Last November Bill Browder, founder and chief executive of Hermitage Capital Management, the largest foreign portfolio investor in Russia, disembarked from a plane in Moscow after one of his frequent trips to London. As he tried to pass through immigration, he discovered that his visa had been canceled without explanation and he was forced to return to the UK, an outcast from the country he had been investing in for nearly ten years.
But, as he meets IR magazine at a café in the heart of London’s Covent Garden, he seems singularly undeterred by his Kafkaesque exclusion from Russia. ‘I’m more worried about the global markets than I am about my travel plans,’ he insists as he sits down to a calming green tea on yet another day of volatility in the world’s equity markets. It’s not clear whether this blasé attitude stems from his cocksure self-confidence or the fact that modern technology means you can run a fund from anywhere in the world. Either way, Browder is doing just fine. This year he made his debut on the Alpha magazine list of the 25 highest-paid hedge fund managers around the globe, taking home a cool $130 mn in 2005.
Governance, Russian-style
Browder has made his name, and his money, through his advocacy of good corporate governance as a value-added investment strategy. But, he is keen to point out, Russia is not the US or the UK, and Hermitage is no Calpers or Hermes. ‘I wouldn’t even call what we do corporate governance; it’s anti-fraud,’ he says. ‘The types of misbehavior in Russia are so extreme that if you can have any impact on them, it has an enormous economic consequence. Corporate governance is about how decisions are being made and whether executives are being overcompensated. The kinds of issues we’re worried about involve outright fraud – corporate governance is perhaps a polite way of putting it.’
Browder has shown little mercy to the companies he has targeted since Hermitage was set up in 1996. In the intervening decade, he has masterminded ten major governance campaigns, the largest and most successful of which involved putting a stop to asset stripping at Gazprom.
Using good contacts and forensic auditing, Hermitage uncovered how Gazprom executives were secretly transferring assets to their own family members. ‘We exposed the problem through a number of media publications and it led to a debate in the Russian government, which resulted in the dismissal of the management and the recovery of most of the assets,’ he says.
It’s this unforgiving attitude that ruffled a few too many feathers and most likely led to the FSB, the successor to the KGB, canceling Browder’s visa. ‘We’ve made a lot of noise to stop graft and fraud and have been really successful over recent years in making things better at the companies we invest in,’ he says. ‘It’s good for us and good for Russia, but not so good for the guys who are benefiting from the corruption.’
Imperfect market
An American-born UK citizen, Browder was originally attracted to Russia by his familial connections: his grandfather, Earl Browder, was general secretary of the US Communist Party during the 1930s, and Bill’s father was born in Moscow. But Browder’s subsequent attraction, once he had arrived in Russia, was based on how undervalued he felt the country’s assets were. Is he then a victim of the very imperfections that he seeks to exploit? He concedes that ‘if everything was perfect, the asset values would be at a normal level and I wouldn’t be making any money.’ Ever the realist, Browder insists that if Russia’s assets become overvalued he will be one of the first to pull out.
In the meantime, he’ll be busy engaging with companies – and there’s a lot to do. Browder describes the governance concerns of most Western investors (such as board makeup) as ‘luxuries’ in Russia, but that doesn’t mean there aren’t some companies with high governance standards. Among the blue chips, he singles out Lukoil and VimpelCom (which won the IR magazine award for best IR by a Russian company last year) as having good governance of the sort that’s not too dissimilar from that of companies in the West.
If corporate governance is improving at Russian companies, it’s due in no small part to the recent spate of overseas listings in London and elsewhere. ‘To change, people either have to be scared of a stick – which is not the case in Russia – or there has to be a carrot,’ explains Browder. ‘At the moment there’s an enormous carrot because the Western capital markets are open for business for Russian companies in a big way. In order for them to bite into that carrot, they need to comply with Western standards whether they’re required to by law or not. Those companies that are interested in foreign listing or foreign capital are becoming better purely out of self-interest, which is a great thing.’
But do market-led solutions work even in extreme cases such as Rosneft’s recent IPO in London, which George Soros thinks should have been boycotted because of concerns about how the company obtained its assets? ‘The issue at Rosneft is not the company’s governance per se but how it got its assets, whether there’s any risk to its ownership of those assets, and how it prices that risk,’ Browder argues. ‘But the good thing about companies coming to London is that there are stringent requirements. If there are corporate governance requirements in Russia and a company violates them, there are no consequences. If they don’t comply in London, they get de-listed.’
Profit motive
Browder believes companies should have nothing to fear from Hermitage buying up their stock as long as they’re honest. He says that he only became an activist by necessity and would be delighted if he could relax and become a passive investor again.
When listening to his well-rehearsed denunciations, it’s easy to forget that Browder is a fund manager and not an anti-corruption campaigner; ultimately, his interest lies in making a profit and he has no desire to name and shame companies for the sake of it.
‘Oftentimes we do speak to the company first, and there are corporate governance successes we’ve had that you’ll never know about,’ he continues. ‘The arrogance of certain managers in Russian companies was extremely high in the past, and they never thought that a small shareholder like ourselves could have any impact. But, as we’ve been more successful over the years, we can actually have a credible conversation about what could happen if they don’t look at what we’re not happy about.’
