AMAG: Company and Corporate Governance Presentation

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AMAG is a Moscow-based advisory firm that provides consulting services to Russian and foreign companies, as well as to their shareholders, in the areas of Corporate Governance, Investor Relations, …

AMAG is a Moscow-based advisory firm that provides consulting services to Russian and foreign companies, as well as to their shareholders, in the areas of Corporate Governance, Investor Relations, Depositary Receipts, and the Shareholder Meeting process. This presentation describes our firm and presents our view on Corporate Governance in general and in Russia.

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  • 1. Strictly ConfidentialAneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Corporate Governance in Russia For the benefit of all stakeholders
  • 2. Strictly Confidential2Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved • Why Corporate Governance? • Current Situation in Russia • AMAG’s Approach to Corporate Governance • Our Team and Credentials Content
  • 3. Strictly Confidential3Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Evolution of Capital Markets: from Founders & Capitalists to Portfolio Managers Business Founder Capitalist Investors Executives Portfolio Managers 20% 60% 20% 10% 20% 10% 10% 50% • Capitalist gives business founder access to own and public capital • Both are actively engaged in business development and administration • Speculations on stock exchanges • Low control over the capitalist’s activity • Investors actively manage own capital/assets • Emergence of board members and top managers • Activity on semi-closed local markets as the global market does not exist yet • First notion of Corporate Governance • Professional asset managers are active on complex dynamic global markets • Capital owners are completely detached from business administration • Business is run by hired executives • Modern concept of Corporate Governance 5% 6% 5% 4% 80% Regulations, Great Depression, generational change => dilution of initial capital Deregulation, globalizationand new technologies => institutional and retail investors Free float Free float Free float Capitalist Founder Founder Investor 1 Investor 2 Investor 3 Largest shareholders Source: Background chart: DJIA 1900-2013,logarithmic scale; Pie-charts: Illustrative data 1900 1920 1940 1960 20131980 2000
  • 4. Strictly Confidential4Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Complexity of Decision-Making Creates Potential for Conflicts and Agency Costs Capital owner Collector (pension fund, life insurance) Selector (fund of funds) Overseer (board of directors) Executor (CEO) Decider (portfolio manager) Real assets ‘Buy-Side’ ‘Corporation’ Agent #1 Agent #2 Agent #3 Agent #4 Agent #5 20+ years’ arrangement Lock up for 12-15 years Lock up for 5- 10 years Investment horizon of 1-3 years Employment contract for 3-5 years Average tenure of 5 years 2-6% return on capital 1-2% annual fee 0.5% annual fee 2% fee and profit participation Salary and bonus Fixed annual fee Average return on assets of 5-10% Average lifetime of an asset 10-30 years Source: Expert estimates
  • 5. Strictly Confidential5Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved AMAG Views Corporate Governance (CG) as Key Shareholder Value-Creation Tool Key Components Corporate Governance refers to the set of systems, principles and processes by which a public company is governed. It allows shareholders to monitor the efficiency of the board of directors and management in order to minimize agency costs. Definition: Key Roles Shareholders - owners of company equity who carry the ultimate risks and are entitled to benefits from operations Board of Directors - governs the management and designs solutions for shareholders Management - creates shareholder value through efficient development and execution of business activities Key Features Leadership ControlCommunications Tangibility Sustainability Wholeness Perception In an environment of volatile global markets, dynamic capital allocation, and huge volumes of information, Corporate Governance offers an indispensable value-creation tool for capital owners and business managers Leadership
  • 6. Strictly Confidential6Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Wholeness Presumes That All CG Elements Must Function Properly to Create Value Wholeness reflects the synergetic effect, where efficiency of the CG system is more than a sum of its elements, including the ability to adjust to the ever-changing environment Shareholders Board ofDirectorsManagement Leadership Control Communications • Appoint directors • Initiate EGMs • Binding voting • Define strategy • Set agenda for AGMs • CG matters • Chairman/ Senior Independent Director • Internal control system & risk management function • Share price chart • Ultimate decision- makers with ultimate responsibilities • Audit Committee • Executive remuneration • Operational control • HR function • CEO embodies the company • IR/PR functions
  • 7. Strictly Confidential7Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Perception of CG by Investors is Key to Business Understanding and Valuation Current perception of Russian CG often is worse than reality, which is substantially below par S&P average MSCI Russia Actual CG Perception of CG Perception of business by investors Despite its subjective and fragile nature, perception is the real driver of investment decision-making and, thus, must be the focus of communication History Understanding Mood Alternatives Expectations Operations Financials Strategy CG Russian discount (20-30%) Company’s gap (15-20%) Perception gap (10-15%) Source: expert estimates
  • 8. Strictly Confidential8Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Tangibility Helps Maximize Perceived Value of Abstract Concept of Governance Abstract concept #1 Abstract concept #2 Abstract concept #... Practical idea: • based on abstract concept(s) • put in particular business context • responsible person in charge of development • understanding of desired outcome Strategy: • ‘big picture’ view • integrated in overall strategy • for internal use Policy:  a practical document  addresses specific issues  external and internal use ImplementatIon Processes:  matrix of competences/ responsibilities  complements existing frameworks  information flows & reports CommunIcatIon Practical result #1 Practical result #2 Practical result #3 Practical result #... PerceptIon Theory Actual CG practice Perception It is difficult to improve perception without changing actual CG practices. We believe that success is achieved when improvement in perception exceeds changes in underlying practices.
  • 9. Strictly Confidential9Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Dynamic shareholder base All shareholders are treated equally Proper CG System Ensures Sustainability of Investment and Returns • Clear & fair set of rules governing relationships between all stakeholders • Strategic approach presuming continuous future operations • Control mechanisms built-in to ensure adequate risk management on all levels • Transparency guaranteeing ability to understand state of corporate affairs Corporate Governance Assets (e.g. quality, productivity, etc.) Regulatory (Laws and regulations affecting business) Market volatility (e.g. commodity prices, etc.) People (e.g. management team, personnel) Predictable TSR Well-functioning CG system helps increase predictability of shareholder returns and protect invested capital, and creates an intangible asset – corporate reputation
  • 10. Strictly Confidential10Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved “Corporate Governance has evolved over the past century to more effectively promote the allocation of the nation’s savings to its most productive uses. And, generally speaking, the resulting structure of business incentives, reporting, and accountabilityhas served us well. We could not have achieved our current level of nationalproductivity if Corporate Governance had been deeply flawed”. Alan Greenspan “Many forms of government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of governmentexcept all those other forms that have been tried from time to time”. Winston Churchill Like Democracy, Corporate Governance is Flawed, but There Is No Better Concept Yet
  • 11. Strictly Confidential11Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Content • Why Corporate Governance? • Current Situation in Russia • AMAG’s Approach to Corporate Governance • Our Team and Credentials
  • 12. Strictly Confidential12Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Russian Equities Are Part of Global Capital Markets Driven by Institutional Investors Approximately 500 professional portfolio managers with $200-300 bn AUM 26% Global Equities $55tr 3% BRIC Equities $6.4tr 100% Global Assets $209tr 0.3% Russian Equities $800bn Free float Founders/ Oligarchs State Others (treasury shares, strategic investors)  Their decisions and actions define market capitalization of each public company  Manage ‘other people’s money’ according to clearly defined rules  Wide choice of investment opportunities  Experienced professionals with excellent track record and access to information  Collegial decision-making (with some exceptions)  Individual remuneration (motivation) pegged to performance  Human factors: sympathy and antipathy Source: Deutsche Bank, Worldbank, estimates 30% 30% 30% 10%
  • 13. Strictly Confidential13Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Following the 2008 Shock, Russian Equities Clearly Suffer from Non-Economic Factors The economy seems to be in good shape… 2008 2009 2010 2011 2012 GDP Growth Unemployment 5.3% 4.3% 4.3% 3.6% -7.8% 6.4% 8.4% 7.5% 6.5% 6.0% Budget result Gov’t net debt 2008 2009 2010 2011 2012 Public finances are even better… 4.9% -3.5% 1.6% -6.3% 7.9% 11.0% 11.7% 9.6% 8.4% 0.6% Source: Bloomberg … but Russian equities consistently underperform 2012 Gross dividend yield 2012 Trading P/E 1.9% 2.9% 3.5% S&P MSCI EM MSCI Russia 19.3 10.0 5.5 MSCI EM MSCI Russia S&P 2008 2009 2010 2011 2012 MSCI Russia: -35% MSCI EM: -5% S&P 500: +32% EM Russia S&P 500 2013
  • 14. Strictly Confidential14Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Low Business Efficiency and Poor CG Negate Macroeconomic Advantages Source: 2013 IMD World Competitiveness Yearbook 44.8% 28.1% 11.1% 6.3% 54 53 49 42 27 37 40 51 37 25 20 21 11 32 30 40 Global competitiveness, BRIC countries (rank based on review of 60 countries) Overall Country Competitiveness Business Efficiency 2009 2013 2009 2013 2009 2013 2009 2013 32 30 20 52 Attitude & Values Management Practices 27 40 37 57 20 30 23 56 Credibility of Managers (2013 survey results; out of 60 countries; 1=best, 60=worst) Perception of CG Quality (as percentage of respondents who view CG positively) * Based on survey of 4,200 executives in 60 countries.
  • 15. Strictly Confidential15Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Russian Government Is Busy Managing Itself and State-Owned Assets Source: MSCI Market places (MoEx, NSD) State funds (NWF, RF, RVF, etc.) State banks (Sber, VTB, etc.) State-Owned Enterprises Fin institutions (VEB, Pension Fund) Public • Gazprom • Rosneft • Transneft • Alrosa • Inter RAO • RusHydro • Aeroflot • Rostelecom • Avtovaz • etc. Non-public • Railroads • RosTech • RosAtom • RosNano • OSK • OAK • Russian Post • RTRS • Sovcomflot • etc. Central Bank (FSFM - regulator) Government Judicial System Problem areas: • Formalistic universal approach to CG • Too many priorities lead to lack of focus • Lack of leadership in process administration • Lots of various vested interests • Lack of local corporate success- stories MSCI Russia composition State-owned Private 49%51% Owners and managers of Russian public companies should enhance their Corporate Governance Based on Best Practices, thus Setting Example for Government
  • 16. Strictly Confidential16Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Weak Corporate Governance Blocks Capital Flow into Russian Equities Source: CNN (June 7, 2013) “We explicitly adjust our target prices for corporate governance, political and macro risk. So for a company operating in Russia, we’re going to say it’s worth $10 broadly. Since it’s in Russia, it’s worth $8. So if it’s at $6, we’ll buy it. We’re actually pretty positive on Russia. It’s unloved and it’s cheap…” Patrick Ryan, Lazard “Russia is really a conundrum now, because it is so cheap in valuation terms, and it is extremely tempting. At the same time, we want to see some improvements in corporate governance. Now, if that happens, and I think it will, there is going to be a great opportunity in Russia”. Mark Mobius, Templeton
  • 17. Strictly Confidential17Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Content • Why Corporate Governance? • Current Situation in Russia • AMAG’s Approach to Corporate Governance • Our Team and Credentials
  • 18. Strictly Confidential18Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Better Perception of CG Helps Attract New Investors and Increases Valuations Source: 2012 Global Sustainable Investing Alliance review; July 2013 CG report by Sberbank 8,274 6,176 4,689 4,069 172 Negative screening Integrated approach Corporate engagement Positive screening Sustainability investing AUM of CG-sensitive investment funds, $bn (investment style considerations towards CG) Valuation Governance Discount ~20-30% Do not trust! Invest “Despite attractive valuations, the perception (and reality) of corporate governance risk tops most investor concerns when it comes to investing in Russian equities. Simply put, attractive valuations and superior growth characteristics of specific equities matter less when there is no trust and where fear of the unpredictable overshadows rational decision-making”. “Russian Corporate Governance - Embracing the Opportunity” Sberbank, July 2013 Better Governance More investors Higher share price Total $23trn x 3 Cumulative performance of Russian equities with different CG levels (Jan ‘00 = 100) 0 500 1000 1500 2000 2500 "Good" CG "Average" CG "Bad" CG 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
  • 19. 19 Strictly ConfidentialAneta McCoy Advisory Group Optimization of decision-making • Sustainable risk/return ratio • Motivation and alignment of interests • Fairness and ethics Robust management system • In-built organizational learning and development • Adaptability and crisis management I n t e r n a l Efficient CG System E x t e r n a l Ownership evolution • Current or future decoupling from controlling shareholder(s) • Interests of other stakeholders IR marketing tool • Attract responsible investors • Valuation premium/discount • Reputation and goodwill Attract management talent • Clear ‘rules of engagement’ for top-professionals • Release productivity and creativity of human capital Compliance • Legal and regulatory requirements • Timing and cost optimization • Effective risk management Investment in Efficiency of Company’s CG System is a Rational Managerial Decision
  • 20. Strictly Confidential20Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Commitment from Top Management and Dedicated Advisors Are Required to Achieve Results CorporateGovernanceSystem Short-term Strategic DirectIndirect Results of CG improvement Wider investor base Lower volatility Higher credibility Better reputation Higher valuation Higher MarCap Active and independent advisor with high experience and reputation Company and management’s aspiration to perfection Support from depositary bank and exchange
  • 21. Strictly Confidential21Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved To Be Successful, CG Improvement Must Be Incorporated into Company’s Strategy CG strategy helps determine key milestones and effectively allocate resources: 1. Include following elements: • Assessment of current CG framework • Benchmarking • Action plan development • Organizational structure and responsible management team • Monitoring system 2. Should be approved by Board of Directors 3. Long-term approach: • Action plan • Project manager (board level) and stream managers • Resources 4. External and internal communication: • Strategy announcement • Road map with key milestones • Dedicated CG roadshow • Thorough CG perception studyFormal Substantially InternalExternal Waste of time and resources Impractical Informationsources Project approach Internal External Disclosure CG improvement strategy Action plan for main issues resolving Short formal report Assessment survey
  • 22. Strictly Confidential22Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved AMAG Offers Companies Unique Set of Corporate Governance Services DevelopmentofCGSystem • Define scope, objectives and responsibilities • Allocate resources • Propose and discuss solutions • Implement solutions Improvement 6-10 quarters • Control procedures • Ongoing training • Proper motivation Monitoring Ongoing • Identify right peer group • Select criteria • Collect information • Analyze gaps • Identify interdependencies and priorities • Consider preliminary solutions • Prepare final report – reference for changes Assessment 2-3 months • Develop communication strategy • Ensure materials and support • Align execution with PR/IR activities • Collect feedback from investors Communication 8-10 quarters Training • For employees working on CG • Comprehensive set of materials • Tailor-made coaching sessions for top-managers/directors Pre-IPO services • Introduction to CG • Draft of corporate documents and CG system design • Launch of CG communication DR management review • Assessment of reimbursement’s economic value • Tendering and negotiations • Draft of agreements GeneralCG
  • 23. Strictly Confidential23Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Our Services: Assessment of Corporate Governance System Looking Forward • Remove “paradigm blindness” • Set CG improvement goals based on broad external perspective • Discover new governance trends • Understand implications of CG solutions and don’t repeat peers’ mistakes • Know your potential for improvement and learn the benefits of good governance Direction for Changes • Identify peers with excellent and recognized CG practices and solutions • Ascertain and assess gaps between Company’s CG practices and best-governed peers • Identify CG solutions and assess their applicability • Assess success rate of CG solutions applied by best-governed peers • Determine direction of CG improvement • Learn from and utilize peers’ governance experiences Competitive Advantage • Deeper understanding of Company’s positioning within the industry and among best practice peers (relative positioning) • Access to competitive intelligence on peers • Monitoring of competitors’ practices and solutions • Peers’ positioning versus one another • Evaluation of impact of governance changes introduced by peers Seehere:www.amadvosprygroup.com/services
  • 24. Strictly Confidential24Aneta McCoy Advisory Group Strictly Confidential Our Services: Corporate Governance System Improvement & Communications Seehere:www.amadvosprygroup.com/services Monitoring • Keep up with evolving global best practices • Keep optimizing business processes • Continue educating employees responsible for CG matters Improvement & Communications • Position the Company’s stock as a global investment opportunity • Achieve tangible & measurable results  Close the scoring gap to best practices  Increase overall institutional investor base  Attract A-level investors (SWF* and top-10 global asset managers)  Improve investor perception of existing CG system to predominantly ‘better’ in comparison to Russian peers and predominantly ‘average’ in comparison to international peers • Optimize business processes (faster throughput, lower cost) • Conduct dedicated events and road shows to demonstrate management’s commitment to improvement and communication Assessment • Understand the Company’s relative positioning within the peer group • Focus on perception of existing CG practices by institutional investors • Identify CG solutions based on best practices and assess their applicability
  • 25. Strictly Confidential25Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Our Services: Training for Corporate Governance Officers Trainers • AMAG’s experts posses unique knowledge of and expertise in Corporate Governance • We continuously monitor Corporate Governance trends, developments, and initiatives both in Russia and globally • Our mission is to share our Corporate Governance knowledge and experience with our Clients • We strongly believe that before considering any changes to the existing Corporate Governance systems and practices, it is utterly important to make sure that all people involved in the project “speak the same language” and understand the basic concepts and rules of Corporate Governance Learning process • Based on years of experience we have developed a comprehensive set of training materials (induction and advanced) • Normally, our trainees include representatives of legal, compliance, IR and PR departments, and the corporate secretary • Upon request, we can offer tailor-made coaching sessions for top managers and board members Seehere:www.amadvosprygroup.com/services
  • 26. Strictly Confidential26Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Expected Results • Direct value creation for shareholders • Potential substantial savings on reimbursement arrangements • Quality of additional services • Necessary resources for development of Corporate Governance and Investor Relations function Approach to Optimization • Coordinate objectives of management and controlling shareholders • Consider tender between competing depositary banks • Manage and oversee the process of requesting proposals (RFPs) • Negotiate with the selected bank(s) to achieve desired outcome • Ensure your depositary bank is absorbing the appropriate amount of fees, expenses, and charges, rather than passing them on to your company • Draft a deposit agreement and engagement letter with flexible terms serving the issuer and its shareholders’ interests Analysis of DR program • Review existing economic arrangements between the issuer, depositary bank, and key shareholders • Analyze the economic multiple of reimbursement contributions • Benchmark reimbursement contributions against similar DR programs in Russia and globally • Review quantity and quality of additional services provided by the depositary bank to the issuer and its shareholders Our Services: Depositary Receipts Program Review and Optimization Seehere:www.amadvosprygroup.com/services
  • 27. Strictly Confidential27Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Content • Why Corporate Governance? • Current Situation in Russia • AMAG’s Approach to Corporate Governance • Our Team and Credentials
  • 28. Strictly Confidential28Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved AMAG: Team of Dedicated Professionals with Excellent Track Record Aneta McCoy  Founder and Managing Partner  Former long-time head of Russian governance research at Institutional Shareholder Services Inc. (ISS)  Unique expertise in Corporate Governance as Aneta played a key role in formulation of ISS’ voting policies, vote recommendations, and CG ratings methodology Corporate Governance, Regulatory and Compliance, AGM and Proxy Preparation Alexey Subbotin  Partner  Former member of the Management Board at VimpelCom (NYSE: “VIP”)  Alexey was behind the stellar success of Golden Telecom (NASDAQ: “GLDN”)  Unique experience as a member of the Strategic Planning team of Barclays Capital in London  MBA at IESE Business School General Management, Corporate Strategy, Capital Markets, IR/PR and Corporate Governance Azat Nugumanov  Partner  Former long-time head of Bank of New York Mellon’s Depositary Receipts business development in Moscow  Unique expertise in DR program management; IPO and capital markets experience  Currently enrolled into University of Chicago Booth School of Business Depositary Receipts Program Management, DR Inspection, AGM Preparation Alexander Vetrov  Senior Advisor  Former Head of Project Management Office and Board Secretary at Russian Machinery Holding, where he was in charge of strategy development  Practical experience in M&A and post-merger integration  Unique experience in development of management reporting at VimpelCom Management, Strategy, Corporate Governance, Financial Analysis Experience & Core Competences
  • 29. Strictly Confidential29Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved AMAG - Credentials
  • 30. Strictly Confidential30Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved Disclaimer This presentation has been prepared for information purposes only in connection with a possible offering of AMAG’s services. This presentation must not be reproduced, distributed or published (in whole or in part) for any purpose. No representation or warranty is given with respect to reliability, accuracy, validity or completeness of information contained in this presentation, and no entity or person may rely on the contents of this presentation. Information contained in this presentation may be updated, supplemented, corrected or modified or significantly altered. Neither AMAG nor any of its shareholders, affiliated parties or representatives is obligated to update the information contained in this presentation. This presentation contains a number of forward-looking statements. Such forward-looking statements include statements regarding plans, tasks, goals, strategies, future events or results, and any other statements in relation to any of the facts that have occurred or may occur in the future. Forward-looking statements contained in this presentation are based on various assumptions. These assumptions are characterized by a high level of uncertainty and conventionality that are hard or impossible to predict and that are beyond reasonable control. This presentation is not intended for distribution or use by any person or organization which is a national of or is located in a place, state, country or another jurisdiction where such distribution, publication, accessibility or use would constitute a breach of statutory regulations or would require registration or licensing in respective jurisdiction. Neither AMAG nor any of its shareholders, affiliated parties, consultants or representatives bears responsibility (including responsibility arising from negligence or otherwise) for a loss of any kind incurred as a result of the use of this presentation or information contained therein or otherwise in connection with this presentation.