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When large blocks of shares fall into thehands of outside investors, who, however, for one reason or another, cannotensure control in the Board of Directors and who cannot appoint their owngeneral Director, there may be a sharp confrontation of interests and one groupmay attempt to block the decisions of the other.

Nevertheless it is important to retain thecurrent system under which the executive management bodies can be removed bythe owner (shareholders). The Board of Directors cannot exercise realcontrol over the Management, for the two bodies overlap and both operate underthe leadership of the General Director. Actually they are two units ofthe general management of the corporation and the people working for acorporation often wonder what the reason is for having two bodies whichduplicate each other's efforts. In practice it is the managers of theline units and the main deputies of the Director that form the Board ofDirectors (those deputies may be in charge of production or in charge ofcommercial matters), while the leaders of the functional units form theManagement. It is unlikely that such a formal division of personnel iscapable of enhancing the efficiency of management of the company.

Naturally, this may be the cause ofnumerous violations. let us give some examples of the most typicalviolations of the rights of shareholders as they occur in newly created jointstock companies:

- the presence of clauses in thecharters of privatised joint stock companies which discriminate againstdifferent groups (participation quotas in the authorised capital, prohibitionon the Board of Directors changing the composition of the Management of thecompany and so on);

- the practice on the part ofmany managers of joint stock companies of prohibiting the sale of shares bytheir owners to `outside persons';

- deliberate delay in notifyingshareholders of meetings;

- setting a fee for participationby a shareholder in a meeting;

- voting on the basis of a showof hands instead of observing the principle of one share one vote;

- issue of `special' shares(which are different from those stipulated in the law) and which give `special'dividends;

- creating `puppet' Boards ofDirectors made up of a Director, Chief Accountant and some other managers ofthe company;

- purchase of the company'sshares, using its own funds, at reduced prices from shareholders who do notknow their real market value;

- selling the property of thecompany at reduced prices through `dummies' without the knowledge of theshareholders;

- issue and placement of newshares, also without the knowledge of the ordinary shareholders, in the handsof `dummies' at a reduced price;

- refusal to register thepurchase/sale of shares in the company or charging high commissions forregistration;

- manipulation of the votes ofshareholders in order to obtain complete control over the votes(shares/stocks).

A separate problem is that of stateparticipation in running (supervision) of newly created joint stockcompanies.

The continuing strong influence exerted bystate structures on the business activity of newly established joint stockcompanies (via retaining state control over a controlling block or asubstantial number of shares, through `golden shares', through variousforms of concerns, associations and holding companies) is inevitable in atransitional period. However, this cannot be regarded as an efficientmeasure of state industrial policy. That is why such forms of controlshould go on only for a limited period (as a rule, no more than 3 years) andthey should not be prolonged through structures with new names but similar inessence. Even more important is to prevent any direct or indirectintervention on the part of ministries and departments in the process ofdecision making by joint stock companies, except in the form of voting apackage of shares held by the state.

The decree of the President of the RF, No.1392, of 16 November 1992, `On Measures to be Taken to Implement IndustrialPolicy When Privatising State Enterprises' and the second privatisationprogramme (December 1993) specified the enterprises (by kind of activity) inwhich there were to be state-owned controlling blocks of shares or a `goldenshare' for a period of up to three years, as well as providing forpossibilities of creating holding companies.

In principle the development of the latteris quite possible and can play a certain `corrective' role but now it isfraught with the risk of establishing an additional (and not only financial butalso administrative) control over companies, which can hardly be conducive totheir rational integration into the system of market relations (see Chapter6).

On the whole, creation of the legalframework for the corporation to function within is a much more effectivestrategy and is more important than direct institutional control. Thecreation of holding companies, whatever the restrictions imposed on them,inevitably tends toward monopolisation and cartelisation and reducescompetition. It is quite clear that the so-called benefits of `agreeingon investment policies' cannot compensate for the real negative effect on theformation of a competitive business environment, which should enjoy priority inthe strategy of economic transformation. Yet up to the present it is notclear how extensive state influence in the sphere of business is to be.What is happening in the government is a continuation of the struggle betweenthe adherents of the stricter and more liberal tendencies in the evaluation ofthe role of the state at the macroeconomic level.

The transition period in the Russianeconomy provides for the existence of some business elements and the inevitablecompromises with the old forms and their representatives. this makes itstill more necessary that the compromises that lead to the continued existenceof old structures (though in a transformed way) or to previous leaders'retention of positions of power be supplemented with clear and detailedlegislation, that the terms of reference be clearly identified and thateffective and multilateral control (supervision) be established. In thissphere the main task of the state (as well as in other spheres) would be notensuring itself the possibility to interfere in business but rather setting therules and terms of economic activities and maintaining strict control overthose rules. However, one should try to avoid an eclectic combination ofelements of various systems of regulation of corporate activities.Charging the Board of Directors with the functions that are characteristic ofAmerican legislation, and at the same time endowing the Management of thecompany with powers in the spirit of German joint stock companies can only leadto a situation where both structures will be incapable of carrying out theirfunctions.

The main idea that lies at the roots ofconstruction of the system of management and control in a joint stock companyis that the various interrelated but potentially competing interests in thecompany must be taken into account. These are the interests of the owners(shareholders), employees, managers, suppliers and consumers of products, localauthorities and society as such.


With all the shortcomings of the Russianprivatisation model, its first stage of implementation iscompleted.

Naturally, the emergence of a considerablenumber of private enterprises and millions of new owners in Russia in 1992-1994does not mean that there are no administrative and bureaucratic control issuesstill on the economic agenda, nor that new incentives have already been createdto ensure the effective growth of production. However, while that mightnot have happened at the first stage, the main thing that has happened is thata new system of property rights has emerged on a national scale. Thatsystem lacks proportion, it is not at all protected, it is just being formed,but it is a system which is ultimately capable of implementing some key finalgoals of the privatisation reform - such as providing economic efficiency andcreating a base for a genuine democratic society.

In our view it is wrong to judge theresults by formal quantitative criteria. The positive qualitative resultis different: what we can see is the start of the transfer of propertyrights; only after the actual capital market and system of property rights areformed can one speak about tangible positive results of the Russianprivatisation model. It is essential to take the whole package ofproblems into account, both the economic problems we have discussed and thosethat relate to the social and political and the legal sphere.

To begin with, there is the problem ofstability of the legislation in force, which is closely connected with possibledestabilisation by political, regional, nomenklatura and otherfactors.

Secondly, there is the problem of thebalance of interests in the process of the reformation of propertyrelations. One can hardly disagree that the current model of Russianprivatisation generates multiple problems and controversies that areattributable to objective reasons and direct miscalculations by thegovernment. However, let us not forget that this model was formed as theoutcome of a multiple conflict and compromise negotiation process, the resultof which is a balance of economic interests of all the participants, which isembodied in the present legislation. So only further strengthening ofthis balance can lead to stability and irreversibility of the economicreforms. The choice is really simple: either we pursue a stable andconsistent privatisation policy to speed up the economic transformation or wefollow a long and agonising process of `quasi-privatisation' accompanied bysocial and political conflicts, strong reinforcement of state control andbureaucratic structures and actual roll-back of the radical reforms in theeconomy and society.

In this sense, the core of policy in thissphere should be rejection of discrimination for or against any of theparticipants in the privatisation process and, first of all, there should be norestriction of the interests of the private sector in the shape of slowingprivatisation, strengthening the state sector to the detriment of the privateand privatised sectors, or any attempt to return various mechanisms of theprivatised enterprises to state control in the framework of spontaneousnomenklaturaprivatisation.

Thirdly, the absence of any interconnectionbetween the reforms of property relations and other directions of economictransformation is quite a serious problem. At the same time, thedevelopment of privatisation shows that it is essential to co-ordinateprivatisation programmes with the process of formation of industrial(structural) policy and the financial system, which may be interpreted as akind of institutional device that transforms savings into investment andselects directions for their subsequent use in the production sector of theeconomy via the mediation of financial markets and institutions (see Shmeleva& Radygin, 1993).

Fourthly, there is the problem ofreasonable adjustment of the current normative base, taking into account theabove facts as well as the quickest possible elimination of the `blank spots'in the general legal environment in which Russian private, privatised and stateenterprises operate. It is especially important to go ahead in such areasas the securities market, mortgages and hypothecation laws, regulation of trustoperations, company law, land law and the property market. From along-term perspective it is vital to have a civilised criminal and civil law asa whole, and to develop detailed and effective contract law inparticular. Reforms in these areas - creation of the legal environmentnot for short-term accelerated privatisation but long-term operation of theprivatised enterprises - has just been started.

This book leaves uncovered some issueswhich are not unimportant: the formation of property markets inconnection with privatisation (including land), the problem of insolvency(bankruptcy) and some other such matters. The general distinguishingfeature of these problems is the issue of many declarations of intent but alack of practical action. There are a great number of provisions(normative acts), including some of a progressive nature (eg. the 1994Fundamental Provisions lay down the right of a new owner to unconditionalbuy-out of leased property, the right of the privatised enterprises to buytheir land). There is a whole battery of documents on the issue ofbankruptcy, including a law on that subject. We have deliberately leftthese issues aside, trying to keep our focus on the realities rather than thedocumentary provisions. Yet in the next year or two it is these veryquestions, together with the problems of the securities market, that will becrucial and will at the same time indicate the extent of the further progressof economic reforms in Russia.

It is this basis, as well as generalimprovement of the country's finances and vigorous anti-inflation measures anddevelopment of the system of private savings that will make it possible toattract really significant investment resources and effectively restructureenterprises. In other words, any state financial `pumping' of resourcesfor this purpose, as well as Western assistance programmes in this field, willbe largely meaningless until a mechanism of fair control over the operations ofcorporations and mobilisation of resources on the private capital market isestablished, and civilised business law as a whole is firmly in place. Inthis sense the role of the state should be strictly limited through thecreation of an appropriate legal environment on the basis of which it may bepossible to effect indirect (soft) state regulation and strict state legalcontrol.


1. For convenience I shall useonly the term `Russia' although it may refer to a period prior to the collapseof the USSR. I shall use the term `USSR' only for official documents ordepartments of the USSR proper.

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