In its 2004 Corporate Governance Sector Assessment Project, the European Bank for Reconstruction and Development (EBRD) observed that corporate governance legislation in Kazakhstan is in "high compliance" with the Organization for Economic Cooperation and Development's Principles of Corporate Governance. Nonetheless, the report identified weaknesses with regard to the responsibilities of the board, disclosure, and transparency. Many of these deficiencies have since been addressed, in particular, with the introduction of the Law on Joint Stock Companies (JSCs) in 2003 and its subsequent amendments in 2005, as a 2006 EBRD report has noted. The report observed that these amendments enhanced the system of state regulation of JSC activity and the protection of shareholders' and investors' rights. Kazakhstan also introduced new auditing and accounting related legislation, requiring application of International Financial Reporting Standards (for listed entities) and International Standards on Auditing. In addition, the International Financial Corporation initiated the Central Asia Corporate Governance Project starting October 2006 (to be conducted over a period of three years) to improve corporate governance practices of joint stock companies and banks in Kazakhstan.

General Overview

According to a European Bank for Reconstruction and Development (EBRD) assessment conducted in 2004, Kazakhstan is in "high compliance" with the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance, indicating that corporate governance laws are relatively sound when compared to OECD Principles. However, deficiencies were identified. The assessment found "weaknesses in the areas of the board's responsibilities and disclosure and transparency" (p. 10). Further, the findings revealed that "the law does not require all shares to be fully paid before they can be transferred and to publish the list of shareholders not having fully paid the amount due" (p. 10). The assessment also found that the law did not address the board's responsibilities with regard to the nomination process for board members and the integrity of the Joint Stock Companies' (JSCs) accounting and financial reporting systems.

Many of these flaws were already in the process of being addressed at the time of the EBRD assessment and have since continued to be so. Kazakhstan's ongoing efforts to improve corporate governance practices started with a project titled "Building the Grassroots Foundation of Corporate Governance in Kazakhstan" under the University of International Business (UIB) in Almaty, as noted on the website of the Center of International Private Enterprise (CIPE), an independent, nonprofit affiliate of the U.S. Chamber of Commerce. Under a CIPE grant, the UIB issued a voluntary Corporate Governance Code in October 2001. In May 2003, another significant improvement was made with the enactment of a new Law on Joint Stock Companies. According to a 2007 press release from the International Financial Corporation (IFC), the Council of Issuers of Kazakhstan -- an advisory body under the Agency for Financial Supervision (FSA) -- adopted a Model Corporate Governance Code in 2005. The IFC also initiated the Central Asia Corporate Governance Project which started in October 2006, to be carried out over a period of three years. The project aims to improve corporate governance practices of local joint stock companies and banks in Kazakhstan. Additionally, Kazakhstan has introduced new auditing and accounting related legislation requiring application of International Financial Reporting Standards (IFRSs) (for listed entities) and International Standards on Auditing (ISAs).

According to the 2006 EBRD report, the Kazakh legal framework for corporate governance is primarily contained in the Law on Joint Stock Companies. This law was last amended in 2007. Previous amendments were intended to enhance the state regulation of JSC activity and the protection of shareholders' and investors' rights. Kazakh JSCs are organized under a two-tier system, in which the management board is appointed by a supervisory Council and the Council is appointed by the general shareholders meeting. Per the International Financial Law Review website, in January 2003, the Parliament of Kazakhstan also passed the Law on Investments which "represents an effort to consolidate separate past legislation governing foreign and direct investment and to level the playing field for domestic and foreign investors." The EBRD report noted that the Securities Markets Law (SML) regulates the "issue, placement, circulation, and redemption of securities and other financial instruments, the securities market participants, and the protection of investors' rights and securities holders" (p. 5). With regard to the regulatory framework, the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Markets and Financial Organizations (FSA) assumed the role of a consolidated regulator of the banking sector, insurance sector, and securities market and pension funds in January 2004.

According to the 2008 US Department of Commerce Country Commercial Guide, the Kazakhstan Stock Exchange (KASE) has been operational since 1997. As of December 2007, there were 69 listed companies with 31 "A-listed" stock issues; 38 companies with "B-listed" stock issues; and 5 non-listed issuers. There are also 62 "A-listed" and 26 "B-listed" corporate bond issues. Furthermore, total capitalization of the KASE (as of October 2007) was $71.95 billion or roughly 70 per cent of the GDP. It was observed that liquidity is low at the stock exchange "due largely to Kazakhstani companies' recalcitrance to dilute ownership and provide extensive disclosure, the Kazakhstani debt market is substantially more developed."

In its 2008 Doing Business report, the World Bank rates investor protection in Kazakhstan as being slightly above the regional average. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three aspects of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indices range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater shareholder powers to challenge the transaction, and therefore, better investor protection. Kazakhstan scores 7.0 in the disclosure index, against a regional average of 4.9 and an OECD average of 6.4. It scores 1.0 in the Director Liability Index, against a regional average of 3.8 and an OECD average of 5.1; and it scores 9.0 in the Shareholder Suits Index, against a regional average of 6.3 and an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

II

A 2004 EBRD assessment rated Kazakhstan in "high compliance" with the OECD Principles of Corporate Governance, indicating that corporate governance laws are relatively sound when compared to OECD Principles. Nonetheless, weaknesses were identified. Some of these flaws, however, have since been addressed. According to the CIPE website, the UIB formed a coalition of various stakeholders under a project titled "Building the Grassroots Foundation of Corporate Governance in Kazakhstan." As a result of these initiatives, in October 2001, the UIB under a CIPE grant issued a voluntary Corporate Governance Code. In May 2003, another significant improvement was made with the enactment of a new Law on Joint Stock Companies. More recently, according to a 2007 press release of the IFC, in 2005 the Council of Issuers of Kazakhstan -- an advisory body under the FSA -- adopted a Model Corporate Governance Code. The IFC also initiated the Central Asia Corporate Governance Project starting October 2006, to be conducted over a period of three years, to improve corporate governance practices of local joint stock companies and banks in Kazakhstan. Additionally, Kazakhstan has also introduced new auditing and accounting related legislation requiring application of IFRSs (for listed entities) and ISAs. However, the above cited information does not directly address Kazakhstan's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

II

According to the 2006 EBRD report, the Law on JSCs introduced in May 2003 had been amended in July 2005. As explained in the report, these amendments were made "in order to improve the system of state regulation of JSC activity and the protection of shareholders' and investors' rights" (p. 10). The 2004 EBRD report added that, "the law does not require all shares to be fully paid before they can be transferred and to publish the list of shareholders not having fully paid the amount due" (p. 11). In 2005 the EBRD conducted a survey for testing the effectiveness of corporate governance laws in practice, and concluded that there are "a number of procedures for obtaining disclosure in Kazakhstan, but their effectiveness might be undermined by their complexity, the difficulty of the enforcement, and the length of the proceedings, which might last more than one year in order to obtain an executable court order" (p. 11). Complexity in the procedures for obtaining redress was also identified as problematic. Additionally, the U.S. Department of Commerce (DoC) commercial guide pointed out "due largely to Kazakhstani companies' recalcitrance to dilute ownership and provide extensive disclosure, the Kazakhstani debt market is substantially more developed." Many of these deficiencies have since been addressed. The DoC Guide noted that "in March 2007, the Government accepted amendments to legislation regarding the protection of minority stockholders' interests." Despite this detailed information, the reports do not directly address Kazakhstan's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

II

According to the 2006 EBRD report, the Law on JSCs introduced in May 2003 had been amended in July 2005. As explained in the report, these amendments were made "in order to improve the system of state regulation of JSC activity and the protection of shareholders' and investors' rights" (p. 10). In 2005 the EBRD conducted a survey to test the effectiveness of corporate governance laws in practice, and observed weaknesses with regards to the position of a minority shareholder seeking to access corporate information on a presumed related-party transaction and to obtaining compensation in case damage was suffered. The survey concluded that a number of procedures for obtaining disclosure exist, however, "their effectiveness might be undermined by their complexity, the difficulty of the enforcement, and the length of the proceedings, which might last more than one year in order to obtain an executable court order" (p. 11). Complexity in the procedures for obtaining redress was also identified as problematic. However, the report does not directly address Kazakhstan's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

II

According to the 2006 EBRD assessment, the amendments made to the Law on JSC in 2005 improved "the system of state regulation of JSC activity and the protection of shareholders' and investors' rights" (p. 10). However, the report does not directly address Kazakhstan's level of compliance with this principle.

Principle V: Disclosure and Transparency

II

According to the 2006 EBRD assessment, a 2005 EBRD survey found that there existed "a number of procedures for obtaining disclosure in Kazakhstan, but their effectiveness might be undermined by their complexity, the difficulty of the enforcement, and the length of the proceedings, which might last more than one year in order to obtain an executable court order" (p. 11). Complexity in the procedures for obtaining redress was also identified as problematic. The 2004 EBRD assessment observed that the Kazakh legal framework was in "high compliance" with OECD Principles, but noted "weaknesses in the areas of the board's responsibilities and disclosure and transparency" (p. 10). Kazakhstan has introduced new auditing and accounting related legislation requiring application of IFRSs (for listed entities) and ISAs for auditing purposes. However, the sources do not directly address Kazakhstan's compliance with this principle.

Principle VI: The Responsibilities of the Board

II

Although, the 2004 EBRD assessment observed that the Kazakh legal framework is in "high compliance" with OECD Principles, the report noted "weakness in the areas of the board's responsibilities and disclosure and transparency" (p. 10). According to the 2006 EBRD report, "the law is silent on board responsibilities in ensuring a formal and transparent nomination process for board members; ensuring the integrity of the JSC's accounting and financial reporting systems; and ensuring that appropriate systems of control are in place -- particularly, systems for monitoring risk, financial control, and compliance with the law" (pp. 10-11). Also, the board is not legally required to have separate committees to deal with financial reporting, executive and board remuneration, and board nominations. The report, however, does not directly address Kazakhstan's compliance with this principle.