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#13 - JRL 7171
The Newsletter About Reforming Economies
The World Bank
January/February/March 2003
Corporate Governance in Russia: Regime Change Required

Poor corporate governance has been one of the main stumbling blocks in Russia’s uneven transition to a market-based economy. Foreign and domestic investors have little confidence in the current practices of most Russian firms, their trust having been shaken by the numerous scandals involving violations of shareholders’ rights and company mismanagement. An effective corporate governance regime should provide shareholders and other financial stakeholders with timely access to information and the ability to influence and control company management, and that is what foreign and domestic investors are missing.

While Russian laws and regulations in the area of corporate governance have improved substantially in recent years, enforcement and implementation have been notoriously weak and inconsistent. Unscrupulous company executives and majority owners have taken advantage of this situation. Russian corporate governance practices must be improved and brought into line with international standards

As a response, individual and institutional investors have set up various NGOs to address the issue. Russian NGOs are now monitoring and rating the corporate governance practices of Russian companies, appointing independent directors to company boards, providing training to boards of directors of Russian companies, and conducting public awareness campaigns in support of corporate governance reform. Last year the Russian Federal Securities Commission issued the Code of Corporate Governance, which lays out norms and ethical standards for companies in their dealings with shareholders. Nevertheless, the following constraints are still plaguing Russian corporate governance practices:

• Lack of transparency in company management

• Lack of accountability to shareholders on the part of management

• Unfair treatment of minority shareholders

• Weak coordination and advocacy among shareholders and stakeholders

• Weak corporate governance culture

• Poor enforcement and oversight of existing laws and regulations.

In 2002 the Moscow-based Institute of Corporate Law and Corporate Governance conducted a survey based on the corporate governance reports of the 34 largest Russian companies with a 90 percent share of market capitalization. They found that in 2002, compared with 2001, the quality of corporate governance had improved in relation to four out of the five criteria examined as shown in the table.

Igor Belikov, director of the Russian Institute of Directors, which was created to help monitor and improve the dynamics of corporate governance practices among Russian companies, also believes that Russian companies’ disclosure policies and transparency are improving. Annual and quarterly reports are revealing more details about companies’ financial and nonfinancial performance, and a growing number of major Russian companies are releasing their annual and quarterly reports in accordance with International Accounting Standards and Generally Accepted Accounting Principles. The decision by the Russian government to require the use of International Accounting Standards starting in 2004 is expected to result in much more transparency in the Russian corporate community at large, at least in terms of financial disclosure. According to a recent article by Belikov, the trend toward greater corporate transparency can be also tracked by the increasing number of investor-friendly company web sites.

Starting this year, companies will be required to disclose their corporate governance practices to comply with the Russian Corporate Governance Code. Russian corporations have also made significant progress in terms of preparing for and conducting annual shareholders’ meetings and keeping shareholders better informed about their rights to attend and vote at these meetings. In addition, more independent (outside) directors are being elected to company boards: last year the shareholders of 70 leading enterprises decided to elect independent directors to their respective boards. The United Machinery Plant became the first Russian company to have a majority of its board made up of independent directors.

In 2002 the two largest Russian oil companies, Yukos and LUK oil, who rank first and third in market capitalization on the Russian stock market, revealed their ownership structures and identified the exact amounts of shares owned by their top managers. They were joined by many other companies. Even Oleg Deripaska, president of Russian Aluminum (now Basic Element), a secretive oligarch, recognized the benefits of registering his most recent major acquisition, a large share in the Ingosstrakh insurance company, in Russia and not in an offshore company.

Despite these achievements, the Russian corporate community still needs to make dramatic improvements in a number of important areas such as disclosure of ownership structures, clear rules for mergers and acquisitions, reorganizations, dividend payments, board composition, independence, and effective practices.

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