Key Principles and Improvement of the Corporate Governance System

Corporate governance is a sophisticated and rapidly developing framework coordinating shareholders, the Board of Directors, the Company’s executive bodies, and other stakeholders. It needs to closely follow changes in corporate law, recommendations of national and global regulators, as well as market operator requirements.

Rosneft is one of the world’s largest publicly traded petroleum company. Its securities have been included in the First (Top) Tier Quotation List of the Russian securities market and are also traded on foreign markets.

Given its public status, the Company has to comply with requirements of the national regulator (the Bank of Russia) and of the Moscow Exchange Listing Rules for issuers of publicly traded securities. In addition, it has an obligation to investors to comply with international best practices in corporate governance since the quality of corporate governance is a strong driver of investment decisions.

Strong corporate governance is designed to maintain high levels of confidence from shareholders, investors, and counterparties, and should cultivate:

  • higher investment appeal
  • effective risk assessment methods
  • efficient use and safeguarding of shareholder (investor) funds
  • transparency of the Company’s operations and high-quality disclosures
  • higher market value of the Company and lower cost of capital.

Principles of the Corporate Governance

The corporate governance framework adopted by the Company delivers on these objectives and is based on the following principles

  1. Ensuring the exercise and protection of shareholder rights
  2. Strategic management of the Company by an efficient and competent Board of Directors, due control by the Board of Directors over the Company’s executive bodies, accountability of the Board of Directors and executive governing bodies to shareholders
  3. Recognition and protection of stakeholders’ rights stipulated by law, active cooperation with stakeholders in order to promote the Company’s financial well-being, ensure compliance of the Company’s operations with social responsibility standards and create jobs
  4. Ensuring timely and accurate disclosure of all material information such as financial position, performance, property, Company management, and material corporate actions
  5. Building an efficient internal control and risk management system providing reasonable assurance that the Company will achieve its goals
Corporate Governance Code of Rosneft

The Company’s principles as well as the set of underlying rules in corporate governance are detailed in Rosneft’s Corporate Governance Code (the Code). The Code is based on corporate governance principlesIn particular, the Code relies on the principles of the Organization for Economic Co-operation and Development, the confederation of European shareholder associations, and standard corporate practices of the European Bank for Reconstruction and Development. recognized by the global economic community and complies with key recommendations of the Corporate Governance Code of the Bank of Russia (the Bank of Russia’s Code)

The Code is designed to provide additional guarantees and ensure the exercise of shareholder rights to:

  • govern the Company
  • receive dividend income
  • be provided with reliable and effective means of recording their rights to shares, and be able to freely dispose of their shares without any hindrance.

The Code defines the rules of efficient strategic management of the Company by the Board of Directors:

  • Board of Directors membership and independence criteria
  • Proceedings of, and providing information to, the Board of Directors
  • Performance assessment of the Board of Directors and its members
  • Remuneration of members of the Board of Directors and the Company’s executive governing bodies

The Code describes key principles of communication between the Company and its stakeholders: investors, suppliers, customers, and employees.

The Code details the principles of an efficient risk management and internal control system providing reasonable assurance that the Company will achieve its goals.

The Code stipulates the Company’s obligations to comply with rules for taking material actions (such as major transactions, reorganization, increase or decrease of the charter capital).

The Code defines key rules followed by the Company in developing its information policy, which aim to maximize openness and transparency of the Company while guaranteeing proper protection of confidentiality.

Key Corporate Governance Achievements in 2017:

Rosneft considers enhancement of its corporate governance to be part of its overall objective of improving the Company’s performance and an ongoing focus for Rosneft’s Board of Directors and executive bodies.

The Bank of Russia’s Corporate Governance Code serves as a key benchmark for improving the Company’s corporate governance framework.

  1. To maintain the right balance between the interests of the Company’s shareholders and public interests, and ensure appropriate time commitment of directors considering the scale of growth of the Company’s business, a new Board of Directors was elected by the Extraordinary General Shareholders Meeting of Rosneft on 29 September 2017. The new Board of Directors has 11 seats, 4 of which are taken by independent directors. Independent Director Gerhard Schroeder was elected Chairman of the Board of Directors of Rosneft.
  2. The Board of Directors of Rosneft determined the procedure for managing conflicts of interest in Rosneft and Group Subsidiaries by approving Regulations on the Procedure for Managing Conflicts of Interest in Rosneft and Group Subsidiaries.
  3. Actions envisaged by the Roadmap for Incorporating Key Provisions of the Bank of Russia’s Code in Rosneft’s Operations approved by the Board of Directors of Rosneft (Road Map) were carried out. The Board of Directors approved:
    • Regulations on Holding by Members of Rosneft’s Board of Directors of Rosneft Shares, Shares of, and Equity Stakes in, Group Subsidiaries, which document the rules and principles of and the Company’s approaches to holding Rosneft Shares and Shares of Group Subsidiaries by members of Rosneft’s Board of Directors
    • Regulations on Evaluation of Rosneft’s Board of Directors Performance
    • Rosneft Information Policy documenting, in particular, a list of information which the Company commits to disclose to supplement statutory disclosures
    • In accordance with the Roadmap, the Code, and the Regulations on Evaluation of Rosneft’s Board of Directors Performance, the Board of Directors performed self-assessment of its performance in the 2016–2017 corporate year. The self-assessment covered the activities of the Board, the Board Committees, the Board members, the Chairman of the Board of Directors and the Corporate Secretary.

Self-assessment of performance of the Board of Directors was based on a questionnaire approved by the HR and Remuneration Committee of the Board of Directors. The analysis of submitted questionnaires suggests strong performance of the Board of Directors, improved composition and structure of the Board due to increased number of independent directors, and the achievement of optimal composition across the Board Committees, as well as high performance across the key functions and highly effective Board processes.

Higher performance of the Board of Directors in the 2016–2017 corporate year, as suggested by the self-assessment results, was due among other factors to the implementation during 2017 of the Action Plan to Improve the Board of Directors’ Performance adopted following the performance assessment of the Board of Directors covering the 2015–2016 corporate year.

In particular:

  • Regular assessments were carried out to check that Board candidates and the elected members of the Board of Directors meet the independence criteria, with the Board of Directors determining (upon preliminary recommendation by the HR and Remuneration Committee of the Board of Directors) that directors were independent
  • The procedures for preparing the meetings schedule of the Board of Directors (the Committees of the Board of Directors) were optimized, including planning of the Board in-person meetings
  • Arrangements for ongoing effective cooperation with the executive offices of the Board members were put in place, covering inter alia monitoring for potential conflicts of interest related to transactions, as well as reviewing materials and information prepared for the Board meetings
  • In 2017, the Audit Committee of the Board of Directors and the Board of Directors regularly discussed matters related to internal audit arrangements, including the results of review and monitoring of potential conflicts of interest, as well as reports on the internal audit function’s performance.

As a result of our efforts taken in 2017 to improve corporate governance, an assessment of compliance with the recommendations of the Bank of Russia’s Code based on the guidelines of the Federal Agency for State Property Management (Rosimushchestvo) showed that Rosneft complied with almost all recommendations of the Bank of Russia applicable to the Company. Rosneft’s corporate governance complies with 92.4% of recommendations of the Bank of Russia Code, which is higher than the 2016 indicator by 2.7 percentage points and significantly higher than the minimum threshold (65%) recommended by Rosimushchestvo (for the results of integration of the Bank of Russia’s Code into Rosneft’s operations see Appendix 3 to this Annual Report)

The Company is committed to further developing its corporate governance framework in a consistent and focused manner and in line with the highest national and global standards.

Compliance of Rosneft’s Corporate Governance with the Bank of Russia Code, %
92.4% recommendations of the Bank of Russia’s Code (the minimum threshold being 65%) are complied with by the Company, a 2.7% p.p. improvement year-on-year

2018 Priorities

For 2018, we plan to continue our focus on the activities stipulated by the Roadmap for Implementation of Key Bank of Russia’s Code recommendations.

We will continue developing an information system to automate corporate governance processes, designed inter alia to cover shareholder relations and providing them with protected remote access to information on General Shareholders Meetings, accrued dividends, exercise of shareholder rights arising from ownership of Rosneft’s securities, and other information.

In 2018, Rosneft’s Board of Directors is expected to approve a major high-level local regulations – the Policy on Anti-Corruption and Prevention of Corporate Fraud. The plans also include updating the Company’s Regulations on Insider Information.

Every year, the Company implements an action plan to improve corporate governance, which will also be done in 2018. The 2018 action plan includes:

  • performance assessment of the Board of Directors; development, approval, and execution of a plan of actions arising from the assessment
  • performance audit of the corporate governance framework
  • performance audit of the risk management framework and internal controls
  • assessments to check that Board candidates and the elected members of the Board of Directors meet the independence criteria set out in the Bank of Russia’s Code and the Moscow Exchange Listing Rules.

Corporate Governance and Control Structure