corporate governance and legal and judicial reforms in the smaller transition economies case of the...

Corporate Governance and

Legal and Judicial Reformsin the Smaller Transition Economies

Case of the Central Asian Economies, Azerbaijan and Mongolia

Presentation forFinancial Sector Issues in the CIS-7, May 13, 2003

Ms. Shamshad Akhtar

Deputy Director General,

ASIAN DEVELOPMENT BANK

April 20, 2023 [email protected] 2

Outline

I. Introduction

II. Internal Corporate Governance

III. Commercial Bank Governance

IV. Structure and Reforms of the Judicial System

V. Conclusion


I. Introduction

Key laws affecting corporate governance in STEs the Joint Stock Company (JSC) Law Securities market laws defines the rules of game for listed companies Commercial banking laws imposes governance standards on banks Some countries have launched corporate governance codes

Corporate sector: A large large segment of fixed assets and business remain in state sector Only 500 companies are listed across the STEs and most of them do not substantially

contribute to market capitalization, nor does the equity market significantly contribute to corporate finance.

Large segment of enterprises are insolvent Managers lack understanding of modern corporate governance Investors are not aware of their rights and weak perception regarding markets have

affected investment flows There has been a depletion of legal institutional resources after STEs-independence

(e.g. brain drain of qualified judges to Moscow), leading to inadequate capacity


II. Internal Corporate Governance

A comprehensive review of JSC Laws of STEs was conducted to assess its adequacy against the five major OECD principles of corporate governance:

1. Shareholder Rights

2. Equal Treatment of Shareholders

3. Creditor Rights

4. Disclosure and Transparency

5. Role and Responsibilities of the Board


1. Shareholder Rights

JSC law provides shareholders:

Reasonable voting rights and allows for one share one vote, adequate notice of shareholder meetings, and proxy voting by mail, although proxies are rarely solicited by shareholders due to difficulties accessing share registries

Holding of AGMs subject to quorum requirements of 50% in Tajikistan, and 60% in Azerbaijan, Kyrgyz Republic and Uzbekistan

Vote on material transfers of assets outside the company or increases in charter capital

Access to company information such as audited company accounts, and reports on operational and financial performance

JSC further provides for:

Issuance of golden shares in Kazakhstan and Mongolia in connection with privatization that can be used by the state to veto certain shareholder decisions. Until recently state trustees could veto shareholder decisions in Uzbekistan

Rights to call a shareholder meeting or add to the shareholder agenda are well defined, but typically there is no provision requiring for the periodic re-election of directors or appointment of auditors

Typically a super majority of shareholders is required to amend the company charter and approve decisions to transfer assets out of the company:

• Apart from Uzbekistan and Tajikistan, a majority is needed to amend the charter

• In Uzbekistan, the BOD can approve the sale of up to 50% of assets and the state can unilaterally increase shareholder capital if it holds 25% or more of the shares


2. Equal Treatment of Shareholders

Rights providing for equal treatment of shareholders are a critical requirement for foreign and minority shareholders, especially in the context of electing directors, during takeovers, and issuing new shares

To elect directors in most STEs, except for Tajikistan, the JSC provides for cumulative voting

None of the STEs have adequate provisions in law to protect minority shareholders of public companies with respect to takeovers or the issuance of new shares

A closely related issue to minority rights are provisions prohibiting insider trading;

with the exception of the Kyrgyz Republic, none of the STEs clearly prohibit insider trading, although the Mongolian Securities Law has provisions to develop measures in this regard


3. Creditor Rights

STEs generally have adopted a legal framework to protect secured creditors -- if a corporate borrower defaults on his payment obligations, secured creditors should legally be able to repossess collateral but the legislative framework for registering collateral and publicizing liens has not been sufficiently developed and/or effectively implemented:

Pledge registries are government agencies and suffer from capacity and funding problems

Although the STEs provide for non-judicial foreclosure of collateral pursuant to specific provisions in the pledge agreement, such provisions require public auction of the pledged property in line with the defined procedures: These procedures can be complicated and burdensome, may be set aside by the petition of a third party claimant, and public auctions may be postponed for up to one year by the debtor.

When a company cannot meet its financial obligations and creditors can not resolve their competing claims, bankruptcy proceedings can be initiated. The trigger for creditors to institute such proceedings varies assessed based on level of defaulted debt as % of the borrower’s equity or debtors inability to pay debt within a certain period.


3. Creditor Rights - Bankruptcy

The ability of creditors to initiate bankruptcy proceedings and effective use of such proceedings often encourages recourse to non-judicial settlement which could be more cost effective and time efficient

In STEs, except the Kyrgyz Republic, the debtor is stayed from disposing of its property after application for bankruptcy, which delays secured creditors’ claims to foreclose on pledged assets but enables a debtor to continue his operations without the threat of losing critical assets

Although some of the STEs, provide for non-judicial resolution of insolvency, judicial resolution of related issues is still required and debtors may convert the case into a court administered case

Bankruptcy legislation in the STEs generally provides for standards provisions such as the: Formation of a creditors’ committee to collectively represent creditors’ claims Appointment of an administrator to oversee the bankruptcy process Reorganization/rehabilitation option as an alternative to liquidation in appropriate cases


3. Creditor Rights – Priority of Claims in liquidation

In Azerbaijan, secured creditors appear to retain their priority,

Tajikistan provides secured creditors with priority as per the current Law on Collateral,

In Kyrgyz Republic, secured creditors and administrative expenses are paid first. A special administrator is required to provide the secured property to the secured creditor’s possession upon his request and can only sell the property with the secured creditor’s permission,

In Mongolia, the law substitutes secured creditor’s rights to specific collateral for a priority claim on the general assets of the debtor and tort claims. Trustee’s salary and expenses, claims under contracts and transactions concluded in the process of recapitalizing the debtor are given priority.

In Kazakhstan, secured creditors have priority after tort claims.

In Uzbekistan, secured creditors have priority after: (a) payment of wages, personal injury claims, claims of the state, alimony; and (b) demands on compulsory insurance and banks credits.


3. Creditor Rights - Bankruptcy

On an overall basis, the bankruptcy legislation is not being effectively implemented based on because of general lack of understanding of the bankruptcy process as well as: stigma associated with involvement in bankruptcy proceedings and its implications for future

business prospects,

difficulties for government creditors to be as flexible as private creditors which hampers the approval of rehabilitation plans by creditors,

fear by managers of their dismissal by special administrator,

absence of an effective collateral registration system,

absence of adequate accounting and asset valuation standards,

lack of qualified administrators and liquidators,

the absence of an effective judiciary which is instrumental in the bankruptcy process, and

judicial reluctance to play too active a role in the closure of liquidation of a company.


3. Creditor Rights – Alternative to Liquidation

STEs provide for rehabilitation of the debtor as an alternative to liquidation Rehabilitation is initiated by creditors and is a complicated process that is rarely used in

the STEs, Rehabilitation can be abused and may be used to stall liquidation, consequently

proceedings often go into limbo, assets are dissipated, and unclear rules often result in endless negotiations between parties.

Most of the STEs allow the debtor to apply to the court to stay bankruptcy proceedings to examine a sanation option which requires all of the creditors debts to be fully repaid and continuation of the debtor as a going concern. Sanation has not frequently occurred in the STES nor is it likely to be used as it is

highly unlikely that someone would agree to pay all of the debtor’s liabilities when rehabilitation proceedings provide that debts can be resolved without full payment (only the amount of payments that would be made in liquidation)

If such a proceeding is commenced, it is likely to delay a more realistic outcome and increase the losses being incurred by the debtor or increase the debt. Such proceedings can also take up to 6 months.



In order for shareholders and creditors to exercise their rights, they must be able to obtain information about the company and its financial condition, its shareholders, board, management and significant transactions

In STEs, it is extremely difficult for both regulators and shareholders to obtain information about shareholders:

Apart from Tajikistan, STEs have independent share registries, but information is difficult to access, and typically only includes information on nominee rather than beneficial shareholders,

In the Kyrgyz Republic, information in the share register is regarded as a commercial secret.

The inability to access information on shareholders creates a wide range of regulatory problems in the banking sector where financial industrial groups (FIGs) are evolving, leading to serious problems arising from improper related party transactions and excessive credit concentrations



The JSC laws in the STEs typically require the board to disclose information about the company and its financial condition to shareholders at the annual general meeting. However, some issues are noteworthy:

In most STEs there is no requirement, even for listed companies, to make the company charter and accounts publicly available,

Apart from Uzbekistan and the Kyrgyz Republic, there do not appear to be any requirements for public disclosure of the identification and background of board members, although in Kazakhstan board members must be disclosed to the regulator and the stock exchange,

Most of the financial information published by companies only has limited value due to accounting and valuation practices adopted and the lack of requirements to audit accounts or disclose conflicts of interest on related party transactions,

In most STEs, local accounting standards are used in preference to IAS and these fail to require information on issues such as obsolete assets and contingent liabilities, and

Similarly valuation practices do not reflect international standards and do not provide basis for making a judgment on company value.



There are relatively few requirements in the STEs to have company accounts audited and this problem is compounded by the potential for offers from local auditors to “improve” a company’s financial statements

In Kazakhstan, only category A listed companies are required to undergo an independent audit,

In the Krgyz Republic, laws adopted in July of 2002 support the introduction of international auditing standards for all JSCs. In the transition period, financial institutions and publicly listed companies need to be audited annually. It is only by 2004, that all open joint companies will need to be audited based on international standards,

In Uzbekistan, independent audits are only required for commercial banks,

In Tajikistan, there is no requirement for firms other than banks to be audited.

In part these provision recognize the serious lack of qualified accounting and auditing staff available in the STEs due to:

• The absence of accounting education and training facilities,• Lack of text books in local languages,• Lack of professional bodies to oversight of standards and their implementation, and• Lack of sanctions for failure to comply with standards



The BOD is the primary mechanism for enforcing standards of good corporate governance by bearing responsibility for ensuring that management acts on behalf of shareholders and disclosing information on company performance to shareholders; Ideally, guidelines should be specified in legislation that provide:

direction on how board members are appointed and dismissed, procedures for setting the board agenda, procedures when conflicts of interest arise, define the role and responsibilities of the audit committee, determine how board compensation is calculated, and specify experience and qualifications.

Generally, most STEs have a two tier board structure, with one board having supervisory powers that is elected by the shareholders and a second board that represents management

Few STEs have legal requirements governing the independence of board members The JSC in Kazakhstan requires half of board members to be independent (not employed nor

affiliated with the company for the past five years), and The Kyrgyz Republic provides that board members may not be shareholders. Banking law,

however, since 2003 requires independent directors (more on this in commercial banks corporate governance section).



The responsibilities of the board vary widely across countries

Board responsibilities are only vaguely defined in legislation in Kazakhstan and the Kyrgyz Republic and audit committee responsibilities do not appear to be defined in any legislation,

In the Kyrgyz Republic, the JSC law imposes broad liability standards on the board and management but they do not appear to be based on standards of negligence. However, under the Civil Code, the maximum fine that can be imposed for such violations appears to be about $40. Shareholders are also provided with atypical powers that undermine the separation of shareholders and the board of directors, including the right to suspend implementation of board decisions,

Mongolia’s JSC law specifies elaborate roles and responsibilities for the BOD, and liabilities of directors are determined based on duties set forth in a contract between the director and the company which reflects the company’s rules and procedures,

In Kazakhstan and Mongolia, the law imposes a general duty of care on company officers and members of the board and there is a requirement to act in good faith in the interests of the company, and

In Tajikistan, the JSC law is silent on the fiduciary responsibilities of the board and its decisions are not bound by any elaborated standards.


III. Commercial Bank Governance

1. Significance and Relevance of Commercial Banks Corporate Governance

2. Provisions for Banks Corporate Governance Standards

3. Ownership Concentration and Lack of Transparency

4. Weak Prudential Regulation

5. Inadequate Risk Management


1. Significance and Relevance of Commercial Bank Governance

Instituting high standards of corporate governance for banks is crucial because of

Banks’ role and functions in liquidity generation, financier of businesses, and protection of depositor liabilities,

Banks have small equity that is often highly leveraged,

Risk of collusion between banks and enterprises or other subsidiaries whose ownership may be interrelated

Need to discipline corporate borrowers whose governance failures, attendant losses and inability to repay borrowers’ monies may spread to the banking system and have an economy wide and/or global implications.


1. Significance and Relevance of Commercial Bank Governance

Given the special attributes (discussed above), besides requiring compliance with internal corporate governance norms to preserve shareholder value, banks require a different, and more elaborate/complex regime of corporate governance than non-financial enterprises

In particular, an exclusive reliance on addressing the principal-agent problem between owners and managers is not sufficient for commercial banks as they take excessive financial risks and there is a dynamic relationship between the banks, the corporate sector, and the market at large.

Bank regulation, whose primary concern is to prevent systemic instability, alters the parameters of the agency relationship by introducing a third party – the regulator, that serves as an additional external force to ensure that shareholders and managers act to lend prudently.

STEs have attempted to upgrade the legal framework for commercial banks, but a number of factors undermine these efforts and constrain the development of this sector and these are further discussed in next few slides


5. Provision for Banks Corporate Governance

BIS standards of corporate governance of banks includes, among others:

Adoption and effective communication of policies that prohibit activities such as conflicts of interest, lending to employees and other forms of self dealing or preferential treatment to related parties,

Setting and enforcing clear lines of responsibility and accountability throughout the bank,

Ensuring that board members are qualified for their position, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns,

Ensuring that the BOD understands its oversight role and duty of loyalty to the bank and its shareholders, has the power to question management and provide objective advice and avoids conflicts of interest,

Establishing specialized BOD committees to focus on risk management, audits, compensation and board nominations, and

Conduct corporate governance in a transparent manner.


5. Provisions in Banking Legislation for Corporate Governance

Besides JSC Law, banks need to conform to provisions of the commercial banking law, but among STEs only few countries have taken some important initiatives to strengthen the corporate governance provisions in law which need to be fine tuned further. For instance:In the Kyrgyz Republic, amendments to Law on Banks and Banking in 2003, among

others, require:• all members of BOD be independent – this requirement is more stringent than the

general norms which require majority (rather than all) members be independent; Definition of “independent” in the amended law is also not appropriate – as it calls for all members of BOD to have no relations or business with shareholder but is silent on BOD relations with the management. Persons representing large shareholders and CEO/CFO are often a part of the Board in other countries,

• Under Article 14 (1) 4 provisions for licensing, principal shareholders owning more than 5% or more of the shares of the company to seek approval of central banks,

• BOD to continuously conform to certain fitness criteria which disqualifies persons with conviction, or being a manager of an entity under bankruptcy proceedings, or who has been deprived of right to be included in management. Besides the need for further enhancement of this provision, the qualification criteria needs to be extended to principal shareholders and management of banks so that the shareholders not conforming to these requirements could be disqualified,


5. Provisions in Banking Legislation for Corporate Governance

• Election of an audit committee by the AGM of shareholders, establishment of a credit committee of management and has no provision for risk management committee; Besides need to define more enhanced role for audit committee, there is need to recognize that an audit committee elected by shareholders may not be as effective for accountability as a committee of the Board and that Establishment of committees under the BOD for internal audit and risk management,

• specific fiduciary duties on bank directors and managers, • requires disclosure of directors and managers’ financial interests, includes requirements

to avoid conflicts of interests by directors and managers, and • requires non-preferential conditions for bank transactions with related parties

Azerbaijan, Kazakhstan, Mongolia and Tajikistan impose “fit and proper” qualification standards on directors (honesty and competence) and restrict transactions with associated/related persons on more favorable terms.


Implementation of Corporate Governance Provisions

In case of payment difficulties of a borrower, bank managers extend maturities, settle for partial repayments, and roll over credits, rather than to engage in foreclosure of assets of insolvent enterprises through the court system, as enforcement procedures of the courts are slow, unreliable, and costly

To offset high regulatory risks, lenders have adopted a policy of fully securing all the loans in nearly all corporate transactions and the collateral taken is typically twice the value of the loan advanced.

Implementation of corporate governance standards has been weak In the Kyrgyz Republic, corporate governance problems in banks have arisen due to shareholder

interference with management • For example, the shareholders of Maksat Bank instructed management to illegally transfer out

of the bank all of its capital which caused the bank to fail. • Insan Bank made loans to connected persons at low rates and received the funds back as

deposits on which the bank paid higher interest rates. In most of the STEs, bank boards have not become effective governing bodies (e.g. Kazakhstan,

Tajikistan, Mongolia)• Notwithstanding, the recent success of Agricultural Bank in Mongolia, which opted to enter

into management subcontracting arrangement, could serve as a successful model for the region.


2. Ownership Concentration and its Implication for CG

Apart from Uzbekistan, commercial banks in most STEs are now in private sector and the legal framework in the STEs limits individual shareholdings of bank shares Azerbaijan limits individual shareholder to 12% of equity capital, Kazakhstan limits to no more than 22%, Kyrgyz Republic limits to 15%, and Acquisition of bank shares may require Central Bank (or Monopoly Commission)

approval. For example, Kyrgyz Republic requires persons who seek to acquire 5% or more of issued shares of a bank to apply in writing to the Central Bank 40 days prior to acquisition.

Information on bank ownership structure is not public, however, it is well known that Bank ownership is concentrated, Banks are owned by Financial Industrial Groups (FIGs) or banks own other financial,

intermediaries and/or businesses, and Interconnected lending is quite prevalent and monitoring not rigorous.


2. Ownership Concentration and its Implications for CG

Kyrgyz Republic has 19 banks About one-third of the deposits held by state owned banks, Private banks small and owned by individuals or groups connected with real sector entities (cotton and

mineral extraction etc.). Typically a financial group includes some resource oriented development and processing companies and at least one commercial bank.

Even though over 40% of capital of the system is held by foreign shareholders, this has not help improve corporate governance; these partly or fully foreign owned banks are niche players catering to their specific sector/business interest.

Senior managers of the banks are often managers of the business groups. Kazakhstan has 41 commercial banks.

The top three banks (Kazkomertz Bank, Turon-Alem Bank and Norodny Savings Bank) control 60% of total assets and 70% of total deposits and are affiliated with insurance companies and non-financial companies including those in the Erel Group, Bodi Group and Petrovis-Capitron Group, creating complex financial conglomerates.

Tajikistan has 15 commercial banks Of the top four banks, one of which is state owned,the privately owned Agroinvestbank accounts for

70% of banking sector assets with about half of its credit portfolio backed by cotton sales agreements to its largest single shareholder who is also the largest cotton buyer in Tajikistan.

Uzbekistan has 38 bank Sector is predominated by state; although direct shareholdings of government is reported to be around

50%, indirect shareholdings through enterprises with majority state ownership add an additional 25%. There is generally one large holding company covering several enterprises that have equity stakes in

the banks.


3. Prudential Regulation

In 1990s, the STEs were preoccupied with establishing a core banking system and focus was on bank restructuring and consolidation in wake of emerging insolvencies resulting from imprudent and reckless lending or because of the impact on business and banks of the Russian crisis in 1998

Prudential regulation of the STEs banking sector has been evolving, however, enforcement is exacerbated by:

inability of the central bank to effectively regulate and supervise the system: some central banks have better capacities in this area than others,

poor reporting by banks, inadequate accounting and auditing systems, the lack of transparency, and lack of capacities to supervise FIGs and related party lending.


3. Prudential Regulatory Frameworks for STE banks

The National Bank of the Kyrgyz Republic (NBKR) has been significantly strengthened in recent years to resolve issues arising from problem banks and a new law governing bankruptcy of banks is being re-considered. Many of issues related to prudential regulation have been strengthened in the recently adopted

Law on Banks and Banking Activity (March 26, 2003) which provides, among others:• Removal of definitional inconsistencies, including those pertaining to a bank’s capital,• Strengthening the role and authority of the NBKR in issuance and revocation of licenses and

overall supervision, with clear criteria to determine regulatory actions, and • Organizational and methodological requirements for risk management, including operational

risk , market risk, interest rate risk and credit risk as well as overall supervision. The National Bank of Kazakhstan (NBK) has defined the preconditions for an

effective banking supervisory framework and has established a reputation as an efficient and unbiased regulator. Banking standards are based on the BIS requirements but currently only incorporate 17 of the 30

core principles, The number of banks violating prudential norms has been declining, and The legal framework has been strengthened to allow the NBK access to information on regulated

entities, obstacles remain to collect information on non-licensed entities as a group.

Bank of Mongolia (BOM) regulations and reporting requirements are reasonably well developed, although they do not fully comply with BIS principles.



Risk management across the commercial banks in STEs is fairly rudimentary

Key regulatory concerns are related to credit and liquidity risks. The STEs generally define individual party exposure and limit lending on preferential terms to “related persons,” which may be defined to include shareholders, officers and directors of bank subsidiaries and affiliates (e.g. in Uzbekistan & Kazakhstan), and

Internal controls continue to be equated to internal audit and there is a lack of a control environment that entails senior bank management commitment.



Central banks: Are not equipped to assess risks related to the operations of commercial banks, Do not proactively review risk and risk management procedures within commercial banks, Do not provide regulatory guidance yet on market risk, interest rate risk, operational risk, country

risk or transfer risk assessment and management, and Do not monitor effectively connected lending, including indirect violation of credit extension

restrictions.

Perspective at country level NBKR is actively working with commercial banks on how to address specific risks. In 2002, NBKR

took regulatory actions against 7 banks for inadequate risk management,

NBK has encouraged banks to improve their risk taking and management and has held management accountable for prudential standards; banks in cases tend to practice risk avoidance rather than active risk management,

In Tajikistan and Uzbekistan, reform of internal control and risk management systems has been very limited,

In Mongolia, credit analysis is in its infancy, and

Finally, none of the countries have effective credit information bureau.


IV. Structure and Reforms of the Judicial System

1. Historical Role and Evolving Structure of the Judiciary

2. Lack of Independence and Capacity

3. Distorted Incentive Framework

4. Lack of Transparency

5. Difficulty in Enforcing Judgments

6. Judicial Reforms

7. Alternative Dispute Resolution


IV. Structure and Reform of the Judicial System

A legal regime for shareholder and creditor rights is not effective unless it is supported by an accountable, effective and independent judicial system to enable: The prompt and impartial determination of rights and remedies, and Issuance of enforceable orders,

The legal regime needs to be supported by efficient, ethical and competent Judges, prosecutors, arbitrators, bailiffs, bankruptcy administrators and liquidators banking and securities regulators, company and property registries, and private bar, accountants, auditors, etc.

Judicial inefficiencies in STEs weaken shareholder and creditor rights and lead to higher transaction costs that stems from: Historical role and structural problems of the judiciary in STEs which served state interests, Lack of judicial independence and capacity, Distorted incentive framework, Lack of transparency, and Lack of enforceability of judgments.


1. Historical Role and Evolving Structure of Judiciary

In the STEs, prior to independence, justice was controlled by the State as reflected in and the role of the procuracy which investigated and prosecuted crimes and monitored the judge’s conduct in court, including the legality of any verdict, sentence or decision.

STEs adopted either a tripartite court system or a unified court system.

The tripartite system (adopted by Tajikistan, Uzbekistan and Azerbaijan) has no single center of authority over different courts that include the:

• Constitutional Court reviews laws and other normative acts to ensure that they comply with the Constitution,

• Courts of General Jurisdiction over all matters not involving business, and• Economic Court hears all business related matters.

The Courts of General Jurisdiction have three levels with the Supreme Courts at the highest level followed by oblast courts and the raoin courts dispensing justice at lower level

Economic Courts include courts at the oblast level and the Higher Economic Court at the highest level

Azerbaijan also has an Economic Court for Cases Arising Out of International Agreements.


1. Historical Role and Evolving Structure of Judiciary

The unified court system (adopted by Kazakhstan and Mongolia) is centralized and headed by a Supreme Court with the two lower levels of courts

In Kazakhstan, a new set of specialized courts has been created at the inter-raion level which are subordinate to the oblast courts but distinct from the general raoin courts. These new courts are designed to re-introduce specialized adjudication of commercial disputes at the lower level of the judicial system for domestic cases involving sums below a set threshold, not involving foreign parties (approximately less than $25,000) and having geographic jurisdiction over a number of raions in an effort to reduce the influence of local authorities in the adjudication of cases.

A new law on administrative courts was recently adopted to enable the development of a model Administrative Court in Ulaanbaator City.

The Kyrgyz Republic recently amended its Constitution to incorporate the Arbitration Court (Economic Court) into the courts of general jurisdiction and enable, among others, economic and commercial disputes to be held at the raion level. The country will continue to have a separate Constitutional Court.



In STEs, judges are appointed by the President, although legislation may provide Parliament with a role in the nomination and approval process

In Azerbaijan, Uzbekistan and Tajikistan, tenure is 5 years, In Mongolia tenure is 6 years, in Kyrgyz, Constitutional Court judges and supreme court judges are appointed for 10

years and lower court judges are appointed for 7 years, and In Kazakhstan appointments are permanent, judges’ tenure is limited.

The STEs vary in terms of the legal framework to remove judges In Tajikistan there is no constitutional provision to remove higher court judges; lower

court judges are appointed or dismissed by the President on the proposal of the Council of Justice,

In Uzbekistan, the Parliament can terminate the power of Supreme and Higher Economic Court judges at the President’s request,

Mongolia has established a Judicial Disciplinary Committee under the General Chamber of Courts, with broad representation from the legal community) that reviews ethical breaches and recommends sanctions to the President, and



Qualification requirements for judges have been generally adopted in STEs and include, among others,

a law degree,

minimum age (higher court 35 years old, 25 years old for lower court), and

ten years professional experience for higher court judges and 5 for lower court judges, and/or special examinations.

All of the STEs have judicial training centers which has not appeared to improve judicial capacity to understand the increasingly complex legal framework.


3. Distorted Incentive Framework

Salaries for judges are very low across STEs Tajikistan pays judges below the poverty level ($17 per month), making it difficult to attract and

maintain qualified candidates and deter rent seeking activities, In Uzbekistan, lower court judges are paid between $20 and $30 per month and higher court

judges are not paid much more. In some rural areas, judges continue to farm in order to survive. Constitutional Court judges are paid salaries comparable to high level government officials,

In the Kyrgyz Republic, as of February 2003, adjustments in salary has raised payments to higher court judges are paid $450 a month and $190 a month for lower court judges,

In Kazakhstan, Supreme Court judges receive $500 per month and lower court judges earn less, and

In Mongolia, salaries range from $70 per month for regional judges to $76 per month for provincial judges and $85 per month for a Supreme Court judge. A system of supplements calculated a a percentage of judge’s income (66% - 78% for the Chief Judge of the Supreme Court) increases the basic salary. However, these salaries are in line with civil service salaries in general.

Working conditions in STE courts are poor due to Insufficient funding for the court system, Courts, especially those at the regional level, lack modern computerized tracking and filing systems

for court cases, copying machines, other equipment, and adequate logistical support, and Given these factors and low performance of courts public respect for the institution is low.


4. Lack of Transparency

Difficult to assess how the judiciary functions in the STEs

Scarcity of data in all of the STEs,

As is common in civil law systems that do not acknowledge case precedent, court decisions in the STEs are generally not published and/or when available, information concerning the underlying rationale for court decisions is not included,

Judges may not understand prior verdicts and thus treat similar cases differently, and

Difficult to assess the attitudes of judges and their understanding of their role. Legal professional may not understand the role of judicial interpretation and discretion in a functioning legal system.


5. Difficulty in Enforcing Judgments

Even where judgments are rendered,: they may be difficult to enforce, the temptation for losing parties to ignore court decisions is widespread, and enforcement mechanisms are inadequate. Only available enforcement officers are judicial

executors and bailiffs and courts and they have only limited powers to ensure that these officers actually enforce judgments. Bailiff Services may not be fully staffed, funded or trained. Courts often lack rules to deal with contempt or disobedience of court orders

Some country perspectives In Mongolia, bailiffs are offered incentives for executing decisions based on percentage of value of

the judgment (needs to be closely monitored to ensure it is not abused),

In Kazakhstan, the Ministry of Justice employs judicial executors to enforce writs of execution against recalcitrant debtors as well as bailiffs to, among others, serve judicial notices, enforce fines and assist judicial executors in executing orders. Judicial executors and bailiffs work on an incentive system – judicial executors receive a portion of the judgment they collect and bailiffs receive a payment for each notice served,

In most STEs, there is no system to place a judicial lien on debtor’s property.


6. Judicial Reforms

Some of the STE’s have taken steps to set up independent institutions to support their judiciaries Kazakhstan has moved administrative responsibility for the court system from the Ministry of

Justice to a Judicial Administration System under the Supreme Court, Mongolia established a General Council of Courts to oversee the judiciary, including the

preparation of draft budget for submission to Parliament, and Tajikistan has moved administration of the judiciary from the Ministry of Justice to the Council of

Justice which is actively involved in the selection of judges.

In STEs generally most of the investigatory powers previously provided to the procuracy have been now provided to the judiciary. However, in Tajikistan, the office of the Procurator General continues to have investigative, supervisory and some judicial functions.

In the Kyrgyz Republic recent amendments to the Constitution enable the courts of appeals/higher courts to render decisions with finality, thus limiting the number of appeals that can be brought. Prior to such decisions, plaintiffs were required to go through a number of appeals. For example, in

trying to foreclose on a secured claim, the the Debt Restructuring Agency went through 37 appeals and its case was finally rejected by the court concerned.



Alternative Dispute Resolution is emerging as an alternative form of commercial disputes for claims involving foreign investors.

Mongolia, Kyrgyz Republic, Kazakhstan and Azerbaijan have developed a legal framework for arbitration

The Legal Framework includes the Constitution, Civil Code and the Law on (Foreign Investments), international treaties and contractual provisions obligating the parties to use arbitration to resolve disputes. While the Civil Codes refer to arbitration generally, most STEs have functioning frameworks only for disputes involving foreign investors,

Kyrgyz Republic, Mongolia and Azerbaijan have adopted specific laws on arbitration, and

Azerbaijan, Kazakhstan, Kyrgyz Republic and Mongolia provide for arbitration through the International Center for Settlement of Investment Disputes or as per the rules of the United Nations Commission on International Trade (UNCITRAL).



Difficulties in Enforcing Foreign Arbitration Awards

Although Azerbaijan, Kazakhstan, Kyrgyz Republic and Mongolia are signatories to the Convention on Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958, courts in the STEs tend to reject foreign arbitration awards on the grounds that there are no implementing laws or clear procedures. To date, none of the STEs has adopted satisfactory procedures for issuance of writs of execution for foreign arbitration awards,

In the Kyrgyz Republic, although a new law was adopted to permit domestic and foreign arbitration of commercial disputes, amendments are needed to the Civil Code to ensure enforcement of awards, and

In Uzbekistan, additional problems in enforcing foreign arbitration awards arise based on currency conversion issues.


V. Conclusion

The STEs are moving in the right direction by introducing legislative frameworks that include, at least, some provisions that deal with strengthening corporate governance of firms and banks. Progress has been uneven driven by exclusive concentration of drafting of laws with ad hoc or incomplete treatment of international standards. As such

Gaps and inconsistencies exist in laws. For instance, shareholders rights may be overdefined and role and responsibilities of BOD under defined,

Frameworks, including implementing regulations and procedures need to be streamlined and clarified to promote compliance,

Greater awareness has yet to occur among stakeholders of the merits of changes, Penalties are either low or not enforced, and Regulators weak capacities and understanding of the law and regulations has impeded

enforcement.


V. Conclusion

Corporate governance of banks, a crucial element of enforcing higher standards of corporate governance among borrowers, is very weak and often not defined in the Law on Banks and Banking.

Institutional capacity to implement such framework needs to be significantly developed through higher qualification requirements for judges, on-going training programs for judges and regulators, and enhanced transparency of the decision making progress.

Judicial system, given the high degree of politicization and linkages with vested interests and weak incentive framework for judges, is unable to enforce rights and contracts or render timely decisions.


Recommendations

It has to be recognized that

Laws need to be further perfected,

Ownership structures ought to be transparent and greater effort is required from regulators to enforce prudential regulations and adopt appropriate risk management,

Non-government organizations need to be encouraged to effectively monitor compliance with corporate governance standards,

Investor education and awareness campaigns need to be launched,

Independent and reliable credit information bureaus need to be developed and effectively regulated to monitor credit worthiness of borrowers, and

Judiciary needs to be fundamentally transformed.

corporate governance and legal and judicial reforms in the smaller transition economies case of the...

Documents

corporate finance

shareholder agenda

shareholder capital

certain shareholder

shareholder rights jsc

company charter

company information

governance standards