COMPETITION & CHANGE, Vol. 11, No.

2, June 2007

The Role of the EU in the (Trans)formation of Corporate Governance Regulation in Central Eastern Europe The Case of the Czech Republic
ARJAN VLIEGENTHART1 and LAURA HORN2
1

Amsterdam Centre for Corporate Governance Regulation, Department of Political Science, Vrije Universiteit Amsterdam, 1081HV Amsterdam, The Netherlands 2 Amsterdam Centre for Corporate Governance Regulation, Department of Political Science, Vrije Universiteit Amsterdam, 1081HV Amsterdam, The Netherlands

The European Union (EU) has a crucial influence on the institutional development of corporate governance structures in Central Eastern Europe (CEE). As most political forces in the region favoured quick entry to the EU, one outcome has been an asymmetrical power balance between European regulators and national socio-economic configurations. We identify the EUs objectives and strategy with regard to the restructuring of corporate governance as crucial to understanding the role the EU is playing within the transformation of governance structures in CEE. Using the case of the banking and financial sector in the Czech Republic we analyse the changing regulatory framework of corporate governance. Central to our analysis is the role of the European Commission, which as a transnational actor, has played a major role in promoting and advocating regulatory policies conducive to further embedding socio-economic structures in CEE into the transnational political economy of neoliberal capitalist restructuring. Czech Republic, Corporate governance regulation, Transition, Economic accession, EU conditionality
KEY WORDS

Introduction The institutional development of corporate governance structures and regulation in the transition process of Central Eastern Europe (CEE) only started after the stabilisation of a capitalist market system and the privatisation of the hitherto state-owned industries and firms. The lack of proper institutional underpinnings during the first years of the economic transformation had led to market failures in the newly established markets (for instance, E-mail address: a.vliegenthart@fsw.vu.nl 2007 the Editors and W. S. Maney & Son Ltd DOI: 10.1179/102452907X181947

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fraud, exploitation of minority shareholders, management entrenchment). In an attempt to address these issues, corporate governance regulation became an important issue in the restructuring of the CEE economies in the context of EU enlargement. Corporate governance, pertaining to the practices that define the power relations between the various stakeholders of a firm, lies at the heart of the capitalist market system (cf. Berle and Means 1932; Roe 2003; Gourevitch and Shinn 2005). Corporate governance issues, and the regulatory framework establishing the legal and institutional environment enabling corporate governance practices, are thus of immediate importance for the socio-economic variety of capitalism, or, as Michel Albert put it succinctly, the ultimate role and purpose of the company in a capitalist society (Albert 1991: 13). The aim of this article is twofold.1 We argue, that the role of the European Union (EU) in the development of corporate governance structures in CEE, and the way it has become one of the predominant actors pushing for corporate governance regimes is indicative of the transnational, neoliberal character of its socioeconomic restructuring. Moreover, while the corporate governance scandals of recent years (Enron, Ahold, Parmalat and so on) have received immense interest (and continue to do so), both from policy makers and practitioners as well as from the public in general, corporate scandals have not been restricted to Western Europe and the USA. On the contrary, CEE has witnessed a number of big public and private controversies surrounding the ultimate rules of the game within privatised firms. Cases like, for instance, the struggle over power within the Polish PKN Orlen, or the collapse of the Czech Investment and Postal Bank in 2000 showed that corporate governance issues are not only relevant in mature market economies, but even more so in those that are trying to move in this direction. After all, during the transition period, CEE countries have experienced corporate governance failures that led to many small shareholders being deprived of their investments in the Czech context, Victor Kozeny and his Harvard Capital and Consulting fund come to mind. Corporate governance problems like the exploitation of minority shareholders by the transfer of assets and profits out of firms for the benefit of their controlling shareholders (Johnson et al. 2000: 22), the Czech-specific [. . .] tunneling (Cull et al. 2002: 2) and an opaque banking sector have all been issues on the policy agenda for some time and with considerable priority. To dissect the reactions to these corporate governance issues, then, will help to understand just how the particular regime of corporate governance regulation has come about. This article thus sets out to discuss the influence of the EU on the establishment of a system of corporate governance regulation in CEE, in particular in the Czech Republic. More specifically it deals with two mutually constitutive aspects of EU involvement in the Czech Republic. First, it discusses the content of the EU corporate governance agenda in CEE and second, it aims to clarify the mode through which EU influence has taken shape. In doing so, our account deviates from most of the literature on corporate governance regulation in CEE. Although the transformation of corporate governance in CEE has increasingly come to the attention of scholars, in the economic transition literature as well as in political economy approaches, most studies still take on the developments with a path-dependency or a predominantly domestic politics approach (see, for instance, Havdra 2003; Neumann and Egan 1999; Palda 1997). As corporate governance structures are embedded in and influenced by the broader process of the transition and the domestic discussions on the set-up of the new economic system, institutional change is, of course, to a large degree influenced and shaped by these factors. Yet the transformation of corporate governance structures in CEE

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cannot be understood without taking into account the inherently transnational nature of the transition process in the region as it becomes increasingly locked into the world economy. The role of international actors has been crucial for the trajectory of the transition process, with regard to foreign direct investment and financial conditionality as well as institution-building and norm-setting (Shields 2004). Although international financial institutions like the International Monetary Fund (IMF) and the World Bank (WB) and other, private, actors (such as multinationals) also play a part in the economic reform of the region, this paper departs from the point that, ever since the prospect of EU accession has dawned on the CEE countries, the EU has been most influential in the process of restructuring the socio-economic configuration of CEE. The EU has influenced policy making in the Czech Republic in a fundamental way. Through the Accession Treaties and acquis conditionality, the EU has shaped the entire range of public policies during the last decade, especially after the signing of the Accession Treaties in 1998 (Schimmelfennig and Sedelmeier 2004: 661). EU influence has been broader and deeper in scope (Grabbe 2003: 302) with regard to the CEE accession than during former enlargement rounds of the European Union, in particular due to the EUs far more assertive and unyielding stance with regard to accession requirements and acquis conditionality. Yet, as Heather Grabbe contends, the literature on corporate governance in [CEE] has so far made little connection with that on EU integration (Grabbe 2003: 247). Interpreting the developments and changes pertaining to corporate governance regulation in the Czech Republic in order to show where and how far the EUs conditionality has influenced the transformation process allows us to engage with the EUs objectives and agenda with regard to the restructuring of corporate governance in CEE. The case of the Czech Republic here not only represents a particularly interesting case of the EUs influence on a transition economy within the accession process, but also allows us to substantiate our claims by means of content analysis of concrete EU programmes and policies. The empirical focus will mainly be on EU funded programmes aimed at the financial and banking sector (for instance, under the Phare framework). Most corporate governance reforms, in this regard, have taken place in the context of corporate finance and broader financial market reforms since corporate financing is one of the core elements of corporate governance systems, financial sector and banking reforms constitute important developments for the field of corporate governance. Common to all these programmes is that they are designed to provide technical assistance to Czech state officials and policy makers in the three most influential financial authorities the Ministry of Finance (MoF), the Czech National Bank (CNB) and the Czech Securities Commission (SEC). Technical assistance in these programmes is primarily focused on the implementation of the acquis and subsequent EU Directives. The programmes define weaknesses in the current Czech legislation and, in this sense, provide us with evidence for what the Commission considers to be relevant fields of legislation and clues as to what kind of regulation it envisages. The article proceeds as follows. For conceptual clarification, and to position our research theoretically, we briefly discuss some of the main approaches to the transformation of corporate governance in CEE. Then, we outline some of the main developments pertaining to corporate governance in the Czech economy. Section four provides an overview of the corporate governance agenda of the European Union vis--vis the new member states in their build up towards EU membership. Subsequently, we focus on the later years of the transition process just before the accession of the Czech Republic to the EU on May 1st 2004, and the role of the EU and how this influence has been transposed into the institutionalisation of the Czech corporate governance system.

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Varieties of Capitalism and European Integration Approaches to Corporate Governance in CEE Within the field of comparative political economy, the Varieties of Capitalism approach (VoC) provides an innovative perspective on corporate governance as a crucial feature of the different varieties of capitalism (Albert 1991; Hall and Soskice 2001). The VoC acknowledges the institutional variety of capitalist socio-economic organisation, and perceives of corporate governance as an element of the functionally interdependent configuration. As Bohle and Greskovits (2007) outline in more detail in their contribution to this special issue, a broad distinction is made between liberal market economies (i.e. of the Anglo-Saxon type, in which shareholding is dispersed, corporate finance is organised through a disintermediated market system, and corporate governance systems are mainly outsider systems), and coordinated market economies (i.e. of the Rhineland variety, in which family/blockownership prevails, banks provide financing and corporate governance systems are predominantly insider systems). The VoC approach, with its distinction between liberal market economies and coordinated market economies, has now increasingly found its way into the literature on postsocialist economies in CEE, though the conclusions have until now been rather divergent and have changed over time. Arguments have been made in favour of a coordinated market economy (Myant 2004), a hybrid between both models (Neumann and Egan 1999, Palda 1997), a liberal market economy (Cernat 2002) or a model in its own right (Lane 2005, McMenamin 2002). With regard to the corporate governance systems in the CEE region during the transition period, it is striking that the various national corporate governance practices in CEE show a remarkably high level of resemblance, despite different initial institutional choices regarding the mode and speed of the privatisation process (Table 1). As Bohle and Greskovits point out in their contribution, the countries in the region initially opted for varying policy choices. These choices were the result of diverse socioeconomic priorities, different dominant institutions and political dynamics within each of the CEE societies. Yet the developments have eventually led to substantial convergence among the new EU member states, though diversities remain between the Visegrad
TABLE 1 Main corporate governance features in CEE Czech Republic Poland Ownership Initially dispersed, now concentrating Insider 2-tier Initially dispersed, now concentrating Insider 2-tier Hungary Concentrated Slovakia Initially dispersed, now concentrating Insider 2-tier Slovenia Initially dispersed, now concentrating Insider 2-tier

Control Dominance of 1- or 2-tier systems Market 16.5 capitalisation (% GDP, 2003)

Insider 2-tier

17.2

18.7

3.5

23.3

Source: National Bank of Hungary (2006), various statistical sources. Retrieved from http:// english.mnb.hu/Engine.aspx (last accessed 11 January 2007).

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countries on the one hand and the Baltic states on the other. Except for the Hungarian case, where direct sales to foreign investors have led to concentrated ownership, all other CEE countries initially demonstrated dispersed ownership, which is now rapidly concentrating. In this respect, we see a tendency towards insider control, a two-tier system and a relatively low market capitalisation. On the day of their accession to the EU, the Financial Times concluded that the capital markets in most of the new member states are relatively undeveloped. Hungary and the Czech Republic, for example, account for just 0.2 per cent and 0.1 per cent of total EU market capitalisation (Financial Times 2004: 25). Here, the VoC approach, with its explanatory power to a high degree based on pathdependent dynamics of institutional change or persistence, fails to account for the changing (and to an extent converging) trajectories of corporate governance structures in CEE. On the contrary, scholars argued that the transformation actually further strengthened and developed the differences that already existed during the communist era (Stark 1992). As Whitley (1999: 209) contends, the command economies of Eastern Europe varied sufficiently in their political and economic structures to generate significant differences in how they introduced political and economic liberalization and in the resulting patterns of enterprise and market organization. Yet the VoCs explicitly nation-state centric focus fails to take into account the transnational nature of these transformation processes the process of accession and integration of CEE into the EU is not taken into consideration. Thus, it cannot grasp the transnational context in which national economies function and the social purpose of the reforms implemented in the region. As it prioritises the national, it does not come to terms with the question of how the different varieties are embedded in, and fundamentally co-determined by, the transnational context and forces extending across and transcending different territorial levels.2 The role and influence of the EU in shaping these developments is crucial for understanding these processes. European integration theories, however, are still struggling to accommodate the enlargement process in their theoretical focus (see, for instance, Friis and Murphy 1999; Schimmelfennig and Sedelmeier 2004). Rather than interpreting the accession as an intergovernmental bargaining process or an instance of neo-functional spillover (Niemann 1998), the transnational nature and inherently neo-liberal character of the enlargement process need to be accounted for. In this regard, we follow neo-Gramscian approaches to the integration of CEE into the EU (Bohle 2002; Holman 2001; Shields 2004). We understand the influence of the EU on the development of corporate governance structures in CEE as part of a political project aimed at exporting the EUs agenda into CEE. Grabbe outlines the influence of the EU in the socio-economic restructuring as
a set of processes through which the EU changes the logic of political behaviour at national level, by becoming part of domestic discourse, political structures, and public policies. Europeanization in the context of CEE corporate governance is seen as a process whereby the EU exports models of market regulation to CEE, and it affects the relations between firms, the state, and trade unions (2003: 247248).

In contrast to the burgeoning Europeanization literature (inter alia Radaelli 2000, Cowles et al. 2001), we argue for an understanding of the transformation processes in CEE that does not only take into account how these changes take place, but why. As a first step towards this understanding, this paper provides a research perspective that takes into account the concrete content of regulatory policies and changes, rather than just the level on which they are taking place. Only when looking at content and form of the regulatory restructuring pertaining to corporate governance regulation can we begin to discern the driving forces promoting and reproducing this specific system of socio-economic governance.

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In order to provide an overview of the changing trajectory of corporate governance in the Czech Republic, and the role of the EU in shaping these developments, the following section outlines major changes in the Czech corporate governance regime. Czech Corporate Governance in Transition In the first phase of the economic transition process, priority was given to the liberalisation of prices and the imposition of financial discipline. As a second step, the focus shifted towards the restructuring of property rights. Privatisation was at the heart of the debate as the former Czech Minister for Privatisation put it, privatization is not just one of many items on the economic program. It is the transformation itself (Nellis 2001: 19). Yet the Czech method of voucher privatisation led to considerable problems in the field of corporate control and caused chaos in financial structures. International financial institutions and policy-makers favoured a clear-cut break between the socialist era and the post-socialist period, and thus focused primarily on the opening up of new markets. Voucher privatisation provided the primary mechanism as it was expected to create an active capital market as in the United States, while at the same time it was recognized that individual citizens would have neither the capacity nor the incentive to provide any meaningful governance, so they accepted the necessity of capital aggregation in the hands of financial intermediaries (Fitzsimmons 2002: 6). The Czech form of voucher privatisation thus initially resulted in a dispersed distribution of ownership, which then gradually (re)concentrated in the hands of investment funds and banks. The Czech strategy under the right-wing Klaus government was seen as more radical than socio-economic policies in other transition economies, moving towards a market-oriented rather than a network-oriented system; but the Czech government paid scant attention to the institutional development of its new socio-economic system (McDermott 2004: 189). As Stark and Bruszt (1996) have pointed out, privatisation might have created private property, but it has not done away with the existing networks and non-market relations that often have their roots in the socialist era. The establishment of a regulatory framework to keep these developments in check, and the necessary institutional reform, it seems, had been skipped, according to one investment banker (Financial Times 1997). The concentration of share ownership, combined with the virtual absence of corporate governance regulation, led to market failures and contributed to the economic recession which hit the Czech Republic in 1997. As Andreff (1996: 5960) argues, privatisation without underlying corporate governance mechanisms does not solve the problem of having well-identified private owners who actually control and govern newly privatised enterprises. [. . .] Qualitative privatisation could only be achieved by coming to grips with the corporate governance issues. It became clear to policy-makers that it would be necessary to reform the reform (Dragneva and Simons 2001: 94) in order to mitigate the macro-economic consequences of micro-economic patterns stemming from a lack of adequate regulation. The European Commission argued that the capital market is still illiquid, does not encourage strong corporate governance and is a negligible source of finance for commercial and industrial enterprises (European Commission 1998: 17), and identified the financial sector as a key weakness in the Czech Republics accession efforts (European Commission 1999: 24). Moreover, the Czech banking sector, which had been left intentionally nonprivatized in the privatisation process (Havrda 2003: 133), was subject to

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criticism from the EU, international financial institutions and transnational investors. The Organisation of Economic Co-operation and Development (OECD), (2000: 79), for instance, argued that the privatisation of the remaining state-controlled banks was the most critical step to improve overall corporate governance and, thereby, economic performance. EU demands in this respect have not been restricted to the Czech Republic. In their contribution to this issue, Lindstrom and Piroska argue that the EU raised the issue of bank privatization in several of its reports on Slovenia. But whereas the Slovenian government actively resisted EU pressures, the EU found a more willing ear with the Czech government. The Czech financial crisis of 1999, which increased the acceptance for rapid action, fuelled the process of bank privatization. Under the social-democratic minority government that came into power in 1998, the privatisation of the banking sector became one of the priorities in economic restructuring the last publicly controlled bank was eventually privatised in 2001. Banks still play a pivotal role in the Czech corporate governance system, yet it is important to acknowledge the share of foreign equity in the ownership of Czech banks. Table 2 offers an overview of the share of foreign ownership on Czech banks. The Czech corporate governance system, as argued above, indeed shows characteristics of the Rhineland variety (most importantly, the role of banks as financial intermediates and insider corporate governance system). As Richard Salzman, then head of the Prague stock exchange, pointed out as early as 1994, we speak English, we take advice from the Americans, but look at the map. We are going towards the German system (Financial Times 1994: 23). However, these arguments have to be qualified as it is now mainly foreign owned banks which supply corporate financing. To view them as functionally equivalent to national banks would mean to ignore the strategic differences between transnational investment banks and Hausbanken in the traditional Rhineland variety.3 While, as Beyer and Hpner point out (2003: 185), even in the German context there has been a reorientation of big banks towards investment banking, away from retail banking and small-scale lending, in the CEE context, these developments have even been more marked. Corporate managers in CEE in general are responsible to their internal supervisors in other countries, especially in Western Europe, and not to domestic clients or stakeholders. Therefore, major corporate decisions are not negotiated between managers and (domestic) shareholders, but rather between managers of the CEE subsidiary and western headquarters. The monitoring function that Hausbanken exercised in the ideal-typical depiction of the insider system of the Rhenish variety is hardly employed in the CEE context. Rather,

TABLE 2 Ownership structure of Czech banks in 2000, by share of equity Year 1995 1998 2000 Total foreign ownership (%) 22.8 38.7 54.5 EU ownership (%) 13.3 28.6 43.5 US ownership (%) n/a 4.6 7.7

Source: Jan Hanousek, Dana Hjkov and Libor Nb me cek (2002) The Czech Republics banking e h sector: emerging from turbulent times EIB Papers, 7(1): 5572.

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external control mechanisms like transparency and disclosure provisions, independent (non-executive) directors and auditing rules are increasingly being put in place. Also, foreign banks initially focused on top-tier clientele. Small and medium-sized enterprises (SMEs) had considerable problems acquiring capital (Hanousek et al. 2001) for their investments. Although this has changed over the last few years, many SMEs still complain about the difficulties they have with obtaining credit (Domanski 2005: 77). This also resonates as foreign banks seem to treat their subsidiaries as a portfolio investment. As a result, lending strategies are not determined by domestic considerations but rather by the risk appetite at the parent level(Domanski 2005: 78). In addition to that, decisions made by the headquarters of the parent bank compare risks and returns of different subsidiaries before allocating investments (de Haas and Naaborg 2005: 29). Due to the central position of banks for corporate financing, the socio-economic system thus becomes more exposed to global financial developments. The concentrated share ownership is still mainly due to investment funds, which differ considerably in their corporate control objectives than, for instance, large family blockholders. In contrast to the ideal-typical system of Rhenish corporate governance, Czech policy makers increasingly orient themselves to the corporate governance system promoted by the OECD, which arguably advances the outsider, market-based corporate governance system more than the insider, bank-based insider system. The Czech Corporate Governance Code issued in 2004 provides a prime example of this trend.4 Czech accession to the EU EU conditionality and policy export In this section, we turn to the role of the EU in influencing and shaping these developments in Czech corporate governance. The EU has, for more than a decade now, been promoting financial market liberalisation in CEE, which is conducive to bringing about a market-based outsider corporate governance system. As argued above, EU influence has been broader and deeper in scope (Grabbe 2003: 302) with regard to CEE accession states than during earlier enlargement rounds. The relationship between the EU and the accession states has been highly asymmetrical, with the EU exercising a degree of power that it does not enjoy either vis--vis its own member states or vis--vis external actors (Sedelmeier and Schimmelfennig 2004: 675). With the signing of the Accession Partnerships in 1998, the EU increased its influence on corporate governance developments in CEE in that they stepped up the enlargement process by imposing strict(er) conditionalities upon the applicant states. In one of its annual assessments of the prospective member states accession efforts, it explicitly referred to the lack of adequate corporate governance regulation (European Commission 1999: 24). In a 2000 briefing to the European Parliament, it was stressed that the legal and institutional frameworks do not yet provide sufficient security to investors and creditors (European Parliament 2000). A number of the contributors to this special issue note the increased leverage of the EU since the start of the official negotiations. However, they also emphasize that the process of Europeanization not only operates through formal institutions, but also, at occasions, works more subtly in influencing national contestation of mode and speed of economic transformation. As one of these modes of influence, the transfer of expertise via the so-called twinning projects will be discussed later in this contribution. First, however, we turn our attention to the discursive underpinnings and objectives of the EU agenda for corporate governance in the Czech context.

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The EU corporate governance agenda in the Czech context The EU has put much emphasis on improving the functioning and performance of Czech capital markets, as well as on the privatisation of Czech banks. This, it argues, is aimed at attracting foreign capital, which has been crucial in enhancing corporate governance and pushing forward business reorientation in the banking sector (European Commission 2002a: 43). The Commissions conditionality and strategy is explicitly aimed at improving the performance of the Czech capital market. According to one of the programmes, the current capital market continues to fail to fulfil its primary function as it still does not constitute an appropriate place for reallocation and acquiring of the adequate capital and does not fulfil standard price setting function (European Commission 2000: 1). The EUs broader political framework for market integration is used as justification for the marketenhancing approach it is argued that capital market restructuring in the Czech Republic is essential since the Lisbon Summit also explicitly insisted on the creation of an efficient, deep and liquid securities market in Europe (ibid). Addressing a Czech business audience, the former Commissioner for the Internal Market, Frits Bolkestein, pointed out why a rapid integration of the Czech economy into the Internal Market is essential: Firstly, because it gives [Czech business] access to a very large market which should encourage you to invest more because the returns are likely to be even greater. And secondly, because it subjects [Czech business] to much tougher competition effectively forcing you to shape up and become more efficient (Bolkestein 2004). However, corporate governance has been a contentious policy area in the EU ever since it rose higher on the agenda in the late 1990s. Under the heading of the Financial Services Action Plan (FSAP), the European Commission marked corporate governance as a key factor for its plans for an integrated and efficient capital market in the EU thus effectively embracing a market-led corporate governance regime. However, a more coherent corporate governance strategy only came into existence with the presentation of the Commissions 2003 Company Law Action Plan (European Commission 2003). In this regard, a report for the European Bank for Reconstruction and Development (EBRD) points towards the seemingly endless harmonisation process for EU accession. A dilemma constantly facing accession countries is that while they are endeavouring to establish a so-called EU compatible regulatory framework at the national level, the relevant EU norms themselves and the global environment in which the countries are trying to thrive is also changing very fast (EBRD 2004: 4). Yet while the corporate governance agenda of the EU-15 was (and, of course, remains) in a phase of constant negotiation (see, for instance, the case of the Takeover Directive), the accession conditionality pertaining to corporate governance and financial sector restructuring already pinpointed policy initiatives aimed at integrating the new market economies into the transnational political economy. In the Czech context, this mainly implied the EUs insistence on the construction of a regulatory framework conducive to enabling capital markets to play an ever more important role, and to encourage public listing of companies. This resonates with the Commissions emphasis of the role of capital markets, and, more particularly, the role of the market for corporate control, for the protection of (minority) shareholder interests. This stands in stark contrast to the actual developments in the region, where, as the Economist concluded in 2002, the stock market is not the place to raise capital (Economist 2002). Yet, an outsider-based system, it was argued, was favourable for attracting foreign

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capital, which has been crucial in enhancing corporate governance and pushing forward business reorientation in the banking sector (European Commission 2002a: 43). To the Commission, foreign investments inherently facilitate effective restructuring of the CEE economies and, at the same time, serve to enhance the attractiveness and competitiveness of the Internal Market for transnational investors. As we have argued above, the corporate governance system in the Czech Republic displays some of the characteristics of the Rhineland variety of capitalism, most importantly a low market capitalisation. In this respect, the EUs persistence on implementing corporate governance provisions that are conducive to bringing about a more marketised corporate governance system (Van Apeldoorn & Horn, 2007) constitutes a mismatch between socioeconomic reality and regulatory zeal. However, it is indicative of the broader EU agenda for the transformation of the enlarged EU. The integration of the Czech economy into the European Market is framed by the competitiveness and efficiency discourse propagated by the Commission only that, due to the bilateral negotiation character (see Bohle 2002), alternatives to the EUs ideologically tinted market system are not an option if the accession criteria are to be fulfilled. The conditions for the establishment and deepening of capital markets are put forward as if they were very obviously the only possible policy option. The assumed self-evidence of the EUs conditionality denies any dialogue between the accession state and the EU, and does not take into account that, in the EU-15, many of the EUs policies are far from uncontroversial. As Grabbe contends (2003: 256), the thrust of the agenda is neoliberal, emphasizing privatization of the means of production, a reduction in state involvement in the economy [. . .], and further liberalisation of the means of exchange. Through EU conditionality, in particular the dissemination of ideas and policy transfer of the EUs objectives to CEE, the policy range available to the accession countries has been considerably limited. As Schimmelfennig and Sedelmeier rightly point out, the massive benefits of EU membership being within close reach, the fulfilment of EU acquis conditions became the highest priority in CEE policy-making, crowding out alternative pathways and domestic obstacles (Schimmelfennig and Sedelmeier 2004: 671). This can be observed in particular in the highly complex area of financial market and corporate governance regulation. As David Brenneman puts it (2004: 5253), the Commission points out a problem with securities regulation in its annual report and Czech officials subsequently adopt measures designed to address that same problem.

Rule transfer EU influence on corporate governance regulation The EU has made use of a variety of mechanisms in its accession strategy, ranging from gate-keeping, benchmarking/monitoring, provision of legislative and institutional templates, technical and financial assistance to policy advice and twinning (Grabbe 2001). Among the EUs steering mechanisms, the Phare programme5 has a central place in the accession strategy of the EU. Initially devised as providing predominantly food aid and technical assistance (Niemann 1998: 435), the subsequent raise of the Phare budget and its increased importance for institution-building in CEE made it a prime mechanism for exporting EU policies into CEE. With regard to the financial sector, EU-funded programmes aimed at the liberalising and improving the role of Czech capital markets or, as the Commission enthusiastically put it, Phare has provided advice, training and

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equipment to help Czech institutions more effectively fulfil their new role in a market economy. In particular, projects have helped in the privatisation and the restructuring process, the development of banking, and provided specialised training (European Commission 2001a). Table 3 provides an overview over the main elements of the programme. With regard to the Twinning programme, the finishing school for EU membership as a Commission report puts it (Cooper and Johansen 2003: 7), the finance and internal market

TABLE 3 Technical Assistance: EU Funded Programmes in the Czech Financial Sector Project Name Strengthening Financial and Banking Sector Institutional/ Regulatory Capacity Strengthening Credit risk Management Methodology and Application in the Banking Sector Capital Market Legalisation & Securities Commission Czech National Bank Supervisory Diagnosis Capital Markets Regulation and Legislation Capital Markets Central Depository of Securities Strengthening the Czech Banking Sector Application of Basle II Funding Agencies involved agency Phare Czech National Bank, Ministry of Finance Time period September December 2000 Volume (million Euro) 2

Phare

Czech National Bank

September 2000 April 2002

2.7

Phare

Phare

Phare

Central Financing and Contracting Unit, Czech Securities Commission Czech National Bank, Hanney Associates Phare

September 2000 December 2002

4.2

December 2003 July 2004 December 2003 December 2004 January 2002 September 2006

n/a

1.5

EU

Central Financing and Contracting Unit EU,Czech National Bank

2.4

EU

February 20042006

2.0 Of which 1.65 paid by the EU

Source: Commission Documents available at http://ec.europa.eu/enlargement/key_documents/ phare_legislation_and_publications_en.htm

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sectors have been at the heart of the EUs policy dissemination and transfer programme. Whereas the Phare programme was initially based on technical assistance by foreign consultants, twinning engaged national bureaucrats in the policy transfer and implementation. Twinning entails that bureaucrats accustomed to their own countries methods of working and assumptions about policies and policy-making processes advise on implementation from within CEE governmental structures (Grabbe 2003: 260). In most of the projects at least one other state institution is involved. The Czech National Bank (CNB) participates in four of the seven projects. The Czech Securities Commission (SEC) takes part in three projects. The SEC was founded in 1998, under the auspices of the EBRD, as a supervisory authority for the capital market (EBRD 1999: 30). According to one of the programmes it requires the EUs assistance for elaboration of a technical framework related to the regulation of cross-border transactions and e-business and for strengthening the effective monitoring of transactions on capital market in general (European Commission 2002b: 2). It is instructive that, in the first three twinning rounds for the accession countries, the number of projects has been highest in the finance and internal market sectors, with 86 out of the 371 Twinning projects in CEE in those years having taken place in these fields (European Commission 2001b: 27). The use of experts from EU Member States to familiarize bureaucrats in the Czech Republic and CEE in general with EU policy compliance has thus led to the potentially widespread dissemination of EU practices in the Czech financial and banking sector. As a senior officer for the EU projects implementation department at the Czech National Bank points out, Phare allowed Czech experts to become familiar with common EU practice, and, at the same time, foreign experts contributed to the development of banking supervision in the Czech Republic (European Commission 2001a: 28). In total, the programmes aimed to address more than 4000 civil servants in the MoF, the CNB and the SEC. Apart from the transposition of EU directives and the acquis, twinning is also aimed at raising awareness training for the officials of the Ministry of Finance and members of professional institutions for the fact that participating in the EU requires substantial changes, both of conceptual and implementation character (European Commission 2000: 2). The transposition of EU policies into CEE corporate governance structures, and the integration of a national bureaucratic elite into the financial epistemic communities of the EU has made it virtually impossible for the Czech Republic to take any other route to corporate governance restructuring other than the market-based and foreign investment-oriented strategy advanced by the Commission. Alternative policies, for instance a reinforcement of the banking sector towards the already emergent insider system with stable insider block ownership and low market capitalisation, are beyond the Commissions policy range. In doing so, the Commission inherently opens CEE markets for transnational corporations and cross-border capital flows to enter the region. It contributes to the further transnationalisation of the CEE economies in the era of global neoliberalism. This strategy is by no means solely imposed externally, but also receives substantial support from diverse domestic social forces that see the transformation towards a neoliberal market economy as an ideologically necessary step in the undoing of the socialist heritage widely discredited in the region and simultaneously those parts of society that serve as the domestic representatives of the interests of transnational corporations based amongst other things on their managerial position within local subsidiaries of transnational firms (Vliegenthart and Overbeek 2007). The programmes developed to enhance the implementation of the acquis into the Czech national regulation were predominantly aimed at the improvement of the Czech capital

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market. Three of the four programmes explicitly named the increase of investor confidence as an objectively verifiable indicator. In two cases, the level of protection of minority shareholders was explicitly addressed. The Commission has long been critical of the development of the Czech capital market. Only after the regulatory framework for a functioning capital market had been implemented (stimulated by acquis conditionality) did it give a more positive assessment of the developments. In its 2001 annual report, the Commission on the Czech progress towards the full implementation of the acquis, cautiously signalled its approval by stating that the situation on the Czech capital markets is improving slowly. The Czech Securities Commission has played a more active role and progress in legislation has been made (European Commission 2001c: 36). The Role of the European Union Revisited Whereas its plans for the modernisation of corporate governance regulation in the EU-15 have sometimes met fierce resistance from member states, the European Commission perceived the CEE enlargement as a good opportunity to revise its take on corporate governance, and add a stronger sense of urgency to its reform projects.
The forthcoming enlargement of the EU to 10 new Member States is another gilt-edged reason to revisit the scope of EU company law. The new member countries will increase the diversity of the national regulatory frameworks in the EU, underlying further the importance of a principles-based approach able to maintain a high level of legal certainty in intra-Community operations. [. . .] initiatives to modernise the EU Acquis will become more urgent than ever to ease the rapid and full transition of these countries to becoming fully competitive modern market economies (European Commission 2003: 7).

The Commission is playing an essential role in pushing this market-oriented agenda. With regard to the Phare programme, Niemann (1998: 440) points out that government preference formation is affected by the ad hoc and long-term manipulation of domestic elites [. . .] at the decision-making level the Commission can make an impact, especially when assisted by temporary support from organized interest. In a moment of self-reflection and literary bravado, Frits Bolkestein points to the Commissions mission statement:
Our overall approach is reflected in the advice given by the famous Czech writer, Franz Kafka: Start with what is right rather than what is acceptable. Our job is to propose measures that we think are right for the Internal Market, and then to persuade the Council and Parliament that what we suggest should indeed be accepted (Bolkestein 2004, emphasis in original).

The Commissions perception of the right way to go down for the market economies of the accession states, and the EU in general, however, does not leave any room for alternatives to the further liberalisation of the new member states market economies. Even more so, the Commission appreciates the accession of the CEE states, with their economies having been subject to acquis conditionality for a critical time, as an opportunity to inject the policy debates in the new EU-25 with new impulses.
Although some of our leaders seem to be falling back on old ideas, I am not pessimistic. I believe that the arrival of the new Member States will re-energise discussions in Brussels [. . . with] a real breath of fresh air. This is not surprising. You have been living with rapid and relentless changes for many years now. You are obviously less resistant to it. I am sure that your presence will help move the discussion forward and revitalise our economic reform agenda (Bolkestein 2004).

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Arguably, with the accession countries economies having been subject to strict acquis conditionality, Bolkesteins tribute to their lack of resistance to change is intended to read ironically. With the strong influence the Commission has asserted during the accession process, through institution-building as well as technical and financial assistance, it aimed at modelling and forming the accession economies as far as possible in its own envisaged mould. Now that the accession has been accomplished, the new Member States could be assumed to serve the role of the paragon of liberal market economies to the old Member States. Tommaso Padoa-Schioppa, Member of the Executive Board of the European Central Bank (ECB) has already indicated this with regard to taxation policy (ECB 2004) and it is likely that other fields such as corporate governance will follow. In this respect, the bargaining power of the Commission vis--vis all the member states might well grow in the near future. Here, the promotion of competitiveness lies at the heart of the Commissions agenda for CEE as well as for the EU-15, and might serve as a guiding principles for future reforms in the EU. Inspired by the Lisbon agenda that ought to make Europe the most competitive knowledge based economy in the world by 2010, the incorporation of CEE into the EU can be regarded a further increase of internal competition between the different member states with the aim to increase the EUs overall competitiveness. The new member states with their not yet fully developed markets provide Western European capital with a valuable place to invest. As the build up towards EU membership came to a close, the three different actors mentioned above, the CNB, the MoF and the SEC, had to a large extent internalised the EU agenda. In reaction to the Commissions Green Paper on Financial Services Policy, these three agents subscribed to the general conclusion that the proposals made by the commission are one of the essential prerequisites in the fulfilment of the Lisbon strategy (Prouza et al. 2003: 1). Moreover, they also argued for an unambiguous Directive without a number of possible national discretions (ibid: 2). Here it seems that the Commissions involvement has created disciples through its own agenda, albeit that the Czech agents argue against the introduction of something like a super-regulator but in favour of convergence of supervisory practices and the more effective co-operation and information and know-how exchange between the supervisory authorities (ibid: 3). This last point can only be dealt with parenthetically here, but constitutes a crucial element in any comprehensive analysis of the developments in corporate governance in the Czech Republic, and CEE in general. While this contribution has predominantly focused on the EUs agenda for and modes of involvement in the context of corporate governance developments in the Czech Republic, the reception, dissemination and perpetuation of these neoliberal policies by domestic elites and actors represents the other side of the coin to the initiatives discussed at some lengths above. Neoliberalism has found domestic support in the region, as well as domestic resistance (Drahokoupil 2006). As Bockman and Eyal (2002: 311) have pointed out, transnational networks consisting of East-European economists and their American counterparts have existed since the early years of the Cold War, paving the way for the introduction of neoliberal practice after 1989, in which many of the reformers became some of the strongest global champions of such reforms.

Conclusion The arguments discussed in this article lead us to the question what kind of capitalism is currently evolving under the pressures of the EU. As Laszlo Bruszt (2002: 128) has argued,

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market-making is about the re-making of the state, about re-regulation of relations among economic actors, and about the re-institutionalisation of the economy. The EU, as an inherently market-making project, is using its influence to shape the developments of market and corporate governance structures in CEE, and by gently, but firmly, pushing for an increasingly marketised socio-economic order, it seeks to widen the investment opportunities of transnational capital, while at the same time subordinating CEE even more to the discipline of the markets. With regard to the emerging corporate governance structure in the Czech Republic and other CEE countries, EU intervention in the economic trajectories of the accession states has been fundamental. As we have argued above, the Czech corporate governance system has been characterised by the incremental re-concentration of ownership, on the one hand through national investment funds and on the other hand through increased foreign share and bank ownership. With its still comparatively low market capitalisation, two-tier system and strong insider control, the Czech Republic does indeed reflect a coordinated rather than a liberal market economy. Against this background, the EUs efforts to export a corporate governance system, which as such hardly exists in the old member states, illustrates the political nature of the accession strategy. The transnational integration of capital markets takes precedence over alternative political responses to the challenges of integration, while simultaneously access to this market is still limited for the accession countries. Even more so, the financial market and corporate governance system strongly advocated by the EU in the accession countries is far more liberal and market-based than any corporate governance system in the EU-15, with the exception of the UK. In a neo-Gramscian interpretation, we can see these developments as an expansion of the neo-liberal project of European market integration with the help of acquis conditionality, and increasingly the use of policy dissemination through expert groups and twinning. Acknowledgements The authors would particularly like to thank Andreas Nlke, Alan Cafruny, the editors of this special issue and the referee for their comments and suggestions. Financial support from the Dutch Scientific Funding Organisation (NWO) is gratefully acknowledged. Notes
1 Earlier versions of this paper were presented at the 2005 ECPR conference in Budapest and the 2005 ESA conference in Torun. 2 For a more complete theorisation of the transnational, see Bastiaan van Apeldoorn Theorising the transnational: a historical materialist approach (2004) Journal of International Relations and Development, 7(2): 14276. 3 On the role of Hausbanken and the disintegration of the Rhineland VoC in Germany, see Jrgen Beyer and Martin Hppner, (2003) The disintegration of organised capitalism: German corporate governance in the 1990s West European Politics, 26 (4): 179198. 4 See the Czech Corporate Governance Code 2004 (Czech Securities Commission), available at http://www.ecgi.org/codes/documents/czech_code_2004_en.pdf. A revised version of the OECD Principles of Corporate Governance has been published in 2004. 5 PHARE initially standing for Poland-Hungary: Aid for Restructuring of the Economies, but currently covering 10 countries: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia, as well as Bulgaria and Romania.

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