1

Functioning of Boards of Directors in Romania

Prepared by Angela Ionita

Vice President - EFM / A company of HKK Partners

Senior Investment Officer - The Romanian Investment Fund Ltd.

November, 2002

2

Functioning of Boards of Directors in Romania

• Progress - the macroeconomic environment:

– GDP, inflation, unemployment etc.

– NATO

– EU

• Progress - the Romanian capital market:

– BET Index increased by more than 100%, in USD, for the first 10 months of the year 2002 (Source: BSE)

– Rasdaq/ OTC Index increased by 37%, for the first 9 months of the year 2002 (Source: ANSVM)

3

Functioning of Boards of Directors in Romania

• Corporate Governance in Romania:

– “Companies Law no. 31/1990”

– “Ordinance 28/2002” approved by the “Law 525/2002” - “The Romanian Securities Law”

• Cumulative Voting

– Rules, procedures, Codes

– “Transparency Tier” - Bucharest Stock Exchange

• Code of Corporate Governance

4

Functioning of Boards of Directors in Romania

• Duties and powers of the Board, based on the new “Romanian Securities Law”:

– takeovers

– quarterly reporting

– reporting in the cases the General Shareholders Meeting delegates some of its attributions to the Board

– dividends

– buy, sell, exchange of assets etc.

– “in- kind” contributions

– capital increases/ settlement of price for the capital increase

– Etc.

5

Functioning of Boards of Directors in Romania

• Composition of Boards, Independence:

– size: generally, between 3- 9 members

– executives/non-executives: on average, executives are not in the Board with the exception of the Chairman/CEO (exceptions: (i)illegal - MEBO / Management and Employees Buy-Outs, (ii) legal -banks)

– Chairman / CEO: in general, the Chairman is the CEO, especially for MEBO and State owned companies; the Chairman is not the CEO when foreign investment funds are majority shareholders

– Independent directors: very rare, in joint stock companies

– Independent directors: existing in all the five SIFs (Financial Investment Funds)

6

Functioning of Boards of Directors in Romania

• Related parties transactions:

– “Romanian Securities Law”: above EUR 50,000, related parties transactions shall be disclosed

• Directors Committee: not implemented, although it is mentioned in the “Companies Law”; in practice, informal split of attributions takes place, in some Boards

• Audit, Nomination and Compensation Committees: these Committees do not exist in any law

• Censors / financial auditors: some “gaps” exists when the transfer from censors to financial auditors is being made

• Internal audit activities: not enough organized

7

Functioning of Boards of Directors in Romania

• Boards qualifications:

– For joint stock companies: there are not very specific provisions

– For the SIFs: specific provisions were issued by the Romanian National Securities Commission

– For the banking sector: the central bank requires some general qualifications and has the right to reject candidates

8

Functioning of Boards of Directors in Romania

• Board compensation:

– state owned companies: board fee is in general 20% of the salary/ base salary/ gross salary of the general manger;

– private joint stock companies: in general, the net board fee is between USD 200-300;

– banks: at the Bucharest Stock Exchange, the range of the net board fee is between USD 600 - 800 net;

– there are cases when the chairman is better remunerated than the rest of the Board members (ex. banks);

– directors are not remunerated based on the performance of the company;

9

Functioning of Boards of Directors in Romania

• Board compensation:

– IAS implementation requires a disclosure of the salaries of the managers and directors: this disclosure does not take place in practice

– SIFs: on average, the net remuneration is between USD 300 - 500

– SIFs: performance bonus is paid to the directors of some SIFs

• Board evaluation:

– in many cases, a proper evaluation is not taking place