In general, describing the model of the Russian firm in the 2000s, we can point out that a significant part of Russian firms have assumed standard market incentives to develop business,
Trang 1The Emergence of Russian Corporations 31
part in the division of public assets, a strategy which some firms deliberately chose Such firms have survived more hardships in the 1990s, but they could have learned more Furthermore, it was they who created that potential for future economic growth which was first noticed by the McKinsey Co in their report titled “Unlocking Economic Growth in Russia” and announced
in Moscow in October 1999 (Palmeda & Lewis 2003)
In general, describing the model of the Russian firm in the 2000s, we can point out that a significant part of Russian firms have assumed standard market incentives to develop business, such as making long-term profits, having higher company capitalization, and expanding their market share
In addition, majority shareholders, who, as a rule, maintain operational management in their hands and effectively control the activities of other managers, have become the key figures in most Russian firms
At the same time, the internal restructuring of Russian firms is far from completion In terms of efficiency, Russian companies are still far behind the firms of other developing and emerging economies For example, World Bank data show that, in 2004, labor productivity in the Russian industry was just slightly above the level of that in China but about a third of that in the South African Republic, less than half of that in Poland, and two thirds
of that in Brazil (Desai & Goldberg 2007) However, these average figures conceal very large actual gaps in terms of added value between firms in the same industries For instance, in 2004, the labor productivity gap between the best 20% and the worst 20% of firms was 11 times in transportation machinery, 16 times in light industry, and 24 times in the woodworking and food industries (Golikova et al 2007) In actual practice, this means the coexistence of efficient and absolutely inefficient firms among Russian industries in the 2000s
This was possible because of an extensively growing domestic demand, which allowed inefficient firms to keep afloat In this context, the global financial crisis, which started in 2007, may play an important role It is clear that this crisis will test the durability of leading companies, and, on the other hand, it will help eliminate inefficient firms and eventually contrib-ute to a more efficient economy
Now, by comparing the evolution of the transition firm in Russia with the trends in Eastern Europe at the present stage, the following key points can
be identified
A shift of the government to responsible macroeconomic and fiscal
poli-cies, supported with substantial consolidation of public institutions, was very important for the change in firm behavior in Russia It was a political result of the 1998 crisis, but, in Russia, strengthening of the government fol-lowed a different trajectory from that in the countries of Eastern Europe
In Eastern Europe, the state, oriented toward EU standards, was more inclined toward setting up the rules of the game and acting as an arbitrator
In Russia, however, the stronger government turned to active expansion of
Trang 232 Organization and Development of Russian Business
its presence in the economy by using investment programs, policy-based institutions of development, and state-owned companies (see Table 1.1) This could be defined as an attempt to repeat the experience of South-East Asian countries from 1960 through the 1980s through the building of a similar pattern of relations between the state and big business under state leadership
One of the reasons for following this path is the illegitimacy of the results
of privatization In the public opinion, the privatization of the 1990s is sidered unjust (Denisova et al 2007), and the representatives of the busi-ness community themselves acknowledge the legality of revising its results (Frye 2006) This lowers the degree of protection of property rights and gives the state an additional lever for keeping the largest companies under informal pressure, particularly those that received their assets at loans-for-shares auctions
con-Being closed for foreign investors is Russia’s another major distinction
In Eastern Europe, the model of corporation was shaped under very strong influence of foreign shareholders, who gained control over most large com-panies (Andreff 2005; Stark & Vedres 2006) In Russia, in the 1990s, although the government more than once pledged support to foreign investments, company managers were typically hostile to foreign shareholders In the 2000s, the government and businesses reversed their roles, but the real situ-ation changed little The companies that are controlled by Russian private owners are more inclined to cooperation with foreign investors, but, at the government level, foreign investments are truly welcome only in certain sectors In a number of large-scale raw material projects, the government helped to oust foreign investors, and, in general, foreign shareholders in big business were assigned, under government pressure, to junior-partner positions
It is not by chance that here, in contrast to preceding sections of this ter, we have made comparisons only with Eastern Europe Although pack-ages of reforms at the enterprise level were originally quite similar in Russia and in Eastern Europe in the 2000s, the East European and Russian models
chap-of a firm were divergent in their development, and Russia was inclined to an orientation more comparable to that of China The differences that we have reported above confirm this thesis
As a consequence, in the future, we expect that Russian companies will
be divided into two sectors: the largest firms will remain directly or rectly controlled by the state, and mid-sized firms, by the standards of the global market, will be more independent and open to foreign participation (Yakovlev & Danilov 2007) The largest firms share similarities with the model of the development firm as defined by Berglöf & von Thadden (2000); they have informal relations with the state and investors, which are typical
indi-of this model On the other hand, mid-sized firms will evolve toward the model of a closely held firm with the predominance of large shareholders
Trang 3The Emergence of Russian Corporations 33
in governance and a limited presence in the stock market In this context, the gradual disappearance of the concept of the transition firm is a distinct possibility
Notes
1 According to the data given by Qian (1999), in 1940, the annual plan in the USSR was compiled for 500 commodity items; however, in the late 1950s, the product mix of Gosplan had more than 2,000 items, and, by the end of the 1970s, plans on the level of USSR ministries had about 60,000 items On the other hand, in China, in 1957, the plan of the central government included
532 items, and, by 1973, their number increased to only 617 This had been the result of several campaigns of administrative decentralization conducted
by Mao Zedong, and, later, it was related to the consequences of the Cultural Revolution, when, in 1967–1968, no annual plans were compiled at the level of the central government
2 This policy was a logical outcome from the Soviet model of organization of ized planning by industry, which implied the management of all enterprises from
central-a single center, central-and the mere sccentral-ale of the country required to reduce the number
of managed objects to a minimum and to streamline their structure On the
con-trary, the government of China, based on the idea of regional self- sufficiency in case of American or Soviet aggression, designed a regional system of centralized planning and deliberately supported the development of the same types of pro-
ductive facilities in different regions In the literature, these differences in nomic organization in the USSR and China were labeled U-Form and M-Form, by analogy with the linear-and-functional and matrix structures of management in corporations (Qian & Xu 1993; Maskin, Qian, & Xu 2000)
eco-3 For instance, according to data given by Sinelnikov et al (1998), by the end of
1991, expenditures of the Union budget were three times as large as its revenue
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Trang 7Part I
Ownership, Internal Control, and
Management System
Trang 8This page intentionally left blank
Trang 9redistribu-of ownership affected the development redistribu-of corporate control and evolution
of the mechanisms of corporate governance (Natsional’nyi Doklad 2008) This high concentration provides the basis for control by the majority share-holder or a consolidated group of such shareholders exercised by various formal and informal means (Dolgopyatova 2003, chapter 2) Majority share-holders are constrained only by the need to comply with the formal legal provisions and often imitate the activities of intra-corporate tools (bodies) (Razvitie Sprosa 2003) Third, the prevailing model of corporate control is that in which majority shareholders participate directly in management as top managers of companies (Insiders and Outsiders 2004; Stiglitz 1999) A combination of ownership and control has become a formal institution of Russian corporate practices, which restrict the demand for “outside” man-agers who do not own company shares This institution has become wide-spread not only as a result of privatization (“red directors” becoming owners
of enterprises) but also as a tool intentionally chosen by owners who lished their businesses from scratch In a situation of underdeveloped mar-kets for managerial staff and institutions for protection of property rights, this arrangement was preferred as compared to high costs of preventing opportunistic behavior of hired managers.1 At the time of economic tran-sition, this behavior would take the extreme form of asset stripping and business raiding This resulted in the elimination of the agency problem of corporate governance
estab-On the basis on quantitative data obtained from our representative
sur-vey and qualitative information of in-depth interviews with company ers and managers, in this chapter, we will discuss the relevance of simple
Trang 10own-40 Organization and Development of Russian Business
hypotheses regarding the role of high concentration of capital in the tion of intra-corporate control forms and business performance We pre-sume that a high concentration of ownership is linked with its hidden structure and that it affects intra-corporate relationships The vast major-ity of Russian JSCs combine ownership and control despite the current trend to separate executive management from ownership Concentrated ownership will encourage owners to restructure and develop their businesses
evolu-The second section contains a description of the structure of stock ership that emerged in Russian companies in 2005 and the types of share-holders they include The third section discusses the correlations between the level of ownership concentration and business performance, and the fourth section contains a description of the corporate control tools used by the majority shareholders The results of the analysis are summarized in the fifth section
own-Ownership composition
Since the mid-1990s, empirical studies performed by many Russian and international institutions have focused on corporate ownership and the con-trol mechanisms of Russian companies These studies (e.g., Radygin & Entov 2001; Dolgopyatova 2003; Guriev et al 2003; Yasin 2004; Kapelyushnikov & Dyomina 2005; Aukutsionek et al 2007) suggested that, for many years, the economy underwent an extensive redistribution of stock ownership that was accompanied by entry of new shareholders The Russian Economic Barometer (REB), the Center for Economic Conjuncture, and State University – Higher School of Economics (SU-HSE) have reported that the entry of new large owners affected from 5–7% of JSCs each year from the 1990s to the early 2000s.2
Quantification of ownership concentration
Russian companies have a characteristically high level of stock ship concentration that increases annually Aggressive ownership redis-tribution in the wake of privatization resulted in the rapid emergence of large shareholders According to various surveys, in the beginning of the 2000s, the largest shareholder would own, on average, 40–50% of the assets; JSCs including a blockholder accounted for 40–65% of the total sample, while those with a controlling stakeholder accounted for up to 45% of the sample Respondents also suggested (Razvitie Sprosa 2003) that at least two-thirds of open JSCs had an owner in control of the company Qualitative surveys (e.g., interviews and case studies) generally suggested a higher level of concentration of real control, as opposed to formal ownership, in one person and practically the universal presence
owner-of a controlling shareholder
Trang 11Stock Ownership and Corporate Control 41
Other important trends in the evolution of the structure of stock capital were reduced to a growth of holdings of company managers, with a notice-able decrease of holdings of all employees and a higher participation of external owners, primarily Russian legal entities, against the background
of corporate integration Moreover, the role of public authorities at all els against the background of ongoing privatization and the emergence of new businesses showed a decreasing trend almost up to the mid-2000s Currently, the last trend is being reversed as the position of public authori-
lev-ties, primarily federal agencies, becomes stronger In the area of zation, the federal government has demonstrated an active stance.3 Today, federal authorities hold a predominant interest with major Russian compa-nies in the real economy and financial sector Through these agencies, the government not only controls the production of a sizeable portion of GDP but has also become a major stock market investor, the government’s share
nationali-in capitalization of the Russian stock market benationali-ing more than one-third nationali-in
2006 (Panov & Borissov 2006) By estimates of Troika Dialog (2008), the state controlled about 40% of capitalization at the end of 2007
Our studies have confirmed a very high degree of ownership
concentra-tion (more than 50% of shares owned by one shareholder) in the sample, which was observed in almost 70% of surveyed companies Companies with the average level of concentration (25–50% of shares owned by the largest shareholder) were approximately 18% of the total, while those with a low level of ownership concentration (in Russian terms) with the blockholder (owner of more than 25% of total stock) yet not to emerge accounted for only 13% of the sample
High-concentration companies included two subgroups depending on whether there was the second large shareholder with at least a blocking minority ownership (counterbalance) Almost one-half of the companies had a dominant shareholder not contained by the stake of the second share-holder (Figure 2.1) A desirable level of concentration was achieved to a large extent, which almost 70% of respondents considered optimal for business development, with about 18% wanting an increase and only 13% wanting
a decrease
A vast majority of respondents (over 87%) asserted that their company already had an owner (coalition of owners) in control of corporate opera-tions The area of real control turned out to be considerably wider than the ownership structure would suggest, and more in line with the evidence collected in in-depth interviews Curiously, companies with a controlling owner included 50% of low-concentration companies and more than 86%
of average-concentration companies
Studies dating back primarily to the late 1990s (for example, Dolgopyatova 2001) found that a higher concentration of capital was characteristic of smaller companies and businesses in relatively better-off industries, whose shares were attractive for their management and potential outside investors,