Igor Belikov is the former general director of the Stock Market and Management Institute, which in the fall of 2000 started working with the Federal Securities Commission to create a code of corporate behavior.

The code is still in progress but has been well received by business and government experts.

In preparing the code, Belikov and his colleagues have analyzed how corporate governance could be improved, and how sound governance practices have taken root in other countries.

In November 2001, Belikov helped found the Russian Institute of Directors (RID), a non-commercial partnership between members of leading companies, and later became its director. The RID develops professional principles, ethical norms, and progressive practices in corporate governance.

On Wednesday the RID held the first congress of corporate board directors in Russia. The Russia Journal met with Belikov to get his assessment of the state of corporate governance in Russia, and the institute's place in promoting it.

The Russia Journal: In November 2002, it will be a year since the RID was founded. Can you give examples of the institute's accomplishments since that time?

Igor Belikov: Sure. First, we have written "The Board of Directors in the Corporate Governance System of a Company." This is the first book of its kind in Russia – a textbook where the main problems in corporate governance and the activities of boards of directors are illuminated. This book is the result of research we conducted, and the training course we have been administering since November of last year.

Various company representatives who have received instruction have acknowledged the quality of the course, and the book will soon be available in English. Right now we're conducting three surveys – reactions of companies to the corporate governance code and illumination of the best ways to increase accountability, the work practices of company secretaries, and a survey on companies' corporate governance needs. We are the only Russian organization that has been recognized by the European Corporate Governance Institute in Brussels.

RJ: Several large Russian companies helped found the institute. Could you name some of them and talk about how the idea of the institute came about?

IB: Norilsk Nickel, Surgutneftegaz, Yukos, Svyazinvest, Tatneft, and Severstal were among the founding members. I put the idea of the institute forward, but it wasn't something I thought up on my own – there are similar institutes in some 20 other countries.

Our institute was based on the British Institute of Directors, which has been in existence for almost a hundred years and has about 52,000 members. In the last three years, such institutes have been founded in developing countries such as the Philippines, Taiwan and South Korea. Our initiative was intended to ensure that Russia would not lag behind.

RJ: What problems do you face in the course of implementing your plans?

IB: Not all companies realize the importance of corporate governance. There are those that feel they do need it, and know that it is an important instrument for raising their stock value.

There is also the issue of confrontation between internal and external directors as there have been many attempts to build a "Great Wall" between them.

While we do feel there are differences between the two, progressive corporate governance will only be possible if all members of the board are working cooperatively, with common professional principles and norms.

RJ: In developing standards for the activity of board directors you have used Western models. Do you take characteristics of the Russian business environment into account?

IB: We strive first and foremost to fulfill the needs of Russian companies. The requirements put forward by investors must of course be taken into account, but we feel that investors should not simply demand Western requirements. They should consider the situation here.

After the numerous scandals in the United States, the New York Stock Exchange (NYSE) has accepted the requirement that the board of a company must consist entirely of independent directors. We feel that this is not entirely sensible in the Russian business context. In Russia, major shareholders are commonly managers of the company as well.

We feel that fully excluding them from board discussions is simply not sensible from the point of view of running an efficient business. Yes, the board of directors should have a sufficient number of external directors to provide independence and objectivity in strategic decision-making, but there should also be representatives from management.

We, of course, don't have any of our own standards yet, but I have to say that the problem of standards has not been solved in the West either. As compared to a year ago, the current advantage for our companies lies in the fact that we can take an equal part in these discussions.

RJ: Do you think that recent events in the United States will influence the understanding and practice of corporate governance in Russia?

IB: Yes, of course there will be an influence, because the new listing rules adopted by the NYSE will apply to Russian companies that are already being traded there. Companies that are about to enter the NYSE will have to take this into account, since investors will scrutinize the development of corporate governance in countries outside of the United States much more rigorously. We need to be ready – on the one hand, to actively improve our corporate governance; and on the other, to sensibly explain practices based on Russian business ownership structure.

RJ: In the RID program to help implement the code of corporate behavior in Russian companies, there is the issue of enforcing the code's recommendations – confirming the authenticity of disclosed information, for instance. How are these recommendations enforced?

IB: The problem of enforcement exists in all countries. In German corporate governance there is a principle – you either state that you follow one or another recommendation of the code, or explain why you don't follow it. There is no mechanism for verification, however. For the time being, it is being emphasized that, if a company falsely states that it follows recommendations when in fact this is not the case, there are dire consequences.

The problem of how to provide for compliance is now being discussed in Russia. One of the options is selective verification, and we're working on developing that now.

Using auditors is another option. In addition to their yearly audit, they would verify whether a company's declared information and real practice correspond – but even this is not 100 percent accurate.

The third option is developing public mechanisms. In other countries, there are public organizations that investigate both the remuneration of managers and company results; if there is a discrepancy, they publicize it. This draws the attention of investors and regulatory bodies. Endeavoring to create this type of mechanism is one of the projects of the RID.

If a company announces that it fulfills all of the requirements for disclosure of information, even selectively, we investigate. If we deem this not to be the case, we prepare a public announcement that this company's practices do not correspond to its statements.

This could very well work, because unlike U.S. companies, the number of Russian companies traded on the stock market in the United States is less than 100, so it is not an impossible task.

RJ: RID has participated in several international corporate governance forums. How similar are Russia's corporate governance problems to those of other developing countries, in Eastern Europe for example?

IB: I think that there are quite a few similarities. Across Eastern Europe, you see a high concentration of property, an insufficiently developed stock market, and the lack of a long tradition of corporate governance. These are the general factors.

The differences are that in other Eastern European countries, business practice had not been fully suppressed – some vestiges of it were preserved. Other countries also experienced a less severe brand of socialism.

Another important distinction is that their stimuli are much more obvious. These countries are a lot closer to being accepted into the European Union, so they are after a larger, juicier carrot [than Russia].