MoldTelecom Prices Rebalancing: the Stakeholders Perspective

Full essay available here: Corporate Governance – Bejan Natalia

Stakeholders play a very important role in each company due to the fact that it represents the source which permits the (it-self) existence of the company, the development and growth. Thus, stakeholders influence and importance is not negligible and has to be an important detail to take into account when it comes to decision-making processes.

The role of stakeholders in a company is being stated in The OECD Principles of Corporate Governance[1], highlighting that one of company’s main missions should be co-operation and satisfaction of stakeholders’ needs. Using the case study of MoldTelecom Company prices rebalancing, which occurred in January 2011, I will try to stress the negligence expressed with respect to company’s stakeholders and the unfavorable consequences for both, company and stakeholders, boosted by this situation.

An important note to be done before pursuing to the development of the approached problem is that I have explicitly focused in this context on the customer stakeholder, since there can also be other stakeholders[2] (shareholders, government, employees, suppliers, investors, creditors, community, competitors, analysts, media) which I will not refer to within this essay.

Company review

MoldTelecom is a state-owned company, activating in the Republic of Moldova, which has a dominant position on the market[3] of landline-phone services. The figure 1, which shows the landline market share in terms of number of users of this service, clearly relates about the fact that MoldTelecom is a very influent and big company on the respective market, at the national level. However, being big doesn’t mean being efficient.

Starting with 1999, World Bank, International Monetary Fund, International Development Association and the International Finance Corporation suggested to Moldovan national authorities to start the privatization of MoldTelecom, taking into account that the company recorded very high rates of equipment deterioration, registering also one of the lowest efficiency ratios[4] in the world (comparing to similar companies).

In the same time, taking into account that more than 1,124 million of people are using MoldTelecom’s services[5], this would imply that the matter of customers’ opinions and the informational transparency with respect to them should be a strong priority for MoldTelecom. Theoretically it works and even MoldTelecom’s mission is: “The client and his needs are our top priority”, but practically the customers have no access to any reliable information and do not participate at all in the decision-making processes which directly affect the quality of the services they receive, as well as the amount of money they (have to) pay for those services.

In January 2011, MoldTelecom introduced to the public a new tariff-strategy which would decrease the prices for international landline phone calls and would increase the prices for national calls. The way the rebalancing was introduced, the invented arguments behind it, the sharp modification in prices and lack of transparency – finally led to cancelation of the rebalancing program and decrease of credibility of the company on the market, but also in front of its customers.

Literature Review

The role of stakeholders within the framework of the corporate governance is described in the Corporate Governance Principles of The Organization for Economic Co-Operation and Development. What this principle mainly recommends is a strong co-operation between stakeholders and the corporate governance in order to create wealth, jobs and financially sound enterprises. The Republic of Moldova also has a national Code of Corporate Governance[6] which, however, doesn’t say anything about stakeholders’ rights and it doesn’t rely on the consumers, particularly, as on a reliable participant in companies’ life. The Code is reduced to naming the rights and responsibilities of shareholders, as well as the price for the shares and the general management recommendations.

One more relevant lack regarding the stakeholders’ involvement in the corporate governance in Moldova is related by the World Bank in the Corporate Governance Country Assessment[7] from 2004. It valuates that there is no information at the national level which would give the chance to observe the access of the stakeholders to reliable information at the corporate governance level; the co-operation between corporate governance and stakeholders is negligible, as well as the opportunity to redress the violation of their rights. To all of these World Bank added a weak assessment of the performance-enhancement mechanisms for stakeholders, mainly employees.

Unlike Moldovan example, the international experience posses a strong emphasis on the stakeholders’ participation in the corporate governance. When it comes to defining the spheres to which stakeholders do have an impact within a corporation, the Association of Chartered Certified Accountants stress that their role in promoting fair and efficient corporate governance is important not only from a financial perspective. Because of the growing pressures from different groups [of stakeholders], companies’ responsibilities have been increasingly seen in a wider context than the merely financial (ACCA, 2001).

Regarding time-related issues, increasing the efficiency and transparency of a company leads to diminished short-term value for the shareholders. From this point of view, there appears a conflict of interests between stakeholders and shareholders, whose goal is mainly maximization of their current profit. Thus, the independence of shareholders power is contrary to the maximization objective of the stakeholder value (Charreaux, Desbrières) and the stakeholders’ role in the corporate governance is also ensuring that the social interests are not ignored.

Heath and Norman (2004) suggest that efficient corporate governance can be observed only when it goes hand-on-hand with the corporate social responsibility. What becomes impossible to demonstrate with knock-down arguments is that companies are limiting the influence of the stakeholders in the decision making processes, mainly because in this case they imply that stakeholders are not interested in ex ante involvement.

MoldTelecom practice versus OECD Principles

“The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation”[8]

Transparency is a method by which a company can show its openness toward the society, market, economy, as well as consumers. When it comes to MoldTelecom, we find that the company is absolutely not following any transparency rules and there is practically no access to any disaggregated financial information which could design MoldTelecom’ position on the market. The last annual report[9] is for the year 2008 and it does not present any financial data, excepting: total sales and total capital investments. Taking into account that MoldTelecom has three types of services provided: the aggregated information for all three sectors is useless for any analysis. The types of provided services are presented in the figure 2.

Furthermore, MoldTelecom implied that the need to rebalance prices for the landline services followed from the fact that the national calls where extremely non-profitable. The company uses the cross-subsidy instrument[10], taking into account that the international phone calls are very profitable, but comparing to neighboring-states: have much higher prices. This motivation cannot be considered as groundless because cross-subsidy is economically inefficient. But from the point of view of financial data: there is no grounded information to be analyzed and economically fond the rebalancing decisions, mainly because analysts and the public as a whole doesn’t have access to financial data.

“The Corporate Governance framework should […] encourage active co-operation between corporations and stakeholders in creating wealth”[11]

The creation of wealth which has been stated in the OECD Principles of Corporate Governance is clearly contradicted by the actions of MoldTelecom Company due to its concrete decisions of prices rebalancing in terms of numbers (tariffs). On average, MoldTelecom intended to decrease its international landline phone calls price by 150% which obviously is a beneficial measure, taking also into account that Moldova is one of the leading states when it comes to the percentage of Moldovan citizens working abroad[12] and the amount of remittances sent from abroad.

If we look at the data relating about the approximations of proposed rebalanced prices for the national landline calls which is shown in the Table 1, we find that the decrease in international phone calls are compensated by the increase in national calls prices. But from a social point of view, the national calls are more often used comparing to the international ones, which means that the benefits of the rebalancing are below the financial costs. And one more detail concerns the profile of people which use landline services: usually we can notice poor people (which don’t use mobile services) and, thus, the costs of rebalancing are being translated to social costs of the poorer part of the population. In terms of wealth creation, which I referred earlier, it is clear that society doesn’t have anything to gain out of this “rebalanced” situation; at least not in such a short period of time.

“[…] stakeholders […] should have access to relevant, sufficient and reliable information on a timely and regular basis”[13]

To stress the negligence of the information to which the stakeholders do (not) have access, I would imply the process which represented the main point of introducing and starting the rebalancing program by MoldTelecom.

In January, 2011, right after a national regulatory agency[14] decided that MoldTelecom doesn’t need to be anymore regulated, the company announced that the Diasporas of Moldovan citizens working abroad solicited MoldTelecom to decrease international phone call prices which was followed by a “strategy” presented by MoldTelecom and which in the end showed, as already specified, that social benefits were exceeded by the costs. In about three weeks, Moldovan Diasporas reacted and blamed MoldTelecom for inventing their solicitation. When MoldTelecom was asked to make public the solicitation they earlier implied, the company recognized that officially there was no document which was received from Moldovan Diasporas. However, MoldTelecom decided that the strategy of tariffs rebalancing will not be canceled.

Obviously the information which MoldTelecom provided to people was erroneous and had the unique goal: to introduce the rebalancing strategy as being consumers’ incentive. Certainly, MoldTelecom neglected the corporate government recommendation concerning the provision of stakeholders with relevant and sufficient information.

Conclusions and Recommendations

The MoldTelecom case is one of the most reliable examples on how inefficient and unclear are the strategies of such a big company having a strong political background – state-owned-enterprise and also which do neglect with international recommendations regarding the corporate governance principles. The role of stakeholders, mainly referring to consumers, is practically insignificant and their only linkage with the company comes up only with respect to provided services and paid bills.

However, the tendency to neglect with the principles of corporate governance disparage the position of the company on the market, decreasing the wealth of the population, lowering the efficiency of the activity and minimizing the credibility of the company. From this perspectives, there can be concluded several general, but important recommendations:

    1. The company should present publicly all the financial information concerning the activity of the company: ensuring financial transparency;
    2. The company should increase the transparency of the decision-making processes: explicitly presenting the explanation of the taken decisions and presenting reliable motivations using financial and non-financial argumentations;
    3. The state should clearly delimitate the responsibilities of regulatory agencies[15] which should be in charge for supervising the activity of the companies with a dominant position on the market;
    4. The stakeholders should actively participate in the decision-making processes and this participation should be ex ante, in this case I mainly refer to analysts and media;
    5. The regulatory agencies should define punishments (e.g. financial penalty) for using any invented data in order to motivate the decisions of the company.

What can be consequently extracted from these recommendations is that they are explicitly or implicitly linked to the OECD Principles for Corporate Governance, re-demonstrating that the respective document presents a compliable, embracing set of recommendations which has to be taken into account by companies in order to ensure their credibility on the market. This can be reached only by demonstrating that the responsibilities with respect to stakeholders are not negligible. And not less important is recognition that the consumers’ demand plays a strategic role in ensuring company’s activity sustainability.

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REFERENCES:

  1. Association of Chartered Certified Accountants: “Corporate Governance: the stakeholders challenge”, May 2001
  2. Journal of Business Ethics 53, 2004, Joseph Health, Wayne Normal: “Stakeholder Theory, Corporate Governance and Public Management”, pages: 247-265
  3. Gérard Charreaux, Philippe Desbrières: “Corporate governance: Stakeholder value versus Shareholder value”
  4. Moldovan Association for Private ITC Companies: “ICT Sector in Moldova. Policy White Book”, 2008
  5. The OECD Principles of Corporate Governance, 2004
  6. World Bank: “Corporate Governance Country Assessment”, Report on the Observance of Standards and Codes (ROSC), Moldova, 2004
  7. World Bank: “Moldova Country Assistance Evaluation”, Report nr. 28981, 2004

Websites:

  1. Code of Corporate Governance of Moldova: http://www.ecgi.org/codes/documents/cg_code_moldova_en.pdf
  2. MoldTelecom website: http://www.moldtelecom.md
  3. MoldTelecom’ Annual Reports: http://www.moldtelecom.md/ro/companie/rapoarte/
  4. National Agency for the Protection of Competition: http://anpc.md/index_en.php
  5. National Regulatory Agency for Electronic Communications and Information Technology of the Republic of Moldova: http://en.anrceti.md/front
  6. Wikipedia on Corporate Stakeholders: http://en.wikipedia.org/wiki/Stakeholder_(corporate)

[1] The OECD Principles of Corporate Governance; Chapter IV: The Role of Stakeholders in Corporate Governance, page 21

[2] Wikipedia on the Corporate Stakeholders: http://en.wikipedia.org/wiki/Stakeholder_(corporate)

[3] The National Regulatory Agency for Electronic Communications and Information Technology of the Republic of Moldova declared MoldTelecom as a company with a dominant position on the market on March, 2011

[4] World Bank, Moldova Country Assistance Evaluation, Report No.28981, Operations Evaluation Department, October 22, 2004

[5] Information provided by The National Regulatory Agency for Electronic Communications and Information Technology of the Republic of Moldova DATA

[7] World Bank: “Corporate Governance Country Assessment”, Report on the Observance of Standards and Codes (ROSC), Moldova, 2004

[8] The OECD Principles of Corporate Governance; Chapter V: Disclosure and Transparency, page 22

[10] Moldovan Association for Private ITC Companies: “ICT Sector in Moldova. Policy White Book”, 2008

[11] The OECD Principles of Corporate Governance; Chapter IV: The Role of Stakeholders in Corporate Governance, page 21

[12] The World Bank estimated that about 1/5 of Moldovan citizens are legally or illegally working abroad

[13] The OECD Principles of Corporate Governance; Chapter IV: The Role of Stakeholders in Corporate Governance, (D), page 21

[14] National Agency for the Protection of Competition: http://anpc.md/index_en.php

[15] National Agency for the Protection of Competition and the National Regulatory Agency for Electronic Communications and Information Technology of the Republic of Moldova

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Presentation of our team (my essay is related only to 1/4th of the slide-presentation):

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3 comments

  1. […] De multe ori am scris la subiectul MoldTelecom. Şi cu impresii generale, şi cu o analiză mai aprofundată din punct de vedere a organizării şi conducerii corporative. De fiecare dată […]

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  2. […] multe ori am scris la subiectul MoldTelecom. Şi cu impresii generale, şi cu o analiză mai aprofundată din punct de vedere a organizării şi conducerii corporative. De fiecare dată […]

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