Management Team and Firm Restructuring 169 managers in total employment is 1–5%. In 68% of companies, they occupy top-managerial positions, and in 26%, middle-level positions (Malykhin 2008). Bibliography Adizes, I. (2006) Kak Preodolet’ Krizisy Menedzhmenta (St. Petersburg: Stockholm School of Economics in Russia). Aukutsionek, S., Dyomina, N., & Kapelyushnikov, R. (2007) Ownership structure of Russian industrial enterprises in 2007, Russian Economic Barometer, 3: 3–13. Avdasheva, S., Shastitko, A., & Kuznetsov, B. (2006) Konkurentsiya i struktura rynkov: chto my mozhem uznat’ iz empiricheskih Issledovanij o Rossii, Rossijskiy Zhournal Menedzmenta, 4/4: 3–22. Avdasheva, S. (2007) Holding company groups and model of corporate governance in Russia. In: Avdasheva, S., Golikova, V., Sugiura, F., & Yakovlev, A., External rela- tionship of Russian corporations. Discussion paper No. B37: 1–28, Tokyo: Institute of Economic Research, Hitotsubashi University. Belokonnaya, L., Gimpelson, V., Gorbacheva, T., Zhikhareva, O., & Lukianova, A. (2007) Formirovanie zarabotnoj platy: Vzgliad cherez prizmu professij. Preprint WP/3/2007/05, Moscow: Vysshaya Shkola Ekonomiki. Bhaumik, S. & Estrin, S. (2005) How transition paths differ: Enterprise perform- ance in Russia and China. Working paper No. 744, Ann Arbor: William Davidson Institute, University of Michigan. Brown, D., Earle, J., & Telegdy, A. (2004) Does privatization raise productivity? Evidence from comprehensive panel data on manufacturing firms in Hungary, Romania, Russia, and Ukraine. Staff working paper No. 04–107, Kalamazoo: Upjohn Institute. Chen, D H., Fan, J. P. H., & Wong, T. J. (2004) Politically-connected CEOs, corpo- rate governance and post-IPO performance of China’s partially privatized firms. Working paper No. 2004–5, Tokyo: Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. Desai, R. & Goldberg, I. (2000) Stakeholders, governance and Russian enterprise dilemma, Finance and Development, 37. (available at: http://www.imf.org/external/ pubs/ft/fandd/2000/06/desai.htm) Golikova, V., Gonchar, K., Kuznetsov, B., & Yakovlev, A. (2007) Russian Industry on the Crossroads: What Prevents Our Firms from being Competitive? (Moscow: Higher School of Economics). Goncharova, O. (2008) Upravlyates’ sami, Vedomosti, September 9: A07. Jenter, D. & Kanaan, F. (2008) CEO turnover and relative performance evalua- tion, Stanford Graduate School of Business Research paper No 1992, May 2008, 74 pp. Kabalina, V. (ed.) (2005) Praktiki Upravlenia Personalom na Sovremennyh Rossijskih Predpriyatiyach (Moscow: Institute of Comparative Labor Studies). Kapelyushnikov, R. & Dyomina, N. (2005) Obnovlenije vysshego menedzhmenta rossijskih promyshlennykh predprijatij, Rossiiskii Ekonomicheskii Barometr, 1: 8–16; 2: 23–29. Kramarz, F. & Thesmar, D. (2006) Social networks in the boardroom. Discussion paper No. 1940, Bonn: Institute for the Study of Labor (IZA). Krueger, G. (2004) Enterprise Restructuring and the Role of Managers in Russia (New York and London: Sharpe). 9780230_217287_08_cha06. dd 169 5/12/2009 5:30:07 PM 170 Organization and Development of Russian Business Kuznetsov, B. (2005) Vliyaniye konkurencii na process modernizatsii i reformirov- aniya promyshlennykh predriyatiy. In: Vliyaniye Konkurencii i Antimonopolnogo Regulirovaniya na Processy Ekonomicheskoy Modernizatsii v Rossii (Moscow: TEIS). Kuznetsov, B. (2007) Vliyaniye konkurencii i struktury rynkov na razvitie i povede- nie promyshlennykh predriyatiy: Empiricheskij analiz. Paper presented for the VII International Conference of SU-HSE “Modernization of the Economy and State,” April, 2007. Landier, A., Sraer, D., & Thesmar, D. (2005) Bottom-up corporate governance. Paper presented for the AFA 2006 Boston Meeting. (available at: http://ssrn.com/ abstract=687542) Lucier, C., Wheeler, S., & Habbel, R. (2007) The era of the inclusive leader, Strategy and Business, June. Malykhin, M. (2008) Sudba inostrantsa, Vedomosti, September 4: A07. Muravyev, A. (2003) Obnovlenie direktorskogo korpusa na rossiiskikh privatizirov- annykh predpriyatiyakh, Rossiiskii Zhurnnal Menedzmenta, 1: 77–90. Pal’shin, K. & Goverdovskaya, O. (2007) Raskadrovka, Kompaniya, 21: 21–29. Rachinsky, A. (2002) Self-enforced mechanism of corporate governance: Evidence from managerial turnover in Russia. Working paper, Moscow: Center for Economic and Financial Research. Radaev, V. (2008) How managers establish their authority at the Russian indus- trial enterprise: A typology and empirical evidence. Paper presented at the 10th EACES conference “Patterns of Transition and New Approaches to Comparative Economics”(Moscow, State University-Higher School of Economics, August 28–30, 2008). Roschin, S. & Solntsev, S. (2006) Rynok Truda Top-Menedzherov v Rossii (Moscow: Higher School of Economics). Shekshnya, S. (2006) Ot plokhogo k velikomu, Expert, 29: 26–32. Standard & Poor’s (S&P), (2006) Issledovanije Informaciornoj Prozrachnosti Rossijskih Kompanij v 2006 g.: Skromnye Uspechi na Fone Vseobschego Stremlenija k IPO (Moscow: Standard & Poor’s). Zubarevitch, N. (2006) Rossijskiye goroda kak centry rosta, Rossijskoye ekspertnoyeo- bozreniye, 2/16. 9780230_217287_08_cha06. dd 170 5/12/2009 5:30:07 PM Part II Business Integration and Its Impacts on Corporate Governance 9780230_217287_09_cha07. dd 171 5/14/2009 3:50:13 PM This page intentionally left blank 173 7 Organizational Patterns of Corporate Control and Business Integration Tatiana G. Dolgopyatova Introduction Conjecturing about the evolution of the Russian system of corporate governance continues; however, it would be interesting to answer the ques- tion of which model of governance dominant shareholders choose and whether or not they consent to the separation of executive management from company ownership. Reliance on hired management prompts owners to seek other methods of control over a business entity, and they sometimes resort to the use of internal corporate mechanisms. The issue of the gradual separation of executive management from ownership was discussed on the basis of records of 20 in-depth interviews with senior managers of joint- stock companies (JSCs) (Dolgopyatova 2004). In formal terms, separation was recognized when a general director did not own shares and other com- pany managers held little interest. It was demonstrated that as Russian busi- ness underwent an intense integration, the ways and means of corporate control also saw extensive change. Some examples are as follows: The separation of the ownership and management functions was prima-1. rily characteristic of subsidiaries companies within company groups. Formal separation resulted in real changes in the distribution of compe-2. tencies, gradual delegation of some managerial issues to hired managers, and, in particular, production and operational issues and some strategic issues related to logistics and marketing. Separation contributed to a more active use of internal mechanisms of 3. corporate governance (boards of directors) by dominating owners to exercise control over hired managers. In academic studies (Yakovlev et al. 2006, for instance), it had been predicted that owners would tend to depart from business management, 9780230_217287_09_cha07. dd 173 5/14/2009 3:50:14 PM 174 Organization and Development of Russian Business and this practice has received the attention of industry experts and the business community (Korporativnoe Upravleniye 2007). The separation of ownership from management and the delegation of authority to hired managers are the products of two opposing trends. The institutionally underdeveloped economy promotes the combination of both functions to protect the rights of large shareholders. At the same time, specific skills and competences still remain in demand under the current conditions as well as in the long-term perspectives for the development of Russian com- panies in the framework of a market embedded in the global economy; therefore, the requirements for management quality are likely to become exclusive. In many companies, owners have been withdrawing from exec- utive management. The representatives of the reform-period managerial corps are also affected by the time factor. They gradually retire from the businesses, often by voluntarily selling consolidated blocks of share to new owners. Our main objective in this chapter is to identify, on the basis of a repre- sentative sample, a set of factors underlying the preference of dominating shareholders for top managers who do not hold shares of a given company. We will empirically test two core assumptions regarding the role of corpo- rate integration in the choice of the form of control. The first hypothesis is that integration is a tool that replaces direct control by the shareholder and suggests a preference for a form of control with the separation of manage- ment and ownership. Our survey makes it possible to identify two types of companies, one, independent businesses, which are stand-alone entities and parent compa- nies of holdings, and the second, business divisions, which are the rank- and-file entities of a company group. The second hypothesis is that two types of companies will respond differently to demands of property rights protection and quality of management. For divisions of larger businesses, factors of preference for hired managers are linked to the state of corporate management, which includes that at the level of business groups. For stand- alone companies, the main determinants for the departure of shareholders from management are linked to the protection of property rights and the nature of markets. The chapter is organized as follows. The second section is a comparison of internal tools of corporate control in which management and ownership functions are either separate or combined. Based on the findings in the survey, the third section contains the driving factors of choice of the form of control with separate functions and measurement indicators, while the fourth section is a comprehensive analysis of their possible impact on the choice using a binary logistic regression. The final section is a summary of the outcome of the analysis and contains a qualitative forecast of the evolu- tion of corporate control within companies. 9780230_217287_09_cha07. dd 174 5/14/2009 3:50:14 PM Corporate Control and Business Integration 175 Internal corporate governance tools at different types of corporate control Corporate integration and separation of ownership from management The survey data demonstrate that the patterns of a combination of owner- ship and control are different in JSCs that represent a business or a part of a business (Figure 7.1). 1 The separation of ownership from manage- ment is typical (twice as often) of the enterprises that are rank-and-file members of holding company groups, but independent firms and parent companies are mostly operated on the basis of the inseparability of these functions. The stakes owned by a CEO are practically the same in all types of surveyed companies, but the few cases in which large sharehold- ers participate in management when they are not CEOs are typical of parent companies. Patterns of control in rank-and-file members of company groups were correlated with their features. The separation of management is typical of large-scale business groups with complicated management: massive groups with large numbers of its entities, or holding company groups that are more widely dispersed geographically and diversified by industry (Table 7.1). Exceeding the boundaries of a single region gives the compa- nies with separate ownership and management an advantage of nearly 10 percentage points. Separation of functions is evident in 55% of con- glomerates; at 13 percentage points, there are fewer vertically integrated groups; and, at 20 percentage points, there are horizontally integrated company groups. 02040 % 60 80 100 Independent joint stock companies Affiliated companies (subsidiaries) Parent companies of company groups M&D_S M_S D_S Separation of ownership and management Figure 7.1 Links between ownership and management in integrated and independ- ent companies Notes: M&D_S stands for JSCs where large shareholders are managers and the CEO is a shareholder, M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder, D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder. Source: Author’s illustration based on survey data. 9780230_217287_09_cha07. dd 175 5/14/2009 3:50:14 PM Table 7.1 Ownership and management configuration at affiliated companies of holding company groups Types of control Diversification of company group by location, %: Diversification of company group by industry, %: Size of company group by number of legal entities a A single region of Russia Two or more regions of Russia Russia and abroad A single industry Technologically related industries Technologically unrelated industries M&D_S 41.1 21.7 15.2 31.7 27.0 8.9 9.1/6.0 M_S 10.5 8.5 6.1 5.5 10.8 14.3 27.9/6.0 D_S 14.7 26.4 33.3 27.4 20.3 21.4 33.4/9.0 Separation 33.7 43.4 45.5 35.4 41.9 55.4 31.4/10.0 Significance of differences b 0.002 0.006 0.000/0.003 Notes: a Numerator: means, denominator: medians. b Comparison of frequencies by ␹ 2 test; comparison o f means by Kruskal Wallis test in the numerator and median test in the denominator. M&D_S stands for JScs where large shareholders are managers and the CEO is a shareholder, M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder, D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder. Source: Author’s calculations based on survey data. 9780230_217287_09_cha07. dd 176 5/14/2009 3:50:15 PM Corporate Control and Business Integration 177 Intra-corporate relations Separation of the executive management function and use of hired manag- ers affect the state of corporate governance of companies that select this model of control. On the one hand, aggravation of corporate conflict could be anticipated as a result of agency problems, while, on the other hand, more focus by the board of directors and other corporate bodies on execu- tive management activities would be expected. To test these assumptions, we used the indicators describing the state of corporate control, which included assessments by respondents of the role of main bodies in corporate decision-making, composition of the board of directors, relations between actors of corporate governance (Table 7.2), and intensity of rotation of corporate governance bodies (Table 7.3). The first assumption did not hold true. Despite the expected aggravation of the agency problem in the wake of the separation of ownership and manage- ment, an intra-corporate dispute was observed in a quarter of the companies as compared to 29% in other JSCs, the difference being negligible. This can be explained in two ways. The first explanation relates to the nature of the sur- vey, in which respondents were managers normally reluctant to disclose con- flicts with the owners. In addition, conflicts included not only those between managers and shareholders but also those between large and small sharehold- ers. It is possible that, in this case, hired managers acted as arbitrators who took into consideration the sustainability of the company as a whole, unlike “managing owners,” who would often ignore the claims of minority share- holders. The second explanation is that, in formal separation, large owners would have at their disposal a variety of tools for tight control over the man- agement. For example, Shekshnya and Kets de Vries (2007) demonstrated, on the basis of case studies, that where owners relinquished the management function, they typically gave up the responsibility but retained opportunities to intervene into business operations. The lead Russian experts in corporate governance were unanimous that owners would strongly contain the inde- pendence of top managers, largely because of the problem of trust rather than that of proper qualifications (Korporativnoe Upravleniye 2007). The second assumption was confirmed by various findings. Where own- ership and management were separate, the internal control system demon- strated the following features: The decision-making role of the board turned out to be considerably 1. larger, although no difference in the assessment of influence of the gen- eral meeting of shareholders was observed (the significance of the dif- ference by forms of control being 0.635). Interestingly, in the subgroup in which the CEO was one of the shareholders, a strong influence of the board was noted by most respondents (three-quarters). Large outside shareholders, on the average, had more than half of the 2. votes (almost 60%, together with independent directors) on the board, 9780230_217287_09_cha07. dd 177 5/14/2009 3:50:15 PM 178 Organization and Development of Russian Business which enabled them to monitor the activities of the executive manage- ment. Both the percentage of independent directors and frequency of their membership turned out to be significantly higher. On the contrary, where top managers and CEOs were among the shareholders, managers had two-thirds of the votes. We observed the most intensive board turnover: in half of the companies, 3. the board of directors was completely or considerably replaced, while the most conservative policies in respect of the board were maintained; when managers and CEO were shareholders, on the other hand, less than 18% of companies had a new or largely renewed board. 2 Table 7.2 Characteristics of intra-corporate control Indicators M&D_S M_S D_S Separation Significance of differences a Representatives in the board of directors, % of total membership Company managers 67.0 53.6 33.6 26.3 0.000 Rank-and-file workers, trade union 5.3 8.6 4.8 3.5 0.020 Federal administration 1.3 1.8 3.9 2.4 0.013 Regional and/or local administration 1.8 3.2 4.3 3.4 0.041 Large outside shareholders 16.7 22.7 40.3 50.7 0.000 Minority outside shareholders 3.4 4.9 6.3 3.8 0.067 Independent directors 4.2 2.7 6.7 8.8 0.011 Influence of board of directors on corporate decision-making, % of the number of JSCs Strong influence 58.9 62.1 74.7 71.5 0.002 Moderate influence 29.8 27.6 21.1 25.0 Practically no influence 11.3 10.3 4.2 3.5 Corporate control indicators, % of the number of JSCs JSCs included independent directors in board of directors 15.1 7.3 22.4 22.6 0.014 JSCs passed through intra- corporate disputes in 2001–2004 29.5 35.7 25.0 25.0 0.305 JSCs used outside auditing firm from the company’s base region 80.1 71.2 58.5 60.4 0.000 JSCs used non-auditing service of their auditors regularly or occasionally 75.8 59.7 78.8 68.7 0.044 Note: a Comparison of frequencies by ␹ 2 test, means by Kruskal Wallis test. M&D_S stands for JScs where large shareholders are managers and the CEO is a shareholder, M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder, D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder. Source: Author’s calculations based on survey data. 9780230_217287_09_cha07. dd 178 5/14/2009 3:50:15 PM [...]... Ϫ0.820*** (0.293) Ϫ853*** (0.307) X 188 Organization and Development of Russian Business total of 456 of surveyed JSCs, 38% of companies had separate ownership and management compared to less than 28% of independent businesses and almost 58% of JSCs, which were previously integrated into a holding company Corporate integration and the choice of separated ownership and management Model A was tested separately... comprehensive measure of restructuring 9780230_217287_09_cha07 dd 181 5/14/2009 3:50:15 PM 182 Organization and Development of Russian Business R&D holds a special place On the one hand, it relates to the industry association of the business and could partially suggest higher complexity of its nature (and, therefore, a positive influence on the preference for the separation of functions) On the other hand, in the... role of other factors of choice for different types of companies Direct participation of shareholders in management is preferred by stand-alone enterprises and parent companies, while engagement of hired managers is encouraged by both competition with companies of the developed countries increasing demands to management and the peculiarities of capital structure Factors of corporate management and restructuring... indicator of a truly competitive environment that has an impact on enterprise behavior and forces the Russian manufacturers to resort to modern market methods of competition (Kuznetsov 2005) With regard to competition with Russian companies, estimates of this type of competition are often of subjective nature, failing to be associated with the modernization behavior of enterprises and reflecting low demand,... expenditures, new technologies, and certification of production in line with international standards, which are measures of a more profound reform of the business Therefore, we used the existence of (both severe and moderate) competition with companies from developed foreign countries as the key indicator of competition, assuming that it should multiply the chances of appointment of hired top management With... analysis of factors could be made by using the binary logistic regression and excluding from the sample a group of enterprises in which the director has an interest (D_S) The dependant variable CONTRL was therefore expressed by the probability of choosing a form of control with separation of ownership from management, which adopts a value of “1” in the case of separation and one of “0” in the case of inseparability... The communications sector and machinery-building industry can, to a certain degree of conventionality, be considered more complex in terms of their organization and production Management complexity can be characterized by the particularities of the organizational structure and management techniques, in particular, the methods of strategic planning required due to the extension of the decision-making horizon... assessment of the average wages in the regions with the data of a sample survey on wages of CEOs of enterprises and organizations conducted by the Federal Service of State Statistics (Rosstat 2006) We expect that the higher the wages are, the faster the division of functions that may be chosen The wage level shows not only the market development because managers-shareholders may use other channels of remuneration... Relatively often, these JSCs retained an auditor from elsewhere or a large international firm In terms of this indicator, companies in which the director was one of the shareholders performed no worse, but they were more likely to raise suspicions of deviating from the principle of independent audit 9780230_217287_09_cha07 dd 179 5/14/2009 3:50:15 PM 180 Organization and Development of Russian Business... assessment of the existence of competition with Russian and foreign manufacturers of similar products.7 In many empirical studies, it is competition with manufacturers of developed market countries, rather than competition with Russian manufacturers or CIS enterprises that are mostly based on the prevailing stereotypes of operation and interaction in the market (mainly price competition and administrative . estimation. 97 80230_217287_ 09_ cha07. dd 187 5/14/20 09 3:50:18 PM 188 Organization and Development of Russian Business total of 456 of surveyed JSCs, 38% of companies had separate ownership and management. depart from business management, 97 80230_217287_ 09_ cha07. dd 173 5/14/20 09 3:50:14 PM 174 Organization and Development of Russian Business and this practice has received the attention of industry. survey data. 97 80230_217287_ 09_ cha07. dd 1 79 5/14/20 09 3:50:15 PM 180 Organization and Development of Russian Business Factors for the choice of corporate control forms Various methods of corporate