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Corporate governance and integration issues in the Russian economy

2006

This research was initiated when we revealed a gap in the previous decade’s empirical works that hampered a complex analysis of Russian business development. It appeared that corporate integration processes had not previously been studied by representative quantitative analysis (except for major business groups). Research of the corporate sector was often focused on  the evolution of corporate ownership and control structures. However, in Russia’s transition economy, market structures were formed simultaneously with ownership rights and corporate governance, thus researching these problem areas separately led to distorted results.

The target of this research is Russian joint stock companies – independent enterprises as well as companies undergoing a process of corporate integration.

The purpose of the work is to analyze integration processes in the Russian economy and to find their consequences for the national system of corporate governance, raising the standard of corporate management and improving the competitiveness of Russian business in an era of globalization.

This work is based on a survey of top managers of 822 joint stock companies operating in the industry and communication in 64 regions (subjects of the Russian Federation), conducted in 2005. The questionnaire included a special series of questions for independent enterprises and companies that were part of business groups, which allowed us to study integration processes and their impact on the operations of Russian joint stock companies. When preparing the research, we used various sources of information and methods of statistical and econometric data analysis, which ensured the credibility of the conclusions.

This research is unique because of:

  • The focus on the analysis of businesses that usually fall beyond the scope of single legal entities;
  • The simultaneous analysis of various sizes of business groups as well as independent (autonomous) enterprises;
  •  The foundation for an analysis of integration processes in Russia, which, for the first time in Russia, comprises a large quantitative data base obtained through representative sampling;
  •  The research of problems that haven’t been analyzed using quantitative empirical data (among these problems we note incentives for integration, impact of integration on corporate governance and on the economic behavior of enterprises in general, including measures to improve their competitiveness, relations between corporate management and business associations, etc).

The following conclusions were drawn from the research work.

One of the most widely spread organizational forms of larger and medium enterprises in Russia is a business group – an aggregation of legal entities that are affiliated through property and/or contractual relations. Today business groups develop as hierarchally organized  Western-type companies with unified leadership, goals and business strategies. Business groups play an especially important part in forming the features of corporate ownership and corporate control in the companies.

Empirical analysis showed that joint stock companies have a very high degree of corporate ownership concentration, which has become a base for establishing insider control of a dominant shareholder (a consolidated group of shareholders). The dominant shareholder puts the system of internal relations under its control and provides a basis for choosing a type of company control that combines both ownership and governance.

Using empirical data, for the first time in economic literature, we have obtained a portrait of Russian holdings. Business groups control a major part of the assets in industry and communications, incorporating larger companies. The leading industries in terms of integration were telecommunication and in the industrial sector - fuel and energy companies and metal companies. Most groups were formed during the period of economic growth in the early 2000s, even though some of the business groups were effectively established before privatization.

Most business groups have a unified decision-making system, mostly affecting strategic issues. The degree of centralization of the operating decisions is lower, while even in these cases almost half of the business group members have to obtain approval for operating decisions with the management, which is bound to increase governance costs.

Integration processes have had a major impact on the characteristics of the managerial body as well as on management turnover  and company restructuring. Business groups usually use hired management, young and professionally trained managers, and often hire managers that have worked in Western companies or in the government.

Analysis of business-government relations has demonstrated that the characteristics of the exchange system model, when state support for enterprises is related to the activity of rendering support to regions and municipalities is prevalent in the economy. However there still exists a model of business capture, when officials take advantage of administrative resources to exert pressure on companies and to get help from them. The model of business capture by the state is receding.