Corporate Governance in Russia - Essay Example

?Corporate Governance in Russia Table of Contents Introduction 3 Approach and Characteristic of Corporate Governance in Russia 4 Regulation and Corporate Governance Codes 7 Drivers and Influences of Corporate Governance in Russia 9 Transparency and Accountability 10 Conclusion 13 References 14 Introduction Effective corporate governance has been acknowledged as quite noteworthy for creating fascinating investment climate, featured by competitive companies along with well-organized financial markets. One of the most noteworthy methods through which the companies are monitored and controlled is corporate governance. This normally comprises a collection of association between administrators of the company along with its shareholders. It also tends to involve board members as well as stakeholders (OECD, 2012). Corporate governance offers the framework through which the goals of the companies are formulated and also suggests the means of accomplishing those objectives as well as identifies controlling performances (Viam Invest, 2012). It is in this regards that corporate governance can be identified as quite significant for today’s commercials. Sound corporate governance needs to offer adequate incentives to attain the desired objectives by the company. It must also assist in proper monitoring of the activities of the organisation and thus endorse the firms to make use of the resources in an effectual manner (Shvyrkov, 2012). Corporate governance method in Russia can be regarded as appealing since they tend to take place because of the institutional experiments undertaken by the Russian government in the early 1990s with strong support of international financial institutions (Paredes, 2003). Hence, the concept of corporate governance system practiced in Russia has been one of the significant topics of discussion in the present times. Most of the Russian firms are found to be adhering to good corporate governance standards by escalating disclosure, conforming to the international accounting standards and espousing numerous codes related to the matter. The government of Russia, the regulators as well as private agencies has taken certain measures such as enforcement of the codes, improvement of the transparency along with accountability issues among others in order to enhance the corporate governance (DYCK, 2002). The objective of this paper is to demonstrate and discuss the numerous approaches as well as features of the corporate governance system in Russia. The various drivers as well as impacts of corporate governance in Russia will also be discussed in the paper. Last but not the least, it will endeavour to identify whether the corporate governance system of Russia offers transparency as well as accountability to its stakeholders. Approach and Characteristic of Corporate Governance in Russia The corporate governance system in Russia is featured by elevated ownership attentiveness in firms basically in the hands of the insiders. It has also been noted that the legal institution of the country is not quite firm that has generally led to greater personal advantages of controls through corruption and immature capital markets which might lead to inadequate return on shareholders’ investments a fragmented labour market as well as major participation of the state in business with increasing political barriers (Vasilyev, 2002). The Russian corporate governance tends to be quite different from that of the corporate governance in developed countries such as Anglo-Saxon countries. The chief conflict of interest with regards to the Russian firms has been between big and small shareholders instead of managers and greater number of fragmented shareholders as in the contexts of US or UK (Nestor & Jesover, 2000). Notably, the Russian model of privatisation that was exercised in the period of 1992-1994 facilitated in the determination of the main features of the structure of corporate ownership as well as governance in the country. Privatisation also identified the main direction for the growth of Russian firms. Nearly three-fifth of the open joint stock companies of Russia that are running successfully in the present times has privatisation in place. This has led to the determination of a greater degree of development in the nature of Russian corporate securities market. It is due to privatisation that the shareholders in Russia gained greater power over the decision making capabilities regarding the organisational operations. In addition, shareholders activism is not much imperative method of corporate governance in Russia in comparison to the countries such as US and UK. The major reason behind this phenomenon is that it needs higher degree of transparency to be practiced by the companies, strong regulators as well as independent trustworthy media. In terms of all these parameters, it has been observed that Russia scores quite low (Bank for International Settlement, 2010). Russian corporate governance is basically system oriented and is quite similar to that of the UK and USA. The main reason behind this fact is that the Russian corporate governance system was actually formulated in juxtaposition with the OECD as well as Russian Corporate Governance Project (Yakovlev, 2010). The first and foremost attribute of corporate governance is considered as transparency. Transparency can be identified as the philosophy considered by the company to disclose all the appropriate information regarding the company’s financial and strategic stability for its stakeholders. The financial as well as operational data are generally revealed to the stakeholders during this process by the Board of Directors. From a generalised point of view, the other most momentous characteristic of corporate governance system is that it tends to shield the rights of the shareholders as it is through effective corporate governance practices that the companies are capable of disclosing its shareholders regarding the financial as well as non-financial matters related to the company. The companies must be capable of shielding all the stakeholders, basically the minority stakeholders with due consideration to the fact that shareholders’ interests and perceived values can reward the company with better sustainability in its long run. Corporate governance mandates that the CEO of the company must be bestowed with greater power so that the company’s plan as well as policies can be approved by him autonomously (Osipova, 2003). The next most significant characteristic of the notion of corporate governance is accountability which states that the CEO as well as the Board of Directors of the company needs to be held responsible for their deeds to the shareholders as well as the stakeholders. It is a well known fact that corporate governance chiefly focuses upon ethics, values, principles and morals perceived by the organisational leaders (McCarthy, & Puffer, 2002). Therefore, it is quite significant for the Board of Directors to deter any kind of cheating, exploitation as well as unfair practices from taking place in the company. The other characteristic of the corporate governance is that it has worldwide applications. This implies the fact that the generalised notion of corporate governance is used all over the world. It is in this context that the system of corporate governance is quite methodical by its nature. It is generally established according to the laws, rules, and procedures. The main objective of creating such law is to escalate the wealth of the shareholders. It also aims at shielding the rights of the stakeholders concerned (Jones, 1999). Regulation and Corporate Governance Codes It has been found that the government, private agencies as well as regulators have been taking numerous initiatives to enhance the corporate governance in Russia. The government of Russia is taking into account new legislations and thus making amendments to the prevailing laws. With this concern, it was the Federal Financial Markets Service to initiate the Code of Corporate Conduct. It was based upon OECD principles of good corporate governance (International Finance Corporation, 2010). It can be observed in this context that the regulators recommended but not necessitated the companies to espouse the code’s suggestion and to disclose the part of the code followed. However, the Federal Financial Markets Service required the stock exchanges to implement conformity with the code or at least some parts of it for those firms that lie in the higher tiers. It can be apparently identified from the study that was conducted by the Russian Institute of Directors that there has been significant enhancement in the disclosure of corporate governance practices as well as the quality of corporate governance after the creation of the Code. It can be thus mentioned that the Code serves as an investment proposal to the firms with appropriate guidance so that they can create their own governance systems. The codes can as well play a significant educational as well as informational role in the field of corporate governance (Goriaev & Stepanov, 2010). Corporate governance plays a vital role in determining the performance of the company and its capability to fascinate investors. In order to enhance the miserable corporate governance record of Russia, it was observed that the Russian government attempted to be highly focused upon the creation of the special commission through which the Corporate Code could be altered. The main objective of this commission has been to shield the interests of the shareholders, thus enhancing the investment climate in Russia (Porshakov, 2006). In this regards, it has been observed that the Code tends to create the numerous principles related to corporate governance. The first principle states that the corporate conduct practices need to permit all its shareholders to execute their rights linked with involvement in a company. The second principle states that corporate conduct practices need to ensure that all the shareholders are treated in an equally irrespective of their invested amount and thus it must be made certain that their earning per share is uniform (Scherbakova, 2006). Corporate conduct practices also need to ensure that the board of directors of the company are effectively looking after its strategic management procedure. Furthermore, it is quite significant that the corporate governance practices secure effectual monitoring of the actions of executive bodies by the board of directors of the company. The other principle of corporate governance code states that the executive bodies of the organisation must effectively manage the company in a rational manner, in good faith and exclusively in the interests of the company. Corporate conduct practices also need to secure responsibilities related to executive bodies of the company towards its shareholders as well as the board of directors of the company concerned (RichardChandler, 2012). Corporate conduct practices further require ensuring timely disclosure of information regarding the company along with its financial position, management structure, performance as well as ownership structure through which the shareholders or the investors will be capable of making wise decisions regarding the functioning processes and other managerial issues (Bokov & Vernikov, 2008). Drivers and Influences of Corporate Governance in Russia Attempts to stimulate corporate governance needs to take into consideration the drivers of reforms such as positive as well as negative. On the negative side, it can be revealed that the drivers of the corporate governance are basically linked with financial failures as well as corporate scandals. Such collections of drivers offer a reactive approach to corporate governance reforms. On the other hand, proactive approach is generally associated with the positive drivers or attributes that a company possesses to attract larger investments making an attempt to minimise corruption (Abea & Iwasakia, 2010). Countries possessing poor corporate governance standards in place needs to implement numerous methods to improve their system. Though the investors are pressurising to enforce government standards, it can be mentioned that the government authorities tend to be the driving force in the corporate governance enhancement in Russia. Hence, it can be observed that the initiator of the corporate governance system in Russia had been the portfolio investors who in turn forced the international organisations to surpass corporate law. The portfolio investors were capable of persuading only the leading large-sized organisations in order to adjust with the international best practices. Owing to the fact that their investments were just speculative, it was noted that their interest in stimulating corporate governance was generally short term in nature (Belikov, 2010). With the passing time it was found that the Russian companies planned to form their own standards of governance, hoping to enhance their initial public offering attracting numerous international investors. In the latter years, the urge to create internal governance initiated from greater interest in mergers and acquisitions and by means of investigation started against Russian companies by the regulators abroad. It was because of this alteration that most of the companies started perceiving corporate governance as a significant tool through which investments could be attracted. Hence, it can be viewed that corporate governance system in Russia is used as an anti-corruption tool. By means of transparency standards in purchasing goods and services the companies can avoid paying bribes to generate business (ABE & Iwasaki, 2007). It assists in modernising the institutional environment and in analysing numerous issues such as property rights by making use of the economic, technical or pragmatic approach in order to resolve the problem (Burmistrova, 2010). In few countries like that of Russia, discussions regarding ownerships, state-owned enterprises or property rights have been turned into polarised “left-right” political debates. When faced with such contexts, good corporate governance case make the process of the discussion quite smoother as the issue tends to be eliminated from the political contexts and a non-partisan method is generally taken into consideration in order to settle the matter completely (Hermitage Capital Management, 2010). Hence, the influence of the corporate governance has accomplished beyond the performance of the individual company. It is quite significant for the Russian organisations to instigate sound corporate governance (Puffer & McCarthy, 2003). Transparency and Accountability In the current day phenomenon, it has been identified that the regulators of Russia are pursuing measures through which they can minimise the overall perception of country risk associated with the country’s economic stature with concern towards luring foreign investors and thus making the way for Russia’s entry into the World Trade Organisation (WTO). The regulators are paying due emphasis upon the creation of the credible system of corporate governance so that they can shield the rights of shareholders and thus endorse transparency and accountability among the corporate executives (Markus, 2002). A wider vision of corporate governance embraces not only the ultimate goal of value creation for the shareholders, but tends to place equal importance on ensuring an environment of accountability in attaining this value. It is imperative for the companies in Russia to focus upon the issues concerning accountability as well as transparency. Hence, the agents and owners belonging to the Russian organisations will be capable of generating and sustaining the credible partnerships required for creating value for all organisational applicants (Black & et. al., 2000). It is quite important for the Russian firms to attract people from all parts of the organisation into a matrix structure for the purpose of executing the strategy and purposely creating horizontal connections within its internal business environment. By doing so, the organisational leaders will be capable of focusing upon greater transparency as well as accountability with regards to the affective implementation of the corporate governance system. Hence, this value of accountability and transparency among the internal agents needs to be created prior to the formation of the new culture of accountability and transparency between internal agents and stakeholders. It has further been noted that in order to motivate the employees to embrace transparency as well as accountability it is quite significant to create a link between new strategies, goal achievements, employee compensations and structures among the Russian firms (Bernal, 2001). The Russian markets have been criticised on grounds of inadequate transparency in terms of its corporate capital frameworks. Most of the companies have implemented structures of cross-ownership along with financial institutions which is generally in the form of financial industrial groups (McCarthy & et. al., 2004). It has been observed that most of these groups are fragmenting because of the banking crisis where most of the shareholders are found to take the minority ones of their wealth. The Federal Commission and the Securities Market (FCSM) regulation enforced in Russia has ordered such companies to disclose completely regarding the major shareholdings by the issuers in another company which tends to be higher than 5%. In case of OECD countries, the trend that is followed is to make use of the state holdings as one of the vital instruments for establishing transparency in corporate governance structures (Wu, 2005). Therefore, the state needs to act as a commercial asset manager and must focus upon becoming the most transparent in relation to owner of assets (Markus, 2007). Hence, it can be stated that low degree of transparency and accountability, government dominance as well as arbitrariness in the regulatory activities as well as enforcement, prevalence of informal relations along with other inadequacies in the corporate governance system of Russia might lead to distortion as well as mismanagement of resources. In this context, it can be affirmed that the country focuses upon the enhancement of transparency as well as accountability factors in its corporate governance (KMPG, 2012). Conclusion In order to be successful and to attract a significant portion of the investors towards the company, it is quite significant that it focuses upon sound corporate governance framework. It must report its shareholders with the accurate financial information in a timely manner. Corporate governance has been gaining due attention in the present times. The main reason behind this fact is that the failure of the corporate governance has led to numerous corporate disgraces. Organisation for Economic Cooperation and Development (OECD) is the chief source of guidance for the corporate governance in Russia. It can be mentioned in this regard that Russia needs to put into practice IFRS for companies both in public as well as private sectors. It is quite significant for the management of the companies as well as the board of directors to be aware of their accountability regarding both financial as well as non-financial disclosures. The FCSM along with the stock exchanges should mandate the publicly listed companies to disclose when there are significant alterations in terms of auditors as well as in terms of their fees for any sort of non-auditing services being conducted. It is also significant for the companies in Russia to pay due emphasis upon the enhancement of the transparency as well as accountability issues so that they can attract a significant number of investors for better future growth prospects. References Abea, N. & Iwasakia, I., 2010. “Organisational Culture and Corporate Governance in Russia: A Study of Managerial Turnover”, Post-Communist Economies. Vol: 22, Iss: 4. ABE, N. & Iwasaki, I., 2007. Impacts of Corporate Governance and Performance on Managerial Turnover in Russian Firms. Doc. [Online] Available at: http://www.ier.hit-u.ac.jp/ifd/doc/IFD_WP06.pdf [Accessed May 21, 2012]. Bank for International Settlement, 2010. Principles for Enhancing Corporate Governance. Sound Corporate Governance Principles. [Online] Available at: http://www.bis.org/publ/bcbs176.pdf [Accessed May 21, 2012]. Black, B. & et. al., 2000. Russian Privatization and Corporate Governance: What Went Wrong? Abstract. [Online] Available at: http://deepblue.lib.umich.edu/bitstream/2027.42/41203/3/wp269a.pdf [Accessed May 21, 2012]. Bernal, A., 2001. Applying Modern Practices in the Latin American Business Community. Abstract. [Online] Available at: http://www.cipe.org/sites/default/files/publication-docs/CG_USAID.pdf [Accessed May 21, 2012]. Burmistrova, M. A., 2010. Corporate Governance and Corporate Finance: A Cross-Country Analysis. Publication. [Online] Available at: http://www.iwim.uni-bremen.de/publikationen/pdf/b099.pdf [Accessed May 21, 2012]. Belikov, I., 2010. Corporate Governance: The Russian Experience and Beyond. Publication. [Online] Available at: http://www.transparency-lebanon.org/publications/casestudiesen.pdf [Accessed May 21, 2012]. Bokov, V. & Vernikov, A., 2008. Possible Impact of Corporate Governance Profile on a Russian Bank Valuation. UCL Discovery. [Online] Available at: http://eprints.ucl.ac.uk/17445/ [Accessed May 21, 2012]. Dyck, A., 2002. The Hermitage Fund: Media and Corporate Governance in Russia. Harvard Business School. [Online] Available at: http://hermitagefund.com/about/hermitageeffect/Harvard%20Business%20School%20--%20Hermitage%20Case%20Study.pdf [Accessed May 21, 2012]. Goriaev, A. & Stepanov, S., 2010. Financial Policy And Corporate Governance Of Russian Companies. Suggested Topics For Student Papers. [Online] Available at: http://pages.nes.ru/agoriaev/RS0607%20Goriaev-Stepanov.pdf [Accessed May 21, 2012]. Hermitage Capital Management, 2010. Driving Positive Change in Russia. Media. [Online] Available at: http://hermitagefund.com/newsandmedia/index.php?ELEMENT_ID=814 [Accessed May 21, 2012]. International Finance Corporation, 2010. The Russia Corporate Governance Manual. IFC. [Online] Available at: http://www.ita.doc.gov/goodgovernance/adobe/CGMEnPart_1/Part_I_fulltext.pdf [Accessed May 21, 2012]. Jones, R., 1999. “Corporate Governance in Russia”. Data OECD. [Online] Available at: http://www.oecd.org/dataoecd/55/15/1921322.pdf [Accessed May 21, 2012]. KMPG, 2012. Corporate Governance Practice in Russia: Defining the Boundaries of the National Model. Issues and Insights. [Online] Available at: http://www.kpmg.com/ru/en/issuesandinsights/articlespublications/press-releases/pages/corporate-governance-practice-russia.aspx [Accessed May 21, 2012]. OECD, 2012. OECD Investment Policy Review of the Russian Federation: Russia’s Energy Investment Policy. Russia’s Policy Framework for Energy Investment. [Online] Available at: http://www.oecd.org/dataoecd/45/52/40311537.pdf [Accessed May 21, 2012]. McCarthy, D. & Puffer, S., 2002. “Corporate Governance in Russia: Towards a European, US, or Russian Model”, European Management Journal. Vol: 20, Iss: 6, pp: 630-640. Markus, S., 2002. Western Capital versus the Russian State: Towards an Explanation of Recent Trends in Russia’s Corporate Governance. Publication. [Online] Available at: http://www.ces.fas.harvard.edu/publications/docs/pdfs/Markus.pdf [Accessed May 21, 2012]. Markus, S., 2007. “Corporate Governance as Political Insurance: Firm-Level Institutional Creation in Emerging Markets and Beyond”, Socio-Economic Review. Vol: 6, pp: 69–98. McCarthy, D. J. & et. al., 2004. Corporate Governance in Russia. Edward Elgar Publishing. Nestor, S. & Jesover, F., 2000. OECD Principles of Corporate Governance on Shareholder Rights and Equitable Treatment: Their Relevance to the Russian Federation. Data OECD. [Online] Available at: http://www.oecd.org/dataoecd/54/18/1920683.pdf [Accessed May 21, 2012]. Osipova, V., 2003. “The Problems of Development of Corporate Governance in Russia: Comparison with Central Europe and China”, Bond Law Review. Vol: 15, Iss: 4, pp: 113-145. Paredes, T. A., 2003. “A Systems Approach To Corporate Governance Reform: Why Importing U.S. Corporate Law Isn’t The Answer”, William and Mary Law Review. Vol: 45, Iss: 1055, pp: 1055-1057. Porshakov, S., 2006. Improving Corporate Governance in Russia and the EU. Current Issue. [Online] Available at: http://eng.globalaffairs.ru/number/n_6580 [Accessed May 21, 2012]. Puffer, S. M. & McCarthy, D. J., 2003. “The Emergence of Corporate Governance in Russia”, Journal of World Business. Vol: 38, Iss: 4, pp: 284-298. RichardChandler, 2012. The Capital Marketplace. Corporate Governance. [Online] Available at: http://www.richardchandler.com/publications/Corporate%20Governance_u.pdf [Accessed May 21, 2012]. Shvyrkov, O., 2012. OECD Russia Corporate Governance Roundtable. March 2012 Technical Seminar Background Paper. [Online] Available at: http://www.oecd.org/dataoecd/43/16/50064556.pdf [Accessed May 21, 2012]. Scherbakova, J., 2006. “Russia Gets Ready for Corporate Governance Code”, The Russian Journal. Vasilyev, V., 2002. Corporate Governance in Russia: Is There Any Chance of Improvement? Pubs. [Online] Available at: http://www.imf.org/external/pubs/ft/seminar/2000/invest/pdf/vasil2.pdf [Accessed May 21, 2012]. Viam Invest, 2012. What is Corporate Governance? Corporate Governance. [Online] Available at: http://e.viaminvest.com/WhatIsGorpGov.asp [Accessed May 21, 2012]. Wu, X., 2005. Corporate Governance and Corruption: A Cross-Country Analysis. Published. [Online] Available at: http://www.spp.nus.edu.sg/docs/fac/wu_xun/Published%20Papers/cg_corr_xw.pdf [Accessed May 21, 2012]. Yakovlev, A., 2010. Corporate Governance in Russia: Formal Rules and Real Incentives of Economic Agents. Institute. [Online] Available at: http://www2.wiwi.hu-berlin.de/institute/im/_html/tagung/Yakovlev.pdf [Accessed May 21, 2012]. Read More