Model of initial majority control. This model is based on one-stage or, at least, not stretched on time obtaining of majority (i.e. more than 50 % of the voting shares) control by the outsider. Such practice was characteristic for rather small group East-European countries, but not at all for Russia. Though it is the slowest method of privatization, its advantage to effective corporate governance are rather obvious.
Western analog (and sample) for this model is the "case by case" method well tested in Great Britain and Chile. 7
This most simple (within the framework of the corporate governance) model has been widely applied only in Hungary and Estonia. In former GDR it is possible to consider this model as the main for more than 8 000 enterprises, but only in a combination with MBOs and liquidation. In Czech Republic this model was dominant after MP (32 % of the enterprises, but only 5 % of all enterprises value).
The further development of the enterprise in this case depends on the applied method of privatization. As a rule, it is carried out through auction, competition or direct sale, where the preference is received, as a rule, by the "external" investor, often connected with the enterprise. The special variant of this method (which is limited by the state of stock market) is the public offering of the shares, including stock exchanges.
Other important factor is the nature of the investor/owner of a majority block of shares. In many cases we may speak only about pseudo-outsiders denominated the interests of the management of the enterprise (see below).
Certainly, in each concrete country the choice of this or that model (primary, secondary etc.) – and accordingly expected outcomes of privatization - was carried out depending on balance of political forces and ideological traditions. At the same time the majority of countries (with any models, legally adopted or spontaneous) were guided by reaching of the certain level of concentration of ownership. It was supposed that the concentrated ownership is the basis for effective corporate governance, which, in turn, will increase efficiency of the enterprises. In this connection we’ll try to evaluate available data on ownership structure of the enterprises in various countries.
2.2. Ownership structure in transition economies: main trends
By the end of 90s a lot of empirical studies on ownership structure in various countries with the economy in transition were conducted. Practically all of them are rather conditional for the purposes of inter-country comparisons (by virtue of problems of sample, various sizes of the enterprises, close-oriented behavior of the respondents, impossibility to reveal affiliate entities and real pole of corporate control, etc). Nevertheless they allow to evaluate most general and characteristic tendencies with the relatively high level of reliability. In second half of 90s several attempts also were undertaken to evaluate correlation between ownership structure and enterprise performance after privatization. 8
On the basis of the findings, obtained in these researches, it is possible to make the following general conclusions.
(1) In countries, where the course towards the attraction of the external (quasi-external) investors was taken from the very beginning, the struggle for control for the obvious reasons has not received noticeable development. The intensity of this struggle for control in joint-stock companies is also lower in those countries, where the model of MP resulted in the concentrated ownership with transparent structure (Czech Republic).
The most acute struggle was developed there, where the "sprayed" property as the result of MP or insider’s model (in frameworks or irrespective of MP) dominated. The large shareholders, including insiders-managers, continue to buy up the shares. In Albania - with minimum privileges of insiders - immediately after MP the wave of resales of the shares from small shareholders to larger ones began (mainly informally - passing Center of registration of the shares). In Macedonia struggle for control and, accordingly, the ownership concentration, happens with fastest rates in joint-stock companies, where the ownership structure is not "amorphous", but gravitates to the managers (their “teams"). In Poland in those 853 companies, which were created by insiders in the frameworks of “direct sales", the dominating tendency has become concentration of the capital in hands of the managers. In Slovenia the managers have developed indeed war against outsiders, down to entering into the charters of joint-stock company of a various kind of restrictions of their rights.
Direct consequent of more heavily struggle for corporate control, in turn, are:
- Long-term reproduction of conditions for a conflict of interests and violations of the rights of the shareholders;
- More long character of shaping of a precise model of corporate control and governance;
- And, therefore, necessity of the heavily and centralized state policy.
(2) In many countries after privatization the insider’s model of corporations were generated. It has become characteristic not only for countries, legislatively selected MEBO as a main method of privatization (table 1). In many other countries the establishing of insider’s model passed spontaneously, in many cases as kind of sale of assets to formal outsiders.
In Russia in 1993-1994 insiders have received on the average about 55-65 % of the shares of the privatized enterprises. By 1998 their cumulative share has decreased to 50-60 %.
In Croatia, by September, 1996 on completely privatized joint-stock companies the control has been obtained by insiders in 1000 joint-stock companies, by the external investors (including the social state funds, and also some banks and firms owned by managers) - in 300 joint-stock companies. The open tenders were conducted on the Zagreb stock exchange, however they become as a matter of fact addition to the MBO. It was connected to full absence of any disclosure requirements by the issuer before sales.
In Macedonia and Slovenia by the end of 1996 the prevalence of insiders was characteristic for 80 % privatized enterprises. By this time typical ownership structure on Slovenian privatized joint-stock companies looked as follows: 42 % - insiders (managers and employees), 20 % - outsiders-investment funds (largely controlled by banks), 20 % - state funds (compensatory and pension), 18 % - small-sized outsiders (also including managers of joint-stock companies).
In Lithuania, Mongolia, Armenia, Georgia, Ukraine insider’s model has been developed through MP (as well as in Russia). In Bulgaria insiders dominated in small joint-stock companies (55 % of transactions). Even in Estonia, with the formal basic orientation to the sales to outsiders, the actual role of the managers was very high.
The employees - insiders in all countries with transitional economy, as a rule, do not represent an independent side as special subject of corporate control. Their shares are controlled by the managers 9
, or are hardly “sprayed" and form an amorphous structure of stockholdings. The activity of the small-sized shareholders-insiders is traditionally low, and their interests are focused mainly on different payments. For example, the practice of general meetings of the shareholders in Moldova shows that the typical conflict between the shareholders - employees and managers is on employment and various money payments.
According to the survey of 312 Russian joint-stock companies in 1996, only 7,5 % of the managers indicated importance of participation of the employees - shareholders in the board and supervisory council, 19 % - in discussion of strategic and current problems on general meeting of the shareholders and 21 % - on desirability of granting managers with the right of a voting for general meeting of the shareholders (Афанасьев, Кузнецов, Фоминых, 1997, с. 96).
As to efficiency of activity of the managers as subjects of corporate control in a post -privatization period, the evaluation can be only dual:
- On the one hand, this policy is certainly successful and is effective in the sphere of preservation (consolidation) of control;
- On the other hand, this activity remains a subject for discussion if we are trying to evaluate efficiency of "managerial model " of control (not only for strategic development, but also for an elementary survival of the enterprise).
According to some studies, the concentration of managerial control ensures significant increase of enterprise efficiency. But, according to some data (Frydman, Gray, Hessel, Rapaczynski, 1997), the dominating control of the managers divides some "weakness ", appropriate to the employees ownership. Nevertheless corporations controlled by the managers were characterized by much higher efficiency, than enterprises owned by employees.
(3) Practically in all countries with transitional economy the tendency to a high level of ownership concentration is observed during and/or after privatization
In Czech Republic, Hungary and Poland in a middle 90s 98 % of the inspected medium-sized companies had the dominating shareholder (Frydman, Gray, Hessel, Rapaczynski, 1997). The average share of the main shareholder varied within 50-85 % (except for the state and Czech investment funds). It is connected first of all to the fact that owners cannot afford to rely on other institutions and arrangements designed to monitor and discipline managerial performance (although the separation of ownership and management is common in the region).
In the countries of the former USSR (so called NIS) the tendency towards concentration is also marked. The available data on 6 countries (table 2) allow to speak first of all about stable growth of a share of the managers.
In Russia post-privatization redistribution of ownership leads to the concentration of the dispersed stocks of the privatized enterprises since 1993 as the most common process (including loans for shares schemes of 1995, the “oligarchs” wars of 1997, transition from the wildest forms of redistribution to the legal procedural technologies of the corporate control and redistribution of the equity in 1996-1999).10
The complex and controversial formative process of the post-privatization structure of ownership in Russia (table 3) had as its general positive outcome the gradual stabilization (streamlining of the structure) of the ownership rights: from an amorphous and dispersed structure to the appearance of the apparent (formal, based on the title to the property) or hidden (informal, based on the real authority within a corporation) hubs of the corporate control. According to the FCSM estimates in 1996 the struggle for control was over in 25% of the Russian corporations, in the beginning of 1998 – in 50%. Although it’s impossible to speak about the real economic effect of such stabilization even in 1997-1998 (especially since the redistribution was still going on and the system in general remained unstable), nevertheless, we believe that there were some preconditions for that.
The financial crisis of 1997-1998 significantly changed the situation and lead to a serious shift in accents in the ownership (control) redistribution. A part of investors may become attracted by the extremely sharp devaluation of corporate papers. Some of the shareholders, including the issuers, on the contrary, tried to improve their financial situation by dumping the stocks. Many commercial banks and financial groups which found themselves on the verge of bankruptcy or in the process of it already considered the possibility of ceding their stakes in the real sector or attempted to cede the non-liquid shareholdings. Within the framework of the privatization sales some of the stakeholders attempted to consolidate their holdings in the interests of control at minimum cost.
At the same time the crisis brought about more active use of the additional issues of shares and derivatives, debt schemes (securitization of debt), the mechanism of bankruptcy and company’s reorganization. Under such conditions the attempts by the regional elite to establish control over the major enterprises of their regions became more noticeable and successful. At the federal level the ideas of the employee ownership and large state holdings as the main structural unit of the Russian economy were reanimated.
Nevertheless the most widely used way to get rid of outsiders is still the dilution of the outsider’s share (both in the Board of Directors and in the issuer’s equity) in favor of the majority shareholders (of a holding).
The derivative mechanisms may also be used for this purpose: convertible bonds, fractionalization or consolidation of shares, transition to a single share etc. In the holding companies in case if an outsider has the veto right (more than 25% of the voting stock) and can block the additional issues the so-called transfer prices are used and the assets are redistributed between the parent company and affiliates without taking into account the interests of minority shareholders.
The more widely known conflicts of 1997-1998 took place in the oil companies YUKOS (transfer of funds from the subsidiaries) SIDANCO (an attempt to issue convertible bonds at the price lower than the market one and place them with the friendly entities), Sibneft (transfer of assets to the holding and discrimination of the minority shareholders of subsidiaries during the transition to a single share).
Among the violations of the shareholders rights are the widely-spread practices when the managers unrestrainedly “pump over” the assets of the company they work for into their own companies and their accounts both in Russia and abroad or, in the best possible case, fix exorbitantly high salaries for themselves (while the rank and file employee-shareholders are not being paid their wages and /or dividends for months and months). Such behavior is primarily explained by the unstable situation in the corporate control that provides an incentive to the management to prepare the “golden parachutes” for themselves.
These tendencies are going to continue into 1999-2000, which may increase the instability of the ownership rights and would demand a tighter policy of the investors (shareholders) rights protection.
(4) Privatized enterprises nevertheless are more effective, than state-owned. They find out more intensive economic growth, faster increase the investments. 11
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