Independent director of Norilsk Nickel Sergey Volk on the benefits of minority shareholders. Column

Sergey Volk, an independent member of the Board of Directors of PJSC MMC Norilsk Nickel, discusses the need for a number of changes in corporate legislation and approaches to managing public companies in the Kommersant column.

To a simple question, “Are minority shareholders in public companies a burden or a blessing?” you can answer with a question from an old joke: “Excuse me, but who is interested and why?” As an independent director of the largest public company, the answer is very clear to me: minority shareholders are a blessing both for the company and for the largest or majority shareholders. Therefore, the interests of minority shareholders must be protected.

Minority shareholders of public companies appear when a PJSC has a desire to gain access to public equity and debt capital – in the process of entering the public market through the initial placement of its securities.

A fundamental factor in a successful public offering is transparent and high-quality corporate governance.

It, as a guarantor of the preservation and increase in the value of the company, creates trust between minority shareholders and the company’s management, and especially in the case when the managing majority or largest shareholder appoints and controls the company’s management, it becomes a system of checks and balances that balances the interests of all participants.

Properly functioning corporate governance, on the one hand, provides comfort to minority shareholders, and on the other hand, it disciplines and motivates management and introduces the best market practices into the work of the company’s management bodies, favoring the development of the company in the interests of all shareholders, including the largest or controlling ones.

What exactly should work within the best corporate governance practices? Different situations, of course, require appropriate corporate governance configurations, but for a sustainable and healthy company, a number of points are important that depend on the effective protection of the interests of minority shareholders. Thus, the status of a public company requires transparency and reliable disclosure of information. This, in addition to the requirements and regulations of the regulator, can be ensured by the correct motivation and level of responsibility of the company’s management and strict supervision of the board of directors to prevent the manipulation of information. This is the foundation of the basics.

And for the operation of this mechanism, the opportunity for minority shareholders and independent directors to propose and make changes to corporate governance in favor of transparency and in order to implement best practices is important.

How to do it? Here, many issues can and should be resolved not only by the board of directors, but also by shareholders at a general meeting. Who sets the agenda for the meeting? Board of Directors. And what if it so happened that the board of directors is controlled by one or a group of shareholders? Then the issues on the agenda to change corporate governance in favor of transparency simply will not be submitted to the meeting of shareholders.

To get around this trap, you need to change the charter – but even here a problem arises: the company develops changes to the charter. Why can’t significant minority shareholders develop and submit proposals for amending the charter directly to the general meeting, bypassing the board of directors controlled by one or a group of shareholders? But they can’t, that’s the law. And if, for example, the issue of submitting a change in the charter to a meeting of shareholders requires a qualified majority, then representatives of a major shareholder on the board of directors can block the decision. A vicious circle, which could be broken by the possibility of submitting proposals to the general meeting for consideration by all shareholders, especially when there is no one controlling shareholder. But this requires a change in legislation – the law “On Joint Stock Companies”.

A separate problem is control over the sole executive body of the company (president or general director), over the board and key executives: the board of directors should have it.

The alignment of levels when delegating powers and responsibilities by the meeting of shareholders to the board of directors and then to management implies exactly this. The president or CEO, of course, must be appointed and dismissed by the board of directors, as well as establish his motivation and approve compensation. The same applies to the key executives of the company. Most of them must be members of the management board, which is approved by the board of directors.

A separate question is about charity. The management of the company and the managing shareholder, if any, are not entitled to use the funds of all shareholders at their own discretion and preference. And charity, social investments and sponsorship significantly influence the formation of the company’s image in society. Transparency, intended use and reporting are simple and clear requirements for spending in these areas, which is what the board of directors is supposed to ensure, and therefore social investment issues should be within its competence.

In the composition of the audit and corporate governance committee, the majority of directors, and preferably all, should be independent – as well as their management. Almost everywhere, independent directors are the stronghold and hope of minority shareholders, since they stand up for the interests of all shareholders equally. The same applies to internal audit services – the law does not require their creation, but in many companies they already exist. For example, in Uralkali and in the Balkan food conglomerate Fortenova, internal audit services worked very well. Such a service or directorate, similar in functionality to the institution of financial controllers, to a large extent becomes the independent eyes and ears of the board of directors in the company, with the authority to access any information and conduct any investigations, planned and unscheduled. If problems and risks are identified, the information is first reported to the company’s management. If the situation is not rectified or the violation is gross, and the risk is huge, a red flag is raised on the board of directors. Ideally, only independent members of the board of directors should appoint the head of internal audit and his deputy. The internal audit service works on an operational basis in the company itself, in contrast to the external audit commission, which makes an audit once or twice a year. I think it is appropriate to express the opinion that with a well-functioning service, the role of the audit commission, which is no longer mandatory by law, loses its significance.

Turning public companies towards minority shareholders establishes clear business rules, shows respect for minority shareholders, demonstrates adherence to the principles of mutually beneficial joint investment declared during a public offering, and reduces risks.

Who today, as always, provides liquidity, and hence fair pricing, to securities traded on the stock exchange? Funds and a huge number of individuals-minority shareholders. Therefore, the introduction by blue chips of the best corporate governance practices, which is already happening in a number of companies, firstly, creates the right motivation for the company’s management – not to pursue narrow group goals, but to act in the interests of all shareholders – and, secondly, provides a comfortable symbiosis the largest or controlling shareholders, large and minority funds, and individuals who are gaining weight and importance – minority shareholders.