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How to Improve Corporate Governance in State-owned Companies

Russian companies with state participation lack transparency.

Companies with state participation in Russia show room for improvement in terms of corporate governance. Greater information transparency is needed, as are improvements in creating boards and reporting to investors. Currently, not all Russian state-owned companies operate in line with the international standards of corporate governance.

Researchers from the HSE Laboratory for Studies in Business Communications, together with the Association of Professional Investors (API) analyzed corporate governance at Russian state-owned companies. The results of this research has been published in the paper ‘Evaluation of corporate governance in public companies with Russian state participation and publicly traded shares’.

Biggest companies in the spotlight

The key regulations governing Russia’s corporate sector – the Corporate Governance Code – date to 2014, but researchers found in surveys that not all companies follow its recommendations.

The research included the following companies:




VTB Bank


UAC (United Aircraft Corporation)







Federal Grid Company



The total revenues of all companies that feature in the 2015 survey was 15,162 billion roubles, with 4,315 billion EBITDA, 3,750 billion was paid in taxes, and their consolidated net income was 1,763 billion roubles, based on company reports and financial statements covering income tax and other taxes according to IFRS. The net income of the companies listed above amounted to 2.3% of GDP, and the taxes paid – 4.7%. Their total capitalization as of September 30, 2016, was 13,610 billion roubles, or about 40% of the total Russian securities market capitalization.

The researchers interviewed independent directors at over half the companies included in the survey. They also talked to 27 executives who are responsible for investment (department heads, portfolio managers, senior analysts etc) at investment companies and banks. The researchers analyzed these public companies using Bloomberg data on their equity capital structure, as well as information on voting published online by shareholders (usually, by portfolio or institutional investors) and international regulators.

Board elections are not a formality

One of the issues highlighted by the researchers is how Boards at Russian state-owned companies operate. Their research revealed some problems. For example, the survey demonstrated that the lists of candidates for the Board are often provided by the management. The Board either treats the list creation very formally, or is not involved in seeking shareholder approval for it, which obviously creates the risk of a potential conflict of interest. For example, an effective, but ‘unwanted’ member of the Board can be replaced with a less effective one who is more friendly to the management.

Independent CEOs, fully in line with the listing rules of the Moscow Stock Exchange and the 2014 Corporate Governance Code, have been nominated and elected by the state in just half the surveyed companies (ALROSA, Bashneft, Rosneft, Rostelecom, Rosseti, and the Federal Grid Company). In the other companies (Gazprom, UAC, RusHydro, and Transneft), only several Board members meet the independence criteria, and most are affiliated either with the state, or with one of the company’s significant counteragents.

A survey of investors demonstrated that it is necessary to organize 1 or 2 meetings of independent CEOs and Board members with shareholders annually, at which the management team is not present. This would allow investors and state representatives to get the independent CEOs’ opinions on important aspects of the Board members’ work and corporate governance at the company.

At the shareholders’ AGM, minority shareholders in the surveyed companies are passive. According to an analysis of voting performed by international investors, many of them (such as funds operated by Blackrock Company) have not voted in companies with state participation in 2016, except for Sberbank. Such low activity levels among ‘responsible’ investors can partly be explained by the broader political situation and their attitude to the Russian market.

Investors lack information

All the companies studied meet the key requirements in terms of obligatory information disclosure. The situation regarding the disclosure of information on shareholder meetings has significantly improved over recent years, but there still are some problems.

One involves related party transactions . For example, in 2015-2016, general shareholder meetings in the three biggest companies (VTB Bank, Gazprom, and Rosneft) approved 291 related party transactions worth 51 trillion roubles, $25.7 billion, and EUR1 billion.

Companies treat the disclosure of information on such transactions differently. The regulations on information disclosure do not regulate the volume of information on such transactions, the research paper said. ‘Certain companies use this uncertainty and do not indicate any of the basic terms of these transactions (such as counteragents and prices), instead simply indicating that the decision on approving the transaction was made’, the researchers said.

It also became apparent that investors would like to receive information on the companies’ total spending on charity and capital costs.

As part of the survey, institutional and portfolio investors were asked to give their general evaluation of corporate governance in each of the analyzed companies on a five-grade scale from ‘very bad’ to ‘very good’. As a result, Sberbank, Bashneft, and ALROSA got the highest grades. VTB, Gazprom, and Transneft got the lowest evaluations.

May 17, 2017