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Board Issues Controlling Shareholders

Paul Oster presents: Board Practices in groups and concentrated/state-controlled entities.

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Board Issues Controlling Shareholders

  2. 2. “Privatization is typically associated with concentration of ownership and often occurs in countries with weak property protection. Therefore, conflicts of interests between the large shareholders and the minority shareholders are likely to influence the success of privatization….We document two channels through which large shareholders expropriate resources at the expense of minority shareholders. One is through related-party transactions, including transfer pricing of goods and services, assets sales, and extracting trade credits; the other is through dividend policies so that corporate resources are kept in the firm and under their control… Expropriation [behaviors] significantly reduce firm performance… Moreover... We demonstrate that large shareholders’ incentive to expropriate depends critically on the firm’s organizational form, which is shaped by the privatization process.” Privatization, Large Shareholders’ Incentive to Expropriate, and Firm Performance, Deng, Gan and He, 2007 2
  3. 3. “Waves of privatization in the past two decades have provided ample evidence of improved operating efficiency under private ownership. There are, however, notable exceptions. For example, it has been reported that privatization in Russia has failed to improve firm performance when the firms do not have significant ownership or control by outsiders” Privatization, Large Shareholders’ Incentive to Expropriate, and Firm Performance, Deng, Gan and He, 2007, at p.1 3
  4. 4. See, e.g., “TNK-BP minorities vs Igor Sechin: fair fight?” Financial Times, 13 September 2013 “Minority shareholders in TNK-BP got a raw deal when Rosneft…” TRUE? FALSE? Does it matter? 4
  5. 5. See, e.g., “Surgutneftegas reveals $15bn of treasury shares missing from books” Financial Times, 30 April 2013 “Treasury shares worth $15bn … have disappeared from the books of the Russian company, which reported annual results for the first time in 11 years…” TRUE? FALSE? Does it matter? 5
  6. 6. “Weaknesses in corporate governance are frequently cited among the primary risk factors facing Russian companies, considerably affecting their performance and market valuations” Corporate Governance Structures of Public Russian Companies, Deloitte & Touche CIS, 2012 6
  7. 7. • Things ARE getting better • Russia Is About to Enact a New Corporate Governance Code, That Adopts the LSE Style of “Comply or Explain” • The “overall” Laws, rules and regulations would appear to mandate GOOD corporate governance BUT, the Global Capital Markets still seem to be skeptical. Why? 7
  8. 8. 8 The types of transactions / situations that give rise to governance concerns re Russian controlling shareholders and SOEs 1. Minority shareholder rights 2. Related party and interested party transactions (M&A, transactions/contracts with daughter, sister, cousin companies; or companies where directors or major shareholders have ownership, asset sales) 3. Dividend policies 4. Election of directors by shareholders with 2% or more of shares and lack of formal board/ nominating committee role – WHO DO THE INEDs REALLY REPRESENT? 5. The smaller number of “outside” INEDs for very large companies 6. The definition of what an INED can be, and still be “independent” under Russian law, allows for more financial relationships than do the laws of UK, US, e.g. 7. Companies that list in “comply or explain” jurisdictions and are perennial “explainers” – will they EVER comply? 8. Is there an internal audit and internal control function reporting independently to the Audit Committee? 9. Are there a majority of truly independent outside directors staffing the Audit, Remuneration, Positions/Governance Committees?
  9. 9. 9 Some perceptions about Russian SOEs and some listed companies with controlling shareholders that persist even today 1. The view that corruption still exists in certain aspects of the operating model (particularly in procurement) – and that serious anti-corruption compliance programs are not effective 2. The view that for certain large SOEs with dominant market shares that there is serious value leakage and that the entities do not deliver the efficiency and value accretion – because there is little incentive to impose efficiencies that are driven by companies with diverse shareholders and effective boards 3. The view that board seats in certain of these companies are allocated to “cronies”, political allies, or rent-a-lords who “drop in” but are “absentee landlords” with little interest in creating the creative tension that will result in evolutionary change in board effectiveness and improved governance
  10. 10. The rent a lord culture is not adding value. The investor community does not see sufficient interaction by the elected INEDs of “controlled entities” with minorities. Also, too many INEDs are too closely linked to controlling shareholders. The stronger the INEDs, the stronger the board, and ultimately governance. 10
  11. 11. New UK FCA Premium Listing Regime to Force Controlling Shareholders to take account of Minority Shareholders’ Rights • Definition of “controlling shareholder” 30% or more • Requirement of “Agreement” to regulate the controlling shareholder • Guarantee the listed company’s “independence” • Related party transaction could require “independent shareholder vote” to approve • Board will have to be made up of a majority of INEDs • More “say” (dual voting procedure) for independent shareholders in the nomination and appointment of these INEDs WILL THIS LEAD TO NON-PREMIUM LISTEES FROM RUSSIA ADOPTING SIMILAR STANDARDS TO DEMONSTRATE GOOD GOVERNANCE? 11
  12. 12. What have other Russian majors done to try to address these concerns? • MTS use of “special committees” – even where the transaction may not raise to the level of an ITP. Committee exclusively of INEDs to review and approve major transactions where there will be public scrutiny. E.g., Comstar, MGTS, MTS Bank, etc. • Public commitments to best governance practices and “aggressive compliance and disclosure”. E.g., Uralkali (perhaps not the best poster child today 12
  13. 13. Is any of this relevant for Sberbank? • Can Moscow achieve global financial center status without banks like Sberbank and VTB leading the way? • Can Sberbank be an agent for transformational change in Russia by aggressively leading the charge for improved transparency and corporate governance in Russian? • Do the implicit charges of risk premia and reduced market capitalization result in both societal “charges” for all Russian companies seeking access to the capital markets, and, and potential direct and indirect negative drivers to the banks deal flow and revenue upside? 13
  14. 14. How does Sberbank self-score its reputation for corporate governance against these issues? 14