Balancing the powers of dominant shareholders with transparency and disclosure practices
Ownership patterns differ substantially in emerging economies from the US or Western Europe. In Russia in particular, the power of major private shareholders, or oligarchs, creates opportunities for tremendous private gains, often at the expense of minority shareholders and potentially to the detriment of the overall Russian economy. Furthermore, Russian government tends to exercise control over the economy through involvement in the governance of firms in “strategic” industries, such as natural resources and defence, and by providing political support and preferential treatment to some firms. These privately or politically motivated interventions by oligarchs or Russian government are likely to affect investments, productivity and performance of the Russian businesses.
Power of controlling shareholders over their firms and minority shareholders can be productive or destructive. ‘Bad’ power can lead to exploitation of minority shareholders. This may occur when an oligarch is a single controlling owner (no other owners can contest his powers) or is a board member of the leading lobbying business association – Russian Union of Industrialists and Entrepreneurs – and thus has political leverage within the economy. However, controlling shareholders may also exercise ‘good’ power – for example provide indispensable resources, connections, and information that they draw from being part of the Russian ownership network. The more central the position of an oligarch in such a network, the more resources an oligarch draws to the firm which may then translate into productive investments.
The power of companies’ owners can influence the outcomes of corporate governance practices adopted by their companies, such as organizational transparency and information disclosure. How such powers interact with corporate governance is the focus of our study.
We develop new measures to describe “excessive” power of owners and the firm’s access to valuable resources through the ownership network. When we analyse the implications of these measures, we find that corporate governance practices that improve transparency and disclosure can mitigate the negative effects of unusually powerful owners. Transparency and disclosure also can help firms in poorly-connected positions in the ownership network to gain access to needed resources and information.
Our research has implications for policymakers and investors choosing in which Russian firms to invest. Returns to minority shareholders are likely to depend not only on internal management practices but also on the actions of the major shareholder, and minority investors will want to pay attention to the associated risks of expropriation. Therefore, investors may want to select better-networked and more transparent firms that are likely to generate more long-term growth. Whereas policymakers and stock exchanges may have little control over the concentration of ownership of Russian firms, they should enhance transparency about the ultimate owners and ownership stakes of large companies. The availability of this information could counterbalance the tendency of controlling oligarchs to exercise their power to their private gains.
This article is based on the authors’ paper “Organizational transparency and power in firm ownership networks”, Journal of Comparative Economics, 2018.