Boards of Directors in Russian Companies in the Context of ESG Transformation
Only when businesses actively participate in the implementation of the UN Sustainable Development Goals will inclusive economic growth be achievable on both national and international scales. The rise of corporate environmental responsibility, social responsibility, and the high quality and transparency of corporate governance are all outcomes of the widespread adoption of Environmental, Social, and Governance (ESG) concepts by businesses, investors, and regulators in recent decades. Although the ESG agenda is primarily a feature of developed capital markets, such as those in the US and EU, many companies in emerging markets across Asia, the Middle East, Africa, and Latin America have recently intensified their efforts to transform their business models to be more ESG-friendly.
Numerous experts have expressed grave concerns, yet Russian businesses and regulatory bodies continue to work on altering ESG frameworks despite severe sanctions, economic restructuring, and geopolitical unpredictability. Russia’s «Turn to the East» and the establishment of closer economic ties with rapidly developing nations have, on the one hand, resulted in stricter carbon regulations and increased efforts to adopt to climate change (E-component). This shift has led to stringent requirements for Russian exports, particularly those involving oil, natural gas, metals, minerals, and other commodities. On the other hand, challenges such as economic inequality, demographic shifts necessitating new methods of managing human capital, and rising societal expectations regarding businesses’ contributions to the socioeconomic development of regions (S-component) pose significant obstacles for Russian businesses.
Many large Russian businesses have enhanced their sustainability disclosures and revised their sustainability plans in recent years in response to these challenges. Consequently, an increasing number of boards have established dedicated sustainability committees and intensified their efforts to address ESG concerns. This shift has heightened the demand for board members to possess specialized knowledge and skills.
However, limited research has been conducted on board composition effects on ESG transformation of Russian firms. To address this gap, Irina Ivashkovskaya, Elena Makeeva, and Konstantin Popov investigate the relationship between board composition and human capital attributes and the efficiency of ESG transformation in the largest Russian public non-financial companies, which is particularly significant for the educational and professional backgrounds of board members. This research is part of HSE University’s Strategic Project «Social Policy for Sustainable Development and Inclusive Economic Growth».
Who sits on the boards of successful companies?
Using RAEX Europe’s corporate ESG rankings to assess how effectively a company manages ESG risks, the authors found that companies with higher rankings tend to have larger boards characterized by greater levels of independence (39.1%) and national diversity (24.7%). In contrast, companies with lower rankings exhibit significantly lower levels of independence (22.5%) and a higher percentage of foreign directors (11.4%).
The authors examine several hypotheses regarding the influence of independent and foreign directors’ professional and educational backgrounds on the ESG transformation of Russian companies, taking into consideration the critical role that board members’ human capital plays in enhancing advisory performance and strategic planning efficiency. The study showed:
- Independent board members in leading companies have pursued more education, resulting in a higher percentage of independent directors with academic degrees (38.5% compared to 29.6% in the companies ranked below average).
- The educational backgrounds of independent board members in the companies leading the ESG rankings are more diverse.
- When comparing these companies to underperforming ones, the professional backgrounds of independent directors in firms with higher ESG rankings are notably varied. These backgrounds include prior experience as CEOs or equivalent roles, work in banking, finance, or auditing, technical field experience, and service in government.
- In contrast, companies with lower ESG rankings tend to have a greater concentration of independent directors with similar professional backgrounds. According to the authors, this limited diversity in information and skills on the board leads to increasingly biased decision-making due to the predominance of specific types of expertise.
What changed in recent years?
It is noteworthy that by the start of 2022, a significant number of independent board members in major Russian corporations were foreigners, primarily from the United States, the United Kingdom, and Europe. However, the percentage of foreign board members in the sample of Russian public businesses under consideration fell by over 35% in 2022 due to the sanctions imposed on Russian enterprises during that year and into 2023. In this context, it is critical to examine the professional and educational backgrounds of foreign directors to develop recommendations for identifying independent board members among Russian specialists and those from developing countries with stronger economic ties to Russia.
The authors demonstrate that companies ranked as leaders in ESG criteria have more diverse educational backgrounds among their international members. Furthermore, they find that companies with a higher number of foreign directors possessing state service experience performed better in ESG rankings over the past three years, from 2021 to 2023. This improvement is attributed to these members’ awareness of the global ESG agenda and the regulatory initiatives implemented by foreign regulatory bodies. Interestingly, Russian enterprises with a greater percentage of foreign directors holding MBAs also achieved higher ESG rankings during the same period. From the perspective of resource-based theory, the authors interpret this finding as follows: directors with MBAs bring more practical knowledge than those with purely academic degrees, making practice-oriented education particularly valuable in times of economic and geopolitical uncertainty. Additionally, organizations with more independent and foreign board members who have financial backgrounds have seen improvements in their ESG rankings amid severe sanctions and economic turbulence.
Summarizing their findings, the authors emphasize the importance of examining corporate boards through the lens of human capital. The results of this study are not only valuable for academia but also useful for a wide range of business practitioners. As non-financial variables increasingly contribute to company value, investors should consider the board’s ability to create and oversee the implementation of ESG initiatives while making strategic decisions that mitigate ESG risks. Analysts studying Russian public corporations and consulting firms specializing in executive search will also find this report relevant. Furthermore, the significant exodus of foreign professionals from the Russian corporate governance market, coupled with an IPO boom on the Russian capital market, has made an analysis of board characteristics that facilitate ESG transformation even more pertinent. This situation has led to an increased demand for new professionals capable of establishing effective corporate boards in Russia.
Elena Makeeva, Associate Professor, Faculty of Economic Sciences, School of Finance
Our findings in the paper «Boards of Directors in Russian Companies in the Context of ESG Transformation» align with data from a recent analytical study conducted by Technologies of Trust and the Skolkovo Moscow School of Management. Current trends in the corporate sector and the new challenges businesses face necessitate a broader range of skills among board members. A study of board members reveals that 40% of them are dissatisfied with board performance regarding sustainability and ESG issues, representing the highest percentage among various concerns addressed by Russian corporate boards. In the light of the economic crisis and political instability confronting Russian companies, boards must prioritize short-term risk mitigation and corporate resilience over long-term strategic planning, which includes sustainable development and ESG transformation. This situation raises critical questions about balancing a business’s long-term viability with short-term resilience. Consequently, there is a pressing need for a comprehensive approach to risk management and strategic decision-making, which should also reflect on the composition of the board by considering the competencies of its members.