Developing of ESG Score to Assess the Non-financial Performances in Romanian Companies

Monica-Violeta Achim; Sorin Nicolae Borlea

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Procedía Economics and Finance 32 (2015) 1209 - 1224

Emerging Markets Queries in Finance and Business

Developing of ESG score to assess the non-financial performances in Romanian companies

Monica-Violeta Achima* , Sorin Nicolae Borleab

aFaculty of Economics and Business Administration, "Babe§-Bolyai University 58-60 Teodor Mihali, 400591, Cluj-Napoca, Romania bWest Vasile Goldis University, Faculty of Economics, Arad, Romania, 15, Mihai Eminescu Street, Arad, 310086, Romania

Abstract

The development of an extra-financial analysis is indisputable in the current context of world economy. This issue is also argued by the appearance and development of extra-financial rating agencies which already asses some extra financial scores based on environmental, social and governance performances (ESG scores) that the companies have registered. These scores are complementary used with the financial score, increasing accuracy in performance and risk assessments. Our attempt consists in developing an environmental, social and governance (ESG) score in order to evaluate the non-financial performances recorded by the companies which activate within the Romanian space. Our sample consists of 65 companies listed on the Bucharest Stock Exchange (BSE) which reports a Comply and Explain Statement, as a document of adhering at the BSE Corporate Governance Code. The period of analysis is 2011-2012. In 2012 the overall results reflect a medium level of 73% of adopting the principles of best practices in corporate governance. Regarding the social and environmental performances, our results reflect that in the same year 2012 a majority share of 97 % of sample companies report that they have adopted such activities. Compared to 2011, Romanian companies have made great progress in obtaining a high level of ESG performances

Selection and peer-review under responsibility of Asociatia Grupul Roman de Cercetari in Finante Corporatiste Keywords: financial analysis; extra-financial analysis; ESG scores;

* Corresponding author. Tel.: +40-264-41-86-52/3/4/5. E-mail address: monica.achim@econ.ubbcluj.ro.

Selection and peer-review under responsibility of Asociatia Grupul Roman de Cercetari in Finante Corporatiste doi: 10.1016/S2212-5671 (15)01499-9

1. Introduction

Basing on the classical approach of performance concept, launched by Milton Friedman (1970), maximizing the financial results for shareholders is the highest social responsibility of a company. Under this approach, only the economical and financial results are the main important reason to survive in economy. The modern concepts of performances are based on value creation for all the stakeholders under The Triple Bottom Line approach introduced by Elkington, 2002 which are based on the three pillars, namely:

• ECONOMIC: Maximizing economic performances means maximizing performance for shareholders. This goal can be achieved based on traditional accounting financial criteria, (based on income, profitability, cash flow) or criteria derived from the theory of value creation for shareholders (Economic Value Added, Market Value Added).

• SOCIAL: Maximizing social performance, which requires maximizing performance for all participants in economic life (stakeholders) from employees to community, from suppliers to customers and from investors and creditors to state, from managers and corporate governance and it also requires maintaining the center attention of the shareholders.

• ENVIRONMENTAL: Maximize environmental performance which implies an activity that does not affect the surrounding community and the environment, thus developing the best environmental performance in relation to the environment.

The new conceptual framework changes radically the final aim of a company because it is not anymore maximizing the value of shares held by shareholders, but it is maximizing it for all stakeholders, where shareholders are just another category of stakeholders. A new fourth dimension of performances arising in the literature and also in the current activity of various rating agencies, namely GOVERNANCE dimensions of performances. Assessing ESG scores (basing on the Environmental, Social and Governance pillars) as non-financial scores of business companies, became nowadays an important step in determining the real business performances. There are also extra-financial rating agencies (Vigeo - France, ELRiS - England, SiRi Company - Switzerland, Ethibel -Belgium, Innovest - USA), that assess and rate the policies of social, environmental and governmental responsibility of the large, marketable companies. Large international extra-financial rating agencies have developed partnerships with the companies that underlie the stock market indexes to create indexes reuniting the companies which obtain the highest scores in the social, environmental and governmental field (Dow Jones Sustainability Indices - DJSI; FTSE4GOOD; ASPI Eurozone) Mironiuc, 2009. Also we can conclude that the Triple Bottom Line Approach may become The Quadruple Bottom Line by maximizing the economic results only if it can satisfy the interests of all partners: shareholders, employees, suppliers, customers, creditors by adopting the best practices in corporate governance of a company. in describing the business performances the Quadruple Bottom Line approach can be designed as in the figure 1.

So, the modern governance of the companies is dominated by adopting the best practices in corporate governance, corporate social responsibility which is the only ways to ensure the sustainability of the company and to increase it's adding value on a long term.

Regarding the evaluation of the company's global performances, we should mention the concerns of the international rating agencies to asses some ESG scores of the companies (Environmental, Social and Governance), which will be used complementary with the financial score, in order to increase the accuracy of evaluating the company's performances and risks.

| 2001- pnacnt

Fig. 1. From financial performance to global performance, Source: Authors

2. Research goal, methodology and data

The objective of our research is to quantify the non-financial performances of the Romanian companies by determining ESG type performance scores. The data source is represented by the information voluntarily reported by the companies to Bucharest Stock Exchange (BSE) under the Comply or Explain Statement. In this statement, the companies listed on the B SE provides a lot of information on the extent to which they adopt the best corporate practices required by the BSE Code of Corporate Governance. If the companies do not report such a statement, data sources are represented by investigating the information contained in annual reports, financial reports or any other information posted on the websites by the companies listed on BSE. For our purpose, the financial years 2011 and 2012 are taken into consideration when reporting the data the next year, respectively in April 2013 (for the financial year 2012) and in April 2012 (for the financial year 2011). At the end of 2013, there were 106 companies traded on the BSE which were classified into four categories as follows: First Category (28 companies), Second Category (52 companies), Third Category (one company), Unlisted Category (22 companies) and other categories namely Int'l, Other Intl and IPO (3 companies). From the 106 companies traded at BVB, we will retain only those from the First, Second and Third Category, eliminating the unlisted companies and those listed in categories Int'l, Other Intl. and IPO. Thus, we obtain a preliminary sample of 81 companies. From these companies we include in our final sample only those companies that voluntarily report to BSE the Comply or Explain Statement, for the 2012 fiscal year. We find this statement on the companies' website in a special corner addressed to investors or as a part of the Annual Report. There are a number of 16 companies for which we didn't find on their website the Comply or Explain Statement for. Consequently, a total of 65 companies remain in our final sample. All these companies post on their website a Comply or Explain statement, for the fiscal year 2012. The Comply or Explain Statement contains a total of 51 questions of which 50 relate to corporate governance practices and one question refers to the development of activities which concern corporate social responsibility (Social and Environmental Responsibility).

2.1. Developing a corporate governance score- G score

The 50 questions on corporate governance practices refer to the company's degree of fulfillment regarding the BSE Code principles. The questions within the Comply or Explain Statement cover 10 key areas that substantiate the principles of BSE Code, as follows:

1. Corporate governance framework (Principle 1: 10 questions in Comply or Explain Statement).

2. The share- & other financial instruments holders' rights (Principles 2, 3:11 questions in Comply or Explain Statement).

3. The role and duties of the Board (Principles 4, 5: 3 questions in Comply or Explain Statement).

4. Composition of the Board (Principles no. 6, 7, 8: 6 questions in Comply or Explain Statement).

5. Appointment of Directors (Principles no. 9, 10: 2 questions in Comply or Explain Statement).

6. Remuneration of Directors (Principle no. 11: 4 questions in Comply or Explain Statement).

7. Transparency, financial reporting, internal control and risk management (Principles 12, 13: 9 questions in Comply or Explain Statement).

8. Conflicts of interests and related parties' transactions (Principles 14, 15, 16: 3 questions in Comply or Explain Statement).

9. Treatment of corporate information (Principle 17: 1 question in Comply or Explain Statement).

10. Management and control systems (Principle 19: 1 question in Comply or Explain Statement).

At each of the questions contained in the Comply or Explain statement, the companies answer with YES/NO/If NO then EXPLAIN. For our reason, in order to assess a corporate governance score, we will give 1 point for each answer with YES and 0 points for NO, resulting the G score as follows:

, where G is the corporate governance score for a company; Gi shows the responses given to each from the 50 questions referring to the way of adopting the best practices of corporate governance by the company. The minimum governance score obtained by a company is 0 points and the maximum is 50 points.

2.2. Developing a corporate social responsibility score (Environment and Social performance score)-ES score

According to BSE Code, best practices in corporate governance must recognize the legally established rights of stakeholders and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. The last questions, the 5th question within the Comply or Explain Statement is referring to Corporate Social Responsibility. This question is formulated in a simple way, respectively, if the company performs or not the corporate social responsibility activities (according to principle 18 from the BSE Code). The answer of the companies can be YES or NO and if it is NO then EXPLAIN. In order to evaluate this field we will give 1 point if the company says YES - that is: it performs social responsibility activities and 0 points for NO - that is: it does not perform social responsibility activities.

The minimum ES score obtained by a company is 0 points and the maximum is 1 point

ES = YES/NO = {min 0, maxl}

3. Results and discussion

Regarding the level of adopting best practices in corporate governance, we obtain the following results according to those 10 key areas contained in the BSE Corporate governance Code:

A. Corporate governance framework

According with BSE Code the companies will adopt a clear and transparent corporate governance framework which shall be adequately disclosed to the general public (Principle 1 from the Code):

a) Reporting Comply or Explain Statement

A main way of reflecting the transparencies of corporate governance concern is preparing and reporting a Comply or Explain Statement by the companies.

Thus, companies that decide total or partial adoption of BSE Code recommendations shall annually submit a statement of compliance or non-compliance with the BSE Code (namely Comply or Explain Statement), which will contain information on the best practices effectively implemented by them and also the way of implementation. This statement will be made in the standardized format provided by BSE. According to the results of the 2012, 16 of the 81 companies in the sample do not report Comply or Explain Statement or they report a statement of non-compliance to the BSE Code. Such companies are: AMO, BCM, CMCM, ENP, CGC, ELJ, MJM, UAM, UCM, UZT, TUFE, EFO and the recent traded companies on BSE (since 2012), respectively COTE, CNTE, SNN, SNG. The remaining 65 companies choose to report Comply or Explain Statement for 2012. In comparison to previous year, in 2012, a total number of 9 companies improved their best practices. Here are some of the companies which report for the first time the Comply or Explain Statement in 2012: APC, BVB, CAOR, CBC, MECF, PEI, PTR, SRT and TEL.

Fig. 2. (a) Reporting Comply or Explain Statement in Romania, (b) Reporting Comply or Explain Statement in EU

Compared to the European average, the share of listed companies which report Comply or Explain Statement in Romania is slightly below, but it has experienced significant improvements year after year.

b) Corporate Governance Charter/Regulations

Another request of the BSE Code is that the companies must have their own Corporate Governance Code where to describe the main aspects of corporate governance. According to our study, from the final sample of 65 companies, a number of 39 (that is about 58%) have adopted in 2012 such a Corporate Governance Code where the main aspects of corporate governance are described. Compared to 2011, there are no significant changes in this way. Meanwhile, all these companies describe within their Corporate Governance Code the corporate governance structures, positions, components and responsibilities of the Board of Directors and of the executive management. Only 36 of the 39 companies that hold such a Corporate Governance Code (about 92 %) have posted it on the company's website, according to the companies' reports for 2012. For the previous year, that is 2011 the situation is similar.

At an European level, a percentage of 73 % of the listed companies have their own corporate governance code Albert-Roulhac and Breen, 2005. The 58 % of the Romanian companies that adopt such a code in 2012 is even lower than the European average calculated in 2005. In Croatia, the percentage of companies which have such corporate governance code is 70 %, close to the European average Vitezic, 2006.

c) Annual Report includes a chapter of corporate governance

According to the provisions of the BSE Code, the companies will stipulate in their Annual report a chapter on corporate governance where they describe all the relevant events related to the corporate governance, recorded during the previous financial year. Our study reveals that a total of 48 companies from the sample (about 75 % in total) elaborate in the company's annual report a chapter on corporate governance concerning the previous financial year. The situation appears greatly improved compared to 2011, in 2012 the number of companies that choose to adopt this good practice increased by 11.

d) The Operating and Organization Regulation are disseminated on the website

Regarding the transparencies of corporate governance structures that companies must publicly disclose, in 2012, only 30 companies (less than a half from our sample) chose to disseminate on the company's website the Operating and Organization Regulation. Although in comparison to 2011 when the number of these companies was only of 26, in 2012, the situation has improved. The companies that have registered improvements are: ATB, BRM CAOR and CBC.

e) The Company's By-laws are disseminated on the website

The number of companies that disseminate their By-laws on the website is somewhat higher than those who disseminate their Operating and Organization Regulation. Thus, in 2012, a total of 47 companies, representing about 72 % in total, chose to adopt this practice. Compared to 2011, this number increased with 7 companies, from 40 (in 2011) to 47 (in 2012).

f) The respective functions of the Board of Directors and management, as well as their powers and responsibilities are disseminated on the website

According to our study, in 2012 a total of 55 companies from the sample representing approx. 85% of the total, declared that they disseminate such a list of Board of Directors and management members. Among these companies, only a number of 45 companies disclose in addition a short CV version for each member of the Board and of the executive management. Compared to 2011, it can be seen an improvement in transparency adopted by the companies. Thus, a number of 12 companies supplemented in 2012 their disclosure about the list of Board members and also the management members. Among these companies we can mention: ARTE, RCE, SPCU, CAOR, CBC, ELGS, MECF etc. Only 5 companies have in 2012 improved on the website their disclosure related to the CV of the Board and management members, respectively: ARTE, CMP, ELGS, ECT, MECF.

B. The share- & other financial instruments holders' rights

a) The rights of shareholders are respected

According to the principles of the Corporate Governance Code of BSE, the companies shall respect the rights of their share and other financial instruments holders and shall ensure that they receive equitable treatment. In accordance with the survey completed in 2012, we found that all the 65 companies included in the sample declared that they respect the rights of shareholders. The situation appears to be improved comparing with the previous year, when the number of these companies was of 58. Thus, in 2012, other 6 companies improve their best practices towards protecting the interests of investors. These companies are: CBC, MECF, PEI, SRT and STIB.

b) A good communication with shareholders is adopted

The issuers shall endeavor their best efforts to establish a policy of effective and active communication with their share- and other financial instruments holders, according with the BSE Code. This active and effective communication with shareholders is achieved by respecting the following:

b1) publishing on the companies' website the details of the General Meetings of Shareholders; b2) the company has drawn and proposed to General Meetings of Shareholders the procedures for the efficient and proper development of the General Meetings of Shareholders;

b3) the company disseminated on the website the details of the shareholders' rights as well as the regulations for the attendance at General Meetings of Shareholders;

b4) the company provides the information in due time (immediately after the General Meetings of Shareholders) to all the shareholders through the separate section on their website;

b5) the company circulates through the special section of the website, that is easily identifiable and accessible, current/communicated reports;

b6) the company has a special department/person dedicated to the relation with the investors.

Publishing on the company's website the details of the General Meetings of Shareholders

From our study, we found out that in 2012 all the sample companies publish in a section of their website, the details concerning the General Meetings of Shareholders such as: GMS summons, materials/documents corresponding to the agenda as well as any information on the agenda or special power of attorney forms. In comparison with the previous year, in 2012 the degree of adopting these best practices in corporate governance improves, therefore other 4 companies registered improvements in this area.

The company has drawn and proposed to GMS the procedures for the efficient and proper development of the GMS

A number of 50 sample companies (about 77 %) have drawn and proposed to GMS the procedures for the efficient and proper development of the GMS agenda without any damage to the right of any shareholder to express their free opinion on the debated topics. There are no significant changes in this way, in comparison with previous year.

Ensuring relevant information for investors

Regarding the access to relevant information for shareholders, our study reflects these major concerns for the sample companies, as follows:

• In 2012, a number of 57 sample companies (about 88 %) publish in a section of the website the details of the shareholders' rights as well as the regulations for the attendance at GMS. No significant changes are registered in comparison with the previous year.

• In 2012, all the sample companies, provide the information in due time (immediately after the GMS) to all the shareholders through the separate section on their website on the decisions made within GMS. Compared with the previous year 2011, an increase of 4 companies is registered among the companies which adopt a better transparency in this area. The companies are: ARTE, CAOR, CBC and PEI.

• A number of 62 companies from a total of 65 provide in the meantime a discloser of the detailed result of the vote. The remaining 3 sample companies which do not adopt this practice are: CMP, ELGS and OIL.

• All of the sample companies disclose on the special section on the website the current reports and statements. In 2011 the number of these companies was with 2 less. In 2012 , CAOR and PEI choose to improve these best practices

A special department/person dedicated to the relation with the investors

The results for 2012 reflect that only one company in the sample namely ELGS hasn't a special department/person dedicated to the relation with the investors. The company stated that this deficiency was due to lack of staff. The other 64 sample companies adopt this good practice for more effective and active communications with investors. In 2011, the number of these companies was of 60, so there is an increase of 4 companies is registered. These companies are: ARTE, CAOR, PEI and SRT.

C. The role and duties of the Board

According to the BSE Code's principles, the Board of Directors has to meet at regular intervals in which it makes decisions which enable it to perform its functions in an effective and efficient manner. The board of an issuer will be responsible for its management and it will act to the best interests of the company and will protect the general interests of the shareholders by ensuring the sustainable development of the company.

a) Frequency of Board meetings

Our results for 2012 reveals that, for all the sample companies, the Directors of the Board meet at least once a trimester for the monitoring the activity of the company. Compared to the previous year, a total of 7 companies have improved their good practice, respectively: ARTE, CAOR, CBC, MECF, PEI, SRT, STIB. A study made by Feleaga et. al (2011) on the 15 companies listed on the BSE in 2010, reveals that Board of Directors meets on average 6 times / year. The average of the Board's meetings in the European countries which have a two-tier system of governance is of 6, 7 meetings and for the ones that have a unitary system of governance, the average is of 9,3 meetings Albert-Roulhac, Breen, 2005. In Croatia the average of the Board meetings is 5.8 meetings / year Vitezic, 2006.

b) Special provisions of transactions carried out by directors are drawing up

For 2012, a total of 45 companies (about 70% of the sample) have a set of rules referring to the reporting conduct and obligations of the transactions of the shares or other financial instruments issued by the company

(the "company's securities") carried out for their own account by directors and other persons. Compared with the previous year (2011), only 2 companies have improved this good practice, namely SPCU and CBC.

c) Transactions carried out by directors are disseminated on the company's website

Our results for 2012 reveal that a total of 49 companies in the sample (about 70%) disseminates through its website if a member of the Board or executive management or any other person carried out in their own account a transaction with the company's shares. Compared to 2011, 7 companies have improved the corporate governance best practice, namely: BIO CAOR, CMP, IMP, MECF, PEI, SRT, STIB.

D. Composition of the Board

a) Board size

BSE Code required a number of Board members that warrants an effective capacity to supervise and analyze the activity of the executive directors and the fair treatment of all the shareholders. The number of the Board members generally depends on the specific regulations of each country, on the company's size and on the sector to which the company belongs. In Romania, Companies Law no. 31/1990 required a minimum of 3 members and a maximum of 11 members of Board Directors. The Comply or Explain Statement doesn't require disclosing the numbers of the Board members, consequently we don't have such a result in our study. Although, for Romania, Feleaga et. al, 2011 found in their study that the average number of Board member is with 6 members above the European average of 12,5 members according to the study ran by Albert-Roulhac, Breen, 2005. Other studies conducted by Maier, 2005 reveal a great diversity of the Board size, from 2 members (New Zeeland), to 18,1 members (Austria), to 22,8 members (Germany). The largest range is found in Japan (47) where the Board's size varies between 3 and 50 members.

b) Ensuring a balance between executive and non-executive directors

According to the principles adopted by the BSE Code, the composition of the Board should ensure a balance of executive and non-executive directors (and in particular independent non-executive directors) insofar as no individual or small group of individuals can dominate the board's decision taking. For the financial year 2012, for 54 sampled companies (about 83 %) the companies' Board structure provides a balance between the executive and non-executive members (and especially independent non executive directors). Comparing to the previous year, a number of 3 companies have improved the best practice in this area, respectively: CAOR, CBC and MECF.

c) Independence of the Board

As the BSE Code required, an adequate number of non-executive directors shall be independent, in the sense that they do not maintain, nor have recently maintained, directly or indirectly, any business relationships with the issuer or persons linked to the issuer, of such significance as to influence their autonomous judgments. Our results reveal that for a number of 42 companies (representing about 65% of the sample) the structure of the Board of Directors provides a sufficient number of independent members, both in 2011 and 2012. The study conducted by Maier, 2005 shows average percentages on the Board's independence on a scale that ranged from 1.5% in Germany to 81.3 % in Switzerland.

d) Consultative committees

The Board of Directors should ensure that consultative committees are constituted to examine specific topics chosen by the board and to advise the board about them. In 2012, for a total of 41 companies from the sample (about 63%) during their activity, the Board of Directors has the support of advisory committees / commissions for the examination of specific topics chosen by the Board and their counseling on these topics. Also for these

companies the consultative commissions/committees forward activity reports to the BD on their specific themes. Therefore, we found an improvement over the previous year when the number was 37; the improvements were seen in companies SPCU, CMP, OLT, PEI.

e) Members of the Board are improving the skills and knowledge

Directors should update their skills and improve their knowledge regarding the company's activity, as well as the corporate governance best practices. In 2012, a total of 60 companies (about 92%) reported that the Board members permanently improve their knowledge through training/formation in corporate governance. An evolution of these best practices compared to year 2011 can be found at 6 companies such as: ATE, BSE CAOR, CBC, SPCU and MECF.

E. Appointment of directors

a) Transparence in appointment of directors

Corporate governance principles of BSE point out that the appointment of the Directors should be a formal, rigorous and transparent procedure. Such a procedure shall use objective criteria and ensure timely adequate information on the personal and professional qualifications of the candidates. For the financial year 2012, a number of 61 companies (about 94 %) declared that the selection of the Board members is a procedure based on transparency (objective criteria regarding the personal/professional qualification etc.). In addition to the companies from the previous year another 6 companies adopted these best practices of transparency, namely ARTE, CAOR, CBC, MECF, BVB and SRT. Companies as COS, PEI, COTR, SOCP still maintain their reticence in adopting the best corporate practice of transparency in the election of board members.

b) Nomination Committee

BSE Code of Corporate Governance points out that the Board of Directors shall evaluate whether to establish among its members a nomination committee made up, mainly, of independent directors. Only 19 sample companies (about 30 % of the total from the sample) have in 2012 a Nomination Committee in the company. Companies such as ARTE, BSE CAOR, CBC, MECF and SRT first constituted a Nomination Committee in 2012.The percent of the Romanian companies having a Nomination Committee is quite low compared to the European average of 71 %, according to the studies of Albert- Roulhac and Breen, 2005.

F. Remuneration of directors

The remuneration policy greatly influenced the interest manifested by the member of the Board and management. Also, the companies will secure the services of good quality directors and executive managers by means of a suitable remuneration policy that is compatible with the long-term interests of the company.

a) Preoccupations regarding the remuneration of directors

The BSE Code of Corporate Governance emphasizes that the Board of Directors has to analyze at least once a year the need to register a remuneration policy committee for the directors and members of the executive

management. Our results, both for 2011 and 2012, reflect that for 40 sampled companies (about 62 %), the Board of Directors analyzes at least once a year the problem of directors' remuneration.

b) The remuneration policy is approved by the GMS

For a total of 53 companies (about 82 %), the remuneration policy is approved by the GMS in 2012, compared to the previous year, 6 companies have registered an improvement, namely ARTE, CAOR, CBC, RMAH, MECF and OIL.

c) Remuneration Committee

According to the BSE Code, the Board should establish a remuneration committee from among its members, to assist in formulating a remuneration policy for directors and managers and it should define the committee's internal regulations. Our findings for 2012 reveal that only 26 companies in the sample (representing only 40 % from total) have a Remuneration Committee which exclusively consists in non-executive directors. For the first time in 2012, a number of 5 companies adopt a Remuneration Committee, respectively ELGS, RMAH, MECF, OLT and SPCU. At an European level the average of companies having a Remuneration Committee is 94 % Albert-Roulhac and Breen, 2005.

d) Disclosing the remuneration policy

The BSE Code of Corporate Governance required that the companies should disclose their remuneration policy within their Corporate Governance Code. The total amount of direct and indirect remuneration received by directors and executive managers by virtue of their position should be disclosed in the annual report. Our study conducted for 2012 points out that only a few number of companies, which is 24 (representing about 37 % from the sampled companies) disclose the remuneration policy in the Corporate Governance Code. Compared to previous year, the companies TRP and CMP have made improvements in disclosing the remuneration policy within its Corporate Governance Codes. Most of the companies in the sample (about 63%) have not informed yet about the remuneration policy for directors and executive managers. The studies conducted by Maier (2005) for 25 different countries reveal a percentage of 84 % representing the average of remuneration disclosure regarding the directors and the executive management members. At European level this percentage is even higher, of 94% Albert-Roulhac and Breen, 2005. Anyway, the percentage of the disclosure of the remuneration policy found in Romania, in 2012 (37 %) is higher than the percent recorded in Croatia (20 %), according to the study conducted in Croatia by Vitezic, 2006.

G. Transparency, financial reporting, internal control and risk management

The corporate governance framework must ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial position, performance, ownership and governance of the company. The board will establish strict rules, designed to protect the company's interests, in the areas of financial reporting, internal control and risk management.

a) Disseminating the financial schedule, annual/quarterly reports

Both in 2011 and 2012, a total of 62 out of 65 companies (representing about 95% from the total) disseminate in a special section on their website, financial schedules, annual reports, half-yearly and quarterly. The remaining 3 companies that deviate from this best practice are ARTE, CBC and BRM.

b) Disseminating data in English

In 2012, only 31 of the analyzed companies, representing about half of the companies in the sample disseminate in English the information representing the subject of the continuous and periodic reporting

requirements. Compared to the previous year, in 2012 companies as BCC and RMAH record improvements in this regard.

c) Disseminating the financial reports in accordance with IFRS

A total of 57 out of 65 companies (representing about 88% from the total) disseminate the financial report in accordance with IFRS, in 2012. Compared to previous year, the sampled companies have recorded great progress in this regard, meaning that a total of 20 companies have reported for the first time in 2012 the financial statements according to IFRS.

c) Meetings for disclosing the company's data

Both in 2011 and 2012, a total of 35 companies (representing slightly over half of the total) promotes at least once a year, meetings with financial analysts, brokers, rating agencies and other market specialists in order to present the financial data which are relevant to the investment decision.

d) Audit Committee

According to the BSE code, the Board should establish an Audit Committee, from among its members, to assist in the discharge of its responsibilities in the areas of financial reporting, internal control and risk management. Regarding the existence of an Audit Committee, only 37 companies (about 57% of the total) have an Audit Committee in 2012. Compared to the previous year, for the first time in 2012, 4 companies have constituted an Audit Committee, respectively: RMAH, MECF, OLT, ROCE. The percentage of the companies having an Audit Committee in Romania is below the European average of 94 %, according to the survey conducted by Albert-Roulhac and Breen, 2005. In Croatia, the findings of Vitezic, 2006 point out that a percent of 20 % of the companies have an Audit Committee.

e) Annual meeting of Audit Committee

The BSE code required that the Audit Committee should meet as often as it is necessary, but at least twice a year, when it will deal with the half-yearly and yearly results and present their disclosure to the shareholders and to the public. Our results for the survey conducted in 2012 reveal that All Audit Committees that have been identified in the 37 companies, meet at least two times a year; the meetings were devoted to the preparation and dissemination of quarterly and annual results towards the shareholders and the public. Also, for all the companies that own an Audit Committee, it makes recommendations regarding the selection, appointment, re-appointment and replacement of the financial auditor as well as the terms and conditions of their remuneration, both in 2011 and in 2012.

f) Independence of Audit Committee

The Audit Committee should be composed exclusively of non-executive directors and it should contain a sufficient number of independent directors, according to the provisions of BSE Code. For all the 37 companies that own Audit Committee, except RPH, the Audit Committee consists exclusively of non-executive directors and has a sufficient number of independent directors, according to the results from the survey conducted in 2012. According to the study conducted in Romania by Feleaga et. al, 2011 the percentage of the companies that did not ensure the independence of the Audit Committee in 2010 was of 80%. Compared to the results of our study for 2012, we find great concerns in the desire of the companies in increasing the independence of the Audit Committee in Romania over the period 2010-2012. The study conducted by Maier, 2005 in different 24 world countries found an average of 64.5% regarding the Audit Committee's independence, ranging from 4% in Japan to 95% in Canada, U.S., Ireland, UK, Luxembourg and the Netherlands. For the European space, the survey of

Albert-Roulhac and Breen, 2005 reflects that the Audit Committee is not independent in 52 % of European companies.

g) Regular concerns to ensure the efficiency of financial reports, internal control and risk management

Whether or not having Audit Committee, 61 companies in the analysis (representing about 94% of the total) examine on regular basis, the efficiency of the financial report, the internal control and the managing system of the risk adopted by the company. The 4 remaining companies that deviate from this practice are COFI, ELGS, STZ and SRT.

H. Conflicts of interests and related parties' transactions

a) Procedure of resolving the conflicts of interests

According to the BSE Code's provisions, the Board of Directors shall adopt operating solutions suitable to facilitate the identification and an adequate handling of those situations in which a director is bearer of an interest on his/her behalf or on behalf of third parties. Our findings for 2012 reveal that in the case of 40 companies (about 62 % of the total) the Board of Directors passed a procedure in order to adequately identify and settle the conflicts of interests.

b) Information given by the director to the Board about conflicts of interest

The BSE Code of Corporate Governance requires that each director should inform the board about conflicts of interest as they arise and refrain from deliberating or voting on the relevant issue. We found from our study for 2012, that in the case of 63 companies (a majority if 97 % of the total), the directors inform the Board of Directors about the conflicts of interests as they occur and refrain from the debates and the vote on those matters, according to the legal provisions. Only two companies namely ELGS and SNO deviate from this principle of corporate governance in 2012. Compared to the previous year, 6 companies have adopted this principle of corporate governance, respectively ARTE, CAOR, CBC, MECF, PEI and TEL.

c) Specific procedures

After consulting with the internal control body, The Board of Directors shall establish approval and implementation procedures for the transactions carried out by the issuer, or by its subsidiaries, with related parties. The results for 2012 point out that only for 39 of the sample companies (about 60 %), the Board of Directors passed the specific procedures in order to provide their procedure accuracy (identification criteria of the significant transactions, relevant for transparency, objectivity, non-concurrence, etc.) for defining the transactions. Compared to the previous year, there are no changes recorded.

I. Treatment of corporate information

According to the principle of the BSE Code, Directors and managers shall keep the documents and information acquired in the performance of their duties confidential and shall comply with the procedure adopted by the issuer for the internal handling and disclosure to third parties of such documents and information. Our findings for 2012 reveal that for 48 companies (about 74 %) the Board of Directors has passed a procedure of the internal circuit and the disclosure to third parties of the documents and information referring to the issued, with emphasis on the information that can influence the price of the assets issued by them. Comparing to the previous

year, 5 companies have made improvements in this area of best practices, respectively ATB, SPCU, CBC, PEI and SRT.

J. Management and control systems

Our findings in 2011-2012 point out that a majority of 58 out of 65 sample companies (about 89%) are managed based on a unitary system (by the Board of Directors and the Board of Managers). Only 7 companies from the sample (representing about 11 %) are managed in two-tier system. A two tier system of governance implies besides the Board of Directors and the Board of Managers the existence of a complementary system of governance including the Supervisory Board and the Directorate. The Romanian companies which are managed according to a two-tier system are: BCC, MPN, PPL, TEL, SOCP, SNP and VES. According to the research of Maier (2005), at an European level, a majority of 77 % of the companies is managed based on a unitary system and only 23 % of the European companies are managed according to a two-tier system. In countries such as Germany, Austria, France, Croatia, the companies are entirely managed according to a two-tier system. After investigating how much of these above best practices are adopted by the Romanian companies, we can compute. Governance score for each company, by summing all the YES answers reported in the Comply or Explain Statement by the companies. For the financial year 2012, the results or the Governance score are presented as follows:

Table 1: Top of the companies according to the corporate governance score, in 2012

CG CG CG CG

Rank Firms score Rank Firms score Rank Firms score Rank Firms score

1. BCC 50 18. ROCE 44 35. SNO 36 52. SOCP 27

2. ATB 49 19. 20. SIF4 44 36. 37. COFI 35 53. 54. ARM 26

3. COMI 49 21. SIF5 44 38. ECT 35 55. ELGS 26

4. FP 49 TRP 44 DAFR 34 PPL 26

5. PREH 47 22. 23. BRM 43 39. 40. VESY 34 56. 57. PTR 26

6. SIF1 47 24. IMP 43 41. ALT 33 58. CBC 25

7. MEF 46 VNC 42 CAOR 33 RRC 25

8. OLT 46 25. RMAH 41 42. EPT 33 59. PEI 24

9. RPH 46 26. ALR 40 43. BRK 33 60. SRT 24

10. TGN 46 27. OIL 40 44. CEON 32 61. ELMA 23

11. SIF2 46 28. MPN 40 45. COS 32 62. STIB 21

12. TEL 45 29. BIO 39 46. COTR 32 63 ARTE 19

13. CMP 45 30. SCD 38 47. RTRA 31 64 CMF 19

14. SIF3 45 31. TLV 37 48. BVB 31 65. STZ 19

15. TBM 45 32. SPCU 37 49. ART 30 Average 36,5

16. BRD 44 33. MECF 37 50. APC 30

17. SNP 44 34. ARS 36 51. ALU 29

Note: A symbol of companies on BSE we present. An extensive name of the companies are presented on the website of BSE: http://www.bvb.ro/Companies/ListedCompanies.aspx?t=2

According to the results of our study conducted in 2012, the average score of corporate governance at the company level is 36.5 points out of a maximum total of 50 points. This means that an average percentage of 73 % of the best practice principles are adopted by the Romanian companies.

The corporate governance score has increased by 3 points in 2012 compared to 2011. So in 2011 only a percentage of 66 % of best corporate governance practices were adopted by the companies listed on the BSE, therefore the percentage increased with 7 %. The top companies that adopt the best governance practices in Romania during 2012 are the BCC (50 points) followed by ATB, COMI, FP (49 points) PREH, SIF1 (47), MEF, OLT, RPH, TGN, SIF2 (46 points). In contrast, the minimum score was recorded by ARTE, CMF and STZ (19 points). These companies are followed by CBC, RRC, PEI SRT with scores below 25 points.

3.1. Corporate social responsibility

Regarding the conclusion about environment and social score (ES score) encapsulated in corporate social responsibility, a vast majority of companies (a number of 63 out of 65 companies, about 97 %) run such activities. Only two of the sample companies do not engage in such activities not even in 2012, respectively CMP and STZ. Compared to the previous year, when the number of companies which ran CSR activities was 58, the situation has improved; among the companies that improved the practice of CSR activities in 2012 are : CAOR, PEI, SRT, STIB and SPCU.

Similar research conducted in Romania by Popa et al, 2009 also by using as sample the BSE listed companies, reflects that in 2007 and 2008 the percentage was of 44 % representing the BSE listed companies which disclosed at least one type of information about environment, social responsibility or sustainability. Comparing our findings with those of a study by Popa et al., 2009 we found that the percentage of companies making CSR practices increased in 2012 at 97 % from approx. 44% (2008) representing the percentage of companies which disclosed information about CSR.

4. Conclusions

The overall results of our survey point out a mean rate of 73% representing the level adopting the best corporate practices by the BSE listed companies, in 2012. The general score of the governance performances achieved by the Romanian companies (G score) is 36.5 points out of a maximum of 50 points (for the results of 2012). The level of adoption the best practices by Romanian companies has significantly improved year after year since 2008, with the adoption of the Code of Governance by BSE which was voluntarily required to comply to by the companies traded on the regulated market operated by the BSE. Despite of the progresses made in this regard, many of the best practices of corporate governance of the Romanian companies are well below the European Union average or even below the average recorded for other European countries. The main weakness recorded for the Romanian companies in the corporate governance area: developing a Corporate Governance Code; disseminating the Operating and Organization Regulation on the company's website ; developing the consultative committees such as Nomination Committee, Remuneration Committee, Audit Committee ; independence of the Board ; transparency in remuneration policy ; reporting into English the regular and continuous reports. In terms of social and environmental performances directly related to the manifestation of CSR practices by the Romanian companies, our results point out a continued improvement year after year, a majoritary percentage of 97 % from the sample companies have conducted such activities over the period 2012.

References

Achim, M.V., Borlea, N.S. (2013) Corporate Governance and Business Performances. Modern approaches in the new economy, LAP LAMBERT Academic Publishing, Germany,

Elkington, J. (1997) Cannibals with Forks: The Triple Bottom Line of 21st Century Business, Capstone Publishing, Oxford, 1997.

Feleaga, N., Feleaga, L., Dragomir, V.D., Bigigoi, A.D. (2011) Corporate governance in emerging economies: the case of Romania, Theoretical and Applied Economics, Vol. XVIII (2011), No. 9(562), 3-15.

Maier, S. (2005) How Global is Good Governance? Ethical Investment Research Service", 2005, http://www.eiris.org/publications_request.html.

Mironiuc, M. (2009) Financial Analysis versus extra-financial analysis in sustainable business performance measurement, Supplement of Theoretical and applied economics, Bucharest. 29-31 May, 151-167, 2009.

Vitezic, N. (2006) Corporate governance in emerging economy and their impact on enterprise performance: a case of Croatia, The 4th International Conference on Accounting and Finance in Transition (ICAFT 2006) - Adelaide, UniSA, April 2006.

Pintea, M. (2011) Performance of the companies in the context of sustainable development, Publishing House Risoprint , Cluj-Napoca.

Popa, A., Blidijel, V., Bogdan, V. (2009) Transparency and disclosure between theory and practice. A case study of Romania, Proceedings of FIKUSZ '09 Symposium for Young Researchers, 2009, 173-183, Proceedings compilation © Budapest Tech Keleti Karoly Faculty of Economics 2009. Published by Budapest Tech Keleti Karoly Faculty of Economics, Tavaszmez_ u. 15-17. H-1084 Budapest, Hungary. http://kgk.bmf.hu/fikusz

Developing of ESG Score to Assess the Non-financial Performances in Romanian Companies Academic research paper on "Economics and business"

Abstract of research paper on Economics and business, author of scientific article — Monica-Violeta Achim, Sorin Nicolae Borlea

Similar topics of scientific paper in Economics and business , author of scholarly article — Monica-Violeta Achim, Sorin Nicolae Borlea

Academic research paper on topic "Developing of ESG Score to Assess the Non-financial Performances in Romanian Companies"