Corporate governance legislation in Romania has undergone major changes in the run-up to its accession to the European Union (EU). Prior to the Romanian adoption of the acquis communautaire, the EU body of law, the European Bank for Reconstruction and Development (EBRD) had assessed Romania's legislation in 2004 as being in "Low Compliance" with the Organization for Economic Cooperation and Development's (OECD) "Principles of Corporate Governance". The most relevant laws for corporate governance are the Company Law and the Capital Markets Law 2004. The Company Law was amended in 2006, and again in 2007 by Government Emergency Ordinance 82/2007. According to the 2006 International Financial Law Review, the changes to the Company law were intended to incorporate the European aquis communautaire and OECD corporate governance principles. The objectives were to clarify the rights and duties of directors, improve shareholder protection and synchronize regulations governing mergers and acquisitions with EU law. Given this extensive legislative reform the focus of Romanian authorities, especially the National Securities Commission should now be on implementation and enforcement of the body of law. This view is supported by Duca et al., who in a 2007 paper note that Romania has made relatively large advancements in corporate governance; but suffers from frequent discrepancies between the written law and implementation of the law.
General Overview
The World Bank's 2004 Report on the Observance of Standards and Codes (ROSC) Corporate Governance Country Assessment for Romania indicates that the major developments in Romania's capital markets and in the corporate governance legislation were part of Romania's process of joining the European Union (EU), which has since occurred on January 1, 2007. An example is the revisions to the securities laws, in 2002 and 2004, which upgraded minority shareholder protection in public companies. However, in its 2004 assessment on the commercial laws of Romania, the European Bank for Reconstruction and Development (EBRD) indicated that Romania's legislation was in "Low Compliance" with the Organization for Economic Cooperation and Development's (OECD) "Principles of Corporate Governance" at the time of the assessment in 2003. Nonetheless, in the most recent comprehensive paper on corporate governance in Romania, , Duca et al.' in 2007 note that Romania has made relatively large advancements in corporate governance; but highlight the frequent discrepancies between the written law and implementation of the law, indicating that the challenge in Romania lies now in the enforcement of the body of law.
In the 2004 ROSC on Corporate Governance in Romania a number of policy recommendations regarding the legislative, institutional and voluntary/private environment in order for Romania to improve its compliance with the OECD Corporate Governance Principles. Because extensive legislative reform had occurred just prior to the assessment, it recommended focusing on enforcing the laws. It also suggests legal reforms such as removing privatization exemptions, including provisions for shareholders to appoint the external auditor, explicitly identify the duties, functions, responsibilities and liabilities of the directors and require disclosure of all inside trading. The assessment suggests strengthening the institutional environment by adjusting the focus and priority. The Securities Commission (Comisia Naţională a Valorilor Mobiliare, or CNVM) should place a greater focus on disclosure and monitor compliance with accounting standards. Despite the large number of public companies on RASDAQ, the assessment recommends that CNVM jurisdiction should cover all public companies and protect shareholders rights in all the public companies. "The natural delisting process of many companies could be accelerated by technical assistance, training and outreach" (p. 18). The assessment also suggests that a Corporate Governance Institute should be created to support private sector initiatives, but before that, would need to revise the Corporate Governance Code (2002) to include voluntary best practice recommendations for boards and directors. The listing requirements should then should include disclosure of compliance with the Code. In addition, the assessment recommends creating an Institute of Directors, or other training organization that helps educate directors to better fulfill their role and responsibilities, provide accreditation, spread best practice and facilitate dialogue between the private and public sectors.
The most relevant laws for corporate governance are the Company Law (Law no, 31/1990) and the Capital Markets Law 2004 (Law no.297/2004). The Romanian Company Law, Law no. 13/1990) was amended in 2006 by Law no. 441/2006 , and again in 2007 by Government Emergency Ordinance 82/2007. According to 2006 article by Theiss in the International Financial Law Review, the changes to the Company law were intended to incorporate the European aquis communautaire and OECD corporate governance principles. The objectives were to clarify the rights and duties of directors, improve shareholder protection and synchronize regulations governing mergers and acquisitions with EU law. In his 2007 article, Theiss explains that the newest amendments to the Company Law were to further reduce ambiguities in the Law, particularly relating to the differences in legislation pertaining to joint stock companies and LLCs. According to the 2004 ROSC assessment, the 2002 and 2004 revisions to the Capital Markets Laws are the most pertinent to protecting minority shareholders of publicly held companies. In addition, in their 2007 report, Ducea et al. conveys that the Voluntary Corporate Governance Code (2002) is a collection of best practices but information on how many companies adopted and observe the Code is unavailable.
With respect to the regulatory environment, the 2004 ROSC on Corporate Governance for Romania reports that the CNVM, was established in 1994. Its responsibilities include supervising the stock exchanges, financial intermediaries, enforcing disclosure requirements and insider trading laws, and overseeing takeovers. The CNVM is an autonomous agency that has no specific obligation to shareholders but considers corporate governance a priority. In 2003 the number of sanctions distributed for failing to comply with disclosure requirements represented an increase in enforcement efforts. The CNVM holds significant authority over supervised and licensed entities but its authority over securities issuers is not as strong. The two stock exchanges, the Bucharest Stock Exchange (BSE) and RASDAQ have merged. The 2004 ROSC assessment reports that, at the time, "the State continues to play a major role in governance in many companies. The state privatization agency (APAPS) holds stakes in about 90 percent of listed companies. In about 100 companies, APAPS also has a "golden share" which gives it the right to board representation" (pp. 1-2). The 2006 European Bank for Reconstruction and Development (EBRD) report on the "Commercial Laws of Romania" indicates that the majority of companies in Romania are joint-stock companies and limited liability companies (LLCs).
The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investment Protection Index 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 indexes vary 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. Romania scores 9 in the Disclosure Index, against a regional average of 4.7 and an OECD average of 6.3. It scores 5 in the Director Liability Index, against a regional average of 3.8 and an OECD average of 5.0 and 4 in the Shareholder Suits Index against a regional average of 6.0 and an OECD average of 6.6.
The Principles
Principle I: Ensuring the Basis for an Effective Corporate Governance Framework
The 2004 ROSC on Corporate Governance in Romania makes a number of policy recommendations on the legislative, institutional and voluntary/private environments in Romania to improve its compliance with the OECD Corporate Governance Standard. Because extensive legislative reform had occurred just prior to the assessment, it recommends focusing on enforcing the laws. It also suggests legal reforms such as removing privatization exemptions, including provisions for shareholders to appoint the external auditor, explicitly identify the duties, functions, responsibilities and liabilities of the directors and require disclosure of all inside trading. The assessment suggests strengthening the institutional environment by adjusting the focus and priority. The CNVM should place a greater focus on disclosure and monitor compliance with accounting standards. Despite the large number of public companies on RASDAQ, the assessment recommends that CNVM jurisdiction should cover all public companies and protect shareholders rights in all the public companies. "The natural delisting process of many companies could be accelerated by technical assistance, training and outreach" (p. 18). The assessment also suggests that a Corporate Governance Institute should be created to support private sector initiatives, but before that, would need to revise the Corporate Governance Code (2002) to include voluntary best practice recommendations for boards and directors. The listing requirements should then should include disclosure of compliance with the Code. In addition, the assessment recommends creating an Institute of Directors, or other training organization that helps educate directors to better fulfill their role and responsibilities, provide accreditation, spread best practice and facilitate dialogue between the private and public sectors.
The CNVM, was established in 1994. Its responsibilities include supervising the stock exchanges, financial intermediaries, enforcing disclosure requirements and insider trading laws, and overseeing takeovers. The CNVM is an autonomous agency that has no specific obligation to shareholders but considers corporate governance a priority. The primary laws governing corporate governance and the Companies Law (Law no. 31/1990) and the Capital Markets Law 2004 (Law no.297/2004). The Company Law, was amended in 2006 by Law no. 441/2006, and again in 2007 by Government Emergency Ordinance 82/2007 (WB 2004). According to Theiss' 2006 article, the changes to the Company law were intended to incorporate the European aquis communautaire and Organisation for Economic Cooperation and Developemnt (OECD) corporate governance principles. The objectives were to clarify the rights and duties of directors, improve shareholder protection and synchronize regulations governing mergers and acquisitions with EU law. In 2007, Theiss explains that the newest amendments to the Company Law were to further reduce ambiguities in the Law.
Principle II: The Rights of Shareholders and Key Ownership Function
The 2004 ROSC Corporate Governance Country Assessment for Romania rates the sub-principles "right to participate in fundamental decisions", "shareholder AGM rights," and "control arrangements should be allowed to function" as largely observed, indicating that the assessment found only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The assessment rates the sub-principles "basic shareholder rights" and "disproportionate control disclosure" as partially observed, indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. The ROSC assessment gives the sub-principle "cost/benefit to voting" a compliance level of materially not observed, indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
In order to improve compliance with this principle, the 2004 ROSC assessment recommends that explicit provisions strengthening the law, with respect to nominee ownership, the rights of beneficial owners and the responsibilities of custodians should be included in the regulations governing Central Depository to be created in accord with the 2004 revisions of the Capital Markets Law. On the other hand, without a requirement for nominee holding, the new Depository may function with better transparency. In addition, the assessment suggests that annual general meetings (AGMs) be announced 30 days in advance and significant shareholders should be able to add items to the AGM agenda after publication. In line with good practice standards, companies are supposed to publish shareholder counter-proposals and resolutions, at their own cost. The law is should require that shareholders' rights and restrictions are in the annual report and the law and guarantee full shareholder disclosure of direct ownership and control. The CNVM would ensure compliance. "Lower thresholds could be set for the [Financial Investment Companies (Societati de Investitii Financiare or SIFs)]" (p.6). Also, the assessment advises the obligations of disclosing shareholder agreements and deriving from privatization contracts. Privatization exemptions ought to be removed from the takeover code and minority shareholders included in majority-privatization agreements. Adding regulations for delisting and closing a company in the company law would eliminate the potential violation of shareholder rights when delisting and closing a publicly held company. In addition, disclosure of voting policies should be required of institutional investors.
In the a 2006 report the "Commercial Laws of Romania," the European Bank for Reconstruction and Development (EBRD) concluded that Romania lacks legislation requiring the full payment of shares before being transferred and disclosure of shareholder agreements. In addition, there are no regulations on cross-shareholdings. However, the CNVM's '2005 Annual Report' indicates that the amended Company Law would extend the period needed for calling an AGM from 15 to 30 days, improve shareholders' ability to enter topics onto the AGM agenda, regulate shareholders' right to information, improve the dividend payment system, define the conditions required for a shareholder/associate to withdraw from a company, include a provision for the appointment of financial auditors by the AGM, and strengthen legislation for awarding compensation to minority shareholders. Also, Theiss, in his 2006 article, notes that the Company Law would increase the power of shareholders over the board of directors.
Principle III: The Equitable Treatment of Shareholders
The 2004 World Bank Corporate Governance Country Assessment for Romania gives the sub-principle "prohibit insider trading" a largely observed compliance rating, indicating that the assessment found only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. It rates the sub-principles "all shareholders should be treated equally" and "board/managers disclose interests" as partially observed, indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge.
The 2004 ROSC assessment recommends that the CNVM should continue strengthening its protection of minority shareholder to improve compliance with this principle. It suggests that the CNVM might do so by including a mandate for shareholder protection in its mission statement and becoming a special tribunal to solve shareholder disputes. The CNVM should also review issuer disclosure. In order to make these improvements, the CNVM requires greater resources and additional trained staff. The assessment points out that Romania must formalize rules on nominee ownership and custodians' corporate governance responsibilities. With respect to insider trading, the assessment recommends that sanctions be intensified and widely publicized. Reporting requirements should be applied to all insiders and the CNVM should focus its efforts on enforcing disclosure, as well as looking into investor complaints about possible insider trading. The assessment also advises that annual reports include related party transactions and that the current reports should be sent to the relevant regulated markets and be compared with the annual report disclosures. Enforcement action should be taken against particularly bad cases. It suggests that, in the long term, consistency between the Capital Markets Law requirements and the International Auditing Standards (IAS) definition of related party transactions and verification by an independent audit committee of the board.
According to the EBRD's 2006 report on the "Commercial Laws of Romania" the results of a 2005 EBRD case study on minority shareholders access to information on related-party transactions demonstrates that the law provides for actions available to minority shareholders but there is little case law to provide guidance for implementation. Although proceedings are relatively short, the defendant can easily delay the proceedings. Also, although enforcement of judgments is improving, it remains a problem and so does corruption. In addition, the EBRD judges that the law falls short in prohibiting voting rights for shareholders, and significant transactions are not governed by specific approval procedures.
However, the April 2007 publication of the Romanian Digest indicates that the amended Company Law includes a number of provisions protecting minority shareholders. Minority shareholders who individually or together make up 5 percent of the share capital may bring claims against directors, censors, auditors, and all others involved in the daily business of the company. The quorum of shareholders to vote in an ordinary AGM was reduced from representing 1/2 of share capital to 1/4; and was reduced by more than 50 percent for extraordinary AGMs, as well. Also, shareholders only representing 5 percent of share capital may amend the AGM agenda. The Company Law now also includes restriction on increasing the number of shares of a company. In his 2006 article, Theiss noted that the Company Law would prohibit restrictions to prevent a shareholder to refuse from selling shares, require that a company must give Trade Registry its financial statements in writing and electronic format and include additional provisions restricting related-party transactions.
Principle IV: The Role of Stakeholders in Corporate Governance
In the 2004 ROSC on Corporate Governance in Romania, the sub-principles "stakeholders rights respected," "redress for violation of rights," and "access to information" received a compliance rating of largely observed, indicating that the assessment found only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The sub-principle "performance enhancement" was rated as materially not observed, indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
The 2004 ROSC notes that the Bankruptcy Law, Labor code and other labor protections, and the Consumers' Protection Ordinance defend stakeholder rights, as do big trade unions. The law provides for several redress options. Stakeholders are entitled to the same information as other interested parties, by law. On the other hand, Romania's law lacks provisions addressing "employee participation in company profits and on the topic of share option" (p.11). In the 2006 report on "Commercial Laws of Romania," EBRD notes that legislation fails to include provisions pertaining to employee participation in profits.
The sub-principles "disclosure standards," "standards of accounting and audit," and "fair and timely dissemination" were assigned a compliance level of partially observed by the 2004 ROSC Corporate Governance Country Assessment for Romania, indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. It gave the sub-principle "independent audit annually" a rating of materially not observed, indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
In order to improve its compliance with this principle, the 2004 ROSC assessment advises that Romania institutes a standardized annual report format to include all elements recommended in the OECD principles and that the CNVM boosts its review and enforcement of disclosure requirements, especially with regard to certain non-financial information and SIFs' disclosures. Also, the BSE/Rasdaq should determine the level of disclosure necessary for different types of public companies. For example, guidelines for Rasdaq companies need only disclose basic information. Another policy recommendation is that the Company Law include a provision that the shareholder meeting elect the external auditor, and to comply with international good practice standards, the auditor be nominated by the board's independent audit committee. "Policymakers should also consider amending the role of the censors' committee as an institution separately elected by (and reporting to) the shareholders' meeting. The censors' committee could, for example, be converted into an independent audit committee of the board of directors, whereby the audit committee consists solely of independent non-executive members" (p. 13). The ROSC assessment commends the BSE/Rasdaq's efforts to provide information to the public but suggests that it improve public access to the complete statutory annual reports by making them immediately available electronically, as opposed to via the Official Gazette. Shareholders should be provided with full IAS statements, the auditor's position and the Chairman's letter to the shareholders. To do so, the assessment recommends that an integrated electronic information system providing disclosure of statutory and public information replace the paper and filing system.
According to the EBRD's 2006 report on the "Commercial Laws of Romania" only listed companies must continuously release reports. The results of a 2005 case study on minority shareholders access to information on related-party transactions demonstrates that the law provides for actions available to minority shareholders but there is little case law to provide guidance for implementation. Although proceedings are relatively short, the defendant can easily delay the proceedings. Also, although enforcement of judgments is improving, it remains a problem and so does corruption.
The CNVM's "2005 Annual Report" indicates that the amended Company Law would include a provision for the appointment of financial auditors by the AGM and enforce disclosure to shareholders (2006). Theiss, in his 2006 article, reports that the law would require companies to release its financial statements in writing and electronic format to the Trade Registry and include new provisions restricting related-party transactions. Also, the April 2007 edition of the Romanian Digest indicates that a company is required to publish AGM decisions on their website, if it has one.
The 2004 ROSC on Corporate Governance in Romania rates the sub-principle "ensure compliance with law" as largely observed, indicating that the assessment found only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The assessment gives the sub-principle "acts with due dilligance, care" a compliance level of partially observed, indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. The sub-principles "treat all shareholders fairly," "the board should fulfill certain key functions," "the board should be able to exercise objective judgment," and "access to information" received a rating of materially not observed, indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
The 2004 ROSC assessment provides the government of Romania with a number of recommendations to improve their level of compliance with this principle. To improve the significance of the board's role, the Company Law should include a minimum board size requirement. Creating an Institute of Directors, or other training organization, would help educate directors in financial, business and industry practices so that they may better fulfill their role and responsibilities. The Institute should update the Code of Corporate Governance, in collaboration with stakeholder, to focus on board issues. Necessary modifications to the Company Law are to explicitly identify that the board's duty is to represent the best interest of the company and shareholders, as well as define and mandate the directors' duty of care and loyalty, and clearly identify the board's functions and responsibilities such as supervising and setting company manager's remuneration, setting strategic plans, capital investment budgets, internal control policies and procedures and performance evaluation. The Institute should be responsible for providing implementation guidelines. Also to follow best practice, independent directors should be introduced to boards and oversight should be improved through special committees, especially an audit committee. The directors should be provided full access to all material information by the management. In addition, to conform with international best practices, when a company becomes financially distressed, creditors should take over the directors' duties.
In its 2006 report on the "Commercial Laws of Romania,"the EBRD indicates that legislation applying to the board is vague and disregards issues such as the importance of independent directors, remuneration and compensation on audit committees. However, Theiss's 2006 article reported the amendments that were expected to be included in the Company Law, which is now in effect. Directors are subject to a management agreement, that must be filed with the Trade Registry, which covers remuneration, termination and executive and representative functions of the directors, at a minimum. Definitions of censory and internal auditors are to be clarified. In addition, company bylaws must include supplementary information on auditors. According to the April 2007 edition of Romanian Digest, the amended Company Law calls for better organization of the board and creates an explicit division between executive and non-executive director duties, determines that directors can not also be employees, and clarifies that the directors' responsibility is to act in the best interest of the company and its shareholders and protect company confidentiality. However, the available information does not determine whether the changes to the legal framework directly address the issues suggested by the 2004 ROSC on Corporate Governance in Romania.
Duca, I., et al., "Corporate Governance Practices' Imprlementation in Romania - achievements, deficiencies, action items," 2007. Available from European Regional Science Association website. Accessed on August 28, 2007. (Duca et al., 2007)
European Bank for Reconstruction and Development, "Commercial Laws of Romania - An Assessment by the EBRD," 2006. Available from European Bank for Reconstruction and Development website. Accessed on August 28, 2007. (EBRD 2006)
World Bank Group, "Report On The Observance Of Standards And Codes (ROSC) - Corporate Governance - Country Assessment - Romania," April 2004. Available from World Bank website. Accessed on August 28, 2007. (WB 2004)
Law 525/2002 approving Emergency Ordinance 28/2002 on Securities, Financial Investment Services and Regulated Markets
Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 On the Application of International Accounting Standards (Regulation No 1606/2002)
PricewaterhouseCoopers Romania, "Tax & Legal Alert - Amendments to Company Law no. 31/1990," July 2007. Available from PricewaterhouseCoopers website. Accessed on August 28, 2007.
Romanian Digest, "Romanian Company Law Amended," Vol. XII No. 4, April 2007. Available from Herzfeld & Rubin, P.C. website. Accessed on August 28, 2007. (RD 2007)
Romanian National Securities Commission, "Annual Report 2005," 2006. Available from Romanian National Securities Commission website. Accessed on August 28, 2007. (CNVMR 2006)
Theiss, Wolf, "Romania: Company Law," August 2007. Available from International Financial Law Review website. Accesson on August 28, 2007. (Theiss 2007)
Theiss, Wolf, "Romania: Company Law Now in Line with EU," February 2006. Available from International Financial Law Review website. Accessed on August 28, 2007. (Theiss 2006).
World Bank, "Doing Business: Snapshot of Business Environment - Romania," 2007. Available from World Bank website. Accessed on August 28, 2007. (WB 2007)
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