Corporate Governance in Russia: Quo Vadis? 9783110695816, 9783110695700

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Corporate Governance in Russia

De Gruyter Studies in Corporate Governance

Series Editor Jill Atkins Professor at Sheffield University Management School, University of Sheffield, UK Visiting Professor at the University of the Witwatersrand, South Africa

Volume 3

Corporate Governance in Russia Quo Vadis? Edited by Alla Dementieva and Elena Zavyalova

ISBN 978-3-11-069570-0 e-ISBN (PDF) 978-3-11-069581-6 e-ISBN (EPUB) 978-3-11-069590-8 ISSN 2570-1673 Library of Congress Control Number: 2020944022 Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available on the Internet at http://dnb.dnb.de. © 2021 Walter de Gruyter GmbH, Berlin/Boston Typesetting: Integra Software Services Pvt. Ltd. Printing and Binding: CPI books GmbH, Leck www.degruyter.com

To the readers Why do some market leaders, after years of success, become outsiders? Why do some firms keep business profitable, while their competitors strive to make ends meet? Why are results of mergers & acquisitions disappointing? Should a wholesaler try to satisfy the needs of customers? How to sort out priorities: shareholders, employees, clients, or vice versa? What goals are more important: long-term or short-term? What is the optimum management motivation for a particular company? Who is to be invited to the Board of Directors? Who is an independent director and is such independence enough to fulfil the role of a director? When do companies need to think about change management? Is there any difference in a director’s responsibility for action and inaction? Why does a change by the controlling stakeholder imply the right of the minority shareholders to sell him their shares? Can artificial intelligence be a member of the Board of Directors, and who is liable for its decisions? All these questions are considered by one of the most interesting spheres of economic science – corporate governance. The first corporations were created hundreds of years ago and businesses and regulators have gained considerable expertise and formulated the best practices in the form of laws, corporate governance codes and listing rules, but corporate governance is still of current interest and the number of disputes concerning different aspects of this phenomenon is mounting. The reason is obvious – new technologies stimulate rapid changes which shorten the horizon of strategic planning, and the quality of management of the corporation has an increased impact on its ability to adapt to current changes, and hence on its own competitiveness. In such an environment we see the creation of new business models, innovative approaches to the monetisation of data and access to clients, and the use of alternative forms of raising capital. The role of ecological components of the company’s work increases, and the phenomenon of social networks leads to such situations when users unite and raise their market power, which corporations have to take into account. Unfortunately, new trends substitute for common directions, which seemed unlikely to change. In emerging markets, raising public equity is still one of the main ways of fixing profit by investors into private companies and the source of business financing, on the developed markets the recent trend is delisting of public companies into private ones and unwillingness of private companies investors to share their margin with other investors when filing for an IPO. There is no doubt that these trends will spur a new wave of discussions concerning approaches to the best practices and standards of corporate governance. In 2013, the Russian Federal Service for the Financial Markets delegated its authority concerning regulation and control in the sphere of corporate relations to the Bank of Russia. At the beginning of 2014 the Bank of Russia enacted the first corporate governance code, which had been initiated by the Russian Federal Service for Financial Markets and attracted financial market specialists and competent foreign experts. https://doi.org/10.1515/9783110695816-202

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The code and its adoption by Russian public companies is in line with the format “follow or explain”, which implies that Russian public companies are to reveal to investors why the recommendations of the code are not followed or why they are amended. The key message of the Bank of Russia concerning the code is that its norms are to be followed organically and not mechanically, i.e. that society should deliberately follow the principles of the code instead of adopting all its recommendations, or deliberately not. The Bank of Russia has been scrutinizing progress in this sphere for several years (see references to our reports), and notes with satisfaction the increased number of recommendations followed as well as improved quality of explanations in case of notfollowed recommendations. Awareness-raising activities and continuous discussions on the development of corporate governance institutions attracting the parties concerned help it. Nevertheless, we continue to consider corporate governance as a living matter, rather than a determined list of rules fixed in the code. The Bank of Russia, as a regulator of the whole financial market, endeavours to implement the most suitable practices of corporate governance in the financial sector. Analysis of the reasons for revoking financial institutions’ licences shows that, in most cases, the main source of financial organisations’ problems is a defective system of corporate governance. Companies, along with the Government and the Parliament of Russia, work on a “tough” regulation of corporate governance. In particular, norms hindering adherence to the principles of the corporate governance code are eliminated, new statutory concepts are created to enhance the liability of the Board of Directors and their legal competence, the role of managers’ business reputation increases, and information transparency of joint-stock companies and companies with state participation rises. As corporate governance is of current interest to higher education institutions in Russia and to the Russian economy, we acclaim publication of this book. Although separate chapters represent the authors’ expert views and contain disputable conclusions, the articles show a comprehensive study of corporate governance. The reader can get a basic idea of corporate governance, the history of its development in Russia and abroad, and find answers to a wide range of questions concerning relations between modern corporations and shareholders, lenders, employees, regulators and even local people worried about environmental pollution. I am certain that this book can spark the interest of the reader and many of them will read more books about corporate governance and even participate in many discussions on this topic, and some of them will even be fortunate enough to become members of the governing board of corporations and so have the chance to apply the acquired knowledge. Only experience, coupled with broad knowledge, can help a person gain appropriate expertise in the art of corporate governance. Sergey Shvetsov First Deputy Governor of the Bank of Russia Member of the Bank of Russia’s Board of Directors

Commentary It has been almost 30 years since the transition of the economy and the formation and practice of modern corporate governance in Russia, yet the topic of corporate governance is increasingly important and attractive in the field of transition economics, especially in the new era of globalization and global inequality. After all the opportunities and challenges, booms and sanctions, Russian companies have developed various modes of corporate governance, from the traditional one based on continental law system, to a system blended with the Anglo-American law system, and to the more specific mode with Russian characteristics, which is in line with Russian political institutions, social status, and cultural background. All corporate governance practices have significantly reshaped the business environment and culture of the Russian economy, and have affected the economic performance of both Russian companies and Russian international business. The profound change and development of Russian corporate governance over the past 30 years provides valuable references and comparisons for other transition and emerging economies like China. It is therefore of great importance and value in both theory and practice to study the various regulations and practices of corporate governance in Russia, to summarize key facts and features, to analyze representative cases of corporate transition, reformation and merging in the process of development, to evaluate the effect of government intervention and regulation and the impact of evolving business environments, and most importantly to explore the trends and paths of future development of corporate governance in Russia, given the recent challenges and conflicts with the Western world. The book Corporate Goverance in Russia: Quo Vadis does an excellent job in fulfilling this task. It covers three major theoretical and practical aspects of corporate governance in Russia: the mode of corporate governance under the global contents, the changing image and perception of corporate governance from the views of government regulator and business community, and a more detailed and specific application of corporate governance in Russian business. Written and edited by leading economists and researchers, the book provides an extraordinary outline of the evolution of corporate governance in Russia, and explains how the roles of shareholders, stakeholders, employees and insiders are played and changed following the impacts of cultural, political, economic and institutional factors and how strategic planning was formed and developed from transition economy in 1990s to the globalization era in 2000s and to the most recent phase of digitalization in 2010s. In addition to analyzing the framework of Russian corporate governance, the authors also address important issues in practice, many of which are common to transition economies, such as regulation enforcement, ownership structure, the roles of the state and the market, efficiency of boards, etc. Another key attraction of the book is the topic of corporate social responsibilities, which is crucial for companies to establish good perception of corporate governance in public alongside the fact that income https://doi.org/10.1515/9783110695816-203

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and wealth gaps are getting wider as the economy and business grow in Russia, as happens in many other countries in the world. Chengyu Yang Professor of Economocs Business School, Beijing Normal University (China) Guest professor Ludwigshafen University of Business and Society (Germany)

Contents To the readers

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Commentary

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Introduction

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Part I Alla Dementieva, Olga Dubovskaya, Natalya Brovko 1 Corporate Governance Concept: Modern Approaches

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Vladimir Milovidov, Yulia Bochkova 2 Before the Era of Digitalization: The Transformation of a Shareholders’ Corporation to a Stakeholders’ Corporation 15 Alla Dementieva, James C. Leontiades, Olga Dubovskaya 3 Current Trends in Corporate Governance 25 Vladimir Milovidov, Yulia Bochkova 4 Corporate Governance 2.0 and the Digitalization of Corporations

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Part II Vladimir Verbitskiy, Farida Kardanova 5 Dialectics of Corporate Management Development in Russia

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Sergey Vodolagin 6 The Evolution of the Legal Regulation of Corporate Relations in Russia 57 Sergey Vodolagin 7 Current Trends in the Legal Regulation of Corporate Relations Konstantin Manuylov, Vasily Tkachev, Inna Andronova 8 The Russian Financial Market: Progress and Challenges

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Part III Alla Dementieva, Olga Kandinskaia, Olga Dubovskaya 9 Russian Corporate Sector: A Portrait 93 Igor Belikov 10 Russian Quasi-corporation As It Is

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Igor Belikov 11 Russian Corporate Boards: How to Pull Oneself Out by the Hair

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Part IV Raisa Nozdreva, Mitsuaki Shimaguchi 12 Formation and Development of Russia’s Corporate Strategic Planning in a Market Economy 129 Raisa Nozdreva 13 The Role of the Board of Directors in Corporate Strategic Planning and the Main Areas for Improvement in its Forms and Methods 139 Irina Tkachenko 14 Features of Long-term Strategic Planning in Medium-sized Companies with State Participation 151 Igor Turuyev, Ulugbek S. Ziyadullaev, Lyudmila Zainullina 15 Internal Audit as an Ethics Standard for Smart Corporate Governance Design 163

Part V Elena Zavyalova, Jae Sung Lee, Elena Ostrovskaya 16 Corporate Social Responsibility 173 Irina Tkachenko, Irina Pervukhina, Oksana Sokolovskaya 17 Corporate Governance and Environmental Reporting in Russian Companies: Present and Future 189

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Viktor Onuchak, Ekaterina Nikitchanova, Maria Grineva 18 Corporate Social Responsibility and Corporate Governance Ratings as a Component of Sustainable Development 201

Part VI Marie Sokolova, Diana Madiyarova, Asya Pshikhacheva 19 Organizational Culture in the Corporate Governance System Elena Zavyalova, Zogbe Pepe Khorrine, Elena Ostrovskaya 20 Corporate Conflicts 225 Marie Sokolova, Marianne Nepoklonova 21 Russian Companies: Talent Management at the Top Christian Schopper Conclusion 249 Contributors Index

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Introduction Market-oriented joint-stock companies represent the type of capital structure organisation, most prevalent in the world today, and also in Russian business activity. Operating in specific conditions, and being the backdrop for development of the national economy, Russian joint-stock companies frequently need to raise finance from outside sources with a view to promoting their business development and growth. In the course of decision-making on how the amount of funds they are prepared to pour into a certain company, the investor first of all analyses the functioning of the company’s and the economy’s system of corporate governance and the outlook for the company’s growth. The more information on the company they have and the more accurately they can evaluate its potential, the higher price they are ready to pay for its stock. Russian companies often experience certain problems in their relationships with investors, which take the form of either underestimating the firm’s value or the potential investors’ unwillingness to invest their money in it. In the modern world of globalised economic activity, the development of an efficient system of corporate governance, which embraces generally accepted world standards in this area, gives companies a sufficient edge, in particular, a higher qualitative level of management and increased attractiveness to investors, which creates the necessary pre-conditions for the company’s successful entry into financial markets and its improved competitiveness both on domestic and world markets. Effective corporate governance also reduces the risk of occurrence of crisis situations, lessens various conflicts in relationships between managers and shareholders, and induces management to efficiently make use of the company’s resources and take decisions aimed at pumping up the value of the business. Thus, for Russian companies improvingthe system of corporate governance is becoming increasingly important. Currently,the task of finding a credible solution for enhancing thee system of corporate governance, creates several priorities: increasing shareholders’ participation in corporate management in the form of sharing responsibility; establishing terms of reference for boards of directors, and: enhancing decision-making on a strategic approach to business development. This book contains material covering all the essentialaspects of corporate governance in Russian companies,. The contributions in this bookencompass a large number of examples of modern practical implementation in corporate governance by Russian companies. There is an emphasis on the activities of boards of directors and executive bodies of society. The material is presented on the basis of updated sources of information, encompassing different aspects of modern implementation of the corporate governance concept. Research into corporate governance in Russian companies allows us to fill the existing gaps in economic literature available today. The first part of this book contains an analysis of the modern concept of corporate governance. Issues addressing digitalization in modern business are given special attention. The second part explores the evolution of the practical application of https://doi.org/10.1515/9783110695816-205

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corporate governance in Russia, organisational and legal aspects of the modern system of regulation of joint-stock companies’ activities. It also includes an analysis of the current state of the Russian financial market. The third part contains material on the development and present condition of the Russian corporate sector, with afocus on the practical work of boards of directors. The fourth part of the research acquaints the reader with up-to-date technologies of corporate governance in the Russian business. The fifth section contains an analysis of distinctive features of corporate social responsibility and sustainable development, making reference to the experience of Russian companies in the sphere of nonfinancial reporting and the CSR ratings in Russia. Part and parcel of the success of any company is its well-established corporate culture. This leads tothe concluding part of the monograph which is devoted to issues of human capital development and cultivating leaders which is a prerequisite for business success. In the modern environment highly-skilled managers provide the key competitive edge for any company, assuring its long-term and sustainable development. The book should be of considerable interest to managers who work in large joint-stock companies, since it offers an analysis of modern forms, methods and technologies of corporate governance, reflecting the latest achievements in this sphere. The text should be a useful practical tool for a variety of experts in the field of business management. A list of questions for consideration also allows researchers, teachers, students and business schools to gain valuable insights into methodological and practical aspects of corporate governance in Russia which can help them acquire analytical and practical skills in this sphere. The authors and the editorial board express their gratitude to Mr. A.V. Torkunov, rector of MGIMO University. Alla Dementieva Doctor of Economics, Professor Gerchikova Department of Management Marketing and External Economic Асtivity MGIMO University Elena Zavyalova Assistant Professor, PhD Head of the Department of Economic Policy and Public-Private Partnership MGIMO University

Part I

Alla Dementieva, Olga Dubovskaya, Natalya Brovko

1 Corporate Governance Concept: Modern Approaches Introduction Corporate governance is a relatively new trend in management that has its roots in the separation of ownership and management, and studies problems of controlling and operating corporations. There is no unique definition of corporate governance; some authors define corporate governance as the system of rules by which a firm is directed, while others narrowly define it as responsibilities of the Board of Directors. Most foreign authors (Tricker, 2015; Freeman, 2002; Cadbury, 2002; Clarke, 2017; Charkham, 2005; Adams, Hermalin, Weisbach, 2010; etc.) adhere to a principle that corporate governance refers to a system by which corporations are directed and controlled by shareholders and the Board of Directors. There are different definitions of corporate governance in Russian economic literature. Some authors define corporate governance as a system of management (Samosudov, 2008; Antonov, 2008), and some authors (Orekhov, Seleznev, 2008) make a clear distinction between “corporate management” and “corporate governance” as the latter has its own principles and organized structure. Others (Gazin, 2003; Radygin & Entov, 2001; Belikov, 2017) believe that corporate governance refers to the activities of the board of the directors and top managers. Different approaches to corporate governance emphasize that a dramatic overhaul in this sphere is taking place now. The greater importance of the private sector, globalization, and the alterating of the terms of competition all show that corporate governance is one of the most topical issues in the modern scientific and business world (Clarke, 2017). In this research study, the authors explore the backbone of corporate governance and its importance in modern business. To reach this goal, the first part of the research is devoted to analysing the leading theories of corporate governance, then different approaches to corporate governance are considered, and the last part covers the main modern principles and mechanisms of corporate governance. The authors conclude that the definition of corporate governance is broader, and corporate governance is gaining importance in the modern world of business.

Methods In the research, the method applied was a comparative analysis of conceptual literature (the works of foreign and Russian authors) pertaining to the understanding of https://doi.org/10.1515/9783110695816-001

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corporate governance. A qualitative analysis and dialectical and comprehensive approaches were used to generalize principles of corporate governance. Analysis, synthesis method, and inductive reasoning were applied to draw a conclusion.

Development of the Theories of Corporate Governance For corporate institutions, a long period of development has led to the formation of corporate governance. As a result, by the 1990s, corporate governance had become an integral part of managing big corporations. The first studies of corporate governance date back to the 1930s. The research in this sphere reflects the evolution of integrated systems. In 1932, American economists A.Berle and G.Means published the book “The Modern Corporation and Private Property”, where ownership and control was separated in public corporations. They showed that such separation led to the emergence of a new social class of professional managers and development of equity market (Berle & Means, 1932). According to a survey of the 200 biggest public companies, management controlled 58% of assets. In 1963 R. Lerner carried out a similar research that showed that managers controlled 85% of assets of 200 leading companies (Tricker, 1994). In 1937 in his article “The Nature of the Firm” Ronald Coase pointed out transaction costs, the costs of negotiating and concluding contracts; he also claimed that any firm was created to minimize transaction costs and the size of the firm depended on it (Coase, 1937). Research into the activities of corporations shows that management almost totally controls the assets of the biggest corporations. Separating ownership and control brings a wide range of hot issues in the theory and practice of corporate governance, such as: – decision-making in corporations is in favour of managers or stakeholders – the ways of enhancing corporate government efficiency – the rights to consider when making decisions Interest in corporate governance practices increased in the 1980–1990s, following mergers and acquisitions and a new trend in adopting social oriented norms in regulation. Studies of corporate governance over the last 20 years have been dominated by the following theories: stakeholder theory (R. Ackoff) and agency theory (М. Jensen). Stakeholder theory is often called the theory of divergence of interests of corporations and society. The main principles of the theory were formed in 1960. The company was studied as economic integrity for gaining profit; moreover the company was considered as an element of business environments and as a system which influences and is influenced by local communities, customers, suppliers,

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non-governmental organisations, personnel, investors, and stakeholders. In the mid-1970s researchers headed by R. Ackoff continued further development of this theory. Ackoff believed that future generations, along with suppliers, customers, employees, investors and lenders, and governments, were interested in corporations. He argued that many social problems could be solved if the main institutions were rearranged and effective cooperation of the stakeholders within the system was established (Ackoff, 1994). The modern ‘stakeholder theory’ was developed in the mid-1980s, when R. Edward and E.Freeman published their papers introducing a new term – stakeholder – and giving its definition. Freeman identifies a firm with its external and internal environment as groups of stakeholders, the interests of whom managers should take into account and meet (Freeman, 1984). All stakeholders are considered an inconsistent whole and the course of the development of organization is hard to define. Such a group is referred to as a “stakeholder coalition”. According to this theory, corporate governance is a system of finding a balance between stakeholder interests, i.e. a combination of institutions stimulating management to take into account all the participants (Tirole, 2001). Agency theory considers corporate relations from the angle of agency costs. This theory dates back to the 1960–1970s. M. Jensen is one of the founders of this theory (Jensen, 1976). This theory implies that there is a divergence of interests of capital owners and agents managing the capital. Managers and shareholders are interested in the success of a company, but it does not mean that the individual interests of every group are similar. When minority shareholders prevail, there is a risk that company managers, in the absence of shareholder control, can use resources as they see fit. Agency costs are investor losses incurred due to separation of ownership and control. According to this theory and the relationship between shareholders and managers, corporate governance provides a set of rules and norms protecting shareholders from opportunistic behaviour of managers. In 1992 C. Hill and T. Jones published a combined theory called Stakeholderagency theory, which is a combination of stakeholder theory and agency theory. The authors of this theory believe that a manager should take into account the interests of all the participants, and they consider a corporation as a range of contracts between managers and stakeholders (Hill, 1992). The core of all theories of corporate governance is the relationship between stakeholders, Board of Directors, managers and others (see Figure 1.1). Practice shows that the interests of different groups overlap in some spheres yet are poles apart in others. Usually all the participants of corporate relations are interested in thestability and profit of the company. The interests of every group may differ from the ones of the shareholders as well as from each other. It is worth mentioning that the structure and the role of every group can vary from company to company and over a period of time. Hence

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State authorities

Shareholders

Board of directors Suppliers

Lenders Managers Customers Employees

Regional and local authorities

Society Figure 1.1: The main participants of corporate relations.

the system of corporate governance of every company should take into account the interests and opportunities of every group and establish optimal forms and methods of cooperation between them. An organised system of corporate governance aims to eliminate any possible negative impacts these divergences may have on the performance of the company. Thus, corporate governance is a kind of “umbrella” under which all groups of members participate. We can identify two main issues of corporate governance: who wins, and who is to win in every particular case when decision is made. Such matters are regulated within the framework of corporate governance.

Definition of Corporate Governance Cadbury Committee gave one of the first definitions of corporate governance in 1992, according to which “corporate governance is the system by which companies are directed and controlled” (Clarke, 2017, p. 2). Experts of McKinsey argue that the following definition is more accurate: “Corporate governance is a combination of mechanisms necessary in the process of managing the company in order to find the adequate balance between the shareholders rights and the interests of the Board of Directors and management (Gazin, 2003). According to the definition of the Organisation for Economic Cooperation and Development, “corporate government is a system of management and control in companies. Corporate governance provides the structure through which the objectives

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of the company are set, and the means of attaining those objectives and monitoring performance are determined. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. The Principles of corporate governance recognise the interests of employees and other stakeholders and their important role in contributing to the long-term success and performance of the company”.1 The National corporate governance council reports, “In Russia this term implies complex systems and structures with the help of which managers operate the company on a daily basis in addition to direction and control of the company on a strategy level. In the majority of western jurisdictions “corporate governance” refers to the way a company is run and controlled and the Board of Directors is collectively responsible for these functions”.2 Thus, there is a wide spectrum of definitions of this term that reflect different aspects of corporate governance, but relations between stakeholders are always a focus of interest for scientists. We believe that the following definition can be provided: corporate governance is the process by which the corporation is operated by the shareholders and the Board of Directors who make corporate and strategic decisions and take into account the interests of all stakeholders. The operating system with the board of directors governing the company predetermines: – efficient corporate governance in general – sustainable operation of the corporation – competitiveness of the company Corporate governance is to solve two main problems: – to reach the company’s maximum value by making beneficial corporate decisions – to keep a balance between the interests of the Board of Directors and shareholders, the Board of Directors and managers, majority shareholders and minority shareholders, and the corporation and society Corporate governance enhances a company’s efficiency of operation and its longrun stability, which benefits all groups of stakeholders. Corporate governance aims at maximizing shareholder’s value by means of efficient management of a company (see Figure 1.2). Business transparency, accountability, and trust, as well as protecting stakeholders’ interests, are the main tools in reaching these goals.

1 Principles of corporate governance of OECD, 2015, pp.9, 10, available at: https://www.iia-ru.ru/ upload/iblock/0f1/0f174cac13747b3895aa57a53afab352.pdf 2 National Report on Corporate Governance. Issue 4/NCCG. 2011. p. 10.

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Sustainability

Shareholder value maximization

Corporate Governance

– Business transparency – Protection of interests of stakeholders

Figure 1.2: The goal of corporate governance.

The main trend in the modern practice of a large business is a wider definition of corporate governance, which embodies a number of new stakeholders (besides shareholders, Boards of Directors and managers, stakeholders including employees, counteragents, consumers, lenders, authorities, financial institutions, local communities, parent companies and subsidiaries, analytical and consulting agencies, auditors etc.). This efficient system of corporate governance helps to mitigate economic, social and political risks. This concept is included in the UN Sustainable Development Goals.3

Modern Principles and Mechanisms of Corporate Governance Corporate governance is based on the following principles: control depends on ownership, and the share of investments in the company defines the extent of control. According to the shareholder’s right, “one share is one vote”. Corporate governance is to reflect the company legislation. A shareholder is to direct the company. A joint-stock company cannot function without shareholder meetings. The Board of Directors, as elected by the shareholders, runs the corporation. The corporation’s top management acts in accordance with the company legislation and social

3 National Agency for Sustainable Development Official Website [Electronic source]. Available at: https://green-agency.ru/istoriya-formirovaniya-koncepcii-ustojchivogo-razvitiya/

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responsibility. Shareholders have the right to consider the company as a way to maximize return on investment. However, the bigger the joint-stock company is, the more appealing it is to new shareholders; therefore it is harder to control and make decisions. In such circumstances the main principles of corporate governance are transparency, fairness and accountability. According to the system of corporate governance the key mechanisms (external and internal) of running business efficiently in modern environment are as follows: – shareholders’ (owners) control: – management cooperation in the structure of corporate governance – participation of managers in the equity – correlation between benefits of managers and performance of the company – control from the Board of Directors – control from lenders and mechanism of bankruptcy External control mechanisms refer to: – mechanism of stock market where conditions are created to raise additional funds – mechanism of transfer of ownership rights and control over joint-stock company on the market for corporate control – system of state regulation of corporations (legal arrangements, such as corporate law, measures of protecting the rights of shareholders and investors, creation of institutional environment, international standards and requirements of global corporations in the sphere of corporate governance) The organisation model, aiming to regulate relationships between managers and owners on the one hand, and take into account goals of different stakeholders on the other, both to the benefit of the company, is called corporate governance system or model (see Figure 1.3). The framework of corporate governance stipulates who is to direct the company and its funds and with what tools, who invests in the company, and how return on investments is distributed.

Shareholders

Board of directors

Corporate governance

Managers

Stakeholders

Figure 1.3: Organisation model of the Corporate Governance System.

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Decision-making influences the efficiency of corporate governance (see Figure 1.4), the company’s performance, competitive advantages; this is why prospective investors thoroughly study the work of the managers and the Board of Directors in order to evaluate business opportunities, possible risks, and return on investments. Stages of system formation

Prospective advantages

International leadership

Access to the capital market

National leadership

Cheaper loans

The first improvements of corporate governance

Higher efficiency

Obedience to law

Goodwill

Figure 1.4: Advantages of efficient corporate governance. Source: Karapetyan (2004).

The importance of corporate governance increases as globalisation and integration lead to the expansion of the interests of shareholders and stakeholders. Corporate governance influences the inflow of investment in big corporations and is one of the characteristics which finance and restructuring depend on. The risks of corporate governance define the climate of investment. In Russia, corporate governance has its own distinguishing features, due to the historical, economic and cultural peculiarities of the country. Corporate governance serves as a tool to protect ownership rights and institutional flaws of the Russian reforms impacted. There is a considerable gap between the law and real norms and methods of corporate governance. In practice, corporate governance in Russia considers relations between shareholders (and the state), Board of Directors, and top managers. The interests of other stakeholders are not taken into account. The risks of corporate governance remain relatively high; hence, the attractiveness of investing in Russian companies is low. The main principles in this sphere are in the process of development.

Conclusion The definition of corporate governance is expanding. In the middle of the 20th century corporate governance covered relationships only between owners and managers, whilst in the 1990s it embodied the balance of interests of shareholders, Boards of Directors, and managers; nowadays the range of stakeholders has broadened

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significantly (besides shareholders, Boards of Directors, and managers, stakeholders include employees, counteragents, consumers, lenders, authorities, financial institutions, local communities, parent company and subsidiaries, analytical and consulting agencies, auditors etc.) While global markets are being shaped amid volatility and growing competition, the development of an efficient system of corporate governance – as it influences not only shareholders and managers – is of paramount importance. It leads to a further theoretical advancement of the practice of corporate government, its principles, methods and mechanisms. Differences in national legislation, institutional structures, and traditions lead to the divergence in approaches (Clarke, 2017). Nevertheless, all governance policies ensure business operates for the optimal benefit of stakeholders, who trust their investment funds. Moreover, the directors of prosperous corporations understand that interests of the society may influence reputation and results of activities of the company in the long run. The theory of corporate governance is in progress, its improvement depends on the positive results of successful corporations.

References Adams, R. (2010), “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework & Survey”, R. Adams, B.E.Hermalin, M.S.Weisbach (eds), Journal of Economic Literature, Vol. 48 No. 1, pp. 58–107. Ackoff, R.L. (1994), The Democratic Corporation: A Radical Prescription for Recreating Corporate America and Rediscovering Success. New York: Oxford University Press. Antonov, V.G. (2008), “Teoreticheskiye problem corporativnogo upravleniya”, Antonov, V.G., Samosudov, M.V., Problemy teorii i praktiki upravleniya, Vol. 25, pp. 50–61. Antonov, V.G. (2008), “Theoretical Issues of Corporate Governance”, Antonov, V.G., Samosudov, M.V., Issues of Theory and Practice of Management, Vol. 25, pp. 50–61. Bebchuk, L.A. (2009), “Investor Protection and Interest Group Politics”, L.A.Bebchuk, Z. Neeman, (ed.) Review of Financial Studies, Vol. 23. No. 3. Bebchuck, L.A., Hamdani, A. (2009), “The Elusive Quest for Global Governance Standards University of Pennsylvania”, Law Review 157 2009, pp.1263–1317. Belikov, I. (2017), “Effectivnyi sovet directorov: noviy vzglyad”, Aktsionernoye obschestvo: voprosy corporativnogo upravleniya, Vol. 3–4. (Belikov, I. (2017), “Efficient Board of Directors: a New Approach”, Public Company: Corporate Governance. Vol. 3–4). Berle, A., Means, G. (1932), The Modern Corporation and Private Property. New York: MacMillan. Cadbury, A. (2002), Corporate Governance and Chairmanship. A personal View. Oxford: Oxford University Press. Charkham, J.P. (2005), Keeping Better Company: Corporate Governance Ten Years On. Oxford: Oxford University Press. Coase, R.H. (1937), “The Nature of the Firm”, Economica, Vol.4 No.16, pp. 386–405. Clarke, T. (2016), “The continuing diversity of corporate governance: Theories of convergence and variety”, Ephemera Vol. 16. pp. 19–52. Clarke, T. (2017), International Corporate Governance: a Comparative Approach. New York: Routledge.

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Cofee, J. (2001), “The Rise of Dispersed Ownership. The Role of the Law in the separation of Ownership and Control”, Yale Law Journal, Vol. 111 No. 1, pp. 12–19. Dementieva, A. G., Sokolova, M. I. (2017), “International Regulation of Corporate Governance”, Law and Management. Twenty-first Century, No. 4, pp. 47–58. Freeman, E.R. (1984), Strategic Management: A Stakeholder Approach, Boston: HarperCollins. Freeman, E.R. (2002), “A Stakeholder Theory of the Modern Corporation”, in L.P. Hartman, (Ed), Perspectives in Business Ethics, Singapore, McGraw-Hill, pp. 171–181. Gazin, G. (2003), “Corporativnoye upravleniye v Rossii: realnoye konkurentnoye preimuschestvo”, McKinsey Quarterly, Vol. 3, pp. 7–19 (Gazin, G. (2003), “Corporate Governance in Russia: Real Competitive Advantage”, McKinsey Quarterly, Vol. 3, pp. 7–19). Hail, L. (2006), “International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?”, L.Hail, C.Leuz, (ed.) Journal of Accounting Research, Vol. 44, pp. 485–531. Hill, C.T. (1992), “Stakeholder-Agence Theory”, Journal of Management Studies, Vol. 28 No. 2, pp. 131–154. Hermalin, B.E., Weisbach, M.S. (2009), “Information Dislosure and Corporate Governance”, Working Paper, Ohio State University, 2009. Jackson, H.E. (2009), “Public Enforcement of Securities Laws: Resource-Based Evidence”, H.E. Jackson, M.J. Roe (ed.), Journal of Financial Economics, Vol. 93 No.2, pp. 207–238. Jensen, M. (1976), “The theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, M. Jennsen, W. Meckling (eds.), Journal of Financial Economics, Vol. 3 No. 4, pp. 305–360. Jackson, G., Deeg, R. (2012), “The Long-term Trajectories of Institutional Change in European Capitalism”, Journal of European Public Policy, Vol.19 No. 8, pp. 1109–1125. Jacoby, S.M. (2007), The Embedded Corporation: Corporate Governance and Employment Relations in Japan and the United States. Princeton, NY: Princeton University Press. Jeffers, E. (2005), “Corporate Governance: Toward converging models?”, Global Finance Journal, Vol. 16 No. 2, pp. 221–232. Karapetyan, D. (2004) “Korporativnoye upravleniye: osnovnye ponyatiya i rezultaty issledovatelskoy praktiki”, Karapetyan, D., Gracheva, M., Upravleniye kompaniyey, Vol. 1, pp. 42–49 (Karapetyan, D. (2004), “Corporate governance: key definitions and results of research practice”, Upravleniye kompaniyey, Vol. 1, pp. 42–49). Kim, K.A. & Nofsinger, J.R (eds) (2010) Corporate Governance. – PrenticeHall: Pearson. Kogan, T., Palepu, K. (2006), “Globalization and Similarities in Corporate Governance: A CrossCountry Analysis Review of Economics and Statistics”, Vol. 88 No. 1, pp. 69–90. La Porta, R. (2002), “Investor Protection and Corporate Governance”, La Porta, R., Lopez-deSilanes, F. el al, Journal of Finance, Vol. 57 No. 3, pp. 1147–1170. Leuz, C.K., Lins, K.V., Warnock, F.E. (2009), “Do Foreign Invest Less in Poorly Governed Firms?”, Review of Financial Studies 7. Levine, R. (2005), “Law, Endowments, and Property Rights”, Journal of Economic Perspectives, Vol. 19 No.3, pp. 61–88. Nicolo, G., Laeven, L., Ueda, K. (2006), “Corporate Governance Quality: Trends and Real Effects”, IMF, working Paper #293. Orekhov, S.A. (2008), “Teoriya corporativnogo upravleniya”, Orekhov, S.A., Seleznev, V.A., M., p. 11. (Orekhov, S.A. (2008), “Theory of Corporate Governance” M., p. 11). Osipova, A. (2006), “Corporativnoe upravlenie – tendetsii razvitiya”, “iTeam – Tehnologii corporativnogo upravleniya”, available at: http://www.iteam.ru/publications/cjrpiration/sec tion_96/article_3297/.

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(Osipova, A. (2006), “Corporate Governance – Development Trends”, “iTeam – Corporate Governance Technologies”, available at: http://www.iteam.ru/publications/cjrpiration/sec tion_96/article_3297/.) Plessis, J., Hargovan, A., Bagaric, M., Harris J. (eds) (2015) Principles of Contemporary Corporate Governance, Cambridge: Cambridge University Press. Plihon, D. (2005), “Towards a convergence of the shareholder and stakeholder models”, in D. Plihon, J.P. Ponssard, P. Zarlowski (eds), Corporate Ownership & Control, Vol. 2 No. 3, pp. 11–18. Radygin, A.D. (2001), “Corporativnoye upravleniye i zaschita prav sobstvennosti. Empiricheskiy analiz i aktualnye napravleniya reform”, Radygin, A.D., Entov, R.M., working paper, IEP, No. 36. (Radygin, A.D. (2001), “Corporate Governance and Property Rights Protection. Empirical Analysis and Current Reforms Directions”, M., working paper, IET, No. 36). Salvioni, D.M., Gennari, F. (2016), “Corporate Governance, ownership and sustainability”, Corporate Ownership Control, Vol. 13., pp. 606–614. Serafeim, G., Kaiser, E., Linder, J, Naranjo, K., Nguyen-Taylor, K., Streur, J. (2015), “The Role of the Corporation in Society: Implications for Investors”, available at: www.calvert.com/NRC/litera ture/documents/wp10012.pdf Tirole, J. (2001), “Corporate governance”, Econometrica, Vol. 69 No. 1, pp. 1–35. Tricker, R. (1994), International Corporate Governance. Text, Readings, and Cases: Prentice Hall. Tkachenko, I.N. (2013), “Vliyanie globalizatsii na razvitiye steikholderskoy modeli korporativnogo upravleniya”, Izvestiya Uralskogo gosudarstvennogo economicheskogo universiteta, Vol 45 No. 1, pp. 19–27. (Tkachenko, I.N. (2013), “The Impact of Globalisation on Development of Stakeholders’ Model of Corporate Governance”, Izvestiya Uralskogo Gosudarstvennogo Economicheskogo Universiteta, Vol 45 No. 1, pp. 19–27.) Tricker, R.I. (2015), International Corporate Governance: Principles, Policies and Practices. NY: Prentice-Hall. Zagashvili, V.S. (2009), “Na poroge novogo etapa economicheskoi globalizatsii”, МEiМО, Vol. 3, pp. 15–23. (Zagashvili, V.S. (2009), “On the Verge of a New Level of Economic Globalization”, MEiMO, Vol. 3, pp. 15–23.)

Vladimir Milovidov, Yulia Bochkova

2 Before the Era of Digitalization: The Transformation of a Shareholders’ Corporation to a Stakeholders’ Corporation Introduction The evolution of how people perceive corporate governance graphically shows a gradual widening of the scope of complex and multilateral social relations, as regards the accumulation and analysis of economic information, owing to the inclusion in this subject-sphere of so-called “stakeholders”, meaning a wide social strata not formally falling into the category of corporate (stock) owners – shareholders. Stakeholders represent a wide group of people who have or may have an interest in the performance of various joint-stock companies. As a result of expansion of the concept of “corporate governance”, it has become closely related with ideas such as “corporate social responsibility” and “corporate citizenship”. When combined, all of that more vividly highlights the importance of the information component in the up-to-date integrated system of corporate governance, which includes corresponding relations and institutions of management in joint-stock companies, shareholders’ and public control of their activities, and norms and rules of corporate behaviour either legally established or developed in the course of their daily practical implementation. Trustworthiness of the information – receiving it at the right time, its objective character – helps to form a certain degree of trust between different economic subjects. The principal’s willingness to trust the agent can be regarded as one type of rational behaviour. However, the factors forming this trust often lie in the sphere of irrationality. In a broad sense, the modern system of corporate governance is a combination of forms and methods of ensuring control of joint-stock companies’ activities, carried out both by shareholders themselves and representatives of society at large, not only on a national but also on an international level. Many modern requirements to the responsibility of joint-stock companies are of a supranational character, which leads to the gradual development of supranational formats of law-enforcement in this sphere. To the end of bringing out tendencies in the evolution of corporate governance, the main theses of agency theory have been chosen as a starting point of the present research.

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Methods In this chapter the author analyses the evolution of views on the system of corporate relations. The research is based on publications on this theme with a particular focus on the role of information in decision-making, as well as on the necessity of ensuring a reliable protection of the rights and rightful interests of investors and an enormous group of stakeholders, interested in the financial results of joint-stock companies’ activities.The author uses the results of bibliometric research found in publications on the subject of corporate governance and also theoretical studies, giving a deep insight into the reasons for the evolution of the conception from the shareholders corporation to the stakeholders corporation.

Results Historically, the issue of the rules and norms of corporate governance, presented as a quasi-framework for managers’ responsibility to shareholders, was first raised with the emergence of joint-stock companies. However, it was only during the period of rapid development of mass shareholders’ ownership that issues of corporate governance became the focus of attention for regulators, investors and researchers. Multinational activity of joint-stock companies also led to a tightening of requirements for the quality of corporate information and broadened the conception of principal.

Agency Theory and the Problem of Effectiveness of Shareholders’ Control According to agency theory, in relation to information asymmetry dealt with by both the owners of money or capital (principals) and their employed managers (agents), the latter can, in certain circumstances, put their own interests before those of their clients – that is to misuse and manipulate the information at their disposal for the sake of their own bonuses and all kinds of direct and indirect incomes, going as far as withdrawing some of the corporate assets. As a result, principals receive less than they are due, as a part of their incomes is misappropriated by agents (Eisenhardt, 1989). The principal’s interests require appropriate mechanisms for preventing the negative effects such actions produce and minimizing conflict of interests. It is from this standpoint that the problem of information is viewed in scientific publications on corporate governance. Agency theory distinguishes two types of contracts: income-motivated and behaviour-motivated. They let owners either exercise a strict control of agents’ (managers’)

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behaviour or use different market incentives, encouraging them to do their job properly (Eisenhardt, 1989). This is a time-honoured approach, which is widely used in the practical implementation of corporate governance. At the same time, it does not help eliminate drawbacks or resolve problems. A close look at such contracts and at cases where agents have violated principals’ rights shows that these contracts are built on a shaky ground of different aims, interests, and risk perceptions as well as upon selfishness of the parties, forced to be cooperative. Besides, even modern information technologies are unable to qualitatively change the nature of or defuse the conflict between the principal and the agent, with information asymmetry, as a constant companion of the economy, remaining. As a result, in the course of time contracts become more complex, there is a need for establishing “superstructure” mechanisms, exercising control and providing ensurance, which, in turn, leads to higher costs not only in the sphere of management but also in the system of corporate governance as a whole (Milovidov, 2017). Along with that, overall efficiency of management falls. The beginning of the deep crisis in the system of internal corporate control, followed by a fall in efficiency of Boards of Directors as well as exacerbation of tensions between shareholders and management, can be dated back to the 1980–1990s. M. Jensen pointed out that in that period of time in the US, the market of “corporative control”, which in the 1980s allowed the redistribution of ownership to be concentrated it in the hands of managers, is considerably shrinking. Beginning at that period, a deep crisis in the system of inside corporate control, accompanied by a decrease in the efficiency of Boards of Directors and exacerbated tensions between shareholders and management, was becoming more spectacular. Moreover, the processes exposed by Jensen in the US were taking place in all developed countries, to a lesser or greater extent. It prompted the regulators of the financial market to give the problem of corporate governance their most careful attention. In a sense, the beginning of modern corporate governance history dates back to 1992, when the famous Cadbury Report by the Committee on Financial Aspects of Corporate Governance was published. The Committee was established in May 1991 by the Council on Financial reporting at the London Stock Exchange. It was chaired by Adrian Cadbury, and from then on the final report was informally named after him. The basic principles of Cadbury’s report gained popularity around the world, becoming an integral part of both the codes of corporate governance of different public firms and advisory and normative documents issued by multinational (e.g. OECD) as well as national regulatory institutions (Shleifer, Vishny, 1987). The Cadbury Report, Sarbanes-Oxley Act recommendation of the OECD on codes of corporate governance, became the foundation on which an integral system of principles and standards of corporate governance was formed between the late 1990s and early 2000s. This system, which can be given the codename “system of

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corporate governance 1.0” (Visser, 2008), became an important landmark in the development of corporate relations. However, within its framework, information was unable to acquire a sort of individual value as a factor of corporate activity and production, or as an economic resource possessed by the corporation’s owners along with both tangible and intangible assets of the public company.

Information as an Important Factor of Corporate Responsibility From 1992 to 2008 the overall number of articles on corporate governance increased from 16 to 228 a year, and the total number of their authors from 25 to 742 (ChiungYao Huang, Yuh-Shan Ho, 2011). Meanwhile, the analyses of key words in more than 1,800 articles written during this period points to the absence of such a notion as “information”. At first this may seem surprising, since the notorious corporate scandal of that period, the bankruptcy of corporation Enron in 2001, broke out as a result of its management actively concealing important information from shareholders and presenting fictitious financial reports. US lawmakers immediately responded to the bankruptcy of Enron by working out and bringing into effect the Sarbanes-Oxley Act. It was aimed at making the requirements to financial reporting to the shareholders stricter (disclosure of financial information), meaning providing them with free access to information, safeguarding shareholders’ rights to information, and preventing negative effects of the so called information asymmetry, which has a profound impact on the relationships established among the financial market players. Even placed in the relatively narrow framework of Agency theory, the problem of information was not attended to properly. During the period of 1992–2008, the annual number of articles promoting this theory rose from 1 to 23, with the total figure hardly reaching 109, or 6% of all publications on corporate governance (Chiung-Yao Huang, Yuh-Shan Ho, 2011). Experts shifted the focus of their research to the juridical area – a search for the most suitable forms of contracts concluded between the manager and the shareholders. Meanwhile, as practice shows, information can and should be capitalized, like any other asset, today including even intangible ones, for example, “business reputation”, or “goodwill”. The transformation of information into such a resource is already taking place and this process will continue gradually as changes occur in the paradigm of corporate governance, bringing about the emergence of a new “system of corporate governance 2.0”. In the 1980s the first step towards a qualitative development of the concept of corporate governance was the emergence of the idea of “corporate citizenship”. The need for it can be explained by the formation around corporations of a wide range of stakeholders, meaning those who are interested in the social implications of

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corporate activity and its common good, not just in being paid dividends or in the increase in the company’s capitalization. On the threshold of the 1980s-1990s the world saw the beginning of a chain of transformation processes, which foreshadowed a technological and, in a certain sense, social, or “civil” revolution in the 21st century. It spurred a practical realization of the virtual world-wide web, which, in turn, gave a new impulse to the development of ideas in civil society (Kane, 2009) and created conditions for civil activity, thus acquiring for the issues of business social responsibility a new significance. In that period, “information society”, as one of the most spectacular manifestations of post-industrialism, stopped being just a scientific concept or a futuristic dream, but was shaped into a tangible and concrete form. According to Cleveland’s research, at the beginning of the 1980s, up to 50% of those employed in the U.S. were already doing a job which to some extent was connected with information flows (Cleveland, 1982). These data led him to the conclusion in 1982 that in such a post-industrial information society, information had become a basic resource. The ongoing changes, in Cleveland’s opinion, spread across various spheres of human activity, including economic one. In particular, he drew public attention to the rise of so-called “sharing transactions” and to “participatory” decision-making. These categories are closely interconnected, as they mean a wide range of stakeholders are able to participate in corporate decision-making, thus turning it into an increasingly collective process. All these changes could only serve to influence further development of the theory and practical implementation of corporate governance. In 1984 Freeman put forward the concept of “stakeholders” as an alternative to such notions as “shareholders” and “shareholder management” (Freeman, 2004). The main idea of this concept was that a modern corporation finds itself built into an intricate net with a great number of participants with conflicting interests. Those involved could influence the corporation activities but also depend on its performance. At the same time, directly participating in the capital of the corporation as a shareholder becomes just one of many isolated cases in the system of common interests. Using this concept Freeman called on corporate managers, responsible for strategic management and planning, to listen to and take into account interests of the vast strata concerned – stakeholders. Introducing his concept of stakeholders, Freeman managed to presciently sense the general course of changes in the society such as the ease of gaining access to information, and was able to almost exactly predict the advent of still more radical changes. After all, today the number of Internet users exceed 3.6 bn (Internet Life Stats), with users of social nets accounting for 2.5 bn people. Considering the availability of all kind of information and free its exchange, the issue of “participatory decision-making” in managing modern international corporations acquires a new significance.

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Concept of Corporate Citizenship A further step in the development of the idea of a corporation of stakeholders, or “participatory” corporation, was the introduction of the concept of “corporate citizenship” as an institutionalized system of social responsibility of business to the society. The concept of corporate citizenship firstly focuses on the social responsibility corporations have, but interprets it more widely than just charity. The directions in which the concept of corporate citizenship is realised include intensive work with civil society, education, the creation of jobs for certain social groups of citizens, and support for municipal programmes. In other words, this concept tries to make corporations part of civil society, so that they should have not only rights but also responsibilities (Schwab, 2008). The status of corporate citizenship implies a considerable broadening of corporate social reporting and incorporating the opinion of different social groups in planning corporate business activity. The logic of corporate citizenship also embraces the activities of management of joint-stock companies: the roles of independent directors in the corporate structure acquire a new significance, concepts of social and “moral” investments come into being, and ethical aspects feature prominently in planning different kinds of commercial deals. As in the case of codes of corporate management, one of the gauges of efficiency of social policy becomes the financial market, which integrates in the share valuations, among other things, an assessment of ethical, social and civil components in the a corporation’s performance and has them priced in. This phenomenon gives ground for increased activity by all kinds of investors and shareholders who resort to financial forms of boycotting corporate activity. For example, urging shareholders to refuse to buy products of the corporation and sell its shares in case the management infringes assorted ethical norms and principles. In view of this, any information about the activity of the corporation can become a powerful resource, capable of either spurring growth of its capitalization or bringing about its decline. Owing to great popularity of social nets, information – including negative information – spreads quickly among a wide range of users and can provoke turmoil in equity markets. That is why, notwithstanding the positive sides of the development of corporate citizenship, it could give way to wrongdoings on the part of both shareholders and stakeholders, such as corporative blackmail, market manipulation and abuse of right. As a result of these processes, issues such as the conflict of interest between managers, shareholders, and stakeholders begin to be looked at from a different angle. At the present time, a conflict between the principal and the agent is complicated by simultaneous conflicts between the agent and the stakeholders, and between the principals and the stakeholders. Now, when taking decisions in terms of incentives and control, the assessment of the efficiency of corporation activities is made in the context of its social responsibility.

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A practical realization of the concept of corporate citizenship is hindered by a great number of limitations, such as in the case of the seemingly time-honoured principles of the “system of corporate management 1.0”, which hardly ever guarantee the efficiency of joint-stock company management and conflict-free relations between managers and shareholders. One fact is worth noting. One of the stimuli for the practical implementation of the concept of corporate citizenship was the institution in 1996, on the initiative of the then-President of the U.S. Clinton, of the “Ron Brown Award” for achievements in the sphere of corporate citizenship. The first award was conferred in 1997 to Levi Strauss & Co. and IBM. Among those awarded were big American corporations and even the Federal National Mortgage Association. The latest award, however, was presented in 2006–2007, on the eve of the global financial crisis, which tested both the “system of corporate management 1.0” and still not fully given a practical form the concept of corporate citizenship. In the post-crisis period many former the “Brown Award” winners turned out to be involved in various scandals, which illustrates the fact that big corporations never became conscientious “citizens” of society, continuing to manipulate information and mislead their shareholders concerning the allegedly high performance of the corporation. For example, Procter & Gamble, the 2006–2007 award winner, bought palm oil from Wilmar International, which in 2016 was charged with infringement of human rights and exploitation of child labour; Johnson & Johnson (2004–2005) in 2016 faced a series of lawsuits from US citizens, accusing the company of producing goods which could be a cause of cancer; bank JPMorgan Chase (2003–2004) in 2012 was forced to pay over $900m in fines for serious wrongdoings in the financial market which had cost its shareholders a lot. This list could be continued. It’s symbolic that since 2008 there has been no information about any awards at all. The financial crisis of 2007–2008 did not just highlight the shortcomings of the practical implementation of different concepts and systems of corporate governance and corporate responsibility. In the course of the crisis it became clear that, although modern society now is much better informed, the problem of information asymmetry is still rather acute, and the need for public control of corporations’s activities and responsibility to society is only increasing. The financial problems of such big international banks as Bear Stearns, The Royal Bank of Scotland and, of course, Lehman Brothers became a stark example of “fragility” and inefficiency of the system of corporate governance, formed by the middle 2000s (Poojari, 2013). The Sarbanes-Oxley Act was one of the most important legislations, providing the necessity of an independent audit of financial reports and the responsibility of independent directors and committees on audit at the Board of Directors, the introduction of codes of corporate governance, and the encouragement and protection of “whistleblowers”, who could report on illegal and risky decisions of management. The act turned out to be not onlyinefficient, but also it simply did not work. All these principles seemed to be in great practical use and under control of auditors, stock exchanges and regulatory bodies, but did little to solve the problem of

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information asymmetry in the relationships between managers, shareholders and society as a whole. In the Lehman Brothers’ case, it was the shareholders, the stakeholders-investors, the borrowers and the employees of the bank corporation that bore the brunt. The public backlash took the form of protest movement “Occupy Wall Street”. On the strength of the introduced norms of “corporate governance 1.0”, independent directors and members of committees on audit were granted unlimited rights to express and protect shareholders’ interests, whilst accessible information still remained asymmetrically restricted (Dodo, 2017). It occurred owing to the complexity of financial transactions and the emergence of fundamentally new market called ‘risk insurance instruments’, as well as the absence of clear-cut rules for entering such transactions and instruments in the formal financial reports. Financial reports looked more like pictures after a “photoshop” treatment, which obscured real risks inherent in the complex financial innovations rather than let those concerned see the signs of looming losses. All this allowed corporations and financial institutions to efficiently manipulate financial resources in their own interests and use “window dressing” to cover potential gaps in their financial statements.

Conclusion The concept of corporation of stakeholders and corporate citizenship has failed to be universally adopted as an organic system of controlling the responsibility of joint-stock companies, both of shareholders and society as a whole. Only separate parts of this concept are being implemented in the form of corporate social responsibility, charity, and other socially-oriented programmes. The events of the crisis of 2007–2008 came as an accelerator to conceptually rethink of the rules and principles of corporate management. Since the crisis, the term “corporate governance 2.0” has gained in popularity across the scientific and management society. Moreover, increased attention to this concept is being given paid, with such ideas as “corporate social responsibility 2.0” and “Internet 2.0” widely proliferated, generally pointing to a real insight of the expert community into the link between them. The interaction of these concepts forms a code system of coordinates, allowing the emergence of the basic characteristics of the “corporate governance 2.0”. The first axis of the new system of coordinates is the modern conception of an inclusive character of corporate decision-making, which takes into account the variety of interests in civil society. The second axis is the exclusively technological aspects of corporate management, needing to be taken into consideration in the context of informatization and the “digitalization” of economic activity.

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On the basis of his research, the author comes to the conclusion that developing the concept of corporate governance from the shareholders’ corporation to the stakeholders’ corporation is an objective process, primarily reflecting the owners’ desire to shift as many factors as possible in confidence in management from an irrational, sensitive sphere of economic relations to a rational and measurable one, adding to it public control of joint-stock companies’ activities.

References Chiung-Yao Huang, Yuh-Shan Ho. (2011), “Historical research on corporate governance: A bibliometric analysis”, African Journal of Business Management. Vol. 5 (2), 18 January, pp. 276–284. Cleveland H. (1982), “Information as resource”. The Futurist. December, pp. 34–39. Dementieva A.G., Kalyuzhnova E., Sokolova M. (2018). “Vliyanie globalizatsii na konvergentsiu modelei korporativnogo upravlenya” (“Convergence of Corporate Governance Models in the Context of Globalization” ) Mezhdunarodnye Protsessy No. 4. pp. 35–45 Dodo A.A. (2017), “Corporate collapse and the role of audit committees: a case study of Lehman Brothers”. World Journal of social sciences. Vol. 7, No. 1, pp. 19–29. Eisenhardt K. (1989), “Agency Theory: An assessment and review”. Academy of Management Review. Vol. 14, No. 1 pp. 57–74. Freeman R.E. (2004), “The stakeholder approach revisited”. Zeitshrift fur Wirtschafts-und Untemehmensethik. No. 5, pp. 228–254 Internet Life Stats. http://www.internetlivestats.com/internet-users/ Jensen M. C. (1993), “The Modern Industrial Revolution, Exit, and the Failure of Internal Control”, Journal of Finance, Vol. 48, No. 3, Papers and Proceedings of the Fifty-Third Annual Meeting of the American Finance Association: Anaheim, California January 5–7, 1993, pp. 831–880 Kane J. (2009), “Civil Society, Definition and Approaches”. Springer-Verlag, Berlin, Heidelberg, 2009, pp. 1–4 Milovidov V. D. (2017), “Information Asymmetry and Big Data: Should the Financial Market Paradigm be Revised?” Mirovaya ekonomika i mezhdunarodnye otnosheniya, Vol. 61, No. 3, pp. 5–14 (Миловидов В.Д. (2017), “Информационная асимметрия и “большие данные”: грядет ли пересмотр парадигмы финансового рынка?”, Мировая экономика и международные отношения, Том 61, № 3, сс. 5–14.) Poojari C.A. (2013), “Implications of the Corporate Governance Framework during the Credit Crisis on 3 banks”. NMIMS Management Review. Vol. 23, October-November, pp. 148–178 Report of the Committee on the financial aspects of corporate governance, Gee and Co Ltd., London, December 1992. 90 p. Schwab K. (2008), “Global corporate citizenship. Working with Governments and Civil Society.” Foreign Affairs, January/February, Vol. 87, No. 1. pp. 107–118 Shleifer A., Vishny R.W. (1987), “A Survey of Corporate Governance”. Journal of Finance, Vol. LII, No. 2, pp. 737–783. Smith D.J. (2011), “Hidden Debt: from Enron’s Commodity Prepays to Lehman’s Repo 105s”. Financial Analysts Journal. Vol. 67, No. 5, pp. 15–22. Visser W. (2008), “CSR 2.0: The New Era of Corporate Sustainability and Responsibility”. CSR International Inspiration Series, No. 1, 2008, pp. 1–2.

Alla Dementieva, James C. Leontiades, Olga Dubovskaya

3 Current Trends in Corporate Governance Introduction This research aims to analyse current trends in corporate governance development: the convergence of corporate governance systems in the age of globalization and development of harmonized standards designed by the business community, international, and local regulators. These processes have shaped new tendencies of corporate governance improvement. Modern business studies show that globalisation influences the current development of corporate governance (Clarke, 2017; Tricker, 2015). Factors impacting this include liberalisating foreign exchange and finance regulations alongside global finance market formation, developing information technologies that can accelerate capital movement on a global scale, growing the scope of international business, which influences the development of the global and national economies, and increasing the number of portfolio investors from different countries. All these factors lead to the formation of a global corporate environment for modern business. The process of the development of business and corporations influences society, environment and economy. The number and the scale of transnational corporations increase not only in leading economies, but also in China, India, and South Korea. There is a trend of transforming multinationals into global companies; global supply chains evolve; new global markets appear (Zagashvili, 2009). In order to increase market awareness, gain higher profit, and maximize capitalisation, big companies leave the frames of one nation. Large stock exchanges tend to merge and create global stock markets (Clarke, 2017). Global competition drives efficiency in corporations. The main reason for altering corporate governance systems is to integrate into global economy the corporate law of countries, which should not deviate form the standards designed by the global community. Global economy converges institutions, introduces uniformity and erases national peculiarities. Such processes have acted as a prerequisite to elaborating unified standards and developing corporate governance systems with a hybrid model, which embodies elements of the models of different countries (Jeffers, 2005; Plihon, 2005; La Porta, Lopez-de-Silanes, 2002; Levine, 2005; Bebchuck, Hamdani, 2009; Clarke, 2017). Companies, investors, stock markets, capital flows, and accounting are becoming global, leading to a convergence of rules in the sphere of corporate governance (Hail, Leuz, 2008; Jackson, 2009; Plessis, Hargovan, Bagaric, Harris, 2015). Governance mechanisms and technologies still vary from country to country, but there is a clear https://doi.org/10.1515/9783110695816-003

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trend of consensus on the main principles of regulation and development of corporate governance practice (Kim, 2010; Tricker, 2015). Corporate governance of big companies is compared with global standards. As companies expand and the new interests held by shareholders and other stakeholders appear, corporate governance becomes more important. Factors of corporate governance play a key role in investment analysis, and directly influence economic conditions of business development. Corporate governance becomes important in providing competitive advantages in national and global markets. Regulatory system develops, corporate governance practice advances, and corporate governance systems converge.

Methods A systematic approach to current trends in corporate governance in the global framework was used to reach the stated goals. The following methods of economic research were used: general scientific methods (induction, deduction, analogy, analysis, synthesis), a comparative analysis and content analysis of actual papers of international organisations, and historic and dialectic approaches to corporate governance development trends.

Convergence of Corporate Governance Systems The last two decades have shown how corporate governance systems of leading countries converge, creating new global standards with elements of different models (Cofee, 2001; Jacoby, 2007; Jackson & Deeg, 2012; Clarke, 2017). There are different approaches to the classification of national models of corporate governance in economic literature. According to the correlation between ownership and control, we believe two models of corporate governance can be identified: insider model (control model) and outsider model (market). The Market model, which includes the Anglo-Saxon model, is developed in corporate environments characterised by a high level of dilution of shareholders equity. The Control model (continental model and model of the Asian-pacific region) implies majority shareholders. The Market model is characterised by a big number of individual shareholders, who are not dependent on the company, and are called outsiders. The triangle of corporate governance in such a company consists of independent shareholders, managers and directors responsible for the shareholders’ interests and control over managers. However, over recent years the model has changed towards an increase in the number of big shareholders instead of institutional investors.

3 Current Trends in Corporate Governance

27

Many experts claim that market model prevailed in the 2000s (Osipova, 2010). Until the mid-1990s the majority of research into corporate governance was devoted to studying American companies. Later, specialists in the field of corporate governance carried out comparative analyses of models of corporate governance (La Porta, Lopez-de-Silanes, 2002; Levine, 2005; Hail, Leuz, 2008; Jackson, 2009). These experts demonstrated that American and Anglo-Saxon legal systemsappeared to protect investors more effectively than other systems. The majority of investors prefer the Market model as the Insider model is conservative, passive, closed, and has a low level of protection of the interests of minority shareholders. Nevertheless this does not imply that the Insider model lacks advantages. This model has long-run goals, keeps corporations and the economy in general stable, and mainstains traditions and businesses’ social responsibility. Every model has its benefits and drawbacks, which are connected with regulation and institutional peculiarities. Numerous studies of corporate governance show that there is a trend for models to converge and for combined models with advantages of both systems to be created (Jeffers, 2005; Plihon, 2005; Tricker, 2015). On the one hand, the Insider model evolves towards an Outsider model, on the other, elements and mechanisms of the Insider model are used in the creation of market system of corporate governance. Leading successful global companies develop different systems of regulation (companies Sony and Toyota in Japan, Apple and Exxon Mobil in the USA, Daimler and Volkswagen in Germany, BP and Tesco in Great Britain, Total and Peugeot in France etc.), but they have to take global conditions of trade into account. That is why big international companies aim to use a hybrid (mixed) model of corporate governance, which follows the requirements of international practice of corporate governance. Some countries use transition models of corporate governance. In Australia, Canada and New Zealand, which refer to the Anglo-Saxon model, ownership is more concentrated than in the USA and Great Britain. Therefore, the process of the harmonisation of corporate governance systems takes place, but still there are divergences in the following components of corporate governance system: the rate of concentration of ownership, the structure of the board of the directors, top management rights, financial statements, and rewarding mechanisms. Countries with the Insider model of corporate governance pay attention to ways of enhancing stock markets liquidity and their competitiveness, adopting acts of law to increase protection of investors, and limiting the influence of banks on the formation of the system of non-financial corporations, and it shows that principles of the market model are implemented. On the contrary, companies with the AngloSaxon model tend to adopt regulative acts, which aim to mitigate conflicts between majority and minority stakeholders, managers and shareholders, and consolidation

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of the portfolio of shares of majority shareholders. Countries with the Outsider model enlarge the number of investors in the Board of Directors and increase control of the board of the directors over the company activities. Such instruments of control – carried out by the shareholders as a pyramidal structure of the group of the companies, dual-class shares, shareholders agreements, cross holding of shares and others – are widespread in companies in European, American, and Asian countries. National standards and recommendations in rich and developing countries cover the following aspects: increasing the authority of the Board of Directors, optimizating its structure, increasing the number of independent members of the board and their competence, broadening the scope of authority and responsibility of the Chief Administrative Officer, developingthe balanced system of remuneration and bonuses for top managers, and maintaining systems of risks control, independence of auditors, and higher social responsibility in corporate strategy of companies. There is a trend of creating alliances with participants of corporate relations like government, managers and employees. Corporate governance practice develops in the modern environment and uses leading international standards and positive results of operation of the biggest companies.

International Regulation of Corporate Governance Corporate governance has been a focal point of studies over two decades as the dynamics of business development and its influence on economy, society and environment has led to the need to design and enhance standards of corporate governance and corporate social responsibility. Since the end of the 20th century a whole range of global standards concerning corporate governance has been adopted. These standards can be found in national corporate governance codes, stock markets, and institutional investors requirements. The leading rating agencies Moody’s Investors Service, Fitch Rating, Standard & Poor’s follow these principles when they assess corporate governance. Researchers identified three main phases of corporate governance regulation development on a global level (see Table 3.1). The first phase began in 1988 when the World Bank started its corporate governance programme. In the 1990s western investors started an active campaign for the development and application of regulations designed to protect their rights, with support of their governments and international organizations (the World Bank, the European Bank for Reconstruction and Development, the International finance corporation, the Organisation for Economic Cooperation and Development and many others). The OECD developed “Principles of corporate governance” in 1999, which were updated in 2004 and 2015; the Principles have a proven record as the international reference point and as an effective tool for implementation.

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Table 3.1: Phases of international regulation of corporate governance. Phases

Organisations and documents

s Adoption of international standards in the field of investment policy, increased role of transnational corporations, creation of global companies, diversified multinational structure of ownership

Programme of the World Bank () OECD Principles of corporate governance ( г.) International Corporate Governance Network (ICGN) () Euroshareholders () The UN Global Compact () International corporate governance ratings and indices of sustainable development

–. Corporate conflicts and bankruptcies Development of international standards and local recommendations on corporate governance Introduction of the new rules of corporate governance on the state level

Principles of corporate governance ICGN () Corporate governance principles for companies with state participation () Public Company Accounting Reform and Investor Protection Act (The Sarbanes-Oxley Act) () International Financial Reporting Standards () European Corporate Governance Forum () National corporate governance codes

– Global crisis Revision of corporate governance principles taking into account the interests of stakeholders

Implementation of recommendations related to corporate governance G (FSB) () Corporate social responsibility ISO  () Recommendations of OECD (–) Updated ICNG Global Governance Principles (), recommendations () The Green Book on a European Framework for Corporate Governance () Amendments to the corporate governance rules for listing (–) Principles of corporate governance G/ОECD ()

Rating agencies and investment and consulting companies also developed recommendations concerning investors’ requirements in the system of corporate governance and evaluation of real practice of the companies in this sphere. The second phase is connected with specifications of the primary standards after a wave of bankruptcies and corporate scandals in large companies such as Enron, Tyco International, Adelphia, World-Com, Arthur Andersen, Parmalat. The third phase of revising corporate governance standards began after the credit crunch of 2008–2009, as it revealed the flaws of the adopted norms and recommendations.

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National regulators implement these principles and standards; there is an active process of harmonisation with international standards. Table 3.2 provides the Corporate Governance Regulation Index for 15 rich countries. This Index developed by the European Corporate Governance Institute takes into account the number of implemented documents in the sphere of corporate governance and the period of adoption of the documents. Table 3.2: Corporate Governance Regulation Index (2019). Country

Period of adoption of the documents

Number of documents

Index

Australia

–





Austria

–





Great Britain

–





Germany

–





Denmark

–





Italy

–





Canada

–





The Netherlands

–





New Zealand

–





Norway

–





The USA

–





France

–





Switzerland

–





Sweden

–





Japan

–





Source: European Corporate Governance Institute official web-site: https://ecgi.global/.

The world business society regularly revises and provides additional standards and norms of corporate governance, and develops new guidelines. Corporate governance of big companies is compared with international standards. The leading rating agencies improve methods for evaluating corporate governance quality. Developing corporate governance standards by leading world organisations and global business society, there is a tendency to create global stock markets which stimulate further unification and convergence of the main principles of governing a company.

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The Ways of Corporate Governance Improvement Corporate governance practice improves along with new standards and guidelines, which take into account the process of globalisation and typical risks of corporate governance (see Figure 3.1).

Formal system of management control

Board of Directors – dependent body Corporate governance risks Non-disclosure of information to the society, government

Enormous pay to managers Inefficient system of risk-management

Figure 3.1: Main risks of corporate governance.

The following elements of the corporate governance system are improved: business transparency, protection of interests of shareholders, development of the rules for stakeholders’ relations, creation of a risk control system, increased authority of the Board of Directors, functions of the executive board and chief executive officer, social responsibility of the company. Nowadays, transparency of the corporate governance system serves as a competitive advantage a company can have in attracting investments. This disclosure of information characterises the quality of corporate governance and helps to evaluate a company.1 The number of companies creating a system of risk-management that is independent of the ownership and corporate law of the company is increasing. The shareholders’ interests and rights are protected by the adoption of corresponding local documents and the creation of the rules specifying relations between shareholders, owners, the Board of Directors, and top management (such rules include a list of rights and obligations, structure, conditions of membership, and key procedures related to the work of the main governance board). The role and importance of the Board of Directors increases as new independent members join the board, but there is a balance between independence and competence of board members as the total number of the members decreases. The Board of Directors tends to internationalise and more women join the board. New committees

1 Disclosure of Information impies that it is shown either to shareholders, or to investors (shareholders and lenders). However, the interests of all stakeholders should be taken into account when disclosing information about a company.

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of independent members are formed (they concern strategic governance, audit, risk management, remuneration, corporate social responsibility, corporate governance). The scope of the executive board’s authority and its functions increase, along with the role and responsibilities of CEOs, whilst top managers’ remuneration correlates with long-term interests of the company and its shareholders. Corporate social responsibility gains importance for companies all over the world. Although policy in this sphere has a number of disadvantages such as additional costs and complicated control over financial reporting, it has such undeniable advantages as goodwill and market capitalization of the company. This policy becomes a competitive advantage for a company and is gradually integrated into the strategy and structure of large corporations’ governance.

Conclusion To sum up, this study showed that there is a certain harmonization of corporate governance standards and the creation of benchmarks for investors, shareholders, managers, and other members of corporate relations. On the one hand, a harmonised model can be used as a guideline for the development of governance systems, which can adapt to the peculiarities of an institutional environment. To attract investments, companies have to implement such standards. The adoption of harmonised standards helps market participants save on the costs of making investment decisions. On the other, following unified standards and a universal model of corporate governance can impede the implementation of different tools and mechanisms for arranging relationships between all participants of corporate relations, as well as limiting innovative methods of governing a company and impairing its effectiveness. That is why the effectiveness of a system of a particular company’s corporate governance matters more than the effectiveness of the model. The researchers believe that the implementation of unified standards should be constrained by the peculiarities of a country, and its economic development, corporate law, national habits, and business culture. To conclude, the recent decade is characterised by the convergence of different systems of corporate governance in the leading countries. It illustrates that there is no such model that could suit every country and could outperform other models. In general, corporate governance undergoes improvement, arranged by the global business society, in order to protect stakeholder interests. Corporate governance practice is in the process of developing, based on the leading global standards and positive results of activities of the key companies. Standardised instruments and mechanisms are widely used by international organisations adopting standards in this sphere, by stock market regulators, and with

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the requirements of investors and other participants of corporate relations. To operate in the global market, companies have to follow the rules of corporate governance. Best practice demonstrated by some companies gradually stimulates alterations in other companies’ behaviour and the spread of leading corporate standards. To sum up, we have seen the development of international standards for corporate governance. National regulators implementing these standards have brought about an international process of harmonization in corporate governance. This has facilitated transparency, to the benefit of investors, shareholders and management.

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Vladimir Milovidov, Yulia Bochkova

4 Corporate Governance 2.0 and the Digitalization of Corporations Introduction In the present circumstances, both shareholders and corporate management often face a dilemma: either to act swiftly and take decisions merely adequate at meeting the challenges arising in connection with stormy progress in innovation and information development, or continue to stick to the old rules of corporate management where every move should comply with the norms of the bureaucratic procedure. However, as is known from experience, the bureaucratic system of “corporate governance 1.0” not only provides poor protection against risks, mismanagement, or financial problems, but also incites management to introduce “incremental” innovations: step-by-step, dragged out changes which, in the end, turn into inefficient costs and threaten companies with a technological gap in their competition with innovative leaders (Milovidov, 2018). To remain in the paradigm of “corporate governance 1.0” today means losing in the competition for markets and investments. In the new paradigm of corporate governance 2.0 it is necessary to focus on the accumulation of intangible assets, development of network formats of economic activity, forming corporate information, allowing not only to account for what has been achieved, but also to shift attention to further development and prospects. All that could facilitate the move towards long-term planning, attracting long-term investments, restoring the confidence of investors and shareholders, and increasing the possibility of their real participation in decision-making.

Methods The research is based on a qualitative analysis of new principles and approaches to the establishment of corporate relations, now that society has gained access to information. The author has studied the processes of development of new forms of corporate relations and the advent of digital corporations. Citing as an example the formation of Decentralized Autonomous Organizations (DAO) the researcher points to the increased importance of the information factor in protecting the rights of shareholders and stakeholders, and stresses the idea that the development of network forms of control over corporate activity is likely to become a reality.

https://doi.org/10.1515/9783110695816-004

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Vladimir Milovidov, Yulia Bochkova

Results The system of “corporate governance 2.0” is conceptually formed as a component part of the modern system of views on “stakeholders corporation”, a dynamic development of the basic principles of civil society and the system of “participatory”, or, in new terminology, “collaborative” management of society, the actors of which, along with non-government organizations, unions, government and inter-government institutions, are also considered to be corporations (Rasche, 2010). The idea of “collaborative” management gains popularity in the context of dynamically developing the process of informatization of society, which manifests itself in the rise in the number of social network users, the spread of big-data processing technologies, a preponderance of intangible assets in production processes, an increasingly wider use of digital formats of activity; in other words, in formation of a new “digital economy”.

Corporate Governance 2.0: Definition Visser suggests key, underlying principles of the new system of “corporate social responsibility 2.0”, such as “global commons”, “innovative partnership”, “stakeholders’ involvement” (Visser, 2008). Firstly, he sees a practical use of these terms in establishing broad contacts with stakeholders, in preparing transparent reports in real-time regimes, and in providing stimuli for the development of sociallyoriented entrepreneurship. Secondly, Visser points out that it is necessary for corporations to decentralize the planning, management and realization of programmes of social responsibility, defining it as movement “from centralised to decentralised; a change in scale from few and big to many and small; and a change in application from single and exclusive to multiple and shared”. This approach wins an increasing number of supporters and gradually gains ground in both applied and concrete recommendations in the sphere of corporate governance. Subramanian, looking at the concept of “corporate governance 2.0”, stresses the expediency of extending the term for which members of the Board of Directors are elected, ensuring a qualitative, balanced and varied composition of the Board of Directors, and involving shareholders in the process of making systemic, motivated decisions (Subramanian, 2015). According to Subramanian, the principles of “corporate governance 2.0” can be easily implemented in their practical work by those who are able “to agree on once they have untethered from vested interests and staked-out positions”. Libert goes still farther than his colleagues who share the same views. He notes: “The digital revolution is forcing every company to move from business models focused on products and services to those that leverage networks and platforms” (Libert, 2017). A similar idea is expressed by Vermeulen, who underlines

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the profound influence of “network society” on the philosophy of modern business (Vermeulen, 2015). He notes a steady shift of focus whereby relationships among members of Boards of Directors, shareholders and executive organs of companies move towards closer cooperation in the long-term interests of each side of these relations. “It is exciting to see that the shifted focus towards collaborating with business executives is slowly but surely starting to become the norm of what is expected of active investors”, he says. This changes both the requirements to the process of data-processing in the company itself and the principles of disclosure of information to shareholders. According to Libert’s estimates, intangible assets account for more than 80% of modern corporations’ productive assets: knowledge, information, information resources, accumulated data. According to the estimates, jointly made by two research organizations – Conference Board and Corporate Governance Research Initiative at Stanford University – 93% of firms do not resort in their decision-making to any digital resources, notwithstanding the fact that a huge mass of information, measured in trillions of megabytes, is accumulated daily (Libert, 2013). In Vermeulen’s opinion, the traditional approach, which implies disclosure of past (reported) information, cannot fully meet the requirements of investors and shareholders. Experience shows that high performance in the past does not guarantee success in the future. That is why it is far more important to form open, future-oriented information. It helps strengthen the collaborative effort of all involved in the process of managing a stakeholders’ corporation, and move away from exclusively short-term aims of distribution of dividends, find support for long-term investments which would ensure sustainable development, technological renovation and competitiveness in the dynamically changing innovation environment (Vermeulen, 2015).

Evolution of Standards of Corporate Governance and a New Type of Modern Corporations The findings by modern researchers into corporate relations are gradually being implemented in practical recommendations and standards. Thus, the “Green Paper” on corporate governance of the EU provides for: a greater focus on professional, national and gender variety when forming joint-stock companies’ Boards of Directors; the creation of conditions for more active involvement of shareholders, including minority ones, into a dialogue with members of the Board of Directors and the management; the increased priority of long-term aims, higher motivated responsibility of directors to shareholders; and the creation of a flexible system of public monitoring of corporate activity. All that is the essence of a qualitatively new, both theoretical and methodological, base for the development of corporate governance principles, which could form an integral part of the progress going on in the era of digitalization and the intellectualization of society.

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As a result of the development of information society and digital economy, as well as the changes in the proprietary model of modern business and corporate governance, a new type of the so-called “network firms” is being formed. In Table 4.1 a comparison is made between “network firms” and “traditional” ones. Table 4.1: Network and traditional firms. Network firms

Market numbers

Traditional firms

Market numbers

Uber

– – billion dollars capitalization – No cars, more than  million drivers

Hertz

–  billion dollars capitalization –  thousand cars

Airbnb

–  billion dollars capitalization – >. million rented houses, none in ownership

Starwood

– . billion dollars purchase price november  – >, hotels in ownership

WeChat

–  billion dollars estimated value –  million users –  miles of network cable

AT&T

–  billion dollars capitalization –  million subscribers –  million miles of network cable

Alibaba

–  billion dollars capitalization –  retail outlets

Walmart

–  billion dollars capitalization , retail outlets

Source: Beck, Libert, Wind (2016).

Investors are ready to actively respond to such changes, and already today the multiple (P/E) is higher for companies with a larger share of intangible assets. Thus, for companies of such sectors as high-technology medicine, financial services, or hightechnology services, the multiple is in the range 3–5, while the share of their physical assets is less than 20% and, for example, the share of physical assets in energy companies, utilities, transportation companies exceeds 50%, with the multiple remaining in the range of 1.5–2.5 (Beck, Libert, Wind 2016). The “traditional” firms with the remaining large share of physical assets are also undergoing serious changes: automating production processes is on the rise; the quality of physical assets which, to a great extent, are complemented by robotic technological lines and sections is also improving; the spread of the Internet for industrial purposes; and research into clients’ behaviour, control of ecological and industrial safety, and analysis of big data also contribute a lot to further development of ongoing processes. However, still more radical changes in the character of corporate governance of corporations of a “new type” can be connected with development of the so-called “Decentralized Autonomous Organizations, DAO”. DAO represents, in fact, a computer programme, which uses Digital Ledger Technology (DLT), and which actually gave birth to such examples of technological brands as “blockchain”, etherium, and a number of others. The main purpose of this technology is securing the operation of the distributed network of exchange of

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data, and also communication of end-users as subjects of the relative virtual transactions. The concept of DAO was first implemented in the virtual investment fund, which, thanks to crowdfunding, managed to raise 150 million dollars for investing crypto-currency in virtual start-ups (The Economist, 2016). The members of DAO get digital tokens which gives them the right to vote when choosing investment projects. The virtual organization does not have any managers or leaders, and its members-owners of tokens are connected by an intricate system of relations, which is formed and regulated exclusively within the framework of the digital ledger. The authors of this idea have already worked out the corresponding programme codes of automatic management of such an organization (Gentzsch). The development of such conceptual decisions on the automation of management function dates back to the 1970s, but it is only with the development of modern technologies, such as blockchain, that these decisions provided a sufficient impetus for their wide-spread implementation. In particular, they open up opportunities for the creation of principally new formats of corporate information disclosure to a wide range of stakeholders. One of the first corporations which came close to the “industrial” implementation of the concept DAO was Hitachi, which designed an open platform for corporate processes management. In 2016 Hitachi announced that it had created a system of corporate governance on the basis of principles of decentralized autonomy (Hitachi, 2016).

Intellectualization of Corporate Governance As the practical use of this platform for stakeholders’ collective participation when forming corporate strategies expands, the concept of “corporate governance 2.0” will surely develop further. Meanwhile, the further digitalization of economic activity, accompanied by the implementation of artificial intelligence in management processes on a larger scale, can become a prologue for forming the concept of “corporate governance 3.0”. In Table 4.2 comparative characteristics of the two conceptual systems of corporate governance 1.0 and 2.0 are presented, alongside blueprints for possible characteristics of the next system of corporate governance 3.0, which may develop in connection with a wider use of artificial intelligence as business processes and corporate relations develop. At the same time, the introduction of artificial intelligence into the sphere of corporate governance does not help resolve all conflicts and contradictions. Bostrom looks at the evolution of the conflict between principal-agent if the factor of artificial intelligence is taken into consideration. He points out that in this case the organizer, or the customer of this project, should be under permanent stress, fearing that the scientists and programme designers engaged in the project might act in their own interests at the expense of the organizer’s (Bostrom, 2014). However, there is another

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Table 4.2: Comparative characteristics of conceptual systems of corporate governance. Corporate governance .

Corporate governance .

Corporate governance .

Hierarchical system of relations Collaborative “inclusive” system shareholders-directorsof relations stakeholdersmanagement shareholders-directorsmanagement

Distributed system of owners of digital tokens (rights to participate in network platforms), decentralized autonomous system of management, algorithmization of management decisions

Disclosure of historical information, financial statements, independent audit

Financial statements, public strategies of development, longterm programmes of investments in innovative projects

Presentation of a company’s performance in the real-time regime, strategic planning on the basis of big data analysis, registering financial and business information on the basis of technologies of digital ledger (blockchain), access to information for all participants

Key organ of protection of shareholders’ rights – Board of Directors, obligatory presence of independent directors, bureaucratization of system of corporate decision-making, election of Board of Directors for one year

Decentralization and democratization of conception of corporate decision-making, enlarging the Board of Directors by including into it more representatives of stakeholders (civil society), extension of the term of service for the elected members of the Board of Directors

Transformation of Boards of Directors into open virtual “hubs”, providing access to decision-making for all participants, distributed system of voting, involvement of all digital token owners into the process of decisionmaking, an open system of management

Conflict of interests of agent and principal. Contractual responsibilities of management to shareholders, independent and regular shareholders’ control of management

Conflict of interests of management and stakeholders, variant of a conflict between shareholders and stakeholders is possible, stakeholders control management and shareholders’ activities

Interests of stakeholders, digital token-holders can run counter to the interests of designers of intellectual systems, the human vs artificial intelligence, the problem of ethics of artificial intelligence

Source: Milovidov (2017).

possible course of events in the development of this conflict: artificial intelligence might turn rogue and wreak havoc on the interests of the project. This conflict is only hypothetical, based on the assumption that artificial intelligence could go out of hand, acting on its own, with no regard to the interests of its human designers and users. However, Bostrom believes that this conflict poses an unprecedented danger.

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That is, according to Bostrom, designed to free the human from resistance and could create additional resistance for people in its direct and indirect sense. Today, in connection with the wide proliferation of algorithmic strategies and the development of artificial intelligence, a great number of publications are appearing on the subject of the ethics of artificial intelligence, its ability to borrow some characteristics or manners typical of human beings, and on the possibility of its coexistence with humans. This is not a new theme for a mental exercise in an effort to look into human nature rather than artificial intelligence itself (LaChat, 1986). Yet, in all earlier, as well as modern, attempts to construct a model of artificial intelligence behaviour, one can detect a subconscious desire to endow it with a purely human ability to think, to word, to respond, and even experience emotions. A question of artificial intelligence rights also arises. That all is quite understandable, as in a wide range of situations there are no simple problems which can be solved with the help of algorithms, but the human reason is needed to cope with them.

Conclusion The main factors of how inefficient the traditional model of “corporate governance 1.0” is, both inherited and of a new model just being formed, are the remaining potential conflicts between the principal and the agent. Among other negative factors are information asymmetry, risks of unscrupulous management and auditors, and management mistakes. The existing approaches to securing transparency of corporate governance do not either change the nature of or resolve these conflicts but are just aimed at reducing the risks involved. There comes into existence corporate system of checks and balances, which can be efficient as tactics but in the long term can only make management processes more complex. In the system of “corporate governance 2.0”, thanks to the inclusive character of the process of management and involving in it representatives of civil society and stakeholders, the responsibility of shareholders and directors is partly dispersed and passed on to the new participants. The process of management is democratized, acquiring formats of social responsibility. The system of corporate governance 3.0 implies the automation of reporting, rationalization of decision-making, and the maximum exclusion of subjective factors, the first one being the “evil will” of management who put their own interests before those of end owners. The evolution of standards and principles of corporate governance taking place in the era of corporate digitalization, accompanied by development of information technologies, allows the field for conflicts to be considerably narrowed, corporate transparency to be increased, and a rise in investment in innovative development to be ensured. The technologies of the digital ledger, an analysis of massive

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information, artificial intelligence should find their place in the development of corporate relations and systems of corporate governance. Along with it, the practice, being just formed, and new research in the sphere of artificial intelligence point to the fact that the possibilities of the informatization and intellectualization of the management process do not remove any underlying causes of conflicts between the principal and the agent. The human, both as principal and as agent, will still hold their place in this system of relations, which, in many ways, remains irrational and full of conflicts.

References Bostrom N. (2014), Superintelligence. Paths, Dangers, Strategies., New York: Oxford University Press. LaChat M. R. (1986) “Artificial intelligence and ethics: an exercise in moral imagination.” AI Magazine. Vol. 7, No. 2, 1986, pp. 70–79 “The DAO of accrue”. The Economist. May 19, 2016. http://www.economist.com/news/finance-andeconomics/21699159-new-automated-investment-fund-has-attracted-stacks-digital-moneydao Green Paper. “The EU Corporate Governance Framework”. European Commission. Brussels, 05.04.2011, 23 р. “Hitachi High-tech Announces Mid-term Management Strategy.” Press-release, April 27, 2016. http://www.hitachi-hightech.com/file/global/pdf/about/news/2016/nr20160427e_1.pdf Jentzsch C. (n.d.) “Decentralized Autonomous Organization to Automate Governance.” Final draftunder review. pp. 1–31, https://download.slock.it/public/DAO/WhitePaper.pdf Libert B. (2013) Governance 2.0: the future for boards in the age of big data. Corporate Secretary. https://www.corporatesecretary.com/articles/technology-social-media/12562/governance20-future-boards-age-big-data/ Libert B., Beck M., Wind Y (2016). Investors today prefer companies with fewer physical assets. Harvard Business rReview. pp. 1–8. https://hbr.org/2016/09/investors-today-prefercompanies-with-fewer-physical-assets Libert B., Bonchek M. (2017) To the change your strategy, first change how you think. Harvard Business Review. рр. 1–7. https://hbr.org/2017/05/to-change-your-strategy-first-change-howyou-think Milovidov V.D. (2017), “Corporate governance 2.0. Corporate Relations’ Evolution in the Information Society”. Problemy natsionalnoy strategii, No. 4, pp. 171–189 (Миловидов В.Д. (2017), «Корпоративное управление 2.0. Эволюция корпоративных отношений в информационном обществе», Прболемы национальной стратегии, № 4, сс. 171–189. Milovidov V.D. (2018), “Hearing the Sound of the Wave: What Impedes One’s Ability to Foresee Innovations”? Foresight and STI Governance, vol. 12, no 1, pp. 88–97. (Миловидов В.Д. (2018), “Услышать шум волны: что мешает предвидеть инновации?” Форсайт, Т. 12, № 1, сс. 88–97) Irie N., Ohashi A., Onodera T., Kato H. (2016) “Information and control systems. Open innovation achieved through symbiotic autonomous decentralization”. Hitachi Review, Vol. 65, No. 5. pp. 13–19.

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Rasche A. (2010) “Collaborative Governance 2.0”, Corporate Governance: The International Journal of Business in Society, Vol. 10 Issue: 4, pp.500–511 Subramanian G. (2015) “Corporate Governance 2.0”. Harvard Business Review. Vol. 93, No. 3. pp. 96–105. Vermeulen E.P.M. (2015)“Corporate Governance in the Networked Age”. Tilburg Law School Legal Studies Research Paper Series No. 16, pp. 1–23. http://ssrn.com/abstract=2641441 Visser W. (2008) “CSR 2.0: The New Era of Corporate Sustainability and Responsibility. CSR International Inspiration Series”, No. 1, pp. 1–2.

Part II

Vladimir Verbitskiy, Farida Kardanova

5 Dialectics of Corporate Management Development in Russia Introduction There are six paired dialectic categories in the field of corporate governance development in Russia: 1) board members’ independence and professionalism 2) external forms and internal needs 3) foreign and domestic independent directors 4) large and medium-sized businesses 5) private business and the state 6) corporate governance & corporate management (Berlin, Gulyayev, Verbitskiy, 2010) It is worth focusing on the use of the linking word “and” instead of “or”. The fact is that further, in the course of considering these paired categories, it will be tempting to consider them as antagonistic, which is conceptually wrong. It is necessary to see in their contradictions and contrasts not “differences”, but “common things”; J. Porras and J. Collins, who dispel the myths about great companies, believe that the latter “never allow the word “or” to prevail . . . they put emphasis on the word “and” and refer to the well-known symbol of the Chinese dualistic philosophy of “yin-yang” (Collins, Porras, 2004). R. Posen of the Harvard Business School was one of the first to raise the issue of a professional Board of Directors. Adizes, Rosenzweig and Lensioni focused on such qualities of independent directors and top managers as wisdom.

Methodology The author considers from a philosophical dialectical perspective several of the most important features of the development of the Russian corporate governance system’s initial phase of formation which, in his opinion, require a systematic and comprehensive analysis. The proposed concepts are based both on the author’s many years of research, consulting and practical experience in the field of corporate governance, and on ideas and opinions of well-known Russian and foreign authors.

https://doi.org/10.1515/9783110695816-005

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Independence and Professionalism of Board Members Board members’ independence has always been viewed as a fundamental principle of all corporate governance issues. At the initial stage of corporate governance development in Russia, this aspect was given primary attention, perhaps even excessively and to the detriment of the professional qualities of board members. As there was a growing number of independent members of boards, and especially after the crisis of 2008, the need for more careful attention to the issues of their professional competencies has become more evident. The article by R. Posen of the Harvard Business School “Boards of Directors: The Team of Professionals” (Posen, 2011) seems to have played a pivotal role in this discussion. The issue of board members’ professionalism, the substantive aspects of their activities, and their functionality is on the agenda, and Posen proposes a model of a professional board. In fact, in mathematical terms, the efficiency of the Board of Directors is determined the independent directors with necessary strategic experience relevant to this company. Personally, I express the same idea a little differently: a member of the Board of Directors must be able to give an independent opinion on matters within his professional competence. I think that within the discussion on the competence of board members, it is necessary to make mention of their age. The fact is that, as of recently, this topic has gained unprecedented popularity in Russia, and quite often young managers (even under the age of 30) turn to me with requests to advise them on how to become professional independent members of the Boards of Directors. The simple answer I provide – that this topic will become relevant to them in fifteen to twenty years – as a rule, is not found satisfactory. M. Gladwell, in his global bestseller “Outliers: The Story of Success”, demonstrates the 10,000-Hour Rule derived by psychologists with the very colorful examples of world-famous people like Bill Joy, the Beatles, or Bill Gates. He cites the words of the neuropathologist D. Levitin that “no matter what field we are talking about, we need 10,000 hours of practice to achieve the level of mastery (VV. – professionalism). Ten thousand hours is equal to 3 hours of practice a day or twenty hours a week for ten years” (Gladwell, 2010). As far as I understand, to be prepared for the professional work of a member of the Board of Directors, one must have at least ten years of work experience as a top manager, which is impossible to obtain by the age of 30. I. Adizes says the following about the leader: “a good leader implies maturity; they (VV. – young managers with MBA degrees) climb to the top, relying only on their knowledge, although they have not achieved much apart from it. They lack the experience with which maturity comes” (Adizes, 2007). Also, I have often come across the infinitely varied and unexpected views and interpretations many different authors express on wisdom and they are very important to share. F. Rosenzweig thinks that “wise managers – insightful, thinking, able to distinguish the right from the wrong – are in short supply” (Rosenzweig, 2008),

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and P. Lensioni, analyzing the flaws of teams, raises the bar for success factors to the need for a “wise Board of Directors” (Lensioni, 2011). It turns out that again it is necessary to spend years and years of painstaking managerial work before it is possible to sit in the welcome and cherished chair of a professional independent director. In my opinion, there has been another more important and positive emerging trend: the arrival in the industry of top managers from regular management, both acting and retired top managers, which is especially encouraging if not for them personally then for the common cause. These are executives with many years of experience; therefore it is not necessary to teach them. However, they also have their own problems – they are still managers, not members of the Boards of Directors. Many among them were on the Boards of Directors, but of “their own” companies, which they managed. This was, after all, essentially a representation of management on the Board of Directors, and not a function of a “pure” member of the Board of Directors, and moreover, not a function of an independent director. These too are the features of the work of an independent director that they have to master for an independent director.

External Forms and Internal Needs The early phase of corporate governance in Russia was dominated by external forms of corporate governance; that is a trend towards formal compliance with the requirements of the legislation and recommendations of corporate governance best practices (CGBP), which were put forward by stock exchanges, potential investors, and other stakeholders. Companies actively developed internal documents that formalize such components of corporate governance as information and dividend policies, interaction with investors, the work of the corporate secretary; they then adopted their own codes of corporate conduct/management, introduced independent directors to the Boards of Directors, and created committees of Boards of Directors. Perhaps the main, if not the only, driver of these innovations for companies was the public placement of their shares on stock exchanges, mostly foreign (usually the United States and Europe). As time went on, however, and more and more Russian companies floated their shares on stock exchanges, investors had alternatives in investing their funds, and they began to pay more and more attention to the level of corporate governance. After the crisis of 2008, everyone somehow unexpectedly discovered that corporate governance, as a beautiful external attribute of the company’s investment appeal, no longer provides the same effect. Investors, in addition to reducing their activity, became generally much more prudent and very attentive to issues such as internal control and risk management systems, real (rather than formalistic) implementation of the tasks of strategic management by companies

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and control of its management by Boards of Directors. There was a need for a deep understanding of the essence of share capital, including the sometimes conflicting interests of different groups of shareholders (majority and minority, strategic and short-term). Shareholders have come to the understanding that these approaches not only take into account the external manifestations of actions taken by companies, but also direct them toward meeting internal needs as dictated by the logic of the company’s business development, the industry in which it operates, and the economy as a whole.

Foreign and Russian Independent Directors Until 2005–2007 foreign specialists were mainly appointed to Russian companies’ Boards of Directors as independent directors. As a rule, they were former professional managers or even politicians, consultants, or experts with significant industry and functional experience as well as a reputation for international business. It is clear that this was the result of IPOs of Russian companies mainly on foreign exchanges. After 2008, there was a decline of the share of foreigners on Boards of Directors in Russian companies. This is largely due to the need for companies to directly implement corporate governance standards which they had already adopted in the form of internal documents of corporate governance. It was important not only to declare the company’s creation of a corporate governance system based on CGBP recommendations, but also to ensure its full and, most importantly, effective implementation. In this context, in addition to foreign specialists with extensive experience abroad and with understanding of what the company’s corporate governance system should represent, Russian independent directors began to come in with ideas and experience of how to put into practice all the elements of the system and make them really work in Russia. My favorite expression on this subject is “foreigners know what to do, ours know how to do”. The co-owner and chairman of the Board of Directors of the Ilim group, Z. Smushkin, argues on this subject as follows: “Strategic shareholders, of course, understand that people of Russian origin must work in Russian companies. Not because they are patriotic, just better adapted” (Smushkin, 2015).

Large and Medium-sized Businesses For quite a long time, only large Russian corporations were interested in issues regarding corporate governance. For large corporations whose shares are listed on Russian and foreign stock exchanges, this was due to their desire to increase their investment attractiveness by introducting advanced standards of corporate governance. Historically in Russia, in the eyes of specialists of the stock market,

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corporate management, or finance, the link between “the stock market, investment attractiveness, raising capital, and privatization”, meaning corporate management, is very strong. From this originates the skepticism a large number of colleagues hold on the issue of the decline in interest in corporate governance in the country: since there are problems with the Russian stock market, investment attractiveness, new privatization, and capital raising, this reflects the fate of Russian corporate governance. This is not, however, the exact case. Significant changes have occurred in the interest companies take in corporate governance, including those related to the emergence of such a new driver for its development as medium-sized businesses (Verbitsky, 2013). With the transition of corporate governance – from only an external attribute of investment attractiveness for foreign investors to its role as a tool to improve a company’s internal efficiency, as well as the beginning of Russian medium-sized business owners withdrawing from operational management (according to I. Adizes, this is the “youth stage” (Adizes, 2007)) – their noticeable interest in the introduction of institutional bodies, policies and procedures of corporate governance becomes apparent. The Russian Institute of Directors has already accumulated sufficient consulting experience working with medium-sized private limited companies in the development and launch of their corporate governance systems – by medium-sized companies, we imply the broad definition of this term as proposed by G. Simon of “companies with an average market size”, or the catchy English abbreviation MM (middle-market or midmarket companies, with annual revenues from $10 million to $1 billion (Yudanov, 2013)). My personal practical experience, and that of my colleagues in the area of working as independent directors in such medium-sized private companies, is also accumulated. In addition this experience is significantly different from working on the Boards of Directors of large public companies, with an emphasis primarily on the managerial aspects of work. Referring to the basis of ideal corporate governance is not very useful within the framework of communication with the owners of such medium-sized companies. “The Board of Directors is not just a place for communications, it is a management body” – these are the words of one of the owners of a medium-sized Russian company in reply to my detailed account of the functions, methods and principles of functioning of the Board of Directors in accordance with the recommendations of the CGBP. In 2015 in partnership with SKOLKOVO Moscow School of Management we conducted the first study “Corporate governance in medium-sized Russian non-public companies”. The main result is that there is some level of corporate governance in these companies, but the implementation of its individual elements is selective and is due to the owners assessing the feasibility of using them, and not following the recommendations of the CGBP. The principal, if not the only, driver for the development of corporate governance systems is the internal will and the owners’ desire, and not the external requirements of the regulatory environment. We even proposed the term “alternative corporate governance” (Verbitsky, 2016).

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Private Business and Government The introduction of corporate governance standards began during the privatization of the 1990s, when state property became private. This was certainly done by businesses out of necessity to comply with legislation, and often with violations. Since the early 2000s private businesses have begun to consciously implement the recommendations of the CGBP. For a long time since, the companies have been the leaders in the implementation of corporate governance standards in practice. Since the mid 2000s the state has begun to build up its indirect and direct presence in the economy via ownership of property; at present, according to various estimates, the direct and indirect participation of the state in the Russian economy is over 50%. Significant growth of state-controlled assets naturally leads to the need to improve the efficiency of their management. Implementation of this task is impossible without the use of corporate governance tools. Keeping this in mind, since 2008 the state has set the task of introducing corporate governance standards into the practice of Russian companies with state participation (state-owned companies). In addition to replacing officials on Boards of Directors of state-owned companies with independent directors and professional designated representatives (designated representatives are a purely Russian phenomenon: they have got the officials removed and kept control), the state begins to systematically introduce the entire set of necessary corporate policies and management procedures in the practice of state-owned companies. Sometimes it seems to us that in this process there are some elements of prematurity, which is clearly expressed in the well-known phrase “do not rush head over heels!”. For example, on a large scale, the state is trying to introduce across very different companies “very advanced” standards of corporate governance (in fact, the full set of CGBP recommendations), which inevitably leads to elements of formality in the work, and even its profanation “for the sake of appearance”. Further if earlier the expert community of professionals in the field of corporate governance pushed the state to introduce corporate governance standards into the practice of state-owned companies, now it sometimes acts as a certain block. This concerns, in particular, the issue of the cancellation of all guidelines for professional directors, the withdrawal of all officials from the Boards of Directors, and the implementation of recommendations of the new Russian Corporate Governance Code of 2014 for all state-owned companies and in full, etc. (VV. – in the future it is necessary to recognize that the state limited itself to only the thirteen largest public companies for the mandatory implementation of the Codex norms). According to my expert estimate, this was the case until 2016. After this the process which I personally call the “bureaucratization of corporate governance” in state-owned companies launched, at which time the very essence of corporate governance began to become distorted in favor of the abovementioned factors. Officials started to return in great numbers to the Boards of Directors and their share began

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to grow. Independent directors were chosen among the newly-resigned officials, and real independent directors became very few.

Corporate Governance & Corporate Management I decided to complete the presentation of the paired dialectic categories of corporate governance with this thought, which I formulated after my colleagues and I published the abovementioned article (Berlin, Gulyaev, Verbitsky, 2010), and, perhaps, therefore, it was the most controversial aspect (according to a number of my colleagues). Their main argument is as follows: they are different concepts, different research topics and different systems within the company, and they should not be confused. This is quite clearly and unequivocally stated by the International Finance Corporation (IFC) in its basic guide for the development of corporate governance in Russia (Clause 13, 2004). Colleagues from the IFC believe that “corporate governance should not be confused with management” and demonstrate Figure 5.1a. I am not going to confuse these concepts, but I just want to comment upon the part where they intersect, which, in fact, can be seen in the presented figure and is called by the colleagues from the IFC “strategic leadership”. It seems to me that, at a certain stage of development of the corporate governance system and the corporate management system in companies (this is most noticeable in the largest of them), the distancing of these systems, unjustified for the common cause of effective company management, occurred. Each of them began to live their own independent and even self-sufficient life, according to different principles: the corporate governance system is in accordance with the well-known principle “nose in, hands off”, and the management system follows the principle “feel with your hands”, as the Japanese say. This difference

Accountability and Supervision

Corporate Governance

Strategic Management

Executive Management Decision and Control Operational Management

Corporate governance & Corporate management

Corporate Management

a) Figure 5.1: Corporate governance & Corporate management. Source: Robert I. Tricker, Corporate Governance (1984).

b)

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is especially topical when one has to deal with issues of building corporate governance systems, or working as an independent director on the Boards of Directors of mediumsized companies with prior work experience in a large public company. I think that such a separation and, to a certain extent, isolation of corporate governance and corporate management from each other is unreasonable and even contradictory to the principles of systematic work of companies as integral systems. Therefore, I put the well-known sign & (ampersand) between them, which, in my opinion, most clearly expresses what I want to say about the relationship between corporate governance and corporate management (Figure 5.1b). The dialectic in this paired category consists in the fact that, after emerging in the management of our companies in the early 2000s, corporate governance began to develop as an independent area, closely connected with such areas as the stock market, IPO, privatization, investment attractiveness, portfolio / institutional investors (minority shareholders), IR, independent directors, stakeholders, transparency etc. A perception has formed that the value of companies depends solely of these factors. As a matter of fact, we completely forgot that the efficiency of the company’s operation and its competitiveness which, according to all textbooks on management are provided in the subject area of corporate management, are primary contributors to the value of the business. Yet here, in the Russian context of a highly concentrated ownership structure, the leading role is played by the majority shareholders, some of whom already understand the significance of the bond between corporate governance & corporation management: “The link between corporate governance mechanisms and corporate management needs, which JSFC Sistema backs up by building organizational mechanisms, incentive tools, and formal and informal communication practices between managers, directors, and shareholders” (Dolgopyatova, Libman, Petrov, 2015).

Conclusion The issues raised are extremely relevant for improving the efficiency of corporate governance in Russian companies to ensure their competitiveness and investment attractiveness in the long term.

References Articles Berlin A.D., Verbitsky V.K., Gulyaev K.A. (2010), “Dialectics of Corporate Governance: What has Changed in Connection with the Crisis?” Joint-stock company: issues of corporate governance, № 10.

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Dolgopyatova T.G., Libman A.M., Petrov I.O., Yakovlev A.A. (2015), “Role of the Board of Directors in Russian Growth Companies: Sistema, Part II” Russian Management Journal, № 23. Posen R. (2011) “Boards of Directors: Team of Professionals” Harvard Business Review Russia. Smushkin Z. (2015) “We are Now at the Epicenter of the Crisis” Kommersant. Verbitsky V. (2013) “What Kind of Corporate Governance is Needed Today” Securities Market, № 7. Verbitsky V.K. (2016), “Corporate Governance in Medium Russian Non-Public Companies: Other Corporate Governance” Joint-Stock Company: Issues of Corporate Governance, No. 12. Yudanov A.Y. (2013), “On the Formula for the Success of Medium-sized Businesses in the World and Russia” Russian Management Journal, № 3.

Books Adizes I. (2007), Management of the life cycle of a corporation. St Petersburg: Peter. Adizes I. (2007), The Ideal Executive: Why You Cannot Be One and What to Do About It. Moscow: Alpina Business Books. Collins J., Porras J. (2004), Building Your Company's Vision. St Petersburg: Stockholm School of Economics in St. Petersburg. Gladwell M. (2010) Outliers: The Story of Success. Moscow: United Press. Lensioni P. (2011) The Five Dysfunctions of a Team. A Leadership Fable. Moscow: Mann. Ivanov and Ferber. Manual on corporate governance: in 6 tons (2004). Moscow: Alpina Business Books. Rosenzweig F. (2008), The Halo Effect. . . and the Other Eight Illusions that Mislead Managers. New York: BestBusinessBooks.

Sergey Vodolagin

6 The Evolution of the Legal Regulation of Corporate Relations in Russia Introduction The post-Soviet legal system was not ready to accept market realities. To do so, there were neither qualified personnel nor experience in the regulation of market relations. Therefore, to understand how legal regulation is carried out today, it is necessary to trace the history of its formation. This paper attempts to analyze these issues and identify the main trends in the development of corporate law legislation in Russia. The work relies primarily on Russian regulatory sources (the Civil Code of the Russian Federation, federal laws “On Joint-Stock Companies”, “On Limited Liability Companies”, “On Insolvency (Bankruptcy)”, Code of Corporate Conduct 2002, Corporate Governance Code 2014, etc), as well as on the United Kingdom Companies Act 2006 and the Corporate Governance Code 2018, and on the works of both Russian and foreign authors (E.A. Sukhanov, A. Shonfield, H. Hansmann, R. Kraakman). This work uses a number of research tools: comparative law analysis, historical, sociological as well as the empirical methods proved especiallyproductive.

Formation of Basic Private-law Mechanics for Regulating Corporate Conduct Russian corporate law began to take shape in the 1990s when still under the Soviet regime, when even the legislators – let alone ordinary citizens and organizations – lacked basic knowledge of legal entities, not to mention more complex matters, which pertain to the legal forms of collective enjoyment, relating to the right to conduct business and of patterns and global trends in the regulation of corporate relations. For example, paragraph 3 of Article 11 of the Russian SFSR Law “On Enterprises and Entrepreneurial Activities in the Russian SFSR” of 1990 established that “The property of a limited liability partnership (closed joint-stock company) is formed through the contributions of participants, income received and other lawful sources and belongs to its participants on the right of common shared ownership”.1 From the standpoint of modern corporate legislation, this article contains a number

1 “Gazette of the Congress of People’s Deputies of the RSFSR and the Supreme Soviet of the RSFSR” 12.27.1990, N 30, art. 418 Hereinafter, references to regulatory acts are given according to “Consultant Plus” legal database. https://doi.org/10.1515/9783110695816-006

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of serious inaccuracies, starting with the identification of a limited liability partnership with a closed joint-stock company (a joint-stock company and a partnership are all in the end different legal entity types, but if it is still the same legal entity type, then why give it two different names?), and ending with the statement that the property of an LLP belongs to its participants on the right of common shared ownership. While the ownership of property is widely accepted as one of the attributes of a legal entity, the then-Soviet legislator deemed LLP not the owner of “its” property. Against this historical background, the recent developments in the corporate legislation look like indisputable progress, although it would be a stretch to claim that they evolved into a system of legal regulations of corporate relations which is conceptually integral, organic, and based on common underlying logic. For example, the motives for preserving such a type of legal entity as a non-public joint-stock company, whose predecessors were a closed type of joint-stock company (AOZT), and then a closed joint-stock company (ZAO), are still unclear. The creation of such a type of legal entity as a state corporation, which in a paradoxical way is not a corporation but a unitary organization (clause 1 of article 65.1 of the Civil Code of the Russian Federation), may serve as another example. The mere existence in Russian law of an “unincorporated corporation” is a somewhat symbolic reflection of how complex the development of corporate legislation has been; this manifests itself, on the one hand, through the enormous distance it has covered over a historically short period, and on the other hand, through a certain inconsistency, incoherence, and a lack of a unifying concept, at least at the level of terminology. Radical changes in corporate law (although the legal term itself did not exist at the time) came with the adoption in the mid-1990s of the First Part of the Civil Code of the Russian Federation, Federal Laws “On Joint-Stock Companies”2 (hereinafter the law on JSC) and “On limited liability companies”3 (hereinafter the law on LLC). It is safe to assume that the transition from post-Soviet to modern Russian corporate law ends precisely with the adoption of these acts that became fundamental for Russian corporate law. On January 1, 2002, many the amendments to the law on JSC, introduced by the Federal Law of 07.08.2001 N 120-FZ,4 came into force. These amendments were aimed at protecting shareholder rights, particularly against “erosion” when increasing the share capital, during the reorganization and exercise of their preemptive rights, when approving of major transactions and interested-party transactions, and convening and holding general meetings. It can be said that the “fine-tuning” of the corporate law, based on experience gained in its application by that time, 2 Federal Law of 26.12.1995 N 208-FZ “On Joint-Stock Companies”. 3 Federal Law of 08.02.1998 N 14-FZ “On Limited Liability Companies”. 4 Federal Law of 07.08.2001 N 120-FZ “On Amendments and Addenda to the Federal Law “On Joint-Stock Companies”.

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began with the adoption and implementation of these amendments. Unfortunately, in striving to improve the law on JSC, the legislator adopted 55 different amendments to the law during the 24 years of its existence (from 1995 to 2019), changing it on average 2.5 times a year, which did not add to stability of corporate relations. In 2002, the new Federal Law “On Insolvency (Bankruptcy)” was adopted, more progressive than its predecessor.5 The 2002 Bankruptcy Law was adopted taking into account the practice of applying the previous bankruptcy legislation, as well as judicial acts, including judgments of the Constitutional Court of the Russian Federation. From 2002 to 2019, the Bankruptcy Law was changed 88 times, more often than five times a year. The law saw the introduction of rules for bankruptcy of certain categories of debtors, significant clarification of the grounds and procedures for bringing persons with significant control over the debtor to a subsidiary liability, and the bankruptcy-specific grounds for and consequences of declaring the debtor’s transactions invalid. Nevertheless, accepted in 2002, the law remains valid, albeit thoroughly revised. In 2002 the Federal Commission for Securities Market recommended the Code of Corporate Conduct for application.6 Against the background of the aforementioned legislative changes, its adoption meant, firstly, the transition to the use of a new method of regulation of corporate relations – with the help of the “soft law” of recommendations. Secondly, beginning with the introduction of this code into corporate governance practice, in addition to the formal fulfillment of the requirements of a company’s legislation and constituent documents, the company’s governing bodies had to ensure a certain level of quality in its company governance. In this sense, it is safe to say that, in the early 2000s, corporate governance in Russia saw the emergence of a trend for transforming to a qualitatively new level: from the formal execution of imperative legal regulations to the voluntary implementation of recommendations, from the letter of the law to its spirit.

Strengthening of the Public-law Principles in the Face of the Economic Crisis In 2008–2009 a new stage in the development of corporate law began, during which legislative acts from most diverse branches of law saw significant amendments. The global financial crisis, the immediate cause of which was the crisis in the US mortgage market, became the economic context of this period. Among other things, the mortgage crisis in the United States revealed numerous gaps and imperfections in

5 Federal Law of 26.10.2002 N 127-FZ “On Insolvency (Bankruptcy)”. 6 Order of the Federal Commission for the Securities Market of 04.04.2002 N 421 “On the recommendation of the Code of Corporate Conduct for implementation”.

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the US corporate legislation and the corporate governance system. The US Financial Crisis Inquiry Commission Report stated, in particular: “dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.”7 This circumstance is important to note, in particular, due to the notion that the American corporate governance system is sometimes perceived as a reference which must be studied and adopted by other countries. Speaking of study, while it is inarguably an important element of the cognitive process, it is also important that the study remains critical, aimed, among other things, at analyzing errors in order to prevent their repetition in Russia. As A.E. Sukhanov correctly claims, “in general, it can be stated that the American corporate governance system has ultimately failed to demonstrate any fundamental advantages over traditional European approaches” (Sukhanov, 2014). Against the background of this global economic crisis which also affected Russia, the then-existing loopholes in the Russian legislation grew increasingly apparent, allowing for the so-called raider seizures of businesses through semi-legal means and stripping the owners of enterprises of real capability to protect their rights. The “soft law” of recommendations was not enough to make up for these gaps. The “anti-raiding” legislative package was therefore adopted in 2008–2010, on the one hand expanding the beginnings of corporate law discretion by introducing (for the first time) the notion of a shareholders’ agreement (an agreement on the exercise of the rights of participants in an LLC),and introducing additional administrative and criminal sanctions for violations of the corporate legislation on the other. In addition, the procedural mechanisms for resolving corporate disputes8 have been significantly updated.

7 http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcchchchchchjchjc/cccnnmedia/fcic_ lap.edu pdf, p. XVIII, request date 07.07.2017. 8 Main laws included in the “anti-raider” package: – Federal law of 30.12.2008 N 312-FZ “On Amendments to Part One of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation” – Federal law of 03.06.2009 N 115-FZ “On Amendments to the Federal Law “On Joint-Stock Companies” and Article 30 of the Federal Law “On the Securities Market” – Federal Law of 09.02.2009 N 9-FZ “On Amendments to the Code of Administrative Offenses of the Russian Federation regarding the strengthening of administrative liability for violation of the legislation of the Russian Federation on joint-stock companies, on limited liability companies, on the securities market and on investment funds and Federal Law “On the Securities Market” in part of clarifying the definition and specification of indications of price manipulation in the securities market.” – Federal law of 19.07.2009 N 205-FZ “On Amendments to Certain Legislative Acts of the Russian Federation”. – Federal law of 01.07.2010 N 147-FZ “On Amendments to the Criminal Code of the Russian Federation and to Article 151 of the Criminal Procedure Code of the Russian Federation”.

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In 2008–2009 the notion of a shareholders’ agreement, or an agreement on the exercise of the rights of participants or shareholders, was introduced for limited liability companies and joint-stock companies respectively. In this case, it is not so important that these essentially similar agreements differed quite seriously in terminology and these differences have not been completely overcome to date, but it is very important that, for the first time, participants of a corporation were given more opportunities to settle their mutual rights and obligations on the basis of the contract’s discretion and freedom. The introduction of a new institution to Russian legislation – which will later be named a corporate agreement in the Civil Code of the Russian Federation – allows discussion on the beginning of a new stage in the development of corporate law in Russia. The securities market legislation saw the introduction of rules regarding suspension – grounds for, procedures, and consequences thereof – and declaring issue in security void or invalid. This gave shareholders additional capabilities for protecting their rights if there were violations in the process of issuing securities. The creation of the Unified Federal Register of Data on Facts of Activity of Legal Entities9 and the Unified Federal Register of Bankruptcy Information10 may be considered as additional instruments helping improve the quality of corporate governance through the expansion of corporation members’ control capabilities. Members of corporations received more opportunities to enjoy their rights and to receive information on their own initiative, including information about the ratio of the company’s net assets value to its authorized capital size, which is one of the basic indicators of its financial standing and ability to meet its obligations before creditors. In addition to expanding the capabilities of using private-law instruments to protect the rights of corporation members, the regulation of corporate relations gained also in public-law, or more precisely, punitive component. Thus, the amendments to the Code of Administrative Offenses have significantly increased fines for violations in the field of corporate governance. In addition to the fines, the disqualification was introduced as a new sanction for officers of corporations. Of fundamental importance is the introduction of article 15.23.1 newly into the Code of Administrative Offenses, which provides for administrative penalties against corporations and their officers for violating the legislative requirements to

9 Federal Law of 18.07.2011 No. 228-FZ “On Amendments to certain legislative acts of the Russian Federation regarding the revision of methods of protecting the rights of creditors in course of a decrease in an authorized capital, changes in the requirements to business entities in the event of a discrepancy between the share capital and the net asset value”. 10 See also the Order of the Ministry of Economic Development of Russia of 05.04.2013 N 178 “On approving the procedure for forming and maintaining the Unified federal register of information on the facts of activities of legal entities and the Unified federal register of bankruptcy information and the List of information to be included in the Unified federal register of bankruptcy information”.

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the procedures for preparing for and holding general meetings of participants of corporations. In particular, fines were introduced for illegally evading or refusing to convene a general meeting, as well as for other violations: violating the procedure for preparing a general meeting; violating the requirements for giving notice of a general meeting; violating of the rules for listing up persons entitled to attend a general meeting; failure or delay in sending of voting ballots; and many more. In respect of holding the meetings, new fines were introduced for violating the legal requirements for a general meeting’s form, time or place, holding a shareholders general meeting in the absence of a quorum necessary for holding it, violation by a chairman or secretary of the requirements to the content, form or term for an execution of minutes of a general meeting, and so on. For each of the administrative offenses specified in the law, officers of a corporation will face a fine of 20–30 thousand rubles, while the corporation itself runs the risk of incurring penalties worth of 500–700 thousand rubles per violation. This amount is very significant, as it is intended to become an additional negative incentive discouraging corporate officers from committing offenses while on duty. In addition to a fine, corporate officers may face disqualification, being prohibited from holding management positions in corporations. However, exemption from such a liability is granted to an officer of the corporation (member of the Board of Directors, audit commission, tally commission or liquidation commission of a jointstock company) who voted against the resolution that led to the violation of the requirements of federal laws. 2009 saw a significant increase in the cost of various fines for legal entities. For unfair security issues, fines rose from 40–50 thousand rubles to 500–700 thousand rubles; fines for illegal transactions with unregistered issue-grade securities against professional securities market participants increased from 20–30 thousand rubles to 300–500 thousand rubles; for a non-compliance with the requirements on the disclosure of information in the financial markets fines rose from 30–40 thousand rubles to 1 million rubles; and for an unlawful refusal to make changes to a register of securities holders they rose from 10–20 thousand rubles up to 1 million rubles. In 2010, the Criminal Code of the Russian Federation was supplemented with article 185.5, implementing various punishments – from large fines to up to five years of imprisonment – for falsifying resolutions of business companies’ general meetings of either shareholders (participants) or the Board of Directors (supervisory board). Falsification in this regard covers deliberate misrepresentation of the voting results by means of adding to the minutes of the general meeting of knowingly false information about the number of voters, quorum, or voting results, by drafting a knowingly false list of persons entitled to attend the general meeting, knowingly false vote counting, blocking or limiting actual access of a shareholder (participant) of a business company or a member of the Board of Directors (supervisory board) to voting, non-communication of notice of a general meeting of

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shareholders (participants) or a meeting of the Board of Directors (supervisory board) or giving notice containing misrepresentation of the time and place of the general meeting, etc. At the same time, article 170.1 was introduced to the Criminal Code of the Russian Federation, providing punishment in the form of fines and imprisonment for up to three years for falsifying the unified state register of legal entities, the register of securities holders or the depositary accounting system. In general, when assessing the package of laws adopted in 2008–2011, one should note its comprehensive nature. Shareholders’ agreements and agreements on the exercise of the rights of participants of LLCs were the principles introduced into legislation which expanded the principles of discretion in the regulation of corporate law relations. The stipulation of a notarial form for transactions involving the alienation of shares (participation interests) in limited liability companies, and the introduction of registers of participants to LLCs, enabled transactions with LLC shares to become more secure and predictable. New rules established regarding corporate and group disputes have expanded the capabilities members of corporations hold to protect their rights. Administrative and criminal sanctions for corporate violations also contribute to the protection of the rights of bona fide corporate participants, becoming a new form of their protection. Where previously a shareholder could use only private-law remedies for protecting his/her rights (for example, bringing a resolution of the general meeting or a company’s transaction before court for invalidation), now the same infringement can entail not only civil, but also administrative and even criminal, liability for the corporation and its officers. There is plenty of room to discuss the question of how far the legislator is entitled to go in the use of public-law tools of administrative and criminal law in corporate relations, which are basically private in their legal nature. This trend, on the one hand, encourages the corporation and its officials to respect the rule of law in corporate relations, but on the other hand, this encouragement is supported by methods that are not quite traditional for private law. After all, according to articles 1 and 2 of the Civil Code of the Russian Federation, corporate relations are subject to regulation by the civil legislation, which is characterized by equality amongst its participants, the exercise of civil (including corporate) rights by those participants at their own free will and in their own interest, and the protection of rights in the court. State intervention in these relations – introducing administrative and criminal sanctions for violations for which civil sanctions are envisaged, which can be protected using private law – may conflict with the nature of regulated relations. Foreign legal literature also discusses the possibilities, advantages, and disadvantages of active state intervention in the affairs of corporations. Many authors point out that after World War II state control over corporations has markedly increased (see, for example, A. Shonfield, 1967). However, pro-state approaches in

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regulating corporate relations have gradually become less popular. After Margaret Thatcher leading the Conservatives to power in Great Britain in the late 1970s, Francois Mitterrand carrying out privatization in France in the 1980s, and communist regimes falling in the 1990s, the ideas of active state interventionism, both in the economy as a whole and in the corporate sector in particular, have to a large extent discredited themselves (H. Hansmann, R. Kraakman 2000). In Russia, by contrast, the State has been gaining weight in corporate affairs recently. Here, however, it is important to note not just theoretical and methodological aspects, but also the practical consequences of corporate law “going public”. Due to the introduction of fines and disqualifications for corporate officers, the latter can become (and are already becoming) an easy target in corporate conflicts. It is not uncommon for unscrupulous minority shareholders who cannot influence the appointment of a general director to artificially create formal grounds for his/her disqualification (for example, when preparing for and holding the general meeting of shareholders). If such shareholders suffer no real violation of their rights or any losses, they are highly unlikely to successfully challenge the resolution of the general meeting in state arbitrazh proceedings, but they are still able to cause (or at least threaten) the administrative disqualification of the general director, with the corporation running the risk of losing the manager appointed by the majority as a result of minority shareholders’ manipulations with these administrative law instruments. In connection with the above, it can be argued that it would be more appropriate for the administrative liability of a corporation or its officers to arise only upon the condition that any violations of corporation member’s rights constitute grounds for a court to invalidate, for example, the resolution of a general meeting of shareholders or the Board of Directors, or a transaction executed in violation of applicable approval procedures. In this case, the administrative liability would have occurred upon a real (and not formal) violation of the rights of members of a corporation, which is more suitable for private-law regulation methods that aim not only at punishment but also at the restoration of violated rights. In addition, where there are no grounds for invalidating the resolution of a corporation’s body, there should also be no grounds for any administrative punishment of its officers, even if a technical violation has occurred. Probably, when adopting the package of anti-raider laws, the legislator took notice that even the existence of advanced corporate governance institutions in the USA could not prevent the abuses that led to the onset of the subprime mortgage crisis. Therefore, this stage in the development of corporate law is also characterized by a slight departure from the application of the “soft law” of recommendations, with imperative principles gaining weight while preserving discretion as exemplified by introducing a corporate contract. Ultimately the balance in the legal regulation of corporate relations is expected to shift towards private law methods, which is already starting to happen.

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Conclusion In summary, it can be stated that the legal regulation of corporate relations in Russia has come a long way: first, in the mid-1990s, basic private corporate law institutions were created and later these institutions were perfected and developed, whilst a superstructure of “soft law” of recommendatory codes of corporate conduct and governance began to unfold. It becomes more typical than before for corporations to not just formally adhere to the letter of the law, but also to voluntarily follow the recommended guidelines. After the financial crisis of 2008, public law principles began gaining weight in the legal regulation of corporate relations, and multiple rules were introduced to legislation envisaging administrative and criminal sanctions for corporations and their managers who violate corporate law. Russian corporate law demonstrates a tendency to be more state influenced and state oriented, however, judging by the global trends, this tendency is temporary.

References Hansmann H., Kraakman R. (2000) “The End of History for Corporate Law” Discussion Paper No. 280.3 Harvard Law School Cambridge, MA 02138. P. 7 Shonfield A. (1967) Modern Capitalism: the Changing Balance of Public and Private Power. The Indian Economic and Social History Review. 4.1, 94–97 Sukhanov E.A. (2014) Comparative Corporate Law. Moscow, Statut.

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7 Current Trends in the Legal Regulation of Corporate Relations Introduction The creation of a system for combating corrupt practices constitutes an important part of corporate governance. Shareholders are those most interested in this, since the behavior of corrupt managers results in the decrease of management efficiency and the business’ value at the company level. Considering the fact that commercial organizations contribute the lion’s share of the volume of economic activity, a decrease in their effectiveness due to corrupt practices inevitably adversely affects the overall performance of the national economy. The analysis of the model of the corporate governance in Russia is based on a comparison with the corporate governance models used in different countries: USA, UK, Germany, France. The comparative law method is used as the primary research tool. This chapter uses works by Russian authors A.A. Ayurova, O.A. Belyaev, M.M. Vildanova, A.V. Gabov, A.B. Zolotareva, and A.V. Kireeva, as well as foreign authors M. Moore, M. Petrin, H. Hansmann, and R. Kraakman. From a theoretical point of view, Moore and Petrin’s book Corporate Governance: Law, Regulation and Theory was especially interesting (Moore, Petrin, 2017). This book was written by British legal scholars who fill the existing gap in the law literature on the corporate governance. Most corporate governance books and articles are from economic or management perspectives, whereas Moore and Petrin concentrate on theory and practice of English and American corporate governance legal framework.

Anti-corruption Aspects of Corporate Governance in Russia Russian anti-corruption legislation consists predominantly of regulations governing the relevant aspects of activities of public law entities themselves (state and municipal) and of legal entities in which they hold participation interests such as state corporations. Most notably, these are the Federal Laws “On Countering Corruption” of 2008 and “On Monitoring Of Correspondence of Expenditures of Persons Holding Public Office and Other Persons to Their Revenues” of 2012, as well as subordinate acts of the President and the Government of the Russian Federation, such as the President’s Decree of 2012 which approved the “National Anti-Corruption Plan for 2012–2013”. These regulatory legal acts are, to a certain extent, implemented in the

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form of anti-corruption procedures adopted by public institutions: authorities, ministries and agencies, courts and prosecutor’s offices, etc. Nevertheless, private law legal entities are left almost unaffected by these anticorruption procedures, despite it being precisely in the course of financial and business activities related to the circulation of money and goods that incidents of corrupt practices tend to happen. These incidents include situations when a manager exercises their discretion in the choice of seller and cost of goods, or contractor and terms of order placement, etc. The manager may decide to purchase goods from a supplier related to them and their potential advantages, as opposed to the good of the company and its participants/shareholders. Corporate law contains procedures for approving major transactions of interested parties; in recent years provisions have been introduced or specified regarding the managers’ liability for their decisions and their subsidiary liability for the company debts if the company becomes insolvent due to the managers’ gross negligence or willful misonduct. However, these are private law tools, and therefore their application is based on the initiative of shareholders/participants, which is not always easy to exercise; moreover, shareholders rarely have the information necessary to take the initiative to, for example, challenge a company’s transaction made to the detriment of their interests. Criminal and administrative laws formulate sanctions for crimes of corruption. For example, chapter 23 of the Criminal Code of the Russian Federation of 1996 titled “Crimes against the interests of service in commercial and other organizations” contains elements of such crimes as “Abuse of Authority” and “Commercial Bribery”. Corrupt practices in the private law environment can also be covered by provisions of the Criminal Code of the Russian Federation for crimes of unlawful actions during bankruptcy, deliberate and fraudulent bankruptcy, and unlawful actions during issue of securities, unlawful use of insider information, etc. The problem is that the sanctions envisaged for corruption offenses, despite undoubtedly deterring potential violators and forcing them to be more cautious, still cannot stand in for a system of the prevention of the corruption in private corporations. The timid step in this direction was taken on March 21 2014, when the Central Bank of Russia approved the Corporate Governance Code and recommended it for implementation by joint-stock companies whose securities are admitted to stock exchange trading (Clause 5, N40). Section 5 “Risk Management and Internal Control System” of part B “Recommendations on Corporate Governance Principles” of the Code contains the following recommendation (paragraph 260): “It is recommended to provide, in the framework of risk management and internal control systems of a company, a set of measures designed to prevent corruption and mitigate reputational risks and risks that the company may be subject to liability for bribery. The company should approve an anti-bribery policy setting forth measures aimed at developing elements of corporate culture, its organisational structure, and rules and procedures which would rule out corruption.”

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Upon analyzing the text of the recommendation, one comes to a paradoxical conclusion: the measures for preventing corruption are aimed at reducing reputational risks, yet the risks of potential exposure to liability for bribing officials, not at the maximization of the profit to be distributed among the shareholders, not at the improvement of governance, efficiency, but at the preservation of the façade of reputation! Further down the text, companies are still advised to approve an anticorruption policy, but the Corporate Governance Code and the Recommendations on its application do not contain anything specific in terms of its content. In this light, foreign experience when adopting anti-corruption laws that also apply to private companies, and not only nationally but internationally too, appears interesting and useful. With globalization in the world economy, issues of combating corruption in international economic relations become ever relevant. Major Western multinationals occasionally use methods to gain access to new markets that they would never risk trying at home. Indeed, the United States adopted the Foreign Corrupt Practices Act in 1977 (Foreign Corrupt Practices Act, hereafter FCPA or American law), Germany adopted the Anti-Corruption Act in the same 1977, Canada had its Foreign Corruption Officials Act passed in 1999, while the Bribery Act in the UK received Royal Assent in 2010. Of these, the American FCPA and the English Bribery Act are of particular interest because they oblige companies to create internal anti-corruption procedures and envisage sanctions for corruption practices in case companies lack such procedures. This article is not up to the task of highlighting all aspects of the two aforementioned laws or comparing them in any detail; mentioning them serves to show examples of legal regulations that led to the implementation of anti-corruption institutions and procedures for all major global companies that deal with American and English counterparties. Many major Russian companies – public ones in particular – have already begun to apply English and American anti-corruption acts and implement appropriate procedures. JSC Raspadskaya, one of the largest Russian coal-mining companies, has their Anti-Corruption Policy posted in the “internal documents” section of its website. On page 4 of the Anti-Corruption Policy, the English Bribery Act and the FCPA are indicated as applicable law.1 Policies on combating corruption, drafted in accordance with the requirements of the English and American anti-corruption acts, are present in such companies as PJSC Uralkali,2 PJSC Rosseti (a reference to the Russian Federal Law On Countering 1 URL: http://www.raspadskaya.ru/upload/files/Антикоррупционная%20политика%20ОАО% 20РАСПАДСКАЯ.pdf?FileID=619. 2 URL: http://www.uralkali.com/ru/about/corporate_governance/regulatory_documents/politiki_ kompanii/.

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Corruption is there, but the text reproduces the principles set forth in the English act),3 PJSC FSK YeES,4 PJSC Rosbank,5 PJSC Severstal (which expresses desire to comply with the English Act for combating corruption),6 and others. Thus, we must admit that, at present, the anti-corruption laws of certain foreign states have actually more impact on corporate governance of large Russian enterprises when combating corruption than Russian anti-corruption legislation itself.

Present Day Developments in the Russian Corporate Law Present-day development of corporate law in Russia features “legitimation” – i.e. inclusion of the term “corporation” in the texts of regulatory legal acts. Corporate legal relationships have been included into the scope of regulation of civil law (N 302-FZ; 30.12.2012). A cardinal reform of the structure of the Civil Code of the Russian Federation, with respect to legal entities in general and corporations in particular (N 302-FZ; 30.12.2012), has been introduced. Additional private law tools for protecting the rights of corporate members, and general improvements to the law of obligations, as well as the introduction of new institutions to such law with a significant impact on the corporate law – these are just a few important legislative changes in the recent past worth mentioning. At the same time, the new Code of Corporate Governance was adopted. Since 2014, legal entities have been legally divided into two groups – corporate and unitary. Legal entities whose founders (members) have the right of participation (membership) and form their highest governance body are corporations; legal entities whose founders do not become participants and do not acquire membership rights in them are unitary organizations. Non-commercial organizations fall under the same division into corporate and unitary entities. Broadly speaking, the formalization of the term “corporation” at legislation reflects long-established ideas about the types of legal entities, and therefore adds to the consistency and stability of the legal regulation in this part. However, the principles underlying the division into corporate and unitary organizations are not consistently maintained, and sometimes not completely clear. Judging by the text of the law, the only attribute separating a corporation from a unitary organization is membership – inherent to the first and missing in the second. However, take a foundation: a non-profit unitary organization that does not have membership, yet it can be established by several persons. How should the relations between founders be regulated in this case; if not on the principles of 3 4 5 6

URL: http://www.rosseti.ru/media/docs/antikoruptsionnaya_politika.pdf. URL: http://www.fsk-ees.ru/Anticorruption_policy/. URL: http://www.rosbank.ru/files/about/disclosure/2013/Rosbank_Anti-Corruption_Policy_final.pdf. URL: http://against-corruption.ru/ru/glavnaya/2-news/47-severstal.html.

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membership, then on what? O.V. Gutnikov, while commenting that “the division of legal entities into corporate and unitary should be made according to the number of subjects of this unified corporate law”, further voices the opinion that “. . . it’s possible, however, that legal entities could be also classified according to other attributes (for example, the “divisibility ”of their property into participation shares or units or the entitlement to use the results of the activities of legal entities to satisfy personal material or spiritual needs), provided such a division would reveal practical benefits (Gabov, 2015). A.B. Zolotareva and A.V. Kireeva express a more radical judgment, believing that “the normative division of organizations into corporate and unitary is deprived not only of practical sense but also of logical grounds” (Kireeva, Zolotareva, 2015). However, it should be acknowledged that a uniform, and therefore more predictable, mechanism of legal regulation based on concepts that are widely accepted in the legal doctrine should be introduced to the text of legislation. Another thing is that the criteria of being “corporate” should be defined more carefully.

The Current State of Corporate Law in Russia: The Continued Quest for the Optimal Regulatory Model The major milestone of the recent developments in corporate governance was the approval of the Corporate Governance Code (hereinafter – CGC) in April 2014 by the Board of Directors of the Bank of Russia. At almost the exact same time, in May 2014, the aforementioned law was adopted, amending Chapter 4 of the Civil Code of the Russian Federation dedicated to the regulation of legal entities. This law newly introduced article 65.3 into the Civil Code of the Russian Federation, headlined “Governance in a Corporation”. Since the titles of this article of the Civil Code of the Russian Federation and the CGC practically coincide (“Corporate Governance” vs. “Governance in a Corporation”), one may question how these concepts and provisions compare to each other. What the CGC and the Civil Code have in common is that they both are designed to settle relations arising in a corporation; that is, both the CGC and the Civil Code are elements of the regulatory system of society. The analysis of methods of regulation, of consequences for violating prescriptions contained in the GCG and the Civil Code, allows the determination of the place and role of each of these elements in the regulatory system. However, one must note that the Civil Code stands higher than the CGC in the hierarchy of regulatory legal acts, so the provisions of the CGC must comply with the Civil Code. For this, in particular, they should use a unified terminology, which does not seem to be the case: the term “corporate governance” used in CGC better corresponds with the Civil Code term “corporate relations”. According to the CGC, corporate governance is not only the structure and competence of the corporate bodies but is the “system of relationships”.

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Corporate governance is a system of relationships that in part lies outside the purely legal aspect of corporate relationships, although a significant (perhaps predominant) part of corporate governance shares the subject of regulation with the legislative regulations of the Civil Code on corporate relations. However, the CGC and the Civil Code regulate different aspects of these relationships. The Civil Code governs formal aspects related to the structure and competence of bodies of a corporation, as well as to the participation in it, while the CGC establishes values and goals for these relations. Corporate governance according to the CGC, and Corporate relations according to the Civil Code, are bound to overlap and even sometimes “mingle” with each other, being two sides of a single process a corporation uses in achieving its goals; the Civil Code sets the minimum necessary rules which when followed serve grounds for a corporation to exist as a social unit, and the CGC establishes the rules, the observance of which gives the corporate social unit a certain quality. As for correlating the Civil Code and the CGC, the Civil Code is of course, a federal law, whilst the CGC is merely approved “in general” by the Government of the Russian Federation and “recommended” by the Bank of Russia to “be used by joint-stock companies whose securities have been admitted to organized trading”.7 As a result of the recommendation of the Bank of Russia, which is the regulator of the securities market, the Moscow Stock Exchange requires mandatory compliance with the provisions of the CGC in its listing rules (Clause 17; 2017), and the annual report of a public joint-stock company whose securities are admitted to organized trading must contain information on compliance with the principles and recommendations of the CGC.8 In this regard, it is safe to say that for public joint-stock companies the CGC is no longer an act of “soft law” which is optional to observe, but rather has the attributes of an effective and applicable regulatory legal act. In this, in particular, the CGC differs from its predecessor, the 2002 Code of Corporate Conduct. While the CGC aims at governance, the Code of Corporate Conduct called for “fair conduct”, showing examples of good practice and serving (at least in the first stages of its existence) as a moral beacon rather than a legal imperative. Both the laws governing corporate relations and the CGC are structured in such a way that they primarily protect the interests of shareholders. Turning to the doctrinal analysis of possible corporate governance models implemented at the legislative level, it can be seen that such models may differ according to those whose interests they are primarily aimed at protecting.

7 Letter of the Bank of Russia dated 10.04.2014 No. 06–52 / 2463. 8 Letter of the Bank of Russia dated 17.02.2016 No. IN-06-52 / 8.

7 Current Trends in the Legal Regulation of Corporate Relations

73

It is natural that shareholders always act as the primary, but not always as the only, beneficiaries of corporate governance (Moore, Petrin, 2017). In their work “The End of History for Corporate Law” Hansmann and Kraakman distinguish four models of corporate governance (Hansmann, Kraakman, 2000). The first protects managers, the second protects workers, the third protects the state, and the fourth protects all stakeholders. The manager-oriented model assumes that managers, viewed as disinterested professional agents of shareholders, must act not only in the interests of the corporation and its shareholders, but also must serve the general public interest. In this regard, they should not be entirely dependent on shareholders. The labor-oriented model protects employees of a corporation, allowing them a certain degree of participation in the corporation’s decision making. The extreme form of this model has manifested itself in the legislation of post-war Germany, gradually introduced from the 1950s to the 1970s, according to which employees were granted extensive rights to participate in corporate governance. Employees were entitled to elect half of the members of the Board of Directors in large German firms. The state-oriented model allows the state to exercise broad powers in relation to large private companies, ensuring that they act not only in their own interests but also for the common good. This model was, to a certain extent, implemented in post-war France and Japan. At the same time, the state exerts its influence with instruments outside of corporate law: for example, by allocation of credit, granting exemptions from competition rules or licenses for certain activities. The stakeholder model assumes that a corporation ultimately acts to the benefit of the public in general when taking care of the interests of its most diverse representatives that one way or another are related to the activities of the corporation or may be exposed to the consequences of such activities. To such stakeholders belong employees, creditors, customers, contractors, or even persons having a very remote relation to the corporations such those benefitting from a well-preserved environment that may be affected by the corporation. If we try to analyze the model of corporate governance implemented in Russia using the above approach, we can conclude that it is primarily a state-oriented model. Recognizing that the state controls major corporations in commodity and financial sectors, and, in addition, that many corporations were formed during the privatization process, the Federal Law “On Joint-Stock Companies” provides for a special regime of operation for joint-stock companies with state ownership of shareholding (N 208-FZ; 26.12.1995). This regime was introduced by the legislation on privatization (N 178-FZ; 21.12.2001). For instance, if the state owns 25% or less of the voting shares, it can, nevertheless, be given a special right (“golden share”), entitling the state representatives participating in general meetings of shareholders to veto the issues of reorganization

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Sergey Vodolagin

and liquidation, amendment of the charter and alteration of the share capital size of the company, and approval of major transactions and interested-party transactions. The corporations that are listed as ‘strategic’ have significant restrictions related to public law imposed on their activities, especially in relation to being accessible for foreign investments (N 57-FZ; 29.04.2008). As for the protection of other interest groups in corporate relations, it seems that the corporate governance model implemented in Russian legislation protects almost none of them. For example, managers (first and foremost a sole executive body – General Director) who, despite their extensive powers, are in fact under shareholders’ total control, can be removed by a majority vote at the general meeting of a corporation. The status of an employee of their enterprise and labor relationships with the employer-company serves them no good, since the Labor Code of the Russian Federation deems the adoption of a corresponding resolution by members of the corporation as standalone ground for terminating the employment contract with its manager (N 197-FZ; 30.12.2001). As for the participation of corporation’s employees in corporate relations, it is essentially not covered by the legislation. As an example, the 2018 UK Corporate Governance Code stipulates that the Board of Directors should include a director appointed from the workforce, or a formal workforce advisory panel should be established, or the employees should designate a non-executive director to the board (paragraph 5 and 6 of article 1 of the British CGC).9 There is nothing remotely similar in Russian legislation. Employees are hardly ever mentioned either in the laws on joint-stock companies and limited liability companies or in the Russian CGC. Recently, the role of the workforce has gained some weight in the context of bankruptcy proceedings. Since 2015, employees (or former employees) have the right to demand that their (former) employer be declared bankrupt if they have outstanding wage arrears to them. Previously, they did not have such a right. Other stakeholders similarly lack the capability to exert any significant influence on the activities of corporations through corporate governance mechanisms.

Conclusion To sum up this analysis of the Russian corporate governance model for the purposes of determining the most protected interest group, we can draw the conclusion

9 https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-CorporateGovernance-Code-FINAL.PDF, request date – 12.02.2019.

7 Current Trends in the Legal Regulation of Corporate Relations

75

that a more-or-less standard model has been formed in Russia which primarily protects the interests of shareholders, with the state expanding on its capabilities to exert influence on the corporate sector.

References M. Moore, M. Petrin. (2017) Corporate Governance: Law, Regulation and Theory. London, Red Globe Press. Legal entities in Russian civil law: monograph: in 3 volume. / A.A. Ayurova, O.A. Belyaev, M.M. Vildanova et al .; ed.-in-chief A.V. Gabov M.: IZiSP, INFRA-M, 2015. Vol. 2: Types of legal entities in the Russian legislation. 352 p. Zolotareva A.B, Kireeva A.V. (2015) “On the Question of the Feasibility of Dividing Organizations into Corporate and Unitary Ones” Jurist. 15 pp. 29–34. Letter of the Bank of Russia dated 10.04.2014 No. 06–52 / 2463 “On the Corporate Governance Code”. Hansmann H., Kraakman R. (2000) “The End of History for Corporate Law” Discussion Paper No. 280 3/2000 Harvard Law School Cambridge, MA 02138. P. 7.

Konstantin Manuylov, Vasily Tkachev, Inna Andronova

8 The Russian Financial Market: Progress and Challenges Introduction Some of the challenges the Russian financial market is currently facing are caused by its intrinsic features and the specifics of its historical development, whilst some have emerged due to external factors, political environments and regulatory limitations. Generally emphasis is placed on the key aspects of the market operation, especially its differential characteristics, which define its quantitative and qualitative indicators. The major questions to focus on are the following: – financial resource supply and monetary policy – external funding through equity and bond markets – current economic sanctions, their concept and their consequences The vital role played by these problems in Russian financial market progress and its future development dictate such a significant analysis. Different authors underpinned various aspects of the peculiarities in developing or transitional economies and their financial markets, which should be taken into consideration. First of all, as Gorton and Winton (1998) show, such markets are smaller compared to developing countries. Harper & McNulty (2008) further support this point by analyzing the “effect of legal origin”. They argue that claims on the private sector/gross domestic product (GDP) are 46 to 60 percentage points lower in the countries of the former Soviet Union, and 23 to 39 percentage points lower in non-Soviet transition economies compared to countries of English legal origin. There is a positive relation between claims on the private sector and the rule of law for a broad cross section of countries. Secondly, Popov (1999) strongly believes that the type of financial system that emerges in transition economies is a result of path-dependent-development with an outcome determined primarily by two factors: the chosen model of privatisation, and the degree of concentration of the banking system. Summing up the transformations of the Russian financial system and financial markets during the last decades, Milovidov (2018) concludes that the revolutionary changes they have undergone cannot be denied. At the same time, compared to even larger transformations of global finance and the formation of new world centers (especially in China), the dynamics and the current state of the Russian financial market look very modest.

https://doi.org/10.1515/9783110695816-008

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Konstantin Manuylov, Vasily Tkachev, Inna Andronova

Methodology Unlike conventional approaches of analyzing the Russian financial market based on different legal aspects, structural reforms, and peculiarities in how Russian companies and investors behave, we put the monetary policy of the Russian Central Bank at the heart of our analysis. We believe that Russian Central Bank influences the development of the Russian financial market most of all. Therfore the framework of this research consists of analyzing various transmission channels of the Bank of Russia’s monetary policy on the Russian stock market. One major key feature of the Russian financial market, defining most of its problems and challenges as well segment interaction, is the model of monetary supply currently applied by the Bank of Russia. Its external nature makes the whole market liquidity and financial resources volume dependant on the balance of payment and official reserve dynamics. After this, we compare and contrast Russian equity and bond markets, paying special attention to current economic sanctions, their concept, and their consequences. Upon this we build the causality of interactions of various market segments.

The Supply of Financial Resources and Monetary Policy Russia foreign currency has been the major source of its primary monetary supply since at least the early 2000s, reaching its peak of 95% in 2007. Though claims on banks rallied up to 23% in 2008 due to counter-crisis policy, after the acute phase of the crisis was over, asset structure returned to its starting point with claims on non-residents of 91% in 2011 (Figure 8.1). Later, in approximately 2013–2014, bank claims soared to 20% and continued growing. At first glance this could reflect a new positive trend of policy shift, moving towards internal sources of money supply and a chance to curtail dependency form the foreign assets. It should be emphasized that the volumes of repo and foreign currency swap operations were scaled up at the same time. Thus, claims on commercial banks did rise, though their increase was partly nominated in foreign currency and had nothing to do with the ruble supply. In 2015, repurchase agreements accounted for 20–30 bln dollars (i.e. 20 to 25% of claims on the banking system), which suggests at least 80% of foreign currency was on central bank assets. Another almost unique set of features of the money supply in Russia are government claims on the central bank, as sovereign funds are deposited resulting in negative claims on the federal government. The sums withdrawn from circulation have been equal or even exceeded the monetary base. Almost half of the liquidity created was not actually supplied, though it still corresponded to the same volume of foreign currency on the assets side of the balance sheet (Figure 8.2).

8 The Russian Financial Market: Progress and Challenges

79

45000000 40000000

mln. rubles

35000000 30000000 25000000 20000000 15000000 10000000 5000000 0

Claims on non-residents

Claims on credit institutions

Claims on general government

Claims on other sectors

Figure 8.1: The Central Bank’s of Russia assets. Source: Central Bank Survey, The Central Bank of the Russian Federation, 2019, available at: http://cbr.ru/vfs/eng/statistics/credit_statistics/survey/survey_cb_e.xlsx (accessed 20 February 2019).

30000.0 bln. rulbles

25000.0 20000.0 15000.0 10000.0 5000.0 0.0

Absorption of liquidity Figure 8.2: Absorption of liquidity. Source: Central Bank Survey, The Central Bank of the Russian Federation, 2019, available at: http://cbr.ru/vfs/eng/statistics/credit_statistics/survey/survey_cb_e.xlsx (accessed 20 February 2019).

Officially the Bank of Russia changed the exchange rate regime from managed float to free float in November 2014. In spite of the declared exchange rate regime, a runaway share of foreign assets suggests it ultimately resembles the currency board agreement. Currency board itself implies monetary base supply at the same

80

Konstantin Manuylov, Vasily Tkachev, Inna Andronova

increment rate as anchor currency growth. Besides, it requires national currency to be convertible at least for current account transactions, and the exchange rate should equal the ratio of the monetary base to anchor currency reserves (Enoch, Gulde, 1998). If we assume that the current currency regime had something to do with the currency board, the nominal exchange rate would be calculated as monetary base divided by currency in the reserves. The calculations prove that since 2005 the nominal rate has been lower than the theoretical currency board value, while in 2001–2005 the difference did not exceed 10–12% (Figure 8.3).

Exchange rate USD/ruble

80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0

Nominal exchange rate Currency board rate

2019

2018

2017

2016

2014

2015

2013

2011

2012

2010

2009

2008

2007

2006

2005

2004

2002

2003

2001

0.0

Currency board with liquidity absorption

Figure 8.3: Nominal and theoretical exchange rates. Source: The Central Bank of the Russian Federation.

In 2004 the Stabilization Fund of Russia was created, starting the trend for liquidity withdrawal through government deposits in the central bank. This money still corresponds to the anchor currency on assets and thus should be taken into consideration. After the adjustment the ratio of nominal rate to currency board rate has never exceeded 1.18, proving the second requirement of currency board model is met. The aforementioned liquidity absorption policy has affected other segments of the financial market, including the stock market as well.

External Funding Through Equity and Bond Markets The Russian equity market is relatively small compared to the economy size (GDP). The table shows that the market capitalization of listed companies as a percentage

81

8 The Russian Financial Market: Progress and Challenges

of GDP is similar to countries such as Poland, Columbia and Malta. These values are far behind the developed economies such as the UK, the USA, Hong Kong and Switzerland, though the level of 100% GDP was reached in 2006–2007. Besides, the market never recovered after the meltdown in 2008 (Table 8.1). Table 8.1: Market capitalization of listed domestic companies (% of GDP).  Hong Kong SAR, China

















. . . . . . . . .

South Africa

.

. .

.

.

.

. .

.

United States

.

. .

.

.

.

. .

.

Canada

.

. .

.

.

.

. .

.

France

.

.

.

.

.

.

.

.

.

Germany

.

.

.

.

.

.

.

.

.

Brazil

.

.

.

.

.

.

.

.

.

Malta

.

.

.

.

.

.

.

.

.

Russian Federation

.

.

.

.

.

.

.

.

.

Colombia

.

.

.

.

.

.

.

.

.

Poland

.

.

.

.

.

.

.

.

.

Mexico

.

.

.

.

.

.

.

.

.

Source: World Bank, Market capitalization of listed companies (% of GDP), available at: http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS/countries?display=default (accessed 20 February 2019).

It should be mentioned that different sources provide mixed data. Thus, according to the Moscow Exchange, capitalization value of 100% of GDP was not reached in 2006. Nevertheless, the tendency for declines has been evident since 2010. The absolute value in national currency drops slower due to exchange rate dynamics. Specifically, in 2008 and 2014, market capitalization and the ruble exchange rate collapsed simultaneously, which underpinned the capitalization in the local currency. The market is highly concentrated. Just 254 of more than 30 thousand public companies are traded at organized markets (NAUFOR, 2017). Besides, capitalization of 10 major companies (basically crude producers and large banks) comprises more than 60% of the whole stock market. This corresponds to the current economy structure and is quite obvious. However, it inflicts serious macroeconomic repercussions. A high level of capital concentration makes market prices and stock indexes

82

Konstantin Manuylov, Vasily Tkachev, Inna Andronova

follow the major companies’ trends, strengthening the speculative nature of the market. As far as market indicators are concerned, the focus should be on the indexes of the Russian market. MSCI Russia index is a part of the MSCI EM (Emerging Markets) Europe, Middle East and Africa Index. It is calculated on a weights average basis and includes equities traded at MICEX, and later MOEX. The equities, traded both in rubles and US dollar nominated ADRs and GDRs, are weighted by market capitalization and availability for non-residents. For each the free float indicator is calculated, representing the share of equities available. If a company’s FIF (Foreign Inclusion Factor) is lower than 0.15, it is generally not included in the MSCI index, unless it composes more than 15% of the market capitalization. In 2001–2002 the FIF calculation method was updated, and now the index is targeted to comprise 85% of a market instead of 60%. The equities list is updated quarterly and now contains 23 companies, 58.26% of which are in the energy sector, including Lukoil at 20.67% and Gazprom at 12.87% (MSCI, 2019). The RTS Index was introduced in 1995. It is calculated for 50 major listed companies in US dollars. In order to minimize the influence of a single equity, a threshold of 15% is set. The geographical structure of IPOs is evidence of the lack of internal financial resources. Almost two thirds of public offerings have been conducted by Russian enterprises at foreign exchanges in recent years. Besides, the practice of doubleoffering both in Russia and abroad has been quite common, though such transactions are often referred to as an internal capital formation. This allegedly means that the actual amount of capital raised abroad is significantly larger than statistically reported. There are several reasons for such behavior: firstly, relatively small market volume and low liquidity level; secondly, offering equity at a foreign exchange is believed to provide a better defense of the legitimate interest and property, which is essential in terms of the modern legal practice, as any property dispute is arbitrated under the law of the exchange legal jurisdiction. Therefore, the IPO itself has been available mostly to large and renowned companies. Historical data proves that, in terms of quantity, the IPO market peaked in 2006 only to decline in following years, with the exception of 2011. Lenta Ltd was the last to hold an IPO abroad in February 2014 before current economic and financial sanctions were imposed, with the exception of “En+” (Table 8.2). The importance of foreign offering availability should not be underestimated. The amounts raised vary widely. For example, in 2013, all the IPOs on the Moscow Exchange totaled 56.3 bln rubles while Russian companies raised 1.4 bln USD on London and New York exchanges at the same year. The size of the company matters. PJSC “Credit Bank of Moscow”, ranked 9th by assets out of Russian banks, held one of the four IPOs in Moscow amounting to 29 bln rubles. Tinkoff Bank JSC (TKS Bank in 2013), ranked 33th, raised more than 1 bln USD on the London Stock Exchange.

       

















Moscow Exchange

NASDAQ US

Deutche Boerse

NASDAQ OMX Europe

Hong Kong Stock Exchnage

NYSE

Total









































































































































































































































Quantity

.

.

.

.

.

.

.

.

%

Source: An overview of Russian IPOs: 2005 to 2014 (2015), Price Waterhouse Coopers, available at: https://www.pwc.ru/en/capital-markets/publications/ assets/a4_brochure_ipos_eng _print.pdf (accessed 20 February 2019).

London Stock Exchange (LSE)





Table 8.2: Russian IPOs.

8 The Russian Financial Market: Progress and Challenges

83

1250

2007

8,1

1257

2008

12,5

1860 421 2009

13,3 2747 462 2010

12,1

2903 424 2011

11,6

440

3297

2012

2013

15,0

532 2014

17,0

2015

18,8

6100 2016

2017

11448 719

9438 634

8068 576

6623

5189

4166

3437

2966

2569

1815

1272

Figure 8.4: Volume of the Domestic Debt Market (billion Rubles). █ Sub-federal and municipal bonds (left scale) █ Government federal bonds (including bonds of the Bank of Russia) (left scale) █ Corporate bonds (left scale) ── Ratio of the market volume to the GDP, % (right scale) Source: NAUFOR, 2017.

0

2800

8,3

221

5600

277

12,9

3721

8400

4693

11200

499

21,1

7247

14000

5573

0

5

10

15

20

25

84 Konstantin Manuylov, Vasily Tkachev, Inna Andronova

2007

94,3

51,2

2008

103,8

54,3

2009

99,4

84,9

2010

112,1

97,3

2011

115,4

106,7

2012

149,5

133,6

2013

181,8

159,0

Figure 8.5: Domestic and Foreign Corporate Bonds Market (billion Rubles). Foreign corporate bonds market Domestic corporate bonds market. Source: NAUFOR, 2017.

0

90

180

270

360

2014

165,9

174,4

2015

139,1

133,0

2016

136,4

141,1

2017

132,4

196,4

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Since sanctions were imposed, the geographical structure of the offerings changed for internal exchanges followed by a significant quantitative drop. Nevertheless, there is no evidence that the current sanctions have been a direct reason for these changes. Neither the US Treasury nor EU regulations contain any limitations that could affect the Russian companies that initially offered equities in 2014–2017. There were certain concerns about NKHP JSC due to its major shareholder United Grain Company JSC, though void. Detsky Mir Group is not targeted by any sanctions as well. We could assume that underwriting a bank’s operations would be limited; however, this is not proved by “En+” IPO being on the London exchange in 2017 for more than 1 bln. USD. Though the following SDN list update in April 2018 affected the stock market, causing a 12.4% RTS index decline, it was followed by a recovery. The Russian bond market, both corporate and government, lags behind other financial market segments by volume. Since 2008 it has shown a sizeable growth in absolute terms – approximately 5.8 times. However, the ratio to the GDP has increase 2.5 times – from 8.1 to 21.1 percent (Figure 8.4). Bonds are issued both in organized and OTC markets. Up to 2014, the entire corporate bonds market had been almost equal to exchanged-traded bonds volume, until it plummeted to 580.3 bln rubles, never to recover. The market structure shifted to OTC segment, which now accounts for more than 50%. Like the equity market, the debt market is highly concentrated as well. The share of the first ten corporate bond issuers traded on the Moscow Exchange has increased and amounted to 60.9%. The list of issuers of the most liquid corporate bonds changed insignificantly as compared to 2015. It is noted that the share of Rosneft Oil Company PJSC in the total volume of exchange transactions in corporate bonds increased up to 30.9%. Rosneft bonds have shown a significant growth at about 50% on average. Thus, Russian bond market is relatively small and primarily provides funds for large issuers. In that context foreign market data is indicative. Its volume was comparable and even exceeded the domestic market up to 2015. The amount of corporate bonds traded abroad is further evidence of low liquidity level and the lack of funds available for issuers. The decline since 2014 is clearly explained by limitations major Russians enterprises are exposed to (Figure 8.5). The Bond market has faced dramatic challenges due to the sanctions imposed. The contents of most regulatory restrictions are generally targeted at the debt market.

Current Economic Sanctions, Their Concept and Consequences Sectoral sanctions under the UKRAIN-EO13662 program are applied to more than 70 Russian financial enterprises. These are major banks such as Sberbank, Gazprombank, Russian Agricultural Bank, VTB, Bank of Moscow, and all their regional, foreign affiliates and divisions, leasing, factoring, investment and insurance subsidiaries, depositories and pension funds. Besides, smaller banks are

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also included in the SSI list: Novikombank, Eximbank of Russia, Sviaz-bank, Globexbank, Prominvestbank, SME bank etc. Regulatory limitations are defined by the directives of the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC). The Russian economy’s financial sector is directionally affected by Directive 1 under Executive Order 13662 (as amended on September 29, 2017). All transactions in, provision of financing for, and other dealings in new debt for longer than 14 days maturity for new debt or new equity issued on or after November 28, 2017 are prohibited for a U.S. person or within the United States (Directive 1, 2017). Directives 2 and 3 under Executive Order 13662 are targeted at the energy and defense sectors respectively. They limit the maturity of new debt by 60 and 30 days respectively. In contrast to financial services, the directives specifically prohibit any transactions with debt, while equities are omitted (Directive 2, 2017; Directive 3, 2014). OFAC issues general licenses in order to authorize activities that would otherwise be prohibited. General licenses allow all US persons to engage in such activity without needing to apply for a specific license. Thus, Ukraine General License Number 1B directly allows transactions within the United States involving derivative products whose value is linked to an underlying asset that constitutes prohibited debt (General license NO. lB, 2017). In 2018 the SDN list was extended, basically added under UKRAIN-EO13661 and UKRAIN-EO13662 programs (Sanctions List Search, 2019). The later had earlier included enterprises only and had just sectoral sanctions application. No changes were made for persons already included, though new ones had SND status instead of the non-SDN status for whom this program used to be targeted. Enterprises added included: Gazprom Burenie, Ladoga Menegzhment, Russian Machines, B-finace Ltd., Gaz group, Renova group etc. Major Russian companies had already faced sectoral sanctions; however, extending blocking SDN sanctions to such significant companies and their owners was an unprecedented move. Another large company listed as SND in 2018 is Rosoboronexport, together with its affiliated bank Russian Financial Corporation. Rosoboronexport had already been subjected to sectoral sanctions under UKRAIN-EO13662 and faced debt maturity limitations under Directive 3. The effect on the financial market has not been notable, however. The Russian Financial Corporation is rated 186th by assets and like most other SDN listed Russian banks is far from being systematically important. EU regulation contains specific definitions of the activities that are prohibited under current sanctions. Initially, it prohibited directly or indirectly purchasing, selling, providing brokering or assistance in the issuance of, or otherwise dealing with transferable securities and money-market instruments with a maturity exceeding 90 days, issued after by five major Russian banks (Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB), Rosselkhozbank) or any legal person, entity or body established outside the Union whose proprietary rights are owned for more than 50% by

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them (Council Regulation (EU) No 833/2014, 2014). In September 2014 the maturity terms were lowered to 30 days. The same decision extended the limitations to defense-related entities such as OPK Oboronprom, United Aircraft Corporation and Uralvagonzavod. Additionally, under EU Council Regulation 960/2014 of September 8, 2014, a 30 day maturity limit is also applied to publicly controlled entities or with over 50% public ownership and having estimated total assets of over 1 trillion Russian Roubles, i.e. Rosneft, Transneft, Gazprom Neft (Council Regulation (EU) No 960/2014, 2014). The prohibition is not applied to loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Union and any third State or loans that provide emergency funding to meet solvency and liquidity criteria for legal persons established in the Union. Financial sanctions have not been applied to Russia’s public debt yet, though prohibition of transactions is implied in the package being currently discussed by US Congress. This brings another challenge for the bond market – the role of nonresidents – to the foreground. In recent years, government bond yield has shown a spectacular growth, which accelerated in late 2014. The yield curves shift was primarily caused by the monetary policy conducted by the Bank of Russia. The key rate was raised from 9.5% up to 10.5% on December 12 and up to 17% on December 16. The change of the price of money resulted in the yield curve movement. Clearly, the bonds’ yield rally meant decrease of the prices. Thus, the holders faced losses due to asset revaluation. Besides, rising prices reflect higher risk level, not necessarily acceptable for public debt investors (Figure 8.6).

15

Yield, %

13 29.12.2017

11

01.06.2017 01.06.2016

9

05.01.2015

7 5

02.06.2014

0.25 0.5 0.75

1 2 3 Duration, years

5

7

10

Figure 8.6: Russian Government Bond Zero Coupon Yield Curve. Source: The Central Bank of the Russian Federation, available at: http://www.cbr.ru/hd_base/ zcyc_params/ (accessed 25 February 2019).

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In spite of a relatively small change of non-resident exposure, that plunged from 25.6% to 24.3%, their exit from the contracting market is believed to be one of the reasons for yield curves shift. We may assume it was a consequence rather than the cause. Public debt is generally considered to be a low-risk asset, and the two times yield growth was not the factor of buy boost. In this case, another channel of market segments connection can be revealed. Specifically, bulk selling of ruble-nominates securities may have provided additional demand for foreign currency and caused short-term ruble exchange rate fall. As the most rapid national currency drop exactly followed the key rate hike on December 17–18, this scenario is highly probable. Thus, the public bond market has translated the monetary policy to forex market in a controversial way, i.e. key rate rise caused currency collapse instead of an expected recovery.

Conclusion The Russian financial market currently faces numerous challenges. Some of them are the result of its historical development and imbalances triggered by specific aspects of the economic environment. Others have been caused by economic sanctions employed lately against enterprises and individuals for political reasons. Especially, the following aspects appear to be of immediate interest. First, the modern monetary supply model, based upon external sources, makes the whole monetary system and financial market liquidity dependent on the balance of payments. Besides, this is aggravated by the policy of monetary base absorption. Therefore, reliance on external funds is apparent for each market segment, which has been proved by stock market indicators. Current financial sanctions are targeted precisely at the availabiliy of foreign funds, definitely affecting the market. However, they primarily have an impact on the public sector. In recent years Russian public debt has become a vital vehicle of capital influx, supporting the exchange rate. In this case, sanctions are extended to operations with government bonds, the market itself, and each segment is likely to experience a profound crisis.

References Executive Order 13662 (2014), The President of the United States of America, March 2014, available at: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_eo3. pdf (accessed 16 February 2019). Council Regulation (EU) No 833/2014 (2014), 31 July, available at: http://eur-lex.europa.eu/eli/reg/ 2014/833/oj (accessed 20 February 2019).

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Council Regulation (EU) No 960/2014 (2014), 8 September, available at: http://eur-lex.europa.eu/ eli/reg/2014/960/oj (accessed 20 February 2019). Council Regulation (EU) No 1290/2014 (2014), 4 December, available at: http://eur-lex.europa.eu/ eli/reg/2014/1290/oj (accessed 20 February 2019). Directive №1 (2017) under Executive Order 13662, OFAC, U.S. Department of the Treasury, September 29, available at: https://www.treasury.gov/resource-center/sanctions/Programs/ Documents/eo13662_directive1_20170929.pdf (accessed 18 February 2019). Directive №2 (2017) under Executive Order 13662, OFAC, U.S. Department of the Treasury, September 29, available at: https://www.treasury.gov/resource-center/sanctions/Programs/ Documents/eo13662_directive2_20170929.pdf (accessed 18 February 2019). Directive №3 (2014) under Executive Order 13662, OFAC, U.S. Department of the Treasury, September 12, available at: https://www.treasury.gov/resource-center/sanctions/Programs/ Documents/eo13662_directive3.pdf (accessed 18 February 2019). GENERAL LICENSE NO. lB. (2017), Office of foreign assets control, U.S. Department of the Treasury, November 28, available at: https://www.treasury.gov/resource-center/sanctions/Programs/ Documents/ukraine_gl1b.pdf (accessed 18 February 2019). Enoch С. and Gulde A.M. (1998), “Are Currency Boards a Cure for All Monetary Problems?”, Finance & Development, IMF, № 4, Volume 35, December. NAUFOR (2017), Russian Stock Market: 2017. Events and Facts. NAUFOR, available at: http://www. naufor.ru/download/pdf/factbook/ru/RFR2017.pdf (accessed 20 February 2019). MSCI (2019), “Licensed Indexes: MSCI Russia”, available at: https://www.msci.com/eqb/custom_ indexes/russia_performance.html (accessed 1 March 2019). Popov, Vladimir. (1999). “The Financial System in Russia Compared to Other Transition Economies: The Anglo-American Versus the German-Japanese Model.” Comparative Economic Studies. 41. 1–42. 10.1057/ces.1999.1. Harper, J., & McNulty, J. (2008). “Financial System Size in Transition Economies: The Effect of Legal Origin.” Journal of Money, Credit and Banking, 40(6) Gorton, Gary and Winton, Andrew, (1998), “Banking in Transition Economies: Does Efficiency Require Instability?” Journal of Money, Credit and Banking, 30(3), p. 621–650. Milovidov V. D. (2018), “Double Ten: the Lost Decades or the Found Trends of the Russian Financial Market”. Problemy natsionalnoy strategii, No. 4, pp. 149–169.

Part III

Alla Dementieva, Olga Kandinskaia, Olga Dubovskaya

9 Russian Corporate Sector: A Portrait Introduction The transformation of the Russian economy in the 1990s led to the formation and development of corporate structures in the economy. This is connected with privatisation of public companies, which resulted in the creation of thousands of jointstock companies, including big industrial and manufacturing enterprises, financial industrial groups, holdings, and international companies. At the same time, Russia’s economy is dependent on big extracting companies, the majority of which are state controlled. The Russian corporate sector is characterized by a high concentration of capital (Dolgopyatova, 2014; Entov, Radygin, 2015; Belikov, 2015, 2017), and lacking a balanced system of rights and obligations of the participants of corporate relations (A.Abramov, Radygin, 2017). Corporate sector companies in Russia are not as efficient as companies in developed countries (Verbitskiy 2015; Kondratiev 2015). The state plays crucial role in its development (Belikov, 2015; Radygin, Entov, 2015; Verbitskiy, 2015; Yakovlev, 2016). Imposed in 2014, sanctions affected the Russian corporate sector. Under these conditions, new terms for business development have been created and new governmental approaches to regulating economic development are needed. The state alone cannot increase corporate sector effectiveness. It is the problem of all stakeholders, and managers of the company should distinguish between their own short-term interests and long run priorities of enhancing competitiveness of business.

Methods In their research the authors applied a combination of qualitative and quantitative approaches, and different expert reviews of the leading foreign and national agencies. When analyzing the development of the Russian corporate sector the following principles were used: historical, logical analysis and synthesis, methods of institutional economic analysis. Russian corporate structures’ state was evaluated with the help of system and finance analysis as well as an economic analysis of performance of companies.

https://doi.org/10.1515/9783110695816-009

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Formation of Russian Corporate Sector In 1996 joint-stock company VympelCom became the first Russian company listed on the New York Stock Exchange. In 2002 companies started listing on the Russian Trading System and Moscow Interbank Currency Exchange. Back then the main strategy to raise funds on the stock market was through corporate Eurobonds. In the 2000s there were about 170 issuers. The Russian stock market started to develop actively in 2006 after the adoption of an act by Russian Federal Service for the Financial Markets,1 according to which 30% of shares after IPO had to be traded on the national marked. In 2006–2007 49 Russian companies listed their shares on the stock market. Over the period of 2006–2007, besides oil and steel companies, there were companies from other industries that filed for an IPO (banking, trade, food, IT, transport, construction, chemical companies). At the same time, Russian companies listed their shares on foreign exchanges where share prices were higher than on the national market. Out of 80 companies that filed for an IPO or SPO until 2008, two thirds listed their shares on foreign stock markets (Dolgopyatova, 2009); European stock exchanges prevailed when companies filed for an IPO, mostly the London Stock Exchange. This was also a period when middle-sized companies were regularly formed which, contrary to the big ones, were very efficient and had low leverage, as they had limited access to external financial resources. In 2006–2008 they started activity on the Russian stock market. Russian business of different industries and sizes was characterised by high concentration of ownership and control. The level of capital concentration increased year on year.2 The majority shareholders had a 58% stake. In companies listed on the foreign stock exchanges, this share was almost 50%.3 State control was strengthening; big investment projects and infrastructure programmes were supported by the funds of Investfond and Vnesheconombank to stimulate demand for state purchases. As a result big corporations became public resources oriented. Restructuring state property led to the formation of new jointstock companies partially owned by the state, the assets of state companies increased, and informal ties between business and the state became stronger. The government increased control over business by buying bigger shares in large companies and forming holdings to govern the groups of companies with state participation. By 2008 3,997 joint-stock companies with federal participation

1 Act of Russian Federal Service for the Financial Markets concerning public offerings and trading of shares of Russian listed companies in foreign countries: Order of Financial Service for the Financial Markets No06-5/pz-n dated January 12, 2006, available at: http://base.garant.ru/12145165. 2 National Report on Corporate Governance (2008), Vol 1. M, NCCG. 3 Portrait of the Board of Directors of Russian companies: concentrated structure and obstacles to corporate governance М: Standard&Poor’s, Corporate governance rating. March 16, 2007.

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had been registered: 1,702 companies had 100% shares in federal ownership, 368 had more than 50% shares and 181 companies had “golden share” right.4 The largest Russian international companies were forming over the same period of time; some of them were listed in the global Fortune 500, an annual ranking of the top 500 corporations worldwide (Gazprom, Lukoil, Rosneft). In 2004–2005 alone foreign assets of Russian international companies soared 2.5 times to $59bln, while the volume of foreign sales (including export) reached $200bln and at the beginning of 2008 foreign assets accounted for $77bln.5 From 2001 till 2008, the cumulative foreign direct investments of Russian companies surged from $20bln to more than $370bln.6 Along with the law on investment into strategic corporations, new restrictions on activities of foreign investors and shareholders were imposed. The leading Russian companies lagged behind their foreign peers in capitalisation, volume of sales, size of controlled foreign assets, and level of transnational operations. The low competitiveness Russian companies displayed can be explained by inefficient labour productivity and a low technology level. (see Table 9.1) There were few promising high technology companies in the Russian corporate sector structure. In 2007 only 7 companies out of 56 national technology companies accounted for 3% of the corporate capitalisation of the industry. Metallurgical and metal-processing companies accounted for 50% of all technological companies and 80% of capitalisation.7 The development of the Russian corporate sector in business and innovation was far behind rich countries. A rapid growth of Russian business was accompanied by the complication of its structure; this has led to a slump in efficiency and governability for owners. By 2008 195,000 joint-stock companies had been registered, 66,000 of which were publicly-owned joint-stock companies. The shares of 255 companies were traded on stock exchanges, 40 Russian companies traded depository receipts issued for shares on the foreign stock markets.8 Therefore, only 1% of Russian companies were represented on the organised markets.

4 Forecast plan for privatisation of federal property in 2008 and the main guidelines for privatisation of federal property in 2008–2010: approved by the Russian Federation government on April 29, 2007 No. 543-r. 5 “Foreign purchases”, available at: www.fd.ru/reader2.htm?id=332. 6 “Vestnik of the Bank of Russia” (2009), available at: http://www.cbr.ru/publ/main.asp?Prtid= Vestnik&Y=2009. 7 OECD Science, Technology and Industry Scoreboard 2007: Innovation and Performance in the Global Economy. Paris: OED, 2007. p. 228. 8 “Rossiyskiy fondovyi rynok v 2008: sobytiya i fakty” (“Russian stock market in 2008: events and facts”), available at: www.naufor.ru, p. 34

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Table 9.1: Comparative performance of Russian and foreign companies (2007). Industry

Company

Country

Sales bln. dollars

Employees thousands

Petroleum

Lukoil ExxonMobil Petrobras Gazprom StatoilHydro

Russia USA Brazil Russia Norway

. . . . .

 .   

Metallurgy

Severstal ArcelorMittal Nippon Steel Shanghai Boasteel Group Corp Gerdau S.A.

Russia Luxemburg Japan China Brazil

. . . . .

    

Chemicals

Uralkalii BASF Mitsubishi Gas Chemical

Russia Germany Japan

.  .

  

Automobiles

AvtoVaz Suzuki Motor

Russia Japan

. .

 

Source: Kondratiev (2009).

Global Crisis of 2008 The Global crisis of 2008 affected the Russian economy. The state took an active part in the process of redistributing ownership. To support the corporate sector during the crisis, the following measures were taken9: – State credits were taken to repay foreign loans by large Russian companies and banks (Rosneft, Rusal, Vympelcom, YevrAz). – The state directly intervened in the stock market (financing the purchase of Russian companies’ shares by sovereign wealth fund to the amount of 350bln roubles). – Purchases were made showing preference to shares and convertible bonds (new equity offering) of companies of interest to the state. Thus, the state has improved its role in the country’s economy increasing its share in corporate sector. Adopted laws were designed to solve the crisis problems, but the issues of corporate governance, such as protection of the rights of investors,

9 “Rossiyskiy fondovyi rynok v 2008: sobytiya i fakty” (“Russian stock market in 2008: events and facts”), available at: www.naufor.ru, p. 34

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enhancement of effectiveness of the Board of Directors, risk management were not addressed properly. The state focused on providing help to big companies and banks, and the problems of coming out of the crisis were considered from the point of view of big business. Mid-sized companies did not receive any help, which was one of the reasons for the worsening situation for the Russian economy. Although companies had serious problems and lacked funds, ownership concentration did not change, as Standard&Poor’s (90 biggest listed companies) showed in 2010.10 Majority shareholders owned 54 companies, 24 companies had one or several shareholders with a golden share. There were many shareholders only in 12 companies, but even in those companies there were consolidated stocks and agreements between shareholders. High ownership concentration was accompanied by “insider” control of the dominant owner. The number of state-controlled publicly-owned joint-stock companies rose from 29 to 30. The state had a blocking stock in 9 companies. As state controlled companies are among the biggest, their market value in 2010 accounted for 54% of the total capitalisation of 90 companies.11 In the period of 2007–2010, several stateowned companies filed for an SPO, but in most cases (except several subsidiaries of OAO RAO UES Rossii) it failed to lead to privatization. The Recession introduced some alterations in the functioning of Russia’s financial market. Until 2010 there had not been public offerings.

Russian Companies: Current Trends The first signs of recovery on the stock market became apparent in 2010. Seven Russian companies filed for an IPO on the national stock market and raised $1.1bln; five Russian companies filed for an IPO on foreign stock exchanges and raised $4.3bln. The most successful IPO was conducted by Rusal in Hong-Kong in 2010 and $2.2bln was raised (Novikov, 2010). Number of IPO/SPO/POs in 2010 reached an all time high since the foundation of Russian stock market, and its value ($6.7bln) can be compared with 2005.Many small public offerings were carried out.12

10 S&P Transparency & disclosure survey on the Russian companies in 2010: modest increase in transparency at the expense of electric power industry/ November 19, 2019 – p. 26. 11 S&P Transparency & disclosure survey on the Russian companies in 2010: modest increase in transparency at the expense of electric power industry/ November 19, 2019 – p. 14. 12 “Publichnye razmescheniya v Rossii: s nadezhdoy na rost” // “Publichnye i chastnye razmescheniya aktsiy” / (“Public offerings in Russia: waiting for growth”// “Public and private offerings”), available at: Offerings.ru; ReDeal.: http://www.offerings.ru/market/placement/review/review_34.html.

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In the Russian market of 2010, mergers and acquisitions surged by 27% and reached $52.09bln against $41bln in 2009. Indicators, however, were 70–75% of results of 2007 at best.13 Big deals, mostly cross boarder, which estimated at $24.6bln (about 44% of the M&A market), were the main drivers of the M&A market. At the same time, three big deals accounted for 93% of all purchases of Russian assets by foreign companies. In value terms, Russian companies acquired 14.8% foreign assets and 25.2% of contracts with participation of foreign counterparts (Anikanov, 2010). In 2011 the number of M&A deals of mid-sized companies increased. From 2010 to 2014 more than 30 public offerings had been conducted on the Russian and foreign stock markets. The majority of the companies were listed on the London Stock Exchange. Since 2014, sanctions by western countries and the volatility of the oil market has impeded Russian companies from listing on national and foreign stock markets. Many companies fled stock markets whilst others postponed their IPO. Notwithstanding this unfavourable economic environment, a few Russian companies succeeded in raising capital. For example, in 2015 the following companies conducted successful IPO: OVK (the leading manufacturer of freight wagons), Moscow credit bank, and TNS energo. Over the period of 2014–2015, 14 IPO/SPO had been conducted on the Moscow Exchange.14 However, capitalisation of Russian companies in 2014 was almost a half the indicator of 2013 and accounted for $517bln; this was much lower than capitalisation of Apple Inc. ($724.7bln).15 In 2016 the number of public limited companies decreased by almost 15% in comparison with 2015 (from 26,870 to 23,041),16 and in 2018 there were 15,843 companies. In 2015 only 4 Russian companies filed for an IPO. In 2016 Russneft (capitalisation – $2.7bln) and Buduscheye (capitalisation – $981m) conducted successful IPOs; in 2017 there were 4 companies.17 The number of public offerings on the national market continued to diminish. It decreased from 230 companies in 2017 to 225 companies in 2018. Foreign investors showed little interest in Russian assets. After the adjunction of Crimea in 2014, foreign capital fled the Russian market. In 2017 $4.6bln was invested into shares of Russian companies. There had not been such growth in investment since 2012. China and Austria became the main investors into Russian companies. In 2018, shares of Russian companies became more appealing against the gloomy background on the emerging markets. Foreign investors have become interested in big listed companies that are a part of a business group or a holding.

13 “Itogi rynka M&A 2010 – Poroga v $70bln dostich ne udalos” (“The results of M&A market – the level of $70bln was not reached”), AK&M, available at: http://akm.ru/rus/ma/stat/2010/12.htm. 14 Moscow Exchange data http://www.ifru.ru/workdir/files/File/25_11_2015/2.pdf. 15 FT Global 500, 2015. 16 «Russian stock market in 2016: events and facts », www.naufor.ru, p. 9. 17 RIA Rating http://riarating.ru/corporate_sector/20170131/630054698.html.

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Nowadays there are a lot of corporations in Russia that belong to families that own the businesses and control their governance. In 12 companies families have a majority stake or a tie-breaking vote in the Board of Directors; shares of 9 of them are traded on the stock market. These 12 Russian companies have been included in the E&Y 500, where 500 companies owned by families all over the world have been surveyed; the share of the family and number of votes exceeds 32% for public companies and 50% for privately held company. Public family companies include Rusal (metallurgy), Systema (finance holding), Magnit (retail), Severstal (metallurgy), Trubnaya Metallurgicheskaya Kompania (TMK), Dixi group (retail), Novolipetskiy Metallurgicheskiy Kombinat (NLMK), Magnitogorskiy Metallurgicheskiy Kombinat (MMK), Mechel (metallurgy, mining); privately held companies include T Plus (energy), Stroygazmontazh (oil and gas construction), SUEK (coal-energy). The share of equity of one family in these companies accounts for 40–100% (Lekhnitskaya, 2017). The development of privatisation programmes started in 2009.18 The Government property privatisation plan for 2017–2019 was adopted in 2017.19 Energy and commodities, defence and space industry, are to be controlled by the state. The state still has significant assets in power generation, mining industry (oil and gas, mineral amber, uranium and diamonds), oil refinery, transport engineering and nuclear industry. In 2016 capitalisation in the Russian corporate sector started to rise. A strengthening rouble, plus the attractiveness of Russian securities and positive finance reports by many Russian companies, stimulated it. Capitalisation of the 100 biggest companies increased by 58% (by $233bln) in 2016, in comparison with 2015. The share of 10 the most capital-listed companies increased in 2018 by 5% to 65.7% year on year (see Table 9.2).20 More than half of the companies of the Russian industrial structure are from oil and gas industry. Seven out of ten the most capitalised companies represent the oil and gas sector (Rosneft, Lukoil, Gazprom, Novatek, Tatneft, Gazprom Neft, Surgutneftegaz). There is one bank among the leaders (Sberbank) and two metallurgic companies (Norilsk Nikel, NLMK) (see Table 9.2). Half of the trade transactions on the stock market are effected by three state companies – NK Rosneft (oil and gas), Gazprom (oil and gaz) and Sberbank Rossii – and by two private companies – Novatek (gas extraction, gas refining), Lukoil (oil and gas). At the same time, the list of the most liquid companies is unchanged. Compared with rich European companies, the share of capitalization of a similar

18 Federal property privatisation // Ministry for economic development URL: http://www.economy. gov.ru/minec/activity/sections/govproperty/index. 19 Federal property privatisation // Ministry for economic development URL: http://www.econ omy.gov.ru/minec/activity/sections/govproperty/index. 20 “Rossiyskiy fondovyi rynok, pervoe polugodiye 2018: sobytiya i fakty” (“Russian stock market in the first half of 2018: events and facts”), available at:, www.naufor.ru с.1file:///Users/nt_guilty/ Downloads/%D0%A0%D0%A4%D0%A0%201%20%D0%BF%D0%B3%202018%20(1).pdf

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Table 9.2: Top Russian Joint Stock Companies 2018. Issuer

Capitalization (bln. rub)

Share in total capitalization (%)

Sberbank

.

.

Rosneft

.

.

Lukoil

.

.

Gazprom

.

.

Novatek

.

.

Norilsk Nikel

.

.

Tatneft

.

.

Gazprom Neft

.

.

Surgutneftegaz

.

.

NLMK

.

.

Total

.

.

Total capitalization ME

.

.

Source: Moscow Exchange http://moex.com/s1606.

number of the leading corporations does not exceed 30% (about 20% in Germany and 30% in France). There is a positive shift in the dividend policy of the Russian companies. Over the recent decade the practice of paying out real dividends has become common in large companies. Amendments to the corporate legislation adopted in 2010 concerning dividends spurred the process. The formation of holding companies as a special type of integrated structures turns out to be one of the main trends of development of large corporate structures. Nowadays, most of the national industrial companies belong to holding structures, and almost the all biggest Russian companies are organized as holdings and play important role in the development of Russian economy.

Conclusion Russian companies still need investments as they have a high level of depreciation of plants and capital-intensive industries prevail in the structure of economy. The Russian stock market is characterized by low liquidity, whilst the number of listed companies decreases.

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Ownership structure is not transparent and is highly concentrated, and the share of national institutional and big foreign investors is low and they play a passive role in the governance of business. The state remains the main owner and stakeholder, and informal relations are important in business. The level of corporate integration has increased along with the role of integrated business-groups in the economy of Russia. The main issue to be considered is the share of the state in corporate governance. Should the state stimulate competition, create an equal environment for public and private companies, execute a privatization programme, enhance corporate legislation, respect investors’ rights, provide necessary conditions for the development of the national liquid stock market and ethics and business culture, then the financially struggling Russian business will have to create an efficient system of corporate governance.

References Anikanov, S.I., Matyushin, A.S. (2010), “Rossiyskiy rynok sliyaniy i pogloscheniy v 2010”, available at: http://www.fbk.ru/upload/contents/561/Mergers_and_aguisitons_2010d.pdf. (accessed 15 March 2015) (Anikanov, S.I., Matyushin, A.S. (2010), “Mergers and acquisition in Russia in 2010”, available at: http://www.fbk.ru/upload/contents/561/Mergers_and_aguisitons_2010d.pdf. (accessed 15 March 2015)) Abramov, A.E., Radygin, A.D., Chernova, M.I., Entov, R.M. (2017), “Gosudarstvennaya sobstvennost I kharakteristiki effectivnosti”, Journal “Voprosy economiki”, Vol. 4, pp. 5–37. (Abramov, A.E., Radygin, A.D., Chernova, M.I., Entov, R.M. (2017), “Government property and characteristics of efficiency”, Voprosy economiki, Vol. 4, pp. 5–37.) Belikov, I. (2017), “Effectivnyi sovet directorov: novyi vzglyad”, Journal “Aktsionernoe obschestvo: voprosy korporativnogo upravleniya”, Vol. 3–4, pp. 12–18. (Belikov, I. (2017), “Efficient Board of Directors: new approach”, Joint Stock Company: Corporate Governance Issues, Vol. 3(4), pp. 12–18.) Belikov, I. (2015), “Kak povysit effectivnost raboty soveta direktorov: rekomendatsii chlenam sovetov”, Journal “Aktsionernoe obschestvo: voprosy korporativnogo upravleniya”, Vol. 4, pp. 21–27. (Belikov, I. (2015), “How to Increase the Efficiency of the Board of Directors: Recommendations to the Members of the Boards”, Joint-stock company: corporate governance issues, Vol. 4, pp. 21–27.) Verbitskiy, V.K. (2015), “Iz idealnogo realnomu”, Moscow, Alpina publisher, p. 216. (Verbitskiy, V.K. (2015), “From ideal to real”, Moscow, Alpina publisher, p. 216.) Dolgopyatova, T. (2009), “Korporativnoe upravlenie v rossiyskikh kompaniyah: rol globalizatsii i krizisa”, Journal “Voprosy ekonomiki”, Vol. 6, pp. 83–96. (Dolgopyatova, T. (2009), “Corporate governance in Russian companies: role of globalosation and crisis”, Voprosy ekonomiki, Vol. 6, pp. 83–96.) Dolgopyatova, T.G. (2014), “Evolutsiya struktury i dinamiki kontsentratsii sobstvennosti”, in Kuznetsov, B.V. (Ed.), Ocherki modernizatsii rossiyskoy promyshlennosti: povedeniye firm, Publishing house of HSE, pp. 143–166.

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(Dolgopyatova, T.G. (2014), “Evolution of ownership structure and its dynamics”, in Kuznetsov, B.V. (Ed.), Analytical review of modernization of Russian industry: behavior of firms, HSE Publishing House, pp. 143–166. Kondratiev, V.B. (2015), “Promyshlennaya politika kak garant stabilnosti ekonomiki”, Journal “Regionalnaya Rossia”, Vol. 3, pp. 30–39. (Kondratiev, V.B. (2015), “Industrial Policy as a Security of Stable economy”, Regionalnaya Rossia, Vol.3, pp. 30–39.) Lekhnitskaya, D. (2017), “Semeinye tsennosti”, available at: https://www.rbc.ru/newspaper/2017/ 10/10/59d66f599a7947412209ff5d (accessed 10 October 2017) (Lekhnitskaya, D. (2017), “Family values”, available at: https://www.rbc.ru/newspaper/2017/10/ 10/59d66f599a7947412209ff5d (accessed 10 October 2017)) Novikov, A.S. (2010), “Hongkongskaya birzha – vrata k sokrovischam Podnebesnoy”, Journal “Economicheskie nauki”, Vol. 66 No. 5, pp. 198–212. (Novikov, A.S. (2010), “Hong Kong Stock Exchange – Gates to Treasure of the Middle Kingdom”, Economicheskie nauki, Vol. 66 No. 5, pp. 198–212.) Radygin, A.D., Simachev, Y.V., Entov, R.M. (2015), “Gosudarstvennaya kompaniya: sfera proyavleniya ‘provalov gosudarstva’ ili ‘provalov rynka’”?, Journal “Voprosy ekonomiki”, Vol. 1, pp. 45–79. (Radygin, A.D., Simachev, Y.V., Entov, R.M. (2015), “State company: illustration of government flaws or drawbacks of the market?”, Voprosy ekonomiki, Vol. 1, pp. 45–79.) Yakovlev, A.A. (2016), “Rossiyskaya korporatsiya i regionalnye vlasti: modeli vzaimootnosheniy i ikh evolutsiya”, Journal “Voprosy ekonomiki”, Vol. 1, p. 124. (Yakovlev, A.A. (2016), “Russian Corporation and Regional Authorities: Models of Relationships and their Evolution”, Voprosy ekonomiki, Vol. 1, p. 124.) Kondratiev, V. (2009), “Korporativniy sector i gosudarstvo v strategii globalnoy konkurentosposobnosti”, (“Corporate Sector and the State in the Strategy of Global Competitiveness”), World Economy and International Relations. Vol 3. pp. 24–25; URL: www. global500.com.

Igor Belikov

10 Russian Quasi-corporation As It Is A visitor to a remote wild countryside stops a random local and asks, “How do I get to London from here?” The local answers, “Och, if I were going to London, I wouldn’t start from here!”

Introduction This chapter seeks to analyze the group of major Russian companies which make up the skeleton of the Russian economy. The core of this group includes companies whose stocks are listed at the Moscow stock exchange and some foreign stock exchanges. Rather few experts point to the effect of the high concentration of ownership of Russian companies, both state-owned and non-state, on their governance practices (and very few point to the impact of the national socio-cultural background on Russian companies’ corporate governance practices (Auzan and Kokorev, 2018; Belikov, Sovet, 2019; Belikov, Effective board, 2019). Few experts analyze the Russian state’s real interests in shaping the institutional environment (Radygin, Simachev, Entov, 2015) and the impact of this policy on companies’ corporate governance (Abramov, Radygin, Chernova, 2016). Employees, environment protection groups, and local authorities have been analyzed out of the context of corporate governance as separate issues, unrelated to Russian companies’ corporate governance practices (Kapelyushnikov and Lukiyanova, 2010). The same is true of analyses of the defects of the Russian judicial system (Morschakova, 2010). The first attempt at complex analysis of Russian companies to embrace ownership structure, shareholders conduct, domestic political, social, cultural and judicial environment was made quite recently (Belikov, 2019). The bulk of literature by Russian experts on Russian listed companies as corporate entities (90%) has been focused on analyses of various formal aspects of their corporate governance practices (board and board committees’ composition, etc.) from the point of their correspondence to Western corporate governance best practices and the Russian corporate governance сode (Bank of Russia, 2017; Bank of Russia, 2018; Entov et al. 2009; Nationalnyi doklad, 2018; Nationalnyi doklad, 2017; Nationalnyi doklad, 2015; Nationalnyi doklad, 2014; Otsenka korporativnogo, 2017; Praktika korporativnogo, 2011 Soveremennaya praktika, 2017). This approach assumes that the basic interest of controlling Russian listed companies’ shareholders is to move towards the model of Western corporation (i.e. dispersed ownership), assuming that the domestic business environment in https://doi.org/10.1515/9783110695816-010

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Russia, despite its serious defects, is evolving towards the one in which Western companies operate and that the Russian state is interested in large numbers of foreign portfolio investors to come and to make ownership of Russian companies dispersed. All public discussions of corporate governance in Russia are underpinned on this approach. The aim of this paper is to: – understand the nature of Russian listed companies in terms of its ownership structure and its dynamics – include socio-political and cultural factors into the equation of large Russian companies – identify real stakeholders of these companies – understand the real model these companies are governed by

Method The methods used in the paper are manifold and are comprised of an analysis of ownership structures alongside the socio-political and cultural factors which constitute the environment in which Russian companies operate. The paper shows that both agency theory and stakeholder theory are not relevant to understanding the real nature of major Russian companies and the way they are governed. Although the analysis is focused entirely on Russian companies, it is relevant to other companies of emerging market countries. The paper’s conclusion is useful for investors in stocks of Russian companies as well as in other companies in emerging markets.

Ownership Structure of Russian Joint-stock Companies and Their Shareholders In 2015–2018, the total number of Russian companies whose stocks are listed at domestic and foreign stock exchanges slipped down from 120 to 85. The survey of ownership structures and corporate governance practices of listed Russian companies in 2015 numbered 120 companies ( Corporate Governance Structures, 2015). 73% of sampled companies were majority owned. Furthermore, 95% of companies in the sample had at least one block holding with 25% of shares, with an average free float share of 25%. The share capital of Russian companies is very unevenly divided between two categories of shareholders: majority shareholders, most of which are controlling shareholders, and minority shareholders. Majority shareholders fall into two main categories – private shareholders and the state.

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Most Russian experts agree that the real level of ownership concentration in non-state-owned major Russian companies is higher as compared with official data. The primary reason for controlling shareholders to veil their control is defense against expropriation of their assets by raiders who have connections in law enforcement bodies and judicial system. OECD experts provided the following explanation for the Russian corporate landscape: “The ability of large businesses to protect their property rights against both the private sector and government intervention resided precisely in their size, giving them an advantage that smaller competitors did not have. Likewise, the size of these conglomerates allowed them to finance themselves more easily and redistribute the cash flows intragroup in the face of an underdeveloped external capital market. Internal mobility of the workforce was also a substitute for an inefficient labor market” (Kostyleva and Lehuedé, 2012). High risks of assets expropriation, weak judicial protection, authoritarian social and business culture, and a low level of trust in relations among business partners have cemented high ownership concentration of Russian companies, both listed and non-listed (private). The determining factor affecting the conduct of controlling shareholders of major Russian non-state-owned companies is restrictions imposed on them by the Russian state, who considers these companies as strategic assets. In 2008–2018, the Government Commission on Foreign Investment received 516 stock acquisition applications from foreign investors. It reviewed 229 applications and rejected 13 of them. No explanation has ever been provided on why the other 287 applications have not been reviewed. In all likelihood, these applications have been tacitly withdrawn because applicants saw very little chance to succeed. Reportedly, an unknown number of prospective applicants decided not to submit their applications at all for fear of being rejected. The Russian state considers big private business as its subordinate partner to act at its will. This makes the state very much interested in preserving high concentration of ownership of major Russian companies. It is much easier for the state to deal with a limited number of controlling shareholders rather than with large number of portfolio investors. This is the key to understanding the real practices of the government regulation of the relationship between majority and minority shareholders in major Russian companies. The political and economic situation and the nature of relations between big business and government in Russia, make the future of major Russian non-state companies very uncertain. Most founders of major Russian companies are now in their 60s or even 70s. However, there has been no indication of any forthcoming bequeath of these assets to the founders’ heirs. In the 2010s, experts identified only 4 cases of transferring control over major companies from founders to their heirs (Zagieva, Matveeva, 2017).

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Experts point out that almost all founders of major Russian companies view complete sell- their companies as the best strategy. However, there have been numerous cases of the Russian state resctricing controlling shareholders of major Russian companies to sell control to foreign investors. This practice, in my view, will tighten, in the foreseeable future. According to the assessment made by Moody’s in October 2018, the Russian banking system is the weakest in the BRICS group of countries in terms of quality of credit portfolio, liquidity and profitability (Moody’s, 2018). It is unable to finance transfers of control over major companies at market prices. Lasting political tension between Russia and the West undercuts prospects for Russian banks to borrow much funding from the West and makes schemes in which major share stakes of leading Russian companies are used as collateral to Western banks absolutely unacceptable for Russian political leadership. This political apprehension is likely to prevent similar transactions of Russian banks with major Chinese banks. Therefore, controlling shareholders of major Russian companies face the prospect of having no choice but to sell their control stakes at a very discounted price to new owners designated by the Kremlin, or to state-owned banks or companies. Over the last 12–15 years the Russian state has been steadily increasing its direct holding in the Russian economy. According to the Federal Anti-Monopoly Service, the share of state-owned companies and banks in the national economy doubled over 2005–2015 – from 35% up to 70%. In 2014, Russian government analysts estimated the share of the state in the economy, by sale volumes and market capitalization of state-owned companies, at 50–51% ( Bulleten, 2016). A part of Russian owners of significant assets opted to emigrate. According to Knight Frank, in 2000–2016, 20,000 of high net wealth and ultra high net wealth individuals left Russia. Nonetheless, the overwhelming majority of public companies’ controlling shareholders stay in Russia and conduct their businesses in accordance with rules set by the Kremlin. For many of them the period of 2016–2018 was extremely successful. In 2016–2018, the number of US dollar billionaires in Russia grew up by 29 and reached 106, putting Russia third, after US and China. According to The Wealth Report, in 2017 the number of owners of 500 billion dollars-plus fortunes grew in Russia by 22%. According to the BCG findings (BCG, 2019), 46% of the Russian private capital is owned by ultra high net wealth individuals (with assets of more than 100 ml US dollars), while for Eastern Europe this indicator is 28% and the global average is 12%. The pace of Russian economic growth was very low during that period, with very few IPOs and SPOs and negative effect of Western economic sanctions. Therefore, this is a very good reason to believe that the above personal success stories were based on close cooperation with the state. This kind of strategy does not require corporate governance practices modeled on the Western ones. The reverse side of these personal wealth growth stories is that the Russian state has

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entrenched its belief that it can order, at its discretion, big Russian business to make additional financial contributions, besides taxes paid, to projects which the state considers of strategic importance. The total amount of investment in stocks by Russian institutional investors is estimated by experts in the range of 1.1–1.5 trillion rubles. In comparison, total market capitalization of stocks traded at the Moscow stock exchange July 1, 2018, according to stocks.investfunds.ru, was 40.3 trillion rubles. Russian minority shareholders have not had any consistent policy with regard to their stock holdings. The level of their activism at shareholders meetings is very low, erratic, and even accidental (Otsenka korporativnogo, 2017). The group of foreign institutional investors in Russian listed companies is much more organized as compared with Russian minority shareholders. Yet, the agenda promoted by it is limited to the following issues: – to ensure the election of some minority representatives to boards – to ensure more transparency on transactions with corporate assets – to increase dividends to be paid – to include market capitalization indicators in senior management’s KPIs

Stakeholders of Russian Companies Russian big business, controlling shareholders of major Russian companies, have dutifully accepted the framework designed by the Kremlin, under which Russian non-state business must stay away from any attempt to build up its own relationship with major social and professional groups and organizations in order to work out and to present their common demands to the state. Under the current political regime, Russian business, as well as any other social group, has to appeal directly to the state on issues it is concerned with, and to do so strictly on its own behalf. The list of appeals may include current business issues but no fundamental political issues. The latter are fully and exclusively reserved for the country’s top political leadership. All communications between the business and various social groups have been conducted under strict supervision by the state and have been limited to ad hoc issues like wages, charity for cultural, sports and educational projects, and support for public organizations operating under tight government control (GONGOs). The Federation of Independent Labor Unions (FILU) claims to have 20.7 million members (out of 76.6 ml active population) and accounts for 92 to 95% of all labor union members in Russia. However, the FILU has very little to do with real labor unions. The FILU leadership has turned it into an element of the state machine. Its mass activities have been limited to rallies in support of President Putin, the United Russia party, Anti-Maidan (i.e. anti-Kyiv) rallies, and May 1st marches with slogans copied from the Soviet period. Experts unanimously agree

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that FILU activities related to protection of employees rights is of very limited scale and have been shrinking over time. In mid-1990s, a number of genuinely independent labor unions emerged, which proved to be active in protecting employees’ rights. However, the “foreign agents” law adopted in 2012 put a very tight straightjacket on them. As the result, the bulk of labor and the population at large have lost belief in labor unions as tools of their rights’ protection. Public opinion polls have regularly fixed very low level of trust in labor unions as an institution. In Russia, environmental problems are very acute. The 1990s witnessed the emergence of a large number of independent environment protection organizations and groups. The above “foreign agent” law became a real crackdown on them. According to Human Rights Watch, in 2012–2017, 29 major environment protection organizations were classified as “foreign agents” and some of them were shutdown. Instead, the state seeks to set up “patriotic” environment organizations to act under state guidance and funded by the state. The system of local self-government, as many experts point out, has lost all autonomy and has become a lower level element of the unitary nationwide power hierarchy. Local authorities are fully dependent on funds provided by regional authorities. Many local governments have “voluntarily” handed over their key management functions to regional authorities. As the result, the local population has lost belief in local self-government: turnout at local elections has varied between 10 and 15% in 2010s. Under the paternalistic social model, built up in Russia, social groups, which theory classifies as stakeholders, have accumulated very little, if any, experience in independently articulating their interests and cooperating with each other in promoting these interests. Within the existing socio-political model their interaction has been mediated by the state. A very important factor that has made this model possible is a deeply entrenched belief of Russians that a strong and powerful state is the only guarantee against total anarchy, chaos and aggression of foreign powers. The Edelman Global Barometer survey of 2018 (Edelman, 2019), conducted across 27 countries, registered a dramatic downfall of peoples’ trust in main social institutions like state, business, media and others. However, in 26 countries NGOs retained top position in the hierarchy of public trust, while in Russia the state is at the top of trusted institutions and NGOs are at the bottom. Russian companies clearly understand that their only, almighty and plenipotentiary, stakeholder is the state. All other groups are nothing but nominal stakeholders. Many Russian companies have implemented large-scale social corporate responsibility and sustainable development programs; however, the content and scale of these programs has been determined by signals from the state and by personal views on social issues of companies’ controlling shareholders and top executives.

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Top Management of Russian Companies as a Participant of Corporate Governance Practices The high concentration of ownership, high non-market risks, and weak legal and judicial protection coupled with the dominant role of controlling shareholders in strategic and operative management, all have made very close cooperation between controlling shareholders and top management the core of almost all Russian companies. Other important factors which have cemented this core are centuries-long traditions of rigid power hierarchy and a low level of social and personal trust. Put together, all of these factors make top executives, directly controlled by major shareholders, much more understandable partners for the latter than boards of directors. There are very few studies of Russian top executives. The most valuable of them, providing a general picture, was made by Ward Howell Talent Equity Institute (Effective CEO, 2015), and covers the period of 2003–2013. In Russian companies, top executives’ turnover is very high: 3 years on average, as compared with 6.5–7 years in Western corporations. Decisions to keep on or to fire top executives are taken by controlling shareholders at will. The survey did not find any correlation between the duration of CEOs office tenure and success or failure of their companies. A long horizontal executive career is a rare phenomenon in Russian business. Many Russian CEOs and corporate C-suit residents have dropped out of the top management community forever after losing their senior jobs held for a short period. This seriously hinders accumulation of collective management experience in the Russian economy. According to RBC, in 2015, expats (i.e. non-residents) accounted for only 2% of top-500 CEOs of Russian companies. The average tenure of an expat CEO at a Russian company is just 2.1 years, versus the overall CEO tenure average of 3 years (Effective CEO, 2015). Russian top and senior executives’ payment practices are very complicated, controversial, and opaque. Firstly, payments to Russian top executives are very uneven. According to Spencer Stuart’s study of top executives’s compensation within the top 50 largest (by sale volume) companies in RAEX top-600 companies rating, CEOs of these Russian companies have been paid much higher remunerations than CEOs of Western companies. For instance, remunerations of CEOs of British peer companies from FTSE-250 index were 41% less than the ones of their Russian counterparts and remunerations of peer US companies was 47% less. According to experts, remunerations in Russian peer companies for same position can differ from 4–5 to up to 10 times. Secondly, disclosure of Russian top executives’ remuneration has always been very opaque in terms of total amounts and structures. Deloitte’s 2015 survey

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discovered that none of the 82 listed Russian companies disclosed individual remunerations of their top executives. 73% of them disclosed only total amounts of remunerations to their management boards put together (usually 9 to 12 persons).

Conclusion The model of governance dominant in almost all major Russian companies is based on a direct and close interaction between controlling shareholders and top executives. In this interaction, decisions are taken on all major governance and management issues, with controlling shareholders playing decisive role in this process. Boards of directors play a symbolic role in this design. I define this model the model of executive hierarchy. Graphically, it can be presented as shown in Figure 10.1.

Western corporation

Russian company

Shareholders

Controlling shareholder

Board of directors

Board of directors

Top management

Top management

Figure 10.1: Models of corporate governance of Western and Russian corporations.

This model has been shaped by both internal specific features of Russian companies and specific features of the domestic economic, socio-political and cultural environment in which Russian companies operate. The executive hierarchy model has produced quite limited results. Judging by key development indicators, most Russian companies lag far behind Western corporations and behind companies of leading emerging market countries. At present and for foreseeable future Russian companies will be continuously affected by factors which reduce the efficiency of this model and capacity of top executives as key partners of controlling shareholders.

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References Abramov, E. Radygin, A. Chernova, M. (2016) “Kompanii s gosudarstvennym uchastiem na rossiyskom rynke; struktura sobstvennosti i rol v ekonomike” ( State-owned Companies on the Russian Market: Ownership Structure and the Role in the Economy), Voprosy ekonomiki (Russian Journal of Economics), N 12, pp. 61–87 Abramov, E. Radygin, A. Chernova, M. Entov, R. (2017) “Gosudarstvennaya sobstvennost i kharakteristiki effektivnosti” (State ownership and efficiency characteristics). Voprosy ekonomiki (Russian Journal of Economics), N 4, pp. 5–37 Auzan, A. Kokorev, R. (2018), “Spetsyfika korporativnogo upravelniya v Rossii; institutsionalnye i sotsiokulturnye aspekty” (Specificity of Corporate Governance in Russia: Institutional and Socio-Cultural Aspects), in Natsionalnyi doklad po korporativnomu upravleniyu. (National report on corporate governance). Moscow, Vol. 10, pp. 5–36. Bank of Russia (2017), Obzor praktiki korporativnogo opravleniya v rossiyskih publichtyh obschestvah. (Review of Corporate Governance Practices in Russian-listed Companies). N1, April. available at: https://www.cbr.ru/StaticHtml/File/14233/Review_17042017.pdf (accessed 15 January 2019). Bank of Russia (2017), Obzor praktiki korporativnogo opravleniya v rossiyskih publichtyh obschestvah po itogam 2016 goda. (Review of Corporate Governance Practices in Russianlisted Companies in 2016). N2, December. available at: https://www.cbr.ru/Content/ Document/File/33001/Review_27122017.pdf (accessed 15 January 2019). Bank of Russia (2018), Obzor praktiki korporativnogo opravleniya v rossiyskih publichtyh obschestvah po itogam 2017 goda. (Review of Corporate Governance Practices in Russianlisted Companies in 2017). N3, December. available at: http://www.cbr.ru/Content/ Document/File/33001/Review_27122017.pdf (accessed 15 January 2019). BCG (2019). Global Wealth 2019: Reigniting Radical Growth. available at: http://image-src.bcg. com/Images/BCG-Reigniting-Radical-Growth-June-2019_tcm9-222638.pdf (accessed 25 June 2019). Belikov, I. (2019), Sovet direktorov kompanii: novyi podhod (Board of directors: new approach), Moscow, De Libri. Belikov, I. (2019), “Effective board of directors: a new approach”, Journal of Corporate Finance, Vol 13 N 1, pp. 20–30. available at: http://rid.ru/wp-content/uploads/2019/05/CFR_01_2019.pdf (accessed 25 June 2019). Bulleten o tekuschih tendentsiyah rossiyskoi ekonomiki (Bulletin of Russian economy’s current trends). (2016). Analiticheskiy tsentr pri Pravitelstve Rossiyksoi Federatsii (The analytical center of the Russian Federation Government), issue 17, September, pp. 2–20. available at: http://ac.gov.ru/files/publication/a/10337.pdf (accessed 21 January 2019). Corporate Governance Structures of Public Russian Companies. Survey by Deloitte CIS Center for Corporate Governance, (2015), available at: https://www2.deloitte.com/content/dam/ Deloitte/ru/Documents/risk/corporate-governance-structures-survey-eng.pdf (accessed 20 January 2019). Edelman Trust Barometer. Global Report. (2019), available at: https://www.edelman.com/sites/g/ files/aatuss191/files/2019-01/2019_Edelman_Trust_Barometer_Global_Report.pdf (accessed 25 January 2019). Effective CEO in the Russian context. Ward Howell (2015). available at: http://wardhowell.com/en/ tei/item/effective-ceo-in-the-russian-context (accessed 21 January 2019). Entov, R., Radygin, A., Apevalova, E. et al. (2009), Vnutrennie mehanizmy korporativnogo upravleniya: prikladnye problem (Internal Mechanisms of Corporate Governance: Some Applied Problems). Moscow, Delo.

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Issledovanie tekuschego sostoyaniya i tendentsiy razvitiya vnutrennego audita v Rossii. Issledovanie provedeno Institutom vnutrennih auditorov pri podderzhke kompanyy EY. (Survey of the Current State of Internal Audit in Russia. Sponsored by EY), (2015). available at; https://www.ey.com/Publication/vwLUAssets/EY-internal-audit-2016/%24File/EY-internalaudit-2016.pdf (accessed 19 January 2019). Issledovanie tekuschego sostoyaniya i tendentsiy razvitiya vnutrennego audita v Rossii. Issledovanie provedeno Institutom vnutrennih auditorov pri podderzhke kompanyy EY. (Survey of the Current State of Internal Audit in Russia. Sponsored by KPMG), (2017). available at: https://assets.kpmg.com/content/dam/kpmg/ru/pdf/2017/12/ru-ru-internal-audit-survey. pdf (accessed 19 January 2019). Kapelyushnikov, R. Lukiyanova, L. (2010). Transformatsiya chelovecheskogo kapitala v rossiyskom obschestve. (Transformation of Human Capital in Russian Society). Moscow, Fond Liberalnaya missiya. available at http://www.liberal.ru/upload/files/Kapelushkin_Final_Web%20(2).pdf (accessed 20 January 2019). Kostyleva, V. Lehuedé, H. (2012), “Board formation: nomination and election in OECD countries and Russia”. In 2012 Russian Corporate Governance Roundtable, Moscow, pp. 1–45. available at: http://www.oecd.org/daf/ca/Board%20ENG.pdf (accessed 6 January 2019). Moodys. (2018). Among BRICS nations China’s banks have the strongest credit. pp. 1–7. available at: https://www.moodys.com/research/Moodys-Among-BRICS-nations-Chinas-banks-havethe-strongest-credit–PR_390608 (accessed 6 January 2019). Morschakova, T. (2010). Sudebnoye pravoprimeneniye v Rossii: o dozlhnom i realnom. M. P. Valenta. (Judicial enforcement in Russia: due and real). Moscow. P. Valenta. available at: http://www.neps.ru/media/files/library/file83.pdf (accessed 20 January 2019). Nationalnyi doklad po korporativnomu upravleniyu” (National Report on corporate governance), (2018), Moscow, Issue 10. Nationalnyi doklad po korporativnomu upravleniyu (National Report on Corporate Governance), (2017), Moscow, Issue 9. Nationalnyi doklad po korporativnomu upravleniyu (National Report on Corporate Governance), (2015), Moscow, Issue 8. Nationalnyi doklad po korporativnomu upravleniyu (National Report on Corporate Governance), (2014), Moscow, Issue 7. Otsenka korporativnogo upravleniya v publichnih aktsionernih obschestvah s uchastiem Rossiyskoi Federatsii, aktsii kotorih obraschayutsya na organizovannom rynke tsennyh bumag (Assessment of Corporate Governance in Listed Companies owned by the Russian Federation), (2017). available at: https://buscom.hse.ru/data/2017/04/18/1169055539/%D0%9F%D0%BE %D1%81%D0%BB%D0%B5%D0%B4%D0%BD%D1%8F%D1%8F%20%D0%B2%D0%B5%D1% 80%D1%81%D0%B8%D1%8F%20%D0%BE%D1%82%D1%87%D0%B5%D1%82%D0%B0__% D1%80%D1%83%D1%81.pdf (accessed 9 January 2019). Praktika korporativnogo upravleniya: opredelenie granits natsionalnoy modeli. (Corporate Governance Practice: to Define the Limits of the National Model), (2011), Moscow, KPMG, AMR. available at: https://assets.kpmg.com/content/dam/kpmg/ru/pdf/2011/ru-ru-corporategovernance-practice-in-russia-2011.pdf (accessed 9 January 2019). Preemstvennost v rossiyskom biznese; rezultaty isslodovaniya (Succession in Russian Business; Survey Results), (2014), Ward Howell Talent Equity Institute. Radygin, A. Simachev, Yu. Entov, R. (2015). “Gosudarstvennaya kompaniya: sfera proyavleniya provalov gosudarstva ili provalov rynka?” (“State-owned Company: the Space of Failure by the State or by the Market?”) Russian Journal of Economics, N1. pp. 45–79.

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“Sotsialno-trudovyie koflikty v Rossii i v mire. (Social and Labor Conflicts in Russia and the World.) (2017) in The role of government, labor unions and employers in their prevention and settlement. 3rd international academic and practical conference. March 31, pp. 67–123. Sotsialno-trudovyie konflikty v Rossiyakoi Federatsii. (Social and Labor Conflicts in the Russian Federation.) (2016), Moscow. Sovremennaya praktika korporativnogo upravleniya v rokkiyskih kompaniyah (Modern corporate governance practices of Russian companies), (2017), Moscow, Alpina Publishers Books. Spencer Stuart. (2016), Kompensatsii top-menedzherov v krupmom biznese. Issledovanie razmera i struktury kompensatsionnih paketov CEO, CFO i CHRO sredi 50 krupneishih rossiyskih kompaniy (Top Management Compensation in Big Business. The Study of the Size and Structure of CEO, CFO and CHRO Compensation Packages of the 50 Largest Russian Companies). available at: https://www.spencerstuart.com/-/media/pdf%20files/research% 20and%20insight%20pdfs/russia-compensation-study_090216.pdf (accessed 6 January 2019). Zagieva, V., Matveeva, A. (2017). “Generalnaya liniya” (General line), Harvard Business Review Russia, March. pp. 1–15. available at: https://hbr-russia.ru/liderstvo/lidery/a19741 (accessed 4 January 2019).

Igor Belikov

11 Russian Corporate Boards: How to Pull Oneself Out by the Hair – You assert that anyone can pull one’s self out of a bog by his hair?! – Absolutely. Every sane individual has to do just that from time to time! Baron Munchhausen (a Soviet movie)

Introduction This chapter seeks to analyze board practices of major Russian companies with a focus on companies whose stocks are listed at the Moscow stock exchange and foreign stock exchanges. In analyses of Russian boards by Russian experts, 99% of the experts sing the same hymn book, which is replica of Western boards’ best practices. The tone is set by the regulator, the Bank of Russia. It is embodied in the Corporate Governance Code (Corporate governance code, 2014), adopted in 2014. Since then the regulator has regularly issued reviews in which it analyzes corporate governance practices of listed companies through the prism of the Code (Bank of Russia, 2017, N1; Bank of Russia, 2017, N2; Bank of Russia, 2018). The chapter on board practices is the core of the Code, so, the Bank of Russia’s reviews have been mostly focused on boards’ practices. The aforementioned approach, set up by the regulator, added by analysis of compliance of boards’ practices with the Russian corporate law, has been followed by experts in their analyses of Russian boards’ practices at large (), with focus on such aspects as board composition, frequency of meetings, performance of major functions, board evaluations and of boards’ practices in particular companies (Entov et al, 2009; Issledovanie tekuschego sostoyania, 2015 and 2017; Nationalnyi doklad, 2018, 2017, 2015, 2014; Organizatsiya raboty, 2014; Praktika korporativnongj, 2011; Sovet direktorov, 2008; Sovremennaya pkratika, 2007). Experts identify a high level of non-compliance by Russian boards with practices of the Code, but provide limited explanation for reasons thereof. They imply that major reasons behind non-compliance are poor knowledge of the Code by controlling shareholders, top executives and board members, their low consciousness, complacence of independent directors largely due to their small number and a mismatch with independence criteria. These factors are viewed as main reasons for the gap between boards’ practices in Western corporations and Russian companies. Some experts point to high concentration of ownership in Russian companies as an important factor undercutting the boards’ role (Kostyleva, Lehuedé, 2012). Their recommendations are fully of legal regulation character: to tighten the corporate law to https://doi.org/10.1515/9783110695816-011

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limit powers of controlling shareholders, build in special arrangements for minority investors’ protection, improve law enforcement, and tighten requirements for independent directors (higher level of liability, longer and harder independence criteria, etc.). In sharp contrast to the above, are the works by I. Belikov (Belikov, 2017–2019) who seeks to analyze the Russian boards’s role and their real performance as heavily determined by such key factors as high ownership concentration, very weak propery rights protection, steadily expanding role of the state in all fields and disadvantageous social and societal practices, and the paper by A. Auzan and R. Kokorev (Auzan and Kokorev, 2018) who analyze board practices of Russian companies through G. Hofstede’s cultural dimensions theory. The aim of the present paper is to: – provide an analysis of Russian boards’ practices and actual roles – identify fundamental constraints that undercut the workability of the Western model in Russian companies – provide a new cognitive and explanatory model to analyze Russian boards – propose an alternative board model, providing new legitimacy for boards and enabling them to contribute to improvement of corporate efficiency within existing fundamental constraints

Metodology The method used in the paper is multifactor and seeks to include such major factors as deeply entrenched high concentration of ownership in Russian corporations, high concern of Russian controlling shareholders with the risk of expropriation due to inefficient and corrupt judicial system, well-entrenched disadvantageous sociocultural habits and the low level of personal and public trust. Although the analysis is focused entirely on Russian companies, it is relevant to other companies of emerging market countries.

General Environment Russian Boards Operate In Very high concentration of ownership in Russian companies leads to widespread practices where overwhelming majority, if not the entirety, of board members are elected with the votes of controlling shareholders. At best, 1 or 2 board members are elected with minority votes. This is typical for both state-owned and non-state listed companies. There are no factors which may drive private shareholders or the state to diminish their shareholdings and to encourage minority shareholders’ activism. The market for board members on the demand side in Russia is very small: about 80–90 listed companies and about 100–130 non-listed companies where

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boards have a more or less visible profile. Board members who lost their seats for challenging controlling shareholders or powerful CEOs run the risk of being blacklisted and falling out of the professional community for ever. In state-owned companies, both listed and non-listed, boards’ practices are very heavily influenced by directives (orders) which are issued by the Federal Agency for the Management of State Property (Rosimushchestvo) in close cooperation with ministries and other government bodies (Belikov, Nikitchanova, Verbitskyi, 2018). Boards do not take part in the elaboration of directives. Directives are mandatory for board members who are government officials and professional plenipotentiaries. As these categories make up the majority in boards, directives predetermine the results of voting. In any country, its system of corporate governance at large and boards of directors’ practices operate not just in a particular legal framework but in a specific societal and cultural environment as well. In my view, the national societal and cultural environment overrides formal legal regulations and determines the actual management and governance practices. Negative social patterns and practices deeply entrenched in Russia, such as a very hierarchical and authoritarian style of social and business communication and a low level of public and personal trust, seriously affect boards’ practices. As A. Auzan and R. Kokorev point out, a high degree of power disparity results in many board members being willing to accept and strictly comply with the hierarchy whereby decisions are taken by controlling shareholders and top executives handpicked by the former. High level of uncertainty avoidance, coupled with high power disparity, often provokes opportunistic behavior of de jure independent directors, their unwillingness to take over responsibility, and their readiness to bend under controlling shareholders and CEOs. Over the 2010s, the above habits have developed even deeper roots.

The Portrait of Russian Corporate Boards Some very useful sources to understand the performance of Russian listed companies’ boards are reviews of listed companies’ compliance with the Corporate Governance Code issues by the Bank of Russia (Bank of Russia, 2017, N 1; Bank of Russia, 2017, N 2; Bank of Russia, 2018 )).1 The reviews reveal that Code’s chapter related to boards practices has the lowest compliance level as compared with all other chapters: out of 10 Code recommendations the least complied with, 7 relate to board practices. None of the listed companies, covered by reviews of 2015–2017, has declared full compliance

1 In my view, in drafting the reviews, the Bank of Russia has created a conflict of interests: it is the author of the Code and thus bears responsibility for promoting it, and it assesses the degree companies comply with it. It is worth noting that in, drafting the Code compliance reviews, the Bank of Russia relies on companies’ reports on compliance with the Code and does not verify them.

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with recommendations related to board practices. 5 of the worst quality explanations on non-compliance with the Code relate to board practices. According to a Deloitte survey ( Corporate Governance Structures, 2015), in 2015, the number of outside directors on boards of Russian listed companies averaged 27%. It often happens that boards of state-owned companies approve as independent board members the directors who do not comply with criteria of the Code (Otsenka korporativnogo, 2017). Based on Code compliance reports, almost all Russian listed companies have board committees. The problem is with their quality: according to Deloitte, in 2015 only 23% of listed companies’ board committees comprised independent directors only, 19% of listed companies had no independent directors in their audit committees, and 25% of remuneration and nomination committees had no independent directors. Code compliance reviews by the Bank of Russia have revealed that many listed companies’ boards do not comply with their very basic board duties. For instance, among most non-complied recommendations of the Code is the one under which the board approves the structure and size of management remuneration, principles of its motivation, and its key performance indicators. Other very useful sources for understanding how Russian companies’ boards perform are surveys (polls) conducted in 2012–2017 by Russian office of PWC (PWC, 2012; PWC, 2013; PWC, 2014 PWC. Russian Boards, 2016; PWC, 2017). In their 2017 poll, 44% of directors said their boards failed to have meaningful dialogue with senior management on the latter’s remuneration and motivation, 31% said their boards do not have an adequate understanding of corporate risks, and 31% said other board members were not well prepared for board meetings (PWC, 2017). Similarly, boards often fail to approve companies’ policies of risk management and internal control, to ensure its effective performance and to regularly assess it. According to the compliance review of 2016, only 61% of companies with first-tier listing and 50% of companies with second-tier listing reported their compliance with this basic Code recommendation. The PWC poll of 2017 revealed that only 11% of board members said they were fully satisfied with their companies’ risk management and internal control practices. 43% said they were more satisfied than dissatisfied with that. PWC polls revealed a lack of a clearly-defined allocation of analysis and key risks monitoring duties between board as a whole and its committees (PWC, 2017). According to the Bank of Russia’s Code Compliance review of 2016, only 75% of companies with first-tier listing and 64% of companies with second-tier listing reported they had anti-corruption policies and a hot line to report its board and audit committee about corruption cases, legal regulations violations, internal procedures and ethics code violations (Bank of Russia, 2017, N1). To have such a policy and mechanism is a basic duty of a board. This is especially important for Russia, as in early 2018, an economic crime report by PWC placed Russia in the top

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5 of countries where companies suffer most of economic crimes. The PWC poll of 2016 revealed an amazing gap between boards’ perception and management’s perception of relevance of such problems as corruption, mistrust towards business in society, cyber risks and social instability – 2,%, 2%, 4%, 4% and 70%, 60%, 43% and 69% respectively (PWC. Russian Boards, 2016). The basic recommendations of the Code with regard to corporate disclosure are to have a company’s information policy bylaw and its information policy discussed by the board at least once a year. It is a basic duty of the board to ensure these practices. However, according to the Code compliance review of 2016 (Bank of Russia, 2017, N1), only 59% of companies with first-tier listing and 14% of companies with second-tier listing reported compliance with these recommendations. According to PWC 2017 poll, just 20% of directors said that social corporate responsibility and sustainable development were on their agenda, 34% said it was a responsibility of top management, 9% said this is responsibility of middle management, and 32% said they have no idea who is in charge of this issue. Only 9% of board members said that they are completely sure that their corporate strategies embrace social corporate responsibility and sustainable development goals, whilst 59% said “to some extent” (PWC, 2017). According to a Deloitte survey in 2015, 12% of listed companies paid nothing to their board members ( Corporate Governance Structures, 2015). Half of these companies referred to bad corporate financial results as the the reason but half said it is their corporate policy not to pay board members at all. Deloitte experts stressed that among those non-payers were large state-owned companies. According to the Code compliance review of 2016, 20% of listed companies did not pay any remuneration to their boards (Bank of Russia, 2017, N2). Among them were such very large state-owned listed companies as Rosseti and FSK. In some cases remuneration payments to boards were ridiculously symbolic: in 2016, Novorossyisk sea merchant port paid its board members an annual remuneration of 84,000 rubles in total (about 1,300 US dollars) but paid 643.1 million rubles (10 million US dollars) to its management. As A. Shevchuk, head of Professional Investor Association, stated, “Rosimushchestvo and industrial ministries view boards as non-performing bodies. The state and companies are sure that sitting on the board of a large company is a prize per se as it offers the opportunity to establish personal connections in high government offices”. According to the Russian Institute of Directors, in 2014, just 17% of listed companies made evaluations of their boards, and according to Deloitte it was 16% in 2015. According to the Code Compliance review of 2016, 26% of companies reported having board evaluation practice. Issues of board and management gender balance have been out of agenda of Russian companies boards. As the Bank of Russia’s Code compliance reviews reveal, listed companies have provided very formal or even snide explanations for non-compliance with the Code.

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For instance, all companies explain their low percentage of independent directors on their boards with “a limited pool of competent candidates available on the market”. However, first, there are several professional directors associations in Russia plus 20–30 firms (both Russian and foreign) offering service of director search; second, it is board evaluation that normally determines what competences and experiences candidates for company’s board should have. Yet, board evaluation is a rare practice in Russian companies and it has been conducted mostly in a very formal way. Most companies explain rare practice of board evaluation with “unavailability of board evaluation methodology on the market”. Mockery of this sort of “explanation” is hardly worth commenting on. PWC polls have revealed deep confusions and frustrations directors feel with the status of boards, directors’ questionable competence in a number of key areas of management and governance, and a trend at window dressing on a number of board issues to fit into ideal best practice. It is remarkable that directors polled by PWC considered taking over CEO hire-and-fire functions as a panacea to remedy negligible status of boards. The regulator, Bank of Russia, also appears to believe that the gap between board practices of Western corporations and of Russian companies’ ones can be bridged through amendments to corporate law, like, for instance, curtailing powers of controlling shareholders to nominate board candidates.

Big Elephant in the Boardroom The real model of governance – the raison d’etre of almost all Russian companies – is the model of executive hierarchy. Under this model, all major decisions on companies’ governance and management are taken by controlling shareholders in close personal interactions with top executives. Boards of directors play a symbolic role in this design. In the face of a high risk of expropriation due to the inefficient and corrupt judicial system, Russian controlling shareholders consider transferring oversight and control powers to boards, limitations on their exclusive powers to nominate board members and to fire and hire CEOs as unacceptable risks. Restrictions by the state on the sale of control to foreign investors, growing apprehension of major Western institutional investors with regard to Russia, disadvantageous socio-cultural patterns, and a low level of public and personal trust have cemented the above model. This cognitive model adequately explains actual role of Russian boards and the picture above. Yet, the Russian state does not want to openly recognize this problem. It is a big elephant in boardroom officially ignored. The official stance of the government on corporate governance and its rhetoric in this area determine the rhetoric used by companies, their boards, and of other market participants with regard to board practices.

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Boards of Russian Companies: A New Approach The present political, economic and social trends in Russia have been draining the executive hierarchy model. In the future this model will be even more challenged by new global trends. The most important of these are a very high level of uncertainty at global, regional, country and industry levels and high volatility of business environment; the breakup of old business logic and nonlinearity in a growing number of industries; very swift and deep technology changes capable of radically transforming industry, business models and breaking up inter-industry barriers; adaptive problems coming to the forefront; and the loss of new opportunities in cases of stubborn adherence to old experience. The above trends challenge dramatically the very basis of executive hierarchy model. In my view, it is only fundamental changes in the institutional basis of Russian society – its culture, ethics and moral climate – that could adequately meet the above challenges. However, I see no forces to drive such changes in Russia in foreseeable future. Therefore, companies, whose controlling shareholders are not happy with their current performance and prospects, should seek out individual changes in their governance practices within existing institutional constraints. I see this as the only chance for them to mitigate shocks of forthcoming challenges for their companies. This instrumental approach should be based on raising the board’s role in companies’ governance and decision-making on key issues. This, however, requires serious changes in the modus operandi of Russian boards. In my view, efforts to transfer real control powers from controlling shareholders to boards are doomed to fail under the current business environment. For many reasons, rejecting board control power at a corporate law level is not an option. In those few specific cases where Russian boards have oversight and control powers, they should seek to execute them. However, pushing hard with the utmost focus on a board’s control powers and attempts at expanding them further through amendments in the corporate law are counterproductive. This will only lead to a new round of imitations. Russian boards need new focuses for their activities to obtain more tangible legitimacy in the eyes of controlling shareholders and top management besides the weak one derived from Russian corporate law. This new focus and approach should be based on understanding of constraints which stem from high ownership concentration, inefficiency of judicial system and negative socio-cultural legacy fueled up by the state’s policy in 2010s. The new approach, which I put forwad, is that Russian boards and their members should primarily focus their efforts on the following (Belikov, 2017; Belikov, 2018; Belikov, 2019): – to act as coaches and mentors to controlling shareholders and top executives to encourage breakthroughs in their professional development to meet new challenges

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– to provide business solutions which tangibly contribute to companies’ competitiveness and sustainability – to introduce new efficient practices and tools for board work which bring much more value to decision-making processes at both governance and management levels Diminishing efficiency of the executive hierarchy model opens up some chances for the above new approach to the board’s role. Focus by the board on professional development of controlling shareholders and top management may lay down grounds for a real gradual increase in the board’s role in Russian companies’ governance, due to: – more time for professional interaction between the board and controlling shareholders or top executives under the new approach – a higher quality and depth of such interaction – more comfortable psychological frameworks for such interaction. In this interaction the board should focus on its role of a consultant, mentor and advisor who is capable to extend mental frameworks of controlling shareholders and top executives and to arm them with new management ideas, technologies and tools. Current performance and compliance assessment communicative dimensions will be added by an “old knowledge-plus-new-knowledge” dimension. Experts in strategic communication stress that people are much more open towards new ideas which expand their old knowledge rather than towards ones which simply contradict it (Ertel and Solomon, 2014). Such an approach may help the Russian boards to prove their governance-cum-management value. Within the new approach the board should focus its efforts on three main components: – strategic planning and competitiveness – human capital development – risk management and internal control The new approach requires Russian board members to both increase their business relevance and to master soft skills to promote this approach to controlling shareholders and top management.

Conclusion Internal features of Russian companies, coupled with lasting disadvantageous social and cultural factors, impose tight constraints on Russian boards to carry out oversight and control functions. They need a new approach which may enable

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them to obtain new legitimacy and gradually increase their real role in companies’ governance.

References Auzan, A. Kokorev, R. (2018), “Spetsyfika korporativnogo upravelniya v Rossii; institutsionalnye i sotsiokulturnye aspekty” (Specificity of Corporate Governance in Russia: Institutional and Socio-Cultural Aspects), in Natsionalnyi doklad po korporativnomu upravleniyu. (National report on corporate governance). Moscow, Vol. 10, pp. 5–36. Bank of Russia (2017), Obzor praktiki korporativnogo opravleniya v rossiyskih publichtyh obschestvah. (Review of Corporate Governance Practices in Russian-listed Companies). N1, April. available at: https://www.cbr.ru/StaticHtml/File/14233/Review_17042017.pdf (accessed 15 January 2019). Bank of Russia (2017), Obzor praktiki korporativnogo opravleniya v rossiyskih publichtyh obschestvah po itogam 2016 goda. (Review of Corporate Governance Practices in Russianlisted Companies in 2016). N2, December. available at: https://www.cbr.ru/Content/ Document/File/33001/Review_27122017.pdf (accessed 15 January 2019). Bank of Russia (2018), Obzor praktiki korporativnogo opravleniya v rossiyskih publichtyh obschestvah po itogam 2017 goda. (Review of Corporate Governance Practices in Russianlisted Companies in 2017). N3, December. available at: http://www.cbr.ru/Content/ Document/File/33001/Review_27122017.pdf (accessed 15 January 2019). Belikov, I. (2019), Sovet direktorov kompanii: novyi podhod (Board of directors: new approach), Moscow, De Libri. Belikov, I. (2018). “Sovety direktorov rossiyskih kompaniy: novyi podhod” (“Russian companies’ boards; new approach”), in Demetieva, A. Milovidov, D. (ed), Korporativnoye upravlenie v Rossii: novye grani (Corporate Governance in Russia: New Dimensions), Moscow: MGIMOUniversity, pp. 163–203. Belikov, I. (2017). “Effetivnyi sovet direktorov: novyi vzglyad” (Efficient Boards: a New View), Aktsionernoye obschestvo (Journal of Joint-stock Companies), No 3, pp. 28–34 / No 4, pp. 151–159. Belikov, I. Verbitskyi, V. Nikitchanova, E. (2013), “Direktivy v kompaniyah s gosudarstvennym uchastiem: za i protiv” (Directives in State-owned Companies: Pros and Cons), Aktsionernoye obschestvo (Journal of Joint Stock Companies), N 10, pp. 47–56. Belikov, I. Nikitchanova, E. Likhacheva, N. (2013), “Otsenka raboty soveta kak upravlehcneskyi instrument” (Board Evaluation as a Governance Tool), Aktsionernoye obschestvo (Journal of Joint Stock Company), N 4, pp. 42–50. Belikov, I. Verbitskyi, V. Nikitchanova, E. (2011), “Sovety direktorov s gosudarstvennym uchastiem: optimalnaya sruktura na perehodnom etape” (Boards of State-owned Companies: Compositon at the Transitory Stage), Aktsionernoye obschestvo (Journal of Joint Stock Company), N 12, pp. 41–50. Corporate Governance Code (2014). available at: http://www.ecgi.org/codes/documents/final_ code_english.pdf (accessed 6 January 2019). Corporate Governance Structures of Public Russian Companies. Survey by the Deloitte CIS Center for Corporate Governance, (2015), available at: https://www2.deloitte.com/content/dam/ Deloitte/ru/Documents/risk/corporate-governance-structures-survey-eng.pdf (accessed 6 January 2019).

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Entov, R., Radygin, A., Apevalova, E. et al. (2009), Vnutrennie mehanizmy korporativnogo upravleniya: prikladnye problem (Internal Mechanisms of Corporate Governance: Some Applied Problems). Moscow, Delo. Ertel, K. Solomon, L. (2014). Moments of Impact: How to Design Strategic Conversations That Accelerate Change, Simon & Schuster, New York. Issledovanie tekuschego sostoyaniya i tendentsiy razvitiya vnutrennego audita v Rossii. Issledovanie provedeno Institutom vnutrennih auditorov pri podderzhke kompanyy EY. (Survey of the Current State of Internal Audit in Russia. Sponsored by EY), (2015). available at; https://www.ey.com/Publication/vwLUAssets/EY-internal-audit-2016/%24File/EY-internalaudit-2016.pdf (accessed 19 January 2019). Issledovanie tekuschego sostoyaniya i tendentsiy razvitiya vnutrennego audita v Rossii. Issledovanie provedeno Institutom vnutrennih auditorov pri podderzhke kompanyy EY. (Survey of the Current State of Internal Audit in Russia. Sponsored by KPMG), (2017). available at: https://assets.kpmg.com/content/dam/kpmg/ru/pdf/2017/12/ru-ru-internal-audit-survey. pdf (accessed 19 January 2019). Kostyleva, V. Lehuedé, H. (2012), “Board formation: nomination and election in OECD countries and Russia”. In 2012 Russian Corporate Governance Roundtable, Moscow, pp. 1–45. available at: http://www.oecd.org/daf/ca/Board%20ENG.pdf (accessed 6 January 2019). Nationalnyi doklad po korporativnomu upravleniyu” (National Report on corporate governance), (2018), Moscow, Issue 10. Nationalnyi doklad po korporativnomu upravleniyu (National Report on Corporate Governance), (2017), Moscow, Issue 9. Nationalnyi doklad po korporativnomu upravleniyu (National Report on Corporate Governance), (2015), Moscow, Issue 8. Nationalnyi doklad po korporativnomu upravleniyu (National Report on Corporate Governance), (2014), Moscow, Issue 7. Organizatsiya raboty sovetov direktorov. Prakticheskiye rekomendatsii (How to Make a Working Board of Directors. Practical Recommendations), (2014) Moscow, Alpina Publishers. Otsenka korporativnogo upravleniya v publichnih aktsionernih obschestvah s uchastiem Rossiyskoi Federatsii, aktsii kotorih obraschayutsya na organizovannom rynke tsennyh bumag (Assessment of Corporate Governance in Listed Companies owned by the Russian Federation), (2017). available at: https://buscom.hse.ru/data/2017/04/18/1169055539/%D0%9F%D0%BE %D1%81%D0%BB%D0%B5%D0%B4%D0%BD%D1%8F%D1%8F%20%D0%B2%D0%B5%D1% 80%D1%81%D0%B8%D1%8F%20%D0%BE%D1%82%D1%87%D0%B5%D1%82%D0%B0__% D1%80%D1%83%D1%81.pdf (accessed 9 January 2019). Praktika korporativnogo upravleniya: opredelenie granits natsionalnoy modeli. (Corporate Governance Practice: to Define the Limits of the National Model), (2011), Moscow, KPMG, AMR. available at: https://assets.kpmg.com/content/dam/kpmg/ru/pdf/2011/ru-ru-corporategovernance-practice-in-russia-2011.pdf (accessed 9 January 2019). PWC, (2016). Russian Economic Crime Survey 2016. Looking to the Future with Cautious Optimism. available at: https://www.pwc.ru/en/publications/resc-2016.html (accessed 18 January 2019). PWC, (2014). Megatrends on Board Agenda. Russian Boards Survey. available at: https://www. pwc.ru/en/governance-risk-compliance/assets/russian_boards_survey2014_eng.pdf (accessed 10 January 2019). PWC, (2016). Russian Boards Survey: Between Strategy and Tactics. available at: https://www.pwc. ru/en/services/corporate-governance/publications/russian-boards-survey-2016.html (accessed 10 January 2019).

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PWC, (2017). Directors and Top Managers: Allies or Rivals?. available at: https://www.pwc.ru/en/ services/corporate-governance/publications/russian-boards-survey-2017.html (accessed 10 January 2019). PWC, (2013). Vzglyad vysshego rukovodstva. Opros chlenov sovetov direktorov (The Leaders’ Viewpoint. The Boards’ Members’ Poll). available at: https://www.pwc.ru/boardsurvey (accessed 10 January 2019). PWC, (2012). V tsentre vnimaniya. Opros chlenov sovetov direktorov (In Focus. The Boards’ Members’ Poll). available at: https://www.pwc.ru/boardsurvey (accessed 10 January 2019). Sovet direktorov. Mirovoy standart korporativnogo upravleniya (Board of Directors. Global Standard of Corporate Governance), (2008), Moscow, Eksmo. Sovremennaya praktika korporativnogo upravleniya v rokkiyskih kompaniyah. (2007). (Current Corporate Governance Practices of Russian Companies). Moscow, Alpina Publishers.

Part IV

Raisa Nozdreva, Mitsuaki Shimaguchi

12 Formation and Development of Russia’s Corporate Strategic Planning in a Market Economy Introduction Currently, in Russia, companies are only starting to work in a strategic range. In the 1990s and 2000s, both in business and in scientific circles, the necessity and effectiveness of strategic long-term planning in a market economy – both at state and corporate levels – was virtually denied. It was emphasized that the planned system is inherent in the socialist, command-administrative system of the economy, and in market conditions it is unacceptable. However, the experience of development in countries with a market economy system that have managed to achieve significant economic and social results indicates an active use of strategic planning (Hoshino, 2003). Corporate strategic management in foreign countries – namely, governance of joint-stock companies – is actively developing and improving in the modern period. Moreover, American economists Lindgren and Bandhold emphasize the importance of nationwide strategic planning, which determines the main directions and development strategies of the entire national economy (Lindgren, Bandhold, 2003). In particular, one can observe the process of decentralization in the economic activities of major transnational companies, the allocation of independent strategic business centers in them, endowing subsidiaries with autonomy and responsibility for carrying out business activities, etc., which aims to optimize business and increase profits through internal corporate competitionand the development of business knowledge and new technologies. However, it should be noted that, at the same time, the parent company retains such predominant functions as the goal-setting function – in this case, the strategic planning function, which is the function of strategic control over the consolidated activities of the company and the function of strategic financial planning. Japanese economist, specialist in strategic management, Professor M. Shimaguchi (Shimaguchi, 2016), noted that, currently, the entire management process is concentrated around the planning function, which is the cornerstone of the management system. The modern global business environment and the uncertainty and turbulence of its development, including crises, entail a transformation of generally accepted ideas and methods of corporate governance and planning, emphasizing the danger of overenthusiasm for short-term indicators, both in assessing the performance of companies

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and in encouraging the work of top managers. In this regard, the role of strategic planning in corporate governance is highlighted.

Materials and Methods When writing this work, the works of Russian and international scientists, and experts in the fields of government regulation, corporate governance and planning were used. In addition to in this work, along with the official documentation, interviews with foreign experts in the field of strategic management and planning, scientists from major Japanese universities (Keio daigaku, Kokusai kirisutokyo daigаku) are used as an empirical base. In the course of the study, the author applied the methods of comparison, generalization, the creation of periodical models, andmicroeconomic analysis tools with extrapolation to the planning sphere.

Results: The Main Stages of Corporate Planning Development in Foreign Country Historically, business has been characterized by a desire to streamline its development, and to ensure its forward movement in a meaningful and predetermined direction. The planning system at the firm level in countries with market economies began to emerge as early as the 1920s, and has undergone a number of stages in its development: – The first period. The Formation of Intra-Firm Planning: 1. The first stage (1920s). Planning based on monitoring the results of the company. 2. The second stage (1945–1950). Short-term operational planning. 3. The Third Stage (1950s). Long-term planning. – Second period. The Development of Strategic Intrafirm Planning and Management: 1. First Stage (1960s). Strategic planning 2. The second stage (1970s). Strategic management based on strategic planning. – Third period. Planning in a situation of uncertainty and turbulence: 1. First Stage (1980s). Scenario planning. 2. Second stage (1990s). Anti-crisis planning. 3. The third stage (2000s. – present). Social – economic planning. Below, the features of each of the stages of the formation and development of corporate planning abroad are considered (Nozdreva, 2016).

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The first period of the formation of intra-company planning in countries with market economies is divided into three stages. 1. The first stage of the formation of intra-company planning (1920s) is determined by attempts to make plans based on monitoring the results of the company’s work. Taking into account these results, controlling the company’s actual activity, adjustments and changes were made (post-factum) to its development directions. However, there was no real planning, foresight and realization of the future course of business development and management of the company. Subsequently, the Great Depression in the USA, crisis phenomena in the economies of many countries, and the Second World War, suspended the development of intra-company planning. 2. The second stage of the formation of intra-firm planning (1945–1950s). Only after World War II did clearly structured planning in the specific document (plan) at the micro level emerge at the firm level as one of the most important management functions, when companies began to develop short-term operational plans for a period of usually 1–3 years. At this time, changes in the business environment occurred slowly, for a long time the usual trends in the development of business conditions persisted. Therefore the main planning method was the extrapolation of series (trends), according to which the curves of the graphs of changes in the business environment indicators and financial and economic indicators of the company for the previous period were transported by an analogy for the future planned period of the company’s development. 3. The third stage of the formation of corporate planning (1950s). Although changes in the business environment are accelerating, corporate planning is carried out mainly based on an analysis of past experience and contemporary trends, implying their preservation not only for a short time but also for a long time in the future; that means the extrapolation of the series remains the main method. Mainly in this period, however, long-term planning began to take place, during which there is an increase in the role of investment policy, which serves as the primary basis for the active development of entrepreneurship and the growth of companies. The importance of financial and economic indicators, and the importance of drawing up the budget part of the plan (items of income and expenditure for the planned period), are especially emphasized. The second period is characterized by the development of strategic corporate planning and management. This period includes two stages. 1. The first stage of the second period of the development of intra-company planning (1960s) is associated with the formation of strategic planning. During this period, changes in the business environment accelerate, becoming more complex and multifaceted, whilst markets slow down, most of them becoming saturated, turning into a “buyer’s market” (where supply exceeds demand). Longterm planning becomes strategic. In many ways, this is facilitated by the

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development of marketing, which, being a pre-planned function of management, provides a high-quality research base and a system of marketing measures to adapt to the market and the demands of consumers as a basis for effective planning. The quality of the forecast of changes in the market environment, the quality of planning is improved. During this period, the concept of firm management, based on the extrapolation of past and present development trends for the future is rejected, and the task is to make adjustments due to market changes, up to the possibility of predicting the strategy and tactics of entering the markets for goods. In this period, market research and marketing technologies have become factors in the feasibility of possible planning changes in the long term. With its help, attempts have been made to anticipate future fluctuations in market conditions and take them into account in the company’s operations. Table 12.1: Distinctive features of short-term, long-term and strategic plans (Nozdreva, 2016). Short-termplan

Long-termplan

Strategic plan

Planning horizon

– years

– years

– years

Degree of specificity

high

low

very low

Strategy Development

no

no

include

Ratio

enter long-term plan

include short- term plan

do not include short-term plan

Short-term plans have a planning horizon of 1–3 years and include a large number of specified quantitative indicators. To a certain extent, they are taken into account in medium and long-term plans, but they do not contain the company’s development strategy. Strategic corporate plan is a long-term plan, but a long-term plan may not be strategic if it does not include the strategies for the future development of the company. Strategic planning, in contrast to long-term planning, involves the development of a complex of entrepreneurial and market strategies for the development of a company and the formation of a market conditions and demand. The use of strategic planning methods in this period is due to the rapid development of scientific and technological progress, increasing the degree of risk in business activities, the processes of differentiation and diversification of the product mix and business areas, the complexity of the organizational structure and management, the need to concentrate efforts onsolving the most important tasks and perspective directions of development (Dementieva, Zagrebelnaya, 2015). If operational planning (up to two or three years) had existed for many years and was characteristic of managing companies even before marketing, the introduction of the marketing concept into corporate management through active market research ensures the validity of long-term forecasts and is associated primarily with strategic, long-term

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planning (5 years and after). Strategic planning allows for adaptation to changes in the market and the external environment, but does not anticipate measures that can actively influence the market situation and the formation and regulation of demand. The second stage of the second period of development of intra-firm planning refers to the 1970s. This stage is marked by the formation of a strategic management system on the basis of strategic planning, which eliminates the above disadvantage. The strategic management linked strategic planning with a complex of effective forms and methods of management, a system of active technologies for influencing the market and the business environment, created opportunities for companies to design the market and demand. This, in general, yielded impressive results in the implementation of the set management goals and objectives and increased the competitive position of the company in the national and global markets. At this stage, strategic planning enhances the active focus and allows the formation of a market in accordance with the strategic goals of the company, ensuring its high competitive position. The third period involves the adaptation of corporate planning to the uncertain and turbulent situations of the business environment. This period is divided into three stages. 1. The first stage (1980s) is characterized by the complication of forecasting how the business environment develops, increasing its turbulence and uncertainty. Planning the company’s work becomes extremely difficult, even when using methods to ensure the flexibility of planning, “rolling” planning, the creation of reserves, the so-called “Airbags” (Hoshino, 2003). It becomes practically impossible to achieve the feasibility of planned goals, objectives and indicators. Practically, there was a question about the fiasco of corporate planning. This situation required the use of a new approach to the planning system, specifically the use of scenario planning techniques, which involves the simultaneous development of several plans for the future development of the company (namely, plans, and not draft plans, as it was before, of which one was approved for execution). For example, leading multinational companies are simultaneously developing about 20 scenario-ready plans, from which, in each separate period of the planned period, the implementation is taken on the basis of a more accurate forecast of the development of the business environment. Such a system is very costly and requires highly skilled managers and planners, but it justifies itself by ensuring the earliest restructuring of the company’s work and adaptation to the changing conditions of the external business environment, increasing its market stability and competitive position. 2. The second stage of in-house planning (1990s) is largely characterized by increased turbulence, a situation of business uncertainty and crisis phenomena. In this period, with particular urgency, firms are faced with the task of developing anti-crisis plans and emergency programs, which can be in the form of one of a scenario series of plans or a separate independent plan to overcome the situation of bankruptcy and take the company out of the crisis (Reynolds, Nohara, 2015).

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The third (modern) stage of corporate planning (2000s and 2010s) is characterized by socioeconomically orienteering the plans and improving planning methods. The concept of sustainable development, the requirements of environmental protection, and the social responsibility of companies and its management all change the perspective of the goals and objectives of the development of companies – they are obliged to draw up social plans and report on them to the appropriate structures. The work on environmental protection, in the field of public relations, as well as charitable activities and suchlike are being intensified.

Formation of Corporate Strategic Planning in Russia in a Market Economy It should be recognized that Russian companies dealt with issues of intra-company planning with a certain caution and even prejudice when transitioning to the market, completely denying the role of planning in a market economy and believing that it is peculiar only to only a command control system as whole and separate legal entities. In addition, on the path of development of the planning system in Russia during the period of Perestroika and immediately after it, other significant hampering factors had emerged. In particular, during the transition to the market, it turned out that Russian enterprises (companies), strange as it may seem, did not have highly qualified specialists-managers who are familiar with the methods of corporate planning, since under socialism the so-called “planners” in the enterprise mainly performed the control and reporting function, and the targets for the enterprises went down as directives from government ministries and departments and GOSPLAN. Extreme volatility and turbulence in the development of Russia and the international business environment also complicated any planned work, which made it possible to build targets only for a short-term period (no more than 3–6 months), and did not allow the company to draw a long-term development course. However, over time, the development of Russian business required the implementation of project planning from companies, including the preparation of business plans, the evaluation and approval of which was the prerogative of the top management of companies. However, there was often confusion when the company adopted a development plan (management plan) as a business plan. Business plans, however, are made to justify borrowing from external organizations (banks, investment companies and funds, individual investors, insurance organizations) and financial resources for opening a new business or reconstruction, reforming an existing business, and implementing various projects (the construction of enterprises, mining, the development of new products, etc.). Business plans are a written document, a justification of the need to raise funds, explaining the content of the project, proving its effectiveness, and justifying the return of the

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received funds. Management plans or plans for the development of the company are current, operational and long-term, strategic, scenario and anti-crisis development plans of the company, setting the main management goals and objectives of the company. Currently, after more than 20 years since the beginning of Perestroika, Russia has identified the need to develop strategic plans for companies and, above all, development strategies in leading state corporations in Russia, and also set the task of creating a strategic planning system at the state level. At present, there is the urgent need to formulate a nationwide development strategy for Russia, identify key financial, economic and social priorities, and develop a system of plans for both strategic, medium-term and short-term planning horizons. In 2014, for the first time since the beginning of Perestroika, the Russian government announced the need to develop plans for social and economic development that can give a targeted impetus to the growth of the most important areas and sectors for the country’s economy. On June 28, 2014, the Federal Law “On Strategic Planning in the Russian Federation” was adopted. It establishes the legal basis for strategic planning in the Russian Federation, the coordination of state and municipal strategic management and budget policy, for powers of federal government bodies of the constituent entities of the Russian Federation, for local governments and their procedure for interaction with public, and for scientific and other organizations in the field of strategic planning. This law governs relationships which arise between the participants of strategic planning in the process of goal-setting, forecasting, planning and programming the socioeconomic development of the Russian Federation, constituent entities of the Russian Federation and municipalities, and industries and spheres of state and municipal government, ensuring the national security of the Russian Federation, as well as monitoring and controlling the implementation of strategic planning documents. Target programs are also active, such as health care reform, pensions, assistance to small and medium-sized businesses, helping young families, etc. In Russia, attempts were made to develop national anti-crisis plans – for example, the “Gref’s Plan”. On January 28, 2015, the anti-crisis “Shuvalov plan” was published, which, however, was mainly a revision of the budget, and by mid-October 2016, only 63% was implemented, and later on it was completely revised. In the modern period, great importance is attached to long-term (mainly until 2030) development strategies of state corporations in Russia, such as Rosneft, Gazprom, Russian Railways, and others, which concentrate in their hands the most important sectors of the Russian economy and determine the quality of its development. Currently, the Ten-Year Energy Plan of Russia, the Energy Strategy of Russia for the period up to 2030, the Strategy for space activities, the Strategy for maritime activities, the Development Strategy of the State Corporation Rosatom and others are also being implemented. But the introduction of anti-Russian sanctions, as well

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as the transformation of the international business environment, determined the need to revise the above strategies (Nozdreva, 2015). The focus, content and quality of the development strategies of these strategic companies of Russia play a significant role in determining and ensuring the forward movement of the Russian economy both now and in the future. However, these documents do not yet constitute strategic plans.

The Concept and Benefits of Corporate Strategic Planning Corporate management of Russian companies is currently paying great attention to strategic planning, leaving the issues of short-term operational and tactical planning to middle and lower levels of management. The strategic management plan of a company determines the main course of its development and differs from the operational plan in that it includes such sections as the mission of the company, SWOT analysis, business strategies of the company (including general strategies, global strategies, product-market strategies, functional strategies, market coverage strategies, leadership strategies, market penetration strategies, portfolio (matrix) strategies, etc.). This is the most important part of the plan – the company’s positional work – which can only be prepared at the highest level of corporate management. In addition to the above, defining parts of the content of the plan, the strategic plan also includes the usual sections for a company’s operational (short-term) plan, namely: organizational plan, personnel plan, product or assortment plan, scientific and technical plan, production plan, transport (logistics) plan, capital construction plan, equipment maintenance plan, logistics plan, marketing plan, financial plan. Strategic planning, in contrast to long-term planning, involves the development of a complex of entrepreneurial market strategies for the development of a company and the formation of a market and demand. The use of strategic planning in the present period in the corporate governance of Russian companies is due to the need to embed guidelines and priorities for the further development of the company, determine growth strategies. It is caused also by increases in the degrees of risk in business activities, the processes of differentiation and diversification of product ranges and business areas, the increasing complexity of the organizational structure and management system, the need to concentrate the efforts of the company’s top management on solving the most important tasks, and future directions of business growth and expansion. If operational planning (up to two – three years) is simpler relative to strategic long-term planning (over 5 years), the latter implies the introduction of a marketing concept into corporate management and ensures, through active market research, the soundness and greater accuracy of long-term forecasts.

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Table 12.2: Benefits of a Corporate Strategic Plan (Nozdreva, 2018). provides a general, strategic course of action involves strategies for company development links all strategic directions into a single whole holds back the desire to maximize profits to the detriment of strategic tasks focuses managers to a greater degree on anticipation of future changes in the external environment than on responding to changes already occurring provides the optimal set (portfolio) of strategic business zones SBU in order to efficiently allocate resources and create the foundations of a firm’s strategic invulnerability coordinates organizational structure with the goals and objectives of the company identifies problem priorities and resources to achieve the main goal establishes reasonable priorities for the allocation of limited resources of the company and mobilizes them to achieve the objectives in priority areas has a long-term planning range

The corporate strategic plan is a very secret document and only the most general content is provided for publication. Strategic planning allows Russian companies to adapt to changes in the market and the external environment, and in a more active case includes measures that can influence the market situation and the formation and regulation of market demand.

Сonclusions The author in this chapter aims to present the main stages of development of the planning system at the firm level, show the main types of plans, highlight the benefits of strategic planning in a conceptual aspect, and also analyze and identify the features of strategic planning in Russia at the corporate level. Despite the planned system of the economy of Russia in the pre-Perestroika period, both at the macro and micro levels, domestic companies were unable to organize this planned work, especially in the strategic range. Most entrepreneurs were convinced that planning is incompatible with the principles of the market and contrary to its essence. Companies developed short-term operational plans for intra-corporate development, and used business planning and project planning in their management. However, they refused to use strategic plans in their work.

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As a result, Russian companies found themselves in a difficult situation, not having strategic development goals, competent strategic planning or effective strategic management, and at the same time losing opportunities to increase their competitive positions in both the domestic and foreign markets. Noting the serious backlog of corporate governance in this matter, it is now necessary to emphasize that, in the wide circles of domestic business, the importance of developing strategic plans for corporate development is recognized. Of particular importance in this context is the Federal Law of June 28, 2014 N 172-FZ “On Strategic Planning in the Russian Federation”, which pointed to the need to build up development strategies and a strategic vision of economic processes at the state, regional and municipal levels.

References Federal’nyj zakon (2014) Federal’nyj zakon ot 28 iyunya 2014 g. N 172-FZ “O strategicheskom planirovanii v Rossijskoj Federatsii” (Federal Law of June 28, 2014 N 172-FZ “On Strategic Planning in the Russian Federation”) GARANT System: URL: http://base.garant.ru/70684666/ #ixzz3ovXvDfVd (accessed 11 October, 2018). Dementieva A.G., Zagrebelnaya N.S. (2015), “Rossiyskiy korporativnyy sektor: sovremennoye sostoyaniye i perspektivy razvitiya.” (“Russian Corporate Sector: Current State and Development Prospects.) Law and governance.XXI century. №4 Pp.67–75 Dementieva A.G., Sokolova M.I. (2018) “Korporativnii Tsentr v sisteme strategicheskogo upravleniya globalnim bizneso” (“Corporate Centre in the System of Global Business Strategic Management’) Upravlenets/The Manager Vol.9 №4. P.66–74. Hoshino S. (2003) Seiji to shite-no keizaikeikaku. Tokyo, Nihon keizai hyoronsha, 2003. Lindgren M., Bandhold H.(2003) Scenario Planning: The Link Between Future and Strategy. New York, Palgrave Macmillan. Nozdreva R.B. (2015) “Rynochnaya economica i gosudarstvennoye planirovaniye: zarubezhnyjj opyt” (“Market Economy and State Planning: Foreign Experience.”)// Bulletin of MGIMOUniversity, № 6 С. 216–224. Nozdreva R.B. (2016) Marketing.Uchebnik. (Marketing.Text-book.) Moscow: Аspekt Press. Nozdreva R.B. (2018) Corporate Planning. Management.Uchebnik. (Management.Text-book) Theory, practice and international aspects. Ed. Konina N.U. Chapter 7. Moscow: Aspekt Press. P. 187. Reynolds I., Nohara Y. (2015) “Abe’s New Economic Plan Confounds Analysts”. Bloomberg Business, September 24,2015. Simaguchi M. (2016) Ichi-karano senryakuron. Tokyo, 2016 URL: http://www.seki gakusha.com/ strategy2flash/ (accessed 12 January 2019). Simerson K. (2011) Strategic Planning. A Practical Guide to Strategy Formulation and Execution. California: Praeger. Survey of Members of Boards of Directors of Russian Companies (2015), available at: https://www. pwc.ru>%20assets>russian_bo%20. . .; https://www.natural-sciences.com> view (accessed 14 December 2018). “Strategy and Strategic Management in Russian Companies” (2019), available at: https://www.pro fiz.ru/se/4_2010/strategia_v_ros_komp/ (accessed 11 January 2019). Vaganov D.A. (2014) “Features of strategies and strategic planning in Russian companies”.

Raisa Nozdreva

13 The Role of the Board of Directors in Corporate Strategic Planning and the Main Areas for Improvement in its Forms and Methods Introduction Strategic planning is intended to determine the main directions of a company’s further development in market conditions, and indicate the methods and means for improving its competitiveness. Planning involves setting goals and objectives, defining principles, means and methods to achieve them, allocating financial, production, time and human resources in order to successfully implement the plans, and building measures to control their realization. French economist Fajol – a specialist in management, founder of the administrative school of management – stressed that a plan is a foreseeable result and a course of action to be followed, steps to go through, methods to apply, and a picture of the future, in which the upcoming events are outlined with some certainty, while distant events appear less and less distinct (Fajol, 2007). The plan is the decisions that need to be made today in order to ensure the effectiveness of the facility in the future. Planning relies on data in the past, but seeks to determine and monitor the company’s development in the future. The content of a company’s planned work identifies special significances in the system of corporate strategic planning and management of the company’s Board of Directors, which is the highest level of organization of corporate planning (Konigsburg, 2017). Planning Committees of the Board of Directors include representatives of the company’s top management; they prepare long-term strategic plans for subsequent approval by the Board of Directors and envisage the development of the company’s main development strategies, optimally allocating resources to ensure their implementation. Strategic corporate planning has an arsenal of scientific and practical methods of forecasting, building econometric models, and effective tools for scenario development (Simerson, 2011), as well as methods for developing corporate strategies and market behavior, which allows companies to overcome situations of turbulence and uncertainty in a global world.

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Materials and Methods In this work research by Russian and foreign scientists are used, all experts in the field of corporate governanceand corporate planning systems. Over the course of the study, in addition to official documentation, materials of international scientific conferences are also used. Results of the survey of CEOs of Russian companies on the field of strategic management and planning (Survey, 2015) are used as an empirical base in this work. The author applied statistical methods, methods of multivariate analysis, and the method of G. Simon.

Results Organization of the Work of Planning in Corporate Governance and the Role of the Board of Directors Corporate planning is carried out in the functional divisions of the company at different levels of management. In foreign countries, as a rule, a company’s strategic development plans are developed by planning committees, working under the corporation’s Boards of Directors and possessing the most complete and reliable information. This is the highest level of organization planning. Planning committees include top management representatives; they are preparing for the subsequent approval by the Board of Directors of long-term strategic plans for the most important problems and directions of development of the company and provide for the optimal distribution of financial, production, marketing, personnel and other resources. For example, in American and British companies, one collegial management body is usually created – the Board of Directors – to which the shareholders’ delegation delegates all basic functions (including strategic planning functions), as well as corresponding powers and responsibilities (up to criminal). The authority, and authority of the Board of Directors is ensured by law and the entire system of formal and informal institutions of the country. At the same time, a rather rigid process for evaluating the effectiveness of the work of its members is observed, which can, as a rule, be ensured through external control. As for the legal system of the countries of continental Europe, it is determined by the functioning of two collegial governance bodies: the Supervisory Board (Aufsichtsrat) and the Board (Vorstand). The process of evaluating the effectiveness of its work is different relative softness.In Japan, the development of a company’s development strategy and its strategic plans is a function of the Board of Directors and, in particular, its Planning Committee (Hoshino, 2003).

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In foreign companies, Boards of Directors determine the strategy and growth vectors of the company, analyze the environment and determine possible ways to implement the concept of sustainable development, find methods to ensure a balance between growth and investment, and so on. Thus, in the 1992 British Cadbury Code, it was noted that the chairman of the Board of Directors should be an “architect of corporate strategy” (Simerson, 2011). However, among analysts and specialists in the field of corporate governance and strategic planning, discussions continue about how closely and actively the members of the Board of Directors and its chairman should be involved in the strategic planning process. A number of companies are of the opinion that, in this matter, the Board of Directors can limit itself to the role of an instance, only approving or endorsing the corporate strategy, represented by the management or executive management of the company. This also applies to monitoring the implementation of strategic management initiatives, including on the issues of penetration into new markets, mergers and acquisitions, and the development of new products and ideas including the practice when the board’s initiatives correlate with the strategic plans proposed by the company’s management. This work involves a high degree of responsibility and the ability to take risks with respect to strategic decisions. At the same time, other companies determine the function of developing strategic plans as a fundamental and key responsibility in their work. However, most companies note the active participation of board members in discussions of both the positional strategies of companies and their strategic plans. According to the Global Center for Corporate Governance Deloitte Touche Tohmatsu Ltd., the issues of strategy, strategic development and planning ranked from first to third in the agenda of meetings of Boards of Directors participating in the global study (Konigsburg, 2017); this indicates the extreme importance of these issues. In Russia, a very controversial situation is observed in connection with this issue; noting, first of all, the very weak development of goal-setting and strategic planning functions in corporate governance of domestic companies, it is necessary to note also the systematically unsettled and unformed practice of organizational decision-making on strategic planning. Firstly, there is no clear definition of the structure of the company’s top management bodies. The Federal Law “On Joint-Stock Companies” focuses on the Board of Directors (Supervisory Board) of the company and leaves the creation of a collegial executive body at the discretion of the shareholders. Secondly, there is no clear prescribing of the key functions of the Board of Directors. Third, a significant feature in making strategic decisions in domestic business is attached to the high concentration of ownership, and the role of company owners in managing and owning a significant proportion of shares. In 71% of Russian companies, the director is the owner or the owner himself controls the company. Usually, the main shareholder exercises possessory control directly, bypassing the Board of Directors, regardless of its membership.

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In Russia, the development of a company’s development strategy and its strategic plan is most often handled by the management – the executive body – since it has all the necessary resources for this, and the Boards of Directors, at best, set tasks for the management, make appropriate adjustments, and approve planning documents. For the most regulated banking sector of the Russian economy, the Central Bank has specified recommendations on the organization of corporate governance. According to them, the company’s development strategy is assigned to the Board of Directors. However, the recommendations do not imply a clear distinction between full powers between governing bodies, which does not allow an unequivocal conclusion whether it is a matter of creating a Board of Directors in the form of a supervisory board or Board of Directors. Formally exercising the company’s “general management of activities” and being responsible for everything, the Boards of Directors in Russian companies usually take pragmatic positions and tacitly agree to lead the company in the execution of the CEO and/or the Management Board. The fact is that members of the Board of Directors have the right to receive the information necessary to perform the company’s functions, but they do not always have sufficient, up-to-date and reliable data that allow them, through advisory bodies (committees) to effectively develop planning guidelines and strategies. In addition, there is a tendency for the inverse, when the Board of Directors assigns itself a large amount of authority and de facto becomes the main executive body, the regime which is approaching the American model. This reflects the traditional weak division of the concepts of management and governance (whether the Board of Directors should manage the company or just rule) – particularly widespread in Russia. For example, according to the charter in the company Baltika, the Board of Directors consists of seven members, two of whom are independent directors. The Board of Directors is responsible for the formation of an effective management system for their company; ensuring a stable financial position; identifying perspectives and priority activities; and developing and implementing strategic tasks facing the company (Baltika, 2018). Its responsibilities also include approving the company’s annual budget (for current economic activity) and the investment budget. The company has a special unit that ensures compliance with internal control procedures – the internal control and audit department – which are assigned the responsibility of monitoring the implementation of indicators of strategic plans. The company’s Board of Directors is responsible for its risk management system, overseeing and ensuring its effectiveness, and organizing corporate crisis management. The Audit Committee of the Board of Directors monitors compliance with the company’s risk management policies, analyzes the risk management system for actual compliance with risks and carries out its oversight functions in conjunction with the internal audit service. In case of one or more risks, the company is ready to take all possible measures to minimize negative consequences. The main financial risks include credit risk, liquidity risk, currency risk and inflation risk.

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To maintain the strategic planning function, the Board of Directors sets up committees to work out the main issues in areas of activity, including the organization of planned work. However, at present, with the exception of the largest Russian companies, the quality of the work of such committees on strategic planning cannot be observed. Mainly, if there are such committees, they deal either with audit issues or with appointments and rewards. The provisions on committees adopted by the Board of Directors are the main documents regulating the committees’ activities and determining the issues of their competencies and the procedure for forming the composition and functioning. A promising trend is the ensuring of keeping board members and management independent, with the inclusion of external members on the Board of Directors. It also appears that the system of “strong governance plus a supervisory board” – which is compatible with Russian legislation – takes into account the ownership structure and the traditional features of the national management model. However, strategic planning issues, because of their importance to the company’s development prospects, should be managed by the Board of Directors, as can be seen in most leading international companies. As for medium-term target plans, a central planning service is employed to develop and control their implementation in the company, whose tasks are to develop specialized tactical and operational current plans for the company’s development, to coordinate them with production departments and subsidiaries, to adjust and refine plans, and to control their implementation with drawing up forms of planning documentation and reporting. Planning departments can be an independent structure in the management system of a company, or can enter one of the other functional central services. Planning departments are responsible for drafting medium-term and operational plans for the office as a whole. Planning departments in production departments are faced with the task of developing operational, current plans (annual, semi-annual, quarterly, and monthly), as well as the adjustment of these plans. Operational planning and control services in subsidiaries and factories (enterprises) are responsible for drawing up and executing plans for each shift, day, week, month, quarter, half year, or year (Nozdreva, 2016).

Principles and Methods of Corporate Strategic Planning The work of planning in the company is based on a system of fundamental principles, the substance of which will be discussed in Table 13.1. The principle of holism is the principle of unity and interrelation of all elements of the plan in the aggregate, their systemic nature, the unified directionality of the indicators.

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Table 13.1: Basic Principles of Corporate Planning. The name of the planning principle

The main characteristic of the planning principle

The principle of holism

The principle of holism is based on the unity and interdependence of all elements of the plan.

The principle of participation

The principle of participation implies participation in the development of plans by the majority of structural units and company employees

The principle of permanence

The principle of permanence determines the continuity of the planning work of the company

The principle of taking into account “bottlenecks”

The principle of taking into account “bottlenecks” takes difficulties, problematic issues, limiting factors when planning into account

The principle of rolling planning

The principle of rolling planning provides, during the process of implementing the plan, scanning the business environment and the implementation of a consistent adjustment of planned indicators

The principle of multivariate

Not one but several (usually ) development plan projects are being prepared

The principle of scenario planning

Is developed several (--) separate ready-made plans for different conditions for the development of international and domestic business environment

The principle of flexibility

Is based on the inclusion in the content of plans of financial and resource reserves – “airbags” and on the support of strategic plans with targeted programs

The principle of participation is also applied. It provides for the employees and majority of structural units to participate in the development of plans of the company. In this case, employees must make personal plans for the areas of their work, and the company’s management is obliged to inform all employees of the company about the primary planned directions for further strategic development. In planning work, the principle of permanence is important. It determines continuity in the planning work of a company. Plans that have already been implemented are successively replaced by other plans where there was agreement on sections and targets. However, this principle is not respected for all plans. For example, business plans, targeted programs, and some other plans are one-time and separate. Also, when implementing intra-company planning, including strategic planning, one usually observes the principle of taking into account “bottlenecks” – that is, when drawing up a plan, firstly considering difficulties, problematic issues, and limiting factors in finance, sales, labor, material resources, etc.

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The strategic corporate planning of Russian companies, taking into account situations of uncertainty and turbulence in the international and domestic business environment, uses the principle of rolling planning, which involves monitoring and controlling the conditions of the external and internal business environments in the process of implementing the strategic plan and making appropriate amendments to it, consistently adjusting planned indicators in the implementation of the plan. In particular, if the plan is designed for five years or more, then every year, or even half a year, changes are made to it, due to unforeseen circumstances in the development of the market situation, and it is completely revised. In this case, not only indicators directly related to changes in the market, but also all related indicators, are subject to amendment, since the plan is a coherent, interconnected, interdependent regulatory guide of the firm, where even small changes in external and internal conditions and factors in the development of a business may violate the structures and balance provided for and therefore require a complete review of all components of the plan section. When developing strategic development plans, Russian companies use the principle of multi-variant. Corresponding structural planning services prefer to prepare not one but several projects of the company’s development plan, usually two or three, i.e. minimum, optimum, maximum. The minimum plan provides for the development of business activities in the worst conditions, and the maximum plan in the best conditions. Further developments of this principle resulted in a new concept of corporate planning – scenario planning, which involved the development not of different versions of draft plans but the development of several ready-made plans for implementation in different business conditions, taking into account changes in the most important factors of the external environment and the market (Bandhold, Lindgren, 2003). However, so far, Russian companies have not worked as leading foreign multinational companies to implement the principle of scenario planning, which is when at the planning stage several versions of its projects are not only developed, but several ready-made types of plans for various conditions for the development of international and domestic business environment are made in anticipation. With regards to implementing such a strategic plan in the event of a change in the business environment – which its drafters had foreseen – a plan is drawn up from a number of potential scenarios, which was prepared taking this change into account, and the company immediately switches to its implementation. Modern corporate strategic planning is a very flexible management tool, responsive to the changing conditions of the external and internal environments of a company’s business development, and involves the principle of flexibility, which in turn is based on the inclusion of some financial and resource reserves – “pillows security” (Nozdreva, 2016). It is also provided with additional special target programs developed for the urgent solution of current and most pressing tasks.

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As the experience of leading foreign firms shows, the above requirements are mainly for operational planning. Strategic plans are less subject to frequent adjustments and revisions. As an extreme option of flexibility, they can assume the complete rejection of the periodization of strategic decision-making processes, when financial organizational issues can, amidst other issues, be resolved on the basis of personal contacts of the company’s management with the leadership of its departments and divisions. However, Russian companies that face tougher conditions of turbulence and uncertainty either make attempts to use the principles listed above, or there are cases where strategic planning is refused and as such and companies prefer to base themselves on the short-term version of the planned work. In drawing up plans, companies use a variety of methods, in their entirety, simultaneously (Dementieva., Sokolova. 2018). The following methods are also used in the strategic planning process: – Forecasting methods – Balance method – Econometric methods – G. Saimon method – Digital methods Firstly, the method of forecasting using the Delphi method is a method with opportunity orientation (a method with an orientation towards the main goal of planning). Secondly, the balance method of developing plans provides for coordination and correlation, i.e.balancing economic conditions and indicators, namely: “tasks – resources”, “resources – sources”, etc. Thirdly, econometric planning methods include linear and nonlinear programming, multivariate analysis, Bayes theory, Monte Carlo theory, chaos theory, etc. Fourthly, the method of G. Saimon is the method of simplification, or limited rationality, according to which it is recommended that planners, in the event of discerning difficulties when planning, reduce how complex planned goals and objectives are and leave unstable business areas. Fifthly, the digitization of the planned work of companies is actively developing, computer software is being improved, and approaches to developing standards and specialized computer programs are being modernized in order to increase the effectiveness of strategic plans (Simerson, 2011). Planning methods used are complex and subject to constant updating and improvement.

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Key Areas for Improving Corporate Strategic Planning In the 2010s, Russian companies were particularly acute to the issue of raising the effectiveness of planning, in the face of uncertainty and turbulence in the world market, the international financial system and the social and political environment, and the adaptation of planning methods and tools to the new challenges of the global economic system. In particular, an increase in the types of plans being developed is required, which predetermines the further development of scenario planning, and provides an increase in the effectiveness of the planning system in the company’s corporate management due to its readiness for drastic changes in the external business environment. Scenario planning allows the quick switch of management, production, marketing and other processes and makes it possible to bring them in line with new development conditions, when it is possible to speedily and promptly select the most accurate and appropriate plan from several ready-made plans for a new situation, and proceed to its implementation.This ultimately makes it possible to increase the level of flexibility and adaptability of the entire system of intra-company planning. Also, in order to improve the planned work of the company, there is currently a reduction in the horizons of the planned periods: if before a long-term plan was considered a plan with a period of 7–10 years, then at present it is a period of 5–7 years; whereas before plans for a period of up to 7 years were related to mediumterm planning, now that refers to the period of 3–5 years; if before the planning period of the short-term plan was 1–3 years, then in the modern period it is already only a year. Such a process is explained by the fact that the external market environment is changing dramatically and it is very difficult to carry out effective planning for long periods – all the same, plans in the process of their implementation have to be rewound or abandon them and develop new ones. The modern period of entrepreneurial activity requires the company’s planning bodies to increase how complex their plans are, or what expresses the desire to take into account the largest possible number of agreed indicators and factors. This is considered to be the basis for increasing how efficient the planning system can be, especially as modern computer programs (built on complex econometric models) allow us to successfully solve these problems. It is becoming increasingly important to increase the systematic nature of planning in order to avoid contradictions between plans and to ensure coherence and consistency of planning directions and indicators. The task of raising the level of balance of plans is highlighted: the need to strictly observe of the principle of balance “goals – resources” (when each goal and task must be provided with appropriate resources: financial, raw materials, personnel, time, etc.), and the principle of balance “resources – sources” (when, for each resource, its source is determined in advance).

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To improve how efficient planned work can be, another important area of work is the further development of econometric methods and digital planning tools which allow aggregating and consolidating large amounts of digital data, which thereby takes into account the widest and most representative range of economic indicators and conditions of the business environment when forecasting the future development of companies. These directions of modernizing the intra-firm planning system are designed to ensure the implementation of plans and their feasibility. When identifying the key factors to ensure the successful implementation of the company’s corporate strategy, the following emerged: effective communication between the Board of Directors and the company’s management, quality management, and periodic reporting and monitoring of the results achieved.It should be emphasized that the evaluation of the effectiveness of strategic planning based on the results of the implementation of long-term indicators of the relevant plan also serves as one of the most important criteria for evaluating the effectiveness of its activities, the corporate governance system and the work of the Board of Directors.

Conclusions Developing strategic plans for the development of a corporation is one of the main tasks of optimizing the corporate governance of Russian companies. Strategic plans provide opportunities to build a course for the company, taking into account possible transformations of the global business environment and the goals and objectives of the company’s development. Until now, Russian companies – diminishing the role of planning and, in particular, strategic planning – have made a lot of mistakes in the development of their business, practically “living one day” and the “burning desire” to maximize profits in the short term. Evidence of this is served by decisions on the development of imports in the military-technical projects of the Russian state corporation ROSTEC – in particular, the project for purchasing military vessels in France, the project for developing the Superjet aircraft by the Russian Aviation Corporation, using almost 70% of foreign parts and assemblies, and more. However, at present, we cannot fail to note the promising achievements in the organization of strategic management and planning, albeit from a somewhat limited perspective. Results of the survey of CEOs of Russian companies show awareness of the increasing role of the Boards of Directors of Russian companies in matters of strategic planning and of the greater involvement of the Boards of Directors in interaction with key suppliers, customers and business partners.

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Since 2013, strategic planning has consistently topped the list of priority topics in the activities of Boards of Directors in Russia and still deserves more time and attention, in the opinion of 77% of directors. As in previous years, the second and third positions in the list of priorities were taken up by issues of crisis management and succession planning of top management (Survey, 2015). According to an analysis of seven state corporations in Russia – InterRAO UES, Gazpromneft, Rostec, Transneft, Russian networks, VEB, RusHydro – the following corporate strategic planning features were identified in Russia: – All plans include a “mission”, “strategic objectives” and an “integrated plan for the implementation of the strategic plan”. – As a rule, form a target business model. – The horizon of strategic planning is 10–30 years. – Provides data as of the end of the planning period – Do not indicate in plans the principles of making management decisions (Except for the Rostec Group of Companies and partly of InterRAO ES). – Do not provide indicators over the entire planning period and do not provide a detailed plan for the implementation of the strategic plan indicators (Except for Rostec Group of Companies). – Do not include periods of strategy updating their revision due to possible changes in the business environment (with the exception of VEB Group of Companies, which provides for such a procedure every five years). – Scenario planning is not carried out either by macroparameters or by fundamental development indicators (Except for Rostec Group of Companies). At the same time, according to a survey of CEOs of Russian companies conducted in 2015, only 6% of the surveyed directors were absolutely sure that their companies were able to achieve the target values of strategic indicators. Almost a third of respondents estimate that the odds of their companies to achieve the specified long-term targets as “50/50”. In 2015, 83% of companies either revised their strategies, or considered this possibility in 2016 under the influence of factors such as the devaluation of the ruble, difficult access to capital, lower oil prices, the consequences of sanctions, and so on. The aforementioned development strategies Russian companies are holding until 2030 are, in the strictest sense, not yet strategic plans. To be a plan, a document must meet the following basic requirements: the plan must indicate not only the goals and objectives for a specific period of time, but also determine the means, methods and resources for their achievement, and also include a system of control and responsibility for their implementation. In this regard, the role of the top level of company management, primarily of the Board of Directors, in matters of active implementation of strategic planning in corporate management and its further improvement should increase.

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References www.Baltica.ru (2018) (accessed 24 November 2018). Fajol A. (2007), Obshhee I promyshlennoe upravlenie. (Total and Industrial Administration). Moscow: Alfa-Press. Features of the Organization of Strategic Planning in the Company. URL: rosim.ru /Attac hment. aspx?Id=26300 (accessed 11 February 2019). Federal’nyj zakon ot 28 ijunja 2014 g. N 172-FZ «O strategicheskom planirovanii v Rossijskoj Federacii» (Federal Law of June 28, 2014 N 172-FZ “On the strategic planning Russian Federation”) (2014), URL: http://base.garant.ru/70684666/#ixzz3ovXvDfVd. (accessed 12 November 2018). Dementieva A.G., Kalyuzhnova E., Sokolova M. (2018). “Vliyanie globalizatsii na konvergentsiu modelei korporativnogo upravlenya” (“Convergence of Corporate Governance Models in the Context of Globalization”) Mezhdunarodnye Protsessy №4. P. 35–45. Dementieva A.G., Sokolova M.I. (2018) “Korporativnii Tsentr v sisteme strategicheskogo upravleniya globalnim bizneso” (“Corporate Centre in the System of Global Business Strategic Management’) Upravlenets/The Manager Vol.9 №4. P. 66–74. Hoshino S. (2003) Seiji to shite-no keizaikeikaku. TokyoL Nihon keizai hyoronsha. Konigsburg D. (2017). “Evolution of the Practice of Work of Boards of Directors in a Global Context. National Corporate Governance Report.” National Council on Corporate Governance. Lindgren M., Bandhold H. (2003) Scenario Planning: The Link Between Future and Strategy. New York: Palgrave Macmillan. Nozdreva R.B. (2016) Marketing. Uchebnik. (Marketing. Text-book) Moscow: Aspect Press. Nozdreva R.B. (2015) “Rynochnaya economica I gosudarstvennoye planirovaniye: zarubezhnyjj opyt” (“Market Economy and State Planning: Foreign Experience.”) Bulletin of MGIMOUniversity, № 6 Pp..216–224. Simaguchi M.Ichi-karano senryakuron (2016) Tokyo, 2016. URL: http//www.sekigakusha.com/ strategy2flash/ (accessed 25 January 2019). Simerson K. (2011) Strategic planning. A Practical Guide to Strategy Formulation and Execution. California: Praeger. “Strategy and Strategic Management in Russian Companies” available at: https://www.profiz.ru/ se/4_2010/strategia_v_ros_komp/ (accessed 15 January 2019). Survey of Members of Boards of Directors of Russian Companies (2015) available at: https:www. pwc.ru> assets>russian_bo . . . ; https: //www.natural-sciences.com>view (accessed 17 January 2019). Vaganov D.A. (2014) “Osobennosti strategij I strategicheskogo planirovaniya v rossijskikh kompaniyakh” (“Features of Strategies and Strategic Planning in Russian Companies”). Vaganov D.A. (2016) “Osobennosti organizacii strategicheskogo planiro vaniya v krupnykh kompaniyakh s uchactiem gosudarstva” (“Features of the Organization of Strategic Planning in Large Companies with State Participation).

Irina Tkachenko

14 Features of Long-term Strategic Planning in Medium-sized Companies with State Participation Introduction Strategy means making decisions about a company’s time, overall resources, and the use thereof, based on estimates about the likelihood of achieving the set goal in a period of several years. Strategic planning is an organizational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and assess and adjust the organization’s direction in response to a changing environment. It is a disciplined effort that produces fundamental decisions and actions that shape and guide what an organization is, who it serves, what it does, and why it does this, with a focus on the future. Effective strategic planning articulates not only where an organization is going and the actions needed to make progress, but also how it will know if it is successful. Strategic planning as a management tool has been used, with great success, in large multinational organizations to manage uncertainties, exploit opportunities, and to better their position for long-term growth and performance. Oddly enough, research has shown that most small and medium-sized enterprises do not engage in strategic planning (Berman, Gordon, and Sussman, 1997; Orser, Hogarth-Scott, and Riding, 2000). SME owner-managers have been accused of being strategically myopic and lacking the long-term vision as to where their company is headed. However, the ability to think and act strategically is probably the most important attribute an owner-manager can have, and one that is critical to sustained business development (Mazzarol, 2004). In Russia, small businesses remain too small and lack sufficient scale to be truly competitive (Golikova and Kuznetsov, 2017). According to official statistics (Rosstat, 2017), in 2015 the total number or registered operating SMEs in Russia was 4.5 million, including micro-, small, medium-sized enterprises and individual entrepreneurs. SMEs account for 25% оf total employment in Russia’s economy. Their contribution to GNP (21%) is considered marginal and amongst the lowest compared to other countries. In the Russian Federation, the sector of joint-stock companies (JSC) with state participation is regulated by the Federal Agency for State Property Management, or Rosimushchestvo, which provides methodological tools capable to enhance business performance of this type of companies. In the current https://doi.org/10.1515/9783110695816-014

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economic situation, Rosimushchestvo pursues the policy of consistent adherence to corporate governance standards; long-term strategic planning, openness and transparency of decision making. In order to increase a business investment attractiveness, Rosimushchestvo creates a clearly formalized, open, and strategically targeted system, including such elements as growth strategies, long-term development programs (LTDP), and a set of key performance indicators (KPIs). When developing a strategy for a company with state participation, it is essential to build a future corporate model as envisioned by the owner (state), and identify specific stages of its development as well as measures to achieve set goals. While Rosimushchestvo is in charge of designing relevant strategic planning methodology and monitoring its application, the Board of Directors should be actively involved in the strategic planning process; and the executive management task is to make every effort to bring the firm as close as possible toward a strategic goal. In addition to strategy itself, tools are needed that will enable a firm’s strategic goals to be detailed at all levels of management and to further control how effectively the company achieves its full performance and growth potential. In 2014, Rosimushchestvo adopted common guidelines for designing LTDPs for companies with state participation (Minehkonomrazvitiya Rossii, 2014). LTDP can be considered as a detailed company strategy, a ‘roadmap’ of its implementation. The developed LTDP is a detailed internal program document, listing financial resources and specific measures to ensure the achievement of strategic development goals within the given time frame, with current and expected performance results. The company’s development strategy should have a planning horizon of 7–10 years and be reviewed every 2–3 years, while LTDPs should be written for a 3–5 year time-frame and reviewed annually (Otkryitoye Pravitelstvo, 2014). LTDPs should contain the following constituents: a business model and an action plan; a set of KPIs measuring organization and its management; investment and innovation forecasts; analysis of main company risks; benchmarking; measures designed to improve corporate governance. On an individual department level, tactical planning tools should be designed with the planning horizon of one year, such as the departmental budget and the action plan. In today’s Russia, strategic planning as a management tool is still mostly used with regard to large business. Due to current and future institutional, organizational, and structural uncertainties amongst others, the practice of strategic management is equally important to small and medium-sized enterprises (SMEs) as it is for large established corporations. However, the standards applied to large companies are of little use for SMEs due to their specific organizational structure and lack of clear rules and regulations. Thus, medium-sized companies should be guided by the best practices of using elements and tools of the traditional system of corporate governance (CG), which allows them to build a robust management structure.

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The following features can be conceptualized in managing SMEs (Tkachenko, 2016): – a high degree of ownership concentration, but blurred responsibility – active involvement of owners in day-to-day activities – lack of transparent ownership structure and financial information – lack of development strategy (in most cases) – unclear regulations of business processes – lack of quantitative indicators measuring top management effectiveness – immature internal control systems and risk management The main distinctive feature of a CG in medium-sized companies is that control over all business processes is exercised by the owner. CG in SMEs should be based on the same principles and use the same tools as the traditional ‘big business’ system, but at the same time fit the existing ‘medium-size’ management system. Development strategies are vital not only as a company model, seen by the owner 5–10 years from now, but also as step-by-step growth along with measures to attain set goals. The owner’s task is to formulate a clear strategy and monitor its implementation. A paid manager should run a business in such a way as to push the company as close as possible to attaining strategic goals. In a medium-sized business, improved CG – both overall and at the level of individual elements – means all specifics of the business model, growth perspectives, positioning in a market segment. Multiple interests of diverse stakeholder groups should be considered. Interaction with foreign business partners is not a priority, and neither are the issues of borrowing overseas, enhanced investment attractiveness, or listing. The gradual introduction and improvement of CG tools to ensure sustainable development, as well as functioning of CG mechanisms, are the trends that should be adopted by medium-sized companies with state participation. Despite the fact that the Russian Ministry of Economic Development and Rosimushchestvo highlight the importance of long-term strategic planning for state-owned companies, researchers state that the existing management methods and techniques have serious shortcomings that significantly minimize the effectiveness of the measures taken. For example, recommendations for long-term strategic planning lack a ‘target audience’ and do not take into account the size of the business; in fact they lack a differentiated approach to large and medium-sized organizations (Vaganov, 2014). In this chapter, we present the case of developing and integrating LTDP in SVEK,1 a medium-sized company with state participation. In this type of organization, the key issue is often not just to design a strategy, but to link it with the internal planning system, which in turn is also underdeveloped. The difficulties of constructing and

1 The name of the company has been changed.

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launching an internal planning system in state-owned companies relate not only to the planning process per se, but also to the fact that the developed concept could be effectively applied by the company management and project office.

Methodology The case builds on an environmental analysis whose purpose is to evaluate the key factors that would impact current and future development within the enterprise and determine the specific impact factors in the process of strategy formulation (Beal, 2000). The PEST module was applied when assessing the macro environment. SWOT analysis determined what assisted the firm in accomplishing its objectives, and what obstacles it must overcome or minimize to achieve desired results: where the organization is today, and where it may go. The scope of each business unit activity was identified, and each business unit was placed within the GE-McKinsey matrix. A complex self-assessment of the quality of CG in the firm was run in accordance with the ‘Methodology for self-evaluation of corporate governance quality in companies with state participation’ (Rosimushchestvo, 2014). CG was evaluated to see if it conformed to the principles and recommendations embodied in the Corporate Governance Code (Corporate Governance Code, 2014). The assessment of the CG quality was carried out on the following mandatory elements: shareholders’ rights, the Board of Directors, executive management; transparency and disclosure of information; risk management, internal supervision and audit; corporate social responsibility, business ethics, and compliance.

Results Following the Methodology for self-evaluation (Rosimushchestvo, 2014), CG in SVEK was scored 45% vs 65% of the recommended minimal level. However, as the Methodology targets mostly large corporate businesses, 45% for a medium-sized company is quite consistent with the general principles of CG. Through an interpretation of information gathered during the environmental analysis, the company’s operational planning was found to be chaotic, time-consuming and unregulated. In essence, SVEK lacked an integrated system of in-house planning, which complicated the achievement of strategic goals, since these goals simply did not reach the ‘planning bottom’. Areas of responsibility were ‘diluted’, making it unclear who was accountable and to what extent for achieving the targeted indicators, which is most likely to demotivate workers.

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The process of strategy development for SVEK included three stages: Stage 1: Environmental analysis. Its purpose is to evaluate key internal and external factors that would impact both the current and future development of the organization, such as the company’s life cycle or its formation of strategic economic fields. Stage 2: Organizational direction. There are two important ingredients when determining the organizational direction. These are the organization’s mission and vision, defined within the framework of the organization philosophy. They are used as a context for development and evaluation of intended and emergent strategies (Auka and Langat, 2016). Stage 3: Strategy formulation. This refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision and mission (selection of strategy and development of strategic measures within a given time-frame, the volume of investment, appointing people who are in charge of implementation). Three development scenarios were offered to the company management for consideration: 1. pessimistic (inertial development): The company responds slowly to market needs, there is no change in the business model and lack of growth investment. 2. conservative: The company uses its own funds to ensure the minimum infrastructure development, meet the needs of target customers, slightly increase sales; and moderately invest in the development of the most promising business units. 3. optimistic: The company makes considerable investments in innovative development, modernization and re-equipping, dynamic growth of services and generated revenues. The Board of Directors made their choice in favor of a conservative scenario as the most likely to be implemented. For SVEK, a business model was developed which describes the value the organization offers to various clients, the company’s competences, a list of partners that can help to create, promote, and deliver this value to customers, and a corporate financial model that analyzes the structure of costs, revenues, and the cash flow patterns necessary to obtain sustainable income flows. Based on the already developed business model, a list of actions was designed for achieving the organization’s strategic goals. For each action, the outcome, or final result, was formulated, how it could be measured (KPIs) and the volume and sources of funding were determined, and deadlines were set. The SVEK management was presented with a roadmap, or a strategic plan that defined a goal or desired outcome, and objectives; it also included the major steps, or milestones, needed to reach the goal and objectives (Figure 14.1). This furthermore served as a communication tool, a high-level document that helped articulate the strategic thinking – the ‘why’ – behind both the goal and the plan for getting there.

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Goal: Improved internal processes through ensuring continuous, f lexible, comprehensive and effective planning involving all participants with minimum time-related costs and labor input

1. Reducing the complexity of planning processes

2. Clarity of procedures and planning

3. Sharing responsibilities

4. Engaging and motivating employees

1.1. Automation of accounting and reporting systems

2.1. Formulation of planning logic

3.1. Definition of managers’ areas of responsibility (AORs)

4.1. Use of the balanced scorecard (BSC)

1.2. Creation of electronic databases

2.2. Development of planning procedures

3.2. Preparation of manager job descriptions

4.2. Use of KPIs for middle management

2.3. Development of Regulations on Planning 2.4. Development of management accounting provisions Figure 14.1: Roadmap to improved internal planning of JSC SVEK.

In the Board of Directors’ opinion, the company’s strategy should target sustainable development by optimizing and upgrading its business portfolio, focusing on core businesses, and ensuring sustainable synergy. Consequently, SVEK’s goal was formulated as follows: ‘improved internal processes through ensuring continuous, flexible, comprehensive and effective planning involving all participants with minimum time-related costs and labor input’. The Board of Directors made the decision that, in order to achieve its strategic goals, the company should develop in the following directions: – maintaining and increasing its share in existing services markets – focusing on the development of new businesses (new services and new markets) – systematic asset renewal using innovative technological solutions – building partnerships with counterparties As a result, four long-term objectives of the SVEK company were set: 1. reducing the complexity of planning processes 2. clarifying procedures and planning stages 3. sharing responsibilities 4. engaging and motivating employees to work towards the company’s strategic goals

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The roadmap also included the major steps needed to reach the goal and each objective (Figure 14.1).

Automation of Accounting and Reporting Systems This step primarily relates to the use of computer technology and appropriate software to simplify business and management accounting and data access. Primary documentation will be recorded by the program, and generating reports, data consolidation, and other processes will be carried out automatically.

Creation of Electronic Databases with Access to Financial and Economic Performance Indicators and Project Information in Real Time Mode Management accounting software ensures on-line access to financial and economic performance indicators.

Formulation of Planning Logic Planning logic is a system of ideas about the sequence and validity of actions related to the development of the managerial decision (plan), as well as scientific methods and tools for carrying out target estimates. The logic of planning should correlate with the goal of the enterprise. Currently, SVEK is following a certain logic of planning, but the latter remains unregulated. More specifically, it includes project development, cost estimation, and unit budget planning. However, there is a need to see how strategic and current plans are logically linked with current activities. This can be done by using the BSC and KPI for measuring middle management performance.

Development of Planning Procedures This step includes the formulation of principles, methods, techniques of planning management, and elaboration of plans (plan organization, the content of sections, achievement measurement). The SVEK planning procedure could start with brainstorming some ideas and be finalized with the involvement of all key managers and experts. Afterwards it should be prescribed in the relevant documentation (Planning Procedures and Regulations on Planning).

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Development of Regulations on Planning Preparation and revision of the documents would be the key task of a newly set project office. The CEO, heads of the departments and experts should also be involved in this activity.

Development of Management Accounting Provisions In case of external experts’ involvement, development of management accounting provisions will be carried out after the event. Improving the system of planning, accounting, and management is, in many ways, an on-going process: regulations on planning and accounting will be updated; new and more effective methods of using this system will be used.

Definition of Managers’ Areas of Responsibility (AORs) The definition of managers’ AORs is closely related to the firm’s organizational structure.

Preparation of Manager Job Descriptions There is a close link between AORs and job descriptions: they will facilitate the use of KPIs, which will make the middle manager job dependent on the achievement of strategic goals stated in the BSC. Drafting job descriptions should be preceded by a description of the overall functions of the unit. Only in this way will it be possible to estimate if the employee fits the position held and whether this post is needed.

Use of the Balanced Scorecard (BSC) The BSC is a strategy performance management tool that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions. To use the BSC will be the main challenge. As soon as the real time mode is available, the next step will be to make the system calculate balanced indicators on the basis of entered primary data.

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Use of KPIs for Middle Management Unlike the BSC which is used for measuring a company’s performance, KPIs measure individual performance. The use of KPIs is somewhat a decomposition of the BSC: managers’ ability to attain the target will affect their rewards. KPIs include quantitatively and qualitatively measurable financial and non-financial indicators of the company. A well-built system of KPIs can ensure both strategic and operational management. The use of the BSC and KPIs requires free access to the organization’s performance indicators in the real time mode. If the tracking and monitoring processes are hindered, this control tool runs the risk of becoming ineffective. As can be seen, the proposed milestones relate not only to planning processes, but also affect the processes of management, accounting, and supervision. Following the recommended guidelines (Rosimushchestvo, 2014) a set of nine KPIs was worked out for SVEK till the year of 2020: six economic and financial indicators: revenue, EBITDA, return on equity (ROЕ), profit margin, net assets, investment net of VAT; and three industry-based: customer satisfaction index, the number of completed projects, and productivity. The weight or percentage of each indicator in the overall company’s KPI system was determined by expertise: EBITDA and ROE took the most weight (15%), while the other indicators had 10% each. The less frequently used Consumer Satisfaction Index was considered as a relative indicator which is calculated as the ratio of the number of customers satisfied with the quality of goods and services to the total number of customers surveyed. To achieve the strategic objectives formulated in LTDP of companies similar to SVEK, the management needs to initiate the transition from a one-man management style to a functional structure and professional management; actively involve employees in the process of attaining corporate goals.

Conclusion Strategic planning in SMEs is an essential instrument for planning and forecasting how competitive the organization will be and what challenges it has to meet in order to gain a competitive advantage. The strong agreement of factors of a firm’s strategic planning indicates the effectiveness and efficiency of such planning and hence affects its performance positively. There must be a strategic fit between what the environment wants and what the business has to offer, as well as between what the business needs and what the environment can provide. In SMEs with the so-called ‘other’ type of CG, special emphasis should be given to the need to strengthen the middle management level; to gradually change the company organizational structure and management in line with the strategy and

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vision adopted by the Board of Directors; and to deepen the interaction between executives and professional Board of Directors. We believe that the analysis of experience and errors associated with the development of strategies, LTDPs, and KPIs can be useful for developing LTDPs in small and medium-sized business with state participation.

References Auka, D.O. and Langat, J. C. (2016), “Effects of Strategic Planning on Performance of Medium Sized Enterprises in Nakuru Town”, International Review of Management and Business Research, Vol. 5 No. 1, pp. 188–203. Beal, R.M. (2000), “Competing Effectively: Environmental Scanning, Competitive Strategy & Organizational Performance in Small Manufacturing Firms”, Journal of Small Business Management, Vol. 38 No. 1, pp. 27–47. Berman, J.A., Gordon, D.D. and Sussman, G. (1997), “A Study to Determine the Benefits Small Business Firms Derive from Sophisticated Planning versus Less Sophisticated Types of Planning”, The Journal of Business and Economic Studies, Vol. 3 No. 3, pp. 1–11. Corporate Governance Code (2014). Version published on the Official Journal of the Bank of Russia No. 40 (1518) – 18 April 2014. Translated by the EBRD, available at: http://www.ebrd.com/ downloads/legal/corporate/russia_code.pdf (accessed 15 December 2018). Federal’naya sluzhba gosudarstvennoj statistiki (Rosstat) (2017), Maloe i srednee predprinimatel’stvo v Rossii, Statisticheskij sbornik (“Federal Statistics Office (Rosstat). Small and Medium-sized Entrepreneurship in Russia, Statistics Digest), Rosstat, Moscow. Federal’noe agentstvo po upravleniyu gosudarstvennym imushchestvom Rosimushchestvo (2014), “Metodika samoocenki kachestva korporativnogo upravleniya v kompaniyah s gosudarstvennym uchastiem”. (Federal Agency for State Property Management (2014), “Methodology for Self-evaluation of Corporate Governance Quality in Companies with State Participation”), available at: https://rosim.ru/documents/231515 (accessed 21 December 2018). Federal’noe agentstvo po upravleniyu gosudarstvennym imushchestvom Rosimushchestvo (2014), “Metodicheskie ukazaniya po primeneniyu klyuchevyh pokazatelej ehffektivnosti gosudarstvennymi korporaciyami, gosudarstvennymi kompaniyami, gosudarstvennymi unitarnymi predpriyatiyami, a takzhe hozyajstvennymi obshchestvami, v ustavnom kapitale kotoryh dolya uchastiya Rossijskoj Federacii, sub”ekta Rossijskoj Federacii v sovokupnosti prevyshaet pyat’desyat procentov.” (Federal Agency for State Property Management (2014), “Guidelines for the Use of Key Performance Indicators by State-owned Corporations and Companies, State Unitary Enterprises, and Business Entities where the Share of the Russian Federation exceeds 50 percent), available at: http://www.rosim.ru/documents/143749 (accessed 15 December 2018). Golikova, V. and Kuznetsov, B. (2017), “Suboptimal Size: Factors Preventing the Growth of Russian Small and Medium-sized Enterprises”, Foresight and STI Governance, Vol. 11 No. 3, pp. 83–93. Mazzarol, T. (2004), “Strategic Management of Small Firms: a Proposed Framework for Entrepreneurial Ventures,” in Entrepreneurship as the way of the future 2004 proceedings of the 17th Annual SEAANZ Conference, 26–29 September, Brisbane, Queensland, available at: https://cemi.com.au/sites/all/publications/Mazzarol%20SEAANZ04%20paper.pdf (accessed 02 January 2019).

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Ministerstvo Ehkonomicheskogo Razvitiya Rossijskoj Federacii (Minehkonomrazvitiya Rossii) (2014), “Metodicheskie rekomendacii po razrabotke dolgosrochnyh programm razvitiya strategicheskih otkrytyh akcionernyh obshchestv i federal’nyh gosudarstvennyh unitarnyh predpriyatij, a takzhe otkrytyh akcionernyh obshchestv, dolya Rossijskoj Federacii v ustavnyh kapitalah kotoryh v sovokupnosti prevyshaet pyat’desyat procentov.” (Ministry of Economic Development of the Russian Federation (Mineconomrazvitiya of Russia) (2014), “Methodical Recommendations for Designing Long-term Strategic Development Programs for Open Jointstock Companies, Federal Unitary Enterprises and Open Joint Stock Companies, where the Share of the Russian Federation in the Authorized Capital Exceeds 50 percent”), available at: https://rosim.ru/documents/190521 (accessed 12 November 2018). Orser, B., Hogarth-Scott, S. and Riding, A. (2000), “Performance, firm size, and management problem solving”, Journal of Small Business Management, Vol. 38 No. 4, pp. 42–48. Otkryitoye pravitelstvo (2014), “Razrabotka dolgosrochnyh programm razvitiya i klyuchevyh pokazatelej ehffektivnosti kompanij s gosudarstvennym uchastiem i gosudarstvennyh korporacij.” [The Development of Long-term Development Programs and Key Performance Indicators for Companies with State Participation and State-owned Corporations], available at: http://open.gov.ru/upload/iblock/33b/33b0ca706c0cc2410c7c675fef2ffbac.pdf (accessed 12 November 2018). Tkachenko, I.N. (2016), “Specifika ocenki kachestva korporativnogo upravleniya v kompaniyah srednego biznesa s gosudarstvennym uchastiem”, Effektivnoe antikrizisnoe upravlenie [“Specifics of Measuring Corporate Governance Quality in Medium-sized Businesses with State Participation”, Effective Anti-Crisis Management], Vol. 2 No. 95, pp. 58–65. Vaganov, D.A. (2014), “Osobennosti strategij i strategicheskogo planirovaniya v krupnyh rossijskih kompaniyah s gosudarstvennym uchastiem”, Global’nye rynki i finansovyj inzhiniring [“Features of strategy and strategic planning in large Russian companies with state participation”, Global Markets and Financial Engineering], Vol. 1 No. 1, pp. 35–52

Igor Turuyev, Ulugbek S. Ziyadullaev, Lyudmila Zainullina

15 Internal Audit as an Ethics Standard for Smart Corporate Governance Design Introduction In recent years, internal control has grown to become a matter of particular interest for owners of both private and public business entities. Being under closer scrutiny is merely one of the causes; another one is the marked trend of having an efficient internal control system as a factor increasing the value of a company. Most experts argue that internal control systems have become an ethical norm in modern corporate management. COSO – the Committee of Sponsoring Organizations of the Treadway Commission – has come up with the basic principles of efficient internal control. National laws reflect how the principles can be influenced by and adjusted for a particular legal environment (Federal Law №208-FZ of December 26, 1995 “Of Joint-Stock Companies”; Federal Law №156-FZ of August 8, 2001 “Of Investment Funds” etc.) as well as the specific policy of a given national regulator. Watchdog department bylaws and corporate internal regulatory documents govern the handson aspect of how the laws should be adhered to (Methodological Recommendations on Regulation Document on Allowances and Remuneration of Internal Audit Committee of Joint-Stock Companies Members №253 dated July 9, 2014 approved by the Decree of The Federal Agency for State Property Management).

Methodology Herein the author conducts a qualitative analysis of how, with time, the expert mindset has been evolving when it comes to certain issues, particularly on how corporate management system should be built up to be a success and how essential the owners’ control is for companies’ better performance. It is based on research devoted to the importance of internal audits when analyzing efficiency whilst making business decisions and complying with regulators’ requirements. The author refers to studies on internal audit and internal control, as well as international institutions’ advice.

Results For an internal auditing team to be independent, it is of vital importance for it to report directly to the management and the Board of Directors. The internal auditing https://doi.org/10.1515/9783110695816-015

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department should neither be involved in any operational activity of a company, nor have any connections with the department to be audited whatsoever. While doing their job, internal auditors analyze and evaluate risk management systems, internal control systems, and the quality of corporate management overall. Internal auditing is the ethical norm of efficient corporate management systems.

The Methodology on How Internal Control Should be Executed Modern business is undergoing changes. Capital flows are becoming footloose and multinationals are growing more global amid escalating regulatory scrutiny when it comes to legal safety and taxes. – Digital technologies are becoming an overwhelming trend, having an ever greater impact on how business is being organized, which is in turn leading to a growing number of technological start-ups. – Information safety is now an urgent issue to address. Meanwhile it is hard to say if there have been any significant changes in internal control theory. One of the most widely known models is the one COSO came up with in 2013. It is based on a systematic approach made of 17 principles, and if one adheres to them, they succeed in the establishment of efficient internal control. These principles break down into 5 categories. Firstly, the control system: this implies loyalty to ethical values and honesty; the Board of Directors being independent from the management and monitoring the internal control system of a company; optimizing organizational structures; delegating authority and responsibilities to reach the objectives set; employing, improving and keeping highly-qualified personnel; division of powers among the employees. Secondly, risk evaluation: having set objectives enables one to detect, analyze and address risks as well as potential frauds. It also involves assessing how all alterations made actually influence the internal control system. Thirdly, control principles: choosing and applying the controlling procedures helps to mitigate risks and tackle problems while implementing IT and reflecting it in the internal documents. Fourthly, information and communication principles: obtaining and using relevant information, as well as having better communication within a company, helps the internal control system function. Communication with the external world also matters. Finally, monitoring: the assessment methods chosen and implemented should identify whether all the components needed for the internal control system to operate are there, not to mention the need to supervise the system for possible flaws and to advise those who can handle the issue, including top management and the Board of Directors.

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Corporate management principles imply monitoring a company’s activities as well as its top executives, and is done by the Board of Directors on behalf of shareholders. Therefore, having a highly-qualified Board of Directors is the key to supervising business activities. Many companies practise having so-called independent directors, implying those who have no ties with a company’s employees and managers and no personal interest in the matter whatsoever. The Russian Central Bank’s Regulation document №534-P of February 24, 2016 “Of Allowing Securities to be Traded” has the following requirements to how the Board of Directors should work: – There should be no less than one fifth of the Board of Directors and only three as far as independent directors are concerned. – The Board of Directors should appoint audit committee members under the management of an independent director. For what it’s worth, there is no substantial practice on where independent directors’ qualifications are to lie but, generally, profound knowledge of economics and corporate finance is implied.

The Mechanisms Enabling the Owners to Control Business Activities The Internal Audit Committee (IAC) is one of the bodies that can control companies’ economic activities as per Russian law. It can be established according to company policy as stated in Federal Law №208-FZ of December 26, 1995 “Of Joint-Stock Companies” (clause 85, sub-clause 1) and Feneral Law №14-FZ of February 8, 1998 “Of Limited Liability Companies” (clause 32, sub-clause 6). Many companies use this mechanism to supervise their activities within a group. The Federal Agency for State Property Management applies it too when inspecting companies with state ownership. The Agency has developed some more documents to regulate IACs’ doings: – Methodological Recommendations on Regulation Document on Internal Audit Committee of Joint-Stock Companies №350 dated September 16, 2014 approved by the Decree of The Federal Agency for State Property Management – Methodological Recommendations on Regulation Document on Allowances and Remuneration of Internal Audit Committee of Joint-Stock Companies Members №253 dated July 9, 2014 approved by the Decree of The Federal Agency for State Property Management – Methodological Recommendations on Regulation Document on Organizing Inspections of Internal Audit Committee of Joint-Stock Companies members №254 dated August 26, 2013 approved by the Decree of The Federal Agency for State Property Management

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Initially the documents in question had been drawn up for state-owned companies, but can still be applied to all companies seeking to use IACs mechanism. The internal control system still stems from the three line safety concept. The first line is those controlling elements that are inherent to the business processes themselves and are provided for by adhering to the internal policy and rules as well as departments delegating their authority and responsibility efficiently. The second line is the internal control departments actually performing control functions while being implemented in business processes as well – finance control department, risk department, safety department, compliance department etc. These report to the management and in some cases should monitor the whole range of the company’s activities. The third line represents the internal audit department itself which is independent from the management and reports to the Board of Directors directly. The department in question inspects the business on its own with the view to analyzing and evaluating how efficient internal control and corporate management systems are. This is all the internal audit department can do, for otherwise its independence can be affected. Its performance in turn can be audited by external specialists hired by the company to report to the Board of Directors.

Management and Internal Control Even big companies’ bosses still largely believe internal control systems are internal control departments only (i.e. internal control and internal audit departments), as many surveys conducted by consultancies show. In reality, the departments in question are only part of the system, albeit a crucial one. A different survey tells us many executives don’t have a clear idea on what business processes take place in their companies, therefore cannot fully assess the corresponding risks. As laws – both in Russia and elsewhere – improve, business owners and companies themselves need to have the appropriate knowledge and skills to perform internal control. Under the Sarbanes-Oxley Act, public companies are to account for their internal control system and be inspected by an external auditor. The Russian Federal Agency for State Property Management has developed most of the laws monitoring internal control. The latter ones have been designed for companies with state ownership, are in line with international practices in the field, and are mandatory for state-owned firms as per the government decrees. Methodological recommendations enlist requirements for how the proper functioning of internal audit department, audit committees, the group’s audit department, and antitrust compliance should be arranged for. Nevertheless, those can still be utilized by all companies seeking to provide for due internal control. The Code for Corporate Management has been adopted by the Board of Directors of The Bank of Russia and advised to listed joint-stock companies.

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Safety Lines and The Corresponding Law Adjustment It is helpful to dwell on the three-line safety concept in detail. The first line is mostly about reflecting business peculiarity, and influences efficiency directly. Labour-intensive inefficient processes with lots of paperwork can lead to disastrous consequences, e.g. as when the Proton satellite rocket crashed due to the producer’s error of having used the wrong brazing alloy technology. As shown by the investigation, a stock keeper had fallen sick and this was how lack of stock keeping control had taken place. The bottom line is that the lack of control followed through all the rocket production stages. With computer technologies and automation processes perfecting, the first safety line can be altered but the principles to stick to are still the same, i.e. conflict of interests should be avoided and all the processes are to be properly arranged. Authorities and responsibilities are to be duly delegated, with the corresponding amendments to the internal documents being promptly made. As departments use computer technologies, they gain additional internal control tools. Even when production is fully automated, parts of it are bound to interact and depend on supply, finance, distribution and other factors. As for the second safety line, its two main aspects are of the highest importance. Initially, in Russian business practice, the finance and accounting departments were the ones to perform internal control functions overall within a firm. This kind of control is ever-going, universal and systematic. It monitors business efficiency, asset and spending policy, as well as investment activities. It’s worth studying how the controlling function of accounting departments has been evolving throughout the years. According to the current version of The Accounting Act (№357-FZ as of December 21, 2013) a chief accountant isn’t obliged to do this. As clause 9 goes, “the one who is employed to keep books cannot be held liable for how other specialists prepare and present the source documents that represent the transaction taken place”. The Compliancy department is one more element worth outlining, being relatively new to Russian business practice. The first ones to face the necessity of compliance were supposedly banks, together with companies seeking to raise capital in international capital markets. Currently, a compliance department is a must in all banks, as it is for companies with stated ownership, The Federal Agency for State Property Management designed Methodological recommendations on how internal control should fight corruption (which is also a function of compliancy department).

Compliance Department Ethics The main objectives of a compliance department are making sure a company operates in line with national laws as well as its own rules and policy. Whenever an entity does otherwise, it will either be fined or have its goodwill damaged.

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Compliancy sanctions have become an urgent matter recently, being imposed by foreign corresponding authorities in accordance with their national legislation. Those can imply limiting measures linked with capital market entrance, restraining funds, asset freeze and more, are imposed by foreign regulators, and lie far beyond the control and will of those sanctioned. The US Treasury deems dollar transactions sanction violations – these exploit the US finance system – and imposes substantial fines. In October 2015 Credit Agricole, the French bank, was ordered to pay an 800 million dollar fine to the US to settle the dispute on their infringing sanctions against Iran and Sudan. The French institution was accused of illegal transfers to Iranian and Sudanese accounts through their US subsidiaries and, in order for the dispute not to be submitted to the courts of law, admitted the claim for breaking the US sanction law and agreed to assume the responsibility in full. In 2015, Commerzbank, the German bank this time, had a penalty of 1.15 billion dollars imposed for not following the same sanction regime against Iran. Earlier on, in 2014, BNP Paribas, another French bank, settled a 9 billion dollar fine and pleaded guilty to violating the very same sanction regime against Iran, Sudan and Cuba. One should always bear in mind that whenever a bank remits, it is considered a counterpart participating in such a transaction. Sanctions can be applied through either a direct law statement or because it’s common practice to do so. All institutions should avoid any activity that might fall under the sanctions in place or that can fall under them too. Ethical issues matter too. This is one more new objective Russian compliancy departments now have. The Corporate Management Code indicates many corporate management issues are not of a legal, but rather an ethical nature. In the event that there are no applicable laws and acts, civil norms offer the opportunity to follow the fairness and reasonableness principles, i.e. one’s civil rights are to be effected fairly and reasonably; it’s prohibited to use one’s rights to purposely cause harm as well as to evade the law with a view to violating one’s rights. The Code also advises the Board of Directors to create some other permanent or temporary committees, including ethics committees. The methodological recommendations of the Federal Agency for State Property Management also say that audit committees have to make sure companies abide by the law as well as ethical norms, rules and procedures, requirements of The Bank of Russia and the stock market (if applicable). Consequently, ethical rules are an essential part of corporate management with working them out and effecting control being entrusted to the highest level of corporate hierarchy, i.e. the Board of Directors. Certainly, the main job is done by the compliance department as the latter participates in developing internal policies and rules, e.g. corporate ethics code, holds training events, studies conflict of interests matter, collects material for it to be filed with the ethics committee and the Board of Directors. A matter that stands out in ethics compliance is foreseeing and taking preventative measures against corruption. In its Decree №80 of March 2, 2016, the Russian

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Federal Agency for State Property Management approved the Methodological Recommendations on how risk management and internal control system are to be arranged in order to be able to predict and prevent corruption. It was done primarily with a view to improving the quality of corporate management in joint-stock companies with public interest. In accordance with p.2,10 of the Methodological Recommendations in question, a “compliance department, or its manager as a representative, is to tackle the issues of coordinating, developing and arranging the processes needed for preventing and fighting corruption by perfecting the values of corporate ethics within an entity”. Finally, the third safety line is mostly about internal audit. As per the definition provided by the Institute of Internal Auditors (an international association of professionals aimed at improving the very profession of internal auditors as well as globally supporting all specialists in the field), it represents an act of granting guarantees and advice pursuing the aim of perfecting the company’s operations. Thus, the internal audit department monitors the activities of an entity, bearing in mind that it should always be impartial and unbiased at all times.

Conclusion Summing up, developing a highly efficient corporate management system is subject to the basic principles of how internal control should be put into effect. Internal audit has become a must in corporate culture and is currently, supposedly, the main tool of monitoring for business owners who are willing to obtain an unbiased opinion on the matter, have ample resources, and advance its business technology.

References Provision of the Bank of Russia №242-P of December 6, 2003 “Of how internal control system in credit organizations and bank groups is to be arranged” with all the further amendments and addenda. http://www.coso.oxgjdocuments/cosoermexecutivesunimary.pdf Code of corporate ethics (2014), clause 85. OECD Corporate governance principles (2004), www.oecd.org International finance corporation (2010), “How to manage a company amid crisis, a manual for board members”. Guide to Enterprise Risk Management. http://www.ucop.edu/enterprise-risk-management/files/ protivitifaqguide.pdf Decree of The Federal Agency for State Property Management №86 of March 20, 2014 “Of approving the Methodological recommendations on Regulation document on organizing inspections of Internal Audit Committee of Joint-Stock Companies members”. Methodological Recommendations on Regulation Document on Allowances and Remuneration of Internal Audit Committee of Joint-Stock Companies Members №253, July 9, 2014.

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Provision 82 of Federal Law №208-FZ of December 26, 1995 “Of Joint-Stock Companies”. Provision 45 of Feneral Law №14-FZ of February 8, 1998 “Of Limited Liability Companies”. Federal Law №156-FZ of August 8, 2001 “Of Investment Funds”; Federal Law №134-FZ “Of defense of rights of legal entities and sole proprietorships when under government scrutiny, Civil Procedure Rules of Russia. Filatov, A. Jurayev, E. (2015), “Managing risks, auditing and internal control.” Federal Law №395-FZ of December 2, 1990 “Of banks and their activities”. Sharoyan, S. (2016), “How finance is going to change in the near future”, The RBC, Finance, January 21. https://www.imolvencydirect.bis.gov.uytechmcalman

Part V

Elena Zavyalova, Jae Sung Lee, Elena Ostrovskaya

16 Corporate Social Responsibility Introduction Corporate Social Responsibility (CSR) and concerns in this area have become an integral part of the modern business world. Its role and place in running a company and making corporate decisions is obvious. For individual organizations, using CSR is no longer a voluntary decision; instead, nowadays, compliance to CSR is mandatory according to certain guidelines and standards at the organizational level. It is worth mentioning that companies may engage in CSR for ethical or strategic purposes. The purpose of this research is to study the theoretical basis of CSR and examine its different models, which are typical for different countries and regions and for studying CSR development in Russia.

Theory of Corporate Social Responsibility The issues surrounding a business’ social responsibility have become very popular in the last decade. Social responsibility is today seen as an essential condition for doing business. However, neither scientists nor business leaders yet have a unanimous opinion as to whether the involvement of business in community-oriented projects is a clear blessing. A number of scientists believe that business must solve the problems of society. In accordance with this approach, companies that focus mainly on maximizing profits seem to be the main threat to society. Such a position is presented, for example, in books by Joel Bakan, Robert Phillips and R. Edward Freeman. Within the opposite approach, scientists believe that the only correct goal of a company in a market economy is to increase shareholders’ profits. Any distraction from this goal is considered a violation of shareholders’ rights and, accordingly, the main threat to the well-being of both individual shareholders and the company as a whole. Spending money on ecology and charity is permissible only when it coincides with the interests of the company itself. The most distinguished scientists who follow this approach are M. Friedman and E. Sternberg. The most popular theory today is the stakeholder theory, which offers a compromise between the approaches discussed above. The theory is based on the assertion that, along with the task of maximizing shareholders’ profits, a company must serve the interests of a wide range of stakeholders, i.e. all parties involved. It is important to note that the stakeholders are as shareholders of the company, as well as employees, tenants, investors, creditors, suppliers and even residents of local communities. For https://doi.org/10.1515/9783110695816-016

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optimal organization of the company, it is necessary to take into account and observe the balance of interests of all these participants, and there is no reason to single out any of the groups, even the group of shareholders. Thus, the stakeholder theory does not support the idea when maximum priority is given to shareholders’ interests, but at the same time offers a theoretical justification of ethical standards of business behavior. The concept of Corporate Social Responsibility (CSR) is built on these provisions in particular and on the conviction that a company is morally responsible for the consequences of its actions. G. Bowen is considered the founder of the CSR concept, who as far back as 1953 in his book “Social Responsibility of a Businessman” designated CSR as an obligation of business to follow such a policy and make such decisions that would best meet the interests and values of society (Bowen, 1953). In today’s world, the majority of experts refer to the definition of CSR given in the international standard ISO 26000: “Guide to social responsibility”: corporate social responsibility is “the responsibility of an organization for the impact of its decisions and activities on society and the environment through transparent and ethical behavior1” (Clause 23, 2019). However, due to the fact that the concept of CSR is interpreted quite widely and includes different target groups, there has recently been a clear trend towards a gradual “absorption” of the concept of corporate social responsibility by a larger process, called the sustainable development concept. For the purpose of our analysis, we will focus exclusively on the classic understanding of social responsibility of business.

Forms of Social Responsibility Implementation There are a wide variety of forms and mechanisms for implementing CSR, but the main common feature of all these forms is the exclusively voluntary nature of the activities carried out. Despite the presence of a sufficient number of regulatory standards, both at the international and national levels, all of them are non-regulatory. Forms of CSR are described almost in full in ISO 26000: – establishing contractual provisions or incentives – public statements – interaction with the community, political leaders, and other concerned parties – making investment decisions – sharing knowledge and information – implementation of joint projects – implementation of responsible lobbying and use of media relations – promotion of successful practices – the formation of partnerships with sectoral associations, organizations and others

1 URL: http://www.iso.org/iso/ru/home/store/publication_item.htm?pid=PUB100258

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According to the well-established approach, all initiatives and CSR tools can be divided into two large groups: cross-sectoral and sectoral. As the names imply, the first ones apply to more than one sector, and the second ones apply only to the public or private sector. In addition to the classical approach in practice, the following forms of corporate social responsibility are common: corporate volunteering, social entrepreneurship, charity, social investments. Corporate volunteering implies employees’ participation in their company’s social programs. This is a fairly broad concept that includes various forms: from the personal labor of employees to the collection of money and material resources. The main goal of corporate volunteering is always the development and strengthening of relations between the company and its employees with the local community. That is why most often the programs of this direction are implemented in the field of landscaping, social protection, a little less in the field of education, exchange of best practices and health care. Social entrepreneurship can be described as an alternative to the traditional business approach. For a social entrepreneur, the main goal is not to make a profit (although this factor is not excluded), but to create a sustainable business project that benefits society. The main principle of a social enterprise is to earn money by selling goods and services, and to spend the profits on socially-oriented programs. It is worth mentioning that many researchers do not consider social entrepreneurship as a form of CSR. Today there is a sufficiently broad understanding of the term “social investment”. This includes any systematic and long-term activity of companies aimed at improving the quality of life: for example, funding programs to achieve a positive social, environmental, cultural effect or to develop a particular industry.2 It is common for experts to distinguish three groups of forms of social investment: 1) traditional investment, which takes into account one criterion or another when choosing an investment strategy (this is mainly about collective investments of funds, for example, pension funds) 2) direct investment in social enterprises (in some countries, social enterprises exist as joint-stock companies) or a business with a socially significant mission 3) grant financing of non-profit organizations with the help of traditional philanthropy tools – grants, subsidies, or debt financing of NPO with the help of new tools such as recurring grants and social bonds (social impact bonds) (Zavyalova, 2016)

2 What is VP? // European Venture Philantropy Association. Mode of access. URL: http://evpa.eu. com/about-us/what-is-vp.

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Charity. In most cases, an equal sign is put between the concepts of charity and CSR, a triusm for the first stages of CSR development. Today, these concepts have been divided. In general, CSR is directly related to the company’s development strategy and aims to make a profit, at least in the long term, while charity is associated with the goodwill of private individuals or non-profit structures (Mukhina, 2013). Mostly charity takes the form of a donation of money or property. In practice, charitable programs are more often implemented as part of the work of specially created charitable organizations, which take the form of public organizations (associations), foundations, institutions; it is possible to use such form as sponsorship.

The Impact of Social Programs on Business Value and the Creation of Risk Management Models The question of whether a company’s socially-oriented activity affects its value does not have an unambiguous answer. In the scientific world there are still discussions on this topic. For example, Ulmann denies there being such a connection (Ullmann, 1985), while Pava and Krauz, Sims, Kotler and Lee, Horn and Rantzien talk about the direct link between the commercial and social component of any company (Pava, Krausz, 1996). In reality, such a connection is increasingly less under question. In general, studies show that CSR programs have an impact on business value through such areas as improving interaction with employees, increasing customer loyalty, increasing reputation and brand value, and reducing transaction costs. Practice shows that the use of CSR as an element of corporate governance helps the company to improve the efficiency of business processes and create new business models. Therefore, on the corporate level, CSR allows a company to review its business processes by reducing costs. For example, sustainable development initiatives also reduce use of resources, reduce waste or emissions, increase investment in healthcare and/or employee education, which reduces costs, and also helps to improve productivity. Thus, CSR initiatives do not only affect the company’s reputation, but also increase its sales. Global companies such as IKEA (Sweden), Tata (India), Grupo Bimbo (Mexico), Target (USA), pay great attention to philanthropic and social activities, which increase their sales (Zavyalova, 2017). It is possible to illustrate how interrelated projects within the framework of CSR are and business value by the fact that many stock exchanges have, for a long time, had indices that take into account the involvement of companies in the processes of sustainable development, and CSR in particular. For example, in the USA, indices such as the Dow Jones Sustainability Indexes and the NASDAQ OMX CRD Global Sustainability Index are used, whilst the FTSE4Good operates on the London Stock Exchange. There are also a number of indices from new industrial countries: in Brazil Bovespa, in Hong Kong HKQ AA HSBC, and many more. The oldest indices of

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sustainable development in the corporate sector are the Dow Jones Sustainability Indexes (DJSI). The generally accepted view is that the significant impact of social and environmental programs is associated with a long-term period and does not have a direct impact on the business. However, it is possible to assess the financial implications of such programs in the short term. For this purpose, both traditional business indicators, such as cost effectiveness and indicators developed by a particular company for assessing the consequences of their social and environmental programs, as well as target indicators for their evaluation, are used. Nevertheless, it should be noted that CSR is often a part of a long-term strategy to increase the value of a company. Since the introduction of CSR elements usually implies additional costs for a company, the management often reconciles corporate social responsibility practices with its risk management strategy. Such coordination is based on the values of the company, aimed, as a rule, at social and environmental results. It can be stated that the valuable landmarks of a company work on a global and regional scale. At the global level, it is important for companies to minimize such risks as the threat of climate change, geopolitical uncertainty, conflicts, corruption, or disease outbreaks, because ultimately this will have an impact on the value and activity of the company. At the national or even local level, the company is more interested in minimizing such risks as inequality, the lack of economic opportunities, and access to basic goods and services (education, energy resources, loans and information technology). In other words, the direct interest of the company is to create a stable environment, which equally can attract solvent consumers of the goods and services of the company and skilled labor force. That is why companies voluntarily finance any programs at a national or local level that can reduce the likelihood of all above mentioned risks.

International Reporting Standards of Corporate Social Responsibility Unlike financial reports, non-financial reporting is addressed to a wide range of concerned parties. In most cases, non-financial reporting is used as a tool for building and strengthening public relations and public authorities, as well as a tool for analyzing and planning a company’s CSR activities at the internal level. In most countries of the world, non-financial reporting remains a voluntary business, although in some countries there is a requirement by at least state-owned companies for its mandatory publication (France, Norway, Denmark, Sweden, Finland, Holland, etc.) Depending on the interpretation of the CSR concept by companies, such reports may be called reports: “on corporate citizenship”, “on (corporate) social responsibility”, “on sustainable development”, “on corporate responsibility and sustainable development”, etc. The global trend of the last decade has been the preparation of

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comprehensive reports “on sustainable development”, which account for about 75% of the total non-financial reporting (Zavyalova, 2017). The world’s largest corporate non-financial reporting database is the International Register of NonFinancial Reports Corporate Register.3 The register contains more than 30,000reports of more than 7,500 companies from 101 countries. A non-financial report can be prepared both in a free form and in accordance with certain guidelines and standards. Over the past 20 years, various standards and guidelines for social reporting have been developed. The most commonly used reporting system is the Sustainability Reporting Guidelines, prepared by the Global Reporting Initiative (GRI); ISO 14000; SA 8000; OHSAS 1800; AA 1000; Global Compact UN. When deciding to publish a non-financial report, a company has several goals. Firstly, it is an opportunity to position itself as a socially responsible market participant, and thereby improve its reputation in the national and global markets. Secondly, this practice strengthens the confidence of all involved parties (stakeholders). Thirdly, the systematic use of non-financial reporting practices increases ratings and investment attractiveness, even during the process of working on global stock markets. Fourthly, it helps identify, evaluate and prevent non-financial risks. In Russia, the first non-financial reports were published by Rosatom and Vnesheconombank in the early 2000s. Currently, non-financial reporting is published by about 200 Russian companies. However, most companies still prefer to prepare social reports.

Corporate Social Responsibility in the European Union In Europe, CSR has been an integral part of both supranational and national policies, an important element in maintaining social stability, and an effective tool for promoting the policy of unity for a long time. Formally, the “CSR era” began in 1995, when the Social Platform was created – an organization uniting 40 European NPOs4 with the aim of developing the social dimension of the European Union and building a fully developed society. Already in 1996, the European business established the CSR Europe network,5 which unites about 60 multinational corporations. In 2001 the European Commission released the “Green Book: Creating a European CSR system”, which was when CSR issues reached the institutional level. In 2006, a new organization was created – the European Alliance on CSR, uniting 32 enterprises and 26 business associations. The European Alliance on CSR supports

3 The official website of the Corporate Register Reporting Awards. URL: http://www.corporateregis ter.com/crra/. 4 Social Platform. URL: http://www.socialplatform.org/. 5 The European Business Network for Corporate Social Responsibility. URL: http://www.csreurope. org/.

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existing CSR programs and initiates new programs and initiatives (Kravtsova, Matveeva, 2016). The traditional European instruments of CSR include responsible policies in relation to staff and consumers; community development; environmental protection; and conscientious conduct of business. However, at the level of individual EU member states, CSR policies may differ significantly. Looking at the practice of making decisions at the level of companies, the German (or continental), Anglo-Saxon, or Swedish (or family) models can be selected. The German model (Germany, Austria, Netherlands, Scandinavian countries, France) is characterized by the highest level of interaction between all parties involved. The main advantage of this model is that, when making decisions, the maximum interest range of interested companies and individuals is taken into account. As for the Anglo-Saxon model, it is not so much about the direct support of stakeholders or consideration of the interests of concerned parties, but about the creation of conditions in which the maximum efficiency of all participants in the process is achieved. That is why, within this model, lots of attention is paid to programs in the field of education and retraining personnel, as well as support of any programs leading to an increase in the efficiency and competitiveness of a specific addressee. Among the forms used more often than in other models, charity is found, and the activities of charitable non-profit organizations, such as Oxfam, have long crossed national frameworks (Zavyalova, 2017). The Swedish model is characterized by the maximum level of social responsibility. This is largely due to the fact that family holdings that control a number of firms are at the heart of this type of economy, and social responsibility is distributed across all corporate levels in areas indicated by the head above, which ensures maximum efficiency and more effective use of resources. There are other types of CSR. An interesting approach is proposed by the European Business Association, which gives the following models (Bataeva, 2017): – Partnership Model (Denmark, Finland, Netherlands, Sweden): partnership strategy in all areas, including employment issues – Business in society (Ireland, UK): soft intervention policies to encourage companies to solve government problems – Sustainability and citizenship (social contract with an emphasis on sustainable development (Germany, Austria, Belgium, France, Luxembourg) Regardless of the model adopted in a particular country, there is a fairly standard set of tools to support the social responsibility of European companies: tax breaks, mandatory non-financial reporting, and the non-economic impact (rewards and incentives). The most popular and effective one among these tools is traditionally tax incentives. For example, in the UK there are tax incentives for investment in socially significant goals and charity. In Spain, there are incentives for investment in non-profit social initiatives.

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Summing it all up, it can be concluded that an important distinguishing feature of the European approach is the legislative consolidation of the obligation of companies to conduct socially oriented programs. Largely because of this, socially responsible behavior is more typical for European companies as a whole than for companies from other regions.

Corporate Social Responsibility in the USA Unlike Europe, US legislation gives more freedom to their companies regarding their participation or non-participation in socially important, but non-essential, activities. In addition, compared to European legislation, the United States has much milder environmental and social rights protection standards. Funding can only come from companies or be shared with the government of a state or the whole country. However, American companies remain key donors to the social system in their country. The CSR peculiarity of American companies, when compared to companies from other regions, is maximum transparency. Since the country is characterized by a low concentration of share capital, detailed social reports are the only way to convey information to its shareholders and, most importantly, to justify the expediency of financing socially or environmentally oriented programs at the expense of its own shareholders. Another distinctive feature of CSR in the United States is the predominant financing of those states and countries where a single American company has a maximum presence. As a rule, the motivation in this case is the desire to ensure stability in the recipient region, the loyalty of consumers and workers, and the desire to create a positive image of the company after environmental disasters or in response to anti-globalists’ speeches (Pichkov, 2013). The main areas of American companies’ CSR are support for education, environmental protection, and protection of employees and health care; as a specific area, the responsibility for workplace safety and product quality must be highlighted. The authors will consider these areas in detail. Education. In this area, co-financing programs by the state and business are most common. Support is provided to all levels of education from school to university and the system of personnel retraining, but priority is given primarily to the financing of natural science and engineering disciplines. As an example, we will take the National Initiative in the field of physics and mathematics (National Math and Science Initiative). Among the measures of supporting education by the private sector, the ones most often used are direct funding, a system of grants, scholarships, funding for research centers, and a commensurate increase in private donations of company employees to education. On its part, the state is concerned about ensuring equal

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rights and equal access to education and business. This activity is expressed in support of national communities and organizations of women and minorities engaged in science and technology (Pichkov, 2013). Healthcare. Since the US healthcare sector is the responsibility of private business, the private sector finances more than half of all medical expenses, including payments for private health insurance and direct costs to health care consumers (Zimenkov, Zavyalova, 2016). This refers to both, private business in the health sector and financial support for those in need of medical services. However, in recent years there has been a trend towards the development of mixed forms of financing in the health sector: most of the financing from business is concentrated in the private insurance system, and the state pursues an incentive tax policy in relation to private health insurance, removing taxes from social packages provided by the employer to the employee. Among the areas of CSR in this field, the most common are programs for combating AIDS, mass epidemics and helping children in the United States and around the world. Workplace safety and care about product quality. Generally, workplace safety issues are central to CSR production companies. The most common goal is to achieve zero mortality, as well as to prevent injuries and accidents. The leaders who have achieved the greatest success are such famous companies as Chevron and Exxon Mobil. There are also examples when a company takes responsibility for unethical behavior or for the consequences of using their products. To offer an example, Nike and Gap acknowledged their responsibility for using child labor, and the alcohol producing companies Segram and Diageo for traffic safety associated with the abuse of alcohol (Kravtsova, Matveeva, 2016).

Corporate Social Responsibility in Countries with Emerging Economies The practice of CSR is typical for many countries that have recently been developing and whose rapid economic development has allowed local companies to incorporate the best foreign practices into their management system. The leaders in this process are undoubtedly the BRICS countries (the Russian experience will be considered separately). Companies in these countries, especially in India and Brazil, work in conditions characterized by chronic social problems: poverty, high unemployment, poor environment and corruption. Therefore, most often the practice of companies’ socially responsible behavior is aimed at solving precisely these problems. In general, companies in the developing world are characterized by voluntary participation in programs, as well as the determination of their direction and scope. However, more and more often, the state includes a provision of the mandatory participation of companies operating in the local market in local legislation. With some assumption, it can be said that socially responsible programs are common to

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those companies from developing countries that are seeking to enter the world market (Bentsion, Beliaeva, 2015). With a sufficient number of common features, one can talk about the existence of different CSR models in the countries of the developing world. One of the most famous is the Latin American model. This model is characterized by attention to social policy issues in relation to company personnel, environmental programs and high media activity. Furthermore the charity of corporations still remains the most common form. Recently, there has been a convergence of government policies and programs initiated by business. Thus, in Brazil, entire groups of projects were launched: “Structural Policy”, aimed at eradicating the deep causes of hunger and poverty, and the “Special Programs” group aimed at families in need, for which, in addition to direct financial assistance, numerous national canteens were created. Another group of projects referred to local food programs (in prefectures, municipalities, and towns): alternative channels of selling products to low-income citizens were created through contracts with supermarkets and wholesale markets, consumer cooperatives were organized, and food was sold without intermediaries (Pankov, 2017). For its part, the government does not only initiate programs, but also provides tax breaks, rewards companies, and offers preferential loans for CSR leading companies. In addition, countries in this region are characterized by a large share of state capital, respectively, to state-owned companies or companies with state participation who, as a rule, are more inclined to socially responsible behavior. The Indian model. The features of this model stem from specific conditions, such as poverty and social stratification, the absence of social elevators, the monstrous state of the infrastructure, an acute shortage of electricity, and more. For companies operating in this region (not only in India), the priority is the creation, development and maintenance of public infrastructure. Historically, the main form of CSR was and remains charity, when large family companies, guided by their own values, donate money. This leads to the unsystematic nature of the areas of assistance – from donations for the construction of a new church to the construction of sewage treatment plants. Mahatma Gandhi played a key role in the development of CSR in India by introducing the concept of “social care”; in accordance with this policy, the largest companies financed the development of education and science. It should be said that CSR in its traditional sense is typical only for foreign companies operating in the country, as well as for Indian companies operating on the external market or listed on world stock exchanges. Since the 1980s, “public sector enterprises” have been established in India with the participation of the federal government or in cooperation with state or territorial administrations. Along with this, a number of national laws establishing labor and environmental standards have been adopted. From this point, it is possible to talk about a significant increase in the importance of the state in the issue mentioned above, and the main focus is the redistribution of resources (finance, food, etc.)

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from the well-off to the neediest segments of the Indian population. The state legally obliges Indian business to allocate 2% of its net profit to social and environmental programs in case the turnover of companies and equity reaches the level established by law. Due to this, at present, large corporations in India demonstrate relatively high standards of CSR; however, the unsystematic nature of social programs has not yet been successfully overcome.

Corporate Social Responsibility of Business in Modern Russia In general, the Russian CSR practice is in the vector of global trends, and sometimes ahead of the best Western counterparts. However, the perception of CSR in Russian society differs quite significantly. On the one hand, in the minds of a generation of Russians who survived the reforms of the 1990s, the idea that any business is a semi-legal activity, also obtained by misappropriating public property, is firmly rooted. It is almost impossible to get rid of this attitude. Accordingly, the Russian society makes excessive claims on the business. On the other hand, the development of Russian business took place in extremely tough competitive conditions. At the initial stages, any diversion of resources to non-core activity meant the inevitable and immediate bankruptcy of the company. Moreover, the economic model of the “new” Russia was based on the principles of liberal economic thought, according to which the social responsibility of a company is limited to the timely and full payment of taxes and the creation of new jobs. At the same time, as noted above, Russia gradually created a fully developed CSR system. To a certain extent, this can be explained by the “historical memory” of our society. The 19th century was the heyday of patronage and charity. Up to now, the objects of social infrastructure have been used, built with the help of private capital of families such as the Mamontovs, the Tretyakovs, the Lyamins, and many others. The 20th century, in turn, was associated with the priority of social policy. Although it would be incorrect and even absurd to put an equal sign between socialism and the responsibility of business, nevertheless, the idea of a person’s priority over commercial material interests was strengthened during the Soviet years. In the 21st century, starting with simple charity, in less than twenty years Russian companies have managed to adapt all possible CSR tools to the Russian reality. In trying to characterize the “Russian model of CSR” in the same way as the models discussed above, it will be possible to identify the following distinctive features. The main distinguishing feature is the fact that CSR programs are carried out only by strategically oriented large companies or companies that traditionally have close ties with the state. Unlike many European countries, small and medium-sized

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businesses are not involved in this process. Another peculiarity is that CSR programs in some cases become the only guarantee of a company’s survival; this happens when, for example, talking about city-forming enterprises, or former Soviet enterprises in working regions. Differ from the public expectations are noticeably revealed too. Any charity from the company is not accepted with gratitude, but as a “due”, as if the company is “paying off debts” or, even worse, just launders money. However the main feature is the participation of the authorities in this process. The main principle of CSR is the voluntary nature of all programs; however, in Russia, power often dictates to business that something needs to be done, making it impossible for a company to independently choose the scope of its funds. As a result, CSR programs are often of an ostentatious nature, events remain one-time, and their effectiveness is extremely low. In this regard, it is interesting to look at the practice of leading companies. The most famous examples will be enumerated. Gazprom Neft, PJSC. The principles of CSR are reflected in the very strategic goal of Gazprom Neft, PJSC: “To become a major international player of Russian origin with a regionally diversified portfolio of assets along the entire value chain, actively participating in the development of regions, having high social and environmental responsibility.6” In practice, this results in large-scale programs on ecology, education (both for employees and for representatives of local communities), projects of corporate volunteers. Special attention should be paid to the program “Native Towns”, which clarifies the company’s approaches to social investments in the regions of its presence. It brings together a series of projects aimed at improving the quality of life in the cities of the company’s presence, expanding the access of their residents to a quality urban environment, education, culture and sports. Severstal, PJSC. The company’s activities in the field of corporate social responsibility cover the following main areas: development and social support of staff; industrial safety and environmental protection; promotion of social and economic development of the recipient regions; charity. In September 2001, Severstal became the first Russian company that received a certificate of compliance with the international standard ISO 14001 for the environmental protection and environmental management system from the international agency Bureau Veritas Quality International.7 Rosatom, State Atomic Energy Corporation. Due to the high public importance of the nuclear industry in Russia, one of the priorities of the State Atomic Energy Corporation Rosatom (hereinafter referred to as Rosatom) is the sustainable

6 Sustainable Development Report of Gazprom Neft, PJSC for 2015. P. 10.URL: http://www.gaz prom-neft.ru/annual-reports/2015/GPN_SR_2015_rus_web.pdf . 7 TASS news agency. URL: http://tass.ru/obschestvo/3359578.

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development of nuclear industry organizations, the corporation itself, and its contribution to sustainable development of the country and humanity as a whole.8 The activities of the corporation in the social sphere are described in the Program of Activities of the State Atomic Energy Corporation Rosatom for the long term period (2009–2015), and approved by a Government Resolution of the Russian Federation No. 705 dated September 20, 2008. Based on this program, the main corporate social programs of Rosatom State Corporation have been developed: the housing program for employees of Rosatom State Corporation and its organizations, the organization of sanatorium-resort treatment and recreation, the support program for veterans and pensioners of Rosatom State Corporation. Much attention is paid to building communications with regional administrations, public and environmental organizations, and education authorities in the regions where nuclear power facilities are located. Special attention should be paid to the corporate social responsibility of foreign companies in Russia. The most famous in this regard is IKEA. In 2012 IKEA created a new sustainable development strategy “Yes – to people and the planet!” as part of its long-term development plans. The document is based on the experience gained by the company in the field of sustainable development, as well as new goals and activities planned for the period up to 2020.9 The three main areas of strategy are: 1. Motivate and provide the opportunity for millions of people to take a more responsible attitude towards everything that surrounds them. Offer products and solutions that help reduce costs by reducing the consumption of electricity, water, and reducing waste – as an example, the transfer of all lighting to LED sources, which serve for up to 20 years and reduce energy consumption by 85%. 2. Become an energy and resource independent company, which means producing enough renewable energy to compensate for the volume consumed by IKEA stores. Increase energy efficiency in all areas of the company by at least 20% and encourage all suppliers and partners to follow the company’s example. 3. Improve the living conditions of people and society, implying the support of creating jobs with good conditions. Thus, CSR has become an integral part of corporate governance. No company can count on successful market positionings, efficiency, and capitalization growth if its management ignores the interests of all involved parties. It is pleasant to note that

8 Rosatom. Activity results in 2014. Section “Agenda of Rosatom, State Corporation in the field of ustainable development”. URL: http://www.rosatom.ru/upload/iblock/28e/ 28e6864617b177fc10b55d1e7e8cf544.pdf. 9 IKEA official web site. URL: http://www.ikea.com/ms/ru_RU/about_ikea/press/press_releases/in ternational/int_023.html.

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our country is in the world mainstream and even ahead of some countries with a comparable level of socio-economic development.

Conclusions The research proves the following conclusions: 1. There has recently been a clear trend towards a gradual “absorption” of the concept of corporate social responsibility by a larger process, called the sustainable development concept. 2. The classical definition of CSR is in line with international standard ISO 26000. In addition to the classical approach in practice, the following forms of corporate social responsibility are common: corporate volunteering, social entrepreneurship, charity, social investments. 3. The Russian CSR practice is in the vector of global trends, especially the European one. Non-financial reporting is published by about 200 Russian companies. 4. The distinctive features of the Russian model of CSR are the following: CSR programs are carried out only by strategically oriented large companies or companies that traditionally have close ties with the state; city-forming enterprises policies; higher society expectations, state involvement.

References Bataeva, B. S. (2017), “Sotrudnichestvo gosudarstva i biznesa dlya resheniya social’nyh problem: kollektivnaya monografiya” (“Cooperation of the State and Business for Solving Social Problems”), in E.B. Zavyalova (ed) A Collective Monograph. Moscow: MGIMO-University. Bencion, V.D., Belyaeva, ZH.S. (2015), “Formirovanie napravlenij korporativnoj social’noj otchetnosti v stranah BRIKS” (“Formation of the Directions of Corporate Social Reporting in the BRICS Countries”) Vestn. Ural Federal University. Economy and management. Vol. 14. No. 5. pp. 762–777 Bowen, H. (1953), Social Responsibilities of the Businessman. New York: Harper & Row. Dementieva A.G., Kalyuzhnova E., Sokolova M. (2018). “Vliyanie globalizatsii na konvergentsiu modelei korporativnogo upravlenya” (“Convergence of Corporate Governance Models in the Context of Globalization”) Mezhdunarodnye Protsessy No. 4. pp. 35–45 Kravcova, E. M., Matveeva, V. YU. (2016), “Modeli social’noj otvetstvennosti biznesa v mirovoj ehkonomike” (“Models of Business Social Responsibility in the World Economy”), Economy, Business and Law. Vol. 6. No.1. pp. 81–98 Muhina, M. I. (2013), “KSO i blagotvoritel’nost’” (“CSR and Charity”), in E.B. Zavyalova (ed.) Corporate Governance and Social Responsibility of Business: Conference proceedings of the Moscow State Institute of International Relations (University) of the MFA of Russia. Moscow: MGIMO-University.

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Pankov, E.I. (n.d.) “Braziliya: nekotorye aspekty social’noj politiki.” (“Brazil: Some Aspects of Social Policy”) Pava, M. L. & Krausz, J. (1996), “The Association between Corporate Social-Responsibility and Financial Performance: The Paradox of Social Cost.” Journal of Business Ethics. Vol. 15. Pichkov, O.B. (n.d.) “Vliyanie deyatel’nosti krupnejshih neftegazovyh kompanij SSHA v oblasti korporativnoj social’noj otvetstvennosti na social’nuyu sferu gosudarstva” (“Influence of the Activities of the Largest US Oil and Gas Companies in the Field of Corporate Social Responsibility on the Social Sphere of the State”), Corporate Governance and Business Social Responsibility: Conference proceedings of Moscow State Institute of International Relations of the MFA of Russia. Pichkov, O.B. (2013), “Korporativnaya social’naya otvetstvennost’ amerikanskih neftegazovyh kompanij” (“Corporate Social Responsibility of American Oil and Gas Companies”). International processes. Vol. 11. No. 32. pp. 113–121 Ullmann, A. A. (1985), “Data in search of a theory: A Critical Examination of the Relationship among Social Performance, Social Disclosure, and Economic Performance of U.S Firms.” Academy of Management Review. Vol. 10. Zavyalova, E. B. (2017), “Korporativnaya social’naya otvetstvennost” (“Corporate Social Responsibility) in E. B. Zavyalova, Y. K. Zaitsev, N. V. Studenikin (eds.) A Textbook for Bachelor and Master Programs. Moscow: Urait Publishing House. Zimenkov, R. I., Zavyalova, E. B. (2016), “Sotrudnichestvo amerikanskogo gosudarstva i biznesa v reshenii social’nyh problem” (“Cooperation of the American State and Business in Solving Social Problems”), USA and Canada: economics, politics, culture. No. 2 (554). pp. 3–21 Zavyalova E. B. (ed.) (2016), Social’naya otvetstvennost’: vyzovy vremeni: kollektivnaya monografiya (Social responsibility: challenges of time: a collective monograph) Moscow. MGIMO-University. Intigrinova T.P., Zavyalova E.B. (eds.) (2016), “The Modern System of International Humanitarian Aid: Best Practices and Challenges: materials of the International conference. (Moscow, October 26, 2016)” Moscow State Institute of International Relations of the MFA of Russia, Department of economic politics and public-private partnerships. Moscow: MGIMO-University. The official website of the Corporate Register Reporting Awards. URL: http://www.corporateregis ter.com/crra/ The European Business Network for Corporate Social Responsibility. URL: http://www.csreurope. org/ “What is VP?” European Venture Philantropy Association. Mode of access. URL: http://evpa.eu. com/about-us/what-is-vp. Sustainable Development Report of Gazprom Neft, PJSC for 2015. P. 10. URL: http://www.gazpromneft.ru/annual-reports/2015/GPN_SR_2015_rus_web.pdf IKEA official website. URL: http://www.ikea.com/ms/ru_RU/about_ikea/press/press_releases/ international/int_023.html Rosatom. Activity results in 2014. Section “Agenda of Rosatom, State Corporation in the field of sustainable development”. URL: http://www.rosatom.ru/upload/iblock/28e/ 28e6864617b177fc10b55d1e7e8cf544.pdf Social Platform. URL: http://www.socialplatform.org/ TASS news agency. URL: http://tass.ru/obschestvo/3359578

Irina Tkachenko, Irina Pervukhina, Oksana Sokolovskaya

17 Corporate Governance and Environmental Reporting in Russian Companies: Present and Future Introduction The formation and evolution of stakeholder theory by R. Edward Freeman has established the foundation for supporters of corporate social responsibility (CSR) to hypothesize that CSR can help in building and strengthening trusting relationships with a variety of stakeholders (employees, consumers, local communities, environmental activists etc.) that are important to the firm’s long term success and financial reputation (Editorial, 2018). CSR is treated as an integral part of the concept of corporate sustainability (Daizy and Das, 2014). A sustainability report is an effective tool by which firms disclose their integrated financial performance with their non-financial performance to its various stakeholders. A sustainability report refers to the act of measuring, understanding and revealing organizations’ economic, environmental, social and governance performance to their stakeholders (Glebova, Rodnyansky, Sadyrtdinov, Khabibrakhmanova, and Yasnitskaya, 2013). Sustainability reporting (SR) can be considered synonymous with other terms for non-financial reporting; they are variously known as corporate social responsibility reports, eco-reports, and corporate accountability reports, as well as ‘social reporting’ and ‘environmental reporting’. The value of SR is that it ensures that the information provided to stakeholders is transparent, which leads to better decision making, as stakeholders’ decisions are rarely based on financial information alone. The history of SR goes back to the 1970s, when ‘social reports’ were sometimes produced to supplement conventional financial reports. The first reports labelled as ‘sustainability reports’ were mostly single-issue reports that focused on environmental performance. The reason for this was partly the high priority given to environmental concerns and partly the difficulty in grasping the multidimensional concept of sustainability. In the late 1980s the first voluntary report focused only on environmental issues was published. By the late 1990s, joint reports, including both environmental and social information alongside financial reports, began to emerge following the Global Reporting Initiative (GRI) programme and this trend continues (Ilysheva and Baldescu, 2014). As of the beginning of 2017, according to CorporateRegister.com, the largest number of sustainability reports in Europe is produced in the UK, followed by Germany, Spain and France. The United States produces the largest number of sustainability reports today, although a few years

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ago American companies were streets behind their European peers. However, since the turn of the millennium, the share of environmental reports has decreased. Non-financial disclosures may be mandatory – a legal requirement to deliver this information – or voluntary – where the extent and nature of reporting may vary substantially between firms. Over time, mandatory reporting requirements have been introduced in a wider variety of countries. Countries with mandatory sustainability disclosure rules now include Brazil, China, Denmark, Hong Kong, India, Malaysia, and South Africa (Editorial, 2018). However, mandatory and comprehensive SR for all firms still is not a systematic activity, nor is it considered important by most companies. Today, only 25% of large companies report to shareholders on sustainability practices. This is the reason for the United Nations to recommend that by 2030 SR should be commonplace for all large firms (United Nations, 2013). The aim of this chapter is a fairly limited one: to assess the current state of the environmental reporting agenda with regard to Russian companies by examining the websites and reports (both annual and sustainability) of leading companies located in the Ural Federal Okrug (UrFO). By doing this, we would like to highlight some unexplored aspects and trends of the environmental disclosure across the region and individual organizations. In Russia, the practice of describing company impacts on society, in comparison with the traditional reporting on the key financial and operational indicators, is rather new (Preuss and Barkemeyer, 2011). One of the reasons for that is the fact that non-financial information is qualitative and can be difficult to measure and access as there are generally no accepted reporting principles and the data can take many different forms. In the Russian Federation, work on the concept of social disclosure began in 2013 and was monitored by the Ministry of Economic Development. For a number of reasons it was not completed, and was resumed in 2016. The Concept is to be fully developed within four time periods: – Stage 1: 2017–2018 – Stage 2: 2019–2020 – Stage 3: 2021–2022 – Stage 4: 2023 and beyond In accordance with the Directive (dated March 30, 2012) and the requirements of the Concept, the following categories of organizations are subject to the mandatory sustainability reporting requirements: – large state-owned companies and state unitary enterprises – strategic and systemic companies – large private companies quoted in the A-list of the Moscow Exchange, and largest businesses in terms of revenue (income) For other organizations and companies, non-financial reporting will remain voluntary.

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The National Register of Corporate Non-Financial Reports and the Library of Corporate Non-Financial Reports of the Russian Union of Industrialists and Entrepreneurs (RSPP) contain the most complete information on how many Russian companies produce sustainability reports and which reporting models are used. The National Register database makes it possible to trace the development of SR, the growth of the number of companies that publish non-financial reports, and its variance by industry. The first non-financial reports were received in 2000, and since then the total number of reports has increased significantly, totalling 922. They include different types of reporting: environmental – 8.9% (82); social – 35.7% (329); sustainability development – 33.8 % (312); integrated – 18.7% (172) and industry (sector) – 2.9% (27). However, Russia-specific studies on CSR and SR practices are scarce. Sometimes the status of CSR in Russia is analyzed through the prism of the BRIC nations (Alon, Lattemann, Fetscherin, Li, and Schneider, 2010; Baskin, 2006; Kumar and Das, 2018; Preuss and Barkemeyer, 2011) and the findings do not sound very optimistic: Russia (along with China) was among the worst performers with regard to CSR communication (Alon, Lattemann, Fetscherin, Li, and Schneider, 2010). In terms of the overall average coverage level of various GRI indicators, Russian companies were at the bottom of the list with the lowest score (Kumar and Das, 2018). The main type of reports used by Russian organizations is a report on the triple bottom line, which includes information on the company’s economic, environmental and social performance (Glebova, Rodnyansky, Sadyrtdinov, Khabibrakhmanova, and Yasnitskaya, 2013). The most common model of integrated reporting incorporates the following information: market analysis, financial statements, corporate governance (in accordance with the requirements of the Bank of Russia), specific industry topics, HR management, environmental issues, and social investments. The share of non-financial data can vary from several pages (as in the annual reports 10 years ago) to 2/3 of the report (Feoktistova, Alenicheva, Dolgih, Kopylova, Ozeryanskaya, and Honyakova, 2017). As of January 2019, 175 Russian companies are registered in the National Register (compared with 164 companies in February 2017). Slightly less than 50% of companies have chosen only one reporting model – the GRI. This choice may be due to the fact that the GRI, as an integrated and universal reporting system, fully meets the needs of the majority of reporting organizations. About 20% of companies use two reporting models: as a rule, these might be the GRI combined with the industryspecific corporate reporting standards or with the Social Charter of the Russian Business or RSPP Reporting indices (Feoktistova, Alenicheva, Dolgih, Kopylova, Ozeryanskaya, and Honyakova, 2017). The application of the GRI underlines the trend that business in Russia is influenced internationally with regard to CSR. As for possible sectorial differences, mining and processing enterprises are more likely to report environmental information, while banking organizations often focus on charity work. Companies from the primary and financial sectors use the

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GRI most often, while company size and ownership demonstrate no remarkable differences in the application of the GRI (Fifka and Pobizhan, 2014). However, while presenting social and environmental information, firms try to show mainly the areas where the positive results were achieved; problematic issues are not disclosed. As a result, reports reflect an ideal situation which is presented in a form that meets stakeholder expectations (Editorial 2018; Glebova, Rodnyansky, Sadyrtdinov, Khabibrakhmanova, and Yasnitskaya, 2013). With the advent of SR, the development of qualitative methods of analyzing environmental and economic information has generated considerable recent research interest among Russian academic studies which investigate sets of key indicators that can be used for environmental analysis. Some authors (Ilysheva and Baldescu, 2014) suggest that using non-financial reporting as an information base for environmental analysis will enable measurement of the impact a company’s activities has on the environment. They argue that environmental analysis can determine not only the degree of balance between the firm’s economic growth and the environment, but it enables to evaluate the social, environmental and economic ‘context’ of the territory where the firm is planning to perform. The results of the environmental analysis might serve as the main platform for assessing both positive and negative environmental impacts, which may affect the company environmental policy and environmental strategy. Criticizing the Russian existing practice of SR in accordance with the GRI standard, E. Morozova (Morozova, 2013) highlights limitations of environmental disclosure: the environmental expenditures are reported without a breakdown by types of activity or environmental components. Examining the relationship between environmental disclosure and CSR, Y. Sorokina (Sorokina, 2018) suggests linking reported environmental data with indicators of statistical reporting in the field of environmental protection. In an attempt to address the issue of environmental damage estimation, an algorithm has been proposed: this would measure value relevance of environmental damage; disclose environmental risks in value terms; and include negative environmental impacts on human health in the calculated ecological deprivation (Medvedeva, Mikerin and Medvedev, 2017). It has been argued whether there is a link between disclosure and company market value (Editorial 2018). In their recent research Kuzubov & Evdokimova (Kuzubov and Evdokimova, 2017) analyze the sample drawn from the body of companies located in BRICS nations. Applying the Ohlson’s model, the authors proved that SR, based on the GRI standard, resulted in an increase in the company’s market value within the year of the report release and a year after the release.

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Methodology To analyze non-financial reporting we identified key companies in the Ural Federal Okrug (UrFO), relying on the 2017 Rating of 400 largest companies – in terms of turnover – of the Urals and West Siberia provided by the Expert Rating Agency. The focus was placed exclusively on joint stock companies and public limited companies registered in the UrFO, and with head offices based in the UrFO. We analyzed the sampled company websites to assess the availability of sustainability reports, and the quality and extent of reported CR practice across a range of social and environmental issues. The respective media comprised annual reports and non-financial reports (often being issued under the titles “Corporate Social Responsibility Report” or “Sustainability Report”) for the period from January 2017 to January 2018. Concerning the compilation of data, the respective online publications were scanned entirely for the relevant information, following this algorithm. First we scanned the company homepage for the presence of non-financial reporting. If it was absent, we scanned a company annual report or its section entitled “Non-Financial Reporting” found on the home page. If the information was still unavailable, the next step was to study the Interfax (The Centre of Corporate Information Disclosure) web site or RSPP National Register and Library of Corporate Non-Financial Reports. The quality of disclosure was measured by looking at six indicators. The measurement was based on a binary scale. The scoring scale consisted of 1: indicator fully addressed; and 0: indicator not addressed. All answered items were then summed to form individual company total scores.

Results The Ural Federal Okrug (UrFO), chosen for this study, includes four Oblasts (Sverdlovskaya, Chelyabinskaya, Kurganskaya and Tyumenskaya) and two autonomous Okrugs: Khanty-Mansi and Yamalo-Nenets. In 2016, the UrFO contributed 13.5% to the federal gross regional product; 18% to the national capital investment; 37.38% to the national mining output; and 12.29% to the national manufacturing output (Rosstat, 2018). As it provided the basis for our research, the first element of CSR we examined was non-financial reporting online. The sample selection took into consideration the 2017 ranking for 400 largest companies of the Urals and West Siberia developed by Expert-Ural. The sample summary of the initial selection of companies in terms of business sector, location, sales and net profit or loss is given in Table 17.1. The research showed that only 15 companies, or around 4%, in the sample either produced a sustainability report or had a specific section covering corporate

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Table 17.1: Profiles of sample companies (2017). Company

Industry

Region

Turnover, mln rubles

Net profit/ loss, mln rubles

ExpertUral- Rating

. Surgutneftegas

Oil and gas

Tumenskaya Oblast

  

 



. Novatek

Oil and gas

Tumenskaya Oblast

 

 



. Magnitogorsk Iron and Steel Works

Iron and steel Chelyabinskaya Oblast

 

 



. Ural Mining and Metallurgical Company

Non-ferrous metallurgy

 

–*



. Uralkali

Chemical and Perm Krai petrochemical

 

 



. Chelyabinsk Tube Rolling Plant

Iron and steel Chelyabinskaya Oblast

 

 



. UralVagon-Zavod

Machine building

Sverdlovskaya Oblast

 

– 



. Sinara Group

Multi-industry Sverdlovskaya Oblast holding

 





. Ural Airlines

Transport

Sverdlovskaya Oblast

 

 



. Russian Copper Company

Non-ferrous metallurgy

Sverdlovskaya Oblast

 

 



. Metafrax

Chemical and Perm Krai petrochemical

 

 



. Chelyabinsk Zinc Plant

Non-ferrous metallurgy

Chelyabinskaya Oblast

 

 



. Ural Bank for Reconstruction and Development

Banking

Sverdlovskaya Oblast

 





. Kamensk-Uralsky Metallurgical Works

Non-ferrous metallurgy

Sverdlovskaya Oblast

 

 



. Uralkhimmash

Machine building

Sverdlovskaya Oblast

 

–



Sverdlovskaya Oblast

*data not available. Source: “Rejting krupnejshih kompanij Urala i Zapadnoj Sibiri «Ekspert-Ural – 400» po itogam 2017 goda” [‘Expert-Ural-400’ Rating of the Largest Companies of the Urals and West Siberia (2017)] http://www.acexpert.ru/analytics/ratings/reyting-krupneyshih-kompaniy-urala-i-zapadnoy-sibi-12. html.

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responsibility on their website or in their annual report. This is an extremely low figure and suggests that even large Russian companies do not see SR as an essential element of CSR. Figure 17.1 presents a breakdown of the analyzed companies by economic sector and shows that they come from seven sectors: banking; machine building; oil and gas; transport; chemical and petrochemical; iron and steel; and non-ferrous metallurgy. 7%

7% 13%

Banking Machine building

27%

Oil and gas Transport and logistics 13%

Chemical and petrochemical Iron and steel Non-ferrous metallurgy

7%

Multi-industry holding

13% 13% Figure 17.1: Sample companies analyzed by economic sector.

Of the analyzed companies 27% are involved in non-ferrous metallurgy. The extraction and refining of oil and gas, iron and steel, machine building, chemical and petrochemical industry accounts for 13% of our sample each. Financial and transport service providers and multi-industry holding constitute 7% of the total sample each. The quality of disclosure was measured by looking at the following parameters: 1. availability of non-financial reporting 2. presence of the headings “Corporate Social Responsibility”, “Social Responsibility”, “Sustainable Development”, “ Environmental Policy”, “Charity” etc. on the company homepage 3. availability of a corporate annual report on the company website 4. availability of a corporate annual report containing the sections on “Corporate Social Responsibility”, “Social Responsibility”, “Sustainable Development”, “Environmental Policy”, “Charity” etc. on the company website 5. availability of non-financial reports in Interfax or RSPP National Register and Library of Corporate Non-Financial Reports 6. availability of a corporate annual report containing the sections on “Corporate Social Responsibility”, “Social Responsibility”, “Sustainable Development”, “Environmental Policy”, and “Charity” in Interfax. The measurement of the non-financial aspects of sustainability performance was based on a binary scale. The scoring scale consisted of 1: indicator fully addressed;

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and 0: indicator not addressed. The individual company score was then calculated. The results of measurement are given in Table 17.2. Table 17.2: Results of measuring non-financial aspects of sustainability performance of the sample companies. Company

Indicator 

Indicator Indicator Indicator Indicator    

Indicator Total 

. Surgutneftegas















. Novatek















. Magnitogorsk Iron and Steel Works















. Ural Mining and Metallurgical Company















. Uralkali















. Chelyabinsk Tube Rolling Plant















. Ural Vagon-Zavod















. Sinara Group















. Ural Airlines















. Russian Copper Company















. Metafrax















. Chelyabinsk Zinc Plant















. Ural Bank for Reconstruction and Development















. Kamensk-Uralsky Metallurgical Works















. Uralkhimmash















As can be seen from Table 17.2, the highest scores (6 points and 5 points) were received by companies whose non-financial statements are registered in the National Register and the Library of Corporate Non-Financial Reports: Surgutneftegas; Novatek; Magnitogorsk Iron and Steel Works and Uralkali. The lowest score (1 point) was attained by Ural Airlines, Chelyabinsk Zinc Plant, and Uralkhimmash, each addressing one indicator only: Ural Airlines provided an

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annual report; Chelyabinsk Zinc Plant had an annual report available in Interfax, and Uralkhimmash had the section “Activities in the field of ecology” on the company website. Of the analyzed sample the same four corporations are registered in the National Register of Corporate Non-Financial Reports: Surgutneftegas (reports presented since 2011); Novatek (reports presented since 2004); Magnitogorsk Iron and Steel Works (reports presented since 2004), and Uralkali (reports presented since 2011). The same four companies had the highest score and were in the group of Leaders of the Sustainable Development Vector and Responsibility and Transparency indices used by RSPP to measure the degree of information disclosure on sustainable development and CSR in public corporate reports in 2013–2018 (Table 17.3). Table 17.3: RSPP Index Leadership in information disclosure (2013–2018). Year

Responsibility and Transparency Index

Sustainable Development Vector Index



Magnitogorsk Iron and Steel Works Novatek

Magnitogorsk Iron and Steel Works



Uralkali



Uralkali Novatek

Uralkali



Uralkali

Uralkali



Uralkali



Uralkali Surgutneftegas

Though we have made an attempt to analyze the impact of environmental and social reporting on stock market performance at the firm level (Figures 17.2 and 17.3), 250 225 200 175 150 125 100 75 50 25 0

Magnitigiorsk Iron and Steel Works Uralkali

Surgutneftegas

Novatek 2013

2014

2015

2016

2017

Figure 17.2: Social investment in the analyzed companies (2013–2017).

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700 Magnitogorsk Iron and Steel Works

600 500

Uralkali 400 300

Surgutneftegas

200 Novatek

100 0 2013

2014

2015

2016

2017

2018

Figure 17.3: Market capitalization of the analyzed companies (2013–2018).

our findings are not wholly representative due to scarcity of empirical evidence. Hence, we can neither accept nor reject the hypothesis that environmental information appears to be stock price relevant in financial markets. This can be identified as a potential fruitful venue for further research.

Conclusion The aim of this chapter has been to assess the current state of the environmental reporting agenda with regard to Russian companies by examining the websites and annual and sustainability reports of leading companies of the UrFO. It is reasonable to conclude from this analysis that, overall, the limitation of this paper is its scope due to the region-specific aspect. We have analyzed only 15 companies, which does not allow us to generalize and make convincing conclusions. However, the lack of complete data on sustainability practice and environmental reporting in particular can also be indicative: expanding the practice of SR among large and medium-sized companies with state participation is still a serious challenge in Russian business. Most authors comment that the trends of SR in Russia are generally consistent with international practice, which is particularly relevant to Russian listed corporations whose shares are traded in international stock markets. However, a majority of Russian companies, even being socially responsible, has not perceived environmental reporting as a standard of the corporate behaviour. For the last 28 years, since the start of privatization, the Russian model of CG has had its ups and downs. In critical times, firms tend to ‘forget’ about CSR and consequently about SR. Incompany CG institutes once again simulate their desire to meet the governing norms and regulations. However, the relative youth of SR might form a good basis

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for the further development of data collection and analysis systems, which will be crucial for a real increase in disclosure levels. These findings could serve as a wakeup call for local companies to improve their SR practices for long-term competitiveness and sustainable development.

References Alon, I., Lattemann, Ch, Fetscherin, M., Li, Sh., and Schneider, A.M. (2010) “Usage of Public Corporate Communications of Social Responsibility within Brazil, Russia, India and China (BRIC)”, International Journal of Emerging Markets, Vol. 5 No. 1, pp. 6–22 Baskin, J. (2006), “Value, values and sustainability – Corporate responsibility in emerging market companies”, working paper, Cambridge Programme for Industry, 1 October. Daizy and Das, N. (2014), “Sustainability Reporting Framework: Comparative Analysis of Global Reporting Initiatives and Dow Jones Sustainability Index”, International Journal of Science, Environment and Technology, Vol. 3 No.1, pp. 55–66. Editorial (2018): “The Effects of Environmental, Social and Governance Disclosures and Performance on Firm Value: A Review of the Literature in Accounting and Finance”. The British Accounting Review, Vol. 50, pp. 1–15. Federal’naya Sluzhba Gosudarstvennoj Statistiki Rosstat (Russian Federal State Statistics Service Rosstat) (2018), “Regiony Rossii. Social’no-ehkonomicheskoe pokazateli 2018. Statisticheskij spravochnik” (“Regions of Russia. 2018 Social and economic indicators. Rosstat, Moscow”), available at: http://www.gks.ru/free_doc/doc_2018/region/reg-pok18.pdf (accessed 15 February 2019). Feoktistova, E.N., Alenicheva, L.V., Dolgih, E.I., Kopylova, G.A., Ozeryanskaya, M.N., and Honyakova. N.V. (2017), “Otvetstvennaya delovaya praktika v zerkale otchyotnosti: nastoyashchee i budushchee. (“2015–2016 issues of Responsible Business Practices in the Mirror of Reporting: Past and Present”). The Analytical review of corporate non-financial reports, RSPP, Moscow. Fifka, M. S. and Pobizhan, M. (2014), “An institutional approach to corporate social responsibility in Russia”, Journal of Cleaner Production, Vol. 82, pp. 192–201 Glebova, I., Khabibrakhmanova, R. Rodnyansky, D., Sadyrtdinov, R., and Yasnitskaya, Ya. (2013), “Evaluation of corporate social responsibility of Russian companies based on nonfinancial reporting”, Middle-East Journal of Scientific Research, Vol. 13, pp. 143–148 Global Reporting Initiative (n.d.), Sustainability Reporting, available at: https://www.globalreport ing.org (accessed 4 January 2019) Ilysheva, N.N. and Baldescu, E.V. (2014), “Nefinansovaya otchetnost’ kak informatsionnaya baza ekologicheskogo analiza”, (“Non-financial Reporting as an Information Base for Environmental Analysis”) Russian Agrifood Policy, Vol. 10 No. 34, pp. 78–80. Kolk, A. (2010), “Trajectories of sustainability reporting by MNCs”, Journal of World Business, Vol. 45 No. 4, pp. 367–374 Kumar, A. and Das, N. (2018), “Sustainability Reporting Practices in Emerging Economies: A CrossCountry Study of BRICS Nations,” Problemy Ekorozwoju – Problems of Sustainable Development, Vol. 13 No 2, pp. 17–25 Kuzubov, S.A. and Evdokimova, M.S. (2017), “Povyshayet li stoimost’ kompanii publikatsiya nefinansovykh otchetov po standartam GRI? (na primere stran BRIKS” (“Does the Company

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Value Increase through the Publication of Non-Financial Reports under GRI Guidelines? (On the Example of BRICS Countries)”) Accounting Analysis. Audit Vol. 2, pp. 28–36 Medvedeva, O.E., Mikerin G.I. and Medvedev P.V. (2017), “Integrirovannaya nefinansovaya otchetnost’ i problem vklyucheniya v neye ekologicheskoy sostavlyayushchey v Rossii” (“Integrated non-financial reporting in Russia and the issue of including the environmental component”) Property relations in the RF, Vol. 11 No. 194, pp. 6–14. Morozova, E.V. (2013), “Nefinansovaya otchetnost’: kharakteristiki, predstavleniye rezul’tatov sotsial’noy i ekologicheskoy deyatel’nosti” (“Non-financial reporting: characteristics, social and environmental data disclosure”) Economy, sociology, law, Vol. 12, pp. 50–53. Preuss, L. and Barkemeyer, R. (2011), “CSR priorities of emerging economy firms: is Russia a different shape of BRIC?”, Corporate Governance, Vol. 11 No. 4, pp. 371–385. Russian Union of Industrialists and Entrepreneurs (2018), Russian Business and Sustainable Development Goals, Corporate Practices Collection, Moscow, available at: http://media.rspp. ru/document/1/b/2/b24091d44c9660fcf3a9fdad6551b88f.pdf (accessed 20 January 2019). Sorokina, Y.M. (2018), “Non-Financial Reports of Russian Companies: Topicality and Termsof Compilation”, Baikal Research Journal, Vol. 9 No. 2, pp. 2–2 United Nations (2013), “UN panel call for global sustainability reporting”, available at: http://www. post2015hlp.org/wp-content/uploads/2013/05/UN-Report.pdf (accessed 20 January 2019).

Viktor Onuchak, Ekaterina Nikitchanova, Maria Grineva

18 Corporate Social Responsibility and Corporate Governance Ratings as a Component of Sustainable Development Introduction The versatility of factors shaping the global economy has always been a stumbling block for researchers. The Russian Union of Industrialists and Entrepreneurs (RSPP) defines non-financial reports as documents officially disclosed by companies and organisations, which also outline either the whole scope of a company’s activities or focus on its certain areas, in the field of responsible business conduct, corporate social responsibility (CSR) or sustainable development (SD). (Alenicheva & Feoktistova, 2014) The authors of this chapter aim to analyse the parameters measuring corporate governance effectiveness in terms of non-financial reporting and its impact on sustainable development.

Materials and Methods Ranking the surveyed companies on a number of indicators is essential when characterising their sustainable development. Ratings are often used to assess various objects (companies); due to the fact that one criterion defines a variety of characteristics, such ranking systmes are extremely user-friendly. The applicable tools of deriving the information required to calculate a rating score include: companies’ annual reports, environmental and social reports, sustainable development reports, integrated reports, and sector specific reports.

International Experience in Designing Corporate Social Responsibility Ratings For all the variety of approaches to building the system of corporate social responsibility, they all aim to ensure the all-round sustainable development of an enterprise through its effective relationship with employees, investors, and other stakeholders, as well as the environment.

https://doi.org/10.1515/9783110695816-018

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Profound steps are being undertaken globally to design standards for corporate rating assessment in the sphere of sustainable development, along with universally accepted guidance on setting the relevant tools. In the EU, the Directive on the disclosure of non-financial information is in force, obliging large listed companies to report on environmental protection, social and employee-related issues, human rights, anti-corruption, and gender equality. According to a survey by KPMG, of the world’s top 250 companies, 92% submitted their non-financial reports in 2015, up from 35% in 1999 (Kuvaldin, 2019). The Global Reporting Initiative (GRI), an independent international standardsetter in sustainability reporting, has introduced 36 modular standards that facilitate reporting on such topics as greenhouse gas emissions, electric energy, water and labour resources utilization. This new format of sustainability reporting will enable GRI – should need arise – to amend thematic focus areas independently, without having to revise the whole range of its standards. The World Business Council for Sustainable Development (WBCSD) published the latest version of “Reporting matters” in line with its 2016 edition. The survey shows that 76% of the world’s leading companies have improved on their nonfinancial disclosure since 2013, when the first report by WBCSD came out. Member companies vary in their ways of reporting their non-financial information, which compounds the process of devising a uniform rating. One third of all companies in the report (31%) communicate their key Sustainable Development Goals (SDGs) to the users of such information. About 42% of the surveyed companies choose to unveil key information on-line by posting it, mainly on their web site, while the rest opt for showing financial and non-financial data on their annual report. According to the report, of all the existing guidance on integrated sustainability reporting, with corporate social responsibility issues embedded, the GRI Guidelines are most widely recognized and used. Table 18.1 summarizes the reporting practices Table 18.1: Number of non-financial reports as of October 2015. Years



worldwide in Russia



worldwide in Russia



worldwide in Russia

Total Number of Published Reports

Number of Reports Published in Compliance with GRI G

The Share of Reports Published in Compliance with GRI G





%



–

%





%





%

 

 

% %

Source: based on: Dow Jones Sustainability Index and Report Watch.

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of Russian and foreign companies in compliance with the latest version of the GRI Guidelines (GRI G4). The improvement of the methodology for adequately assessing a company’s social responsibility performance represents the main problem institutions (including international financial organisations) are facing, regarding rating agencies and forecasting. At present, corporate social responsibility ratings are the focus of attention for leading economists, both Russian and foreign, as well as of international financial organisations. The Russian delegation was one of the participants at the Global Social Business Summit hosting representatives from 50 countries. In their reporting practices about 75% of all Russian companies follow the GRI Standards as the sole set of standards, or make use of them in combination with other standards (Lukin, 2018). The problem has deeper roots, though, as it involves establishing conditions for long-term continuous development of both state and private businesses accompanied by integration of occupational health and safety, environmental protection, industrial safety, and social well-being in the region of operation into a company’s policies and practices. (Zavyalova, 2018) The rating of foreign countries, ranking them by the

Table 18.2: Rating of Foreign Countries by the number of Corporate Non-financial Reports. Countries

Number of Reports

Growth Rates in  in Comparison with , %

Growth Rates in  in Comparison with , %







USA







,

,

Great Britain







,

,

Germany







,

,

Spain







,

,

Australia







,

,

…

…

…

…

…

India







,

,

Russia







,

,

China







,

,

…

Source: Corporateregister.com as of 1.06.2015 and 1.01.2017.

number of corporate non-financial reports, reflects the foregoing criteria (See table 18.2). The data provided in the table suggest that the USA, Great Britain and Germany, where non-financial reporting dates back to the 90s, are at the top of the rating by

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the number of non-financial reports submitted by the companies featured in the rating. However, such countries as India and Russia topped the rating in 2013 and 2015 respectively in terms of the rates of growth in the number of companies practicing non-financial disclosure. To assess corporate performance of individual foreign companies with regard to sustainable development and social responsibility such metrics as ISO 9001 and 14001, the Equator Principles and GRI’s Sustainability Reporting Guidelines (G4) are made use of (Onuchak, 2014). The most recognized metrics, applicable to constructing corporate social responsibility ratings both in Russia and abroad, must be considered. The Dow Jones Sustainability Index (DJSI) is part of a larger family of Dow Jones Sustainability Indices (DJSI). It was first issued in September 1999 along with the rating of the same name, which defines corporate sustainability as “an approach to business generating long-term shareholder value by means of maximizing all the available resources while minimizing economic, environmental and social risks (Clause 12, 2019)”. As of today the DJSI World Rating includes more than 300 companies from 27 countries (Russia is not yet among them). The annual DJSI World Rating represents a comprehensive assessment of corporate performance on the basis of economic, social and environmental criteria, with an emphasis on shareholder value. The survey also contains an analysis of the regions of a company’s operation, as well as an overall industry report. The FTSE Good Rating, first published in 2001 by the FTSE group, ranks companies on 4 benchmark and 4 tradable indices, which investors rely on when making investment decisions regarding companies operating in the USA and Europe (Belogoryev & Afanasyeva, 2011). ReportWatch, a global independent rating of annual reports, is compiled on the basis of non-financial data publicly reported by companies, global and national ratings released by rating agencies, as well as on the internal surveys carried out by ReportWatch. ReportWatch 2016 features a total of 16 Russian companies, with a leading PJSOC Bashneft ranking 53rd (Clause 16, 2017).

Corporate Social Responsibility Ratings in Russia Unfortunetely, there are no market stimuli on investors’ parts to encourage companies to report on non-financial aspects of their performance. Therefore the government aims to meet society’s needs by raising social responsibility of state-run companies. RSPP’s efforts in this field have resulted in reaching a consensus on the areas an integrated report should contain for a company to be considered fully accountable.

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The effectiveness of corporate governance in Russian companies is measured on an annual basis by the National Council on Corporate Governance (NCCG) and the Russian Institute of Directors (RID) set up for designing, implementing and monitoring up-to-date professional corporate governance standards with regard to the activities of Russian companies. Other renowned sustainable development and corporate social responsibility ratings used to asses Russian companies’ performance include: – Interfax-ERA environmental and energy ratings – WWF Russia and CREON environmental rating – corporate governance ratings – APEC corporate responsibility ratings – aggregate Responsibility and Transparancy Index and Sustainable Development Vector Index calculated by RSPP to evaluate companies’s activities in the sphere of social responsibility, openess and sustainable development with their critical impacts and performance taken into account According to the annual survey of Russia’s 855 largest companies conducted by the Russian Regional Network on Integrated Reporting (RRN), OJSC JFSC Sistema sits on top of the National Corporate Transparancy Rating. RSPP’s recent releases of its Responsibility and Transparancy Index and Sustainable Development Vector Index feature such companies as OJSC JFSC Sistema, JSC Aeroflot, PJSC Gazprom and a few others among the leading 25 businesses by the extent and quality of disclosure of corporate social responsibility related information. These indices are calculated on the basis of the analysis of the annual financial and non-financial statements publicly posted by Russia’s top 100 corporations (Clause 18, 2017). In general, out of 14 enterprises with the highest RSPP index, the majority are among the total of 50 companies which, according to the Russian Regional Network on Integrated Reporting, meet the up-to-date international requirements on corporate transparency. 10 out of 25 leading businesses with the highest sustainability development index are among the top 20 companies on the Corporate Governance Index, issued by the National Association of Corporate Directors (NACD). The World Wildlife Fund (WWF) and CREON Group, a consultancy in the energy sector, were joined by the National Rating Agency to implement a pilot project aimed at compiling the environmental rating of oil and gas companies in 2014. The rating provides objective and comparable data on the level of environmental responsibility of oil and gas companies and the scale of their environmental impact. It enables potential consumers and investors not only to give preference to the product of a particular company, but also to evaluate various investment risks, including reputational ones, on the basis of comparing companies’ environmental responsibility and management.

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The rating in question was issued on the basis of the set of criteria outlined in the Joint Environmental Requirements of Public Environmental Organisations to oil and gas companies. PJSC Surgutneftegaz is at the top of the rating, followed by PJSC Gazprom and Sakhalin Energy with PJSC Rosneft and PJSC Bashneft ranking 6th and 13th respectively. PJSC Surgutneftegaz ranks 3rd in expenditure on environmental protection; however, the company has the highest ratio of such expenditure to revenue (Levitskiy & Pikanov, 2017). The company’s investments in construction and the modernization of air protection facilities, including APG utilization facilities, amount to 53% of the total volume of capital outlays on construction of environmental protection facilities. It spent 2.8 bln roubles on air protection in 2015 (Clause 15, 2015). The Agency of Political and Economic Communication (APEC) seeks to issue its Social Responsibility Rating of Russian companies on a monthly basis. Professional assessment of corporate performance through holding surveys forms the methodological basis for the rating. The Agency assessed Russia’s 100 largest companies in February 2014. Each expert evaluated the degree of a company’s social responsibility, which was then followed by the calculation of the average score (the arithmetic mean).

National Corporate Governance Rating The Russian Institute of Directors has regularly assessed the level of corporate governance in Russian companies and assigned the National Corporate Governance Rating (NCGR) since 2004. The exclusive rights of the Russian Institute of Directors for using NCGR were certified by Rospatent in 2012. The National Corporate Governance Rating reflects expert opinion on corporate governance practices in a particular company and is an integrated assessment of the quality of corporate governance, indicating the level of relevant risks for shareholders and other stakeholders. The NCGR methodology was developed in accordance with Russian legislation on joint-stock companies, the listing rules of the Moscow Exchange with regards to the requirements to issuers, the Corporate Governance Code of the Russian Federation, and the international standards for corporate governance (the G20/OECD Principles of Corporate Governance, the OECD Guidelines on Corporate Governance of State-Owned Companies). Currently, the NCGR methodology includes 160 criteria, summarized in 4 assessment components, each having a unique unit weight in a scorecard: 1. shareholder rights (right of ownership; voting rights; shareholder right to participate in decision making; dividend policy; potential risks of shareholder rights violation; company’s initiatives to protect shareholder rights) – 45 criteria, unit weight – 25%.

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2.

activities of the governance and control bodies (composition, structure, areas of responsiblity and procedure of the Board of Directors and executive management; managing conflicts of interests; internal control and audit; risk management; interaction between governance bodies; corporate secretary) – 66 criteria, unit weight – 40%. 3. disclosure (the level of disclosure of financial and non-financial data; overall disclosure discipline, equal access of shareholders and stakeholders to information) – 36 criteria, unit weight – 25%. 4. corporate social responsibility and sustainable development (social responsibility policies; corporate culture; social projects; environmental policy; social reports) – 13 criteria, unit weight – 10%. Three types of assessment are used when analysing coporate governance practices according to the aforementioned criteria: positive, neutral and negative. On certain criteria companies are assessed not only in terms of declaring the relevant standards on their internal documents, but also in terms of the practical implementation of such standards, which suggests sustainability of corporate governance practices. Apart from the foregoing set of criteria, in exceptional cases, a company’s rating may also reflect a range of external stress factors, which may have an adverse effect on the quality of corporate governance. Such stress factors include corporate disputes, claims made against members of the governance bodies, transactions with company assets at non-market prices, etc. When calculating a company’s rating, the following sources of information are used: a company’s internal documents; data publicly disclosed by a company and available on its website or websites of information agencies; a questionnaire filled in and certified by a company; and any additional information, commentaries or interviews provided by a company at experts’ request. A company’s NCGR is calculated on the basis of assessments on each of the 4 components under the NCGR methodology with weights put on each component. The final rating score varies from 1 to 10. The rating scale has 10 rating classes. Each class has 2 subclasses: if a company’s quality of corporate governance is average for this class, a “+” symbol is added to its rating class; if it is above the average and close to the next rating class, a “++” symbol is added to it. In addidion, rating classes are grouped in 7 quality levels (characteristics) of corporate governance performance, reflecting changes in the level of corporate governance. The higher the rating, the lower the risks related to corporate governance at the company under assessment, according to experts’ opinions. The Scale of the National Corporate Governance Rating: – NCGR 10 – Very best corporate governance practice – NCGR 9++ - NCGR 9 – Best corporate governance practice – NCGR 8++ - NCGR 8 – Advanced corporate governance practice

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NCGR 7++ - NCGR 7 – Developed corporate governance practice NCGR 6++ – NCGR 6 – Good corporate governance practice NCGR 5++ - NCGR 4 – Moderate corporate governance practice NCGR 3++ - NCGR 1 – Low corporate governance practice

How can a company benefit from being assigned the NCGR? Firstly, it becomes eligible for an expert report, which enbles it to enhance its corporate governance practices as well as its relationship with the stakeholders. Secondly, it can obtain information support in building a developed system of corporate governance. Thirdly, such a company is able to effect benchmarking, which involes weighing its level of corporate governance against the accompanying risks across businesses. It is not binding for companies to disclose their NCGR. Disclosure of a company’s rating score is subject to its consent. The companies holding a public NCGR tend to disclose it in various sources, including their annual report. This practice enables a company’s stakeholders to track the dynamics of its corporate governance. So far the NCGR has been assigned to more than 50 Russian companies. Currently, 17 companies have a public NCGR. The majority of them are market leaders operating in various sectors of the economy such as banking, electricity, metallurgy, engineering, transport services; namely these companies in these fields are Sberbank, VTB Bank, Aeroflot, AFK Sistema, ALROSA, MMK, IDGC of Center, TransContainer, Rostelecom, Rosseti, RusHydro, FGC UES, etc.

Conclusion The survey shows that such countries as the USA, Great Britain and Germany, where non-financial reporting dates back to the 90s, are the leaders by the number of reports disclosed by the companies featured in the ratings. However, India and Russia were at the top of the list by the rates of growth in the number of companies posting non-financial reports in 2013 and 2015 respectively. Non-financial disclosure is not a long-standing practice in thesecountries, but it is rapidly gaining momentum. Of all the tools used to evaluate corporate governance in Russia, the National Corporate Governance Rating (NCGR), which is both an integrated estimate of the quality of corporate governance and an indicator of the level of risks shareholders and other stakeholders may bear, is of special interest.

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References Alenicheva L.V., Feoktistova E.N., Honyakova N.V., Ozeryanskaya M.N., Kopilova G.A. (2015), Otvetstvennaya delovaya praktika v zerkale otchyotnosti. Analiticheskiy obzor korporativnih nefinansovih otchyotov: 2012–2014 godi vipuska (Corporate Responsibility in the Light of Information Disclosure. The Analytical Survey of Corporate Non-financial Statements: 2012–2014 editions) RSPP, Moscow. Belogoryev A.M., Afanasyeva M.V. (2011) “Zachem nuzhen indeks ustoychivogo razvitiya?” (“What is the Sustainability Development Index for?”), Neft Rossii (Oil of Russia), No 11, pp. 6–10 Zavyalova E.B., N.V.Studenikin, E.A.Starikova (2018) “Business participation in implementation of socially oriented Sustainable Development Goals in countries of Central Asia and the Caucasus region” (Central Asia and the Caucasus), Volume 19, Issue 2. – P. 56–63. Kuvaldin S. A. (n.d.) “Nefinansovoy otchyotnosti umen’shili obyazantel’nosti” (“Non-financial Reporting Requirements Have Been Eased”) available at: https://www.kommersant.ru/doc/ 3182553 (accessed 22.01.2019). Leikin I. (n.d.) “Zelyoniy protcent” (“Green Interest”) Vedomosti, available at: https://www.vedo mosti.ru/partner/articles/2016/12/05/668241-zelenii-protsent (accessed 1.12.2018) Levitskiy D.N., Pikanov K.A. (2017) “Protcessniy podhod pri postroenii upravlencheskoy strukturi gazotransportnogo obchestva” (“Process Approach to Governance Structure of an Oil and Gaz Company”), Quality Management in Oil and Gas Industry, No 3/4, pp. 31–33 Levitskiy D.N., Pikanov K.A. (2016) “Risk-orientirovanniy podhod kak osnova prinyatiya upravlencheskih resheniy.” (“Risk-Oriented Approach as a Basis for Management Related Decisions”), Science and Techonology in the Gas Industry, No 1 (65), pp. 23–28 Lukin A.V. (n.d.) “Strategia gosudarstva v razvitii pererabotki PNG”. (“Governmental Strategy of ANG Processing”), available at: http://www.globotek.ru/about/doklad/strategija-gosudarstva -v-razvitii-pererabotki-png- (accessed 12.08.2018). Onuchak V.A. (2012) Mezhdunarodniye i natcionalniye reitingoviye agentstva (International and National Rating Agencies) Moscow:, Ankil. Onuchak V.A., Levitskaya E. N. (2014) “Nefinansovaya otchyotnost’ v otcenke ohrani okruzhayuchey sredi.” “Non-financial Reporting in Assessing Environmental Protection Performance”), Corporate Governance as a Factor of Raising Investment Attractiveness, MGIMO-University, Moscow. P. 227–239. Onuchak V.A., Milovidov V.D. (2016) Reitingoviye agentstva v sisteme mezhdunarodnih finansov. (Rating Agencies in the International Financial System) Moscow: Ankil. Zhoidik A.P. (2015) “Reiting kak instrument kolichestvennoy otcenki korporativnoy sotcial’noy otvetstvennosti.” (“Rating as a Tool of Quantitative Assessment of Corporate Social Responsibility”), Economic System Management, No 78, p. 14. Dow Jones Sustainability Index, DJSI, available at: www.sustainability-indices.com (accessed 30.01.2019). GRI Sustainability Disclosure Database, available at: http://database.globalreporting.org (accessed 20.12.2018). Konsul’tantPlus (2017): Utverzhdena Kontceptciya razvitiya publichnoy nefinansovoy otchyotnosti (The Concept of Development of Public Non-financial Reporting). http://www.consultant.ru/ law/hotdocs/49565.html accessed 26.07.2018. OAO Surgutneftegaz. Ekologicheskiy otchyot (Environmental Report), 2015. S. 24. Report Watch: Top 400 annual reports, available at: https://www.reportwatch.net/annual-reporton-annual-reports-2016/top-400-annual-reports/ (accessed 10.07.2018).

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RSPPP: Natcional’niy Registr i Biblioteka korporativnih nefinansovih otchyotov (National Register and Library of Corporate Non-financial Reports). http://rspp.ru/simplepage/157 (accessed 12.09.2018) RSPP otcenil prozrachonst’ i sotcial’nuyu otvetstvennost’ krupneyshih bisnes sruktur (RSPP Assessed Transparency and Social Responsibility of the Largest Companies). https://www. vesti.ru/doc.html?id=2860320 (accessed 27.02.2017).

Part VI

Marie Sokolova, Diana Madiyarova, Asya Pshikhacheva

19 Organizational Culture in the Corporate Governance System Introduction The phenomenon of “organizational culture” has existed since ancient times, although the appearance of the term itself, alongside its detailed study and theoretical justification, are attributed to the 1970s. In-depth study of organizational culture stems from the emergence of new economic conditions, the growing uncertainty of the external environment, scientific and technological progress and many other factors characterizing the 20th century. As the amount of research in the field of organizational behavior grew, so did the perception of organizational culture. R.M. Cyert, J.G. March, D. Hampton (Сyert, March, 1959; Hampton, 1987) and a number of other authors believed that organizational culture encompasses the search and analysis of patterns creating common values, concepts, rules, and behavioral norms of personnel in the course of its activities in the organization. T. Deal, A. Kennedy, T. Peters, R. Waterman (Deal, Kennedy, 1982; Peters, Waterman, 1986) focused on the influence of organizational culture on corporate performance. Representatives of the so-called “modeling school” – E. Schein, C. Handy, K. Cameron, R. Quinn (Schein, 2012; Handy, 2001; Cameron & Quinn, 2001) – view organizational culture as an independent object of study, and suggest various models of its development, methods of assessment, culture typology, etc. The most significant theoretical foundations related to the organizational culture were developed by western scientists in the 20th century. Russian studies are mainly of an applied nature, adapting the best practices in the development and management of organizational culture to the Russian business environment.

Materials and Methods The complex of theoretical scientific knowledge about organizational culture, being the basis for a personnel management system amid a rapidly changing external environment, was backed by specific empirical studies. The methodological framework of the study was the dialectical method of knowledge and a systematic approach to the study of economic and organizational phenomena. In the course of research, general (analysis, synthesis, systemic and functional approaches) and https://doi.org/10.1515/9783110695816-019

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specific (historical, statistical, mathematical, logical) scientific cognition methods were employed to reflect the relationship between theory and practice, the form and content of the object of this study. Moreover, private methods and research procedures were used, implemented through the main methods of observation, survey methods, content analysis, and focus group method. The work is based on studies of Russian and international specialists in the field of organizational culture development, the results of surveys, and interviews with employees of Russian companies.

Types of Organizational Culture There are a large number of definitions of the term “organizational culture”, but they all emphasize that the keepers and transmitters of organizational culture, in the first place, are people or the human potential of an organization. Organizational culture performs several functions in a company: it shares a part of the company with employees, encourages employee loyalty, strengthens the stability of the social system, and helps employees understand their environment. Each organization develops its own internal culture. Researchers tried to identify various types of organizational culture, trying to figure out its correlation with the organization’s performance. This research was prompted by the idea that some types of cultures are much more effective than others. Unfortunately, the study did not lead to the establishment of a single, generally accepted typology of cultural styles. There are various approaches to determining the type of organizational culture of a company. One of them is based on the fact that there are three main types of organizational culture: constructive, passive-defensive, and aggressive-defensive – and moreover, each type is associated with a different set of normative beliefs. Normative beliefs imply a method that demonstrates how members of a group or organization should do their work and interact with others. A constructive type of culture implies active interaction between employees and work on tasks and projects, in such a manner that will most meet their needs for personal growth and development. This type of culture pursues normative beliefs related to achievement, self-actualizing, humanistic-encouraging and affiliative norms. In a passive-defensive type of culture, in contrast, employees should interact with each other in a manner that does not threaten their own security. This type of culture is characterized by approval, conventional, dependence, and avoidance norms. In companies with an aggressive-defensive type of organizational culture, it is assumed that employees must solve problems, making all efforts to protect their status and ensure their safety. This type of culture is characterized by oppositional, power, competitive, and perfectionistic norms.

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Although the organization may at large comply with one cultural type, some external features and normative beliefs may be derived from others. The study reveals that organizations might well encompass functional, hierarchical, geographic, social subcultures and countercultures. The role of the dominant coalition of board level executives is decisive in the organizational culture of the company. This group of people makes strategic decisions about the core activities of the company. One of the approaches to distinguishing various types of organizational culture is based on a certain similarity between the behavior of key figures of the dominant coalition and the behavior of organizations (Sokolova, Zaitsev, 2008). Thus, an analogy can be drawn between unstable people and “nervous” organizations, as well as between balanced, quiet people and “healthy” organizations. Unstable people demonstrate extreme psychological inclinations in behavior, which leads to problems affecting not only them, but also those around them. However, usually these problems are not intractable. The idea of the functioning of a “nervous” firm is similar: firms of this kind face difficulties, but nonetheless operate, run by managers or groups of leaders with neurotic inclinations. If the company is centralized, and the dominant coalition has strong grip, the views, sentiment and actions of nervous managers, through managerial decisions, are implemented in organizations’ strategies, and ultimately affect its operations and organizational culture. The relationship between five psychological personality types which can be described as “nervous” and the type of organizational culture is revealed. The head’s propensity for excessive dramatization leads to the emergence of a charismatic organizational culture; suspicion of his character results in a paranoid one; propensity for depression defines an avoiding organizational culture; impartiality or indifference lead to politicized one; behind the bureaucratic organizational culture there is a formalist leader. In certain situations, it is not the personality of the leader that affects the organizational culture, but vice versa. The state of affairs in a company can make its head nervous. For example, the possible imminent bankruptcy of a company may make a relatively mentally healthy person get depressed. The impact of external factors can lead to the same result: the general volatile environment in a country causes a sense of insecurity about tomorrow, which may provoke depression and suspiciousness. There are diverse psychological personality types in a strong organization, but none of them prevails and are not extreme. Studying these extreme types of organizational culture contributes to understanding the organizational culture of a “healthy” company. Extreme types of organizational cultures differ from normal ones only in the degree of their extremes. Moreover, the processes leading to the emergence of “neurotic” organizations do not differ fundamentally from the processes leading to the emergence of less extreme companies: they are only more intensive and extreme.

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There are five types of “neurotic” organizations and corresponding types of managers with the same number of “healthy” organizations: – charismatic organizational culture versus self-sustaining – paranoid organizational culture versus trusting culture – avoiding organizational culture versus innovation-oriented culture – politicized organizational culture versus focused organizational culture – bureaucratic organizational culture versus creative one Organizational cultures that can be called “strong” or high-performance often start with strong leadership and vice versa. However, the strength of organizational culture is not limited only to the leadership; at least two other factors define it: engagement and commitment. Engagement determines the extent to which employees share the core values of the company. Commitment estimates employees’ loyalty to its ideals. The degree of engagement depends on the awareness and incentive reward system. If employees are to recognize the cultural values of an organization, they must be aware of them. The company should acquaint its employees, especially newcomers, with the corporate philosophy and the practices adopted in it. Furthermore, the system of career advancement, pay increase, recognition, and other rewards for employees who share the core values of the company contribute to acknowledging the ideals of the company. The degree of commitment is the result of a reward system. An employee should realize that his remuneration depends on whether he will work in compliance with practices adopted in this organization. If they are not encouraged or see that it is more beneficial to behave in ways that are not customary in an organization, their commitment to the core values of the organization fades.

Profiles of the Organizational Culture One of the most acclaimed models developed to describe organizational culture is the model proposed by T. Deal and A. Kennedy. They identified four culture profiles (process culture, tough guy macho culture, work-hard play-hard culture, bet-yourcompany culture), each characterized by a combination of two factors: the risk managers take and the type of feedback resulting from their decisions (Deal, Kennedy, 1982). Process is a culture characterized by the risks being low and the feedback being low. The focus is on the work process. The notion of ‘result’ is connected with personal responsibility, a system of fines and deductions, and a strict management evaluation. Employees make personal safety a priority and avoid liability in every way. This model entails unnecessary delays; numerous meetings to resolve irrelevant issues, heavy regulation, red tape. All work is busy and important. It is impossible to blame someone for anything. However, the result is zero.

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Tough guy macho culture is characterized by high risks and fast feedback. The main principle is winner-take-all – fierce internal competition, no-holdsbarred to achieve the goal, high efficiency and large-scale, but short-term results. This is a culture of corporate stars and bestsellers; in their eyes, however, the company is perceived solely as a source of income. Loyalty is quite low. Often competition for leadership puts the process of work on a back burner. Employees are divided into opposing groups striving to annoy competitors. In addition, not everyone can bear this style of work. As a result, high staff turnover, aggression and intrigue permeate the team. Work hard play hard culture is characterized by small risks and fast feedback. The main motivation: worked hard – played hard. The priorities are teamwork, the achievement of significant common “big victories”, and positive relations in the team. Corporate stars here are replaced by the heroes of the day, week, or month. Individuality is not a key factor, and those who are trying to stand out only disrupt the effectively established system. Such a model is dangerous, as it extends internal work patterns outwards. Trusting each other is one thing, but taking a word for completely untested people is another. And the situation “we trust you” can end up with serious financial losses. Bet-your-company culture is characterized by high risks and slow feedback. Companies with large and global projects adopt this type of culture. A project failing leads to the collapse of the whole company. Moreover, it is impossible to estimate in advance its successful completion. This format implies a high value of professional skills and competence, a high significance of the hierarchy, and internal communication between employees. This system has only one downside, but it cannot be neglected: the cost of a mistake is too high, which means that the whole work process requires perfect accuracy. This is similar to the first type (process culture), except that responsibility is avoided there, whilst in this type of culture everyone assumes this maximum responsibility. In most organizations, these types are combined: different divisions of large companies may correspond to different types.

Organizational Subcultures A subculture is a sum of values shared only by a minority of members within an organization. A company’s internal structural units, such as functional departments, product departments, or different hierarchical levels of management and certain groups of employees (for example, brigades), may have their own culture which consist of the core values of the dominant culture alongside additional values that are unique to each individual subculture. Therefore, when examining the organizational culture of a company, it is necessary either to analyze the firm as a

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whole, or consider the cultures of its various units, identify their common dominant features, and then combine them. Subcultures can weaken or undermine an organization should they be in conflict with the dominant culture and/or the overall objectives of the company. Thus, in some organizations, one often hears about conflicts between marketing and production departments, between different ethnic groups. However, in most cases, subcultures emerge in order to help members of a particular group to cope with day-to-day problems and, fundamentally, they are not toxic. What impact subcultures will have on the development of an organization depends to a large extent on how these subcultures are managed.

The Impact of the Organizational Culture on the Development of Human Capital The main sphere of influence of organizational cultures of any organization is its staff. A well-formed and well-established organizational culture, first of all, ensures its influence on employees, adjusting, if necessary, their behavior, the perception of the external environment, and, to some extent, personal life ideals in accordance with core values of the organization. Innovative high-tech manufacturing technologies have transformed the criteria for employee requirements. General requirements, regardless of the type of company and its organizational structure, are not limited to high levels of professionalism and necessary competence, but also include a high level of independence and responsibility for the work performed, leadership and participation in management decision making, and a results-oriented viewpoint. In 1961, the American economist T. Schultz proposed the term “human capital” and defined it as “knowledge and skills which play an important role in determining labor productivity.” In 1975, he added to the definition “the ability to absorb new knowledge and master new technologies” (Schultz, 1975). In the 21st century, the concept of “human capital” is used in a much broader sense, as an intensive productive factor in the development of the national economy and society, combining educated and qualified part of the labor force, competence and skills in managing technological processes, management of commercial and non-profit enterprises and organizations, and government institutions that ensure the effective and efficient economic performance. Human capital in all types of economic activity determines productivity and efficiency. The qualifications of specialists, their knowledge, skills and competence, leadership and results-oriented approach play a decisive role in the effective functioning and operation of institutions and organizations of all forms and types. A well-defined organizational culture can be a driving force for a company’s employees to develop their skills and competence and to gain new knowledge. In

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companies with a “healthy” organizational culture, the quantity and quality of innovations, inventions, and utility models are significantly higher than in companies with an “unhealthy culture”. An important element determining the potential an organizational culture has to encourage the development of human capital (primarily corporate capital) is its manifestation in developing a selection strategy and socialization of new employees.

One-Size-Fits-All and Unique Organizational Cultures One crucial point in appreciating the importance of organizational culture, in terms of effective corporate governance, is the study and evaluation of the unique and universal character of organizational culture. However, it is important to clarify that there is no one-size-fits-all organizational culture. Speaking about the universal character of organizational culture, one should understand the possibility of its development in all types of organizations, regardless of their size, structure, type of economic activity and the market in which the organization operates. At the same time, the flexibility of organizational cultures implies common criteria, features and rules to which elements of a company’s organizational culture should correspond, in order to secure the solid economic and financial standing and stability of a company. Thus, when developing the selection strategy and socialization, deciding the most valued features of the employee, the priority will be a strong corporate spirit, in addition to their professional competence, as well as the ability to work in a team and the desire to contribute to the common cause. Abiding by such rules will enable the development of a principle to establish a strong organization; this will determine an efficient algorithm for building an organization and management style, the content and form of advertising activity, interaction with the external environment, designing a product line, and so on. Having studied the organizational cultures of a number of successful American companies T. Peters and R. Waterman revealed some common attributes that, in their opinion, are iron laws in organizational structures (Peters, Waterman, 1986). 1. “A bias for action” – meaning the importance of decision making even in the face of the lack of information. Moreover, postponing decisions is tantamount to inaction. 2. close to the customer – meaning successful companies really listen to the voice of the customer. 3. autonomy and entrepreneurship – the organizational structure of the company provides for the division into “small” management groups, which, along with certain individuals, are granted with a certain degree of autonomy necessary for fostering creativity and risk.

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4. productivity through people – furthermore, the level of efficiency of an organization is measured through the satisfaction of its members. 5. hands-on, value driven – managers visit facilities and communicate with subordinates at their work sites. 6. stick to the knitting – the organization stays in businesses they know how to run. 7. Simple Form, Lean Staff – managers are focused on work performance, and keep corporate staffs small. 8. Simultaneous Loose-Tight Properties Employees share the company’s values and that unites the team whilst minimizing management intervention, which encourages employee innovation and responsibility. As the result, the rigid structure of shared cultural values makes it possible to create a flexible structure of managerial control. Seemingly, the most important universal element of organizational cultures of the largest Russian partially state-owned enterprises is their ideology, which unites the company’s goals, values, attitudes and beliefs. Proper formation of ideological messages will allow the company to flourish and overcome various negative environmental factors affecting its performance. Sharing universal elements, each organizational culture is unique. The unique character of the organizational cultures of different companies is similar to the uniqueness of each individual, endowed with certain spiritual and psychological characteristics. It is one-of-a-kind elements and factors of organizational culture, as well as the algorithm of its development, that form the uniqueness of each individual company. At the same time, the uniqueness of organizational cultures correlates with such a criterion as the inimitability of a company, expressed in the fact that the company A, trying to completely blindly copy the organizational culture of the highly successful company B, can never achieve comparable success by capturing the market share of the company B and edging it out. Areas of manifestating corporate identity can be behavioral characteristics of members of the organization, the perception of this organization by counterparts, or customers’ preferences for its products.

Organizational Culture of the Russian Business At present, in terms of cultural values, Russian companies appear to be extremely disparate. At least two large types of organizations can be distinguished, highly dissimilar in the characteristics of the internal environment: – organizations that have a Soviet-era past and which, accordingly, have passed the transformation in order to adapt to the new conditions – newly established firms, initially focused on activities in a market environment

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It is clear that in each type many subcultures can be distinguished, but the processes of formation of an organizational culture in these two cases will have their own fundamental features. The organizational culture of the Soviet period was often an important motivating factor in the difficult 1990s, when cultural values, despite their partial erosion and declared transformation, determined the dedication workers felt to idle plants, prevented escalation of destructive conflicts, and saved organizations as some socially significant entities. From scientists to workers, doctors to the military, many felt their involvement in noble work, without which the country would not survive. Despite virtually no wages and a sense of hopelessness, people continued to work and, perhaps, the values of the Soviet period were of some help to them. It is notable that, unlike Eastern Europe, the majority of ongoing concerns in Russia existed during the period of socialism. In this regard, the elements of the “framework” of the organizational culture of defense enterprises, which include the philosophy of the enterprise, its values, vision, mission and goals, united by the organization’s ideology, should be based on the functional role of these enterprises in the state system. Without challenging the truth of the thesis on the nonexistence of companies with exactly the same organizational cultures, the similarity of aspects of the formation – development and strengthening of defense enterprises, their common tasks, the unity of their external environment, the market, the legal framework in which defense companies operate – allows the defining of such a type of organizational culture as the organizational culture of defense enterprises and, possibly, of all state unitary enterprises. Based on the previously cited typology of organizational cultures by Deal and Kennedy (1982), the organizational culture of defense enterprises can be attributed to the “Bet-your-company culture” – high risks and slow feedback. New organizations that emerged in the country during the reform period had different cultural basises for their development. First, there was a particular founder, or, at least, a group of founders. The freedom of these people in terms of the establishment of organizations was almost absolute. Secondly, in contrast to their older counterparts, new enterprises pursued an aggressive policy aimed solely at making profit. The majority of nascent domestic enterprises had been characterized by the pursuit of enrichment as a basic cultural value. Finally, the emerging market relations in the country determined the situation in which, for a long time, the owners of the company fulfilled the responsibilities of managers at the same time. Recently, the situation has been beginning to change slowly, when a rather large cohort of effective managers evolved and discussions about civilized corporate management and corporate behavior have arisen. In the 1990s, Russian business evolved in an environment where the owner and the manager were the same person. The authority of such a person in the organization was absolute. The status of a person in such a company was determined by its

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proximity to the top management. People built a so-called centripetal career, trying to get into the “inner core” and thereby get the opportunity to somehow influence decisions. For example, the director’s secretary in such organizations, being often just a pretty girl, turned out to be much higher in status than older, more educated, or more qualified people than her. However, despite this seemingly absurd order, there is some merit. The culture of power in such young Russian organizations is aimed at reviving the role of a servant, since all workers in them are the servants of the leader; they must cater to their boss’ whims, and trample on their pride in terms of general equality allegedly existing between people.

Conclusion Organizational culture, like the culture of mankind, is formed in the process of joint activity of people in the organization. However, the main difference between organizational culture and culture in a general sense is that culture is formed spontaneously in the course of the development, life, and activity of mankind, whilst organizational culture is only an integral part of organizations which are developed and established by people and thus must also be created by means of conscious formation with subsequent management of its development. It should be noted that, in the most developed countries, firms today operate in an environment where they cannot ignore social demands and, consequently, do not specifically manage their organizational culture. This forces organizations to monitor their reputation in society, and also indicates a high level of civil responsibility of the population of industrialized countries. For Russia, the determining factor in the process of activity of both organizations and employees is the maximum profit; ethical principles and the possible implications of the activity are, as a rule, of marginal importance. Russian companies should shift away from focusing on gaining maximum profit with no regard for public interest.

References Cameron, K., Quinn, R., (2001), Diagnostika i izmenenie organizacionnoj kul’tury (Diagnosing and changing organizational culture). St. Petersburg: Piter. Сyert, R.M., March J.G. (1959). “A Behavioral Theory of Organizational Objectives” in M. Haire (ed.) Modern Organizational Theory. New York. Deal, T., Kennedy, A. (1982), Corporate Cultures: The Rites and Rituals of Corporate Life. AddisonWesley: Reading Mass. Dementieva, A.G., Sokolova, M.I., (2018), Strategicheskoe rukovodstvo global’nym biznesom (Strategic guidance of global business). Moscow: Magistr.

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Dementieva, A.G., Sokolova, M.I., (2017), Sovremennaja praktika upravlenija personalom v rossijskih i zarubezhnyh kompanijah (Modern practice of personnel management in Russian and foreign companies). Moscow: Magistr [In Russian]. Glisson, C. (2015). “The Role of Organizational Culture and Climate in Innovation and Effectiveness. Human Service Organizations: Management”, Leadership & Governance, 39(4), pp. 245–250. Hampton, David R. (1987). Organizational behavior and the practice of management. New York: Harper Collins. Handy, C. (2001), Vremja bezrassudstva (Age of Unreason). St. Petersburg: Piter. Hartnell, C. A., Ou, A. Y., & Kinicki, A. (2011). “Organizational culture and organizational effectiveness: a meta-analytic investigation of the competing values framework’s theoretical suppositions”. Journal of Applied Psychology, 96(4), 677. Peters, T., Waterman, R. (1986), V poiskah jeffektivnogo upravlenija (In search of excellence). Moscow: Progress. Schein, Ed., (2012), Organizacionnaja kul’tura i liderstvo (Organizational culture and leadership). St. Petersburg: Piter. Schultz, T. W. (1975), “The ability to deal with disequilibria”, Journal of Economic Literature, 13 (3), pp. 827–846. Zajcev, L.G., Sokolova, M.I. (2008), Organizacionnoe povedenie (Organizational behavior) Moscow: Magistr.

Elena Zavyalova, Zogbe Pepe Khorrine, Elena Ostrovskaya

20 Corporate Conflicts Introduction Corporate conflicts are an integral part of any market economy. This problem became acute in Russia in the 1990s when private corporations were established. Numerous raider attacks on businesses resulted from illegal property redistribution, as there was no well-defined legal framework. For the past 25 years, the situation has changed for the better and corporate conflicts nowadays are more civilized. Still, there is an opinion that corporate conflicts have a negative side, pose obstacles to running a business, and have a negative impact on the investment climate in the country. All in all, it is based on the business practice of the “turbulent 90s”. However, a clash of different interests does not always have disastrous and regressive consequences, as quite often a search for a compromise leads to progressive and steady development. For the past thirty years, many experts and scholars have been interested in solving corporate conflicts, whilst at the same time trying to understand the essence of disputes and differences between the parties involved. Corporate conflicts in organizations take many forms.

The Definition of “Corporate Conflict”, Its Causes, and the Main Forms There is no broad definition of “corporate conflict” in the existing legislation of the Russian Federation. Therefore, the researchers of this topic have made numerous attempts to find an adequate definition of this term. One of the definitions is given in the Corporate Governance Code, whichis based on the guidelines offered by the Organization for Economic Cooperation and Development. This definition is worth considering, remembering that Russia is aiming to join the OECD and is undertaking to harmonize its legislation. In particular, Chapter 10 of the Code specifies that a corporate conflict is any dispute or disagreement between a company’s body and its shareholder, arising in connection with shareholder’s participation in the company, or any dispute or disagreement between shareholders, if it affects the company’s interests.1 A broader definition is given by the Chamber of Commerce and Industry of the Russian Federation. It includes opinions of the main participants of the process, i.e.

1 http://www.msfofm.ru/library/239-russian-corporate-code. https://doi.org/10.1515/9783110695816-020

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of the business community. This definition states that a corporate conflict is a disagreement between a company’s shareholders (investors) and managers, connected with the infringement of shareholders’ rights. Such disagreements result, or may result, in lawsuits against the company, controlling shareholder or manager in connection with decisions taken by them, early termination of powers of management bodies, and a considerable change in shareholders’ composition. In the aforementioned definitions, a corporate conflict and a corporate dispute are equal. However, these terms are not always identical. The term “corporate conflict” has a general meaning and is an early stage of a dispute. A “corporate dispute” is a specific term and considered as the second stage of a corporate conflict, when the parties apply to courts. The definition of corporate disputes is given in Article 225.1 of the Arbitration Procedural Code of the Russian Federation of July 24, 2002 No.95-FZ. According to the Arbitration Procedural Code, these are disputes connected with setting up, running, or participating in a legal entity, which is in turn a commercial organization, as well as in a non-profit partnership, association (union) of commercial organizations, other non-profit organization that unites commercial organizations and (or) self-employed entrepreneurs, and a non-profit organization that has a status of selfregulatory organization, in accordance with Federal law.2 Thus, from a legal point of view, a dispute is a disagreement (conflict) that is resolved in court. At the same time, it is important to note that modern practice provides for the possibility of resolving corporate conflicts with the consent of the parties and without the need to appeal to courts. Corporate conflicts can be divided into internal and external conflicts. Internal conflicts include conflicts between shareholders, between shareholders and management bodies of the company, or within the company as a whole. External conflicts include conflicts between the company and third parties (for example, raiders). From a legal point of view, the following types of corporate conflicts can be identified that are described in detail in D.I. Dedov’s work “Conflict of Interests” (Dedov, 2004): termination of share ownership rights violation of the rights of shareholders certified by shares violation of the interests of the corporation (company)

The following economic classification of types of conflicts can also be given: 1. acquisition 2. conflicts regarding payment of dividends

2 http://www.consultant.ru/documents/cons_doc_LAW_37800/.

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3. conflicts with management bodies 4. conflicts aimed at undermining the competitiveness of the organization (company) 5. greenmail, etc3 Speaking about corporate conflicts, it is necessary to consider the main reasons for their occurrence in detail. In general, it seems that they can be roughly divided into four large groups. First of all, it is necessary to note the imperfection of the current legislation regulating relations in the broadest sphere of business and particularly joint-stock companies. In terms of time, the development of corporate relations in modern Russia began relatively recently; it is quite young and requires constant adjustment to the emerging realities. At the same time, a lot has been done in this direction over the last quarter of the century. Secondly, corporate conflicts are often caused by various violations of existing legislation, or the desire parties have to circumvent the law and existing legal norms. The third group includes the conflict of interests of corporate relations participants. As a rule, these are conflicts between minority and majority shareholders regarding violation of their property interests. Finally, another cause of conflict may be hostility towards the official concerned.

Internal Conflicts and Their Resolution An analysis should begin with internal corporate disputes. The most common of these are conflicts between minority and majority shareholders. The essence of contradictions is that, despite being equal participants of corporate relations formally, they are in an unequal position in terms of making key decisions on the issues of the company’s development. When discussing controversial issues, parties actively defend their interests. Only on the part of the former does it looks like “greenmail”, and on the part of the latter as an abuse of rights. Such corporate conflicts must be considered in detail. Minority shareholders are defined as owners of an insignificant stake in the company, with no opportunity to actively influence management decisions. There is no official definition of “minority shareholder” in Russian legislation. At the same time, this term is actively used in the documents of executive and judicial authorities. They also use such synonyms as “small shareholder”, “owners (proprietors) of non-controlling stakes”, “owners of a small number of shares”.

3 http://lawbook.online/hozyaystvennoe-pravo-rossii-kniga/klassifikatsiya-korporativnyihkonfliktov-13348.html.

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Being a “weak party” in corporate relations and in need of protection, minority shareholders also have certain rights enshrined in law. In particular, their rights are set out in articles 51 and 55 of Federal Law No. 208-FZ of 26 December 1995 “On Joint-Stock Companies”. For example, owners of at least 10% of voting shares have the right to call an extraordinary general meeting, and owners of at least 1% of the shares have the right to request the list of persons entitled to participate in the general meeting of shareholders for familiarization. According to the same law, minority shareholders have the right to demand the controlling stake in the shares from the owner, at a price not lower than that at which they were acquired by the controlling shareholder within the 6–12 months preceding the buyback.4 In fact, minority shareholders are deprived of the opportunity to influence the decisions made by the General Meeting. In principle, they may not even be aware of the date and agenda of the general meeting, if there were no serious violations or losses in the company’s activities during this period. It should be understood that the main purpose of small shareholders is not to make decisions hypothetically, but to receive appropriate dividends. Decisions about their payment and size are taken at a general meeting, where the voice of minority shareholders is not so important. Thus, they are not able to influence the distribution of net profit (Kondratiev, Zavyalova, 2014). Minority shareholders’ rights may also be violated when decisions on a jointstock company are made. As a rule, this is a failure to notify or to give proper notice of the meeting, or failure to provide full information about the meeting on the issue of reorganization. For majority shareholders it is important to prevent violation of the current legislation and the charter of the company itself – otherwise decisions made in the meeting may be invalidated. In addition to the above violations, they may also include the absence of a quorum for holding the meeting and the absence of the majority of votes required for the adoption of the resolution. As noted above, the rights of small shareholders may be violated in the repurchase of their shares. In accordance with the law, shares should be repurchased at a price determined by the Board of Directors (Supervisory Board), but not lower than the market value determined by an independent appraiser. The basis for abuse is the underestimation by the market value appraiser of the shares, with a view to their subsequent redemption in the interests of majority shareholders and large investors. As a rule, it is very difficult to prove intent in the actions of appraisers and controlling shareholders. At the same time, minority shareholders have developed their own tactics for fighting against owners of large and controlling stakes, called “greenmail”. A clear legal definition of this term is not developed. In practice, this means that minority shareholders abuse their corporate rights in order to obtain property or non-property

4 http://www.consultant.ru/documents/cons_doc_LAW_8743/.

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benefits. In the West, the term “greenmail” means the procedure of buying additional shares in order to instigate a threat of hostile takeover and the possible buyback of the company’s shares at an inflated price. In cases like these, the actions of a minority shareholder are in fact legal in nature, but are a form of abuse of power. Article 10 of the Civil Code of the Russian Federation, however, deals with the abuse of rights in a rather broad way. Therefore, when considering cases of abuse of rights, including greenmail, much depends on the qualification or position of a particular judge. Even in similar cases, contradictory decisions may be taken depending on the situation. It should be recognized that, in modern practice, greenmail encompasses a much wider range of actions that hindering or hampering the normal conduct of public affairs. There are other ways in which a company’s performance can be hindered. Minority shareholders may request a large amount of materials and copies of documents they need, or they believe they need to know. These requirements may be repeated. Such actions distract the company’s employees from performing other duties and create difficulties in carrying out normal economic activities. Many internal documents are confidential or relate to commercial secrets. When small shareholders request them, their real purpose is not always clear. Nevertheless, refusing to issue a full or partial set of the requested documents may lead to the minority shareholders’ claims being considered in court, which again does not contribute to the company’s normal operation and affects its reputation. In principle, the Corporate Governance Code (para. 6.3) recommends that the provision of requested information should be equally accessible and easy to obtain and should not create any undue difficulties. However, given the advisory nature of the Code and the fact that these provisions are not enshrined in existing legislation in practice, this is rarely a serious obstacle for “greenmailers”. Shareholders owning at least 10% of the voting shares may repeatedly request the convening of an extraordinary meeting in order to resolve issues that have already been considered for resolution. In this case, the aim is that the extraordinary meeting using the old agenda will not convene a quorum. The absence of a quorum does not prevent the repeated application for convening an extraordinary meeting. In general, the fight against greenmailers does not exclude the possibility of criminalizing this act under the Criminal Code of the Russian Federation. However, due to the absence of a legislative definition of this rather vague concept, as well as taking into account the fact that the country’s leadership is pursuing a policy of mitigation of penalties or decriminalization of a number of economic crimes, criminal prosecution as a way to combat corporate conflicts and disputes is unlikely to be justified and expedient. As an example of confrontation between minority and majority shareholders, the notorious story of how Mosenergosbyt’s (MES) minority shareholders faced forced buyout can be cited. At the beginning of September 2017, Inter RAO Holding, as the main shareholder, announced that it had the right to forcibly repurchase

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shares from minority shareholders. At the same time, the minority shareholders unequivocally objected, accusing the major shareholders of bypassing the law. The conflict unfolded over several years, since Inter RAO received a controlling stake in Mosenergosbyt as part of the asset swap and sent a voluntary offer to minority shareholders to purchase their shares. Collecting more than 90% of the shares was problematic, as there was low concentration of share capital and there were 16,000 shareholders, and the largest minority shareholders (about 1.5% of all shares) considered the offered price to be too low so did not sell their stakes. At that time, Inter RAO decided to increase its stake in MES by issuing additional shares via closed subscription. The largest minority shareholders, fearing dilution of their shares, could block this issue, as the majority shareholders, as interested parties, had no right to vote under the law on joint-stock companies. However, the day before the shareholders’ meeting, 7.78% of the shares were transferred to a third party company for trust management, which voted as a minority shareholder and provided a positive solution to the issue. As a result, the minority shareholders, considering that the voting was conducted in violation of the law, sent a request to the Central Bank. In turn, the Central Bank supported the minority shareholders and noted that the transaction could be declared invalid and the shareholders could appeal to the court, which was done. On the other hand, the position of the majority shareholders is that large minority shareholders increased their stake in the company within the framework of the additional issue, and now, with the help of blackmail and greenmail, they justify a higher price for subsequent sale. The issue has not been resolved as of yet; however, the share of majority shareholders has reached 95% so far.5 This example once again proves that relations between minority and majority shareholders are never cloudless in any country. Each party pursues its own goals, which coincide or diverge at different stages. In the first case, this will benefit the development of the company, and in the second case, it may create certain difficulties or lead to the termination of the activities. Objectively, majority shareholders are more thoroughly protected by law, have more rights than minority shareholders, and bear the main responsibility for the development of the company. At the same time, any joint-stock company is a whole, single organism, and success depends on the unity of all shareholders, both large and small. The main focus should be on achieving and maintaining a balance of interests and civilized resolution of conflicts. As noted earlier, the basis for observing the balance of shareholder interests is set out in the Corporate Governance Code. Certain provisions are also contained in the charters of the companies. Mechanisms for judicial and pre-trial resolution of corporate conflicts have been created.

5 http://www.forbes.ru/kompanii/345089-energetika-kovalchuka-kak-minoritarii-mosenergosbytaboryutsya-s-inter-rao.

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Litigation procedures and grounds are set out in the Federal Law “On JointStock Companies”. Thus, decisions of the Board of Directors (Supervisory Board) or the executive body may be appealed by declaring them invalid on the grounds provided for by the said law, as well as in the absence of relevant instruction, if the decision adopted does not meet its requirements and requirements of other regulatory acts. Shareholders holding at least 1% of ordinary shares have the right to file a lawsuit for compensating losses caused to the company by their guilty actions or omissions (Clause 5, Article 71). Shareholders of the subsidiary company have the right to file a claim for compensating losses caused to their company through the fault of the main company (clause 3 of Article 6). In accordance with Article 173 of the Civil Code of the Russian Federation, they may bring lawsuits to invalidate transactions on the grounds provided by this article. A pre-trial settlement of corporate conflicts is the responsibility of a special corporate conflict settlement committee, established under the Board of Directors. In order to ensure the unbiased and balanced consideration of disputes, it is advisable to appoint independent directors – members of the Board of Directors and, in some cases, a mediator – to the Committee. If necessary, as well as the seriousness of a corporate conflict, the issue may be considered by the Board of Directors. Companies, as a rule, have other structures for settling specific problems in their sphere, which are not always related to corporate conflicts (for example, audit committees, remuneration committees). Pre-trial legislation does not contain requirements for mandatory compliance with pre-trial procedures. It is entrusted and depends on the will of the company itself. A requirement for pre-trial proceedings may be included in the charter or other internal documents. In instances where a common position in the course of pre-trial proceedings is not found, persons whose rights have been violated, in their opinion, are entitled to apply to the court. Regarding extrajudicial protection of shareholders’ rights, the Federal Financial Markets Service (FFMS) plays a key role here. In accordance with its powers, the Federal Financial Markets Service (FFMS): – controls the compliance of issuers, professional participants of the securities market, self-regulating organizations of professional participants of the securities market with the requirements of the Russian legislation on securities – ensures the disclosure of information on registered issues of securities, professional players and market regulation – establishes and defines the procedure for access to the initial public offering and circulation of securities in Russia – applies to the Arbitration Court with a claim for liquidation of the legal entity that violated the legislation and for application of appropriate sanctions to violators

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The FFMS prescriptions are obligatory for organizations and their officials, and individual entrepreneurs. The FFMS has the right to initiate the judicial process, also for the protection of the investors’ rights. The legislation also provides for the possibility of settling disputes with the participation of a mediator. These provisions are enshrined in Federal Law No. 193-FZ of June 27, 2010 “On Alternative Dispute Resolution Procedure with the Participation of a Mediator (Mediation Procedure)”. The arbitration court may postpone proceedings upon the request of the interested parties in case of their application to the mediator. When using the mediation procedure, corporate conflicts of any complexity may be considered, but are subject to the consent of both parties. Self-regulatory organizations (SROs), including self-regulating organizations of professional securities’ market participants, can also play an important role in protecting shareholder rights. Like mediators, self-regulating organizations are quite a young phenomenon. Their activity is regulated by the Federal Law “On SelfRegulatory Organizations” dated December 1, 2007, No. 315-FZ. In particular, SROs control the compliance of their members with the requirements of the legislation on protection of lawful interests of investors in the securities market. The advantage of self-regulating organizations is that they know their participants and their problems well, which allows them to quickly and effectively resolve the conflict. Self-regulatory organizations have the right to apply various sanctions to violators under the current legislation. Frequently, applying to SROs contributes to faster and more efficient resolution of corporate conflicts than when involving government agencies.

External Conflicts and Methods of Protection As noted above, corporate conflicts may be internal or external in nature, or may go beyond that; an analysis of the most common forms of external conflicts is the next step. These cases refer to “friendly” or “unfriendly” mergers and acquisitions, as well as corporate raids. These terms and concepts are borrowed from Western practice and realities. In Russia, they can be accepted as a business term, since the Russian legislation mainly uses the term “reorganization of a legal entity”. It should be noted that the terms of greenmail and corporate raidership are often identified, although in reality these terms are not synonymous. Actions of a greenmailer may be aimed at implementation or the threat of hostile takeover, but more often they are aimed at the repurchase of their shares at an inflated price. In addition, greenmail is a broader term than corporate raidership. In Western countries, raidership refers to actions in the process of the merger and/or acquisition of a company. Despite the fact that they may be unfriendly, the term “raidership” is not clearly negative. In Russia, however, “hostile takeovers”

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and “raidership” are unambiguously associated with criminal proceedings of the late 20th and early 21st century. While in foreign practice such acquisitions are a normal phenomenon since they are carried out within the framework of current legislation, in Russia these actions imply a criminal connotation. Raidership is mainly connected with the post-privatization redistribution of property, and the seizures themselves are often carried out not for the purpose of further development of production, but for the purpose of obtaining real estate, reorientation, or further resale of the company. The methods of raidership are well known and include the following actions: – withdrawal of property by falsifying information – the use of provisional measures in pending lawsuits – the emergence of parallel registers of shareholders – exerting pressure on company shareholders when buying shares – the formation of parallel management bodies As a rule, an illegal takeover is carried out over several stages. The first stage is the information stage, where information is collected and analyzed about the company itself, its shareholders, conflicts and the balance of power in the company, etc. At the second, preparatory, stage, on the basis of the received information, documents can be forged, and lawsuits are prepared to make the actions of the raider “lawful”, whislt agreements with the judiciary are provided. At the final stage, the seizure of the object itself takes place in the form of mass purchase of shares (mainly from minority shareholders), the seizure of premises by force with the use of its private security companies or law enforcement agencies, the seizure of the company’s documentation, and seals and expulsions of former owners. It cannot be said that there is no protection against hostile takeovers. Protective measures can be both preventive and legal in nature, in the absence of obvious violations in the activities the administration or owners of the organization undertake, subject to raider seizure. Preventive measures consist of providing a whole range of measures. There is the need for constantly monitoring the situation around the organization, whilst analysing emerging and developing corporate conflicts that may lead to raider seizure. Special attention should be paid to the signals related to attempts by unknown persons to obtain information about the company’s real estate through the Unified State Register of Property or otherwise. Signs of possible raider seizure may be indicated by the intensification of minority shareholders’ activities and their demand for a large volume of assorted documents. In preparation for any alarms, the possibility of forming a consolidated block of shares (purchase of shares by majority shareholders from minority shareholders), as well as the use of cross-shareholding schemes, can be considered as a preventive measure.

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If the main purpose of a raider seizure may be to seize immovable property, it is advisable to segregate it and transfer it into trust management as a preventive protective measure. These issues are regulated by the relevant articles of the Civil Code of the Russian Federation. If a company has not paid sufficient attention to preventive measures, and raidership has already begun, it is necessary to take urgent action. They include voluntarily blocking shares in personal accounts. Additional issue of company shares may also be used as a protective measure. At the same time, the percentage of raiders’ shares is diluted to an insignificant extent. The additional issue is usually distributed among friendly organizations. The main problem is the need to convene a general meeting at which shareholders should decide on an additional issue. However, if a raider seizure has already begun, it can be quite problematic to convene a meeting. Protection against raidership must be carried out in court. In practice, however, everything is not so simple. As noted earlier, when resolving corporate conflicts, much depends on the decision of a particular judge. It depends both on the imperfection of the legislation and on the possible interests the judge may have. Illegal decisions can be made both on the basis of the court knowingly and incorrectly applying the norms of the current law, and on the basis of documents being falsified by a raider. Often, during the hearing, judges impose restrictive security measures on property, which hinders normal economic activity and plays into the hands of raiders. Much also depends on the position of the prosecutor’s office, which supervises and monitors the validity of procedural decisions in cases related to raider seizures. Overall, it appears that a regulatory framework has been established to combat this negative phenomenon. The corresponding articles are available in the Code of the Russian Federation on Administrative Offences (art. 15.22) and the Criminal Code of the Russian Federation (art. 170.1, art. 185.5, 285.3). At the same time, life does not stand still, and the opposing sides try to use all available methods to achieve their goals.

Conclusion In real life, it is rather difficult to draw a distinction between different types of corporate conflicts. Often attempts at unfriendly takeovers are made at the “hands” of minority shareholders. Conversely, tough confrontation within a company makes it vulnerable to third parties. In any case, the most effective model of conduct within a company is to identify and prevent potential conflicts in a timely manner based on the best possible consideration of the interests of all parties.

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References Dedov D.I. (2004), Konflikt interesov (Conflict of Interests). –Moscow: Wolters Kluwer. Dementieva A.G., Zagrebel’naya N.S. (2015), “Rossijskij korporativnyj sektor: sovremennoe sostoyanie i perspektivy razvitiya” (“Russian Corporate sector: current state of affairs and development prospects”), Pravo i upravlenie. XXI vek. № 4. s. 67–75. Dementieva, A.G. (2016), Korporativnoe upravlenie: uchebnik (Corporate Governance: textbook). Moscow: Magistr. Zavyalova E. B., Kondratiev V.B. et al (2014) “Korporativnoe upravlenie kak faktor povysheniya investicionnoj privlekatel’nosti” (“Corporate Governance as a Factor of Increasing Investment Attractiveness.”). E. B. Zavyalova, V.B. Kondratiev (eds.) Corporate Governance in Russia: a collective monograph. Moscow: MGIMO-University. http://www.consultant.ru/documents/cons_doc_LAW_37800/ http://www.consultant.ru/documents/cons_doc_LAW_8743/ http://www.forbes.ru/kompanii/345089-energetika-kovalchuka-kak-minoritarii-mosenergosbytaboryutsya-s-inter-rao http://www.msfofm.ru/library/239-russian-corporate-code http://lawbook.online/hozyaystvennoe-pravo-rossii-kniga/klassifikatsiya-korporativnyihkonfliktov-13348.html

Marie Sokolova, Marianne Nepoklonova

21 Russian Companies: Talent Management at the Top Introduction The issue of leadership is becoming more and more popular every day all over the globe. This tendency can be attributed to the fact that, today, an ever-increasing number of companies are coming to realize that their effectiveness and success depends largely on their leadership potential. A “Classical” functional approach, which analyzes strategy, organization and operational activities as factors which define the company’s success, is adapted, taking into account the role of a leader in achieving goals. When appointing a manager, each company faces the same problems, such as where to find people who are able to choose the right course of transformations and attain achievements of goals, based on their knowledge and leadership skills. In the 1930s, Court Levin (Levin & Lippit, 1938) attempted to devise three types of leadership depending on the priorities of a leader: either the priority is people or the work itself. At the end of 1940s Stogdill attempted to formulate the specific features of a leader (Stogdill, 1974); however, he failed to make an ideal model, as leadership skills alone are not what makes a leader. In the 21st century, the number of papers on leadership didn’t decrease but, on the contrary, increased, as this phenomenon still remains an unexplored spot. Understanding the nature of leadership may hold many different surprises, and more importantly, all companies are in need of effective leaders. Psycological aspects of leadership are analyzed in the works of Yan Malfeit, Melina Costi and John Baldoni (Baldoni, 2014). John P. Cotter (Cotter, 1997) analyzed the path to success taken by the prominent Japanese manager Matsushita, whereas Steven P. Covi (Covi, 2019), while analyzing lives of successful leaders, managed to invent seven skills of highly effective leaders. In his works, John Maxwell (Maxwell, 2013) outlined a frame of requirements to the set of basic attainments, which are integral for modern leaders. Studies devoted to the national specifics of leadership are of particular interest. “Russian-style leadership” by V. Nikonov is one of such works (Nikonov, 2017). The material of the following chapter is based on analyses of information about problems of leadership, as well as research by the author.

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Methododology The study of problems facing leadership in modern companies is based on methods such as analysis, synthesis, analogy, and multi-faceted approach methods: examination, description, gauging, surveying, colloquy, experimentingand modeling. The basis for the experiment conducted about leadership phenomena, as well as related issues, is the dialectic method, which in turn is based on the following principles: – taking into account the basic laws of dialectics – relying on philosophical categories, when describing events – treating the object of the study as a part of objective reality – using a systematic approach when describing facts and phenomena related to the object of research – testing newly obtained knowledge on practice The aforementioned principles and methods were applied in the process of writing this chapter. It is scientifically proven that the formation of personality and characteristics (including leadership) is connected with the process of an individual’s socialization. As a rule, leadership qualities are not a part of the genetic code of an individual, but it is still possible to develop the personal traits that are naturally inherent in leaders. When developing the leadership qualities of top managers, it is important to consider such factors as channels of power at a company, theories, and approaches to studying ‘leadership’, charisma of a manager, and others.

Channels of Power It has been scientifically proven that personality development and related qualities (including leadership) are associated with the process of an individual’s socialization. Generally, leadership qualities are not included in the genetic code of any individual. It is possible to develop several character traits naturally inherent to leaders. When forming managerial leadership qualities, it is necessary to take into account factors such as the applicable channels of power in the organization, theories and approaches to the study of the phenomenon of “leadership”, managers’ level of charisma, and a number of other aspects. Differences in understanding leadership and management can be attributed to their connection with the concept of ‘power’. Experts single out two types of power in organizations: power-empowerment, which is based on official position; and power-authority, which appears as a result of personal qualities. Leadership, on the other hand, is formed on the basis of power-authority, where relations between leaders and subordinates are built on the principle of good will.

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What is Power? What Definition can be Given to This Concept? The simplest definition might be that “Power is the ability to do work at one’s discretion”. Power exists and manifests itself through a certain system of communication, which is called the channels of power. These include: 1. Power of compulsion. This is inciting people to work against their will. 2. Power of influence. This interaction between the leader and influential persons gives them an indirect power. 3. Power of competence. The leader, if he is professionally trained, is empowered to act as an expert and “judge” on many production problems. Subordinates perceive this as an overbearing phenomenon. 4. Power of information. Employees are constantly in need of information. The leader provides specific people with access to information. There is a manifestation of power: the type of information people have is reflected in their behavior. 5. Power of occupational status. The higher job status the leader has, the higher his degree of influence on people is. 6. Power of authority. A manager who is in good standing with his subordinates exercises influence on them without showing his authority. The subordinates obey the competent leader without protest and sometimes do so eagerly. 7. Power to reward. People easily obey the one who has the right and opportunity to reward and reprieve. A person using only one channel of power is destined for failure. Combining two or more channels, based on competence and authority, will allow the person to be not just a manager but also a leader. Despite the aforementioned differences, there are some common features between such definitions as “management” and “leadership”, and “manager” and “leader”. Leadership is often considered a crucial and practically necessary characteristic of a modern manager. A successful manager should have leadership potential and leadership skills, owing to which he manages people on an interpersonal level and increases the efficiency of interactions between the manager and his employees in a rapidly changing competitive world.

Different Approaches to Studying Leadership Personal approach: It is common knowledge that leaders are active, are usually very sociable, and have a knack for conviction. These observations form the basis of the view that the personalities of effective leaders and non-leaders differ significantly. Personal leadership theories are based on this idea.

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In process of different studies (Stogdill, 1974), leadership characteristics such as age, height, intelligence, academic achievement, capacity for logical judgment, perception, and several others are all recognized as key to successful leadership. The research was conducted in various conditions and alternate environments: military units, business firms, student organizations, primary schools, and universities. This research has been conducted in different conditions and in different environments: military units, business firms, student organizations, primary schools, and universities. They led to a quite a disappointing conclusion: there is no specific feature that, by all accounts, was inherent in well-known leaders, and the aforementioned feature did not correlate with leadership in the studied situations. There are several reasons for such a result. First of all, the fact that a person has the specific features of a leader is not an adequate condition for the acquisition of leadership positions and successful functioning in this capacity. A person should want to receive the work of a manager and should want to be effective. In addition, personal features should not be evaluated separately, but should be evaluated only via interaction with other factors. The second reason for the aforementioned issue is that these studies led to very controversial results, and are tightly connected with the fact that they had been carried out in numerous different situations. Traits might influence the effectiveness of activities in one particular situation, but might not have any impact on it in a different situation. The third reason is the tendency of researchers to focus their search on more specific features rather than on general characteristics. After a thorough analysis of several hundred personal traits which leaders should posess, scientists came to the conclusion that if certain traits were grouped into the enlarged classes of factors, the differences between effective and ineffective leaders could be identified. Behavioral approach: The behavioral approach of the study of leadership implies trying to associate what a leader does with his performance, while a personal approach focuses on who the leader is. How many times have they punished their employees? How often does a leader communicate with their employees? There are two types of behavior to which much attention is paid in the literature on these problems regarding decision-making behavior and behavior aimed at the problem solution and the organization of the intragroup interactions (Levin & Lippit, 1938). The behavior of the leader in decision-making can be subcategorised into the following: autocratic leadership (autocratic); leadership, allowing the participation (open, democratic) and nominal leadership (laissez-faire). In the case of the nominal leadership, managers allow groups to have complete autonomy. They are rarely controlled directly, thus giving group members the opportunity to make many tactical decisions on their own. In this approach, subordinates set their own goals and work on achieving them without any guidance from the management.

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Research has shown that effective groups had both oppressive and participatory leaders. Enabling participation is related to a higher level of satisfaction amongst subordinates, as subordinates of such leaders are less resistant to innovation and demonstrate higher corporate awareness than those who work from under the leadership of oppressive leaders. The nominal style has not been studied yet as thoroughly as despotic and democratic leadership, but the results show that the satisfaction of subordinates and the quality of their functioning with the nominal style are lower than with the resolution approach, but higher than with the first two approaches. One of the weaknesses of this leadership study approach is that situational differences are neglected. In some situations, one-sided decisions could be more effective than an open decision-making process. If so, how can one find out which approach should bring the best results with the greatest probability? Behavior aimed at the achievement of goals and the organization of intra-group interaction is characterize by two aspects: consideration of the opinions of subordinates, and the creation of adaptive structures. Process approach: Personal and behavioral approaches focus mainly on the leader – their role or their actions. Some newly developed theories try to explain the “processes” during which relationships develop between leaders and subordinates. One of these theories is called the theory of ranforming (transforming) leadership; the other is called the theory of vertical pairing.

The Theory of Evolving Leadership Characterizing the most charismatic features of leaders may turn out to be especially important in transforming traditional ways of leadership in an organization to adapt to the changes taking place. It is the process of change that has become the object of study in the theory of evolving leadership. The theory of evolving leadership is an attempt to explain how leaders develop and improve the loyalty of their subordinates. Under this approach, transforming leaders are the opposite of interacting (transactional) leaders. In leaderships where people interact closely, both leader and subordinate are considered as agents clinching a deal, bargaining in order to maximize the utility gained from the position they occupy. The motivation for an employee to obey their leader is a personal interest, provided that a leader can reward him or her in some way and it is valuable enough for an employee in economic and psychological terms. Evolving leadership, as compared to interacting leadership, deals with the leader’s influence on the values of their subordinates, their self-esteem, trust, and confidence. The influence of an interacting leader is based on feedback, but it differs significantly from evolving leadership. Interacting leadership operates within the

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context of subordinates’ personal interests, while transforming leadership aims to change this context. The influence of an evolving leader lies in their ability to inspire and raise the level of consciousness among subordinates, appealing to their highest ideals and values. The concept of evolving leadership raises some interesting questions. Firstly, giving priority to the subordinate’s obedience to the leader rather than the quality of the organization’s functioning, problems arise when the interests of the leader and large owners (shareholders) differ. Some observations indicate that, in the absence of shareholders’ influence, performers manage the firm only in their own interests, and not in the interests of the owners. Managers can define the directions of the firm’s development, so they will most likely raise the risk of owners rather than maximize their profits, which means that an evolving leader manages the company inefficiently for shareholders. Secondly, the question is raised of whether it is possible to create a type of transforming leadership. Results of certain studies suggest that the possibility of learning the charismatic style of leadership exists.

The Theory of Vertical Pairing The theory of vertical pairing is based on an evaluation of the relationship between a leader and his or her subordinate. The given theory asserts that leaders treat certain employees differently and the relationship that developed between them influences behavior of both sides. The evaluation of the relationship model “leader – group member,” which determines the leader’s style, is based on his answers to questions of a psychological test or is formed in accordance with the description of the leader provided by his subordinates. The theory of vertical pairing is based on the assumption that leadership can be described in terms of role-focused relations between managers and employees, who are part of the vertical feedback system in the organization.

Probabilistic Leadership Theories Probabilistic leadership theories attempt to systemically account for the interdependent relationship of situational aspects and the effectiveness of leadership. The most well-known situational models of leadership are the random leadership theory of Fidler, the Vruma-Yetona-Yago model, and the P. Hershey and K Blanchard model. The given theories attempt to determine how a leader or a manager’s behavior is related to his or her effectiveness in different circumstances. These leadership studies present a more specific outline of how a manager should function in different situations.

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Since the P. Hershey and K Blanchard model is widely used for training upperlevel management, it requires analysis. The Hershey and Blanchard model is based on two types of behavior: “taskoriented” and “relations-oriented.” These types of behavior are considered independent from each other: a leader can have a high degree of performance in both, a low degree of performance in both, or a high degree in one and a low in the other. In order for a leader to select the best combination of actions, he should consider how ready an employee is to follow his lead. That readiness is comprised of two aspects: the ability and desire to follow the leader. A leader should take into account the willingness of subordinates to follow him, in order to choose the best combination of behavior. Willingness is made up of two factors: the ability and the desire to follow the leader. Ability (readiness to work) includes general abilities at professional skills, and the knowledge and experience necessary to perform a particular job. Desire (psychological readiness) is the unity of confidence in the necessity and usefulness of work, in organizational and motivational aspiration. The readiness of subordinates is presented in four stages: lack of readiness, poorly expressed readiness, readiness of medium degree, high degree of readiness. The model involves the use of one of four leadership styles: instructing (indicating), support (convincing), attraction (participating) and delegation. The style of instruction is applied in the absence of subordinate capability to do this activity and in case of their unwillingness to act. Managers’ instructions mainly concern the technical side of their subordinates’ behavior. To ensure coherent group behavior, the head uses power and practices the method of coercion. As can be seen, in the actions of the head, elements of classical authoritarianism can be viewed to their full extent. The style of support is used in subtle cases of where subordinates are ready follow the leader. This style is aimed to give subordinates detailed information about the solution of the main task of the organization. Methods are used to convince, explain, and inform. The engaging style is practiced at an average level of readiness, when subordinates are able to carry out responsibility for a common task and are useful in the decision-making process. The delegation style comes into play with a high degree of willingness of subordinates to the case. The application of a particular leadership style is linked to a number of external factors. Any situational concept implies a rather elementary, albeit obligatory, procedure when choosing a leadership style: 1. to assess the task thoroughly and identify stages of intense influence on subordinates 2. to check the readiness of the subordinates to perform tasks of this class 3. to identify the nature of motivational preferences of subordinates 4. to predict the behavior of subordinates when they are given a task

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In this regard, the presented model is a good case in point. An excessive emphasis on intuition, and putting regulatory prescriptions on the back burner, is a significant disadvantage of the model. In a managerial system they are known to occupy a sufficiently crucial place.

Manager’s Charisma Distinguishing leadership as an important organizational phenomenon, it cannot be helped but to mention the concept of “charisma”. The term “charisma” is used by researchers to indicate a leader’s ability to influence his followers due to the leader’s perception as a person possessing a set of special personal qualities and characteristics. In view of these particularities, followers are sure that leaders are able to introduce positive alterations in group and organization activities. As a result of this credence, followers of charismatic leaders demonstrate dedication and loyalty to performing the tasks set for them by the leader. Scientists believe that charismatic leaders have a strong influence on their followers, that they are perceived as competent professionals, and consequently that they have their followers’ confidence. Therefore, the influence of charisma develops in the perception of followers who perceive the leader’s charisma. Charisma can be determined not by the particularities of the leader and the followers’ perception of them, but by the relations that develop between leaders and followers. As a result of such a relationship, the latter delegate power to the leader. It is based on ideology and emotions. A charismatic leader inspires employees to innovate, and can make “breakthroughs” when gaining a leading position by the company. A charismatic leader can instill new values for team members, but this process cannot be compulsory – emphasizing the importance of individual values, the leader seeks to connect them with the group values. A charismatic leader easily unites people and creates effective teams. As a rule, his subordinates demonstrate a high level of loyalty and commitment. This kind of leader does not need to resort to additional material incentives, since his own personality is a strong enough motivational factor for his subordinates. In a group which is managed by a charismatic leader, priority is given not to external incentives (salary or prestige), but to internal motivation – the realization of personal needs in selfexpression, awareness of self-worth, recognition from the leader and team members. The charismatic leader reveals the best qualities of a person. The range of tasks he sets to do for his subordinates are difficult, but always feasible, and each member of the group feels he is competent and believes that he is able to overcome difficulties. This belief directly affects initiatives, individual interests of the employee, and their persistence when overcoming obstacles. Individual belief in his or her own strength is based on the collective expectation of high performance from each employee and from

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all members of the workforce. Moreover, such a leader can often be authoritarian and be distinguished by a rigid management style. Charismatic leaders often succeed in breaking through and mobilizing their subordinates in crisis or force majeure situations. For example, the decision of the appointment of EM Primakov, Prime Minister of the Government of the Russian Federation, was completely reasonable and helped to save the economy, which was facing a severe economic slump, whilst the country was on the verge of bankruptcy and collapse. The team of Primakov worked 18 hours a day, staying at the workplace, doing their utmost, remaining loyal to the leader. and unconditionally following all of his instructions. The main aim of every leader in any organization is to increase employee productivity. It follows that the creation of an organizational vision – setting goals and objectives, convincing group members why these goals are important within their organization, and (equally essentially for these members) taking responsibility for making decisions and for embodying strategic tasks – has become the most important challenge for a real leader. It is necessary to emphasize the leader’s desire to take responsibility for decisions. Meanwhile the majority of group members have a desire to shift the responsibility to a suitable candidate, who is the leader. The leader’s vision helps the staff to understand the essence and importance of their work duties. The task of the leader is to allocate the required information for the system from the general information flow. It helps the leader to encourage employees by engaging them in collaborative work on the implementation of the organization’s strategic objectives. By forming a vision, the leader forms a special world that includes values which are important to followers/employees. The leader has a strong impact on the performance of the organization by linking the success of the organization and the work of its employees. In other words, the leader regulates the different interests of group members and organizes joint actions of group members in order to achieve an overall positive result. Leaders know their employees well, and understand how they think and feel. Effective leaders find a balance between behavior focused on complete tasks and work with their subordinates, depending on the trust and the skillset of their followers/employees. The leader pays attention to their employees’ problems and helps to resolve them, provides constant feedback, supports their followers’ motivation/ambition, and extends the autonomy of group members through delegation of authority. Leaders practice actively the delegation of authority, giving their subordinates enhanced rights and opportunities in work. Thus, employees feel how important they are for their organization, and get satisfaction from the working process. In this way, the leader creates conditions where employees feel that they are useful and valuable for the organization. Today, employees’ active participation in organizational activities is a robust indicator of employees’ commitment and job satisfaction.

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Thus, the authority of the leader (recognized by their followers) is made up of their ability to unite the group members around achieving the goal of the group, to form/generate group values, or to defend the group’s interests and values at the level of inter-group interaction.

Conclusion The analysis of upper level management work in the largest Russian companies revealed qualities that allow a professional manager to become a successful leader. These qualities include strategic thinking and high creative potential, adaptability to a high-pressure environment and desire for professional development, an ethical approach (adhering to company’s traditions), participation and involvement in the affairs of the team colleagues, development of human capital, and a systemic approach to solving unusual problems. The given qualities incorporate multiple factors and form a model of an effective leader. Only a combination of all the qualities listed in the model will provide a synergy effect when making managerial decisions. Educational programs were developed based on the comprehensive model of a leader, and since 1997 there has been a Presidential management training program for certain sectors of national economy in which five thousand specialists trained annually. In 2018 during the first stage of the “Leaders of Russia” program (what the Presidential program is called now), more than 25,000 applications were submitted, of which 100 winners received grants to study (including leadership skills) and will be admitted to the personnel reserve of top management personnel in the Russian economy. However, Russian economy requires tens, if not hundreds, of thousands of qualified managers and leaders, whose knowledge and skills meet today’s requirements. Close attention to a person and his/her qualifications, on behalf of the government and employers, is entirely justified. The program assists in the professional and career development of young managers. Annually 300–400 graduates go on to work for federal and municipal authorities. The main economic outcomes of the management training program are the achievements of graduates after the completion of the program. The main economic results of the management training program are those effects that graduates of the program achieve after the completion of the program. The program not only increases the quality of human capital in Russian regions, but is an instrument of intensification of economic development in Russia. Summing up, it can be concluded that any top-manager can independently evaluate how his or her professional activity corresponds to the term “leadership”. If, in some aspects, requiring a creative approach is prevalent bureaucracy, everyone should remember that only the head is the guardian of order and development

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in an organization as a comprehensive whole. Only a leader predominantly ensures the implementation of corporate strategy, thereby providing its sustainable development in any situation. A leader, by his or her professional activity, ensures the successful and effective implementation of the organization’s strategic goals and objectives by supporting the organization’s sustainability of development.

References Antonakis, J. (2002), An Analysis of the Full-range Leadership Theory: The Way Forward. Amsterdam: JAI Press. Avolio, B.J., Yammarino, F.J. (2002), Transformational and Charismatic Leadership: The Road Ahead. New York: Elsevier. Baldoni, G. (2014), Lidirovat’ so smyslom (Meaningful Leadership). Moscow: Eksmo. Dementieva, A.G., Sokolova, M.I., (2018),“Chelovecheskij potencial – osnova jekonomicheskogo razvitija: sovremennyj podhod k podgotovke sovremennogo menedzhera” (“Human capital – a basis for economic development: a modern approach to train contemporary manager”), Bulletin of University of Russian Academy of Education, № 4, p. 89–93. Evtihov, O.V. (2012), “Social’no-psihologicheskaya model’ razvitiya liderskogo potenciala rukovoditelya” (“Social-Psychological Model of Leadership Potential Development of a Manager”), Psychopedagogy in Law-Enforcement Authorities, № 4 (51), p. 3–6. Ivankina, L.I. (2012), “Liderstvo kak mekhanizm institucionalizacii poryadka i razvitiya social’noj sistemy” (“Leadership as a mechanism of institutionalization of the order and development of social system”), Bulletin of Tomsk Polytechnic University, № 6(1), p. 178–182. Kotter, J.P. (1997), “Matsushita Leadership. The lessons of an outstanding businessman”, Moscow: Alpina publisher. Levin, R. and Lippit, R. (1938), “An Experimental Approach to the Study of Autocracy and Democracy”, Sociometry, Vol. 1 No.3/4, pp. 292–300. Maxwell, J. (2013), Five levels of leadership. Moscow: Poppuri. Mul’fejt, YAn, Kosti M. (2018) Vdohnovlyayushchij lider. Komanda. Smysly. EHnergiya (Inspring leader. Team. Meaningfullness. Energy) Moscow: Mann, Ivanov and Feber. Nikonov, V. (2017), Liderstvo po-russki (Leadership, the Russian way). Moscow: Eksmo. Sokolova, M.I. (2006), “Korporativnaya strategiya i korporativnoe upravlenie” (“Corporate strategy and corporate management”). Management of Corporate Finance, № 4 (16), p. 214–219 Sokolova, M.I., Dementieva, A.G. (2008), Upravlenie personalom Human Resource management, Moscow: Magistr. Covey, S.R. (2019), Seven Habits of Highly Effective People. Moscow: Alpina Publisher. Stogdill, R. (1974), Handbook of Leadership. A survey of theory and research. New York: The Free Press. Zajcev, L.G., Sokolova, M.I. (2012), Organizacionnoe povedenie (Organizational Behavior), Moscow: Magistr. Zelenkova, A.S. (2014), “Analiz liderstva v rossijskih kompaniyah”, (“An analysis of leadership in Russian companies”), Economics and management of innovation technologies, № 3. Part 1. [Electronic source]. URL: http://ekonomika.snauka.ru/2014/03/4575, (access date: 23.09.2018).

Christian Schopper

Conclusion: Reflections on the Current State of Russian Corporate Governance from a Capital Markets Perspective Operating a successful business in an environment such as Russia, which investors perceive today as being somewhere between an emerging and developed market economy, has always been a challenge: in the course of a massive transformation process – stretching over the last three decades – some of the components of what defines emerging markets, such as the absence of specialized intermediaries, regulatory systems, and contract-enforcing mechanisms, have meanwhile been established in Russia. Nevertheless, to succeed, even in today’s environment, corporates have to uniquely adapt their business and operative models to certain particularities, whilst retaining their core business propositions. One of the challenges in implementing any emerging markets-related adaptation strategy is frequently the lack of development, depth or – at times – sophistication of the banking and capital markets. Whilst Russia has, in this regards, progressed markedly over the last decades, its current status still leaves plenty of room for improvement. This refers not only to its stock exchanges and governmentappointed regulators, but also to other reliable intermediaries, such as credit-rating agencies, investment analysts, investment banks, or venture capital firms. Also, access to accurate information about companies cannot always be ensured. Eventually, can investors, especially from abroad, actually trust investees adhere to laws or agreements? Also, whilst nowadays strong private sector companies actually do exist across numerous market segments, in the meantime the government has either maintained or even reclaimed a dominant role in several of them, such as in financial services. As a matter of fact, investment professionals do take into account weak corporate governance as well as a poor legal environment; they are simply willing to pay less when considering investment propositions. This is especially valid in regards to emerging markets, or to put it another way: there is absolute consensus on the global buy-side that good corporate governance positively affects a company’s valuation. Naturally, such premium varies from market to market. The inconvenient and proven truth, however, is that the downside risk of poor governance is indeed formidable and it can easily result in discounts of somewhere around a third of an investee’s fundamental value. Therefore, it is not surprising that governance is always on the minds of global buy-side investors. Against this background, one should also take into account that in today’s globalised world investors have a wide range of choices to allocate capital: for

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instance, should investments be favored in environments with a more solid investor protection regardless of the governance standings of individual companies? Or, should investors consider corporate governance through the same lens, regardless of where an investment is located? Now, evidence suggests that corporate governance is especially important in countries with weaker investor protection. There, well-governed companies enjoy significant value premiums that can partially offset the negative impact of a poor institutional environment, which in turn suggests that the payoff associated with better governance is quite high. Consequently, firms in countries with weak investor protection can significantly improve their valuations by implementing better governance and upgrading their disclosures practices. This observation is of the utmost relevance for Russia, a country where investment decisions are far less influenced by macro-economic fundamentals but instead by ongoing concerns with regards to reliability and trust in its institutions. Also, the quite common view that Western standards of corporate governance – particularly the US and UK models of governance which put maximizing shareholder value at the core of a company’s mission – may not apply to emerging markets should be re-considered. This refers also to arguments such as that “things are different here”, with reference to extensive family or state-related ownership structures or different corporate cultures. They are frequently quoted as conditions that make developed country standards of corporate governance less of a priority. Curiosities remain, though: for example, Russian regulations as well as the Governance Code give boards extensive powers to perform their duty as shareholder representatives. However, in practice, real decision making can drift up, down or sideways. As a consequence, it can be a major challenge – especially for an independent director – to ensure that the board performs the function for which it is actually designed for; and, at the same time, failure to do so could only justify the assumption that the board was merely appointed for window-dressing purposes. On a global scale, emerging markets have responded to the current trend of activist shareholders incentivizing corporations to improve their governance structures and practices. In the aftermath of a cascade of financial crises, it has crystallized that publicly stated strategies mean little to investors if a company lacks disclosure, transparency, management accountability, and, ultimately, a strong commitment to shareholder value. One has to be mindful, though, that only a very small handful of Russia-dedicated fund managers can be regarded as activist shareholders. However, despite activist shareholders frequently receiving unfavorable press coverage in Russia, they are absolutely necessary for and critical to the governance ecosystem in Russia. Numerous factors contribute to what is deemed good corporate governance, whereby some of them, such as the relationship between the CEO and the chairman of the supervisory board, are, of course, difficult to quantify. Having said this, high-quality corporate governance commonly assesses the following parameters: ownership structures, shareholder rights, independence and responsibilities

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of the board and management, disclosures and auditing, responsibility towards the stakeholders. Accordingly, better firm-level corporate governance not only reduces agency costs, but also enhances an investor’s optimism in the firm’s future cash-flow and growth prospects. This, in turn, reduces the overall risk profile of the corporatation, consequently reducing the rate of return expected by the investors, leading to lower cost of equity capital to the firm. Likewise, a reduction in agency costs is likely to cause improved operating and investment performance of the better governed firms. The reduced cost of equity and the improved operating performance eventually enhance both the firm’s ability to access equity finance and the firm value. This eventually also accelerates the process of capital market development. The first challenge for an investor in a Russian corporate is to actually identify its ultimate owners: ideally, a company’s ownership structure is transparent, thereby providing adequate public information on the breakdown of shareholdings, the identification of substantial or majority holders, and the disclosure on director shareholdings, as well as cross and pyramid holdings, and management shareholdings. In Russia, however, shares owned by controlling stockowners are frequently registered with numerous, formally unaffiliated, offshore companies. Too often, too, minority shareholders have not been offered fair buyout terms in control acquisitions, whilst profit tax optimizations were undertaken at their expense. With regards to the corporate governance-related principle of accountability, foreign investors in Russia are also concerned with the cluster of takeover rules and regulations. As a matter of fact, Russian law does not generally prohibit acquisitions of significant stakes in public joint-stock companies. Therefore, naturally, there are a number of provisions addressing the procedure for an acquisition of a stake of more than 30% in public joint-stock companies. However, unlike in Western jurisdictions, there is hardly any specific regulation on defense strategies against hostile takeovers. A core parameter in assessing the corporate governance-related principle of independence is a firm’s ownership structure. In the Western world, firm ownership structures of publicly listed corporates are, in general, quite widely dispersed. In Russia, however, about two thirds of public company shares are closely held; hence, a principle source of friction is between majority and minority shareholders. In Western markets, on the other hand, it is therefore the agency problem which is the more common source of concern. This can therefore have interesting consequences; in a Russian company, the views of one or two individuals representing the majority owner will quite likely drive the overall attitude towards corporate governance. Therefore, directors representing a non-majority should be prepared to debate vigorously with them. It has to be said, though, that many majority owners have by now bought into the benefits of good governance, such as the correlation between good governance and higher valuations or the lower risk and better decision making from board diversity. On

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the other hand, the consequences of institutional investors exposed to firms whose majorities don’t buy into these ideas are in all likelihood lower share prices, if governance practices fall short of expectations. Having said this, convincing majority shareholders and company management of these basic realities can be a painful process. Although the presence of a larger or majority block holder is not necessarily a concern, to start with, a more widely spread ownership normally tends to be a more attractive investor proposition. It should be ensured, though, that no single shareholder or group of shareholders has privileged access to the business or excessive influence over the decisionmaking process. Such constellations, however, are rarely found in Russia. Instead, and in addition, despite the fact that one may only assume this, invisible groups and arrangements of holdings as well as shareholder agreements do frequently exist, allowing selected investor parties not only privileged information access but also exercising more influence. Evidence suggests that, in Russia in the 1990s, this high concentration of ownership caused numerous expropriations of minority shareholders by larger ones and consequently a massive transfer of wealth. This environment naturally resulted in low valuations of Russian companies. The following phase of political stability improved corporate governance practices and subsequently made such types of transfers expensive. This new environment consequently resulted in an upwards correction of market capitalizations of Russian firms. Also, crosslistings on Western stock exchanges, ownership structures with multiple large shareholders, independent block holding, and foreign ownership all helped to mitigate agency costs. Much of this dynamics has regrettably been lost, although a legacy, particularly amidst the enhanced engagement of foreign investors, seems to be the number of independent directors on boards, which, for major corporate, is fluctuating somewhere around the forty percent mark. The supervisory board is at the heart of the corporate-internal mechanism for resolving agency problems. This is because the board is primarily responsible for recruiting and monitoring the executive management to protect the interests of the shareholders and other stakeholders. Also, outside directors are expected to assume the essential governance role in relation to the welfare of corporate investors, especially non-controlling shareholders. The presence of outside directors should, therefore, ultimately improve the degree of corporate accountability and create a fair balance of power between the CEO and the board. Interestingly enough, though, it appears that board independence seems a rather low-level concern for emerging market investors, also as far as Russia is concerned. In exercising their influence, not least in appointing members to the supervisory board, shareholders should be allowed one vote per share: Corporates should therefore only have one class of shares. That means that all shareholders should also receive equal financial treatment, including the receipt of an equitable share of profits. With regards to Russia, at the moment we can observe lobbying towards limiting – or potentially even abandoning – the one-share one-vote principle as a

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basic rule protecting investors of public joint-stock companies. According to latest proposals, public joint-stock companies may be allowed to issue shares carrying super-rights, belonging to the founders of businesses, therefore ensuring the proper development of innovative companies. Of course, this could also have further repercussions for the voting structures of government-held entities, even if future privatizations may result in the government eventually owning less than the majority. The outcome of this ongoing initiative is being carefully observed abroad. As a matter of fact, Russia is known for persistent corporate governance problems, such as non-transparent ownership structures, transfer pricing within corporate groups, boards with limited de-facto power, and the tunneling of cash flows through related-party transactions by dominant shareholders. Nevertheless, over the years the overall level of investor protection and transparency has improved. Still, it is fair to ask why the level of implementation of the domestic Corporate Governance Code – also within larger publicly listed companies – still leaves a lot to be desired. Good corporate governance is not only a fundamental precondition for the long-term sustainability of a business; it is a prerequisite for the stability of capital markets, as well as sustainable growth. As a matter of fact, corporate governance affects every stage of a firm’s investment cycle and should provide a business with a framework to take risks to grow and create value. This requires access to funding, to subsequently enable the effective allocation of capital. Besides, it should also enhance the optimal allocation of resources. Despite the appetite of internationalcapital markets, (but not domestic markets) for Russian credit and equity being limited, corporates may seriously consider further enhancing corporate governance standards to be prepared for the moment when markets open up again.

Contributors Inna Andronova, Doctor of Economics, Associate Professor, Department of International Economic relations, Peoples’ Friendship University, Moscow, Russia Igor Belikov, PhD in Political Science, Director (CEO), Russian Institute of Directors, Moscow, Russia Yulia Bochkova, Senior Lecturer, Department of English Language №2, MGIMO University, Moscow, Russia Natalya Brovko, Doctor of Economic Sciences, Professor, Department of Economics, Kyrgyz-Russian Slavic University, Bishkek, Kyrgyzstan Alla Dementieva, Doctor of Economics, Professor, Gerchikova Department of Management, Marketing and External Economic Асtivity, MGIMO University, Moscow, Russia Olga Dubovskaya, PhD in Philology, Associate Professor, Department of English Language №2, MGIMO University, Moscow, Russia Maria Grineva, PhD in Pedagogics, Associate Professor, Department of English Language №2, MGIMO University, Moscow, Russia Olga Kandinskaia, Doctor, Assistant Professor of Finance and MSc Business Management Director, Cyprus International Institute of Management, Cyprus Farida Kardanova, Senior lecturer, Department of English Language №2, MGIMO University Zogbe Pepe Khorrine, PhD in Economic Sciences, Trainee of the Program “Economics of enterprises and markets”, University of Franche-Comte, Besançon, France James C. Leontiades, Doctor of Economics, Professor, Former Professor of Strategy and Academic Dean, CIIM Business School, Cyprus Diana Madiyarova, Doctor of Economics, Professor of Economics Department, L.N.Gumilyov Eurasian National University, Astana, Kazakhstan Konstantin Manuylov, PhD in Economics, Senior Lecturer, Department of International Finance, MGIMO University, Moscow, Russia Vladimir Milovidov, Doctor of Economics, Professor, Head of the Department Department of International Finance, MGIMO University, Moscow, Russia Marianne Nepoklonova, Senior lecturer, Department of English Language №2, MGIMO University, Moscow, Russia Ekaterina Nikitchanova, Deputy Director, Head of Expert Centre of Non-Commercial Partnership, Russian Institute of Directors, Moscow, Russia

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Raisa Nozdreva, Honored Scientist of Russian Federation, Phd in Economics, Professor Gerchikova Department of Management, Marketing and External Economic Асtivity, MGIMO University, Moscow, Russia Viktor Onuchak, Associate Professor, PhD in Economics, Department of Accounting, Statistics and Audit, MGIMO University, Moscow, Russia Elena Ostrovskaya, Senior Lecturer, Department of English Language № 2, MGIMO University, Moscow, Russia Irina Pervukhina, Senior Lecturer, MA (USA), Department of Business Foreign Languages, Ural State University of Economics, Ekaterinburg, Russia Asya Pshikhacheva, Senior lecturer, Department of English Language №2, MGIMO University, Moscow, Russia Lyudmila Zainullina, Lecturer, Department of English Language №2, MGIMO University, Moscow, Russia Christian Schopper, Dr, Founder of Corporate Finance Central Europe/CorpFinCE, Corporate Finance and Capital Markets Advisory across Russia, CIS and CEE, Member of Visiting Faculty of New Economic School, Moscow and University of Vienna, Austria Mitsuaki Shimaguchi, PhD in Economics, Professor, Keiyo University, Emeritus Professor, Keiyo Business School, Department of Management, Head Researcher, Japan Marketing Association, President, Tokyo, Japan Marie Sokolova, PhD in Economics, Professor, Department of Management, Marketing and Foreign Economic Activities, MGIMO University, Moscow, Russia Oksana Sokolovskaya, Senior Lecturer, Corporate Economics and Business Governance Department, Ural State University of Economics, Ekaterinburg, Russia Jae Sung Lee, President Intraros Co. LTD, Moscow, Russia Vasily Tkachev, PhD in Economics, Associate Professor, Department of International Finance, MGIMO University, Moscow, Russia Irina Tkachenko, Doctor of Economics, Professor, Head of Corporate Economics and Business Governance Department, Ural State University of Economics, Ekaterinburg, Russia Igor Turuyev, Doctor of Economics, Professor, Department of Bank, Money Circulation and Credit, MGIMO University, Moscow, Russia Vladimir Verbitskiy, NP “Russian Institute of Directors (RID)”, Moscow, Russia

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Sergey Vodolagin, PhD in Law, Associate Professor, Professor S.N. Lebedev Department of Private International and Civil Law, MGIMO University, Moscow, Russia Elena Zavyalova, PhD, Assistant Professor, Head of the Department of Economic Policy and PublicPrivate Partnership, MGIMO University, Moscow, Russia Ulugbek S. Ziyadullaev, PhD in Economics, Senior Lecturer, Tashkent State University of Economics, Tashkent, Uzbekistan

Index Ability 241 Administrative offenses 60 –The Agency of Political and Economic Communication 204 Agency theory 5, 14, 16 An aggressive-defensive type of organizational culture 212 Anglo-Saxon model 177 Anti-corruption 65 Arbitration Procedural Code of the Russian Federation 224 Artificial intelligence 39, 40 Attraction 241 Balanced Scorecard 156 Balance of payments 87 Bankruptcy Law 57 Bank of Russia 113 Basic board duties 116 Behavioral approach 238 Bet-your-company culture 215 Blockchain 36–38 Board committees 116 Board of Directors 6, 26, 29, 46, 95, 97, 146 Board evaluation 118 Board members 46 Board practices 114 Boards of Directors 139, 140 Bovespa 174 Business development 48 Business plans 132 Business relevance 120 Business in society 177 Centripetal career 220 CEOs of Russian companies 147 Chamber of Commerce and Industry of the Russian Federation 223 Channels of power 236, 237 Charisma 242 –A charismatic leader 242 Charity 173 Civilized corporate management 219 Code compliance reviews 116

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Codes of corporate conduct 47 –The Code of the Russian Federation on Administrative Offences 232 Cognitive model 118 Collaborative 34, 35, 38 Command control system 132 Concentration of ownership 250 Concentration of ownership and control 92 Concept of “social care” 180 –A constructive type of culture 212 Controlling shareholders 105, 107, 108, 114 Controlling shareholders stay 104 Coporate governance practices 205 Corporate behavior 219 Corporate citizenship 13, 18, 19 Corporate conflict 223 Corporate conflict settlement committee 229 Corporate dispute 224 Corporate governance 3–6, 10, 13, 15, 16, 19–21, 23, 45, 57, 65, 70, 94, 99, 150, 189, 217, 247–249 Corporate governance 2.0 33, 39 Corporate Governance Code 66, 113, 226 Corporate Governance Index 203 Corporate governance quality 28 Corporate law 66 Corporate management 45, 49, 166 Corporate management system 161 Corporate policies 50 Corporate raidership 230 Corporate raids 230 Corporate relations 55, 70 Corporate sector 91, 93 Corporate social responsibility (CSR) 30, 187, 199 Corporate social responsibility ratings 201 Corporate volunteering 173 Corporation 68 Criminal Code 60 –The Criminal Code of the Russian Federation 232 CSR Europe network 176 –The culture of power 220 Decentralized 33, 36–38 Delegation 241

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Deloitte survey 117 Desire 241 Digital corporations 33 Directives 115 Disclosure 206 Disqualification of the general director 62 Dividend policy 98 –The dominant coalition 213 –The Dow Jones Sustainability Index 174, 202 Economic and organizational phenomena 211 Educational programs 244 Emerging markets 247 Environmental analysis 190 Environment protection organizations 106 Equity 9 Equity market 78 Ethical approach 244 –The European Alliance on CSR 176 Evolving leadership 239 Exchange rate 77–79, 87 Executive hierarchy model 108 The Federal Financial Markets Service (FFMS) 229 Feedback 239 Firm Planning 128 –The flexibility of organizational cultures 217 Foreign exchanges 92 Foreign investors 96, 103 Formation 128 Founders of businesses 251 –The “framework” of the organizational culture 219 FTSE4Good 174 –The FTSE Good Rating 202 Gazprom Neft, PJSC. 182 –The German model 177 Global companies 25 Global competition 23 Global crisis 94 Globalisation 10 Globalization 23 Global market 11, 31 –The Global Reporting Initiative 200 –The Global Social Business Summit 201 Governance policies 11 Governance practices 101

Greenmail 225, 226 –The GRI standard 190 Guy macho culture 215 Harmonisation 28 Harmonised model 30 “Healthy” organizational culture 217 High creative potential 244 High ownership concentration 114 HKQ AA HSBC 174 Holding companies 98 Hostile takeovers 231 Human capital 216, 244 Independent director 45, 47, 115 Indian model 180 –An individual’s socialization 236 Inefficient processes 165 Information asymmetry 14–16, 19, 20 Insider model 25 Institutional constraints 119 Institutional environment 248 Institutional investors 26, 105, 250 Instructing 241 Internal audit 167 Internal Audit Committee 163 Internal audit department 164 Internal auditors 162, 167 Internal control 161, 162, 165, 167 Internal control departments 164 Internal control functions 165 Internal control system 162, 164 Internal corporate disputes 225 Internal motivation 242 Internal planning system 152 Internal policies 166 International Register of Non-Financial Reports Corporate Register 176 International standards 26 Intra-company planning 129 Investment professionals 247 Investors 10 IPO 80, 84, 95 The Joint Environmental Requirements of Public Environmental Organisations 203 Joint-stock companies (JSC) with state participation 149 Joint stock company 8, 93

Index

Key performance indicators (KPIs) 150 Key to successful leadership 238 Labor unions 106 Large Russian companies 94 Latin American model 180 Leaders 213 Leadership 235, 237 Leadership qualities 236 Leadership skills 235 –The leader’s vision 243 Legal Regulation 55 Liquidity 98 Listed companies 115 Listed Russian companies 102 Long-term development programs (LTDP) 150 Long-term planning 129 Loyalty and commitment 242 Majority shareholders 7, 102 Management 6, 237 Managers 47, 238 Mandatory 188 Marketing technologies 130 Market model 25 Medium-sized companies with state participation 151 Mergers and acquisitions 96 Method of forecasting 144 Minority shareholders 7, 102, 225 Model of executive hierarchy 118 –The model of governance 108 Monetary policy 75, 76, 86, 87 Money supply 76 –The Moscow Exchange 204 NASDAQ OMX CRD Global Sustainability 174 National models of corporate governance 24 –The National Register 189 Network firms 36 –The new approach 119 New global trends 119 New legitimacy 121 Non-financial disclosures 188 Non-financial reporting 175, 187, 201 Non-transparent ownership structures 251 Oil and gas industry 97 Organizational behavior 211

261

Organizational culture 211, 212, 216, 220 Ownership 8 Ownership concentration 95 Ownership and control 4 Ownership rights 10 Ownership structure 99, 249 Participation 244 Partnership Model 177 –A passive-defensive type of culture 212 Paternalistic social model 106 Personal approach 237 Plan 134, 144 Planning service 141 Poll 117 Portfolio investors 103 Power-authority 236 Preventive measures 231 Principles of corporate governance 7 Principles of Corporate Planning 142 Private-law 55 Privatisation programmes 97 Privatization 95 Probabilistic leadership 240 Process approach 239 Professional development 120 Profiles of the Organizational Culture 214 Public debt 86–87 Public-law Principles 57 PWC 117 Raider attacks 223 Rating score 205 Regulatory Model 69 Report on the triple bottom line 189 ReportWatch 202 Responsible policies 177 Risk control system 29 Risk profile 249 Risks 8 Risks of assets expropriation 103 Role-focused relations 240 Rosatom, State Atomic Energy Corporation. 182 Russian boards’ practice 113 Russian companies 206, 218 Russian corporate governance model 72 Russian economic literature 3 Russian economy 91 –The Russian Institute of Directors 117, 204

262

Index

Russian international companies 93 Russian model of CSR 181 Russian Regional Network on Integrated Reporting 203 Russian regulations 248 –The Russian state 101, 104 –The Russian Union of Industrialists and Entrepreneurs 199 Sanctions 96 Scenario planning 145 Scenario planning techniques 131 Self-regulatory organizations (SROs) 230 Severstal, PJSC. 182 Shareholders 48, 172 Shareholders rights 6 Short-term 144 Situational models of leadership 240 Small and medium-sized enterprises 149 Social and cultural factors 120 Social entrepreneurship 173 Social investments 173 Social Platform 176 Social responsibility 18 Socio-cultural background 101 –The Soviet period 219 –The specific features of a leader 238 Stakeholder agency theory 5 Stakeholders 4, 5, 13, 14, 17, 18, 20, 24, 34, 35, 37, 39, 91, 199, 206 Standards for corporate rating assessment 200 State control 92 State interventionism 62 State-owned enterprises 218 State regulation 9 Stock market 92 Strategic 134 Strategic development plans 143 Strategic planning 130, 135, 149

Strategic plans 138 Strategic thinking 244 –The strength of organizational culture 214 Subculture 215, 216 Subordinate 240 –A successful leader 244 Supervisory board 250 Support 241 Sustainability of a business 251 Sustainability and citizenship 177 Sustainability performance 193 Sustainability report 187 Sustainable development 151, 195 Sustainable development concept 172 Sustainable development and social responsibility 202 Swedish model 177 System of corporate governance 27 Take responsibility for decisions 243 The team of Primakov 243 Temporary committees 166 Top executives 107 Top executives’s compensation 107 Top manager 46 Top managers’ remuneration 30 Transparency 9, 29 28, 2014, the Federal Law 133 Two large types of organizations 218 Types of “neurotic” organizations 214 Vertical pairing 240 Voluntary 188 Wave of bankruptcies 27 Work hard play hard culture 215 –The World Business Council for Sustainable Development 200