Corporate Governance System of Azerbaijan

Corporate Governance System of Azerbaijan

Summary 

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance involves balancing the interests of a company's stakeholders, such as shareholders, senior management executives, customers, suppliers, government. 

How the corporate governance system in Azerbaijan is directed and controlled ? What are advantages and disadvantages of the corporate governance systems ?

Facets in Corporate Governance system of Azerbaijan

It is well known that there are two main set of rules on the supervision of corporate governance; one-tier boards and two-tier boards. In the one-tier board system not only the management of companies, but its control (supervision) of directors of companies lies in the hands of a management, it is an additional task for the board itself, by contrast, in the two-tier system the control (supervision) of directors of companies lies in a different board which is a supervisory board.

Within Europe, the United Kingdom is a prominent country with a single board system, consisting of executive and non-executive directors; other countries such as Ireland takes the same approach. On the other hand, Germany traditionally employs dualism of a management board and a separate supervisory board. This system is also found in the Netherlands, Austria, Finland and Denmark. While some countries such as Sweden have legal frameworks that cannot be classified as one-tier and two-tier systems, other countries, such as Belgium, Portugal, Spain, allow companies to choose between the two systems.

As for Azerbaijan, it can not be classified as one-tier and tier system. There is not a specific requirement in general to estabslish any kind of system. By default law, there are some mandatory rules which regulate specific occasions when companies should establish a supervisory board within the company:  

       - In cases specified in the Charter of the Company

             - In socially significant structured companies:

                           Criteria Indicators for socially significat structured companies

Annual income (mln.manat)	Average number of employees during the reporting year (people)	The final amount of the balance (mln.manat)
180,0	1500	450,0

-          



             -The supervisory board shall be established in a stock company with more than 50 shareholders
             -Supervisory board shall be established in Banks

In other cases, the supervisory board may be established, there is no a strict requirement for a mandatory establishment.  

As we see, the corporate governance of Azerbaijan is classified as a mixed system.

Advantages and Disadvantages of One-tier and Two-tier systems

The core idea behind the two-tier model system was to strictly separate the controlling institution from the managing institution. Theoretically, in two-tier system conflict of interests between the members of the two boards should not arise as one manages the company operations, the other controls or monitors them. Thus, the key advantage of the two-tier system, i.e. the independence of the members of the supervisory board due to the separation of the control and management, is also at the same time the reason for a number of structural weaknesses.

A weak point of the two-tier system is the information management. In other words, the supervisory board is not involved in the management and decision-making process and as a result, the supervisory board lacks the information about the performance of the functions. The management board should disclose an adequate information to the supervisory board based on what they will be able to judge on the performance of the management board.  However, there is a strong asymmetry between the two boards, since all information concerning questions of strategy, business opportunities (projects), budget questions etc., lies in the hands of management board, which is also directly speculated as a dependence on the management board. Moreover, the members of the management board are in direct contact with employees and junior management. Thereby, the members of the supervisory board receive all the information from the management board. They are not permitted to collect information on their own and employees are not under obligation to report to the supervisory board directly, it should be done through through management board.  

Reversely, in the one-tier system there is an information asymmetry within the board. The non-executive directors might not ask for additional facts, figures, numbers etc. if they are confronted with the well-informed executive directors in the board meeting, while in the meetings of the supervisory board, all board members face the problem insufficient or lacking an adequate information to make a right decision.

Furthermore, the members of one-tier system fulfill both managerial and supervisory roles. Thus, they face a dilemma: they should make decisions and at the same time, control or monitor these decisions, that is why, sometimes, it causes non-transparency.

Conclusion

Having said all these, we can conclude that there is not a perfect type of corporate governance system. Each system has its own advantages and disadvantages. Upon consideration of the default rules about corporate governance, all the issues such as the company type, its size, functions, purpose, business plans etc. should be taken into account. In addition, it is worth to mention that because of the above-mentioned issues, lawmakers adopt some imperative rules with regard to corporate governance system of specific companies.