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Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.Copyright (c) 2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Governance ServicesStandard & Poor’s
MoscowFebruary 2008
Corporate Governance Services in Russia
2.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
• Corporate governance is:
• A mechanism that encourages efficient use of resources and equally demands responsibility for managing these resources (Sir Adrian Cadbery)
• A set of internal mechanisms to lead the company and control it (OECD)
• The system of interaction of a company’s management, board of directors and shareholders designed to ensure maximization of the company’s value and that all financial stakeholders receive their fair share of the company’s earnings (Standard & Poor’s)
• A corporate governance score (CGS) is Standard & Poor’s opinion on the effectiveness of corporate governance practices and mechanisms
• The assessment of non-financial risks – primarily the risks associated with inefficient or dishonest management
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• Governance evaluation helps investors to minimize their risks
• Is particularly important for institutional international investors
• CGS is important for equity investors, as well as creditors (examples include Enron, WorldCom, Kmart, Global Crossing, Marconi, Lucent, Nortel, ABB, Tyco International, Adelphia, Cable & Wireless, Parmalat, Finmatica, HealthSouth, Hollinger, Qwest, Adecco, AIG, Refco etc.)
• In Emerging Markets, governance-related risks are particularly high; hence governance assessment is critical, despite high growth and volatility
• Standard & Poor’s is the most reliable source of independent professional information on that (11,000 original subscribers to RatingsDirect)
Investors are the CGS target audience
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CGS can
• Push the share price and liquidity up by providing additional
assurance to investors
• Decrease the cost of debt and equity, diversify the sources of
funding
• Reduce the costs of D&O insurance policies
• Help to improve the image for clients and investors; build up
reputation and corporate history
• Provide companies with benchmarks for internal change
• particularly if an enhanced comparative analytical report is produced in
the framework of ‘Corporate Governance Evaluation’, or CGE
Reasoning behind a company’s decision to receive a CGS
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200 institutional investors (collectively responsible for some USD 2 trillion of assets under management)
85% - put corporate governance on a par with financial indicators when evaluating investment decisions
78% - willing to pay a premium for a well-governed company
Premium for good corporate governance may be as high as 40% (see graph on the next slide)
Global Investor Opinion SurveyMcKinsey & Co. (July 2002)
Corporate governance is at the heart of investment decisions
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Global Investor Opinion SurveyMcKinsey & Co. (July 2002)
Average premium
investors would
pay for a well-
governed
company by
country and
region
Average Premiums
0
5
10
15
20
25
30
35
40
45
%
33%
22%14%
22%
13%
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Corporate Governance and Equity Prices
Survey by Andrew Metrick (Wharton School of business), Paul A. Gompers and Joy L. Ishii (Harvard University) of 1,500 US companies
for period 1990-1999
*August 2001
12%
Stock returns
16%
10%
4%
S&P Index well-governed companies
companies with low standards of corporate
governance
15.5%
7%
Hewlett-Packard, IBM, Wal-Mart, DuPont, Southern Company GTE, Waste
Management, Time Warner, Kmart, United Technologies
CG premium – 8.5%
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Distribution of 50 companies by groupsby quality of CG
13
15
13
9
Group 4 Group 3 Group 2 Group 1
Note:
Group 1: Score > 80%
Group 2: Score 70-80%
Group 3: Score 60-70%
Group 4: Score < 60%
Relation between CGS and value: Deutsche Bank study, 50 emerging-markets companies
Source: Deutsche Bank, January 2003
Companies under study: 50 leading companies operating in Eastern Europe and Middle East
Score components: country infrastructure, financial transparency, independence, openness, equal shareholder
rights, etc.
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Basic value multipliers(break-down according to the level of CGS)
1.2 1.5 1.92.9
3.94.9
7.9
9.5
4.85.9
8.9
11.3
8.7
13.4
18.3
20.5
0
5
10
15
20
25
Group 4 Group 3 Group 2 Group 1
P/BV
EV/EBITDA
P/CF
P/E
Relation between CGS and value: Deutsche Bank study, 50 emerging-markets companies
Companies under study: 50 leading companies operating in Eastern Europe and Middle East
Score categories: country infrastructure, financial transparency, independence, openness, equal shareholder rights, etc.
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1 year 3 years 5 yearsGroup 1 4.20% 23.80% 53.60%Groups 3 & 4 15.90% 5.80% -24.80%Difference -11.70% 18.00% 78.40%
Relative stock performance by the groups for 2 years
Relative stock performance by the groups for 5 years
Relation between CGS and value: Deutsche Bank study, 50 emerging-markets companies
Source: Deutsche Bank, January 2003
Score components: country infrastructure, financial transparency, independence, openness, equal shareholder rights, etc.
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Link between Valuation multiples and CGS of Russian companies
2.71
35.00
5.45
11.47
1.69
5.782.46
6.98
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
EV/EBITDA P/E EV/Sales P/BV
4 - 6
6 or higher
Source: Standard & Poor’s CGS, Valuation multiples - Bloomberg (average for October 2006 – May 2007)Companies with CGS ranging from 4 to 6: NWT, Sibirtelecom, CenterTelecom, STC, MGTS, Dalsvyaz, VolgaTelecom, WGC-5, WGC-4Companies with CGS higher or equal to 6: MTS, WBD, TMK, VimpelCom
CGS level
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Link between P/BV and CGS of Russian companies
Source: Standard & Poor’s CGS, P/BV - Bloomberg
WGC-5
WGC-4
Volgatelecom
Dalsvyaz
Sibirtelecom
STCNWT
MGTS
CTC
TMK
МТS
Vimpelcom
y = 1.0 x - 2.0
0.000
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
9.000
10.000
4 4.5 5 5.5 6 6.5 7 7.5 8
CGS
P/B
V
WBD
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• Company scores are comparable on a global basis
• Country context critical
CGS0 10
Country infrastructure
Maximum shareholder protection
Minimum shareholder protection
weak
strong
average
Selected companies on the CGS/country scale
S&P Corporate Governance Score – a global instrument
5
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• 7-10: strong global governance standards– Ownership structures do not pose conflicts– Shareholder rights well defined and protected– High transparency and disclosure (IFRS or GAAP)– Effective board structure and active engagement by non-
executives and independent directors
• 4-6: basic governance standards in place, though certain shortcomings are apparent– Ownership structures and the board are often the
weakest areas of assessment
• 1-3: fundamental weaknesses or holes in governance structures and practices
Interpretation of Scores
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List of public Corporate Governance Scores (CGS) in Russia# Company CGS initially
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List of public Corporate Governance Scores (CGS) and Governance Assessments (GA) assigned outside Russia in 2001-2005
Company Country CGS/GA initially assigned
Latest review Current CGS/GA
Infosys Technologies Ltd. India 12.04.2004 13.07.2004 8+
Hong Kong Exchanges Inc. Hong Kong 13.12.2001 02.03.2005 8
ORIX Corp. Japan 09.08.2002 08.07.2005 8
Telecom Italia Italy 14.04.2005 14.04.2005 7+
Korea Tobacco & Ginseng Korea 19.10.2003 23.02.2005 7+
Sanpaolo IMI Italy 15.09.2004 15.09.2004 7
Resona Holdings, Inc Japan 21.12.2004 26.12.2005 7
ITV UK 26.07.2004 26.07.2004 Strong
Jones Apparel USA 18.10.2004 18.10.2004 Moderate/strong
Schering Plough USA 02.08.2004 02.08.2004 Moderate/strong
PT Antam Tbk. Indonesia 10.04.2005 10.04.2005 6+
PT Bank Niaga Tbk. Indonesia 12.04.2005 12.04.2005 6+
Biovail Corp. Canada 20.05.2005 20.05.2005 6+
Sinochem International Co. Ltd. China 19.02.2004 15.05.2005 6
Baxter International Inc USA 05.10.2004 05.10.2004 Moderate
Bank Mandiri Indonesia 10.05.2004 15.04.2005 5 (Gov.Watch Negative)
Royal Dutch/Shell UK 21.07.2004 21.07.2004 Moderate/weak
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1 10
Standard & Poor’s CGS: methodology
1. Ownership structure and
external influences
2. Shareholder rights and stakeholder
relations
4. Board structure and effectiveness
3. Transparency, disclosure and
audit
• Interactive analytical process
• Four main mechanisms of mitigating risks -- Four components of analysis (and 11 sub-categories)
• Scores from 1 (the lowest) to 10 (the highest) – sub-scores and overall score
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CGS evaluates the effectiveness of co-ordination mechanisms between management, board of directors and shareholders
Shareholders
CEO, management
Board of directors
Fair and integrate disclosure of company operations and financial results
Distribution of profits
Accountability and succession Timely provision of information Balanced influence
Independent oversight over management Strategic decision-making
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Key analytical issues:1. Ownership structure and external influence
• Transparency of ownership– Disclosure of beneficiaries of large blocks, including their
external interests– Management shareholdings– Group structure, affiliate parties
• Concentration and influence of ownership
and external stakeholders– Clear and balanced influence– Existence of conflicts of interests of different shareholder
groups (cross-subsidization, transfer pricing)– If that exists, how it is balanced (decisions on related party
transactions)– Influence of external stakeholders (federal government, local
authorities)
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Key Analytical issues (cont.):2. Shareholder rights and stakeholder relations
• Shareholder meetings and voting procedures– Ease of access– Quality of materials provided– Voting procedures and discussions
• Ownership rights and takeover defenses– Guarantees of ownership rights– Dividend policy and discipline– Mechanisms impeding change of ownership
• Stakeholder relations– Social policy– Ecological policy– Labor relations
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Key Analytical issues (cont.):3. Transparency, Disclosure and Audit
• Content of public disclosure– Financial reporting standards, completeness of disclosure– Non-financial information (assets, strategy)– Analysis of risks– Management and director remuneration– Auditor compensation– Non-financial reporting (GRI standards)
• Timing of, and access to, public disclosure– Timeline– Ways of disclosure, non-discriminating access– Timeliness of event-driven commentaries
• The audit process– Auditor selection process– Scope of services provided by the auditor– Independent oversight (Audit Committee)– Internal controls
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Key Analytical issues (cont.): 4. Board structure and effectiveness
• Board structure and independence– Balance of interests– Independent directors– Skill mix and personal qualities– Committees
• Role and effectiveness of the board– Oversight and audit (related-party transactions, material
• Director and senior executive remuneration– Adequacy of director remuneration policy; evaluation procedures– Principles and forms of remuneration (BSC, KPI system)
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Selected comparative governance data on Russian companies
Disclosure of
private
ownership*
Financials
under IFRS /
US GAAP
Published
on time
S&P
Transparency
Index
Audit
committee
70 largest
Russian
companies
34 77 60 53 74
19 companies
with public
S&P CGSs
70 84 37 62** 95***
Note: all data for 70 companies is based on public sources(*) share of the disclosed private ownership in aggregate private ownership(**) based on results of 15 companies (except for Eurochem, TransTeleCom, TGC-1 and WGC-4)(***) including 47% -- independent Audit committees
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Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.