Corporate governance and financial reporting timeliness in Russian banks

Corporate Governance in Russia

Accountability of Corporations

Delivering a financial report in a timely manner is quite important. Financial report becomes stale quickly, so informing while the information is still new and relevant is important. The longer one waits to post financial information, the less significant it is[footnoteRef:1]. Timeliness of financial reporting and channeling is one of the benchmarks the Organization for Economic Cooperation and Development (OECD) has began to show the quality of a corporation's corporate governance practices. The present research shows the timeliness of financial posting of the Russian banking sector and contrasts it to the timeliness of financial publishing for selected banks in the U.S. And Europe. [1: Guriev, Sergei and Andrei Rachinsky, "Ownership concentration in Russian industry," Background paper for Russia CEM 2003 March 2004]

Approach and characteristics of the system

Ten years of improvements, during which the economy in Russia has undergone historical changes, have formed the key characteristics of the present national model of corporate governance. The personalization program has made private property rights, formed corporate ownership pattern with insider regulation, and dispersed ownership. The form of the program and unavailability of lawful and controlled framework to support it is an outcome in major corporate governance issues, which impede effective venture restructuring and triumphant economic advancement of the country. The World Bank confesses in its current information that personalization to diffuse enterprise and diffuse owners workers and manager has not been important; indeed, privatization to employees in the CIS Commonwealth of Independent States has been worse than state ownership for restructuring.'

Alexander Radygin notes that the Russian corporate governance model is established by sticking to features: permanent ways of distribution of corporate property; particular incentives of corporate catalyses, participate in self dealing and asset-stripping; weak placement of external mechanisms of corporate regulation (bankruptcy, financial markets takeovers); important residual state ownership and minor issues of control and governance; intervention of regional authorities in the creation of corporate relations; and useless and selective enforcement of comparatively good legislation concerning protection of shareholders' rights.

Regulations and Corporate Governance codes

During Soviet times, the regulation over SOEs was undertaken by Parties and the Ministries. After privatization, various companies realized that they were in a serious "control vacuum," which negatively changed incentives of corporate managers. But with the downfall of major planning and existence of internal constraint, insiders and managers in transition economies achieved almost total discretion to go as per their own objectives[footnoteRef:2]. [2: Forbes, Daniel P., Frances J. Milliken, "Cognition and Corporate Governance: Understand Boards of Directors as Strategic Decision Making Groups," Academy of Management Review, 1999 Vol 24 No 3 489-505]

The current management is the strongest group of corporate owners. In 1999 the distribution of ownership had the following structure: managers' ownership - about 15%, workers =30%, the state=7% and the rest = outsiders. In spite of the management ownership is relatively small, their real influence if substantially greater. Therefore, members of boards of directors are always appointed by managers, and various outsiders are 'de facto insiders'

Transparency and accountability to stakeholders

Since the commencement of the privatization, managers of Russian firms, involved in self-dealing discussions, became common for disregard and obvious violation of shareholders' rights. The rights of shareholders consisted 'asset rights, income rights (the payment of dividends) and control rights.' Shareholders also have routine rights: to vote, to entrance and exit, and to have information about the corporation's activity.

In Russia, shareholders have skillful defilement of all of these rights. The predominant methods of violating shareholders' rights are share weakening by means of new share issues and by issue of corporate bonds exchangeable into shares; instituting barriers to shareholders' turnout on all-purpose meeting, in order to prevent them from playing a part in decision-making on important issues, through failure to adequately inform about the meeting, or rejecting to register shareholders, or not tolerating substitution voting. Shareholders' right to vote is desecrated when the one-share-one-vote rule is replaced by one-shareholder-one vote rule, thus weakening the impact of large shareholders.

The right to liberally sell one's shares is rejected through 'influence of share registers' when management declines to register shares acquired by new owners. The list of such violations, which also includes non-payment or late payment of dividends, as well as disregard of information revelation requirements, can easily be continued. To illustrate these violations, it would be enough to highlight the activity of already mentioned oligarch Khodorkovsky[footnoteRef:4]. The transfer pricing transactions with Yukos' subsidiaries never received approval of their minority shareholders, which was 'a blatant violation of the company law'. [4: Garret, Bob, "A Portrait of Professional Directors: UK Corporate Governance in 2015" Corporate Governance, Vol 13 No 2 March 2005]

However, in 1999 Khodorkovsky did succeed to get shareholder endorsement for transfer of Yukos' stakes in the production subsidiaries to offshore companies, as well as for a massive new share issuance. But the means to get the authorization were indeed scandalous. Yukos' leader needed 75% of the votes of those who participated in stakeholders meeting. In order to reach his goals, Khodorkovsky made a judge rule out all unwanted shareholders from voting on the ground of acting in defilement of the Antimonopoly Law.

Fortified guards blocked minority shareholders from attending the meeting on the basis of the court order. The position of minority shareholders in Russian corporations is establishment to improve as a result of recent modifications brought about by obligation of reformers to enhance the image of the Russian market and create an auspicious investment environment. The same Yukos Company is 'allegedly making an effort to advance shareholder relations' and is now a role typical for other Russian firms. In the last two years Khodorkovsky started to publish the company's accounts according to universal standards, hosted five foreign directors into the board, and paid $500 million in dividends in 2002

In addition, investor protection establishments are developing in Russia who goals at making marginal shareholders more pro-active in guarding their rights. More and more companies are becoming conscious that violating shareholders rights is one of the major complications that have to be removed in order to get entrance to foreign capital. There is a hope that Russian companies will finally 'turn the page on their past corporate supremacy abuses' and the need for external capital will 'open critical opportunities for the development of corporate governance.'

The first legislative attempt to give enterprises more autonomy was embodied in the 1988 Law on State Enterprises. By 1990 several statutes had been passed, both on the Soviet Union and on the Russian Federation levels, which recognized private organizations of different types, however they 'were superficial and provided little if any guidance on organizational structure, fiduciary duty or shareholders' rights'.

The statute on joint stock companies confirmed by Council of Ministers of RSFSR (Decree 601) adopted in 1990 contained some improvements, such as 'guidelines on the rights and duties of shareholders and directors'. Nevertheless, it still failed to address some very important issues, such as remedies and fiduciary duty, and it did not provide shareholders with mechanism to enforce their rights. The Russian privatization law was passed in 1991 to give the legal basis for the corporatization of enterprises which were after that privatized. The law was followed by Presidential Decree on Privatization in 1992. During the privatization process, several presidential decrees were issued which were mainly aimed at implementing the reform program and just touched upon some certain aspects of company law. They would often contradict one other or be in conflict with underlying legislation[footnoteRef:5]. [5: Warther, Vincent A. "Board effectiveness and board dissent: A model of the board's relationship to management and shareholders," Journal of Corporate Finance, No 4, 1998, 53-70Garret, Bob, "A Portrait of Professional Directors: UK Corporate Governance in 2015" Corporate Governance, Vol 13 No 2 March 2005]

The new Russian company law, the 1996 Law on Joint-Stock Companies, which develops relevant provisions of the new 1995 Civil Code, is recognized to be a well drafted and comprehensive piece of legislation. It contains detailed articles covering almost all standard elements of normal company law, such as procedural issues of the corporate relationships (provisions for the preparation of the shareholders' meeting, election of members of management board, issue of new securities), requirement for information disclosure, and provision on insider transaction etc.

The law demonstrates significant improvement regarding protection of shareholders' rights. Together with the definition of the rights, it contains a variety of routine rights for shareholders, such as voting, information and restoration rights, and details of preparations that shareholders possess if their rights are desecrated. Under the Russian Company Law the corporation consists of three organs: the shareholders' meeting, the board of directors (a supervisory body), and the executive board. The top organ is the shareholders' meeting which meets annually and has the power to hire and dismiss company's directors to whom shareholders delegate overall operating authority.

The managerial body, which can be formed by one person -- the overall director, is accountable to the board of directors and to the shareholders' meeting. General shareholders' meeting can discharge executive board unless the power to form the executive board is given to the board of directors by the corporate code. Since 1996, a total of other laws and regulatory documents have be passed targeting at creating legal framework for corporate activity, such as the 1996 Securities Market Law, the 1998 Bankruptcy Law, the 1999 Law on Protection of Investors' Rights, the 2001 Investment Funds Law. In 2001, there were approved changes and amendment to the 1996 Joint-Stock Companies Law, which presented further enhancements regarding protection of shareholders' rights. In drafting of many of these laws, Russia established assistance from foreign advisors, namely the American Aid Agency (USAID). Such legislative activity and honesty to outside help reflects current obligation of Russian government to introduce necessary measures to improve corporate governance in the country[footnoteRef:6]. [6: Warther, Vincent A. "Board effectiveness and board dissent: A model of the board's relationship to management and shareholders," Journal of Corporate Finance, No 4, 1998, 53-70Garret, Bob, "A Portrait of Professional Directors: UK Corporate Governance in 2015" Corporate Governance, Vol 13 No 2 March 2005]

In the last couple of years, Russia has witnessed some definite signs of reformers' determination to improve national corporate governance performance. Along with the effort of the government to create a firm legal foundation for business activity of Russian corporations, a wide range of research work has been conducted by public, professional and academic organizations to develop programs for improvement of corporate governance. Besides, the corporate enactment of Russian companies is measured by foreign and local organizations, and corporate governance ratings are published regularly to provide information for investors, as well as to promote competition among Russian companies and stimulate the development of corporate governance practices. To assist Russia in conveying its corporate governance principles faster to global standards, the Organization for Economic Cooperation and Development (OECD) propelled the Russian Corporate Governance Consultation in June 1999.

In April 2002, a White Paper of Corporate Governance in Russia was presented in Moscow, which contains endorsement on improvement of corporate governance performance. The White Paper is the result of three years of debates and soundings, which were aimed at ascertaining the main areas for enhancement of corporate governance practices in Russia. The White Paper utilizes the OECD Principle of Corporate Governance which was designed for OECD members, i.e. For countries with developed market economies, but which is also recommended for countries with developing markets. The Principles' task is to facilitate administrations 'in their efforts to evaluate and improve the legal, institutional and monitoring framework for corporate governance in their countries.'

The White Paper of Corporate Governance in Russia was obtainable to specific institutions as a source for lawmaking change and reform enactment. The OECD Principles of Corporate Governance have also been used to develop the principles of the Russian Code of Corporate Conduct, a document which venture was prepared by the Federal Commission for the Securities Market (FCSM), approved by the Government in April 2002, and was suggested for general use. Along with the highest beliefs of corporate governance the Code contains provisions for general stakeholders meeting, the board of directors, the executive board, information disclosure, recommends to introduce independent directors into the board, and to establish a position of a corporate secretary, etc. The Code is not legally binding on companies; its provisions are offered only as recommendations.

However, once they are included into the regulations of a company, they obtain compulsory character. Momentary a document of such recommendatory nature is innovative for Russia; never before has it adopted non-obligatory documents. The Code helps to address those issues, which have not yet been covered by legislature[footnoteRef:7]. It provides necessary guidance to Russian companies in drafting their corporate codes with a focus on protection of shareholders' rights. National corporations are highly motivated to include the provisions of the Russian Code of Corporate Conduct into their own corporate code to attract courtesy of foreign investors. In November 2002, the FCSM introduced modifications into the trading regulations of Russia's major stock exchanges which oblige companies to implement the Code of Corporate Conduct or they could face delisting of their securities. The Russian business community has predictable of the need to improve corporate governance practices. Local system of government is established to promote high professional standards and moral norms among Russian corporations. With this purpose, the Russian Institute of Directors (RID) was founded by a group of the major Russian corporations.63 [7: Brown, Lawrence D. And Caylor, Marcus L., "Corporate Governance and Firm Performance" (December 7, 2004)Black, Bernard S., Love, Inessa and Rachinsky, Andrei, "Corporate Governance and Firms' Market Values: Time Series Evidence from Russia" (November 2005). McCombs Research Paper No. FIN-05-05Naomi A. Gardberg and Charles J. Fombrun, Corporate Citizenship: Creating Intangible Assets across Institutional Environments, Academy of Management Review, 2006, Vol. 31, No. 2, 329-346]

The RID believes that 'Russia's economic development depends to a large extent on ethics, competence, and entrepreneurial spirit of those who sit on boards of Russian companies, as well as on policy makers and government officials.' At present, the institute is working on a code of rules for the board of directors called Professional Standard of Corporate Directors, which is meant to become a recommendatory document for companies to be used as a guide in building the board of directors in accordance with the highest professional requirements[footnoteRef:8]. [8: Brown, Lawrence D. And Caylor, Marcus L., "Corporate Governance and Firm Performance" (December 7, 2004)Black, Bernard S., Love, Inessa and Rachinsky, Andrei, "Corporate Governance and Firms' Market Values: Time Series Evidence from Russia" (November 2005). McCombs Research Paper No. FIN-05-05Naomi A. Gardberg and Charles J. Fombrun, Corporate Citizenship: Creating Intangible Assets across Institutional Environments, Academy of Management Review, 2006, Vol. 31, No. 2, 329-346]

Another revolution in Russian business is the effort to introduce methods of alternative dispute steadfastness. In December 2002, the Russian Union of Industrialists and Entrepreneurs (RUIE) formed a commission on corporate ethics. The Commission will be industry with out-of-court settlement of disputes, which will be there determined according to the Charter of Corporate Ethics, adopted by the RUIE in October 2002. The Commission consists of 43 arbiters, ten of which are well-known oligarchs, the members of the RUIE Bureau. According to the decision of the Commission on Corporate Ethics, throughout the first year of its work the ADR system will be utilized to settle an engagement only if both parties agree on it. Later the ADR mechanism will be used even in the deficiency of the respondent.

Conclusion

The comparison of development of corporate governance in Russia with that of China and Central Europe helps to expose the factors that influence its pitiable performance. Although in the course of reforms all those countries have encountered similar problems, such as insider-dealing, defilement of shareholders' rights, remaining state property in enterprises and others, it seems that the first conditions in a country as well as its characteristics and implemented policy reforms play a key role in shaping the performance of a nationwide system of corporate governance[footnoteRef:9]. [9: Brown, Lawrence D. And Caylor, Marcus L., "Corporate Governance and Firm Performance" (December 7, 2004)Black, Bernard S., Love, Inessa and Rachinsky, Andrei, "Corporate Governance and Firms' Market Values: Time Series Evidence from Russia" (November 2005). McCombs Research Paper No. FIN-05-05Naomi A. Gardberg and Charles J. Fombrun, Corporate Citizenship: Creating Intangible Assets across Institutional Environments, Academy of Management Review, 2006, Vol. 31, No. 2, 329-346]

The significance of developing good corporate governance instruments cannot be overvalued in the world that is getting more and more globalised. Globalization opens exciting opportunities for conversion economies, but at the same time, it places the encumbrance of huge responsibility on them. When more and more nations become members of the global community, each contributing country has to realize that its economic performance and the quality of corporate governance are now extremely significant not only for that very country, but for the whole world. The interconnectedness of economies all over the globe makes them very powerful, yet vulnerable at the same time, just like the world itself.