Alla Laletina, Head of the corporate-legal department at the state corporation Rostec, talks about the system of corporate governance at Rostec and the specificities of its reform.
Talent Equity Institute: This year, Rostec began to reform its system of corporate governance. How did the corporation’s concept of asset management change?
Alla Laletina: To answer how Rostec's asset management changes, I first have to start with why Rostech initiated these changes.
The reasons, or, better yet, the prerequisites for changing the system of corporate governance were objective factors: on the one hand, changing Rostec’s legislation and formulation is a practice of corporate governance, and, on the other hand, it is the last stage of formulating a holding and a mature, objective necessity for transforming to a business model of management, or, in other words, a request from potential market investors for an understandable and transparent system of corporate decision-making. These prerequisites and conditions stimulated the reformation of our previous asset management rules. As such, this is objectively an evolutionary process.
Now I’ll answer how. The primary changes of Rostec’s system of corporate governance included introducing a differentiated approach to managing Rostec’s assets, increasing the independence of their holdings and the transparency of decisions made by the Boards of Directors, updating the procedure for composing a Board of Directors, implementing of a system of support for the corporation’s managers when making decisions (that being the members of the Board of Directors).
A differentiated approach to holding management lies in the selection of a several models of corporate governance. The models primarily differ in the level of authority of the Board and the holding company executives, as well as to what extend the corporate headquarters participates in making operational decisions.
Another model of corporate governance can be applied in cases where the equity capital of the organization includes private investors in addition to the government corporation. This form of corporate governance in accordance with legal shareholders agreements. For example, this model applies to the Kalashnikov Corporation.
Talent Equity Institute: What role does a holding’s Board of Directors play, and how does one assess its effectiveness?
Alla Laletina: The role of a Board of Directors, when talking about corporate relations, is quite traditional and difficult to assess. The Board of Directors is responsible for protecting the rights and legitimate interests of the shareholders; for strategic (not operational) management of the holding; for formulating of an effective system of decision-making; for evaluating the organization and its key leaders.
These directives relevant to both the Board’s work as a whole and that of its individual members, as well as reviewing the activities of nominated candidates. These tasks, which lie in front of the Board of Directors, are extremely valuable.
The Board’s effectiveness depends on a variety of factors, including a professional and balanced composition, the motivation and engagement of corporate directors, the presence of specialist committees, quality methodology and procedure, and a qualified corporate secretary.
Rostec’s holdings created committees within the Boards of Directors in the following areas: strategy, budget, audit, personnel, and remuneration. The work of these committees is used to make recommendations to the Board, which influence their decisions. We attract the most qualified and experienced experts from corporate headquarters and holdings, as well as external market experts, to work on our committees.
The Rostec corporate headquarters created a registry of corporate secretaries, all of whom guarantee the effective work of the holdings’ Boards and committees and help maintain a consistent set of corporate standards.
Analyzing the work of the holdings’ Boards of Directors over previous cycles has given us a reference point and plans for improvement. Now Rostec has a monitoring function to evaluate the effectiveness of collective management bodies. The results of the ongoing evaluation of the Boards’ effectiveness will be used to create profiles of candidates and professional matrices of each holding’s Board for the following corporate year, which helps to evaluate ongoing performance, especially regarding the above-mentioned reform changes.
Talent Equity Institute: How are internal and external members nominated for the Board of Directors?
Alla Laletina: As you know, in September of this year amendments to the Civil Code of the Russian Federation went into effect, which significantly increases the responsibility of Board members. In addition, due to the changes in legislation, potential actions by Board members could post more direct risks for the corporation. Consequently, starting from the current corporate year, the professional experience and reputation required to join a Rostec Board of Directors has increased significantly.
In this corporate year, the composition of all of the holdings’ Boards of Directors have been formulated according to new principles. Each holding’s Board now includes one executive director (the CEO of the holding), and the remainder are non-executive directors. Two places are reserved for independent directors, who will be representatives from the business community, relevant ministries, or agencies. Heads of key corporate departments overseeing finance, strategic planning, industrial planning, corporate governance, and investments are all eligible for election to the Board of Directors.
Talent Equity Institute: Do you see any advantages to the corporate governance system’s development? What kind of direction will the remaining development take?
Alla Laletina: As mentioned before, the primary goal of the ongoing corporate governance reform is to help increase of effectiveness and investment attractiveness of the company’s holdings and other Rostec organizations.
Without question, the introduction of a new system and the achievement of sustainable results is a time-consuming process, not least because cycles in the sphere of a corporate year are longer than those of the regular business processes of the organization. Obviously, steady growth in key performance indicators will be monitored for three years after each change in the system of corporate governance.
This means that the corporate governance system won’t improve just once – the work in this area must be carried out continuously, taking into account the corporation’s goals and objectives, as well as constantly changing external factors.
Our main efforts in our attempt to perfect our system of corporate governance will lead to the development and improvement of Board members’ competence, an improvement in how the Board and organization management interact with one another (please don’t implicate any members of the Board in operational activities), as well as to the development of a system of support for decision-making.
This article was published as part of the eighth issue of Talent Equity Newsletter "Effective Corporate Government".
To read all other journal issues, please follow the link to TE Newsletters page.