Reform of Kazakhstan’s Corporate Governance Framework (By Igor Lukin, Junior Associate, Dentons Kazakhstan)
Reform of Kazakhstan’s Corporate Governance Framework
By Igor Lukin,
One of the expected draft laws that will soon be submitted to the Parliament of the Republic of Kazakhstan is the draft Law «On Amendments to Some Legislative Acts of the Republic of Kazakhstan on Issues of Corporate Governance» (hereinafter, the Draft Law). Its purpose is to improve the Kazakhstan corporate governance framework and bring it into line with the world best standards. The text of the Draft Law as of the date of the writing of this article was not published. However, based on the concept of the Draft Law (hereinafter, the Concept), available from open sources, we can already form our first opinion on the key areas of the proposed reform.
The most important, in our view, set of changes will be aimed at «separation of powers, functions and responsibilities of the bodies of a joint stock company.»There is no doubt that for the purposes of corporate governance a balanced distribution of authorities between the bodies of a company is crucial. In our opinion, such changes must first address the issue of strengthening the control functions of the board of directors of Kazakhstan joint-stock companies. One of the main global trends in corporate governance development is to strengthen the control role of the board of directors of a single-tier board structure (towards which the Kazakhstan board structure gravitates).
Despite this, in the current edition of the JSC Law, very little attention is given to the control function of the board of directors. For example, the law does not establish such powers of the board of directors as the possibility to check the activities of the executive body at any time or appeal the decisions of the executive body in court. Another fundamental problem is that the board structure in Kazakhstan joint-stock companies as a whole is deformed: it does not have any flexibility of a single-tier board structure (mandatory creation of an executive body), or strict division of the functions of control and management of a two-tier board structure (the chief executive officer has the right to be a member of the board of directors and its committees). In this respect the Concept notes that the JSC Law does not reflect the general principle of delegation of authority, and that the board of directors should have full authority to manage the joint stock company and control its operating activity. On the basis of these statements one may assume that the Kazakhstan board structure will be changed with a view to further approximation to the classical one-tier board structure. Then the formation of an executive body of a joint stock company may cease to be mandatory. However, given the depth of this change, it seems unlikely to us at this stage of the development of corporate legislation of Kazakhstan.
Another area of the reform is closely related to the previous one, it is indicated in the concept as «a clear definition of the purpose of an independent director.»The Concept rightly points to a formal approach to the use of the institute of independent directorship in Kazakhstan and, among other things, it proposes to define clearly the functions of an independent director and a number of the mandatory qualification criteria. These measures, of course, can have a positive influence on further development of corporate governance in Kazakhstan. However, in our opinion, the problem of independent directorship in Kazakhstan lies on a deeper system level. First of all, one must understand why independent directors in Kazakhstan, in most cases, are not effective and are included in the board of directors exclusively under the pressure of the requirements of the JSC Law (box-ticking approach). Among the many issues underlying this inefficiency, for example, we can note dependence of «independent directors.»In the vast majority of joint stock companies in Kazakhstan, independent directors—as well as other board members—are appointed and dismissed by the decision of the sole or dominant shareholder. In such circumstances, one cannot speak about independence of a director, even if he meets the independence criteria set forth in the JSC Law. With such direct dependence, «independent directors» are powerless to fulfill one of their central functions - to ensure that the interests of all shareholders, and first of all minority shareholders, are respected. This issue, in our opinion, should be one of the first on the agenda of the reform to be discussed.
The Draft Law provides for amendments to the Kazakhstan Institute of Committees of the board of directors. The Concept only sets the aim of «specification of the functions of the board of directors committees, taking into account international standards.»In our opinion, regulation of committees of the board of directors in the JSC Law is one of the perfect examples of inconsistent implementation of an Anglo-American Institute in the corporate governance system of Kazakhstan. Firstly, we have here a misunderstanding of the purpose of the institution by the legislator. Committees of the board of directors appeared and developed in the framework of the Anglo-American system of corporate governance as mechanisms of enhancing the independence of a one-tier board of directors from the management of the company. The most important committees recognized in international theory and practice are as follows: an audit committee, remuneration committee and nomination committee. Their aim is to establish effective control over the management of the company. Despite this, the main function of the committees of the board of directors under the JSC Law is advisory and consists in preparing recommendations for the board of directors. The difference of Kazakhstan legislation from international best practices is most evident in the fact that the head of the executive body may be a member of any committee of the board of directors. Another drawback is that any and all joint companies are obliged to have at least one committee of the board of directors. At the same time the world best practice requires formation of committees of the board of directors only in those cases where an agency problem arises in the company, and it is necessary to establish control over the management, for example, in the case of listed companies. In Kazakhstan, however, the majority of private joint stock companies have a sole or dominant shareholder who independently carries out control over the management or the manager-shareholder. In such circumstances, committees of the board of directors may not only be unnecessary, but also burdensome. This conclusion is to some extent true of independent directors discussed above. Unfortunately, it is impossible to understand from the content of the Concept, whether these problems will be taken into account in the drafting of the Draft Law.
Another set of changes will have as its subject the institute of fiduciary duties of directors and officers of a joint stock company. The current edition of the JSC Law contains some elements of the institution, such as prohibition from the use by the directors and officers of assets of the joint stock company for their personal benefit and the obligation to act in the interests of the joint stock company. However, there is no institute of fiduciary duties as a single integral set of norms of Kazakhstan legislation. For example, the JSC Law lacks some important aspects of the duty of loyalty, does not establish the duty of care, does not impose the burden of proof on the directors and officers, etc. In addition, it should be understood that the institution of fiduciary duties is perhaps the most complicated mechanism for application in corporate governance. The most important condition for its effective use is the availability of competent and influential court that has sterling knowledge of the doctrine of fiduciary duties. In Kazakhstan, this condition is absent. It is also necessary to remember that the concept of fiduciary duties is based on the perception of the company's managers as agents, and the shareholders as the owners-principals. Such interpretation is alien to Kazakhstan corporate law. Therefore great care must be taken in implementing this typically Anglo-Saxon institute in the legal system of Kazakhstan. We believe that, along with the general principles of fiduciary duties, it is necessary to provide for a number of specific actions (omissions), which will be the grounds for responsibility of the directors and officers of a joint stock company. Such regulation, for example, is used in Germany. It should also be noted that this approach, although to a very limited extent, is already established in Article 63 of the JSC Law.
The Draft Law provides for changes in the status of the corporate governance code. Currently, the Model Code of Corporate Governance adopted in 2005 does not perform the tasks that are assigned to such samples of soft law in international best practice. This is primarily due to the lack of mechanisms to ensure compliance with the recommendations of the Code. One of the objectives of the reform will be to create such mechanisms. The most important innovation of the corporate governance system in Kazakhstan will be the introduction of the recognized international principle of «comply or explain.»While this is not apparent from the text of the Concept, we can assume that this principle will be enshrined at the legislation level. This approach is used, for example, in German corporate law. However, it remains unclear what joint stock companies will be subjects of the corporate governance code. In the international best practice, the principle of «comply or explain» is generally applicable only to listed companies. We believe that this trend should also be established in Kazakhstan. Along with the changes in the legislation, the Model Code of Corporate Governance will be updated. We hope that specific guidelines for different groups of joint stock companies (listed companies, family businesses, companies of the quasi-public sector, etc.) will also be formulated.
Other important aspects ofthe corporate governance systemin Kazakhstan, which according to the Concept will bechanged, include: disclosure by joint stock companies of information in the securities market and risk management in the joint stock company, etc.
The purpose of the Draft Law, according to the Concept, is «improving the legal framework of Kazakhstan on corporate governance taking into account international principles and standards of corporate governance.»Given the significance of the corporate sector and the need for integration of Kazakhstan into the global economy, the importance of harmonization of Kazakhstan legislation on corporate governance with recognized world samples seems to us unquestionable. It should be noted, however, that implementation of corporate governance institutions of developed economies of the world by way of their blind copying usually does more harm than good. That is why in introduction of the principles of best practices, the national peculiarities of the system of corporate governance should be taken into account. We can only hope that this approach will be the basis for the proposed reform of Kazakhstan corporate governance framework.
www.online.zakon.kzDossier on the draft Law of the Republic of Kazakhstan On Amendments to Some Legislative Acts of the Republic of Kazakhstan on Issues of Corporate Governance