Employee Ownership and Corporate Governance in Post-Privatization Russia

This article brings into focus the impact of employee buyouts on corporate governance ten years after the large-scale privatization in Russia. The analysis shows that although employee buyouts have helped to reduce unemployment and prevent major social conflicts, it otherwise had a negative effect on corporate governance and firms' productivity. An excessively large labor force and the management's tendency to preserve the old Soviet-style corporate governance hampered the long-term growth of privatized enterprises. Unlike in many other transition countries, employees in Russia were obedient to the directors who ruled the enterprises in the absence of any meaningful system of checks and balances. Employee ownership still remains a popular idea in Russia, but subsequent attempts of the Russian government to isolate enterprises from outside investors in the form of people's enterprises have proved to be a failure. The article concludes that instead of giving employees control over their companies, they should only receive minority stakes. The majority stakes should be sold to outside investors, preferably foreign. This would improve employees' incentives without adversely affecting the the company's ability to raise external financing and maintain effective mechanisms of management control