Introduction

Severstal remains strongly committed to the best practice in corporate governance. We believe we have already seen the benefit of a strong and independent Board and we believe that in the current economic environment it becomes ever more important to maintain the high level of corporate governance already achieved and to make further progress.

Severstal first published its Corporate Governance Code in October 2006. This was approved by the Board and the Board continues to be at the centre of the corporate governance of the Company. This report has been prepared following the recommendations of the Code of Best Practice set out in section 1 of the Financial Reporting Council’s Code on Corporate Governance.

The Company complies fully with Russian corporate governance law requirements and also fully meets the corporate governance mandatory requirements of MICEX and RTS (Russia) for the Russian listed ‘B’ companies, which in turn follow the recommendations of the Russian Corporate Behaviour Code issued by the Russian Federal Securities Commission.

The Board

Severstal’s Board comprises five Independent Directors including the Independent Chairman, Christopher Clark, plus Ronald Freeman, Dr Peter Kraljic, Martin Angle, and Dr Rolf Stomberg. There is also one Non-Executive Director, Mikhail Noskov, and four Executive Directors; Alexey Mordashov, Anatoly Kruchinin, Sergei Kuznetsov and Alexey Kulichenko. This 10-strong Board offers a balance, which is an important requirement for good decision-making and good governance.

The proportion of Independent Directors on the Board – unprecedented for a Russian Company – guarantees equal regard for the interests of all shareholders. This is reinforced by special voting rules on strategically important issues. The Board considers all of its Independent Directors to be independent for the purposes of the Combined Code.

Board meetings and attendance

Attendance by individual directors at the meetings of the Board and its Committees in 2009 was as follows:

Members of the Board of Directors JSC ‘Severstal’	Number of Board meetings possible2	Number of Board meetings attended	Audit Committee (4 meetings)	Remuneration and Nomination Committee (4 meetings)	Strategy Committee (1 meeting)
Christopher Clark	5	5	41	4	-
Ronald Freeman	5	5	4	41	-
Peter Kraljic	5	5	4	41	1
Martin Angle	5	5	4	41	-
Rolf Stomberg	5	5	41	4	11
Alexey Mordashov	5	5	-	4	-
Mikhail Noskov	5	5	11	-	-
Vadim Makhov	2	23	-	-	1
Anatoly Kruchinin	5	5	-	-	-
Gregory Mason	24	2	11	-	1
Sergei Kuznetsov	35	3	21	-	-
Alexey Kulichenko	26	1	11	-	-

¹ Means that the specified Director is not a member of that Committee, although he attended the meetings at the invitation of the Chairman of the Committee;

² One of the meetings was held via conference call;

³ Mr. Makhov left his office as a member of the Board of Directors by decision of the General Annual Shareholders Meeting held on June 15, 2009;

⁴ Mr. Mason left his office as a member of the Board of Directors on the basis of his voluntary resignation letter;

⁵ Mr. Kuznetsov was elected member of the Board of Directors by decision of the General Annual Shareholders Meeting held on June 15, 2009;

⁶ Mr. Kulichenko was elected member of the Board of Directors by decision of the Extraordinary General Shareholders Meeting held on October 19, 2009.

Board and Committee members now have direct and constant access to Board and Committee materials through an electronic system, which also serves as an electronic archive of Board and Committee materials for convenient reference by Board members, and an electronic voting engine for Board meetings conducted by correspondence.

Role of the Severstal Board

Severstal’s Board of Directors is responsible for the general management and performance of the Company’s operations, including discussion, review and approval of its strategy and business model, as well as closely monitoring its financial and business operations both by segments and as a whole. The Board’s principal objective is to run the Company in such a manner as to increase shareholder value in the medium and long term. Short-term financial and operational issues such as debt levels and costs also receive close attention.

The Board bases its decisions on the need to act in the best interests of all stakeholders. This often includes taking decisive and difficult decisions in complex situations. The Board is also responsible for the proper functioning of the system for disclosure and dissemination of information about the Company’s operations, and for implementing the Company’s information policy.

The Board is authorised to take decisions concerning every aspect of Severstal’s activity, with the exception of matters within the jurisdiction of the General Shareholders’ Meeting.

Key duties:

1. Responsibility for the strategic direction of the Company.
2. Review of the consolidated budget and the provision of appropriate recommendations.
3. Reviewing the appointment and compensation policy applying to the Company’s senior executives, and making recommendations regarding such a policy.
4. Dividend policy.
5. Approving transactions with interested parties (as this term is defined in accordance with Russian Law) with the value for each such transaction not to exceed 2% of the book value of Severstal’s assets at the date of the decision to enter into such a transaction.
6. Approval of a transaction if its value exceeds 10% of the book value of Severstal’s assets at the date to enter into such a transaction.
7. Approval of a transaction to acquire (i) shares or participation interests or rights to manage such shares or participation interests or (ii) fixed or intangible assets if the amount of the transaction specified in sub-clauses (i) or (ii) above exceeds the equivalent of US$500 million.

A resolution on the matters set out in clauses 2 and 7 requires a two-thirds majority vote of all members of the Board of Directors.

Board effectiveness

The roles of Chairman and Chief Executive Officer are separate and their responsibilities are clearly defined in the Company’s statutory documents and regulated by Russian law. The role of the Chairman is to organise, lead and manage the Board and to convene and preside over Board meetings.

Directors new to the Board are given background information on the Company when they join. This includes details of its operations and procedures, as well as information on what is required from them in their role according to the Company’s statutory documents. This includes Severstal’s Corporate Governance Code, and applicable corporate governance law, which is best practice to help ensure their early effective contribution to the Company.

The Chief Executive Officer carries out the day-to-day management of the Company and ensures its efficient operation by discharging the tasks set by the Board of Directors. The Chief Executive is responsible for the organisation, status and accuracy of the Company’s accounting practices, timely provision of financial reports to appropriate authorities, and timely provision of information regarding the Company’s operations to shareholders, creditors and the media. The Chief Executive also cooperates with trade unions to protect the interests of Company employees and communicates with government and municipal authorities.

In 2009 OAO Severstal developed a new mission, vision and values. The Board of Directors believes that it is a very important step in the Company development. It will set the path for the Company to become one of the world leaders in the steel industry. Severstal mission is “to become a leader in value creation” through a focus on People, Unity and Excellence. The following values are the foundation of Severstal new corporate culture: Safety, Customer care, Efficiency and Agility, Respect to employees, Teamwork. The findings of the Board’s first independent audit of its effectiveness conducted by the respected international executive search firm Heidrick & Struggles, and completed in the beginning of 2009, were presented to the Board. Along with this independent audit an internal evaluation of the Chairman’s performance was performed by the Senior Independent director. These demonstrated, amongst other things, the wealth of experience available to the Company from the Independent Directors and the fact that the Company is keen to benefit from their experience and commitment to the Company to promote and sustain best corporate governance standards.

Severstal is monitoring the proposed changes to the rules of the United Kingdom Listing Authority, as well as the proposed new governance framework outlined by the Financial Reporting Council. The UKLA is essentially proposing the re-classification of overseas companies with depositary receipts listed on the London Stock Exchange as ‘standard’ listings and certain other changes with regard to the disclosure of conformation with governance standards. Severstal believes it already exceeds these requirements.

The FRC proposals may not apply to companies with standard listings but propose a more active dialogue between institutional investors and board members, including independent directors. The Board already encourages the involvement of independent directors in investor meetings and will consider how best to approach the FRC proposals.

Company Secretary

Oleg Tsvetkov (PhD, MBA) became Company Secretary of Severstal in 2006 after the listing in London. The scope of activities of the Company Secretary’s office includes: Board of Directors activities, preparation and holding of the General Meetings and meetings of the Board of Directors, disclosure of information, corporate governance advice, communications with shareholders and GDR holders, as well as relations with Russian and foreign stock market regulators. The Company Secretary is responsible for ensuring that the Company, its management and officers comply with the corporate applicable law, the Company’s charter and internal documents.

Non-executive Directors

The Board reviews the independence of all Independent and Non-Executive Directors annually and has determined that all such directors are independent and have no cross-directorships or significant links, which could materially interfere with them exercising their independent judgment. The Independent and Non-Executive Directors play a leading role in corporate accountability and governance through their membership of the Remuneration and Nomination and Audit Committees.

Senior Independent Director

Rolf Stomberg is Severstal’s Senior Independent Director and is also Chairman of the Remuneration and Nomination Committee.

His responsibilities include meeting major shareholders and chairing meetings of the Independent and Non-Executive Directors when the Chairman is not present.

In 2009 Mr. Stomberg conducted the first internal evaluation of the Chairman’s performance and reported its results to the Chairman of the Board of Directors and the Chief Executive Officer of the Company.

Terms of appointment

Members of the Company’s Board of Directors are elected by the shareholders at their General Meeting and remain members for the period until the next annual General Meeting. If a Board Member elects to terminate his office the whole body of the Board of Directors shall be re-elected at a General Shareholders Meeting. Those elected to the Company’s Board of Directors may be re-elected an unlimited number of times.

Meetings of Non-executive Directors

The Independent and Non-executive Directors meet separately during the year. There were four such meetings in 2009.

Key Committees

The key Committees of the Board are consultative and advisory bodies intended for dealing with issues raised by the Board. Committees may not act on behalf of the Board of Directors; neither are they management bodies of the Company, having no powers in relation to managing the Company.

Committee meetings are held as and when necessary but in any case are held at least three times a year. Committee decisions are made by a majority vote of all Committee members taking part in the meeting. Each member has one vote and the Committee Chairman has no casting vote in the event of a tie. In 2009 the Board resolved not to establish Strategy Committee. With the growing importance of forming and implementing the Company’s strategy, the relevant questions of strategy development and discussion are referred to the activities of the full Board.

The Audit Committee

• The Audit Committee has an important role in monitoring and reviewing risk management process and supervising the financial performance and business operations of the Company. The objective of the Audit Committee is to assist the Board of Directors in Monitoring the timeliness, completeness and reliability of financial and other reporting, its preparation and submission process;
• The operation of risk management, internal control and corporate governance systems.

The Audit Committee consists of three Independent Directors and currently comprises Martin Angle, Chairman of the Audit Committee, Ronald Freeman and Dr. Peter Kraljic. In accordance with its terms, the Committee has sufficient recent relevant financial experience, and the overall skills required for financial statements, business risk analysis and financial management skills. No senior executive of the Company is a member of the Audit Committee. During 2009 the Audit Committee met four times. Moreover the Chairman of the Audit Committee keep in touch regularly with the Chairman, external audit lead partner, Company CFO and Head of Internal Audit.

The Audit Committee carries out the following functions:

• Evaluating candidates proposed as the Company’s external auditors, developing recommendations for the Board regarding the selection of the external auditors;
• Developing recommendations for the Board of Directors regarding the amount of the external auditors’ fees;
• Supervising the scope and results of the auditors’ work (including the evaluation of the auditors’ opinion) and its efficiency and objectivity; monitoring the independence of the external auditors, taking into account the applicable requirements of professional and regulatory bodies in Russia and the UK;
• Reviewing the Company’s regular financial statements and analysing the changes in accounting policies and practices, as well as material adjustments made on the basis of the audit findings;
• Analysing the Company’s annual report and any other published financial information prior to its submission for approval to the Board of Directors and its publication;
• Analysing any official statements relating to the Company’s financial performance; reviewing any opinions concerning significant aspects of financial reporting;
• Monitoring the effectiveness and efficiency of risk management, internal control and corporate governance systems;
• Monitoring and exercising control over the efficiency of the internal audit function;
• Developing and implementing an ethical compliance policy for auditors supplying non-audit services, taking into account relevant ethical restrictions applicable to such activities; operating risk management, internal control and corporate governance systems;
• Analysing any material changes in the existing legislation affecting the Company’s financial statements and any findings of supervisory authorities and court proceedings.

The Audit Committee prepares its own evaluation of the auditors’ opinion on financial statements and provides this evaluation to the Board of Directors and to the Annual Shareholders’ General Meeting.

In order that the Company’s financial and business operations are monitored efficiently, the Company employs external auditors, that have no interests in the Company, for annual verification and approval of the accounts. The KPMG external auditor lead partner always participates in meetings of the Audit Committee, reviewing the Company quarterly and annual results. The Audit Committee members regularly meet the external auditors without management, to discuss matters arising from the audit and review process. There were four such meetings in 2009.

The Company’s books and records are audited in compliance with the requirements of statutory law and International Standards on Auditing issued by the International Federation of Accountants (IFAC) with respect to financial statements prepared under the International Financial Reporting Standards (IFRS). Such an audit takes place annually and, as of the first quarter of 2007, the Company’s quarterly reports are also reviewed IFRS in accordance with the International Standard on Review Engagements 2410.

The Remuneration and Nomination Committee

The Remuneration and Nomination Committee seeks to assist the Company in engaging qualified professionals to manage the Company, and in creating the incentives necessary to ensure their successful work for the Company. It also reviews the remuneration and compensation level for senior managers of the Company and the Independent Board members.

The Remuneration and Nomination Committee consists of three members. At least two members, including the Chairman, are Independent Directors who are not senior executives of the Company.

The Remuneration and Nomination Committee performs the following functions:

• Developing general recommendations for the Board of Directors on selecting nominees to the Board of Directors, proposed by the Board of Directors;
• Conducting preliminary evaluations of potential nominees to the Board of Directors and provides the Board of Directors with recommendations regarding such nominees;
• Informing the Board of Directors of any potential nominees to the Board of Directors it is aware of and recommends individual persons for nomination or election to the Board of Directors;
• Issuing an opinion as to whether a person nominated to the Board of Directors qualifies as an Independent Director;
• Developing the system of remuneration and other payments made by the Company or at the Company’s expense (including life and health insurance, pension plans) for Board members of the Company based on personal contributions of its members to the achievement of the Company’s strategic objectives;
• Preparing and submitting for approval by the Board of Directors the appointment and remuneration policy for senior executives of the Company including its Chief Executive, as well as providing recommendations on the terms of the contract signed with the Chief Executive;
• Reviewing the performance of Board members including the advisability of nominating respective Board members for another term in office;
• Providing recommendations to the Board of Directors regarding material terms of the General Director’s contract;
• Reviewing the information furnished by Board members, which shall be disclosed in accordance with the existing legislation or the Charter, with a view to establishing whether such Board members have an interest in any decisions of the Company, as well as information related to the circumstances preventing the aforementioned officers from efficiently discharging their duties as members of the Board and circumstances entailing their loss of independence as a member of the Board of Directors.

The Remuneration and Nomination Committee comprises Dr Rolf Stomberg (Chairman of the Committee), Christopher Clark and Alexey Mordashov.

The Remuneration and Nomination Committee met four times in 2009. Moreover the Chairman of the Remuneration and Nomination Committee keeps in touch regularly with the Company CEO and Head of Human Relations.