Russia

Corporate Governance in Russia:
Protection of Foreign Investors’ Rights

Tatiana Kokoreva, Director, Tax & Legal, Deloitte CIS, and Olga Vorobjova, Consultant, Tax & Legal, Deloitte CIS, outline the protection of foreign investors’ rights in Russia.

A significant number of Russian companies have tapped or are planning to tap outside capital to develop their businesses. Raising outside capital requires a company to be as transparent as possible for investors, who want to evaluate the opportunity and possible future profits before making an investment decision. Companies attempting to attract foreign investment try to establish guarantees to ensure the rights of foreign investors and make the company as attractive as possible for investment. The main factors affecting investments in Russian companies are transparency and the availability of independent information about the companies.

Corporate governance

One of the key elements that makes a company transparent and attractive to investors is a high level of corporate governance. Corporate governance is defined as a set of actions and rules which allows shareholders to exercise control over the company’s management in order to maximize profitability and shareholder value. Corporate governance is also regarded as a set of measures and rulings that provides for the protection of rights of the company’s shareholders and investors and guarantees equal and legal distribution of the company’s profit among shareholders. Corporate governance is one of the determining factors in investment decisionmaking. This means that a good level of corporate governance tends to lead to greater foreign investment and provides better access for a company to the investment market.

Current practice shows that foreign investors pay great attention to a company’s corporate governance. A high level of corporate governance means that the company is transparent for investors and that there are internal control systems over the company’s management. These controls serve as an indicator for investors that their money will be protected by the company. Foreign investment in Russia is now one of the main driving factors determining economic stability and the well-rounded development of the Russian economy. Thus, the Russian government seeks to establish a favorable investment climate and strives to adopt regulations that would provide the legal support for both domestic and foreign investors.

Non-governmental Programs

In April 2000, the Association for the Protection of Investors’ Rights (APIR) was founded in Russia to provide support to both foreign and domestic investors. The association’s primary aims are to protect investors’ rights and improve Russian systems of corporate governance. One of the initiatives introduced by the association is an evaluation of the level of corporate governance in Russian companies. APIR also monitors major legislative and corporate changes that may influence investors’ rights, tries to be involved in the legislative process and prepares amendments to improve corporate legislation. Each year, the association evaluates, recognizes and awards companies and top managers who achieve excellence in advancing corporate governance. Work done by the association is very important for investors, especially for foreign investors, as the association helps them to get a better understanding of the current business situation in Russia.

Governmental Programs

The Russian government adopted a number of laws, beginning in 1999, to protect investors’ rights and establish a favorable investment climate in Russia. Apart from laws which directly protect the rights and interests of investors (eg the law “On Protection of Legal Rights and Interests of Investors in the Securities Market”), the governmental decrees adopted in this field aim at structuring relations in companies and establishing proper corporate governance systems.

As a part of the governmental program on improving corporate governance in Russian companies, the Federal Commission for the Securities Market (FCSM) adopted in 2002 the Model Code of Corporate Governance (the Code). Though the Code is not obligatory for use in Russian companies, its implementation by Russian joint-stock companies is highly recommended and, moreover, some of the Code’s provisions were included as part of the obligatory listing requirements. In order to make information regarding the observance by companies of the Code’s provisions available for investors, it is recommended that joint-stock companies disclose information in their annual reports on whether the company follows the Code’s requirements. It is also recommended to include the section on corporate behavior in annual reports and to comment on the company’s relative adherence to the Code’s principles and recommendations. Annual reports should be disclosed on the company’s website and, therefore, should be helpful for investors in making decisions.

Key Corporate Governance Points

In order to be able to evaluate the level of corporate governance, it would be advisable to pay special attention to the following aspects. As mentioned above, one of the most important issues is a company’s transparency. A foreign investor should be able to easily obtain information on the company from open sources of information. The companies should disclose data on their websites about the ownership structure, top management and their remuneration, as well as the number of shares held by management.

Russian legislation concerning corporate governance is being amended. These changes will mandate that a company shall disclose its annual report, information on affiliated companies/persons, foundation documents, information on acquisition of shares by the company, etc. in open information sources, including the company’s official website. Under recent changes made to the FCSM requirements, companies whose securities are listed shall disclose information on decisions made by the company’s executive bodies no later than one day after the respective decision was made. It should be noted that changes made to FCSM requirements on information disclosure made by the issuers of equity securities protect the rights and interests of both potential and current investors.

another key point for foreign investors is that the company’s board of directors shall include independent directors, and the work of the board of directors should be organized into committees specialized in certain issues. This, in its turn, provides certain guarantees on the quality of decisions made by the board of directors. It is also recommended to appoint a corporate secretary of the company (not one of the company’s shareholders or executives) who monitors observance by the company’s bodies and management of the procedures established by the company’s internal documents and the effective Russian legislation. Corporate secretaries are guarantors of observance by the company’s bodies and its top management of internal procedure requirements that aim at protecting rights and interests of the company’s shareholders.

Initial Public Offerings (IPO)

IPOs are regarded today as one of the key instruments for attracting foreign capital. Moreover, if shares are publicly offered, it is a guarantee that the company is transparent and has a good level of corporate governance; otherwise its shares cannot be admitted to public offering. In accordance with the requirements of Russian legislation, in order for a company to be able to offer its shares to the public (initially in the internal Russian market and then in the foreign market), the company shall prove compliance with the obligatory requirements of the FCSM (FCSM decree No. 96-68 dated June 22nd, 2006). This decree, in its main provisions, refers to the requirements of the Model Code of Corporate Governance.

The main requirements of the decree and the Code for companies who offer their shares publicly are as follows:

• Obligatory disclosure of information about the company and its top management (availability of the company’s documents on its website);
• The presence of independent directors in the company;
• The presence of a collective executive body in the company;
• The company has policies in place, covering different aspects of the company’s activities (eg dividend policy, policy on information disclosure, policy on protection of a commercial secret etc.).

It is presumed that a company that can offer its shares publicly and comply with FCSM requirements can thus properly organize its business and relations with shareholders and investors. Therefore, and taking into account that a lot of Russian big companies are now offering (or hope to offer) their shares publicly in Russian and foreign stock exchanges, acquisition of shares during an IPO shall be regarded as one of the most favorable and protected ways to invest.

Summarizing all the above, it should be noted that today investing money in Russian businesses is becoming more and more secure; foreign investors’ rights and interests are protected as well as by Russian companies that try to follow fair practice of corporate governance and provide additional guarantees for potential and current investors and by the Russian government by means of introducing new mechanisms of ensuring rights of foreign and domestic investors.

 

This article first appeared on Amcham Russia’s website.

 

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