Opal''''s Site Organization and Development of Russian Business_9 ppt

Management Team and Firm Restructuring 169
managers in total employment is 1–5%. In 68% of companies, they occupy
top-managerial positions, and in 26%, middle-level positions (Malykhin
2008).
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Part II
Business Integration and
Its Impacts on Corporate
Governance
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173
7
Organizational Patterns of

Corporate Control and
Business Integration
Tatiana G. Dolgopyatova
Introduction
Conjecturing about the evolution of the Russian system of corporate
governance continues; however, it would be interesting to answer the ques-
tion of which model of governance dominant shareholders choose and
whether or not they consent to the separation of executive management
from company ownership. Reliance on hired management prompts owners
to seek other methods of control over a business entity, and they sometimes
resort to the use of internal corporate mechanisms. The issue of the gradual
separation of executive management from ownership was discussed on the
basis of records of 20 in-depth interviews with senior managers of joint-
stock companies (JSCs) (Dolgopyatova 2004). In formal terms, separation
was recognized when a general director did not own shares and other com-
pany managers held little interest. It was demonstrated that as Russian busi-
ness underwent an intense integration, the ways and means of corporate
control also saw extensive change. Some examples are as follows:
The separation of the ownership and management functions was prima-1.
rily characteristic of subsidiaries companies within company groups.
Formal separation resulted in real changes in the distribution of compe-2.
tencies, gradual delegation of some managerial issues to hired managers,
and, in particular, production and operational issues and some strategic
issues related to logistics and marketing.
Separation contributed to a more active use of internal mechanisms of 3.
corporate governance (boards of directors) by dominating owners to
exercise control over hired managers.
In academic studies (Yakovlev et al. 2006, for instance), it had been
predicted that owners would tend to depart from business management,
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174 Organization and Development of Russian Business
and this practice has received the attention of industry experts and the
business community (Korporativnoe Upravleniye 2007). The separation
of ownership from management and the delegation of authority to hired
managers are the products of two opposing trends. The institutionally
underdeveloped economy promotes the combination of both functions
to protect the rights of large shareholders. At the same time, specific skills
and competences still remain in demand under the current conditions as
well as in the long-term perspectives for the development of Russian com-
panies in the framework of a market embedded in the global economy;
therefore, the requirements for management quality are likely to become
exclusive. In many companies, owners have been withdrawing from exec-
utive management. The representatives of the reform-period managerial
corps are also affected by the time factor. They gradually retire from the
businesses, often by voluntarily selling consolidated blocks of share to
new owners.
Our main objective in this chapter is to identify, on the basis of a repre-
sentative sample, a set of factors underlying the preference of dominating
shareholders for top managers who do not hold shares of a given company.
We will empirically test two core assumptions regarding the role of corpo-
rate integration in the choice of the form of control. The first hypothesis is
that integration is a tool that replaces direct control by the shareholder and
suggests a preference for a form of control with the separation of manage-
ment and ownership.
Our survey makes it possible to identify two types of companies, one,
independent businesses, which are stand-alone entities and parent compa-
nies of holdings, and the second, business divisions, which are the rank-
and-file entities of a company group. The second hypothesis is that two
types of companies will respond differently to demands of property rights
protection and quality of management. For divisions of larger businesses,

factors of preference for hired managers are linked to the state of corporate
management, which includes that at the level of business groups. For stand-
alone companies, the main determinants for the departure of shareholders
from management are linked to the protection of property rights and the
nature of markets.
The chapter is organized as follows. The second section is a comparison
of internal tools of corporate control in which management and ownership
functions are either separate or combined. Based on the findings in the
survey, the third section contains the driving factors of choice of the form
of control with separate functions and measurement indicators, while the
fourth section is a comprehensive analysis of their possible impact on the
choice using a binary logistic regression. The final section is a summary of
the outcome of the analysis and contains a qualitative forecast of the evolu-
tion of corporate control within companies.
9780230_217287_09_cha07. dd 174 5/14/2009 3:50:14 PM
Corporate Control and Business Integration 175
Internal corporate governance tools at
different types of corporate control
Corporate integration and separation of
ownership from management
The survey data demonstrate that the patterns of a combination of owner-
ship and control are different in JSCs that represent a business or a part
of a business (Figure 7.1).
1
The separation of ownership from manage-
ment is typical (twice as often) of the enterprises that are rank-and-file
members of holding company groups, but independent firms and parent
companies are mostly operated on the basis of the inseparability of these
functions. The stakes owned by a CEO are practically the same in all
types of surveyed companies, but the few cases in which large sharehold-

ers participate in management when they are not CEOs are typical of
parent companies.
Patterns of control in rank-and-file members of company groups were
correlated with their features. The separation of management is typical
of large-scale business groups with complicated management: massive
groups with large numbers of its entities, or holding company groups
that are more widely dispersed geographically and diversified by industry
(Table 7.1). Exceeding the boundaries of a single region gives the compa-
nies with separate ownership and management an advantage of nearly
10 percentage points. Separation of functions is evident in 55% of con-
glomerates; at 13 percentage points, there are fewer vertically integrated
groups; and, at 20 percentage points, there are horizontally integrated
company groups.
02040
%
60 80 100
Independent joint
stock companies
Affiliated companies
(subsidiaries)
Parent companies
of company groups
M&D_S M_S D_S Separation of ownership and management
Figure 7.1 Links between ownership and management in integrated and independ-
ent companies
Notes: M&D_S stands for JSCs where large shareholders are managers and the CEO is a shareholder,
M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder,
D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder.
Source: Author’s illustration based on survey data.
9780230_217287_09_cha07. dd 175 5/14/2009 3:50:14 PM

Table 7.1 Ownership and management configuration at affiliated companies of holding company groups
Types of
control
Diversification of company group
by location, %:
Diversification of company group by
industry, %:
Size of
company
group by
number of
legal entities
a
A single
region of
Russia
Two or more
regions of
Russia
Russia
and
abroad
A single
industry
Technologically
related industries
Technologically
unrelated
industries
M&D_S 41.1 21.7 15.2 31.7 27.0 8.9 9.1/6.0

M_S 10.5 8.5 6.1 5.5 10.8 14.3 27.9/6.0
D_S 14.7 26.4 33.3 27.4 20.3 21.4 33.4/9.0
Separation 33.7 43.4 45.5 35.4 41.9 55.4 31.4/10.0
Significance of
differences
b
0.002 0.006 0.000/0.003
Notes:
a
Numerator: means, denominator: medians.
b
Comparison of frequencies by ␹
2
test; comparison o f means by Kruskal Wallis test in the numerator and median test in the denominator.
M&D_S stands for JScs where large shareholders are managers and the CEO is a shareholder,
M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder,
D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder.
Source: Author’s calculations based on survey data.
9780230_217287_09_cha07. dd 176 5/14/2009 3:50:15 PM
Corporate Control and Business Integration 177
Intra-corporate relations
Separation of the executive management function and use of hired manag-
ers affect the state of corporate governance of companies that select this
model of control. On the one hand, aggravation of corporate conflict could
be anticipated as a result of agency problems, while, on the other hand,
more focus by the board of directors and other corporate bodies on execu-
tive management activities would be expected.
To test these assumptions, we used the indicators describing the state of
corporate control, which included assessments by respondents of the role
of main bodies in corporate decision-making, composition of the board of

directors, relations between actors of corporate governance (Table 7.2), and
intensity of rotation of corporate governance bodies (Table 7.3).
The first assumption did not hold true. Despite the expected aggravation of
the agency problem in the wake of the separation of ownership and manage-
ment, an intra-corporate dispute was observed in a quarter of the companies
as compared to 29% in other JSCs, the difference being negligible. This can be
explained in two ways. The first explanation relates to the nature of the sur-
vey, in which respondents were managers normally reluctant to disclose con-
flicts with the owners. In addition, conflicts included not only those between
managers and shareholders but also those between large and small sharehold-
ers. It is possible that, in this case, hired managers acted as arbitrators who
took into consideration the sustainability of the company as a whole, unlike
“managing owners,” who would often ignore the claims of minority share-
holders. The second explanation is that, in formal separation, large owners
would have at their disposal a variety of tools for tight control over the man-
agement. For example, Shekshnya and Kets de Vries (2007) demonstrated, on
the basis of case studies, that where owners relinquished the management
function, they typically gave up the responsibility but retained opportunities
to intervene into business operations. The lead Russian experts in corporate
governance were unanimous that owners would strongly contain the inde-
pendence of top managers, largely because of the problem of trust rather than
that of proper qualifications (Korporativnoe Upravleniye 2007).
The second assumption was confirmed by various findings. Where own-
ership and management were separate, the internal control system demon-
strated the following features:
The decision-making role of the board turned out to be considerably 1.
larger, although no difference in the assessment of influence of the gen-
eral meeting of shareholders was observed (the significance of the dif-
ference by forms of control being 0.635). Interestingly, in the subgroup
in which the CEO was one of the shareholders, a strong influence of the

board was noted by most respondents (three-quarters).
Large outside shareholders, on the average, had more than half of the 2.
votes (almost 60%, together with independent directors) on the board,
9780230_217287_09_cha07. dd 177 5/14/2009 3:50:15 PM
178 Organization and Development of Russian Business
which enabled them to monitor the activities of the executive manage-
ment. Both the percentage of independent directors and frequency of
their membership turned out to be significantly higher. On the contrary,
where top managers and CEOs were among the shareholders, managers
had two-thirds of the votes.
We observed the most intensive board turnover: in half of the companies, 3.
the board of directors was completely or considerably replaced, while the
most conservative policies in respect of the board were maintained; when
managers and CEO were shareholders, on the other hand, less than 18%
of companies had a new or largely renewed board.
2
Table 7.2 Characteristics of intra-corporate control
Indicators M&D_S M_S D_S Separation Significance of
differences
a
Representatives in the board of directors, % of total membership
Company managers 67.0 53.6 33.6 26.3 0.000
Rank-and-file workers, trade union 5.3 8.6 4.8 3.5 0.020
Federal administration 1.3 1.8 3.9 2.4 0.013
Regional and/or local
administration
1.8 3.2 4.3 3.4 0.041
Large outside shareholders 16.7 22.7 40.3 50.7 0.000
Minority outside
shareholders

3.4 4.9 6.3 3.8 0.067
Independent directors 4.2 2.7 6.7 8.8 0.011
Influence of board of directors on corporate decision-making, % of the number of
JSCs
Strong influence 58.9 62.1 74.7 71.5 0.002
Moderate influence 29.8 27.6 21.1 25.0
Practically no influence 11.3 10.3 4.2 3.5
Corporate control indicators, % of the number of JSCs
JSCs included independent
directors in board of directors
15.1 7.3 22.4 22.6 0.014
JSCs passed through intra-
corporate disputes in 2001–2004
29.5 35.7 25.0 25.0 0.305
JSCs used outside auditing
firm from the company’s base
region
80.1 71.2 58.5 60.4 0.000
JSCs used non-auditing
service of their auditors
regularly or occasionally
75.8 59.7 78.8 68.7 0.044
Note:
a
Comparison of frequencies by ␹
2
test, means by Kruskal Wallis test.
M&D_S stands for JScs where large shareholders are managers and the CEO is a shareholder,
M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder,
D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder.

Source: Author’s calculations based on survey data.
9780230_217287_09_cha07. dd 178 5/14/2009 3:50:15 PM
Corporate Control and Business Integration 179
The CEO changed more frequently, sometimes repeatedly, with the 4.
change being increasingly initiated by shareholders. It appeared that
the director would be “entrenched” in office if he were a large or small
shareholder. On the one hand, separation could result from the replace-
ment of a director, normally following a change of owners. On the other
hand, separation undermined the position of the CEO, as confirmed by
a considerable number of rotations over several years, and contributed to
enlisting new managers from the outside. For companies with separate
functions, the director was an employee of the same company in 36% of
cases versus 68% for the other JSCs.
These companies took the lead in the rotation of the board chair-5.
man (along with companies in which managers held a large interest)
and were significantly ahead of the rest as regards multiple changes.
Moreover, the current board chairman was a company employee at 28%
of the companies with separate functions, as compared to 52% in other
companies.
Relatively often, these JSCs retained an auditor from elsewhere or a large 6.
international firm. In terms of this indicator, companies in which the
director was one of the shareholders performed no worse, but they were
more likely to raise suspicions of deviating from the principle of inde-
pendent audit.
Table 7.3 Turnover of CEOs, boards of directors, and its chairs in 2001–2004, % of
the number of respondents
Indicators of changes M&D_S M_S D_S Separation Significance of
differences
a
CEO was never changed 75.5 50.0 71.4 35.3 0.000

CEO was changed once 21.1 33.3 24.6 35.8
CEO was changed several
times
3.4 16.7 4.0 28.9
CEO was changed by
shareholders’ decision
40.6 60.0 45.2 71.0 0.000
Chairman was never changed 60.1 42.6 51.7 44.0 0.000
Chairman was changed once 32.1 47.5 30.8 31.1
Chairman was changed
several times
7.8 9.8 17.4 24.9
Board practically unchanged 72.2 22.0 16.5 17.3 0.000
Board slightly renewed 55.2 45.8 48.8 30.2
Board largely renewed 14.8 15.3 30.0 31.2
Board completely renewed 2.8 16.9 4.7 21.3
Note:
a
␹
2
test.
M&D_S stands for JScs where large shareholders are managers and the CEO is a shareholder,
M_S, for JSCs where large shareholders are managers but the CEO is not a shareholder,
D_S, for JSCs where large shareholders are not managers but the CEO is a shareholder.
Source: Author’s c.alculations based on survey data.
9780230_217287_09_cha07. dd 179 5/14/2009 3:50:15 PM
180 Organization and Development of Russian Business
Factors for the choice of corporate control forms
Various methods of corporate control provide the dominating owner with
choice options. For example, he or she must decide which type of operational

environment of companies is in favor of the selection of hired management
and the separation of ownership and management. In our empirical analy-
sis, we include four sets of factors influencing owners’ choices. Furthermore,
we define the indicators of the factors to be introduced and the specific
hypotheses to be formulated for subsequent testing.
Corporate governance and ownership
Direct participation of the owner in management under a formal contract
is a tool of property rights protection from the opportunistic behavior of
managers when institutions are weak. There are other tools of control that
substitute or complement a combination of management and ownership.
Not all of them can be reflected in a formalized questionnaire.
The basic tool is the integration of enterprises into company groups bring-
ing other instruments of control and making it possible to enlist hired man-
agement among the rank-and-file members of business groups. In this case,
parent companies and stand-alone enterprises will be less likely to separate
ownership from management.
Another tool is a very high concentration of capital, which makes it legally
possible to take control of company boards. It can also be used as a substitute
for a combination of ownership and management. With a lower concentra-
tion, a combination provides for strengthening of controlling positions of
shareholders, thereby complementing the ownership.
Another mechanism of protection (substitute) is property nontransparency
or ultimate owner (beneficiary) concealment, which, in Russia, can be reflected
by an interest owned by different legal entities or foreign investors (offshore).
3
The existence of special owners, such as the government and real for-
eign investors, multiplies the chances of selection in favor of the division
of the functions.
4
The degree of a company’s publicity should follow the

same direction. Open JSCs and, particularly, companies whose securities
are traded in stock markets must be more inclined to engage hired manag-
ers because it may be a positive signal for retail investors.
We believe that the peculiarities of internal corporate governance mecha-
nisms as tools for protection of property rights, which are important for the
monitoring of executives (for example, the composition and activities of the
board), result from the use of hired managers. For this reason, we did not include
these characteristics into the explanatory variables despite observing the link.
Path-dependency
Voucher privatization provided employees at enterprises with shares and
created preconditions for the redistribution of ownership. The managerial
9780230_217287_09_cha07. dd 180 5/14/2009 3:50:15 PM
Corporate Control and Business Integration 181
corps had strong informational and organizational advantages over other
potential owners in terms of the purchase of shares of the company, in
which case the former used their own assets, which had previously accu-
mulated in the shadow turnover (Dolgopyatova 2001). The scheme with a
shareholder being in the capacity of manager is more likely to be used at
JSCs established during privatization than at new (start-up) businesses or
reorganized companies. At the same time, the effect of privatization might
have lessened after such a long period of intensive redistribution of owner-
ship upon its completion.
Corporate management and markets
A complex operational environment often requires professional manage-
rial skills and expertise. The size and industrial classification of a company
are indirect indicators of managerial complexity. The bigger the number
of employees, the bigger the number of special competences required for
its management. With regard to production particularities and industrial
markets, the only existing aggregated industrial classification fails to allow
such industries to be clearly identified. The communications sector and

machinery-building industry can, to a certain degree of conventionality, be
considered more complex in terms of their organization and production.
Management complexity can be characterized by the particularities of
the organizational structure and management techniques, in particular,
the methods of strategic planning required due to the extension of the
decision-making horizon in the 2000s (Yakovlev 2003). The strategic plan-
ning indicator of a company is the duration of the company’s decision-
making horizon beyond 3 years, during which their chances of engaging
hired managers should multiply.
5
Restructuring plays a special role in the area of corporate management. There
is much truth in the literature on management (Shekshnya & Kets de Vries
2007) in that restructuring is much easier to perform with a single center
for decision making when a single person is acting in the capacity of owner
and top manager.
6
To measure the level of restructuring, the survey gives the
following indicators describing the development of enterprises in the period
between 2001 and 2004: introduction of new technologies, new production
capacities, essentially new products or services, and R&D activities.
As evidenced by many previous studies (Yasin 2004), the indicator of
production promotion is not valid for restructuring, since respondents will
often consider small improvements of the existing product range as new
products. This measure is normally used by a vast majority of companies
(from two-thirds to three-quarters). At the same time, some companies
might not need new products due to the nature of their industry. Since
new production capacities and new technologies are two strongly correlated
variables, our analysis will be based only on the latter, as it provides a com-
prehensive measure of restructuring.
9780230_217287_09_cha07. dd 181 5/14/2009 3:50:15 PM

182 Organization and Development of Russian Business
R&D holds a special place. On the one hand, it relates to the industry
association of the business and could partially suggest higher complexity
of its nature (and, therefore, a positive influence on the preference for the
separation of functions). On the other hand, in the weak innovative eco-
nomic environment and production decline of the 1990s, R&D may suggest
the intensification of production and technology restructuring and, thus,
negatively affect the choice of hired managers. In our opinion, the second
assumption is closer to the truth, and we consider R&D expenditures as an
indicator of restructuring.
Management complexity and peculiarities are also associated with mar-
ket conditions, namely competition including global markets as well as
enterprise engagement in the foreign trade. The survey provides respondent
assessment of the existence of competition with Russian and foreign manu-
facturers of similar products.
7
In many empirical studies, it is competition with manufacturers of devel-
oped market countries, rather than competition with Russian manufactur-
ers or CIS enterprises that are mostly based on the prevailing stereotypes
of operation and interaction in the market (mainly price competition and
administrative leverage), that becomes the indicator of a truly competi-
tive environment that has an impact on enterprise behavior and forces the
Russian manufacturers to resort to modern market methods of competition
(Kuznetsov 2005). With regard to competition with Russian companies, esti-
mates of this type of competition are often of subjective nature, failing to
be associated with the modernization behavior of enterprises and reflecting
low demand, poor competitiveness, and, thus, incomplete restructuring as
Avdasheva (2006) wrote. Incidentally, according to the findings of our sur-
vey, strong competition with Russian companies correlated positively with
primary restructuring measures, such as the promotion of new products

and new capacities. Competition with companies from developed econo-
mies was linked not only to new products but also to R&D expenditures,
new technologies, and certification of production in line with international
standards, which are measures of a more profound reform of the business.
Therefore, we used the existence of (both severe and moderate) competi-
tion with companies from developed foreign countries as the key indicator
of competition, assuming that it should multiply the chances of appoint-
ment of hired top management. With regard to competition (strong) with
Russian enterprises, it is difficult to forecast any sign of correlation.
Enterprise engagement in foreign economic activity can be assessed
by using an indicator describing the existence of the export of products.
Exports may require a more complex setup for production; however, this is
true only for enterprises of manufacturing industries. We will not include
this indicator in our model, as an antistimulus is available as well: owners
are very unlikely to entrust their heavy export-based cash flows to the care
of outsiders. In-depth interviews provided evidence of a positive correlation
9780230_217287_09_cha07. dd 182 5/14/2009 3:50:16 PM
Corporate Control and Business Integration 183
between export activities and a combination of ownership and manage-
ment (Dolgopyatova 2004).
Managerial labor market
Operational conditions govern the demand for hired managers; in addi-
tion, their engagement is also encouraged by the management labor mar-
ket’s development and the growth in the supply of qualified managers.
Unfortunately, it is very difficult to provide an adequate assessment of it
as part of a survey on a micro-level.
8
The Russian labor market’s develop-
ment, taking into account its well-known regional dimension and low
labor force mobility, can be assessed by using indicators based on regional

official statistics.
9
As a proxy for the labor market supply, we will use the
assessment of the average wages in the regions with the data of a sample
survey on wages of CEOs of enterprises and organizations conducted by
the Federal Service of State Statistics (Rosstat 2006). We expect that the
higher the wages are, the faster the division of functions that may be
chosen. The wage level shows not only the market development because
managers-shareholders may use other channels of remuneration (they
may prefer informal methods of shadow income extraction or dividend
payout).
Empirical analysis of the determinants of
hired management choice
Basic models and results
Holding of an enterprise’s shares by its general director could give the direc-
tor solid advantages in decision-making, particularly because a JSC with a
small director’s interest is distinguished by a lower concentration of owner-
ship and a higher share of state in equity. This suggests that a comprehen-
sive analysis of factors could be made by using the binary logistic regression
and excluding from the sample a group of enterprises in which the direc-
tor has an interest (D_S). The dependant variable CONTRL was therefore
expressed by the probability of choosing a form of control with separation
of ownership from management, which adopts a value of “1” in the case of
separation and one of “0” in the case of inseparability (that principal share-
holders are top managers of the companies).
Table 7.4 shows a comparison of JSCs according to the value of basic indi-
cators (descriptive statistics), which we assume have an effect on the choice
of the control configuration. The names of variables used in regression anal-
ysis are presented in parentheses. In the analysis of binary dependencies,
we obtained the expected results, although the correlations were not always

significant. It is the communication sector in which separation occurs more
often. With regard to branches of industry, separation occurred signifi-
cantly more often in the fuel and energy and chemical and petrochemical
9780230_217287_09_cha07. dd 183 5/14/2009 3:50:16 PM
Table 7.4 Comparison of JSCs with separation or combination of ownership and management
Combination Separation Significance of
differences
a
Average number of employees in a JSC, persons (COMSIZ) 1096 2154 0.129
JSCs in communications, %
4.7 9.2 0.035**
Open JSCs, % (OPECOM)
60.2 68.3 0.048**
Privatized enterprises, % (PRICOM)
70.0 61.7 0.040**
JSCs with securities traded on stock markets, % (STOCKM) 7.9 13.3 0.039* *
Independent JSC or parent company in a group of companies, % (BUSINES) 77.4 49.1 0.000***
Parent company of a group of companies, % (HOLCOM) 5.8 4.1 0.367
Average percent of shares owned by foreign investors, % (OWNFOR) 2.4 7.6 0.000***
Average percent of shares owned by authorities, % (OWNSTA) 3.7 7.0 0.620
Including average percent of shares owned by federal administrations, %
(OWNFED)
2.2 4.1 0.792
Average percent of shares owned by regional and local administrations, %
(OWNREG)
1.4 3.0 0.743
Average percent of shares owned by all legal entities, % (OWNENT) 11.0 26.3 0.000***
The largest shareholder owns less than 25% of shares (CONLOW) 9.0 11.4 0.356
The largest shareholder owns less than 50% but more than 25% of shares
(CONMED)

20.6 11.0 0.003***
The largest shareholder owns more than 50% of shares 70.3 77.6 0.061*
JSCs invested in R&D, % (R&DEXP)
61.0 49.5 0.007***
JSCs introduced new technologies, % (NEWTEC) 58.2 49.5 0.042**
JSCs faced intense competition with Russian enterprises, % (COMPRU) 67.5 55.3 0.004***
JSCs faced competition with enterprises of developed countries, % (COMPFO) 26.6 30.7 0.303
JSCs with horizon of strategic planning of 3 years and more, % (STRPLA) 22.8 33.5 0.005***
Average wages of enterprises top managers by regional statistics data,
thousand roubles (SALCEO )
16.041 16.627 0.121
Note:
a
Comparison of frequencies by ␹
2
test, comparison between means by Kruskal Wallis test: ***: significant at the 1% level, **: at the 5% level, *: at the
10% level.
Source: Author’s calculations based on survey data.
9780230_217287_09_cha07. dd 184 5/14/2009 3:50:16 PM
Corporate Control and Business Integration 185
industries. The negative correlation found between the separation of func-
tions and severe competition with Russian companies is probably explained
by the aforementioned peculiarity of its subjective assessments. Competition
with developed countries played the expected role, although it was insig-
nificant at a 10% level.
The logistic regression model of choice was assessed for all JSCs (sample
I) and for JSCs with the exclusion of enterprises of the communication and
fuel and energy sectors due to their features (sample II). Large holding com-
pany groups organized and controlled by the federal state operate in these
two sectors. They are distinguished by a high public interest and developed

market regulation.
Based on the principle that choice is an exclusive right of the controlling
owner, we also considered only those JSCs with a clearly defined controlling
owner (sample III represents all sectors, while sample IV excludes the fuel
and energy and communication sectors). Indeed, if it is necessary to look
for compromises or take into account the interests of different shareholders,
there may be factors in place which are not included into our model and
defy formalization.
Two models, each with a different definition of the value of the public
block of shares, were made: in model A, this block is calculated as the sum
of interests held by the federal and regional/local governments, while, in
model B, these types of holdings are separated.
Table 7.5 shows calculation results including the previously introduced
indicators. The models include mostly dummy variables. All 9 industries
(7 for samples II and IV) were used for industry classification (INDDUM),
with the communication sector (construction materials industry) being the
basic category. JSC, with a high level of concentration, was considered as the
basic category for ownership concentration. The logarithm was taken from
the quantitative variable of the number of employees in a company.
Close estimates of selection options of the form of control were obtained
with different samples. A steady significant effect is typical of ownership
characteristics and corporate management: the chances of selection in favor
of separation multiplied at open JSCs, with an increase in the interest held
by legal entities, foreign investors, and government bodies at all levels; on
the other hand, the chances were reduced with a medium level of equity
concentration in comparison with a high level (only for industries outside
of the fuel and energy, and communication sectors). Furthermore, a posi-
tive effect was demonstrated by the existing competition with companies of
developed market economies. Fewer chances for using hired management
were observed in companies under restructuring or severe competition with

Russian companies as well as in those related to privatized enterprises.
In addition, integration had a stable and strong influence at all specifica-
tions and samples: the chances of engaging hired managers were consider-
ably reduced for enterprises classified as independent businesses. With a
9780230_217287_09_cha07. dd 185 5/14/2009 3:50:17 PM
Table 7.5 Logistic regressions for shareholder choice of separated ownership and management
Sample I I II II III III IV IV
Model
a, b
[A] [B] [A] [B] [A] [B] [A] [B]
Constant 0.719*
(0.396)
0.741*
(0.394)
1.106**
(0.468)
1.129**
(0.468)
0.773*
(0.413)
1.444**
(0.637)
0.875*
(0.509)
0.902*
(0.509)
BUSINES Ϫ1.187***
(0.250)
Ϫ1.161***
(0.250)

Ϫ1.410***
(0.291)
Ϫ1.397***
(0.291)
Ϫ1.396***
(0.266)
Ϫ1.279***
(0.276)
Ϫ1.580***
(0.320)
Ϫ1.558***
(0.320)
HOLCOM XXXXXX
1.108*
(0.568)
1.060*
(0.566)
COMSIZ XXXXXXXX
OPECOM 0.670**
(0.264)
0.711***
(0.261)
0.739**
(0.299)
0.778***
(0.297)
0.784***
(0.292)
0.766***
(0.287)

0.917***
(0.341)
0.970***
(0.338)
PRICOM Ϫ0.594**
(0.255)
Ϫ0.594**
(0.255)
Ϫ0.660**
(0.288)
Ϫ0.653**
(0.289)
Ϫ0.504*
(0.281)
X Ϫ0.528*
(0.320)
X
STOCKM XXXXXXXX
CONLOW XX0.719
(0.444)
0.666
(0.443)
XX0.209
(0.662)
0.149
(0.661)
CONMED XXϪ0.
719*
(0.375)
Ϫ0.756**

(0.377)
XXϪ0.927**
(0.431)
Ϫ0.959**
(0.432)
OWNSTA 0.015**
(0.007)
0.020**
(0.009)
0.021***
(0.008)
0.020**
(0.010)
OWNFED 0.018*
(0.010)
0.022*
(0.013)
XX
OWNREG XXXX
OWNFOR 0.020***
(0.007)
0.020***
(0.007)
0.029***
(0.009)
0.029***
(0.008)
0.024***
(0.007)
0.024***

(0.007)
0.030***
(0.008)
0.029***
(0.008)
9780230_217287_09_cha07. dd 186 5/14/2009 3:50:17 PM
OWNLENT 0.015***
(0.004)
0.015***
(0.004)
0.013***
(0.005)
0.013***
(0.005)
0.017***
(0.004)
0.016***
(0.004)
0.014***
(0.005)
0.014***
(0.005)
COMPRU Ϫ0.599**
(0.236)
Ϫ0.621***
(0.236)
Ϫ0.776***
(0.268)
Ϫ0.781***
(0.267)

Ϫ0.776***
(0.256)
Ϫ0.709***
(0.269)
Ϫ0.814***
(0.294)
Ϫ0.820***
(0.293)
COMPFO 0.700***
(0.260)
0.670***
(0.258)
0.859***
(0.279)
0.825***
(0.278)
0.653***
(0.282)
0.590**
(0.300)
0.899***
(0.308)
Ϫ853***
(0.307)
STRPLA 0.490*
(0.264)
0.540**
(0.264)
XXXXXX
R&DEXP Ϫ1.117***

(0.250)
Ϫ1.137***
(0.250)
Ϫ1.263***
(0.284)
Ϫ1.261***
(0.283)
Ϫ0.943***
(0.268)
Ϫ0.987***
(0.294)
Ϫ1.047***
(0.309)
Ϫ1.047***
(0.309)
NEWTEC Ϫ0.528**
(0.234)
Ϫ0.540**
(0.233)
Ϫ0.626**
(0.261)
Ϫ0.62
7**
(0.260)
Ϫ0.685***
(0.256)
Ϫ0.775***
(0.266)
Ϫ0.911***
(0.295)

Ϫ0.910***
(0.294)
SALCEO XXXXXXXX
INDDUM XXXXXY
es* X X
N 456 456 394 394 401 401 352 352
Ϫ2Log
likelihood
476.680 477.567 385.214 385.513 402.293 393.606 322.944 324.812
Pseudo R
2
0.326 0.324 0.357 0.354 0.350 0.372 0.386 0.381
Test of the
model ␹
2
124.585*** 123.698*** 117.278*** 115.979*** 117.759*** 126.446*** 112.721*** 110.843***
Notes:
a
Standard errors are reported in parentheses. ***: significant at the 1% level, **: at the 5% level, *: at the 10% level.
b
Forward stepwise method was used: X: variables dropped from the final regression equation.
Source: Author’s estimation.
9780230_217287_09_cha07. dd 187 5/14/2009 3:50:18 PM
188 Organization and Development of Russian Business
total of 456 of surveyed JSCs, 38% of companies had separate ownership
and management compared to less than 28% of independent businesses
and almost 58% of JSCs, which were previously integrated into a holding
company.
Corporate integration and the choice of separated
ownership and management

Model A was tested separately at companies representing independent busi-
nesses (subsample 1) or a division of t hem (subsample 2) w ith a view to assess-
ing the possible effect of the same factors on companies of different types.
Similar specifications for these subsamples (including an indicator identify-
ing the enterprise as the parent company) allowed us to see an appreciable
difference in the effect of tested independent variables (Table 7.6). The his-
tory of a company ceased to have an effect when the sample was broken
down into two types. While the choice of a form of control for businesses
remained heavily influenced by factors of ownership and corporate govern-
ance, enterprises integrated into holding company groups remained under
a positive effect of the interest held by legal entities and (exclusive of the
energy and communication sectors) foreign investors. The interests of legal
entities as well as, to some extent, those of foreign investors were previously
interpreted as a means to reduce ownership transparency used by ultimate
owners as a tool to protect their property rights.
Restructuring had an effect on independent businesses and rank-and-
file members of the holding company groups. With regard to the latter,
both indicators manifested themselves with an added effect from the use
of strategic planning. Competition with foreign manufacturers always
had a positive effect on independent businesses as well as on rank-and-file
members of company groups in industry (exclusive of the fuel and energy
sector). Competition with Russian manufacturers always was significant
for independent businesses and, in some cases, divisions of the holding
company groups. It is only the rank-and-file members of the company
group that experienced a positive effect from the labor market, mostly
due to the existence of enterprises of the energy and communication sec-
tors. Naturally, all-Russian holding companies of these sectors have to take
into account the situation in the regional labor market when hiring new
employers.
In addition, two other models were estimated for rank-and-file members

of business groups, which took into account the scale and structure of the
entire group of companies. The management complexity in the group was
assessed by including an industry diversification indicator into model C
(affiliation to a vertically integrated holding company INTVER or conglom-
erate INTCON, while affiliation to a horizontal type of association became
the basic category), and the D specification was added with a variable for the
size of group of companies (SIZHOL, the logarithm of the number of legal
9780230_217287_09_cha07. dd 188 5/14/2009 3:50:18 PM
Table 7.6 Logistic regressions for shareholder choice of separated ownership and management and corporate integration
Sample
I
-1I-2I-2I-2II-1II-2II-2II-2 III-1 III-2 III-2 III-2
Model
a, b
[A] [A] [C] [D] [A] [A] [C] [D] [A] [A] [C] [D]
Constant Ϫ0.658**
(0.311)
Ϫ1.315
(0.805)
Ϫ1.044
(0.826)
Ϫ2.007**
(1.001)
1.043
(1.163)
Ϫ1.132
(0.884)
1.031
(0.733)
Ϫ2.939**

(1.376)
Ϫ1.210***
(0.422)
Ϫ0.222
(0.919)
Ϫ0.140
(0.988)
Ϫ2.283
(1.702)
HOLCOM XXXX XX X X0.900*
(0.510)
XXX
COMSIZ XXXXϪ0.893*
(0.449)
XX XXXX0.956*
(0.522)
OPECOM XXXX0.723**
(0.356)
XX X0.678*
(0.370)
XXX
PRICOM XXXX X X X XXX X X
STOCKM XXXX XX X X XX X X
CONLOW 0.710*
(0.427)
XXX0.865*
(0.457)
XX XXXXX
CONMED Ϫ0.566
(0.424)

XXXϪ0.580
(0.457)
XX XXXXX
OWNSTA 0.036***
(0.010)
X X X 0.030***
(0.010)
X X X 0.031***
(0.010)
XXX
OWNFOR 0.032***
(0.012)
X X X 0.039***
(0.014)
0.023**
(0.010)
0.020*
(0.012)
0.032**
(0.015)
0.032***
(0.012)
XXX
OWNENT 0.016***
(0
.006)
0.018***
(0.006)
0.018***
(0.006)

0.016**
(0.006)
0.014**
(0.007)
0.017**
(0.007)
0.021***
(0.008)
0.021**
(0.009)
0.016**
(0.007)
0.016**
(0.007)
0.019***
(0.007)
0.018**
(0.008)
COMPRU Ϫ0.680**
(0.292)
XXXϪ0.741**
(0.317)
X Ϫ0.975*
(0.589)
Ϫ2.088***
(0.809)
Ϫ0.671*
(0.325)
Ϫ0.938*
(0.487)

Ϫ1.000*
(0.520)
Ϫ1.133*
(0.581)
COMPFO 0.700**
(0.320)
XXX0.770**
(0.339)
1.030**
(0.487)
1.173**
(0.569)
1.144*
(0.687)
0.733**
(0.354)
XX X
STRPLA X 1.273***
(0.445)
1.485***
(0.470)
1.360***
(0.496)
XX1.343**
(0.627)
X X 1.754***
(0.519)
1.885***
(0.547)
1.516***

(0.597)
Continued
9780230_217287_09_cha07. dd 189 5/14/2009 3:50:18 PM
Table 7.6 Continued
Sample
I
-1I-2I-2I-2II-1II-2II-2II-2 III-1 III-2 III-2 III-2
Model
a, b
[A] [A] [C] [D] [A] [A] [C] [D] [A] [A] [C] [D]
R&DEXP Ϫ1.232***
(0.308)
Ϫ1.047**
(0.429)
Ϫ1.199***
(0.449)
Ϫ1.170***
(0.462)
Ϫ1.258***
(0.340)
X Ϫ1.689***
(0.645)
Ϫ1.430**
(0.687)
Ϫ0.887***
(0.340)
Ϫ1.314***
(0.486)
Ϫ1.625***
(0.529)

Ϫ2.283***
(0.669)
NEWTEC X Ϫ1.332***
(0.443)
Ϫ1.453***
(0.468)
Ϫ1.356***
(0.496)
X Ϫ1.503***
(0.496)
Ϫ1.778***
(0.589)
Ϫ1.463**
(0.674)
Ϫ0.645**
(0.328)
Ϫ1.636***
(0.503)
Ϫ1.810***
(0.543)
Ϫ1.634***
(0.567)
SALCEO X 0.125***
(0.047)
0.110**
(0.049)
0.090*
(0.051)
X0.083*
(0.051)

XXX0.125**
(0.050)
0.120**
(0.054)
X
INDDUM XXXX X X X XXX X X
SIZHOL 1.382***
(0.531)
5.699***
(1.473)
2.045***
(0.681)
INTVER Ϫ0.126
(0.450)
Ϫ0.286
(0.466)
0.008
(0.579)
0.
413
(0.681)
Ϫ0.270
(0.513)
Ϫ0.624
(0.559)
INTCON 1.940***
(0.663)
1.864***
(0.698)
2.374***

(0.775)
1.924**
(0.881)
2.051***
(0.744)
Ϫ2.275***
(0.877)
N 313 143 143 139 291 103 103 100 273 128 128 125
Ϫ2Log
likelihood
307.773 159.491 150.291 138.480 270.919 116.397 97.636 73.135 251.365 133.697 122.209 106.697
Pseudo R
2
0.247 0.288 0.354 0.401 0.263 0.281 0.458 0.628 0.253 0.361 0.446 0.526
Test of the
model ␹
2
58.318*** 34.356*** 43.556*** 48.937*** 56.908*** 24.200*** 42.960*** 62.923*** 50.627*** 39.949*** 51.436*** 61.556***
Notes:
a
Standard errors are reported in parentheses. ***: significant at the 1% level, **: at the 5% level, *: at the 10% level.
b
Forward stepwise method was used: X: variables dropped from the final regression equation.
Source: Author’s estimation.
9780230_217287_09_cha07. dd 190 5/14/2009 3:50:19 PM
Corporate Control and Business Integration 191
entities integrated into the holding company). The use of these indicators in
the model has a positive effect on the choice and increases its explanatory
function with retained stability of basic dependences.
Conclusions

Business integration encourages a gradual separation of ownership from man-
agement, and shareholding relations among the members of a company group
allow abandoning a combination of ownership and control through direct
managerial control by principal shareholders. Hiring of top managers con-
tributes to changes in the development of internal corporate norms. The role
of the board of directors becomes stronger; it evolves into an agency working
in the interests of large shareholders, and it is able to monitor the executive
management. As the mechanisms for control over executive management are
more widely used, managers have fewer entrenchment opportunities. At the
same time, the use of hired managers did not aggravate the agency problem,
which suggests that large owners still maintained tight control.
Summing up the results of a statistical analysis of the factors affecting
the choice of the form of control, two basic hypotheses and most of the
special assumptions with regard to the effect of suggested factors were con-
firmed with different samples and specifications. Indeed, factors of owner-
ship and corporate governance, which are “responsible” for property rights
protection, made a considerable contribution to multiplying the chances of
engagement of hired managers at Russian JSCs. Evident were differences in
owners’ choice at JSCs representing independent businesses against rank-
and-file members of company groups.
Another and more important result is that integration became a signifi-
cant feature that predetermined differences in the role of other factors of
choice for different types of companies. Direct participation of shareholders
in management is preferred by stand-alone enterprises and parent compa-
nies, while engagement of hired managers is encouraged by both compe-
tition with companies of the developed countries increasing demands to
management and the peculiarities of capital structure. Factors of corporate
management and restructuring play an important role at rank-and-file
members of company groups, in which case the management complexity
of the entire group is important as well. Holding company groups retain

their nontransparency as an additional element of protection for principal
shareholders.
At the same time, no evidence was obtained on a possible effect of com-
pany openness. While identification as an open JSC showed the previously
positive effect (for all enterprises as well as those that represented independ-
ent businesses), free floating of company securities in stock markets had no
significant effect on the selection of the form of control. The role of stock
markets was not evident.
9780230_217287_09_cha07. dd 191 5/14/2009 3:50:19 PM