The Corporate Governance Mechanism: How It Works in the

Context of Uzbekistan

Zufar Ashurov
PhD Candidate
Corporate Governance Department
Tashkent State University of Economics
49, Uzbekistanskiy Prospekt
100003 Tashkent, Uzbekistan
E-mail: zashurov[at]intal[dot]uz

Abstract
The corporate governance has become a vital topic for the most researches and scientific
controversies. Effectiveness of corporate governance is determined by that how the
corporate governance mechanisms are launched and work in the company. By this paper
we are given opportunity to study and describe the corporate governance mechanism in
the context of Uzbekistan. Especially, in this paper we give a definition to corporate
governance mechanism and analyze the mechanisms of shareholder rights and interests
protection, monitoring of company activity by the Supervisory Board, providing
information transparency and disclosure, accountability of the corporate governing
bodies applied in Uzbekistan.

Key words: Corporate governance, corporate governance mechanism, shareholder

rights and interests, General Meeting of Shareholders, Supervisory Board, Executive
Body, business plan, information transparency and disclosure, accountability.

JEL Classifications: G30, G38

This paper is a translated English version of the one which was originally presented in
Russian in the Second International Scientific and Practical Conference on Innovation
Processes and Corporate Governance, 15-30 March, 2010, Minsk, Belarus as well as was
published in the conference proceedings.

Electronic copy available at: http://ssrn.com/abstract=1748444

 Today the corporate governance in the companies has become a vital topic for
the most researches and scientific controversies. The corporate governance, as an
effective method of managing the system of relationships between property owners,
managers and other stakeholders, began to significantly matter not only for
economically developed countries but also for other emerging markets. Effectiveness of
corporate governance is, to a large extent, determined by that how the corporate
governance mechanisms are launched and work in the company. In this regard, we are
given opportunity to study the corporate governance mechanism and describe this
mechanism in the context of Uzbekistan.

For the beginning, let’s talk about the corporate governance mechanism. The
corporate governance mechanism is a complex of elements actuating social and
economic, legal and organizational relationship needed for achieving objectives set for
the parties of corporate property. The corporate governance mechanisms are urged to
ensure responsibility of the Supervisory Board before shareholders, the company
management before Supervisory Board, the holders of large blocks of shares before
minority shareholders, the company before employees and customers, and before the
society in tote. The corporate governance is focused on that all these groups and
institutes to execute their functions to the best advantage while retaining the balance of
interests between them. The corporate governance mechanism is continually improved
on the basis of the best governance principles when regulating the activity of the
business entities.

At present, in Uzbekistan, there being grown the comprehension of that the

improved mechanism of corporate governance, ensuring establishment, identification,
adjustment and adoption of the standards and principles of corporate governance,
increases investment attractiveness of the company, consequently, and of the securities
market.

Let's analyze the mechanism of protection of the shareholders’ rights and

interests. The corporate governance mechanism must protect the shareholder rights. The
Uzbek Law on Joint-Stock Companies ensures for shareholders the rights to participate
in governance of the joint-stock company; to get a company’s profit share in the form of
dividends and to freely dispose of them; to obtain a complete and reliable information
about financial and economic performance of the joint-stock company; to be included in
the shareholder register; to receive a portion of property in case of joint-stock company

Electronic copy available at: http://ssrn.com/abstract=1748444

liquidation; to protect their rights in the state authority; to unite with associations and
other public organizations for the purpose of representing and protecting their own
interests etc.

It is important to note that a shareholder can use various legal measures for
protection of their rights and legitimate interests. Firstly, he/she can use his/her
organizational rights to claim share buyback, to claim the extraordinary General
Meeting of Shareholders to be convened - provided that he/she has not less than 10% of
shares in the corporate authorized capital, to be involved in formation of corporate
governing bodies. Secondly, a shareholder can refer for protection to the state
authorities, namely to the Center for Coordination and Control for Functioning of the
Securities Market under the State Property Committee of the Republic of Uzbekistan,
and to the law-enforcement bodies. Thirdly, a shareholder has a right to make use of the
judicial protection. This, first of all and to the greatest degree, concerns to minor
shareholders. The principal shareholders possessing major block of shares can also
effectively protect in practice their rights by means of advancing the decisions they need
in the General Meeting of Shareholders and by help of persons elected in the corporate
governing bodies.

The shareholders owning blocks of shares of various sizes are not equal not only
because they have various percentage of the votes but also because their rights depend
on the share size. According to the Uzbek Law on Joint-Stock Companies the rights are
arranged in the following order:

Share size Rights

1% - putting forward items for the agenda of the annual General Meeting of
Shareholders and proposing candidates for the Supervisory Board as well
as for the Auditing Committee of the company;
1% - right to go to the law with an action to the member of the Supervisory
Board and to the company’s Executive Body for compensation of
damages caused to company;
10% - making demands to the Supervisory Board to convene the extraordinary
General Meeting of Shareholders;
10% - making demands to audit the company’s financial and economic

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 performance following the results of an activity for the certain period;
60% - taking decisions on making changes in the company’s by-law or on
approving new version of the by-law; on company reorganization and
liquidation; on augmentation or reduction of the company authorized
capital; on share buyback; on electing members of the Executive Body,
Auditing Committee and Supervisory Board; and on other issues referred
to the exclusive competence of the General Meeting of Shareholders;
75% - right to take decision of the General Meeting of Shareholders by
correspondence voting in the close joint-stock company.

Now, let’s review the mechanism of monitoring the company activity by the
Supervisory Board. In Uzbekistan, the company’s Supervisory Board, or as it is called
in other countries – Board of Directors, executes a general administration of the
company activity, except taking decisions on issues referred to the exclusive
competence of the General Meeting of Shareholders. The Supervisory Board, while
monitoring the company activity, every quarter hears reports of the Chief of Executive
Body on a progress of the annual business plan implementation. If the Executive Body
commits the gross violations or breaks up implementation of approved parameters of the
company’s annual business plan, the Supervisory Board has a right to terminate ahead
of time the agreement with Executive Body.

A business plan to be developed by the Executive Body for the forthcoming year
is approved annually by the General Meeting of Shareholders. At the same time, the
company’s business plan for the next year has to be countenanced at the meeting of the
Supervisory Board not later than 1 December of the current year. To assess a
performance of the Executive Body as well as annual business plan implementation the
Supervisory Board grounds on the statutory key parameters of the business plan:
production growth, profitability and dividend payout.

One more relevant mechanism of corporate governance is provision of an

information transparency. The mechanism of providing information transparency
includes publication of the maximum volume of information about company activity
and financial performance, providing transparency of performance of the company
management and principal shareholders. An information transparency is considered as
one of the main requirements of the corporate governance.

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 According to the Uzbek legislation an information disclosure by the joint-stock
company can be realized by providing adequate information to investors, by publishing
and providing information to the state authority regulating the securities market.
Information, subject to be obligatorily disclosed by publication, is placed by the
company in mass media as well as in the worldwide network – Internet. Thus, there
should be obligatorily published the information on share issue, the report on holding
the General Meeting of Shareholders, the annual report for the last fiscal year, the lists
of affiliated persons of the company specifying the quantity and types of shares they
own, the information about essential facts etc.

A strict accountability of company management to the Supervisory Board and of

the Supervisory Board to the General Meeting of Shareholders is also highlighted as the
corporate governance mechanism. In Uzbekistan, to raise the accountability level of the
corporate governing bodies the significant changes in legislative and subordinate
regulatory acts have been made for the last years. For example, it has been established
that the Supervisory Board, during the summary General Meeting of Shareholders,
presents a report on the items of its competence as well as on the items concerning
observance of corporate governance requirements set by legislation.

In turn, a company management, at a stated times, presents to the General

Meeting of Shareholders and the company’s Supervisory Board the quarterly reports on
a progress of implementation of the annual business plan and execution of contractual
obligations for increasing company’s performance as well as the reports on a state of
matters covering his competence. Company management, in due time, also presents the
annual report and other financial statements as well as the information about company
activity to other stakeholders (shareholders, creditors, etc.).

Undoubtedly, the corporate governance mechanisms require to be studied more

deeply, and we have studied only some of them. In the corporate governance system
they should be continually improved. In our opinion, further improvement of corporate
governance mechanism in Uzbekistan, being adequate to market transformations in the
country considering a wide experience of the advanced market economy countries on
market expansion and demonopolization, is the relevant condition for economic growth
of the companies.