On November 1, 2001 the Investor Protection Association (IPA), Ernst & Young, the UK-Russian Chamber of Commerce and The Moscow Times hosted a business lunch to discuss the role of independent directors at companies.

Speakers included Mark Jarvis, Ernst & Young's Corporate Finance Managing Director; Dmitry Vasilyev, Chairman of IPA Board of Directors; Alexander Kolesnikov, member of the Board of RAO UES of Russia; Alexander Ikonnikov, IPA Executive Director; Yevgeny Yasin, independent director at Vimpelcom; Michael Tappan, Chairman of the Board of Ward Howell International; and Juan Cavaller, Ward Howell International's Chief Expert.

Independent directors are quite a novel concept on the Russian market, whereas in Europe and the US the nomination of independent directors to corporate boards is a common practice. Hence, discussions over the breakfast placed a special focus on the analysis of the independent directors' roles and functions at companies, based on the accumulated Western experience and the fledgling Russian practice in the area.

Mark Jarvis (Ernst & Young) highlighted the fact that the Independent Directors Program is part of a broader international effort sponsored by Ernst & Young, in conjunction with the Institute of Directors in UK and the IPA in Russia, and designed to facilitate improvements in the corporate governance culture. Along with and in addition to the Corporate Governance Code being developed by the Federal Securities Commission in Russia, the IPA and Ernst & Young's initiative to institute and develop the institute of independent directors in Russia will benefit the businesses and the society in general rather than isolated individual shareholders. The Program will complement the existing IPA practice of nominating shareholders' representatives for inclusion onto the boards of Russian enterprises. Mr. Jarvis mentioned that in 2001 alone 23 independent directors proposed by the IPA were made members of the board at 38 Russian companies.

In his presentation, IPA Chairman of the Board Dmitry Vasilyev emphasized that the concept of independent directors should be viewed separately from that of minority shareholders' representatives who are nominated for inclusion in corporate boards through vote consolidation. Companies aspiring to present themselves as truly public must have both minority shareholders and independent directors represented on the board. In addition, as Mr. Vasilyev believes, there is a need to alter the attitude of corporate CEOs, who ought to willingly engage independent professionals that can act as mediators in situations where disparate shareholder groups defend differing opinions and antipodal proposals. To accomplish this, Mr. Vasilyev suggests that shareholders agree to voluntarily delegate a portion of their votes to elect an independent director. In such cases, the candidate should be acceptable to everyone and will be merited on his/her professional qualities and reputation. "A rating of Russian companies by the Institute of Corporate Governance showed that the companies with independent directors are better off in terms of the quality of corporate governance", added Mr. Vasilyev. Several Russian corporations, mindful of their good corporate image, have already undertaken this effort by incorporating the relevant provision into their charters.

A distinguishing characteristic of an independent director is his/her independence of the controlling shareholder, the management of the company and the government. In the opinion of Alexander Kolesnikov, member of the Board of RAO UES of Russia, "- there is no such thing as an ideal independent director. Minority shareholders represent specific legal entities with quite definite business interests". Even so, Mr. Kolesnikov believes that if at a given point in time and in a given place an independent director represents the interests of the company and its shareholders in general, he/she may be regarded independent. In 2001 an IPA director, David Hearn, was added to the Board of RAO UES of Russia. Mr. Hearn, who among other things represents the interests of the company's minority shareholders, has already demonstrated some tangible deliverables. Most recently Mr. Hearn became head of the Committee on Energy Sector Reform established at the company in September 2001. As an independent director, Mr. Heard is responsible for securing an appropriate balance of interests between the various groups of shareholders, and protection of their rights during the restructuring of the sector.

According to Mr. Kolesnikov, there is unfortunately no readily available market for independent directors in Russia yet. Similarly to any other professionals, independent directors need to be educated and trained, possibly at specialized business management schools. Matters that should fall within their authority include compliance, industry knowledge and business management issues.

Yevgeny Yasin shared his views and experience as an independent director on the Board of Vimpelcom. Mr. Yasin highlighted three issues that independent directors should focus on: their reputation as independent directors; interaction with different shareholder groups; and relations between the business community and the government. As vividly described by Mr. Yasin, "an independent director is God's envoy to the company", and his/her reputation is the principal warranty of his objectivity. In the absence of minority shareholder representatives on the Board, it is the duty of the independent director to protect their interests. The role of the independent director is to find a balance of interests between various shareholder groups, and resolve strategic planning issues. Mr. Yasin also spoke of his experience as part of the Board of Vimpelcom. Invited to join the Board by co-founder Dmitry Zimin, he nonetheless chose to represent the interests of the company in general, consistently calling for strategic investor search and focusing the Board on gaining a wider market share, which required significant investments and profit capitalization.

According to Michael Tappan, Chairman of the Board of Ward Howell International, the nomination of independent directors to corporate boards is a fairly common global practice. For example, in the US 78% of the Boards of Directors have "external" members, and 21% of these are women. Professionally, the breakdown is as follows: 53% are current executives of other companies; 9% are former executives; and 38% represent other categories (according to Ward Howell International). The role of external directors is to monitor the efficiency of the top management and the company in general, assist the management in adopting strategic decisions for the benefit of the company, and substitute for top managers in critical circumstances.

IPA Executive Director Alexander Ikonnikov outlined the initial results of the Independent Directors Program, emphasizing that the IPA has already commenced on-going consultations with Russian and foreign investors to nominate independent directors to the Boards of Directors of Russian companies for the next year. Program agenda for 2001 includes a series of research efforts to study the role and significance of corporate Boards, and create a list of independent director candidates. The joint initiative will be headed by Mr. Alexander Filatov, PhD in Economics.

The implementation of the Program requires joint efforts on the part of government agencies, securities market players and other concerned representatives of the business community. The seminar was attended by Russian and foreign investors and issuers, representatives of international financial agencies, major consulting firms, public organizations and the academic community.

Event Materials:
Ernst& Young Presentation

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