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Organisation for Economic Co-operation and Development

Organisation de Coopération et de Développement Économiques

Hosted byThe Government of Lithuania

CORPORATE GOVERNANCE INLITHUANIA

by

Prof. Juozas BivainisDirector

Institute of PrivatisationLITHUANIA

and

Dr. Artūras BučasHead of Division

Institute of PrivatisationLITHUANIA

Seminar onCORPORATE GOVERNANCE IN THE BALTICS

Vilnius, Lithuania21-22 October, 1999

Seminar on Corporate Governance in the Baltics21-22 October, 1999 - Vilnius

BACKGROUND PAPER on CORPORATE GOVERNANCE IN LITHUANIA

Copyright © OECD All rights reserved

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TABLE OF CONTENTS

TABLE OF CONTENTS..................................................................................................................................... 2

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

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

GENERAL ECONOMIC CONTEXT.......................................................................................................................... 4CORPORATE GOVERNANCE CHARACTERISTICS IN LITHUANIA ............................................................................ 6

Corporate Governance Agents ...................................................................................................................... 6Corporate Behaviour, Finance and Restructuring...................................................................................... 11

PART III: REGULATORY FRAMEWORK AND THE ROLE OF POLICY............................................ 12

EQUITABLE TREATMENT OF SHAREHOLDERS AND OTHER STAKEHOLDERS ...................................................... 13Shareholder Protection ............................................................................................................................... 13Role of the Board of Directors .................................................................................................................... 16

IMPORTANCE OF TRANSPARENCY AND DISCLOSURE ........................................................................................ 18

PART IV: CONCLUSIONS........................................................................................................................... 20

APPENDIX ......................................................................................................................................................... 21




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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, aswell as in an overall system of economical activities. Creation and development of forms ofeconomical activities, typical for a market economy, are one of the most important changes in thiscontext. 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 resultof privatisation of state property. The first stage of privatisation was characterised by privatisation ofstate property to the public with employing a voucher system, the second one - by selling for moneybig stakes in larger enterprises to strategic investors. This reflects the initial composition ofownership in respective companies.

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

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

5. The Company Law of the Republic of Lithuania provides for completely equitable treatment ofshareholders without regard for their being foreign or local or any other characteristics. A generalmeeting of shareholders is the ultimate organ of a company both, in law and in fact. Shareholders canobtain information from a company; their rights to information are differentiated according toamount of stock held by them currently. There are provisions in force being applied on conflict ofinterests 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 boardand a managing board. The supervisory board appoints the managing board. One of the boards maybe not formed. There are no legal limits on shareholders in respect to their formation, including limitson ability of a member of a company board to take position of a member of a board in anothercompany.

*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 rendercross-country comparisons easier.

The data and discussion focus on large, mostly listed companies and corporate groups, although some observations on smallercompanies are also made. No original research, such as new data gathering or corporate surveys was required. Authors were askedto 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.




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7. Accounting standards are developed. The system of disclosure of information via the register ofenterprises 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 inLithuania. Its development does not depends so much on short-term processes and events, such ascrisis in some other countries, though these events influence the economy, as on a long-termeconomic environment, traditions and the state's measures related to the regulation of corporategovernance.

PART II: CORPORATE GOVERNANCE ENVIRONMENT INLITHUANIA

GENERAL ECONOMIC CONTEXT

9. During the period of 1991-1999, the Lithuanian economy has experienced radical changes in allits sectors. Two mayor stages may be clearly distinguished in the development of economy. The firstone - covering the period of dramatic economic decline between 1991 and 1993. In 1991, essentialeconomic reforms were started in Lithuania, through which the fundamentals for the market economywere sought to form, and preconditions for access of Lithuania into the world economy wereattempted to create. This phase, the phase of reforms (up to 1993) was difficult for Lithuania. Asevere decline was characteristic of all sectors of the economy. The second one was the period ofrecovery during the overall period of 1994 - 1999, when economic stabilisation and growth wereclearly observed. Lithuanian economy started to recover and overcome the decline of the formerperiod 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 quantitativeprocess 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 sectorcreated 60% of the GDP, in 1995, it created 65%, in 1996, it created 68% and in 1997, it created70%. The structure of economy also changed rapidly; these changes are illustrated in Table 2. Theshare of agriculture and industry decreased, the share of trade activities increased, and share ofservices 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 duringthe period of 1991-1999 are presented in Table 3; it clearly shows the re-orientation of the Lithuaniantrade towards the West.

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

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




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14. International integration of the Lithuanian economy is also characterised by trends of foreigninvestment in Lithuania. Data characterising foreign investment in Lithuania during the period of1991-1999 are presented in Table 5. It shows that the amount of foreign investment, especially offoreign direct investment, is constantly growing.

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

16. The decline in trade harmed the current account situation, while further improvement in thecapital 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 - decreaseof sales, profits, issues related with cash flows; due to financial crisis in Russia, some Russianimporters were unable to pay for goods purchased previously. Such events caused some strain in thefinancial system of Lithuania, too; banks that used to invest into the Russian government bonds facedespecial 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, slowingdown the GDP growth and even leading to decrease in the beginning of the year 1999 (comparingquarterly data for the years 1997 and 1998, 1998 and 1999 respectively, it is possible to see aslowdown of growth in III and IV quarters of the year 1998 and decrease in the I quarter of the year1999). This slowdown is illustrated in Table 8. The worsening of results of companies' activities maybe illustrated by the fact, that in average based on data of 100 largest Lithuanian companies, in thefirst half year of 1999 comparing with the first half year of 1998 sales decreased by 15,2 percent (thetotal sales of these 100 companies decreased from 6,37 billion Litas∗ to 5,40 billion Litas), and netprofits decreased by 14,8 percent (the total net profits decreased from 241 million Litas to 216million Litas). Among these 100 companies 20 companies which where profitable in the first half ofyear 1998 suffered loss in the first half of the year 1999. The general picture reflecting issues in thefinancial situation of enterprises is shown in Table 9.

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

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

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

∗ Exchange rate: 1 Lithuanian Litas = US$ 0.25




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proposals to overcome the problems. It was decided by the Government to provide some financialsupport to a few enterprises, which were facing financial difficulties and were unable to pay wages totheir employees, due to the Russian crisis.

22. The Government made a decision, obliging all ministries, other state institutions, budgetorganisations, public institutions and enterprises, which make procurements using funds of theLithuanian state budget, State Social Security Fund budget, Compulsory Health Insurance Fundbudget 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 obligedto 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 thebudget revenue; revenue from customs duties decreased most significantly. Thus, in response to theRussian crisis, the Government has undertaken measures to save budget expenditure. Taking intoaccount 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 suggestedto 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 halfof 1999. Signs indicating a potential for this recovery may be seen: enterprises, which formerlyexported to Russia, are finding opportunities to export to the West; the volume of retail trade hasbegun to grow.

CORPORATE GOVERNANCE CHARACTERISTICS IN LITHUANIA

CORPORATE GOVERNANCE AGENTS

25. The major factors that have shaped the current corporate governance environment (the ownershipand 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 wereapplied.

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

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




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an initial stake of private capital. The main method of privatisation according to the Law on InitialPrivatisation was public subscription for shares. It was rational to pay for subscribed shares by usingvouchers, however paying in cash was also possible. In its initial stage application of the Law onInitial Privatisation of State Property featured absence of privileges for employees of a company. Thesituation changed later. From June 1991 until April 1992, employees had a priority right to subscribefor shares of the enterprise being privatised. From April 1992 they had a right to subscribe in additionto shares held previously for shares up to 30% of a company's capital at the price equal to nominalvalue disregarding their subscription price fixed for other persons which was always higher. FromFebruary 1993, this share was increased to 50% (20 % of this amount had to be subscribed for ahigher price, but from June 1994, conditions for subscription of these 20% were made the same as forthe rest part).

29. Another factor is to be taken into account - participation of investment stock companies invoucher privatisation. It was allowed to create them from October 1991; from January 1992, theirinvestments into enterprises being privatised by public subscription for shares were restricted to notmore than 50% of the statutory capital of an enterprise. In August 1992, an additional restriction wasimposed: a number of shares of an enterprise being privatised subscribed by investment stockcompanies could be reduced proportionally, if the total subscription exceeded 110% and allinvestment 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 onState and State-Stock Enterprises it was possible to increase share capital (capital which did notbelong to the state) by using profit of such an enterprise and to transfer the respective shares toemployees.

31. The facts disclosed above are related to the initial composition of ownership in privatisedcompanies. In enterprises privatised under the Law on Initial Privatisation of State Property duringthe beginning of its application, privatisation usually resulted in initial structure of ownership thatfeatured 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 tomention, that investment stock companies (more than 300 of them were created) were used not onlyto accumulate vouchers from public. Very often they were created by persons, who wished toprivatise enterprises for vouchers purchased (by using other formal types of contracts ascircumvention) from public.

32. In cases of privatisation of large companies under the Law on Privatisation of State andMunicipal Property, usually, a big stake in an enterprise is sold to a single investor offering the bestprice 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 inthe Stock Exchange. In practice these stakes, as a rule, are purchased also by a single investor, whoalready participates in the company usually.

33. The main tendencies of development of ownership structures are disclosed below. Here it isnecessary 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 ownedby other employees. This is an important reason, why ownership of companies where a great part ofcapital stock belonged initially to employees, is more concentrated now. Besides, stock exchangetransactions were employed in the process. Increases in subscribed capital were also used. Foreigninvestors who purchased shares usually bought them it from persons who had already concentratedthem in their own hands (sometimes these persons constituted quite numerous groups).




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34. The present situation related to the composition of ownership in Lithuanian companies anddevelopment of this situation in the past may be characterised by using the Lithuanian CentralSecurities Depository's data describing value of shares held in accounts of the Central SecuritiesDepository'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 byprivate companies and natural persons; state enterprises and commercial banks own less; certainamount 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 ina company; power of a particular shareholder in control of a company is proportional to the numberof 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 notdefined in the Company Law.

37. Corporate groups play an important role in the Lithuanian economy. They are formed by meansof ownership of an equity stake in a company by another company; the latter company thenparticipates in formation of managing bodies of the former company. Meanwhile it is necessary tosay, 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 afterprivatisation or take-overs used to "pump out" property of subsidiary companies. Seeking for externalfinancing, 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 outsideinvestment, because financial institutions regard this situation as contributing to effectivemanagement of a company and hence to financial reliability of a firm. Possible investors also usuallyregard 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 andsuggestions 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 andreturns shall be equitably distributed among them in proportion to a number of shares owned by ashareholder.

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 corporatecontrol; 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 twogroups: the ones owned and controlled mainly by the state (number of such banks is 2) and the onescontrolled by private bodies (number of such banks is 9). Among owners of banks belonging to thesecond group (listed according their importance and influence in control) are foreign financialinstitutions, local companies, including banks, and the public.




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44. Currently one relatively small commercial bank is known as member of a Lithuanian corporategroup. There is no information on other Lithuanian commercial banks regarding membership in sucha corporate group. Formerly, after privatisation of a number of banks, some banks actually weremembers of such groups, in some cases after some kind of take-overs. However, operation of suchbanks 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 ofinitial privatisation; they were being created with the purpose of participation in the initialprivatisation. At this moment their number diminished sharply, but their role in governance ofLithuanian companies is still noticeable. Foreign financial companies are increasing theirparticipation in equity of Lithuanian companies.

� Securities brokerage companies now own a certain amount of equity; in some number of casesthey 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 maybe evaluated as moderate. Well-developed and successfully operating companies use to solve issuesof 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 theyresult in re-formation of a company's managing bodies and changes of executives. There are nospecial provisions in the legislation limiting take-overs except for that contained in legislation oncompetition 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 corporateownership 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 onInvestment Companies is in force, which allows creation of controlling investment companies, closeinvestment funds and investment funds (investment companies with variable capital). Onlycontrolling investment companies (created after re-organisation of investment stock companies,which were formed during the first stage of privatisation) are actually operating. However, somesteps of private structures are observed that are related with efforts to create investment companies ofother kinds, including investment funds. The Law on Pension Funds was adopted in June 1999. Itwill 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 oftechnical differences (within the limits to be established by Minister of Finance) into shares listed ona stock exchange, and upon authorisation of the Board of the Supervisory Council - into unlistedshares and into shares of foreign companies. According to the same Law, insurance companies maynot invest into equity funds, which correspond to their statutory capital. These restrictions oninsurance 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 inownership of a company. According to partial data, in the value of total investments into companies'




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shares, investments of Lithuanian residents into these shares equal to 49.5 % of the total value ofLithuanian companies' shares; private firms account for 26.7 % and natural persons - for 15.2 % ofthe total value of Lithuanian companies' shares. Share of investors of other kinds, including state andmunicipalities - 7.6 % (shares of these kinds of investors in the total value of domestic shareholdingare respectively 53.9 %, 30.7 % and 15.4 %). (Respublika, 1999 July 26, p. 17; "Investicijos i akcijasper ketvirti isaugo")

51. The state’s as a shareholder's behaviour may be regarded as different during the time. A veryloose control of companies in which the state had a share, in the beginning, was tightened later, whileministries and other state institutions still performed the role of representatives of the state as ashareholder. These arrangements were expressed by decrees of the Government, adopted in March1995 and in July 1997. The main principles of these decrees are as follows: representation of the statein a company (mainly in the way of participation in the general meetings) through an officerempowered by the respective institution. Decisions to be implemented by the empowered officerrepresenting the state are to be made, according to their importance, by the empowered officerhimself, 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 (ormanaging) board and vote for them. The last tendency is to concentrate functions of representation ofthe state as a shareholder in the remaining companies with state's participation in equity in a singleinstitution - 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 figuresdescribing the composition of ownership in public companies. According to the Lithuanian CentralSecurities Depository, on June 30, 1999 among the total value (equal to 2.12 billion Litas) of sharesaccounted by securities' circulation intermediaries, on which information regarding their ownershipwas 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, fromwhich 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 onwhich information was available (Respublika, 1999 July 26, p. 17; "Investicijos i akcijas per ketvirtiisaugo"). According to the Department of Statistics, the main countries providing foreign directinvestment 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 directinvestment 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 SecuritiesDepository information, during the period of March 31 - June 30, 1999 the value of domesticinvestments into companies shares decreased by 68 million Litas, and value of foreigninvestments into companies' shares increased by 166 million Litas. The value of foreigninvestments 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 topurchase of shares from shareholders by other persons including other current shareholders,due to increases of statutory capital.




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CORPORATE BEHAVIOUR, FINANCE AND RESTRUCTURING

54. Diversified corporate groups exist in the economy of Lithuania. Control in such groups isexercised by the means of ownership.

55. Availability of possibilities for companies and corporate groups to expand ought to be named asthe main cause of diversification: when making a choice of a company for acquisition of equity, thementioned companies and corporate groups take into account foremost business perspectives of sucha 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 inindustries 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) onequity in Lithuanian companies may be characterised as average; there are profitable (some - of highprofitability) and loss-making industries.

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

58. Lithuanian companies showing satisfactory financial results, have a tendency to invest much andexpand 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 forstatistics 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 wholeLithuanian economy and in some industries chosen as an example in IV quarter of 1998 is presentedin Table 13.

60. The main part of corporate debt is constituted by loans from banks. According to creditors, thestructure of companies' debt may be characterised by the following data: in the whole Lithuanianeconomy in IV quarter of 1998 financial debts constituted 37% of all liabilities of non-financialenterprises, trade credits - 32%, and other liabilities - 31%. Companies enjoy rights to take loansfrom 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 bankstoo.

61. Lithuanian enterprises have more short term debt than long term. The data characterisingsituation 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 whichcould be treated as significant, but it is possible to notice that companies' trade debts increased, anddebts to financial institutions decreased (the latter decrease is more significant than the formerincrease) in the IV quarter of 1998. It may be supposed that banks restricted their loans making tobusiness 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-




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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 areabsent, these provisions restrict non-performing loans making, too.

64. An excessive risk taking, as well as almost all other mismanagement issues, may be linked tofailures in the corporate governance via inability of the corporate governance to establish and ensurean effective management practice. In some cases it was possible to notice a purposive excessive risktaking 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 couldbe attributed to the crisis in Russia of 1998 is not taking place. Financial/corporate restructuring isgoing on as a natural process. The influence of the mentioned crisis ought to be more evident infuture. Meanwhile, there exist new ideas which where inspired by the crisis about financialrestructuring of companies in trouble: a new draft law is prepared. When adopted this law willregulate rehabilitation (restructuring) of companies having problems in those cases when the need toapply bankruptcy procedures is still absent at the given moment. A possibility to restructure debts ofa company is provided in this draft.

66. The major actors in corporate restructuring are investors/owners. As everywhere else, conflictinginterests 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 whichcan be retained.

67. Corporate restructuring is an intensive process at present. The most widely used form ofrestructuring during the years of 1992-1995 was formation of new companies, usually privatecompanies. 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; effectivenessof these processes may be evaluated as low due to the fact, that the demand for these resources isquite low. This may be illustrated by the fact, that in those enterprises, whose bankruptcy procedureswere started after October 1, 1997, during the second half of 1998, property was sold for the totalamount of 5018 thousand Litas, while the total accounting value of this property was equal to 11275thousand Litas. Bankruptcy proceedings are initiated currently only at a stage of development, whena company has no remaining net assets. It is difficult to find possibilities to revitalise such firms, andtheir assets are to be sold or distributed separately. This low effectiveness of re-allocation may berelated with structural changes in the economy: companies' going bankrupt is related to theiroperation in industries which have no perspective for further successful development; thus theirassets 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




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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 heldby them entitle them to, and are treated equitably.

70. Shares in public companies may be both registered and bearer. Actually registered shares totallyprevail. 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 toArticle 16, Part 2 of the Company Law, if all shares of the company, which bear a voting right, are ofthe 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 facevalue, one share of the lowest face value provides one vote to its holder. The number of votesprovided by other shares is equal to their face value, divided by the lowest face value. It is possible toprovide in the statute of a company different rules for determination of the number of votes, but ineach 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 shareswith prefixed dividend and no voting rights.

73. Voting by proxy is provided for in the Company Law (Article 17) and is very broadly carried outin practice. If a proxy's power of attorney is issued by a shareholder-natural person, it shall benotarised, and if by a shareholder-legal body, it shall be confirmed by the signature of the chiefexecutive and the seal. A power of attorney for representation of a shareholder in the general meetingshall be submitted to a person in charge of registration of participants of the meeting, who shall markit 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, distributedto shareholders before the general meeting) shows, that such form of voting should be introduced inthe future.

74. Shareholders can voice their concerns in a general meeting freely. According to Article 22 of theCompany 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 proposetheir decisions. They must be included into the agenda, in case they are submitted not less than 15days 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 ofthe Company Law): shareholders who possess at least 1/10 of the share capital have the right toappoint an expert (a group of experts) to examine operation of the company and its accountingdocuments, to identify presence of facts, indicating insolvency or deliberate bankruptcy and of factsof 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 theyare expressed by minor shareholders.

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




14

information related with decisions to be adopted in general meetings and these efforts are seen by aminor 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 oflong-term assets, whose value exceeds 1/20 of the statutory capital of the company. Such provisionswere needed because of the demand to prevent such cases, when property of a company is disposedwhile it is needed by the company or when property is sold at too low price; these cases may berelated 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 ofthe company. In future this issue will be regulated according to the EU law - it will be possible toabandon this right only by a decision of a general meeting.

78. According to the law, any differences in treatment between foreign and domestic shareholdersare 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 ofinterests between company’s shareholders and the company. Article 13, Part 2, subparagraph 6allows a company that has not more than 50 shareholders to receive loans from its shareholders forthe interest defined by a contract. It is provided in the Company Law, that if a company receives aloan from its shareholder, it is prohibited for this company to provide collateral. Furthermore, theannual 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 dayof 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) issuedby 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 disclosurethresholds, the obligation to extend a tender offer to all shareholders, etc. are provided undersecurities legislation. Namely, according to Article 10 of the Law on Securities Public Circulation, ifa person acting individually or together with other persons has acquired shares of an issuer registeredin Lithuania, conferring more than 1/10, 1/5, 1/4, 1/3, 1/2, 2/3 or 3/4 of votes, he shall inform theSecurities Commission and the issuer about the total number of shares bearing a voting right and thenumber of votes held by him within 7 days. The same obligation to report is applied in cases, whenthe indicated thresholds are passed due to decrease of share of votes possessed. Persons actingtogether are defined as 1) a person who issued a power of attorney, and its holder, if the holder of thepower of attorney has a right to vote according his own mind; 2) persons being controlled andpersons 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 personthe right to vote according his own mind and the transferee; 5) members of managing board andsupervisory board, chief executive and his deputies, chief financier, persons, empowered to concludetransactions in the name of the enterprise; 6) spouses.

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




15

purchase the rest part of securities conferring a voting right as well as securities confirming the rightto acquire securities bearing voting rights of the issuer for the price of the proposal which may not belower than the average price of securities which were purchased by the person submitting theproposal 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 mainlybecause of comparatively low financial capacities of firms, which might wish to execute a hostiletake-over, possibilities to compete by expanding one's own firm by other means (the main of them ismore successful management leading to growth).

84. Insider trading regulations are being applied under securities legislation. According to Article 6of the Law on Securities Public Circulation, persons who have information which is not publiclydisclosed about an essential event (any event, which may have a significant influence on investor'sdecision to purchase or sell securities of the issuer or can significantly influence the market price ofthese securities) due to their occupation, profession or duties - these persons may include members ofa 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. Thisprohibition is applied also to legal bodies, if a member of managing board or supervisory board, thechief executive or his deputy, chief financier, a person, empowered to conclude transactions in thename of the enterprise, a person, making the decision to conclude transaction in the name of theenterprise, or a person, having control over the enterprise possesses the information which was notpublicly disclosed. Restrictions are applied also regarding the transfer of such information andconclusion 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 uponconclusion a transaction on their own account with securities of the company-issuer shall inform theSecurities Commission about the transaction.

86. Shareholders can be protected against abuses or infringements of their rights by the way ofapplication to the court or, in cases related with public securities turnover, to the SecuritiesCommission. Cases of application of a shareholder to courts whenever infringements of their rightsoccur are quite numerous. It is complicated to assess the effectiveness of courts' processes relatedwith abuses or infringements of shareholder rights, because information possessed on this issue is toofragmented, 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 submissionof a request shall be allowed by the company to get acquainted with and to make copies of annualand 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 obligationin a written form on non-distribution of confidential information, may also get acquainted withminutes of sittings of supervisory and managing boards, if these minutes do not contain informationabout essential events in the company which was not publicised (information is confidential, whenthe managing board designates by its decision it as being such; information, defined by the law aspublic, may not be designated as confidential).

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




16

with all minutes of supervisory and managing boards, transactions of the company, as well aswarrants, 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 ofstatutory 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 smoothand efficient running of the everyday business of the firm: in cases unrelated with violations of thelaw or infringements of their rights by a company bodies (in opposite cases they are entitled to courtprotection) shareholders can not influence (excluding unofficial influence) actions and decisions ofmanaging bodies of the company. On the other hand, shareholders constitute the supreme body of acorporation and adopt most important decisions; they have the right to obtain information and maymonitor the way these decisions are implemented.

91. Management’s liability towards shareholders is limited: according to the Company Law, Article29 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 lossesinflicted on a shareholder or shareholders only in those cases, when the head of administration or aperson 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 thecost of the company or its other shareholders. In other cases managers are not liable for losses whichwere 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; inthis case functions of the body being not formed are to be transferred to other bodies. A typical sizeof 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 asemployees, creditors or major clients/suppliers, in boards. According to the Company Law, boardsare formed entirely by shareholder's voting; shareholders have full freedom of decision in selectingtheir candidates and voting. In practice inclusion of employees, creditors or clients/suppliers intoboards may happen, though it is not common.

94. The law does not include a provision in obliging a board to give special consideration to theinterests 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 amember 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 severalcompanies, is usual. Information on "cross-membership" in boards of two companies unrelated byownership links is absent.

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




17

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 notexempt him from the duty to cover losses. A member of managing board may be exempted fromcoverage of losses, if he acted on the basis of documents of the company or other information, whenthere was no reason to distrust it, or acted not exceeding the usual degree of production or economicrisks. Disputes regarding coverage of losses shall be taken to court. There are penal provisionsapplicable to head of administration also.

97. Members of managing boards are elected by supervisory boards, and members of supervisoryboards are elected by general meetings. Currently a managing board or a supervisory board (but notboth) may be not formed in a public company; the last proposed amendments to the Company Lawprovide 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. Whensupervisory board or, in case supervisory board is not formed, managing board is elected by generalmeeting, 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 therespective 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 fortheir election. However, it is quite common, when members of managing and supervisory boards arenot personally shareholders or employees of the company.

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

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

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

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

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




18

105. There were some initiatives shown by industrial associations to establish voluntary corporategovernance guidelines. However, usually separate companies determine the precise definition of therole of supervisory and managing boards themselves, subject to their particular needs. Self-regulationin the British sense, performed by associations, is not traditional in Lithuania, though there are somethoughts 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, regulatingprotection 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'scompanies), encompassing all necessary provisions. Moreover, this new Company Law will containdifferent from that being applied currently provisions on establishment of a company, on the mannerof formation of its bodies, expanded provisions on mergers and divisions, amended provisions onvoting by qualified majority in a general meeting, etc. It will provide for the new order ofparticipation of a shareholder in a general meeting, equality of rights of shareholders in obtaininginformation from the company not withstanding number of votes held by them and it will contain anumber 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 CashFlow (Changes of Financial Position) Statement and the Explanatory Note.

108. Lithuanian financial accounting standards are sufficient for market participants and for thepurposes of governance. Present disclosure channels allow users who have some deeper interest inoperation 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 assetsvalue was redefined several times. There existed rules established for this re-valuation of assets, andenterprises had a possibility to perform these re-valuations properly. The legal basis for this wasestablished by a Decree of the Government.

111. Mandatory disclosure of companies' non-financial information is provided by accountancyregulations (applying to the contents of the Explanatory Note), regulations of securities publiccirculation 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 theenterprise, conditions of operation of the enterprise, activities of the enterprise in the field of researchand 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 ofoperation 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.




19

114. Rules regulating work of a managing board according to Part 1 of the Article 27 of theCompany Law shall be established by the regulation of work of the managing board. Rules regulatingorder of calling of sittings of supervisory board according to Part 7 of the Article 25 of the CompanyLaw shall be established by the regulation of work of the supervisory board. It is not provided fordisclosure 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 generalmeeting by shareholders. According to Part 7 of Article 16 of the Company Law, each shareholderhas right to become acquainted with and to make copies of protocols of general meetings, where therespective information uses to be contained.

116. According to the Law on Audit of the Republic of Lithuania, the external auditor is responsiblefor inspection of financial statements of a company and making conclusion regarding the correctreflection by financial statements of financial situation of a company, results of activities and cashflows, compliance of financial statements with legal acts regulating financial accountancy andworking out of financial statements, as well as with the general principles of accountancy, applied inthe Republic of Lithuania. Thus, an external auditor improves possibility of shareholders and otherinterested 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 financialaccountancy 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 fineonly - 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 underdevelopment. There exist standards for consolidated accounts that are developed for financialinstitutions.

119. The disclosure of ownership links is arranged under the legislation on public securities. Thisdisclosure is provided in the Law on Securities Public Circulation and organised by the SecuritiesCommission pursuant to legal acts adopted by it. Companies-issuers of securities are required tosubmit 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 sharecapital 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 relatedenterprises. The issuer shall inform the public in the media, where and when it is possible to becomeacquainted 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 isstill insufficient, there is a general requirement to disclose in the Explanatory Note (one of company'sfinancial statements) "all large amounts accounted in off-balance sheet accounts".

121. There is Law on Economic Entities Funds Lending, regulating possibilities of non-financialinstitutions to borrow and lend funds, and some provisions in the Company Law that is currently inforce, regulating such possibilities of companies. Regulation of financial institutions' affiliatedlending 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 exceed10 percent of the bank's capital. Persons related with the bank are: 1) owners of stake in the bank and




20

in its subsidiary banks, their spouses, parents or children or firms, in which these persons directlyor/and indirectly acquired or control more than 20 % of equity; 2) members of boards and managingboards, revisors, heads of administration and heads of branches of the bank and its subsidiary banksand subsidiary firms and their spouses, parents and children or firms, in which these persons directlyor/and indirectly acquired or control more than 20 % of equity. Banks shall inform the Bank ofLithuania about loans granted to persons related with the bank according to the order, established bythe Bank of Lithuania.

122. Affiliated lending, if this term is treated in wider sense, as related not only with financialinstitutions, is an issue, because operation of corporate groups requires exercising it, but it is quitestrongly restricted by the law. Affiliated lending of financial institutions previously was a veryimportant 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 ofLithuanian 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 informationregarding banks and issues of supervision of commercial banks by the central bank. That crisis led toimprovements 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. Itcaused a significant decrease of exports over a short period of time after brake-out of the crisis inRussia, necessity to redirect Lithuanian exports to even greater degree than during former years, aslow-down of economical growth.

125. A very important issue now, as well as it used to be, is measures to be taken to hasteneconomical 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 statewould be able to make some steps to influence corporate governance subject to changes in externalconditions of operation of the economy. The state responded to changes caused by crisis in Russiawith 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 shalloperate and which are the framework for structural changes. These structural changes are a naturalprocess that is characteristic to any market economy. It is a duty of the state to supervise thesoundness 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 oflaws with the EU legislation, which will enhance the legal conditions for companies' operation; thenew Company Law will be adopted in the next year.




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APPENDIX

Table 1.

GROSS DOMESTIC PRODUCT OF LITHUANIA

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998*

GDP, at constant prices(1995=100), mill. Litas

41564.0 39204.0 30870.0 25861.0 23335.0 24102.8 25238.4 27075.1 28468.6

GDP per capita, at constantprices (1995=100), Litas

11166.0 10478.0 8250.0 6933.0 6272.0 6488.0 6803.7 7306.5 7685.9

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




22

Table 2.

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

Kin d o f Eco n o mi c Ac t i v i t y

Year Agriculture Industry Transport and Construction Trade,hotels

Services

Total industry Manufacturingcommunication

sand

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 theRepublic of Lithuania bulletin.




23

Table 3.

BASIC CHARACTERISTICS OF LITHUANIAN FOREIGN TRADE.

Year 1993 1994 1995 1996 1997 1998

Exports, % of

GDP

75.1 47.8 44.9 42.5 40.3 34.7

Imports, % of

GDP

84.5 55.4 60.5 57.8 58.9 54.2

Exports

To

the EU

To

the CIS

100

16.9

57.1

100

25.8

46.7

100

36.4

42.3

100

32.9

45.4

100

32.

46.4

100

38.0

35.7

Imports

From

the EU

From

the CIS

100

18.7

67.5

100

26.4

50.3

100

37.1

42.0

100

42.4

32.9

100

46.5

29.3

100

50.2

24.7

Sources: Lithuanian Statistics Annals, 1997, 1998;Lietuvos ekonomine ir socialine raida. Monthly booklets. Vilnius: Department of Statistics under theGovernment 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,mln. Litas

-1278 -3774 -4815 -7136 -8332

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




24

Table 5.

FOREIGN INVESTMENTS IN LITHUANIA

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

Total foreign investments in Lithuania, mill. Litas

Among them:

Direct foreign investments

Portfolio investments

Other foreign investments

1408

11253

2801

1227

7225

15864

4162

1664

10037

19714

6501

1473

11740

20541

6980

2355

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, firsthalf-year

Russia's share in exports fromLithuania, %

24 24.5 16.5 6.7

Russia's share in imports to Lithuania,%

29 25.3 21.2 19.6

Source: Ministry of Economy of the Republic of Lithuania




25

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 LITHUANIAGDP, at constant prices(1995=100), mill. Litas

Change over the previousperiod, %

Change compared to thecorresponding 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 4.7I 5427.1 -11.8 2.7II 5989.0 10.4 1.0III 7262.4 21.3 7.8IV 6560.1 -9.7 6.7

1997 27075.1 7.3 7.3I 5649.0 -13.9 4.1II 6491.7 14.9 8.4III 7708.3 18.7 6.1IV 7226.1 -6.3 10.2

1998* 28468.6 5.1 5.1I 6108.7 -15.5 8.1II 7167.1 17.3 10.4III 7953.8 11.0 3.2IV 7239.0 -9.0 0.2

1999*I 5759 -20.4 -5.7

*Preliminary data




26

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




27

Table 11.

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

June 31, 99 December 31,98

June 30, 98 December 31,97

June 30, 97 December 31, 96

Investors MillionLitas

% MillionLitas

% MillionLitas

% MillionLitas

% MillionLitas

% MillionLitas

%

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 byinvestors of a group is calculated multiplying the amount of shares at a respective moment by the latest rateestablished at the National Stock Exchange trade session in the central market. If this rate is not established, theamount 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 Lithuanianeconomy

Industry ofmanufacture ofmachinery and

equipment

Industry ofmanufacture of

refined petroleumproducts


medical, precisionand opticalinstruments

Industry ofmanufacture ofchemicals and

chemical products

Average rate of return (beforetax) on equity, %

7.6 -7.4 -10.7 26.2 8.6





28

Table 13.

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



equipment






chemical products

Average debt/equity ratio 0.65 0.59 2.55 1.46 0.39


Table 14.

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



equipment






chemical products

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


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