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.