AMAG: Company and Corporate Governance Presentation

Strictly Confidential Aneta McCoy Advisory Group Copyright©2013 AMAG Ltd., All Rights Reserved

Corporate Governance in Russia For the benefit of all stakeholders

Strictly Confidential 2 Aneta 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


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, globalization and 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 2013 1980 2000


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


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

Control Communications

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


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

Shar

eh

old

ers

Bo

ard

o

f D

ire

cto

rs

Man

agem

ent

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


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&Paverage

MSCIRussia

Actual CG Perceptionof 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


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

I m p

l e

m e

n t

a t

I o

n

Processes: matrix of

competences/ responsibilities complements

existing frameworks

information flows & reports

C o

m m

u n

I c

a t

I o n

Practical result

#1

Practical result

#2

Practical result

#3

Practical result

#...

P e

r c

e p

t I

o n

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.


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


“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 accountability has served us well. We could not have achieved our current level of national productivity 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 government except 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


Content






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%


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


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.


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


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


Content






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

Negativescreening

Integratedapproach

Corporateengagement

Positivescreening

Sustainabilityinvesting

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

20

01

20

02

2003

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

19 Strictly Confidential Aneta 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


Commitment from Top Management and Dedicated Advisors Are Required to Achieve Results C

or

po

ra

te

G

ov

er

na

nc

e

Sy

st

em

Short-term Strategic

Dir

ect

In

dir

ect

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


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 study Formal Substantially

Inte

rna

l Ex

tern

al

Waste of time and resources

Impractical

Info

rmat

ion

so

urc

es

Project approach

Internal External

Disclosure

CG improvement

strategy

Action plan for

main issues resolving

Short formal report

Assessment survey


AMAG Offers Companies Unique Set of Corporate Governance Services D

eve

lop

me

nt

of

CG

Sys

tem

• 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 G

en

eral

CG


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

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Strictly Confidential 24 Aneta McCoy Advisory Group Strictly Confidential

Our Services: Corporate Governance System Improvement & Communications

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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


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

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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

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Content






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


AMAG - Credentials


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.

AMAG: Company and Corporate Governance Presentation

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Transcript of AMAG: Company and Corporate Governance Presentation