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 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 CEOs (or joint CEOs) and limit their discretion on matters that are crucial for the stability and sustainable development of the company. The supervisory and management boards are not responsible for the day-to-day management of the company, and therefore do not have authority to enter binding contracts with third parties on behalf 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 (e.g, the acquisition or disposal of major assets or the entry into a joint venture). Supervisory board members are usually nominated by the shareholders and rarely include representatives of the company's management – in particular, there is a statutory limitation on the representation of members of the management board on the supervisory board. Additionally, the CEO, if elected to the supervisory board, may not serve as its chair. The supervisory board may not delegate matters within its competence to the management board or the CEO (or joint CEOs).
The information rights granted to the supervisory board were reinforced in 2014. Despite these improvements, the scope of information rights is not broad enough to ensure an appropriate level of transparency. For example, some Russian listed companies are only holding companies, while the key assets of the group are held by their operational subsidiaries. Russian law views these subsidiaries as separate legal entities (rather than as part of a single economic unit); therefore, supervisory board members and shareholders of the holding company are not entitled to request information about the activities of key subsidiaries bypassing the management of the holding company (however, an obligation of the management of the holding company to request and share information on the key subsidiaries if requested by the shareholders or supervisory board members of the holding company may be set out in the company's internal regulations). However, as mentioned above, a draft law was proposed in 2016 to fill in this gap and to grant supervisory board members access to the documents, books and records of the company on whose board they serve and its subsidiaries. The draft law also proposes to subject the management of the company to administrative liability for failure to provide this information upon the supervisory board members' request. The draft law has not been introduced to the Parliament and is still under discussion.
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 on the implementation of the strategy approved by the supervisory board and the most important matters of the company's day-to-day activities. The CEO is vested with the office of the chair of the management board by operation of law.
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.Decision-making procedures
With few exceptions, the law does not regulate the decision-making procedures of the supervisory board or the management board, so that shareholders are free to specify the relevant procedures in the charter. The CGC urges the procedures for the supervisory board to be set out in a way that allows the supervisory board members to have appropriate time to prepare for meetings of the supervisory board and to engage in meaningful discussions on the matters in question. The CGC also recommends that important matters are decided by supermajority or unanimous voting.Committees
Until recently, the formation of supervisory board committees was generally discretionary. However, from July 2018 public corporations are required to form an audit committee in their supervisory boards and implement risk management and internal control functions in general (July 2018 Amendments). There is no such statutory requirement for non-public companies.
A recommendation that such committees be formed was historically included in the CGC, which specifically refers to an audit committee (the formation of which has now been put on a statutory footing), compensation committee and human resources (HR) committee. The CGC urges that each of these committees, either entirely (audit and compensation) or predominantly (HR), comprise independent directors. The supervisory board is urged to form other committees that are necessary based on the scale of the company's business (e.g., a strategy committee, corporate governance committee or ethics committee may be appropriate). Those recommendations continue to apply following the adoption of the July 2018 Amendments.
Additional requirements regarding the formation of supervisory board committees are included in the stock exchange rules. Compliance with such additional requirements is often a condition for a company to be included in certain quotation lists. For example, the MOEX Rules require that companies with securities included in the first quotation level have audit, compensation and HR committees, and that companies with securities included in the second quotation level have an audit committee.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 (with assistance from, and supervision by, the supervisory and management boards). The CEO is held accountable by Russian law for the company's overall compliance with the applicable law. The CEO is vested with the power to enter 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.
The scope of powers of each of the joint CEOs may differ depending on the provisions of a company's charter. The powers vested in the office of the CEO by the applicable law and the charter (in particular, the representative powers) may be performed by each of them individually and independently from each other or by all (or some) of them acting jointly. The functions of the CEO may alternatively be performed by a specialised management company on the basis of a management services agreement with the company.
Any action of the CEOs that is taken without due authorisation from the supervisory board, the management board and, in certain cases, the general shareholders' meeting, may be open to challenge by shareholders or supervisory board members, and be a basis for the CEOs to be liable to the company.ii DirectorsAppointment and removalSupervisory board
Supervisory board members of a public JSC are elected annually by the general shareholders' meeting (meaning that the maximum term is one year). 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 among the nominees as desired. The supervisory board is then composed of the candidates who receive the largest number of votes. Cumulative voting is an important element of the minority protection system in Russia, allowing minority shareholders to be represented on the supervisory board, which would not have been possible had those matters been decided upon by simple or qualified majority of votes.
As a general rule, the general shareholders' meeting may dismiss the supervisory board (as a group rather than any member individually) at any time prior to the expiration of its term of office.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 in Russia. 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. For example, a CEO of a bank must have a higher education degree and relevant managerial experience of at least two years. Similarly, a person who heads a financial organisation during a period in which its licence is withdrawn cannot serve as the CEO of an insurance company for three years from the date the licence was withdrawn.
In the absence of limitations in the charter, supervisory board members are generally free to simultaneously hold managerial and supervisory positions in other companies. The approach is entirely different for executive body members, which require an express authorisation from the supervisory board to be able to combine more than one office. Additionally, there are certain specific restrictions for regulated companies. For example, the CEO of a bank cannot simultaneously hold the CEO or chief accountant position in another bank, insurance company, non-state pension fund and certain other financial organisations (or their affiliates).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 the supervisory board members.
Executive body members are company employees and their salary is stipulated in their employment contracts. The CEO is responsible for implementing the company's employment policies by operation of law and, therefore, whether the executive bodies' compensation package (or that of any other key employees) requires special approval from the supervisory board or the general shareholders' meeting depends on the provisions of the charter. In practice, the compensation of key managers is usually made subject to the consent of the supervisory board.
In accordance with Russian employment law, there is no upper limit on the amount of severance payments to the CEO of a non-state-owned company – it all depends on the terms of the CEO's employment agreed with the company. However, following a high-profile case in 2013 where courts invalidated a multimillion dollar severance payment to the former CEO of a state-controlled and significantly leveraged telecoms major, the severance payments to CEOs of state-controlled companies were capped at the level of three months' salary.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 person of the company is interested personally or through companies under their control or their respective relatives. With effect from 1 January 2017, related-party transactions are not subject to mandatory prior approval by the supervisory board or the general shareholders' meeting. Instead, the management of the company is under an obligation to notify the supervisory board and, in certain circumstances, the shareholders of the intention to proceed with a related-party transaction. The supervisory board members and more than 1 per cent of shareholders in the company are then entitled to request that the transaction be postponed until the approval of a competent management body of the company is obtained. If no such request is made, the management is free to proceed with the transaction. The management may request an approval from the competent bodies of the company even in the absence of a request from the supervisory board members or the shareholders (e.g., to enhance the legitimacy of the transaction). At the same time, as clarified by the Supreme Court of the Russian Federation, even if the corporate approval of a transaction is in place, the transaction can nevertheless be invalidated if it is clearly detrimental to the company and the other side has been or should have been aware of that.
A transaction made or approved in the presence of a conflict of interest (unless it was properly disclosed and the interested persons refrained from participating in the approval process) 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. This obligation can be enforced through a derivative action by the supervisory board members or shareholders.
Following a number of high-profile cases involving major credit institutions becoming insolvent as a result of significant financing having been extended to persons connected with management and major shareholders, the CBR has sought to put an end to such practices. In particular, the CBR has introduced and continues consistently to enforce more rigid standards on the level of risk that can be assumed by a bank with respect to a single borrower and its affiliates and on the value of transactions with the bank's connected persons. Another example of the regulation aimed at elimination of a conflict of interest is a statutory prohibition on a non-state pension fund to become a shareholder of the management company that manages its assets.LiabilityInternal liability
In the event that a supervisory board members or executive body, or a company's controlling persons, are in breach of their duties to the company, they are under an obligation to indemnify the company (rather than its shareholders) for the damage (both direct loss and loss of profit) 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. There are several exemptions from liability: for example, if the action in question, although detrimental to the company, qualifies as a reasonable commercial risk.
The CEO is not exculpated from liability merely because he or she obtained all requisite corporate approvals for an action – 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. In assessing the scope of liability of the members of the supervisory board and the management board, courts will take into account the scope of their information rights and, in certain cases, their dependency on the CEO in terms of the information required for their decision making.
As executive body members are in an employment relationship with a company, they can be sanctioned in accordance with employment law for any breach of their duties to the company.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 exception is that management and the controlling persons are liable in the event that the company is declared insolvent. The controlling persons of the company are subject to secondary liability to the company's creditors if the insolvency is the result of their actions or omissions. In the case of the controlling persons, there is a presumption in favour of liability if the creditors' interests have been prejudiced as a result of a transaction made by, in favour of or with the approval of the controlling person. In the case of the CEO, the presumption also applies if the accounting documents are misleading, omitted or missing, which complicates the course of the insolvency proceedings.
Another exception is set out in the Securities Market Law, which provides that any person who has signed or approved a prospectus (i.e., the CEO, the chief accountant and the supervisory board members) is subject to secondary liability for losses caused to investors as a result of inaccurate, misleading or incomplete information being contained in the prospectus.