Independent directors have even been recently appointed to joint-stock companies in which the state owns up to 100%.
Alexander Filatov, head of the Russian Association of Independent Directors, told Business World about the development of this management institution, which is new for the country’s economy. He said the presence of independent directors gives a company such additional advantages as the opportunity to attract top managers capable of giving a fresh impetus to business development and borrowing money in the country and abroad, which helps to create new jobs and, consequently, contributes to economic growth.
How many independent directors are there in Russian business? The first independent directors appeared in Russia at the turn of the 21st century, at first in leading companies that were fighting for a foothold on international markets.
Now there are hundreds of them. Not so long ago we held the Director of the Year 2007 competition and found out that 100 leading private companies have over 200 independent directors, as compared to 180 a year before. Usually, they head audit and personnel and reward committees, which is important for developing proper relations between shareholders and management.
Medium-sized companies are now beginning to attract independent directors. Is this just a fad or do they have serious reasons for doing so? This is definitely not about fashion.
Smaller companies need an efficient governance system as much as bigger ones. An additional impetus for introducing a couple of independent directors to the board can be the need to divide the functions of the owner and the manager.
An independent director does not just guarantee the creation of an efficient management control system, but also acts as a referee who ensures the real division of powers between owners and managers.
After all, an efficient manager is as much interested in this as the owner; he wants good results, because his reward depends on it. Constant interference from the owner who has seemingly retired can be harmful to business.
An independent director can develop an efficient system of owner control via the board of directors, by applying the principle according to which the management has obligations to the owner, while the owner also has commitments to the company and the management.
But the need to divide the functions of the owner and the manager is hardly the main and only reason for active development of the institution of independent directors, is it? I would rate it second, while the first one is definitely the opportunity to attract investment.
No serious investor today will put money in a non-transparent business with a badly shaped corporate management system.
How can independent directors help to enhance businesses’ social responsibility? Russia needs to catch up with the countries that have developed stable rules of civilised business. Companies that use resources and infrastructure must take into account the interests of not only their business and shareholders, but also of other concerned parties, above all the people, and carry out some state tasks, which can be social or environmental.
What are the main criteria of directors’ independence? The Russian Code of Corporate Governance stipulates that a proposed independent director must not be affiliated with themanagement, major beneficiary or counter agent of a company in which he or she is offered a job.
To be able to work efficiently, an independent director must have professional experience and a reputation in the professional or investment community. So far, however, the state as a shareholder relies on a different set of criteria, such as personal acquaintance and loyalty, and a specific notion of professionalism.
We are only developing a concept of nominating and electing independent directors, and should introduce effective methods of corporate governance in business more energetically.
We should change the mechanism of nominating candidates for independent directors. Shareholders should have broader opportunities to elect really independent managers capable, among other things, of taking into account the interests of both majority and minority shareholders.
However, their main task is to promote the company’s effectiveness.
Does the existence of a large group of such shareholders ensure the election of independent directors to the board? What matters is not the existence of minority shareholders, but the stake they hold in the company. Don’t confuse minority shareholders with independent directors. A 2% stake is enough to nominate a candidate for the board of directors, who, if elected, will control as much as 10% of the vote.
The norms of shareholder legislation stipulate that the boards of directors should be formed so as to represent the interests of all groups of shareholders. Besides, it is not necessarily the minority shareholders who propose independent candidates.
Company owners and managers can also do this. An independent director should not protect the interests of one or the other group in the company, but work to enhance its efficiency.
Independent directors are seemingly nominated in state-owned companies in a transparent procedure. What does this mean? I would not say the procedure is quite transparent. The majority of candidates were proposed according to the principles I have criticised. Practice shows that government officials are not efficient as company directors. They work like the voting machine, because they are too busy doing their government duties to thoroughly consider the details of the business they have been elected tomanage.
Besides, they have no material reasons to make their companies more efficient because they do not receive remuneration or bonuses as directors of these companies.
Attempts are now being made to change this system of governance, so that the strategy of state-owned companies will be at least discussed by the board of directors that should have independent members.
