Shareholder Rights & Corporate Disclosure

1. Shareholder Rights & Corporate Disclosure ‘Corporate Governance Conference’ Semiramis Intercontinental Hotel Thebes Hall Dan Konigsburg Director, Corporate Governance Standard & Poor’s, New York March 2006

2. Disclaimer I am participating today in a personal capacity only and do not represent Standard & Poor’s. Opinions expressed do not necessarily reflect those of Standard & Poor’s 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

4. Shareholder Rights Why should we care? • Because it’s 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

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

7. Shareholder Rights:Problems 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

8. Shareholder Rights:Problems Encountered Voting rights • Proxy voting • Electronic voting • Voting by a show of hands • Majority vs. Plurality Voting

9. Shareholder Rights:Ownership 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

10. Shareholder Rights:Ownership, 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

11. Shareholder Rights:The 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

12. Shareholder Rights:Recap Why should we care? • Important for growth, discipline • Fairness, again • Legitimacy

13. Corporate Disclosure Introduction: Why is Disclosure So Important?

14. 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

15. 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.

16. Corporate Disclosure The importance of incentives • for behavior • for accuracy • for strong internal controls The Watchword is Accountability

17. 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

18. 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

19. 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

20. 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 management’s other businesses

21. 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

22. 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

23. Disclosure: What Investors Expect from Egypt Non-Financial Disclosure:Operations • Discussion of strategy • Discussion of business risks • Operating performance, metrics • Competition-sensitive information

24. Disclosure: Standard & Poor’sDisclosure 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

25. Disclosure: Standard & Poor’sDisclosure Studies Disclosure Study: Turkey • Strongest: Financial Information • Weakest: Board of Directors • Few disclose more than required • Little variation in financial disclosure

26. Disclosure: Standard & Poor’sDisclosure 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

27. 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

28. 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.”

29. 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.”

30. 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”

31. 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

32. 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 Disclosure: Conclusion & Recap