Share consolidation by owners could be explained in terms of poor legal protection8 with regards to minority shareholders and principal-agent problem in Slovenia. This is where the dispersed number of shareholders, each with a small number of shares, are legally incapable of preventing managers from running the company for their own benefit. And since the legal protection that investors receive determines their readiness to finance companies. This has led to the concentration of voting rights within few shareholders.
A unique aspect of the Slovenian corporate regulations is ‘The Slovenian Companies Act’8 (1993), which states that for a company with fewer than 500 employees, one-third of the Supervisory Board members must be workers’ representatives. For a company of 1000 or more employees, one-half of the Supervisory Board members must be workers’ representatives.
Features of the Board of Directors
The features of the board of directors of almost all Slovenian companies are similar to that of the western (capitalist) model, in that they tend to follow the ‘pyramid’ structure of command. With the ‘shop-floor’ employees reporting to managers, who in turn report to senior managers, who in turn report to directors, who in turn report to executive directors, who in turn report to the CEO. The CEO is elected by and therefore reports to the owners of the company. Other features of the board of directors that are similar between Slovenian and western companies are listed in the “LSJE Corporate Governance Code (2.1.1 -2.1.6)” 9 and include: (i) Board of directors acting in the best interests of the company and shareholders and providing a continuous growth of business, revenue and profits. (ii) Ensuring that contracts agreed with third-parties, shareholders and within the company are fulfilled. (iii) Board of directors setting a framework of risk management and control, and taking accountability for any business issues.
As the aforementioned “Slovenian Companies Act” says that the worker representatives have to be present on the supervisory board, it means that the employees in Slovenian companies have a much bigger say on how the company is ran than their counterparts in the western firms. This is advantageous to Slovenian companies because it shortens the time it takes to pass information and orders between employees and makes Slovenian firms react faster to changes in consumer tastes. It also helps to integrate new ways of doing business (new technology and new modes of operation) because, normally employees feel opposed to change but by having the workers’ representatives explain the advantages of new ways of doing business to their colleagues it will help to increase understanding that change is beneficial as it will improve the way in which company operates.
Corporate Finance
“Corporate Finance” has many meanings around the world. In the US it is used to describe techniques, activities and decisions that deal with company’s finances. But in the UK and Europe it is used to describe transactions in which capital is raised for corporations.
Whereas in the UK and Europe companies that seek more liquid capital go to the banks for a loan, in Slovenia even though banks are the main lenders, they represent only a small amount of corporate financing. This has to some extent, contributed to the poor development of new listed companies, with only 23 new share listings in the period 1996-2001, with banks having over 75% of shares in those 23 companies10. Such poor investment severely restricts the funding that firms can get in Slovenia, which in turns lead to poor growth and performance results because firms can not afford the necessary research and development to make them compete on an international level. However, during the past few years foreign direct investment has greatly increased mostly due to Slovenia adopting the euro. So investors from other Eurozone countries can invest in Slovenian companies without having to worry about: exchange rate fluctuations and Slovenian government pursuing irresponsible expansionary policies.
Quality of corporate governance
The aforementioned concentration of voting rights within large investors could lead to managers being controlled by the largest shareholders seeking maximum short term profits. Concentration of voting rights coupled with the principal-agent problem and with the effects of the Slovenian Companies Act has led to severe power struggles between the external owners, the management and the employees of the companies. This in turn has led to firms having no focus, low incentives to implement new technologies (employees perceive it to be threatening their jobs), and decisions take a long time to be implemented as each of the sides pursues its own objectives. All this results in poor competitiveness abroad, low economies of scale, poor products and inefficient resource allocation.
Even though concentrated ownership could result in large shareholders pursuing their won aims, at least it will avoid the problems of dispersed ownership and therefore will prevent executives from neglecting owners and other stakeholder interests and have control over managers by not allowing them to form power networks11. Concentration of ownership and voting rights also leads to more obedient workforce, whose main priority is job security, as owners could force upon management to reduce costs and therefore the workforce. By improving protection laws, freeing up trade to increase liquidity and investment, and providing better regulations for division of power within the company, Slovenian government will see the competitiveness and performance of Slovenian firms significantly increase in relation to other firms, both in Eurozone, and in the wider world.
Bibliography:
1) Bank of Slovenia -
2) Corporate Governance in Transition Economies -
3) Corporate Governance Country Assessment – Slovenia -
4) Ljubljana Stock Exchange – Mercator Profile -
5) Ljubljana Stock Exchange – Pivovarna Lasko Profile -
6) Corporate Governance Country Assessment – Slovenia -
7) Corporate Governance Country Assessment – Slovenia -
8) Corporate Governance in Transitional Economies -
9) Corporate Governance Code -
10) Corporate Governance in Transitional Economies -
11) Corporate Governance in Transition Economies -
