Issues related to board meetings, shareholder meetings, all working groups and committees

An analysis conducted on the 2011 annual reports (based on the regulator guidelines) of 40 Russian companies listed under “A1” and “A2” on the Moscow Stock Exchange indicated that 75% of companies disclose information on Code compliance in the form proposed by the Federal Securities Market Commission (FSMC), as approved by decree no. 03-849/r dated 30/04/2003.  Less than 30% of the total number of recommendations according to the guidelines is used by 5% of companies and the rest 20% disclose partial information.

Problems of companies reporting on Corporate Code of Ethics compliance generally and selectively, for example the activities of committees attached to Boards of Directors

The essence of the problem
1. Reports on Code compliance are only guided by recommendations, which leads to incompleteness and distortion of actual data on companies’ compliance with the recommendations.

2. Based on Code compliance reports, issuers actively form Committees attached to their Board of Directors and satisfy the requirements of the Code. However, in practice, some committees are not set up, and their powers under the Code are not handed over to functioning committees, which can have a negative impact on the effectiveness of the Board of Directors with regard to certain aspects that are important to the company and its shareholders.

Examples of non-compliance or impact of the issues

3. It follows from the analysis of a sample that one of the leading recommendations of the Code not adhered to is that there be two committees attached to Boards of Directors. Based on the results of the analysis the risk committee attached to the Board of Directors (or any other committee, apart from the audit committee and human resources and pay committee, to which the duties of this committee are entrusted) does not function. 16% of the companies sampled entrusted the duties of the Risk Committee to the Audit Committee. This result is suggestive of two possible causes: 1) a low level of priority attached to the risk management system in key aspects of the Board of Director’s activities; 2) the Board of Directors does not consider the risk committee an effective instrument to develop such a system. The latter assertion in part is corroborated by a survey of members of a Board of Directors carried out by the company PWC in 2012 [22], according to which only 39% of respondents mentioned that their companies had a clearly-defined allocation of analysis and key risks monitoring duties between the Board of Directors as a whole and its committees, which might suggest that the role of committees is limited in risk management.
13. Only 10% of joint-stock companies have corporate conflict resolution committees. The Code does not restrict Boards of Directors in terms of creating various committees, and in practice many companies set up additional specialist committees for preliminary scrutiny of certain key issues. For example, interregional distribution grid companies have created technological connection and reliability committees.
14. The 100% implementation of point 28 of the regulator guidelines [3] with regard to supervision of the Audit Committee by an independent director raises some doubt surrounding the accuracy of reporting. A spot check of three companies with the most informative websites showed that actually the Chairmen of the Boards of Directors at “IDGC of Centre, JSC”, “IDGC of the Urals, JSC” and “IDGC of Centre and Volga Region, JSC” are members of a joint executive body of the controlling shareholder (“IDGC Holding, JSC”) of these companies. In spite of this the companies report compliance with this point.
15. Based on these factors the decision was made to check the compliance of the report information with the actual data on the Chairman of the Human Resources and Pay Committee of “IDGC of the North-West, JSC”. In the regulator guidelines [3] there is also a point regarding the supervision of this committee by an independent director. Admittedly, 13% of the sampled companies declared that they did not comply with this point. In fact, the Chairman of the Human Resources and Pay Committee of “IDGC of the North-West, JSC” in 2011 was an employee of the controlling shareholder of the company, but was not part of
the executive body. In this regard, it must be noted that in the report of “IDGC of the North-West, JSC” on Code compliance, in the corresponding column of the point was a footnote to the effect that, for the purposes of compliance with this point, the company has adopted the notion of an independent director within the meaning of article 83 of the Federal Law “On joint-stock companies”. Nonetheless, the hypothesis about the implementation of a uniform policy to report compliance with the Code‟s recommendations within the IDGC companies making up the “IDGC Holding, JSC” group of companies was not corroborated. An analysis of the “IDGC of South, JSC” report (a company which was not included in the sample since it is not A-listed), the controlling shareholder of which is also “IDGC Holding, JSC”, indicated that the accuracy with which the report was compiled depends on the judgement of the company employees compiling the report. “IDGC of South, JSC” reported that the Chairman of the Human Resources and Pay Committee was not an independent director since the head of the committee was an employee of the controlling shareholder.
16. It must be noted that corporate practice, including with regard to the experience of independent directors selected with the support of the Investor Protection Association (IPA), shows that strategy committees in grid, communications, retail, pharmaceutical and various other companies, as well as in the banking sector, carry out this role effectively to a sufficient degree. The issues considered at such committees are actually important, and their recommendations are implemented by the Boards of Directors. But such committees, as well as certain industry-specific technical committees, for the most part do not have the significant supervisory and control duties that they should have in accordance with OECD principles and best practices in leading jurisdictions.
The impact of the issues on the rights and legal interests of shareholders, the main reason for non-compliance/improper compliance with the requirements of the Code
17. This issue has an impact on the right of shareholders to receive clear and accurate information on the state of corporate governance, as well as on general confidence in the corporate reporting system.
18. The main reason for improper compliance with the requirements of the Code relates to institutional regulatory weaknesses, the facultative nature of the committees themselves and the low degree of accountability for presenting information that is not in-keeping with the actual situation.
Does the Code touch upon the issue?
19. The issue of reporting compliance with the Code is touched upon in the regulator guidelines [3]. The issue relates to observance of section 3, Chapter 1 and section 4.7 of Chapter 3.
Possible key mechanisms to resolve the issues
Reporting on Code compliance
20. Further attention must be paid by companies, shareholders, investors and the regulator to the issue of guaranteeing accurate and correct reporting by issuers on the subject of compliance with the recommendations of the Code. The list of provisions set forth by the Code within the regulator guidelines is not exhaustive. The study carried out on company reporting shows the need for a substantial modification of the guidelines.
21. The recommendations of Directive EC 2005/162/EC [6], based on the OECD Principles, provide for implementation of the “comply or explain” principle. Such a principle can only be effective provided that the corresponding obligations are duly fulfilled. FFMS Order no. 11-46/pz-n dated 4 October 2011 [24] only obliges issues to include information in their annual report on compliance with the Code in view of the aforementioned principle. But the form and quality of the report at the present time is only regulated
by the regulator guidelines without any corresponding obligations to follow them. Thus, there is a need to lay down a mandatory report format and to reinforce the administrative accountability of public company managerial structures with regard to disclosing information on compliance with the Corporate Governance Code in terms of administrative sanctions from the regulator.
Increasing the effectiveness of committees
22. Stipulate the existence and actual workings of committees within the listing and securities flotation requirements.
23. Recommend that listed companies adopt internal documents that clearly define the powers of committees attached to the board of directors based on best practices and requirements.
24. Should it not be necessary to set up a risks and conflict of interests committee, assign the corresponding powers to existing committees.
2.2.2. Disclosing information to general shareholders’ meetings
The essence of the problem
25. According to the law and the Code, shareholders of Russian companies are not able to obtain high-quality materials for shareholders‟ meetings in the most appropriate form and within timeframes to suit the shareholders.
26. Many Russian issuers disclose information on closing the ledger with a view to holding a shareholders‟ meeting on the date of its closure. In practice, there are instances when it is disclosed after the ledger closing date (drawing up a list of shareholders with the right to take part in the meeting).
Examples of non-compliance or impact of the issues
27. Companies frequently disclose information on forthcoming shareholders‟ meetings in strict compliance with mandatory requirements set forth in acting laws (notice of a meeting with an agenda). This issue only concerns A-listed companies to a lesser degree. From the sample of 40 A-listed companies, 10% do not allow shareholders to consult materials over the Internet. A selective analysis of the materials for annual general shareholders‟ meetings of 15 companies has shown that there is a second issue – the quality of the materials provided for shareholders‟ meetings. Only 1 company provides detailed explanations regarding the proposed draft decisions, exhaustive information on candidates for the Board of Directors, including information on their status (independent director, executive director, non-executive director), and comparative tables with corresponding explanations on proposed amendments to the Company‟s internal documentation.
28. 12.5% of the total number of A-listed companies are prepared to provide materials on the official company website at least 30 days before the date of the meeting. All of the other companies, as a general rule, do this at least 20 days beforehand. In practice, there are cases where the materials are provided 14 days before the date of the meeting.
29. Approximately 40% of A-listed companies give notice of the ledger closing on the date of its closure.
The impact of the issues on the rights and legal interests of shareholders, the main reason for non-compliance/improper compliance with the requirements of the Code
30. Shareholders, especially foreign investors, are in fact stripped of the possibility of exercising their voting right at general shareholders‟ meetings in terms of being able to scrutinise all of the materials and reach a reasoned decision on items on the agenda. The timeframes for providing the materials (including 20 days) do not allow foreign investors with an impressive chain of depositaries (international, regional and local), each of which also have their own internal voting timeframes, to participate in votes by correspondence having adopted a well-founded position regarding each point on the agenda.
31. Shareholders are deprived of the right to prepare for a shareholders‟ meeting and to formulate their positions on the votes in advance of the time at which the list of meeting participants is drawn up. Furthermore, if the agenda for the shareholders‟ meeting lists the payment of dividends, the date of closing the ledger, according to current laws, has an effect on the market value of the shares and on the interests of shareholders in terms of receiving their dividend pay-outs.
32. The main reason for complete non-compliance with the principles of the Code guaranteeing effective protection of the interests of shareholders is the compliance by a number of companies solely with the minimum technical legal requirements to disclose information.
Does the Code touch upon the issue?
33. The Code regulates the process for disclosing information whilst a company is making preparations for a general shareholders‟ meeting, but it does not give recommended timeframes for providing the information or a detailed description of the required quality of the materials.
34. The issue relates to compliance with the recommendations of section 1.4. of Chapter 1, section 1 of Chapter 2 and section 1 of Chapter 7 of the Code.
Possible key mechanisms to resolve the issues
35. The recommendation is that the Code be supplemented with guideline timeframes to disclose materials for general shareholders‟ meetings online at least 30 days before the meeting date. Supplement the listing requirements with compliance with the recommendations of the Corporate Governance Code in terms of timeframes to disclose materials for general shareholders‟ meetings online at least 30 days before the meeting date.
36. Ensure the inclusion of criteria to guarantee that high-quality materials are prepared for shareholders‟ meetings in the regulator guidelines on reporting with regard to compliance with the new Corporate Governance Code.
37. It has been suggested that a minimum timeframe be established to give notice of the ledger closing date at least 10 days before the ledger closing for the purposes of compiling a list of individuals with the right to participate in a general shareholders‟ meeting.