Concentration of joint stock capital and gradual “squeezing out” of minority shareholders in principle deteriorates the importance of a broad legal tool kit of protection of minority shareholders from the viewpoint of the corporate sector at large, while the tools of protection of minority shareholders per se transform in tools of corporate blackmail. At the same time, the creation of an extended system of means of legal protection of shareholders’ rights constraints the further process of concentration of joint stock capital (as a factor of reverse influence of the law).
Is it possible to discuss the prospects of formation of either classic model in Russia (as adjusted for the processes of convergence of national rules) in this situation It seems that it is possible to state that in Russia, in spite of the contradiction of approaches described above, takes place the objective (in terms of its economic principles) gravitation to the continental European model of the company law (corporate governance). This conclusion is based on the similarity of the key problems encountered by both Russia and continental EU member countries.
According to K. Hopt, the initial conflict in terms of “principal – agent” in the European company law is rather the conflict between majority and minority shareholders than the conflict between shareholders and the board of directors (which, due to the dominance of the American tradition, has been most often discussed in the modern economic theory since the thirties10). This situation is based on the differences between continental Europe and USA – UK as concerns joint stock ownership and control structure, what allows to single out two different types of corporate governance systems – insider and outsider systems. Both in US and UK, neither private shareholders, nor institutions have significant shares in companies, while on the continent, shareholdings are highly concentrated in families, other companies, or universal banks (the phenomenon of “groups”). Mutual and cross ownership is frequent. In such companies, boards of directors are often only marionettes in the hands of the controlling shareholder or the parent company. The reaction of the European legislation on companies (if any) to this phenomenon is different safeguards relating to the protection of minority shareholders’ rights11.
Russia clearly fits in the typical continental model characterized by puppet boards of directors. The trend towards a superficial reformation of their role noted above is sometimes viewed as a new panacea for efficient corporate governance in Russia. Nevertheless, as concerns the discussion of policies with regard to boards of directors, it is necessary first to settle the apparent problem: is it necessary to legislatively strengthen the role of this management body in the situation, where the controlling shareholder (group), top managers, and the board of directors are most often identical in terms of personal composition and / or their interests In a somewhat different context, it is referred to the possibility to use US – UK prescriptions for the settlement of the continental European problem.
Another problem is related to the traditional requirement to improve the transparency of companies and is similarly complicated. It is well known that strict standards of financial reporting and audit in the system of corporate governance are necessary for portfolio outside investors, i.e. in the cases where a company relays on a considerable inflow of funds from outside joint stock financing. A legitimate question arises: should the state pursue a policy in favor of strict transparency standards in the situation of concentration of joint stock property (or, similarly in this context, reduction of minority joint stock ownership)However, the situation is even more complex. For instance, on the one hand, the most serious problem in Russia is the conflict between majority (controlling) shareholders and minority shareholders due to the specifics of the Russian corporate landscape. In fact, the importance of this conflict is based not on its absolute significance, but on the absence of equivalent conflicts in the system of Russian corporate governance13. On the other hand, there is no apparent economic necessity and possibility to further tighten measures aimed to protect minority shareholders (such as monitoring of boards of directors, transparency, etc.). Similarly, there are no legislative tools in place, which would protect major shareholders’ (issuers’) rights from corporate blackmail, since this issue shall be settled in the framework of the problem of efficient judicial system. Implementation of a policy in favor of either group of subjects of the system of corporate governance requires a radical economic reform of the existing relations and would result in the upsetting of the balance of interests of all other subjects, who have equal rights to be protected from the viewpoint of general principles of protection of ownership rights. What are possible solutions 1) First of all, it is necessary to take into account the global trend toward the convergence of models of corporate governance and formation of generally accepted principles of the “corporation of the 21st century.” On the whole, it seems that the most suitable approach is the recognition of the fact that responsibility, accountability, integrity (lawfulness), and transparency are really universal standards for all regimes of corporate governance14.
At the same time, the opinion that the more fully principles of national entrepreneurship are taken into account, the more efficient will be the functioning of the “corporation of the 21st century,” still remains widespread.
See also: Hopt K.J. et al., eds. Comparative Corporate Governance – The State of the Art and Emerging Research.
Hopt K. Modern Company Law Problems: A European Perspective. In: Company Law Reform in OECD Countries.
A Comparative Outlook of Current Trends. Stockholm, Sweden, 7-8 December 2000.
Of course, it concerns only the feasibility of enforceable rules (i.e. those set by the law). Nothing prevents a close circle of interested Russian companies to use international accounting principles voluntary. Nothing also prevents these companies to invite “independent managers” and carry out other measures aimed at the improvement of their corporate image.
In the case the separate problem of hostile takeovers is not taken into account.
Fremond O., Capaul M. Corporate Governance: One Size Fits All (2002). http://rru.worldbank.org/ Hot_Topics_Fremond_Capaul.asp 2) In the long term perspective, it is necessary to move in the direction of a mixed model, which, on the one hand, would take into account the balance of interests of all shareholders, or, in more broad terms, all “coparticipants.” In practical terms, this approach (at this moment of time) presupposes unfeasibility (impossibility) of the legal fixation of the “national model” of corporate governance corresponding to either classical pattern (it shall be noted that these patterns become more and more eroded). From the viewpoint of the state, the fundamental task is to review corporate governance in the context of protection of and guarantees for ownership rights (both investors and shareholders) and maintenance of the balance of interests (rights) of all participants of corporate relations. Exactly in this context, corporate governance shall be reviewed as the most important institutional condition of economic growth.
3) Enforcement of legislation is the principle aspect of the problem. Although significant differences exists across Western countries, in Russia the reform in this sphere is most urgent15. In the context of potential harmonization of rules relating to corporate governance in Russia and EU, it is important to take into account the differences across judicial systems of EU member countries, or more exactly, the prospects and frameworks of functioning of the “European legal space” mentioned in the Amsterdam treaty (implementation of conventions on civil and criminal proceedings, equal rights of legal recourse, fast and efficient implementation of legal procedures).
4) As concerns the urgent reforms relating to the company law in Russia, in many aspects they are also similar to the current tasks of the respective reform in the EU. In Russia, the practical priorities include such areas as takeovers and mergers, monitoring of large transactions, affiliated structures, beneficiary ownership and responsibilities of owners, collision “management on trust – trust,” groups of companies, bankruptcies, existing size of the state in corporations (for instance, the problem of “golden share”). It is apparent that any progress will be meaningless in case there is no efficient infrastructure and political will in the enforcement of legislation.
Apparently, even in the case Russia is admitted in EU, there would be required a significant transition period for the adaptation and harmonization of legal regulations and standards. However, even outside the problem of accession to EU, at present it would be feasible to discuss a number of positive innovations (at reception level) present in EU acts, some of which are listed below:
- public approval of new legal regulations concerning companies by all parties (proceeding from the procedure adopted for the elaboration of Directives);
- dependence of the level of disclosure of information (transparency) on economic conditions: size of a company, organizational and legal form of a company, concentration of ownership (the fourth and other Directives);
- protection of creditors’ rights and the requirement of independent evaluation in the course of mergers and divisions of companies (the third and sixth Directives);
- regulation of employees’ rights in the course of reorganization (Directive 77/197);
- elaboration of circumstances in which consolidated accounts are to be drawn up (the seventh Directive), although difficulties are apparent (the Directive is not implemented in some EU member countries);
- transparent and understandable requirements concerning individuals and legal entities performing audit functions (the eighth Directive), although the problems of efficient audit are apparent both in Russia (merger of ownership and management) and “puppet” boards of directors (some EU member countries);
- incentives for single member private limited liability companies (the twelfth Directive), what is especially important in Russia, taking into account the traditional trend towards the closeness of companies and problems relating to the responsibility of owners;
- use of the proposals for the draft fifth directive as concerns the cooperation with employees as recommendations for companies, although in this case it would be more acceptable to use approaches employed by countries where the tradition of cooperation is more weak (for instance, UK approach excludes such provisions from the corporate law);
- proposals drawn up by the group of top experts in 2001 as concerns regulation of takeovers (elaboration of bidders’ rights with regard to replacement of members of boards of directors and top managers, acquisition of residual shares, guarantees of “fair price” for minority shareholders, etc.);
- transparency of legal procedures at the EU level and control of implementation of requirements set by Directives and other EU acts by the European Court of Justice.
A. D. Radygin See: Radygin A. D., Entov R. M. Zaschita prav aktsionerov: teoriya i praktika pravoprimeneniya [Protecting shareholders’ rights: theory and practice of enforcement]. M., IET, 2002.
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