Skeptics had reservations when Czechoslovakia launched its massive program in 1992 to privatize state-owned enterprises. The state's voucher scheme gave almost every citizen a chance to own shares in one or more companies. But critics complained that having so many owners would mean that nobody would be in control. There would be no effective way for shareholders to manage the managers. However, hundreds of new investment funds emerged that traded their own equity for vouchers. That gave the funds the heft to bid for large blocks of stock in newly private companies and led to a greater concentration of ownership than expected. Whether it also leads to improved corporate governance is another matter.
The program gave all citizens over 18 a chance to buy a package of vouchers for about $35, then equal to about the average weekly wage. Vouchers represented points that the owner could use to bid for shares in any of 1,491 enterprises. Most people turned their points over to one or more of the 430 investment funds formed by banks and other sponsors. The funds ended up owning 70 percent of the bidding points. But the concentration of ownership was even greater than that suggests. The 10 largest bank-sponsored funds, including several managed by the same institution, picked up 43 percent of the points.
Despite the strength of the funds, they did not obtain dominating equity positions. Although some funds, notably in Slovakia, have exceeded the limit, all are technically prohibited from holding more than 20 percent of the shares of an individual firm. Moreover, the funds tended to bid for the shares of larger firms and then, because of the bidding, paid more points per share. As a result, only two funds have a position in a firm exceeding 30 percent of the stock. With dispersed ownership, of course, an investor can have effective control with only a small fraction of shares. And in many cases, two or three funds could have combined control of an enterprise. There is no company in which two funds have a combined majority stake, but in almost half the companies in the program, the two funds with the largest number of shares jointly have a controlling position. (Individual domestic or foreign direct investors have effective control of about 100 companies.)
There has been too little time and too many shocks---including the country's split---to judge the effect of new ownership arrangements on the performance of the privatized firms. But share prices in the final round of bidding and in the secondary market theoretically should anticipate the benefits of concentrated ownership. Other things being equal, the shares of a company with a controlling ownership and, presumably, better corporate governance should trade at higher prices than the stock of a firm with more diffuse ownership. But that has been so only when ownership is highly concentrated, with a single owner or group holding an absolute majority. Relative control, especially when it is held by one or two funds, has had a negative effect on share prices.
One explanation for the way share prices have reflected the concentration of ownership could be the potential conflict of interest for investment funds controlled by banks. In many cases, these banks are major creditors of the firms in which the funds have a large equity interest. Other investors might be less willing to bid up share prices without more separation between fund management and commercial lending. A possibly stronger factor is that the investment regulations of both republics require absolute majorities for important decisions such as removing directors and supermajorities for fundamental corporate changes. As a result, only a very large shareholder is legally able to restructure a firm and carry out the radical changes needed to ensure profitable growth.
One lesson to be taken from the program is the importance of small shareholders. In some markets a well-developed proxy system allows a stakeholder with less than majority ownershipÑfor example, a bank in GermanyÑto solicit the support of small shareholders and thus exercise control even in the presence of high majority requirements. So far, small Czech and Slovak shareholders have not taken an active interest and their votes are essentially lost. The result is weaker shareholder control and---the ultimate penalty for the investor---lower share prices.