WHY CORPORATE GOVERNANCE IS ONCE AGAIN ON

THE AGENDA AND DO RUSSIAN COMPANIES REALLY

NEED IT?
By Mikhail G. Delyagin

Using Norilsk Nickel as an example

What in our country bears the proud name of corporations, in reality most often proves to be
a kind of “old chums’ get-together”, or something like cooperative workshop associations,
which only have remotely to do, if anything, with the Western models that had proven their
sustainability and were initially taken as basis for the creation of effective and transparent
management standards.

Probably the latest example of the utterly twisted domestic corporate model must be the situation
with Norilsk Nickel.

There is no doubt that corporate governance is one of the key factors as far as competitiveness is
concerned. But it seems that endless talks about its improvement rather reflect wishful thinking:
the quality of Russia’s big business has hardly seen any changes over the past years, and those
changes were definitely not for the better.

The impression is that, in pursuit of impressive performance indicators and the specter of global
leadership, to say nothing of the need to report to the country’s leaders or to the shareholders, top
managers of the Russian companies often openly disregard the universally adopted international
standards, describing this as “adaptation to the Russian realities” to suit their needs. What need
is there to observe all these complex and seemingly meaningless rules and regulations (or even
laws!), when one can opt for a shortcut and just pull the strings one has access to. After all, large
money is usually at stake, which one wants to get not after 100 years of hard work, like it is the
case in the West, but in 2 or 3 years in exchange. What do a couple of M&A bargains with your
conscience mean, after all?

Perfectly realizing that nothing overwhelmingly new is going to be discovered - the lamentable
situation is simply obvious for any economist, - it appeared sensible to opt precisely for
examination of the factors of ineffectiveness in order to stress unambiguously the main problems
and failures. This may, after all, come in useful to someone at some point.

So, there is Norilsk Nickel, the flagship of the Russian economy operating under remarkably
favorable market conditions: the production capacities were created during the Soviet era,
and its position in the market is stable and secure. This is the world’s largest producer of
palladium (38%) and nickel (22%), the fourth largest producer of platinum (9%), one of the
major producers of copper (3%), also producing cobalt, rhodium, gold, silver, iridium, osmium,
selenium, ruthenium and tellurium.

Let us take the Australian-British BHP Billiton for comparison (wherever available, of course),
which operates in a similar format, but with the Anglo-Saxon management model.

Team of ‘commissars’

It looks like the presence of members of elites and lobby groups, who lack work experience in
a specific area, in the management of major companies is obviously one of the characteristic
features of the Russian reality. But should shareholders be blamed for putting their own ‘trusted
people’ into the management. They can be understood considering the Russian reality. However,
it is reasonable to suggest that one or two observers or supervisors ensuring loyalty would be
sufficient. Nevertheless, they should have professionals with industry knowledge in their team.
By the way, even the Bolsheviks understood that: though the real power in the young Red Army
belonged to a commissar planted by the Party, all military operations were still planned by
professional military officers. So, the often misquoted Lenin’s words that any cook is being able
to run the country were only meant to please the proletariat. Thus, the efficient management,
be it management of a military base or a business corporation, has no room for sentiments of
loyalty. Strategy solutions must be sought and found by professionals, even if under supervision.

But the number of commissars in Norilsk Nickel appears to be at any rate excessive. The head of
the company, V. Strzhalkovsky, is a former KGB colonel. In 1991 he started a travel agency, and
since 1999 he has been managing the country’s entire tourism industry (despite accusations that
he had a hand in organised prostitution). At that, he is not only the Chairman of the Executive
Committee of Norilsk Nickel, the position allowing him to restrict his activity to defining the
strategy, but also the CEO of the company, which involves direct management of the company
and consequently requires knowledge of the production and market specifics. The difference
between tourism business and non-ferrous metallurgy is abysmal: almost everything, including
corporate cultures, is vastly different.

At that time another member of the Executive Committee of Norilsk Nickel, V. Poltavtsev, was
involved in the establishment of a travel agency named Neva together with Strzhalkovsky.
Ye. Muravyov, director of the most important division, the Polar Division, was the vice-
president of the Krasnodar Territory for many years, being therefore both far away from the
North and unfamiliar with the problems of miners. He was also involved in tourism business,
as well as the Norilsk Nickel’s representative in the Krasnoyarsk Territory, V. Demidov, who
owned a travel agency.

O. Pivovarchuk, V. Strzhalkovsky’s first deputy responsible for foreign business activities,

probably lacks industry background either. Seven years before his coming to Norilsk Nickel he
was the Deputy CEO for Commercial Operations in Management Company ‘Dynamo’ CJSC,
then he was the executive director of Dinamo-Telecom CJSC, achieving highly controversial
results in both positions. While working for the management company, he lost the contract
for the reconstruction of Petrovsky Park for which the federal government had allocated
considerable funds. It is noticeable that only after Pivovarchuk’s dismissal that an opportunity
to find an efficient investor appeared. While with Dynamo-Telekom, he was responsible for
arrangement of an ‘on-line’ national state lottery, however in fact not a single game was held. In
this connection, the Federal Communications Agency filed a suit but Pivovarchuk escaped the
legal proceedings by moving to a managing position in Norilsk Nickel.

It is impossible to imagine such a situation in a major foreign corporation. Let us take the top
management of BHP Billiton as an example: all the top managers of the company either have
excellent education in the corresponding fields or extensive industry experience, the majority
can boast of both. There are seven of them and the team holds a total of three PhDs, two MBA
degrees, received, by the way, not in a provincial college near Moscow upon completion of a
correspondence course but in such prestigious universities as Yale, Harvard and Wharton. Their
aggregate experience in the metals and mining industry exceeds a hundred years. As you can see
something quite different from our “tourists” situation.

It looks like the 'tourist' background of the key managers of Norilsk Nickel may be a source of
infinite jokes, but in terms of business it is important to determine the limits of their abilities.
As is obvious from the results of their work, little use is to expect strategic breakthroughs from
them however hard they tried. They can have their own objectives. Since the ‘metallurgic’
period in their careers can be quite short, increasing the company’s capitalization seems to be
an unacceptably long-term objective as compared with the aims that are more familiar to them.
This is where the so-called ‘tourist inclination’ comes from. Press-releases of Norilsk Nickel and
statements of the company executives sometimes give an impression that the main breakthrough
is made in arranging holidays for their employees, which also involves, among others, Neva
travel agency, well-known to Mr. Strzhalkovsky, the purchase of airplanes, supposedly for the
benefit of Norilsk citizens, the overzealous reconstruction and special care given to holiday
resorts owned by Norilsk Nickel. If only this team had devoted themselves to the development of
the main business of Norilsk Nickel with the same enthusiasm but, unfortunately, they seem to
lack not only the required professional skills but the corporate culture as well.

Development problems or, rather, the problem of lack of development

It seems from the above that the current managers of Norilsk Nickel just do not know where to
move with the company, and how, and, quite possibly, they do not care much either. This is, by
all means, an unconceivable situation, especially in the country with the development strategy
determined as far ahead as 2020. In return, Strzhalkovsky’s team seemingly is very skillful in
creating semblance of intense activity as is the case with the strategy development.
”You criticize us for the lack of strategy,” Strzhalkovsky’s team says, ”well, here it is!”
Eventually they demonstrate something costing USD 34 billion to the public and to the
shareholders. In order to gauge the efficiency of the presumably planned work, let us compare
this amount with the investments of the global leaders into new nickel projects. Such projects
indicate that the annual development-to-production ratio of investments is USD 2,000-2,100
per tonne of nickel-bearing deposits. That is why Norilsk Nickel’s investment programme in
the amount of USD 34 billion can increase the known iron-bearing deposits up to 16.6 million.
tonnes, i.e. thrice as much, compared to the current volume of the known iron-bearing deposits in
Russia (5.8 million tonnes). However, according to the Norilsk Nickel management’s statement,
the resource base will not change by 2025, that is, it will remain at 5.8 million tonnes. Within
14-15 years the Company will produce 3.5 million tonnes of nickel from its Russian assets.
Therefore, if the resource base remains the same, the additional deposits will be not 16.6 million
tonnes (as shown by global companies) but 3.5 million tonnes.

It seems that, blinded by megalomania, the top managers of Norilsk Nickel are unable to act
either with logic or reason. May be, they did not bother to examine the experience of global
companies. The planned volume and distribution investments that have been declared, as well
as the discrepancies in the estimates of expected effect, rise serious doubts. The members of
the company’s management claim that the strategy will begin to produce results staring from
2016 and in that same statement they declare, without any explicable basis for such claims, that
emissions will have been reduced by four times by 2015 –how this will be done remains unclear.
Reports on strategy updates remind of a patchwork quilt hastily stitched together from
everything that has ever been considered by the management of Norilsk Nickel throughout
the company's history. Neither business logic, nor understanding of the comparative value of
disparate projects, all stuffed into the strategy, have shown so far.

The internal heterogeneity of the strategy makes it seem utopian and superfluous, and the
declared volume of investments indicates the impossibility of their efficient application (of
course, if such application does not mean siphoning off funds from the company).

Where does the image of Norilsk Nickel as that of a successful company come from then?
Alas, it is very likely that this is achieved through skillful fudging of documents. It is sufficient
to set modest targets in plans by systematically understating forecast prices for metal against
the consensus forecast of analysts and, with that done, reports on high operating efficiency of
Norilsk Nickel will be quite plausible.

By the way, constant and all-round understatement of planned targets was the usual trick of
Soviet planners which had eventually resulted in the complete inadequacy of the Soviet planning
system that had actually brought about the demise of the almighty Soviet Union. It is sad that
the management of Norilsk Nickel, a company created during the Soviet era, had borrowed
probably the most destructive features of the Soviet economy instead of making use of its better
achievements. It is not that they do this intentionally. Most likely, the management of Norilsk
Nickel simply wants to create an impression of self-sufficiency but lacks the ability to make
realistic plans, just because they do not have the knowledge of the industry specifics.

Along the Beaten Path past the Money

The situation with the sales evokes the shameful memories of the Soviet past. It is reasonable
to expect that potential customers willing to purchase the products of the company on more
favorable terms would be queuing up Analysis of the demand, competitors' offers and consistent
search for new schemes of work in the market might boost the profit significantly. If this is all
done indeed. But there is another, less bothersome ‘good old’ way to sell, chosen by Norilsk
Nickel - via traders. There is no wonder that, according to estimates of experts, Norilsk Nickel
loses significant profit (up to USD 400 to 500 million annually!) because the management does
not cooperate with end customers actively enough and relies on LME too much.

So it seems possible to conclude that, as a result, the position and price policy of Norilsk Nickel
in the market is determined in some cases not by Norilsk Nickel itself but by intermediaries that
take a significant portion of the potential profit while the company keeps shuffling in the same
place issuing bombastic reports on achieved results. ‘What do you want? The stock is sold!’ It
seems that it does not occur to the management that the company could sell its products by itself
developing its own sales network, getting closer to the end consumer, which is more profitable,
and, at least, that it is necessary to revise traders’ offers from time to time (just to see whether
some of them are ready to offer more favorable terms).

Lack of attention to the sales was the Achilles heel of the Soviet management system both on
the state and production facilities levels. It is regrettable that Norilsk Nickel’s management,
seemingly, has inherited this unfortunate trait of the Soviet economy.

Meanwhile, top managers of BHP Billiton Group spare no effort to make it clear to their partners
and to themselves that ‘marketing does increase the value’ of their company and base their entire
policy on this simple concept. Read their latest annual report: it shows that the top management
strives to understand what is going on in the local market not trusting outside information that
can be 'filtered' in some way or other. The holding has marketing units in 37 countries – all in
order to be closer to customers. It has one even in Russia and its efficiency could be viewed as a
direct reproach to Norilsk Nickel as well!

Let is return to BHP Billiton. The marketing system of this corporation enables it to work with
over 80 very different customers in China alone! Those are not two or three intermediaries that
buy all the products wholesale. In their interviews with analytics the BHP Billiton top managers
admit that they have to spend a lot of resources and efforts to keep the database on operational,
technological and logistic specifics of their customers, to estimate their solvency or even to
understand cultural differences, even when dealing with customers from one country! Why do
they need that? They understand one simple thing: a thoughtful approach pays.
In this situation, the fact that Norilsk Nickel keeps selling its products to a few selected traders
without taking into consideration the individual features of the consumers seems to indicate
either that the management lacks necessary understanding or that its members have their own
interests to pursue.

Failures in attack on the Global market

Ironically, Strzhalkovsky’s team is not completely devoid of entrepreneurial spirit. Slack where
one would have expected them to promote corporate interests and seek new solutions, e.g. in
sales, the management engage zealously in bizarre financial transactions. Cannot wait to rule the
global economy? - Among the rather dubious results is the sale of treasury shares to Trafigura,
Norilsk Nickel’s direct competitor in metals sales featuring in a row of scandals (including, most
recently, the disclosure by Wikileaks of Trafigura’s discharge of toxic waste in West Africa.)

This begs a lot of questions, both as to the general logic of such dealings, which menace to
destroy the company’s value, and the mechanism of this particular agreement signed without
approval by Norilsk Nickel’s board. Moreover, the clandestine deal was made without disclosure
even of such basic parameters as the price and the final buyer and, quite likely, at a discount in
the price announced during the share redemption.

It seems reasonable to assume that this is enough to annul the deal and take a closer look at
the degree of professionalism and bona fide conduct of Norilsk Nickel’s management. It is no
coincidence that the US Federal Court ordered Trafigura to submit all documented evidence and
give witness testimony both in respect of that specific deal and all its agreements with Norilsk
Nickel and its key shareholder, Interros.

The deal with Trafigura may be viewed as an example of Norilsk Nickel’s failure to expand into
the global financial markets, but there is also plentiful evidence of failure in its ambitious plans
to develop global production.

It will suffice to recall discontinued production at Australian sites Black Swan and Silver Swan,
at the Cawse, Waterloo and Amorac fields. True, Lake Johnston is expected to restore production
in 2011, but only at a meager 4,500 tonnes of nickel.

This gives the impression that the global expansion of Norilsk Nickel was fuelled chiefly by the
enthusiasm and vague general concepts of its underskilled management, rather than based on
sober reasoning. As a result, this policy is at times unjustified, and more often than not patently
pernicious.

… And Waiver of Commitments in Russia

By the way, it looks like transactions within Russia are not going on smoothly. Overrated and
unrealistic management estimations repeatedly put Norilsk Nickel in an embarrassing situation
both inside and outside Russia. Thus, Norilsk Nickel has abandoned its plans to develop three of
the five polymetallic ore fields in the South-East of the Zabaikalsky Territory because their ore
reserves had been overestimated by the management.

Meanwhile, the Norilsk Nickel management had entered into an investment agreement as part
of a public-private partnership with a view to constructing a railway, which the government had
undertaken to fund at ¾ of the cost (the total cost exceeding RUR 62 billion) The abandonment
of the three fields makes the railway inefficient.

In 2009, Norilsk Nickel funded the project at RUR 130 million instead of 7 billion, as was
initially approved, later discontinuing the funding altogether.

All of this, rather than adding to the image of a flagship of the Russian economy and business,
gives the impression of the management’s desperate attempts to position the company it runs
as the cornerstone of the public-private partnership without the real capability to lead Norilsk
Nickel towards this status. Crucial here is the lack of management abilities and skills, rather than
potential for an efficient public-private partnership, which does exist. Alas, the management
appears to be unable to make use of it without entangling itself in poor and unrealistic planning.

Another specific example demonstrating the general state of affairs at Norilsk Nickel is the
pumping of over USD 600 million from a subsidiary, OGK-3, under the guise of redeeming
the interest in the Interros Group’s assets to salvage it during the financial crisis. This amount,
accumulated as target investments as part of the power industry reform, ended up in the purchase
of obviously overpriced and useless assets.
In any developed country such dealings would have been the limelight of a headline-making
criminal action, possibly involving spectacular arrests. It is precisely for this reason that BHP
Billiton, for instance, publicizes the details of each forthcoming asset acquisition not only before
shareholders but also before the general public, describing the assets acquired and proving why
this acquisition is necessary for the company and why this step is in line with the corporate
development strategy. As an example, it will suffice to track the acquisition of the Chesapeake
Energy Corporation’s Fayetteville energy company bought recently for USD 4.75 billion.
The Russian Audit Chamber merely ordered OGK-3 to return the money. Now Norilsk Nickel
is exchanging OGK-3, stripped of the investments, for shares in Inter-RAO, with an estimated
loss of over RUB 2 billion (as of the date of Norilsk Nickel’s board resolution, i.e. on December
27th, 2010, the market value of the effective interest of Norilsk Nickel in OGK-3 was RUR 67.7
billion as against the market value of Inter-RAO shares additionally issued for the needs of the
deal with OGK-3 at RUR 65.5 billion).

Importantly, all these calculations are net of premium for controlling interest. Indeed, the
deal involves the exchange of a controlling interest in OGK-3 (effective share of 82.7%) for a
minority interest in Inter-RAO (about 10%). The fact that the OGK-3 share price for the deal
does not reflect the premium makes impression of a striking example of either lack of M&A
competence or dishonesty on the part of the management.

Poor ore or poor mining skills?

Possibly due to the long-term under-investment in the development of new fields (and that
despite Norilsk Nickel not having experienced any shortage of funds), the metal content in the
ore is decreasing (e.g., the content of the platinum group metals had dropped over three years,
between 2007 and 2009, by 9.6%.) Even doubled investment envisaged for 2011 may prove
insufficient to save the production capacities without capacity replacement plan in place.

Against this background, the forthcoming production enhancement and maintenance of the
resource base at the current level until 2025 announced by Norilsk Nickel’s First Deputy CEO
Yuri Filippov seem to be hanging in midair.

Indeed, the output of copper had dropped by 14% between 2005 and 2010 (including the drop of
7.2% between 2008 and 2010, while the production volumes had fallen by 8.7% inside Russia
and grown by over 25% abroad, which gives the impression that production is being gradually
divested from Russia.) The production of palladium dropped by 9.6% in 2010 as against 2006,
the production of platinum - by 7.8% (while the global demand for these metals is growing, with
a shortage forecast for 2011.)
Among other, decline in production results in lower payments to budgets. But the main danger
is threat of Norilsk Nickel’s easing on the metals markets, which weakens Russia’s global
influence. Given that according to a number of estimations platinum group metal reserves in the
state depositary for precious metals are almost exhausted, any shrinkage of production may result
in significant difficulties for their repletion.

Emancipation from the Housing and Utilities Sector

The Programme of Modernisation and Development of the public utilities infrastructure

and housing in Norilsk, Krasnoyarsk Territory, for the years 2011-2021 states that the “total
collecting pipe length, in Norilsk, Taknakh and Kayerkan districts, is 120.2 km for the heating
network, 58.7 km for the water-supply network and 57 km for the sewage network.

30% of the total length of arterial drains is in a dilapidated or inoperable condition. They have
numerous deformations of structural elements, from mortar fallout to local collapses. The lower
tiers of drains are often completely flooded, with a mud level of up to 1 meter.

Heat losses reaching 40% melt the permafrost on which the city is built, causing further
deformation of drains, which threatens not only the drains themselves but also housing quarters.
A significant share of cablings in the lower tier of drains has collapsed due to high humidity and
poor repair. Cables lie in water, which is a direct hazard to the lives of employees.

In Norilsk, utility charges and budget funding merely suffice to maintain the power supply of
the city. To normalize the situation by taking away the Damocles’ sword of large-scale accidents
which may disrupt the supply of utility services to large population numbers is but a futile
dream.
As remarked at the meeting of August 31st, 2010, an infrastructure improvement would
require “approximately” RUR 27 billion (although a threat of incidents will still remains during
the recovery.) So, it is reasonable to beg the question: what about the management of one of
Russia’s – and the world’s - richest corporations? Why should the entire nation - through the
federal budget, all Krasnoyarsk taxpayers – through the budget of the territory – be the first to
pay for the management’s negligence of the needs of what effectively is their corporate capital,
while Norilsk Nickel is the last to pay? Or does the formula of the public-private partnership now
spell,” ride free for the state’s account and have all taxpayers across Russia pay your bills?”

No paradise around the flagship industry centre

Norilsk is on the verge of environmental collapse; about 350 days a year an increased level of
atmospheric contamination is registered. There are 9 tonnes of emission per every resident of
the Norilsk industrial district and Norilsk gets 11% of all emission in Russia. In a 30 km radius
around it there has developed a real industrial wasteland.

Emissions of contaminants into the atmosphere (mostly sulphur dioxide) in 2009 added up to
2,113,000 tonnes while in 2008 (at the peak of the crisis) they were 2,116,000 tonnes. Thus in
the two years there were practically no changes in the amount of emissions even though the
revenue in the same period significantly decreased from almost USD 14.0 billion to USD 10.2
billion or by 27.1%. It has to be said that federal environmental protection agencies had tried
to file arbitration claims against Norilsk Nickel before. Thus in February 2008 deputy head of
the Federal Service for the Supervision of the Use of Natural Resources (Rospridnadzor) Oleg
Mitvol filed a claim against Norilsk Nickel for RUR 4.4 billion as compensation for the harm
done to water resources in the territory of the Krasnoyarsk region by the Second branch of the
company. In addition to that according to a Greenpeace information letter, the concentration
of zinc in Norilsk Nickel’s liquid waste was 150 times the maximum permitted concentration
(MPC), the concentration of iron was up to 220 times the MPC, the concentration of nickel
was up to 630 times the MPC, the concentration of copper was up to 2400 times the MPC, the
concentration of oil products was up to 140 times the MPC, the concentration of phosphates was
up to 370 times the MPC and the concentration of nitrites was up to 633 times the MPC.

However, it seems that Norilsk Nickel just shrugged it all off continuing to discharge
contaminants into surface water bodies (the rivers Schuchya, Novaya Nalednaya and others) in
quantities significantly exceeding the temporarily approved maximum amounts. All of this was
evidence that the company was operating ‘as normal’, generating huge returns for its owners.
When it came time to resolve this issue, in all probability, Vladimir Potanin’s administrative
experience did come in handy after all; it wasn’t for nothing that he’d evidently spent years
going door to door in the highest echelons of power.

In 2009 the investments in environmental protection measures by the Second branch of Norilsk
Nickel totaled almost RUR 1 billion but emissions were reduced by a very modest 0.3%. In
2011 there are plans to increase expenditures on environmental protection to RUR 3.6 billion,
however, representatives of the public suspect that ever since 2007 the branch has been using
money earmarked for environmental protection to buy equipment that is not directly used to
protect the remnants of nature in the region. In any case unless the efficiency of investments
improves dramatically, the planned increase in financing isn’t going to make much difference.
Norilsk Nickel’s management promises a fourfold reduction in emissions in four years, which
sounds like little more than a cheap PR move since not only the actual reduction in emissions
achieved so far has been a measly 0.3% but also because some of the previously started
programmes have been cancelled

Thus in late 2009 the company’s management unilaterally terminated an agreement under which
Norway was to provide a grant of EUR 32 million and a loan of USD 30 million for 10 years to
reduce the emissions of sulphur dioxide, dust and heavy metals in the Kola peninsula. As a result
of this step by Norilsk Nickel’s management Norway’s state pension fund, one of the largest
strategic investors in the world, removed the company from its investment portfolio. It’s unclear
where the management is going get investments of USD 34 billion now.

But the worst statistic is that according to the international Blacksmith Institute, which has
included Norilsk in its list of ten most polluted cities in the world, the average life expectancy
there is 10 years lower than in the rest of Russia. So, it is possible to assume that Norilsk
Nickel’s management’s disregard for environmental issues is actually causing people to die
prematurely.
If we compare this with BHP Billiton further, last year BHP Billiton had to deal with the
consequences of two global catastrophes; the oil spill in the Gulf of Mexico, where additional
losses were caused after the drilling had to be stopped and natural disasters (bush fires and
floods) in Australia.

Fortunately there have been no global catastrophes in Norilsk and if there is God there won’t
be any, because if Norilsk Nickel’s management can’t conform even to the basic environmental
standards in ‘peace time’, there is no way they’ll be able to effectively respond to an emergency.

Corporate spirit, is it only for the management?

The impression is that Norilsk Nickel’s management employs a variety of methods to

ruthlessly eradicate any independent labour union activity. As a result the independent labour
union ‘Protection’ literally has to work underground to protect the unalienable human and
employment rights of Norilsk Nickel’s employees.

There’s no denying that it’s no easy task to enter into constructive dialogue with the workers
and labour leaders; human resources management is a whole science in modern business. Any
manager worth his or her salt knows that it’s paramount to ensure that the workers are content. A
discontented workforce causes a lot of problems and adverse impacts on the profit.
Another approach is to simply ignore the workers to avoid ‘overcomplicating’ the relations
One of the results of this second approach, where there is no constructive dialogue with the
workers, has been the crumbling social infrastructure in Norilsk (which Prime Minister Putin
commented on during his visit) and industrial accidents, some of which end in death. Thus while
in 2008 there were 1.7 industrial accidents per 1000 employees at Norilsk Nickel, by 2009 this
statistic had increased to 2.3 (by more than a third), which was far above Russia’s average. It’s
evident that the majority of Russian companies couldn’t even dream of being as flush with cash
as Norilsk Nickel is.
And this is despite the fact that huge amounts of money are routinely allocated to health and
safety; in 2009 RUR 3.1 billion was spent, which for Norilsk Nickel translates into almost RUR
72,000 per employee

This inevitably begs the question whether it was the money originally allocated to improving
health and safety that was eventually used by the Polar transport branch of Norilsk Nickel to buy
four Liebherr mobile port cranes as well as a powerful river tug.

In addition to that, the social degradation of Norilsk under the ‘loving care’ of the management
of one of Russia’s wealthiest companies, is also evidenced by the fact that alcoholism is twice as
wide spread in Norilsk as it is in the Krasnoyarsk Territory on average while the situation with
drug use is three times as bad as in the region as a whole

By contrast BHP Billiton, which employs people not just in two small regions but on five
continents and in at least eight industries, is making every effort to have good relations with
its workforce. Its management is proud of cooperation with labour unions and views it as their
personal achievement that 53% of the company’s employees work under collective bargaining
contracts!

It would appear that at Norilsk Nickel the top managers of BHP Billiton would be considered
insane.

Much wisdom, much grief

Finally, it would be naïve to expect that the incompetence of the management will ‘spare’ the
managers themselves.

In November 2010 the president of Norilsk Nickel A. Klishas proposed cancelling the right of
minority shareholders to access full information about the activities of companies whose shares
they hold. In his opinion, the amount of information disclosed to each shareholder must depend
on the number of shares held by that shareholder!

It’s obvious that such primitive notions about corporate governance need no comment.

At the same time a clear distinction must be made between good performance and conformance
to corporate governance principles. Nobody is guaranteed against failure. For instance, the head
of BHP Billiton Marius Kloppers has failed to secure the acquisition of the Canada-based Potash
for a record amount of USD 24 billion, having spent over GBP 200 million on the services of
investment bank consultants. However, all the information about his attempts and failures was
completely transparent (and was even discussed in the mass media), even though it obviously
caused quite a bit of discontent among employees and shareholders of the Company.
It seems that in Russia it’s the other way around; if all of the ideas of A. Klishas were to be
implemented, this course of events would probably be impossible at Norilsk Nickel even in
theory; minority shareholders will probably never even learn about how much cash got spent on
failed attempts.

The situation is completely macabre; it is like when a militia (oops, I mean police) officer begins
to think that he (or she) is the law. Or when a tenant begins to think that the property they lease
is theirs and starts talking about how things should be rebuilt and redecorated. In other words,
seemingly, Norilsk Nickel’s management in fact ends up existing and working for their own
sake. It is as if the company’s actual owners no longer really matter.

In the meantime, the decisions taken by Norilsk Nickel’s management that is so completely
independent from the shareholders continue to raise questions. For instance the insurance
programme proposed by Norilsk Nickel’s management exceeds USD 130 million while
insurance experts estimates that its real cost, when the amounts to be insured are taken into
account, cannot exceed USD 30 million.

Exceeding expenses more than fourfold is causing significant damages to the company and can
be interpreted only as a sign of lack of professionalism or deliberate deception on the part of
management

Now in this context the attempt to limit the control of minority shareholders makes much more
sense

A kind of conclusion

Thus even a superficial overview of the corporate governance at Norilsk Nickel leads one to
an unsettling conclusion that it appears like that the company’s management is comprised of
some sort of saboteurs who, through their unprofessional and negligent actions, in all probability
unintended, are destroying this flagship of the domestic economy.

This begs the sacramental Russian question; what do we do? In the situation with corporate
governance and corporate culture at Norilsk Nickel, a key priority is to try and ‘normalize’ the
company’s corporate culture. This means that the values shared by the civilized international
business community should not just be proclaimed but must be followed in every management
decision made at the Company. There aren’t that many of these values and they are easy to
understand. As we’ve seen in the example of BHP Billiton as well as the international experience
as a whole these values include openness, responsibility, partnership, honesty and transparency,
efficiency, focus on the customer and the interests of the employees and shareholders. These
values are quite simple if company managers believe in it and share them. And if they don’t
believe in them and do not want to share them, then the top managers must be replaced however
loyal they may be. After all loyalty in and of itself can’t ensure growth and at the end of the day
the kind of loyalty that’s needed most is not loyalty to specific people but rather loyalty to the
logic behind the development processes in the production, business, social and environmental
aspects of the company. And this must be done by well trained and experienced professionals.

There’s only one alternative; devaluation of the business and regress of a company that was
created, and this must be remembered, not by the genius of a handful of business people (who, in
theory, can do as they please with their creation) but by the labour of many generations of Soviet
people.