Fondul Proprietatea “losing the battle” for corporate governance in Romania

Fondul Proprietatea “losing the battle” for corporate governance in Romania
Fondul Proprietatea portofolio managers Greg Konieczny (centre) and Johan Meyer (right) at a press conference in Bucharest.
By Clare Nuttall in Bucharest September 26, 2017

Romanian restitution fund Fondul Proprietatea (FP) is losing its battle to enforce corporate governance standards in the state-owned companies where it holds a minority stake, the fund’s managers told a press conference in Bucharest on September 26. 

They claim the sudden erosion of corporate governance under Romania’s current government will have wider implications for investment in the country. Specifically, it is likely to see planned IPOs of state-owned enterprises delayed, which in turn would be a setback for ambitions to secure an upgrade from frontier to emerging market status for the Bucharest stock exchange. 

Speaking to journalists in Bucharest, Greg Konieczny, CEO of Franklin Templeton Investment Management (FTIM) and portfolio manager of FP, said the situation was already “extremely concerning” and the adoption of plans currently being considered by the parliament to change the corporate governance code for state owned enterprises would mean “the very sad funeral” of the corporate governance initiative that has helped improve governance in the country in recent years. State-owned enterprises in Romania are currently subject to rules on corporate governance, but the draft legislation would make it possible for the government to exempt companies from them.

The sudden deterioration in the situation dates from when the current Social Democratic Party (PSD) led government came to power, according to Konieczny. FP claims that since then there have been negative changes to corporate governance at 12 of its portfolio companies, while the status quo has been maintained at the remaining six. 

FP has already clashed repeatedly with the government over the appointment of interim management and supervisory boards at major companies such as Hidroelectrica — the largest company in its portfolio — and nuclear energy company Nuclearelectrica. 

At Hidroelectrica, the government, as majority shareholder, enacted a decision by which Hidroelectrica sued FP’s representative Oana Truta for alleged actions with a negative impact on the management of the company. FP has responded by calling the government’s actions “abusive”. 

The fund has also spoken out about the decision to appoint interim management at Nuclearelectrica, saying the company “urgently needs a solid, full-term competent supervisory board”. 

Konieczny claims recent interim board appointments have been followed by “massive new appointments” usually of “friends, family and other people without proper expertise” who “risk not being able to take right commercial decisions”. 

If the new legislation is adopted this could see a return to the situation of seven years ago at companies like Hidroelectrica, where the newly formed FP installed new management that embarked upon legal battles to overturn contracts with so-called “smart guys” — energy traders that were making huge profits from shady contracts with the company.

Hidroelectrica, which has long been earmarked for an IPO, has achieved strong profits in the last few years, and its profitability reached a new record in the first part of this year mainly thanks to high electricity prices. Nonetheless, FP managers argue that the short-term board appointments, typically for four to six months, being made at the company are jeopardising its future performance.

This also has implications for the planned IPO of the company. Energy Minister Toma Petcu indicated on September 23 that the government wants to push ahead with the listing, which would be one of the largest ever in Romania. Petcu elaborated on the size of the stake the government wants to put up for sale and said that the funds generated from the IPO would be reinvested in Hidroelectrica’s business. 

However, managers of FP, which owns 20% of Hidroelectrica, were unconvinced by Petcu’s comments. “We would be happy to see Hydro listed, but the situation at the moment is that the government’s words and actions don't align,” said Johan Meyer, co-CEO of FTIM and co-portfolio manager of FP. “Their objective is to have a stock market upgrade to emerging market status, but you don’t achieve this by not promoting any listings, and companies can’t be listed without the corporate governance code being applied.” 

Indeed, while FP has already appointed advisers for a potential IPO of the company, Konieczny reiterated that the fund has decided to look at other options, specifically a private sale of its stake. The fund said in a statement earlier this month that it was “reviewing strategic options” regarding its stake in Hidroelectrica.