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. Disclosing information to general shareholders’ meetings
The essence of the problem
2.1. According to the law and the Corporate Governance Code, shareholders of Russian companies are not able to obtain high-quality materials for shareholders‟ meetings in the most appropriate form and within timeframes to suit the shareholders.
2.2. Many Russian issuers disclose information on closing the ledger with a view to holding a shareholders‟ meeting on the date of its closure. In practice, there are instances when it is disclosed after the ledger closing date (drawing up a list of shareholders with the right to take part in the meeting).
Examples of non-compliance or impact of the issues
2.3. Companies frequently disclose information on forthcoming shareholders‟ meetings in strict compliance with mandatory requirements set forth in acting laws (notice of a meeting with an agenda). This issue only concerns A-listed companies to a lesser degree. From the sample of 40 A-listed companies, 10% do not allow shareholders to consult materials over the Internet. A selective analysis of the materials for annual general shareholders‟ meetings of 15 companies has shown that there is a second issue – the quality of the materials provided for shareholders‟ meetings. Only 1 company provides detailed explanations regarding the proposed draft decisions, exhaustive information on candidates for the Board of Directors, including information on their status (independent director, executive director, non-executive director), and comparative tables with corresponding explanations on proposed amendments to the Company‟s internal documentation.
2.4. 12.5% of the total number of A-listed companies are prepared to provide materials on the official company website at least 30 days before the date of the meeting. All of the other companies, as a general rule, do this at least 20 days beforehand. In practice, there are cases where the materials are provided 14 days before the date of the meeting.
2.5. Approximately 40% of A-listed companies give notice of the ledger closing on the date of its closure. 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
2.6. Shareholders, especially foreign investors, are in fact stripped of the possibility of exercising their voting right at general shareholders‟ meetings in terms of being able to scrutinise all of the materials and reach a reasoned decision on items on the agenda. The timeframes for providing the materials (including 20 days) do not allow foreign investors with an impressive chain of depositaries (international, regional and local), each of which also have their own internal voting timeframes, to participate in votes by correspondence having adopted a well-founded position regarding each point on the agenda.
2.7. Shareholders are deprived of the right to prepare for a shareholders‟ meeting and to formulate their positions on the votes in advance of the time at which the list of meeting participants is drawn up. Furthermore, if the agenda for the shareholders‟ meeting lists the payment of dividends, the date of closing the ledger, according to current laws, has an effect on the market value of the shares and on the interests of shareholders in terms of receiving their dividend pay-outs.
2.8. The main reason for complete non-compliance with the principles of the Code guaranteeing effective protection of the interests of shareholders is the compliance by a number of companies solely with the minimum technical legal requirements to disclose information.
Does the Code touch upon the issue?
2.9. The Code regulates the process for disclosing information whilst a company is making preparations for a general shareholders‟ meeting, but it does not give recommended timeframes for providing the information or a detailed description of the required quality of the materials.
2.10. The issue relates to compliance with the recommendations of section 1.4. of Chapter 1, section 1 of Chapter 2 and section 1 of Chapter 7 of the Code.
Possible key mechanisms to resolve the issues
2.11. The recommendation is that the Code be supplemented with guideline timeframes to disclose materials for general shareholders‟ meetings online at least 30 days before the meeting date. Supplement the listing requirements with compliance with the recommendations of the Corporate Governance Code in terms of timeframes to disclose materials for general shareholders‟ meetings online at least 30 days before the meeting date.
2.12. Ensure the inclusion of criteria to guarantee that high-quality materials are prepared for shareholders‟ meetings in the regulator guidelines on reporting with regard to compliance with the new Corporate Governance Code.
2.13. It has been suggested that a minimum timeframe be established to give notice of the ledger closing date at least 10 days before the ledger closing for the purposes of compiling a list of individuals with the right to participate in a general shareholders‟ meeting.