CORPORATE GOVERNANCE GUIDELINES
SOFIA, 2001
The present action plan contains
practical measures and proposals for the improvement of the
corporate governance in Bulgaria. It was prepared by the expert
group, working on projects within the Corporate Governance
Initiative in Bulgaria. A substantial part of the proposals were
induced by the results and analyses presented in the Corporate
Governance Assessment Report:2000, other expert opinions have also
been used for the regulatory changes and improvement of the
practice in that aspect.
The practical steps are grouped in
the following problematic fields, in which the attention of the
professional community should be focused in order the corporate
governance in Bulgaria to improve considerably and get closer to
the global standards.
1 Equitable treatment of the
shareholders and protection of the minority shareholders rights
1.1. "Issue 200,000" - the
possibility projected with the LPOS for delisting of the companies
from the registrar of the publicly traded companies ("delisting"),
in case their registered capital is less than BGN 200,000 upon a
resolution of the general meeting - in the second wave of the mass
privatization only, there were 400 companies with registered
capital below BGN 200,000, over 30 out of them have been delisted
already and the process continues its acceleration, and according
to the data of the SSC around 300 companies have filed applications
for delisting, two former privatization funds have also been
delisted - a fraud against the participants of the second wave of
the mass privatization (which are already over 1.1 million) and a
danger of the process discrediting, lack of protection of their
interests, inadequate liquidity for the shares acquired, limitation
of the pension funds participation in the process.
Proposal: To prepare a list
of: all quoted companies with registered capital below BGN 200,000;
all already delisted companies, and all companies that have filed
an application for delisting, and that list to be made widely
available to the public with the cooperation of the Centre for Mass
Privatisation and BSE-Sofia.
1.2. The persisting possibility
under the LPOS (ยง10, para.3) for increase of the authorized
capital in divergence of the pro-rata rule, in the cases when such
action is envisaged in the privatization agreements. In addition,
it is a common practice not follow the requirement to submit a
notification to the SSE and BSE-Sofia for the availability of such
an agreement within fourteen days of the LPOS coming into
effect.
Proposal: To explore the
possibilities the buyers to apply a pro-rata increase in the
registered capital, allowing the remaining shareholders also to
participate in execution of the investment plan, while the
controlling shareholder still follows the privatization
arrangements for investment amounts on his/her behalf and expense.
To allow the buyers when interested to sign supplementary
arrangements with the privatisation authorities with which the
definition "on behalf of the buyer and at the expense of the buyer"
to be discarded. The SSC to sanction the companies that failed to
meet the 14-day notification period, and to prepare in cooperation
with BSE-Sofia and the Centre for Mass Privatisation a list of
those companies for wide dissemination.
1.3. The Sopharma AD case and the
lack of legal regulation for determining the share subscription
date for new issues, which practically hindered the sale of the
residuary stake held by the state. Placing the shareholders into an
inequitable position as for the procedure for subscription of the
remaining shares by non-admission of a certain part of them to the
building hosting the subscription before its opening.
Proposal: A legal regulation
of the method for determining the shareholder membership as at a
particular date in relation to the right of subscribing shares from
a new issue while exercising the preferential rights granted to the
shareholders under the Commercial Act, as well as the equitable
treatment of the shareholders during the process.
1.4. With the LPOS important steps
have been taken in limiting the possibility for changes of the
listed companies' authorized capital in dilution of the minority
stakes by the controlling shareholders. Despite the amendments the
practice of minority stakes dilution in capital increases
persisted. The practice reveals, that within the underdeveloped
corporate environment and culture, this right /and not obligation/
is not able to perform its regulatory functions.
The interest on behalf of the public
in individual investing is still very suppressed as a result of the
poor efficiency of the protection of their rights in the
environment of a very limited solvency.
Proposal: Legislative
provision for the right of the shareholders under Art. 194, para. 1
and 2. of the Commercial Act granting advantage in subscription of
new issue shares to be separable from the shares themselves and to
be available for trading.
1.5. One of the core shareholder
rights - the right of vote in the general meeting is not
exericised in an adequate extent by the minority shareholders. The
compulsory physical presence is an obstacle for a large part of the
minority shareholders to give their vote at resolving over some of
the most important for the company issues. Without the exercising
of this right the election of minority shareholders representatives
in the managing or supervisory bodies may not be expected.
The practical minority shareholders
participation in the decision-taking process of the general meeting
should be facilitated, which should facilitate also the election
and participation of minority shareholders representatives in the
managing bodies.
Proposal: To introduce the
cumulative right in voting for the general meetings of the listed
companies.
To prepare proposals for legislative
amendments in relation to the minimum of a mandatory information
/standardized form/ to be sent to all shareholders for proxy voting
/example USA/.
2. Responsibilities and motivation
of the board
The board of the public limited
(joint stock) companies is responsible and should be therefore
motivated to ensure the strategic guidance of the company in the
best interest of the company and its shareholders and to monitor
the executive management performance. However, as a result of the
dramatic changes in the ownership structure and the institutional
environment of Bulgaria's economy, the efficient work of these
bodies is often limited by poor organization, obscure authority and
responsibilities, lack of information and experience in the new
environment. In that relation it is recommended the interested
institutions to stimulate the preparation of a Best Practice Code,
considering the particular conditions and environment in the
country. This code should include, but not necessarily limited only
to, the following principles:
2.1. Division and specification of
the responsibilities of the board members
Particular scope of competence,
authority and responsibilities of the listed companies' board
members should be determined. These responsibilities should be
binding for each board member (whether entitled with representative
authority or not) and to include at least:
- An obligation to declare before the other
board members the possible existence of a conflict of
interest;
- A restriction from voting in taking a
decision for transactions in which a conflict of interest might
arise;
- An obligation to provide guidance for the
business in a way to minimize the investors' risk of loss /e.g. to
determine the parameters of the definitions "management on best
efforts basis" and "loyalty".
2.2. Conditions for appropriate board
motivation
The code should validate the practice of creating a
modern system for remuneration of the listed companies' board
members, which to be applied by a remunerations committee in
consideration of strict and clear criteria for evaluation of the
contribution of each of the board members. The system should bind
the board remuneration with the direct results of the company's
activities and provide incentives for efficient use of the
company's resources in the best interest of its shareholders.
2.3. Presonal requirements for the board
members
The code should provide firm and clearly defined
basic requirements for the qualification, knowledge and experience
of the internal and outside /independent/ board members.
Specialized training programmes to be held
communicating basic knowledge in the filed of law (commercial,
civil, penal), finance and accounting, marketing for the members of
managing and executive bodies. Minimum educational requirements (as
type and level) should be introduced for the candidates for the two
groups of positions mentioned, and a testing system for evaluation
of their knowledge and expertise might be developed.
2.4. Establishment of specialized internal
committees
The good corporate governance practice should
involve the creation of specialized supporting committees at the
managing bodies. Such committees could substantially assist the
functioning of the managing bodies or, alternatively, be used as an
instrument for the monitoring of their activities. The global
practice confirms the benefit from the existence of an auditing
committee and of a technical committee.
2.5. Collaboration with outside experts
The present tendency reveals that Bulgarian
companies collaborate with outside experts to a small extent. In
many cases this leads to unfounded resolutions by the managing
bodies. Along with that the collaboration with outside experts
cannot be imposed as a requirement, as it depends on the specifics
of each company. But the Code can recommend that under specific
circumstances the managing bodies should consult outside
experts.
2.6. Division of responsibilities
The Code should recommend the division of
responsibilities of the executive members of the managing body and
the board chairman. Along with that there should be a clear
division of the authorities and responsibilities between the
managing body's members, including the statute of inside and
outside directors.
2.7 Regulated procedures for approving
resolutions
An important part of the Code should be attributed
to the resolution approval procedures. They should be clear,
unambiguous, easily applicable in the practice and should include
at least:
- Meetings scheduling and quorum checks
procedure
- Procedure for informational and
organizational assurance of resolutions
- Voting procedure
- Protocol preparation and archive storing
procedure
3. Disclosure and transparency
3.1. The quality of the disclosed financial and
accounting information is still very low which results in the
subdued attractiveness of the listed stock both for the local and
foreign portfolio investors.
Proposal: Introduction of mandatory
application of the international accounting standards by the listed
companies and independent auditing of their activities.
3.2. It is necessary to improve the quality of
the information disclosed by the Bulgarian listed companies and
overcome formalism.
Proposal: The Best Practice Code to prescribe
the listed companies' managing bodies to discuss with shareholders
at the general meetings the annual and semi-annual reports for the
company's activities. This will contribute for increasing the
interest and better understanding of the reports by the
shareholders. This will also provide an impetus for a feedback to
managing bodies.
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