Eight questions for a foreign investor managing a Russian subsidiary
1. Is the Board of Directors necessary?
The company management structure depends on whether the company is public or non-public and whether an investor has in place valid corporate management rules, subject to mandatory provisions of the Russian laws.
In most cases, management bodies include a single-person executive body (General Director or the GD) and, as the investor sees fit, a collective executive body (the Board) that are in charge of day-to-day management of the company’s affairs. The supreme management body is the General Meeting of shareholders.
Such two-level management system applies in a number of cases, e.g. for limited liability companies and non-public joint stock companies, when companies are entitled, but not obliged, to establish an additional management body – the Board of Directors, with the function of controlling or supervising the activities of the executive bodies.
This approach does not apply to public joint stock companies where the Board of Directors (a collective management body) is required.
2. If the Board of Directors is established, how many directors should it include?
As a general rule, the Board of Directors of a joint stock company should be composed of at least five directors. The Board of Directors in public joint stock companies with over 1,000 voting shareholders should be composed of at least seven directors, and in public companies with over 10,000 voting shareholders – of at least nine directors.
It should also be highlighted that the laws do not regulate the number of directors in a limited liability company. Therefore, two, three or more directors can be appointed upon a decision of the shareholders and subject to provisions of the charter.
3. Is it necessary to engage independent Directors?
Since 2001, the law on joint stock companies has provided the opportunity to appoint independent directors. However, the law does not oblige a company to engage independent directors, nor does it establish their number.
One can say that the principle of appointing independent directors is implemented through soft law instruments. In 2014, the Government of the Russian Federation and the Board of Directors of the Bank of Russia approved the Corporate Management Code to replace the substantially out-of-date Code that was in effect since 2002. The updated Code gives shareholders advanced corporate control mechanisms that professionally develop and strengthen the role of the Board of directors, provide for internal checks and balances by engaging independent directors and create a risk control hierarchy that is not associated with the management.