Legal Materials - Corporate Governance Code

 UES of Russia

Code of Corporate Governance

 Table of Contents

1. Preamble
2. Corporate Governance Framework
3. UES of Russia Shareholders
4. UES of Russia Board of Directors
  4.1. General Provisions
  4.2. Board of Directors Membership
  4.3. Eligibility requirements for members of the Board of Directors
  4.4. Criteria for judging a member of the Board of Directors to be independent
  4.5. Combining positions in other governing bodies of other companies
  4.6. Committees
  4.7. Proceedings of the Board of Directors
  4.8. Functions of the Board of Directors
  4.9. Chairman of the Board of Directors
5. The Management
  5.1. General Provisions
  5.2. Chief Executive Officer
6. Remuneration of members of the Board of Directors and Management executives
7. Disclosure of information and audits
8. Concluding provisions

1. Preamble

UES of Russia is one of the world's largest energy holding companies with hundreds of thousands of stockholders both inside and outside Russia. In order to preserve public control over the sector the Government has secured in its possession the controlling interest in the ordinary stock of the company.

UES of Russia as an integral part of the nation bears responsibility to the public for the reliable and quality supply of power, which is a source of income for the company and its shareholders, allowing for stable operations and further growth and the preservation of existing and creation of new jobs.

The scope and unique nature of UES of Russia operations involve a great degree of commitment to its shareholders and employees, customers and suppliers, as well as the public and the nation in general.

In recognition of this commitment and the need to pursue sound corporate governance practices in order to succeed in business, and with a view towards achieving understanding between all the parties involved in the company's business, UES of Russia undertakes to abide in its activities by the principles disclosed herein and endeavor to make all and any reasonable efforts to implement such in the course of the day-to-day operations of the company.

The provisions of the proposed Code have been designed on the basis of internationally developed principles of good corporate governance, in particular, as reflected in the OECD Principles of Corporate Governance.

2. Corporate Governance Framework

Corporate governance in UES of Russia is a system of relationships between company shareholders, Board of Directors members, Management executives and other interested persons (stakeholders): employees, customers, suppliers, creditors, government agencies, etc.

These relationships are based on governance and accountability, supervision and responsibility.

The ultimate governing body of UES of Russia is the General Meeting of Shareholders. Basic authority to manage the company is delegated by the shareholders to the Board of Directors. The Board of Directors appoints the Management, which is responsible for running the operations of the company.

The UES of Russia Board of Directors oversees corporate governance in subsidiary and affiliated companies. In this connection the Board of Directors takes any measures to encourage the adoption of the Code by all subsidiaries and affiliates.

3. UES of Russia Shareholders

UES of Russia shareholders as owners of the company enjoy a combination of powers vis-à-vis the company and the Board of Directors and the Management are required to uphold and safeguard such powers.

1. Shareholders are entitled to the defense of their rights to own shares against any infractions.

UES of Russia implements this by allowing an independent registrar (with proper technology and controls and of impeccable standing in the securities market) to register ownership, maintain and keep the register of shareholders in the company.

2. Shareholders have the right to dispose freely and at their own discretion of shares owned by them, and undertake any actions that are neither in violation of applicable laws, nor in infringement of the legitimate interests of other parties, including the transfer of shares to other persons.

For the purposes of implementing and safeguarding such rights UES of Russia shall take any action necessary, including lodging of appeals with legislative and regulatory authorities with a view to repealing any requirements that may impose unequal treatment of UES of Russia shareholders and potential investors vis-à-vis shareholders and potential investors in other Russian companies. UES of Russia shall continuously maintain efforts to increase the liquidity of its shares.

3. Shareholders have the right to regular and timely disclosure of company information to the extent that such information is adequate to make sound and reasonable decisions regarding the disposal of company shares.

For the purposes of implementing and safeguarding such rights UES of Russia shall guarantee compliance with statutory disclosure requirements, as well as volunteer additional information, including by way of holding conferences with investment analysts, to keep the interested parties properly informed. Any information disclosed in whatever manner shall be posted on the UES of Russia Web-site.

4. Holders of voting stock shall be entitled to participate and vote at general meetings of shareholders on any issues within their authority.

For the purposes of implementing and safeguarding such rights UES of Russia shall undertake to arrange general meetings of shareholders in such a manner so as not to impose any pecuniary or temporal burden on any shareholders that chose to participate, and thus provide equal treatment of all shareholders alike.

UES of Russia undertakes to advise the shareholders of the meetings' agenda to the extent and within a time-frame that allow shareholders to make reasonable decisions.

For each issue on the agenda the Board of Directors shall prepare impartial substantiated recommendations for the shareholders. During elections to the Board of Directors UES of Russia shall provide shareholders with biographical backgrounds on the nominees, detailed and complete as accepted in international practice.

Any information regarding general meetings of shareholders, including shareholders' proposals for the agenda, shall be posted on the UES of Russia Web-site.

5. Shareholders have the right to receive on a timely basis complete and objective information regarding the following:

Transactions that involve the assets of the company;

• Transactions that may have material effect on the financial results of the company;
• Any liabilities of the company to third parties failure to honor which may cause a reduction in the price of UES of Russia stock.
• Increases in authorized capital of the company.

Shareholders have the right to participate in making decisions with regard to such transactions in line with applicable procedures.

For the purposes of implementing and safeguarding such rights UES of Russia shall undertake to disclose in advance information pertaining to such proposed transactions through mandatory publication of such information on the UES of Russia Web-site.

The Board of Directors, based on a review of suggestions from shareholders, shall determine the contents and structure of communications (hereinafter referred to as 'corporate events') information on which should be disclosed in addition to any information required to be disclosed under Russian laws.

The UES of Russia Board of Directors, based on a review of suggestions from shareholders, shall determine a set of criteria for transactions (in addition to those already prescribed by law), the approval of which by the shareholders shall be a prerequisite for their completion, as well as determine the procedures for shareholder review of transactions. Whenever the governing bodies of UES of Russia (the Board of Directors, the Management) fail to secure approval of such transactions by the shareholders, they shall refrain from entering into such transactions, notwithstanding the fact that the law does not require an approval by shareholders as a prerequisite for such transactions.

6. Shareholders have the right to collect a part of UES of Russia net profits in a given year in the form of dividends.

For the purposes of implementing and safeguarding such rights UES of Russia shall undertake to pay out announced dividends within the established time-frame.

The UES of Russia Board of Directors shall on an annual basis develop the overall dividend policy of the company and submit it to shareholders for approval.

In their own turn the shareholders in UES of Russia as owners of the company shall bear responsibility to each other, the company, other interested parties and the public in general for the longer-term stability and profitability of the company. In this connection the shareholders should not take any action that may undermine the longer-term profitability of the company and should not exert any pressure on the UES of Russia Board of Directors and Management to compel them to implement the objectives of such shareholders at the expense of other shareholders.

A shareholder or shareholders that hold in total more than 2 per cent of shares are recognized as large shareholders in UES of Russia that may have significant influence over the activities of the company. In this regard the Board of Directors and other shareholders expect such large shareholders to act in a responsible manner as regards the following:

• Recognition of their ownership and disclosure of information regarding affiliated persons;
• Refusal to use insider information (information regarding UES of Russia that is not otherwise public and allowing persons that avail themselves of such information any advantage as compared to other persons);
• Disclosure of information on any transactions with UES of Russia shares undertaken by them;
• Allow other shareholders the opportunity to nominate members of the Board of Directors whenever an extraordinary General Meeting of Shareholders is convened at the request of a shareholder or shareholders that own no less than 10 per cent of the voting stock in the company.

Whenever any single person (group of affiliated persons) may happen to own more than 50 per cent of the voting stock in the company, UES of Russia shall request that such a shareholder disclose information regarding any decisions taken or proposed by him vis-à-vis UES of Russia, because such decisions may affect the rights of other shareholders.

Shareholders may create coalitions and the Board of Directors shall allow them this opportunity by establishing a shareholders' forum at the UES of Russia Web-site.

4. UES of Russia Board of Directors
   1. General Provisions

Members of the Board of Directors are representatives of the shareholders, report to the shareholders and are accountable to the shareholders for the successful operations of the company.

The Board of Directors recognizes its responsibility to the shareholders and sees its primary objective in managing the company in good faith and in a competent manner so as to maintain and promote the well-being of the shareholders, as well as safeguard their rights and provide opportunities for exercising them.

The decisions of the Board of Directors are founded on the need to ensure equitable treatment of all shareholders and should not take into account the interests of any single group of shareholders only. The Board of Directors maintains a system for monitoring and managing potential conflicts of interest.

The Board of Directors establishes an environment within which shareholders can exercise their rights.

The Board of Directors is responsible for the proper functioning of the system for disclosing and communicating information on the activities of the company.

The Board of Directors maintains a continuous dialogue with the shareholders.

The Board of Directors formulates and implements the company's development strategy, approves its business-plans, financial plans and the budget of the company.

The Board of Directors establishes and maintains necessary mechanisms for overseeing the activities of the Management, including monitoring implementation and corporate performance as compared to approved plans. The Board of Directors also establishes a framework of clear and transparent criteria and procedures for appointing and replacing members of the Management, an effective system of remunerating Management executives and their re-training and skill-enhancement programs.

The Board of Directors determines the position of UES of Russia vis-à-vis the items on the agenda of general meetings of shareholders and board of directors meetings of subsidiary and related companies the decisions on which may have an impact on the rights of UES of Russia shareholders.

The Board of Directors establishes a transparent system for evaluating its performance as a whole and for each individual member of the Board of Directors; determines the eligibility requirements for nominees to the Board of Directors; designs a transparent system for remunerating Board of Directors members and compensating expenses related to performing the functions of the Board of Directors and submits it for approval by the General Meeting of Shareholders.

The Board of Directors ensures the establishment of a system for managing financial risks.

The Board of Directors recognizes that the operations of the company affect the interests of a wide range of persons both inside and outside the company.

The following major groups are recognized as stakeholder persons interested in the operations of the company: UES of Russia employees and employees of its subsidiaries and related companies; shareholders of its subsidiaries and related companies; its suppliers and customers; legislative and executive authorities of the Russian Federation; governmental authorities of member-states of the Russian Federation.

In order to ensure the successful operations of the company the Board of Directors formulates principles of interacting with various groups of stakeholders.

2. Board of Directors Membership

The quantitative composition of the Board of Directors should allow for its effective operation; it should represent various groups of shareholders and reflect different interests and perspectives in the decision-making process.

The Board of Directors should have no less than 9 seats and should not exceed 20 seats. The exact number of seats on the Board of Directors shall be determined by the General Meeting of Shareholders and shall be reflected in the company Articles of Association.

Composition of the Board of Directors should, to the extent possible, reflect the shareholding pattern in such a manner so that no single person or group of persons shall have unrestricted opportunity to influence the decisions of the Board of Directors in its favor. The process of establishing a Board of Directors should take due account both the interests of shareholders controlling significant blocks of shares and the interests of other shareholders.

In order to ensure impartiality of decisions and to maintain a balance between the interests of various groups of shareholders the Board of Directors should include independent directors.

In order to maintain a balance between oversight of Management activities and participation in managing the company, Management executives should be represented on the Board of Directors. The number of such members of the Board of Directors should not exceed three.

3. Eligibility requirements for members of the Board of Directors

Eligibility requirements for nominees for membership on the Board of Directors are determined by the Board of Directors, approved by the General Meeting of Shareholders and incorporated in the Articles of Association.

The eligibility requirements shall be formulated in such a manner so that the Board of Directors would comprise of persons with sound professional and personal reputations, capable of making their unique contribution to the work of the Board of Directors and fit to contribute towards attaining a common objective.

Whenever persons that are nominated for seats on the Board of Directors disagree with the eligibility requirements prescribed by the Articles of Association, they should refuse their nomination for election to the Board of Directors.

Members of the Board of Directors acting in this capacity should undertake the following:

• Act in good faith and with due diligence in the interest of all shareholders and the company as a whole;
• Avail themselves of sufficient time to effectively perform their duties as members of the Board of Directors;
• Exercise their independent judgement and defend it whenever they believe that it best serves the interest of the company;
• Upon election to the Board of Directors cease representing the interests of any single person or group of persons and act in the interests of all shareholders and the company as a whole;
• Fairly and completely disclose any information regarding their interests in transactions perpetrated by the company;
• Enhance their skills whenever it is necessary in order for them to perform their duties as members of the Board of Directors.

Upon accepting their positions members of the Board of Directors shall in writing affirm their commitments to act in the interests of all shareholders and the company as a whole.

The language for the commitments undertaken by members of the Board of Directors, procedures for inaugurating Board members, briefing and clearance arrangements, termination of powers in cases of both early and scheduled re-elections, voluntary resignations, procedures for convening and holding Board of Directors meetings shall be prescribed by in-house by-laws of UES of Russia designed by the Board of Directors.

4. Criteria for judging a member of the Board of Directors to be independent

Independent members of the Board of Directors should not be related to the company in any way other than through its position on the Board of Directors, nor to shareholders that control significant blocks of shares, nor to the Management executives, as this may influence their independence and the impartiality of their decisions.

The independence criteria shall be determined by the Board of Directors and incorporated in the Article of Association of the company, and published on its Web-site and in annual reports.

Members of the Board of Directors elected as independent directors should resign whenever they cease to conform to criteria applicable to independent directors.

In determining the independence criteria the Board of Directors should proceed from the following provisions.

• An independent member of the Board of Directors (as well as their spouse, parents, children or siblings):
• Shall not be a representative of a shareholder that owns two or more per cent of the voting stock in the company;
• Shall not be related to the company in any manner (employment, contractual) other than their position on the Board of Directors and ownership of less than 0.5 per cent of voting stock. They shall not render any legal, consulting or other services to UES of Russia and its affiliates. They shall not have any employment record with UES of Russia or any of its affiliates within any five years prior to their appointment and during their term in office;
• Shall not be a representative of any government agency.
4. Combining positions in other governing bodies of other companies

Members of the Board of Directors should avail themselves of sufficient time to effectively perform their duties.

In making decisions regarding combining positions in governing bodies of other institutions members of the Board of Directors should proceed from the assumption that they can only perform their duties to UES of Russia in a proper manner provided that they devote sufficient time to it.

6. Committees

For the purposes of tackling specific tasks at hand the Board of Directors may establish committees, including the Board of Directors Committee on appointments and remuneration, Committee on corporate governance and ethics, Committee on audits and financial issues, Committee on strategy and development, etc.

A committee shall operate on the basis of a terms of reference approved by the Board of Directors.

Members of any given committee shall be appointed by the Board of Directors. A committee should seat at least two independent directors. Only an independent director may chair a committee.

Committees of the Board of Directors should meet as required and as prescribed by their terms of reference. Committees may hold joint sessions as required. Disclosure of information regarding the activities of committees shall be implemented through the UES of Russia Web-site.

7. Proceedings of the Board of Directors

The Board of Directors should meet in joint sessions, as a rule, no less than six times a year. At least one meeting per year should focus on issues of the company's development strategy.

Meetings of the Board of Directors may be held both in the joint presence of the members of the Board of Directors and in absentia (by polling), as well as by teleconference. Whenever meetings of the Board of Directors are held in their joint presence any member of the Board that can not physically participate in the meeting shall be granted the opportunity to vote in absentia.

Meetings of meetings of the Board of Directors shall indicate votes cast by every Director participating in the vote. Whenever a Director fails to participate in a meeting or in a vote a relevant record shall be included in the minutes.

In order to the effectiveness of their operations members of the Board of Directors should have access to all relevant information.

the Board of Directors may invite outside consultants to advise them on specifics matters of their business. For these purposes the annual budget of UES of Russia shall have a specific expense allocation of at least 1 per cent of total projected outlays.

8. Functions of the Board of Directors

The functions of the Board of Directors shall cover the following basic areas:

• Formulation and approval of the company's mission and its development strategy;
• Approval of business and financial plans;
• Supervision of Management activities by determining the authority and responsibilities of the Management, establishing a system of transparent criteria and procedures for appointing and replacing Management executives, an effective system for remunerating managers and enhancing their skills, monitoring and assessing Management performance as compared to a set of performance objectives designed by the Board of Directors;
• Review of financial reports and audit findings. Quarterly review of the company's financial statements and debriefing Management executives regarding discrepancies between actual and projected financial results;
• Assessment of plans to reform the company and their progress of implementation;
• Identification of material financial risks and managing such risks, as well as establishing systems for maintaining oversight over internal procedures;
• Evaluation of recommendations for internal controls offered by relevant units of UES of Russia and its auditors;
• Evaluation of Management activities in the field of software and hardware security, as well as backup options for data processing tasks;
• Review of Management activities towards assessing material financial risks and programs of minimizing them;
• Supervision over disclosure of company information, whereby all interested persons are granted access to exhaustive information regarding the operations of the company;
• Establishment of a system for the evaluation of performance of the Board of Directors as a whole and of individual Directors in particular;
• Act to ensure that the audit of the company is conducted by the most reputable firm;
• Act to ensure that the Code of Corporate Governance is adopted by all subsidiaries and that they disclose information at their own Web-sites or at the UES of Russia Web-site;
• Exercise oversight over transactions that may have a negative impact on the company's performance;
• Transactions involving securities issued by the company perpetrated by members of the Board of Directors, Management executives and other managers of the company. Disclosure - information regarding any such transactions should be publicized on the company's Web-site within a month of their completion;
• Transactions which may involve a certain interest. Disclosure - prior disclosure within five days of receipt of relevant information by the Board of Directors and subsequent disclosure within one week after completion of the transaction - through the UES of Russia
• Transactions involving non-current assets of UES of Russia worth between 10 and 25 per cent of their balance sheet value as of the date the decision to perpetrate such a transaction is made, as well as shares and equity holdings in subsidiary or related companies in excess of 10 per cent of their respective authorized capitals. Disclosure of information - through the UES of Russia Web-site within 5 days after any such changes take place;
• Other transactions that the UES of Russia Board of Directors shall designate by summarizing proposals offered by shareholders.
8. Chairman of the Board of Directors

The Chairman of the Board of Directors shall be accountable to the shareholders for implementing the UES of Russia development strategy and the financial results of its operations.

The Chairman of the Board of Directors shall be charged with the task of organizing the activities of the Board of Directors. The Chairman is therefor required to govern the Board of Directors in such a manner so that no single person or group of persons would gain unrestricted opportunity to influence the activities of the Board of Directors.

5. The Management
   1. General Provisions

The Board of Directors shall appoint the Management for the purposes of running the day-to-day operations of the company. The Management shall be chaired and governed by the Chief Executive Officer, which shall be elected by the General Meeting of Shareholders.

The Management shall be accountable to the Board of Directors. It shall act in strict conformity to the rules prescribed by the Bard of Directors and shall on a regular basis report to the Board of Directors on its activities.

For the purposes of ensuring effective administration of UES of Russia business the Management shall be allowed a high degree of autonomy. The Board of Directors and the shareholders shall not unreasonable interfere with the daily activities of the Management, thereby restricting its capacity to manage the operations of the company in an expeditious manner in line with economic developments.

The Management recognizes its responsibility to the shareholders and sees its primary mission in performing its duties of managing the day-to-day operations of the company in good faith and in a competent manner with a view towards ensuring the company's longer-term profitability.

The Management shall be responsible for arranging, maintaining and preserving the integrity of the company's accounting function, for the timely submission of annual and other financial reports to relevant authorities, as well as communicating briefing material regarding the operations of the company to its shareholders, creditors and the media.

The management shall be responsible for communicating relevant information to the Board of Directors and informing it on a timely and regular basis.

Management executives may only be allowed to simultaneously hold positions in governing bodies of other institutions with the consent of the Board of Directors of the company. Management executives shall be allowed to simultaneously hold positions in no more than three institutions, excluding UES of Russia.

2. Chief Executive Officer

The Chief Executive Officer shall be accountable to the shareholders for implementing development strategy and the financial results of its operations.

The Chief Executive Officer shall be charged with the task of organizing the activities of the Management. The Chief Executive Officer is therefor required to govern the Management and the UES of Russia in such a manner so as to ensure the longer-term profitability of the company.

The Chief Executive Officer shall at least once per quarter submit for review by the Board of Directors the plans for the activities of the Management and report to the Board of Directors on the progress of their implementation.

6. Remuneration of members of the Board of Directors and Management executives

The Board of Directors shall approve the remuneration package for Management executives and shall submit, in line with the established procedure, the remuneration package for members of the Board of Directors for approval by the General Meeting of Shareholders.

The remuneration system should be transparent and comprehensible to the shareholders and shall be disclosed in the company's annual report.

The remuneration arrangements shall be established in such a manner so as to make employment with the company attractive to highly skilled experts and encourage them towards earnest and effective activities. The remuneration packages for members of the Board of Directors and Management executives should be competitive to other comparable companies.

The size of the remuneration package for members of the Board of Directors should be based on the results of company activities and the performance of the Board of Directors.

The size of the remuneration package for Management executives should be based on company performance, including the UES of Russia share price and profitability indicators, as well as individual performance of each executive.

The remuneration packages may include both cash and non-pecuniary benefits.

7. Disclosure of information and audits

All information disclosed by the company shall as a requirement be published on the UES of Russia Web-site as the Internet is the most easily accessible and least costly method of communicating information about the company to interested persons.

UES of Russia shall ensure timely and accurate disclosure of information on all material issues of the company's activities by complying with statutory disclosure requirements and by voluntary disclosure of any additional information. For these purposes the Board of Directors shall monitor investor queries in order to enhance the extent of information disclosed and its methods of disclosure. Also, based on a summary of information disclosed by large energy sector companies in other countries, the Board of Directors shall determine a list of economic information for the sector that shall be subject to mandatory disclosure.

UES of Russia shall on an annual basis invite an auditor, which is not related by dominial interests to the company or its shareholders, to audit its accounts and confirm its financial statements. UES of Russia shall allow representatives of the auditor to take part in the General Meetings of Shareholders in order to allow shareholders to raise questions to the auditor.

The Board of Directors shall on an annual basis report to the shareholders on its activities and the activities of the company in the format of an annual report. Information to be disclosed in the annual report shall be determined by the Board of Directors with due account of international practices and shall include the following details:

• Results of the activities of UES of Russia, including information on individual lines of business and markets;
• Company strategy and plans;
• Large shareholders and institutional investors that control at least 5 per cent of the authorized capital of the company;
• Members of the Board of Directors and Management executives, including biographical backgrounds, the number of company shares and other securities held by them and any changes in holdings over the reported period;
• Transactions that may involve company interests;
• Any facts that may cause a conflict of interest for members of the Board of Directors and Management executives, loans and other material relations between the company and any given person or persons related to it;
• Implementation of established plans by the Management or reasons for failure to implement them, including detailed comments by the Management on the financial results of the company's activities and financial statements;
• Membership and structure of Board of Directors Committees (if any), number of meetings and issues discussed over the reported period;
• Risks (their description) connected to the activities of the company and decisions made by governing bodies;
• Affiliated persons, subsidiary and related companies;
• Compliance with the present Code.

In connection with the holding of General Meetings of Shareholders the Board of Directors shall ensure a timely and complete disclosure of information for the benefit of the shareholders.

The Board of Directors shall be maintain continuos communication with the shareholders and potential shareholders/investors, which shall include the following:

• Availing the shareholders the opportunity to query the managers of the company;
• A dialog between the managers of the company and investment analysts and disclosure of information of such (tele)conferences to all investors.

The Board of Directors shall determine the nature of insider information and procedures for perpetrating transactions involving such information.

The Board of Directors shall on an annual basis produce a calendar of corporate events.

8. Concluding provisions

The present Code shall come into force upon approval by the Board of Directors.

Within one month upon enforcement of the present Code the Board of Directors shall approve an plan of action to bring the Articles of Association in conformity with the Code and design and approve the documents prescribed by the Code (hereinafter - the Plan). The approved plan shall be disclosed through the UES of Russia Web-site within five days after its approval.

The timing for the implementation of the Plan shall be established by the Board of Directors in such a manner so that the amendments to the Articles of Association and any other documents shall be submitted for approval by UES of Russia shareholders, in line with statutory requirements, at the next annual General Meeting of Shareholders following the meeting of the Board of Directors that approved the Plan.

The Board of Directors shall on a quarterly basis report to the shareholders on the implementation of the Plan by disclosing relevant information through the UES of Russia Web-site.