Interview of S. A. Shvetsov – First Deputy Chairman of the Bank of Russia, member of the Supervisory Board of Sberbank
In September 2013, the Central Bank obtained the powers to regulate and supervise corporate relations in joint-stock companies, and six months later it approved the Code of Corporate Relations. On the eve of the VI Russian Corporate Governance Forum, First Deputy Chairman of the Central Bank Sergey Shvetsov (has the superior Director international qualification – IoD Chartered Director) answered the questions about how the system of information disclosure to minority shareholders should be adjusted and why the Central Bank wants to strengthen the responsibility of boards of directors.
– The Corporate Governance Code has been in force for over two and a half years. Does the Central Bank analyze the successfulness of its implementation? If so, what are the results?
– Of course, we do analyze it. We have collected information about the progress of the code implementation in public companies from their annual statements and will publish the results in the nearest time. For the time being I am not ready to speak about them, but I firmly believe that the implementation trend will be positive.
The implementation of the norms of the code depends not only on a company itself. It's also essential that the legislation does not hinder that process. In some aspects, this is not so at the moment. For instance, it's a problem to delegate powers to the board of directors from the shareholder meeting, because in the judicial practice it is interpreted as infringement of minority shareholders' rights. Due to that, such delegation involves making an offer for stock buyback from shareholders.
We have been doing our best to promote particular provisions of the code through explanatory activities – conferences and workshops. Some provisions of the code have been embodied in the rules of listing. For example, these include the minimal number of independent directors in boards of directors and the requirements for heads of the board's committees.
Needless to say that tough approaches to the implementation of the code provisions are often resisted by issuers. This is why the principle “comply with or explain” is enshrined in the rules. Thus, the board of directors may itself interpret the degree of independence of its member, for instance if the latter has been within the board for over seven years. Of course, we could have established the stringent rule: seven years and no more. But considering the shortage of highly qualified and truly independent directors and in the conditions of the sanctions, such tough implementation would have been improper. Moreover, the spirit of the code is a voluntary and conscientious usage of the corporate governance rules embodied in it.
– In other words, you are not planning to make the requirements of the code mandatory, aren't you?
– This would not ensure the desired effect. Literal interpretation of the rules instead of their natural and conscientious usage can sometimes cause an opposite effect. As the regulator, we are striving to implement the code primarily through explanatory activities.
You know, there is a form of consulting when a consultant does not describe what should be done, but only asks questions. Answering those questions, a consultee finds the right solution himself. The Central Bank is like that consultant. We say: “Do you refuse to implement that rule? All right. But explain your shareholders why you refuse.” The management of a company often comes to the conclusion that there are no reasonable arguments to depart from the code. Quite the contrary, it is possible and necessary to implement particular provisions of the code.
– You've mentioned explanatory activities. Is the Central Bank really planning to create a task group that would explain the provisions of the code?
– Such group has already been formed within the Bank of Russia and it will soon start its work. We realize that the code largely consists not of rules, but of principles that are subject to interpretation. Discrepancies may occur within a joint-stock company itself, between a stock exchange and an issuer, between an issuer and its shareholders and investors, etc. The special-purpose body is needed to provide the market with the uniform interpretation of the provisions of the code. That will be a standing group. Requests for interpretation of the code that we receive will be redirected to that group.
– What questions do you receive?
– A very popular question is about the subordination of an internal auditor if the latter also has other powers in addition to the audit function. Companies ask if this is appropriate. Another question is about what should be done if the director of the internal audit department reports not to the company's chief executive, but to his deputy. May the chief executive officer propose a candidacy to the board of directors for the post of the internal audit head or is this improper in terms of the corporate governance standards? There are plenty of questions regarding what an independent director means. The code does describe the features characterizing the director's dependence. But in general, the interpretation is under complete control of the board of directors that may recognize a particular director independent.
– Do you agree with the statement that the level of corporate governance in Russia is not high enough, or is this a misperception?
– There are three aspects forming an investor’s overall view about the jurisdiction. The first one is the legislation and enforcement, i.e. how the laws protect shareholders' rights and how the norms of the law are supported by real actions of the judicial system and the regulators. The second issue is the maturity of the financial market infrastructure. The third one is individual forms of corporate governance in each particular company. We do have defects in the first issue. In the second component, we fully comply with the world standards. And the third one is very heterogeneous. However, I can say with confidence that our market does have companies and banks whose corporate governance is at the highest level. If we take their financial ratios and capitalization, such companies outperform many international peers.
– In other words, the corporate governance quality does influence financial performance, doesn't it?
– Of course, it does. If the governance in a corporation is inefficient, its profit is lower than it could have been. And accordingly, vice versa: the more efficient is the governance, the better are usually the financial ratios. Investors do not only analyze financial performance showing the management's efforts in the past. They also consider the strategy, analyze the management's ability to implement it, compare the company's plans versus the management's actions in real life. Besides, the potential of the industry where a company works is essential.
– You've mentioned courts. How much does the judicial practice promote confidence in the Russian market?
– The corporate governance is changing, and the pace of those changes is unprecedented. Our financial market is very young, while the judicial practice should develop for years in the conditions of a stable legislation. Thus, courts have to address a very hard task. There has not yet been enough time for the judicial practice to properly develop, when something new already emerges in the laws. You know there is such a term – ‘regulatory tsunami’. It is generally used in respect of the world regulation in the banking sector. To a certain extent, such tsunami has flooded corporate relations in Russia, and indeed the entire Russian financial market. For this reason, the situation is objectively difficult for courts. It would only be possible to discuss the quality of the existing judicial practice after the completion of the period of the large-scale alteration of the legislation. But this will require several more years.
– In what industries of the Russian economy the quality of corporate governance is the highest?
– I can assert that there are stars almost in all industries: in metallurgy, trade, communication, finance, etc.
– That is to say, in the sectors where there is mostly no state participation?
– You know, the system of the corporate governance rules has been invented for a company without any majority shareholder at all. After all, it is considered that the existence of a majority shareholder simplifies governance because he takes full responsibility for the company's performance. In public companies, the quality of corporate governance depends on the state: a company is working just in the way the state has organized its work. Motivation of the public officials responsible for that work is extremely important. In general, the existence of the state as an owner in the economy is highly questionable. But in our environment when we have just started implementing best corporate governance practices, the state's equity interest in a company sometimes increases confidence among customers, especially in the financial sector. Although it must be admitted that this does infringe the terms of market competition.
– The expert community, including within the Expert Council of the Central Bank, is actively discussing the possibility of strengthening the powers of boards of directors. What is your opinion about this idea?
– It is hazardous to create powers where there is no responsibility. The Central Bank's stance – strengthening of the powers of supervisory bodies – should be accompanied with increase of their responsibility for decisions adopted. When it comes to abuse, this should involve financial and criminal liability. As regards professional impropriety, this should be disqualification as administrative responsibility. This resembles the way drivers work: if you often get involved in road accidents, even if you have no malice, probably you should abandon that occupation. Members of boards of directors should be motivated to attentively and scrupulously approach each and every decision being made. Incentives, professional interest and status are the carrot, while the stick is still to be developed by the legislative bodies so as to make the system well-balanced.
– Who will approve decisions on disqualification?
– Both shareholders of a company itself and the regulator may act as a plaintiff because destruction of shareholder value of one company adversely affects the reputation of the market in general. A critical point is that in case of bankruptcy of a company the burden of proving the adequacy of actions of members of the board of directors should lie not on the plaintiff, but on members themselves. Who will make a decision on disqualification – the court or the Bank of Russia – depends on components of an offense. But imposition of administrative and criminal liability for deliberate acts shall remain within the court jurisdiction, while disqualification due to professional impropriety may be enforced by the securities market regulator. The draft law on business reputation is currently being improved – it will stipulate the cases where and subject to what procedure a director may be disqualified.
– Is the Central Bank preparing any amendments to the corporate laws?
– Yes, we are currently working on them. We are actively collaborating with the Ministry of Economic Development and the Ministry of Justice on these matters. We are developing several draft laws, namely about information disclosure, removal of the restrictions on the delegation of the function to boards of directors from shareholders' meetings. I hope that at least a part of those laws will be adopted by the State Duma already this year.
– Are there any plans to more precisely stipulate the rights of minority shareholders as regards their demands to companies to disclose nonpublic information?
– This is a good, but a complicated question. Our philosophy is as follows: one of the features of a sound market is absence of information asymmetry between buyers and sellers. If this information may be disclosed to a minority shareholder, it should be preferably disclosed to everyone. At the same time, we believe that a minority shareholder in the system of corporate governance of a public company should not perform control and audit functions. There is a board of directors, internal and external audit, an audit commission, the regulator, the prosecutor's office, etc. for that purpose. But it must be confessed that the quality of work of external audit today often fails to conform to the requirements of the world standards and regulators, and the Ministry of Finance together with the Central Bank continue working to solve that problem. Besides, there are some companies where boards of directors fail to quite efficiently perform control functions, while the internal audit service is excessively dependent on executive bodies. Therefore, shareholders undertake an extrinsic function and try to detect abuses in a company. Sometimes these efforts are justified; in some cases they are image-building for a shareholder; and sometimes they are greenmailing when a shareholder blackmails a company forcing it to buy back his stake at a premium in return for cessation of the greenmail.
We are planning to stipulate it in the legislation that shareholders owning less than 1 % of shares will not be allowed to request information not subject to disclosure. Whereas owners of 10 % of shares and more should be entitled to initiate consideration by the board of directors of any issues they are concerned with, including those involving commercial secrets. Moreover, refusal to provide information to shareholders will be transferred to the jurisdiction of the board of directors from the management. In our opinion, such structure will not reduce control over a company on the part of shareholders and will correct the existing asymmetry in terms of access to information for current and potential investors.
– Does the Central Bank still believe it unreasonable to oblige companies, at least public ones, to publish information about their top-managers' incomes?
– We absolutely believe that shareholders should know that the management does receive incentives. We insist that this very information should be disclosed in detail, but not amounts of incentives. Shareholders should also know the total amount of expenses for the management bodies. The issue whether it is necessary to disclose numbers on every member of the executive body shall be solved by the board of directors. If this enhances the transparency of the company's operations and improves the collaboration with its shareholders, such decision may be adopted and stipulated in the labor agreement with the management. If the board of directors considers that publishing these data would hamper employment of highly competent staff by the company, this should not be done. I hope that such scheme will be soon specified in the legislation.
– You said at the Saint Petersburg forum that minority shareholders do not trust boards of directors in Russia. Why so?
– Trust is based on practical experience and information background. If practical experience proves that institutions perform efficiently, trust is developing bit by bit. I will repeat – a favorable information background also matters. Negative information is more easily remembered because one needs to react to it. To make up for one conventional unit of negative information, it is necessary to produce 5–10 positive units. We do have boards of directors that work very efficiently. But there are also opposite examples, and, unfortunately, quite many of them. Investors also question and distrust the way how boards of directors are formed and work. These complaints are largely reasonable. Hence, we are working to implement the code simultaneously changing the legislation.