Enabling the Business of Corporate Governance Corporate Governance and Sustainability: What Institutional Investors Want Featuring the 2006 ISS Global

Enabling the Business of Corporate Governance

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

April 24, 2007

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www.issproxy.com© 2007 Institutional Shareholder Services Inc.

Why is corporate governance important?

“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

Opening Quotation

Opening

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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

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ISS has been the corporate governance industry leader for 20 years

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

Institutional Shareholder Services

Introducing ISS

April 24, 2007

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RiskMetrics Group Acquired ISS in 2007

RiskMetrics, Inc.

Risk Analysis, Researchand Modeling

InstitutionalShareholder

Services, Inc..

Governance Researchand Proxy Voting

InsightExpertise

Relationships

RiskMetrics Group

RiskMetrics was spun off from JP Morgan in 1998

Industry-standard analytics with leading-edge technology

World’s largest independent provider of risk management solutions

Introducing ISS

April 24, 2007

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United States/Canada61.2%

Latin America1%

Europe28.7%

Middle East/Africa1.5%

Asia/Australia7.7% Asset Managers

Pension Plans Insurance

Companies Central Banks Hedge Funds Funds-of-Funds Corporate

Treasuries Trading Banks Lending Banks Prime Brokers

Combined companies have more than 2,100 clients on six continents…

Global Reach

Introducing ISS

April 24, 2007

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… and more than 800 employees in 12 countries

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

Global Reach

Introducing ISS

April 24, 2007

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Our coverage of Russian companies has more than doubled in the past three years

Increasing Coverage

Introducing ISS

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32102

32174

48

0

50

100

150

200

250

2205 2006 2007

Growing Coverage of Russian Companies

Non-CoreCore

84

134

222

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Our coverage includes the following 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

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

Top Russian Companies

Introducing ISS

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Agenda

Introducing ISS




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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

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We conducted 322 interviews, mainly in person, with investors representing a wide variety of regions and views


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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

• Standard vote recommendations

• Client-specific custom vote recommendations

• Full agent voting service

• Votex platform

• Turnkey service for disclosing vote policies and voting records

• CGQ

• Voting Analytics

• SCAS

• Sustainability Risk Reports

• ESG Data Feeds

• M&A Insight

Introducing ISS

April 24, 2007

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The ISS 2006 Global Study finds investors voicing five major themes highlighting the value of corporate governance

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

Institutional Investors Voice Five Major Themes


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Corporate governance has shifted from a compliance obligation to a 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

1. From compliance obligation to business imperative

Compliance Obligation to Business Imperative

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63% of investors believe corporate governance will become even more important in the next three years


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Scandals have receded as drivers of corporate governance importance, but business-related drivers have grown


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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

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Corporate governance is global – it’s not just limited to Anglo-American markets but is important everywhere

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 and the U.S.

– Increase in cross-border proxy voting Investors use the power of the ballot box to improve standards in global markets

2. The globalization of corporate governance

Corporate Governance Is Global

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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

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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 cross-border 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

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Investors globally share four fundamental concerns about corporate governance over the next three years

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.

3. Global concerns: four fundamental issues

Four Fundamental Concerns

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These four concerns stand out from a longer list of issues that institutional investors identified


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From board accountability to pay for performance, investors explain why the rank these four issues their priorities


Better Boards

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

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One size doesn’t fit all investors – investors also reveal differences in their views on corporate governance

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.

4. One size doesn’t fit all

One Size Doesn’t Fit All

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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 in-depth corporate governance design changes.”

– French asset manager


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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

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We’ve developed profiles based on the differences between pension funds, mutual funds, hedge funds, and asset managers

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


Investor Type Profiles

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Agenda

Introducing ISS




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In addition to the five themes, we found that China may become the next hot spot globally for corporate governance

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

China: The Next Corporate Governance Hot Spot?

Special report: on China

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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

Nowhere in the countries we studied do investors place greater importance on corporate governance or see faster growth in its importance than in China


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Chinese investors believe increased focused on returns and risk management will drive future corporate governance importance

(Multiple responses allowed)


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Chinese investors expect dramatic reforms to address significant challenges

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


China as the Next Corporate Governance Hot Spot

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Board independence, a top priority in nearly all markets, soars in importance among Chinese investors

Special report on China

“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

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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

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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

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Agenda

Introducing ISS




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The topic of corporate social responsibility (CSR) drew polarized and passionate responses

“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.”


“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.”


“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.”


“We aren’t sure, as we think about a sustainable society, that shareholders should be the dominant stakeholder vote.”

– U.S. mutual fund

ESG: Emerging Trend

There Are Believers… …And There Are Non-Believers

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We see market trends driving the growing interest in ESG issues

“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

Beyond the Global Study: Our Perceptions

ESG: Emerging Trend

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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$1.2B

BP announces cutting production by 8% due to Alaska spill

ESG: Emerging Trend

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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

ESG: Emerging Trend

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Investors are looking for opportunities to capture value as the market rewards companies with improving governance

DEC ’03 Comp committee independent; increase board size; limits on board service

JAN ‘04 Majority of board is independent; nominating committee independentFEB ‘04 Shareholders vote to fill board vacancies; policy on auditor rotation

DEC ‘04 Disclosed CEO related party transactionJAN ‘05 Option plan costs are deemed

reasonable SEP ’05 New CGQ methodology

OCT ’05 Board independence increases

CGQ Index Scores

Many managers are looking for positive trends in governance “momentum”

ESG: Emerging Trend

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ISS uses 400+ indicators for governance and sustainability to develop a complete ESG profile

Environmental

Social

GovernanceBoard of Directors

Structure and Independence

Management Entrenchment

Compensation and Ownership

Equity-based Compensation

Mgmt and Director Ownership

Audit

Internal Controls

Restatements

Takeover Defenses

Oversight and Reporting

Climate Change

GHG Policy

Emissions

Environment

Resource Use (Energy, Water, etc.)

Waste and Recycling

Labor and Human Rights

Labor Rights

Working Conditions/Wages

Security Forces

Benefits, Training and Enforcement

Discrimination

Ethics

Product Issues

Controversial Business Issues

Ties to Oppressive Regimes

Management Policy and Execution

Disclosure and Accounting

ESG: Emerging Trend

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How can you leverage corporate governance – and ESG – for Russia and your individual companies?

“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

Concluding Challenge

Conclusion

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Let’s continue to the dialogue – here is how you can reach us.

Stephen DeaneVice President and Director, ISS Center for Corporate GovernanceDirector of the 2006 Global Institutional Investor [email protected]

For More Information, Contact:

Institutional Shareholder Services, Inc.2099 Gaither RoadRockville, MD 20850 USA+1 301.556.0500www.issproxy.com

Conclusion and discussion

Documents

Enabling the Business of Corporate Governance Corporate Governance and Sustainability: What Institutional Investors Want Featuring the 2006 ISS Global