Corporate Governance Sector Assessment

Introduction

As part of its Legal Transition Programme, the European Bank for Reconstruction and Development (“EBRD”) has been assessing the state of legal transition in its countries of operations. These assessments provide an analysis of the progress of reform and identify gaps and future reform needs, as well as strengths and opportunities.

In 2012, the EBRD developed with the Assistance of Nestor Advisors a methodology for assessing corporate governance frameworks and the governance practices in the EBRD countries of operations. This assessment was implemented in 2014-2015 (the “Assessment”).

The Assessment aims at measuring the state of play (status, gaps between local laws/regulations and international standards, effectiveness of implementation) in the area of corporate governance

The Assessment is meant to provide for (i) a comparative analysis of both the quality and effectiveness of national corporate governance legislation (including voluntary codes); (ii) a basis to assess key corporate governance practices of companies against the national legislation; (iii) an understanding whether the legal framework is coupled with proper enforcement mechanisms (e.g., sanctions) and/or with authorities able to ensure proper implementation; (iv) a support to highlight which are the major weaknesses that should be tackled by companies and legislators for improving the national corporate governance framework; and (v) a tool which will enable the EBRD to establish “reference points” enabling comparison across countries.

This Assessment is based on a methodology designed to measure the quality of legislation in relation to best practice requirements and the effectiveness of its implementation through judicial and company practice as well as the capacity of the broader institutional framework to sustain quality governance. The analytical grid developed for assessing the governance framework is based on internationally recognised best-practice benchmarks (e.g. OECD Principles, IFC and World Bank ROSC governance methodologies). The methodology is applied identically across all the countries reviewed. The process for gathering, analysing and reporting information is applied identically for each of the countries assessed, which allows for comparing countries to each other a long a set of benchmarking points.

 

 

Albania

The corporate governance framework in Albania is essentially comprised by the Law on Entrepreneurs and Commercial Companies, the Law on Statutory Auditing and Organization of Registered Chartered Auditors and Approved Accountants, and the Law on Banks. A Corporate Governance Code was adopted in 2011. It provides a set of recommendations and is purely voluntary. Joint stock companies can be organised under a one-tier or two-tier system, however in the two-tier system, the appointment and dismissal of executives can be assigned to the general shareholders meeting, which makes it more like a “hybrid” system. Boards of companies do not appear to have a strategic role and they lack objectivity. Gender diversity at the board is also very limited. The quality of transparency and disclosure is poor; this also derives from the lack of a functioning stock exchange, however better quality disclosure (especially on non-financial information) would be expected from banks and state owned enterprises, because of the high number of stakeholders involved. The internal control framework does not appear to be in line with best practices and suffer from lack of independence. Right of shareholders are regulated by law, but room for improvement exists. The Corporate Governance Code is not implemented. The country lacks a functioning stock exchange and an authority that can act as champion for the promotion of corporate governance. The banking sector in Albania is well developed and banks can be in a position to be promoting good corporate governance. This can be achieved by encouraging banks to assess and monitor the quality of corporate governance of their corporate borrowers as a critical part of their on-going credit risk management.

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Armenia

The corporate governance framework in Armenia is essentially comprised by the Law on Joint Stock Companies, the Law on Banks and Banking Activity, the Law on Securities Market and a Corporate Governance Code (adopted in 2010), which is to be implemented by listed companies on a “comply or explain” basis. Joint stock companies in Armenia are organised under a one-tier system, where the CEO can be the chair of the board. Boards of companies do not appear to have a strategic role, they lack objectivity and gender diversity at the board is limited. Further, legal entities can be board members. All largest companies appear to formally comply with the requirement to prepare annual reports including financial and non-financial information; however there is room for improvement of quality of non-financial information. Banks are required to establish an internal audit function and appear to be the only companies with that function in place, even though the Corporate Governance Code recommends all listed companies to have an internal auditor. The possibility for external auditors to provide non-auditing services to audited entities should be carefully monitored as it can undermine the auditors’ independence. Basic shareholders rights appear to be granted by law, except for shareholders’ pre-emptive rights on capital. It appears that there are a few inconsistencies in corporate governance legislation and some key corporate governance issues are not regulated. It is important that Armenian authorities commit necessary time and resources to ensure proper implementation of the Corporate Governance Code by establishing an active dialogue with companies and providing guidance on how to improve the companies’ practices, thus enhancing ownership disclosure, shareholders rights and quality of information; monitoring of self-dealing and related party transactions; and strengthening the oversight role of boards.

 
 
 
 
 

Azerbaijan

In Azerbaijan, the corporate governance framework is mainly included in the Civil Code, the Law on Banks the Law on Insurance Activity, the Law on Accounting, and the Law on Internal Audit. The Azerbaijan Corporate Governance Standards were adopted in 2011 and became mandatory for companies where the Azerbaijani Investment Company has made equity investment in 2014, while remaining voluntary for others. Companies with more than fifty shareholders are organised under a two-tier board system where the CEO cannot be chair of the board. Boards seem to have very little authority over the company’s strategic functions, and they are not entitled by law to appoint or dismiss executives. Boards are generally small with very limited gender diversity. Insurance companies and companies listed on the exchange’s Premium Segment are required to have independent directors (for other companies this is merely a recommendation). The implementation of many requirements/recommendations (e.g. board members’ independence, liability and fiduciary duties, activities, functioning and evaluation of the board) could not be verified as the disclosure on these issues is very scarce. The organisation of board committees and the internal control framework do not appear to be in line with best practices. External auditors are allowed to provide non-auditing services, and are not subject to rotation obligations. For most companies, disclosures in annual reports are limited to financial information, while websites are generally incomplete and not easily accessible. Most of the basic shareholders rights are granted by law, and major corporate decisions are subject to supermajority. Related party transactions and conflicts of interests are regulated. Regulation on insider trading and self-dealing exists, but it does not seem to be enforced in practice. There is no clear legislation on shareholders agreements.

Overall, the institutional environment promoting corporate governance in Azerbaijan needs to be strengthened. The relevant authorities do not seem to have an active role in promoting good governance practices. Corporate Governance Standards exist but do not appear to be taken as a reference, as none of the ten largest companies disclose any information about their compliance therewith. Listed companies do not seem to pay much attention to requests by stakeholders, and international organisation indicators show a framework where corruption is still perceived as a critical problem.

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Belarus

The corporate governance framework in Belarus is essentially regulated by the Law on Companies, the Law on Accounting and Financial Reporting, the Law on Auditing Activity; and - for banks - the Regulation on Organization of Corporate Governance in Banks, Non-Banking Credit Organisations and the Regulation on the Activities’ Disclosure of Banks, Non-Banking Credit and Financial Institutions, Banking Groups and Banking Holdings. A Set of Rules on Corporate Governance (i.e., the Belarusian Corporate Governance Code) was approved in 2007. The Rules are voluntary and recommend companies to develop their own corporate governance code. Joint stock companies have the option to be organised under a one-tier system or two-tier system. The law does not assign to the board some of the key functions and responsibilities and boards do not appear to have a strategic role. Gender diversity at the board is also very limited. Financial and non-financial disclosure is poor in the case of both companies and banks, but there is a clear gap between the quality of disclosure offered by banks and other companies. Only banks are required to have an audit committee and the internal control framework in place, while all companies are required to appoint a “control commission” or an “inspector”, but there is no evidence that this body is adding value. The requirement that the head of the internal audit function is a member of the audit committee is not in line with best practices as it poses a risk of conflicting interests. Further, the fact that the board is in charge for appointing the external auditor, the possibility to provide non auditing services to audited entities, the lack of requirement for rotation and the extremely limited disclosure on these matters, raises some doubts about the independence of the external audit. By law, shareholders enjoy numerous rights; however, there is no evidence that the law is well implemented. The stock exchange is illiquid and the relevant authorities do not seem to have an active role in promoting good governance practices. The Set of Rules on Corporate Governance were enacted to provide some best practices reference to companies, however they do not seem to be treated as a reference.

 
 
 
 
 

Bosnia and Herzegovina

Bosnia and Herzegovina is composed of two autonomous Entities: the Federation of Bosnia and Herzegovina (“FBH”) and the Republika Srpska (“RS”). Corporate governance in the FBH is regulated by the Law on Companies; the Law on Banks and the Law on Accounting and Audit. To note also a Joint Stock Company Regulation issued by the Securities Commission and a number of Decisions and Guidelines issued by the Banking Agency of the Federation of Bosnia and Herzegovina. In 2009, the Sarajevo Stock Exchange issued its own Corporate Governance Code to be implemented under the “comply or explain” approach. Corporate governance in the RS is regulated by the Law on Companies, the Law on Banks and the Law on Accounting and Audit. In 2006 the Securities Commission issued the Standards of Corporate Governance, which were revised in 2011. The Standards can be considered the Corporate Governance Code in place in RS, and are to be implemented on a “comply or explain” basis.

Joint stock companies in the FBH and banks in both Entities are organised under a two-tier board system. Companies in the RS are organised under a one-tier board system, however if there are more than two executive directors, then a separate executive board must be established. Boards appear to be small, with limited gender diversity and possibly lacking the appropriate mix of skills. It appears that, in contrast to banks, there are no requirements for qualification of companies’ board members. In FBH, companies are recommended to have independent directors; in the RS, this is a legal requirement. There are different definitions of independence in both Entities. In FBH and in banks in both Entities audit committees are obligatory (in RS, the audit committee is optional), but members of that body cannot be board members. In both Entities the law provides for fiduciary duties, conflicts of interest and for board member liability.

Companies are required to publish annual reports including non-financial information; however, disclosures are generally patchy. Financial statements are prepared in line with IFRS. In both Entities, companies are required to have independent external auditors and to disclose their names and reports. Provision of non-auditing services by the external auditor is allowed but restricted. In both Entities, companies and banks are required to have an internal audit function. Related party transactions and conflicts of interest are regulated in both Entities; however, it seems that related-party transactions remain an issue. A new law on whistleblowing protection has recently been approved.

Basic shareholders rights are granted by law. Shareholders agreements are not regulated by law or subject to any formalities.

Stock exchanges exist in both Entities and trade on both exchanges is organised in different segments with different transparency requirements. Corporate Governance Codes exist in both Entities; however their implementation is very limited. We could not find any evidence of monitoring in place on how companies comply with the Codes. International organisations indicators reveal that the framework is in need of reform, since corruption is still perceived as a problem.

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Bulgaria

The primary sources of corporate governance legislation in Bulgaria are the Law on Public Offering of Securities, the Law on the Independent Financial Audit, the Law on Commerce, the Law on Accountancy and specific corporate governance regulations for banks included in the Ordinance of the Bulgarian National Bank No 10 of 26.11.2003 on Internal Controls in Banks. A Bulgarian National Code for Corporate Governance was introduced in 2007 and amended in 2012. The Code is to be implemented under the so-called “comply or explain” approach.

Joint stock companies in Bulgaria can be organised under a one-tier or two-tier board system. Gender diversity at the board is limited and legal entities can be board members. Qualification requirements exist only for bank board members. Public companies are required to have at least one third of the board made up of independent directors, but disclosure on this matter is limited. The definition of independence included in the law is not comprehensive. Public interest companies are required to have an audit committee appointed by GSM, but this committee is not necessarily made up of board members, thus it cannot be accurately classified as “board” committee. There are no independence requirements for audit committee members. It appears that there is no consolidated practice of board evaluation or corporate secretary function. Fiduciary duties, liability of board members and conflicts of interest are regulated by law.

The law requires companies to disclose their annual reports, comprising financial and non-financial information. All ten largest listed companies appear to comply, but disclosure is generally very formalistic and focuses on internal documents rather than practice. Where disclosed, comply or explain statements are rarely informative. Companies are required to disclose financial information in line with IFRS and all ten largest listed companies appear to comply. Joint stock companies are required to have their financial statements reviewed by an independent external auditor and to disclose the auditor’s report. Provision of non-auditing services is allowed, subject to the scrutiny of the audit committee. External auditors are required to rotate after five years, but the practice does not seem to be well implemented. It is not clear how this scrutiny is undertaken as audit committees are not necessarily independent and disclosure on this matter is extremely limited. Internal audit is regulated only for banks, who must also have a compliance function (it is not clear if this is a standalone function).

Most of the basic shareholders rights are granted by law. Shareholder agreements and significant shareholding variations must be disclosed.

The Bulgaria Stock Exchange (BSE) is the main local stock exchange in Bulgaria. Companies in the Premium Market Segment must “commit to apply” the Corporate Governance Code. The stock exchange lists on its website the companies that have made this commitment, however there is little evidence that this commitment is then translated into proper implementation. Indicators provided by international organisations rank Bulgaria moderately well in terms of investor protection and competitiveness, but relatively poorly in terms of corruption.

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Croatia

The primary sources of corporate governance legislation in Croatia are the Company Act, the Audit Act, the Accountancy Act and the Credit Institutions Act. A Corporate Governance Code was adopted by the Croatian Financial Services Supervisory Agency (HANFA) and the Zagreb Stock Exchange in 2007. In line with EU legislation, the Code is to be implemented on a "comply or explain" basis. Companies may be organised under a one-tier or two-tier system. Boards of companies do not appear to have a strategic role and they lack objectivity. Only in banks the law is clear in assigning to the board its key functions and responsibilities. Gender diversity at the boards of the largest companies appears to be relatively high. Companies are required to publish their annual reports and the largest listed companies appear to comply well with this requirement. Quality of non-financial information seems to be generally good, however some key information is not available (e.g., qualification of board members, activities and frequency of meetings of board and committees, and committees’ composition). Only credit institutions are required to create an internal audit function. They are also required to have a compliance function in place. Public interest entities are required to establish an audit committee; however it does not appear to be necessarily a board committee, as “outsiders” (i.e., non-board members) are allowed as committee members. In practice, it appears that the audit committees of the ten largest listed companies are always made by a majority of outsiders. The provision of non-auditing services to companies by the external auditor does not seem to be restricted, but it is subject to the audit committee scrutiny. Basic shareholders rights are granted by law. The market capitalisation of the Zagreb Stock Exchange is quite high but liquidity appears limited. In general, it appears that the institutional framework supporting good corporate governance is relatively sound. The Corporate Governance Code is an excellent complement to the law. All ten largest listed companies have published a compliance statement, however explanations for non-compliance are not always meaningful and appropriate. The regulator and the exchange have prepared very interesting statistical reports offering general overview of the corporate governance and securities market situation in the country.

 
 
 
 
 

Cyprus

The primary sources of corporate governance legislation in Cyprus are the Companies Law, the Transparency Law, the Investment Services and Activities and Regulated Markets Law, the Auditors and Statutory Audits of Annual and Consolidated Accounts Law, the Business of Credit Institutions Laws and the Market Manipulation Law. The Code of Corporate Governance was issued by the Cyprus Stock Exchange (CSE) Council in 2002, and was most recently reviewed in 2014. The CSE Code is to be implemented under the so-called “comply or explain” approach, with a stricter obligation of adherence for companies listed on the Main Market segment of CSE.

Companies are organised under a one-tier board system. Boards tend to be relatively large with limited gender diversity. Qualification requirements exist only for bank board members. Banks are required to have a majority of independent directors. The CSE Code provides the same recommendation for larger companies. It appears that at least nine of the ten largest listed companies disclose having independent board members. In contrast to the banking framework, not all key functions of the board – most notably setting up budget and risk profile – are clearly spelled out for companies. Fiduciary duties, liability of directors and conflicts of interest are regulated by law.

Companies are required to publish their annual reports which should include financial (in line with IFRS) and non-financial information. In accordance with the CSE Code and financial markets regulations, every listed company has an obligation to include a report on corporate governance within the annual report.

Companies are recommended to have an internal audit function in place. Banks are required to establish an internal audit department, reporting directly to the board, via the audit committee, as well as a standalone compliance function. Public interest entities are required to set up audit committees, which should be composed of at least two (three in case of banks) non-executive board members; at least one member must be independent and have competence in accounting or auditing matters. Companies’ financial statements are audited by independent auditors. Provision of non-auditing services by the external auditor is allowed, but subject to an “independence test” by the audit committee. There is no rotation requirement for audit firms.

Regulation on shareholders’ rights seems to be comprehensive and generally in line with best practices. Certain major corporate changes require supermajority of shareholders’ votes. Derivative suits are permitted and insider trading and self-dealing are regulated by law and appear to be enforced. Shareholders agreements are enforceable and widely used in practice.

The institutional framework supporting corporate governance seems to be moderately well developed. The CSE is the regulated market in the country. In 2002, the CSE adopted a Corporate Governance Code, which was most recently reviewed in 2014. The level of Code’s implementation by companies does not seem to be actively monitored. International indicators rank Cyprus fairly well in terms of transparency and investor protection perceptions, although its competitiveness performance is relatively poor.

 
 
 
 

Egypt

The primary sources of corporate governance legislation in Egypt are the Companies Law, the Capital Market Law, the Central Depository Law and the Law on the Central Bank, the Banking Sector and Money. In 2011, the Central Bank of Egypt issued a Decision on the Corporate Governance Guidelines and Instructions for Banks. A Corporate Governance Code was adopted in 2005 and reviewed in 2011 and most recently in 2016. The Code is to be implemented under the so-called “comply or explain” approach.

Companies in Egypt are organised under a one-tier board system. Boards appear to be relatively large with very limited gender diversity. Legal entities can serve as board members. There is no legal requirement for independent members and the roles of board chair and CEO can be combined. The law does not assign the board all its key functions. Boards of the largest companies appear to be supported by audit committees who seem to lack the necessary independence to make them effective. There is no practice of performing board evaluations or appointing corporate secretaries. It was not possible to determine how boards and audit committees work in practice, since disclosures on the number of their meetings and their activities are very limited. The framework underpinning fiduciary duties seems to be undeveloped.

Listed companies must prepare annual reports including both financial (in accordance with the Egyptian Accounting Standards) and non-financial information, as well the auditors’ opinion, and file them with the Stock Exchange. Non-financial information, however lacks quality and is often difficult to find. Listed companies and banks are required to set up an audit committee and to have their financial statements audited by an independent external auditor (two auditors in case of banks). External auditors are allowed to provide non-auditing services, and are not subject to rotation obligations. Banks are also required to establish an internal audit function; it is not clear if this is also required for listed companies (the Code recommends it). There is no law on whistleblowing protection.

Shareholders enjoy a number of basic rights. The law is silent on cumulative voting. Insider trading is prohibited, but there is limited evidence of enforcement. Shareholder agreements are common and appear to be enforceable between parties; however, they are not required to be disclosed. Egypt has a well-capitalised and liquid stock exchange, which lacks fundamental information on listed companies, such as the boards’ composition. The code seems to be poorly implemented and there is very little disclosure on the level of compliance with its recommendations. The institutional environment promoting corporate governance does not seem strong and indicators produced by international organisations rank Egypt poorly with regard to investor protection, competitiveness and corruption perceptions.

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Estonia

The primary sources of corporate governance legislation in Estonia are the Commercial Code, the Law on Auditors Activities, the Law on Securities Market and the Credit Institutions Act. The Estonian Corporate Governance Recommendations (the Corporate Governance Code) were prepared in cooperation between the Estonian Financial Supervision Authority and the Tallinn Stock Exchange and adopted in September 2005. They apply to companies whose shares are traded on a regulated market and are to be implemented on the “comply or explain” basis.

Large companies are required to adopt a two-tier board structure, while smaller companies can opt for a one-tier system. Boards are generally small with very limited gender diversity. Only board members of banks are subject to qualification requirements. At least half of the board of a listed company should consist of independent members. Seven among the ten largest listed companies disclosed having independent directors; however, only in two cases they make half of the board. Public interest entities are required to establish audit committees, but outsiders seem to be allowed as members, which raises some doubts. The company law does not make any direct reference to risk oversight function of the board and allows placing the responsibility for approving the budget within the competence of the general shareholders’ meeting (GSM). There is no established practice of board evaluation and company secretary function.

The law requires companies to disclose their annual reports, which should include both financial (IFRS) and non-financial information. All ten largest listed companies comply with this requirement and the quality of disclosure is generally sound. The listing rules require companies to report their compliance with the Recommendations or to explain deviations. All ten largest listed companies comply with this requirement, with high levels of compliance being disclosed. Annual reports contain external auditors’ opinions and all ten largest listed companies declare their auditors to be independent. The provision of non-audit services is allowed, subject to the scrutiny of the audit committee. Companies and banks are required to have internal audit functions. Banks are also required to establish compliance functions. Disclosure on activities of the audit committee is limited and does not allow assessing if they are playing a key control role. There is no requirement to have a code of ethics and regulation on whistle-blowers in the private sector is almost non-existent.

Shareholders enjoy a number of basic rights. Cumulative voting, proportional representation and derivative suits are not foreseen. Insider trading is prohibited and punishable with fines or imprisonment. Shareholders agreements are considered enforceable among the parties. The Recommendations are relatively comprehensive and well implemented, but have not been updated in a decade. The monitoring efforts undertaken by the FSA have been generally successful in ensuring compliance with the Recommendations. International organisations’ indicators confirm that the institutional framework supporting good corporate governance is sound.

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FYR Macedonia

The principal legislation on corporate governance in FYR Macedonia is found in the Law on Trade Companies, the Law on Securities, the Law on Banks, and the Basic Principles of Corporate Governance in Banks. A Corporate Governance Code was approved by the Macedonian Stock Exchange in 2006. Companies listed in the Special Listing segment of the Macedonian Stock Exchange are required to disclose their compliance with the Code on a "comply or explain" basis. Companies can be organised under a one-tier system or a two-tier system, which is mandatory for banks and more common among largest listed companies. Boards of companies do not appear to have a strategic role and they lack objectivity. The law does not explicitly assign to the board of companies all of its key functions, however in banks the framework is clearer in this respect. Companies and banks are required to have independent directors, however, due to lack of disclosure the extent to which companies comply with this requirement is not clear. There are at least two definitions of independence and neither addresses positive criteria that a board member needs to meet to be considered independent.

All companies are required to include non-financial information in their annual reports, but it appears practices in that area could be improved. Listed companies must provide this information to the stock exchange and the regulator and are subject to fairly comprehensive on-going disclosure obligations. Listed companies and banks are required to develop an internal control system, overseen by an internal audit function, audit committee and the board. Setting up an audit committee is recommended to companies and required for listed companies and banks. In companies, the audit committee is created by the board but the composition and scope of activities is undetermined, which creates space for inadequate practices.

Basic shareholder rights seem to be well regulated by law and major corporate changes require supermajority. The institutional framework supporting good corporate governance is generally sound, but there is room for improvement, notably in relation to the quality, accessibility and consistency of information being disclosed by companies and regulators. The stock exchange has approved a Corporate Governance Code, but only companies listed in the Super Listing segment – which currently consist of only one company – are required to disclose their level of compliance with the Code.

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Georgia

The primary sources of corporate governance legislation in Georgia are the Law on Entrepreneurs; the Law on Activity of Commercial Banks; the Accounting and Auditing Law; and the Law on Securities Market. A Corporate Governance Code for Commercial Banks was developed in 2009 by the Association of Banks. The Code is meant to be applied on a “comply or explain” basis, however, there are no mandatory requirements to this end and the Code does not seem to be taken as a reference. There is no corporate governance code for companies.

Companies are organised under a two-tier board system. Supervisory boards (hereafter “boards”) are generally small, with an average of 4.7 members for the ten largest companies. Gender diversity at the board is low. Qualification requirements exist only for banks’ board members. There is no requirement for companies or banks to have independent directors, and only very few companies disclosed having them. Companies are not required to establish board committees. In banks, the audit committee is established by decision of the supervisory board, but the practice is rare. In contrast to the banking framework, approval of the strategy or setting risk profile are not explicit board functions in companies.

Companies are required to include financial and non-financial information in their annual reports; however, corporate governance information provided by companies is often of poor quality and annual reports mainly include financial information only. Financial information needs to be in line with IFRS. Large companies are required to disclose names and reports of their external auditors. Provision of non-auditing services by the external auditor is allowed, but disclosure on this matter is extremely limited.

Only banks are required to have an internal audit function in place, but the majority of companies in our sample also disclosed having one. Banks are also required to have a separate compliance function, but there is no disclosure on this. Only banks seem to be required to set up audit committees; however the law only vaguely regulates its composition. Large companies are required to appoint an independent external auditor, and all auditors declare to be independent, but it is not clear who should run the “independence test”. Rotation of the external auditor is not required.

Minority shareholders can call a general shareholders meeting (GSM) and ask questions at the GSM. Supermajority is required to approve major corporate changes. It is not clear if shareholders can propose new items to the GSM agenda or if they have inspection rights. Shareholders are also entitled to bring a derivative claim, but it depends on the approval of shareholders. Cumulative voting seems to be used in practice. Shareholders agreements do not need to be disclosed and are very rare in practice. It is not clear whether they are enforceable.

The institutional framework supporting good corporate governance needs improvement.  There is no corporate governance code for companies, and the there is no evidence that the Code for banks is used as a reference. The National Bank of Georgia (supervisor/regulator for the whole financial market) has the authority to address corporate governance failures and compel appropriate remedial action. International organizations’ indicators place the country very well in terms of strength of investor protection, and relatively well on corruption perception and competiveness.

 
 
 
 

Greece

Primary sources of corporate governance legislation in Greece are the Law 2190/1920 on Companies Limited by Shares, the Law 3016/2002 on Corporate Governance, Board Remuneration and other Issues, the Law 4261/2014 on Access to the Activity of Credit Institutions and Prudential Supervision of Credit Institutions and Investment Firms, the Law 3693/2008 on Harmonisation of Greek Legislation with Directive 2006/43 on Statutory Audits and the Law 3556/2007 on Transparency Requirements for Issuers. To note also the Law 3864/2010 on Establishing the Fund for Financial Stability, that includes a set of corporate governance provisions applicable the four systemically important banks in the country. A Corporate Governance Code, which is to be applied on a "comply or explain" basis was adopted in 2011 and has been revised in 2013. However, it seems that this concept has not been fully understood: at least one third of the listed companies in Greece has drafted its own corporate governance code and provides comply or explain declaration on this, which cannot be considered good practice.

Joint stock companies in Greece are organised under a one tier system. The law does not assign to the board some of the key functions and responsibilities. Gender diversity at the board is very limited. Further, legal entities can be board members; which raises some doubts. Companies and banks are required by law to prepare and publish an annual report, including financial and non-financial information. Disclosure on key corporate governance matters seems to be generally comprehensive, with significant room for improvement in the area of disclosure on board’s and committees’ activities and meetings.

Banks and listed companies are required to establish an internal audit function. Basic shareholders rights are provided by law. Cumulative voting is possible if provided by the Articles. The Articles can also provide certain shareholders with the power to appoint up to one third of the board. It is not clear how this process is conducted in practice and whether those directors owe fiduciary duties to the company and all shareholders or only to shareholders that have appointed them. The institutional framework supporting good corporate governance is generally sound. The stock exchange is liquid and well capitalised. The Corporate Governance Code is well shaped on legislation so to address those issues that are not sufficiently regulated by law. However, implementation and monitoring of the Code should be improved.

 
 
 
 

Hungary

The primary sources of corporate governance legislation in Hungary are Act V of 2013 on the Civil Code; Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises; Act CXX of 2001 on the Capital Market; and Act C of 2000 on Accounting. In 2004, the Corporate Governance Committee of the Budapest Stock Exchange issued the Corporate Governance Recommendations which were reviewed in 2007 and 2012. Public disclosure of compliance with the Recommendations under the so-called “comply or explain” approach is mandatory.

On paper, listed companies in Hungary can be organised under a one- or two-tier board system, however the prescribed “two-tier system” is in reality a “hybrid” system, where the supervisory board has a marginal role and decision making is retained by the management board and general shareholders’ meeting. We believe this approach should be reconsidered. Board of directors (in one-tier system) and supervisory boards (in the two-tier system) are required to be composed of a majority of independent directors. Gender diversity at the board is very low. The majority of the surveyed companies disclose carrying out board evaluations.

Disclosure of non-financial information is detailed in most areas. Annual reports include both a corporate governance report and financial statements (prepared in line with IFRS).The law requires companies to disclose basic information on external auditors, as well as information on non-auditing services provided by them. Companies are recommended to have an internal audit function, whereas banks are required to have both internal audit and compliance functions. Public companies and banks are required to establish an audit committee appointed by the general shareholders’ meeting from the board of directors’/supervisory board’s independent directors, and reporting to one of those boards, depending on the structure in place. The effectiveness of the audit committee in two-tier companies is questionable due to very marginal role assigned to the supervisory board. All limited companies must have their financial statements audited by an independent external auditor, whose independence is subject to audit committee scrutiny.

Shareholders in Hungary have access to comprehensive financial and non-financial information, as well as inspection rights. Minority shareholders are entitled to call a GSM, add items to the agenda, and start derivative claims. Supermajority is required to approve most major corporate changes. Cumulative voting is not foreseen. Shareholder agreements are considered enforceable, but there are no obligations to disclose them. The share register of companies – including public ones – is to be maintained by the board of directors of the company.

The institutional framework supporting corporate governance practices seems to be relatively well developed, however room for improvement exists. It is not clear if the reporting by companies on compliance with Corporate Governance Recommendations is monitored, as we could not locate any monitoring report. Since 2013, the Hungarian Central Bank has assumed all competences from the former HFSA. Indicators provided by international organisations rank Hungary moderately poorly in terms of competitiveness, investor protection and corruption.

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Jordan

The primary sources of corporate governance legislation in Jordan are the Companies Law, the Securities Law, the Banking Law and a number of Instructions and Regulations issued by the Jordanian Securities Commission and the Central Bank of Jordan. Further, the Corporate Governance Code for Banks (issued) is meant to be a model upon which banks can draft their own corporate governance codes. There are two additional national corporate governance codes in Jordan: the Corporate Governance Code for Shareholding Companies Listed on the Amman Stock Exchange (Code for Listed Companies), which contains both mandatory provisions based on the compulsory requirements of laws, regulations and instructions, and voluntary provisions which companies can implement on a “comply or explain” basis; and the Jordanian Corporate Governance for Private, Limited Liability and Non-listed Public Shareholding Companies (Code for Unlisted Companies), which is purely voluntary.

Joint stock companies are organised under a one-tier board system, while banks are required to be organised under a two-tier system. All board members are required to be shareholders. Banks are required and companies are recommended to have independent directors. These two requirements seem misaligned. Legal entities may serve on boards and the majority of the ten largest listed companies appear to have corporations sitting on their boards. Gender diversity at the board is very low. Listed companies are required to establish an audit committee and to have an internal auditor, whereas banks are additionally required to establish other committees and a separate compliance function. The audit committee is composed of three non-executive board members. The Code for Listed Companies recommends that two of these members should be independent directors, and that one of them should be appointed as the committee chairperson. Disclosure requirements mostly focus on financial reporting and on the relationship with the external auditor. The ten largest listed companies disclose information on their board composition, general shareholders’ meetings’ minutes and share capital. However, disclosure on the composition of committees, board’s and committee’s activities, Articles of Association, and beneficial ownership is very limited.

Important rights, such as pre-emptive rights and cumulative voting rights, are not granted by law. Additionally, the right to call a general shareholders’ meeting can only be exercised by shareholders representing 25% of the share capital, which seems excessively high. Supermajority is required to approve major corporate changes, but not for asset sales. Derivative suit is not a developed concept under Jordanian law.

The institutional environment promoting corporate governance in Jordan seems to be fairly developed, but key reforms would benefit the advancement of current efforts. The extent to which the codes are implemented does not seem to be monitored. Case law and Securities Commission’s rulings are hardly accessible. Some key corporate governance issues are not regulated and international organisations indicators show a framework where investor protection is still perceived as a critical problem.

 
 
 
 
 

Kazakhstan

The primary sources of corporate governance legislation in Kazakhstan are the Law on Joint Stock Companies, the Law on Accounting and Financial Reporting, the Law on Securities Market and the Law on Banks and Banking Activity. A Code on Corporate Governance was adopted by the Council of Issuers and the Council of the Association of Financiers (Financial Institutions’ Association) in 2005 and amended in 2007. The Code is voluntary and applies to Kazakhstan listed companies, which are recommended to incorporate the provisions of the Code in their own codes and bylaws. While the majority of companies formally incorporate the Code in their corporate documents, in practice the implementation of the Code’s principles remains weak.

Joint stock companies are organised under a one-tier system. Although the CEO is the only executive director allowed to be a board member, he/she is not permitted to chair both the board and committees. The law seems to be excessively prescriptive in requiring all joint stock companies (of any size and business activity, listed or not) to have independent directors and committees (however they are not necessarily board committees, as they might include outsiders). The law does not refer to key functions that should be performed by the board such as, such as oversight of the management, budget approval and risk management. The fact that the general shareholders’ meeting can overturn any board decisions is a major shortcoming. Gender diversity on boards is very limited. The internal control framework seems to be developing. Companies are recommended to create an internal audit function, while for banks this is a legal requirement. Companies are also required to have external audit and an internal audit committee headed by an independent director. However, it is not clear if internal audit – where established – is independent and reporting to the board or internal audit committee. Companies do not seem to be required by law to disclose non-financial information in their annual report. Financial information is disclosed in line with IFRS.

Basic shareholder rights seem to be adequately regulated by law and major corporate changes require qualified majority at the general shareholders’ meeting. The institutional framework supporting good corporate governance needs improvement. It seems that much effort is made when it comes to legislation, but more attention should be paid to monitoring. The Corporate Governance Code, approved in 2005 and reviewed in 2007, lacks proper implementation mechanism and seems to be outdated. Indicators by international organisations clearly point out corruption as a perceived concern.

 
 
 
 
 

Kosovo

The primary sources of corporate governance legislation in Kosovo are the Law on Business Organizations, the Law on Banks, the Law on Publicly Owned Enterprises, and the Law on Accounting, Financial Reporting and Audit. A Corporate Governance Code for Publicly Owned Enterprises (POEs) was enacted in 2010 and reviewed in 2014. The Code represents a model corporate governance code that all POEs are required to adopt.

Joint stock companies are organised under a one-tier system. In banks and POEs the position of the CEO and chair of the board must be separate. Boards do not appear to have a strategic role and they lack objectivity. The law does not expressly assign the boards with all its key functions. The law requires large companies and banks to have independent directors, but in practice none among the ten largest companies disclosed having any. Gender diversity at the board appears to be limited. The definition of independence is provided in three different laws and regulations, which does not help clarity. There is no functioning stock exchange, hence disclosure requirements – which are typical for listed companies – are very limited. In this respect, only banks and POEs are required to prepare and disclose annual reports including financial and non-financial information. Other companies are required to file their annual reports to the business registry, which is publicly accessible in English. The law requires large companies and banks to prepare and disclose their financial statements in line with IFRS and most of the largest companies seem to comply with this requirement.

Banks and POEs are required to have an internal audit function as well as audit committees. However, only in POEs the audit committee must be made only of board members. The practice of having outsider members in the audit committee should be carefully considered. Basic shareholder rights appear to be regulated by law. Cumulative voting is also provided, unless the Articles provide otherwise. Major corporate changes do not require qualified majority at the general shareholders’ meeting.

The Policy and Monitoring Unit at the Ministry of Economic Development (in charge for monitoring the Code’s implementation by POEs.) appears quite active in the promotion of good corporate governance in POEs. The Ministry has a website – albeit only in Albanian – posting some key information about the major POEs in the country. The website also includes a report prepared by the Ministry on the performance and effectiveness of the board of POEs. Indicators by different international organisations, show that corruption is perceived as a problem.

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Kyrgyz Republic

The primary sources of corporate governance legislation in the Kyrgyz Republic are the Law on joint stock companies; the Law on Banks and Banking Activity; the Law on Securities Market; the Administrative Code and the Resolution N32/7 of the National Bank on Principal Requirements for the Audit Committee. A National Corporate Governance Code was enacted in 2012. The Code is voluntary and does not seem to be taken as a reference.

Joint stock companies are organised under a two-tier board system, where members of the executive body cannot sit on the board. Companies with less than 50 shareholders can decide not to establish a supervisory board. The boards of the ten largest companies are small, with very limited gender diversity.  There are no qualification requirements for board members in companies and limited ones for banks. Only banks are required to have independent directors, but the practice is rare.

In companies, there is no requirement to have “board” committees. Companies are required to have a revision commission appointed by the general shareholders’ meeting. In banks, the audit committee must be made of independent board members. 

The Law on joint stock companies does not refer to all the key functions that should be performed by the board. The banking law is more comprehensive, as it assigns all these roles to the banks’ board.

The legal framework on directors’ duties is not developed. Liability of board members and conflict of interest are regulated by law; nevertheless, legislation does not seem to be comprehensive. Also the judicial practice and case law in this area are limited.

The law requires companies to prepare and disclose their annual report, which should include both financial and non-financial information. The corporate governance section in the annual reports is very limited though and disclosure is often limited to the names of board members and management. Despite the requirement to have financial information in line with IFRS, not all of the largest companies do so. Companies and banks are required to have an external audit and to disclose the auditors’ name and report, and most companies seem to comply with this requirement. Auditors are allowed to provide non-auditing services. This should be carefully monitored as it might undermine the auditor’s independence. Unfortunately, no company seems to disclose any information on that.

Only banks are required to establish an internal audit function. There is no requirement for banks to create a standalone compliance function. Companies are not required to have board level audit committees. Banks are required to have an audit committee composed of three independent board members. However, in our sample, only one bank discloses having such committee in place.

In banks, the external auditor is appointed by the general shareholders meeting; whilst in companies it is appointed by the board, which is not in line with best practices. There is no rotation requirement for external auditors. The law requires the external auditor to be independent, but it is not clear who should run the “independence test”.

Minority shareholders may can call a general shareholders’ meeting, nominate candidates to the board and include additional items on the agenda of the general shareholders’ meeting. Shares carry voting rights in proportion to their value. Shareholders have cumulative voting rights and the right to access corporate documentation. Derivative claims are regulated. Supermajority is required for major corporate decisions. Pre-emptive rights in open joint stock companies are granted only if provided by the articles of association.  Cumulative voting is foreseen by law and it appears to be widely used in practice. There is, however, no disclosure or case law in this area.

Significant ownership variations must be disclosed. Shareholder agreements are not regulated by law. Registration of shareholding by an independent registry is required by law. Free transferability of shares of open joint stock companies cannot be restricted.

The institutional framework supporting good corporate governance needs improvement.  The stock exchange has limited capitalisation and liquidity.  International law firms and international rating agencies have limited presence in the country, whilst the largest audit firms have their offices in the country. These firms usually provide some contribution to enhancing good corporate governance. 

A Corporate Governance Code exists since 2012. The Code recommends companies to adopt their own corporate governance code taking into consideration the Code’s recommendations. In practice, there is no evidence of the Code’s implementation. Indicators by international organisations show a framework under an urgent need for reform, where corruption is still perceived as a critical problem.

 
 
 
 

Latvia

The primary sources of corporate governance legislation in Latvia are the Civil Code; the Commercial Law; the Law on Sworn Auditors; the Law on Financial Markets Instruments; and the Law on Annual Accounts and Reports. In 2005 the Riga Stock Exchange adopted the “Principles of Corporate Governance and Recommendations on their Implementation”, which have been reviewed and amended in 2008 and in 2010. Listed companies are required by law to disclose in their annual reports the extent to which they comply with the Principles and in case on non-compliance explain the reasons for such non-compliance (so called “comply or explain” approach), which seems to be well implemented. Joint stock companies are organised under a two-tier system, where the board appoints the management. In companies, the law does not explicitly empower the board to approve the company’s budget, strategy and risk profile. The Principles recommends that these functions should be undertaken by the board. The law for banks is more precise in this respect. Boards are generally small and legal entities cannot be board members. Companies are not required by law to have independent board members but the Principles of Corporate Governance recommend companies to have a majority of independent directors and set a definition of independence. Half of the ten largest listed companies disclose having independent board members, but only in three cases independent directors represent the majority of the board. Public interest entities are required to have an audit committee, however it is not necessarily a board committee as it can include “outsiders” (i.e., non-board members), a common practice in Latvia. Banks are also required to have a risk committee and a nomination committee. Gender diversity on the board is among the highest in the EBRD region.

Disclosure requirements are detailed in the law, which appears to be generally well implemented. However, information on beneficial ownership, board’s activities and audit committee’s activities and meetings is not systematically disclosed. Companies prepare and disclose their financial information in line with IFRS. Banks are required to create internal audit and compliance functions. Other companies might appoint an internal audit and/or a company controller, but these functions are created upon shareholders’ request and are different from what is generally understood as internal audit. External auditors are required to be independent, but they are allowed to provide non-auditing services. Rotation of external auditors is required, but this requirement does not seem to be well implemented.

Basic shareholders rights are granted by law and generally well implemented. Insider trading and self-dealing are regulated by law, which appears to be well enforced. Shareholders agreements must be disclosed; however they are rarely used and not much regulated. The stock exchange is active in promoting good quality disclosure by listed companies. It appears that the institutional framework supporting good corporate governance is sound. This is also confirmed by international organisations indicators.

 
 
 
 
 

Lithuania

The primary sources of corporate governance legislation in Lithuania are the Civil Code; the Law on Companies; the Law on Banks; the Law on Audit; and the Law on Securities. The Corporate Governance Code for the Companies Listed on NASDAQ OMX Vilnius was introduced in 2006 and reviewed in 2009. The law and the Listing Rules require listed companies to include an annual statement of how they have applied the main principles of the Code. A special template is to be answered by listed companies, where they are required to explain their practices even when they declare to comply with the principles (so-called “comply and explain” approach).

The law allows a large amount of flexibility for companies to decide about their organisational structure, with both supervisory board and board of directors being merely optional. Within this flexible approach, it is not always entirely clear how companies are organised in practice. Board size is generally small and with limited gender diversity, but with a diversified mix of skills. The Code recommends having a sufficient number of independent directors, however, present definitions of independence concentrate on negative “non-affiliation” criteria only. Listed companies and banks are required to set up audit committees which must include at least one independent member, but these committees are not necessarily “board” committees, as they are often made up of “outsiders” and do not necessarily report to the board. The law is silent on some key functions of the board (e.g., budget, risk). It appears that there is no established practice of board evaluation and none of the ten largest listed companies disclosed having a corporate secretary in place.

Companies are required to disclose financial information (IFRS) and a fair amount of non-financial information, and the ten largest listed companies in the country appear to comply well with this requirement. The only negative note relates to disclosure on board and committees meetings and activities. Companies and banks are required to have an internal audit function. Large companies and banks are required to have their financial statements audited by an independent external auditor. The provision of non-auditing services is restricted under the audit committee’s scrutiny.

Basic shareholder rights seem to be adequately regulated, cumulative voting is broadly used and major corporate changes require supermajority at the general shareholders’ meeting. Insider trading is prohibited and it appears that in the last five years several cases on insider trading were investigated. Shareholder agreements seem to be permitted. The institutional framework supporting good corporate governance in Lithuania is relatively advanced. Nevertheless, some key corporate governance issues in the law and the Code deserve some reflection and regulatory reforms would improve the transparency of the monitoring processes. A generally sound institutional framework is also confirmed by international organisations’ competitiveness, investor protection and corruption indicators.

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Moldova

The primary sources of corporate governance legislation in Moldova are the Law on Joint Stock Companies; the Law on Audit; the Law on Securities Market; the Law on Financial Institutions; and the Law on Administration and Privatisation of Public Property. In 2007, the National Commission for Financial Market approved a Corporate Governance Code. The law requires public interest entities to report their compliance with the Code on a “comply or explain” basis, however none of the ten largest listed companies included any reference or information on their compliance with the Code.

In Moldova, joint stock companies with up to 50 shareholders can choose between a one-tier or two-tier system. Companies with more than 50 shareholders must be organised under a two-tier system with a supervisory board and an executive body (no person may serve simultaneously on both bodies of one company). The law deprives the board of its key functions (e.g. approving the direction of the company’s activities and appointing executives), assigning them to the general shareholders meeting. The law requires the majority of board members to be “non affiliated”, but it is silent on “independence”. None of the ten largest listed companies appear to have board committees. Instead, an auditing commission must be established – made of non-board members – which is appointed and accountable to the general shareholders meeting. Finally, gender diversity at the board is limited, there is no established practice of board evaluation and little evidence that the board is supported by a corporate secretary.

The law is quite detailed on disclosure requirements, however in practice, only banks’ websites appear to be relatively informative. Largest companies prepare financial statements in line with IFRS and publish their annual reports online, however information on corporate governance practices is extremely limited.

All entities are required to establish a system of internal control, but the internal audit function is regulated only for banks. The law requires the external auditors to be independent, but it is not clear who should run the “independence test”. Auditors are prohibited to provide non auditing services and companies are required to rotate them every three years. It seems that these requirements are not well implemented. Minority shareholders enjoy a number of basic rights under the law. Shareholders agreements are not regulated and it is not clear if they are enforceable.

The stock exchange in Moldova suffers from limited liquidity and does not seem active in promoting good corporate governance. Further, there is no monitoring on implementation of the Corporate Governance Code and no company report complying with it. Indicators by different international organisations show a framework under need of reform, where corruption is perceived as a problem.

 
 
 
 
 

Mongolia

The primary sources of corporate governance legislation in Mongolia are the Company Law; the Banking Law; and the Law on Securities Market. A Corporate Governance Code was adopted in 2007 by the Financial Regulatory Commission of Mongolia, and it was reviewed in 2014. Listed companies are recommended to include a corporate governance report about their compliance with the Code, but this practice does not seem to be well implemented. Companies are organised under a one-tier board system (roles of CEO and chair of the board cannot be combined) and the minimum board size required by law (nine members) seems excessive. Legal entities cannot be board members. Board gender diversity is very low. In contrast to bank boards, the law does not explicitly assign to the board of the company all its fundamental functions. The law requires that at least one thirds of the board be composed of independent directors. Definitions of independence do not include any “positive criteria” (i.e., what it is expected in practice from independent directors). Provisions on qualification requirements (for board members of banks and state-owned companies), annual board evaluations and audit, nomination and remuneration committees (for all public companies) are provided in the law, but the extent to which they are implemented is not clear.

The framework does not ensure high levels of transparency and disclosure of financial and non-financial information, as there is no requirement to publish mandatory annual reports. Disclosure in most areas of corporate governance is very patchy and companies do not seem to disclose any information on their board and committee activities, transactions with company’s shares by directors or their compliance with the Corporate Governance Code.

The internal control framework does not appear to be well developed. For companies, an internal audit function is not mandatory and is rare in practice, whereas banks must have internal audit, but there are no requirements for a standalone compliance function. Listed companies and banks are required to appoint an independent external auditor. Audit firms are required to rotate every five years, and the provision of certain non-auditing services is restricted. Companies are recommended to adopt a code of ethics, but only one of the top listed companies discloses having one. The legal framework does not provide protection to whistle-blowers. A number of basic shareholder rights are provided by the legal framework. Shareholder agreements are regulated by law, but are not subject to any specific disclosure obligations.

The institutional environment promoting corporate governance in Mongolia would benefit from further reforms. A Corporate Governance Code was adopted in 2007 by the Financial Regulatory Commission of Mongolia (FRC), and it was recently reviewed in 2014. The new Code proposes less detailed recommendations than the previous one, and omits many important regulatory aspects. There seem to be no authorities monitoring the Code’s implementation. There are a few inconsistencies in the law and some key corporate governance issues are not regulated. These shortcomings are evidenced by international indicators, which rank Mongolia poorly in terms of competitiveness and corruption.

 
 
 
 

Montenegro

The primary sources of corporate governance legislation in Montenegro are the Law on Business Organizations; the Law on Banks; the Law on Accounting and Auditing; and the Law on Securities. In 2009, a Corporate Governance Code was adopted aiming at improving corporate governance practices of listed companies. The Code is to be implemented according to the so-called "comply or explain" approach.

Joint stock companies are organised under a two-tier system while banks under a one-tier system. Boards are generally small, with some gender diversity. It seems that legal entities can serve as board members. Fiduciary duties, liability of board members and conflict of interests are regulated by law, however case law on these issues is very limited. Listed companies are not required to appoint independent directors, and the Corporate Governance Code contains a rather vague recommendation on this matter. In the case of banks, boards are required to be composed of at least two persons who are "independent from the bank", but the criteria which determine their independence are not comprehensive. Companies are not required to establish an audit or any other board committees but only "auditing boards", which do not fulfil the same function. In the case of banks, the law requires them to set up audit committees. In both cases, these committees can be composed of "outsiders" (i.e., non-board members) and thus cannot be accurately classified as board committees. There are no independence requirements for audit committees or auditing board members.

Large entities are required to prepare and disclose their financial statements in line with IFRS and to appoint independent external auditors. Provision of non-auditing services is restricted, but there is no requirement to rotate the external auditor. In banks, external auditors are appointed by the board, which raises some doubts. Annual reports include mainly financial information. Companies listed into "A" and "B" listing segments of the Stock Exchange are required to report their compliance with the Corporate Governance Code, but we could not find any compliance statements.

Large legal entities and banks are required to have an internal auditor who must meet certain qualifications. Banks are additionally required to establish a compliance function. Only a small minority of the surveyed companies —all banks— disclose having an internal audit in place, and compliance functions do not seem to be dealing with ‘compliance risk’.

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Morocco

The primary sources of corporate governance legislation in Morocco are the Commercial Code, the Investment Charter, the Law on Partnerships, Limited Partnerships, Limited Partnership by Shares, Limited Liability Companies and Joint Ventures; and the Law on Public Limited Companies. In 2008, the National Corporate Governance Commission issued the Moroccan Code of Corporate Governance. The Code has been complemented by three annexes over the years. The Code recommends companies to implement its recommendations pursuant to the so-called "comply or explain" approach; however, this approach has not been transposed in mandatory legislation and in practice companies do not seem to take the Code’s recommendations as a reference.

Companies in Morocco can be organised under a one- or two-tier system. In the one-tier system, adopted by most listed companies, the role of CEO and board chair can be combined. The law vests the board with the broadest powers but fails to assign the board (except in banks) with the authority to approve the company strategy, budget and risk profile. All board members are required to be shareholders and legal entities may serve on boards, an observed common practice. The law does not require companies (with the exception of banks) to have independent board members, it only requires them to have a majority of non-executive members. Only the Corporate Governance Code recommends listed companies to have a sufficient number of independent board members. The definition of independence included in the Code is not comprehensive. Gender diversity at the board is very limited.

Disclosure of non-financial information by companies is limited. Companies are required to disclose their financial statements and annual reports mainly include financial information only. Banks are required to prepare their financial statements in line with the IFRS. Other companies can choose between the IFRS and the Moroccan GAAP.

Companies are recommended and banks required to establish an internal control function. Banks are also required to establish a compliance function. It seems that a number of companies combine the compliance and internal audit functions, which is not a good practice. Banks are required, and companies are recommended, to set up an audit committee. Companies are required to have their financial statements audited by an independent auditor, appointed by the general shareholders’ meeting. Publicly listed companies and banks are required to have two external auditors.

Basic shareholder rights seem to be adequately regulated by law.

The Casablanca Stock Exchange (CSE) is the main local stock exchange in Morocco. Its market capitalisation appears to be around 50% of the country’s GDP and it has three listing segments; however, none of them requires higher corporate governance standards. When looking at the indicators provided by international organisations, Morocco is not well positioned in terms of competitiveness, ease of doing business and corruption.

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Poland

The primary sources of corporate governance legislation in Poland are the Code of Commercial Companies; the Act On Public Offering, Conditions Governing the Introduction of Financial Instruments to Organized Trading, and Public Companies; the Act On Trading Financial Instruments; the Accounting Act; the Act on Statutory Auditors; the Banking Act; and the Resolution of Banking Supervisory Commission on systems of internal control. A Code of Best Practice for WSE Listed Companies was approved by Warsaw Stock Exchange in 2002, reviewed and amended in 2005, 2007 and 2012. A further revision is currently underway. Listed companies are required by law and the Listing Rules to report on their compliance with the Code (so-called “comply or explain” approach). All ten largest listed companies disclose how they comply with the Code. Nine companies also provide explanations in case of non-compliance, the majority of which appears to be meaningful.

Joint stock companies are organised under a two-tier system, where the general shareholders meeting (GSM) appoints the supervisory board and the latter appoints the management board. However, the statute can provide otherwise (this rule does not apply to banks). Supervisory boards of the ten largest listed companies are generally well-sized, with gender diversity nearing 20% of the board, one of the highest in the EBRD region. Legal entities cannot be supervisory board members. There are limited law requirements concerning the qualification of board members, but it appears that the boards of the ten largest listed companies have a diversified mix of skills. The Code also recommends that at least two members of the supervisory board should be independent. Board evaluation practices and corporate secretary function do not seem to be well developed. Fiduciary duties, liability of board members and conflicts of interest are regulated by law and elaborated quite extensively in the case law and judicial practice. Disclosure requirements are detailed in the law and appear to be generally well implemented.

Internal control is regulated only for banks. Banks are also required to establish a compliance function and internal audit. Large companies are required to be subject to independent external audit. Public interest companies are required to create an audit committee, appointed by the supervisory board among its members. The audit committee must include at least one independent member, qualified in accounting and finance. There is no comprehensive standalone law that protects whistleblowers.

Basic shareholders rights are granted by law and seem generally well implemented. The company’s statute might grant so-called “personal rights” to some shareholders, such as, inter alia, the right to nominate members of the management board or the supervisory board. In addition, certain shares can have double voting rights in certain matters.

The Warsaw Stock Exchange is a well-functioning exchange, and there seems to be a number of players in the country supporting good corporate governance. Though the Code is generally sound, it appears that there are no institutions actively monitoring companies’ compliance with it. In general, it appears that the institutional framework supporting good corporate governance is sound.

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Romania

The primary sources of corporate governance legislation in Romania are the Companies Law; the Accounting Regulation; the Capital Markets Law; the Government Emergency Ordinance on Credit Institutions and Capital Adequacy; and the Government Emergency Ordinance 109/2011 on state owned enterprises. In 2008, the Bucharest Stock Exchange (BSE) adopted a corporate governance code addressed to listed companies, to be implemented as "comply or explain". The Code was revised in 2015 and a new Code entered into force in January 2016.

Joint stock companies in Romania can choose between the one-tier and the two tier system. The large majority of the ten largest listed companies are organised under a one-tier system. In the one tier system there is no requirement for the CEO to be separated from the chair of the board. Boards are generally well-sized, but have limited gender diversity. Legal entities can be board members. In banks, the law provides for qualification requirements for board members, while for companies this is only a recommendation. If the audit committee is established, it should have at least one member with experience in accounting or auditing. There are at least two definitions of independent directors, one in the law and one in the Code, which does not help clarity. The definition in Code is more comprehensive and includes some positive criteria (i.e., what it is expected in practice from independent directors).

All companies and banks are required by law to prepare and publish an annual report, which should include financial and non-financial information; the large majority of the largest listed companies appear to formally comply with this requirement. Seven of the companies in our sample disclosed a "comply or explain" statement; however, the quality of explanations is often poor. Following the adoption of the 2015 Code, the Bucharest Stock Exchange has publicly committed to have a leading role in monitoring the quality of disclosure by listed companies. We expect that non-financial disclosure will substantially improve in the following years.

Companies whose annual financial statements are subject to audit (large companies and banks) are required to establish an internal audit function, with direct access and reporting to the board or audit committee. Provision of non-auditing services by external auditors is allowed.

Basic shareholders rights are detailed in legislation and appear to be well implemented. Insider trading seems to be comprehensively regulated by law and enforced. Registration of shareholding appears reliable and well established. Regulation on self-dealing has room for improvement.

Both the right framework and the institutions are present in Romania to ensure the promotion of good corporate governance. The BSE appears to have limited capitalisation, but it is active in promoting good quality disclosure by listed companies. There are a number of inconsistencies in the legislation especially when considering the framework of private companies vs. state owned enterprises. Because some of the largest listed companies are state-controlled, this causes an uneven playing field. Much will depend on how the recommendations of the newly adopted Code will be translated into practice.

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Russia

The primary sources of corporate governance legislation in Russia are the Law on Joint Stock Companies, the Law on the Securities Market, the Law on Countering the Illegal Use of Insider Information and Market Manipulation, the Regulation on Information Disclosure by Issuers of Securities and the Law on Banks and Banking Activity. In 2001, a Corporate Governance Code was adopted to be implemented pursuant to the so-called "comply or explain" approach. The Code was revised in 2013 and a new Code was enacted in 2014. So far, there has been little or no monitoring of compliance with the Code, but the Central Bank of Russia has committed to actively oversee the implementation of the new Code.

Joint stock companies (JSC) in Russia are organised under a one-tier system, where the role of CEO and chair of the board must be separate. Legal entities cannot be board members. Boards are generally well-sized, but have limited gender diversity. The law does not clearly assign to the board all key functions; such as the strategic role in balancing risk and reward, appointing and removing executives (unless provided by the Articles) and management oversight. Companies are required to have independent directors on their board. All ten largest listed companies have created an audit committee, which in most cases is made by a majority of independent directors. Eight companies also have remuneration and nomination committees.

Preparation of annual reports including financial and non-financial information is mandatory and all ten largest listed companies published comprehensive annual reports; however, disclosure is generally very formalistic and focuses on internal documents rather than practice. Financial information is disclosed in line with IFRS.

Joint stock companies are required to appoint an independent external auditor, who can also provide non-auditing services. Listed companies and banks are required to set up internal audit departments, and the majority of the largest companies appear to comply. Banks are not required to establish a standalone compliance function. In addition to the audit committee, listed companies are required to set up a revision commission, which is responsible for the oversight of the company’s financial and business activities. There is no comprehensive legislation protecting whistle-blowers. Regulation on related party transactions and conflict of interests appears to be limited.

Most of the basic shareholder rights seem well regulated, but there is limited case law and other information on their enforcement in practice. The law regulates registration of shareholding and shareholder agreements, which are considered enforceable.

The Moscow Exchange is highly capitalised and very liquid. Trading is divided in five segments with different corporate governance requirements. The Exchange appears to be very active in promoting good corporate governance. All joint stock companies are recommended to implement the Corporate Governance Code’s provisions, and all listed companies are required to include a "comply or explain" section in their annual reports. However, only five of the ten largest listed companies have disclosed a "comply or explain" statement. Indicators by international organisations point out that corruption remains a perceived concern.

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Serbia

The primary sources of corporate governance legislation in Serbia are the Law on Business Companies; the Law on Banks; and the Law on Capital Market. In 2008, the Belgrade Stock Exchange issued a Corporate Governance Code addressed to listed companies, to be implemented as "comply or explain". In 2011, the Law on Business Entities was amended and listed companies were required to disclose their compliance with a corporate governance code (so-called "comply or explain" approach). In 2012, the Chamber of Commerce and Industry of Serbia also developed its own corporate governance code, which is voluntary and addressed to all companies. Among the ten largest listed companies, it appears that the majority takes as a reference the Code of the Belgrade Stock Exchange, however a few companies also refer to the Code of the Chamber of Commerce and Industry.

Companies in Serbia can be organised under a one-tier or two-tier system, the latter being more common among the largest listed companies. The law assigns to the board most of its key functions, except for the approval of the budget. Boards of listed company are required to have at least one independent member. In banks, the boards must be made up of at least one third of independent members. Legal entities can be board members; this approach raises some doubts. Gender diversity at the boards of the ten largest listed companies is among the highest in the EBRD region. Listed companies are required to create an audit committee, while banks are also required to create other committees. It is common practice for committees to include non-board members. It seems that the law also allows executives to sit in committees, which is a major weakness.

Companies are required to disclose a significant amount of financial and non-financial information, and largest companies appear to generally comply with the requirements. Financial statements must be in line with the IFRS. Companies and banks are required to establish an internal control system and have an internal auditor. Banks are also required to have standalone compliance and risk management functions. Medium, large, listed companies and banks are also required to have an independent external audit. The provision of non-auditing services by the external auditor is restricted and they are required to rotate on a regular basis.

The law grants shareholders all basic rights related to the general shareholders meeting as well as other general protections and access to corporate documents. The institutional environment promoting corporate governance seems to be fairly developed, but key reforms would benefit the advancement of current efforts. International organisations’ indicators reveal that corruption is still perceived as a problem.

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Slovak Republic

The primary sources of corporate governance legislation in the Slovak Republic are the Commercial Code; the Accounting Act; and the Securities Act. A Corporate Governance Code was first adopted in 2002 by Stock Exchange Commission and the Financial Market Authority. It was later revised in 2008 by the Central European Corporate Governance Association. The Code is to be implemented under a “comply or explain” basis. Companies are required to be organised under a two-tier board system with a supervisory board (also referred below as “board”) and a management board. Unless the Articles provide otherwise, the general shareholders’ meeting retains the authority to appoint and remove both the members of the supervisory board and of the management board, which is a major shortcoming. Supervisory boards are relatively small, with very limited gender diversity. Legal entities cannot be board members. Only the Act on Banks and the Corporate Governance Code provides for qualification requirements for board members.

Public interest entities are required to have an audit committee where at least one member is independent. It appears that there are two definitions of independence: one in the law (referring to the audit committee) and one in the Corporate Governance Code. The audit committee is appointed by the general shareholders’ meeting and might include “outsiders” (i.e., non-board members), which means that this body is not necessarily a “board” committee. In at least one case the audit committee included executives, which is a very bad practice. Banks are required to establish a remuneration committee and a committee for risk management, but they can opt out. The Corporate Governance Code recommends companies to establish a nomination and remuneration committee. Board evaluation practices are not well developed. Fiduciary duties, liability of board members, and conflicts of interest rules are regulated by law.

Companies are required to disclose non-financial information within their annual reports. Large companies are required to have their financial statements audited by an independent external auditor. The provision of non-auditing services by the external auditor is allowed, and the requirement to rotate external auditors had been recently removed. Internal audit function is required only for banks. It seems that there is no requirement for banks to create separate compliance function.

The Corporate Governance Code recommends companies to adopt a code of ethics, and half of the ten largest listed companies disclose having one in place. Regulation of related party transactions appears to be minimal. A new whistle-blowing protection Act entered into force in January 2015. The law details all basic shareholders rights.

The institutional framework supporting corporate governance practices in the Slovak Republic seems to be moderately well developed, with room for improvement. Disclosures on corporate governance practices should be strengthened. When looking at the international organisations’ indicators, the Slovak Republic ranks moderately poorly – compared to other EU countries - in terms of competitiveness, ease of doing business and corruption perception.

 
 
 
 

Slovenia

The primary sources of corporate governance legislation in Slovenia are the Companies Act, the Banking Act, the Market in Financial Instruments Act and the Auditing Act. In 2004, the Ljubljana Stock Exchange adopted the Slovenian Corporate Governance Code (revised in 2009), which is to be implemented on a “comply or explain” basis.

Companies in Slovenia can operate under a one- or two-tier board system, which is prevalent in practice. The board size seems adequate and gender diversity at the board is one of the highest in the EBRD region. Employee representation at the board is mandatory. The law is silent on the board authority of approving the company’s strategy, budget and risk appetite/profile. The Corporate Governance Code recommends that at least half of the board members in listed companies are independent, however its definition of independence provides only for negative “non-affiliation” criteria. Adequate qualification for companies’ board members is merely recommended while in banks, board members are subject to fit and proper requirements. Listed companies are required to set up audit committees that must include at least one independent expert on accounting and audit. It seems that this “independent expert” is meant as being an “outsider” (i.e., not a board member). We have some reservations about this solution, as we believe that “board” committee should be composed exclusively of board members. In banks, audit committees must be composed entirely of board members. Banks are also required to set up risk committees and - depending on their size - nomination and remuneration committees.

Companies are required to prepare and disclose annual reports including financial (in line with IFRS) and non-financial information. Annual reports of listed companies must include a corporate governance statement and explain deviations from the Corporate Governance Code’s recommendations. This is adhered to in practice, although some explanations are very formalistic and not much explanatory. Listed companies and banks disclose names and opinions of external auditors in their annual reports.

Companies are merely recommended to create an internal audit function while banks are required to establish it, but it seems to report to the management board, rather than to the board via the audit committee. Banks are also required to establish a standalone compliance function. The law assigns to the general shareholders’ meeting the exclusive authority to appoint the external auditor, upon recommendation of the supervisory board, based on audit committee’s recommendation. The law requires the external auditor to be independent and it is the audit committee that runs the “independence test”. The law requires auditors’ rotation after a maximum of seven consecutive years, which is in line with best practices.

Shareholders with at least 5% of company’s shares can call a general shareholders’ meeting (GSM) and add items to the GSM agenda. Supermajority is required to approve major corporate changes. Self-dealing is regulated and insider trading is forbidden. Derivative action is regulated by law, but procedurally difficult to pursue and it seems that there are no instruments that enable minority shareholder representation at the supervisory board. There is no requirement to disclose shareholders agreements and it is not clear whether they are enforceable.

The institutional framework supporting good corporate governance in Slovenia is relatively advanced. The Ljubljana Stock Exchange seems to be actively monitoring the securities market and promoting good corporate governance. Indicators provided by international organisations rank Slovenia moderately well with regard to corruption and investor protection perceptions, but reforms are needed to improve the country’s competitiveness levels.

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Tajikistan

The primary sources of corporate governance legislation in Tajikistan are the Joint Stock Companies Law, the Auditors Activities Law, the Securities Market Law and the Banking Activity Law. The only endorsed Corporate Governance Code is the "Principles of Corporate Governance in Commercial Banks and other Credit Institutions, Licensed by the National Bank of Tajikistan", which were adopted in 2005. Although the Principles are approved by the National Bank of Tajikistan and on the face appear to be mandatory, their language is vague and do not seem to be well implemented in practice.

Companies with up to 50 shareholders can chose to be organised under either a two-tier or a one-tier system. Companies with more than 50 shareholders are required to establish a supervisory board, but most of its traditional key functions (such as approving the company’s risk profile and appointing/dismissing executives) are retained by the general shareholders’ meeting. There is no requirement for independent directors in boards, and they are rarely seen in practice. Gender diversity at the board is also very limited. Both financial and non-financial disclosure is poor. The requirements by law are minimal, but still they do not seem to be well implemented, which can be attributed to (but not justified by) the lack of a functioning stock exchange. Only financial disclosure by banks seems to have reached an acceptable level – at least on paper.

The internal control in companies does not look to be well developed. The law provides some regulation about internal audit, but it was not possible to understand how it is implemented in practice. Only banks are required to create an audit committee at the board level, however its composition is not defined Joint stock companies must have a "revision commission", which is appointed by the general shareholders’ meeting. The lack of independent audit committee and the unclear role of the revision commission are major issues.

Shareholders have a number of rights granted by law, however it is not clear how these rights are implemented in practice. The extent to which shareholders can in practice have access to their rights before and during the general shareholders’ meeting is also unclear. There are very few active players and very little pressure for the promotion of good corporate governance in the country. International organisations’ indicators show a framework under urgent need of reform where corruption is perceived as a critical problem.

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Tunisia

The primary sources of corporate governance legislation in Tunisia are the Law enacting the Commercial Companies Code; the Law on the Strengthening of the Security of Financial Relations; the Law on the Stimulation of Economic Initiative; and Law on the Establishment of Lending Institutions. In 2008, the Tunisian Centre of Corporate Governance issued the Tunisian Guide of Corporate Governance, which was revised in 2012. Although the Guide promotes practices of higher standards than those required by law, it is purely voluntary, and none of the ten largest listed companies provides a “comply or explain” statement with its annual report.

Companies can be organised under a one- tier system (where the role of CEO and board chair can be combined) or a two-tier board system. In the two-tier system the general shareholders’ meeting appoints the supervisory board, which in turn appoints the management board. Only one among the ten largest listed companies is organised under a two-tier system. Legal entities can be board members, which seems to be common practice. In companies there are no qualification requirements for board members and in banks those requirements are quite vague. Gender diversity at the board is limited. Independent directors (minimum two) are mandatory only in banks. Fiduciary duties, directors’ liability and conflicts of interest situations are regulated by law and consistent case law on these issues exist.

Disclosure of companies’ non-financial information is insufficiently regulated and poor in practice. Companies are required to prepare and disclose their financial statements with the auditor’s opinion, however those statements are not prepared in line with IFRS. Banks, insurance companies and large companies are required to have two external auditors. There is limited restriction on the provision of non-auditing services. Large and listed companies and banks are required to establish audit committees. In companies, it seems that except for the CEO, executive directors may be members of the audit committee, which is a bad practice. Banks are also required to set up a risk committee, and both committees must be composed only of non-executive directors and chaired by an independent director. Companies and banks are required to establish an internal audit function. Banks are also required to establish a compliance function. Related party transactions and conflicts of interest are regulated by law. There is no whistle-blowing regulation in place.

The Companies Code was amended in 2009 and one of the main purposes of this reform was to reinforce the rights of minority shareholders. Despite some improvement, some fundamental rights are not yet granted by law.

It appears that the institutional framework supporting good corporate governance in Tunisia has improved over the past decade, but space for further reform exists. It seems that companies’ compliance with the provisions of the Guide is not monitored. Some important corporate governance issues are not thoroughly regulated. International indicators rank Tunisia relatively poorly with regard to competitiveness, corruption and investor protection perceptions.

 
 
 
 
 

Turkey

The primary sources of corporate governance legislation in Turkey are the Turkish Commercial Code, the Capital Market Act and various Communiques of the Capital Markets Board. The Corporate Governance Code in Turkey is represented by the "Principles on Corporate Governance" first issued in 2003 and revised most recently in 2014. Some of the provisions of the Principles are mandatory; others are to be implemented under the so-called "comply or explain" approach.

Companies are organised under a one-tier system. The law is clear in assigning the board a strategic role for the company’s direction. The New Turkish Commercial Code includes various provisions related to the professionalism of the board and overall, the boards of the ten largest listed companies appear to have a diversified mix of skills. Legal entities can be board members and this solution raises some doubts. The Turkish Corporate Governance Principles recommend the role of the CEO and chair of the board to be separate. The law and the Principles require listed companies to establish committees. Audit committees must be entirely composed of independent directors, while other committees may comprise non-executive, executive and non-board members. Gender diversity at the board appears very limited.

The law and the Corporate Governance Principles require disclosure of a fair amount of non-financial information and companies seem to comply with this requirement, disclosing through their website, the stock exchange’ disclosure platform or their annual reports information on their board composition, directors’ qualifications and independence, board and committee activities, capital, number of shares, major shareholders, transactions by directors with company’s shares, general shareholders’ meeting’s minutes, articles of associations and material events. Listed companies are required to disclose whether they comply with the Principles, or to explain why they do not apply certain recommendations. Explanations are however rather weak and often limit themselves to rephrasing the Principles or the law.

Companies are required to establish an internal control function. Banks are also required to set up a compliance function and to establish a clear separation between the management and control functions. Companies and banks seem to comply with these requirements. Listed and large companies are required to appoint an independent external auditor to review the financial results being reported in their financial statements. Auditors are not required to rotate, and the provision of certain non-auditing services is allowed.

Basic shareholder rights seem to be adequately regulated by law. Shareholder agreements are common, but they lack specific regulation.

The institutional framework supporting good corporate governance in Turkey is relatively advanced. The Istanbul Stock Exchange is the main local stock exchange in Turkey. The Capital Markets Board of Turkey (CMB) is the state regulator responsible for supervising the capital market and the activities of joint stock companies. The CMB seems to be actively promoting the Corporate Governance Principles and monitoring the securities market. Indicators provided by international organisations rank Turkey moderately well with regard to corruption, competitiveness, and investor protection perceptions.

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Ukraine

The primary sources of corporate governance legislation in Ukraine are the Law on Joint Stock Companies; the Law on Banks and Banking Activity; the Law on Accounting and Financial Reporting in Ukraine, the Law on State Regulation of the Securities Market in Ukraine; the Civil Code; and the Law on Financial Services and State Regulation of Financial Service Market. The Ukrainian Corporate Governance Principles (i.e., the Ukrainian Corporate Governance Code) were first released by the National Commission on Securities and Stock Market in 2003 and revised in 2008. Implementation of the Principles, as well as disclosure of compliance with them, is purely voluntary.

Joint stock companies (JSCs) with ten or more shareholders must be organized under a two-tier system and establish a supervisory board. The requirement for a board size of minimum 5 members has been recently reintroduced in the company law, while the banking law already contained this requirement. Since 2016, legal entities can no longer serve as board members. Banks, public joint stock companies and state owned enterprises are required to have independent directors on their board. A definition of independence was recently introduced in the law but it focuses only on non-affiliation criteria. Disclosure on independent board and committee members is yet non-existent. The law does not explicitly assign to boards of companies some key functions such as approving corporate strategy and annual budget, as well as determining the company’s risk profile, while this is much more clearly regulated for banks.

The law requires companies to prepare and disclose their annual reports, including both financial and non-financial information (although not a “comply or explain” statement). Financial statements of public companies must be prepared in line with IFRS, audited by independent auditors and made public. Only banks are required to create an internal audit function. Starting from May 2016, public companies and majority-state-owned companies are required to establish an audit committee consisting exclusively or predominantly of independent members of the supervisory board and chaired by them. Previously, establishing board committees was not obligatory, and the disclosure in this area is generally very poor. There is no requirement to rotate external auditors. The provision of non-auditing services to companies by the external auditor is restricted, but the restriction is limited to consulting services. Only banks are required to disclose information on non-auditing services.

Shareholders representing 10% of the company’s shares can call a GSM. Shareholders are not entitled to pre-emptive rights in public offering. Supermajority requirements and cumulative voting are provided in the law. The concept of derivative suits has only recently been introduced into Ukrainian legislation. Shareholders agreements are allowed only if envisaged by the articles of association.

Although corporate governance trends in the country are actively monitored by the National Securities and Stock Market Commission, it is not clear whether there is a body in charge of actively monitoring the Principles’ implementation. Indicators by international organisations show a framework where corruption, competitiveness and investor protection are still perceived as critical problems.

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