Julia Kochetygova

1
Analytical assessment of the Progress in
Corporate Governance in Russia

• Julia Kochetygova
• Director
• Standard Poors
• Governance Services

AEB30 March 2005
2
Governance in Russia General Summary

• Improving environment, but there is still much to
  be done governance is still one of the main risk
  factors for Russian companies and their investors
• Much of what is done is self-serving in a way
  which is itself non-transparent
• Codes, compliance and legal/regulatory
  enforcement (top-down approach) are immediate
  objectives, but effective corporate governance is
  not just that
• Transition to world class standards from a
  culture of legalistic compliance to a culture of
  fairness, accountability and transparency
  (management culture, board effectiveness, and
  independence of mind) is an ultimate task

3
SP Corporate Governance Score - market based
solution

• A corporate governance score (CGS) is Standard
  Poors opinion on the extent to which a company
  adopts corporate governance practices that
  clearly serve the interests of its financial
  stakeholders
• CGS is the assessment of non-financial risks,
  i.e. mainly the risks of inefficient or dishonest
  management
• Substance over form. Important for external
  investors and stakeholders to understand
  governance beyond superficial, and possibly
  misleading, structures

4
Focus on key governance issues in Russia macro
environment

• Renewed country risk concerns government
  intervention into business affairs
• Slowdown of the reform process
• Limited independent media
• Limited rule of law
• Weak protection and enforcement of ownership
  rights
• Corruption
• Evolving accounting standards and disclosure
  requirements
• Russian accounting focus on reporting for tax
  purposes
• Key weaknesses transparency of ownership,
  related party transactions

5
Focus on key governance issues in Russia micro
environment

• Non-transparent ownership structures
• Strong influence of controlling shareholders
  various conflicts of interest
• Risks of expropriation and abuse of minority
  shareholder rights
• Related party transactions can be difficult to
  monitor
• Asymmetry of information between majority and
  minority owners
• Scope for improvement in accounting standards and
  non-financial disclosure
• Weak audit processes, internal controls and risk
  management
• Limited board independence (20 of outside
  directors)
• Board committee structures and oversight
  mechanisms still developing
• Limited self assessment and succession planning
• Weak disclosure on remuneration.
• Scope for improvement in long term performance
  related pay structures and in ensuring that pay
  levels are set independently of management

6
List of Corporate Governance Scores (CGS)
assigned in Russia in 2001-2005
7
Russian companies CGSs and their components
As of August 2004