Independent shareholder advisory group, ISS, recommends to shareholders of Norilsk Nickel to vote to terminate the Board at the forthcoming EGM on Fiday 11th March 2011 and to vote for the re-election of the existing two independent non-executive directors (“INEDS”), Gerard Holden and Brad Mills.
Gerard and Brad were first appointed INEDS in December 2008 and have spent considerable time understanding the company and recommending actions to improve performance and governance.
Gerard is currently chairman of the Audit Committee and a member of the Budget Committee while Brad is Chairman of Strategy Committee and a member of the Audit Committee. Given the complexity of Norilsk Nickel and the need for the Audit Committee to consider the 2010 IFRS accounts in the next couple of months there is a significant risk for independent shareholders if the Chairman of the Audit Committee is changed to someone with no or limited knowledge of the company.
Gerard and Brad strongly encourage independent shareholders to concentrate their votes on the two of us to ensure that they procure at least two well experienced independent directors on the new Board of Norilsk Nickel.
The full text of the ISS announcement follows.
Executive Summary
- The company is engaged in a long-running proxy fight between its two largest shareholders, UC Rusal and Interros Holding Co., both of which hold approximately 25-percent stakes in the company.
- This meeting has been called at the request of Rusal, which is seeking the support of other shareholders to terminate the current board and elect new directors. Rusal claims that the board is imbalanced, and that company management has taken certain actions without due oversight from the board, which have led to the loss of shareholder value
- A meeting with the same agenda was convened on Oct. 21, 2011, also at the request of Rusal. At that meeting, Rusal was seeking the termination of the board and election of new directors, citing what it believed were shareholder rights abuses at the company AGM. Shareholders did not approve Rusal’s proposal to terminate the board at the EGM. Rusal believes that at the current meeting, there is a greater chance that shareholders will approve the termination of the board
- In a surprise decision, the company’s board has recommended that shareholders vote FOR the termination of the board of directors, citing the advent of a new shareholder, Trafigura, which recently acquired an 8-percent stake. Interros also came out in favor of the termination, citing a need to avoid any further aggravation of the shareholder conflict.
- ISS is recommending FOR the termination of the board, and FOR the two incumbent independent directors, Holden and Mills
Item 1. Shareholder Proposal: Approve Early Termination of Powers of Board of Directors
Vote Recommendation: A vote FOR this resolution is warranted, because:
- The director elections subsequent to this termination could bring about a more balanced and more effective board;
- The resulting board would more accurately reflect the company’s ownership structure, and could give minority shareholders relatively more power via increased representation on the board;
- Approving this resolution appears to be the shortest path toward reducing the hostilities that are currently hampering the board’s, and the company’s, operations.
ISS Comments
- While we do not support Rusal’s claims regarding wrongdoing at the company’s AGM or October 2010 EGM, and do not comment on their claims regarding management abuses, we do recognize the need for a more balanced and more effective board
- Norilsk Nickel’s board does not accurately reflect the company’s ownership structure. We believe that, given that all parties have come in support of the termination of the current board, and that the termination therefore looks probable, shareholders should take this opportunity to elect a board that more closely reflects the company’s ownership.
- On the issue of board effectiveness, we believe the board’s decision-making ability is hampered by the ongoing conflict, which, among other reasons, revolves around the imbalance on the board. We believe that correcting this imbalance could help mitigate the shareholder conflict, and bring about a more effective board. However, we believe that Rusal’s adverse reaction to the balance of the board issue has been disproportionate. The majority of Rusal’s accusations at Norilsk Nickel, particularly prior to the October 2010 EGM, have been unsubstantiated, according to the courts and other authorities to which it appealed.
- We believe that, generally, the most appropriate venue for electing the board at Russian companies is the AGM, which gives all shareholders equal opportunity to vote for the directors that they wish to see on the board, either as independent members, or the shareholders’ representatives. The board is populated in accordance with the votes cast by all shareholders. Rusal had the opportunity to elect its directors at the company’s 2010 AGM. It elected the number of directors that its stake in the company, combined with its voting strategy, permitted. Russian authorities have verified the validity of voting procedures at Norilsk Nickel’s 2010 AGM; aside from the negative (in our view) but not illegal practice of voting quasi-treasury shares, no wrongdoing was proven.
- Nevertheless, the current EGM is the second meeting Rusal has called following the AGM to try to elect a new board. We believe that such frequent EGMs where a termination of the board is proposed hamper the work of the board and distract company management from strategic and operational issues.
- We commend the company’s board and its other largest shareholder, Interros, for taking steps towards resolving the conflict by recommending FOR the termination of the board and election of new directors.
- Irrespective of the source of the conflict, we believe that at this point, the company would benefit from a rebalancing of the board, and the resulting reduction in hostilities; this EGM gives shareholders the opportunity to affect that outcome.
Items 2.1-2.27: Shareholder Proposals: Elect 13 Directors via Cumulative Voting
Vote Recommendation: A vote FOR Mills (Item 2.19) and Holden (Item 2.21) is warranted because:
- Based on the company’s ownership structure, minority shareholders can realistically expect to elect no more than two independent directors
- These two incumbent nominees have the best qualifications from among the independent candidates to effectively contribute to board deliberations
- Both of these candidates have the necessary experience to serve in key roles on the board’s committees;
- If a new board is elected at this EGM, it would function for only about three months before the new round of board elections at the AGM. Therefore, any new, non-incumbent directors would face a difficult time coming to understand the company and their role on the board and the committees in such a short timeframe.
ISS Recommendation
- While we recognize the qualifications of all the proposed candidates, including all seven nominees who meet ISS’ criteria for independence, we believe that minority shareholders would be best served by cumulating for the incumbent independent directors, Holden and Mills, at this EGM
- We believe that these two are not able to not only best serve all shareholders’ interests as fully independent directors, but to also most effectively address the operational issues currently facing the company.
- At Norilsk Nickel’s October 2010 EGM, ISS recommended for Holden, an incumbent with a finance background, and Wilkinson, who has mining experience. We recommended at that time for Wilkinson instead of Mills, the incumbent former mining executive, because we believed that while the board would benefit from foreign mining experience, it could also use a new perspective, in order to break the deadlock on the board. However, at this EGM, we believe that this need for a new perspective will be taken care of because of the anticipated termination of the full board and the resulting entry of new shareholder representatives, and reshuffling of the representatives of the major shareholders.
- Further, if elected, as an incumbent, Mills, would not need any time to familiarize himself with the situation at Norilsk Nickel, as a non-incumbent would. The work of the board and, importantly, the committees, would continue uninterrupted. This issue is particularly noteworthy because after this EGM, the board will have only about three months to operate before being terminated and elected again at the AGM. Any new, non-incumbent directors would have a difficult task familiarizing themselves with the company’s operations in such a short period of time.
- We believe that Mills and Holden have proven themselves as capable and independent directors over the course of several difficult years at Norilsk Nickel. They have both faced challenges during their service at Norilsk Nickel, but, by all accounts, have retained their independence, and have continued to meaningfully and effectively contribute to the company’s board. Further, these incumbent directors possess the qualifications necessary to the board, and to the board’s committees: Holden possesses valuable financial experience critical to the company’s audit committee, while Mill’s background as a high-level mining executive makes him valuable as the head of the company’s strategy committee.
- For these reasons, at the current EGM, we believe that the election of Mills and Holden warrants support.
