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. Last Updated: 07/27/2016

Investors Wary Over Governance Quality

Corporate governance standards are deteriorating as companies stop holding initial public offerings amid the economic crisis, investors said Tuesday.

The rights of minority shareholders and bondholders are widely violated, while state intervention poses a danger for the independence of private business in Russia, foreign investors said at a Moscow roundtable titled "Corporate Governance During the Financial and Economic Crisis."

"The quality of corporate governance in Russia has deteriorated, which is a major concern for foreign portfolio investors buying or holding Russian stock," said Boris Sinegubko, head of Russia and CIS equities at UBS.

One of the main reasons for the decay of corporate governance standards has been a slowdown in IPOs, said Joerg Bongartz, chairman of Deutsche Bank in Russia. "The improvements in corporate governance in Russian companies were strongly inspired by the need for new capital from foreign markets," Bongartz said. "As the IPO activity of Russian companies is close to zero now, there are less incentives for the implementation of corporate governance."

Corporate governance in the electricity sector has been affected most by the crisis, Sinegubko said.

Investors are well aware of corporate governance disputes at TGK-2 and TGK-4, where majority shareholders have balked at implementing mandatory buyout offers to minority investors, but there are many similar conflicts in electricity sales companies that have not been made public because foreign investors have preferred to "vote with their feet" rather than deal with Russian courts, Sinegubko said.

Bondholders in various sectors face problems too, Sinegubko said. "Some companies don't pay the coupon, which causes the bond's price to plummet," he said. "After that, the company buys its bonds back from the market."

Corporate governance has also suffered in real estate because of the financial turmoil, Sinegubenko said.

"The quality of disclosure and investor relations has deteriorated at the real estate companies," he said.

Sectors like telecommunications that had the best corporate governance practices going into the crisis remain in the lead now, Bongartz said.

Bongartz cautioned that the government's intervention in the private sector might open the door to government meddling in companies' strategies. "It is not clear yet whether the government's taking stakes in Russian private companies is short- or long-term," Bongartz added.

Russian investors, however, have different concerns. A recent survey of top managers at 30 major companies, including VimpelCom, Wimm-Bill-Dann and Polyus Gold, found that 87 percent believed that the main corporate governance issues exposed by the crisis are problems in risk management. In contrast, only 35 percent named disregard for minority shareholders as a problem, according to the survey by KPMG and the National Council on Corporate Governance.