MOSCOW (Standard & Poor's) Nov. 14, 2008--Standard & Poor’s Governance Services today raised its corporate governance score (CGS) on RusHydro (OJSC) (RusHydro), Russia’s largest electricity generation company, to 'CGS-5+' from 'CGS-5'. At the same time, Standard & Poor's raised its Russia national scale CGS on RusHydro to 'CGS-5.7' from 'CGS-5.2'.
RusHydro is Russia’s largest and the world’s second-largest hydropower company in terms of installed capacity, with 50 hydropower plants and an installed electricity capacity of 25 gigawatts. After a series of share swaps within the framework of the industry reform, RusHydro emerged as an entity controlled directly by the government, which holds 60% of equity. The free float accounts for 40%, of which 1.9% is traded in the form of Global Depositary Receipts (GDRs). RusHydro has over 350 000 shareholders.
"The Russian government, RusHydro’s main shareholder, recognizes the importance of developing strong governance structures at RusHydro for the long-term development of the company," said Standard & Poor's governance analyst Ekaterina Marushkevich. "On several occasions, government representatives on RusHydro’s board proved themselves open to a dialogue with the minority representatives and were generally sensitive to minorities’ interests.
“We note, however, that the board decision making process may be influenced by the risks that the government’s social and strategic goals do not always correspond to the interests of other shareholders. Checks and balances at the board level are relatively weak and do not provide a strong protection against these risks," Ms. Marushkevich added.
The overall CGS on RusHydro is the result of four component scores on the global and Russia national scales of 1 (low) to 10 (high). The global scale score is shown first below, and the Russia national scale second:
-- Ownership structure and external influences
5+/5.9
-- Shareholder rights and stakeholder relations
6+/6.5
-- Transparency, disclosure, and audit
5+/5.5
-- Board structure and effectiveness
5/5.4
Major strengths of the current governance system are:
· The government’s goals for the company are generally in line with the interests of minority shareholders. There is an understanding that RusHydro’s ambitious investment plans make the company dependent on financial markets, and that solid governance mechanisms are needed for these plans to succeed in the long term.
· The transparency of RusHydro is higher than that of most other Russian generating companies.
· Shareholder rights are robust on the back of Russian law. Shareholder meeting procedures are strong.
· The company is developing its internal audit practice. In early 2008 an audit committee was established which currently provides an effective oversight over the work of the internal audit and risk management department.
· RusHydro’s executive compensation system is sound.
The score is constrained by a number of weaknesses, including:
· There are risks that the government may require RusHydro to engage in commercially unattractive projects that serve strategic and social goals. These risks are only partially compensated by the presence of a constructive dialogue between the company and minority shareholders.
· The board of RusHydro does not include a significant independent element, which limits its ability to mitigate risks associated with the government’s influence.
· The board’s role in decision making is negatively affected by the limited frequency of face-to-face meetings.
· Risk-based internal audit work is still in its early stages of development.
· Despite the improvement of the timing of financial disclosure it still lags behind practices at leading international companies.
The opinions expressed are the independent opinions of S&P’s Governance Services, a department of Equity Research Services, and do not reflect the opinions of other areas of Standard & Poor’s. Standard & Poor's GAMMA scores and other analytic services are performed as entirely separate activities in order to preserve the independence and objectivity of each analytic process. GAMMA scores are offered to companies in the emerging markets, with the primary focus on Brasil, Russia, India, and China (the BRIC countries).
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