As a means to promote transparency and combat corruption in Russia, the Center for International Private Enterprise supported a pioneering survey of independent corporate directors in that country. The survey generated considerable interest among Russian businesses and international investors, while attracting coverage in the Russia media as well as in The Financial Times (Wednesday, March 14, 2001, edition, page two).

The survey has drawn attention to the need for Russian businesses to improve corporate governance practices to attract much-needed domestic and foreign investment. At the same time, the survey suggests that executives of major Russian companies increasingly recognize this need and see value in independent directors.

Corporate governance involves the relationship between a company's shareholders, who own the company, and the managers who run the companies. Russia has received notoriety for corporate governance abuses in which the managers have milked corporations at the expense of the shareholders. Independent directors can demand financial transparency, insist on ethical business transactions, and thus serve as a critical check on corruption.

The survey was conducted jointly by two Russian business associations: the Investors Protection Association, which represents investors, and the Association of Russian Managers, which represents managers.

CIPE provided financial support and technical assistance for the two groups to undertake the project. CIPE's funding was made possible by a grant from the U.S. Agency for International Development for CIPE's "Corporate Governance Initiative for the Transition Economies." CIPE has conducted other corporate governance projects in Russia and around the globe with the support of the National Endowment for Democracy.

This is the first large-scale survey of its kind in Russia. The survey was sent to more than 300 large Russian corporations, plus some 100 institutional investors and private business associations. More than 80 joint-stock corporations and some 20 institutional investors responded.

The survey found growing acceptance among Russian businesses of the role of independent directors. This led IPA to conclude, "The perception of complete lack of any corporate governance practices in Russia, widely spread in the international investment community, does not fully correspond anymore to the reality."

Key Findings of the Survey

Corporate Governance:

• The perception of complete lack of any corporate governance practices in Russia, widely spread in the international investment community, is does not fully correspond anymore to the reality.

• In the absence of clear business rules and relevant legislative basis, the Russian business community makes efforts to shape the system of relationship with shareholders, investors and management on the basis of civilized corporate governance practice.

• Given insufficient information about the activity of Russian joint-stock companies investors pay specific attention in their decision-making to good reputation of companies with regards to outside investors, as well as to appropriate corporate governance.

Equity Funding:

• The main source of funding of almost all responding companies is own capital. More than a half use debt funding. 15% of companies use equity investments as the source of funding, while the demand for equity investments was expressed by 75% of companies.

• The demand of Russian companies for equity investments exceeds significantly investors' supply.

Attitude towards Independent Directors:

• Most responding investors believe that one of the important factors in increasing investors' confidence towards companies is strengthening the role of the Board of Directors and the presence of Independent Members therein.

• The survey showed that the Russian business community expects the following from Independent Directors activities:

• ensuring objectiveness of public information about the company's activities,
• strengthening investors' confidence towards the company,
• establishing relationship with potential investors,
• enhancing the overall image of companies, including on international markets.

• Together with positive expectations a number of concerns were expressed with regards to Independent Directors activities: possible support of short-term interests of narrow groups of shareholders without due attention to strategic needs of companies; possible failures to maintain confidentiality of non-public (commercial) information about company's activities.

• The views of investors and managers on the role of the Board and Independent Directors do not fully match:

• Investors tend to regard the independent director as a controlling agent for monitoring of the executive management actions and prevention of possible abuses on their behalf. This explains by the lack of appropriate level of corporate governance in Russia.
• Enterprise managers, in general, believe that an Independent Director, being an outside representative, may bring in outside experience and innovative ideas (a strategy-maker role).

• The lack of clear standards and rules of Independent Directors activities may power the efficiency of their work and lead to a situation where such directors would protect the interests of only a narrow group of shareholders to the detriment of long-term interests of the company.

The definition of "Independent Directors":

• Based on the Survey findings the existing perception of the notion "Independent Director" can be formulated as follows:

  A member of the Board of Directors can be considered "Independent" if meets the following criteria:

1. Is not financially or otherwise depending upon a shareholder owning more than 25% of voting shares.
2. Is not financially or otherwise depending upon the company's management.
3. Is not a representative of the State, even if the State is a minority shareholder.
4. Is not financially or otherwise depending upon the company's auditors, appraisers or consultants.
5. Does not pursue personal political interests in his or her activities.

• There are certain differences in the Russian perception of "Independent Director" from what's generally accepted in other countries:
  • Because of the Russian legislation a shareholder owning more than 25% of voting shares can be classified as "large shareholder".
  • The preference is to see Independent Directors free from political obligations and not pursuing personal political goals different from goals of the company's shareholders.

The practice of Independent Directors nomination:

• The majority of Independent Directors in Russian companies were nominated and elected by representatives of institutional investors with the support of non-governmental professional investor organizations.

• The survey identified about 70 companies, where, as respondents believe, there are "Independent Directors".

• The total number of companies where there are Independent Directors which meet three major criteria (are not representatives of the State, are not financially or otherwise depending upon the dominating shareholder and are not financially or otherwise depending upon the management) is 45. The number of Independent Directors meeting the above criteria is about 60.

• In 65% of companies nomination of Independent Directors meeting the three criteria was carried out thanks to support by non-governmental professional investor organizations such as Investor Protection Association (IPA) — 56% and Association for Shareholders' Interests Protection (ASIP) - 9 %.