From your point of view, how are corporate social responsibility and corporate governance interrelated?

In my opinion, these concepts are inextricably linked. Corporate governance and corporate social responsibility (CSR) complement each other, allowing the company to increase efficiency and achieve better results in their work. But this relationship is not obvious to everyone. Besides, I am sure that there will be opponents to my point of view, because, unfortunately, many people still share the view that businesses do not have to be socially responsible.

According to economist Milton Friedman, "the business of business is business". However, in response to this claim, we have to remember the unprecedented environmental catastrophe in the Gulf of Mexico (British Petroleum), frequent explosions in coal mines in China, and the loss of thousands of deposits and retirement savings after the collapse of major corporations, including Enron, Bank of America, Lehman Brothers, as well as other examples, when people and the environment are severely affected as a result of the work of companies. The question arises - should the activities of companies should focus solely on profits, not taking into account socially important interests? I'm certain they should not. Otherwise, egregious situations of human rights violations, environmental pollution and abuses by corporations will be ignored and continue everywhere.

Returning to the question of the relationship of corporate governance and CSR, I note that CSR is a concept that must be initiated by senior management of the company and fit into the overall corporate strategy. CSR is not a one-time event aimed at increasing the company's reputation, but above all the awareness that many interested parties (stakeholders), are involved in the realization of management decisions, and in particular those who have socially significant interests in respect to the company’s activity (e.g, employees, suppliers, partners, local communities, governmental authorities and society as a whole). The main problem of the system of corporate governance is the necessity to establish mechanisms to balance the interests of owners and other participants in corporate relations. It is about achieving a balance of interests between majority and minority shareholders, between shareholders, managers and external stakeholders, between shareholders, managers and employees.

Thus, corporate governance can be considered a tool for the effective implementation of the concept of CSR. This being said, CSR should be seen as an instrument to promote the proper implementation of corporate governance principles such as justice, responsibility, transparency. Here is an example. A Code of Business Ethics is a key internal document. The company defines certain patterns of behavior, common principles and standards for relations by means of a Code of Ethics. The Code of Ethics also serves as a reflection of the concept of social responsibility to which the company adheres. Adoption of the Code of Ethics is the responsibility of the Board of Directors. The Board of Directors is thereby entrusted with the important role of presenting to the management and employees of the company principles that the company its officers and its employees should follow. The principles of social responsibility must be consolidated and incorporated in the "DNA" of the company by its top management with an effective system of corporate governance.

Please explain in more detail what is meant by corporate governance?

This is an important and, at the same time, a difficult question. A single universal definition, applicable to all kinds of situations, countries and legal systems, does not exist. International practice offers many options. For example, IFC defines corporate governance as the structures and processes of company management and control. Corporate governance is a system of relationships between the main participants in corporate relations - shareholders, company management and stakeholders. The effective implementation of this system is possible due to the generally accepted principles of corporate management, which include such principles as fairness, responsibility, transparency and accountability. These principles were presented by the Organization for Economic Cooperation and Development (OECD) in 1999, later receiving recognition in most countries as a basic guide on corporate governance issues.

Could you assess the current state of corporate governance in Kazakhstan?

In Kazakhstan, corporate governance has been discussed for a long time. Back in 2002, the Expert Council on the securities market under the National Bank of Kazakhstan adopted the "Guidelines on the application of principles of corporate governance by Kazakhstani joint-stock companies." Corporate governance often becomes a central topic of discussion at a variety of conferences and round tables. In general, there is increasing interest in Kazakhstani companies in corporate governance issues. On the one hand, this is due to initiatives of the regulator to raise corporate governance standards, consolidated in normative-legal acts, which are compulsory for market participants. On the other hand, it is due to the desire of companies to successfully enter the IPO, attract domestic and foreign investors, improve their image, get high ratings.

In addition, we should mention the consequences of the financial crisis, which have demonstrated weaknesses in corporate governance and risk management. As noted in the OECD report "Corporate Governance Lessons from the Financial Crisis,” the financial crisis has exposed serious shortcomings in corporate governance. The OECD concluded that in a difficult situation, corporate governance experts have not been able to fulfill their functions - opposition to excessively risk-taking business practices. As a result, at present many well-established concepts of corporate governance are being reviewed and updated. And Kazakhstan is not an exception. At the moment, we are working on two bills, where additions and changes to legislation on the strengthening of accountability for officials, increasing transparency of companies, disclosure of major deals and deals in whose commission there are are private interests, etc. will be presented. These are the bill "On making amendments and additions to some legislative acts of the Republic of Kazakhstan on mortgage lending and consumer protection, financial services and investment,” which is currently under consideration in the Parliament of the Republic of Kazakhstan, and the draft Law of the Republic of Kazakhstan “On making amendments and additions to some legislative acts of the Republic of Kazakhstan on regulation of banking and financial institutions in terms of minimizing the risks.”

Could you describe the main advantages of implementation of corporate governance principles in a company?

A common opinion on the benefits of applying the principles of corporate governance is that it provides greater access to capital markets, increases investment attractiveness of the company, increases its operating efficiency and creates a positive image. In my view, corporate governance indeed contributes to the realization of these goals.  We should remember that the construction of an effective system of corporate governance is a continuous and complex process involving many facets of the company.

I shall note that international practice does not have an ideal model of corporate governance. Managers should choose those components of effective management and control that will meet the goals and objectives of the company. For example, a company searching for investors should, above all, pay attention to improving the system of disclosure of information and providing mechanisms to protect shareholder rights. For companies with a concentrated ownership structure it is optimal, in the first place, to form well-functioning governing bodies, as well as to establish a clear mechanism of interaction between the board and management, including issues of responsibility and accountability.

It isn’t necessary to try out all the recommendations for best practices. Ultimately, this will give the opposite effect - formal structures and regulations that don’t actually work. In addition, you must be prepared for the fact that the development of corporate governance can be costly. This is due to the introduction of new institutions (for example, independent directors, committees of the board), attraction of additional expertise (corporate secretary), development of new procedures and regulations, brining in external consultants if necessary, etc.

Work to improve corporate governance practices should be gradual and based on business strategy and the specifics of the company. I shall note that one of the directions of our project is to conduct a comprehensive assessment of corporate governance in Kazakhstani companies and banks and to assist in reforming corporate governance in line with the best international practice ("pilot program"). IFC pilot program gives companies an opportunity, together with leading experts from IFC, to look at existing practices for  management and control from the outside, to eliminate deficiencies in corporate governance, to assess internal capabilities, to go through necessary training, as well as to receive answers to their questions in the field of corporate governance.

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Adalyat Abdumanapova

IFC Kazakhstan Project Coordinator, Legal Advisor

IFC Central Asia Corporate Governance Project

IFC
International Finance Corporation (IFC) is a member of the World Bank Group and promotes open and competitive markets in developing countries and countries with economies in transition to improve people's living conditions and reduce poverty. One of the activities of IFC is to implement advisory programs aiming to promote entrepreneurship, private sector involvement in infrastructure projects, improving the business environment, increasing an access to financing and strengthening the environmental and social sustainability. For more information, please go to web site: www.ifc.org

IFC Project on Corporate Governance in Central Asia (www.ifc.org/cacgp) carries out activities to familiarize joint-stock companies with international best practice of corporate governance through seminars and inpidual counseling; to advise public authorities in Central Asia on reforms of legislation and practice in the field of corporate governance; to assist higher educational institutions to develop training programs on corporate governance in order to prepare the next generation of business leaders; as well as to conduct public and educational campaigns to raise public awareness on issues relating to corporate governance.