Shaking off the past

As rumors swell about a possible merger between PKO BP bank and insurance firm PZU, recently appointed PZU chief executive Cezary Stypułkowski sits down with the Business Journal's Timothy Sifert to discuss the future of Poland's state-run insurance company. With the corporation's long legacy of corruption, its conflict with minority shareholder Eureko, its lack of modern technology and a government that is averse to privatization, the former Citibank Handlowy CEO has his work cut out for him.

One thing that PZU has definitely ensured over recent years is that vocal critics of state-owned companies - and of the government itself - would always have a topic to grouse about. The largely state-owned insurance company, with an enticing zł. 20-billion asset collection, has embodied many of the complaints of the country's pro-business camp: Past executives have been jailed for flagrant abuses of power; the State Treasury has been accused of cold-shouldering PZU's foreign investors; and, because PZU enjoys majority market share, it has been slow to modernize - often the symptom of a complacent giant.

Enter Cezary Stypułkowski, who was named chief executive of PZU in June, replacing Zdzisław Montkiewicz, in whom the treasury said it lost confidence after he somewhat secretly tried to broker a deal with global financial giant HSBC.

Stypułkowski hopes to clean up PZU's image. "In terms of the culture, the approach and the way people deal and interact, I think the (negative) developments over the last few years have impacted the organization in a significant way," he explained. "So now it's time to establish a new culture. As I say to the staff: We need to be like an aquarium, so you can see us from the outside in."

During more than a dozen years at Bank Handlowy, Stypułkowski took the company public on the Warsaw Stock Exchange (1997) and, following rebuff after rebuff in attempting to merge the bank with local state-owned banks, he orchestrated the 2000 merger with global giant Citibank.

Though evidently comfortable in the banking sphere, Stypułkowski is also no stranger to the insurance industry. He sat on the board of PZU Życie when it was established in 1992, until the State Treasury decided to name Władysław Jamroży acting chief executive of PZU Group.

"I simply resigned," he said. "This decision was not driven by Jamroży's personality - I didn't know him very well - but by the style in which he was installed."

In 2002 Jamroży was arrested for what generally amounted to inappropriate use of PZU's copious cash pile. He had allegedly invested company capital in securities at unnecessarily inflated prices. Prior to Jamroży's arrest, the former head of PZU Życie, Grzegorz Wieczerzak, was charged with siphoning off funds from the life insurance branch as well as engaging in several dubious investments.

Stypułkowski says: "There is an element of irony ... that my major enemies are in prison and I am sitting here."

Refocusing capital investment

Stypułkowski refuses to dwell in the past. He and his employees have their work cut out for them in creating a modern institution capable of packing a punch on the increasingly competitive financial markets and floating an initial public offering - optimistically - sometime next year.

Besides, he's quick to add, the damage done by scandals was slim compared to the extent of the public fanfare related to it, and to the overall size of the company. "In my time at Handlowy, which was more than 12 and a half years, there were 11 chief executives (at PZU)," he explains. "You can imagine the company has to be very strong to survive, and in such good shape. The good shape means it's profitable, it generates reasonable returns."

Oddly enough, one of the many lightning rods for criticism of the company, its antiquated management structure, was perhaps one of its greatest assets, at least in the past.

"One of the reasons (PZU) was able to survive was because it was not that modern; it was kind of an association of small insurance offices across the country," he says. "The turmoil at the top didn't (reach those offices). It's not centralized enough. Sometimes you benefit from not being modern."

But Stypułkowski quickly corroborates his assertion. "Overall PZU has a more than 50 percent market share, which is a pretty good result. The second reason PZU survived is that it generates profits in most of its products."

Today, modernization is paramount in Stypułkowski's strategy. Under his charge, PZU will work to modernize its product offering and technology, improve customer service, flatten out its unnecessarily vertical structure, improve transparency, iron out the details of the intense shareholder dispute, and - markets and shareholders willing - float an IPO.

The company also intends to decrease the number of direct investments it has in companies, which tie up company time attending shareholder meetings. PZU's plan is to adopt a more investment fund-driven style.

Some of these plans have been bandied about by past management, but Stypułkowski says there will be action behind his words. "I believe the real need of the company in the near future is to (improve) the technology," he asserts. "The company is very much decentralized in terms of technology. It doesn't have sufficient information, which is a prerequisite for (sound) management. We need to move from intuition to information in management. It is one of the critical factors of success for this organization."

Question of ownership

The next issue on the agenda is more difficult: changing the corporate governance culture. "The current situation is, one could say, unbearable. We have to reconcile the shareholders because it's very difficult to manage any company where you have two major shareholders in conflict."

The treasury owns 56 percent of PZU, followed by Eureko in cooperation with Millennium Bank, with 30 percent.

Last October Netherlands-based insurer Eureko filed for international arbitration to resolve a conflict over an April 2001 agreement that would have had the State Treasury sell the Eureko-Millennium group an additional 21 percent stake in PZU, giving it control of the company. That deal was signed with the previous Solidarity-led government. Since Leszek Miller's coalition government came to power, it has put the brakes on progress toward privatizing the insurer. Some critics view the government's attitude towards PZU's privatization as the death knell of the government's zł. 9.1-billion privatization revenue target for this year.

Critics became even more skeptical of the government's motives when the treasury placed Zdzisław Montkiewicz, a former intelligence officer and protégé of Leszek Miller, at PZU's helm, much to the dismay of Eureko.

Stypułkowski admits that making amends with these shareholders, along with building up a new investor base and restructuring the company's organization, is a prerequisite to floating the company on the stock market.

But Stypułkowski is aware he cannot play an omnipotent role in the pace and nature of shareholder negotiations. "One has to understand as well, I am the chief executive," he says. "I am expected to manage the company to the best of my knowledge and to have the expertise to produce very good financial results and returns for the investors. At the same time, I cannot (substitute for shareholders), I can only facilitate the process. It's very difficult for children to advise their parents. To some extent I am in such a position."

Taking it all into account, he notes that he would like to see the shareholder structure refined this year - he can't attract investors with such a confounded company history - and the company floated locally and internationally by May of next year, if possible.

Asked whether he actually expects this government to suddenly relinquish control of PZU, he said, "I can't imagine they would sell off PZU to unknown hands or an unknown entity."

PKO BP merger?

Stypułkowski dwells on one of the considerations for the future of PZU, a possible merger with state-owned banking giant PKO BP. The issue has received a fair amount of media attention recently, with some news sources stating that the merger of PZU and PKO BP is about to go ahead, with PKO taking a 30 percent stake in PZU from the Eureko-Millennium Bank consortium. Stypułkowski spoke out in favor of such a merger prior to taking the top job at PZU, but now he is more cautious on the issue.

"I can easily say that there are very attractive prospects (for a merger of) the major domestic retail bank with the major insurance company," he says. "There are some clear overlaps which can be exploited."

However, despite the attraction of creating such a large Polish institution (the proposed merger would be the first national financial group of its kind in the country), the group would have a very complicated structure, Stypułkowski notes.

"The media are very much attracted by this," he says. "(But) I don't think that many people really understand the concept of bank-insurance and the way it is managed, and the fact that it's not very successful all over the world. The dynamics of both businesses are different."

Key among those differences is that, in banking, you are addressing customers' immediate needs. People prefer to keep their money with a bank rather than under the mattress. On the other hand, with insurance, salespeople must convince potential customers that they have a need they may never have realized existed.

"There is a potential (for a merger), but let's not exaggerate the potential," Stypułkowski concludes.

One could question why someone accustomed to the private sector would elect to become the chief executive of PZU. Stypułkowski responds: "There is no bigger challenge on the financial market in Poland than this job. So I would say I took this job because I (believed) that I could challenge myself."

Stypułkowski realizes that there is a lot to be overcome. "Being in the position of chief executive of one of the biggest companies in the country, obviously you have to cope with a political environment," he said. "You cannot be completely immune."