CORPORATE GOVERNANCE: THE ROLE OF THE NED

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• CORPORATE GOVERNANCE THE ROLE OF THE NED
• Improving Professionalism, Training Support
• Mark V. Jarvis, Partner Corporate Finance

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Thinking Globally

• What do investors consider when investing?

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McKinsey Study

• McKinsey 2000 survey showed global investors
  would pay 18 premium for a well governed company
• The new survey (2001)
• "highlights that the emerging market corporate
  governance model is markedly different than that
  which prevails in the US and UK. Any transition
  from the former to the latter requires
  substantial reform not only at the corporate
  level but also at the institutional level. The
  complexity of this transition has for too long
  been underestimated."

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McKinsey suggests two areas in need of greater
emphasis

• Complementary governance improvements at the
  corporate level (enhanced disclosure, better
  board practice etc) with institutional reforms at
  the market level.
• Improving the efficiency of equity and private
  equity markets provides more external financing
  options for local businesses, as does improving
  linkages with global capital hubs, and improving
  the legal and regulatory environment for doing
  business.
• Focus on family / related party owned businesses.
  "Without incentives to change, they could
  continue to act a major obstacle to reform."
• Hangover for Mass Privatisation period

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Importance of institutional factors when
selecting Emerging Markets
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Factors when selecting Emerging Market companies
for investment
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Independent Non-Executive Directors
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Role of Non-Executive Directors

• Strategic direction a theme that recurs
  throughout research findings
• Monitoring and supervising is generally regarded
  as important
• Non-executive directors perceive themselves more
  as providers of strategic direction and less as
  suppliers of knowledge and contacts.
• Type of knowledge other industries (39),
  companys industry (29) specialist knowledge
  (27).
• While the most important contacts were industry
  related (63), city related (20) and politically
  related (13).

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How can a non-executive director add value?

• Effective NEDs can optimise board performance,
  making the company attractive not only to its
  current shareholders but also to future
  investors.
• They should actively contribute to the success of
  an enterprise by
• Bringing knowledge and experience to the board,
  whether in the context of the business itself or
  on matters such as international markets,
  technology or public affairs.
• Applying a broad, objective view of the company
  and its markets to the development and evaluation
  of business strategy.
• Supporting the executive team, while maintaining
  independence and objectivity, and ensuring the
  adoption of corporate governance best practice.

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Cadbury Report 1992 - NEDs

• Non-executive directors should bring an
  independent judgement on issues of strategy,
  performance, resources, including key
  appointments, and standards of conduct.
• The majority should be independent of management
  and free from any business or other relationship
  which could materially interfere with the
  exercise of their independent judgement. apart
  from their fees and shareholding. Their fees
  should reflect the time which they commit to the
  company.
• Non-executive directors should be appointed for
  specified terms and reappointment should not be
  automatic.
• Non-executive directors should be selected
  through a formal process and both this process
  and their appointment should be a matter for the
  board as a whole.

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The Contribution of Non-Executive Directors as
viewed by Non-Executive Executive Directors
Strategic Direction
Independence
Catalyst
Supervising/Monitoring
Mentor
Personal Qualities
Knowledge
Contacts
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SUMMARY OF RESEARCH FINDINGSNOP NON-EXECUTIVE /
EXECUTIVE STUDY

• Non-executive directors tend to be very
  experienced with 42 having over 20 years of
  directorial experience
• 3 main attributes non-executive directors brought
  to the board Strategic Direction, Independence
  Knowledge
• Knowledge Management, E-Commerce Globalisation
  identified as key opportunities for growth
• Conversely Government Regulations were seen as a
  substantial threat to the future success of
  businesses
• Around 60 of boards within the sample had
  non-executive directors

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Growth Opportunities Threats

• Interesting to see where growth opportunities are
  and where threats are perceived

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Threats Opportunities to success
Opportunities
Threats
KnowledgeManagement
Globalisation
E-Commerce
Environmental Issues
GovernmentRegulations
WorkforceChanges
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Main Threats and Opportunities

• Executive and non-executive directors - biggest
  worry was seen as government regulations,
• around half of both categories felt that they
  were a potential threat
• Others were workforce changes environmental
  issues
• Knowledge Management was perceived by both type
  of directors to provide the greatest opportunity
  for future growth.
• E-commerce and Globalisation were the other major
  opportunities cited

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Market Driven Reforms develop Corporate
Governance not Enforcement

• Proven to be more effective
• Russian SEC (FCSM) will not make Corporate
  Governance Code legislation
• Over regulation is detrimental to development
• Board level development is key and NEDs are a
  key element in developing Corporate Governance
  and Market Perception

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NEDs at All Levels

• In the UK independent NEDs are seen at companies
  at all levels
• In Russia practice has only been seen at Blue
  Chip Level
• Beginning to see interest SMEs

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ACCA Research Report - Berry Perren 2000 - SMEs

• There is a high level of awareness of NEDs
• Only 5 of respondents stated that they were
  unaware of the existence of NEDs.
• There is some mistrust of the NED role (for
  example, disruption of directorial team, breaches
  of privacy, loss of control and freedom)
• only 2 felt that NEDs had actually harmed their
  company
• 80 of managing directors (MDs) who had NEDs felt
  that they were helpful.
• The majority of SMEs do not have NEDs
• NEDs within SMEs is directly related to the size
  of the company with 20 of companies with lt50
  employees, having NEDs.
• As companies get larger they are more likely to
  have NEDs nearly 50 with 200499 employees hav3
  NEDs.

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ACCA Research Report - Berry Perren 2000 -
SMEs (cont)

• NEDs spend on average 18 days per year on their
  SMEs business
• Managing directors called upon a broad range of
  business advice and mentorship
• Favourite mentors with managing directors were
  fellow directors, outside accountants, their
  spouses, bank managers and business friends
• When a managing director had access to an NED
  then they ranked near the very top of mentors
  just below other inside directors

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Why do Russia companies need Independent Directors
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PROMOTION OF INVESTORS REPS TO RUSSIAN BOARDS

• Lack of truly independent directors represents
• a significant obstacle to the investment
  attractiveness of Russian issuers
• creates room for violations of rights and
  infringement legitimate interests of investors
  and shareholders.
• To improve corporate governance investors have
  promoted independent directors to boards of
  Russian issuers.
• IPA helped investor representatives were elected
  at AGMs in 2001 to Boards of Directors of 39
  leading Russian companies.
• The number of independent representatives in BoDs
  of Russian enterprises grew 60 as compared to
  last year results.

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Issuers with Independent Directors

• Energy companies
• Amurenergo, Volgogradenergo, Voronezhenergo,
  Kalugaenergo, Krasnoyarskenergo, Kubanenergo
  Kurskenergo, Lenenergo, Magadanenergo, Mosenergo,
  Nizhnovenergo, Permenergo, RAO "UES of Russia",
  Rostovenergo, Saratovenergo, Tambovenergo,
  Tverenergo
• Telecom companies
• Vladimirsviaz, Kirovelectrosviaz,
  Krasnoyarskelectrosviaz, Kubanelectrosviaz, MGTS,
  Novgorodtelecom, PTS, Rostelecom,
  Smolensksviazinform, Uraltelecom,
  Chelyabinsksviazinform, Electrosviaz (Moscow
  region)
• Oil and Gaz
• Gazprom, Sibneft
• Machinery-building companies
• Aviastar, Kazan Helicopter Plant, United Heavy
  Machinery
• Other industries
• Alfacement, GUM, Krasny Octyabr, Petrovsky Passage

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Independent Director Programme

• Russia
• www.independentdirector.ru

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EY and IPA Launch Russia Indpendent Director
Programme

• The best non-executive independent directors
  have a breadth of view that complements the
  necessary focus of executive directors involved
  in the day-to-day running of the business. They
  are experienced, prepared to challenge the
  accepted wisdom,and today, (2 October 2001) Ernst
  Young and the IPA launch this programme to
  develop these ideals in Russia.
• The is intended to promote wide understanding of
  the role and contribution of independent
  non-executive directors through a programme of
  targeted events, publications and electronic
  media.
• Independent directors are becoming a recognised
  and important tool in Russia at the level of the
  Boards of Directors' and gradually becoming
  incorporated into Russian business practice.

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Independent Director Programme - Moscow

• The Independent Director Programme established
  this 2nd October 2001 by EY and the IPA
• The Independent Director Programme will initiate
  a programme of workshops, surveys, seminars,and
  publications to assist non-executive independent
  directors to keep abreast of good practice.
• In the UK Ernst Young established The
  Independent Director - a joint initiative with
  the UK Institute of Directors aimed at developing
  and supporting the role of Independent
  Non-Executive Directors.
• The issues surrounding the increased role of
  Boards of Directors in companies and the
  maintenance of high professional standards are of
  concern for both the business community and State
  authorities.
• Institutes of independent directors have been
  established and proven in international countries
  and have become one of the key elements in
  building good corporate governance

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Not that easy..
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Barriers for Independent Directors

• Not really ready to pay for NEDs
• Are Boards a real body or puppets
• Legal right to have Board Meetings

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Barriers for Independent Directors

• Not really ready to pay for NEDs
• Are Boards a real body or puppets
• Legal right to have Board Meetings

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Non-Executive pay

• Survey of non-executive director practice and
  fees by the Monks Partnership considered pay and
  practice of non-executive directors and chairmen.
  
• The survey reveals a significant increase in fees
  for most non-executive directors and increasing
  use of payment in shares.
• The findings also highlighted the fact that
  organisations are requiring greater time
  commitment from their non-executive directors.
• The most common activities undertaken, in
  addition to the AGM, board and committee
  meetings, are site visits and strategy meetings.
• Most post holders have additional commitments
  over and above board and committee meetings.

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Non-Executive pay

• Russian companies not really ready to pay
• Data base of candidates poor (EY and Ward Howell
  developing this)
• Language often a barrier

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Barriers for Independent Directors

• Not really ready to pay for NEDs
• Are Boards a real body or puppets
• Legal right to have Board Meetings

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Are Boards a real body or a puppet?

• Boards are not a real executive body in many
  cases and remain puppets of the majority
  shareholders

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Barriers for Independent Directors

• Not really ready to pay for NEDs
• Are Boards a real body or puppets
• Legal right to have Board Meetings

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Legal Developments in Russia

• The Supreme Arbitration Court has upheld an
  appeal by the Russian Union of Industrialists and
  Entrepreneurs (RSPP) to stop the practice whereby
  a court bans a shareholder meeting pending the
  hearing of a legal claim
• On October 10 the higher court condemned the
  practice of using such preventive measures as
  violating the constitutional rights of
  shareholders.
• There have been many instances over the past few
  months of courts canceling shareholder meetings
  without an actual ruling being made such as
  Novosibirskenergo and later the NTV television
  channel.
• Mosenergo is the latest such instancein the
  fortnight preceding the September 1 EGM, the
  company received 16 court rulings,each
  superseding the previous.

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Progress will come

• Lets Work !! Every blow with the hammer helps
  the Country