NATIONAL COUNCIL ON CORPORATE GOVERNANCE

Preface

The global economic crisis marked off the entire era in corporate governance development in Russia in 2001–2008. The hallmark of this era was the establishment of the corporate governance infrastructure in the country’s leading companies, mastering basic elements of the modern global practice, laying the foundations of corporate law.

However, high profits yielded by Russian companies, primarily in the raw materials sector, favorable market environment made their shares all the same attractive to investors, which finally overweighed the existing drawbacks in corporate governance, and made up for insufficient attention to its improvement and filling with real content. Some business owners and top managers believed they had achieved the required level and no longer needed to invest any additional resources in this business development aspect.

Global credit crunch has revealed the most obvious shortcomings in Russian corporate governance practice: formal and “window dressing” nature of a whole range of corporate procedures; lack of the necessary professionalism and skills by many board directors, shortage of experts in financial markets among top management, weakness of the risk management system, inadequate transparency, selectiveness in corporate information disclosure practices.

Many of the stereotypes that were common in theory and practice of corporate governance have been refuted; many truths that used to be regarded as copy-book maxims have been challenged. In particular, with the narrow Russian stock market and its heavy reliance on global factors, the link between a company’s corporate governance and its capitalization became hardly discernible.

In a new macro-economic environment, corporate governance is to pass through a series of ordeals. The influence of external and internal positive factors that used to encourage its development has weakened significantly. IPOs by Russian companies have virtually flattened out. The stock market fell to an all times low. Certain owners who abandoned the day-to-day management of their businesses a couple of years ago, resume their managerial functions again. Some companies (not only Russian but also foreign) slashed their dividend payments; others postponed them until better times. There is a trend towards lower business transparency. The cases when minority shareholders’ rights are violated by forced redemption of their shares at the understated value or by illegal dilution of their stakes in a company’s equity became more frequent.

On the other hand, the factors that will push the companies worldwide to upgrading and generalizing corporate governance standards are already evident. This is the need to overcome the commonly recorded loss of trust in the corporate good, and the quest by international institutions and national regulators for new approaches to formulate the rules of behavior in financial markets. There are many uncertainties, which arise in connection with the corporate debt restructuring that would supposedly lead to a greater government involvement in corporate processes.

The business community embarks on a critical rethinking of previous experience, searching for the configuration of the new corporate governance model that meets actual business interests, with a greater emphasis on financial management and risk management, improvement of the internal audit functions, transparency, stepping up requirements to recruitment and professional level of the board of directors. The economic recession is to give momentum to evolution of the qualified independent directors’ and professional managers’ services market that is still underdeveloped in Russia.

The National Report offered to your attention is distinguished by its being the first attempt at analyzing the implications and possible consequences of the current economic crisis for different corporate governance aspects.

Introduction

The National Council on Corporate Governance has prepared the second issue of the National Corporate Governance Report that proceeds with the discussion of topical corporate governance problems against the background of Russia’s socio-economic development.

Several factors pre-determined the selection of topics for the second issue and different approaches to their coverage, namely: (1) significant developments in corporate governance relations, (2) major developments in the Russian economy, triggered, first and foremost, by the global economic recession, (3) differentiation and diversity in the context of regional economic development, (4) availability of information on different aspects of corporate governance.

As the result, we selected nine topics, most of which are devoted to conventional aspects of corporate governance. These include relations between the board of directors and the corporate management, independent directors’ participation in corporate governance, legal regulation of corporate governance relations, corporate blackmailing involving minority shareholders. The list would not be complete without reflecting upon such an important issue as shareholders’ agreements (Chapter 8), formalization of which in the Russian corporate law was the major intrigue in 2008.

At the same time, some topics are rather self-sufficient, meaning that they comprise an array of different corporate governance aspects, including corporate governance problems in the context of promoting Russian companies abroad and foreign companies’ entering the Russian market (Chapter 2), corporate social responsibility (Chapter 9), which interfuse virtually all spheres of corporate relations. No doubt, these topics include corporate governance in state corporations (Chapter 3). One must note that, despite a seemingly natural title of the chapter, the very possibility of identifying the attributes of corporate governance in state corporations is being questioned. The answer to the question about why this topic was nevertheless included into this report can be found in Chapter 3.

Such conventional issues as the status and functions of independent directors are being considered, taking into account the particular features of the situation that evolved in 2008, namely: mass replacement of civil servants with independent directors in state-owned enterprises (Chapter 1). This topic is featured as the one of a greater significance in the Russian 2008 corporate governance, despite much wider-scale developments in the second half 2008 / beginning of 2009.

In 2008, the state continued to increase its influence on the shaping and development of economic relations which touched upon different corporate governance aspects. This trend was reflected both in the chapters devoted to corporate governance in state corporations and to independent directors in state-owned enterprises, and in the coverage of certain issues pertaining to regional aspects of corporate governance, combating corporate blackmailing (Chapter 6) and changes in corporate law (Chapter 7).

The particular feature of this issue is a special attention, in a separate chapter, to regional aspects of corporate governance. This topic is opened with presentation of corporate governance in the companies of the Urals region of Russia (Chapter 5). The previous issue of the National Report designated the intention to consider corporate governance problems in the context of other types of relations in the field of competition and corporate social responsibility. Chapter 8 in this issue is fully devoted to CSR.

One of the most extensive surveys on corporate governance, which was held by the State University – the Higher School of Economics and Hitotsubashi University (Japan) in 2005 was used as the information base, as well as other, more local surveys. The report took into account the recent research by OECD, IMF, Standard&Poor’s, KPMG, PricewaterhouseCoopers, Russian Union of Industrialists and Entrepreneurs, National Council on Corporate Governance, Managers’ Association, data by the Russian Ministry for Economic Development, Federal Financial Markets Service and the Russian Statistics Committee.

The primary event of the second half of 2008 became proliferation of the influence of the global financial recession to Russia and its transformation into a multisectoral economic crisis. This crisis has many particularities if compared with all of the preceding crises, with the global nature and high proliferation rate having become its particular features. No doubt, the crisis has already affected individual aspects of corporate governance. In certain cases, there are clear expectations of how the crisis might influence corporate governance in the future. These issues were also included into the report. However, the systemic perception of the relationship between the modern crisis and corporate governance is a subject for further discussions.

Andrey E. Shastitko,

Analysis Foundation