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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.

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Codes of Corporate Governance

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  1. Codes of Corporate Governance Hungary’s Experience with a Soft Law Transplant Éva Ozsvald Institute of Economics, HAS

  2. Proliferation of codes of good governance Source: Enrione,A.- Mazza,C.-Zerboni,F. (2006): Institutionalizing Codes of Governance American Behavioral Scientist, 49; 961

  3. 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

  4. The main characteristics of listed companies (Budapest Stock Exchange) ownership concentration2001 Q4 - 2007 Q4 (% holdings) A blockholder is defined as an owner with higher direct ownership than 5 percent

  5. The dominance of foreign institutional investors 2007 Q4

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

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