Opal''''s Site Organization and Development of Russian Business_9 ppt

The issue of the gradual separation of executive management from ownership was discussed on the basis of records of 20 in-depth interviews with senior managers of joint-stock companies J

Management Team and Firm Restructuring 169

managers in total employment is 1–5% In 68% of companies, they occupy top-managerial positions, and in 26%, middle-level positions (Malykhin 2008)

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ekspertnoyeo-Part II

Business Integration and

Its Impacts on Corporate

Governance

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to seek other methods of control over a business entity, and they sometimes resort to the use of internal corporate mechanisms The issue of the gradual separation of executive management from ownership was discussed on the basis of records of 20 in-depth interviews with senior managers of joint-stock companies (JSCs) (Dolgopyatova 2004) In formal terms, separation was recognized when a general director did not own shares and other com-pany managers held little interest It was demonstrated that as Russian busi-ness underwent an intense integration, the ways and means of corporate control also saw extensive change Some examples are as follows:

The separation of the ownership and management functions was

prima-1

rily characteristic of subsidiaries companies within company groups

Formal separation resulted in real changes in the distribution of

compe-2

tencies, gradual delegation of some managerial issues to hired managers, and, in particular, production and operational issues and some strategic issues related to logistics and marketing

Separation contributed to a more active use of internal mechanisms of

174 Organization and Development of Russian Business

and this practice has received the attention of industry experts and the business community (Korporativnoe Upravleniye 2007) The separation

of ownership from management and the delegation of authority to hired managers are the products of two opposing trends The institutionally underdeveloped economy promotes the combination of both functions

to protect the rights of large shareholders At the same time, specific skills and competences still remain in demand under the current conditions as well as in the long-term perspectives for the development of Russian com-panies in the framework of a market embedded in the global economy; therefore, the requirements for management quality are likely to become exclusive In many companies, owners have been withdrawing from exec-utive management The representatives of the reform-period managerial corps are also affected by the time factor They gradually retire from the businesses, often by voluntarily selling consolidated blocks of share to new owners

Our main objective in this chapter is to identify, on the basis of a sentative sample, a set of factors underlying the preference of dominating shareholders for top managers who do not hold shares of a given company

repre-We will empirically test two core assumptions regarding the role of rate integration in the choice of the form of control The first hypothesis is that integration is a tool that replaces direct control by the shareholder and suggests a preference for a form of control with the separation of manage-ment and ownership

corpo-Our survey makes it possible to identify two types of companies, one, independent businesses, which are stand-alone entities and parent compa-nies of holdings, and the second, business divisions, which are the rank-and-file entities of a company group The second hypothesis is that two types of companies will respond differently to demands of property rights protection and quality of management For divisions of larger businesses, factors of preference for hired managers are linked to the state of corporate management, which includes that at the level of business groups For stand-alone companies, the main determinants for the departure of shareholders from management are linked to the protection of property rights and the nature of markets

The chapter is organized as follows The second section is a comparison

of internal tools of corporate control in which management and ownership functions are either separate or combined Based on the findings in the survey, the third section contains the driving factors of choice of the form

of control with separate functions and measurement indicators, while the fourth section is a comprehensive analysis of their possible impact on the choice using a binary logistic regression The final section is a summary of the outcome of the analysis and contains a qualitative forecast of the evolu-tion of corporate control within companies

Corporate Control and Business Integration 175

Internal corporate governance tools at

different types of corporate control

Corporate integration and separation of

ownership from management

The survey data demonstrate that the patterns of a combination of ship and control are different in JSCs that represent a business or a part

owner-of a business (Figure 7.1).1 The separation of ownership from

manage-ment is typical (twice as often) of the enterprises that are rank-and-file members of holding company groups, but independent firms and parent companies are mostly operated on the basis of the inseparability of these functions The stakes owned by a CEO are practically the same in all types of surveyed companies, but the few cases in which large sharehold-ers participate in management when they are not CEOs are typical of parent companies

Patterns of control in rank-and-file members of company groups were correlated with their features The separation of management is typical

of large-scale business groups with complicated management: massive groups with large numbers of its entities, or holding company groups that are more widely dispersed geographically and diversified by industry (Table 7.1) Exceeding the boundaries of a single region gives the compa-nies with separate ownership and management an advantage of nearly

10 percentage points Separation of functions is evident in 55% of glomerates; at 13 percentage points, there are fewer vertically integrated groups; and, at 20 percentage points, there are horizontally integrated company groups

M&D_S M_S D_S Separation of ownership and management

Figure 7.1 Links between ownership and management in integrated and

independ-ent companies

Notes: M&D_S stands for JSCs where large shareholders are managers and the CEO is a shareholder,

M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder,

D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder.

Source: Author’s illustration based on survey data.

Corporate Control and Business Integration 177

Intra-corporate relations

Separation of the executive management function and use of hired ers affect the state of corporate governance of companies that select this model of control On the one hand, aggravation of corporate conflict could

manag-be anticipated as a result of agency problems, while, on the other hand, more focus by the board of directors and other corporate bodies on execu-tive management activities would be expected

To test these assumptions, we used the indicators describing the state of corporate control, which included assessments by respondents of the role

of main bodies in corporate decision-making, composition of the board of directors, relations between actors of corporate governance (Table 7.2), and intensity of rotation of corporate governance bodies (Table 7.3)

The first assumption did not hold true Despite the expected aggravation of the agency problem in the wake of the separation of ownership and manage-ment, an intra-corporate dispute was observed in a quarter of the companies

as compared to 29% in other JSCs, the difference being negligible This can be explained in two ways The first explanation relates to the nature of the sur-vey, in which respondents were managers normally reluctant to disclose con-flicts with the owners In addition, conflicts included not only those between managers and shareholders but also those between large and small sharehold-ers It is possible that, in this case, hired managers acted as arbitrators who took into consideration the sustainability of the company as a whole, unlike

“managing owners,” who would often ignore the claims of minority holders The second explanation is that, in formal separation, large owners would have at their disposal a variety of tools for tight control over the man-agement For example, Shekshnya and Kets de Vries (2007) demonstrated, on the basis of case studies, that where owners relinquished the management function, they typically gave up the responsibility but retained opportunities

share-to intervene inshare-to business operations The lead Russian experts in corporate governance were unanimous that owners would strongly contain the inde-pendence of top managers, largely because of the problem of trust rather than that of proper qualifications (Korporativnoe Upravleniye 2007)

The second assumption was confirmed by various findings Where ership and management were separate, the internal control system demon-strated the following features:

own-The decision-making role of the board turned out to be considerably

1

larger, although no difference in the assessment of influence of the eral meeting of shareholders was observed (the significance of the dif-ference by forms of control being 0.635) Interestingly, in the subgroup

gen-in which the CEO was one of the shareholders, a strong gen-influence of the board was noted by most respondents (three-quarters)

Large outside shareholders, on the average, had more than half of the

2

votes (almost 60%, together with independent directors) on the board,

178 Organization and Development of Russian Business

which enabled them to monitor the activities of the executive ment Both the percentage of independent directors and frequency of their membership turned out to be significantly higher On the contrary, where top managers and CEOs were among the shareholders, managers had two-thirds of the votes

manage-We observed the most intensive board turnover: in half of the companies,

3

the board of directors was completely or considerably replaced, while the most conservative policies in respect of the board were maintained; when managers and CEO were shareholders, on the other hand, less than 18%

of companies had a new or largely renewed board.2

Table 7.2 Characteristics of intra-corporate control

differences a Representatives in the board of directors, % of total membership

directors in board of directors 15.1 7.3 22.4 22.6 0.014

JSCs passed through

corporate disputes in 2001–2004 29.5 35.7 25.0 25.0 0.305

JSCs used outside auditing

firm from the company’s base

Note: a Comparison of frequencies by  2 test, means by Kruskal Wallis test.

M&D_S stands for JScs where large shareholders are managers and the CEO is a shareholder,

M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder,

D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder.

Source: Author’s calculations based on survey data.

Corporate Control and Business Integration 179

The CEO changed more frequently, sometimes repeatedly, with the

4

change being increasingly initiated by shareholders It appeared that the director would be “entrenched” in office if he were a large or small shareholder On the one hand, separation could result from the replace-ment of a director, normally following a change of owners On the other hand, separation undermined the position of the CEO, as confirmed by

a considerable number of rotations over several years, and contributed to enlisting new managers from the outside For companies with separate functions, the director was an employee of the same company in 36% of cases versus 68% for the other JSCs

These companies took the lead in the rotation of the board

chair-5

man (along with companies in which managers held a large interest) and were significantly ahead of the rest as regards multiple changes Moreover, the current board chairman was a company employee at 28%

of the companies with separate functions, as compared to 52% in other companies

Relatively often, these JSCs retained an auditor from elsewhere or a large

6

international firm In terms of this indicator, companies in which the director was one of the shareholders performed no worse, but they were more likely to raise suspicions of deviating from the principle of inde-pendent audit

Table 7.3 Turnover of CEOs, boards of directors, and its chairs in 2001–2004, % of

the number of respondents

differences a

CEO was changed once 21.1 33.3 24.6 35.8

CEO was changed several

Chairman was never changed 60.1 42.6 51.7 44.0 0.000

Chairman was changed once 32.1 47.5 30.8 31.1

Chairman was changed

several times

7.8 9.8 17.4 24.9

Board practically unchanged 72.2 22.0 16.5 17.3 0.000

Board slightly renewed 55.2 45.8 48.8 30.2

Board largely renewed 14.8 15.3 30.0 31.2

Board completely renewed 2.8 16.9 4.7 21.3

Note: a  2 test.

M&D_S stands for JScs where large shareholders are managers and the CEO is a shareholder,

M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder,

D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder.

Source: Author’s c.alculations based on survey data.