Events

The Transformation of Russian Enterprises: Reshaping Performance and Management

March 03, 2002 // 11:00pm

"Enterprise transformation is one of the keys to rapid and equitable development," stated John Simmons in a Kennan Institute lecture at the Woodrow Wilson Center. Simmons, President of Participation Associates, discussed how an early amendment to the privatization law and the lack of enforcement of shareholder rights has limited the growth of many businesses in Russia. However, Simmons also described how a growing number of mid-sized companies have challenged the 1992 law and successfully transformed into broad-based, employee-owned businesses. He concluded by explaining the importance of federal support for these "protest enterprises," and outlined ways in which Russian business and political leaders could more effectively encourage enterprise transformation.

According to Simmons, an amendment to Russia's privatization law helped increase mismanagement and corruption throughout the country and limited the desired rate of improvement in management and ownership practices. He explained how the amendment, which was drafted as an executive order by Anatoli Chubais, then Minister of Privatization, disenfranchised employee shareholders in the selection of directors and effectively transferred control of a firm's assets to a small group of outside shareholders. The June 1992 law permitted employees to buy up to 80 percent of the shares of their companies, but allowed small groups of outside shareholders to appoint 2/3 of a firm's board of directors, regardless of what percentage of shares were owned by the employees. Simmons pointed out that the law was never effectively challenged in court because underpaid judges were easily swayed by bribes from minority shareholders.

Simmons observed that despite the obstacles established by the privatization law, many firms have made significant changes to avoid the problems of corruption, mismanagement, and "predatory privatization." He described how some Russian business leaders have created more employee involvement by introducing shared decision-making teams, gain-sharing of profits and offering broad ownership of shares to employees. In other cases, employees of "protest enterprises," locked out plant management or threatened to strike unless a Western style of increased participation management and ownership was introduced. He estimated that over 40 protest enterprises currently exist in Russia, but noted that it is hard to measure because the media rarely covers them.

Simmons stressed that in order to enhance and sustain the growing productivity of restructured firms, changes are needed in the national economic policy. He noted that political leaders have shown an increased understanding of the anti-corruption effect of broad-based employee ownership, and, recently, the Russian Duma passed a law legalizing broadened ownership. Simmons suggested, however, that the government must provide more support in creating a regional model that can be used as an institutional blueprint of change for small and medium-sized businesses as well as a guide for the newly structured, high-performance Russian companies.

Simmons concluded by offering several recommendations for implementing enterprise transformation throughout Russia. He stated that in order for enterprise transformation to be successful, it is imperative that President Putin follows through on his campaign promise to eliminate corruption. Simmons also noted that government leaders must strengthen or develop adequate institutional mechanisms, like the protection of shareholder rights, which encourage transformation, realizing that immediate rewards may not occur. He also called for increased cooperation among international agencies, government officials and non-government organizations in supporting increased employee participation and ownership. Finally, business, labor, and government leaders must communicate the results of successful transformations in both the local and national media.

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