[We’re pleased to welcome authors Alexander Libman of Ludwig Maximilians University of Munich, Tatiana Dolgopyatov of the National Research University Higher School of Economics, and Andrei Yakovlev the National Research University Higher School of Economics. They recently published an article in the Journal of Management Inquiry entitled “‘Board Empowerment: What Motivates Board Members of Founder-Owned Companies?” which is currently free to read for a limited time. Below, they reflect on the motivations of this research:]
Our study emerged from a puzzling observation we made looking at the development of Russian (and, more generally, emerging markets) companies after the global financial crisis of 2008-2009. The crisis reduced the benefits of having an advanced and transparent corporate governance structure: international investors (who in many cases demanded better governance practices in the first place) became cautious and unwilling to engage even the most transparent companies. Since maintaining a well-functioning formal corporate governance system is costly, we would expect emerging market companies to abandon it in favor of informal management mechanisms. AFK Sistema – the company we study in our paper – did exactly the opposite. After the crisis, it invested substantial effort into improving the corporate governance, including empowering the board of directors, going well beyond the Russian standards in this respect.
Our paper, therefore, was an attempt to understand how does the company benefit from improving its corporate governance, even if it is created not for investor’s sake? It appears that empowering boards of directors could have another, equally important function: it can increase the motivation of board members, making them eager to invest their time and effort in advancing the cause of the company. This, in turn, opens new business opportunities and new possibilities for growth. These opportunities can be challenged by changes in external environment: after 2014, for example, AFK Sistema faced challenges in Russia related to Bashneft case, which could also influence the further pathway the company will follow in terms of developing the corporate governance. But fundamentally, the approach of empowering boards to improve motivation appears to be sound and beneficial for achieving long-term business growth.
Our argument applies even to companies with concentrated ownership, which traditionally pay less attention to transfer real authorities to the board of directors. In the AFK Sistema, it was the founder, who controls more than 60% of the company’s stock, who triggered and consistently implemented the change towards a more transparent and better organized corporate governance structure.
From this case study, two conclusions follow. First, we show how important it is to go beyond the simple generalizations and to look at more nuanced factors explaining the choices made by individual companies. In some cases, personality and convictions of the key decision-makers can push the company in a new direction, creating avenues from achieving success. Capturing these nuanced factors was, in fact, the main challenge of our research: we had to gain insight into the motivation and the perceptions of the highest echelons of the AFK Sistema (which is one of the biggest Russian companies). It was not enough that the managers and the board members agreed to talk to us to verify facts and to respond to specific questions – we needed to gain insights in their view of how the company develops and why certain decisions are made, without biasing the respondents by our own preconceptions and ideas.
Second, the case of AFK Sistema also shows that the business experience of emerging markets can be used to draw valuable lessons for companies operating elsewhere – the logic of board empowerment as a tool for increasing motivation of directors could be of value for companies in mature markets as well. Emerging markets are not only about hostile business environment – they are (potentially) about managerial innovations with broader relevance