Experience Values Mission Articles and Comments Contact
   Corporate Governance
   Strategy and BSC
   Investment services
   Trade finance
   SME financing

Articles and Comments

Print version


Vladimir Sidorovich
Corporate Governance and Ethics in Russia.


In the last few years, corporate governance has been among the top 10 most topical issues in economic literature and periodicals. The scandals around Enron and WorldCom, and, for example, the shooting of seven shareholders of a chemical plant in Karachaevo-Cherkessia in 2004, are all, one way or another, united by common problems, where flaws in corporate governance (although, certainly, not only them) have led to the well-known consequences.

We will define corporate governance as "the system (internal mechanisms) by which business corporations are directed and controlled."1. Literature contains many comprehensive definitions, which can be easily found by those interested.

Appropriate corporate governance is regarded as an important instrument, which makes an enterprise more perfect in terms of various parameters and thus permits the enterprise to develop more successfully. Corporate governance is not an ethical category. Ethical issues, certainly, relate to corporate governance same as they relate to any kind of human activity. Without limiting ourselves to this argument, we will proceed further by examining in detail the relationship between corporate governance institutions and ethics and measures designed to ensure (mutual) improvement of both.

In corporate governance, enterprise management structures and mechanisms directly and obviously interlock with ethics of human economic behavior, the moral choice.

To emphasize this close relationship, Professor Josef Wieland from Germany introduced the concept of Governanceethik (composite words are common in German, and in this case it is a combination of English "Governance" and German "Ethik", ethics). It means that an enterprise's activities are determined not only by formal (external) laws and (internal) orders and directives, but also by ethical conceptions and values inherent in each of its members. According to his idea, these values represent "informal structures" of corporate governance and therefore its integral part. From this derives the expediency of "values management" at the micro-level, which is reflected in the creation of appropriate organizational structures within an enterprise, which complement traditional risk management and internal control. 2.

Values management within an enterprise is seen as a complement to traditional formal legislative instruments regulating corporate governance practices.

The reasons behind the Enron and WorldCom cases were not formal legal flaws in corporate governance, which on paper were exemplary in both companies, but immoral actions by their executives, which are partly explained (but not justified) by the specificity of a public company's system of goals and management in specific country conditions. It may be said that unethical behavior not only revealed weaknesses of the state-legal system of corporate governance regulation, but also demonstrated the inadequacy of its "formal", external side.

It is obvious that management of the "value side" of corporate governance is effective when there are certain social framework conditions, but even when these conditions are available, they do not fully protect from unethical behavior of persons who have monopoly over key management decision-making. Therefore, developing legislative regulation and regulatory control in the corporate governance sphere remains an important task.

Measures on corporate governance development and related laws adopted abroad in recent years may be regarded, in certain cases, as a response of the public and the government to unethical behavior by entrepreneurs and managers (non-disclosure of information and falsification of financial statements, but in effect a lie, infringement of shareholders' rights, etc.)

For instance, the logic behind the enactment of the Sarbanes-Oxley Act may be described by the following scheme: "lied - inflicted harm to shareholders and public - got rich by deception - pay for your sins". Recalling the principle "deception = violence" formulated by A. Schopenhauer, this legislative act may be viewed as an action aiming to restore morality and thereby to protect the existing social order. It is obvious that many of the negative sides of Russia's governance practices in the 1990s and at present are not attributable to lack of knowledge of management technology and operation of internal mechanisms, which are fairly easy to learn (there is no shortage of literature and various local and international educational programs), bur rather to immoral economic behavior, which is due to a complex of historical and social circumstances and personal value factors. Such interrelated offences of appropriate corporate governance practices, typical for us, as falsification of financial statements, deception of minority shareholders and "arbitrary" dividend policy, are nothing else than violation of ethical norms.3.

It is unquestionable that an appropriately built corporate governance system restrains company members from some of the potential unlawful and unethical actions, helping to settle disputes "within the limits of the legal field".

That is why the activities to develop the corporate governance institution undertaken in Russia in recent years in the form of educational and training missions and publication of non-binding recommendations (such as Code of Corporate Behavior) deserve praise and support. However, this activity might not only contribute to improvement of economic behavior and business manageability, but may also help to disguise actual relationship.

After getting an idea of modern "economic fashion", enterprises use it to "dress up properly", hide their true face under a handsome mask, e.g. when entering upon international capital markets, without changing the relationship contents. As it is noted in the Corporate Governance Handbook prepared by the International Finance Corporation (IFC), "in practice, corporate governance reforms are often … used for propaganda purposes".

Realizing that there is an old domestic tradition of "non-compulsory law abidance", I, nevertheless, share the view that at the current historical stage in Russia's development, "legislation might be favored over voluntary codes." "4.

Discoursing on self-regulation and "voluntary self-obligations", contemporary western theorists of economic ethics also recognize that "in many cases, there will be a need for legal changes in the external business behavior environment"5 to guarantee bona fide compliance with the norms. That is why it is deemed necessary to incorporate in legislation a number of provisions of the Code of Corporate Behavior, taking into account best practice of corporate governance and international experience."6.

Legislation and government obviously cannot regulate each aspect of corporate behavior. On the other hand, there is a manifest need for a legislative initiative aimed at strict prevention of unethical corporate behavior which negatively affects business climate. The educational and preventive task of such legislation is urgent, and today social and economic prerequisites for its accomplishment have already "ripened".

Although the law does not make people moral, does not "transform the human nature, does not liquidate sin, but through fear, both external and internal, keeps sin within certain limits"7, still, assuming a historical approach to this issue, it is difficult to negate its educational role (but only provided that the law does not contradict the basic moral values, since "the moral right underlies any lawful legislation"8).

Changing human behavior, organizations and the state is an on-going and a long-run process. Neither corporate governance, nor didacticism, nor legislation and the state can play the role of a panacea. On the other hand, there are institutions, measures and actions, which have impact on the direction of development, on turning its vector head, at least slightly, in a certain direction. And it is such actions that make up progress (or vice versa).

In this context, corporate governance, although it is only its external form, within which human actions may be or may not be moral - subject to its correct setup, support by law and protection by the state - may be viewed as a structure contributing to the observance of moral principles, establishment of a just order in the society.

In conclusion I will add that I wouldn't want to create a wrong impression of contrasting here an honest state and immoral private business. Even remembering the share and the role of the state in economy, it can be confidently stated that appropriate corporate governance rules incorporated in legislation are essentially necessary for the state itself.

     _____________________________________

1 OECD Principles of Corporate Governance

2 For more details see, for instance, site

3 Notwithstanding the pluralism of value concepts in the modern world, I proceed from the existence of a commonly shared set of basic ethical norms, formed in the society at a certain historical stage, whose non-observance is conductive to destruction of the society. Thus, even in the example of seven people shot "for ownership" in the first paragraph, the sponsor of this crime himself would not call it "the triumph of good" or would claim it to be moral, just, etc.

4 "Why codes of governance work?", The McKinsey Quarterly, 2004, № 2.

5 A.Suchanek, "Oekonomische Ethik", Mohr Siebek, 2001, s. 118-119

6 "On the ways to normativization of corporate governance institutions in Russia", see O.V. Osipenko "Corporate Governance Institutions and Shareholder Conflicts in Russia", Moscow, ICF Ekmos, 2004, pp. 180-182.

7N. Berdyaev, Experience of Paradoxical Ethics, Moscow, Folio, 2004, p. 149

8A. Schopenhauer, The World and Will and Representation, vol.1, Chapter 62

Copyright © 2005 Sidorovich & Partners
Made by <S.M.ART>