ENTERPRISES IN THE POSTPRIVATISATION PERIOD: FIRM-LEVEL
EVIDENCE FOR SLOVENIA
Janez Prašnikar*,
Jan Svejnar**,
Polona Domadenik*
February 2000
* University of Ljubljana
** The William Davidson Institute at the University of Michigan
Business School and CERGE-EI, Prague
ENTERPRISES IN THE POST-PRIVATISATION PERIOD: FIRM-LEVEL
EVIDENCE FOR SLOVENIA
Abstract
Paper analyses restructuring process and ownership structure of Slovenian enterprises
in the post-privatisation period using unique firm-level panel data set of 127 large and
middle enterprises in period 1996-1998. The Slovenian ownership structure calls for a
new approach to the analysis of corporate governance because of the presence of
multiple types of owners pursuing conflicting objectives and absence of other
corporate governance mechanism in Slovenia. We distinguish between two important
groups of owners, insiders and outsiders, who presumably pursue conflicting
objectives. Our main hypothesis is that the speed of restructuring depends on which
group of owners has in fact a predominant influence on decision making.
Our conceptual model consists of variables that measure different aspects of
restructuring. The restructuring process the firm has to undertake for its long-run
survival in a demanding foreign markets could be divided into defensive, cost related,
and strategic, revenue focused restructuring. The paper’s main conclusion is that firms
where outside investors have had the predominant influence on the decision-making
process have entered the process of restructuring earlier. Despite that, there is no
evidence that any of the groups have taken significant steps toward revenue-focused
restructuring.
1
I. INTRODUCTION
Most empirical studies in recent times have examined the effects of privatisation
and new ownership structures on enterprise performance in transition economies.
Although the initial expectation was very optimistic, the empirical evidence does not
confirm the hypothesis that enterprises in transition countries perform better after
privatisation (Earle and Estrin, 1996, Konings, 1998, Jones and Mygind, 1998).
Konings (1998) emphasises that the unexpected worse performance of the privatised
firms could be the result of the new ownership structure formed after the mass
distribution of vouchers. Insiders, workers and managers1 were then able to block the
process of restructuring that in its first phase is mainly characterised by the
downsizing of loss-making activities and associated redundancies.
Many authors present managers as being skilful in protecting themselves against
pressures for change while being hardly innovative and prone to restructuring
activities. However, the empirical studies again do not generally confirm this. Carlin
et al. (1994), for example, concluded that managerial behaviour was very diverse in
CEECs between 1990 and 1993 with evidence of both pre-privatisation restructuring
on one hand and resistance to privatisation and restructuring including active rentseeking behaviour in order to insulate firms from competitive pressures on the other.
Brada and Singh (1999) expose the key question about managers’ capacities to
successfully accomplish the strategic tasks involved in a firm’s restructuring in
transition economies. In their opinion, this doubt about managers’ capacities could be
explained by a hostile economic environment that is primarily reflected in large
differences in relative prices and falling demand and, later, in the lack of sufficient
funds to finance restructuring. Earle and Estrin (1997) established that managers’
influence in Russia in 1994 positively statistically determined firm operations, while
workers’ influence was lower and equalled their influence in the planned economy.
Djankov (1999) demonstrates that the link between managerial ownership and a firm’s
performance in the six newly independent states in the 1995-1997 period was not
monotonous, but it was statistically significant and positive where the managers’
ownership share was lower (under 10%) and higher (below 30%). In the middle, the
link was negative.
Moroever, it was found that internal or external ownership is not the prevailing
factor in a firm’s efficiency, since growth of internal ownership could result from
faster growth in the share of managers who could act as external owners. (Pohl et al,
1998, Prašnikar, Svejnar, 1998). Managers should really have the main role in the
decision-making process with minor workers’ influence on corporate governance.
(Nuti, 1997, Brada and Singh, 1999).
The paper analyses the restructuring of Slovenian firms in the post-privatisation
period. The introductory part involves a broader analysis of privatisation’s influence
on the speed of the restructuring process in Slovenian firms. Our main hypothesis is
that the speed of restructuring depends more on which interest group in the firm has
the prevalent influence on decision-making than it does on ownership structure2
(Prašnikar, Gregorič, 1999). Hence, we examine the differences between two
1
Employees own a considerable amount of shares in privatised firms because programmes of
privatisation stimulated employees to buy shares in the firms that employ them. (Smith, Cin,
Vodopivec, 1997)
2
In the analysis, no major differences in restructuring speed between firms with prevailing external or
internal ownership were found.
2
subgroups of firms that depend on the amount of workers’ influence on the decisionmaking process. First, the main model of restructuring will be presented. Then factors,
affecting the enterprise restructuring in Slovenia are summarised. That is followed by
a statistical description and presentation of the main figures based on the responses of
127 large and middle-sized Slovenian enterprises in the 1996-1998 period. At the end,
we set out conclusions that could be drawn despite the simple analysis and
propositions.
II. MODEL
Economics literature provides several concepts of enterprise’s restructuring in
countries in transition. Konings (1998) for example lists three key factors having an
important impact on a firm’s competitive and financial pressures and disorganisation.
As tight budgetary constraints are imposed and product market competition increases,
the incentives to engage in “deep” restructuring increase. Konings argues that a drastic
fall of GDP could be caused by disorganisation and this could then lead to a fall in
domestic aggregate demand.
Some authors have tried to connect different aspects of restructuring in an index
that seeks to measure the speed of restructuring. Earle and Estrin (1997) proposed an
aggregate index as an average index of five different restructuring categories
(production, employment, wage, financial restraints, and investment) obtained through
the linear escalation of the variables included on an interval 0-100.
Roland (1996) split the restructuring process into two phases - defensive and
strategic restructuring. The first phase of defensive restructuring is defined by the
downsizing of loss-making activities and associated redundancies. The main problem
here is how to resolve the difficult task of overcoming potential resistance from
workers connected with the layoffs and downsizing. Workers as owners and
stakeholders with significant power in the decision-making process on one side, and
as surplus working force on the other, play an important role in the first process.
Successful completion of defensive restructuring does not necessarily mean the firm’s
long-run survival in demanding market competition. For Roland, the key phase is the
second one, involving investment in physical and soft firm capital. Radical
reorganisation of the human resources' area should lead to an internal labour market
connected with a system of internal promotion, remuneration and possibilities of
workers' education and qualification that allows employees to become a source of
comparative advantage. (Pinto et al., 1993, Carlin et al., 1994). Investment in
management who have special knowledge of the firm, R&D, new products and new
markets are also important. (Chandler, 1993) The most financially demanding part of
strategic restructuring is investment in physical capital. Because of the underdeveloped capital markets in transition economies, the main financing source for
investment has depended on the quality of existing assets. (Roland, 1996). The higher
the quality of assets, the more accumulation could occur and be directed at investment
financing.
A conceptual model of a firm’s restructuring reflecting these relations is shown
below:
3
REDUNDANCY FROM WORKERS’
LAYOFFS
FINANCIAL REHABILITATION
DEFENSIVE
RESTRUCTURING
STRATEGIC
NEW MARKETS’
INVESTMENT
INVESTMENT
IN MANAGEMENT
INVESTMENT
IN HRM
NEW PRODUCTS’
INVESTMENT
R&D INVESTMENT
INVESTMENT IN
PHYSICAL CAPITAL
REMUNERATION
SCHEME
EDUCATION
& TRAINING
Figure 1: Conceptual model of restructuring
III. MAIN
FACTORS
AFFECTING
THE
ENTERPRISE
RESTRUCTURING IN SLOVENIA IN THE PERIOD 1990- 1998
Both micro- and macro-economically, Slovenia chose an evolutionary path
during its transition to a market economy. At the macro level, it was characterised by a
stabilisation policy of soft budget constraints with restrictive monetary policy,
exogenously determined money supply and a floating exchange rate policy, and a
relatively slow process of ownership transformation involving gradual legal changes.3
These policies enabled the Slovenian economy to achieve relatively favourable macro-
3
See e.g. Mencinger, 1991, Bole, 1992, OECD, 1997.
4
economic results. Due to the loss of the Yugoslav market4, the Slovenian economy
experienced a period of economic decline in 1990-1992. Thereafter, Slovenia's
economic performance has been relatively successful with GDP increasing by 3.8%
and 4%, respectively, in the past two years.
At the micro level, the government in 1993 rehabilitated the commercial bank
sector, with losses being written off against capital and bad loans of the two largest
banks being replaced with long-term bonds of the Agency for Bank Rehabilitation. As
a result of the rehabilitation, the two banks came under state ownership, their
operating costs started to decrease, profitability increased and the regulatory
conditions set by the Bank of Slovenia were being met. By the mid-to-late 1990s, the
two banks were ready for privatisation.5
As in many other transition economies, interest rates were kept high by central
bank policy, limited competition in the banking sector and low domestic savings,
while problems of asymmetric information between bankers and managers contributed
to credit rationing at the level of firms.6 In this situation, profitable firms could be
expected to rely more on internal funds or funds from abroad in financing investment,
even if the domestic supply of credit remained positively related to profitability and
other performance criteria.7 In this context, it is worth noting that, since its inception,
the Bank of Slovenia has been strict in enforcing regulations, thus forcing commercial
banks to be more careful in screening credit applications by firms. The result of all
these factors was limited financing of firms by domestic banks throughout the earlyto-mid 1990s. In 1994, for instance, Slovenian commercial bank credit amounted to
23.2% of GDP, while by 1996 it dropped to a mere 14.5% of GDP.8
The part played by the newly established Ljubljana Stock Market in capital
supply and allocation was also limited. With very few new issues and an annual
turnover of transactions of only about $6 billion, the primary capital market was
almost non-existent in the early-to-mid 1990s. The information provided by the Stock
Exchange was also highly incomplete as a result of limited regulatory framework,
high volatility and insider trading.
The corporate ownership and governance issues that we explore in this paper were
very much affected by the Law on Ownership Transformation of Enterprises (1992).
The law applied to 1,345 firms in virtually all sectors of the economy and required
them to allocate 20 percent of their shares to insiders (employees), 20 percent to
Development Fund that auctioned the shares to investment funds, 10 percent to
4
The potential for serious economic disruption becomes clearer if one examines the structure of sales.
In 1990, Slovenian firms accounted for 24.8 percent of total turnover on the Yugoslav market. (Source:
Ministry of Planning, unpublished statistics).
5
As of November 1999, there were twenty-seven banks operating in Slovenia. Except for the two
largest banks, all of them are in private hands. Twelve banks have foreign shareholders and in seven of
them the share of foreign capital exceeds 20 percent. The market share of 5 largest banks was about 60
percent. Not all of the banks had equal operating licenses, with the limitations on bank operations
varying with their capitalisation and other factors.
6 See e.g., Bole’s (1997) analysis based on the theoretical framework of Stiglitz and Weiss (1981).
7 See e.g., Cornelli et al. (1997) for the argument that in the above circumstances demand for credit will
be negatively related to profitability, as high profit firms are able and prefer to finance their investment
internally rather than borrow.
8
In comparison, in 1994 the ratio of bank credits to GDP attained 95 percent in the Czech Republic,
63percent in Hungary, 33 percent in Poland, and 13 percent in Russia. By 1996, the corresponding
percentages were 75, 27, 20, and 13. The range of values observed in developed market economies is
120-130 percent (see Meyendorff and Snyder, 1997).
5
National Pension Fund, and 10 percent to Restitution Fund.9 In addition, in each
enterprise the workers council or the board of directors (if it existed) was empowered
to allocate the remaining 40 % of company shares for sale to insiders (employees) or
outsiders (through a public tender). The remaining 40% of shares could have been
offered to employees under a special buy-out scheme (50 percent discount) or to
outsiders (through a public tender) 10.
The change in ownership structure also caused a change in levers of firm
management that were introduced by the Law on Commercial Companies (ZGD,
1993). The ZGD took a compromise standpoint by allowing both one- and two-tier
governance structures. The difference between the two systems lies in the forming of
an intermediate body (supervisory board) between the shareholders (shareholders'
assembly) and the management (management board). The details are left to be set out
in the firm's Articles of Association (Article 261 of the ZGD). Exceptions here are
the so-called large joint-stock companies and joint-stock in the case of the public
gathering of capital and when a firm’s shares are on the stock market, for which the
two-tier system is compulsory under the law. However, most privatised Slovenian
companies have opted for the form of joint-stock companies. As a rule, this means
that they have introduced a two-tier system of governance with a supervisory board.
Workers' participation in the corporate structure is primarily defined by the
Law on Co-determination (ZSDU, 1993). At least one-third of the members of
supervisory boards in companies with up to 1000 employees and, at least half of the
members of supervisory boards in companies with 1000 or more employees, have to
be workers' representatives. Workers can participate in management boards through
the workers' representative - the workers' director - in firms with more than 500
employees11.
Workers are also entitled to participate in a union organisation. The basic union
organisations within single firms are joined together into union organisations at the
national level that are led by their central organisations. As there is significant
politicisation of the unions in Slovenia, it is hard for individual union organisations to
communicate. This, together with extensive framework for workers’ participation in
firm management, has an important influence on the organisation of the Slovenian
labour market and an indirect impact on the macroeconomic level.
In terms of wage setting, since 1990 Slovenia has had a layered system of
agreements that have permitted wages to fluctuate between firms and defy government
attempts to reign in real wage growth. In August 1990, an “umbrella” general
collective agreement was signed between the Slovenian Chamber of Commerce
(representing the employers) and the Trade Union Organisation (representing all
9
The Law did not apply to enterprises providing special public services, banks and insurance
companies, enterprises engaged in the organisation of gambling, enterprises that were transformed
under the Law on Co-operatives, enterprises that were transformed under the forestry legislation, and
firms in the process of bankruptcy.
10
No less than 80% of privatised Slovenian enterprises chose internal buyout as a privatisation method
(Jaklin, 1995). To a certain extent, the decision for external buyout was an exogenous variable since
firms with a high value of company capital could not be privatised through the internal buyout method.
11
However, it is possible for workers to participate in management also through the workers' council.
The exsistence of the workers’ council makes possible the mutual agreement on participative rights
which includes different degrees of workers' participation: from the lowest degree to inform the
workers' council about the economic situation of the firm, its development goals, production, changes in
production organisation, technology and similar (Article 89) to the highest degree, the right of veto on
an employer's decisions concerning human resource management and status questions (ZSDU).
6
workers). This agreement set the initial wages for each category of workers and it was
supplemented by industry-specific agreements that effectively converted the initial
wages in the umbrella agreement into minimum wages at the level of industries.
Moreover, at the level of each firm the union and management bargained further in the
context of the firm’s annual plan to adjust the industry-level wages. This multi-layer
bargaining structure resulted in both wage dispersion and rapid wage growth. Overall,
the first half of the 1990s was a period that allowed insiders to influence wages
significantly at the firm level. As a result of continuous growth of wages faster than
labour productivity, in 1994 the government started considering the acceptability of an
Israeli-type social agreement that would limit wage increases and link them to growth
in productivity. This agreement came into effect in 1995 and stipulated that wages
would (a) remain constant if inflation remained below 3 percent per month, and (b)
increase but lag behind productivity growth if monthly inflation exceeded 3 percent.
However, the agreement was not strictly followed, real wages continued to grow and
exceed productivity in 1995, and especially in the 1996-election year. In July 1997, a
new collective agreement was signed for the non-government (business) sector, but no
social agreement was reached that year. Paradoxically, this “breakdown in
negotiations” prevented the government agencies and firms from increasing wages,
and in 1997 and 1998, real wage growth finally fell behind productivity increases.
IV. DATA AND RESULTS
Due to the specific Slovenian circumstances, described above we performed a
comparative analysis of firm’s restructuring between two groups of sample firms. In
the first group, we classified firms in which workers had the dominant influence on
decision-making exercised through the supervisory board. In this group, more than 50
percent of supervisory board members in 1996 represented employees' interests. We
expect those enterprises to restructure slowly due to stronger workers’ influence on
the decision making. In second group, we put firms in which employee representatives
represented less than 50 percent of all supervisory board members in 1996.
A. Ownership and supervisory board members structure
Privatisation created new owners of the former socially-owned firms which
could be divided into two large groups, internal and external owners. Shareholders
who are employed by the firm (workers and managers), their relatives and former
employees fall within the first group. The second group consists of state privatisation
funds (Compensation Fund, Pension Fund, Development Fund), investment funds,
banks, state, other firms and small shareholders. The ownership structure of sample
firms in the 1996-1998 period (data refers to the end of the year) is shown in Table 1.
As is evident from the figures, both the Pension and Restitution Funds reduce
their ownership share especially in those firms where employees retain a dominant
influence on decision-making. We could conclude that they are primarily following
the politics of making a good financial portfolio and trying to avoid corporate
governance. The opposite behaviour can be noted for investment funds. In the 19961998 period, they increased their stakes by an average 25 percent. The average
increase is surprisingly bigger in the first, »employeestic«, group (up 32 percent). That
7
could be the result of external factors such as the Development Fund's decision12 on
which firms were to be offered at auction. We could also conclude that investment
funds are more interested in corporate governance than the strategy of assembling a
good financial portfolio.
The share of other firms in the ownership structure increased on average,
significantly more so in the second group. The share of banks was low (less than 2
percent on average), but started to increase after 1997. There are no statistically
significant differences between the shares of small owners, so we may conclude that
firms in both groups are very heterogeneous by size. Although an empirical study of
the privatisation behaviour of Slovenian firms (Prašnikar, Svejnar, 1998) proved that
large firms mainly chose the external privatisation method (external owners receiving
more than 50 percent of the shares), employees in those firms retained a big influence
on decision-making because of the Law on Co-Determination.
The employees’ share fell on average in the study period and this confirms the
hypothesis about employees’ short-term horizons and their willingness to sell their
shares where they will get more than they paid for it (Ribnikar, 1995). Managers, as
expected, are on average building up their share in both groups. Internal owners,
primarily due to managers’ and former employees’ expanding shares, have on average
increased their share in the second group, while their share in the first group has
decreased.
Other mostly refers to the share of denationalisation claimants who, in the
period under study, represented on average less than 2 percent.
12
The Development Fund was established by the government of the Republic of Slovenia with the goal
of assisting in restructuring the Slovenian economy during the privatisation process. In 1992, the
Development Fund held a public tender for assistance in which 98 companies with over 56,000
employees took part (former socially-owned capital was transferred to the Fund). In 1997, the Fund was
transformed into the Slovenian Development Company.
8
Table 1: Ownership structure in 1996-1998 period
Variable
Year
N
Total
Mean
Std. Deviation
t test
Sign.
1
2
Total
1
2
Total
1
2
1996 102
68
34
22.374
24.501
18.119
12.449
12.228
11.949 6.267
0.014
1997 108
65
43
20.162
19.829
20.665
13.682
11.382
16.705 0.096
0.758
1998 111
68
43
17.32
18.133
16.033
12.043
10.668
13.983 0.8
0.373
Investment
1996 102
68
34
14.127
14.697
12.986
11.248
10.484
12.73
0.522
0.472
Funds
1997 108
65
43
17.317
19.575
13.905
13.974
13.501
14.138 4.396
0.038
1998 111
68
43
18.204
20.292
14.902
15.737
15.762
15.298 3.151
0.079
1996 102
68
34
12.349
6.288
24.472
27.882
21.189
35.223 10.55
0.002
1997 108
65
43
14.708
9.109
23.171
28.49
23.453
33.285 6.637
0.011
1998 111
68
43
17.686
11.266
27.84
30.523
24.941
35.712 8.281
0.005
1996 102
68
34
1.4
0.067
4.067
6.777
0.293
11.375 8.482
0.004
1997 108
65
43
0.845
0.39
1.532
3.939
2.392
5.478
2.198
0.141
1998 111
68
43
1.357
1.35
1.368
4.992
4.684
5.503
0
0.985
Small
1996 102
68
34
3.706
3.73
3.659
9.148
8.455
10.534 0.001
0.971
Shareholders
1997 108
65
43
4.108
4.046
4.202
9.399
9.244
9.739
0.007
0.933
1998 111
68
43
3.611
3.643
3.562
8.698
9.044
8.226
0.002
0.962
1996 102
68
34
0.873
0.23
2.159
5.69
1.895
9.446
2.649
0.107
1997 108
65
43
0.952
0.24
2.028
5.67
1.939
8.614
2.611
0.109
1998 111
68
43
1.24
0.692
2.106
6.894
5.68
8.471
1.11
0.294
1996 102
68
34
0.075
0
0.225
0.757
0
1.312
2.02
0.158
1997 108
65
43
0.194
0.102
0.332
1.154
0.822
1.525
1.03
0.312
1998 111
68
43
0.129
0
0.332
0.957
0
1.525
3.24
0.075
Internal
1996 93
62
31
25.783
29.246
18.858
15.268
13.493
16.443 10.56
0.002
Owners
1997 98
59
39
24.073
27.67
18.632
15.179
14.255
15.084 9.012
0.003
Employees
1998 99
61
38
22.999
25.785
18.528
16.114
16.292
14.967 4.939
0.029
Internal
1996 93
62
31
1.628
1.772
1.341
3.425
3.353
3.605
0.325
0.57
Owners
1997 98
59
39
2.203
2.744
1.384
5.196
6.117
3.267
1.618
0.206
1.597
0.209
State funds
Other firms
Banks
State
Municipalities
Managers
1998 99
61
38
2.889
3.494
1.919
6.051
7.009
3.968
Former employees,
1996 93
62
31
10.27
11.336
8.137
9.349
8.88
10.034 2.458
0.12
Retired workers,
1997 98
59
39
11.016
11.877
9.715
9.995
9.311
10.946 1.1
0.297
Relatives
1998 100
62
38
10.683
11.42
9.482
9.672
9.611
9.779
0.945
0.333
Internal
1996 102
68
34
38.266
42.649
29.499
19.242
16.401
21.639 11.71
0.001
Owners- total
1997 108
65
43
37.568
42.384
30.286
19.354
17.09
20.47
11.06
0.001
1998 111
68
43
36.915
40.628
31.043
21.42
20.335
22.009 5.489
0.021
Unrealised internal
1996 102
68
34
5.062
6.718
1.749
9.815
11.311
4.259
6.104
0.015
buy-out
1997 108
65
43
2.512
3.18
1.502
5.162
6.016
3.314
2.782
0.098
(Development Fund)
1998 112
69
43
1.503
1.729
1.14
4.121
4.726
2.915
0.539
0.464
Other
1996 101
67
34
1.749
1.076
3.076
5.774
4.403
7.715
2.752
0.1
1997 107
64
43
1.417
0.725
2.447
5.03
3.222
6.817
3.076
0.082
1998 112
69
43
1.665
1.871
1.334
6.23
7.476
3.448
0.196
0.659
As is evident from Table 2, on average 48 percent of all supervisory board
members in 1996 represented employees’ interests. If we also take managers’
representatives into consideration, we can see that internal owners in both groups had
a considerable influence on decision-making. The proportion of internal owners’
representatives is, of course, statistically significant and smaller in the second group.
9
Table 2: Supervisory board members who represent employees’ interests
Variable
Year
N
Total 1
Workers’ representatives 1996 121
Mean
Std. Deviation
t test
Sign.
2
Total
1
2
Total
1
2
74
47
47.462
57.952
30.946
20.748
18.512
11.11
81.28
0
74
47
51.788
64.142
32.337
20.671
15.97
8.82
155.9
0
on supervisory board (%)
Workers’ and managers’ 1996 121
representatives on
Supervisory board (%)
B. Defensive restructuring of firms
The first phase of restructuring, defensive restructuring, usually demands less
financial funding than the second phase of strategic restructuring. Especially painful
for workers in Slovenian firms were labour force reductions caused by the general
strategy of cost cutting following the loss of Yugoslav markets and tough competition
in demanding markets.
As we might expect, firms from the second group were more successful in
employment adjustment. They managed to cut the number of employees in the 19891996 period on average by almost 60 percent, while firms from the first group cut the
number of employees by 35 percent compared to 1989. The proportion of employees
declared to be a surplus shows that in the period studied the problems of surpluses
were resolved mostly temporary. Firms in the first group on average faced more open
resistance in the form of declared and actual strikes. Fluctuation and net fluctuation
were also bigger in the first group. In the sample firms, the number of fired workers
exceeded the number of newly-employed workers on average in 1996. The share of
workers employed for a fixed time and workers with unsteady employment was on
average higher in the second group. The second group’s firms also performed more
working and overtime hours.
On the basis of the data presented, we conclude that the second group’s firms
were on average more successful in defensive restructuring than firms from the first
group.
10
Table 3: Defensive restructuring: Layoffs
Variable
Year
N
Total
Mean
Std. Deviation
2
t test
Sign.
1
2
Total
1
Total
1
2
Average number
1989 71
46
25
929.2
1041.16 723.2
1208.1
1421.3
633.31 1.124
0.293
of employees
1992 88
55
33
710.16
831.968 507.152
927.31
1117
405.52 2.576
0.112
1994 92
59
33
641.53
750.227 447.205
888.09
1067.7
340.78 2.505
0.117
1996 96
60
36
603.11
727.447 395.874
813.31
985.31
297.04 3.852
0.053
114
71
43
0.272
0.324
0.186
0.934
1.131
0.45
0.582
0.447
114
71
43
0.184
0.239
0.093
0.573
0.686
0.294
1.759
0.187
Fluctuation (%)
1996 108
66
42
8.476
8.388
8.614
5.779
4.778
7.136
0.039
0.844
Net fluctuation (%)
1996 108
66
42
-3.141
-3.433
-2.682
6.094
6.253
5.881
0.388
0.535
New employees (%)
1996 105
63
42
6.515
5.784
7.611
8.448
4.393
12.239 1.18
0.28
Employees for fixed
1996 107
66
41
6.671
5.963
7.809
7.585
5.874
9.707
1.506
0.223
1996 107
66
41
7.495
6.297
9.423
8.738
6.217
11.548 3.308
0.072
Surplus
1989 102
65
37
0.04
0.063
0
0.378
0.473
0
0.659
0.419
Of employees (%)
1992 95
60
35
3.249
2.218
5.016
5.411
3.703
7.215
6.24
0.014
1994 101
64
37
1.03
0.819
1.396
3.64
1.659
5.636
0.588
0.445
1996 106
66
40
2.452
2.307
2.692
4.211
4.501
3.726
0.207
0.65
Sick leave less than
30 days relative to
total hours (%)
All absence relative
to total hours (%)
Working hours (%)
1996 96
59
37
3.757
3.837
3.629
1.603
1.556
1.689
0.38
0.539
1996 96
59
37
9.747
9.866
9.558
4.036
3.842
4.375
0.131
0.718
1996 96
59
37
79.017
78.894
79.214
5.371
5.885
4.503
0.08
0.778
Overtime hours
1996 96
59
37
1.297
1.013
1.749
1.868
1.235
2.532
3.626
0.06
Declared strikes
1991-
Actual strikes
1991-
1996
1996
Time limit (%)
Unsteady
Employment rate (%)
Relative to working hours (%)
Financial rehabilitation of firms was studied using indices, which may be
classified into three groups:
1. Measures of profitability: profit margin, return on sale, return on assets and return
on equity;
2. Capacity to pay: measured by current and quick ratios; and
3. Measures of financing: debt-to-asset ratio, times interest earned.
The average values of indexes for both groups of firms are given in Table 4.
Examining the measures of profitability, we find that on average firms in the first
group were more profitable in 1994 and 1995 (that is before the end of privatisation).
After the completion of formal privatisation, the average results achieved by firms in
the second group are better, which is in accord with the findings set out in Table 3. In
fact, the firms in the second group started defensive restructuring earlier and that has
influenced the values of their profitability indices.
There are no major differences in the values of payment capacity indices between
the two groups of firms. Payment capacity, measured by both the current and quick
ratios, is decreasing on average in the period following the end of privatisation. On
average, firms in the first group had higher indebtedness in the period from 1994 to
11
1998. The amount of debt increased for both groups during the whole period. The
coverage of liabilities with cash flow from operations is on average relatively stable
for both groups of firms, and a trend of growth is detectable.
According to the conclusions set out in Table 3, the firms from group 1 are falling
behind those from group 2 in the speed of defensive restructuring in 1996. Taking this
conclusion into consideration and using the financial ratios for a longer period of time,
we can state that the differences between the two groups in terms of profitability
measures, payment capacity and financing are on average being reduced.
Table 4: Defensive restructuring: Financial rehabilitation
Variable
Year
N
Mean
Std. Deviation
Total
1
2
Total
1
2
Total
1
2
t test
Sign.
Profit
1994
120
73
47
-0.001
0
-0.003
0.076
0.079
0.073
0.045
0.833
Margin
1995
119
72
47
-0.019
-0.019
-0.02
0.085
0.095
0.068
0.01
0.919
1996
121
74
47
-0.003
-0.01
0.007
0.068
0.073
0.058
1.888
0.172
1997
120
73
47
0.004
-0.004
0.017
0.077
0.084
0.063
2.155
0.145
1998
90
58
32
-0.002
-0.002
-0.002
0.061
0.055
0.072
0.003
0.954
1994
120
73
47
-0.042
-0.004
-0.101
0.326
0.082
0.509
2.538
0.114
1995
119
72
47
-0.015
-0.007
-0.026
0.112
0.115
0.108
0.8
0.373
1996
121
74
47
-0.005
-0.008
-0.001
0.073
0.072
0.074
0.235
0.629
1997
120
73
47
0
-0.017
0.027
0.115
0.136
0.063
4.424
0.038
1998
90
58
32
0.007
0.001
0.018
0.06
0.069
0.035
1.543
0.217
1994
120
73
47
0.003
0.01
-0.008
0.063
0.07
0.051
2.298
0.132
1995
120
73
47
-0.015
-0.017
-0.012
0.134
0.162
0.072
0.039
0.844
1996
121
74
47
0.002
0.001
0.004
0.047
0.052
0.04
0.127
0.722
1997
120
73
47
0.008
0.004
0.014
0.059
0.071
0.033
0.826
0.365
1998
90
58
32
0.004
-0.001
0.013
0.088
0.107
0.032
0.492
0.485
1994
120
73
47
0.034
0.052
0.007
0.369
0.425
0.26
0.408
0.524
1995
120
73
47
-0.009
0.001
-0.025
0.219
0.258
0.137
0.397
0.53
1996
121
74
47
-0.017
-0.029
0.002
0.17
0.208
0.079
0.913
0.341
1997
120
73
47
0.008
0.003
0.017
0.308
0.392
0.069
0.061
0.806
1998
90
58
32
0.022
0.026
0.016
0.141
0.167
0.079
0.11
0.741
1994
120
73
47
1.905
1.857
1.981
1.614
1.662
1.551
0.17
0.681
1995
120
73
47
2.159
2.209
2.08
3.26
4.006
1.534
0.044
0.833
1996
121
74
47
2.048
2.105
1.96
2.798
3.411
1.392
0.077
0.782
1997
120
73
47
1.956
1.966
1.941
2.016
2.353
1.357
0.004
0.949
1998
90
58
32
1.671
1.694
1.628
1.17
1.191
1.15
0.065
0.799
1994
120
73
47
1.174
1.132
1.239
1.271
1.228
1.345
0.203
0.653
1995
120
73
47
1.333
1.373
1.271
2.296
2.787
1.213
0.056
0.814
1996
121
74
47
1.266
1.326
1.169
2.079
2.532
1.042
0.163
0.687
1997
120
73
47
1.212
1.244
1.161
1.518
1.826
0.857
0.084
0.772
1998
90
58
32
0.972
0.991
0.938
0.785
0.819
0.732
0.094
0.76
1994
120
73
47
0.308
0.314
0.298
0.167
0.155
0.186
0.277
0.6
1995
120
73
47
0.331
0.35
0.302
0.194
0.209
0.167
1.749
0.189
1996
121
74
47
0.333
0.355
0.298
0.178
0.187
0.158
2.946
0.089
1997
120
73
47
0.347
0.372
0.309
0.199
0.213
0.171
2.894
0.092
1998
90
58
32
0.368
0.379
0.347
0.239
0.268
0.178
0.368
0.545
Return on Sale
Return on Assets
Return on Equity
Current Ratio
Quick Ratio
Debt-to-Asset Ratio
12
Variable
Year
N
Mean
Std. Deviation
t test
Sign.
Total
1
2
Total
1
2
Total
1
2
Times interest earned 1994
120
73
47
-0.1
-0.006
-0.246
2.819
3.049
2.445
0.204
0.652
1995
119
72
47
-0.192
-0.228
-0.138
2.741
3.035
2.247
0.03
0.862
1996
121
74
47
0.175
0.177
0.172
2.185
2.248
2.106
0
0.99
1997
120
73
47
0.65
0.792
0.43
3.925
4.895
1.507
0.241
0.624
1998
90
58
32
1.929
2.989
0.01
17.712
22.011
1.978
0.581
0.448
t test
Sign.
2.256
0.136
C. Strategic restructuring of firms
According to the presented model, we classified the variables that depict
strategic restructuring into five groups. Table 5 summarises the variables that
indirectly measure investments in management. Data for 1996 show that the second
group of firms has already experienced certain replacements of managers. (In fact, 5
years earlier there were fewer managers in the same positions in the second group of
firms than in the first). Another point is that, on average, in 1996 a larger share of
managers compared to the number of employees has been replaced in the second
group of firms. Both factors proved to be statistically significant. In the second group
of firms, younger and more educated managers with shorter working experience were
employed on average. These could be managers who bring about changes and do not
carry the burden of the past, who know how a market economy works and have
knowledge of the finance and marketing required. There are no significant differences
in the size of managerial wages, except for the variable part of wages given under
individual contracts. This part of wages is higher for the second group of firms.
Table 5: Strategic restructuring: Investment in management
Variable
Year
N
Total
Mean
Std. Deviation
1
2
Total
1
2
Total
1
2
Top managers (%)
1996 109
67
42
2.197
2.003
2.506
1.71
1.609
1.839
Managers with
university
Education (%)
1996 112
70
42
58.603
55.535
63.717
31.158
30.741
31.544 1.824
0.18
Managers younger than 1996 112
69
43
49.344
47.961
51.563
27.477
28.301
26.274 0.453
0.502
69
43
16.479
15.756
17.64
23.845
24.843
22.387 0.164
0.686
69
43
22.667
25.023
18.887
33.327
35.168
30.154 0.897
0.346
1996 108
66
42
0.165
0.113
0.246
0.296
0.258
0.336
3.306
0.072
1996 106
64
42
72.507
76.57
66.316
28.712
25.979
31.767 5.426
0.022
1996 108
66
42
0.031
0.03
0.032
0.034
0.036
0.03
0.08
0.778
1996 109
69
40
1.943
1.967
1.903
2.58
2.246
3.105
0.015
0.902
45 years (%)
Managers with work
1996 112
Experience less than 5 years (%)
Managers with work
1996 112
Experience over 16 years (%)
Replaced managers
To all employees (%)
Managers who held
similar position 5 years ago (%)
Individual contracts
per employee
Individual contracts
per manager
13
Variable
Year
N
Total
Mean
2
Total
39
4697.12 4686.27 4714.65
1760.87 1889.18 1554.88 0.006
0.937
on individual agreement (in
DEM)
Minimum wage based 1996 98
60
38
3613.37 3686.36 3498.13
1746.27 1809.81 1658.10 0.268
0.606
on individual
agreement (in DEM)
Maximum wage based
60
38
6888.86 6859.06 6935.91
2384.57 2628.66 1971.02 0.024
0.877
62
39
4.5
4.49
1.268
1.306
1.224
0.004
0.952
1996 98
on individual agreement (in
DEM)
Average wage under
1996 101
4.506
Total
1
Sign.
63
1996 102
2
t test
1
Average wage based
1
Std. Deviation
2
Individual contract relative to average wage under collective agreement
Maximum wage under
1996 99
60
39
6.036
6.052
6.013
1.635
1.801
1.361
0.013
0.908
2.878
2.81
2.981
1.045
1.088
0.982
0.623
0.432
3.748
3.844
1.841
1.904
1.762
0.063
0.803
1.472
1.438
0.549
0.553
0.549
0.09
0.764
Individual contract relative to average wage in firm
Maximum wage under
1996 98
59
39
Individual contract relative to maximum wage under collective agreement
Maximum wage under
1996 99
60
39
3.786
Individual contract relative to average wage in Slovenia
Minimum wage under
1996 98
59
39
1.458
Individual contract relative to average wage under collective agreement
Fixed part of wage of
1996 85
55
30
89.841
91.491
86.817
15.241
16.367
12.624 1.844
0.178
1996 85
55
30
8.982
6.691
13.183
11.663
10.528
12.624 6.403
0.013
top management (%)
Variable part of wage
of top management (%)
On average, the ratio of investments in fixed capital as part of total revenues
was higher for the second group of firms in 1996, but we cannot generalise this
statement. For both groups of firms, financing using funds for depreciation is on
average overwhelming. The share of long-term loans is higher in the second group,
while the share of short-term loans is higher in the first group.
Table 6: Strategic restructuring: Investment in physical capital
Variable
Year
N
Total
Mean
Std. Deviation
t test
Sign.
0,308
0,58
1
2
Total
1
2
Total
1
2
1996 115
72
43
5.832
5.601
6.219
5.755
5.311
6.48
Retained profit
1996 109
66
43
11.649
12.139
10.895
22.05
20.936
23.892 0,082
0,775
Long-term bank loan
1996 109
66
43
13.679
12.636
15.279
24.51
21.717
28.469 0,301
0,585
Depreciation
1996 109
66
43
63.052
60.776
66.547
35.013
34.415
36.037 0,705
0,403
Disinvestment
1996 109
66
43
3.556
3.403
3.791
12.816
13.597
11.667 0,024
0,878
Short-term credit
1996 109
66
43
5.807
7.318
3.488
13.095
14.559
10.187 2,253
0,136
Others
1996 49
30
19
2.204
3.6
0
13.059
16.646
0
0,353
Investment in
Total revenue (%)
Sources of investment:
0,882
Surprisingly enough, marketing expenses as part of total revenues was on
average higher in the first group of firms than in the second group in 1996. This holds
for both the domestic as well as the foreign markets. In spite of this, however, the
share of new customers was higher for the second group of firms in 1996. The firms in
the 1st group still depended relatively heavily on the domestic market in 1996, while in
the same year, firms in the 2nd group realised almost 50 % of their revenues abroad.
14
Table 7: Strategic restructuring: Investment in marketing and supply
Variable
Year
N
Total
Mean
Std. Deviation
t test
Sign.
3.626
1.805
0.182
5.586
3.168
1.147
0.287
3.704
4.536
1.716
1.467
0.229
11.726
9.504
9.445
9.591
0.991
0.322
9.507
7.335
5.824
8.982
3.142
0.079
70.597
54.518
34.429
33.34
34.399 4.933
0.029
35.303
29.403
45.714
34.554
33.34
34.679 5.046
0.027
1.993
2.3
1.504
2.806
2.963
2.492
2.098
0.15
t test
Sign.
0.758
0.386
1
2
Total
1
2
Total
1
2
1996 106
65
41
4.773
5.494
3.632
6.976
8.382
1996 100
60
40
3.115
3.532
2.489
4.776
1996 104
63
41
1.853
2.207
1.308
New buyers (%)
1996 104
62
42
10.599
9.835
Sale to new
buyers(%)
Sale structure:
1996 104
62
42
7.974
6.935
Share of sales in
1996 94
60
34
64.781
1996 94
60
34
1996 109
67
42
Marketing expenses
in total sale (%)
Marketing expenses
in domes. market (%)
Marketing expenses
in foreign markets(%)
domestic market(%)
Share of sales in
foreign markets (%)
Supply claims (%)
In the next stage of restructuring - investment in research and development there are no significant differences between the two groups of firms. On average, the
sample firms spent less than 3 % of their revenues on research and development. Most
of those funds were spent on financing new products’ introduction and improvement.
Table 8: Strategic restructuring: Investment in R&D
Variable
Year
N
Total
R&D costs (%)
Mean
Std. Deviation
1
2
Total
1
2
Total
1
2
1996 87
49
38
2.496
2.277
2.779
2.664
2.561
2.801
1996 75
41
34
7.413
5.902
9.235
10.132
8.578
11.607 2.04
0.158
1996 74
41
33
37.932
36.341
39.909
26.68
27.983
25.254 0.324
0.571
1996 74
41
33
36.446
39.829
32.242
26.99
28.212
25.181 1.454
0.232
1996 75
41
34
11.573
11.415
11.765
13.628
13.414
14.082 0.012
0.913
1996 76
41
35
7.474
6.415
8.714
16.468
15.59
17.588 0.365
0.548
Structure of R&D costs:
Basic research into
new products and technologies
Research into
product improvement
New product
Development
New production
method development
Laboratory activities
R&D financing structure:
Internal funds
1996 77
40
37
87.471
92.233
82.324
26.573
22.175
30.093 2.733
0.102
Loans
1996 78
41
37
3.91
0.976
7.162
13.208
4.362
18.202 4.459
0.038
Partners' financing
1996 78
41
37
1.872
0.366
3.541
8.492
1.729
12.061 2.781
0.1
Foreign firms
1996 78
41
37
0.513
0
1.081
4.529
0
6.576
1.11
0.295
Domestic firms
1996 78
41
37
0.128
0
0.27
1.132
0
1.644
1.11
0.295
Financed by Ministry
1996 78
41
37
1.932
1.285
2.649
4.877
3.452
6.052
1.53
0.22
of Science and
Technology
Fund for technology
1996 78
41
37
0.038
0.073
0
0.34
0.469
0
0.901
0.345
and development
15
There are also no major differences in the investments in human capital. (The
investments in human capital can be divided into two subgroups: education and
qualification on one part and compensation on the other.). Apparently, the sample
firms performed worst right in this field in 1996, on average. The low share of
employees with higher education and low educational expenses per employee point to
the fact that, on average, the firms did not invest in improvement of the existing
workforce structure in 1996. The politics of employee compensation also run in the
direction opposite to that desired. The part of wages that does not depend on the
results of operations has been increasing on average since 1989. In the second group
of firms, this trend has reversed since the end of privatisation, but the differences
between both groups of firms are surprisingly small.
Table 8: Strategic restructuring: Investment in human capital
Variable
Year
N
Total
Mean
Std. Deviation
t test
Sign.
1
2
Total
1
2
Total
1
2
1996 113
70
43
9.046
8.261
10.325
7.93
7.586
8.394
1.818
0.18
1996 91
54
37
8.374
8.797
7.757
10.384
11.255
9.079
0.218
0.641
Training costs per
1996 99
61
38
171.49
169.96 173.945
241.50
262.73
206.23 0.006
0.937
Worker per year(in
DEM)
Training costs in total
1996 95
59
36
1.179
1.205
1.593
1.781
1.246
0.84
1996 104
64
40
1162.35
1162.30 1162.42
350.45
381.38
298.99 0
0.999
1996 104
64
40
88.093
87.415 88.517
29.732
31.548
26.947 0.034
0.855
61
40
4.248
4.322
4.136
1.716
1.886
1.437
0.28
0.598
Employees with
university education (%)
Hours of training
per worker per year
1.136
0.041
wages (%)
Average wage per
month (in DEM)
Average wage
relative to average wage in Slovenia (%)
Maximum : minimum
1996 101
wage based on collective agreement
Maximum:minimum
1989 48
32
16
5.156
5.293
4.881
2.023
2.115
1.86
0.437
0.512
wage in firm
1992 66
42
24
7.535
7.531
7.542
2.617
2.244
3.221
0
0.987
1994 71
47
24
8.975
9.006
8.915
4.085
3.872
4.56
0.008
0.93
1996 81
54
27
9.253
9.318
9.123
3.817
4.062
3.344
0.046
0.83
Fixed part of wage in
1989 48
31
17
79.005
78.51
79.907
14.41
16.311
10.478 0.101
0.752
Total employee wage
1992 67
41
26
83.048
82.221 84.352
14.846
18.167
7.134
0.325
0.571
(%)
1994 75
49
26
84.199
84.077 84.428
10.038
11.109
7.824
0.021
0.886
1996 83
54
29
84.168
84.936 82.739
10.124
10.318
9.768
0.887
0.349
Variable part of wage
1989 48
31
17
20.933
21.329 20.211
14.211
15.965
10.701 0.067
0.798
In total employee
1992 66
40
26
15.34
15.39
15.263
11.031
12.897
7.54
0.002
0.964
wage (%)
1994 75
49
26
15.601
15.617 15.572
10.002
11.06
7.824
0
0.985
1996 83
54
29
15.368
14.389 17.192
10.107
10.309
9.63
1.459
0.231
16
IV. CONCLUSION
In the paper we examined two groups of Slovenian firms that differ by the
influence of their employees on decision-making. We assumed that the share of
employee representatives on the supervisory board is a good proxy variable for the
influence of employees on decision-making.
The ownership structure of the firms examined changed in the period from 1996 to
1998. The ownership share of state funds has been falling, while the share of
investment funds has been increasing. The ownership shares of other firms and
managers have also been rising, while the share of employees has been falling. This
could mean that the state funds and employees are losing while the investment funds,
other firms and the managers are gaining in importance in corporate governance
terms. The changes in the ownership structure are more important in the group of
firms where employees have a majority on the supervisory board. This could be
expected since it is harder to bring the different interests of the interest groups
involved into line.
Those firms in which the share of employee representatives on the supervisory
board is below 50% have been more successful in their defensive restructuring. They
had more success in adjusting the number of full-time employees, a bigger share of
part-time employees and a higher share of contractually and seasonally employed
workers. This shows that flexible employment is more often used in the group of firms
with a lower share of employee representatives on the supervisory board. There is a
similar tendency in favour of this group of firms regarding financial rehabilitation.
However, differences in profitability, payment capacity and financing among the two
groups of firms are on average becoming smaller.
More importantly, we should be concerned about the fact that there are no major
differences in the strategic restructuring of both groups of firms. The differences can
be best seen in investments in management. Firms with a lower average share of
employees on the supervisory board are quicker when it comes to replacing managers
and tend to employ younger and higher-educated managers. On the other hand, there
are no statistically significant differences between both groups of firms regarding
investments in physical capital, marketing and purchases, research and development
and human capital. It is of interest that it is the firms with a higher share of employees
on the supervisory board that have greater marketing expenses on average, yet they are
attracting fewer new buyers than the firms with a lower share of employees on the
supervisory board. A small share of highly-educated employees, low education and
qualification expenses per employee and the rising fixed part of employees’ wages
point to the fact that both groups of firms are not paying enough attention to human
capital investments.
With the statistical analysis we have so far conducted we have not been able to
detect any major differences between firms that differ in their ownership structure
(comparison of firms with prevailing internal and external ownership). This applies to
both defensive as well as strategic restructuring.
17
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