UNIVERSIT COMMERCIALE LUIGI BOCCONI

MMC Norilsk Nickel Russia

Corporate Governance (a.y. 2012/2013)
Cod. 20123

Antonio Mercurio 1239284

ABSTRACT

The Research examines the History and evolution of a Russian company considered strategic to the Russian government, Norilsk Nickel. The study outlines how the Corporate Governance practices of the company have been influenced by the Russian economic model, underlying the areas where the governance is particularly weak. The main results show: strong involvement of the government in the management and ownership of the company; fault of the traditional corporate governance mechanisms such as independence of the supervisory board, and separation between ownership and control; the typical agency problem form characterizing highly concentrated ownership structures with limited safeguard of minority shareholders; presence of control enhancing mechanisms.

Contents
MMC NORILSK NICKEL ....................................................................................................................................... 1 The Privatization ............................................................................................................................................ 3 THE CONTEXT .................................................................................................................................................... 4 OBJECTIVES, STRATEGIES AND PERFORMANCE ................................................................................................ 6 THE OWNERSHIP ............................................................................................................................................. 13 The Years From 1999 To 2006 ..................................................................................................................... 14 American Depositary receipts ...................................................................................................................... 15 The Years From 2007 to 2012 ...................................................................................................................... 15 Recent Developments ................................................................................................................................. 17 CORPORATE GOVERNANCE ............................................................................................................................. 17 CONCLUSIONS ................................................................................................................................................. 22 BIBLIOGRAPHY ................................................................................................................................................. 24

MMC NORILSK NICKEL

MMC Mining and Metallurgical Company Norilsk Nickel is a Russian mining and smelting company. It is headquartered in Moscow and is the world's leading producer of nickel and palladium and it is ranked among the worlds top ten copper producers. Its products portfolio also comprises platinum, cobalt, chromium, rhodium, silver, gold, iridium, ruthenium, selenium, tellurium and sulfur. The Group is characterized by a strong vertically integrated business model. In addition to operating assets, the Company possesses sales and marketing network in the major regions of the world, energy assets ensuring the security of energy supply to the Companys operations and proprietary research and development assets. It is possible to identify seven main business units (Mining and Metals, Sales, Geological, Energy, Transportation and Logistics, Research and Development and Support) and place them within 3 main operational Mining and Metals Unit: includes mining, concentration and metallurgical assets located in Russia in the Taimyr and Kola Peninsulas, in Australia, Botswana, Finland and South Africa. Sales Unit: includes a network of sales and representative offices located in Russia, the UK, China, USA and Switzerland, involved in the marketing and sales of the Groups main products. Geology Unit: conducts activities aiming at surveying and estimating new deposits of the main metals and technological raw materials, exploring new and current deposits to provide ore reserves for the Groups mining and smelting facilities. Energy Unit: includes several energy production plants and utility companies focused on securing energy supplies for the Group, the Norilsk industrial and Taimyr (DolganoNenets) municipal regions. Transportation and Logistics Unit: comprises several maritime, land and air transportation fleets, which primary objective is to carry out all of the Companys cargo in its agreed volumes and within the agreed time limits in the most cost efficient manner. Research and Development Unit: takes care of the implementation of surveying, scientific-researching, experimental-constructional works and technical-economical researches directed to reduce the operating costs. Support Unit: supporting activities to the core operations.

The Complex Organizational Structure of the group is clearly summarized in the diagram below.

Organizational Structure

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The Group core business is operated by the first three business units through prospecting, exploration, extraction, concentration and processing of mineral resources; production, marketing, and sales of non-ferrous and precious metals. These business units account for more than 90% of Revenues as of December 2011. Norilsk Nickels production facilities are located on three continents and in five countries: Russia, Australia, Botswana, Finland, and South Africa. The main production units are: the Polar Division, located in the Taimyr Peninsula, and the Kola Mining and Metallurgical Company, located in the Kola Peninsula.
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Norilsk Nickels Main Assets

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The birth of Norilsk Nickel was pushed by the abundance of mineral resources in the Soviet Union territories. The increasing mining and exploration activities finally led in 1935 to the constitution of the Norilsk Combine and the beginning of Soviet Unions biggest mining and metallurgical complex. A decisive factor in the growth of the company has been represented by the Second World War and the dramatic increase in demand driven by the heavy industry. By 1953 the group was producing 35% of the Soviet Unions total nickel output, 12% of its copper, 30% of its cobalt and 90% of its platinum group metals. On November 4, 1989 the Council of Ministers of the USSR passed a resolution on creation of the State Concern for NonFerrous Metals Production Norilsk Nickel. The State Concern brought together the Norilsk combine, the Pechenganickel and Severonickel combines, the Olenegorsk mechanical works, the Krasnoyarsk non-ferrous metal processing works, and the Gipronickel Institute.

The Privatization
On June, 30 1993, the Russian State Concern for the Production of Non-Ferrous and Precious Metals Norilsk Nickel was transformed by a decree of the President of the Russian Federation into the Russian Joint Stock company (RAO) Norilsk Nickel for Production of Non-Ferrous and Precious Metals. The privatization process of Norilsk Nickel started very slowly in the following year. Although, the shares of the company were distributed to the labor force and to private investors, the control package composed of 38% of the shares (51% of the voting rights) remained in the hands of the state. In 1995, the collapse in the price of nickel posed serious treats to the company survival as the company was already heavily indebted and with liquidity problems. For this reason, in November 1995, the control packet of shares in the RAO
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Norilsk Nickel was sold to Uneximbank through an auction process. Uneximbank held the possession until August 97, when Swift, representing Uneximbank itself, became owner for 270 million dollars consideration. In 2000, a restructuring process of the company was launched in an attempt to improve the performance of the company and increase the interest of investors. In 2002, the company went public on the Moscow stock exchange and began a process of development of its portfolio of investments in other companies with the 2003 acquisition of 55.4% of Stillwater Mining Company, the only producer of palladium in the United States, and the incorporation of Polyus gold in 2005, the largest Russian producer of gold. The cross-boarding acquisitions continued until 2007 and transformed Norilsk Nickel in a large multinational company. Another crucial point in the restructuring process was Norilsk Nickel listing on foreign stock exchanges (OTC in the US, International Order Book Unlisted Section of LSE and OTC-section of the Berlin-Bremen Stock Exchange) that allowed the circulation of Norilsk Nickel shares abroad and improved systems of Corporate Governance adopted by the company.

THE CONTEXT
The stock market has played an irrelevant role in the short history and evolution of Russian corporate governance. During the Soviet Union, the government ruled out the possibility of privatizing companies considered strategic, such as those operating in the natural resources sector. This system based on state control of investment and public ownership of industrial assets has led to a slow economic development compared to U.S. and European countries. A sudden, but messy economic development began with the fall of the Soviet Union. Between 1991 and 1992, with the collapse of the Soviet Union and the Perestroika (economic reforms started in 1987), a privatization process began and gave impetus to the Russian economy development; the government, however, continued to hold a significant amount of shares in most of the strategic sectors. The rest of the shares were entrusted to investment funds and institutional investors. In December 1995, following an urgent need for financing, the Russian government began an exchange policy called "loans for shares". This scheme allowed the government to swap the equity of the companies in its possession for loans made by commercial banks. One of the main actors of this policy was Vladimir Potanin, head of a major Russian commercial bank (Uneximbank), whom at this stage became a shareholder of Norilsk Nickel acquiring the controlling stake of 38% (previously held by the state). Between 1992 and 2003 more than 140,000 state-owned enterprises were privatized, of which 31,200 became Joint Stock Company. This privatization process favored the ownership concentration in the hands of oligarchs, internal managers and employees, virtually eliminating agency costs related to opportunistic behaviors of outside directors. The Russian privatization process showed several similarities with what happened in France in the 80s. The French government made sure that the control packets of the most important national companies were acquired by a stable group of investors (hard core), and maintained close relations with them. The Russian government was aware that a strong ownership concentration by one group of individuals would have influenced the Board and the Top Management. Nonetheless, the government wanted to reward the stability of corporate governance, even reducing the independence of the two bodies.
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The privatization process led, therefore, to a strong increase of Russian oligarchs power: men who, at the end of the Soviet era, became rich through illicit trade of import products, including jeans and personal computers, which were sold on the black market, obtaining high profits. These Figures were often linked to state officials, and sometimes had also relations with members of crime organizations. In the years following the end of the Soviet Union, the oligarchs strengthened their relations with the govern Yeltsin, achieving great benefits, such as buying state assets at prices much lower than the market benchmark. As a matter of fact, the ownership structure of the new privatized companies was characterized by the presence of consolidated majority stakes that allowed a strong company control.

Ownership Concentration in Russian Listed Companies

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In 2002, the Russian government adopted a code of corporate governance in order to enhance the attractiveness of investments in Russia. This code had a dual impact on the policies of Russian companies: on the one hand, it has provided guidelines to enable them to initiate a process of corporate governance accountability, on the other hand was an instrument of political pressure used by the state to provide greater protection to shareholders minorities and to regulate dividends distribution policies. In this context, Norilsk Nickel has been one of the companies to be more influenced by these new policies. As a matter of fact, it presents a risk profile of corporate governance under the national average, although this is considered to be well below that of other major industrialized countries. The companies listed on the Moscow stock exchange (MICEX-RTS) are c. 700. This is a very few number, considering the size of the country and its potential. Despite the crisis of the 90s, the exit from communism, the current crisis, the high level of corruption and organized crime, Russia, thanks to its size and natural resources, is destined to be one of the main players in the international economy.

OBJECTIVES, STRATEGIES AND PERFORMANCE

The main strategic goal of Norilsk Nickel is to strengthen its leadership in the mining and metal sector and establish itself between the top 5 major international miners. The strategy implemented to achieve this goal is based on: Geologic exploration, development, and acquisition of large mineral deposits in countries and regions where the Company has or intends to obtain competitive advantages. Rational approach to its unique mineral base and stability of operating expenses; Safeguarding the Companys key competitive advantage as the lowest-cost nickel producer Stability and security of the Companys core Russian assets by warranting infrastructure and services costs at competitive levels. The graph below clearly shows how the group operates in different continents through its subsidiaries support.

Business Operations Flow

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Norilsk Nickel's offer is addressed mainly to companies, that is, the companys commercial transactions are characterized by a B2B (business to business) scheme. The companys sales, as shown by the map above, are spread globally and this obviously exposes the business to an exchange-rate risk. The map shows both the position of the various customers of the group and the number of buyers interested in specific products. Another relevant data that the map underlies is that the major product sold by the company is nickel. Despite a broad diversification of its product portfolio and of its offer, the group, considering the profit performance heavily influenced by nickel sales is constantly exposed to the volatility in the price of nickel.

Companys Sales

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The company, recognizing the scale and complexity of the environmental issues related to its activity, considers environmental protection to be an integral part of its business and strives to ensure compliance with all international and Russian laws and that resources are used in a sustainable manner. Ecologically friendly production and preservation of environment are top priorities for the management of MMC Norilsk Nickel and the Company is committed to minimize its environmental footprint through gradual reduction of emissions and increased utilization of industrial waste. In 2011, the company has spent about USD 590 million (16% increase YoY) in environmental projects. Nevertheless, environmental organizations, among others, claim that the company environmental efforts are not sufficient. The company plays a vital role in the economy and social life of the regions in which it operates, considering that the population of the city of Norilsk is almost entirely employed in the activity of Norilsk Nickel.

SWOT Analysis
Strengths Strong Market Position Developed transport and logistics units (Arctic fleet) Lowest Cost Nickel producer Opportunities Strong portfolio of growth opportunities both domestically and internationally Vertically Integrated system of production asset Geographic dispersion of production facilities Weaknesses Dependence on third parties for the supply of raw materials Concentration of investments Government Pension Funds in Non-

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Corporate Governance (Shareholders conflict) Threats Environmental Regulation Currency risk Political Risk Disruption of operations due to extreme weather conditions

The table above provides an overview of the main strengths and weaknesses of the company. The matrix shows that one of the main strengths of the company is its strong market position. As a matter of fact, Norilsk Nickel is, as previously said, the world leader in nickel (22% of global production) and palladium production (38% of global production) and it is responsible for 9% of the platinum and 3% of copper worlds production (one of the top four producers in the world). The enviable market position and diversification of product lines is one of the competitive advantages of Norilsk Nickel. Since 2004, one of the groups main aims has been to develop its own independent transportation system. This strategy has made Norilsk Nickel, the only company to own a fleet of five ships that can guarantee transports in the Arctic area. A well-developed transportation unit has given the group increased flexibility in its operating costs, which in this industry certainly constitutes a relevant competitive advantage.
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Position on Key Markets by production

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The main weaknesses in Norilsk Nickel are related to conflicts between its shareholders and corporate governance issues affecting management efficiency (Corporate Governance section). Moreover, a poor investment policy that concentrated all the investments in nongovernmental pension funds entrusted to a single asset manager, Rosbank, is likely the result of a conflict of interests. The low yields achieved by Rosbank and the low diversification of the investments produce a risk-return combination that seriously penalizes the group. As a matter of fact, it would be more scope for the company interests to rely on various operators, preferably "independent". Finally, The companys processing facilities depend on the availability of raw materials, some of which are supplied by third parties that the company does not control. If there is a shortage of these raw materials, Norilsk Nickels processing facilities may not be able to run at full capacity. The company 3 main strategic pillars try to exploit the opportunities provided by: Growth of output in Russia and Finland that aims to +19% in Nickel, +49% in Copper and +41% in PGMs by 2025 Product diversification, adding new metals to current portfolio and lowering revenue volatility and diversifying revenue mix International Expansion exploiting strong existing footprint and the geographical dispersion of production facilities.

On the one hand, the companys management has to catch the opportunities offered by the market to pursue its expansions aims. On the other hand, it has to pay attention to the threats provided by environmental regulations, monetary market (conversion problems for Russian
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currency and exchange rate risk) and the opportunistic behaviors typical of corporate governance systems not well established. Analyzing the Norilsk Nickel performance trend, it is possible to clearly recognize a growth pattern and the several renovations efforts that have been pursued in the last decade. The analysis of performance should also take into account that the sector in which the company operates is characterized by high investment in fixed assets, technology and research and development of new processes. Investments are essential to improve performance, improving production and distribution processes in terms of low costs and high quality. The income of the group, ignoring the years 2001-2002 and the last two years of consolidation in 20082009, is characterized by a steady increase. The graph below shows that such growth has had an exponential trend, a clear symptom of the ongoing commitment that Norilsk had in achieving its expansions goals.

Performance Trend

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In 2002, as evidenced by the revenues and profit, there is a decline in performance. The 29% decrease in Revenues and the 53% decrease in Profit are mainly driven by exogenous factors. In the period 2001-2002, the role of China in the heavy industries has greatly expanded, consequently enhancing the competition of these sectors. In this period the demand for palladium was greatly reduced. Although it was less important in Norilsk Nickel revenue composition with respect to nickel, also this reduction affected the companys results. The last negative factor is related to the political expectations of a possible war in Iraq. These expectations led to political instability in the country and to a downturn the entire national economy. From 2002 to 2007, the turnover steadily increases at 41% CAGR. The growth suddenly stopped in 2007, when the global economy was badly shaken by the crisis. From 2007 to 2008 the income falls. The crisis and the subsequent fall in the price of nickel have a significant impact on Norilsk Nickel business performance. The financial statements for those
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years show clearly the difficulties that firms with substantial investment and resources of third parties face in times of financial crisis. The year 2008 ended with a net loss of $ 555 million. The following year, the sales continued to decrease. Nonetheless, the group got a net profit that gave signs of a small recovery in the sector and the economy, mainly driven by national central banks policies to stem the effects of the crisis. During the crisis, the strong relationships with the government and the banks have represented for Norilsk Nickel a strategic point in the implementation of anti-crisis measures and financial consolidation. The 2009 has represented the most difficult year of the last decade. The crisis has shown that the highest value for the company is represented by its human capital and for this reason a strategic objective should be to preserve its highly qualified personnel. In the same year, the group has entered a period of economic uncertainty: the price of metals increased an average of 30%, the demand in the U.S., Europe and Asia fell, the financial markets turmoil persisted and no one had any reliable forecasts on the near future. In this climate of uncertainty, the strong collusion with government and banks allowed the company to continue its investment projects focused on the modernization of production assets.

Key Financials

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The table above shows the key financials for the period 2006-2011. Looking at these data is immediately visible one of the main strengths of the company: an efficient cost management pointed out by a strong and steady EBITDA margin. Another interesting observation can be done looking at the Net Debt/EBITDA ratio . The ratio always maintains a low value and in some years it is even negative since a high Cash balance makes the Net Debt value negative. These data denote a healthy financial structure with a good capacity to repay the debt outstanding.

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Profitability Ratios (%)

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A final evidence of Norilsk Nickels good shape is given by its Profitability Ratios. The graph above shows the ROE, ROCE and ROA historical trends. All three ratios show positive trends and reach extremely satisfying levels. ROE and ROCE gauge the company capacity of generating returns from its capital base. The first is computed based on the equity contribution, while the second takes into account the entire capital base. This means that considering exclusively the ROE can lead to misleading conclusions, as highly geared companies, unable to properly remunerate their equity, can still show high ROE levels. In this case ROE and ROCE values are almost aligned and for this reason it is clear the capacity of the company to properly employ its capital base. The ROA indicates how profitable a company is relative to its total assets and it should be quite low in a capital intensive business such as Norilsk Nickels one. This means that asset management is pretty efficient and characterized by constant improvement. In accordance with the dividend policy approved by the Board of Directors in 2002, the Company is committed to allocate 2025% of its IFRS annual income to dividends. Based on the profit performance recorded each year, the following chart shows the dividend per share from 2002 to 2011. The trend showed by the companys financials is also identifiable in its dividends history, characterized by a continuous growth and a sharp reduction during the economic crisis. Employees are one of Norilsk Nickels key stakeholders. Every year, in order to improve relations with them, some interviews are conducted to measure their satisfaction. According to a survey run by Superjob.ru among employers operating in Russia, the Polar Division of MMC Norilsk Nickel was recognized to be the Most Attractive Employer of 2011.

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Dividends per Share

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THE OWNERSHIP
The ownership structure of Norilsk Nickel is very concentrated and difficult to control for market owners, reflecting what the peculiarities of Russian capitalism are. In Russia, the business activity has always been characterized by lack of transparency, making models of corporate governance opaque and reticent with little public accountability. Consequently, redesigning the corporate governance models turns out to be rather complex and figuring out the ownership and control history is very difficult. The distribution of share ownership is highly concentrated, highlighting the presence of blockholders with large stakes of the company. In Particular, Norilsk Nickel has seen among its shareholders the presence of Potanin and Prokhorov from 1999 to 2007, and Deripaska and Potanin yet from 2008 to 2012. These people represent three of the major Russian oligarchs. The presence of blockholders is a consequence of the of the Russian legal system incapacity to protect minority investors. An unclear regulation that poorly limits the blockholding is due to the Russian government interests in controlling the most important economic realities of the country through "close" investors. That is the case of Norilsk Nickel, in which stands the figure of shareholder Vladimir Potanin, Norilsk important blockholder, and committed politician. As a matter of fact, Potanin was First Deputy Prime Minister of the Russian Federation from August 1996 to March 1997, and in 2003 he was appointed director of the National Committee for Corporate Governance.

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The Years From 1999 To 2006

Analyzing the ownership structure and Top Management composition from 1999 to 2001, it is possible to deduct that about 50% of Norilsk Nickel is under the control of Rosbank JSC, the largest Russian commercial bank, part of the Interros group. The latter is a conglomerate that invests in mining, energy, finance, retail and real estate, founded in '91 by Potanin and Prokhorov. The remaining shares of Norilsk Nickel were distributed among several banks, which had the role of passive investors since their participation to the management was very limited. In 2002, following the IPO, Rosbank is replaced by several operating and financial companies, whose ownership was still attributable to Prokhorov and Potanin that using a pyramidal control structure were able to have a strong blockholding. Despite the company listing, the blockholders were not affected, as there was no entry among the controlling shareholders. The only relevant difference in the ownership structure is the increase of the small investors, as well as the investment Bank of New York with a 10.05% stake. Bank of New York played a leading role in the Norilsk Nickels shares diffusion in the United States through the ADRs (American Depositary Receipt).

Pre-Listing Ownership Structure (2001)

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A similar shareholding structure increases the possibility that the controlling shareholders uses the company for their own private benefits. This makes it particularly risky for the minority shareholders investment risky and not appealing. For this reason, it is necessary that the company makes use of the best corporate governance practices to stimulate the interest of investors. The period from 2003 to 2006 does not record major changes. On the one hand, Investments of Prokhorov and Potanin remain almost stable with a cumulative share of about 22% each. On the other hand, the share of Bank of New York increased up to 27%.
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Post Listing Ownership Structure (2001)

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American Depositary receipts

An interesting observation can be done about American Depositary Receipts (ADRs), an instrument used by Norilsk Nickel controlling shareholders to protect their power. ADRs allow the circulation of foreign securities in the U.S. market and are typically used to limit the spread of voting rights while increasing the shares liquidity and raising funds.A foreign investor who buys an ADR has the dual chance to hold the instrument, or convert it into companys shares, consequently gaining the right to vote. The exercise price of an ADR is extremely high; therefore, most of the times, the conversion option remains only theoretical. In addition, companies such as Norilsk Nickel do not ensure that minority shareholders will receive timely communications about the questions discussed in the board meetings, effectively preventing their right to vote. In the specific case of Norilsk Nickel, ADRs were issued together with the stock market listing in 2002 with the aim of obtaining financial resources in foreign markets, and particularly in the U.S. The ADRs issue was subscribed by the U.S. bank Bank of New York, which supported the company in the ADRs diffusion and became a major shareholder. Among the reasons that brought the company to issue ADRs, there was the possibility to raise funds while limiting foreign investors to acquire control of the company easily.

The Years From 2007 to 2012

2007 can be considered as the turning point for Norilsk Nickel, characterized by the collapse of the historic union between Prokhorov and Potanin. The will of the first to divest its investment in Norilsk Nickel and focus on renewable energies had been known for a long
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time. Prokhorov stake in the company would have granted to Potanin, the absolute control of Norilsk Nickel. But the relationships between the two Russian tycoons drastically stopped due to a prostitution scandal that involved Prokhorov in France and led to his arrest. Because of the scandal, Interros did not allow Prokhorov to exploit its vehicles and reputation to realize his renewable investments plans: this cracked the relationship between Prokhorov and the remaining shareholders of the company (included Potanin). In response to that, Prokhorov sold his Norilsk Nickel stake to Oleg Deripaskas UC Rusal, the main Russian competitor of the group. The deal enabled Prokhorov to get 14% of the property of UC Rusal plus a considerable monetary consideration. Thanks to the participation obtained by Prokhorov, UC Rusal arrived to hold the 25% of Norilsk Nickel, the 9% through direct possession and the remaining part through a financial subsidiary. After that, the property of the company was no longer linked to a single large blockholder, but was now characterized by two of equal force with a very different strategic vision.

Ownership Structure (2008)

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With UC Rusal deal onwards, a strong shareholders conflict hit the company, making governance difficult and stopping the company from fulfilling its potential. Potanin and Deripaska, the two oligarchs behind Interros and Rusal, have battled publicly and in the courts for control of Norilsk since May 2008. The dispute mired the countrys biggest mining company in lawsuits and constrained investments. During this time, Rusal has rejected at least three offers to sell out of Norilsk since October 2010, rebuffing an $8.75 billion offer from Norilsk itself for 15 percent in September 2011. Rusal has called many times for the ouster of Norilsk CEO Vladimir Strzhalkovsky, claiming the former chief of Russias tourism agency lacked mining industry experience. Deripaska also clashed with Potanin over Norilsks buybacks, which amounted to $9 billion in 2012, and the percentage of profit paid out in dividends.
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Moreover, the conflict between Potanin and Doripaska pushed important institutional investors away. As a matter of fact, bank of New York completely divested its shares in 2011. The conflict was negatively perceived by the financial markets and the trade volumes of Norilsk Nickel stock consistently decreased and its share price plummeted.

Recent Developments
On December 11th of 2012, it was announced that Roman Abramovichs Millhouse LLC investment company (MHC Services), UC Rusal and Interros have entered into agreement where Rusal and Interros will sell shares of Norilsk Nikel in favour of MHC Services. Rusal, Interros and Millhouse agreed to execute the transaction redeeming all quasi-treasury shares held by MMC amounting to 16.99% of the company. Following the redemption of all quasitreasury shares held by Norilsk Nickel, Interros, RUSAL and Millhouse will hold approximately 30.3%, 27.8% and 7% shares in MMC, respectively. As such, the parties will deposit approximately 20% of Norilsk Nickel shares to a nominated escrow account Millhouse will control compliance with the partnership agreement by voting those shares. The agreement is a clear attempt to settle the shareholders conflict, that in four and half years has contributed to a 48% decline in Norilsks London stock from its May 2008 high and stymied investment in expansion. As shown by the following graph, this structure will balance the decision-making power held by the blockholders in the board.

Ownership Structure and Decision Making Influence (2013)

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CORPORATE GOVERNANCE
Norilsk Nickels ownership structure has undoubtedly considerable implications on corporate governance. All the economic activities carried out by this company, have always been referred to few investors, who have greatly influenced the strategic choices and
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consequently, drew large private benefits from the company. Some of the most significant examples date back to 2008. During this year, the company carried out a share buy-back of 4.12% without Board approval. In this transaction Norilsk Nickel acquired shares by Interros with a 200% premium on the market price. The same year OGK3 (a subsidiary of Norilsk) purchased 25% of Rusia Petroleum, a subsidiary of Interros, paying a much higher price than the offer of another company, Gazprom. It should also be noted that Russian Petroleum was next to the crisis. Finally, in the same year, Norilsk Nickel has allowed "Roza - Khutor", controlled by Interros, to obtain a US$ 140 million loan providing one of its own assets as collateral.
These are just a few examples of a bizarre and irrational decisions of the management team that has led the company to spend over US$2 billion in projects completely misaligned with respect to the corporate interests. Most of these episodes have emerged thanks to the complaints of one of the main shareholders (UC Rusal), who sought to inform the minority shareholders, in order to obtain their support. Often in Russia, similar situations remain hidden because of the failure of corporate governance systems. At this point, a question spontaneously arises: Why cannot the Board prevent the top managements opportunistic behaviors? The questions answer is quite simple. Until 2007 a single shareholder was expressing both the Board that the top management. Then controller and controlled were headed by the same entity. This means that the role of the Board was merely formal. As a matter of fact, it was often not even consulted. Someone may wonder if the independent directors were unable to notice the conflict of interests. At this point further questions arise: How were the independent directors chosen? Who are they really? We can find the answer to this question analyzing the composition of the Board since 1999. In the period preceding the UC Rusal presence, most of the directors were attributable to Interros, while those declared independent had links to the government.

BOARD MEMBERS (2006)

A. A. Klishas A. E. Bougrov V. I. Dolgikh (Independent) R. T. Morgan M. D. Prokhorov E. M Salnikova Chairman, held managerial roles both in Interros and Rosbank Ex chairman Rosbank, politician Polititcian, Chairman of Moscov City Council of Veterans of war, Norilsk Nickel board member Board member, advisor Norilsk Nickel CEO from 2001, Interros He held operative roles in Interros, Rosbank board member from '04 to '06

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U. L. Ugolnikov (Independent) H. S. Schimmelbusch (Independent) Guy de Selliers (Independent)

First Deputy Minister for Taxes and Levies, politician Metallurg holdings CEO (Interros) He held similar roles in other companies of the sector, UE consultant

In the table above, we see that four out of nine board members declared their independence. This data would seem to be a good governance indicator, but in reality, those who appeared independent are linked to Interros and to the Russian government. In addition, their remunerations were well above those of independent members of similar companies. According to the Russian Corporate Governance Code, an independent director should be a director who: 1. over the last three years has not been, and at the time of election to the board of directors is not, an officer (manager) or employee of the company, or an officer or employee of the managing organization of the company; 2. is not an officer of another company in which any of the officers of the company is a member of the appointments and remuneration committee of the board of directors; 3. is not an affiliated person of an officer (manager) of the company (officer of the company's managing organization); 4. is not an affiliated person of the company or an affiliated person of such affiliated persons; 5. is not bound by contractual relations with the company, whereby the person may acquire property (receive monies) with a value in excess of 10 percent of such persons aggregate annual income, other than through receipt of remuneration for participation in the operations of the board of directors; 6. is not a major business partner of the company (a business partner with an annual value of transactions with the company in excess of 10 percent of the asset value of the company); 7. is not a representative of the government. Taking into consideration the 2006 board, two of the independent directors, although they are not representatives of the government, they are clearly linked to it. Moreover, it is considered independent Schimmelbush, despite his obvious relationship with Interros. The situation changed drastically with the arrival of the new blockholder UC Rusal. Its presence had a significant impact on the composition of the Board: The number of directors increased from 9 to 13, to ensure that Interros and UC Rusal representatives number were balanced. The number of independent directors increased in order to respect the previous ratio of independent directors to total board members (now 6 out of 13). The number of directors linked to the Russian politics decreased to one. The independent directors have good skills and good knowledge of the industry.
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The new features of the Board would seem appropriate to carry out its main functions: the top management control, the selection of managers, the evaluation of business performance, the allocation of financial resources, the assessment and approval of the strategic plans of the company. However, the presence in the board of two forces of equal weight, but with divergent interests and objectives, has equally limited the activity of the company. From 2008 to date, the two sides have been in constant conflict: on the one hand UC Rusal accused Interros to continue to extract private benefits from its position as blockolder. On the other hand Interros argued that UC Rusal has an interest to make a hostile takeover in order to merge with Norilsk Nickel and become one of the largest metallurgical and mining companies in the world. The conflict reached its climax on September 2nd of 2010, when UC Rusal, through a public letter to the Board, accused the management of irregularities in the new Board election of June 28th of 2010. UC Rusal claimed irregularities in the vote and called for Interros to provide details about the effective exercise of ADRs voting rights. The offense led to a violation of fundamental corporate governance rules, of the principles of transparency and of the previous agreements between UC Rusal and Interros about a Board balanced structure, representative of the ownership. The board of directors should ensure a balance between the two forces. The distribution of the Board members was apparently balanced between the two parties, but the presence of a link between Titov and VTB Bank and consequently Interros violated the previous agreements. VTB Bank was an Interros financer and for this reason the independence of Titov was fictitious. Despite an initial, but informal agreement between Interros and UC RUSAL, which should have led to the election of A. Voloshin as Chairman of the Board, thanks to the manipulation of the votes Interros gained more representatives. The management, in strict accordance with Interros, transferred treasury shares to off-shore companies that voted against the election of A. Voloshin. Interros managed to manipulate the votes thanks to its ADRs depositary role. The new structure of the Board in the last election was as follows:

BOARD MEMBERS (2011)

A.S.Voloshin (Independent) L.Bebchuk (Independent) A. Bougrov O. Deripaska M. Zakharova E.N.Banda (Independent) S.V.Barbashev Russian politician, Chairman of OJSC RAO from 2003 to 2008 Corporate Governance Expert Chairman, Interros Director UC Rusal Owner Interros Legal Director General Manager of FREETEL Capital since 2006 General Director, Chairman of the Management Board of CJSC Interros Holding Company 20

B. A. Mills (Independent) C.Dauphin (Independent) M. Sokov V. Strzhalkovsky L.G. Zelkova A.Moshiri (Independent)

Mandalay Resouces Director He held similar roles in other companies of the sector UC Rusal Strategy Director Norilsk Nickel Director She holds Managerial roles in endowment funds and charity companies (Interros) He held similar roles in other companies of the sector

The entry of UC Rusal in the ownership had also a positive impact, leading to a greater alignment with international corporate governance best practices. UC Rusal required to management a greater openness of dialogue and a greater transparency in the decisionmaking process. In 2009, there is the inclusion in the top management of corporate governance and metal and mining business experts. UC Rusal also claimed a major number of independent directors into the Board and to minimize the number of managers inside. The company had already started this practice in 2002, when it entered the stock and had to follow the Russian Code of Conduct. A further improvement in the system of governance can be discerned in the establishment of new monitoring committees. From 2004 to 2009, the only committee of control was the Audit Committee, consisting of four directors, of which 2 are independent, with the function to review the statement of financial performance, and to evaluate the internal control systems. In 2009, the number of monitoring committees increased to four, with the creation of three new organs: Strategy Committee, Budget Committee and CG, Nomination and Remuneration Committee. The first is intended to assist the Board in the definition of medium/long term strategic objectives. This implies that the members of this committee cannot be executives. The second, consisting of three directors, of which one is independent, assists the Board in policies related to finance, budgeting and business planning. The last one, made up of 4 members, of which one is independent, sets out the guidelines for effective corporate governance. These changes had a positive effect on business performance and the expectations that the market had for the company. From 2009 to 2012, the share price increased by 118%. From the graph below, it is possible to see that it is a good result, given the substantial reduction in price that affected Norilsk Nickel after the sale of the shares owned by Prokhorov to UC Rusal. As shown by its history, Norilsk Nickel is one of the companies considered strategic to the Russian economy by the government. The recent development that has led to the presence of a new blockholder in the ownership structure is a clear move of the government to preserve Norilsk Nickel and solve the conflicts that have characterized the governance of the company during the last 5 years.
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Main Share Prices Trend (Rebased to 100)

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The Kremlin inspired deal that should have defined a new and more rigorous path for Norilsk Nickel has still shown the presence of strong interests conflicts and bad corporate governance practices as clearly visible by Ex Norilsk Nickel CEO Vladimir Strzhalkovsky Golden Parachute payout of $100 Million, the largest in Russian History, and its replacement with Vladimir Potanin, one of the main Blockholders. Though, the Russia is shifting towards the open markets economy characterizing the Western countries, there is a long road ahead and the role of the government in this process is essential.

CONCLUSIONS
This study examined the business and the context in which Norilsk Nickel operates. In particular, the descriptive analysis of the business has been revealing of significant events that have characterized the development of the current ownership structure in Russia. The companys strengths and weaknesses have been shown through a logical and chronological evolution, together with the companys governance system. This research discussed the significance of the Russian Companies privatization process that took place in the 90s, highlighting how the pervasive State control was still deep in those strategic sectors of the country's economy. Findings revealed the importance of a single large blockholder in the Russian corporate governances structure. The influence of the State on business violates the principles of capitalism and the free market. Moreover, the exercise of control over such important companies as part of a single
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group, allows the extraction of private benefits. However, should not be forgotten that a structure of this type has allowed the development and implementation of unique corporate strategies, well-defined and in line with national interests, which led Norilsk Nickel to play a key role in the international economy. The strong relationship between State and property has been essential for avoiding the development of corporate restructuring that could have led to spin-offs, relocation and other operations that would have damaged the national economy. This could have been the possible scenario realized by a foreign investor interested in pursuing his "rationalization" goals. Finding clearly show that the negative effects of this model of governance outweigh the positive effects, as property and governance structures are not consistent with the evolution of the economy that is increasingly oriented towards globalization. For this reason, the arrival of a second large blockholder, UC Rusal specifically, has seen as a considerable opportunity for improvement. In particular, UC Rusal, denouncing this system, makes government strategies company more transparent, adopting obstructionist politics. However, on the other hand, these actions have caused paralysis in decision-making and a deterioration of corporate performance led by the interests discordance. A clear attempt from UC Rusal to gain the control over the Company has involved the preparation of plans directed to obtain the consent of the minority shareholders. In this perspective, UC Rusal created a website (www.savenornickel.com) in which, in addition to the reasons for his interest in Norilsk Nickel and its plans to improve the government processes, highlights the lack of transparency in management. However, the absence of effective protection mechanisms of the one share, one vote principle obstructed UC Rusal efforts. The recent resolution of the Norilsk Nickel conflict is a clear sign of the still fundamental and strong influence of the State in the Russian economy. The appearance of Abramovich to solve the dispute and balance the ownership blocks into the company is the direct consequence of a strategic interest of the Russian government into the mining company. This is the proof that only a strong intervention of the Russian government can improve the transparency of the Corporate Governance system and encourage investors to trust domestic firms. In the future, this would contribute to a considerable improvement in the economy and to the implementation of a capitalist system typical of the modern economy. Furthermore, a gradual development of this evolution would be appropriate to allow companies, such as Norislk Nickel to be ready to adapt to changes. Ultimately, although the implementation of these radical changes appears to be a difficult goal, it is believed that the main obstacle may lie within the will of the Government and the lobbies linked to it to engage in the capitalist system.

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BIBLIOGRAPHY
Maria Kolesnikova Interview, bloomberg Moscow Corporate Governance and Finance in Poland and Russia; Thomas Mickiewicz; Basingstoke; New York: Palgrave Macmillan, 2006 Organization and development of Russian business: a firm-level analysis; Tatiana Dolgopyatova, Ichiro Iwasaki e Andrei A. Yakoviev; Basingstoke; New York: Palgrave Macmillan, 2009 A Taxonomy of Systems of Corporate Governance; Weimer J. Pape J. C.; Corporate Governance; 1999 Good governance and the misleading myths of bad metrics; Sonnenfeld J.; Academy of Management Executive; 2004 A Survey of Corporate Governance, Shleifer A., Vishny R.W., Journal of Finance, 1997 Vladimir Potanin named Norilsk Nickel CEO in board peace deal (December 2012); The Wall Street Journal Mining Executive Receives Payout of $100 Million, Russias Largest Ever(December 2012); The New York times www.nornik.ru/en/ www.ecgi.org www.bloomberg.com Rusal to challenge Norilsk board elections results (July 2010); Reuters Norilsk Nickel plants 20 billion $ program to boost artic output ( October 2010); www.bloomberg.com/news Norilsk Nickel, Razgulay, www.bloomberg.com/news Silvinit May move: Russian Stock Market Preview;

Russia Eyes Norilsk Nickel Stake Amid Ownership Fight (July 2010); www.businessweek.com/news Oleg Deripaska ordered by Kremlin to sell out Norilsk Nickel (October 2010); Global post Vladimir Potanins offer to Buy Out Rusal Is Beginning of End to Feud (October 2010); www.bloomberg.com Deripaska loses Norilsk Nickel fight (October 2010); Asia Times Database: Amadeus, Bloomberg, Business & Industries, Business Source Complete, Factiva, Orbis.

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