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. Last Updated: 07/27/2016

Corporate Governance Requires More Than PR

Former German Chancellor Gerhard SchrЪder was appointed as an independent director to TNK-BP last week. It is too early to tell whether SchrЪder will be truly independent in this position, but the appointment once again brings the issue to the forefront.

The window dressing that passed for good corporate governance is fast becoming a thing of the past. The expensive, glossy audited annual reports, which used to be enough to secure financing, won't do the job anymore.

For many Russian companies, corporate governance and transparency are not priorities. These concepts sound pleasant and Western to their ears, but they treat them as PR tools rather than fundamental corporate principles that need to be incorporated when making business decisions. It used to be that prior to a MICEX or RTS listing, many companies would throw together a board with several independent directors, even though most of them did not understand the function of an independent director. The minutes from subsequent board meetings were filled with vapid issues and unanimous "aye" votes.

This certainly won't cut the mustard anymore. Track records must be built anew. Today, any risk manager worth his salt will need to examine the records of any prospective financing with a far keener eye for the obvious fault lines. He needs to ask the following questions: How long has the board been structured? How long have base committees been operational? Do their directors and officers have professional liability insurance against shareholder suits and other claims of negligence and breach of fiduciary duty?

Independent means independent. Russian companies with government participation in their assets may not require outside financing, but when an analyst points out that a company's independent directors are also current or past government employees, this will cause serious problems. It will put most of the company's published data in question and complicate the financial decision process.

Russian firms that have addressed the issue of corporate governance proactively will be the first to emerge from this economic crisis stronger and more dynamic.

The best form of risk management incorporates the highest standards of corporate governance, which independent directors need to implement at every level.

Paul Goncharoff is a member of the supervisory board and chairman of the ethics committee for the Independent Directors Association in Russia.