Corporate Governance

The 1990s was a time of high expectation. Russia was a big player in emerging markets and investors came to the country in droves. The August 1998 financial crisis was a wake-up call not only for the Russian Government, but also for international investors, who now realized that the speculative environment had come to a severe halt. Concern for corporate governance, specifically transparency and disclosure, replaced speculation as has been reflected in highly publicized violations of corporate governance in Russia, which directly resulted in a largely negative view of the Russian investment climate held by major investors. Having admitted that, Russia in early 2000s has been undertaking visible steps towards establishment of developed model of corporate law in general, and western standards of corporate governance in particular.

Add to this the confusion of the Russian accounting system, which was originally designed to provide information to government officials for a centrally planned economy, not to provide useful information to business managers for day-to-day operational decisions. Therefore, many potential investors, not familiar with the standards, were not able to clearly gauge a companyÒs performance. Understanding the key importance of the issue, Russia is planned to introduce new accounting standards based on internationally accepted principles. The turn is expected as early as beginning of 2004.

Recognition of the corporate governance importance was coming slowly to the Russian companies and only recently ÑÒcorporate governanceÒÒ stopped being just a foreign word. The companies have appreciated the corporate governance importance to a companyÒs value and its attraction for strategic and financial investors. However good corporate behavior is still to come, each day newspapers bring new stories of shareholder rights violations, including denial of the right to participate in shareholders' meetings, dilution of capital, non-compliance with information disclosure requirements, stripping off assets to ÑÒfriendlyÒÒ companies, transfer pricing, unlawful transactions with related parties, and fictitious bankruptcy with subsequent buy-out of disposed assets.

Russian corporate governance can be improved by focusing on ensuring fairness, transparency, accountability, and responsibility. Disclosure and transparency has been implemented in a number of Russian companies, although the challenges may seem daunting: the different systems of accounting, punitive tax system and complex and often non-transparent ownership structures are still compounded by negative attitudes towards transparency.

However, shareholders and management are more aware of the relationship between good corporate governance and increased investment into the company. Many managers are realizing that to maximize their market value and continue to attract critical financial capital Russian enterprises must focus on the issues of corporate governance and transparency. Furthermore, RussiaÒs leadership is focused on the absolute need for reforms. For the first time in the history of Russia, a parliamentary committee for the protection of investor rights has been established. The State Duma and the Government have stepped up their efforts to enhance the corporate legislation. The two major acts aimed to regulate the corporate governance finally were adopted, namely:

- Significant amendments were introduced into the Law On Joint Stock Companies. Such novelties as appearance of fractional shares, new reorganization rules, provisions on interested partiesÒ transactions, etc. were enacted to ensure the further improvement of shareholdersÒ rights and interests.
- Secondly, with participation of the Federal Commission on Securities Market, the Code of Corporate Governance was adopted. At this stage, the Code, being the recommendation, does not yet have the force of law. However, there exist clear indications that the role of the Code will be increased further up to normative act. The substance of the Code had been developed on the expertise of European models and provides for western standards of corporate governance. Not a surprise, that several major Russian companies have passed already their internal codes with the clear purpose of improving investment attractiveness and effectiveness of corporate governance.