Evolution, not revolution! Corporate Governance Rating 2005

[01/09/2006]
source: PFCG
author: Dzierżanowski M., Milewski G., Przybyłowski M.,Tamowicz P.

The third edition of the corporate governance rating by the Polish Forum for Corporate Governance, elaborated in cooperation with the daily Rzeczpospolita, shows that the level of corporate governance solutions in public companies becomes higher. This translates into promotion of particular companies up to higher rating categories and into lower investment risk in respect of corporate governance. In this year’s edition of the rating, the highest category A consisted of three companies, namely Bank BPH, Bank Zachodni WBK, and Agora.

The rating of solution quality

The aim of the rating is to provide investors with an overall assessment of corporate governance solutions applied by the companies covered by the rating. This means that the degree of the protection of outside investor’s interests and the level of investment risk relating to corporate governance are assessed. However, the rating does not aim at an assessment of corporate governance practices in the past, even if this edition of the rating has introduced a variable based on analysts’ opinions in order to verify additionally the solutions applied by companies.

Rating	Companies
A	Bank BPH, Agora, Bank Zachodni WBK
A-	ING Bank Slaski, Kęty, PKN Orlen, Eldorado, Computerland, Stomil Sanok, Bank Pekao, PGF
B+	BRE Bank, Polimex-Mostostal Siedlce,  Telekomunikacja Polska, Amica,  Forte, LPP, Bank Handlowy, KGHM, GTC, Grajewo, Groclin, Bank Millennium, Kredyt Bank, Getin Holding, TVN, PKO BP, Prokom
B	Boryszew, Impexmetal, Polmos Białystok, Netia, Comarch, Grupa Lotos, Bioton, CCC, Orbis, Jelfa, Farmacol, Softbank, Ciech, Hoop, Budimex,  Rafako, Mondi Swiecie
B-	Sokołow, Kogeneracja, Krosno, TC Debica, Rolimpex, Mennica, Kruszwica, Cersanit, ABG Ster-Projekt, Echo Investment

The rating shows that corporate governance risk is lower for companies using legal solutions stipulated in relevant corporate documents which properly safeguard outside investors’ interests, for example, through the introduction of supervisory board independent members. However, the rating does not pass judgments on the independence and qualifications of supervisory board members or on management quality. Summing up, it is mainly corporate governance mechanisms that are assessed in the PFCG rating. Better mechanisms should reduce investment risk and be conducive to better management of companies, but of course they cannot provide a 100% guarantee in this respect. The profits that issuers obtain include a higher evaluation, better conditions of financing through the public capital market, and more loyal shareholders.

The corporate governance rating by the PFCG seems to us an important complement to public companies’ statements concerning compliance with the Good Practices by the Warsaw Stock Exchange. Firstly, the way the stock exchange code is formulated makes these statements have often declaration nature, whereas the rating is preceded by checking whether or not the statements translate into specific regulations in the companies’ documents and into the information disclosed on their websites. Secondly, the reliability assessment of the statements requires further analyses, which are not carried out publicly at all. Companies happen to declare a principle, while the explanations they give indicate that the principle is not actually complied with or that such a company uses solutions incompatible with the spirit of the principle. As a result, it is somewhat difficult to compare the level of corporate governance standards implementation and existing risk on the basis of the companies’ statements only. By all means, the PFCG rating may be helpful in this respect, simultaneously constituting an important mechanism of enforcement of the appropriate application of the corporate governance standards on the Polish capital market.

A few words about the methodology

The level of corporate governance solutions is assessed on he basis of detailed analysis of companies’ corporate documents available on their websites (statutes; the regulations of the supervisory board, the management board, the general meeting of shareholders; and the statement concerning compliance with the Good Practices 2005) and of the content of the websites. The relevant analyses were conducted in the period from November 2005 to January 2006, concerning 55 companies of high capitalisation, turnover, and liquidity.

Companies were assessed in terms of more than 60 variables grouped in 9 thematic indices, the indices reflecting corporate governance standards based on the OECD Corporate Governance Principles, the recommendations of the European Commission, and the Polish optional regulations in this respect, namely Good Practices in Public Companies 2005 and the PFCG Corporate Governance Code. When compared with the previous editions of the rating, a novelty was the introduction, in the form of a new index, of corporate governance practices assessment provided by investment portfolio managers and analysts of the largest open-end pension funds, investment fund companies and asset management companies. Within the rating, such assessment constitutes additional verification of the reliability of the applied corporate governance solutions and it accounts for ca. 30% of the impact on the final score of companies. The PFCG rating is based on an independent set of criteria prepared mainly on the basis of the PFCG Corporate Governance Code and the Good Practices in Public Companies 2005 by the Warsaw Stock Exchange. The discrepancy between these criteria and those of the official code for the listed companies results above all from a different approach to the matter which corporate governance standards and in what specific form are of the greatest importance to the protection of the interests of outside investors in Poland. For example, the recommendation that seems the most important to us and concerns the number of supervisory board independent members should require the functioning of at least two such members having specific competences, and not, with some exceptions, at least half of the supervisory board, which is required by the Good Practices. We also believe that a good practice is that the supervisory board may have their meetings without management board members present, whereas the 25th principle of the stock exchange code seems to imply otherwise and it is interpreted so by many companies. The PFCG rating also provides for some additional criteria which are not included in the Good Practices by the Warsaw Stock Exchange, two examples being the recommendation that the statute of a company should explicitly require the supervisory board’s consent to transactions with affiliated entities or the recommendation that mechanisms for hostile takeover impediments should not be used. As regards audits, the safest, in our opinion, solution ensuring audit independence is the periodic rotation of the entity conducting company financial statements audits. The Good Practices do not definitely require such rotation; they do not require either that the value of other services provided to a company by its auditor be disclosed or that the possibility of the provision of such services should be approved by the supervisory board.

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What was assessed by managers and analysts

Within the conduced survey, respondents assessed corporate governance practices in a scale from 1 to 10:

-      as regards the company’s communication with its shareholders, the availability of information about the company and the managing persons was assessed,

-      as regards respecting the interests of outside (minority) shareholders, including the practice of transactions with affiliated entities, audit reliability and general meetings were assessed,

-       as regards supervisory board functioning, its independence and ability to protect the interests of all shareholders were assessed.

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The Polish version of text presented Corporate Governance Rating 2005 was published by the daily Rzeczpospolita on 6.02.2006 (No 31)

For more information e-mail michal.przybylowski@ibngr.pl