Who Needs Corporate Governance Anyway?

Yesterday’s Moscow Times article (first few days free, members only thereafter) looks at corporate governance practices in Russian companies.  Referencing a recent study of CIPE partner Russian Institute of Directors (RID) the story highlights the fact that in many Russian companies corporate governance is little more than “window-dressing.”  In regards to companies holding or planning an IPO:

…those firms often pay lip service to corporate governance and adopt basic measures aimed at achieving maximum results with minimum effort, the study said.  Such measures were often last-minute changes limited to the adoption of a dividend policy or the introduction of one or two independent directors, preferably well-known foreign names, the study said.

Despite poor corporate governance practices, many companies’ IPOs in are going through the roof.

“The readiness to pay an extremely high price for the assets [of those companies] is a deviation from common sense,” RID head Igor Belikov, the study’s main author, said by telephone.

Igor Belikov held a roundtable on the subject at the U.S. Chamber of Commerce earlier this year and has published a good article on the discrepancies between the theory — experts’ propositions that investors reward good corporate governance — and the reality — high prices for IPOs of companies with poor governance practices (see “Corporate Governance in Russia: Who Will Pay For It and How Much?” in CIPE’s Economic Reform Feature Service).

In this case, it seems, access to information matters, or as Igor Belikov puts it, an ability to see matters from the “inside.”

According to RID, at fault are not so much the companies and investment banks rushing to cash in on their listings but the investors who are feeding that frenzy. And between 75 percent and 100 percent of those investors are foreigners, the study says.

Most domestic investors prefer to either stay away from IPOs or go for secondary listings, as they don’t have as much money to spend as their foreign counterparts, Belikov said. Another reason is that “they see the situation from the inside,” he said.

So how do you sell corporate governance to companies in Russia, when the reality suggests its not really crucial?  How about sustainability (hat tip: Andrew Wilson)?  Corporate takeovers through illegal and semi-legal means are on the rise in Russia, with thousands reported in 2005.  The most disturbing trend, which should ring the alarms throughout the Russian business community is that

“Corporate takeovers often target economically stable and dynamically developing companies that pursue long-term investment goals.”  

In an environment where courts are easily influenced by public officials or monetary payments (bribes) and legal and regulatory contradictions create opportunities for hostile takeovers, corporate governance may just become a mechanism of self-defense for Russian companies.  Stronger boards, clear rules and procedures, solid bylaws, transparent dealings, and other mechanisms of good governance can help Russian companies build a solid line of defense against attacks.