Professor Alexander Settles
Faculty of Management, State University
– Higher School of Economics
Email: asettles@hse.ru

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Corporate Governance is a principle variable in evaluating risk / setting discount for IPOs
Firms reaching the market make significant CG changes to their board structure and practices to conform to market expectations

The First Wave (1996-2002)
VimpelCom, 1996
New York Stock Exchange (NYSE);
American Depository Receipts (ADRs);
$110,8 m Raised.
Tatneft, 1996
Snapshot of the Issuers
London Stock Exchange 144A (LSE);
Global Depository Receipts (GDRs);
$ 120 m Raised
MobileTeleSystems,
2000
NYSE; ADRs;
$353 m Raised
Wimm-Bill-Dann, 2002
NYSE;
ADRs;
$207 m Raised
Gazprom, 1996
LSE 144A;
ADRs;
$ 430 m Raised
GoldenTelecom, 1999
NASDAQ;
Ordinary shares;
$144,2 m Raised
LUKOIL, 2002
LSE 144A;
ADRs;
$775 m Raised
RBC Information
Systems, 2002
RTS/MICEX;
Ordinary shares;
$ 13,28 m Raised
Why?
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Insufficient volumes on Russian
Market;
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Perception that without US investors sufficient capital could not be raised;
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NYSE was significantly larger and more prestigious than LSE;
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Undeveloped legal regime in
Russia; and

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In 2006 LSE IPO Market exceeds NYSE IPO Market
2007 IPO pipeline from Russian companies reached
$28 bln. compared with $20 bln. in 2006
“We are very concerned about corporate governance, transparency of company financials and protection of minority shareholders and, with a number of Russian companies, these things are called into question”, Mr. Thair, the New York Stock
Exchange (April, 2007; www.ft.com);
Number of US listings of Russian companies since
2004: 2
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Mechel (2004)
CTC Media (2006)
Number of LSE/AIM listings of Russian companies greater than $200 mln. during 2005/2006: >17

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NYSE – SOX/NYSE Rules
LSE – UK Combined Code.
Governance Metrics International
(2005) ranks UK as leading country in terms of Corporate Governance
LSE GDR/London AIM – Combined
Code not required but usually insisted by underwriters as “Best
Practice”

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Accounting regulation
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Public accounting oversight board
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Restricting consulting/auditing
Audit committee
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Independent financial experts
Internal control assessment
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Assessment by auditors and company (Section
404)
Deemed costly and contested
Cross-listing elsewhere…
Executive responsibility
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CEOs and CFOs must sign off on the company’s quarterly and annual financial statements. If fraud causes an overstatement of earnings, these officers must return any bonuses.

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Many argue that SOX is hurting U.S. capital markets.
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SOX undermines CEO’s appetites for risk
SOX is a full employment act for Accountants
(404)
The Committee on Capital Markets
Regulation, set up by U.S. Treasury
Secretary Hank Paulson, advocates rolling back the Sarbanes-Oxley Act.

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U.S. is losing out on new international listings…
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London is beating the U.S. in the number of IPOs it draws.
Last year, the NYSE drew 192 IPOs and
Nasdaq 126.
The LSE, often cited as the example of how SOX is chasing companies away, attracted a robust 617 IPOs, 510 of which were on the AIM, the exchanges small-cap market.

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However, the U.S. IPOs are larger.
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Of a total of $118.2 billion raised through IPOs in 2006
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$17.5 billion occurred on the LSE, $4.2 billion on
AIM
$16.9 billion on the NYSE
$9.4 billion on Nasdaq
$0.2 billion on AMEX, according to Thomson
Financial.

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Listed companies to have boards of directors with a majority of independents
The compensation, nominating, and audit committees to be entirely composed of independent directors
The publication of corporate governance guidelines and reporting of annual evaluation of the board and CEO

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Cadbury Code
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Boards of directors of public companies include at least three outside (non-executive) directors
The positions of CEO and chairman of the board of these companies be held by two different individuals
Cadbury Code is not legislated into law
LSE requires companies to “comply or explain.”
Empirical research suggests the code has been effective despite not being enforceable in courts…

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The Board
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Effectiveness
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Talents and background of board members
Tying board remuneration closely to performance
Strategic thinking by the Board
Managing risk effectively

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Developing a robust audit committee
Taking corporate social responsibility on board
Encouraging and active dialogue with shareholders

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Clear strategy aligned to capabilities
Vigorous implementation of strategy
Key performance drivers monitored
Effective risk management
Sharp focus on views of the capital market and other key stakeholders
Regular evaluation of board performance

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To monitor the integrity of the financial statements
To review the company’s internal financial controls, internal control and risk management systems.
To monitor/review the effectiveness of the internal audit function.
To make recommendations to the board on the appointment/removal of the external auditor

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To monitor/review the external auditor’s independence/objectivity and the effectiveness of the audit process.
To develop/implement policy on the engagement of the external auditor to supply non-audit services
To review arrangements by which staff may raise concerns about possible improprieties (‘whistleblowing’)

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Owners & employees
Stock Exchange
Government (SEC, FSFM, etc.)
Institutional shareholder
Public Investors

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Reports valued Google’s IPO at $16 billion
Estimated 2003 revenue: $1 billion, profit: $300 million
In order to compete with the giants
(Yahoo! and Microsoft), it would be in Google’s best interest to raise more money

Google’s naïve attempts to stay private
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Why stay private?
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Eric Schmidt: “We’re generating cash. We don’t ever need to go public.”
Google didn’t want to become a “short-sighted” company
However, Google was bound to become publicly traded
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SEC regulation forcing them to report because of stock options offered to employees
Companies funded by venture capitalists almost always result in IPOs
During 2003, they unsuccessfully toyed with different strategies to remain private

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Decision to become public in early
2004
Debate over filing for public offering
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Using investment bank vs. auction method
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Ended up using a Dutch auction
Proposed S1 (formal public offering document)
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Sell $2,718,281,828 worth of shares

S1 “An Owner’s Manual for Google’s Shareholders”
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Outlined how Brin/Page planned on running the company
Claimed Google was different, so it would not act as a traditional public company
Proposed corporate structure that protected Google’s ability to “innovate and retain its distinctive characteristics”
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“Dual class shareholding structure”: Founders and executives have far more control than common shareholder (common in media companies)

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Google IPO did not follow Wall
Street practices:
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S1 represented a destruction of the traditional share selling, corporate governance, investor communications, and management structure of public companies
However, it showed tremendous numbers in the income statement
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Profits, Cash, Operating Margins

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Bad Reputation
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Google increased Secrecy
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Slow amendments to S1 and entire process
Playboy Interview
Relentless scrutiny (SEC)
Companies uneven management of overwhelming growth
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Reporting requirements would require a great deal of restructuring (e.g. Advertising)
Founders’ reluctance about the public path

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Auction on August 12, 2004
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Revealed market price range: $85 to
$108
Public on August 19, 2004
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Price was $85/share

Post-IPO steps?
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Created “Tablets” (declaration of what makes Google itself)
Post-IPO Organization (core groups)
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Core search
Advertising Products
“20 Percent” (Gmail, Google News, Orkut)
“10 Percent” (Google Keyhole, Picasa)
Could now execute on its two core businesses, while other groups could pursue projects that could potentially turn into core businesses or useful products

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Brian Reid (former senior manager) sued Google for age discrimination
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“Google is a monarchy with two kings”
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Culture: “youth obsessed”
However, somehow they have succeeded
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5 year revenue growth is 400,000%
Fastest growing company ever

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The Group has three principal areas of business:
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Corporate banking
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Retail banking
Investment banking

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1,399,835,420,000 shares or
20.82% of the capital of VTB was offered as GDRs
79.15% was retained by the Federal
Property Administration

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Joint Global Coordinators
Citi
Deutsche Bank
Goldman Sachs
International Joint Bookrunners
Citi
Deutsche Bank
Goldman Sachs International
Renaissance Capital

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The interests of VTB’s principal shareholder may conflict with those of other shareholders;
VTB’s management has recognised a material weakness in the Group’s internal controls;
Some interested party transactions of Russian banks in the Group require the approval of disinterested directors or disinterested shareholders;
Shareholder liability under Russian law could cause the Group to be liable for the obligations of its subsidiaries;
There are weaknesses in legal protections for minority shareholders and in corporate governance standards under Russian law;

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Of the eleven seats on VTB’s
Supervisory Council, six are held by representatives of various
Government ministries and agencies, one is held by representatives of each of the CBR and the Russian President, one is held by VTB’s President-Chairman, and two are held by independent directors.

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Global Offering:
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Russian securities legislation does not permit
VTB to sell more than70% of the total number of ordinary shares authorised in the Global
Offering in the form of GDRs.
Retail Offering - retail investors in Russia
“People’s IPO”
The Institutional Offering
13.60 Kopecks or $0.00528 per Share and $10.56 per GDR.
Dec 2, 2008 share price is $2.05

VTB GDR price
140
130
120
110
100
90
80
70
Jun 2007 Aug 2007 Oct 2007
Russia RTS VTB Bank
Dec 2007 Feb 2008
Source: Factset