1. Corporate Management in the CIS
Week 8
Corporate governance and accounting

2. What is Corporate Governance?
The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.
The aim is to align as nearly as possible the interests of individuals, corporations and society
(Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, World Bank, 2000)

3. What is Corporate Governance?
Corporate governance is the system by which business corporations are directed and controlled.
The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and
spells out the rules and procedures for making decisions on corporate affairs.
By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.
OECD 1999

4. Why is it necessary?
“The directors of public companies being the managers rather of other people’s money than of their own, cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company”.
Adam Smith The Wealth of Nations (1776)

5. Why do we need Corporate Governance?
Loss of the role of the state
Western style governance
Continental Europe
Dual board
Management & Supervisory
UK/US (Anglo)
Single tier board

6. Corporate Governance Codes
Non-mandatory
Market for corporate control
Independence of directors
Audit functions
Remuneration
Transparency/Accounting

7. Does it work? - Europe
Shares in media conglomerate Vivendi Universal have collapsed on reports in the French press that the company attempted to 'massage' its accounts to the tune of £1bn.
Vivendi shares fell by a third after a report in national newspaper Le Monde alleged the company tried to flatter its 2001 accounts by as much as Euro 1.5bn (£1bn).
It refers to an October 2001 transaction when Vivendi tried to avoid booking a Euro 1.5bn loan transaction that resulted from a deal involving the sale of BskyB shares
Accountancy Age

8. Does it work? - Europe
Although formal charges have not yet been brought, the elder Tanzi has already admitted that he secretly siphoned off at least 500 million euros ($630 million) from Parmalat to a family-owned subsidiary
According to the charges, numerous shell companies were set up to generate fake profits for Parmalat and subsidiaries.
In addition, Parmalat’s finance director has told interrogators that he participated in a “cut and paste” forgery, in which a document with Bank of America letterhead was scanned and then added to a document verifying a deposit account with that bank holding over $4.98 billion. The document was then passed through a fax machine several times in order to appear authentic.

9. Does it work? – Europe (er, and US)
Tyco Inc
Ex-chairman Kozlowski, former finance chief Mark Swartz and former general counsel Mark Belnick have been indicted and face criminal charges for allegedly taking $600m (£3.75m) through fraudulent stock sales and other means.
Ahold, the Dutch-based supermarket giant, has admitted that it overstated its profits by at least $500m (£317m).

10. Corporate Governance Russian Style
Abuses – EBRD
Asset Stripping
Issue of new shares with preferential conditions for insiders
Delayed dividend payments affected by inflation
Disinformation to outsiders
Redistribution of property from bankruptcy

11. History of Corporate Governance
3 stage model – Judge & Naoumova (2004)
1. In the hands of the state
Handled property claims
Monitored corruption
Oversaw all financial transactions
Private enterprise moves too fast for the state to react

12. History of Corporate Governance
3 stage model – Judge & Naoumova (2004)
2. Anglo-American form
Minimal state intervention
Rule of law and markets govern enterprises
Checks provided
For equity: market for corporate control
For debt: collateral and bankruptcy procedures
Few laws to establish fairness
Victory of informal rules
No easy entry/exit to market

13. History of Corporate Governance
3 stage model – Judge & Naoumova (2004)
3. Three choices
A) new CG code presumes Anglo approach
International markets – oil & gas
B) Continental Europe model
Bank-led FIGs
Pressure from banks
Paternalistic/hierarchical control
Participative decision making
50% of banking capital in 5 banks
C) Develop unique method of control

14. Obstacles to good Corporate Governance
Lack of transparency in finances
Lack of effective enforcement in commercial law
Low trust nation
Skewed reward system for managers
Maintenance of value not transparent operation

15. Good Governance Ratings

16. Does it matter? Black “Does CG matter? (2001)
High correlation between governance rating and potential market capitalisation
1 sd improvement in rating = X8 increase in market potential
Better CG = lower cost of capital
Better CG = more FDI

17. Governance & FDI?

18. Drivers of Governance reform
Global rating system
Outside institutional investors
Putin administration & need to actively involve in global economy
Approach to “criminals” in private sector
PWC estimate hard line could generate extra $10 billion annual foreign investment
Russian firms sell for $54 bn less as result of poor governance (Troika Dialog)

19. Wimm-Bill-Dann – the right way
Dairy plant founded in 1992
Now employs 15,000
20 manufacturing plants
2002 sales = US$675 million
Growth = 40% per annum
Committed to transparency & good governance
Standard & Poor’s rate in top Russian firms

20. Wimm-Bill-Dann – the right way
In its initial public offering for the New York Stock Exchange, WBD’s prospectus revealed that one of its principal investors had spent nine years in prison for committing a violent crime, and that this could hurt investors in the future.
According the New York Times, this revelation was startling and unexpected.
Perhaps because of its words and deeds to be “squeaky clean”, along with its considerably upside potential, the public offering on 8 February 2002 was a huge success and its stock value continues to rise

21. Corporate Governance Code – April 2002
Will it be any good?
Brunswick UBS Warburg suggest aims
Educational providing firms with clear checklist of what initiatives investors would like
Sets out mechanism to attain these

22. Corporate Governance Code – April 2002
Not actual Law
So no binding force
Government suggest could become law
UBS argue companies with state in majority control (eg Gazprom/Sperbank) will conform
Should/could have cascade effect

23. Structure of code Chapter 1. Principles of Corporate Governance
Chapter 2. General Shareholders Meetings
Chapter 3. Board of Directors
Chapter 4. Executive Bodies
Chapter 5. Company Secretary
Chapter 6. Essential Corporate Activities
Chapter 7. Information Disclosure
Chapter 8. Monitoring Operational
Chapter 9. Dividends
Chapter 10. Resolving Corporate Conflicts

24. Content of the Code Principles of Corporate Governance
Rights of shareholders
Reliable registration of ownership
Participation in management
Receipt of full information
General Shareholders Meetings
AGM/EGM right to full information/right to participate
Board of Directors
Roles/elections/regular meetings/not to disclose sensitive information

25. Content of the Code Executive Bodies
Law currently allows all executive power to be with CEO
Should set up supervisory board
2 tier system
Company Secretary
New post
Intermediary between board and shareholders
Essential Corporate Activities
Large transactions (25% asset base) to be approved by board or EGM before finalisation & evaluated by independent auditor
Rules on takeover – information & protection

26. Content of the Code Information Disclosure
What information to be disclosed and when
Monitoring Operational
3 layers of control
Internal audit/control and revision committee reporting to AGM/external audit
Dividends
Clear rules on calculation and payment
Resolving Corporate Conflicts
Role and powers of company secretary in conflict resolution

27. Is it working?

28. Ownership & Control Highly concentrated Largely non-transparent
Examples
Gazprom ignores legal requirement for independent audit
Lukoil issues financial statements well beyond deadlines & often unaudited 6 monthly reports

29. Current problems Preobragenskaya & McGee (summer 2004)
Lack of clear & transparent professional standards
Slow progress in internal control
Lack of criteria in establishing board remuneration
Weak procedures to settle conflicts of interest
Low effectiveness of audit work
Low level of disclosure of main beneficial owners

30. An Investor Perspective
Corporate governance in Russia remains weak despite progress since the Task Force visit two years ago. Moreover, the Yukos affair and other recent government actions to reassert control over the energy sector have underscored the weaknesses and fragility of Russia’s institutional framework that underpins corporate governance practices. President Putin’s assurances during the past year that the government places great value on property rights and the rule of law have not been confirmed by realities of the marketplace and investors have been increasingly disturbed by the government’s heavy-handed action to seize Yukos assets for non-payment of taxes. As a consequence, investor confidence has been shaken on a scale not seen since the Russian 1998 financial crisis.

31. Failure of policy? Rise of political risk (US Banker Jan 2004)
Politics has a huge effect even when market fundamental look good
Khodorkovsky case
Raises all the red flags
Selective enforcement of laws
Crisis of democracy – political rivalry

32. Elsewhere…. Ukraine – see yesterday’s crisis of democracy
Also Kostyuk (2003)
Market for corporate control
Corporate ownership structures getting more concentrated
Corresponding drop in market performance
Most active players are FIGs
Companies do not have systems of financial reporting which meet international standards
Buying in Ukraine like “cat in a sack”
Weak informational transparency deters foreign investors