William Browder, the top executive of the Hermitage Fund, the best-performing international equity fund over the last five years, attributed much of his funds' strong returns to its focus on shareholder activism and corporate governance. In 2001, he was putting this approach to the test by accusing the Russian oil and gas giant Gazprom and the international accounting firm Price Water house Coopers of not stemming governance problems. Although the press provided extensive coverage of Gazprom's problems and the share price rose, Browder failed in his other efforts to get a board seat, and his lawsuits were dismissed. Was it time to refine or change this activist strategy? These were the questions Browder (and his investors) considered as he left on a long overdue vacation.
1. What are the various ways in which managers in Russia extract value out of their companies disproportionate to their equity stakes? Which of these methods seem to be peculiar to the Russian environment?
2. What institutions and mechanisms are normally important in decisions by insiders to divert resources and which of these are ineffective in Russia?
3. What is Browder’s strategy? How does this differ from traditional investing? Do you agree with Browder’s contention that media attention limit corporate governance abuses (in Russia, elsewhere)? How does the medium affect governance decisions?
4. As an investor in the Hermitage Fund, what would you advise Bill Browder do in Summer 2002?
5. What stands in the way of shareholder activism of this type more generally for investment funds? Is such activism good for fund investors? Is it good for the country?