Corporate Governance Issues: Hermitage CEO’s Case Study
The CEO of Hermitage Fund Bill Browder undertook an unusual approach in his efforts to foster corporate governance. Hermitage’s presence in Russia was progressing smoothly before both domestic and international occurrences started affecting fundamental corporate governance issues. As a response, Browder had to take into account some of the basic aspects of the Russian corporate governance environment and thereby deciding to take the option of shareholder activism as a corrective measure. Some of the factors that influenced Browder’s decision include Russia’s weak judicial instruments and the lack of reliable regulatory bodies in the country. Nevertheless, there are concerns as to whether shareholder activism was the most viable approach to Hermitage’s problem. This essay investigates Bill Browder’s corporate activism strategy including its merits and demerits. Furthermore, the essay offers viable alternatives to corporate activism and some recommendations for players who might be in similar situations.
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One feasible strategic option for the manager is to rely on Russian regulatory authorities both from the political and professional realms. Turning to regulators would have improved Browder’s approach but this strategy also came with its strengths and weaknesses. The first weakness in this approach is that during this era, corporate governance regulations and regulators were mostly weak. Therefore, this strategy was a gamble for Browder who was most afraid of the influence that Russian oligarchs had on independent bodies (Lazareva et al 315). The other shortcoming in this approach is that it was hampered by the fact that Hermitage was mostly among the minority shareholders in most of the companies that it had put its investments.
Therefore, a likely outcome was that the regulators would have sided with the majority shareholders, who were mostly the perpetrators of corporate governance ills. The use of regulators would have made Browder’s approach less confrontational. Corporate activism was quite a confrontational approach, which came with several risks. For example, in his story, Browder admits to hiring bodyguards during the height of his activism (Dyck 6). Another positive aspect of the use of regulators was that it was more effective to get the regulators to act instead of reacting. Regulators only reacted to the bad publicity that Russia got from Browder’s shareholder activism. Nevertheless, corporate governance issues in Russia would have benefited more from a wholesome reaction by the regulators as opposed to knee-jerk reactions.
Another feasible strategic option for Browder was to utilize Russian judicial instruments without taking a confrontational stance. The case study notes that most of the other players in Russia preferred not to air their dirty linen in public when it came to policy and governance issues (Dyck 5). One major strength of using this approach is that it guaranteed a speedy conclusion to Browder’s issues. The use of activism only prolonged the process of getting justice for Hermitage’s interests. Furthermore, the judicial strategy would have ensured that Browder was left with other viable approaches when the court processes failed. One weakness in the court strategy is that there were high levels of corruption within Russia’s judiciary at the time.
Browder had identified oligarchs and other cartels to be the main perpetrators of corporate governance problems. Therefore, relying on the judiciary was unlikely to yield the results that the manger had hoped to achieve. Courts also came with the disadvantage of high costs and unfulfilling outcomes. For example, without activism, likely, the Gazprom’s case ruling would only have given Browder only half of the concessions that he wanted. An outcome of this type would have made the court process lengthy leading to more losses by the investors. Some of the people who were at the center of corporate governance issues in Russia included individuals who had enough power to influence the judiciary. Some of these personalities include government ministers and people within the infamous Russian oligarch (Dyck et al. 1096).
There are several recommendations regarding Browder’s corporate activism approach. First, the manager should have taken it upon himself to maintain a certain level of civility and cordialness in the course of his activism. To date, Browder’s activism remains a blotch in Russia’s corporate governance record. For instance, one of the government regulators at the time denies knowing Browder leave alone his perceived activities. This scenario is a strong indicator that although significant gains were made as a result of Browder’s activism, there is a possibility that things could have been even better for all those who were involved in the activism. Observers also doubt Browder’s intentions when he was engaged in explosive contests with the Russians.
It was recommendable for Browder to gain the support of the Russian Media on top of relying on the international press. This strategy would have proved fruitful during the aftermath of the activism. For example, although Browder considers himself a hero in the fight for better corporate governance in Russia, this sentiment is not echoed in Russia, whereby ordinary investors were the main beneficiaries of his activism. The use of international media had a polarizing effect because it elicited a feeling of West’s perceived superiority over Russia. Consequently, most observers could not immediately confirm the good intentions of Browder’s activism. It is important to note that some of the selected international media outlets eventually lost interest in the manager’s activism, thereby weakening his resolve. It would have been recommendable for Browder to manage his media usage to avoid overuse.
Another recommendation for Browder was to have his activism be an attraction to Russia than a deterrent. The activism served the purpose of discouraging small and medium investors who felt that they could not take on Russian entities (Claessens and Yurtoglu 14). Throughout his activism, Browder should also have given a higher priority to international governance regulators. The activist’s one-man army eventually appeared to be a form of showboating as opposed to being a struggle for better governance.
Some of the alternative strategies that were taken in this case are only theoretical as the available evidence shows that activism was highly effective to some extent. Therefore, some of the proposed alternative strategies could be only great on paper and not when they are put into practice (Tricker 39). First, focusing on courts would have been a great risk for the activist because historical data indicated that Hermitage investors did not stand a chance. Second, focusing on press reports only could have killed Browder’s efforts prematurely. Mixing media activism with court cases extended the half-life of the manager’s activities. A single strategy would not have been a good idea for Hermitage under any conceivable conditions. It remains to be seen how a friendly approach would have worked in Browder’s favor. The activist reports that he had received pseudo threats from oligarchs and majority shareholders before he decided that it was time for ‘war’ (Dyck 7). Therefore, there is a high chance that a non-confrontational strategy would not have worked for the investor.
The governance issues that apply to this case are prevalent even in the modern economic environment. Corporate governance issues are mostly manifested in economies where majority shareholders wield extraordinary influence on both economic and political matters. Japan is one such country and it has a corporate governance rating of 3.3 even though it is a first-class economy (Lazareva et al. 321). The element of oligarchs has been associated with Japan in the last few centuries. China, another giant economy has issues to do with regulators and regulations. Therefore, just like Russia, Chinese regulators are mostly expected to react and not to act on international matters. Developing economies such as Mexico, Turkey, and Brazil are also constant offenders when it comes to corporate governance (Mallin 29). Most of these countries suffer from high levels of corruption and unreliable judicial machinery hence their poor performance.
In the course of concluding this analysis, it is important to note that the case of Hermitage investors in Russia can offer valuable lessons to firms that face similar challenges. The first important lesson, in this case, is that although corporate activism worked for Browder, it is not a solid response to corporate governance issues. Activism only worked for Browder under unique circumstances. Another important lesson to be drawn is that international corporate governance bodies are the most viable enforcement tools for aggrieved parties. Therefore, investors who want to play it safe should opt to invest in countries that are covered by international governance codes. In cases where local means of seeking justice have failed, activism through international media is a viable strategy for victims of corporate governance issues in foreign countries. Nevertheless, it is important to note that high-risk corporate governance environments are likely to bring high returns like in the case of Hermitage.
Claessens, Stijn, and Burcin Yurtoglu. “Corporate Governance in Emerging Markets: A Survey.” Emerging markets review, vol. 15, no. 1, 2013, pp. 1-33.
Dyck, Alexander. “The Hermitage Fund: Media and Corporate Governance in Russia.” HBS Case, vol. 2, no. 1, 2002, pp. 1-24.
Dyck, Alexander, et al. “The Corporate Governance Role of the Media: Evidence from Russia.” The Journal of Finance, vol. 63, no. 3, 2012, pp. 1093-1135.
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Lazareva, Olga, et al. “A Survey of Corporate Governance in Russia.” Corporate Governance in Transition Economies, vol. 63, no. 1, 2010, pp. 315-349.
Mallin, Christine. Handbook on Corporate Governance in Financial Institutions. Edward Elgar Publishing, 2016.
Tricker, Bob. Corporate Governance: Principles, Policies, and Practices. Oxford University Press, 2015.