Clare Nuttall in Belgrade -

Emerging Europe has seen improvements in corporate governance and transparency, though progress is still mixed. However, the two of the leading producers of consumer goods in the Balkans are pushing hard for better governance for the simple reason it makes financing cheaper and easier to raise.

Atlantic Grupa is one of Southeast Europe’s largest food producing companies that have some of the region’s best-known brands including Smoki snacks and Bebi baby food. Emil Tedeschi, president and CEO of the Zagreb-based company, says that corporate governance is “our philosophy”.

Back in 2006, the company, which also has operations in Germany, the UK, Italy and Slovenia, adopted a corporate governance code based on EU and Organisation for Economic Co-operation & Development (OECD) practices, setting out procedures for its supervisory and management boards, preventing conflicts of interest and increasing transparency. The following year, it carried out a record-breaking IPO on the Zagreb Stock Exchange. Atlantic is also a signatory to the Croatian Chamber of Commerce’s code of business ethics.

These and other measures have had concrete benefits. “We can get loans at a more favourable rate than the sovereign because we are so transparent,” Tedeschi told the East Capital Summit in Belgrade on June 4. “Improving corporate governance and transparency has paid back a lot. We have the ability to raise more money than the market cap of the company provided we have a good business plan.”

Plane talking

In neighbouring Serbia, holding company MK Group is one of the country’s most successful businesses, whose companies include Serbia’s largest producers and exporter of sugar, wheat, corn, soybeans and animal feed. Since 2006, it has expanded internationally to Ukraine, Russia and Belarus.

MK's president Miodrag Kostic believes the region, in particular Serbia and Ukraine, has strong growth prospects. “Serbia is improving. There is a new government with a young prime minister. Serbia is now at its weakest point – the economy won’t decline further. There is a lot of space for growth, especially in the public sector and among state owned enterprises. So long as we have political stability, there will be future growth.”

Despite MK Group’s own expansion over the last three decades, according to Kostic, “10 years ago, we did not know about corporate governance. It was like a different language. However it is the language that investors speak and so we had to learn it."

Kostic goes on to draw a parallel with flying a plane. The manager of the company is the pilots and the investors other passengers. Investors need to be sure that the pilot won't crash the plane and so demand reports and checks to make sure that the company is well run.

"It's hard work persuading all my managers that they have to create all this paperwork. There is a balance because the investors want to feel safe, but at the same time they do need to leave me enough time to actually fly the plane," says Kostic.

Today things are very different. Like Atlantic, MK has admitted independent members to its supervisory board, which today includes two independents and one representative of the European Bank for Reconstruction and Development (EBRD). In 2013, the EBRD announced a €50m investment to increase the capital of MK – a long-standing client of the bank – through a subscription to newly issued shares. The deal was the EBRD’s first equity investment in primary agriculture in Serbia, which the bank said reflected confidence in both the sector and the group.

“Corporate governance is an important aspect of business in all economies, not only in developed countries, but also in countries in transition. In the past ten years in Serbia, great progress has been made in this area, and MK Group is a good example, as confirmed by the fact that the EBRD increased the capital of our company,” Kostic told the summit.

Louise Hedberg, East Capital’s head of corporate governance says: “Although country-specific research on corporate governance delivers mixed results, our experience shows that ownership structure and board composition are the key governance considerations in emerging and frontier markets.”

According to Hedberg, the four major factors contributing to development and enforcement of higher corporate governance standards are active investors, the presence of free and independent media, peer pressure, and a positive influence from groups such as corporate governance associations, research groups and international organisations.

Public push

In addition to private companies like Atlantic and MK, governments and financial authorities have also pushed for better corporate governance. Turkey has seen a series of reforms to develop its financial markets and protect shareholders, which were stepped up after plans to turn Istanbul into an international financial centre were announced.

The Capital Markets Board of Turkey (CMB) was the initiator of a code of corporate governance principles, based on OECD benchmarks. This was followed by a requirement that all listed companies adopt IFRS accounting standards. In 2012, Turkey ruled that all listed companies must broadcast their general shareholders meetings online – resulting in over 13,556 investors from 41 countries participating electronically in general meetings.

Pressure can also come from the company side, as show by Romania’s Fondul Proprietatea (FP). Set up by the Romanian government to compensate citizens whose property was seized under communism, FP is now a closed-end investment company traded on the Bucharest stock exchange. The fund, which has holdings in 62 companies of which 55% are listed, has been managed by Franklin Templeton Investment Management since September 2010. Since then, the fund has seen the introduction of new corporate governance practices as well as greater efficiency and transparency.

“In striving to implement the highest corporate governance standards, FP and its manager have show professionalism, consistency and notably courage in fighting for necessary improvements in the holdings – not uncommonly taking disputes to court,” Hedberg writes. FP is expected to benefit when Romania takes further steps to improve functioning of the local capital market.

There are also hopes of improvements in the former Yugoslavia region, where Atlantic’s Tedeschi wants governments to be more active in developing stock markets and calls for a regional approach. “Croatia has a good system but in Serbia it doesn’t work so well,” he says. “The problem is that markets in the region are quite fragmented - I would like to see a joint stock exchange for the region.”