Evidence from a survey

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a variety of ownership structures and inter-enterprise associations, which will result in increased ... The Patterns of Legal Restructuring of Russian Companies ...... undesirable variant of restructuring ownership and introducing organisational.
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Ownership and control in Russian privatised companies: Evidence from a survey Igor Gurkov a

a b

& Gary Asselbergs

c

Higher School of Economics , Moscow

b

Research Fellow, Foundation for Economic Research , Rotterdam c

Research Fellow, Foundation for Economic Research, Rotterdam , Postbox 2638, Rotterdam, CP3000, The Netherlands Published online: 13 Dec 2007.

To cite this article: Igor Gurkov & Gary Asselbergs (1995) Ownership and control in Russian privatised companies: Evidence from a survey, Communist Economies and Economic Transformation, 7:2, 195-211, DOI: 10.1080/14631379508427819 To link to this article: http://dx.doi.org/10.1080/14631379508427819

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Communist Economies & Economic Transformation, Vol. 7, No. 2, 1995

195

Ownership and Control in Russian Privatised Companies: Evidence from a Survey

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IGOR GURKOV & GARY ASSELBERGS The last day of the voucher privatisation scheme in Russia was 30 June 1994. Now that the first phase of privatisation is completed a serious analysis of its short and long-term implications can commence. What is to be evaluated is whether the system of private property rights and the enforcement of these rights have created a perverse governance structure, which only serves to strengthen the position of special interest groups in exploiting the assets of the enterprise, or whether the reforms have created a variety of ownership structures and inter-enterprise associations, which will result in increased effective and efficient production. This article reports and discusses the results of a survey of 27 privatised companies in Russian industry. All the companies surveyed were privatised by the same method of voucher privatisation, which transferred a controlling interest to the employees. We try to map the structure of power in privatised companies, to evaluate current trends in the redistribution of shares and to investigate practices used by Russian managers to prevent outsiders from gaining control over their companies. The article is organised as follows. In the first section we present the basic legal patterns of company restructuring in Russia. The second section gives a brief overview of the research methodology: the measures used and the principles of sample selection. The third section presents the main results of the survey. Brief conclusions and suggestions for further research are offered in the last section of the article. The Patterns of Legal Restructuring of Russian Companies Privatisation is broadly understood to mean the sale of state-owned assets as a means to achieve greater productivity and cost effectiveness and reliance on market mechanisms for the efficient allocation of resources.1 After the sharp struggles about the choice of privatisation methods the model of voucher privatisation was established as a temporary compromise between different political and economic forces.2 This is not the place to present a complete picture of the legal and organisational Professor Igor Gurkov, Higher School of Economics, Moscow and Research Fellow, Foundation for Economic Research, Rotterdam; Dr Gary Asselbergs, Research Fellow, Foundation for Economic Research, Rotterdam, Postbox 2638, CP3000 Rotterdam, The Netherlands. An earlier version of this article was presented at the Sixth Annual International Conference on Socio-Economics in Paris, 15-17 July 1994. We would like to acknowledge financial support from European Community PHARE/TACIS funds. We would also like to thank Elena Avraamova and Gregory Kuntsman for their valuable assistance during the data collection and Solomon Cohen for many useful comments on earlier drafts. Of course, all errors are our sole responsibility. 1351-4393/95/020195-17 © 1995 Centre for Research into Communist Economies

196 Igor Gurkov & Gary Asselbergs Table 1. Main Methods of Voucher Privatisation Type of preferential terms

First method

Second method

Third method

25

51

up to 5

n.a. various

5

various up to 20 up to 20 various

20

20

various

35

24

various

21

78

1

(% of shares)

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Workers and managers Top managers Workers and managers ESOP Temporary holding of Local Property Committee Temporary holding of Federal and/or Oblast' Property Committee Remaining to be sold at voucher auctions Percentage of privatisation transactions using method

10 5

Note: Data are for the beginning of July 1994. Sources: Ministertsvo Ekonomiki data; Privatizatsiya v Rossii (1993); Frydman, Rapaczynski & Earle (1993); Kommersant, 1993, 21, pp. 57-63.

issues of the Russian privatisation programme.3 We summarise only the options for preferential share distribution provided for enterprises' work collectives. A synthesis of privatisation rules from 1992 to the first half of 1994 is presented in Table 1. Simultaneously, a model of the emerging ownership structures is revealed. In the first variant common, non-voting shares were distributed free to managers and workers. Top managers could buy preferred voting shares at the nominal price based on July 1992 book value of assets. Shares under the Employee Share Ownership Program (ESOP) could be purchased by both managers and workers at a 30% discount from nominal prices. The local State Property Committee automatically received 5% of shares that they could sell for cash. In most cases the federal government retained 20% of shares for a short but unspecified period of time. In other cases shares have been contributed to industry associations or financial-industrial groups. The remaining company shares were sold at auctions in exchange for vouchers. Some of these auction sales were straightforward open bids; other shares will be sold to domestic and foreign investors employing a closed tender system, where payment is not always in cash, but in an investment commitment. In the second variant preferred shares, all voting, could be purchased by workers and managers, at a nominal price 1.7 times the July 1992 book value. In a highly inflationary environment this represented a low price relative to the possible free market value. Evidence indicating the distribution of these shares among managers and workers can be found below. Rules for federal government shares and auctioning of remaining shares under the second variant are identical to those under the first variant. In the third, very rare variant of privatisation managers could purchase 20% of company shares at the nominal share price after one year if pre-conditions were met, such as maintaining workers' wages and the number of jobs in the company. Workers could also purchase 20% of company shares, at a 30% discount from their nominal value. The main difference between variants one and two is that till June 1993 leased enterprises could be transformed into limited partnerships (TOO in the Russian abbreviation) and closed joint-stock companies (AOZT). This legal arrangement was

Ownership and Control in Russian Privatised Companies

197

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preferred for the privatisation of small and medium-size companies (less than 1000 employees). Since July 1993 all privatised companies have been required to be transformed into open joint-stock companies (AO). Since the second variant was the most prevalent in the mass privatisation scheme, we concentrated our attention on companies privatised using this method. In this article the emphasis is on finding explanations for the following questions: • What are the patterns of share distribution among insiders—managers and workers? • What kinds of control structures are prevalent in Russian privatised companies? • What were the popular ideologically inspired attitudes towards privatisation and how are they changing under the influence of post-privatisation experience? • What are the possible directions of organisational development of Russian privatised companies?

Research Design At present there is a trend towards integration of economic and sociological approaches in studies on management in the economies in transition.4 Indeed, the use of single techniques in management studies and transition economies has led to lopsided data presentation and subsequent misinterpretation of results, while concentrating on surveys or interviews does not enable the researcher to trace variations in performance, which are the principal outcomes of management modifications. On the other hand, evaluation of secondary economic data alone does not give a complete picture of organisational changes, because the main variables such as power or worker-manager coherence can not be derived from any written sources. With allowance for circumstances, the study comprised: (1) Interviews with top managers of industrial firms (general directors, commercial directors, chief engineers and personnel managers). (2) A survey of managers and workers using a specially developed questionnaire for each group. The first component of the study was interviews with top managers. The interviews were carried out using an informal scenario. The principal topics discussed during the interviews were: • What is the financial position of the company and its ability to survive in the near future? • What are the principal goals of the company, and what are the main obstacles preventing the achievement of strategic goals? • What are the company's marketing strategies? • What are the main features of the organisational development and personnel policy of the company? The length of an interview varied between one and eight hours. Shortly after the interviews the structural decomposition and normalisation of answers were carried out using a special framework which allowed the interviewer to compare the situation of different enterprises. Additional interviews conducted with human

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198 Igor Gurkov & Gary Asselbergs resource managers clarified the quality of interpersonal relations within the company and the impact of political and social environment on performance of workers. The second component of our study was a questionnaire survey of managers and workers. The survey involved management staff at all levels—top managers, senior staff managers (especially chief accountants and heads of marketing departments), middle managers and shop floor managers, as well as production workers and clerical workers. The survey was composed of several blocks for mapping response to key variables: job satisfaction, cohesion of the workforce, attitudes towards privatisation, patterns of property distribution, authority in decision making. Assessing job satisfaction required a special 11-item instrument for evaluation of overall satisfaction and the partial degrees of satisfaction of different job aspects. This instrument is a modification of the Michigan Quality of Work Questionnaire,5 adapted to the specific Russian conditions. A five-point scale ranging from 'very dissatisfied' to 'very satisfied' was used to rank the responses. The Cronbach's Alpha used as a reliability coefficient for this scale was 0.7669. Assessing the degree of cohesion of the workforce, and the partnership and mutual confidence of employees and administration was done using an original 11-item instrument. The respondents were asked to indicate their opinions about: • • • • •

abilities of the management team to improve the economic position of the firm; loyalty of managers in defending the interests of their subordinates; conditions of work discipline; principles of settling disagreements within the firm; job security.

The five-point respondent scale ranged from 'strongly disagree' to 'strongly agree'. The Cronbach's Alpha for this scale is 0.8060. To assess attitudinal changes with respect to privatisation we asked workers and managers to evaluate nine particular aspects of business activities, job-related resources, company position and their personal economic position. The five-point scale ranged from 'much worse' to 'much improved' with 'no change' set at the midpoint (a value of 3). The most valuable outcome of this aspect of the survey is the possibility to compare the perception of privatisation as experienced by different groups within the company. This clarifies the results of the satisfaction measurement. Finally, we asked respondents to select the 'real owner' of their company from a list of 11 possible situations, from 'working collective' to 'nobody really owns', 'director' and 'top management'. The next part of the questionnaire was reserved exclusively for managers. This part contained 27 items pertaining to four types of decisions common in managerial work, namely: • • • •

strategic decisions and capital investment—eight items, human resources—seven items, wages and benefits—five items, production decisions (i.e. product characteristics, value chain, quality issues)— seven items.

Managers were also asked to describe their level of decision-making authority for various decision items on a 6-point scale ranging from 'beyond my position's duties' (a value of 0), through 'marginal authority' (a value of 1) to 'total authority' (a value

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Ownership and Control in Russian Privatised Companies 199 of 5). This scale is a development of McCarthy and Puffer's instrument. The additional point on the scale, 'beyond my duties', allowed us to restrict the appraisal of perceived authority to firmly reliable points. For instance, the personnel department manager has only marginal authority on selecting suppliers. The computation of his real level of influence using the average of all decision items would underestimate his real power in a specific area. The respondents rated all items for two time periods, namely before ownership transformations (before 1991-92) and after privatisation (1992-93). The degree of change in perceived authority was calculated as the mean after privatisation minus the mean before privatisation. The Cronbach's Alpha of this scale is extremely high and ranged between 0.8620 and 0.9370 for different types of decisions. In the questionnaire designed specifically for workers, several instruments were constructed to describe the level of decision-making authority of the workforce for each of the 23 decision items on a five-point scale ranging from 'no authority' (a value of 1) to 'total authority' (a value of 5). The respondents rated the items for two time periods; before ownership transformations (before 1991-92) and after privatisation (1992-93). The degree of change in perceived authority was calculated as the mean after privatisation minus the mean before privatisation. The items were grouped in two blocks; the remuneration rights and the control rights held by employees. Several additional instruments were used to assess the attitudes towards privatisation, conditions of share distribution and post-privatisation changes.6 The Sample The field research was carried out in steps. First, in November-December 1993 a pilot study embraced nine companies in the central region of Russia. The principal attention was given to the textile industry as the most depressed and crisis-prone branch. The size of the companies studied varied between 98 and 2878 employees. The questionnaires were administered to 95 managers and 125 workers. The pilot study showed that the reliability of the measures used was sufficient and the research instruments were generally applicable. The main field study was carried out in March-April 1994. It embraced 18 companies. Their size ranged from 120 to 8489 employees. Thirty-eight interviews were carried out with top executives, primarily with presidents, chief accountants and personnel managers. The questionnaires were administered to 197 managers and 245 workers. Initial Attitudes towards Privatisation Various measures were used to assess the attitudes of both managers and workers towards privatisation in general. First of all, we observed a positive attitude towards privatisation; 76.4% of managers and 74.6% of workers believed that privatisation was 'reasonable'. However, when we asked about the terms of privatisation, only 27.9% of managers and 25.5% of workers 'completely agreed'. Furthermore, 55.8% of managers and 60.0% of workers strongly believed that the terms of privatisation should be revised, while 16.3% of managers and 14.5% of workers 'completely disagreed' with the terms of privatisation. During the privatisation process, both workers and managers demonstrated a very high level of activity in the acquisition of shares. Indeed, 53.8% of workers and

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200 Igor Gurkov & Gary Asselbergs 61.6% of all managers acquired shares in their firm 'because they felt this was expedient'. This involvement in ownership has strengthened the position of managers. Of the top managers 100% and of senior staff managers 91.4% reported they had acquired shares in their firms, 'because this is reasonable', while 80% of shop floor managers and only 50% of middle managers did so. Although 9.4% of workers and 5.4% of managers did acquire shares 'under pressure from the directors', 36.8% of workers and 16.3% of managers did not acquire any shares in their firms. It is interesting that in the survey population workers demonstrated a much higher involvement in 'outsider privatisation' than managers. At the time of our first survey (September 1993) only 29.5% of the managers had acquired shares in other firms, although 22.9% of managers intended to do so in the near future, while 40% of workers had already acquired shares in other companies. This difference is explained by the fact that managers are much more involved in 'insider' privatisation. Having spent their vouchers for the acquisition of shares in their own companies this decreased the possibilities of acquiring shares in investment funds or other companies. Patterns of Share Distribution Despite different legal forms, in all the companies surveyed the controlling interest (more than 51% of the shares) belonged to the employees. The rules of share distribution among managers and workers varied from firm to firm. In the majority of cases two methods of share allocation were used. The first consisted in the buy-out of some of the shares by the 'collective privatisation fund' of the firm, with subsequent distribution of shares among employees. This distribution was made according to several criteria: managerial position, length of service within the company, average salary. Sometimes the necessary vouchers for this scheme were not solicited from employees but bought on the stock markets or 'street voucher markets'. The second method was the buy-out of some of the shares with the personal means of employees—cash and vouchers. The principal aim of using both of these methods was to acquire a controlling interest (51% of shares) and to prevent the transfer of control outside the firm. We used the ANOVA procedure from the SPSS package to analyse the sources of variation in the present allocation of shares among managers and the correlation between different factors which influenced the initial distribution of shares (see Table 2). The principal predictors of variation in share allocation were 'managerial position' (15% of the total variance) and 'number of years in organisation' (19% of the total variance). These predictors conformed to the formal rules of share distribution elaborated by general meetings of employees. However, some additional factors influencing the unfair allocation of shares were found. The explanatory variables influencing distribution are: • 'the frequency of conflicts over choice of privatisation methods' (9% of the total variance). • 'the frequency of conflicts over share allocation' (5% of the total variance). • 'perceived influence of a manager on choice of privatisation method' (6% of the total variance). The negative correlation between the number of shares in the ownership of managers and the severity of conflicts over share distribution (corr. —0.24) signifies that

Variable Sex Age Managerial position Length of service in organisation Length of service in the field Salary Frequency of conflicts on choice of privatisation methods Frequency of conflicts on share allocation Influence of managers on choice of privatisation method Influence of managers on share allocation Number of shares in managers ownership

Sex

Age

Position

Service local

Service total

Salary

Confl privat

Confl share

Infl privat

Infl share

Number shares

% of the total variance 6 5 15 5 19 12 9

1.00 0.10 0.02 0.39* 0.56** -0.07 -0.08

1.00 0.53** 0.54** 0.54** 0.10 -0.17

1.00 0.28 0.18 0.30 -0.23

1.00 0.76 0.06 -0.10

1.00 -0.08 -0.18

1.00 -0.08

1.00

-0.06

-0.01

-0.32

0.13

0.06

-0.20

0.67**

-0.04

-0.01

0.08

0.01

-0.16

0.30

-0.02

-0.12

0.05

0.01

0.20

0.06

-0.11

0.17

0.08

0.07

0.02

0.10

0.28

0.17

0.24

-0.02

-0.05

-0.24

1.000

— as P^

3 IT a"

5 1.00 0.62** -0.08

^* aKg

6 2

1.00 0.06

1.00

84

2

R = 0.842 l-tailed significance: * = 0.01, ** = 0.001.

a.

Comp

1

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Table 2. Factors Influencing the Distribution of Shares among Managers

to

o

202 Igor Gurkov & Gary Asselbergs Table 3. Perception versus Reality of Actual and Desired Owners of the Firms

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Managers

Employees Top managers The managing director Committee of State Property Local administration Other industrial companies Investment funds, banks, financial corporations One or several magnates Foreign firm Shadow structure, mafia Nobody really owns

Workers

Perceived owner

Desired owner

Perceived owner

Desired owner

38.9 14.7 25.3 3.2 1.1 1.1 0.0

46.3 14.7 14.7 0.9 1.1 3.2 0.0

17.4 51.4 25.7 0.0 0.9 0.0 0.0

49.5 22.0 6.4 0.9 0.9 5.5 0.9

1.2 0.0 1.1 13.6

9.5 2.1 n.a. 3.2

0.0 0.0 0.9 2.8

3.7 6.4 n.a. 2.8

Note: The managers could choose several answers, so the sum exceeds 100%.

during the primary legal restructuring the companies surveyed have been an area of deep internal conflicts between managers and workers. The consequences of this battle for initial distribution of corporate control will be much clearer after the assessment of post-privatisation changes. It should be noted that the actual distribution of shares does not conform to the real structure of control. In our samples of 27 companies, in 18 companies all the shares were owned by employees, in eight companies more than 5 1 % of shares belonged to employees and only in one company did employees hold less than 30% of the shares. However, we can see that only 17.4% of employees believe they are the real owner, while 75% of workers believe the general director together with the team of top managers are the real owners of privatised companies. Table 3 presents the opinion of both workers and managers about the desired and actual 'real owners' of their company. Virtually identical proportions of managers and workers, 25.3% and 25.7%, believe the director himself is the real owner of their company. This opinion is based broadly on the leadership abilities and management style of a director, and does not take into account the director's holding in the company stock. For example, in one firm surveyed, a closed partnership (TOO), although the shares were distributed absolutely equally, 87% of respondents believed that the real owner was the director. At the same time, there is a latent but strong dissatisfaction among workers with the post-privatisation structure of control; 53% of workers wish to transfer control from the director and top managers to their 'fellow workers'.

Post-privatisation Change in Corporate Control: Workers' Opinion We started mapping the post-privatisation distribution of power from the worker point of view. In all the privatised firms surveyed in the sample there was to be a formal and legal transfer of shares, whereby control over the firm was to be vested in the employees. As a result many employees expected an improvement in living

Ownership and Control in Russian Privatised Companies 203

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Table 4. Perception of Influence on Privatisation by Workers Facet of activity

Mean

S.D.

General economic situation Possibilities of attraction of financial resources Possibilities to influence decision making Possibilities of wage raise Possibilities of keeping job Conformity between real work input and pay Possibilities to influence the results of work Relations at the workplace Personal economic situation Personal status

2.15

1.11

2.16

1.11

2.36 2.35

1.21 1.16

2.04

1.05

2.24

1.16

2.33 2.07 2.13 3.25

1.30 1.18 1.12 1.02

Average change of all 9 items

2.32

n.a.

Scale: 1 much worse; 2 somewhat worse; 3 no change; 4 somewhat improved; 5 much improved.

and working conditions. However, in reality the actual shift in power does not support such a hypothesis. We can see from Table 4 that all possible facets of working life are subject to sharp deterioriation. There are two possible reasons for a such negative assessment of privatisation. First, the transformation of ownership structure is being carried out during a deep economic recession, high inflation and deterioration in standards of living. For example, the workers surveyed strongly agreed that in the past one-two years they 'experienced a deterioration in food consumption' (mean 3.87 on the five-point scale), 'bought fewer clothes' (mean 3.85), 'bought less home furniture and fewer appliances' (mean 3.86), 'had to work much more' (mean 3.65), and especially 'began to worry much more about tomorrow' (mean 4.38). The deterioration in the economic situation had led to a profound dissatisfaction with the main labour conditions (payment, prestige of workplace, career possibilities, possibilities of receiving social goods) (see Table 5). This general trend also makes its imprint on the perception of privatisation. Another cause for the negative assessment of privatisation's outcomes is a deterioration in rights to participate in decision making. We tested this in two ways. First, we assumed that the principal resource for real decision making was access to the necessary information about the company's affairs. Workers in our survey indicated that they lacked the necessary information for participation in decision making (mean 3.08 on a four-point scale). This statement was shared by clerical workers, as well as by production and auxiliary workers. Second, we tested the change in decision making authority of workers for 23 types of decisions. Perception of their formal rights to participate in the decision-making process was disappointing. Employees' rights in production decisions (production mix, choosing suppliers) and remuneration rights (wage and bonus level) have been reduced by 1/5 point on a

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to

2 s Table 5. Levels of Satisfaction with Working Conditions of Different Groups of Company Personnel Top management

Senior staff management

Middle management

Shop flooi management

|

Workers

Job facets

Mean

S.D.

Mean

S.D.

Mean

S.D.

Mean

!S.D.

Mean

J5.D.

Pay Regime of work Conditions of work Prestige of work place Conditions for displaying skills and abilities Level of independence in work Career possibilities Possibilities of receiving social goods Personal relations in working team Work place safety in crisis conditions

3.36 4.64 4.45 4.36 4.36 4.55 3.27 2.91 4.00 3.18

0.67 0.81 0.82 1.03 0.92 0.69 1.68 1.38 0.77 1.33

3.12 4.46 3.76 3.92 3.73 3.73 3.20 3.35 4.00 3.04

1.24 0.81 1.16 0.95 1.22 1.19 1.31 1.41 0.87 1.28

3.15 4.23 3.54 3.38 3.15 3.15 2.92 1.92 3.82 2.58

1.07 0.83 0.97 1.04 1.14 1.21 1.24 0.90 0.58 0.90

2.62 4.52 3.45 3.44 3.49 3.55 3.10 2.55 4.22 2.79

.31 ().8O .17 1.19 .00 .09 1.21 .33 ().72 .14

2.21 3.79 2.98 2.75 2.81 3.00 2.42 1.83 2.34 3.88

L.17 1.38 1.33 1.26 1.41 1.38 1.34 1.15 L.36 1.15

Average of 11 items

3.91

0.50

3.64

0.70

3.21

0.55

3.37

().61

2.80

().78

Scale: 1—completely dissatisfied; 5—completely satisfied.

§>

Table 6. Increase of Perceived Authority of Managers after Privatisation

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Type of decisions Organisational decisions Participation in concerns Participation in joint ventures Credit and borrowing Investment decisions Capital investment Research & development New technology Equipment repair Human resources Appointment of supervisors Recruitment to your division Hiring people Administering rewards Administering punishments Promoting subordinates Authority over own job Remuneration rights Wage and current bonus of subordinates Yearly bonus of subordinates Own wage and bonus Profit allocation for consumption Dividend policy Product characteristics Quantity Pricing Product mix Product for export Quality Choosing suppliers Choosing customers

Management on average

Top

management

Senior staff management

Middle management

Shop floor management

0.10 -0.07 -0.04

0.42 0.34 0.78

0.13 -0.44 -0.07

n.a. -0.16 -1.00

0.44 -0.11 -0.75

0.03 0.09 0.16 0.10

-0.22 0.50 -0.10 0.45

0.37 0.31 0.27 0.03

0.00 -1.00 0.27 -0.07

-0.08 -0.67 0.09 0.23

-0.09 0.12 0.03 0.00 0.06 0.09 0.39

-0.64 -0.01 0.52 0.29 0.20 0.44 1.00

0.14 0.35 0.04 0.07 0.25 -0.05 -0.15

0.83 0.32 -0.12 -0.58 -0.69 0.42 0.13

0.18 -0.05 -0.12 0.07 0.10 -0.02 0.76

0.27 0.19 0.22 0.24 0.39

1.47 1.07 0.64 0.31 0.25

0.57 -0.04 -0.34 0.01 0.51

-0.41 0.00 1.00 0.25 -0.17

-0.28 0.07 0.14 0.33 0.38

0.26 0.18 0.27 0.28 0.15 0.14 0.10

0.82 0.11 0.07 0.80 0.50 -0.22 -0.16

0.30 0.43 0.23 0.76 0.21 0.62 0.28

-0.20 -0.42 0.50 -0.33 0.16 0.13 0.33

0.14 0.33 0.52 -0.09 -0.05 0.22 0.42

Note: Managers assessed the authority they possessed before and after privatisation. The difference is presented in this table. Scale: 0 outside my position's duties; 1 no authority; 2 little authority; 3 some authority; 4 much authority; 5 total authority.

1

I

I So

5

I a to

o

206 Igor Gurkov & Gary Asselbergs Table 7. Correlation Matrix of Managerial Characteristics Position Managerial position Number of subordinates Satisfaction with independence Strategic rights Staffing rights Remuneration rights

NumSub

Satlndep

StratR

StaffR

1.00 0.56** 0.64**

1.00 0.50**

RemR

1.00 0.26

1.00

0.31*

0.19

1.00

0.54** 0.21 0.49**

0.42** 0.28 0.26

0.13 0.26 0.26

1.00

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1-tailed significance: * = 0.01, ** = 0.001.

five-point scale. This means there is a fundamental divergence between the formal distribution of property and the real control structure. This statement is supported by an evaluation of the managers' opinions about corporate control after privatisation. Post-privatisation Change in Corporate Control: Managers' Opinion Managers' answers presented quite a different picture of post-privatisation change. We asked managers to indicate their opinion about the change in perceived authority after privatisation. The results, presented in Table 6, suggest a positive reassessment of the perceived authority of top managers following privatisation. Indeed, the largest increases in top managers' rights have occurred in: • • • •

'wage and current bonus of subordinates' ( + 1.47 on a five-point scale); 'authority over own job' ( + 1.00); 'product for export' ( + 0.80); and 'credit and borrowing' ( + 0.78).

Correlation analysis to determine the relationship between position occupied, satisfaction with independence in work and influence in different types of decisions (see Table 7) demonstrated the close positive correlation between managerial level and authority in strategy decisions (corr 0.5380), remuneration rights (corr 0.4929) and independence in work (corr 0.3142). The expansion of power and decision-making authority entails growing responsibilities; this usually manifests itself in the increased amount of information to be processed, prolonged working hours and growing reliance on one's own qualities. The results of the survey suggest that all these trends are to be found in the everyday life of Russian top managers. Indeed, 45% of all top managers agree with the statement that 'there is an excess of information to be processed'. Top managers also suggested that: • 'they were forced to work much more' (mean 4.00, S.D. 1.82); • 'work is becoming much more difficult' (mean 4.47, S.D. 1.02); and • 'they can rely only upon themselves' (mean 4.75, S.D. 0.55). Given the difficult working environment, it is obvious that top managers will build effective management teams that are able to translate strategic approaches into everyday production, technical and marketing decisions.7 We tested this hypothesis

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by assessing the cohesion of the management teams. The results demonstrate the highly paternalistic character and authoritarian style of the Russian managerial culture. Indeed, 61% of top managers and 59% of shop floor managers strongly agreed with the statement that 'management should be more effective when a manager fully controls the activities of subordinates' (mean 4.32 for top managers; mean 4.13 for shop floor managers). At the same time, according to Russian managers, a 'manager should be persistent in defending the interests of his subordinates'. According to our analysis, managers really believe that their supervisors are indeed vigorous in defending their rights (mean 4.02, S.D. 1.13). Shop floor managers hold this belief even more strongly (mean 4.08). The top managers also believe that they should try to maintain the jobs of their subordinates as long as possible (mean 4.25, S.D. 1.12). An additional suggestion of our hypothesis of effective team building is that the circle of key decision makers has been slightly increased after privatisation (mean 3.36, S.D. 0.86). The results of our study suggest that in general Russian top managers succeeded in maintaining the corporate loyalty of subordinates: 64.9% of all managers in the sample suggested that they 'would not move to another job, even for a higher wage'. This cohesion of the management team provides a stronger defence against both workers and outside interest groups seeking to acquire a controlling interest in the firm. Threats to the Managers' Rights We have already reported the profound dissatisfaction of employee shareholders with the managerial control of their firms. However, there exist several additional threats to the position of top managers of newly privatised companies. In-depth interviews with top executives clarified this point. The managers distinguish three possible types of economic agents interested in establishing corporate control: • domestic financial institutions (i.e. banks, investment funds); • strategic partners—foreign firms; • mafia. The acquisition of a controlling interest by financial institutions is more acceptable than the other two for managers. However, the possible negative implications of this variant, according to top managers, are pressures by outside financial institutions to: • increase short-term profitability and dividend payments at the cost of reducing long-term growth opportunities; • liquidate assets acquired at 1992 book values at higher market prices; • reduce R&D expenditure; • reduce investment necessary for increasing production efficiency; • replace top executives quickly. The top managers of open joint-stock companies are especially concerned with losing control of their companies for two reasons; first, the state will eventually auction off for cash the 20% of shares it controls, and secondly, many financial institutions have already accumulated shares acquired from private investors. Top managers are defending their position by trying to forge agreements with financial institutions for financing long-term investment programmes in exchange for favourable share prices at the auctions. The acquisition of a controlling interest by a foreign strategic partner is also an

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undesirable variant of restructuring ownership and introducing organisational change. Two principal outcomes of this scenario are foreseen by Russian managers:

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• a quick transformation of the product mix to meet Western requirements, locking the Russian partner into producing only a selected assortment of components. • 'shock treatment' for the established management and mass dismissals of excess clerical and production staff will destroy the positive aspects of Russian corporate culture. Finally, the acquisition of a controlling interest in the company by the mafia operating behind a hypothetically bona fide financial institution will lead to an ineffective transformation of the product mix, plundering of accumulated resources, and neglect of working conditions and employees' benefits.8 Russian managers are trying to develop an anti-takeover defence against this unwilling scenario, using some unusual methods of interorganisational reallocation of shares described in the next section.

The 'Matreshka' Method of Anti-takeover Defence: Creating Stable Interests from Employees' Holdings To eliminate the threat of losing control of the firm to outsiders, top managers want to increase their share in the firm's equity. Two principal methods are being used to attain this goal. First, the direct withdrawal of employees' shares: this can be achieved by dismissals of employee shareholders and required mandatory sale of shares to top managers. A second, more effective approach to secondary allocation of shares to top managers was demonstrated in several of firms surveyed. In these cases all worker shareholders are divided into groups, according to the number of top managers. For example, each director, chief engineer and chief accountant has the shares of his group at his own disposal. The assignment of voting and dividend rights is legalised by a formal agreement 'passing the title'. There is evidence that similar schemes exist in many Russian privatised companies. However, few top managers are willing to indicate this frankly, so as not to attract attention to their real wealth and power.9 Anti-takeover defence never existed in the former Soviet Union. For many years manufacturing companies in the USSR passed through .merger or liquidation according to ministerial or government prescriptions. The largest wave of amalgamation in Soviet industry took place in 1972-78, when 'production associations' were created from clusters of factories. Over the last three years these associations have disintegrated as now all factories have received the legal rights of limited partnerships or open and closed joint-stock companies.10 For managers of closed joint-stock companies the retention of corporate control does not create a serious problem. Another case is represented by the privatisation of large enterprises (more than 1000 employees). Firm No. 20 of our sample demonstrated quick managerial learning of anti-takeover devices and methods. This firm is the biggest company in the sample. The average number of employees in 1993 was 8817, and the gross sales amounted to Rb. 58.4 billion in current prices. In the same year the profitability of sales was 29%, and the return on assets was 47.9%. Historically, firm No. 20 had a very specific power structure. All key decision makers are members of a few closely related families of alumni of one technical

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university. The privatisation process created a contradiction between the distribution of power and the ownership structure, in the following way. Firm No. 20 chose the second variant for the preferential distribution of shares to employees, that is, employees acquired 51% of the shares. Of the remaining shares, two holding companies acquired 29% in a voucher auction, while the State Property Committee temporarily delegated 20% of its voting rights to the company's General Director. As a result of such a distribution of shares the director and other decision makers, as natural persons, remained minority shareholders in the company. According to the Primary Bylaw of the open joint-stock company,11 the governing bodies of a joint-stock company are the shareholders' meeting, the Board of Directors, the Governing Board and the Auditing Committee. The shareholders' meeting has the exclusive rights to alter the bylaws, increase or decrease the authorised capital, elect the directors, confirm the annual report and so on. The Board of Directors, elected by the general meeting from among the shareholders, is empowered to make decisions on all matters concerning the company's business not exclusively reserved for the general meeting. At the first shareholders' meeting a board of directors was elected consisting of the company's top managers: the general director, the chief engineer, the commercial director, the chief economist and five production superintendents. After the voucher auction a large financial holding company (outsider) tried to place its nominees on the board of directors, which would have facilitated further acquisition of the company's assets. The company's management had very few tools to counterbalance these plans with standard anti-takeover devices like the 'poison pill', 'scorched earth' or 'white knight' defence. A controlling interest in the stock of firm No. 20 would be highly attractive. Indeed, the shareholders' equity as determined by the book value of assets, with no adjustment for inflation, is less than 2% of the total assets. Fixed assets such as buildings, property and natural resources are extremely undervalued, although prices for new technological equipment increased by 1000%. Overall, a share of firm No. 20 with a nominal value of Rb. 1000 is backed by real assets worth Rb. 400 000. The top managers found a new device to prevent the election of new directors. A new closed joint-stock company was incorporated which was formed exclusively by employees from firm No. 20. This company accumulated some 38% of the shares. Together with the 20% of state shares temporarily controlled by the director a block of 58% of the shares was created. This signified a veto power against alteration of the bylaws and election of new directors to the board by outsiders. The next step envisaged by the management is organisation of an investment tender to purchase the state's share in the company through long-term financing.

Conclusions The principal outcome of our analysis indicates that despite the implementation of ideologically inspired schemes for mass reallocation of shares, Russian managers have developed several effective mechanisms to ensure their total control over company assets. The future will show whether they will be able to cope with threats to their unique position as manager-owners and simultaneously be able to translate their power into a more efficient mode of production.12 A major problem in the next phase of privatisation is not to decide who will be the lucky owner of assets, but how to ensure the tradability of property rights and shares belonging to the federal government, employees of enterprises, investment funds and private investors.

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Notes and References

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1.

For a complete presentation of the variety of definitions of privatisation see Igor Gurkov, Privatization: A Review of the Literature (Haifa, Technion, Israel Institute of Technology, 1992). 2. For a detailed description of discussions about privatisation in Russia see Lynn D. Nelson & Irina Y. Kuzes, Property to the People. The Struggle for Radical Economic Reform in Russia (Armonk, NY, M. E. Sharpe, 1994). 3. See Privatizatsiya v Rossii (Moscow, Yuridicheskaya literatura, 1993); also Roman Frydman, Andrzej Rapaczynski & John S. Earle et al., The Privatization Process in Russia, Ukraine and the Baltic States (Budapest, Central European University Press, 1993); Saul Estrin, 'Economic Transition and Privatization: The Issues', in S. Estrin (ed.), Privatization in Central and Eastern Europe (Harlow, Longman, 1994), pp. 3-30. 4. Solomon Cohen (ed.), Patterns of Economic Restructuring for Eastern Europe (Aldershot, Avebury, 1992); John M. Ivancevich, Richard S. DeFrank & Paul R. Gregory, 'The Soviet Enterprise Director. An Important Resource before and after the Coup', Academy of Management Executive, 6, 1992, pp. 42-55; Paul R. Lawrence & Charalambos A. Vlachoutsicos, Behind the Factory Walls: Decision making in Soviet and US Enterprises (Boston, MA, Harvard Business School Press, 1990); Fred Luthans, Dianne H. B. Welsh & Stuart A. Rozenkrantz, 'What Do Russian Managers Really Do? An Observational Study with Comparison to US Managers', Journal of International Business Studies, Fourth Quarter, 1993, pp. 741-762; Daniel J. McCarthy & Sheila M. Puffer, 'Perestroika at the Plant Level', Columbia Journal of World Business, 27, 1, 1992, pp. 86-99; Sheila Puffer (ed.), Russian Management Revolution (Armonk, NY, M. E. Sharpe, 1992); Avraham Shama, 'Management Under Fire: The Transformation of Managers in the Soviet Union and Eastern Europe', Academy of Management Executive, 7, 1993, pp. 22-35; James B. Shaw, Cynthia D. Fisher & W. Alan Randolph, 'From Materialism to Accountability: The Changing Cultures of Ma Bell and Mother Russia', Academy of Management Executive, 5, 1991, pp. 7-20; Dianne H. B. Welsh, Fred Luthans & Steven Sommer, 'Managing Russian Factory Workers', Academy of Management Journal, 36, 1993, pp. 58-79. 5. Michael Moch, Cortland Camman & Robert A. Cook, 'Organizational Structure: Measuring the Distribution of Influence', in S. E. Seashore et al. (eds), Assessing Organizational Change (New York, John Wiley & Sons, 1983), pp. 177-201. 6. For a complete presentation of the research instruments see Igor Gurkov, 'A Framework for Empirical Analysis of Organizational Behavior in Transitional Economies: A Pilot Exploration of Russian Industries', Working Paper No. 1, Rotterdam-Moscow, Higher School of Economics & Foundation for Economic Research. 7. The content of these strategic approaches is beyond the scope of this article. Some theoretical foundations of strategic crisis management can be found in Simon A. Booth, Crisis Management Strategy (London, Routledge, 1993) and Thomas R. Lenz, 'Strategic Management and Organizational Learning: A Meta-theory of Executive Leadership', in John Henry & Garry Johnson (eds), Strategic Thinking: Leadership and the Management of Change (New York, John Wiley and Sons, 1993). For the practical aspects of the current survival strategies of Russian industrial companies see Irina Boeva & Tatiana Dolgopiatova, 'State Enterprises During Transitions: Forming Strategies for Survival', in Anders Aslund (ed.), Economic Transformation in Russia (London, Pinter Publishers, 1993); I. Gurkov & V. Kossov, 'Strategiya vyzhivaniya—posleslovie k odnomu obsledovaniyu', Delovoi mir, 4-10 March 1994; Igor Gurkov & Shlomo Maital, 'Frolicking with Sharks', Barron's, Editorial Commentary, 18 July 1994; I. Gurkov, 'Iskusstvo vyzhivaniya rossiiskikh predpriyatii—razmyshlenie posle sotsiologicheskogo obsledovaniya', Ekonomika i organizatsiya promyshlennogo proizvodstva, 1994, 9, pp. 2-22. 8. For a very good presentation of incompatibilities of corporate cultures and struggles during mergers and acquisitions see Antony F. Buono & James L. Bowditch, The Human Side of Mergers and Acquisitions (San Francisco, CA, Jossey-Bass, 1989).

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9. The hidden, semi-criminal techniques of property redistribution and gaining corporate control still need more profound and careful investigation both by economists and lawyers. For more information on this issue and for an initial typology of post-privatisation organisational strategies see I. Gurkov, 'Promyshlennyi i bankovskii kapital v period reform', Obshchestvennye nauki i sovremennosf, 1994, 6, pp. 35-43. 10. For an overview of the historical experience of organisational development in Russian industry in the 1970s and 1980s see I. Gurkov, 'Iz istorii otraslevogo upravleniya', in L. Abalkin (ed.), Byurokratizm v ekonomike sotsializma (Moscow, Institut Ekonomiki AN SSSR, 1989). 11. Tipovoi ustav aktsionernogo obshchestva otkrytogo tipa', Sobranie aktov Prezidenta i Pravitel'stva RF, 1992, 1, Art. 3; 21, Art. 1731. 12. See Svetozar Pejovich, 'A Property Rights Analysis of Alternative Methods of Organising Production', Communist Economies & Economic Transformation, 6, 2, 1994, pp. 219-230.