An extract from The Corporate Governance Review, 11th Edition
Corporate leadershipi Board structure and practices
Russian law provides for a two-tier board structure in public companies, including a supervisory board (also referred to as the board of directors) and the executive bodies. The two-tier structure is also mandatory for non-public companies that have more than 50 shareholders or that are subject to a specific regulatory regime (e.g., credit institutions).
The executive bodies of a company include the chief executive officer (CEO) (or several joint CEOs) and the management board. The formation of a management board is optional, except for those companies that are subject to special regulatory regimes (such as credit institutions).Supervisory board and management boardFunctions and formation
The functions of the supervisory and management boards are to supervise and advise the CEO (or joint CEOs) and limit their discretion on matters that are crucial for the stability and sustainable development of the company. The supervisory board is responsible for determining the company's long-term strategy and deciding on matters that affect key aspects of that strategy. The minimum competence of the supervisory board is specified by the RCC and the JSC Law. The competence of the management board is determined wholly by the company's charter. The management board usually includes the company's senior management and is subordinate to the supervisory board. Its primary function is to advise the CEO (or joint CEOs) on the implementation of strategy approved by the supervisory board.Decision-making procedures
With few exceptions, the law does not regulate the decision-making procedures of the supervisory board or the management board. Therefore, shareholders are free to specify the relevant procedures in the charter.Committees
The formation of supervisory board committees was generally discretionary in the past. However, as of July 2018, public corporations are required to form an audit committee within their supervisory boards and implement risk management and internal control functions in general.
Additional requirements regarding the formation of supervisory board committees are included in the stock exchange rules. Compliance with these additional requirements is often a condition for a company to be included in certain quotation lists.CEO (or joint CEOs)
The CEO (or joint CEOs) (referred to in law as the sole executive body) has the duty of managing the company. The CEO is held accountable by Russian law for the company's overall compliance with the applicable law, and is vested with the power to enter into binding contracts with third parties on behalf of the company. Additionally, the CEO may issue powers of attorney to other individuals or legal entities to allow them to represent the company.
If there are joint CEOs, the scope of powers of each of them may differ depending on the provisions of a company's charter. The functions of the CEO may alternatively be performed by a specialist management company on the basis of a management services agreement.ii DirectorsAppointment and removalSupervisory board
Supervisory board members of a public JSC are elected annually by the general shareholders' meeting.11 Members may be re-elected for an unlimited number of terms. The supervisory board in a public JSC is elected by cumulative voting. Each shareholder receives a number of votes equal to the product of the number of shares held by the shareholder by the number of seats on the supervisory board, and may distribute these votes between the nominees as desired. The supervisory board is then composed of the candidates who receive the largest number of votes.Management board and the CEO (or joint CEOs)
Statute does not prescribe the term or procedure for the appointment of members of the executive bodies. In view of this, the matter is governed by the company's charter.Independence, expertise and reputation
The professional suitability of supervisory board members and executive body members is becoming increasingly important. Under Russian law, no person disqualified by a court for an administrative or criminal offence (e.g., the falsification of financial and accounting reports, money laundering or insider trading) can serve as a CEO or a member of the management or supervisory boards of a public or non-public company for the term of their disqualification. There are further reputational and qualification requirements for supervisory board members and executive body members of regulated companies.
In the absence of limitations in a company charter, supervisory board members are generally free to hold managerial and supervisory positions simultaneously in other companies. The approach is entirely different for executive body members, who require express authorisation from the supervisory board to be able to hold more than one office. Additionally, there are certain specific restrictions for regulated companies.Remuneration of directors and senior management
Membership of the supervisory board does not result in employment by the company per se. In view of this, the basic position is that membership of the supervisory board is unpaid. However, the general shareholders' meeting may decide to remunerate or compensate supervisory board members. Executive body members are company employees and their salary is stipulated in their employment contracts. In practice, remuneration of the senior management is usually made subject to the consent of the supervisory board. Public corporations are required to disclose their remuneration policy and the amount of remuneration of the key managers and supervisory board members in their annual reports.Conflicts of interest
Russian law contains the principle that supervisory board members and executive body members should act in the absence of conflicts of interest. To enforce this principle, supervisory board members and executive body members are required to provide to the company the information necessary to determine whether a transaction undertaken by the company qualifies as a related-party transaction – that is, a transaction in which an executive body member or supervisory board member or a controlling person12 of the company is interested personally or through companies under their control or their respective relatives. These types of transactions do not require mandatory approval, unless a supervisory board member or a shareholder with a holding of more than 1 per cent (having received notice from the management of its intention to proceed with the transaction) requests such approval, or the management submits the transaction for prior approval of its own accord (e.g., to enhance its legitimacy). As a general rule, the interested parties are banned from voting on the items of the agenda in which they have an interest. In 2019, draft law was put forward to extend the scope of these disenfranchisement provisions to the persons under the control of the interested parties.
A transaction made or approved in the presence of a conflict of interest or resulting in a loss to the company (or both) may trigger an obligation for the conflicted persons to indemnify the company for the loss. There are a number of provisions specific to the financial services sector that target conflict of interest (in particular, regarding the risks assessment of a credit institution's dealings with its connected persons).LiabilityInternal liability
In the event that a supervisory board's members or executive body, or a company's controlling persons, are in breach of their duties to the company, they are obliged to indemnify the company for the damage resulting from the breach. There is a statutory restriction on the ability to limit management's liability in relation to bad faith (all companies) and unreasonable conduct (public companies), and the liability of controlling persons.
The CEO is not exculpated from liability merely because he or she obtained all requisite corporate approvals for an action (the Supreme Court reinforced this position in its December 2019 ruling referred to in Section I.ii). If the action caused damage to the company and none of the exemptions from liability apply, all persons who voted in favour of that action (or abstained from participation in the voting in bad faith) may be held jointly and severally liable.External liability
The general position under Russian law is that executive body members, supervisory board members and a company's controlling persons are not liable to parties who contract with the company for the company's debts. However, there are several exemptions to this principle, one being that management and the controlling persons13 may be held liable in the event that the company is declared insolvent.
Another exception is set out in the Securities Market Law, which provides that any person who has signed or approved a prospectus is subject to secondary liability for losses caused to investors as a result of inaccurate, misleading or incomplete information being contained in the prospectus.