The Voucher Privatization and its Impacts on the Governance and Financing of Czech Stock Corporations

The Czech voucher privatisation scheme has long been the subject of debate among foreign commentators, both lawyers and economists. After initial (and, for that matter, almost universal) approval, the programme has gradually fallen from grace with most writers as its destructive effects on the Czech economy started to unfold in the second half of the 1990s. My thesis in this paper is two-fold. First, the voucher privatisation program has had profound (and very disruptive) effects on the governance of the privatised companies, resulting in wide-spread decapitalisation and social losses. Inadequate (or completely missing) rules of corporate law contributed to these losses but were not the main cause thereof. The main cause was the privatisation method itself. By using the public stock corporation as the chief legal tool of privatisation, it had separated control from residual rights to assets, creating agency problems on a scale that was far beyond the modest means of the fledgling institutions of a post-communist economy. The supposed answer to these agency problems - the privatisation fund - had itself become the source of additional (and probably even worse) agency problems and ended up serving as the primary tool of corporate fraud. The failure of the privatisation funds in their governance role has been virtually universal - partly owing to wrong incentives, partly to inadequate regulation, but mainly due to general institutional limitations of a transforming post-communist economy. Available empirical research supports these findings on the whole, although some reconciliation of contradictory empirical results is needed. Secondly, the voucher privatisation program has barred all Czech corporations from access to outside financing, or at least has made that access most difficult. This is primarily because the program has completely undermined the initial investor confidence in the domestic capital market. Inadequate corporate and securities laws and lacking enforcement have contributed to this effect. The comparison between the Czech and the Polish experience lends powerful support to this conclusion. One question to be addressed is whether inadequate corporate and securities laws alone (i.e. without the impacts of the privatisation programme) would lead to the same result. Another issue that requires further research is that, in spite of the above, a small (but not insignificant) market with domestic corporate bonds has existed in the Czech Republic throughout the 1990s. As a by-product of the development of my first thesis, I have attempted to review the most important current schools of thought on corporate law, in particular the American law and economics theories. By testing these theories against my findings on the Czech privatisation programme, I have concluded that pure-form contractual theories of corporate law (no matter how close they may be to my philosophical beliefs) are not applicable in the institutional environment of a post-communist economy