Views on improving the integrity of global capital markets
12 February 2013

The Russian New Market: Will Higher Corporate Governance Standards Bring Investors? Moscow Exchange Wants Your Input

Corporate governance can be a sleepy little corner of the financial world. As in many markets, the broad corporate governance standards of the market are already relatively well established —  leaving investors, issuers, and their boards to argue over details like executive pay, board representation, poison pills, and other company-specific issues. It is rare — and more exciting, frankly — when we come across a development that has the potential to change an entire market.

Has such a development come to Russia? It’s too early to tell, and a healthy dose of skepticism is an understandable first reaction considering the current state of shareowner rights in the country and a government that isn’t always friendly to investors. Add to these factors a perception of corruption that ranks Russia as one of the most corrupt major economies in the world (ranked 133 out of 176), and it isn’t surprising that investors tend to shy away. The government knows it has an image problem, as it recently hired Goldman Sachs as a corporate broker in order to boost the country’s image in the minds of institutional investors.

The Moscow Exchange is looking to do its part to attract investors by creating a segment of the market for companies with higher corporate governance standards. The market would be called Novy Rynok, or “new market.” This may sound familiar to those who follow the corporate governance world as the Brazilian “new market,” or Novo Mercado, has been going strong for about a decade and (to great reviews) serving as a safe haven for investors who understand that stronger corporate governance can mean healthier and less volatile returns.

The reasoning behind such a “new market” is simple. Investors will seek a safe haven of well governed companies when investing in markets in which they are unfamiliar or where investors feel that they may be offered a lower standard of shareowner rights or legal protections than they enjoy in their own markets. Companies can benefit, too, as numerous studies have shown that higher corporate governance standards can lead to a lower cost of capital. The Novo Mercado in Brazil has been very successful because both international and Brazilian investors gain comfort from the higher corporate governance standards offered by companies in Brazil’s new market. (The Novo Mercado in Brazil now boasts more than 100 companies nearly a decade after it was started.)

Other markets around the world have toyed with the idea of creating their own new market. In recent years the Philippines has flirted with starting up their Maharlika Board, meant to feature companies in the Philippines with higher governance standards. Such efforts seem to be on hold, however, as no companies have yet committed to more rigorous corporate governance listing standards in Manila.

Argel Astudillo, head of corporate governance of the Philippine Stock Exchange (PSE), recently provided us with the PSE’s official statement on the Maharlika Board:

“The PSE has decided to defer the launch of the Maharlika Board. While we look at the next few years to launch this initiative, we will continue to study how we can further refine the concept of a special corporate governance segment in the PSE in order to gain market acceptance while maintaining the high corporate governance standards demanded by the Maharlika Board.”

For now, a Philippine “new market” is a dream deferred. But the Novy Rynok appears to be set to launch later this year.

We will have to wait and see what the Novy Rynok has to offer and whether the market in fact gets off the ground in the near future. The plan is for the listing standards to begin sometime in 2013. For those looking for a sneak peek of the kind of increased transparency and shareowner rights you would enjoy as an owner of a Novy Rynok company, here is a sample of some of the proposed higher listing standards:

  • Disclosure of public reporting in English
  • Mandatory adherence to a higher level of corporate governance standards (currently being developed by MICEX)
  • Quarterly IFRS Financial Statements
  • A formal policy on trade in shares for major shareholders and top management
  • A retail tranche in IPO’s
  • Protection of shareholder rights in cases of transition of control or delisting

In an interview last September with FTSE Global Markets, Sergei Sinkevich, primary market department and globalisation managing director of the Moscow Exchange, detailed the reasoning behind developing the Novy Rynok:

“Joining the premium segment involves the voluntary acceptance by issuers of the need for enhanced commitments in reporting, corporate governance and transparency. The segment will provide comfort to foreign and local investors by introducing additional mechanisms that protect their rights and increase the level of information disclosure.

“We are introducing this segment for two reasons: on the one hand we are planning to attract long-term investors who are ready to invest in “high-quality’’ issuers. On the other, we want to attract issuers that want to establish reputational capital and who expect to enjoy market premia, added to the price of their shares, which clearly demonstrate their exemplary practice of corporate governance and transparency. The project is set to be launched in 2013.”

The devil will of course be in the details of the corporate governance standards developed by MICEX. If too stringent, the market may scare away a number of Russian companies, and perhaps keep the Novy Rynok from reaching a critical mass of issuers. If the standards are too lenient, no new investors will be attracted to the market, defeating the purpose of a market with higher standards in the first place.

At this time, the corporate governance standards envisioned by MICEX have not been made public, though organizations such as the Investor Protection Association (IPA) of Russia, the Organisation for Economic Co-operation and Development (OECD), and the International Corporate Governance Network (ICGN) are participating in discussions and soliciting input from interested parties in order to establish best practices on the Russian market.

Now, we would like to solicit information from you. We have been invited by Russia’s IPA to encourage our readers to share their thoughts on the Novy Rynok and what they would expect from such a listing standard. If you are so inclined, fill out a short survey prepared by the IPA and the Moscow Exchange. The survey aims to understand the needs of investors who are currently, or are considering, investing in Russia so that the new exchange can provide it.

To help tailor this product to investors’ needs, please use the online form (platform provided by the Deloitte Center for Corporate Governance). The survey closes at the end of February.

Please reach out to Elena Pastukhova at MICEX with any questions regarding the MICEX Novy Rynok project; contact Demid Fedorov at the IPA with any general questions regarding governance or fighting shareholder abuse in Russia.

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About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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