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Treating Investors Right Article published in the Moscow Times on 7 August 2001
As Russia's market economy approaches its 10th birthday, the debate over corporate governance continues to rage just as intensely as in previous years. Yet it is often forgotten that the issues now being debated by investors, company executives, government officials and a host of others are far from being unique to Russia. Indeed, we can learn a lot by studying the track records of other countries that have been tackling the same issues.
For example, in Asia the ill-defined concept of Asian values was for many years used as an excuse to pass off the gravest abuses of minority shareholder rights in the region. The perpetrators of these abuses talked about everything from Confucian values of family loyalty to the challenges of managing a diverse portfolio of assets. The only thing they didn't talk about was corporate governance.
While the Asian economic miracle was in full swing and stock markets were booming, investors were prepared to turn a blind eye to these shortcomings. But when the Asian boom turned into the Asian bust, investors began to take a closer look at the companies they had been funding. This was enough to persuade them to become a lot more discerning. Many Asian companies have since been busily trying to patch up their corporate governance records, and the successful ones have seen their access to capital greatly improved.
A similar process has been under way in Russia, only progress has been somewhat slower. Over the years, most of Russia's largest companies, including Sibneft, have been accused of failing to respect the rights of their minority shareholders in one way or another. When Russia was home to the world's best-performing stock market, few investors seemed concerned that some of the companies they had invested in were bleeding profits faster than they were raking them in.
When the stock market nosedived in 1998, investors were quick to point the finger at poor corporate governance as the source of their woes. While this struck many Russian companies as a touch insincere, the warning was nevertheless a timely one. Rather than pointing the finger at those companies that they felt had been ripping off minority shareholders, investors were simply saying that they wanted adequate controls in place to prevent abuses from occurring in the future.
We responded with Russia's first corporate governance charter in July 1998, drawn up by a panel of independent experts. It introduced hitherto exotic notions, such as independent directors, management accountability and audit and remuneration committees. In the process of drawing up the charter, we had to grapple with the problem that there was no adequate Russian translation for the term corporate governance.
In the interim, many other firms have followed suit. With a few exceptions, most large Russian companies have managed to achieve basic standards of corporate governance. But in the future, investors will increasingly seek out companies that not only meet minimum standards but also outperform their peers. In other words, sound corporate governance will become a major competitive advantage for those companies with the foresight to implement it.
Many Russian firms became public companies more by accident than by design. New companies issued shares in order to consolidate majority-controlled subsidiaries and metamorphosed overnight into public corporations. But these companies were public in name only. In reality, they were still run as the private fiefdoms of their majority owners. Only with the passage of time have some Russian businessmen come to understand what it means to be a public company. Others have yet to catch on.
In order to improve standards of corporate governance, Russian companies need both a carrot and a stick. A carrot of sorts exists in the shape of easier access to capital. But the carrot is not a particularly tempting one, given that equity markets continue to place extremely low valuations on Russian stocks. There is still nothing resembling a stick.
Some of the most notorious shareholder abuses, such as the sale of commodities to offshore affiliates at hugely discounted prices, have been stamped out by Russian authorities. But penalties for lax standards of corporate governance are still almost nonexistent. And too many Russian companies still believe that the best practices in the field of corporate governance carry an unnecessarily high cost.
Changing this situation hinges on reforming Russia's weak and ineffective legal system. If Russia cannot protect the rights of individuals as citizens, there is little hope that it will protect their rights as shareholders. However, reform of public institutions will take infinitely longer than the reform of corporations. It is part of a wider transition underway in Russia, from a system based on relationships to one based on the rule of law. It is also worth remembering that developed economies took decades to put in place the controls necessary to keep their businessmen in check.
In the absence of a strong legal framework, a group of major Russian companies has teamed up to draft their own corporate governance code. Unfortunately, not all of them understand the need that such a code be mandatory. Russian companies are slowly coming of age, but they have yet to catch up with their peers in other emerging markets.
Until this happens, capital will continue to take a detour around Russia, instead heading for other, safer havens. Sound corporate governance must no longer be regarded as a luxury but instead as a necessity. For that to happen, all Russian companies must be forced to play by the same rules.
Eugene Shvidler is president and CEO of Sibneft, one of Russia's largest oil companies. He contributed this comment to The Moscow Times.