Corporate governance is essential in the management of foreign investments in Russia, especially when shareholders reside abroad. Good corporate governance involves all the stakeholders in the company including the shareholders, the board of directors, and the senior management. In this article, we concentrate on the roles and responsibilities of the director(s) in a Russian entity and provide practical guidance in limiting negligence.
The two-key principle
Recent reforms in corporate governance laws and regulations have optimised the business environment for foreign investors. Prior to 2014, Russian law provisioned that one person may hold the CEO role and be registered as CEO in the State Register of Legal Entities (‘Register’). Therefore, shareholders could not appoint two or more directors to hold joint or separate powers of the company and exercise the two-key principle – an essential tool in joint ventures. From, 1 September 2020, amendments to the law allowed the possibility of recording joint or separate powers of each director in the Register.
Duties of directors
In the management of the company, the director is a crucial role and duties include:
- determining the company’s strategic objectives and policies;
- monitoring performance to achieve the objectives and implementing policies referred in the previous point;
- ensuring that the company fulfills its statutory and legal obligations;
- signing and submitting accounting reports for the company.
Generally in Russia, the Board of Directors (‘BoD’) is not utilised and not mandatory in small and medium-sized enterprises (‘SME’). The BoD is mandatory for a joint-stock company with more than 50 shareholders.
Many Russian SMEs, choose to establish a limited liability company with one sole executive body. The sole director holds extensive powers and consequently broad legal responsibilities – therefore shareholders should regulate the responsibilities to mitigate risks and damages caused to the company.
Negligence of duties
Under Russian law, directors of a company are required to exercise their rights and duties reasonably and in good faith, acting in the best interest of the company. Shareholders of a limited liability company and shareholders of a joint-stock company holding at least 1% of the company’s voting shares may submit a claim in court for damages to the company caused by directors.
However, there are few cases where the court rules in favour of the shareholder(s) claiming damages caused by directors. Even in such successful cases and the court orders directors to compensate the injured party, directors may not be able to pay compensation due to the lack of personal assets.
Equally, directors are often reluctant to make high-risk decisions due to the personal liabilities of being taken to court. In such cases, companies could face inadequate corporate governance especially for businesses that require daily high-risk decisions.
Foreign investors may apply the common Western practice to manage the director such as limiting the director’s liability for unreasonable behavior or establishing the Directors’ and officers’ liability insurance (‘D&O’).
However, such practices are not popular in Russia. In the first practice, there is no strict provision to determine unreasonable behavior from bad faith actions, which means in a court there is no legal basis to define the behavior. In the second practice, under the Russian Civil Code D&O cannot be directly applied to the liabilities of directors. Furthermore, special regulation of D&O policies in the federal legal system has not yet been adopted.
At Horizons, we encounter foreign investors who have not established good corporate governance due to the undefined provision for directors to act “reasonably and in good faith”. Commonly in such cases, the governance of the company is weak and the shareholders cannot direct the directors. We strongly advise investors to rely on local qualified experts to support local directors and implement a code of conduct to provide practical guidance and fulfill legal obligations.
Horizons Corporate Advisory
If you are looking to invest in Russia and need further assistance on corporate governance issues, our international legal and tax experts can help you assess specific risks and provide you with the best solutions.
For further information, please contact Horizons at firstname.lastname@example.org and our Partner in charge will be in touch.