In its 2003 Corporate Governance Sector Assessment Project, published in 2004, the European Bank for Reconstruction and Development (EBRD) came to the conclusion that corporate governance legislation in Lithuania is in "high compliance" with the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. In its 2002 Report on the Observance of Standards and Codes (ROSC), the World Bank made recommendations in three broad categories: legislative reform, institutional strengthening, and voluntary/private initiatives. These issues have since been addressed for the most part, according to the 2006 EBRD Commercial Laws in Lithuania Assessment. Legal procedures and measures are generally clear, rapid, and enforceable, and the institutional environment is considered sound, with reliable company information. Furthermore, the Vilnius Stock Exchange (VSE) approved a Corporate Governance Code in April 2004, which was endorsed by the Lithuanian Securities Commission (LSC) in August 2006. In addition, Lithuania improved its rating over the EBRD's Corporate Governance Sector Assessment in 2002. This improvement is attributed mainly to enhancements of Lithuania's Company and Securities Market laws. Minor shortcomings remain, however, in the area of shareholders rights, as well as in the composition and responsibilities of management boards. Lithuania has three financial supervision authorities: the Bank of Lithuania, the LSC, and the Insurance Supervisory Commission. The VSE is the only regulated securities market in Lithuania and is part of the OMX group of exchanges, which offers access to approximately 80 percent of the Nordic and Baltic securities market.

General Overview

The extensiveness of corporate governance legislation in Lithuania was last assessed in 2003 by the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment Project, which published its report in 2004. The EBRD came to the conclusion that corporate governance legislation in Lithuania is in "high compliance" with the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. Lithuania obtained a better rating in comparison to the EBRD Corporate Governance Sector Assessment in 2002. This was attributed mainly to the improvements made to Lithuania's Company and Securities Market laws in order to bring the Lithuanian regulatory framework in line with the European Union (EU). In its 2002 Report on the Observance of Standards and Codes (ROSC), the World Bank made recommendations in three broad categories: namely legislative reform, institutional strengthening, and voluntary/private initiatives. These issues have since been addressed for the most part, according to the 2006 EBRD Commercial Laws in Lithuania Assessment. Legal procedures and measures are generally clear, rapid, and enforceable, although proceedings to obtain an executable judgment can exceed two years in case of an appeal. Furthermore, the institutional environment is considered sound, with reliable company information. Finally, the Vilnius Stock Exchange (VSE) approved a Corporate Governance Code in April 2004, which was endorsed by the Lithuanian Securities Commission (LSC) in August 2006. Amendments to the Corporate Governance Code in 2006 introduced the comply-or-explain principle. Per a 2003 EBRD assessment published in 2004, the Law on Companies was revised, inter alia, to remove inconsistencies between the Company Law and the Civil Code, and to clarify the rights and obligations of shareholders. Minor shortcomings remain, however, as stated in the 2006 EBRD Assessment. These shortcomings can be found in the area of shareholders rights as well as in the composition and responsibilities of management boards, in particular in ensuring the integrity of accounting and financial reporting systems. Related party transactions are not well detailed in the legislation, and the lower courts lack experience in corporate law cases.

Lithuania has three financial supervision authorities: the Bank of Lithuania, the LSC, and the Insurance Supervisory Commission. As noted in the 2007 U.S. Department of Commerce (DoC) Country Commercial Guide, Lithuanian law requires that these institutions cooperate with appropriate European Union (EU) authorities. The VSE is the only regulated securities market in Lithuania, and is part of the OMX group of exchanges, which offers access to approximately 80 percent of the Nordic and Baltic securities markets.

In its 2008 Doing Business report, the World Bank perceives investor protection in Lithuania in 2007 as being average. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indices range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Lithuania scores 5.0 in the disclosure index, against a regional average of 4.9 and an OECD average of 6.4. It scores 4.0 in the Director Liability Index, against a regional average of 3.8 and an OECD average of 5.1; and it scores 6.0 in the Shareholder Suits Index, against a regional average of 6.3 and an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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In its 2002 ROSC, the World Bank made recommendations in three broad categories: legislative reform, institutional strengthening, and voluntary/private initiatives. These issues have mostly been addressed since the 2006 EBRD Commercial Laws in Lithuania Assessment. Legal procedures and measures are generally clear, rapid, and enforceable, although proceedings to obtain an executable judgment can exceed two years in case of an appeal. Furthermore, the institutional environment is considered sound, with generally reliable company information. Finally, the VSE approved a Corporate Governance Code in April 2004, which was endorsed by the LSC in August 2006. The Law on Companies was revised, inter alia, to remove inconsistencies between the Company Law and the Civil Code and to clarify the rights and obligations of shareholders, as noted in the 2003 EBRD assessment published in 2004. Per a 2006 EBRD Commercial Laws Assessment, amendments to the Corporate Governance Code in August 2006 introduced the comply-or-explain principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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In its 2002 ROSC Assessment, the World Bank rates Lithuania's observance with the sub-principles of Principle II as follows. "Shareholder's Annual General Meeting rights" is rated as "Observed," indicating that the country has fully implemented the principle. "Basic Shareholder rights" and "Rights to participate in fundamental decisions" are rated as "Largely Observed," indicating that only minor shortcomings are noted, and that these do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Disproportionate Control Disclosure," "the facilitation of ownership rights," and "shareholders' right to consult with each other" are rated as "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance. The World Bank recommended increasing transparency and enforcement of disclosure rules. Based on the results of the 2006 EBRD assessment, only minor shortcomings were found in the "rights of shareholders."

Principle III: The Equitable Treatment of Shareholders

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In its 2002 ROSC Assessment, the World Bank rates Lithuania's observance with all three sub-principles of Principle III as "Largely Observed", indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The World Bank noted that insider trading was prohibited and subject to both fines and imprisonment under the Law on Public Trading in Securities (LPTS).

Principle IV: The Role of Stakeholders in Corporate Governance

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In its 2002 ROSC Assessment, the World Bank rates Lithuania's observance with Principle IV as follows: "Performance-enhancing mechanisms" is rated as "Observed," indicating that the country has fully implemented the principle. "Legal Rights of stakeholder are respected" and "Stakeholder Redress" are rated as "Largely Observed," indicating that only minor shortcomings exist, and these do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Stakeholder Disclosure" is rated as "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance. According to the same report, although Lithuanian law contains many provisions aimed at protecting creditors' interests, the legal rights of stakeholders are not well defined. Furthermore, stakeholders do not appear to participate actively in the corporate governance process. However, new accounting legislation in force since 2002 should improve the quality of public disclosure.

Principle V: Disclosure and Transparency

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In its 2002 ROSC Assessment, the World Bank rates Lithuania's observance with Principle V as follows: "Fair and timely dissemination" is rated as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Disclosure standards" is rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the principle, practices and enforcement diverge. "Standards of accounting and audit" and "Independent audit annually" are rated as "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance. The World Bank recommended fully implementing the IAS by 2004, and improving the quality of audits. Per a 2006 EBRD Assessment, related-party transactions are not well detailed in the legislation.

According to the 2007 KPMG Investment Guide, beginning in 2004, companies in Lithuania performed accounting and prepared financial statements and consolidated accounts in accordance with Lithuanian Business Accounting Standards (LBAS), which require less disclosure than the corresponding International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). As of January 1, 2005, however, Lithuania has complied with European Commission (EC) Regulation No 1606/2002, which requires all European Union (EU) listed companies to prepare consolidated accounts following IFRSs.

Principle VI: The Responsibilities of the Board

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In its 2002 ROSC Assessment, the World Bank rates Lithuania's observance with all six sub-principles of Principle VI as "Largely Observed," indicating that only minor shortcomings are noted and that these do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The World Bank recommended developing a corporate governance code that would provide details on the roles, responsibilities, operation, structure and qualifications for members of supervisory boards. As stated on the VSE website, a Corporate Governance Code was approved by the VSE in 2004, and endorsed by the LSC in August 2006. Per a 2006 EBRD Assessment, the Code was last amended in August 2006 to incorporate the comply-or-explain principle. However, according to the same report, minor shortcomings still exist in the composition and responsibilities of management boards, in particular in ensuring the integrity of accounting and financial reporting systems.