Enacted Summary
In its 2003 Corporate Governance Sector Assessment Project the European Bank for Reconstruction and Development (EBRD) came to the conclusion that corporate governance legislation in the Czech Republic was in "medium compliance" with the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. The EBRD assessment pointed out shortcomings in certain areas, including disclosure and transparency, protection of shareholders rights, and implementation and enforcement of corporate governance legislation. In 2002, the World Bank had conducted a similar review and made policy recommendations in three broad areas: legislative reform, institutional strengthening, and voluntary/private initiatives. The Czech Corporate Governance Code of 2004 is modeled on the OECD's principles of Corporate Governance and remains voluntary.
General Overview
According to the World Bank's 2002 Report on the Observance of Standards and Codes (ROSC), the Czech Republic's privatization drive in the early 1990s was accompanied by issues of ownership concentration, exploitation of control, lack of transparency, and price manipulation. Nonetheless, Czech securities markets were evolving rapidly, even though institutional weaknesses prevented the development of a culture for corporate governance. In 2001, the Czech Republic initiated financial regulatory reforms to tackle these issues. However, the 2002 World Bank report noted that "related party transactions, insolvency and more technical issues, such as voting by mail and shareholder meetings, still require more attention" (p. 1). The report recommended legislative reform, institutional strengthening, and voluntary/private initiatives.
In 2003, the European Bank for Reconstruction and Development (EBRD) conducted a Corporate Governance Sector Assessment Project (the results of which were published in 2004). The report concluded that corporate governance legislation in the Czech Republic was in "medium compliance" with the Principles of Corporate Governance developed by the Organization for Economic Cooperation and Development (OECD). The EBRD assessment pointed out shortcomings in disclosure, transparency, and protection of shareholders rights. Since then, however, progress has been made to improve legislation, enforcement, and corporate governance culture in the Czech Republic. For instance, the Czech Code of Corporate Governance was revised from its original 2001 version in 2004 by the Czech Securities Commission and is modeled after the OECD's Principles of Corporate Governance. A 2007 EBRD Corporate Governance Legislation Assessment Project report had pointed out that the Czech authorities were in discussions about making the Code of Corporate Governance legally binding. However, as a 2009 EBRD Law in Transition publication points out, compliance with the Code remains voluntary, in fact, the Czech Republic is the only transition country not to adopt the "comply-or-explain" principle for its corporate governance code.
According to the details of the legal structure, provided in the 2007 EBRD report, the primary law regulating corporate governance is the Commercial Code, which was enacted in 1991 and was last amended in 2005, as of the writing of the EBRD report. The Commercial Code regulates the general establishment and function of companies, rights of shareholders, takeover rules, reporting requirements for changes of shareholding in a company, and merger and acquisition policies. With regard to legal developments affecting corporate governance, the report noted recent legalization transposing relevant European Union (EU) directives into Czech law.
The Czech National Bank (CNB), assumed the role of the integrated regulator for the financial sector on April 1, 2006, at which time it took over the responsibilities of the Czech Securities Commission, the Ministry of Finance's Office for Supervision of Insurance and Supplementary Pension Insurance, and the Office for Supervision of Credit Unions. The CNB is responsible for the supervision of the banking sector, the capital market, the insurance and pension scheme industry, and credit unions. Per the CNB website, the bank "lays down rules safeguarding the stability of the banking sector, the capital market, the insurance industry, and the pension scheme industry. It systematically regulates, examines, assesses and, where appropriate, issues penalties for non-compliance with these rules."
According to the 2009 US Department of Commerce (DoC) Doing Business report, lax regulation, fraud and scandals has marred the securities market’s reputation. The Prague Stock Exchange has – as of January 2010 – only 13 listed companies. In its Doing Business 2010 report, the World Bank rates investor protection in the Czech Republic in 2009 as being on par with the regional average. The Investor Protection Index is a subcomponent of the World Bank's 2010 Doing Business Indicators, and consists of three aspects of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indices range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. The Czech Republic scores 2.0 in the disclosure index, against an OECD average of 5.9. It scores 5.0 in the Director Liability Index, against an OECD average of 5.0; and it scores 8.0 in the Shareholder Suits Index, against a regional an OECD average of 6.6.
The Principles
IIPrinciple I: Ensuring the Basis for an Effective Corporate Governance Framework
In its 2002 ROSC, the World Bank made policy recommendations in three broad areas: legislative reform, institutional strengthening, and voluntary/private initiatives. The now-defunct Securities Commission of the Czech Republic initiated the idea of improving corporate governance and in partnership with several other stakeholders published a Code of Corporate Governance in 2001, which was later updated in 2004 based on the OECD principles. According to the 2007 EBRD report, compliance with the Code is recommended but not enforced, and the Prague Stock Exchange (PSE) accepts securities for trading without insisting on compliance. As the 2009 EBRD Law in Transition publication points out, compliance with the Code remains voluntary, making the Czech Republic the only transition country not to adopt the "comply-or-explain" principle for its corporate governance code. The 2007 EBRD report had added that Czech authorities were discussing the possibility of changing the Code's voluntary application to a legally binding requirement, but no information is available on the status of these discussions.
Overall, the 2007 EBRD report observed that the legal and regulatory requirements affecting corporate governance are generally clear and are enforced in an efficient, consistent manner. However, shortcomings were observed with regard to the official dialogue between government and private sector and understanding the impact of new legislation on costs. Further, the report clarified that "the new reform modernizing the regulation of the state apparatus, which should implement RIA [Regulatory Impact Analysis] in the legislative procedure, is being processed" (p. 10). However, the publicly available information does not directly address the Czech Republic's compliance with this principle.
ENPrinciple II: The Rights of Shareholders and Key Ownership Function
The 2002 World Bank assessment rates the Czech Republic's observance with the sub-principles of Principle II as follows: "The functioning of control arrangements" was rated as "observed," indicating that all essential criteria are met without significant deficiencies. "Basic Shareholder rights" was rated as "largely observed," indicating that only minor shortcomings are observed that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Shareholder's Annual General Meeting rights," "Rights to participate in fundamental decisions," and "Disproportionate Control Disclosure" were rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. "The requirements to weigh costs/benefits of exercising voting rights" was rated as "not observed," indicating that no substantial progress towards observance had been achieved.
Overall, the World Bank reported that the 2001 amendment to the Commercial Code improved certain aspects of this Principle. However, enforcement remained inadequate. More recently, a 2007 EBRD report also observed certain departures from the OECD sub principles. For instance, Czech law does not provide for sanctions when shareholders are not provided free and timely information by the company. Furthermore, the report noted that the law did not give the shareholders' meeting the exclusive power to appoint auditors, approve auditors' remuneration, or request additional information regarding the auditors' report.
NCPrinciple III: The Equitable Treatment of Shareholders
The 2002 World Bank assessment rates the Czech Republic's observance with the sub-principles of Principle III as follows: "All shareholders should be treated equally" is rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. "Prohibit Insider Trading," and "Board/Management should disclose interest" were rated as "materially not observed," indicating that despite progress, deficiencies raise doubts on the authorities' ability to achieve observance. More recently, the 2007 EBRD assessment also observed certain departures from the OECD sub-principles, specifically on issues concerning protection of minority shareholders, information on shareholders' options in the use of their voting rights and disclosure of any material interest in transactions or matters affecting the corporation.
ENPrinciple IV: The Role of Stakeholders in Corporate Governance
The 2002 World Bank assessment rates the Czech Republic's observance with sub-principles of Principle IV as follows: "Access to relevant information" is rated as "largely observed," indicating that only minor shortcomings are observed that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. Sub-principles "The redress for violation rights" and "performance-enhancing mechanisms" were rated as "partially observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. Finally, the OECD sub-principle "role of stakeholders in corporate governance" was rated as "materially not observed," indicating that despite progress, deficiencies raise doubts on the authorities' ability to achieve observance. More recently, the 2007 EBRD also observed departures from the OECD sub principles on issues concerning the lack of clear provisions in law on protection of suppliers as stakeholders and secondly, provisions on protection of 'whistleblowers'.
ENPrinciple V: Disclosure and Transparency
The 2002 World Bank assessment rates the Czech Republic's observance with the sub-principles of Principle V as follows: "Independent audit annually" and "fair and timely access to information" are "largely observed," indicating that only minor shortcomings are observed that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Timely and accurate disclosure of material information" was rated as "partially observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. OECD sub-principle "disclosure standards" was rated as "materially not observed," indicating that despite progress, deficiencies raise doubts on the authorities' ability to achieve observance. More recently, the EBRD's 2007 report also observed certain departures from OECD sub-principles, specifically on issues concerning disclosure of financial and operating results of the company, governance structures and policies, independence of auditor, dissemination of information to shareholders, and documentation available for inspection by shareholders.
ENPrinciple VI: The Responsibilities of the Board
In its 2002 ROSC, the World Bank rated the OECD sub principle "access to accurate, relevant, and timely information" as "largely observed," indicating that only minor shortcomings are observed that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. Further, the OECD sub-principles "act on an informed basis, in good faith, with due diligence and care, in the best interest of the company of shareholders," "fair treatment of each class of shareholders," "compliance with law and taking into account stakeholders' interests," and "fulfillment of key functions" were rated as "partially observed," indicating that although the legal and regulatory framework complies with the OECD principles, practices and enforcement differ. More recently, the EBRD in its 2007 report also observed certain departures from OECD sub-principles, specifically on issues concerning ensuring a formal and transparent nomination process for board members and on objective judgment on corporate affairs independent from management.
