This document discusses issues related to corporate governance practices in companies with concentrated ownership or state control in Russia. It notes that conflicts of interest are likely between large shareholders and minority shareholders due to weak property protection. Large shareholders may expropriate resources through related party transactions or dividend policies that keep resources under their control. Weak corporate governance is cited as a risk factor for Russian companies. While laws and regulations mandate good governance, global markets remain skeptical about issues such as minority shareholder rights, interested transactions, board independence, and perceptions of corruption. Leading companies have tried addressing these concerns through best practices commitments and independent committees.

1. BOARD PRACTICES IN GROUPS AND
CONCENTRATED / STATE –
CONTROLLED ENTITIES
1

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. “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. 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. 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. “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. • 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
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
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. 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. 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. 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. 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. How does Sberbank self-score its
reputation for corporate governance
against these issues?
14