Polish power

The state security police came calling at Poland's largest oil-refining company one cloudy Warsaw morning in February while investors were meeting with management. The agents carted Polski Koncern Naftowy Orlen president Andrzej Modrzejewski off to the prosecutor's office, where he was interrogated about a three-year-old insider-trading scandal involving a firm where he had formerly worked.

The government's use of state security personnel, who arrived unannounced, rather than ordinary police or court officers with a summons requiring Modrzejewski to appear before the prosecutor at some later date, evoked the bad old Communist days. Also disturbing was the timing of the incident: It occurred just one day before PKN Orlen's supervisory board (roughly equivalent to an American-style board of directors) was expected to extend Modrzejewski's tenure despite opposition from Poland's new left-wing government, which holds 28 percent of the company's shares. Modrzejewski, who has maintained his innocence, was released hours after his arrest. But PKN Orlen's board lost enthusiasm for its president and voted to install a new executive.

Such is the bare-knuckles style of Treasury Minister Wieslaw Kaczmarek, the Democratic Left Alliance, or SLD, official in charge of companies in which the state has an ownership stake or exercises outright control. More finesse might have been used in handling Modrzejewski, the minister concedes in an interview with Institutional Investor (see box), but he is unrepentant about the outcome. "In any case, he had to be replaced," says Kaczmarek, who has fired more than 60 senior managers from a score of state-dominated firms since assuming his post last October.

The Modrzejewski episode "really shocked investors," says Piotr Szczepiórkowski, chief executive officer of PTE Commercial Union Polska, Poland's biggest private pension fund. "Everybody thought, If the government can do that, then anything can happen."

通过解雇经理、暂停交易and imposing new investment strategies, the government has turned shareholders' rights, financial transparency and other aspects of corporate governance into hot business topics in Poland. Even though privatization has been under way in the country since the 1980s, the government still owns assets worth $33.5 billion in more than 1,700 companies and is widely viewed as abusing its position in a number of major energy, telecommunications, mining and financial services corporations that have attracted foreign and domestic private capital. "Investors don't like the government's strong involvement in the management of firms, and that gets reflected in lower share prices," says Grzegorz Zawada, an analyst at Erste Securities Polska in Warsaw.

But if the government is throwing its weight around it's not the only one asserting shareholder rights. Polish minority shareholders have become embroiled in lengthy disputes with several prominent foreign companies, including French tire maker Cie. Générale des Etablissements Michelin and Dutch financial services company ING Group. "A lot of investors are discovering that in Poland you either have a majority share in a company or you lose," says Andrzej Mikosz, a lawyer at Weil, Gotshal & Manges's office in Warsaw. "Laws on corporate governance are in place, but the problem is getting them enforced."

Who can champion the cause of minority shareholders in Poland? Increasingly, the answer is private pension funds. Created less than three years ago to replace a nearly bankrupt state social security system (Institutional Investor, December 1999), the 17 pension funds have so far signed up some 11 million Poles (out of a total population of 38 million) and manage almost $5 billion, or the equivalent of about 3 percent of GDP.

因为法规禁止资金投资我n foreign stocks, they keep about 70 percent of their assets in Polish Treasury notes and the remainder in domestic stocks and corporate bonds. There are 230 companies listed on the Warsaw Stock Exchange, with a combined market capitalization of $28.75 billion. Trouble is, there are only about 20 companies that meet the blue-chip criteria for pension fund equity investments, which now exceed $1.5 billion. In such a shallow, low-liquidity stock market, the funds can't readily dump shares in a company whose managers turn out to be incompetent or corrupt and find another company to replace it. That in turn is fueling the newfound activism.

"What can I do if I can't vote with my feet?" asks Dariusz Adamiuk, chief investment officer of PTE Powszechny Zaklad Ubezpieczen, or PZU, Poland's third-largest pension fund in terms of contributors and capital. "I have to adopt an approach that adds value to the companies in which I invest."

One obvious way: Press for more transparency and fuller disclosure. "Insisting on better corporate governance is in our own interest," says Jaroslaw Bauc, a former finance minister who is now president of pension fund PTE Skarbiec Emerytura.

Some of the pension funds' most memorable battles to date have been against foreign companies. Last year ING Bank provoked an outcry when it attempted to buy Bank Slaski at 265 zloty ($66) per share, or about 10 percent below the prevailing stock price. ING was eventually forced to raise its bid to the market price, and most pension funds sold their shares. ING now holds between 80 percent and 90 percent of the Polish bank, which has been renamed ING Bank Slaski.

今年的闹得满城风雨的事件主要是围绕着密歇根州elin's 66 percent-owned Polish subsidiary, Stomil-Olsztyn. The pension funds, which hold most of the remaining shares in the local tire manufacturer, contend that Michelin has used transfer pricing to skim profits from Stomil - a charge that Michelin vehemently denies. The pension funds and Michelin initially hired their own auditors to support their positions, but recently agreed to an in-depth audit by Deloitte & Touche.

Meanwhile, the quarrel has turned public and nasty. Michelin announced in January that it will halt further capital outlays and expansion at Stomil until the dispute is resolved. "We are fed up with being accused of stealing money," says Benoît de la Bretèche, the Michelin-appointed president of Stomil-Olsztyn. He warns that parts of the tire factory might have to be closed and workers fired.

Leading the minority shareholders is the PZU pension fund, which holds 10 percent of Stomil's shares and has issued ultimatums of its own. "It won't look good for Michelin if Polish pensioners are told they are being cheated out of their pensions - people might stop buying Michelin tires," says PZU investment chief Adamiuk. "Either management runs the company more transparently, or they can buy us out at the current market price in a public tender."

The pension funds haven't displayed this sort of bravado in defending shareholders' rights in companies in which the government is the dominant investor. For one thing, Warsaw appoints the supervisory board that oversees the funds. Although the board is unlikely to fire an outspoken fund manager, it could show the government's displeasure - for example, by blocking prospective mergers between pension funds, part of an ongoing consolidation process in the industry. Moreover, funds are unlikely to press managers of state-dominated firms to carry out restructurings that would result in layoffs. "Our first duty is to provide good returns at an acceptable risk for our contributors," says a pension fund manager. "But nobody wants to be seen advocating smaller workforces at a failing steel or mining company."

Instead, funds sometimes prefer to act as silent partners of foreign institutional investors that are less hesitant to confront state-appointed managers. "They depend on us to shake the tree for them," says Mark Mobius, manager of Templeton Emerging Markets Fund. "We're the ones who get to tell the government that the company has to be reorganized and more efficiently run." For example, Polish pension fund managers have asked foreign investors to press for lower labor costs and higher productivity at Impexmetal, a nonferrous metals and bearings producer. "We're making some progress - at least salaries aren't rising," says one pension executive.

The pension funds can use all the help they can get in upholding minority shareholders' interests, because the left-leaning SLD government that routed the center-right Solidarity Election Action coalition in last year's elections has taken a decidedly interventionist stance toward state-controlled companies. "There is no reason to keep the people appointed by the Solidarity [government]," said Prime Minister Leszek Miller at a February press conference. "The blame for the fact that so many state-controlled companies are on the verge of bankruptcy falls on the people connected with the previous government."

To be sure, the wholesale replacement of managers at such companies is nothing new: A 1999 World Bank report on corruption in Poland asserted that political cronyism determines appointments to supervisory boards and senior management posts.

"What's new and worrisome," says Krzysztof Rybinski, chief economist of Bank Zachodni WBK in Warsaw, "is that this government doesn't want to move ahead with privatizations. Kaczmarek seems to believe that at this stage of development, the government should actively use its assets to manage the economic restructuring of the country."

For his part, Kaczmarek insists that Warsaw intends to privatize almost every company eventually but is holding out for the best possible prices. "The fact is that the easy privatizations in Poland have been done," he says. "What's mostly left are difficult sectors like heavy industry, coal, steel, railways."

但Kaczmarek的批评者——私人养老基金的人agers among them contend that there are attractive, state-dominated firms in the financial and energy sectors that would sell quickly and at prices that minority shareholders would welcome. At the top of this wish list is financial services conglomerate Grupa PZU, which includes the PZU pension fund and is 55 percent state owned. Eureko, a largely Dutch-owned financial services group, and its Polish partner, BIG Bank Gdanski, hold 30 percent of PZU and signed an agreement with the Solidarity government to purchase an additional 21 percent of the company's shares. Kaczmarek, however, has held up the deal, asserting that the previous government failed to consider bids from other companies and that the $700 million offered by Eureko for the additional shares was too low.

Some analysts suggest another reason for the minister's resistance. "He figures that if the government loses control over PZU, it won't be able to use its assets to purchase Treasury notes, for example," says Erste Securities' Zawada. In addition, by maintaining a dominant position in banks that have yet to be privatized (about 25 percent of the sector), the government can funnel loans to deficit-ridden heavy industries.

Although the pension funds have kept a low profile in the PZU case, they favor its privatization, because that would create a sizable company whose shares would draw domestic and foreign investors and supply much needed liquidity to the stock market. "We're talking about a company with a market capitalization of $2.8 billion," says a pension fund investment manager.

Eureko has appealed to the European Union, claiming that Kaczmarek is breaking a legally binding business agreement. High-level EU officials have met several times with Kaczmarek, Prime Minister Miller and Finance Minister Marek Belka, but to no avail. Meanwhile, to strengthen the government's grip over PZU, Kaczmarek has fired several of its top managers.

The controversy comes at a sensitive moment for Poland. It is applying for EU membership in 2004, and in March EU Commissioner for Enlargement Günter Verheugen suggested at a press conference that the way Poland resolves the PZU dispute will influence foreign investment.

"On a per capita basis, Poland has a much lower level of foreign investment than Hungary or the Czech Republic," notes John O'Rourke, first counselor at the EU's delegation in Warsaw. And the government needs more foreign capital urgently. To help cover a projected 2002 deficit of $10 billion, equivalent to about 6 percent of GDP, the government is counting on $1.75 billion in revenues from privatizations this year. Yet four months into the year, Warsaw had raised only $150 million.

Kaczmarek's handling of energy company PKN Orlen, whose $2 billion market cap makes it the third-largest company on the Warsaw exchange, has set off even louder alarm bells. Before the minister's dramatic removal of the president in February, private investors seemed to have the upper hand in guiding the company. Investors, including the pension funds, were pushing for a merger between PKN Orlen, Hungary's Magyar Olaj-és Gázipari (MOL) and Austria's OMV to form a company that could compete against European rivals or at least fetch a higher price.

The coup against top management by Kaczmarek instantly made clear that the government is in charge at PKN Orlen, not private investors. Arguing that national interests were involved, the minister rejected a tie-up with MOL and OMV and has instead pushed for an all-Polish merger between PKN Orlen and Rafineria Gdanska, also state-controlled and the country's second-largest oil refinery. But with fears mounting that not enough foreign investment is flowing into the country, Kaczmarek has recently toned down his nationalist rhetoric and said that he would welcome a bid for Rafineria Gdanska by a consortium of the U.K.'s Rotch Energy and Russia's OAO Lukoil.

Pension funds may yet be forced to assume a higher profile as minority shareholders, if only to protect their participants. This isn't the role intended for them. "Theoretically, pension funds should be passive investors and behave like mutual funds," observes Marek Gora, a professor at the Warsaw School of Economics and a chief architect of the private pension fund system. "But they have no choice but to be more activist." According to Gora, there are so few financial instruments available in Poland that pension funds - with their growing mass of capital - will have to be allowed to invest in foreign equities and bonds. The government has opposed this, arguing that pension fund money is needed in Poland. Kaczmarek has even suggested that pension fund capital be funneled into new highways and other sorely needed infrastructure projects.

That's an incendiary notion to some pension fund managers. "It's an absolutely crazy, populist idea to force the funds to invest in something they don't want," says former Finance minister Bauc, the Skarbiec fund manager. "What could I say to my pensioners when they retire - have a piece of asphalt?"

A frank exchange with Kaczmarek

Treasury Minister Wieslaw Kaczmarek has emerged as the most controversial and visible cabinet member in the leftist Democratic Left Alliance government that took power after thrashing Solidarity and its allies in last year's elections. A gruff, burly, 44-year-old former mechanical engineer, Kaczmarek seems to relish confrontations with opposition politicians, investors and journalists. His critics accuse him of paralyzing the privatization of state-controlled companies at a time when the Polish economy is in near-recession and in dire need of foreign capital to help close a yawning budget deficit. But Kaczmarek insists he won't countenance privatizations that he thinks are flawed - even if this means angering investors who signed agreements with the previous government.

Kaczmarek recently sat down in his Warsaw office for an hourlong interview with Institutional Investor Contributing Editor Jonathan Kandell. With elbows-high reflexes, the Treasury minister defended his conduct in his most contentious cases - the decision to stop the takeover of PZU Group, Poland's largest financial services conglomerate, by Netherlands-based Eureko, and the heavy-handed fashion in which the president of another state-dominated company, Polski Koncern Naftowy Orlen, the country's leading oil and gas firm, was deposed. Kaczmarek also spoke of the need for a more nationalistic stance in banking and for greater public and private investment in failing economic sectors.

Institutional Investor: Since you took office, a number of privatizations have stalled . . .

Kaczmarek:Oh, really? Like which ones? I'd like to know.

Well, let's take banking . . .

Do you know that foreign control of bank assets in Poland has reached 76 percent? There is not a single country in the European Union that has such high foreign participation in its banking sector. So as far as I'm concerned, the privatization of banks in Poland has been completed. There are only six banks left under state control or ownership. And we could not privatize these banks right now even if we wanted to, because they have internal problems, structural problems that must be solved. Our goal will then be to maintain government dominance - maybe a 30 or 35 percent share - in these banks and not allow any other investor to have more than 5 percent.

Why have you stopped the sale of state shares in PZU Group to Dutch financial consortium Eureko?

This privatization was not done well. I don't know why my predecessor chose Eureko and rejected better offers. We are accused of not sticking to an agreement signed by the previous government. But Eureko hasn't kept to the conditions spelled out for the privatization. For instance, it signed an agreement stating that it had no intention to take over PZU and only wanted a partnership. And where is the transfer of insurance know-how that Eureko promised?

Is it worth the confrontation with the European Union, especially since Poland is up for EU membership in 2004?

It is Eureko that is pushing the confrontation, not us. Eureko and its lobbyists have tried to bring the EU into this. Anyway, because of mistakes made by the previous management at PZU, we will have to start all over again with the preparations for an IPO. We expect to be ready for an offering next year.

In this era of privatization, why should the government want to own shares in any company, anyway?

It should be only in very limited cases where there are considerations of national security - for instance, the companies that own the national power grid and the gas pipeline network. As far as the rest of the companies in which the government now owns shares, it's simply a matter of finding responsible investors.

Are you concerned that replacing so many managers at state-dominated companies sends a negative signal to investors?

I'm more worried about the terrible financial conditions that we discovered in these companies after we assumed office. Some of them showed their worst losses ever. The people I fired were incompetent managers who could not be allowed to continue in their jobs. And anyway, it is nothing unusual for a new government to replace managers appointed by [its predecessor].

At PKN Orlen, the oil and gas company, the president was arrested by the secret police . . .

He should never have been president of PKN Orlen in the first place. He was accused of using insider information some years ago, so I don't understand how he could have been appointed to his position. But I think it was unfortunate that the arrest took place just when there were discussions of changing the management at PKN Orlen, and it was a mistake that the Ministry of Justice used the special security police.

Are you satisfied with the investment policies of private pension funds?

They are an important new source of investment capital. But for now, they are focusing on treasury bonds - probably more than 70 percent of their investment. It isn't their fault, because they are under regulations that limit their investment possibilities. We are hoping to provide the pension funds with more investment opportunities. For example, we will try to privatize some major electric power companies. Also - and I know this is a very sensitive issue - I think it would be a good idea to try to use some private pension fund capital to help restructure the Polish economy. I mean sectors like heavy industry, coal, steel and railways that have to be reorganized. Also, Poland needs to build many more roads.

Are you worried about your image among foreign investors?

No, because I have a positive attitude toward foreign investors. We cannot make further economic progress without foreign investment. But there have been cases where foreign investors have broken agreements, leaving us with a bitter aftertaste. I think journalists only look at these controversies from the point of view of foreign investors, never from the side of the Polish government. I think it's because a lot of politics are involved. Some people did not like the election results. So journalists write things about me and our policies that have nothing to do with reality.

Do you mind being portrayed as the tough guy in the government?

[Laughs] . . . Maybe a bit. But I don't think of myself that way.