid conflict of interest, less than 50% know about potential conflict of interest disclosed by board members

Romanian financial investment companies 5 investment companies born during privatisation process closed end funds with millions of shareholders and owning portfolios with hundreds of companies (both majority and minority shareholders)-act in this dual capacity maximum stake permitted by the law is 0.1% of share capital none of the financial investment companies inform which shareholders reached the 0.1% threshold 4 have web sites available

Romanian financial investment companies –all provide on the web sites annual, quarterly reports which include –financial statements –budget execution –structure of portfolio –lawsuits –portfolio risk –3 provide information on –company objectives – dividend payment schedule – contact person

Romanian financial investment companies only 2 inform stakeholders who are Board members, who manages the company, issues discussed and decisions of the shareholders’ assemblies - only 1 presents : information on major transactions CV of the board and management remuneration of board members

Romanian Mutual Funds -Relatively low investment in capital market, as minority and very small investor -portfolio management companies: 1.CERTINVEST - Intercapital 2.VANGUARD ASSET MANAGEMENT -FON 3.QUADRANT ASSET MANAGEMENT – STABILO, Integro, FDI 4.GLOBINVEST – NAPOCA 5.ACTIVE MANAGEMENT – ACTIVE Dinamic, Junior, Classic 6.CAPITAL ASSET MANAGEMENT - FORTUNA - CLASSIC - mutual funds web sites reveal the following aspects:

Romanian Mutual Funds

Institutional investors activism Most institutional investors –participate to all shareholders assemblies where they invest –are represented in the board of directors and other governing bodies in some cases –have many court trials when abused by majority shareholders Set up in 2000 by most active institutional investors, Romanian Shareholders’ Association has the mission to protect the interests of Romanian Companies' shareholders and to introduce and enforce the OECD principles of corporate governance Outlook: new capital market legislation with provisions closer to the OECD principles and best EU practices