Expert Cites Problems With Corporate Governance in Russia: The Case of Norilsk Nickel

As Russia struggles to improve its investment climate and attract more foreign direct investment, the country’s largest corporations are starting to resemble the nearly-forgotten Soviet economic plants, with incompetent management, lack of supervision, and very creative accounting, according to the report published in Moscow this week.

Mikhail Delyagin, the author of the report entitled “Why Corporate Governance Is Once Again on the Agenda And Do Russian Companies Really Need It?”,  is one of the most influential Russian economists and the former chief analyst of the Russian council of economic advisers.

In the report, Delyagin compares Russian and Western corporate governance practices based on the examples of JSK Norilsk Nickel, one of Russia’s largest companies and Australian-British BHP Billiton and finds that “top managers of the Russian companies often openly disregard the universally adopted international standards, describing this as “adaptation to the Russian realities” to suit their needs.”

He cites the typical Russian practice of installing the team of commissars, i.e. “members of elites and lobby groups, who lack work experience in a specific area” to run the companies — a practice used by the Soviets since the WWI, when military units were supervised by commissars,  politically-reliable but incompetent officers. Yet, states Delyagin, “all military operations were still planned by professional military officers,” while Norilsk Nickel is being run by Vladimir  Strzhalkovsky, the former KGB officer and the owner of the travel agency with no industry experience whatsoever. Many of Strzhalkovky’s team also share his “tourism” background.

Delyagin compares the top managers of the Russian miner to those of BHP Billiton, who boast excellent education in the corresponding fields or extensive industry experience and have advanced degrees from top institutions and notes that lack of Norilsk managers’ experience has led to the array of problems for the miner, such as undercover deals, siphoning money from the company, neglect of safety regulations and social obligations and even making the town of Norilsk an ecological disaster.

The expert also cites the questionable sale of the company’s treasury shares to Trafigura, Norilsk Nickel’s direct competitor in metal sales. This transaction, which has not been approved by the board, might have reduced the shareholders’ value and would not have been possible in a well-established corporate governance environment. “The US Federal Court ordered Trafigura to submit all documented evidence and give witness testimony both in respect of that specific deal and all its agreements with Norilsk Nickel and its key shareholder, Interros,” writes Delyagin.

In his report, Delyagin calls for structural changes at Russia’s largest corporations, especially those that are publicly-traded as their image reflects on that of the country. The situation with poor corporate governance at Norilsk Nickel might cause damage to the investment climate in Russia. Delyagin recommends to try and ‘normalize’ the company’s corporate culture. “This means that the values shared by the civilized international business community should not just be proclaimed but must be followed in every management decision made at the Company. These values are quite simple if company managers believe in and share them. And if they don’t believe in them and do not want to share them, then the top managers must be replaced however loyal they may be… There’s only one alternative; devaluation of the business and regress of a company that was created, and this must be remembered, not by the genius of a handful of business people (who, in theory, can do as they please with their creation) but by the labour of many generations of Russian people,” concludes Delyagin.

Complete report on corporate governance in Russia is available on Russia! magazine (www.readrussia.com)

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