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Firm-Level Determinants of Board System Choice: Evidence from Russia

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Abstract

In this paper, using a unique data set of joint-stock companies, we empirically examine the determinants of the choice and size of the collective executive board, a core element of the multi-tier board system of Russian firms. Our empirical evidence strongly suggests that the need of company executives for a collective management system is a key driver for the formation of a collective executive board, while outside investors are generally indifferent toward its adoption as a means to strengthening the monitoring and control functions over top management. We also found that Russian firms in the pursuit of the internationalization of their business activities tend to avoid the establishment of a collective executive board, which is an unorthodox corporate organ from the viewpoint of the international standard of corporate governance systems.

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Notes

  1. No reference is made in this paper to the relevant system of each country due to space limitations. For details, see country studies by Lausten (2002), Eriksson et al. (2003), van Ees et al. (2003), Gorton and Schmid (2004), Her and Mahajan (2005), Maury (2006), and Cho and Rui (2009) as well as international comparisons by Hopt and Leyens (2004), Jungmann (2006), Enriques and Volpin (2007), and Maitland-Walker (2008).

  2. This refers to the Federal Law on Joint-Stock Companies dated 26 December 1995. This and the next sections were written with reference to laws or regulations that were in force during the period of the 2005 enterprise survey on which the empirical analysis in this paper is based. See Iwasaki (2003, 2007a) for more details on the legislative structure of Russian joint-stock companies.

  3. According to Article 11.1 of the Federal Law on Banks and Banking Activities dated 2 December 1990, however, establishment of an executive board is not a voluntary affair left to the discretion of a banking institution but a rule.

  4. The rights and obligations of an appointed executive board member are stipulated in a contract to be agreed upon between the board member and the firm as his or her employer, and either the chairman of the board of directors or a person delegated by the board of directors shall sign the contract with the board member on behalf of the company. The labor law applies to relationships between firms and executive board members only to the extent that it does not conflict with the Law on JSCs (Art. 69 (3)). As reported by Iwasaki (2007a), however, there is a fierce debate over the rights of board members who are dismissed during the term of their appointment. The focal point in the controversy is whether contractual relationships between firms and executive board members are regulated on a civil-law basis or whether they are based on labor law (Mogilevskii, 2001; Rubeko, 2007; Kyrov, 2009).

  5. With regard to the quorum of a collective executive board meeting and the voting rights of the board members, the Law on JSCs prescribes only that the quorum for a collective executive board meeting must be at least half of the appointed board members and that the voting rights of the board members should never be delegated to other persons, including other board members (Art. 70 (2)).

  6. This refers to the resolution of the Federal Commission for the Securities Market dated 4 April 2002 regarding the recommendation on the adoption of the Corporate Governance Code. Concrete examples of such important matters listed in the said provision include (a) formulation of flagship documents including strategic action policies as well as financial and managerial plans, (b) approval of major transactions and loans, each of which amounts to the equivalent of at least 5% of company's total assets, (c) a series of issues related to the organization and management of subsidiaries, branches, and agents, and (d) approval of internal documents, including company working rules and job instructions.

  7. The questionnaire used for the joint survey was carefully designed by the project members and experts of the Levada Center based on similar surveys conducted in the past, although it is impossible to completely avoid bias and moral hazard problems with respect to self-reporting.

  8. In addition, workers’ joint-stock companies are very different from typical joint-stock companies in their establishment, capital management principles, allocation of authority among corporate organs, and decision making with regard to the appointment and remuneration of corporate officers (Iwasaki, 2003, 2007a).

  9. In this survey, we also asked respondents about other aspects of their companies, including: (a) year and way of establishment; (b) form of incorporation; (c) ownership structure; (d) composition of top management teams and statutory company organs; (e) production, sales, investment, and fund procurement activities; (f) financial performance; (g) affiliation with a business group and basic attributes of the business group his/her company belongs to; (e) relationship with the state and business associations, and so forth. See Dolgopyatova and Iwasaki (2006) and Dolgopyatova et al. (2009, Appendix) for more details on the methods and results of the survey.

  10. In fact, the CG Code recommends that boards of directors hold at least one meeting every 6 weeks (Chapter 3, Section 4, Article 4.2.1) while calling on collective executive boards to hold at least one meeting every week (Chapter 4, Section 4, Article 4.1.1).

  11. The follow-up survey was conducted using the SPARK commercial enterprise database (http://www.spark.interfax.ru). The kind assistance from Svetlana Avdasheva and Tatiana Dolgopyatova in the implementation of the survey is highly appreciated.

  12. This refers to Part I of the Civil Code dated 30 November 1994. Between these two forms of incorporation, certain differences are stipulated in terms of the minimum capital requirement, the number of shareholders, and the obligation to disclose information (Iwasaki, 2007a,2007b).

  13. The name ‘directorate’ appeared in the context of a core business executive board in industrial enterprises as early as 29 June 1927, when the Resolution of the Central Executive Committee USSR and the Council of People's Commissars ‘On the Approval of the Provisions of State-Owned Industrial Trusts’ were promulgated. Later on, it was also inherited through a series of government documents as follows: the Resolution of the Cabinet of Ministers of the USSR ‘On the Approval of the Provisions of Socialist State-Owned Production Enterprise’ dated 4 October 1965; the Resolution of the Cabinet of Ministers of the USSR ‘On the Approval of the Provisions of Joint-Stock Companies and Limited Liability Companies and the Provisions of Securities’ dated 19 July 1990; the Resolution of the Cabinet of Ministers of the Russian Socialist Federation ‘On the Approval of the Provisions of Joint-Stock Companies’ dated 25 December 1990; and the Presidential Decree of the Russian Federation ‘On Organizational Measures to Transform State-Owned Enterprises and Voluntary Associations of State-Owned Enterprise into Joint-Stock Companies’ dated 1 July 1992.

  14. When the independent variables used in the first stage of estimation materially overlap with those used in the second stage, the conventional Heckman two-step estimation method, which combines the probit and the OLS models, tends to cause a multicollinearity problem due to the use of the inverse Mill’s ratio. For this reason, the maximum likelihood method is employed to estimate our sample selection models.

  15. We completely exclude the ownership share of domestic individual shareholders from OWNOUT in order to eliminate the ownership effects from those of the management executives’ family members, relatives, or friends as well as those of employees, all of whom are formally categorized as outside shareholders.

  16. The mean of the absolute value (standard deviation) and the maximum value of the correlation coefficient of the independent variables that are simultaneously estimated in the regression analysis are 0.090 (0.090) and 0.543, respectively. Thus, every combination falls well below the threshold of 0.700 for possible multicollinearity.

  17. Using the same data set in this paper, Iwasaki (2008) analyzed the composition of the board of directors and found that the establishment of a collective executive board has no statistically significant impact on the outside directorship. This result is considered to be attributable to the behavior of senior managers, who avoid placing restrictive regulations on the directorship being represented by collective executive board members.

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Acknowledgements

This paper is the product of a Japanese-Russian joint research project entitled ‘Corporate Governance and Integration Processes in the Russian Economy’ launched by the Institute of Economic Research, Hitotsubashi University (Tokyo), and the Institute for Industrial and Market Studies, National Research University – Higher School of Economics (Moscow). The research was financially supported by grants-in-aid for scientific research from the Ministry of Education and Sciences in Japan (Nos. 21402025 and 23243032) and the Joint Usage and Research Center of the Institute of Economic Research, Kyoto University (FY2011) and Hitotsubashi University (FY2011–2012). I am grateful to Josef Brada (the editor), Norio Horie, Katsuyuki Kubo, Satoshi Mizobata, Fumikazu Sugiura, Riichi Tabata, and an anonymous referee as well as participants at the study meeting at the Institute of Economic Research, Hitotsubashi University, Kunitachi, Tokyo, 21 December 2011, and the Conference on Economic and Financial System Development in the Pacific-Rim Region, Honolulu, Hawaii, 16–19 May 2012, for their helpful comments and suggestions. I would also like to thank Yoshisada Shida for his research assistance and Jim Treadway for his editorial assistance.

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  1. Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi City, Tokyo, 186-8603, Japan

    Ichiro Iwasaki

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Iwasaki, I. Firm-Level Determinants of Board System Choice: Evidence from Russia. Comp Econ Stud 55, 636–671 (2013). https://doi.org/10.1057/ces.2013.6

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