Russian Managers and Business Reform
By Jodi Koehn
"Russian managers are critical participants in the transforming of the business environment, remarked Linda Randall at a lecture at the Kennan Institute on 29 November 1999. Randall, Associate Professor, College of Business Administration, and Chair, Department of Management at the University of Rhode Island; Member, Kennan Institute Advisory Council; and former Title VIII-Supported Research Scholar, Kennan Institute continued to say that failure to take into account all levels of the hierarchy results in confusion and a gap between what was intended by the reform and what actually happens.
Randall described the two different types of change within organizational or systemic reform. Deep rooted change is when every level of a system or organization reflects the changes. Superficial change, Randall continued, occurs when the top of the hierarchy advocates a reform. This latter type of change is what has occurred in Russia, Randall commented. In some cases there have been changes made in the names of departments or titles of personnel--such as replacing the economic department with the accounting department or the title of director with CEO--but either the "old ways" continue or there is a distortion or mixture of the old and the new. In either instance, what has resulted is different from what the reform intended.
In order to implement change, Randall argued, all levels need to "buy into" the reforms and see the benefit of participating or supporting it--or at least believe that the cost of not supporting the reform is greater than allowing it to happen. However, according to Randall, Russian managers are reluctant--and sometimes even resistant--to participate in reforms. Their reluctance can stem from a variety of factors. In many cases managers--mostly from former state-owned companies--do not "buy into" the reforms and do not see how the reforms directly benefit them and the networks of which they are a part. Second, managers often did not understand that having a market economy would create "business risk." A third factor is that inconsistent leadership and action from the top--meaning the federal and often the regional government--has heightened managers' reluctance to the proposed changes. As a result of this reluctance, the decisions and actions of managers often distort what was intended by the reforms, Randall stated.
Randall then described examples of the reluctance of managers toward the reforms and how this reluctance created the distortions in business practices and structure: privatization, risk averse strategies, and "insider deals." First, privatization was the "hopeful catalyst to get business managers to become participants," Randall remarked. However, the managers Randall interviewed did not see any benefit to it. They viewed the process as losing control of their companies, even though they received stock in the enterprise. In order to combat this loss of control, Randall cited a case where the director and several managers of a company joined forces with regional government officials, a bank, and several friends to purchase more shares and gain control over a large block of the company--resulting in a tightly controlled company. This group treated the company as a "cash cow," squeezing the cash out of the company, diminishing its value, and leaving the other shareholders without any protection. In Russia, Randall added, there are no laws enforced which protect shareholders from actions by company managers which are "detrimental to the value of the stock." This leaves the company and minority shareholders powerless.
Another example is the prevalence of insider deals with networks of people, Randall continued. In this case, deals are made to keep the network satisfied, with members of the network receiving preferential treatment. The result is differential pricing of goods or services, not based on transportation costs or whether or not the customer was deemed "credit worthy." According to Randall, the network is taken care of and those outside the network are left to fend for themselves. This type of business activity is not based on the development of a competitive pricing scheme to expand business, but to maintain close relationships, Randall argued.
A third example is the aversion to business risk, which is an accepted factor when doing business. Randall cited managers in Novgorod who developed "risk reducing strategies" which led to the creation of monopoly-like situations. Another tactic is the "carving out of territories" and making agreements with competitors. Such strategies guarantee a greater potential for the success of the company by keeping risk at a minimal level, Randall stipulated.
Randall concluded that it is necessary not only to consider what is happening at the top and what is happening with the federal government in Russia or the IMF, but to also look at the "ground floor." One should see how people are responding to reform, what actions are being taken, and what decisions are being made. According to Randall, looking at the ground level is a critical component in determining the future success of any reform that Russia is trying to make.