Corporate Governance and Sustainability What Institutional Investors Want

Corporate Governance and Sustainability: What Institutional Investors Want Featuring the 2006 ISS Global Institutional Investor Study on Corporate Governance Presentation to Russian Delegation April 24, 2007 Enabling the Business of Corporate Governance

Opening Why is corporate governance important? Opening Quotation “Unless companies start paying more attention to corporate governance, emerging markets could remain stuck in the backwaters of global finance for years to come. ” -- Wall Street Journal, Nov. 8, 2000 © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 2

Agenda § Introducing ISS § The 2006 ISS Global Institutional Investor Study § Case Study: China – The Next Global Hot Spot for Corporate Governance? § Emerging Trend: Environmental, Social and Governance (ESG) Integration © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 3

Introducing ISS has been the corporate governance industry leader for 20 years Institutional Shareholder Services § Founded in 1985 — with more than two decades of experience § Recognized industry leader § More than 1, 700 Institutional Investor clients and 29 global custody clients worldwide § ISS is the leader is “end-to-end” market solutions § 550+ employees in twelve offices in the U. S. , Brussels, London, Paris, Amsterdam, Melbourne, Manila, Toronto and Tokyo § Research and proxy distribution coverage of more than 35, 000 shareholder meetings spanning over 115 global markets © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 4

Introducing ISS Risk. Metrics Group Acquired ISS in 2007 Risk. Metrics Group Risk. Metrics, Inc. Risk Analysis, Research and Modeling Insight Expertise Relationships Institutional Shareholder Services, Inc. . Governance Research and Proxy Voting §Risk. Metrics was spun off from JP Morgan in 1998 §Industry-standard analytics with leading-edge technology §World’s largest independent provider of risk management solutions © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 5

Introducing ISS Combined companies have more than 2, 100 clients on six continents… Global Reach Europe 28. 7% United States/Canada 61. 2% § Asset Managers § Pension Plans § Insurance Companies § Central Banks § Hedge Funds § Funds-of-Funds § Corporate Treasuries § Trading Banks § Lending Banks § Prime Brokers © 2007 Institutional Shareholder Services Inc. Middle East/Africa 1. 5% Asia/Australia 7. 7% Latin America 1% www. issproxy. com April 24, 2007 6

Introducing ISS … and more than 800 employees in 12 countries Global Reach Office locations: § New York headquarters § Rockville, Maryland § Washington, D. C. § Chicago § Toronto § London § Paris § Frankfurt § Brussels § Amsterdam § Tokyo § Singapore § Melbourne § Manila § Research & Development Centers: – – Cambridge, Mass. Ann Arbor, Michigan Norman, Okla. Geneva, Switzerland © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 7

Introducing ISS Our coverage of Russian companies has more than doubled in the past three years Increasing Coverage © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 8

Introducing ISS Our coverage includes the following Russian companies Top Russian Companies § Lukoil Oao § Gazprom OAO § Mobile Telesystems OJSC § Vimpel Communications OJSC § MMC Norilsk Nickel § POLYUS ZOLOTO OAO § Surgutneftegaz AO § CTC Media Inc § TMK OAO § Unified Energy Systems RAO © 2007 Institutional Shareholder Services Inc. § Novatek OAO § Sberbank of Russia § Wimm-Bill-Dann Foods OJSC § Mechel Steel Group OAO § Sistema JSFC § Novolipetsk Steel (frmly Novolipetsk Ferrous Metal Factory) § Tatneft OAO § Rostelecom § Comstar United Telesystems § Severstal www. issproxy. com April 24, 2007 9

Agenda § Introducing ISS § The 2006 ISS Global Institutional Investor Study § Case Study: China – The Next Global Hot Spot for Corporate Governance? § Emerging Trend: Environmental, Social and Governance (ESG) Integration © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 10

Sub-Agenda for the Global Investor Study § Introducing the 2006 ISS Global Institutional Investor Study § From Compliance Obligation to Business Imperative § The Globalization of Corporate Governance § Global Concerns: Four Fundamental Issues § One Size Doesn’t Fit All: Where Investors Differ © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 11

Introducing the 2006 ISS Global Institutional Investor Study We conducted 322 interviews, mainly in person, with investors representing a wide variety of regions and views © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 12

Introducing ISS Only ISS provides an end-to-end set of solutions to meet all corporate governance and proxy voting requirements • Policy development • Client-specific custom policies • U. S. research • International research • Client-specific custom analyses © 2007 Institutional Shareholder Services Inc. • Standard vote recommendations • Full agent voting service • Client-specific custom vote recommendations • Votex platform • Turnkey service for disclosing vote policies and voting records • • CGQ Voting Analytics SCAS Sustainability Risk Reports • ESG Data Feeds • M&A Insight www. issproxy. com April 24, 2007 13

Introducing the 2006 ISS Global Institutional Investor Study The ISS 2006 Global Study finds investors voicing five major themes highlighting the value of corporate governance Institutional Investors Voice Five Major Themes 1. Corporate governance has shifted from a compliance obligation to a business imperative: – – – First came compliance But investors are seeing corporate governance in a new light, with competitive and portfolio advantages And they expect the importance of corporate governance to grow 2. Corporate governance is global: – – There are universal views on the importance of corporate governance, and Global forces are shaping corporate governance practices 3. Investors globally share four fundamental concerns: – Better boards, aligned executive pay, improved and trusted disclosure, and bottom-line company and CEO performance 4. One size doesn’t fit all investors: – – Meaningful differences appear across regions and types of investors Corporate social responsibility offers a case study of contrasting views 5. Investors face undeniable challenges in corporate governance: – Yet investors are adopting innovative approaches to meet the challenges and, in the best of cases, are turning costs into profit © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 14

Sub-Agenda for the Global Investor Study § Introducing the 2006 ISS Global Institutional Investor Study § From Compliance Obligation to Business Imperative § The Globalization of Corporate Governance § Global Concerns: Four Fundamental Issues § One Size Doesn’t Fit All: Where Investors Differ © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 15

1. From compliance obligation to business imperative Corporate governance has shifted from a compliance obligation to a business imperative Compliance Obligation to Business Imperative § First Came Compliance: Compliance requirements, which were raised in response to well-publicized corporate scandals, provided the catalyst behind the increased importance of corporate governance § Shift to a Business Imperative: Investors increasingly seeing corporate governance in a new light – as a business imperative – due to: – Recognition of ownership responsibilities – “it’s the right thing to do” – Increased competitive requirements – Enhancement of portfolio value § Forecasted Increased Importance: 63% of investors globally expect increased growth in the importance of corporate governance for their firms over the next three years © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 16

1. From compliance obligation to business imperative 63% of investors believe corporate governance will become even more important in the next three years © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 17

1. From compliance obligation to business imperative Scandals have receded as drivers of corporate governance importance, but business-related drivers have grown © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 18

1. From compliance obligation to business imperative Most investors also believe that corporate governance offers business value, with very few seeing it as merely compliance § “Just because it's hard to quantify doesn't mean it cannot be a competitive advantage. ” – U. S. investment manager § The focus on corporate governance has increased significantly in the last couple of years because of new proxy voting regulations. Now as more data comes in, we are beginning to look at it as possibly a good investment and performance tool. ” – U. S. mutual fund § We have materially outperformed the S&P 500 over the last decade. ” – U. S. activist investor © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 19

Sub-Agenda for the Global Investor Study § Introducing the 2006 ISS Global Institutional Investor Study § From Compliance Obligation to Business Imperative § The Globalization of Corporate Governance § Global Concerns: Four Fundamental Issues § One Size Doesn’t Fit All: Where Investors Differ © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 20

2. The globalization of corporate governance Corporate governance is global – it’s not just limited to Anglo-American markets but is important everywhere Corporate Governance Is Global § Universal Views on Corporate Governance Importance: Investors share strong views on the value of corporate governance regardless of their region § Global Forces Shaping Corporate Governance Practices: Globalizing forces exert a pull that shapes and accelerates the development of corporate governance in markets throughout the world: – Spread of governance standards, such as § The U. S. Sarbanes Oxley Act § Pan-European standards § Shareholder voting on remuneration plans has spread from the U. K. to the Netherlands, Sweden, and Australia – and now has shareholder proponents in Switzerland the U. S. – Increase in cross-border proxy voting § Investors use the power of the ballot box to improve standards in global markets © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 21

2. The globalization of corporate governance A majority of investors in all markets studied consider corporate governance very or extremely important to them § Answers range from a high of 90% of Chinese investors, to a low of 61% in continental Europe § Percentage of investors saying that governance is not important is limited to single digits in every market studied § Majority of investors in every market also believe their relationships with portfolio companies have become more constructive © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 22

2. The globalization of corporate governance Investors themselves are agents for change – and are interested in the views of overseas investors § The U. S. , Canada, and Australia are the most likely to vote global – and we also find anecdotal evidence of increasing crossborder voting in markets from France to Australia § “Before, we had a proxy committee but did little voting. Starting in January 2005, we have a global committee. ” – Dutch asset manager § “We are interested in learning…how overseas investors’ views of Japanese issuers might be changing. ” – Japanese asset manager © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 23

Sub-Agenda for the Global Investor Study § Introducing the 2006 ISS Global Institutional Investor Study § From Compliance Obligation to Business Imperative § The Globalization of Corporate Governance § Global Concerns: Four Fundamental Issues § One Size Doesn’t Fit All: Where Investors Differ © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 24

3. Global concerns: four fundamental issues Investors globally share four fundamental concerns about corporate governance over the next three years Four Fundamental Concerns § Better Boards: The number one priority in all markets except Japan – includes board structure, composition, and independence as well as the process of nominating and electing directors. § Aligned Executive Pay: One of the top three priorities in all markets studied except Japan. While significant numbers of investors believe that pay should be reined in, their key concern is pay for performance. Investors want boards to disclose the performance metrics and demonstrate the links justifying executive compensation. § Improved and Trusted Disclosure: Financial reporting is one of the top three priorities in most markets. More broadly, more than seven in 10 investors globally cite improved disclosure in all areas, not just financial reporting, as an improvement they most want. § Bottom-line Performance: Institutional investors increasingly view corporate governance as a business imperative – and they rank company and CEO performance among the top three issues in four of seven markets studied. © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 25

3. Global concerns: four fundamental issues These four concerns stand out from a longer list of issues that institutional investors identified © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 26

3. Global concerns: four fundamental issues From board accountability to pay for performance, investors explain why the rank these four issues their priorities Better Boards: If you get the board right, the rest takes care of itself. ” – U. K. investment manager Aligned Executive Pay: § “The compensation committees on most boards are out of touch with reality. ” – U. S. hedge fund § “Executive compensation is a razor-like ray that gets shareholders into the boardroom…This is where you see whether directors in fact are independent in action. ” – U. S. pension fund Improved and Trusted Disclosure: § After the scandals and the subsequent catching-up in the financial reporting area, problems still persist. It’s the basics of corporate governance to have good reporting…” – Belgian investment manager Bottom-line Performance: § “[Company and CEO performance] is the bottom line for everything. ” – U. S. investment manager © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 27

Sub-Agenda for the Global Investor Study § Introducing the 2006 ISS Global Institutional Investor Study § From Compliance Obligation to Business Imperative § The Globalization of Corporate Governance § Global Concerns: Four Fundamental Issues § One Size Doesn’t Fit All: Where Investors Differ © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 28

4. One size doesn’t fit all investors – investors also reveal differences in their views on corporate governance One Size Doesn’t Fit All § Markets Exhibit Distinct Differences: While there are significant similarities in how institutional investors view corporate governance on a global basis, meaningful differences appear across regions on these issues: – – Collective engagement, an emerging trend in some markets Protecting minority shareholders, especially where family firms and parent corporations prevail Claiming securities class action settlements, with interest spreading from the U. S. The Australia-New Zealand market: a chance to leapfrog? § Where You Sit Influences Where You Stand: Patterns emerge from the ISS Global Institutional Investor Study revealing profiles of each type of investor group studied: – – Pension Funds: The True Believers Mutual Funds: “Reluctant Activists” Revisited Hedge Funds: The New Force Investment Managers: A Microcosm of the Investment World § Corporate Social Responsibility: CSR offers a case study in the diversity of investor views, drawing polarized and passionate responses on an issue that, its advocates contend, represents the next generation of corporate governance. © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 29

4. One size doesn’t fit all For example, regional context influences investors’ perceptions about the advantages of corporate governance § Two markets stand out: – 80% of Japanese investors cite enhanced returns as the most important advantage of corporate governance, compared to global average of 37% – Only 7% of Chinese investors chose enhanced returns, with 80% pointing to risk management § Investors in China, continental Europe, and Japan are the most likely to say that corporate governance will be more important over the next three years § “So far corporate governance has been window dressing, but shareholders are discovering the real value of corporate governance and the state of corporate governance in Europe: they will have to react. We are on the verge of indepth corporate governance design changes. ” – French asset manager © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 30

4. One size doesn’t fit all Japanese investors are far more likely to rank anti-takeover devices as the number one issue than any other country Poison pills are new to Japan – as is the threat of hostile takeovers. “We are worried about excessive management entrenchment, with overuse of poison pills and other takeover defenses. ” — Japanese pension fund © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 31

4. One size doesn’t fit all We’ve developed profiles based on the differences between pension funds, mutual funds, hedge funds, and asset managers Investor Type Profiles § Pension Funds: The True Believers? – The most likely group to cite enhanced returns as the most significant CG advantage (53%) – They say they are unique among institutional investors in their long-term perspective § Mutual Funds: “Reluctant Activists” Revisited – They are the most likely to say that CG is important to them (84%) § Hedge Funds: The New Force – True to their image, show a willingness to take on management and focus on M&As – Least likely to say that the tone of interaction with issuers has improved (50%) § Investment Managers: Microcosm of the Investment World – Most of the other investor groups are their clients – As a result, their responses align closely with global investor averages – They differed from the average only in their emphasis on client demands © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 32

Agenda § Introducing ISS § The 2006 ISS Global Institutional Investor Study § Case Study: China – The Next Global Hot Spot for Corporate Governance? § Emerging Trend: Environmental, Social and Governance (ESG) Integration © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 33

Special report: on China In addition to the five themes, we found that China may become the next hot spot globally for corporate governance China: The Next Corporate Governance Hot Spot? § China reminds the rest of the world why corporate governance has become so important § Chinese investors feel the need for corporate governance practices and protections that counterparts in developed markets take for granted: – Companies lack oversight – Boards fail to provide proper checks and balances – Markets stir distrust instead of building investor confidence – Constraints conspire to hold back the growth of capital markets § But China also presents great prospects for growth, with study participants pointing to a raft of reforms that they expect to propel the country forward in developing a framework of corporate governance laws and standards § These findings show why some China watchers insist that it can become the world’s next hot spot in corporate governance © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 34

Special report: on China has the only developing economy studied, and its investors present a unique picture Nowhere in the countries we studied do investors place greater importance on corporate governance or see faster growth in its importance than in China © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 35

Special report: on China Chinese investors believe increased focused on returns and risk management will drive future corporate governance importance (Multiple responses allowed) © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 36

Special report: on China Chinese investors expect dramatic reforms to address significant challenges China as the Next Corporate Governance Hot Spot § Investors cited four key challenges of investing in China today: – The corporate ownership structure and resulting conflicts of interest between insiders and minority shareholders – Lack of independent directors – The lack of regulations and enforcement to prevent abuses and protect the rights of minority shareholders – The lack of transparency and disclosure § But Chinese investors also expect reforms in these areas: – Changes in the ownership structure, with non-tradable shares becoming tradable – More independent boards – Better corporate disclosure – The introduction of equity pay to align managers interests with that of minority shareholders © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 37

Special report on China Board independence, a top priority in nearly all markets, soars in importance among Chinese investors “One of the major problems facing corporate governance in China is insider control. A well-balanced independent board can well defend against insider control. ” – Chinese mutual fund professional © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 38

Special report: on China New Incentives Needed: Chinese investors emphasize pay for performance as an improvement they most want to see Cultural shift: Managers must now meet shareholder needs, not government quotas. So China must introduce new incentives to align managers’ interests with those of shareholders. “The executive has no incentive to perform well. And there is no punishment for bad performance. ” – Chinese investor © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 39

Special report: on China Better disclosure and transparency also top the list of improvements Chinese investors most want to see “A public company’s internal operation is like a black box. ” – Chief investment officer of a Chinese mutual fund © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 40

Agenda § Introducing ISS § The 2006 ISS Global Institutional Investor Study § Case Study: China – The Next Global Hot Spot for Corporate Governance? § Emerging Trend: Environmental, Social and Governance (ESG) Integration © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 41

ESG: Emerging Trend The topic of corporate social responsibility (CSR) drew polarized and passionate responses There Are Believers… …And There Are Non-Believers § “Corporate governance is just one part of all governance risks – social, environmental and corporate… We favor a holistic response. ” – Australian superannuation (pension) fund § “The concept of corporate governance must be more broadly defined and understood. It’s more than boards and executive pay; rather, it’s all of sustainable development. Boards must actively pursue environmental and social issues management. Companies and investors must move away from the historically very narrow view of corporate governance. ” – U. S. pension fund § “SRI is impractical warring between people competing for the same space: investment managers versus the ‘conscience of the world’ with no skin in the game. Everyone has gotten so pious. ” – Australia-New Zealand pension fund § “We don’t follow any type of SRI philosophy. But we believe strongly in corporate governance in all of our holdings, whether it’s Philip Morris or GE or whatever. The state or the EPA [Environmental Protection Agency] should regulate. That is not our scope or mission. We’re an investor. ” – U. S. pension fund § “It’s been delegated to special interests and moral issues. But there is increasing evidence that it has economic impact. We have a new, long-term project to look at the issues and try to bring it into the mainstream. ” § “We aren’t sure, as we think about a sustainable society, that shareholders should be the dominant stakeholder vote. ” – U. S. mutual fund – U. S. pension fund © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 42

ESG: Emerging Trend We see market trends driving the growing interest in ESG issues Beyond the Global Study: Our Perceptions § “Mainstreaming” of ESG issues among the investment community § Broader awareness and understanding of key issues (human rights, climate change…) § Trend toward incorporation of extra-financial indicators § Broader view of risk © 2007 Institutional Shareholder Services Inc. www. issproxy. com ISS Template version 1. 0 -20041109 -rsh 43

ESG: Emerging Trend Investors are beginning to look at extra-financial criteria as indicators of risk BP Controversies in 2006 BP settles suit over TX refinery explosion for US$1. 2 B BP announces cutting production by 8% due to Alaska spill © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 44

ESG: Emerging Trend Sustainability issues are shaping investment decisions for a growing number of managers Wal-Mart Controversies in 2006 Norwegian government cites labor practices in ordering national pensions to divest Wal -Mart shares © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 45

ESG: Emerging Trend Investors are looking for opportunities to capture value as the market rewards companies with improving governance CGQ Index Scores DEC ’ 03 Comp committee independent; increase board size; limits on board service JAN ‘ 04 Majority of board is independent; nominating committee independent FEB ‘ 04 Shareholders vote to fill board vacancies; policy on auditor rotation Many managers are looking for positive trends in governance “momentum” © 2007 Institutional Shareholder Services Inc. DEC ‘ 04 Disclosed CEO related party transaction JAN ‘ 05 Option plan costs are deemed reasonable SEP ’ 05 New CGQ methodology www. issproxy. com OCT ’ 05 Board independence increases April 24, 2007 46

ESG: Emerging Trend ISS uses 400+ indicators for governance and sustainability to develop a complete ESG profile Environmental Social Governance Oversight and Reporting Labor and Human Rights Board of Directors Climate Change § Labor Rights § Structure and Independence § GHG Policy § Working Conditions/Wages § Management Entrenchment § Emissions § Security Forces Compensation and Ownership Environment § Benefits, Training and Enforcement § Equity-based Compensation § Resource Use (Energy, Water, etc. ) § Discrimination § Mgmt and Director Ownership § Waste and Recycling Ethics Audit Product Issues § Internal Controls Controversial Business Issues § Restatements Ties to Oppressive Regimes Takeover Defenses Management Policy and Execution Disclosure and Accounting © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 47

Conclusion How can you leverage corporate governance – and ESG – for Russia and your individual companies? Concluding Challenge “Unless companies start paying more attention to corporate governance, emerging markets could remain stuck in the backwaters of global finance for years to come. ” -- Wall Street Journal, Nov. 8, 2000 © 2007 Institutional Shareholder Services Inc. www. issproxy. com April 24, 2007 48

Conclusion and discussion Let’s continue to the dialogue – here is how you can reach us. For More Information, Contact: Stephen Deane Vice President and Director, ISS Center for Corporate Governance Director of the 2006 Global Institutional Investor Study stephen. deane@issproxy. com © 2007 Institutional Shareholder Services Inc. Institutional Shareholder Services, Inc. 2099 Gaither Road Rockville, MD 20850 USA +1 301. 556. 0500 www. issproxy. com April 24, 2007 49