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Austrian Journal of Humanities and Social Sciences 5-6 (2017)^^^ Economics
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- ISSN 2310-5593 (Print) / ISSN 2519-1209 (Online) -
UDC 65.01 DOI: http://dx.doi.org/10.20534/AJH-17-5.6-60-65
S. Sh. Makhmudov1 M. Raimova 1
1 Karshi State University, Karshi, Uzbekistan
COMPARATIVE ANALYSIS OF THE GERMANY AND UZBEKISTAN CORPORATE GOVERNANCE CODES
Abstract
Objective: to make comparative analysis of the corporate governance codes of Germany and Uzbekistan. Methods: There is used the method of comparative analysis in the article.
Results: Researchers can learn the advantages and disadvantages of the two codes and can use the findings of the article in their studies.
Scientific novelty: The Code of Corporate Governance is a new law in Uzbekistan and developed on the basis of successful experience of Germany and other highly developed countries. We analyzed Germany and Uzbekistan Corporate Governance Codes and gave recommendations for the elimination of disadvantages in the article.
Practical significance: Joint stock companies can use the conclusions of the article, in particular recommendations for the development of rules in their activities.
Keywords: Management, corporate governance, joint stock company, code, general meeting, shareholders.
Introduction
The diversity of property relations that is among the validity conditions of the market economy, in turn, requires improvement of joint stock companies (JSC) along with other forms of ownership. The development of corporate governance is also connected with the process of privatization of state property. As a result of this work, many joint-stock companies have been established in Uzbekistan. The activities of large enterprises in the form of JSC, which make a significant contribution to the growth of the country's gross domestic product, also attest to the great importance of the development of corporate governance. Uzbekistan such as the many countries of the world connects the way of its development with the socio-economic system of the market economy. To improve the activities of the JSC, there are many features of Uzbekistan, such as attracting foreign direct investments, further improving the efficiency of joint-stock companies, ensuring their transparency and attractiveness for future investors, introducing modern corporate governance practices, creating favorable conditions for strengthening the role of Shareholders in the strategic management of enterprise.
Results of the research
On the basis of the decree PF-4720 "On the measures of introduction of modern methods of corporate governance in joint stock companies" [1] of the first president of Uzbekistan I. Karimov on April 24, 2015 developing of Uzbekistan Corporate Governance Code [2] (UCGC), which was approved at the meeting on December 31, 2015 by the Commission for enhancing the efficiency and improvement of the Corporate Governance System of joint-stock companies at the meeting on December 31, 2015, was the first step towards the implementation of the above mentioned tasks.
For additional information, Commission for enhancing the efficiency and improvement of the Corporate Governance System of JSC is established to assess the effectiveness of the joint-stock companies of Uzbekistan on the basis of the Resolution of the President of the Republic of Uzbekistan of March 31, 2015 № PF-2327. One of the main tasks of the Commission is to conduct a systematic study of the financial and economic activities of domestic JSC, as well as to determine the prospects for their further development.
Economics
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In this regard, a thorough study of the activities of of signs of economic insolvency and other indicators and
joint-stock companies created by the Governmental requirements established by the legislation. As a result
Commission was carried out to determine their compli- of the study, 364JSC were identified that do not comply
ance with the size of the authorized capital, the presence with the requirements established by law.
Table 1. - Comparative analysis of the Germany and Uzbekistan corporate governance codes
№ Chapters of UCGC Chapters of GCGC
1 General rules Foreword
2 Provision of transparency of activities Shareholders and the General Meeting
3 Introduction of mechanisms of effective internal control Cooperation between Management Board and Supervisory Board
4 Ensuring implementation of the rights and legal interests of shareholders Composition and Compensation
5 Determining the development strategy and tasks for a long-term perspective Supervisory Board
6 Implementation of mechanisms of effective interaction of the executive body with shareholders and investors Transparency
7 Conflict of interest Audit of Annual Financial Statements
8 Introduction of a typical organizational structure
9 Publication of information based on international audit standards and financial statements
10 Monitoring implementation of code recommendations
11 Final provisions
Below we will make a comparative analysis of the Code with Germany Corporate Governance Code [7] (GCGC), and evaluate its significance for enhancing the efficiency and improvement of the Corporate Governance System of joint-stock companies according to the management principles.
It should be noted that, GCGC was developed by Germany Corporate Governance Commission in February, 2002 and published in the Official Gazette. In contrast to UCGC, GCGC is compulsory for JSC which possess exchange quotations. It applies to companies that are either public or have other securities — for example, bonds — traded in regulated markets, including multilateral trading platforms (MTFs). This rule of law requires companies to provide a declaration of compliance with the requirements (Entsprechenserklarung), which must be published in the online version of the Official Gazette. Companies that fully comply with the provisions of the code can simply state that they comply with the established requirements in full; Other companies should give explanations as to which provisions they are not observing, sometimes limited to the word-
ing that they will not apply certain provisions, or that the individual provision is not adapted to the specifics of the company. The statements relate to past facts and the company's intentions for the near future, with the latter part not mandatory [3].
As Chris Pierce said: All of the European jurisdictions have companies acts that regulate the activities of companies. These laws typically draw clear "lines" to distinguish legal from illegal activity.
Soft law is typically composed of corporate governance codes that contain "recommendations" for good and responsible governance. Typically, companies are required to report to their shareholders on a comply-or-explain basis.
If a company chooses to depart from a corporate governance code, the company must explain in its annual report to shareholders which parts of the code it has departed from and why it has done so. A comply-or-explain approach provides companies with flexibility to adapt their corporate governance to their specific situation. Technically, "apply or explain" (associated with the King Reports in Southern Africa) is a more accurate term than
Austrian Journal of Humanities and Social Sciences 5-6 (2017)
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Economics
"comply or explain," but it is rarely used in Europe other than in the Netherlands (which is the country that first brought in this expression) [5].
At first glance we can see the difference between the numbers of codes' chapters. UCGC consists ofll chapters and 42 articles, and there are 7 chapter and 32 articles in GCGC.
If we look at the names of the codes, the question arises: Are there any differences in the essences of the codes like their number of chapters?
"General rules" — the first chapter of UCGC and "Foreword" — the first chapter of GCGC, and "Provision of transparency of activities" — the second chapter of UCGC and "Transparency" — the sixth chapter of GCGC are essentially focused on the same issues.
Today it is not a discovery for anyone that the application in practice of transparent and fair rules and well-established mechanisms of observance of the legal norms of corporate governance ensure the attractiveness of the domestic economy for both domestic and foreign investors and extending far beyond the interests of shareholders or corporations is a critical factor of economic growth.
Second chapter of GCGC (Shareholders and the General Meeting) is devoted to Shareholder powers and their relation with the General Meeting.
Board-centric systems (like those of Germany, Italy, the Netherlands and Poland), reserve only certain key powers to the general meeting. These powers are defined in the law either by a catch-all clause (such as "economically important decisions") or by a catalogue of fundamental decisions, such as charter amendments, share issuance, mergers, divisions etc. In shareholder centric systems, like the U. K., the division of powers between the board and the shareholders is left to the articles of association, but the shareholders may decide in all matters that lie in the competence of the board and may change its decisions by reaching a 75 per cent majority of the votes [4].
It is mentioned that an auditor is appointed by the General Meeting of the Shareholders in the second chapter of GCGC.
GCGC: "2.2.1. The Management Board submits to the General Meeting the Annual Financial Statements and the Consolidated Financial Statements. The General
Meeting resolves on the appropriation of net income and the discharge of the acts of the Management Board and of the Supervisory Board. It elects the shareholders' representatives to the Supervisory Board and, as a rule, the auditors" [7].
According to chapter 3 article 16 of UCGC, General Meeting of the Shareholders approves the "Regulations on Internal Control", and defines the requirements for the structure and members of Internal Control Body (Revision Commission and the Internal Audit Service) of the JSC, and develops order of attracting independent professional organizations — consultants to assess the effectiveness of the system of the internal control body of the JSC. If we consider that it is emphasized the issue of self-control in UCGC, the General Meeting of the Shareholders should seriously consider above mentioned recommendation and appointing of the auditor a in separate paragraph of the Regulations will be consistent with the objectives.
"Ensuring implementation of the rights and legal interests of shareholders" — Chapter 4 of UCGC and "Shareholders and the General Meeting" Chapter 2 of GCGC are similar in content. Issues on the rights of the shareholders which can't participate in the General Meeting of Shareholders, the realization of the necessary measures which directed to ensure the implementation of the rights and legitimate interests of shareholders, shareholders' rights of preferential purchasing of shares proportionally to the share in the authorized capital in the event of the issue of additional shares are reflected in both of the codes.
In addition, the UCGC has several chapters containing issues which are not envisaged in GCGC. In particular, while there is not any article provided for minority shareholders committee in GCGC, in UCGC there is mentioned that minority shareholders committee activities to be organized on a voluntary basis taking into account the scale, nature and direction of the network of JSC, and expenses of minority shareholders committee are covered by the JSC funds.
We can bring as evidence for above mentioned idea that the Ministry of Justice on August 27, 2015 for № 2712 registered the order of the Center on 10.08.2015 № 2015-09 on approval of the Regulations on the pro-
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cedure for the activities of the committee of minority shareholders in the JSC.
This Regulation was developed in accordance with Article 82 of the Law of the Republic of Uzbekistan "On Joint Stock Companies and Protection of Shareholder Rights" (dated 05.05.2014 №. O'RQ-370), according to which, in order to protect the rights and legitimate interests of minority shareholders in a JSC, a committee of minority shareholders may be established from among them. In the election of members of the committee, shareholders present at the general meeting of shareholders who did not nominate candidates to the supervisory board or whose nominees were not elected to the supervisory board at the general meeting of shareholders held.
The committee can not include a director, members of the management board of the company, as well as persons elected to the supervisory board and the audit commission (auditor) of the company.
According to clause 1 of the Regulations, minority shareholders are understood to be the owners of shares whose participation and voting at the general meeting of shareholders does not affect the results of voting on the agenda of the meeting.
In clause 7 of the Regulation it is established that the decision to elect members to the committee is adopted by the general meeting of shareholders for a period of one year.
In accordance with clause 12 of the Regulations, in order to organize the activities of the committee, the head of the executive body of the company is obliged to create the necessary working conditions for the members of the committee by allocating a working space, computer equipment, safe, telephone or facsimile connection.
It's said in Chapter 5 (Determining the development strategy and tasks for a long-term perspective) of UCGC that elaborating and approving of a long-term development strategy of JSC for a period of more than 5 years are carried out by the General Meeting of the Shareholders, and Chapter 3 (Cooperation between Management Board and Supervisory Board) of GCGC says that strategic aspects ofJSC are carried out on the basis of mutual consent of Management and Supervisory Board.
GCGC: "3.2. The Management Board coordinates the enterprise's strategic approach with the Supervisory
Board and discusses the current state of strategy implementation with the Supervisory Board in regular intervals" [7].
From our point of view, assigning of the task of elaborating a long-term development strategy to the General Meeting of the Shareholders is very important in strengthening the role of shareholders in the strategic management of enterprises.
It's mentioned in GCGC that the General Meeting of the Shareholders is to be invited for a period not less than once a year, and according to UCGC, governing body of JSC usually refers the date of the general meeting in JSC's charter.
Besides, issues such as reimbursement of the damage caused to the enterprise as a result of violation of the principles of management by a member of the management or supervisory board, establishment of a franchise in professional liability insurance contracts, credit allocation to the management or supervisory board or members of their families are not mentioned in any paragraph of UCGC. The main reason of these shortcomings is there is stipulated in UCGC, that JSC develops 5 regulations in order to establish its activities effectively. These regulations are followings:
1. Regulations on Information Policy
2. Regulations on the Supervisory Board
3. Regulations on Internal Control
4. Regulations on Dividend Policy
5. Regulations on the procedure of acting during the contradiction of interests
In our view, it would be useful if there were given instructions referred on above mentioned cases in these regulations.
There are given recommendations on avoiding the situations related with conflict of interest and conflict resolution measures in chapter 7 of UCGC. Although this issue is not included as a separate chapter in GCGC, but chapter 4, article 3 and chapter 5, article 5 of the code are dedicated to conflict of interest.
Conclusions
Rules and norms of corporate governance are important components of the framework for successful market economies. Although corporate governance can be defined in a variety of ways, generally it involves the
Austrian Journal of Humanities and Social Sciences 5-6 (2017)
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Economics
mechanisms by which a business enterprise, organized in a limited liability corporate form, is directed and controlled. It usually concerns mechanisms by which corporate managers are held accountable for corporate conduct and performance.
Corporate governance is distinct from and should not be confused with the topics of business management and corporate responsibility, although they are related [8].
The effectiveness of the corporate governance system depends on the trust of the public, and it can not be obtained without the timely provision of complete and reliable information. The appropriate mode of disclosure is the main prerequisite for the shareholders to exercise their rights, protect their legitimate interests and is one of the main ways of corporate control. For investors and creditors, the forms in which shareholders exercise their ability to control the activities of the management of a JSC and participate in the adoption of critical decisions must be understandable and acceptable.
To improve the domestic corporate governance system, it is necessary to create a flexible mechanism for investing domestic investors in the country's economy, widely introduce generally accepted international corporate governance standards into the practice of domestic JSC, create reliable legal mechanisms to protect investors' rights, ensure a high level of information transparency of the corporate sector, to develop and implement a system for collecting, analyzing and monitoring information
JSC, which will allow for the rapid accounting, processing and transmission of information through electronic channels, analyze and take, if necessary, operational measures to curb violations of the law.
The developed Code of Corporate Governance of Uzbekistan summarizes the best world practice, adapted for use in JSC of the Republic, and its successful implementation will promote the introduction and further improvement of the basic principles of corporate governance in the companies and firms of Uzbekistan, ensuring transparency of JSC activities, protecting the rights and legitimate interests of shareholders. In addition, it is noted that it is necessary to identify financial sustainability, increase labor productivity, increase production and export performance, achieve energy efficiency, modernize, technically and technologically upgrade production as strategic objectives of enterprises. Well-educated young people who own modern methods of corporate governance come to the leading positions of JSC. This, in turn, will give a new impetus to the activities of many enterprises, ensuring sustainable growth of the Uzbek economy, despite the deepening crisis in most countries of the world [6].
In conclusion, Uzbekistan Corporate Governance Code developed on the basis of successful experience of Germany and other highly developed countries, is compatible with the principles of science of management and can be recognized as high code of comparative value within the framework of international norms.
References:
1. Collection of the legislation of the Republic of Uzbekistan, - 2015, - № 17, - article 204.
2. Uzbek Corporate Governance Code. The text of the Code was published in "Xalq so'zi" newspaper on March 11, - 2016.
3. Wymeersch, Eddy. "European Corporate Governance Codes and Their Effectiveness." In Boards and Shareholders in European Listed Companies Facts, Context and Post-crisis Reforms, ed. Massimo Belcrediand Guido Ferrarini, - 2013. - 67-142. Cambridge University Press.
4. Massimo Belcredi, Guido Ferrarini. The European Corporate Governance Framework: Issues and Perspectives. Working Paper N°. 214/2013 May - 2013.
5. A Guide to Corporate Governance Practices in the European Union. URL: http: ifc.org/corporategovernance.
6. Авазходжаева Д. М. Особенности внедрения системы современных методов корпоративного управления в Республике Узбекистан//Молодой ученый. - 2017. - № 15. - С. 321-323.
7. German Corporate Governance Code. URL: http://www.ecgi.org/codes/documents/cg_code_germany_ 24jun2014_en.pdf
Economics << Austrian Journal of Humanities and Social Sciences 5-6 (2017)
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8. Comparative Study of Corporate Governance Codes Relevant to the European Union And Its Member States. On behalf of the EUROPEAN COMMISSION, Internal Market Directorate General. January - 2002.
Information about authors
Sukhrob Sh. Makhmudov, teacher of the Chair of Economy and service, Karshi State University
Address: 16/28 Korasoy str., Karshi, Uzbekistan,
Tel.: +998 97 313 07 86
E-mail: smahmudov01@gmail.com
ORCID : http://orcid.org/0000-0001-5137-8239
Muborak Raimova, teacher of the Chair of Economy and service, Karshi State University Address: 21 Kunchikar str., Karshi, Uzbekistan, Tel.: +998 90 608 82 19 E-mail: first_sm@mail.ru
