Report of the Board of Directors

Results of the year in the context of 3D strategy implementation

Last 12 to 18 month showed us how rapidly a macroeconomic environment, business climate and the world in general may change. We saw how strong external influences can be and how rapidly and promptly we need to react to them. Despite such dynamic changes we were able to provide for a required speed and balance in taking difficult decisions such as retorn of the Company to Uzbekistan market, entry of the Company into a new for it market of the system integration, start of using the brand of our Vodafone partner within the framework of MTS Ukraine business. And perhaps, to avoid getting the impression that all our decisions were aimed at changes, we need to mentions that we confirmed a compliance with the strategy “3D Data, Differentiation, Dividends” adopted at the end of 2013.

Data

When categorizing achievements of the Company by 3D areas, initiatives worth noting primarily are related to Data Transformation.

One of key achievements of the Company in 2015 were a record-breaking volume of construction of the networks for mobile data transfer, and modernization of the landline communication network in Moscow.

Here it is necessary to mention a highly intensive development of new LTE network in Russia over the last 18 months. LTE networks have been launched in 83 regions of Russia. We also continue to develop other elements of our network, for example, 3G mobile network and landline networks, especially in Moscow. All of this allowed the Company to show better income dynamics in comparison to competitors in terms of mobile Internet income in Russia in 2015. Similar efforts were made in other countries of MTS operation. For example, we received 3G license and launched 3G network in first cities of Ukraine. All these issues were worked on at the level of the Board of Directors with a significant attention to the right balance between commercial and competition consequences which are usually defined by the timeline of market entry and the efficiency of investments. Such concentration on the efficiency resulted in initiation and implementation of a very interesting project – active joint use of LTE network in some regions with our competitor VimpelCom. By the way, it was a first example of the active joint use of mobile networks in the entire history of mobile communications in Russia. I also believe that MTS managers were able to improve a very complex method for planning of LTE coverage we call “smart LTE investments” at least partly because of such attention to the efficiency.

Differentiation

As for the second “D,” differentiation, aimed at creation of differentiation points, we need to mention two brand new commercial areas that were analysed and adopted by MTS Board of Directors:

1) Acceleration / launch of “Big data” project as one of the main areas of further development of the entire communications industry;

2) Entry into the system integration market. This is the opportunity for MTS enter the adjacent market and get an additional growth, as well as the possibility for differentiation in B2B market.

It would be no exaggeration to say that initial stages of creating ideas for both projects were carried out by the Board of Directors as we continuously analysed and assessed MTS strategy, business activities, structures and processes and compared them to cutting-edge practices of leading communication operators in the world.

Dividends

Now the last D in 3D strategy, dividends: Board of Directors always thoroughly checks how chief officers of the Company optimize operational expenses and carry out “smart” investments. Finally, despite significant investments that were required for the deployment of LTE networks, introduction GPON and other projects, those investments were made efficiently (intentionally, with a maximum output) and timely.

Board of Directors always examines the main investment projects of the Company thoroughly and requires from the managers an unconditional efficiency of such projects. This allows MTS to star reducing capital expenditures in current difficult times without losing its competitiveness. And that absolutely has a positive impact on possible dividends that are subject of interest of all the investors.

Work intensity and interaction with managers

Before and after each meeting of the Board of Directors, i.е. virtually each month, I have several meetings or phone conversations with representatives of the shareholders or managers of the Company. As usual, topic of such meetings is the “Management of Strategic Changes”. This is all related to initiation of global and strategic changes we consider within the Company. Usually the discussions go beyond a routine management and performance or simple strategy matters. Sometimes they touch upon a general view of systems and processes.

For example, last year we discussed the new Corporate Governance Code (hereinafter, for the purposes of this section – the Code) a lot, outside of the Board of Directors meetings. However, normally addressed issues are important complex strategy matters and long-term perspective. For example, we may discuss long-term global technology trends and things we must do in MTS to meet the requirements of changing environment. We can discuss and share our opinions on Big Data or reflect upon the influence on MTS from developing robotic technologies or IT start-ups. Or we can share our concerns and opinions on specific risks we see in the future of the Company.

We believe it is a good practice allowing each shareholder to share interesting ideas and useful observations of experience of other companies and businesses, which at the end of the day enriches our discussions in the Board of Directors and forms a strong base for right decisions of the executives.

Significance of the role of the independent members of the Board of Directors

We acknowledge that the Board of Directors needs to include independent directors in order to efficiently discharge their functions and take deliberate substantiated decisions.

On June 25, 2015 we increased the number of independent directors in the Board of Directors to four directors. The increase of the independent directors’ number allows the independent standpoint within the Board of Directors to exercise greater influence on the business decisions taken, on the Company’s corporate policy and strategy.

According to the Code recommendations, the key committees, namely the Audit Committee and the Remuneration and Nominations Committee are made up exclusively of independent directors.

At the same time, we note a considerable extension of the independent director’s role issues related to corporate strategy and its implementation monitoring, increase of the Company’s corporate governance quality in general, situation evaluation in case of reorganizations, mergers and acquisitions. The independent director is a participant of all the business processes of the Company carrying responsibility for the Company’s standing and work results on an equal basis.

Evaluation of the Board of Directors performance

The evaluation of the Board of Directors performance serves as an efficient tool of corporate governance development and is aimed to raise the efficiency of Board of Directors performance.

After adoption of the Code and completion of the corporate governance audit of MTS in 2015 the Corporate Governance Committee under the Board of Directors made a decision on the need for drafting a new methodology, for which an external advisor was engaged.

Self-evaluation of the Board of Directors using a new evaluation methodology is planned for 2016.

Development of Corporate Governance System at Plans for 2016

2015 we continued the work on development of our corporate governance system.

Beginning of 2015 saw the completion of the audit of Company’s corporate governance, conducted following the instruction of the Corporate Governance Committee under the Board of Directors within the framework of implementation of Code recommendations in the company. Audit confirmed high level of corporate governance and implementation of principles and recommendations of the Corporate Governance Code.

Following the audit results we approved the Roadmap for implementation of Code recommendations in MTS (Roadmap), and started its enforcement. Most of the Roadmap activities were done by the end of 2015. Details on fulfilment of the Code see in the section on observation of principles and recommendations of the Corporate Governance Code.

In 2015 we also introduced new institute of anti-monopoly compliance, new for Russian practices of corporate governance. Details on implementation of the system see in the Compliance System section.

We positively assess the results we managed to achieve, however we do not settle for them. We strive to continuously improve our corporate governance in view of the experience and practices in the market, listing regulations and legislation changes. That is why our main goal for the next year is to continue implementation of Roadmap activities with regard to changing regulatory environment.

Ron Sommer
Chairman of MTS PJSC Board of Directors