Corporate Governance in Lithuania

Organisation for Economic Co-operation and Development

Organisation de Coopération et de Développement Économiques

Hosted by The Government of Lithuania

CORPORATE GOVERNANCE IN LITHUANIA

Prof. Juozas Bivainis Director Institute of Privatisation LITHUANIA

and

Dr. Artūras Bučas Head of Division Institute of Privatisation LITHUANIA

Seminar on CORPORATE GOVERNANCE IN THE BALTICS Vilnius, Lithuania 21-22 October, 1999 Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA

TABLE OF CONTENTS

TABLE OF CONTENTS...... 2

PART I: INTRODUCTION AND SUMMARY ...... 3

PART II: CORPORATE GOVERNANCE ENVIRONMENT IN LITHUANIA...... 4

GENERAL ECONOMIC CONTEXT...... 4 CORPORATE GOVERNANCE CHARACTERISTICS IN LITHUANIA ...... 6 Corporate Governance Agents...... 6 Corporate Behaviour, Finance and Restructuring...... 11 PART III: REGULATORY FRAMEWORK AND THE ROLE OF POLICY...... 12

EQUITABLE TREATMENT OF SHAREHOLDERS AND OTHER STAKEHOLDERS ...... 13 Shareholder Protection ...... 13 Role of the Board of Directors ...... 16 IMPORTANCE OF TRANSPARENCY AND DISCLOSURE ...... 18 PART IV: CONCLUSIONS...... 20

APPENDIX ...... 21

* PART I: INTRODUCTION AND SUMMARY

1. The Lithuanian economy experienced a period of essential changes during the years 1990-1999. It featured rapid changes in the GDP, the structure of the economy, orientation of foreign trade, as well as in an overall system of economical activities. Creation and development of forms of economical activities, typical for a market economy, are one of the most important changes in this context. A very important part of this process is the development of corporate governance.

2. The current system of corporate governance in Lithuania has formed to a great extent as a result of privatisation of state property. The first stage of privatisation was characterised by privatisation of state property to the public with employing a voucher system, the second one - by selling for money big stakes in larger enterprises to strategic investors. This reflects the initial composition of ownership in respective companies.

3. The largest groups of company owners are other private firms and natural persons. The fact of the group of other firms taking the lead in shareholding in companies also illustrates importance of corporate groups in the economy. The major role in governance of companies belongs to shareholders. Influence of the banking system, in which private banks prevail, as well as of other financial intermediaries, is of lesser importance in this sphere. Foreign shareholders are holding a great part of equity in larger public companies.

4. It is common that corporate groups include companies operating in different industries. The main source of funds for companies is bank loans. There are some difficulties in providing funds by companies to other members of a corporate group due to restrictions on lending imposed in respect of companies.

5. The Company Law of the Republic of Lithuania provides for completely equitable treatment of shareholders without regard for their being foreign or local or any other characteristics. A general meeting of shareholders is the ultimate organ of a company both, in law and in fact. Shareholders can obtain information from a company; their rights to information are differentiated according to amount of stock held by them currently. There are provisions in force being applied on conflict of interests between shareholders and the company, on protection of shareholders in cases of take-overs, on court protection of shareholder rights, on insider trading.

6. The Company Law of the Republic of Lithuania provides for two boards: a supervisory board and a managing board. The supervisory board appoints the managing board. One of the boards may be not formed. There are no legal limits on shareholders in respect to their formation, including limits on ability of a member of a company board to take position of a member of a board in another company.

* The views in this report are those of the authors and do not necessarily represent the opinions of the OECD or its Member countries.

This background paper was prepared within a set of guidelines provided by the OECD, in order to ensure homogeneity and render cross-country comparisons easier.

The data and discussion focus on large, mostly listed companies and corporate groups, although some observations on smaller companies are also made. No original research, such as new data gathering or corporate surveys was required. Authors were asked to survey existing data and published materials. In some cases, complete and well-supported answers to questions were not possible, due to a lack of data or due to irrelevance of specific questions in the context of individual country environments. 3

7. Accounting standards are developed. The system of disclosure of information via the register of enterprises is operating. External audit will be made compulsory for public companies.

8. The following conclusions may be made: the system of corporate governance is developing in Lithuania. Its development does not depends so much on short-term processes and events, such as crisis in some other countries, though these events influence the economy, as on a long-term economic environment, traditions and the state's measures related to the regulation of corporate governance.

PART II: CORPORATE GOVERNANCE ENVIRONMENT IN LITHUANIA

GENERAL ECONOMIC CONTEXT 9. During the period of 1991-1999, the Lithuanian economy has experienced radical changes in all its sectors. Two mayor stages may be clearly distinguished in the development of economy. The first one - covering the period of dramatic economic decline between 1991 and 1993. In 1991, essential economic reforms were started in Lithuania, through which the fundamentals for the market economy were sought to form, and preconditions for access of Lithuania into the world economy were attempted to create. This phase, the phase of reforms (up to 1993) was difficult for Lithuania. A severe decline was characteristic of all sectors of the economy. The second one was the period of recovery during the overall period of 1994 - 1999, when economic stabilisation and growth were clearly observed. Lithuanian economy started to recover and overcome the decline of the former period in 1994 - 1995; in the following years the growth of economy was gaining speed annually. Data characterising the GDP changes in the period of 1991-1998 are presented in Table 1.

10. Development of the Lithuanian economy during the said period was not only a quantitative process related to output changes. Its deep characteristic is transformation of the economical system, featuring privatisation and changes in the character of economic relations. In 1994, the private sector created 60% of the GDP, in 1995, it created 65%, in 1996, it created 68% and in 1997, it created 70%. The structure of economy also changed rapidly; these changes are illustrated in Table 2. The share of agriculture and industry decreased, the share of trade activities increased, and share of services was increasing constantly.

11. One of the main features of the development of the Lithuanian economy during the years 1990- 1999 is a change in its foreign trade. Data characterising trends in the Lithuanian foreign trade during the period of 1991-1999 are presented in Table 3; it clearly shows the re-orientation of the Lithuanian trade towards the West.

12. The Lithuanian foreign trade was increasing in absolute numbers in the period of 1991-1998; this is illustrated in Table 4. The negative factor here is the foreign trade deficit, though it was balanced to some degree by capital inflows.

13. Moreover, developments during this period were characterised by efforts to create favourable conditions for foreign trade using the means of free trade agreements with big number of countries and works related with accession to the WTO.

14. International integration of the Lithuanian economy is also characterised by trends of foreign investment in Lithuania. Data characterising foreign investment in Lithuania during the period of 1991-1999 are presented in Table 5. It shows that the amount of foreign investment, especially of foreign direct investment, is constantly growing.

15. The rise of the Lithuanian economy is not a process without some setbacks, though they may be characterised as temporary. The main events, which had inflicted damage for the Lithuanian economy during the period of 1995-1999, are the banking crisis in Lithuania, which occurred in autumn of 1995 and the crisis in Russia, which broke out in late summer of 1998. The main effect of the latter crisis was a sharp decrease in Lithuanian exports to Russia and other CIS countries, which still accounted for a significant part in Lithuanian exports at the time. The decline in trade with Russia is illustrated in Table 6.

16. The decline in trade harmed the current account situation, while further improvement in the capital account situation enabled the economy to remain vital. This is illustrated in Table 7.

17. The decline in exports itself expresses accumulated problems of particular businesses - decrease of sales, profits, issues related with cash flows; due to financial crisis in Russia, some Russian importers were unable to pay for goods purchased previously. Such events caused some strain in the financial system of Lithuania, too; banks that used to invest into the Russian government bonds faced especial problems, though the amount of such investments was lower than elsewhere in the Baltics.

18. The decline in exports to the East created a chain reaction in the Lithuanian economy, slowing down the GDP growth and even leading to decrease in the beginning of the year 1999 (comparing quarterly data for the years 1997 and 1998, 1998 and 1999 respectively, it is possible to see a slowdown of growth in III and IV quarters of the year 1998 and decrease in the I quarter of the year 1999). This slowdown is illustrated in Table 8. The worsening of results of companies' activities may be illustrated by the fact, that in average based on data of 100 largest Lithuanian companies, in the first half year of 1999 comparing with the first half year of 1998 sales decreased by 15,2 percent (the total sales of these 100 companies decreased from 6,37 billion Litas∗ to 5,40 billion Litas), and net profits decreased by 14,8 percent (the total net profits decreased from 241 million Litas to 216 million Litas). Among these 100 companies 20 companies which where profitable in the first half of year 1998 suffered loss in the first half of the year 1999. The general picture reflecting issues in the financial situation of enterprises is shown in Table 9.

19. Amount of investments into the economy was also impacted negatively. It may be seen from Table 10.

20. These events had no influence on the exchange rate of the national currency (Litas), which is equal to 4.0 LTL/USD, as Lithuania uses a currency board arrangement that does not allow any significant fluctuations in the exchange rate.

21. The Government of Lithuania possesses not many means to influence the process of overcoming troubles created by the last crisis in Russia. Recovery from the consequences of crisis in Russia and the extent to which the economy has recovered from it actually depends mainly on the ability of enterprises to re-arrange themselves, and to re-orient trade. The Government made some steps in response to the crisis in Russia: the Centre for monitoring and analysis of consequences of the crisis in Russia was created. The Centre was constantly monitoring the situation and was preparing

∗ Exchange rate: 1 Lithuanian Litas = US$ 0.25 5

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA proposals to overcome the problems. It was decided by the Government to provide some financial support to a few enterprises, which were facing financial difficulties and were unable to pay wages to their employees, due to the Russian crisis.

22. The Government made a decision, obliging all ministries, other state institutions, budget organisations, public institutions and enterprises, which make procurements using funds of the Lithuanian state budget, State Social Security Fund budget, Compulsory Health Insurance Fund budget and other state funds, as well as loans received in the name of state or under a state guaranty, performing small size procurements, to procure goods, services and works that are produced, provided or carried out by enterprises established in the Republic of Lithuania, except those cases, when it is impossible. In cases when the size of a procurement is higher these institutions are obliged to apply a price preference in favour of local contractors.

23. The largest problem caused by the crisis in Russia to the Government itself is a fall down of the budget revenue; revenue from customs duties decreased most significantly. Thus, in response to the Russian crisis, the Government has undertaken measures to save budget expenditure. Taking into account the crisis in Russia, the budget of the year 1999 was modified during process of its drafting; this year it became obvious, that the budget expenditure shall be cut down even more. It is suggested to decrease the budget's spending of 1999 by approximately 450 mill. Litas.

24. It is possible to foresee now that the Lithuanian economy shall start to recover in the second half of 1999. Signs indicating a potential for this recovery may be seen: enterprises, which formerly exported to Russia, are finding opportunities to export to the West; the volume of retail trade has begun to grow.

CORPORATE GOVERNANCE CHARACTERISTICS IN LITHUANIA

CORPORATE GOVERNANCE AGENTS 25. The major factors that have shaped the current corporate governance environment (the ownership and control arrangements for corporations) are:

♦ Methods of privatisation used; ♦ Developments after privatisation.

26. Of course, ownership trends after privatisation depended on methods of privatisation that were applied.

27. Privatisation of enterprises in Lithuania was carried out in two stages. The first stage of privatisation was characterised by privatisation of state property to the public with employment of a voucher system, the second one - by selling for money big stakes in larger enterprises to strategic investors. These stages are directly related with legislation, used in a respective stage. The main law regulating the process of privatisation in the first stage was the Law on Initial Privatisation of State Property (February 28, 1991, in force until December 1, 1997), in the second stage - the Law on Privatisation of State and Municipal Property (November 4, 1997). With reference to its impact on corporate governance, the first stage of privatisation may also be divided into sub-periods featuring different characteristics and offering different factors for further developments.

28. During the first stage, before application of the Law on Initial Privatisation, enterprises were allowed to privatise to their employees up to 10% of state capital for cash at low prices, thus creating 6

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA an initial stake of private capital. The main method of privatisation according to the Law on Initial Privatisation was public subscription for shares. It was rational to pay for subscribed shares by using vouchers, however paying in cash was also possible. In its initial stage application of the Law on Initial Privatisation of State Property featured absence of privileges for employees of a company. The situation changed later. From June 1991 until April 1992, employees had a priority right to subscribe for shares of the enterprise being privatised. From April 1992 they had a right to subscribe in addition to shares held previously for shares up to 30% of a company's capital at the price equal to nominal value disregarding their subscription price fixed for other persons which was always higher. From February 1993, this share was increased to 50% (20 % of this amount had to be subscribed for a higher price, but from June 1994, conditions for subscription of these 20% were made the same as for the rest part).

29. Another factor is to be taken into account - participation of investment stock companies in voucher privatisation. It was allowed to create them from October 1991; from January 1992, their investments into enterprises being privatised by public subscription for shares were restricted to not more than 50% of the statutory capital of an enterprise. In August 1992, an additional restriction was imposed: a number of shares of an enterprise being privatised subscribed by investment stock companies could be reduced proportionally, if the total subscription exceeded 110% and all investment stock companies had subscribed for more than 30% of the statutory capital.

30. Employees of an enterprise had one more opportunity to privatise it: according to the Law on State and State-Stock Enterprises it was possible to increase share capital (capital which did not belong to the state) by using profit of such an enterprise and to transfer the respective shares to employees.

31. The facts disclosed above are related to the initial composition of ownership in privatised companies. In enterprises privatised under the Law on Initial Privatisation of State Property during the beginning of its application, privatisation usually resulted in initial structure of ownership that featured a big impact of "outside" shareholders (not employees) and investment stock companies. Later the share of employees increased, "outside" persons become inactive. It is also necessary to mention, that investment stock companies (more than 300 of them were created) were used not only to accumulate vouchers from public. Very often they were created by persons, who wished to privatise enterprises for vouchers purchased (by using other formal types of contracts as circumvention) from public.

32. In cases of privatisation of large companies under the Law on Privatisation of State and Municipal Property, usually, a big stake in an enterprise is sold to a single investor offering the best price or the best certain conditions; practically, this investor is mostly foreign. According to this law, small stakes remaining in the state ownership are privatised by applying the method of public sale in the Stock Exchange. In practice these stakes, as a rule, are purchased also by a single investor, who already participates in the company usually.

33. The main tendencies of development of ownership structures are disclosed below. Here it is necessary to mention that concentration of ownership took place mainly as over-the-counter trade. Very important players here were managers of companies: managers used to purchase shares owned by other employees. This is an important reason, why ownership of companies where a great part of capital stock belonged initially to employees, is more concentrated now. Besides, stock exchange transactions were employed in the process. Increases in subscribed capital were also used. Foreign investors who purchased shares usually bought them it from persons who had already concentrated them in their own hands (sometimes these persons constituted quite numerous groups). 7

34. The present situation related to the composition of ownership in Lithuanian companies and development of this situation in the past may be characterised by using the Lithuanian Central Securities Depository's data describing value of shares held in accounts of the Central Securities Depository's participants-brokerage firms, which is presented in Table 11.

35. According to this data, the largest amount of equity among domestic shareholders is held by private companies and natural persons; state enterprises and commercial banks own less; certain amount of equity is owned by investment and insurance companies.

ROLE OF SHAREHOLDERS 36. The Company Law of the Republic of Lithuania provides that shareholders have the major role in a company; power of a particular shareholder in control of a company is proportional to the number of votes he possesses. In this regard major shareholders play the major role in control of a company, though the Company Law does not deal in particular with major shareholders and such concept is not defined in the Company Law.

37. Corporate groups play an important role in the Lithuanian economy. They are formed by means of ownership of an equity stake in a company by another company; the latter company then participates in formation of managing bodies of the former company. Meanwhile it is necessary to say, that some very negative experience related with corporate groups was present in the past years. Namely, controlling companies or persons related with them in corporate groups created after privatisation or take-overs used to "pump out" property of subsidiary companies. Seeking for external financing, it is important to assure now, that such practice will not be present.

38. Existence of major shareholders is perceived usually as positive when seeking for outside investment, because financial institutions regard this situation as contributing to effective management of a company and hence to financial reliability of a firm. Possible investors also usually regard this situation as making it easier to deal with a company.

39. There are some issues related with facts that major shareholders tend to ignore opinions and suggestions of minority shareholders and do not take into account their interests.

40. According to legislation, risk shall be equally spread among shareholders of the same class and returns shall be equitably distributed among them in proportion to a number of shares owned by a shareholder.

COMMERCIAL BANKS 41. Commercial banks do not own a considerable part of industry, and their shareholding in non- financial institutions is restricted by the banking legislation.

42. At present, commercial banks providing financing have some other means to exercise corporate control; the pattern of such control usually is defined on case-by-case basis.

43. Lithuanian commercial banks according to their ownership structure may be divided into two groups: the ones owned and controlled mainly by the state (number of such banks is 2) and the ones controlled by private bodies (number of such banks is 9). Among owners of banks belonging to the second group (listed according their importance and influence in control) are foreign financial institutions, local companies, including banks, and the public.

44. Currently one relatively small commercial bank is known as member of a Lithuanian corporate group. There is no information on other Lithuanian commercial banks regarding membership in such a corporate group. Formerly, after privatisation of a number of banks, some banks actually were members of such groups, in some cases after some kind of take-overs. However, operation of such banks was not successful.

ROLE OF NON-BANK INTERMEDIARIES 45. The role of non-bank intermediaries may be disclosed by the following facts: In Lithuania commercial banks perform the role of merchant banks, and the latter, as separate institution, are absent; investment companies were extremely important during the period of initial privatisation; they were being created with the purpose of participation in the initial privatisation. At this moment their number diminished sharply, but their role in governance of Lithuanian companies is still noticeable. Foreign financial companies are increasing their participation in equity of Lithuanian companies. Securities brokerage companies now own a certain amount of equity; in some number of cases they represent investors in regard of their participation in management of companies.

ROLE OF THE EQUITIES MARKET 46. The role of the equities market in financing of corporations as well as in corporate finance may be evaluated as moderate. Well-developed and successfully operating companies use to solve issues of renovating of equipment by means of issuing new emissions of shares.

47. Take-overs are perceived as an important corporate governance factor, as in most cases they result in re-formation of a company's managing bodies and changes of executives. There are no special provisions in the legislation limiting take-overs except for that contained in legislation on competition and rules contained in securities public circulation regulations. However, companies (their shareholders) use to exercise measures against take-overs being carried out in their respect.

ROLE OF LOCAL INSTITUTIONAL INVESTORS 48. The role of local institutional investors such as private pension and mutual funds in corporate ownership and governance is minimal, as such institutions are not still being created in Lithuania. However, steps are made to encourage creation of private pension and mutual funds: the Law on Investment Companies is in force, which allows creation of controlling investment companies, close investment funds and investment funds (investment companies with variable capital). Only controlling investment companies (created after re-organisation of investment stock companies, which were formed during the first stage of privatisation) are actually operating. However, some steps of private structures are observed that are related with efforts to create investment companies of other kinds, including investment funds. The Law on Pension Funds was adopted in June 1999. It will come into force on January 1, 2000 and will enable creation of private pension funds.

49. According to the Law on Insurance, Lithuanian insurance companies may invest their funds of technical differences (within the limits to be established by Minister of Finance) into shares listed on a stock exchange, and upon authorisation of the Board of the Supervisory Council - into unlisted shares and into shares of foreign companies. According to the same Law, insurance companies may not invest into equity funds, which correspond to their statutory capital. These restrictions on insurance companies' investment into equity are legally binding.

ROLE OF THE STATE 50. The state participates in control of companies in those cases when the state participates in ownership of a company. According to partial data, in the value of total investments into companies'

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA shares, investments of Lithuanian residents into these shares equal to 49.5 % of the total value of Lithuanian companies' shares; private firms account for 26.7 % and natural persons - for 15.2 % of the total value of Lithuanian companies' shares. Share of investors of other kinds, including state and municipalities - 7.6 % (shares of these kinds of investors in the total value of domestic shareholding are respectively 53.9 %, 30.7 % and 15.4 %). (Respublika, 1999 July 26, p. 17; "Investicijos i akcijas per ketvirti isaugo")

51. The state’s as a shareholder's behaviour may be regarded as different during the time. A very loose control of companies in which the state had a share, in the beginning, was tightened later, while ministries and other state institutions still performed the role of representatives of the state as a shareholder. These arrangements were expressed by decrees of the Government, adopted in March 1995 and in July 1997. The main principles of these decrees are as follows: representation of the state in a company (mainly in the way of participation in the general meetings) through an officer empowered by the respective institution. Decisions to be implemented by the empowered officer representing the state are to be made, according to their importance, by the empowered officer himself, head of the institution representing the state or the Government. State representatives also, according to the number of shares held by the state, propose candidates into the supervisory (or managing) board and vote for them. The last tendency is to concentrate functions of representation of the state as a shareholder in the remaining companies with state's participation in equity in a single institution - the State Property Fund, which was created in the beginning of 1998.

ROLE OF FOREIGN INVESTMENT 52. Foreign investment is a major factor in the Lithuanian economy. This is confirmed by figures describing the composition of ownership in public companies. According to the Lithuanian Central Securities Depository, on June 30, 1999 among the total value (equal to 2.12 billion Litas) of shares accounted by securities' circulation intermediaries, on which information regarding their ownership was available, the value of resident investments was equal to 1.05 billion Litas and the value of non- resident (foreign) investments was equal to 1.07 billion Litas, that makes 49.5 % and 51.5 % respectively. According to the Lithuanian Central Securities Depository, the main countries, from which foreign investments into companies' shares come, are Sweden, USA and the Great Britain, accounting respectively 20.2 %, 8.7 % and 4.1 % of the total investments into companies' shares on which information was available (Respublika, 1999 July 26, p. 17; "Investicijos i akcijas per ketvirti isaugo"). According to the Department of Statistics, the main countries providing foreign direct investment to Lithuania were Sweden, USA, Finland, Germany, Denmark and the Great Britain. They accounted for 17.3%, 15.3%, 10.3%, 8.1%, 8.0% and 6.3% of the total foreign direct investment respectively. 53. The trends of corporate ownership and control are as follows: I. Increase of foreign investments into shares and decrease of investments by residents into shares of companies. According to the above mentioned Lithuanian Central Securities Depository information, during the period of March 31 - June 30, 1999 the value of domestic investments into companies shares decreased by 68 million Litas, and value of foreign investments into companies' shares increased by 166 million Litas. The value of foreign investments into companies' shares in relative numbers increased from 44.3 % to 50.5 % during this period and the value of domestic investment decreased respectively. II. Concentration of ownership, when the number of shareholders is decreasing due to purchase of shares from shareholders by other persons including other current shareholders, due to increases of statutory capital.

CORPORATE BEHAVIOUR,FINANCE AND RESTRUCTURING 54. Diversified corporate groups exist in the economy of Lithuania. Control in such groups is exercised by the means of ownership.

55. Availability of possibilities for companies and corporate groups to expand ought to be named as the main cause of diversification: when making a choice of a company for acquisition of equity, the mentioned companies and corporate groups take into account foremost business perspectives of such a company, other factors being of less importance.

56. Data on the average rate of return (before tax) on equity in the whole Lithuanian economy and in industries chosen as an example, which may be characterised by prevalence of quite big enterprises, in the year 1998 is presented in Table 12. According to this data, the rate of return (before tax) on equity in Lithuanian companies may be characterised as average; there are profitable (some - of high profitability) and loss-making industries.

57. The total value of shares of the Official List and Current List companies, according to the Central Securities Depository of Lithuania, in July 1998 was 4.942 billion Litas. On September 1, 1999 the total face value of public companies' shares registered at the Central Securities Depository was equal to 15.723 billion Litas.

58. Lithuanian companies showing satisfactory financial results, have a tendency to invest much and expand their business. Funds for distribution in the form of dividends usually are modest (of course, there are exceptions). However, the amount of investments made by companies is not an object for statistics in Lithuania. The main external source of funds for large companies is loans from banks. Some large enterprises were laying efforts to issue bonds.

59. The debt/equity ratio in Lithuanian companies is rather low. The debt/equity ratio in the whole Lithuanian economy and in some industries chosen as an example in IV quarter of 1998 is presented in Table 13.

60. The main part of corporate debt is constituted by loans from banks. According to creditors, the structure of companies' debt may be characterised by the following data: in the whole Lithuanian economy in IV quarter of 1998 financial debts constituted 37% of all liabilities of non-financial enterprises, trade credits - 32%, and other liabilities - 31%. Companies enjoy rights to take loans from banks in both local and foreign currency, and they have the right to borrow from foreign banks. Actually, the largest companies have successful experience in obtaining loans from foreign banks too.

61. Lithuanian enterprises have more short term debt than long term. The data characterising situation in the whole Lithuanian economy and in a few particular industries, chosen as an example, in IV quarter of 1998 reveals this situation. It is presented in Table 14.

62. The composition of companies' debt was not influenced by the Russian crisis to the rate which could be treated as significant, but it is possible to notice that companies' trade debts increased, and debts to financial institutions decreased (the latter decrease is more significant than the former increase) in the IV quarter of 1998. It may be supposed that banks restricted their loans making to business companies as a result of the Russian crisis.

63. Scarce data is available on the size of non-performing loans (loans, which do not incur interest). However, it ought to be noticed, that according to the law, general possibilities of Lithuanian non- 11

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA banking companies to provide loans to other companies of the kind are restricted to a great degree. As such loans ought to be provided between related companies, among which banks usually are absent, these provisions restrict non-performing loans making, too.

64. An excessive risk taking, as well as almost all other mismanagement issues, may be linked to failures in the corporate governance via inability of the corporate governance to establish and ensure an effective management practice. In some cases it was possible to notice a purposive excessive risk taking with the aim to gain benefit for particular persons/groups at the expense of a company.

65. Financial/corporate restructuring which volume could be treated as significant and which could be attributed to the crisis in Russia of 1998 is not taking place. Financial/corporate restructuring is going on as a natural process. The influence of the mentioned crisis ought to be more evident in future. Meanwhile, there exist new ideas which where inspired by the crisis about financial restructuring of companies in trouble: a new draft law is prepared. When adopted this law will regulate rehabilitation (restructuring) of companies having problems in those cases when the need to apply bankruptcy procedures is still absent at the given moment. A possibility to restructure debts of a company is provided in this draft.

66. The major actors in corporate restructuring are investors/owners. As everywhere else, conflicting interests of creditors and debtors converge due to the need to preserve both the creditors' and debtors' property. This need requires to keep running a company which has problems, but operation of which can be retained.

67. Corporate restructuring is an intensive process at present. The most widely used form of restructuring during the years of 1992-1995 was formation of new companies, usually private companies. Currently evidence of significant re-alignment of ownership structures through de- mergers and mergers and acquisitions by outside investors (including foreign) is also present.

68. Resources of failed firms are re-allocated according to the bankruptcy legislation; effectiveness of these processes may be evaluated as low due to the fact, that the demand for these resources is quite low. This may be illustrated by the fact, that in those enterprises, whose bankruptcy procedures were started after October 1, 1997, during the second half of 1998, property was sold for the total amount of 5018 thousand Litas, while the total accounting value of this property was equal to 11275 thousand Litas. Bankruptcy proceedings are initiated currently only at a stage of development, when a company has no remaining net assets. It is difficult to find possibilities to revitalise such firms, and their assets are to be sold or distributed separately. This low effectiveness of re-allocation may be related with structural changes in the economy: companies' going bankrupt is related to their operation in industries which have no perspective for further successful development; thus their assets are not marketable. The problem is that there is also quite low demand for assets of firms, which are bankrupt due to mismanagement issues.

PART III: REGULATORY FRAMEWORK AND THE ROLE OF POLICY

EQUITABLE TREATMENT OF SHAREHOLDERS AND OTHER STAKEHOLDERS

SHAREHOLDER PROTECTION 69. Looking from the legal point of view, shareholders have such rights in a company, as shares held by them entitle them to, and are treated equitably.

70. Shares in public companies may be both registered and bearer. Actually registered shares totally prevail. According to the law, registries of shareholders are available to all shareholders.

71. "One share-one vote" rule is established in the Company Law for common stock: according to Article 16, Part 2 of the Company Law, if all shares of the company, which bear a voting right, are of the same face value, each share except for special shares provides one vote in a general meeting. According to Part 5 of the same article, if shares, which bear a voting right, are of different face value, one share of the lowest face value provides one vote to its holder. The number of votes provided by other shares is equal to their face value, divided by the lowest face value. It is possible to provide in the statute of a company different rules for determination of the number of votes, but in each case the number of votes provided by a share shall be proportional to its face value.

72. It is a usual matter to have more than one category of shares with different rights in companies. Larger companies, besides registered ordinary shares, often have issued registered preference shares with prefixed dividend and no voting rights.

73. Voting by proxy is provided for in the Company Law (Article 17) and is very broadly carried out in practice. If a proxy's power of attorney is issued by a shareholder-natural person, it shall be notarised, and if by a shareholder-legal body, it shall be confirmed by the signature of the chief executive and the seal. A power of attorney for representation of a shareholder in the general meeting shall be submitted to a person in charge of registration of participants of the meeting, who shall mark it in the list of registration. The law does not provide for electronic voting and this is not practised. This form of voting may be regarded as too advanced for this time, but the current development (attempts to introduce in the Company Law compulsory employment of voting bulletins, distributed to shareholders before the general meeting) shows, that such form of voting should be introduced in the future.

74. Shareholders can voice their concerns in a general meeting freely. According to Article 22 of the Company Law, a shareholder or shareholders, possessing at least 1/20 of the total number of votes, may propose to include into the agenda of the general meeting an additional item or may propose their decisions. They must be included into the agenda, in case they are submitted not less than 15 days before the meeting. It is possible to provide a lower number in the statute of a company. Besides, in order to protect a minority shareholders there is another provision (Article 16, Part 8 of the Company Law): shareholders who possess at least 1/10 of the share capital have the right to appoint an expert (a group of experts) to examine operation of the company and its accounting documents, to identify presence of facts, indicating insolvency or deliberate bankruptcy and of facts of squandering of the company's property, loss-making contracts, violation of shareholders' rights. There is another, practical issue: major shareholders usually tend to ignore these concerns, when they are expressed by minor shareholders.

75. Uninformed voting is not a major issue now, as minor shareholders have become less active in participation in general meetings and voting; usually uninformed voting is their problem. The main obstacle to informed voting is caused by the fact that some efforts are needed to obtain and to analyse

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA information related with decisions to be adopted in general meetings and these efforts are seen by a minor shareholder as giving too small effect to him due to his share in the company. In general, possibilities to obtain information from a company may be regarded as sufficient.

76. Shareholders are required to approve such transactions, as selling, transfer, leasing or pawning of long-term assets, whose value exceeds 1/20 of the statutory capital of the company. Such provisions were needed because of the demand to prevent such cases, when property of a company is disposed while it is needed by the company or when property is sold at too low price; these cases may be related both with non-competence and dishonesty of managers of the company.

77. The issue of pre-emption rights when new equity is issued is being solved currently. Up to now, according to the Company Law, shareholders had this right, unless it was restricted in the statute of the company. In future this issue will be regulated according to the EU law - it will be possible to abandon this right only by a decision of a general meeting.

78. According to the law, any differences in treatment between foreign and domestic shareholders are absent. The aforesaid is characteristic of the actual situation, too.

79. The current Company Law regulates some issues that are possibly related to the conflict of interests between company’s shareholders and the company. Article 13, Part 2, subparagraph 6 allows a company that has not more than 50 shareholders to receive loans from its shareholders for the interest defined by a contract. It is provided in the Company Law, that if a company receives a loan from its shareholder, it is prohibited for this company to provide collateral. Furthermore, the annual interest rate for such a loan may not be higher than the average interest rate for the securities (bonds), issued by the Government of the Republic of Lithuania during the last quarter before the day of conclusion of a contract.

80. The right of a company to grant loans to its shareholders as well as to other persons is restricted. A company may lend to banks; it may also lend to other firms by acquiring securities (bonds) issued by them on condition that there is a decision of a general meeting, adopted by simple majority.

81. Provisions for the protection of shareholders in cases of take-overs, such as special disclosure thresholds, the obligation to extend a tender offer to all shareholders, etc. are provided under securities legislation. Namely, according to Article 10 of the Law on Securities Public Circulation, if a person acting individually or together with other persons has acquired shares of an issuer registered in Lithuania, conferring more than 1/10, 1/5, 1/4, 1/3, 1/2, 2/3 or 3/4 of votes, he shall inform the Securities Commission and the issuer about the total number of shares bearing a voting right and the number of votes held by him within 7 days. The same obligation to report is applied in cases, when the indicated thresholds are passed due to decrease of share of votes possessed. Persons acting together are defined as 1) a person who issued a power of attorney, and its holder, if the holder of the power of attorney has a right to vote according his own mind; 2) persons being controlled and persons in position to control; 3) persons, who have concluded a written contract regarding co- ordinated voting on issues of the issuer's management; 4) a person, who transfers to another person the right to vote according his own mind and the transferee; 5) members of managing board and supervisory board, chief executive and his deputies, chief financier, persons, empowered to conclude transactions in the name of the enterprise; 6) spouses.

82. According to Article 10 of the Law on Securities Public Circulation, if a person acting individually or together with other persons has acquired more than 50 percent of votes in the general meeting of an issuer of securities for public circulation, he shall submit an official proposal to 14

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA purchase the rest part of securities conferring a voting right as well as securities confirming the right to acquire securities bearing voting rights of the issuer for the price of the proposal which may not be lower than the average price of securities which were purchased by the person submitting the proposal during 12 months before exceeding the 50 percent limit.

83. Hostile take-overs by a competitive firm are not very common, but they do happen. It is mainly because of comparatively low financial capacities of firms, which might wish to execute a hostile take-over, possibilities to compete by expanding one's own firm by other means (the main of them is more successful management leading to growth).

84. Insider trading regulations are being applied under securities legislation. According to Article 6 of the Law on Securities Public Circulation, persons who have information which is not publicly disclosed about an essential event (any event, which may have a significant influence on investor's decision to purchase or sell securities of the issuer or can significantly influence the market price of these securities) due to their occupation, profession or duties - these persons may include members of a company's managing bodies, employees, etc. - may not conclude transactions regarding securities, with which the said information is related, until the information will be publicly disclosed. This prohibition is applied also to legal bodies, if a member of managing board or supervisory board, the chief executive or his deputy, chief financier, a person, empowered to conclude transactions in the name of the enterprise, a person, making the decision to conclude transaction in the name of the enterprise, or a person, having control over the enterprise possesses the information which was not publicly disclosed. Restrictions are applied also regarding the transfer of such information and conclusion of transactions by persons who received it nevertheless.

85. A company's member of managing board or supervisory board, the chief executive or his deputy, chief financier, a person, empowered to conclude transactions in the name of the enterprise upon conclusion a transaction on their own account with securities of the company-issuer shall inform the Securities Commission about the transaction.

86. Shareholders can be protected against abuses or infringements of their rights by the way of application to the court or, in cases related with public securities turnover, to the Securities Commission. Cases of application of a shareholder to courts whenever infringements of their rights occur are quite numerous. It is complicated to assess the effectiveness of courts' processes related with abuses or infringements of shareholder rights, because information possessed on this issue is too fragmented, but in general, the situation is improving in the course of time.

87. According to Article 16, Part 7 of the Lithuanian Company Law, a shareholder upon submission of a request shall be allowed by the company to get acquainted with and to make copies of annual and intermediary financial statements, reports of the managing board on operation of the company, minutes of general meetings and the list of shareholders. A shareholder, who presents an obligation in a written form on non-distribution of confidential information, may also get acquainted with minutes of sittings of supervisory and managing boards, if these minutes do not contain information about essential events in the company which was not publicised (information is confidential, when the managing board designates by its decision it as being such; information, defined by the law as public, may not be designated as confidential).

88. A shareholder, owning shares of the company whose total face value is equal to or exceeds 1/20 of the statutory capital of the company or a representative of shareholders, together owning shares of the company whose total face value is equal to or exceeds 1/20 statutory capital of the company upon submission of a written promise on non-distribution of confidential information may get acquainted 15

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA with all minutes of supervisory and managing boards, transactions of the company, as well as warrants, contracts regarding pawning of long term tangible assets.

89. A shareholder, owning shares of the company whose total face value is equal to or exceeds 1/2 of statutory capital of the company, may get acquainted with all documents of the company.

90. The need to protect shareholder rights is properly balanced with the need to guarantee the smooth and efficient running of the everyday business of the firm: in cases unrelated with violations of the law or infringements of their rights by a company bodies (in opposite cases they are entitled to court protection) shareholders can not influence (excluding unofficial influence) actions and decisions of managing bodies of the company. On the other hand, shareholders constitute the supreme body of a corporation and adopt most important decisions; they have the right to obtain information and may monitor the way these decisions are implemented.

91. Management’s liability towards shareholders is limited: according to the Company Law, Article 29 Part 11, the head of administration (chief executive) and a person empowered by him (a manager) may be declared by a court on the grounds of an application of a shareholder liable to cover losses inflicted on a shareholder or shareholders only in those cases, when the head of administration or a person empowered by him has concluded a transaction illegally or performed other unlawful acts, which caused a loss to the company or resulted in direct or indirect benefit for these persons in the cost of the company or its other shareholders. In other cases managers are not liable for losses which were inflicted on a company by their decisions.

ROLE OF THE BOARD OF DIRECTORS 92. Management bodies in Lithuanian companies pursuant to the Company Law are the following: general meeting of shareholders, supervisory board, managing board and head of administration (chief executive). In a public company supervisory board or managing board may be not formed; in this case functions of the body being not formed are to be transferred to other bodies. A typical size of a board of directors of a public company is 5 persons.

93. There does not exist a requirement to represent interested parties other than shareholders, such as employees, creditors or major clients/suppliers, in boards. According to the Company Law, boards are formed entirely by shareholder's voting; shareholders have full freedom of decision in selecting their candidates and voting. In practice inclusion of employees, creditors or clients/suppliers into boards may happen, though it is not common.

94. The law does not include a provision in obliging a board to give special consideration to the interests of minority shareholders; they shall act in the interests of the company as a whole.

95. Provisions in the Company Law or other rules limiting possibility of a person to be elected as a member of managing board or supervisory board of more than one company are absent. Practice, when one and the same person is a member of managing board or supervisory board in several companies, is usual. Information on "cross-membership" in boards of two companies unrelated by ownership links is absent.

96. According to Article 27 Part 8 of the Company Law, members of managing board shall jointly cover losses inflicted on the company due to decisions of managing board contradicting the statute of the company and the law. A member of managing board is exempted from this duty, in case he voted against such decisions or did not participate in a respective sitting of managing board, on condition 16

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA that he within 7 days after the moment, then he learned or should learned about such a decision, handed to the chairmen of the sitting a written protest. Dismissal or retirement of a member does not exempt him from the duty to cover losses. A member of managing board may be exempted from coverage of losses, if he acted on the basis of documents of the company or other information, when there was no reason to distrust it, or acted not exceeding the usual degree of production or economic risks. Disputes regarding coverage of losses shall be taken to court. There are penal provisions applicable to head of administration also.

97. Members of managing boards are elected by supervisory boards, and members of supervisory boards are elected by general meetings. Currently a managing board or a supervisory board (but not both) may be not formed in a public company; the last proposed amendments to the Company Law provide for a possibility not to form a supervisory board, but not a managing board.

98. When managing board is elected by a supervisory board, it is elected by simple voting. When supervisory board or, in case supervisory board is not formed, managing board is elected by general meeting, a cumulative voting is used: in this voting each shareholder has such amount of votes, which is equal to number of voting shares held by him multiplied by number of members of the respective board being elected. These votes may be distributed by a shareholder at his own discretion - votes may be given to one or several candidates.

99. “Outsider” or “independent” directors are not defined in the law; there are no requirements for their election. However, it is quite common, when members of managing and supervisory boards are not personally shareholders or employees of the company.

100. Committees of boards on internal audit and management remuneration are not provided in the legislation. The Company Law provides for a revisor (internal controller), elected by the general meeting, who takes control over financial activities of the company. It is doubtful, will the legislation provide for this position in the future.

101. The law does not include a provision on compensation of directors and/or senior management in the form of stock options. Such compensation may be arranged in a case, when a company issues convertible bonds (that could be converted into equity), but in general, issues of convertible bonds are very rare.

102. Sometimes representatives of media announce directors’ fees. Their disclosure is not a legal requirement, except a provision in accounting regulations to provide information on "changes of managers' salaries" in the Explanatory Note.

103. There does not exist general legislation or judicial practice to disregard a company's limited liability, including cases when there is lack of autonomy in a company’s actions. A company's limited liability is always recognised.

104. The main rules on corporate governance and the role of boards are included in the Company Law. During the drafting, discussing and adoption of the current Company Law in 1994-95, an intensive joint work with representatives of the business spheres was performed, intensive consultations were held with them with the purpose to find the best solutions for issues of regulation of operation of companies. The some approach is used now, in the course of adoption of the new version of the Company Law.

105. There were some initiatives shown by industrial associations to establish voluntary corporate governance guidelines. However, usually separate companies determine the precise definition of the role of supervisory and managing boards themselves, subject to their particular needs. Self-regulation in the British sense, performed by associations, is not traditional in Lithuania, though there are some thoughts about possibilities to encourage its usage.

106. The new version of the Company Law, which is currently being discussed in the Government, will be harmonised with the EU legislation in the field of company law (i.e. directives, regulating protection of interests of shareholders and other parties by means of disclosure of information, formation and maintenance of capital of a company, mergers and divisions, single member's companies), encompassing all necessary provisions. Moreover, this new Company Law will contain different from that being applied currently provisions on establishment of a company, on the manner of formation of its bodies, expanded provisions on mergers and divisions, amended provisions on voting by qualified majority in a general meeting, etc. It will provide for the new order of participation of a shareholder in a general meeting, equality of rights of shareholders in obtaining information from the company not withstanding number of votes held by them and it will contain a number of other new provisions.

IMPORTANCE OF TRANSPARENCY AND DISCLOSURE 107. The basis for accounting standards is the Law on Fundamentals of Accountancy. It establishes, that financial statements of a company are the Balance Sheet, the Profit and Loss Statement, the Cash Flow (Changes of Financial Position) Statement and the Explanatory Note.

108. Lithuanian financial accounting standards are sufficient for market participants and for the purposes of governance. Present disclosure channels allow users who have some deeper interest in operation of a company to obtain information on its financial situation.

109. Accounting standards shall be evaluated as sufficient for operation and control of companies. Improvements related with their approximation with the EU legislation are being prepared.

110. There are some issues related with asset valuation: due to inflation in former years the assets value was redefined several times. There existed rules established for this re-valuation of assets, and enterprises had a possibility to perform these re-valuations properly. The legal basis for this was established by a Decree of the Government.

111. Mandatory disclosure of companies' non-financial information is provided by accountancy regulations (applying to the contents of the Explanatory Note), regulations of securities public circulation and regulations of operation of register of enterprises.

112. Information, which can be obtained from these sources is important not only to shareholders, but to other parties as well: an Explanatory Note shall contain information on general situation of the enterprise, conditions of operation of the enterprise, activities of the enterprise in the field of research and development, changes of capital and reasons for that, main events in the enterprise.

113. There are especially great debates about improvement of disclosure through improvement of operation of the register of enterprises (or creating the register of economic entities on its basis). Work in this field is related with harmonisation of Lithuanian law with that of the EU also.

114. Rules regulating work of a managing board according to Part 1 of the Article 27 of the Company Law shall be established by the regulation of work of the managing board. Rules regulating order of calling of sittings of supervisory board according to Part 7 of the Article 25 of the Company Law shall be established by the regulation of work of the supervisory board. It is not provided for disclosure of these regulations as main boardroom procedures are regulated in the Law.

115. Remuneration for members of supervisory board and managing board is defined at a general meeting by shareholders. According to Part 7 of Article 16 of the Company Law, each shareholder has right to become acquainted with and to make copies of protocols of general meetings, where the respective information uses to be contained.

116. According to the Law on Audit of the Republic of Lithuania, the external auditor is responsible for inspection of financial statements of a company and making conclusion regarding the correct reflection by financial statements of financial situation of a company, results of activities and cash flows, compliance of financial statements with legal acts regulating financial accountancy and working out of financial statements, as well as with the general principles of accountancy, applied in the Republic of Lithuania. Thus, an external auditor improves possibility of shareholders and other interested parties to rely on financial statements of a company.

117. There is a penalty for an auditor, who issues a misleading opinion on veracity of financial accountancy of a firm, if such opinion led creditors, stockholders, state or other institutions, enterprises or persons to great material losses - up to 3 years of imprisonment and a fine or a fine only - provided in the law (Article 313 of the Penal Code of the Republic of Lithuania).

118. Standards for consolidated accounts and reporting on business combinations are still under development. There exist standards for consolidated accounts that are developed for financial institutions.

119. The disclosure of ownership links is arranged under the legislation on public securities. This disclosure is provided in the Law on Securities Public Circulation and organised by the Securities Commission pursuant to legal acts adopted by it. Companies-issuers of securities are required to submit to the Securities Commission annual prospectus-report, semi-annual and quarterly reports; they shall contain a list of largest shareholders, who own or posses more than 5 percent of share capital of the issuer. It shall be indicated, how many shares each such shareholder has or possesses, what is his share in equity and share of votes held. It is necessary to disclose in an annual prospectus- report also long-term investments, including investments into subsidiary companies and related enterprises. The issuer shall inform the public in the media, where and when it is possible to become acquainted with the above mentioned reports. The Securities Commission monitors ownership links.

120. Current standards do allow for appropriate disclosure of off-balance sheet transactions, cross- guarantees of credits, contingent liabilities and other similar risks. Legal regulation of this sphere is still insufficient, there is a general requirement to disclose in the Explanatory Note (one of company's financial statements) "all large amounts accounted in off-balance sheet accounts".

121. There is Law on Economic Entities Funds Lending, regulating possibilities of non-financial institutions to borrow and lend funds, and some provisions in the Company Law that is currently in force, regulating such possibilities of companies. Regulation of financial institutions' affiliated lending is based on the provisions of the Law on Commercial Banks of the Republic of Lithuania, Article 29. According to these provisions, a bank's lending to persons related with it may not exceed 10 percent of the bank's capital. Persons related with the bank are: 1) owners of stake in the bank and 19

Copyright © OECD All rights reserved Seminar on Corporate Governance in the Baltics 21-22 October, 1999 - Vilnius BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA in its subsidiary banks, their spouses, parents or children or firms, in which these persons directly or/and indirectly acquired or control more than 20 % of equity; 2) members of boards and managing boards, revisors, heads of administration and heads of branches of the bank and its subsidiary banks and subsidiary firms and their spouses, parents and children or firms, in which these persons directly or/and indirectly acquired or control more than 20 % of equity. Banks shall inform the Bank of Lithuania about loans granted to persons related with the bank according to the order, established by the Bank of Lithuania.

122. Affiliated lending, if this term is treated in wider sense, as related not only with financial institutions, is an issue, because operation of corporate groups requires exercising it, but it is quite strongly restricted by the law. Affiliated lending of financial institutions previously was a very important problem, being one of sources of financial sector crisis in 1995.

123. The crisis in Russia of 1998 was not directly related with transparency and disclosure issues of Lithuanian financial institutions. There was a major crisis in the financial sector in Lithuania in 1995, which was subject to poor and dishonest management of banks, issues of disclosure of information regarding banks and issues of supervision of commercial banks by the central bank. That crisis led to improvements in the field of transparency and disclosure.

PART IV: CONCLUSIONS

124. The crisis in Russia of 1998 did not cause significant changes in corporate governance itself. It caused a significant decrease of exports over a short period of time after brake-out of the crisis in Russia, necessity to redirect Lithuanian exports to even greater degree than during former years, a slow-down of economical growth.

125. A very important issue now, as well as it used to be, is measures to be taken to hasten economical development, to create better conditions for operation of companies.

126. The role of the state in corporate governance is not of such big importance in order the state would be able to make some steps to influence corporate governance subject to changes in external conditions of operation of the economy. The state responded to changes caused by crisis in Russia with some delay, mainly with actions in the field of fiscal policy.

127. The main role of the state is to establish rational rules, according to which companies shall operate and which are the framework for structural changes. These structural changes are a natural process that is characteristic to any market economy. It is a duty of the state to supervise the soundness and legality of processes, resulting in structural changes in the economy.

128. Actually, the state institutions are working in this field. Part of this process is harmonisation of laws with the EU legislation, which will enhance the legal conditions for companies' operation; the new Company Law will be adopted in the next year.

APPENDIX

Table 1.

GROSS DOMESTIC PRODUCT OF LITHUANIA

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998*

GDP, at constant prices 41564.0 39204.0 30870.0 25861.0 23335.0 24102.8 25238.4 27075.1 28468.6 (1995=100), mill. Litas

GDP per capita, at constant 11166.0 10478.0 8250.0 6933.0 6272.0 6488.0 6803.7 7306.5 7685.9 prices (1995=100), Litas

GDP per capita, USD ……489.3 713.8 1136.1 1622.1 2127.6 2586.6 2886.6

GDP change, % - -5.7 -21.3 -16.2 -9.8 3.3 4.7 7.3 5.1

*Preliminary data

Source: Lithuanian Department of Statistics bulletin, April 27,1999

Table 2.

STRUCTURE OF GROSS VALUE ADDED BY KIND OF ECONOMIC ACTIVITY,%

Kind of Economic Activity

Year Agriculture Industry Transport and Construction Trade, Services hotels communication and Total industry Manufacturing s restaurants

1990 26.4 20.3 - 7.7 9.7 9.0 26.8

1991 16.4 44.4 - 8.2 5.4 7.6 18.1

1992 13.8 37.5 33.3** 9.5 3.9 10.9 24.3

1993 14.2 34.2 30.1** 9.8 5.1 15.3 21.4

1994 10.7 27.0 24.1 10.1 7.2 18.9 26.2

1995 11.8 26.1 22.2 9.4 7.1 19.3 26.3

1996 12.3 25.8 21.8 9.5 7.1 18.5 26.9

1997 11.7 25.2 20.5 9.6 7.7 18.3 27.6

1998* 9.9 23.7 18.7 9.6 7.9 17.8 31.1

*Preliminary data **Includes mining and quarrying

Source: Quarterly national accounts, 1998, IV quarter. Department of Statistics under the Government of the Republic of Lithuania bulletin.

Table 3.

BASIC CHARACTERISTICS OF LITHUANIAN FOREIGN TRADE.

Year 1993 1994 1995 1996 1997 1998

Exports, % of 75.1 47.8 44.9 42.5 40.3 34.7

GDP

Imports, % of 84.5 55.4 60.5 57.8 58.9 54.2

GDP

Exports 100 100 100 100 100 100

To 16.9 25.8 36.4 32.9 32. 38.0 the EU 57.1 46.7 42.3 45.4 46.4 35.7

To the CIS

Imports 100 100 100 100 100 100

From 18.7 26.4 37.1 42.4 46.5 50.2 the EU 67.5 50.3 42.0 32.9 29.3 24.7

From the CIS

Sources: Lithuanian Statistics Annals, 1997, 1998; Lietuvos ekonomine ir socialine raida. Monthly booklets. Vilnius: Department of Statistics under the Government of the Republic of Lithuania, 1994, 1997, 1998; Internet page of the Department of Statistics under the Government of the Republic of Lithuania: http://www.std.lt Table 4

VOLUME OF LITHUANIAN FOREIGN TRADE

Year 1994 1995 1996 1997 1998

Exports, mill. Litas 8077 10820 13420 15441 14842

Imports, mill. Litas 9355 14594 18235 22577 23174

Balance of merchandise trade, -1278 -3774 -4815 -7136 -8332 mln. Litas

Source: Internet page of the Department of Statistics under the Government of the Republic of Lithuania http://www.std.lt/informacija/rodikliai/pagrindiniai_rodikliai_apie_sali.html, 1999.08.15

Table 5.

FOREIGN INVESTMENTS IN LITHUANIA

1995* 1996* 1997* 1998* 1999, I quarter*

Total foreign investments in Lithuania, mill. Litas 11253 15864 19714 20541

Among them:

Direct foreign investments 1408 2801 4162 6501 6980

Portfolio investments 1227 1664 1473 2355

Other foreign investments 7225 10037 11740 11206

*at the end of period

Sources: Foreign direct investment in Lithuania, 1999 04 01. Department of Statistics bulletin. Internet page of the Department of Statistics under the Government of the Republic of Lithuania: http://www.std.lt/informacija/rodikliai/pagrindiniai_rodikliai_apie_sali.htm 1999.07.01 Table 6.

RUSSIA'S SHARE IN EXPORTS AND IMPORTS OF LITHUANIA

Year 1996 1997 1998 1999, first half-year

Russia's share in exports from 24 24.5 16.5 6.7 Lithuania, %

Russia's share in imports to Lithuania, 29 25.3 21.2 19.6 %

Source: Ministry of Economy of the Republic of Lithuania

Table 7.

BALANCE OF PAYMENTS DATA

I quarter II quarter III quarter IV quarter I - IV quarters

Current account balance, mill. Litas

1999 -861.94

1998 -914.68 -1169.34 -1506.10 -1602.36 -5192.48

1997 -771.73 -967.41 -556.61 -1629.60 -3925.35

1996 -536.62 -508.10 -456.16 -1389.44 -2890.32

1995 -834.56 -367.04 -288.68 -967.18 -2457.46

Capital and Financial Accounts balance, mill. Litas 1999 1162.64

1998 972.60 814.30 1091.87 1173.79 4052.56

1997 518.85 631.61 706.26 1278.10 3134.82

1996 762.0 465.6 240.1 1205.0 2672.7

1995 1307.0

Source: Internet page of the Department of Statistics under the Government of the Republic of Lithuania: http://www.std.lt/informacija/kita_info/mokejimu_balansas.html, 1999.08.26 Table 8.

QUARTERLY CHANGES OF GDP IN LITHUANIA GDP, at constant prices Change over the previous Change compared to the (1995=100), mill. Litas period, % corresponding period of the previous year, % 1995 24102.8 3.3 3.3 I 5285.8 - - II 5928.4 12.2 - III 6738.2 13.7 - IV 6150.5 -8.7 - 1996 25238.4 4.7 4.7 I 5427.1 -11.8 2.7 II 5989.0 10.4 1.0 III 7262.4 21.3 7.8 IV 6560.1 -9.7 6.7 1997 27075.1 7.3 7.3 I 5649.0 -13.9 4.1 II 6491.7 14.9 8.4 III 7708.3 18.7 6.1 IV 7226.1 -6.3 10.2 1998* 28468.6 5.1 5.1 I 6108.7 -15.5 8.1 II 7167.1 17.3 10.4 III 7953.8 11.0 3.2 IV 7239.0 -9.0 0.2 1999* I 5759 -20.4 -5.7

*Preliminary data 25

Sources: Lithuanian Department of Statistics bulletin, 27.04.99; Internet page of the Department of Statistics under the Government of the Republic of Lithuania: http://www.std.lt/informacija/kita_info/bendras_vidaus_produktas.htm, 1999.07.01 Table 9.

FINANCIAL INDICATORS OF NON-FINANCIAL ENTERPRISES IN 1998, IN TOTAL, THOUSAND LITAS

I quarter II quarter III quarter IV quarter

Equity 30406475 31372406 31985538 34000179

Liabilities 20918087 21968566 22854349 22237797

Long term financial liabilities 5658632 6279325 6691789 5286254

Long term trade credits 209464 238037 254820 336116

Operating profit, loss 561941 736941 868009 686681

Net profit, loss 373279 541403 621645 -

Source: Financial indicators of enterprises, I - IV quarters, 1998. Lithuanian Department of Statistics bulletin. Table 10.

VOLUME OF WORK CARRIED OUT BY CONSTRUCTION ENTERPRISES BY THEMSELVES AT CURRENT PRICES, MILLIONS LITAS

Year Quarters

I II III IV I - IV

1999 381.2 761.2

1998 454.0 780.3 1041.0 799.2 3074.5

1997 365.9 614.9 822.7 706.1 2509.6

1996 302.2 486.4 650.1 609.5 2048.2

Note: Small joint-stock companies, close joint-stock companies and individual enterprises excluded.

Source: Internet page of the Department of Statistics under the Government of the Republic of Lithuania: http://www.std.lt/informacija/kita_info/statyba.htm, 1999.08.01

Table 11.

VALUE OF SHARES HELD IN ACCOUNTS OF THE CENTRAL SECURITIES DEPOSITORY PARTICIPANTS- BROKERAGE FIRMS*

June 31, 99 December 31, June 30, 98 December 31, June 30, 97 December 31, 96 98 97

Investors Million % Million % Million % Million % Million % Million % Litas Litas Litas Litas Litas Litas rokerage companies 21.5 1.0 12.5 0.7 8.1 0.4 19.1 1.0 7.1 0.5 6.6 0.8

Commercial banks 66.1 3.1 7.9 4.3 108.8 5.6 80.0 4.3 59.3 4.4 2.5 0.3

Insurance companies 1.1 0.1 1.9 0.1 2.0 0.1 4.2 0.2 5.0 0.4 6.5 0.8

Investment companies 22.8 1.1 13.6 0.7 14.0 0.7 8.7 0.5 10.6 0.8 25.2 3.0

Individuals 323.3 15.2 278.3 15.0 329.0 17.0 254.1 13.5 160.5 11.9 85.6 10.4

State enterprises 83.2 3.9 54.3 2.9 0.4 0.0 18.6 1.0 25.5 1.9 6.7 0.8

Private companies 524.4 24.7 509.9 27.4 540.1 27.9 541.2 28.8 379.2 28.0 378.7 45.8

Other 9.1 0.4 5.3 0.3 40.2 2.1 26.2 1.4 10.2 0.8 33.2 4.0

Total residents 1051.9 49.5 955.0 51.4 1042.5 53.9 952.1 50.7 657.4 48.5 545.0 65.9

Total non-residents 1074.3 50.5 903.5 48.6 893.3 46.1 924.0 49.3 697.0 51.5 281.9 34.1

Total 2126.2 100 1858.5 100 1935.7 100 1876.1 100 1354.4 100 826.9 100

* Calculated by the Central Securities Depository basing on data collected from Central Depository participants- brokerage firms by circulating questionnaires at the end of a respective period. The value of shares held by investors of a group is calculated multiplying the amount of shares at a respective moment by the latest rate established at the National Stock Exchange trade session in the central market. If this rate is not established, the amount of shares is multiplied by the par value of shares.

Source: Internet page of the Lithuanian Central Securities Depository: http://www.csdl.lt/Akcijos/investors.shtml, 1999.08.25 Table 12.

AVERAGE RATE OF RETURN (BEFORE TAX) ON EQUITY IN LITHUANIAN ECONOMY IN 1998

Industry Whole Lithuanian Industry of Industry of Industry of Industry of economy manufacture of manufacture of manufacture of manufacture of machinery and refined petroleum medical, precision chemicals and equipment products and optical chemical products instruments

Average rate of return (before 7.6 -7.4 -10.7 26.2 8.6 tax) on equity, %

Source: Financial indicators of enterprises, I - IV quarters, 1998. Lithuanian Department of Statistics bulletin.

Table 13.

THE DEBT/EQUITY RATIO IN LITHUANIAN COMPANIES IN IV QUARTER OF 1998

Average debt/equity ratio 0.65 0.59 2.55 1.46 0.39

Source: Financial indicators of enterprises, I - IV quarters, 1998. Lithuanian Department of Statistics bulletin. Table 14.

THE SHORT/LONG TERM DEBT RATIO IN LITHUANIAN COMPANIES IN IV QUARTER OF 1998

Average short/long term debt ratio 2.32 6.91 3.45 0.54 2.44

Source: Financial indicators of enterprises, I - IV quarters, 1998. Lithuanian Department of Statistics bulletin.