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A Revolutionary at Heart:

“I’m a revolutionary in my heart,” claimed Bill Browder, the head of the largest Russian hedge fund, in his meeting with HBS students on March 15th. Mr. Browder, an international investor and protagonist of a recent HBS case, came to share his experience of shareholder activism in one of the most dynamic and challenging emerging markets, Russia.

The talk was hosted by the Eastern European Association at Hawes 102, the exact venue of the now (in)famous Jim Rogers’ debate. Aware of the historic setting, Bill Browder started off by saying he would try to do better than his predecessor. His odds were not bad: with more than a decade of investing experience in Russia, first as a banker at Salomon Brothers and then as head of the $1.4 billion Hermitage Fund, Mr. Browder has achieved significant recognition for his investment results and market insight.

As one of the leading portfolio investors in Russia, Browder expanded upon traditional passive investment strategies by pioneering shareholder activism as a key driver of his funds’ performance. Referring to Professor Dyck’s HBS case, Browder focused his presentation on the story of a dramatic shareholder fight for Gazprom, the largest producer of natural gas in the world. Despite its enormous reserves, by 2000 Gazprom traded at a 99% discount to its international peers, due to its poor transparency and corporate governance. Browder and his research team at Hermitage Fund saw the situation as a unique investment opportunity. Hermitage took a significant stake in Gazprom and launched a comprehensive campaign to improve its corporate governance.

Bill Browder’s research provided major Western newspapers with numerous stories of asset stripping and insider dealing at Gazprom. While Gazprom’s management largely ignored the critique, the Russian government did not. As the gas giant’s largest shareholder, the government took stern action by reshuffling the Board of Directors, replacing the CEO and launching a detailed audit of the more controversial corporate transactions. The markets’ enthusiasm about Browder’s initiative rewarded Hermitage with an 88% return since the beginning of the campaign.

By building on such early success stories, Bill Browder and his team developed an impressive track record of shareholder activism with the largest Russian blue chip companies. His toolbox differentiated him from the rest: although Hermitage employed most of the classic activist strategies like shareholder meetings, lawsuits and appeals to the regulators, Browder placed a particular emphasis on PR campaigns in mass media.

Despite losing 40 out of 44 lawsuits raised in shareholder battles, Browder managed to win media support in his drive for better corporate governance. “The evil tends to wither under the bright light of publicity,” he said, nodding to Alan Cullison, a WSJ Moscow correspondent who attended the talk. This approach worked particularly well in a country where market institutions and regulators were too embryonic to take serious action against corporate wrongdoings.

Browder also took time to answer students’ questions about Russia and hedge fund investing. “I’m a Putin bull,” he said in assessing the results of the recent presidential elections in Russia. While recognizing Russia’s dependency on the “rule of men, not the rule of law”, Mr. Browder was enthusiastic about the concentration of power in the hands of just one man, President Putin. Concurrently, he deplored the trend for concentration of Russian businesses under a few ‘oligarchs’, and expressed his cautiously optimistic hope that “the time of oligarchs is over”.

Browder was generally upbeat about the economic situation in Russia, citing political stability and high commodity prices among the key drivers of economic growth. However, he warned against making superficial comparisons with other emerging markets. In Browder’s opinion, Russia is good only at extracting natural resources, and is unlikely to compete in manufacturing industries with coastal nations like China.

In closing, Browder shared his personal excitement about living and working in Russia. A grandson of the general secretary of the American Communist party, Bill seemingly enjoyed the irony of his role as an advocate of proper capitalism in the former Soviet Union: “It’s adrenalin every day; the time flies in dog years, and I love it!”

April 5, 2004
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