New markets, new laws

Timothy Sifert interviews Jacek Socha, chairman of Poland's Securities and Exchange Commission

For Jacek Socha, chairman of the Polish Securities and Exchange Commission (KPWG), a man who directly and indirectly helped craft the country's burgeoning capital markets in the early 1990s, membership in the European Union - and its related benefits - embodies an important watershed for the Warsaw Stock Exchange.

Over the past year, the chairman, along with local capital markets colleagues, has been drafting amendments to the country's securities law that will bring domestic regulations in line with new and evolving EU financing laws, and also - if adopted unchanged - vest KPWG with more policing power, something it's had too little of as the country's securities industry watchdog.

With the positive referendum in the bag, and the EU hardening some of its own laws as part of its Financial Services Action Plan (adopted three years ago), Socha figures it's high time to finally trigger necessary changes to the country's laws on the public trading of securities and on investment funds.

"We started over a year ago on the laws," Socha pointed out. "But we consciously postponed it because we knew the EU had to make some new legislative changes."

Those days are over, he assures: the EU is developing its securities laws and that's a green light for KPWG.

"I would like to propose to the cabinet and to the ministers and to the parliament (that) this new securities law be in effect after we become part of the EU. It means we will be able to fulfill all (EU) requirements."

That alacrity to make changes is also intensified by what Socha believes will be a renaissance of the Warsaw Stock Exchange around 2005 - a prophecy he bases on slow but sure growth in the country's gross domestic product in the past few months, a willingness in the Treasury Ministry to sell PKO and PZU on the exchange and tighter security and corporate governance on the part of listed companies.

He believes that in the future the WSE will identify more closely with the WSE of 1996-98, during which period it ushered in just under 200 companies to public trading.

"We are joining the EU as a Polish capital market which is well-organized as an emerging market," he says. "The capital market in Poland will still be an 'emerging' one, which means a very promising market. We as a country have to catch up to the standards of business and level of (wealth) of the EU. In doing this, the market will be more attractive to investors."

Socha backs up his thesis.

"Polish GDP growth is higher and higher every quarter," he explains, predicting that "2004 will be a good year with 5 percent GDP growth. We used to have a situation of high growth in the mid-1990s." What followed, he says, was "the best three years in this supply side of Polish capital markets."

He dwells, too, on the other indispensable ingredient: investors.

"If we look at the demand side today, we can see that we have a new category of investors that we didn't have in 1996-98. I am talking about open pension funds, as they make up slightly more than zł. 35 billion (in assets), and is an amount that grows every month."

Mutual funds have also blossomed.

"We have almost 120 investment funds that are managed by 17 trust fund corporations," he points out. "All mutual funds in Poland manage about zł. 30 billion. So as you see we have more institutional investors."

His prediction for new and improved capital markets culminates in two years, on the heels of integration.

"In 2005 we will have some visibly increasing numbers of Polish companies which (will) decide to go public."

What's more, he says he expects the state to pitch in.

"The State Treasury will propose some future privatizations to the Polish capital markets. There are several projects - PZU, PKO and some others - announced by the Treasury Ministry, and privatizations will be done by public offering."

He said he does not blame the Treasury Ministry for holding off on privatization plans in the past few years, admitting that the capital markets, which he watches so closely, have been feeble.

Whether or not his positive spin on the future will turn out to be correct, it is supported by Socha's tenure in his industry.

In 1989, before the country began to sidle up to western-style capitalism, Socha worked in the Polish Academy of Sciences (PAN) where he researched the history of modern economic thought and such ideas as the "Phillips Curve," the inverse relationship between inflation and unemployment, which describes contemporary Poland quite well.

Asked about his ascent up to the chairmanship of KPWG, he says that he got the job "by chance." After leaving PAN, he says, "I looked for a new challenge...And I met some people in the Finance Ministry who were working on creating capital markets in Poland."

Through them, he was introduced to Lesław Paga, who was the founder of Poland's Securities and Exchange Commission.

"He's my predecessor," says Socha. "I am the second chairman. We started in 1991 and we celebrated our 12th anniversary in June 2003."

He explains his view on how he, now on his second five-year term, was able to stay at a prime minister-appointed position when so many other such posts show a long roster of appointments.

"I think it is a non-political position," he says.

On second thought, Socha entertains another idea: "Maybe I'm a good chairman. Maybe."

Part of the legislation this "good chairman" hopes to push through to securities law includes amending the process of listing securities on the WSE and better ways to stamp out market abuse.

When not facing the legislative battle, Socha says, he hopes to see improvement in the market, short of pursuing strict directives, by educating publicly traded companies. With this in mind, last year securities industry players created a "soft law" that universally set forth how companies were to be governed.

Socha explains some of the corporate governance challenges for him, as a watchdog overseeing a country that rapidly adopted capitalism.

"We had many businessmen in the 1990s who decided to go public with their companies," he says. But those entrepreneurs weren't up to scratch on the responsibilities of the capital markets. "They were not managed correctly. We heard, unfortunately, that some companies used public money in an improper manner. Because of this some investors lost their investments."

Good corporate governance, now an important issue in the U.S. with the recent multi-billion dollar accounting scandals at Enron and WorldCom, is the ideal lure for investors, one which the WSE, with its low share turnover and few stocks, sorely needs

"Without changing it would be difficult to attract new investors," Socha points out. "In 2002 a group of individuals drafted a best practice code which consisted of 48 rules relating to the operations of management boards, supervisory boards, and the relations between company and media and so on. This is a code which presents best practice."

He explains that, in the coming year, industry pros will reevaluate the list of rules, conclude whether WSE-traded companies are complying and, if need be, change part of the code.

But Socha says the fact that the country has such a code would be a comfort for investors, who he expects to warm to the market in the coming years.

When Socha is not spending time stamping out corruption on the financial markets, he writes books on the financial market, he mentions, pointing to his third and most recent academic tome, Rynek papierów wartościowych w Polsce. ("The securities market in Poland.")

But for a man with so many positive things to say about Poland's capital markets, it is odd he is so poor at promoting his third book.

"I have finished my third one about - of course - the capital markets," he says, as if he just finished drafting legislative proposals.

But, he adds, "If you have some problems sleeping, this is also a very good book."