The main issue of the persistent inadequacy of corporate governance in Russian companies, including among the larger companies listed on the Moscow Stock Exchange, is the formal implementation of the many principles set forth in the Corporate Governance Code that are voluntary in nature, and the actual lack of enforcement or improper enforcement of the regulations not directly stipulated by law. Moreover, in a number of serious corporate conflicts or infringements of shareholders’ rights, certain unscrupulous shareholders or companies are even trying to exploit these very possibilities that are an unambiguous violation of the law, but that are made very difficult to counteract on the part of regulatory bodies or other shareholders due to flawed approaches to their integration into existing arbitral practices, the inadequacy of sanctions or issues of a technical nature.
In relation to the foregoing, it is important to bear in mind that the provisions of the new Corporate Governance Code, which will both be implemented in relation to the requirements of the stock exchange listing / premium listing and will be applied voluntarily through the company Articles of Association or internal documentation based on „opt in‟ and „comply or explain‟ models, cannot be a substitute for improving the most important legislative instruments with a deciding influence on protecting the rights and legal interests of investors. The corporate governance recommendations which will be exposed below must be fully in-tune with and complement basic legislative provisions, regulator requirements and corresponding court practices.
1. Compliance with the Code’s recommendations
Based on the guidelines of the Federal Securities Market Commission (FSMC), as approved by decree no. 03-849/r dated 30/04/2003 (hereinafter, regulator guidelines), the information on Code compliance is presented in the form of a list comprising 78 points on the following aspects of corporate governance:
General shareholders‟ meeting;
Board of directors;
Significant corporate actions;
Disclosure of information;
Controls on financial and business operations;
1.2 An analysis conducted on the 2011 annual reports (based on the regulator guidelines) of 40 Russian companies listed under “A1” and “A2” on the Moscow Stock Exchange (hereinafter, A-listed) indicated that 75% of companies disclose information on Code compliance in the form proposed by the recommendations. 5% of companies disclose only partial information – less than 30% of the total number of recommendations according to the guidelines. Taking into account the overall result amongst the A-listed companies, in the sampling and corresponding calculations below only the 30 companies filing such accounts will be used (for comparability and to avoid loaded results).
1.3. The study of corporate reporting in accordance with the recommendations of the regulatory body for 2011 indicates a level of compliance with the Code‟s recommendations of 66% of the total number of recommendations used for the companies‟ reports. “Disclosure of information” shows the greatest level of compliance with the recommendations – 79% of the total number, and the outsider is “Significant corporate actions”.
1.4. The reporting analysis showed that companies include information on Code compliance in their annual report in a form that is convenient for them. Often this information does not make it possible to formulate a balanced opinion on the corporate governance system at a company, but is sometimes entirely misleading to the user of the information.
2. Problems of companies reporting on Code compliance generally and selectively, for example the activities of committees attached to Boards of Directors
The essence of the problem
2.1. Reports on Code compliance are only guided by recommendations, which leads to incompleteness and distortion of actual data on companies‟ compliance with the recommendations.
2.2. Based on Code compliance reports, issuers actively form Committees attached to their Board of Directors and satisfy the requirements of the Code. However, in practice, some committees are not set up, and their powers under the Code are not handed over to functioning committees, which can have a negative impact on the effectiveness of the Board of Directors with regard to certain aspects that are important to the company and its shareholders.
Examples of non-compliance or impact of the issues
2.3. It follows from the analysis of the sample that one of the leading recommendations of the Code not adhered to is that there be two committees attached to Boards of Directors. Based on the results of the analysis the risk committee attached to the Board of Directors (or any other committee, apart from the audit committee and human resources and pay committee, to which the duties of this committee are entrusted) does not function. 16% of the companies sampled entrusted the duties of the Risk Committee to the Audit Committee. This result is suggestive of two possible causes: 1) a low level of priority attached to the risk management system in key aspects of the Board of Director‟s activities; 2) the Board of Directors does not consider the risk committee an effective instrument to develop such a system. The latter assertion in part is corroborated by a survey of members of a Board of Directors carried out by the company PWC in 2012, according to which only 39% of respondents mentioned that their companies had a clearly-defined allocation of analysis and key risks monitoring duties between the Board of Directors as a whole and its committees, which might suggest that the role of committees is limited in risk management.
10. Only 10% of joint-stock companies have corporate conflict resolution committees. The Code does not restrict Boards of Directors in terms of creating various committees, and in practice many companies set up additional specialist committees for preliminary scrutiny of certain key issues. For example, interregional distribution grid companies have created technological connection and reliability committees.
2.4. The 100% implementation of point 28 of the regulator guidelines  with regard to supervision of the Audit Committee by an independent director raises some doubt surrounding the accuracy of reporting. A spot check of three companies with the most informative websites showed that actually the Chairmen of the Boards of Directors at “IDGC of Centre, JSC”, “IDGC of the Urals, JSC” and “IDGC of Centre and Volga Region, JSC” are members of a joint executive body of the controlling shareholder (“IDGC Holding, JSC”) of these companies. In spite of this the companies report compliance with this point.
2.5. Based on these factors the decision was made to check the compliance of the report information with the actual data on the Chairman of the Human Resources and Pay Committee of “IDGC of the North-West, JSC”. In the regulator guidelines there is also a point regarding the supervision of this committee by an independent director. Admittedly, 13% of the sampled companies declared that they did not comply with this point. In fact, the Chairman of the Human Resources and Pay Committee of “IDGC of the North-West, JSC” in 2011 was an employee of the controlling shareholder of the company, but was not part of the executive body. In this regard, it must be noted that in the report of “IDGC of the North-West, JSC” on Code compliance, in the corresponding column of the point was a footnote to the effect that, for the purposes of compliance with this point, the company has adopted the notion of an independent director within the meaning of article 83 of the Federal Law “On joint-stock companies”. Nonetheless, the hypothesis about the implementation of a uniform policy to report compliance with the Code‟s recommendations within the IDGC companies making up the “IDGC Holding, JSC” group of companies was not corroborated. An analysis of the “IDGC of South, JSC” report (a company which was not included in the sample since it is not A-listed), the controlling shareholder of which is also “IDGC Holding, JSC”, indicated that the accuracy with which the report was compiled depends on the judgement of the company employees compiling the report. “IDGC of South, JSC” reported that the Chairman of the Human Resources and Pay Committee was not an independent director since the head of the committee was an employee of the controlling shareholder.
2.6. It must be noted that corporate practice, including with regard to the experience of independent directors selected with the support of the Investor Protection Association (IPA), shows that strategy committees in grid, communications, retail, pharmaceutical and various other companies, as well as in the banking sector, carry out this role effectively to a sufficient degree. The issues considered at such committees are actually important, and their recommendations are implemented by the Boards of Directors. But such committees, as well as certain industry-specific technical committees, for the most part do not have the significant supervisory and control duties that they should have in accordance with OECD principles and best practices in leading jurisdictions.
The impact of the issues on the rights and legal interests of shareholders, the main reason for non-compliance/improper compliance with the requirements of the Code
2.7. This issue has an impact on the right of shareholders to receive clear and accurate information on the state of corporate governance, as well as on general confidence in the corporate reporting system.
2.8. The main reason for improper compliance with the requirements of the Code relates to institutional regulatory weaknesses, the facultative nature of the committees themselves and the low degree of accountability for presenting information that is not in-keeping with the actual situation.
Does the Code touch upon the issue?
2.9. The issue of reporting compliance with the Code is touched upon in the regulator guidelines. The issue relates to observance of section 3, Chapter 1 and section 4.7 of Chapter 3.
Possible key mechanisms to resolve the issues
Reporting on Code compliance
2.10. Further attention must be paid by companies, shareholders, investors and the regulator to the issue of guaranteeing accurate and correct reporting by issuers on the subject of compliance with the recommendations of the Code. The list of provisions set forth by the Code within the regulator guidelines is not exhaustive. The study carried out on company reporting shows the need for a substantial modification of the guidelines.
18. The recommendations of Directive EC 2005/162/EC, based on the OECD Principles, provide for implementation of the “comply or explain” principle. Such a principle can only be effective provided that the corresponding obligations are duly fulfilled. FFMS Order no. 11-46/pz-n dated 4 October 2011 only obliges issues to include information in their annual report on compliance with the Code in view of the aforementioned principle. But the form and quality of the report at the present time is only regulated by the regulator guidelines without any corresponding obligations to follow them. Thus, there is a need to lay down a mandatory report format and to reinforce the administrative accountability of public company managerial structures with regard to disclosing information on compliance with the Corporate Governance Code in terms of administrative sanctions from the regulator.
Increasing the effectiveness of committees
2.11. Stipulate the existence and actual workings of committees within the listing and securities flotation requirements.
2.12. Recommend that listed companies adopt internal documents that clearly define the powers of committees attached to the board of directors based on best practices and requirements.
2.13. Should it not be necessary to set up a risks and conflict of interests committee, assign the corresponding powers to existing committees.