Term Paper: Corporate Governance in Russia Accountability

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[. . .] 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… [END OF PREVIEW]

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