By Stephen Deane
Senior Program Officer for Eurasia
February 6, 2001

Presented To:
Institutional Shareholder Services
A Thomson Financial Company
1455 Research Blvd.
Rockville, MD

It’s a pleasure to be here.

The Center for International Private Enterprise is a not-for-profit affiliate of the US Chamber of Commerce. We are a non-governmental organization, and our mission is to support market reform and democratic development in other countries around the world. Corporate governance has become one of our key themes.

Let me begin by talking about the challenges that we see in places like Russia, and you can judge to what extent they apply to other countries and regions that you cover.

Instead of an open market economy, we see too much crony capitalism. It’s an unholy alliance between government and business elites, both nationally and at the regional and local levels. The result is corruption, an unfair playing field, and a lack of open competition. Corporate governance abuses have been widespread. Onerous taxes, regulations and inspections cause companies to hide their assets and force many into the shadow economy. Savings mobilization is another challenge, because most Russians rightly trust their mattresses more than the banks. Foreign investment is low, and capital flight is high. No wonder, then, that Russian businesses tells us that high taxes and lack of access to credit are their top problems.

We have found that corporate governance — with its emphasis on transparency, accountability and fairness — is an effective way to address these challenges.

Our approach is grass-roots, bottom-up and advocacy-based. CIPE does not work directly with government bodies, nor do we work with individual companies. Instead, we work with business associations, think tanks, and shareholder rights organizations that are building pressure from below for reform.

Let me tell you about some of our projects in corporate governance, beginning with a global overview and then focusing on Russia.

We have published this book In Search of Good Directors, and translated into a number of languages. The book credits ISS for its assistance.

We are also designing a curriculum on good corporate governance.

In Asia, we have programs in Indonesia and the Philippines. We are also active in Egypt, Latin America, and numerous countries in Central and Eastern Europe and Eurasia. In Slovakia, for instance, a think tank called the Center for Economic Development is doing surveys of the quality of corporate Annual Reports, focusing both on what they do say and the gaps of information that should be disclosed but is not.

Let me give you some more detailed information about projects in Russia. In doing so, I will try to give you a flavor what we hear and what we sense are the attitudes and mentality of businesses and stakeholders.

In February 2000, we held a seminar in Ekaterinburg. That’s a formerly closed city 900 miles east of Moscow, in the Ural Mountains at the border of Europe and Asia. We believe that we hit upon a successful model, because we really got Russian participation and buy-in in this event. We worked with two local shareholder rights groups, the Center for Collective Investment and the Public Committee for Shareholder Rights, who organized the event and got a fantastic turnout. They insist that we really introduced the concept of corporate governance to the region, and they have done some good follow-up since our meeting.

Nearly all of the speakers were Russians themselves, some of whom were experts from Moscow. There were just a few Americans crazy enough to venture most of the way to Siberia in the middle of the Russian winter. Dan [Konigsburg of ISS] was one; Willard Workman, Vice President of CIPE and of the US Chamber of Commerce was another; a representative from a global investment fund was a third; and I was the fourth.

We had an audience of some 90 people for the day-long conference. Our seminar, plus some other interviews that we did, generated lots of media coverage.

We could really see that the Russians were living through a transition period, in which vestiges of the old mixed curiously with the new. At a dinner gathering, our hosts supported their arguments by quoting Marx. At the seminar itself, a manager of the local airport was trying to get foreign investment. But our American institutional investor declared that he would need a 25 percent annual US Dollar-adjusted Internal Rate of Return even to consider an investment in Ekaterinburg. The American was being generous, since that is his institution’s general rate. But in Russia, where they’ve been burned, the true rate would be at least 40 percent. But even the lower figure shocked our Russian friend from the airport, who declared, "That’s a bourgeois rate, and we don’t want your money." He didn’t seem to understand that the higher the risk, the higher the demand on return.

There was also a fairly young woman who worked for the privatization ministry, and she tried to persuade us that having the local government as a significant shareholder was the best possible guarantee anyone could expect for the value of a company.

But there were also some Russians with much better informed and more Western-oriented views. One man had succeeded in broadening his perspective by trips to Europe and by cultivating business ties with companies in Vienna.

More recently, we held a seminar in Moscow that grew out of our work with Russian Chambers of Commerce and Industry. Some of the regional chamber leaders came to us and said that they wanted to learn more about corporate governance. So we put them together with our network of grass-roots shareholder rights groups, and we brought Dan in to provide an overview of the subject.

The discussion consisted almost entirely of Russians talking to Russians, and the discussion was quite lively. The chamber executives are pragmatic people, and they asked lots of good, pragmatic questions. For example, a chamber executive from Yaroslavl explained that he was being called in to mediate in a dispute at a local plant. After listening to our seminar discussion, he came to the idea that the local dispute could be resolved by placing an independent director on the board. But then he and other participants raised a number of questions about independent directors:

• Who proposes them — shareholders or management?
• Can an independent director own shares? If so, is there a limit?
• If one group of shareholders supports the nomination of one candidate, can that person really be independent?
• One participant even asked whether the independent director could be the chairman of the regional industrial committee.

We also have been cooperating with the OECD. You’re probably aware of the OECD Corporate Governance principles. To promote those principles, the OECD has been holding a series of semiannual roundtable discussions in Moscow, which CIPE co-sponsors. The OECD is great at bringing experts from around the world, especially from Europe, together to discuss topics like corporate governance. CIPE’s contribution has been to make the discussion more inclusive by sponsoring the participation of Russians — who represent both the regional grass-roots organizations and some of the leading national organizations. Dan also has spoken at these roundtables.

In addition to organizing our own programs, we give grants to indigenous organizations for specific projects. For example, we have given grants to the Investors Protection Association for several pioneering projects. They have launched Russia’s first website dedicated exclusively to corporate governance, and one of a very few that are independent of a particular company, such as the Troika Dialog brokerage firm. You can find the site at www.corp-gov.ru in Russian, or www.corp-gov.org in English (though the English content has not yet caught up with the Russian version).

The content of the site includes the following:

• A data base of laws and regulations, which has a wealth of information.
• A weekly digest on corporate news, drawn from Russian media sources, on such topics as restructurings, plans to issue ADRs, privatization, and upcoming board meetings. Companies covered so far including the energy monopoly UES, gas monopoly Gazprom, Norilskii Nickel, and Lukoil.
• Information about violations of shareholders rights and shareholder activism. Information includes analysis, opinions of shareholders, court decisions and law suits, and documents related to the conflicts.
  
• Information about independent directors, including hyperlinks to the websites of some of the directors themselves, like Boris Fedorov, the former Finance Minister. IPA also plans to post information about companies that the independent directors obtain.
• In an effort to reach out the rest of the world, the site also has a section on international experience, and this is something you might wish to pursue directly with IPA.
• You may also be interested in a section on leading companies that provide support services corporate governance. IPA plans to invite law firms, insurance companies, consulting companies, and recruitment agencies to place information on the website.
• The site has conducted interactive discussion forums and plans to expand this section significantly in the coming year. Topics will include conflicts between shareholders the management; new legislation; court practices; and voluntary corporate initiatives.
• Last but not least, the site announces IPA’s first annual best and worst managers of the largest Russian companies, based on a poll of IPA members using eight criteria ranging from financial performance to corporate governance issues.

Any guesses?

The winners — the best managers — were the heads of LUKoil (President Vagit Alekperov) and Severstal (General Director Alexei Mordashov.)

Anatolii Chubais, the Chief Executive Officer of Unified Energy Systems, was voted the worst manager. He received particularly poor ratings on protection of minority rights and overall management of the company.

Since it was launched last fall, the site has attracted some 7,000 viewers. That’s an impressive audience of 112 viewers per day, and they are spending an average of more than 14 minutes on the site. So our conclusion is that interest in corporate governance is strong and growing in Russia, as elsewhere around the world.

Now let me mention several projects that focus on independent directors.

In Russia, the stock markets are weak, and the shares of many companies are illiquid. That makes it hard for investors to vote with their feet. The alternative is to improve company performance by targeting the Board and by placing independent directors on it.

The Investors Protection Association is engaged in a project to place independent directors on boards, and you can read about it on their website. We’re not involved in that project, but we did suggest a related project to IPA — to conduct a survey of independent directors in Russia. With our financial support, IPA and the Russian Managers Association are nearing completion of this survey. They have designed questionnaires and sent them to a target group of some 700 persons: more than 600 chairmen and CEOs representing more than 300 large Russian corporations, plus some 80 institutional investors that have nominated independent directors.

Respondents so far include Lukoil, Kamaz, Norilskii Nikel, SvyazInvest, and Vympelkom.

The survey will result in two things: first, a comprehensive list of independent directors in Russian corporations; second, a picture of how major Russian corporations understand Boards and independent directors. For example, they will be asked to rate major advantages and disadvantages of having independent directors. Companies also will be asked to agree or disagree with a list of criteria for independent directors, and to add their own criteria. Major investors also will be asked to comment on major incentives and disincentives for investing.

In another pioneering project, we are working with a Moscow foundation to establish professional standards for board Directors. Here our partner is the Institute for Stock Market and Management (ISMM). ISMM has positioned itself as a key resource for the Federal Commission on the Securities Market in its efforts to draft a Russian corporate governance code.

In our project, ISMM seeks to fill a vacuum in Russia, which has no required standards or certification of Board members. ISMM is drafting standards as well as a pilot examination that could be used to certify corporate directors. In addition, ISMM is writing a curriculum and will test it out in a pilot course for 25 directors, both executive and non-executive. ISMM will then make recommendations on introducing a professional certification program for corporate directors. That project is just getting underway. ISMM hopes it will lay the groundwork for its eventual goal of helping to create a Russian Institute of Directors, modeled after the UK Institute of Directors.

Besides using its own experts, ISMM will assemble a team of reviewers to provide their advice on the standards. ISMM plans to draw on the resources of Troika Dialog, Standard & Poors, which has just started a corporate governance ratings service, PWC, the law firm Baker & McKenzie, and the Moscow International Currency Exchange, or MICEX. If any of you wanted to get involved, ISMM would welcome your input.

So we see that Russia has two strong, independent organizations that are heavily involved in corporate governance, with a focus on corporate boards and directors. In our experience, both groups have shown themselves to be highly professional and to deliver excellent results.

Last, and very briefly, let me mention a grant we have given to the Ryazan Chamber of Commerce and Industry to build an umbrella council that includes all the local stakeholders. They will try to work out a consensus on best practices, drawing in part on their work on international accounting standards. The national chamber has told us that it would then like to use the Ryazan chamber as a model and follow up with other chambers around the country.

In conclusion, let me step back and ask why are we doing this; why are we engaged all of these projects. We believe that promoting corporate governance is one of the best ways to both an open market economy and a democracy. You know better than I how sound corporate governance can translate into improved business performance. But let’s recall the challenges that countries like Russia face — lack of fair competition, lack of transparency, lack of capital and credit. Corporate governance directly answers these challenges. At the same time, corporate governance promotes democratic values — disclosure, accountability, fairness, minority rights, and rule of law.

Earlier, I gave you a couple of examples of old thinking that we still encounter. But I hope you will agree that projects described here represent rays of hope. And the indigenous organizations that design and carry out projects of this caliber also represent rays of hope.

In Moscow, Dan cited a quotation that compares boards of directors to quantum particles — they behave differently when observed. Our approach is something more than observation — but it’s quite different from trying to dictate or impose our views. Instead, we are working with indigenous groups so that they themselves can promote reform. We believe that the result will be a change in the way a country and its institutions and businesses and individuals behave.

Thank you.