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Monday, 6 May, 2002, 11:53 GMT 12:53 UK
Russia's corporate crusader
William Browder
William Browder heads Moscow's most successful equity fund.
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By James Schofield
reporting from Moscow
Immediately after the collapse of the Soviet Union, Russian capitalism had a "Wild East" reputation, and the management of many companies drove roughshod over shareholders.

Not many Western investors had the stamina to cope, but William Browder, in charge of investment fund Hermitage Capital Management, is determined to slug it out.

It's time for yet another battle in corporate Russia. Gazprom, the country's state controlled gas giant, will announce on Tuesday who will be its new auditor.

The loser will be PricewaterhouseCoopers, dumped amid allegations of "false and misleading" reports on Gazprom.

Minority shareholders took it one step further, launching legal proceedings against the accountancy firm.

The man behind the move is William Browder, chief executive of Hermitage Capital Management, Moscow's most successful equity fund.

His fight over Gazprom's management culture and its books is just the latest in a series of moves that have turned him from capitalist money mogul into the leading corporate governance crusader in Russia.

From investor to shareholder activist

According to Mr Browder the transformation was triggered by Russia's catastrophic financial crisis of 1998.

As the country teetered on the brink of an economic abyss, pessimists predicted the break up of the country and the renationalisation of its industry.

Gazprom HQ
Allegations of "false and misleading" reports on Gazprom.
Russia's all powerful business oligarchs, who had carved up much of the country's industrial assets through notorious insider privatisation schemes in the mid 1990's, panicked.

"When the market crashed every oligarch decided to misbehave like never before," says Mr Browder.

"They grabbed, stole and stripped anything they could. It was like a fight for their life."

Rather than stand by and watch, Mr Browder decided to stand and fight the asset transfers that were stripping Russian companies of billions of dollars.

Since then he has launched a series of legal actions that he claims will help to clean up the country's volatile business environment and safeguard his investments worth millions of dollars.

Communist family turns capitalist

In an ironic twist of fate, Mr Browder is the grandson of the man who was boss of America's communist party during the 1930s.

In the early 1990s he arrived in Russia as an investment banker. He quickly established a reputation for making money in the country's bargain sell-off of Communist-era industry.

In 1996, he decided to go it alone. Backed by the famous and secretive investor Edmund Safra he set up Hermitage Capital Management with an initial $25m to invest.

The fund was a runaway success, gaining 140% in value by the end of the first year, while the second year was even better, up almost 240%.

At the top of the market - just before the crash - William Browder had $1,15bn under management.

But then came the Asian crisis of 1997. Russia was soon swept up in the panic and Hermitage Fund caught the full brunt of the market collapse, down almost 90%.

Investors - both Westerners and Russians - left in droves.

Mr Browder compares Moscow in the wake of the crash to waiting at the airport when you have lost your luggage and everyone else has gone home.

But Mr Browder stayed put. Despite plummeting equity prices, some of his investments turned out to be profitable.

Oil companies, for example, were doing well as the price of crude oil soared on global markets while domestic costs - charged in rouble - fell 75% after the devaluation.

The crusade begins

It was around this time, says Mr Browder, that the free-for-all asset stripping and corporate governance abuse began in earnest.

"Without challenging these things they would have gone completely unchecked," says Mr Browder, as ways of explanation for what has now become something of a crusade.

His first success came in 1997 when he blocked moves by Vladimir Potanin, the majority shareholder of Russian oil major Sidanco, to issue 173% new shares to company insiders for a whopping 96% discount to the then market price.

With over $100m invested, Hermitage would have seen it's stake diluted from 4% to 1.4% and lost more than $63m.

Hermitage Capital Management filed suit with the Russian Federal Securities Commission and won - to Mr Browder's surprise. The share issue was cancelled.

Uniting shareholders

Browder next prevented state-controlled energy giant UES, United Energy Systems, from implementing a damaging restructuring plan that would have seen the rapid sale of assets at rock bottom prices.

The plan was little more than a give-away and minority shareholders were outraged.

Appeals to the Kremlin and concerted shareholder pressure won a significant victory. The charter of UES was amended to make any asset transfer subject to 66% approval of the board, effectively preventing any future asset stripping.

Other battles have since been fought, and now Mr Browder is targeting oil giant Gazprom.

Over the past decade billions of dollars of assets are said to have vanished from Gazprom. The firm is under new management now, and reportedly approves Mr Browder's law suit against Gazprom's auditors PwC.

Satisfaction with success

"It's good to see our impact. Our actions really do fundamentally affect these companies," says Mr Browder.

In addition to the law suit against PwC, Mr Browder is seeking to have himself elected to Gazprom's board at the firm's next annual general meeting in June. This, he believes, will create some checks and balances in the company.

"However you look at it, I think we have had a big and important impact on corporate governance here. I am making money for my investors of course, but I also think I have made Russia a better place."

So would his communist grandfather approve of his championship of capitalism?

Mr Browder says "yes".

"Although our overall political philosophies are different, our passions for righting wrongs and exposing corruption are similarly strong and consistent. I'm sure he would be smiling with pride, if he knew what I was doing today."

See also:

15 Apr 02 | Business
Challenge to PwC Russian audit
06 Sep 01 | Business
Kremlin lifts Gazprom secrecy veil
19 Feb 02 | Business
Russian guru upbeat on economy
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