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Directors Declare Independence. Independent Directors of State Corporations Ask Medvedev for Less State Guidelines.

20.07.2011 / gazeta.ru

The Government should refrain from directive voting in state-owned companies, otherwise the replacement of state officials on state-owned companies` Boards of Directors is useless, independent directors told Dmitry Medvedev. The State should trust Boards of Directors more, and in case of any misuse of power the shareholder can always litigate. This practice should form, concurred the President, promising to slash directives.

President Dmitry Medvedev held a meeting with independent directors and professional State representatives of State Corporations Boards of Directors in Gorki. The President first spoke about replacing state officials with Independent Directors in summer 2008. One Director may represent the State, while other State officials on the Board "are involved in lobbying and cronyism", the President explained at that time. As early as March 2011, Medvedev ordered to withdraw field-specific Deputy Directors and Ministers from State Corporation Boards and replace them with Independent Directors by July 1, and choose the Chairmen of the Boards of Directors from non-officials by October 1.

"The goals of such decisions are well known. Enhancing transparency, management effectiveness and as a result the company`s capitalization growth. But this is probably secondary", Medvedev said at the meeting. According to the President, ultimately, the situation in State Corporations affects the investment appeal of the Russian economy.

"That`s why a lot will depend on you, your professional experience, your business reputation", stressed the President. He said that he knows corporate management firsthand, as during eight years he had been the member of the Gazprom Board of Directors.

One of the major issues is the state directives voting. "It`s not as simple as it may seem", said Medvedev. Independent Directors have restricted powers, and they are objective", said Elena Titova, member of Sovkomflot Board of Directors. In her opinion, Independent Directors should represent shareholders` interests, that means the State, and the main goal should be capitalization growth and improvement of State Corporations business. "But some State Corporations, especially monopolies, have purely commercial interests. The Independent Directors are more effective in the situation where there are more commercial interests than social and infrastructural tasks", Titova admitted, adding that the directives relate to the social and non-commercial part.

"The directives issue is closely connected to whether we give the authority, whether we trust our Independent Directors and representatives", says member of the Supervisory Board of the Mortgage Housing Credit Agency and Rector of the Russian Economic School Sergey Guriev. According to the expert, directive voting has no future:

"We hire very qualified people, pay them big money, and then they simply vote by the directive, actually functioning as a robot.

Alternative directive voting, except specified by the law, is to replace the State in State Corporations management, delegating control to the Board of Directors. "If state officials can clearly formulate the corporate strategy and what the corporation needs to do, then the members of the Board of Directors will perform the tasks well", Guriev explained and added that otherwise it will be possible to file lawsuits against the members of the Board of Directors.

"If we hire independent members of the Boards of Directors, we simply need to trust them and not to hogtie them with directives", Medvedev agreed. However, the president noticed that he does not remember shareholders litigating against the Board of Directors for damages from unqualified actions. But this practice should be formed: then "this will contribute to the proper attitude of the Board of Directors, who need to understand that they do not only occupy a seat and get paid some money, but bear responsibility".

There are no lawsuits, as no liability insurance exists, Independent Directors say. According to Guriev, today the consequences of the lack of liability insurance are "catastrophic". "Today we hear nothing about shareholders filing a lawsuit against independent directors, and we understand why: they are not insured.

That`s why if we come to a wrong decision, shareholders sue us, they will get our property, we will go into bankruptcy, but the 1 billion or 10 billion rubles that we need to compensate as a result of our mistake, they will not get", Guriev explained. "Some of them, to be honest, are rather well-to-do, there will be ten or more persons that you can easily file a lawsuit against, taking into consideration the property they own is enough for pursuing their own interests", Medvedev answered. But according to Guriev, the number of directors who can pay the damages of Sberbank or "Rosneft" is limited. Most Independent Directors spoke in favor of Tax Code amendments to compel State Corporations to insure liability. Today this practice exists in some State Corporations, but it is not well established, Titova admits. "If liability is not insured, then the State will never be able to allow independent directors to make a decision, there`s too much at stake", Guriev said.

Some orders will be given following the results of the meeting, Presidential Aide Arkadiy Dvorkovich told "Gazeta.Ru".

"We already have some verbal orders to minimize directives and check the tax consequences of liability insurance", Dvorkovich explained. According to the Presidential Aide, authorities can be told to regularly consult with Independent Directors.

The range of matters that the State can issue directives on should be restricted. "A directive, for example, can consider state-owned share management. All the other issues, particularly social, can be resolved by the Board of Directors just as well as by the officials who issue the directives”, says Director of the PKF Strategic Analysis Department Igor Nikolaev. “At the end of the day, it is a matter of trust: if a person is independent he is responsible, when someone decides for him he is not responsible, those who issue the directives bear the responsibility”.

 

Olga Tanas

Improvement of corporate governanceArkady DvorkovichSergei Guriev