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Corporate Governance Ethics finally taking root in Russia

By Christopher Kenneth

Most CEOs heading major Russian companies are implementing the tenets of the Corporate Governance Code in day-to-day management of their companies, according to several independent studies conduct­ed by major business organizations.

The code, which was drafted by the Federal Securities Commission (FSC), the federal stock-market watchdog, contains a raft of rules of behavior aimed at improving companies' trans­parency and disclosure, among other things.

According to a study conducted by the International Financial Corp. (IFC) — the invest­ment arm of the World Bank and sponsored by the governments of the Netherlands and Switzerland — that polled top CEOs of compa­nies operating outside Moscow, 147 out of 304 respondents, or about 49 percent, said they view the implementation of the Corporate Governance Code as positive for their companies.

"Much has changed in the way business is con­ducted in Russia. This includes the enactment of more business-friendly legislation, the adoption of the FSC code and a willingness among CEOs to implement these principles once shown how to do so," said Sebastian Moleneus, the IFC's director on corporate-governance issues, who oversaw the study in the Rostov-na-Donu, Samara, St. Petersburg and Yekaterinburg region­al areas.

Other findings from the report released on April 1 in Moscow also showed that about 50 per­cent of the CEOs say they now place implementation of the code as one of their Top Three priority tasks, while about 83 percent of those who are aware of the code, but say they have not implemented it so far, have declared a willingness to implement it in the near future.

About 78 percent said they conduct both internal and external audits, although only about 18 per­cent are done according to international auditing standards. But over 90 percent say they disclose what is on their books, providing information on financial statements, operating results, composition and owner­ship structure of major owners and top management to their shareholders.

"However, the lack of infor­mation on the code's impor­tance and the added advan­tages that it provides to busi­ness performance as well as the lack of qualified special­ists to promote its implemen­tation, especially in the regions, have continued to remain the main barriers to a fuller implementation of the code in the country," Moleneus added.

Another study released earlier in February, which was conducted by the Institute of Corporate Law and Corporate Governance, one of the most vocal advocates for comprehensive implementation of the code in all aspects of busi­ness management in Russia, has also shown improvement on the issue.

The report was presented as a rating of the country's blue chips based on the quality of their corporate-governance policies as manifested in their disclosed corporate data, such as financial statements and consolidated audit reports exe­cuted according to international standards in the third quarter of 2002. The companies it rated seem to have maintained the same positive posi­tions they did when they were placed on the same list in the second quarter.

The institute attributed this in part to the tradi­tional relative lull in corporate activity between July and September following a flurry of annual shareholders' meetings. However, there is more to the story.

"On the other hand, such consistency of behavior among the rated companies also confirms that the corporate-governance situation on the Russian securities market has stabilized, as companies inter­ested in outside investments are now making more consistent efforts to improve their information-dis­closure records and, therefore, lower corporate-gov­ernance risks," according to the institute's report.

Vimpelcom, which owns the Beeline brand, headed the list, while Rosneft-Purneftegaz ranked lowest. However, dramatic changes occurred in the standing of Lenenergo, a St. Petersburg-based energy company, which fell from second place to llth, a point ahead of Aeroflot. Lenenergo was also found to have an inferior balance-sheet structure, as reflected in its lower current liquidi­ty and capital ratio.

On the other hand, Severo-Zapadny Telecom jumped four points to come in fourth. The climb was due mostly to its overall greater transparency, as seen in the improvements made to its corpo­rate Web site. Better financial performances lifted the rankings of oil majors such as Sibneft, Yukos, Tatneft, and Tyumen Oil Co., the report said.

The institute also noted that the amended federal law on the securities market, which makes more stringent requirements on infor­mation disclosure in the form of quarterly reports and came into effect in January, would favorably help to improve corporate-governance standards in domestic companies. As the institute had forecast would transpire, the Russian Trading System (RTS) and the Moscow International Currency Exchange (MICEX), the country's leading domestic exchanges, now require companies wishing to list stocks on their trading platforms to fully observe the tenets of the Code.

When he announced the new listing rules in February, Vadim Yegorov, MICEX's public-rela­tions director, said that the move is in line with the FSC's policy of boosting disclosure and trans­parency. Consequently, MICEX and RTS have now divided all equities traded on their platforms into three categories — A-l, A-2 and B.

To qualify for the A-l list, the creme de la creme of the domestic stock exchanges on which most of the country's blue chips are traded, the aspir­ing companies will now have to prove that, apart from meeting the exchanges' traditional basic requirements, they have implemented the Code and are following its tenets to the letter, the exchange spokespeople said.

Leonid Savinov, a MICEX director in charge of listing, said the introduction of the B category, which requires less-stringent requirements for listing, will allow companies not meeting the A-list parameters to get the attention of investment and banks that traditionally shy away from pro­viding financing to non-listed companies.