Azamat JOLDASBEKOV Independent director (Almaty, Kazakhstan) Specially for the 3rd Mongolia Corporate Governance Forum May

27, 2010 Ulaanbaatar, Mongolia

THE EXPERIENCE OF KAZAKHSTAN IN CORPORATE GOVERNANCE REFORM AND SECURITIES MARKET DEVELOPMENT1
1. The Structure and the Role of the Listed Companies Boards in Kazakhstan on Risk Management, Executive Remuneration and Shareholders Rights Protection, Especially the Minority Shareholders The corporate legislation in Kazakhstan is concentrated in the Joint-stock Companies Law2 (2003) with the multiple subsequent amendments plus in several subordinate regulatory acts. Some special corporate norms are included in the Law on the Banks and Banking Activity in the Republic of Kazakhstan3 (1995), the Securities Market Law4 (2003) and other specific laws. The shareholders rights in Kazakhstan are common with many other jurisdictions and include the following:

to participate in the management of the company in the manner provided by the law and the charter of the company to receive the dividends to obtain financial reports and other information about the company in the manner provided by the charter of the company or by the decisions of the general shareholders' meeting to obtain the registering extracts confirming his ownership on the shares to nominate the candidate members of the Board of Directors to appeal (in the court) against the decisions of the company's authorities to apply to the company with written inquiries about its activities and to receive reasoned responses within 30 days to receive the part of company's property in case of its liquidation to use the first option rights, if company places the new shares or other securities convertible into its shares other rights described by the charter of the company

So, there are not specific rights for the minority shareholders. But the principal shareholder (with the 10 or more percent stake in the outstanding shares) has such additional rights as:

to request to convoke an extraordinary general shareholders' meeting or to apply to court with the claim of such convocation to propose the additional topics in the agenda of general shareholders' meeting to request to convene a meeting of the Board of Directors to require the external audit of the company for his own account

1 2 3 4

The subject and the topics are named according to USAID Terms of Reference. The full Russian version is available from http://www.kase.kz/files/normative_base/zakon_ao.pdf. The full Russian version is available from http://www.nationalbank.kz/cont/publish852328_6518.doc. The full Russian version is available from http://www.kase.kz/files/normative_base/zakon_rzb.pdf.

Azamat Joldasbekov, May 27, 2010, Ulaanbaatar: The Experience of Kazakhstan in Corporate Governance Reform and Securities Market Development

Important note: the group of minority shareholders may act together as the single principal shareholder. To provide these rights the Joint-stock Companies Law established the detailed procedures for the general shareholders' meeting and Board of Directors, including but not limited to the following: the date and time of the general shareholders' meeting shall be installed so that the maximum number of persons eligible to participate in this meeting could take part in it the place of general shareholders' meeting shall be in the locality of the company's executive body the list of persons eligible to participate in the general shareholders' meeting shall be fixed at the moment within the period between the date of decision to convoke this meeting and the date of this meeting shareholders shall be notified of the upcoming general shareholders' meeting not later than 30 calendar days prior to this meeting, personally or via web-site/newspaper named in the charter of the company a minority shareholder may apply to the registrar of the company in order to join with other shareholders for voting on general shareholders' meeting materials on the agenda of the general shareholders' meeting (incl. the detailed data about the candidate members of the Board of Directors) shall be available no later than 10 days prior to this meeting the participants of the general shareholders' meeting vote by the principle "one shareholder one vote" while making technical decisions (e.g. electing a chairman and a secretary of this meeting) minutes of the general shareholders' meeting (stitched together with the powers of attorney and the voting minutes) shall be provided to shareholders for review at any time the Board of Directors shall consist at least of three people at least one-third of the members of the Board of Directors shall be independent (nonaffiliated) directors of the company the Board of Directors shall not have more than half of its members who are not elected as the shareholders' representatives the public companies5 shall have, and other companies may have the committees of the Board of Directors for strategic planning, for nominations and remunerations, for internal audit, for social affairs, for other possible matters (in the banks this requirement is even tough) the Board of Directors shall follow the special procedures making the decisions about the big deals and deals with the affiliated persons of the company the non-confidential decisions of the general shareholders' meeting and of the Board of Directors shall be open for the company's shareholders in the manner provided by the law and the charter of the company the remuneration for the members of the Board of Directors shall be determined by the general shareholders' meeting; the salaries and the bonuses for the executive topmanagers shall be determined by the Board of Directors

Public company is the special status for the listed company which placed its shares in public way. Non less that 30 percent of outstanding shares of such company must belong to minority shareholders. There are special requirements for the trades' volume of public company's shares. But no one company in Kazakhstan was awarded with such status, as there is no tax or other preferences for the public companies only additional load exists.

Azamat Joldasbekov, May 27, 2010, Ulaanbaatar: The Experience of Kazakhstan in Corporate Governance Reform and Securities Market Development

Kazakhstan didn't invent the rules. All national corporate legislation is the adaptation of the ready and well-known recipes. The authors of this legislation just tried to create a logical and clear system. But: the main problem for the proper implementation of the prudential legal norms is "Who?". Yes, the laws set-up different formal requirements for the candidate members of the Board of Directors. Nevertheless these requirements don't guarantee the professionalism of Directors. And, what is more important, these requirements don't guarantee the morality, honesty and conscience of Directors, their absolute instinct to follow the laws and the rules. Of course, the decision of the Board of Directors may be challenged in court. And there is another problem Kazakhstan's judicial system suffers from incompetence, bias and corruption.

2.

Issues Surrounding Transparency and Disclosure and Other Corporate Governance Weaknesses That Were Impediments to Further Development of the Financial Markets in Kazakhstan The financial markets can't function without the reliable information about the objects of investments, especially about the companies which attract equity or debt financing by issuing securities. From the very beginning the corporate legislation in Kazakhstan was and still is quite liberal regarding the disclosure by joint-stock companies (practically, for partnerships and entities of other legal forms there are no legal requirements for disclosure). For the regulators it was more important to establish such rules of the game in which the company would have no opportunity to publish important information in the newspapers with small circulation and a narrow geographical distribution. This problem was solved by:

establishing special requirements for newspapers, which may publish information of jointstock companies allowing the usage of corporate or other web-sites for posting information of joint-stock companies requiring a direct indication of the name of the newspaper or web-site in the charter of the company

Plus the Joint-stock Companies Law defined the "Information which affects the interests of shareholders" (e.g. the certain decisions of company's bodies) and the "Documents which are related to the activity of the company" (e.g. the charter and the certain minutes). Such information and documents must be provided to the shareholders in accordance with law and the charter of the company. However, such disclosure system is not quite convenient for investors, as it force them to monitor different newspapers or web-sites, unless the company does exercise the direct mailing of its information to the shareholders. In Kazakhstan there is no centralized state/quasi-state or private source of corporate information for the shareholders and other investors like in some other countries. The only one centralized system is brand new, still under construction by the Ministry of Finance and called "Depository for the Financial Reporting". This electronic system is meant for collecting and keeping the annual financial statements of the entities of "public interest", like financial institutions, subsoil users and organizations with the state participation. That's why for the ones who invest in traded securities the web-site of Kazakhstan Stock Exchange (KASE) www.kase.kz is the main source of information. The disclosure requirements are the additional KASE requirements for the listed companies (beside the merely listing requirements)6. These requirements include:

The set of disclosure requirements is set-up by Listing Rules of KASE (http://www.kase.kz/files/normative_base/listing_rules_eng.pdf).

Azamat Joldasbekov, May 27, 2010, Ulaanbaatar: The Experience of Kazakhstan in Corporate Governance Reform and Securities Market Development

the initial admission requirement for the supposed listed company to provide the set of historical, legal, financial and other documents to be provided by the issuer. The important component of this set is investment memo, which must be prepared by the financial adviser (brokerage company or bank) of the issuer the requirement for the listed company to provide quarter and annual financial statements comprised by IAS/IFRS and audit reports on annual financial statements, information about shares and shareholders of the company or about its bonds and bondholders the requirement for the listed company to provide the annual calendar of forthcoming corporate events the requirement for the listed company to provide the essential information about the current activity of the company (e.g. about the amendments to the charter of the company or about new licences) the requirement for the listed company to provide any sensitive information that may affect the activity of the company and the prices of its securities, as well as any information on other events that may significantly affect the interests of investors

The state made a very strong support for KASE in building the disclosure system, through the introduction of two important legal norms in 2007: (A) in the Law on Accounting and Financial Reporting all big-business companies7 and entities of "public interest" should keep their records and prepare their financial statements in accordance with IAS/IFRS; (B) in the Securities Market Law the information which must be presented to KASE by the issuers according to the disclosure requirements cannot be classified (closed for the publication and distribution). Of course, there is enough room to improve the transparency and disclosure. But the solutions are already known (e.g. the implementation of "ad hoc" electronic system for rapid and small companies' announcements and other information, the development of "is2in" ("from issuers to investors") automated system for information exchange) and only need time, labor and hardware resources.

3.

The Role of Kazakhstan Stock Exchange in Ensuring Improved Disclosure and Transparency

Title (news) page Issuer page

With more than 250 employees or with the assets exceeding USD ~3 millions.

Azamat Joldasbekov, May 27, 2010, Ulaanbaatar: The Experience of Kazakhstan in Corporate Governance Reform and Securities Market Development

The vast majority of listed companies' information is published by KASE free for its web-site users. In order to accelerate the access to the fresh important data and to provide additional comfort for the investors, KASE divides the documents received from the issuers on three groups prior to the posting them "inadequate" information, "easy" information, "hard" information. "Inadequate" information the information with the unsatisfactory quality. KASE immediately returns such information to the issuers with the remarks what must be corrected. "Easy" information like brief letters, press-releases and other "one-page" materials are published as soon as possible. The most popular and convenient way for such publishing KASE news containing the main essence of "easy" information. "Hard" information like financial statements, audit reports, prospectuses, etc. needs additional processing scanning and converting in pdf. This processing may take several days, depending on the length of queue. But at the day when such information is received, KASE distributes the short e-mail messages with the notification that interested persons may read the paper version of such information directly in KASE premises, without waiting for pdf-file publication. The KASE notifications are also free. It needs 10 minutes and one e-mail application to become the addressee of these notifications. For "lazy" readers the special individual services are available, rendered by KASE daughter company IRBIS Financial Markets News Agency. IRBIS may provide practically any processed or unpolished financial markets information in different forms and by different ways. Against the certain payment, of course. The web-site of KASE:

contains a lot of databases, options and services is developed constantly, day-by-day, meeting the new needs of web-site users and suggesting them the new services holds Top-1008 position among the sites which are visited by Kazakhstan's users in global Internet

Very important part of everyday KASE activity is the total and detailed "hand-made" control over the quality of informational massifs. This is necessary to keep the reputation of KASE web-site as of the reliable, accurate and comfortable source (though KASE doesn't earn money from it). Serious difficulty in improving disclosure was and still is (in some organizations) the absence of personal habits and traditions of the top managers to support permanent transparency of their companies. This consideration was the main reason to set-up the special KASE sub-division Monitoring Section within the Listing Department. Now it would be true to mark that this Section plays its role in strengthening the disclosure discipline. Another important factor which helps to stimulate and to develop the KASE disclosure system is the neutrality and objectivity of KASE. This means that KASE refrains from commenting to information of listed companies and from analyzing it in the news products, unless the problems related to such information are so evident that they need to be commented and/or explained by KASE. (Yes, KASE analyzes the issuers' information while preparing the listing conclusions, but these conclusions have a special purpose and are not aimed to affect the reputation of the companies). Thus, KASE keeps its position for the listed companies as strict and demanding controller, on the one hand, and the impartial and comfortable mass-media, on the other hand. 4. The Corporate Governance Regulatory Reforms in Kazakhstan That Worked Actually, the history of corporate governance regulatory reforms in Kazakhstan is just the genesis of the Joint-stock Companies Law. 1991 The first and the most primitive Law on Economic Partnerships and Joint-stock Companies. Minimum corporate procedures were regulated.
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# 82 according to http://www.alexa.com/topsites/countries;4/KZ.

Azamat Joldasbekov, May 27, 2010, Ulaanbaatar: The Experience of Kazakhstan in Corporate Governance Reform and Securities Market Development

1995

The second Economic Partnerships Law. Minimum corporate procedures were regulated. This law still exists after the norms concerning limited partnerships and joint-stock companies were extracted from it in 1998.

1998

The first Joint-stock Companies Law. This law was evaluated by international experts as one of the best on the territory of Eastern Europe and CIS. A lot of corporate procedures were included in this law, but the large part of them were indistinct, illogical or contradictory. The improvement of this law started immediately after its adoption. Four set of amendments were created in the period of 19992002.

2003

The second (existing) Joint-stock Companies Law. Very detailed law with a wide range of improvements in comparison with the law of 1998. Easy-to-use structure which allows to perfect the law keeping its integrity and logic. Now there are 15 sets of amendments created since the start day of this law.

2005

Model Corporate Governance Code was approved by the Issuers Board under Financial Supervision Agency9 (FSA or AFN). A very controversial document, almost completely duplicating the rules of Joint-stock Companies law. The legal status of this document is unclear.

2005 2005 2007

The new amendment to the Joint-stock Companies law the approval of company's Corporate Governance Code is the competence of its general shareholders' meeting. The new listing requirement of KASE the listed company shall have the Corporate Governance Code based on the Model one. The Issuers Board under FSA approved the comments and amendments to Model Corporate Governance Code. This document still looks like tribute to strange fashion and not applicable for litigation.

5.

The KASE Experience in Managing the Thin Line Between Regulation and the Reluctance on the Part of Issuers to Fully Comply with Disclosure Requirements and Other Corporate Governance Practices There were no ready international standards and hints when in 1997 KASE started to design and develop its disclosure system. Many problems hinder this process, especially the lack of commonly recognized corporate procedures and structures of documents content, the absence of uniform accounting and reporting standards. Plus, as it mentioned above the situation was complicated by business-behavior problems (lack of habits and traditions). To pass this long and winding road KASE followed some basic principles:

the requirement must be reasonable, understandable and workable no any advanced requirement can be introduced until KASE is sure that this requirement may be proper fulfilled within the existing legislation, documentation, technologies and other circumstances the observance of the requirement must be executable and must not demand extreme resource-intensive efforts to meet it the requirement must be comfortable for the fitting to the maximum extent

Full name of the mega-regulator Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations.

Azamat Joldasbekov, May 27, 2010, Ulaanbaatar: The Experience of Kazakhstan in Corporate Governance Reform and Securities Market Development

KASE must be persistent and consistent in controlling the requirement it is better not to have the requirement rather than to have the numerous facts of breaking this requirement; only the extremely exceptions from the rules are acceptable the penalties for violations of requirements must be structured, uniform and irresistible the issuer should feel the constant monitoring from the KASE side

So, the creation and implementation of disclosure standards in greater wear a psychological nature. It was and still is the "chess-game", in which the right move must be done at right place and at right time. But: to be polite and patient in building the disclosure system doesn't mean to forget the ultimate goal of such building to provide investors with the necessary and sufficient information at the right time.

6.

The Kazakhstan Financial Regulatory Authority Practices in Regulation of the Markets and Enforcement Please, read the following strategic documents (in Russian only): Law On State Regulation and Supervision of Financial Market and Financial Institutions http://www.afn.kz/attachments/cont/publish858185_5867.doc; The Concept of Development of the Financial Sector of the Republic of Kazakhstan for 20072011 http://www.afn.kz/attachments/raznoe/publish589857_2034.pdf or http://www.nationalbank.kz/cont/publish718843_5051.doc; The Concept of Development of the Financial Sector of the Republic of Kazakhstan in the Post-crisis Period http://www.nationalbank.kz/cont/publish681711_6297.doc.

7.

The Balance Between the KASE and Kazakhstan Financial Regulatory Authority in Implementing Corporate Governance Codes and Regulations Though KASE has the listing requirement that the listed company should have the Corporate Governance Code based on the Model one approved by the Issuers Board under FSA, KASE absolutely don't like to be the controlling body for the corporate governance this sensitive matter is the area of relations between the company, its officials. shareholders and investors. But as KASE is a joint-stock company itself, it has own opinion about the proper corporate governance and does not hesitate to publicly protect and promote its views. And the main view is that the existing Corporate Governance Codes are wrong documents in a context where the law describes in detail almost all the necessary corporate procedures. The discussions are going on.

8.

What Were the Skills Training Needs, and Other Capacity Development Requirements in the Securities Market and What Was Done? In the very beginning of the national securities market Kazakhstan launched the certification system. The purpose of this system was (A) to educate the people who would like to work professionally on this market and (B) to permit access to these people to work professionally on this market. to work professionally on these market private educational centers, the "B" part was the state competence. This system was destroyed in 2005 as it provoked the corruption. Today the professional education and training is either the personal matter of the young students, or the company matter of the employers. No serious problems are detected in this area the special education is available in home country as well as abroad. Plus the enough number of experienced workers gives the opportunity to educate by the educated. And Internet, of course, is the most popular source of professional knowledge. The expatriate trainers are probably necessary only for the specific needs (e.g. to give the skills on new or complicated instruments, on mathematical approaches, on risk-management).

Azamat Joldasbekov, May 27, 2010, Ulaanbaatar: The Experience of Kazakhstan in Corporate Governance Reform and Securities Market Development

More important training is necessary in ethical field. The securities market of Kazakhstan is still young, but already was affected by booms and crises. Dominating idea of quick money by any means may destruct the market soon and at all. The country urgently needs such moral guidelines as the Code of Good Conduct or the Rules of Prudence. What was and is absolutely useful for the market development the regular fair evaluations of the market from aside. Such surveys help to understand the situation, to define the problems or malfunctions and to find the optimal solutions. Several groups of foreign experts who worked in Kazakhstan made great contributions to the market development. Thank them.

9.

Other Relevant Information and Lessons Learned Please, listen to my speeches and watch my presentations.