According to the 2002 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA) of Latvia, the corporate governance framework in Latvia either fully observed or largely observed the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. Similarly, in 2004, Latvia achieved "high compliance" in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance. Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant." Nevertheless, the 2004 EBRD Corporate Governance Assessment of Latvia revealed weaknesses with regard to disclosure and transparency as well as the protection of shareholders. In addition, the 2005 EBRD Legal Indicator Survey claimed that case law did not always offer guidance to legal provisions, even though actions available to minority shareholders were provided for by the law. Also, the enforceability of judgments could be problematic, and courts and prosecutors appeared not to be well experienced and competent in corporate cases.

General Overview

According to the 2002 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA) of Latvia, the corporate governance framework in Latvia either fully observed or largely observed the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance (p. 49). Similarly, in 2004, Latvia achieved "high compliance" in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance (Cigna and Enriques 2005, p. 37). Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant" (p. 11).

The 2004 EBRD Corporate Governance Assessment of Latvia revealed weaknesses with regard to disclosure and transparency as well as the protection of shareholders. In addition, the 2005 EBRD Legal Indicator Survey claimed that case law did not always offer guidance to legal provisions, even though actions available to minority shareholders were provided for by the law. Also, the enforceability of judgments could be problematic, and courts and prosecutors appeared not to be well experienced and competent in corporate cases. Therefore, the 2005 EBRD Legal Indicator Survey concluded that "despite the fact that Latvia has in place good laws concerning corporate governance issues, continuing efforts still need to be made to improve the effective implementation and enforcement of existing legislation" (pp 10-11).

Corporate governance issues in Latvia are governed by the Commercial Code (CC 2000) and the Financial Instruments Market Law. In 2005, the CC 2000 replaced the Joint Stock Company Law entirely. Pursuant to the CC 2000, businesses can be established as partnerships, either general or limited, or capital companies, such as limited liability or joint stock companies.

The EBRD 2005 assessment found that, in Latvia, "joint stock companies operate under a two-tier system" (p. 9). The members of the supervisory board, or council, are appointed by a general assembly of shareholders and serve three-year terms. The council represents the interests of the shareholders and is charged with the task of supervising the board of directors, which is the executive body tasked with managing and representing the company. Included in the council's mandate is the appointment or recall of board members and assuming the role of company representative in any court action brought against the board. The council must also monitor the company's compliance with applicable laws.

Regular annual shareholding meetings must be convened by the board of directors, but extraordinary meetings may be called by either the board or by the supervisory council, according to the EBRD's 2005 assessment. Auditors may also call such an extraordinary meeting, as may shareholders who represent least 5% of the company's capital. At least 30 days advance notice must be given prior to the annual shareholder meetings, and two-weeks notice is required prior to extraordinary meetings. The EBRD reports, also, that proxy votes are allowed and there is an appeals process available to shareholders if the rules governing convening a meeting are violated. Appeals must be filed with the court within three months of the violation.

Amendments to the Criminal Code in 2005 established the concept of criminal liability for legal entities, holding the legal entity criminally liable for the commission of crimes by a representative of the entity. According to the EBRD's 2005 assessment, the consequences of a conviction can be (1) the mandatory liquidation of the company; (2) the restriction on certain rights; (3) the confiscation of assets; and (4) a fine and liability to remedy the changes.

According to the 2002 World Bank Report on the Observance of Standards and Codes (ROSC) covering Corporate Governance in Latvia, the Latvian corporate governance framework complied with then existing European Union (EU) Directives.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

FC

According to the IMF's 2002 FSSA of Latvia, the corporate governance framework in Latvia either fully observed or largely observed the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. Similarly, in 2004, Latvia achieved "high compliance" in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance (Cigna and Enriques 2005, p. 37). Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant" (p. 11).

The 2005 EBRD assessment reported that corporate governance issues in Latvia are governed by the Commercial Code (CC 2000) and the Financial Instruments Market Law. In 2005, the CC 2000 replaced the Joint Stock Company Law entirely. Pursuant to the CC 2000, businesses can be established as partnerships, either general or limited, or capital companies, such as limited liability or joint stock companies.

According to the Financial and Capital Market Commission (FCMC) website, the FCMC is an autonomous public entity that conducts the supervision of Latvian banks, insurance companies and insurance brokerage companies, participants of financial instruments market, and private pension funds. It was established July 1, 2001.

Principle II: The Rights of Shareholders and Key Ownership Function

CP

According to the 2002 World Bank ROSC, four subprinciples of principle II were largely observed and two subprinciples were materially not observed. In 2004, Latvia achieved 'high compliance' in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance (Cigna and Enriques 2005, p. 37). Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia 'highly compliant.' (p. 11)

The 2004 EBRD Corporate Governance Assessment of Latvia revealed weaknesses with regard to disclosure and transparency as well as the protection of shareholders. In addition, the 2005 EBRD Legal Indicator Survey claimed that case law did not always offer guidance to legal provisions, even though actions available to minority shareholders were provided for by the law. Also, the enforceability of judgments could be problematic, and courts and prosecutors appeared not to be well experienced and competent in corporate cases.

The 2002 WB ROSC reported that a book entry into a securities account either with a custodian or with the Latvian Central Depository (LCD) proves legal ownership. Shares must be freely transferable in order to be traded on the Riga Stock Exchange; share transfers need not be approved by the respective company (p. 4).

According to the EBRD's 2005 corporate governance assessment, regular annual meetings of shareholders must be called by the board of directors, whereas extraordinary meetings may be called by the board of directors, the auditor, shareholders representing at least 5% of the company's capital, or the supervisory council. There must be 30 days advance notice given prior to general shareholder meetings, and two-weeks notice is required prior to extraordinary meetings. The rules allow for proxy voting, and an appeals process is in place should the meeting rules be violated. Complainants have three months following the date of the violation to file their appeal with the court (p. 9).

Amendments to the Criminal Code in 2005 established the concept of criminal liability for legal entities, holding the legal entity criminally liable for the commission of crimes by a representative of the entity. Consequences of a conviction can be (1) the mandatory liquidation of the company; (2) the restriction on certain rights; (3) the confiscation of assets; and (4) a fine and liability to remedy the changes (EBRD 2005, p. 9).

Principle III: The Equitable Treatment of Shareholders

CP

According to the World Bank's 2002 ROSC, all three subprinciples of principle III were largely observed. In 2004, Latvia achieved 'high compliance' in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance (Cigna and Enriques 2005, p. 37) Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia 'highly compliant.' (p. 11)

The 2004 EBRD Corporate Governance Assessment of Latvia revealed weaknesses with regard to disclosure and transparency as well as the protection of shareholders. In addition, the 2005 EBRD Legal Indicator Survey claimed that case law did not always offer guidance to legal provisions, even though actions available to minority shareholders were provided for by the law. Also, the enforceability of judgments could be problematic, and courts and prosecutors appeared not to be well experienced and competent in corporate cases. In its 2002 ROSC, the World Bank reported that Latvian law protected minority shareholder rights in mergers. However, the World Bank recommended the close monitoring of the EU debate on takeover rules and tender offers that was ongoing at that time.

In 2004, the OECD reported that Latvia had agreed to adhere to the OECD Declaration on International Investment and Multinational Enterprises thereby expressing its openness to foreign direct investment. The declaration ensures foreign investors to be treated no less favorable than domestic enterprises.

In 2002, the WB's ROSC noted that, pursuant to the Commercial Code (CC 2000), joint stock companies may issue three types of shares: common, preferred and employee. In the words of the WB's ROSC, "Common shares typically carry one vote per share.... Preferred shares carry no voting rights unless the company is in default on dividend payments [and] employee shares are non-transferable, non-voting shares" (p. 7). Voting rights of a class may be changed by means of a shareholder vote.

The WB's 2002 ROSC also found that Latvian law prohibits insider trading and market manipulation, particularly by employees, brokers, and the Central Depository. Latvian legislation also provides for provisions requiring disclosure of conflicts of interest. For example, a board member shall not have voting rights on an issue involving a conflict of interest. Board members have to provide notice to the board; of they fail to do so, they are liable for losses the company incurs. However, according to the World Bank, as of 2002, there was no mechanism to proactively ensure compliance with the disclosure requirement. Finally, the WB ROSC recommended that Latvia institute a disclosure requirement pertaining to all sales and purchases of company shares by members of the company's management and supervisory boards.

Principle IV: The Role of Stakeholders in Corporate Governance

CP

The 2002 World Bank ROSC states that three subprinciples of principle IV were largely observed and one subprinciple was partially observed. In 2004, Latvia achieved "high compliance" in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance (Cigna and Enriques 2005, p. 24). Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant." (p. 11)

As of the World Bank's 2002 ROSC, Latvia's labor laws were found to be in conformity with EU standards, and a well functioning bankruptcy system was in place. Stakeholders could bring lawsuits in their own name with the management board being the defendant in the action. Stakeholders and the general public had the same access to information.

Principle V: Disclosure and Transparency

CP

The 2002 World Bank ROSC states that three subprinciples of principle V were partially observed and one subprinciple was largely observed. In 2004, Latvia achieved 'high compliance' in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related 'laws on the books' against the OECD Principles of Corporate Governance (Cigna and Enriques 2005, p. 37). Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant" (p. 11). However, 2004 EBRD Corporate Governance Assessment of Latvia revealed weaknesses with regard to disclosure and transparency as well as the protection of shareholders.

According to the World Bank's 2002 ROSC, Latvian enterprises had to file their financial statements with the Enterprise Register thereby making information publicly available. Listed companies had to file annual audited statements and quarterly unaudited statements with the Financial Capital and Markets Commission (FCMC); annual statements also had to be filed with the Riga Stock Exchange. Shareholders of listed companies had to disclose to the FCMC ownership of 25%, 50% and 75%. In case of all other companies, holdings of 25%, 50%, 75% and 90% had to be disclosed to the Enterprise Register. Names of the members of the supervisory board, the management board, the independent auditor and the auditing commission were publicly available. In addition, companies had to use International Accounting Standards (IASs), and auditors had to follow International Standards on Auditing (ISAs).

Principle VI: The Responsibilities of the Board

CP

The World Bank's 2002 ROSC states that three subprinciples of principle VI were partially observed, two subprinciples were largely observed, and one subprinciple was observed. In 2004, Latvia achieved "high compliance" in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance (Cigna and Enriques 2005, p. 37). Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant" (p. 11)

The EBRD's 2005 assessment found that amendments to the Criminal Code in 2005 established the concept of criminal liability for legal entities, holding the legal entity criminally liable for the commission of crimes by a representative of the entity. Consequences of a conviction can be (1) the mandatory liquidation of the company; (2) the restriction on certain rights; (3) the confiscation of assets; and (4) a fine and liability to remedy the changes.

The EBRD 2005 assessment found that, in Latvia, "joint stock companies operate under a two-tier system" (p. 9). The members of the supervisory board, or council, are appointed by a general assembly of shareholders and serve three-year terms. The council represents the interests of the shareholders and is charged with the task of supervising the board of directors, which is the executive body tasked with managing and representing the company. Included in the council's mandate is the appointment or recall of board members and assuming the role of company representative in any court action brought against the board. The council must also monitor the company's compliance with applicable laws. The 2002 World Bank ROSC cautioned that, as of that time, the concept of conflict of interest and independent board members was not well developed.