CC BY
20
UDC 330
U.I. Djumaniyazov
THE TENDANCES OF DEVELOPMENT AND IMPROVING CORPORATE GOVERNANCE IN UZBEKISTAN
This article discusses the issues of implementation of effective corporate governance system in Uzbekistan, as well as analyzes of corporate governance requirements, along with the basic problems of the implementation of the corporate governance system.
Keywords: Corporate Governance (CG), Joint-Stock Company (JSC), Gross Domestic Product (GDP), Organization for Economic Cooperation and Development (OECD)
One of the most important tasks to improve the efficiency of production at industrial enterprises in Uzbekistan is to improve the system of corporate governance. So far, the variety of positive steps has been taken in this direction. In other words, corporate development is occurring on the basis of corporate governance features at national corporations, concerns, associations, industrial holdings, joint-stock companies and limited liability companies, and of socio-economic development at national level.
Moreover, corporate governance is historical development; at certain periods it represents the organizational and economic relations, and their mutual dependence. The formation of large-scale corporate governance during the past totalitarian system while maintaining the strategic importance of large-scale production and scientific-production associations makes necessary to recognize the experience of foreign countries in such areas. Indeed, though the role of small business in the development of the market economy is of great importance, organize their activities in the form of large financial and industrial corporations ensure free competition with large global corporations.
The corporate governance also has an important role in independent and moderate development of national economy without economic crises, investment to the production and in the effective use of investment funds. It also creates crucial conditions for the development of production forces, the application of modern production technologies for entrepreneurship in the conditions of market economy. Therefore, during the current formation of the modern market economy the theoretical and methodological study of corporate governance development is vital.
Besides, corporate governance is also essential in terms of social and economic terms. Economic essence of corporate governance is following:
S corporate governance allows optimal distribution of material production and labor at both micro and macro-level management;
S it leads to amalgamation of corporate governance laws with the laws and regulations of the market economy;
S corporate governance based on multi-sector production leads to the development of modern sectors of the industry and production;
S corporate governance unifies economic relations;
S it improves the quality of manufactured products and increases sales prices to improve the income;
S it also allows consumer market expansion by improving the price formation for products.
Social aspects of corporate governance are as follows:
© Djumaniyazov U.I., 2016. DOI: 10.15350/2221-7347.2016.9
""Djumaniyazov Umrbek Ilxamovich - Assistant Lecturer of the Department "Economic Analysis and Audit", Tashkent State University of Economics, Uzbekistan.
S corporate governance improves economic relations between production entities from different industrial sectors; it also expands the social postion of production forces as a result of the effective use of resources;
S application of R&D achievements in the production process allows reduction of the labor costs compared to other production costs;
S labor productivity growth as a result of efficient corporate management allows to have more leisure time for workers;
S it creates sufficient economic conditions in workforce replacement;
S corporate governance improves consumption level by expanding production process, advancing the quality of products, thus cutting the per item costs;
S corporate governance improves further the manufacturing, economic and social relations;
S improve staff training and creates opportunity to have a second profession;
S Improving the health, housing and living conditions of the employed in manufacturing.
Unique to the market economy, corporate governance is a management method formed as a result of world economic development. Therefore, the methods of corporate governance play an important role in improving the effectiveness of national economic activity. After all, as mentioned by the President of the Republic of Uzbekistan, "Uzbekistan is the integral part of the international community and global financial and economic markets. This is confirmed by the ever increasing links with the outside world, the implementation of the programs for development of economic sectors with the support of the developed countries in modernization, technical and technological re-equipment, and the growth of exports and imports of goods by the integration to international trade, and by other facts [1]".
It is known that the effectiveness of corporate governance depends upon the macroeconomic stability, and the state support for enterprises of the real sector. In this regard, such state support of the real sector enterprises in the framework of anti-crisis measures against the global financial and economic crisis influenced to gradual introduction of corporate governance principles to them. In particular, support of the enterprises of the real sector addresses for modernization, expansion of cooperative ties, establishment close cooperation, stimulating the domestic demand for the local goods.
Over the past years, a number legal acts that influence directly and indirectly to the development of corporate governance was adopted and implemented. In particular, the Constitution of the Republic of Uzbekistan, the property law, law "On denationalization and privatization", Companies Act, Entrepreneurship Law, Law "On joint-stock companies and shareholder rights", Law "On protection of the rights of investors in the securities market", Law "On competition and restriction of monopolistic activity on the commodity markets, Law "On foreign investments", Law "On guarantees of the rights of foreign investors and measures to protect them", Law "On guarantees of freedom of entrepreneurship", the decrees of President of the Republic of Uzbekistan "On improving the system of economic management bodies", "On measures to drastically improving the share and importance of private sector in the Economy of Uzbekistan", "On measures to further improve the financial stability of the enterprises of the real sector of the economy", "On measures to support enterprises of the real sector of the economy, to ensure their stable operation and the program to increase the export potential", "On approval of the procedure for the sale of insolvent enterprises to commercial banks, the order of the Cabinet of Ministers of the Republic of Uzbekistan "On measures to improve corporate governance at denationalized enterprises" are some of them.
Thus, several steps have been taken for further development of corporate management in 20142015.
In January 2015 the President of the Republic of Uzbekistan delivered a speech dedicated to the development of corporate governance Uzbekistan at the meeting of the Cabinet of Ministers. In particular, it was mentioned that serious attention requires a radical change in the principles and approaches to corporate governance, introduction of advanced international standards of corporate management of production, foreign trade and investment processes.
First, you need to critically assess the effectiveness of our corporate or joint-stock association, compared with similar foreign, especially in developed countries, especially in the sphere of industrial production, this ownership is dominant today.
Joint-stock form of ownership is gaining more importance. And as the result of decentralization and privatization, more than 1,100 joint-stock companies (JSC) were founded. Their total capital amounts to more than 11.7 trillion soums, and in the last ten years has this figure has grown by 5.3 times.
We must now recognize that the increase in the scale of corporatization demonstrates the many unresolved problems in corporate governance and the distribution of income from the activity, a number of other areas of the privatization process.
This is especially true of joint stock companies where the owner of stakes in the state. In such societies, the shareholders, especially minority shareholders, effectively cut off from the real management and decision-making due to the low volume and fragmentation of shares.
As a result, the actual management of production still carries the director's body, which is often not interested in the efficient use of resources, expanding the product range, reducing production costs and increasing the competitiveness of its products. That he is a supporter of the old administrative-command management style, where the predominant mechanism of subjective "manual" control, which leads to passivity and lack of initiative of administrative staff, waiting for commands from above.
Today, it has accumulated sufficient experience, which shows that in Uzbekistan the most acceptable and justifies itself option is a form of ownership where the owners of the shares are, in addition to domestic and foreign investors [1].
Today in the republic successfully operates more than 4 thousand enterprises established with foreign capital participation from more than 90 countries.
These companies, operating in the country, well known in Uzbekistan and abroad. On the territory of Uzbekistan successfully operating companies, fully based on foreign capital and foreign corporate governance. We need to better understand the experience of foreign companies and, based on this analysis to establish standard corporate governance structure for our businesses, actively implement them, on that basis, reconstructing and reforming the whole system of management of our joint-stock companies in all sectors and areas of the real economy [2].
Moreover, decentralization and privatization measures, as a part of post-independence economic reforms towards market economy, led to increasing role of non-state ownership, especially, in GDP production (1-diagram).
However, such increase in the scale of corporatization demonstrated many unresolved problems in corporate governance system, and in the distribution of income from the activity of JSCs. This is especially true for joint stock companies where the owner of most stocks is the Government. In such companies, the shareholders, especially minority shareholders, are effectively cut off from the real management, and from decision-making due to the low volume and fragmentation of shares.
As a result, the actual management of production is still carried out by the directors, who are often not interested in the efficient use of resources, expanding the product range, reducing production costs and increasing the competitiveness of their products.
Moreover, they are supporters of the old administrative-command management style, where the mechanism of subjective "manual" control is predominant, and which leads to passivity and lack of initiative of administrative staff, waiting for commands from above.
Today, sufficiently accumulated experience shows that, in Uzbekistan, the most acceptable and justified form of ownership is foreign investors' ownership of the shares, in addition to domestic ones. However, corporate governance (CG) still remains mysterious phenomenon for most investors. Corporate governance is relevant for both large and medium-sized businesses. The importance of CG is manifested by the fact that corporations in particular, this mechanism of governance represents system of checks and balances, which allows shareholders to control the company's management, and influence to its management in order to maximize profits, and the value of the enterprise.
As mentioned by the Head of our state, at this stage of development of our nation, it is considered expedient to retain the direct state control of the companies engaged only in the extraction
and processing of hydrocarbon raw materials, precious and base metals, uranium, as well as strategic infrastructure industries of natural monopolies - railways and roads, air transport, power generation, electrical and utilities [1].
120 100 80 60 40 20 0
1995 2000 2010 2012 2015
years
□ State □ Non-state
58,4 72,6 81,7 83,6 85,8
41,6
27,4 18,3 16,4 14,2
Diagram 1. Transforming structure of production of GDP in Uzbekistan, by the forms of ownership percent
The task was set to to create conditions for mass sale of state assets, especially to foreign investors. For instance, 506 property complexes at "zero" redemption value was sold on a competitive basis to new investors with some obligations, including investment of around 1 trillion soums and US $ 40 million, as well as the creation of 22 thousand new jobs.
In 2015, 245 low-profit organizations and inactive were completely liquidated. Under the program of privatization, 353 unused and/or unfinished construction facilities of state property were demolished. As a result, 20 hectares of land was released, 80 hectares of which is reserved for the new owners for organizing production and provision of services.
Moreover, the year 2015 witnessed a completed inventory and put up for auction for the realization of entirely private property 319 of unused state property, 102 of them were sold to new owners. Besides, the state stakes in 378 joint stock companies were evaluated and put up for public auction for sale to strategic foreign investors. It should be emphasized that the state share in a rather successful, growing companies such as joint-stock companies "Navoiazot", "Ferghanaazot", "Urgench excavator", "Kyzylkumcement", "Jizzakh Battery Plant", "Aloqabank" "Turonbank" insurance company "Uzagrosugurta" and other joint-stock companies were put on sale as well.
As stated by our President I.Karimov, radical changes in the principles and approaches to corporate governance provided truly market-driven feature, releasing the conservative views [1].
Indeed, as a result of a complete inventory of all the activities of joint-stock companies, 462 of these companies (43 %) were decided to be liquidated or changed into other organizational and legal structures.
On the basis of the best international practices of corporate governance enterprises, a new standard structure of a stock company was developed and approved. And taking into account of modern approaches to corporate governance, a new classifier positions and professions has been developed and approved, with the inclusion of 566 new categories, corresponding to the requirements of a market economy.
Corporate governance as the mechanism of interaction. CG represents a mechanism of interaction between bodies that contribute to the management of the corporation as a single body. At
the same time, CG performs the function of reporting to shareholders by the persons entrusted with the current management of the company. Corporation, by taking a range of measures and regulations, helps shareholders to influence the will of control and thus coordinate the activities of the company.
The essence of CG is to give shareholders the opportunity to spectacular control and monitoring of management and thereby contribute to the company's capitalization. This control involves both internal management procedures and external legal and regulatory mechanisms. Shareholders want to know exactly what kind of responsibility senior officials has for the company's results, while investors want to understand whether they have a real opportunity to influence important decisions.
The need for corporate governance in Uzbekistan
Economic growth is impossible without additional investments. The need to attract long-term strategic investment into industries with particular importance was emphasized by the President of the Republic of Uzbekistan as one of six priority areas for development in the coming years.
When investing in a certain country, the priority issue for the investor is the current state of corporate governance there. Another question for them is the compliance of the existing CG system with international principles of CG developed by OECD. Moreover, the presence of corporate governance in a particular country is mutually beneficial for both the investor and the state: while CG represents a set of rules for effective business management, and a protection tool in the event of violations of the shareholders' rights for the investor, For the state it is a tool to attract investment and decentralizing the management of the economy.
The experience of foreign countries in developing corporate governance culture has shown that the introduction of corporate governance encourages the inflow of both foreign and domestic investment. Attracting FDI will increase the technical level of the enterprises to upgrade production facilities and to introduce advanced technology. As a result, this will increase the competitiveness of the national economy.
The main problems in the implementation of corporate governance
In May 2014 the new edition of the Law "On joint-stock companies and protection of shareholders' rights" was adopted. The law was passed in order to better define the powers, rights and responsibilities of corporate management and control, enhance the role and importance of supervisory boards, general meetings and the Audit Committee of JSCs with the application and the new realities of the market economy, increase transparency and accessibility of information of JSCs for all shareholders and potential investors.
The law will promote the further development of corporate relations through better regulation of the founding JSCs, the formation of the statutory fund, determining the market value of the securities, as well as their placement by public offer of shares. The law also addresses to improve the legal protection of shareholders, especially the minority through a better definition of the mechanism of their participation in the management of the company, as well as the creation of a special body representing the interests of minority shareholders.
Meanwhile, currently there are a number of CG issues that need to be addressed:
Firstly, the high level of centralization of control and the presence of the State in all sectors and areas of the real economy. It is necessary to critically analyze the effectiveness of such presence of the state in all sectors of the economy. In view of this some measures to radically reduce the state's presence should be taken, for example, by reducing related government administrative functions and structures or by developing an effective market mechanism of economic management. At the same time, it is necessary to form effective standard CG model to accompany the privatization process.
The main objective of such new stage of privatization is fundamental to reduction of state participation in the charter capital of business companies. It also provides for full transfer of companies that do not have strategic importance into private ownership, as well as a reduction to the minimum (and adequate) level of state participation in the charter capital of strategic companies. Full or substantial shift of public shares to private individuals must be accompanied by appropriate transition of control over the enterprises, which is possible only with a well-established CG system.
Secondly, lack comprehensive approach to legal regulation of corporate governance. In Uzbekistan, the legal framework of corporate governance is in its formative stages. And the Cabinet of Ministers of the Republic of Uzbekistan approved a number of documents (a model regulations of the
General Meeting of Shareholders, a model regulations on the Supervisory Board, and others) in order to promote JSCs in developing their internal documents. These provisions were amended and supplemented in accordance with the Presidential Decree of January 24, 2003 № UP-3202 "On measures to radically increase the proportion and significance of private sector in the economy of Uzbekistan", and by the decree of Cabinet of Ministers on April 19, 2003 №189 "On measures to improve corporate governance of privatized enterprises". In 2012 an order of the President of the Republic of Uzbekistan "On the establishment of the Commission to prepare a program of measures to reform and improve the efficiency of public administration". The purpose of this order was to develop concrete measures to further deepen the reform and liberalization of economic management, improving the efficiency of government and economic management bodies. The objectives defined in this order included all the concern related to complete transformation of state management of the economy into an efficient system. In the first place, for example, completeness and quality of the legislative and regulatory framework in public management of the economy should be assessed, along with level of compliance of such framework to present stage of further deepening democratic market reforms and liberalization of the economy. Moreover, the most important assessment was that of actual performance of the existing legislation by the state and economic management bodies, law enforcement and regulatory agencies.
This order, among other issues, paid special attention to the analysis of CG at the level of business associations, JSCs and enterprises that largely mimic, rather than implementing the CG principles of corporate governance.
Third, lack of regulatory mechanism of internal procedural matters for the protection of violated rights and interests of shareholders. Due to the lack of clear guidelines and manuals on GC system, JSCs do not have the opportunity to determine the best ways to address the issues not regulated by the legislation. Moreover, lack code of corporate governance code, which has been adopted in many foreign countries, further worsens the situation. Availability of such Code could address the issues of corporate governance.
Fourth, the lack of rules governing the mechanism for resolving corporate conflicts and determining the extent of liability for cases of conflict between private and corporate interests as a consequence of the actions of officials. It is therefore necessary to develop underlying principles and rules of performance of duties of officials in charge and to determine the qualification requirements for them. Furthermore, they should not be allowed to work in JSCs simultaneously.
Fifth, ensuring transparency of information about the activities of JSC. Due to the large concentration of interests of individuals (shareholders, directors, etc.) involved in the corporate governance process, it is essential to ensure transparency. It is a prerequisite for the realization of the rights and interests of the owners (shareholders). In other words, shareholders must be fully aware of the decisions made, transactions done, plans for future, and of course, and financial condition of the company. However, a specific feature of business in Uzbekistan now is the secrecy of information about them. The main condition to ensure transparency of information is awareness of minority shareholders whose interests are often not taken into account. Usually, information transparency for this category of shareholders is to a greater extent determines the level of development of corporate governance.
Sixth, the low legal awareness of most shareholders, and the lack of relevant knowledge on corporate governance. It should be recognized that the reason for this case is the low level of informatization through the mass media. Moreover, to some extent, this process is affected by the level of development of the securities market. At the same time, the lack of the necessary teaching materials, comments to the related legislation, as well as the absence of the discipline in the curriculum in most universities in Uzbekistan can be mentioned as another reason for such situation.
Seventh, the absence of corporate secretary positions in JSCs. World practice in CG indicates the increasing role of the corporate secretary as the basic unit to ensure a process of interaction between different participants of CG. Corporate Secretary is an employee responsible for regular communication between the owners of the company, managers and the supervisory board. The Corporate Secretary is the guarantor of compliance officers and management bodies for the procedural requirements that ensure the realization of the legitimate rights and interests of shareholders. Review
of the corporate legislation of several countries shows that the functions of the Corporate Secretary include the preparation and provision of meetings of the supervisory board and general meetings of shareholders; management of corporate protocols, ensuring their safety and access to them in cases provided by law, and by internal regulations of the company; monitoring execution of decisions of the supervisory board and general meeting of shareholders; control of the proper disclosure of information about the company and other issues. However, above mentioned functions are currently performed by the legal service of the enterprise or by securities analysts who are subordinates of the executive body (managing directors). Consequently, obeying the will of the managing directors, they make decisions that are often against to the interests of shareholders. Moreover, they do not have all the functional responsibilities of Corporate Secretaries, and are not able to carry out their work fully. Therefore, it is necessary to form an appropriate regulatory framework that will give an opportunity to introduce the position of Corporate Secretary. This initiative is timely in accordance with the orders of the President aimed to get rid of old, long outdated characteristics of the Soviet planning and distribution system for management of official nomenclatures, Besides, these orders introduce new CG positions to meet the requirements of the market economy - the commercial director, financial director, project manager, PR officer, procurement and so on, with a clear regulation of their duties in accordance with international practice.
Eighth, the insufficient number of joint forms of management with the participation of foreign capital. Today more than 4000 enterprises established with foreign capital participation from more than 90 countries are operating successfully. They are well known not only in Uzbekistan but also abroad. Besides, there are several successfully operating companies that are fully based on foreign capital and foreign corporate governance. In this regard, we need to better understand the experience of foreign companies and establish standards of corporate governance structure for national JSCs based on this analysis, actively implement them, and reconstruct and reform the whole system of management of national JSCs in all sectors of the real economy. This can be achieved by 'borrowing' management techniques. In other words, it is necessary to establish by law the requirement of the presence of foreign capital only in the form of a joint venture in certain sectors of the economy. This will allow to effectively learning from TNCs.
Prospects for the development of corporate governance
Undoubtedly, the successful development of any business is impossible without access to capital investment. Moreover, investors will not invest heavily in the company without an effective system of management, and control over its activities. After all, it is important for investors to participate in a real control over the process of corporate management. They also should make sure that the company has a corporate governance system that provides an adequate level of transparency, clarity in corporate decision-making and thereby provides additional safeguards to protect the rights of investors. Investors need that key corporate governance procedures meet all these requirements and are adequately secured in the internal documents of the company.
Current stage of the corporate market in the Republic of Uzbekistan requires serious attention to fundamental changes in the principles and approaches to corporate governance, and secondly, the introduction of advanced international standards of corporate management for production, foreign trade and investment processes.
Moreover, it is crucial to analyze the presence and effectiveness of the presence of the state shares in the economy. In this view, measures to radically reduce the state's presence in sectors of the real economy should be taken.
References:
[1] I.A. Karimov, Global Financial-Economic Crisis, and measures to overcome it in conditions of Uzbekistan // Tashkent, Uzbekistan, 2009
[2] Report of the President of Uzbekistan Islam Karimov titled "Our main goal -, determined going forward despite the difficulties, consistently continuing the ongoing reforms, structural changes in the economy, creating more opportunities for the development of private property, entrepreneurship and small business"; the enlarged meeting of the Cabinet of Ministers dedicated to the socio-economic development in 2015 and the most important priorities of economic program for 2016// Uza.uz.
[3] "The implementation of major structural changes in the economy, continuation of the modernization and diversification to create opportunities for private ownership and entrepreneurship is a priority task for 2015"; the Report of the President of Uzbekistan Islam Karimov at the meeting of the Cabinet of Ministers dedicated to the country's socio-economic development outcomes in 2014, and the economic program for 2015 // Turkistan, January 17, 2015, p.2
[4] Harry G. Broadman (2010), "Competition, Corporate Governance and Regulation in Central Asia: Uzbekistan's Structural Reform Challenges, WorldBank, USA, Washington DC.
[5] Z. Ashurov (2010), "The Corporate Governance Mechanism: How it Works in the Context of Uzbekistan", SSRN Electronic Journal 03/2010; DOI: 10.2139/ssrn.1748444.
[6] Statistical Digest, 2013:52.
[7] Dates of State Committee of Statistics of the Republic of Uzbekistan
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УДК 330
У.И. Джуманиязов
ТЕНДЕНЦИИ РАЗВИТИЯ И УСОВЕРШЕНСТВОВАНИЕ КОРПОРАТИВНОГО УПРАВЛЕНИЕ В УЗБЕКИСТАНЕ
В данной статье рассматривается вопросы внедрения эффективной системы корпоративного управления в Узбекистане, а также анализируется потребности в области корпоративного управления, наряду с основными проблемами в реализации системы корпоративного управления.
Ключевые слова: корпоративное управление (CG), акционерное общество (АО), валовой внутренний продукт (ВВП), Организация экономического сотрудничества и развития (ОЭСР).
