Corporate governance and sustainability

CORPORATE GOVERNANCE AND SUSTAINABILITY

CORPORATE GOVERNANCE

One of the important strategic goals of the Company was to revise our management policy taking into account the components of sustainable development and to set performance targets for the new level of development. Sustainable development for us is a significant component of corporate governance.

Management system change

In 2018 we continued to actively implement the Transformation Program. According to the new management model, one of the major sub-holdings, KMG Exploration and Production, merged with us in 2018. Now production assets are managed directly by KMG.

Corporate culture development

In 2018, we approved a new Code of Business Conduct (hereinafter – the Code) which enshrines KMG’s corporate values, defines the most important principles and rules of business conduct and stakeholder relations, and is a set of corporate ethics requirements to be followed by all employees of the Company.

Business communities shall support and respect protection of internationally recognized human rights.

Business communities shall make sure that they are contributory infringer of human rights.

Business community should advocate liquidation of all forms of forced and compulsory labour.

Business community should advocate liquidation of discrimination in the area of labour and employment.

Businesses should support a precautionary approach to environmental challenges.

Undertake initiatives to promote greater environmental responsibility.

Businesses should work against corruption in all its forms, including extortion and bribery.

Transparency of the corporate governance and organization structure is essential for ensuring accountability of these bodies and those involved. These reporting elements contain information about how the organization creates its supreme corporate governance body, forms its structure taking into account its goals, and how these goals relate to the economic, environmental and social impacts of the organization.

The Board of Directors performs general management of KMG activities, defines priority areas of activities, development strategy of the company, and is responsible to the General Meeting of Shareholders for implementation of its leadership functions. Management of current activities is carried out by the Management Board, which in turn reports to the Board of Directors.

Corporate Governance Structure

In accordance with the KMG Charter, KMG corporate governance bodies are:

1) Supreme Body – General Shareholders Meeting,

2) Management Body – Board of Directors,

3) Executive Body – Management Board.

Committees of the Board of Directors

To consider the most important issues and prepare recommendations to the Board of Directors, KMG establishes committees of the Board of Directors. In 2018, the following Committees operated under the Board of Directors:

1. Nominating and Remuneration Committee established for the tasks of succession planning of the Board of Directors and the Management Board, assessment of the activities of KMG authorities, ensuring effective personnel policy, remuneration system, as well as social support, professional development and training of KMG officials and employees;

2. Strategy and Portfolio Management Committee, formerly known as the Strategy and Innovation Committee, established for such issues as the development strategy and investment policy, priority areas of KMG’s activities, improving the investment attractiveness of KMG, planning financial and economic activities and monitoring the transformation of KMG;

3. Finance Committee established for the purpose of effective financial policy, by assessing a financial condition, monitoring a financial structure and strategy, as well as monitoring the implementation of investment projects;

4. Audit Committee which functions are aimed at effective control over financial and economic activities, the performance of systems of internal control, risk management and corporate governance, audit and financial reporting;

5. Committee on Safety, Health and Environment and Sustainability established in 2018 to consider a range of issues on safety, health and the environment, the implementation of the principles of sustainability and socio-economic development, social obligations and programs, ensuring business continuity and environmental efficiency. This Committee is responsible for initiating, in-depth consideration and decision-making on the economic, environmental and social aspects of the impact of the organization.

Composition of the Board of Directors and its Committees

As of the date of this Report, the Board of Directors includes:

1. Walton Christopher John, Chairman of the Board of Directors;

2. Baljeet Kaur Grewal, Representative of Interests of JSC “Samruk-Kazyna”;

3. Uzakbay Karabalin, Representative of Interests of JSC “Samruk-Kazyna”;

4. Almasadam Satkaliyev, Representative of Interests of JSC “Samruk-Kazyna”;

5. Whyte Stephen James, Independent Director;

6. Dyer Philip John, Independent Director;

7. Viana Palha Da Silva Luis Maria, Independent Director;

8. Anthony Espina, Representative of Interests of JSC “Samruk-Kazyna”;

9. Alik Aidarbayev, Chairman of the KMG Management Board.

As of the date of this Report, the composition of the Committees is as follows:

Strategy and Portfolio Management Committe
1.	Whyte Stephen James, Chairman of the Committee
2.	Walton Christopher John
3.	Uzakbay Karabalin
4.	Grewal Baljeet Kaur
5.	Dyer Philip John
6.	Viana Palha Da Silva Luis Maria
7.	Anthony Espina

Nominating and Remuneration Committee
1	Viana Palha Da Silva Luis Maria, Chairman of the Committee
2.	Dyer Philip John 3. Walton Christopher John
4.	Whyte Steven James
5.	Uzakbay Karabalin
6.	Anthony Espina

Finance Committee
1.	Walton Christopher John, Chairman of the Committee
2.	Whyte Steven James
3.	Grewal Baljeet Kaur
4.	Dyer Philip John
5.	Viana Palha Da Silva Luis Maria
6.	Anthony Espina

Audit Committee
1.	Dyer Philip John, Chairman of the Committee
2.	Whyte Steven James
3.	Viana Palha Da Silva Luis Maria

Committee on Safety, Health and Environment and Sustainability
1.	Dayer Philip John, Chairman of the Committee
2.	Walton Christopher John
3.	Whyte Steven James
4.	Uzakbay Karabalin
5.	Viana Palha Da Silva Luis Maria

SUSTAINABILITY

SUSTAINABILITY IS OUR STRATEGIC GOAL

In 2018, the Board of Directors approved a new KMG Development Strategy until 2028 (hereinafter – the Strategy), which defines corporate governance and sustainability as one of the three strategic goals of the Company for the next ten years.

Implementation of the strategic goal “Corporate Governance and Sustainability” should be resulted in establishment of a management system that ensures achievement of improved indicators of corporate social responsibility, health, safety and environment, improving the economic impact in the presence regions, combating corruption, improving the quality of relations with stakeholders, improving the rating of corporate governance and corporate culture of ethics.

The Action Plan for implementation of the Strategy includes in the corporate key performance indicators (KPI) the indicators related to implementation of sustainability components in the Company and its business units. Next year sustainability KPIs are planned to be integrated in the system of strategic and mediumterm planning and KPI tree of the Company.

In order to implement and introduce the sustainability system, a Guide on Sustainability Management System for the KMG Group of Companies will be developed in 2019.

STAKEHOLDER INTERACTION

KMG carries out a full production cycle from the exploration and production of hydrocarbons, their transportation and processing to the sale of oil and oil products both inside Kazakhstan and abroad, and represents the interests of the state in the oil and gas sector. Due to its complex structure and activities, KMG interacts with a wide range of stakeholders.

Identification of stakeholders

KMG on an ongoing basis takes measures to establish a dialogue and long-term cooperation and management of relations with the Stakeholders.

In KMG, a Stakeholder Map has been prepared, taking into account risks and ranking, taking into account the dependence (direct or indirect), obligations, situation (paying special attention to high-risk areas), influence, various (diverse) perspectives. Plans of stakeholder interaction for effective implementation of the tasks are drawn up.

In identifying and interacting with stakeholders, KMG applies best practices for stakeholder engagement, including international standards, such as the AA1000SES Stakeholder Engagement Standard.

Methods of stakeholder interaction include the following:

Interaction level	Interaction methods
Consultations: Bilateral interaction; Stakeholders answer the questions of the Fund and organizations	Questionnaires; focus groups; meetings with stakeholders; public meetings; seminars; providing feedback through means of communication; advisory councils
Negotiations :	Collective negotiations based on the principles of social partnership
Involvement: Bilateral or multilateral interaction; building expertise and knowledge from all sides; stakeholders and organizations operate independently	Bilateral or multilateral interaction; building expertise and knowledge from all sides; stakeholders and organizations operate independently Multilateral forums; consulting panels; consensus-building process; the process of joint decision-making; focus groups; feedback schemes
Cooperation: Bilateral or multilateral interaction; joint building of experience and knowledge, decision-making and measures	Joint projects; joint ventures; partnership; joint initiatives of stakeholders
Delegation of authority: Stakeholders participate in the management	Integration of issues of interaction with stakeholders in management, strategy and operations

IDENTIFICATION OF MATERIAL TOPICS OF THE REPORT

To assess and disclose material topics, the Report analyzed information on both external and internal stakeholders. Based on the results of the procedures, a materiality matrix was constructed of 152 potential topics. This matrix is divided into 4 conditional zones (quadrants) according to the level of importance of those or other topics as presented below.

To select the most significant topics from the general list of potential topics, certain procedures were carried out aimed at prioritizing and ranking topics. In other words, so-called “filters” were applied.

Internal filters are:

• Workshop or seminar for KMG employees;

• Online survey of KMG management.

External filters are:

• Online survey of external stakeholders;

• Media field (mass media) analysis;

• Review of reports of analogue companies;

• Analysis of global trends, so-called “Megatrends”.

List of significant topics

Economic topics
4	Investments for production upgrading
7	Key financial indicators
11	Company’s approaches to procurement and work with suppliers
12	Company’s approaches to ensuring responsibility for its products: quality and compliance with requirements
17	Main objectives and directions of the strategy
20	Production results by types of products

Personnel, company, corporate governance
65	Fatal accidents
73	Injury rate
76	Transport security
83	Salary and benefits package
84	Staff health and safety
88	Collective agreement
86	Staff training and education
91	Recruitment
94	Employee incentive program
99	Investments in infrastructure of the presence regions
109	Local content in procurement
115	Sponsorship and charity
117	Employment of local staff in the presence regions
119	Combating corruption
122	Business ethics / Corporate governance
136	Availability of the company’s development strategy, its availability

Environment
25	Water use
31	Air pollutant emissions
32	Measures to reduce flaring of associated petroleum gas
39	Information on protected areas in the presence regions
41	Impact on biodiversity
53	Compliance with the environmental protection requirements
54	Types and volumes of waste generation
58	Energy consumption
47	Climate change risks and adaptation
49	Participation in international/local environmental/ climate change initiatives
61	Measures to improve energy efficiency and reduce energy intensity Personnel, company

ETHICS AND FAIR PRACTICES

Values, Principles, Standards and Code of Conduct

In 2018, Company approved a new Code of Business Conduct (hereinafter – the Code) which enshrines KMG’s corporate values, defines the most important principles and rules of business conduct and stakeholder relations, and is a set of corporate ethics requirements to be followed by all employees of the Company.

The Code is an important part of KMG’s corporate governance system; it contributes to the long-term economic growth of the Company.

The provisions of the Code apply to KMG employees, regardless of their position. KMG employees are required to familiarize themselves with the principles and recommendations of the Code and comply with them.

KMG adopts and follows the provisions of this Code in its relations with KMG shareholders, employees, subsidiaries and affiliates, government agencies, partners and other stakeholders, both in business decision-making and in everyday situations.

The Code is a public document and is freely distributed to KMG business partners and any other stakeholders. It is also posted on the Company’s website in the “Corporate Documents” section.

According to the approved Code, the KMG activities are based on the following principles:

Openness

Responsibility

Transparency

Ethical conduct

Respect

Leglity

Professionalism

Justice

Intolerance of corruption

No confilict of interest

Envirnmental responsibility

Safety

MECHANISMS FOR SEEKING ADVICE ON UNETHICAL CONDUCT

We have developed various mechanisms through which employees, business partners and stakeholders can report any non-compliance with corporate ethics, human rights, labor practices, negative environmental or social impact:

• Employees – by informing their direct supervisor or superior; or by providing information to the Ombudsman (by phone 78-65-60, or via email: ombudsman@kmg.kz).

• Employees and others – by phone 78-65-60, or via email of trust: ombudsman@kmg.kz.

• “Hot line” calls by phone 8-800-080-1994, e-mail: sk.hotline@deloitte.kz, or at www.sk.deloitte-hotline.com.

For confidentiality purposes, all information is accepted and processed by an external independent company. This company draws up report on received complaints and sends it to the Compliance Service on a daily basis.

Compliance Service employees decide on further actions to consider received complaints in accordance with internal policies.

In accordance with the best international practice, including the standards and principles of the International Association of Ombudsmen (IAO), the KMG Ombudsman is accountable to the Board of Directors of KMG and is an independent high-level manager who advises and contacts the employees, participants in labor disputes and conflicts assistance in the development of a mutually beneficial, constructive and realizable solution, taking into account the observance of the norms of the legislation of the Republic of Kazakhstan (including necessity), assistance in resolving the problematic social and labor issues of both employees and KMG and the organization, as well as in observing the principles of business ethics of KMG employees and organizations.

When resolving disputes within the Company, the Ombudsman seeks to help the parties to the conflict resolve it through peaceful settlement. For this purpose, the Ombudsman can act as a consultant, negotiator, mediator or a resolution lawyer, while adhering to the principles of objectivity, confidentiality and independence. In the process of conflict resolution, the Ombudsman relies on the principle of equality and fairness, which contributes to improving the moral and psychological climate in the workplace and increasing the motivation and loyalty of employees.

The activities of the Ombudsman allow KMG to also comply with international standards for dealing with conflict resolution (ISO 10003), and work with complaints (ISO 10002) provided by the International Organization for Standardization.

We strive to prevent any kind of disputes and conflicts in the organizations of the Group. The right of any person to appeal should not be violated.

In addition, within the Unified System of Internal Communications there are such mechanisms as:

• meetings of managers with labor collectives and trade union;

• reception of employees by a CEO on personal issues;

• CEO blog;

• Boxes for proposals.

Applications for non-compliance with the Code of Business Conduct are considered with the obligatory participation of the Ombudsman on the terms of confidentiality.

The Group management is informed when any applications are received. All received complaints and proposals are recorded, a decision of the management on the results of consideration of an application is brought to an applicant.

Hotline

You can communicate any violations of the Code of Conduct, including but not limited to corruption, fraud, unethical behaviour or discrimination

We guarantee

confidentiality and anonymity 100% handling of reports

8 800 080 19 94 sk.hotline@deloitte.kz www.sk.deloitte-hotline.com

All the received reports will be collected and handled by an independent Deloitte company

INFORMATION BELIEF SYSTEM AND “HOT LINE”

Active preventive work on anti-corruption issues has led to a certain increase in involvement of employees and other persons to use the capabilities of the information belief system (hereinafter – IBS), by phone 78-65-65, or by e-mail of trust: doverie@ kmg.kz, (confidentiality is guaranteed), as well as the Fund’s hot line by phone 8-800-080-1994, by e-mail: sk.hotline@deloitte.kz or to www.sk.deloitte-hotline.com and other channels in order to inform about all known or established violations in the KMG Group.

Thus, in 2018, 67 applications were received only through KMG IBS, another 57 applications were received through the same channels of subsidiaries (in 2016 – 65, in 2017 – 60, respectively). 24 applications were received through the Fund’s hotline. 48 applications were received as part of personal reception of KMG management and postal communication.

All applications of legal entities and individuals are considered in accordance with the established procedure and terms, with the adoption of appropriate measures and notification of their authors.

To avoid possible corruptogenic standards, more than 60 draft internal documents, more than 100 draft contracts on procurement of goods, works and services were examined. 413 employees and candidates for vacant administrative positions for involvement in corruption and other offenses were checked.

In total, over the past three years, more than 1,500 employees and candidates have been checked for employment in the Сompany, while no information has been revealed that hinders the refusal to hire, for appointment in the order of transfer and nomination.

223 potential counterparties were checked for civil-legal solvency, and the related conclusions were provided to the initiators of the requests in a timely manner.

Statements and appeals 2018, %

12%

25%36%

ISD applications and appeals

Postal communication and as part of
personal reception of management

Fund Hot line

NEXT SECTION

Address by the Chairman of the Board of Directors

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