ABSTRACT
Privatization of state-owned enterprises and the growth of indigenous private sector firms has greatly changed the structure of the economies of the Czech Republic, Hungary, and Poland. With successful privatization, a host of new issues has appeared. Appropriate representation of stakeholders, those who stand to gain or lose from the change in disposition of an enterprise or are affected by the activities of an enterprise, was critical as privatization took place and remains critical after privatization. Further, with the change in ownership, corporate governance issues familiar to market economies (agency problems in particular) are beginning to arise. This paper focuses on the linkages among ownership changes, the development of new forms of corporate governance, and the creation of new dominant shareholders, mainly institutions such as investment funds or commercial banks.
After a short introduction, the second section examines general corporate governance issues in a comparative framework. The third section discusses the recognition of stakeholders in the former centrally planned economy and the need to convert stakeholder interests into ownership interests to advance privatization efforts. Both small and large privatization efforts in the Czech Republic, Hungary, and Poland are briefly reviewed in this context.
88As enterprises are privatized, the principal-agent problem, aligning the interests of shareholders (the principals) and managers (the agents) at the lowest possible cost, becomes a critical issue. The fourth section reviews the mechanisms for solving the principal-agent problem in the Central European context. While the market for corporate control is the ultimate monitor of corporate governance, it requires a rather well-developed capital market. Policymakers in Central Europe are then faced with the need to provide a means to ensure alignment of management and shareholder interests while stock markets develop. One solution is to promote dominant shareholding by an intermediary such as a commercial bank or investment fund.
The fifth section discusses the development of the corporations and the evolution of dominant share holding in each country. As a result of the lenient lending policies of state-owned commercial banks during the early transition period, the banks have inadvertently acquired an excessive stake, through lending, in enterprises that are not viable under current conditions. The accumulated bad debt has required the recapitalization of the banking system and, as a result, commercial banks and investment funds have converted these stakes into ownership interests in the enterprise sector through debt restructuring and debt-for-equity swaps. Thus, intentionally or not, financial intermediaries are evolving into the dominant shareholders necessary to ensure corporate oversight on behalf of a larger group of dispersed shareholders.
The last section concludes by noting that whether or not the recapitalization of the banking systems and the assumption of corporate oversight by financial intermediaries has solved either the ad debt problem or corporate governance problems depends, first, on whether there has been a change in the operational behavior of banks in evaluating the creditworthiness of loan clients, i.e., whether banks now lend solely on economic criteria and, second, on whether they are successful in monitoring the effectiveness of the management of the companies they influence through dominant ownership.
