This paper focuses on the impact of employee buyouts on corporate governance in transition, ten years after large-scale privatization took place in Russia. My analysis shows that although privatization through employee buyouts helps reduce unemployment and prevent major social conflicts, it has otherwise negatively affected corporate governance and firm productivity. Moreover, an excessively large labor force and management's tendency to preserve the old Soviet-style corporate governance hampers the long-term growth of privatized enterprises in Russia.
Unlike in many other transition countries, employees in Russia were obedient to corporate directors who ruled enterprises in the absence of any meaningful system of governmental checks and balances. At present, employee ownership remains a popular idea in Russia, but contemporary attempts of the Russian government to isolate enterprises from outside investors in the form of "people's enterprises" have proven to be a failure.
Extern Law Clerk to Judge Stephen F. Williams, U.S. Court of Appeals for the D.C. Circuit. Email: firstname.lastname@example.org; personal web site: http://www.kryvoi.net. The author wishes to thank Harvard professors Reinier Kraakman, Mark Roe, Andrei Shlefier, Judge Stephen F. Williams, Ethan Burger, Michael Sabin and Jane Bestor for their comments and interesting discussions on this paper.