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Summary Report
At present, a few countries in the world can afford
to ignore the problems related to corporate governance and control,
still more if they are aiming to attract foreign investment. This
is quite true for the transitional economies as well. The good
corporate governance and control guarantees a benefit for
shareholders, restrict the abuses and corruption, and, finally, it
is a guarantee for economic growth and social progress.
The positive point is that Bulgaria is also a part
of the global process of theoretical discussions and practical
initiatives to apply the best world standards in the field. Until
recently, "corporate governance and control" were an abstract and
incomprehensible concept not only for the mass of individual
shareholders who acquired ownership through mass privatization, but
also for the representatives of state institutions and private
business. As of today, the importance of the problem particularly
for an economy whose restructuring is an urgent need is realized on
the highest governmental level. During the last years, meetings and
discussions, education seminars and sociological surveys were
organized and the first more serious editions on the issue were
published in Bulgaria, all of them supported by the active efforts
of the professional community and media. A proof for Bulgaria. s
striving for searching an answer to the global problems in the
field of corporate governance and control is the inclusion of the
issue in the program of this year. s Investment Forum for
South-East Europe (18th-20th October, 1999,
Sofia).
This report is aiming at presenting the state and
specific problems of corporate governance and control in Bulgaria.
It has been elaborated as part of the project "Corporate Governance
Initiative in Bulgaria" with the financial support of the Center
for International Private Enterprise, an affiliate of the U.S.
Chamber of Commerce. The project is mainly targeted at facilitating
the introduction of contemporary standards of corporate governance
and procedures that are to guarantee responsibility and
accountability, transparency in the economy and control mechanisms
within companies.
The report has been drawn on the basis of data from
sociological surveys (carried out by Vitosha Research Agency for
the Center for Economic Development) as well as publications of
international organizations and specialized editions. The
conclusions for Bulgaria presented in the report are based on the
information from a qualitative sociological survey on the corporate
governance problems. The survey was carried out in late January
1999 using the discussions-in-focus-groups method. Participating in
the discussions were representatives of branch ministries, the
Privatization Agency, Center for Mass Privatization, Securities and
Stock Exchanges Commission, Bulgarian Stock Exchange - Sofia,
managers of enterprises and investment companies, investment
intermediaries, investors. organizations, individual shareholders,
journalists.
The basic empirical data presented in the report are
a result of a quantitative sociological survey carried out in the
autumn of 1998. The sample covers 52 enterprises with more than 100
employees, a value of assets owned exceeding Levs 20 million (as of
December 31st, 1995) and privatized prior to the end of
1996.
The report presents an analysis of the core problem
areas of corporate governance in Bulgaria during a period when the
predominant number of enterprises and approximately half of the
assets were privatized. Apart from diversifying the forms of
ownership, the privatization of state-owned enterprises also
denotes a necessity in new mechanisms for control over managers and
coordination of owners. interests. The ambition is to identify the
specific peculiarities of corporate governance and control for
transitional economies on the example of Bulgaria, that are
supposed to require adequate measures for overcoming the specific
problems.
1. Obscurity of the concept and terminological
difficulties
The discussions in the focus groups confirmed the
hypothesis that a commonly accepted understanding of the contents
and scope of corporate governance has not yet been shaped and
approved. Differences were ascertained in the interpretation of the
"corporate governance" concept even on experts. level. A typical
illustration of absence of a commonly accepted understanding of
corporate governance is its repeated mixing with the strategic and
operational management. In a number of cases, the concept. s scope
includes also elements such as personnel (human resources)
management, realization of production, financial management, etc.
The related difficulties are manifested also in the "terminological
insufficiency" ensuing from the use of a single concept
"governance" that is given different meanings. For the wide public
presented in the discussions by individual shareholders and media
representatives, the problems of corporate governance are solely
brought forward in a practical aspect, without searching for their
conceptual basis.
At present, corporate governance in Bulgaria is most
often interpreted as governance of relationships and coordination
of interests between owners (principal) and managers of
corporations (agent). A specific details is the addition that
corporate governance also concerns the relationships between
various categories of shareholders having specific interests and,
most often, unequal possibilities for exerting influence on
joint-stock companies. The scope of corporate governance also
includes the issues of management structure, rights and
responsibilities of managing bodies of joint-stock companies as
well as the inside relationships within the managing bodies (e.g.
between inside and outside directors).
Standing out, as a specific element of corporate
governance in the transition process in Bulgaria, is the role of
the state in the process of corporate governance both as being
responsible for creating the common legal and regulatory and
economic conditions whereon corporate governance is being
implemented, and a specific subject of these relationships. In
practice, the contents of the concept "corporate governance" in
Bulgaria do not usually include the relationships with the
stakeholders, i.e. customers, suppliers, the local communities. A
connection between corporate governance and the role of banks
within it is made very rarely.
2. Ongoing restructuring of corporate
ownership
Most of the Bulgarian enterprises are relatively
small and most often they prefer the model of the limited liability
company rather than the joint-stock company. Today, most of the
joint-stock companies in Bulgaria are a product of their mass
transformation with a view of their upcoming privatization, and not
of the natural development of market mechanisms. This is the heart
of the most serious challenge to them during the transitional
period. They have to establish and strengthen their corporate
structure and introduce efficient mechanisms of corporate control
within a short time.
A considerable number of enterprises privatized
under the mass privatization scheme, and former privatization funds
have already been granted a status of public companies. The new
model of corporate ownership with various schemes of interaction of
capital (private and state) as well as the status of a public
company are the ground for development of corporate governance and
control in Bulgaria. The development of corporations and formation
of public companies in particular in Bulgaria is not always
subordinated to the economic necessity but is subject to
administrative and legal measures. This is a serious obstacle to
the establishment of principles of corporate governance and
control.
At present, the joint stock companies do not yet
have serious economic motivation to apply the principles of
corporate control, nor a created corporate culture. This forms the
idea of "artificiality", "compulsive nature" and "inefficiency" of
the legal and regulatory rules within the experts. community.
The ongoing changes in the ownership structure are
also exerting negative effect (in the sense of indefiniteness) on
corporate governance in the Bulgarian firms. Unlike many ex
socialist countries, Bulgaria does not suffer from the deformations
in the ownership structure occurring often in the said countries,
i.e. excessive dispersion of ownership resulting from mass
privatization and considerable shareholders participation of
investors being inside to the firm (employees and managers).
According to data from the quantitative sociological
survey, the most significant category of owners in the Bulgarian
enterprises after the privatization are the local legal entities
(23%) and privatization funds (19%). Follow the present employees
and managers of the company and ex personnel (24%) and foreign
investors (10%). The state is still an owner of 18% of the
enterprises under survey.
A characteristic feature of the ownership structure
is the high degree of ownership concentration. In 60% of the
companies, a strategic investor owning over 50% of stock is
present. In 32% of the companies under survey, this investor owns
over two thirds of the ownership, that guarantees an entire control
of the investor over the management. In the remaining 21% of the
companies, the biggest investor cannot influence the management
since the former owns less than one third of the stock. At the same
time, not more than three among the biggest investors are holding
the controlling stock interest in 87% of the joint stock
companies.
As a result of privatization and transformations in
the ownership in the Bulgarian companies surveyed, four basic
models of ownership structure are formed. The first and most often
occurred (55% of the companies) is the one with predominant
participation of the outside local investors in the ownership,
where in 25% of the companies these are privatization funds, and in
30%, other Bulgarian legal entities. The second model is the one
with predominant participation of employees and managers in 21% of
the enterprises surveyed. The third model is with predominant
participation of outside foreign investors (12%), and the fourth
model is the one where none of the subject of ownership has more
significant participation (12%).
In 64% of the enterprises in the sample under
survey, a one-tier system of management is applied, and a two-tier
system is applied in the remaining 36%. As a whole, the staff of
the managing bodies of companies corresponds to their ownership
structure. Yet, persons being related in one way or another with
the state very often represent the companies. It is expected that
the restructuring of ownership in the line of its concentration
(especially in the former privatization funds) and final withdrawal
of the state from its role of an owner will be completed in the
near future.
From a point of view of the ownership structure, the
prospects for applying the contemporary corporate governance and
control in the Bulgarian reality can be estimated as good. No
serious difficulties are to be expected in coordinating the
interests and standpoints for development of business of various
groups of owners. A much more serious problem is how to overcome
the short-term thinking and behavior of owners and managers by
means of corporate governance mechanisms.
3.Realization and protection of shareholders.
rights
As a result of the mass privatization program, some
3.5 million Bulgarian citizens became owners of financial
instruments during the period 1996-1997. (The total number of adult
citizens is some 6.5 million). Some 3 million citizens are owners
of shares of 81 privatization funds, and some half a million
citizens are owners of shares of 1,050 companies proposed in the
program.
These individual shareholders whose number is
enormous on the strength of mass privatization are usually not
quite aware of their rights and responsibilities and have not
sufficient experience in their exercising. The realization of their
rights is impeded by deficiency of financial resource and
unwillingness of the management to work for the shareholders.
benefit. The motivation and interests of individual shareholders
are too weak.
Under these circumstances in Bulgaria, the
individual shareholders seem to be passive in most cases. At
present, their role is considered to be peripheral and economically
subordinate. Still, they are not thought of as a source of
financial resource but are rather perceived as a problem and not a
possibility. Regardless of the skeptical attitude towards the
individual shareholders at present, the expectations are for
continuous increase of their significance as a source for
accumulating a financial resource in the future. Their activity as
a participant in corporate governance is to be manifested. Unlike
the USA and Western Europe, these shareholders in the Central and
East-European countries will probably be more active because of
their ambition to "make up for the missed time" and the smaller
average size of enterprises within the region.
The issue of the most adequate way of protecting the
interests of minority shareholders has not yet been solved within
the Bulgarian environment. There has not been sufficient practice
on the realization and protection of the rights of minority
shareholders. On the one hand, the legislation regulates the
shareholders. rights to exert influence on the management and
prevent serious violations on the part of the managers. This will
be achieved to a maximum extent by the forthcoming adoption of the
Law on Securities by the National Assembly. Discussed were also
proposals for legal regulations allowing voting via mail,
cumulative voting, etc. At the same time, there are still numerous
organizational and bureaucratic obstacles to the entire realization
of the rights of minority shareholders - participation in the
general meeting of shareholders, representation in the managing
bodies, receiving dividends and so on. One cannot sufficiently rely
on the judicial system since it intervenes slowly and not always
professionally in settling disputes related to corporate governance
and control. In such an environment, it is difficult to protect the
shareholders. rights and provide, at the same time, the required
degree of freedom of managers under an underdeveloped institutional
basis that has to clearly define the relationships between owners
and managers.
This is the situation where an acceptable balance
between the interests of shareholders and managers has to be found.
Besides the legal regulations, numerous other measures aiming to
convert the individual shareholders into "active" owners will be of
high significance. They include education and support by NGOs,
public awareness campaigns with the participation of all interested
parties, disclosure of positive examples through media, etc.
4. Composition and behavior of managing
bodies
Another issue of importance for corporate governance
and control, having specific dimensions related to the transitional
period, is the following: who are the members of company. s
managing bodies and what is their role for restructuring and
determining the trends of company. s development? This is the point
where one should also trace out whether the requirements for
representativeness and team-operation in governance, transparency
and responsibility in the work of managing bodies are adhered.
In Bulgaria, these aspects of corporate governance
and control have not yet been entirely perceived and are realized
in insufficient degree in practice. There is no empirical
information for determining what is the role of company. s insiders
and outsiders and whether there is a balance between them in the
managing bodies. The issue of the motivation of operational
management to work for company. s interest and all shareholders has
been investigated insufficiently as well.
Like the other former socialist countries, the
structure and personnel composition of corporate governance bodies
in Bulgaria were not formed completely. Data from the sociological
survey is pointing out that representatives of the former owner,
i.e. of the state, are members of the corresponding boards in more
than a half of the companies. They are present even in 20% of the
companies with a foreign investor. On the one hand, this fact is an
evidence for the ambition of the state to continue influencing the
privatized enterprises, and on the other one, it evidences that, in
the best case, in most of the enterprises the inertia of the past
and dependence on the state authorities has not yet been overcome.
In the worst case this might be a manifestation of some form of
corruption.
The next big group of members of the supervisory
boards/boards of directors are the owners - company. s insiders.
They are present in 44% of the companies and mostly in those with
predominant ownership of employees and managers. In 36% of the
companies, there are also representatives of Bulgarian legal
entities (without privatization funds), and in 22% of the
companies, there are representatives of privatization funds. A
summary of these data from a point of view of the dominating
positions of any of the groups will give the following result: in
66% of the companies under survey, the boards are dominated by
outside representatives not related to the state; in 24%, by inside
representatives (employees and managers), and in 10%, by outside
representatives related to the state.
This aspect of corporate governance in Bulgaria
should also concern the problems of relationships between the
owners and representative managing bodies appointed by the former
and the executive bodies of management - first of all, the
executive directors. The role and function of these main subjects
whose relationships are regulated by corporate governance have not
yet been defined and differentiated clearly in Bulgaria. This is
the ground where conflicts arise and the existing practice deviates
from the principles of corporate governance.
The executive directors have not yet been adjusted
to subordinate the governance of joint-stock companies to the
owner. s interests. Usually, they do not perceive their obligations
to work for the interest of the company and its shareholders, but
led by the heritage of the past, they are acting as sole owners or
serving the interests of some of major shareholders. This model of
governance is assessed as a rather steady one, thus impeding the
establishment of principles of corporate governance. Sometimes, the
executive managers succeed in affecting strongly some of the
shareholders (e.g. workers and employees) under a threat of
dismissal, and even some of company. s outsiders by allowing them
no access to information being of importance for the company.
The present situation is, to a great extent, a
consequence of the continuous absence of efficient control on
managers due to the delayed privatization, permanent instability of
the management teams, presence of a common environment and
mechanisms motivating a kind of managers. behavior that favors them
for the account of the companies managed by them. In Bulgaria,
there are still no satisfactory regulations on the problem related
to the "conflict of interests" and such occurrences are not subject
to sanctions. A serious problem is also the objective lack of
knowledge and experience for work in a market environment. The
attempts to bind the managers. remuneration to the achieved
economic results (e.g. by payment of a bonus to the executive
directors as percentage of the realized profit) are not always
effective. Pressed is the view that the lawful economic incentives
do not have the motivating force of the personal interest that is
often formed out of the framework of the legal economic
practice.
In conclusion, it should be noted that also in
Bulgaria the most part of the former executive managers of
companies, who preserved their positions after the privatization as
well, will continue to be opponents to the restructuring and
establishment of a new type of relationships with the owners.
Besides, the privatization funds in Bulgaria changed 3-7% of the
managers of enterprises upon the completion of the first round of
mass privatization. (In comparison with the Czech Republic, this
percentage is within the limits of 80-90%.)
The gradual introduction of the corporate governance
standards in Bulgaria will also contribute to the creation of a new
type of managers - having knowledge on the market economy and with
the proper respect and skill for working with the shareholders and
stakeholders. Also, we are speaking of managers being acquainted
with, and using the capital markets, who will contribute to the
observance of rules of accountability and transparency. The use of
methods such as disclosure of information about the remuneration of
managing bodies and executive directors, structuring of auxiliary
bodies such as a remuneration committee, an appointment committee,
and an internal audit section will significantly improve the
corporate governance practice. There is also a necessity of
brisking up the efforts for education and enhancement of the
advanced vocational training of the members of companies. managing
bodies and executive managers.
5. Corporate governance and capital market
In Bulgaria, the interconnection between the
application of principles of corporate governance and development
of capital markets is perceived increasingly. The approval of
professional standards of corporate governance is a prerequisite
and a significant stimulus for development of capital market. These
are of a particular importance for maintaining the investors. trust
and guaranteeing the market liquidity. The feedback (capital market
- corporate governance) is also making its way. The capital market
is an extremely important control mechanism that evaluates the
corporations and selects those of them that are governed skillfully
and are running efficiently.
At the same time, there are numerous factors
impeding the potential possibilities for implementation of this
kind of interaction. The predominant experts. assessment is that at
present the capital market in the country is still in an embryonic
state and stagnation. It is existing mostly as a secondary market
and does in practice serve mostly the reallocation of ownership.
The expectations are pointing out that without development of the
capital market that could allow raising of financial resources
under favorable conditions, the capital market in Bulgaria will
play an insignificant role.
There is no confidence among the investors that the
resources provided by them will be governed efficiently. On the one
hand, this is related to the inefficient application of principles
of corporate governance, and on the other one, to the limited and
inaccurate, in many cases, information being submitted on the state
of public companies.
Most part of joint-stock companies that are granted
a statute of "public companies" are not interested and willing to
maintain this statute. To them, this is related with administrative
pressure and supposes considerable expenditure without getting
economic benefit in return.
Even in cases where an interest in issuing stock and
bonds is manifested, the state in the person of the Securities and
Stock Exchanges Commission is often imposing a restrictive policy.
At experts. opinion, a striving for "overregulation" is
demonstrated, that appears to be an additional obstacle to the
development of the primary market.
A demotivating factor for investing in stock is also
their low liquidity. This does not allow to actuate the control
function of capital market as well since the shareholders do not
know for certain that they are in a position to impose sanctions on
eventually inefficient governance of joint-stock companies.
During the post-privatization period in Bulgaria,
the capital market will further increase its active role for
restructuring of enterprises (property rights and control rights).
It is to be implemented exclusively on a market basis by the
managers who are feeling threatened by the owners, as well as by
takeover. The efficiently operating capital market may play an
important role for disciplining the managers and finding an
objective market evaluation of their activity's results.
Through the capital market, the mass privatization
participants who are not willing to remain owners, should have the
possibility to relieve from their shareholdings under fair
conditions, thus consolidating additionally the ownership and
improving the corporate governance. Restructuring of strategic and
institutional investors. portfolios will continue as well. The
developed and liquid capital market in Bulgaria will forward the
companies. stock to the most efficient structure of ownership and
concentrate the ownership among the most efficient investors.
6. Transparency and disclosure of information
The establishment of statutory rules and a mechanism
for granting a free, fast and inexpensive access to information
about the state of joint-stock companies is a key condition for
realization of the remaining principles of corporate governance as
well.
All participants in the focus-groups discussions are
sharing the view that transparency and access to information as of
today are extremely restricted. Violated is even the statutory
requirement for publishing the annual balance sheets of joint-stock
companies. Managers of enterprises declare that they are providing
information about the companies. state and activity quite
reluctantly and only when required to do so within their statutory
obligations.
It is paradoxical that a large volume of information
being one and the same in most cases, is gathered by various
institutions. At the same time, the subsequent access to it appears
to be extremely difficult that makes the efforts for its gathering
rather senseless.
The public companies which, by definition, have to
guarantee maximum transparency about their activity, do not realize
in practice this basic principle of corporate governance.
The main reason for this state is to be searched in
the joint-stock companies. lack of motivation to provide
information. First, absent is the important motive that providing
information to the wide public will make possible to attract a
financial resource. Providing information to the wide public has
not been motivated by a real economic interest but rather by a
statutory and administrative pressure. Second, there are fears that
the information might be used against the organization. s
interests. Third, expressed are opinions that the enterprises are
not interested in providing a comprehensive and reliable
information, that is manifested, in some cases, in the differences
between data submitted by tax administration, on the one hand, and
the National Institute of Statistics, on the other one.
Transparency on the state of public companies cannot
be obtained through administrative pressure even when required by
law. The stipulated sanctions when are not supported by economic
motivation fail to be efficient.
During the last months, a noticeable progress was
achieved along these lines in Bulgaria. The Securities and Stock
Exchanges Commission is working actively for providing a fast and
inexpensive access to information about the public companies. The
most suitable way to do so is the electronic form of the unified
register. Information has to be received operatively and in a form
allowing for making an analysis and summaries.
Particularly important is also the necessity in
providing adequate information to the small individual
shareholders. The availability of comprehensive and reliable
information about the state of companies whose shares they are
holding, is the most reliable mechanism for protecting their
interests. The confidence in the joint-stock company and
expectations for receiving a yield exceeding the average rate of
interest appear to be the main motives for the investor. From this
point of view, the reliable information about the existing risk and
expected yield on share purchase are a paramount element of the
information searched for.
7. The role of former privatization funds in
corporate governance in Bulgaria
The program for the first round of mass
privatization in Bulgaria envisaged the participation of
privatization funds in their capacity of institutional
participants. To this end, 81 privatization funds were registered
and licensed then by the Securities and Stock Exchanges Commission.
The specific conditions for their establishment, their
characteristics and regulation of their activity are of a great
importance in the long run for the development of companies in
which the participants hold shares as a result of mass
privatization. Their influence on corporate governance and
perspectives for companies. restructuring is mostly dependent on
the relative share of their ownership in privatized enterprises and
their own long-term strategy. The already former privatization
funds themselves are also an interesting example for application
and development of corporate governance mechanisms.
As a result of the program for the first round of
mass privatization, about 3 million citizens are holding shares in
81 privatization funds, whose total face value is about Levs 60
billion. The privatization funds themselves are owners of
diversified portfolios of shares of totally 1,050 companies. Upon
completion of the program, the most part of former privatization
funds were transformed into industrial holding companies, and their
single representatives, in investment companies.
Unlike other countries in Central and Eastern
Europe, Bulgaria is short of sufficient empirical information from
specialized surveys dealing with the behavior of privatization
funds during the post-privatization period, as well as surveys
tracing through the problems of corporate governance in the funds
themselves.
The influence of privatization funds on the development of
corporate governance in Bulgaria is going to be manifested in full
strength and evaluated within a few years. But even now one can
assert that they are meeting, to a great extent, the requirements
for providing a high concentration of capital and ownership,
efficient control over operational management and professional
management oriented to purely economic aims.
The aims they set themselves and their behavior
during the post-privatization period are pointing out that they are
acting rather as a strategic than a typically institutional
investor. The insufficient experience and training of the members
of managing bodies of their subsidiary companies appeared to be a
serious problem for former privatization funds. This brings forth
the urgent need of additional training and skills enhancement. The
significance of the purely market mechanisms for employing adequate
personnel with proper experts. knowledge and managerial skills will
become stronger as well. There are also difficulties in the
relationships with the executive directors who are taking away the
most managerial functions. It is still hard to overcome the weak
personal interest and lack of understanding of shareholding
relationships on the part of workers and employees who have
received minimum blocks of free shares through mass
privatization.
Serious problems related to corporate governance are
also emerging in the cases when certain privatization funds are
controlled by managers of the main companies in their portfolios,
i.e. inside shareholders are controlling the enterprises. The
outside shareholders (the holders of shares in the privatization
fund) are a very incompact group to exert significant influence.
There are also omissions in the regulatory enactments, the
regulation and infrastructure of capital market, that make possible
the abuses and violations of the rights of shareholders of former
privatization funds.
8. Specific role of the state in corporate
governance
At present, numerous enterprises are still
experiencing an extremely unpleasant precedent of partnership
between the state and private shareholders. In many cases, the
state is still a majority shareholder but its shareholding exceeds
insignificantly that of the remaining shareholders, and finalizing
of privatization procedures is at hand. In even more cases, the
state is a minority shareholder, i.e. the state is getting for the
first time into a situation where it is just one of the
shareholders, and not the owner.
Under this situation, the state representatives are
demonstrating several types of behavior. They are either
disinterested in the enterprise and do not participate in its
governance at all, or the state- appointed representatives are
easily talking at a common ground with private shareholders to the
prejudice of the state in its capacity of a shareholder. Finally,
they often abuse of their capacity of state administration
representatives and interfere beyond their authority of a
shareholder. All of these cases bring forth conflicts whose
settlement has to be sought for in the strict observance of
corporate governance principles.
During the process of transition until the state
retires in practice from the enterprises or in cases where the
state will maintain for a while a noticeable or majority
participation in large-scale enterprises of service sector
infrastructures, it is very important to specify the essence of
corporate governance through adequate forms of training and
continuous dialogue with state authorities. Probably, it is not
still late to elaborate and approve the adequate regulatory
enactments on state participation in corporate governance, that
will be in conformity with the transformed structure of
ownership.
The state intervention in the functioning of private
economic entities creates a situation favoring undesirable informal
commitments of companies with civil servants and often unnecessary
politicizing of decisions being economic in essence. This will be
overcome by the completion of the privatization process in broad
outlines and establishment of a common public policy on the issue
of state shareholding.
As the analysis points out, in Bulgaria there are still missing
approved rules and practice to exercise efficient corporate
governance and control. For the present, the regulatory framework
and entire institutional environment have not found a system that
can provide efficient governance of ownership to the benefit of all
shareholders. The efforts of the Corporate Governance Initiative to
prepare and discuss, as broadly as possible, the Policy
Recommendation Paper - Policy for Corporate Governance Development
in Joint-Stock Companies in Bulgaria, are an attempt to foster
these processes in Bulgaria.
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