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State’s Role In Corporate Governance In South East Europe

Corporate Governance. State’s Role In Corporate Governance In South East Europe. Thomas Wels, Partner September 21, 2001. Overview. Importance of corporate governance in SEE Barriers to improved governance State attempts to improve governance A pan-regional response?

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State’s Role In Corporate Governance In South East Europe

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  1. Corporate Governance State’s Role In Corporate Governance In South East Europe Thomas Wels, Partner September 21, 2001

  2. Overview • Importance of corporate governance in SEE • Barriers to improved governance • State attempts to improve governance • A pan-regional response? • Options for the State

  3. More 25 33 48 • Same 39 44 32 36 • Less 23 20 Europe Asia Latin America Importance of quality of board practices when evaluating investments • % “In evaluating companies for potential investment in the following regions, how important is the quality of board practices relative to financial issues?” Source: McKinsey Investor Opinion Survey 1999/2000

  4. Venezuela Columbia • Korea Brazil Mexico Argentina Chile • US • UK • 0 • Anglo-Saxon • Latin America Average premium investors would be willing to pay for a well-governed company • Average % Over 80% of investors willing to pay a premium 30 28 • Indonesia 26 • Thailand • Malaysia • Greece 24 • Italy 22 • Germany • Taiwan • France 20 • Japan • Spain 18 • Switzerland 16 • Asia • Continental Europe Source: McKinsey Investor Opinion Survey 1999/2000

  5. Overview • Importance of corporate governance in SEE • Barriers to improved governance • State attempts to improve governance • A pan-regional response? • Options for the State

  6. Shareholder environment • Independenceand performance Dispersedownership Non-executivemajority boards Sophisticated institutionalinvestment Aligned incentives OECD Principles • Institutional • context • Corporate context Active privateequity market(incl. IPOs) Highdisclosure Active takeover market Shareholder equality • Capital market liquidity • Transparency and accountability The market model governance chain* * Examples can be found in Australia, Canada, U.K. and U.S. Source: McKinsey

  7. Shareholder environment • Independenceand performance Concentrated ownership ‘Insiderboards’ Reliance on family, bank and State finance Incentivesaligned withcore shareholders OECD Principles • Institutional • context • Corporate context Under-developednew issue market Limiteddisclosure Limited takeover market Inadequateminorityprotection • Capital market liquidity • Transparency and accountability The control model governance chain* * Examples can be found in Asia, Latin America and many Continental and South Eastern European countries Source: McKinsey

  8. Importance of institutional factors when selecting emerging market countries in which to invest • Average response Irrelevant Relevant Highly Relevant Enforceability of legal rights (e.g. contracts) Quality of economic management Independence of judiciary/quality of legal system Level of corruption Predictability and level of taxation system Quality of accounting standards Effectiveness of regulatory system Administrative efficiency of government Effectiveness of banking sector Scale and liquidity of local investment market Source: McKinsey Emerging Market Investor Opinion Survey 2001

  9. Importance of corporate level factors when selecting emerging market companies in which to invest • Average response Irrelevant Relevant Highly Relevant Distinctions between company and family interests Clearly defined governance arrangements Accuracy of financial reporting Legally enforceable minority shareholder protection Use of performance-related pay for top management Timeliness of financial reporting Coverage of financial reporting Presence of independent (non-executive) directors Establishment of conflicts of interests committee Source: McKinsey Emerging Market Investor Opinion Survey 2001

  10. Overview • Importance of corporate governance in SEE • Barriers to improved governance • State attempts to improve governance • A pan-regional response? • Options for the State

  11. A radical reduction in State involvement – a crisis response COUNTRY EXAMPLE • Financial reform . . . • Banking sector reform • Public, agricultural, and social security spending reform • Plan to remove barriers to foreign investment • Government asset management company to be established • Economic crisis • Large currency devaluation • High unemployment • Falling stock market capitalizations • Increased non-performing bank debt • Falling corporate profitability • Will buyers for state-owned enterprises be found? . . . coupled with significant corporate reform • Privatization of Turkish Telecom, TUPRAS (oil refinery), POAS (petrol distribution), TEKEL (tobacco/alcohol), and SEKER (sugar) • Preparations being made to facilitate further private investment in gas, electricity generation, and distribution rights, Petkim (petrochemicals), Turkish Airlines, and ERDEMIR (steel) Source: Turkish Treasury; IMF; clippings

  12. Decreasing State ownership in corporate sector . . . COUNTRY EXAMPLE • Objectives • Attract local and foreign investors • Boost entrepreneurship • Encourage mergers and strategic alliances • Challenge • Lack of interest from international investors. For ex: • Prolonged negotiations for selling of Olympic Airways and Hellenic Shipyards • Motor Oil’s disappointing IPO • Expected results • Over 3 billion Euros revenues • Market consolidation • Boost market confidence in Stock Exchange • Measures • Undertake large scale privatization plan, incl. 12 major banks and companies in 2002 (e.g., OTE, PPC, Agricultural Bank, Postal Savings Bank) • Introduce tax incentives to encourage more companies to merge • Introduce new legal and fiscal environment to encourage more venture capital Source: Clippings; McKinsey analysis

  13. . . . and radically reduced State influence in specific companies COMPANY EXAMPLE • % owned by state • Other measures planned • Revoke trade union right to appoint board director • Management to be appointed by shareholders for 5-year tenures** • Stock options introduced – to be open to all employees over time • External influences on telecomms sector • Deregulation • Competition from new market entrants Prior to 1996 June 2001 September 2001 Planned in future* * Legislation passed enables changes ** Previously, State-appointed Source: Clippings

  14. Investors react favorably to improved corporate governance COMPANY EXAMPLE • High/low points • Spread of response • Institutional changes • Liberalisation of foreign ownership of equities and bonds • Elimination of cross guarantees • Liberalisation of the M&A market • Corporate and banking restructuring • Governance changes • Strengthening of shareholder rights • Installment of transparency and accountability measures • Increased legal activity by shareholders • Accumulation of governance knowledge and practice • More independent boards • Premiums for well-governed companiesPercent • 36 • 34 • 32 • 30 • 28 • 26 • 24 • 22 • Before changes (1998) • After changes (1999) Source: McKinsey analysis, McKinsey Investor Opinion Surveys 1999/2000

  15. Overview • Importance of corporate governance in SEE • Barriers to improved governance • State’s attempts to improve governance • A pan-regional response? • Options for the State

  16. WIP Most capital markets – and companies listed – in South East Europe are small… Total market cap – end 2000 Millions USD Number of companies listed (main and parallel markets) – end 2000 Average company market capitalization Millions USD Athens Istanbul Sofia * Bucharest ** Skopje London 1,100 2,612,230 * 25 listed on the official market and 478 on the free market ** Estimates Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD

  17. 93 34 2 5 <1 * 185 …although in relative terms, ASE is quite successful Selected examples Value of S.E. as a percentage of GDP – end 2000 Athens Istanbul Sofia Bucharest Skopje London * Estimates Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD

  18. Yet, core shareholders dominate Greece’s largest publicly-listed companies • Shareholder structure of top 15 companies ranked by market capitalization, end 2000 Domestic shareholders > 5% Foreign shareholders > 5% Shareholders < 5% Domestic shareholder’s average holding ~33% Foreign shareholder’s average holding ~13% Source: ASE; McKinsey analysis

  19. Two recent initiatives in South East Mediterranean • Negotiating: • Open respective markets to investors in Turkey and Greece via cross-membership of companies on both markets • Common technical application to follow stocks on both markets • Discussing increased cooperation: • Create common index comprising shares of all three stock exchanges • JV is planned within 2001 Source: Clippings

  20. A more radical solution – a combined pan-regional exchange? • Percent of total, USD millions, number of companies Equivalent to Brussels Stock Exchange Equivalent Toronto Stock Exchange • Skopje • 172,485 • 1,416 • Bucharest • Bulgaria • While combined number of companies is high, aggregate market capitalization is still relatively small • Without more dynamic pooled equity markets, difficult for privatisation programs to access (foreign) equity financing option • Istanbul • Athens Market capitalization Number of companies Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD

  21. ILLUSTRATIVE Requirements for pan-regional South East Europe exchange • Requirements • Models • Common trading platforms • Coming listing/tracking standards • Common corporate governance standards • Effective market makers/traders • Complementary, if not common, securities legislation • Euronext • Euronext • SEC-regulated exchanges/OECD Principles • SEC-regulated exchanges • U.S. SEC/U.K. FSA regulations

  22. Overview • Importance of corporate governance in SEE • Barriers to improved governance • State attempts to improve governance • A pan-regional response? • Options for the State

  23. Concentrated ownership ‘Insiderboards’ Reliance on family, bank and State finance Incentivesaligned withcore shareholders Under-developednew issue market Limiteddisclosure Limited takeover market Inadequateminorityprotection Moving from control model governance chain • Shareholder environment • Attract foreign equity capital • Reduce State ownership • Independenceand performance • Encourage more independent boards • Facilitate stock- related compensation OECD Principles • Institutional • context • Corporate context • Transparency and accountability • Mandate international accounting standards • Create and enforce shareholder rights • Capital market liquidity • Encourage equity-based financing • Remove barriers to takeovers Source: McKinsey

  24. Alternatives to state share- holdings Where the State can contribute to improve Corporate Governance • Objective • Examples Adequate regulatory frameworks • Create an adequate Institutional and Corporate framework to • attract Direct Investment • Indirect Investment • Internationally accepted governance rules (e.g.,OECD, SEC, IAS/US-GAAP) • Create broad distribution of stock in population • Reduce State stakes to create market for control • Incentivise stock exchange co-operations to improve liquidity Liquidity of exchanges

  25. 250401LNZXC483TSMW-P1 For further information contact: Thomas Wels: +30 (1) 3672 777 Mark Watson: +1 212 446 8021 • McKinsey Investor Opinion Survey 1999/2000 can be downloaded from • www.mckinsey.com • Also, available on www.mckinseyquarterly.com, “Corporate reform agenda in the developing world", an article that includes findings from the McKinsey Emerging Market Investor Opinion Survey

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