December Value Creation and Market Valuation: Measuring Performance in Eastern Europe

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1 December 2016 Value Creation and Market Valuation: Measuring Performance in Eastern Europe

2 ABOUT HCM HCM is a leading independent international advisory firm specializing in the strategic aspects of Governance, Finance, and Compensation, with deep experience across various industries and in the advising of boards, board committees, senior management, and control functions. HCM s partners, managers, and analysts work in its offices in Zurich, Geneva and Kyiv. They are bolstered by our global partners in the US, UK, Australia, Singapore, and China, which allow us to reach all major markets and support companies of all sizes, from large multinationals and public institutions, to mid-sized and smaller companies, including those preparing for an IPO. Our mission is to support companies and other organizations tackle the ever important question: How to measure, steer and allocate value creation? We also cover risk and compliance as these also affect value. The value question is of core interest not only to Owners, Board of Directors and Senior Management, but also increasingly to institutional investors, proxy advisors, HR and control functions, regulators, and international standard setters. HCM is Chair of the Global Governance and Executive Compensation Network. Offices in Switzerland: HCM International Ltd. Mühlebachstrasse 23/25 CH-8008 Zurich Phone international@hcm.com 8 rue des Charmilles CH-1203 Genève Phone geneva@hcm.com HCM International Ltd. All rights reserved.

3 Introductory Note Over the last decade, the Eastern European countries have become an important destination for global investors. Indeed, these economies offer outstanding growth opportunities and high returns to the investors. Local companies in most of these countries benefit from low production costs and generate income mainly from two sources: sales of products and services in the local markets (which can be significant, e.g., Poland and Turkey) and exports to more developed countries resulting from numerous free-trade agreements. However, investments in these emerging countries also bear significant risks, which can vary a lot depending on the country. Twelve Eastern European countries have joined the European Union during and now enjoy the advantage of the bilateral flow of capital and goods with the developed EU economies. This has contributed to the diversity of economic conditions in the region: while some economies offer macroeconomic stability, a transparent regulatory environment and a healthy investment climate, others, such as former Yugoslav countries and Greece, often suffer from political or macroeconomic instability. This decreases investors confidence, particularly in crisis times. Yet, in such vulnerable conditions, it is valid to ask how well the Eastern European companies are doing on value creation, both on an absolute basis and relative to indices. It is equally valid to ask whether the share price movements of Eastern European stocks in recent years accurately reflect the internal value creation taking place at these firms. This HCM study provides a comparative overview of 203 companies from 17 Eastern European countries. The findings suggest only moderate value creation in , with some companies even deteriorating internal value. Nevertheless, during this period, the total shareholder return was positive for most companies in the sample even though the overall performance of the stock markets in this region was poor. Further, we find a plausible correlation between internal value creation and share price movements for most companies. For others, however, stock returns cannot be adequately explained by internal value creation. Countryspecific macroeconomic environment (e.g., risk free rate, GDP growth and monetary stability) as well as fundamental changes in business strategy and/or capital structure are likely to cause a gap between the internal value creation and its appraisal by the investors. The goal of this study is not to provide any definitive performance evaluation of any company or sector but to illustrate alternative and complementary methods for measuring performance. It also aims to assist each firm in its internal discussion on which key performance indicators (KPIs) are the most relevant to it. Measuring performance is not only aimed at understanding the current situation (ex post value capturing), but perhaps more importantly for driving the desired value creation (ex ante). As an international consulting firm, HCM advises board of directors and senior management in different regions and sectors on determining the right approach to performance measurement. HCM s involvement in financial stewardship work goes hand in hand with its principal work on supporting companies in all sectors to establish compensation, governance, and compliance systems that support their fundamental business strategy. To fulfill these assignments, we use a range of financial and non-financial methodologies and apply them according to the specific client needs. Value Creation: External and Internal Metrics A company s performance can be measured using internal and external indicators of value creation, which should be perceived as two sides of the same concept and used by investors to an equal extent. From an internal perspective, a widely-used performance measure is Economic Profit (EP). It has certain advantages over other internal measures of performance, since it allows tracking company earnings while accounting for risk. It reflects managerial performance and value added to shareholders wealth through timely decisions, sound cost management, successful expansion strategies, etc HCM International Ltd. All rights reserved.

4 From an external perspective, the most common way to capture value is by using total shareholder return (TSR). Being intuitive, simple and easily observable, TSR clearly remains of foremost importance to investors. The degree of investor satisfaction is closely related to an increase in company value either through share price appreciation or income distribution (dividends, share buybacks). Despite the popularity of EP as an internal measure of performance, it can still provide an incomplete picture of business results to investors, particularly on a comparative basis. Rather than using only EP as an internal measure of value creation, in this study we use Economic Profit Dynamic (EP Dynamic). EP Dynamic is based on two variables: (1) change in Economic Profit as an economic measure of net value gain to investors, and (2) average revenue 1. In this study, we have slightly modified the common definition of EP Dynamic by making calculations on a five-year basis 2 (details are presented in Figure 1). This approach has been gaining support among economic professionals, and HCM has successfully used EP Dynamic with its clients, making relevant adjustments in each case. Indeed, using EP Dynamic on a five-year basis has several advantages over using EP as a performance measure: 1. EP Dynamic is a relative measure. Unlike EP, which is an absolute measure, sales are used to correct for size differences when calculating EP Dynamic. This facilitates the comparison of companies without applying additional calculations and adjustments. 2. EP Dynamic assesses value creation only for the period in question. EP accumulates past success (e.g. strong brand) or past failures (e.g. inefficient distribution network or cost management), while EP Dynamic captures how efficiently the value was created, rather than the mere fact that EP was positive or negative. 3. EP Dynamic is less impacted by accounting considerations. Generally, both EP and EP Dynamic use readily available accounting data and do not require sensitive assumptions. It facilitates calculations, but the results may be disturbed by some form of short-term income management used to make the appearance of a better performance. We believe that using EP Dynamic on a five-year basis rather than yearly EP reduces the effects of possible short-term income management. 4. EP Dynamic reduces business cycle effects. Using change in EP and average sales on a five-year basis allows reducing, to a certain extent, the fluctuations, which arise in cyclical industries and potentially disturb the conclusion about value created by the company. Methodology Insight EP Dynamic = (EP EP2010) Average Revenue Financials EP = Net Income - Total Equity x Cost of Equity Non-Financials EP = Operating Income x (1 - Tax Rate) - Capital Employed x WACC Figure 1: Derivation of Economic Profit Dynamic (simplified). 1 In context of banking industry, total revenue represents a sum of interest and non-interest revenue of a bank. 2 A common way to calculate EP Dynamic is to divide absolute yearly changes in the economic profit by trailing revenue HCM International Ltd. All rights reserved.

5 Sample insights To assess value creation in the Eastern European economies, we test both TSR and EP Dynamic on a set of 203 constituents of the STOXX Eastern Europe 300 index. 3 Performance is calculated for the period For the sake of comparability of the findings to our readers, we have grouped the results along three dimensions: country, industry and size. Figure 2 specifies the share of each industry and country group in the sample. In terms of size, the set of companies was divided into three groups by market capitalization as of as follows: Large more than EUR million; Mid EUR 400 million to EUR million; Small less than EUR 400 million. The sample represents 17 Eastern European countries. However, according to similarities in the economic, political or geographical situation, the countries are grouped as follows: Balkan countries: Slovenia, Croatia, Serbia, Macedonia, Bulgaria and Romania; Baltic countries: Estonia and Lithuania; Central Europe: Czech Republic, Slovakia and Hungary; Greece and Cyprus; Poland; Post-soviet countries: Ukraine and Russia; Turkey. Overall, the sample is skewed towards small- and midcap Polish and Turkish companies. The distribution appears reasonable, since these countries represent the major economies in the region in terms of GDP and have the second and third largest stock exchanges by market capitalization following Russia. Among others, the large representation of Polish andturkish companies is also supported by the fact that the net inflow of foreign direct and portfolio investments to Turkey and Poland were the largest in Eastern Europe. Firms from postsoviet countries are less numerous in the sample, yet among the largest companies with an average market capitalization of over EUR 10'000 million. For exploiting the similarities at the industry level, we use 11 sectors of the Global Industry Classification Standard (GICS): consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate, telecommunication and utilities. The industries are rather evenly distributed with the financial sector being the largest group. Indeed, financials represent the major part of the stock market in most countries and the weight of this industry is typically higher in the emerging markets. The small number of firms in each of the real estate, health care and information technology sectors is also in line with industry representation in the emerging markets. Energy companies are the largest in terms of average market capitalization and 8 out 20 firms in this industry are headquartered in Russia. Internal performance assessment of the Eastern European companies One of the most important questions asked by investors is whether the companes continuously increase their value. Looking at the sample, the overall performance appears to be rather poor when EP is applied in absolute terms - the cumulative EP over the period of was positive for only 25 percent of companies. The main reason behind such a poor performance was high capital costs. The median value for cost of capital was 17 percent as of 2015, which was twice the rate observed in the more developed markets. Both components, the risk-free rate as well as the Equity Risk Premium (ERP), caused high cost of capital. For example, macroeconomic vulnerability and low sovereign rating of Greece and Cyprus during the five-year period caused the risk-free rate to fluctuate between 10 and 25 percent. In most countreis, ERP exceeded 9 percent in 2015, which translated in the extensive cost of capital, particularly in the financial companies and highly cyclical industries. 3 Constituents as of , excl. companies for which no comprehensive data is available for HCM International Ltd. All rights reserved.

6 Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecommunication Utilities Total Balkan Baltic Note: size of a bubble corresponds to average market capitalization, number corresponds to number of companies in an industry-country grouping Central Europe Greece and Cyprus Poland Post-soviet Turkey Total Figure 2: EP Dynamic (calculated from EUR values). Data source: Thomson Reuters. Analysis: HCM HCM International Ltd. All rights reserved.

7 When EP Dynamic is used as an indicator of value creation, the position of the Eastern European companies appears less stunning: median EP Dynamic was -3 percent (see Figure 3). Even though just 35 percent of firms reached a positive EP Dynamic in , a narrow distribution of the results is observed in the sample: two thirds of companies reached EP Dynamic in the range of -10 to +10 percent. This was a result of rather small shifts in the economic profit between 2011 and The lowest EP Dynamic of -21 percent at median was observed at the group composed of Greek and Cypriot companies. Realized EP Dynamic in this country group ranged from -104 to +10 percent with a vast majority of companies lying below zero. Such a poor performance was the consequence of a significant GDP decline (by 30 to 33 percent) in both countries during due to the financial crisis. The companies in Greece and Cyprus that focused on the local market (e.g., utilities) have therefore delivered the worst results. Macroeconomic and political instability has also hurt the companies in the post-soviet group, which showed an EP Dynamic of -11 percent at median. The main reasons for the poor performance during these years were political instability and the decline in GDP, which caused the cost of capital to increase and currencies to devaluate significantly Baltic countries have a scarce representation in our sample, however, this country grouping had the highest EP Dynamic at median. Baltic countries have indeed a favorable environment transparent regulations, low interest rates, stable economic policy, and access to the EU market. Most companies, however, demonstrated rather low growth rates in revenue and operating income in Additional interesting characteristics of company performance in Eastern Europe are observable when further analyzing firms at the industry level. A positive median EP Dynamic was achieved only in two industries materials and information technology. Energy companies were lagging in value creation (EP Dynamic of -10 percent at median), since profitability of the oil companies was impaired substantially due to low oil prices. Low commodity prices (mainly gas) were also among the reasons for poor performance of the utilities industry (-6 percent at median). Financial companies also showed negative EP Dynamic at median (-9 percent) due to low-rates environment and slow GDP growth. Industrials had a median EP Dynamic close to the overall sample and the largest dispersion among the industries (interquartile range of 15 percentage points). The differences could be due to the great variety of services and products they offer, which may lead to their operations being influenced by different external factors. The results of EP Dynamic appear to be related to the size of the company the smaller the company, the higher EP Dynamic can be expected. Indeed, smaller companies were typically related to industries perceived as more dynamic and facing quick development. Larger firms were mostly represented by financials, telecommunication and energy industries, which were heavily dependent on external economic conditions (e.g., oil price, interest rates, GDP growth) and for which competitive advantages are not easy to obtain. A favorable economic environment in the country or industry represented a good opportunity for value creation and improving company performance. Nevertheless, the firms reaching the top results of EP Dynamic in the sample belonged to different country and industry groups, suggesting that value creation might also be driven by the following factors: 1. M&A activities. Low-rates environment and low GDP growth in Europe translated into limited opportunities for organic growth in recent years. Successful mergers may produce important synergies (e.g. access to a new production technology, use a of joint distribution chain), which result in a rapid increase in a company's value. Acquiring smaller competitors in the market might enable the company to increase its value though expansion over the country and region HCM International Ltd. All rights reserved.

8 Eastern Europe (n=203) -3% Balkan (n=21) -3% Baltic (n=5) 1% Central Europe (n=11) -5% Greece and Cyprus (n=16) -21% Poland (n=59) 0% Post-soviet (n=26) -11% Turkey (n=65) -4% Consumer Discretionary (n=26) Consumer Staples (n=19) 0% 0% Energy (n=20) Financials (n=36) -10% -9% Health Care (n=8) Industrials (n=22) -3% -4% Information Technology (n=11) Materials (n=30) 1% 2% Real Estate (n=4) -20% Telecommunication (n=12) Utilities (n=15) -6% -4% Large (n=59) Mid (n=73) Small (n=71) -8% -2% -1% -40% -30% -20% -10% 0% 10% Interquartile range Median Figure 3: EP Dynamic (calculated from EUR values). Data source: Thomson Reuters. Analysis: HCM HCM International Ltd. All rights reserved.

9 Measuring performance using TSR 2. Spin-off or selling assets. In contrast to M&A activities, spin-offs allowed some firms to increase their profitability by splitting business activities into separate entities. Similarly, sale of unproductive assets (or business units) led to lower amount of capital employed at the same level of the operating income. 3. Changes in capital structure. In some cases, companies operated with a far from optimal capital structure thus having a high cost of capital. For several companies with a low leverage in 2011, financing new assets through bond issues allowed them to decrease their cost of capital and capital charge (relative to operating income). However, the reverse situation was also observed additional debt taken by a highly levered firm increased the cost of equity due to risk of financial distress. 4. Successful managerial decisions. Several companies in the sample have reached large increases in economic profit with a stable level of assets employed in production/servicing. A successful managerial decision (e.g., inventory management, human resources organization, improved supply chain) led to boosting revenues, profitability or efficiency. 5. Competitive advantage. Increase in value was also attainable through gaining market share with a unique product in terms of price or quality. The most innovative companies gain advantage by investing in R&D activities. In case of a successful product launch, this innovation allowed having a unique positioning on the market and superior returns on the same unit of capital. Even though the most innovative industries are traditionally information technology and health care, the innovation dimension cannot be fully captured by the industry classification. Unique products were also the key to success for several firms in the industrials, consumer discretionary, and consumer staples and materials industries. For the purposes of this study, we applied standardized view on company performance. However, to better understand performance of the companies in Eastern Europe, one needs to pay closer attention to the capital structure and the cost of capital, products offered, economic conditions and long-term outlook. Figure 4 presents statistics on the external side of value creation in Eastern European companies split by country, industry and size. This is captured by the five-year total shareholder returns relative to the STOXX Eastern Europe 300 EUR Net Return index. The five-year cumulative return for the index was -34 percent as of the end of 2015 (approximately -9 percent per year). Just 40 percent of companies in the sample have increased their market value in recent years, particularly those from Poland and Turkey. However, due to the poor performance of the Eastern European market in general, the median TSR relative to the index was largely positive (48.5 percent) for our sample in TSR results for most country groups were positive and were close to the overall sample median of 49 percent. The broadest dispersion was observed among Polish and Turkish companies. Companies from the post-soviet countries had the lowest TSR at median (-3 percent). The main driving factor for such low stock returns was currency devaluation. Indeed, local currencies experienced an extreme devaluation in (loss of percent against EUR), which translated into low stock returns. In turn, Russian companies in the sample were among the largest in the index, and therefore the share price decrease for these stocks pushed index returns to the negative side. Contrary to the results for internal performance, consumer discretionary companies stood out with an outstanding performance in comparison with other industries: the highest median TSR of 133 percent. Moreover, the lower quartile of the stock returns of consumer discretionary group lied above single industry medians and, in some cases, above the upper quartiles. A closer look at these companies unveils that stock returns were primarily fueled by positive investor expectations rather than actual positive performance: many companies in the consumer discretionary industry started an aggressive expansion in the European markets or have successfully gained 4 Index returns were calculated for the dynamic set of constituents (reviewed quarterly), while our sample of companies for measuring value creation is constant. This automatically implies survivorship bias problem, since the companies with the lowest stock returns over the period have already been excluded from the index. On the contrary, the well-performing companies, which have increased their market value (or have decreased it less significantly than other constituents), were included into the index. To give the insight into the index turnover in , it is worth to mention that 44 out of 300 current index constituents of the index were listed only since 2010 or later. Therefore, many of these companies were not included in the sample due to lack of information HCM International Ltd. All rights reserved.

10 Eastern Europe (n=203) 49% Balkan (n=21) Baltic (n=5) Central Europe (n=11) Greece and Cyprus (n=16) Poland (n=59) Post-soviet (n=26) Turkey (n=65) -3% 50% 74% 54% 41% 60% 52% Consumer Discretionary (n=26) 133% Consumer Staples (n=19) 59% Energy (n=20) Financials (n=36) 28% 27% Health Care (n=8) Industrials (n=22) Information Technology (n=11) Materials (n=30) 53% 53% 65% 42% Real Estate (n=4) 11% Telecommunication(n=12) 38% Utilities (n=15) 3% Large (n=59) 26% Mid (n=73) Small (n=71) 61% 54% -30% 20% 70% 120% 170% 220% Interquartile range Median Figure 4: Total shareholder return cumulated over relative to STOXX Eastern Europe 300 EUR Net Return Index (calculated using EUR values). Data source: Thomson Reuters. Analysis: HCM HCM International Ltd. All rights reserved.

11 Putting it All Together competitive advantage through R&D activities during Expansion was positively priced for textiles & apparel producers and specialty retailers. The positive effect of R&D activities particularly concerned household appliances as well as auto parts and automobile producers. For the latter, in view of tightening CO2 regulations in the European Union, investors anticipated a higher demand on the lightweight materials or parts (e.g. carbon fiber). The lowest TSR of 3 percent at median was observed in the utilities industry. Company activities in this industry often face limiting regulations, however, their stocks are usually considered as defensive due to a stable demand. Low stock returns by the utilities were explained by the sample composition 12 out of 15 companies are electric power generators or renewable energy producers. First, these companies were hurt by low commodity prices as low oil prices generally reduce demand for renewable energy, while low gas prices jeopardize cash flows of the electric power generators. Second, slow GDP growth in the European countries translated into low revenue growth rates for electric power generators. The energy and financials industries were also performing poorly in with the relative TSR being below 30 percent, which implied a negative absolute TSR. Stock performance in these industries mirrored EP Dynamic results, since shifts in economic profit and investors expectations were most likely influenced by the same unfavorable economic conditions low oil and gas prices for the energy sector and low-rates environment for financial companies. Notably, large companies have significantly underperformed mid- and small-cap firms. Such an underperformance of the large firms was mostly related to country and industry composition of the size groups more than half of large companies belonged to either the energy or financial industry and one third of large companies was located in the post-soviet countries. We present company performance using both indicators of value creation in a two-dimensional graph in Figure 5 5. Indeed, assessing company performance using only TSR can be incomplete or even misleading. This is so, since TSR can sometimes be distorted by market conditions. Further to the degree that TSR also reflects future expectations of investors, it can get ahead of or lag behind the actual value creation taking place at a company. As regards EP Dynamic, the advantage is that it captures the actual internal value being created. As such, EP Dynamic can also be used to assess the rise or decline of enterprise value. If so, the EP Dynamic should also be reflected in stock returns when markets are operating efficiently. Thus, there should be a positive correlation between the two performance measures. As shown in the graph, stock markets priced EP Dynamic and a statistically significant trendline was observed. The slope implied that each percentage point change in EP Dynamic translated into a 4.3 percentage point change in stock returns (on average). This result confirmed a positive relationship between stock returns and EP Dynamic. A meaningful relationship between the two indicators was also observed when the country groups were assessed separately. The relationship between EP Dynamic and TSR generally reflected the quality of a local macroeconomic environment and indirectly showed investors confidence in sustainability of current performance. Polish companies showed a particularly strong relationship between the two indicators a 1 percentage point increase in EP Dynamic translated into 7 percentage point increase in TSR (slope of 7.0). Positive reaction of the investors to the higher EP Dynamic values was fueled by favorable economic conditions in this country as well as by the access to large internal and EU markets. In the same way, the relationship between EP Dynamic and TSR was much weaker for other country groups, where the economic environment was less favorable and value creationdid not translate in the stock returns to the same extent as for Polish companies. The slope of 0.95 for the post-soviet countries was most likely related to the currency devaluation, while the slope of 1.5 for Greek 5 For representation reasons, only the central part of the graph was shown. This includes 169 out 203 companies and does not include outliers on either EP Dynamic or relative TSR scale HCM International Ltd. All rights reserved.

12 200% Size of the bubbles corresponds to the market capitalization as of % Relative TSR % 50% 0% -50% -40% -30% -20% -10% 0% 10% 20% EP Dynamic Balkan Central Europe Poland Turkey Baltic Greece and Cyprus Post-soviet Figure 5: Relation between EP Dynamic and TSR measures. Data source: Thomson Reuters. Analysis: HCM HCM International Ltd. All rights reserved.

13 and Cypriot firms resulted from the financial crisis and a significant GDP decline. Most firms in both countries were located on the left side of the graph in Figure 5 due to poor EP Dynamic results. The industry relationship between EP Dynamic and relative TSR was most often the result of the country composition of each sector. As regards size, TSR in the large companies appears to have a moderate sensitivity to the changes in EP Dynamic (slope of 2.2) compared to mid- and smallcap groups (slopes of 3.7 and 8.4 respectively). Moreover, large companies (size is shown by the bubble size) are located in the lower left part of the graph thus confirming the underperformance of the large companies from both internal and external points of view. As explained earlier, the main difference between EP Dynamic and TSR is that EP Dynamic reflects wealth actually created by the company, while TSR reflects the perception of such value by investors. If the company s stock price grew more than the wealth that was actually created, this would mean that investors are confident about the company s future. In this case, TSR will continue to overestimate actual performance until the company either increases its internal value creation or the share price decreases. Indeed, the highest elative TSR was achieved by the companies overcoming changes in their structure and scope of business operations. Thus, market expansion, M&A activities, restructuring, and spin-offs were often seen favorably by investors. In this case, the company needed time to capitalize on these changes and increase the enterprise value internally. The inverse situation occurs when TSR is disproportionally low vis-à-vis EP Dynamic. In such cases, the reason may be related to an ineffective communication of company results and outlook to the investors. Moreover, the market might not have confidence that the company can support a current level of value creation in the long-run due to external threats. Indeed, sustainability of the current level of value creation cannot be captured by EP Dynamic, which assesses historical data. Investors, however, have a long-term outlook and an opinion about sustainability of the current performance and the capital markets adjust share prices accordingly. This situation might be relevant for firms launching new products. Demand for some kinds of goods may fade quickly. For example, a new video game becomes obsolete shortly after release, making it necessary to continuously introduce new video games to the market. Moreover, investors may believe that competitive advantages based on proprietary technology may be lost if the other companies introduce similar ones. In addition, current levels of value creation may not be sustainable due to unfavorable macroeconomic environment in the country of operation. Getting the Incentives and Governance Right Whatever may explain the gap between value creation and market valuation of a particular company, what is clear is that each company needs to understand how it can create value in the long-term perspective and manage investors expectations. In that connection, many steps can help in addressing this gap. This includes improving the quality of communication with shareholders and analysts but also paying attention to underlying factors that can undermine shareholders' confidence, such as uncertainties about corporate culture, corporate governance or compliance. It is a great challenge to identify the right performance indicator that captures all facets of value creation. This study focuses on two possible metrics, total shareholder return and EP Dynamic. Which metric or combination of metrics are appropriate for a particular company depends on many factors, including its owner strategy, strategic goals, and corporate culture, as well as the external market and country-specific conditions. HCM has deep experience working with companies around the world on these challenges and factoring in each company s individual complexity, such as when there is part or full state ownership. As compensation and governance experts, HCM also supports companies in ensuring that the managerial incentives and the governance system are properly calibrated to promote sustainable financial and corporate success. Please contact us if we can be of help to your institution in addressing any of these areas HCM International Ltd. All rights reserved.

14 ABOUT THE AUTHORS Olga Beregova Partner, Head of Operations Olga Beregova has over 12 years of professional experience in consultancy in the fields of corporate governance, corporate finance and Board/executive compensation. She has successfully steered extensive compensation and governance changes for private companies, national and international public companies in different industries. As Head Operations, Olga Beregova successfully manages a team of research analysts and consultants dealing with economic research, company performance analysis, corporate valuation, calibration of short- and long-term variable compensation plans, including the assessment of risk/payout profiles and fair value estimates. Olga Beregova holds a Master degree in Finance and Capital Markets from University of Zurich and in Linguistics from Kyiv State University of Foreign Languages. olga.beregova@hcm.com Anastasiia Medianovska Analyst Anastasiia Medianovska is a research analyst primarily dealing with the analysis and evaluation of executive compensation frameworks, including assessment of risk/ payout profiles and calibration of short- and long-term variable compensation plans. Anastasiia Medianovska holds a Master of Science in Finance from the Universities of Neuchatel, Lausanne and Geneva, as well as a Master s degree in International Economics from Kyiv National Economic University. She passed all three levels of the CFA Program and may be awarded the charter upon completion of the required work experience. anastasiia.medianovska@hcm.com HCM International Ltd. All rights reserved.

15 December 2016 Copyright HCM International Ltd. Fax: Address: HCM International Ltd. Muehlebachstrasse 23/25 CH-8008 Zurich HCM also offers tailored studies for companies in all sectors and regions as well as for specific functions. Please contact us for further information or visit our website for free downloads and further updates about our studies and publications.