Chapter 4 provides conclusions emanating from the review and policy recommendations to help Azerbaijan Investment Holding and the Government of Azerbaijan implement planned and further reforms to better align with the OECD Guidelines on Corporate Governance of State-Owned Enterprises.
OECD Review of the Corporate Governance of Azerbaijan Investment Holding and its State‑Owned Enterprises
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4. Conclusions and recommendations for Azerbaijan Investment Holding and the Government of Azerbaijan
Copy link to 4. Conclusions and recommendations for Azerbaijan Investment Holding and the Government of AzerbaijanAbstract
4.1. Conclusions
Copy link to 4.1. ConclusionsThe corporate governance review of AIH and its portfolio companies and the assessment against the SOE Guidelines was undertaken against the backdrop of a wave of reforms in Azerbaijan.
These reforms include:
the enactment of Cabinet of Ministers Resolution No. 257 in 2019 that requires corporate governance arrangements in the SOE sector of Azerbaijan1
the establishment of AIH in 2020 as a coordinating management body with the mandate to improve the performance of PCs, including setting KPIs and ensuring their monitoring and evaluation
the creation of supervisory boards and board committees in all AIH PCs since 2021
the development and implementation of detailed AIH corporate governance standards for six individual PCs in 2023, with three still underway
the introduction of a new Competition Code (as of July 2024) that applies to SOEs
the enactment of a revised Law “on Public Procurement” (as of January 2024) that provides for central oversight and expanded supervision of public procurement by the state’s competition authority.
AIH has introduced reforms on the PC level which are in the process of being rolled out, such as revised procurement policies and more rigorous requirements for transparency and disclosure. These reforms could thus not be adequately assessed under this review. The assessment is therefore a snapshot of the current state of AIH and its PCs, while acknowledging that the landscape may look different in a few years’ time. The following section provides a summary of the assessment of AIH and its PCs alignment with each Chapter of the SOE Guidelines.
4.1.1. Rationales for state ownership
SOE ownership rationales and public policy objectives in Azerbaijan are currently found across several documents, including the AIH Charter, in a number of Presidential decrees, and sectorial regulations. The government has embarked on ambitious privatisation plans, but for this undertaking a clear overarching rationale (including criteria) for maintaining state ownership or for privatisation would be useful.
The future ownership policy, which would elaborate ownership rationales, public policy objectives, and define governance roles and their implementation would serve to improve transparency and disclosure, and help raise accountability for the exercise of ownership rights for AIH PC but also across the wider SOE landscape.
4.1.2. State’s role as an owner
SOEs in Azerbaijan, including those operating under the AIH portfolio, have the same legal forms as private legal entities, with their operational practices following commonly accepted corporate norms. The only exception is the “state company”, SOCAR which does not reflect a legal form listed in the Civil Code. Despite this difference, in practice it remains subject to the same legal regime as the other PCs.
Although state ownership rights in Azerbaijan are dispersed among various ministries and institutions, AIH serves as a central management and coordinating body to advise and support the governance and oversight of PCs.
This is a welcome first step, as transparency and efficiency have been enhanced. AIH’s unique position as coordinating body helps to unify corporate governance practices in SOEs, monitor their performance on the basis of KPIs and professionalise the exercise of ownership. AIH also brings legal and financial know-how which has been an important to the benefit the PCs and the state’s role as an owner.
The state, primarily represented by AIH, exercises ownership rights over PCs by convening shareholders meetings, setting and monitoring company KPIs, establishing reporting systems and developing disclosure policies.
To minimise political intervention in PC management, AIH has set up governance bodies including the management and supervisory boards in SOEs. The AIH Charter specifies in what areas and types of decisions AIH is competent to intervene or give instructions to PCs. The presence of political appointees on PC boards and lack of transparency in setting objectives could, however, undermine these efforts.
4.1.3. SOEs in the marketplace
Recently revised PC corporate governance frameworks emphasise fiduciary duties of individual board members. Moreover, the framework aims for regulatory and ownership functions of government to be separated (including in the board room). However, despite these positive developments, there is still a lack of clear separation between these function in practice. Both functions often intersect due to the involvement of line ministers and political appointees on at the boards of PCs and AIH itself.
On stakeholders’ access to redress, which also includes creditors and competitors, the assessment team found adequate systems and rights to be in place from a corporate governance perspective. However, the practical efficiency and impartiality of these mechanisms could not be confirmed in the review, but other sources suggest this may be a point of concern.
At the PC level, systematic identification, accounting, disclosure, and compensation for the costs by the state related to PSOs and public policy objectives is missing. The assessment team acknowledges that this is not required by Azerbaijani law or other corporate governance standards. AIH is currently working on the identification and separation of costs associated with some PSOs, such as for AZAL. AIH is also working on phasing-out cross-subsidisation of loss-making public policy related activities by profitable economic activities within PCs.
As noted, Azerbaijani law applies equally to SOEs and private firms. However, the presence of policy makers on boards may potentially interfere with financial decisions of SOEs. This extends into the state-owned banks such as ABB and ATB, for which the CBA’s requirement to have one-third of supervisory boards comprised of independent board members is currently not applicable. The CBA stated that this exemption will be lifted when qualified independent board members can be found, which the CBA and AIH have noted is a priority.
Although some large PCs attract substantial foreign financing, in practice, many PCs benefit from state-backed financing. For those PCs involved in economic activities, this may lead to competitive advantages. AIH is establishing benchmarks for SOEs to ensure market-consistent rates of return for CAPEX of PCs, which is encouraged from a competitive neutrality perspective.
Public procurement is an important point of attention for AIH. The public procurement law is an improvement over its predecessor but currently provides for broad exemptions that PCs may benefit from. AIH is currently working on new internal procurement policies for its PCs that, according to AIH, will aim to uphold the principles of competitiveness, non-discrimination and transparency. These planned measures could not be assessed.
4.1.4. Equitable treatment of shareholders and other investors
The state of Azerbaijan wholly owns all PCs, except two: ATB (75%) and ABB (96%). These banks also have non-state shareholders. The equal treatment of shareholders is generally governed by Azerbaijan's Civil Code and banking laws, but specific attention for the protection of minority shareholders is absent from applicable regulation.2 Legislation on participation in the general meeting of shareholders appear to be aligned with international practices.
Azerbaijani legislation and other corporate governance standards do not include provisions regarding access to information for shareholders or the restriction thereof. ABB and ATB do not have policies to ensure active communication and consultation with non-state shareholders, including on dividend policies or board appointments which may pose concerns for minority shareholders.
In view of potential future (partial) privatisations, the government and the BSE are working on capital market reforms. Although out of scope of this review, the assessment team notes that capital markets development will require a reinforcement of BSE’s roles as a gatekeeper for establishment of listing requirements and transaction monitoring, as well as other instruments to protect investors. Such reforms will be instrumental for further privatisation plans.
4.1.5. Stakeholder relations and responsible business conduct
Azerbaijan has established legal frameworks for protecting stakeholder rights, including human rights and workers’ rights. In some sectors, such as mining, there are still some enforcement challenges. Reporting on stakeholder relations by SOEs in Azerbaijan is mandated by AIH corporate governance standards for individual PCs, but compliance is limited, with only a few PCs actively reporting on social, environmental, and stakeholder-related issues.
Azerbaijan has enacted anti-corruption legislation and has taken steps to implement ethics and compliance programmes within SOEs, but monitoring could be enhanced. While Azerbaijan lacks specific responsible business conduct standards for SOEs, government strategies outline expectations for responsible business conduct, which are to be applied uniformly across all businesses.
4.1.6. Disclosure and transparency
AIH has imposed IFRS reporting and disclosure requirements for all PCs, including for non-financial SOEs. In practice the assessment team has found that none of the PCs fully adhere to AIH disclosure and transparency requirements. While compliance across all PCs remains a significant challenge, many PCs have already shown improvements in recent years.
While AIH currently does not publish an aggregate report on its PCs. it has developed a KPI dashboard and internal reporting system for its PCs to actively monitor their performance. This information system would allow AIH to consolidate and aggregate data for the purpose of aggregate reporting. AIH indicated it intends to publish its first aggregate report in 2024.
4.1.7. Responsibilities of SOE boards
Laws and corporate governance standards applicable to state-owned banks and other PCs (i.e. only those that have explicitly implemented AIH standards) include detailed provisions on the responsibilities of boards. For instance, they include provisions on fiduciary duties of board members and they require audit functions and relevant audit procedures to be in place under the board’s responsibility. However, the assessment team found no indication that, in practice, all board members are subject to the same or equivalent responsibilities or liabilities towards the company, its shareholders or its stakeholders.
AIH or the supervisory boards at the PC level, however, do not have the power to appoint and remove the CEO of the management board of all individual PCs, as this is the prerogative of the President.3 PCs currently do not have any independent members sitting on their respective supervisory boards nor are they required to do so. The government has indicated that it plans to gradually phase-in independent members. All PCs have established specialised board-level committees, including audit, strategy and investment, and appointment and remuneration committees. However, these committees are mostly or fully composed of dependent board members at this time.
Although there are mechanisms on the PC level and AIH level to manage conflicts of interest, managing these in practice and avoiding undue political interference in PC supervisory boards remains a challenge.
4.2. Recommendations
Copy link to 4.2. RecommendationsAt the request of AIH, this report reviewed AIH’s corporate governance framework relative to the OECD Guidelines on Corporate Governance of State-Owned Enterprises. The SOE Guidelines were developed by the Working Party on State-Ownership and Privatisation Practices to help governments ensure that their SOEs are competitive, efficient, and transparent. The implementation of the SOE Guidelines can be important for Azerbaijan given the prominent role of SOEs in the economy.
The below section identifies several areas for consideration by AIH and the government of Azerbaijan to improve the corporate governance framework applicable to the AIH portfolio.
4.2.1. Rationales for state ownership
Priority could be given to develop an ownership policy clearly outlining the rationales and objectives for state ownership in Azerbaijan.
For a whole-of-government approach, the scope of the ownership policy would ideally span across all SOEs – including those in the AIH enterprise portfolio – and define the respective responsibilities of the state bodies involved in its implementation, including clearly delineating AIH’s mandate.
The ownership policy could clearly streamline corporate governance and disclosure requirements applicable to SOEs in Azerbaijan.
AIH could be tasked with leading the development of the ownership policy, in consultation with and fully supported by all relevant government departments and the associated line ministries. A requirement to regularly update the ownership policy should also be established.
AIH could consider making the policy process behind the decision on privatisation transparent and link it to the overall state ownership policy and the rationales for state ownership.
AIH should ensure its long-term sustainability by carefully considering changes to the ownership model in Azerbaijan, also against the backdrop of its current dividend policy.
In the longer term, the government should consider streamlining the legal, regulatory and policy frameworks, including corporate governance codes, to be equally applicable to SOEs and private companies.
4.2.2. Maintaining a level-playing field
Public policy objectives, PSOs and economic activities
AIH could consider undertaking a comprehensive review of its PCs to identify and separate economic activities from PSOs (and other types of public policy objectives that may be subject to state support).
AIH could, as a next step, consider including clear descriptions of public policy objectives and PSOs for individual PCs and preferably report on their fulfilment on an annual basis, to be disclosed on AIH’s website or in an aggregate report. It is noted that many PCs already disclose broader objectives on their website to some extent, which could be used as a starting point to monitor their implementation.
Noting AIH is already making substantial efforts, further efforts on phasing-out cross-subsidisation practices within PCs are welcomed. AIH is also encouraged to continue its efforts on phasing-in state compensation schemes for loss-making activities that are subject to public service obligations or are otherwise undertaken in the public interest of Azerbaijan.
SOEs’ economic activities - market consistent conditions to access finance
Noting that many PCs benefit from preferential loans from the Ministry of Finance, the government could consider designing mechanisms to impose compensatory payments to the Treasury from PCs benefiting from lower funding costs than private companies would in like circumstances to ensure competitive neutrality.
From the portfolio side, AIH could design mechanisms to ensure that PCs develop relations with the Ministry of Finance, state-owned banks, other financial institutions as well as other SOEs based on commercial grounds. It is encouraged to explain and publicly disclose any warranted deviations from these measures in PC’s financial statements and in the aggregate report.
AIH is currently developing expectations for rates of return for PCs on a project or investment level, which is encouraged. Afterwards, AIH could consider expanding these expectations for all economic activities’ of PCs (e.g. return on equity requirements), taking into account their operational conditions, consistent with those obtained by competing private enterprises.4
Public procurement
AIH is in the process of revising individual PC procurement policies. In this process, AIH could emphasise the aim maintain all procured goods, services and works that fulfil a government purpose to fall under the public procurement law or be closely aligned to its principles.
AIH could consider publicly disclosing the universal procurement principles in an overarching procurement policy document for its enterprise portfolio.
In parallel, the government of Azerbaijan could consider ensuring that, building upon the recently revised law, it has effective monitoring and enforcement mechanisms in place (applying to SOEs as bidder or procurers) that ensure a level playing field and high levels of integrity.
4.2.3. Equitable treatment of shareholders and other investors
AIH should consider establishing investor relations’ departments for ABB and ATB and those PCs to be potentially privatised, to support active communication with shareholders. Another area that will be important with for (prospective) investors and non-state shareholders is to formulate an overarching AIH dividend policy, followed by dividend policies per PC that have a strong basis in corporate governance (e.g. proposed by the board and approved by the general meeting of shareholders, linked to other corporate documents such as the charter or corporate governance standards).
Minority shareholder rights could be bolstered by permitting qualifying minority shareholders to appoint supervisory board members proportionate to their ownership in the PC. A more elaborate list of ‘reserved matters’ that require shareholder approval (either for a simple or a supermajority) in PC charters should be included, as it would strengthen transparency for minority shareholders.
To further protect minority shareholders, AIH could consider including in its corporate governance frameworks that no shareholder representative (other than the supervisory board members) is allowed to attend PC supervisory board meetings or submit agenda points to those meetings.
4.2.4. Stakeholder relations and responsible business conduct
The compliance function within all PCs that report directly and in a double reporting line to the CEO and the PC supervisory board audit committee could be further developed and refined by AIH. Preferably with a universally applicable ‘compliance function requirements document’ prepared by AIH that would be a starting point for implementation.
AIH could better clarify its expectations for promoting anti-corruption among AIH PCs. It should ensure that integrity and anti-corruption risks are monitored and adequate measures for prevention and mitigation are implemented. Boards should have the responsibility to ensure a robust risk management framework. In particular, PC supervisory boards should ensure responsibility for robust internal controls, ethics and compliance measures, including whistleblowing policies. Such policies can be implemented with the support of the Anti-Corruption General Directorate which may propose useful measures for state-owned enterprises.
AIH could consider setting and monitoring additional portfolio wide compliance KPIs for PCs that capture, among other areas, the compliance function.
4.2.5. Enhancing transparency and disclosure
AIH’s intention to publish an aggregate report in 2024 is welcomed. AIH could consider publishing the aggregate report annually and to make it accessible to the public, including an English translation.
SOEs financial and non-financial (including information on public policy objectives, if any) objectives and related aggregated performance should be included in addition to an assessment of SOEs compliance with the applicable governance and disclosure requirements.
Ideally include the costs resulting from public policy objectives.
AIH’s information monitoring systems will be a good starting position for compiling data for a future aggregate report. However, AIH should bear in mind that data collection and accounting on the PC level could be improved, as well as coordination and exchange of information (e.g. on state contributions) with the ministries of Economy and Finance and Chamber of Accounts.
Noting that IFRS has been introduced for all PCs, and PC compliance is on a positive trajectory it is encouraged to further increase efforts to ensure the timely, annual disclosures of externally audited financial statements by all PCs. This should be accompanied by an annual report that includes non-financial disclosures in line with AIH corporate governance standards.
AIH’s revised charters, corporate governance standards and other corporate documentation provides valuable data and information for third parties. AIH should consider publicly disclosing this documentation and to make it easily accessible.
4.2.6. Responsibilities of SOE boards
Independent board members
Azerbaijan’s intention to gradually phase-in independent board members at PC supervisory board levels is a welcomed development. This may be piloted in a selection of portfolio companies and could be rolled out in the rest of the portfolio on a gradual basis.
As a starting point, it could be considered that AIH, which already has a substantive role in managing board nomination processes for PCs5, is authorised in its Charter to develop a structured, competitive and transparent board nomination process universally applicable to all.
AIH could have a central role in the development of board profiles for PCs, in coordination with the existent PC boards.
These processes, in particular for the selection of the management board, could subsequently be implemented in corporate governance frameworks on the PC level under the purview of the ‘appointment and remuneration committees’.
Subsequently, AIH could consider granting larger roles to supervisory boards of PCs nomination committees in organising the search and nomination process for management board members (including the CEO), in coordination with AIH and in accordance with AIH frameworks described above. Developing a centralised pool of vetted, potential board candidates for PCs with the help of head-hunters could also be considered.
AIH and the government could consider gradually phasing in independent board members on the AIH supervisory board and preferably also gradually phasing-out political appointees and high-ranking line ministry representatives from its board.
In the future, the government of Azerbaijan could consider empowering AIH with the authority to represent the state and appoint all supervisory board members of PCs, while empowering PCs’ supervisory board to appoint management board members. To this end, the President could retain a right to be consulted on supervisory board nominations and/or to be able to object or veto a specific nomination if such nomination would be detrimental to the interests of the state.
Professionalising boards
With regards to specialised supervisory board committees, AIH could consider having a majority of independent supervisory board members appointed on audit committees of PCs. Furthermore, AIH could consider excluding management board members from being part of these committees, as these are established for the purposes of supervising management itself and could create conflicts of interest.
To further professionalise supervisory boards and specifically to bolster the appointment of independent board members, AIH could consider instituting market consistent remuneration (non-variable) fees for supervisory boards of PCs. To this end, AIH could formulate an overarching supervisory board remuneration policy that positions AIH to attract independent, qualified and diverse professionals.
AIH should consider formalising specific supervisory board members’ fiduciary duties explicitly in PC charters and/or corporate governance standards. Board members should be held liable in a court of law by the company or its shareholders.
Table 4.1. Action Plan
Copy link to Table 4.1. Action Plan|
Topic |
Stakeholder |
Short-term |
Medium-term |
Long-term |
|---|---|---|---|---|
|
Rationales for state ownership & state’s role as an owner |
||||
|
Ownership policy and surrounding landscape |
Government of Azerbaijan (specifically), AIH |
|
|
|
|
SOEs in the marketplace |
||||
|
Maintaining a level playing field |
AIH, PCs, government of Azerbaijan |
|
|
|
|
Identifying and separating public policy objectives and PSOs |
AIH (specifically), PCs |
|
|
|
|
Public procurement |
AIH (specifically), PCs, Government of Azerbaijan (primary for long- term recommendation) |
|
|
|
|
Equitable treatment of shareholders and non-state investors |
||||
|
Protection of minority shareholders |
AIH |
|
enabling shareholders to appoint supervisory board members proportionate to their ownership in the PC.
|
|
|
Stakeholder relations and responsible business conduct |
||||
|
Strengthening the compliance function, including procedures related to whistle-blowers and ethics |
AIH |
|
|
|
|
Disclosure and transparency |
||||
|
Enhancing transparency and disclosure |
AIH (specifically), PCs |
|
|
|
|
Responsibilities of the boards of SOEs |
||||
|
Independent board members |
Government of Azerbaijan (specifically), AIH |
|
|
|
|
Professionalising boards |
AIH |
|
|
|
Notes: The action plan is based on the recommendations section of the report and was developed by the OECD assessment team in consultation with AIH, in line with its reform efforts and plans, and was further reviewed by the informal taskforce of Working Party delegates and the World Bank.
Notes
Copy link to Notes← 1. It is expressly noted that this resolution is not relevant for the AIH portfolio and as such for this assessment, it is carved out.
← 2. As was noted in section 1.3.2, the voluntary “Azerbaijan Corporate Governance Standards” of 2011 do have some provisions relating to minority shareholders, but these standards are not applied to PCs.
← 3. Only in relation to ABB, ATB, Tamiz Shahar and Baku Bus, the President in agreement with AIH appoints or dismisses the CEO.
← 4. Whereby any deviation from the market level rate of return to achieve certain public policy objectives should not result in a lower rate of return but should be accounted for in the actual cost of the public policy objective that is accounted separately.
← 5. Among others, a recommendation right for CEOs and nominating CEOs in some instances and overall responsibility for board compositions.