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Lessons from Fiascos in Russian Corporate Governance

Merritt B. Fox

Columbia University - Law School

Michael A. Heller

Columbia University - Columbia Law School

October 1999

New York University Law Review

Bad corporate governance is often invoked to explain poor enterprise performance, but the catch phrase is never precisely defined. Neither its consequences for the real economy, nor its causes in particular countries has been adequately explained. This paper uses Russian enterprise examples to address these open questions in corporate governance theory. We define corporate governance by looking to the economic functions of the firm rather than to any particular set of national corporate laws. Firms exhibit good corporate governance when their managers maximize residuals and, in the case of investor-owned firms, make pro rata distributions to shareholders.

Using this definition, we develop a typology that shows the channels through which bad corporate governance can inflict damage on the real economy. The typology helps identify vulnerabilities to corporate governance problems that may appear in any country and it suggests a new way to tailor policy responses. Second, we explain the causes of poor corporate performance in Russia by looking to the particular conditions prevailing at privatization - the untenable initial firm boundaries and the initial allocation of shares primarily to insiders -- and the bargaining dynamics that followed. The focus on initial conditions helps expand a comparative corporate governance literature built on United States, Western European, and Japanese models.

Lessons from Russian fiascos counsel caution as to stakeholder proposals including labor or local communities in formal corporate governance and generate testable hypotheses regarding potential losses from the multiple large block share ownerships typical of many U.S. firms, especially close corporations.

Number of Pages in PDF File: 56

JEL Classification: K10, K22, K42

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Date posted: January 7, 2000  

Suggested Citation

Fox, Merritt B. and Heller, Michael A., Lessons from Fiascos in Russian Corporate Governance (October 1999). New York University Law Review. Available at SSRN: https://ssrn.com/abstract=203368 or http://dx.doi.org/10.2139/ssrn.203368

Contact Information

Merritt B. Fox (Contact Author)
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States

Michael A. Heller
Columbia University - Columbia Law School ( email )
435 West 116th Street
New York, NY 10025
United States

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