Organization and Development of Russian Business 9780230_217287_01_ e . dd 5/20/2009 4:56:26 PM This page intentionally left blank Organization and Development of Russian Business A Firm-Level Analysis Edited by Tatiana Dolgopyatova, Ichiro Iwasaki, and Andrei A. Yakovlev 9780230_217287_01_ e . dd 5/20/2009 4:56:27 PM Selection and Editorial matter © Tatiana Dolgopyatova, Ichiro Iwasaki and Andrei A. Yakovlev 2009 Individual chapters © Contributors 2009 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2009 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN-13: 978–0–230–21728–7 hardback ISBN-10: 0–230–21728–1 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Organization and development of Russian business : a firm-level analysis / edited by Tatiana Dolgopyatova, Ichiro Iwasaki, and Andrei A. Yakovlev. p. cm. Includes bibliographical references and index. ISBN 978–0–230–21728–7 (alk. paper) 1. Corporate governance – Russia (Federation) I. Dolgopyatova, Tatiana, 1951– II. Iwasaki, Ichiro. III. Yakovlev, Andrei A. HD2741.O74 2009 338.60947—dc22 2009013790 10 9 8 7 6 5 4 3 2 1 18 17 16 15 14 13 12 11 10 09 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne 9780230_217287_01_ e . dd 5/20/2009 4:56:27 PM v Contents List of Tables vii List of Figures xi Acknowledgments xii Notes on the Contributors xiii List of Abbreviations xiv Introduction 1 Tatiana G. Dolgopyatova, Ichiro Iwasaki, and Andrei A. Yakovlev 1 The Emergence of Russian Corporations: From the Soviet Enterprise to a Market Firm 12 Tatiana G. Dolgopyatova, Ichiro Iwasaki, and Andrei A. Yakovlev Part I Ownership, Internal Control, and Management System 2 Stock Ownership and Corporate Control 39 Tatiana G. Dolgopyatova 3 Legal Form of Incorporation 62 Ichiro Iwasaki 4 The Structure of Corporate Boards 89 Ichiro Iwasaki 5 Impact of Corporate Governance and Performance on Managerial Turnover 122 Naohito Abe, and Ichiro Iwasaki 6 Management Team and Firm Restructuring 148 Victoria V. Golikova Part II Business Integration and Its Impacts on Corporate Governance 7 Organizational Patterns of Corporate Control and Business Integration 173 Tatiana G. Dolgopyatova 8 Corporate Governance and Decision-Making in Business Groups 195 Svetlana B. Avdasheva 9780230_217287_01_ e . dd 5/20/2009 4:56:28 PM vi Contents 9 Impact of Business Integration on Corporate Restructuring and Performance 213 Svetlana B. Avdasheva Part III The Role of External Agents in Corporate Governance 10 The Banking Sector and Corporate Finance 235 Fumikazu Sugiura 11 Business Associations: Incentives and Benefits from the Viewpoint of Corporate Governance 258 Victoria V. Golikova 12 State–Business Relations and Improvement of Corporate Governance 284 Andrei A. Yakovlev Conclusions 307 Tatiana G. Dolgopyatova, Ichiro Iwasaki, and Andrei A. Yakovlev Appendix: Outline of the Japan–Russia Joint Enterprise Survey 312 Tatiana G. Dolgopyatova, and Ichiro Iwasaki Index 321 9780230_217287_01_ e . dd 5/20/2009 4:56:28 PM vii Tables I.1 Selected macroeconomic indicators of the Russian transition economy, 1992–2007 2 1.1 Chronology of enterprise reforms and related events in the USSR and Russia, 1986–2007 17 1.2 Privatization of state-owned enterprises and privatization revenue in Russia, 1993–2007 23 2.1 Intra-corporate disputes in 2001–2004 at different levels of ownership concentration 44 2.2 Average percentage of ordinary shares owned by type of shareholder at different levels of ownership concentration 45 2.3 Current economic situation of enterprises at different levels of ownership concentration 49 2.4 Coefficients for the variable “concentration of ownership” in regression models 51 2.5 Ownership and control in JSCs at different ownership and control concentrations 54 2.6 Influence of board of directors on corporate decision-making at different levels of ownership concentration 54 2.7 Structure of board of directors at different levels of capital concentration 56 3.1 Differences in the legal framework between open and closed joint-stock companies in Russia 66 3.2 Comparative advantages of open and closed companies over an alternative corporate form of joint-stock company 70 3.3 Most important reason for being in the current corporate form 71 3.4 Comparison between open and closed joint-stock companies regarding the ownership structure, capital demand and supply constraints, relationship with business groups, past policies on company start-ups, and company size 77 3.5 Probit regression analysis of the corporate-form choice model 80 4.1 Descriptive statistics on board size and number of directors by their attributes of 730 surveyed firms 95 4.2 International comparison of board size and proportion of outsider directors 96 4.3 Correlation matrix of board components 101 4.4 Theoretical predictions of the impacts of firm organization and business activities on board components 107 9780230_217287_01_ e . dd 5/20/2009 4:56:28 PM viii Tables 4.5 Definition, descriptive statistics, and data source of variables used in the empirical analyses and correlation coefficients with board components 110 4.6 2SLS system estimates of endogenous board formation 112 5.1 Studies of managerial turnover in Russian firms 126 5.2 Results from vote-counting analysis of the impact of different types of owners and changes in ownership structure on CEO turnover 128 5.3 Descriptive statistics of independent variables by company group in terms of turnover type 134 5.4 Logit regression analysis of the impacts of corporate governance and performance on CEO turnover 136 5.5 Multinomial probit regression analysis of the impacts of corporate governance and performance on managerial turnover taking its magnitude into consideration 138 5.6 Multinomial probit regression analysis of the impacts of corporate governance, corporate performance, and internal conflict on managerial turnover taking its magnitude into consideration 141 6.1 Recruiting sources of general directors at independent enterprises and in HCGs 152 6.2 Characteristics of managerial skills and experience by different status of company location 153 6.3 Change of general director/board chairman at independent enterprises and HCGs depending on changes of main company shareholders in 2001–2004 155 6.4 Change of middle-level managers in JSCs in which the general director was changed by the status of the current director 157 6.5 Logistic regression analysis of the propensity of proactive restructuring 162 7.1 Ownership and management configuration at affiliated companies of holding company groups 176 7.2 Characteristics of intra-corporate control 178 7.3 Turnover of CEOs, boards of directors, and its chairs in 2001–2004 179 7.4 Comparison of JSCs with separation or combination of ownership and management 184 7.5 Logistic regressions for shareholder choice of separated ownership and management 186 7.6 Logistic regressions for shareholder choice of separated ownership and management and corporate integration 189 8.1 Enterprises coordinating strategic decisions with outside stakeholders 203 9780230_217287_01_ e . dd 5/20/2009 4:56:28 PM Tables ix 8.2 Ownership and management in JSCs depending on their affiliation with BGs 204 8.3 Boards of directors in subsidiaries of BGs in regulated and nonregulated industries 207 9.1 Impact of membership in business groups on restructuring activity 221 9.2 Impact of membership in business groups on performance indicators 224 9.3 Total factor productivity in subsidiaries of BGs compared with independent enterprises (Cobb–Douglas production function, output in 2004) 226 10.1 Financing sources of fixed investment 237 10.2 Recent Sberbank financial undertakings 240 10.3 Asset structure of Sberbank 244 10.4 Definitions, descriptive statistics, and sources of variables used in the empirical analysis 249 10.5 Results of regression analysis on enterprises with no external borrowings 250 10.6 Certain characteristics of enterprises depending on main source(s) of external finance 251 10.7 Results of regression analysis on enterprises with borrowings from Sberbank 253 11.1 Characteristics of companies: Members and nonmembers of business associations 263 11.2 Indicators of financial standing of joint-stock companies and membership in business associations 264 11.3 Types of support rendered to authorities and aid through various channels depending on membership in business associations 265 11.4 Benefits for members of associations from the establishment of steady contacts with authorities 266 11.5 Logistic regression analysis of the determinants of participation in business associations 270 11.6 Logistic regression analysis of probability to obtain financial and organizational support from the state authorities 274 11.7 Utility of business associations and their contribution to the establishment of standards and rules of conduct of business, evaluated by respondents in 2002 and 2005 276 11.8 Evaluation of contribution of NGBOs to the solution of important problems of the business community by the respondent joint stock companies 277 12.1 Construction of the CG_IDX 290 12.2 Distribution of firms depending on the value of the CG_IDX 290 9780230_217287_01_ e . dd 5/20/2009 4:56:28 PM x Tables 12.3 State-controlled companies and firms with a minority stake held by the government 291 12.4 Construction of the POLCON variable 292 12.5 Distribution of firms depending on the value of the POLCON variable 292 12.6 Correlation matrix of the variables used in the regression analysis 293 12.7 Definitions and descriptive statistics of control variables 294 12.8 Ordinary probit regression analysis of the effect of state ownership on the quality of corporate governance 297 12.9 Ordinary probit regression analysis of the effect of political connections on the quality of corporate governance 300 A.1 Composition of respondents by their position in a company 314 A.2 Geographical composition of the surveyed firms: Comparison with offical statistics 315 A.3 Sectoral composition of industrial firms surveyed: Comparison with offical statistics 316 A.4 Composition of the surveyed firms by total number of employees 316 A.5 Breakdown of the surveyed firms by location, sector and industry, form of incorporation, and total number of employees 318 9780230_217287_01_ e . dd 5/20/2009 4:56:28 PM [...]... Governance and Integration Processes in the Russian Economy” conducted by staff members of the Institute of Economic Research of Hitotsubashi University, the Institute for Industrial and Market Studies of Higher School of Economics, and Teikyo University These institutions provided considerable support with the organization of the study meetings and conference presentations within the framework of the... stock in 70% of the companies and about 13% of companies had no block-holders (owners of more than 25% of the stock) The high concentration of ownership is paralleled by its hidden structure and affects intra-corporate relationships We also show that some of these relationships include the development of a set of formal and informal tools used by dominant shareholders for the supervision of executive... research funds and state institutions, including those from the Inamori Foundation, the Japan Securities Scholarship Foundation, the Ministry of Education and Science of Japan, the Moscow Science Public Foundation sponsored by the USAID, the Program for Fundamental Studies of Higher School of Economics supported by the Ministry of Economic Development and Trade of the Russian Federation, and the Zengin... of the National Economy Branches ordinary least squares research and development Russian Economic Barometer Russian Federation return on assets Federal State Statistical Service of Russia Russian Soviet Federative Socialist Republic Russian Trading System Stock Exchange Standard & Poor’s Savings Bank of Russia state-owned enterprise small and medium-sized enterprise State University-Higher School of. .. integration via the formation of holding companies and other types of business groups upon corporate governance and firm performance of affiliated firms; and (c) the role and influence of various external agents, such as financial institutions, business associations, and the state, in the process of corporate governance of nonfinancial enterprises We believe that a thorough examination of the outlined objectives... system in Russian firms In this chapter, evidence of simple 978023_0217287_02_ dd 5 5/12/2009 5:18:00 PM 6 Organization and Development of Russian Business hypotheses regarding the role of a high concentration of ownership in the evolution of intra-corporate control forms and business performance is provided Our empirical data demonstrates that the largest shareholder owned more than 50% of the total... according to directors of enterprises by time of merger 9.2 Restructuring activity in subsidiaries of BG vis-à-vis independent companies 9.3 Financial performance of different types of enterprises 10.1 Trend of major asset and liability items of Russian enterprises 10.2 Composition of bank credits in Russia 10.3 Existence of a main bank relationship 10.4 Maturity structure (the longest) of borrowings made... the vertical and horizontal integration of Russian companies In Russia, almost 30 to 40% of middle- and largescale companies are currently involved in the formation of business groups Chapters 7, 8, and 9 present examinations of the impact of this remarkable phenomenon in the current Russian economy on the organizational behavior and management effectiveness of group companies in comparison with independent... Chapter 4, we examine the endogenous formation of corporate boards and its determinants The findings reported in this chapter strongly suggest that the theories and empirical methods of financial and organizational economics help accurately pinpoint the determinants of board size, proportion of outsider directors, and appointment of outside chairmen in Russian firms We also found that their board structure... University – Higher School of Economics, Moscow Ichiro Iwasaki is Professor at the Institute of Economic Research at Hitotsubashi University, Tokyo Fumikazu Sugiura is Assistant Professor of the Faculty of Economics at Teikyo University, Tokyo Andrei A Yakovlev is Director of the Institute for Industrial and Market Studies and Vice-Rector at State University – Higher School of Economics, Moscow xiii . 0 .1 12.6 18 .0 11 .1 8.4 8.2 10 .1 11. 0 9.5 5.9 Trade balance (Million USD) 10 .6 15 .3 6.5 20 .1 19.8 14 .6 16 .9 36.2 60 .1 48 .1 46.3 59.9 85.8 11 8.4 13 9.2 13 2 .1 General government balance (% of GDP) c Ϫ42.6. = 10 0) a 0 .1 0.8 3.4 8.3 12 .1 14.0 16 .6 28.5 39.3 45.8 53.0 60.3 72.5 86.4 10 0.0 11 3.5 Consumer price (end-year, annual change, %) a 15 26.0 839.9 215 .1 1 31. 3 21. 8 11 .0 84.4 36.5 20.2 18 .6 15 .1. Ϫ4.0 12 .0 Ϫ8.0 Ϫ5.0 2.0 13 .0 4.0 7.7 7.5 1. 5 1. 3 3.0 2.3 3.6 3.3 Fixed capital investment (annual change in real term, %) b Ϫ40 12 Ϫ24 10 18 Ϫ5 12 5 17 10 3 13 14 11 17 21 978023_0 217 287_02_