When west goes east
‘Go West’ was not just a 1990s song by the Pet Shop Boys. For decades, this was the goal of people trying to escape from life behind the Iron Curtain.
Then the wall came down and the curtain was flung wide open.
Fast-forward a few decades and international investors are heading east in the pursuit of yields that they can no longer find in the West. The closest eastern exposure they can get is through investments in central and eastern Europe (CEE).
However, despite their proximity to and close relations with the West, CEE companies often operate differently.
Corporate governance remains a new issue in the region and one that is less of a priority for local investors, and vast differences can be found in across the region.
The need for liquidity and foreign investment is improving corporate governance standards in the more developed CEE countries, such as Poland and the Czech Republic.
Russia, however, seems to remain opaque although certain measures taken by its government might well pave a Russian path to better corporate governance standards and lead to higher valuations of Russian companies.
One of the biggest obstacles investors find in their exposure to CEE companies is the conflicts of interest that arise between shareholders and management as a result of state ownership of companies or the dominance of majority owners.
So while many investors have taken to engagement with company management, with varying success, a lot of the future of corporate governance in CEE hinges on national legislation.
In Romania, for example, a corporate governance law was adopted in 2011 that requires state-owned companies to appoint independent board members and professional managers.
Swedbank, which runs several pension funds in the Baltics, also started a corporate governance initiative with the Tallinn Stock Exchange and the Baltic Institute of Corporate Governance to bring the issue to the attention of mid-sized corporates that might list in the future.
Governance and self-regulation also remains a crucial topic in the oil and gas sector following the Deepwater Horizon oil spill by BP almost two years ago.
Regulatory changes in the aftermath of the disaster fell short of expectations, as we report on page 53. This is particularly vital as oil companies embark on drilling missions in more ecologically sensitive environments, such as the Arctic.