29 Jul 2009 19:15

S&P assigns GAMMA-5+ to Russia's Dalsvyaz, replacing CGSs

MOSCOW. July 29 (Interfax) - Standard & Poor's Governance Services has replaced its Corporate Governance Score (CGS) on Dalsvyaz OJSC with a Governance, Accountability, Management Metrics and Analysis (GAMMA) score on the company, the leading fixed-line telecommunications operator in the Far Eastern region of Russia, the ratings agency said in a statement.

A GAMMA score of GAMMA-5+ was assigned to Dalsvyaz.

The GAMMA score replaces Standard & Poor's CGS that was assigned to Dalsvyaz on 4 July 2003. In connection with the assignment of GAMMA score, the CGS on the company will no longer be maintained. The CGS was affirmed at CGS-5 on the global scale and CGS-5.4 on the Russia national scale and withdrawn.

The GAMMA score is based on an updated CGS methodology and introduces two new elements of governance analysis: the enterprise risk management system (ERM) and the strategic process. The assignment of a GAMMA score to Dalsvyaz follows the invitation by Standard & Poor's Governance Services to replace CGSs with GAMMA scores, which Standard & Poor's believes to be a more comprehensive assessment of governance structures and practices. This invitation was extended to all existing CGS clients.

"We note Dalsvyaz management's commitment to constant improvement of governance practices. The company has improved the timing of disclosure of IFRS statements, begun publishing IFRS financial reports on a quarterly basis and updated its dividend policy," says Standard & Poor's governance analyst, Anna Grishina. "The score is primarily constrained by the dominant influence of government-controlled holding parent company, Svyazinvest. Although the parent's influence has generally become more positive in recent months, new risks associated with the expected reorganization of the Svyazinvest group mitigate these positive changes."

The overall GAMMA score of Dalsvyaz is the result of four component scores of 1 (low) to 10 (high).

-- Shareholder influence 4

-- Shareholder rights 7

-- Transparency, audit and ERM 6+

-- Board effectiveness, strategic process and incentives 5

The strengths of corporate governance practices at Dalsvyaz include:

-- A generally good level of transparency, and Dalsvyaz has improved the timing of financial reporting - publishing 2008 IFRS statements earlier than other inter-regional telecom providers (IRTs) in Russia and, importantly, prior to the annual shareholder meeting.

-- Minority shareholders are active; they are represented on the board by three directors (including one representative of the largest minority shareholder, C.I.T. Finance Bank).

-- The board has substantial authority and is proactive, supported by four board committees, all of which include external directors.

-- A strategic planning process is in place; strategy is discussed at the board-level strategy committee and is subject to board approval.

-- Dalsvyaz demonstrates an integrated approach to risk management. The ERM, launched in 2007, is continuously evolving.

-- Shareholder meeting procedures are strong, and minority shareholders enjoy a good measure of rights under Russian law.

Standard & Poor's analysis, however, has identified several weaknesses in the company's governance system, including:

-- State-controlled holding company Svyazinvest plays a dominant role in the governance of Dalsvyaz, exercising its influence through a majority of board seats and, at times, through direct contact with executives. Svyazinvest is exposed to material conflicts of interest, while minority representatives and independent directors have limited capacity to counter this influence.

-- A potential reorganization of the Svyazinvest group presents significant risks for minority shareholders in Svyazinvest's IRTs.

-- There are shortcomings in the level of independence of committees and the board.

-- Irregular face-to-face meetings held by the majority of board committees.

-- Room for improvement in terms of board involvement in risk management discussions.

The opinions expressed are the independent opinions of Standard & Poor'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 GAMMA scores and other analytic services are performed as entirely separate activities in order to preserve the independence and objectivity of each analytic process. GAMMA scores are offered to companies in emerging markets, with the primary focus on Brazil, Russia, India and China (the BRIC countries).