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Published on October 11, 2007

Author: Lucianna

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Self enforced mechanisms of corporate governance: Evidence from managerial turnover in Russia. :  Self enforced mechanisms of corporate governance: Evidence from managerial turnover in Russia. Andrei Rachinsky Centre for Economic and Financial Research The State of Economics and of Transition December 19-21, Moscow Motivation:  Motivation to evaluate the effectiveness of corporate governance mechanisms CEOs turnovers in 110 largest Russian listed companies during the period since 1997 till 2001 Literature review:  Literature review Strong evidence on negative corporate performance – turnover probability relationship. Morck et al. (1989), Weisbach (1988) Kaplan (1994a) Kaplan (1994b) Coughlan and Schmidt (1985) Warner et al. (1988) Controversial evidence on turnover – further firm performance relationship. Weisbach (1988) Denis and Denis (1995) Warner at al. (1988) Khanna and Poulsen (1995) Heterogeneity of turnovers Holmstrom (1979), Huson et al. (2002), Khurana and Nohria, Dalton and Kesner (1985). forced and voluntary turnovers origin of new director (insider versus outsider). Literature review:  Literature review Industry homogeneity, ownership structure, board effectiveness and other factors could affect relationship between performance, managerial turnover and choice between insider and outsider. Parrino (1997), Yermack (1996), Denis, Denis and Sarin (1997) Literature review:  Literature review The evidence on firm performance–managerial turnover relationship in transition economies is limited undeveloped financial markets short history of privatized firms Warzynski (2000) Goltsman (2000) Muravyov (2001) Groves et al (1995)) Claessens and Djankov (1999) Barberis et al. (1996) Bikbov (2001), Rachinsky (2001) Market dynamics:  Market dynamics Most companies in our sample are regional telecommunications or energy companies :  Most companies in our sample are regional telecommunications or energy companies Less than one forth of companies in our sample are situated in Moscow or St. Petersburg. :  Less than one forth of companies in our sample are situated in Moscow or St. Petersburg. General turnover analysis:  General turnover analysis General turnover analysis:  General turnover analysis General turnover analysis:  General turnover analysis Detailed turnover classification: Honor retirements :  Detailed turnover classification: Honor retirements 24 cases Honor retirements are quite predictable In half cases they take place on annual shareholders meetings Usually CEOs use opportunity to take vacation before retirement In almost half cases outsiders occupy CEO position On average managers retire being 63-64 years old some even 70 years old Big work experience only 5 men worked as CEO < 5 years / 10 worked > 10 years most former CEOs take place in board of directors after retirement (11 cases) or even head it (7 cases) Most of honor retirements took place in years 2000 – 2001 (10 cases in year 2000 and 5 cases in year 2001) Probability of honor retirements was lower in oil and black metal industries and higher in electro energy industry Detailed turnover classification: Honor retirement case:  Detailed turnover classification: Honor retirement case GAZ is a large car producer, experienced a lot of difficulties after 1998 crises. On the 29th November 2000 president Nikolai Pugin appointed Victor Belyaev as GAZ vice president and CEO. On the 20th January 2001 GAZ shareholder meeting confirmed this decision and stayed Pugin as GAZ president. Pugin was 60 years old. In soviet time he was minister of automobile industry and member of Central Committee of CPSU. New CEO is an outsider. He was supported by financial industrial group SibAl that recently acquired considerable stake in GAZ equity and took most places in new board of directors. Detailed turnover classification: Promotions:  Detailed turnover classification: Promotions 16 cases Larger companies or government (regional or central) 3 members of Upper Chamber of Russian Parliament one regional governor Average age of promoted managers is 52 years On average they worked as CEO for 5 years In most cases insiders occupy CEO position Detailed turnover classification: Promotion case :  Detailed turnover classification: Promotion case On the 30th of January 2001 36-years old CEO of Norilsky Nickel Alexander Hloponin got 62% of votes and won Taimyr governor elections. Two days before being sure in victory he appointed Johnson Hagazeev as Norilsky Nickel acting director. After one and a half year Hloponin took part in Krasnoyarsk region governor elections. On the 22th of September he won second stage of the elections. However his opponent head of regional legislative assembly Vladimir Us appealed against election results. The problem was resolved only by president Putin’s decision. Finally on the 15th of October 2002 Hloponin took office of Krasnoyarsk region governor Detailed turnover classification: Bankruptcy procedures and external government :  Detailed turnover classification: Bankruptcy procedures and external government 12 cases Federal law #6 (8/01/1998) on insolvency (bankruptcy) 5 companies Most cases in 1998-1999 Chernogorneft case: 3 external governors during one year Detailed turnover classification: Conflicts :  Detailed turnover classification: Conflicts 9 cases several CEOs and several board of directors Legitimacy of decisions is confirmed by one court and appealed by other extreme forms: real battles with police and special forces Workers and state are often involved 5 cases in 2001 Detailed turnover classification: Restructuring / rearranging :  Detailed turnover classification: Restructuring / rearranging 18 cases changes of companies’ organization structure FIG controls several enterprises CEO of one firm can be rearranged to similar position in another firm or take position in this FIG neither promotions nor dismissals hardly related to CEO’s performance Detailed turnover classification: Other types:  Detailed turnover classification: Other types Takeovers (4 cases) Political reasons (3 cases) ? (5 cases in 1997) Detailed turnover classification: Dismissals:  Detailed turnover classification: Dismissals 22 Cases shareholders usually do not publicly blame retired managers for poor performance official reason for turnover is neutral: health conditions, experience of contract with manager no comments at all. Criminal cases are exceptions Only 2 cases No one was sentenced to imprisonment. Detailed turnover classification: Dismissal case:  Detailed turnover classification: Dismissal case Rostselmash is a largest combine harvester producer. On 25th September 1998 former CEO Vladimir Trinev and commercial director Sergei Beloglazov were arrested on suspicion on theft from Rostselmash. They head the company from the end of 1996 till the beginning of 1998 when they were forced to resign by ”health conditions”. New CEO Pavel Pokrovsky blamed them in massive self-dealing and transfer pricing. According to Pokrovsky prices of combines were significantly lower than costs while materials were acquired on above market prices through special structures. Losses from Trinev’s actions were estimated up to 41 bln. no denominated rubles (approximately $ 8 mln). Investigations took two years and finally Rostov region Prosecutor exculpate Trinev and Beloglazov. Summary:  Summary Conclusions:  Conclusions Managerial turnover activity was quite intensive during 1997-2001 period In most cases managerial turnover is not directly related to firm performance Top managers have low incentives to perform well since their chances to become CEO are low Internal and external corporate governance mechanisms do not work properly managerial entrenchment is high undeveloped financial market complicates manager performance monitoring top managerial labor market is thin poor legal system and law enforcement

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