BOARD FORMATION: Governance and Value Creation

Paul J.Ostling

OECD Russia Corporate Governance RoundtableMoscow, 25–26 November 2012

Co-sponsored by

Informational partner

Disclaimer: The views expressed in this presentation are those of the author and do not necessarily represent the opinion of the OECD Russia Corporate Governance Roundtable, the OECD or its Member countries, or of the Moscow Exchange.

OECD Russia Corporate Governance RoundtableMoscow, 25–26 November 2012

Co-sponsored by

Informational partner

IS THERE A COMPELLING VALUE PROPOSITION FOR IMPLEMENTING

“BEST IN CLASS” GOVERNANCE / BOARD FORMATION?

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EMERGING MARKETS LISTEES SUFFER A MATERIAL RISK PREMIUM CHARGE –Investors and regulators are concerned about:

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• “rule of law” (Yukos, YPF…) • accuracy of financial reporting

(Puda Coal, China Forest)• domination by “controlling

shareholders” (Volkswagon, ENRC)

• behind the scenes government influence or the influence of networks connected to officials (Rosneft-BP-TNK oligarchs)

• corruption (Hermitage Capital)

• “Repeatedly over the last 20 years, when British shareholders are surveyed they have responded that they are willing to pay a premium for better governance in their investee public companies.”

• “When companies from emerging markets have competed for capital markets access using visibly better corporate governance models, they have been rewarded with higher market capitalization.”Example: Uralkali

EMERGING MARKETS LISTEES NOW TRADE AT 10% - 40% DISCOUNT

Good Corporate Governance Creates Value

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Corporate governance has been linked to financial performance

Poor governance clearly hurts

Good governance is a long-term investment

Good corporate governance creates trust

(…and, hopefully, transparency and high ethical standards….)

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WHAT ARE THE NECESSARY PREREQUISITES TO A SUCCESSFUL & SUSTAINABLE IPO AND HIGH EV (Achieved Target Multiple + Ongoing Market Cap Enhancement)?

1.Business model that is “sellable”2.Reliable, timely financial data3.“Acceptable” corporate governance/board

ACCORDING TO A HBS 2010 STUDY: the factors that indicate “success” inside the Russian market (dominant, control-oriented owner/founder + “the personal ‘way’ of the founder” + shorter term bottom-line focused operational model) have NOT translated well to the global markets without significant remediation

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BUT…

Moving from a “controlling / dominating” operational/management model to a “shared oversight/ ‘governance’ model”

The octopus vs the shark vs the outsider

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SUCCESSFUL GOVERNANCE/ BOARD FORMATION IS AN EVOLUTION, NOT A REVOLUTION

It normally takes 2 years to work with INEDs to reach the IPO-ready stageGE!

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Typical Metamorphosis from typical Russian “Ex-Co” to “Governed Board”

There must be TRUST in the INEDs and the Board process from owners

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THERE ARE SOME SPECIFIC RUSSIAN LEGALITIES THAT SHOULD

BE CONSIDERED:

RUSSIAN SHAREHOLDERS REPRESENTING 2% OF SHAREHOLDERS HAVE THE RIGHT IN OJSCs TO NOMINATE DIRECTORS….

Therefore, if the “controlling shareholder” nominates all the directors, there is a possible appearance of “controlled” rather than independent directors

Therefore, the role of the Remuneration and Nomination Committee can appear weak and superfluous

There should be consideration of giving the Board and the R&N Committee a Role

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THE DEFINITION OF INDEPENDENT DIRECTOR VARIES FROM THE NORM IN OECD, UK, US

E.g., director could have annual transactions up to 10% of company’s NAV and still be independent

E.g., could have transactions with the company annually up to 10% of his or her annual income and still be independent

Perhaps it is time to align the OJSC and OECD definitions?

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THERE ARE MODELS OF ‘ENGAGING IN QUALITY GOVERNANCE’ - Uralkali

PREMIUM LISTING IS AN EVEN FURTHER STEP -– Polyus Gold

These companies took the time and effort to create corporate governance as a strategic competitive advantage. They are being rewarded by the investment community for their efforts.

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