S&P upgrades GAMMA corporate governance rating for Kazakhtelecom (Kazakhstan) to GAMMA-5+
January 11. KASE
Standard & Poor’s Governance Services said it has raised its governance, accountability, management, metrics and analysis (GAMMA) score on JSC Kazakhtelecom (Kazakhtelecom) to GAMMA-5+ from GAMMA-5, primarily due to improvements in the board process. The largest telecommunications operator in Kazakhstan, Kazakhtelecom’s major shareholder is the Samruk-Kazyna National Welfare Fund of Kazakhstan, which currently holds a stake of 51%.
“The raising of the GAMMA score reflects significant improvements in the board process in 2010. Board procedures took more of a regular format; for instance, formal face-to-face board meetings became the norm, instead of the earlier practice of holding informal meetings between some of the board members and executives. In 2010 the board held six face-to-face meetings as compared with two in 2009, both of which were convened at the end of the year. Also, in 2010 the ratio of independent directors sitting on the board increased. Additionally, the company continually strives to improve risk management and strategic planning processes,” said Standard & Poor’s governance analyst Elena Pastoukhova. “Nevertheless, incomplete disclosure of beneficial ownership, the supermajority requirement in terms of board decisions and the timing of annual shareholder meetings continue to constrain the GAMMA score”.
The overall GAMMA score of Kazakhtelecom is the result of four component scores ranging from 1 (low) to 10 (high).
– Shareholder influence – 5+;
– Shareholder rights – 5+;
– Transparency, audit and ERM – 6;
– Board effectiveness, strategic process and incentives – 5 (raised from 4+).
The strengths of corporate governance practices at Kazakhtelecom include:
– Minority shareholders enjoy a broad measure of voting rights under Kazakh law and Kazakhtelecom’s Charter, and in this case are represented on the board by two directors who are actively involved in management oversight;
– The board composition is balanced and has substantial authority. A majority of board members are external directors, independent of Samruk-Kazyna. The board process is supported by three board committees, two of which are fully independent;
– Shareholder meeting procedures are strong overall. Annual IFRS financials are available before the AGM;
– Financial disclosure is generally good in our view. Annual and quarterly IFRS financial statements are available. The audit committee is chaired by an audit expert and is fairly active;
– All elements of a holistic risk management system are in place and the strategic process has several strengths.
Standard & Poor’s analysis, however, identified several weaknesses in the company’s governance system, including:
– All board resolutions must be supported by a supermajority of at least seven votes out of nine. Although we view current relations between shareholders as fairly constructive, the supermajority arrangement could in our opinion become a major impediment to the board functioning should this change;
– The influence of the majority shareholder has been controversial at times, such as in the case of executive compensation policies. The government of Kazakhstan maintains a cap on compensation that applies to executives of the largest state-owned (national) companies, including Kazakhtelecom. There may be other areas related to the social role of telecoms services where the government as a shareholder may be exposed to conflicts of interest;
– AGMs were delayed in 2009 and 2010, i.e. the timing of the meetings was outside the period set by both the Company Law of Kazakhstan and the company’s charter. In 2009 the delay resulted in a significantly protracted dividend pay-out period ending in December, although this was not the case in 2010;
– There are several weaknesses in disclosure, primarily with respect to beneficial ownership and executive compensation practices. The investor relations function is only now being developed.