Shareholder Rights

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Shareholder Rights Corporate Disclosure

• Corporate Governance Conference
• Semiramis Intercontinental Hotel
• Thebes Hall
• Dan Konigsburg
• Director, Corporate Governance
• Standard Poors, New York
• March 2006

2
Disclaimer

• I am participating today in a personal capacity
  only and do not represent Standard Poors.
• Opinions expressed do not necessarily reflect
  those of Standard Poors or its parent company,
  McGraw-Hill.

3
Shareholder Rights

• Why should we care?
• Egyptian companies are majority- controlled
• There are relatively few minority holders
• Little attention paid to corporate governance
  in Egypt

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Shareholder Rights

• Why should we care?
• Because its in your financial interest
• Attracts foreign capital
• A discipline for internal controls
• Promotes Fairness

5
Shareholder Rights

• History
• Separation of ownership from control
• Where there is no separation risk of
• Expropriation
• Who decides? Shareholders vs. the board
• Strong boards, weak rights
• Weak boards, strong rights
• Shareholders vs. creditors

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Shareholder Rights

• Rights are enforced differently around the
  world
• In law / legislation
• Informal regulation / Codes of Conduct
• By convention

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Shareholder RightsProblems Encountered

• Right to attend shareholder meetings
• Meetings held far away Siberia Meetings
• Meetings held at the last minute
• Large holders only
• Ability to ask questions

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Shareholder RightsProblems Encountered

• Voting rights
• Proxy voting
• Electronic voting
• Voting by a show of hands
• Majority vs. Plurality Voting

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Shareholder RightsOwnership

• Ownership rights
• Right to secure ownership
• Right to free transfer of shares
• Right to equality of economic and voting
  interest
• Pre-emptive rights
• Right to convene a shareholder meeting
• Right to place an item on the agenda

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Shareholder RightsOwnership, Continued

• Ownership rights
• Right to nominate directors
• Right to vote for all directors, each year
• Right to vote on certain items
• Appointment of auditors
• Approval of dividends
• Mergers large acquisitions
• Changes to class rights
• Related-party transactions
• Executive compensation
• Amendments to Articles or By-laws

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Shareholder RightsThe Market for Control

• Takeover defenses
• Less of an issue in Egypt (perhaps)
• May promote management entrenchment
• Discipline against underperforming management?
• Or legitimate defense/negotiating tool?
• Defenses most common in U.S.
• Outside of U.S.
• Golden shares, governmental veto, foreign
  ownership limits,
• pyramid structures, multiple or non-voting shares

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Shareholder RightsRecap

• Why should we care?
• Important for growth, discipline
• Fairness, again
• Legitimacy

13
Corporate Disclosure

• Introduction
• Why is Disclosure So Important?

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Corporate Disclosure

• Theory Practice
• Investors need disclosure to monitor and
  protect their investments
• Efficient allocation of capital
• Driver of investment ? liquidity ? value
• ? lower cost of capital ? global
• competitiveness

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Corporate Disclosure

• In practice.
• Disclosure affects investment decisions
• U.S. pension funds California CalPERS
• Egypt is excluded from list of permissible
  countries
• Recent research connects disclosure to
  investment attractiveness at the firm level
• Case Study Infosys Technologies Ltd.

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Corporate Disclosure

• The importance of incentives
• for behavior
• for accuracy
• for strong internal controls
• The Watchword is Accountability

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Corporate Disclosure

• What do we mean by transparency?
• Developed markets vs. developing
• Ownership is a critical difference
• Different ownership leads to different
  conflicts
• management vs. shareholders
• large shareholders vs. small shareholders

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Corporate Disclosure

• We want different disclosures for different
  situations.
• Classic American Failure
• WorldCom
• Classic Italian Failure
• Parmalat
• It is necessary to look in different places for
  potential problems

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Disclosure What Investors Expect from Egypt

• Accounting Standards
• Use of internationally recognized standard
• IAS, US GAAP
• For more than just tax purposes
• Use of a high quality auditor
• Consolidated financial reports
• Clean audit opinion

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Disclosure What Investors Expect from Egypt

• Related Party Transactions
• Key area of disclosure for smaller holders
• Reflects expropriation risk
• How are transactions identified, vetted,
  approved by the board?
• Transactions not just with shareholders, but
  management, or managements other businesses

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Disclosure What Investors Expect from Egypt

• Non-Financial Disclosure Ownership
• Who controls the firm?
• Full disclosure of entire holding structure
• Other experience Brazil, UK
• Typical questions investors will ask about
  ownership

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Disclosure What Investors Expect from Egypt

• Non-Financial Disclosure The Board
• Critical for ensuring accountability
• Who sits on the board?
• Conflicts of interest
• Independence
• Committee structure
• Nomination process

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Disclosure What Investors Expect from Egypt

• Non-Financial Disclosure Operations
• Discussion of strategy
• Discussion of business risks
• Operating performance, metrics
• Competition-sensitive information

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Disclosure Standard PoorsDisclosure Studies

• Disclosure Studies Turkey Russia
• Completed in 2005
• For Russia, history to 2001
• 100 Objective, yes or no questions
• Tested for disclosure of
• Ownership Structure
• Shareholder Rights
• Financial Operational Information
• Board of Directors

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Disclosure Standard PoorsDisclosure Studies

• Disclosure Study Turkey
• Strongest Financial Information
• Weakest Board of Directors
• Few disclose more than required
• Little variation in financial disclosure

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Disclosure Standard PoorsDisclosure Studies

• Disclosure Study Russia
• Strongest Financial Information
• Weakest Compensation
• Ultimate beneficial ownership is elusive
• Websites often more informative than annual
  reports
• Russian vs. English language disclosure

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Disclosure Other Common Problems

• Timely disclosure
• as important as quality and content
• timely continuous disclosure
• Selective disclosure
• Difficulty obtaining disclosure
• Differences in language of disclosure

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Disclosure A Case Study

• A case study.Dividend Policy
• FleetBoston Financial Corp (US)
• The level of dividends paid to stockholders
  on our common stock, which currently approximates
  1.5 billion annually, is reviewed regularly and
  determined by the Board considering our
  liquidity, asset quality profile, capital
  adequacy and recent earnings history and
  prospects, as well as economic conditions and
  other factors deemed relevant.

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Disclosure A Case Study

• Dividend Policy
• Eriks NV (Netherlands)
• It is our policy to pay out a dividend of
  approximately 50 percent of the result from
  ordinary activities, circumstances permitting.

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Disclosure A Case Study

• Dividend Policy
• SeverStal (Russia) The key points of the
  dividend policy
• The affordable level of the annual profit is the
  prerequisite for the dividend payment
• The annual dividend payout will depend on the
  industry's cycle, i.e. it will vary with the
  amount of the profit received and company's cash
  flow
• The mid-term dividend policy is to pay out as
  dividends a minimum of 25 of net profits
  received by the end of the reporting period,
  calculated according to IFRS
• In long-term the company may increase the
  dividend payout ratio if the capex requirements
  are reduced

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Disclosure A Case Study

• Dividend Policy
• Emap plc (UK) Looking at our historic
  dividend cover, restated in line with this new
  basis, we were sitting at 2.1 times cover last
  year. Going forward, and over the cycle, we will
  aim to operate within a relatively tight range
  with a target cover of between 2.0 and 2.5 times.
  This compares with an average across the FTSE
  Media Photography sector of 1.9 times. Our
  target dividend cover range is therefore
  marginally ahead of this..
• Conclusion Predictability, Context,
  Thoughtfulness

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Disclosure Conclusion Recap

• More disclosure is not always better
• Good disclosure touches on all other aspects of
  corporate governance

• Shareholder rights disclosure
• Ownership disclosure
• Board of director disclosure
• Compensation disclosure
• Financial disclosure
• Non-financial (operational) disclosure
• Key risks and strategic disclosure
• Stakeholder disclosure
• Timely disclosure
• Thoughtful disclosure