SOFIA, 2001
Introduction
1. Legal and institutional
framework of the corporate governance
2. Organizational internal
factors of the corporate governance
2.1. Equitable treatment and
protection of minority shareholders rights
2.2. Board composition and
functioning
2.3. Disclosure of
information
Conclusion
Introduction
The present report has the objective to provide an
overview of the general framework and particular dimensions of the
corporate governance in Bulgaria. It is published for the first
time and the authors intend to continue its publication on an
annual basis. In its present form, the study contains
information thus far unavailable to the professional community and
the media. The evaluations and analyses herein are the first
attempt to outline the achievements and the problems in the field
of corporate governance in Bulgaria in the years of transition. The
authors of the report thus aim to encourage a wider discussion on
the subject and that, as a result, practical improvement action
will be undertaken.
At the end of the past year the Corporate
Governance Initiative conducted a pilot study for assessment of
the corporate governance in Bulgaria. It is a part of the
activities under phase II of the project aiming at the elaboration
of recommendations for practical measures for improvement of the
corporate governance, including diagnostics and analysis of the
existing corporate structures.
The survey was conducted by Vitosha Research and
covered all listed companies with authorized capital over BGN
200,000. The sample comprised 268 companies, while the number of
the surveys was 158. The research method applied is a standard
interview with representatives of the companies' managing bodies
and senior management. Based on the survey results, the first index
of corporate governance in Bulgaria was calculated. The index has
values between 1 and 5, the lowest value of 1 indicating
unfavorable legal and institutional frame and internal
organizational factors of the corporate governance, and the highest
value of 5 - ideal conditions and good practice of corporate
governance.
The report has been prepared mainly on the basis of
the results of the pilot study, compared and partially supplemented
by conclusions and assessments of other studies, publications in
the press and international sources.
The report has been prepared by the following team:
prof. Dr. Bistra Boeva, associate prof. Dr. Stefan Petranov, Dr.
Vesela Stancheva, senior research associate Plamen Chipev, Diana
Hristosova - senior expert, Center for Economic Development, Stoyu
Nedin - Chairman of Association of shareholders, Dr. Maria Prohaska
- coordinator, Corporate Governance Initiative.
1. Legal and institutional framework of the
corporate governance
This section of the report presents analysis of
the regulatory and institutional environment for the corporate
governance development in Bulgaria, based on the results of the
pilot study. These results comprise assessments of the role of the
judicial system, capital market development and efficiency of its
institutions, and above all the extent in which the existing
legislative framework facilitates or constrains the development of
corporate governance.
The index value for this section is 3.26. It is
certainly a very positive and high assessment, attributed
predominantly to the high index values in the part of the
regulatory framework. Most of the questions in this part received
assessments close to or exceeding 4.
Along with that, considerably
lower are the assessments for the efficiency of the capital market
institutions: the State Securities Commission, the Bulgarian Stock
Exchange in Sofia, and the Central Depository. It should be
outlined here that the assessment for each of the three
institutions should be analyzed separately rather than in
comparison due to the substantial differences in their functions
and tasks. They are grouped together under a generalized question
as long as their integrity and interrelation has an impact on the
creation and functioning of a developed capital market in
Bulgaria.
Out of the three institutions constructing the
capital market infrastructure - the State Securities Commission
(SSC), the Bulgarian Stock Exchange (BSE) and the Central
Depository (CD), the Central Depository received the highest
assessment for efficient functioning. It is the only institution
ranked above average (the average value is calculated at 3.38),
while the efficiency of the other two is assessed below the average
value (2.83 for SSC and 2.55 for BSE). The explanation relates
mainly to the scope of activities and different responsibilities of
the three institutions. The Central Depository has an important,
but to a certain degree predominantly technical, role in the
capital market functioning. This makes its work relatively easier
compared to the role of the other two institutions. The relatively
high assessment for the Central Depository reflects both its proper
functioning and the generally successful solution of the problem
related to the registration of holdings in listed companies in
Bulgaria. The establishment of the Central Depository and its
functioning has facilitated secure transactions and eliminated
numerous difficulties experienced by other transition economies
that did not have institutions of an analogous kind. This is
obviously appreciated by the respondents to the study.
The lower assessments for the
efficiency of the other two institutions result both from the
relatively higher complexity of their responsibilities and from the
specifics of the companies' perception of their public statute. The
responsibilities of these institutions have relatively higher
complexity compared to the activities of the Central Depository,
are of larger scale, involve more complicated interaction with the
market agents, and have relatively higher requirements for
resources, qualifications and experience. As a result their
successful functioning is materially more complex and is likely to
suffer relative delays in time. It should be however noted, that
the activities of the State Securities Commission, which carry
highest responsibility and complication, are nevertheless assessed
higher than the activity of the BSE.
On the other hand a very important factor for the
institutions appraisal by the listed companies is their own
perception of the capital market. Due to the specifics of their
genesis, presently a substantial part of the Bulgarian listed
companies is not interested in its public statute. These companies
find no benefit in it, while complying with the regulations entails
costs in one or other form. Thus this statute is assumed as imposed
and even temporary, as a result of which they assess the activity
of the institutions as not particularly efficient from their point
of view.
Unsatisfactory are also the assessments of the
objectivity and the activities of the judicial system in the
corporate governance part (ranging from 1.82 to 2.68). These
assessments have been based on respondents' opinion for the process
time horizon and related expenses for the court settlement of
disputes.
The larger part of the questions in this section
aims to assess the presently effective regulatory framework in
Bulgaria in terms of existing environment for corporate governance
development. It should be noted, however, that such an approach has
its natural limitations as the corporate governance development
level depends on both the availability of a good and modern
regulatory framework, and, more important, the way in which it is
applied. A discrepancy arises in this context between the
relatively high assessments under most of the survey questions in
this part, and the practically unanimous opinion among professional
circles for the relatively low level of corporate governance
development in Bulgaria. The assessments for the regulatory
framework were given in the highest values of the range (close to
5, the highest possible assessment) among all other sections of the
survey.
Several evaluations under the scope of particular
questions of the pilot study are presented in more detail here. The
respondents assessed positively the regulatory framework in its
part concerning shareholder rights. The currently effective
legislation /the Law on Public Offering of Securities - LPOS/
adequately provides for the exercising of the shareholder voting
rights, including through a representative, and a proportional
share in the company's earnings in the cases when dividend pay-out
is resolved.
There are certain divergences of opinion in the
assessment of the quality of the regulatory framework concerning
the prevention of insider information misuse. In that aspect the
LPOS strictly follows the European standards. The restrictions
envisaged for insiders provide for the equitable treatment of
shareholders in respect to their access to information.
The divergence in the responses most probably
relates to the efficiency levels of the practical enforcement of
the restriction envisaged in the law. In that aspect indeed there
is much to be desired, moreover that revealing the misuse of
insider information by definition entails a factual and legal
difficulty. This relates to the issue of the further enhancement of
the securities market institutions - the Bulgarian Stock Exchange
in Sofia, the Central Depository and the State Securities
Commission, and particularly the implementation of efficient
procedures for securities, trade monitoring and supervision in
order to provide timely and efficient detection of the cases when
the regulations have been violated concerning insiders and insider
information.
A high assessment is given also to the quality of
the regulatory framework in terms of exercising control over
conflicts of interest, including the cases of property handling and
transactions with related parties. Indeed, the LPOS envisage that
the managing body of a listed company may not execute without the
explicit consent of the general meeting any transactions that would
lead to the transfer of ownership or other rights over assets that
exceed fifty percent of the value of the total company assets as
accounted on its books. Furthermore, the general meeting can
approve such resolution with a majority of three quarters of the
capital present, if at least three quarters of the authorized stock
is present or represented at the meeting, and under the conditions
of a descending quorum - at least a half of the capital. This
regulation is limited, however, to transactions with property
handling. Besides, the relatively recent introduction of the
regulation is still a reason for the lack of any practice
whatsoever on its enforcement. The violations under this rule are
merely sanctioned with administrative-penal liability of fines from
BGN 2,000 to BGN 10,000 (in case the deed does not represent a
crime), but so far no sanctions have been enforced. On the other
hand, transactions between related parties are not regulated at all
by the legislation on the listed companies and are not subject to
any control. The same applies to the conflicts of interests. The
only regulation concerning conflicts of interests is included in
the Commercial act and relates to the exercise of the voting right
at the general shareholders' meeting. According to that regulation,
a shareholder or its representative cannot participate in the
voting of resolutions for:
1. filing claims against him/her;
2. initiating actions for enforcing
his/her liability to the company.
The study attempts to assess the legislative
framework in terms of providing the objective evaluation of the
board of the corporate activities, independent of the executive
position. Such legal possibility and, moreover, such practice are a
definitive sign for good corporate governance. In this aspect, the
assessment in the study is high (3.59), but it should not be
accepted without any reservations and is most probably due to the
lack of understanding on the part of the respondents. Generally,
the Bulgarian legislative framework neither requires the inclusion
on the board of the so-called outside directors, nor concerns the
internal distribution of the functions between the board members.
In fact, in some companies a part of the board members are
outsiders for that company (i.e. they are not employees of the
company), but in most cases they are representatives of persons
related to the company or the controlling shareholder and therefore
they do not satisfy the requirement of independence in the sense of
the international papers on corporate governance. Besides, there
are no specific rules or procedures enacted to guarantee such
independent evaluation. Whenever some companies are doing this, it
is on a purely voluntary basis. Therefore, it cannot be asserted
that the legal framework guarantees the board's objective
evaluation for the corporate activities, independently of the
executive position.
Similarly, it cannot be asserted to the extent
revealed by the results of the study, that the legal framework
guarantees the implementation of the board's functions related to
the preparation of the company's strategy, action plans, annual
budgets and business plans. The revue of the legal framework shows
that the board's functions and powers are not subject of
regulation, except in most general aspects. The legal framework
even does not oblige the company to approve such documents as
company strategy, action plans, annual budgets and business plans,
and even lesser indicates which body is empowered to approve such
acts. Whenever such documents are discussed in some companies, this
is done on the basis of internal company documents, such as the
Articles of Association.
2. Organizational internal factors of the
corporate governance
This section focuses on evaluation and analysis of
three key corporate governance fields: the equitable treatment of
minority shareholders, the members and functioning of the managing
bodies, and the disclosure of information. The general index has
the value of 3.11. The assessment should be considered in the
context of the research method applied and the objective
development of corporate governance in Bulgaria.
2.1. Equitable treatment of
shareholders and protection of the minority shareholder rights
The attempt to create an index providing a measure
of the corporate governance development level necessitates the
inclusion of the issues concerning the equitable treatment and
protection of minority shareholders. To a certain extent these
questions represent the essence of the corporate control as, by
definition, in the environment of separation of ownership and
control, the corporate governance is intended to provide
submergence of the managers' activities to the shareholders
interests. In Bulgaria, which is characterized by a significant
concentration of ownership in the listed companies with managers
practically identifiable with the controlling shareholders, the
corporate control problem is projected into a problem of protection
of the minority shareholders interest to that of the controlling
shareholders.
When determining the role and the participation of
the minority shareholders, numerous formal and informal issues are
interrelated. The present research is predominantly directed to the
formal aspect - how frequently the capital is increased in
divergence of the pro rata principle, are there cases of legal
action undertaken etc., but it also provides a number of
interesting informal evaluations as the issue of the minority
shareholders activism or their representation in the managing
bodies.
The research results with direct relation to the
evaluation of the minority shareholders' protection have definitely
an unearthing value despite the fact that the pilot nature of the
study has imposed certain limitations. The responses reflect with a
high degree of exactness the situation in this issue. Above all,
the set of questions for the equitable treatment of minority
shareholders and protection of their rights has lowest value - 2.42
among all other sections. Further, it is the only section indexed
below the average possible value of 3.00. This means that within
all components of the corporate governance study, the direct
evaluation of the equitable treatment of minority shareholders is
lowest. A major influence has the low assessment for the minority
shareholders representation in the managing bodies with value of
2.08. Closely two thirds of the interviewed representatives of
listed companies have stated that minority shareholders are either
inadequately represented or not represented at all.
The low result can be interpreted in two directions.
On one hand, it is induced by the suppressed minority shareholders
activism in the election of the board members, which could be
affected by either their amorphous structure or the objective
impotence to influence the nomination process, regardless of the
willingness and attempts for concerted action, resulting from their
restrained access to the nomination procedures and to the general
meetings for shareholders. From a different perspective, it also
reveals the level of board identification with the interest of the
minority shareholders. Since, after all, a nominated by the
minority shareholders board member, with his or her passiveness,
incompetence and lack of interest, could be far less efficient in
following the corporate governance principles and protecting the
interest of the nominating shareholders, than board members,
nominated by the largest (or controlling) shareholders solely,
which however protect on best efforts the rights of all
shareholders
Similar meanings have the responds concerning weak
minority shareholder activism in relation to discussing the
strategic directions for the company's activity and decision-making
by the general meeting - 58% of the respondents assess it below the
average level of activism, which in combination with the 22% that
assessed it at the average level, draws a very impressive picture
if inadequate activism. A certain role for the low index value for
minority shareholders protection have also the responses concerning
proxy voting - the few cases of such voting and the predominantly
low assessment for the minority shareholders activism. The
evaluations on both issues have close values - 2.31 and 2.45.
The above problem is of paramount importance despite
that the LPOS regulates proxy voting quite comprehensively. This
regulation is prevailingly directed to the limitation of the
improper use of proxy voting and is restrictive in nature, e.g. the
requirement for an explicit power of attorney with fixed contents.
At the same time it leaves untouched the problem for the broader
involvement of investment companies and especially banks in the
accumulation of minority shareholders' votes and the active voting
on their behalf.
It should not be overlooked, that the above issues
vastly depend on the shareholder culture and the activism of the
shareholders themselves, and not merely on the adopted internal
corporate documentation and practice. This drags on the conclusion
for the necessity of continuous practical measures directed to
increasing of the shareholder culture in Bulgaria in terms of
corporate governance issues and the specific shareholder
rights.
The issue concerning the minority shareholders
rights is most condensly highlighted by the responses to the
question: "Does your company have an investor relations
department?" Positive responses are not reaching even 20%, and even
those should be addresses with a certain dose of skepticism. A
certain portion of the respondents are likely to have meant
investor relations departments that often have very limited scope
of duties. Some responses contain explanations that experts from
different departments or the chief accountant, financial officer,
or legal advisors respond to inquiries upon the resolution of the
executive director. Considering that by virtue of the revoked
Securities, Stock Exchanges and Investment Companies Act, companies
with more than 50 shareholders were deemed public, and particularly
in this case these are companies from the real sector and former
privatization funds that took part in the first wave of the mass
privatization, and that have significantly more than 50
shareholders, it is obvious there is a lack of an efficient
mechanism for maintaining relations with minority shareholders and
providing a timely supply of the necessary information to
interested parties.
Capital increases in divergence of the proportional
participation principle are a classic example of violation of the
minority shareholder rights. The question whether the company's
capital has been increased in divergence of the proportional
participation principle has been answered by 129 companies and 27
former privatization funds, namely: positively - 14 companies (11%)
and 1 former privatization fund (4%); negatively - 98 companies and
26 former privatization funds; the board representatives of 17
companies did not know. The next question - how many times has the
capital been increased in divergence of the proportional
participation principle, directed to those who answered positively
to the above question, 12 companies and 1 former privatization fund
indicated once, 2 companies - twice, and the representative of 1
company answered that he does not know how many times exactly the
capital has been increased in divergence of the proportional
participation principle.
The clearest positive part in the protection of the
minority shareholder rights has had the discontinuation of the
practice for non-proportional capital increases, which is a merit
of the LPOS. The same proposal was among the measures for
improvement of the corporate governance in Bulgaria, developed by
the Initiative for Corporate Governance in its Action Plan. Capital
increases are one of the "narrow" issues, which even in a well
functioning economy present a real threat to minority shareholders,
the least in respect of the "dilution" of their interests. In this
sense, the limitation of the capital increase cases in divergence
of the proportional participation principle is an important step
towards greater respect of their rights, although not solving all
"narrow" issues that still exist in this process.
Along with the possibility given by the new LPOS, in
force since February 2000, to delist the companies with capital
less than BGN 200,000 upon on a resolution of the general
shareholders meeting from the registrar of the publicly traded
companies ("delisting") - a possibility that numerous companies and
former privatization funds have taken and continue to take
advantage of, the non-proportional capital increase is the most
striking example of bad corporate governance, moreover regulated in
the legislation in force. These two possibilities have an extremely
adverse effect on the ongoing second wave of the mass voucher
privatization, as well as on the development of the capital market
in Bulgaria, because of the investors' uncertainty for the
efficient protection of their interests, resulting in low liquidity
of the shares acquired. They restrict the possibilities for the
pension funds to participate in the voucher privatization and in
the trade on the stock exchange, as these institutional investors
are minority shareholders in the company's capital and their
interests are equally exposed as the interests of the individual
investors.
If summarized, the survey results in the present
part clearly reveal the still weak protection of the minority
shareholders, the possibility for violation of their rights or more
specifically their factual inability to exercise their rights,
which above affects the level of their activism and resultantly the
entire investment process in Bulgaria.
There are also several other aspects of the minority
shareholder rights, which did not find a place in the present
survey. First of all is the right of dividend - it is not a secret
that a large number of the listed companies are not taking an
endeavor to fix any relation between financial results and dividend
policy. This is the major impediment for an efficient interest on
behalf of portfolio investors. In the corporate control theory the
issue is not among the most discussed problems all long as in many
cases the shareholder interest is adequately protected by capital
gains. This is not however the case of our economy in which the
vicious circle of the lack of dividend, lack of liquid market, lack
of capital gains and in addition the existence of transfer pricing
for draining of the companies, does not allow the dividend policy
issue to be overlooked. Despite the significant complexity of this
issue, it would be viable to consider incentives for the companies
towards a more liberal dividend policy. In the first place such
measure could be provising an equal tax regime for dividends and
income from government securities and bank account interest, i.e.
elimination of the 15% profit taxation, but probably other measures
will also have to be enacted.
2.2. Board Composition and Functioning
It is accepted in the global theory and practice to
consider the board of publicly traded companies as the symbol of
corporate governance. A predominant number of researches point out
into prime importance the issues of the managing bodies. In the
theory and in the practice, the evolution in the methods of
research and the practical development of these bodies is clearly
outlined. The interest on these issues is not merely from a legal
point of view. More and more economic and management problems are
considered in relation to their composition and functioning. This
is of material importance for the Bulgarian research and practice
on the issues concerning the listed companies' managing bodies and
corporate governance. The predominant interdisciplinary method in
the theory and practice should be also present in the Bulgarian
environment.
The second point of peak importance in the
rationalization of the modern tendencies is the explicit relation
between the issues of the composition of the managing bodies and
the effect of the "principal-agent" institution functioning. In the
Bulgarian practice the issue of the managing bodies and their
composition is still not considered in its systematic relation, as
with the principles of corporate governance.
Generally, the assessment for the board composition
and functioning has the highest aggregated value (3.47) in relation
to the other issues of the pilot study. This value is substantially
above the average (3.00), as are also six of its nine components,
while the other three are very close to it. This fact demonstrates
that all aspects included in the study concerning the board
composition and functioning are valued relatively high individually
and in comparison to the aspects of corporate governance, examined
in the different blocks of the study.
This assessment should be considered in the context
of the study. As far as it has been conducted among the members of
the listed companies boards or in some cases among people involved
in the management structures of the companies, it is possible that
some overvaluation has taken place as a result of the
"self-evaluation effect".
In this block relatively high is the assessment for
the aspects of board functioning, related to the qualification of
its members, the exercise of shareholder control and the
differentiation of the authorities and the responsibilities among
the members. Relatively low is the assessment for the practice of
the board on cooperating with external experts, the binding of the
board with the shareholder participation, the control of the board
by the specialized internal committees and procedures. The low
assessment for the last two aspects of the board functioning is
another empiric confirmation of the observations and conclusions
made in other studies on these problems.
Definitive for the managing bodies of a listed
company is the level of the protection they provide to the
principal interests. The effect of the actions of each managing
body depends on how the interests of the shareholders are
represented and protected. In the specific case of the Bulgarian
publicly traded companies, the assessment on whether the board
members representing the shareholders interests effectively control
the managers activities, is the second highest out of the nine
components in that part of the study and is lower only than the
assessment for the board members qualifications. Such an assessment
is objective and can be explained by the structure of the property
in the listed companies. The presently dominating model in the
publicly traded companies in Bulgaria shows a high concentration of
the property and a tendency to involve in one way or another the
controlling shareholders in the company management. Therefore, it
is natural that the board effectively controls the management of
the company and that there are no impressive "principal-agent"
problem at this time.
This high assessment however should be considered
rather in general as an effective control by the shareholders. As
for the minority shareholders' effective control and
representation, the assessment should be considered in the context
of section 2.1. In that section in the same aspect, but considered
from the point of view of the minority shareholders, obtained much
lower assessment (2.42 for the block). The results of the study in
this part are not homogenous, i.e. there is a significant
dispersion in relation to the extent of the protection of the
minority shareholders' interests. The fact that 42% of the answers
reveal a low level of protection and representation of the
shareholders interests means that in Bulgaria the institution of
the "agent" still does not operate effectively. Frequently, the
board members are rather managers than directors (in the sense of
corporate governance). Further efforts should be focused in that
direction for the establishment of the good practice of corporate
governance in Bulgaria.
With a relatively high value is
indexed the separation of authorities and responsibilities within
the board. In almost half of the cases such a separation can be
observed and in a quarter of these the separation is described to
be in "a large extent". Certainly, this is a positive fact, as the
existence of such separation is one of the substantial elements of
the good practice in corporate governance. Along with that, the
answers to this question are rather non-concentrated and in many
cases (around 30%) this practice vaguely exists or is
unavailable.
The lowest assessment in this block received the
collaboration of the board with outside experts (2.79). Merely in
one quarter of the respondent companies the board collaborates
intensively with outside specialists, who by their expertise assist
the process of taking management decisions. In many companies the
managing bodies use the services of outside experts rather rarely,
and 10% of the respondent companies do not use such at all. This
fact testifies the possibility that in some cases the managing
bodies do not take well-informed decisions and therefore miss
opportunities for their respective companies. But the fact is
becoming increasingly important in the context of the present
specific concrete composition of the managing bodies in Bulgaria.
As a result of the specifics of their genesis, the managing boards
of the Bulgarian listed companies frequently have inhomogeneous
composition, and some of the members have poor experience in the
respective sector. Therefore, it can be expected that involving
outside experts in the activities of the managing bodies can
generally contribute for a better management of the companies.
Still, such a practice is uncommon and the explanation of that fact
can be found in two directions. The first direction is the
unwillingness of the firms to disclose information to outsiders
(excessive of the legally imposed requirements), even if these
outsiders are consultants. The other direction is the poor
development of the consultancy services market.
Bordering on the average (2.99) is the assessment
for the outside directors. The analysis of the answers shows that
most cases can be grouped around the average value (3.00) and
almost symmetrically around it. That fact points out the
significant heterogeneity in the practice of individual companies.
In a large number of them the participation and the role of the
outside directors in the managing bodies is considerable and is
evaluated as efficient. But in another broad number of the
companies, the work of those directors is considered to be
inefficient. Obviously in those companies the benefit of their
participation in the management is not clearly perceived or these
directors do not understand their functions personally. It is also
obvious that the specific controlling role of the outside directors
in these companies over the inside directors and the management are
not well understood.
The results of the pilot study confirm the
conclusion that in Bulgaria the institution of the outside
directors is not yet established. There are no clear and strict
criteria for an outside director and their role, as a part of the
"checks and balances" system is not fully understood. In many cases
they have a formal political role. Additional information on the
effect of this institution is provided by the data on the
cross-participation: the requirements for non-participation in the
managing bodies of more than one listed company are still not in
force. Only a third of the respondents have formulated requirements
to the directors for that participation. The outlined aspects of
the outside directors' activities give reasons to recommend to
direct in future a more significant part of the promotional
activities to the outside directors - their status, regulation,
promotion and education.
A positive trend in the principal-agent relations
represents the ascertained separation of the positions chairman of
the board and executive director. In the Bulgarian listed companies
this is a dominating tendency with positive consequences expected
in connection with the institution of the agent and the
principal-agent relation.
The separation of the board chairman and executive
director positions is the practice of a considerable number of the
respondent companies (over 82%). This is a positive fact, as it
guarantees the partition of functions and responsibilities, as well
as a more efficient organization of the work of the managing body
itself. This formulation corresponds to the spirit of the
international experience and recommendations for good corporate
governance.
Unfortunately, the comparison between this and
previous analyses and conclusions, gives us the reason to believe
that this separation still has a rather formal character. When
evaluated in the light of the global practice, these conclusions
and results should not be considered as dramatic - this separation
is not always effective in the listed companies even in the
countries with developed corporate governance. The separation
should be considered positive, although the practical results can
be expected after the accumulation of experience and after the
implementation of adequate educational initiatives.
The motivation of the board members is a problem
repeatedly studied by the modern theory and practice. The picture
in Bulgaria is pronouncedly diverging from the global
tendencies.
The assessment for the board members and the
managing teams remuneration dependence on the companies' financial
results is relatively high (average of 3.37). In slightly over a
half of the companies this dependence is clearly outlined. For the
rest it is vague, and in 17% of the companies such practice does
not exist. In other words, the practice on that issue is
heterogeneous as well. Many companies have accepted this motivation
mechanism, but also many companies do not apply it. For the second
category this fact could represent either a management problem,
caused by the lack of understanding of the motivation mechanisms,
or the existence of motivation mechanisms of another nature.
In this context board remuneration issues should be
considered, such as the use of management & employee stock option
plans. With a few exceptions the practice is not applied. It exists
in only 3.2% of the cases for the managing bodies and 1.3% for the
employees. A discrepancy can be observed here between the practice
of stimulating the board members through relating their
remuneration to the company's results, on the one hand, and the
possible realization of this practice through the company stock on
the other. The latter would be the most natural motivation
mechanism, which is also widely applied in the international
practice. The reason for that discrepancy can be found in the legal
difficulties for remuneration in the form of shares, as well as in
the low liquidity of the Bulgarian capital market.
Along with that, some attention should be paid to
the social and economic climate in Bulgaria as a whole. The total
lack of stock compensation is a reason for concern. Only three
percent of the respondents answered that they follow that
principle. In Bulgaria's case the specifics are multiple: deviation
from the global practice, lack of connection between directorship
and ownership, lack of effective principal-agent relations and last
but not least deviation from the principle and the aim to work in
the interest of the shareholder. This issue should be analysed from
now on and evaluated in future. Other studies show that even the
big international companies privatizing Bulgarian listed companies
do not follow these corporate governance principles in respect to
the company managing bodies. And this reveals a paradox - the
parent companies follow these principles in the countries having
developed capital markets and corporate governance, but
underestimate them in the transition economies.
The effectiveness of the internal procedures for
revelation and avoidance of conflicts of interests is indexed above
the average (average value of 3.28). But this index includes only
the companies where such procedures exist. Actually, a large number
of the companies (29.9%) do not have procedures for avoidance of
conflicts of interests at all. And the evaluation of the general
picture requires taking into account the situation in all of the
companies. After adjusting the average value by the part of the
companies not having procedures for the revelation and avoidance of
conflicts of interests, the assessment falls to 2.68, which would
be the lowest value in this block. This can be considered as a more
accurate value for the efficiency of these procedures, as a lot of
evidence has been already accumulated that the conflict of
interests represents a main problem for many listed companies in
Bulgaria.
This fact reveals the necessity to undertake
concrete measures for clarification of the type of conflict. Along
with that, it can be easily foreseen, that part of the problems
would be solved after the introduction - by law or by
self-regulated organizations, of requirements for widening the
scope of the information disclosed by the board members in relation
to their material interests in the listed companies they head. The
global practice in this field is categorical. To the opposite - the
Bulgarian practice is far from perfect to the disadvantage of the
shareholders. This is exactly the objective for the work for
improvement of the corporate governance practice in Bulgaria.
The effectiveness assessment for the internal
corporate rules and procedures for corporate governance should be
interpreted in a similar way to the assessment for the efficiency
of the internal procedures for revelation and avoidance of
conflicts of interests. Many companies (21.7%) do not have such
procedures. If the average value of the assessment for the
companies, where such procedures exist, were adjusted, the total
value for all companies of the sample would have the average value
of 2.79. Such relatively low value gives a more realistic idea on
the efficiency of the internal corporate rules and procedures. At
the same time, these rules and procedures are perceived to be,
although by little, still more effective than the rules for
revelation and avoidance of conflicts of interests. Internal
corporate rules and procedures exist in more companies than the
rules for revelation and avoidance of conflicts of interests.
The vast majority of the listed companies (75.8%) do
not have auxiliary committees at their managing bodies. Where such
committees exist, the assessment for their efficiency is relatively
low (average value of 2.94). Obviously, at this stage the good
practice of corporate governance involving the functioning of such
committees is not frequent and in use in Bulgaria. This might be
due to the fact that the shareholders are not familiar with it or
that the interested shareholders cannot impose it to the board. The
second hypothesis is referring to the dominating model of ownership
structure.
The assessment for the level of the requirements
applied to the board members represents a separate homogenous
block. According to the answers of the study, the requirements at
the appointment of the board members are relatively high. The most
important requirement is the educational census (average value of
4.55) and the least important is the non-commitment to other
companies through participation in their managing bodies (average
value of 3.46). The distribution of the assessments for the block
has a similar profile showing the lack of asymmetry and grouping to
a large scale around the assessment that the stated requirements
are applied to a large extent.
Unfortunately, the practice often demonstrates that
the principles of the corporate governance in this aspect are only
formally applied. In this case the matter in hand is the content of
these requirements.
The general assessment for the managing bodies
should take into consideration the fact that the one-level
structure is dominating: 66% of the respondents have one-level
system. The additional studies show that the one-level system is
typical for the listed companies in the real sector and the
two-level - for the holding structures. This is not just a legal
issue but also an issue for the sense of the corporate governance
and the institution of holdings and deserves separate research and
respective proposals.
2.3. Disclosure of Information
The pilot study of the corporate development in
Bulgaria had the objective to evaluate and analyze the legal and
regulatory framework and practice relating to the disclosure of
information. The results reveal relatively high assessments in both
sections, which however imposes the necessity for some additional
clarifications. The respondents evaluated the regulatory framework
with an index of 4.13 as adequate to secure the shareholders right
of regular and up-to-date information for the company in which they
have securities holdings.
Considering the rulings of the LPOS for mandatory
filing into SSC of the annual, semi-annual and quarterly financial
reports of the companies and for disclosure of the so called
"material information", the respondents' evaluation reflects
accurately the actual conditions in relation to the requirements
set by the regulatory framework.
A high assessment is also given to the practical
application of the rulings related to the disclosure of information
in terms of annual, semi-annual and quarterly financial statements
- 4.60. This reveals that the self-evaluation of the large number
of listed companies is related to meeting the requirements for
periodical disclosure of information. It is a different question
for the quality of these filings and the extent in which they
comply with the requirements of the LPOS in terms of contents and
exhaustiveness. In any case however the companies have high
self-evaluation for the exhaustiveness and accessibility of the
information disclosed - 3.87 and 3.80 respectively. Concerning
accessibility, the self-assessment is relatively fair as long as
the regulatory framework contains explicit requirements in that
aspect and the compliance with it is guarded by the SSC.
A notable development is the respondents'
strengthened understanding of the necessity the listed companies to
provide and disseminate in addition to the required by the LPOS
standardized and timely information, and more particular the
company's financial statements, resolutions of the general meeting,
the management's discussion and analysis for the annual operations
and results, etc. Probably it is considered that the information
for the specific issues listed above should be made accessible
through the use of modern methods, in addition to the explicitly
prescribed by the LPOS, like Internet for instance. Such an
understanding is certainly welcome, as long as practical steps are
undertaken in that aspect.
The availability and accessibility of information
are by far the soundest protection of the minority shareholders
rights. In that relation noteworthy is the relatively high average
assessment under the questions included the Disclosure of
Information block - 3.43. At first sight such an assessment runs
into an inconsistency with the low average evaluation of the
minority shareholders rights protection. The result is however
explicable with the fact that the factors included in the
disclosure of information section concern exclusively trailing
information that covers decisions already taken, reports and
assessments, but not the method of organization and conduction of
the general meeting itself. Comparing these assessments with the
relatively high evaluation of the legislatively provisioned right
of the shareholders of regular and up-to-date information on the
company whose securities they hold - 4.60, the interpretation of
the results could go in the direction of the somewhat formal
disclosure of information aiming to "comply with the words of the
law", whose volume and content is not sufficient for a more
profound analysis of the company's current performance and the
quality of its management. Despite the relatively high assessment
for the accessibility and sufficiency of the disclosed information
as well as for its compliance to the international standards -
3.80, 3.87 and 3.84 respectively, the doubts for formalism cannot
be excluded, as the questionnaires were filled by the board members
who have a direct influence on the type and content of the
information disclosed, so that their assessment would not
necessarily correspond to that of the minority shareholders who are
the consumers of that information. And the conduct of the minority
shareholders could be considered also as a "reaction in response"
to the quality and the sufficiency of the information disclosed as
the inadequately informed holders of securities are unable to take
active and competent strategic decisions for the future of the
company at the general meeting. In connection with the above lies
the explanation of the divergence in the assessment for the
compliance to the legal requirements for disclosure of information
- 4.60 - that is substantially higher than the assessment for the
quality and timeliness of the information disclosed.
Conclusion
The Corporate Governance Assessment Report for
Bulgaria does not claim comprehensiveness. It is an attempt to
present in a general forms the main characteristics and problems of
the Corporate Governance, based on data from the pilot survey. As a
whole the results show the existence of trends, which follow the
global ones and trends, which reflect the transition's
distinctiveness. There is still a diversion between the norm and
the concrete content, the requirements of the law and their
implementation.
Some of the more important tendencies for
improvement of the Bulgarian Corporate Governance practice are
shown in it, as well. The report will be ground for active and
informative professional debate on these issues, but it will also
be a starting point for undertaking the necessary practical steps,
in order for Bulgaria to get closer to the modern standards and to
become more attractive place for investments.
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