**6. Corporate governance in transitional economies**

There is no a specific model of corporate governance within countries with transitional economies; as a rule, the mixture of features of Anglo-American and German models are used. For transitional economies, the key goal is to shift from command to market economy that requires huge investments from the private sector. At the same time, to encourage the investors and to increase the flow of finance to the business and due to the essential need of investors to control and be guaranteed to receive the return, the adequate system of corporate governance should be implemented.

To develop and implement the proper model of corporate governance, the business sector accompanied by the government should solve vital issues of transitional economies. The first one is the absence of the trust in the financial instructions in general and to the investment procedure in particular. As with changing the system of economy, there was a modification in financial sector as well, while with transition, the elements of old and new systems contradict one another that in turn decreases the level of reliability. Weakly developed banking system is not able to play a crucial role in a corporation's performance as an investor and an overseer.

The second one is the privatization of huge public companies, where with public properties inefficient methods of management were transferred to private sector. Under those conditions, there is a complex mission to rearrange the whole understanding of the goals of a company, starting from building up a new strategy of a company till modernization of the bottom level of an organization in combination with launching key functions of corporate governance.

The third one is a changing legislation; with improving market rules, there is a transformation of old norms and regulations to new modern ones. Dealing with changing legal system requires day-to-day updates and forming the system of corporate governance in accordance to it, as one of its functions is to ensure the legislation of a company's performance. Modern models of corporate governance include stakeholders' interests, but in the command system, they were not counted as interested in a corporation's performance, thus they were out of the legislation at all.

The forth one is the lack of trust in shares and corporations with a share capital, that slows down the investment and accumulation of the share capital that is essential for all corporations. The adequate legal system can ensure the rights of shareholders and investors, but for transitional economies, the legislation is under continuous changes.

The fifth one is the superior role of the state, as previously state companies are transferred to private owners, but still the state can participate as a shareholder, and it has unrestricted influence on a corporation's performance based on the previous ownership. In such corporations, the state, as a rule, forces shareholders to make decisions that are beneficial for itself and then for other shareholders and stakeholders. At the same time, there can be even cases on violation of property rights and misuse of corporate governance functions in order to meet needs of state shareholders [8].

#### **6.1. Discussion**

The current issues on corporate governance implementation in transitional economies require the development of specific principles of building up a reliable and suitable system of corporate governance based on real transformations and incomplete legislation, as the norms appropriate for successful performance in advanced countries cannot be fully used in transitional economies. The gap between principles of efficient corporate governance published by international organizations and suitable principles for transitional economies allows managers and shareholders to misuse them in favor with their personal interest.

## **7. The evaluation of corporate governance**

increase the flow of finance to the business and due to the essential need of investors to control and be guaranteed to receive the return, the adequate system of corporate governance should

To develop and implement the proper model of corporate governance, the business sector accompanied by the government should solve vital issues of transitional economies. The first one is the absence of the trust in the financial instructions in general and to the investment procedure in particular. As with changing the system of economy, there was a modification in financial sector as well, while with transition, the elements of old and new systems contradict one another that in turn decreases the level of reliability. Weakly developed banking system is not able to play a crucial role in a corporation's performance as an investor and an overseer. The second one is the privatization of huge public companies, where with public properties inefficient methods of management were transferred to private sector. Under those conditions, there is a complex mission to rearrange the whole understanding of the goals of a company, starting from building up a new strategy of a company till modernization of the bottom level of an organization in combination with launching key functions of corporate

The third one is a changing legislation; with improving market rules, there is a transformation of old norms and regulations to new modern ones. Dealing with changing legal system requires day-to-day updates and forming the system of corporate governance in accordance to it, as one of its functions is to ensure the legislation of a company's performance. Modern models of corporate governance include stakeholders' interests, but in the command system, they were not counted as interested in a corporation's performance, thus they were out of the

The forth one is the lack of trust in shares and corporations with a share capital, that slows down the investment and accumulation of the share capital that is essential for all corporations. The adequate legal system can ensure the rights of shareholders and investors, but for

The fifth one is the superior role of the state, as previously state companies are transferred to private owners, but still the state can participate as a shareholder, and it has unrestricted influence on a corporation's performance based on the previous ownership. In such corporations, the state, as a rule, forces shareholders to make decisions that are beneficial for itself and then for other shareholders and stakeholders. At the same time, there can be even cases on violation of property rights and misuse of corporate governance functions in order to meet

The current issues on corporate governance implementation in transitional economies require the development of specific principles of building up a reliable and suitable system of corporate governance based on real transformations and incomplete legislation, as the norms appropriate for successful performance in advanced countries cannot be fully used in transitional

transitional economies, the legislation is under continuous changes.

be implemented.

14 Corporate Governance and Strategic Decision Making

governance.

legislation at all.

needs of state shareholders [8].

**6.1. Discussion**

As an investor's goal is to ensure the future return and benefits, to realize their interests, as a rule, they sink their capital in well-governed corporations, which operate in accordance with the current legislation and guarantee the fair participation of investors in the decision-making procedure, are able to eliminate the risks and balance the interests of shareholders, managers, and stakeholders. The level of corporate governance effectiveness can be measured by using the methodology of rating agencies, by evaluating the actions of key participants as well as the financial outcomes.

The first agency that implemented the rating system on corporate governance is Standard & Poor's, which evaluates the efficiency of corporate governance by studying the following actions: the misuse of a corporation's resources by the dominants for the satisfaction of personal interests, the structure of bonus systems that can encourage managers to achieve the short-run benefits instead of following long-run priorities, and inappropriate control of information that can lead to the asymmetric access to the information, accompanied by an increasing gap between interests of shareholders and stakeholders.

The rating reports provide the information on a corporation's financial and managerial performance due to the investors' need to understand and evaluate in advance the potential benefits of financing a specific corporation based on the rating criteria, which in turn form the perception of a company, its image and ability to create value, weak and strong sides of its corporate structure and functions, comparative advantages, etc., in general, the place among competitors. The availability of an objective, nonbiased, and reliable evaluation methodology allow to eliminate the asymmetry of information between shareholders, managers, and stakeholders, that, in turn, increases the probability of implementation of common interests and gaining the higher return of invested financial resources.

The corporate governance score, evaluated by the agency, provides the experts' opinion on the principles of existing structure of corporate governance and the efficiency of implementing the declared principles in comparison with other corporations. The score is calculated based on the detailed analysis of a corporation's reports and official documents and interviews with top managers. There are four key criteria of overall evaluation (for more information see **Table 1**):


shareholders and mangers to improve the structure of corporate governance, the indicator will remain low, limiting or preventing any further elimination of risks and dealing with a conflict of interests.


To meet the demand of financial institutions and private investors for reliable evaluation of a corporation's governance and the level of protection of shareholders' rights, a well-known organization, Moody's, provides evaluation reports on the efficiency of corporate governance. Moody's (see **Table 1**) empathizes the crucial influence of corporate governance on financial or credit risks.


**Table 1.** The common and specific criteria of corporate governance efficiency evaluation.

Moody's defines five key positions based on which the overall estimation on corporate governance can be completed [12]:


The Fitch rating report is another case on estimation the efficiency of corporate governance; the goal of this rating system is to ensure the interests of creditors and shareholders by valuing the influence of corporate governance on possible credit risks. According to Fitch (see **Table 1**), the crucial elements of corporate governance for ensuring the interests of shareholders are the following:


#### **7.1. Discussion**

shareholders and mangers to improve the structure of corporate governance, the indicator will remain low, limiting or preventing any further elimination of risks and dealing with

**3.** Transparency in actions, which shows the level of information accessibility and openness of a decision-making procedure; a principle of regular reporting provides an overall understanding of financial results, current and potential risks, and growing possibilities, in addition, it offers the symmetric access of information to shareholders, managers, and stakeholders that ensures the rationality of managers' decisions on the operating stage. **4.** The structure of the board, which illustrates the level of independence of the participants separately and the board as an entity, the functions of the board and the efficiency of their implementation, the form of interactions between lenders, managers, and stakeholders,

To meet the demand of financial institutions and private investors for reliable evaluation of a corporation's governance and the level of protection of shareholders' rights, a well-known organization, Moody's, provides evaluation reports on the efficiency of corporate governance. Moody's (see **Table 1**) empathizes the crucial influence of corporate governance on financial

**Criteria Moody's Fitch S&P** Board independence x x x Director quality and diversity x x x Internal control (audit) x x x

Shareholders' rights (voting rights) x x Governance transparency x x

Transparency of ownership structure x

Transparency and disclosure of information x

**Table 1.** The common and specific criteria of corporate governance efficiency evaluation.

x

x

x

Mechanisms or policies for transaction supervising x

a conflict of interests.

16 Corporate Governance and Strategic Decision Making

or credit risks.

the system of compensation [10, 11].

Ethical policies and processes x Directors and managers conflict of interests x Interest balancing policies x

The performance-based compensation linked to the

Potentially market expectations for the company's earnings

The concentration and influence of ownership and external

company's long-term growth

growth

stakeholders

Based on the previous study, it is crucial to identify the common and specific criteria (see **Table 1**) that are used to evaluate the efficiency of corporate governance by different agencies, in order to improve the efficiency and to decrease the potential risks its crucial to ensure the transparency of financial and managerial performance, to disclosure regularly the information required by shareholders and creditors in order to plan their future finance and understand the overall financial situation.

The transactions and potential interdependence between shareholders and managers should be regulated by the existing legislation and internal policies regarding balancing the interests of shareholders, creditors, managers, and stakeholders, supervision of negotiations, and adopting the system of compensation in accordance to the strategic long-term goals rather than short-term benefits. An improvement in corporate governance can be considered as a comparative advantage, which attracts new investments and can be an excellent foundation for further growth of a corporation; from the point of view of creditors and shareholders, appropriate governance eliminates and minimizes possible risks and ensures the future return.
