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Overview Importance of corporate governance in SEE

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Presentation on theme: "Overview Importance of corporate governance in SEE"— Presentation transcript:

0 State’s Role In Corporate Governance In South East Europe
Thomas Wels, Partner September 21, 2001 010913AHO020MW-P1

1 Overview Importance of corporate governance in SEE
Barriers to improved governance State attempts to improve governance A pan-regional response? Options for the State 010913AHO020MW-P1

2 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?” 36 23 20 44 32 25 33 48 39 Europe Asia Latin America More Same Less Source: McKinsey Investor Opinion Survey 1999/2000 010913AHO020MW-P1

3 Over 80% of investors willing to pay a premium
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 Latin America Chile Argentina Mexico Brazil Columbia Venezuela Indonesia 26 Thailand Malaysia Greece 24 Korea Italy 22 Germany Taiwan France 20 Japan Spain Anglo-Saxon US UK 18 Switzerland 16 Asia Continental Europe Source: McKinsey Investor Opinion Survey 1999/2000 010913AHO020MW-P1

4 Overview Importance of corporate governance in SEE
Barriers to improved governance State attempts to improve governance A pan-regional response? Options for the State 010913AHO020MW-P1

5 The market model governance chain*
Shareholder environment Independence and performance Capital market liquidity Corporate context Institutional context Transparency and accountability OECD Principles Dispersed ownership Sophisticated institutional investment Non- executive majority boards Aligned incentives Active takeover market Active private equity market (incl. IPOs) Shareholder equality High disclosure * Examples can be found in Australia, Canada, U.K. and U.S. Source: McKinsey 010913AHO020MW-P1

6 The control model governance chain*
Shareholder environment Independence and performance Capital market liquidity Corporate context Institutional context Transparency and accountability OECD Principles Concentrated ownership Reliance on family, bank and State finance ‘Insider boards’ Incentives aligned with core shareholders Limited takeover market Under-developed new issue Inadequate minority protection Limited disclosure * Examples can be found in Asia, Latin America and many Continental and South Eastern European countries Source: McKinsey 010913AHO020MW-P1

7 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 010913AHO020MW-P1

8 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 010913AHO020MW-P1

9 Overview Importance of corporate governance in SEE
Barriers to improved governance State attempts to improve governance A pan-regional response? Options for the State 010913AHO020MW-P1

10 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 010913AHO020MW-P1

11 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 010913AHO020MW-P1

12 . . . 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 010913AHO020MW-P1

13 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 companies Percent 36 34 32 30 28 26 24 22 Before changes (1998) After changes (1999) Source: McKinsey analysis, McKinsey Investor Opinion Surveys 1999/2000 010913AHO020MW-P1

14 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 010913AHO020MW-P1

15 Most capital markets – and companies listed – in South East Europe are small…
WIP 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 2,612,230 1,100 * 25 listed on the official market and 478 on the free market ** Estimates Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD 010913AHO020MW-P1

16 …although in relative terms, ASE is quite successful
Selected examples Value of S.E. as a percentage of GDP – end 2000 34 2 5 93 185 <1 * Athens Istanbul Sofia Bucharest Skopje London * Estimates Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD 010913AHO020MW-P1

17 Domestic shareholder’s Foreign shareholder’s
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 010913AHO020MW-P1

18 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 010913AHO020MW-P1

19 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 Istanbul 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 Athens Market capitalization Number of companies Source: FiBV.com; EIU; ASE; BSE; FEAS; EBRD 010913AHO020MW-P1

20 Requirements 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 SEC-regulated exchanges/OECD Principles SEC-regulated exchanges U.S. SEC/U.K. FSA regulations 010913AHO020MW-P1

21 Overview Importance of corporate governance in SEE
Barriers to improved governance State attempts to improve governance A pan-regional response? Options for the State 010913AHO020MW-P1

22 Moving from control model governance chain
Shareholder environment Attract foreign equity capital Reduce State ownership Independence and performance Encourage more independent boards Facilitate stock- related compensation Concentrated ownership Reliance on family, bank and State finance ‘Insider boards’ Incentives aligned with core shareholders Limited takeover market Under-developed new issue Inadequate minority protection Limited disclosure OECD Principles Institutional context Corporate context Capital market liquidity Encourage equity-based financing Remove barriers to takeovers Transparency and accountability Mandate international accounting standards Create and enforce shareholder rights Source: McKinsey 010913AHO020MW-P1

23 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 Alternatives to state share- holdings Liquidity of exchanges 010913AHO020MW-P1

24 For further information contact: Thomas Wels: +30 (1) 3672 777
250401LNZXC483TSMW-P1 For further information contact: Thomas Wels: +30 (1) Mark Watson: McKinsey Investor Opinion Survey 1999/2000 can be downloaded from Also, available on “Corporate reform agenda in the developing world", an article that includes findings from the McKinsey Emerging Market Investor Opinion Survey 010913AHO020MW-P1

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