Corporate Governance in Russia

Quo Vadis?

Alla Dementieva, Elena Zavyalova, Alla Dementieva, Elena Zavyalova

• Verlag: De Gruyter
• Jahr: 2020
• ISBN:
  9783110695908
• Auflage: 1
• Thema: Business
• Thema: Leadership

This book explores discussions and practice around corporate governance in Russia from the early 1990s until 2018. It covers three major aspects of corporate governance theory and practice: a vision of corporate governance in Russia in the context of global trends and challenges, the general perception of corporate governance in Russia, and the real nature of Russia's corporate community from the viewpoint of its corporate governance practices.

It provides a unique complex analysis and detailed description of how corporate governance has been perceived by both Russian regulators and the business community, and how it has been applied in Russian companies. This analysis covers the period of over 25 years: from early attempts at directing transfer and implanting the Western model of corporate governance to the nascent Russian big private business, up to the period of resurgence of the state as the dominant player both in Russian society and its economy at large. It gives an understanding of what corporate governance is in Russia in the days of "sovereign democracy" and confrontation with the West.

It explains how cultural, political, economic and institutional factors have shaped corporate governance in Russia. The authors provide insights into such aspects of Russian corporate governance framework and practices as regulatory philosophy and enforcement, ownership structure, the role of the state, the impact of unfriendly domestic business climate, how the value of corporate governance is perceived in Russian context, etc.

Predominantly, the book paints an interesting picture of how the "sovereign corporate governance" model has been shaped in Russia.

This book will be useful not just for experts in corporate governance and investors, but also for those who have an interest in modern Russia at large.

Part I

1 Corporate Governance Concept: Modern Approaches

Alla Dementieva

Olga Dubovskaya

Natalya Brovko

Introduction

Corporate governance is a relatively new trend in management that has its roots in the separation of ownership and management, and studies problems of controlling and operating corporations. There is no unique definition of corporate governance; some authors define corporate governance as the system of rules by which a firm is directed, while others narrowly define it as responsibilities of the Board of Directors.

Most foreign authors (Tricker, 2015; Freeman, 2002; Cadbury, 2002; Clarke, 2017; Charkham, 2005; Adams, Hermalin, Weisbach, 2010; etc.) adhere to a principle that corporate governance refers to a system by which corporations are directed and controlled by shareholders and the Board of Directors.

There are different definitions of corporate governance in Russian economic literature. Some authors define corporate governance as a system of management (Samosudov, 2008; Antonov, 2008), and some authors (Orekhov, Seleznev, 2008) make a clear distinction between “corporate management” and “corporate governance” as the latter has its own principles and organized structure. Others (Gazin, 2003; Radygin & Entov, 2001; Belikov, 2017) believe that corporate governance refers to the activities of the board of the directors and top managers.

Different approaches to corporate governance emphasize that a dramatic overhaul in this sphere is taking place now. The greater importance of the private sector, globalization, and the alterating of the terms of competition all show that corporate governance is one of the most topical issues in the modern scientific and business world (Clarke, 2017).

In this research study, the authors explore the backbone of corporate governance and its importance in modern business. To reach this goal, the first part of the research is devoted to analysing the leading theories of corporate governance, then different approaches to corporate governance are considered, and the last part covers the main modern principles and mechanisms of corporate governance. The authors conclude that the definition of corporate governance is broader, and corporate governance is gaining importance in the modern world of business.

Methods

In the research, the method applied was a comparative analysis of conceptual literature (the works of foreign and Russian authors) pertaining to the understanding of corporate governance. A qualitative analysis and dialectical and comprehensive approaches were used to generalize principles of corporate governance. Analysis, synthesis method, and inductive reasoning were applied to draw a conclusion.

Development of the Theories of Corporate Governance

For corporate institutions, a long period of development has led to the formation of corporate governance. As a result, by the 1990s, corporate governance had become an integral part of managing big corporations.

The first studies of corporate governance date back to the 1930s. The research in this sphere reflects the evolution of integrated systems.

In 1932, American economists A.Berle and G.Means published the book “The Modern Corporation and Private Property”, where ownership and control was separated in public corporations. They showed that such separation led to the emergence of a new social class of professional managers and development of equity market (Berle & Means, 1932).

According to a survey of the 200 biggest public companies, management controlled 58% of assets. In 1963 R. Lerner carried out a similar research that showed that managers controlled 85% of assets of 200 leading companies (Tricker, 1994).

In 1937 in his article “The Nature of the Firm” Ronald Coase pointed out transaction costs, the costs of negotiating and concluding contracts; he also claimed that any firm was created to minimize transaction costs and the size of the firm depended on it (Coase, 1937).

Research into the activities of corporations shows that management almost totally controls the assets of the biggest corporations. Separating ownership and control brings a wide range of hot issues in the theory and practice of corporate governance, such as:

• decision-making in corporations is in favour of managers or stakeholders
• the ways of enhancing corporate government efficiency
• the rights to consider when making decisions

Interest in corporate governance practices increased in the 1980–1990s, following mergers and acquisitions and a new trend in adopting social oriented norms in regulation.

Studies of corporate governance over the last 20 years have been dominated by the following theories: stakeholder theory (R. Ackoff) and agency theory (М. Jensen).

Stakeholder theory is often called the theory of divergence of interests of corporations and society. The main principles of the theory were formed in 1960. The company was studied as economic integrity for gaining profit; moreover the company was considered as an element of business environments and as a system which influences and is influenced by local communities, customers, suppliers, non-governmental organisations, personnel, investors, and stakeholders. In the mid-1970s researchers headed by R. Ackoff continued further development of this theory. Ackoff believed that future generations, along with suppliers, customers, employees, investors and lenders, and governments, were interested in corporations. He argued that many social problems could be solved if the main institutions were rearranged and effective cooperation of the stakeholders within the system was established (Ackoff, 1994).

The modern ‘stakeholder theory’ was developed in the mid-1980s, when R.Edward and E.Freeman published their papers introducing a new term – stakeholder – and giving its definition. Freeman identifies a firm with its external and internal environment as groups of stakeholders, the interests of whom managers should take into account and meet (Freeman, 1984). All stakeholders are considered an inconsistent whole and the course of the development of organization is hard to define. Such a group is referred to as a “stakeholder coalition”.

According to this theory, corporate governance is a system of finding a balance between stakeholder interests, i.e. a combination of institutions stimulating management to take into account all the participants (Tirole, 2001).

Agency theory considers corporate relations from the angle of agency costs. This theory dates back to the 1960–1970s. M. Jensen is one of the founders of this theory (Jensen, 1976).

This theory implies that there is a divergence of interests of capital owners and agents managing the capital. Managers and shareholders are interested in the success of a company, but it does not mean that the individual interests of every group are similar. When minority shareholders prevail, there is a risk that company managers, in the absence of shareholder control, can use resources as they see fit. Agency costs are investor losses incurred due to separation of ownership and control.

According to this theory and the relationship between shareholders and managers, corporate governance provides a set of rules and norms protecting shareholders from opportunistic behaviour of managers.

In 1992 C. Hill and T. Jones published a combined theory called Stakeholder-agency theory, which is a combination of stakeholder theory and agency theory. The authors of this theory believe that a manager should take into account the interests of all the participants, and they consider a corporation as a range of contracts between managers and stakeholders (Hill, 1992).

The core of all theories of corporate governance is the relationship between stakeholders, Board of Directors, managers and others (see Figure 1.1).

Figure 1.1: The main participants of corporate relations.

Practice shows that the interests of different groups overlap in some spheres yet are poles apart in others. Usually all the participants of corporate relations are interested in thestability and profit of the company.

The interests of every group may differ from the ones of the shareholders as well as from each other. It is worth mentioning that the structure and the role of every group can vary from company to company and over a period of time. Hence the system of corporate governance of every company should take into account the interests and opportunities of every group and establish optimal forms and methods of cooperation between them. An organised system of corporate governance aims to eliminate any possible negative impacts these divergences may have on the performance of the company.

Thus, corporate governance is a kind of “umbrella” under which all groups of members participate. We can identify two main issues of corporate governance: who wins, and who is to win in every particular case when decision is made. Such matters are regulated within the framework of corporate governance.

Definition of Corporate Governance

Cadbury Committee gave one of the first definitions of corporate governance in 1992, according to which “corporate governance is the system by which companies are directed and controlled” (Clarke, 2017, p. 2). Experts of McKinsey argue that the following definition is more accurate: “Corporate governance is a combination of mechanisms necessary in the process of managing the company in order to find the adequate balance between the shareholders rights and the interests of the Board of Directors and management (Gazin, 2003).

According to the definition of the Organisation for Economic Cooperation and Development, “corporate government is a system of management and control in companies. Corporate governance provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are dete...