In search of the good corporation

While investors are supposed to be rational, swings of popular mood can have a powerful grip on the market. Some, when they lead to bubbles, can prove disastrous. The recent surge of interest in corporate governance, sparked by a spate of scandals in the world's most developed economies, is more benign. But how relevant is it to this country? The concept of 'creative accounting' has gained some popularity in the country, following the assertion by Lew Rywin, the now infamous film producer, that it would be easy to conceal any transfers between Agora and his firm, Heritage Films, connected to his demand for a bribe. His statement, which was taped by Adam Michnik, prompted a member of the parliamentary investigative commission into the affair to hilariously ask Piotr Niemczycki, vice-president of Agora, "How many creative accountants do you know?" But it has been the world of politics, not corporations, that these scandals have cast light on. There has been no Polish Enron, some people say. Krzysztof A. Lis, the president of the Polish Directors Institute (PID), the organizer of last weekend's conference on corporate governance, begs to differ. "The scale is obviously different, but 4Media or Universal can be seen as equivalents to corporate scandals in more developed countries," he says in reference to two formerly listed companies that collapsed after evidence that they had cooked their books came to light. He agrees, however, that the impact of these scandals on investors' thinking has been somewhat milder than might have been expected. Lis was among the initiators of the Corporate Governance Forum in 1998 and participated in the setting up of a "self-appointed committee of wise men" to develop a code of good practice that was adopted by the board of the Warsaw Stock Exchange (WSE) in 2002. The 20 rules the wise men have come up with "do not look as nice as the documents adopted in some other countries in the region," Lis says. He is, however, keen to stress that the code was developed locally and is, therefore, more relevant to the country's conditions. T he Polish code is heavy on regulations regarding general shareholders' meetings, he says, reflecting the situation in the 1990s, when pressure was applied on shareholders to vote in the way that suited the dominant investor, frequently a foreign company, and this occasionally took fairly exotic forms. Lights would suddenly be switched off ahead of a crucial vote, shareholders would be locked up in a room for hours without access to sanitary facilities or two parallel meetings would be called and elect alternative boards, leading to a paralysis of the company. "These things were done by serious people from serious companies for very serious money," Lis says. That is why, he adds, the issue was given particular attention in this country's code. "Funny stuff still goes on occasionally, but great progress has been made," says Jarosław Dominiak, the president of the Individual Investors Association (SII). His association has, indeed, scored some important victories in "proxy fights" against overly assertive management boards. Last year, Mostostal Płock, a listed construction company, saw the election of a minority shareholders' candidate to the supervisory board. Dominiak hopes this could prove to be a turning point, adding that, "just a couple of years ago, the chief executive was outraged that shareholders dared to be so inquisitive." Now, he says, the management "is prepared to listen to us carefully." While progress has clearly been made, there is no cause for celebration just yet, corporate governance activists in the country say. While there is a number of companies that have developed excellent investor relations, the further from the limelight, or the attention of prestigious financial institutions, the less regard there is for shareholders' rights. A common problem is the lack of transparency with regard to ownership structure. Cross-shareholding is common and foreign investors frequently use 'the oldest tricks in the book' to conceal the extent of their involvement. The price of some stock might indeed suggest that corporate governance issues do not matter. When Szeptel, a troubled fixed-line telecom firm in the eastern part of the country, released a statement that neither denied nor confirmed rumors of its acquisition bid for a much larger rival, Telefonia Dialog, investors and analysts did not conceal their dismay at the company's failure to communicate its strategy effectively. "I don't even cover that company anymore," says Michał Marczak, a telecoms analyst at DI BRE Bank brokerage. "It's just too unpredictable. You could not call it a serious proposition for investors." His words find confirmation in the opinions of investors, one of whom described the statement as "adding insult to injury." Towards the end of last year, the Internal Security Agency (ABW) arrested two of the company's former executives in connection with charges that the zł.14.5 million raised from a bond issue in 2002 was spent in a way that bore no relation to the aims of the issue as set out in the prospectus. Allegations have also been made that the funds were used in a way that directly reduced shareholder value. "The previous management's actions constituted an outright breach of the law," says Robert Niczewski, the company's spokesman. "The current board has taken successful steps to rebuild the company's image." He describes Szeptel's situation a year ago as "dramatic," as it then stood on the brink of bankruptcy, while its investor relations were "a shambles." He goes on to say that a turnaround was affected by the current management. Niczewski's optimism may not be shared by all investors, but the recovery of the share price, which shot up from circa zł.2.5 in early 2003 to zł.3.98 Friday, suggests that poor corporate governance, to say nothing of outright fraud, is perhaps irrelevant in this country, a stock market investor observes sarcastically. He adds that, despite a warning about the past improprieties in the new prospectus for a new bond issue earlier this year, investors snapped up Szeptel's debt in no time. "You can do these things and not get punished by the market," he says. The example of Szeptel may at least suggest that the authorities, setting an example for future sinners, might punish the perpetrators of outright fraud. Yet considering the state of the judicial system, whose inability to resolve cases quickly is one of the most common complaints in the country, this, too, may prove a vain hope. Some investors are even skeptical about the relevance of high corporate governance standards when the courts are so inefficient. What's the point of spending time and money on corporate governance when your competitors can sit comfortably even as they cheat investors, secure in the knowledge that fraud often goes unpunished? Such discontent is understandable, says PID's Krzysztof A. Lis, but the picture is not as bleak as it may seem. Michał Marczak agrees, pointing to examples of companies that are rewarded by the market for transparency and the weight it affords to good corporate governance. "I have no doubt that, had it not been for the respect the management commands, Agora's stock price would have been a lot lower now," Marczak says, adding that the company has always been at pains to make its strategy clear to investors. Agora was among the companies that provided the most detailed response to the set of corporate governance rules adopted by the WSE last year and, although it declined to comply on several points, Lis compliments the company. The stock exchange's board adopted a 'comply or explain' approach to the code of good practice. "The beauty of this approach is that a good 'explain' is better than a poor 'comply,'" he says. A thoughtful response to the code is far more reassuring to investors than merely paying lip service to the rules, which can then be ignored in practice, as scandals around the globe have shown, Lis adds. Some of the country's largest companies have, however, rejected the code wholesale and corporate governance activists detect a pattern here. The involvement of Jan Kulczyk, the richest Pole and a major shareholder in PKN Orlen, the country's largest corporation, is a powerful indicator that companies can reject the WSE's code of good practice. Kulczyk, who has repeatedly turned down requests for interviews, is thought to consider such rules superfluous and to be particularly opposed to the requirement that a majority of supervisory board members should be independent. While America's Sarbanes & Oxley Act makes such a requirement binding, the WSE has merely suggested this would be a desirable state of affairs. Indeed, many people ask where the board members at companies such as Szeptel or 4Media were exactly when fraud was going on. The recent scandal at Italian dairy producer Parmalat demonstrates that a strong strategic investor, whose presence makes for checks on the management's sweeping powers, does not immunize a company against the dangers of fraud, Lis says. At the Parma-based company, it was the founder and owner of the firm, Calisto Tanzi, who orchestrated fraud on a monumental scale. Such a situation proves that independent directors are a crucial element of corporate governance at any company, including those with a single majority shareholder. The Warsaw Stock Exchange plans to make an independent majority a binding requirement by 2009. Even then, some say, it will be crucial to ensure that these independents know enough about the business and ask the right questions. There is no way to put an end to all fraud and that even goes for countries with more efficient court systems than here. But that is no reason to stop trying, and the WSE has not been doing a bad job of it, say market insiders.