Corporate Governance in Bulgaria: Results from the Corporate Governance ROSC

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. Presentation Outline • The Definition of and Business Case for Corporate Governance (CG)The World Bank’s CG ROSC ProgramKey Findings of the CG ROSC for BulgariaPolicy Recommendations

3. Corporate Governance Defined • 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

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

5. 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 • 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 • 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 • CG can make/break reputations by creating confidence &goodwill andbuilding/restoring investor trust Benefits of Good CG at the Company-Level Optimizes Operational and Financial Efficiency Improves Access to Outside Capital Improves Valuation and Lowers the Cost of Capital Builds/Improves the Company’s Reputation The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

6. 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. About the CG ROSC Program • Report on the Observance of Standards and Codes  World Bank & IMFformal 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: • Benchmark local CG regime against OECD Principles of CG • Formulate policy recommendations • Launch country action plan (led by Global CG Forum) • www.worldbank.org/corporategovernance The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

8. Coverage: 71 CG ROSCs for 58 Countries Notes: Assessments in bold are in process. Assessments in italics have not been published. The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

9. Prelude to Findings • 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! The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

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

11. Key Obstacles Key Achievements • 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 • 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 Message: “Law on the Books” Not Practiced The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

12. 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. … 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. 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. 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. … 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. 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. Policy Recommendations & Country Action Plan • 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 • Minor amendments to the legal and regulatory framework • The CG TF to review NCGC  More practical guidance on how to implement CG • Train and build cadre of qualified, experienced, and professional directors The “What & Why” of CG >> WB CG ROSC >> Key Findings >> Policy Recommendations

19. Thank you!