S&P downgrades GAMMA corporate governance rating for National Company KazMunayGaz (Kazakhstan) to GAMMA-4+

December 23. KASE

S&P downgrades GAMMA corporate governance rating for National Company KazMunayGaz (Kazakhstan) to GAMMA-4+Standard & Poor’s Governance Services said it has lowered its governance, accountability, management, metrics, and analysis (GAMMA) score on to JSC National Company KazMunayGas  (NC KMG) to GAMMA-4+ from GAMMA-5 on concerns related to reduced involvement of independent directors in the board process and weaknesses in internal audit. NC KMG is an integrated oil and gas company wholly owned by Samruk-Kazyna National Welfare Fund of Kazakhstan.

“Unlike in 2009, the independent directors attended very few meetings in person in 2010, which we believe constrained their ability to influence decision-making at NC KMG. This led us to re-assess the strength of checks and balances at the company. Although the executives, the board and the shareholder recognise the need for improvement, there was in fact very little progress in several aspects of governance and management practices in 2010 and in some cases, a step back,” said Standard & Poor’s governance analyst Oleg Shvyrkov. “Areas with little or no progress include enterprise risk management, strategic planning and organisational re-design, internal audit and controls, financial reporting, investor relations, and executive compensation practices.”

The overall GAMMA score of NC KMG is the result of four component scores of 1 (low) to 10 (high).

– Shareholder influence – 4+                     

– Shareholder rights – 5

– Transparency, audit and ERM – 5

– Board effectiveness, strategic process and incentives – 4+

The strengths of corporate governance practices at NC KMG, according to Standard & Poor’s Governance Services, include:

– In our view, representatives of the shareholder and independent directors are highly competent and knowledgeable of the industry. They provide close management oversight and decision-making is consensus-based. The independent directors form a majority on all board-level committees.

– Annual IFRS statements are audited by a widely known international auditor, Ernst & Young. Internal audit and risk management functions are set up albeit not fully fledged.

– NC KMG is the most valuable asset of Samruk-Kazyna, the primary asset management fund for the government of Kazakhstan. The government has been pushing for governance improvements at companies under its control. This includes the appointment of experienced independent directors, encouraging transparency and risk management procedures.

– The government provides NC KMG with a pre-emptive right on all domestic oil and gas assets and new subsoil licences.

Standard & Poor’s analysis, however, identified several weaknesses in the company’s governance system, including:

– According to our analysis, there is a risk that the government of Kazakhstan may influence NC KMG to invest in projects of national importance that may lie outside its core area of expertise or otherwise to not meet its investment criteria. As a consequence of such influence in the past, NC KMG holds a significant number of non-core assets, which could impede the effectiveness of controls and limit the influence of the board of directors.

– NC KMG often serves as a government policy tool for insuring domestic supplies of affordable oil products, and its domestic downstream operations have a strong social focus. NC KMG has limited autonomy in executive compensation policies and the strategic process.

– Independent directors are in the minority on the board and do not have any specific veto powers. In 2010, they attended most board and committee meetings via telephone conferencing; this constrained their influence in our view.

– The internal audit department is not fully staffed and has limited remit.

– There are several gaps in disclosure and the timing of NC KMG’s financial reports lags that of international peers.

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