State Says It Backs Ethics in Business

Coming against the background of boardroom battles at TNK-BP and Norilsk Nickel, a conference Friday on the issue of corporate governance appeared to be either the lucky beneficiary of current events or the victim of bad timing.

Senior government officials made the most of the situation, stressing Russia's commitment to achieving higher standards of corporate governance, both at state-owned companies and private corporations.

Newly appointed First Deputy Prime Minister Igor Shuvalov pushed the government's message at the conference, emphasizing that better corporate governance would be vital as the country embarked on enormous new investment to develop infrastructure and diversify the economy.

"If Russia is to become a major financial center, we need to embrace evolving corporate standards and be very clear about the niche we want to fill," Shuvalov said.

His comments were echoed by Deputy Prime Minister Alexander Zhukov, who said state-controlled corporations should lead by example when it comes to disclosure and transparency.

"We want to be seen as a country with a good deal of responsibility in business ... and a country with which you can deal effectively and comfortably," he told investors.

The conference was organized by the World Bank Group and the National Council on Corporate Governance, which brings together representatives from Russian business and the government.

Dmitry Medvedev has made improved transparency and a commitment to the rule of law central themes at the beginning of his presidency, calling them fundamental to the attraction of investment that the country badly needs.

But the Kremlin's message appeared at odds with the backroom battle at TNK-BP, as the Russian shareholders -- Alfa Group, Access and Renova -- called Friday for CEO Bob Dudley to step down, arguing that he represented the interests of co-owner BP.

The stream of problems for TNK-BP -- running from back taxes to visa problems for the company's employees -- has been widely interpreted by analysts as a state-led effort to bring Gazprom in as a controlling shareholder.

"For everybody who invests here, [what's going on at TNK-BP] gives you reason to pause," said James Cook, a director at Aurora Russia, a private-equity company.

Shuvalov said the government did not wish to get involved in the conflict.

But analysts said the government was involved behind the scenes, as it seeks to regain control over one of the last of the so-called legacy issues.

"The state is being very careful to try and distance itself" from the shareholders' dispute in TNK-BP, said Chris Weafer, chief strategist at UralSib. "Hence, the assumption is that local shareholders are taking on the role of the state and applying the pressure."

With moves to consolidate its control over key sectors in recent years, and in energy as the most obvious example, the state is often doing the opposite of distancing itself.

The practice of having state officials work as "independent" directors is widespread in certain industries, with First Deputy Prime Minister Igor Sechin's position as chairman at state-run oil giant Rosneft only the most obvious example.

"High-ranking officials are not efficient as independent directors," Anna Belova, the director for strategic development at the Siberian Coal and Energy Company told the conference. "Very often, the time they devote to reading documents on the situation in the company amounts to the time they spend in a traffic jam on their way to a board meeting."

Meanwhile, corporate battles are being waged at some of the country's most public companies. Norilsk, the world's largest nickel and palladium miner, is proving to be a key testing ground for transparency, as the management fights to defend minority shareholder rights amid Oleg Deripaska's efforts to merge his company RusAl with the miner.

Analysts have expressed concern that RusAl, a private company, has overvalued itself at a reported $45 billion, while undervaluing Norilsk. If the deal were to be pushed through, analysts have said minority shareholders could see the value of their stakes eroded.

On Wednesday, Denis Morozov, the general director at Norilsk, withdrew his candidacy for the June 30 vote to elect a new board at the company, saying there should be greater opportunities for independent directors.

At the conference Friday, he said the possibility of a hostile takeover at Norilsk had demonstrated just how important making information public can be.

"We had to show our stakeholders around the world in 2007 that their interests were not in danger, so we advertised harder, through channels like advertisements in newspapers presentations around the world."

There has also been conflict at Polyus Gold, where independent directors have opposed the miner's plans to carve off strategic assets without full board approval.

The spat spilled out into the open recently, when management said it would not endorse the reappointment of an independent director, whom they claim has a conflict of interests as a result of work one of his companies has carried out for the key shareholders, Vladimir Potanin's Interros and Mikhail Prokhorov's Onexim Group.

Sources familiar with the row say minority shareholders are "very disturbed" by the developments.

Each of these battles underpins the need for clearer corporate governance.

"Russia's key political priority is to change the investment image of Russia from a difficult, risky place to invest to one that's more receptive," Weafer said. "This is the rebranding theme that the Kremlin is very keen to pursue."

But the list of elements involved in such a branding enumerated by Zhukov at the conference gives a sense of just how daunting the task will be.

"We have to work out legislation to toughen the obligation companies have to make information public, make managers materially responsible for the decisions they make, bolster the role of independent directors, work out mechanisms companies can use to resolve their corporate disputes outside the courts, and make ownership structures transparent," Zhukov said.

"Sometimes we only learn about the real owners of Russian companies from foreign exchanges," he added, smiling.

Norilsk's Morozov said Friday that Russian law in some cases made open reporting impossible.

"We launched an ADR program in 2001, which required us to provide a maximum in transparency and disclose information as to our reserves," Morozov said. "But Russian law forbade this, as the platinum stocks were considered a state secret."

Investors said many companies in Russia are keen to move toward more open and Western practices, but often lack the necessary knowledge to do so.

"We've found in Russia that there's a willingness to have good corporate governance, but a lot of companies just don't know what's required, or what investors are looking for," said Cook, of Aurora Capital.

Potanin, who chairs the National Council on Corporate Governance, illustrated the particular way corporate governance works in Russia using the Norilsk example.

"In a big company like Norilsk Nickel, a new investor, RusAl, appeared, which changed the company," he said on the sideline of the conference. "And now it is entertaining to watch how the new shareholders fight for their positions, for the minority shareholders' votes, through the media and analysts' public comments."

"But the most constructive way is, of course, a proper dialog between the company's shareholders," he said.