Corporate Governance in Russia: Report on the Observance of Standards and Codes

Corporate Governance Assessment of the Russian Federation

Corporate governance has been a major policy issue in Russia since the beginning of its transition to a market economy. The privatization process of the early 1990s was put in place before most elements of the corporate governance and investor protection framework, and there were many widely publicized abuses, leading to very low asset prices.

Most observers agree that the corporate governance environment has improved in recent years, as the government has enhanced the legal and policy framework, and key institutions have grown in sophistication and maturity. Many major Russian companies have also voluntarily improved their financial and ownership transparency. A number of reform initiatives are currently underway.

The report covers four main themes:

• the commitment of the public and private sectors to reform;
• shareholder rights;
• disclosure and transparency; and
• Boards of Directors.

The report also includes a special annex that details the reform agenda focusing on related party transaction approval and disclosure, based on the approach of the Protecting Investors indicator developed in the World Bank's Doing Business report.

What is corporate governance?

Corporate governance refers to the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among management, the board of directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.

The OECD Principles of Corporate Governance provide the framework for the work of the World Bank Group in this area, identifying key practical issues: the rights and equitable treatment of shareholders and other financial stakeholders, the role of non-financial stakeholders, disclosure and transparency, and the responsibilities of the board.

Why is corporate governance important?

For emerging market countries, improving corporate governance can serve a number of important public policy objectives. Good corporate governance reduces emerging market vulnerability to financial crises, reinforces property rights, reduces transaction costs and the cost of capital, and leads to capital market development.

Weak corporate governance frameworks reduce investor confidence, and can discourage outside investment. Also, as pension funds continue to invest more in equity markets, good corporate governance is crucial for preserving retirement savings.

Over the past several years, the importance of corporate governance has been highlighted by an increasing body of academic research. Studies have shown that good corporate governance practices have led to significant increases in economic value added (EVA) of firms, higher productivity, and lower risk of systemic financial failures for countries.

The Corporate Governance ROSC

Corporate governance has been adopted as one of twelve core best-practice standards by the international financial community. The World Bank is the assessor for the application of the OECD Principles of Corporate Governance. Its assessments are part of the World Bank and International Monetary Fund (IMF) program on Reports on the Observance of Standards and Codes (ROSC).

The goal of the ROSC initiative is to identify weaknesses that may contribute to a country’s economic and financial vulnerability. Each Corporate Governance ROSC assessment benchmarks a country’s legal and regulatory framework, practices and compliance of listed firms, and enforcement capacity vis-à-vis the OECD Principles.

• The assessments are standardized and systematic, and include policy recommendations and a model country action plan. In response, many countries have initiated legal, regulatory, and institutional corporate governance reforms.
• The assessments focus on the corporate governance of companies listed on stock exchanges. At the request of policymakers, the World Bank can also carry-out special policy reviews that focus on specific sectors, in particular for banks and state-owned enterprises.
• Assessments can be updated to measure progress over time.
• Country participation in the assessment process, and the publication of the final report, are voluntary.

By the end of June 2013, 85 assessments had been completed or were underway in 58 countries around the world.