Striving To Reach Their Full Potential

The Baltic States are making rapid progress towards instilling the best corporate practices in private businesses and state-owned enterprises (SOEs), but there are still challenges to be overcome. Dalius Simenas reports.

Lithuania’s State Owned Enterprises (SoEs) are leading the way when it comes to transparency, accountability and good governance standards. So says Sonata Matuleviciene, chair of the board of the Vilnius-based Baltic Institute of Corporate Governance (BICG). The reform of SOEs is just one of the priorities of the BICG, which celebrates its fifth anniversary this autumn. In its short lifespan, it has become an internationally recognised inspiration for best practice in corporate governance in the Baltics. The institute represents more than 100 Baltic members. It is a non-profit, non-governmental organisation with strong involvement from Baltic business and political leaders. “Through our many activities and engagement with other parts of civil society and governments we share a common responsibility to develop our region,” Matuleviciene says. “This year we explored diverse topics such as corruption, capital market development and corporate governance in the EU”. Within Lithuania, high quality corporate governance is, as you would expect, already followed by multinational investors such as Barclays Bank, Western Union, Statoil and Danske Bank. Amongst domestic players it appears to be within the SOEs where the most exciting advances are taking place. Much of this is by necessity as well as choice. Some SOEs are involved in highly capital-intensive projects, and in order to attract investment from bodies like the Nordic Investment Bank, the European Bank of Regional Development (EBRD) or other international institutions, being able to demonstrate good corporate housekeeping is a must. “Reform of state-owned enterprises in Lithuania is a shining example of what can and should be achieved in a very short time period” Matuleviciene says:“ The fact is that the Lithuanian Government now is at the top of the class in Europe when it comes to reporting the aggregated figures of the SOEs. It is something we at the BICG are proud to be involved in.”

She explains that improving competitiveness in the Baltics will speed up the region’s alignment with the Nordic countries, formally co-ordinated through the Nordic-Baltic Eight (NB8), a regional forum which aims to create one of the world’s most prosperous regions. “To stay competitive we must improve even further. Latvia and Estonia have recently joined the Euro and Lithuania will soon follow. A single currency across the Baltics that is in turn part of a greater Europe will act as further enhancement for regional growth,” she adds. The BICG chair emphasises the importance of encouraging shareholders from small or large companies in the Baltics to show real leadership in creating well-governed companies. The goal is to create companies that are truly transparent and which demonstrate genuine accountability to investors, employees, stakeholders and to the public. She believes that shareholders should put more emphasis on building valuable companies rather than ones that are seen primarily as good dividend-payers. Implementing proper governance standards is the best way to do this. “We need better leadership in the Baltic companies,” Matuleviciene says. “They must start to bridge the gap between the way they operate and how their international competitors operate.” To her it seems that the days of small local or regional markets are in the past. “The competition for our companies will increase from all sides and we must stand ready to meet the challenge.” BICG was launched in Vilnius in 2009 at a time the Baltic economies were stuttering. “One of the reasons why Baltic countries are doing very well today is that very many people including governments, private companies and other stakeholders immediately decided to change,” says Kristian Kaas Mortensen, the Danish-born former president of BICG. This meant that tough decisions on internal devaluations which meant cutting salaries, cutting budget expenses had to be made. All this had dramatic consequences but it also helped to improve things in a short time. “Capital is portable asset. And for Baltic countries to stay competitive we must have access to capital. Being competitive also means being well-governed which means companies should be transparent, accountable, and attractive to investors. It also means investors should not look at separate economies of Lithuania, Latvia or Estonia, but the Batic region as a whole”. Sonata Matuleviciene says: “Either the Baltic region is attractive, or it isn’t. We needed to bridge the gap between the governance in the Nordic and other EU member states and the Baltic countries.” Adding to the challenge, the institute also acknowledged that they had a perceptions gap to deal with. It turned out that the reality of governance in the Baltic countries was actually better than many people thought, underneath a layer of confusion over terminology. Early on it was clear that, for example, Lithuanian capital companies understood the role of the CEO and the management. They also understand the role of the shareholder. However, when people in the Baltic countries speak about “the board” they mean the management board. When on their business cards it says “the Chairman of the Board” they mean the CEO. In contrast, in Nordic countries when people talk about the board they mean the board of directors. And the chairman of the board for Nordic people means chairman of that board of directors. “This is quite a gap on how people talk about these things here and there. And of course we need a common terminology of corporate governance,” Matuleviciene adds. In order to change things BICG created an international board member education programme to bridge this knowledge gap. In over five years there have been 350 “graduates” from the programme, ranging from shareholders of large companies, CEOs of international companies in the Baltic countries, to high level politicians and public servants. Compared with what they have managed to achieve, the BICG’s initial goals were not that ambitious. In its early days, it wanted to create more awareness on corporate governance. In fact, there has been a significant transformation, for private companies, SOEs, lenders and private equity funds. BICG has been well-sustained by its stakeholders from the start, dating from its first annual meeting in March, 2011. On that occasion, Hillary Clinton, then US Secretary of State, made a video address, followed later by Lithuanian president Dalia Grybauskaite, and representatives of the European Bank of Reconstruction and Development. It amounted to endorsement at the highest level of the BICG’s impact in changing views on corporate governance in the Baltic States. But it is not content to rest on its laurels. Sonata Matuleviciene says: “Our most exciting project for 2014 is the opportunity to help Ukraine. I believe that it is time for Baltic countries, which received so much support and encouragement from the Nordics in the early 1990s, to give the same support for Ukraine”. Quite apart from its wider geopolitical sensitivities – somewhat acute at present – Ukraine’s future success is extremely important for business success in the Baltic countries. “So we have taken upon ourselves to support the new Ukrainian Government and have started to share our experiences in the reforms of SOEs. And the first step is to publish a report on the Ukrainian SOEs by November 2014,” she says. However, this willingness to expand its field of operation does not imply that BICG believes that everything is as it should be in the Baltics. BICG figures reveal that the Latvian State Forest, LVM, has, between 2009 to 2012, paid more than €240 million in dividends to its shareholder, the Latvian Government. For its part the Lithuanian State Forest has paid €74.9 million in assigned profit contribution, property tax and raw material tax for the same period to the Lithuanian Government – almost three times less. According to the Institute, the main reason is lack of reform in the Lithuanian forest SOEs due to their adherence to oldschool management. “We don’t claim to be forestry experts at the BICG, but even a cursory look at the comparable sectors seems to indicate that in Latvia the company has reformed and improved more than in Lithuania where they still operate as more than 40 individual companies,” Matuleviciene suggests. She also says most private businesses are family-run in the Baltics. However, unlike family businesses such as those in the Nordics or other Western countries, most do not care as much about transferring the business down to younger generations. In contrast, Scandinavian business owners plan ahead as they know that if they transfer their business, their offspring may require a well-governed corporate framework to sustain them.

Box 1: Driving best practice

The Baltic Institute of Corporate Governance, which claims to “represent the voice of Baltic Non-Executive Directors” is an internationally recognised driver of best practice Corporate Governance development in the Baltic region, with more than 100 Baltic members. The Institute is a non-profit, non-governmental organisation with strong involvement from the Baltic business and political leaders. The BICG engages business and political leaders in the region and “aims to be the most transparent and accessible civil society organisation in the Baltics.” Activities include the creation of events, programmes and policy publications, also executive education programmes for Board members and Chairmen, with international business leaders invited to share their experience with members. In addition, the BICG also hosts international business delegations for members to learn best practice and promote the Baltic region as a business partner in destinations including New York, Singapore, London, Copenhagen, Stockholm and Oslo.

Box 2: Recent Baltic governance failures

Vilniaus Prekyba – Clear lack of proper Governance was evident in relation to how the main shareholder reacted to a tragic accident (The collapse of Maxima shopping centre in Riga in November, 2013).

AirBaltic – under the former management, lack of governance structures nearly bankrupted the company – implementation of new governance standards by the new management under chief executive Martin Gauss has had clear benefits in recent strongly positive financial results.

Tallink – In 2006 the Estonian ferry and cruise operator was dogged by newspaper reports of scandalous on-board happenings, resulting in an embarrassing stock exchange release about “improprieties that may have occurred during a private dinner and cruise of its management board and key advisors” these, the release said “should not be seen as an evaluation or criticism of the staff’s integrity or professionalism”. Perception problems were compounded by unfortunate media appearances, but notwithstanding, the chairman and one more supervisory council member remain unchanged since 1997, raising questions about corporate governance in a high-profile listed company.

Achema Group – Infighting between the largest shareholder, owner of over 50% of the Lithuanian industrial giant, Lidija Lubiene and smaller shareholders led in July this year to the resignation of the Chairman. A new board of directors was elected on 6 August.

Box 3: Energy group pools its resources

One example of the influence of improving corporate governance in the Baltic region is the Lietuvos Energija Group, a Lithuanian group of energy SOEs, which at the end of July announced the establishment of a shared services centre to provide unified public procurement, accounting and labour relations administration services – practices second nature elsewhere in Europe. Five separate companies make up the state-owned group, encompassing electricity generation and trading, energy distribution and ICT services companies. Their spin-off, UAB Verslo aptarnavimo centras (Business services centre) will handle public procurement in October 2014. In December, the company will start providing centralised accounting services, and next spring it will start administrating labour relations across the group. “We expect this decision to centralise these processes to help cut the costs by up to 15%”, Dalius Misiunas, chairman and CEO of the Group’s holding company Lietuvos Energija, told BQ Baltic. He adds that the new centralised entity could provide services not just to the Group but also to third parties later on. Misiunas believes that the establishment of a company providing specialised services, is a key step in the implementation of the group’s improved corporate governance model. Kristian Kaas Mortensen, formerly of BICG admits that there are probably not many companies in the Baltic countries of sufficient scale to warrant a shared services centre. “The Lithuanian energy group probably is on this size where certain functions such as IT or accounting could be pulled into one. It makes no sense that for each group or company has its own head of IT or a director of finance,” he says. The streamlined energy group, which recently bought back the assets of the national gas company Lietuvos Dujos and gas pipeline firm Amber Grid from Russia’s Gazprom and Germany’s E.ON, has ambitious plans for the future. These include the construction of combined heat and energy plants that will help to cut costs for energy users in Vilnius and Kaunas, the two biggest cities of Lithuania. They also plan to explore the complex byways of the liberalised Baltic- Nordic electricity market. This April Energijos Tiekimas, which forms part of Lietuvos Energija Group, announced that it will operate in Latvia and Estonia under the new name Geton Energy. The company first entered those markets in 2013 but the corporate restructuring promises new momentum. “Last year we were rather passive in foreign markets but this year we will seek to compete more strongly in the Latvian market by being more flexible and dynamic than others and by focusing on the individual needs of our clients,” says Algirdas Juozaponis, CEO of Energijos Tiekimas.