Main agenda item – the Corporate Governance Code.
Dmitry Medvedev’s opening remarks
Remarks by Central Bank Governor Elvira Nabiullina
Remarks by Moscow Exchange CEO Alexander Afanasyev
Remarks by First Deputy Prime Ministe Igor Shuvalov
Remarks by Deputy Prime Minister Arkady Dvorkovich
Transcript:
Opening remarks at the Government meeting
Dmitry Medvedev: Today we’ll review several important issues, including the Corporate Governance Code. In effect, it combines several basic principles and rules aimed at improving different aspects of corporate relations. These are ensuring shareholder equality, protecting the interests of investors, planning the work of the board of directors, following the rules for disclosing information and generally improving the performance of corporate governance bodies. The code is addressed to major companies that have access to public capital markets. Naturally, the Corporate Governance Code endorsed in 2001 does not fully conform to the numerous new regulations adopted in 2011-2012, or legislation on the security market and depository, so this work was necessary.
Many issues of corporate governance that are topical for our companies have long been resolved by their foreign counterparts. Naturally, our task is to borrow best practices from around the world and consistently introduce them in our business environment. Therefore, on the one hand, the new code takes into account international experience, including recommendations of the Organisation for Economic Cooperation and Development. On the other, it corresponds to the specific features of the Russian legislation and takes into account the practice of our commercial courts.
Dmitry Medvedev: I hope that the development of our business culture will make our financial market more competitive and trustworthy, and improve the operation of our companies. Public companies with state participation should make the most of this code.
I hope that the development of our business culture will make our financial market more competitive and trustworthy, and, most important, improve the operation of our companies. Public companies with state participation should make the most of this code.
Ms Nabiullina will speak about this in more detail. We’ll also hear from our experts.
I’d like to draw your attention to one more issue – preparations for seasonal fieldwork. Quite recently, at the 6 February meeting, we discussed preparations for the sowing season. Farmers need seeds, fertilizer, and equipment in good repair, fuel and money for all this.
We have almost 96% of grain seeds, including some 73% of standard seeds. This is one of the issues we should resolve. We’ll need 1.76 tonnes of mineral fertilizer for spring sowing, but only about 375,000 tonnes are available. Agricultural equipment is in better shape this year than last year. Farmers have enough motor fuel and lubricants, but the Ministry of Agriculture should monitor all these issues and prices almost every day.
Dmitry Medvedev: Most of all, agricultural producers need short-term loans before the sowing season. As of late January, banks provided them with about six billion roubles of loans. The Government must continue supporting agricultural producers. They will receive almost 35 billion roubles for crop cultivation and nearly 14.5 billion roubles without conditions.
Most of all, agricultural producers need short-term loans before the sowing season. As of late January, banks provided them with about six billion roubles of loans. The Government must continue supporting agricultural producers. They will receive almost 35 billion roubles for crop cultivation and nearly 14.5 billion roubles without conditions. So we have enough funds for the sowing season. After summing up results in late June, we may decide to provide additional support if needed, like we did last year.
Another item on the agenda concerns the results of monitoring the efficiency of universities in 2013. This is the second round, and it should help us get the right idea about the condition of higher education in Russia and incentivise our higher education institutions to improve their performance, because ultimately the competitiveness of our economy and the efficiency of our universities depend on this.
Compared to the first round of monitoring in 2012, during the past year the number of participants practically doubled, covering municipal and private educational institutions. More criteria were used to assess the performance of universities. Experts took into account the specific features of educational institutions that train students for creative professions, or jobs in medicine, agriculture, physical fitness and sports, transport, or the military and security services. Their job placement after graduation has become an important indicator.
Dmitry Medvedev: The 2013 monitoring revealed that the majority of ineffective universities are private – about 127 out of 135. They do require restructuring.
The 2013 monitoring revealed that the majority of ineffective universities are private – about 127 out of 135. They do require restructuring. The minister will speak about this in more detail. In any event we must continue improving monitoring methods and criteria. I’ll issue a relevant instruction based on the results of this meeting. However, it is already obvious that we have certain problems with the quality of professional training. Although many secondary school graduates go on to receive higher education, we still face a critical shortage of the modern professionals needed for the country’s successful development. Universities share a large part of the responsibility for this, including the specialties they offer their students. At any rate we’ll continue paying close attention to this issue and continue our monitoring with subsequent conclusions.
Okay, let’s move on to the first item. Ms Nabiullina, go ahead please.
Central Bank chairman Elvira Nabiullina reports at the Government meeting
Elvira Nabiullina: Mr Prime Minister, colleagues. We propose discussing our draft of the Corporate Governance Code. Mr Medvedev, you said that the adoption of the previous code in 2002 was vital for developing corporate relations and introducing corporate governance standards. Many later editions of the code were incorporated in listing requirements and provided the guidelines for the adoption of individual corporate governance codes by many companies. But it was a long time ago. Many countries upgrade their corporate governance codes every two or three years, while we haven’t done this for over ten years. This is why we have proposed not amending the code but adopting a new one.
The second slide shows the reasons behind and the prerequisites for drafting a new code. The most important of them are changes in Russian legislation. For example, takeover rules, buyout procedures, multistage dividend payment models and larger public corporation information disclosure provisions have been approved. All of this should be reflected in the corporate governance code. Corporate governance and legislative and regulatory compliance practices have also been improved, including following the board meetings of the Supreme Commercial Court.
One more reason is largely connected to the global financial crisis of 2008 and 2009, which highlighted the importance of risk management and internal control, as well as the fair remuneration of a company’s management.
Elvira Nabiullina: Russia’s economic development is changing investor focus. At the first stage of Russia’s economic development, our economy mostly attracted speculative investors because many of our assets were undervalued. But the focus has moved to the need to attract long-term investors – this is an objective necessity of our economic policy – who are concerned about the protection of their rights and the use of best corporate practices in Russia.
It is also important that Russia’s economic development is changing investor focus. At the first stage of Russia’s economic development, our economy mostly attracted speculative investors because many of our assets were undervalued. But the focus has moved to the need to attract long-term investors – this is an objective necessity of our economic policy – who are concerned about the protection of their rights and the use of best corporate practices in Russia.
In itself, the use of best corporate practices helps to reduce the non-market risk that investors cannot assess independently and that largely depends on legislation, legislative and regulatory compliance practices, and company policies in this sphere.
Slide No 3: The structure of the code. The code consists of two parts, one covering corporate governance principles and basic principles, and the other including the methods and mechanisms that should facilitate code implementation.
Elvira Nabiullina: One of the recommendations is to prevent shareholders from using methods of profiting from the company other than dividends and disposal value. We recommend the introduction of the electronic voting system, the provision of maximally full information to the general shareholder meeting, and methods for doing this so as to increase the efficiency of the shareholders’ contribution to the company’s governance and to reduce the cost of such contributions. In addition, we believe that it is necessary to prevent shareholders from taking actions that are aimed at damaging other shareholders or the company as a whole.
The code’s principles and recommendations are divided into themed chapters, which you can see on the right side of the slide. I’ll talk in more detail about the main changes made to the Corporate Governance Code now.
Next slide please. The first issue concerns shareholder rights. The key priority is to prevent actions that result in the unnatural redistribution of corporate control. Unfortunately, there have been cases of questionable methods and tricks to this end, such as non-payment of dividends on preference shares although a company has posted adequate income figures and there is no objective reason not to pay the dividend.
The second recommendation is to prevent shareholders from using methods of profiting from the company other than dividends and disposal value. There have been cases when majority shareholders used transfer prices and internal loans to controlling shareholders to receive additional profits instead of paying dividends, including to minority shareholders. This is not a best practice, to put it mildly. We recommend the introduction of the electronic voting system, the provision of maximally full information to the general shareholder meeting, and methods for doing this so as to increase the efficiency of the shareholders’ contribution to the company’s governance and to reduce the cost of such contributions. In addition, we believe that it is necessary to prevent shareholders from taking actions that are aimed at damaging other shareholders or the company as a whole. In other words, we must prevent the abuse of power.
Elvira Nabiullina: It is considered good practice when a company’s executive bodies are elected and terminated by the board of directors, not the general shareholder meeting, which has no instruments to exercise running control. It is the board of directors that should monitor the operation of the company’s CEO and the management board.
Another important issue is the role of the board of directors. It is considered good practice when a company’s executive bodies are elected and terminated by the board of directors, not the general shareholder meeting, which has no instruments to exercise running control. It is the board of directors that should monitor the operation of the company’s CEO and the management board.
Surveys have shown that publicly-held companies only convene 10-12 physical meetings of their boards of directors and 15-25 meetings in absentia per year. The proportion of meetings in absentia held by state companies is even larger. It is good practice when important issues such as the approval of the company’s priority businesses, major transactions and restructuring are discussed – I repeat, discussed – by the board of directors.
One more recommendation concerns the establishment of audit, remuneration and nominations (or personnel) committees at the boards of directors. Many companies already do this, but we suggest formalising this practice in the code. The code will set out the powers and spheres of responsibility for each committee.
Furthermore, independent directors should make up at least a third of the board. Our surveys have shown that a large part of Russian public companies comply or are working to comply with these recommendations. Chairs of the boards of directors should elect or appoint a senior independent director to coordinate the work of the independent directors, to increase their involvement in the work of the board, and to coordinate cooperation with the chairperson of the board of directors.
Let’s see slide 6 please. The next item deals with independent directors. The code envisages various requirements for the experience and professionalism of independent directors and independence in designating their status. At the same time, directors controlling over 50% of the votes, major partners whose obligations exceed 2% of the book value of the assets or rivals of any specific company cannot be considered independent directors.
Elvira Nabiullina: The level of bonuses and remuneration should create sufficient motivation for efficient work, to attract competent and skilled experts and to convince them to stay. For their part, members of the board of directors have the right to receive a fixed annual royalty and bonus, and it would be inappropriate to pay royalties and bonuses for their involvement in the work of separate boards of directors and committees.
The board of directors assesses the independence of prospective and current independent directors. Despite formal criteria regarding the affiliations of independent directors, the board of directors has the right to consider a director to be independent, at its discretion, after confirming that the affiliations of independent directors don’t affect their ability to make independent, objective and conscientious decisions.
And now let’s see slide 7 on bonuses and remuneration for management agencies please. The general principle implies that the level of bonuses and remuneration should create sufficient motivation for efficient work, to attract competent and skilled experts and to convince them to stay. For their part, members of the board of directors have the right to receive a fixed annual royalty and bonus, and it would be inappropriate to pay royalties and bonuses for their involvement in the work of separate boards of directors and committees. Situations where they are paid separately for this work, depending on the number of meetings, can hardly be considered a best practice. We can differentiate between certain royalties and bonuses, depending on the duties of the directors. We should determine whether he or she is a board chairperson, committee member or other chairperson or a senior independent director. Bonuses and royalties in the form of shares should only be made in line with the deduction period and not less than one year after the concerned person has resigned from the board of directors. This would make it possible to merge the financial interests of board members and shareholders. At the same time, people are divided on various alternatives that are widespread in our practical work because these alternatives have a number of negative implications, so to say, and these implications are a cause of disagreements between the interests of board members and those of shareholders.
Elvira Nabiullina: As for limiting the amounts of so-called “golden parachutes,” it should be noted that my colleagues and I have studied the foreign experience. It is suggested that we require certain restrictions so that these golden parachutes don’t exceed two fixed annual royalties and bonuses. This is in line with the 2009 recommendation of the European Commission. Even lower amounts can be stipulated for state companies per the law, but most importantly they should not exceed the above amounts.
As for limiting the amounts of so-called “golden parachutes,” it should be noted that my colleagues and I have studied the foreign experience. It is suggested that we require certain restrictions so that these golden parachutes don’t exceed two fixed annual royalties and bonuses. This is in line with the 2009 recommendation of the European Commission. Even lower amounts can be stipulated for state companies per the law (it’s being discussed now), but most importantly they should not exceed the above amounts. It should be noted that, considering the Russian experience and a number of cases, these amounts are much larger.
The next slide, number 8, shows how the code will be applied. This code is aimed at exchange-listed public companies whose securities are accessible by a wide scope of investors. As of now, this includes 271 issuers of company stocks and 334 issuers of bonds. For reference, 53 and 104 of them, respectively, have top tier listings. Therefore, some of the code’s clauses will be mandatory for companies that have or aspire to have top tier listings. I’m referring to the required number of independent directors on the board – at least 20% of the total but no less than three. The criteria used should be based on the code’s requirements: mandatory committees on audit, on remuneration, and on personnel, compulsory appointment of a corporate secretary, arrangements for internal audit, and a clear management-approved dividend policy.
Companies that currently do not comply with the new listing requirements in terms of corporate governance will be granted a two-year transition period during which they will be able to keep their listings.
Elvira Nabiullina: Public companies will also be asked to include information on their compliance with the code in their annual reports. A special methodology will be worked out for the self-evaluation of compliance with the code and for disclosure, so that the information provided will be structured, definite and comparable, and so users can analyze it.
Public companies will also be asked to include information on their compliance with the code in their annual reports. A special methodology will be worked out for the self-evaluation of compliance with the code and for disclosure, so that the information provided will be structured, definite and comparable, and so users can analyze it.
In conclusion, I would like to explain how this code will be developed and applied in the future. The plan is to have it considered and approved at the Bank of Russia Board of Directors, which has taken over the respective authority. The code has been much discussed at various platforms involving the concerned ministries and departments, and we believe that it is ready to be approved and applied.
The Bank of Russia will be looking at how the code is applied and conduct explanatory work on best practices for observing it. We plan to produce the first report on the code requirements’ application by Russian public companies in 2015, based on companies’ annual reports. These reports are to be released annually from then on. We also believe that special attention needs to be given to joint stock companies with large shares of government capital. They should model the best corporate governance standards for other companies. Here the government can act as a shareholder rather than a regulator to introduce these standards through its representatives on the board. We request issuing the relevant instructions to the Economic Development Ministry and the Federal Agency for State Property Management on this account. The Bank of Russia is ready to assist in this work.
Dmitry Medvedev: Thank you, Ms Nabiullina. We have agreed to listen to our colleagues from the expert community. Mr Afanasyev, proceed please.
Remarks by Moscow Exchange CEO Alexander Afanasyev
Alexander Afanasyev (Moscow Exchange CEO): Thank you. Mr Prime Minister, members of Government. Moscow Exchange actively helped to organise discussions of this code by Russian and foreign experts. That work lasted several years, including discussions by the expert community. We organised an OECD-Russia roundtable discussion, which was very important for implementing the best modern practices, including foreign ones, in this code. It was discussed by two RUIE commissions, the professional communities of corporate lawyers, corporate secretaries, internal auditors, independent directors, etc.
We did this for the following reason. Unlike other codes, for example codes that set out punishment for criminal conduct, this code provides examples of the best conduct, which we cannot formalise or enforce at all companies without exception. This is why it should be upgraded from time to time. It is a living document. It promotes the best practices that initially not all companies can comply with, but then it becomes an established and formalised standard, like in the case of the previous corporate governance code, and then there comes a time when we need to consider upgrading it.
Now is the right time for this. Ms Nabiullina has rightly said that investors have changed. They are not the aggressive investors who came to the Russian market 10 or 12 years ago and who closed their eyes to many things, including in the area of corporate governance, because our growth potential was huge. They no longer do this now. As a result, our companies have calculated that we are losing money compared to their foreign counterparts, because inadequate standards of corporate governance give foreign investors reason to undervalue them. Moreover, Russian investors have changed too. They have learned a lot during the previous crisis, have become much more observant, cautious and careful, and demand that Russian companies comply with best business practices. Therefore, the adoption of a new code is a pragmatic issue.
Alexander Afanasyev: “This is an advisory code, but there are economic tools for influencing companies and encouraging them to adopt and actively apply this code.”
It is true that this is an advisory code, but as Ms Nabiullina has said, there are economic tools for influencing companies and encouraging them to adopt and actively apply this code. The instrument which Moscow Exchange is using is listing. Companies are vitally interested in making it onto the top quotation lists, better still their premium segments, because this gives them access to many funds and money that will never flow to the companies listed on the lowest quotation lists. Moscow Exchange is therefore monitoring companies’ compliance with best practices. We issue dozens of reprimands regarding compliance with corporate governance standards every year, as a result of which some companies are delisted. We have to do this sometimes. This is an effective tool.
I believe that the time is right for this because the Government and the Central Bank have drafted important documents that will promote the development of the financial market and the creation of an international financial centre in Moscow, including documents on the regulation of pension funds, the use of insurance companies’ reserves, as well as changes in the taxation system that provide incentives for people to more actively trade on the stock market. Moscow Exchange has implemented several reforms of its trading infrastructure.
And lastly, we have approved new listing rules that are aligned with the new Corporate Governance Code, which has been recommended for adoption. As members of the expert community, we believe that this is above all a very good document that corresponds to Russian requirements and international standards. The time is right for adopting it, and so we recommend that Government members do so and subsequently promote its implementation through government representatives in the supervisory councils of companies with state capital and also possibly in their speeches to which the market listens very attentively. Thank you.
Dmitry Medvedev: Thank you, Mr Afanasyev. We’re already promoting this document because right now we’re discussing it in public and praising its merits, which it apparently has. Does anyone have any comments? Mr Shuvalov, go ahead please.
Igor Shuvalov: Mr Medvedev, ladies and gentlemen. I don’t what to repeat what the speaker and the expert have already said.
Mr Medvedev, although this issue is mostly within the competence of the Bank of Russia, the code was produced by concerted efforts on the part of the bank and ministries and departments. This is the first time the document looks like this. The Government has offered to endorse the Corporate Governance Code and, if it does, the bank’s Board of Directors will formally follow suit. Although the code contains recommendations, some of its provisions will become mandatory through the procedure of listing and the sale of various securities on the Moscow Exchange, which is becoming increasingly important. So in some respects the code will become a binding document.
At the same time I’d like to reassure my colleagues that the Ministry of Economic Development, the Ministry of Finance, the Ministry of Justice and other ministries and departments are actively working on mandatory standards of conduct, as we reported to you, Mr Medvedev. The Government is working on this in addition to the code, which is not prescriptive in nature and is largely based on moral and ethical principles.
The code pays attention to minority shareholders (a sign of respect). In this context the Government has drafted some amendments (we’ve just discussed these amendments to civil legislation with the Russian Union of Industrialists and Entrepreneurs) to give more protection to minority shareholders by introducing special norms on affiliation, for instance.
After the meeting you conducted, we’ve been instructed (I simply want you to know what we are going to do next) that norms on affiliation will be smoothed over. They won’t be as strict as they were after the expert community drafted their initial version. It was decided that the general provision on affiliation will be included in the Civil Code and special regulations that will apply to minority shareholders will be elaborated.
Igor Shuvalov: It was decided that the general provision on affiliation will be included in the Civil Code and special regulations that will apply to minority shareholders will be elaborated.
We’ll try to do this in spring, before the end of the Duma’s spring session, so that it can adopt the chapter on legal entities. In the meantime we’ll continue working on special norms, including those on joint stock companies.
Mr Medvedev, the draft protocol decision suggests approving relevant directives, and start applying norms contained in the Corporate Governance Code primarily at the companies with state participations. At the same time, civil and corporate legislation will acquire new norms of mandatory conduct that will create a completely different attitude toward the rights of minority stockholders, who are not worse than large shareholders and are just as important. The code emphasises the importance of all shareholders. It holds that they have equal rights and are equally important. Thank you.
Dmitry Medvedev: Thank you. Go ahead please.
Government meeting
Arkady Dvorkovich: Just a very brief proposal. I support what has been said. I think that some norms of the code should be applied not just within corporations but also by the owner, which is the state in the case of companies controlled by the state. So, maybe it makes sense to supplement the protocol decision with an instruction to the Ministry of Economic Development to present proposals on adjusting departmental acts that are based on regulations for the Federal Agency for State Property Management, which concern directives and other decisions on joint stock companies. In these cases such norms will operate not only within such companies and will conform to the code.
Dmitry Medvedev: Are there any more comments or proposals?
We should adopt the code. It suggests a model of conduct and is not prescriptive. So we are offering and promoting this model. As it was rightly pointed out, the draft decision reads that government bodies should prepare, according to the established procedure, directives to representatives of the interests of the state in companies with state participations so as to discuss the code’s provisions with them. We should always start with ourselves. In this case we are in charge of companies with state participation.
Dmitry Medvedev: I agree that apart from the norms of corporate governance, which are recommended, we should continue upgrading our civil legislation, including provisions on related party transactions and the institute of affiliation. This also applies to departmental regulations.
I agree that apart from the norms of corporate governance, which are recommended, we should continue upgrading our civil legislation, including provisions on related party transactions and the institute of affiliation. This also applies to departmental regulations. I think they should be reviewed once again. We could include into the decision an instruction to analyse delegated legislation to establish whether it conforms to our new norms. This would be good for our entire political system. Let’s do this and also endorse the Corporate Governance Code. Agreed?
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