- establishing control over the concrete perspective enterprise being privatized (usually for the purpose of bookkeeping, control over the financial flows and expert revenues etc.);
- purchase of shares in order to create footholds for the expansion into certain branches;
- buying up the stocks of the privatized enterprises on behalf of the large foreign and domestic investors (in order to get the commission or the price margin during the sale of the stocks);
- takeover policy for the purpose of the minimum restructuring and resale;
- obtaining a stake in the company as repayment of debt;
- redistribution in their own favor of a part of the proceeds from the sale of the governmental shareholdings;
- ownership of a peculiar “insurance fund” (since the government would not allow bankruptcy of the industrial giants and would even resort to subsidies or some other benefits which may be used by an outside shareholder as well);
- ownership of the stocks of the largest companies in order to create an image of a serious investor.8
As regards the other institutional investors, the corporate securities didn’t constitute a significant part of their investment portfolios.10 Insurance companies and pension funds (except for the affiliates of some large insurance companies) were traditionally oriented towards the government securities. The voucher investment funds offered some exception since due to their origins they became the holders of rather large stakes in privatized enterprises. Mostly these funds performed the brokers functions; they resold stocks specifically to the managers of the enterprises or handed the shares over to them in trust, structured the portfolios for foreign investors. Some of the funds acted as speculatively – oriented portfolio investors. Only a very small proportion of these funds which were also set up by large corporations were the long-term holders of a stake in the parent company in order to conserve the control over the corporation. The mutual funds and the bank managed mutual funds as a relatively new type of collective investors so far can hardly be regarded as an institution playing a serious role in the context of the ownership rights redistribution.
Against the background of the overall process of the control consolidation in the Russian corporations and within the framework of this process at least two significant sub-stages can be singled out.
First, the end of 1995-1997 period was a very specific stage in the post-privatization redistribution of property when reshaping of the ownership structure in a number of key Russian companies was already finished. In some of them the agreements between the major centers of influence were already reached and the consolidation of control was painless (like in the oil companies LUKoil and Surgutneftegaz). In other companies the final stage of control consolidation was protracted because of the continuing struggle between the interested parties (federal and regional authorities, natural monopolies, largest banks and industrial enterprises), intensive lobbying as well as continued ownership of the state over the large shareholdings. It was because of this that some of the largest transactions of this period were accompanied by big scandals (Sviazinvest, “Norilsky nickel”, large oil companies).
In practical terms this process manifested itself in the loans-for-shares schemes of 1995 and in the buying back the stocks used as collateral in 1997-1998; in the “oligarchs” wars of 1997, legalized dilution of the governmental stakes, trust schemes, buying up the drafts, manipulation of dividends on privileged shares etc.11 Both the presidential elections (1996 and 2000) and more long-term financial and economic interests of the rival groups acted as catalysts for these developments.
Second, when the law “On joint-stock companies” went into force and a whole number of other legislative and regulatory documents were enacted and the situation in law enforcement somewhat changed for the better12, in 1996-1999 the purely procedural methods began to be used more and more often including those which constitute a violation of the corporate law:
- shareholders are either not getting notified at all about the shareholders meetings or are not notified on time or are not notified about the substantive issues on the agenda of the meeting;
- boards of directors are not elected at the general meeting as is required by the law;
- outside investors under different pretexts are not allowed to become members of the board, which are “closed” to outsiders;
- there is an opposition to the independent audit of the financial activity of the company although outside shareholders insist on it;
- the procedural requirements concerning the voting during the general meetings are not observed;
- the rights of small shareholders are infringed upon during the distribution of dividends;
- the rights of shareholders are violated during the exchange of shares (when shares of the holding solely are introduced).
Nevertheless the most widely used way to get rid of outsiders is still the dilution of the outsider’s share (both in the Board of Directors and in the issuer’s equity) in favor of the majority shareholders (of a holding).
The derivative mechanisms may also be used for this purpose: convertible bonds, fractionalization or consolidation of shares, transition to a single share etc. In the holding companies in case if an outsider has the veto right (more than 25% of the voting stock) and can block the additional issues the so-called transfer prices are used and the assets are redistributed between the parent company and affiliates without taking into account the interests of minority shareholders.
The more widely known conflicts of 1997-1998 took place in the oil companies YUKOS (transfer of funds from the subsidiaries) SIDANCO (an attempt to issue convertible bonds at the price lower than the market one and place them with the friendly entities), Sibneft (transfer of assets to the holding and discrimination of the minority shareholders of subsidiaries during the transition to a single share).
Among the violations of the shareholders rights are the widely-spread practices when the managers unrestrainedly “pump over” the assets of the company they work for into their own companies and their accounts both in Russia and abroad or, in the best possible case, fix exorbitantly high salaries for themselves (while the rank and file employee-shareholders are not being paid their wages and /or dividends for months and months).Such behavior is primarily explained by the unstable situation in the corporate control which provides an incentive to the management to prepare the “golden parachutes” for themselves.
B. Structure of the stocks ownership, tendency toward concentration and myth of “an efficient owner”
In general the present process of the ownership redistribution is characterized by two parallel basic trends: strengthening of the managers (in their capacity as shareholders or as persons who exercise real control over the enterprise) and the growing “invasion” of outsiders. All this redistribution is taking place against the background of the further concentration of property.
It would make sense to apply in the Russian practice (in the spirit of the US SEC interpretation of insiders transactions) the following categories:
- “insiders” (internal shareholders) – “managers” and “large shareholders” – “small shareholders “(up to 10% of the stocks, hence, they can’t exert procedural pressure and, therefore, the managers and large shareholders can simply ignore them).
One of the nuances of the Russian situation is that the monitoring of the large transactions (involving large stakes in companies’ equity) is exercised with low efficiency only for the purpose of the antimonopoly regulation.
At the same time such monitoring (or transparency of participation) is no less important in order to prevent the insiders’ transactions detrimental to the “external”/”small” shareholders who (as opposed to the managers and large shareholders) do not have access to the information about the company which is not publicly disclosed.
From the standpoint of changes in the equity structure the following key trends should be singled out (Table 2):
- the decrease of the employees’s share, the rate of which slowed down in 1995-1998;13
- stabilization or growth of the administration (management)’ share;14
- significant increase of the share of the outside majority investors (which in 1996-1998 nevertheless was growing slower than in 1994-1995);
- stabilization or decrease of the share of external minority investors (individuals);
- consistent decrease of the government’s share.
In general we can draw the conclusion that the aggregate share of the internal shareholders was going down (due to the decrease of the employees’ interest) while the share of external and pseudo-external shareholders in the companies’ equity was growing.
The stock ownership structure of the largest Russian companies is, of course, different from the typical one (Table 3 of the Addendum). It’s characterized by the following features:
- large participation of the financial and industrial groups and holding including the public ones;
- considerably smaller (as compared with the typical) share of the employees of all kinds;
- relatively large share of the non-residents of different types.
Of course any quantitative estimate would be rather artificial if you take into account the fact that among the formally external shareholders of the companies there is a considerable number of those which are directly or indirectly owned by the managers of this particular company or are friendly towards them. It’s indirectly confirmed by the fact that among the holders of large or controlling stakes a considerable proportion consists of the commercial enterprises and holdings. In practice such commercial enterprises or holdings are often nothing but companies set up by the management as trade intermediaries and created for the mobilization of the company’s profits which are being used, among others, for the buying out of the company’s shares during the privatization and at the secondary market. Similar mechanisms are well known, for example, in Slovenia and other countries.
As regards the foreign investors (both in the typical and largest companies) the major problem here is to identify the real origin of investment. In many cases it’s in reality the repatriation of the capital which was taken out of Russia.
In general, notwithstanding the gradual concentration of stock ownership and the increase of the outside stockholders’ share in the capital of the companies their role in the management of the companies is so for inadequate to their growing proportion of equity. Of course, with the growth of the outsiders’ share in the capital their positions (including the opportunities provided by the mechanisms of the legal protection) would be strengthening.
It’s also important to take notice of one more principal trend. The second half of 1990s is characterized by a very specific process of merging between the functions of managers and outsiders in the Russian corporations. The managers gradually become stockholders in corporations while the outsiders, consolidating their control, start function as managers. This is a conflict-ridden process and so far it doesn’t play a decisive role but in perspective it’s very important as regards its potential for smoothing over of so far very bitter corporate conflicts and further stabilization of the ownership rights in corporations.
The data about the changes of managers in 100 largest Russian corporations provide some indirect confirmation of this fact (Khoroshev, 1998). Thus, 50% of general managers of these companies assumed this position after 1992, moreover, 25% of them – in 1997. Before assuming the office they either didn’t work at these companies at all (36.4%), or were deputy general managers (45.5%) or held other positions with the same company (18.2%). The average age of general managers was between 50 and 65 years, 19% of them were younger than 40.
The state shareholdings in the equity of the majority of enterprises (with the exception of the strategic branches of economy and largest companies) are not, in fact, playing any key role. If the management and a part of the large outside shareholders can be included into the “active” groups of stockholders the most “passive” group actually include the government and the rank-and-file employees of enterprises.
There was an example when the state in its capacity as a shareholder of the company was used in the corporate conflict in a coordinated way: the case of the additional stock issue by the Sayansky aluminum plant (SaAP). Although the problems of the corporate control in the aluminum industry are multi-faceted and have financial and political dimensions is this case it is the technology of the action itself which is of interest. In the spring of 1998 the capital of SaAP was increased 2.5 times (through the open subscription) which led to the decrease of the state’s share from 15 to 6.15% while the share of the private company Trans-World Group (TWG) went down below the blocking level.15 The additional issue was bought up by the companies belonging to the “Sibirsky Aluminiy” (“Siberian Aluminum”) of which SaAP is also a part. The Khakass property fund supported the group and voted with its stocks for this issue. The court proceedings initiated by TWG didn’t change the situation since SaAP subsequently handed over to the state a part of the shares free of charge in order to reestablish the 15% stake of the government (after that 6.15% of that stake were sold during the privatization tender).
If the concentration of ownership takes place then, sooner or later (as the legislative basis develops), a relatively transparent system of corporate control is shaped with the predominant “cores” of shareholders. In this connection the role of the concentrated ownership in upgrading the efficiency of the corporation and corporate governance during the post-privatization period becomes the issue of the utmost importance.