State-owned companies blamed for pushback

They are slow to follow the Central Bank’s transparency and accountability recommendations

Implementing openness and transparency recommendations in corporate governance practices is clearly not a priority for state-owned companies, as follows from a review by the Government Expert Council. Its specialists analyzed implementation by companies of the Corporate Governance Code developed by the Bank of Russia more than two years ago. According to the Expert Council, companies are avoiding reforms referring to the impossibility of “decision-making” once they are implemented.

The Government should indicate to state-owned companies the need for implementing the Corporate Governance Code (CGC) guidelines, according to the Government Expert Council’s report reviewed by the Kommersant. It should be recalled that the CGC was developed by the Central Bank and recommended for application by public companies in the spring of 2014 to improve transparency and efficiency of corporate governance in Russia; it sets out recommendations concerning the role of the Board of Directors, information disclosure, etc. The experts drew conclusions based on the actual implementation by companies of the CGC guidance after two seasons of annual shareholders’ meetings. The recommendations provided in the report were submitted, both off the record and officially, to the companies, Rosimushchestvo, the Central Bank, the Government and the Presidential Executive Office.
According to the Expert Council, less than half, namely, 6 out of the 13 majors (the group of which includes Rostelecom, Rosneft, Transneft, ALROSA, RusHydro, Aeroflot, ROSSETI, VTB, FGC UES, Russian Railways, Sovcomflot, Gazprom and Bashneft) implemented the CGC rather effectively at their AGMs. Russian Railways, Gazprom, Transneft and Sovcomflot failed to make the CGC an effective instrument, while Bashneft, Rostelecom and ALROSA were the top performers.
According to the report, the Code is being discussed at almost all companies, but many will not give its recommendations full effect, primarily regarding them as an obstacle for “decision-making.” This reason, in particular, was mentioned by Rostelecom, FGC UES and Rosneft. The Government needs “evidence that companies have prioritized this issue,” according to the Expert Council’s recommendations concerning the further Code implementation. Companies appear to be “quite effective” in what pertains to information disclosure, delegation of supervisory powers to Boards of Directors, information hotlines and anti-corruption policies; the slowest progress is made in ensuring “clarity and transparency of selecting members of Boards of Directors” and in providing real powers to Boards of Directors which are currently denied the power of decision-making by a simple majority vote, the right to appoint directors at state-owned companies’ subsidiaries and full access to subsidiary companies’ documents, the experts say.
Denis Spirin, a member of the Government’s Expert Council, emphasizes that there are two parties primarily benefiting from the proper CGC implementation: the Government (the controlling shareholder) which can rely on effective Boards of Directors in corporate governance and investors interested in companies’ transparency. Some of the companies so far fail to follow top-priority recommendations – often because management teams stick to current procedures that are more comfortable and familiar to them, and sometimes because of the controlling shareholder’s actions, the expert says.
Dmitry Stepanov, a partner of Egorov, Puginsky, Afanasiev & Partners law firm, notes that the Government exercises control over state-owned enterprises through officials sitting on their Boards of Directors, but its representatives may be unaware of first-tier or lower-tier subsidiaries’ affairs or generally inexperienced in business. The Russian White House makes a point of launching effective market mechanisms tested abroad in the past 30 years through the CGC where each innovation is a small improvement, even though none makes a breakthrough. “Gradual CGC implementation may help abandon top-down regulation, which can only be welcomed," the lawyer commented.
Sofia Okun
We regret to note an error in the article “State-owned companies blamed for pushback” dated Sep 28, 2016. The statement “Gazprom, ROSSETI and FGC UES are recognized as underperformers in complying with the Corporate Governance Code” is incorrect. In fact, ROSSETI is among the three leaders in implementing the CGC guidelines, FGC UES is in the middle of the ranking, while Sovcomflot, Transneft, Gazprom and Russian Railways have a long way to go. We apologize for this unfortunate error.
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