Corporate Governance and
Sustainability: What
Institutional Investors Want
Featuring the 2006 ISS Global Institutional
Investor Study on Corporate Governance
Presentation to Russian Delegation
April 24, 2007
Enabling the Business of Corporate Governance
Opening
Why is corporate governance important?
Opening Quotation
“Unless companies start paying more attention to
corporate governance, emerging markets could remain
stuck in the backwaters of global finance for years to
come.”
-- Wall Street Journal, Nov. 8, 2000
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Agenda
 Introducing ISS
 The 2006 ISS Global Institutional Investor Study
 Case Study: China – The Next Global Hot Spot for Corporate Governance?
 Emerging Trend: Environmental, Social and Governance (ESG) Integration
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Introducing ISS
ISS has been the corporate governance industry
leader for 20 years
Institutional Shareholder Services
 Founded in 1985 — with more than two decades of experience
 Recognized industry leader
 More than 1,700 Institutional Investor clients and 29 global custody
clients worldwide
 ISS is the leader is “end-to-end” market solutions
 550+ employees in twelve offices in the U.S., Brussels, London, Paris,
Amsterdam, Melbourne, Manila, Toronto and Tokyo
 Research and proxy distribution coverage of more than 35,000
shareholder meetings spanning over 115 global markets
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Introducing ISS
RiskMetrics Group Acquired ISS in 2007
RiskMetrics Group
RiskMetrics, Inc.
Risk Analysis, Research
and Modeling
Insight
Expertise
Relationships
Institutional
Shareholder
Services, Inc..
Governance Research
and Proxy Voting
RiskMetrics was spun off from JP Morgan in 1998
Industry-standard analytics with leading-edge technology
World’s largest independent provider of risk management solutions
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Introducing ISS
Combined companies have more than 2,100 clients
on six continents…
Global Reach
Europe
28.7%
United States/Canada
61.2%
 Asset Managers
 Pension Plans
 Insurance
Companies
 Central Banks
 Hedge Funds
 Funds-of-Funds
 Corporate
Treasuries
 Trading Banks
 Lending Banks
 Prime Brokers
© 2007 Institutional Shareholder Services Inc.
Middle East/Africa
1.5%
Asia/Australia
7.7%
Latin America
1%
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Introducing ISS
… and more than 800 employees in 12 countries
Global Reach
Office locations:
 New York headquarters
 Rockville, Maryland
 Washington, D.C.
 Chicago
 Toronto
 London
 Paris
 Frankfurt
 Brussels
 Amsterdam
 Tokyo
 Singapore
 Melbourne
 Manila
 Research &
Development
Centers:
–
–
–
–
Cambridge, Mass.
Ann Arbor, Michigan
Norman, Okla.
Geneva, Switzerland
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Introducing ISS
Our coverage of Russian companies has more than doubled
in the past three years
Increasing Coverage
Growing Coverage of Russian
Companies
222
250
134
200
150
100
50
0
© 2007 Institutional Shareholder Services Inc.
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84
32
32
52
2205
174
Non-Core
Core
102
2006
2007
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Introducing ISS
Our coverage includes the following Russian companies
Top Russian Companies
 Lukoil Oao
 Gazprom OAO
 Mobile Telesystems OJSC
 Vimpel Communications OJSC
 MMC Norilsk Nickel
 POLYUS ZOLOTO OAO
 Surgutneftegaz AO
 CTC Media Inc
 TMK OAO
 Unified Energy Systems RAO
© 2007 Institutional Shareholder Services Inc.
 Novatek OAO
 Sberbank of Russia
 Wimm-Bill-Dann Foods OJSC
 Mechel Steel Group OAO
 Sistema JSFC
 Novolipetsk Steel (frmly Novolipetsk
Ferrous Metal Factory)
 Tatneft OAO
 Rostelecom
 Comstar United Telesystems
 Severstal
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Agenda
 Introducing ISS
 The 2006 ISS Global Institutional Investor Study
 Case Study: China – The Next Global Hot Spot for Corporate Governance?
 Emerging Trend: Environmental, Social and Governance (ESG) Integration
© 2007 Institutional Shareholder Services Inc.
www.issproxy.com
April 24, 2007
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Sub-Agenda for the Global Investor Study
 Introducing the 2006 ISS Global Institutional Investor Study
 From Compliance Obligation to Business Imperative
 The Globalization of Corporate Governance
 Global Concerns: Four Fundamental Issues
 One Size Doesn’t Fit All: Where Investors Differ
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Introducing the 2006 ISS Global Institutional Investor Study
We conducted 322 interviews, mainly in person, with
investors representing a wide variety of regions and views
© 2007 Institutional Shareholder Services Inc.
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Introducing ISS
Only ISS provides an end-to-end set of solutions to meet all
corporate governance and proxy voting requirements
• Policy
development
• Client-specific
custom policies
• U.S. research
• International
research
• Client-specific
custom analyses
• Standard vote
recommendations
• Full agent voting
service
• Client-specific
custom vote
recommendations
• Votex platform
• Turnkey service
for disclosing vote
policies and
voting records
• CGQ
• Voting Analytics
• SCAS
• Sustainability Risk
Reports
• ESG Data Feeds
• M&A Insight
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Introducing the 2006 ISS Global Institutional Investor Study
The ISS 2006 Global Study finds investors voicing five major
themes highlighting the value of corporate governance
Institutional Investors Voice Five Major Themes
1. Corporate governance has shifted from a compliance obligation to a
business imperative:
–
–
–
First came compliance
But investors are seeing corporate governance in a new light, with competitive and portfolio advantages
And they expect the importance of corporate governance to grow
2. Corporate governance is global:
–
–
There are universal views on the importance of corporate governance, and
Global forces are shaping corporate governance practices
3. Investors globally share four fundamental concerns:
–
Better boards, aligned executive pay, improved and trusted disclosure, and bottom-line company and CEO
performance
4. One size doesn’t fit all investors:
–
–
Meaningful differences appear across regions and types of investors
Corporate social responsibility offers a case study of contrasting views
5. Investors face undeniable challenges in corporate governance:
–
Yet investors are adopting innovative approaches to meet the challenges and, in the best of cases, are turning
costs into profit
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Sub-Agenda for the Global Investor Study
 Introducing the 2006 ISS Global Institutional Investor Study
 From Compliance Obligation to Business Imperative
 The Globalization of Corporate Governance
 Global Concerns: Four Fundamental Issues
 One Size Doesn’t Fit All: Where Investors Differ
© 2007 Institutional Shareholder Services Inc.
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1. From compliance obligation to business imperative
Corporate governance has shifted from a
compliance obligation to a business imperative
Compliance Obligation to Business Imperative
 First Came Compliance: Compliance requirements, which were raised in
response to well-publicized corporate scandals, provided the catalyst behind
the increased importance of corporate governance
 Shift to a Business Imperative: Investors increasingly seeing corporate
governance in a new light – as a business imperative – due to:
– Recognition of ownership responsibilities – “it’s the right thing to do”
– Increased competitive requirements
– Enhancement of portfolio value
 Forecasted Increased Importance: 63% of investors globally expect
increased growth in the importance of corporate governance for their firms
over the next three years
© 2007 Institutional Shareholder Services Inc.
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1. From compliance obligation to business imperative
63% of investors believe corporate governance will become
even more important in the next three years
© 2007 Institutional Shareholder Services Inc.
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1. From compliance obligation to business imperative
Scandals have receded as drivers of corporate governance
importance, but business-related drivers have grown
© 2007 Institutional Shareholder Services Inc.
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1. From compliance obligation to business imperative
Most investors also believe that corporate governance offers
business value, with very few seeing it as merely compliance
 “Just because it's hard to quantify doesn't mean it cannot be a competitive advantage.”
– U.S. investment manager
 The focus on corporate governance has increased significantly in the last couple of years because of new
proxy voting regulations. Now as more data comes in, we are beginning to look at it as possibly a good
investment and performance tool.”
– U.S. mutual fund
 We have materially outperformed the S&P 500 over the last decade.”
– U.S. activist investor
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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Sub-Agenda for the Global Investor Study
 Introducing the 2006 ISS Global Institutional Investor Study
 From Compliance Obligation to Business Imperative
 The Globalization of Corporate Governance
 Global Concerns: Four Fundamental Issues
 One Size Doesn’t Fit All: Where Investors Differ
© 2007 Institutional Shareholder Services Inc.
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2. The globalization of corporate governance
Corporate governance is global – it’s not just limited to
Anglo-American markets but is important everywhere
Corporate Governance Is Global
 Universal Views on Corporate Governance Importance: Investors share strong
views on the value of corporate governance regardless of their region
 Global Forces Shaping Corporate Governance Practices: Globalizing forces exert
a pull that shapes and accelerates the development of corporate governance in markets
throughout the world:
– Spread of governance standards, such as
 The U.S. Sarbanes Oxley Act
 Pan-European standards
 Shareholder voting on remuneration plans has spread from the U.K. to the Netherlands, Sweden, and
Australia – and now has shareholder proponents in Switzerland and the U.S.
– Increase in cross-border proxy voting
 Investors use the power of the ballot box to improve standards in global markets
© 2007 Institutional Shareholder Services Inc.
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2. The globalization of corporate governance
A majority of investors in all markets studied consider
corporate governance very or extremely important to them
 Answers range from a high of 90% of Chinese investors, to a low of 61% in continental Europe
 Percentage of investors saying that governance is not important is limited to single digits in every market
studied
 Majority of investors in every market also believe their relationships with portfolio companies have become
more constructive
© 2007 Institutional Shareholder Services Inc.
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2. The globalization of corporate governance
Investors themselves are agents for change – and are
interested in the views of overseas investors
 The U.S., Canada, and Australia are the most likely to vote global – and we also find anecdotal evidence of increasing crossborder voting in markets from France to Australia
 “Before, we had a proxy committee but did little voting. Starting in January 2005, we have a global committee.”
– Dutch asset manager
 “We are interested in learning…how overseas investors’ views of Japanese issuers might be changing.”
– Japanese asset manager
© 2007 Institutional Shareholder Services Inc.
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Sub-Agenda for the Global Investor Study
 Introducing the 2006 ISS Global Institutional Investor Study
 From Compliance Obligation to Business Imperative
 The Globalization of Corporate Governance
 Global Concerns: Four Fundamental Issues
 One Size Doesn’t Fit All: Where Investors Differ
© 2007 Institutional Shareholder Services Inc.
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3. Global concerns: four fundamental issues
Investors globally share four fundamental concerns about
corporate governance over the next three years
Four Fundamental Concerns
 Better Boards: The number one priority in all markets except Japan – includes board structure,
composition, and independence as well as the process of nominating and electing directors.
 Aligned Executive Pay: One of the top three priorities in all markets studied except Japan. While
significant numbers of investors believe that pay should be reined in, their key concern is pay for
performance. Investors want boards to disclose the performance metrics and demonstrate the links
justifying executive compensation.
 Improved and Trusted Disclosure: Financial reporting is one of the top three priorities in most
markets. More broadly, more than seven in 10 investors globally cite improved disclosure in all areas,
not just financial reporting, as an improvement they most want.
 Bottom-line Performance: Institutional investors increasingly view corporate governance as a
business imperative – and they rank company and CEO performance among the top three issues in
four of seven markets studied.
© 2007 Institutional Shareholder Services Inc.
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3. Global concerns: four fundamental issues
These four concerns stand out from a longer list
of issues that institutional investors identified
© 2007 Institutional Shareholder Services Inc.
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3. Global concerns: four fundamental issues
From board accountability to pay for performance, investors
explain why the rank these four issues their priorities
Better Boards
Better Boards:
If you get the board right, the rest takes care of itself.”
– U.K. investment manager
Aligned Executive Pay:
 “The compensation committees on most boards are out of touch with reality.”
– U.S. hedge fund
 “Executive compensation is a razor-like ray that gets shareholders into the boardroom…This is where
you see whether directors in fact are independent in action.”
– U.S. pension fund
Improved and Trusted Disclosure:
 After the scandals and the subsequent catching-up in the financial reporting area, problems still
persist. It’s the basics of corporate governance to have good reporting…”
– Belgian investment manager
Bottom-line Performance:
 “[Company and CEO performance] is the bottom line for everything.”
– U.S. investment manager
© 2007 Institutional Shareholder Services Inc.
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Sub-Agenda for the Global Investor Study
 Introducing the 2006 ISS Global Institutional Investor Study
 From Compliance Obligation to Business Imperative
 The Globalization of Corporate Governance
 Global Concerns: Four Fundamental Issues
 One Size Doesn’t Fit All: Where Investors Differ
© 2007 Institutional Shareholder Services Inc.
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4. One size doesn’t fit all
One size doesn’t fit all investors – investors also reveal
differences in their views on corporate governance
One Size Doesn’t Fit All
 Markets Exhibit Distinct Differences: While there are significant similarities in how
institutional investors view corporate governance on a global basis, meaningful
differences appear across regions on these issues:
–
–
–
–
Collective engagement, an emerging trend in some markets
Protecting minority shareholders, especially where family firms and parent corporations prevail
Claiming securities class action settlements, with interest spreading from the U.S.
The Australia-New Zealand market: a chance to leapfrog?
 Where You Sit Influences Where You Stand: Patterns emerge from the ISS Global
Institutional Investor Study revealing profiles of each type of investor group studied:
–
–
–
–
Pension Funds: The True Believers
Mutual Funds: “Reluctant Activists” Revisited
Hedge Funds: The New Force
Investment Managers: A Microcosm of the Investment World
 Corporate Social Responsibility: CSR offers a case study in the diversity of investor
views, drawing polarized and passionate responses on an issue that, its advocates
contend, represents the next generation of corporate governance.
© 2007 Institutional Shareholder Services Inc.
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4. One size doesn’t fit all
For example, regional context influences investors’
perceptions about the advantages of corporate governance
 Two markets stand out:
– 80% of Japanese investors cite enhanced
returns as the most important advantage
of corporate governance, compared to
global average of 37%
– Only 7% of Chinese investors chose
enhanced returns, with 80% pointing to
risk management
 Investors in China, continental Europe,
and Japan are the most likely to say
that corporate governance will be more
important over the next three years
 “So far corporate governance has been
window dressing, but shareholders are
discovering the real value of corporate
governance and the state of corporate
governance in Europe: they will have
to react. We are on the verge of indepth corporate governance design
changes.”
– French asset manager
© 2007 Institutional Shareholder Services Inc.
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4. One size doesn’t fit all
Japanese investors are far more likely to rank anti-takeover
devices as the number one issue than any other country
Poison pills are new to Japan – as is the threat of hostile takeovers.
“We are worried about excessive management entrenchment, with overuse of poison pills
and other takeover defenses.” — Japanese pension fund
© 2007 Institutional Shareholder Services Inc.
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4. One size doesn’t fit all
We’ve developed profiles based on the differences between
pension funds, mutual funds, hedge funds, and asset managers
Investor Type Profiles
 Pension Funds: The True Believers?
– The most likely group to cite enhanced returns as the most significant CG advantage (53%)
– They say they are unique among institutional investors in their long-term perspective
 Mutual Funds: “Reluctant Activists” Revisited
– They are the most likely to say that CG is important to them (84%)
 Hedge Funds: The New Force
– True to their image, show a willingness to take on management and focus on M&As
– Least likely to say that the tone of interaction with issuers has improved (50%)
 Investment Managers: Microcosm of the Investment World
– Most of the other investor groups are their clients
– As a result, their responses align closely with global investor averages
– They differed from the average only in their emphasis on client demands
© 2007 Institutional Shareholder Services Inc.
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Agenda
 Introducing ISS
 The 2006 ISS Global Institutional Investor Study
 Case Study: China – The Next Global Hot Spot for Corporate
Governance?
 Emerging Trend: Environmental, Social and Governance (ESG) Integration
© 2007 Institutional Shareholder Services Inc.
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Special report: on China
In addition to the five themes, we found that China may
become the next hot spot globally for corporate governance
China: The Next Corporate Governance Hot Spot?
 China reminds the rest of the world why corporate governance has become so
important
 Chinese investors feel the need for corporate governance practices and
protections that counterparts in developed markets take for granted:
– Companies lack oversight
– Boards fail to provide proper checks and balances
– Markets stir distrust instead of building investor confidence
– Constraints conspire to hold back the growth of capital markets
 But China also presents great prospects for growth, with study participants
pointing to a raft of reforms that they expect to propel the country forward in
developing a framework of corporate governance laws and standards
 These findings show why some China watchers insist that it can become the
world’s next hot spot in corporate governance
© 2007 Institutional Shareholder Services Inc.
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Special report: on China
China has the only developing economy studied, and its
investors present a unique picture
Nowhere in the countries we studied do investors place greater importance
on corporate governance or see faster growth in its importance than in China
© 2007 Institutional Shareholder Services Inc.
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Special report: on China
Chinese investors believe increased focused on returns and risk
management will drive future corporate governance importance
(Multiple responses allowed)
© 2007 Institutional Shareholder Services Inc.
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Special report: on China
Chinese investors expect dramatic reforms to address
significant challenges
China as the Next Corporate Governance Hot Spot

Investors cited four key challenges of investing in China today:
– The corporate ownership structure and resulting conflicts of interest between insiders
and minority shareholders
– Lack of independent directors
– The lack of regulations and enforcement to prevent abuses and protect the rights of
minority shareholders
– The lack of transparency and disclosure
 But Chinese investors also expect reforms in these areas:
– Changes in the ownership structure, with non-tradable shares becoming tradable
– More independent boards
– Better corporate disclosure
– The introduction of equity pay to align managers interests with that of minority
shareholders
© 2007 Institutional Shareholder Services Inc.
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Special report on China
Board independence, a top priority in nearly all markets,
soars in importance among Chinese investors
“One of the major problems facing corporate governance in China is insider
control. A well-balanced independent board can well defend against insider
control.” – Chinese mutual fund professional
© 2007 Institutional Shareholder Services Inc.
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Special report: on China
New Incentives Needed: Chinese investors emphasize pay for
performance as an improvement they most want to see
Cultural shift: Managers must now meet shareholder needs, not government
quotas. So China must introduce new incentives to align managers’ interests
with those of shareholders.
“The executive has no incentive to perform well. And there is no punishment for
bad performance.” – Chinese investor
© 2007 Institutional Shareholder Services Inc.
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Special report: on China
Better disclosure and transparency also top the list of
improvements Chinese investors most want to see
“A public company’s internal operation is like a black box.”
– Chief investment officer of a Chinese mutual fund
© 2007 Institutional Shareholder Services Inc.
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Agenda
 Introducing ISS
 The 2006 ISS Global Institutional Investor Study
 Case Study: China – The Next Global Hot Spot for Corporate Governance?
 Emerging Trend: Environmental, Social and Governance (ESG) Integration
© 2007 Institutional Shareholder Services Inc.
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April 24, 2007
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ESG: Emerging Trend
The topic of corporate social responsibility (CSR)
drew polarized and passionate responses
There Are Believers…
…And There Are Non-Believers
 “Corporate governance is just one part of all
governance risks – social, environmental and
corporate… We favor a holistic response.”
– Australian superannuation (pension) fund
 “The concept of corporate governance must be
more broadly defined and understood. It’s
more than boards and executive pay; rather,
it’s all of sustainable development. Boards
must actively pursue environmental and social
issues management. Companies and investors
must move away from the historically very
narrow view of corporate governance.”
– U.S. pension fund
 “SRI is impractical warring between people
competing for the same space: investment
managers versus the ‘conscience of the world’
with no skin in the game. Everyone has gotten
so pious.”
– Australia-New Zealand pension fund
 “We don’t follow any type of SRI philosophy.
But we believe strongly in corporate
governance in all of our holdings, whether it’s
Philip Morris or GE or whatever. The state or
the EPA [Environmental Protection Agency]
should regulate. That is not our scope or
mission. We’re an investor.”
– U.S. pension fund
 “It’s been delegated to special interests and
moral issues. But there is increasing evidence
that it has economic impact. We have a new,
long-term project to look at the issues and try
to bring it into the mainstream.”
 “We aren’t sure, as we think about a
sustainable society, that shareholders should
be the dominant stakeholder vote.”
– U.S. mutual fund
– U.S. pension fund
© 2007 Institutional Shareholder Services Inc.
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ESG: Emerging Trend
We see market trends driving the growing interest in ESG
issues
Beyond the Global Study: Our Perceptions
 “Mainstreaming” of ESG issues among the investment
community
 Broader awareness and understanding of key issues
(human rights, climate change…)
 Trend toward incorporation of extra-financial indicators
 Broader view of risk
© 2007 Institutional Shareholder Services Inc.
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ESG: Emerging Trend
Investors are beginning to look at extra-financial criteria as
indicators of risk
BP Controversies in 2006
BP settles suit over TX
refinery explosion for
US$1.2B
BP announces cutting
production by 8% due to
Alaska spill
© 2007 Institutional Shareholder Services Inc.
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ESG: Emerging Trend
Sustainability issues are shaping investment decisions for a
growing number of managers
Wal-Mart Controversies in 2006
Norwegian government cites
labor practices in ordering
national pensions to divest
Wal-Mart shares
© 2007 Institutional Shareholder Services Inc.
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ESG: Emerging Trend
Investors are looking for opportunities to capture value as
the market rewards companies with improving governance
CGQ Index Scores
DEC ’03 Comp committee independent; increase board size; limits on board service
JAN ‘04 Majority of board is independent; nominating committee independent
FEB ‘04 Shareholders vote to fill board vacancies; policy on auditor rotation
Many managers are
looking for positive
trends in governance
“momentum”
© 2007 Institutional Shareholder Services Inc.
DEC ‘04 Disclosed CEO related party transaction
JAN ‘05 Option plan costs are deemed reasonable
SEP ’05 New CGQ methodology
OCT ’05 Board independence
increases
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ESG: Emerging Trend
ISS uses 400+ indicators for governance and sustainability
to develop a complete ESG profile
Environmental
Social
Governance
Oversight and Reporting
Labor and Human Rights
Board of Directors
Climate Change
 Labor Rights
 Structure and Independence
 GHG Policy
 Working Conditions/Wages
 Management Entrenchment
 Emissions
 Security Forces
Compensation and Ownership
Environment
 Benefits, Training and Enforcement
 Equity-based Compensation
 Resource Use (Energy, Water, etc.)
 Discrimination
 Mgmt and Director Ownership
 Waste and Recycling
Ethics
Audit
Product Issues
 Internal Controls
Controversial Business Issues
 Restatements
Ties to Oppressive Regimes
Takeover Defenses
Management Policy and Execution
Disclosure and Accounting
© 2007 Institutional Shareholder Services Inc.
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Conclusion
How can you leverage corporate governance – and ESG –
for Russia and your individual companies?
Concluding Challenge
“Unless companies start paying more attention to
corporate governance, emerging markets could remain
stuck in the backwaters of global finance for years to
come.”
-- Wall Street Journal, Nov. 8, 2000
© 2007 Institutional Shareholder Services Inc.
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Conclusion and discussion
Let’s continue to the dialogue – here is how you can reach
us.
For More Information, Contact:
Stephen Deane
Vice President and Director,
ISS Center for Corporate Governance
Director of the 2006 Global Institutional
Investor Study
stephen.deane@issproxy.com
© 2007 Institutional Shareholder Services Inc.
Institutional Shareholder Services, Inc.
2099 Gaither Road
Rockville, MD 20850 USA
+1 301.556.0500
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