Hungary comes of age
As market forces took hold across the former eastern bloc following the collapse of communism, the emergence of a thin layer of very wealthy individuals was one of the most visible, and disturbing developments.
How can a system of supposed equality give way to such apparent inequality? Is it the same people who, under the old system, were ‘more equal than others’?
One clear answer is the freeing up of entrepreneurial spirit. Corruption fuelled by government incompetence over privatisation of state assets might well be another; Russia is still dealing with the consequences of this today.
But in other countries, the picture is altogether more reassuring. In Hungary for example, foreign investment was at the centre of the government’s ambitious programme of privatisation of state assets. As the iron curtain fell there was an instant flood of foreign interest which provided immediate and extensive exposure to western business methods and philosophies with a bombardment of due diligence studies, IAS audits and valuations.
As a result, one factor that influences Hungary’s present-day governance scene significantly is the level of foreign investment in the country: more than three-quarters of its GDP is accounted for by multinationals. “So the manner in which their local subsidiaries and affiliates behave is often dictated by the philosophy code of conduct set down by the parent company,” notes Arpád Balázs, director of assurance and advisory at PriceWaterhouse Coopers’ Budapest office.
He adds: “Indeed it is taken for granted by investors that the product portfolio and processes and business strategy of multinationals will be beyond question.”
As in Anglo Saxon countries, governance principles and SRI have acquired much greater importance over the last 10 to 15 years. “But the region also underwent enormous change both economically and politically so we can’t expect that, in such a short time, the region should be able to reach the level of Anglo Saxon countries’ thinking on governance,” says Balázs. “But it is gradually taking root.”
He explains, as elsewhere, companies take on these responsibilities as a result of competitive and ethical considerations. He adds that “in Hungary the move is also due to the fact that responsibility for these questions is shifting from government to enterprise”.
Among locally owned companies the question of social responsibility at a corporate level is not as well advanced and takes a form well known in the West, namely sponsorship of local community activities. Balázs notes: “This has a business value in that it demonstrates a company’s social priorities, be it sport, youth, or bringing up children – more than the environment.”
But he explains that companies do not make a big deal of communicating their business practices to their clients. “Consumers do not pay attention to whether or not a company uses ethical business principles. It is beyond them, so, for the time being, accessibility of investment dominates for the population and not what banks, funds, listed companies etc are investing in.”
Investments do not leave much room for considerations of this nature anyway. Balázs says: “The main policy aim of pension fund advisory boards is to ensure a cautious investment policy and guarantee that the benchmarks will be achieved safely. The investment in equities is so small that investors will not be interested in whether responsible investment or not. There are no mandates thus far that stipulate that investments have to be carried out in an ethical or socially responsible manner.”
He adds: “The Hungarian stock exchange is small, with around 50 companies registered. So there is not much of a choice of companies with open and clear governance policies.”
In terms of asset allocation for pension funds, around 75% is invested in state bonds, 3% in corporate bonds, 8% to 9% in Hungarian equities and the rest in mutual funds mainly investing in government bonds, and foreign equities.
The concept of good governance and SRI equating to better performing companies is yet to make much impact in Hungary. “The specialist press has relatively few articles on
the subject by international standards, but this concept is gaining more attention and recognition in Hungary,” says Balázs. “But they are on the increase. For example, one local research institution, linked to the Budapest Corviinus University has done much research on the area.”
It is now a year since Hungary and seven of its neighbours in the region acceded to the EU. Balázs notes: “Regulations legislation and practice in the new EU members of central and eastern Europe are very similar.”
One question that the EU influences in Hungary, prior to and following accession, is protecting the environment. As in other spheres, a harmonisation of legislation was a key requirement. “But Hungarian government didn’t stop there,” says Balázs. “It is sponsoring an environment protection programme to discuss what principles to adopt with a view to creating a better Hungary from this point of view.”