1. THE ROLE OF CREDITORS AS STAKEHOLDERS IN TRANSITION ECONOMIES THE THIRD SOUTH EASTERN EUROPE CORPORATE GOVERNANCE ROUNDTABLE ZAGREB, 21-22 NOVEMBER 2002 Dr. Aurelian DOCHIA

2. Bank lending as the traditional way of financing in transition countries Bank lending occupies in transition economies a prominent position in financing economic activities; capital markets are just emerging and have a limited role in raising capital. The strong position of the banks is not accompanied by a similar corporate governance stance. A bank-centered governance model (like in Germany or Japan) cannot be clearly identified. An inadequate legal framework left banks over-exposed to credit risk.

3. The Romanian experience… Contract based protection of banks interests in their role of creditors was considered to be sufficient. Experience proved this position to be wrong – non-payment was building up, destabilizing the financial sector. Bankruptcy legislation was adopted late and reluctantly. Law 64 issued in 1996 succeeded to avoid mentioning “bankruptcy”, talking instead of “insolvency” and “reorganization”. Even after the legislation was amended, courts and procedures are still biased in favor of the debtors.

4. …and its outcome The second largest Romanian bank plus several smaller banks were on the brink of collapse. A huge effort was made to avoid a systemic crisis in 1999. Only the costs associated with Bancorex are estimated at 8% of the GDP. Although the situation has much improved and the banking system is healthy now, the financial sector lost ground and is now among the least developed among the transition countries.

5. Market lending The Company Law (no.31/1990) provides firms with the legal basis for borrowing directly from the market. Bondholders rights are specified in the legislation. They can call a general meeting of bondholders, elect representatives, participate (through representatives) to the general assembly of the company’s shareholders and oppose certain decision (particularly changes in the the statute of the company and issue of new bonds). In practice, as any action for defending bondholders’ interests has to go through courts, which are not very effective, protection is far from being adequate. It is probably one of the reasons the bond market is little developed in Romania.

6. Creditors’ role: “investors” or “stakeholders” ? Creditors, like the shareholders, do provide funds to the company as investors and they are confronted with the same risk of being expropriated by the insiders. Creditors have little in common with the other “stakeholders” which are not financial investors in the company. Devising adequate corporate governance instruments to protect creditors rights requires adopting a proper perspective on their role.

7. Investors’ protection Bank creditors Bondholders Shareholders Rights over the cash flows Decision rights