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The corporate governance practices in Russia shaped up in a number of known circumstances, such as:

• low transparency of Russian companies and the Russian market;
• insufficient regulatory framework;
• poor enforcement system, including inefficiency of many courts;
• specific motivations of managers and large shareholders: the main goal is not to increase the market capitalization, but to acquire control over the company or to strip assets and capital;
• low liquidity of most Russian corporate securities.

The fundamental problem in the area of corporate governance in Russia is the fact that company insiders (managers and controlling shareholders) abuse their position to the detriment of minority shareholders, including expropriation of assets through:

• transfer pricing;
• asset stripping ;
• capital dilution;
• restructuring/mergers;
• undue information disclosure (non-transparency).

In most researches of investment analysts no due attention is paid to corporate governance risks.

The Institute Mission - to help investors in identifying companies with best governance by means of:

• in-depth legal analysis of the company documents (Charter, minutes of general shareholders meetings and Board of Directors meetings, other by-laws);
  
  
• assessment of the company transparency;
  
  
• evaluation of corporate governance risks through the analysis of the company documents and information to be disclosed; financial statements and audit opinions, information about material corporate events;
  
  
• evaluation of the regulatory process, including analysis of possible legal defense of investors' rights in courts.

Investors' experience in Russia shows that successful investments in Russia require a more thorough analysis of corporate governance in Russian companies compared to other countries. Not all the investors are able to do it on their own, which created the need for a certain benchmark that would reflect the corporate governance quality in a specific company.

Corporate governance quality rating (CORE-Rating) is exactly the benchmark needed, reflecting specific risks associated with investing in Russian companies. In addition to the overall rating, separate sub-ratings are calculated for various corporate governance aspects. In addition, the Institute experts prepare reviews of corporate governance practices of companies, included in the corporate governance ratings.

The assessment of corporate governance quality is based on the proprietary methodology, allowing to make an objective evaluation of corporate governance practices. The methodology was developed by the experts of the Institute, with direct control and assistance on behalf of the Blue Ribbon Panel members, including renowned international and Russian corporate governance specialists, managers of largest investment funds, experts from the World Bank, the International Financial Corporation, the European Bank for Reconstruction and Development etc.

Key principles of the methodology:

(1)     Independence:  The Institute reviews companies at its own initiative, regardless of the reviewed company's willingness and/or direct request; companies do not pay for the rating;

(2)     Objectiveness: the rating is calculated so as to minimize subjectivity. The majority of methodology questions are formulated in such a way that the expert would not express his or her opinion, but would simply state certain facts or absence thereof;

(3)     Use of information available to any minority shareholders: The Institute owns small stakes in all companies included in the rating, and relies exclusively on the information available to any minority shareholders.

2  categories of source data are used for rating calculation:

 -          the information subject to mandatory disclosure; any additional information, publicly disclosed by the company; information, disclosed by regulatory authorities (the FCSM of Russia). A shareholder, acting legally, can make decisions only based on information publicly disclosed by the company, or other public sources (mass media, market analysts' reviews etc.). Consequently, the information which is unavailable to shareholders, is not used in rating calculation;

 -          companies' replies to written requests and phone calls from the Institute acting as a shareholder. The practice shows that owners of small share stakes face some serious problems trying to obtain information about the company, which requires time and resources to resolve. In order to evaluate the real attitude of the company towards its shareholders, the Institute as a shareholder sends various requests to the company and monitors replies.

Companies are assessed by 6 main parameters, each reflecting various corporate governance aspects:

• Information disclosure (terms and completeness of both public disclosure and materials provided upon shareholders' requests, etc)
  
  
• Equity structure (controlling groups, transparency of ownership structure etc.)
  
  
• Board of Directors and Executive Board structure (affiliations, remuneration, minutes of meetings etc.)
  
  
• Basic shareholders' rights  (the right to participate in governance of the company, the right for dividends etc.)
  
  
• Expropriation risks (asset stripping, transfer pricing, dilution of shareholder capital etc.)
  
  
• Corporate governance history (past violations of shareholders' rights, conflicts with regulatory authorities, financial reporting standards, audit opinions etc.).

The Institute's proprietary methodology allows to get a realistic picture of corporate governance in a company and identify potential problems investors may face.

The corporate governance in companies is evaluated on a quarterly basis; companies included in the rating represent all the key industries and account for over 90% of the capitalization of the Russian market.

 In whose interests do we work?

 Investors

 Investors need CORE-Ratings for a variety of reasons:

 -   to compare Russian companies by corporate governance risks;

-    to identify companies with suitable corporate governance standards for investment purposes.

The products we offer to investors is a competent opinion about corporate governance practices in a company, which will allow to make well-informed investment decisions and to evaluate corporate governance risks.

 Companies

For issuers the rating is a benchmark, which managers could use to evaluate their existing corporate governance practices and find ways to improve them, because good corporate governance is a key precondition for successful investment raising.

 What others have to say about CORE-Ratings

 Market

 William  Browder,
 Managing Director, Hermitage Capital Management (Moscow)
 (June 2001)

                   “This corporate governance rating system is based on company analysis from the standpoint of an ordinary minority shareholder, without access to privileged information and without any bias resulting from the company paying for the analysis. In my view, this is most objective method of analysis and produces valuable insights for investors”.

 
Government

 M. Dmitriev,
 First Deputy Minister of Economic development and Trade of Russia
 (April 2001)

                 “Already in 2002 a portion of mandatory deductions to the RF Pension Fund will be allocated to mandatory reserves. It is a rather significant amount - the investment resources volume exceeds 1 bln. US Dollars.
            In the perspective we view investments in Russian corporate securities as a key component of the future investment portfolio for placement of mandatory reserves of the accumulation pension system…
            Formation of the portfolio should be based on mechanisms of passive investing in an investment index built of Russian leading companies…
            We will add a new criteria to the basic aggregate investment index - information of various independent rating agencies, doing corporate governance rating in Russia. These are ICLG and Standard&Poor’s…
            Ratings by ICLG and S&P should be information sources of equal right to adjust the structure of the investment portfolio in the part of pension  reserves”…

 Rated companies

 A. Sinenko,
  Surgutneftegaz
 (April, 2001)

             “…The company is seriously concerned about the obtained rating. …An interesting mismatch: 25th place in the rating and, at the same time, serious interest on behalf of investors. I would formulate this question as follows: why is our market, i. e. investors who form it, looking at some other indicators instead of corporate governance?…Obviously, before the market starts looking at corporate governance ratings as well, nothing will change in this country, at least for our company…Of course, we are not happy with 25th place…”