governance services standard & poor’s

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

Corporate Governance Score Measuring corporate governance performance


• 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


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


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


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%


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%


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.


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


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.


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%

Groups 3&4

Group 1

MSCI index

110

100

90

80

70

60

50

40

3011/16/00 02/16/01 05/16/01 08/16/01 11/16/01 02/16/02 05/16/02 11/16/0208/16/02

Groups 3&4

Group 1

MSCI index

380

330

280

230

180

130

80

30

11/12/97

11/12/98

11/12/99

11/12/00

11/12/01

11/12/02

Relative stock performance by the groups for 2 years

Relative stock performance by the groups for 5 years


Source: Deutsche Bank, January 2003

Score components: country infrastructure, financial transparency, independence, openness, equal shareholder rights, etc.


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


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


• 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


• 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


List of public Corporate Governance Scores (CGS) in Russia# Company CGS initially

assignedLatest review Current CGS Russia national

scale1 Wimm-Bill-Dann 19.04.2004 09.07.2007 7+ 7.7

2 Mobile TeleSystems (MTS) 20.05.2002 27.12.2007 6+ 6.9

3 MDM Bank 14.11.2002 04.02.2008 6+ 6.7

4 EuroChem 24.04.2006 11.04.2007 6+ 6.5

5 North-West Telecom(NWT) 10.10.2005 19.10.2007 5+ 5.6

6 TGC-1 25.03.2002 25.05.2007 5+ 5.5

7 MGTS 06.03.2006 14.05.2007 5+ 5.5

8 Dalsvyaz 03.07.2003 31.07.2007 5 5.4

9 WGC-5 27.04.2007 - 5 5.4

10 Sibir Telecom 03.07.2003 11.09.2007 5 5.3

11 RusHydro 23.10.2007 - 5 5.2

12 TGC-8 15.02.2007 15.10.2007 5 5.2

13 Volgatelecom 15.08.2003 19.09.2007 5 5.2

14 South Telecom 12.02.2003 24.08.2007 4+ 4.9

15 TGC-9 22.06.2006 - 4+ 4.8

16 WGC-4 21.05.2007 - 4 4.4

17 TransTeleCom 23.12.2004 06.03.2007 4 4.2


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


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


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


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)


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


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


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

transactions, investments) – Strategic planning– Risk management policies (incl. non-financial risks)– Evaluations of efficiency, management nomination procedures

• Director and senior executive remuneration– Adequacy of director remuneration policy; evaluation procedures– Principles and forms of remuneration (BSC, KPI system)


Russian companies CGS and their components

№ C ompany C GS

Ownership structure and

external influences

Shareholder rights and stakeholder

relations

Transparency, disclosure and

audit

B oard structure and effectiveness

1 Wimm-Bill-Dann 7.7 7.8 7.5 8.0 7.72 MTS 6.9 7.1 7.5 7.6 6.53 MDM-Bank 6.7 7.3 6.3 6.4 6.64 EuroChem 6.5 6.9 5.8 5.7 6.85 North West Telecom 5.6 5.1 6.9 6.5 5.26 TGC-1 5.5 5.7 6.0 4.9 5.57 MGTS 5.5 5.5 6.5 5.7 5.18 Dalsvyaz 5.4 5.0 7.2 6.2 4.79 WGC-5 5.4 4.9 6.2 5.2 5.5

10 Sibirtelecom 5.3 4.9 7.0 6.1 4.711 RusHydro 5.2 5.4 5.8 4.6 5.112 TGC-8 5.2 5.1 6.2 5.2 5.013 VolgaTelecom 5.2 5.0 7.2 5.7 4.614 Southern Telecom 4.9 4.8 6.6 5.3 4.215 TGC-9 4.8 5.0 5.3 4.5 4.516 WGC-4 4.4 4.5 5.9 4.7 3.817 TransTeleCom 4.2 4.9 5.5 3.4 3.5

Average 5.6 5.6 6.4 5.6 5.2


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


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.

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