The revolving door that leads to nowhere

On 4 July 2007, the Warsaw Stock Exchange adopted a brand new corporate governance code, Best Practices of the Companies Listed on WSE. Previous attempts at implanting corporate governance into the Polish market (Best Practices of Public Companies 2002, 2005) were targeted at local companies listed on a locally significant stock exchange. But in the hot summer of 2007 Warsaw did not consider herself local any more.

Among the companies listed on the WSE main floor there were already a few dozen (the number is increasing rapidly) companies registered abroad, acting under foreign legal systems and expected to comply with various corporate governance frameworks. So the WSE became a junior international player, with considerable aspirations to perform a leading role in the whole region of Central and Eastern Europe.

In consequence, the Polish approach to corporate governance is no longer a strictly domestic matter. It concerns companies coming here from different markets and with different experience in complying with the standards of best practices. Warsaw is also a playground for international investors.

Director difficulties Polish company law follows the two-tier system. Management and supervision are performed by separate boards. The quality of management in public companies is satisfactory or even high. The quality of supervision is often unsatisfactory or even poor. One of the reasons is the lack of experience and adequate qualifications of non-executive directors. The other is because of the lack of stabilisation of the membership of supervisory boards.

Few members serve the full terms. Supervisory boards of Polish listed companies are like revolving doors: one enters only to leave a while later. Even the best and the brightest members of the boards often do not have enough time to gain the orientation in the company’s matters that is necessary to perform effective supervision of its activities.

Some steps had been taken in Best Practices of Public Companies of 2002 and, later, in the 2005 version. Since 2002, a supervisory board has been expected to prepare and submit to the annual meeting a concise evaluation on the situation of the company.

The reason behind this requirement was obvious: to prevent the supervisory board from repeating the management's views and to provide the shareholders with a responsible second opinion on the company’s standing and its perspectives for, at least, the near future.

However, this solution did not work. The supervisory board’s obligation to formulate its own, independent opinion on the standing of the company was only responsibly fulfilled by banks (with the notable presence of foreign capital) and some bigger companies. The majority of boards did not bother.

The latest Best Practices code came into force at the beginning of 2008, widely expanding supervisory boards’ tasks. Supervisors are now expected not only to prepare their own view on the situation of the company, but to take into account the evaluation of the company's system of management of the risks relevant to the company (and the evaluation of company's system of internal control).

Are the supervisory boards able to evaluate the risk management? Are they able to define the most significant aspects of risk facing the company? Will the dream concerning efficiency of the supervision over company’s activities in all fields come true?

Better not bet on it!

First of all, there is less and less space in supervisory boards for the independent directors. The 2002 code required them to constitute ‘at least one-half of members of supervisory board’. As the institution of independent members of supervisory boards was at that time new and strange to Polish companies, such a solution certainly went a bridge too far – or even two bridges. This requirement was modified in the 2005 Best Practices code, providing for an exception for companies ‘where a single shareholder holds a package of shares giving him the right to more than 50% of the total number of votes’ (the number of such companies on the WSE is astonishingly high).

According to the present (2008) Best Practices code, the supervisory board is expected to include at least two independent directors. ‘At least two’ basically means two. In companies where the state holds a stake, ‘at least two’ sometimes means one (whose independence is often ornamental), sometimes none.

The 2008 code also requires the supervisory board to form just one committee – an audit committee – although the former regulations required more. Expectations for the composition of the audit committee are modest: at least one of its members should be both independent and competent in accounting and finance. ‘At least one’ means one, and, quite often, it means none.

Even if such expectations are fulfilled and the audit committee includes an independent non-executive director with considerable experience in accounting and finance, he or she is well aware that the door revolves all the time … While facing the danger of being fired from the board at any moment for no reason at all, there is some consolation. Polish directors, executive and non-executive alike, do not face liability for their errors or negligence. Polish companies are anchored in safe harbour. There is no culture of litigation; cases are left pending for years, so seeking justice or compensation in the inefficient courts would be obviously pointless. Directors may be sure that nobody will sue them for false evaluation of the risks facing a company, or for negligence in failing to evaluate such risk at all.

The idea of supervisory boards’ ability to define the risks that are significant to a company, and to evaluate the system of the management of such risk, is still a dream in Poland. The awakening may be troubled.