Andrej Galogaža The Zagreb Stock Exchange

1. FIRST SOUTH EAST EUROPE CORPORATE GOVERNANCE ROUNDTABLESHAREHOLDER RIGHTS AND EQUITABLE TREATMENTBucharest, 20-21 September 2001ENFORCMENT OF SHAREHOLDERS RIGHTS Andrej Galogaža The Zagreb Stock Exchange Andrej Galogaža, The Zagreb Stock Exchange

2. LAW • LAW ON THE BOOKS • EXTENT TO WHICH RULES ARE EFFECTIVELY ENFORCED • EFFECTIVENESS OF THE JUDICIARY • RULE OF LAW • THE ABSENCE OF CORRUPTION • LOW RISK OF CONTRACT REPUDIATION • LOW RISK OF GOVERNMENT EXPROPRIATION • LEGALITY – Effectiveness of institutions that enforce the law

3. EXAMPLE FROM CROATIA Croatian Securities Act requires reporting on large shareholdings (i.e. passing thresholds of 10%, 20%, 1/3, 50%, 2/3, 75% of votes must report to issuer and CROSEC). Issuer must publish that information in national newspapers. Largely unobserved but no enforcement.

4. LEGAL TRANSPLANTATION • Many SEE countries made an active decision to copy the formal legal system of another country (voluntary transplantation) • However, practice developed in these countries on basis of such legislation often differs substantially from practice in county of origin

5. EXAMPLE FROM CROATIA (2) Vinculatio - transfer of shares limited by consent by Issuer (usually management board) – copied from German legislation In Croatia is was turned into powerful weapon through which managers exercise control of the company unproportional to their actual stake in it

6. RULE OF LAW Securities Act presently in force imposed deadline for privatisation of Security Depository Agency (at request of WB who provided financing for the establishment of SDA) Deadline expired on January 1st 2001 SDA is still not privatised Draft of new Securities Act imposes mandatory stake of State (min. 51%) One could hardly expect that government or state which itself does not respect it’s own legislation would do much to enforce laws that protest others.

7. COURTS OF LAW • Inefficient and slow • Lack of expertise • Problems with understanding and application of transplanted laws • Corruption

8. ADMINISTRATION • To certain extent same problems as judiciary • May be faster • Lack of credibility due to past experiences • Misuse of discretionary powers • Non-transparency in performing their duties • Lack of control

9. ADMINISTRATION (2) In order to develop confidence of investors and market participants administrative bodies must themselves transform and: • Adopt more transparent procedures in decision making • Publish their rulings • Develop closer ties with industry • Staff must refrain from certain activities or make them public (such as investing) Administrative bodies which aspire to enforce or otherwise promote CG practices must provide example an act themselves in a transparent and responsible manner which includes public oversight and liability of members of such bodies.

10. EXCHANGE • May be powerful tool in development of Corporate Governance • Main obstacle: too few listings • Possible remedy: State should provide for incentives (such as tax benefits) to fully listed companies and therefore encourage end promote listing • Listed companies that attract investment from international institutional investors are further stimulated to expand and refine their CG rules, transparency etc.

11. OTHER ENTITIES High risk of liability must be imposed on certain professions that may influence decisions made by investors • Auditors • Accountants • Lawyers • Bankers • Managers that provide false disclosures

12. Croatian Corporate Governance Council (CCGC) CCGC is established under auspice of Croatian Employers Association. Members of CEA are managers and large shareholders. CG is about protecting minority shareholders from abuse by managers and big shareholders. We may conclude that Managers and large shareholders in Croatia are • very altruistic group of people, or • perhaps want to have close control over application of CG principles

13. INFORMAL INSTITUTIONS “Almost every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of economic backwardness in the world can be explained by the lack of mutual confidence.”* *K. Arrow (1975), "Gifts and Exchanges", Altruism, Morality and Economic Theory, E.S.Phelps, New York, Russell Sage Foundation: 24.

14. Problems arising out of mass privatisation Transitional Economies are characterised by mass privatisation process and in many cases privatisation funds or PIF-s are used as privatisation vehicle. In such cases, investors are even further away from companies they invest than in the case of direct shareholding. Bearing in mind misuse of PIF-s some countries have already experienced, CG rules should be further developed and more stringent apply to such funds.

15. CLASIC STRUCTURE

16. PIF-s 1 SHAREHOLDERS FUND MANAGEMENT COMPANY 2 PIF 3 Companies A B C D

17. WHY SHOULD GOVERNMENT HAVE INTEREST IN PROMOTING GOOD CG? Government should be interested in maintaining healthy economy Imposing god CG standards transfers incentives to monitor and improve performance of individual companies to shareholders and stakeholders Recent empirical research reports on: • “...striking relationship between corporate governance and stock returns” • “...weaker shareholder rights are associated with lower profits, lower sales growth, higher capital expenditures and higher amount of corporate acquisitions.”

18. IMPORTANT CASES OF ENFORCEMENT OF MINORITY SHAREHOLDERS RIGHTS IN CROATIA (1)

19. IMPORTANT CASES OF ENFORCEMENT OF MINORITY SHAREHOLDERS RIGHTS IN CROATIA (2)

20. As you have noticed, last two slides were unfortunately empty.I sincerely hope that we shall be able to fill them for next SEE CG Roundtable.Thank you very much for your patience.