Corporate Governance in Russia: Current Practices and Future Trends

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Corporate Governance in RussiaCurrent Practices
and Future Trends
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Presentation Purpose and Outline
Purpose To provide an assessment of corporate
governance in Russia today

• Outline
• Market Overview
• The Current Corporate Governance Framework
• The Legal Regulatory Environment
• Institutions and Enforcement
• Corporate Governance as Practiced by Companies
  Today
• Consequences

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A Market OvervieworOnce Bitten, Twice Shy
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Why Investors Want In

• Economic growth

• Stability

• Avg. 6.7 of GDP growth
• Appr. 113 bln. in reserves
• Modest inflation (10) and unemployment (8)
• SPs, Moodys Fitch upgrades
• Rich in natural and human resources

• V. Putin brings political stability
• Government restructuring underway
• Important legal reforms ? e.g. tax corporate
  law
• Increased professionalism in the private sector

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Market Expanding Middle Class Purchasing
Poweron Rise
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So While Some Investors are Upbeat
Talented managers directors on the rise
Companies adopting CG Codes
Legal framework improving by the day
Stripping/tunneling assets a thing of the past
Listing requirements improving
All OJSCs to use IFRS by 2007
Independent directors are nominated to Boards
Effective market regulator now in place
Protection of minority SH rights via cumulative
voting
Govt. now tackling corruption!
Quality CG services now available
Administrative reforms underway
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Many Investors Remain Wary
Poor Management, no control
Weak/arbitrary enforcement
Stripping/tunneling assets
No Level Playing Field
Hostile Takeovers
Poor Financial Information
Insider trading
Undercapitalized market
Govt. bureaucracy
Corruption!Courts, Police, Fed. Govt., Regional
Govt., City Govt., suppliers, tax inspectors
Weak banking
No internal controls
Administrative inertia
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Why? Because Corporate Governance Matters!
McKinseys 2002 Global Investor Opinion Survey
finds that 73 of respondents would consider a
38 premium for better governed firms in Russia
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The Legal and Regulatory EnvironmentorTwo Steps
Forward, One Step Back
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In Some Ways, Russia Has a Model Framework, in
Others, Well
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Possible Explanations for RussiasLegal
Challenges

• The transition context - or - Rome was not built
  in a day
• Russia has achieved much in ten-plus years
• Yet much remains to be done in completing
  streamlining
• One system two models gt conflicts
• Franco-German model used for reforming Russias
  legal system as a whole
• Yet corporate law based on Anglo-Saxon
  antecedents
• Lack of comprehensive strategy and framework for
  legal reforms

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Poor Enforcement MechanismsRemains a Problem
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For Example Poor Legal Redressvia Courts
SP 2003 Investor SurveyInvestor confidence in
court system remains low

• All participants have encountered problems
• Only 20 went to court to defend their rights
• And only a handful managed to win their suits!

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But the Root Problem Lies Elsewhere
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Corporate Governanceas Currently Practiced
by Russian Companies
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Most Companies LackReal Commitment to Reform
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Good Board Practices Remainan Anomaly
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And There is Much Confusion as toWho Does What
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SH Rights Appear to Have Improved Yet Much
Remains Amiss Behindthe Surface
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Disclosure Transparency, Finally, Remains Weak
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One Explanation Relationships Collapses in
Russia
Shareholders
Managers
Directors

• Short-term results
• Weak oversight
• Poor internal controls
• Bad disclosure
• Little independent advice

• Long-term impact
• Majority-minority SH conflicts
• Investors fears/high premiums
• Weak capital markets
• Slow economic development

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Consequences
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Investment Volumes Remain Low
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Russias Capital Market Is Underdeveloped
200 companies with foreign listing, yet only 37
listed domestically Only 4 IPOs have taken place
to date
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Conclusion
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Russian companies are undervalued due to
sovereign and CG risk

• Weary investors hesitant to provide capital
• And those willing charge high risk premiums
• Many Russian companies remain uncompetitive due
  to
• Under capitalization
• Poor decision-making
• Weak oversight and internal controls
• Immobility due corporate conflicts
• Poor corporate reputation

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Summary
Major International Legal Trends on Corporate
Governance Taking Place
Russia Responds, Legal Regulatory Environment
Improves, but Slowly
Enforcement However Remains a Key Concern
Thus Russian Companies Need to go Above and
Beyond to Allay Fears
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Net Capital Outflow Remains High
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Capital Flight Continues
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