Corporate governance: investing in the emerging market of the Czech Republic

In the Czech securities market, corporate governance plays a crucial role in strengthening investor confidence and ensuring an efficient market. After the fall of communism, the economy in a very short time moved from state to capitalist. Since then, the Czech Republic has come a long way to quickly reach the standards of other capitalist markets and successfully join the European Union. As the market continues to evolve, there is a growing need for transparency of information and interaction between board members and managers in firms.

From the voucher privatization program of the Czech Republic in 1992 to the late 1990s, corporate governance was viewed negatively and / or did not exist for Czech public companies. The path began with a lack of regulation, continued with a lack of enforcement, and finally turned since 1998 with the Securities and Exchange Commission Act. Even now, as Czech companies strive to become more competitive globally in the marketplace, awareness among firms of the need for structured corporate governance and greater transparency in their reporting information is fixed as an ongoing effort to report and align enterprise goals with other stakeholders.

Using an analysis of the ten largest public companies in terms of market capitalization on the Prague Stock Exchange, I will assess the availability of information on corporate governance to determine the current state of compliance with the Corporate Governance Code. This information will serve as a benchmark and allow investors to link the positions of the largest companies on PSE with other companies in the Czech Republic, as well as apply knowledge in general in the Czech securities market. The results allow investors and other stakeholders to gain insight into corporate governance practices and information transparency in companies operating in the Czech Republic today.

Current state of corporate governance

I now turn to the analysis of corporate governance disclosure in the modern Czech market. Using the ten largest publicly traded companies (see Table 1) listed on the Prague Stock Exchange in terms of market capitalization, I will determine the extent to which their stated corporate governance policies are disclosed, as found in their recent annual reports. This is the annual report of all companies for 2004. In addition, I will briefly assess the availability of information on company websites.

Table 1

The top ten companies that register for PSE

Rank Company Market Capitalization. (Miles. CZK) Market capitalization. (Million USD)

1 CEZ 402,881 16,293

2 Erste Bank 317 598 12 844

3 Český Telecom 160 014 6 471

4 Commercial Bank 128 397 5 193

5 Unipetrol 42,922 1,736

6 Zentiva 41 683 1 686

7 CETV 39 718 1 606

8 Philip Morris CR 32 816 1 327

9 Severocheske Doly 14 434 584

10 Prague Energy 11 492 465

Source: Prague Stock Exchange, November 2005


CEZ, a joint-stock company, is the largest energy conglomerate in Central and Eastern Europe. The company’s website has a section for investors with information on stocks, bonds and financial information, and the date of the annual general meeting, but does not provide information that specifically relates to corporate governance practices and the structure as a whole. The site presents the structure of shareholders, relationships and dividends. In the annual report, ČEZ adheres to the German corporate governance model, and key board members are also part of the management. The structure of the council and the members of the council are widely discussed. The board of directors usually meets weekly, where the requirement is monthly. The company complies with the Commercial Code for the Protection of Shareholders’ Rights, and bases its corporate governance on the Corporate Governance Code. ČEZ Group actually participated in the development of the Corporate Governance Code in 2004. In general, the company provides reports on most key areas of corporate governance, but does not have a single section on their policies, making it necessary to scan the entire report for relevant information.

Erste Bank

Erste Bank, based in Austria, is a leading financial services provider in Central Europe. Its website contains a section on investor relations, which provides detailed information, as well as a section on corporate governance, in which the company shows that in practice it adheres to the Austrian Code of Corporate Governance. In the annual report, the company shows that it complies with all statutory provisions of the Code and follows most of the recommendations. It directs individuals to the website to learn about the actual provisions of corporate governance, making the information available but not detailed in the annual report itself. In addition, shareholder policy was difficult to distinguish.

Czech Telecom

Český Telecom is a telecommunications group operating mainly in the Czech Republic. The company has a website with information about shareholders, including board structure and notice of the annual general meeting. In addition, access to the company’s annual report leads to a broad discussion of corporate governance. The company recognizes improved reporting in this area since the 2004 Annual Report compared to previous annual reports, and as stated in the 2002 Annual Report, the company will fully comply with the Corporate Governance Code by 2005. One note made in the Report includes a list of members of the Supervisory Board who qualify as independent, which is an important provision in line with the recommendations of the 2004 Code.

Commercial Bank

Komerční Banka is one of the most important banks in the Czech Republic and the region of Central and Eastern Europe and provides comprehensive services to customers in the field of retail, corporate and investment banking services. The company’s website provides access to key shareholder information and also has an investor relations section. However, there is no specific section of corporate governance. Access to the annual report allows you to see most of the corporate governance requirements, but there is no specific mention of their overall corporate governance policy, nor is there any mention of their adherence to or lack of a Corporate Governance Code.


Unipetrol, a group of companies operating in the Czech chemical industry, is a major company in Central Europe. The company’s website has direct links to board members as well as an investor page with access to its annual report, but does not contain detailed information on corporate governance. The annual report does not improve the company’s corporate governance policy. There are no statements about the company’s policy regarding corporate governance, and the information provided is primarily a list of board members. Qualifications are not given, and the rights of shareholders are not disclosed or discussed.


Zentiva is a pharmaceutical group that holds leading positions in the Czech and Slovak markets, as well as among the largest players in Central and Eastern Europe. The Zentiva website contains extensive information on corporate governance, including factual rules governing boards. Investor relations are also prominent on the company’s website, which includes information about shareholders, the date of the general meeting and other important information. According to the annual report, the company adheres to the Dutch Corporate Governance Code.


Central European Media Enterprises, or CME, is traded on the Prague Stock Exchange as CETV. The Bermuda-based company is an international television company that operates a group of networks and stations in Central and Eastern Europe. The company’s website contains board members and their qualifications, as well as the company’s financial results and policies, such as their code of ethics. Interestingly, analyst reports regarding CME are available on the company’s website. CME is listed on the NASDAQ, so information on the annual report is available through their website according to SEC documents.

Philip Morris of the Czech Republic

Philip Morris ČR is a subsidiary of Philip Morris International, whose parent company is the Altria Group. The Philip Morris website directs all investors requesting shareholder information to its parent company’s website, although some financial details, general meeting date and agenda are disclosed at its location in Kutná Hora in the Czech Republic. As with CETV, Altria Group has extensive information disclosed in its SEC documents. The Altria Group website extensively discusses corporate governance, lists statutes, as well as board members and governance recommendations.

Northern Valleys

Severočeské Doly is the largest producer of lignite in the Czech Republic. The company extracts, processes and sells lignite and its by-products. The company’s website lists the members of the board of directors, their qualifications and shareholder structure. There is no area devoted to corporate governance structure or policy. In its annual report, the company revealed that it does not comply with the Corporate Governance Code, but respects the requirements of the law and hopes to adopt more principles in the future. The report makes it easy to find key areas of corporate governance, and although the company says it does not adhere to the Code, it does very well with the reporting required and recommended information.

Prague Energy

Prazská Energetika is a company for the purchase, distribution and sale of electricity in Prague and Roztok, as well as a trader in the wholesale market in the Czech Republic. The Prazská Energetika website lists the composition of the management and board, the shareholder structure and access to the annual report. There is no section specifically for corporate governance. In the annual report, the company reports legislative information in accordance with the requirements of the Commercial Code, but fails to detail corporate governance. He also does not mention his commitment to any part of the Corporate Governance Code.


After reviewing the information provided on the website of the listed companies or their annual report (see Table 2), it was found that the transparency of the information was achieved. At least, as stated, most companies comply with the provisions of the Commercial Code and other laws, and six out of ten companies comply with the recommendations of the Corporate Governance Code. Of the four who did not adopt the principles of the Code, some mentions of corporate governance policy go through the disclosure of relevant information.

I found that companies listed on the Prague Stock Exchange with large market capitalizations improved their corporate governance reporting in their 2004 annual reports for previous years. These companies took steps to adopt the recommendations of the Corporate Governance Code even before they became legislative regulations. Although these are stated measures that have been taken, it is assumed that the policy is implemented as a result of an audit statement regarding the reporting of the information contained in the annual reports. Overall, investor confidence in the Czech securities market should improve due to increased transparency of information, and future legislation on additional requirements for corporate governance will improve this further.

Table 2

The results of the company’s analysis


Does the company disclose YYYYNYY YYY

corporate governance structure

and politics?

Does the company use YY * YN NY ** Y *** Y *** NN

Corporate Governance Code

as a basis?

Is a joint stock property of YYYY NYY YYY

disclosed and the right to vote?

Membership in the board and YYYYYYY YYY

disclosed qualifications?

Remuneration of a member of the board YYYYYYY YYYY


Contains website NYNN NYNYNN

area of ​​corporate governance?

* Austrian Code of Corporate Governance

** Dutch Code of Corporate Governance

*** Requirements of the US Securities and Exchange Commission

Source: Annual reports for relevant companies for 2004