1. Corporate Governance in Bulgaria: Results from the Corporate Governance ROSC A presentation by Sebastian Molineus World Bank Corporate Governance Group In Sofia on December 12, 2008

2. 2 out of 19 Presentation Outline 1.The Definition of and Business Case for Corporate Governance (CG) The World Bank’s CG ROSC Program Key Findings of the CG ROSC for Bulgaria Policy Recommendations

3. 3 out of 19  Corporate governance is the system by which companies are directed and controlled.  Corporate governance involves a set of relationships between: - A company’s management - Board of directors - its shareholders and - Other stakeholders  Corporate governance provides the structure through which company objectives are set, attained and monitored. The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations Corporate Governance Defined

4. 4 out of 19 Good board practices and Control Structures Managing Stakeholder Relations Strong disclosure & transparency regime Protection of (minority) shareholder rights The ‘Look & Feel’ of Corporate Governance The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations Robust legal & regulatory environment Strong enforcement regime

5. 5 out of 19 Improves Access to Outside Capital Improves Valuation and Lowers the Cost of Capital Builds/Improves the Company’s Reputation Optimizes Operational and Financial Efficiency Streamlines business processes, leading to better operating performance & lower capital expenditures  Gompers, Ishii and Metrick, Corporate Governance and Equity Prices, August 2001 Improves the company’s ROCE, with firms in the top cg quartile avg. 33% & in bottom quartile 15%  Credit Lyonnais SA, 2001 Better share price performance, higher profitability, larger dividend payouts & lower risk levels than peers  Lawrence Brown, Georgia State University, Sept. 2003 Over 10 years, well-governed companies across a wide range of sectors have seen superior valuation multiples of more than 8% over their badly governed peers.  Metrick, Ishi and Gompers, Corporate Governance and Equity Prices, August 2001 One standard-deviation improvement in governance brings an improvement in valuation multiples that ranges from 18% for companies in major OECD markets to 33% in emerging markets.  Clapper and Love, World Bank, 2002 Global Institutional Investors managing more than 1 trillion of assets state that they will pay a premium for well governed companies. Premiums avg. 30% in Eastern Europe & Africa and 22% in Asia and Latin America  McKinsey Global Investor Opinion Survey on Corporate Governance, 2002 CG can make/break reputations by creating confidence &goodwill and building/restoring investor trust Benefits of Good CG at the Company-Level The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

6. 6 out of 19 Benefits of Good CG at the Country-Level  For regulators and supervisors: - A first line of prudential defense - Increased financial stability & reduction to crisis  For markets: - Higher market capitalization and liquidity - Increase in investor confidence and trust - Ability to attract, allocate & monitor investment  For economies: - More “champion” companies that can compete and grow internationally - Higher economic growth The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

7. 7 out of 19  R eport on the O bservance of S tandards and C odes  World Bank & IMF formal assessors of ROSCs  CG identified by G-8 Financial Stability Forum as one of 12 standards and codes  Purpose: To help improve CG for client countries  Voluntary. Three-step process: 1.Benchmark local CG regime against OECD Principles of CG 2.Formulate policy recommendations 3.Launch country action plan (led by Global CG Forum)  www.worldbank.org/corporategovernance About the CG ROSC Program The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

8. 8 out of 19 Notes: Assessments in bold are in process. Assessments in italics have not been published. 20012002 - 2004 2005 -20062007-to date BrazilGeorgiaMauritiusEgypt 2ArmeniaUruguayZambia CroatiaCzech 2Brazil 2SloveniaPoland 2BosniaArgentina Czech Rep.LithuaniaHungaryRussiaGhanaSenegalCroatia 2 Egypt Bulgaria UkraineIndia 2PakistanUkraine 2Malawi IndiaLatviaKoreaPeruThailandVietnamBangladesh MalaysiaMoroccoHong KongRomania 2 Malaysia 2Philippines 2 Kenya PhilippinesRomaniaChileIndonesiaNepalBhutan Bulgaria 2 PolandSouth AfricaMexicoJordanBrazil 3 UK TurkeySlovakiaMoldovaMacedonia Saudi Arabia ZimbabweColombiaPanamaAzerbaijan Mongolia Coverage: 71 CG ROSCs for 58 Countries The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

9. 9 out of 19  Bulgaria CG ROSC carried out from April to June 2008  Focus: Publicly listed companies  Also covers large LLCs, banks & SOEs  In close cooperation with the IFC Global CG Forum and Accounting & Auditing ROSC teams  Thank you! Prelude to Findings The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

10. 10 out of 19 The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations Great Improvements since 2002 CG ROSC

11. 11 out of 19 Key Message: “Law on the Books” Not Practiced  A few gaps remain in legal and regulatory framework. For example: - Company Law - Code - Enforcement framework  Majority owners dominate board & CG processes  Actual practices lag behind legal reforms as per: - Board practices - Non-financial disclosure - Control frameworks Key Obstacles The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations  Substantial legal, regulatory & institutional reforms, in particular per: - Board practices - Shareholder rights - Disclosure  Launch of National CG Code (NCGC) and National CG Task Force in late 2007  Forty companies have agreed to implement the NCGC Key Achievements

12. 12 out of 19 While Basic Shareholder Rights are in Place …  Shareholder are able to participate and vote in the GSM - Basic information rights in place - Ability to vote for directors, executive compensation and dividends - Preferred SHs, creditors & employees invited to participate w/o vote  Take-over provisions in-line with good CG - Tender offers, squeeze-out and sell-out rights  Special 2/3 and ¾ voting requirements on key issues  Shareholders able to launch direct and derivate suits - Of note: Concept of shadow directors introduced The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

13. 13 out of 19 … Some General Concerns Remain  Cumulative voting not endorsed or practiced  Risk of politicizing non-executive remuneration in GSM  Companies do not generally have dividend policies and declared dividends not fully paid to minority shareholders  No recommendations for institutional investors to participate in governance process  Whistle-blowing procedures should be required or recommended The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

14. 14 out of 19 Findings on Disclosure and Transparency  Disclosure of financial information has improved - See ensuing Accounting & Auditing ROSC  The disclosure of non-financial information remains weak: - Company objectives - Ownership, in particular control structures and beneficial SHs - Risk, audit and control frameworks - CG, despite legal requirement  Most companies do not have CG sections on website or AR The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

15. 15 out of 19 Need to Build Stronger Control Structures …  Risk management and internal controls - Little practical guidance offered, hence underdeveloped - Compliance function thought to be underdeveloped in banks  Internal audit function - Should report to board’s independent audit cttee.  The external audit process. Independence an issue: - Provision of non-audit work - Audit partners stay with clients beyond rotation period - Auditor review process by ICPAB should be strengthened  Best practice calls for independent audit committee The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

16. 16 out of 19 … and Professional and Independent Boards  Role of (supervisory) board not properly understood - Duties of loyalty and care mentioned, but not defined - Little to no succession planning - CG framework built by IR; no ownership by board  Conflicts of interests on board remain an issue - Legal framework is strong, practice is underdeveloped - NCGC recommends ethics code, few have followed suit  Board effectiveness thought to be an issue - Few boards have committees - Board evaluations virtually non-existent  Independent directors not thought to play assigned role  Outside members on management board The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

17. 17 out of 19 The Legal, Institutional & Enforcement Regime  Legal and regulatory framework much improved - Key amendments to CA, LPOS - Launch of NCGC  Institutional framework robust - Regulatory authorities enjoy positive reputation - Clear enforcement framework - Division of responsibilities clearly articulated - Enforcement takes place in practice - Some difficulty in implementing EU directives in timely manner  Court system remains underdeveloped The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

18. 18 out of 19 Policy Recommendations & Country Action Plan 1. FSC to continue and enforce laws and ‘comply or explain’ disclosure for NCGC  Focus on: (i) largest 10 issuers; (ii) growth companies on the Unofficial Market; and (iii) holding companies 2. Minor amendments to the legal and regulatory framework 3. The CG TF to review NCGC  More practical guidance on how to implement CG 4. Train and build cadre of qualified, experienced, and professional directors The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

19. 19 out of 19 Thank you!