Corporate Governance in Russia: The Yukos Case
by Bruce A. Reznik

Corporate governance—the responsibility of management to shareholders—today enjoys totemic status, but even if this quality were to disappear, its economic importance would remain. Good corporate governance promotes increased stockholder investment and confidence. Thus good corporate governance is good business. This simple truth is resonating loudly in Russia, where many of the "oligarchs," including Yukos majority owner and CEO Mikhail Khodorovsky, are ready to adhere to world corporate governance standards (see box).

A link exists between a country’s adherence to the rule of law and its corporations’ adherence to corporate governance. Corporate managers unfamiliar with the fundamentals of democracy and transparency cannot be effective occupants of company boardrooms. This applies conversely to those shareholders who, unaware of their rights, are unable to assert themselves against corporate management, both internally and in the courts. Moreover, if a government is corrupt, its corporate management probably is too.

In transition economies, robust advances in corporate governance can only ride on the coat-tails of the change from state to private ownership and control. Even then, however, the nature of such privatizations must be examined.

Investigating Yukos

In Russia, the murky loans for shares privatization scheme of the mid-1990s did not create conditions for responsible corporate management. A dozen or so oligarchs came to own and control much of the Russian economy, some of whom reportedly orchestrated the privatizations from which they benefited. Even though Prime Minister Mikhail Kasyanov insists that the privatizations of the1990s are "irreversible," Deputy Property Minister Alexande Braverman has refused to rule out the possibility that the government could overturn some of the privatizations. "We should distinguish between privatization results as a whole and certain privatization deals," he said recently in a TV interview quoted by the Moscow Times.

Because the privatization laws that were in place in the 1990s left much to be desired, companies that were bought in allegedly rigged auctions are now open to attack Mihail Khodorkovsky bought Yukos, Russia’s second biggest oil company and the world’s fourth biggest, paying just $170 million for a majority share stake. With 11.4 billion barrels in oil reserves, Yukos is close in size to British Petroleum (about 12 billion barrels), which is worth some $180 billion. Khodorkovsky’s purchase of the company drew criticism, as the auction was held by Menatep bank, which he himself owned. Khodorkovsky is now Russia’s richest individual with a fortune of $8 billion.

In early October Yukos Oil merged with Sibneft Oil. As a result of the $3 billion deal, the new giant, Yukos-Sibneft, became the world’s leading oil company in terms of proven oil reserves. Its assets of $35 billion make it the world’s fourth largest publicly- traded oil producer. Maybe it will grow even bigger. At present both Exxon Mobil and ChevronTexaco are considering buying into Yukos-Sibneft.

The Kremlin has not overlooked Yukos’s rapid expansion and its involvement in financing opposition politicians before the December parliamentary elections: in July, Platon Lebedev, one of Yukos’s top shareholders and the head of the Menatep Group, was arrested on charges of theft of state property in relation to a privatization deal dating back to 1994. The prosecutor-general’s office is also investigating other criminal cases connected with the company.

Is Russia’s Russian Corporate Governance Coming of Age?

Yukos and some other Russian corporations now recognize that they must at least appear to be committed to good corporate governance in order to access foreign capital. Sullied by his 1990s reputation, Khodorkovsky has done just that and is now one of those preaching good corporate governance. "Transparency and good corporate governance are the rules of the game now. The more developed our market, the stricter those rules need to be," he said in an interview last fall.

Yukos now portrays itself as adhering to world corporate governance standards and as having an independent and international board of directors. The company has developed its own code of corporate governance. To its credit, to eliminate dilution risks for its shareholders, the company decided that new share issues can go ahead only with the approval of shareholders who represent at least 75 percent plus one share. The new board of directors, elected at the annual shareholders meeting in June 2003, dismissed all but three members of the previous management team. Two-thirds of the board are representatives of the international finance and oil industries, leading Russian academics, or officials of federal or local government agencies, bringing a wide range of professional experience to Yukos. The chair of its corporate governance committee is an attorney from Washington, D.C.

The U.S. Chamber of Commerce’s Center for International Private Enterprise had already concluded from its 2001 survey that executives of major Russian companies had begun to recognize the importance of corporate governance principles and that there was "growing acceptance among Russian businesses of the role of independent directors."

New York Listing Is No Guarantee

Yukos has also succeeded in entering the U.S. capital market to raise money. In March, the U.S. Securities and Exchange Commission approved Yukos’s request to issue American depositary receipts tradable on American exchanges. But investors beware: a New York Stock Exchange (NYSE) listing of a foreign company does not imply a Good Housekeeping seal of approval. American investors are mistaken if they believe that Yukos’s listing on the Big Board means compliance with the NYSE’s proposed corporate governance rules, which will apply only to U.S. companies. For foreign applicants the NYSE simply requires a letter from a law firm in the company’s home country confirming that the company complies with its country’s corporate governance norms, whatever those may be. In relation to corporate governance requirements, foreign listers are regulated by the Sarbanes-Oaxley Act passed in 2002, but that act was approved in the wake of the Enron and MCI accounting scandals, and therefore concentrates on rules of auditing and financial reporting rather than on the range of managerial duties in relation to shareholders. Thus foreign companies could receive the legitimacy of a NYSE listing without full compliance with its rules: not a bad deal for all but minority investors.

Bruce A. Reznik is a U.S.-trained attorney specializing in commercial law reform. He can be reached at bruceareznik @hotmail.com.