THE THIRD SOUTH EASTERN EUROPE

CORPORATE GOVERNANCE ROUNDTABLE

Zagreb, 21-22 November 2002

The Role of Institutional Investors

in Corporate Governance
Case of Romania
Cristina Hodea, MBA

Institutional investors universe

domestic financial investment companies - most
important and diversified portfolios (5 players)

foreign portfolio investors (7 players out of which 4

have important investments on Romanian capital market)

venture capitalists (10 players, invest mainly in private

equity, but have few participation in listed companies; one of
the envisaged exit strategies is listing the company)

domestic mutual funds (7 portfolio management

companies; mainly invest in money market; tend to increase the
investment in capital market)

Institutional investors universe

insurance companies
-most of them invest mainly in Romanian T-bills and bank deposits
-international players prefer to invest in international capital
markets
-some examples of :
-Nederlanden has investments in stock of companies listed on
BSE
-Unita invests in listed and unlisted tourism companies
-Asirom invests mainly in companies where controlling
shareholder has control

Institutional investors universe

Privatisation institutions
special institutional investors
majority, controlling but also minority shareholders;
goal: preserve/increase the value of the company; restructure it in
order to become more appealing to strategic/portfolio investors)
should implement and promote OECD corporate governance
principles where are stakeholders

International institutions (IFC, EBRD, EBRD)

Banks prefer less riskier investments
No pension fund

Survey respondents
Type of respondents

Romanian
mutual
funds
15%
Foreign
portfolio
investors
30%

Romanian
financial
investment
companies
25%

Venture
capitalists
30%

Privatisation institutions, insurance

companies, international institutions were
not subject to the survey
Questionnaires were sent only to managers
of institutional investors
70% response rate, over 80% for Romanian
financial companies and foreign portfolio
investors and only 43% for mutual funds
68% of respondents invest for capital
growth, only 28% investing for income
generation
76% of institutional investors have an active
investment policy

Main findings
The priority in order to strengthen corporate
governance should be enforcement of existing laws and
regulation while improving legal framework
74% of respondents consider lack of experience and
precedent in judicial system as well as corruption the
main obstacles in enforcing legal framework;
half of respondents consider insufficient training and
expertise of SECs staff to deter law enforcement

Main findings
Respondents consider that the auditors of the company have a
moderate contribution in increasing transparency of financial
information
On a scale 1 to 5 (1 - poor, 5 -excellent) the institutional
investor evaluate:

representation in the board of directors 2.88

existing accounting standards
2.59
disclosure of information 2.53
fairness in formation of governing bodies 2.53
regulatory framework on investment
2.35

Main findings
All respondents are mainly minority shareholders, although
some have also control and majority participation
Exit strategies preferred by institutional investors seem to be
direct negotiations with other investors and capital market in
similar percentages

93% of respondents the most important factors in selecting

a target are the quality of management and financial
issues; payment of dividends is regarded as less important.
The most important perceived risks are protection of
shareholder rights and management competence.

Main findings
65% of institutional investors declare to have an investor relation
unit able to provide:

financial statements for last semester/quarter,

information for next shareholders assembly,
inform on material events from last assembly,
minutes of the assemblies

over 70% of the institutional investors disclose information about

their portfolio monthly or at shorter periods, using traditional
communication means or company web site
all managers have access to the balance sheet and income
statement of the institutional investor they work for, but only 84%
to the statement at cash flow and shareholders equity

Main findings
75% of respondents consider that the board should include
representatives of majority shareholder, institutional investors
and minority shareholders, but also independent experts from
the industry.
75% know remuneration of board members of institutional
investor, in most cases from annual budget
86% know the other occupations of board members from CVs
presented when they were elected; less than 25% have more
current information
although 77% of respondents have detailed internal rules to
avoid conflict of interest, less than 50% know about potential
conflict of interest disclosed by board members

Romanian financial investment companies

5 investment companies born during privatisation process
closed end funds with millions of shareholders and owning
portfolios with hundreds of companies (both majority and
minority shareholders)-act in this dual capacity
maximum stake permitted by the law is 0.1% of share capital
none of the financial investment companies inform which
shareholders reached the 0.1% threshold
4 have web sites available

Romanian financial investment companies

all provide on the web sites annual, quarterly reports which include
financial statements
budget execution
structure of portfolio
lawsuits
portfolio risk

3 provide information on
company objectives
dividend payment schedule
contact person

Romanian financial investment companies

only 2 inform stakeholders
who are Board members,
who manages the company,
issues discussed and decisions of the
shareholders assemblies
- only 1 presents:
information on major transactions
CV of the board and management
remuneration of board members

Romanian Mutual Funds

-Relatively low investment in capital market, as minority
and very small investor
-portfolio management companies:
1.CERTINVEST - Intercapital
2.VANGUARD ASSET MANAGEMENT -FON
3.QUADRANT ASSET MANAGEMENT STABILO, Integro, FDI
4.GLOBINVEST NAPOCA
5.ACTIVE MANAGEMENT ACTIVE Dinamic, Junior, Classic
6.CAPITAL ASSET MANAGEMENT - FORTUNA - CLASSIC

- mutual funds web sites reveal the following aspects:

Romanian Mutual Funds

Nr.
Crt.

Investment
Policy
X

Current,
periodic
reports
X

Who are
trust/board
members
X

CV board/
Board
management members
members
remuneration
X

1
2

XX

XX

Romanian Mutual Funds

Portfolio
structure
1
2X
3X
4X
5
6X

Riskeness History
X
X
X
X

X
X
X

Investor Contact
education/ person
guidance
X
X
X
X
X

Institutional investors activism

Most institutional investors
participate to all shareholders assemblies where they invest
are represented in the board of directors and other governing bodies in some
cases
have many court trials when abused by majority shareholders

Set up in 2000 by most active institutional investors, Romanian

Shareholders Association has the mission to protect the
interests of Romanian Companies' shareholders and to
introduce and enforce the OECD principles of corporate
governance
Outlook: new capital market legislation with provisions closer to the
OECD principles and best EU practices