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52 Stan. L. Rev. 1731 (1999-2000)
Russian Privitization and Corporate Governance: What Went Wrong

handle is hein.journals/stflr52 and id is 1751 raw text is: Russian Privatization and Corporate Governance: What Went Wrong? Bernard Black, Reinier Kraakman, and Anna Tarassova* In Russia and elsewhere, proponents of rapid, mass privatization of state- owned enterprises (ourselves among them) hoped that the profit incentives un- leashed by privatization would soon revive faltering, centrally planned econo- mies. In Russia, the revival didn't happen. We offer here some partial explanations. First, mass privatization is likely to lead to massive self-dealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastruc- ture for controlling self-dealing. Russia accelerated the self-dealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to fur- ther corrupt the government and block reforms that might constrain their ac- tions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren't privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reforms. A principal lesson: developing the institutions to control self-dealing is central to successful priva- tization of large firms. * The authors are, respectively, Professor of Law, Stanford Law School; Professor of Law, Harvard Law School; Senior Legal Advisor, IRIS (Institutional Reform and the Informal Sector), University of Maryland, College Park. We thank Harry Broadman, Jason Bush, Kevin Covert, Richard Craswell, George Crawford, Simeon Djankov, Alexander Dyck, John Earle, David Eller- man, Itzhak Goldberg, Dale Gray, Barry Ickes, Gregory Jedrzejczak, Tarun Khanna, Miriam Klip- per, Michael Klausner, Branco Milanovic, David Moss, Peter Murrell, John Nellis, Hugh Patton, Katharina Pistor, Russell Pittman, Gerhard Pohl, Harold Rogers, Andrew Schwartz, Andrei Shleifer, Christopher Stone, Lee Wolosky, Alexander Yushkevich, Lena Zezulin, and participants in workshops at the American Law and Economics Association, George Mason Law School, Har- vard Business School, an OECD Conference on Corporate Governance in Russia, the International Monetary Fund, Stanford Center for Russian and East European Studies, Stanford Law School, University of California, Berkeley (Haas School of Business), University of Michigan (William Davidson Institute), and the World Bank for helpful discussions and comments. Special thanks to James Fenkner of Troika Dialog for the data on Russian market capitalization and comparable Western values for Russian companies reported in Part III of this article, and to Brian Fonville for research assistance. The research for this article was substantially completed in September 1999; we updated partially through June 2000, primarily to correct statements that were inaccurate by then. 1731

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