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. Last Updated: 07/27/2016

AGM Choice Limited to Cash or Questions

It's the season for shareholders' meetings, when grinning executives twirl around for their investors, unveil their profits and promise the moon. But when you look a bit past the charade, Russian firms are giving investors a choice they shouldn't have to make.

The country's five biggest blue chips -- Gazprom, Rosneft, LUKoil, Sberbank and Unified Energy System -- all held their AGMs last week along with a handful of other firms, and an interesting pattern emerged.

On the whole, the stronger the state's hold over a company's board of directors, the more dividends it decided to pay, as if to appease demands for more independence and transparency with a wad or two of cash.

The most glaring example was Sberbank, whose March public offering of about 18 percent of its capital should really have opened it up to some fresh voices. But none are going to be heard on its board during the next financial year, and the Central Bank, as the sector's regulator, will still play the two-faced role of policing the bank from the outside and supervising it from within.

This year's dividend payments, however, were upped by a hefty 64 percent.

Only Gazprom topped this figure, paying 70 percent more in dividends than last year, while making no changes to its Kremlin-wed board of directors.

Rosneft, on the other hand, increased dividends by less than 7 percent, but has opened up significantly since its initial public offering last year, with three independent directors and a U.S.-born vice president for finance.

As for LUKoil, the country's biggest nonstate firm, its dividends also did not impress, even though last year's financial results broke company records. But its board will still have four out of 11 outsiders, including a law professor and a retired vice chairman of Chevron.

Of course, the dividends are tempting, but if it comes down to a choice, analysts say better management should pay off in the end.

"To put it bluntly, the value of an asset is different in different people's hands," said Al Breach, head of research at UBS. "In state-run companies, the managers are usually not significant shareholders. They have the incentive to have a steady life, make some money, perhaps even steal some money. But it's not particularly obvious that they want to make things run better."

Merrill Lynch drove this point home on Friday, the day of Gazprom's annual shareholders' meeting, when it released a bullish report about the gas giant with one big caveat: a lack of independence is putting the company's value at risk.

For an investor, risks always come at a price, and it is one of the biggest challenges of an analyst to quantify these risks and see whether they are worth taking. "When we model a company, there is a line-item for the risks associated with corporate governance, and depending on how bad it is, the company's value can shrink by 1 percent or 2 percent," said Svetlana Borodina, head of governance services at Standard & Poor's.

It may not sound like much, but 1 percent or 2 percent shaved off of Gazprom's stock, which closed at 267 rubles ($10.34) per share on the MICEX exchange Friday, would trump this year's dividend payment of 2.54 rubles per share.

Ultimately, the hope is that companies will be able to add more value by opening up, rather than winning quick brownie points with dividend payments.