General Overview
According to the 2004 World Bank Report on the Observance of Standards and Codes (ROSC), "the governance framework of the corporate (and banking) sector is strong relative to the Organization for Economic Co-operation and Development (OECD) Principles, and adheres to high levels of transparency of ownership. Several institutions, including the Central Securities Clearing Corporation (KDD) and Association of Supervisory Board Members (ASBM) set an example for other countries" (p. 16). Slovenia's legislation complied with European Union (EU) Directives, and its corporate governance legal and regulatory framework was comparable to that of many EU member states. However, the 2004 ROSC identified several areas where changes to the laws would increase compliance with OECD guidelines. The enforcement of corporate governance rules, particularly the disclosure provisions, remained the key challenge.
The principal law dealing with corporate governance in Slovenia is the 1993 Companies Act, which was amended in 2006. The Companies Act allows commercial companies to be set up as a general partnership, limited partnership and silent partnership, limited liability company, joint stock company (JSC), and limited partnership with share capital. Traditionally, Slovenian JSCs are organized under a two-tier system, which means that management and supervisory boards are in charge of the management and supervision of the company, respectively. With the 2006 amendments to the Companies Act, the legislator introduced an alternative, one-tier system, under which the board of directors is appointed by the general shareholders meeting (GSM) and manages the company. In the two-tier system, the GSM appoints the supervisory board, which in turn appoints the management board. The 2006 amendments also implement EU Council Regulation No. 2157/2001 of October 8, 2001 on the Statute for a European Company.
On March 18, 2004, the Managers' Association of Slovenia (MAS), the ASBM, and the Ljubljana Stock Exchange (LJSE) adopted a Corporate Governance Code, which was amended in 2007. According to the 2006 EBRD report, the Code is not mandatory and contains a "comply or explain" rule, which asks companies to declare their compliance with the code or explain their reasons for their non-compliance. Amendments to the code made in 2005 are supposed to enhance the independence requirements of the supervisory board.
In 2004, Slovenia achieved 'medium 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. Major weaknesses were found with respect to 'disclosure and transparency' and the 'role of stakeholders.'
In 2005, the EBRD launched a Legal Indicator Survey which tested how corporate governance legislation works in practice. The 2006 published results of the survey assessed the effectiveness of the legislation according to institutional environment, enforceability, complexity and speed. The EBRD found Slovenia's legal framework to be relatively effective, but with some shortcomings, especially with respect to the time needed to reach an executive judgment in case of an action for redress or disclosure. The EBRD deemed the institutional environment generally sound; it found that company books are reliable, auditors are considered fairly independent, and courts and regulators are deemed impartial. The EBRD, however, noted weakness in the competence and experience of the prosecutors in corporate cases and the framework for related party transactions.
According to the World Bank's 2004 report, the LJSE was founded in 1989. The equity market is divided into two tiers: the Official (or Listed) Market and Free Market. As of 2004, 32 companies were listed on the Official Market and 98 (including 30 closed-end investment funds) were listed on the Free Market on October 31, 2003. Market capitalization of all quoted shares (excluding the closed end funds) was USD 5.9 billion, or 22.9 percent of GDP. The ten largest companies account for about 60 percent of the total.
The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investor Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Slovenia scores 3 in the disclosure index against a regional average of 4.7 and an OECD average of 6.3. It scores 8 in the Director Liability Index against a regional average of 3.8 and an OECD average of 5.0 and 6 in the Shareholder Suits Index against a regional average of 6.0 and an OECD average of 6.6.
The Principles
Principle I: Ensuring the Basis for an Effective Corporate Governance Framework |
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Based on German legislation, the 1993 Companies Act provides general rules on all forms of business associations and company forms. The most common company forms are the limited liability company and the joint stock company. Only a joint stock company may issue shares and therefore be listed on the stock exchange. Firms that issued all or part of their shares on the basis of a public call for subscription of shares are defined as 'public.' Besides the Companies Act, listed companies are also governed by the 1999 Securities Market Act, the 1997 Mergers and Acquisitions Act, the 1997 Dematerialized Securities Market Act, and the 2005 Investment Funds Act. However, there is insufficient information publicly available as to Slovenia's compliance with this principle.
According to the 2004 World Bank ROSC, Slovenian capital markets are supervised by the Securities Market Agency (SMA). Its responsibilities include the licensing of new issues of securities, the licensing and supervision of the activities of securities intermediaries (including the LJSE, the KDD, securities brokers and other investment service providers, custodians, investment funds, asset management companies, and mutual pension funds), enforcement of stock exchange disclosure requirements and insider trading laws, and overseeing takeovers. The SMA is independent and fully funded by market participant fees. It may issue legally binding regulations.
The 2004 ROSC concluded that "the SMA has relatively strong authority over supervised and licensed entities (brokers), but limited authority over securities issuers, and has no general duty to protect shareholder rights. Also, SMA staff has no specific legal protection against personal lawsuits for their professional activities, even when conducted conscientiously and in good faith" (p. 2). Companies have to file fundamental documents with the Court Register, such as company charters, foundation documents, articles of association, contracts/agreements with board members, trade licenses, certain Annual General Meeting (AGM) minutes, financial statements and annual reports. The Court Register is maintained by the Supreme Court and open to the public (World Bank 2004).
According to the EBRD's 2006 report, 0n March 18, 2004, the MAS, the ASBM, and the LJSE adopted a Corporate Governance Code. The Code is not mandatory and contains a "comply or explain" rule, which asks companies to declare their compliance with the code or explain their reasons for their non-compliance. Amendments to the code made in 2005 are supposed to enhance the independence requirements of the supervisory board.
Principle II: The Rights of Shareholders and Key Ownership Function |
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According to the 2004 World Bank ROSC, Slovenia largely observes all 6 subprinciples of Principle II. "Basic shareholder rights are fairly well-protected in law and in practice" (p. 3). In general, shareholders have the right to obtain complete and accurate information on the company. Besides having access to company articles, annual and semi-annual reports filed by companies traded on the stock exchange, and other material information, shareholders may attend and vote at the AGM. At the AGM, cumulative voting is not allowed, but proxy voting as defined in the 1997 Mergers and Acquisitions Act is. The AGM appoints the supervisory board and the supervisory board appoints the management board.
The World Bank 2004 ROSC reports that shareholders are involved in several fundamental decisions, such as the use of profits, amendment of the company charter, board member appointment, changes in share rights, mergers and takeovers, share buy-backs, dividend approval, and delisting and transformation of the company into a limited liability company. Shareholders also have preemptive rights for capital increases, but shareholder approval of large, unusual, or related party transactions is not required.
Shares of publicly-traded firms must be freely transferable. The KDD serves as the central registry and is responsible for shareholder record-keeping for almost all joint stock companies. The 1993 Companies Act sets forth the principle of one-share/one-vote. Joint stock companies can issue both common and preferred shares, whereby non-voting and multiple-voting shares are not allowed. The 1997 Mergers and Acquisitions Act regulates ownership disclosure by shareholders. According to the 2004 World Bank ROSC, "control and ownership are highly transparent in Slovenia because of the policy to make the central share register publicly accessible" (p. 6). The World Bank ROSC also recommended increasing minority shareholder representation on the supervisory board. The failure to require special approval for large related-party transactions was considered a potential weakness, and the World Bank suggested requiring shareholder approval (with supermajority) for large related party transactions. Shareholder agreements should be disclosed.
Principle III: The Equitable Treatment of Shareholders |
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According to the 2004 World Bank ROSC, Slovenia largely observes two subprinciples and partially observes one subprinciple of Principle III. The 1993 Companies Act guarantees the equitable treatment of shareholders. Several redress possibilities for shareholders exist, such as suing for the cancellation of shareholder resolutions that violate the company articles, the law, or fair business practices, as well as any decision that does harm to a shareholder, is against the interests of the company, or is in the interest of a third party at the expense of the company. The World Bank notes, however, that "many of these types of suits have been filed, but the court process is slow and inefficient for shareholder redress" (p. 8).
Under the 1999 Securities Market Act, insider trading is prohibited and considered a criminal offense. The 1993 Companies Act governs conflicts of interest at board and shareholder meetings. Accordingly, interested parties are not allowed to vote. Loans to board members are possible on an arm's-length basis and subject to the prior consent of the supervisory board and disclosure in the annual report. Besides the Law on Concerns, which governs transaction between parent companies and majority-owned subsidiaries, there are no other provisions that govern other types of related-party transactions. Pursuant to Slovenian accounting standards, significant disclosures of related party transactions must be made in the annual financial statements.
In its 2004 ROSC, the World Bank recommended that the supervisory board should approve and disclose related party transactions and other conflicts of interest. With respect to minority shareholders, their representation on boards should be increased. With the 2006 amendments to the 1993 Companies Act, the legislature introduced rules governing the squeeze-out of minority shareholders. Controlling shareholders holding 90% or more of the shares may require minority shareholders to sell their shares at a price set by an independent auditor. On the other hand, the 2006 EBRD report notes that minority shareholder may exit the company and request from the controlling shareholders to buy-out their shares. In both situations, minority shareholders have a right to judicial appraisal.
Principle IV: The Role of Stakeholders in Corporate Governance |
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According to the 2004 World Bank ROSC, Slovenia largely observes all four subprinciples of Principle IV. Slovenian employees may elect at least 1/3 of the supervisory board members. Companies with more than 20 employees must establish Worker's Councils, which take over certain responsibilities in the company's management. Bankrupt companies are managed by bankruptcy trustees. According to the World Bank, creditor rights are strong in Slovenia. The ROSC further notes that the Slovenian legal framework governs labor, social insurance, and environmental protection. Under the Companies Act, company bylaws provide for profit sharing for employees. However, Slovenian laws do not address share options. Stakeholders have the right to access all publicly available company information and can access the courts for redress, even though the process is slow.
Principle V: Disclosure and Transparency |
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According to the 2004 World Bank ROSC, Slovenia largely observes one subprinciple and partially observes three subprinciples of Principle V. The World Bank states that "most key items recommended by the OECD Principles are required under the law, including the disclosure of the company's financial and operating results, company objectives, major share ownership and voting rights, and information about board members and key executives including remuneration in aggregate" (p. 11). The law, however, does not cover the disclosure of material foreseeable risk factors, material issues regarding employees and other stakeholders, or governance structures and policies.
According to the ROSC, companies quoted on the LJSE must file audited and consolidated annual reports; in addition, official market listed companies must file unaudited semi-annual reports. Publicly traded companies also have to disclose material events that might affect the share price. In case a company does not comply with the disclosure rules, the SMA has several means to take action; for example, it can issue an order to eliminate the violation or recommend fines to the administrative judge. The ROSC also noted that all firms had to follow Slovenian Accounting Standards, which materially differ from International Financial Reporting Standards (IFRSs). All listed companies (as well as other public interest entities, such as financial institutions) had to apply IFRSs by 2005. International Standards on Auditing (ISAs) are directly applicable in Slovenia, and listed companies must be audited by an independent auditor. Finally, the ROSC recommended that the LJSE should establish an electronic information system for statutory and public information disclosure, which would allow the issuer to make one disclosure that is then sent to the LJSE and the SMA, and at the same time be disclosed to the public.
Principle VI: The Responsibilities of the Board |
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According to the 2004 World Bank ROSC, Slovenia largely observes four subprinciples, partially observes one subprinciple, and materially does not observe one subprinciple of Principle VI. Traditionally, Slovenian companies are governed by a two-tier board structure consisting of a management board and a supervisory board. The latter appoints the management board and sets its remuneration. The management board is the executive body of the company and responsible for the day-to-day operations. The management board reports to the supervisory board at least once a year. The law does not set forth independence requirements for supervisory board members, but supervisory board members generally are not members of the management board. With the 2006 amendments to the 1993 Companies Act, the legislature introduced an alternative one-tier system as an alternative. Under the one-tier system, the board of directors is appointed by the GSM and manages the company.
The management board is accountable to the supervisory board, which is accountable to the shareholders. Management and supervisory board members are fiduciaries under the law. They owe the company a duty of good faith, trust, and confidence, which means that they have to exercise a professional standard of care in managing the company's business. Pursuant to Article 280 of the 1993 Companies Act, members of the board of directors and the supervisory board are jointly and severally liable for damage to the company and to shareholders, unless they demonstrate that they fulfilled their obligations honestly and conscientiously or their actions were based on lawful AGM resolutions. According to the 1993 Companies Act, the supervisory board also monitors compliance with the laws, company articles, and AGM instructions. In case a law is breached or the interest of the company requires it, the supervisory board can convene general meetings and propose remedial measures to the AGM. Employee interests are protected through seats on the supervisory board.
The 2004 ROSC indicates that Slovenia materially does not observe the requirement that the supervisory board should fulfill certain key functions. Basically, the supervisory board has limited formal duties, which are laid out in the 1993 Company Act. Slovenian law does not require audit and other board committees. There is no independence requirement for directors, except that management board members may not be supervisory board members in the same company. The law does not cover the case of interested directors. The World Bank recommended requiring an audit committee of the supervisory board for listed companies.
With the 2006 amendments to the 1993 Companies Act, Slovenia introduced new provisions on the duties of the board of directors' and the supervisory boards' committees, particularly the audit committees. The amended Companies Act also sets forth that one of every three directors may be appointed by employees. The ASBM, founded in 1996, offers training programs for directors since 2000. The World Bank ROSC notes that, as of 2004, one hundred forty five supervisory board members have received certificates from the ASBM. The ASBM should be encouraged to continue its training activities.
Slovenia