Index of balancing stakeholders interests as a mechanism

Index of balancing stakeholders’ interests as a mechanism to improve corporate governance of Russian oil companies Julia Krutilina National Research University – Higher School of Economics 4 th International Doctoral Meeting of Montpellier 3 – 5 May, 2011

Actuality and theoretical background Consumers Company Government financial and economic crisis of 20082010 and its implications globalization of the world economy increasing level of quality of people life Suppliers increasing desire of companies to improve their reputation Stakeholder concept Conceptual framework Models of evaluation Freeman, 1984; Jensen, 1976; Post, Preston, 2002; Bradley, 2009; Donaldson, 1995; Hill, Jones, 1992 Mitchell, 1997; Frooman, 1999; Jones, 1995; Rowley, 2003; Kaler, 2006 Standards Recommendations on Policy Freeman, 2007; Keeney, Gregory, 1999 • Guide to reporting on sustainable development from GRI; • AA 1000 series from Account. Ability; • Oil and gas industry guidance on voluntary sustainability reporting from IPIECA; • Global compact from UN; • etc. 2

Internal External Suppliers Consumers, Government, Regions and local communities Interests Shareholders, investors, Management, Employees Indicators Companies values of benefits of indicators and costs C 1 C 2 Cn … … … … … … Groups dynamic indicators Stakeholders interests Groups indexes Scorecard model based on index of balancing stakeholder interests Index of balancing stakeholder interests Annual average increase rate of main indicators of benefits Short-term and long-term periods 3

Scorecard model based on index of balancing stakeholder interests Table 1. Indicators for internal stakeholder groups. Group of Characteristic Goals stakeholder ic of of goal indicator Indicators Shareholders Static and investors Dividends per share, $, Share price, $, Dividends nonpayment accidents, un. Specific risk rate of emitter, Beta level of shares Annual average increase rate of dividends, %, Annual average increase rate of company capitalization, % Level of top-management salary and compensation, thousands $, Average tenure, year, Average percentage of manager’s tasks and duties, %. Average number of conflicts, un. , Average time spent on overtime, hours per day. Annual average increase rate of compensation level, %, Annual average increase rate of tasks and duties share, % Benefits Costs Dynamic Management Static Benefits Costs Dynamic Employees Static Benefits Costs Dynamic High level of dividends, High company capitalization, Stability of dividend payments. Decrease of specific risks, Decrease of systematic risks Annual average increase rate of main indicators of benefits High level of compensation, Career opportunities, Power and authorities. Level of conflict in the company, Personal time spent on the job Annual average increase rate of main indicators of benefits High level of salary, Level of salary, thousands $ per month, Employment and development guarantees Social benefits, thousands $ per year, Duration of employees training programs, thousands of man-hours. Employment and development guarantees, Level of staff turnover, %, Work safety Number of victims of accidents, people, Average frequency of accidents, units per mln of manhours Annual average increase rate of main Annual average increase rate of salary, %, indicators of benefits Annual average increase rate of social benefits, % 4

Scorecard model based on index of balancing stakeholder interests Table 2. Indicators for external stakeholder groups. Group of Characteris Goals stakeholder tic of goal indicator Indicators Suppliers Long-term partnership, Percentage of long-term contracts, %, Large amounts of supplies, Percentage of the cost of procurement, %, Support local partners Percentage of local suppliers, % Timeliness of payments, Percentage of debt to pay for supplies in the total amount of payments on deliveries for the year, %, Stability of supply Average level of disruptions caused by the company, units per year Annual average increase rate of main indicators of benefits High product quality, Annual average increase rate of procurement, % Quality of retail sales service, Deep of oil refining, %, Relatively low price for the products Average time of signing of OTC, days, Static Benefits Costs Dynamic Consumers Static Benefits Costs Light oil product yield, %, Saturation coverage ratio of retail stations. Average price for oil on internal market, $/bbl, Average price for gasoline on internal market, $/tn Dynamic Annual average increase rate of main indicators of benefits Annual average decrease rate of main production price, %, Annual average decrease rate of deep of oil refining, % 5

Scorecard model based on index of balancing stakeholder interests Table 3. Indicators for external stakeholder groups. Group of Characteris Goals stakeholder ristic of goal indicator Indicators Government Reserves replacement ratio (by SEC-LOF), %, Percentage of new licenses for exploration and development in the total number of licenses, %, Percentage of exploration costs in total costs, %, Percentage of tax payment in total costs, %, Percentage of organic investment in total costs, %, Level of APG utilization, %, Saving energy, %, Investments on environmental protection, mln. $, Waste utilization, thousands of ton, Light oil product yield, % Total greenhouse emissions, thousands of ton, Water usage, thousands of sq. m. Annual average decrease rate of tax payment, %, Annual average decrease rate of APG utilization, %, Annual average decrease rate of saving energy, % Percentage of area remediated, %, Social investments, mln. $, Investment in young professionals development programs, thousands $, Number of students who passed the intern in the company, people Level of staff turnover, %, Average loss rate of local businesses, mln. $ Annual average increase rate of percentage of area remediated, %, Annual Average increase rate of social investments, % Static Benefits Replenishment of hydrocarbon reserves, Developing new greenfields, Tax payments, Modernization of facilities, Increasing energy efficiency, Costs Dynamic Regionals and Static communities Dynamic Environmental protection, High product quality Compliance with national and international environmental standards Annual average increase rate of main indicators of benefits Benefits Reconstruction of regions, Social responsibility events, Interaction with universities and young professionals Costs Employment guarantees for population, Negative impact on local companies Annual average increase rate of main indicators of benefits 6

Scorecard model based on index of balancing stakeholder interests Table 4. Main indicators of the proposed scorecard model based on index of balancing stakeholder interests. Stakeholders Main indicators of a model Shareholders Dividends per share, share price, dividends nonpayment accidents, specific risk rate; and investors Management Level of top-management salary and compensation, average tenure, average time spent on overtime; Employees Level of salary, social benefits, level of staff turnover, average recordable incident rate; Suppliers Percentage of long-term contracts, percentage of the cost of procurement, percentage of local suppliers, average level of disruptions caused by the company; Consumers Deep of oil refining, average price on production on internal market, saturation coverage ratio of retail stations, average time of signing of OTC; Government SEC reserves replacement ratio, percentage of taxes, level of APG utilization, Light oil product yields, total greenhouse emissions; Regions and Percentage of area remediated, social investments, level of staff turnover, investment communities in young professionals development programs. 7

Calculation formula of the scorecard model • The index of indicator: 1 , i - consecutive number of group; j - consecutive number of indicator • The stakeholder group index: 2 , m - number of indicators in the group • Index of balancing stakeholder interests: 3 , n - number stakeholder groups - weight of stakeholder group 8

Matrices for analysis the balance of stakeholders interests Positive dynamics Annual average increase rate of main indicators of benefits, % UPD Negative dynamics 0 BPD Group index meaning 1 UND BND Unbalance Balance Figure 1. Matrix of interests balance of external stakeholders groups. 9

Matrices for analysis the balance of stakeholders interests Annual average increase rate of main indicators of benefits, % Positive dynamics Inflation rate, % UPDui 0 BPDui Under inflation Negative dynamics BPDoi Over inflation UPDoi Group index meaning 1 UND BND Unbalance Balance Figure 2. Matrix of interests balance of internal stakeholders groups. 10

Recommendations on adjusting the company's stakeholder policy BPD • No special events to increase the stakeholders satisfaction involved in this zone • To use a potential for reallocating resources towards less satisfied groups UPD • To increase a static indicator in the short term • To review long-term plan for reallocating resources towards less satisfied weighty groups BND • To plan an increase of the key benefits indicators in the long term, • To undertake work to bring new policy to stakeholders UND • To bring values of static and dynamic indicators to market average level • To gradually increase the level of indicators values to level of core industry leaders towards less satisfied weighty groups • To use of the mechanisms to inform stakeholders about planned activities, organization of the feedback channel to receive complaints and grievances for they can be removed UPD BPD UND BND 11

Implementation of the model: TNK-BP Scorecard model calculation Average in industry Financial and social statements 2005 - 2009 Stakeholders TNK-BP Rosneft Lukoil Gazprom neft TNK-BP’s model Surgutneftegas Bashneft Tatneft Group index Dynamic meanings indicator meanings, % Suppliers 1 19, 38 Shareholders 1, 03 15, 7 Employees 1, 35 11, 13 Government 1, 11 10, 77 Management 1 1, 74 Consumers 0, 96 0, 35 Regions 1, 07 -1, 39 TNK-BP Index of balancing stakeholder interests: • 0, 87 Annual average increase rate of main indicators of benefits • 5, 64 % 12

Implementation of the model: TNK-BP Calculation results analysis Figure 3. Matrix of interests balance of internal stakeholders groups of TNK-BP. 13

Implementation of the model: TNK-BP Calculation results analysis Figure 4. Matrix of interests balance of external stakeholders groups of TNK-BP. 14

Implementation of the model: TNK-BP Main recommendations on company’s policy in stakeholder management Shareholders Regions and communities Increasing dividends payment to level of $0, 5 by 2012 Annual increase of social investments to level of 150 mln$ by 2015 Annual growth of dividends payment on average for 20%, Decrease of staff turnover to level on average of 6% Realization of projects in Russia and Ukraine providing annual capitalization growth on average for 6 -10% 15

Testing model The testing method Main pitfalls The sample forming Preliminary current control Stakeholder groups Indicators Shareholders Dividends per share, $, Share price, $, Dividends nonpayment accidents, un. Specific risk rate of emitter, Beta level of shares Annual average increase rate of dividends, %, Annual average increase rate of company capitalization, % Management Level of top-management salary and compensation, thousands $, Average tenure, year, Annual average increase rate of compensation level, %, Employees Level of salary, thousands $ per month, Social benefits, thousands $ per year, Duration of employees training programs, thousands of man-hours Level of staff turnover, %, Number of victims of accidents, people, Average frequency of accidents, units per mln of man-hours Annual average increase rate of salary, %, Annual average increase rate of social benefits, % Mean 0, 552 14, 544 0, 057 0, 971 1, 321 0, 256 0, 058 103, 921 5, 861 0, 017 1, 635 0, 537 185, 000 5, 839 52, 250 1, 467 0, 100 0, 123 St. dev. 0, 760 19, 961 0, 151 0, 960 0, 401 0, 458 0, 135 99, 993 2, 435 0, 120 0, 412 0, 315 105, 987 2, 707 31, 774 1, 256 0, 122 0, 134 16

Testing model Stakeholder groups Indicators Suppliers Consumers Government Regions Percentage of the cost of procurement, %, Percentage of local suppliers, % Annual average increase rate of procurement, % Light oil product yield, %, Deep of oil refining, %, Saturation coverage ratio of retail stations. Average price for oil on internal market, $/bbl, Average price for gasoline on internal market, $/tn Annual average decrease rate of main production price, %, Annual average decrease rate of deep of oil refining, % Reserves replacement ratio (by SEC-LOF), %, Percentage of new licenses for exploration and development in the total number of licenses, %, Percentage of exploration costs in total costs, %, Percentage of tax payment in total costs, %, Percentage of organic investment in total costs, %, Level of APG utilization, %, Saving energy, %, Investments on environmental protection, mln. $, Waste utilization, thousands of ton, Light oil product yield, % Total greenhouse emissions, thousands of ton, Annual average decrease rate of tax payment, %, Annual average decrease rate of APG utilization, %, Annual average decrease rate of saving energy, % Percentage of area remediated, %, Social investments, mln. $, Investment in young professionals development programs, thousands $, Level of staff turnover, %, Annual average increase rate of percentage of area remediated, %, Annual Average increase rate of social investments, % Mean 38, 767 76, 857 0, 194 52, 014 75, 817 4, 836 34, 469 763, 481 0, 029 0, 028 310, 040 4, 059 0, 617 31, 583 12, 262 78, 829 6, 094 157, 225 286, 571 52, 014 535, 600 0, 037 0, 376 9, 873 149, 059 1, 055 5, 922 -0, 092 0, 037 St. dev. 35, 342 26, 207 0, 313 8, 885 9, 701 3, 868 3, 756 66, 675 0, 078 0, 033 223, 453 3, 911 0, 384 22, 771 9, 630 16, 922 7, 472 169, 258 264, 587 8, 885 409, 916 0, 273 0, 046 0, 834 9, 011 188, 317 0, 502 2, 846 0, 116 0, 136 17

Спасибо за внимание! Julia Krutilina E-mail: Julia. kroutilina@gmail. com

Appendix A: calculation of TNK-BP model Stakeholder Indicators groups Shareholders Dividends per share, $, Share price, $, Dividends nonpayment accidents, un. Specific risk rate of emitter, Beta level of shares Group index Annual average increase rate of dividends, %, Annual average increase rate of company capitalization, % Annual average increase rate of main indicators of benefits, % Management Level of top-management salary and compensation, thousands $, Average tenure, year, Group index Annual average increase rate of compensation level, %, Annual average increase rate of main indicators of benefits, % Employees Level of salary, thousands $ per month, Social benefits, thousands $ per year, Duration of employees training programs, thousands of man-hours Level of staff turnover, %, Number of victims of accidents, people, Average frequency of accidents, units per mln of man-hours Group index Annual average increase rate of salary, %, Annual average increase rate of social benefits, % Annual average increase rate of main indicators of benefits, % TNK-BP Gazprom Rosneft Lukoil Tatneft Surgutn Bashnef Market eftegaz t average level 0, 07 1, 95 0, 40 2, 00 1, 75 0, 33 -28, 80% 0, 15 5, 42 0, 00 0, 80 1, 25 0, 73 6, 05% 0, 07 8, 34 0, 00 1, 00 0, 68 15, 83% 1, 61 56, 09 0, 00 0, 50 1, 00 2, 51 8, 38% 0, 21 4, 62 0, 00 1, 25 0, 68 62, 66% 0, 04 1, 71 0, 88 24, 50 0, 00 2, 50 0, 00 1, 00 2, 00 0, 46 1, 81 5, 64% 109, 69% 0, 55 14, 54 0, 06 0, 97 1, 32 1, 03 25, 6% -8, 06% 9, 72% 4, 63% -1, 42% 8, 61% -4, 99% 32, 29% 5, 8% -18, 43% 7, 88% 10, 23% 3, 48% 35, 63% 0, 33% 70, 99% 15, 7% 287, 32 3, 90 1, 72 103, 40 2, 48 0, 71 170, 00 4, 45 1, 20 108, 00 7, 90 1, 19 39, 20 6, 80 0, 77 4, 53 9, 50 0, 83 15, 00 6, 00 0, 58 103, 92 5, 86 1, 00 10, 59% 5, 73% 6, 25% 10, 88% -6, 14% -22, 28% 7, 14% 1, 74% 10, 59% 1, 84 0, 70 5, 73% 1, 46 1, 00 6, 25% 1, 79 0, 75 10, 88% 2, 03 0, 25 -6, 14% 0, 89 0, 34 -22, 28% 2, 03 0, 61 7, 14% 1, 40 0, 11 1, 74% 1, 63 0, 54 340, 00 9, 50 78, 00 150, 00 3, 00 n 100, 00 8, 80 70, 00 150, 00 5, 57 54, 00 n 4, 37 7, 00 n n 3, 80 n 185, 00 5, 84 52, 25 3, 23 1, 00 4, 10% 0, 96 1, 41 3, 23% 0, 29 1, 57 26, 70% 1, 39 0, 93 26, 75% n 2, 49 -5, 32% n 1, 19 6, 84% n 0, 87 7, 69% 1, 47 1, 35 10, 00% -3, 61% 30, 19% 14, 47% 29, 10% 0, 00% 10, 91% 4, 76% 12, 26% 0, 25% 16, 71% 20, 59% 27, 92% -2, 66% 8, 88% 6, 23% 11, 13%

Appendix A: calculation of TNK-BP model Stakehold er groups Suppliers Indicators Gazprom Rosneft Lukoil Tatneft Surgutn Bashne Market eftegaz ft average level Percentage of the cost of procurement, %, 26, 84 82, 10 80, 15 63, 00 4, 36 11, 35 3, 56 38, 77 Percentage of local suppliers, % 85, 00 100, 00 91, 00 92, 00 30, 00 50, 00 90, 00 76, 86 0, 90 1, 71 1, 63 1, 41 0, 25 0, 47 0, 63 1, 00 Annual average increase rate of procurement, % 78, 07% -5, 88% -3, 31% 1, 61% 22, 82% 42, 84% -0, 49% 19, 38% Annual average increase rate of main indicators of benefits, % 78, 07% -5, 88% -3, 31% 1, 61% 22, 82% 42, 84% -0, 49% 19, 38% 53, 50 62, 00 57, 30 50, 10 40, 60 40, 20 60, 40 52, 01 n 75, 50 64, 60 74, 80 90, 00 66, 60 83, 40 75, 82 8, 80 0, 70 8, 17 5, 59 0, 92 n n 4, 84 4, 07 0, 63 4, 03 3, 23 1, 00 n n 2, 59 29, 40 38, 48 35, 00 n n n 34, 47 654, 07 735, 30 814, 00 794, 90 717, 50 853, 60 775, 00 763, 48 1, 13 0, 75 1, 19 1, 05 0, 72 0, 83 1, 08 0, 96 -4, 46% 18, 48% -3, 38% 5, 81% 3, 55% -0, 98% 1, 30% 2, 90% n 3, 42% -0, 69% 0, 44% 1, 12% 4, 06% 8, 31% 2, 78% -4, 46% 10, 95% -2, 04% 3, 13% 2, 33% 1, 54% 4, 81% 2, 32% Group index Consumers TNK-BP Light oil product yield, %, Deep of oil refining, %, Saturation coverage ratio of retail stations. Optimality of distances ratio between retail stations. Average price for oil on internal market, $/bbl, Average price for gasoline on internal market, $/tn Group index Annual average decrease rate of main production price, %, Annual average decrease rate of deep of oil refining, % Annual average increase rate of main indicators of benefits, %

Appendix A: calculation of TNK-BP model Stakehold Indicators er groups Governme Reserves replacement ratio (by SEC-LOF), %, nt Percentage of new licenses for exploration and development in the total number of licenses, %, Percentage of exploration costs in total costs, %, Percentage of tax payment in total costs, %, Percentage of organic investment in total costs, %, Level of APG utilization, %, Saving energy, %, Investments on environmental protection, mln. $, Waste utilization, thousands of ton, Light oil product yield, % Total greenhouse emissions, thousands of ton, Group index Annual average decrease rate of tax payment, %, Annual average decrease rate of APG utilization, %, Annual average decrease rate of saving energy, % Annual average increase rate of main indicators of benefits, % Regions Percentage of area remediated, %, Social investments, mln. $, Investment in young professionals development programs, thousands $, Level of staff turnover, %, Group index Annual average increase rate of percentage of area remediated, %, Annual Average increase rate of social investments, % Annual average increase rate of main indicators of benefits, % Index of balancing stakeholder interests Annual average increase rate of main indicators of benefits, % TNK-BP Gazpro Rosneft Lukoil m neft 143, 20 4, 27 20, 8% 23, 25 14, 46 84, 40 n 94, 07 210, 00 53, 50 955, 00 0, 78 -16, 97% 2, 83% n -7, 07% 5, 29 40, 00 0, 70 10, 00 0, 51 265, 00 167, 50 279, 00 n n 310, 04 1, 52 0, 56 2, 18 4, 42 57, 5% n 55, 3% 113, 5% 19, 20 41, 99 13, 14 49, 30 12, 15 10, 66 10, 22 1, 10 48, 10 67, 00 76, 00 93, 70 -5, 90 3, 87 10, 00 13, 00 62, 90 373, 30 419, 00 130, 00 247, 00 779, 90 251, 20 30, 00 62, 00 57, 30 50, 10 40, 60 202, 00 944, 80 813, 70 80, 70 0, 77 1, 11 1, 15 1, 56 -8, 60% -25, 45% 18, 17% 0, 47% 13, 25% 5, 41% 1, 72% -0, 95% n -12, 05% -16, 67% 160, 52% 11, 41 n 4, 97 31, 65 96, 90 n 17, 00 465, 90 40, 20 217, 40 1, 47 56, 71% 1, 37% n n n 69, 23 5, 60 85, 70 9, 50 4, 30 22, 00 60, 40 n 0, 94 1, 25% 2, 02% 18, 75% 4, 06 61, 7% 31, 58 12, 26 78, 83 6, 09 157, 22 286, 57 52, 01 535, 60 1, 11 3, 66% 3, 67% 37, 64% 2, 33% -10, 70% 1, 28 11, 30 28, 11 526, 80 n 3, 00 0, 76 1, 41 8, 80 1, 67 -20, 60% -20, 79% 6, 30% 695, 50 Tatneft Surgutn Bashnef Market eftegaz t average level 1, 08% 11, 82 277, 10 53, 35% 3, 43 92, 00 29, 04% 26, 11 39, 70 7, 34% n 39, 70 10, 77% 9, 87 149, 06 n 5, 57 1, 37 n 4, 37 0, 77 n н 1, 46 n 3, 80 0, 91 1, 06 5, 92 1, 07 -0, 45% -16, 59% -3, 18% n -9, 22% -18, 35% 8, 12% -4, 82% 24, 89% -1, 85% 7, 30% 10, 28% 3, 65% -19, 48% -6, 34% 0, 74% 12, 22% -9, 22% 2, 06% 10, 28% -1, 39% 0, 87 0, 98 1, 29 1, 37 1, 04 0, 96 0, 98 1, 07 5, 64% 4, 48% 3, 11% 8, 62% 13, 73% 8, 91% 15, 18% 8, 53%