Letting in light
Corporate governance in Poland is "a complete disaster," according to at least one auditor. But institutional investors are increasingly fighting to protect minority stakes.Dariusz Adamiuk, vice president of PZU's pension fund and the head of its investment arm, is on the warpath. He is battling against France-based Michelin over the management of the tire maker Stomil Olsztyn, in which his fund has a 5% stake - small compared to the French tire manufacturer's strategic 66%, but enough to give it a voice.
"We're giving Michelin an alternative - either you run your company in a transparent and honest fashion and no minority shareholder is cheated or, if that doesn't suit you, you can buy us out," Adamiuk said.
In the wake of U.S. energy giant Enron's collapse, shareholders around the world are now looking more carefully over management's shoulder. In Poland, nascent but growing pension funds are playing an increasingly important role in the companies where they've invested millions of złotys. And they're beginning to ask difficult question that often make majority shareholders uneasy.
As a result, boardrooms are increasingly battlegrounds in the war of corporate governance. In Stomil Olsztyn's case, minority shareholders accuse Michelin of skimming money from the Polish tire producer. Michelin last week retaliated, announcing sanctions against the Polish company until its dispute with minority shareholders has been resolved. Developing role for funds
Pension funds are typically passive investors and pull out the moment they lose trust in the company they've invested in, Adamiuk said. But in Poland limited investment opportunities - they are legally restricted from investing more than 5% of assets abroad - hamper the funds' moves.
"And even if you do exit, there is little stock to invest in, because the Polish equity market is too small," he said. "Therefore, pension funds have no option but to take a more active role in the management of companies in which they hold stakes."
Powszechne Towarzystwo Emerytalne PZU, the full name for the pension fund's manager, took a much more active role in the tire maker. Along with other financial shareholders it managed to vote a representative onto the supervisory board during an extraordinary shareholders meeting earlier this month. Raimondo Eggink, a former executive with ABN Amro Asset Management, was empowered to personally supervise the management's actions and demand compensation from the French parent company for the allegedly improperly transferred profits.
"Michelin is bleeding Stomil Olsztyn dry," said Andrzej Mikosz, a lawyer at Weil, Gotshal & Manges, who represents the minority shareholders in the dispute.
But the Michelin-appointed president of Stomil Olsztyn, Benoit de la BretŻche, said there is no question of transfer pricing.
"Michelin is providing service, know-how and access to the market and for this Michelin is getting paid," he said.
Mikosz downplayed the role of Stomil Olsztyn's managers and said the company is really managed centrally from Michelin's head office in Clermont Ferrand, France.
"The people who manage the plant in Olsztyn have been sent there by Clermont Ferrand, so their accountability to Stomil Olsztyn is nil," Mikosz said.Win some, lose some
The conflict in Stomil Olsztyn has its roots in the problematic issue of cohabitation between a strategic investor and financial shareholders. Polish pension funds in particular - with rapidly growing cash resources already estimated at zł. 22 billion ($5.2 billion) - are now demanding more say in the company's affairs.
"Nobody can say that having 66% of votes gives them 100% power, even though that's how Michelin thinks," Mikosz said.
The Olsztyn-based tire maker has been the most extreme recent example of a conflict between a strategic investor and financial shareholders among Poland's publicly listed companies.
But the Warsaw Stock Exchange in the past year has experienced a number of other attempts by minority shareholders to either introduce their representatives on supervisory boards or to squeeze a good buyout price from majority owners in return for their exit from the company.
Some attempts failed, like the case of ING Bank Śląski, where the minority shareholders could not get a seat on the bank's supervisory board. But financial institutions managed to appoint four of five supervisory board members at the confectionery maker Jutrzenka last June. This week, general shareholders meetings will be held at two construction firms, Mostostal Export and Mostostal Gdańsk, at which financial investors are hoping to vote their representatives onto the supervisory boards.
"Pension funds will play an increasing role in the management of companies," said Paweł Kubiak, an analyst at Dom Maklerski BZ WBK.
The pension fund's involvement in company management is, according to Kubiak, positive for firms and shareholders because concentrating power in the hands of just one entity creates too much temptation to mishandle a company.
"They are guards of the management's actions," he said. Checking out
A wide coalition of financial investors assumed the role of guard dog in September against hotel group Orbis, which is 25% owned by its France-based strategic investor Accor. Accor committed itself to merging its Polish operation, Accor Polska, with Orbis but smaller shareholders worried that the terms would benefit Accor Polska at the expense of Orbis.
"We saw potential for a conflict of interests between financial shareholders and Accor," said Grzegorz Sawicki, director of investment at Poland's largest insurer Powszechny Zakład Ubezpieczeń (PZU) and one of Orbis' shareholders. "If the terms of merger are better for Accor Polska, then Accor loses on its 20% in Orbis but gains on its nearly 100% in Accor Polska."
The merger is yet to be completed, but since the September general shareholders meeting, the financial investors have had their representative on the supervisory board, whose key task is to make sure the operation is conducted fairly.
Supervision by financial shareholders becomes particularly important when the strategic investor is a foreign company and may be running its own global policy - a policy not always identical with the Polish firm's interest, Kubiak said.
But while minority shareholders say that they contribute to increasing the company's value, strategic investors complain that minority owners often do more harm than good.
"During the time I spend with minority shareholders, which is about 80% of my time, I have no time to deal with company affairs," Stomil Olsztyn's de la BretŻche said. "And the conflict is creating a very bad image for the company. Sooner or later, it will have an effect on our sales."Buying a stake
Financial institutions buy stakes in listed companies with the intention of selling them at a better price later. This leads them to start conflicts to get good buyout prices from the strategic investor, critics said.
"If you say the value of shares is zł. 40 and you're not able to explain how you calculated that, then I don't call it a negotiation, but rather blackmail," de la BretŻche said, referring to minority shareholders' offer for their shares in Stomil Olsztyn. The company closed at zł. 29.20 last Thursday.
Harassed managers add that financial investors are competent in financial affairs but not in management; they should leave the running of a company to those who have resources and experience in the particular industry the company operates in.
But Sawicki said that the problem can be solved by finding a representative that has both knowledge about finance and experience in the particular industry, or by appointing one representative that is a finance specialist and one that comes from the industry.
"In Orbis, one representative is a specialist in finance and two persons came from the Polish Chamber of Tourism," Sawicki said.The law
Some disputes among shareholders drag on for months or even years through Poland's courts. The January 2001 commercial companies' code, designed to clarify shareholder relations within a company, hasn't resulted in a smaller number of suits.
"The problem is not in the legislation but in its execution," Sawicki said. "The law provides that, for instance, investors can demand an extraordinary shareholders meeting and the management does call a meeting, but six months later."
Poland's underfinanced and understaffed courts are another weak point of the system, according to Mikosz. "Polish law protects the minority shareholders' interests sufficiently, so the problem is not in the lack of legal tools but in the inefficiency of the judicial system," said Mikosz, who asked the court to call Stomil Olsztyn's general shareholders meeting last March but had to wait until December for a decision. "If an investor can't have his rights enforced in a certain time then they're ready to even accept a loss and they give in."
The fight over Stomil Olsztyn is a case in point, he noted."I often have an impression that Michelin's legal advisers, who are absolute experts in their profession, deliberately play out the inefficiency of the Polish system of justice," Mikosz said.
Before an issue is taken to court, shareholders often hire auditing firms to establish whether the other party has infringed on the company's interests. The reports, however, are often contradictory and reflect the position of the party that hired the auditor. For example, Stomil Olsztyn's management employed Andersen to audit annual reports for years but the minority shareholders hired the auditor BDO to establish whether Michelin applied inappropriate prices in transactions with its subsidiary.
When BDO confirmed that profit skimming had taken place, Stomil Olsztyn hired KPMG and PricewaterhouseCoopers (PwC), which in turn stated that BDO's report was based on opinions rather than facts.
Investors and analysts said the auditors' reports should not be relied on entirely but are necessary and useful.
"Nobody has invented a better tool yet," Adamiuk said.Think globally, act locally
As the Enron scandal reveals ever-deeper layers of irregularities, the role of auditing firms is increasingly questioned - Andersen's U.S. parent was the energy firm's auditor and failed to report the pending collapse.
Audits are, according to Kubiak, indispensable but after what happened in the United States they should be watched more carefully.
"When you read those reports, it's critical that you look at what kind of interests bind the auditor with the strategic investor globally," Sawicki said.
The Big Five auditing companies, PwC, KPMG, Ernst & Young, Andersen and Deloitte & Touche, have come under heavy fire in the past few weeks, undermining the trust they once enjoyed, Kubiak said. "The Big Five have a range of allegiances, not only of a financial but a political nature," Kubiak said.
Tony Reczek, president of PwC's auditing arm in Poland, said there is, particularly in Poland, a big misunderstanding about what an auditor's report should contain. For instance, the auditor has in most cases no responsibility to comment on transfer pricing practices, he said.
The problem lies with management and supervisory boards that pay too little attention to the reports, he said."A disaster"
"Corporate governance in Poland is a complete disaster," Reczek said. "Many Polish companies are run to the benefit of a small minority of shareholders that may hold just a few percent of shares but happen to sit on supervisory boards or management boards."
Management boards exert pressure on auditors not to report on controversial moves, forcing the firms to eventually give up clients, Reczek said. But while such moves by clients typically initiate inquiries by foreign investors and analysts asking for explanations, Polish firms show little interest.
"In cases where PwC was replaced as auditor during the past 12 years that I've worked in Poland, no Polish investor or analyst asked why we were replaced," Reczek said.
This may change. Poland's financial institutions are pressing for more transparency and accountability of the management and they are using auditor's reports as weapons in the struggle.
"We find both reports, by Andersen and by BDO, very interesting," Mikosz said. "They both show that transferring benefits from Stomil Olsztyn to other entities in Michelin's group did take place."
"We're giving Michelin an alternative - either you run your company in a transparent and honest fashion and no minority shareholder is cheated or, if that doesn't suit you, you can buy us out," Adamiuk said.
In the wake of U.S. energy giant Enron's collapse, shareholders around the world are now looking more carefully over management's shoulder. In Poland, nascent but growing pension funds are playing an increasingly important role in the companies where they've invested millions of złotys. And they're beginning to ask difficult question that often make majority shareholders uneasy.
As a result, boardrooms are increasingly battlegrounds in the war of corporate governance. In Stomil Olsztyn's case, minority shareholders accuse Michelin of skimming money from the Polish tire producer. Michelin last week retaliated, announcing sanctions against the Polish company until its dispute with minority shareholders has been resolved. Developing role for funds
Pension funds are typically passive investors and pull out the moment they lose trust in the company they've invested in, Adamiuk said. But in Poland limited investment opportunities - they are legally restricted from investing more than 5% of assets abroad - hamper the funds' moves.
"And even if you do exit, there is little stock to invest in, because the Polish equity market is too small," he said. "Therefore, pension funds have no option but to take a more active role in the management of companies in which they hold stakes."
Powszechne Towarzystwo Emerytalne PZU, the full name for the pension fund's manager, took a much more active role in the tire maker. Along with other financial shareholders it managed to vote a representative onto the supervisory board during an extraordinary shareholders meeting earlier this month. Raimondo Eggink, a former executive with ABN Amro Asset Management, was empowered to personally supervise the management's actions and demand compensation from the French parent company for the allegedly improperly transferred profits.
"Michelin is bleeding Stomil Olsztyn dry," said Andrzej Mikosz, a lawyer at Weil, Gotshal & Manges, who represents the minority shareholders in the dispute.
But the Michelin-appointed president of Stomil Olsztyn, Benoit de la BretŻche, said there is no question of transfer pricing.
"Michelin is providing service, know-how and access to the market and for this Michelin is getting paid," he said.
Mikosz downplayed the role of Stomil Olsztyn's managers and said the company is really managed centrally from Michelin's head office in Clermont Ferrand, France.
"The people who manage the plant in Olsztyn have been sent there by Clermont Ferrand, so their accountability to Stomil Olsztyn is nil," Mikosz said.Win some, lose some
The conflict in Stomil Olsztyn has its roots in the problematic issue of cohabitation between a strategic investor and financial shareholders. Polish pension funds in particular - with rapidly growing cash resources already estimated at zł. 22 billion ($5.2 billion) - are now demanding more say in the company's affairs.
"Nobody can say that having 66% of votes gives them 100% power, even though that's how Michelin thinks," Mikosz said.
The Olsztyn-based tire maker has been the most extreme recent example of a conflict between a strategic investor and financial shareholders among Poland's publicly listed companies.
But the Warsaw Stock Exchange in the past year has experienced a number of other attempts by minority shareholders to either introduce their representatives on supervisory boards or to squeeze a good buyout price from majority owners in return for their exit from the company.
Some attempts failed, like the case of ING Bank Śląski, where the minority shareholders could not get a seat on the bank's supervisory board. But financial institutions managed to appoint four of five supervisory board members at the confectionery maker Jutrzenka last June. This week, general shareholders meetings will be held at two construction firms, Mostostal Export and Mostostal Gdańsk, at which financial investors are hoping to vote their representatives onto the supervisory boards.
"Pension funds will play an increasing role in the management of companies," said Paweł Kubiak, an analyst at Dom Maklerski BZ WBK.
The pension fund's involvement in company management is, according to Kubiak, positive for firms and shareholders because concentrating power in the hands of just one entity creates too much temptation to mishandle a company.
"They are guards of the management's actions," he said. Checking out
A wide coalition of financial investors assumed the role of guard dog in September against hotel group Orbis, which is 25% owned by its France-based strategic investor Accor. Accor committed itself to merging its Polish operation, Accor Polska, with Orbis but smaller shareholders worried that the terms would benefit Accor Polska at the expense of Orbis.
"We saw potential for a conflict of interests between financial shareholders and Accor," said Grzegorz Sawicki, director of investment at Poland's largest insurer Powszechny Zakład Ubezpieczeń (PZU) and one of Orbis' shareholders. "If the terms of merger are better for Accor Polska, then Accor loses on its 20% in Orbis but gains on its nearly 100% in Accor Polska."
The merger is yet to be completed, but since the September general shareholders meeting, the financial investors have had their representative on the supervisory board, whose key task is to make sure the operation is conducted fairly.
Supervision by financial shareholders becomes particularly important when the strategic investor is a foreign company and may be running its own global policy - a policy not always identical with the Polish firm's interest, Kubiak said.
But while minority shareholders say that they contribute to increasing the company's value, strategic investors complain that minority owners often do more harm than good.
"During the time I spend with minority shareholders, which is about 80% of my time, I have no time to deal with company affairs," Stomil Olsztyn's de la BretŻche said. "And the conflict is creating a very bad image for the company. Sooner or later, it will have an effect on our sales."Buying a stake
Financial institutions buy stakes in listed companies with the intention of selling them at a better price later. This leads them to start conflicts to get good buyout prices from the strategic investor, critics said.
"If you say the value of shares is zł. 40 and you're not able to explain how you calculated that, then I don't call it a negotiation, but rather blackmail," de la BretŻche said, referring to minority shareholders' offer for their shares in Stomil Olsztyn. The company closed at zł. 29.20 last Thursday.
Harassed managers add that financial investors are competent in financial affairs but not in management; they should leave the running of a company to those who have resources and experience in the particular industry the company operates in.
But Sawicki said that the problem can be solved by finding a representative that has both knowledge about finance and experience in the particular industry, or by appointing one representative that is a finance specialist and one that comes from the industry.
"In Orbis, one representative is a specialist in finance and two persons came from the Polish Chamber of Tourism," Sawicki said.The law
Some disputes among shareholders drag on for months or even years through Poland's courts. The January 2001 commercial companies' code, designed to clarify shareholder relations within a company, hasn't resulted in a smaller number of suits.
"The problem is not in the legislation but in its execution," Sawicki said. "The law provides that, for instance, investors can demand an extraordinary shareholders meeting and the management does call a meeting, but six months later."
Poland's underfinanced and understaffed courts are another weak point of the system, according to Mikosz. "Polish law protects the minority shareholders' interests sufficiently, so the problem is not in the lack of legal tools but in the inefficiency of the judicial system," said Mikosz, who asked the court to call Stomil Olsztyn's general shareholders meeting last March but had to wait until December for a decision. "If an investor can't have his rights enforced in a certain time then they're ready to even accept a loss and they give in."
The fight over Stomil Olsztyn is a case in point, he noted."I often have an impression that Michelin's legal advisers, who are absolute experts in their profession, deliberately play out the inefficiency of the Polish system of justice," Mikosz said.
Before an issue is taken to court, shareholders often hire auditing firms to establish whether the other party has infringed on the company's interests. The reports, however, are often contradictory and reflect the position of the party that hired the auditor. For example, Stomil Olsztyn's management employed Andersen to audit annual reports for years but the minority shareholders hired the auditor BDO to establish whether Michelin applied inappropriate prices in transactions with its subsidiary.
When BDO confirmed that profit skimming had taken place, Stomil Olsztyn hired KPMG and PricewaterhouseCoopers (PwC), which in turn stated that BDO's report was based on opinions rather than facts.
Investors and analysts said the auditors' reports should not be relied on entirely but are necessary and useful.
"Nobody has invented a better tool yet," Adamiuk said.Think globally, act locally
As the Enron scandal reveals ever-deeper layers of irregularities, the role of auditing firms is increasingly questioned - Andersen's U.S. parent was the energy firm's auditor and failed to report the pending collapse.
Audits are, according to Kubiak, indispensable but after what happened in the United States they should be watched more carefully.
"When you read those reports, it's critical that you look at what kind of interests bind the auditor with the strategic investor globally," Sawicki said.
The Big Five auditing companies, PwC, KPMG, Ernst & Young, Andersen and Deloitte & Touche, have come under heavy fire in the past few weeks, undermining the trust they once enjoyed, Kubiak said. "The Big Five have a range of allegiances, not only of a financial but a political nature," Kubiak said.
Tony Reczek, president of PwC's auditing arm in Poland, said there is, particularly in Poland, a big misunderstanding about what an auditor's report should contain. For instance, the auditor has in most cases no responsibility to comment on transfer pricing practices, he said.
The problem lies with management and supervisory boards that pay too little attention to the reports, he said."A disaster"
"Corporate governance in Poland is a complete disaster," Reczek said. "Many Polish companies are run to the benefit of a small minority of shareholders that may hold just a few percent of shares but happen to sit on supervisory boards or management boards."
Management boards exert pressure on auditors not to report on controversial moves, forcing the firms to eventually give up clients, Reczek said. But while such moves by clients typically initiate inquiries by foreign investors and analysts asking for explanations, Polish firms show little interest.
"In cases where PwC was replaced as auditor during the past 12 years that I've worked in Poland, no Polish investor or analyst asked why we were replaced," Reczek said.
This may change. Poland's financial institutions are pressing for more transparency and accountability of the management and they are using auditor's reports as weapons in the struggle.
"We find both reports, by Andersen and by BDO, very interesting," Mikosz said. "They both show that transferring benefits from Stomil Olsztyn to other entities in Michelin's group did take place."
