REVIEW OF THE PAST
Slovakia has undergone important changes in recent years. Transition from the planned economy to the market economy, privatisation of state-owned companies and emergence of a multitude of new private companies have brought along the first experience with the administration and management of private equity. Corporate governance, initially aimed only at maximising profit regardless of the sustainability of such development, has been gradually improving. The main influence is the growing competition and new experience from international developments in corporate governance, whereas many changes also come through the change of legislative environment. The quality of corporate governance is not a problem only of the Slovak companies. On the contrary, it is among the most discussed issues in the area of company law on a worldwide scale, whereby the Slovak companies have an advantage in being able to skip a historical period of development in this area and utilise the experience of the world’s advanced economies. Positive, but particularly negative experience has led, on various platforms, to the formulation of certain principles that should govern the relations between the owners of companies, executive management and other stakeholders. On an international scale, this issue has been most noticeably addressed by the Organisation for Economic Co-Operation and Development, which published the OECD Principles of Corporate Governance in 1999. The Principles were subsequently updated in 2004, due to new experience from accounting scandals in many American and European corporations at the turn of the millennium. The OECD Principles have become a basis for creation of national codes of good corporate governance in a majority of advanced countries of the world.
Similar to many other countries in the world, it was the Stock Exchange that took charge of the initiative to create a national code of corporate governance for Slovakia. In the year 2001, Bratislava Stock Exchange (BSSE) with support of FIRST Initiative Management Unit, London, and in co-operation with the then Financial Market Authority, INEKO economic institute, representatives of professional associations and listed companies hosted ‘round table meetings’. The meetings discussed two drafts of the code – one submitted by INEKO and the other by the BSSE. As a result of numerous discussions, and based on a broad consensus of the participating parties, a common code was created in September 2002 under the name ‘the Unified Code of Corporate Governance’. In April 2003, the Unified Code of Corporate Governance was incorporated into the Stock Exchange Rules for Shares Admission to the Listed Market.
In order to implement the principles of the Unified Code of Corporate Governance into the everyday practice of companies, the BSSE initiated the establishment of an association with a mission to monitor worldwide development in corporate governance, to bolster public, professional and political discussion of this issue in the society, to ensure professional growth of both current and potential board members and to create professional background allowing to gain up-to-date information in corporate governance. With the support of its 20 founding members, the Central European Corporate Governance Association (CECGA) was founded in October 2004.
A need to revise and update the then valid Unified Code of Corporate Governance resulted from the release of the revised OECD Principles in 2004, from the issue of European Commission recommendations for corporate governance in 2004 and 2005, and from relevant legislative changes in Slovakia. To co-operate in the update of the Code, the CECGA invited the representatives of the National Bank of Slovakia, the Ministry of Finance of the Slovak Republic, the Ministry of Justice of the Slovak Republic, the Ministry of Economy of the Slovak Republic and the Slovak Banking Association. All of the aforementioned became the members of the Steering Committee. A Working Group counting five members was formed from among the Association members, with a mission to draft a new Code in compliance with international recommendations and best practice. The draft of the new Code was published on the CECGA website in September 2007 in order to raise a broad discussion with expert community, which allowed for collection of many valuable comments and their incorporation into the Code. The result of co-operation between the Steering Committee, the Working Group and the expert community is the new Corporate Governance Code for Slovakia.
The Corporate Governance Code for Slovakia (hereinafter the ‘Code’) is a part of the Stock Exchange rules for securities admission to the regulated market, which are approved by the BSSE Management Board and the National Bank of Slovakia. In compliance with an Amendment to the Accountancy Act No 431/2002 Coll. as amended by subsequent legislation, effective from 1 January 2008, the Code applies to all companies that have securities admitted to trading on the BSSE’s regulated market i.e. on the Main Listed Market, the Parallel Listed Market and/or the Regulated Free Market. In their Annual Reports, for the year 2007 for the first time, said companies will include a statement prepared on the ‘comply or explain’ basis specifying to what degree they have complied with the principles of good corporate governance. If a company has not so far applied a certain principle, it will give reasons in the Annual Report.
Nevertheless, the Code is not intended only for the companies that have securities traded on the Stock Exchange, although the need for the Code is most noticeable in such companies. That is to say, trading on the Stock Exchange oftentimes changes the ownership of securities. As a result, the owners of companies are not in direct contact with executive management and the administration of their assets tends to get out of their reach. The adoption of certain principles, which govern relations between the owners and the management, is of great importance for all companies whether private or state-owned. The Code is open to all companies that are interested to acknowledge it and gradually implement its principles into their corporate governance.
The Code sets up relations within a company as well as the company’s relations with its environment on the principles of openness, integrity and accountability. An open approach to the disclosure of corporate information – within the bounds given by the company’s position among its competitors – is a basis of trust which must exist between the company and those that participate in its success i.e. shareholders, employees, creditors, suppliers, customers and other stakeholders. Integrity necessitates the submission of correct information about the company’s economy and intentions, as well as the building of a time-tested, truthful image of the company. The principle of accountability is of essential importance for the formation of trustworthy relations of a company, and requires that the board members adopt accountability for their decisions and explain their actions to the shareholders and other stakeholders.
The principles of the Code should be a guideline for companies, but without being too restrictive. They should ensure a balance between control and entrepreneurial freedom in a company, and also foster communication and transparency in the company’s corporate governance. The principles and recommendations are very flexible in their nature, which allows for their implementation in every company regardless of size, orientation or corporate culture. The ‘comply or explain’ basis allows companies a certain degree of deviation from the principles, provided that it is justifiable by specific conditions and an appropriate explanation is given. Whether such explanation is sufficient will be ultimately judged by, for example, potential investors or creditors. They can decide, based on information provided in the Annual Report, whether to invest in the company or whether and under what conditions to lend it.
The Working Group has based the creation of the Code primarily on the OECD Principles issued in 2004, on the European Commission Recommendation No 2004/913/EC fostering an appropriate regime for the remuneration of directors of listed companies and on Recommendation No 2005/162/EC on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board. Taken into account were also the legal regulations currently effective in the Slovak Republic, as well as the current European Commission initiatives that aim to fulfil the action plan – ’Modernising Company Law and Enhancing Governance in the European Union – A Plan to Move Frorward’ from the year 2003.
Aimed to provide a maximum level of readability for the user, the text of the Code is divided into individual principles that copy the OECD Principles, where each principle includes ‘Notes’ explaining the principles themselves in more detail. Not-binding notes, which are only explanatory or illustrating the best practice, are graphically distinguished from the other text. Given that fact that many of the principles are currently incorporated into laws, the text is supplemented with the indicative list of legal provisions that govern the relevant issue. The Working Group’s idea, however, was not to comprise the entire legal framework as that would be an unfeasible task given the ever-changing legislation. Nevertheless, the extensive list of legal provisions highlights the importance of good corporate governance that has been increasingly penetrating the ’hard law’. The Code does not aim to replace the legal regulations dealing with partial issues in this area. Dominating during its inception was an effort to present a complex view on all the most important principles, the observance of which can help create a balanced, transparent and quality business environment.