Kremlin launches radical overhaul of state corporations’ boardroom compositions

This policy of placing top government bureaucrats in charge of strategically vital state corporations, according to the president, who had personally served in such capacities on boards of key state corporations, including the omnipresent Russian gas monopolist Gazprom prior to clinching the presidency in 2008, was absolutely necessary in the 1990s after the collapse of the Soviet Union as post-Communist Kremlin tried to reformat the defunct Soviet communist economic system and readapt it to the new capitalist reality. “Today, such policy has become obsolete; therefore, its continuous execution in its present form will yield the opposite effect.”  

Embodiments of Kremlin’s model of ‘state capitalism’ 

The roles of these state-owned or controlled companies in the local economy are colossal, as that do not only overshadow other private companies in their respective sectors, but also transcend industrial boundaries to form, together with the other hegemonies in other sectors, the collective backbone of the economy. To give a perspective on the scope of the pending policy change, suffice it to note that the 17 largest of these state-owned corporate behemoths, often called, Russia Plc, “Kremlin, Incorporated”, etc., overt references to the government’s model of ‘state capitalism’ in Russia, generate between 15-20% of the country’s annual GDP. This sum, in monetary terms, translates into about $1.5trln-$2trln per year, while the number of citizens in and outside the country employed by these companies run into several tens of millions. 

Announcing the new policy, President Medvedev noted that the move was aimed at winning back the waning trust and whipping up the interest of local and foreign investors in the economy, and thus stem the stark lack of investor confidence and ongoing capital flight from Russia. “I must note here that widespread corruption has continued to remain a key negative factor that is strangulating all forms of business activities in Russia, and thus negatively impacting on the general economic and investment atmosphere in the country.”

“It is high time the Russian government stopped trying to be a better entrepreneur than private businessmen because that has never happened before, and besides, it is absolutely not possible.”

One of the ways of remedying the situation is to overhaul state-owned corporations’ boardroom composition by removing state officials and replacing them with independent directors. “It is totally inadmissible for ministers and heads of other state agencies to be on BoDs of companies that are working in competitive segments of the economy.” Asking the ministers and other bureaucrats not to be annoyed by the move, the president told them to instead focus more efforts on their direct official duties in the Cabinet. “The government should not try to be a better entrepreneur than private businessmen, because that has never happened before. This is absolutely not possible.” 

Commenting on the Kremlin’s new initiatives, Arkady Dvorkovich, the economic adviser to the Russian president, noted as a way of clarification that the policy is aimed at removing state officials from the BoDs of companies functioning in the industries under their direct official regulation, because in Russia almost everything depends on BoD chairpersons. “I must note that these officials still have the authorities and all needed tools to regulate the activities of these companies, whilst the proposed substitution of Cabinet members on companies’ BoD with independent business executives will positively impact on corporate governance practices in Russia.”

The first batch of such BoD chairpersons or heads of supervisory boards of state companies operating in a competitive environment, totaling 17, is to be axed by July 1, as most companies in the countries usually hold their annual BoD meetings in June. By October 1, all the remaining state-owned corporations are to replace all the bureaucrats serving either as BoD chairpersons or as board members. The policy’s end goal is to remove arrangements that often create conditions for inevitable conflicts of interests between corporate and government objectives, corruption, lobbyism and other negative phenomena. 

In a de-facto and de-juror functioning free-market economy, a company BoD chairperson’s topmost priority is to serve the corporate interests of his/her company. But in Russia, where strategically vital corporations’ BoD chairmanships are usually mandatory addendums to the official positions of key government officials, bureaucrats holding such positions often have to balance the delicate equation of simultaneously pursuing the government’s official policies aimed at protecting public interests in such companies and the competitive business environment in their industries, while at the same time performing the role of a typical corporation BoD chairman, which, amongst others, also envisages active lobbying of commercial interests of the company.  

It is, therefore, not surprising that most of the BoD chairpersons cannot actually draw a fine line between their official roles as government representatives or industry regulators and their other equally vital corporate roles as companies BoD chairpersons or members. Needless to say that such vagueness does not only breed corruption, lobbyism on behalf of the state corporations and unaccountability, but also constant juxtaposition and mixing up of both government and corporate functions, which often lead to overall ineffectiveness of such companies, compared to those run by BoDs composed of independent chairpersons and business professionals drawn from the private sectors. 

Besides, in a situation, where corporate and government affairs coincide, for instance, an emergency Cabinet meeting called at the 11th hour after scheduling a vital BoD meeting, the bureaucrats will, naturally, give preference to the state issues, thus disrupting the companies’ agenda. This unpredictability of government officials’ schedules and the inherent supremacy of state affairs over corporate issues in such corporations are also another cogent reason for adopting this policy, as it will establish a regime that is independent of the government’s day-to-day activities. Therefore, it is expected that the new policy will not only eradicate these problems, eliminate conflicts of interests and improve corporate governance practices, but also significantly boost transparency in the management’s policies, and hence increase such companies’ profitability for shareholders.

The policy hailed as a right step in the right direction

Thus, under the new directive, such bureaucratic heavyweights as First Deputy Prime Minister Igor Sechin, currently serving as chairman of Rosneft, Russia’s largest oil firm, deputy prime minister and Finance Minister Alexei Kudrin, currently serving as the BoD chairman of VTB, the nation’s second largest banking group, and Alrosa, the largest diamond miner, Transportation Minister Igor Levitin, currently serving as BoD chairman of Aerflot, the nation’s No. 1 airlines and Moscow’s Sheremetyevo airport, one of the key gateways into the country, and several other government officials will have to relinquish their lucrative positions on state companies’ BoDs so as to devote more time and resources to their core functions in the Cabinet.  

Several experts, specializing in convoluted conspiracy theories, have argued that the move is a Kremlin’s political stunt calculated to enable President Medvedev gain an upper hand in the upcoming presidential election over his political mentor, Vladimir Putin, the nation’s current prime minister. This, to say the least, seems a really far-fetched theory bordering on the rim of ridicule, as both president and prime minister do not seem to have openly divergent views on strategic issues of state governance and other policies. This point is further collaborated by clarification that came from the Prime Minister’s Office, when Dmitry Peskov, the government spokesman, said the Kremlin policy was being executed within the general frameworks of the Cabinet’s decision on replacing bureaucrats on state firms’ BoDs with professional business executives. “The policy goal is to ensure that BoDs are run by professionals and not government officials.”

The news of the ongoing overhaul of state corporations’ BoD chairmanship positions has been welcome by members of the local investors community. Thus, Alexei Navalny, a local vocal corporate governance transparency activist and corruption fighter that is often compared with Wikileaks founder Julian Assange for his whistle-blowing on corruption and wrong corporate practices among major companies in the country, has hailed the move as ‘as small revolution’ in corporate governance issues in Russia. Another policy supporter is Alexander Lebedev, the billionaire owner of National Reserve Corp., who has called the presidential move ‘a right step in the right direction,’ noting that the premier and his ministers will have to carry out the Kremlin order, irrespective of their view of the policy. 

However, other local experts, such as Alexei Mukhin, the director of Moscow-based Center for Political Information, fear the policy could initiate a war between the nation’s elites loyal to the president and prime minister. “This policy has the potential to provoke ‘a war of elites,’ and this could mean a real conflict between the president and the prime minister.”  

“To give a perspective on the scope of the pending change, suffice it to note that the 17 largest of these state-owned corporate behemoths generate about 20% of the country’s annual GDP, or about $2trln per year, and employ millions of citizens.” 

Besides, there are worries among investors that the policy could fall a victim of Russia’s traditional ineffectiveness of policy implementation of political decisions or its outright sabotage by bureaucrats that are being purged from what the president has called the ‘state’s gravy train.’ 

For instance, Navalny feels the realization of the policy could face practical obstacles due to realistically objective reasons. “The policy calls for substituting bureaucrats with professionals from the private sectors to avoid conflicts of interests between corporate and state objectives. But the same is also true of private independent directors invited to these companies boards, as the private directors’ companies’ core interests might also be in direct conflicts with those of state companies on whose boards they sit.” 

Besides, most of these so-called independent directors are also from business entities that are in one way or the other directly or indirectly affiliated with the government. For instance, a top VTB executive will replace Sechin on the Rosneft board. Question – what is the difference, if VTB is actually a state firm and its employees are factually state bureaucrats, Navalny noted. “If this is the way the policy will be executed, then the good idea embedded in the policy will undoubtedly be nullified in the process.” Secondly, there is also another fear, giving the fact the so-called independent professional BoD members will still need approval from the government, whether or not they will actually be as ‘free and independent’ as expected, and if so, how will their decisions that might go contrary to the official policies on contested issues be carried out by the company executives. 

However, there is a general consensus amongst experts that should this highly publicized policy turn out to be only a smokescreen for the new BoD members to act as government’s new surrogates, fulfilling Kremlin’s direct orders masked as corporate policies endorsed by such BoDs, then the whole exercise would turn into a real farce. It will fail awfully in its declared mission of radically improving the local investment climate by eliminating the lopsided influence of state-owned companies in their industries and so-called ‘excessive presence’ of the government in the domestic economy. Such negative developments will certainly stunt any improvements in Russia’s investment environment, thus lessening its overall attractiveness for both local and foreign strategic investors.

Another worrying point is the fact that not all major factors that forced the government in the past to become directly involved in the management of these companies have been eliminated. For instance, most of these state companies, including such behemoths as Rosneft or Russian Railways Corp., still require substantial state’s financial support in one form or another, either in the form of state’s orders procurements, direct public investments or government loans granted on exclusive terms to exist and thrive. Indeed, it is generally believed that most of these corporations ‘in a de-juror and de-facto fair competitive business environment’ will not be able to exist as prosperous ventures without the state’s direct financial support and official incentives. 

On the other hand, the government cannot afford to put these state companies that have cost billions of dollars to set up under the management of totally independent business executives that can set up independent corporate policy agendas and run the day-to-day affairs of the companies without any oversight or interference from the Kremlin or Russia’s White House. Indeed, this is one of the main reasons why these companies’ BoD chairmanships have largely remained ‘exclusive birthright gifts’ for the government’s trusted elite. At the same time, however, these companies under this type of management cannot attract strategic investors if they are run by bureaucrats. 

The new policy, therefore, is an attempt to find a balance between these two extremes. Indeed, it is the urgency to find as quickly as possible a solution to this dilemma that will not disrupt these companies’ current modus operandi that has forced the Kremlin to act the way it did. Therefore, President Medvedev’s ability to push this landmark corporate policy through to its intended successful logical end after over three years in the Kremlin, despite the stiff opposition that would be put up by all the nation’s influential special interest groups, whose businesses would be hurt by the removal of their ‘guys’ from these strategically vital companies’ BoDs, will reveal a new level of maturity in his actions, and a hence a vital springboard for seeking a second term in the nation’s highest political post.