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Sberbank of Russia

Sustainability, remuneration and compliance

Home / EOS Case Studies / Sberbank of Russia

Jaime Gornsztejn, Hermes EOS

Sberbank is the largest bank in Russia and Eastern Europe. Established in 1841, the company has grown into a universal commercial bank with diversified businesses.

Background
The bank is the biggest taker of deposits in Russia and the key lender to its economy. It accounts for approximately half of retail deposits, 40% of retail loans and one third of corporate loans in Russia. The Central Bank of Russia is the majority shareholder of Sberbank, owning 58% of its voting shares.

Our engagement with Sberbank has focused on compliance and anti-money laundering practices and systems, executive remuneration structures and environmental and social risk management in corporate and project finance activities.

Our engagement
Given its extensive network across the Russian territory and significant role in the banking sector, we started engaging with Sberbank in 2013, pressing it to have in place robust anti-money laundering policies, procedures and systems. We encouraged the bank to implement group-wide policies and procedures under a centralised approach to reduce the potential for human error and ensure consistency across all branches.

In terms of remuneration, the bank used to pay cash bonuses associated with the achievement of certain undisclosed targets. We highlighted in our engagement that the structure in place did not provide any transparency about the alignment of interests between management and investors and shared with the bank our Remuneration Principles for Building and Reinforcing Long-Term Business Success[1].

The importance of having strong environmental and social risk management policies in the lending business has been a common engagement theme for us with banks in developing markets. By adopting guidelines for the assessment and mitigation of environmental and social risks and safeguards in their financial instruments, banks can promote the adoption of best practice in the companies they finance. Moreover, sound risk management policies help to reduce financial and reputational risks. We raised this with Sberbank’s senior independent director in the fourth quarter of 2016, particularly with a view to the bank’s main borrowers which are extractive industries. We have been engaging with the bank on best practice in this area and provided it with examples from other emerging markets, such as Brazil, where we have seen progress in the implementation of environmental and social risk management in the financial sector.

Changes at the company
Sberbank has been responsive to our engagement and we maintain a constructive dialogue.

It has developed an anti-money laundering framework through the creation of a central compliance centre based in St Petersburg dedicated to the assessment of executed transactions in relation to breaches of compliance. The bank has also significantly invested in the replacement of a number of legacy IT systems by setting up a unified platform. More broadly, we continue to engage on the embedding of a compliance culture in the bank through training on its code of ethics, as well as on anti-corruption and anti-money laundering, conflicts of interest and sanctions from the EU and US following the annexation of Crimea.

In relation to remuneration, a long-term incentive plan for its senior management was established in the fourth quarter of 2015, taking into account our remuneration principles. Bonuses are now partly paid in equity, with a three-year vesting period. We continue to press for the greater disclosure of metrics and incentives in order to assess the alignment of pay and performance.

Our engagement on environmental and social risk management has also been progressing. We are reassured by the initial steps taken by the bank to address our concerns, such as the establishment of a sustainability committee, with which we will continue our dialogue.

[1] https://www.hermes-investment.com/wp-content/uploads/2017/09/Remuneration-Principles.pdf

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Jaime Gornsztejn Hermes EOS Jaime Gornsztejn is responsible for engagements in Latin America and Russia and focuses on the mining, oil and gas, technology and utilities sectors. Prior to joining Hermes EOS, he worked for the Brazilian Development Bank (BNDES), where he held executive positions in Brazil and the UK as banker in its Telecommunications Department, as portfolio manager in its Venture Capital Division and as a project finance manager at the Renewable Energy Department. More recently, as managing director of BNDES UK, he was responsible for setting up the bank's subsidiary in London. Jaime has also held executive positions as portfolio manager at Nortel Networks UK and as an adviser to private finance initiative projects at KPMG Corporate Finance UK. Jaime holds a BSc in Electronics Engineering from IME, the Military Institute of Engineering in Rio de Janeiro, an MSc in Telecommunications Engineering from PUC-Rio, the Catholic University of Rio de Janeiro and an MSc in Finance from Cass Business School in London. He is also chair of the board of the Brazilian Chamber of Commerce in Great Britain and serves on the Senior Advisory Council of the Brazil Institute at King’s College London.
Read all articles by Jaime Gornsztejn
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Shinhan Financial Group
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Royal Bank of Scotland

Engagement objectives

Environmental:
Environmental and social risk management

Social: Anti-money laundering systems

Governance: Remuneration disclosure

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