Timely and Reliable Disclosure In Accordance with Internationally Recognised Standards.
In general, the legal, regulatory and institutional structures that govern the transparency and disclosure regimes for listed companies seem sound on key disclosure requirements such as financial reporting and related party transactions. All Estonian listed companies are required to comply with International Financial Reporting Standards (IFRS). The standards for auditing have been brought into line with International Standards on Auditing (ISA) with the enactment of the Auditing Act.
However, some disclosure gaps remain, in particular in relation to Principle V.A. There is no specific requirement to disclose company objectives (V.A.2), nor to disclose information about board members, including remuneration, qualifications, the selection process, other company directorships and whether they are regarded as independent (V.A.4). No reporting is required in relation to employee or stakeholder issues (V.A.7). While Estonia has a “comply or explain” corporate governance code, it does not require a general explanation of corporate governance structures and policies (V.A.8), requiring explanations only in cases of non-compliance. A proposal currently under consideration by the Ministry of Finance to require listed companies to disclose information on management board remuneration would be a desirable improvement. In addition, Estonia’s implementation of Principle V.A could be considerably strengthened through a review and update of the voluntary CG code to include clearer guidance on disclosure in relation to the points mentioned above, and to consider adopting regulatory requirements in cases where voluntary compliance appears to be weak or not well justified, such as in relation to independent directors.
With passage of the Auditing Act, SOEs are also required to conform fully to international accounting standards, and the 2009 State Assets Act requires them to report on their compliance with the voluntary CG code.
Effective Separation of the Government’s Role as Owner and its Regulatory Role, and Ensuring a Level Playing Field. The review found no evidence of special treatment for Estonia’s main, commercially-oriented SOEs. Regulatory entities such as the FSA for listed SOEs, the Competition Authority and Estonian Technical Surveillance Authority appear to perform regulatory oversight functions independently of Estonia’s SOEs and their ownership ministries. Ministers are not permitted on SOE boards, and while government officials can serve on SOE boards, officials involved in regulatory oversight functions are excluded.
While some state subsidies, loans and loan guarantees have been provided to Estonian SOEs, these appear to have been exceptional cases that have been provided at commercial market rates and handled transparently and with clear designation of the public policy objectives they are intended to serve. Subsidies have been offered and transparently disclosed to serve specific policy and public service objectives when an SOE has not been able to obtain sufficient revenue from its clients to cover the costs required to offer such products or services.
Greater political-level involvement, including the appointment of ministers to boards, is permitted in Estonia’s foundations (involving for example, museums, educational institutions, hospitals and business development agencies), and high-level public officials also serve on the board of a separate for-profit entity, the Forest Management Centre, responsible for ensuring the sustainability of Estonian forests. The Corporate Governance Committee considered, however, that this did not raise the same degree of concern as it would if such practices were adopted by larger, more commercially-oriented SOEs.
The OECD review did not find evidence of SOEs receiving preferential treatment from the Government. Estonia continues to take steps to open up certain sectors dominated by SOEs to greater competition. The energy sector, which in some areas remains closed to competition, is due to liberalise its retail function by 2013 under a derogation from the European Union. The postal service has been opened to competition but the state-owned Eesti Post was the only bidder offering to provide these services. Although there are still a few SOEs with sole right to operate in certain narrowly-defined markets, these are exceptional cases in which Estonia has cited the need for a state role in public protection or safety as a justification (port pilotage, elevator inspections, lotteries).
Recognising Stakeholder Rights and the Duties, Rights and Responsibilities of Boards. To
protect employee rights, Estonia has a general legal framework and special collective agreements which appear to be respected by listed companies and SOEs. However, Estonia lacks some specific provisions related, for example, to whistle-blowing protection and implementation of codes of ethics. Communication with stakeholders tends to be informal and lacks formal mechanisms such as reporting on relations with stakeholders.
With respect to boards, one area of concern is the lack of information available related to the independence of supervisory board members in listed companies. The voluntary CG code recommends a majority of board members with independence from controlling shareholders, but no companies comply with this recommendation, and they are not required to report on the number of board members meeting the code’s definition of independence. A previous listing requirement for at least two independent board members was dropped when the voluntary code took effect in 2006. The need for such independence has become increasingly relevant in light of the passage of legislation to establish Audit Committees in large Estonian companies. Independent board members could play an important role in the Audit Committee, due to its responsibility for reviewing sensitive issues where there is a potential for diverging interests between controlling and minority shareholders and management, requiring even-handed treatment of all shareholder interests. The issue of supervisory board independence is not dealt with in Estonia’s law, nor under listing requirements. Accordingly, as recommended by the FSA, this is an issue for which “legislative regulation” with corresponding enforcement capacity should be considered.
For SOEs, Ministers are not permitted on boards, and some good examples can be found of commercially-oriented boards with the involvement of board members with entrepreneurial backgrounds. However, market participants raised concerns that some boards have too many politically-related appointees rather than members with more appropriate skills and experience to oversee a commercially-oriented enterprise. Draft legislation currently under consideration, to bar parliamentarians from serving on boards would be a step in the right direction, but this should be coupled with better structured and more transparent nomination (and removal) processes aimed at ensuring an appropriate mix of professional skills and experience.