Jan Macháček

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Czech Business Weekly

Flaws in Czech-made corporate governance

31. 01. 2005
Two recent cases involving large state-controlled enterprises reveal that Western-style corporate culture isn’t firmly rooted in this country — especially when it comes to the bonuses and financial rewards given to corporate top bosses.

A Český Telecom shareholders meeting last June approved a system of bonuses offering members of the supervisory board rewards that, more or less, equaled those offered to the board of directors. Depending on share price evolution, members of the supervisory board could earn approximately Kč 10-20 million.

After this move was criticized, Finance Minister Bohuslav Sobotka announced at the end of December that a special Telecom shareholders meeting would cancel all bonuses for members of the supervisory board. In the meantime, it was revealed that members of the ČEZ supervisory board are eligible for even larger bonuses. Not only were they eligible, but some of the money had already been paid out to people on the supervisory board representing the state and the unions. Some of these people are eligible for Kč 30 million, and the bonuses might increase. Sobotka says he wasn’t informed about the deal and, unlike with Telecom, nothing can be done, supposedly.

A basic rule in western corporate governance is that non-executive members of the board (or non-executive directors) who are the equivalent of our “supervisors” are strictly forbidden to join stock-motivation programs. If there are exceptions — and these are very, very rare — the motivation program for the supervisory board must be as different from that of the board of directors as possible.

Obviously, this is not the case with Telecom and ČEZ. In both companies, the bonus systems are identical for executive and non-executive directors. This is a huge mistake. How can a person motivated by a certain incentive program be responsible for checking on the possible abuse of the system by others? And there is another unwritten rule: working as a non-executive director should only be a supplementary part of one’s income, not the bulk of it. But some people serving on ČEZ’s board can earn more in this position than from a lifelong career.

And just who does the nominating? It is widely known that, informally, it is the political parties. This does not imply that corruption definitely exists, but it clearly creates a potentially corrupt environment. Standards of corporate governance exist to limit potential conflict-of-interests and to make control and supervision possible. As the high-profile cases of Enron, Worldcom and Ahold perfectly illustrate, the fatal misuse of managerial posts can occur in other systems as well. With this in mind, the confused Czech arrangement is a very risky path.

Moreover, the vetting of those who run the corporations seems flawed. The bonuses granted in some companies are comparable to those given in some of the biggest and best companies in the West. Why, then, aren’t some of the best western managers not queuing up for jobs here?

There is growing pressure both from politicians and large companies to silence the awakening public discussion about the rewards and bonuses for company directors. Some believe Czech citizens are not ready to hear about these juicy rewards. But I don’t think so. Financial bonuses in publicly traded companies are also a legitimate topic of public debate. Therefore, we should not think twice about encouraging the discussion.

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