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. Last Updated: 07/27/2016

Corporate Governance: A Modern Topic or a Necessity?

UnknownNataly Nikolaeva Director Government Affairs and Acting Public Affairs Officer Citigroup
"Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The aim is to align as nearly as possible the interests of individuals, corporations and society."

-- Sir Adrian Cadbury

in "Global Corporate Governance Forum,"

World Bank, 2000

Recently there has been considerable interest in the corporate governance practices of companies, particularly since the high-profile collapses of large U.S. firms such as Enron Corporation and Worldcom. This is also happening on the background of legislative and regulatory changes, an increase in the scope of audit and other internal control and risk management activities and increased public scrutiny.

It is also becoming a very modern topic for Russian companies and Russian banks as they are entering capital markets and changing their management styles and structures. It can also be attributed to shareholders leaving the management of companies to professionals.

The question that arises is which corporate governance model will Russia adopt and which will best suit the current market conditions. Is it the liberal model that is common in Anglo-American countries that tends to give priority to the interests of shareholders or the coordinated model that one finds in continental Europe and Japan that also recognizes the interests of workers, managers, suppliers, customers, and the community?

Both models have distinct competitive advantages, but in different ways. The liberal model of corporate governance encourages radical innovation and cost competition, whereas the coordinated model of corporate governance facilitates incremental innovation and quality competition.

Russia has the benefit of taking into account the best international practices of corporate governance, but what has to be taken into account? While regulators are essential for establishing principles, they play a secondary role when it comes to putting them into practice.

Ultimately, it is companies' practices that determine whether corporate governance delivers benefit or not. First of all, compliance is the founding block and companies and other market players have to adhere to laws and regulations imposed. This is a challenge for a number of reasons -- constantly changing legislation and variances in interpretation at different levels as well as evolving understanding of the overall need to comply by staff at various levels. Secondly, in order to create an effective corporate governance model main stakeholders have to be defined and key elements have to be created. Some of them are still new concepts for the market -- like a proactive audit committee or full transparent disclosures and open communication to the public on significant events of the corporate life.

What can support the development of an efficient governance structure in a company? A comprehensive set of policies and procedures that are documented, made clear and enforced by all employees have to be developed and have to be kept updated and available. An internal control framework and structure that evaluates, controls and mitigates possible risks and follows up on significant business risks is one of the other key elements. Internal and external audits that provide effective feedback to the management, the board and the shareholders are the final controls to be imposed. The system will not work without appropriate staffing and communication -- both internal and external.

The corporate governance structure should not be treated as a regulatory requirement but as a way of adding value to the company. This is the goal that should be taken in to account when creating one.