The Development and Challenges of Russian Corporate Governance I : The Roles and Functions of Boards of Directors 9783838272870

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Yuko Adachi, Professor for Russian Studies, Sophia University

The author: Dr Oksana Kim, FCCA, is Associate Professor of Accounting at Minnesota State University, Mankato. She studied economics and management at Moscow, Bloomington as well as Melbourne, and worked as an auditor for Deloitte and Ernst & Young. Since 2013, Kim has served on the editorial board of The International Journal of Accounting. Her papers have appeared in, among other journals, Accounting and Business Research, Journal of Multinational Financial Management, and Journal of Contemporary Accounting and Economics.

SPPS

Edited by Andreas Umland

Soviet and Post-Soviet Politics and Society

The Development and Challenges of Russian Corporate Governance I

„There still is a lack of understanding about the Russian economy in general and Russia’s corporate governance in particular. This book is a welcome addition to a series of literature focusing on how Russian corporate governance works in practice.“

SPPS 198

Kim

Despite increasing attention towards Russia’s economy and capital market, corporate governance norms of Russian public firms are rarely analyzed. This project presents and interprets evidence regarding various governance practices followed by Russian firms covering almost the entire period of the existence of the Russian stock market. Its findings run counter to some widely held beliefs according to which Russia is a country with high resistance to corporate innovations due to socialist imprints. Part one of this two-volume study focuses on the role that boards of directors play in reducing intra-corporate agency conflicts. Russian companies have adopted progressive governance mechanisms including director independence, nationality and gender diversity on the board, dismissal of poorly performing CEOs, and cross-listing of companies on foreign markets with stringent reporting obligations. Some of these innovations have had notably positive impact on firms’ performances and market valuation. Others, such as nationality diversity on boards of directors, enhanced the image of Russian companies but made little contribution towards improving internal governance. Unresolved issues impeding further progress include limited liability of directors towards shareholders due to imperfections of the Russian legal system, a taboo on disclosures of executives’ compensations, and generally high risks of conducting business in Russia. Despite impressive improvements in internal practices, Russian firms still have a long way to go to achieve the governance levels of their peers in developed countries.

Vol. 198

Oksana Kim The Development and Challenges of Russian Corporate Governance I

The Roles and Functions of Boards of Directors

The author of the foreword: Dr Sheila M. Puffer is Distinguished Professor of International Business and Strategy at the D’Amore McKim School of Business at Northeastern University in Boston.

With a foreword by Sheila M. Puffer

ISBN: 978-3-8382-1287-6 Distributed by COLUMBIA UNIVERSIT Y PRESS

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Oksana Kim

THE DEVELOPMENT AND CHALLENGES OF RUSSIAN CORPORATE GOVERNANCE I The Roles and Functions of Boards of Directors With a foreword by Sheila M. Puffer

Bibliographic information published by the Deutsche Nationalbibliothek Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

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ISSN: 1614-3515 ISBN-13: 978-3-8382-7287-0

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TO MY FAMILY

Contents List of Tables ....................................................................................... 11  List of Figures ...................................................................................... 13  Foreword by Sheila M. Puffer .......................................................... 15  Chapter 1: Introduction .................................................................... 17  Chapter 2: Corporate governance laws and regulations in Russia: overview and dynamics .................................................. 29  2.1. National stock exchanges .................................................... 29  2.2. Laws and regulations outlining the major corporate governance provisions .............................................. 46  2.3. Accounting standards and reporting requirements. Adoption of IFRS ......................................................................... 53  2.4. Implications of the corporate governance reforms for the Russian stock market ...................................................... 58  2.5. Conclusions ........................................................................... 62  Chapter 3: Board of directors’ structure and composition: one- versus two-tier boards .............................................................. 63  3.1. Unitary versus two-tier board structure: overview of the major differences and global practices ......... 63  3.2. Russian public companies’ choice to adopt a unitary versus a two-tier board model ..................................... 72  3.2.1. Data collection process .............................................. 73  3.2.2. Empirical examination of the impact of the board of directors’ structure on a firm’s performance and value ....................................................... 85  3.3. Conclusions ........................................................................... 93

 

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Chapter 4: Cross-listing practices of Russian companies............ 95  4.1. Reasons to cross-list. Overview of cross-listing theories and empirical findings ................................................. 95  4.2. Cross-listing practices of Russian companies ................... 99  4.3. Determinants of cross-listing ............................................ 110  4.4. The impact of cross-listing on a firm’s performance and value ............................................................. 113  4.5. Conclusions ......................................................................... 115  Chapter 5: Nationality diversity on the board of directors of Russian firms ................................................................................ 117  5.1. Pros and cons of hiring diverse boards. Literature overview ................................................................... 117  5.2. Foreign accounting/consulting firms and foreign directors: Russian firms’ practices ........................................... 120  5.3. Implications of hiring foreign nationals on the board of directors....................................................................... 123  5.3.1. Summary statistics. Comparison of covariates .... 123  5.3.2. Foreign directors’ impact on the monitoring and advisory functions of the board ............................... 129  5.4. Conclusions ......................................................................... 138  Chapter 6: Gender diversity on the board of directors of Russian public companies ......................................................... 141  6.1. Benefits and costs of maintaining gender-diverse boards. Global evidence and literature overview ................. 141  6.2. Female representation on Russian corporate boards ..... 144  6.2.1. Summary statistics. Comparison of covariates .... 144  6.2.2. The impact of female directors on a firm’s performance and value. Mechanisms through which female directors contribute towards the board’s activities ................................................................ 151  6.3. Conclusions ......................................................................... 156 

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Chapter 7: CEO performance-induced turnover ......................... 159  7.1. CEO turnover and a firm’s performance. Empirical evidence .................................................................... 159  7.2. CEO performance-turnover sensitivity among Russian public companies ........................................................ 162  7.3. Conclusions ......................................................................... 165  Chapter 8: Unresolved issues and concluding remarks ............ 167  Concluding remarks .................................................................. 170  Bibliography ...................................................................................... 171 

 

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List of Tables Table 2.1. European stock exchanges’ dynamics, 2001–2010 ........ 32 Table 2.2. Domestic market capitalization of listed firms, EMEA region, 2012–2017 (million USD)......................... 38 Table 2.3. Number of listed companies, EMEA region, 2012–2017 ............................................................................ 42 Table 2.4. Three-tier listing system adopted by the Moscow Exchange in 2014 ............................................................... 51 Table 3.1. Major differences between unitary and two-tier boards .................................................................................. 68 Table 3.2. Advantages and disadvantages of unitary versus two-tier boards ...................................................... 70 Table 3.3. Distribution of the corporate governance observations by year and industry. ................................. 76 Table 3.4. Summary statistics for key governance (Panel A) and financial (Panel B) variables ..................................... 80 Table 3.5. Correlation between board structure and corporate governance metrics (Panel A) and selected financials (Panel B) ............................................. 87 Table 3.6. The impact of board structure on a firm’s performance and value ..................................................... 91 Table 4.1. Cross-listing summary ................................................... 103 Table 4.2. Determinants of a firm’s decision to cross-list ............ 112 Table 4.3. The impact of cross-listing and listing in London on a firm’s performance and value ............................... 114 Table 5.1. Distribution of sampled firms by year and presence of foreign directors (expats) on the board.... 124

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Table 5.2. Comparison of covariates: firms hiring foreign directors compared to firms hiring only local directors ............................................................................ 127 Table 5.3. The impact of foreign director representation on the board’s monitoring activity ................................ 132 Table 5.4. The impact of foreign director representation on the board’s monitoring activity: Partitioning by headquarters location...................................................... 134 Table 5.5. The impact of foreign director representation on the board of directors of Russian companies on liquidity, financial health, and the probability of subsequent equity issuance ............................................ 137 Table 6.1. Distribution of sampled firms by year and presence of female directors on boards ........................ 146 Table 6.2. Distribution of sampled firms by industry and presence of female directors on boards ................ 147 Table 6.3. Comparison of covariates: firms hiring female directors compared to firms hiring only male directors ............................................................................ 149 Table 6.4. Determinants of hiring female directors ...................... 153 Table 6.5. The impact of female directors on a firm’s performance, shareholder returns, and value ............. 154 Table 6.6. The impact of female directors on board activity and a firm’s liquidity, financial health, and the probability of subsequent equity issuance ................... 155 Table 7.1. CEO performance-induced turnover ............................ 164 

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List of Figures Figure 2.1. Dynamics of price index returns (USD): the MICEX price index compared to the 24 countries comprising the MSCI Emerging Markets Index .......... 45 Figure 2.2. Timeline of shareholders’ and board of directors’ meetings and actions ....................................................... 49 Figure 2.3. Net inflow of FDIs in millions of USD (current).......... 60 Figure 2.4. Non-resident (foreign) clients (investors) of the Moscow Exchange, 2007–2017 ....................................... 61 

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Foreword This book admirably fulfills its aim, as noted in Chapter 1, “to dismantle the myths surrounding Russian corporate governance practices and to shed light on the realities encountered by Russian public companies.” As documented in this important monograph, corporate governance practices in Russia have made considerable progress since the fall of the Soviet Union in 1991. Russia’s ensuing chaotic decade of the 1990s saw the Yeltsin government enter into cozy deals with powerful business oligarchs who built empires and wealth for themselves and their cronies at the expense of citizens who sold them their property ownership vouchers as well as other legitimate minority shareholders including foreign firms and individual investors. That era of constant turmoil, rampant corruption, lack of transparency, and trampling of minority shareholder rights came to be addressed by the Putin administration that came to power in 2000. In the subsequent nearly two decades, the Russian government and regulatory bodies, along with numerous corporations themselves, have put into place a number of financial and regulatory institutions and enlightened corporate governance practices, one of the earliest being the 2002 Code of Corporate Conduct recommending compliance with international corporate governance standards by the country’s largest corporations. While by no means free of corruption and other abuses, the corporate governance landscape in Russia has improved in visible ways, yet that progress has been little noticed, ignored amid press reports of scandals and overshadowed by the precipitous reduction in business transactions with Western firms as a result of economic sanctions imposed on Russia in 2014 by the United States, Canada, the European Union, and Japan. Oksana Kim’s book fills an information void that documents the progress that has been made. This carefully researched volume owes its value to the meticulously hand-collected data that provides the substance of the book, a large sample of Russian firms listed on the Moscow Exchange from 1999 to 2016 as well as the inclusion of a number of delisted firms. Moreover, the data reflect 15

  reports of actual internal governance mechanisms adopted by Russian firms, rather than generalizations from surveys and interviews as had been relied upon in the past. Dr. Kim’s assertion that “the situation has changed dramatically in the last decade and that Russian public companies have been actively adopting governance practices prevalent in developed markets” is well supported by hard data and analysis. Each chapter focuses on a specific aspect of corporate governance and systematically provides an overview of the literature, global evidence of the practice, and an analysis of its use in Russia. The concluding chapter takes a realistic perspective by noting that while Russian corporate governance practices have improved in recent years, progress is still needed in important areas such as holding corporate directors responsible for decisions, public reporting of executive compensation, minority shareholder protection, cross-border trades, and contract enforcement. The Development and Challenges of Russian Corporate Governance is a valuable addition to the academic literature on corporate governance, providing quantitative data to measure and interpret corporate governance practices by Russian public companies. The book is written in an accessible style such that it also can inform decision making by business people and legal professionals interested in the evolving business environment of Russia. I strongly recommend this book as a welcome update to the topic that helps dispel some of the myths surrounding current corporate governance practices in Russian public companies. November 3, 2018 Sheila M. Puffer University Distinguished Professor D’Amore-McKim School of Business Northeastern University Boston, Massachusetts

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Chapter 1 Introduction “Governance is the process whereby people in power make decisions that create, destroy or maintain social systems.” —Maria Ramos, CEO of Barclays Africa

The aim of this book is to dismantle the myths surrounding Russian corporate governance practices and to shed light on the realities encountered by Russian public companies. The Russian economy has undeniably attracted significant global attention, while empirical evidence examining the dynamics of changes in the corporate governance norms in the country vis-à-vis other nations remains very limited.1 Our study is the product of significant commitment to manual data collection work spanning several years, coupled with first-hand knowledge of Russian firms’ listing practices, which allowed us to compile a database of governance metrics for almost the entire period of the Russian capital markets system’s existence. Therefore, our evidence and conclusions presented below are based on authentic data pertaining to the Moscow Exchange, as opposed to perceptions and paradigms commonly prevailing in the mass media.2 The more comprehensive goal of this manuscript is to fill the gap in the empirical literature by providing evidence relating to governance mechanisms adopted in one of the leading emerging nations: Russia.

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2

Muravyev (2017) examined the structure and dynamics of changes in Russian firms’ boards of directors for the period of 1998–2014 but focused on very different research questions and methodologies compared to those used in this manuscript. The author also offers a comprehensive literature review of the studies that have examined Russian governance choices: only 8 studies have been published internationally and those are analyzed by Muravyev (2017) in great detail; we omit a discussion of them here. The survey-based study of Iwasaki (2008) focuses on the year 2005 when examining determinants of Russian boards. In contrast to these important works, our manuscript covers the period of 1999–2016 and is based on a larger sample of public firms; we also examine a wider range of governance topics. To the credit of Russian companies, the corporate governance mechanisms discussed throughout this manuscript were predominantly adopted voluntarily. This is true for both large and medium-/small-sized public firms.

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18 OKSANA KIM Corporate governance is defined as the system of checks and balances, both embedded within an organization and external, that is expected to prevent the abuse of power by executives. History has witnessed numerous instances when this system failed, the most notorious cases being those of Enron, WorldCom, Parmalat, Satyam, Petrobras, Siemens, and Olympus, among others. The fundamental reason for the failure of internal governance mechanisms is the agency problem, which was formulated in the seminal treatise of Jensen and Meckling (1976) on the theory of the firm.3 Particularly, the separation of duties between shareholders (owners) and executives (the management team and the chief executive officer (CEO)) may lead to situations where the latter have opportunities to implement self-benefiting policies, which gives rise to agency costs. This so-called principal-agent conflict that arises because both parties are utility-maximizers can be reduced via the implementation of stringent governance practices.4 While the literature focused extensively on various internal and external mechanisms aimed at reducing the principal-agent conflict, Fama (1980) and Fama and Jensen (1983) posit that boards of directors are shareholders’ most important monitoring device. As such, this manuscript is dedicated to examining the role that boards of directors play in reducing principal-agent conflicts within Russian public firms.5

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The agency theory has been subject to much criticism for its pure focus on economic self-interest. Some theories, such as the stakeholder framework, posit that other parties’ interests—those of employees, customers, and/or suppliers—must be considered alongside those of equity holders. Additionally, the agency theory ignores the ethical aspects of the managerial decision-making process (Freeman 1984). Nevertheless, the agency theory remains the central framework for empirical research on corporate governance. Jensen and Meckling (1976) emphasized the nature of agency costs and outlined three components: [1] costs incurred by the principal (shareholder) to monitor the agent’s (management’s) actions; [2] bonding costs incurred by the agent to guarantee the quality of his actions; and [3] the loss in utility experienced by the principal as a result of the agent’s self-interested actions. Some of our empirical analyses will also be dedicated to examining external governance mechanisms such as cross-listings on foreign markets. Nevertheless, we will begin this investigation by determining which characteristics of a board of directors drive a firm’s decision to cross-list. The discussion of crosslisting practices of Russian firms as an important governance mechanism is inevitable, given that a large fraction of firms have been pursuing overseas listings and the internal governance practices of Russian firms have been heavily

INTRODUCTION 19 Despite decades of discussions and volumes of research findings, corporate governance remains a contentious topic, as it is still unclear which governance mechanisms are pivotal in reducing the agency conflict between shareholders and executives (or between minority and majority equity holders). Notwithstanding numerous accounts of executives’ fraud, earnings management, egregious audit fiascos, insider trading, and failures to remove poorly performing CEOs—to name a few—that have led to market penalties and bankruptcies, executives still exhibit self-benefiting behavior that shareholders fail to prevent. For example, the total number of accounting restatements by US firms between 2001 and 2016 did not decline, while the proportion of so-called revision restatements, as opposed to reissuance restatements, has actually increased (Audit Analytics 2016).6 This indicates that misreporting by companies is still a significant issue, despite the Sarbanes-Oxley Act (2002) that enacted enhanced governance requirements for corporate boards, executives, and auditors. Furthermore, the number of federal securities class action lawsuits in the US climbed from 265 in 2002 to 412 in 2017, pointing towards a growing trend in the violation of securities laws (Stanford University and Cornerstone Research 2018). Turning to the academic evidence, studies have generally produced a mixed picture of the impact of various internal and external governance mechanisms on organizational outcomes. Findings have not been clear or consistent regarding the impacts of a board’s activities and composition, gender, and nationality diversity on boards, and CEO turnover on a firm’s performance and value (see

                                                            

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affected by globalization. By listing shares overseas, Russian firms subject themselves to enhanced laws and listing requirements and increased monitoring, as will be discussed in detail in chapter 4. Revision restatements are defined as restatements due to immaterial errors and are less severe than reissuance restatements that address material errors. Academic research suggests that even unintentional Generally Accepted Accounting Principles (GAAP) violation restatements and small errors can be linked to earnings management, a practice that lowers the quality of financial reporting. Companies with strong internal governance mechanisms are expected to have a lower number of both intentional and unintentional errors and restatements (Lin et al. 2015).

20 OKSANA KIM Post and Byron 2015). Because each firm is unique, the evidence obtained from large-scale archival studies does not answer the question of what works for a specific company—the query investors are most concerned with (Larcker and Tayan 2016). Another significant limitation of the empirical studies is that documented correlations between governance mechanisms and organizational outcomes do not establish causality (Knowledge@Wharton 2018). Randomized experiments, unfortunately, are hardly possible in the case of corporate governance studies. Lastly, as noted by Larcker and Tayan (2016), event studies that do present an opportunity to observe the economic consequences of changes in governance regulations typically struggle to control for confounding effects and fail to make risk adjustments. When examining corporate governance norms, context matters, and the uniform adoption of a common set of governance practices globally is likely to fail (Larcker and Tayan 2016). One should account for country-specific factors including the legal system, the efficiency of capital markets, the strength of the litigation environment, the government’s willingness to enforce regulations, the accounting standards and reporting practices followed, and social and cultural values (La Porta et al. 1998; 2000; Hofstede 2001; McCarthy and Puffer 2002; Ball 2006; Barth et al. 2008; Adams and Ferreira 2009; Francis et al. 2009). A large number of studies have been conducted in Western settings such as the US and UK, which are characterized by dispersed ownership, heavy reliance on capital markets, and strong laws. As pointed out by Allen (2005), the view prevailing in the governance literature based on the common law traditions that shareholder wealth maximization should be the ultimate goal of an organization may strongly contradict the practices and goals of companies in emerging markets. The latter generally have imperfect and incomplete markets and regulations and are oriented toward long-term growth. Adopting a narrow view that firms are run exclusively in the interests of shareholders ignores the fact that emerging markets follow different traditions, have distinct political arrangements, and adopt unique ownership structures. Additionally, scholars recognize that internal governance mechanisms, such as boards of directors, are uniquely shaped by national

INTRODUCTION 21 institutions—formal and informal—embedded in national customs and traditions (see Aguilera et al. 2012). Among all the emerging markets, Russia has demonstrated unprecedented economic growth since the dissolution of the Soviet Union in 1991 and remains at the forefront of the Commonwealth of Independent States (CIS, former Soviet Union) in terms of economic development, according to the World Bank (2017). Russia has been named a driving force and a “barometer” of emerging markets’ development projections for the next decade. During the economic meltdown that impacted most global economies in 2008, Russia demonstrated a surprising resilience and its GDP was on the rise shortly after the crisis (World Bank 2017). Experts attribute this phenomenon to a very low level of public debt—7 percent of GDP—which allowed the state to stabilize its strategic industries fairly quickly.7 Brookings Institution (2018) predicts that the Emerging Seven group,8 of which Russia is among the leaders, will deliver half of global growth in the next two years. In comparison, the G7 developed nations9 will account for a modest 25 percent of global growth. PricewaterhouseCoopers (PWC 2018) forecasts that the Emerging Seven group will open up a 30 percent lead in GDP over the G7 nations by 2030. Based on the most optimistic of projections, by 2030, Russia may become the sixth largest economy in the world, surpassing that of Germany (CNBC 2010).10 Experts believe that overall, Russia is poised to play a major role in the shift of economic power from the G7 to the Emerging Seven in the next decade (Brookings Institution 2018).

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8 9 10

 

A large number of corporations remain under state shareholding in Russia, which is uncommon for developed economies. Nevertheless, restructuring the country's state-controlled corporations without putting jobs in the Soviet-era single-industry towns at risk or unduly exposing legitimately strategic assets is a challenging task that should be implemented gradually (CNBC 2010). This, again, demonstrates the uniqueness of the prevailing conditions in emerging markets. China, Russia, India, Brazil, Turkey, Mexico, and Indonesia. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. The geographical position and history of Russia and its neighbors are discussed in significant detail in Blinnikov (2011) and are omitted from this manuscript.

22 OKSANA KIM Despite its notable place among the world’s largest economies, Russian corporate governance practices remain largely under-studied. While the Moscow Exchange has developed into one of the prominent European stock exchanges and Russian blue chips occupy a leading position among foreign companies trading through the International Order Book (IOB) in London, little is known about Russian firms’ internal governance mechanisms. Early studies generally adopted a pessimistic tone when discussing Russian laws and regulations. The projections of those studies were commonly unimpressive and were dictated by gloomy policies implemented by the Russian government as well as the gray economic schemes prevailing in the first decade of Russia’s sovereignty (Blinnikov 2011).11 Not without merit, Black et al. (2006) and Larcker and Tayan (2016) pointed to the inefficiency of Russian governance regulations, the limitations of firms’ ownership structures dominated by insiders, and heavy state control. Corruption and bribery have also been ongoing problems for the Russian economy. Among other shortcomings, early studies cited a low level of reporting transparency and outdated accounting rules, which kept foreign investors from participating in Russian equity trades. In their notable study examining the early formative period of the Russian market economy, McCarthy and Puffer (2002) outlined the major difficulties of Russia’s transition towards internationally accepted governance practices: “Seven decades of communism and central planning had provided little or no experience in dealing with issues of ownership and shareholder rights.” In their followup study examining the development of Russian corporate governance norms from the perspective of integrative social contracts theory, the authors concluded: “agency theory alone is not useful for determining ethicality in the current Russian corporate governance context, since the theory’s foundations, processes, and restrictive

                                                             11

McCarthy and Puffer (2002) referred to the first years of Russia’s independence, which were characterized by destructive corporate practices, as the “Wild West of capitalism”.

INTRODUCTION 23 assumptions are not appropriate for that country” (McCarthy and Puffer 2008).12 We do not dispute the unenthusiastic statements made in the previous works examining Russian governance and, in fact, very much appreciate the early efforts of our colleagues to understand Russian realities. Nevertheless, we propose that the situation has changed dramatically in the last decade and that Russian public companies have been actively adopting governance practices prevalent in developed markets. Our study’s findings clearly support this narrative. Most of the previous conclusions on the lack of progress in Russia were based on interviews/surveys conducted in the early formative period of the Russian economy as well as widely adopted paradigms portraying Russia as a country with high resistance to change due to socialist imprints. Our study is clearly different in that our examined sample of firms is up to date and we manually collected firm-level governance information from the financial statements of virtually all active public companies (as of December 31, 2016), supplemented by a number of delisted firms (for the period of 1999–2016). Accordingly, our study’s findings are based on a large sample of Russian firms listed on the Moscow Exchange and hence provide an excellent overview of the actual internal governance mechanisms adopted by Russian firms. In each chapter, we focus on a particular governance feature: we provide an overview of the literature, discuss global evidence, and examine whether certain governance mechanisms work in the case of Russian public firms. In chapter 2, we offer a historic excurse into the development of corporate governance regulations, from

                                                             12

 

One plausible explanation for the lack of evidence on Russian governance practices, beyond the above mentioned disbelief that progressive changes are, in fact, possible in Russia, is the low availability of data (Black et al. 2006). For this reason and because English translations of Russian firms’ financials were rare in the past, Russia was often excluded from global samples examining governance practices (La Porta et al. 1998). The coverage of Russian public firms in databases and the availability of Russian firms’ financial statements have improved tremendously since 2011, as will be discussed in the following chapters. This, along with a knowledge of the Russian language and first-hand exposure to Russian firms’ reporting practices, made it possible for us to undertake our empirical investigation.

24 OKSANA KIM the onset of the Russian capital markets system in 1995 until the present day. We provide evidence consistent with growing investor confidence in the Russian economy as a whole, based on the positive dynamics of net inflows of foreign direct investments (FDIs). The positive dynamics were somewhat affected by the financial crisis (2008) and the economic sanctions imposed by the Western community on the Russian economy (2014–2016). Nevertheless, we report that the Russian stock market demonstrated remarkable resilience to these adverse events, as there was no incremental decline in the Moscow Exchange’s performance compared to other emerging markets. Moreover, the evidence points to the growth in the number of foreign investors—especially individuals—over time, including during the economic sanctions period (2014 onwards). Combined, these findings challenge the statement that “the confusion about values in corporate governance behaviors and decisions will not soon be resolved” in Russia and that “[for] the foreseeable future, Russian managers and other stakeholders will likely continue to exhibit behaviors that reflect traditional Russian norms and values, and these behaviors might often be seen by Westerners as unethical” (McCarthy and Puffer 2008). In chapter 3, we examine how a particular board structure— unitary versus two-tier—affects Russian firms’ performance and valuation. In the early study examining the determinants of corporate boards, Iwasaki (2008) suggested that: “In general, Russian corporate law adopts the Anglo-American type of corporate model,” a proposition that was not examined. Our empirical investigation pinpoints a different picture: about 72 percent of Russian boards are two-tier and lean toward a Continental European model, with some unique features such as very young boards and CEOs, a relatively high level of female representation, and partial participation of executives in the board’s duties, among others. Accordingly, our findings tend to support the early predictions of McCarthy and Puffer (2002) that: “Russian corporate governance will evolve into its own unique model reflecting the country’s traditions, values, and culture” (p. 630). Most importantly, ours is possibly the first study to examine pros and cons of adopting a particular board

INTRODUCTION 25 structure within the same jurisdiction, which allows us to keep country-level factors constant.13 We report strong evidence that the twotier board structure has an adverse impact on both a firm’s performance and value. Cross-listing, however, mitigates this negative impact. These findings may be of importance to policy makers outside of Russia, as Russian boards have notable similarities with those in other European countries, as will be discussed below. Chapter 4 is dedicated to examining cross-listing practices of Russian firms. Foreign markets have welcomed Russian blue chips as early as 1996 and we report a growing trend in popularity of overseas stock exchanges representing different regions among Russian firms. The most popular cross-listing destination has historically been the London Stock Exchange (LSE), followed by German stock exchanges and a non-Nasdaq over-the-counter (OTC) market. These markets’ listing and reporting obligations are rigorous but are not as extensive as those of the US exchanges, such as the New York Stock Exchange and Nasdaq. We report that listing on any foreign stock exchange, irrespective of the rigor of listing requirements, confers significant benefits such as improved performance and market valuation, and these benefits are more pronounced in the case of London listings. Accordingly, our findings complement the results of prior cross-listing research that documented the significant economic effects of cross-listing in non-Russian settings (Doidge et al. 2004; 2009). As in chapter 2, our statistics indicate the resilience of Russian firms during challenging periods: the numbers and proportion of cross-listed firms did not decline both during the economic downturn (2008–2009) and the sanctions periods (2014 onwards).

                                                             13

 

Cross-country studies are important because of the global nature of capital markets systems as well as the international scope of investments and financial services. Nevertheless, the interpretation of findings of such studies is difficult because one has to control for a myriad of country-level factors when conducting empirical tests. In many cases, countries’ settings are very distinct and are not directly comparable. Such is the main limitation of studies attempting to compare the US and German board structures, for example (Block and Gerstner 2016).

26 OKSANA KIM In chapter 5, we turn our attention to the long-standing debate regarding the importance of foreign directors to the success of Russian public firms. The practice of hiring high-profile foreign executives and politicians with world-renowned reputations has flourished over the years and, as documented in Kim (2018), foreigner representation manifests in improved performance and firm value. Additionally, Aguilera et al. (2017) documented that the appointment of foreign directors by Russian firms was an efficient way of monitoring the allocation of resources to investments, based on data from 2000–2010 and selective firms. Nevertheless, we find that foreign nationals negatively affect the board’s monitoring activity and do not make contributions towards the board’s advisory role. Overall, it appears that Russian firms experience marginal benefits from the diverse knowledge and expertise possessed by foreign directors. Our conclusion regarding the cultural diversity on boards, therefore, parallels that in Kim (2018) in that foreign nationals are likely to be hired to boost companies’ prestige rather than to improve internal governance mechanisms. Accordingly, naming foreigners to Russian boards is a double-edged sword. Chapter 6 addresses a different aspect of the board’s diversity—female representation14—and our findings are strikingly different from those documented in relation to cultural diversity. Russian firms have demonstrated impressive gender representation, including having multiple female directors on boards, although there is no official gender quota established in the corporate codes. Examining the implications of hiring gender-diverse boards in Russian settings provides a stronger experiment, compared to AngloSaxon countries (the US and the UK) that dominate extant gender research. Russia has had a significant history of patriarchy, some features of which (such as differences in societal roles between

                                                             14

One may argue that “gender diversity” and “female representation” are not necessarily correlated and are distinct concepts: a board of directors comprising 100 percent female board members is actually associated with low gender diversity. In our study the median female representation is 1 and there are no extreme cases of female-only/female-dominated boards. Therefore, we believe that in the Russian setting, the two terms are fairly interchangeable.

INTRODUCTION 27 males and females) have persisted till the present day (Zdravomyslova 2012). Naturally, females’ contributions towards boards’ activities should be more pronounced in the case of Russian boards due to the vast social gap between men and women, provided that female directors are not named to boards merely for gender equality reasons. Similar to prior research, we do not find a clear or consistent picture of the impact of female directors on a firm’s performance or value (Adams and Ferreira 2009). Nevertheless, we report that female directors contribute towards the board’s activity and their presence on boards is positively associated with a firm’s financial health. Overall, while diversity appears to be embedded within Russian boards, the benefits of either cultural or gender representation remain debatable to date. Chapter 7, the final empirical chapter, is dedicated to a discussion of CEO performance-induced turnover practices in Russia. We do not find conclusive evidence that Russian firms replace CEOs based on poor operating or market performance. Nevertheless, some of our findings are novel: we show that Russian boards are concerned with liquidity and the ability to repay debt obligations more than with accounting/market returns. Particularly, a CEO is removed following a period of poor liquidity and/or decline in the credit strength of the organization. This sensitivity of CEO removal decisions to liquidity/creditworthiness is explained by the fact that banks have historically been the major providers of finance in Russia and firms are alarmed by possible violations of debt covenants and the inability to fulfill debt obligations (perhaps more so than by reported performance and market valuations). Once again, this evidence suggests that corporate governance norms are contextspecific and that shareholder-oriented norms and values may not be applicable to stakeholder-oriented economies. Importantly, our findings on the factors that impact CEO turnover are potentially generalizable to the population of European civil law countries that are also characterized by heavy reliance on private debt, as opposed

 

28 OKSANA KIM to public debt or equity, as the dominant financing source (Allen and Gale 2000; Ergungor 2004).15 In chapter 8, we discuss unresolved governance issues, among which are the undefined liability of directors, non-existent executive compensation disclosure, and high levels of risk in conducting business in Russia. We acknowledge that despite the obvious progress in adopting effective governance mechanisms over the last two decades as well as a well-established global recognition path followed by public companies, Russia has a long way to go in order to achieve the governance levels of developed nations. We leave the reader with an abundance of evidence in relation to the previously unexplored market and the great hope that governance practices of Russian firms will improve in the future.

                                                             15

Ergungor (2004) argues that civil law courts are less effective in resolving conflicts because they have less flexibility in interpreting the laws and creating new rules compared to common law courts. Accordingly, in civil law jurisdictions, banks naturally emerge as primary contract enforcers, which leads to the creation of bank-oriented financial systems.

 

Chapter 2 Corporate governance laws and regulations in Russia: overview and dynamics “For the past 12 years, I have witnessed firsthand [the] dramatic changes Russia has undergone in a short period of time, and I truly believe that Russia is now poised to become an even more significant player in the global economy.” —Ronald Pollett, President and CEO of GE, director of Inter Rao EES

This chapter is dedicated to the history of the corporate governance system in Russia. We discuss the development of capital market institutions, which is followed by an overview of corporate governance rules and regulations. We then document the dynamics of changes in accounting standards over time and particularly, the adoption of the International Financial Reporting Standards (IFRS).

2.1. National stock exchanges The modern capital market era in Russia began after the dissolution of the Soviet Union in 1991 and following a wave of mass privatization of the formerly state-owned enterprises. Russia’s first centralized stock exchange—the Russian Trading System (RTS)—was established in 1995 as a non-profit organization and was subsequently re-organized into a joint-stock company. The exchange comprised several platforms: the RTS Classica market, the main listing and trading platform for blue chips; the RTS Standard market for listing by other companies; the RTS order-driven platform; and the RTS Board, which was an over-the-counter trading board. The RTS Board was an information system of indicative quotes for non-listed securities. The common practice of Russian companies was to simultaneously list securities on more than one—sometimes all—of the aforementioned platforms, which allowed them to tap into different classes of investors. Common and preferred stock shares were admitted for trade. However, common stock instruments were significantly more popular and the preferred stock was

29

30 OKSANA KIM often issued simultaneously or after the common stock issuance (Kim 2018). Russia’s second exchange, the Moscow Interbank Currency Exchange (MICEX), was established in 1992 and was primarily designated for trading foreign currencies until 1997 when equity instruments started trading on the MICEX. The MICEX remained Russia’s secondary equity listing/trading exchange until 2006, the year in which the RTS and the MICEX had almost equal numbers of listed companies. After 2006, the MICEX developed into Russia’s primary stock exchange due to its growing popularity among local and foreign investors. By 2011, the MICEX was regarded as one of the leading European stock exchanges in terms of growth in number of listings and total market capitalization of listed firms (World Federation of Exchanges 2016).16 Table 2.1 provides an overview of the changes in liquidity metrics for European stock exchanges, indicating that the MICEX posted an unprecedented 1,800 percent growth in the market capitalization of listed firms (2001–2010), surpassing other Eastern European trading platforms and showing one of the most impressive growth rates among emerging markets (World Federation of Exchanges 2012). Overall, the MICEX was ranked first in terms of growth rate among all the European stock exchanges, and was ahead of notable markets such as Luxembourg. At the beginning of 2011, shareholders of the RTS and the MICEX announced that they considered the merger of the two exchanges as an essential step toward reinforcing the position of the Russian stock market on the global arena. Following this commitment to the reorganization plan, the RTS and the MICEX filed a joint statement with the Federal Monopoly Commission (FMC) of Russia, and the merger was approved in December 2011. The merger of the two Russian exchanges was a vital step in developing the capital markets system that would position the Russian market among the top European exchanges.

                                                             16

The RTS Classica, the RTS Standard, and the RTS order-driven platforms ceased to exist following the merger of the RTS and the MICEX; however, the RTS Board remains fully operational to date and can be accessed at http://rtsboard.com/.

LAWS AND REGULATIONS 31 In February 2013, the joint MICEX-RTS platform—rebranded as the “Moscow Exchange”—conducted a successful initial public offering (IPO), which was twice oversubscribed and involved the participation of investors from the UK, the US, and Asia. This event raised approximately $500 million on self-listing and was Russia’s largest-ever IPO (Moscow Exchange 2018). According to the Financial Times (2013), self-listing would “convince more of the country’s companies to shun London for a domestic listing.” The Russian government supported the merger transaction and pledged to turn the platform into a competitive international financial center by improving its infrastructure and facilitating access to foreign market participants (Global Legal Post 2013). Overall, the creation of the joint platform with globally-oriented investment standards had important implications for the Russian and global investment communities.

 

 

Change, %

2002

2003

2004

2005

2006

2007

2008

2009

2010

29%

58,888 21% 477,075 −10%

48,503

527,467

 

614,842

461,560 −1%

468,203

137,611 134%

726,243 57%

727,103 33%

547,020 −13%

625,909

28%

789,563

153,323 11%

940,673 30%

826,041 14%

1%

798,073

266,425 74%

959,910 2%

935,448 13%

−51%

26%

655,848

522,088 29%

4%

1,026,504 1,072,535

N/A

N/A

949,149 29%

736,307 118%

337,089 −72% 886,517 233%

1,221,530 38%

1,064,687 1,229,357 21% 15% 1,434,540 1,171,625 51% −18%

880,334 −31% 948,352 −47%

1,322,915 1,781,133 38% 35%

1,212,308 1,271,048 30% 5%

1,079,026 1,194,517 1,221,106 1,637,610 2,105,198 1,110,580 1,292,355 1,429,719 57% 11% 2% 34% 29% −47% 16% 11%

686,014 −36%

1,071,749

1,889,455 1,538,684 2,076,410 2,441,261 2,706,803 3,712,681 4,222,680 2,101,746 2,869,393 2,930,072 −19% 35% 18% 11% 37% 14% −50% 37% 2%

2,164,716 1,856,194 2,460,064 2,865,243 3,058,182 3,794,310 3,851,706 1,868,153 3,453,622 3,613,064 −14% 33% 16% 7% 24% 2% −51% 85% 5%

2001

Dynamics of market capitalization (million USD) for the major European exchanges, per the World Federation of Exchanges (2001–2010)

Absolute value Change, % NYSE Euronext Absolute (Europe) value Change, % Absolute Deutsche Börse value Change, % SIX Swiss ExAbsolute change value Change, % BME Spanish Absolute Exchanges value Change, % Absolute value MICEX Change, % Absolute Borsa Italiana value

London SE, or LSE Group

Exchange

Panel A.

Table 2.1. European stock exchanges’ dynamics, 2001–2010

32 OKSANA KIM

Malta SE

Ljubljana SE

Budapest SE

Irish SE

Athens Exchange

Luxembourg SE

Oslo Børs

Istanbul SE

Absolute value Change, % Absolute value Change, % Absolute value Change, % Absolute value Change, % Absolute value Change, % Absolute value Change, % Absolute value Change, % Absolute value Change, % 66,040 −21% 59,938 −20% 12,989 25% 5,578 61% 1,374 1%

83,481

75,298

10,367

3,461

1,357

24,551 3%

68,103 −2%

69,445

23,783

34,217 −27%

47,150

1,845 34%

7,134 28%

18,868 45%

85,071 42%

103,764 57%

37,333 52%

95,920 41%

68,379 100%

2,842 54%

9,677 36%

28,300 50%

114,086 34%

121,921 17%

50,144 34%

141,624 48%

98,299 44%

4,097 44%

7,899 −18%

32,576 15%

114,086 0%

145,121 19%

4,504 10%

15,181 92%

41,934 29%

163,269 43%

208,256 44%

79,514 55%

279,910 47%

190,952 35% 51,248 2%

162,399 1%

161,538 64%

5,635 25%

28,794 90%

46,196 10%

143,905 −12%

264,961 27%

166,094 109%

353,353 26%

286,572 76%

3,576 −37%

11,799 −59%

18,465 −60%

49,490 −66%

90,200 −66%

66,615 −60%

4,080 14%

12,141 3%

30,037 63%

61,291 24%

112,632 25%

4,323 6%

9,383 −23%

27,708 −8%

60,368 −2%

67,586 −40%

105,048 101,129 58% −4%

145,906 227,233 295,288 −59% 56% 30%

118,329 233,997 307,052 −59% 98% 31%

LAWS AND REGULATIONS 33

34 OKSANA KIM Panel B.

Exchange London SE, or LSE Group NYSE Euronext (Europe) Deutsche Börse SIX Swiss Exchange BME Spanish Exchanges MICEX Istanbul SE Oslo Børs Luxembourg SE Athens Exchange Irish SE Budapest SE Ljubljana SE Malta SE

Rankings of the major European exchanges, per the World Federation of Exchanges (2001–2010) Change in market cap 2001–2010, %

Rank based on market capitalization as of 2010

Rank based on growth, 2001–2010

67%

1

10

55%

2

11

33%

3

12

96%

4

9

150% 1,857%

5 6

8 1

551% 325%

7 8

2 3

325%

9

4

−19% −20%

10 11

13 14

167%

12

7

171% 219%

13 14

6 5

Source: The World Federation of Exchanges (2012).

LAWS AND REGULATIONS 35 The Central Bank of Russia, which had initially held a controlling stake in the Moscow Exchange, gradually reduced its share to 12 percent in 2016. Other major shareholders as of 2016 were Sberbank (10 percent), Vnesheconombank (8.5 percent), and the European Bank for Reconstruction and Development (6 percent). At present, the Moscow Exchange comprises platforms trading equity and debt instruments, derivative contracts, foreign currencies, and commodities (precious metals and grains). Table 2.2 reports the market statistics for the period of 2012– 2017, which allows assessing the progress of the Moscow Exchange as a unified equity trading platform. We compare the changes in market capitalization for the Europe, the Middle East, and Africa (EMEA) group with which the Moscow Exchange is most closely affiliated, according to the World Federation of Exchanges (2018).17 The dynamics of changes in the total market capitalization are rather complex. Particularly, the Moscow Exchange demonstrated a significant decline in this metric in 2014, followed by a modest recovery in 2015, and a significant improvement in market capitalization in 2016–2017. On the other hand, the level of market capitalization in 2012 has not been achieved, and the overall change over the period of 2012–2017 was negative. In contrast, the EMEA region as a whole experienced a 40 percent increase in domestic market capitalization, indicating that the Moscow Exchange underperformed during the period of 2012–2017 compared to its peers, based on the market capitalization metric alone. Several factors likely contributed to the decline in market liquidity documented in Table 2.2. First, the national currency, the Russian Ruble (RUR), significantly devalued compared to the USD in 2014, which could have driven the negative changes in the market capitalization statistics, per the World Federation of Exchanges.

                                                             17

Note that although we rely on the statistics of the World Federation of Exchanges, the numbers of listed companies are somewhat different from those reported by the Moscow Exchange due to differences in methodology. For example, companies that are suspended from trade as at year-end may not be included in the World Federation of Exchange’s list, whereas the Moscow Exchange would still treat them as “active” rather than “dead” until an official delisting procedure is completed. Our investigation reveals that every year the number of such suspended but not delisted firms was, on average, 10–15.

36 OKSANA KIM The devaluation of the RUR, along with falling oil prices, resulted in the decline of national GDP in 2014, for which recovery began only in the second half of 2017 (World Bank 2018). We therefore reexamine the dynamics for the liquidity metric by converting all the numbers to the RUR. Indeed, the RUR-denominated change in market capitalization was positive in the case of the Moscow Exchange (41 percent) but was nevertheless still below the changes in market liquidity for the EMEA region (162 percent), suggesting that the Moscow Exchange underperformed compared to other stock markets, irrespective of the currency choice. In Table 2.3, we analyze changes in the total number of listed companies for the EMEA region. In the case of the Moscow Exchange, there has been a steady decline in the number of listed firms, resulting in an overall decrease of 20 percent. Conversely, the EMEA region experienced a 7 percent increase in the number of listed firms, which supports the previous conclusion that the Moscow Exchange underperformed its peers during the period 2012– 2017. One should note that the economic recession, according to experts, is still in progress in Russia, as demonstrated by the decline in GDP in recent years and an array of economic factors, including a decline in energy resource prices, economic sanctions imposed by the international community beginning in 2014, and the devaluation of the RUR, which have collectively impacted the development of the Russian capital market. Another potential explanation of the stale growth in the number of listed firms is the increased rigor of listing and reporting obligations introduced in 2014 by the Moscow Exchange, accompanied by the adoption of a revised, more detailed code of corporate conduct (discussed below). Lastly, we turn our attention to emerging markets exclusively and examine the performance of the MICEX (post-2011, the Moscow Exchange) price index, compared to the group of 24 emerging markets as defined by MSCI (2018). The dynamics of returns for the two price indices—the MICEX price index versus the MSCI Emerging Markets Index (EM)—are depicted in Figure 2.1. The two indices’ movements generally followed similar trends, although the Russian stock market outperformed the emerging markets group in 2004, 2006, and 2011. In 2005 and 2012–2015, the MICEX price index

LAWS AND REGULATIONS 37 underperformed compared to its peers. Contrary to expectations, the Russian market did not show growth following the merger of the RTS and the MICEX in late 2011, and the Moscow Exchange’s IPO in 2013 had virtually no impact on its performance. On the positive side, the economic sanctions imposed in 2014–2016 did not have an obviously negative impact on the relative performance of the Russian stock market. On the contrary, there is some evidence that the Moscow Exchange performed better than its peers in 2016.

 

 

N/A 20,760 1,996

Bucharest Stock Exchange

Budapest Stock Exchange

Cyprus Stock Exchange

 

N/A

BRVM

N/A

Belarusian Currency and Stock Exchange

52,480

N/A

Beirut Stock Exchange

315,198

N/A

Bahrain Bourse

Bourse de Casablanca

44,877

Athens Stock Exchange (ATHEX)

Borsa İstanbul

26,967

Amman Stock Exchange

995,088

67,951

Abu Dhabi Securities Exchange

BME Spanish Exchanges

2012

EMEA exchanges

2,105

19,797

24,574

N/A

53,831

195,746

1,116,561

N/A

N/A

N/A

82,594

25,764

109,639

2013

4,031

14,513

22,387

11,710

52,747

219,763

992,914

575

11,328

N/A

55,154

25,555

113,740

2014

17,687

18,539

12,493

45,928

N/A

188,862

787,192

534

11,381

19,251

42,080

25,452

111,937

2015

2,514

22,870

18,073

12,476

58,050

157,702

705,369

1,239

12,123

19,369

37,206

24,553

120,977

2016

2,822

31,554

23,621

12,486

67,048

227,512

888,838

157,617

11,492

21,706

50,605

23,969

124,529

2017

Change for the period, %

Table 2.2. Domestic market capitalization of listed firms, EMEA region, 2012–2017 (million USD)

38 OKSANA KIM

 

6,475

Ljubljana Stock Exchange

 

N/A

Kazakhstan Stock Exchange

70,338 3,631 825,340 25,394,076

Luxembourg Stock Exchange

Malta Stock Exchange

Moscow Exchange, USD

Moscow Exchange, RUR

3,396,505

907,723

Johannesburg Stock Exchange

LSE Group

108,989

N/A

2,832,189

N/A

1,486,315

Irish Stock Exchange

Iran Fara Bourse Securities Exchange

Euronext

Dubai Financial Market

Deutsche Börse AG

25,344,122

770,657

N/A

78,641

4,428,975

7,128

26,228

942,812

170,123

N/A

3,583,900

N/A

1,936,106

21,531,120

385,927

3,642

63,168

4,012,882

7,519

22,973

933,931

143,466

N/A

3,319,062

87,859

1,738,539

27,418,502

393,238

4,405

47,131

3,878,774

6,035

34,892

735,945

128,009

3,305,901

83,937

1,715,800

2,692

38,614,969

622,052

4,438

60,981

3,467,434

5,269

40,130

958,907

119,968

16,508

3,463,888

92,236

1,718,032

35,915,508

623,425

5,171

68,639

4,455,408

6,318

45,558

1,230,977

146,554

17,851

4,392,995

107,575

2,262,223

41%

−24%

LAWS AND REGULATIONS 39

995,719 N/A N/A N/A

Nairobi Securities Exchange

Namibian Stock Exchange

Nasdaq Nordic Exchanges

Nigerian Stock Exchange

161,855 59,182 N/A N/A N/A

Tel Aviv Stock Exchange

The Egyptian Exchange

Trop-X

Tunis Stock Exchange

Ukrainian Exchange 177,408

N/A

Tehran Stock Exchange

Warsaw Stock Exchange

8,942

7,180

204,543

N/A

8,601

1

61,630

203,301

345,777

1,540,700

1,233,439

467,366

373,375

SIX Swiss Exchange Stock Exchange of Mauritius

152,576

N/A

Qatar Stock Exchange Saudi Stock Exchange (Tadawul)

N/A

N/A

265,377

N/A

1,269,214

N/A

N/A

24,580

2013

Palestine Exchange

242,765

20,264

Muscat Securities Market

Oslo Børs

2012

EMEA exchanges

40 OKSANA KIM

168,896

12,246

8,744

3

70,084

200,525

113,858

8,751

1,495,314

483,116

185,860

3,187

219,370

62,766

1,196,725

1,924

26,013

24,170

2014

137,770

5,720

8,819

3

55,192

243,904

87,246

7,239

1,519,323

421,060

142,556

3,339

193,896

49,974

1,268,042

1,911

20,429

22,232

2015

140,859

4,453

8,450

8

32,118

215,007

101,008

7,605

1,414,746

448,939

154,892

3,390

234,102

28,901

1,249,628

2,356

19,237

23,316

2016

201,393

5,198

8,923

19

46,546

231,049

106,329

9,743

1,686,497

451,379

130,610

3,891

287,192

37,218

1,533,497

2,915

N/A

21,299

2017

Change for the period, %

 

43,589,582

N/A

117,671

38,172,883

20,037

96,790

43,339,749

18,414

96,079

54,586,845

20,181

100,317

55,859,109

22,765

150,646

30.77

32.89

55.79

69.73

62.08

57.61

1,228,693,082 1,433,504,432 2,129,691,861 3,021,864,001 3,388,576,650 3,218,043,274

39,934,123

N/A

106,037

Source: World Federation of Exchanges (2018).

RUR/USD exchange rate

Total region, RUR

Total region, USD

Zagreb Stock Exchange

Wiener Börse

162%

40%

LAWS AND REGULATIONS 41

 

N/A N/A 3,200 243 N/A

Beirut Stock Exchange Belarusian Currency and Stock Exchange

BME Spanish Exchanges

Borsa İstanbul

Botswana Stock Exchange

52 101

Budapest Stock Exchange

Cyprus Stock Exchange

 

81

N/A

Bucharest Stock Exchange

BRVM

77

N/A

N/A

Bahrain Bourse

Bourse de Casablanca

N/A

265

Athens Stock Exchange (ATHEX)

95

50

83

N/A

76

N/A

236

3,245

N/A

251

239

243

Amman Stock Exchange

65

2013

66

2012

Abu Dhabi Securities Exchange

EMEA exchanges

94

48

83

38

75

N/A

227

3,452

67

10

N/A

244

236

65

2014

84

45

84

39

75

N/A

393

3651

62

10

46

240

228

68

2015

Table 2.3. Number of listed companies, EMEA region, 2012–2017

42 OKSANA KIM

81

43

86

43

75

34

381

3,506

55

10

44

218

224

68

2016

74

41

87

45

74

35

375

3,136

N/A

10

43

200

194

69

2017

Change for the period, %

 

N/A N/A 228

Nasdaq Nordic Exchanges

Nigerian Stock Exchange

Oslo Børs

115

Muscat Securities Market 751

293

Moscow Exchange

N/A

2012

EMEA exchanges

Namibian Stock Exchange

22

Malta Stock Exchange

Nairobi Securities Exchange

293

61

Ljubljana Stock Exchange

Luxembourg Stock Exchange

78

Kazakhstan Stock Exchange

2,767

387

Johannesburg Stock Exchange

LSE Group

N/A

N/A

50

Irish Stock Exchange

1,062

1,073

Euronext Iran Fara Bourse Securities Exchange

216

N/A

755

N/A

N/A

116

262

2013

N/A

274

2,736

55

80

375

50

N/A

N/A

Dubai Financial Market

720

747

Deutsche Börse AG

220

189

787

38

65

117

257

2014

24

220

2,752

51

76

380

N/A

52

1,055

58

670

214

184

832

41

64

116

254

2015

23

192

2,685

46

85

382

N/A

53

1,068

60

619

214

170

938

42

65

113

245

2016

23

180

2,590

38

98

376

51

84

1,051

60

592

225

167

984

44

N/A

112

234

2017

23

168

2,498

35

103

366

52

103

1,255

61

499

−20%

Change for the period, %

LAWS AND REGULATIONS 43

61 322 549 235 N/A N/A N/A 867 99

Stock Exchange of Mauritius

Tehran Stock Exchange

Tel Aviv Stock Exchange

The Egyptian Exchange

Trop-X

Tunis Stock Exchange

Ukrainian Exchange

Warsaw Stock Exchange

Wiener Börse

Source: World Federation of Exchanges (2018).

13,752

268

SIX Swiss Exchange

Total region

158

Saudi Stock Exchange (Tadawul)

N/A

N/A

Qatar Stock Exchange

Zagreb Stock Exchange

N/A

Palestine Exchange

44 OKSANA KIM

13,667

N/A

102

895

N/A

71

1

236

508

314

64

272

163

N/A

N/A

14,735

193

99

902

172

77

4

247

473

315

67

276

169

43

48

15,004

186

92

905

160

78

4

252

461

318

72

270

171

43

49

14,783

160

83

893

123

79

9

254

451

325

76

264

176

44

48

14,752

155

536

890

96

81

24

255

457

326

76

263

188

45

48

7%

LAWS AND REGULATIONS 45

2006

2008

 

Source: Thomson Reuters’ Datastream (2018).

‐1

‐0,5

0 2004

0,5

1

1,5

Year

2010

2012

2014

2016

MSCI EM returns

MICEX returns

MICEX price index versus MSCI EM returns, 2004–2017

Figure 2.1. Dynamics of price index returns (USD): the MICEX price index compared to the 24 countries comprising the MSCI Emerging Markets Index

Returns

46 OKSANA KIM

2.2. Laws and regulations outlining the major corporate governance provisions Prior to 2002, public companies followed limited corporate governance provisions defined in the Federal Law (N 208FZ) on JointStock Companies adopted in 1995 (Central Bank of Russia 1995). This law provided the foundations for creating an effective corporate governance system, although its provisions were not enforced and public companies had significant discretion over its implementation. According to the law, the general meeting (GM) of shareholders is the supreme governing body. The annual meeting of shareholders is required to be held between 2 and 6 months after the company’s financial year-end. During the meeting, shareholders are charged with the election of the board of directors (the supervisory board), the revision commission, and an external auditor (each by a majority vote). According to this law, the board of directors is responsible for providing oversight of the actions of the executive bodies: the management board (if one was appointed)18 and the CEO. In rare circumstances, executive functions can be transferred to a managing (e.g., parent) organization (typically upon restructuring). The boards of directors are to be elected for an annual term (there is no option for a staggered board) and each member can be reelected an unlimited number of times. Shareholders can terminate the duties of a supervisory board early and, if necessary, have the right to call for extraordinary meetings throughout the year. The Russian law also set the minimum number of directors to 5, and larger companies with more than 10,000 voting shareholders must have at least 9 directors on their boards. Board members have

                                                             18

As will be discussed in the next chapter, only two-tier boards have formally established management boards. In the case of one-tier board structures, the CEO is the sole executive body.

LAWS AND REGULATIONS 47 to be reelected by cumulative vote to ensure the representation of minority equity holders.19 Russian companies close their books on December 31, with no exception, and financial results are expected to be announced by the end of the first quarter (March 31) for local accounting standards-based financial statements and later (normally within 4 months after financial year-end) for IFRS/US GAAP-based financial statements. The CEO’s performance is evaluated based on the financial results for the preceding financial year and the board makes dismissal/retention recommendations. Figure 2.2 provides an overview of the timeline of the decisions made by shareholders and the board of directors. Beginning in 2002, Russian public firms were encouraged to comply with the very first official Corporate Code of Conduct adopted by the former Russian regulator, the Federal Commission on Securities Markets (see Central Bank of Russia 2002: April 2002, no. 421). The code’s provisions, however, were only a set of recommendations for companies to follow, and there were no penalties for non-compliance.20 The code’s provisions pertaining to the board of directors’ functions and composition were rather limited. Companies were encouraged to have at least three independent directors with no quota established for nationality, gender, or race of the individuals named to boards. Consistent with other countries’ practices, an independent director is an individual who does not have familial or financial ties with a company.21 Accordingly, foreign directors almost always fall under the definition of an independent

                                                             19

20

21

 

The provisions of the aforementioned laws did not require firms with fewer than 50 shareholders to appoint boards of directors. This is not particularly relevant to our study because public firms have hundreds and thousands of shareholders. Companies demonstrated different levels of compliance with this code: some included the provisions of the code in their annual report outlining which ones they followed, whereas others did not mention the extent of their compliance in any reporting documents. Auditors do not have to attest to the company’s compliance with the code. The stock exchanges—the RTS and the MICEX—imposed additional requirements on companies with the highest level of listing, e.g., reporting under IFRS. Specifically, the individual (1) has not been employed by the company in the previous three years; (2) is not an officer of another company where any of the

48 OKSANA KIM director and companies recognize them as such. Companies were recommended to create a number of committees, and an audit committee shall be chaired by and comprise independent directors (Central Bank of Russia 2002).22 As in the 1995 Law on Joint-Stock Companies, the code emphasized the effectiveness of the board of directors’ work rather than the balance in its composition. Consistent with practices in other jurisdictions, boards of directors of Russian firms are responsible for monitoring and advising executives: the CEO and the management team. Boards are charged with establishing priorities for companies’ operations, formulating their long-term strategies, convening an annual shareholder’s meeting and preparing its agenda, deliberating on debt and equity issuances, evaluating the performance of the company’s executive bodies, issuing recommendations regarding payments of dividends, and providing counsel on restructuring matters, among other duties. Each company, as a rule, would have an internal charter that provides specific details regarding the duties and composition of its board of directors. In practice, large companies also set up one or more committees—audit, nomination, remuneration, strategic planning, risk management, investor relations, etc.— whose duties are also outlined in the companies’ charters and summarized in annual reports. The practice of creating committees is, however, voluntary.23

                                                            

22

23

officers are members of the board’s nominations and remunerations committee; (3) has no affiliation with any officer (manager) of the company; (4) is not a party to an obligation whereby they are entitled to acquire property (receive money) valued at 10 or more percent of the total annual income of such party, less their remuneration as board members; (5) is not a major agent of a company that is a counterparty to the company whose transactions with the company account for 10 or more percent of the company’s asset value; and (6) is not a representative of the state. Russian blue chips previously listed overseas generally followed the corporate governance provisions of foreign markets (e.g., the Combined Code on Corporate Governance of the UK). Sample governance structures can be found in public firms’ annual reports that are available at e-disclosure.ru and also on individual companies’ websites.

Year (t) financial results are reported

Q1 end (March 31st) Q2 end

New Board (t+1) is elected at a GM

Q3 end

Year-end (t+1): CEO (t+1) closes the books

December 31 (t+1)

Notes: The financial reporting period ends on December 31 of year (t). The financial results for year (t) are reported and filed by March 30, year (t+1), which is the end of the first quarter. The CEO’s performance is evaluated once the results are reported, and the board that was elected in year (t) makes a dismissal/retention recommendation. At the end of the second quarter (or close) of year (t+1), the board is re-elected at the GM of the shareholders.

Year-end (t): CEO (t) closes the books

December 31 (t)

CEO (t) performance is evaluated and a new CEO (t+1) steps in in the case of dismissal

Figure 2.2. Timeline of shareholders’ and board of directors’ meetings and actions

LAWS AND REGULATIONS 49

50 OKSANA KIM In 2014, the Moscow Exchange implemented a corporate governance reform, creating a three-tier listing system with listing and reporting requirements following those of the world’s leading markets (Moscow Exchange 2018). At the same time, the Central Bank of Russia24 established and approved a new, more detailed, code of corporate governance (March 2014). The new code required onethird of the directors appointed to boards to be independent directors. In addition to previous requirements, an independent director should also not possess more than 1 percent of the total shareholder’s capital of the company and was not expected to provide consulting services to the company, its subsidiaries, and its controlling entity. The code called for the creation of audit committees comprising independent directors; it did not contain any recommendations concerning the gender balance of the board or the cultural background of the directors. Table 2.4 provides comparative details regarding the three-tier listing scheme adopted by the Moscow Exchange in 2014. As evidenced therein, the first and second levels of listings on the Moscow Exchange require compliance with stringent reporting obligations and also adherence to the provisions of the new code on corporate governance (2014), whereas the third level of listing grants exemptions from provisions of the code.25 Additionally, companies with governmental ownership must strictly follow the code.26

                                                             24

25

26

The Central Bank of Russia (also the Bank of Russia) has served as a mega-regulator for Russia’s financial markets; since 2013, its duties and oversight functions were significantly expanded under the current chair Ms. Elvira Nabiullina (see https://www.bis.org/review/r170314h.htm). The bank’s history dates back to the 19th century when it was created as the State Bank of the Russian Empire and later became the State Bank of the Soviet Union (Gosbank). It is not uncommon for public issuers to join the Moscow Exchange as Level III listings with an intention to upgrade their status to the most prestigious Level I listing. Therefore, in practice, many public companies voluntarily adopted the corporate governance provisions that Level III listings are exempt from. Prior to the merger in 2011, the RTS and the MICEX also had tiered listing systems and Level A entailed the most stringent obligations. Nevertheless, the corporate governance requirements, except for IFRS reporting, were not strictly formalized. Our investigation shows that firms with state ownership had already implemented stringent governance requirements prior to 2014 and hence the new listing obligations hardly affected them.

LAWS AND REGULATIONS 51 Table 2.4. Three-tier listing system adopted by the Moscow Exchange in 2014 Requirements Compliance by issued securities with the Federal Law on securities issuance (No. 39 FZ, 1996) and provisions of the Central Bank Issuance and registration of a prospectus document Disclosure of information in accordance with the Federal Law on securities issuance (No. 39 FZ, 1996) Free-float requirements Minimum period of issuer’s business activities Reporting in accordance

Level I

Level II

Level III

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

≥ 10% 3 years

≥ 10% 1 year

N/A N/A

Prior 3 years

Prior 1 year

N/A

1 million RUR, including 70% of all trading days in a given quarter

N/A

N/A

with IFRS27 (audited) Minimal quarterly liquidity requirements

 

 

                                                             27

 

As will be discussed below, the IFRS reporting requirement became mandatory in 2012, yet the listing requirements exempt Level III-listed firms from it. The IFRS adoption requirement was enforced only for consolidated financial statements. Accordingly, if a company had no subsidiaries but was Level III-listed, it did not have to adhere to IFRS reporting requirements.

52 OKSANA KIM Corporate management requirements (Level I and II only) Minimum number of independent directors on the board of directors

Disclosure of nomination and election (vote) of independent directors and their adherence to the independence criteria established by the Corporate Code Audit committee comprised of independent directors and chaired by independent directors Remuneration committee shall be elected annually and shall comprise independent directors Nomination committee shall be elected annually and the majority of its members shall be independent directors Internal audit department shall comprise non-executives The duties and responsibilities of the internal audit department shall be formalized

Not less than 1/5 of the total board size and not less than 3 individuals Yes

Not less than 2 individuals

N/A

Yes

N/A

Yes

Yes

N/A

Yes

No

N/A

Yes

No

N/A

Yes

Yes

N/A

Yes

Yes

N/A

Source: The Moscow Exchange (2018).

LAWS AND REGULATIONS 53

2.3. Accounting standards and reporting requirements. Adoption of IFRS After the dissolution of the Soviet Union in 1991, Russian companies reported under the local Russian Accounting Standards (RAS) that were largely based on the Soviet accounting principles emphasizing the legal form of a transaction. In 1998, the Russian government launched a number of initiatives aimed at modernizing reporting practices in Russia. In particular, in 1998 the Russian Ministry of Finance announced the gradual convergence of the RAS to the International Accounting Standards (IAS).28 One of the innovations in Russian accounting practices introduced over the period of 1998–2001 was the recognition of revenue and expense transactions in accordance with their substance rather than their legal form, which signified the beginning of a gradual transition from a cash to accrual basis of accounting. As a result of the first reform initiated by the Ministry of Finance, 14 new provisions on accounting (termed PBUs) were issued in 1998–2000 (Ministry of Finance 2012). The new provisions closely followed the IAS principles; however, major differences between the IAS and the RAS remained. For example, there was no requirement to prepare consolidated financial statements and companies continued to report on a standalone basis, and the fair value concept had limited application. In 2002, the Ministry of Finance delegated the responsibility for establishing accounting and reporting principles for banks and other credit institutions to the Central Bank of Russia (CBRF). Since 2002, the Ministry of Finance and the CBRF have been jointly responsible for promulgating accounting standards. Shortly after, the CBRF announced that all banks would be required to comply with the IAS starting from 2004 (CBRF 2004). In the same year, the Prime Minister of Russia declared that all companies and banks would switch to IFRS and that the Ministry of Finance would be responsible for developing guidance with respect to the RAS-IFRS transition period. One year later, the IFRS adoption plan was reaffirmed by

                                                             28

 

IAS and IFRS are used interchangeably throughout this manuscript.

54 OKSANA KIM the Finance Minister of Russia who confirmed that all listed companies would need to prepare consolidated financial statements using IFRS starting from 2004. At the same time, companies would continue preparing RAS-based standalone financial statements because those served as the basis for taxation (Ministry of Finance 2012). Effectively, the policy would lead to raising the reporting costs for publicly listed companies at least in the short-term, as two sets of financials would be required. In 2004, the Russian state parliament (Duma) preapproved the IFRS adoption plan, specifically emphasizing that the requirement to prepare financials in accordance with IFRS would not lift the requirement to prepare financial statements in accordance with RAS. According to the plan, companies would be allowed up to six months to file their annual IFRS-based reports with the Federal Committee on Securities Markets (FCSM), the main market regulator (Ministry of Finance 2012). In 2005, however, the plan did not obtain the approval of the Duma, the main reason being that “IFRS implementation would create reporting chaos due to lack of technical capabilities, as well as lack of incentives for transparency.” Additionally, experts questioned the quality of IFRS-based financials prepared by banks and credit institutions that were required to report in accordance with IFRS from 2004. The IFRS adoption plan was delayed for six years until 2010 when the Duma passed the law on Consolidated Financial Statements (No. 297 FZ), according to which banks, insurance firms, and companies listed on domestic exchanges would be required to file annual reports with regulators and publish financials in accordance with IFRS, following the year in which IFRS is officially adopted in Russia (Ministry of Finance 2012). As in the 2004 attempt to implement IFRS, companies would still need to prepare RAS-based standalone financial statements. The initiative was strongly endorsed by the global investment community. The first step on the way to its implementation was the translation of the IFRS and the IFRS for small- and medium-sized entities into Russian (Deloitte 2011). Additional updates were issued in 2011 in Russian and, in November 2011, the IFRS adoption procedure was signed off by the Russian government and the Ministry of Finance. Supervision over the

LAWS AND REGULATIONS 55 implementation of the IFRS adoption plan was delegated to the National Council on Financial Reporting Standards (NCFRS), a nongovernmental organization that was expected to consult with the Ministry of Finance, the Central Bank of Russia, and the FCSM throughout the transition process. The first full set of financials in accordance with IFRS were to be prepared for the year 2012 (with 2011 comparatives). Alongside with banks, insurance companies, and publicly listed firms, issuers preparing to raise capital via public or private placements were also required to comply with IFRS, unless they had fewer than 500 shareholders. In the latter case, the exemption from IFRS reporting had to be approved by a 75 percent majority of shareholders and granted by the FCSM. Firms that issued bonds or that reported under US GAAP were given a three-year exemption from IFRS reporting requirements (until 2015). The Russian Law required that IFRSbased financial statements were to be audited, made publicly available (published), and filed with the FCSM or the Central Bank within 120 days after the year end.29 The Russian government made a choice in favor of the accelerated mandatory adoption of IFRS, driven by Russia’s long-standing attempt to be admitted to the World Trade Organization (WTO). In December 2011, following 18 years of negotiations, the protocol for Russia’s accession to the WTO was signed in Geneva (WTO 2012). As a part of its WTO commitments and under pressure from the global community, Russia was expected to implement a number of innovations aimed at attracting FDIs into the country. One such initiative was the adoption of high-quality accounting standards such as IFRS. Indeed, extant research points out that IFRS adoption facilitates the inflow of FDIs and improves the scope of

                                                             29

 

The format and content of both the RAS- and IFRS-based financial statements have historically been regulated by the Ministry of Finance and the Central Bank, which also prescribed a standardized chart of accounts for companies. The requirements for financial statements generally adhere to those worldwide and Russian companies have to prepare a balance sheet with two years of comparative figures, an income statement, a statement of changes in equity, a cash flows statement, and disclosure notes. The financial year-end for both RAS and IFRS-based financial statements is December 31 and both sets of financial statements must be audited.

56 OKSANA KIM cross-border mergers and acquisitions (Amiram 2012; Chen et al. 2014).30 The accelerated IFRS adoption plan raised concerns with respect to the actual RAS-IFRS transition path. Experts noted that small Russian firms did not have internal capabilities, including human resources and technology, to transform financial statements from RAS- to IFRS-compliant and would have to outsource this function (Deloitte 2011). By some preliminary estimates, there were only 40,000 professionals in Russia capable of working with IFRS in 2012, which was far from enough to service the entire Russian economy (Accounting and Business International 2012). Further, the official IFRS adoption date in Russia was 2012, one month after the official IFRS adoption announcement, whereas there was no detailed IFRS implementation plan recommended by the Ministry of Finance. Given investor concerns that there would be reporting chaos in the first years of IFRS implementation in Russia, one would expect a negative spillover effect of this reform on the entire investment community. These concerns manifested in the negative market reaction exhibited by London-based investors towards Russian cross-listed firms, although those were already reporting under IFRS (Kim 2016a). Nevertheless, the counter-arguments to this criticism were that [1] a significant number of Russian public firms—not limited to blue chips—had already voluntarily adopted IFRS prior to the official date and that [2] the mandatory IFRS adoption reform was long-anticipated, which allowed companies time to prepare for the RAS-IFRS transition. In support of this narrative, Kim (2016a)

                                                             30

As noted above, the IFRS adoption plan was on the agenda for several years. Our data collection work, discussed in greater detail in the next chapter, suggests that a vast majority of Russian public firms adopted IFRS voluntarily prior to the official adoption date in 2012. Indeed, about 70 percent of the sampled firms that we will rely upon to conduct empirical tests complied with IFRS and US GAAP requirements, and the latter gradually transitioned to IFRS by 2015. Therefore, the early adoption by Russian firms can be partly explained by the long-awaited official IFRS adoption. Additionally, Russian blue chips had listed on the world’s leading markets, which required reporting under IFRS or US GAAP.

LAWS AND REGULATIONS 57 found that there was no detectable market reaction to either the preliminary endorsement or the official IFRS adoption announcement from local (Russian) investors. Prior literature extensively examined the benefits and costs of IFRS adoption in various jurisdictions and under different adoption schemes but the findings from this stream of research are largely mixed. Studies commonly focused on changes in value-relevance of earnings and book value per share, and/or changes (differences) in the degree of conditional conservatism and the timeliness of reported information due to the adoption of IFRS. The notable study of Barth et al. (2008) examined voluntary IFRS adopters from 21 countries and found that the value-relevance of earnings and the timeliness of recognition of losses improved following the adoption of IFRS. Bartov et al. (2005) studied comparative value-relevance of earnings for German firms listed on the New Market and documented that IAS-/US GAAP-reported earnings had higher valuerelevance than those based on local standards. Hung and Subramanyam (2007), however, found very limited evidence of improvement in value-relevance and conditional conservatism of earnings for a sample of German firms. Evidence relating to the improvements in the quality of reported information as a result of IFRS adoption in emerging markets is also mixed. Liu and Liu (2007) reported higher value-relevance of information for B-shares listed on the Chinese market and reporting under IAS. Chen et al. (2001) found no evidence of improved earnings quality for a sample of firms that were required to reconcile Chinese GAAP numbers to IAS. Ahmed et al. (2013) conducted a meta-analysis of the IFRS adoption literature and concluded that the value-relevance of book value did not increase, whereas the value-relevance of earnings and the accuracy of analyst forecasts generally improved following the adoption of IFRS. A related stream of literature examined the market reaction and changes in liquidity and cost of capital around the IFRS adoption event. For a global sample of firms from 26 countries, Daske et al. (2008) reported improvements in these metrics, but only based on the premise that the major effects occurred before the switch to IFRS. Importantly, the authors documented that the major capital

 

58 OKSANA KIM markets benefits occurred in countries with strong legal enforcement mechanisms and where firms had strong incentives to adopt high-quality standards. Further, Daske et al. (2013) found that these capital markets effects were significant in the case of “serious” adopters, as opposed to “label” adopters. Armstrong et al. (2010) documented an incrementally negative market reaction to several IFRS-related events for code (civil law) countries, compared to common law countries, indicating that investors were concerned whether the benefits of IFRS adoption would materialize. In the case of the Russian market, Kim (2016b) reported that IFRS adoption reform had a positive impact on the reporting quality of public firms, when supported by other regulatory changes.31

2.4. Implications of the corporate governance reforms for the Russian stock market We examine the dynamics of changes in FDIs during the period of 1998–2016. Figure 2.3 reports the net inflow of FDIs, expressed in millions of current USD (World Bank 2018). As was noted above, the very first corporate governance code was adopted in 2002, and that was the period when FDIs started steadily growing, peaking in 2008. The financial crisis hit the Russian economy in mid-2009, and Figure 2.3 shows a significant decline in FDIs, although recovery began soon afterwards in 2010. Another sharp increase in FDIs began in 2012, the period when an array of governance reforms was implemented, including the formation of the joint Moscow Exchange, IFRS adoption, and accompanying changes in regulations. In 2014, FDIs posted a negative dynamic, most likely as a result of the economic sanctions imposed by Western society, which affected select Russian companies and also the country’s economy as a whole. Therefore, the adoption of revised governance regulations

                                                             31

The changes in regulations and reforms that accompanied IFRS adoption are discussed in detail in Kim (2016b) and are therefore omitted here. Kim (2016b) provides strong evidence of improvements in both the value-relevance of information and conditional conservatism upon the mandatory adoption of IFRS and accompanying changes in regulations. We do not replicate their results here.

LAWS AND REGULATIONS 59 in 2014 and the creation of a new three-tier listing system by the Moscow Exchange discussed above were clouded by the severe political turmoil that left Russia in isolation from its economic partners. The FDI’s dynamics are a function of a myriad of factors, and the literature suggests that the strength and credibility of a national stock market, along with its governance system, is only one key indicator of donors’ willingness to commit funds (La Porta et al. 1998; Globerman and Shapiro 2002; Luo et al. 2009). To supplement the FDI analyses, we now examine the statistics of non-resident (foreign) clients (investors) of the Moscow Exchange during the period of 2007–2017, which is a more direct measure of investor confidence in the Russian stock market. Figure 2.4 reports a steady increase in the total number of foreign investors over the examined period. Although foreign entities somewhat decreased their presence on the Moscow Exchange, the decline was well-compensated by the increasing number of foreign individual investors. Overall, this indicates that economic sanctions did not diminish foreign investor confidence in the Russian stock market.32

                                                             32

 

Vedomosti (2016) reported conclusions similar to ours based on the total volume of foreign investors’ transactions; the presence of foreign investors did not decline as a result of economic sanctions and their buy/sell trading balances with respect to Russian equities did not change (see https://www. vedomosti.ru/finance/articles/2016/03/22/634550-inostrannih-investorov).

YEAR

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: World Bank (2018).

0

10000

20000

30000

40000

50000

60000

70000

80000

Net inflow of FDIs into russia, in millions of usd (current)

Figure 2.3. Net inflow of FDIs in millions of USD (current)

60 OKSANA KIM

2007

2008

2010

2011

Total Foreign investors

2009

2013

Individuals

2012

Entitites

2014

2015

2016

2017

 

Source: The Moscow Exchange (2018). The breakdown for individuals versus entities is not available prior to 2012.

0

2000

4000

6000

8000

10000

12000

14000

16000

Number of non-resident (foreign) clients (investors) of the Moscow Exchange

Figure 2.4. Non-resident (foreign) clients (investors) of the Moscow Exchange, 2007–2017

LAWS AND REGULATIONS 61

62 OKSANA KIM

2.5. Conclusions In summary, we documented dynamic changes in both Russia’s corporate governance regulations and reporting requirements over the past two decades. Those changes were not made painlessly, as some of them—such as the adoption of IFRS and concurrent regulatory reforms—were implemented within a short timeframe, leaving market participants in disbelief. Other innovations, such as the 2014 improvements in listing regulations and governance, were overshadowed by global events such as the economic and trading sanctions imposed by the Western community. Nevertheless, the empirical evidence suggests that the Russian society as a whole benefited from these innovations, as demonstrated by the improved reporting quality of Russian firms, a significant inflow of FDIs, and improved investor confidence in the Russian market over the examined period.

Chapter 3 Board of directors’ structure and composition: one- versus two-tier boards “Corporate governance should be done more through principles than rules.” —Adi Godrej, chairman of the Godrej Group

In this chapter, we examine the structure and composition of Russian corporate boards. We begin our investigation by discussing the board structures that prevail in different jurisdictions and outline pros and cons of unitary versus two-tier boards. We provide the details regarding the types of the board structures adopted by Russian public companies. We then turn our attention to the determinants of adopting a unitary as opposed to a two-tier structure. Lastly but most importantly, we examine how the choice of board structure affects a firm’s performance and value.

3.1. Unitary versus two-tier board structure: overview of the major differences and global practices The unitary board structure, also referred to as the “one-tier” or “single-tier” model, represents a common model adopted in Western jurisdictions such as the US, the UK, and Australia. Two-tier boards, on the other hand, are prevalent among European countries and are often referred to as the “German model.” The choice of model is collectively defined by the applicable regulatory framework, historical developments, societal expectations, and differences in legal structures between jurisdictions. Additionally, the process of globalization has had a significant impact on the convergence of unitary and two-tier structures: within Continental Europe, only Austria and Germany have fully adopted two-tier structures (Heidrick and Struggles 2011). In contrast, the only nation that has fully adopted unitary board structures is the United Kingdom. Other European nations, as reported by Heidrick and Struggles

63

64 OKSANA KIM (2011), have generally embraced mixed structures that share features of both types of models. Remarkably, Belgium, France, Portugal, and Sweden have the highest proportion of mixed board structures, ranging from 74 to 95 percent. Denmark, Finland, the Netherlands, and Poland have predominantly two-tier boards (84–89 percent of firms), whereas Italy and Spain have a clear tendency to adopt unitary structures (68 and 83 percent of firms, respectively). Overall, the report by Heidrick and Struggles (2011) concludes that across 15 European nations,33 on average, 27 percent of firms have adopted a unitary structure, 42 percent adopted two-tier boards, and the remaining 31 percent of companies had a mixed board structure. These statistics show no particular trend towards a single board structure, suggesting that either unitary or two-tier structures are not strictly a European phenomenon. In an extended study, the International Finance Corporation (IFC) examined a larger spectrum of European members, including those newly admitted to the European Union (EU) and also Eastern European countries (IFC 2015). Interestingly, the examined jurisdictions do not necessarily represent the same group of nations in terms of historical, cultural, or geographical features when partitioned by board model. For example, there is a significant variation in board models among the Eastern European countries and those that were the members of the Soviet bloc. Thus, Bulgaria, Croatia, Cyprus, Greece, and Malta adopted a unitary board structure when developing national corporate governance regulations. The corporate governance regulations of the Czech Republic, Estonia, Latvia, Poland, and Slovakia strictly require a two-tier structure. Lithuania and Romania, on the other hand, grant companies full discretion over their board structures (IFC 2015). The unitary board structure has been shaped by the historical, economic, and cultural processes of the past two centuries in the countries that have adopted it. The norms of free market capitalism and shareholder orientation with widely dispersed ownership in

                                                             33

Those examined were Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

STRUCTURE AND COMPOSITION 65 these countries have formed a modern structure of the corporate board that highly favors a unitary governing body—the board of directors—that comprises both insider executives and outsiders. On the contrary, the main feature of the German model is its stakeholder orientation and lesser emphasis on wide shareholder groups, as well as the prevalence of block (concentrated) shareholding. The cultural traditions within Continental Europe emphasize social responsibilities, such as those towards employees (Germany) or minority groups (Scandinavian countries) (Coffee 2006; Larcker and Tayan 2016). The two-tier board structure, dictated by this practice of codetermination, allows incorporating the interests of main stakeholders other than capital providers in the board of directors. Respecting and addressing the interests of various stakeholder groups promotes long-term value creation and enhances stability within an organization (Block and Gerstner 2016). The EU promotes a compromise that would satisfy the interests of most of its members: it generally supports the freedom of choice between a unitary and a two-tier board structure for European companies (IFC 2015). The unitary board structure implies that managerial and supervisory duties are invested in a single board of directors. This board structure allows both executive and non-executive directors to serve on the board. Executive directors are typically employees of the company working for it in a senior capacity and are usually concerned with day-to-day operations; non-executive directors are commonly outsiders serving on the board of directors part-time and receiving a flat remuneration. The main duties of non-executive directors include providing an independent perspective on a company’s mission and management, as well as evaluating the performance of the executive directors. A unitary board structure allows the duties of a CEO and a Chairman to be borne by the same individual, whereas a two-tier board structure typically prohibits this practice.34 According to Block and Gerstner (2016), the CEO is

                                                             34

 

The Spencer Stuart Board of directors index (2015) reports that about 50 percent of US corporations implemented this practice of CEO duality. Goyal and Park (2001) report that the sensitivity of CEO turnovers to firm performance is significantly lower when the same individual performs the duties of CEO and

66 OKSANA KIM more commonly the only executive on the board of American companies due to a recent push towards independent boards and committees. Within a two-tier board, a supervisory board—the board of directors—that typically comprises non-executive directors is separated from the management board that consists of executives who run the business. The supervisory board evaluates the performance of the executive bodies—the management board and the CEO—and issues dismissal recommendations, if necessary. Lastly, a unitary board structure almost always requires the election of a number of committees, while the two-tier structure is less demanding in this regard. Table 3.1 summarizes the major differences between unitary and two-tier board models. The mixed board structure adopted within some European jurisdictions, as discussed above, generally leans towards a two-tier model with separate meetings and agendas for the non-executive and executive boards. Nevertheless, the CEO and chairman roles are combined and the same individual governs both streams of meetings, as in the unitary structures. Additionally, some executives are allowed to sit on the non-executive board (see Heidrick and Struggles 2011). As was noted above, a significant number of European companies—31 percent—prefer this particular model of corporate governance, yet no study, to our knowledge, has examined the pros and cons of adopting such a board structure. Further, the literature separately identifies “Nordic boards” as a distinct phenomenon; such boards are grounded in a unitary structure and have a smaller membership but are characterized by a significant proportion of females on the board (which is generally a feature of a two-tier board): 42 percent in Norway, 27 percent in Sweden and Finland, and 16 percent in Denmark (IFC 2015). We summarize the main advantages and disadvantages of unitary versus two-tier boards in Table 3.2. Unitary boards are characterized by the improved flow of information, leading to faster and more efficient decisions. Unitary boards may be considered

                                                             chairman of the board. The authors conclude that the CEO duality practice undermines the independence of the board, making it difficult to remove poorly performing CEOs.

STRUCTURE AND COMPOSITION 67 friendlier due to enhanced informal communications and social ties, which could be an advantage or a disadvantage for the company. On one hand, Adams and Ferreira (2007) propose that enhanced social relations and friendship within unitary boards create an enhanced exchange of information between executives and directors, which improves a board’s advisory potential. On the other hand, the literature has cited clashes of personalities and in-group bias as negative distinct features of unitary boards. The latter refers to the psychological phenomenon where group members are likely to agree with the decisions made by the rest of their peers, as well as to value the personal characteristics of those in the group, including themselves, higher than those of members of other groups (see Aberson et al. 2000; Page 2009). Thagard (2007) noted that unconscious in-group bias does not necessarily occur when individuals have similarities or share beliefs. Instead, the repeated exposure of people to certain groups tends to increase the bias. Further, individuals with higher powers and positions within an organization generally have higher in-group bias compared to those with lower levels of status and power. Overall, in-group bias is likely to impede a board’s monitoring role, according to the literature.

 

68 OKSANA KIM Table 3.1. Major differences between unitary and two-tier boards Unitary Board

Two-Tier Board

Composition: Single board comprising executive and non-executive directors.

Major roles and responsibilities: Decision-making and oversight; management of the business; evaluation of business performance; strategic planning; accountability, etc.

CEO duality: Allowed, but may not be recommended by the corporate governance code; at the discretion of the company. Appointment and dismissal: Both executive and non-executive directors are appointed by shareholders.

Committees: Mandatory/recommended by the corporate governance provisions: audit committee, strategic committee, remuneration committees, personnel committee, etc.

Supervisory board is separated from management board. The former comprises non-executive directors, whereas the latter comprises executives.

Supervisory board (board of directors): monitoring, performance evaluations of executive bodies (management, CEO), strategic oversight, accountability. Management board: performance-enhancing decision-making; management of various divisions; directing day-to-day operations.

Generally prohibited or not recommended.

Supervisory board members are appointed by shareholders, while management board members are appointed by the supervisory board.

Optional but recommended in many jurisdictions.

Source: Spencer Stuart (2015); The European Confederation of Directors’ Associations (2014); The European Corporate Governance Report (Heidrick and Struggles 2011; 2014).

STRUCTURE AND COMPOSITION 69 Experts cite separation of duties between monitoring parties and executives as the main advantage of a two-tier board structure (IFC 2015). The very existence of a separate monitoring body may prevent fraud by the management. Information asymmetry has been cited as the major shortcoming of the two-tier system, leading to suspicion, confusion about authority, and lack of accountability between the board of directors and executives. Operational costs of two-tier boards are substantially higher due to separate meetings by the two boards and additional coordination efforts. In summary, both unitary and two-tier board structures offer distinct advantages and disadvantages. Fortunately, a majority of European jurisdictions allow a choice between the two models.

 

70 OKSANA KIM Table 3.2. Advantages and disadvantages of unitary versus twotier boards Panel A.

Unitary board

Advantages

Disadvantages

The role and impact of non-executive directors are enhanced because all participants share legal responsibility for the actions of the board. Superior flow of information among the board members due to common meetings.

Non-executive directors are part of a decision-making process, hence their monitoring role is reduced.

Faster and more inclusive decisionmaking process due to a better understanding of the business as a result of attendance of meetings by executives; separate decision approval protocols are not required. Better professional relationships among directors due to easier cooperation and generally a greater number of meetings. Direct performance feedback due to a better chance of face-to-face critique from non-executive directors during meetings. Friendlier environment as a result of common tasks and association with the same group (in-group bias).

The monitoring role may be limited due to the part-time position of nonexecutive directors and their limited involvement. Enhanced interpersonal relationships and friendship on the board are likely to undermine the true independence of non-executive directors, therefore reducing their monitoring and evaluative roles. Clashes of personalities are more likely and hence, conflicts and increased resistance during the decision-making process are more pronounced. In the case of busy directors serving on multiple boards, there is a risk that internal information may be shared with competing peers. Smaller board size restricts the variety of expertise and professional skills of directors.

Source: Spencer Stuart (2015); The European Confederation of Directors’ Associations (2014); The European Corporate Governance Report (Heidrick and Struggles 2011; 2014); Block and Gerstner (2016).

STRUCTURE AND COMPOSITION 71 Panel B. .

Two-tier board

Advantages

Disadvantages

Separation of duties between the monitors and the executive bodies, resulting in a more independent evaluation of the management’s and CEO’s performance. The very existence of the separate monitoring and evaluative board may deter management from wrongdoing.

The secrecy surrounding the discussion process during board of directors’ meetings may lead to confusion over authority and lack of accountability. Information asymmetry between the supervisory and management boards can significantly slow down the decision-making process and lead to conflicts between the supervisory and the management boards. Extended monitoring may pose operational challenges and increase costs. Less frequent meetings of the board of directors leads to untimely decisions regarding CEO dismissal. Larger boards are likely to increase the divergence of opinions, making it difficult to reach a verdict.

Greater involvement of various stakeholder groups such as employees. Reduced influence of the management and the CEO on the board’s decisionmaking process. Board of directors’ committees are optional and boards have full discretion in deciding which functions must be strengthened.

Source: Spencer Stuart (2015); The European Confederation of Directors’ Associations (2014); The European Corporate Governance Report (Heidrick and Struggles 2011; 2014); Block and Gerstner (2016).

 

72 OKSANA KIM

3.2. Russian public companies’ choice to adopt a unitary versus a two-tier board model Russian corporate law allows companies to have a unitary or a twotier board model. Particularly, the Law on Joint-Stock Companies (No. 208 FZ 1995), which set the foundation for the corporate governance principles in Russia at the onset of the formation of the market economy, contains only one restriction related to the composition of the board of directors: if a company chooses a two-tier system, the participation of the management (executives) on the board of directors shall be limited to ¼ of the number of members on the board of directors. In the case of a two-tier model, the board of directors is called a “supervisory board” (nablyudatelnij sovet), whereas the executives board is called the “management board” (pravlenye), consistent with terminology for two-tier boards adopted in other European jurisdictions. The law explicitly prohibits the practice of CEO duality.35 The corporate governance codes (2002, 2014) do not impose additional restrictions on the structure of the board of directors, and their recommendations are predominantly aimed at enhancing the efficiency of the board’s activity, irrespective of its structure. The CEO may or may not serve as head of the management board and there is some variation in the native Russian terminology relating to this position. In the vast majority of examined firms in our study, the CEO was the president of the company, whereas in a limited number of cases the CEO was a general director. In order to correctly identify a CEO, we ensured that a person was identified as “edinolichnij ispolnitelnij organ” in the quarterly report (section 5.1) and that he/she also personally attested to the accuracy of the company’s financial statements.

                                                             35

While CEO duality has received considerable attention in the literature, it is still unclear whether bestowing the functions of board chairman and CEO on the same individual is optimal, as will be discussed later.

STRUCTURE AND COMPOSITION 73 3.2.1. Data collection process Our empirical investigation is based on a unique hand-collected dataset of corporate governance metrics. We started the data collection process by identifying the list of Russian public firms with active listings as of December 31, 2016, using Thomson Reuters’ Datastream. The major difficulty we encountered was that the records of the Moscow Exchange significantly diverged from the respective list of equities in Datastream, from which we expected to retrieve financial information. In August 2017, we launched a major investigation into this discrepancy with the Thomson Reuters content team, and the “clean up” process for the Russian market was completed on August 24, 2017. On this date, Datastream’s and the Moscow Exchange’s records showed the same lists of active/delisted public companies.36 Lastly, we relied on Thomson Reuters’ Datastream rather than Eikon, both of which had impressive coverage of emerging markets,37 because the latter database partially omitted coverage of delisted companies.

                                                             36

37

 

According the Thomson Reuters, this significant discrepancy (in which 25 percent of Russian public firms were either missing in Datastream or had a wrong listing status) was due to the 2011 merger of the RTS and the MICEX that created information acquisition difficulties from the newly established Moscow Exchange. Datastream’s methodology in relation to the Russian market is complex. As of January 2018, there was still no “Moscow Exchange” equity list. The primary list of equities, MICEX-RTS, includes all companies that were listed on the MICEX prior to its merger with the RTS in 2011, and also all firms listed on the joint Moscow Exchange post-merger. Thomson Reuters treats this list of public companies as the primary Moscow Exchange list of equities. The second list of stocks supported by Datastream, the RTS, consists of public companies that had listed on RTS Classica, RTS Standard, and RTS order-driven platforms prior to 2011, and also RTS Board stocks that were registered with the RTS Board prior to and after the merger. The RTS Classica-listed firms were Russian market blue chips and were dual-listed on both the RTS and the MICEX prior to the merger. After the merger, these companies’ RTS trading codes were dropped but the MICEX codes were retained as the primary codes. Hence, such firms were already included in Datastream’s main MICEX-RTS (Moscow Exchange) list. The firms that were listed on RTS Standard and/or RTS order-driven platforms were either dual-listed on the MICEX (and followed the same pattern as RTS Classica’s firms) or gradually migrated from the RTS to the joint MICEX-RTS (Moscow Exchange) after the merger. Therefore, these firms are also included in Datastream’s MICEX-RTS list. As for the RTS Board-traded stocks, current legislation in Russia does not recognize the RTS Board as an organized stock

74 OKSANA KIM Next, the crucial feature of the data collection process in the case of the Russian market is the availability of public companies’ financial statements from which corporate governance metrics are retrieved. Russian companies report quarterly (in Russian), for which they use a standardized template prescribed by law. Additionally, public companies prepare annual reports (in Russian) using an unrestricted format, and also prepare a set of financial statements in accordance with RAS and, if applicable, under IFRS or US GAAP. Both sets of annual financial statements are audited and filed with regulators. Public companies that are cross-listed overseas are encouraged to disclose any documents and announcements made in English (or some other relevant language) to local market participants and regulators. Public companies’ websites vary significantly in terms of the amount of public disclosure and typically have limited reports for the mid- and late 2000s. Russian public companies must also publish reports and financial statements on the Interfax website, e-disclosure.ru (Central Bank of Russia’s Law on Disclosure Requirements for Public Entities N 454-П, 2014). This initiative by the Central Bank of Russia, the main financial regulator that endorses the disclosure of information by public firms, is relatively recent: financial statements and reports prior to 2011 are often missing on this website. Due to the limited amount of information available at the abovementioned sources, we turned to the Moscow-based database, SKRIN, which contains financial statements of public and private companies from the 1990s onwards. Overall, we collected data relating to corporate governance practices for 207 active public companies (as of 2016) and additionally, 47 delisted companies. The market capitalization of these 207 public companies represented

                                                             exchange. Firms admitted to trade on the RTS Board do not have to comply with any reporting obligations and are predominantly small-cap firms with low liquidity. These firms also have partial coverage in financial databases and their financial statements have very limited availability. More importantly, RTS Board-traded firms are not considered public companies (Civil Law of the Russian Federation article 66.3, 2014; Federal Law on the securities issuance process, 1996 with amendments) and we therefore omit them from the study. This information was subject to extensive verification with the Thomson Reuters’ research and content teams.

STRUCTURE AND COMPOSITION 75 99.8 percent38 of the total market value of common stock equity instruments listed and traded on the Moscow Exchange as of December 31, 2016.39 Accordingly, our corporate governance dataset comprises 2,122 firm-year observations over the period of 1999–2016. This, we believe, is the most complete Russian corporate governance database to date. Lastly, we merged the governance sample with the Datastream universe, which somewhat reduced the sample available for empirical investigation. Table 3.3 reports the distribution of the corporate governance sample of 2,122 observations by year (Panel A) and by industry (Panel B). Panel A reveals that the coverage of the Russian market improved significantly over time, particularly after 2010. We attribute this increase in availability of information to the creation of the joint platform—the Moscow Exchange—due to which both the public image of the Russian market and the disclosure requirements improved significantly. As was noted above, starting from 2011, public companies were required to publish their audited financial statements and quarterly/annual reports on the Interfax website. In the previous chapter we also provided insights into the capital market reforms of 2011–2012 that improved investor confidence towards Russian firms and substantially reduced the information asymmetry in the Russian market. These important reforms, collectively, both improved the listing dynamics of public firms and resulted in more extensive and accurate disclosures. Panel B of Table 3.3 reports the summary statistics by industry sector (Datastream). As expected, electricity, mining, industrial

                                                             38

39

 

To avoid duplication, we omitted preferred stock issuers from our sample because, as a rule, such stock is issued simultaneously or after common stock is issued. Our data set excludes 4 companies that are controlled by Russian residents and are widely known as Russian businesses because they are incorporated and have a primary listing overseas. Those are Rusal (Hong Kong), Promsvyazbank and Polymetal (UK), and Yandex (US). From 2015, such companies are classified as Foreign- Controlled Entities rather than Russian companies (Federal Laws No. 150-ФЗ (2015) and No. 32-ФЗ (2016)). This new law addressed the problem of the deoffshorization of Russian businesses and entailed significant revisions in the tax regulations for such companies.

76 OKSANA KIM metals and mining, and oil and gas producers are the largest industries in the Russian economy (29, 5, 10, and 8.2 percent of the sample, respectively). Banks that have historically been the major providers of finance account for about 6 percent of the total sample. With the exception of chemicals (5.33 percent), other industry sectors individually account for less than 5 percent of the total observations. Table 3.3. Distribution of the corporate governance observations by year and industry. This table reports the distribution of the corporate governance sample by year and industry. Period: 1999–2016.

Panel A.

Distribution by year

Year

# of firm-year observations

% of total sample

1999

2

0.09%

2000

4

0.19%

2001

7

0.33%

2002

9

0.42%

2003

13

0.61%

2004

21

0.99%

2005

39

1.84%

2006

83

3.91%

2007

120

5.66%

2008

162

7.63%

2009

184

8.67%

2010

194

9.14%

2011

211

9.94%

2012

217

10.23%

2013

220

10.37%

2014

212

9.99%

2015

217

10.23%

2016

207

9.75%

Total

2,122

100%

STRUCTURE AND COMPOSITION 77 Panel B.

Distribution by industry # of firm-year observations

% of total sample

Aerospace and Defense

46

2.17%

Automobiles and Parts

54

2.54%

Banks

126

5.94%

Beverages

21

0.99%

Chemicals

113

5.33%

Construction and Materials

34

1.60%

Electricity

617

29.08%

Financial services

52

2.45%

Fixed-Line Telecommunications

60

2.83%

Industry sector, per Datastream

Food and Drug Retailers

21

0.99%

Food Producers

69

3.25%

Forestry and Paper

4

0.19%

Gas, Water, and Multi-utilities

28

1.32%

General Industrials

19

0.90%

General Retailers

22

1.04%

Industrial Engineering

79

3.72%

Industrial Metals and Mining

211

9.94%

Industrial Transportation

61

2.87%

Leisure Goods

4

0.19%

Media

29

1.37%

Mining

108

5.09%

Mobile Telecommunications

31

1.46%

Nonlife Insurance

4

0.19%

174

8.20%

Personal Goods

Oil and Gas Producers

2

0.09%

Pharmaceuticals and Biotechnology

36

1.70%

Real Estate Investment and Services

30

1.41%

Software and Computer Services

13

0.61%

Technology Hardware and Equipment

12

0.57%

Travel and Leisure

42

1.98%

2,122

100%

Total

 

78 OKSANA KIM Table 3.4 reports the descriptive statistics for the governance sample (Panel A) and financial variables (Panel B). The variable definitions for all the empirical tests in this manuscript are provided in Appendices A-1 and A-2 that follow Table 3.4. Panel A of Table 3.4 reveals that 72 percent of the examined companies adopted a twotier board structure. Interestingly, this proportion of unitary versus two-tier boards is closest to that of Finland and Norway (Heidrick and Struggles 2011), with which Russia’s historical and cultural ties are quite distinct, compared to Eastern European nations, for instance. Further, approximately 31 percent of companies have hired foreign directors on their boards, whereas 59 percent of companies have appointed female directors. Accordingly, Russian firms highly value diversity on their boards, despite the fact that neither the Russian law nor the Moscow Exchange’s regulations explicitly contain requirements for such diversity practices. In the following chapters, we will provide a more detailed analysis of the implications of board diversity for Russian public companies. Only 3 percent of firms have a female CEO, which is, on average, lower than in other European jurisdictions (Spencer Stuart 2015). Further, the maximum number of foreign directors is 19 and the average board size is 9 directors. Based on the reports by Spencer Stuart (2015) and the IFC (2015), the average board size is below that of Germany and France (16.2 and 14.3 directors, respectively) but above the average metrics for Scandinavian countries: Norway (8.2) and Finland (7.9). The board’s and CEO’s average ages (46.61 and 47.71 years old, respectively) are significantly lower than those reported in prior studies for European countries (Spencer Stuart 2015), the US market (Adams and Ferreira 2009), and China (e.g., He et al. 2017a). Accordingly, this suggests that younger specialists are gradually replacing the Soviet generation of directors. Despite the fact that CEO duality is explicitly prohibited by the law, 1 percent of sampled firms did have a CEO-chairman. An extended investigation revealed that CEO duality occurred in extraordinary circumstances, such as a year preceding a corporate restructuring event, and was short-lived. The director ownership is not high on average, but reaches a maximum of 97.2 percent. About 27 percent of companies have political (governmental) connections on the

STRUCTURE AND COMPOSITION 79 board and 60 percent of companies are affiliated with strategic industries that are under the state monitoring system. Companies reporting under IFRS/US GAAP account for 70 percent of our sample, which can be attributed to a significant number of early voluntary adopters, discussed in greater detail in the previous chapter. Russian companies have been cross-listing on the world’s major markets since the mid-1990s and cross-listed companies represent 25 percent of our sample. As reported in Kim (2013), London-based Global Depositary Receipt (GDR) programs have become especially popular among Russian firms, accounting for 16 percent of our sample. Average state ownership is 15.67 percent, though the maximum for this metric is as high as 96.1 percent. Lastly, 53 percent of companies in our sample were audited by one of the Big Four accounting firms. Panel B of Table 3.4 reports only the selected financial variables that we will predominantly rely upon in our empirical tests. The variables have significant maximum values and have skewed distributions, consistent with evidence in Kim (2016b) concerning the earlier period of the Russian stock market (ending in 2012). Overall, Table 3.4 provides unique statistics for an array of corporate governance metrics in relation to the Russian market.

 

D2tier DExpat BoardSize BoardAge CEOWoman FemaleDir IndepDir ChDir DirShare CEOAge CEOdual Dpolit DIFRS DLondon DCL StratInd StateOwn DBig4

Panel A. Mean 0.72 0.31 8.99 46.61 0.03 0.59 2.21 2.76 4.42 47.71 0.01 0.27 0.70 0.16 0.25 0.60 15.67 0.53

Observations 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122

Corporate governance variables 1 0 9 46.29 0 1 2 2 0 47 0 0 1 0 0 1 0 1

Median 1 1 19 69.82 1 1 15 15 97.2 75 1 1 1 1 1 1 96.1 1

Maximum 0 0 5 27 0 0 0 0 0 26 0 0 0 0 0 0 0 0

Minimum

0.45 0.46 2.39 6.43 0.18 0.49 2.63 2.51 13.70 8.87 0.12 0.45 0.46 0.37 0.43 0.49 23.30 0.50

Std. Dev.

This table reports the summary statistics for the key governance and financial variables used in the empirical analyses. Examined period: 1999–2016. The variable definitions are provided in Appendices A-1 and A-2.

Table 3.4. Summary statistics for key governance (Panel A) and financial (Panel B) variables

80 OKSANA KIM

1,954 1,892 2,023 2,021

MB

SIZE

LEV

1,906

CFO

TQ

1,906 1,915

EBIT

Observations

Selected financial variables

ROA

Panel B.

0.57

13.56

0.05

0.02

0.19

0.08

0.06

Mean

0.55

13.77

0.02

0.01

0.07

0.07

0.05

Median

8.34

20.13

7.97

9.88

101.89

4.75

1.09

Maximum

−0.05

3.04

−4.77

−3.91

−10.13

−2.27

−1.51

Minimum

0.40

2.27

0.61

1.19

2.85

0.19

0.13

Std. Dev.

STRUCTURE AND COMPOSITION 81

82 OKSANA KIM Appendix A-1. Notations and definitions for the corporate governance metrics collected from quarterly and annual reports and financial statements for Russian public firms D2tier DExpat/ Fr_Expat/No_Expat

BoardSize BoardAge CEOWoman FemaleDir IndepDir ChDir

DirShare CEOAge CEOdual Dpolit

 

A dummy variable equal to one if the company has a two-tier board, and zero otherwise A dummy variable equal to one if the company has at least one foreign director on the board, and zero otherwise/the fraction of foreign directors on the board of directors/a number of foreign directors on the board of directors The total number of directors on the board of directors The average age of the directors on the board of directors A dummy variable equal to one if the company has a female CEO, and zero otherwise A dummy variable equal to one if there are female directors on the board of directors The number of independent directors on the board of directors Changes in directorship from the previous period: the number of new directors in the case of an increase in board size, or the number of new directors plus the net change in the number of directors in the case of a decrease in board size The percentage ownership in the company held by all the directors on the board The age of the company’s CEO A dummy variable equal to one if the company’s CEO is also a board chairman, and zero otherwise A dummy variable equal to one if there is at least one director on the board of directors who has political affiliations, and zero otherwise

 

STRUCTURE AND COMPOSITION 83 DIFRS DLondon DCL Industry

StratInd

StateOwn DBig4

A dummy variable equal to one if the company reports under IFRS or US GAAP, and zero otherwise A dummy variable equal to one if the company is crosslisted in London, and zero otherwise A dummy variable equal to one if the company is crosslisted overseas in any market, and zero otherwise A set of dummy variables created for each industry according to Datastream’s classification: aerospace and defense, automobiles and parts, banks, beverages, chemicals, construction and materials, electricity, financial services and non-life insurance, fixed-line and mobile telecommunications, food and drug retailers, food producers, forestry and paper, gas, water and multi-utilities, general industrials and retailers, industrial engineering and transportation, industrial metals and mining, leisure goods, media, mining, oil and gas producers, personal goods, pharmaceuticals, real estate, software and computers, technology hardware and equipment, and travel and leisure A dummy variable equal to one if the company operates in one of the strategic industries (aerospace and defense, electricity, oil and gas producers, gas, water and multiutilities, mining, industrial transportation, or industrial engineering), and zero otherwise The state’s ownership in the company A dummy variable equal to one if a company’s RAS or IFRS/US GAAP (or both) financial statements are audited by a Big Four accounting firm, and zero otherwise

Source: Companies’ websites; e-disclosure.ru; SKRIN.

 

84 OKSANA KIM Appendix A-2. Notations and definitions of accounting and market variables downloaded from Datastream ROA

EBIT

CFO

MB TQ

Size Lev ChSales Ret Year

Return on assets, a performance metric computed as net income divided by average total assets (expressed as a percentage in empirical tests) Earnings before interest and tax, a performance metric computed as earnings before interest expenses and income tax scaled by total assets Cash flows from operations, a performance metric computed as cash flows from operating activities scaled by lagged total assets A proxy for firm value, computed as the natural logarithm of the market-to-book value of equity A proxy for firm value, computed as the natural logarithm of {[total assets + market value of equity - book value of equity]/total assets} The natural logarithm of total assets Leverage, computed as total debt divided by total assets A proxy for growth, computed as the percentage change in net sales over the immediately preceding two years A proxy for risk, computed as the company’s realized returns adjusted for stock splits and dividends A set of dummy variables for the years 1999–2016

Source: Thomson Reuters’ Datastream.

STRUCTURE AND COMPOSITION 85 3.2.2. Empirical examination of the impact of the board of directors’ structure on a firm’s performance and value We present the correlation statistics for the main variables in Table 3.5. Panel A (Panel B) reports the ordinary correlation between the attributes of the board of directors and other corporate governance metrics (selected financial variables). Panel A reveals that two-tier boards tend to be larger (consistent with evidence from prior studies) and older. Females are less likely to be hired as CEOs by twotier boards. Such boards have a greater number of independent directors and a higher rate of director turnover. Directors’ shareholding is significantly lower in two-tier boards, while CEOs tend to be older. Two-tier boards are also more likely to be adopted by stateowned companies and those with political connections on the board. Conversely, unitary boards prevail among firms within strategic industries. Firms with two-tier boards tend to report under IFRS or US GAAP, be listed overseas and, particularly, pursue cross-listing in London. One plausible explanation for this finding is that Russian firms have frequently listed on one or more German stock exchanges (including where London was a primary cross-listing destination): Germany, as noted above, has historically adopted a two-tier structure; Russian firms, therefore, may follow the practice of the native-German firms with which they are affiliated through cross-listing practices. Panel B of Table 3.5 reports the correlation between a two-tier board structure and selected financial variables. Such boards have lower financial leverage and are more likely to be audited by a Big Four accounting firm. Despite the greater extent of external monitoring due to cross-listing and a higher proportion of independent directors, there is some evidence that firms with two-tier boards are performing worse than their peers with unitary boards, and have lower firm value. To further shed light on the relationship between board structure and firm performance/value, we estimate the following regression: Perfit /FirmValueit = ∝0 + ∝1 D2tierit +βCit + YearFixed it + IndustryFixedit +eit . (1)

 

86 OKSANA KIM We suppress subscripts for brevity. In model (1), the dependent variable, Perf/FirmValue, is a performance and also firm-value metric for a given financial year. We rely on two performance metrics, return-on-assets (ROA) and earnings before interest and tax (EBIT), and two firm value metrics, the market-to-book value of equity and Tobin’s Q (Adams and Ferreira 2009; Masulis et al. 2012; Estelyi and Nisar 2016; Frijns et al. 2016; Garcia Lara et al. 2017). The coefficient α1 denotes the impact of the two-tier board structure on these metrics. The vector Cit represents a matrix of control variables. Building on prior research, we control for a company’s size (Size), leverage (Lev), growth (ChSales), and risk (Ret). We also introduce a dummy variable, StratInd, equal to one if a firm operates in one of the strategic industries as defined in Appendix A-1, and StateOwn representing a state’s ownership in a company (e.g., He et al. 2017b). Additionally, we employ a set of governance-related regressors that may affect a firm’s performance and value, in accordance with prior literature (Johnson and Greening 1999; Goyal and Park 2002; Masulis et al. 2012; Hahn and Lasfer 2016; He et al. 2017a, b).

0.406***

0.198***

-0.042*

0.224***

0.106***

-0.050**

0.086***

-0.039

BoardSize

BoardAge

CEOWoman

IndepDir

ChDir

DirShare

CEOAge

CEOdual

 

D2tier

Panel A.

-0.018

0.126***

-0.075***

0.345***

0.347***

-0.143***

0.091***

1.000

Board Size

-0.038

0.413***

0.163***

-0.380***

-0.051**

-0.013***

1.000

Board Age

-0.019

0.009

0.088***

-0.058**

-0.092***

1.000

CEO Woman

-0.013

-0.035

-0.051**

0.226***

1.000

Indep Dir

-0.029

-0.101***

-0.142***

1.000

Ch Dir

-0.024

0.009

1.000

Dir Share

-0.009

1.000

CEO Age

1.000

CEO dual

D polit DIFRS

D London DCL

Strat Ind

State Own

Table 3.5. Correlation between board structure and corporate governance metrics (Panel A) and selected financials (Panel B)

STRUCTURE AND COMPOSITION 87

0.289***

0.225***

0.309***

-0.118***

0.215***

DIFRS

DLondon

DCL

StratInd

StateOwn

 

0.254***

Dpolit

0.484***

0.137***

0.293***

0.202***

0.225***

0.500***

88 OKSANA KIM

-0.096***

-0.119***

0.335***

0.320***

0.223***

0.066***

 

-0.119***

-0.176***

-0.110***

-0.084***

-0.083***

-0.083***

0.121***

0.153***

0.143***

0.183***

0.263***

0.134***

0.341***

0.209***

-0.071***

-0.125***

-0.030

0.246***

-0.203***

-0.244***

0.016

0.044*

-0.029

-0.118***

0.047*

0.056**

0.071***

0.048*

0.024

0.125***

-0.063**

0.065***

0.000

0.014

0.005

-0.040

0.614***

0.075***

0.199***

0.101***

0.153***

1.000

0.133***

0.154***

0.312***

0.292***

1.000

0.061**

0.053**

0.763***

1.000

0.085***

-0.050**

1.000

0.213***

1.000

1.000

D2TIER

−0.055**

−0.077***

0.488***

−0.109***

−0.089***

−0.067***

0.375***

Panel B.

ROA

EBIT

SIZE

LEV

LN(MB)

LN(TOBINSQ)

DBIG4

0.054**

0.258***

0.191***

−0.229***

0.046*

0.684***

1.00

ROA

0.017

0.321***

0.234***

−0.135***

−0.0154

1.000

EBIT

0.586***

−0.046*

−0.044*

−0.069***

1.00

SIZE

−0.036

0.220***

0.320***

1.000

LEV

0.073***

0.798***

1.000

LN(MB)

0.077***

1.000

LN(TOBINSQ)

1.000

DBIG4

STRUCTURE AND COMPOSITION 89

90 OKSANA KIM We control for audit quality (DBig4), board size (BoardSize), the average age of the board’s directors (BoardAge), shareholding by directors (DirShare), the presence of a female CEO (CEOWoman), a board’s independence (IndepDir), director turnover (ChDir), CEO duality (CEOdual), the CEO’s age (CEOAge), and political connections on the board (Dpolit). Lastly, we control for a company’s reporting under IFRS or US GAAP, in addition to the local standards (DIFRS), a company’s listing in London (DLondon), and a company’s cross-listing practices (DCL). The model (1) is estimated using an ordinary least squares (OLS) technique with White robust standard errors, controlling for year- and industry-fixed effects, and we report the results in Table 3.6. The coefficient of the D2tier variable is significantly negative at one percent or better for both the performance and the firm value specifications. Accordingly, a two-tier board structure is negatively associated with a firm’s performance and value. Turning to the control variables, a board’s size and a firm’s returns have no impact on either performance or firm value metrics. There is some evidence that younger boards negatively affect both the performance and value of public firms. Next, a female CEO has a negative impact on EBIT but shows no association with other metrics. Independent boards are viewed positively by investors but have no impact on a firm’s performance. Conversely, director rotation is detrimental to a firm’s performance but has no impact on a firm’s value. Interestingly, director-shareholders are not associated with improved performance and firm value is negatively affected by their presence on the board. Young CEOs have a negative impact on a firm’s value and make no contribution towards a firm’s performance.

STRUCTURE AND COMPOSITION 91 Table 3.6. The impact of board structure on a firm’s performance and value This table reports the results from estimating model (1) with an OLS technique using White (heteroscedasticity) robust standard errors. The dependent variable is a firm’s performance, measured as ROA, EBIT, and firm value (measured as market-to-book value of equity and Tobin’s Q). The variable definitions are presented in Appendices A-1 and A-2. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Variable

ROA

EBIT

MB

Tobin's Q

Constant

18.835***

0.276***

0.939*

0.355*

D2tier

−2.945***

−0.043***

−0.279***

−0.120***

BoardSize

−0.213

−0.002

0.005

0.002

BoardAge

−0.138**

−0.001

−0.010**

0.002

−1.384

−0.039**

−0.168

−0.082 0.016***

CEOWoman IndepDir ChDir DirShare^

−0.175

−0.0003

0.031***

−0.355**

−0.003*

−0.013

−0.004

2.369

0.026

−0.832***

−0.412***

CEOAge^

1.225

−0.002

−0.729**

−0.299**

CEOdual

4.758**

0.056**

0.256*

−0.056

Dpolit

−1.610**

−0.011

0.051

−0.004

DBig4

1.980**

0.019*

0.248***

0.124*** −6.809***

Size^ Lev ChSales^ Ret^ DIFRS

26.430

−0.322

−11.841***

−12.903***

−0.163***

1.785***

0.562***

0.312***

0.002***

−0.002

−0.003***

1.791

0.019

−0.025

−0.104 0.071**

−1.555*

−0.005

0.223***

DCL

2.119*

0.032**

0.094

0.071**

DLondon

0.113

0.002

0.368***

0.203***

StratInd StateOwn^

0.746

0.002

−0.083

−0.156**

4.245**

0.036

−0.214*

−0.113*

Adj. R-sq.

0.21

0.14

0.36

0.30

No. Obs.

1,749

1,733

1,725

1,720

Industry-fixed effects

yes

yes

yes

yes

Year-fixed effects

yes

yes

yes

yes

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

 

92 OKSANA KIM Further, CEO duality has a positive impact on a firm’s performance, although the evidence is weak in the case of a firm’s value. This finding contradicts conclusions in Goyal and Park (2002) who found that CEO duality is detrimental to the governance practices of US firms. The picture is somewhat mixed regarding size, leverage, growth, political connections, and state ownership. As expected, companies audited by the Big Four accounting firms exhibit both improved performance and higher firm value. Reporting under IFRS produces more conservative performance results, based on ROA (at ten percent), which is consistent with evidence in Barth et al. (2008) and Kim (2016b), who found that reporting under IFRS, as opposed to local standards, is associated with enhanced conservatism. Firm value is higher for IFRS/US GAAP reporters. Lastly, overseas listings are associated with both improved performance and higher firm value, and the latter is more pronounced in the case of firms cross-listed in London. We previously discussed the possibility that cross-listing practices prompted Russian companies to adopt a two-tier structure that had a negative impact on a firm’s performance and value. We also documented a positive association between the D2tier variable and cross-listing/London listing indicators. We now interact the dummy variable of interest, D2tier, with cross-listing/London listing regressors and re-estimate model (1). In unreported results, we find that cross-listing/London listing practices mitigate the negative impact of the two-tier structure on a firm’s performance and value. Accordingly, it is only locally-listed Russian firms that experience drawbacks when adopting a two-tier board structure. Generally, such firms are smaller than cross-listed firms. For them, the benefits of having two boards—supervisory and management— potentially do not outweigh the associated costs such as a higher administrative workload, the lack of transparent communication, and enhanced logistical issues, compared to unitary boards. Although two-tier boards tend to be more independent, they do not always serve the purpose of improved internal governance.

STRUCTURE AND COMPOSITION 93

3.3. Conclusions In summary, the evidence reported in this chapter indicates that two-tier boards may have significant drawbacks that impede their effectiveness, but only in the case of locally-listed firms. This manifests in both reduced operating performance, as measured by ROA and EBIT, and lower firm value. These results have significant implications for Russian policy makers: approximately 72 percent of Russian public firms have adopted a two-tier structure and Russian law does not prohibit this choice. Nevertheless, our results unambiguously indicate that this structure may have a detrimental impact on organizational outcomes. We believe important inferences can be made from these findings. As was noted above, a significant number of public firms within Continental Europe have chosen a two-tier board structure (IFC 2015). Yet, the debate regarding the optimal board structure—unitary or two-tier—remains unresolved to date. Our study sheds light on this important discussion providing, to our knowledge, the first direct evidence regarding the pros and cons of adopting a particular corporate board model within the same jurisdiction.

 

 

Chapter 4 Cross-listing practices of Russian companies “When the economies of emerging markets do not just grow but beat expectations, there is scarcely a mention.” —Kenneth Fisher, chairman of Fisher Investments

In this chapter, we provide a detailed analysis of the cross-listing practices of Russian public companies. We offer an overview of cross-listing theories, which is followed by an examination of Russian firms’ choices of cross-listing destinations and their impact on a firm’s value and performance.

4.1. Reasons to cross-list. Overview of cross-listing theories and empirical findings Cross-listing represents a strategic decision of a firm to offer equity instruments on overseas markets, following a domestic listing. Cross-listing is done via Depositary Receipt (DR) programs, the most popular of which are American and Global Depositary Receipts (ADRs and GDRs, respectively). Both ADRs and GDRs have a tiered listing structure and are associated with stringent reporting obligations and enhanced compliance regulations compared to companies’ domestic markets. According to the literature, crosslisting confers significant benefits such as increased liquidity, reduced cost of capital, and enhanced market valuation (e.g., Miller 1999; Doidge et al. 2004; 2009). On the other hand, cross-listing is associated with increased reporting and compliance costs, which managers often cite as the major factor precluding firms from pursuing an overseas listing (Karolyi 1998; 2006; 2012).40 Despite the growing number and diversity of cross-listing programs in the past two decades, the source of valuation benefits that stem from cross-

                                                             40

Cross-listing may or may not involve capital raising activity (Level III ADRs and GDRs). We omit a detailed discussion of the structure of ADRs and GDRs and their notable differences, as those are described in prior studies (Kim and Pinnuck 2014).

95

96 OKSANA KIM listing is not well-understood.41 The major theories attempting to explain the benefits and costs of the cross-listing phenomenon are the market segmentation and bonding hypotheses. The market segmentation framework suggests that due to investment barriers that result in the segmentation of markets worldwide, foreign stocks are priced differently from domestic stocks (Alexander et al. 1987). Investors bear (i) direct costs associated with the restrictions imposed by the regulatory environment, such as foreign ownership restrictions, taxes, and international treaties; and (ii) indirect costs in the form of monitoring costs due to differential disclosure requirements and a lack of reporting transparency (Alexander et al. 1987; 1988; Karolyi 1998). Cross-listing represents one of the policy options that allows companies and investors to overcome the negative impact of market segmentation (Stapleton and Subrahmanyam 1977). In the theoretical work of Alexander et al. (1987), firms that list on two segmented markets (dual-listed) have lower expected returns than single-listed firms because the risk is more widely shared by investors. In line with these findings, Errunza and Losq (1985) reported that when the investment barriers are asymmetric across two markets, firms from the markets with higher investment barriers would be priced with a premium. When the degree of market segmentation decreases (as a result of cross-listing), the premium vanishes. The study by Alexander et al. (1988) was the first empirical work to demonstrate that firms from partially segmented markets have incentives to pursue a dual listing because it reduces their required returns (cost of capital). In a study that covered 181 dual-listed ADRs, Miller (1999) documented positive abnormal re-

                                                             41

Initially, it was expected that the Luxembourg Stock Exchange (LuxSE) would be the primary exchange for GDRs due to its well-established historic linkages to the Eurobond market and direct settlement procedures through the Euroclear and Clearstream electronic systems (Mondovisione 2009). However, the LSE was the first exchange to provide a convenient regulatory approach and establish the trading of GDRs through the International Order Book (IOB) with high liquidity and global investor access (Russian IPO Capital Markets Guide 2010). Consequently, the LSE, and not the LuxSE, became the niche for GDR business (Mondovisione 2009).

CROSS-LISTING PRACTICES 97 turns around the cross-listing announcement day followed by normal returns after the announcement. The author also documented differential changes in post-listing abnormal returns for exchangelisted programs (Level II and III ADRs) and for less liquid offerings (Level I and Rule 144A ADRs). In addition, firms from emerging markets experienced a more dramatic decline in their post-listing abnormal returns. Together, these findings provide support for the market segmentation theory. Nevertheless, there were some intriguing findings and trends that this framework failed to explain. Foerster and Karolyi (1999) documented a puzzling post-listing decline in firm value, which seems to contradict the market segmentation hypothesis. Moreover, in their study, the increase in firm value for Canadian stocks whose market is fairly integrated with the US market was as dramatic as that of firms from other markets. Foerster and Karolyi (2000) showed, for a sample of global equity offerings (GEOs), that the magnitude of post-listing underperformance over a three-year window was not a function of a firm’s origin, which is also inconsistent with the market segmentation framework. The authors put forward alternative theories, such as the theory of market incompleteness and the liquidity explanation (Amihud and Mendelson 1986; Merton 1987), to justify these findings. Stulz (1999) summarized the limitations of the market segmentation framework: despite the benefits of cross-listing, a fair number of firms choose not to cross-list their shares. Furthermore, the rapid growth in crosslisting numbers is inconsistent with the argument that as markets become integrated over time, the net benefits of cross-listing decline. The theoretical works of Stulz (1999) and Coffee (1999) set the stage for explanations for international listings alternative to the market segmentation theory. Particularly, Stulz (1999) suggests that a firm’s cost of capital depends on its corporate governance attributes, which includes a firm’s internal controls—such as its board of directors—as well as external (market) controls, including monitoring from analysts, auditors, and institutional investors (see also Chung et al. 2015). A firm can improve its corporate governance

 

98 OKSANA KIM attributes by credibly committing, or “bonding,” itself to the stringent regulatory and legal environment of a cross-listing market such as the NYSE or NASDAQ in the US. Coffee (1999) also highlighted the importance of corporate governance in a firm’s crosslisting decision and suggested that valuation benefits accrue through legal bonding mechanisms such as the enhanced risk of litigation due to SEC enforcement, investors’ ability to exercise class actions at lower cost, and increased reporting requirements.42 The bonding hypothesis found support in empirical works. Reese and Weisbach (2002) reported that firms from French civil law countries with poor protection for minority shareholders were more likely to cross-list in the US. Doidge et al. (2004) found that the cross-listing premium, as measured by Tobin’s Q, existed for firms with foreign listings, and was higher for exchange-listed firms and those from countries with weak investor protection. Furthermore, Doidge et al. (2009) documented that the cross-listing premium existed in every year during the period of 1990–2005. The documented valuation benefits, however, could stem from the cost of capital decline, consistent with the bonding hypothesis, or from revisions in cash flow growth due to the improved operational performance of firms as a result of cross-listing. The study of Hail and Leuz (2009), based on a large panel of companies from 45 countries listed as ADRs on the NYSE and NASDAQ attempted to isolate the cash flows effect: the documented decline in cost of capital upon cross-listing in their study was more realistic—between 70 and 120 basis points—compared to the substantially higher numbers documented in earlier empirical works. Several empirical studies nevertheless challenged the validity of the bonding theory. Licht (2001, 2003) argued that corporate governance was of secondary importance in the case of cross-listing, and bonding, in fact, played a negative role because it allowed foreign issuers to avoid some of the domestic regulations. Siegel (2005)

                                                             42

Both Coffee (1999) and Stulz (1999) emphasized the significant role of reputational intermediaries: underwriters, analysts, auditors, and institutional investors who provide additional scrutiny upon cross-listing.

CROSS-LISTING PRACTICES 99 examined the extent of legal action taken by the SEC against Mexican ADRs. He documented that in the case of asset tunneling, the SEC’s response was weak and it failed to recover those assets; this is because foreign authorities were either unwilling or unable to cooperate with US enforcement agencies. The author acknowledged, however, that the prior corporate governance violations impeded the ability of firms to subsequently raise funds internationally. Thus, Siegel (2005) documented that firms received a significant reputational penalty, which was more severe than the punishment they received from the US enforcement agencies.43 Lastly, Kim (2017) documented that legal bonding mechanisms and reduction in segmentation had a joint, complementary impact on changes in firm value upon GDR cross-listing, based on equity trading costs as a measure of market segmentation. The author found limited evidence that reputational intermediaries had a positive impact on GDRs’ valuation upon cross-listing.

4.2. Cross-listing practices of Russian companies In chapter 3, we reported that approximately 25 percent of Russian companies in our empirical sample were cross-listed on one or more overseas markets; 16 percent of firms were cross-listed in London (alone or in combination with other markets). Table 4.1 provides more detailed summary statistics for cross-listed and London-listed firms by industry (Panel A) and by year (Panel B). Panel A of Table 4.1 reveals that firms from the telecommunications, real estate, industrial metals and mining, oil and gas, and food and construction sectors were the most active in pursuing cross-listing

                                                             43

 

Bris et al. (2007) attempted to disentangle the market segmentation, liquidity, and bonding hypotheses by examining foreign stocks with dual-class shares cross-listed in the US during the early period of 1987–1996. The authors compared listing premiums for listed/unlisted and low-voting/high-voting rights classes of shares. Bris et al. (2012) performed tests on the impact of the market segmentation and liquidity hypotheses against information-based explanations. The authors compared foreign firms listed and traded on the LSE and found evidence in favor of the latter effect.

100 OKSANA KIM strategies and were more often cross-listed in London.44 Panel B of Table 4.1 indicates a growing popularity of cross-listing programs among Russian firms, as evidenced by a steady increase in the number of listings over time. Interestingly, we do not observe a decline in the number of cross-listing cases during the economic crisis in 2008–2009. The number and proportion of cross-listed and Londonlisted firms experienced a very modest decline beginning in 2014, which coincides with the imposition of economic sanctions on the Russian economy. Overall, 344 firm-year observations in our examined sample are associated with cross-listing in London alone or in combination with other markets. Panel C of Table 4.1 provides insight into the most popular cross-listing destinations and combinations thereof. The LSE, alone and in combination with the Berlin SE, the Deutsche Börse and/or the non-Nasdaq OTC remain the most popular choices for Russian firms. The Stuttgart SE and the Berlin SE, however, lost their popularity over time as standalone cross-listing destinations. After London, the second-most popular destination during the examined period was the Deutsche Börse. Lastly, a NYSE listing was pursued only in combination with a listing on the Deutsche Börse and was represented only by two firms in the sample: Mobile Telesystems and Mechel.45 It is well-documented in the literature that US stock exchange listings impose the most stringent reporting and compliance obligations, whereas OTC trading programs provide significant exemptions from those (Miller 1999; Doidge et al. 2009). Additionally, London-based GDR programs enforce less-strict reporting and governance requirements compared to ADRs (Kim and Pinnuck 2014; Kim 2017), which allows minimizing listing costs for firms from

                                                             44

45

Our investigation period begins in 1999 for this study, while the first Londonbased GDR listing was done by Gazprom in as early as 1996 (simultaneously with the non-Nasdaq OTC). The Main Market of the LSE is the primary destination for GDRs. The first sponsored GDR program was officially registered by the LSE in 1994. Two listings in Berne (Switzerland) were undertaken by Gazprom in 2015–2016 that also cross-listed in Mexico and Austria in 2017.

CROSS-LISTING PRACTICES 101 emerging markets.46 Overall, it appears that Russian companies have selected markets with less stringent regulations to cross-list,47 compared to those of the NYSE, as is evident from Table 4.1 (Panel C).48 In the next section, we examine if this strategy confers significant valuation benefits.49 Lastly, Panel D of Table 4.1 reports the statistics for the total number of trades and the trading volume (in USD) for all companies whose Depositary Receipt programs are traded via the IOB in London, including those from Russia. The numbers clearly show that Russian GDRs have historically dominated IOB trades,50 confirming the previously discussed evidence on London being the primary choice of cross-listing destination for Russian firms. Importantly, we do not observe an obvious decline in the relative percentage of either trades or the total volume traded for Russian GDRs during the economic downturn (2008–2009) or the economic sanctions period (2014 onwards). This reinforces the previous conclusions that the Russian stock market demonstrated remarkable

                                                             46

47

48

49

50

 

The conclusion from the study of Kim and Pinnuck (2014) is that although GDRs are subject to less stringent reporting obligations upon cross-listing in London, they still experience a significant reduction in the cost of capital, similar to their ADR peers. That is, reporting obligations do not have to be overly strict and the regulations enforced by LSE are sufficient to reduce the information risk faced by investors when emerging markets’ firms cross-list. The GDR listing requirements in London are outlined in the UK Listing Authority’s (Financial Services Authority’s) Handbook, Chapter 18: Admission and continuing obligations requirements for GDR issuers, 2015. We focus on a conventional cross-listing mechanism where a firm is first listed domestically and later becomes cross-listed overseas. Emerging market firms choose different strategies when pursuing global recognition, including singlelistings overseas (forgoing a local market) and reverse cross-listings (Kim 2013). We believe these phenomena should be investigated in a standalone study and therefore omit their discussion here. Extended investigation reveals that London was commonly the leading (primary) cross-listing market and that additional markets were chosen as crosslisting destinations by firms after their GDR listings in London. The IOB is specifically designated for Depositary Receipt services and the daily trading volume exceeds 1 billion USD. According to the LSE, the “IOB offers cost efficient, secure and transparent access to invest in some of the world’s fastest growing markets. The IOB allows direct access to securities from around 45 countries in Central and Eastern Europe, Asia and the Middle East and is the largest market in Russian instruments outside of Moscow” (http://www.lseg.com/sites/default/files/content/documents/iob-factsheet.pdf).

102 OKSANA KIM resilience to adverse events and investor confidence in Russian companies did not diminish.

 

 

 

71 0

34 617 52 60 21 69 4 28 19

Construction and Materials

Electricity

Financial Services

Fixed-Line Telecommunications

Food and Drug Retailers

Food Producers

Forestry and Paper

Gas, Water, and Multi-utilities

General Industrials

0

0

0

0

11

9

30

10

42

21

24

113

126

Banks

11

Chemicals

54

Automobiles and Parts

10

Cross-listed on any market

Beverages

46

Total number of firm-year obs.

0%

0%

0%

16%

43%

50%

0%

12%

29%

37%

0%

19%

20%

22%

As a % of the total sample

Distribution of cross-listed firms by industry sector

Aerospace and Defense

Industry

Panel A.

Table 4.1. Cross-listing summary

0

0

0

11

9

0

0

40

10

24

0

16

0

0

Cross-listed in London

0%

0%

0%

16%

43%

0%

0%

6%

29%

21%

0%

13%

0%

0%

As a % of the total sample

CROSS-LISTING PRACTICES 103

Total

2,122

42

30

Real Estate Investment and Services

Travel and Leisure

0

36

Pharmaceuticals and Biotechnology

13

2

Personal Goods

12

174

Oil and Gas Producers

Software and Computer Services

4

Nonlife Insurance

Technology Hardware and Equipment

21

31

520

15

0

9

0

102

0

31

18

0

0

Mobile Telecommunications

4

Leisure Goods

84 15

29

61

108

211

Industrial Metals and Mining

Industrial Transportation

7

Mining

79

Industrial Engineering

0

Media

22

General Retailers

104 OKSANA KIM

25%

36%

0%

0%

70%

25%

0%

59%

0%

100%

17%

0%

0%

25%

40%

9%

0%

344

0

0

0

21

9

0

92

0

17

10

0

0

7

71

7

0

16%

0%

0%

0%

70%

25%

0%

53%

0%

55%

9%

0%

0%

11%

34%

9%

0%

 

 

Total number of firm-year obs.

2 4 7 9 13 21 39 83 120 162 184 194 211 217 220 212 217 207 2,122

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total

2 3 6 9 13 16 20 29 40 43 45 46 44 44 43 40 40 37 520

Cross-listed on any market (alone or in combination with other markets)

Distribution of cross-listed firms by year

Year

Panel B.

100% 75% 86% 100% 100% 76% 51% 35% 33% 27% 24% 24% 21% 20% 20% 19% 18% 18% 25%

As a % of the total sample 1 1 4 5 5 6 8 15 23 25 27 28 32 34 34 33 33 30 344

Cross-listed in London (alone or in combination with other markets) 50% 25% 57% 56% 38% 29% 21% 18% 19% 15% 15% 14% 15% 16% 15% 16% 15% 14% 16%

As a % of the total sample

CROSS-LISTING PRACTICES 105

 

1999

London, Munich London, NonNasdaq OTC London, NonNasdaq OTC, Deutsche Börse London, NonNasdaq OTC, Xetra, Deutsche Börse

London, Berlin London, Berlin, NonNasdaq OTC London, Deutsche Börse

1

1

3

 

2

3

2

3

2

3

2

3

1

2

3

4

2

2

5

1

8

2

5

2

2

1 1

4

2

London

1

2000

4

1

2006 4

3

2007

Deutsche Börse Deutsche Börse, Xetra

2

2003

1

2002 2

2004 3

2001 1

2005

Berlin

Foreign market(s) 2

2008 2

4

2

10

3

4

2

4

2

5

2

10

3

4

2

4

2

2009

Cross-listing destination choice(s) of Russian public firms

2

6

4

9

4

2

2

4

2

2010

Panel C.

106 OKSANA KIM

2011 3

6

4

9

5

4

5

2012 3

7

4

1

7

5

5

4

2013 3

8

4

1

6

5

5

4

2014 3

8

4

1

6

5

4

3

2015 2

8

4

1

6

5

4

3

2016

10

2

7

4

1

37

82

33

5

81

1

1 5

43

47

9

52

4

3

2

Total

 

1 13

9

Total

6

Stuttgart, Xetra

3

1

Stuttgart

2

2

1

16

1

1

1

1

2

1

1

2

2

1

1

20

1

2

2

1

2

29

1

2

2

1

2

40

1

2

2

1

2

1

43

1

2

2

1

2

2

45

1

2

2

1

2

2

Non-Nasdaq OTC Non-Nasdaq OTC, Xetra Non-Nasdaq OTC, Deutsche Börse Non-Nasdaq OTC, Stuttgart, Xetra NYSE, Deutsche Börse

1

London, Stuttgart London, Stuttgart, Non-Nasdaq OTC London, Xetra, Non-Nasdaq OTC, Deutsche Börse, Berne

46

3

2

1

2

2

1

44

1

2

1

1

2

1

44

1

2

1

1

1

1

1

43

2

1

2

2

40

2

1

1

2

1

40

2

1

37

2

1

2

1 1

2

2

520

7

17

27

10

27

1

16

2

11

2

CROSS-LISTING PRACTICES 107

 

46,240 67%

Russia

Russia, as a % of all countries

 

70%

13,862,415,882

Russia

Russia, as a % of all countries

19,675,530,838

All countries

USD Value Traded:

69,049

All countries

Total Number of Trades:

2006

81%

33,479,201,783

41,418,333,273

68%

100,381

147,441

2007

87%

11,291,644,936

12,971,511,448

85%

196,722

230,436

2008

86%

17,563,816,466

20,458,667,855

86%

286,986

332,666

2009

London Stock Exchange: International Order Book statistics

December of Year

Panel D.

108 OKSANA KIM

88%

32,604,554,284

36,856,537,165

86%

540,013

625,061

2010

91%

28,008,829,031

30,925,965,098

92%

1,219,292

1,323,807

2011

87%

17,183,375,175

19,768,169,163

89%

819,759

918,606

2013

86%

17,818,161,917

20,624,337,655

93%

1,953,229

2,098,162

2014

81%

7,391,570,752

9,157,580,981

90%

930,267

1,032,869

2015

88%

11,915,615,088

13,540,284,775

90%

1,053,389

1,165,944

2016

 

Source: The London Stock Exchange (2018). Notes: The all-countries list as of December 2016 comprises: Argentina, Bahrain, Bermuda, the British Virgin Islands, China, Cyprus, Egypt, Greece, Guernsey, Hungary, India, Jersey, Kazakhstan, Lebanon, Luxembourg, the Netherlands, Nigeria, Oman, Pakistan, Poland, Romania, Russia, South Africa, South Korea, Taiwan, and Turkey.

87%

20,377,552,476

Russia

Russia, as a % of all countries

23,396,799,506

All countries

USD Value Traded:

89%

972,035

Russia, as a % of all countries

1,090,894

Russia

2012

All countries

Total Number of Trades:

December of Year

CROSS-LISTING PRACTICES 109

110 OKSANA KIM

4.3. Determinants of cross-listing We first examine the determinants of a firm’s decision to cross-list, which is then followed by analyses of the implications of cross-listing for a firm’s performance and value. We estimate the following model: Pr DCL/DLondon

λ

χC

ξ . 2

In model (2), the dependent variable is an indicator for cross-listing; the vector of control variables C is the same as in model (1) and includes firm-level variables such as size, leverage and growth, and a spectrum of corporate governance metrics discussed in greater detail in chapter 3.51 This model is estimated using a probit specification. Table 4.2 reports the results of model (2) estimation. A twotier board structure is positively associated with a decision to crosslist. Firms with larger boards are less likely to cross-list in London, although this metric has no impact on a decision to cross-list. Older boards are more likely to prompt cross-listing but the board’s age is irrelevant to the choice of a London listing. Further, director shareholding and turnover are important determinants of a listing in London. CEO duality and political connections on the board have a positive impact on a cross-listing decision but are irrelevant to listing in London. Larger firms and those audited by a Big Four accounting firm are more likely to be cross-listed on any overseas market, while firms with significant amounts of debt are unlikely to cross-list. IFRS reporting is important to a London-based listing but not to any foreign listing. It appears that the second-most popular cross-listing destination, the Deutsche Börse, grants some issuers exemptions from the IFRS reporting requirements (Ernst and Young 2018). A firm’s market and accounting performance has no

                                                             51

 

Due to estimation issues with using a probit specification, we had to drop a female CEO indicator variable and fixed effects. We also included ROA as an additional explanatory variable as the performance of cross-listed firms needs to meet certain benchmarks.

CROSS-LISTING PRACTICES 111 implications for a London-based listing, which is somewhat surprising given that the LSE clearly indicates that certain reporting benchmarks must be met for a company to be listed on the Main Market and maintain its listing status. Lastly, state ownership negatively affects the probability of cross-listing. In summary, the evidence reported in Table 4.2 indicates that several corporate governance attributes are important to a firm’s decision to cross-list, although there are some notable differences depending on the choice of foreign market.

 

112 OKSANA KIM Table 4.2. Determinants of a firm’s decision to cross-list This table reports the results from estimating model (2) using a probit specification. The dependent variable is a dummy variable equal to 1 if a firm chooses to [1] crosslist on one or more foreign markets (Panel C of Table 4.1) or [2] chooses to cross-list in London alone or in combination with other markets. The variable definitions are presented in Appendices A-1 and A-2. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Variable Constant D2tier

DCL

DLondon

[1]

[2]

−8.097***

−10.999***

0.700***

0.692***

BoardSize

0.032

−0.086***

BoardAge

0.026***

−0.001

IndepDir

−0.029*

0.033*

ChDir

−0.015

−0.065***

DirShare^

0.302

0.879**

CEOAge^

−0.544

−0.357

CEOdual

0.651***

0.592

Dpolit

0.384***

−0.143

DBig4

0.640***

0.389***

Size^

38.960***

64.706***

Lev

−0.678***

−1.204***

−26.480

−11.160

Ret^

−0.814***

−1.017

ROA

0.011**

0.006

0.074

1.428***

ChSales^

DIFRS StratInd

−0.047

0.245**

−1.088***

−0.731**

Adj. R-sq.

0.40

0.50

No. Obs.

1,749

1,749

StateOwn^

Industry-fixed effects

no

no

Year-fixed effects

no

no

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

CROSS-LISTING PRACTICES 113

4.4. The impact of cross-listing on a firm’s performance and value A firms’ decision to cross-list is voluntary and non-random, which raises concerns of potential self-selection bias. To address this issue, we rely on the Heckman (1979) two-stage estimation technique widely adopted in the literature. In particular, we now treat model (2)—the determinants of a cross-listing decision—as a first-stage estimation. Next, we use the residuals series from this first-stage regression, representing each firm’s propensity to cross-list/list in London, to compute an additional control variable: the inverse Mills ratio. Finally, we add the inverse Mills ratio to the model (1) estimation, running separate analyses for the DCL and DLondon metrics.52 Table 4.3 reports the results of the second-stage estimation.53 The inverse Mills ratio is significant in 3 out of the 4 specifications, indicating that self-selection bias is likely to be an issue.54 The coefficient for the DCL/DLondon variable is significantly positive suggesting that cross-listing on any market or combination of markets confers significant benefits. The magnitude of the coefficient for DLondon is higher than that of the DCL variable for both the ROA and Tobin’s Q specifications. In unreported results, when estimation is performed with both DCL and DLondon included in the model, the coefficient of DCL is no longer significant, indicating that valuation and performance benefits primarily stem from crosslisting in London, whether alone or in combination with other markets.55 Overall, the results are supportive of both the market segmentation and the bonding theories discussed above: firm value

                                                             52 53

54

55

 

Second-stage estimations for DCL and DLondon would employ different inverse Mills ratios, as model (2) was estimated separately for each of these two metrics. We focus on ROA and Tobin’s Q, while our results are consistent for EBIT and MB. We also omit a discussion of the coefficients related to the control variables because that was extensively discussed in chapter 3. Despite our efforts, we cannot affirm that our findings are not exposed to selection bias, since the validity of the Heckman selection model is still being debated in the literature. This should be interpreted with caution because the correlation between DCL and DLondon is 55 percent.

114 OKSANA KIM improves upon cross-listing, including on markets with less stringent regulations (German markets); the magnitude of improvement in firm value is greater in the case of greater bonding (London). Table 4.3. The impact of cross-listing and listing in London on a firm’s performance and value This table reports the results from estimating a modified model (1) with an OLS technique using White (heteroscedasticity) robust standard errors. We include an inverse Mills ratio, which is calculated using residuals from the estimation of model (2), as an additional control variable. The dependent variable is firm performance measured as ROA, and firm value measured as Tobin’s Q. The variable definitions are presented in Appendices A-1 and A-2. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Variable

ROA DCL

DLondon

DCL

DLondon

Constant

309.063***

246.754**

1.729**

1.439**

D2tier

−30.149***

−18.824***

−0.273***

−0.193***

BoardSize

−1.066***

1.559***

−0.003

0.011

BoardAge

−0.820***

0.038

−0.002

0.003

CEOWoman IndepDir ChDir DirShare^

0.384

−0.631

−0.025

−0.050

1.101***

−0.732***

0.025***

0.014**

0.137

0.949***

−0.001

0.003

−5.002**

−12.878***

−0.439***

−0.505***

CEOAge^

17.679***

6.926**

−0.231

−0.296*

CEOdual

−15.206***

−5.003**

−0.144**

−0.110*

Dpolit

−12.788***

1.818**

−0.080**

0.014

DBig4

−22.302***

−7.146***

−0.019

0.082*

Size^

−12.425***

−12.676***

−0.128***

−0.130***

Lev

18.332***

15.927***

0.717***

0.694***

ChSales^

1.037***

0.293***

0.005**

0.001

Ret^

 

Tobin's Q

0.029***

0.022***

0.001

0.001

DIFRS

−4.060***

−32.762***

0.068

−0.070

DCL/DLondon

5.917***

7.556***

0.209***

0.282***

StratInd

3.082***

−3.959***

−0.120

−0.169**

 

CROSS-LISTING PRACTICES 115 StateOwn

39.928***

19.139***

0.096

−0.055

−42.416***

−23.702**

−0.224**

−0.113

Adj. R-sq.

0.51

0.32

0.30

0.30

No. Obs.

1,748

1,748

1,648

1,648

Industry-fixed effects

yes

yes

yes

yes

Year-fixed effects

yes

yes

yes

yes

IMills

Notes: DirShare^ = DirShare/100; StateOwn^ = StateOwn/100.

CEOAge^ = CEOAge/100;

4.5. Conclusions In this chapter we examined the dynamics of cross-listing practices of Russian firms. An interesting taxonomy was documented: 25 percent of firms in our sample were cross-listed on one market or, more often, a combination of markets representing different regions. As would be expected, European markets dominate the list of cross-listing destinations due to geographic proximity (Sarkissian and Schill 2009) and less stringent (less costly) listing requirements compared to those of US exchanges (Kim and Pinnuck 2014). London remains by far the most popular cross-listing destination for Russian firms and its impact on a firm’s performance and value is more significant compared to other markets. The popularity of cross-listing programs remained intact during challenging periods such as during an economic downturn (2008– 2009) or periods of economic sanctions (2014–2016).

 

 

 

Chapter 5 Nationality diversity on the board of directors of Russian firms “If I pick my team from a diverse group of gender, ethnicity, nationality and age, I guarantee I will win every time.” —Jamie Dimon, Chairman and CEO of JPMorgan Chase

In this chapter, we examine the implications of having culturally diverse boards, as evidenced by the presence of foreign nationals on the board of directors. We discuss the pros and cons of having diverse boards and provide an overview of the extant literature on board diversity. We then examine whether culturally diverse boards add value in the case of Russian companies.

5.1. Pros and cons of hiring diverse boards. Literature overview In their seminal study, Pfeffer and Salancik (1978) laid out the resource dependence theory (RDT) to explain how organizations decrease their environmental uncertainty and manage resource interdependence with various stakeholder groups (Pfeffer 1972; Pfeffer 1987). This theory emphasizes the personal characteristics and skills of board members as the main drivers of the organizational success.56 Pfeffer (1972) noted that boards of directors help firms to minimize their external resource dependence and/or obtain additional resources. Pfeffer and Salancik (1978) (chapter 7) suggested that “[directors] bring four benefits to organizations: (a) information in the form of advice and counsel, (b) access to channels of

                                                             56

The traditional agency theory formulated in Jensen and Meckling (1976) also highlights the importance of having diversity in board composition, but predominantly focuses on the monitoring function of the board. Hillman et al. (2009) suggest that when it comes to examining the efficiency of the board of directors as a monitoring mechanism, the RDT provides a more useful perspective and is better supported by empirical studies compared to traditional agency theory; that is why we discuss the RDT here.

117

118 OKSANA KIM information between the firm and environmental contingencies, (c) preferential access to resources, and (d) legitimacy.” In line with the predictions of the RDT, empirical studies have documented that these attributes are crucial to a firm’s survival and prosperity, especially in the case of growing firms and those operating in regulated industries (e.g., airlines). Directors’ unique skills and expertise also have a positive impact on the social and corporate performance of firms, according to Johnson and Greening (1999). Overall, the RDT views directors as a valuable organizational resource, placing a focus on various aspects of their uniqueness and connectedness with important stakeholder groups. One of the most important features of a board is the diversity in its composition. The literature has extensively examined various sources of diversity—education, gender, race, culture, social status, and industry experience—providing evidence both in favor of and against the practice of diversity. Diversity on the board remains a significant governance issue that affects wide stakeholder groups. Ferreira (2010) discussed various costs and benefits of a board’s diversity.57 He emphasized greater access to resources and connections, creativity, and unique organizational skills as the main benefits of hiring diverse boards. The author also highlights the importance of equal opportunity practices and adherence to societal expectations as the main benefit of a diverse board: “Diversity on the board can be means of acquiring legitimacy in the view of [the]

                                                             57

Ferreira (2010) explains that economics and management perspectives on board diversity differ in terms of how boards are viewed. Economists consider the board of directors a single entity charged with a monitoring task and the main focus of this stream of research is on the distinction between independent directors and others. The management stream of research focuses on the heterogeneity of the directors and various aspects of board diversity, with an emphasis on the advisory role of directors. Accordingly, the management perspective goes beyond the monitoring role of the management, which is the emphasis of economics research and the agency theory, and this arguably provides a richer perspective on the board of directors’ functions (Ferreira 2010, page 226). Ferreira also noted that examining the dual role of the board—monitoring and advisory—has become a mainstream idea in economics research. Adams and Ferreira (2007) develop a model showing that separating the two roles of the board is not desirable, as the same information is used to both monitor the executives and advise them.

118   

NATIONALITY DIVERSITY 119 public, media, and the government,” Ferreira (page 228) noted. On the other hand, the author mentioned that enhanced board diversity may potentially create a conflict of interest among groups, and is characterized by lack of cooperation and miscommunication. Lastly, choosing directors mainly because of their association with a particular demographic/cultural group neglects other important skills such as prior experience. Our study contributes to the empirical stream of literature that examines the impact of a cultural background on a board’s efficiency and firm performance. Personal culture is unobservable but is inevitably related to one’s decision-making ability, as noted by Hofstede (2001). The stream of literature examining the presence of foreign directors on the board as a source of cultural diversity is relatively new and studies are not numerous. Masulis et al. (2012) reported that boards with foreign directors contributed to better cross-border acquisition decisions but that foreign directors had poor meeting attendance. In the extended analyses, Masulis et al. (2012) documented that companies with culturally diverse boards were associated with a higher probability of accounting restatements and were therefore more likely to misreport. Additionally, firms with diverse boards were less effective at removing an underperforming CEO and performed poorly. Estelyi and Nisar (2016) examined UK firms’ practices and reported that nationality diversity on the board positively contributed towards a firm’s international operations and performance. Conversely, Hahn and Lasfer (2016) reported that UK firms with foreign directors on their boards had poor meetings attendance, lower shareholder returns, and paid excessive CEO compensation. Naveen et al. (2014) documented that multinational corporations were more likely to hire dissimilar (foreign) directors, to which the market reacted positively. Miletkov et al. (2014) found, in a study that covered 80 countries, that foreign directors were associated with lower performance. In summary, the existing evidence suggests that cultural diversity on boards raises numerous contentious issues and may affect a wide array of stakeholders.

 

120 OKSANA KIM

5.2. Foreign accounting/consulting firms and foreign directors: Russian firms’ practices After the dissolution of the Soviet Union into independent states in 1991 and following the mass privatization of formerly state-owned enterprises, in the mid-1990s the leading Russian companies started tapping into the world’s major markets: the NYSE and London. Russian companies successfully conducted public offerings and cross-listed as ADRs and GDRs, as was discussed in the previous chapter. In the 1990s, foreign markets provided significant opportunities for Russian blue chips to raise funds and improve visibility, while Russia’s first centralized exchange, the RTS, was in its juvenile stage and was unable to provide the necessary listing and trading support. In the mid-1990s, the Russian stock market was characterized by low settlement efficiency, transaction delays, and the lack of an institutional investor base. Accordingly, it was unable to service the capital-raising needs of Russia’s largest conglomerates such as Gazprom. To be admitted to listing on the NYSE and the LSE, Russian companies had to restate their financial statements from RAS to US GAAP or IFRS, file interim reports, prepare enhanced disclosures, and be audited (Kim 2013). This practice created a strong need for the presence of highly skilled auditing and consulting firms in the region. Accordingly, the Big Four (formerly Big Five) accounting firms (Deloitte, E&Y, KPMG, and PWC) and a number of international consulting firms (e.g. McKinsey and Co.) joined the Russian market in the 1990s. At the beginning of the 2000s, Deloitte launched their “Don’t go to London without Deloitte” initiative, offering a complex program to aid companies in preparing for an IPO in London. The program included an IPO diagnostic, tax and legal restructuring, IFRS reporting, executive compensation plans, and corporate governance advice for Russian firms applying for listing on the LSE (Deloitte 2005). Notably, the international auditing and consulting firms working in Russia were initially led by experienced foreign nationals who possessed unique skills and knowledge of Western markets’ practices and listing requirements.

NATIONALITY DIVERSITY 121 Beginning in the 1990s, public firms also more frequently invited foreign individuals to participate in their day-to-day management activities and serve on their boards of directors, and this practice has persisted to the present day. One notable example is Russia’s oil and gas giant Rossneft that hired the former head of British Petroleum Robert Dudley, Exxon Mobil’s Donald Humphreys, and the former German Chancellor Gerhard Schroeder onto its board. Russia’s leading bank Sberbank invited McKinsey’s Peter Kraljich and American economist Martin Gilman as independent directors; Allessando Profumo (Banca Monte dei Paschi di Siena) and Nadya Wells (Invesco) joined Sberbank more recently. Rosseti and Rosnano, along with smaller energy companies, invited Seppo Remes (FIM Financial Service) to serve on the board. The energy conglomerate Inter RAO EES has General Electric’s Vice-President Ronald Pollett as a director on its board. According to recent research, Russian public companies hire foreign directors to benefit from their diverse expertise and knowledge of global financial markets that can positively contribute towards firm performance and potentially enhance firm value (Association of Independent Directors 2014). Market participants expect foreign directors to serve as gatekeepers to firms’ financial systems, limiting earnings management and implementing reporting practices in the spirit of the world’s leading markets (Association of Independent Directors 2014). Foreign clients are more inclined to do business with Russian companies that have foreign directors due to their better understanding of organizational excellence (Vedomosti 2015). The Ministry of Labor and Social Development (2017) of Russia ranks executive and boards of directors’ positions among those in highest demand, citing that most Russian public firms are looking for foreign specialists, primarily for their unique Western experience. Nevertheless, critics argue that appointments of foreigners on boards are highly political and nothing more than an image of prestige: at best, they can serve as a successful lobbying mechanism

 

122 OKSANA KIM upon a company’s foreign listing (Russian and World News 2017).58 Foreign nationals, however, often struggle to understand Russian corporate realities and experience culture shock, which obstructs their gatekeeping role (Grebenyukova and Pashkova 2014). Dolgopyatova et al. (2015) conducted a study which showed that only 50 percent of foreigners working in Russian firms believed that their personal skills and expertise were their most important contributions towards Russian companies’ missions; 28 percent responded that their main contribution was towards a formal, independent status and image of the company and 22 percent of respondents could not define their roles. These disturbing findings suggest that foreign directors join Russian firms’ boards in pursuit of high compensation and other perquisites that are conditioned upon a company’s success on the market. Indeed, the compensation of a foreign professional in Russia is at least three times higher than that of a local one, and the compensation package includes luxury accommodation, family relocation reimbursements, and exceptional insurance coverage, among others (Vedomosti 2015). Their contract termination option typically includes a one-time “golden parachute” payment of an outstanding amount and the contracts are denominated in USD and Euro, which makes foreigners’ income less susceptible to adverse economic changes (RBC 2015). More recently, those against having a foreign presence within the Russian economy have also argued that the lion’s share that belonged to the Big Four accounting firms created unhealthy competition on the market and prevented regional firms from growth and expansion. In 2014, the state Duma made a proposal calling Russian-controlled entities to withhold from hiring Big Four accounting firms to conduct their statutory audits (Sputniknews 2014). The main argument supporting this proposal was “to prevent foreign

                                                             58

In our study, “lobbying” means advocating for, promoting, and campaigning for the interests of a company in the local or foreign market. “Lobbying” here does not necessarily result in legislative or political actions in favor of Russian companies (Kim 2018). Rather, its aim is to raise the status of a public company on the market using the “political weight, economic pragmatism and organizational excellence skills” of foreign directors (Russian and World News 2017). In the Russian press, it is common to refer to foreign professionals working in Russian businesses as “lobbyists.”

NATIONALITY DIVERSITY 123 nationals from having access to state secrets.” Arguably, this was done in response to economic sanctions imposed by Western society on select Russian companies and the economy as a whole. Deloitte (2017) noted, however, that the development of the market for consulting and auditing services in Russia became possible largely due to the international companies’ presence and their crucial role as advisors to smaller local firms. Services such as IT consulting, IFRS/US GAAP transformation, financial risk management, overseas listing preparation, and tax optimization would be underdeveloped in the absence of international companies on the Russian market (Deloitte 2017). In summary, the issue of the importance of foreign nationals (and firms) to the Russian economy remains highly debatable, and the pressure on companies to forgo hiring foreigners has been exacerbated by political and economic tensions between Russia and the Western nations.

5.3. Implications of hiring foreign nationals on the board of directors 5.3.1. Summary statistics. Comparison of covariates We begin our empirical investigation by examining how the dynamics of hiring foreign directors on boards changed over time. Table 5.1 reports the distribution of sampled firms by year and presence of foreign directors on the board. In 1999 and 2001, there were no foreign directors on the boards of the examined firms. After 2002—when Russia’s first official corporate governance code was adopted (discussed in chapter 2)—public firms started hiring foreign directors more actively. The distribution of foreign directors is not clustered in any particular year and, overall, foreign director representation increased during the examined period. In 2009, the number of firms with at least one foreign director and multiple foreign directors decreased (32 and 16 percent, respectively), which is most likely due to the financial crisis that hit the Russian economy in 2008–2009. Remarkably, we do not observe a significant decrease in the proportion of foreign directors after 2014,

 

124 OKSANA KIM despite the economic sanctions imposed by the EU on Russian firms in 2014. Lastly, the proportion of firms with at least one foreign director for all the periods examined—31 percent—is significantly higher than the number reported in prior studies (e.g., 12.74 percent in Masulis et al. 2012). Overall, the positive trend in the presence of foreign directors on boards is in line with the previously documented statistics on the increasing number of foreign investors in Russian securities (chapter 2). Table 5.1. Distribution of sampled firms by year and presence of foreign directors (expats) on the board This table reports the distribution of examined firms by year. The number of firms with one or more foreign directors (FDs) on their board of directors is reported. Period: 1999–2016.

Year

# of firms in the sample

# of firms with at least one FD

% of firms with at least one FD

# of firms with multiple FDs

% of firms with multiple FDs

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1999–2016

2 4 7 9 13 21 39 83 120 162 184 194 211 217 220 212 217 207 2,122

0 1 0 3 6 7 15 30 47 57 58 57 65 70 65 59 60 62 662

0% 25% 0% 33% 46% 33% 38% 36% 39% 35% 32% 29% 31% 32% 30% 28% 28% 30% 31%

0 0 0 1 4 6 10 18 30 37 29 29 39 44 41 35 38 40 401

0% 0% 0% 11% 31% 29% 26% 22% 25% 23% 16% 15% 19% 20% 19% 17% 18% 19% 19%

NATIONALITY DIVERSITY 125 In Table 5.2, we shed light on how firms hiring foreign directors differ from their peers employing only local directors. Two-tier boards are more likely to have foreign directors, suggesting that such boards have greater demand for their unique expertise and/or are more concerned with formal independence compared to onetier boards. Smaller companies and those with smaller boards are less likely to hire foreigners, possibly due to limited resources, as foreign directors’ compensation packages require significant cash outflow. Older boards are also more likely to hire foreigners, although a CEO’s age is not a significant factor. Interestingly, female CEOs oppose the hiring of foreign directors, indicating that different sources of diversity are not necessarily favored within the same organization. Foreign directors clearly contribute to the pool of independent directors and are associated with lower director turnover. The latter finding indicates that foreigners are replaced at a slower pace compared to local directors, suggesting that companies do value their unique skills and expertise. Further, firms with political (governmental) affiliations are more likely to hire foreigners, although state ownership and affiliations with strategic industries show the opposite trend. There is a strong evidence that companies reporting under IFRS/US GAAP and those cross-listed overseas and/or in London hire foreign directors more actively. This evidence provides preliminary support for the notion that companies benefit from foreign directors’ unique knowledge of international reporting practices, as well as global markets’ listing requirements. Lastly, firms with foreign directors have higher firm value but similar operating performance, growth, and leverage compared to their peers. We supplement Table 5.2 with descriptive statistics for the variables that proxy for the presence of foreign directors on the board: DExpat (a dummy variable equal to one if a company has at least one foreign director on the board), Fr_Expat (the proportion of foreign directors on the board), and No_Expat (the number of foreign directors on the board).59 The average proportion of foreign directors on boards was 8.4 percent, and the maximum number of

                                                             59

All other variables are as previously defined: see Appendices A-1 and A-2.

 

126 OKSANA KIM foreign directors on boards was 11 (Rosbank). Overall, Table 5.2 reports unique statistics on the attributes of Russian firms hiring foreign directors as opposed to those hiring only local directors on their boards.

 

 

0.304

662

662

662

662

662

662

662

662

CEOWoman

IndepDir

DirShare

CEOAge

CEOdual

ChDir

Dpolit

DIFRS

 

2.544

662

BoardAge

0.921

0.008

48.175

4.373

2.938

0.012

49.446

9.557

662

BoardSize

0.863

Mean

662

Observations

DExpat = 1

D2tier

Variables

0.269

0.460

2.472

0.087

8.655

13.835

2.364

0.109

5.657

2.449

0.345

Std. dev.

1,460

1,460

1,460

1,460

1,460

1,460

1,460

1,460

1,460

1,460

1,460

Observations

0.597

0.259

2.856

0.018

47.492

4.441

1.875

0.043

45.319

8.739

0.653

Mean

DExpat = 0

0.491

0.438

2.519

0.132

8.963

13.644

2.677

0.203

6.341

2.322

0.476

Std. dev.

1

−0.325***

−0.045**

0.312***

0.010*

−0.683

0.068

−1.063***

0.031***

−4.126***

−0.818***

−0.209***

Difference

This table reports the comparison of covariates (mean values) between the sample of firms that hire foreign directors on their boards and those that do not. The variable definitions are presented in Appendices A-1 and A-2. Additionally, DExpat is a dummy variable equal to one if a firm has at least one foreign director on its board, and zero otherwise. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1% levels, respectively.

Table 5.2. Comparison of covariates: firms hiring foreign directors compared to firms hiring only local directors

NATIONALITY DIVERSITY 127

641

641

633

662

Size

Lev

ChSales^

StratInd 0.530

0.001

0.594

15.089

0.163

6.791

14.343

0.444

0.361

0.499

0.008

0.418

1.966

0.546

13.162

23.255

0.497

0.481

1,460

1,343

1,380

1,382

1,261

1,300

1,460

1,460

1,460

0.633

0.062

0.565

12.845

0.001

5.878

16.238

0.155

0.072

0.482

2.26

0.393

2.035

0.634

13.517

23.194

0.362

0.258

0.103***

0.061

−0.029

−2.244***

−0.163***

−0.912

1.895*

−0.289***

−0.289***

0.312 0.084 0.769

DExpat

Fr_Expat

No_Expat

Mean

0

0

0

Median

11

0.917

1

Maximum

0

0

0

Minimum

1.505

0.162

0.463

Std. Dev.

2,122

2,122

2,122

Observations

Notes: ChSales^ = ChSales/1,000. Descriptive statistics for variables that proxy for the presence of foreign directors on the board: DExpat, Fr_Expat, and No_Expat.

606

631

662

StateOwn

TQ

662

DCL

ROA, %

662

DLondon

128 OKSANA KIM

NATIONALITY DIVERSITY 129 5.3.2. Foreign directors’ impact on the monitoring and advisory functions of the board Corporate boards have a dual role of monitoring and advising executives: the management team and the CEO (Adams and Ferreira 2007). The monitoring function of boards has been extensively examined in the empirical literature in various settings and time periods. The extant research suggests that [1] enhanced monitoring is associated with improved firm performance (Vafeas 1999; Adams 2005) and [2] the number of meetings held by the board is an important dimension of the board’s monitoring activity (Brick and Chidambaran 2010). Accordingly, we examine whether representation of foreign directors on boards has a positive impact on their monitoring function, as defined by the number of annual meetings. We estimate the following model: NoMeet

δ

δ Expat

φC′′

YearFixed

IndustryFixed

ξ . (3)

In the above model, NoMeet is the natural logarithm of the total number of annual meetings conducted by the board (Brick and Chidambaran 2010). The set of control variables is the same as in model (1); additionally, we introduce three variants of the variable (dummy, fraction, number) denoting the presence of foreign directors on the board (DExpat, Fr_Expat, No_Expat). A positive coefficient on this variable indicates that foreign directors positively contribute towards the board’s monitoring activity. Table 5.3 reports the results from estimating model (3), revealing several intriguing results. First, the coefficient on the DIFRS variable is significantly negative, while we would expect otherwise because IFRS reporting makes firms’ reporting systems more complex and prone to discussion. Next, neither cross-listing in general nor cross-listing in London affects the board’s activity. This is also surprising, as cross-listing entails additional performance and reporting obligations and is another source of business complexity. The presence of an auditor from the Big Four accounting firms is associated with more meetings, suggesting that Russian firms strive to communicate with their auditors. Further, director ownership is

   

130 OKSANA KIM negatively associated with the board’s activity, although we would also expect otherwise. Most importantly, the coefficient on all three variants of the Expat variable is significantly negative, indicating that foreign directors are associated with lower meeting frequency. These findings are consistent with the narrative that cultural diversity on the board may create logistical and communication problems (Ferreira 2010) and weaken firms’ internal governance mechanisms overall (Hahn and Lasfer 2016). Next, the literature also suggests that firms’ governance practices are shaped by the institutional differences at the federal, regional, and local levels (Hillman et al. 2004). Firms that are geographically remote are less motivated to improve corporate governance quality (Brandt and Li 2003). In support of this, Marquis and Qian (2014) show that compared to firms with headquarters located in developed regions, Chinese firms in less-developed regions are less likely to adopt governance changes to improve internal corporate governance mechanisms. Additionally, RBC (2017) reported that when seeking employment with Russian firms, foreign nationals prefer metropolitan cities and Central Russia due to the greater familiarity of the local population with the English language, better business ethics, and more active social and cultural lifestyles. A firm’s location in a metropolitan city therefore promises more comfortable living, fewer communication issues, and lower logistical costs. We re-estimate model (3) by partitioning our sample into [1] firms headquartered in Moscow as opposed to other cities and [2] firms headquartered in Moscow or Saint Petersburg as opposed to other cities. Table 5.460 reveals that foreign nationals’ representation has no impact (negative impact) on the board’s activity when a firm is headquartered in Moscow or Saint Petersburg (other cities), supporting concerns raised in prior literature regarding high communication and logistics costs associated with maintaining culturally

                                                             60

The results reported in Table 5.3 and 5.4 are based on a reduced sample of firms because Russian companies are not obliged to make disclosures about board activity. The corporate governance regulations only require firms to meet at least once every six weeks and meetings can be held in any form: in the presence of all the directors or in absentia.

NATIONALITY DIVERSITY 131 diverse boards (Ferreira 2010). In summary, foreign nationals’ representation on Russian boards negatively affects the number of annual meetings held by the board, which is likely to impede the boards’ monitoring activity. For robustness, our additional measure of effectiveness of the board’s monitoring activities is the number of independent director-days, consistent with Brick and Chidambaran (2010). This second measure of board effectiveness is computed as the natural logarithm of the number of foreign directors multiplied by the number of annual meetings. In unreported results, we find that the coefficient of the Expat variable is negative at 10 percent or better in the case of the fraction variant but is insignificant in the case of the dummy and number variants of this variable. Accordingly, there is only weak evidence that foreign director representation on Russian boards obstructs their monitoring activity, based on this additional metric.

 

132 OKSANA KIM Table 5.3. The impact of foreign director representation on the board’s monitoring activity This table reports the results from estimating model (3) with an OLS technique using White (heteroscedasticity) robust standard errors. The dependent variable is the natural logarithm of the number of annual meetings held by the board. The variable definitions are presented in Appendices A-1 and A-2. We use three variants of the Expat variable indicating presence of foreign directors on the board: DExpat (a dummy variable equal to one if a company has at least one foreign director on the board), Fr_Expat (the proportion of foreign directors on the board), and No_Expat (the number of foreign directors on the board). Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Number of meetings Variable

Dexpat

Fr_expat

No_expat

Constant

1.123***

0.987***

0.982***

Expat

−0.096**

−0.446***

−0.042**

D2tier

−0.133**

−0.127**

−0.131**

BoardSize

−0.023**

−0.025**

−0.021*

BoardAge

−0.008*

−0.007

−0.007*

CEOWoman

−0.130

−0.135

−0.130

IndepDir

−0.003

−0.002

−0.002

ChDir

0.030***

0.029***

0.029***

DirShare^

−0.451***

−0.489***

−0.468***

CEOAge^

0.806***

0.796***

0.815***

CEOdual

0.058

0.039

0.043

Dpolit

−0.001

−0.018

−0.015

DBig4

0.151***

0.160***

0.155***

Size^

14.954***

15.122***

15.145***

0.086*

0.085*

0.083*

−0.012***

−0.012***

−0.012***

6.583

7.924

7.664

−0.141**

−0.145**

−0.145**

0.035

0.027

0.031

−0.075

−0.081

Lev ChSales^ Ret^ DIFRS DCL DLondon

 

−0.083

 

NATIONALITY DIVERSITY 133 StratInd

0.177**

0.178**

0.176**

StateOwn^

−0.075

−0.104

−0.103

Adj. R-sq.

0.20

0.20

0.20

No. Obs.

1,255

1,255

1,255

Industry-fixed effects

yes

yes

yes

Year-fixed effects

yes

yes

yes

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

 

134 OKSANA KIM Table 5.4. The impact of foreign director representation on the board’s monitoring activity: Partitioning by headquarters location This table reports the results from estimating model (3) with an OLS technique using White (heteroscedasticity) robust standard errors. The dependent variable is the natural logarithm of the number of annual meetings held by the board. We partition the sample by the headquarters location: [1] Moscow versus others and [2] Moscow or Saint Petersburg versus others. The variable definitions are presented in Appendices A-1 and A-2. We report the results for Fr_Expat (the proportion of foreign directors on the board); the results are consistent for the DExpat and No_Expat variants. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Number of meetings Variable

[2] Partitioning by HQ_MoscowSpb

HQ_Moscow = 0

HQ_Moscow = 1

HQ_MoscowSpb = 0

HQ_MoscowSpb = 1

Constant

2.000***

−0.495

2.217***

−0.465

Fr_Expat

−0.422***

−0.160

−0.518***

−0.183

D2tier

−0.189***

0.142

−0.201***

0.091

BoardSize

0.013

−0.097***

0.009

−0.076***

BoardAge

−0.022***

0.014

−0.025***

0.012

CEOWoman

−0.219*

−0.019

−0.267**

−0.120

IndepDir

−0.005

−0.024

−0.007

−0.016

ChDir

0.018**

0.073***

0.015*

0.065***

DirShare^

−0.251

−0.335

0.125

−0.446*

CEOAge^

0.778***

1.041*

1.028***

0.686

CEOdual

0.070

−0.546***

0.043

−0.601

Dpolit

−0.151***

0.325***

−0.146***

0.255**

DBig4

0.029

0.547***

0.093

0.484***

Size^

15.309***

9.459***

15.123***

9.447***

−0.102*

−0.017

−0.098

−0.014

Lev ChSales^

 

[1] Partitioning by HQ_Moscow

−0.014***

−1.942

−0.013***

−2.006

Ret^

10.271

5.788

12.796

5.995

DIFRS

−0.101*

0.120

−0.154**

0.112

 

NATIONALITY DIVERSITY 135 DCL

−0.072

−0.182*

−0.111*

−0.074

DLondon

0.028

−0.102

0.188**

−0.212*

StratInd

−0.093

1.006***

−0.228**

1.100***

StateOwn^

−0.146

0.084

−0.094

0.193

Adj. R-sq.

0.21

0.39

0.21

0.39

No. Obs.

854

401

788

467

yes

yes

yes

yes

yes

yes

yes

yes

Industry-fixed effects Year-fixed effects

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

We further examine how foreign director representation affects Russian firms’ liquidity position, overall financial health, and the probability of subsequently issuing additional equity instruments. We therefore estimate a modified model (3), replacing an independent variable with [1] a liquidity metric (quick ratio), [2] a financial health measure (Altman Z-score for emerging markets), and [3] an indicator variable for a future period equity issuance. Unlike the previous tests where we examined the contribution of foreign nationals towards the monitoring activity of the board, which has been the focal point of the agency theory, these tests are aimed at assessing the advisory function of the board, advocated by the research dependence framework (see Ferreira 2010). This framework posits that directors’ unique expertise and connections allow the provision of optimal advice and counsel to the executives of a company regarding financial decisions, such as changes in capital structure, mergers and acquisitions, and capital expenditures (Pfeffer and Salancik 1978; Ferreira 2010). The results reported in Table 5.5 reveal disturbing findings. Particularly, the presence of foreign directors on the board does not improve the liquidity/financial health of companies and somewhat reduces the probability of subsequent equity issuances. This evi-

 

136 OKSANA KIM dence suggests that foreign nationals on the boards of Russian public companies did not fulfill the advisory role for which Russian companies had appointed them. In a study related to ours, Kim (2018)61 reported that foreign director representation on the board of directors of Russian firms, on one hand, is associated with higher operating performance and enhanced firm value. Nevertheless, the author also reports that the presence of foreign directors in examined firms is negatively related to reporting quality and instances where modified audit opinions are issued. Kim (2018) concludes that hiring foreign directors is a double-edged sword for Russian firms and benefits brought about by enhanced cultural diversity do not potentially outweigh the costs of reduced board independence and the decline in relevance of information reported to market participants. The findings reported in this study supplement those reported in Kim (2018) and suggest that cultural diversity on the board remains a contentious governance issue, similar to the results of prior research conducted in developed market settings (Masulis et al. 2012; Frijns et al. 2016; Hahn and Lasfer 2016).62

 

                                                             61 62

The study of Kim (2018) is conducted using the same sample and we therefore do not replicate its findings here. Our conclusions are unchanged when we estimate a two-stage model and supplement the results reported in Tables 5.3 and 5.4 with the inverse Mills ratio. The first-stage estimation—the selection model—accounts for the same factors as those in study by Kim (2018), and we omit its discussion here.

NATIONALITY DIVERSITY 137 Table 5.5. The impact of foreign director representation on the board of directors of Russian companies on liquidity, financial health, and the probability of subsequent equity issuance This table reports the results from estimating a modified model (3) with an OLS technique using White (heteroscedasticity) robust standard errors. The dependent variables are as follows: [1] quick ratio = [current assets-inventory]/current liabilities; [2] Altman’s z-score (emerging markets) = natural log of [3.25 + [Working Capital/Total Assets]*6.56 + [Retained Earnings/Total Assets]*3.26 +[EBIT/Total Assets]*6.72 + [Book Value of Equity/Total Liabilities]*1.05]; and [3] a dummy variable equal to one if a company issued additional equity in year T+1. Other variable definitions are presented in Appendices A-1 and A-2. We report the results for Fr_Expat (the proportion of foreign directors on the board); the results are consistent for the DExpat and No_Expat variants. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Variable

Liquidity

Financial health

Subsequent equity issuance

Constant

23.180

3.796***

0.861***

Fr_Expat

−0.386

0.051

−0.148*

D2tier

−3.042

−0.239***

−0.029

BoardSize

0.055

−0.018**

−0.009

BoardAge

−0.055

−0.009***

−0.002

CEOWoman

−2.111

−0.202**

0.072

IndepDir

0.376

−0.002

0.000

ChDir

0.501

−0.007

−0.004

−4.753

0.347**

0.184**

DirShare^ CEOAge^

0.303

0.041

0.230

CEOdual

0.333

0.295***

0.028

Dpolit

0.897

−0.067**

0.036

DBig4

−2.404

0.014

0.047

Size^

−80.745

2.567**

0.307

Lev

−7.519**

−2.182***

0.038

−0.094

0.001

0.002***

2.378

0.146***

0.062

ChSales^ Ret^

 

 

 

138 OKSANA KIM DIFRS

2.609

−0.181***

0.020

DCL

0.806

0.130***

−0.019

DLondon

−0.341

−0.035

0.122***

StratInd

−1.970

−0.231***

−0.019

StateOwn^

−1.475*

−0.010

0.059

Adj. R-sq.

1,641

1,625

1,580

No. Obs.

0.010

0.59

0.33

yes

yes

yes

yes

yes

yes

Industry-fixed effects Year-fixed effects

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

5.4. Conclusions In their study on Russian corporate governance, McCarthy and Puffer (2008) noted: “Norms underlying agency theory can be inappropriate for interpreting the ethicality of corporate governance decisions and behaviors of Russians because they were developed in countries with mature market-oriented economies.” This statement suggest that Russia falls well behind developed countries in adopting progressive corporate governance practices, one of which is hiring diverse boards. The evidence reported in this manuscript suggests that Russian firms, on the contrary, have long adopted governance mechanisms similar to those in the Western world, although we agree with McCarthy and Puffer (2008) that the effectiveness and credibility of those practices needs to be evaluated, which was the main purpose of this chapter. The findings suggest that the “westernization” of emerging markets, advocated by many, may not be a priori successful. Despite their astounding expertise and knowledge of global financial markets, foreign nationals may not perform as expected when hired by firms with distinct—and sometimes shockingly different—corporate cultures.

NATIONALITY DIVERSITY 139 A wide array of factors can impede the monitoring and advisory roles of foreign directors, among which are lack of familiarity with national laws, regulations and the level of risk tolerated by market groups; high expectations for loyalty to group decisions and the dominance of informal ties; enhanced isolation from their roots and home country environments due to language barriers and geographical distance; and resistance to change and innovation from the rest of the board of directors and executives due to “socialist imprints.” Our findings and those reported in Kim (2018) shed light on the benefits associated with hiring foreign directors, including improved operating performance and firm value. On the contrary, there is no evidence of improvement in financial decisions, and the board’s activity is negatively related to nationality diversity on the board.

 

 

 

Chapter 6 Gender diversity on the board of directors of Russian public companies “Gender equality is more than a goal in itself. It is a precondition for meeting the challenge of reducing poverty, promoting sustainable development, and building good governance”. —Kofi Annan, 7th Secretary-General of the United Nations

In this chapter, we discuss the benefits and costs associated with maintaining gender-diverse boards. We provide examples of gender diversity practices adopted globally and offer an overview of the existing research examining how female representation on the board of directors affects organizational outcomes. This is followed by an empirical examination of the pros and cons of female representation on boards of Russian public companies.

6.1. Benefits and costs of maintaining gender-diverse boards. Global evidence and literature overview As in the case of nationality diversity, gender diversity on boards remains a debated topic. On one hand, policy makers across the globe advocate for increasing female representation on corporate boards, adopting special regulations and creating incentives for corporate boards to invite female directors. This drive for changes to the gender composition of boards is based on the premise that female representation on corporate boards may affect the internal governance of public firms in meaningful ways. Proponents of gender-enhancing initiatives argue that males and females in general significantly differ in their cognitive values, education levels, experiences, and values. Accordingly, gender diversity on boards allows the expansion of the talent pool and female involvement in board activities is expected to change its effectiveness and dynamics (Adams and Ferreira 2009). In their study of European corporate governance best practices, Heidrick and Struggles (2011) examined fe-

141

142 OKSANA KIM male representation on boards across 15 nations, some of which imposed quotas (e.g., France, Norway), with others voluntarily adopting gender diversity practices. The findings of this report suggest a growing trend in female representation, with the highest proportion of female directors reported in Scandinavian countries: Denmark (18 percent), Finland (25 percent), Sweden (20 percent), and Norway (33 percent). The average female representation on boards of directors in Europe was 12 percent as of 2011. On the other hand, 25 percent of examined companies did not have women on their boards. In a similar vein, Credit Suisse (2012) implemented a global study examining North American, European, EMEA, Latin American, developed Asian, and emerging Asian regions. Emerging markets clearly lagged behind developed countries, although there was tremendous improvement in female representation for some emerging markets between 2005 and 2011, including Russia. The major premise of the report was that companies with one or more females on the board outperformed those with male-only boards, based on share price growth. Moreover, over the period of 2005– 2011, gender-diverse boards reported higher ROEs (16 percent versus 12 percent), greater price/book ratios (2.4 versus 1.8), and improved growth (14 percent versus 10 percent), compared to maleonly boards.63 Notwithstanding the growing global trend towards improved gender diversity on corporate boards, critics argue that female representation on the board does not improve—or, in fact, worsens— a firm’s performance and the board’s effectiveness. This is because females named to boards may not differ from their male peers in terms of experience and knowledge, especially in developed countries such as the UK, the US, and Australia (Hedrick and Struggles 2011; Knowledge@Wharton 2018). Moreover, women are often appointed to boards for gender equality reasons, rather than their professional values, and are therefore mere “tokens” whose voices and

                                                             63

Ferreira (2010) cautions against directly interpreting the results of non-peer reviewed reports because some of the methodologies adopted by pro-gender-diversity organizations preparing these reports lack scientific rigor.

GENDER DIVERSITY 143 opinions may be discounted by their male peers. Aggarwal (2018) noted that “adding female directors because one ‘has to’ rather than ‘wants to’ may create a negative environment where diverse views are either not voiced, or heard.” Besides, studies finding evidence in favor of gender-diverse effects cannot claim causality between female representation and a firm’s performance/value because females are named to corporate boards on a non-random basis (Knowledge@Wharton 2018). The empirical evidence on the benefits and costs of genderdiverse boards has been mixed to date. In support of the growing trend of diversity, studies reported that female directors are more conservative and open to discussion and are more focused on the long-term growth, compared to their male peers (Gul et al. 2011; Francis et al. 2015). Adams and Ferreira (2009) documented that female directors on boards have better meeting attendance and have a significant impact on the board’s decisions, suggesting that “diverse boards are tougher monitors” (p. 293). Nevertheless, the average effect of a board’s gender diversity on the firm’s performance in their study is negative, after controlling for potential endogeneity. Garcia Lara et al. (2017) reported that a larger percentage of women among independent directors is associated with lower earnings management, concluding that gender-diverse boards are better monitoring mechanisms when it concerns reporting quality. In a related study, Francis et al. (2015) documented significant increase in accounting conservatism when a female CFO replaces a male CFO. In a recent study of Fortune 500 US corporations, Francoeur (2018) reported that gender-diverse boards significantly improve performance towards less powerful stakeholders such as the community and the environment. Some studies, on the other hand, concluded that firms with more females on the board have lower accounting returns and stockholders’ value (Bøhren and Strøm 2010; Darmadi 2011). Lastly, several works documented no association between female representation and a firm’s performance (Carter et al. 2010). In an attempt to reconcile contradictory evidence on genderdiverse boards, Post and Byron (2015) conducted a meta-analysis combining the results of 140 studies. The authors found that female

 

144 OKSANA KIM board representation is positively related to accounting returns but is not associated with market performance. Female directors also tend to be more engaged in the board’s activities and strategy implementation. Jeong and Harrison (2017) performed meta-analyses of 146 studies across 33 countries examining how female representation in the upper echelons affects a firm’s performance. The authors documented weakly positive (weakly negative) effects between women on top management teams and long-term financial performance (short-term market returns). Overall, the evidence regarding female representation on boards/executive teams has not been clear or consistent to date.

6.2. Female representation on Russian corporate boards 6.2.1. Summary statistics. Comparison of covariates The descriptive statistics reported in Table 3.4 indicated that 59 percent of companies in the examined sample have at least one woman on their board of directors and only 3 percent of companies have a female CEO. Table 6.1 reports the dynamics of changes in female representation over time. Consistent with the global trend, we observe an increase in the number of gender-diverse boards, and 66 percent of examined public companies named at least one woman to the board as of 2016. Importantly, the proportion of firms with multiple female directors also steadily increased during the examined period, despite the fact that Russian law does not enforce or specifically recommend high gender representation. The numbers reported in Table 6.1 are therefore impressive and are evidence of steady (voluntary) improvement in the internal governance practices of Russian companies. The fact that female board representation where there are multiple female directors has also improved over time may indicate that females are not hired by Russian boards merely for reasons of equality, a proposition that we will test below. Table 6.2 provides details of female representation within specific industry sectors. Consistent with the evidence in Credit Suisse

GENDER DIVERSITY 145 (2012), we find that female representation is uneven across industries and is most pronounced in the case of construction, forestry, real estate, pharmaceuticals, and hardware and technology businesses. Businesses in the aerospace and defense, food and drug retailers, personal goods, and travel and leisure sectors have the lowest proportion of females on their boards. Mining, energy, oil and gas producers, and industrial engineering sectors also have impressive female representation, despite having significant state ownership and the fact that these industries are traditionally considered “male” businesses in Russia. We report the comparison of covariates (mean values) between a sub-sample of firms with female directors and a sub-sample of male-only boards in Table 6.3. Two-tier and older boards/CEOs are less likely to hire women, while larger boards, those that have a female CEO, and those that have a dual CEO welcome gender diversity. Director turnover is higher in boards with female directors, however. Firms with political connections on their boards and larger firms (firms with greater leverage or operating in strategic industries) are less (more) likely to hire female directors. One intriguing result is that the presence of female directors on boards is associated with a reduced probability of business complexity, based on the IFRS reporting practices and cross-listings/London listings. Turning to performance variables, we find no (negative) association between operating performance (ROA) and market returns (firm value), preliminarily indicating that females on boards of directors do not add any value. We further explore this association between female directors and firm attributes below.

 

146 OKSANA KIM Table 6.1. Distribution of sampled firms by year and presence of female directors on boards This table reports the distribution of examined firms by year. The number of firms with one or more female directors on their boards of directors is reported. Period: 1999–2016.

# of firms in the sample

# of firms with at least one female director

% of firms with at least one female director

# of firms with multiple female directors

% of firms with multiple female directors

1999

2

2

100%

0

0%

2000

4

1

25%

0

0%

2001

7

2

29%

2

29%

Year

2002

9

5

56%

1

11%

2003

13

6

46%

0

0%

2004

21

10

48%

3

14%

2005

39

19

49%

8

21%

2006

83

42

51%

19

23%

2007

120

62

52%

25

21%

2008

162

87

54%

37

23%

2009

184

109

59%

53

29%

2010

194

116

60%

51

26%

2011

211

118

56%

58

27%

2012

217

131

60%

68

31%

2013

220

135

61%

73

33%

2014

212

125

59%

68

32%

2015

217

137

63%

68

31%

2016

207

136

66%

61

29%

1999–2016

2,122

1,243

59%

595

28%

 

 

21 69 4 28

Forestry and Paper

Gas, Water, and Multi-utilities

60

Fixed-Line Telecommunications

Food Producers

52

Financial Services

Food and Drug Retailers

34 617

113

Chemicals

Electricity

21

Beverages

Construction and Materials

54 126

Automobiles and Parts

Banks

46

Aerospace and Defense

18

4

32

1

33

40

464

30

64

4

84

27

11

64%

100%

46%

5%

55%

77%

75%

88%

57%

19%

67%

50%

24%

14

3

12

0

18

36

243

16

15

2

51

13

0

50%

75%

17%

0%

30%

69%

39%

47%

13%

10%

40%

24%

0%

This table reports the distribution of examined firms by industry sector. The number of firms with one or more female directors on their board of directors is reported. Period: 1999–2016. % of firms % of firms # of firms with # of firms with with at least with multiple # of firms in at least one femultiple feIndustry one female difemale directhe sample male director male directors rector tors

Table 6.2. Distribution of sampled firms by industry and presence of female directors on boards

GENDER DIVERSITY 147

31 4

Mobile Telecommunications

Nonlife Insurance

42

Travel and Leisure 2,122

12

Technology Hardware and Equipment

1999–2016

30 13

Software and Computer Services

36

Pharmaceuticals and Biotechnology

Real Estate Investment and Services

2

Personal Goods

174

108

Mining

Oil and Gas Producers

4 29

Media

61

Industrial Transportation

Leisure Goods

79 211

Industrial Metals and Mining

22

General Retailers

Industrial Engineering

19

General Industrials

148 OKSANA KIM

1,243

8

12

2

24

29

0

94

1

9

63

18

1

38

69

45

10

8

59%

19%

100%

15%

80%

81%

0%

54%

25%

29%

58%

62%

25%

62%

33%

57%

45%

42%

595

7

11

0

14

10

0

28

1

0

30

8

0

11

20

24

8

0

28%

17%

92%

0%

47%

28%

0%

16%

25%

0%

28%

28%

0%

18%

9%

30%

36%

0%

 

1,243

1,243

1,243

1,243

1,243

1,243

CEOdual

ChDir

Dpolit

DIFRS

1,243

IndepDir

CEOAge

1,243

CEOFem

DirShare

9.160

1,243

 

0.647

0.256

3.006

0.023

47.131

4.474

2.138

0.053

45.030

1,243

BoardSize

BoardAge

Mean 0.674

Observations

D_FemDir = 1

1,243

D2tier

Variables

0.478

0.437

2.565

0.151

8.523

13.680

2.794

0.224

6.000

2.446

0.469

Std. dev.

2.408 0.297

879 879

0.770

0.002

879

879

4.342 48.517

2.304

879 879

0.006

879 879

8.760 48.836

879

0.782

Mean

879

879

Observations

D_FemDir = 0

0.421

0.457

2.382

0.048

9.287

13.737

2.375

0.075

6.351

2.295

0.413

Std. dev.

0.123***

0.041**

−0.598***

−0.021***

1.385***

−0.132

0.165

−0.047***

3.806***

−0.400***

0.107***

Difference

This table reports the comparison of covariates (mean values) between the sample of firms that hire female directors on their boards and those that do not. The variable definitions are presented in Appendices A-1 and A-2. Additionally, D_FemDir is a dummy variable equal to one if a firm has at least one female director on its board, and zero otherwise. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively.

Table 6.3. Comparison of covariates: firms hiring female directors compared to firms hiring only male directors

GENDER DIVERSITY 149

1,153

1,243

ChSales^

StratInd

0.624

0.072

0.591

13.143

0.291

0.030

5.827

16.094

0.177

0.118

0.484

2.434

0.411

2.291

1.232

0.615

14.199

22.365

0.382

0.323

14.136 0.551 0.001

841 841 823 0.568

2.670

790

879

6.648 0.089

793

879 793

0.341 15.016

879

0.224

879

0.496

0.011

0.388

2.103

66.042

0.605

12.204

24.387

0.474

0.417

−0.057***

−0.071

−0.040**

0.993***

2.379

0.059**

0.822

−1.078

0.164***

0.106***

 

0.586

0.118

1.018

D_FemDir

Fr_FemDir

No_FemDir

Mean

 

1

0.091

1

Median

6

0.714

1

Maximum

0

0

0

Minimum

1.121

0.134

0.493

Std. Dev.

2,122

2,122

2,122

Observations

Notes: ChSales^ = ChSales/1,000. Descriptive statistics for variables that proxy for the presence of female directors on boards: D_FemDir, Fr_FemDir, and No_FemDir.

1,182

1,180

Lev

1,157

Ret

Size

1,113

1,099

1,243

StateOwn

TQ

1,243

DCL

ROA, %

1,243

DLondon

150 OKSANA KIM

GENDER DIVERSITY 151 6.2.2. The impact of female directors on a firm’s performance and value. Mechanisms through which female directors contribute towards the board’s activities As was previously noted, female directors are assigned to boards on a non-random basis, potentially leading to a self-selection bias, which is a critical issue in corporate governance empirical research. Accordingly, we first estimate a selection model where the probability of hiring women on the board is a function of a set of board-, firm-, and industry-level factors: Pr D _FemDir

ϖ

ωC

ψ . (4)

We rely on the work by Knyazeva et al. (2013) and Huang et al. (2017) and introduce Ind_FemDir, the average level of board gender diversity in a firm’s industry, as an exclusion restriction. Table 6.4 reports the results from the selection model estimation. As expected, the average female representation in a firm’s industry is positively related to firm-level female representation on boards. Interestingly, boards with foreign directors are less likely to name females to their boards, indicating that nationality and gender diversity may not have complementary effects. Large boards and those led by a woman/dual CEO are more likely to hire female directors. Older boards and boards with more independent directors, however, are negatively associated with female representation on boards. Overall, several of these findings are rather unique. As noted above, the prior literature examined the impact of female representation on boards on a firm’s operating performance (ROA), shareholder returns (Ret), and value (Tobin’s Q); we follow this approach. We estimate a modified model (3) where the dependent variable is one of the aforementioned metrics and the control variables are as previously defined, complemented with the Fr_FemDir variable and an inverse Mills ratio.64 The latter variable is computed based on model (4)’s output. We find a mixed picture

                                                             64

The results are generally consistent with those reported in Table 6.5 for the D_FemDir and No_FemDir variants.

152 OKSANA KIM in Table 6.5: female directors have no impact on operating performance, a positive impact on shareholder returns, and a negative impact on firm value. In unreported results, we also find that female directors negatively affect cash flows but have no impact on EBIT. Accordingly, similar to previous works on gender diversity, we do not have a clear or consistent picture of how female representation on boards affects a firm’s performance or value (e.g., Adams and Ferreira 2010). Nevertheless, the growing trend towards hiring multiple female directors documented above indicates the presence of alternative channels through which companies may benefit from having female representation on their boards. Therefore, we replicate the analyses reported in Table 5.4 (impact on board activity) and Table 5.5 (impact on liquidity, financial stability, and subsequent capital issuances), replacing Fr_Expat with Fr_FemDir. Table 6.6 is where we present the results of these additional tests. We find that female directors are associated with enhanced board activity, consistent with the finding in Adams and Ferreira (2010) that gender-diverse boards allocate more effort to monitoring. Additionally, we find that the financial health of a company and female representation on boards are also positively related. On the other hand, there is no impact of female directors on a firm’s liquidity and the probability of subsequent equity issuances.

GENDER DIVERSITY 153 Table 6.4. Determinants of hiring female directors This table reports the results from estimating model (4) using a probit specification. The dependent variable is D_FemDir. The variable definitions are presented in Appendices A-1 and A-2. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Variable

D_FemDir

z-stats

Constant

1.247

3.069***

Ind_FemDir

0.839

9.116***

DExpat

−0.200

−2.395**

D2tier

0.007

0.077

BoardSize

0.154

7.451***

BoardAge

−0.052

−6.907***

CEOWoman

1.370

4.042***

IndepDir

−0.054

−3.711***

ChDir

−0.027

−1.735*

DirShare^

1.114

3.643***

CEOAge^

0.201

0.480

CEOdual

1.316

2.590***

Dpolit

−0.104

−1.101

DBig4

−0.066

−0.676

Size^

−4.196

−1.658*

Lev

0.188

1.901*

ChSales^

0.034

0.319

Ret^

−13.281

−0.522

DIFRS

−0.042

−0.438

DCL

−0.403

−3.270

DLondon

0.452

3.173

StratInd

−0.062

−0.787

StateOwn^

−0.525

−2.704

Adj. R-sq.

0.20

No. Obs.

1,822

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

 

154 OKSANA KIM Table 6.5. The impact of female directors on a firm’s performance, shareholder returns, and value This table reports the results from estimating a modified model (3) with an OLS technique using White (heteroscedasticity) robust standard errors. The dependent variables are [1] ROA, [2] returns, and [3] Tobin’s Q. The variable definitions are presented in Appendices A-1 and A-2. Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. Variable Constant Fr_FemDir DExpat D2tier BoardSize BoardAge CEOWoman IndepDir ChDir DirShare^ CEOAge^ CEOdual Dpolit DBig4 Size^ Lev ChSales^ Ret^ DIFRS DCL DLondon StratInd StateOwn^ IMills Adj. R-sq. No. Obs. Industry-fixed effects Year-fixed effects

ROA

Returns

Tobin's Q

24.419*** 1.376 0.844 −2.860*** 0.338 −0.347*** 1.124 −0.319** −0.466** 5.620* 2.273 6.907*** −1.895** 1.575* −2.061 −12.728*** 0.365*** −71.594** −1.831** 0.668 1.289 −0.168 3.068 5.718**

0.042*** 0.008*** −0.008*** 0.001 0.007*** −0.003*** 0.033*** −0.002*** −0.001*** 0.043*** 0.012*** 0.026*** −0.004*** −0.001 −0.303*** 0.005*** 0.001*** n/a −0.002*** −0.023*** 0.021*** −0.010*** −0.019*** 0.074***

0.637*** −0.244** 0.083*** −0.122*** 0.006 −0.001 −0.019 0.014** −0.004 −0.382** −0.294* −0.007 −0.006 0.106*** −7.621*** 0.555*** −0.003** −0.513 0.060 0.073 0.190*** −0.173** −0.115* 0.029

0.22 1,749

0.15 1,822

0.31 1,720

yes yes

yes yes

yes yes

GENDER DIVERSITY 155 Table 6.6. The impact of female directors on board activity and a firm’s liquidity, financial health, and the probability of subsequent equity issuance This table reports the results from estimating a modified model (3) with an OLS technique using White (heteroscedasticity) robust standard errors. The dependent variables are as follows: [1] the natural logarithm of the number of meetings held by the board; [2] quick ratio = [current assets-inventory]/current liabilities; [3] Altman’s z-score (emerging markets); and [4] a dummy variable equal to one if a company issued additional equity in year T+1. Other variable definitions are presented in Appendices A-1 and A-2. We report the results for Fr_FemDir (the proportion of female directors on the board). Estimation period: 1999–2016. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively.

Variable

activity

Liquidity

Financial health

Subsequent equity issuance

Constant

0.981***

13.142**

3.605***

0.955***

Fr_FemDir

0.515***

25.207

0.488***

−0.025

D2tier

−0.121**

−2.676

−0.230***

−0.030

BoardSize

−0.026**

−0.033

−0.021**

−0.008

BoardAge

−0.008*

0.094

−0.006*

−0.003

CEOWoman

−0.168

−5.751

−0.283***

0.087

IndepDir

−0.002

0.433

−0.001

−0.001

ChDir

0.029***

0.509

−0.006

−0.004

DirShare^

−0.435***

−5.990

0.314**

0.199**

CEOAge^

0.813***

0.058

0.038

0.238*

CEOdual

−0.009

−2.753

0.232**

0.038

Dpolit

−0.003

0.865

−0.069**

0.041

DBig4

0.128**

−2.046

0.019

0.037

Size^

15.112***

−61.679

3.155***

0.161

0.067

−7.818*

−2.177***

0.034

−0.012***

−0.078

0.001

0.002***

7.751

3.771

0.177***

0.054

−0.132**

3.003

−0.172***

0.017

Lev ChSales^ Ret^ DIFRS

 

Board's

 

156 OKSANA KIM DCL

0.062

1.283

0.137***

−0.013

DLondon

−0.127*

StratInd

0.194**

−0.981

−0.044

0.113***

−1.726

−0.220**

−0.025

StateOwn^

−0.015

0.193

0.011

0.075

Adj. R-sq.

0.20

0.02

0.60

0.33

No. Obs.

1,255

1,641

1,625

1,580

yes

yes

yes

yes

yes

yes

yes

yes

Industryfixed effects Year-fixed effects

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

Prior research also indicated that female directors are more riskaverse than their male peers and prefer to adopt more conservative financial reporting policies (Francis et al. 2015). In our last test, we shed light on whether this phenomenon holds in the case of Russian firms. In unreported results, we do not find evidence that genderdiverse boards adopt more conservative reporting policies.

6.3. Conclusions Policy-makers across the globe have advocated for an improved balance between male and female directors on the boards of organizations and executive teams, citing enhanced talent pools and the creativity and unique experiences of females as major contributors towards board activity. Despite this growing trend, which we also observe within Russian firms, the research on gender diversity has provided inconsistent evidence regarding the pros and cons of naming females to boards. The prevailing conditions in Russia are a potentially more ideal setting to examine these issues because of lower gender parity between males and females compared to Western countries, which is the result of the unique patriarchal history and traditions within Russian society. Historically, Russian women

GENDER DIVERSITY 157 have greatly differed from men in their family values, business occupations, and experiences, compared to Western societies with higher male-female parity. Nevertheless, our evidence is also mixed, and similarly to prior studies, the empirical findings reported above do not provide a clear answer regarding the benefits of hiring female directors. While we report that women do improve board activity, shareholder returns, and the overall financial stability of examined firms, their presence on the board is negatively associated with a firm’s value and does not improve reporting quality. In summary, gender diversity remains a contentious governance issue in the case of Russian public firms.

 

 

 

Chapter 7 CEO performance-induced turnover “There are pros and cons of experience. A con is that you can't look at the business as objectively as if you were a new CEO. Fire yourself on a Friday night and come in on Monday morning as if a search firm put you there as a turn-around leader.” —Andrea Jung, first female CEO of Avon Products and an activist

This chapter is dedicated to the discussion of the relationship between CEO turnover and a firm’s performance/value. We provide an overview of the findings to date, which is followed by empirical evidence on CEO retention/dismissal practices prevalent among Russian public firms.

7.1. CEO turnover and a firm’s performance. Empirical evidence Among the most important indicators of the quality of internal governance is the willingness of the board of directors to dismiss a poorly performing CEO.65 According to the agency theory, the threat of firing a CEO when performance is poor serves as an important incentive mechanism (Jensen and Murphy 1990; Engel et al. 2003). Beginning with the seminal works of Warner et al. (1988) and Weisbach (1988), researchers have produced a significant number of studies examining various aspects of CEO performance-induced turnover. Two major questions have typically been addressed in the empirical literature. The first one asks, “How likely is it that the board of directors would dismiss a CEO following a poor prior performance?” (the so-called phenomenon of CEO turnover-performance sensitivity). The second question asks, “What are the factors that increase the

                                                             65

A CEO may leave a firm for a variety of reasons not necessarily related to a firm’s performance, such as retirement, accepting a new position at a rival firm, following a corporate restructuring event (takeover), and a poor skill match (Larcker and Tayan 2016). One of the challenges of the empirical research is to identify the true reasons for CEO turnover in settings where press coverage of such events is poor. Such is the case in Russia, as will be discussed below.

159

160 OKSANA KIM likelihood of dismissing a poorly performing CEO?” The third question, rarely explored in the literature, is, “What are the consequences of retaining an underperforming CEO?”66 Brickley (2003) performed an early review of the empirical literature—originating in the 1980s and 1990s—on CEO turnover. The general consensus in the early studies was that CEO turnover was more likely to follow a period of poor performance, as measured by operating performance (ROA or ROE), or shareholder returns. The literature also concluded that CEO turnover was more likely in the case of older CEOs, smaller firms, where there is a greater proportion of independent directors on the board, and within certain types of industries (DeFond and Park 1999; Murphy 1999). Importantly, the study of Engel et al. (2003) reported that CEO turnover-performance sensitivity was a function of the precision of accounting returns and the strength of the signal to the market. Additionally, market-based performance measures would receive less weight when accounting returns were more timely and informative and when market measures were more volatile. This was in line with the stream of research that found support for CEO performanceinduced turnover based on accounting, but not market, measures. In a related study, Farrell and Whidbee (2003) documented that the board’s decision to dismiss a CEO was affected by a deviation from expected performance targets, such as analysts’ forecasts, rather than performance levels alone. Despite the important contributions by these studies towards a greater understanding of CEO dismissal mechanisms, Brickley (2003) noted that the explanatory power of the models examining CEO turnover-performance sensitivity was very modest, and the economic effects were small. For example, Huson et al. (2001) reported that termination rates for CEOs in the bottom performance quartiles were only 3 percent higher than those in the top quartile,

                                                             66

Studies, as a rule, assume that the failure to remove a poorly performing CEO is associated with negative consequences. Nevertheless, a study by Kim, Kuang, and Qin (2018) argues that not dismissing a poorly performing CEO immediately following poor performance and giving him/her time to turn around the situation may be beneficial to a company in the long term.

 

CEO PERFORMANCE-INDUCED TURNOVER 161 notwithstanding the significant performance difference of 16 percent (based on ROA) between the two groups. In Engel et al. (2003), the likelihood of a CEO turnover was only 2 percent greater in firms with high earnings timeliness, as opposed to firms with low earnings timeliness. Overall, their study found that accounting returns did not appear to be important to a CEO dismissal decision. More recently, researchers have paid greater attention to voluntary versus forced turnover, as well as the peculiarities of estimation techniques and assumptions adopted by CEO turnover studies. Kaplan and Milton (2012) examined whether the dynamics of CEO turnovers changed over time. The tenure of CEOs has increased over time, the authors found, and internal (board-initiated) turnovers could be partly explained by the relative stock performance conditional upon the industry and market performance. Furthermore, external (takeover-based) CEO turnovers were not associated with stock performance. In the same vein, Jenter and Kanaan (2015) found that the probability of terminating a CEO was a function of poor industry performance, concluding that “boards mistakenly credit and blame CEOs for performance beyond their control.” In Ellis et al. (2016), CEOs who were previously fired on the basis of poor performance subsequently provided stricter monitoring, indicating that the prior negative experience impacted the CEOs’ decision-making processes. Lastly, Fich and Shidvasani (2006) documented a negative association between busy boards and the probability of dismissing a poorly performing CEO. Empirical research has also considered the impact of diversity on CEO dismissal decisions. Adams and Ferreira (2009) found that CEO turnover-performance sensitivity was greater and equitybased compensation was more likely in the case of gender-diverse boards. Masulis et al. (2012), on the other hand, documented that the presence of foreign directors on boards adversely affected the probability of dismissing an underperforming CEO. In line with these findings, Balsam et al. (2017) observed that social connections between a CEO and the independent directors reduced involuntary CEO turnover. For a subset of global firms, DeFond and Hung (2004) documented that CEO turnover was more likely in countries with strong—but not extensive—law enforcement mechanisms.

162 OKSANA KIM Importantly, Gibson (2003) concluded, based on 8 emerging markets (excluding Russia), that corporate governance mechanisms (CEO turnovers) were ineffective, but only among companies with a significant shareholder. In summary, despite a large body of literature examining the factors affecting CEO performance-induced turnover, the evidence is inconclusive to date. Moreover, the phenomenon of CEO turnover remains an important debated issue within emerging markets that has not received due attention in the literature.

7.2. CEO performance-turnover sensitivity among Russian public companies We follow prior literature and examine how poor performance, measured by ROA, ROE, and market returns, affects CEO turnover. We estimate the following model: CEOTurn

ϑ

ϑ ∗ Perf

C∗ Controls

υ . 5

In the above model, the dependent variable is a dummy variable equal to one if a company dismisses a CEO in year t+1; the performance measures and other regressors are measured at the end of period t, consistent with prior research (e.g., Balsam et al. 2017).67 We remove the observations wherein the CEO’s age is greater or equal to 64, which is the retirement age in Russia. This sample modification allows us, at least in part, to address the issue of voluntary versus forced turnovers. Russian press has very poor coverage of CEO dismissal cases, let alone the reasons for CEO dismissals. Additionally, we follow prior research and estimate the CEO turnover model using a linear probability technique, rather than a probit specification, because the latter requires that we exclude industryand year-fixed effects from the estimation. Prior literature argues in

                                                             67

The mean (median) value for the CEO turnover indicator variable is 0.220 (0.000).

 

CEO PERFORMANCE-INDUCED TURNOVER 163 favor of estimating models with dummy regressors than with a linear probability model if the probit technique puts significant constraints on the estimation outcomes (Caudill 1988; Angrist 2001). In the previous chapters, we argued that the board’s decision to name certain categories of directors to the board could be a function of other metrics such as liquidity and financial health. Accordingly, we rely on the quick ratio and Altman’s Z-score as alternative performance metrics. Table 7.1 reports the results from estimating model (5). We find some evidence that gender-diverse boards are more likely to dismiss a CEO. Director shareholding, growth, and state ownership are negatively associated with CEO turnover. Cross-listed firms are more likely to dismiss a CEO but, surprisingly, firms cross-listed in London follow an opposite trend. Turning to the performance metrics, we find limited evidence (at 10 percent) that operating performance (ROA) affects CEO dismissal decisions. On the other hand, we report that poor liquidity and declining credit strength, as proxied by the quick ratio metric and Altman’s Z-score, respectively, are likely to result in a CEO’s replacement. While this evidence is different from the findings in Western countries, it is well-justified considering that the role of the major financier in Russia has historically been allocated to banks rather than capital markets.68 Violating debt covenants and/or delaying repayment of capital may lead to bankruptcy, encouraging firms to focus on immediate liquidity and creditworthiness.69 In unreported results, we find that a significant fraction of modified audit opinions and emphasis of matter paragraphs in audit reports issued by both Big Four accounting firms and smaller auditing firms cites

                                                             68

69

Russia is a civil law country whose traditions were heavily influenced by German and Dutch norms developed in the 18th and 19th centuries. The Russian Civil Code has been the primary source of law. Ergungor (2004) developed a theory explaining why civil law nations (including Russia) heavily rely on banks rather than capital markets, while common law nations follow an opposite trend. The author argues that this is due to the fact that in civil law jurisdictions, judges have little flexibility in creating law when one is needed, which makes courts less efficient at resolving credit-market disputes compared to common law countries. Accordingly, banks emerge as institutions that can enforce contracts as well as effectively address conflicts without appealing to the court.

164 OKSANA KIM poor liquidity—negative working capital, insufficient funds, and possible violations of debt covenants—in the case of Russian firms.70 Table 7.1. CEO performance-induced turnover This table reports the results from estimating model (5) with a linear probability model (OLS) technique using White standard errors. The dependent variable is CEO turnover; the performance metrics are as follows: [1] ROA; [2] ROE; [3] returns; [4] quick ratio = [current assets-inventory]/current liabilities; and [5] Altman’s z-score (emerging markets). Other variable definitions are presented in Appendices A-1 and A-2. The CEO’s age is less than 64 years. Estimation period: 1999–2015. *, **, and *** denote statistical significance at 10, 5, and 1 percent levels, respectively. CEO turnover Variable

ROA

ROE

Returns

Quick Ratio

Z-score

Constant

0.764**

0.743**

0.714*

0.792**

0.579***

Perf

−0.002*

−0.0001

−0.039

−0.000001***

−0.058**

D_FemDir

0.043*

0.050**

0.035

0.045*

0.043*

DExpat

0.030

0.035

0.014

0.033

0.014

BoardSize

−0.001

−0.004

−0.001

0.0001

−0.006

BoardAge CEOWoman

−0.004*

−0.003

−0.005**

−0.005**

−0.006**

0.016

0.019

0.032

0.046

−0.003

IndepDir

0.005

0.007

0.002

0.010*

0.006

DirShare^

−0.256***

−0.271***

−0.309***

−0.283***

−0.229***

CEOAge^

0.092

0.108

0.104

0.093

0.164

Dpolit

0.012

0.025

0.026

0.015

0.022

Size^

−0.291

−0.278

0.071

−0.367

−0.209

0.037

0.013

0.067*

0.054

−0.120*

ChSales^

−0.001*

−0.002***

−0.002***

−0.002***

−0.002***

DIFRS

−0.033

−0.041

−0.039

−0.035

−0.030

Lev

 

 

                                                             70

The taxonomy of audit opinions and reasons for modifications will be discussed in Volume 2 of this project.

 

CEO PERFORMANCE-INDUCED TURNOVER 165 DCL DLondon StratInd StateOwn^

0.097**

0.105**

0.082*

0.098**

0.106**

−0.110**

−0.124**

−0.096*

−0.112**

−0.124**

0.009

0.007

0.013

−0.006

0.021

−0.154**

−0.155***

−0.197***

−0.141**

−0.157**

0.03

Adj. R-sq.

0.03

0.03

0.03

No. Obs.

1,608

1,572

1,531

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

Industryfixed effects Year-fixed effects

0.03 1,501

Notes: DirShare^ = DirShare/100; CEOAge^ = CEOAge/100; Size^ = Size/100; ChSales^ = ChSales/1,000; Ret^ = Ret/100; StateOwn^ = StateOwn/100.

7.3. Conclusions Whether or not companies should fire a CEO following his or her poor performance remains an open question. A large repository of studies, primarily conducted in Western jurisdictions, suggests that this topic remains of significant importance to academics and policy-makers worldwide. On one hand, prior research found that companies replace poorly performing CEOs based on accounting and market rates of returns. Nevertheless, the economic significance of the relationship between CEO turnover and a firm’s performance is very small. In this chapter we attempted to shed light on CEO dismissal decisions made by Russian companies, seeking explanations for the major drivers of these decisions. Our findings are novel, and we show that Russian boards are concerned with liquidity and the ability to repay debt obligations more than with accounting/market returns. This indicates that internal governance mechanisms work, conditional upon the setting, as Russia is a civil law country where financial institutions—rather than the equity markets—are the major source of finance. Yet again, the evidence reported in this chapter suggests that a one-size-fits-all approach to corporate governance does not work. Importantly, our findings are

166 OKSANA KIM generalizable to the universe of civil law jurisdictions at large that comprises both developed and emerging nations.

 

Chapter 8 Unresolved issues and concluding remarks “Let the future tell the truth, and evaluate each one according to his work and accomplishments.” —Nikola Tesla, inventor and physicist

Despite the fact that corporate governance regulations in Russia have significantly improved in the past decade, certain gray areas still exist, for which Russian authorities have been subject to criticism. The Law on Joint-Stock Companies (no. 208 FZ from 1995, article 71) defines the legal liability and responsibilities of the board of directors towards shareholders. According to its provisions, directors are liable to shareholders for any material damage caused by their intentional actions. The liability of an individual director must be proven on the basis of his/her written vote in favor of the decision that causes damage. Clearly, there is no documentation of many director decisions (e.g., pressure on auditors to issue a clean opinion), making it difficult to prove their guilt in court. According to Kalnitskaya (2017), in Russian practice, there were very few cases where the court ruled in favor of shareholders and against boards. Furthermore, the court typically addresses the collective responsibility of the board, rather than the actions of individual directors. Overall, the imperfections of the legal system regarding corporate responsibility make the personal liability of directors and executives almost non-existent. The recent reports indicate that only 15 percent of Russian public companies—predominantly crosslisted—purchase insurance against losses caused by the adverse actions of the board of directors and the management (Vedomosti 2010). Nevertheless, the absence of a formalized approach to defining directors’ liability and penalties does not preclude Russian companies from establishing unique internal requirements regarding the duties and responsibilities of their boards of directors and executives, as well as criteria for dismissal in case of poor performance

167

168 OKSANA KIM or malpractice. Our extended investigation reveals that large companies and a number of medium-size firms, selected at random, established internal governance charters containing special provisions outlining the roles and responsibilities of directors towards shareholders. Furthermore, volumes of empirical research have been dedicated to establishing a link between executives’ compensation—in terms of amount and structure—and organizational outcomes such as a firm’s performance and value (Mehran 1995; Core et al. 1999; Abudy et al. 2017). On one hand, the agency theory suggests that optimally designed executive compensation contracts provide strong incentives for executives to maximize shareholder value (the so-called “value optimization” argument). Conversely, Abudy et al. (2017) note that “executives are able to practically set their own compensation, therefore executive compensation contracts are set sub-optimally and enable executives to extract rents at the expense of shareholders” (the “rent extraction” perspective). Overall, prior studies have not provided consistent findings regarding the payfor-performance phenomenon, calling for more research in this area of internal corporate governance. One distinct feature of Russian corporate culture is that information regarding the remuneration of executives is considered a commercial secret and is kept confidential. The governance regulations do not oblige public companies to publicly disclose remuneration, especially for individual executives, in their annual reports. This creates a challenge for auditors who need to attest to the accuracy of the material remuneration amounts and related income taxes. When examining the financial reports of Russian companies, we noticed that only select Russian blue chips mentioned the total remuneration paid to the executive teams, without any breakdown into individual-level data, and it was unclear which structure and format (flat, pay-for-performance, cash, share-based, etc.) the compensation contracts contained. Additionally, the definition of “top personnel” also varies among Russian firms: some include the CEO and the management team, while others also include the revision commission and the board of directors; firms provide little disclosure of the individuals who may fall within this category.

UNRESOLVED ISSUES 169 Deloitte (2017) examined the compensation disclosure practices for 82 companies listed on the Moscow Exchange. Only 3 companies disclosed the remuneration of their CEO, and none of the examined firms disclosed information on the compensation of the individuals from the management team. Furthermore, 59 companies disclosed some information regarding how executive compensation was accrued, and only 17 of them mentioned in their IFRSbased reports that there were compensation contracts that contained share-based components. At present, the Russian legislators have no plans to amend the regulations concerning the disclosure of compensation contracts; executive compensation will likely remain shrouded in secrecy for the foreseeable future. Perhaps the most commonly cited arguments regarding the drawbacks of the Russian governance and business environment in general are corruption, bribery, and the political power of the government over court decisions. According to the World Bank (2018), the overall quality of the business environment in Russia is ahead of that of Mexico, China, and Brazil, for example, and has gradually improved since 2005. Nevertheless, the areas of minority shareholder protection, cross-border trades, and contract enforcement have not shown any positive changes in recent years. On the positive side, in terms of the ease of starting a business, Russia is ranked higher than any of the other emerging market regions and members of the Organization for Economic Co-operation and Development that are developed countries (World Bank 2018). Overall, there have been some improvements in selected country-level governance indicators, but Russia has a long journey ahead.

 

 

170 OKSANA KIM

Concluding remarks Corporate governance mechanisms and their impact on organizational outcomes have received significant attention and volumes of studies have been produced based on various jurisdictions. Nevertheless, the Russian market has received very limited attention, which we attribute to the low availability of data in the past and difficulties with the interpretation of national rules and practices for those unfamiliar with Russia’s traditions. Fortunately, the increase in recent years in the quality of public disclosures and improvements to the national governance regulations presented us with the opportunity to conduct this study. We shed light on select governance aspects such as cross-listing practices, cultural and gender diversity on boards, and CEO performance-induced turnover, leaving others for future investigation. Of particular importance is the role of financial gatekeepers—external auditors, audit committees, revision commissions, and financial analysts—in shaping the governance practices of Russian firms. The ultimate goal of our study was to dismantle the myths surrounding Russian corporate governance, grounded in the perceptions and limited evidence shaped by the early periods of economic chaos in the 1990s to the early 2000s, and to present the realities faced by Russian public firms based on a comprehensive sample of public firms. We hope that we have at least partially achieved this goal.

 

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BIBLIOGRAPHY 177 Hahn, P., and M. Lasfer (2016). Impact of foreign directors on board meeting frequency. International Review of Financial Analysis 46: 295– 308. Hail, L., and C. Leuz (2009). Cost of capital effects and changes in growth expectations around US cross-listings. Journal of Financial Economics 93: 428–454. He, K., X. Pan, and G. Tian (2017a). Legal liability, government intervention, and auditor behavior: evidence from structural reform of audit firms in China. European Accounting Review 26 (1): 61–95. He, X., J. Pittman, O. Rui, and D. Wu (2017b). Do social ties between external auditors and audit committee members affect audit quality? The Accounting Reviews 92 (5): 61–87. Heckman, J. (1979). Sample selection bias as a specification error. Econometrica 47 (1): 153–161. Heidrick and Struggles (2011/2014). European corporate governance report: Challenging board performance. Available at: https://www. essere-associes.com/media/2011-HeidrickStruggles-Challenging-bo ard-performance.pdf. Hillman, A., G. Keim, and D. Schuler (2004). Corporate political activity: A review and research agenda. Journal of Management 30 (6): 837–857. Hillman, A., M. Withers, and B. Collins (2009). Resource dependence theory: A review. Journal of Management 35 (6): 1404–1427. Hofstede, G. (2001). Culture’s consequences: International differences in work-related values. 2nd edition, Sage Publications: CA. Huang, M., A. Masli, F. Meschke, and J. Guthrie (2017). Clients’ workplace environment and corporate audits. Auditing: A Journal of Practice and Theory 36 (4): 89–113. Hung, M, and K. Subramanyam (2007). Financial statement effects of adopting international accounting standards: the case of Germany. Review of Accounting Studies 12: 623–657. Huson, M., R. Parrino, and L. Starks (2001). Internal monitoring mechanisms and CEO turnover: a long-term perspective. Journal of Finance 56: 2265–2297. International Finance Corporation (2015). A Guide to corporate governance practices in the EU. Available at: http://www.ifc.org/wps/ wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/ resources/guidelines_reviews+and+case+studies/a+guide+to+cor porate+governance+practices+in+the+european+union. Iwasaki, I. (2008). The determinants of board composition in a transforming economy: Evidence from Russia. Journal of Corporate Finance 14: 532–549.

 

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SOVIET AND POST-SOVIET POLITICS AND SOCIETY

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Edited by Dr. Andreas Umland ISSN 1614-3515

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Андреас Умланд (ред.) Воплощение Европейской конвенции по правам человека в России Философские, юридические и эмпирические исследования ISBN 3-89821-387-0

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David J. Galbreath Nation-Building and Minority Politics in Post-Socialist States Interests, Influence and Identities in Estonia and Latvia With a foreword by David J. Smith ISBN 3-89821-467-2

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Manja Hussner Die Übernahme internationalen Rechts in die russische und deutsche Rechtsordnung Eine vergleichende Analyse zur Völkerrechtsfreundlichkeit der Verfassungen der Russländischen Föderation und der Bundesrepublik Deutschland Mit einem Vorwort von Rainer Arnold ISBN 3-89821-438-9

Марк Григорьевич Меерович Как власть народ к труду приучала Жилище в СССР – средство управления людьми. 1917 – 1941 гг. С предисловием Елены Осокиной ISBN 3-89821-495-8

Christian Wipperfürth Russland – ein vertrauenswürdiger Partner? Grundlagen, Hintergründe und Praxis gegenwärtiger russischer Außenpolitik Mit einem Vorwort von Heinz Timmermann ISBN 3-89821-401-X

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7

Алексей Юрьевич Безугольный Народы Кавказа в Вооруженных силах СССР в годы Великой Отечественной войны 1941-1945 гг. С предисловием Николая Бугая ISBN 3-89821-475-3

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Вячеслав Лихачев и Владимир Прибыловский (ред.) Русское Национальное Единство, 1990-2000. В 2-х томах ISBN 3-89821-523-7

4

Matthew Tejada Bulgaria's Democratic Consolidation and the Kozloduy Nuclear Power Plant (KNPP) The Unattainability of Closure With a foreword by Richard J. Crampton ISBN 3-89821-439-7

5

Andrei P. Tsygankov, Pavel A.Tsygankov (Eds.) New Directions in Russian International Studies ISBN 3-89821-422-2

Николай Бугай (ред.) Народы стран Балтии в условиях сталинизма (1940-е – 1950-e годы) Документированная история ISBN 3-89821-525-3

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Марк Григорьевич Меерович Квадратные метры, определяющие сознание Государственная жилищная политика в СССР. 1921 – 1941 гг ISBN 3-89821-474-5

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Ingmar Bredies (Hrsg.) Zur Anatomie der Orange Revolution in der Ukraine Wechsel des Elitenregimes oder Triumph des Parlamentarismus? ISBN 3-89821-524-5

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Anastasia V. Mitrofanova The Politicization of Russian Orthodoxy Actors and Ideas With a foreword by William C. Gay ISBN 3-89821-481-8

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Nathan D. Larson Alexander Solzhenitsyn and the Russo-Jewish Question

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ISBN 3-89821-483-4

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Guido Houben Kulturpolitik und Ethnizität Staatliche Kunstförderung im Russland der neunziger Jahre Mit einem Vorwort von Gert Weisskirchen ISBN 3-89821-542-3

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Советское прошлое в российском кинематографе 1990-х годов С предисловием Евгения Марголита ISBN 3-89821-511-3

John B. Dunlop The 2002 Dubrovka and 2004 Beslan Hostage Crises A Critique of Russian Counter-Terrorism With a foreword by Donald N. Jensen ISBN 3-89821-608-X

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Эльза-Баир Гучинова Помнить нельзя забыть

Юлия Лидерман Мотивы «проверки» и «испытания» в постсоветской культуре

Annette Freyberg-Inan with Radu Cristescu The Ghosts in Our Classrooms, or: John Dewey Meets Ceauşescu The Promise and the Failures of Civic Education in Romania ISBN 3-89821-416-8

Peter Koller Das touristische Potenzial von Kam’’janec’–Podil’s’kyj Eine fremdenverkehrsgeographische Untersuchung der Zukunftsperspektiven und Maßnahmenplanung zur Destinationsentwicklung des „ukrainischen Rothenburg“ Mit einem Vorwort von Kristiane Klemm ISBN 3-89821-640-3

Антропология депортационной травмы калмыков С предисловием Кэролайн Хамфри ISBN 3-89821-506-7

21

Christian Autengruber Die politischen Parteien in Bulgarien und Rumänien Eine vergleichende Analyse seit Beginn der 90er Jahre Mit einem Vorwort von Dorothée de Nève ISBN 3-89821-476-1

Christian Ganzer Sowjetisches Erbe und ukrainische Nation Das Museum der Geschichte des Zaporoger Kosakentums auf der Insel Chortycja Mit einem Vorwort von Frank Golczewski ISBN 3-89821-504-0

Timothy McCajor Hall, Rosie Read (Eds.) Changes in the Heart of Europe Recent Ethnographies of Czechs, Slovaks, Roma, and Sorbs With an afterword by Zdeněk Salzmann ISBN 3-89821-606-3

Александр Верховский и Галина Кожевникова (peд.) Этническая и религиозная интолерантность в российских СМИ Результаты мониторинга 2001-2004 гг. ISBN 3-89821-569-5

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Евгений Мороз История «Мёртвой воды» – от страшной сказки к большой политике Политическое неоязычество в постсоветской России ISBN 3-89821-551-2

18

The 2003 Chechen Presidential Election ISBN 3-89821-436-2

Leonid Luks Der russische „Sonderweg“? Aufsätze zur neuesten Geschichte Russlands im europäischen Kontext ISBN 3-89821-496-6

Tanya Lokshina, Ray Thomas, Mary Mayer (Eds.) The Imposition of a Fake Political Settlement in the Northern Caucasus

28

Françoise Daucé, Elisabeth SiecaKozlowski (Eds.) Dedovshchina in the Post-Soviet Military Hazing of Russian Army Conscripts in a Comparative Perspective With a foreword by Dale Herspring ISBN 3-89821-616-0

29

Florian Strasser Zivilgesellschaftliche Einflüsse auf die Orange Revolution Die gewaltlose Massenbewegung und die ukrainische Wahlkrise 2004 Mit einem Vorwort von Egbert Jahn ISBN 3-89821-648-9

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Михаил Лукьянов Российский консерватизм и реформа, 1907-1914 С предисловием Марка Д. Стейнберга ISBN 3-89821-503-2

40

Nicola Melloni Market Without Economy The 1998 Russian Financial Crisis With a foreword by Eiji Furukawa ISBN 3-89821-407-9

41

Dmitrij Chmelnizki Die Architektur Stalins Bd. 1: Studien zu Ideologie und Stil Bd. 2: Bilddokumentation Mit einem Vorwort von Bruno Flierl ISBN 3-89821-515-6

42

Roger Griffin, Werner Loh, Andreas Umland (Eds.) Fascism Past and Present, West and East An International Debate on Concepts and Cases in the Comparative Study of the Extreme Right With an afterword by Walter Laqueur ISBN 3-89821-674-8

Josette Baer (Ed.) Preparing Liberty in Central Europe Political Texts from the Spring of Nations 1848 to the Spring of Prague 1968 With a foreword by Zdeněk V. David ISBN 3-89821-546-6

Florian Mühlfried Postsowjetische Feiern Das Georgische Bankett im Wandel Mit einem Vorwort von Kevin Tuite ISBN 3-89821-601-2

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Ivan Katchanovski Cleft Countries Regional Political Divisions and Cultures in Post-Soviet Ukraine and Moldova With a foreword by Francis Fukuyama ISBN 3-89821-558-X

Vyacheslav Likhachev Political Anti-Semitism in Post-Soviet Russia Actors and Ideas in 1991-2003 Edited and translated from Russian by Eugene Veklerov ISBN 3-89821-529-6

Laura A. Victoir The Russian Land Estate Today A Case Study of Cultural Politics in PostSoviet Russia With a foreword by Priscilla Roosevelt ISBN 3-89821-426-5

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Vladimir Kantor Willkür oder Freiheit Beiträge zur russischen Geschichtsphilosophie Ediert von Dagmar Herrmann sowie mit einem Vorwort versehen von Leonid Luks ISBN 3-89821-589-X

Sebastian Schlegel Der „Weiße Archipel“ Sowjetische Atomstädte 1945-1991 Mit einem Geleitwort von Thomas Bohn ISBN 3-89821-679-9

Rebecca S. Katz The Georgian Regime Crisis of 20032004 A Case Study in Post-Soviet Media Representation of Politics, Crime and Corruption ISBN 3-89821-413-3

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Katja Yafimava Post-Soviet Russian-Belarussian Relationships The Role of Gas Transit Pipelines With a foreword by Jonathan P. Stern ISBN 3-89821-655-1

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Boris Chavkin Verflechtungen der deutschen und russischen Zeitgeschichte Aufsätze und Archivfunde zu den Beziehungen Deutschlands und der Sowjetunion von 1917 bis 1991 Ediert von Markus Edlinger sowie mit einem Vorwort versehen von Leonid Luks ISBN 3-89821-756-6

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Anastasija Grynenko in Zusammenarbeit mit Claudia Dathe Die Terminologie des Gerichtswesens der Ukraine und Deutschlands im Vergleich Eine übersetzungswissenschaftliche Analyse juristischer Fachbegriffe im Deutschen, Ukrainischen und Russischen Mit einem Vorwort von Ulrich Hartmann ISBN 3-89821-691-8

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Anton Burkov The Impact of the European Convention on Human Rights on Russian Law

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Сборник докладов Центра «Сова» за 20042007 гг. С предисловием Александра Верховского ISBN 978-3-89821-721-7

53

Stina Torjesen, Indra Overland (Eds.) International Election Observers in Post-Soviet Azerbaijan

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Taras Kuzio Ukraine – Crimea – Russia Triangle of Conflict ISBN 978-3-89821-761-3

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Sonja Schüler Die ethnische Dimension der Armut Roma im postsozialistischen Rumänien Mit einem Vorwort von Anton Sterbling ISBN 978-3-89821-776-7

Ileana Petroniu Privatisierung in Transformationsökonomien Determinanten der RestrukturierungsBereitschaft am Beispiel Polens, Rumäniens und der Ukraine Mit einem Vorwort von Rainer W. Schäfer ISBN 978-3-89821-790-3

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Christian Wipperfürth Russland und seine GUS-Nachbarn Hintergründe, aktuelle Entwicklungen und Konflikte in einer ressourcenreichen Region ISBN 978-3-89821-801-6

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Togzhan Kassenova From Antagonism to Partnership The Uneasy Path of the U.S.-Russian Cooperative Threat Reduction With a foreword by Christoph Bluth ISBN 978-3-89821-707-1

Марлен Ларюэль (ред.) Современные интерпретации русского национализма ISBN 978-3-89821-795-8

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Marlies Bilz Tatarstan in der Transformation Nationaler Diskurs und Politische Praxis 1988-1994 Mit einem Vorwort von Frank Golczewski ISBN 978-3-89821-722-4

Галина Кожевникова и Владимир Прибыловский Российская власть в биографиях III Руководители федеральных служб и агентств РФ в 2004 г. ISBN 978-3-89821-798-9

Claudia Šabić "Ich erinnere mich nicht, aber L'viv!" Zur Funktion kultureller Faktoren für die Institutionalisierung und Entwicklung einer ukrainischen Region Mit einem Vorwort von Melanie Tatur ISBN 978-3-89821-752-1

Галина Кожевникова и Владимир Прибыловский Российская власть в биографиях II Члены Правительства РФ в 2004 г. ISBN 978-3-89821-797-2

Geopolitical Pawns or Agents of Change? ISBN 978-3-89821-743-9

47

Галина Кожевникова и Владимир Прибыловский Российская власть в биографиях I Высшие должностные лица РФ в 2004 г. ISBN 978-3-89821-796-5

Legislation and Application in 1996-2006 With a foreword by Françoise Hampson ISBN 978-3-89821-639-5

46

Галина Кожевникова Радикальный национализм в России и противодействие ему

59

Alexander Höllwerth Das sakrale eurasische Imperium des Aleksandr Dugin Eine Diskursanalyse zum postsowjetischen russischen Rechtsextremismus Mit einem Vorwort von Dirk Uffelmann ISBN 978-3-89821-813-9

60

Олег Рябов «Россия-Матушка»

68

Национализм, гендер и война в России XX века С предисловием Елены Гощило ISBN 978-3-89821-487-2

61

Ivan Maistrenko Borot'bism A Chapter in the History of the Ukrainian Revolution With a new introduction by Chris Ford Translated by George S. N. Luckyj with the assistance of Ivan L. Rudnytsky ISBN 978-3-89821-697-5

62

Post-Communist Democratic Revolutions in Comparative Perspective ISBN 978-3-89821-820-7

69

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Maryna Romanets Anamorphosic Texts and Reconfigured Visions

Paul D'Anieri and Taras Kuzio (Eds.) Aspects of the Orange Revolution I

Bohdan Harasymiw in collaboration with Oleh S. Ilnytzkyj (Eds.) Aspects of the Orange Revolution II

71

Ingmar Bredies, Andreas Umland and Valentin Yakushik (Eds.) Aspects of the Orange Revolution III The Context and Dynamics of the 2004 Ukrainian Presidential Elections ISBN 978-3-89821-803-0

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Ingmar Bredies, Andreas Umland and Valentin Yakushik (Eds.) Aspects of the Orange Revolution V Institutional Observation Reports on the 2004 Ukrainian Presidential Elections ISBN 978-3-89821-809-2

Christine Teichmann Die Hochschultransformation im heutigen Osteuropa Kontinuität und Wandel bei der Entwicklung des postkommunistischen Universitätswesens Mit einem Vorwort von Oskar Anweiler ISBN 978-3-89821-842-9

73

Ingmar Bredies, Andreas Umland and Valentin Yakushik (Eds.) Aspects of the Orange Revolution IV Foreign Assistance and Civic Action in the 2004 Ukrainian Presidential Elections ISBN 978-3-89821-808-5

Taras Kuzio Theoretical and Comparative Perspectives on Nationalism New Directions in Cross-Cultural and PostCommunist Studies With a foreword by Paul Robert Magocsi ISBN 978-3-89821-815-3

Information and Manipulation Strategies in the 2004 Ukrainian Presidential Elections ISBN 978-3-89821-699-9

65

David Rupp Die Rußländische Föderation und die russischsprachige Minderheit in Lettland Eine Fallstudie zur Anwaltspolitik Moskaus gegenüber den russophonen Minderheiten im „Nahen Ausland“ von 1991 bis 2002 Mit einem Vorwort von Helmut Wagner ISBN 978-3-89821-778-1

Democratization and Elections in PostCommunist Ukraine ISBN 978-3-89821-698-2

64

Tim Bohse Autoritarismus statt Selbstverwaltung Die Transformation der kommunalen Politik in der Stadt Kaliningrad 1990-2005 Mit einem Geleitwort von Stefan Troebst ISBN 978-3-89821-782-8

Improvised Traditions in Contemporary Ukrainian and Irish Literature ISBN 978-3-89821-576-3

63

Taras Kuzio (Ed.) Aspects of the Orange Revolution VI

Julia Kusznir Der politische Einfluss von Wirtschaftseliten in russischen Regionen Eine Analyse am Beispiel der Erdöl- und Erdgasindustrie, 1992-2005 Mit einem Vorwort von Wolfgang Eichwede ISBN 978-3-89821-821-4

74

Alena Vysotskaya Russland, Belarus und die EUOsterweiterung Zur Minderheitenfrage und zum Problem der Freizügigkeit des Personenverkehrs Mit einem Vorwort von Katlijn Malfliet ISBN 978-3-89821-822-1

75

Heiko Pleines (Hrsg.) Corporate Governance in postsozialistischen Volkswirtschaften

83

The Role of Historical Regional Development in Kazakhstan’s Post-Soviet Economic Transformation ISBN 978-3-89821-831-3

ISBN 978-3-89821-766-8

76

Stefan Ihrig Wer sind die Moldawier? Rumänismus versus Moldowanismus in Historiographie und Schulbüchern der Republik Moldova, 1991-2006 Mit einem Vorwort von Holm Sundhaussen ISBN 978-3-89821-466-7

77

Galina Kozhevnikova in collaboration with Alexander Verkhovsky and Eugene Veklerov Ultra-Nationalism and Hate Crimes in Contemporary Russia

84

Florian Küchler The Role of the European Union in Moldova’s Transnistria Conflict

85

86

Bernd Rechel The Long Way Back to Europe

Peter W. Rodgers Nation, Region and History in PostCommunist Transitions

87

Stephanie Solywoda The Life and Work of Semen L. Frank

88

Vera Sokolova Cultural Politics of Ethnicity Discourses on Roma in Communist Czechoslovakia ISBN 978-3-89821-864-1

Thomas Borén Meeting-Places of Transformation Urban Identity, Spatial Representations and Local Politics in Post-Soviet St Petersburg ISBN 978-3-89821-739-2

A Study of Russian Religious Philosophy With a foreword by Philip Walters ISBN 978-3-89821-457-5

82

Sabine Jenni Wie stark ist das „Einige Russland“? Zur Parteibindung der Eliten und zum Wahlerfolg der Machtpartei im Dezember 2007 Mit einem Vorwort von Klaus Armingeon ISBN 978-3-89821-961-7

Identity Politics in Ukraine, 1991-2006 With a foreword by Vera Tolz ISBN 978-3-89821-903-7

81

Konstantin Sheiko in collaboration with Stephen Brown Nationalist Imaginings of the Russian Past Anatolii Fomenko and the Rise of Alternative History in Post-Communist Russia With a foreword by Donald Ostrowski ISBN 978-3-89821-915-0

Minority Protection in Bulgaria With a foreword by Richard Crampton ISBN 978-3-89821-863-4

80

Stefan Meister Das postsowjetische Universitätswesen zwischen nationalem und internationalem Wandel Die Entwicklung der regionalen Hochschule in Russland als Gradmesser der Systemtransformation Mit einem Vorwort von Joan DeBardeleben ISBN 978-3-89821-891-7

With a foreword by Christopher Hill ISBN 978-3-89821-850-4

79

Martin Malek, Anna SchorTschudnowskaja (Hrsg.) Europa im Tschetschenienkrieg Zwischen politischer Ohnmacht und Gleichgültigkeit Mit einem Vorwort von Lipchan Basajewa ISBN 978-3-89821-676-0

The 2004-2006 Annual Reports of Moscow’s SOVA Center With a foreword by Stephen D. Shenfield ISBN 978-3-89821-868-9

78

Natalya Shevchik Ketenci Kazakhstani Enterprises in Transition

89

Aygul Ashirova Stalinismus und Stalin-Kult in Zentralasien Turkmenistan 1924-1953 Mit einem Vorwort von Leonid Luks ISBN 978-3-89821-987-7

90

Leonid Luks Freiheit oder imperiale Größe?

97

Essays zu einem russischen Dilemma ISBN 978-3-8382-0011-8

91

92

Eine vergleichende Untersuchung der politischen Entwicklung Lettlands und Aserbaidschans 1985-2009 Mit einem Vorwort von Leonid Luks Ediert von Sandro Henschel ISBN 978-3-8382-0103-0

Christopher Gilley The ‘Change of Signposts’ in the Ukrainian Emigration A Contribution to the History of Sovietophilism in the 1920s With a foreword by Frank Golczewski ISBN 978-3-89821-965-5

Philipp Casula, Jeronim Perovic (Eds.) Identities and Politics During the Putin Presidency

98

Marcel Viëtor Europa und die Frage nach seinen Grenzen im Osten

99

Ben Hellman, Andrei Rogachevskii Filming the Unfilmable

100

Eva Fuchslocher Vaterland, Sprache, Glaube Orthodoxie und Nationenbildung am Beispiel Georgiens Mit einem Vorwort von Christina von Braun ISBN 978-3-89821-884-9

96

Vladimir Kantor Das Westlertum und der Weg Russlands Zur Entwicklung der russischen Literatur und Philosophie Ediert von Dagmar Herrmann Mit einem Beitrag von Nikolaus Lobkowicz ISBN 978-3-8382-0102-3

Michael Minkenberg (ed.) Historical Legacies and the Radical Right in Post-Cold War Central and Eastern Europe With an afterword by Sabrina P. Ramet ISBN 978-3-8382-0124-5

101

Casper Wrede's 'One Day in the Life of Ivan Denisovich' Second, Revised and Expanded Edition ISBN 978-3-8382-0594-6

95

Кирилл Галушко, Лидия Смола (ред.) Пределы падения – варианты украинского будущего Аналитико-прогностические исследования ISBN 978-3-8382-0148-1

Zur Konstruktion ‚europäischer Identität’ in Geschichte und Gegenwart Mit einem Vorwort von Albrecht Lehmann ISBN 978-3-8382-0045-3

94

Tatiana Zhurzhenko Borderlands into Bordered Lands Geopolitics of Identity in Post-Soviet Ukraine With a foreword by Dieter Segert ISBN 978-3-8382-0042-2

The Discursive Foundations of Russia's Stability With a foreword by Heiko Haumann ISBN 978-3-8382-0015-6

93

Kamran Musayev Die postsowjetische Transformation im Baltikum und Südkaukasus

David-Emil Wickström Rocking St. Petersburg Transcultural Flows and Identity Politics in Post-Soviet Popular Music With a foreword by Yngvar B. Steinholt Second, Revised and Expanded Edition ISBN 978-3-8382-0600-4

102

Eva Zabka Eine neue „Zeit der Wirren“? Der spät- und postsowjetische Systemwandel 1985-2000 im Spiegel russischer gesellschaftspolitischer Diskurse Mit einem Vorwort von Margareta Mommsen ISBN 978-3-8382-0161-0

103

Ulrike Ziemer Ethnic Belonging, Gender and Cultural Practices Youth Identitites in Contemporary Russia With a foreword by Anoop Nayak ISBN 978-3-8382-0152-8

104

Ksenia Chepikova ‚Einiges Russland’ - eine zweite KPdSU?

110

Aspekte der Identitätskonstruktion einer postsowjetischen „Partei der Macht“ Mit einem Vorwort von Torsten Oppelland ISBN 978-3-8382-0311-9

105

Леонид Люкс Западничество или евразийство? Демократия или идеократия?

Examinations of Russian Terrorist Attacks at the Onset of Vladimir Putin's Rule Second, Revised and Expanded Edition ISBN 978-3-8382-0608-0

111

Сборник статей об исторических дилеммах России С предисловием Владимира Кантора ISBN 978-3-8382-0211-2

106

Anna Dost Das russische Verfassungsrecht auf dem Weg zum Föderalismus und zurück

Philipp Herzog Sozialistische Völkerfreundschaft, nationaler Widerstand oder harmloser Zeitvertreib? Zur politischen Funktion der Volkskunst im sowjetischen Estland Mit einem Vorwort von Andreas Kappeler ISBN 978-3-8382-0216-7

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Bernd Kappenberg Zeichen setzen für Europa Der Gebrauch europäischer lateinischer Sonderzeichen in der deutschen Öffentlichkeit Mit einem Vorwort von Peter Schlobinski ISBN 978-3-89821-749-1

114

Marlène Laruelle (ed.) Russian Nationalism, Foreign Policy, and Identity Debates in Putin's Russia

Michail Logvinov Russlands Kampf gegen den internationalen Terrorismus

Андрей А. Ковалёв Свидетельство из-за кулис российской политики II Угроза для себя и окружающих (Наблюдения и предостережения относительно происходящего после 2000 г.) ISBN 978-3-8382-0303-4

Ivo Mijnssen The Quest for an Ideal Youth in Putin’s Russia I Back to Our Future! History, Modernity, and Patriotism according to Nashi, 2005-2013 With a foreword by Jeronim Perović Second, Revised and Expanded Edition ISBN 978-3-8382-0578-6

New Ideological Patterns after the Orange Revolution ISBN 978-3-8382-0325-6

109

Андрей А. Ковалёв Свидетельство из-за кулис российской политики I Можно ли делать добрo из зла? (Воспоминания и размышления о последних советских и первых послесоветских годах) With a foreword by Peter Reddaway ISBN 978-3-8382-0302-7

Zum Konflikt von Rechtsnormen und -wirklichkeit in der Russländischen Föderation von 1991 bis 2009 Mit einem Vorwort von Alexander Blankenagel ISBN 978-3-8382-0292-1

107

John B. Dunlop The Moscow Bombings of September 1999

115

Eine kritische Bestandsaufnahme des Bekämpfungsansatzes Mit einem Geleitwort von Hans-Henning Schröder und einem Vorwort von Eckhard Jesse ISBN 978-3-8382-0329-4

Jussi Lassila The Quest for an Ideal Youth in Putin’s Russia II The Search for Distinctive Conformism in the Political Communication of Nashi, 2005-2009 With a foreword by Kirill Postoutenko Second, Revised and Expanded Edition ISBN 978-3-8382-0585-4

116

Valerio Trabandt Neue Nachbarn, gute Nachbarschaft? Die EU als internationaler Akteur am Beispiel ihrer Demokratieförderung in Belarus und der Ukraine 2004-2009 Mit einem Vorwort von Jutta Joachim ISBN 978-3-8382-0437-6

117

Fabian Pfeiffer Estlands Außen- und Sicherheitspolitik I

124

Lukashenka‘s Belarus and the Great Patriotic War ISBN 978-3-8382-0674-5 (Paperback edition) ISBN 978-3-8382-0675-2 (Hardcover edition)

Der estnische Atlantizismus nach der wiedererlangten Unabhängigkeit 1991-2004 Mit einem Vorwort von Helmut Hubel ISBN 978-3-8382-0127-6

125 118

Jana Podßuweit Estlands Außen- und Sicherheitspolitik II Handlungsoptionen eines Kleinstaates im Rahmen seiner EU-Mitgliedschaft (2004-2008) Mit einem Vorwort von Helmut Hubel ISBN 978-3-8382-0440-6

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Mykhaylo Banakh Die Relevanz der Zivilgesellschaft bei den postkommunistischen Transformationsprozessen in mittelund osteuropäischen Ländern Das Beispiel der spät- und postsowjetischen Ukraine 1986-2009 Mit einem Vorwort von Gerhard Simon ISBN 978-3-8382-0499-4

122

Michael Moser Language Policy and the Discourse on Languages in Ukraine under President Viktor Yanukovych (25 February 2010–28 October 2012) ISBN 978-3-8382-0497-0 (Paperback edition) ISBN 978-3-8382-0507-6 (Hardcover edition)

123

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Nicole Krome Russischer Netzwerkkapitalismus Restrukturierungsprozesse in der Russischen Föderation am Beispiel des Luftfahrtunternehmens "Aviastar" Mit einem Vorwort von Petra Stykow ISBN 978-3-8382-0534-2

Simon Geissbühler (Hrsg.) Kiew – Revolution 3.0 Der Euromaidan 2013/14 und die Zukunftsperspektiven der Ukraine ISBN 978-3-8382-0581-6 (Paperback edition) ISBN 978-3-8382-0681-3 (Hardcover edition)

127

Ruslana Vovk Die Offenheit der ukrainischen Verfassung für das Völkerrecht und die europäische Integration Mit einem Vorwort von Alexander Blankenagel ISBN 978-3-8382-0481-9

Ulf Walther Russlands "neuer Adel" Die Macht des Geheimdienstes von Gorbatschow bis Putin Mit einem Vorwort von Hans-Georg Wieck ISBN 978-3-8382-0584-7

Karin Pointner Estlands Außen- und Sicherheitspolitik III Eine gedächtnispolitische Analyse estnischer Entwicklungskooperation 2006-2010 Mit einem Vorwort von Karin Liebhart ISBN 978-3-8382-0435-2

David R. Marples 'Our Glorious Past'

Andrey Makarychev Russia and the EU in a Multipolar World Discourses, Identities, Norms ISBN 978-3-8382-0529-8

128

Roland Scharff Kasachstan als postsowjetischer Wohlfahrtsstaat Die Transformation des sozialen Schutzsystems Mit einem Vorwort von Joachim Ahrens ISBN 978-3-8382-0622-6

129

Katja Grupp Bild Lücke Deutschland Kaliningrader Studierende sprechen über Deutschland Mit einem Vorwort von Martin Schulz ISBN 978-3-8382-0552-6

130

Konstantin Sheiko, Stephen Brown History as Therapy Alternative History and Nationalist Imaginings in Russia, 1991-2014 ISBN 978-3-8382-0565-6

131

Elisa Kriza Alexander Solzhenitsyn: Cold War Icon, Gulag Author, Russian Nationalist? A Study of the Western Reception of his Literary Writings, Historical Interpretations, and Political Ideas With a foreword by Andrei Rogatchevski ISBN 978-3-8382-0689-9 (Paperback edition) ISBN 978-3-8382-0690-5 (Hardcover edition)

132

Serghei Golunov Elephant in the Room

140

Corruption and Cheating in Russian Universities ISBN 978-3-8382-0670-7

133

Manja Hussner, Rainer Arnold (Hrsg.) Verfassungsgerichtsbarkeit in Zentralasien I

Externe bildungspolitische Akteure in der Russischen Föderation Mit einem Vorwort von Frank Ettrich ISBN 978-3-8382-0751-3

141

Sammlung von Verfassungstexten ISBN 978-3-8382-0595-3

134

Aus dem Russischen übertragen von einem Übersetzerteam unter der Leitung von Larisa Schippel

142

Manja Hussner, Rainer Arnold (Hgg.) Verfassungsgerichtsbarkeit in Zentralasien II

143

Sammlung von Verfassungstexten ISBN 978-3-8382-0597-7

136

Manfred Zeller Das sowjetische Fieber Fußballfans im poststalinistischen Vielvölkerreich Mit einem Vorwort von Nikolaus Katzer ISBN 978-3-8382-0787-2

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Boris Popivanov Changing Images of the Left in Bulgaria The Challenge of Post-Communism in the Early 21st Century ISBN 978-3-8382-0717-9

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Bernd Kappenberg Setting Signs for Europe Why Diacritics Matter for European Integration With a foreword by Peter Schlobinski ISBN 978-3-8382-0703-2

Johann Zajaczkowski Russland – eine pragmatische Großmacht? Eine rollentheoretische Untersuchung russischer Außenpolitik am Beispiel der Zusammenarbeit mit den USA nach 9/11 und des Georgienkrieges von 2008 Mit einem Vorwort von Siegfried Schieder ISBN 978-3-8382-0837-4

David R. Marples, Frederick V. Mills (Eds.) Ukraine’s Euromaidan Analyses of a Civil Revolution ISBN 978-3-8382-0700-1 (Paperback edition) ISBN 978-3-8382-0740-7 (Hardcover edition)

Инна Чувычкина (ред.) Экспортные нефте- и газопроводы на постсоветском пространстве Aнализ трубопроводной политики в свете теории международных отношений ISBN 978-3-8382-0822-0

Kristin Schreiter Stellung und Entwicklungspotential zivilgesellschaftlicher Gruppen in Russland Menschenrechtsorganisationen im Vergleich ISBN 978-3-8382-0673-8

David J. Smith (eds.) Latvia – A Work in Progress? 100 Years of State- and Nation-Building ISBN 978-3-8382-0718-6

ISBN 978-3-8382-0024-8

135

Juri Plusnin, Yana Zausaeva, Natalia Zhidkevich, Artemy Pozanenko Wandering Workers Mores, Behavior, Way of Life, and Political Status of Domestic Russian labor migrants Translated by Julia Kazantseva ISBN 978-3-8382-0713-1

Nikolay Mitrokhin Die "Russische Partei" Die Bewegung der russischen Nationalisten in der UdSSR 1953-1985

René Lenz Internationalisierung, Kooperation und Transfer

Lenka Krátká A History of the Czechoslovak Ocean Shipping Company 1948-1989 How a Small, Landlocked Country Ran Maritime Business During the Cold War ISBN 978-3-8382-0716-2

147

Alexander Sergunin Explaining Russian Foreign Policy Behavior Theory and Practice ISBN 978-3-8382-0782-7

148

Darya Malyutina Migrant Friendships in a Super-Diverse City

155

Russian-Speakers and their Social Relationships in London in the 21st Century With a foreword by Claire Dwyer ISBN 978-3-8382-0702-5

149

Alexander Sergunin and Valery Konyshev Russia in the Arctic

The Russian Orthodox Church and Web 2.0 With a foreword by Father Cyril Hovorun ISBN 978-3-8382-0881-7

156

Hard or Soft Power? ISBN 978-3-8382-0783-4

150

John J. Maresca Helsinki Revisited

Jardar Østbø The New Third Rome

157

Simon Kordonsky Socio-Economic Foundations of the Russian Post-Soviet Regime The Resource-Based Economy and EstateBased Social Structure of Contemporary Russia With a foreword by Svetlana Barsukova ISBN 978-3-8382-0875-6

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How Informality Replaces, Renegotiates, and Reshapes Governance in Contemporary Ukraine With a foreword by Colin C. Williams ISBN 978-3-8382-0885-5

Timm Beichelt, Susann Worschech (eds.) Transnational Ukraine? Networks and Ties that Influence(d) Contemporary Ukraine ISBN 978-3-8382-0964-7

160

Duncan Leitch Assisting Reform in Post-Communist Ukraine 2000–2012

Abel Polese Limits of a Post-Soviet State

Edmund Griffiths Aleksandr Prokhanov and Post-Soviet Esotericism ISBN 978-3-8382-0963-0

Mieste Hotopp-Riecke Die Tataren der Krim zwischen Assimilation und Selbstbehauptung Der Aufbau des krimtatarischen Bildungswesens nach Deportation und Heimkehr (1990-2005) Mit einem Vorwort von Swetlana Czerwonnaja ISBN 978-3-89821-940-2

The Illusions of Donors and the Disillusion of Beneficiaries With a foreword by Kataryna Wolczuk ISBN 978-3-8382-0874-9

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Vladimir V. Karacharovskiy, Ovsey I. Shkaratan, Gordey A. Yastrebov Towards a new Russian Work Culture Can Western Companies and Expatriates Change Russian Society? ISBN 978-3-8382-0962-3

Readings of a Russian Nationalist Myth With a foreword by Pål Kolstø ISBN 978-3-8382-0900-5

152

Leonid Luks Zwei „Sonderwege“? Russischdeutsche Parallelen und Kontraste (1917-2014) Vergleichende Essays ISBN 978-3-8382-0823-7

A Key U.S. Negotiator’s Memoirs on the Development of the CSCE into the OSCE With a foreword by Hafiz Pashayev ISBN 978-3-8382-0872-5

151

Mikhail Suslov (ed.) Digital Orthodoxy in the Post-Soviet World

161

Olga Bertelsen (ed.) Revolution and War in Contemporary Ukraine The Challenge of Change ISBN 978-3-8382-1056-8

162

Natalya Ryabinska Ukraine's Post-Communist Mass Media Between Capture and Commercialization With a foreword by Marta Dyczok ISBN 978-3-8382-1051-3

163

Alexandra Cotofana, James M. Nyce (eds.) Religion and Magic in Socialist and Post-Socialist Contexts

170

Historic and Ethnographic Case Studies of Orthodoxy, Heterodoxy, and Alternative Spirituality With a foreword by Patrick L. Michelson ISBN 978-3-8382-1039-1

164

Nozima Akhrarkhodjaeva The Instrumentalisation of Mass Media in Electoral Authoritarian Regimes

Studies on the Building of Nation-States and Their Cooperation in the 20th and 21st Century With a foreword by Petr Vágner ISBN 978-3-8382-1115-2

171

Yulia Krasheninnikova Informal Healthcare in Contemporary Russia

172

Peter Kaiser Das Schachbrett der Macht

173

Die Handlungsspielräume eines sowjetischen Funktionärs unter Stalin am Beispiel des Generalsekretärs des Komsomol Aleksandr Kosarev (1929-1938) Mit einem Vorwort von Dietmar Neutatz ISBN 978-3-8382-1052-0

167

Oksana Kim The Effects and Implications of Kazakhstan’s Adoption of International Financial Reporting Standards A Resource Dependence Perspective With a foreword by Svetlana Vady ISBN 978-3-8382-1037-7

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Faksimile der 1933 erschienenen ersten Ausgabe Mit einem Vorwort von Dmitrij Chmelnizki ISBN 978-3-8382-0515-1

Barbara Kunz Kind Words, Cruise Missiles, and Everything in Between The Use of Power Resources in U.S. Policies towards Poland, Ukraine, and Belarus 1989–2008 With a foreword by William Hill ISBN 978-3-8382-1085-8

175

Anna Sanina Patriotic Education in Contemporary Russia

Rudolf Wolters Spezialist in Sibirien

Alexandra Cotofana, James M. Nyce (eds.) Religion and Magic in Socialist and Post-Socialist Contexts II Baltic, Eastern European, and Post-USSR Case Studies ISBN 978-3-8382-1090-2

Eduard Klein Bildungskorruption in Russland und der Ukraine Eine komparative Analyse der Performanz staatlicher Antikorruptionsmaßnahmen im Hochschulsektor am Beispiel universitärer Aufnahmeprüfungen Mit einem Vorwort von Heiko Pleines ISBN 978-3-8382-0995-1

Sociological Studies in the Making of the Post-Soviet Citizen ISBN 978-3-8382-1033-9

169

Maria Shagina Joining a Prestigious Club Cooperation with Europarties and Its Impact on Party Development in Georgia, Moldova, and Ukraine 2004–2015 With a foreword by Kataryna Wolczuk ISBN 978-3-8382-1104-6

Sociographic Essays on the Post-Soviet Infrastructure for Alternative Healing Practices ISBN 978-3-8382-1030-8

166

Philip Gamaghelyan Conflict Resolution Beyond the International Relations Paradigm Evolving Designs as a Transformative Practice in Nagorno-Karabakh and Syria With a foreword by Susan Allen ISBN 978-3-8382-1117-6

Evidence from Russia’s Presidential Election Campaigns of 2000 and 2008 ISBN 978-3-8382-1043-8

165

Michal Vít, Magdalena M. Baran (eds.) Transregional versus National Perspectives on Contemporary Central European History

177

Anton Oleinik Building Ukraine from Within A Sociological, Institutional, and Economic Analysis of a Nation-State in the Making ISBN 978-3-8382-1150-3

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Peter Rollberg, Marlene Laruelle (eds.) Mass Media in the Post-Soviet World Market Forces, State Actors, and Political Manipulation in the Informational Environment after Communism ISBN 978-3-8382-1116-9

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Building Bridges or Digging Trenches? ISBN 978-3-8382-1134-3

187

Mikhail Minakov Development and Dystopia

Aijan Sharshenova The European Union’s Democracy Promotion in Central Asia A Study of Political Interests, Influence, and Development in Kazakhstan and Kyrgyzstan in 2007–2013 With a foreword by Gordon Crawford ISBN 978-3-8382-1151-0

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John B. Dunlop The February 2015 Assassination of Boris Nemtsov and the Flawed Trial of his Alleged Killers An Exploration of Russia’s “Crime of the 21st Century” With a foreword by Vladimir Kara-Murza ISBN 978-3-8382-1188-6

Petar Cholakov Ethnic Entrepreneurs Unmasked Political Institutions and Ethnic Conflicts in Contemporary Bulgaria ISBN 978-3-8382-1189-3

190

A. Salem, G. Hazeldine, D. Morgan (eds.) Higher Education in Post-Communist States Comparative and Sociological Perspectives ISBN 978-3-8382-1183-1

191

Igor Torbakov After Empire Nationalist Imagination and Symbolic Politics in Russia and Eurasia in the Twentieth and Twenty-First Century With a foreword by Serhii Plokhy ISBN 978-3-8382-1217-3

192

Leonid Luks A Fateful Triangle Essays on Contemporary Russian, German and Polish History ISBN 978-3-8382-1143-5

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Andreas Umland (ed.) Ukraine’s Decentralization Challenges and Implications of the Local Governance Reform after the Euromaidan Revolution ISBN 978-3-8382-1162-6

George Soroka, Tomasz Stepniewski (eds.) Ukraine after Maidan Revisiting Domestic and Regional Security ISBN 978-3-8382-1075-9

Sophie Falsini The Euromaidan’s Effect on Civil Society Why and How Ukrainian Social Capital Increased after the Revolution of Dignity With a foreword by Susann Worschech ISBN 978-3-8382-1131-2

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Andrey Makarychev, Alexandra Yatsyk Boris Nemtsov and Russian Politics Power and Resistance With a foreword by Zhanna Nemtsova ISBN 978-3-8382-1122-0

Marina Lebedeva Russian Studies of International Relations From the Soviet Past to the Post-Cold-War Present With a foreword by Andrei P. Tsygankov ISBN 978-3-8382-0851-0

Studies in Post-Soviet Ukraine and Eastern Europe ISBN 978-3-8382-1112-1

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Vasile Rotaru Russia, the EU, and the Eastern Partnership

Aleksandr Burakovskiy Jewish-Ukrainian Relations in Late and Post-Soviet Ukraine Articles, Lectures and Essays from 1986 to 2016 ISBN 978-3-8382-1210-4

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Olga Burlyuk, Natalia Shapalova (eds.) Civil Society in Post-Euromaidan Ukraine From Revolution to Consolidation With a foreword by Richard Youngs ISBN 978-3-8382-1216-6

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Franz Preissler Positionsverteidigung, Imperialismus oder Irredentismus? Russland und die Russischsprachigen, 1991–2015 ISBN 978-3-8382-1262-3

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The Cold War and Its Influence on Czechoslovakia 1945–1968 ISBN 978-3-8382-1285-2

202

Marian Madeła Der Reformprozess in der Ukraine 2014-2017

Anke Friederike Giesen „Wie kann denn der Sieger ein Verbrecher sein?“

203

Eine diskursanalytische Untersuchung der russlandweiten Debatte über Konzept und Verstaatlichungsprozess der Lagergedenkstätte „Perm’-36“ im Ural ISBN 978-3-8382-1284-5

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Alla Leukavets The Integration Policies of Belarus and Ukraine vis-à-vis the EU and Russia A Comparative Case Study Through the Lenses of a Two-Level Games Approach 978-3-8382-1247-0

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Oksana Kim The Development and Challenges of Russian Corporate Governance I The Roles and Functions of Boards of Directors With a foreword by Sheila M. Puffer ISBN 978-3-8382-1287-6

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Thomas D. Grant International Law and the Post-Soviet Space I Essays on Chechnya and the Baltic States With a foreword by Stephen M. Schwebel ISBN 978-3-8382-1279-1

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Thomas D. Grant International Law and the Post-Soviet Space II Essays on Ukraine, Intervention, and NonProliferation With a foreword by Stephen M. Schwebel ISBN 978-3-8382-1280-7

Iulia-Sabina Joja Romania’s Strategic Culture 1990– 2014 Continuity and Change in a Post-Communist Country’s Evolution of National Interests and Security Policies With a foreword by Heiko Biehl ISBN 978-3-8382-1286-9

Eine Fallstudie zur Reform der öffentlichen Verwaltung Mit einem Vorwort von Martin Malek ISBN 978-3-8382-1266-1

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Slavomir Michalek, Michal Stefansky The Age of Fear

Andrei Rogatchevski, Yngvar B. Steinholt, Arve Hansen, David-Emil Wickström War of Songs Popular Music and Recent Russia-Ukraine Relations With a foreword by Artemy Troitsky ISBN 978-3-8382-1173-2

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Maria Lipman (Ed.) Russian Voices on Post-Crimea Russia An Almanac of Counterpoint Essays from 2015–2018 ISBN 978-3-8382-1251-7

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