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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? - PowerPoint PPT Presentation
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State’s Role In Corporate Governance In South East Europe
State’s Role In Corporate Governance In South East Europe
Corporate Governance
Thomas Wels, Partner
September 21, 2001
OverviewOverview
• Importance of corporate governance in SEE
• Barriers to improved governance
• State attempts to improve governance
• A pan-regional response?
• Options for the State
Importance of quality of board practices when evaluating investmentsImportance of quality of board practices when evaluating investments%
3623 20
44
32
25 33
48
39
Europe Asia Latin America
More
Same
Less
Source:McKinsey Investor Opinion Survey 1999/2000
““In evaluating companies for potential investment in the following regions, In evaluating companies for potential investment in the following regions, how important is the quality of board practices relative to financial issues?”how important is the quality of board practices relative to financial issues?”
Average premium investors would be willing to pay for a well-governed companyAverage premium investors would be willing to pay for a well-governed companyAverage %
16
18
20
22
24
26
28
30
0Anglo-Saxon
USUK
Continental Europe
Italy
Switzerland
Germany
France
Spain
Latin America
ChileArgentinaMexico
Brazil
Columbia
Venezuela
Taiwan
Asia
Japan
Indonesia
Korea
ThailandMalaysia
Source:McKinsey Investor Opinion Survey 1999/2000
Over 80% of Over 80% of investors willing investors willing to pay a premiumto pay a premium
Greece
OverviewOverview
• Importance of corporate governance in SEE
• Barriers to improved governance
• State attempts to improve governance
• A pan-regional response?
• Options for the State
The market model governance chain*The market model governance chain*
*Examples can be found in Australia, Canada, U.K. and U.S.Source: McKinsey
Shareholder environment
Independenceand performance
Capital market liquidity
Corporate context
Institutionalcontext
Transparency and accountability
OECDPrinciples
Dispersedownership
Sophisticatedinstitutionalinvestment
Non-executivemajority boards
Aligned incentives
Active takeover
market
Active privateequity market
(incl. IPOs)
Shareholderequality
Highdisclosure
The control model governance chain*The control model governance chain*
*Examples can be found in Asia, Latin America and many Continental and South Eastern European countriesSource: McKinsey
Shareholder environment
Independenceand performance
Capital market liquidity
Corporate context
Institutionalcontext
Transparency and accountability
OECDPrinciples
Concentrated ownership
Reliance on family, bank and
State finance
‘Insiderboards’
Incentivesaligned with
core shareholders
Limitedtakeover
market
Under-developednew issue
market
Inadequateminority
protection
Limiteddisclosure
Importance of institutional factors when selecting emerging market countries in which to investImportance of institutional factors when selecting emerging market countries in which to investAverage response
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
Effectiveness of banking sector
Administrative efficiency of government
4.5
4.3
4.0
3.9
3.9
3.8
3.8
3.5
3.3
3.3
1 2 3 4 5
Scale and liquidity of local investment market
Irrelevant RelevantHighly
Relevant
Source: McKinsey Emerging Market Investor Opinion Survey 2001
Importance of corporate level factors when selecting emerging market companies in which to investImportance of corporate level factors when selecting emerging market companies in which to investAverage response
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
4.5
4.4
4.4
4.3
4.3
3.9
3.9
3.8
3.3
1 2 3 4 5Irrelevant Relevant
HighlyRelevant
Source: McKinsey Emerging Market Investor Opinion Survey 2001
OverviewOverview
• Importance of corporate governance in SEE
• Barriers to improved governance
• State attempts to improve governance
• A pan-regional response?
• Options for the State
A radical reduction in State involvement – a crisis responseA radical reduction in State involvement – a crisis response
Source:Turkish Treasury; IMF; clippings
COUNTRY EXAMPLE
Financial reform . . .Financial reform . . .• Banking sector reformBanking sector reform• Public, agricultural, and social security spending Public, agricultural, and social security spending
reformreform• Plan to remove barriers to foreign investmentPlan to remove barriers to foreign investment• Government asset management company to be Government asset management company to be
establishedestablished
. . . coupled with significant corporate reform. . . coupled with significant corporate reform• Privatization of Turkish Telecom, TUPRAS (oil Privatization of Turkish Telecom, TUPRAS (oil
refinery), POAS (petrol distribution), TEKEL refinery), POAS (petrol distribution), TEKEL (tobacco/alcohol), and SEKER (sugar)(tobacco/alcohol), and SEKER (sugar)
• Preparations being made to facilitate further Preparations being made to facilitate further private investment in gas, electricity generation, private investment in gas, electricity generation, and distribution rights, Petkim (petrochemicals), and distribution rights, Petkim (petrochemicals), Turkish Airlines, and ERDEMIR (steel)Turkish Airlines, and ERDEMIR (steel)
Will buyers for Will buyers for state-owned state-owned enterprises be enterprises be found?found?
Economic crisisEconomic crisis• Large currency Large currency
devaluationdevaluation• High unemploymentHigh unemployment• Falling stock market Falling stock market
capitalizationscapitalizations• Increased non-Increased non-
performing bank debtperforming bank debt• Falling corporate Falling corporate
profitabilityprofitability
Decreasing State ownership in corporate sector . . .Decreasing State ownership in corporate sector . . .
Source:Clippings; McKinsey analysis
COUNTRY EXAMPLE
ObjectivesObjectives• Attract local and foreign investorsAttract local and foreign investors• Boost entrepreneurshipBoost entrepreneurship• Encourage mergers and strategic alliancesEncourage mergers and strategic alliances
MeasuresMeasures• Undertake large scale privatization plan, incl. 12 Undertake large scale privatization plan, incl. 12
major banks and companies in 2002 (e.g., OTE, major banks and companies in 2002 (e.g., OTE, PPC, Agricultural Bank, Postal Savings Bank)PPC, Agricultural Bank, Postal Savings Bank)
• Introduce tax incentives to encourage more Introduce tax incentives to encourage more companies to mergecompanies to merge
• Introduce new legal and fiscal environment to Introduce new legal and fiscal environment to encourage more venture capitalencourage more venture capital
Expected resultsExpected results• Over 3 billion Over 3 billion
Euros revenuesEuros revenues• Market Market
consolidationconsolidation• Boost market Boost market
confidence in confidence in Stock ExchangeStock Exchange
ChallengeChallenge
Lack of interest Lack of interest from international from international investors. For ex:investors. For ex:• Prolonged Prolonged
negotiations for negotiations for selling of Olympic selling of Olympic Airways and Airways and Hellenic Hellenic Shipyards Shipyards
• Motor Oil’s Motor Oil’s disappointing IPOdisappointing IPO
. . . and radically reduced State influence in specific companies. . . and radically reduced State influence in specific companies
*Legislation passed enables changes**Previously, State-appointed
Source: Clippings
% owned by state
COMPANY EXAMPLE
External influences on External influences on telecomms sectortelecomms sector• DeregulationDeregulation• Competition from new Competition from new
market entrantsmarket entrants 33
42
51
100
Prior to 1996
June 2001
September 2001
Planned in future*
Other measures plannedOther measures planned• Revoke trade union right to Revoke trade union right to
appoint board directorappoint board director• Management to be appointed by Management to be appointed by
shareholders for 5-year tenures**shareholders for 5-year tenures**• Stock options introduced – to be Stock options introduced – to be
open to all employees over timeopen to all employees over time
Governance changesGovernance changes
• Strengthening of Strengthening of shareholder rightsshareholder rights
• Installment of Installment of transparency and transparency and accountability measuresaccountability measures
• Increased legal activity by Increased legal activity by shareholdersshareholders
• Accumulation of Accumulation of governance knowledge governance knowledge and practiceand practice
• More independent boardsMore independent boards
Investors react favorably to improved corporate governanceInvestors react favorably to improved corporate governance
Source: McKinsey analysis, McKinsey Investor Opinion Surveys 1999/2000
Institutional changesInstitutional changes
• Liberalisation of foreign Liberalisation of foreign ownership of equities and ownership of equities and bondsbonds
• Elimination of cross Elimination of cross guaranteesguarantees
• Liberalisation of the M&A Liberalisation of the M&A marketmarket
• Corporate and banking Corporate and banking restructuringrestructuring
Premiums for well-Premiums for well-governed companiesgoverned companiesPercentPercent
Before Before changes changes (1998)(1998)
After After changes changes (1999)(1999)
2222
2424
2626
2828
3030
3232
3434
3636
High/low pointsHigh/low points
Spread of responseSpread of response
COMPANY EXAMPLE
OverviewOverview
• Importance of corporate governance in SEE
• Barriers to improved governance
• State’s attempts to improve governance
• A pan-regional response?
• Options for the State
Most capital markets – and companies listed – in South East Europe are small…Most capital markets – and companies listed – in South East Europe are small…
Total market cap – end 2000Millions USD
102,032
69,508
574
366
7
* 25 listed on the official market and 478 on the free market ** EstimatesSource:FiBV.com; EIU; ASE; BSE; FEAS; EBRD
Athens
Istanbul
Bucharest
Skopje
Sofia
London
Number of companies listed (main and parallel markets) – end 2000
342
315
503
115
141
2,3742,612,230
Average company market capitalizationMillions USD
1
3
221
>1
298
WIP
1,100
**
*
…although in relative terms, ASE is quite successful…although in relative terms, ASE is quite successful
Selected examplesValue of S.E. as a percentage of GDP – end 2000
Athens
Istanbul
Bucharest
Skopje
Sofia
London
34
2
5
93
185
<1 *
*EstimatesSource:FiBV.com; EIU; ASE; BSE; FEAS; EBRD
InterAmerican
Panafon
ETVA
DOL
HBC
Viohalko
Intracom
EFG
CBG
OTE
Titan
Alpha
NBG
Bank of Cyprus
Piraeus
Yet, core shareholders dominate Greece’s largest publicly-listed companiesYet, core shareholders dominate Greece’s largest publicly-listed companies
Source:ASE; McKinsey analysis
Shareholder structure of top 15 companies ranked by market capitalization, end 2000
Foreign shareholder’sForeign shareholder’s average holding ~13%average holding ~13%
Domestic shareholder’sDomestic shareholder’s average holding ~33%average holding ~33%
Domestic shareholders > 5%
Foreign shareholders > 5%
Shareholders < 5%
Two recent initiatives in South East MediterraneanTwo recent initiatives in South East Mediterranean
Source:Clippings
Discussing increased cooperation:• Create common
index comprising shares of all three
stock exchanges• JV is planned
within 2001
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
A more radical solution – a combined pan-regional exchange?A more radical solution – a combined pan-regional exchange?Percent of total, USD millions, number of companies
Market capitalization
Bulgaria
Istanbul
Athens
Source:FiBV.com; EIU; ASE; BSE; FEAS; EBRD
59
24
22
36
40
>1
8
>1
10
>1BucharestSkopje
• 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
172,485 1,416
Equivalent to Brussels Equivalent to Brussels Stock ExchangeStock Exchange
Equivalent Toronto Equivalent Toronto Stock ExchangeStock Exchange
Number of companies
Requirements for pan-regional South East Europe exchangeRequirements for pan-regional South East Europe exchange
ILLUSTRATIVE
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
OverviewOverview
• Importance of corporate governance in SEE
• Barriers to improved governance
• State attempts to improve governance
• A pan-regional response?
• Options for the State
Moving from control model governance chainMoving from control model governance chain
Source: McKinsey
Corporate context
Institutionalcontext
OECDPrinciples
Concentrated ownership
Reliance on family, bank and
State finance
‘Insiderboards’
Incentivesaligned with
core shareholders
Limitedtakeover
market
Under-developednew issue
market
Inadequateminority
protection
Limiteddisclosure
Capital market liquidity• Encourage equity-
based financing• Remove barriers to
takeovers
Transparency and accountability-Mandate international
accounting standards- Create and enforce
shareholder rights
Independenceand performance- Encourage more
independent boards- Facilitate stock-
related compensation
Shareholder environment- Attract foreign equity
capital- Reduce State ownership
Where the State can contribute to improve Corporate GovernanceWhere the State can contribute to improve Corporate Governance
Objective Examples
•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
Alternatives to state share- holdings
Liquidity of exchanges
Adequate regulatory frameworks
250401LNZXC483TSMW-P1
25
For further information contact:For further information contact:Thomas Wels: +30 (1) 3672 777Thomas Wels: +30 (1) 3672 777Mark Watson: +1 212 446 8021Mark 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