The Fight for Shareholder Rights in Russia

MOSCOW: Abuse of shareholders by managers and majority owners cripples foreign investment in Russia. No surprise, then, that improving corporate governance and protecting minority shareholders is becoming a concern of the Putin government. Refusing shareholders entry to shareholders meetings, or striking their names off share registers – two popular gimmicks of a few years ago – are rarer nowadays. Some “oligarchs” have undergone Damascene conversions and are trying to improve their image among investors. A few companies, such as the oil giant Yukos, even appoint independent directors from abroad. These private sector improvements, however, are nowhere to be seen among large businesses controlled by Government, even though many of these firms have a substantial minority of private shareholders who need protection from managerial abuse. Management in these firms, indeed, has become more arrogant and inventive in violating shareholder rights. As an independent member of the boards of electricity utility RAO UES and the gas giant Gazprom, I know directly of their waywardness.

United Energy Systems (UES) is headed by Anatoly Chubais, a former deputy prime minister with a reputation as a reformer. At board meetings, tame in-house managers usually outvote me. If UES bosses want to buy a skyscraper despite UES’s making a $350 million loss, it is fine with them. In November we were asked to approve – without review – huge overpayments on administration. Sometimes we hear that UES has acquired a TV station or finances a political faction in the Duma via a subsidiary. Extracting information on any of these matters is almost impossible.

After 3 years as CEO, Chubais decided to “restructure” UES, thinking that glib talk about competition and liberalization will garner him continued support from London and New York. He tried to brow-beat investors at a board meeting in the Kremlin where – in good Soviet tradition – everyone was expected to vote unanimously to split the company into small pieces so as to sell them at low prices to cronies, political allies, and friendly oligarchs. When shareholders balked, Chubais sought to neutralize his opponents, unilaterally changing the agreement with the Bank of New York to control the votes of most holders of American Depository Rights (ADRs).

Disgusted, many UES shareholders sold their shares. Others are fighting on – calling an extraordinary shareholders meeting, complaining to Government, possibly suing. What do investors want? To solve the issue of government set electricity rates, to stop theft and mismanagement, to put the company’s house in order before any “restructuring.” No investor believes that current management will sell UES assets at fair prices.