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 KAZAKHSTAN International Business Magazine №4, 2007
 Corporate Governance. Kazakh Reality
Corporate Governance. Kazakh Reality
By Anastasiya Raziyeva, lawyer of the Premier Asset Management company
Kazakh big and rapidly-growing medium-sized companies are increasingly actively employing modern management methods. They are adopting management accounting, international financial accountancy standards, quality and risk management systems and internal auditing, and so on. As their interest in attracting investment is growing, above all, through initial public offerings, new instruments such as corporate governance are becoming more popular.
It is believed that the adoption of corporate governance best practices – a wide range of recommendations made by investors, international organisations, financial institutions and consultancies.
The Organisation for Economic Cooperation and Development, which unites 29 developed economies, defines corporate governance in its Principles of Corporate Governance, which explains that corporate governance is internal mechanisms to manage corporations and control them, ensuring a system of relations between the management of a company, its board of directors, shareholders and other people concerned.
Corporate governance is used to determine a company’s targets and ways of achieving them, as well as ensuring control over this process. Proper corporate governance should ensure appropriate incentives to make sure that the board of directors and managers achieve targets to meet interests of the company and interests.
According to the World Bank’s definition, corporate governance combines legislation and private sector practices that enable companies to attract financial and personnel resources, efficiently using activities and continuing efficient functioning, accumulating long-term economic value for their shareholders and observing interests of partners and company in general.
Corporate Governance Models
There is neither a universal model of corporate governance, nor the common principle of building body structure of a company. Nevertheless, two models can be singled out:
The Anglo-American model is used in the USA, Britain, Canada, Australia, New Zealand and other English-speaking countries. It is characterised (1) by individual shareholders with the constantly growing number of independent, not linked to a company, shareholders (they are called outside shareholders or outsiders); (2) a clear legislative basis, defining the rights and obligations of three key players – managers, directors and shareholders; (3) a relatively simple mechanism of relations between a company and shareholders, and between shareholders themselves (both at annual general meetings and in between them).
In this model of management there is a single board of directors, who have “controlling” and “management” functions. In order to ensure the proper fulfilment of both functions, it is made up of executive directors who act as managers and independent directions who are controllers and strategists.
The German model is characteristic of Germany and the Netherlands. Its management body has two-tier structure and made up of a supervisory body which includes independent directors and a board which includes managers. The peculiarity of the German model is the clear division of “controlling” functions from “management” ones in a company: the supervisory body controls the executive body which manages the day-to-day operations of a company.
There are also other differences between the Anglo-American and German models of corporate governance. For example, in the first model property is very scattered and interests of partners in corporate governance are not represented, while outsiders do not have enough incentives to take part in corporate supervision and hostile takeover is widespread and so on. The German model, on the contrary, has property concentrated in few hands, the observance of interests of all partners and control by sides concerned – banks, partners and staff members, and no hostile takeovers and so on.
The Anglo-American and German corporate governance models are opposite models between which there is a wide range of forms of corporate governance existing in other countries. At the same time, they are mutually excluding and their elements may combine, creating mixed models.
It should be noted that Kazakhstan, like other transitional countries, has intermediary models of corporate governance that are being built up.
Our Own Model
The analysis of international experience shows that the Kazakh system of managing major holdings and corporations has many commonalities with the aforementioned models. However, the Anglo-American model is more popular.
Important factors that influence the formation of the Kazakh model of corporate governance are the following:
·  the structure of shareholders in companies;
·  the specific of the financial system in general, as a mechanism of transforming savings into investment (types and distribution of financial contracts; the state of financial markets; types of financial institutions; the role of banks;
· shares of sources of funding of companies;
·  macroeconomic and economic policy in the country;
·  the political system (there is research that draws direct parallels between the political system “voters-parliament-government” and the corporate governance model “shareholders-board of directors-managers”);
· the history of development and modern peculiarities of the legal system and culture;
·  traditional (historical) national ideology;
·  the established practice of business relations;
·  the traditions and level of government involvement in the economy and its role in regulating the legal system.
Practical Application
While defining the boundaries of corporate management, i.e. separating functions of corporate governance from managing company activities, let us consider the existing three-tier management hierarchy in Kazakh companies using the example of the Premier Asset Management company.
There are individuals who pursue their own aims within companies: (1) shareholders (owners); (2) hired top managers accountable to owners (management); (3) hired workers.
Relations between medium and low levels of the hierarchy make up the very essence of management of a firm's activities – functions of professional specialists in running business operations. In other words, management is concentrated on mechanisms of running business.
At the same time, the category of corporate governance is far wider.
Firstly, this is relations between top and medium levels of the hierarchy - running a company by hired managers in the interests of owners. This means that the owners delegate the right to run the firm as a property to managers for the term of a contract.
Secondly, in a wider sense corporate governance mechanisms reflect relations of many economic players whose interest is related to a wide range of aspects of a company’s functions (shareholders, the board of director, managers, creditors, staff members, suppliers, buyers, government officials and local authorities).
The overlap of functions of corporate governance and management takes place only while drafting a company’s development strategy.
Our company has now adopted a code of corporate governance, dividend policy, the statute on the board of directors, and endorsed the organisational structure that clearly defined duties of top managers and heads of department, organised the work of the board of directors and regulating mechanisms of passing decisions. There are some politicians who define specific functional aspects: personnel policy; motivation policy; risk management policy; information technology management policy and so on. The company regularly holds meetings of the board of directors and the personnel and remuneration committee, and the audit and finance committees.
The company’s observance of the main principles of the proper corporate governance has started to play a greater role in adopting decisions on attracting investment. Interest in international standards of corporate governance has now grown.
At present, many local companies by law have to draft and adopt codes of corporate governance. However, many of them do this just to tick the boxes – to submit a formal report or to get into the Kazakh Stock Exchange’s listing. As a rule, they copy the code of corporate governance from a more developed company or Western company, coarsely adapting it to Kazakh reality. It is superfluous to talk about the real adoption principles of corporate governance specified in similar documents that are being borrowed.
For the proper development of a company, above all, it is necessary to improve the managerial education both of owners and top and medium-level managers. We are now observing that this process is developing and it aims to hire professional top managers and attract professional advisers to building a management system. This process is already developing in Kazakhstan, although with problems and controversy.
What We Need
Our country is at the stage of creating companies and holding companies of traditional types. They aim to compete against foreign companies, above all, on foreign markets, while suppressing competition on the domestic market. An acute need in investment in acquiring material assets, not human capital, arises. Since the volume of this investment exceeds domestic capabilities of companies there emerges a need to receive sizeable external resources. However, in case of attracting outside investors, because of differences in interests, conflicts emerge immediately between foreign investors and managers. This may paralyse companies, wasting intellectual, organisational and managerial resources, and producing bad results for its competitiveness.
This and other problems can be solved only if the corporate governance system is built properly, in a way that envisages the rational distribution of rights and obligations between parties involved. The main elements of this system include the transparency of the structure of property and the organisation of a company, shareholders’ involvement in its management, the efficient protection of minority shareholders, and ensuring high-quality and reliable business information for all shareholders.

Table of contents
Competitiveness. A Step Forward, Two Backward  Sergey Gakhov, Yelena Zabortseva 
Rating of Kazakhstan... Goes Down  Ben Faulks, Luc Marchand 
Corporate Governance. Kazakh Reality  Anastasiya Raziyeva 
Stock Market: Evaluation and Forecasts  Zhasulan Bekzhigitov 
Exchange Summaries. Mess and Disorder  Tatyana Kudryavtseva 
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