The corporate portrait of a typical independent director in Russian corporations’ BoDs
The main features of a collective portrait of a typical Russian independent director (ID) could be summarized follows: he is certainly a man, probably about 60 years old, and has been working not less than 14 years as a member of a Board of Directors (BoD) simultaneously in at least 2 companies. Also, he is mostly a financier or economist by education without experience of working in companies with a high level of corporate governance, such as those listed in the FTSE-250, Fortune Global-500, S&P-500, amongst others. And, finally, he lacks key competences in corporate business management.
Such portrait is the composite picture that could be formed of an ID from the first ranking of the best Russian independent directors (IDs), the best BoD chairmen/women, corporate directors and corporate secretaries for 2013. The ratings were prepared and published in October by the Association of Independent Directors (AID), together with the Russian Union of Industrialists and Entrepreneurs (RSPP) and the global auditing giant, PricewaterhouseCoopers (PwC).
The key findings in these ratings were both educative and disturbing as they revealed certain trends that are not consistent with global practices. For instance, only 2% of Ids in the rating have the appropriate competence in the field of corporate governance, while the ratio of Russians and foreigners among the BoD members is relatively high, at 60% and 40%, respectively.
In terms, gender equality, Russian BoDs seem to be in the pre-historic era, compared with global practices or in the other neighboring European countries, as the compositions of the boards are shamelessly lopsided in favor of the representatives of the so-called “stronger sex." This is more glaringly illustrated by the ratings statistics, according to which almost 96% of the Russian BoDs are men, leaving the representatives of the so-called “weaker sex” with 4% of the board seats nationwide. For comparison, major European public companies, this ratio is around 14%, not quite illustrative of ideal gender equality, but al the same it is till lights years ahead of the Russia’s current reality. However, the EU’s declared objective of increasing this ratio to not less than 40% in the non-too distant future should be seen as a strategic move towards enhancing almost true gender equality in the continent’s corporate world.
Commenting on the glaring gender inequality in Russian corporations’ BoDs, Alexander Ikonnikov, the AID supervisory board chairman, the practice of using quota systems to ensure a fairer representation of women and men in major corporation’ BoDs are enshrined in law in a number of Western countries. "The BoDs composed in such ways enable companies to make much better decisions in the field of risk management and corporate social responsibility, as well as generally help improve the overall dynamics of BoDs’ functions," he said.
“The key findings in the ratings were both educative and disturbing as they revealed certain trends in Russian corporate governance principles that are not consistent with global practices.”
Other discoveries in the rankings show that the average age of most of the Top-50 independent directors is in the retirement and pre-retirement age range, as about 38% of the BoD members are well over 60 years old. About 30% are in the 51-60 age range, while only 6% of the board members are younger than 40 years. Notably, the most aged BoD members are foreigners, with average age of 65 years. Independent BoD members in most Western companies are much older their colleagues in most Russian corporations. The average age of an independent board member in a Russian company is 57 years, while the global average age, according to PwC’s data, stands at 62.
The average total length of work experience of Russian IDs is at least 14 years. Most of the best Russian IDs are either financiers/economists (28%) or working as CEOs and board members (28%), or are top industry experts (20%). Most of them have majored in economics and finance or in sciences (28%).
The independent directors are most likely to work in the BoDs’ audit, appointments and remuneration committees. On average, most independent directors are simultaneously working in more than one corporation, while the total number of independent directors - both foreign and Russian - with experience of working on the BoDs of companies with a high level of corporate governance, such as those listed in the FTSE-250, Fortune Global-500, S&P-500, is at an infinitesimally low level. This is because only 10% of independent directors – both foreign and Russian – can boast of past rich experiences of working on the BoDs of the world’s largest corporations with the highest level of corporate governance.
There is also a disproportionally high number foreigners among independent directors, as they amount to 40% of the gross total. This is because some Russian companies actively invite foreigners to BoDs, believing that they will help provide the necessary level of confidence among foreign investors, according to the ratings compilers.
The ratings preparation and compilation methodology
The rankings were based on corporate data obtained from open sources relating to the BoDs of Russia’s largest 150 companies by sizes of market capitalization according to the Expert’s Top-400 Corporations Rating for 2012.
The information obtained from these sources were used to form a pool of shortlisted candidates for inclusion in the ratings of the Top-50 Best Independent Directors, Top-25 Best BoD Chairmen/Women and Top-25 Best Corporate Governance Directors and Corporate Secretaries. These ratings were compiled as a part of the Director of the Year National Award and were verified by PwC in accordance with its in-house audit methodology.
"We’re pleased to note that Russian stakeholders, including the professional business community, such as investors, companies owners and government regulators, are paying more attention to the quality of corporate governance and efficiency of the BoDs in the context of improving the overall investment attractiveness of Russian companies,” Anna Uzornikova, a partner at PwC in Moscow, said.
Recommendations and conclusions of these ratings
The ratings findings have led the AID to formulate three main recommendations for Russian companies, the chairman said. First, Russian companies need to more actively attract IDs, who have experience as board members of major international companies with a high level or best practices of corporate governance.
Second, the local independent directors also need to improve their professional skills through participation in international educational programs on corporate governance, as well as undergo voluntary international and/or Russian board members certification procedures.
Third, there is a necessity to improve the quality of information disclosure on independent board directors, including their experiences, competences, educational backgrounds, professional achievements and their recognition by the expert community. These steps will help form a much higher level of investor confidence and ensure control over the quality of the BoDs and their practical implementations of corporate governance principles.
Changes imminent in Russia’s corporate governance practice
According to Alexander Shokhin, the president of the RSPP, the Russian system of corporate governance is now on the threshold of major changes, which will determine the key vector of further development of both corporate governance practices in particular and the local businesses in general for a very long time.
Specifically, the amendments to the Civil Code are expected to be adopted and go into force by the end of the current year. One of the key amendments envisages differentiation of corporations into public and non-public entities. In addition, the new edition of the Code of Corporate Governance, expected to replace a similar document adopted almost 10 years ago, is now almost ready and will also be introduced soon.
These radical changes are being made in the background of the most unfavorable economic situations in and outside Russia which can give rise to additional difficulties for most companies. Under these conditions, the BODs, and most importantly, its IDs, are extremely important organs, which can develop and adopt informed decisions that comply with the best practices of corporate governance that can help companies achieve their long-term strategic development goals.
Features of the Russian Corporate Governance
According to experts, the work of Russian corporations’ BoDs, especially in state-owned companies, “is highly bureaucraticized,” as it requires more coordination with state agencies overseeing their respective industries or market segments of their operations.
At the same time, the feedback mechanism with the government on key issues is very weak. This has become particularly noticeable now, when the government withdraws its representatives from state-owned companies’ BoDs, noted Seppo Remes, recognized as the best independent director in Russia in 2012.
Remes, who currently is an independent director in four Russian companies, including two private, Sibur and Sollers, and two state-owned entities, Russian Grids and Rusnano, have proposed the need to arrange regular meetings between independent directors and ministers to enable the former clarify the state's positions on important issues on their companies’ agendas.
In his speech, Shokhin noted that state officials should not be withdrawn from the BoDs of all government-owned or affiliated companies. "Personally, I don’t really like the idea of indiscriminate withdrawal of all government representatives from the BoDs of companies with state participation,” he added. "I’ve been on the Russian Railways Corp. board for several years as an independent director in two of its board compositions with and without ministers,” he continued. “And, I honestly must say that it was more interesting working with the ministers on the board because most crucial decisions, in fact, received sort of preliminary approval of such ministers during the board meetings and this made formal approval and final adoption by the government easier and much quicker,” he added.However, without the ministers on board, decisions taken by BoDs will have to be sent to the relevant ministry for review and thereafter formulated into a formal document, which, in turn, is later submitted to the government. This leads to excessive bureacratisation of the decisions approval procedures. Under this context, it is both useless and pointless to discuss crucial, strategic issues on the companies’ BoDs without state officials, he added.
To improve such situation, the RSPP chairman proposed the introduction of a system of inviting or request mandatory participation of key ministers responsible for policies in their respective industries to the BoD meetings. He also proposed reviewing the decision of indiscriminate withdrawals of all state representatives from of the BoDs of all state state-owned companies. They should be withdrawn from some, but definitely not from all state-owned companies, he noted.
“In terms, gender equality, most Russian BoDs seem to be in the pre-historic era, a reality more glaringly illustrated by the ratings findings, where almost 96% of the total members of the Russian corporations’ BoDs are exclusively men.”
If a state company is contemplating privatization, the higher the number of independent directors on the board, including as committees chairpersons, the better. This is because such corporations need to prepare for equity capital market debuts and such experts already have experiences on working on the capital market, RSPP president said. But if a corporation is not seeking going public and the state does not intend to exit it in the next three-five years, then the government, at least, needs to demonstrate its presence in these companies on the basis of a necessity to protect its strategic interests, Shokhin noted.
Ikonnikov also proposed that private companies should take the initiative of inviting or nominating independent candidates to BoDs of the largest state-owned corporations. A process of transformation is underway, evident in highly active participation of shareholders, relevant departments and professional business organizations in BoD meetings, he added. “We believe that if more companies will be more actively in the selection process of professional directors to the BoDs of state-owned companies, then such companies will be able to choose those candidates that they wish to see on their BoDs. In this way, they can ensure the approval of whole nomination procedures in advance and guarantee the nominees’ participation in their BoDs, Ikonnikov noted.
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