OREANDA-NEWS. On 07 August 2009 was announced, that corporate governance rating agency Standard & Poor’s hereby reports the assignment to Far East Telecom, a leading fixed-line telecommunications operator in the Far East region of Russia, of a Gamma rating, which represents a new format for rating corporate governance (analysis and evaluation of the efficiency of corporate efficiency, accountability and management), at the level of Gamma-5+.

The Gamma rating replaces the corporate governance rating (CGR) earlier assigned to Far East Telecom.  In conjunction with the assignment of a Gamma rating to the company the CGR was withdrawn. At the time when the operator switched over to the new Gamma rating the company’s corporate governance stood at CGR-5 on the international scale and CGR-5.4 on the Russian scale.

In assigning a Gamma rating an enhanced CGR methodology is used, including two new elements in the analysis of corporate governance:  a risk management system and a strategic planning process.  The assignment of a Gamma rating came in response to a proposal from Standard & Poor’s corporate governance rating Service to replace the CGR rating with a Gamma rating, which, according to Standard & Poor’s, gives a more complete picture           of the structure and practice of the company’s corporate governance.  The same proposal was made to all clients which have a CGR rating.

 “Over the last year, the company has reduced the timeframe for preparing its financial statements drafted to international standards, and began to release these reports on a quarterly basis, as well as overhauling its dividend policy”, according to Anna Grishina, an analyst with the corporate governance rating unit. She went on to say that the rating level is constrained mainly by the dominant influence of its majority shareholder, state-owned Svyazinvest. 

On the whole, the nature of the shareholder’s influence has changed for the better, although the risks associated with the expected restructuring of the holding at present balance out these positive trends”.

A Gamma rating is the result of an evaluation of four analytical components on a scale ranging from 1 (the lowest) to 10 (the highest).

Ownership structure and external influence – 4

Shareholder rights – 7

Transparency, audit and risk management – 6+

Efficiency of the Board of Directors, strategic process, incentive system – 5

Standard & Poor’s note the following strong points in Far East Telecom’s corporate governance practice:

The company is generally distinguished by its high level of transparency.  Far East Telecom improved the time frame for presenting its financial reports and published its 2008 IFRS financial statement earlier than the other regional telecom operators (RTOs) and, even more importantly, before the annual general shareholders meeting

Minority shareholders are active; three of them sit on the Board of Directors (including an appointee from Bank KIT Finance, a large minority shareholder);

The Board of Directors has extensive authority and conducts active operations along with four committees under the Board of Directors; external directors are members of all these committees.

A strategic planning process has been set in place.  The strategy is being discussed by the Business Strategy Development Committee under the Board of Directors, and is also subject to approval by the board.

Far East Telecom takes an integral approach towards risk management. The integrated risk management system (RMS) that was introduced ion 2007, is being continuously developed.

The procedures for preparing and conducting shareholder meetings are efficient, minority shareholders are vested with a broad range of rights in strict conformity with the Russian legislation.

However, Standard & Poor’s analysts note a number of shortcomings in Far East Telecom’s corporate governance system:

The majority shareholder Svyazinvest exerts a dominant influence on the company through the Board of Directors, in which it holds a majority of seats, and also indirectly        through management.  In addition, Svyazinvest is exposed to significant conflicts of interests, whereas the ability of minority shareholders and their proxies to balance this influence is extremely limited.

The possible restructuring of Svyazinvest creates considerable risks for RTO minority shareholders.

There are a number of shortcomings which related to the level of independence of the Board of Directors and the committees under the board.

Routine meeting of most of the committees under the Board of Directors are not held on a regular basis.

There is room for improvement as regards the involvement of directors in the discussion of risk management issues.

The opinions set out in this report reflect the independent position of the corporate governance rating service, which is part of the Market Research division of Standard & Poor’s, and does not reflect the position of other analytical units of Standard & Poor’s.  The assignment and support of Gamma ratings is carried out separately from the other analytical procedures of Standard & Poor’s for the purpose of maintaining the independence and objectivity of each analytical process. Gamma ratings are assigned in countries classifiable as emerging markets, mainly BRIC countries.

Standard & Poor’s assessment of the current corporate governance status of Far East Telecom is given in a research report entitled “Far East Telecom – Justification for a Gamma Rating, which was released on July 29, 2009.  Additional information concerning corporate governance ratings, including Gamma ratings, can be found on the website www.standardandpoors.ru, and also provided by the Corporate Governance Ratings Service of Standard & Poor’s in Moscow at the following telephone: 7 (495) 783- 40-40.  In addition, all relevant questions should be addressed to the Rating Information Division of Standard & Poor’s in Moscow at the following telephone: 7 (495) 783- 40-00.