Transcript Andrzej S. Nartowski President, Polish Institute of

Andrzej S. Nartowski
President
Polish Institute of Directors
[email protected]
Corporate Governance
and
Pension Funds in Poland
www.pid.org.pl
Corporate governance: THE PLAYGROUND
• Corporate governance is a playground between the law
and the market.
• Its frontiers are not strictly defined.
• Law is constantly annexing some pieces
of the field while market produces new areas.
• The play is arbitrated by the referee: Money.
www.pid.org.pl
WHERE MONEY MEETS TRUST
• It is said [and sung] that Money makes the world go around.
• Yet the economy is based on Trust; without it, banknotes would
be just pieces of printed paper.
• Pension fund is the place where Money and Trust meet.
Money is to be invested, Trust is to be created.
• Corporate governance is all about Trust. Pension funds are
expected to guarantee a well-being of future generations by
implanting corporate governance into companies in their
portfolios, thus transforming Money into Trust at best rate
of exchange.
www.pid.org.pl
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Poland: THE LAW
• Polish company law is deeply rooted in XIX century German
tradition.
• There is a two-tier system of the companies’ organs.
• Management board and supervisory board are separated from
each other.
• The co-operation between them is strictly regulated.
• In general, companies are overregulated, especially in the field
of reporting duties. Bureaucracy takes precedence over
disclosure.
www.pid.org.pl
A TALE OF TWO BOARDS
• [Strong] management board runs the company, [weak]
supervisory board rather observes and than controls its
activities.
• Some supervisory boards are ornamental and hold meetings
once in a blue moon.
• As supervisors gain experience and competence, supervisory
boards play more active roles.
• Supervisors feel themselves representatives of particular
shareholders’ interests [often coming into collision] rather than
of common interest.
www.pid.org.pl
Poland: EUROPEAN LEGISLATION
• Due to Poland’s membership in the European Union,
radical changes of domestic legislation take place in the
course of implementation of EU directives on company
law and corporate governance.
• Two-tier system is kept but new solutions are introduced,
even if coming into collision with previously established
rules.
• In consequence attempts are taken at reconciliation of
past with present, water with fire…
www.pid.org.pl
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Poland: ANGLO-SAXON INFLUENCE
• Under the pressure from market [and Brussels] some new
phenomena in the supervisory boards are initiated: independent
directors, boards’ committees [audit, remuneration], involvement
in risk management, supervisory board members’ responsibility
for company’s financial statements.
• Above the letter of law supervisory board contacts directly
company’s employees: risk managers, internal auditors, financial
staff.
• There are attempts aimed at establishing a double subordination
of internal audit both to management and supervisory boards.
www.pid.org.pl
AT THE CROSSROADS
• In consequence, there is a rough co-existence between
conservative system of company law, its heritage very much
German, and modern corporate governance, its spirit at least
partly Anglo-Saxon.
• As staying at crossroads is highly unpractical it may be expected
that, as time goes by, an element of market
will prevail.
• Expansion of corporate governance is encouraged both by the
inflow of foreign capital and local shareholders activism.
www.pid.org.pl
Poland: THE MARKET
• Commonly considered to be an emerging market, Poland proudly
claims to be market already emerged.
• Warsaw Stock Exchange is gaining capitalization, code of best
practices is mature, foreign investments grow.
• There are several dozens of foreign companies listed in Warsaw.
• Society is highly entrepreneurial, economy is promising,
privatization is in progress.
• Against prevailing in Europe spirit of crisis, Poland’s prospects
seem bright. However, a stormy weather is forecasted.
www.pid.org.pl
Poland: DEMOGRAPHY
• There is a dark cloud expected to come over Poland
[and not a silver lining in sight]: demography.
• Society gets older. And affluent. And childless.
• A considerable number of young people, the best and brightest,
emigrate to other EU countries, bearing the children there.
• Budget is endangered by the alarmingly growing
pension gap.
www.pid.org.pl
ENTER PENSION FUNDS
• Supported mainly by foreign capital, pension funds entered in 1999
bringing hope and comfort to the economy.
• At present there are fourteen of them. Some are considerably big:
one has 3 million members, two other approaches that number and two
have over one million members.
• There are 15.5 million members of pension funds in Poland.
• Pension funds collected, and earned [and lost, due to falls of capital
market] a considerable wealth of PLN 224,7 billion – approx. USD 75
billion at the end of 2011.
• Among the financial industries, banking sector is biggest in size and
pension funds industry is second, ahead of insurances and mutual funds.
www.pid.org.pl
TOO MUCH OF POLITICS
• Since the beginning of Polish transformation in the early 1990s
an aggressive invasion of politics into economy can be observed.
• Domain of State’s ownership is still of considerable size, and State
tends to play a dominant role even in privatized companies where
it holds a minority stake.
• Managers of companies under State’s [too] strong influence face
the revolving door trauma: they often enter company only to leave
soon.
www.pid.org.pl
BETWEEN REGULATIONS AND SELFREGULATIONS
• At turbulent market under dynamic transformation, pension fund
industry is heavily regulated.
• There is also strict [on a daily basis] supervision of their activities;
perhaps ‘surveillance’ would be more proper term.
• Pension funds had not questioned neither the need for
overhelming regulation nor particular requirements put upon their
activities.
• Most of industry went much further subscribing to self-regulatory
Code of Best Practices of Institutional Investors (worked up with
mutual funds industry).
www.pid.org.pl
THE MAGNIFICENT FEW
• The biggest pension funds volunteered to adopt their own
additional corporate governance obligations: the standards of
behavior at general meeting of shareholders in companies they
own considerable stake.
• They publish the reports on their activities at GMS’ and the stands
taken in voting on particular resolutions.
• However, their example had not gather following among middle
and small funds.
• Reason is simple: only The Few attend the general meetings of
numerous companies, rest of funds prefers not to bother
themselves.
www.pid.org.pl
CORPORATE GOVERNANCE WITHIN PENSION
FUNDS
• Pension funds are transparent and efficiently organized.
• Only once the government intervened into their governance
demanding disclosure of funds’ managers individual salaries.
• There were some cases of window-dressing of funds’ investment
results, severely punished by Financial Services Authority.
• From time to time media takes public attention to the fact that
funds’ owners always make money while the members’ accounts
depend on the market’s performance.
www.pid.org.pl
SHAREHOLDERS AND STAKEHOLDERS
• There is a constant dispute concerning the balance of interests in
companies between their shareholders and stakeholders.
• Corporate governance is oriented toward shareholders. Corporate
social responsibility is oriented toward stakeholders or, in some
cases, MISTAKEholders.
• Pension funds are in a very specific situation. They have to fulfill
interests and expectations both of shareholders [owners] and true
stakeholders [members].
www.pid.org.pl
THE GREAT FUNDS’ ROBBERY
• In 2011 Ministry of Finance proposed sharp reduction of pension
funds’ share in individual pension contributions.
• Against protests of the part of financial community parliament
adopted the proposal.
• Reason: funds heavily buy T-bonds causing growth of public debt.
• Pension funds’ share had been cut from 7% do 2.3%. According to
law it will successfully grow up to 3.5% in 2017.
• Shareholders of pension funds lost immediately. Stakeholders may
suffer heavy loses for decades.
www.pid.org.pl
A FRIEND IN NEED IS A FRIEND INDEED
• Protests were ignored as if the well-being of generations was less
important that current deficit in public finances.
• Protesters were loud but not numerous.
• They were calmed when accused that their personal interests as
members of the funds’ supervisory boards or advisers to funds
were at stake. In some cases the accusations were false.
• However, support of general public for keeping contribution to
pension funds at previous level happened to be astonishingly
weak.
• Campaign of Pension Funds’ Chamber, aimed at mobilizing society
to oppose new law proved to be unsuccessful.
www.pid.org.pl
LESS MONEY, MORE RISK
• Limit of investments in shares and similar instruments is lifted
each year by 2.5% [up do 42.5% in 2011, 45% in 2012, and so on].
• As the final limit will reach 90%, funds’ risk exposure will surpass
generally accepted ratio of safety.
• Pension funds are encouraged to invest more and more heavily on
volatile capital market. That provokes risk!
• At present limit of their foreign investment is 5% of resources [it
will grow up to 30% in 2021] but at the end of 2011 it was fulfilled
up to 0.48% only, mainly due to growing foreign exchange risk.
• Therefore it may be observed that pension funds behave
cautiously and more responsibly than legislators advise them.
www.pid.org.pl
CORPORATE GOVERNANCE LANDSCAPE
• At Polish market there is not an official corporate governance
watchdog.
• The stock exchange requires from listed companies reports on their
respect for, and observance of, its Code of Best Practices based upon
comply or explain principle.
• Polish Institute of Directors promotes corporate governance standards
and Association of Individual Investors intervenes in cases of corporate
governance failures.
• The biggest pension funds feel responsibility for corporate governance in
companies in their portfolios.
• Due to the size and resources of industry, pension funds are able to
exercise vast influence on capital market.
www.pid.org.pl
CORPORATE GOVERNANCE PREMIUM?
• Are investors ready to pay more for shares of companies with good
corporate governance?
• Some surveys say: “YES”.
• They are ready to pay more [indicator for Poland is up to 23%]
if certain conditions are met.
• For instance:
– majority of independent NEDs (Non-Ececutice Directors) free of ties with company;
– board members own shares of the company;
– company uses formal criteria for boards’ assessment.
• Good [??] news for investors: they can save money because trere
are not such companies on Warsaw stock exchange.
www.pid.org.pl
THE SPIRIT OF OWNERSHIP
• All pension funds invest in companies listed on stock exchange.
At present some does not invest up to the limits allowed.
• Yet only some funds, primarily the Magnificent Few, represent
the spirit of ownership.
• Each year they attend at least hundred of general shareholders
meetings, annual meetings and some more important
extraordinary general meetings [extraordinary meetings
are extremely popular to the detriment of shareholders].
• They contact the management at least twice a year to get the true
picture of companies.
www.pid.org.pl
WHO TRUST COMPANIES RATED AS MOST
TRUSTED?
• Polish IoD had been encouraging fund managers to point out listed
companies deserving market’s trust.
• Fund managers used to point out companies on the top of their
portfolios even if investment proved to be a disaster.
• Companies rated as the most trusted had not performed better
than average with some of them performing poorly.
• In order to avoid reputational risk Polish IoD had withdrawn its
patronage over rating.
• Then ranking quietly died.
www.pid.org.pl
GENERAL MEETINGS ATTENDANCE
• At general meetings held in Warsaw [all pension funds are seated
there] funds are represented by competent employees,
investment directors or lawyers.
• At meeting held outside capital funds are represented by the
employees of local branches of brokerage houses.
• Preparation to attend meetings is a tremendous time consumer.
• Costs of attendance are considerable as companies are in habit
of adjourning meeting being already in course up to thirty days;
breaks are numerous.
www.pid.org.pl
HOT DAYS OF JUNE
• Companies are obliged to convene annual general meeting not
later than six months after the end of fiscal year.
• Vast majority of listed companies keeps books at the rhythm
of calendar year.
• It results in plethora of general meetings in the last working days
of June and serious difficulties for investors interested in
participation.
• This aspect of corporate governance had not been
yet properly addressed.
www.pid.org.pl
REMOTE CONTROL?
• Polish law allows companies to organize “electronic” general
meetings with shareholders participating and voting via internet.
• Yet only two companies out of four hundred listed on main floor
apply this solution [transmission to no-voting public is popular].
• Pension funds do not push companies for electronic meetings.
• Perhaps they do not trust technological appliances or their own
ability to use them properly.
www.pid.org.pl
HOW CANDIDATES FOR DIRECTORSHIPS
ARE SELECTED?
• Pension funds usually do not propose an employee
for directorship in company.
• Although Polish Institute of Directors runs a list of candidates
to boardrooms [they represent experience, competence and
confidence of the market] pension funds exploit rather lists
of own candidates.
• They do not sit on boards as formal representatives of funds and
are not instructed how to vote on particular resolutions nor they
are expected to report to the funds on their activities.
• They are expected to work hard in the interest of company.
www.pid.org.pl
HOW DIRECTORS ARE ELECTED?
• General meeting elects the members of supervisory board and
pension funds are highly interested in this point of agenda
[executive directors are usually elected by the supervisory board].
• Funds holding a stake in company [at least 5% of capital]
are interested in election of a candidate [s] proposed by them.
• Funds are cautious in consulting their candidates with other
investors or organize coalition. Such steps may be considered by
the Financial Services Authority as [forbidden] action in concert.
• Therefore funds publish names of their candidates well ahead
of general meetings.
www.pid.org.pl
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PENSION FUNDS AND MAJORITY
SHAREHOLDERS
• On Polish market there is an over-average number of companies
with strong majority investor, often foreign ones.
• Majority investors on principle respect the right of institutional
investors to representation in supervisory board.
• However, there are some conflicts of institutional investors with
majority investor on the ground of alleged transfer pricing,
dividend, managers’ remuneration or related-party transactions.
• When other means of dispute resolution fail, institutional
investors sometimes go to the court.
www.pid.org.pl
PENSION FUNDS AND MINORITY
SHAREHOLDERS
• Minority shareholders usually consider pension funds as allies.
• They expect pension funds to take firm stand against corporate
shenanigans and to use all legal means at their disposal to support
shareholders activism.
• They vote for pension funds’ candidates to the supervisory board.
• In case of conflict with majority shareholder, or company’s poor
performance, minority shareholder expect institutional investors
not to sell the shares and leave company but to stay – and fight.
www.pid.org.pl
PENSION FUNDS IN COMPANIES UNDER
STATE’S INFLUENCE
• In number of companies, formerly State-owned, then floated, State keeps
considerable stake.
• While in majority, State firmly stands at helm. While in minority, State stands
at helm if considers the company of “strategic significance”.
• In some companies State, being in minority and using voting cap to ensure
its dominant position, solely decide on the composition of both boards.
• In some companies institutional investors, if considered to behave properly,
are graciousnessly “permitted” by State to elect to the supervisory board one
or two candidates proposed by them.
www.pid.org.pl
INSTITUTIONAL INVESTORS IN COMPANIES
OF THEIR OWN
• Among the hundreds of companies listed at stock exchange’s main
floor there is a handful of Edens: companies ruled jointly by
institutional investors.
• There are privatized companies with small or none stake of State
or other big investor.
• Pension and mutual funds own vast majority of shares and freely
decide on the composition of the supervisory board.
• There is no employee representation in the boardroom.
• Corporate governance in such companies is considered proper.
www.pid.org.pl
THE MIGHTIEST PAY THE BILL
• In companies jointly owned by big institutional investors small
pension funds demonstrate their activism.
• They attend the general meetings, motion projects of meeting’s
resolutions, take part in discussion, propose candidates to the
board.
• It is easy for them to be active in such friendly environment.
• Yet only the biggest institutional investors, including pension funds
Magnificent Few, do real efforts and pay the bill.
www.pid.org.pl
TOPICS OF PENSION FUNDS’ PARTICULAR
INTEREST (i.a.)
•
•
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Sustainable growth of company and its far-reaching strategy.
Mergers and acquisitions.
Financial statements and division of profit. Dividend.
Management remunerations: salaries and options.
Increases of share capital, especially when the shares are not to be
covered by shareholders’ pre-emptive rights.
• Composition of supervisory boards, including the number
of independent [non-executive, outside] directors.
• Amendments to the company’s statutes.
www.pid.org.pl
FOCUS ON AUDIT COMMITTEE
• According to law, audit committee within supervisory board
is obligatory at public interest entities only when board is
composed of more then five [minimal number] of members.
• Pension funds encourage all companies in their portfolios
to establish an audit committee.
• They often propose to the board candidates with qualifications
to work in audit committees.
• Reports of audit committees are evaluated by the pension funds
and brought to attention of shareholders at general meetings.
www.pid.org.pl
FOCUS ON AUDIT COMMITTEE
REMUNERATION
• Neither law nor stock exchange’s Code of Best Practices pay attention
to the remuneration of members of audit committee.
• Usually members of audit committee are remunerated at the same level
as the other board members.
• Only the Best Practices of Audit Committees in Poland advocate for additional
salary for them.
• It is a document of lesser significance, drafted by Polish chapter of ACCA and
Polish Institute of Directors and not endorsed yet by stock exchange.
• However, some pension funds has already taken efforts to promote adequate
additional remuneration for chairperson and members of audit committees.
www.pid.org.pl
PENSION FUNDS AS SEEN BY FOREIGN CAPITAL
• Foreign capital highly appreciate the presence and activities of
pension funds on Polish capital market.
• Investors an investment banks often declare: We are pushing
money to Poland because there are pension funds and we trust
them, and that is official.
• They consider pension funds industry a main factor behind
privatization and recent successes of economic transformation.
• It is perhaps not commonly realized that only some pension funds
engage themselves in corporate governance and building value of
companies in their portfolios, while majority of funds are simple
free riders.
www.pid.org.pl
CENTRAL EUROPEAN FINANCIAL HUB?
• Poland aspires to create Central European Financial Centre.
• In early 2000’s Ministry of Finance produced Agenda Warsaw City
2010 aimed at privatization Warsaw Stock Exchange and
development of capital and financial markets.
• Agenda had been fulfilled successfully. Pension funds industry
played an important role in reaching its goals.
• Now in 2012 Poland have no agenda for coming years and decades
and Ministry of Finance demonstrates hostility toward the pension
funds.
• Question-mark.
www.pid.org.pl