Download Codes of Corporate Governance

Codes of Corporate
Governance
Hungary’s Experience with a Soft Law Transplant
Éva Ozsvald
Institute of Economics, HAS
Proliferation of codes of good governance
Source: Enrione,A.- Mazza,C.-Zerboni,F. (2006): Institutionalizing Codes of Governance
American Behavioral Scientist, 49; 961
Hungary at the turn of millenium
 golden years of growth and restructuring
 transition to a full-fledged market economy completed
 preparation for the EU accession

legal harmonization – complying with the acquis
communautaire
 weaknesses of institutions

„laws on the book” vs. enforcement and embedded norms
 underdeveloped capital markets



bank-based finance
investors’ protection and trust
majority of companies are closely held – out of scope of the
analysis
The main characteristics of listed companies
(Budapest Stock Exchange)
ownership concentration
Definition
First largest blockholder
Second largest blockholder
Third largest blockholder
Largest two blockholders
Largest three blockholders
All blockholders
Mean
45,6
16,0
7,6
58,8
59,8
64,3
2001 Q4 - 2007 Q4 (% holdings)
SD
21,3
8,8
4,0
21,3
22,6
28,4
Minimum
0,0
0,0
0,0
0,0
0,0
0,0
Median
48,0
20,1
6,4
58,9
56,9
62,5
Maximum
99,8
41,2
15,0
99,5
99,8
99,8
A blockholder is defined as an owner with higher direct ownership than 5 percent
The dominance of foreign institutional investors
2007 Q4
Magyar Telekom, MOL, OTP – the big three
 more than 75% of BSE capitalization
 different ownership structures




Magyar Telekom: one majority owner (Deutsche Telekom
A.G. -60%)
MOL: numerous blockholders
OTP: widely dispersed
what they share:


two-tier board structure
power of insiders,strong managers, friendly boards
 the main corporate governance problem of the Hungarian public
companies: weak protection of the interest of minority
shareholders and the lack of incentives for a higher degree of
transparency and disclosure
Innovations in the 2006 Company Act
 a policy shift towards deregulation, flexibility, less bureaucratic




obstacles
enhanced protection of creditors, shareholders (including
minority shareholders)
distinction was drawn between private and public companies different rules
the possibility of choice between the Anglo-Saxon type of unitary
board system and the two tier board structure
explicite reference to the BSE codes of cg governance


obligation to provide an annual complience report
must be posted on the official website of the company
The main points of our empirical research on codes of
corporate governance (Bedo,Zs.-Ozsvald,E.2008)
 the triggering force matters (Aguilera, R.V. and Cuervo-
Cazurra,A 2004):
endogenous demand vs. exogenous pressure
Hungary was following the directives of the EU Commission
external pressure  transplant of codes of best practice
 modifying the content to suit better country-specific needs:
very little adjustment was made
 the quality of disclosure
case-by-case examination of „comply or explain” answers
most companies do not recognize the value of providing
good quality informaton
 What attributes of companies can be linked to the the quality of
corporate governance statements?
size? debt-to-equity? liquidity? the strength of
blockholders?
Regression analysis:
- large ownership blocks generate more inadequate
answers
- higher liquidity increases the quality of
disclosure
Conclusion
 short experience so far
 codes of best practice in Hungary: a transplant from
abroad without taking into account the local
conditions
 form decoupled from practice
 high formal complience („box-ticking”) –
- opacity remains
- little change in corporate behaviour
 on the positive side:
 adoption of cg codes: a signal of commitment to
internationally promoted principles and values
 educational and awareness-raising function
 future research:
 evolutionary approach to corporate governance
 examining the link between the performance of
companies and their adherence to good governance
practices