The Bank of Russia issues the first review of corporate governance in Russian public companies

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In its pilot review drawing on the 2015 annual statements prepared by companies, the regulator conducts a comprehensive analysis of their compliance with the principles and recommendations set forth by the Corporate Governance Code, and assesses the quality of reasoning provided by the companies to explain their failure to comply with the Code’s principles.

The review was produced using information from 84 reports from public joint-stock companies (PJSCs) with exchange-listed shares. The corporate reports on compliance with the Corporate Governance Code were prepared in line with the Bank of Russia’s recommendations.

According to the companies’ estimates, their compliance with the Code’s principles averaged 58%.

21% of companies reported full compliance with at least 75% of the Code’s principles, and 42% of PJSCs comply with 50% to 75% of the principles.

The average level of quality of reasoning behind the failure to comply with the Code’s principles and recommendations was 36%. For 80% of companies, this level did not exceed 50%, 14% of companies provided sufficiently detailed explanations which disclosed their position in all material respects, though had areas for improvement (50-75%). 6% of PJSCs showed a high level of the quality of reasoning (over 75%).

The review demonstrates the readiness among the majority of the companies indicated to observe the Code’s principles and recommendations, and also provide high-quality reasoning to explain instances of incompliance with the Code.

The detailed analysis and assessment of explanations provided by the regulator in the review will, in turn, go on to serve as additional guidance for PJSCs and will help them to further improve the practice of corporate governance and information disclosure with regard to the compliance with the Code. To this end, the Bank of Russia has forwarded individual recommendations to all companies with comments about the quality of their reasoning.

The Bank of Russia pays a great deal of attention to the improvement of corporate governance and the implementation of best practices by Russian companies. In so doing, the central bank employs a soft regulatory mechanism based on the “comply and explain” principle.  This means an absence of formal requirements to comply with the Code’s principles, therefore PJSCs may implement them while taking into consideration specific circumstances and conditions of their business. However, companies must provide convincing reasoning in order to explain why at any given moment their currently adopted practice is more in line with the interests of the PJSC and shareholders than the Code. Explanations thus provided are an important element of the transparency of corporate activities, their communications with shareholders and other stakeholders.

The regulator plans to publish reviews of corporate governance practice on an annual basis.

17 April 2017

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