The unveiling of the "Handbook on Corporate Governance for Supervisory and Management Boards Members of Companies in the Republic of Uzbekistan" during Chapter Zero's press conference on February 27th marked a pivotal moment in the country's corporate governance landscape. The comprehensive handbook aims to elucidate the concept of corporate governance, offer practical recommendations, and bolster the effectiveness of boards of directors in Uzbekistan.

Correspondent of Daryo got exclusive interviews from the panelists at the conference and inquired about the field of audit in Uzbekistan.

Olzhas Omarov, Director, Governance & Sustainability Services KPMG in the Caucasus and Central Asia, highlighted that in Uzbekistan, a notable trend is the increasing adoption of risk-oriented internal audits, in line with international standards. This transition is becoming widespread among various enterprises beyond commercial banks, primarily observed in the financial sector due to a Central Bank resolution.

Since the opening of the Uzbekistan market post-2016, major firms like the big four have been operating in the country, initiating competition inquiries about standing out. Market competition is evident and that is why each company aims to carve its niche:

"We are going to differentiate ourselves through a combination of KPMG's international and local expertise by helping our clients to apply world's leading governance practices with understanding of Uzbekistan's business environment's specifics. In particular, I also joined KPMG's Tashkent office last year, to be close to our clients and promptly address their needs," says the expert.

Competition and Market Differentiation: Insights from KPMG

Addressing market development, Karen Srapionov, Chapter Zero's Advisory board member and partner at Avesta Investment Group, emphasized that investors in Uzbek companies, as any other at the frontier markets, face numerous risks due to the nascent stage of governance processes. Initially, these risks involve shareholder and management relations, alongside the persistent threat of corruption.

But later, a significant challenge for the company's development awaits in management's unfamiliarity with corporate governance, investor communication, and ensuring investor interests. Despite external financing, companies often operate without regard to established norms. Over time, these risks diminish, giving way to technical concerns like planning, budgeting, climate, and commercial risks. This progression is a natural part of development, which leads to an eventual focus on long-term strategies.

Regular audits are indispensable rather than problem-solving measures; they are akin to breathing. Audits offer external investors insights into a company's inner workings, with higher-quality audits inspiring investor confidence.

"The higher the quality of audit, the higher interest to review and invest, the more authoritative and professional the team does it, the more it inspires confidence among investors."

Risk Landscape and Corporate Governance in Uzbekistan: Identifying Challenges and Solutions

Denis Spirin, Steering Committee Member at Chapter Zero Uzbekistan, shed light on corporate governance risks in Uzbekistan, emphasizing the need for meticulous scrutiny of company practices to manage risks effectively. Currently, these risks remain notably high, evident both in practical instances and the existing corporate governance structures within companies.

Investors, especially institutional ones, should actively engage with companies, advocating for increased transparency and improved governance practices. Ultimately, transparency serves as a cornerstone for bolstering market confidence and attracting investments, aligning with the broader goal of developing the capital market to attract foreign investors and foster sustainable growth.

Understanding Corporate Governance

Building robust corporate governance, alongside sound climate governance, is a nuanced and deliberate process. It necessitates time, dedication, and a steadfast commitment from shareholders, boards, and management. Corporate governance transcends procedural compliance; it embodies ethical conduct and strategic foresight, serving as a cornerstone of a company's competitive advantage.

Each jurisdiction and company therein possess unique attributes, rendering a one-size-fits-all governance solution impractical. However, universal principles provide guiding frameworks when contextualized within specific environments. By aligning with these principles, companies can chart a path towards progress and sustainability.

Systematic Implementation of Recommendations

The handbook advocates for the systemic and consistent implementation of governance recommendations by stakeholders. While tangible outcomes may not materialize immediately, initiating the process promptly and adhering to substantive actions are imperative for progress.

Developed by esteemed members of Chapter Zero Uzbekistan's Steering and Advisory Committees, including Odil Musaev, Denis Spirin, and Karen Srapionov, with support from the EBRD team comprising Pavle Djuric, Umidjon Abdullaev, Divya Chawla, and Solomiia Petryna, the handbook stands as an accessible resource for enhancing corporate governance practices.

Corporate Governance Landscape in Uzbekistan

The corporate governance system in Uzbekistan underwent a comprehensive assessment in 2020 by the EBRD. The assessment aimed to measure the alignment with international best practices across five key areas: Structure and Functioning of the Board, Transparency and Disclosure, Internal Control, Rights of Shareholders, and Stakeholders and Institutions. The assessment revealed areas of strength and weakness, highlighting opportunities for improvement.

Uzbekistan's dynamic economic landscape, marked by a 6% GDP growth in 2023 and a projected growth rate of 6% in 2024, underscores the relevance of corporate governance. Initiatives such as attracting foreign investors, privatization programs, and the development of the local capital market drive the imperative for effective governance frameworks.

In response to evolving governance needs, Uzbekistan implemented strategic reforms, including the approval of the Strategy of Management and Reform of State-Owned Enterprises for 2021-2025. The strategy, developed with international financial institutions' support, aims to enhance governance practices, increase board independence, and foster transparency.

Legislative reforms, such as the adoption of the Corporate Governance Code in 2016 and the Law on State Property Management in 2022, further underscore Uzbekistan's commitment to strengthening governance frameworks. The introduction of updated Corporate Governance Rules for state-owned enterprises reflects a concerted effort to enhance transparency, mitigate conflicts of interest, and promote ethical conduct.

Strategy Implementation

The "Strategy for the Management and Reform of State-Owned Enterprises for 2021-2025" (the Strategy) in UzSAMA's 2022 annual report witnessed notable progress across various fronts:

• Regulatory Framework Enhancement: Legislative reforms, including amendments abolishing the special right of the state to the "Golden Share" and extending the term of office for members of executive bodies and supervisory boards to three years, underscore a commitment to modern governance practices.

• Privatization Initiatives: Efforts to privatize state assets gained momentum, with a significant increase in asset sales observed. The reduction of state-owned enterprises by 40% reflects a decisive move towards market-driven mechanisms.

• Market-oriented Reforms: Initiatives to introduce modern market approaches to financing non-commercial purposes of SOEs and eliminate existing monopolies signal a shift towards fostering competition and efficiency.

Corporate Governance Methods Implementation

The implementation of modern corporate governance methodologies witnessed significant strides:

• Supervisory Board Formation: Transparent and merit-based processes for forming supervisory boards were established, facilitated by the launch of a dedicated web portal and the association of independent members.

• Corporate Governance Assessment: A robust assessment framework based on OECD principles was developed and applied to assess corporate governance systems in joint-stock companies, ensuring alignment with international best practices.

• Transparency and Disclosure Practices: Measures to enhance transparency, such as publishing information on state-owned enterprises' financial performance and operational efficiency, were introduced, bolstering accountability and stakeholder trust.

Internal Controls and Compliance

Internal audit committees, compliance services, and supervisory boards were reinforced to ensure effective oversight and risk management:

• Internal Audit Services: The establishment of internal audit services in a significant portion of state-owned enterprises enhances risk management and operational efficiency.

• Compliance Services: The implementation of compliance services in joint-stock companies with state participation further strengthens governance frameworks and fosters ethical conduct.

• Supervisory Board Committees: The formation of committees under supervisory boards, including audit, strategy, investment, nomination, remuneration, anti-corruption, and ethics committees, enhances oversight and governance effectiveness.

Streamlined Selection Processes

Transparent and standardized procedures for selecting supervisory board candidates were introduced, ensuring merit-based appointments and fostering diversity:

• Selection Procedure: A structured selection process, including vacancy identification, publication of criteria, candidate search, shortlisting, interviews, and final candidate selection, promotes transparency and fairness in board appointments.

• Timely Resolutions: Efficient decision-making processes ensure prompt resolutions on candidate elections, enabling swift implementation of governance reforms.

Follow Daryo's official Instagram and Twitter pages to keep current on world news.