Portrait of an Independent Director in a Russian Company: Expectations, Reality, Guidelines

12 December 2007 — The news conference was held in the run-up to the Director of the Year 2007 awards ceremony.

The news conference featured addresses by:

Richard Matzke, independent director, OAO LUKoil, winner of Director of the Year 2006 as “Independent Director” — Work experience as an independent director in a Russian company
Alexei Rybnikov, general director, ZAO MICEX Stock Exchange — Monitoring compliance with requirements for corporate governance of issuers
Philip Gudgeon, Partner, PricewaterhouseCoopers — The Russian market needs independent directors
Alexander Filatov, managing director, Independent Directors Association (IDA) — Portrait of an independent director. Presentation of IDA research results

In the course of the news conference the participants discussed issues related to the significance and role of an independent director on the Board of Directors and current aspects of building and evaluating the efficiency of corporate governance systems in Russian companies. The results of the Portrait of an Independent Director research, conducted by IDA, were presented.

The research contains information on the development of independent directors as an institution in Russia, as well as a collective portrait of an independent director in a Russian company.

The research analysed information on 225 independent directors from 100 companies. Researchers examined both public and private companies from all major industries and the financial sector.

According to the data received by IDA analysts, the average number of independent directors per company for the whole sample is 2.56. A board of directors in a Russian company on average comprises 9 members, with the most common number of members (mode) being 11 and 9 (26% of companies).

As a result of the research, the following trends were identified (compared to similar research conducted in 2006).

Improvement of disclosure of information on independent directors and board committees;
Increase in the number of public companies presented in the research, from 51 to 73;
Increase in the average number of independent directors in a company, from 2.45 to 2.56;
Increase in the number of companies with board committees, up to 85% in 2007;
Increase in the share of foreign independent directors in Russian companies, from 40% to 52%.

“The growing significance and number of independent directors in boards of directors of Russian companies is one of the major indicators of Russia’s integration in global economics,” Philip Gudgeon said, addressing the news conference participants, “as it is hard to imagine such integration without the adoption of corporate governance standards ensuring transparency and the protection of shareholders’ interests. This trend is facilitated by the aspiration of a large number of companies to place their shares on Russian and foreign exchanges, or attract new investors and business partners. We as auditors and consultants note that exchanges, investors, investment banks and funds express their expectations regarding these standards in a more consistent way, which has a considerable impact on the corporate scenery in Russia.”

“The research has shown that the increase in the number of independent directors in Russian companies is mostly due to listing rules; investors’ expectations that their rights will be protected in the course of public and private placement; the necessity to create an effective board of directors when the owner stops executing day-to-day management,” Alexander Filatov said, commenting on the research results. “Today there are 225 independent directors (256 seats in boards of directors) in 100 leading Russian companies, and the share of independent directors in boards of directors is 28% on average.”

“It is evident from the results of the research that the concept of an independent director as an institution is advancing in Russia,” Philip Gudgeon said. “The fact that persons of different professions, age and nationality become independent directors indicates the complexity of their role and its significance. These persons are able to apply their long-term business experience in multiple areas, such as risks, control and audit, investments, budgeting and financial management on the whole, staff and compensations, strategy and efficiency of business processes. They look at all these issues from the standpoint of the shareholders’ interests and the company’s public mission. Companies’ entry into stock markets facilitates the increase in significance and number of independent directors, but I believe that independent directors’ importance is also understood in private companies, regardless of the requirements of stock exchanges and investors, which is also demonstrated by the results of the research.”