Academic journal article Management International Review

Effects of Top Management Replacement on Firms' Behavior: Empirical Analysis of Russian Companies

Academic journal article Management International Review

Effects of Top Management Replacement on Firms' Behavior: Empirical Analysis of Russian Companies

Article excerpt


* This paper describes an empirical study of the decision-making process firmly rooted in the soil of the highly uncertain political and social environment of Russian business enterprises, exploring the relationship between changes in top enterprise management (CEO and Boards of Directors) and subsequent managerial decisions.

Key Results

* Results indicate a greater willingness on the part of new managers to develop long-term plans and to enter into new business ventures, while at the same time retaining mechanisms such as employee stock redemptions to ensure their control over enterprise decision-making.

* Such results point to the need for enhanced policies to bolster both the decision rights of outside shareholders and the role of Russian capital markets in (efficient) resource allocations.


Comprehensive reform of the governance systems of business enterprises is one of the most complex and important elements in the transition from an administrative to a transitional market economy. With the onset of economic reform in Russia in the 1980's and early 1990's, it was generally assumed that privatization would automatically create significantly new corporate governance systems, to provide reasonable assurance to suppliers of capital that they would receive an appropriate return on their investment. It was assumed that such new governance systems would almost instantaneously replace Soviet era systems that lacked a focus on income maximization and fostered unequal or biased returns to stakeholders (Fox/Heller 1999, Nellis 2003). After privatization, firms were expected to exhibit "good corporate governance," with managers making decisions consistent with the maximization of residual equity claims and willing to distribute returns in a pro-rata fashion. Unfortunately, voucher privatization in Russia often left incumbent managers firmly in control. Many of these old managers mastered their "asset-stripping" skills, but failed to adapt to competitive market conditions. Already in the mid-1990's, the need for changes in and research into corporate governance in Russia became obvious. In subsequent years the need to curb the excesses of "crony capitalism" in the development of a healthy investor climate in Russia has not changed. To attract both domestic and foreign investors by demonstrating an ability to adapt to a market-oriented economy (Knight/Spreng/Yaprak 2003), Russian corporations have to prove that they are serious about change. After privatization in the mid-1990's, numerous Russian working collectives became frustrated with poor firm performance and voted for new managing directors (Chief Executive Officers or CEOs) in the expectation that top executive change in an enterprise would help overcome inertia and resistance to change (Black 2001, Krivogorsky/Eichenseher 2003).

Prior research related to enterprise governance issues in Russia has concentrated on the impact of privatization on firm performance (Bergstrom 1995, Blasi 1996, Blasi/Shleifer 1996, Popov 1998, Black/Kraakman/Tarassova 2000, Perevalov/ Gimadi/Dobrodey 2000, Kozenda/Svejnar 2002, Munari/Oriani 2002), focusing on distinctive ownership structures after privatization as well as "ownership power" (1). Empirical evidence provided in this literature has been limited by a lack of availability of meaningful accounting data. Firm managers continue to show reluctance to fully report financial results due to high levels of economic (policy) uncertainty and general tax avoidance motives (Nellis 2003). The most common approach taken in the literature--to analyze firm performance as a function of ownership structure or board of directors composition--is consistent with the most commonly invoked paradigm for corporate governance--the US system of corporate governance with strong capital markets but limited constraints on managerial behavior. Much less attention has been paid to the German (Continental) model, where strong institutional (bank) control on management compensates for weaker capital market influence. …

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