Organization and Development of Russian Business A Firm-Level Analysis_2 pdf

The Emergence of Russian Corporations 31
part in the division of public assets, a strategy which some firms deliberately
chose. Such firms have survived more hardships in the 1990s, but they could
have learned more. Furthermore, it was they who created that potential for
future economic growth which was first noticed by the McKinsey Co. in
their report titled “Unlocking Economic Growth in Russia” and announced
in Moscow in October 1999 (Palmeda & Lewis 2003).
In general, describing the model of the Russian firm in the 2000s, we can
point out that a significant part of Russian firms have assumed standard
market incentives to develop business, such as making long-term profits,
having higher company capitalization, and expanding their market share.
In addition, majority shareholders, who, as a rule, maintain operational
management in their hands and effectively control the activities of other
managers, have become the key figures in most Russian firms.
At the same time, the internal restructuring of Russian firms is far from
completion. In terms of efficiency, Russian companies are still far behind
the firms of other developing and emerging economies. For example, World
Bank data show that, in 2004, labor productivity in the Russian industry
was just slightly above the level of that in China but about a third of that in
the South African Republic, less than half of that in Poland, and two thirds
of that in Brazil (Desai & Goldberg 2007). However, these average figures
conceal very large actual gaps in terms of added value between firms in the
same industries. For instance, in 2004, the labor productivity gap between
the best 20% and the worst 20% of firms was 11 times in transportation
machinery, 16 times in light industry, and 24 times in the woodworking
and food industries (Golikova et al. 2007). In actual practice, this means
the coexistence of efficient and absolutely inefficient firms among Russian
industries in the 2000s.
This was possible because of an extensively growing domestic demand,
which allowed inefficient firms to keep afloat. In this context, the global
financial crisis, which started in 2007, may play an important role. It is clear

that this crisis will test the durability of leading companies, and, on the
other hand, it will help eliminate inefficient firms and eventually contrib-
ute to a more efficient economy.
Now, by comparing the evolution of the transition firm in Russia with the
trends in Eastern Europe at the present stage, the following key points can
be identified.
A shift of the government to responsible macroeconomic and fiscal poli-
cies, supported with substantial consolidation of public institutions, was
very important for the change in firm behavior in Russia. It was a political
result of the 1998 crisis, but, in Russia, strengthening of the government fol-
lowed a different trajectory from that in the countries of Eastern Europe.
In Eastern Europe, the state, oriented toward EU standards, was more
inclined toward setting up the rules of the game and acting as an arbitrator.
In Russia, however, the stronger government turned to active expansion of
978023_0217287_03_cha01. dd 31 5/12/2009 5:19:15 PM
32 Organization and Development of Russian Business
its presence in the economy by using investment programs, policy-based
institutions of development, and state-owned companies (see Table 1.1).
This could be defined as an attempt to repeat the experience of South-East
Asian countries from 1960 through the 1980s through the building of a
similar pattern of relations between the state and big business under state
leadership.
One of the reasons for following this path is the illegitimacy of the results
of privatization. In the public opinion, the privatization of the 1990s is con-
sidered unjust (Denisova et al. 2007), and the representatives of the busi-
ness community themselves acknowledge the legality of revising its results
(Frye 2006). This lowers the degree of protection of property rights and
gives the state an additional lever for keeping the largest companies under
informal pressure, particularly those that received their assets at loans-for-
shares auctions.

Being closed for foreign investors is Russia’s another major distinction.
In Eastern Europe, the model of corporation was shaped under very strong
influence of foreign shareholders, who gained control over most large com-
panies (Andreff 2005; Stark & Vedres 2006). In Russia, in the 1990s, although
the government more than once pledged support to foreign investments,
company managers were typically hostile to foreign shareholders. In the
2000s, the government and businesses reversed their roles, but the real situ-
ation changed little. The companies that are controlled by Russian private
owners are more inclined to cooperation with foreign investors, but, at the
government level, foreign investments are truly welcome only in certain
sectors. In a number of large-scale raw material projects, the government
helped to oust foreign investors, and, in general, foreign shareholders in
big business were assigned, under government pressure, to junior-partner
positions.
It is not by chance that here, in contrast to preceding sections of this chap-
ter, we have made comparisons only with Eastern Europe. Although pack-
ages of reforms at the enterprise level were originally quite similar in Russia
and in Eastern Europe in the 2000s, the East European and Russian models
of a firm were divergent in their development, and Russia was inclined to an
orientation more comparable to that of China. The differences that we have
reported above confirm this thesis.
As a consequence, in the future, we expect that Russian companies will
be divided into two sectors: the largest firms will remain directly or indi-
rectly controlled by the state, and mid-sized firms, by the standards of the
global market, will be more independent and open to foreign participation
(Yakovlev & Danilov 2007). The largest firms share similarities with the
model of the development firm as defined by Berglöf & von Thadden (2000);
they have informal relations with the state and investors, which are typical
of this model. On the other hand, mid-sized firms will evolve toward the
model of a closely held firm with the predominance of large shareholders

978023_0217287_03_cha01. dd 32 5/12/2009 5:19:15 PM
The Emergence of Russian Corporations 33
in governance and a limited presence in the stock market. In this context,
the gradual disappearance of the concept of the transition firm is a distinct
possibility.
Notes
1. According to the data given by Qian (1999), in 1940, the annual plan in the
USSR was compiled for 500 commodity items; however, in the late 1950s,
the product mix of Gosplan had more than 2,000 items, and, by the end of the
1970s, plans on the level of USSR ministries had about 60,000 items. On the
other hand, in China, in 1957, the plan of the central government included
532 items, and, by 1973, their number increased to only 617. This had been
the result of several campaigns of administrative decentralization conducted
by Mao Zedong, and, later, it was related to the consequences of the Cultural
Revolution, when, in 1967–1968, no annual plans were compiled at the level of
the central government.
2. This policy was a logical outcome from the Soviet model of organization of central-
ized planning by industry, which implied the management of all enterprises from
a single center, and the mere scale of the country required to reduce the number
of managed objects to a minimum and to streamline their structure. On the con-
trary, the government of China, based on the idea of regional self- sufficiency in
case of American or Soviet aggression, designed a regional system of centralized
planning and deliberately supported the development of the same types of pro-
ductive facilities in different regions. In the literature, these differences in eco-
nomic organization in the USSR and China were labeled U-Form and M-Form, by
analogy with the linear-and-functional and matrix structures of management in
corporations (Qian & Xu 1993; Maskin, Qian, & Xu 2000).
3. For instance, according to data given by Sinelnikov et al. (1998), by the end of
1991, expenditures of the Union budget were three times as large as its revenue.
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Part I
Ownership, Internal Control, and
Management System
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39
2
Stock Ownership and
Corporate Control
Tatiana G. Dolgopyatova
Introduction
Researchers of the Russian economy have unanimously identified the most
important features of stock ownership and control. First, the concentration

of capital in the corporate sector resulting from its aggressive redistribu-
tion for more than 15 years tends to be high. Second, the high concentration
of ownership affected the development of corporate control and evolution
of the mechanisms of corporate governance (Natsional’nyi Doklad 2008).
This high concentration provides the basis for control by the majority share-
holder or a consolidated group of such shareholders exercised by various
formal and informal means (Dolgopyatova 2003, chapter 2). Majority share-
holders are constrained only by the need to comply with the formal legal
provisions and often imitate the activities of intra-corporate tools (bodies)
(Razvitie Sprosa 2003). Third, the prevailing model of corporate control is
that in which majority shareholders participate directly in management as
top managers of companies (Insiders and Outsiders 2004; Stiglitz 1999). A
combination of ownership and control has become a formal institution of
Russian corporate practices, which restrict the demand for “outside” man-
agers who do not own company shares. This institution has become wide-
spread not only as a result of privatization (“red directors” becoming owners
of enterprises) but also as a tool intentionally chosen by owners who estab-
lished their businesses from scratch. In a situation of underdeveloped mar-
kets for managerial staff and institutions for protection of property rights,
this arrangement was preferred as compared to high costs of preventing
opportunistic behavior of hired managers.
1
At the time of economic tran-
sition, this behavior would take the extreme form of asset stripping and
business raiding. This resulted in the elimination of the agency problem of
corporate governance.
On the basis on quantitative data obtained from our representative sur-
vey and qualitative information of in-depth interviews with company own-
ers and managers, in this chapter, we will discuss the relevance of simple
9780230_217287_04_cha02. dd 39 5/14/2009 3:42:31 PM

40 Organization and Development of Russian Business
hypotheses regarding the role of high concentration of capital in the evolu-
tion of intra-corporate control forms and business performance. We pre-
sume that a high concentration of ownership is linked with its hidden
structure and that it affects intra-corporate relationships. The vast major-
ity of Russian JSCs combine ownership and control despite the current
trend to separate executive management from ownership. Concentrated
ownership will encourage owners to restructure and develop their
businesses.
The second section contains a description of the structure of stock own-
ership that emerged in Russian companies in 2005 and the types of share-
holders they include. The third section discusses the correlations between
the level of ownership concentration and business performance, and the
fourth section contains a description of the corporate control tools used by
the majority shareholders. The results of the analysis are summarized in the
fifth section.
Ownership composition
Since the mid-1990s, empirical studies performed by many Russian and
international institutions have focused on corporate ownership and the con-
trol mechanisms of Russian companies. These studies (e.g., Radygin & Entov
2001; Dolgopyatova 2003; Guriev et al. 2003; Yasin 2004; Kapelyushnikov &
Dyomina 2005; Aukutsionek et al. 2007) suggested that, for many years, the
economy underwent an extensive redistribution of stock ownership that was
accompanied by entry of new shareholders. The Russian Economic Barometer
(REB), the Center for Economic Conjuncture, and State University – Higher
School of Economics (SU-HSE) have reported that the entry of new large
owners affected from 5–7% of JSCs each year from the 1990s to the early
2000s.
2
Quantification of ownership concentration

Russian companies have a characteristically high level of stock owner-
ship concentration that increases annually. Aggressive ownership redis-
tribution in the wake of privatization resulted in the rapid emergence of
large shareholders. According to various surveys, in the beginning of the
2000s, the largest shareholder would own, on average, 40–50% of the
assets; JSCs including a blockholder accounted for 40–65% of the total
sample, while those with a controlling stakeholder accounted for up to
45% of the sample. Respondents also suggested (Razvitie Sprosa 2003)
that at least two-thirds of open JSCs had an owner in control of the
company. Qualitative surveys (e.g., interviews and case studies) generally
suggested a higher level of concentration of real control, as opposed to
formal ownership, in one person and practically the universal presence
of a controlling shareholder.
9780230_217287_04_cha02. dd 40 5/14/2009 3:42:31 PM
Stock Ownership and Corporate Control 41
Other important trends in the evolution of the structure of stock capital
were reduced to a growth of holdings of company managers, with a notice-
able decrease of holdings of all employees and a higher participation of
external owners, primarily Russian legal entities, against the background
of corporate integration. Moreover, the role of public authorities at all lev-
els against the background of ongoing privatization and the emergence of
new businesses showed a decreasing trend almost up to the mid-2000s.
Currently, the last trend is being reversed as the position of public authori-
ties, primarily federal agencies, becomes stronger. In the area of nationali-
zation, the federal government has demonstrated an active stance.
3
Today,
federal authorities hold a predominant interest with major Russian compa-
nies in the real economy and financial sector. Through these agencies, the
government not only controls the production of a sizeable portion of GDP

but has also become a major stock market investor, the government’s share
in capitalization of the Russian stock market being more than one-third in
2006 (Panov & Borissov 2006). By estimates of Troika Dialog (2008), the
state controlled about 40% of capitalization at the end of 2007.
Our studies have confirmed a very high degree of ownership concentra-
tion (more than 50% of shares owned by one shareholder) in the sample,
which was observed in almost 70% of surveyed companies. Companies with
the average level of concentration (25–50% of shares owned by the largest
shareholder) were approximately 18% of the total, while those with a low
level of ownership concentration (in Russian terms) with the blockholder
(owner of more than 25% of total stock) yet not to emerge accounted for
only 13% of the sample.
High-concentration companies included two subgroups depending on
whether there was the second large shareholder with at least a blocking
minority ownership (counterbalance). Almost one-half of the companies
had a dominant shareholder not contained by the stake of the second share-
holder (Figure 2.1). A desirable level of concentration was achieved to a large
extent, which almost 70% of respondents considered optimal for business
development, with about 18% wanting an increase and only 13% wanting
a decrease.
A vast majority of respondents (over 87%) asserted that their company
already had an owner (coalition of owners) in control of corporate opera-
tions. The area of real control turned out to be considerably wider than
the ownership structure would suggest, and more in line with the evidence
collected in in-depth interviews. Curiously, companies with a controlling
owner included 50% of low-concentration companies and more than 86%
of average-concentration companies.
Studies dating back primarily to the late 1990s (for example, Dolgopyatova
2001) found that a higher concentration of capital was characteristic of
smaller companies and businesses in relatively better-off industries, whose

shares were attractive for their management and potential outside investors,
9780230_217287_04_cha02. dd 41 5/14/2009 3:42:32 PM
42 Organization and Development of Russian Business
as well as of closed JSCs, in which it was easier for managers to reach capi-
tal consolidation.
4
Unlike privatized enterprises, in which privatization by
vouchers formed a still existing class of minority shareholders, new busi-
nesses may demonstrate a higher degree of concentration. It could be also
presumed that concentration of the stock could be lower in those com-
panies whose shares are tradable at stock markets and attractive to small
investors.
Our survey produced contradicting results. The pattern of distribution
of businesses by the degree of ownership concentration was approximately
the same in manufacturing and communications and was not dependent
on company size, type of incorporation, corporate background, and lack
of international or domestic tradability of stock. As the only significant (at
the 1% level) difference, new companies had the second-largest shareholder
twice as often as privatized and reorganized ones.
A very high level of concentration was also characteristic of large public
companies. According to a survey by Standard & Poor’s of 80 Russian com-
panies with most liquid shares, about 71% of them had shareholders with
more than 50% stock in 2007, and only 8% of companies did not have a
blockholder (S&P 2007a). At 75 public companies accounting for 90% of the
capitalization of the Russian stock market (S&P 2007b), the largest share-
holder would own, on average, 58% of shares. Moreover, in internationally
tradable companies, this share was almost 50% (56% in companies listed
with LSE, and 34% in companies listed with NYSE/NASDAQ).
A high concentration of ownership and control became an intrinsic fea-
ture of Russian companies and, at the same time, demonstrated a significant

More than 50% of
shares + absence
of a counterbalance
48%
Less than 25%
of shares
13%
From 25% to 50%
of shares
18%
More than 50% of
shares + presence
of a counterbalance
21%
Figure 2.1 Classification of surveyed joint-stock companies by level of ownership
concentration
Source: Author’s illustration based on survey data.
9780230_217287_04_cha02. dd 42 5/14/2009 3:42:32 PM
Stock Ownership and Corporate Control 43
link with corporate integration (Figure 2.2), which confirmed the ideas
expressed by Deryabina (2001) and Radygin (2001) regarding the role of
emerging market structures in the redistribution of property. A higher con-
centration is characteristic of subsidiary companies in a holding company
group, while parent companies would more often include the second-largest
shareholder.
In 2001–2004, a change of the main owner was characteristic of 30%
of companies covered by surveys (7–8% of companies each year, on aver-
age). The higher the concentration was, the more often it was foreshad-
owed by a change of owners; this change happened twice as often with
a high concentration of capital than with a low one (33% compared to

16%) This change would most frequently happen in companies with
the second control center and affected over 39% of companies. In one-
third of companies, consolidation of control in one person was preceded
by a change of the main owner, while the reverse was true for 13% of
companies.
Ownership concentration developed against the background of intra-
corporate disputes, which demonstrated a significant link with the change
of owners taking place in this period: in the event of the change, disputes
were characteristic of 41% of companies, as compared to 22% of the rest. In
2005, the extent of stock concentration correlated positively with internal
disputes in 2001–2004, which peaked in the event of the second control
center (Table 2.1). In JSCs with a controlling shareholder, the frequency of
disputes was almost 30%, against 13% at those companies without a con-
trolling owner.
Concentration of ownership (%)
020406080100
Independent joint-
stock companies
Affiliated companies
of company groups
Parent companies of
company groups
Low Medium High with a counterbalance High, absence of a counterbalance
Figure 2.2 Concentration of ownership in independent and integrated companies
Source: Author’s illustration based on survey data.
9780230_217287_04_cha02. dd 43 5/14/2009 3:42:32 PM
44 Organization and Development of Russian Business
Stock ownership structure
As reported by Dolgopyatova (2007), an important fact of corporate reality
is the non-transparency and complexity of ownership rights and the con-

cealment of true owners behind a multilevel chain (5–8 levels) of affiliated
individuals and companies, offshore firms, nominal holders, and multistage
company management systems. This was the result of the general institu-
tional environment of the Russian economy, in which the use of illegal
finances and not always legitimate ways of property acquisition was com-
mon. The Standard & Poor study of transparency cited above (S&P 2007a)
revealed that less than a quarter of the large public companies reported
shareholders who owned 10 and more percent of stock. The situation in
other companies was much worse. Recently, Chernykh (2008) conducted
in-depth research on this issue based on formal and informal data of public
companies and demonstrated that companies are controlled by anonymous
insiders masking their holdings through nominee and foreign offshore
arrangements. In fact, some of these owners (beneficiaries) are well known
by the public and the media.
Survey results based on voluntary estimates of respondents show an
aggregated structure of ownership that sometimes differs from a formal
structure. The studies cited above suggest a minor role of financial investors
and foreign shareholders in the capital of a company; the core owners are
company employees (mostly managers) and outside shareholders (legal enti-
ties). Normally, employees will account for 30–45% of shares, with managers
accounting for 10–20% (as a matter of exception, REB data suggest almost
one-third of total capital), but ownership of the management is always hid-
den. External holders, primarily Russian nonfinancial entities, will account
for 50–60%. In a situation of ownership concentration, the predominant
role in ordinary stock holding
5
is played by large shareholders (individuals),
paralleled by a meaningful total holding of minority shareholders, the third
largest group of owners being Russian nonfinancial entities (Table 2.2).
Table 2.1 Intra-corporate disputes in 2001–2004 at different levels of ownership

concentration (% of the number of JSCs)
Disputes: Sample Low Medium High Presence of
counterbalance
Absence of
counterbalance
Were 26. 8 17.8 25.2 30.2 41.7 24.2
Were not 73.2 82.2 74.8 69.8 58.3 75.8
Number
of JSCs
768 90 127 514 347 151
Significance of differences by three groups of JSCs, 0.042; by four groups, Ϫ0.000
a
Note:
a
␹
2
test.
Source: Author’s calculations based on survey data.
9780230_217287_04_cha02. dd 44 5/14/2009 3:42:33 PM
Table 2.2 Average percentage of ordinary shares owned by type of shareholder at different levels of ownership concentration (% of
charter capital)
Type of shareholder Sample
a
Low Medium High Presence of
counterbalance
Absence of
counterbalance
Significance of
differences
b

Federal administration 4.7 7.2 5.5 4.2 4.5 4.1 0.034/0.094
Regional and/or local
administrations
1.9 1.3 1.7 2.3 3.2
2.0 0.136/0.157
Minor individual shareholders 24.9 40.5 31.1 20.5 19.1 20.9 0.000/0.000
Banks 1.5 1.0 0.6 1.8 1.5
2.0 0.681/0.524
Investment funds and
companies
2.7 1.9 1.5 3.2 3.9
2.8 0.547/0.736
Russian nonfinancial
enterprises
13.7 7.1 9.4 16.0 15.9 16.6 0.002/0.004
Major external shareholders –
individuals
34.8 26.3 35.4 35.8 37.5 34.8 0.107/0.195
Foreign investors (individuals
and legal entities)
4.6 2.8 3.0 5.3 5.1
5.6 0.207/0.299
Notes:
a
The number of respondents varies from 698 to 720.
b
Kruscal Wallis test was used. The numerator presents significance of differences by three groups of JSCs, and the denominator presents significance
by four groups.
Source: Author’s calculations based on survey data.
9780230_217287_04_cha02. dd 45 5/14/2009 3:42:33 PM

46 Organization and Development of Russian Business
Public authorities ranked fourth by holding more than 7% of ordinary
shares. In each fifth company, the government was among the sharehold-
ers, with federal agencies holding a stake in each ninth company, while
regional and municipal governments held a stake in each thirteenth com-
pany. REB data also suggest that state holding amounted to 7% in 2005, and
increased to 9% in 2007 (Aukutsionek et al. 2007). Federal authorities hold
2.5 times more shares than regional and municipal authorities do. In com-
panies in which public agencies are among shareholders, federal agencies
hold an average of approximately 40% of shares, while regional and local
authorities hold less than one-fourth.
The share of small investors is naturally lower at high-concentration com-
panies, while, at the same time, the share of Russian nonfinancial entities
is at its highest. The share of federal agencies turned out to be the highest
at low-concentration companies. In identified companies with/without the
counterbalance, the formal ownership structures were practically identical.
Interestingly, the differences in terms of shares held by large external
shareholders were negligible. It is noteworthy that, at a high concentration
of equity, almost one-fifth was held by different Russian financial and non-
financial entities, which apparently represented the interests of the largest
owners. Holdings of foreign investors (in the form of companies incorpo-
rated elsewhere) could also act as a shield.
The ownership composition of ordinary stock confirmed the high concen-
tration of capital along with the continued existence of sizeable dispersed
holdings and the prevalence of large shareholders from among individuals
and nonfinancial entities. Moreover, legal entities were used to cover up the
holdings of the largest individual owners. Shares of banks and other finan-
cial investors were minor, only to reflect the weak role of financial interme-
diation and banking sector. The shares of foreign investors were still small.
Ownership concentration and business development

Qualitative studies would repeatedly suggest that business incentives of
large holders changed from asset stripping to development of the business.
Owners became interested in developing their businesses, and the difference
between former directors and owners and new holders gradually diminished
(Yakovlev 2003; Yakovlev et al. 2006). When a company was purchased with
the purpose of corporate integration, its prospects were originally under-
pinned by the development of the whole business.
Meanwhile, attempts to measure statistically how ownership concentration
affected the performance of Russian companies (which was normally done
on current profitability indicators) did not produce clear results. While some
researchers reported a positive impact (Radygin & Entov 2001), others found
a negative influence (Kuznetsov & Muravyov 2000), and some reported no
linkage at all (Yasin 2004). Some studies revealed a nonlinear dependence.
9780230_217287_04_cha02. dd 46 5/14/2009 3:42:33 PM
Stock Ownership and Corporate Control 47
According to studies of the major Russian companies (Kuznetsov & Muravyov
2000), concentration and profitability had a U-shaped linkage, the mini-
mum being reached with 52% owned by the largest shareholder. According
to a 2001 REB survey, the average level of concentration (10–50% of equity)
proved to be the most efficient (Kapelyushnikov 2001). In a later REB survey
based on 2003 data (Kapelyushnikov & Dyomina 2005), the concentration
of ownership had a negative effect, resulting in lack of capacity, lower wages
and profitability, and a higher risk of loss. Moreover, the authors produced
evidence (in a small sample of companies) of the positive role of the size of
shareholding owned by the second-largest owner.
The analysis of quality of corporate governance in Russian companies
identified a reversed U-shape linkage with ownership concentration. The
concentration would improve corporate governance up to a certain thresh-
old, but any further increase of the largest shareholding would no longer
have a positive impact (Guriev et al. 2003). Golikova et al. (2003) demon-

strated that, when there was a controlling owner, the company tended to
use the best practices of corporate governance.
Incidentally, econometric studies performed in other transition economies
also reported conflicting findings. For example, Earle and Telegdy (2001)
demonstrated with an example of Romanian firms that the concentration
of ownership correlated positively with labor productivity. A positive effect
(with a foreign investor as the owner) was also demonstrated in a study
performed in the Czech Republic (Hanousek, Kocenda, & Svejnar 2004); on
the other hand, another study reported a positive effect of dispersed owner-
ship on the profitability of companies under the survey (Kocenda & Svejnar
2002). For Polish companies, the concentration was U-linked to perform-
ance, with competition being a complementing factor to improve the qual-
ity of corporate governance (Grosfeld & Tressel 2002).
Interviews conducted at individual companies normally suggested a
positive effect of stock ownership concentration by private shareholders
on business restructuring and strategic development but an absence of a
linear link to performance (the best performers were companies with the
average level of concentration, and the worst, those with a low level). The
project (Yasin 2004) also demonstrated, on the basis of nearly 40 inter-
views, that high-concentration companies were more active investors
and had easier access to bank loans to finance their investments. A test
of these assumptions based on a sample of more than 500 companies
(Dolgopyatova & Uvarova 2006) did not produce any evidence in favor
of better performance, investment, and restructuring preferences of high-
concentration businesses. However, when there was a controlling interest,
companies could more actively seek outside funds, bank loans, and funds
of Russian partners and other private investors. A comparison of owner-
ship structures and intensity of corporate restructuring performed by the
Bureau of Economic Analysis as part of the survey of about 430 companies
9780230_217287_04_cha02. dd 47 5/14/2009 3:42:34 PM

48 Organization and Development of Russian Business
revealed a positive role of concentration by foreign investors for restruc-
turing (Simachyev 2001).
Based on this evidence, we speculated that the high concentration of own-
ership positively affected the long-term aspects of corporate operations to be
paralleled by higher investment activities and a tendency for restructuring.
Through our survey, we evaluated the linkages between the extent of the con-
centration and business performance/development indicators (Table 2.3).
The best operating performance was demonstrated by entities with aver-
age levels of concentration, and the worst, by those with lower levels.
Similar findings were produced when we compared companies by dynam-
ics (adjusted for inflation) of sales and labor productivity for the period of
2001–2004.
6
A comparison of companies by level of labor productivity in
2004
7
showed that, in terms of the average value of this indicator, the best
companies were high-concentration companies, but no significant differ-
ence was found for medians. Moreover, the presence of the second control
center, while not affecting a vast majority of ratings, impaired the dynamics
of sales and labor productivity in the high-concentration group, which was
contrary to the above findings reported by the REB.
The survey revealed a positive correlation between ownership concentra-
tion and restructuring and business development policies (Figure 2.3). In
10%
30%
50%
70%
Introduction of

new production facilities
Increase inexpenditures
on marketing and
advertising
Successful introduction
of new technologies
Successful certification by
international standards
Making of significant
capital investments
Horizon of planning is
more than 3 years
Increasing R&D
expenditures
Increasing volume
of exports
Less than 25% of shares
From 25 to 50% of shares
More than 50% of shares
Successful introduction of
essentially new products and services
Figure 2.3 Modernization activities of companies at different levels of ownership
concentration
Source: Author’s illustration based on survey data.
9780230_217287_04_cha02. dd 48 5/14/2009 3:42:34 PM
Table 2.3 Current economic situation of enterprises at different levels of ownership concentration
Indicators of business performance Low Medium High Presence of
counterbalance
Absence of
counterbalance

Significance of
differences
a, b
Financial and economic state (% of the number of JSCs)
Good or quite good 26.8 45.8 36.7 38.2 36.3 0.001/0.005
Fair 56.7 49.6 50.9 49.0 51.7
Rather poor or poor 16.5 4.6 12.4 12.8 12.0
Business performance
JSCs increased gross sales in 2004 (% of the
number of JSCs)
39.6 65.7 57.9 54.1 59.7 0.005/0.023
JSCs increased labor productivity during
2001–2004 (% of the number of JSCs)
44.4 61.4 55.6 47.7 58.0 0.071/0.028
Labor productivity in 2004 (mln rubles
per employee)
c
0.61
(0.29)
0.71
(0.36)
4.11
(0.40)
2.56
(0.38)
4.89
(0.40)
0.015 (0.330)/
0.027 (0.438)
Notes:

a
Comparison of frequencies was based on ␹
2
test, comparison of means used Krukcal Wallis test, and comparison of medians was based on median
test.
b
The numerator presents significance of differences by three groups of JSCs, and the denominator presents significance by four groups.
c
Median or median test in parentheses.
Source: Author’s calculations based on survey data.
9780230_217287_04_cha02. dd 49 5/14/2009 3:42:35 PM
50 Organization and Development of Russian Business
production upgrading (production capacities commissioned, principally
new products introduced), the best performers were companies with an
average level of concentration, and, in higher exports, those with a high
concentration. Similarly, companies with the second-largest shareholder
were more active in the introduction of new products and in the expansion
of capacity, and there were no significant differences in the other indicators
observed.
All companies with a blockholder would behave similarly, while those
with dispersed ownership were the least prone to restructuring in any
respect (except R&D expenditures). Some advantages of companies with an
average concentration were explained by the fact that they normally started
restructuring later than those in which the process of ownership consolida-
tion was completed for the most part.
In 2001–2004, investment activities were characterized by the fact that
almost one fourth of the sample did not invest while 40% of respondents
estimated the amount of investments as considerable. The higher the con-
centration of ownership, the more frequent the assessment of investments.
In companies without a counterbalance, enterprises with considerable

investments accounted for almost 47% of the total. At the same time, the
decision-making horizon, which indirectly characterized the development
of strategic planning, was invariable to capital consolidation profiles.
To check these revealed correlations, we conducted multivariate regres-
sion analysis controlling for size (number of employees) and industrial affil-
iation of companies with various levels of ownership concentration (high,
medium, and low). In the list of independent variables, we also included
other characteristics important for business modernization, such as the
indicators of competition with different market players (this external fac-
tor may increase propensity for restructuring activities); a dummy for being
a new company established after 1992 (these companies are more flexible
and adjusted to market environment); and company affiliation to holding
company groups (we assume that independent companies are less involved
in restructuring).
8
First, we constructed nine binary logistic regression models for each mod-
ernization action illustrated by Figure 2.3 (the dependent variable was equal
to “1” in the case of implementing of the action and “0” otherwise). For the
second step, we applied an ordinal probit regression and a Poisson model for
a special count-dependent variable INDRES, constructing it as a sum of val-
ues of the seven partial variables (excluding increasing exports and strategic
planning for more than 3 years as events, as those are not considered mod-
ernization activities). This measure of the intensity of restructuring assumes
values from zero up to seven. Selected results of calculations are presented
in Table 2.4.
Logistic models demonstrated that, in a majority of cases, dispersed own-
ership had negative influence on the choice of a modernization action,
9780230_217287_04_cha02. dd 50 5/14/2009 3:42:35 PM
Stock Ownership and Corporate Control 51
but medium- and high-concentration JSCs had no significant differences.

Medium concentration was positively correlated with the introduction of
essentially new products. In addition, an empirical study reported that
dispersed ownership had a significantly negative effect on the intensity of
restructuring.
9
Russian companies demonstrated a dominating trend for self-financing,
although it could be assumed that high-concentration entities would use
external funds more actively. Simultaneously, informal and personalized
relationships in economic operations specific to Russia could, on the con-
trary, encourage creditors to cooperate with the “Master” of the enterprise
they know. As a result, we did not reveal any differences in terms of funds
and their percentage in the structure of investments between companies
with varying levels of ownership concentration.
10
Table 2.4 Coefficients for the variable “concentration of ownership” in regression
models
a
Dependent variables Low
concentration
Medium
concentration
Pseudo R
2
Horizon of planning is more
than 3 years
b
Ϫ0.104 0.407 0.19
Significant capital
investments
b

Ϫ0.933*** Ϫ0.232 0.24
Introduction of new
production capacities
b
Ϫ0.555** 0.308 0.18
Increasing of exports
b
Ϫ0.719** Ϫ0.421 0.29
Increasing of marketing and
advertising expenditures
b
Ϫ0.671** 0.001 0.15
Increasing R&D expenditures
b
Ϫ0.591* Ϫ0.122 0.20
Successful introduction of new
products
b
0.047 0.455* 0.15
Successful introduction of new
technologies
b
Ϫ0.138 0.248 0.11
Successful certification by
international standards
b
Ϫ0.422 0.208 0.28
INDRES (intensity of
restructuring)
c

Ϫ0.386*** 0.077 0.22
INDRES (intensity of
restructuring)
d
Ϫ0.227*** 0.040 ⌵〈
Notes:
a
Basic category is high concentration of ownership.
b
Binary logistic model.
c
Ordinal probit model.
d
Poisson model.
***: significant at the 1% level, **: at the 5% level, *: at the 10% level.
Source: Author’s estimation.
9780230_217287_04_cha02. dd 51 5/14/2009 3:42:35 PM
52 Organization and Development of Russian Business
Corporate control under concentrated ownership
The existence of controlling shareholders brings to another level the solution
of the key problem of corporate governance, i.e. coping with opportunistic
behavior of the management (Stiglitz 1999). On the one hand, the free-rider
problem copes with principal shareholders with incentives to develop and
provide control of the business. On the other hand, there are various oppor-
tunities, including formal and informal tools, to achieve corporate control.
The Russian practice includes the entire range of control procedures.
Combination of ownership and management
Control through direct participation of the principal shareholder in cor-
porate management in the capacity of top manager (CEO and/or other top
managers) has been widely practiced, thereby resolving the agent problem.

In this case, the data of interviews demonstrate (Insiders and Outsiders
2004) that the combination of ownership and management usually charges
managers with the responsibilities of the boards. Shareholders, executives,
and nonexecutive directors make a unified group that represents itself across
all corporate bodies and places intra-corporate procedures under its control.
Then, it becomes futile to try to define good corporate governance.
Our survey gave two variables of the inseparability/separation of owner-
ship and management. The first variable is the question of whether large
shareholders work as company managers; the second, that of whether a
company CEO holds company shares. Without considering those who indi-
cated that it was difficult to answer, large shareholders were managers of
48% of the surveyed companies, and the CEOs were shareholders in 63% of
them. As anticipated, these indicators are significantly correlated.
Joint consideration of these questions makes it possible to divide the sur-
veyed JSCs into a number of groups (Figure 2.4). We can define JSCs in
which large shareholders are managers as a group with a combination of
ownership and management. This group includes two unequal subgroups.
One group, called M&D_S,
11
has a large group of shareholders who are man-
agers, and, at the same time, the CEO is a shareholder (as a rule, large).
This subgroup is identified as having “complete inseparability.” In the small
subgroup, large shareholders are company’s managers, but the CEO is not
a shareholder (M_S). Such situations occur infrequently; they are usually
temporary or related to the geographical isolation of an enterprise from its
major owners. However, a number of such cases were revealed during the
in-depth interviews (Yasin 2004). In JSCs in which respondents gave nega-
tive answers to both questions, the ownership was formally separated from
management.
There is a substantial subgroup in which only the CEO is a small or

medium shareholder (D_S). The CEO’s stake may be the result of privati-
zation because “red directors” were still preserved or new owners tend
9780230_217287_04_cha02. dd 52 5/14/2009 3:42:35 PM
Stock Ownership and Corporate Control 53
to appoint CEOs from the ranks of former managers who were minority
shareholders or because the owners endowed him with some shares. Even
a modest stake in the hands of a top manager gives him additional control,
especially in situations in which working teams or public administration
has a stake in the capital and in cases involving dispersed property.
There were clear differences in the organization of governance at entities
with various levels of stock ownership concentration (Table 2.5). A combi-
nation of functions was found to be more characteristic of the average level
of concentration and companies with a counterbalancing large shareholder.
In division of functions, a high concentration was characteristic of 78% of
companies, while the controlling owner was found in 85%. However, when
the managers or directors were large shareholders, high-concentration com-
panies accounted for only 68 and 64% of the total, while a controlling owner
was found in 91 and 82%, respectively. This finding confirms the possibil-
ity to combine executive management and ownership in strengthening the
control of shareholders.
Other control tools of large shareholders
Along with the practice of inseparable functions, large shareholders have
other ways of gaining control over companies. One of them is to capture the
corporate boards. Through domination, principal shareholders can legally
adopt basic decisions at the meeting of shareholders, including the forma-
tion of the board of directors and management boards while ignoring the
interests of minority shareholders. Although such a method allows a joint-
stock company to be virtually controlled as a private company, it remains
Large shareholders
are not managers,

but the CEO is a
shareholder
23%
Large shareholders
are not managers,
and the CEO is not
a shareholder
29%
Large shareholders
are managers, and
the CEO is a
shareholder
40%
Large shareholders
are managers, but
the CEO is not a
shareholder
8%
Figure 2.4 Classification of surveyed companies by participation of shareholders in
their management
Source: Author’s illustration based on survey data.
9780230_217287_04_cha02. dd 53 5/14/2009 3:42:35 PM