Government fails to increase transparency at many state-owned companies

Either due to the lack of commitment or because of resistance from management teams, experts say
The 13 largest state-owned enterprises are instructed by the Government of Russia to comply with the recommendations of the Corporate Governance Code (approved by the Central Bank in 2014). In doing so, officials tried to increase transparency of state assets for investors. As three years passed, experts of the Open Government reviewed the progress in that direction.
The Code recommends prohibiting the voting of quasi-treasury shares, expanding the Board of Directors’ control over managers, easing Board members’ access to corporate information, adopting an anti-corruption policy. It was of crucial importance to establish control over managers: such positions are often held by heavyweights who can directly contact the President of Russia, which makes actions of state-owned companies unpredictable for investors, one of the Code developers notes.
As follows from the report, corporate governance has generally improved, but some of the state-owned companies failed to improve the role of their Boards of Directors. Russian Railways, Sovcomflot, Gazprom lagged behind the others in implementing the Code, the Open Government experts note while praising Rostelecom, ALROSA and VTB as the top performers.
One of the key weaknesses highlighted by experts is the failure of Russian Railways, Sovcomflot and Gazprom to increase the role of their Boards of Directors. The risk management systems and internal audit activities at Russian Railways and Sovcomflot also raise questions. How closely Gazprom’s Board of Directors monitors transactions of its subsidiaries remains shrouded in secrecy as the company will not contact with the experts.
The report contains the companies’ comments on reasons for defying the Code. One of them is dependence on the Government’s actions. For example, Russian Railways cannot strengthen the Board’s powers in appointing the company’s president as this resolution should be taken by the Government under the current legislation. As for risk management improvements, the company has been negotiating related proposals with authorities since June, the rail operator’s spokesperson said. However, the relevant authorities are in no haste to approve amendments to the charter of Russian Railways, a participant of discussions at the government admitted.
For Sovcomflot, implementation of the Code is hampered by the upcoming privatization: as long as the Government is the company’s shareholder, it prefers retaining the CEO appointment power, the report notes. The Government announced plans to privatize the shipping company several years ago, but has not since made the final decision. The company has complied with most of the Code recommendations, with allowance for the specific nature of its activity, Sovcomflot’s spokesperson emphasized.
Gazprom does not state the reasons for underperformance in implementing the Code in the report, only indicating that the “objective ability of the management to influence implementation of some activities” was taken into account when the roadmap for implementing the Code provisions prioritized by Gazprom was prepared, the gas producer’s spokesperson said. Representatives of Russia’s Federal Agency for State Property Management (Rosimushchestvo), Ministry of Economic Development and First Deputy Prime Minister Igor Shuvalov did not respond to inquiries from Vedomosti.
The Government itself cannot decide whether it should prioritize compliance with the Code or retaining control, the person participating in the government discussion notes: for example, the management team of Gazprom uses quasi-treasury shares for strengthening the Government’s position as a shareholder.
The blame for the slow pace of corporate governance improvements should fall on officials, one of the Code developers says. Yet managers of state-owned enterprises are in a strong position; for example, if they don't want to increase the Board’s control over transactions of their companies’ subsidiaries, they will just block such an initiative, with few willing to oppose managers of state-owned companies. They are the real owners of state-owned enterprises, says the person participating in the government discussion addressing the issue. “There is a lack of political will for the Code – we need another kick from the President for a leap forward,” he admits.
According to Alexander Shevchuk, Executive Director of Association of Institutional Investors, the key issues concern the powers of Boards of Directors and risk management. A few years ago, the Government decided to add power to Boards of Directors by bringing in high-ranking officials. “The result is that all key resolutions are discussed between heavyweight managers and those officials in top echelons rather than at the Board,” Shevchuk notes. The Board then learns about resolutions taken behind its back and if someone protests, the response is: “We see your point, you may be right, but the instruction has already been given,” says Shevchuk.


Contributed by: Arthur Toporkov, Alexandra Terentyeva
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