Chairman Paradigm Glance from Inside. Features of Board of Directors: Russia, Kazakhstan, Ukraine. hs chairman Paradigm v1.

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1 Chairman Paradigm Glance from Inside Features of Board of Directors: Russia, Kazakhstan, Ukraine hs chairman Paradigm v1.indd 1 27/11/ :30

2 Table of Content Survey Overview, 4 Main Conclusions, 5 The Role and Activity of the Board Chair, 6 Strategic Objectives, 6 Assessment of Personal Contribution to Company Success, 6 Board Efficiency, 6 Practical Effect of Independent Directors for Majority Shareholders, 7 Blue Chip Companies Main Factors of Success, 8 Main Challenges to Board Chairmen, 8 Future Development of Corporate Governance Systems in CIS Countries, 9 Our Respondents, 10 About the Company, 11 2 Chairman Paradigm Glance from Inside

3 Introduction While working with Boards of Directors of public and private companies of the former USSR, we became increasingly curious about the role the Board and its Chair generally play in management of the business, especially in the presence of a dominant shareholder. We considered it important to learn directly from Chairmen what they worry about, what practical benefit they believe they provide to the shareholders, what personal achievements they are proud of, what they want to change and what longterm effect their actions have. We would like to thank the Board Chairs who met with us and shared their opinions about their role and specifics of their work in the Boards of Russian, Kazakhstan and Ukrainian national companies. Yaroslav Glazunov Partner, Heidrick & Struggles, Moscow Office Daria Sklyarova Knowledge Manager, Heidrick & Struggles, Moscow Office We would like to thank Scott Eversman, a partner in the London office, Heidrick & Struggles, for his contribution to this work. Thirty two Board Chairs took part in this initiative. The discussions covered two issues. First, the role and activity of the Board Chair including the strategic tasks and challenges and the effect of the Board on company performance. Second, general development trends of corporate governance in Russia, Kazakhstan and Ukraine. Heidrick & Struggles 3

4 Survey Overview As the countries of the former USSR are being integrated into a global economy, the role of the Board Chair evolves. Under the leadership of the Chair, the Board of Directors is becoming a well-integrated team where all members have unique competencies and complement each other. The Chairs are increasingly anxious to make the Board and management team compliant with the company development strategy as well as competent, efficient and competitive. We conducted the Chairman Paradigm Glance from Inside; Features of Board of Directors: Russia, Kazakhstan, Ukraine survey between November 2012 and April 2013 in an effort to reveal how the chairman perceive their role and the role of the Board in the presence of an involved dominant shareholder. We were also interested in the Chairs opinions about the role of independent directors on the Board and about corporate governance in the CIS. Based on these objectives we talked with 32 Chairs about various aspects of their activity and their contribution to the development of the company. We also discussed the following: their level of satisfaction with their achievements and level of authority; their perception of their strategic objectives and the challenges impeding their achievements; their main expectations regarding their activity in the company and the changes required to achieve long-term effect. 4 Chairman Paradigm Glance from Inside

5 Main Conclusions While assessing the efficiency of the Board, half of the respondents marked 8 out of 10 points and one-third marked 7 points. 1 Chairs lack a comprehensive approach to the Board structure. They think the Board composition in terms of experience and knowledge is inconsistent with the company development strategy. To reach the maximum score for efficiency, every fifth respondent stated the need to improve the discipline of the Board meetings. Nearly the same number suggested improved proactivity and involvement of Board members and improved committee activity. Every sixth respondent stated the need for a deeper understanding of the market and clients. Only a few mentioned measures such as improving interaction with minority shareholders, corporate culture or increasing the creativity of management. Some noted that the low efficiency of the Board stems from low involvement of independent directors. As for the possibility of improving personal contributions, the opinions of the respondents split almost evenly. A bit less than half mentioned the need to ensure a balance of interests among minority and majority shareholders. And a bit more than half considered it essential to improve the composition of the Board, to strike a balance of experience, expertise and knowledge. None of the respondents mentioned CEO succession planning as a priority task, although resignation of a CEO typically catches the Board and the shareholders unaware. Chairs of local companies, in their view, face less bureaucratic problems, and they are more results-driven and oriented on involving Board members than Chairs of global companies. The key obstacle to achieving maximum efficiency of the Board, based on the opinion of the Chairs, is a controlling position of shareholders. 1 We asked respondents to appraise the performance of their Boards using a conventional subjective ten-point rating scale (1-10 points). As for the specifics of corporate governance development in the CIS, respondents thought the following were needed: stricter government requirements for corporate governance transparency, more profound influence of the Board Chair and a more reasonable approach to the Board structure. Heidrick & Struggles 5

6 The Role and Activity of the Board Chair Strategic Objectives In response to the question about the strategic objectives of the Board Chair, most of the respondents (4 out of 5) noted that strategic objectives should include improving corporate governance, creating a well-integrated team and creating a long-term HR strategy for the Board and top management. About half of the respondents consider strategic planning to be one of their priority tasks. More than one-third of the respondents consider attracting investment, harmonizing relations with investors, improving the company image and value creation to be other essential objectives of the Chairmen. Another priority includes keeping shareholder interests balanced. Most respondents consider the Chair to be the leading role in corporate governance. One of the Chairmen said, The Board Chairman is a steersman, he leads the way. Assessment of Personal Contribution to Company Success Giving high ratings to their contribution to the company development and success in general, respondents primarily mentioned their participation in the development, approval and implementation of the strategy, as well as risk and image management. Most of the Chairs mentioned that they are the ones who, hoist the flag when something goes wrong, and revise the company development strategy accordingly. In addition, the Chairs actively use a well-built network of contacts in their work, which they believe plays an important role in obtaining success for the company. They also consider it critical that they directly influence the executive team development. The absolute majority of the respondents consider it unfeasible to evaluate quantifiably the contribution of the Board Chair, i.e. dealing with such matters as approval of the company strategy, development of the top management, financial supervision and risk management. Only qualitative assessment of the contribution is appropriate. The majority of the respondents consider the most constructive approach for the majority shareholder is to employ a respectful and considerate attitude towards the work of the Board and its collective decisions. Board Efficiency We asked respondents to appraise the performance of their Boards using a conventional subjective ten-point rating scale (1-10 points). In general, all respondents gave rather high ratings to the performance of their Boards ranging from 6 to 9 points. 6 Chairman Paradigm Glance from Inside

7 Half of the respondents gave 8 points out of 10 to the performance of their Boards. One-third rated their Boards as a 7. The rest of the ratings split evenly between 9 and 6 points. A significant number of respondents mentioned a controlling position of shareholders on the Board to be a key obstacle to achieving 10 points on this scale. In addition, the respondents believe that the personality of the Chair can significantly hamper the improvement of Board performance. Practical Effect of Independent Directors for Majority Shareholders Experience shows that most discussions and lack of understanding on the part of the majority shareholders in post-soviet states arise out of the effect independent directors have. What practical effect can independent directors provide to the majority shareholders? Almost one-third of the respondents believe that independent directors can offer more objective and unbiased expertise. Independent directors have a broader view on the strategy and risks; you do not need to invent anything. According to the respondents, independent directors have considerable experience and a wide network of contacts. They also mentioned that in contrast to owners, independent directors have a more unbiased point of view from the outside. The owner is typically tied down to his company, which prevents a neutral point of view. More than two-thirds of respondents emphasized that having independent directors on the Board makes the company more attractive for investors. Independent directors are litmus papers for investors. One-third of the respondents think that independent directors help represent the positions of all shareholders, they are somewhat of a feedback channel between the shareholders and the managers, and they frequently act as arbitrators. Every fourth respondent mentioned that the presence of independent directors on the Board promotes better operational activity and favorably affects decision-making. The opinions about uselessness of independent directors were quite rare. How would you describe the advantages (if any) of independent directors who have already been invited to the Boards of the public companies listed on the London and New York Stock exchanges? The vast majority of respondents emphasized that independent directors on the Board creates a serious competitive advantage. Heidrick & Struggles 7

8 Few respondents consider such advantage insignificant. Every fourth respondent is certain that independent directors with such experience understand the principles, processes and game rules of corporate governance. Nearly the same number of respondents emphasized the importance of attracting such directors to improve the image of the company, its preparation for the listing and interaction with investors. What is your opinion about the difference between Chairmen of local blue chip companies and global companies? Most of the respondents (4 out of 5) mentioned that the Chairs of local blue chip companies encounter a lack of talent among Board members and top management. They also mentioned that global companies have a better understanding of Board principles and are more consistent in their decisions. The respondents think locality can be a kind of restraint, a clanship. At the same time, most respondents think that the modern world makes local companies evolve into global ones, subject to their sustainable development, which inevitably induces the companies to broaden their views: You should not retire into your shell, you should look around. Blue Chip Companies Main Factors of Success What is your opinion about how local blue chip companies become global in the modern world, where even local business is part of the global system? Every third respondent emphasized the necessity to improve the quality of the Board, make its composition more transparent and enhance the Board meeting discipline. In addition, the company s readiness to become global and move forward continuously is also important. Main Challenges to Board Chairmen Among the most critical challenges emphasized by the respondents included recruitment, development and retention of top managers. Almost half of the respondents mentioned top management development as one of the main challenges. Nearly one-third were more anxious about the proper composition of the Board. Every fifth respondent mentioned the need to balance the contradictions between the shareholders. Every seventh respondent emphasized the challenges relating to a global economy and interaction with regulators. Only a few respondents stated that they did not encounter any serious challenges. 8 Chairman Paradigm Glance from Inside

9 Future Development of Corporate Governance Systems in CIS Countries More than half of our respondents believe that corporate governance in CIS countries will evolve, and that quality and investor confidence will gradually improve: Economic rationality will prevail, and management quality will improve. Nearly every third respondent expects an increase in government influence on corporate governance and more tightened regulations with regard to transparency in the three countries included in the survey. According to respondents, Board composition will eventually become more diverse. The opinion that corporate governance in CIS countries has stagnated and making no headway was rare. In addition, respondents expect strengthening of the Chair role. Most think that corporate governance development is a reasonable and economically sound trend of every company: The Board of Directors is a good investment to enhance the competitive advantage of the company. Heidrick & Struggles 9

10 Our Respondents Total number of respondents is 32. All respondents are men. Average age is 54 years. Experience as Board Chair Companies by country years years Russia Kazakhstan Ukraine over years Companies by industry oil and gas chemicals transports and infrastructure agriculture mining retail telecommunications Companies by revenue (USD) Companies by listing m bn over bn bn foreign stock exchange national stock exchange no listing On the average, companies taking part in the survey have Boards comprising 7 members, 2 of whom are independent directors. 10 Chairman Paradigm Glance from Inside

11 About the Company Heidrick & Struggles International, Inc., (Nasdaq:HSII) is the premier provider of senior-level Executive Search, Culture Shaping and Leadership Consulting services. For 60 years, we have focused on quality service and built strong leadership teams through our relationships with clients and individuals worldwide. Today, Heidrick & Struggles leadership experts operate from principal business centers in North America, Latin America, Europe and Asia Pacific. For more information about Heidrick & Struggles, please visit For more details, please contact Yaroslav Glazunov +7 (495) Heidrick & Struggles 11

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