CASE Network Report 47 - Secondary Privatization in Poland (Part I): Evolution of Ownership Structure and Company Performance in Firms Privatized by Employee Buyouts

P i o t r Ko z a r z e w s k i
R i c h a r d Wo o d w a r d
Secondary Privatization in Poland (Part I):
Evolution of Ownership Structure
and Company Performance in Firms
Privatized by Employee Buyouts
W a r s a w , 22 0 0 1
No . 44 7

This research was undertaken with support from
the European Union's Phare ACE Programme 1997,
project P97-8201R „Secondary Privatization: The Evolution
of Ownership Structure of Privatized Companies“,
co-ordinated by Professor Barbara B³aszczyk,
CASE Foundation, Warsaw. The content of the publication
is the sole responsibility of the authors and it in no way
represenets the views of the Commission or its services.
Key words: privatization, secondary transactions,
corporate governance, transition economies,
Czech Republic, Slovenia, Poland.
DTP: CeDeWu Sp. z o.o.
Graphic Design – Agnieszka Natalia Bury
Editing – Julia Iwiñska, Richard Woodward
Warsaw 2001
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted in any
form or by any means, without prior permission in writing
from the European Commission.
ISSN 1506-1647 ISBN 83-7178-277-2
Publisher:
CASE – Center for Social and Economic Research
ul. Sienkiewicza 12, 00-944 Warsaw, Poland
e-mail: case@case.com.pl
http://www.case.com.pl

3
Secondary Privatization in Poland (Part 1) ...
Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1. Introduction: The Role of Employee Buyouts in the Polish Privatization Process . . . . . . . . . . . . . .7
2. The Evolution of Ownership Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
2.1. Companies Dominated by Top Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2.2. Companies with Strategic Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
3. Factors in the Post-Privatization Evolution of Ownership Structure . . . . . . . . . . . . . . . . . . . . . . .17
3.1. Motivations for Choice of the EBO Privatization Method and Subsequent Changes
in Ownership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.2. Initial Ownership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
3.3. Sector, Company Size, and Unionization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
3.4. Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
3.5. Methods for Ownership Transformation: Share Sales and New Issues . . . . . . . . . . . . . . . . . . . . . . .22
3.6. Top Management Domination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
3.7. Companies with Strategic Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
4. The Economic Performance of Employee-Leased Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
4.1. Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
4.2. Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
4.3. Restructuring and Adjustment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
5. The Relationship between Ownership Structure and Productivity: Evidence
from the Early 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
5.1. Productivity Analysis: Estimating Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
5.2. Productivity Analysis: The Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
6. Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
6.1. Formation of Corporate Governance Bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
6.2. The Decision-Making Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
7. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
CASE Reports No. 47

Piotr Kozarzewski
Piotr Kozarzewski has worked for the CASE Foundation since 1992. He obtained a PhD in political science in 1999 from
the Institute for Political Studies of the Polish Academy of Sciences. He has participated in numerous research and adviso-ry
projects focusing on the systemic transformation of post-communist countries and especially on ownership transforma-tion,
in Poland and various post-Soviet countries (including Kyrgyzstan, Kazkhstan, Bulgaria and Belarus). His chief research
interest to date has been in the area of employee ownership, and he is the author of numerous publications on the subject
of employee-owned companies in Poland. Piotr Kozarzewski also works for the Institute of Political Studies of the Polish
Academy of Sciences, where he is involved in a study of the effects of privatisation of the Polish enterprises.
Richard Woodward
Richard Woodward has collaborated with the CASE Foundation since 1994. He graduated from the Pennsylvania State
University (economics) and received his PhD at the Department of Sociology and Economy of £ódŸ University (2000). He
has participated in numerous research projects on the privatisation and restructuring of state enterprises in Poland and
other post-communist countries, with a special focus on employee ownership issues. He also supervised the work of the
Polish researchers participating in an UNDP programme focused on the decentralisation of the public administration
(1997–1999) and a team conducting research on the institutional framework supporting small and medium-sized enter-prises
(1997–1999).
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P. Kozarzewski, R. Woodward
CASE Reports No. 47

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This volume contains the output of country research
undertaken in Poland by Piotr Kozarzewski and Richard
Woodward under the international comparative project
"Secondary Privatization: the Evolution of Ownership Struc-tures
of Privatized Enterprises". The project was supported
by the European Union's Phare ACE* Programme 1997
(project P97-8201 R) and was coordinated by Barbara
B³aszczyk from the Center for Social and Economic
Research (CASE) in Warsaw, Poland.
The support of the ACE Programme made it possible to
organize the cooperation of an international group of schol-ars
(from the Czech Republic, France, Poland, Slovenia and
the U.K.). The entire project was devoted to the investiga-tion
of secondary ownership changes in enterprises priva-tized
in special privatization schemes (i.e., mass privatization
schemes and MEBOs**) in three Central European countries
– the Czech Republic, Poland and Slovenia. Through a com-bination
of different research methods, such as secondary
analysis of previous research, analysis of legal and other reg-ulatory
instruments, original field research, statistical data
CASE Reports No. 47
base research and econometric analysis of individual enter-prise
data, the project aimed to investigate the scope, pace
and trends in secondary ownership changes, the factors and
barriers affecting them and the degree of ownership con-centration
resulting from them.
The authors begin with a general discussion of MEBOs in
Poland and go on to analyze ownership changes in a sample
of such companies. First, they present the initial ownership
structures created at the time of privatization and the evo-lution
of those structures through 1999, and then go on to
analyze the factors behind these changes and the relation-ships
between the evolution of ownership structures on the
one hand and economic performance and corporate gover-nance
on the other.
We hope that the results of this research will be of great
interest for everyone interested in the little-researched
question of what has happened to companies after privati-zation
in transition countries.
Barbara B³aszczyk
Preface
* "Action for Cooperation in the Field of Economics".
** Management-Employee Buyouts.

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CASE Reports No. 47

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1. Introduction: The Role of Employee Buyouts in the Polish
Privatization Process1
In the Polish literature and legislation relating to privati-zation,
two general types of privatization of state enterpris-es
are generally distinguished. The first, privatization by
commercial methods such as trade sales and initial public
offerings, is currently referred to as indirect privatization
(previously as capital privatization). The second, with which
we will be concerned in this paper, is currently referred to
as direct privatization (previously, as liquidation privatiza-tion2).
In direct privatization, the state enterprise is dis-solved
and its assets transferred (by one of three methods)
to the private sector. The three methods of direct privati-zation
are leasing of assets, sale of assets, and inkind contri-bution
of assets to a company. Leasing decidedly dominates
as the preferred form of direct privatization, and it is leased
firms that we are concerned with in this paper, as the vast
majority of employee buyouts in the Polish privatization
process have been generated via the leasing variant of direct
privatization3. In fact, since these employee buyouts only
become real buyouts after several years of leasing, in the
remainder of this paper we will refer to the companies in
question not as employee buyouts, but rather as employee-leased
companies.
In the leasing variant of direct privatization, at least 50
percent of the employees of the state enterprise being liq-uidated
must form a company to lease the assets of the
CASE Reports No. 47
enterprise. Moreover, no corporate investors or foreigners
were allowed to participate in the absence of special per-mission
from the privatization ministry4. For this reason
such companies are commonly referred to in Poland as
"employee-owned companies" (spó³ki pracownicze). By 31
December, 1998, 2966 state enterprises had completed
either privatization or "Article 19 liquidation" (see the first
footnote), with 240 indirect privatizations, 512 firms trans-ferred
to the National Investment Funds, 1515 direct priva-tizations
and 699 Article 19 liquidations. At this point, there-fore,
51.1 percent of all privatizations were direct privatiza-tions.
Since about 66 percent of the direct privatizations
were leasing cases5, by the end of 1998 lease-leveraged
employee buyout represented about one third of the complet-ed
privatizations carried out under the supervision of the priva-tization
ministry6, thus constituting the single most frequent-ly
used method (in terms of the numbers of enterprises pri-vatized.
It is important to note that this privatization
method was intended by Polish legislators to be applied in
the case of small and medium-sized enterprises, and for the
most part this has been the case in practice. Most of the
firms in this category are small- to medium-sized firms, usu-ally
with less than 500 employees. As of 1998, 78.2 percent
of leased companies had up to 250 employees, 19.7 percent
had 251–1000 employees, and 2.1 percent had over 10007.
1 This research was undertaken with support from the European Union's Phare ACE Program 1997, project P97-8201 R "Secondary Privatisation:
The Evolution of Ownership Structure of Privatised Companies", coordinated by Professor Barbara Blaszczyk, CASE Foundation, Warsaw. The content
of the publication is the sole responsibility of the authors and in no way represents the views of the Commission or its services. We would also like to
thank Professor Maria Jarosz of the Polish Academy of Sciences for kindly allowing us to utilize the data bases created in research projects conducted
under her direction.
2 This is not to be confused with liquidation based on Article 19 of the 1981 Law on State Enterprises. Article 19 liquidation is applied to an insol-vent
state enterprise, entailing its dissolution and the sale of its assets, and means the end of the enterprise as an economic unit, in contrast to direct
privatization, in which the economic activity of the state enterprise is continued.
3 Since 1995, we can also refer to the National Investment Fund program as a third type of privatization – Poland's version of voucher privatiza-tion.
Reference is also often made to "small privatization." No separate law governed this process, which generally affected very small businesses in the
areas of retail trade and consumer services (grocers' shops, restaurants, barber shops, etc.) and was largely carried out by local governments without
supervision by the privatization ministry.
4 The new privatization act of 30 August, 1996, requires that – unless a special exemption is granted – at least 20% of the shares of companies pri-vatized
by leasing be held by outsiders.
5 See Central Statistical Office (1999), 31, Kozarzewski et al. (2000), 32–33.
6 If one considers employment, direct privatization does not outweigh capital privatization so strongly, as total employment in firms privatized by
these two methods was – at least until recently – much closer to being equal. See Central Statistical Office (1995), 62–3.
7 See Kozarzewski et al. (2000), 50.

8
Year privatized Number %
1990 3 2.7
1991 41 36.9
1992 23 20.7
1993 14 12.6
1994 13 11.7
1995 8 7.2
1996 8 7.2
CASE Reports No. 47
Several preferential conditions facilitate this form of pri-vatization.
First, the 1990 Law on Privatization essentially
gave insiders precedence in privatizing their enterprises.
Second, preferential interest rates are applied for the lease
payments. The interest payment (referred to in Polish regu-lations
as the "additional payment" [op³ata dodatkowa]) was
originally set by the Finance Ministry at 75 percent of the
central bank refinancing rate. (Moreover, the interest pay-ments
could, to some extent, be postponed during the first
two years of the leasing period.) Finally, the corporate
income tax law allowed the firms to include the interest
portion of the lease payments as costs in their accounts,
thus reducing their tax liability. Later, it was determined that
if the central bank refinance rate were to exceed 40 per-cent,
the interest rate would be set at 30 percent (75 per-cent
of 40 percent)8. In 1993, the interest rate was lowered
again, to 50 percent of the refinance rate9. At the same time,
further favorable conditions were created in order to stim-ulate
investment in the employee-leased companies; these
provisions, as well as the difficulties which leased firms con-tinue
to face in spite of these measures, will be discussed
below. The new privatization act of 30 August, 1996, once
again liberalized leasing conditions somewhat.
The data about employee-leased companies used in this
paper were gathered directly in the companies during
research conducted by the interdisciplinary team headed by
Professor Maria Jarosz of the Polish Academy of Sciences: a
three-year study (1993–1995) devoted to employee privati-zation
(with a sample of 200 companies) and a four-year
study (1997–2000) devoted to direct privatization (the sam-ple
for this study included about 160 employee-leased com-panies)
10.
The samples were representative with respect to sector
(manufacturing, construction, services, trade), size (mea-sured
by number of employees) and region. Data were col-lected
using two methods: interviews with the main actors
in the companies and collection of hard data by question-naire
(these included data from the balance sheets and finan-cial
statements, as well as information on ownership and
corporate governance issues, employment, restructuring,
investments, etc.). Most financial and ownership data were
collected for several periods of time: immediately following
privatization, year-end, and at the time of the research (usu-ally
the middle of a given year). Thus, we use two separate
databases, each for three subsequent semi-panel polls:
1993–1996 (polls in 1993, 1994, and 1995) and 1997–2000
(polls in 1997, 1998, and 1999), which we refer to as Data-base
1 and Database 2, respectively.
The sample for Database 2, drawn on most frequently in
this paper, consists of 110 firms privatized between 1990
and 199611.
This constitutes 12.9% of the total number of compa-nies
privatized by the leasing method through the end of
1996.
For the purposes of the paper, all source data were
processed. Where we considered this useful, we also used
data from the earlier study as an additional source of infor-mation.
Some findings of other members of Maria Jarosz's
team are also referred to12. In discussing certain correla-tions,
we refer to various variables referring to ownership
structures using abbreviated labels. An explanation of these
labels and the variables, as well as tables containing the cor-relations
themselves, are found in the appendix13.
Table 1. Number of firms privatized, by year (%)
Source: own calculations using Database 2.
8 Zarz¹dzenie Ministra Finansów z dnia 7 maja 1991 r.
9 Zarz¹dzenie Ministra Finansów z dnia 13 maja 1993 r. (Monitor Polski 1993 nr 26, poz. 274).
10 For detailed discussions of the results of these studies, see Jarosz (ed.), 1994, 1995, 1996, 1999, 2000.
11 The moment of privatization is identified with the year in which the company was registered; we include among the firms privatized in 1990 one
which was actually registered in 1989, since the Polish privatization law was not adopted until 1990.
12 Most importantly, Gardawski (2000) and Kozarzewski (1999).
13 The analysis presented here is indicative of linear correlations only. No tests have been made for non-linear relationships.

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2. The Evolution of Ownership Structures
From the very beginning, employee leasing has been the
most "employee-oriented" privatization path, in terms of
ownership structure. Immediately following privatization,
insiders possessed, on the average, 92 percent of the shares
in the sample of employee-leased companies, and in 95 per-cent
of those companies, insiders owned over 50 percent of
the shares14.
In employee-leased companies, the share of non-man-agerial
employees in ownership has steadily decreased, from
58.7 percent immediately after privatization to 31.5 percent
in 1999. It is worth noting, however, that despite wide-spread
selling of their shares by non-managerial employees,
by 1999 only in 6 percent of firms had this group of owners
vanished completely. In most companies, non-managerial
employees retained at least minor blocks of shares. Very
often those blocks were very small: in 17 percent of the
firms they did not exceed 10 percent, and in almost half of
the companies (43 percent) non-managerial employees did
Table 2. Ownership structure in the average employee-leased company immediately after privatization (%)
CASE Reports No. 47
not have blocking capabilities at shareholders' meetings (at
least 25 percent of the votes). Because of the dispersed
character of these blocks of shares, in practice the voting
capacity of non-managerial employees is even weaker than
these numbers indicate. If we assume that this group would
need at least 50 percent of the shares in order to block cer-tain
decisions at a shareholders' meeting, then it is clear that
in at least 76 percent of the companies under review, non-managerial
employees lack decisive influence on the deci-sion-
making process as owners15.
While non-managerial employees were losing their
shares, the number of shares in the hands of outsiders
increased fivefold (from 7.6 percent to 38.5 percent).
Almost all of them are domestic investors; only three firms
have foreign investors (in two cases, strategic investors). A
large portion of the outsider shares represent concentrated
holdings: 44.4 percent of the outsider shares were held by
owners whom respondents referred to as strategic
14 Where weighted, average ownership structure figures are weighted by end-of-year employment for the year preceding the given ownership
structure observation.
15 Of course, they can influence decision-making in other ways, for example, through trade unions, workers' protests, etc. However, analysis shows
that the situation in almost all employee-leased companies is largely free of conflicts, with trade unions passive and even – in many companies – ceas-ing
to exist.
Shareholder groups Simple average
(%)
Weighted
average (%)
Outsiders 8.0 7.6
Managers 41.0 33.7
Non-managerial employees 51.0 58.7
Table 3. Percentage of employee-leased companies dominated by various owner groups immediately following privatization
Biggest shareholder group Simple average
(%)
Weighted
average (%)
Strategic outside investors 8.9 4.9
Managers 32.7 37.3
Non-managerial employees 50.5 57.8
a Domination by one of four main shareholder groups (strategic investors, other outside investors, managers, and non-managerial employees) is defined
by the group with the largest holdings.

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CASE Reports No. 47
investors. There is also a large group of private firms and
entrepreneurs (18.7 percent).
However, the second largest group of outsider owners
consists of unidentified "others" (34 percent of outsider
shares). One might hypothesize that this group consists
mostly of former employees of the companies who lost
their jobs due to layoffs, retired, or left for other reasons.
Respondents were not asked in the survey to identify
whether these "others" were in fact former employees, so
we can only test this hypothesis indirectly. Initial calculations
have not yielded clear results. There is negative correlation
between growth in the shares of this group between the
time of privatization and mid-1997 (GROO) and the change
in the shares of non-managerial workers (GRWOR) – that is,
the more the share of the workers fell, the more share of
"other" outsiders grew – and there is a positive correlation
between the change in employment from the time of priva-tization
to mid-1997 (P.C. CH) and GRWOR (so that, for
example, the more employment fell, the more the share of
workers fell). However, there is no direct correlation
between GROO and P.C. CH – between the drop in
employment and the growth in the "other" outsiders' share.
One might hypothesize that in cases in which employment
drops were particularly drastic, these drops reflected a dra-matic
worsening of the companies' economic prospects and
workers sold their shares (e.g., to management) in a des-perate
attempt to minimize their losses, in which case there
would be a negative correlation between GROO and P.C.
CH up to a certain threshold of employment reduction,
beyond which this correlation would disappear and be
replaced by a negative correlation between P.C. CH and the
growth in the share of Executive Board members
(GRMAN). And in fact, where employment reductions were
over 50%, there is a negative correlation between GRMAN
and P.C. CH. However, for other firms we observe no cor-relation
between GROO and P.C. CH. It is, however, quite
certain that we are not dealing with small portfolio investors
here, because of the generally small size of the companies
under review and the fact that less than two percent of
them are listed on the Warsaw Stock Exchange.
Tables 4 and 5 show how the detailed ownership struc-ture
of employee-leased companies evolved over the
course of time.
Interestingly, by comparing simple with weighted aver-ages,
we see that at the time of privatization, the role of
strategic investors is lower, and that of non-managerial
employees greater, in the case of weighted averages. This
means that strategic owners were generally involved in the
privatization of smaller than average companies, while the
percentage of shares belonging to non-managerial employ-ees
at the time of privatization was generally higher in larg-er
firms. By 1999 the situation has changed: while strategic
Table 4. Ownership structure of employee-leased companies (weighted averages; %)16
Shareholders
Immediately
after
privatization
1997 1998 1999
Outsiders
1. Strategic investors (domestic and foreign) 1.4 9.1 15.2 17.1
2. Other domestic outside investors
a. private firms – 0.6 1.5 2.1
b. commercialized firms – 0.4 0.4 0.0
c. private banks – – – –
d. state-owned banks – – – –
e. private businessmen 4.2 4.3 5.1 6.4
f. others 2.0 7.0 9.2 12.9
3. Other foreign investors – 0.1 0.1 0.0
Insiders
4. Supervisory board members employed in the
company*
9.4 10.6 6.1 3.9
5. Executive board members 8.7 13.4 15.1 14.2
6. Other managers 15.7 13.7 15.4 11.1
7. Non-managerial employees 58.7 41.0 31.8 31.5
TOTAL 100.0 100.0 100.0 100.0
* Note: Supervisory Board members in 1999 are only those who were also employees; prior to 1999 there was no such restriction in this definition.
16 In this and other tables "0" or "0.0" means that the frequency of occurrence of the given category is less than 0.5 or 0.05 respectively; a hyphen
means that the category is absent, and "x" means lack of data.

11
Table 5. Ownership structure of employee-leased companies (simple averages; %)
investor presence tended to be noted in smaller firms at the
time of privatization, in 1999 they tended to be present in
larger firms. Executive board members' shares are consis-tently
smaller when averages are weighted, meaning that
they tend to dominate in smaller firms. As mentioned
above, the higher non-managerial employee holdings in the
weighted averages at the time of privatization indicate that
at that time the largest group of employees exercised the
strongest ownership domination in the largest firms. By the
late 1990s, however, this difference has disappeared, indi-cating
that the holdings of this group are now relatively
equal with respect to the size of the firm.
We will analyze the structure of employee-leased com-panies
along two axes: concentrated versus dispersed own-ership,
and insider versus outsider ownership. A combina-tion
of these two axes gives us four main groups of
investors: (1) outsiders with small holdings, (2) strategic
outside investors, (3) insider shareholders with large hold-ings
(members of managing and supervisory bodies), (4)
insiders with small holdings (generally, non-managerial
employees). Table 6 illustrates the dynamics of ownership
structures with respect to these four groups.
We see that more and more shares are in the hands of
both outsider groups, while fewer and fewer shares are
held by non-managerial employees (although in 1999 the
employee shareholdings seem to stabilize). The position of
managerial staff is more stabilized, although recently they
have also begun to lose ground. Although it is not evident
from Table 6, earlier studies show that in the first half of the
1990s managers were actively buying shares from non-man-agerial
employees and increasing their holdings17.
Moreover, managers are a far from monolithic group,
consisting of three main subgroups: executive board mem-bers,
supervisory board members employed in the compa-nies,
and lower level managers. Through 1997, executive
and supervisory board members were actively increasing
17 For more, see Gardawski (1996), 96–98, and Kozarzewski (1999), 78–82.
CASE Reports No. 47
Shareholders
Immediately
after
privatization
1997 1998 1999
Outsiders
1. Strategic investors (domestic and foreign) 3.3 7.1 9.4 11.0
2. Other domestic outside investors
a. private firms – 0.6 2.1 2.7
b. commercialized firms – 0.4 0.2 0.0
c. private banks – – – –
d. sta te-owned banks – – – –
e. private businessmen 2.5 2.3 2.0 4.5
f. others 2.2 6.4 8.5 12.2
3. Other foreign investors – 0.2 0.7 0.6
Insiders
4. Supervisory board members employed in the company* 11.5 12.0 8.1 6.4
5. Executive board members 16.0 18.8 18.9 19.3
6. Other managers 13.5 11.9 14.5 11.0
7. Non-managerial employees 51.0 40.3 36.2 32.3
TOTAL 100.0 100.0 100.0 100.0
Table 6. Ownership structure dynamics in employee-leased companies, by major shareholder groups (weighted averages; %)
Shareholder groups
Immediately
after
privatization
1997 1998 1999
Strategic outside investor 1.4 9.1 15.2 17.1
Other outsider investors 6.2 12.3 16.3 22.0
Managers 33.7 37.6 36.7 29.4
Non-managerial employees 58.7 41.0 31.8 31.5
TOTAL 100.0 100.0 100.0 100.0

12
Table 7. Blocks of shares held by executive and supervisory board members (%)
their shares in the companies (Table 7). Later the situation
among executive board members stabilized, but the share
of the supervisory board members began to decrease rapid-ly.
This is probably not due to their selling of shares, but
rather to the rotation in supervisory board membership,
which is much higher than in the executive boards. As a rule,
former supervisory board members still have managerial
posts, and for this reason the total share of management
remains relatively stable.
The lower part of Table 7 shows that in order to effec-tively
exercise their voting rights, members of both boards
in question have to cooperate: thus, for example, in 1999
acting together they can control almost three times more
companies than if they act separately. The Jarosz group's
research confirms the large extent of synergy between
executive and supervisory boards, with the dominant posi-tion
of the executive board in the decision-making system,
in employee-leased companies18.
The data presented here fail to confirm earlier predictions
that the ownership structure of employee-leased companies
would tend towards steadily increasing management domina-tion19,
since in most companies the position of elites has sta-bilized.
However, two trends are confirmed: the decrease in
the shares of non-managerial employees and the increase of
those of outsider investors, both strategic and non-strategic.
Another earlier prediction concerned the appearance of
manager-outsider ownership coalitions20. The fact that in 57
percent of employee-leased companies, more than 50 percent
of the shares belong to managers and outsiders together, could
be seen as supporting this view. On the other hand, only 9 per-cent
of the companies have both an outside investor and an
inside investor possessing at least 10 percent of shares.
In the remainder of this section, we will concentrate on
changes in ownership structures in terms of shareholding by
three groups of shareholders – strategic investors, top man-agement
(i.e., Executive Board members), and non-manageri-al
employees – considering each group to have attained a dom-inant
block of shares when it exceeds 20%. First, in Table 8, we
look at how many firms had domination by each group at the
time of privatization and in 1997, 1998 and 1999, and then, in
CASE Reports No. 47
18 See Kozarzewski (2000a, 2000b).
19 See Gardawski (1995); Kozarzewski (1999).
20 See Gardawski (2000).
Immediately
after
privatization
1997 1998 1999
Average block of shares:
– executive board 8.7 13.4 15.2 14.2
– supervisory board 9.4 10.6 6.1 3.9
TOTAL 18.1 24.0 21.3 18.1
Percent of companies with ownership dominance of:
– executive board 7 8 8 8
– supervisory board 3 6 2 1
– both boards together 25 23 29 25
Source: own calculations using Database 1 and Database 2.
Table 8. Number of firms in which the given ownership groups had shares of at least 20%
At time of
privatization
1997 1998 1999
No data 8 9 13 14
Strategic investor (SI) 4 8 10 12
Executive board members (Managers) 5 10 10 8
Non-managerial employees 69 50 42 36
All three 1 1 0 2
SI and managers 0 0 1 0
Managers and employees 17 20 20 24
SI and employees 1 5 4 3
None 5 7 10 11
Total 110 110 110 110

13
Table 9. Transformation matrix
Table 9, we present a transformation matrix. The latter shows
the transformation trajectory of firms grouped with respect to
dominant shareholders at the time of privatization: in the
rightmost column, we see the number of firms in each group
at the time of privatization, and looking leftward, we see
where the firms in these groups ended up in 1997. The diag-onal,
in which the numbers are printed in boldface, shows
firms that remained in the same group in which they started.
Again, all this confirms that in general non-managerial
employees are slowly losing ground, while top management
and strategic investors tend to consolidate and increase
their holdings. We obtain an even sharper picture of the
concentration that is going on if we look at the average
shares of the single largest shareholder.
In Table 10 we see that in the average company, the sin-gle
largest shareholder held over one quarter of all the com-pany's
shares by 1998. This indicates a large degree of con-centration
on the average.
Analysis of simple correlations between various owner-ship
variables bears out the foregoing observations. The
variables analyzed (presented in detail in the appendix)
include the following: the percentage of shares held by
strategic investors (SI), by Executive Board members
(MAN), and by non-managerial employees (WOR), the per-centage
of the work force holding shares (OWN), dummy
variables for the degree of equality of shareholding (EQ1,
EQ2, EQ3, and EQ4, in ascending order of equality).
Relationships between various ownership variables tend to
be pretty much as one would expect. Thus, for example, the
size and growth of the shares of strategic investors and Execu-tive
Board members on the one hand and the size and growth
of non-managerial employees' shares on the other. There is a
positive correlation between WOR and EQ3, which is logical
given that EQ3 is a dummy representing a relatively high
degree of equality and WOR the percentage of company's
shares held by non-managerial employees (discrepancies
between these two measures can arise in cases in which a large
number of employees have been laid off or left the firm for
other reasons but kept their shares). There is a correlation
between equality and the percentage of the work force hold-ing
shares (OWN), as evidenced in the negative correlations
between EQ1 and OWN. Similarly, there is a positive relation-ship
between equality and the percentage of shares held by
non-managerial employees (WOR), as EQ3 is positively corre-lated
with WOR and EQ1 negatively correlated with WOR for
all three observations. Conversely, there is a positive correla-tion
between MAN and EQ1. Generally, the size and growth
of the shares of strategic investors and top management are
positively correlated with the percentage of company shares
held by the single largest shareholder (BIG). Again, as we
would expect, we observe a positive correlation between the
growth of non-managerial employees' shares (GRWOR) and
the year of privatization (YR1) and a negative correlation
between YR1 and the growth of strategic investors' shares
CASE Reports No. 47
Had over 20% in 1997
Had over 20% at
time of privatization
No
data
SI M Wor SMW SM MW SW None Total at
time of
priv.
No data 5 0 0 1 0 0 2 0 0 8
Strategic investor
0 3 0 0 0 0 0 1 0 4
(S)
Exec. Bd. memb.
(M)
0 0 4 0 0 0 1 0 0 5
Non-mg. workers
(W)
3 4 2 48 0 0 5 3 4 69
All three 0 0 0 0 1 0 0 0 0 1
S & M 0 0 0 0 0 0 0 0 0 0
M & W 0 0 4 1 0 0 12 0 0 17
S & W 0 0 0 0 0 0 0 1 0 1
None 1 1 0 0 0 0 0 0 3 5
Total 9 8 10 50 1 0 20 5 7 110
Table 10. Holdings of the single largest shareholder (weighted averages)
N Minimum Maximum Mean Standard Deviation
1997 88 0.1 86.3 22.896 20.592
1998 93 0.3 100.0 27.652 26.075
1999 108 2.0 100.0 27.364 25.507

14
time of privatization 1997 1998 1999
Strategic vestor in 0.00 0.29 -1.09
State Treasury -- - 5.32
Individual entrepreneurs 1.23 0.77 0.56 0.74
Other outside investors 1.49 1.03 2.49 3.51
Supervisory Board members* 5.95 11.37 5.92 3.15
Executive Board members 32.23 38.33 44.00 39.71
Other managerial employees 20.47 19.29 20.37 11.12
non-managerial employees 38.64 28.92 26.66 35.36
CASE Reports No. 47
(GRSI). This means that the earlier the firm was privatized, the
more the worker share has fallen and the more the strategic
investor share has grown.
We now turn to a more detailed analysis of the evolution
of ownership structures in two groups of companies: those
with large ownership shares of top management (i.e., Exec-utive
Board members) and those with strategic investors.
2.1. Companies Dominated by Top
Management
Holdings of top management – i.e., Executive Board
members – were over 20% in 23 firms, or less than a quar-ter
of sample, at the time of privatization, in 31 (almost a
third) in 1997 and 1998, and 34 in 1999.
A comparison with the sample as a whole (see Table 1) is
not particularly enlightening. While among the firms dominated
by top management a higher percentage was privatized in 1991,
a higher percentage was also privatized in 1995 and 1996.
Next, we look at the average ownership structure in
these firms, comparing those which already had top man-agement
domination at the time of privatization with the
larger group of those that had such domination in mid-1997.
Both groups look very similar; in particular, in both we
observe a decline in top management holdings from 1998 to
1999. The most significant difference between the two
groups appears to be the smaller average share held by top
management in the larger group, where top management
had not been in a dominant position from the very begin-ning.
This is quite clearly an indication of inertia.
Next, we compare firms in which top management gained
control between the time of privatization and mid-1997 with
those in which it neither had such control at the outset nor
gained it later. We do this by looking at the initial ownership
structure of the five firms in which top management held less
than 20% at the time of privatization but at least 20% in 1997,
comparing it with that of the 68 firms in which top manage-ment
held less than 20% as of mid-1997 and for which we
have the appropriate data.
Table 11. Firms with top management domination in 1999, by
year of privatization
Number Percent
1990 1 2.9
1991 16 47.1
1992 3 8.8
1993 4 11.8
1994 3 8.8
1995 3 8.8
1996 4 11.8
Total 31 100.0
Table 12. Firms with top management shares > 20% at time of privatization (weighted averages)
Table 13. Firms with top management shares > 20% in mid-1997 (weighted averages)
time of privatization 1997 1998 1999
strategic investor 0.00 0.19 3.06 4.50
private firms -- - 0.91
state-owned companies - - 0.43 -
State Treasury -- - 3.16
individual entrepreneurs 0.81 0.51 0.35 0.44
other outside investors 1.06 5.85 6.01 7.29
other managerial employees 20.54 18.00 21.13 15.85

15
Table 14. Firms in which top management gained domination: Initial ownership structure
Minimum Maximum Mean Standard
strategic investor 0 0 0.00 0.00
individual entrepreneurs 0 0 0.00 0.00
other outside investors 0 1 0.27 0.44
Supervisory Board members 0 22 8.50 8.69
Executive Board members 4 17 8.75 4.97
other managerial employees 7 31 19.41 8.72
non-managerial employees 49 74 63.08 10.15
Table 15. Firms in which top management does not dominate: Initial ownership structure
Examination of the two above tables shows that there is
very little difference between the two groups with respect to
their average initial ownership structure. The most significant
difference seems to be that in the group in which top man-agement
later attained domination, lower levels of manage-ment
had larger holdings than in those firms in which top man-agement
had not gained a share of over 20% by mid-1997.
2.2. Companies with Strategic Investors
As of mid-1997, 13 companies had such investors; 17
companies had them in mid-1998. No new strategic
investors appeared in 1999.
Comparing with the privatization dates of firms in the
sample as a whole, it seems that companies privatized ear-lier
may have a slight advantage in finding strategic outside
investors (over 70% of them were privatized before 1993,
whereas slightly over 60% of the sample as a whole was pri-vatized
in that time).
Foreign investors were present in only two firms in the
sample by mid-1998 (one of which had gained its foreign
investor in the year since the previous survey, in 1997). Both
companies were privatized in 1991.
As in the case of firms dominated by top management,
we look at the average ownership structure in these firms,
comparing those which already had strategic investors at
the time of privatization with the larger group of those that
had them in mid-1997.
CASE Reports No. 47
Deviation
Deviation
For the last group (of which only five firms provided data
on their ownership structure), the absence of data from
even a single firm in one year can create large fluctuations in
the mean values (and in fact we observe such fluctuations),
so we should exercise great caution in interpreting the pat-terns
in the Table 18.
Next, we compare the initial ownership structure of the
eight firms that had no strategic investors at the time of pri-vatization
but found them by mid-1997 with that of the 84
firms that had no strategic investor as of mid-1997 and for
which we have the appropriate data.
It is interesting to note that in companies that found strate-gic
investors after privatization, top management owned
much fewer shares at the time of privatization than in the case
of those that did not find strategic investors later. This is borne
out by analysis of correlations between various ownership
variables, which shows, for example, negative correlations
between the shares of strategic investors (SI) and those of
Executive Board members (MAN) in 1997 and 1999.
Table 16. Number of companies with strategic investors in 1998,
by year of privatization
Number Percent
1990 1 5.9
1991 9 52.9
1992 2 11.8
1993 2 11.8
1994 1 5.9
1996 2 11.8
Total 17 100.0

16
CASE Reports No. 47
Table 17. Firms with strategic investors in mid-1997: ownership structure (weighted averages)
time of
privatization
1997 1998 1999
private rms fi -- 0.686 3.19
state-owned companies - - 0.954 -
individual entrepreneurs 0.38 0.20 2.321 -
other utside nvestorso i -8.43 8.640 14.23
Table 18. Firms with strategic investors at time of privatization: ownership structure (weighted averages)
time of
privatization
1997 1998 1999
private firms -- - 10.67
individual trepreneurs en 2.86 1.16 --
other utside vestorso in -7.49 25.704 10.05
Executive Board members 3.50 2.83 -11. 67
Table 19. Firms that gained strategic investors: initial ownership structure (weighted averages)
Deviation
Table 20. Firms without strategic investors: initial ownership structure (weighted averages)
Deviation

17
3. Factors in the Post-Privatization Evolution of Ownership
Structure
3.1. Motivations for Choice of the EBO
Privatization Method and Subsequent
Changes in Ownership Structure
Employee privatization is a privatization method used
only when it is chosen by insider actors. What are those
actors' goals in employing this method of privatization in the
enterprises where they work? Members of company elites
were asked about this issue in interviews carried out by the
Jarosz research team.
In their responses, managers of the companies declared
purely material goals aimed at the survival of their enterpris-es.
Contrary to what might have been expected, such issues
as independence of the firm, propertization and mobilization
of employees, etc., were mentioned very rarely. But even if
the main actors in state-owned enterprises were not advo-cates
of employee ownership, the employee leasing path was
attractive for them because, on the one hand, it was a rela-tively
easy privatization method (especially for small and
medium-sized enterprises), and on the other hand, it elimi-nated
the threat posed by outsiders, thus minimizing the
impact of privatization on existing interests and power struc-tures.
This path was also attractive for non-managerial
employees because it gave them a chance to acquire a title to
part of the enterprise's property and opened up the prospect
of material profits from dividends and capital gains.
It took some time, however, for managers to become
aware of the links between share ownership and authority
in a capitalist system. Once this became clear to them, they
began to concentrate shares in their hands more actively. By
the mid-1990s, this process of "economization of mentality"
was more or less complete.
CASE Reports No. 47
In addition to the incentive for management to acquire
shares in order to consolidate its power, there are various
factors that can contribute, alternatively, to the perpetua-tion
of the initial (rather dispersed) ownership structure or
to particular types of changes, while others can have
ambivalent impacts on ownership changes. One variable we
will look at as having a possible effect on both ownership
changes and other types of activity in the firm is unioniza-tion.
This is due to the fact that unionization can be seen as
a measure of employee power which may compound the
effects of the power that employees exercise as owners in
the companies of this sample. As we see from table 21, a
large number of the companies – almost half – lack unions
altogether.
In Table 22, we categorize a number of psychological
and behavioral factors, as well as factors related to the legal
environment, with respect to their impact on the evolution
of the ownership structures of employee-leased companies.
We believe that the patterns of ownership structure evolu-tion
observed in employee-leased companies are to a large
extent determined by those factors.
Nevertheless, the analyzed group of companies is
quite heterogeneous. It varies with respect to size, sec-toral
affiliation, financial condition and many other specif-ic
factors. In Sections 3.2 to 3.4, therefore, we analyze
the impact of those factors, as well as unionization, to find
reasons for particular deviations from the most common
pattern of evolution (presented at the beginning of the
previous section). In Section 3.5 we look at methods for
ownership transformations (including trade in shares and
issues of new shares), and in Sections 3.6 and 3.7 we
attempt to investigate the factors behind transitions to
management domination and strategic owner presence in
particular.
Table 21. Firms with no unions, by year
Number Percent N
At time of privatization 24 30.8 78
1997 21 26.9 78
1998 47 43.5 108
1999 24 38.7 62

18
Table 22. Chief factors behind perpetuation and change of the initial ownership structure of employee-leased companies
3.2. Initial Ownership Structure
We begin our analysis with an investigation of the ques-tion
of path dependency: how does the initial ownership
structure at the moment of privatization (in terms of domi-nance
of a certain group of owners) influence the further
evolution of ownership structures? Our analysis began with
a presentation of the transition matrix in Table 9, which
showed that outside strategic investors and top manage-ment
are steadily gaining ground (although the position of
the latter seems to have stabilized and may even be begin-ning
to decline), and non-managerial employees are steadily
losing it. In Table 23, we take a closer look at the evolution
of the ownership structure in the companies, grouping them
with respect to the type of owner dominant at the time of
privatization.
Companies with a concentrated insider pattern of initial
ownership also seem to tend towards the average owner-ship
structure for the whole sample, although in manager-dominated
companies the share of managers fell more
rapidly than elsewhere in the period 1997–1999. Interest-ingly,
it is in these companies that outside strategic investors
had the least opportunities to acquire shares.
The direction of some processes in these two groups of
companies differs from that in the group of initial strategic
investors' dominance, where insider shareholders have
practically disappeared and almost two thirds of the shares
are now concentrated in the strategic investor's hands.
Changes in the shares of managers and outside investors
have, as experience shows, two opposite vectors: on one
hand, recently more and more strategic outsiders, especially
in small firms, have become strategic insiders by acquiring
top managerial posts in the companies. This can be seen
when analyzing the unweighted ownership structure data:
comparing to the previous year, in 1999 the unweighted
share of strategic investors fell almost two times from 63.4
to 38.1 percent. On the other hand, newly nominated mem-bers
of the Executive Board are often formally not emp-loyees
of the companies for taxation reasons. In initially out-sider-
dominated companies, managers could attempt to buy
shares from strategic outsiders in order to regain control,
while some strategic outsider investors could have become
disillusioned with the companies and begun to sell their
shares. Finally, changes in proportions between managers
and non-managerial employees could be caused by – among
other things – rotation of managerial posts among insiders.
3.3. Sector, Company Size,
and Unionization
The next table shows the trends in ownership changes
by sector. We see that construction companies are the most
"outsiderized" in the whole sample, while in services firms
were not able to find a strategic external investor. In manu-facturing
and trade we see some increase in outsider share-
CASE Reports No. 47
Factors Perpetuation Change
Mentality and behavior
“Legacy” of state-owned
enterprise
- organizational structure
- structures of power and influence
- old mentality of insiders
Changes in the
position of various
insider groups
- fear of outsiders - property factor: ownership = power
- reconfiguration of functions and tasks
- insiders have to adapt to new conditions
- perception of outsiders as representing an
opportunity for new investments,
management techniques, etc.
Legal environment
Privatization law - employee leasing is insider-dominated
- corporate partners and foreigners barred
from participation in privatization
- lower leasing fees (since 1997)
- faster transfer of title to assets to
employee-leased company (since 1997)
- outsiders should hold at least 20 percent of
shares (since 1997)
- faster transfer of title to assets to
employee-leased company (since 1997)
Commercial Code - companies’ charters can contain
restrictions on circulation of shares
- new organizational structure
- system of property rights
- mechanisms of raising capital, share issues
and share trading

19
Table 23. Evolution of ownership structure, by initial ownership structure of the companies (weighted averages; %)
holdings, especially non-strategic, but still the biggest share
of property remains in the hands of insiders.
Company size is often regarded as very strong factor deter-mining
various characteristics of enterprise behavior. We there-fore
looked at the relationship between the degree of concen-tration
and firm size (measured by employment). The only con-sistent
correlation is the positive one between EQ3 and size at
the time of privatization and in 1997, which is easily explained:
Given low levels of personal savings at the beginning of the
CASE Reports No. 47
transformation, it was more difficult for an individual or small
group of individuals to buy a large block of shares in a large com-pany
than in a small firm. It is also clear (see Section 4.3) that
management ownership on the average appears in relatively
small companies, while strategic investors appear in companies
whose average employment is above the sample average.
Is there a relationship between the direction of owner-ship
structure changes and size? In table 25, we show the
ownership structure evolution in three groups of companies
Strategic investor Other
outsiders Managers Non-managerial
employees
Initial strategic investors’ dominance
Initial 53.3 2.9 37.4 6.5
1997 33.8 9.9 47.2 9.1
1998 48.9 33.9 0.3 16.9
1999 70.6 16.8 3.4 5.6
Initial managerial dominance
Initial 0.0 13.4 59.2 27.4
1997 1.9 14.5 65.4 18.2
1998 0.1 25.3 51.3 23.3
1999 3.6 26.0 45.5 25.0
Initial non-managerial employee dominance
Initial 0.0 3.9 25.4 70.7
1997 7.0 12.4 28.1 52.6
1998 16.2 12.0 32.7 39.1
1999 12.8 21.0 27.3 38.9
Table 24. Evolution of ownership structure, by branch (weighted averages; %)
Strategic investor Other outsiders Managers Non-managerial
employees
Manufacturing
Initial 0.7 9.5 33.0 56.9
1997 1.8 12.4 39.2 46.6
1998 4.5 21.3 38.3 35.9
1999 7.5 25.6 31.5 35.4
Construction
Initial 2.8 4.9 31.7 60.7
1997 23.3 17.5 31.5 27.8
1998 28.6 17.6 24.2 29.6
1999 32.4 21.1 22.0 24.0
Trade
Initial 1.3 1.8 46.0 51.0
1997 0.1 9.9 57.2 31.9
1998 7.0 12.4 53.6 27.0
1999 8.1 22.8 44.2 24.9
Services
Initial 0.0 1.7 29.3 69.1
1997 0.0 11.8 28.1 60.1
1998 0.0 10.6 42.9 46.5
1999 0.0 16.1 33.3 50.6

20
Table 25. Evolution of ownership structure, by size of companies (%)
Strategic investor Other outsiders Managers Non-managerial
– small, medium-sized, and large21. As it turns out, the dif-ferences
between the first two groups are not very great. In
small and medium-sized companies, we observe an extend-ed
period of accelerated propertization of managers in
1997–1998. Large companies seem to have undergone a
more dynamic evolution, with a much larger share going to
strategic investors, and the managerial share falling in
1997–1998.
It is very hard to explain differences in ownership
changes with respect to sector and size, although these vari-ables
undoubtedly affect the processes observed. In the
course of the study conducted by the Jarosz team, a hypoth-esis
was formulated that different patterns of ownership
transformations are determined primarily by sector and
number of employees. The hypothesized relationships are
illustrated in Table 2622. The author of this hypothesis,
Juliusz Gardawski, assumes that "there is a certain optimum
ownership structure for small and medium-sized firms
established as a result of privatization of state-owned enter-prises"
23 and that this optimal structure is determined pri-marily
by social relationships within the firm24.
In Table 27, we present an analysis of ownership changes
with respect to sector and size. This table shows that the
situation is far more complex and not always consistent with
the relationships hypothesized by Gardawski. Our results
are different for all of manufacturing and for most construc-tion
and trade firms. Additionally, it must be noted that sev-eral
subgroups are too small to be representative; some are
21 We define small companies as having up to 100 employees, medium-sized companies as having 101–200 employees, and large companies as
CASE Reports No. 47
having more than 200 employees.
22 Gardawski (2000), 163.
23 Ibid., 158. Here Gardawski assumes that almost all directly privatized companies are small or medium-sized.
24 Ibid, 151–158.
employees
Small
Initial 2.7 5.6 36.6 55.2
1997 2.1 5.7 40.8 51.4
1998 2.6 9.3 45.1 43.0
1999 4.7 10.8 40.1 44.4
Medium-sized
Initial 1.8 6.4 38.4 53.4
1997 2.0 13.9 45.1 39.0
1998 2.4 10.0 46.8 40.8
1999 4.4 19.3 40.6 35.7
Large
Initial 1.2 6.1 32.6 60.1
1997 7.7 13.4 36.6 42.1
1998 15.7 20.0 33.0 31.3
1999 17.6 24.7 27.3 30.2
Table 26. Ownership patterns in employee-leased companies in 1999 (Juliusz Gardawski)
Sector Size of employment Form of ownership
Manufacturing
Small
Medium-sized
Large
Investor companiesa
Manager companies
Manager-investor companies
Construction
Small
Medium-sized
Large
Manager-employee companies
Trade
Small
Medium-sized
Large
Manager companies
Manager-investor companies
Investor companies
a By "investors" we understand external investors (outsiders).
Source: Gardawski (2000), 163.

21
Table 27. Ownership structure in employee-leased companies, by sector and number of employees, in 1999 (%)
Number of employees Strategic investor Other outsiders Managers
made up of only a single firm. In fact, only two groups of
companies bear out Gardawski's hypothesis: small con-struction
and medium-sized trade firms.
Moreover, there is significant correlation between size
and sector themselves. By the end of 1998, the average
company in manufacturing employed 337 persons, in con-struction
194, in trade 157, and in services 101 persons (the
average for the whole sample was 203 persons).
Finally, unionization is negatively correlated with the top
management share at the time of privatization and in mid-
1997, and negatively correlated with the non-managerial
employee share in 1999. It is, however, not clear whether
employee power resulting from unionization directly pre-vents
management from accumulating employee shares, or
whether the ownership effect is not due indirectly to union
power, by virtue of unions' preventing layoffs (unionization
is also negatively correlated with employment changes
between the time of privatization and the end of 1996), and
thus preventing worker shareholders from becoming out-sider
shareholders. Interestingly, unionization is not corre-lated
with TRSI, indicating that unions do not constitute a
barrier to the entry of strategic investors.
3.4. Profitability
There are also strong correlations between size and
sector on one hand and the financial situation in the com-panies
on the other, reflecting the external conditions in
which companies in various groups were operating. The
simplest and most rigorous measure of financial perfor-mance
is net profit (after payment of all liabilities except
leasing obligations). If we divide the companies into two
groups, those with net profits and those with net losses,
we see that by the end of 1998, the best situation was
found in services, where there were no loss-making com-panies
at all. In construction, 12 percent of the firms had
losses, in trade – 27 percent, and in manufacturing – 31
percent. Bigger companies more often had losses than the
smaller ones: among large firms 23 percent were loss-making,
medium-sized – 17 percent, and among small
firms – 15 percent. These figures confirm the existence of
cross-correlations between the three variables (size, sec-tor,
and financial performance).
Table 28 shows the evolution of ownership structures
in companies grouped according to net profits or losses in
1993. This year was chosen as a starting point for com-parison
because it is the earliest year for which econom-ic
data in Database 2 is available. Selection of the earliest
possible data allows us to minimize the impact of subse-quent
ownership changes on the financial situation of the
firms.
In this table we see that initially in loss-bearing compa-nies
there were no outside investors at all, although these
companies were undoubtedly in great need of financial
resources; outsiders were probably not interested in
acquiring such enterprises. In 1997–1998, 7 to 9 percent of
CASE Reports No. 47
Non-managerial
employees
Industry
Up to 100 employees – 4.3 57.7 38.0
101-200 employees 21.4 38.6 27.1 12.9
More than 200
6.6 25.9 29.8 37.7
employees
Construction
Up to 100 employees 10.1 15.2 28.3 46.4
101-200 employees 27.6 3.1 44.9 24.4
More than 200
38.4 27.2 14.5 19.1
employees
Trade
Up to 100 employees 7.8 20.9 36.5 34.9
101-200 employees 15.5 31.4 35.8 17.3
More than 200
– 13.9 56.2 29.9
employees
Services
Up to 100 employees – 23.8 26.6 49.6
101-200 employees – 15.1 28.3 56.6
More than 200
– 13.0 41.2 45.8
employees
Two biggest shareholder groups in each category of companies are marked bold-italic.

22
Table 28. Evolution of ownership structure, by net loss vs. net profit (weightted averages; %)
Strategic
Investor
these companies already had strategic investors, and by
1999 as many as 50 percent did – mostly at the cost of man-agers
which were selling their shares. The very quick
growth of the share of non-strategic outsiders before 1999
is most likely due to large-scale layoffs in those companies.
At the same time, the shares of managers and non-manage-rial
employees decreased very significantly: by 1999, the for-mer
group lost almost two thirds of their initial amount of
shares, and the latter group lost more than two thirds of ini-tially
possessed shares.
In the group of profitable companies, slow growth of
shares of outside strategic investors is striking. It seems that
the need for such investors is usually only felt when the sit-uation
in the company is very poor.
We conclude, therefore, that the most powerful factor
determining the dynamics of ownership changes in the
companies is their economic condition. When a company
is doing well, the internal relations in the company are sta-ble,
and none of the main actors has an incentive to
undermine this stability. When a company encounters
severe economic problems, the actors begin to look
around for solutions. The most obvious one is to find an
external investor who brings an injection of fresh capital.
When major inside shareholders and stakeholders have to
choose between survival of the company and preservation
of their shares, they tend to choose survival, at the same
time trying to keep some shares for themselves. In such
conditions, moreover, non-managerial employees lose
every possible motivation for them to hold on to their
shares: the shares never allowed them to participate in
management, and now they don't even bring dividends. In
earlier studies, a strong positive correlation was discov-ered
between lack of dividends and selling of shares by
non-managerial employees25.
3.5. Methods for Ownership
Transformation: Share Sales and New
Issues
In most cases trade in shares was not a completely spon-taneous
process. The main actors behind the privatization of
the companies took care to minimize the risk of unwanted
changes in the ownership structure in their firms. The char-ters
of the great majority of companies (87 percent) con-tained
restrictions on such trade. They were aimed at three
main goals: (1) not to allow shares to "leak" outside the firm;
(2) to facilitate ownership concentration in the hands of
management elites, and (3) to prevent the emergence of
new large shareholders within the firm who could under-mine
the position of governing groups. Several methods
were used to this end: right of first refusal by current own-ers;
requiring share owners selling their shares to receive
prior permission at the shareholders' meeting, or from the
supervisory board (sometimes even the executive board);
prohibition of share sales to outsiders, etc. Nevertheless,
the processes of ownership redistribution often proved to
be stronger than the restrictions, even in the companies
where all trade in shares had been prohibited. Those
restrictions only delayed changes (especially sales of shares
to outsiders), but could not stop them completely26.
Post-privatization ownership transformations, more-over,
were achieved not only by trade in existing shares but
also by issues of new ones. Nineteen firms had carried out
new share issues by mid-1997. Of these, 11 were closed
and 3 were public (we have no information on the charac-ter
of five of the new issues). Of the 11 closed issues, recip-ients
of new shares in all eight firms that we have informa-tion
about were limited to persons already holding shares.
CASE Reports No. 47
25 See Kozarzewski (1999), 85–86.
26 For more, see ibid., 87.
Other
outsiders Managers Non-managerial
employees
Net losses in 1993
Initial – – 49.9 50.1
1997 7.4 8.1 55.9 28.6
1998 9.0 24.6 50.8 15.6
1999 50.0 17.0 17.9 15.1
Net profit in 1993
Initial 0.2 5.8 31.0 63.0
1997 5.8 13.2 35.2 45.9
1998 13.9 16.8 34.1 35.2
1999 11.8 22.9 31.7 33.6

23
Table 29. Management-owned companies and entire sample, by population of headquarter location
Most frequently, new share issues serve to promote con-centration
of shares (especially in the hands of management
and strategic investors), as evidenced by the positive corre-lations
between new issues (the dummy variable NEW) and
variables such as TRCON, TRSI, GRSI, and TRM. Correla-tion
analysis also shows a positive correlation between new
issues and company size, a negative correlation between
new issues and the size of top management's share at the
time of privatization, a negative correlation between NEW
and YR1 (meaning that the earlier the privatization took
place, the greater the likelihood that a new issue has
occurred in the meantime), and a positive correlation
between new issues and a transition to domination by a
strategic investor (the dummy variable TRSI).
Looking more closely at the latter relationship, we see
that of the 13 companies with strategic investors as of mid-
1997, six had carried out new issues, and seven had not. We
have information on the character of four of them, and all
four were closed. Of the three firms that declared having
had a public listing, none had a strategic investor. It appears,
therefore, that strategic investors appear in employee-owned
companies through new share issues as often as
through buying out the employee shareholders, and that
employee-owned companies listing publicly are not looking
for, and/or not finding, strategic investors.
3.6. Top Management Domination
Geography does not appear to be a factor in the transi-tion
to management domination. If we look at the size of
the cities in which the companies in which Executive Board
members held at least 20% of the shares in 1997 are head-quartered,
we see that there seems to be virtually no dif-ference
between the firms dominated by management and
the sample as a whole.
With respect to branch, the only apparently significant
difference between the firms dominated by management
and the sample as a whole is the larger number of trade
companies and smaller number of construction companies
among the former.
In almost all of the firms in which top management held
a share of over 20% in mid-1997, respondents said that the
firm was operating on a competitive market (24 such
responses). Only one respondent claimed to be a monopo-list,
and four claimed to be oligopolists.
In conclusion, management ownership does not seem to
be related to geographic factors or such economic factors
as branch or market share. As we shall see, the situation
with respect to companies in which strategic investors have
appeared is somewhat different.
3.7. Companies with Strategic Investors
As in the case of management-owned companies, loca-tion
seems to constitute no special advantage in finding an
investor (Table 31).
By contrast, as we see in table 32, there are significant
differences between companies with strategic investors and
the sample as a whole with respect to branch. Manufactur-
CASE Reports No. 47
Management-owned companies Whole sample
POP1 3 (9.7%) 9 (8.3%)
POP2 5 (16.1%) 16 (14.7%)
POP3 11 (35.5%) 28 (25.7%)
POP4 3 (9.7%) 23 (21.1%)
POP5 9 (29.0%) 33 (30.3%)
Table 30. Management-owned companies and entire sample, by branch
Management-owned companies Whole sample
Number Percent Number Percent
Food processing 1 3.2 8 7.3
Other manufacturing 7 22.6 21 19.0
Construction 5 16.1 33 30.0
Transport 1 3.2 3 2.7
Trade 12 38.7 26 23.6
Services 2 6.5 8 7.3
Consulting and design 3 9.7 11 10.0
Total 31 110

24
Companies with strategic investors Whole sample
POP1 2 (11.8%) 9 (8.3%)
POP2 2 (11.8%) 16 (14.7%)
POP3 3 (17.6%) 28 (25.7%)
POP4 5 (29.4%) 23 (21.1%)
POP5 5 (29.4%) 33 (30.3%)
Companies with strategic investors Whole sample
Number Percent Number Percent
Food processing 3 17.6 8 7.3
Other manufacturing 4 23.5 21 19.0
Construction 7 41.2 33 30.0
Transport -- 3 2.7
Trade 3 17.6 26 23.6
Services -- 8 7.3
Consulting nd esign a d -- 11 10.0
CASE Reports No. 47
Table 31. Companies with strategic owners and entire sample, by population of headquarter location
Table 32. Companies with strategic owners and entire sample, by branch
ing and construction are more strongly represented among
the group with strategic investors than in the sample as a
whole. Trade is represented more weakly, and services are
not represented at all.
Market share does not seem to differentiate companies
with strategic investors from those dominated by Executive
Board members. Of the 13 companies with strategic
investors as of mid-1997, one claimed to be a monopolist,
three claimed to be oligopolists, and nine said they were
operating on highly competitive markets. Correlation analy-sis
yields no evidence of a relationship between market
share and the presence of strategic investors.
There appears to be evidence that size (employment) is
a factor in attracting strategic investors (positive correla-tions
between TRSI and end-of-year employment in 1996
and 1998), but there is also evidence that strategic investors
have a positive effect on employment (no correlation
between 1996 end-of-year employment and SI, but a posi-tive
correlation between end-of-year employment in 1998
and SI; also, a positive correlation between SI at the time of
privatization and employment changes between the year
before privatization and the end of 1996). The direction of
causality therefore seems very difficult to ascertain, and we
cannot say whether larger companies attract investors, or
whether investors increase employment (or both).
Respondents from companies with strategic investors
were asked whether they had had trade relationships with
the strategic investor previous to the latter's acquisition of
shares. Of the 17 firms, we obtained no answer to this
question from nine, and the remaining eight were evenly
divided between those that had and those that had not
maintained such contacts prior to the investor's acquisition.
These data are clearly insufficient to allow us to draw any
conclusions.

25
4. The Economic Performance of Employee-Leased
Companies
In this section we will review both previous studies of
employee-leased companies in Poland and our own
research results in order to evaluate the economic perfor-mance
of the companies and assess, at least tentatively, the
relationships between this performance and various factors,
including ownership structure and ownership changes.
4.1. Profitability
The financial results of employee-owned companies seem
to be generally fairly sound in spite of the burden of lease pay-ments
and the restructuring needs facing all firms emerging
from Poland's former state-owned sector. The data in Table
33 allow one to compare the financial situation in employee-owned
companies and state enterprises preparing for privati-zation
by the leasing method with that in companies that have
undergone capital privatization and companies participating in
the National Investment Fund program.
These data show that profitability indices for the average
Polish employee-leased company have been close to – and
Table 33. Gross profitability (ratio of gross profit or loss to total revenues)
Employee-leased companies 6.4 6.3 6.0 4.9 4.5
State enterprises currently
undergoing direct privatization 3.1 0.3 1.6 1.0 0.5
Capital-privatized companies 4.9 6.5 4.4 6.3 4.9
Companies designated for
participation in NIF program 4.2 2.5 0.23 1.6 -0.5
Source: Kozarzewski et al. (2000), 49.
CASE Reports No. 47
sometimes even better than – the average indices for firms
privatized by the capital method. In addition, they are much
higher than those of state enterprises and firms participating
in the NIF program27.
It is, however, worth noting that this profitability index
has been consistently falling from year to year, and that prof-itability
was best for those types of enterprises which were
least typical among the group of employee-leased compa-nies;
i.e., among large industrial enterprises employing over
300 persons28.
4.2. Investment Activity
High interest rates and considerable imperfections in the
Polish banking sector rendered access to funds for the
financing of investments difficult for practically all Polish
enterprises, and especially small businesses, throughout the
first half of the 1990s29. During this period, it was often
claimed that leased companies in Poland were characterized
by exceptionally low levels of investment activity. One group
1994 1995 1996 1997 1998
27 See Ministry of Ownership Transformation (1995), 3. The vast difference between reported financial results for firms preparing for liquidation
privatization and those preparing for capital privatization may reflect the use of "creative accounting" due to the different incentives facing the two types
of firms: while the managers of the former type of firms are, for the most part, preparing to purchase the firm themselves, they have an incentive to
underreport the financial results and value of the assets of the firm with a view toward negotiating as low a price as possible with the Ministry of Own-ership
Transformation; the managers of firms being prepared for capital privatization, however, are looking for outsiders to purchase the firm and there-fore
wish to make the firm as attractive as possible.
28 See Pietrewicz (1995), 54.
29 See "Eyeing up the risk".

26
of researchers found a tendency to low investment and
decapitalization in employee-owned companies compared
with the national economy as a whole30.
However, as their name implies, leased companies must
make regular – and sometimes very burdensome – lease
payments, to which a large portion of profits must be dedi-cated,
thus limiting the possibilities for using retained earn-ings
to finance investment; additionally, these firms have
exceptional difficulty (in comparison with other privately-owned
firms) in obtaining bank credits, since (at least in the
early phase of their operation) they do not own, but only
lease, their physical capital and thus possess inadequate col-lateral31.
Some of the consequences of the debt burden
incurred as a result of the leasing construction of most
employee-leased companies are investigated in the Jarosz
group's research, which includes analysis of the liquidity
indices for their sample of firms in comparison with nation-al
averages. The current ratio (i.e., the ratio of current
assets to current liabilities) was, on the average, not parti-cularly
good, but better than the national average in 1993; in
addition, the national average was falling at that time, while
the index for the sample of leased companies was rising. (It
should, however, be noted that the average current ratio in
employee-leased companies in the trade and services sec-tors
was much lower than the sample average; the index for
these firms was on the threshold of becoming threateningly
low and was, moreover, below the national average.) The
same situation was observed with regard to the quick ratio
(i.e., the ratio of current assets minus average reserves to
current liabilities). Similarly, the ratio of long-term debt to
equity was found to be quite high, averaging 2.47 for the
entire sample for 1993 (7.52 in firms employing 100 persons
or fewer)32.
Various governments have made some attempts to alle-viate
this problem. The reductions of the interest rate paid
on the leases have been discussed above (in Section 1). In
addition, a measure to stimulate investment was included in
the 1993 regulatory changes. According to these provisions,
a leased company can apply to its founding organ for a
reduction of the interest payments owed by the company as
a result of postponements during the first two years of the
leasing period if its investment expenditures out of profits
amount to at least 50 percent of its net profit. The new pri-vatization
act of 30 August, 1996, also included a provision
intended to enhance the creditworthiness of employee-leased
firms when applying for bank loans. According to
Article 52, the title to the assets being leased may be trans-ferred
to the leased firm after it has paid only one third of
the obligations resulting from the leasing contract if two
years have passed since the signing of the leasing contract;
this term may even be shortened to one year if the firm has
paid at least one half of those obligations.
In addition to the difficulties arising from the lack of col-lateral,
it is worth noting that the leasing method of privati-zation
is explicitly intended for firms which are considered
to require little investment33.
Bearing all of the foregoing in mind, it is difficult to con-duct
research on, or make conclusive statements about the
level of investment in leased companies – or, for that mat-ter,
any Polish companies (except in the case of foreign-owned
companies where the level of investment is general-ly
so high in comparison with other privatized companies
that it cannot fail to escape notice) – due to the fact that reg-ulation
of depreciation allowances (not reformed until the
passage of the 1999 corporate income tax act) made it
unprofitable for companies to show investment expendi-tures
as such on their income statements (tax liabilities were
decreased by including such expenditures on the cost side
instead). However, already in the early 1990s there was
some evidence that an "elite" of leased companies was
investing on a scale comparable with that observed in enter-prises
privatized by the capital method but without foreign
investors34. Moreover, anecdotal evidence indicates that as
more and more employee-owned companies pay off their
Table 34. Average value of investment projects, per employee (in PLN)
30 See Pietrewicz (1995), 39–40.
31 See Jarosz (ed.) (1995), 16.
33 See Supreme Control Chamber (1993), 9, Uchwa³a Sejmu Rzeczypospolitej Polskiej z dnia 12 lutego 1993 r. w sprawie podstawowych kierun-ków
prywatyzacji w 1993 r., and Kierunki prywatyzacji maj¹tku pañstwowego w 1995 r.
34 See Szomburg et al. (1994), 39, 54. Investment spending in capital-privatized firms with foreign investors was vastly greater than that in capital-privatized
CASE Reports No. 47
firms without foreign investors.
Mean Minimum Maximum Standard
Deviation
N
Sum 1992-1997 6.43 0.00 128.62 13.4625 110
1998 4.66 0.00 128.44 13.6108 106

27
Table 35. Number of firms that obtained investment credit
leases, acquiring legal titles to the property which they had
been leased and thereby gaining the ability to secure loans
with collateral, their access to commercial credit has grown
considerably, thus considerably increasing the level of
investment.
We try to investigate some of these questions using the
data in Database 2.
Table 34 provides evidence that a considerable acce-leration
of investment had oc-curred by the late 1990s.
The mean investment project underway in 1998 had a
per-employee value of about two thirds the per-employ-ee
value for all such projects in the years 1992–1996.
Table 35 shows a similar trend with respect to the num-ber
of firms in the sample that had obtained credit.
Of 108 firms that answered the appropriate question,
26 firms had paid off their leases by mid-1998 (24.1% of
valid responses). Did this increase their access to credit?
Perhaps too little time has elapsed since the payoff of the
leases for statistical relationships to emerge from the
data. At any rate, there is no correlation between the fact
that a company has paid off its lease on the one hand and
either 1998 per-employee investment spending or financ-ing
of such investment by credit on the other.
The question of dividend payments is a difficult one. On
one hand, the failure to make dividend payments may repre-sent
an abuse of shareholder rights by management (via use of
"creative accounting" to "artificially" increase the level of costs,
thus reducing profits and thereby tax liability and the pool of
funds to which shareholders could exercise a claim). On the
other hand, the opportunity cost of dividend payments is
decreased funds available for investment, and therefore
"asceticism" in the area of dividend payments may represent a
pro-investment orientation of the shareholders and a consen-sus
on their part to favor investment over the immediate grat-ification
of dividends. As table 37 indicates, such asceticism is
widespread among employee-owned companies.
However, the data yield no statistical evidence that this
asceticism leads to greater investment. There is no correla-tion
between the dividend payments in either 1998 or 1999
and per-employee investment spending in 1998, and there
is actually a positive correlation between 1995 and 1996
dividends and 1996 investment spending. (Similarly, there is
a positive correlation in 1999 between the dummy indicat-ing
whether a dividend was paid and the variable measuring
expansion into new markets.)
Does ownership make a difference with regard to the pay-ment
of dividends (i.e., do different types of owners have dif-ferent
preferences with regard to tradeoff between invest-ment
and immediate gratification in the form of dividends)?
There is a negative correlation between the dummy indicating
whether a dividend was paid in 1997 on the one hand and the
share belonging to non-managerial employees at the time of
privatization and in 1997, and a positive correlation between
the 1997 dividend dummy and the 1997 shares of strategic
investors. On the other hand, there is negative correlation
between the ratio of the dividend payment to the net profit
Table 37. Number of firms that made, and did not make, dividend payments, 1997–1998
Not paid 55 50.0 57 52.8 74 67.3
Paid 55 50.0 51 47.2 36 32.7
CASE Reports No. 47
Number Percent N
1992-1996 31 33.3 93
1998 21 24.4 86
Table 36. Average investment spending, 1993–1996 (in millions of pre-1995 zlotys) 35
Deviation
N
1993 303.51 0 5200 864.87 70
1994 476.91 0 10840 1517.96 88
1995 379.72 0 10989 1227.71 110
1996 601.74 0 17874 2253.85 110
1997 1998 1999
Number Percent Number Percent Number Percent
35 This table is based on figures from the companies' income statements for the relevant years. Unfortunately, for the years 1997 and 1998, we do
not have such figures, but rather the total value of current investment projects.

28
and the strategic investor share, and a positive correlation
between this ratio and the worker share. We can therefore
conclude that in 1997 companies dominated by workers were
less likely to pay dividends than those dominated by strategic
investors, but if they did pay them, they tended to pay out a
higher percentage of the profits in the form of dividends. In
contrast, there is a positive correlation between the dividend
dummy for 1999 and both the percentage of the workforce
owning shares (OWN) and the percentage of the workforce
belonging to a trade union (UNI) in 1999. So overall, these
relations are rather ambiguous.
Less ambiguous, and very surprising, is the complete
absence of any correlation between various measures of
strategic investor shares and their growth on the one
hand and investment variables or paying off the lease on
the other. In other words, there is no statistical evidence
that the presence of a strategic investor actually leads to
more investment! In contrast, for 1999 (but not for 1997),
there is a positive correlation between concentration in
the hands of management (TRM, but not GRMAN) and
investment spending. Interestingly, per-employee invest-ment
spending for the period 1992–1996 is positively cor-related
with EQ336 – the least concentrated ownership
structure – whereas in 1999 it is negatively correlated
with OWN. Evidence concerning the relationship
between the degree of non-managerial employees' partic-ipation
in ownership and investment is therefore rather
ambiguous.
There is consistently a positive correlation between the
value of investment projects and the use of credit as a means
of financing them, which would tend to support the claims
that lack of access to credit is one of the main explanatory
factors for the low rate of investment in employee-owned
companies in Poland. Interestingly, use of credit is not cor-related
with size. In 1999, it was negatively correlated with
the number of layoffs between the year of privatization and
the end of 1996 (positive correlation with P.C. CH)37, and
positively correlated with the acquisition by Executive
Board members of ownership shares exceeding 20% during
the same period (TRM).
Finally, investment spending in 1992–1996 and in 1996
was positively correlated with the size of the firm (employ-ment),
and investment spending in the period 1992–1996
was positively correlated with the dummy indicating
whether a new share issue had occurred during the same
period (NEW).
Summarizing the results of this analysis, we conclude
that size and access to credit do seem to be key variables in
the determination of the level of investment spending, but
neither the propensity to pay dividends nor the ownership
structure seem to be related in any consistent and significant
way to investment activity.
4.3. Restructuring and Adjustment
Activity
Restructuring and adjustment activity in employee-leased
firms tended in the first half of the 1990s to be con-centrated
in increased promotional activity and adjustments
of a simple, costreducing nature (e.g., employment reduc-tions),
involving little in the way of introduction of new
products or significant improvement in the level of technol-ogy38.
Later, however, an increase in investments of an inno-vative
nature was found39.
Employee-owned companies have shown a great deal
of elasticity in their employment policies, often engaging
in significant layoffs (in firms that are on the average rela-tively
small to begin with). Overall, employment in the
sample consistently fell from year to year, as the table
below shows. On the average, employment fell between
Table 38. Average end-of-year employment, by year
36 It is also positively correlated with the size of the workforce and the oligopoly dummy.
37 It is also negatively correlated with the growth in the ownership share of "other" outsiders (GROO), which may further suggest a positive rela-tionship
CASE Reports No. 47
between the growth of their share and the number of layoffs (see the discussion in Section 2).
39 See Krajewski (1998), 108–109, Krajewski (2000), 123–124.
Deviation
N
1992 262.14 6 1749 294.72 76
1993 226.58 6 1882 275.65 90
1994 219.74 5 2002 276.77 99
1995 211.97 3 1942 268.69 104
1996 206.50 3 1919 262.79 110
1997 201.32 3 1713 246.79 106
1998 192.37 2 1693 240.90 110

Table 39. Average end-of-year employment in companies owned by top management and strategic investors, by year
Companies with top management domination Companies with strategic investors
N Mean Minimum Maximum Mean Minimum Maximum N
1992 22 184.32 6 723 374.46 21 990 13
1993 28 163.54 6 643 362.00 21 964 12
1994 30 151.07 5 606 342.80 21 864 15
1995 33 144.48 3 624 323.00 21 821 16
1996 34 151.06 3 629 299.29 31 751 17
1997 33 158.12 3 638 296.82 34 805 17
1998 34 139.06 2 627 281.59 34 778 17
Table 40. Positive responses to new market expansion question, 1997–1999
Number of positive responses Number of firms %
0 42 38.5
1 31 28.4
2 25 22.9
3 11 10.1
Table 41. Positive responses to new market expansion question, 1997–1999
40 In 1997 they were asked if they had acquired them since privatization; in 1998 and 1999 they were asked if they had acquired them in the pre-vious
year.
29
the end of the year prior to privatization and the end of
1996 by 13.3%.
It should be noted that the maximum values are outliers,
as in 1997 only two companies in the sample had employ-ment
of over 1000.
As noted in Section 3.4, unionization is negatively corre-lated
with employment changes between the time of priva-tization
and the end of 1996, providing some evidence that
unions were effective in preventing layoffs, at least early on.
Later the situation seems to change: while 1997 unioniza-tion
is positively correlated with employment in the year
before privatization and at the end of 1996, unionization in
1999 is not correlated with employment at the end of 1998.
A comparison of tables 38 and 39 shows that average
employment in the companies that have attracted strategic
investors is consistently higher than the sample average,
while average employment in those owned by top manage-ment
is consistently below average. These companies are
similar to the others in the sample, however, in that they
also consistently reduced employment throughout the ana-lyzed
period. Moreover, there appears to be no significant
difference in the rate at which employment was reduced
over the course of the entire period.
Two measures of adjustment and restructuring activity
that we expected to be particularly telling are measures of
employment in marketing and expansion into new markets.
Sixty-three firms (57.3% of the sample) had marketing units
as of mid-1999. The average employment in these units was
2.12 persons. The existence of a marketing unit and the size
of that unit were both positively correlated with employ-ment
at the end of 1998. These variables were not, howev-er,
correlated with any ownership variables, with invest-ment
indicators, or with expansion into new markets.
With respect to new markets, the respondents were
asked on three occasions whether they had acquired new
markets40. A majority had (table 40), and almost half of the
firms that had not acquired new markets were in trade, as
table 41 shows.
One was a monopolist, two were oligopolists, and 35
were in competitive markets. However, as in the case of
marketing activity, expansion into new markets has little
correlation with other variables, and the few correlations
CASE Reports No. 47
Frequency Percent
Food processing 2 4.8
Other manufacturing 5 11.9
Construction 8 19.0
Trade 19 45.2
Services 8 19.0
Total 42 100.0

30
which do exist (with EQ2 and OWN) do not seem to admit
of any explanation.
Finally, we looked at the question whether concentrated
ownership had affected ISO quality certification (Table 42).
In terms of actual certification, there is virtually no dif-ference
between the percentages of certified firms in the
three groups; however, a significantly lower proportion of
firms with strategic investors have no ISO certificate and do
not plan to obtain one than in the other two groups. More-over,
a much higher percentage of firms with strategic
investors is in the process of certification.
CASE Reports No. 47
Table 42. ISO quality certification by ownership group, 1998
Top management
domination
Strategic investor Whole sample
Number Percent Number Percent Number Percent
No data -- 1 5.9 2 1.9
Certified 4 12.9 2 11.8 13 12.0
In process of
certification
2 6.5 4 23.5 11 10.2
Intends to obtain
certificate
3 9.7 4 23.5 16 14.8
Not certified and not
planning certification
22 71.0 6 35.3 66 61.1
Total 31 100.0 17 100.0 108 100.0

31
5. The Relationship between Ownership Structure
and Productivity: Evidence from the Early 1990s
In this section we present the results of econometric
analysis of the relationship between the ownership struc-ture
of employee-leased companies and productivity41. In
particular, we would like to know whether the extent of
participation of non-managerial employees is related to
enterprise performance. The sample is very well suited to
such an analysis due to its great diversity with respect to the
extent of employee participation in share ownership, with
firms ranging from virtually no employee ownership to
complete employee ownership. The analysis was carried
out using data from Database 1.
5.1. Productivity Analysis: Estimating
Framework
We analyze productivity here using an augmented pro-duction
function framework that has been used in several
earlier studies analyzing the relation between employee
participation and productivity42. Ideally43, the logarithmized
production function estimated is a Cobb-Douglas function:
lnV lnK lnL Z X it it it it it it = α +α +α +α +α +μ 0 1 2 3 4
where V denotes value added, K and L represent capital and
labor inputs, respectively, X is a vector of industry and
enterprise-specific variables such as dummies for the year
of production and the branch in which the enterprise oper-ates,
Z is a vector of participatory variables, firms are
denoted by the subscript i, the time period in years by t, and
the residual by μ.
We estimate the models using Ordinary Least Squares
(OLS) techniques. Ordinarily, the endogeneity of the inde-pendent
variables would rule out use of the OLS method.
However, researchers studying the relation between
employee participation and productivity use this technique
due to the fact that it is more robust against specification
errors than simultaneous equations methods44.
5.2. Productivity Analysis: The Results
For this analysis, a fairly large portion of the sample was
eliminated. This was due to the fact that various branches of
manufacturing were represented by too small a number of
firms. Thus, we were left only with firms in construction,
trade, and services. The results of the OLS estimations are
reported in Table 43.
Before discussing these results, some remarks on the
quality of the data and its implications for our analysis are in
order. Unfortunately, no measure of capital costs (e.g.,
depreciation) is included in the data. For this reason, con-struction
of a value added variable was impossible. More-over,
in a number of studies of labor productivity in trans-forming
economies, researchers have used sales revenues
rather than value added in constructing measures of pro-ductivity45.
This is most likely due to the fact that the manip-ulation
of profits in post-Communist economies is endemic
for a number of reasons. Two reasons are: first, the fact that
an increase in the enterprise's profits entails a proportional
increase in its tax liability, and second, the fact that some
portion of profits is often distributed to shareholders in the
form of dividends. In order to avoid such "losses" to the
state treasury and shareholders and retain as much money
in the firm as possible, managers manipulate their accounts.
These manipulations occur on the cost side (for instance, by
including some part of investment costs in production
costs).
41 A full discussion of this analysis is found in Woodward (1999). An earlier version was published in Woodward (1998).
42 See Estrin et al. (1987), Conte and Svejnar (1988), and Jones (1993).
43 Departures from the ideal are discussed in Section 5.2.
44 In fact, the use of OLS to estimate production functions is generally accepted as appropriate. See Zellner et al. (1966).
45 See, for example, Brada and Singh (1995), Grosfeld and Nivet (1998).
CASE Reports No. 47

32
Table 43. OLS estimates of productivity effects (using sales revenues instead of value added)
Variable Construction Trade Non-material services
lnL 0.981263*
For this reason, we performed regressions using the nat-ural
logarithm of sales revenues instead of that of value
added. With respect to non-participatory variables, we
observe the following. Population coefficients appear only
for one sector. We see that here, large population positive-ly
affects sales, and smaller population negatively affects
sales. Amortization is significant in only one sector, but its
coefficient has a negative sign, as one would expect.
Turning to the ownership variables which are our chief
interest here, we note, first, that a number of them do not
appear in the estimations at all, including EQ2 and OWN.
A coefficient for variable WOR – i.e., the percentage of
shares held by non-managerial employees – appears in two
sectors; it is negative, but insignificant, in both. A high
degree of concentration (EQ1) has a negative relationship
with productivity in four sectors (significant in two). The
coefficient for unionization is positive and significant, but
very small. In one case EQ3 appears, with a coefficient
which is negative and significant. This result is the only one
which can be interpreted as evidence of a negative rela-tionship
between (a relatively) egalitarian ownership struc-ture
and productivity.
CASE Reports No. 47
(10.10735)
0.429334*
(3.07973)
0.62137*
(5.40815)
lnK 0.151614*
(2.38320)
0.350398*
(3.20938)
0.20496*
(3.47193)
YEAR 0.208879*
(2.48804)
POP2 -1.35048*
(-3.97939)
POP5 0.90459*
(6.02102)
AMORT -0.02946*
(-5.76673)
EQ1 -0.367536*
(-2.34528)
-.410853*
(-2.70768)
EQ3 -0.495985*
(-3.09907)
WOR -0.003266
(-1.11267)
-0.00517
(-1.77634)
UNI 0.006062*
(2.53779)
n 86 52 40
adjusted R2 .81642831 .78083193 .84440984
Asterisks indicate coefficients which are statistically significant at the 95 percent confidence level.
Figures in parentheses are t-statistics.
Source: Own calculations using Database 1.

33
6. Corporate Governance
6.1. Formation of Corporate Governance
Bodies
Privatization, as one of the pillars of the construction of
the new economic and social relations in Poland's market
economy, is effective only if it spurs innovation in the man-agement
of enterprises. Privatization cannot, therefore, be
seen as a simple matter of transferring shares to private
hands; rather it involves a play of interests regulated by the
Commercial Code and business practice: the interests of
the new owners, in whose hands the chief decision-making
powers are vested, and those of various stakeholders.
Mechanisms are set in motion serving to harmonize the
interests of these main groups. The ownership and stake-holder
configurations emerging in the context of privatiza-tion
play a decisive role in determining the firm's fate46,
shaping authority structures that, in turn, direct the com-panies'
post-privatization development and orientation.
Thus, the reorganization of ownership is accompanied by a
reorganization of management and control structures; the
question is, how deep and effective is this latter process?
Of course, this process represents a very complicated
task. In the most highly developed market economies, corpo-rate
organizational structures were formed in a longlasting,
largely spontaneous, process. The organizational structure,
tasks and functions of management and control bodies were
subject to permanent evolution directed at ensuring the best
possible defense of owners' interests. Legislative codification
of these structures and functions represents a sort of consen-sus
regarding "best practices" which had already emerged. In
the post-Communist countries, by contrast, these structures
were formalized by legislative means, overnight as it were,
without a preceding phase of spontaneous evolution.
In contrast to many post-Communist countries, Poland
inherited, at the outset of its transition, a continental European
(three-tier) model of corporate governance laid out in its Com-mercial
Code, dating from the 1930s, which had never been
suspended by the Communist authorities. However, the leg-islative
circumstances are of secondary concern to us here.
More important for our purposes is the mechanism for super-vision
of the company's executive bodies implied in adoption of
the continental model. This is particularly important in Poland,
as the influence of various forms of so-called external control
(e.g., product and financial markets) is in many cases still not
fully effective. In such conditions, the efficient functioning of so-called
internal supervision assumes fundamental importance.
The basic task of the new body introduced into Polish
enterprises as a result of ownership transformation – the
supervisory board – consists in supervision of the compa-ny's
operations on behalf of – and in the interests of – its
owners. Lately, more and more frequently opinions are
expressed that the supervisory board should not confine
itself to representing exclusively the interests of the own-ers,
but rather become a platform for coordinating the
manifold interests in which the company is involved; i.e., to
be a stakeholder forum. Without entering into a discussion
on whether, in Polish conditions, the supervisory board
should shoulder this additional responsibility, we will
attempt to determine the extent to which such a function
has been assumed by the supervisory boards in the com-panies
under review. The formation and definition of the
supervisory board's goals and functions, of its place among
other organs of the company, is extremely complicated in
Poland, where this body faces the brand new task of per-forming
supervisory functions in the name of the share
owners, a concern which did not exist in the state-owned
enterprise.
The supreme element of the executive line of authority
– the executive board – has a very wide range of powers
and is limited only insofar as certain powers are reserved
for the owners themselves, acting through the sharehold-ers'
meeting.
Shareholders' Meeting
The impact of ownership changes on the composition
of the general assembly of shareholders is obvious. Partici-
46 See Frydman and Rapaczynski (1994).
CASE Reports No. 47

34
25%
33% 19%
20% 24%
16%
80
70
60
50
40
30
20
10
pation in shareholders' meetings and the degree of influ-ence
on decision making at those meetings are strictly
dependent on the size of one's share in the company's share
capital. Therefore, the constellation of interests and power
within this body is implied in the analysis of the ownership
structure of employee-leased companies. In this section we
will attempt to describe the general assembly's place with-in
the authority structure of the firm with respect to other
organs and interest groups.
Supervisory Board
The supervisory board is appointed by the sharehold-ers.
It is (at least in theory) a supervisory and not a man-agement
body, despite the fact that, in the nature of things,
it cannot be excluded from participation in the firm's influ-ence
structure.
Based on responses to the Jarosz team's survey, we can
confirm that a large majority of companies aspire to create,
at least formally, a corporate governance body with the full
range of responsibilities, implying that their owners are
aware of the advantages of separating the ownership and
control functions. Supervisory boards (which are required
in companies exceeding certain size limits) exist in 86 per-cent
of all the companies under review. This conclusion is
supported by the fact that the minority of companies that
have dispensed with a supervisory organ are mostly limited
to the very smallest ones (in terms of employment, charter
capital and number of owners).
One of the most important traits of the personal com-position
of the supervisory boards under review is the very
high participation of insiders (most notably managerial
employees). Interestingly, after a drop in their participation
to 19 percent in 1998 from 33 percent in 1997, we wit-nessed
an increase to 25 percent in 1999. On the other
hand, the percentage of board members employed in the
firm in non-managerial posts has grown steadily over this
three-year period (16 percent, 20 percent and 24 percent,
respectively). As a result, in 1999, the overall share of insid-ers
in the membership of supervisory boards returned to
the 1997 level (i.e., 49 percent). Among the outsiders,
managers from other firms continue to make up the largest
category (22 percent in 1997, 27 percent in 1998, and 24
percent in 1999), of which three fourths are managers from
private companies (Figure 1).
The column "Total" in Table 44 contains detailed data
on the personal composition of supervisory boards in the
companies under review in 1999. In comparison with ear-lier
years, it seems to have remained very stable. There
are still very few experts from various fields of knowledge
potentially useful to this body's work: the joint share of
bankers, consultants, scientific and technological experts
and professionals amounted to 9 percent in 1997 and 7
percent in 1999. Thus, in practice, little use is made of one
of the basic instruments for equipping the supervisory
boards with the capacity for exercising expert control on
behalf of the owners.
We see that the composition of supervisory boards con-tinues
to be dependent primarily on the ownership struc-ture:
outsider dominance in the ownership structure is
accompanied by outsider dominance in supervisory board
membership. The most "outsiderized" supervisory boards
are in the companies dominated by an outside strategic
investor (79 percent of board members in such cases do
not work in the company). The same applies to the domi-nance
of managerial and non-managerial employees. Lack
of dominance of any of the insider groups is correlated with
managerial dominance of the supervisory board. We
observe a larger than average share of private managers
CASE Reports No. 47
Figure 1. Basic groups of supervisory board members (% of total number of members)
22% 27% 24%
0
1997 1998 1999
Insiders – managers
Insiders – non managers
Outsiders – managers

35
Table 44. Composition of the supervisory board in 1999, by categories of ownership dominance (%)
and consultants in the supervisory boards of companies
dominated by strategic outside investors, which should give
these boards superior capacity to carry out their supervi-sory
function competently.
This aggregate picture of the composition of superviso-ry
boards fails to convey the diversity of combinations of
forces and interests found in different boards. The repre-sentation
of different groups (most importantly insiders
and outsiders) varies widely across companies. In 1999, in
more than half (51 percent) of the boards under review,
the majority was made up of people who were not
employees of the given firm, and in 20 percent the boards
were made up exclusively of outsiders. In 47 percent of the
supervisory boards insiders dominated, and in 28 percent
there was not a single person from outside the firm. When
viewed over a longer period of time, the evolution of the
composition of the supervisory boards has not been unidi-rectional.
Contrary to what one might expect in view of
the process of ownership "outsiderization", the position of
insiders measured by numerical dominance in the compo-sition
of different boards was markedly strengthened in
1998–1999. At the same time, polarization into purely
"insider" and purely "outsider" boards was accentuated.
A closer look at the problem reveals that this seeming
paradox actually constitutes a continuation of earlier con-centrated
trends: in companies belonging to the employ-ees,
institutional control is increasingly concentrated in the
hands of insiders, while in the "outsider" companies their
employees are more and more often allowed to participate
in the organs of corporate governance.
This can be seen as evidence that the corporate gover-nance
system in Polish companies is gradually nearing the
continental model. Moreover, this process has entered a
new phase in which this adjustment does not stem primar-
CASE Reports No. 47
Ownership structure of the company; dominance of:
Post occupied outside
the supervisory board
TOTAL Strategic
outsiders
Other
outsiders
Managers
Non-managerial
employees
Without
dominant
group
At the firm under review
Managerial post 25 14 12 25 38 37
Specialist 12 4 14 20 16 11
Trade union activist 1 2 – – 2 2
Non-managerial post 11 1 9 8 24 13
Outside the firm under review
Managerial post in state-owned
enterprise 5 – 8 6 4 4
Managerial post in private sector 19 37 20 13 3 13
Bank employee 3 3 1 1 1 3
Employee of state administration 3 4 3 – 2 1
Employee of local administration 1 – – 2 – –
Scientist 3 3 1 4 2 3
Employee of consulting firm 1 6 – 1 – –
Private businessman 8 10 25 8 1 6
Pensioner 6 10 4 12 4 8
Other 2 6 1 – 1 1
Total 100 100 100 100 100 100
Table 45. Supervisory board composition in 1997–1999, by ownership structure (%)
Ownership structure in the company
Without strategic
investor
With a strategic
investor
Dominant insider
ownership
Dominant outsider
ownership
Supervisory board
composition
1997 1998 1999 1997 1998 1999 1997 1998 1999 1997 1998 1999
Only outsiders 19 12 12 54 41 46 17 10 10 54 37 37
Dominance of outsiders 16 29 29 23 50 38 16 29 27 21 49 40
Mixed composition 11 6 2 13 – 3 13 5 1 9 2 4
Dominance of insiders 28 25 21 5 9 10 28 26 22 9 8 13
Only insiders 26 28 36 5 – 3 26 30 40 7 4 6
Total 100 100 100 100 100 100 100 100 100 100 100 100

36
Table 46. The body that appoints the executive board, by ownership structure type (%)
The executive board is appointed by:
Dominant owner group
shareholders' meeting supervisory board
ily from legal requirements, but rather from the needs of
the agents involved in the functioning of the companies.
When we look at the evolution of supervisory board
composition from the point of view of the occupations of
their members (e.g., the increasing percentage of members
with specialist and non-managerial positions), we see evi-dence
of increasing representation of stakeholders on this
body, which is consistent with the above-mentioned conti-nental
model. While the external investor does not risk loss
of control over the board (an overwhelming majority of
incumbent and newly appointed supervisory board presi-dents
are outsiders), naming a person from the company to
the supervisory board contributes to ease tensions or con-flicts
between employees and the owners and to create at
least an illusion of employee representation. Presumably
this is also due to the owners' realization that insiders have
better access to certain information about what is going on
in the firm than those observing it from outside.
Executive Board
The executive board can be appointed in different ways,
depending on stipulations of the company's charter. In
1999, in 69 percent of the companies under review, the
executive board was appointed and dismissed not directly
by the owners, but by the supervisory board (in 1998 this
was the case in 60 percent of the companies). Appointment
of the executive board by the supervisory board is most
frequent in the companies not dominated by any particular
group of owners, and secondly in companies with a strate-gic
outside investor. The opposite pole is made up of firms
characterized by "insider" ownership structures, where the
executive board is relatively most frequently appointed
directly by the owners (Table 46). Interestingly, superviso-ry
boards appointed executive boards more often in 1999
than in 1998, especially in the groups of companies where
earlier they had performed this function most infrequently.
Research shows that the boards' behavior depends
largely on what positions their members occupied previ-ously,
in particular on the nature of their involvement in the
governance system of the transformed state-owned enter-prise.
From this point of view, the majority of companies in
our sample constitute examples of the reproduction of
managerial elites47: as many as 79 percent of the current
executive board members worked at the given firm before
its privatization, and 74 percent occupied managerial posi-tions.
The membership of the executive boards is dominated
by former state enterprise managers (former state enter-prise
directors and deputy directors together make up 55
percent). Those coming to the companies' executive
boards from outside are primarily managers and owners
from the private sector – private businessmen or managers
of private firms (together 14 percent). On the other hand,
there are very few former managers of other state-owned
enterprises or persons previously occupying non-manager-ial
positions.
Table 47 adds the ownership dimension to this analysis.
There are few surprises here: the reproduction of elites is
more frequently halted in firms in which over 50 percent of
the shares are in the hands of outsiders than in the "insider"
firms, especially those in which the majority of shares
belong to non-managerial employees. Certain exceptions
to this rule are firms with ownership dominance of the
managerial staff, among which we see a surprising percent-age
(14 percent) of private businessmen from other firms.
6.2. The Decision-Making Process
The role of supervisory boards
The main factor defining the place and role of the super-visory
board in the governance system of the companies in
question is the range of powers with which it is vested and
which are exercised by it in practice. Polish law sets the
general framework in the Commercial Code, which pro-vides
only for the following basic, minimum range of the
supervisory board's responsibilities:
– review of the company's balance sheet and profit and
loss statement;
– review of reports of the executive board;
CASE Reports No. 47
47 On the reproduction versus replacement of elites see Wasilewski and Wnuk-Lipinski (1995), 669
Total
Dominance of strategic outsider 25 75 100
Dominance of other outsiders 36 64 100
Dominance of managers 35 65 100
Dominance of non-managerial employees 40 60 100
Lack of dominant group 17 83 100
TOTAL 31 69 100

37
Table 47. Former posts of executive board members, by the companies' ownership structures (percent)
– review of the executive board's proposals regarding
the distribution of profits and coverage of losses;
– reporting the results of the above reviews at the share-holders'
meeting;
– suspending, for important reasons, the executive board
or individual members of the board in the perfor-mance
of their functions;
– delegating supervisory board members to temporary
performance of functions of the suspended executive
board members;
– when necessary, taking steps towards supplementing
the membership of the executive board.
The Commercial Code allows for widening the range
of the supervisory board's responsibilities through appro-priate
provisions of the company's charter. In all the com-panies
under review, the formal powers of the executive
board were extended in comparison with the minimum
provided for by Polish law. The extensions mostly regard
approval of decisions made by other statutory bodies of
the company, more rarely to making "own" binding deci-sions.
Directions in which the rights of the supervisory
boards have been extended can be divided into six cate-gories:
1. Decisions on broadly understood organizational mat-ters
(found in 99 percent of the companies where
supervisory boards had been created): appointing
executive board members, setting the company's
wage scale, monitoring the execution of resolutions
made by the executive board or shareholders' meet-ing.
2. Decisions on financial matters (84 percent): approval
of profit distribution, giving consent to contracting
large financial liabilities.
3. Decisions on economic and production-related mat-ters,
i.e. the company's development and production
plans, quality control, etc. (74 percent).
4. Disposing of the firm's capital and the firm itself as a
corporate entity, i.e. decisions on changes in the
shareholders' agreement and the company's line of
activity, size of the company's capital, operations on
shares, change in the ownership structure, etc. (88
percent).
5. Giving consent to changes in the company's assets:
acquisition or sale of real estate, putting assets to
lease, investment purchases, etc. (73 percent).
6. Powers conventionally defined as "social": monitoring
compliance with occupational safety regulations and
safeguarding the interests of employees (21 percent of
the companies).
The supervisory boards did not use all the powers they
were given, at least during 1998–1999. The use of these
powers depends not only on the character of the board,
but also on the company's need for such actions. For
example, it can be assumed that all supervisory boards are
active in reviewing financial documents, statements, etc.,
while, as a rule, their participation in appointing and dis-missing
the executive board, approving large transactions,
etc., occurs much more rarely, simply because these
actions are much less frequent.
Table 48 shows which powers were actually exercised
by the supervisory boards in 1998–1999. Only 9 percent of
the boards under review confined their activity to the min-
CASE Reports No. 47
Dominant ownership categories
Former positions of executive
board members
TOTAL
outsiders managers
non-managerial
employees
without
dominant
group
Worked at the firm before
privatization
79 68 81 96 86
Of which, in the position of:
Director 26 25 24 31 29
Deputy director, chief accountant 29 25 34 41 27
Other managerial post 19 16 19 20 23
Non-managerial post 5 2 4 4 7
Did not work at the firm before
privatization, but: 21 32 19 4 14
In managerial position in a state-owned
enterprise 2 5 – 2 –
In managerial position in a private
firm 8 17 4 2 4
As employee of a public institution 1 – 1 – 2
As employee of a consulting firm 1 2 – – –
As private businessman 6 5 14 – 4
Other positions 2 3 – – 4

38
imum outlined by the Commercial Code. The most fre-quently
used additional powers were those of an organiza-tional
nature (81 percent of the supervisory boards under
review), followed by powers to dispose of the capital and
the firm (62 percent), economic and production-related
powers (60 percent), control over the firm's assets (49 per-cent),
and powers in the financial sphere (44 percent). The
list ends with supervisory boards that have made use of the
powers defined as social (14 percent).
This table points to certain trends. Confinement of
activities to the statutory minimum of responsibilities is
most frequent in supervisory boards that are composed
exclusively of insiders, and in companies with ownership
dominance of the managerial staff. The supervisory boards'
powers in the organizational sphere are most frequently
exercised where the board's composition is mixed, in loss-making
companies, and in companies without a dominant
owners' group. Financial powers are exercised most fre-quently
in the companies in which more than 50 percent of
the shares belong to the managerial staff and in loss-making
companies. Economic and production-related powers are
most characteristic of supervisory boards in loss-making
companies and companies with a strategic investor. Dispos-ing
of the capital and the firm is most typical of supervisory
boards in firms without any dominant owner category,
boards with mixed membership and boards of loss-making
companies. Exercise of the right of control over the assets
and of powers in the social sphere is most frequently
observed in companies with employee ownership domi-nance
and in loss-makers.
To sum up, we can say that extension of the supervi-sory
boards' activities is observed most frequently in com-panies
in economic distress. Interrelationships between
the ownership structure and the extension of the supervi-sory
boards' powers are of a more complex nature. The
most striking relationships seem to be the following: lack
of any dominant owners' group is linked to extension of
the supervisory boards' activities to the organizational
sphere and to the control over the capital and the firm;
dominance of employee ownership is linked to the board's
"social" activity and control over the firm's assets, and
dominance of the managerial staff in the ownership struc-ture
is, in general, not accompanied by any extension of
the supervisory board's powers, except to the area of
finance. Thus, different configurations of the insider-dom-inated
ownership structure go hand in hand with different
patterns of extension of the supervisory board's range of
powers. Lack of dominance of any group is often accom-panied
by the assumption of other organs' and services'
functions by the supervisory boards; dominance of
employee ownership dictates special attention to matters
that are important for the employees, i.e. to social prob-lems,
and dominance of the managerial staff in the
ownership structure tends to be accompanied by limita-
CASE Reports No. 47
Table 48. Percentage of supervisory boards exercising given powers in 1998–1999
Kind of powers
Characteristics of firm
Only
those
provided
for in the
Commer-cial
Code
Organiza-tional
Financial
Economic
and
produc-tion-related
Disposing
over the
capital and
the firm
Control
over the
assets
Social
Total 9 81 44 60 62 49 14
Dominating ownership group
Outsiders 8 85 40 66 64 57 8
Managers 14 72 62 59 62 38 17
Non- anageriaml employees 5 75 45 65 50 60 25
Lack of predominant group – 95 29 62 86 38 14
Presence of strategic investor
Is not present 7 81 47 58 65 45 14
Is present 8 84 37 76 66 61 13
Type of supervisory board
composition
Only outsiders 7 86 54 75 57 61 11
Predominance of outsiders 9 84 43 64 59 36 7
Dominance of insiders 4 89 52 63 63 48 11
Only insiders 13 70 38 45 68 55 23
Profit criterion
There is no profit 11 89 48 78 70 63 30
There is profit 9 79 43 56 60 46 10

39
Table 49. Average influence of different actors on decision making processes in the company, in the opinion of company presidents
(1 – the weakest influence, 5 – the strongest influence)
tion of the supervisory board's powers to certain strictly
defined areas.
The hierarchy of decision-makers
The strong, stable ownership position of the executive
board members and the inertia in the composition of
executive boards constitute evidence of continuity of the
governance structures in the periods before and after pri-vatization.
We would therefore expect that in most cases it
is the executive board that has the greatest influence on
decision making processes, not only in day-to-day manage-ment
matters but also with respect to strategic problems.
This was verified in company presidents' responses to
questions concerning the relative role of various groups in
decision-making processes.
The important role of company presidents is stressed
more frequently than average in companies with owner-ship
dominance of non-strategic outsiders and managerial
staff; whereas that of the executive board as a whole is
more frequently stressed in firms with dominance of
employee ownership. The biggest shareholders have
strongest influence in the "outsider" and manager-con-trolled
companies, and the weakest where there are few
such shareholders; i.e., in firms with dominant employee
ownership. The general assembly of shareholders, in turn,
is relatively strongest where the ownership dominance of
managers, employees, or non-strategic outsiders has
evolved. The influence of the supervisory board is at its
strongest where there is ownership dominance of external
investors, and weakest in the manager-owned companies.
Trade unions are also at their weakest in the latter group
and strongest in strategic outsider-controlled firms and in
companies with dominance of non-managerial employee
ownership. The role of non-managerial employees is per-ceived
as relatively strongest (but still at the lower end of
hierarchy) in companies controlled by non-managerial
employees and weakest in firms with strategic outsider
investors (Table 49).
The owners most frequently act as decision makers
where ownership is concentrated in the hands of a strate-gic
outside investor. The role of owners in decision-making
also grows in loss-making companies (at the expense of the
powers of the executive and supervisory boards).
The small role of owners is striking. Only 10 percent of
company presidents mentioned them among the decision
makers at all, and a mere 3 percent named them as the sole
center of strategic decision-making. Accordingly, the per-ception
of the relative importance of the general assembly
of shareholders is often very low too. Almost half (45 per-cent)
of the company presidents, when asked directly,
described the role of this body as purely formal. There is
no doubt that among company presidents there is a certain
skewing in the perception of the power distribution within
the companies. They perceive this question from the
standpoint of their own position, tasks and responsibilities.
Since the executive board's basic task is keeping the com-pany
in operation, for them, the most important people are
those who are directly involved in carrying out this task.
CASE Reports No. 47
Dominating ownership group category
Agent strategic
outsiders
other
outsiders
managers
non-managerial
employees
without
dominant
category
Total
Executive board president 4.50 4.73 4.63 4.52 4.45 4.57
Executive board as a whole 4.42 4.54 4.58 4.68 4.40 4.52
Supervisory board 3.58 3.71 3.22 3.42 3.38 3.54
General assembly of
3.42 3.87 3.88 3.86 3.05 3.62
shareholders
The biggest shareholders 4.00 4.00 4.00 3.05 3.50 3.80
Trade unions 2.38 2.00 1.80 2.17 2.09 2.07
Non-managerial employees 2.17 2.40 2.27 2.70 2.29 2.32

40
The ownership structure of Polish employee-leased
companies, especially immediately after privatization, was
characterized by large holdings of dispersed insider owners.
Subsequently, the shares of non-managerial employees
gradually decline, while those of outsiders grow. Concentra-tion
of shares in the hands of managers can be seen from the
very moment of privatization. Later, however, managerial
holdings stabilize and even decrease somewhat in favor of
outsiders.
The sample of employee-leased companies is gradually
becoming more and more heterogeneous. We observe
three chief directions of ownership structure changes:
– perpetuation of a dispersed shareholding structure,
with dominance of insiders (an approximation of an
egalitarian, worker cooperative ownership struc-ture);
– consolidation of ownership in the hands of insider
elites;
– concentration of ownership in the hands of outside
investors.
In general, however, change is incremental. Radical
changes in the ownership structure are rare, and owner-ship
structure seems to be fairly inert. It would, never-theless,
be wrong to conclude that significant change is
not possible when it is in the interests of the incumbents,
as new strategic investors had appeared in about 10 per-cent
of the sample by 1998. (It is, however, worth noting
that there is a negative relationship between the size of
top management's share and the appearance of strategic
investors; it appears that once managers have decisive
control over the ownership structure of a company, they
are reluctant to relinquish it.)
A number of factors which influence the direction and
the dynamics of ownership changes, among others sector
affiliation, company size, initial ownership structure, etc.,
but the most important is the economic condition of the
company, which, when it is poor, favors concentration and
"outsiderization" of ownership (as well as changes in corpo-rate
governance). Management ownership on the average
appears in relatively small companies, while strategic
investors appear in companies whose average employment
is above the sample average. This is probably due to the fact
that, given low levels of personal savings at the beginning of
the transformation, it was more difficult for an individual or
small group of individuals to buy a large block of shares in a
large company than in a small firm.
Post-privatization ownership transformations were
achieved not only by trade in existing shares but also by
issues of new ones. Nineteen firms had carried out new
share issues by mid-1997. Most frequently, new share
issues serve to promote concentration of shares (espe-cially
in the hands of management and strategic
investors).
Access to credit and company size seem to be the
most significant determinants of investment spending.
Very surprisingly, the presence of strategic investors
seems to be unrelated to investment spending. Many
firms in the sample refrain from making dividend pay-ments,
but there is no indication that this leads to
increased investment and may simply be a result of ab-uses
by management. There is some evidence that con-centration
of shares in the hands of management is posi-tively
related to investment, while the evidence concern-ing
the relationship between the share of non-managerial
employees and investment is ambiguous. There appears
to be no relationship between ownership structure and
marketing activity or expansion into new markets (the
former is most strongly related to company size, and the
latter to the branch in which the company is operating).
However, companies with strategic investors do much
better than others in the area of ISO quality certification.
There is (very) slight evidence that the extent of non-managerial
employees' share in the ownership of the firm
had a negative effect on economic performance in the
early 1990s. In particular, there is a case – albeit a weak
one – to be made for the claim that companies whose
employees constitute the dominant owners follow a poli-cy
favoring consumption (wages, dividends and the like)
over investment and development. However, the situa-tion
in the companies is likely to be differentiated, with
the character of relationships between ownership struc-ture
and economic decision-making dependent on many
CASE Reports No. 47
7. Conclusions

48 We must remember that each firm in fact constitutes a complex social organism, and the number of groupings and factions is probably propor-tional
to the number of employees. For a clear and comprehensive picture of the decision-making process in such firms, we probably need an indepth
sociological analysis which would reveal the differences among such groups as current and former employees, new and old employees, white-collar and
blue-collar employees, employees of various departments and divisions, etc.
41
factors which we were unable to analyze here48. An
example of such differences is found in the opinion
encountered by one of the authors of this paper in case
studies of Polish employee-owned companies, according
to which the most consumption-oriented attitudes are
exhibited by former employees. One of the company
presidents expressing this opinion about former emp-loyees
also said that he regretted the fact that new
employees were unable to acquire shares in the company,
since such employees (young, well-educated persons
hired in the 1990s) are often the most valuable in the
firm49. From this point of view, it is possible that emp-loyee-
owned companies in Poland could gain certain
advantages from the creation of trust funds which would
hold employee shares on behalf of the employees, issuing
shares to new employees and purchasing them from
those that leave the company. Such a mechanism might
resemble, for example, the Employee Stock Ownership
Plans of the United States50.
Turning to issues of corporate governance, we conclude
with a brief look at executive boards and supervisory
boards.
The membership of the executive boards is dominated
by persons who had managed the companies before priva-tization,
when they were still state enterprises. The repro-duction
of elites is more frequently halted in firms in which
over 50 percent of the shares are in the hands of outsiders
than in the "insider" firms, especially those in which the
majority of shares belong to non-managerial employees.
When viewed over a longer period of time, the evolu-tion
of the composition of the supervisory boards has not
been unidirectional. Contrary to what one might expect in
view of the process of ownership "outsiderization", the
position of insiders measured by numerical dominance in
the composition of different boards was markedly strength-ened
in 1998–1999. in companies belonging to the employ-ees,
institutional control is increasingly concentration of in
the hands of insiders, while in the "outsider" companies
their employees are more and more often allowed to par-ticipate
in the organs of corporate governance. Moreover,
when we look at the evolution of supervisory board com-position
from the point of view of the occupations of their
members (e.g., the increasing percentage of members with
specialist and non-managerial positions), we see evidence of
increasing representation of stakeholders on this body.
At the same time, polarization into purely "insider" and
purely "outsider" boards was accentuated.
The supervisory boards did not use all the powers they
were given, at least during 1998–1999. The use of these
powers depends not only on the character of the board, but
also on the company's need for such actions. For example,
it can be assumed that all supervisory boards are active in
reviewing financial documents, statements, etc., while, as a
rule, their participation in appointing and dismissing the
executive board, approving large transactions, etc., occurs
much more rarely, simply because these actions are much
less frequent.
Extension of the supervisory boards' activities is
observed most frequently in companies in economic dis-tress.
Interrelationships between the ownership structure
and the extension of the supervisory boards' powers are of
a more complex nature. The most striking relationships
seem to be the following: lack of any dominant owners'
group is linked to extension of the supervisory boards' activ-ities
to the organizational sphere and to the control over the
capital and the firm; dominance of employee ownership is
linked to the board's "social" activity and control over the
firm's assets, and dominance of the managerial staff in the
ownership structure is, in general, not accompanied by any
extension of the supervisory board's powers, except to the
area of finance. Thus, different configurations of the insider-dominated
ownership structure go hand in hand with dif-ferent
patterns of extension of the supervisory board's
range of powers. Lack of dominance of any group is often
accompanied by the assumption of other organs' and ser-vices'
functions by the supervisory boards; dominance of
employee ownership dictates special attention to matters
that are important for the employees, i.e. to social prob-lems,
and dominance of the managerial staff in the owner-ship
structure tends to be accompanied by limitation of the
supervisory board's powers to certain strictly defined areas.
Generally speaking, the small role of owners in the deci-sion-
making process is striking. The owners most frequent-ly
act as decision makers where ownership is concentrated
in the hands of a strategic outside investor. The role of own-ers
in decision-making also grows in loss-making companies
(at the expense of the powers of the executive and super-visory
boards).
49 See Woodward (1999).
50 For more on the subject of ESOPs, see Blasi (1988).
CASE Reports No. 47

42
Appendix
Definitions of variables and correlations
Definitions of variables
L employment (end of year)
P.C. CH percentage change in employment between the end
of the year prior to privatization and the end of 1996
MAN percentage of the company's shares held by members
of the Executive Board (at time of privatization, and
in mid-1997, 1998, and 1999)
SI percentage of the company's shares held by the
strategic investor (at time of privatization, and in mid-
1997, 1998, and 1999)
WOR percentage of the company's shares held by non-managerial
employees (at time of privatization, and in
mid-1997, 1998, and 1999; in section 5, in mid-1992,
1993, and 1994)
GRMAN difference between percentage of the company's
shares held by Executive Board members in mid-
1997 and at time of privatization
GRSI difference between percentage of the company's
shares held by strategic investor in mid-1997 and at
time of privatization
GRWORdifference between percentage of the company's
shares held by non-managerial employees in mid-
1997 and at time of privatization
TRCONdummy indicating whether neither Executive Board
members nor a strategic investor had a share of more
than 20% at time of privatization and one or both of
these types of owners had over 20% in mid-1997
TRSI dummy indicating whether strategic investor had a
share of less than 20% at time of privatization and
over 20% in mid-1997
TRM dummy indicating whether Executive Board mem-bers
had a share of less than 20% at time of privati-zation
and over 20% in mid-1997
BIG percentage of the company's shares held by the single
largest shareholder (in mid-1997, 1998, and 1999)
OWN percentage of the work force that holds shares (at
time of privatization, and in mid-1997, 1998, and
1999; in section 5, in mid-1992, 1993, and 1994)
UNI percentage of the work force that belongs to a trade
union (at time of privatization, and in mid-1997, 1998,
and 1999; in section 5, in mid-1992, 1993, and 1994)
DIV two variables: absolute value of the dividend payment
in PLN, or dummy variable for payment of dividend
(1: dividend was paid; 0: dividend was not paid)
DIVS ratio of dividend to the face value of one share
DIVP ratio of dividend to net profit
LEA dummy for whether the lease had been paid off (mid-
1999)
NMKT number of positive responses to question whether
new markets had been found (range: 0 to 3)
MK DUM dummy for whether the firm has a marketing divi-sion
MK EMPemployment in the marketing division
Dummies for the degree of equality
of shareholding:
EQ1 at least one shareholder holds at least 10 percent of
all shares (high concentration)
EQ2 at least one person holds 5–10 percent of all shares
(medium concentration)
EQ3 at least one person holds 1–5 percent of all shares
(relative equality)
Dummies for the population of the city or town in
which the company is located:
POP1 less than 20,000
POP2 21,000–50,000
POP3 51,000–200,000
POP4 201,000–500,000
POP5 over 500,000
Dummies concerning new issues:
NEW a new share issue was held
CLO the new share issue was a closed (i.e., not public)
subscription
Dummies for market share of the firm:
MON the company is a monopolist
OLI the company is an oligopolist
COM the company operates in a competitive market
Investment variables:
INV annual investment spending (1996)
PC value of current investment projects, per employee
(total from 1992 through 1996, and 1998)
INCR dummy for whether investment was financed by
obtainment of credit
Variables used only in Section 5:
K = value of fixed assets, in millions of pre-1995 zlotys
(as of June 199351, end of 1993, end of 1994)
YEAR = dummy for year of production (1992=0, 1993=1,
1994=2)
AMORT= amortization of fixed assets at the time of privati-zation
(as a proxy for the firm's age)
51 End-of-year fixed assets data for 1992 were unfortunately not available. Given the choice between using fixed assets for the ti me of privatization
(in 1990 or 1991) and in June 1993 as an approximation for the 1992 capital stock, the latter measure seemed much better, given that a great deal of
property was frequently sold or leased by the companies within the initial period following privatization.
CASE Reports No. 47

43
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45
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Accession Process
27 Praca zbiorowa pod redakcj¹ B. B³aszczyk i A. Cylwika: Charakterystyka wybranych sektorów infrastrukturalnych
i wra¿liwych w gospodarce polskiej oraz mo¿liwooeci ich prywatyzacji
28 Praca zbiorowa pod redakcj¹ B. Liberdy: Determinanty oszczêdzania w Polsce
29 Praca zbiorowa pod redakcj¹ J.Kochanowicza: Ekonomia polityczna konsolidacji reform
30 Praca zbiorowa pod redakcj¹ B. B³aszczyk, E. Balcerowicz: Uwarunkowania wzrostu sektora prywatnego w Polsce
32 Praca zbiorowa pod redakcj¹ A. Wojtyny: Alternatywne strategie dezinflacji
33 Praca zbiorowa pod redakcj¹ A. Wojtyny: Wspieranie wzrostu gospodarczego poprzez konsolidacjê reform
34 J. Pankow, L. Dimitrov, P. Kozarzewski: Effects of Privatization of Industrial Enterprises in Bulgaria. Report on
Empirical Research
35 Praca zbiorowa pod redakcj¹ S. Golinowskiej: Edukacja i rynek pracy
36 S. Golinowska, P. Kurowski (eds.): Rational Pension Supevision, First Experiences of Central and Eastern European
States in Comparison with other Countries
37 J. Pañków (ed.): Fiscal Effects from Privatization: Case of Bulgaria and Poland
38 G. Ganev, M. Jarociñski, R. Lubenova, P. WoŸniak: Credibility of the Exchange Rate Policy in Transition Countries
39 M. D¹browski (ed.): The Episodes of Currency Crises in Latin American and Asian Economies
40 M. D¹browski (ed.): The Episodes of Currency Crises in the European Transition Economies
41 M. D¹browski (ed.): Currency Crises in Emerging Markets – Selected Comparative Studies
42 Praca zbiorowa pod redakcj¹ J. Cukrowskiego: Renta emisyjna jako Ÿród³o finansowania bud¿etu pañstwa
43 P. Bujak, M. Jarmu¿ek, S. Kordel, W. Nawrot, J. OEmietaniak: OEredniookresowa projekcja dzia³alnooeci inwestycyjnej
Otwartych Funduszy Emerytalnych na regulowanym rynku gie³dowym akcji
44 E. Balcerowicz, A. Bratkowski: Restructuring and Development of the Banking Sector in Poland. Lessons to be
Learnt by Less Advanced Transition Countries
^
45 E. Kocenda: Secondary Privatization in the Czech Republic: Changes in Ownership and Enterprise Performance
in Voucher- Privatized Firms
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