The impact of socially responsible funds on the behaviour of Russian companies
To this juncture, the research discussion has focused on Russian corporate culture in a general sense. Here, the investigation has been armed with a greater appreciation of the corruption and the culture of corporate lawlessness that have remained as a holdover from Russia’s days as the Soviet empire. Now, the discussion will turn to a more specific examination of the areas where corporate social responsibility is needed, where it is improving and where it has seen either no improvement or an actual state of decline. Channeling this discussion through the perspective of a leading global Socially Responsible Investment Fund (F&C), the case study hereafter centers on F&C as a firm invested on some level in Russian private enterprises.
Using both available literature produced by F&C and by external sources to create a secondary data set, the research will parallel findings there from with data collected from key interview respondents. The Data Collection process is centered on the target interview with Karina Litvack, a director and head of governance and sustainable investment of F&C Investments fund. This interview would provide the research process with a list of companies in Russia in which F&C has key interests and these would consequently help to direct the thrust of the data collection process by guiding the selection of key sources for review as they related to these companies and by pointing the Researcher in the direction of additional interiew subjects. Accordingly, as a result of the target interview with Litvack, the Researcher was able to identify were Lukoil, Rosneft, Gazprom, Novatek and Norilsk Nickel as those of the greatest importance to the presence research.
In order to gain a better perspective on these firms, three additional interviews would be conducted. One would be an interview with a vice-president to an international investment bank in Moscow who requested anonymity. This interviewee would specially as an oil & gas sector analyst who would offer great insight on this sector’s connection to SRI interests. This interviewee is hereafter referred to as Anonymous Investment Bank VP. An additional interview would be gained with an associate at a different international investment bank in Moscow who was, alternately, an expert in metals and mining. This subject would be particularly useful in a discussion on the performance of Norilsk Nickel. The subject is henceforth referred to as Anonymous Investment Bank Associate. A fourth interview would be gained with an employee at Rosneft also requesting anonymity. The subject is referred to as Rosneft Employee.
The interview with Litvack would comprise the single most important primary source in the research process. By and large, the LItvack source would confirm the supposition that a scarcity of data or open discussion exists on the subject of Socially Responsible Investment in Russia primarily because a culture of patronage, corruption, cronyism and state-level abuses persists. Litvack indicates that this makes investment and assessment of investment opportunities in Russia distinct from many other contexts, though not unlike many developing nations. The interviewee would go on to identify certain features of the Russian marketplace that render it thusly. Litvack would tell that Russia suffers from a categorically low level of corporate governance, either internally or through regulatory oversight. The result of this condition is a general absence of accountability to low-level investors and stakeholders. Certainly, this may be viewed as a deterrent for would be investors in the Russian market.
Litvack goes on to indicate that many companies tend to make their decisions without input from or even notification to the shareholders. This denotes the general lack of transparency that is epidemic in the Russian marketplace. Here, Litvack’s claims correspond directly with the research encountered through secondary sources. For instance, the Standard & Poor’s (S&P) 2009 report on transparency and disclosure amongst Russian companies reports this to be generally lacking even in the face of government claims at confronting corporate secrecy. S&P find in their 2009 report that “transparency and disclosure levels per single components have changed insignificantly. We have noted some progress in the ownership structure and the shareholder rights disclosure. Yet, there is a lack of operational information disclosure which we now see as weaker than in the previous survey and around the same number as in 2007. Executive and board members’ remuneration remains the weakest aspect of disclosure.” (p. 4)
Litvack describes improving transparency as a major imperative for F&C in all areas of investment. The characteristic features of the Russian economy and business culture make this yet a more pressing imperative. Litvack indicates that where it determines to involve itself on any level with a Russian firm, the pursuit of transparency is a major priority. The Litvack interview would tell researchers that F&C meets twice annually with leaders at partnered firms in Russia to discuss ways of improving patterns of transparency. As the trends reported in the S&P study illustrate though, the relative scarcity of Socially Responsible Investment funds is at least partially a product of the resistance on the part of corporate leaders to open up to the public. Litvack suggests that this is because any improvement in the decision-making power of stakeholders would impede on current power dynamics. As the S&P report confirms, Russia’s remains one of the least transparent corporate cultures, noting that “our analysis shows that public companies listed in London or New York have continued to be substantially more transparent than companies listed only in Russia, regardless of the quotation level of the latter. The average transparency index for companies traded only in Russia is 49%. At the same time, the average transparency scores of companies listed in London and New York are 64% and 75% respectively.” (S&P, p. 4)
This demonstrates the distinct difference for the SRI in determining to invest in Russian companies as opposed to those in the developed sphere. Here, the absence of corporate governance and transparency means that SRI’s such as F&C must approach investment decisions with the appropriate model. Accordingly, Litvack describes the three models of engagement used by F&C and discusses these as they relate to investment in Russian companies. Litvack describes the Social Responsibility Fund approach, the Emergent Social Responsibility Fund approach and the Engagement approach. The first of these approaches involves high levels of investment in those firms which meet the highest standards of social responsibility. These standards are defined by such key features as the presence of a developed and effective mode of internal corporate governance; the achievement of transparency with respect to its personnel, stakeholders and the public; and the effective adherence to standards of environmental responsibility, sustainability and efficiency. According to Litvack, no Russian companies meet F&C’s stringent standards to be considered eligible for the Social Responsibility Fund approach. Certainly, this helps to underscore the major claim of the present research, that there is a scarcity of applicable knowledge to this juncture on how Socially Responsible Investment might have impacted Russian corporate culture.
In its additional categories for engaging selected firms, Litvack indicates that the standards are somewhat less stringent. The Emergent Social Responsibility Fund approach applies to those firms that meet certain minimal requirements and that are able to demonstrate that they are proceeding in a positive direction with respect to all dimensions of corporate social responsibility (CSR). Demonstration of the proper attitude and a documented willingness to take real and significant steps toward progress have been sufficient to gain such Russian firms as Lukoil and Novatek this status. Their role in justifying this status will be discussed further along in our analysis.
A third status granted by F&C, Litvack describes the Engagement approach, in which those firms demonstrating the greatest need for change and a simultaneous willingness to improve their practices are accompanied in their efforts by F&C’s advisers. A company which Litvack raises at this point in the discussion is Norilsk Nickel, which research encountered in both primary interviews and secondary literature sources denotes to be a particularly troubled firm. The nickel and metals mining firm which is globally notorious for its history of inhumane labour practices and gross environmental degradation is currently engaged in efforts to gradually come up to speed with poorly enforced but evolving environmental standards. This is an area which is also due for considerable investigation in the presence analysis. Litvack’s interview would dictate and secondary sources would confirm that the need for some level of control over environmental regulation and enforcement in Russia is a significant feature of its struggle to move to a more socially responsible corporate culture.
Indeed, this is a point which is raised during one of the subsequent interviews conducted in our research. Anonymous Investment Bank VP provided an interview with a particular focus on the natural gas and oil sector. This would concern many of the firms identified by F&C in discussion as well, including Gazprom, Rosneft, Lukoil and Novatek. Gazprom, in particular, is a company which Anonymous Investment Bank VP identified as having a positive record in areas of CSR. The interviewee would indicate that this is because Gazprom is a state-owned firm and therefore has invested heavily in community aims such as the development of schools and the funding of sports teams. The interviewee would go on to note that Gazprom experienced an inflection point in 2000 with its IPO, suggesting that the need for greater openness and accountability inherent to the courtship of public investment would stimulate fundamental change. The interviewee would indicate that Gazprom would be among the leaders in Russia in producing thorough environmental reporting on its own practices.
This corresponds with what our research finds to be one of F&C’s core priorities. So reports REO Research (2009), which indicates that in the area of sustainability, “F&C’s focus has been to press companies to build a stable long-term business model based on tackling workplace health, climate change and community relations.” (p. 5) This is a primary imperative upon which it bases its interaction with a host of Russian firms, based on their expressed commitment to truly effect environmental policy and sustainability change. Litvack supports claims concerning this priority, indicating that, in fact, Russia is experiencing some degree of success in instigating change. Litvack argues that Russia is in fact well ahead of nations such as India and China in both policy and enforcement of environmental provisions. Litvack identifies several steps with which F&C has begun to see changes in corporate behavior amongst the most prominent and therefore most visible firms. For instance, the interviewee would note that carbon trading has been particularly effective at instigating improvements in corporate compliance, with Lukoil demonstrating a simultaneous increase in revenues and decrease in carbon emissions. Litvack would report similar outcomes in Rosneft, which has demonstrated marked improvement in compliance with emissions standards even in the face of the kind of resistance that is commonplace in Russian corporate culture.
The positive outcomes to which Litvack would speak in interview correspond with the strategy reported to in F&C’s report on sustainability. Here, the SRI reports on the recommendations and counsel which it has provided to Russian firms at every engagement level, demonstrating the importance of connecting the idea of sustainability with promises of economic good-fortune. Indeed, Litvack emphasizes this point, suggesting that Russian firms and Russian corporate culture in general seem to not yet have fully integrated the notion that ethical practice and corporate social responsibility may prefigure better economic efficiency. The connection that Litvack implies has already come to prominent light in American and European markets has yet evaded Russian firms, standing in the way of sustainability enthusiasm or technological innovation. This cultural gap seems essential to the approach reported in the F&C sustainability report, which with respect to the Emergent Social Responsibility Fund firm, recommends “that Novatek form a sustainability committee to help identify how significant risks and opportunities can drive corporate strategy. We also suggested that Evraz, Lukoil, Norilsk Nickel, Novatek and Rosneft embed sustainability into their corporate culture by linking health and safety with executive remuneration.” (REO Research, p. 5)
This reflects the interest of creating a more explicit connection between environmental sustainability and opportunities for greater corporate efficiency. As we find to be overwhelmingly the case throughout primary and secondary research. Russia lags dramatically behind Europe in terms of corporate emissions standards. And even with the increase in regulatory legislation, many of the stated goals for Russia’s oil, gas and mining firms seem unrealistic at best, vulnerability to the persistent patterns of government corruption at worst. The interview with Anonymous Investment Bank VP would reiterate this point, contending that Russia is roughly five to ten years behind Europe in drafting and enforcing protective regulatory standards. The interviewee would indicate that “in Russia alone 20-30 billion m3 of associated gas are burnt annually. In Europe this figure is around zero. European companies understand that burning associated gas not only harms the environment, it also represents lost revenue. However, Russian oil and gas companies are supposed to be forced to utilize 95% of associated gas by 2012.”
However, the interviewee would express scepticism that any such change could truly be made given the current state of Russia’s corporate culture. The degree to which bribery, secrecy, executive abuses and state level malfeasance remain dominant in such big money businesses makes the role of firms such as F&C simultaneously extremely important and extremely difficult. Moreover, the interviewee would in a number of ways recurrently state the response to survey questions noting that no observable or significant change in the behaviour or corporate social responsibility of firms has occurred over the last three years. This is a primary interest of the research, which has intended to determine whether or not SRIs have been able to levy any detectable impact on the CSR levels met by key firms. The interviewee would suggest that the transition for many firms from being totally state-owned to achieving IPOs during the late 1990s and early 2000s would have a far more catalyzing impact than would any force of the last three years. To the point, the incursion of a global financial crisis and a credit crunch have only intensified economic hardship in Russia, prompting many firms to dispense with such interests as corporate governance, sustainability and transparency in favour of mere survival. In the Russian business climate, this survival has often meant engaging in many of the normative practices that are problematically omnipresent in current Russian business culture.
Conclusions and Recommendations:
This points us toward a resolution to the research which is that at this juncture, Socially Responsible Investment Funds can be said to have had very little impact on the broad scope of Russian corporate culture. As both primary data culled from interviews and secondary data culled from literature resources denotes, Russia’s most powerful firms have historically engaged in practices that are consistent with Soviet patterns of cronyism and unfettered industrial growth. It has proven quite a dramatic undertaking both economically and culturally to bring about change in these areas. It is the conclusion of this research that this remains so because so many firms remain connected to the totalitarian practices of their immediate past in a way that is notably incompatible with global free market capitalism. So observes REO Review, which contends that “much will depend on the country’s ability to overcome its Soviet legacy, not least a weak rule of law, endemic corruption, deteriorating public health and the government’s tendency to help itself to private assets. The Russian state keeps a tight grip on the energy sector8and frequently sits on company boards, while companies are often dominated by a single controlling shareholder, either the state or one of handful of well-connected ‘oligarchs’.” (p. 5)
This is a condition which stands largely in the way of the ability of SRIs to levy a meaningful impact on the behavior of corporate actors in Russia. Moreover, it is a condition that has limited the interest of Socially Responsible Investment funds to the extent that our own research has been highly limited to the decidedly non-scientific methods here executed. This helps to produce some basic recommendations that might improve the prospects of future research projects.
First and foremost, it seems there is a need for an expanded sample of case studies. The focus here on a single SRI would be conducted out of convenience and availability. It is recommended that a future research endeavor instead select an array of Russian-bound companies such as those assessed in our research by way of an F&C-based interview subject. Contact should be made with these firms and investigations mounted to be conducted across five years. This duration of time and the method of engaging a set of Russian firms should help to bring greater conclusiveness to the question of the impact of such SRIs and F&C on company practices.
Another recommendation holds that with a greater duration, a greater number of interview subjects would be consulted. With a greater number of respondents, the interview method should be streamlined using a scholastically tested and approved data-gathering instrument. This can help to eliminate some of the bias that is likely to have contributed to responses during face-to-face interviews.
F&C Investments. (2009). Responsible Investments. F&C Management, Ltd.
REO Research. (2009). BRIC: Sustainability Holds the Key to Long-Term Growth. F&C Management, Ltd.
REO Research1. (2009). Sustainable Mining: Oxymoron or New Reality? F&C Management, Ltd.
Standard & Poor’s. (S&P). (2009). Transparency and Disclosure by Russian Companies 2009: The Gap Between the Highest Scoring Companies and the Lowest Scoring Companies Widens. Centre for Economic and Financial Research at the New Economic School.
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