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CORPORATE GOVERNANCE: ICLM reveals corporate management ratings

Dmitry Vasilyev, executive director of the Institute of Corporate Law and Management told about corporate governance researches made by ICLM.

The Russia Journal: What were the major changes in corporate governance in Russian companies in 2001?

Dmitry Vasilyev: On the one hand, Russian companies have become more transparent. Serious and radical changes for the better have occurred in the disclosure of financials. Among companies on our ratings, the proportion of those rated as "poor disclosure" has reduced from 70 percent to 33 percent. The companies are giving more access to their documentation, particularly board meeting minutes and summaries and other data. On the other hand, there is a negative trend of unequal treatment of shareholders. For example, the supremacy of majority shareholders is established in the statutes of many companies. The third interesting tendency is the increasing gap in the quality of corporate management between the companies included in our listing and between different sectors of the economy.

TRJ: Which companies topped the year 2001 rating list in terms of corporate management quality?

DV: Based on objective criteria, topping the year 2001 rating list are the two companies which have issued 3rd-level ADRs: Vimpelcom and Mobile Telesystems. Both specialize in mobile communications. These companies have been found to comply with the very high corporate disclosure requirements set by the American Securities and Exchanges Commission (SEC) and American legislation in general. In addition to these, our top five include RAO Unified Energy Systems of Russia, Lenenergo (St. Petersburg’s power grid) and GUM (Moscow’s department store).

TRJ: Which criteria do you use to assess the quality of corporate management and do these criteria correspond to international standards of such research? Which criteria are principal and which are secondary?

DV: Principal criteria are those related to investment risks, such as the risk of share capital dilution, asset-withdrawal risk, transfer-pricing risk and, finally, risk of bankruptcy. These criteria are most important for the present Russian situation. In making our ratings, we check how corporate activities are in line with Russian legislation, how a given company may be susceptible to legal charges, and also how it corresponds to international standards, including the OECD (Organization for Economic Cooperation and Development) principles of corporate management.

TRJ: How in your opinion does the quality of corporate management affect market capitalization and the company’s attractiveness for investors?

DV: Without a doubt, there is a certain connection between the quality of corporate management and the company’s market capitalization and its investment attraction. In Russia, like elsewhere in the world, an improvement in the quality of corporate management makes the company more attractive for investors. Russia’s specificity is that the market is in the stage of development, it is not as wide and deep as in the West and is susceptible to emotions. Sometimes the quality of corporate management is overestimated and sometimes it is underestimated. For example, we consider that the oil company YUKOS is overestimated because, in our opinion, it has serious problems with corporate management.

TRJ: Which industries are the leaders in your sector rating of corporate management quality?

DV: This list is topped by those industries which really need to attract capital: telecoms, retail trade and electrical power. At the same time, the cash- abundant oil industry is weaker.

TRJ: Do you think Russia is ready to enact a code of corporate management?

DV: It is a good idea to have a corporate management code and I’m giving it my thumbs-up. At the same time, different companies are in different situations and cannot bring themselves into line with a single code all at once. What is most important is that such a code should be abided by on a voluntary basis. Besides, such a code should not contradict Russian legislation. Things are moving in this direction and companies are adopting such codes. But most of them, specifically those adopted by RAO UES of Russia, YUKOS and Sibneft and those planned to be adopted by Tatneft and a number of other companies were made to blend well with the specific conditions of each of these companies

TRJ: You mentioned the increasing gap between different companies and sectors in terms of corporate management quality. Do you think this gap will continue to widen?

DV: In my opinion, such differentiation is a natural and normal tendency. It reflects the process of division of the companies into those which will be public and open, will attract capital and whose shares will be openly traded on the market and those which will eventually leave the market due to various reasons. What practical inference can be derived from that? Investors should be more attentive and discriminating and should exercise due diligence. It would be a mistake to say that companies in Russia are all the same; they are very different and this difference will increase.

TRJ: What developments would you forecast to occur in the sphere of corporate management during this year?

DV: During this year Russian companies will have to bring their documentation into line with the new law on joint-stock companies. The law is intended to protect shareholders from stock dilution and will stimulate improvement of the quality of corporate management. On the other hand, a number of sectors will be facing serious problems related to their reorganization, specifically mergers, acquisitions and divisions. These processes will affect companies specializing in electrical power, telecommunications and, probably, the gas industry. Pulling through reorganizations, these companies will have to demonstrate their high quality of corporate management to investors.

TRJ: What are ICLM’s plans for this year?

DV: In 2002 ICLM will continue doing rating studies in terms of corporate-management quality and will expand the number of companies on its rating list. At this moment ICLM does ratings for 30 companies and by this June the number is planned to reach 40, which will cover approximately 95 percent of the overall market capitalization. This means investors will get an independent (particularly from the stockbrokers) source of information. With due respect for specific needs of investors we expanded the scope of our research, adding assessments of the quality of auditor statements. We also plan to expand our research in such spheres as assets withdrawal and capital-dilution risks.