Russia’s largest companies lag in transparency efforts

A first-of-its-kind report assessing the financial disclosure practices of Russia’s largest companies by revenue, many with global operations, revealed dismal results across the board, making them vulnerable to corruption risk.

Among 200 of Russia’s largest companies recently assessed by Transparency International (TI), their profits in combination make up more than seventy percent of total national income, with significant economic, political, and social influence—and yet most rate poorly in terms of their transparency practices. Specifically, the report rated the transparency efforts of Russian companies in three areas: anti-corruption programs; organizational transparency of company holdings; and the disclosure of financial information on a country-by-country basis.

Overall, only 32 companies received five or more points out of a possible ten. The five highest ranking companies were food retailer Magnit (7.9); financial services company Sberbank (7.9); chemical company Kazanorgsintez (7.8); power company Rosseti (7.5); and petrochemical company Nizhnekamskneftekhim (6.8).

“Even though companies are driven to be more open to meet the demand of investors, the public, and regulators, there is still lack of commitment to openness from the companies’ owners and top-management,” said Anton Pominov, general director of TI Russia. “Most of the largest players underestimate how crucial transparency on political party and candidate financing, explicit zero tolerance for corruption, and support for special anti-corruption programs are to their customers, investors, and partners.” 

“On the other hand, there are a number of examples of best practice that originate from either the goodwill of management or the negative consequences of past mistakes,” Pominov added.

Sector-by-sector, the most transparent industry is telecommunications, which also leads the way in terms of disclosure of anti-corruption policies and organizational transparency. The opaquest industries across all disclosure areas, by contrast, are in infrastructure construction (represented by four companies), and the trade and food sector (represented by 22 companies).

Country-by-country reporting. Country-by-country reporting showed the weakest results among all areas, by far. Most companies assessed are not willing to disclose the amount of public contributions in the countries of their operation, releasing financial information for the selected country only, according to TI. Specifically, among a sample of 115 Russian companies operating in more than one country, 87 don’t disclose any financial information at all on those countries of operation.

Only two Russian companies—Sberbank PJSC and Nizhnekamskneftekhim PJSC—scored higher than 50 percent for their country-by-country reporting efforts. At least some Russian companies in the metals and mining industry disclose financial information on the countries of operation, including Polymetal; Evraz; Nordgold; and RUSAL.

“Even though companies are driven to be more open to meet the demand of investors, the public, and regulators, there is still lack of commitment to openness from the companies’ owners and top management.”
Anton Pominov, General Director, Transparency International Russia

Anti-corruption and organizational transparency. Of the 200 assessed companies, 115 made some anti-corruption provisions public. Documentation TI assessed included the company’s policy on facilitation payments, gifts, and political party donations, for example.

Companies that received the highest transparency scores in this area were diamond mining company, Alrosa; IT company, Lanit Group; and steel production company, NLMK. Other companies that fared well were testing company, MTS Systems; aluminum company, RUSAL; mineral fertilizer producer, Akron.; mining company, Evraz; financial services company, Sberbank; and state-owned oil company, Zarubezhneft.

Although Russia’s anti-corruption law requires companies to implement anti-corruption measures, it doesn’t do much in the way of encouraging anti-corruption policies, like the U.K. Bribery Act, TI said. Specifically, Russian law states that companies will be held administratively liable for corruption-related crimes committed by its employees, regardless of the existence of an anti-corruption policy.

Additionally, cultural support from senior management for Russian companies’ anti-corruption efforts also lags. Only 14 percent of the assessed companies’ CEOs expressed public support of their company’s anti-corruption program.

Concerning organizational transparency, 28 percent of Russia’s largest companies don’t disclose any information about their subsidiaries and joint ventures in the country of registration and at the international level. Most disclose a list of only their major subsidiaries and joint ventures. And just 26 percent extend their anti-corruption policies to agents and consultants, posing an especially high risk for corruption.

Facilitation payment disclosures. Only 20 percent of Russian companies assessed by TI expressly ban facilitation payments, which TI recommends as a best practice. It cites as an example the ethics code of “Sberbank of Russia” PJSC, which states that “it is prohibited, directly or indirectly, in person or through the intermediation of third parties, to offer, give, promise, request, and receive bribes or make payments to simplify administrative, bureaucratic, and other formalities in any form.”

Gift-giving policies.  Russian law imposes restrictions on the receiving of gifts while doing business with commercial organizations and bans officials and workers of certain groups of organizations, including medical and educational institutions, from receiving any gifts. Despite this, most codes of ethics assessed by TI don’t satisfy the requirements for reporting gifts, don’t set an acceptable cost of gift-giving, or have a policy on receiving or giving gifts in general.

One exception is Severstal PJSC, whose gift policy includes all these elements. The company further requires keeping a register of all gifts given to officials, as well as gifts that exceed a certain amount.

TECHNICAL RECOMMENDATIONS

Below is a list of technical recommendations that for companies, provided in the Transparency International report.
1. Establish communication channels with external actors. The process of creating a dialogue with companies in the commercial sector was complicated by the lack of an effective communication channel for companies. Most companies have only one common e-mail address on their website and very few corporations responded.
2. Publish information on anti-corruption policies in a specialized section of the website. We recommend companies have a specialized section on the site in which all public corporate documents that regulate the anti-corruption policy of the company of any kind will be gathered and published: staff Code of Ethics, Anti-Corruption Programs and policies, supplier codes and company gift policy, conflict of interests, and a hot line channel for reporting corruption.
3. Lay out documents in the pdf format with the possibility of performing a machine search of the document. It is necessary to pay attention not only to the content of the document, but also to its technical characteristics. Searching for information of interest is difficult if the company’s reporting is laid out, for instance, in 400 scanned pages or in a file of a poor quality.
4. For companies registered in foreign jurisdictions and carrying out their business mainly outside of Russia, it is important to present publicly reports, including in Russian.
Source: Transparency International

Whistleblower reporting channels. Most of the communication channels of the companies TI examined allow for anonymous or confidential reporting, but don’t provide two-way communication with the reporter, TI stated. As a best practice, companies should employ an independent third party to implement such a communication channel. Internet company Yandex is one such company that offers such a reporting mechanism.

Equally important is ensuring that whistleblowers are protected from discrimination and disciplinary actions. “We have identified very few protection safeguards on ethical behavior in the reviewed documents,” TI stated. Companies that do guarantee such protections in their policies include B&N Bank and Magnitogorsk Iron and Steel Works (MMK).

Compliance recommendations

The TI report describes several best-practice measures Russia’s largest companies should take to improve their disclosure practices in the following areas:

Anti-corruption policies. Aside from publishing as much information as possible about the company’s operations in publicly available sources, companies must also regularly update their anti-corruption compliance programs, TI recommended.

Many codes of ethics and anti-corruption policies date as far back as 2003 and only as recently as 2008. “Their relevance has not been updated for more than a decade,” TI said. “In addition, the texts of anti-corruption policies of several companies almost literally duplicate each other,” highlighting the need to take a more formal approach to developing an anti-corruption policy.

Furthermore, companies should ensure that they extend their anti-corruption policies not only to employees, but also members of their boards, as well as all those who are authorized to act on the company’s behalf—such as agents, lobbyists, and consultants—to reduce corruption risks. Corporate liability and compliance with the company’s anti-bribery and anti-corruption compliance program should also be extended to third parties acting on behalf of the company, including contractors and sub-contractors.

“Due diligence should be carried out before engaging with a business partner to identify existing problems [and] potential risks, and mitigate them,” TI said. Companies should also monitor their performance during the duration of the contractual relationship as another means to mitigate corruption risk.

Anti-corruption training. Few companies regularly conduct anti-corruption training for employees, including board members, and even fewer for third parties and individuals acting on the company’s behalf. “The practice of organizing mandatory training for new employees, regular training for the whole staff, and specialized training programs for employees who occupy the most corrupt risk positions (for example, Procurement Officers) is recommended.”

Corporate disclosure practices. When it comes to disclosure practices, best practice is to disclose a full list of subsidiaries, joint ventures, and other entities controlled by the company. Companies should also disclose financial data in all their countries of operation. This information should include “income, capital expenditures, pre-tax profits, income tax, and the amount of public contributions for each country in which the company conducts business,” said TI, which “will provide information of the company’s influence in each specific region where it is represented either directly or through its subsidiaries,” TI said.

Whistleblower mechanisms. In Russian companies, interaction with whistleblowers is “very formal and reports are not always treated privately and non-publicly, which excludes the possibility of getting a message from outside sources,” TI noted. Thus, it is especially imperative among Russian companies to allow for some avenue of anonymous reporting.

“The hotline for informants in most Russian companies means reporting to a mail address or calling a phone number in the company,” TI noted. “This model of interaction cannot guarantee full confidentiality of the informant, even if the principles of confidentiality and anonymity are declared. Whistleblower hotlines should be managed by independent third-party providers and, if used by a company, should be well publicized to its employees.”

Overall, the TI report reveals that the largest companies in Russia still have a long way to go, and many improvements to make, concerning their financial disclosure practices. The slower they are to adopt a more transparent and sustainable business model, the more they open themselves up to bribery and corruption risk, and the consequential financial and reputational damage that results.