South West | Finance, business

Nationalization of independent directors

5 Oct '09
Source: Gazeta, №183 as of 30 September 2009 http://www.gzt.ru/Gazeta/biznes-kompanii-v-gazete/263355.html
The number of independent directors in Russian state-owned companies matches the number of independent directors in private enterprises. The number of independent directors working in companies with government participation has significatly increased over the past year, reaching nearly 1/3, according to the findings of the new research "Benchmarking Study of the Role of Independent Directors in Private Companies and Companies with Government Participation", presented by Independent Directors Association (IDA) yesterday. However, independent directors' part in state-run companies is not yet important as in private business.

The National Council on Corporate Governance (NCCG) referred to the theme "Independent Director in Companies with Government Participation" as the theme of the year in its national report. "Election of independent directors to boards of directors (supervisory board) in joint stock companies with government participation has been widespread since July 2008," as stated in the report.

However, the authors of the report admit that, although the past year saw yet some more promotions, this tendency has affected only 50 largest state-run companies (as a rule, with 100% of capital in government ownership). "Since last summer we have been witnessing the actively unfolding process of replacing officials with independent directors in state-run companies' boards, we long waited for," says IDA Managing Director Alexander Filatov. The crisis played part in triggering the process as state-owned companies' demand for professionals - independent directors - has risen and we hope this tendency develops further," he added. According to expert's opinion, ideally state-run companies' operations need to be even more transparent than private companies' business since they are funded by taxpayers.

Ranks do not guarantee authority

The study carried out by IDA in 156 largest Russian companies, of which 35 were state enterprises states that a share of independent directors in state-run companies' board committees amounts to 68%. The research found that independent directors in private companies are 84% more involved in the performance of board committees. "These findings show that so far independent directors have fewer real functions in state-owned companies," commented Mr Filatov. "Although more independent directors act as heads of committees in state companies than in private companies: 60% of independent directors, heading state board committees with 42% for the market in total," the expert pointed out. 80% of the largest state companies have independent directors as chairmen of audit committees with 62% for the market in total.

In reality, the issue with actual authorities of independent directors in state-run companies is dependent on the workings of their nomination. "When determining specific requirements to an independent director it is necessary to bear in mind the fact than he or she must be able to make detached judgements," states The Russian Code of Corporate Conduct. It is difficult to talk about independence of judgment when officials nominate candidates, who are loyal to them, to state-run companies' boards, as is often the case. The work of independent directors in Russian state-owned companies is often hindered by lack of sufficient authority. "Nomination of independent directors to companies' boards itself, despite how high it may be assessed by corporate governance ratings, can hardly bring desired results without observing additional requirements," NCCG admits in its report. In theory, independent directors need to focus on fulfilling five key functions: monitoring management performance, maintaining a balance of shareholders interests, intermediation in conflict resolving, assistance in attracting investors and providing strategic consulting. NCCG acknowleges that, perhaps, independent directors are most sought-after for their capacity as strategists. As for the other functions, there are very many questions. For instance, it is not evident what methods are available to independent directors for monitoring management performance or what balance of interests can be established in a 100%-state-owned company.
Alternative to independence, state-owned companies are trying to settle the question regarding interest intermediation in a board of directors through the institution of professional trustees, who now work in many large companies alongside with independent directors. "The difference between these two groups of professional executives consists in the fact that independent directors have a neutral opinion and their decisions are independent, whereas professional trustees vote at government's bidding," Mr Filatov explains. According to IDA's estimation, currently, the ratio between independent directors and professional trustees, recruited by state-run companies, is 1 to 2. In companies' management professional trustees constitute government's position as a public representative. In theory, they also balance different interests and participate in development of compromise solutions. However, in contrast to independent directors professional trustees may be government officials. The NCCG experts find that numerous current issues with interest intermediation in state-run companies are related to the operation of the institution of professional trustees. They believe that the most reliable way to solve contradictions in companies with government participation is to replace officials with independent directors.

Elena Melnikova
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