40839 Company Corporate Governance in Azerbaijan 5002 Survey Results Results Company Corporate Governance in Azerbaijan Survey Results Baku, Azerbaijan - 2005 This report is available free of charge, in print or electronic form, at the following address: International Finance Corporation Azerbaijan Corporate Governance Project 21 Istiglaliyyat Street The Venetian Palace, Second Floor Baku AZ-1001 Azerbaijan Tel: +994 12 497 7698 Fax: +994 12 497 0891 http://www.ifc.org/acgp ©2006InternationalFinanceCorporation Any or all portions of this report may be reproduced, without prior permission, provided the source is cited as follows: Azerbaijan Corporate Governance Project, International Finance Corporation, World Bank Group, 2121 PennsylvaniaAve.,N.W.,Washington,D.C.20433,UnitedStatesofAmerica. Table of Contents INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 INTERNATIONAL FINANCE CORPORATION AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . 5 ABOUT THE INTERNATIONAL FINANCE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 IFC'S FOCUS ON CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 IFC AND AZERBAIJAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 THE SURVEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Questionnaire Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Selection of Survey Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 IMPLEMENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ORGANIZATION AND OWNERSHIP OF JOINT STOCK COMPANIES IN AZERBAIAN . . . . . . . . . . . . . . . . . . . 9 AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES . . . . . . . . . . . . 9 SUPERVISORY BOARD AND MANAGEMENT PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SHAREHOLDERS' RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 DISCLOSURE AND TRANSPARENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ORGANIZATION AND OWNERSHIP OF JOINT STOCK COMPANIES IN AZERBAIJAN . . . . . . . . . . . . . . . . . . . . . . 13 COMPANIES AND THEIR ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 PRIVATIZATION AND JOINT STOCK COMPANY STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n SECTOR OF OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 NUMBER OF EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 LEGAL FORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 METHODS OF RAISING CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SHARES AND STOCK EXCHANGE LISTINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 AFFILIATIONS OF MAJOR SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES. . . . . . . . . . . . . . . . . . 18 COMPLIANCE WITH CORPORATE GOVERNANCE PRINCIPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 CORPORATE DOCUMENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 CORPORATE CHARTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 BYLAWS AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 IMPROVING CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 OBSTACLES TO IMPROVING CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 MEASURES TO IMPROVE CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SUPERVISORY BOARD AND MANAGEMENT PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 DIVISION OF RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SUPERVISORY BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 COMPOSITION AND NUMBER OF MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 FREQUENCY OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PREPARATION FOR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PERFORMANCE EVALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 REMUNERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 BOARD COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 FUNCTION AND DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 COMPOSITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 RESPONSIBILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 REMUNERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 FREQUENCY OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 COMMUNICATION WITH THE SUPERVISORY BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SHAREHOLDERS' RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 AUTHORITY AND FUNCTIONS OF THE ANNUAL GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SHARE REGISTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 PROCEDURES FOR SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 NOTICE - TIMELINESS, METHOD AND INFORMATION PROVIDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 DRAFTING ANDAMENDING THEAGENDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SHAREHOLDER ATTENDANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 EXTRAORDINARY SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 VOTING PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 DISCLOSURE OF RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 DISCLOSURE AND TRANSPARENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 COMPLIANCE WITH IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 MANDATORY DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 DISCLOSURE OF SIGNIFICANTTRANSACTIONS AND RELATED PARTYTRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 41 SOURCES OF INFORMATION FOR POTENTIAL INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 FINANCIAL CONTROL AND AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 FINANCIAL CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 REVISION COMMISSION AND AUDIT COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 EXTRAORDINARY AUDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 INTERNAL AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 INDEPENDENCE OF THE INTERNAL AUDIT FUNCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 EXTERNAL AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Introduction INTERNATIONAL FINANCE CORPORATION AND CORPORATE GOVERNANCE ABOUT THE INTERNATIONAL FINANCE CORPORATION The International Finance Corporation (IFC) is the private sector arm of the World Bank Group. IFC's mission is to promote sustainable private sector investment in developing countries, thereby contributing to reducing poverty and improving the quality of life in these countries. IFC finances investments with its own resources and by mobilizing capital in the international financial markets. IFC also provides technical assistance and advice to governments and businesses. Since its foundation in 1956, IFC has invested nearly $40 billion of its own capital andhassyndicatedmorethan$20billionininvestmentinsome2,800companiesin140countries. IFC'S FOCUS ON CORPORATE GOVERNANCE IFC is a leader among multilateral financial institutions in integrating corporate governance considerations into all phases of the investment process. IFC's long history of direct involvement in structuring investments, appraising investment opportunities and nominating board members has allowed it to put corporate governance principles into action. By focusing on good corporate governance practices in client companies, IFC can manage risk and add value to its clients. In addition to the benefits to individual client companies from IFC's work in improving corporate governance, these efforts contribute to IFC's broader mission to promote sustainable private sector investmentandstrengthencapitalmarketsindevelopingcountries. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 6 INTRODUCTION IFC AND AZERBAIJAN IFC approved its first loan inAzerbaijan in 1995. Since then, it has committed $465 million in financing to projects inAzerbaijan. IFC's strategy inAzerbaijan is to help diversify the country's economic base and support growth and the creation ofemploymentinnon-oilsectors.IFC'sareasofstrategicfocusinAzerbaijaninclude: strengthening the financial sector by promoting domestic and foreign competition in the banking sector and byprovidingtechnicalassistancetolocalprivatebanks promoting the development of micro, small and medium enterprises through lines of credit to local private banksandbyprovidingtechnicalassistance supporting investment in the agricultural sector by targeting competitive agro-processing ventures and identifyingareasforpotentialIFCsupport acting as a catalyst for foreign direct investment in competitive non-oil sectors, particularly those focusing on exports or on generating foreign income and those involving privatization of critical manufacturing activities orinfrastructure supportingincreasedprivateprovisionofpublicservicessuchashealthcareandeducation supportinginvestmentintheoilandgassectors,includingoilexportpipelines promotingalevelplayingfieldfordomesticandforeigninvestors broadeningopportunitiestoobtainfinancingforprivateenterprisesoutsidetheoilsector IFC launched the Azerbaijan Corporate Governance Project (ACGP) on January 26, 2005 with funding from Switzerland's State Secretariat for Economic Affairs (SECO). The project staff works with companies and banks to improve their corporate governance practices, with the government of Azerbaijan to improve the regulatory frameworkforcorporategovernanceinthecountryandwitheducationalinstitutionstoensurethatfuturebusiness leadersareintroducedtocorporategovernanceprinciplesoverthecourseoftheireducation. THESURVEY OBJECTIVES The survey set out to analyze the current state of corporate governance practices in Azerbaijani open joint stock companies and to determine the extent to which they implemented internationally recognized corporate governance best practices. The survey was also intended to provide baseline data against which the impact of ACGP's corporate training events, consultations and pilot programs on corporate governance practices can be measured,thusfurnishingabasisforpossiblefuturetechnicalassistanceprograms. METHODOLOGY QuestionnaireDesign ACGP staff developed the questionnaire for the survey based on IFC's experience with corporate governance projectsinRussia,UkraineandGeorgia. The draft questionnaire was tested in five open joint stock companies in order to identify and correct deficiencies in the questions and the interview instructions.The questionnaire and survey methods were reviewed and revised basedonthesetestresultsandonconsultationswiththeinterviewers. SelectionofSurveyParticipants ACGP requested a list of open joint stock companies (JSCs) from the State Committee for Securities under the auspices of the President of the Republic of Azerbaijan. This list comprised 1,815 companies. Also, ACGP obtained a list of JSCs from the State Statistical Committee of the Republic of Azerbaijan. This list comprised 1,442 companies, with their addresses and telephone numbers. To identify active companies, ACGP also obtained a list of companies from the Ministry ofTaxation of the Republic ofAzerbaijan.This list narrowed the field to 1,204 companies, including entities with state participation (and including banks, which became a separate survey subject). More than half of these companies were located in Baku.To obtain a more representative sample outsideBaku,fourothereconomicregionswereconsideredindevelopingthesample. Thetablebelowshowsthe distributionofthesamplebyregion. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n INTRODUCTION 7 Table 1. The Distribution of the Sample by Region Number of Region Active JSCs Percentage of Companies Active JSCs Surveyed Baku 640 77.1% 70 Sumgait 80 9.6% 10 Ganja 66 8.0% 10 Lenkoran 24 2.9% 5 Khachmaz 20 2.4% 5 Total 830 100.0% 100 Finally, one hundred companies were selected for the survey based on three main criteria: (1) being open joint stockcompanies;(2)beingactivebusinesses;and(3)havinglimitedstateparticipationintheirownership. IMPLEMENTATION The questionnaire was administered in the course of an interview with each participant. The results herein are based on their responses, recorded as given and not verified using other sources of information. Consequently, this self-reported data may include inflated, adjusted or otherwise biased information, given in order to avoid admittingtoviolationsofthelaworsimplytoportraythecompanyanditspracticesinafavorablelight. The survey team began work in August 2005. A local research company, Sigma, conducted the interviews. The ACGP staff trained the interviewers in corporate governance practices and principles. Interviews with company representativesbeganinAugust2005andtheACGPteamreceivedthecompileddatainNovember2005. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Executive Summary 1 See Chart A-1 "Respondent's Position" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n EXECUTIVE SUMMARY 9 2 InAzerbaijan, IFC defines small and medium enterprises according to the number of employees and depending on the sector of operation. In general,enterprisesaredefinedas"small"iftheyhaveuptofiftyemployeesandas"medium"enterprisesiftheyhaveupto100employees. 3 CIVIL CODE art. 107-10.7. (Azer.). Herein, "management" means the executive body, whether management board or individual general directorate. 4 There is no generally accepted legal definition of "major shareholders." In each case the definintion varies depending on the share - ownership structure in a company.. Here "major shareholders" mean shareholders, which own the largest stakes in the company. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 10 EXECUTIVE SUMMARY 5 CIVIL CODE art. 106-2.2. (Azer.) 6 See Id. at art. 99.3 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n EXECUTIVE SUMMARY 11 7 See Id. at art. 99.2. 8 December 29, 2004. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 12 EXECUTIVE SUMMARY C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Organization and Ownership of Joint Stock Companies in Azerbaijan To understand the status of corporate governance inAzerbaijani open JSCs, some general information about the corporate environment inAzerbaijan is necessary. Corporate governance practices are in a state of development. Since appropriate good governance measures are dependent on operating circumstances, the following overview of the companies surveyed will provide context for the information gathered about their corporate governancepractices. COMPANIES ANDTHEIR ACTIVITIES PRIVATIZATION AND JOINT STOCK COMPANY STATUS Since 1991, when Azerbaijan became independent of the Soviet Union, the state has initiated two privatization programs. The first began in 1995 and continued through 1999. The second program, which is still operating, began in 2000. Most of the companies surveyed (89.0%) acquired JSC status in the course of one of these programs. Only ten of them (10.0%) came into being as JSCs, and one (1.0%) reincorporated as a JSC from anotherlegalform. JSCs began to be established in 1996. Most of the companies surveyed (79.0%) predated 1992, the first full year of independence, and had been state-owned enterprises before obtaining JSC status after 1996. The rest (21.0%) were relatively new, established between 1993 and 2005. Over half of the companies surveyed (68.0%) becameJSCsasaresultofthefirstprivatizationprogram.9 9 See Chart A-2 "Companies Surveyed, by Year Established" and Chart A-3 "Companies Surveyed, by Year of Obtaining JSC Status" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 14 ORGANIZATION AND OWNERSHIP OF JOINT STOCK COMPANIES IN AZERBAIJAN SECTOR OF OPERATION Chart 1 shows the industries in which the companies surveyed operated. The five leading sectors were mechanical engineering (18.0%), construction and construction materials manufacturing (16.0%), food processing(12.0%),wholesaleandretailtrade(10.0%)andtransportation(9.0%).10 Chart 1. Companies Surveyed, by Business Sector (%) Mechanical engineering 18.0 Construction and construction materials 16.0 Food processing 12.0 Retail/wholesale trade 10.0 Transportation and roads 9.0 Consumer services 8.0 Forestry and paper 6.0 Organic/inorganic chemicals 4.0 Livestock and poultry 4.0 Financial services 4.0 Electric and electronic equipment manufacturing 3.0 Petrochemicals and fertilizers 2.0 Pharmaceuticals 2.0 Other 2.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) NUMBER OF EMPLOYEES Seventy-three of the companies surveyed (73.0%) had fewer than 100 employees. Only twelve (12.0%) had more than250employees. Chart 2. Number of Employees (%) 14.0 21.0 25 or less 26 - 50 51 - 100 9.0 101 - 150 6.0 151- 250 More than 250 38.0 12.0 10 NotethatthisdoesnotnecessarilyreflecttheindustrybreakdownoftheAzerbaijaninationaleconomy. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n ORGANIZATION AND OWNERSHIP OF JOINT STOCK COMPANIES IN AZERBAIJAN 15 LEGALFORM Only ten of the companies surveyed (10.0%) came into being as JSCs. Seven of those answered the question regarding their reasons for registering as JSCs. Two of them had numerous founders and considered the JSC form most appropriate for that circumstance. Two others said that the JSC form had been selected to enable the companytoattractexternalinvestment. Most respondents (76.0%) considered the open JSC form appropriate for their needs. Of those that would consider an alternative form, 20.0% preferred the Limited Liability Company (LLC) and the remaining 4.0% 11 favoredtheclosedJSC. Chart 3. Preferred Legal Form (%) Open joint stock company 76.0 Limited liability company 20.0 Closed joint stock company 4.0 Eighty-nine of the companies surveyed (89.0%) were not affiliated with a group of companies. Of the rest, six (6.0%)wereparentcompanies,four(4.0%)weresubsidiariesandone(1.0%)wasaholdingcompany. METHODS OF RAISING CAPITAL Eleven of the companies surveyed (11.0%) had attracted external investment in the last five years: ten (10.0%) in theformofbankloansandone(1.0%)throughabondissue. Only six of the companies surveyed (6.0%) had increased the charter capital within the last three years: four (4.0%) by issuing additional shares to current shareholders, one (1.0%) by offering shares to the public and one (1.0%)byincreasingthenominalvalueofoutstandingshares. Sixty-five of the companies surveyed (65.0%) planned to seek financing in the next three years.Among those, the preferred sources were loans from local financial institutions (31.7%), loans from international financial institutions (29.2%), loans from other international organizations (26.8%) and foreign direct equity investment (7.5%).Veryfewwereplanningtoraisecapitalbyissuingsharesdomestically.12 The remaining thirty-five respondents (35.0%) were asked why they were not planning to seek financing. Most frequently, the reason given was lack of interest on the part of investors (38.2%). Others had no plans to expand production capacity (26.5%), had sufficient cash flow for the company's current financing needs (17.6%), had alreadyarrangedadditionalfinancing(5.9%)orcitedavarietyofotherreasons(11.8%).13 As mentioned, only a small number of the companies surveyed indicated willingness to raise capital by issuing shares.Among those who said that they were unwilling to issue shares to raise capital, the reasons given included reluctance on the part of majority shareholders to dilute control (39.7%), the high cost of issuing shares versus obtaining credit (23.3%) and lack of interest on the part of investors (17.8%).Afurther 8.2% gave a variety of other reasonsand11.0%didnotspecifyareason.14 SHARESANDSTOCKEXHANGELISTINGS Ninety-six of the companies surveyed (96.0%) issued common shares only, three (3.0%) also issued preferred sharesandone(1.0%)alsoissuedcorporatebonds. The companies surveyed had an average of approximately 300,000 shares outstanding, with an average nominal value of 10,000 AZM (USD $2.19, or 2.00 New Azerbaijani Manat (AZN)) per share. At the two extremes, five (5.0%) had issued fewer than 1,000 shares and five (5.0%) had issued more than one million shares. Only one companyhadissuedadditionalshares,withanominalvalueof24,000AZM($5.27or4.80AZN)pershare. 11 Unlike the provisions governing closed JSCs, the CIVIL CODE allows shareholders of an open JSC the possibility to freely transfer their shares without regard to priority rights of other shareholders. Some of the provisions of the CIVIL CODE governing LLCs are similar to those governing closed JSCs, such as the fifty-participant maximum. Note that LLCs are prohibited from issuing shares. CIVIL CODE art. 87, 98, 99, 100(Azer.) 12 SeeChartA-4"PlannedSourcesofExternalInvestmentintheNextThreeYears"intheAppendix. 13 SeeChartA-5"ReasonsfornotSeekingFinancing"intheAppendix. 14 SeeChartA-6"ReasonsfornotIssuingSharestoRaiseCapital"intheAppendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 16 ORGANIZATION AND OWNERSHIP OF JOINT STOCK COMPANIES IN AZERBAIJAN Only twenty-two of the companies surveyed (22.0%) were listed on the Exchange. Of the seventy-eight that were not listed (78.0%), 8.9% planned to be listed on the Exchange within three years and 5.1% planned to be listed on anotherstockexchange.Only3.0%weretradingontheover-the-countersecuritiesmarket. Overall, according to the Exchange the volume of trading on the secondary market was only USD $1.2 million in 200415 and only seven of the companies surveyed (7.0%) said that their shares were traded in this market. Within the last year, the shares of fifty-seven of the companies surveyed (57.0%) had not circulated on the secondary market and thirty-six respondents (36.0%) did not know whether their companies' shares had been traded on the secondarymarket. SHAREHOLDERS NUMBER The companies surveyed generally had a small average number of shareholders. Sixty-five of them (65.0%) had 100orfewerandonlysix(6.0%)hadmorethan500. Chart 4. Number of Shareholders (%) 25.0 16.0 3 or less 6.0 4 - 10 11 - 20 9.0 21 - 50 51 - 100 6.0 101 - 500 29.0 9.0 More than 500 DESCRIPTION The survey found inadequate separation of ownership and governance in the companies surveyed. Management and supervisory board members owned in aggregate 55.0% of shareholdings in all companies surveyed. In many of the companies surveyed, the major shareholders also participated in management (36.0%) or as members of supervisory board (31.0%). Foreign investors held shares in nine of the companies surveyed (9.0%), accounting for only 4.0% of the aggregate charter capital of 99.0% of the respondents.16 Other notable shareholders included privateentities(7.0%)andstateownedenterprises(2.0%).(Seechart5.) 15 Note that this number reflects the volume of trading on the secondary market of the Exchange and does not represent the actual volume of trading on the overall secondary market, which is much higher, though not recorded anywhere. Correspondence from the Baku Stock Exchange,Sept.4,2006(onfilewithauthor). 16 SeeChartA-7"MajorShareholders"intheAppendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n ORGANIZATION AND OWNERSHIP OF JOINT STOCK COMPANIES IN AZERBAIJAN 17 Chart 5. Share Ownership as a Percentage of Share Capital, by Shareholder Category (%) Management 34.0 Supervisory board members 21.0 Azerbaijani individuals except supervisory board members, management and employees 15.0 Employees 12.0 Azerbaijani private entities 7.0 Government (direct) 5.0 Foreign entities/individuals except supervisory 4.0 board members, management and employees State-owned entities 2.0 The survey showed that, in five of the fifteen companies where management consisted of a single individual, the general directorate owned more than 20% of the shares. This is in violation of the Civil Code, which prohibits holders of more than 20% of a company's share capital from being a member of the executive body of that company. Ownership in the companies surveyed was highly concentrated. In eighty-one of them (81.0%), a single shareholder had controlling interest. More specifically, in fifty-six companies (56.0%), a single shareholder owned more than 66.7% of the shares and in twenty-five of them (25.0%), a single shareholder owned 50.0% to 66.7% of theshares. Generally, in the few companies where one shareholder did not have a controlling interest, a small number of shareholders controlled the company. In four of the companies surveyed (4.0%), two shareholders each held 25- 50.0%ofthesharesandinthreeofthem(3.0%),threeshareholderseachheld25-50.0%oftheshares. Most of the companies surveyed (76.0%) had minority shareholders (holding 2.0% or less of the shares). Within the survey sample, there was one exception to highly concentrated ownership. In that company, all of the shareholdersheld2.0%orlessoftheoutstandingshares. AFFILIATIONSOFMAJORSHAREHOLDERS The survey found thatownership in non-bank JSCs was not as concentrated through family relationships as it was in the bank sector.17 Seventy-seven respondents (77.0%) reported that their major or controlling shareholders had no outside relationships with one another. Further, eighty (80.0%) reported that no relatives of the controlling shareholders were members of the supervisory board or management. The major shareholders were related in fifteen companies (15.0%). In eight (8.0%), the major shareholders were affiliated through partnerships in other businesses. SUMMARY InAzerbaijan, the main reason for the advent of the JSC was the two waves of privatization.Asignificant number (24.0%)ofexistingJSCswouldpreferadifferentlegalform,andmostofthosewouldchoosetheLLC. Most open JSCs were closely held, with a high level of ownership concentrated in management and/or the supervisoryboard. Most companies were seeking capital, and loans were the preferred source. Respondents considered stock exchangesanddirectinvestmenttheleastattractiveoptionsforraisingcapital. 17Compare with IFC's Survey Results for Bank Corporate Governance in Azerbaijan (2006), in which respondents indicated that 38.2% of the banks surveyed had major or controlling shareholders who were related to one another. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Awareness of and Commitment to Good Corporate Governance Practices IFC focuses on good corporate governance practices in order to add value to client companies and manage risk. Investors look to good corporate governance practices as a key indicator of shareholder value and effective stewardship.As mentioned, most of the companies surveyed (65.0%) were planning to raise capital from external sources.Adherence to corporate governance principles will be a key factor in their ability to attract investors. Only thirty respondents (30.0%) indicated that they were knowledgeable in corporate governance principles, specificallytheOECDPrinciplesofCorporateGovernance. COMPLIANCEWITHCORPORATEGOVERNANCEPRINCIPLES In addition to gauging awareness of good corporate governance practices, the survey sought respondents' views on the level of compliance with corporate governance best practices in their own companies, in other JSCs and in corporate governance legislation. Their responses varied depending on the body assessed: Forty-three (43.0%) respondents scored corporate governance practices in their own companies at the maximum level (four or five points on a five-point scale), while only twenty (20.0%) rated JSCs in general at the maximum level and only seventeen (17.0%) assessed corporate governance legislation at the maximum level of compliance with best practices. Only twenty-five respondents (25.0%) scored compliance with corporate governance practices in their companies at a minimal level (one or two points), but thirty-eight (38.0%) assessed compliance by JSCs in general as minimal and forty-one (41.0%) assessed compliance with best practices in Azerbaijan's corporate governancelegislationasminimal.18 18 See Charts A-8 to A-12 in the Appendix for all corporate governance ratings by respondents. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES 19 The survey responses notwithstanding, based on observations in the course of providing technical assistance, the ACGP believes that the number of respondents who actually understood corporate governance was much lowerthantheirself-assessmentindicated. The survey also asked respondents to indicate the most important benefits of good corporate governance. The top five responses were: (1) improving the company's reputation (59.0%); (2) gaining access to capital markets (48.0%); (3) attracting investment (36.0%); (4) increasing the company's operational efficiency (33.0%); and (5) protecting shareholders' rights (32.0%). While these results are encouraging, other features of good corporate governance were rated low as benefits, including transparency of the supervisory board and its activities (3.0%) andmoreeffectivedisclosure(6.0%).Chart6showsallresponses. Chart 6. Perceived Benefits of Good Corporate Governance (%) Improved reputation 59.0 Better access to capital markets in Azerbaijan and abroad 48.0 Enhanced ability to attract investment 36.0 Increased operational efficiency 33.0 Protection of shareholders' rights 32.0 Improved decision-making process 30.0 Improved efficiency of coordination between 9.0 shareholders and management board Lowering of the cost of equity and debt capital 9.0 Protection of stakeholders' rights 7.0 Prevention/resolution of internal conflict 7.0 Improved disclosure 6.0 Mitigation of risk (takeover, blackmail by shareholders, unfair use of information by competitors) 5.0 No intrinsic added value, but helpful in compliance 3.0 with legal/regulatory requirements Increased transparency of supervisory board 3.0 and/or management Note: Total exceeds 100%. (Respondents were allowed multiple responses.) CORPORATEDOCUMENTATION CORPORATECHARTERS In general, the survey indicated that the governing documents of JSCs needed improvement. For example, only eighteen of the companies surveyed (18.0%) included in their charters a provision regarding the appointment of independent supervisory board members. Notably, even though both the law and good corporate governance practice preclude any restriction on the transfer of shares, fourteen of the companies surveyed (14.0%) included suchrestrictionsintheircharters. Some significant provisions were commonly included in the companies' charters. For example, eighty-two of the companies surveyed (82.0%) included in their charters such fundamental provisions as defining responsibility and authority as between management board and its chairperson or responsibilities of individual general directorate. General principles of shareholders' rights were included in the charters of seventy-three (73.0%) and sixty-seven (67.0%) had procedures for the AGM. Additionally, the charters of forty-two companies (42.0%) had provisions with respect to the treatment of minority shareholders in the event of a takeover or merger. Chart 7 shows all of the provisions mentioned by respondents and the degree to which each was present in the companiessurveyed. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 20 AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES Chart 7. Charter Provisions in Place (%) Defining authority/responsibility of management board 82.0 and its chairperson or individual general directorate General principles of shareholders rights 73.0 Procedures for the AGM 67.0 Treatment of minority shareholders in the event of a takeover 42.0 Procedure for establishing supervisory board committees 32.0 Qualifications required for supervisory board members 25.0 Requirements/criteria for independent directors 18.0 Prohibition/restrictions on sale of shares 14.0 Requirements for rotation of external auditor 9.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) BYLAWSANDPOLICIES Bylaws and formal policies are essential for establishing effective good corporate governance practices.The Civil Code only requires JSCs to adopt a charter and does not contain provisions with respect to specific bylaws. Most companies had adopted basic bylaws with respect to the activities of the governing bodies. For example, most companies had bylaws regarding the AGM (90.0%), the supervisory board (82.0%), management (80.0%) and the revision commission/audit committee (71.0%).Also, an encouraging number of the companies surveyed had bylawsconcerningthepaymentofdividends(63.0%)andtheestablishmentofacodeofethics(52.0%). The corporate secretary function is not yet widely known in Azerbaijan. Based on ACGP's experience, there is a general lack of awareness about the role of this office. It is therefore not surprising that only five of the companies surveyed(5.0%)hadrelatedbylawsinplaceandsixty-five(65.0%)hadnoplanstointroducethefunction. Also of concern is that thirty-six respondents (36.0%) had no plans to introduce bylaws with respect to disclosure. Chart8showsexistingandplannedbylawsinthecompaniessurveyed. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES 21 Chart 8. Existing and Planned Bylaws and Policies (%) 90.0 Annual general meeting 4.0 6.0 82.0 Supervisory board 9.0 9.0 80.0 Management 9.0 11.0 71.0 Revision commission/audit committee 12.0 17.0 5.0 Corporate secretary 30.0 65.0 30.0 Supervisory board committees 29.0 41.0 11.0 Corporate governance for a company group 23.0 66.0 50.0 Disclosure 14.0 36.0 63.0 Dividends 12.0 25.0 32.0 Internal audit function 20.0 48.0 25.0 Code of corporate governance 24.0 51.0 52.0 Code of ethics 8.0 40.0 In place Planned Not planned/did not know Note: Total exceeds 100%. (Respondents were allowed multiple responses.) Preparing corporate documentation was most often identified as the responsibility of management (68.0%) and the supervisory board (55.0%). Only a few respondents indicated that in-house counsel (9.0%) or outside counsel (5.0%)performedthisfunction.19(Respondentswereallowedmultipleresponses) 19 See Chart A-13 "Responsibility for Preparing Internal Bylaws and Policies" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 22 AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES IMPROVING CORPORATE GOVERNANCE OBSTACLESTOIMPROVINGCORPORATEGOVERNANCE A key objective of this survey was to determine the extent to which JSCs applied key corporate governance principles and to identify obstacles to improving corporate governance. The most frequently mentioned obstacle (60.0%) was lack of information and knowledge. Next was ineffective corporate governance legislation (51.0%), followedbythescarcityofspecialistsqualifiedinthefield(44.0%).20 MEASURESTOIMPROVECORPORATEGOVERNANCE Only thirteen respondents (13.0%) reported that they had a written corporate governance improvement plan, approved by the supervisory board or the AGM. When asked to identify the measures they believed would improve corporate governance, the greatest percentage of respondents (46.0%) indicated the implementation of IFRS. Yet, as mentioned, only six respondents (6.0%) saw improved disclosure as a benefit of good corporate governance.(SeeChart6.) Other notable priorities included the introduction of an adequate internal control system (29.0%) and an adequate internal audit function (21.0%), both of which would be substantial steps toward improving corporate governance. Onlytwelverespondents(12.0%)saidthattheyhadaninternalauditfunctioninplace. Encouragingly, twenty-seven of the respondents (27.0%) recognized the benefit of a corporate governance code and twenty-five (25.0%) planned to obtain advice on corporate governance issues. Less encouragingly, only ten (10.0%) considered the independence of supervisory board members a priority. Of those, half represented companies that reportedly already had charter provisions in place with respect to independent supervisory board members. Finally, for the reason noted above, only three (3.0%) cited establishing a corporate secretary as a priority. Chart 9. Priorities for Improving Corporate Governance (%) Implement IFRS 46.0 Introduce an internal control system 29.0 Adopt a corporate governance code 27.0 Hire a corporate governance consultant 25.0 Introduce an internal audit function 21.0 Train supervisory board members in corporate governance 18.0 Establish an audit committee 16.0 Disclose information quarterly 14.0 Implement a remuneration system for supervisory board members 10.0 Appoint independent members to the supervisory board 10.0 Establish supervisory board committees 8.0 Establish the corporate secretary position 3.0 None of the above 8.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) 20 See Chart A-14 "Main Obstacles to Improving Corporate Governance in the Company" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES 23 Substantially all respondents (93.0%) expressed willingness to engage consultants or receive training in a variety of corporate governance matters. Respondents were interested in receiving training in shareholders' rights (45.0%), drafting and/or reviewing the charter and bylaws (37.0%), disclosure and transparency (30.0%) and effective board practices (29.0%). The majority (65.0%) were willing to undergo assessment of their corporate governancepractices.21 Despite the apparent willingness on the part of nearly all respondents to obtain expert advice or training in corporate governance matters, only six of the companies surveyed (6.0%) had hired corporate governance consultants. Two (2.0%) had hired consultants to assist with the preparation of governing documents and two (2.0%) for advice on attracting investors. One company had hired a consultant for advice with respect to holding theAGMandanothertoprepareitsannualreport. SUMMARY Only thirty respondents (30.0%) indicated that they were knowledgeable in corporate governance principles and seventy(70.0%)acknowledgedthattheywerenot. Most of the companies surveyed rated their own compliance with corporate governance best practices higher thanthatofothercompaniesingeneralandhigherthanthatofcorporategovernancelegislation. Respondents seemed to perceive the benefits of corporate governance in terms of enhanced corporate reputation, operational efficiencies and improved access to capital rather than as protections for shareholders andotherstakeholders. In general, the companies surveyed had some of the documentation in place to facilitate good corporate governance, but actual good governance practices were in development or absent in many of them. Encouragingly, however, most respondents expressed willingness to improve their corporate governance practices. Implementing improved accounting practices and internal controls were seen as the main ways to accomplish this. Notably, lack of information/knowledge was seen as the main obstacle to improving corporate governance,followedbyinadequatecorporategovernancelegislation. Although very few of the companies surveyed had engaged consultants to assist with corporate governance matters,almostallrespondentswereinterestedinreceivingtrainingoradvice. 21 See Chart A-15 "Areas of Interest for Obtaining Training or Advice" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Supervisory Board and Management Practices In corporate governance best practices, the supervisory board develops company strategy, approves corporate values, provides a system of checks and balances for senior management and sets and enforces clear lines of responsibility and accountability throughout the organization. The supervisory board is also responsible for ensuringcompliancewithvariousregulations,includingthosepertainingtofinancialreportinganddisclosure. DIVISIONOFRESPONSIBILITIES Azerbaijan has a two-tier board system that separates the supervisory function from the management function. The supervisory function is carried out by the supervisory board and the management function falls to either the management board (if it is a collective) or the individual general directorate (in the case of an individual). Unlike one-tierboardsystems,whichbringtogetherexecutiveandnon-executiveboardmembers,Azerbaijanicorporate legislation provides for a supervisory board comprised of non-executives and a management board composed entirely of executives (or one executive in the case of a general directorate). Under the Civil Code, the supervisory boardisresponsibleforprovidinggeneralguidanceandformonitoringthecompany'sactivities. 22 The Civil Code does not oblige JSCs to have a supervisory board unless the company has more than fifty shareholders.23 Nevertheless, most Azerbaijani JSCs do have a supervisory board, as supported by the survey results: ninety-six of the companies surveyed (96.0%) had a supervisory board. Of these, twenty-nine had fewer thanfiftyshareholders. 22 CIVIL CODE art. 107-7.1. (Azer.) 23 See Id. at art. 107.3. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n SUPERVISORY BOARD AND MANAGEMENT PRACTICES 25 SUPERVISORYBOARD COMPOSITIONANDNUMBEROFMEMBERS Good corporate governance practices require that boards be large enough to encompass individuals with a range of specific finance, legal and commercial skills. On the other hand, a board exceeding a dozen members can be unwieldy. The law in most Eurasian countries requires a minimum number of board members, ranging from three to five.24 In Azerbaijan, there is no legal limit on the number of supervisory board members. A company may specify a number in its charter. In seventy-one of the companies surveyed (71.0%), the supervisory board had three members. The highest number of members recorded was five, found in thirteen of the companies surveyed (13.0%). The averagenumberofmemberswas3.4. The composition of the supervisory board is a crucial factor in preventing conflict of interest and balancing competing demands on a company's resources. In Azerbaijan, the concentration of ownership in JSCs is reflected in the composition of supervisory boards. In seventy-eight of the companies surveyed (78.0%), major shareholders and persons affiliated with them were members of the supervisory board. Notably, the supervisory boards of eighteen of the companies surveyed (18.0%) were comprised entirely of major shareholders and affiliated persons.As a group, major shareholders and persons affiliated with them represented 48.0% of all supervisory board members. Minority shareholders were represented on the supervisory boards of 53.0% companies surveyed, comprising 27.0% of all supervisoryboardmembersinthecompaniessurveyed. The next largest group among all supervisory board members in the companies surveyed was representatives of state or regional authorities (2.0%). Independent members served on the supervisory boards of twenty-eight of the companies surveyed (28.0%) and five respondents (5.0%) claimed that the supervisory board was comprised entirelyofindependentmembers. RESPONSIBILITIES The Civil Code does not confer any exclusive authorities on the supervisory board of a JSC, but does provide that exclusive authorities must be set out in the company's charter.25 The survey results indicate that supervisory boards werenotcarryingoutthefunctionstypicallyexpectedofaboardofdirectors. Pursuant to the Civil Code, the supervisory board members and its chairperson must be elected by the AGM.26 Yet, three respondents among the companies surveyed (3.0%) indicated that the supervisory board members elected the chairperson.Also under the Civil Code, management must be elected or dismissed by theAGM, unless the authority to do so has been reserved for the supervisory board in the company's charter.27 In thirteen of the companies surveyed (13.0%), the supervisory board appointed management. Other conventional board functions were carried out by supervisory boards in similarly low numbers, including approving the remuneration of management (18.0%), approvingbylaws(otherthanthoseforgoverningbodies)(13.0%),andsettingcompanystrategy(28.0%).28 Chart 10. Responsibilities of the Supervisory Board (%) Setting strategy 28.0 Approving remuneration of management 18.0 Representing the company 17.0 Appointing chairperson of management board/ individual general directorate 16.0 Approving budget 14.0 Appointing management board members 13.0 Approving bylaws (other than governing body bylaws) 13.0 Approving governing body bylaws 10.0 Developing operating plan 9.0 Electing chairperson of supervisory board 3.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) 24 Corporate Governance in Eurasia: A Comparative Overview, OECD Roundtable, Kyiv, Ukraine (May 2004). 25 CIVIL CODE art. 107.3. (Azer.) 26 See Id. at arts. 107.1.2. and 107-8. 27 See Id. at art. 107.1.3. 28 See Chart A-24 "Distribution of Duties among the Governing Bodies" and Chart A-25 "Distribution of Authorities among the Governing Bodies" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 26 SUPERVISORY BOARD AND MANAGEMENT PRACTICES FREQUENCYOFMEETINGS Supervisory board members should be able to commit adequate time to their responsibilities, which include attending periodic meetings. In the companies surveyed, supervisory board meetings were most frequently held two to three times a year (31.0%), followed by once a year (29.0%). The Civil Code requires a minimum of quarterly supervisory board meetings.29 Only 26.0% of the companies surveyed met the minimum requirement and8.0%indicatedthatthesupervisoryboardmetmonthly. Nearly half of the respondents (48.0%) indicated that supervisory board meetings lasted one hour; the average durationwassixty-twominutes. Chart 11. Frequency of Supervisory Board Meetings (%) 29.0 26.0 Annually 2-3 times per year Quarterly Monthly 4.0 Other 2.0 No supervisory board 8.0 31.0 PREPARATIONFORMEETINGS Directors require timely, relevant information in order to make competent and informed decisions. Less than half of the companies surveyed provided supervisory board members with adequate information within a reasonable time prior to board meetings. Only 41.0% furnished notice of meetings and related materials more than two weeks in advance. Roughly one-third (28.0%) usually provided notice and materials one week in advance, and 13.0% did so one to two weeks before meetings. Some distributed the materials one day in advance (6.0%) or at the meetings(2.0%);othershadnoestablishedpracticefordistributingmaterialsinadvance(6.0). Chart 12. Notice of Meeting and Background Materials Provided to Supervisory Board Members (%) More than two weeks 41.0 Up to one week 28.0 One to two weeks 13.0 Day before 6.0 At the meeting 2.0 No established practice 6.0 No supervisory board 4.0 29 CIVIL CODE art. 107-9.1. (Azer.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n SUPERVISORY BOARD AND MANAGEMENT PRACTICES 27 The materials most commonly provided to supervisory board members in advance of meetings were an agenda (82.0%), minutes of the last meeting (63.0%), financial statements for the last reporting period (59.0%) and an explanation of each agenda item (36.0%). Only 29.0% included draft resolutions for items subject to approval at themeeting. Chart 13. Materials Provided in Advance of Supervisory Board Meetings (%) Agenda 82.0 Minutes of last meeting 63.0 Most recent financial statements 59.0 Explanation of each agenda item 36.0 Drafts resolutions 29.0 Other 2.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) PERFORMANCE EVALUATION The survey results showed that inAzerbaijan, as in most developing economies, self-assessment of supervisory board performance is not a well-established practice. Effective boards engage in a continuing process of self- assessment or evaluation in order to identify where they are performing well as a board and where they might improve. Only 36.0% of respondents claimed that their supervisory boards had conducted a self-evaluation in the last two years. The concept is quite new in Azerbaijan and therefore, based on ACGP's experience with companiesinthecourseofconsultationsandseminars,the36.0%figureisprobablyinflated. Only 33.0% of the companies surveyed had any documented competency requirements with respect to the qualificationsofsupervisoryboardmembers. REMUNERATION Appropriate remuneration of the supervisory board is a principle of good corporate governance. Good corporate governance practices include aligning supervisory board and management remuneration with the interests of the company and its shareholders. Only ten of the companies surveyed had a remuneration system for supervisory board members in place. Multiple responses to this question were allowed, and eight of those ten respondents said that their companies based remuneration on the board's performance assessment, seven said remuneration was based on profit and two considered additional responsibilities. Notably, gross revenue was not a determining factorforremunerationinanyofthosecompanies.30 Of the ninety-three respondents who answered the question, less than half said that their companies had no formal agreements with the chairperson (41.9%) or the members (43.0%) of the supervisory board. Forty-six companies (49.5%) had agreements resembling employee contracts with the board members, governed by the strict provisions of the Labor Code of Azerbaijan. Only seven (7.5%) had civil contracts in place, governed by the moreflexibletermsoftheCivilCode.31 30 See Chart A-16 "Remuneration Criteria for Supervisory Board Members" in the Appendix. 31 See Chart A-17 "Contracts with Supervisory Board Members" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 28 SUPERVISORY BOARD AND MANAGEMENT PRACTICES BOARDCOMMITTEES Board committees play an important role in corporate governance best practices, and respondents were asked whether they had established or planned to establish the committees generally considered necessary for adequate corporate governance. Although the Civil Code does not require specific supervisory board committees,anumberofcompaniesreportedthattheyhadestablishedsomecommittees. The most prevalent existing committee was the ethics committee (28.0%), followed by the conflict resolution committee (24.0%), the corporate governance committee (18.0%) and the strategic planning committee (12.0%). Only 10.0% had established an audit committee, but, somewhat encouragingly, 26.0% planned to do so. Next in prevalence among the planned committees was the corporate governance committee (22.0%), followed by the nominatingcommittee(20.0%)andtheconflictresolutionandethicscommittees(bothat5.0%). Chart 14. Existing and Planned Committees (%) 26.0 Audit committee 10.0 64.0 19.0 Strategic planning committee 12.0 69.0 20.0 Nomination and remuneration committee 5.0 75.0 22.0 Corporate governance committee 18.0 60.0 5.0 Conflict resolution committee 24.0 71.0 5.0 Ethics committee 28.0 67.0 Planned In place Not planned/no answer Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n SUPERVISORY BOARD AND MANAGEMENT PRACTICES 29 MANAGEMENT FUNCTIONANDDESCRIPTION In Azerbaijan's two-tier system, management is responsible for the day-to-day operations of the company.32 Management boards are not mandatory, however, and in fifteen of the companies surveyed (15.0%), management consisted of an individual general directorate. The other eighty-five companies surveyed (85.0%) organized their managementstructureusingmanagementboards. COMPOSITION There is no legal restriction on the number of management board members. The greatest percentage of boards had three members (61.2% of the eighty-five respondents with management boards). Eleven (12.9%) had five- member boards. The largest board complement was seven members (9.0% of respondents with management boards).The average was 4.3. Women participated on the management boards of thirty-five (41.1%) of the eighty- fivecompanieswithmanagementboards. There are no legal requirements regarding competency standards for management board members. Not surprisingly, less than half of the companies surveyed (40.0%) had competency requirements such as education andexperienceformanagement. RESPONSIBILITIES The survey found that management was exercising authority and responsibility generally assigned to either the supervisory board or the AGM according to corporate governance best practices. Indeed, the apparent concentration of powers in management was also contrary to legislation. For example, management in a significant proportion of the companies surveyed had the authority select the external auditor (57.0%), approve the annualreportandfinancialstatements(54.0%),declareandpaydividends(41.0%)andissueshares(34.0%).33 Under the Civil Code, the responsibilities of management are residual, comprising all authorities not set out in the Civil Code or in the company's charter as exclusive authorities of the AGM and the supervisory board.34 The responses to questions about the main responsibilities of management revealed that some of the companies surveyed might not have been complying with those provisions. For example, under the Civil Code the AGM has the exclusive authority to appoint the chairperson and members of the supervisory board;35 however, eight respondents indicated that management performed this function. Moreover, thirty respondents indicated that managementapproveditsowncompensation,whichisinherentlyaconflictofinterest. Chart 15. Responsibilities of Management (%) Developing operating plan 73.0 Representing the company 65.0 Approving bylaws (other than governing body bylaws) 63.0 Setting strategy 53.0 Approving budget 48.0 Approving governing body bylaws 41.0 Approving remuneration of management 30.0 Approving remuneration of supervisory board 30.0 Appointing chairperson of management board 14.0 Electing supervisory board members 8.0 Electing chairperson of supervisory board 8.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) 32CIVIL CODE art. 107.4. (Azer.) 33 See supra note 28. 34CIVIL CODE art. 107.4. (Azer.) 35 See Id. at arts. 107.1.2. and 107-8. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 30 SUPERVISORY BOARD AND MANAGEMENT PRACTICES REMUNERATION Performance-based compensation for management was rare among the companies surveyed. Only a few tied management remuneration to profit (4.0%), performance evaluation (4.0%), sales (1.0%), market value of shares (1.0%)oradditionalresponsibilities(2.0%).36 FREQUENCYOFMEETINGS In the companies surveyed, the number of management meetings per year reportedly ranged from one to fifty. This wide range can be attributed partly to the lack of any minimum legal requirement with respect to the number of meetings and partly to each respondent's definition of a formal meeting. Roughly a quarter of the companies surveyed (22.0%) indicated that management met only once per year. Fifteen (15.0%) reported that management metquarterlyandthirteen(13.0%)heldmeetingsmonthly. COMMUNICATIONWITHTHESUPERVISORYBOARD Corporate governance best practices include having in place a system for management to report to and regularly communicate with the supervisory board, designed to enhance the operating efficiency of the company. Pursuant to the Civil Code, management must report to the supervisory board,37 but the frequency is not specified. A majority of the respondents did not answer the related question. Among those who did, the most frequent response was that management reported to the supervisory board once per year in writing (28.0%), followed by onceperquarterinwriting(21.0%),onceperyearverbally(14.0%)andonceperquarterverbally(11.0%). Chart 16. Management Reports (%) 10.0 Monthly 12.0 21.0 Quarterly 11.0 28.0 Annually 14.0 5.0 At every meeting 6.0 36.0 No answer 57.0 Written Verbal CONFLICTS OF INTEREST Good corporate governance practices require that supervisory board members and management disclose conflicts of interest and abstain from voting on resolutions when a conflict exists. Under the Civil Code, management must disclose conflicts of interest to the supervisory board and obtain its prior approval before engaging in a transaction that presents conflicts of interest.38 Only 27.0% of the companies surveyed reportedly compliedwiththisrequirement. Some respondents among the companies surveyed reported that their companies had policies and procedures in place to cover conflicts of interest issues, including mandatory disclosure of conflicts of interest for management and members of the supervisory board (18.0%) and mandatory recusal where a conflict exists (14.0%). Notably, however, only two respondents (2.0%) indicated that a member of management board had abstained from voting owingto conflictsofinterestin2004. 36 See Chart A-18 "Remuneration Criteria for Management" in the Appendix. 37 CIVIL CODE art. 107.4. (Azer.) 38 See Id. at art. 107-10.5. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n SUPERVISORY BOARD AND MANAGEMENT PRACTICES 31 RELATEDPARTYTRANSACTIONS In the companies surveyed, the authority to approve related party transactions39 seemed to be shared among governing bodies. With respondents allowed multiple responses, approval authority largely rested with management(72.0%),followedbytheAGM(32.0%)andthesupervisoryboard(27.0%). Chart 17. Approval of Related Party Transactions, by Governing Body (%) Management 72.0 Annual general meeting 32.0 Supervisory board 27.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) SUMMARY Although the number of members participating in governing bodies seemed adequate, the standards in place were not sufficient to ensure that the individuals were qualified and competent. Many of the companies surveyed lacked a system for monitoring the proper functioning of the governing boards. In addition, the board committees inplacewerenotsufficienttoensureadequatecorporategovernance. The division of responsibilities as between governing bodies was not well defined in the companies surveyed; often, the roles of management, the supervisory board and the AGM were unclear, duplicative or apparently outside the boundaries set by law. Supervisory boards did not perform some of their mandated functions and managementoftenexceededitsauthority. Conflicts of interests (such as management approving its own compensation) and potential conflicts were not appropriately addressed and related party transactions were not reviewed and approved in a manner consistent withgoodcorporategovernancepractices. 39 The CIVIL CODE, which is the relevant legislation, does not define related party transactions. However, some legal guidance is provided by the Law of the Republic of Azerbaijan on Banks and Regulations on Transactions with Bank Related Parties, which requires supervisory boardpriorapprovalofallrelatedpartytransactions. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Shareholders' Rights By law, the shareholders are the ultimate governing body of a company. The AGM is their opportunity to participate in managing their investment and to ensure that their interests and rights are protected.The provisions with respect to shareholders' rights in the Civil Code are limited to such basic matters as the right to participate in the company's governance, elect governing bodies, receive information about the company, convene an AGM and receive dividends. What follows is a discussion of the practices related to shareholders' rights among the companies surveyed, including compliance with the aforementioned provisions and with corporate governance bestpractices. AUTHORITY AND FUNCTIONS OF THE ANNUAL GENERAL MEETING Under the Civil Code, certain functions are the exclusive authority of the AGM, including the appointment and removal of the supervisory board.40 Although most of the companies surveyed (87.0%) complied with this provision with respect to members of the supervisory board, few of them (3.0%) did so with respect to the chairperson. The Civil Code also confers on the AGM the right to appoint management; however, the AGM may delegate this function to the supervisory board.41 Nevertheless, the right to appoint management and the chairperson of the managementboard(whereoneexisted)wasretainedintheAGMinmostofthecompaniessurveyed(70.0%). 40 CIVIL CODE arts. 107.1.2. and 107-8. (Azer.) 41 See Id. at art. 107.1.3. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n SHAREHOLDERS' RIGHTS 33 In the companies surveyed, theAGM did not commonly perform many of its conventional functions. For example, only around one-quarter of the respondents indicated that the AGM approved the annual report (26.0%) or appointed the external auditor (22.0%). Less than half (45.0%) said that the AGM approved the declaration and distributionofdividends. The Civil Code requires that the AGM approve significant transactions (more than 25% of the net book value of assets).42 It would be expected, therefore, that all of the companies surveyed would report compliance. In fact, less than half (42.0%) of the respondents reported that this was the practice in their companies. Transactions involving less than 25% of the net book value of assets required approval by theAGM in 26.0% of the companies surveyed. Chart 18 shows the functions of theAGM and the degree to which theAGM performed those functions inthecompaniessurveyed.43 Chart 18. Functions Performed by the AGM (%) Electing supervisory board members 87.0 Approving securities issues (other than shares) 63.0 Approving share issues 56.0 Approving declaration and distribution of dividends 45.0 Approving transactions with a value of more than 50% of book value of assets 43.0 Approving transactions with a value of 25%-50% of book value of assets 42.0 Approving transactions with a value of less than 25% of book value of assets 26.0 Approving annual report and annual financial statements 26.0 Selecting external auditor 22.0 Initiating extraordinary audits 20.0 Implementing and maintaining internal control system 12.0 Approve terms of contract with external auditor 12.0 Implementing and maintaining risk management system 10.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) SHAREREGISTER In Azerbaijan, as elsewhere, the share register is proof of share ownership. The share register identifies the shareholders and the type, number and nominal value of their shares. A reliable registration system, and unencumbered access to it, is therefore particularly essential for the protection of shareholders' rights. By law, JSCsmustensurepropermaintenanceofashareholderregister. By law, if a company has more than twenty registered shareholders, an independent registrar must maintain the share register.44 Companies with fewer than twenty registered shareholders may maintain their own share registers, but most choose to use an external registrar. Ninety-three of the companies surveyed (93.0%) used an external registrar and only three (3.0%) maintained the share register internally. Four (4.0%) did not respond to the question. The state-run National Depository Center of the Azerbaijan Republic, located in the same building as the Exchange and the Securities Committee, maintained the share registers of fifty-eight of the companies surveyed(58.0%).Therestusedvariousprivateregistrars. 42 See Id. at art. 99.3. 43 See Chart A-24 "Distribution of Duties among the Governing Bodies" and Chart A-25 "Distribution of Authorities among the Governing Bodies" in the Appendix. 44 CIVIL CODE art. 106-2.2. (Azer.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 34 SHAREHOLDERS' RIGHTS PROCEDURESFORSHAREHOLDERS'MEETINGS At the AGM, shareholders have the opportunity to exercise their basic rights as providers of equity capital by voting on important matters concerning the company. The Civil Code requires JSCs to hold shareholders' meetingsatleastannually.45Allofthecompaniessurveyedcompliedwiththisrequirement. NOTICE-TIMELINESS,METHODANDINFORMATIONPROVIDED Where good corporate governance is practiced, the AGM agenda is carefully prepared and the meeting is properly conducted. Shareholders are given ample opportunity to raise concerns and put questions to the board. It is important, therefore, that shareholders receive adequate information in advance of the meeting to enable them to give due consideration to the items to be discussed. Indeed, legislation requires companies to provide shareholders with certain information in advance of the AGM, such as time and place, the agenda and the recommendations of the supervisory board and/or management with respect to each agenda item. Shareholders must receive notice of anAGM at least forty-five days in advance.46At least 16.0% did not comply, and, perhaps, less than half of the companies surveyed (46.0%) did comply with this requirement. Chart 19 shows the notice givenasreportedbyrespondents. Chart 19. Timeliness of Notice (%) More than 45 days 46.0 21 - 45 days 38.0 8 - 20 days 8.0 7 days or less 8.0 Notices were most commonly sent to shareholders by registered mail (69.0%). Other methods included an announcementinthepress(51.0%)and(lesseffective)anannouncementatthecompany'soffice(42.0%). Chart 20. Methods of Giving Notice (%) Registered mail 69.0 Announcement in the press 51.0 Announcement in the company's office 42.0 Hand delivery, acknowledged by the recipient 32.0 Electronic mail 10.0 Announcement on the company's website 6.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) The materials prepared by the companies surveyed to accompany the notice included the agenda (92.0%), a description of each agenda item (49.0%), the annual report (47.0%), the financial report (43.0%) and supporting documentsrelatedtoagendaitems(33.0%).Notably,only12.0%includedproxyvotinginstructions.47 45 See Id. at art. 107-1.2. 46 See Id. at art. 107-1.4. 47 See Chart A-19 "Materials Provided to Shareholders with the Notice of the AGM" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n SHAREHOLDERS' RIGHTS 35 DRAFTING AND AMENDING THE AGENDA Most frequently (44.0%), the agenda was prepared by management. Shareholders proposed agenda items routinely (51.0%), rarely (25.0%), or never (9.0%). Notably, 56.0% of respondents said that changes to the agenda were permitted during the meeting, if deemed necessary. This is contrary to internationally accepted corporategovernancebestpractices.48 SHAREHOLDER ATTENDANCE The survey results indicate that AGMs were not well attended by either majority or minority shareholders. More than half of the respondents (57.0%) said that fewer than 85.0% of the shareholders attended the last AGM. Several (12.0%) indicated that fewer than 50% of the shareholders attended the last meeting. Notably, more than one-quarterinaggregate(27.0%)indicatedthat65%orfeweroftheshareholdersattendedthelastAGM. Chart 21. Shareholder Attendance at the Last AGM (%) More than 85% 43.0 >75% - 85% 15.0 >65% - 75% 15.0 >50% - 65% 15.0 Less than 50% 12.0 Typically, shares in the companies surveyed were concentrated in a small number of individuals and it is likely that the attendance figures reflect the difficulty of reaching a quorum49 without the presence of majority shareholders. Minority shareholder attendance was not impressive: about half of the ninety-five respondents who answered the questionreportedthatlessthantwo-thirdsoftheminorityshareholdersattendedthelastAGM. Chart 22. Attendance by Minority Shareholders at the Last AGM (%) More than 66% 51.1 >33% - 66% 22.9 >20% - 33% 5.2 >10% - 20% 15.6 Less than 10% 5.2 EXTRAORDINARYSHAREHOLDERS'MEETINGS An extraordinary shareholders' meeting (ESM) creates an opportunity for shareholders to exercise their rights in an effective and timely manner in the event of an unforeseen issue of urgency. Sixteen (16.0%) of the companies surveyed had held an ESM in the last two years. Of those, six (37.5%) convened the meeting to seek approval of amendments to the charter, three (18.8%) to seek approval for the issue of new shares, two (12.5%) to elect board members, one (6.3%) to seek approval of significant transactions and one (6.3%) because theAGM did not meet expectations/requirements.ThreedidnotprovideareasonfortheESM. 48 See Chart A-20 "Shareholders' Contribution to the AGM Agenda" and Chart A-21 "Preparation of the Agenda" in the Appendix. 49 CIVIL CODE art.107-2. (Azer.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 36 SHAREHOLDERS' RIGHTS VOTINGPROCEDURES Shareholders should be afforded effective and convenient methods of voting and should be able to vote in person or in absentia. In general, the companies surveyed showed a lack of awareness of appropriate mechanisms to protect the rights of minority shareholders, including with respect to voting procedures. For example, only thirty of them (30.0%) applied proxy voting and only six (6.0%) allowed cumulative voting.50 Three (3.0%) had blocking vote mechanisms in place and seven (7.0%) allowed block voting. Chart 23 shows the degree to which various votingmechanismswerepresentinthecompaniessurveyed. Chart 23. Voting Mechanisms (%) Block voting 7.0 Cumulative voting 6.0 Blocking vote 3.0 None of the above/no answer 84.0 For counting votes, two of the companies surveyed (2.0%) used cards and six (6.0%) used paper ballots. Most (92.0%)accomplishedvotingbyashowofhands. DISCLOSUREOFRESULTS Good corporate governance practices requires adequate dissemination of the results of theAGM, and this can be as important as the content. Channels for disseminating information should ensure equal, timely and efficient access to information. The majority of the companies surveyed (77.0%) announced results to shareholders before the meeting adjourned, 12.0% sent a report to shareholders by regular mail, 5.0% sent it by registered mail and 6.0% used other means. Three-quarters of the respondents (75.0%) did not make the results of the AGM availabletothepublic.Ofthosethatdid,alldisclosedtheresultsthroughthemedia.51 DIVIDENDS In good corporate governance practices, executive officers are held accountable for the company's profitability. This seldom happens in Azerbaijani companies. In fairness, however, companies need to retain earnings in the early stages of growth and Azerbaijani companies have been operating in a free market economy for a relatively short time. They therefore have limited experience in dealing with dividends. Only eighteen of the companies surveyed (18.0%) declared and paid dividends for the fiscal years 2002 through 2004. These companies had a good record of timely payment, even though no minimum interval between declaration and payment has been established by law. Twelve of them paid the dividends in less than fifteen days and the other six paid within two months. SUMMARY While it is encouraging that JSCs were holdingAGMs, improvement is needed in the procedures related to giving notice of and conducting these meetings and those related to shareholders' rights. One of the fundamental incentives for investing in shares, potential dividends, appears to be absent in mostAzerbaijani companies. This is a poor reflection on performance, even taking into account the need to retain earnings in the early stages of growth. 50 Note that an ambiguity exists in theAzerbaijani legislation regarding what constitutes a voting majority atAGMs.The ambiguity is in whether a majority consists of the number of shareholders or number of voting shares. Two possible interpretations exist because of the language contained in articles 102.5. and 107-5.1, which provide that a majority is "2/3 voting majority of shareholders, which have voting rights." These provisions contradict article 107-3.5. of the CIVIL CODE, which declares a "one share, one vote" principle for the voting procedures at a company'sAGM. OnAugust 4, 2006, the Parliament ofAzerbaijan amended the CIVIL CODE to include a "one share, one vote" principle into article 107-5.1; however, this inclusion impacts only that part of article 107-5.1. (which refers to the voting procedure on general issues) requiring a "simple voting majority of shareholders present at the general meeting of shareholders."At the same time, the State Committee for Securities has issued a guideline that clarifies that a "one share, one vote" principle should govern voting procedures on all issues at AGMs. In conclusion, though the law on its face is unclear, current enforcement and precedent indicates that the prevailing rule is that 2/3 of thevotingshares,nota2/3majorityofshareholders,constitutesamajorityfordecisions. 51 See Chart A-22 "Means of Communicating AGM Results to Shareholders" and Chart A-23 "Means of Communicating AGM Results to the Public"intheAppendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Disclosure and Transparency Effective disclosure, which includes financial disclosure and transparency, is fundamental to good corporate governanceandessentialforbuildinginvestorconfidence. It is to be hoped that the recent adoption of the Law of the Republic of Azerbaijan on Accounting 52will lead to heightened levels of disclosure and transparency in Azerbaijani JSCs. Improved legislation is in place, but time will tell whether improved practices will follow. Disclosure and transparency are sensitive issues and respondents werelessresponsivetoquestionsinthissectionofthesurvey. COMPLIANCE WITH IFRS Forty-five of the respondents (45.0%) reported that they prepared financial statements in accordance with IFRS. However, analysis shows it to be unlikely that as many as that actually did so. Only fifteen of the companies surveyed(15.0%)disclosedacashflowstatement,whichisanobligatorycomponentinacompletesetoffinancial statements under IFRS.53 Furthermore, only nine respondents (9.0%) said that financial statements were audited inaccordancewithIFRS.SeeCharts24and25. 52 June 2004. Hereinafter, the "Accounting Law". Note that the effective date of this legislation was November 2004. 53 IAS 1 PRESENTATION OF FINANCIAL STATEMENTS provides that a complete set of financial statements compliant with IFRS includes: (1) a balance sheet; (2) an income statement; (3) a statement of changes in equity; (4) a cash flow statement; and (5) notes comprising a summary of significant accounting policies and other explanatory notes. International Accounting Standards Board, INTERNATIONAL FINANCIAL REPORTING STANDARDS 2005, at 609 (2005). C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 38 DISCLOSURE AND TRANSPARENCY Chart 24. Compliance with IFRS Disclosure Requirements (%) Balance sheet 33.0 Profit and loss statement 32.0 Statement of changes in equity 17.0 Notes to financial statements 17.0 Cash flow statement 15.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) MANDATORYDISCLOSURE Annual reports, including financial statements and information on major shareholders and top management, promote transparency and help protect investors. Making this information public helps ensure transparency in the market generally.The Civil Code requires all open JSCs to make public their annual reports and balance sheets.54 A significant number of the companies surveyed did not comply with this requirement. Only thirty-seven respondents (37.0%) reported that they disclosed their annual reports and only thirty-three (33.0%) reported that theydisclosedtheirbalancesheets. One of the basic rights of investors is to be informed about the ownership structure of the company. The identities of beneficial controlling shareholders (those owning more than 50% of the shares) were disclosed by only two of the companies surveyed (2.0%). Eighty-four of the companies surveyed (84.0%) reportedly had no beneficial owners other than those stipulated in the relevant registration documents. In the remaining companies, the identities of further beneficial owners were disclosed to management (10.0%), to the other shareholders (7.0%), to the supervisory board (5.0%) or to the Securities Committee and the Exchange (3.0%). Additionally, only ten (10.0%)disclosedtheirorganizationalchartandonlyfive(5.0%)disclosedrelatedparties.55 Corporate governance policies and principles, which are important in the assessment of a company's governance, were disclosed to the public by only five of the companies surveyed (5.0%), and only six (6.0%) disclosedthechartersandbylaws. Potential investors need to know who governs the companies in which they consider investing. Information about management and the supervisory board was seldom disclosed by the companies surveyed. Only two (2.0%) disclosed biographical information or remuneration details with respect to members of the supervisory board, eitherindividuallyorcollectively,andonlythree(3.0%)disclosedthisinformationwithrespecttomanagement. The low level of awareness of good governance best practices generally (only 30.0% of respondents indicated that they were knowledgeable in the OECD Principles of Corporate Governance) explains the evident lack of awareness of the specific disclosure items that constitute appropriate disclosure in corporate governance best practices. Chart 25 shows the level of compliance with the disclosure of each of these items as reported by respondents. Disturbingly, fifty-six of the companies surveyed (56.0%) did not disclose information of any kind. These respondents were asked to give a reason, and most (65.0%) cited a lack of demand for the information or the absenceofanylegalrequirementfordisclosure(30.4%).56 54 CIVILCODEart.99.2.(Azer.) 55 The CIVIL CODE, which is the relevant legislation, does not define related parties. Conventionally, "related parties" means entities that control orareundercommoncontrolwiththecompanythroughshareholdingsorothermeansofcontrol.Seesupranote39. 56 SeeChartA-26"ReasonsforNon-Disclosure"intheAppendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n DISCLOSURE AND TRANSPARENCY 39 Chart 25. Compliance with Best Practices Related to Disclosure (%) Annual report 37.0 Balance sheet 33.0 Profit and loss statement 32.0 Statement of changes in equity 17.0 Notes to financial statements 17.0 Cash flow statement 15.0 Quarterly reports 10.0 Organization chart 10.0 Audited financial statements prepared in accordance 9.0 with IFRS Material event report 8.0 Charter and/or bylaws 6.0 List of related parties 5.0 Corporate governance principles and policies 5.0 External audit opinion 5.0 Biographical information on management board members or individual general directorate 3.0 Identity of beneficial controlling shareholders 2.0 Biographical information on supervisory board members 2.0 Remuneration of each member of the 1.0 supervisory board Remuneration of supervisory board as a whole 1.0 Information on insider trading 1.0 None of the above 56.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 40 DISCLOSURE AND TRANSPARENCY ANNUALREPORT The OECD Principles of Corporate Governance contain recommendations with respect to information to be disclosed in a company's annual report. Although thirty-seven of the companies surveyed (37.0%) reportedly published annual reports, the quality of these reports is questionable in light of the responses regarding the information disclosed therein. For example, only one respondent indicated that the beneficial shareholders were disclosed. Only four provided profiles of board members and the same number disclosed the shares owned by thoseindividuals.(SeeChart26.) Rather than providing some of the substantive information that a shareholder or potential investor might expect under corporate governance best practices, the annual reports of the companies surveyed focused on complying with legal requirements of the Securities Committee Disclosure Regulations, which sets out minimum requirements for open JSC's annual reports. Although not required by the Regulations, the most frequently disclosed information included the report of the chairperson of the supervisory board (63.0%), followed by the revision commission or audit committee report (61.0%), and management discussion and analysis (41.0%). The external auditor's opinion was disclosed by 41.0%, even though only 28.0% reported that they included the related financial statements. The Securities Committee Disclosure Regulations require companies to disclose significant shareholders (those who own 10.0% or more of the shares), but only twenty-seven of the companies surveyed (27.0%) provided this information. In addition, only four (4.0%) disclosed the shareholdings of the supervisoryboardandmanagement. Chart 26. Information Included in Annual Reports (%) Report of the supervisory board chairperson 63.0 Revision commission or audit committee report 61.0 Management discussion and analysis 41.0 External auditor's opinion 41.0 Goals and strategies 29.0 Audited financial statements including notes 28.0 Ownership structure, dividend policy and history 27.0 Market share and major groups of clients 5.0 Profiles of members of the governing bodies 4.0 Shares held by members of the governing bodies 4.0 Corporate governance policies and principles 3.0 Environmental and social impact 3.0 Beneficial shareholders and shares held 1.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n DISCLOSURE AND TRANSPARENCY 41 DISCLOSUREOFSIGNIFICANTTRANSACTIONSANDRELATEDPARTYTRANSACTIONS In OECD countries, regulators require the disclosure of transactions involving company directors and their associates because of the fiduciary nature of the director's role. In most Eurasian countries also, related party transactions are considered material and are therefore subject to mandatory disclosure.As discussed at a recent OECD Corporate Governance Roundtable,57 however, compliance and enforcement are notoriously weak throughout the region. The Roundtable concluded that in order to increase the effectiveness of supervisory boards in Eurasia, the boards must take a much more active role in managing and disclosing conflicts of interest andrelatedpartytransactions. CurrentlyinAzerbaijan,disclosureofrelatedpartytransactionsisminimalowingtolackoflegislatedrequirements and lack of compliance with good corporate governance practices. Five of the companies surveyed (5.0%) disclosed related party transactions and four (4.0%) disclosed significant transactions.58 Only eighteen (18.0%) disclosedboth.Seventy-three(73.0%)disclosedneither. Chart 27. Disclosure of Significant and Related Party Transactions (%) Both significant transactions and related party transactions 18.0 Related party transactions 5.0 Significant transactions 4.0 No information disclosed 73.0 Notably, many reporting and control functions with respect to governing bodies are concentrated in the hands of the governing body itself, creating conflict of interest. For example, responsibility for investigating related party transactions and conflicts of interest rested with management in fifty-six of the companies surveyed (56.0%). In mostcases,therelatedcontractswerealsoapprovedbymanagement. SOURCES OF INFORMATION FOR POTENTIAL INVESTORS Information on company management, operations and financial condition was not readily available to potential investors. Only a little more than a half of the respondents (63.0%) indicated that this information was available to the public. Only thirteen (13.0%) published interim reports and only ten (10.0%) made such information available on their websites. Most of the companies surveyed (86.0%) reportedly did make this information available upon request.Thus,theonlypracticalwayforinvestorstogetinformationwastoapproachthecompanyitself. Chart 28. Sources of Information for Investors (%) From the company, upon request 86.0 Published annual report 40.0 Published quarterly reports 13.0 Company's website 10.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) 57 See supra note 24. 58 "Significant transactions" means any transaction in excess of 25% of the net book value of the company's assets. CIVIL CODE art.99.3. (Azer.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 42 DISCLOSURE AND TRANSPARENCY 59 See Id. at art. 107-11.1. 60 "Inspector" means an individual (as opposed to the multi-member revision commission) performing the functions of the revision commission. See Id. 61 See Id. 62 See Chart A-27 "Revision Commissions or Audit Committees in Place" in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n DISCLOSURE AND TRANSPARENCY 43 Chart 29. Frequency of Revision Commission Meetings (%) Once per year 44.0 2-3 times per year 26.0 4 times per year 14.0 5-8 times per year 2.0 More than 8 times per year 3.0 No revision commission 11.0 The Civil Code has no upper or lower limit on the number of revision commission members. In thirty-nine of the companies surveyed (39.0%), the revision commission had three or more members.The Civil Code does prohibit shareholders, members of the supervisory board or management from sitting on the revision commission.63 Half of the respondents (50.0%) reported that the chairpersons of their revision commissions were independent and forty-six(46.0%)reportedthattheirrevisioncommissionsincludedcompanyemployees.64 As mentioned, nine of the companies surveyed had an audit committee. In five of those, the majority of the members were employees. In four, the chairperson of the audit committee was independent. Three companies had at least one audit committee member who was a finance/accounting expert and three had a majority of memberswhowerefinance/accountingexperts.Ofthesenineauditcommittees,onlythreemetatleastquarterly. Chart 30. Frequency of Audit Committee Meetings (%) 2-3 times per year 4.0 Once per year 2.0 4 times per year 1.0 5-8 times per year 1.0 More than 8 times per year 1.0 No meetings* 91.0 * Note: "No meetings" represents the companies that reportedly did not have an audit committee. EXTRAORDINARYAUDITS In more than half of the companies surveyed (51.7%), the most recent extraordinary audit was initiated by the revision commission itself. In the rest, it was initiated by management (19.5%), the supervisory board (12.6%) or theAGM (6.9%). In companies with an audit committee, the last extraordinary audit was initiated most often by the supervisory board (33.4%), followed by management (22.2%), the AGM (22.2%) and the audit committee itself (22.2%).65 INTERNALAUDIT An effective internal audit function should determine whether the company has sound systems of internal controls to protect the organization against loss, regularly test and evaluate those control systems, assess risk and make recommendations for improvement and follow-up. InAzerbaijan, there is no legal requirement for JSCs to have an internalauditfunctioninplace,buttwelveofthecompaniessurveyed(12.0%)hadreportedlyestablishedone. 63 CIVIL CODE art. 107-11.3. (Azer.) 64 See Chart A-28 "Composition of Revision Commission" in the Appendix. 65 See Chart A-29 "Impetus for Extraordinary Audit (Companies with Revision Commissions)" and Chart A-30 "Impetus for Extraordinary Audit (Companies with Audit Committees) " in the Appendix. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 44 DISCLOSURE AND TRANSPARENCY INDEPENDENCEOFTHEINTERNALAUDITFUNCTION To be effective, the internal audit function must be independent of management and free of interference in determining the scope of the audit, performing the work, and communicating the results. In most of the companies that had an internal audit function, the function was not independent to an adequate degree. For example, in seven of the twelve companies with an internal audit function (58.3%), the supervisory board appointed the head. Worse from the point of view of independence, in five companies (41.7%), management performed this function. Incorporategovernancebestpractices,theauditcommitteemakesthisappointment. According to best practices, the audit committee is the appropriate body to oversee the internal audit function. In all twelve of the companies with internal audit functions, the internal audit reported to the supervisory board and management. Oversight was provided as follows: AGM (three companies); AGM and management jointly (three companies); supervisory board (two companies); revision commission and supervisory board jointly (two companies);management(onecompany);andAGMandthesupervisoryboardjointly(onecompany). In best practices, the audit committee is responsible for approving the internal audit work plan. This practice was not followed in any of the companies surveyed. Instead, management or the supervisory board approved the work plan,whichfurtherillustratedthelackofindependenceintheinternalauditfunctionwhereitexisted. EXTERNALAUDIT Under the Civil Code, JSCs must submit their annual financial statements to the scrutiny of an independent external auditor prior to public disclosure.66 Only seventy-seven of the companies surveyed (77.0%) complied with this requirement. Of those, sixty-seven (87.0%) used a local auditor or audit firm and ten (13.0%) used an internationalauditfirm.67 Since it bears on the independence of external auditors, it is notable that half of the respondents (50.0%) reported that the external auditor performed other services for the company in addition to conducting the audit. Tax consulting was most prevalent of the services performed (56.6%), followed by legal services (26.5%) and businessconsulting(16.9%). Changing auditors was not common; sixty-two of the companies surveyed (62.0%) had not changed auditors in the last three years. Sixteen (16.0%) had changed auditors in the last three years and twenty-two (22.0%) did not answer this question. Those that had changed auditors did so owing to audit fee considerations (44.0%), unsatisfactory quality of work (25.0%), a conflict of interest (18.5%) and changes in the law applicable to external audits(12.5%).68 SUMMARY In general, the companies surveyed not only failed to follow corporate governance best practices, but also apparentlydidnotalwayscomplywithminimumlegalrequirementsrelatedtodisclosure. Few of the companies surveyed had established internal audit functions.Those that did had not taken appropriate steps to ensure independence and an adequate structure.This suggests that most companies did not have sound systemsofinternalcontrolstoprotecttheorganizationagainstloss.69 Although many respondents claimed that they prepared their financial statements in accordance with IFRS, analysis of the data suggests that this is not the case. Moreover, it appears that very few companies had their financial statements audited in accordance with the International Standards onAuditing or with best practices, in that the financial reports of most companies were not certified by an independent auditor. Without that certification,thefinancialstatementspresentedbycompanieswillbeconsideredunreliablebythepublic. 66 CIVIL CODE art. 107.6. (Azer.) 67 See Chart A-31 "External Auditor" in the Appendix. 68 See Chart A-32 "Reasons for Changing External Auditors" in the Appendix. 69 See supra note 28. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n Appendix INTRODUCTION Chart A-1. Respondent's Position (%) Management board chairperson/ individual general directorate 42.0 Chief accountant 42.0 Management board member 21.0 Supervisory board secretary 10.0 General counsel 10.0 Supervisory board chairperson 4.0 Supervisory board member 3.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 46 APPENDIX ORGANIZATION AND OWNERSHIP OF JOINT STOCK COMPANIES IN AZERBAIJAN Chart A-2. Companies Surveyed, by Year Established (%) 32.0 31.0 21.0 16.0 1904 - 1945 1946 - 1970 1971 - 1992 1993 - 2005 Chart A-3. Companies Surveyed, by Year of Obtaining JSC Status (%) 36.0 22.0 13.0 9.0 7.0 7.0 5.0 1.0 1996 1997 1998 1999 2000 2001 2002 2003 Chart A-4. Planned Sources of External Investment in the Next Three Years (%) Loans from local finanical institutions 31.7 Loans from international financial institutions 29.2 Loans from international organizations 26.8 Foreign direct equity investment 7.5 Domestic direct equity investment 2.4 Share issue through public offering 2.4 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n APPENDIX 47 Chart A-5. Reasons for not Seeking Financing (%) No projects attractive to potential investors 38.2 No plans to increase production capacity 26.5 Sufficient cash flow for current needs 17.6 New financing already arranged 5.9 Other 11.8 Chart A-6. Reasons for not Issuing Shares to Raise Capital (%) Did not want to change ownership structure 39.7 Costly compared to loans 23.3 Not attractive to investors 17.8 Other 8.2 Did not know 11.0 Chart A-7. Major Shareholders (%) 31.0 Supervisory board members 9.0 4.0 36.0 Management 7.0 6.0 6.0 State authorities/state-owned enterprises 13.0 0.0 4.0 Foreign entities/individuals, except management and supervisory 3.0 board members 2.0 9.0 Azerbaijani private entities 4.0 2.0 Azerbaijani individuals, except 10.0 management and supervisory 55.0 board members 54.0 1.0 Other 2.0 5.0 3.0 No answer 7.0 27.0 First major shareholder Second major shareholder Third major shareholder C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 48 APPENDIX AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES Chart A-8. Rating of Corporate Governance in the Company (on a scale of 1 to 5, with 1 as "bad" and 5 as "good") (%) 32.0 24.0 19.0 19.0 6.0 1 2 3 4 5 Chart A-9. Overall Rating of Corporate Governance in Azerbaijani Companies (on a scale of 1 to 5, with 1 as "bad" and 5 as "good") (%) 42.0 22.0 18.0 16.0 2.0 1 2 3 4 5 Chart A-10. Rating of Regulatory Legislation Related to Corporate Governance Practices in Azerbaijan (on a scale of 1 to 5, with 1 as "bad" and 5 as "good") (%) 42.0 26.0 15.0 15.0 2.0 1 2 3 4 5 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n APPENDIX 49 Chart A-11. Average Ratings for Corporate Governance Practices (%) 3.2 2.6 2.5 Company's Azerbaijani Corporate corporate governance companies generally governance legislation Chart A-12. Rating of the Quality of Specific Existing Legislation (on a scale of 1 to 5, with 1 as "bad" and 5 as "good") Procedures for the annual general meeting 4.4 Holding the annual general meeting 4.4 Authorities of governing bodies 4.3 Control of the company's financial and economic activity 4.3 Protecting shareholders' rights 4.3 Disclosure to shareholders 4.3 Registration 4.2 Establishing and organizing the supervisory board 4.2 Disclosure to stakeholders 4.2 Establishing and organizing of management board 4.1 Issuing of securities 4.1 Establishing supervisory board committees 3.8 Conflicts of interest 3.7 Liquidating of JSCs 3.6 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 50 APPENDIX Chart A-13. Responsibility for Preparing Internal Bylaws and Policies (%) Management 68.0 Supervisory board 55.0 In-house legal counsel 9.0 External legal counsel 5.0 Secretary to the supervisory board 4.0 Corporate secretary 1.0 Corporate governance committee of the supervisory board 1.0 Other 2.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) Chart A-14. Main Obstacles to Improving Corporate Governance in the Company (%) Lack of information/knowledge 60.0 Inadequate legislation 51.0 Lack of qualified specialists 44.0 Concern that competitors would benefit from disclosure of information currently kept confidental 18.0 Concern that increased transparency carries 6.0 significant risk (bankruptcy/acquisition, etc.) No benefit to expending resources 6.0 on improving corporate governance Note: Total exceeds 100%. (Respondents were allowed multiple responses.) Chart A-15. Areas of Interest for Obtaining Training or Advice (%) Corporate governance assessment 65.0 Shareholders' rights 45.0 Drafting and/or reviewing charter and bylaws 37.0 Disclosure and transparency 30.0 Effective board practices 29.0 Other 3.0 Not interested in training 7.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n APPENDIX 51 SUPERVISORY BOARD AND MANAGEMENT PRACTICES Chart A-16. Remuneration Criteria for Supervisory Board Members (%) Based on evaluation of board activity 8.0 Tied to company net income 7.0 Includes additional responsibility as board chairperson 1.0 Includes additional responsibility as a committee chairperson 1.0 Tied to company gross income 0.0 Fixed monthly amount 0.0 Market value of shares0.0 Note: Respondents were allowed multiple responses. Chart A-17. Contracts with Supervisory Board Members (%) 19.4 Supervisory board chairperson 38.7 41.9 7.5 Supervisory board members 49.5 43.0 1.4 Independent directors 30.1 68.5 Service (civil law) contract Employment (labor) contract No formal contract Note: Total exceeds 100%. (Respondents were allowed multiple responses.) Chart A-18. Remuneration Criteria for Management (%) Tied to company net income 4.0 Based on performance evaluation 4.0 Additional responsibility as chairperson 2.0 Tied to company gross income 1.0 Market value of shares 1.0 Fixed monthly amount 1.0 Note: Respondents were allowed multiple responses. C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 52 APPENDIX SHAREHOLDERS' RIGHTS Chart A-19. Materials Provided to Shareholders with the Notice of the AGM (%) Agenda 92.0 Description of each agenda item 49.0 Annual report 47.0 Financial report 43.0 Supporting documents related to agenda items 33.0 Proxy voting instructions 12.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) Chart A-20. Shareholders' Contribution to the AGM Agenda (%) Shareholders routinely propose agenda items 51.0 Shareholders rarely propose agenda items 25.0 Shareholders never propose agenda items 9.0 No answer 15.0 Chart A-21. Preparation of the Agenda (%) Developed by management 44.0 Developed by the supervisory board 39.0 No answer 17.0 Chart A-22. Means of Communicating AGM Results to Shareholders (%) Announced before meeting ends 77.0 Sent by regular mail 12.0 Sent by registered mail 5.0 Communicated by other means 6.0 Chart A-23. Means of Communicating AGM Results to the Public (%) Published in the media 25.0 Not communicated 75.0 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n APPENDIX 53 Chart A-24. Distribution of Duties among the Governing Bodies (Supervisory Board, Management and the Annual General Meeting) (%) 17.0 Representing the company 65.0 18.0 3.0 Electing chairperson of supervisory board 8.0 89.0 5.0 Electing supervisory board members 8.0 87.0 16.0 Appointing chairperson of management board/ 14.0 individual general directorate 70.0 13.0 Appointing management board members 17.0 70.0 10.0 Approving governing body bylaws 41.0 49.0 Approving bylaws 13.0 (other than governing body bylaws) 63.0 24.0 28.0 Setting strategy 53.0 19.0 9.0 Developing operating plan 73.0 18.0 14.0 Approving budget 48.0 38.0 Supervisory board Management Annual general meeting Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 54 APPENDIX Chart A-25. Distribution of Authorities among the Governing Bodies (Supervisory Board, Management and the Annual General Meeting) (%) Approving transactions with a value 22.0 of less than 25% of book value of assets 52.0 26.0 13.0 Approving transactions with a value of 25%-50% of book value of assets 45.0 42.0 14.0 Approving transactions with a value 43.0 of more than 50% of book value of assets 43.0 10.0 Approving share issues 34.0 56.0 6.0 Approving securities issues (other than shares) 31.0 63.0 21.0 Appointing external auditor 57.0 22.0 24.0 Approving terms of contract with external auditor 64.0 12.0 20.0 Approving annual report and annual 54.0 financial statements 26.0 14.0 Approving declaration and distribution 41.0 of dividends 45.0 25.0 Implementing and maintaining internal 63.0 control system 12.0 22.0 Implementing and maintaining risk 68.0 management system 10.0 27.0 Aprroving related party transactions 72.0 32.0 Supervisory board Management Annual general meeting Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n APPENDIX 55 DISCLOSURE AND TRANSPARENCY Chart A-26. Reasons for Non-Disclosure (%) No demand 65.0 No legal requirement 30.4 No economic advantage 3.4 Lack of resources for disseminating information 1.2 Chart A-27. Revision Commissions or Audit Committees in Place (%) Revision commission 80.0 Revision commission and audit committee 9.0 Neither 11.0 Chart A-28. Composition of Revision Commission (%) At least one specialist in finance and accounting 63.0 Independent chairperson 50.0 Includes employees 46.0 More than three members 39.0 At least one independent member 33.0 Majority of specialists in finance and accounting 30.0 Includes a shareholders' representative 26.0 Majority of independent members 19.0 No revision commission 9.0 Note: Total exceeds 100%. (Respondents were allowed multiple responses.) C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n 56 APPENDIX Chart A-29. Impetus for Extraordinary Audit (Companies with Revision Commissions) (%) Revision commission 51.7 Management 19.5 Supervisory board 12.6 Annual general meeting 6.9 Shareholder(s) owning more than 10% of common shares 2.3 Other 7.0 Chart A-30. Impetus for Extraordinary Audit (Companies with Audit Committees) % Supervisory board 33.4 Management 22.2 Audit committee 22.2 Annual general meeting 22.2 Chart A-31. External Auditor (%) Local audit firm 65.0 Individual auditor 22.0 International audit firm 13.0 Chart A-32. Reasons for Changing External Auditors (%) Cost considerations 44.0 Unsatisfactory quality of work 25.0 Conflicts of interest 18.5 Changes in legal requirements for external audit 12.5 C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n APPENDIX 57 Table A-1. Distribution of Duties: Supervisory Board (SB), Management (MGMT), Revision Commission (RC), Audit Committee (AC), Internal Auditor/Internal Audit Department (IA) and External Auditor (EA) (%) Function/Responsibility SB No MGMT RC AC IA EA answer Perform regular and extraordinary internal audits 17.0 of the company 11.0 35.0 1.0 7.0 17.0 12.0 Ultimate responsibility for timely and reliable financial reports 4.0 50.0 32.0 2.0 5.0 5.0 2.0 Oversee the implementation of the financial and business plans 51.0 32.0 14.0 0.0 1.0 0.0 2.0 Establish accounting policy statements 11.0 63.0 14.0 0.0 5.0 2.0 5.0 Review the accuracy of accounting entries and check the accuracy and timeliness of document flows 10.0 51.0 26.0 0.0 6.0 5.0 2.0 Assure that the financial statements are free of 53.0 0.0 6.0 5.0 4.0 material misstatement 12.0 20.0 Investigate related party transactions and cases of conflicts of interest 22.0 56.0 8.0 1.0 2.0 2.0 9.0 Prepare periodic financial reports/statements 11.0 61.0 17.0 0.0 5.0 2.0 4.0 Consult on and make recommendations for improvements to the company's operations 26.0 57.0 6.0 1.0 1.0 5.0 4.0 Assign responsibility, delegate authority, establish policies to provide a basis 26.0 71.0 1.0 0.0 0.0 0.0 2.0 for accountability and control Establish control activities encompassing policies and procedures to ensure that directives are achieved 20.0 71.0 6.0 0.0 0.0 0.0 3.0 Convey the message that integrity and ethical 16.0 79.0 0.0 0.0 0.0 0.0 5.0 values will be maintained Implement procedures and policies for the internal control system and risk management 17.0 72.0 3.0 0.0 2.0 0.0 6.0 Implement corrective actions recommended by 0.0 0.0 1.0 auditor and/or supervisory authorities 15.0 65.0 8.0 11.0 Monitor internal controls, including compliance with laws, regulations and policy statements 38.0 57.0 2.0 1.0 0.0 0.0 2.0 Enforce policies and procedures 19.0 77.0 2.0 0.0 0.0 0.0 2.0 Establish an effective audit program 13.0 47.0 11.0 2.0 7.0 7.0 13.0 Periodically assess internal control system 17.0 65.0 10.0 1.0 3.0 0.0 4.0 Approve the system of internal control 23.0 72.0 2.0 0.0 0.0 0.0 3.0 Review actions taken by management to deal with material control weaknesses and verify that those 45.0 40.0 4.0 1.0 1.0 1.0 8.0 actions are adequate C o m p a n y C o r p o r a t e G o v e r n a n c e i n A z e r b a i j a n