Gap Analysis of OECD Principles of Corporate … Gap Analysis of OECD Principles of Corporate...

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Gap Analysis of OECD Principles of Corporate Governance, OECD Guidelines

on Corporate Governance of State-Owned Enterprises, Armenian legislation and

Draft Corporate Governance Code

(to be presented and discussed at the Working Group on October 30, 2009)

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Notes: 1. The first column of this table is a list of those OECD principles which, in the consultants’ opinion, are not currently reflected in Armenian legislation. As such, it is

largely based on the analysis of corporate governance legislation prepared for EBRD in 2007 (http://www.ebrd.com/country/sector/law/corpgov/assess/armenia.pdf), revised to take into account legislative amendments since then. Numbers refer to the relevant paragraph in that assessment.

2. Unnumbered sections are based on the OECD Guidelines on Corporate Governance of State-owned Enterprises. 3. It should be noted that not all the suggested measures are suitable for inclusion in a corporate governance code. Some may involve legislative amendments, or policy

decisions by government. 4. The second column (‘background’) sets out relevant legal provisions, if any, plus comments received from the listed companies sub-committee (‘LCSC’). 5. The third column refers to principles of the FSDP code (USAID Financial Sector Deepening Project’s draft code for banks), whilst the fourth column (‘comments’)

identifies the need to draft a provision in a corporate governance code, and refers to the skeleton code and the project’s Concept Paper (both of which have been previously submitted to the Working Group).

6. Abbreviations used are: AGM: Annual General Meeting CBA: Central Bank of Armenia CEO: Chief Executive Officer CG: corporate governance FSDP: USAID Financial Sector Deepening Project GSM, GM: General (Shareholders) Meeting IAS: International Accounting Standards IFRS: International Financial Reporting Standards LBBA: Law on Banks and Banking Activities LCSC: Listed companies sub-committee LJSC: Law on Joint Stock Companies LSMR: Law on Security Market Regulation SOEs: State Owned Enterprises

7. Rows highlighted in yellow are those whose provisions should be considered for inclusion in the Code. 8. Rows highlighted in red and in bold are those considered key priorities

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Gap Analysis with some issues of the

OECD Principles of Corporate Governance

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BOARD OF DIRECTORS: OECD Principle VI.A: Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders OECD Principle VI.B.1: The board should fulfil certain key functions, including reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures OECD Principle VI.B.3: The board should fulfil certain key functions, including reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process OECD Principle VI.B.5: The board should fulfil certain key functions, including ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law OECD Principle VI.B.6: The board should fulfil certain key functions, including monitoring the effectiveness of the governance practices under which it operates and making changes as needed OECD Principle VI.B.7: The board should fulfil certain key functions, including overseeing the process of disclosure and communications OECD Principle VI.C.1: Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination of executive, board and auditors’ remuneration OECD Principle VI.C.2: Board members should devote sufficient time to their responsibilities

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Description of measure

(“Best practice”) Background (Laws, Regulations and sub-Committee comment)

FSDP draft Code (for banks)

Comments and References to Draft Code Sections

1. Executives who sign the annual report and prospectus should be personally liable for the accuracy of information included therein1

No provisions Bergstrom was neutral on this (more of a US point such as Sarbanes-Oxley).

Not addressed This issue cannot be addressed in a code. It should be addressed in the law.

2.

The responsibilities of the board (management or supervisory) should specifically include:

a) setting performance objectives b) monitoring implementation and

corporate performance2

LJSC 84(1) The Board shall have the exclusive right to determine the main areas of Company activities; LBBA Art 21.6 “The bank determines core activities of the bank, including the approval of the program of perspective development of the bank;

Principles 7.1 requires the Board to approve strategy, business plans etc. & 7.6 requires the Board to meet regularly with the Executive Board to review efficiency … and monitor progress…

Code Annex 1 SOEs – Section A.1.6. Code Annex 3 Listed Companies

3. There should be a principle for the minimum number of Board meetings

LBBA Art 21.7 Board meetings should be every 2 months

Not necessary. Covered by LBBA.

Annex 1 SOEs – Section A.1.14 and Annex 3 Listed Companies - Section A.3.4

4.

The responsibilities of the board (management or supervisory) should specifically include ensuring a formal and transparent nomination process for board members3

No provisions

Principle 6.7 requires transparency and includes requirement to publish information on nominees on the web-site

General Code, Section 5. General Code, Section 6. General Code Sections16 to 20 Annex 1 SOEs - Sections A.1.8 and A. 1.9 Annex 3 Listed Companies - Section A.3.8

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The responsibilities of the board (management or supervisory) should specifically include: a. ensuring the integrity of the

corporation’s accounting and financial reporting systems, including the independent audit, and

LBBA Art 21.6 Principle 7.12 includes responsibility for accounting, reports and systems of control

Annex 1 SOEs – Section A.1.6.3 and Annex 3 Listed Companies – Section A.3.2 (iii)

1 See EBRD CG checklist, question 120b 2 See EBRD CG checklist, question 121 3 See EBRD CG checklist, question 123b

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b. ensuring that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law4

LBBA Art 21.6.4 requires internal audit reports to be reviewed by the Board quarterly.

Annex 1 SOEs – Section A.1.6.4 and Annex 2 Banks – Section A.2.2 Annex 3 Listed Companies - Section A.3.2 (iv)

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The responsibilities of the board should include functions such as monitoring the effectiveness of the governance practices under which it operates and making changes as needed5

No provisions

Principle 7.10 requires Board to monitor governance practices and process of information disclosure and communication

General Code – Section 1.2

8 The responsibilities of the board should include functions such as overseeing the process of disclosure and communications6

LJSC Art 96 (1) (i): Annual Reports, balance sheet and profit & loss accounts in the media. LBBA Art 43 (a). Latest quarterly financial statements and audited Annual Statements on Web-site, Press and through leaflets

Principle 7.10-see above

General Code – Section 1.3 This function should be undertaken by the board or specific committee (e.g., Audit Committee or Corporate Governance Committee)

9 The board should include a sufficient number of non-executive and independent directors7

LJSC, Article 85(5) the executive directors cannot form a majority of the Supervisory Board. LBBA Art 21.4 director can not be related parties to other Board members. CBA Reg 1 Annex 1 sub-annex 21. 1. Director should have no family ties or other relationships with other directors or executive management nor be an employee, director or executive of another bank or credit organisation.

Principle 12.1 only proposes a sufficient number of independent directors

General Code – Sections 2 and 3

4 See EBRD CG checklist, question 125 5 See EBRD CG checklist, question 126 6 See EBRD CG checklist, question 127 7 See EBRD CG checklist, question 130

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10 There should be a clear definition of a board director’s independence8

LBBA Art 21.4 Can not be related CBA Reg 1 above.

Principle 12.4 has a 6 point definition but does not include relationship with controlling shareholders as a criterion

Annex 1 SOEs – Section A.1.10 Annex 2 Banks – Section A.2.1 and Annex 3 Listed Companies – Section A.3.1

11 The board (management/supervisory) should have separate committees to deal with: a. auditing and financial reporting

LBBA Art 21.8 Board can establish other committees. CBA Reg 1. Annex 1 sub-annex 21. Boards may establish audit, risk management, remuneration and other committees on which Board members and management may sit. But LBBA Art 21.12.4 which deals with internal audit states: Auditing Commissions shall not be established by the bank (we guess this refers to the “Control Commissions elected by the GSM and referred to in the LJSC).

Principles 10.1 and 10.5 refer to Audit Committee but no specific duties and Principle 18 states that Executive Board members should not sit on Audit Committee.


12 b. executive and board remuneration See above Principles 10 and 10.5 see above General Code – Section 7 Annex 1 SOEs – Sections A.1.8 and A.1.12

13 c. board nominations See above Principles 10.1 and 10.5 see above Annex 1 SOEs – Section A.1.9 Annex 3 Listed Companies – Section A.3.8

14 d. corporate governance (i.e. to oversee e.

compliance with company governance standards)9

See above Principles 18 applies this responsibility to the Board but not a specially constituted Committee

Annex 2 Banks – Sections A.2.3 and A.2.4 General Code: See also 39 -43 on role of Corporate Secretary and 46 Code of Ethics

15 Board committees should have a minimum number of non-executive board members and independent board members10

No provision General Code – Sections 17 and 18:

8 See EBRD CG checklist, question 131 9 See EBRD CG checklist, question 132 10 See EBRD CG checklist, question 133

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SHAREHOLDERS OECD Principle 1.B: The legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable OECD Principle II.A: The corporate governance framework should protect shareholder rights, which include the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect members of the board; and 6) share in the profits of the corporation. OECD Principle II.B: Shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as: 1) amendments to the statutes, or articles of incorporation or similar governing documents of the company; 2) the authorisation of additional shares; and 3) extraordinary transactions that in effect result in the sale of the company OECD Principle II.C: Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures that govern general shareholder meetings OECD Principle II.C.1: Shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings, as well as full and timely information regarding the issues to be decided at the meeting OECD Principle II.C.2: Opportunity should be provided for shareholders to ask questions to the board and to place items on the agenda at general meetings, subject to reasonable limitations OECD Principle II.D: Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed OECD Principle II.E.1: The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class OECD Principle III.A.2: Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress OECD Principle III.A.4: Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes OECD Principle III.B: Insider trading and abusive self-dealing should be prohibited OECD Principle III.C: Members of the board and managers should be required to disclose any material interests in transactions or matters affecting the corporation

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Description of measure (“Best practice”)

Background (Laws, Regulations and sub-Committee comment)



16 The responsibilities of the corporate registry, and sanctions for breach of the law by it, should be clearly defined11

LSMR. Art 185 and 189 describe responsibilities of registry. Art 206.3 describes sanctions and Art 209.1 Provides authority to sanction to the CBA

Not addressed

To address this issue an amendment to the law is necessary. This issue should not be covered in the Code as sanctions are not suitable for a CG Code (voluntary or mandatory)

17 The responsibilities of the corporate auditors, and sanctions for breach of the law by them, should be clearly defined.12

Only for banks and insurance companies corporate auditors are considered liable (Art 60.1 law LBBA….) “if information about the infringement of the law, regulations revealed by the inspections of the internal audit were not submitted to the board of the bank and the bank have borne losses due to it later on, the head of internal audit shall cover those real losses;”

Not addressed

To address this issue an amendment to the law is necessary. This issue should not be covered in the Code as sanctions are not suitable for a CG Code (voluntary or mandatory)

18 The vendor of shares should be able to require amendment of the register to record the change in share ownership.13

Currently, only the purchaser and nominee have the power to require amendment of the register Art. 52, LJSC “An entry in a Company’s shareholder registry shall be made at the request of a Company shareholder or nominal holder, within three days after the documents required by laws and other legal acts have been submitted”.

Not addressed

To address this issue an amendment to the law is necessary. This issue should not be covered in the Code as this issue is already regulated by law and the Code should only address corporate behaviours and not action towards third parties.

11 See EBRD CG checklist, question 23c 12 See EBRD CG checklist, question 23d 13 See EBRD CG checklist, question 38

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19 There should be sanctions for failure by a company to provide information in due time when requested by a shareholder.14

No provisions Not addressed

General Code – Sections 27 and 28 (see also all Chapter on Disclosure and Transparency) The Code can require companies to follow a procedure in case shareholders require information. Companies will then be required to report on whether this procedure has been implemented. Eventual sanctions should be included in the law/regulations.

20 The shareholders meeting should have the exclusive right to approve auditors’ remuneration.15

Currently the board has the right to decide on auditors' remuneration (LJSC Art. 84.1.(l))

Not addressed

A change in this respect requires amendment to Art. 92 LJSC. Being regulated by law, this issue cannot be part of the CG Code.

21 The shareholders meeting should have the power to request additional information regarding the auditors’ report.16

No provisions Not addressed General Code – Section 22.

22 The shareholders meeting should have exclusive right to approve remuneration of board members.17

LJSC Art 67.1.(u) Right to determine the conditions of remuneration of management officials of the company (chairman, members of Board, the director, the general director (CEO), the executive Board and members of the Management Board. BUT LBBA 21.2 (p) allows this right to be deputed to the Board either by the Charter or by the GSM. So appears to be conflict between these two laws.

Principle 11 sets out provisions on board remuneration, but does not specify which authority should be in charge of it.

If requested, the code can add a provision on a Remuneration Committee at the board.

14 See EBRD CG checklist, question 40b 15 See EBRD CG checklist, question 43b 16 See EBRD CG checklist, question 43c 17 See EBRD CG checklist, question 43d

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23 There should be a provision regulating the principle on nomination and election of directors by shareholders.

LJSC Art 67 (1(e)) sets that General Meeting of Shareholders has right to determine the number of Board members, select them and implement early termination of their powers. This issue shall be discussed exclusively in the AGM unless resignation of Board member before termination of office term. This is an exclusive right of GM and may not be transferred to the Board. LBBA Art 21.3 - 3, 4 and 5 if the shareholders owns 10% or more or as group through contract the group aggregates >10% then there is the right to appoint directly a director without any other vote by the GM. Even shareholders with less than 10% have such a right. LJSC Art. 85.2 Shareholders with > 10 % have a right to appoint a director LJSC Art.72.1. Shareholders > 2% have right to nominate a director and Board will not be able to refuse appointment if certain minimal information conditions are met.

5.6 Refers to the shareholder right to nominate and inform the Board 14 days in advance of the GSM 5.7 Effective participation in the nomination and selection of Board

General Code – Sections 1.1, 5 and 6

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24 Shareholders should have exclusive decision regarding the issuance of additional shares18

LJSC Art 67.1 (g) allows the GSM to authorise the Board to decide on increases in capital LBBA does not have specific provisions on issuance of additional shares. But it regulates increasing of statutory fund which according to LBBA 21.1(2(f) is a right of General Meeting of Shareholders but may be delegated to the Board by charter or decision of GM (LBBA 21.1(4)).

Not addressed General Code – Sections 22.4, 30 and 31

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Exceptions and restrictions to the principle that existing shareholders have pre-emption rights to subscribe to newly issued shares should only be approved if adopted by a 75% majority at a GSM19

LJSC Art 47.3. Allows GSM to waive rights by simple majority but only for 1 year. Art 47.2 States that pre-emptive rights are not exercisable if there is an Open subscription for new shares.

Not addressed General Code – Section 22.3 and 29

18 See EBRD CG checklist, question 47b 19 See EBRD CG checklist, question 49b

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26 Shareholders should be able to participate in the shareholders’ meeting by post20

LJSC Art 69 procedures for remote voting but this applies where the whole GSM is remote LJSC Art 76 allows a Power of Attorney but is silent on whether this requires to be notarised LBBA Art 21.2.1 permits an entire GSM by correspondence BUT does not permit this for the AGM or for resolutions on re-organisation, liquidation and approval of the Annual Reports. Same Art also permits a GSM by telephone or other communications in real time and does not the exclude the exceptions noted for by correspondence. It seems the concept of allowing postal votes to a physically convened GSM is not allowed. LCSC: Proxy voting is well accepted but may be difficult in Armenian context

Principle 5.9 & 5.11 proposes in-absentia rights including a proxy but does not explicitly confer right to a postal vote


27 The necessary majority for adoption of ordinary resolutions should be 50% + 1 of all of the company’s issued voting shares21

LJSC in various Articles specifies that a simple majority is 50% + 1 of the voting shares present at a duly constituted meeting (LJSC Art.68(2)).

Not addressed Too ambitious to implement right now. To address this issue an amendment to the law is necessary.

28

The necessary majority for adoption of a resolution concerning a transaction (or series of transactions) involving 25-50% of the company’s assets should be 75% + 1 of all of the company’s issued voting shares22

LJSC Art 61.1 specifies that such resolutions require a unanimous board decision for transactions involving 25-50% of assets and Art 61.2 involving assets over 50% a 75% vote by shareholders present at GSM

Not addressed General Code – Section 22.5. and 32

20 See EBRD CG checklist, question 54a 21 See EBRD CG checklist, question 56 22 See EBRD CG checklist, question 57e

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29 Shareholders should be given at least 20 days’ notice of the agenda of a GSM23

LJSC Art 71 provides for at least 15 calendar days for > 50 shareholders; companies with less than 50 shareholders may specify (in their charters) notice periods of less than 15 calendar days

Principle 5.1 only refers to ‘sufficient notice’ – but 5.6 requires shareholders to inform Board 14 days in advance for Board nominations. Implies therefore that FSDP accepts the LJSC Notice of 15 days

General Code 23

30 The chairman of the board of directors should have the power to demand addition of items to the agenda of a shareholders’ meeting24

No provisions Principle 7 deals with board functions but does not specify the Chairman’s duties

The Code does not address this issue. Arguably it would be more appropriate to address this issue through an amendment to the law.

31 Any 2 directors should have the power to demand addition of items to the agenda of a shareholders’ meeting25

No provisions (it seems that this right by implication is for the Board as a whole) Not addressed

The Code does not address this issue. This is not a key point but it can be linked to item 14 above. Also, arguably it would be more appropriate to address this issue through an amendment to the law.

32

Shareholders should be permitted to submit questions in advance of a shareholders’ meeting, and the management and board members should be obliged to reply to such questions at the shareholders’ meeting.26

No provisions in the law. LCSC agrees but notes that Board may exercise discretion when answering - some questions might involve confidential information etc

Not addressed General Code – Section 27

33 There should be penalties for failing to reply to a shareholder’s question27 No provisions Not addressed This would be more appropriate for regulation than a

Code

23 See EBRD CG checklist, question 61a 24 See EBRD CG checklist, question 65a 25 See EBRD CG checklist, question 65b 26 See EBRD CG checklist, question 66a 27 See EBRD CG checklist, question 66b

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34 Shareholders should be allowed to ask oral questions at a shareholders’ meeting28

No provisions See LCS comments on 17

Principle 5.12: shareholders given the opportunity to participate effectively but no specific rights provided for asking questions

General Code – Section 28

35 Cross-shareholdings should be regulated29 Currently no provision in the law Not addressed

General Code – Section 34.9 The Code is requiring companies to have a web-site and to disclose the company/holding/group structure clearly evidencing cross-shareholdings and beneficial ownership.

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A voting cap (of, e.g., 10%) should apply to limit the number of votes that a shareholder, who holds a cross-shareholding in another company, may exercise in dealings with that company30

Currently no provision in the law Not addressed This is an important point, but it should be regulated by law.

37

Ownership disclosure rules should enable shareholders to obtain a clear picture of a company’s ultimate ownership and the identity of intermediaries31

LBBA Art 43 1.(d) Disclose significant shareholders by name, holding percentage, loans and other borrowings including those to Related Parties LSMR Art 168 Maintain a List of Insiders

Principle 21.1.2 –disclosure of ‘majority shareholders’ but reference to beneficial owners


28 See EBRD CG checklist, question 66c 29 See EBRD CG checklist, question 67a 30 See EBRD CG checklist, question 67b 31 See EBRD CG checklist, question 68b

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38 The law should allow an offeror to require the holders of the remaining securities to sell their securities at a fair price32


This issue should be regulated by law. The code might include a provision requesting companies to incorporate in their by-laws that when a shareholder reaches a certain shareholding (e.g., 90%) he/she is obliged to extend the offer to buy to the other shareholders at the same price paid for the controlling block or at a fair price. The evaluation method should be fair and guaranteed by law.

39 The law should allow the holders of remaining securities to require the offeror to buy their securities at a fair price33


This issue should be regulated by law. The code might include a provision requesting companies to incorporate in their by-laws that when a shareholder reaches a certain shareholding (e.g., 90%), minority shareholders can require him/her to buy their share at the same price paid for the controlling block or at a fair price. The evaluation method should be fair and guaranteed by law.

32 See EBRD CG checklist, question 74 33 See EBRD CG checklist, question 75

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40

The law should require an authorisation by a shareholders' resolution with a majority of 75% of the company's issued shares, before the board of directors is entitled to enter into any transaction other than for full and valid consideration34

LBB Art 39.4 and 39.5.2 transactions below market value not allowed and 30.5.3 transactions. Equivalent to > 2% of assets or 2% of issued share capital require approval by a simple majority of shareholders present at GSM. LJSC Art 64.3 requires approval by simple majority of shareholders if > 2% of assets or 2% of issued share capital BUT the Board can approve if the transactions involve loans to third party or part of the company’s normal economic activity LJSC Art 59. Transactions must be at market value judged effectively as the value appropriate to an arms length transaction

Not addressed

The Laws cover this by mandating that transactions must be at market value determined on an arms length basis The Code could include a provision for independent assessment of “market value”.

41

The law should provide for sanctions and/or liabilities for:

a) violation of rules on notification of shareholder meetings

b) violation of rules allowing shareholders to place items on the agenda for the annual meeting

c) delays or failure to pay dividends authorised by shareholder meetings

d) failure to allow inspection by shareholders of books and records35

CBA has power to impose sanctions but not clearly tied to the specific issues in the left hand column. In respect of SOEs there is no authority with power to impose sanctions. (Shareholders can however apply to courts for remedies) Not addressed These issues (as all provisions on violations and

sanctions) should be regulated by law.

42 There should be restrictions/ prohibition on holding the general meeting abroad or in a place other than the company headquarters36

Currently there are no restrictions Principle 5.1 & 5.2 but does not specifically mention headquarters General Code – Section 26


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43

There should be a requirement that a company disclose information likely to affect stock exchange prices (in order to prevent insider dealing of shares), without undue delay37

Law LSM, Art.163 The securities issuer shall immediately disclose the inside information directly concerning the issuer. It shall be disclosed in such a way that will ensure quick access to it and complete, accurate and timely assessment by the general public. LSMR Art 127 Significant facts must be disclosed but no mention of timing Companies must disclose information on material events (OMX has provided a long list of material events)

Not addressed

Annex 3 Listed Companies – Sections A.3.14 and A.3.15

44

There should be restrictions on the ability of the company to give people including the company’s directors, officers and employees the right to buy shares38

Currently no restrictions. Particularly relevant in the case of stock options. Rules on insider trading See LSMR 161,162

Not addressed This is not a key issue, but the Code should require disclosure of shareholding or options by any director

45 It should be required that all related party transactions (above a specified minimum threshold) be disclosed to shareholders39

LJSC Art 64.3 approval by a simple majority of shareholders if transaction is > 2% of assets or > 2% of issued share capital except Board can approve if for loans to third party or part of normal economic activity LBBA Art 43.4.(c) shareholders with > 2% may request information on Related Party Transactions LCSC have drafted a quite extensive piece on major transactions which is understandable since they are likely to effect share prices.

Principle 21.1.6 requires policies on RPT handling, the nature of RPTs and transaction information including which Board or Executive Board members are involved and Principle 21.1.5

General Code - Section 34.6 Annex 1 SOEs – Section A.1.22 The Law seems to adequately cover the definitions of Related Parties and approval process by the Board and where applicable, shareholders

37 See EBRD CG checklist, question 82 38 See EBRD CG checklist, question 88b 39 See EBRD CG checklist, question 89b

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46

There should be rules providing that transactions made by companies, which are not based on fair market values, can be invalidated and that action can be taken against the relevant parties40

Currently LSMR Art 216 stipulates fiduciary duty of managers to act in interests of shareholders, thus listed companies are covered. See earlier references to Laws: LJSC Art 64.3 and Art 59 and LBBA Art 39.5.2 and 39.5.3 where such transactions are banned. LBBA 60.1 may impose sanctions on Management LJSC 90 and LBBA Art 39.6 set out circumstances where such transactions may be nullified

Not addressed See also above, item no.40 The legislation covers the issue sufficiently, so regulation in a code is not necessary.

40 See EBRD CG checklist, question 91

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STAKEHOLDERS OECD Principle IV.D: Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis OECD Principle IV.E: Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this





47 Stakeholders should have special access to corporate information41

Currently no specific provision LCSC (Bergstrom discussion) was strongly against any special information rights for stakeholders that are superior to those for shareholders. Regulations of CBA requires banks to disclose on web sites their deposit and loan terms as well as other information

Principle 4.5 states a general principle of disclosure to stakeholders but does not specify how or what

General Code – Sections 47, 48, 49 and 50

48

There should be provisions protecting “whistleblowers” (employees and other stakeholders that file complaints/voice concerns regarding unethical or illegal practices by corporate officers)42

Currently no provisions. LCSC: “Whistleblower” protection is very much a “US” thing and probably not appropriate for Armenia at this time

Principle 7.15 requires that the Board designates a body or person to whom concerns may be addressed and ensures direct communication

General Code – Section 46 (Code of Ethics) See also Sections 39 to 43 on role of the Corporate Secretary Annex 1 SOEs - Sections A.1.15 – 19 (The role of the Internal Auditor) Annex 2 Banks - Sections A.2..8 to A.2.12 (The role of the Internal Auditor)


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DISCLOSURE OECD Principle V.A.1: Disclosure should include but not be limited to, material information on the financial and operating results of the company OECD Principle V.A.2: Disclosure should include but not be limited to, members of the board and key executives, and their remuneration OECD Principle V.A.5: Disclosure should include but not be limited to, governance structures and policies OECD Principle V.B: Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit OECD Principle V.C: An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented OECD Principle V.D: Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users

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49 Companies should be required to prepare quarterly reports43

LSMR Art 126. Listed companies are required to submit interim reports to the CBA. Art 126.1 to public only if requested. No mention of public disclosures to all. LBBA Art 43. Publish latest quarterly report and Annual Reports on Web site, Press and in leaflet form

No specific provision on frequency

Annex 3 Listed Companies – Section A 3.18. Key point for listed companies and banks to both prepare and publish reports. Many Web-sites are password protected and this hinders access to important information.

50 Companies should be required to publish quarterly reports44 See above See above

See references above. Publication on the website for listed companies and companies issuing bonds can be considered.

51

In their annual reports to shareholders: a) there should be a statement that the

financial statements are the board’s responsibility

b) there should be a statement that the auditor is responsible for reporting on the financial statements

c) the auditor and directors should (separately) state whether or not the financial statements fairly present the state of company affairs45

LJSC Art 93 (c) Auditors should report on truthfulness of Company Reports and other financial documents Art 94.1. The CEO shall report on truthfulness of Company information provided to shareholders, creditors and mass media

Not addressed

General Code – Section 34 Including such a provision in the Code will help companies and directors to prepare statements which are a true representation of the company. If accepted, this provision can be used by judges in assessing directors’ responsibility in case of not true statements.


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52 The company should be required to disclose the compensation of board members and key executives46

LBBA Art 43.1.(e) Requires disclosure of name, date of birth, remuneration of director, of CEO and Chief Accountant plus terms of any loans- repaid or not during the year- including loans to related parties CBA Reg 1 Annex 1 sub-annex 21.3.2 which also requires disclosure of the entire remuneration (so this would include cars and other benefits).

Principle 11.3 requires disclosure of Board remuneration 15.3 requires disclosure of Executive Board remuneration. 21.1.4 requires disclosure of incentive and bonus schemes for Board and Executive Board members


53 Companies should appoint a responsible body/officer in charge of corporate governance issues47

Currently no requirement

Principle 19 provides a very comprehensive list of duties and responsibilities of a Corporate Secretary

General Code – Section 39-43 (Corporate Secretary)

54

Companies should be required to disclose (e.g. in the annual report or similar document) their corporate governance structures and policies, (for example, by providing information on the division of authority between shareholders, management and board members)48

Currently applies to listed companies CBA regulation 4/04 at 11.03.2008, Annex 8, Chapter 12 “Issuer shall disclose its corporate governance structure and the rights and responsibilities of each body”

Principle 21.1.9 Requires disclosure of the implementation of CG provisions

General Code – Sections 34 (Annual Report disclosure) and 36

55 Companies should prepare and disclose financial and operating data in accordance with internationally recognised accounting standards49

Article 6.1. of the “Law on accountancy”. This article was amended in 26.12.2008 according to which financial institutions including banks are required to submit their financial reports in accordance with IAS.

Principle 21.2

Annex 1 SOEs – Section A.1.26 and Annex 3 Listed Companies – Section A.3.17 This measure should be a key standard for all companies that are proposed for coverage by the Code. Those which can not comply (e.g. some SOEs on grounds of lack of expertise or funds) can simply state this as their explanation for non-compliance

46 See EBRD CG checklist, question 104 47 See EBRD CG checklist, question 108 48 See EBRD CG checklist, question 109 49 See EBRD CG checklist, question 110

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56 Financial results should be annually audited by an independent auditor50

LBBA Art 58 must be audited. Applies to banks and listed companies. LSM Art 128 Annual financial reports of the Reporting Issuer shall be subject to mandatory Audit which shall be conducted by an independent and reliable audit company having sufficient experience and professional abilities in the area of auditing such issuers. LJSC Art 92 may appoint an auditor if a CLJSC but must appoint if an OJSC. Shareholders with > 5% may require an audit.

Principle 3.3 See above for SOEs and Listed Companies

57 There should be a clear definition of the independence of the auditor, particularly as regards independence from the influence of management51

LJSC Art. 94(2): ‘no common economic interest’ – ineffective definition? LCSC: Audit independency characteristics should be detailed in the Code. There should be a demand not to have the same auditor for 3 or 5 years.

Not addressed

General Code – Sections 44 and 45 (External Auditor) The definition of auditor independence (and restriction on number of successive years that an auditor can be retained) should be drafted in accordance with the provision of the law.

58 The following should be publicly available: a. Minutes of shareholders’ meetings

No provisions Not addressed This is a key issue for Web-site disclosure General Code – Sections 36, 38, 34.7, 38.6 and 38.7


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59 b. Amendments to the company charter

Currently applies to listed companies and banks – on request LBBA Art20(3) On demand of any person the bank shall within a five-day period provide him (her) the opportunity to acquaint himself (herself) with the bank’s charter, additions and amendments thereto. LBBA 43(2-a) Upon request of any party the bank shall be bound to provide copy of state registration certificate and copy of the bank’s charter; CBA regulation at 4/04 Annex 8, chapter 22- The charter of the issuer shall be available for the public.

Not addressed General Code: see above

60 c. the names of any resigning or

removed directors and of newly elected directors

LBBA Art 43.5 Not addressed General Code – Section 34.7

61 d. the name of the external auditor But Annual Reports contain auditor report

21.1.7 Requires disclosure of Annual financial statements and these would include the audit report


62 e. information on bankruptcy proceedings52 No provisions Not addressed This should be regulated by law

63

The following should be available for inspection by shareholders at the company office: a) a list of shareholders owning 1% or

more of the company's issued shares

LBBA Art 43.1 (d). Requires disclosure of “significant” shareholders but does not define “significant”.

Not addressed

General Code – Section 34. 3 List of the company’s major (greater than 10%) beneficial shareholders. It should be discussed the percentage of shareholding to be disclosed along with the beneficial ownership.

52 See EBRD CG checklist, question 115

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Gap Analysis with the

OECD Guidelines on Corporate Governance of State-Owned Enterprises

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STATE-OWNED ENTERPRISES OECD Guidelines on Corporate Governance of State-Owned Enterprises – Principle II: The state should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness OECD Guidelines on Corporate Governance of State-Owned Enterprises – Principle III: The state and state-owned enterprises should recognise the rights of all shareholders and in accordance with the OECD Principles of Corporate Governance ensure their equitable treatment and equal access to corporate information. OECD Guidelines on Corporate Governance of State-Owned Enterprises – Principle IV: The state ownership policy should fully recognise the state-owned enterprises’ responsibility towards stakeholders and request that they report on their relations with stakeholders OECD Guidelines on Corporate Governance of State-Owned Enterprises – Principle V: State-owned enterprises should observe high standards of transparency in accordance with the OECD Principles of Corporate Governance OECD Guidelines on Corporate Governance of State-Owned Enterprises – Principle VI: The boards of state-owned enterprises should have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions

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64

The government should develop and issue an ownership policy that defines the overall objectives of state ownership, the state’s role in the corporate governance of SOEs, and how it will implement its ownership policy. Objectives must be prioritised – e.g. as regards shareholder value, public service and job security. The state’s strategy should be a public document and should be endorsed by the relevant departments, SOEs’ boards and management.

As far as we are aware, currently no written policy statement Not applicable Annex 1 SOEs – Sections A.1.1 and A.1.2

65 Government involvement in the day-to-day management of SOEs should be avoided No laws or regulations Not applicable Annex 1 SOEs – Section A. 1.3

66 There should not be an excessive number of board members from the state administration No laws or regulations Not applicable

Annex 1 SOEs – Section A.1.10 The representation at the board should correspond to the shareholding owned by the State. Participation at the board should be effective and measurable according to corporate criteria.

67

Board members who are representatives of the state administration should not take part in regulatory decisions concerning the same SOE nor have any specific obligations or restrictions that would prevent them from acting in the company’s interest

No laws or regulations Not applicable Annex 1 SOEs – Section A.1.11

68 The government as a whole, or each Ministry, should consider creating a separate department to implement the ownership function in respect of SOEs

Not applicable

This was one of the Key issues discussed with the Ministry when discussing the development of the Code. Purpose of centralisation is to increase management expertise An implementation point rather than a matter for inclusion in the Code

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69 The state owners should be clearly accountable, directly or indirectly, to the National Assembly

Not applicable

This should be regulated by law, but the Code can make clear that the management of SOEs should disclose its practice on the company’s website.

70

The nomination of SOE boards should be transparent, clearly structured and based on an appraisal of the variety of skills, competencies and experiences required. This should be based on the long-term strategy for the company

Not applicable Annex 1 SOEs – Section A.1.9 The Code should detail the procedures for nomination of directors

71 The state should consider establishing a specialised commission or ‘public board’ to oversee nominations in SOE boards

Not applicable

As for issue no. 68 above, this was one of the Key issues discussed with the Ministry when discussing the development of the Code.

72 The co-ordinating or ownership entity and SOEs should ensure that all shareholders are treated equitably

Covered by a combination of the LJSC Law and the General Code

73 SOEs should observe a high degree of transparency towards all shareholders. As above

74 SOEs should develop an active policy of communication and consultation with all shareholders.

As above

75

The participation of minority shareholders in shareholder meetings should be facilitated in order to allow them to take part in fundamental corporate decisions such as board election.

As above

76 The state owner should have a written stakeholder policy No provisions Not applicable General Code – Sections 47 - 50

77 The state coordinating or ownership entities should develop consistent and aggregate reporting on state owned enterprises and publish annually an aggregate report on SOEs

As far as we are aware, currently no consistent aggregate reporting Not applicable

Aggregate reporting is not key because there are so many different activities for SOEs and so data could be difficult for the general public to interpret.

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79 There should be an (annual) report on the SOE’s objectives (with reference to key performance indicators) and how they are being achieved

Not applicable

Annex 1 SOEs – Section A.1.2.4 This is an issue that could be included in the code requiring SOE to prepare and disclose the report. The code should require SOEs to state the objectives, key performance indicators and how they are being achieved

80 There should be disclosure of financial assistance received from the state, including subsidies and guarantees

Annex 1 – Section A.1.22 This is a key point, especially where the SOE is in competition with the private sector.

82 There should be disclosure of inter-SOE transactions

See above This is a key point. Disclosure of such transactions could avoid abuses and tunnelling of funds (especially in cases where the SOE is not audited)

83 The appointment and dismissal of CEOs should be a key function of SOE boards Not applicable Annex 1 SOEs – Section A.1.8

84

SOE boards should have a decisive influence over the compensation of the CEO and should ensure that the CEO’s remuneration is tied to performance and fully disclosed

Annex 1 SOEs – Section A.1.8 The relation of remuneration to performance is a key point and should be included in the code

85 The Chair of the board should be separate from the CEO

LJSC Art 86. Companies with > 500 shareholders but for companies with < 500 shareholders the positions may be combined.

Annex 3 Listed Companies – Section A.3.3 This is an issue which is widely debated in corporate governance of all companies. The WG should decide on this.

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86

Procedures for ensuring the professionalism and independence of employee board members should include: a) democratic election procedures b) training c) clear procedures for managing conflicts

of interest

Annex 1 SOEs – Section A.1.9 The SOEs Code should require SOES to disclose the criteria for election of the board and require board members to disclose their possible conflict of interests.

87 There should be a systematic (self-) evaluation process for SOE boards

CBA Reg 1 for banks does have some guidance e.g. absences have to be disclosed, suitable expertise, requirement to keep up-to-date and so on.

General Code - Section 8 and 9

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