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Kyrgyzstan Review, 10 years ago

J. Corporate Governance

442. The Corporate Governance and Enterprise Reform Program, supported by the Asian Development Bank, was the most important program of institutional reforms and structural adjustments carried out in the real sector in recent years. The newly developed corporate governance guidelines aim to improve the legal and regulatory framework of corporate relations, increasing responsibility, transparency and accountability of corporate management in joint stock companies (JSCs). The guidelines were developed together with a standard charter for JSCs. Amendments and addenda were made to the legislation related to corporate governance issues.
Over 500 JSCs have revised, adopted, and reregistered their charters in accordance with the principles of corporate governance. These included the countrys three largest joint stock companies, KyrgyzTelecom, KyrgyzEnergo, and Kyrgyzstan Airlines (the last two were restructured in 2001 and several JSCs emerged as a result). Clear distribution of authority and decision making functions among various management units of JSCs were the most important aspects of the introducing of corporate governance principles in local companies. The Corporate Governance and Enterprise Reform Program paid special attention to raising shareholders awareness of corporate issues and their rights, and encouraged greater participation in the management of joint stock companies. Another useful measure was the introduction of the position of a Company Secretary, the office responsible for JSCs relations with their shareholders.
The Program has helped to establish a basic legal and institutional framework for development of corporate governance, and a legal framework for bankruptcy. Principles of corporate governance were applied to key areas of the production sector. An environment has been created to ensure practical implementation of legislative requirements on issues of financial insolvency and bankruptcy. All objectives of the Program were achieved and the outcome was highly praised by international experts. Moreover, the Program was named a model program for development of corporate governance and enterprise reform in transition economies.
443. In spite of these significant achievements, a number of issues requiring urgent attention were identified in the course of program implementation.
The institutional environment and the legal framework for effective corporate governance need to be further developed. The existing mechanisms for protection of the rights of small shareholders are insufficient. Shareholders and JSC management bodies have limited capacity and skills to adequately monitor the completeness and correctness of applying legal norms regulating JSC activities. Many JSCs have the problem of poor management.
The policy and environment necessary for monitoring corporate governance are weakly developed. Large shareholders are not always aware of their powers or, if aware, prefer to neglect them. Insufficiently strict criteria for appointment of Board members lead to conflict of interest. Lack of clear corporate policies in joint stock companies negatively affects management. The capacity of the State to monitor and regulate legal aspects of corporate governance needs to be considerably enhanced, especially in the companies with state shareholdings in them.
Corporate governance principles are still weakly applied in the banking sector. Interventions of commercial banks shareholders into banks decision making on lending are becoming frequent incidents that lead to issuance of credits to the people affiliated with banks large shareholders and subsequent deterioration of the financial situation in the bank. Despite the enhancement of banking regulations, some legislative flaws and problems on resolving disputes have prevented the National Bank of the Kyrgyz Republic (NBKR) from effectively carrying out its banking supervision functions.
There is a lack of reliable and transparent information on the condition of various enterprises. Some reporting requirements are complex and hinder effective analysis of the financial condition of the enterprises.
Implementation of international accounting and audit standards is still insufficient. Although USAID has assisted in retraining accountants and financial specialists of more than one thousand economic entities, the following problems remain:
  • many enterprises have not adopted international accounting standards, including many large joint stock companies with the state shareholding in them;
  • lack of adequately trained specialists in the State Tax Inspectorate who can work with financial statements prepared on the basis of international standards of financial accounting; and
  • legislative contradictions related to international standards of financial accounting.
Operational and financial activities of many enterprises are weak. Many joint stock companies operating in such strategically important sectors as machinery building, light and food industry, as well as in the extracting industry, are in great need for working capital. This, along with poor financial discipline and low competitiveness of final products, is the main reason for bankruptcy of many business enterprises. It is critical to urgently assess the viability of companies and assist with development of appropriate recovery and restructuring programs.
444. Given the existing situation, the Government and ADB have developed the Second Corporate Governance and Enterprise Reform Program, which was launched in 2001.
The goal in the area of corporate governance and enterprise reform is to enhance the corporate governance and financial management of business enterprises in order to strengthen the confidence of investors and raise the effectiveness of such enterprises. To achieve this goal the state policy should focus on the following priority areas:
  • development of political, institutional, and legal environment for enhancement and application of effective corporate governance;
  • broad introduction of international standards of financial accounting, audit, and assessment;
  • strengthening management in commercial banks; development of legal regulations for the protection of creditors rights;
  • promoting judiciary and legal reforms in the area of commercial dispute resolution, simplifying judicial process and procedures; and
  • restructuring inefficient but viable enterprises, liquidation of nonviable enterprises.
445. These measures envisage:
  • elaboration of a corporate governance development concept to the year 2006;
  • independent assessment of corporate governance practice in companies listed by the Kyrgyz Stock Exchange;
  • removal of civil servants from the management of joint stock companies that have state shareholdings in them, and replacing them with professional managers selected on a competitive basis; each management position should be assigned a duty statement that sets out the requirements for a position and the responsibilities to be assumed in the joint stock company
  • implementation of proposed measures should later be monitored by the State;
  • developing qualification upgrading system for state representatives participating in management of joint stock companies with a state shareholding in them;
  • development of standard corporate regulations on management, codes of ethics, and other aspects of corporate governance using the principles of corporate governance developed by the Organization of Economic Cooperation and Development (OECD), and ensure their wide dissemination;
  • bring legislation into compliance with the international accounting standards; raising the quality of control and monitoring carried out by state regulatory agencies over conformance with legislation by the corporate managers and boards of directors;
  • enhancing the financial and operational transparency in public joint stock companies;
  • adoption by joint stock companies of the international standards of financial accounting by the year 2004;
  • transferring some state functions on regulation of corporate relations to self-regulating entities; developing a system of extrajudicial resolution of corporate disputes;
  • strengthening corporate governance in commercial banks;
  • further improvement of legislation on bankruptcy and protection of creditors rights; encouraging voluntary restructuring and bankruptcy of unprofitable enterprises that have arrears to the state.
446. Promotion of reforms under the corporate governance development concept for 2003-2006 envisages:
raising the effectiveness of corporate governance systems (refining the principles, expanding the scope, and creating adequate implementation mechanisms);
encouraging establishment of noncommercial organizations (associations, funds, and community associations), protecting the rights and legal interests of shareholders in such organizations;
extra judicial resolution of corporate disputes;
training professional managers; and
encouraging development of internal corporate relations systems in joint stock companies.