Russian police recently raided the Moscow offices of the Hermitage Fund, the high-profile activist shareholder, but its CEO Bill Browder believes there are still prospects for improving corporate governance in Russia.
The Russian authorities emphasised that their latest investigation purely concerned allegations of tax evasion by a fund advised by a Hermitage subsidiary. However, Hermitage has been under pressure since March 2006, when Browder was refused a visa to enter Russia on national security grounds.
Speaking to Emerging Markets shortly before the latest intervention by the Russian interior ministry, Browder underlined that state ownership was not necessarily a bar to stronger corporate governance, which ultimately came down to individual management teams.
“There are large private and even government-controlled companies that are absolutely attuned to their valuations and interested in maximizing shareholder value, and there are other companies without any concern in the world about their valuations,” he told Emerging Markets.
Browder also applied the case-by-case approach to the impact of state involvement on minority shareholders, but said that this had some negative implications.
“It can be very helpful, it can be very harmful. If you were an investor in Yukos, that didn’t work out so well. If you were an investor in Sberbank, then it did. But this raises the overall country risk, Russian companies could trade at higher valuations if there was more consistency,” he observed.
At Standard & Poor’s in Moscow, director of governance services Julia Kochetygova also questioned the role of the government.
“We don’t see corporate governance being a top priority of Russian officials. The clearest evidence of that is the poor state of corporate governance in state-owned companies,” Kochetygova told Emerging Markets.
She warned that some investors were not paying enough attention to the risks of weak corporate governance, focusing instead on the administrative support of the government in valuing state-owned companies.
“It’s not just about the treatment of minority shareholders. Another danger is the ability of these companies to maintain their financial results, because they don’t have proper governance mechanisms such as spending controls, succession planning for management, and incentive structures, so you would hardly expect these companies to perform well in the market,” Kochetygova observed.
This sentiment was echoed by Browder, who saw risks submerged in the recent surge of portfolio investment in Russia.
“When there is a rising tide of liquidity, it hides all the rocks underneath. When the liquidity recedes, then it becomes quite clear which companies have problems and which ones don't,” Browder told Emerging Markets.
However, Mattias Westman, CEO of another major activist investment firm in Russia, Prosperity Capital Management, was more positive on the role of the Russian government. Westman originally learnt Russian during military service in his native Sweden, but these days, he takes a less confrontational approach to shareholder activism, and he told Emerging Markets that the authorities understand the value of corporate governance at the highest level.
He said Prosperity had “constructive meetings” with President Putin over power utility RAO UES in 2003, which resulted in legislation that prevented asset stripping by the company’s previous management. Westman even suggested that the Yukos affair may ultimately benefit the investment environment.
“Minority shareholders were losing out because Yukos was putting profits elsewhere for tax avoidance schemes. Yukos was a turning point because people realised there would be a substantial problem if you didn’t pay your taxes properly,” Westman noted.
The diplomatic approach may be paying off. Prosperity now has larger assets under management than Hermitage, which has underperformed the Russian equity market benchmark year-to-date.