Organization and Development of Russian Business A Firm Level Analysis_4 potx

146 Organization and Development of Russian Business Basargin, V. & Perevalov, Yu. (2000) Analiz zakonomernostei formirovaniya korpora- tiv nogo kontrolya na privatizirovannykh predpriyatiyak, Problemy Prognozirovaniya, 5: 120–138. Bevan, A. A., Estrin, S., Kuznetsov, B., Schaffer, M. E., Angelucci, M., Fennema, J., & Mangiarotti, G. (2001) The determinants of privatized enterprise performance in Russia. Working paper No. 452, Ann Arbor: William Davidson Institute, University of Michigan Business School. Coughlan, A. T. & Schmidt, R. M. (1985) Executive compensation, management turnover, and firm performance: An empirical investigation, Journal of Accounting and Economics, 7: 43–66. Denis, D. J., Denis, D. K., & Sarin, A. (1997) Ownership structure and top executive turnover, Journal of Financial Economics, 45: 193–221. Dolgopyatova, T. (2003) Ownership and corporate control structures as viewed by statistics and surveys, Russian Economic Barometer, 12: 12–20. Dolgopyatova, T. 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(1994) Constraints on capitalism in Russia: The managerial psyche, social inflastructure, and ideology, Calfornia Management Review, 36: 124–141. Hunter, J. E. & Schmidt, F. L. (2004) Method of Meta-Analysis: Correcting Error and Bias in Research Findings (Thousand Oaks: Sage Publications). Huson, M. R., Malatesta, P. H., & Parrino, R. (2004) Managerial succession and firm performance, Journal of Financial Economics, 74: 237–275. Iwasaki, I. (2007a) Corporate law and governance mechanism in Russia. In: Dallago, B. & Iwasaki, I. (eds), Corporate Restructuring and Governance in Transition Economies (Basingstoke: Palgrave Macmillan). 9780230_217287_07_cha05. dd 146 5/14/2009 3:48:00 PM Corporate Governance and Managerial Turnover 147 Iwasaki, I. (2007b) Enterprise reform and corporate governance in Russia: A quantita- tive su rvey, Journal of Economic Surveys, 21: 849–902. Kang, J. & Shivdasani, A. 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(2004) Strukturnye Izmeneniya v Rossiiskoi Promyshlennosti (Moscow: Izdatel’skii dom GU VSHE). 9780230_217287_07_cha05. dd 147 5/14/2009 3:48:00 PM 148 6 Management Team and Firm Restructuring Victoria V. Golikova Introduction The privatization of state-owned enterprises in Russia and the subsequent redistribution of property rights made up a large cohort of manager- owners. This group, according to surveys of the Russian Economic Barometer, became the major category of owners for the first time in 2003, with a 25% share in ownership structure, and maintained their leading position into 2007 with a 35% share (Aukutsionek et al. 2007). Therefore, a considerable number of management teams of Russian JSCs are headed by (or include) manager-owners. On the other hand, in the last decade, a tendency toward the separation of ownership and management has become more and more noticeable, and the old Soviet-style managerial teams are being substituted by a new generation of professionally trained hired managers. They are expected to be more effective at improving company performance by facili- tating the large-scale market-oriented restructuring needed by the majority of privatized enterprises. However, the results of empirical surveys provide evidence that the privatization of initially state-owned manufacturing firms in Russia did not result in significant increases in productivity (Brown et al. 2004). Bhaumik and Estrin (2005) discovered that Russian industrial firms were unresponsive to almost all the normal economic drivers. In an attempt to explain the difference between two transitional countries, China and Russia, they discussed the managerial quality in the economies in transition and its influence on company performance. Due to methodological constraints and lack of information available for analysis, the composition of management teams and the role of CEO char- acteristics in enterprise restructuring do not very often become a subject of empirical research. For example, even public companies, which were obliged by law to disclose information about their activities, were not ready to present the information regarding the work of the general directors. S&P showed that, in 2006, the terms and conditions of the agreement with the general director were disclosed by only 1% of the companies, the remuneration of 9780230_217287_08_cha06. dd 148 5/12/2009 5:30:04 PM Management Team and Firm Restructuring 149 senior managers, by 16%, and information about the manner in which man- agement remuneration depended on company performance, by only 17% (Standard & Poor’s 2006, p. 13). Information arrays, available for experts, are related to specific groups of companies, such as, for example, a study of Rachinsky (2002) based on a sampling of 110 large Russian enterprises, which are members of the Russian Trading System Stock Exchange (RTS), or a study by Roschin and Solntsev (2006) containing information about job dismissals and appointments of CEOs, published in 1999–2004 by the Vedomosti newspaper. 1 Little is known regarding how and to what extent new company owners respond to changes in the composition of manage- ment teams in a situation of broadly recognized shortages of professionals, especially in the regions of Russia. Furthermore, the same could be said for the poor level of trust between owners and managers. By 2005, the cohort of general directors of Russian industrial enterprises consisted of former “red executives” and a new generation of managers who came from business or from government bureaucracy (so-called politically connected CEOs). It is not clear which of the two is really driving the restruc- turing of enterprises. Neither is it clear whether the status of the general director, that is, owner or hired manager, is correlated with the intensity of a company’s modernization and restructuring. The main trends for the formation of a cohort of CEOs and managerial teams are discovered on the basis of a comparative analysis of independent companies and enterprises, included in the holding company groups (HCG). 2 The analysis is based on the results of a Japan–Russia large-scale survey of Russian joint-stock com- panies (JSCs) conducted in 2005. 3 The remainder of this chapter is organized as follows: The first section is a comparative analysis of the basic characteristics of Russian JSC general directors and an exploration of common features and differences from the top managers in countries with developed market economies. The second section is an exploration of how the composition of the management team depends on the arrival of new company owners. The third section contains the main hypothesis regarding the influence of the composition of the man- agement teams, changes of principal owners, and business environment on the intensity of enterprise restructuring and a discussion of the results of their empirical testing. The fourth section includes a summary of the results and the conclusion. General directors of Russian JSCs: “Red executives,” politically connected CEOs, and new professional managers Our survey data make it possible to present a portrait of recent general directors of JSCs and to compare the findings with those of other empiri- cal studies. First, we discover that the average age of a JSC general director is 49.4 years. 4 This is very close to the recent results received by the Center 9780230_217287_08_cha06. dd 149 5/12/2009 5:30:04 PM 150 Organization and Development of Russian Business of Labor Studies of SU-HSE based on the information of Rosstat statistical data (49 years old) 5 and is compared to the earlier estimations of Rachinsky (2002) (50 years of age) related to 2001. Second, the directors in independ- ent JSCs and group-member companies have essential qualitative differ- ences: directors at independent enterprises, on the average, are considerably older; among them, the share of directors under 40 years old is lower, and the share of directors above retirement age is higher. One explanation for this is the fact that a considerable percentage of CEOs had already become shareholders in the course of privatization. Both in independent JSCs and in holding members, the director’s age is essentially related to whether he is a hired manager or a large business owner. For example, the average age of directors who are large shareholders exceeds that of hired top managers without stake in company stock owner- ship by four to six years. Among them, the share of directors younger than 40 is twice as low, and for managers/heads of holding companies, it is three times as low. Furthermore, directors who are large shareholders at group- member companies are younger than those at independent JSCs: for exam- ple, if only 33% of them are older than 50 in the first group, more than 59% of them are above that age in independent businesses. There are differences, although not very significant, regarding the level of education of the chief executive officers. In group-member companies, in contrast with independent JSCs, the share of professional managers having education in economics or management or an MBA (28.4% in the entire sam- ple) is higher (by almost 7 and 3 percentage points, respectively). The most prominent trend is the employment of professional managers in HCGs. At present, almost 15% of Russian JSCs have managers with job expe- rience at a Western company, but, in the group-member companies, the share of managers with such job experience is two times higher (20.1% and 11.3%, respectively) than in independent JSCs. As far as hired manag- ers is concerned, the share of directors having job experience at a Western company is practically the same, but, among the directors-large owners in group-member companies, the share of managers with such experience is significantly larger (20.0% and 7.8%, respectively). According to survey results, 35.6% of general directors were hired manag- ers without a share in company stock ownership. In new appointments of 2005, their share was 50%, which is evidence of the tendency for the separa- tion of ownership and control in stable economic growth. 6 “Red executives” who became large owners in the course of privatization are gradually leav- ing CEO positions. By the time of our survey in 2005, only 39% of general directors-large owners in the entire sample had more than 10 years of job experience as company CEOs. We found that, in Russian companies, the turnover of hired managers is rather high: one-third of directors in the whole sample and as many in inde- pendent JSCs were appointed within one year of the time when the survey 9780230_217287_08_cha06. dd 150 5/12/2009 5:30:05 PM Management Team and Firm Restructuring 151 was conducted. The average number of years in the position of a Russian JSC general director, according to our survey results, is 8.4 years. This number is not much higher than it is in other countries, where, according to Booz Allen Hamilton’s study of CEO turnover in the world’s 2,500 largest public companies defined by their market capitalization, it is 7.8 years (Lucier et al. 2007). However, in our case, the average number of years in a CEO posi- tion in the entire sample of general directors masked essential differences between directors-large owners and directors that do not own shares. For example, in the first case, it is more than twice as high, 9.6 years vs. 4.5. In all categories of top managers analyzed in the survey conducted in the first half of 2005, the average time in one position was 6.5 years. At the same time, it was 5.3 years when large owners did not take a direct part in the enterprise management and 4.0 years when the managerial team was headed by a hired general director and large owners were not involved in the management. Let us briefly overview the recruiting sources of general directors, that is, the prior job occupation of the current general director. On the whole, according to our data, incumbents, , that is, those who previously worked at the same enterprise in another position, made up the larger part, 61%, of the general directors. This is typical for JSCs situated in different settle- ments (Moscow, regional capitals, noncapital cities, urban settlements, and villages). We found no differences in the share of directors-incumbents in terms of industry affiliation, except for chemistry and petrochemistry. 7 Recruiting sources have essential differences depending on the status of the general director (Table 6.1). Therefore, in independent enterprises and in group-member companies, three-quarters of the directors, who are large shareholders of the JSC, are incumbents. 8 With regard to hired directors with- out company shares, at independent enterprises, almost half of them (47.7%) are incumbents as well. The share of incumbents among hired managers in group-member companies is much smaller (30.2%). The modest share of the incumbents within group-member companies corresponds with the fact that the main source of the general directors’ recruitment within group-member companies is the rotation of the CEOs within the group. The appointment of successful CEOs from one group-member firm to another contributes to the rapid transfer of management knowledge and skills and, therefore, is a prereq- uisite for the dissemination of common management standards within the group and of faster adaptation of new group entrants. At independent JSCs, outside owners quite frequently appoint successful top managers without job experience in a particular industry (in 28.4% of cases). In contrast, in group- member companies, such practices occur at one half that rate. One in four directors has work experience in government bodies in the post- privatization period; meanwhile, directors in group-member companies have such experience even more frequently, one in three. On the whole, the share of general directors with job experience at the state bodies is by 11 percentage points larger at JSCs with more than 1,000 employees, since the administrative 9780230_217287_08_cha06. dd 151 5/12/2009 5:30:05 PM Table 6.1 Recruiting sources of general directors at independent enterprises and in HCGs (percentage of respondents who answered) Status of the JSC general director % by line Previous job of general director a This enterprise This HCG, group of companies, business partners Another company from the same industry Company from another industry Total Number of JSC Independent (autonomous) enterprise Large owner 75.8 1.9 12.6 9.7 100 207 Hired manager 47.7 2.3 21.6 28.4 100 88 Total group 67.5 2.0 15.3 15.3 100 295 Significance of differences 0.000 b HCG member Large owner 80.0 12.7 5.5 1.8 100 55 Hired manager 30.2 36.8 19.8 13.2 100 106 Total group 47.2 28.6 14.9 9.3 100 161 Significance of differences 0.000 b Whole sample, including management or parent company of HCG Large owner 76.6 4.0 11.5 7.9 100 278 Hired manager 37.9 20.7 21.2 20.2 100 203 Total group 60.3 11.0 15.6 13.1 100 481 Significance of differences 0.000 b Notes: a A small category that came to business directly from the state bodies was excluded. b ␹ 2 test. Source: Author’s calculations based on survey data. 9780230_217287_08_cha06. dd 152 5/12/2009 5:30:05 PM Table 6.2 Characteristics of managerial skills and experience by different status of company location (percentage of respondents who answered) Company location Total sample Significance of differences a Moscow Capital of the region Noncapital city Urban type settlement/ village Share of companies with directors under 40 years of age 25.0 16.5 13.7 19.4 16.3 0.239 Share of companies with directors with higher education in economics and management 25.0 25.4 27.6 33.3 26.2 0.653 Share of companies with top managers who have job experience in a foreign company 17.2 15.0 12.5 18.8 14.7 0.730 Share of companies with top managers with job experience in governmental bodies 12.5 8.8 6.6 2.8 8.2 0.374 Note: a ␹ 2 test. Source: Author’s calculations based on survey data. 9780230_217287_08_cha06. dd 153 5/12/2009 5:30:05 PM 154 Organization and Development of Russian Business resources of the state bureaucracy in the 1990s–2000s made it easier for the officials to acquire the most attractive (and as a rule, larger) enterprises. On the other hand, the survey results prove evidence that, among CEOs in the past elite of functionaries, the share of directors-large shareholders and directors-hired managers is equal. This demonstrates that, in an unsta- ble institutional environment and with an increased involvement of the state in the economy, business owners are interested in developing neces- sary relationships with state officials by appointing managers with appro- priate experience and personal contacts. The question of whether or not there are any qualitative differences in the top managers in the capital and provinces will be examined. We compare the key indicators of age, education, and job experience by status of location (Table 6.2). 9 A comparison of the main qualitative characteristics of CEOs by status of location has shown the absence of significant differences, which proves a trend toward the formation of a national market of top managers. The leading recruitment companies report that two–three years is the average amount of time spent in a management position. More and more often, mid- dle-level managers of large companies receive a promotion in other regions of Russia and change location (Pal’shin & Goverdovskaya 2007). Many compa- nies with their units in other regions of Russia prefer to send managers from the central office or from smooth-running large regional offices to improve the quality of management in the provinces (Goncharova 2008). The composition of management teams as the decision of main shareholders In 2001–2004, as proved by the survey data, general directors were changed at more than one-third of joint-stock companies (almost 39%). The intensity of the turnover was the same in different types of settlements (Moscow, regional capitals, noncapital cities, urban settlements, and villages). It is evident that changing the controlling owner, with a high likelihood ratio, entails not only changing the general directors (Table 6.3) but also subsequently renewing managers at economic departments in order to pro- vide control over financial flows. 10 This trend has become common for inde- pendent enterprises and for group-member companies. According to the results of our survey, at least in one half of the cases, changing owners is accompanied by changing general directors. The scale of such a change of general directors following the arrival of new controlling owners in Russia is considerably higher (more than twice) than it is in countries with a stable market economy. For example, Booz Allen Hamilton’s survey provides evi- dence that the share of CEOs who left their company after the controlling owner changed was 18% in 2005 and 22% in 2006 (Lucier et al. 2007). For group-member companies, the frequency of the appearance of a new gen- eral director is still higher due to the fact that entering HCGs introduces 9780230_217287_08_cha06. dd 154 5/12/2009 5:30:05 PM Management Team and Firm Restructuring 155 significant changes in the ownership and corporate control structures (Avdasheva 2007). The turnover of general directors on the shareholders’ initiative, as evi- denced by numerous studies, is determined by the achieved and expected results of JSCs (efficiency and growth of market capitalization) and lack of trust on behalf of the shareholders (an agent problem). Recent results pre- sented by Jenter and Kanaan (2008) suggest that the standard CEO turnover model should be extended by capturing bad industry or market perform- ance. They show that a decline in the industry component of firm per- formance from its 75th to its 25th percentile increases the probability of forced CEO turnover by approximately 50%. In Russian joint-stock com- panies, a considerable percentage of general directors (exceeding 59%) are forced to leave their positions on the shareholders’ initiative. This percent- age is much higher than that in other countries, where, according to Booz Allen Hamilton’s research of 2006, approximately one in three CEOs was dismissed due to a decision of shareholders who were unsatisfied with the results of the past activity of the director or concerned about the current situation and the company prospects (the last reason has become a more and more noticeable trend in the recent years) (Lucier et al. 2007). In the opinion of Shekshnya (2006), based on the results of a survey and interviews with general directors, shareholders, and company personnel, 11 a hired Russian general director has not yet become a CEO in the Western sense. He “plays a restricted number of parts, consciously excluding oth- ers from the field of his responsibility; he is concentrated on himself, the Table 6.3 Change of general director/board chairman at independent enterprises and HCGs depending on changes of main company shareholders in 2001–2004 (per- centage of respondents who answered) Change of main shareholder in 2001–2004. % by line. Change of general director/ board chairman in 2001–2004 Significance of differences a No Yes Total Number of JSCs Independent (autonomous) enterprise Yes 50.0 50.0 100 126 0.000 No 73.4 26.6 100 357 HCG member Yes 38.3 61.7 100 94 0.028 No 52.2 47.8 100 178 Management or parent company of HCG Yes 52.9 47.1 100 17 0.009 No 88.5 11.5 100 26 Whole sample Yes 45.6 54.4 100 237 0.000 No 67.3 32.7 100 562 Note: a ␹ 2 test. Source: Author’s calculations based on survey data. 9780230_217287_08_cha06. dd 155 5/12/2009 5:30:05 PM [...]... patterns of separation of ownership from management (with a general director being a hired manager as a basic category) The characteristics of management teams include a long planning horizon in excess of three years and the following indicators of human capital: the presence of sufficient changes in economic and manufacturing departments (dummy); the change of the general director by a shareholders’... Ministry of Economic Development and Trade of the Russian Federation in 2007–2008) I would like to thank Andrei Yakovlev and Yurii Simachyev for their useful comments and suggestions Special thanks are given to Olga Uvarova for her assistance with data processing and manuscript preparation Notes 1 The newspaper monitors job dismissals and appointments at large companies from a limited number of regions Therefore,... experience at governmental bodies (dummy, a 10-year period is considered) Other variables are included as categorical: the age of the general director (basic category: less than 40 years old); education of the general director (basic category: lack of profile high education in economics and management); and prior job occupation of the current general director (incumbent as a basic category) The level of competition... significant at the 5% level One possible interpretation of this puzzle could be connected with the lag needed before new owners change the organizational structure, develop a new business model, form a new appropriate management team, and start modernization As far as the correlation with the changes of managers at the middle level is concerned, we revealed a significant positive correlation of managerial... reasonable Shekshnya explains this situation in several ways: the higher social status of the entrepreneur as compared to that of a comparably or highly paid employee and the orientation of the most capable potential CEOs to entrepreneurship; the presence of a redundantly high part of the owners in the operational management, which prevents managers from realizing their potentials; and, most importantly,... types of legal entities have principally different centers of decision-making concerning the managerial team and the extent of consideration given to the interests of a particular enterprise 3 For a detailed description of the data and sampling procedure, see the Appendix of this book 4 The question was asked on the interval scale with a spacing of 10 years; for the calculations, the medians of the of. .. characterize industry affiliation (communications as a basic category), company size measured as a logarithm of employees, dummies for being a new company established after 1992, membership in a business group, location in capital cities (Moscow or oblast capitals), legal status (open vs closed JSCs), and availability of exports Results The estimation results are shown in Table 6.5 Of the basic company... 9780230_217287_08_cha06 dd 158 5/12/2009 5:30:06 PM Management Team and Firm Restructuring 159 managerial team, which includes the general director and the managers of the economic departments With the current managerial personnel shortage, time is required to replace individuals, and it is likely that qualified individuals for the positions are not available The difficulties of building-up a new managerial team that... among the members of management teams not only in the capitals of Russia but also in the provinces, providing opportunity to improve the managerial quality in Russia On the other hand, the existing shortage of qualified management personnel in the regions limits the potential of growth of Russian firms The separation of ownership and management has a significant correlation with the scale of enterprise...156 Organization and Development of Russian Business shareholders and the important officials to the prejudice of paying attention to the customers, employees and partners; he considers his work to be a means for achievement of more important life objectives not related to it, he plans his actions, predominantly bearing in mind a short-term planning horizon” (p 30, translated from Russian) Such an assessment . dd 149 5/12/2009 5:30: 04 PM 150 Organization and Development of Russian Business of Labor Studies of SU-HSE based on the information of Rosstat statistical data (49 years old) 5 and is compared. U.S. and Russian managers, International Studies of Management and Organization, 27: 85–106. Elenkov, D. S. (1998) Can American management concepts work in Russia? A cross- cultural comparative. 146 Organization and Development of Russian Business Basargin, V. & Perevalov, Yu. (2000) Analiz zakonomernostei formirovaniya korpora- tiv nogo kontrolya na privatizirovannykh predpriyatiyak,