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Home / Corporate governance in contemporary Russia / January 30, 2014. Corporate governance issues as an important part of development program of strategically important state-owned-enterprises (SOEs) were discussed at the Government meeting.

January 30, 2014. Corporate governance issues as an important part of development program of strategically important state-owned-enterprises (SOEs) were discussed at the Government meeting.

In his opening remarks Prime Minister Dmitry Medvedev pointed out the importance of long-term programmes for the development of strategic enterprises and joint stock companies, referring to the enterprises and companies the shares of which are controlled by the state. They provide services that are of national importance: defence capabilities, security and protection of the interests of our citizens. These are not just enterprises of the defence industry or the fuel-and-energy complex but also ship- and aircraft-building, communications companies, banks in which the Government’s has a stake and federal TV and radio broadcasting companies. They are all included in special lists that are approved by the Government. Our Government has already started reviewing the long-term plans of such companies, following their discussion by experts. We’ll continue this work.

Minister of Economic Development Alexei Ulyukayev discussed the fundamental working principles of major companies with state capital, as well as some federal unitary enterprises. As regulators we have been working to create a mechanism of independent directors for SOEs and to promote best corporate practices at private companies and state unitary enterprises. We are cataloguing these companies’ non-core assets with a view to divesting them and are also introducing key efficiency indicators for assessing the performance of their management, which will be taken into account when considering incentives and personnel decisions. We are conducting price and technology audits of Russia’s largest infrastructure companies. We believe that the drafting and implementation of long-term development programmes will become the backbone for all of the afore-mentioned programmes, as well as companies’ internal documents such as strategies, dividend policy, business and financial plans and the like.

A long-term development programme is not only necessary for the company in question, but also for all other organizations and persons linked to it by business relations. Existing and potential investors will use this programme to take responsible decisions on investment, counteragents will use it to substantiate their ties with the company, and shareholders will use it to forecast the company’s profitability and possible increases in the value of their shareholding.

The group of companies involved in this work is determined by such regulations as Government Directives No. 91-r and No. 1060 and includes 63 companies and 13 federal state unitary enterprises. The point at issue now is to consider priority measures for the implementation of this strategy. We propose the following procedure, which we consider methodologically correct.

Development programmes should be drafted by the company and its management with a planning horizon ranging between 5 and 10 years, considering the company’s strategic goals and its current operation. At the same time, management should be encouraged to take into account the company’s role in the fulfillment of government and federal targeted programmes, the related industries’ development strategies, research and technical development forecasts, and the documents adopted by the President and the Government on the strategic spheres of economic development. <

The company’s management then forwards the draft of its programme to a specialized committee of the Board of Directors (for companies) or to the federal executive authorities (for federal state unitary enterprises). Following that, the Ministry of Economic Development and the Federal Agency for State Property Management (Rosimushchestvo) will analyze the draft, including possible risks that may prevent the programme’s implementation, its financial stability and targets, as well as the company’s effectiveness. Then the federal executive agency in charge will send the draft to the Government, which can discuss the document in several ways depending on a company’s structure.

The long-term development programmes of the first group of companies, which are the most important companies – the federal state unitary enterprises Federal Grid Company, Russian Grids, Rostelecom, Russian Railways and Russian Post, should be discussed directly at Government meetings.

The development programmes of the second group of companies can be discussed at meetings of the relevant Government commission or the Military Industrial Commission, after which the drafts will be forwarded to a Government meeting chaired by the Prime Minister. This group includes the following companies and federal state unitary enterprises: Aeroflot, the Agency for Housing Mortgage Lending, Transneft, Gazprom, United Aircraft Corporation, United Shipbuilding Corporation, Rosneftegaz, Russian Agricultural Bank, Uralvagonzavod, Gosznak, and State ATM Corporation.

The third group of companies whose development programmes will be discussed directly at a meeting of the Government commission or the Military Industrial Commission and will not be then forwarded to the Prime Minister includes Rosagroleasing, RusHydro, Rosgeo, Inter RAO UES, Russian Satellite Communications Company, Rosmorport, Salyut and several other companies.

And lastly, the fourth group of companies whose development programmes will be discussed directly by the federal executive agency that monitors their operation, reported to the Government and discussed at a meeting chaired by the Deputy Prime Minister in charge of their operation includes Sheremetyevo, Alrosa, VTB, Sovcomflot, Zarubezhneft, United Grain Company, Rosspirtprom and Russian Hippodromes.

After their development programmes are discussed in accordance with the proposed procedure and also by the expert community, the Government will adopt a decision to approve the document or to review it taking into account critical remarks. The approved long-term development programmes will be implemented by the boards of directors in accordance with the legislation on joint-stock companies. The programmes of federal state unitary enterprises are to be approved by decision of the respective federal executive agency.

Furthermore, we need to regularly audit the implementation of the development programmes of the joint-stock companies that are included in the list of strategic companies. We believe that this will help us to seriously improve the companies’ efficiency, and that regular discussion of the results of such audits by the Government will help to strengthen their effectiveness and compliance with the development goals set to these companies.

Member of the Government Expert Council and managing partner at Euroatlantic Investments Ltd Vasily Sidorov pointed out that the council views the proposal to submit for government approval long-term development programmes by state-owned companies as an integral part of a set of initiatives aimed at improving corporate governance. This issue is even more relevant in a time of slowing economic growth. As for the council, we could go even further by suggesting that the Government should focus on overhauling corporate governance within state-owned companies in 2014.

Against this background, he highlighted two things. First, the Government has already recognized the need to enhance the role of the boards of directors in state-owned companies, and the relevant instruction has already been issued by Igor Shuvalov. In this respect, the council expresses its support for this initiative and suggests to implement the current proposal of the Ministry of Economic Development by being more proactive in enabling chairpersons of boards of directors in state-owned companies, heads of specialized committees and independent directors to participate in the approval of development programmes by Government commissions, Deputy Prime Ministers and Chairman of the Government.

Second, members of the Expert Council regard long-term development programmes as a real, genuine guidance for corporate governance and planning, not just a formality. The strategic goals outlined in such programmes should be pegged to annual plans, and annual plans should contain real operational and financial performance indicators for evaluating the performance of executives and developing employee motivation programmes.

The proposals and report of the Expert Council on this and other points regarding the improvement of corporate governance within state-owned companies have already been submitted to the Government. The council hopes that they will be discussed in more detail during upcoming meetings between the Prime Minister and members of the Expert Council.

First Deputy Prime Minister Igor Shuvalov shares the opinion that we need to bring corporate governance in state-owned companies, not just their investment programmes, to a new level. He would like to assure all Government members, that in 2014 we are determined to find new approaches to working with both state-owned and private companies that for various reasons are involved with the state and the Russian Government. It is our intention to master new ways of working with boards of directors, since until now the Government has mostly been working with corporate executives and heads, while our engagement with board members was rare. We rarely invite them to our meetings to hear what they have to say. Their opinion does not always coincide with that of the supervisory board chairs.

Prime Minister Dmitry Medvedev supported the viewpoint expressed by Mr. Shuvalov: any minister who is engaged with state-owned companies should start working with their boards of directors. As you know, ministers and Government members cannot serve on the boards of directors as used to be the case several years ago, while the number of deputy ministers serving on such boards has been limited. However, this does not mean that you should not meet with the board members. You must meet to discuss the development of these companies, including the performance of directors nominated by the state. At the end of the day they are expected to work in accordance with Government directives. Ministers, as well as other Government members, such as heads of federal agencies who are responsible for a specific industry, should hold such meetings on a regular basis in order to understand what’s happening within the company. It goes without saying that this does not entail any interference in the day-to-day management of such companies, since their executive bodies and the board of directors are there to carry out this work, but you should nevertheless stay abreast of developments within these companies. Make no mistake, this is not about interfering in corporate affairs, just an element of government oversight over decisions taken by state-owned companies. In fact, this is about the owner monitoring its holdings.

Findings of Survey held by National Council on Corporate Governance and Russo-British Chamber of Commerce Moscow, 2010
Joint Survey by NCCG and KPMG, June 2009
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