Look Who's Making A Revolution: Shareholders

Derzhava Fund, a Moscow-based investment firm, was fed up with the managers of Yaroslav Rubber Co., a maker of tires and other car and aircraft parts. Derzhava didn't think they were doing enough to replace military customers. So Andrei Volgin, the fund's head, joined with other outside investors last fall to force a change. They installed a new CEO and a team of young financial experts. In three months, the company has signed new orders equal to last year's sales. "Things can change fast if you can change the management," says Volgin, who is also chairman of the Moscow Committee for Shareholders' Rights.

With capitalism still on shaky terrain, Russia is an unlikely battleground for shareholder rights. Yet over the next three months, old-guard managements at newly privatized companies are going to find themselves increasingly on the defensive. Some 24,000 annual shareholders' meetings are scheduled. Many are likely to turn into showdowns between former state managers and Young Turk private investors demanding better performance. Says Dmitri Vasilyev, deputy chairman of Russia's new Securities Commission: "Many will lose their posts and be replaced by more qualified people." By one estimate, up to 4,800 chief executives could get the boot along with many directors.

YANKED AWAY. The old guard is not going to go quietly. They've lobbied their allies in Boris Yeltsin's government to stall economic reforms. While the Chechen conflict raged, the hard-liners proposed renationalizing some industries and placing curbs on foreign investors.

But there has been a determined counterattack by proreform forces led by Premier Viktor S. Chernomyrdin. The government seems determined to push for reform at the company level, so shareholders will be allowed to install new managements, and subsidies will eventually be yanked away from failing companies.

One can't blame the old-line managers for being upset at the changes. In the Soviet era, all they had to do was please the party bigwigs and meet government targets to get all the trappings of power, including a limo. Now, some twentysomething investment manager in a spiffy suit could toss them out. "They didn't realize privatization would mean reorganization," says David Reuben, president of Trans-World Metals Ltd., a London-based trading company that has made big and controversial plays in Russia's aluminum business.

But the corporate apparatchiks are quickly learning new tricks to frustrate their opponents. They range from diluting the ownership stake of investors to such simple ploys as erasing the names of outside investors from computerized shareholder lists. Or they wrap themselves in the flag, charging that outside investors are speculators or opportunists who want to strip Russia of its wealth.

One investment group that got a nasty surprise was Moscow's Rossisky Credit Bank. When it snapped up a 22% share of Lebedinsky Mining Co. last year, it thought it had a great deal. The mine has modern facilities that produce an iron-ore additive much in demand. But the general director, Anatoli Kalashnikov, denied the bank a board seat and then diluted its holdings by giving big new stakes to a local fish farm and other allies. "He just doesn't want to lose or share power," says Alexander Lyubinin, a Rossisky vice-president. Kalashnikov replies that the investors "don't want to participate in real work here, they just want to make money."

Another company whose shift to capitalism has been tied up in knots is Zil, a dinosaur that has been turning out the same basic truck for 30 years. In Zil's case the problem is money. Its initial stock distributions raised a measly $750,000, though Zil occupies 50 prime Moscow acres. Yet to compete on world markets, Zil needs a modernization program costing $200 million, says Chairman Alexander P. Vladislavlev.

HICCUPS. Shareholders can't agree on how to find that kind of money. Vladislavlev, installed as chairman last May, has put together a rescue plan in which a new financial holding company would offer a $250 million stock issue to fund the modernization. Yet one outside investor, an aggressive Moscow financial company called Microdin that holds 18% of Zil's stock, is balking because its ownership share would be diluted. It also wants Zil's management changed before it puts in more money. Zil managers want Yeltsin to replace Microdin and other troublesome investors with more "patriotic" ones.

As the corporate battles play out in coming weeks, investors will see whether such stories are hiccups on the way to a functional system of corporate governance or whether chaos and arbitrariness remain the norm. The health of Russia's economy rests on the outcome.