Transcript improved transparency and disclosure: the forces at work

THE THIRD SOUTH EASTERN EUROPE
CORPORATE GOVERNANCE ROUNDTABLE
ZAGREB, 21-22 NOVEMBER 2002
THE ROLE OF CREDITORS
AS STAKEHOLDERS IN
TRANSITION ECONOMIES
Dr. Aurelian DOCHIA
Bank lending as the traditional way of
financing in transition countries
• Bank lending occupies in transition economies a prominent
position in financing economic activities; capital markets
are just emerging and have a limited role in raising capital.
• The strong position of the banks is not accompanied by a
similar corporate governance stance. A bank-centered
governance model (like in Germany or Japan) cannot be
clearly identified.
• An inadequate legal framework left banks over-exposed to
credit risk.
The Romanian experience…
• Contract based protection of banks interests in their role of
creditors was considered to be sufficient. Experience
proved this position to be wrong – non-payment was
building up, destabilizing the financial sector.
• Bankruptcy legislation was adopted late and reluctantly.
Law 64 issued in 1996 succeeded to avoid mentioning
“bankruptcy”, talking instead of “insolvency” and
“reorganization”.
• Even after the legislation was amended, courts and
procedures are still biased in favor of the debtors.
…and its outcome
• The second largest Romanian bank plus several
smaller banks were on the brink of collapse.
• A huge effort was made to avoid a systemic crisis
in 1999. Only the costs associated with Bancorex
are estimated at 8% of the GDP.
• Although the situation has much improved and the
banking system is healthy now, the financial sector
lost ground and is now among the least developed
among the transition countries.
Market lending
• The Company Law (no.31/1990) provides firms with the legal basis for
borrowing directly from the market.
• Bondholders rights are specified in the legislation. They can call a
general meeting of bondholders, elect representatives, participate
(through representatives) to the general assembly of the company’s
shareholders and oppose certain decision (particularly changes in the
the statute of the company and issue of new bonds).
• In practice, as any action for defending bondholders’ interests has to go
through courts, which are not very effective, protection is far from
being adequate.
• It is probably one of the reasons the bond market is little developed in
Romania.
Creditors’ role: “investors” or
“stakeholders” ?
• Creditors, like the shareholders, do provide funds
to the company as investors and they are
confronted with the same risk of being
expropriated by the insiders.
• Creditors have little in common with the other
“stakeholders” which are not financial investors in
the company.
• Devising adequate corporate governance
instruments to protect creditors rights requires
adopting a proper perspective on their role.
Investors’ protection
Rights over the cash
flows
Bank creditors
Bondholders
Shareholders
Decision rights