Round table meeting at NRU Higher School of Economics reviews results of corporate governance research at SOEs


On April 18, 2017, the Higher School of Economics (HSE) held a round table meeting presenting the results of the research “Evaluation of corporate governance at state-owned Russian public joint-stock companies traded on the organized securities market.” The research conducted by the HSE Research Laboratory for Business Communications and the Association of Institutional Investors (API) focused on corporate governance at state-owned public joint-stock companies (PJSCs), namely, at Aeroflot, ALROSA, Bashneft, FGC UEC, Gazprom, Rosneft, ROSSETI, Rostelecom, RusHydro, Sberbank, Transneft, UAC, VTB.

The integrated corporate governance assessment was based on the results of meetings with members of Boards of Directors and Supervisory Boards of the PJSCs, chairs of the audit committees and/or HR and remuneration committees, independent directors, and investors. Besides, information from publicly available sources was analyzed. Among others, leading HSE experts, representatives of the companies targeted by the research, the federal executive authorities, the investment community, the largest business media took part in the round table meeting. The keynote report on the results of the research conducted jointly by the HSE Research Laboratory for Business Communications and the Association of Institutional Investors (API) was delivered by the API Executive Director Alexander Shevchuk. Valentina Kirillina, Doctor of Philology, Prof., Head of the Research Laboratory for Business Communications, noted the relevance of the research aimed at improving corporate governance and the need to constantly monitor this problem at PJSCs.

The research makers noted a significant role of the Corporate Governance Code approved by the Russian Government and the Bank of Russia in 2014 in the development of corporate governance in Russia, with “much to be done in the way of development and improvement” of corporate governance quality at many Russian state-owned companies. For example, independent directors are elected is less than half of the companies and are sometimes only technically independent from the Government or the key shareholder. Another point of concern is insufficient activity of the minority shareholders, primarily at shareholders meetings. The efficiency of internal audit is also open to question at most of the companies. That said, disclosure of information by companies has notably improved in recent years.

Among other things, the research makers recommend that companies disclose more information about their activities, including financials, as well as data on the composition and activity of their Boards of Directors, comply with the Corporate Governance Code and the requirements of the Moscow Exchange Listing Rules as regards the number of independent directors. Other recommendations include improvements in the disclosure of information for shareholders’ meetings, non-voting of quasi-treasury shares, payment of dividends out of earnings according to IFRS. Also, the profit distribution by the Board to Directors should be based on clearly-defined criteria, taking into account up-to-date benchmarks, not on formal grounds.

We do see substantial progress in the corporate governance system, and this process is being spurred by the Government, the majority shareholder of these companies. The positive trend manifests itself, for example, in the preparation of information for annual general meetings and in the growing role of the Boards of Directors, and particularly, their Chairs, in corporate business processes. However, there is still a long way to go before the quality of corporate governance at Russian state-owned companies matches international standards,” Alexander Shevchuk noted in his report.

According to Elena Kuritsyna, head of the Central Bank’s Corporate Relations Department, the Corporate Governance Code is not a binding document. To ensure effective implementation of the Code, the Bank prefers the “soft power” approach based on the “comply or explain” principle which leaves the choice of the Code principles and recommendations to follow to the discretion of the companies but requires that companies explain the reasons for non-compliance in as much detail as possible. The results of applying this principle by the Russian PJSCs were disclosed yesterday in the Bank of Russia’s Review of the corporate governance practices at Russian public companies, and the main conclusions of this part of the review were presented at the round table meeting.

Elena Kuritsyna also said that the Bank of Russia did not support the requirement to disclose the amount of individual remuneration paid to top managers; in view of the Bank of Russia, it is of higher priority to ensure disclosure of the correlation between payments and the companies’ performance. Elena Kuritsyna also informed the round table meeting participants how the companies reacted to the Bank’s recommendations to disclose information on the criteria for decision-making on the top management’s remuneration. “We found no support among major companies in this respect, which is why we have chosen the same soft implementation policy: we will offer companies a special disclosure form to report on that,” Elena Kuritsyna said.

Philippe Pegorier, a Board member of the Association of European Business in Russia and the President of Alstom Russia, drew the round table meeting participants’ attention to the internationalization of Russian state-owned businesses (including companies operating outside Russia), which he regards as insufficient: for example, there are hardly any foreign citizens on the Boards of Directors and the management boards, and the current members of the Boards of Directors and the management boards often lack managerial experience and foreign business education. This, in his view, indicates that the Russian corporate governance community is not integrated into the international environment. “What would ensure higher security of businesses under current conditions, the Russian identity and government ownership, or much deeper integration into the global space?” Philippe Pegorier asked. The question remained open, especially in the context of the sanctions imposed against Russian businesses which Philippe referred to.

Standing up to Philippe Pegorier, Alexey Germanovich, an independent member of the Board of Directors of PJSC Aeroflot, emphasized the successful operation of Russian companies amidst global competition referring to several examples of Russian businesses’ full-fledged integration into the international environment to make his point. Speaking about the practice of implementing modern methods in Aeroflot’s corporate governance system, Alexey Germanovich summarized his speech as follows: “I believe that members of the Boards of Directors and all stakeholders should demonstrate to companies the benefits of proper corporate governance for their development, which is why today’s round table meeting is a major step towards this goal.”

Oleg Fedorov, a member of the Board of Directors of PJSC ROSSETI, previously a member of the Supervisory Board of PJSC ALROSA, expressed an opinion that corporate governance largely depended on the company’s business profile and related priorities, as well as the general managerial culture. However, in all cases and scenarios, independent directors perform important tasks, taking consistent efforts to improve the quality of governance in the corporate segment.

Alexander Varvarin, Vice President of the Russian Union of Industrialists and Entrepreneurs, also spoke about the low involvement of minority shareholders in corporate actions emphasizing the need for companies to maintain constant and active engagement with such shareholders (as exemplified by Sberbank). Besides, he highlighted a number of legislative imperfections and restrictions which, among other things, reduce the shareholders’ motivation to participate in meetings, requirements to disclose ultimate owners (beneficiaries), as well as problems related to the voting by Board members representing the Government in accordance with instructions.

In the following discussion, the meeting participants generally supported the conclusions made in the research and touched upon ways of corporate governance development in Russia. In particular, it was noted that the Government should not reduce its role in the Boards of Directors as it guarantees the development of effective corporate governance practices. It was also suggested that Boards of Directors were overloaded with day-to-day matters to the prejudice of strategic objectives. One of the round table meeting participants pointed out that even Russian investors often preferred investing in foreign rather than Russian businesses, which puts corporate governance improvement in Russia on top of the agenda. The quality of corporate governance at companies is correlated with their investment appeal, the speakers said.
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