CORPORATE GOVERNANCE IN ROMANIA 2001 - 2004

Angela Ene General Manager, Ardyan Consulting Galina Narcisa Fatu Bostina & Associates Law Firm Ohrid, Macedonia June 10, 2004

Scope of the report

To review the progress made in terms of corporate governance in
the period 2001 2004, considering: the OECD recommendations from the Report on Corporate Governance September 2001 the OECD recommendations from the White paper on corporate governance in South East Europe the Romanian legislative and organizational framework

To make recommendations for improving the corporate governance

system

Structure of the report / presentation

I Introduction. Premises II Key priorities 2.1 Ownership structure 2.2 Enforcement and implementation 2.3 The rights and equitable treatment of shareholders 2.4 The role of stakeholders in corporate governance 2.5 Disclosure & transparency 2.6 The responsibilities of the board

III Conclusions and recommendations

3

I.

Introduction. Premises

The main institutions of the Romanian capital market

National Securities Commission (NSC) Bucharest Stock Exchange (BSE) - market cap of EUR 4.8 bill Rasdaq Electronic Market (Rasdaq) - market cap. of USD 1.8 bill Financial Investment Funds (SIFs) Foreign Investment Funds Mutual Funds, Insurance companies Romanian Shareholders Association

In Romania - no private pension funds

4

I. Introduction. Premises (cont.)

Main legislation governing corporate governance in the last years:

Companies Law Securities and Stock Exchanges Law - 1994 Capital Market Law 2002

Currently: A NEW Capital Market Law (draft CML) was approved by Government and was sent to Parliament for approval, in order to harmonize the Romanian capital market legislation with the EU legislation
5

II. Key priorities

2.1 Ownership structure 2.2 Enforcement and implementation 2.3 The rights and equitable treatment of shareholders 2.4 The role of stakeholders in corporate governance 2.5 Disclosure & transparency 2.6 The responsibilities of the board
6

2.1 Ownership structure - privatization

Some causes for privatization delays:
managements lack of interest pressures from the part of stakeholders

Measures taken for improving corporate governance

special administration procedure closer monitoring of management performance

Improvement in terms of corporate governance in state owned

companies - below market expectations
7

2.1 Ownership structure consolidation & delisting

The shareholder holding more than 90% from the voting rights obliged to make a public offer aiming to delist the company (Capital Market Law 2002) The price of the public offer shall be determined by an independent valuator considering (i) the market price, (ii) the net asset value per share and (iii) the price paid in the previous 12 months, for the same shares, by a shareholder holding more than 90% of total shares The mandatory public offers - main events in 2003 (many companies were delisted)
the consolidation process continues in 2004 but not on such a large scale
8

2.2 Enforcement & implementation judicial system

There are no specialized courts for corporate governance/capital market claims Training of the judges is one of the priorities of the Ministry of Justice the court decisions on corporate governance issues reveals that judges are not enough experienced in this field there are no specialized courses on corporate governance issues Only the Romanian High Court of Justice is publishing its own decision (with significant delays) studying the courts decisions by analyzing the appropriate files 9 is almost impossible and time consuming

2.2 Enforcement & implementation redress mechanisms for shareholders

The Bucharest Stock Exchange Arbitration Court is designed to settle down disputes between the intermediaries and their clients The disputes between shareholders and companies can be solved, as a general rule, only by the judicial courts The existent Arbitration mechanisms are rarely used The National Securities Commission (NSC) is allowed to file lawsuits on behalf of shareholders, but the NSC never used this right

10

2.2 Enforcement & implementation -National Securities Commission

Significant progress registered: budget stability, staff training, adequate facilities, IT infrastructure etc., transparency (monthly bulletins), increased supervision activities etc. Maintained responsibilities: Rasdaq was not authorized to function as an SRO Developed exchange of expertise with similar international institutions Elaborated the draft of the NEW Capital Market Law for EU harmonization the draft was sent to the Parliament for approval

11

2.2 Enforcement & implementation Voluntary Corporate Governance Code

Code of Corporate Governance Bucharest Stock Exchange
Plus tier or Transparency tier - established in 2001 The BSE Code of Corporate Governance is adopted voluntarily by companies willing to be listed on the Plus tier Main corporate governance elements of the Code, referring to: independent directors, dissemination of information, transparency, dividends, conflicts of interest etc. Only one company listed by now on the Plus tier
12

2.3 The rights and equitable treatment of shareholders capital increases

The shareholders general meeting must approve the share capital
increase however, according to current laws, the right to approve the share capital changes can be delegated to directors; in this case the notification of the board meeting is not publicly available (terms of the capital change are not known by the shareholders)

There are no specific rules requiring a minimum information content

of the shareholders general meeting notification

There is no legal obligation to determine the price of new shares

based on an independent assessment of the companys value

13

2.3 The rights and equitable treatment of shareholders capital increases (cont.)
In the current legislation there are too many exceptional situations
where the in-kind contributions are allowed

The draft of the CML allows the use of in-kind contributions

provided that special attendance and voting conditions are fulfilled is made during the privatization and post-privatization process

The pre-emptive right can be eliminated if the share capital increase

a large number of companies have been privatized during last years

The draft of CML allows the pre-emptive right to be eliminated even

for in cash contributions
14

2.3 The rights and equitable treatment of shareholders related party transactions
There are numerous rules aiming to monitor and prevent abusive
related party transactions Major transactions (valuing more than 20% of the net asset value) have to be approved by shareholders Directors are obliged to disclose any potential conflict of interest and to abstain from voting Certain transactions (valuing more than 10% of the net asset value) between the company and directors & their relatives have to be approved by the shareholders

15

2.3 The rights and equitable treatment of shareholders related party transactions (cont.)
According to current laws there is no legal obligation to disclose all
the transactions that include conflicts of interest currently the affiliated party transactions bigger than 50,000 EURO have to be made public the draft of the CML is slightly diminishing the transparency of the affiliated party transactions (quarterly reporting, EUR 100,000)

Companies are often breaching the a.m. rules and the appropriate
sanctions have been rarely imposed to companies/ directors

16

2.3 The rights and equitable treatment of shareholders institutional investors

A large scale educational and public awareness program - not
initiated however, the Bucharest Stock Exchange initiated in 2004 a program aiming to increase the public awareness about the capital market

Corporate governance issues are still unknown for the wide majority
of the public

Institutional investors - rarely make public their voting policies

17

2.3 The rights and equitable treatment of shareholders general shareholders meetings
Although extremely useful, a Best Practices Guide regarding general
shareholders meeting (GSM) does not exist yet

The minimum notification period (15 days) for GSM - not changed There are rules aiming to ease the shareholders right to participate
at the GSM the identification documentation are included in the capital market law in order to abolish the situations which limit the shareholders right to participate at the GSM

The general meeting deciding dividends to be distributed is obliged

to establish the dividend payment period within six months of the date of the general meeting if the general meeting does not establish the payment period, the dividends shall be paid in 60 days from the date the
18

2.4 The role of stakeholders - employees

The new labor code:
inspired from EU legislation increases consultation and communication between employers and employees; excessive decision making rights for employees (ex. working norms) generates bureaucratic procedures, inefficiencies in the human resources departments Procedures for communication with stakeholders do not exist Employees and others that reveal illegal or abusive practices of a companys board and management are not enough protected
19

2.4 The role of stakeholders - creditors

Two major improvements for protection of creditors rights: the list of suspect acts/documents was extended in the new bankruptcy law providing more power to creditors faster bankruptcy procedure: shorter terms, better organization of courts, more syndic judges etc. For a limited period, the state had priority in front of other creditors for state budget receivables (ex. execution of a guarantee) New bankruptcy law - 2004: accelerates and simplifies the juridical reorganization and the bankruptcy procedure increases control on the activities of directors and liquidators Improvements made in the Civil Code (in 2002, 2003) determined acceleration of law suites
20

2.5 Disclosure & transparency accounting and audit activities

The Romanian Financial Auditors Chamber (SRO) is responsible to
license and watch over the financial auditors the Financial Auditors Chamber is overseen by the Ministry of Public Finances

The main tasks of the Romanian Financial Auditors Chamber

testing and licensing the auditors assuring the relevant training preparing the regulations regarding the professions code of ethics, the continuous training, the disciplinary procedure and assuring the enforcement of its own rules

21

2.5 Disclosure & transparency IFRS implementation

Currently, all the listed companies have to prepare the financial
statements according to the International Accounting Standards as they were enacted by the Romanian Ministry of Finance provided in the financial statements and in the appropriate notes is complete or not

The capital market institutions do not verify whether the information

During 2003, the NSC intensified its efforts to determine the

Romanian issuers to report the financial statement
a large number of sanctions were imposed as a result, more and more issuers are reporting the financial statements

22

2.5 Disclosure & transparency ownership and control structures

The shareholder/the group of shareholders holding over 5%, 10%,
33%, 50%, 75% or 90% have to disclose the holding to the National Securities Commission within 5 business days from the transaction date reported by shareholders and have to be made public

The changes of the significant and controlling holdings have to be The issuers are rarely providing this type of reports

23

2.5 Disclosure & transparency listed companies

A significant progress was registered by BSE
wide majority of BSE issuers comply with disclosure obligations the reports are most of the time complete and accurate during 2003, the number of reporting issuers increased three times compared with 2002, but this number still represents approximately 25% of the total number of issuers listed on RASDAQ

Some progress was registered by RASDAQ

According to the capital market rules the issuers have to prepare

and make public The annual report including the financial statements The half annual report including the financial statements The current report whenever an important event occurs

24

2.5 Disclosure & transparency external auditors

Auditors responsibilities and consequently their liabilities are not
clearly stated in the legislation

The Romanian Financial Auditors Chamber established a Disciplinary

Committee that investigates misconduct and imposes sanctions for different violations of the legislation

So far we are not aware of any case when an auditor was found
liable for some violation of the rules governing audit profession

25

2.6 Responsibilities of the Board acting in the best interest of shareholders

OECD recommendation to introduce in the text of the law the
expression acting in the best interest- not implemented

Collectively and individual responsibilities - not clearly defined Sanctions for directors - weakly enforced in practice Existing redress mechanisms the minority shareholders have
taken out from the draft of the CML

Do directors act in the best interest of shareholders ?

very different opinions of market participants
26

2.6 Responsibilities of the Board acting in a professional and informed manner

Corporate Governance Institute of BSE (established in August
the institutional framework for professional training of directors the conditions for sharing experience among directors the creation of a directors database

2003); the Institute did not start its activity; the Institute should ensure:

The legislation is vague regarding the obligation of management to

provide full access of directors to all relevant information

Directors are allowed to be on a maximum of three boards at the

same time

The Parliament members, the Government members, the elected

officials and the public officers are not allowed to be simultaneously directors or managers of commercial companies (Anti-corruption 27

2.6 Responsibilities of the Board independent directors

In Romania, the concept of independent directors is new The Capital Market Law and listing requirements no provisions
about independent directors

The concept of independent directors - introduced by the

(Voluntary) Code of Corporate Governance BSE

Market participants believe that:

directors are rather not independent OR if they are independent they are independent from management but not necessary from shareholders

The presence of truly independent board members is still an

exception
28

2.6 Responsibilities of the Board specialized committees

Audit, Nomination and Compensation/Remuneration Committees not defined, not implemented

Hybrids of these committees exist but informally: directors delegate

among themselves different responsibilities

The boards is not certifying that the financial statements provide

accurate and relevant information on the state of affairs of the company. This certification is coming from the financial auditors

Some of the responsibilities of censors were not transferred to

external or internal auditors. The result is: weaker redress mechanisms for the minority shareholders less control in the company regarding conflicts of interest

29

2.6 Responsibilities of the Board nomination and remuneration of directors

There is no nomination procedure established by any
legislation/rules but the NSC rules regarding cumulative voting provide some elements helping the nomination process

In many cases shareholders are not timely, adequately and

effectively informed about nominees

Directors remuneration is not disclosed in the financial statements Poor payment of directors - poor performance Remuneration of directors based on performance - not implemented
in Romania
30

CORPORATE GOVERNANCE IN ROMANIA 2001 - 2004

31

III. Recommendations - privatization

When privatization takes place, the privatization contract should
provide minimum free float provisions

After privatization, some of the national companies should be listed

or should remain listed on the BSE or Rasdaq

AVAS should elaborate a special corporate governance program for

national companies; it should co-operate with NSC, BSE, Rasdaq

Areas for future improvements corporate governance:

equal treatment of shareholders elimination through the legislation of the preferential treatment of the state transparency and dissemination of information 32 management performance

33

III. Recommendations consolidation & delisting; judicial system

The process of ownership consolidation and companies delisting
should continue in 2004 and during the following years

NSC and BSE, through the Corporate Governance Institute, should

have the initiative to establish a co-operation with the Ministry of Justice and the National Institute for Magistrates in order to include corporate governance/capital market issues in the training curricula for the judges and prosecutors

34

III. Recommendations public & private redress mechanisms

The NSC shall use its right to initiate lawsuits The Capital Market Arbitration Courts should be allowed to solve
certain litigations (excepting the disputes regarding the nullity of the general shareholders meeting resolution) between shareholders and companies

Awareness of investors should increase regarding the advantages of

using professional arbitration mechanisms

35

III. Recommendations National Securities Commission

Training of staff in the field of corporate governance Authorizing Rasdaq as SRO Rapid elaboration of rules for implementing the new Capital Market
Law which might be soon adopted by the parliament some technical assistance should be considered

for capital market specific issues for harmonizing the provisions of the new law with the
Romanian legislation and existing NSC rules
36

III. Recommendations National Securities Commission (cont.)

Additional technical assistance should be considered for specific
actions: change of control, conflicts of interests, mandatory delisting

NSC should explain the rational of the changes between the current
Capital Market Law and the draft of the new CML; the comparison should be posted on the web site of the NSC

The NSC should promote the White Paper

The White Paper should also be posted on the NSC web site, in Romanian and English

NSC should become more active in providing sanctions to directors

and managers of listed companies
37

III. Recommendations Code of Corporate Governance

BSE Corporate Governance Institute should start activity as soon as
possible

Directors of listed companies on the first tiers of BSE and Rasdaq

should start being trained regarding corporate governance capital market rules the role of specialized committees the role of independent directors the Code of Corporate Governance of the BSE etc.

After training and exchanging experiences directors would be better

prepared to propose to shareholders promotion to the Plus tier
38

III. Recommendations - the rights and equitable treatment of shareholders

The law to clearly state that only the shareholders general meeting can
approve the amendments to the constitutive act, including the changes in share capital

The minimum data to be included in the notification for a share capital

change should be detailed by a NSC regulation applicable to all listed companies only one institution should be responsible for the enforcement of these rules

In-kind contributions to share capital should not be allowed The pre-emptive right shall be honoured for every share capital (no
exclusions from exercising pre-emptive rights)

39

III. Recommendations - the rights and equitable treatment of shareholders (cont.)

The beginning date of the subscribing period for the shareholders having the pre-emptive rights should not be related to the publication date of the resolution of the GSM in the Official Gazette OR the general shareholders meeting should stipulate the subscription period within the share capital increase resolution. The beginning date for the subscription shall be established in such a manner that the shareholders can be aware of it and can take the appropriate actions
40

the subscribing period shall begin at the date when the general meeting resolution has been made public

III. Recommendations - the rights and equitable treatment of shareholders (cont.)

Market should develop and increase the use of independent
assessments of a companys share value

Special regime established for the share capital increases executed

in accordance with the privatization and post-privatization law should be eliminated

Capital market rules should impose on the issuers to disclose all the
transactions that include conflicts of interest (currently above 50,000 Euros should be disclosed)

A special attention should be paid to enforcing these rules since the

number of issuers reporting related party transactions is quite significant

41

III. Recommendations - the rights and equitable treatment of shareholders (cont.)

NSC and the other capital market institutions should contribute to
the educational programs aiming to increase the degree of the public awareness regarding the corporate governance issues

Assuring an unitary and harmonized corporate governance

approach requires a common program of actions acknowledged by all parties involved; this program could be focused on the Corporate Governance Institute but it should be enforced by joint efforts of all the other institutions A Best Practice Guide aiming at explaining the rules governing the organization of a shareholders meeting should be prepared and promoted It should be better established the content of the shareholders registry (including the name of the natural person empowered to represent the shareholder legal person)

42 Dividend payment should be made within a 60 days period from the

III. Recommendations - stakeholders

Companies should put in place governance mechanisms to ensure
familiarity and compliance with outstanding legislation related to the rights of stakeholders

Directors could delegate among themselves responsibilities

regarding stakeholders. Example: elaboration of compliance procedure discussions with management monitoring legislation and compliance process relationship with the respective stakeholder

BSE Corporate Governance Institute could help in drafting

procedures related to stakeholders
43

III. Recommendations - stakeholders

Ministry of Labor should further discuss with employers and

unions/employees regarding the main divergent opinions they have related to the new labor code

Additional protection would be needed for employees and other persons in

order to encourage them to disclose illegal practices of directors and managers

Training of syndic judges and better organization of the bankruptcy

procedure is needed in the future

Definition of affiliated company/party / group of companies should be

included in the bankruptcy legislation

44

III. Recommendations - disclosure and transparency

The institutional and organizational structure for accounting and
audit should be further strengthened

Rules governing the audit profession should be enforced The capital market institutions must verify whether the information
the capital market institutions should find the appropriate measures to make sure that all missing information is provided

provided in the financial statements and in the notes is complete or not

The efforts made to ensure the enforcement of disclosure rules

should be strengthened
45

III. Recommendations - disclosure & transparency (cont.)

Companies should further improve the disclosure of their ownership

and control structures

NSC regulation should be amended by including into the minimum

content of the annual report the shareholders or the group of shareholders holding over 5% of the shares

The NSC should determine whether the issuers are complying with
the requirement to have an internal audit department, and to find the appropriate measure in order to remedy the situation. The law shall stipulate the internal audit department responsibilities in a clear and concrete manner

46

III. Recommendations - disclosure and transparency (cont.)

The role of directors in providing timely, accurate and complete
information should be increased

NSC shall impose gradually to the obligation to post on the WEB the
information they are sending to the NSC

A common electronically data base containing information about

issuers should be set up by the NSC, BSE, Rasdaq etc.; until this project is implemented NSC should make available the information on its own WEB site

The efforts for enforcing the rules regarding the liability of external

auditors should be strengthened, and the NSC should inform the Romanian Financial Auditors Chamber whenever considers that an external auditor did not performed its duties in accordance with the relevant normative deeds

47

III. Recommendations responsibilities of the Board

The law should clearly stipulate in the text that Boards duty is to
serve the best interest of the company and of all shareholders sanctioned in the text of the law

Directors duty of loyalty should be specifically mentioned and A contract between the company and its directors shall increase the
awareness of responsibilities / duties of the respective directors

Directors guideline should be published by the BSE Institute Executives should be excluded from Boards, as requested by law
(only the chairman of the Board could be the general manager/CEO)

48

III. Recommendations responsibilities of the board (cont.)

Separation of the chairman from the CEO is further encouraged The NSC should be more active in providing sanctions to directors
and auditors of listed companies

The collective and individual liabilities of directors should be clearly

defined in the Companies Law

The notion of business judgment should be introduced in the

Romanian legal system

49

III. Recommendations - responsibilities of the Board (cont.)

The activity of the BSE Institute of Corporate Governance shall start
as soon as possible and shall be accelerated

The Companies Law should allow directors to serve in more than 3

Boards

The Companies Law and the new Capital Market Law/ NSC

CVs of directors should be posted on the company site, for the

companies listed on the first tiers of BSE and Rasdaq

regulations should specifically mention access of directors to all company information

50

III. Recommendations responsibilities of the Board (cont.)

Awareness regarding the concept of independent directors should
increase

Data base with independent directors should be created at the

Institute

Listing requirements for the first and second tiers of BSE and

Rasdaq should require independent directors, after having independent directors in the Institute data base The Institute should facilitate the training and the recruitment process for independent directors The independent directors should have a crucial role in monitoring management & conflicts of interests, in promoting corporate governance

The independent directors should be included in the composition of51

III. Recommendations responsibilities of the Board (cont.)

Implementation of specialized committees should be made sequential
Step 1: training of directors should be made regarding the role and responsibilities of these committees Step 2: database with independent directors should be developed Step 3: organizing & functioning rules of these committees should be elaborated, as models, by the BSE Institute Step 4: Audit Committees should be implemented first (composed of at least one independent director) Step 5: Nomination and Remuneration Committees should be also implemented

Listing requirements for companies listed on the first and second tier on BSE

and Rasdaq should require the existence of an Audit Committee composed of directors (from which at least one should be independent)

52

III. Recommendations responsibilities of the Board (cont.)

Procedure / rules for nomination should be developed to increase
transparency (BSE)

Remuneration of directors to be entirely paid by companies The Board fee could be differentiated: different directors could
have different fees; Board fee should be paid according to the workload of directors, size of co. etc.

Companies should start considering paying performance bonus for

directors

External financial auditors should monitor if the remuneration of

directors and management is properly disclosed
53

Other recommendations
The White paper should be better promoted in the market by the
NSC, Institute, BSE, Rasdaq, SIfs, foreign investment funds;

Rasdaq should follow the BSE example and should promote a Code
of Corporate Governance

The SIFs and the foreign investment funds shall also become

important corporate governance messengers along with NSC, BSE, Rasdaq etc. companies

Companies Law: a special chapter should be dedicated to listed

54

Other recommendations (cont.)

Minimum protection should be considered for
shareholders remaining in closed end companies, after delisting (access to some minimum information, trading of shares)

The definition of the conflict of interest should be

included in the capital market legislation/rules

Corporate Governance principles shall be applied by

foreign investors, like in their country of origin

55

Final conclusion & recommendation

OECD corporate governance recommendations were partially

implemented in Romania in the period September 2001 June 2004

Main market institutions (National Securities Commission, Institute

of BSE, Bucharest Stock Exchange, Rasdaq, SIFs, foreign investment funds etc.) should intensify their efforts and should work together for implementing legislative and organizational measures aimed at improving significantly the Romanian corporate governance system

56

Contact details

Angela Ene: enne@rdslink.ro Tel: 00 40 21 232 18 37 Tel: 00 40 722 392 540 Galina Narcisa Fatu: narcisa.fatu@scpabostina.ro Tel: 00 40 21 211 48 00 Tel: 00 40 724 245 101

57