While this article makes no claims to be a comprehensive or conclusive evaluation of Russian privatisation, it will attempt to cover the three key facets of privatisation: that enterprises be transferred to private ownership; that the new owners be able de jure and de facto to exercise ownership rights; and, finally and ultimately most importantly, that the new owners exercise their ownership rights in such a way as to bring about improvements in enterprise performance. The key issues to be surveyed, therefore, are: who as a result of privatisation obtained ownership of Russian industrial assets, and are they appropriate owners; can new owners, particularly if they are appropriate owners, exercise their ownership rights; and has privatisation led to improvements in enterprise performance? The paper will deal with privatisation only within the industrial sector, thereby ignoring the highly controversial privatisations of the last twelve months or so in the energy and utility sectors.
State ownership. The state retains shareholdings in a significant number of privatised enterprises on the basis of government decrees declaring the 'strategic significance for national security' of the enterprise.3 Shareholdings range from 20 to 51 per cent or a Golden Share (a single share giving veto rights over certain strategic issues of corporate development) retained by the state for up to three years. In late 1997 the state had shareholdings in 2900 enterprises. The shareholding consisted of a Golden Share in 1351 cases, of over 50% of shares in 128, of 25-50%, in 1037, of 20-25% in 228, and less than 20% in 303 of cases. By far the largest number of state holdings are in the energy sector (860). Not surprisingly the defence industry sector has a significant number (260). The rest are scattered across the economy.4
This is a not insignificant state equity interest in Russian industry. There appears to be no particular trend towards either the strengthening or weakening of the state's holdings, primarily because there are very differing views within government over which direction any trend should take.5 There is a continuing dribble of disposals, but decrees extending the period for which the state can retain parcels of shares in particular enterprises are also not rare. The number of enterprises deemed to require a 'strategic' state interest increased from the original 2700 set in the government's 1995 decree, to over 3200 in early 1997, but had declined to 2900 by the end of 1997.6 It seems likely that a rump state presence will remain for some time to come, but not at a level that represents the basis for a significant rolling back of privatisation.
The somewhat strange struggle between Minimushchestvo (the Ministry of State Assets, the former Goskomimushchestvo, the privatisation agency) and the 'sectoral agencies' over who should exercise the state's ownership rights continues. It is a strange struggle because, despite Minimushchestvo beating off all attempts to have its power to manage state holdings removed, 92% of the state representatives appointed by the ministry to the board of directors7 of privatised enterprises are officials from the very agencies that are so keen to have the ministry stripped of its powers.8 There are constant complaints about the unwillingness of state representatives to exercise in any serious way the state's ownership rights,9 although it has to be said that cases can be found of the state using its votes in crucial ways in major corporate governance episodes.10
The global data showing about 70% of GNP being generated in the private sector, as well as the relatively rare involvement of the state in the corporate governance of industrial enterprises in which it has a holding, suggest that Russia can be described as having an essentially privately owned rather than state owned economy (which is not to say that it is therefore necessarily a market economy).
The workforce. Given that about 70 per cent of enterprises chose the second privatisation option, under which 51 per cent of voting shares were sold to workforces, one would expect enterprise personnel to be the biggest group of shareholders, particularly when we note evidence that workforces built up their shareholdings further using vouchers. A survey commissioned by the Federal Commission on the Capital Market at the end of 1995 showed that about 65% of privatised enterprises were still majority owned by their workforces.11 Other surveys, the results of which are summarised in Table 1, show percentages from the high fifties to the mid-sixties, with one outrider in the high seventies.
(1) Earle, Ownership, p.13 (92 enterprises in 2 regions)
(2) Frydman, Investing, p.4 (142 enterprises in 32 regions)
(3) Kuznetsov, 'Privatisation', p.1175 (not stated)
(4) Earle and Estrin, Privatization, p.9 (394 enterprises)
(5) Bim, Ownership, p.5 (439 enterprises)
(6) Invest-Kur'er, November 1997, p.44 (not stated)
Majority workforce shareholdings are seen as leading to two possible outcomes: collective ownership, in which the enterprise is owned and managed in a collective way by a workforce with common interests; or management ownership, in which management in various ways gains de facto if not de jure ownership rights over workforce shares and thereby gains effective ownership of the enterprise.
Collective ownership derives either from a natural alliance between managers and rank-and-file employees, probably based on Soviet traditions of paternalism and the 'social contract', or from the need of managers to pander to workers who control a majority of voting rights at shareholder meetings. Although some observers might find a collective ownership outcome desirable, on the grounds that it provides for workplace democracy and high-incentive work habits,12 reform-oriented commentators generally find it a form of ownership likely to lead to the maintenance of excessively high levels of underemployed staff and an overconcentration on consumption at the expense of investment.
The management ownership outcome derives from the ability of managements to totally dominate divided, demoralised or indifferent rank-and-file employees. The argument that they do so by bribing employees with promises of secure employment and the maintenance of social welfare provisions is essentially the same as that presented in the previous paragraph on collective ownership. However, there is an increasing awareness among commentators that any Soviet paternalism and coincidence of management-worker interests that might have once existed have not survived the rigours of the transition and the self-interest of managers. As A.S. Bim puts it:
"Given serious 'positional differences' between managers and other employees, it seemed reasonable as early as 1993 to draw attention to the quite peculiar nature of insider ownership in Russia and to argue against simplifications such as the statements common in 1993-1994 that privatization in Russia had proceeded de facto in favor of workers (employees) or insiders as a homogeneous group."13
The rigours of the transition, difficult market conditions and something close to a hard budget constraint, have made it impossible for managers to maintain employment and social welfare provision. The managers' self-interest, whether it be reflected in asset stripping or building up a profitable enterprise,14 pushes them in a similar direction. They then have two options. Once is to rely on coercion and manipulation, rather than bribery, to get worker owners to support them; the other is to get the workers to sell their shares to them.
Coercion and manipulation have been much in evidence. The crudest approach is the threat of dismissal of those who vote against management. Another popular approach at least requires the initial support of a majority of workforce shareholders. Management sets up a holding company type structure, the paid-in capital of which consists of all the workforce shares (or all those for which the management can get approval). The articles of association of the new structure are written in such a way that management controls it and through it the enterprise.15 Gurkov writes of individual managers building up their own 'cultivated plot' of workers over whom they have most direct work-based control and influence, and the managers then forming alliances and bringing their workers' shares with them into the alliance.16
But such arrangements cannot bring complete security of control. The greatest security comes when managers own in their own right a controlling shareholding. Management appears to have had greater opportunities than rank-and-file workers and staff to obtain shares in the privatisation process itself. If Option 1 were chosen top management was entitled under the privatisation legislation to purchase up to 5 per cent of shares.17 There is evidence that under Option 2 management obtained more than a proportionate distribution of shares in the internal tenders which allocated workforce shares among individual staff. Usually this was because they had greater financial resources, including access to credit.18
Since privatisation some managers have continued to build up holdings by buying shares from workers, often again by applying various forms of coercion. One approach is to engineer high levels of labour turnover, in the expectation that departing workers will sell their shares. Even those who remain, often not being paid for months, are forced to sell through financial exigency. It is implied that wages arrears are a deliberate ploy by managers to bring about such an outcome.19 In the well-known case of the Novosibirsk Tin Combine, the general director paid for workers' shares with consumer goods, which it is alleged were purchased with enterprise funds. He kept the shares for himself, except for judicious allocations to local and central officials.20
The data summarised in Table 1 shows an increase over time in management shareholdings at the expense of the rank-and-file workforce.21 However management shareholdings are still rarely large enough to provide secure control, meaning that the bribery and coercion of worker owners are still important.
But both are dangerous strategies. In particular, as has been already suggested, managers find it increasingly difficult to pay the bribes, the guaranteed employment and social benefits. In those circumstances they run the serious risk of the workforce taking revenge by voting at a shareholders' meeting for their removal. This was the fate of the long-time director of the Vladimir Tractor Factory. At the first shareholders' meeting after privatisation he was able to hold off a challenge for his post by promising the worker shareholders the maintenance of wages and benefits. He could not keep the promises and at the next shareholders' meeting his challenger won. 22 A comment by Andrei Kuznetsov and Olga Kuznetsova, that in Moscow textile enterprises in which they did interviews in 1995 nearly one third of directors had been replaced, 'mostly following disputes concerning late payment',23 reveals the danger to managers of inducing workers to sell their shares to them by not paying them.
Outside owners. Privatisation procedures were designed to give outsiders significant access to Russian industrial assets. As we have already seen, the workforce and management could obtain major holdings, indeed controlling holdings, if they so desired. The rest, however, were disposed of through a combination of voucher auctions (since the vouchers distributed to the entire population were freely negotiable voucher auctions attracted the participation of insiders, outside speculators and outside strategic investors) and investment tenders and auctions (in which fixed parcels of shares, usually ranging from 15-30%, were sold to a single highest bidder, whose bid would have contained an investment plan including cash injections into the enterprise).
The procedures made it very difficult for a single outsider to build up a controlling shareholding. The voucher auctions distributed shares among many bidders; the parcels sold through investment auctions were too small. However it is possible, if not easy, to build up controlling shareholdings through post-privatisation purchases of shares.
An unpromising way of doing so is through the stockmarket. Organised stockmarkets are very underdeveloped in Russia. Few enterprises, particularly from the industrial sector, are listed and turnovers are miniscule.24 Most transactions that do take place, even those between registered sharebrokers, are done off the floor of the exchange and settled offshore.25 Not only does this add significantly to the procedural difficulties in changing ownership of Russian enterprises, but it also means that there is virtually no transparency in the process, potential investors are unable to easily judge the costs and possible gains from an investment, and the share price cannot be used as a measure of the performance of an enterprise and its management. It further means that raising funds through new share issues is not as straightforward as it should be, although it should be noted that new issues, distributed off-market, are by no means rare.
Investors who want to build up holdings in an enterprise generally have to do so through private dealings and very often by literally standing outside the gates of enterprises, buying the shares of worker shareholders as they go home from work. This is an activity usually frowned on by enterprise managements.26
As time has passed, two more 'normal' avenues to outsider investment and control have become evident. Firstly, outside strategic investors are increasingly likely to buy large holdings from an existing investor, whether speculative or strategic, who wants to get out. Such purchases are often consolidated into a controlling holding.27 The second new avenue is that managers with ownership and/or control come to realise that the enterprise cannot survive without an outside investor willing to provide major investment funding. That investor will be allowed to buy into or increase a holding, often through the purchase of a new share issue.
Survey data suggest that outsiders own between 20 and 30% of shares, with there being an increase over time.28 It is clear that the percentages are higher in the biggest and most profitable enterprises. They were more likely to be privatised under Option 1, because the workforces could not afford to buy the 51% on offer, and they are far more likely to attract determined outside attention.
Who are these outside investors? Two surveys of outside share ownership sponsored by the Federal Commission on the Capital Market in the first and last quarters of 1995 revealed considerable percentages of outside-held shares owned by private Russian individuals (29 and 22%). For lack of further information on such individuals they will be left aside here, except to note that Bim reports, rather awkwardly, that in 58% of the 24 enterprises he surveyed individual outsider shareholders had the same surnames as top managers in 3-19% of cases.29
The first outsiders that need to be examined in more detail are the investment funds which got parcels of shares at the time of privatisation, usually through bidding at voucher auctions with the vouchers invested in them by individual citizens. If we exclude the apparently considerable number that were simply scams right from the beginning30 and the significant number set up by enterprise managements for investment in their own shares,31 they generally seem to have found themselves to be locked-in minority shareholders. They were unable to obtain big parcels of shares at voucher auctions, since the parcels put up for sale were rarely big enough to provide control and initially they were limited by the legislation to a maximum 10% shareholding in any single enterprise. Post-privatisation they have had neither the resources (once voucher privatisation was completed they had no ready source of capital) or the opportunity in a very illiquid sharemarket to build up bigger holdings.32
It would appear that they are discriminated against in dividend policy. It is not uncommon for boards and shareholder meetings to decide not to pay a dividend to voting shareholders, even when non-voting shares attract high dividends. While this might be appropriate behaviour on the part of strategic investors, who have decided to forego short-term gain for long-term growth while rewarding the workforce (the holders of non-voting shares) for their efforts, one suspects that often it is a case of cutting minority shareholders out of the profits while majority shareholders - often management and their allies - ensure themselves adequate returns through other non-dividend payments.33 It is a particularly difficult situation for the investment funds who are after all supposed to pay dividends to their investors.
Certainly the investment funds have struggled to provide a decent return for their investors and to establish themselves as the foundations of a ready made Russian 'institutional capitalism'. In Russian circumstances this is perhaps just as well. There are fears in the West that our 'institutional capitalism' tips the balance of corporate governance too far in favour of managers. The Czech model, which was reasonably similar to Russian voucher privatisation, seems to have contributed to the creation of a closed, unaccountable 'crony' capitalism in which shady funds are manipulated by 'soft budget constraint' banks with excessively close links with politicians. 34 It is highly unlikely that Russian investment funds will be able to do better, having neither the management skills nor financial resources to contribute much to the revitalisation of their enterprises or to resist the blandishments of 'crony' capitalism.
What other outside investors are there? Foreign investors make up a small but not insignificant category, particularly in some sectors, usually those such as timber and non-ferrous metals with an export capability. Their shareholdings have usually had to be built up laboriously through private secondary market dealings, although they have also obtained block holdings through investment tenders. Sometimes they are major Western corporations; at other times they are fronts for Russian investors, often of a shady nature.35 Another significant category are partner enterprises in the input-output chain, the so-called smezhniki. Cross-shareholdings between such enterprises or holdings in supplier enterprises by a major producer are not rare, and usually arrived at on a friendly basis. Hostile takeovers are a rarity.
The final important category of outside investors are the banks and related financial institutions. It appears that there is a major struggle in Russia between the proponents of a German-style market economy, based on high levels of industrial equity held by banks, and the Anglo-American model, where banks are more likely to limit themselves to the provision of credit. It took some time for the commercial banking sector to display any interest in industrial investment, including of the equity variety. This was a situation primarily determined by the poor profitability prospects in industry, particularly compared to those in the financial and trade sectors, but it was not helped by the ban on banks owning more than 10 per cent of the shares of any single enterprise. But with the decline in profitability in the banks' traditional sectors, an interest in industrial investment has appeared.36 This has taken the form of both loans and the purchase of strategic shareholdings in individual enterprises. There has also been a lot of interest in larger-scale financial-industrial integration. This has been actively encouraged by the government, with its sponsoring of 'financial-industrial groups' (FIGs) and its controversial 'shares for credit' deals of late 1995.37 One suspects that one of the reasons the FIG model enjoys such governmental support is that the banks are an important source of funding for individual politicians and officials. Indeed among critics of Russian privatisation 'management ownership' has been replaced by 'financial-industrial group ownership' as the paradigmatic and problematic outcome of the process.
Before moving to an evaluation of the FIG model, some concluding comments on the older 'management ownership' model is in order. It is probably true that the majority of Russian industrial enterprises, particularly the less attractive, struggling enterprises, are 'owned' by management, both through their own equity holdings and their control of the workers' equity. Very often it is the same management that 'owned' them in the Soviet period. It is this finding that has led many commentators to characterise Russian privatisation as a failure: what was supposed to lead to the transfer of control of enterprises from a obviously inefficient old elite has only consolidated the control of that elite.38
There are two forms of response to that basic criticism of the 'management ownership' model. One is that management control/ownership is not such a bad thing after all, and that it is certainly better than workforce ownership.39 It is claimed that a significant number of managers have proven themselves to be quite competent when provided with the right incentives.40 Stock holdings can be one such incentive.41 A hard budget constraint is another, as is the realisation that good performance is essential to maintain the support of other shareholders.42
The other response is that management control, while still very evident, is nevertheless breaking down. Sometimes managers themselves turn to outside investors, even at the cost of yielding some ownership and strategic control. Sometimes this is a defensive reaction, to protect the manager from disgruntled workers or from even more dangerous outsiders;43 sometimes it is a genuine effort to find a strategic investor to provide for the long-term development of the enterprise.44
But the performance of Soviet managers in the Soviet period and seemingly well-founded criticism of them since suggest that for privatisation to be considered a success there would have to be evidence of outside investors being able to move into enterprises with aggressive intent to change management performance, if need be by replacing management. It is the author's belief that there is good evidence that, when old managers are bad enough or enterprises are attractive enough to outside investors, workers are quite likely either to vote out those managers or sell their shares to outside investors who will then themselves effect management change.45 In these circumstances one would expect to see significant management turnover. Clearly, for the process to proceed effectively shareholder rights - the right to obtain shares and to exercise the ownership prerogatives that adhere to them - have to be guaranteed. We will now look at those two issues: firstly, management turnover; secondly, corporate governance and shareholders' rights.
A total of 249 enterprises were examined. Names could be found over a useful period for 121 ('useful' being across 1992/93 to 1997. Cases in which names were available only across 1992 to 1993 were not included in the results). There was no change of name in 72 cases; the name changed in 49 cases. This represents a turnover rate of 40.48%. The author sees this as a high rate of management turnover, and certainly one which suggests that privatisation has provided the means to force out existing managers when the incentive for workforce shareholders or outside investors to do so is sufficiently strong. It has to be said that the figure is way above the 2.6% of general directors dismissed in Frydman et al's sample. They admit their result to be much lower than those of others.47 Kuznetsov and Kuznetsova's one third turnover among Moscow textile enterprises has already been mentioned.48 Andreff et al report a 10% dismissal rate of general directors in three regions in 1993-94.49 Bim reports 18% turnover of directors between 1993 and 1994 in the 24 enterprises he surveyed and 20-30% between 1992 and 1995 in various surveys done by other investigators.50 This author's guess is that his own figure is the highest because the period covered finishes later and probably because of the sector from which the data are taken.
These abuses were dealt with initially by a series of presidential and governmental decrees and some of the provisions of the Civil Code. The basic principles of shareholder rights and corporate governance were then set out in a consolidated piece of legislation, the Law 'On Joint-Stock Companies' (aktsionernye obshchestva, AOs), which after a long passage through parliament was passed by the Duma (the lower house) on 24 November 1995 and signed by Yeltsin on 26 December 1995, to come into legal force as of 1 January 1996.57
The Law clearly responds to most of the abuses of shareholders' rights which littered the initial years of post-communist corporate governance. A summary of the legislation, especially the clauses most related to the protection of shareholders' rights follows.
Changes to the Articles of Association (Ustav) of the enterprise require a 75 per cent majority of the shareholders attending a shareholder meeting (except for increases in the paid-up capital, which require a 50 per cent majority) (Art.12.2). A 50 per cent majority is required for most other decisions (Art.49.2). Provision is made for proxy voting, with the procedures being set out in Article 57.
Some of the examples of management behaviour outlined above make it clear how important the rules on notification of meetings and quorums are. Regulations on notification are contained in Article 52. It is not essential that shareholders be informed directly and personally of a shareholders' meeting, although if a simple advertisement is to suffice the publication in which it is to appear must be specified in the Articles of Association. For larger AOs at least 30 days notice must be given of a meeting, with the Law containing a considerable degree of specification of the information that must be included in the notification.
As already mentioned, more than half of shares must be represented for a meeting to be quorate. However if a 50 per cent quorum cannot be achieved, a new meeting can be called, within at least ten days, at which a 30 per cent quorum would suffice. (The Articles of Association of an AO with over 500,000 shareholders can specify a lower percentage.) (Art.58)
Extraordinary meetings can be called by the board of directors, an auditor or a shareholder controlling 10 per cent of shares. Shareholders with two per cent of shares can ask to have items included on the agenda (Art.53). An important aspect of shareholders' meetings, given the difficulties with share registers, is how it is determined who has the right to be registered at the meeting as a shareholder. The list of valid shareholders is determined by the board of directors on the basis of the share register at least 60 days before the meeting and before the date of the meeting has been fixed (Art.51). This should make it difficult for directors to time meetings in such a way as to exclude new shareholders. Article 44 requires share registers to be held by an outside depositary.58
The Law sets out in detail the issues over which a shareholders' meeting has exclusive jurisdiction, shares jurisdiction with the board of directors, and over which it has no jurisdiction, as well as the majorities required in various circumstances. (Art.48, 49 and 65. The functions of the management committee are set out in Article 70.) Exclusive jurisdiction is exercised over, among others, changes to the Articles of Association, except for certain forms of change in paid-up capital, determination of the size (within limits set by the Law) and membership of the board of directors and other corporate structures, and major purchases or sales of assets (for details on this point, see Art.79). Given the cases of management dilution of the holdings of undesirable shareholders by issuing new shares and allocating them to their own supporters, it is important to note the exclusive jurisdiction of the shareholders' meeting over share issues, and the requirement that existing shareholders be given first option on new shares in proportion to their existing holdings. (Art.40.1. For further details on share distributions, see Art.39.) The AO's own share dealings and involvement in holding companies and financial-industrial groups are a matter of joint jurisdiction, as are the determination of dividends (although interim dividends can be set by the board acting alone) (Art.42).
The board of directors of an AO with over 1,000 shareholders must have at least seven members; nine members are required for AOs with over 10,000 shareholders. Members of the management committee must be in a minority on the board, and the general director cannot simultaneously chair the board (Art.66). Although the Law makes no provisions for the representation of minority shareholders on boards of directors, the requirement that 'cumulative voting' be used in elections to boards is presumably designed to provide some protection (Art.59).59 The Federal Commission on the Capital Market reports an increase in outsider representation on boards since the first half of 1994, but also that outsiders are still underrepresented.60
One would be unwise to underestimate the ingenuity of Russian managers in finding ways around the Law, or their willingness to simply disobey it.61 Nevertheless the most obvious sources of abuse of shareholders' rights have been dealt with. The fact that the Law - one passed after all by a communist-dominated parliament - has a pro-shareholder orientation is in itself worthy of note. As Dmitrii Vasil'ev, the head of the Federal Commission on the Capital Market, put it after the passage of the Law: As a result, we can say most violations of shareholders' rights are now illegal in Russia.
However, I must say that I remain concerned by a tendency toward legal nihilism among investors in Russia. By this, I mean that investors are reluctant to use the courts; instead they try to appeal to various bureaucratic officials when they have a problem. However, those who take this route soon discover that, for every individual bureaucrat prepared to give one answer, another is just as ready to say something else. I would urge investors to start appealing to the courts to resolve disputes. I recognize that this is still quite difficult in Russia, but if we don't use the courts, they will never get better. We must be constantly pressuring them to learn this area of law.62 Vasil'ev is right that recourse is often sought in bureaucrats' offices before the courts. Guns and bombs are also all too often used to resolve matters of shareholder rights and corporate governance.63 It is beyond the scope of this paper to discuss that approach to business affairs in detail. However some brief attention will be devoted to the possibilities of legal redress for abuse of shareholder rights. The Russian Federation inherited from the Soviet Union a well-established commercial court system, although one which naturally had little experience of shareholder rights' issues. However the system has had to willy-nilly adapt quickly, with the privatisation process producing a flood of cases over the last few years.
The author is not a lawyer and is unable to comment on either the wisdom or compliance with the law of the decisions of the commercial courts. There are suggestions that local courts are likely to be under the control of local elites, with those elites particularly likely to put pressure on the courts to find against investors coming into the region from outside.64 As reprehensible as such a phenomenon might be, even in such a case there is the option of appeal to the central court. It is clearly not a hotbed of radical reformers, but it does not obviously favour one side or another in corporate governance cases - sometimes shareholders win, sometimes managers.
Even among commentators who consider the commercial courts to be reasonably competent and even-handed, there is a recognition that enforcement is a major problem. The victims of judgments are all too ready to ignore them, to interpret them in a tendentious way, or to drag out appeal procedures in a clearly obstructive way.65 Hendley et al do however note that court judgments, even if not explicitly enforced, can stimulate the private resolution of conflict.66
Presumably in order to overcome enforcement problems within the commercial jurisdiction, efforts have been made to bring securities issues into the criminal jurisdiction. The Comprehensive Program on Protecting Investors and Shareholders' Rights, issued in March 1996, called for amendments to the Criminal Code that established securities fraud and corporate governance misdeeds as criminal offenses. It was also suggested that the Federal Commission be given the power to fine wrongdoers and file lawsuits, including class action lawsuits.67 The Criminal Code that came into effect at the beginning of 1997 did indeed define and provide penalties for securities misdeeds.68 The author is not aware of any prosecutions under its provisions. Here we have done little more than scratch the surface of shareholder rights' issues. Nevertheless the evidence would suggest that like everything else in Russia at the moment shareholders' rights are observed at best in a very rough and ready way. However it also suggests that very determined shareholders are able to have those rights observed. Clearly the costs to those shareholders are considerable and presumably have major deterrence value for potential shareholders, less determined but otherwise well-qualified to assist in the turn-around of poorly performing Russian enterprises.
The 'financial-industrial group' model Before turning to the last key facet of privatisation - whether it has produced an improvement in corporate performance - some brief comments are in order on the new 'FIG' model of Russian corporate ownership. The claim is that the old 'management ownership' model is breaking down, particularly in the most strategic parts of the economy, and that the new owners are primarily major domestic banks. The model also involves a considerable degree of vertical and horizontal integration of producer enterprises.
This is not the place to present detailed data on the phenomenon.69 In very general terms 'FIG ownership' is probably no bad thing: it provides concentrated outside ownership with greater access to investment funds than any manager-owners are likely to have. But a number of serious questions are being asked, based on some clearly troubling Russian episodes and to some extent Czech and Asian Tiger, especially Korean, experience.
These questions include: do excessively close links between FIGs and politicians breed corruption and the misallocation of resources; are banks buying into industry in order to provide captive customers for their loans, something which is again likely to lead to a misallocation of financial resources; do the banks at the core of the FIGs force their subsidiaries to deal with other members of the group in ways that compromise optimal performance;70 do even the biggest Russian FIGs have the financial and management resources to provide worthwhile inputs into their acquisitions; and does a bank-based capitalism put enough emphasis on shareholder value, profitability, transparency and share liquidity.
Russian FIGs are perhaps able to defend themselves at least partially against some of these charges. They seem to use links with politicians to obtain assets for hard-nosed commercial reasons, rather than politicians using them for 'soft budget constraint' political and social ends; they are restrained in their lending to their acquisitions, but do provide loans or arrange finance when the need is clearly there; and their affairs are no less transparent than the insider dealings of manager-owners. Despite these partial defences, the matter is clearly still open and deserving of far more detailed examination.
Has privatisation produced changes in corporate performance? Ultimately privatisation has to be judged in terms of whether it produces improvements in corporate performance. The persistent sluggishness of the Russian economy and GNP growth - an economy and GNP which are now dominated by private ownership - must at least raise questions. The defenders of privatisation would clearly claim, with some degree of justification, that privatisation cannot be held responsible alone for the failures of the economy: an investment climate cannot be produced just by privatisation; there are major taxation and currency value problems affecting economic performance; and bankruptcy was always going to be the only appropriate medicine for many Russian enterprises.
These points, although not removing all questions as to the efficacy of privatisation, do make a 'macroeconomic' evaluation problematic. That makes a 'microeconomic' approach attractive. Single enterprise case studies could clearly be useful in this regard. Kabalina has compared in a very interesting way two similar enterprises, one characterised by management ownership, the other taken over by a Moscow bank. She strongly suggests that the management-owned enterprise has performed better, essentially because it is better managed.71
A few surveys that have compared the performance of state-owned and privately owned enterprises are also available. One has to be wary of such surveys, since state-owned enterprises are by now so relatively rare, and probably in state hands for such specific and atypical reasons, as to make comparison with private enterprises - at least as a test of the efficacy of privatisation - problematic.
The first survey, of 92 enterprises in two regions carried out in October 1993, found generally very little difference between state-owned, insider-owned and outsider-owned enterprises in terms of sales, profitability and short-term restructuring. Privately owned enterprises were somewhat more likely to export, but the whole sample exported at low levels. Outsider owned enterprises were more likely to utilise capacity than state and insider owned enterprises. Generally, the biggest differences, although they were not overwhelming, were between new start-ups and the rest.72 A 1994 survey of 321 firms in all sectors, reported by Earle and Estrin, found that an outside-owned enterprise was more likely to restructure than one that was worker owned, but one that was manager-owned was most likely of all. Manager-owned and outside-owned enterprises were also likely to have higher productivity than worker-owned, but again the best performers were the manager-owned.73 Linz and Krueger summarise a number of surveys. They report that the earlier ones show no correlation between privatisation and restructuring, but in later surveys the correlation does become positive. However they also note a smaller correlation between privatisation and survivability, which is perhaps a better indicator of performance than restructuring.74
The final survey to be mentioned here was commissioned by the Duma's Commission on the Analysis of the Outcomes of Privatisation and covered data for 1993-95.75 A total of 2438 enterprises in eight sectors were examined, of which 575 were fully state-owned, 596 had state holdings over 25%, and 1267 had state holdings below 25%. The survey found that by all indicators, indicators which measured both financial health and production performance, the lower the level of state ownership the better the performance. It also found that over time the gap between private and state performance widened.76
The survey data are clearly contradictory, although if any difference is find between state-owned and private enterprises in terms of performance, the difference is in favour of the privately owned. There is general agreement that workforce ownership leads to poor performance. But there is disagreement as to the consequences of management versus outsider ownership.
Gradually they are doing so, and gradually they are improving their ability to exercise and enforce their ownership rights. Sometimes they are doing so in ways that are no less reprehensible than the methods of the manager-owners. There are also reasons to be concerned about the long-term consequences of the sort of bank-dominated and highly integrated ownership that many of the outsiders have brought. The best that can be said at this stage is that all modern economies have at their peak a corporate sector dominated by large integrated institutions.
Clearly the private sector, and thereby privatisation, has to bear some responsibility for an economy in which it has a 70% share but which is unable to provide in anything like adequate proportions growth or welfare. But in this there are other factors also at work. Indeed there are some small indications, at both macro- and micro-levels, of a positive correlation between private ownership and good performance. With time that correlation could well become stronger and more evident.
1 There is an enormous literature on Russian privatisation. Some publications that cover the political issues involved are L.D. Nelson and I.Y. Kuzes, Property to the People. The struggle for radical economic reform in Russia, Sharpe, Armont NY, 1994; L.D. Nelson and I.Y. Kuzes, Radical Reform in Yeltsin's Russia, Sharpe, Armont NY, 1995; J.R. Blasi, M. Kroumova, D. Kruse, Kremlin Capitalism. Privatizing the Russian economy, Cornell UP, Ithaca and NY, 1997. For a summary of the procedures, see 'Privatisation of Russian industry', Australian Journal of Political Science, vol.29, no.1, March 1994, pp.135-53.
2 Invest-Kur'er, November 1997, p.41; J. Earle and S. Estrin, Privatization versus competition: changing enterprise behavior in Russia, Centre for Economic Performance, London School of Economics, Discussion paper No.316, December 1996, pp.9,22.
3 'On measures for ensuring guaranteed payments into the federal budget of receipts from privatisation', presidential decree No.478 of 11 May 1995 (Sobrania pravitel'stva, no.20, 1995, item 1776.
4 Invest-Kur'er, December 1997, pp.31 and 36.
5 Kommersant, 10 April 1997, p.9 and 11 April 1997, p.9.
6 For the original list, see government decree No.949 of 18 September 1995 (Sobranie zakonodatel'stva, no.41, 1995, item 3899). The 1997 data can be found in Invest-Kur'er, March 1997, p.8; December 1997, p.36.
7 'Board of directors' is a not entirely direct translation of the Russian sovet direktorov (council of directors). The collegial body of enterprise managers, pravlenie in Russian, will be called the 'management committee'
8 Invest-Kur'er, March 1997, p.9.
9 Invest-Kur'er, March 1997, p.9.
10 For example, Kommersant, 26 November 1993, p.8. For a survey based finding that there is a positive correlation between state share ownership and observance of shareholders' rights, see D. Willer, Corporate Governance and Shareholder Rights in Russia, Centre for Economic Performance, Discussion Paper No.343, London School of Economics, April 1997, p.1.
11 Corporate Ownership and Corporate Governance in the Russian Federation, Research report, Federal Commission on the Capital Market, Moscow, May 1996, p.4.
12 L. Allio, M.M. Dobek, N. Mikhailov, D.L. Weimer, 'Post-communist privatization as a test of theories of institutional change', in D.L. Weimer (ed.), The Political Economy of Property Rights. Institutional change and credibility in the reform of centrally planned economies Cambridge UP, 1997, p.332.
13 A.S. Bim, 'Ownership and control of Russian enterprises and strategies of stockholders', Communist Economies and Economic Transformation, vol.8, no.4, 1996, p.473. Working paper WP-96-050, International Institute for Applied Systems Analysis, Laxenburg, May 1996, p.4. See also p.26, and Earle, Ownership, p.12.
14 On asset stripping managers, see Bim, 'Ownership', pp.476-78.
15Kommersant, 25 December 1993, p.6; 26 February 1994, p.6; 27 September 1994, p.9; Metallurg, no.1, 1994, p.11; Obshchaia gazeta, 2-8 December 1994, p.6; Gurkov, Typology, pp.15-16.
16 Gurkov, Typology, p.15.
17 The main provision of Option 1 was that the workforce was given 25% of shares gratis, but these shares were non-voting. The majority of the rest would be sold off in various ways to outsiders paying cash or vouchers.
18 Delovoi mir, 1 February 1994, p.5; Izvestiia, 15 November 1994, p.4; Igor Gurkov and Gary Asselbergs, 'Ownership and control in Russian privatised companies: evidence from a survey', Communist Economies and Economic Transformation, vol.7, no.2, 1995, pp.199-206; Bim, 'Ownership', pp.486-87.
19 Gurkov, Typology, pp.14-15; Susan J. Linz and Gary Krueger, 'Russia's managers in transition: pilferers or paladins?', Post-Soviet Geography and Economics, vol.37, no.7, 1996, p.421. See also Delovoi mir, 5 March 1996, p.3; Izvestiia, 16 October 1997, p.4..
20 Izvestiia, 28 June 1994, p.5.
21 For other evidence of such changes, see Bim, 'Ownership', pp.4-5.
22 S. Fortescue, 'Privatisation of large-scale Russian industry' in A. Saikal and W. Maley, Russia in Search of its Future, Cambridge UP, 1995, p.89; Izvestiia, 2 November 1994, p.5.
23 A. Kuznetsov and O. Kuznetsova, 'Privatisation, shareholding and the efficiency argument: Russian experience', Europe-Asia Studies, vol.48, no.7, 1996, p.1177.
24 The Economist, 23 December 1995 - 5 January 1996, p.107; Business Central Europe, February 1996, pp.54-5.
25 L. Summers, 'Quote - Unquote: "1996 was a year consumed less by policy than by politics and cardiology"', Transition (World Bank), vol.8, no.1, February 1997, p.6; R. Frydman, K. Pistor, A. Rapaczynski, 'Investing in Insider-Dominated Firms: a study of voucher privatization funds in Russia', in R. Frydman, Ch. Gray, A. Rapaczynski (eds), Corporate Governance in Central Europe and Russia, Central European University Press, Budapest, 1996, pp.224-26.
26 For an account of the adventures of the representatives of Kakha Bendukidze's NIPEK as they travelled beyond the Polar Circle to buy up the seven per cent of shares needed to gain control of an oil exploration enterprise, see Kommersant, 30 May 1995, p.5. They were arrested by the local police, refused landing rights at the airport, refused accommodation and food, had their telephone cut off, and threatened with violence. They were able to get only a further four per cent of shares.
27 For example, Kommersant, 8 August 1997, p.10; 18 December 1997, p.10.
28 Bim, Ownership, p.473; Corporate Ownership, p.6; Gurkov, Typology, pp.13-16.
29 Ownership, p.22.
30Those that collected vouchers from the general population, sold them on the secondary market, and then disappeared with the money.
31 Frydman, 'Investing', p.202.
32 For considerable detail on these matters, see Frydman, 'Investing'.
33 Bim, 'Ownership', p.498.
34For a critical analysis of the bank and state domination of the Czech system, see Business Central Europe, February 1996, pp.10-11.
35For some, the latter characterisation applies particularly to the 'foreign' involvement in non-ferrous metallurgy.
36 Joel Hellman, 'Russia adjusts to stability', Transition (OMRI), 17 May 1996, p.7.
37Izvestiia, 16 January 1996, p.5.
38Kuznetsov, ''Privatisation', p.1183; Veronika Kabalina, 'Privatisation and restructuring of enterprises: under "insider" or "outsider" control?', in Simon Clarke (ed.), Conflict and Change in the Russian Industrial Enterprise, Elgar, Cheltenham, 1996, pp.241-2. This debate is closely linked to the very important and interesting debate on the need for and dangers of a 'strong' state in economic transition. M. McFaul, 'State power, institutional change, and the politics of privatization in Russia', World Politics, vol.47, no.2, January 1995, pp.210-43. See also McFaul's 'The allocation of property rights in Russia: the first round', Communist and Post-Communist Studies, vol.29, no.3, 1996, pp.287-308. As the sub-title suggests, here McFaul recognises that significant shifts in ownership could occur post-privatisation. See in particular his final paragraph, p.308.
39 Earle, Ownership Structures.
40 Bim, 'Ownership', pp.487-88.
41 D. Willer, 'Corporate Governance and shareholder rights in Russia', in R. Layard and G. Lucas (eds), Investment Prospects in Russia, Centre for Economic Performance, London School of Economics, February 1997, p.88.
42 Gurkov, Typology, p.12,16,21,32; Earle and Estrin, Privatization, p.8.
43 Bim, 'Ownership', pp.492-93.
44 Gurkov, Typology, p.13-16; T. Dolgopiatova, The Transitional Model of the Behavior of Russian Industrial Enterprises (on the basis of regular surveys during 1991-1995), Working paper WP-96-057, International Institute for Applied Systems Analysis, Laxenburg, May 1996, p.12.
45For earlier presentations of this view by the author, see S. Fortescue, 'The role of a strong state and privatisation: the Russian case', paper presented to a conference of the Australasian Association for Communist and Post-Communist Studies, Latrobe University, 23-24 September 1995; Policy-Making for Russian Industry, Macmillan, London and Basingstoke, 1997, chapter 2.
46 Biznes-Karta Rossii. Chernaia i tsvetnaia metallurgiia, khimicheskaia promyshlennost', NPO 'Nauka' - MP 'NIK', Moscow, 1992; Biznes-Karta 93, vol.25, Metallurgiia. Metalloobrabotka, MP 'NIK', Moscow, 1993; Biznes-Karta 97. vol.1, Gornodobyvaiushchaia promyshlennost'. Rossiia and vol.25-1, Metallurgiia SNG, ADI 'Biznes-Karta', Moscow, 1997; Spisok predpriiatii i organizatsii. Komitet Rossiiskoi Federatsii po Metallurgii, Moscow, 1993.
47Investing, p.56
48 'Privatisation', p.1177.
49 W. Andreff, A. Radygin, G. Malginov, 'The typical shareholding's structure of the Russian privatized enterprises, main investors and corporate governance', mimeograph, October 1996, p.10.
50 Ownership, pp.21,24.
51 Kommersant, 24 October 1995, p.9; 9 April 1997, p.10.
52Kommersant, 7 February 1995, p.5; 22 November 1995, p.9; 16 January 1996, p.9; 9 April 1997, p.10; Corporate Ownership, p.17.
53For an example, see Delovoi mir, 30 August 1995, p.2.
54Kommersant, 24 May 1995, p.14.
55 Willer, Corporate Governance, p.6.
56Delovoi mir, 30 August 1995, p.2. For a summary list, see Andreff, 'Typical', pp.4-5.
57For accounts of the Law's gestation, see Kommersant, 16 December 1994, p.2; 14 January 1995, p.2; 27 May 1995, p.2; Nezavisimaia gazeta, 26 November 1994, p.2. The text of the Law is in Sobranie zakonodatel'stva, no.1, 1996, item 1.
58 For tardiness in meeting that requirement, see Willer, 'Corporate governance', in Layard and Lucas, Investment Prospects, p.87. Although note the comments in the same publication from Stephen Barber, an active institutional investor in Russian equities, that the matter has greatly improved in recent times. pp.119-20.
59 Under cumulative voting each share with voting rights has a number of votes equal to the number of vacancies. Shareholders can give all their votes to a single candidate or split them among a number of candidates. Ekonomika i zhizn', no.23, 1996, p.39.
60 Corporate Ownership, pp.14-15. For other data, see Kuznetsov and Kuznetsova, 'Privatisation', p.1176; Frydman, 'Investing', pp.214-16.
61 K. Hendley, B.W. Ickes, P. Murrell, R. Ryterman, 'Observations on the use of law by Russian enterprises', Post-Soviet Affairs, vol.13, no.1, 1997, pp.33-34.
62 D. Vasiliev, 'Chairman announces 1996 program', Regulatory Update. A newsletter of the Russian Federation Commission on Securities and the Capital Market, vol.2, issue 2, April 1996, p.1. Gray and Hendley are of the view that the strength of insider control of Russian enterprises has stunted the development of effective commercial law structures. Cheryl W. Gray and Kathryn Hendley, Developing Commercial Law in Transition Economies, World Bank Policy Research Working Paper No.1528, Washington DC, November 1995.
63 For a case of an outside director being murdered the day before a crucial board meeting, see Kommersant, 15 October 1994, p.21. See also Kommersant, 11 July 1997, pp.1-2.
64 Hendley, 'Observations', p.25; Kommersant, 25 June 1997, p.9.
65 Hendley, 'Observations', p.25; Kommersant, 15 July 1997, p.7; 23 September 1997, p.7.
66 Hendley, 'Observations', p.25.
67 'Yeltsin issues shareholders' rights initiative', Regulatory Update, vol.2, issue 2, April 1996, pp.1 and 3.
68 'New Criminal Code to take effect', Regulatory Update, vol.3, issue 1, January 1997, p.1.
69 The author will present data on the mining and metals sector in his paper at the forthcoming AACPCS/ANZSA 1998 International Conference on Communist and Post-Communist Societies, Melbourne, 7-10 July 1998.
70 Kabalina, 'Privatisation', p.261.
71 Kabalina, 'Privatisation'. It should be pointed out that if, as seems probably from internal evidence, her pseudonymous enterprise 'Ore' is the Lebedinsk Enrichment Combine, major issues of ownership and performance remain unresolved today. Kommersant, 3 June 1997, p.9.
72 Earle, Ownership, pp.22-24.
73 Earle and Estrin, Privatization, p.15.
74 Linz and Krueger, 'Russia's managers', pp.403,419.
75 As S. Molozhavyi, a deputy chair of the Ministry of State Assets, pointed out with some glee, the survey was commissioned by a body determined to arrive at negative findings, something which for him makes the positive findings particularly noteworthy. Invest-Kur'er, March 1997, pp.3-4.
76 Panorama privatizatsii, no.7, July 1997, pp.39-49.