2021, издание «CORPORATE GOVERNANCE IN RUSSIA: Quo vadis?» published by “De Gruyter”. Edited by Alla Dementieva and ElenaZavyalova, MGIMO UNIVERSITY (© 2021 Walter de Gruyter GmbH, Berlin/Boston ) включает главу Dialectics of corporate management development in Russia, подготовленную В.К.Вербицким, первым заместителем директора Российского института директоров.
Part II
Chapter 5. Dialectics of corporate management development in Russia
Vladimir Verbitskiy, NP “Russian Institute of Directors (RID)”
Moscow, Russia
https://orcid.org/0000-0003-4820-1197
e-mail: verbitsky@rid.ru
Farida Kardanova, Senior lecturer, Department of English language №2
MGIMO University;
Head of the Department Department of International Finance
MGIMO University
Address: 119454, Moscow, Vernadsky Avenue, 76;
e-mail:faridakardanova@gmail.com
JEL-code: M10, M16.
Abstract.This article discusses the establishment of corporate governance in Russia as a dialectical multifactorial process, which develops over a relatively long time interval for such an analysis.
The author considers from a philosophical dialectical perspective several of the most important features of the development of the initial phase of the formation of the Russian corporate governance system, which, in his opinion, require a systematic and comprehensive analysis. The proposed concepts are based both on the author’s many years of research and consulting experience in the field of corporate governance, as well as on his personal practical experience as an independent director in more than fifteen Russian companies of various forms and ownership structure, and on ideas and opinions of well-known Russian and foreign authors also engaged in studying a wide range of management and economic issues.Keywords: dialectics, independence, professionalism, external forms, internal needs, large and medium-sized businesses, private business and the state, corporate governance & corporate management.Results. A systematic and comprehensive critical approach towards the problem of the formation of modern Russian corporate governance is proposed to continue the broad discussion on this issue.Conclusion.This problem is extremely relevant for improving the efficiency of corporate governance systems in Russian companies to ensure their effectiveness, competitiveness and attractiveness to investors in the long term.IntroductionThere are six paired dialectic categories in the field of corporate governance development in Russia:1) independence and professionalism of board members;2) external forms and internal needs;3) foreign and Russian independent directors;4) large and medium-sized businesses;5) private business and the state;6) corporate governance & corporate management.[1]It is worth focusing on the use of the linking word “and” instead of “or”. The fact is that further, in the course of the consideration of these paired categories, it will be tempting to consider them as antagonistic, which is conceptually wrong. It is necessary to see in their contradictions and contrasts not “differences”, but “common things”, because J. Porras together with J. Collins, who dispel the myths about great companies, believe that the latter “never allow the word “or” to prevail. . . they put emphasis on the word “and” and refer to the well-known symbol of the Chinese dualistic philosophy of yin-yang”[2]. R. Posen of the Harvard Business School was one of the first to raise the issue of a professional board of directors. I. Adizes, F. Rosenzweig and P. Lensioni focused on such a quality of independent directors and top managers as wisdom.
Methodology
The author considers from a philosophical dialectical perspective several of the most important features of the development of the initial phase of the formation of the Russian corporate governance system, which, in his opinion, require a systematic and comprehensive analysis. The proposed concepts are based both on the author’s many years of research, consulting and practical experience in the field of corporate governance, and on ideas and opinions of well-known Russian and foreign authors.
Independence and Professionalism of Board Members
Independence of board members has always been viewed as the fundamental principle of all corporate governance issues. At the initial stage of corporate governance development in Russia, this aspect was given primary attention, perhaps even excessive and to the detriment of the professional qualities of board members. As there was a growing number of independent members of boards, and especially after the crisis of 2008, the need for more careful attention to the issues of their professional competencies has become more evident. The article by R. Posen of the Harvard Business School “Boards of Directors: The Team of Professionals”[3] seems to have played a pivotal role in this discussion. The issue of professionalism of board members, the substantive aspects of their activities, their functionality is on the agenda – and R. Posen proposes a model of a professional board. In fact, in mathematical terms, the efficiency of the board of directors is determined the independent directors with the necessary strategic experience relevant to this company. Personally, I express the same idea a little differently: a member of the board of directors must be able to give an independent opinion on matters within his professional competence.I think that within the discussion on the competence of the board members, it is necessary to make mention of their age. The fact is that as of recently this topic has gained unprecedented popularity in Russia, and quite often young managers (even under the age of 30) turn to me with a request to advise them on how to become professional independent members of the boards of directors. The simple answer I provide – that this topic will become relevant to them in fifteen to twenty years – as a rule, is not found satisfactory. M. Gladwell in his world bestseller “Outliers: The Story of Success” demonstrates the 10,000-Hour Rule derived by psychologists on the very colorful examples of world-famous people like Bill Joy, the Beatles group, Bill Gates. He cites the words of the neuropathologist D. Levitin that “no matter what field we are talking about, we need 10,000 hours of practice to achieve the level of mastery (VV. – professionalism). Ten thousand hours is equal to 3 hours of practice a day or twenty hours a week for ten years.”[4] As far as I understand, to be prepared for the professional work of a member of the board of directors, one must have at least ten years of work experience as a top manager, which is impossible to obtain by the age of 30. I. Adizes says the following about the leader: “a good leader implies maturity; they (VV. – young managers with MBA degrees) climb to the top, relying only on their knowledge, although they have not achieved much apart from it. They lack the experience with which maturity comes.”[5]And then I have often come across the views of many different authors on wisdom in the most different and unexpected interpretations of it and I have to share them with you, as they seem important to me. F. Rosenzweig thinks that “wise managers – insightful, thinking, able to distinguish the right from the wrong – are in short supply”[6], and P. Lensioni, analyzing the flaws of teams, raises the bar for success factors to the need for a “wise board of directors”[7]. It turns out that again you need to spend years and years of painstaking managerial work before you can sit in such a welcome and cherished chair of a professional independent director.In my opinion there has been another more important and positive emerging trend. That is the arrival in the industry from regular management of top managers, both acting and, which is especially encouraging, if not for them personally, but for the common cause, retired top managers. These are executives, with many years of experience, therefore it is not necessary to teach them. But they also have their own problems – they are still MANAGERS, not members of the boards of directors. Many among them were on the boards of directors, but of “their own” companies, which they managed. But this was, after all, essentially a representation of management on the board of directors, and not a function of a “pure” member of the board of directors, and moreover, not a function of an independent director. And these are the features of the work of an independent director that they have to master for an independent director.
External forms and internal needs
The early phase of corporate governance in Russia was dominated by external forms of corporate governance, that is, a trend towards formal compliance with the requirements of the legislation and recommendations of corporate governance best practices (CGBP), which were put forward by stock exchanges, potential investors and other stakeholders. Companies actively developed internal documents that formalize such components of corporate governance as information and dividend policies, interaction with investors, the work of the corporate secretary; adopted their own codes of corporate conduct / management, introduced independent directors to the boards of directors, created committees of boards of directors. Perhaps, the main, if not the only, driver of these innovations for companies was the public placement of their shares on stock exchanges, mostly foreign (usually the United States and Europe).But as time went on and more and more Russian companies floated their shares on stock exchanges, investors had alternatives in investing their funds, and they began to pay more and more attention to the level of corporate governance. After the crisis of 2008, everyone somehow unexpectedly discovered that corporate governance, as a beautiful external attribute of the company’s investment appeal, no longer provides the same effect. Investors, in addition to reducing their activity, became generally much more prudent and very attentive to issues such as internal control and risk management systems, real (rather than formalistic) implementation of the tasks of strategic management by companies and control of its management by boards of directors. There was a need for a deep understanding of the essence of share capital, including the sometimes conflicting interests of different groups of shareholders (majority and minority, strategic and short-term). Shareholders have come to understand that these approaches not only take into account the external manifestations of actions taken by companies, but also direct them toward meeting internal needs dictated by the logic of the company’s business development, the industry in which it operates, and the economy as a whole.
Foreign and Russian independent directors
Until 2005–2007 foreign specialists were mainly appointed to the boards of directors of Russian companies as independent directors. As a rule, they were former professional managers and even politicians, consultants, experts with significant industry and functional experience, as well as international business reputation. It is clear that this was the result of IPOs of Russian companies mainly on foreign exchanges. After 2008, the share of foreigners on the boards of directors of Russian companies began to decline. This is largely due to the need for companies to directly implement corporate governance standards already adopted by them in the form of internal documents of corporate governance. It was important not only to declare the creation of a corporate governance system in the company based on the CGBP recommendations, but also to ensure its full and, most importantly, effective implementation. In this context, in addition to foreign specialists with extensive experience abroad and with the understanding of what the corporate governance system of the company should represent, Russian independent directors began to come in, having an idea and experience of how to put into practice all the elements of the system and “make” them really work in Russia. My favorite expression on this subject is “foreigners know what to do, ours know how to do”. The co-owner and chairman of the board of directors of the Ilim group, Z. Smushkin, argues on this subject as follows: “Strategic shareholders, of course, understand that people of Russian origin must work in Russian companies. Not because they are patriotic, just better adapted. ”[8]
Large and medium-sized businesses
For quite a long time only large Russian corporations were interested in corporate governance issues. For large corporations whose shares are listed on Russian and foreign stock exchanges, this was due to the desire to increase their investment attractiveness through the introduction of advanced standards of corporate governance. Historically in Russia in the eyes of specialists of the stock market, corporate management, finance, the link “stock market, investment attractiveness, raising capital, privatization – corporate management” is very strong. From this originates the skepticism of a large number of colleagues on the issue of the decline in interest in corporate governance in the country: since there are problems with our stock market, investment attractiveness, new privatization and capital raising, this reflects the fate of Russian corporate governance. This is not exactly the case. Significant changes have occurred in the interest companies take in corporate governance, including those related to the emergence of such a new driver for its development as medium-sized businesses[9]. With the transition of corporate governance from only an external attribute of investment attractiveness for foreign investors to its role of a tool to improve the company’s own efficiency, as well as the beginning of withdrawal of Russian medium-sized business owners from operational management (according to I. Adizes, this is the “youth stage”[10]) their noticeable interest in the introduction of institutional bodies, policies and procedures of corporate governance becomes apparent.The Russian Institute of Directors has already accumulated sufficient consulting experience in working with medium-sized private limited companies in development and launch of their corporate governance systems. I would like to note that by medium-sized companies we imply the broad definition of this term proposed by G. Simon, “companies with an average market size” or the catchy English abbreviation MM (middle-market or midmarket companies, companies with annual revenues from 10 million to $ 1 billion[11]). My personal practical experience and that of my colleagues in the area of working as independent directors in such medium-sized private companies is also accumulated. And this experience is significantly different from working on the boards of directors of large public companies, with an emphasis primarily on the managerial aspects of work. Referring to the basis of ideal corporate governance is not very useful within the framework of communication with the owners of such medium-sized companies. “The board of directors is not just a place for communications, it is a management body” – these are the words of one of the owners of a medium-sized Russian company in reply to my detailed account of the functions, methods and principles of functioning of the board of directors in accordance with the recommendations of the CGBP. In 2015 in partnership with SKOLKOVO Moscow School of Management we conducted the first study “Corporate governance in medium-sized Russian non-public companies”. The main result is that there is some level of corporate governance in these companies, but the implementation of its individual elements is selective and is due to the owners assessing the feasibility of using them, and not following the recommendations of the CGBP. The principal, if not the only, driver for the development of corporate governance systems is the internal will and desire of the owners, and not the external requirements of the regulatory environment. We even proposed the term “alternative corporate governance”[12].
Private business and government
The introduction of corporate governance standards began during the privatization of the 1990s, when state property became private. This was certainly done by the businesses out of necessity to comply with the legislation, and often with its violation. Since the early 2000s private businesses began to consciously implement the recommendations of the CGBP. And for a long time the companies have been the leaders in the implementation of corporate governance standards in practice.Since the mid 2000s the state began to build up its indirect and direct presence in the economy in the form of ownership of property and at present, according to various estimates, the direct and indirect participation of the state in the Russian economy is over 50%. Significant growth of state-controlled assets naturally leads to the need to improve the efficiency of their management. Implementation of this task is impossible without the use of corporate governance tools. Keeping this in mind, since 2008 the state has set the task of introducing corporate governance standards into the practice of Russian companies with state participation (state-owned companies). In addition to replacing officials on boards of directors of state-owned companies with independent directors and professional designated representatives (designated representatives are a purely Russian phenomenon: they have got the officials removed and kept control), the state begins to systematically introduce the entire set of necessary corporate policies and management procedures in the practice of state-owned companies. Sometimes it seems to us that in this process there are some elements of prematurity, which is clearly expressed in the well-known phrase “do not rush head over heels!”. For example, the state is trying to introduce on a large scale for very different companies “very advanced” standards of corporate governance (in fact, the full set of CGBP recommendations), which inevitably leads to elements of formality in the work, and even its profanation “for the sake of appearance”. And if earlier the expert community of professionals in the field of corporate governance pushed the state to introduce corporate governance standards into the practice of state-owned companies, now it sometimes acts as a certain block. This concerns, in particular, the issue of cancellation of all the guidelines to professional directors, the withdrawal of all officials from the boards of directors, the implementation of the recommendations of the new Russian Corporate Governance Code of 2014 for all state-owned companies and in full, etc. (VV. – in the future it is necessary to recognize that the state limited itself to only the thirteen largest public companies for the mandatory implementation of the Codex norms).But according to my expert estimates, this was the case until 2016. Then the process which I personally call the “bureaucratization of corporate governance” in state-owned companies launched, when the very essence of corporate governance began to become distorted in favor of the abovementioned factors. Officials started to return in great numbers to the boards of directors and their share began to grow. Independent directors were chosen among the newly-resigned officials, and real independent directors became very few.
Corporate governance & corporate management
I decided to complete the presentation of the paired dialectic categories of corporate governance with this thought, which I formulated after my colleagues and I published the abovementioned article[13], and, perhaps, therefore, it was most controversial (according to a number of my colleagues). Their main argument is the following: they are different concepts, different research topics and different systems within the company, and they should not be confused. This is quite clearly and unequivocally stated by the International Finance Corporation (IFC) in its basic guide for the development of corporate governance in Russia.[14] Colleagues from IFC believe that “corporate governance should not be confused with management” and demonstrate Picture 5.1-a. I am not going to confuse these concepts, but I just want to comment upon the part where they intersect, which, in fact, can be seen in the presented figure and is called by the colleagues from IFC “strategic leadership”. It seems to me that at a certain stage of development of the corporate governance system and the corporate management system in companies (this is most noticeable in the largest of them), the distancing of these systems, unjustified for the common cause of effective company management, occurred. Each of them began to live its own independent and in fact self-sufficient life, according to different principles: the corporate governance system is in accordance with the well-known principle “nose in, hands off”, and the management system follows the principle “feel with your hands”, as the Japanese say. This difference is especially topical when one has to deal with issues of building corporate governance systems, working as an independent director on the boards of directors of medium-sized companies with prior work experience in a large public company. I think that such a separation and, to a certain extent, isolation of corporate governance and corporate management from each other is unreasonable and even contradictory to the principles of systematic work of companies as integral systems. Therefore, I put the well-known sign & (ampersand) between them, which, in my opinion, most clearly expresses what I want to say about the relationship between corporate governance and corporate management (Pic. 5.1-b).
Picture 5.1. Corporate governance & Corporate management
- b)
Source: Robert I. Tricker, Corporate Governance, 1984
The dialectic in this paired category consists in the fact that after emerging in the management of our companies in the early 2000 corporate governance began to develop as an independent area, closely connected with such areas as the stock market, IPO, privatization, investment attractiveness, portfolio / institutional investors (minority shareholders), IR, independent directors, stakeholders, transparency etc. A perception has formed that the value of companies depends solely of these factors. As a matter of fact, we completely forgot that the efficiency of the company’s operation and its competitiveness, which, by all the textbooks on management, are provided in the subject area of corporate management, are primary to the value of the business. And here, in the Russian context of a highly concentrated ownership structure, the leading role is played by the majority shareholders, some of whom already understand the significance of the bond between corporate governance & corporation management: “The link between corporate governance mechanisms and corporate management needs, which JSFC Sistema backs up by building organizational mechanisms, incentive tools, and formal and informal communication practices between managers, directors, and shareholders”[15].
Conclusion
The issues raised are extremely relevant for improving the efficiency of corporate governance in Russian companies to ensure their competitiveness and investment attractiveness in the long term.
References
Articles:
- Berlin A. D., Verbitsky V. K., Gulyaev K. A. Dialectics of corporate governance: what has changed in connection with the crisis? // Joint-stock company: issues of corporate governance, 2010, № 10.
- Dolgopyatova T.G., Libman A.M., Petrov I.O., Yakovlev A.A. Role of the Board of Directors in Russian Growth Companies: Sistema, Part II // Russian Management Journal, 2015, № 23.
- Posen R. Boards of Directors: Team of Professionals // Harvard Business Review Russia, 2011, January-February.
- Smushkin Z. We are now at the epicenter of the crisis // Kommersant, 2015, June.
- Verbitsky V. To What kind of corporate governance is needed today // Securities Market, 2013, № 7.
- Verbitsky V.K. Corporate Governance in Medium Russian Non-Public Companies: Other Corporate Governance // Joint-Stock Company: Issues of Corporate Governance, 2016, No. 12.
- Yudanov A.Y. On the formula for the success of medium-sized businesses in the world and Russia // Russian Management Journal, 2013, № 3.
Books:
- Adizes I. Management of the life cycle of a corporation. – SPb .: Peter, 2007.
- Adizes I. The Ideal Executive: Why You Cannot Be One and What to Do About It: – M.: Alpina Business Books, 2007.
- Collins J., Porras J. Building Your Company’s. Vision. – SPb.: Stockholm School of Economics in St. Petersburg, 2004.
- Gladwell M. Outliers: The Story of Success. – M.: United Press, 2010.
- Lensioni P. The Five Dysfunctions of a Team. A Leadership Fable- M .: Mann. Ivanov and Ferber, 2011.
- Manual on corporate governance: in 6 tons. – M .: Alpina Business Books, 2004.
- Rosenzweig F. The Halo Effect. . . and the other eight illusions that mislead – BestBusinessBooks, 2008.
[1] Berlin A.D., Verbitsky V.K., Gulyaev K.A. The Dialectic of Corporate Governance: What Has Changed Due to the Crisis? // Joint-stock company: issues of corporate governance. 2010. No. 10
[2] Collins J., Porras J. Constructed forever: the success of companies with vision. – SPb .: Stockholm School of Economics in St. Petersburg, 2004.
[3] Posen R. Boards of Directors: Team of Professionals // Harvard Business Review Russia. 2011. January-February.
[4] Gladwell M. Outliers: The Story of Success. – M.: United Press, 2010.
[5] Adizes I. The Ideal Executive: Why You Cannot Be One and What to Do About It: – M.: Alpina Business Books, 2007.
[6] Rosenzweig F. The Halo Effect. . . and the other eight illusions that mislead managers. – BestBusinessBooks, 2008.
[7] Lensioni P. The Five Dysfunctions of a Team. A Leadership Fable- M .: Mann. Ivanov and Ferber, 2011.
[8] Z. Smushkin. We are now at the epicenter of the crisis // Kommersant. 2015. June 5th.
[9] Verbitsky V. To whom and what kind of corporate governance is needed today // Securities Market. 2013. № 7.
[10] Adizes I. Management of the life cycle of a corporation. – SPb .: Peter, 2007.
[11] Yudanov A.Y. On the formula for the success of medium-sized businesses in the world and Russia // Russian Management Journal. 2013. № 3.
[12] Verbitsky V.K. Corporate Governance in Medium Russian Non-Public Companies: Other Corporate Governance
[13] Berlin A.D., Verbitsky V.K., Gulyaev K.A. The Dialectic of Corporate Governance: What Has Changed Due to the Crisis? // Joint-stock company: issues of corporate governance. 2010. No. 10
[14] Manual on corporate governance: in 6 tons. – Moscow: Alpina Business Books, 2004.
[15] Dolgopyatova T.G., Libman A.M., Petrov I.O., Yakovlev A.A. Role of the Board of Directors in Russian Growth Companies: Opyat Sistema, Part II // Russian Management Journal. 2015. № 23.