1.4.

Corporate Governance

корпоративное управление

1.4.1. Corporate governance principles and standards

Corporate governance at RusHydro Group is aimed at creating and maintaining the Company’s trust relations with the investors, protecting the rights and interests of the shareholders, and increasing the value of shares. The corporate governance system is created in accordance with the requirements of the legislation and taking into account modern practices of the leading Russian and foreign companies.

The Groups corporate governance principles and procedures are fixed in the Articles of Association and the Company’s internal regulatory documents. The Corporate Governance Code of PJSC RusHydro, approved by the Board of Directors on June 19, 2015, is the fundamental document in this area. It contains the following corporate governance system principles: transparency, accountability, honesty and financial discipline. By the decision of the Board of Directors of June 23, 2016, the Code was amended. In 2016, the Company was implementing the Code standards by bringing internal documents in line with it, as well as by applying its norms to everyday practice.

RusHydro’s Corporate Governance Scheme

Corporate governance structure

Corporate governance in the Company is carried out in strict accordance with:

  • Russian legislation,
  • recommendations of the Russian Governance Corporate Code,
  • requirements for companies listed on MOEX and London Stock Exchange.

STRUCTURE OF THE AUTHORIZED CAPITAL

The largest shareholder of the RusHydro Group is the Russian Federation represented by the Federal Agency for State Property Management (66.8312%12 as of December 31, 2016), the remaining shares are held by the nominee shareholder CJSC National Settlement Depository (30.4579%). Total number of RusHydro’s shareholders is more than 360 000.

The Company’s shares are traded on the MOEX, as well as outside the Russian Federation in the form of depositary receipts on the Main Market of London Stock Exchange (LSE) and on the US OTC market (OTCQX). The percentage of shares traded outside the Russian Federation in the form of depositary receipts, at the end of the reporting period, amounted to 5.4% of the total number of shares.

SUBSIDIARIES MANAGEMENT

PJSC RusHydro participates in the authorized capital of the companies engaged in production and supply of electricity and heat, engineering, construction, repair and service maintenance, technical upgrade and reconstruction of generating facilities.

The Company’s interaction with its subsidiaries is aimed at implementing the strategy, ensuring stable economic development and investment appeal, and also at protecting the rights and interests of the shareholders of both the Company and its subsidiaries.
The Company manages its subsidiaries through its representatives at the General Meetings of Shareholders, the Boards of Directors and governing bodies of the subsidiaries, in accordance with the Articles of Association and the Procedure for JSC RusHydro’s Interaction with organizations in which the Company participates.

The Management Board is in charge of the decision-making process in subsidiaries in which 100% of the authorized capital belongs to the Company. The Board of Directors determines the Company’s opinion on the subsidiaries’ strategic issues (reorganization, liquidation, change in the authorized capital, approval of major transactions, participation in other organizations). The Company’s executive bodies are responsible for other significant issues of the subsidiaries.

In 2016, in connection with the implementation of voluntary offer transactions and the forced repurchase of shares in PJSC RAO ES of the East, the share of RusHydro Group in the authorized capital of PJSC RAO ES of the East was increased up to 99.98%.

In addition, since April 2017, the functions of the executive body of PJSC RAO ES of the East are implemented by PJSC RusHydro.

1.4.2. Control bodies

The General Meeting of Shareholders is the supreme management body of the Company, whose competence is determined by the Federal Law of December 26, 1995 No. 208-FZ «On Joint Stock Companies» and the Articles of Association of PJSC RusHydro. The General Meeting elects the Board of Directors, the Audit Commission and the auditor on an annual basis. In turn, the Board of Directors forms the Committees under the Board of Directors and the Management Board, appoints the Chairman of the Board – General Director, the Corporate Secretary and approves the appointment of the Head of Internal Audit. In 2016, no major changes in the Company’s corporate governance system took place.

BOARD OF DIRECTORS

The Board of Directors’ activity is regulated by the Regulations for the procedure on convening and holding the Board of Directors meetings of PJSC RusHydro, which is approved by the General Meeting of Shareholders on June 27, 2016. According to the Articles of Association, the Board of Directors consists of 13 members. In 2016, there were two members of the Board of Directors: the composition elected by the annual General Meeting of Shareholders on June 26, 2015, and the composition elected on June 27, 2016. The Chairman of the Board of Directors is not a member of the collegial executive body (the Management Board).

The main task of the Board of Directors of PJSC RusHydro is strategic management. However, the Board of Directors also manages corporate governance, investment and business planning, performance management, innovation development, risk management, audit and control, reliability of facilities operation, and sustainable development, including social policy, charity and environmental aspects.

Remuneration to the Board of Directors members is calculated in accordance with the Regulations for remuneration paid to the members of the Board of Directors of PJSC RusHydro. Remuneration is paid to the members of the Board of Directors who do not have legal restrictions and are non-members of the collegial executive body or the sole executive body. According to the Russian legislation, remuneration is not paid to the members of the Board of Directors with the status of government officials.

Please, see the Annual Report of PJSC RusHydro for 2016, for more details about the characteristics of the Board of Directors, evaluation of the Board of Directors effectiveness, as well as information on remuneration of members of the Board of Directors and the Management Board.

COMMITTEES UNDER THE BOARD OF DIRECTORS

The Board of Directors of PJSC RusHydro has six committees: Strategy Committee, Audit Committee, Investment Committee, HR and Remuneration Committee (nominations), Committee for Reliability, Energy Efficiency and Innovations Committee, and the Far East Energy Sector Development Committee.

Committees consist of persons who have experience and knowledge in the relevant fields, which increases effectiveness and quality of the Board’s operation. Committees act on the basis of the Regulations on Committees under the Board of Directors. In accordance with the best practice of corporate governance, only members of the Board of Directors who are independent directors can be elected to the Audit Committee and the HR and Remuneration Committee.

INDEPENDENT MEMBERS OF THE BOARD OF DIRECTORS

The composition of the Company’s Board of Directors includes four independent directors who meet the criteria of the Corporate Governance Code of PJSC RusHydro13. In 2016, Independent Director S.N.Ivanov was the Deputy Chairman of RusHydro Board of Directors.

MANAGEMENT BOARD

The Management Board acts in compliance with the Management Board Regulation and is guided by the decisions of the General Meeting of Shareholders and the Company’s Board of Directors. The Management Board includes managers responsible for financial and economic activities, production activities, capital construction and engineering activities, innovations and strategy formation. Nikolay Shulginov, Chairman of the Management Board – General Director of PJCS RusHydro, elected by the Board of Directors in 2015, is responsible for the Company general management.

Performance of the Management Board members is regularly (quarterly) assessed using key performance indicators (KPIs). This list of KPIs was developed in accordance with recommendations of the Russian Ministry of Energy.

The Board of Directors approved KPI targets for the Management Board which are based on the confirmed business plan. The Regulations on the procedure of remuneration and compensation payment to the Management Board members of PJSC RusHydro provide quarterly and annual bonuses for performance on the basis of individual KPIs.

In 2016, the Management Board held 64 meetings (including 12 meetings in presentia) and considered over 455 issues related to the Company’s current operations.
Also in 2016, the following was developed:

  • KPI for the first cycle (2017-2019) of Long-Term Motivation Program of PJSC RusHydro (three KPIs related to financial results, investments and innovations);
  • list and target values of annual KPIs for the members of PJSC RusHydro Management Board for 2017 (seven KPIs in total, including the share of purchases from small and medium enterprises, the number of accidents at work, and the number of major accidents).

The KPIs introduction will allow to motivate the PSJC RusHydro Management on implementation of strategic goals, and to unite thereby the interests of management and shareholders of the Company.

THE SYSTEM OF INTERNAL CONTROL BODIES: STRUCTURE AND COMPETENCES

The Audit Committee under the Board of Directors

The Committee was elected by the Company’s Board of Directors on August 10, 2016.

The Committee consists of three members.

Acts on the basis of Regulations on the Audit Committee under the Board of Directors
The main goal of the Audit Committee is to guarantee the effective performance of the BoD’s functions in terms of control over the Company’s financial and economic activity.

Regulation on the Audit Committee of the BoD.

Revisory Commission

The Commission is elected annually by the General Meeting of Shareholders in the membership of five people. The current Revisory Commission was elected by the decision of the annual General Meeting of Shareholders on June 27, 2016.

Acts in the interests of the Company’s shareholders and is accountable to the

Company’s General Meeting of Shareholders.

Acts independently of management body officials and the Company’s business units’ managers. The main tasks of the Revisory Commission are:

  • supervision of the Company’s financial and business performance;
  • monitoring of the compliance of the Company’s financial and business transactions
  • with the Russian Federation law and the Company’s Articles of Association;
  • independent evaluation of information on the Company’s financial condition.

Regulations on PJSC RusHydro Revisory Commission.

The Control and Risk Management Department

The main tasks of the Control and Risk Management Department are:

  • organization of an effective corporate internal control system and anti-corruption system operating in the Company;
  • development and monitoring of the implementation of plans and programs to upgrade the corporate internal control system of the Company and its subsidiaries;
  • interaction with the territorial authorities of the Russian Federation, the Accounts Chamber of the Russian Federation, the Internal Audit Commission of the Company and other supervisory bodies on internal control, as well as in the course of their audits of the Company and its subsidiaries;
  • control over the disclosure of information about the risks of the Company and its subsidiaries.

Regulations on Internal Audit and Risk Management Policy.

Internal Audit Service

The goal of the Internal Audit Service of PJSC RusHydro is to assist the Board of Directors and executive bodies of the RusHydro Group in raising the RusHydro Group’s management efficiency and improving its activities. The Internal Audit Service is a separate structural unit of PJSC RusHydro, which is subordinate to the Board of Directors and is governed by the General Director – the Chairman of the Management Board of PJSC RusHydro.

The tasks and functions of the Internal Audit Service are:

  • organization and conduct of internal audits of the Company, its subsidiaries and branches, processes and activities;
  • evaluation of the effectiveness of the internal control system, risk management system, corporate governance of the Company and its subsidiaries and branches;
  • organization of methodological support and control over the activities of the Company’s representatives in the Audit Commissions of its subsidiaries and branches;
  • interaction with the Audit Committee of the Board of Directors.

The priority activities of the Internal Audit Service of the Company in accordance with the objectives of the RusHydro Group, taking into consideration available resources, as well as the risk-oriented approach to planning control measures, are determined in the Control Measures Schedule, which is approved annually by the Audit Committee.

The Internal Audit Policy of PJSC RusHydro.

1.4.3. Corporate governance improvement

In 2016, a remote evaluation of the Board of Directors elected in 2015 was conducted. The evaluation was conducted with the involvement of the Association of Independent Corporate Directors – an organization that is not affiliated with the Company. Based on the results of the assessment, an action plan for improving the Board of Directors activities was implemented and the plan of measures for 2016-2017 corporate year was drawn up.

In 2016, the Board of Directors approved the following:

  • changes in the Corporate Governance Code;
  • new versions of the Regulations on Committees;
  • Regulation on the Corporate Secretary.
Корпоративное управление-совершенствование

It is essential to note that in December 2016, the Board of Directors considered a new organizational structure of the Company. Its amendment is connected with the integration of the executive office of PJSC RAO ES of the East and PJSC RusHydro.

The reorganization was aimed at reducing administrative costs in terms of costs for the Executive Office of PJSC RAO ES of the East. As for the subsidiaries of PJSC RAO ES of the East, it was aimed at reducing costs under management contracts. Integration of a part of the personnel of PJSC RAO ES of the East into the profile functional subdivisions of PJSC RusHydro was carried out. Also, the Far East Division was created in the Executive Office of PJSC RusHydro. The new organizational structure of the Company began to operate from April 1, 2017.

Please, see more details about corporate governance, including the activities and operating conditions of the Board of Directors and committees under the Board of Directors, in the Annual Report of PJSC RusHydro for 2016.