Corporate Governance in Latvia – Does It Follow the Pattern of the U.S.?


Seminar Paper, 2010

38 Pages, Grade: 4.8


Excerpt

Table of Contents

List of Abbreviations

Introduction

1. Corporate Governance: Theoretical Considerations

2. The Framework for Development of CG in Latvia
2.1. Short Historical Overview
2.2. General Political Context
2.3. General Economic Context
2.4. Structure of Enterprises
2.5. The Regulatory Framework

3. The CG Agents
3.1. Shareholders’ Meeting
3.1.1. Shareholders’ Rights
3.1.2. Voting Rights
3.1.3. Shareholder Protection
3.2. Board of Directors
3.2.1. Composition and Election of the Board
3.2.2. Obligations and Responsibilities of the Board
3.2.3. Disclosure of Information
3.3. Council
3.3.1. Composition and Election of the Council
3.3.2. Obligations and Responsibilities of the Council
3.4. Structure of the Ten Largest Latvia’s Companies
3.5. Case study –ASDiena.

4. Corporate Governance in the U.S.
4.1. The Main CG Agents
4.2. Foundations of Corporate Law
4.3. Foundations of Securities Regulation

5. Evaluation of CG in Latvia

Conclusion

Bibliography

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

Corporate Governance (CG) is an often discussed theme, especially in Western Europe and in the U.S. after the financial crisis 2007-2010. However, in Latvia, which suffered the most in the European Union (EU) from the economic crisis, this is seemingly not a subject of debates. This poses the question whether Latvia is an emerging market in the sense of the development of CG. Therefore I chose to look at this issue more closely. The U.S. CG system influences the most important national CG systems in the world[1]and as there is a lot of research done on the CG in the U.S., it seems to be interesting to compare the development of the CG in the U.S. with that in Latvia.

I start with a short theoretical foundation on CG. At first, some definitions of the term CG are given. Secondly, two main approaches to CG – the Anglo-Saxon model and the Continental European model are introduced. Then I move to a general description of the CG environment in Latvia, starting with a short historical overview. In Latvia, CG cannot be separately analysed without looking at the privatisation process. In the Soviet Union, there were no market-oriented institutions and no CG. Therefore, Latvia has been facing a lot of difficulties in creating CG from practically nothing. Also discrepancies at political level do not boost the development of CG. The dynamic development of Latvia’s political and economic situation is described. Legal framework was completely ensured in 2000 by adopting the Commercial Law which encompasses the main provisions of CG in limited companies as well as joint stock companies. In this paper, however, I will look only at joint stock companies when analysing the legal framework.

The fact that CG is getting a more and more important issue in Latvia is shown e.g. in the foundation of the Baltic Institute of Corporate Governance in 2009.[2]The Institute’s aim is to promote development ofresponsibleCG in the Baltic States. As it is a new organisation, it does not yet have any publications on CG in the Baltic States released. In addition, there is actually no up to date research on CG in Latvia. In 2002, the World Bank conducted theCorporate Governance Assessmentbased on the OECD[3]principles of CG. There is the recently (in 2009) published bookCorporate Governance in Transition Economiesedited by R.W. McGee. It contains also an article on CG in Latvia, which, in fact is a summary of the CG assessment by the World Bank in 2002.[4]

Regarding all the aspects mentioned above, the analysis of CG in Latvia provides a very interesting research area as it has been insufficiently researched until now. Moreover, a comparison with a well-established CG system like that in the U.S., could be a source of useful information and recommendations for Latvia’s companies.

In this paper, theresearch questionis the following: does the CG system in Latvia converge in its development toward the American model of CG?

In order to do the comparison, the legal framework of the CG in Latvia is described in regard of the three agents of CG: shareholders’ meeting, the board of directors and the supervisory council. However, because legal framework does not tell sufficiently how the CG is working in practice, the structures of the ten biggest Latvian companies (as in 2008) are compared, mainly regarding the ownership structure. Finally, a brief introduction is given to U.S. CG system as well as some recommendations for Latvia’s CG system.

The empirical data stems from databases of the Central Statistical Bureau of Latvia and Lursoft Statistika, annual reports of the companies analyzed, Riga Stock Exchange (for the listed companies) as well as LETA business portal Nozare.lv.

2 Corporate Governance: Theoretical Considerations

CG is not a new “phenomenon” – already Adam Smith referred to it in 1776 in his bookWealth of Nationswhile criticizing the corporate form of business:

“The directors of such companies, however, being the managers and rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private coparnery frequently watch their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves as dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”[5]

There are many ways to define CG, e.g. as “the set of organizational and institutional mechanisms that define the powers and influence the manager’s decisions”[6]. The OECD defines CG in the following way:

“Corporate governance is one key element in improving economic efficiency and growth as well as enhancing investor confidence. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.”[7]

From the above mentioned follows that the main elements of CG are shareholders, who contribute capital to the company and get shares. They elect the board of directors, which in turn assures that stakeholders’ interests are taken into account. Actually, the main task of the board is to ensure that managers act responsibly and effectively in order to fulfil their functions. A very important task and also a very complex one is the remuneration of management.[8]This issue, however, will not be considered in this paper due to its broad spectrum. The question of CG, and how an optimal CG should look like, is getting more and more important. However, the discussion on it in Europe is different from that in the U.S. – in Europe organisational aspects are more important, such as monitoring and guidance of a company. Therefore, an important aspect of investigation is the board of directors. In the U.S., more attention is given to the impact and the role of financial markets.[9]

In the theoretical foundation of CG, there are two approaches. The first approach isAnglo-Saxon. According to it, the main goal of a company is to maximize the value of shareholders. It is argued that other stakeholders in the organization have their own specific protection mechanisms, which is not the case if speaking of shareholders. Therefore the management can turn this fact to its own advantaged. Shareholder protection is more developed in those countries where companies, regarding their financing, are more dependant on financial markets, governmental activity etc. This is calledmarket-based governance.[10]In these CG systems, ownership is dispersed (if one shareholder holds at least 20% of the company’s shares, the ownership is viewed as concentrated[11]), therefore shareholders’ influence on management is weak, the financial environment is characterised by strong and liquid securities markets, high market transparency and high disclosure standards.[12]Because of the belief that markets function in a self-regulating and balanced way, the competition of individual firms is emphasised. Therefore, the profit oriented behaviour of firms can be described as short-term. Anglo-Saxon system has a one-tier board, where executive and supervisory functions are often combined.[13]Corporate responsibilities are broadly delegated to management; however, an important role is given to protection of minority shareholders. E.g. in the U.S., the most shares are owned by individual shareholders.

The second approach is thecontinental European approach(also Asian relationship-based CG systems belong here[14], the most representative countries are Germany and Japan). According to it, companies are strongly dependant on banks for their financing and ownership is concentrated (more relationship-based). This CG system is also calledbanking governance(called in such a way because of high rates of bank credits and therefore closer relationship with banks which are often represented on the board along with other stakeholders including related firms and employees[15]). The Continental Europe model has two-tier boards, where executive and supervisory functions are separated. In this model, ownership is concentrated, which is characterised by controlling shareholders, weak securities markets and often low transparency and disclosure standards. Financial markets do not have an effective role in monitoring funds,[16]instead, often large banks have a central monitoring role which also have a stake in the company.[17]So banks and enterprises are major shareholders and there are less individual shareholders. Partly due to the fact that shareholders are often banks and their representatives are also often on the board, firms are more long-term oriented in their activity. This creates a more secure environment for the firms, when new capital is needed, firms rely mostly on the banks and not on stock markets.[18]In addition, the role of stakeholders (customers, shareholders, suppliers etc.) is emphasised. After empirically analyzing 22 European CG codes, J. Wieland concludes that there are six basic principles found in all codes, namely: shareholder rights, transparency, voting rights, regulation of remuneration, design of organizational structures and corporate social responsibility.[19]

The biggest difference between these two models is that in Anglo-Saxon systems competition and market processes are emphasised whereas in European systems co-operative relationships and reaching a consensus is very important. However, with more equity financing and broader share ownership, Europe is slowly moving towards the market-based model, although important elements of European traditions still remain. Still, many diverse stakeholders groups as employees, customers are actively recognised. Also there are often close ties to political elite.[20]To conclude, in the Anglo-Saxon system the shareholder value is emphasised, whereas in continental European approach – the stakeholder value. As A. Naciri points out, the stakeholder value is gaining more meaning than the maximization of shareholder value.[21]

In 1932, A. Berle and G. Means wrote in their bookThe Modern Corporation and Private Property[22]that the ownership and control in corporations had to be separated because the corporations were becoming very large.[23]However, because of the separation of ownership and control, many problems arise. At this point, theprincipal-agent theoryshould be introduced. According to it, shareholders, who own the company (principals), elect the directors to run the company on their behalf. The board of directors, in turn, appoints the officers or managers (agents) to run the daily operations of the company. This separation of ownership and management leads to the situation in which many investors are not much interested to monitor the activities of managers because they own only a small stake of a corporation. In turn, management is not very careful in spending money and would tend to maximize their own utility because it is not their money.[24]As owners and managers have different interests which leads to a conflict, and because there is incomplete and asymmetric information, there has to be a mechanism how owners control managers.[25]This principal-agent problem has given rise to two themes: first, the agency costs have to be reduced by making managers faithful to shareholders’ interests, and, second, shareholder value has to be maximised.[26]

The solution of the principal-agent problem can be realised mainly in two ways: through incentives and monitoring. Regarding the former, the solution could be that e.g. the executives receive shares as a large part of their compensation. As for the latter, e.g. additional monitoring mechanisms in order to monitor the behaviour of managers could be introduced.[27]

3 The Framework for Development of CG in Latvia

3.1 Short Historical Overview

Latvia as independent democratic country was founded on November 18, 1918. On August 23, 1939 the secret Hitler-Stalin Pact was signed and Latvia got into the influence sphere of the Soviet Union. A short-time afterwards Latvia was occupied by the Soviet Union on June 17, 1940; by Germany on July 1, 1941. Latvia was reoccupied by Soviet Union on May 8, 1945 with the End of the Second World War. During the occupation most private property was nationalised. Only after the collapse of the Soviet Union in 1991 Latvia became a sovereign state again. Economically, this meant denationalisation. In order to do it, multiple new economic and legal institutions were founded and economy was opened for foreign investors.

The privatisation is the main aspect when starting talking about CG in Latvia. After regaining the independence in 1991 the main economic concern was the transition from a centralized economic system to a market economic, at which basis there are private property and private initiative. Therefore the renewal of ownership rights (denationalisation) was started, as a result massive privatisation of state and local authorities property took place. The goal of the state was, with the change of the proprietors, to create a favourable environment for development of private capital in Latvia and to narrow the activities of the state and local authorities acting as entrepreneurs. This was also meant to attract investment. To facilitate involvement of citizens in the process of reforms, inhabitants of Latvia received securities from the state in accordance of the time they had been living in Latvia. These securities were so called privatization vouchers, which people could use as means of payment when acquiring state and local municipality property. These vouchers had a nominal value of 28 LVL[28]. It has also to be mentioned that the privatization vouchers were used as a mean of compensation for persons who lost their properties after the nationalization in 1940. Therefore a new type of privatization vouchers was introduced in Latvia– certificates of property’s compensation.[29]

In order to manage the process of privatization, the Latvian Privatisation Agency was founded in April 1994. Starting with its foundation, also the discussions regarding CG began:

“It was by then recognized that simply to transfer ownership to any private owner may not be sufficient to ensure a well-functioning market economy”.[30]

The Law on Finishing of State and Local Municipalities’ Property Privatization and Use of Privatization Vouchers was adopted and came into force in September 2005. It foresaw that privatisation was to be completed by August 31, 2006. It also stated that the Minister of Economics supervises the privatization process of state property and is also the chairman of the Latvian Privatisation Agency.[31]Meanwhile, although the privatization process is completed, the Latvian Privatisation Agency still exists and, since 2004, functions as a state joint stock company.[32]

Many large and at the same time strategic important enterprises remained in state hands for a long time, because there were big political disagreements about their privatisation (e.g. Lattelekomin telecommunications). In addition, it was agreed, that main and strategically important enterprises should not be privatized:AS Latvenergo(energy),AS Latvijas Pasts(post),AS Starpautiskā Lidosta Rīga(international airport Riga),AS Latvijas dzelzceļš(railway transportation),AS Latvijas gaisa satiksme(air navigation),AS Latvijas valsts meži(management of state’s forests). Therefore, many strategically important companies still remain under state control.

3.2 General Political Context

In the following, a brief introduction to Latvia’s political system is given. Latvia is a parliamentary democratic republic with a multi-party system. Saeima (the parliament) is elected by the citizens, which in turn elects the executive power – Ministru kabinets (the government). Both Ministru kabinets and Saeima share the legislative power. The head of the executive is the Prime Minister. The head of the state, the President, has a representative role. The Judiciary is independent of the executive and the legislature. Latvia joined the EU on May 1, 2004.

Latvia’s transition government – the Supreme Council – was elected on March 1990, in the first election after the occupation period several political parties were allowed to participate. The Supreme Council adopted the Declaration of Independence on May 4, 1990, after which democratic reforms in the state administration began. Officially, the transition period in the state apparatus ended with the election of the parliament in 1993. Since the year 1993 until now, 13 governments (Ministru kabinets) have changed (13 governments in 17 years gives the arithmetic mean of one government per 1.3 years). Since May 12, 2009, the 14th government since 1993 led by the Prime Minister V. Dombrovskis is working. The shortest governments were the following ones: 6 months (February 13, 1997 – August 7, 1997, led by A. Šķēle), 8 months (November 26, 1998 – July 16, 1999, led by V. Krištopāns), and 9 months (March 9, 2004 – December 2, 2004, led by I. Emsis). The previous government was in office from December 20, 2007 till March 12, 2009 led by I. Godmanis, who also was the first Prime Minister of independent Latvia from 1990 till 1993.[33]This year, on March 17, the largest party in the governing coalition – the People’s party – announced that it is leaving the coalition and going into opposition. As a result, Latvia has now a minority government. The reason for the People’s Party withdrawal were disagreements between the People’s Party and the Prime Minister on propositions regarding the improvement of Latvia’s economic situation after the crisis.

[...]


[1] Naciri, A. Introduction. In: Naciri A. (Ed.) Corporate Governance Around the World. Routledge studies in corporate governance, 2008, p. 15.

[2] http://corporategovernance.lt/, 17.03.2010.

[3] Organisation for Economic Co-operation and Development

[4] McGee Robert W. An Overview of Corporate Governance Practices in Latvia. In: McGee Robert W. (Ed.) Corporate Governance in Transition Economies, Springer US, 2009.

[5] The Wealth of Nations, Books IV-V by Adam Smith, ed. Andrew S. Skinner, Penguin Classics, 1999, p. 330.

[6] Naciri, A. Introduction. In: Naciri A. (Ed.) Corporate Governance Around the World. Routledge studies in corporate governance, 2008, p. 3.

[7] OECD Principles of Corporate Governance, Paris: OECD, 2004. http://www.oecd.org/dataoecd/32/18/31557724.pdf, p.11, 25.03.2010.

[8] Naciri, A. Introduction. In: Naciri A. (Ed.) Corporate Governance Around the World. Routledge studies in corporate governance, 2008, p. 4.

[9] Schiltknecht, Kurt. Corporate Governance. Das subtile Spiel um Geld und Macht. Verlag NZZ, 2004. p. 20.

[10] Naciri, A. Introduction. In: Naciri A. (Ed.) Corporate Governance Around the World. Routledge studies in corporate governance, 2008, pp. 10-12.

[11] Enriques, L., Volpin, P. Corporate Governance Reforms in Continental Europe. In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 253.

[12] Clarke, T., Chanlat, J.-F. Introduction: A New World Disorder? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 24.

[13] Cernat, L. The Emerging European Corporate Governance Model: Anglo-Saxon, Continental, or Still the Century of Diversity? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, pp. 146-147.

[14] Clarke, T., Chanlat, J.-F. Introduction: A New World Disorder? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 24.

[15] Clarke, T., Chanlat, J.-F. Introduction: A New World Disorder? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 25.

[16] Naciri, A. Introduction. In: Naciri A. (Ed.) Corporate Governance Around the World. Routledge studies in corporate governance, 2008, pp. 10-12.

[17] Clarke, T., Chanlat, J.-F. Introduction: A New World Disorder? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 24.

[18] Cernat, L. The Emerging European Corporate Governance Model: Anglo-Saxon, Continental, or Still the Century of Diversity? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 149.

[19] Wieland, J. Corporate Governance, Values Management, and Standards: A European Perspective. In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 65.

[20] Clarke, T., Chanlat, J.-F. Introduction: A New World Disorder? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 25.

[21] Naciri, A. Introduction. In: Naciri A. (Ed.) Corporate Governance Around the World. Routledge studies in corporate governance, 2008, p. 6.

[22] See Berle, A., Means, G. The Modern Corporation and Private Property, NY, MacMillan 1932.

[23] Kim, K. A.; Nofsinger, J.R.; Mohr, D.J. Corporate Governance, 3rd ed. Pearson, 2010, p. 4.

[24] Ibid., p. 3.

[25] Wieland, J. Corporate Governance, Values Management, and Standards: A European Perspective. In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 68.

[26] Clarke, T., Chanlat, J.-F. Introduction: A New World Disorder? In: Clarke, T., Chanlat, J.-F. (eds), European Corporate Governance. Readings and Perspectives, Routledge, London and NY, 2009, p. 27.

[27] Kim, K. A.; Nofsinger, J.R.; Mohr, D.J. Corporate Governance, 3rd ed. Pearson, 2010, p. 5.

[28] LVL (Lati) per 1 CHF – 0.49 (CHF per 1 LVL – 2.03) (Stand 15.04.2010).

[29] Ministry of Economics, Īss ieskats vēsturē, http://www.em.gov.lv/em/2nd/?cat=14760, 18.03.2010.

[30] Vanags A., Štrupišs A. Corporate Governance In Latvia. Seminar on Corporate Governance in the Baltics. Vilnius, Lithuania 21-22 October, 1999. Organisation for Economic Co-operation and Development. http://www.oecd.org/dataoecd/7/59/1931540.pdf, p. 6.

[31] Ministry of Economics, Privatizācijas procesa noslēgums, http://www.em.gov.lv/em/2nd/?cat=14758, 18.03.2010.

[32] Latvian Privatization Agency, http://www.lpa.bkc.lv/lpa/lpa.php?ID=1.5&file=gp2008LV.html, 18.03.2010.

[33] Latvijas Republikas Ministru kabinets (the Government of the Republik of Latvia), http://www.mk.gov.lv/lv/mk/vesture/, 16.04.2010.

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Details

Title
Corporate Governance in Latvia – Does It Follow the Pattern of the U.S.?
College
University of Basel  (WWZ)
Course
Seminar CG
Grade
4.8
Author
Year
2010
Pages
38
Catalog Number
V159937
ISBN (eBook)
9783640732562
ISBN (Book)
9783640732777
File size
665 KB
Language
English
Notes
Tags
Corporate, Governance, Latvia, Does, Follow, Pattern
Quote paper
Ausra Liepinyte (Author), 2010, Corporate Governance in Latvia – Does It Follow the Pattern of the U.S.?, Munich, GRIN Verlag, https://www.grin.com/document/159937

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