S&P Asgns Moscow City Telephone Network CGS-5+ Govrnance Score
March 6, 2006
Standard & Poor's Governance Services said today it assigned its corporate governance score (CGS) of 'CGS-5+' to Moscow City Telephone Network (JSC) (MGTS), a Moscow-based incumbent fixed-line telecommunications company. At the same time, Standard & Poor's assigned the company a score of 'CGS-5.9' on the Russia national scale.
The CGS reflects the positive influence of the majority shareholder Sistema (JSFC) (which holds MGTS stock via its subsidiary Comstar-UTS JSC). The score is constrained, however, by the limited ability of the other blockholder Svyazinvest JSC--and that of minority shareholders and independent directors--to balance Sistema's influence.
“Svyazinvest's future role in the company is uncertain, particularly given its exposure to certain conflicts of interest,” said Standard & Poor's governance analyst Oleg Shvyrkov. “In view of these concerns, the weakness of independent control mechanisms is a principal constraint on the CGS. These mechanisms are new, and their effectiveness is yet to be demonstrated.”
The overall CGS on MGTS 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 score second:
-- Ownership structure and external influences
-- Shareholder rights and stakeholder relations
-- Transparency, disclosure, and audit
-- Board structure and effectiveness
The strengths of corporate governance practices at MGTS include:
-- Sistema's commitment to raising MGTS' shareholder value and to ensuring management accountability. Over the past few years, Sistema has been mindful of the interests and opinions of other stakeholders in the company. This is evidenced, for instance, by the fair buy-out price Sistema offered to minority shareholders following MGTS' restructuring in December 2005.
-- The activity of MGTS' board and the wide scope of expertise among its members. The recent creation of board committees is likely to further contribute to board effectiveness.
-- The election of two independent directors to Svyazinvest's board in June 2005, of which one has experience in chairing an audit committee.
-- A generally good level of transparency and shareholder rights, although room for improvement remains. The company publishes audited U.S. GAAP financial statements prior to annual shareholder meetings.
Standard & Poor's analysis, however, identified several weaknesses in the company's governance system, including:
-- MGTS' exposure to the general risks of concentrated ownership, despite Sistema's generally positive role and Svyazinvest's continuing involvement. These risks are not balanced by strong independent representation, which is particularly important in view of the considerable volume of transactions between MGTS and other Sistema subsidiaries.
-- Uncertainty regarding the effect that Svyazinvest's possible exit, or its expected privatization, might have on MGTS' governance structure.
-- Uncertainty regarding the effectiveness of board committees, which have been created only recently.
-- Several disclosure shortfalls, including the exact terms of related-party transactions, audit fees, and individual compensation of executives.
-- An executive compensation plan that does not provide clear performance incentives.
-- The registrar's affiliation with Sistema.
-- The fact that the auditor is selected by Sistema for all its subsidiaries, and provides considerable nonaudit services to MGTS.
Company — MGTS
Full namePublic Joint Stock Company Moscow City Telephone Network (MGTS)