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Vol 2, No 32
25 September 2000
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Steel StructuresStructures
Set in Steel

Assessing ownership of the steel industry in CEE
Andrew Kotas

It has been asserted at a number of conferences over the last year that the restructuring of the Central and East European (CEE) steel industry has all but stopped. By and large, but with a few exceptions perhaps in Poland and the Czech and Slovak Republics, these assertions are true. Therefore, it is necessary to focus on a single but extremely important related issue—the matter of the drive for industry restructuring, or the pressure for restructuring to happen. On this subject, there are important questions that should be asked both about the responsibility for restructuring (the question of who is in the driver's seat), and about the capability to drive restructuring forward (thus enabling all passengers to be on board).

Responsibility for restructuring

That ownership carries some duty of responsibility is a matter over which there should be little doubt. In the context of the restructuring of the CEE steel industry, it is pertinent to ask, however, who should have responsibility for this restructuring. Governments still own a substantial proportion of the steel industry, especially in Central Europe. Indeed, it is governments that have recently put forward restructuring programmes for their steel industries in countries such as Poland and the Czech Republic. It is governments that are named in those programmes as the bodies to be responsible for directing and managing the restructuring. On the other hand, governments cannot be expected to take day-to-day control of running steel businesses, since this should be the proper role of steel company boards and of plant managements.

Corporate governance is defined by the Organisation for Economic Co-operation and Development (OECD) [1] as the set of relationships between a company's management, its board, its shareholders and other stakeholders. These relationships represent the structures through which company objectives are set, and represent the means for seeing that those objectives are attained. And, whilst there may be no single model of good corporate governance, the OECD has nevertheless outlined some common elements that underlie good practice. There are two particular principles that are relevant to this discussion:

  • The need for a governance framework that ensures strategic guidance and provides for effective board accountability. The creation of such frameworks is an important role for governments.
  • Emphasis on the fulfilment by the board of major plans of action including business plans and the overseeing of major capital investments. This, of course, is at the heart of the implementation of restructuring, which cannot be a government's responsibility.

But, it must be asked, what might effective frameworks be comprised of? Certainly, the frameworks should incorporate appropriate objectives and milestones for restructuring; and a number of recent national steel industry restructuring programmes have indeed addressed this. But if the frameworks really
Restructuring of these industries is not cheap
are meant to assure that objectives are attained, then it is important also that they should include structures that fully enable CEOs and their boards to function. This includes the need for decision-making structures that facilitate change. It is also necessary that such frameworks allow progress to be monitored, and, finally, they must incorporate the appropriate mechanisms to motivate and reward CEOs and their boards for good performance and the pursuit of objectives that are in the interest of companies and their shareholders.

Government and industry

In this context, it is interesting to note some of the structures with which the industry interacts on matters to do with privatisation and restructuring. Across CEE, there are generally the Ministries of Industry or of the Economy that are ostensibly responsible for ensuring progress with restructuring. In the recent Polish and Czech restructuring programmes, these indeed were the specific bodies named as being responsible for managing those programmes. But then there are the Ministries of Finance that are responsible for state budgets; and, as is known, restructuring of these industries is not cheap.

Privatisation Agencies in many countries in turn have their own roles and the National Property Funds have other (sometimes somewhat unclear) responsibilities. To add to this, there are often also the Restructuring Agencies. And, in another instance in Central Europe, last year there was the creation of yet another state body, a Revitalisation Agency which, itself, is controlled by a state-owned bank and concerned only with financial restructuring.

This is not to suggest that each of these bodies exist in all the individual countries of CEE. And, surely, many of these bodies were created with good intention, in many cases in incremental decisions that made sense at the time. But taking stock after some years, there are now instances where three, four, even five such government bodies are in place. Whilst it may be that these arrangements do in fact work efficiently and effectively, to an outsider it would appear that the presence of so many structures creates risks for a number of problems. Potentially, these include:

  • An absence of full clarity of responsibility, and an empty or even powerless driver's seat;
  • a lack of alignment of responsibility with appropriate understanding and full authority (for example, for objective setting, motivating, etc);
  • sub-optimal communication and slow decision-making, due to the number of parties involved;
  • confusion on reporting channels, and, thus, sub-optimal monitoring of performance and progress with restructuring;
  • the absence of any holistic picture, with progress as a result being made in some areas but not others;
  • as a consequence of many of the above, the general lack of an "enabling" framework within which CEOs might function;
  • in consequence also, slower progress in privatisation and restructuring of the state-owned steel sector than might otherwise be the case.

It may be that these problems, in reality, represent far bigger obstacles to progress than the corporate governance issues that have been raised. Nonetheless, there would be little to lose and perhaps much to gain from further discussion about authority and responsibility for restructuring, and from the initiation of stronger structures and mechanisms that better guide, enable and make change happen.

Who's driving?

The capability to drive restructuring forward must also be considered. What follows is relevant to privatised (or partly privatised) companies, rather than to the fully state-owned steel sector.

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If an owner of a business wants to see a process of change, then he or she needs to have control over his or her business so that, if necessary, difficult decisions can be made. Secondly, the owner needs the ability to implement such changes. These considerations bring up two further issues, namely the current fragmentation of steel industry ownership and the nature of current shareholders in the industry.

An assessment of the current ownership structure of the Polish steel industry helps illustrate the fragmentation of ownership.

The structure still involves a significant ownership role for the state. More importantly, it also identifies a large number of companies as currently not having a controlling stake that is in excess of 50 per cent. At the same time, however, there exist numerous minority shareholders, sometimes with individual stakes of only a few per cent, though often with stakes that, in aggregate, could give the dominant shareholders majority control. These minority shareholders include energy or raw materials suppliers, banks and national investment funds, other steel companies and sometimes also local or regional authorities.

In many cases, the ownership structure is therefore very fragmented. This has the consequence that no single shareholder has the power or authority to approve or to drive forward difficult restructuring decisions. The fragmentation also means that, in some instances, minority shareholders (who often have little commitment to these businesses, because of the size of their equity stake) can, in aggregate, block key decisions if they wish to. The ownership structure, therefore, is not one that facilitates a process of change. Rather, it is an ownership structure that can often be disabling. It is a structure where commonly there is nobody in the driver's seat, when it is very evidently time to move on.

But it should be stressed that this problem is not uniquely Polish. Other examples in the region (and this list is by no means exhaustive) include Czech company Nová Huť, where the National Property Fund has a 49 per cent stake recently shared with CSFB, which has an 18.25 per cent stake, and a series of minority owners including HZP (five per cent), the Restituční Investiční Fond (4.7 per cent), the Český Investiční Fond (one per cent), Union Banka (about one per cent), Petrcíle (about one per cent), the City of Ostrava (one per cent) and others. Many press reports concern the problems that the business is now having over matters of control.

Another Czech company, Vítkovice, also has a series of minority shareholders (Ostrava City five per cent, Restituční Investiční 4.5 per cent, PAL one per cent and others totalling 22 per cent), which raises a potential future problem of control when the government's remaining 67 per cent stake is sold, if more than one new owner becomes involved. Plans exist, of course, to create four new businesses from the Vítkovice asset base, and there is some discussion of existing creditors taking equity over the medium term.

Also in the Czech Republic, at Moravské Železárny, it is understood that current minority holdings are owned by a number of small investors, in aggregate, exceeding 60 per cent of total equity, so that, again, there is no single body in overall control.

In Romania, where there is a current lack of control at Ductil, there is a potential for future control problems at Industria Sarmei, when the current government stake is sold, because of current minority holdings of about 33 per cent.

Market turbulence

Many of the ownership structures outlined above were not, of course, intentional or planned. Rather, many of these structures emerged because of difficult trading conditions during the market collapse of the early 1990s, the subsequent liquidity crisis and the debt-for-equity swaps that followed. The current ownership structure, nevertheless, means that there are fewer instances of shareholders who can individually control the future of their businesses, and take and implement tough restructuring decisions than there might be otherwise. The ownership structure is, therefore, directly impacting the capability to act. It is, therefore, ownership structure that is responsible for much of the paralysis in progress to which so many industry commentators now allude.

Some may ask why fragmentation of ownership in CEE should be a problem if comparable fragmentation is also often seen in ownership structures in the Western world. The answer to this is threefold.

First, a key (and generally transparent) control mechanism in the Western world is the share price. If company performance is poor, investors sell their shares, the share price falls and the business becomes vulnerable to takeover. This of course subsequently allows concentration of ownership and much stronger control.

Secondly, investors in the Western world tend to be large financial institutions, who are unified in their objective of maximising the share price. This commonality of purpose means that, in aggregate, shareholders have the motivation, as well as the power over boards, to implement change where appropriate. And, finally, there tend to be regulatory systems in place that encourage transparency and disclosure and that encourage responsible decision-making in companies' interests.

The insiders

Privatisation of much industry in CEE (including steel) was undertaken by the sale of these businesses to management and employees, the so-called insiders. Commenting on this, the recent transition report published by the European Bank for Reconstruction and Development (EBRD) discussed
the ownership structure is still extremely nationalistic
evidence that the performance of businesses privatised to "outside" investors proved unambiguously better than of those privatised with "insider" involvement [2]. Privatisation of the steel industry in CEE has not been as "insider"-focused as that in Russia. It, nevertheless, remains true (with the exception of Lucchini Warszawa and soon of VSZ) that "outsider" involvement - where there is also understanding of technical issues and an ability to assist with international marketing - has been minimal.

In a discussion document on ownership and restructuring, a recent World Bank publication commented [3]:

Inside ownership of enterprises is likely to be less conducive to enterprise restructuring than outsider ownership. Outsiders can bring to enterprises new ideas about how to operate the enterprises under the new conditions, and can serve as links to new sources of investment funds. Enterprise insiders are likely to be a less promising source of new ideas and have less capability to provide investment funds. World experience suggests the importance of openness to new, outside models and ideas in fostering economic development. Evidence from developments in the Czech Republic, Hungary and Poland, while not conclusive, indicates that the nature of enterprise restructuring varies by ownership form, and that outside ownership may promote deeper restructuring.

Assessing the structure of Central and East European steel industry ownership today, it is perhaps fair to say that not only does the current structure largely exclude third parties with technical and distribution capability, but also that the ownership structure is still extremely nationalistic. Banks tend to be domestic banks. Distributors tend to be national distributors. Suppliers tend to be local or national providers of energy or raw materials. Other common owners are local authorities. More speculative investors tend to be national rather than international investment funds. The nature of the industry's ownership is thus still too highly insider-oriented, which is likely to contribute to restructuring too often being insufficiently deep.

Independent metals-oriented management consulting firms should, however, also be considered as "outsiders" but also as sources of new ideas and access to funding.

So, there remain still key impediments to the restruturing of the CEE steel industry. The biggest problem, it seems, is the lack of drive. However, with more attention perhaps to corporate governance issues at the government level and resolution of the problems of the fragmentation and nature of ownership at the shareholder level, it is certain that the drive can be restored. Only then will further substantial progress be made with privatisation and with the deeper restructuring of the industry, with far more passengers on board.

Andrew Kotas, 25 September 2000

[Original photo courtesy of Freefoto.com]

Moving on:


1. See http://www.oecd.org/daf/governance/principles.htm. Note that, whilst these principles focus on publicly traded companies, they are also considered by the OECD to be useful principles for improving governance in privately-held or state-owned companies.

2. See page 33, EBRD Transition Report, 1999, Chapter 2 "Progress and Patterns in Transition." Performance was defined in terms of growth in sales and productivity.

3. Internet publication, WBI Forum, "Ownership and Restructuring." For further details please see http://www.worldbank.org/wbi/edimp/fsu/ownres.html


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