Fianna Jesover
A series of recommendations for improving corporate governance in Russia, drawn up in three years of consultations and debate involving Russian and international policy-makers and businessmen, were recently released by the OECD in Moscow to an audience of policy-makers, business leaders and the press. They were also presented in Paris to high level officials from OECD capitals. The recommendations are contained in a White Paper on Corporate Governance in Russia developed by the Russian Corporate Governance Roundtable. Sponsored by the OECD and the World Bank, the Roundtable has brought together an influential network of Russian and international policy-makers and private-sector decision-makers in five meetings over the last three years. The White Paper, whose text has been the subject of extensive open consultation, is expected to contribute to reform and policy-making in Russia over the coming years.
Until recently, poor corporate governance practices have impeded the development of a sound investment climate in Russia. Much progress has been achieved, however, during the last few years. Laws have been adopted or amended to strengthen protection against abuses. Policymakers, investors and the public at large have become aware of the issues and have pressed for change. Some of the largest corporations, previously the source of notorious abuses, appear to be changing their practices for the better.
This progress has been fully recognised and acknowledged by the Roundtable. The credibility of corporate governance and the development of equity markets in Russia now depend on sustaining the momentum of these reforms, deepening their impact and rendering them enforceable and irreversible. To achieve those goals, priority should be given to the following five areas:
1. Intensify implementation and enforcement
The highest priority is to strengthen the legal and regulatory framework to ensure that existing laws and regulations are implemented and enforced effectively. This is needed for the proper functioning of companies as well as securities markets. Effective implementation requires both sustained levels of investigation and enforcement as well as credible sanctions — severe enough to deter violations. Of particular importance to enforcement are provisions for the equitable treatment of shareholders, expropriation of corporate assets by managers or controlling shareholders, and violations of disclosure requirements.
The legislature and the government should strengthen the judiciary’s ability to deal with commercial disputes. Courts need more resources to hire, retain and train judges and other staff so they can perform their functions in a fully professional manner and with the required level of integrity. Streamlining the rules on jurisdiction over commercial disputes will result in a coherent, predictable body of precedent and also help in developing the necessary body of expertise among judges.
The Federal Commission for the Securities Markets (FCSM) should be granted sufficient resources to pursue its core function: to develop and enforce regulations that protect inventors and maintain market integrity. The mandate of the FCSM should focus explicitly on the supervision of market intermediaries and the monitoring of publicly held corporations, in order to make the best possible use of scarce human and financial resources.
Since implementation and enforcement also concern investors and individual corporations, stock exchanges, business associations, professional organisations and individual companies, they should themselves develop and carry out their own strategies for improved corporate governance.
Russia should adopt in full and as quickly as possible International Financial Reporting Standards for publicly listed and non-private companies (widely held non-listed companies). These companies should be audited in compliance with International Standards of Auditing.
2. Ensure clarity and coherence
Priority also should be given to clarifying the competencies of various institutions and ensuring coherence among different legal and regulatory provisions.
Clear responsibility should be assigned to the proper authority for reporting changes in corporate ownership and control. The regulatory authority for supervising the share registrars needs to be clearly specified. The status and liability of senior managers should be clarified and distinguished from those of other employees as set out in labour law. Board members need to perceive their duties and liabilities clearly and explicitly.
3. Facilitate the development of a culture of corporate governance in the private sector
Several Russian companies are beginning to capitalise on the benefits of good corporate governance. To assist them in this process, it is important that the legal and regulatory framework is understandable and does not burden corporations with undue administrative costs. It is important to develop and implement regulations that strike the right balance between theses costs and their benefits.
It is also important that the corporate sector develops and takes prime responsibility for a set of corporate governance tools, such as a Code of Corporate Governance. Professional associations also need to develop their own ethical and professional standards that ensure legitimacy, better member services, and credibility with market participants and the public at large.
4. Ensure continuing support and review of progress
The reform of corporate governance in Russia is now at a critical stage. To ensure domestic and international credibility, the Roundtable should continue its work using this White Paper as the basis for promoting, assisting and assessing progress in Russian corporate governance. A core group will be formed to guide the work and offer help, advice or expertise on specific issues and related areas of corporate affairs affecting corporate governance such as insolvency. The White Paper should also serve as a resource for Russian authorities and corporations that want to report on progress, seek the opinion of the international business community and identify areas where technical assistance may be required.
5. Support and enhance the development of training programmes
An important task for governmental bodies, professional associations and individual companies is to ensure the effective training of judges, government officials as well as managers, board members, accountants and auditors. This is particularly important in order to raise the general awareness of good corporate governance, keep up with any changes in the laws, facilitate the transition to international financial reporting standards, and develop professional boards.
To accomplish this task, the Russian government, professional organisations, individual companies and the international donor community need to make available sufficient funds and resources. It is important that the training is adapted to the Russian context and to the needs of practitioners.
In developing these recommendations, the Roundtable has used the OECD Principles of Corporate Governance as a point of reference. The OECD Principles are one of the 12 core standards adopted by the International Financial Stability Forum to promote financial market stability and reduce the risk of future financial turmoil. This White Paper thus establishes a direct link between today’s Russian corporate governance agenda and internationally recognised standards.
Broad international participation has been strongly encouraged to ensure full Russian access to today’s international dialogue on corporate governance and to give Russian authorities, corporations and investors the opportunity to discuss developments with their peers from OECD countries. The Roundtable, which has taken an inclusive approach to its work, circulated drafts of the recommendations and made them available for comment. The final White Paper incorporated comments to the draft and others made at presentations during the Roundtable meetings.
This White Paper has been developed on a consensual basis. The Roundtable meetings, organised by the OECD in co-operation with the World Bank Group, have been co-hosted by the FCSM and the Supreme Arbitrazh Court. The Roundtable has also received financial support from the United States Agency for International Development and the Global Corporate Governance Forum.
Participants to the Roundtable have been senior Russian and international policy makers, regulators and market participants. They have included representatives from the legislature, the government, the judiciary, regulatory authorities, stock exchanges, corporations, investors, stakeholder groups and individual experts. Representatives from international organisations, non-governmental groups and bilateral agencies with interest and expertise in corporate governance also participated.
Building on internationally recognised standards, it reflects what is commonly expected from Russian policy makers and the business community in an increasingly global economy. While priorities and details of legislation may differ from country to country, a global consensus on a framework for good corporate governance is rapidly emerging. Regional corporate governance White Papers currently are being developed by similar Roundtables in Asia, Latin America, and South-Eastern Europe.
The recommendations in this White Paper should be viewed as complementing other corporate governance initiatives by private and public institutions in Russia, such as the Corporate Governance Code developed by the FCSM. These recommendations are primarily concerned with corporate governance in publicly traded companies. Improving corporate governance is, however, a shared responsibility between the public and private sectors where individual corporations, investors and professional organisations must play a proactive role. Experience has shown that it is ultimately a matter of self-interest for all members of the business community to evaluate their systems of corporate governance and implement the recommendations in this White Paper.
The recommendations in this White Paper should also be supplemented by reforms to public governance and corporate governance in the financial sector. Special attention should also be given to corporate governance in the continuing process of restructuring the Russian natural monopolies.
Signs of increased awareness are numerous and encouraging. President Putin has spoken out on the role of corporate governance in fostering a favorable investment climate. The FCSM has coordinated an intensive effort to produce a corporate governance code. The Duma has set up a working group on corporate governance. New private non-profit institutions, including managers and investors associations, investor relations groups, institutes on corporate governance and directors, have been created. Ratings agencies have initiated corporate governance ratings for Russian companies. Most tellingly, many major companies have realized and are taking steps to enjoy the benefits improved governance practices can bring to attract outside investors and to raise their market value.
In the mind of the market, however, once bitten, twice shy. Investors well remember the corporate governance abuses of prior years. It is therefore imperative that Russia maintains the momentum of reform and put in place credible enforcement mechanisms. The need for tangible and irreversible progress requires us to move forward from awareness raising to implementation and enforcement. Essential aspects of this movement will be peer discussion based on real-world experience, the type of discussion which the Roundtable is well-positioned to carry out through its existing constituency and the OECD’s network of experts in the delegations and capitals.
The coalition of Russian and international experts has therefore committed itself to continue the work of the Roundtable, using the White Paper and other relevant initiatives as the basis for promoting and assessing implementation of reform. The continuity of the Roundtable’s involvement will preserve a common framework for corporate governance reform and sustain coherence. It will also create synergies among the different group of actors and serve as a nexus for dissemination of new initiatives.
The second phase of the Russian Roundtable’s work over the next three years will therefore focus on designing and implementing corporate governance reforms. The main points of reference will be the recently issued White Paper of Corporate Governance and other relevant Russian reform initiatives. Focus will be on identifying viable and effective solutions through an exchange of experiences among public and as well as private sector experts in Russia and their counterparts from OECD member countries and international organisations. The Roundtable will also provide a link between corporate governance reform and related corporate affairs issues, such as insolvency reform, and help identify areas where technical assistance may be required. The OECD remains a trustworthy and committed partner in helping to drive the work of the Roundtable forward.
For further information, on the White Paper contact Fianna Jesover, Project Manager at the OECD’s Corporate Affairs Division (tel: [33] 1-49-10-4345 or e-mail: Fianna.JESOVER@oecd.org). For information on all the work the OECD undertakes in Russia contact Nick Malyshev at the OECD’s Centre for Co-operation with non-members (tel. [33] 1-45-24-1669).