Lessons from Fiascos in Russian Corporate Governance

Abstract

"Bad corporate governance" is often invoked to explain poor enterprise performance, but the catch phrase is never precisely defined - neither its consequences for the real economy, nor its causes in particular countries has been adequately explained. This paper uses Russian enterprise examples to address these open questions in corporate governance theory. We define corporate governance by looking to the economic functions of the firm rather than to any particular set of national corporate laws. Firms exhibit good corporate governance when their managers maximize residuals and, in the case of investor-owned firms, make pro rata distributions to shareholders. First, using this definition, we develop a typology that shows the channels through which bad corporate governance can inflict damage on the real economy. The topology helps identify vulnerabilities to corporate governance problems that may appear in any country and it suggests a new way to tailor policy responses. Second, we explain the causes of poor corporate performance in Russia by looking to the particular conditions prevailing at privatization - untenable initial firm boundaries and insider allocation of firm shares - and the bargaining dynamics that followed. The focus on initial conditions helps expand a comparative corporate governance literature built on United States, Western European, and Japanese models. Lessons from Russian fiascos counsel caution as to "stakeholder" proposals - including labor or local communities in formal corporate governance - and generate testable hypotheses regarding potential losses from the multiple large block share ownerships typical of many U.S. firms, especially close corporations.