Changes in corporate governance in Kazakhstan and its impact on financial market growth: an empirical analysis (1991-2017)

• Published date: 07 October 2019
• Date: 07 October 2019
• DOI: https://doi.org/10.1108/CG-07-2018-0238
• Pages: 923-944
• Author: Abzal Temirbayev,Alikhan Abakanov
• Subject Matter: Strategy

Changes in corporate governance in

Kazakhstan and its impact on financial

market growth: an empirical analysis

(1991-2017)

Abzal Temirbayev and Alikhan Abakanov

Abstract

Purpose –Since its independence, Kazakhstan has been improving its corporate governance system

according to recommendations of international organizations. It was promised that the adoption of

shareholder primacy approachwould have a positive impact on its financial market growth. Therefore,

the purpose of this paper is to quantitatively analyse whether Kazakhstani corporate governance is

moving towards a shareholder primacy corporate governance approach and its impact on financial

marketgrowth.

Design/methodology/approach –The paper willconduct a quantitative analysis. Firstly,the changes in

corporate governance that occurred between 1991 and 2017 will be analysed using 52 corporate

governance variables. Thus, a questionnaire will be used to collect data. When the questionnaire is

completed, all data will be converted into numbers. Then, multiple liner regression will be used to

estimatethe impact of change in corporate governance.

Findings –The paper finds that Kazakhstan is successfully adopting shareholder-friendly corporate

governance standards and so-called convergence has also occurred. Moreover, it is suggested that

reforms in Kazakhstani corporate governance system have not yet brought the desired result of

prosperousfinancial market and high flows of foreigninvestments.

Originality/value –Analysis specifically considers the changes in Kazakhstani corporate governance

system and uses quantitativemethods, whereas there is a lack (if not complete absence) of quantitative

studiesregarding Kazakhstani corporate governance.

Keywords Shareholders, Foreign investment, Corporate governance, Company law,

Financial market growth

Paper type Research paper

1. Introduction

Nowadays, corporate governance has become one of the more widely discussed topics.

It has been studied by many researchers from different fields such as finance, law,

economy and management. Such growing interest in corporate governance can be

attributed to the growing role of private sector corporations in the economies of countries

worldwide. In addition, the past few decades have demonstrated that corporations are

the engines of economic growth and are necessary for economic stability. Because

economic development depends on corporations, the establishment of good corporate

governance has been prioritized by almost all countries. Particularly, international

corporate scandals, accounting frauds and instabilities in financial markets caused by

poor corporate governance practices have demonstrated the necessity for good

corporate governance.

Abzal Temirbayev and

Alikhan Abakanov are both

based at the University of

Sheffield, Sheffield, UK.

Received 23 July 2018

Revised 14 February 2019

Accepted 24 February 2019

DOI 10.1108/CG-07-2018-0238 VOL. 19 NO. 5 2019, pp. 923-944, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 923

It is necessary to consider the definition of corporate governance because, as a mixture of

different disciplines, it has been defined in a variety of ways. For example, Shleifer and

Vishny narrowly defined it as “the ways in which suppliers of finance to corporations assure

themselves of getting a return on their investment” (Schleifer and Vishny, 1997; Also see

L’Huillier, 2014). This definition clearly highlights the shareholder value approach,

according to which a company must maximize the profit of its shareholders. The Cadbury

Committee also provided a narrow definition by stating that it is “the system by which

companies are directed and controlled” (Cadbury, 2002). In a similar manner, Sheikh and

Chatterjee defined it as “a system whereby directors are entrusted with responsibilities and

duties in relation to the direction of a company’s affairs” (Sheikh and Chatterjee, 1995).

Another broad and, probably, well-known definition, which is more pro-shareholder than

pro-stakeholder, was provided by the Organization for Economic Cooperation and

Development (OECD), which statesthat:

Corporate governance involves a set of relationships between a company’s management, its

board, its shareholders and other stakeholders. Corporate governance also provides the

structure through which the objectives of the company are set, and the means of attaining those

objectives and monitoring performance are determined. Good corporate governance should

provide proper incentives for the board and management to pursue objectives that are in the

interests of the company and its shareholders and should facilitate effective monitoring

[emphasis added] (OECD, 2004).

Nevertheless, for Kazakhstan, which gained its independence in 1991, having lived under

the centrally planned Sovieteconomy for 70 years, corporate governance is a relativelynew

concept. However, the severe economic difficulties that the country experienced after

the collapse of the Soviet Union demonstrated that sustainable growthis impossible without

the development of private-sectorcorporations. Therefore, there have been many corporate

governance reforms since 1991. These reforms were mainly orientated towards the

development of businesses and, importantly, improving the investment climate. Prior to

1998, corporate governance in Kazakhstan remained weak and did not meet many

international standards of corporate governance. In the first decade of Kazakhstan’s

independence, until 1998 when the Joint-Stock Company Law (JSC Law) was adopted,

companies were regulated by different laws. Later, the JSC Law 1998 was further

developed based on the principles of corporate governance introduced by the OECD.

Since 1998, JSC Law has been amended a considerable number of times to reach the level

of international standards. The main driver behind this was the improvement of the

investment climate in Kazakhstan, because previously foreign investors had demonstrated

their unwillingness to invest in Kazakhstani companies, as their interests were inadequately

protected. Foreign investments were, and still are, necessary for the diversification of the

economy, as the country is almost completely reliant on oil revenues. Additionally, since

1991 the state has been a major shareholder in many large corporations, which has

negatively affected the developmentof the private sector.

The OECD’s principles of corporate governance have played a major role in the

development of corporate governance in Kazakhstan. It was suggested that “[C]orporate

governance is one key element in improving economic efficiency and growth as well as

enhancing investor confidence” (OECD, 2004, p. 11). Today, the OECD principles of

corporate governance area widely recognized code of corporate governance. Althoughthe

OECD principles consider stakeholders’ interests, they are primarily based on a

shareholder value corporategovernance model. Therefore, in a practical sense, developing

countries have been recommended to adopt a shareholder value approach, which is based

on the Anglo-American shareholder value model. It was claimed that if the shareholder

value model were adopted, it would help to attract foreign investors by giving them

confidence, which was, and still is,crucial in the case of Kazakhstan.

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