S&P: Telecoms Co. MGTS Governance Score 'CGS-5+', 'CGS-5.5' Russia National Scale Affirmed, Withdrawn At Company Request
April 9, 2009 "Standard & Poor's"
MOSCOW (Standard & Poor's) April, 9, 2009--Standard & Poor's Governance Services said today that it affirmed and immediately withdrew its corporate governance scores(CGS) of 'CGS-5+', 'CGS-5.5' Russia National Scale on Moscow City Telephone Network (JSC) (MGTS), a Moscow-based incumbent fixed-line telecommunications company. The scores were withdrawn at the company's request due to the intention of the majority shareholder to assign a CGS score.
"We have not observed any significant changes in governance processes since our last review,” said Standard & Poor's governance analyst Anna Grishina. “The score is primarily constrained by the unbalanced influence of the majority shareholder, who may be exposed to some conflicts of interest. In fact, three quarters of board seats belong to the majority shareholder and decision-making is not consensus-based”.
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:
-- The influence of majority shareholder Comstar is positive overall. It is motivated to raise MGTS’s shareholder value and to ensure management accountability.
-- The board of MGTS has a strong skill mix and is active.
-- A fairly high level of financial transparency. MGTS produces annual accounts under U.S. GAAP, which are released before the annual general meeting.
-- A sound audit process. MGTS employs a reputable international audit firm. The audit committee is quite active and regularly meets with the internal audit head.
Standard & Poor's analysis, however, identified several weaknesses in the company's governance system, including:
-- The lack of a system of checks and balances at the board level (eight out of twelve seats belong to Comstar and its parent, Sistema JSFC). This is a concern particularly in view of the considerable volume of transactions between MGTS and other Sistema subsidiaries.
-- Several disclosure shortfalls, including the exact terms of related-party transactions, audit fees, and individual compensation of executives. The lack of an English-language web-site is also considered as a negative. The investor relations function is concentrated at the parent company level; requests from investors are usually referred to Comstar.
-- Director compensation creates short-term incentives, which are at odds with the board’s mission to provide strategic guidance.
-- Certain drawbacks in shareholder rights, including a lack of clear guidelines on dividend size and lengthy payout procedures, as well as reservations about the registrar’s independence.
The opinions expressed are the independent opinions of S&P’s Governance Services, a department of Equity Research Services, and do not reflect the opinions of other areas of Standard & Poor’s. Standard & Poor's Corporate Governance Scores, GAMMA scores and other analytic services are performed as entirely separate activities in order to preserve the independence and objectivity of each analytic process.
Information on Corporate Governance Scores and GAMMA scores is available at www.governance.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Moscow (7) 495-783-4000/40.
Company — MGTS
Full namePublic Joint Stock Company Moscow City Telephone Network (MGTS)