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Corporate Governance

Pursuant to the laws of the Republic of Kazakhstan and KMG Charter, KMG’s corporate governance structure is as follows:

KMG bodies are:

1. supreme body is the General Shareholders Meeting;
2. management body is the Board of Directors;
3. executive body is the Management Board;
4. body supervising financial and economic activities of KMG and other entities of KMG Group belonging to Samruk-Kazyna JSC in line with the National Welfare Fund Law of the Republic of Kazakhstan, assessing internal control, risk management, implementation of provisions of documents on corporate governance and consulting for improvement of their operations is the centralised Internal Audit Service.

The Board of Directors is engaged in general management of KMG activities, prioritizes the business areas, defines the Company’s development strategy, assesses the efficiency of KMG corporate governance and is accountable to the General Shareholders Meeting for its management duties. The day-to-day activities are managed by the Management Board that, in its turn, is accountable to the Board of Directors.

In order to address the most critical issues and to develop recommendations to the Board of Directors, the dedicated committees are established at KMG under the Board of Directors. As of 31 December 2021, the Board of Directors had the following committees:

1. Nomination and Remuneration Committee was established to address the succession planning for the Board of Directors and the Management Board, performance evaluation of KMG bodies, ensuring the efficient HR policy, remuneration and remuneration system, as well as social assistance, professional development and training of KMG officers and employees.
2. Strategy and Portfolio Management Committee was established to address the development strategy and investment policy, KMG operation priorities, improvement of KMG’s investment attractiveness, KMG’s financial and economic planning and transformation monitoring.
3. Audit Committee was established to exercise effective control over financial and business operations, including the completeness and accuracy of financial statements, the effectiveness of internal control systems, risk management and corporate governance, as well as control over independence of external and internal audits.
4. Health, Safety, Environment, and Sustainability Committee was established to address the issues related to health, safety and environment, implementation of the sustainable development and social & economic development principles, social commitments and programs, ensuring business continuity and environmental efficiency. This committee is responsible for initiation, in-depth review and decision-making on economic, environmental and social aspects of the impact caused by the organisation.

Economic, Environmental  and Social Responsibility

Pursuant to the Corporate Governance Code, the Board of Directors and the Management Board establish and implement the appropriate sustainable development system within their competence, while every employee and officer at every level contribute to sustainable development.

As of 31 December 2021, the responsibilities for sustainable development were allocated as follows at the executive body level:

1. Deputy Chairman of the Management Board for Strategy, Investments and Business Development is responsible for development and implementation of the sustainable development management system to ensure compliance with the sustainable development principles and integration of sustainable development into the key processes, the Company’s development strategy and decision-making processes.
2. Deputy Chairman of the Management Board for Finance and Economics is responsible for the economic component of sustainable development, including promotion of economic development in the regions of operation.
3. Director of Labour and Environment Protection Department is responsible for development and implementation of KMG’s health, safety and environment strategy and policies, and in general for health, safety and environment issues.
4. Director of HR Department is responsible for implementation of processes and management of labour, human and social aspects of sustainable development.

The above persons are accountable to the Chairman of KMG’s Management Board. Accountability of those responsible for economic, environmental and social issues is governed in detail by the Company’s internal regulatory documents, internal control and business continuity procedures. In this regard, according to the development plans, the issues are regularly presented for review to the Management Board that, in its turn, is accountable to the Board of Directors. Before the relevant matters are considered at Board of Directors meetings, the Board Committees make recommendations to the Board of Directors according to the following allocation:

• Comprehensive control over implementation of duties and actions aimed at improving the corporate governance is delegated to the Audit Committee under KMG’s Board of Directors.
• Initiation, in-depth review and decision-making on the economic, environmental and social aspects of the Company’s impacts, and monitoring of sustainable development in KMG are assigned to the Safety, Health, Environment and Sustainability Committee of KMG’s Board of Directors.

Consulting of Stakeholders in Economic, Environmental and Social Matters

Economic, environmental and social consultations between the stakeholders and the Company’s supreme corporate governance body are implemented in various ways and on a continuous basis.

For instance, the Health, Safety, Environment, and Sustainability Committee of the Board of Directors (hereinafter, the Committee) is in charge of general management of the activities of the above-mentioned officers. Thus, five meetings of the Committee were held in 2021, where 52 issues were addressed, with 115 decisions and assignments developed following the meetings of the Committee.

• The Committee develops and submits to the Board of Directors its recommendations in the following areas:
• Health, safety and environment.
• Integration of the sustainable development principles into KMG strategic planning and social & economic development.
• KMG’s social commitments and programs under the existing subsoil use contracts.
• KMG business continuity.
• KMG’s environmental efficiency.

In 2021, the Committee was mainly focused on health, safety and environment, strategic management of the ESG (Environmental – Social – Governance) aspects, and implementation of a sustainable development system. The key issues on the Committee’s agenda in 2021 are as follows:

• KMG’s ESG (Environmental – Social – Governance) rating.
• Requirements of the new RoK Environmental Code.
• Atmospheric emission management.
• Waste management and implementation of the Historic Waste Disposal Memorandum.
• Implementation of a sustainable development system at KMG and its business units and incorporation of sustainable development principles into key business processes.
• KMG’s contribution to the sustainable development goals.
• KMG’s health, safety and environment reports.
• Management of KMG’s contractors.
• Status of the incident at Petromidia Refinery.
• Investigation of a fire at the diesel and paraffin receiving and transhipment station of the Batumi Oil Terminal.
• Disruptions in the operations of KMG’s subsidiaries and dependent entities due to a power cut by an external supplier, KEGOC JSC.
• The social policy pursued by KMG Group and ensuring social stability at KMG companies.
• Approval of 2022 motivational key performance indicator charts for executives related to the implementation of sustainable development.
• KMG COVID-19 reports.
• Occupational health and safety management system.

Moreover, the Committee reviewed and approved the following main documents in 2021:

• KMG’s Low-Carbon Development Programme for 2022-2031.
• New revision of KMG’s Environmental Policy.
• Corporate standard for environmental impact assessment of the planned activities in KMG Group.
• Action Plan to Improve KMG’s ESG Rating.

KMG officers and employees were regularly invited to take part in the Committee’s activities by attending the meetings of the Committee without the voting right. The KMG’s Board of Directors has accepted every recommendation developed by the Committee.

Economic, environmental and social consultations are provided to a wide range of stakeholders via the Company’s website, public relations service (media office), as well as by issuing the annual Sustainability Report that serves as the central communication channel between KMG and its internal and external stakeholders in terms of disclosing sustainable development information. At the same time, KMG has various communication methods in place, which enable a proper dialogue with the stakeholders and the Company. For example, information for the investment community is posted on a dedicated portal https://kmg.kz/eng/investoram/reporting-and-financial-result/, violations of laws and internal regulations of KMG can be addressed through the help line doverie@kmg.kz, a confidential reporting system is available through http://www.sk-hotline.kz/, and there is functional communication on work of the Ombudsman through ombudsman@kmg.kz, on health, safety and environment throughа hse@kmg.kz and on sustainability through sustainability@kmg.kz.

Composition of the Management Body and its Committees

As of 31 December 2021, KMG’s Board of Directors has the following members¹⁷:

• Christopher John Walton, Chairman of the Board of Directors, Independent Non-Executive Director;
• Alik Serikovich Aidarbayev, Chairman of KMG’s Management Board;
• Miller Timothy Glen, Independent Non-Executive Director;
• Holland Philip Malcolm, Independent Non-Executive Director;
• Uzakbay Suleymenovich Karabalin, Non-Executive Director, Representative of Samruk-Kazyna JSC;
• Bolat Uralovich Akchulakov, Representative of Samruk-Kazyna JSC;
• Mukhtar Nauryzbaevich Mankeyev, Representative of Samruk-Kazyna JSC.

At the time of the Sustainability report approval KMG’s Board of Directors has the following members:

• Christopher John Walton, Chairman of the Board of Directors, Independent Non-Executive Director;
• Magzum Maratovich Mirzagaliyev, Chairman of KMG’s Management Board;
• Miller Timothy Glen, Independent Non-Executive Director;
• Holland Philip Malcolm, Independent Non-Executive Director;
• Uzakbay Suleymenovich Karabalin, Non-Executive Director, Representative of Samruk-Kazyna JSC;
• Yernar Beisenuly Zhanadil, Representative of Samruk-Kazyna JSC;
• Gibrat Kairatovich Auganov, Representative of Samruk-Kazyna JSC;
• Khairova Asel Anuarovna, Independent Non-Executive Director.

At the time of this report, KMG’s Board Committees are as follows (Resolution of KMG’s Board of Directors dated 2 February 2022, Minutes No.1/2022):

The Company complies with requirements of the Corporate Governance Code regarding the number of independent directors on the Board of Directors, according to which the number of independent directors is up to 50% of the total number of members of the Board of Directors.

The Board of Directors is chaired by an independent director and all KMG’s Board Committees are chaired by independent directors.

At the time of the report, the structure of KMG’s Board of Directors is as follows:

• non-executive directors – 4,
• representatives of Samruk-Kazyna JSC – 3,
• head of the executive body (Chairman of the Management Board) – 1

Of eight members of the Board of Directors (at the time of report), five are citizens of the Republic of Kazakhstan, two are from the United Kingdom and one is from the United States.

The term of office of the Board of Directors is three years. Members of the Board of Directors may be re-elected for a period exceeding six consecutive years subject to special consideration of a need for qualitative renewal of the Board of Directors. An independent director cannot be elected to the Board of Directors for more than nine consecutive years. Election of an independent director to the Board of Directors should be carried out annually, with detailed explanation of the need for election of this member of the Board of Directors and influence of this factor on independence of the decision making. However, following an independent corporate governance audit carried out at KMG in 2021, the Company received a recommendation to consider discussing with the Shareholder an approach to retain shareholder representatives and independent directors on the Company’s Board of Directors for a longer period of time. It was also recommended that consideration should be given to aligning the tenure of representatives with the period of the chosen Company Strategy. According to the independent consultant, this can have the following advantages: the term of office of individual directors of five to six years and their rotation in different years will ensure continuity of knowledge of the Company’s operations and its corporate governance processes. A longer term on the Board of Directors contributes to the quality of performed work and accountability for successful implementation of the Company’s strategy.

The Board of Directors and its Committees maintain the balance of skills, experience and knowledge to ensure the independent, unbiased and efficient decision-making process in the interests of KMG and in view of fair treatment of all shareholders and sustainable development principles. Pursuant to clause 4 of Article 54 of the Law of the Republic of Kazakhstan on Joint Stock Companies and paragraph 9 of Chapter 5 of KMG’s Corporate Governance Code, members of the Management Board, other than the Chairman of the Management Board, cannot be elected to the Board of Directors, and the Chairman of the Management Board cannot be elected as Chairman of the Board of Directors. For more details on the members of the Board of Directors, visit KMG’s website: https://www.kmg.kz/eng/kompaniya/korporativnoe_upravlenie/sovet_direktorov/

Composition of KMG's Management Board as of December 31, 2021:

• Alik Serikovich Aidarbayev, Chairman of KMG’s Management Board;
• Dastan Elemesovich Abdulgafarov, Deputy Chairman of the Management Board for Strategy, Investments and Business Development;
• Daniyar Amirbayevich Berlibayev, Deputy Chairman of the Management Board for Oil Transportation, International Projects and Sary-Arka Gas Pipeline Construction;
• Dauren Saparalievich Karabayev, Deputy Chairman of the Management Board for Economics and Finance;
• Zhakyp Nasibkalievich Marabayev, Deputy Chairman of the Management Board for Exploration and Production;
• Daniyar Suinshlikovich Tiyesov, Deputy Chairman of the Management Board for Oil Refining and Petrochemistry;
• Malik Oraluly Saulebay, Director of Department for Legal Support of Business Areas.

The Management Board of Samruk-Kazyna JSC on 28 October 2021 (Minutes No.49/21) decided to appoint Alik Serikovich Aydarbayev as the Chairman of KMG’s Management Board for the term defined for KMG’s Management Board as a whole.

At the time of approval of the 2021 Sustainability Report, the composition of KMG's Management Board is as follows:

• Magzum Maratovich Mirzagaliyev, Chairman of KMG’s Management Board
• Dastan Elemesovich Abdulgafarov, Deputy Chairman of the Management Board for Strategy, Investments and Business Development;
• Bulat Kalavyanovich Zakirov, Deputy Chairman of the Management Board for Oil Transportation, International Projects and Sary-Arka Gas Pipeline Construction;
• Dauren Saparalievich Karabayev, Deputy Chairman of the Management Board for Economics and Finance;
• Kurmangazy Oryngazievich Iskaziyev, Deputy Chairman of the Management Board for Exploration and Production;
• Murat Kirimbekovich Munbayev, Deputy Chairman of Management Board for Major Oil-and-gas Projects;
• Arman Kurmetovich Kairdenov, Deputy Chairman of the Management Board for Oil Refining and Petrochemistry;
• Vasily Sergeyevich Lavrenov, Deputy Chairman of the Management Board.

 More information about the members of KMG’s Management Board https://www.kmg.kz/eng/kompaniya/korporativnoe_upravlenie/pravlenie/

Nomination and Selection of Management Body

Procedure for Nomination and Selection of Candidates to the Board of Directors

The procedure for nomination and selection of candidates to the Board of Directors is determined by the KMG’s Charter and Corporate Governance Code and implemented by the General Shareholders Meeting together with the Chairman of the Board of Directors and the Chairman of the Nomination and Remuneration Committee of the Board of Directors, and is governed by the transparent, fair and professional approach to recruitment and employment of candidates. Members of the Board of Directors are elected from among the candidates nominated as representatives of shareholders and other parties. Candidates to the Board of Directors must have the knowledge, skills and experience necessary to perform their duties and to ensure growth of long-term value and sustainable development, and must also have impeccable business reputation. The Chairman of the Board of Directors is elected by the General Meeting of Shareholders. Independent directors are selected in accordance with the approved Rules for Selecting Independent Directors of companies in Samruk-Kazyna JSC Group.

Conflict of Interest

The main processes for managing the conflicts of interest in the company are described in the Policy on Managing the Conflict of Interest of Employees and Officers in KMG and its SDEs approved by the Board of Directors of KMG, as well as in the Code of Conduct.

It is the responsibility of every employee, regardless of position, and of every officer of the company to comply with requirements of this Policy.

The Company has now implemented an Initial Disclosure of Potential Conflict of Interest Procedure for employees and/or officers when hiring/appointing/assigning and taking up a new position. This Disclosure includes the following information: 1) Information on beneficial ownership/shareholding and management in companies – Counterparties/Competitors of KMG and its SDEs; 2) Information on participation in the sole and collegial bodies of Counterparties/Competitors of KMG and its SDEs, 3) Information on interaction with Counterparties of KMG and its SDEs; 4) Information on intention to acquire assets and/or securities owned by KMG and/or its SDEs, etc. It is arranged to check for conflicts of interest and compliance with requirements and procedures of KMG’s compliance policies and/or other documents, including presence of signs of affiliation of officers of Samruk-Kazyna JSC Group with persons considered as candidates for employment, appointments to managerial positions, as well as when concluding non-arm’s length transactions. In addition, consent to anti-corruption restrictions under the Anti-Corruption Law shall be collected from the above-mentioned persons.

Role of the Management Body in Setting Goals, Values, Mission and Strategy

KMG’s Board of Directors is actively involved in strategic planning and implementation of KMG’s Development Strategy.

In consultation with shareholders, the Board of Directors determines the priorities, strategic goals, initiatives, values, vision and mission, as well as policies and objectives for the economic, environmental and social development of the Company based on proposals developed by the executive body.

The Board of Directors is responsible for determining the priority areas of KMG’s activities and approving KMG’s Development Strategy, as well as monitoring the implementation of KMG’s Development Strategy. 

On 3 November 2021, KMG’s Board of Directors approved the Company’s Development Strategy for 2022-2031.

3 Strategic Sessions were held during the Strategy updating process (separate Board of Directors meeting on the Development Strategy). The Strategic Session in November 2020 considered the need to update KMG’s Development Strategy to reflect global trends in sustainable and low-carbon development and changes in the asset portfolio in terms of withdrawal of KTG from the Company’s structure and entry into the oil and gas chemical business. At this Strategic Session, each member of the Board of Directors shared their views on the issue at hand and expressed their wishes for the Company’s development over the next ten years. It was unanimously decided to further strengthen the Company’s focus on reducing the carbon intensity of operations and developing renewable energy projects, as well as the principles of sustainable development.

At the Strategic Session in May 2021, the Board of Directors was presented with the concept of KMG’s new Development Strategy for 2022-2031, as well as approaches to development and subsequent implementation of KMG’s Low-Carbon Development Programme based on the previous discussions.

On 3 November 2021, KMG’s Board of Directors approved the Company’s Development Strategy for 2022-2031, and reviewed the draft Low Carbon Development Programme for 2022-2031 and KMG’s strategy concepts for major oil and gas projects and international assets of the Company at the Strategic Session.

In order to assist KMG’s Board of Directors in developing the recommendations, the advisory bodies of KMG BoD Strategy and Portfolio Management Committee (SPMC) and KMG BoD Health, Safety, Environment and Sustainability Committee (HSESC) during the year considered the analytical materials on low-carbon development, such as the results of study of the Western Australian experience in implementation of hydrogen-based renewable energy projects, ways to minimise the risks for JSC NC “KazMunayGas” from introduction of a carbon tax in the European Union, and others.

The Board of Directors recognises the high priority given to environmental issues, the lives and health of the Company’s employees and its contractors at all its production facilities, human resource development and commitment to the generally recognised global goals of sustainable development, therefore, it defines sustainable development and progressive reduction of carbon intensity of production as one of KMG’s main strategic goals, which is in line with Samruk-Kazyna JSC’s vision, the Republic of Kazakhstan Development Strategy and the agenda of the global investment community.

Management Body’s Competence and Performance Review

Collective Knowledge of the Management Body Members

The members of the Board of Directors strive to regularly enhance their skills and professionalism, including those related to economic, environmental and social management. The Nomination and Remuneration Committee regularly reviews the current balance of skills and knowledge among the members of the Board of Directors. Information on training of the Board of Directors’ members is regularly updated on the Company’s website and is available via the following link: http://www.kmg.kz/eng/kompaniya/korporativnoe_upravlenie/treningi_chlenov_soveta_direkt/.

Meetings of the Board of Directors, including the separate annual meeting of the Board of Directors on sustainable development, as well as of the Board of Directors Health, Safety, Environment and Sustainability Committee regularly discuss the most relevant topics within ESG (environmental, social, governance) scope, including information on international trends and in-country initiatives.

Management Body Performance Review

Based on the results of the 2021 independent diagnostics, KMG was assigned corporate governance rating of "BBB".

The Regulations on Performance Assessment of the Board of Directors, Board of Directors Committees, Chairman, Members of the Board of Directors and Corporate Secretary of KMG (hereinafter, the Regulations) were developed in accordance with the Corporate Governance Code and based on the Guidelines for Performance Assessment of the Board of Directors and its Committees, Chairman, Members of the Board of Directors and Corporate Secretary of Samruk-Kazyna JSC companies. The Regulations state that the Board of Directors, Committees and members of the Board of Directors should be assessed on an annual basis as part of a structured process approved by the Board of Directors. An independent professional organisation is involved in the assessment at least once every three years. In 2021, an independent corporate governance audit was carried out in 11 portfolio companies of Samruk-Kazyna JSC, including KMG, by the team of PricewaterhouseCoopers LLP (PwC) for the period from 1 January 2020 to 31 May 2021. This audit assessed performance in five areas: efficiency of the Board of Directors and executive body; risk management, internal control and audit; sustainable development; shareholders’ rights; transparency. Therefore, no separate independent assessment of the Board of Directors was carried out in 2021.

However, a self-assessment of the members of the Board of Directors at the end of 2020 was carried out in 2021 through a questionnaire survey as required in the Corporate Governance Code. The self-assessment questionnaire was developed jointly by the chairmen of the Nomination and Remuneration Committee of the Board of Directors and the Board of Directors. The questionnaire consisted of two sections – Composition & Processes and Behaviour & Actions – and 30 questions. Self-assessment results were pre-reviewed at a meeting of the Nomination and Remuneration Committee of the Board of Directors, during which it was recommended that the Chairman of the Board of Directors together with the Chairman of the Nomination and Remuneration Committee of the Board of Directors discuss the following aspects when discussing the performance self-assessment of the Board of Directors for 2020:

1. Appointment of the Chairman of the Audit Committee of KMG’s Board of Directors.
2. Diversity in every aspect
3. Succession plan and the process for electing the members of the Board of Directors.
4. KMG’s Strategy.
5. Professional development and training.

The KMG’s Board of Directors’ 2020 Self-Assessment Report (hereinafter, the Report) was presented and discussed at a closed meeting of the Board of Directors, which was attended only by members of the Board of Directors and the Corporate Secretary. The discussion of the Report included a review of the Board members’ self-assessment results and a review of the skills and competencies that scored below four points (out of the maximum five points) (hereafter, the areas for improvement). In this regard, in order to improve performance of the Board of Directors in the areas for improvement, an Action Plan for Improvement of KMG’s Board of Directors (hereinafter the Plan) was developed and the implementation status of the previous Plan was reviewed.

In April 2021, KMG’s Board of Directors approved KMG’s Board Succession Policy and KMG’s Board Succession Plan. As part of KMG’s 2021 corporate governance audit, recommendations were received from PwC on succession issues and terms of office for KMG’s Board of Directors, which are to be implemented in 2022. The following recommendations are highlighted in KMG’s Corporate Governance Improvement Plan submitted by the consultant:

• consider discussing with the Shareholder an approach to retain shareholder representatives and independent directors on the Board of Directors of the Company for a longer period of time. Consideration should be given to aligning the tenure of representatives with the period of the Company’s chosen Strategy, which would provide an advantage to the Company given the continuity of its corporate memory and reputation in the investment community if the Company plans an international listing.
• consider developing a formal succession plan for the Board of Directors, including a list of candidates, their competencies, likelihood of interest, preferred remuneration and potential term of office, which would be based on the term of office of the current directors and the required skills matrix

At the November 2021 meeting of KMG’s Nomination and Remuneration Committee of the Board of Directors, the issue of assessment of the KMG’s Board of Directors performance at the end of 2021 was considered, where the Chairman of the Board voiced that an independent corporate governance audit of KMG had been carried out, which also included assessment of the Company’s Board of Directors performance, but suggested that self-assessment should also be carried out for 2021. The purpose of the annual self-assessment is to identify the trends based on questionnaires completed by members of the Board of Directors. KMG’s Board of Directors decided, in addition to the independent corporate governance audit, to assess KMG’s Board of Directors’ performance in 2021 through a self-assessment in order to identify provisions requiring attention and to compare the results with the previous ones.

The self-assessment of the Board of Directors, the Board of Directors’ committees, the Board of Directors’ members and the Corporate Secretary at the end of 2021 was completed at the date of publication of the Report, namely in February 2022. The results were considered at 1 March 2022 meeting of the Board of Directors. Further discussions of improvements in its activities will be based on this.

Economic, Environmental and Social Impact Management

The KMG’s Board of Directors plays a crucial role in management of economic, environmental and social impact and the associated prospects. The Company regularly performs the risk assessment on a quarterly basis and at the year-end in compliance with the approved risk management methodology, including economic, environmental and social risks. Based on the identified risks, the relevant action plans are developed and implemented to prevent, monitor and eliminate such risks. In particular, the following functions are deemed to be within the competence of the Board of Directors: determining the corporate risk management policy, approving the risk register and risk map, the critical risk management action plan, the overall risk appetite, the tolerability levels for each key risk, approving the risk report and KMG business continuity documents.

KMG’s Board of Directors sets the “tone from the top” in ensuring adherence to proper standards of conduct, and the main document governing the Company’s ethical standards is KMG’s Code of Conduct, the approval of which falls within the competence of KMG’s Board of Directors. Compliance with the standards of this Code is one step in enhancing the Company’s reputation, ensuring sustainable development and achieving the KMG’s strategic goals.

The Health, Safety, Environment and Sustainability Committee of KMG’s Board of Directors ensures that a culture of safety, health and environmental protection and sustainable development is fostered and enhanced. To this end, “the deep dive issues” on the most relevant aspects of the Company’s business are considered on a regular basis.

The Audit Committee of KMG’s Board of Directors regularly reviews reports on the main results of the compliance system, as well as reports on applications received through the hotline and other official channels. The hotline is operated by an independent operator, KPMG, and is a communication channel through which any breaches of KMG’s Code of Conduct can be reported, including corruption, discrimination, misconduct and other violations. Relevant reports received through the hotline are reviewed, and the corrective actions are taken following review and investigation, and disciplinary actions are taken where necessary. The Company implements ongoing operational preventive actions that encourage employees and others to use the hotline.

In 2020, the Compliance Service developed the Code of Conduct based on the compliance risk assessment and review of internal compliance documents for compliance with the standards and requirements of anti-corruption laws and guidelines, including the Law of the Republic of Kazakhstan on Combating Corruption, the UK Bribery Act, the Convention on Combating Bribery of Foreign Public Officials of the Organisation for Economic Cooperation and Development, which was approved (Minutes 16/2020 dated 10 December 2020) by KMG’s Board of Directors. In 2021, KMG conducted compliance training for its employees on the requirements of applicable law, the Company’s main compliance policies, and case studies from global practices on the consequences of compliance violations. In addition, KMG employees commit in writing to comply with the Code of Conduct and the Anti-Corruption Policy.

Stakeholders are consulted to assist the supreme governance body in identifying and managing the economic, environmental and social impacts, risks and opportunities, as appropriate, during KMG’s Board of Directors meetings with representatives of KMG’s major shareholder, Samruk-Kazyna JSC, during the meetings of KMG’s Audit Committee with KMG’s external auditor, Ernst & Young, and during the meetings of KMG’s Board of Directors and its Committees with the initiators of the agenda – managing officers of KMG.

Principles of the Corporate Risk Management System (CRMS).

Risk management in the Company prevents risk events that affect achievement of strategic and operational objectives, and limits their impact when they occur. Risk management is an integral part of the Company’s strategic planning and corporate governance process and support of financial stability.

KMG has integrated the corporate risk management system (CRMS) into the Company’s key business and management processes. CRMS aims to achieve an optimal balance between the Company’s growth in value, profitability and risk. CRMS is a key component of the corporate governance system aimed at timely identification, assessment and monitoring of all material risks and adoption of timely and adequate risk mitigation measures. The CRMS Policy of KMG and its SDEs applies to all of the Company’s activities.

• The Company’s Risk Management Policy is based on the following principles:
• Unity of methodological basis (processes are implemented based on unified methodological approaches);
• Continuity (functioning on an ongoing basis);
• Comprehensiveness (covers all activities and all types of risks arising within them);
• Accountability (the organisational structure of CRMS defines decision-making and control competencies for risk management at all levels of the group);
• Informed and timely reporting (risk management process is accompanied by objective, reliable and up-to-date information);
• Rationality (the Company uses resources rationally to implement risk management measures, ensuring the cost-effectiveness of risk management measures);
• Reasonable assurance (CRMS can only provide reasonable assurance that the Company’s strategic and operational objectives will be achieved, but cannot provide absolute assurance and strength of the inherent limitations of the external and internal environment);
• Adaptability (CRMS is regularly improved to identify all possible business risks and to apply risk control and management methods as effectively as possible);
• Clear regulation (all operations are carried out in accordance with the procedures laid down by internal regulations);
• Active management involvement (actively participates and supports implementation and improvement of CRMS).

Risk Management Process

CRMS is designed to provide a consistent and clear framework for managing the risks associated with KMG’s operations. The Company has built a vertical risk management process and functioning of risk management system at all levels of the management, from the top level (KMG) to the line level (production business units of SDEs). Each officer ensures that risks are properly considered when making decisions. Risks are assessed using qualitative and quantitative tools that take into account the likelihood and impact of the risk.

Seven interrelated processes, integrated into KMG Group’s business management processes, support the operation of CRMS:

1. Setting of goals (linking the strategic, medium-term and short-term planning objectives).
2. Risk/risk factor identification (determining the exposure of all KMG Group’s activities, business processes to risks, the occurrence of which could adversely affect the ability to achieve planned objectives and goals). A combination of different techniques and tools is used to identify risks and their corresponding risk factors.
3. Risk/risk factor assessment and analysis (assessment is performed to determine the extent to which risks/risk factors influence the achievement of KPIs; production/non-production risks and their corresponding risk factors are analysed by likelihood of occurrence (probability) and degree of impact (potential damage)).
4. Risk management (the process of developing and implementing the measures to mitigate the adverse effects and/or likelihood of risks and their corresponding risk factors or to obtain financial compensation upon occurrence of losses related to the risks of KMG Group operations).
5. Monitoring and reporting (monitoring of changes in risk parameters and efficiency of risk management measures and control procedures; monitoring is performed by KMG’s Risk Management and Internal Control Service, a quarterly risk report consolidated with coverage of KMG SDEs is submitted to the Board of Directors).
6. Informing and communication (enables reliable and timely risk information to be provided to the risk management participants, raises awareness of risks, methods and tools to respond to risks; relevant information is identified, captured and made available in a form and within time that enable staff to perform their functions effectively).
7. Creation of internal environment (implementation of the above components of the risk management process promotes a risk culture within KMG Group, based on establishing an appropriate “tone at the top”, a high level of risk awareness and knowledge, responsibility of risk/risk factor owners, proactive risk management and timely reporting). KMG is committed to building an adequate organisational structure of CRMS that promotes effective corporate governance, ensuring appropriate segregation of duties, powers and responsibilities for identification, assessment, management and reporting of risks.

Risk Management Process Effectiveness

Risk management in KMG prevents risk events that affect achievement of strategic and operational objectives, and limits their impact when they occur. Risk management is an integral part of KMG’s strategic planning and corporate governance process and support of financial stability.

The approach to managing risks, including tax risks, is set by the corporate risk management system (CRMS).

KMG has integrated the corporate risk management system (CRMS) into the company’s key business and management processes. CRMS aims to achieve an optimal balance between the KMG’s growth in value, profitability and risk.

CRMS is a key component of the corporate governance system aimed at timely identification, assessment and monitoring of all material risks (including tax risks) and adoption of timely and adequate risk mitigation measures.

The CRMS Policy of KMG and its subsidiary and dependent entities (SDEs) applies to all of the KMG’s activities.

Measures and Actions to Develop and Improve CRMS in the Reporting Year

The Company is continuously improving its CRMS and regularly improves the regulatory and procedural framework of risk management. To reaffirm its commitment to the continuous development and improvement of CRMS, the Company implemented a number of measures and actions in 2021:

• A risk appetite statement, a Risk Register and Risk Management Action Plan, risk maps, risk tolerance levels and a Key Risk Indicator (KRI) Register were prepared on a consolidated basis and approved by the Company’s Board of Directors for 2022.
• BBB rating was received for the Risk Management, Controls and Audit component of the Independent Corporate Governance Audit (for reference, in 2018 it was BB).
• The register of risk coordinators and composition of the Company’s Risk Committee were updated to reflect changes in the organisational structure of the Company. During the year, the Committee held eight (8) meetings, considered 26 (twenty-six) issues and took relevant decisions.
• Information was prepared for each meeting of the Board of Directors of the Company in the form of seven (7) presentation reports on the impact of pandemic coronavirus risks on KMG operations and measures taken, and interaction with the Board of Directors of the Company on isolated requests (cyber risks, climate risks and other issues) was ensured.
• KMG’s Credit Risk Management Procedure was developed and approved by the Company’s Board of Directors. KMG’s counterparty bank limits and PD PiT and LGD indicators for financial instruments and receivables were updated for KMG’s THC calculation model.
• A weekly reporting format was implemented and data on key events and risks of the Company was made available for the purposes of informing the Fund.
• Test run of the updated version of the automated risk management system (ARMS) was conducted in some SDEs.
• Simulation modelling (stress testing) of key performance indicators of projects was integrated into the risk assessment of investment projects.
• Two training seminars were held by RM&ICS staff online on request of SDE employees on the Risk Management System Implementation.
• Continuous professional development of RM&ICS risk managers is ensured, with international certificates obtained during 2020-2021, in particular: one employee – PRM from PRMIA, one employee – CFA and one employee – PMP. Five RM&ICS staff members were certified according to the international standard ISO 31000:2009/2018 (head of the Service obtained AT31000 certification, staff of the Service obtained C31000 certification).

As part of the corporate insurance programme administration:

• Actions were taken to maintain and renew the risk insurance coverage for Samruk-Kazyna JSC and its SDEs.
• The corporate reinsurance programme for KMG’s SDEs and joint ventures (JVs) was expanded by concluding a property risk insurance contract for Karachaganak Petroleum Operating Project.
• Joint efforts were taken with AIFC and the AFSA regulator on foreign exchange regulation, AIFC legal infrastructure and taxation.
• KERC operation was organised and managed, including outsourcing of financial accounting, building of internal processes and controls including insurance, risk management and compliance, and developing of internal documentation.

Supreme Corporate Governance Body’s Role in Preparing the Sustainability Report

In accordance with the Company’s Charter, approval of the Sustainability Report is the responsibility of KMG’s Board of Directors.

KMG’s Board Health, Safety, Environment and Sustainability Committee is the body that reviews and makes a recommendation to KMG’s Board of Directors on approval of the Sustainability Report.

The Sustainability Report is verified by an independent party to confirm the data in the Report, which in turn contributes to improving the reliability of the information disclosed in the Report and the confidence of investors and, as a result, the investment attractiveness of KMG.

Communicating the Critical Issues

Critical issues are communicated to KMG’s Board of Directors through regular reports on the Company’s operations including but not limited to the following: report by the Chairman of KMG’s Management Board on key business developments, information on occupational health and environmental protection, report on preliminary results of financial and business activities, report on arm’s length transactions concluded, decisions on which were taken by the Management Board, review of strategy implementation status, key performance indicators and investment projects, the report on implementation of KMG’s Consolidated Development Plan, risk report, report on the implementation of the Board of Directors’ decisions, and reports of the chairmen of the Board of Directors’ Committees.

In addition to the aforementioned reports, the BoD from time to time identifies matters on which information is required immediately, such as information on the current situation in KMG Group, including the situation regarding COVID-19, operational performance, etc., on financial performance, on significant health and environmental incidents in KMG Group companies, including fire reports (even if such events have occurred after the reporting period). The Health, Safety, Environment and Sustainability Committee of KMG’s Board of Directors regularly reviews and discusses reports on implementation of the sustainability system in KMG and its business units and incorporation of sustainability principles into key business processes, as well as information on the status of work on improving the ESG (Environmental – Social – Governance) rating.

Nature and Number of Critical Issues

As part of the review of KMG’s health and safety and environmental information, which is considered at each in-person meeting of the Board of Directors, the instructions were given to promptly inform the Board of Directors’ members of any health and safety and environmental incidents in KMG Group companies, regardless of the reporting period. In addition, the Board of Directors requested detailed information on the procedure for investigating the health and safety incidents and to develop an action plan to minimise incidents in KMG Group. The Board of Directors instructed the Management Board of KMG to prepare an action plan including a description of the adverse factors of the changed external environment (impact of coronavirus pandemic, decline in oil prices, decline in gas export and corresponding increase in losses from domestic gas supplies), measures to respond to such factors, timing and involvement of the Board of Directors.

The Board of Directors has been actively involved in transfer of KTG to Samruk-Kazyna JSC, including a discussion of potential risks for KMG.

As part of the quarterly discussion of the risk report, it was commissioned to prepare proposals to arrange work on simulation of unknown risks and scenarios. The Board of Directors also instructed to prepare an analysis of reputational and liquidity risks in view of the current decline in global oil prices and risk management measures. The Board of Directors was informed about the impact of pandemic risks on KMG’s operations.

When discussing KMG’s reports on financial and business activities, the Board of Directors instructed to identify the reasons for the lower net profit.

Information on the impact of COVID-19 on operations of KMG Group is sent to the members of the Board of Directors on a weekly basis.

The Board of Directors was informed of the results of a benchmarking study for competitive analysis of the main indicators of KMG’s refineries, as well as on the employment situation in Zhanaozen.

Remuneration Policies

The remuneration level for members of KMG’s Board of Directors is set based on the resolution of the Management Board of Samruk-Kazyna JSC in accordance with the contracts with members of KMG’s Board of Directors.

The remuneration of the members of KMG’s Board of Directors is fixed. However, the Chairman of the Board of Directors also has additional remuneration for chairing the Board of Directors in addition to the fixed remuneration.

Process for Determining the Remuneration

According to the Corporate Governance Code, “the remuneration level of the Board of Directors’ members should be sufficient to attract, retain and motivate each Board of Directors member to the level required for successful management of the company. Remuneration to a member of the Board of Directors of the company is determined in accordance with the procedure developed by Samruk-Kazyna JSC considering the expected benefit for the Company from participation of this person in the Board of Directors. Also, according to the Corporate Governance Code, no person may participate in decisions relating to their own remuneration.

The procedure for determining the remuneration is defined by Samruk-Kazyna JSC. Resolution of the Management Board of Samruk-Kazyna JSC dated 26 September 2016 (Minutes No.35/16) approved the Regulations on forming the composition of the Board of Directors of Samruk-Kazyna JSC companies, including, among other things, the procedure for determining the remuneration for members of the Board of Directors. Pursuant to Section 3 of the Regulations, Remuneration and Reimbursement of Expenses, the remuneration depends on responsibilities of a Board of Directors member, scale of the company’s operations, long-term goals and objectives. Remuneration is paid to non-executive directors. Representatives of Samruk-Kazyna JSC in the Board of Directors of Samruk-Kazyna JSC Group companies are remunerated on the basis of the resolution of the Management Board of Samruk-Kazyna JSC.

In 2021, KMG did not engage consultants to determine the remuneration of members of the Board of Directors.

Stakeholders’ Involvement in Remuneration

The procedure for determining the remuneration is defined by KMG’s principal shareholder, Samruk-Kazyna JSC. In accordance with Regulations on forming the composition of the Board of Directors of Samruk-Kazyna JSC companies, which include, among other things, the procedure for determining remuneration for members of the Board of Directors, the remuneration depends on responsibilities of a Board of Directors member, scale of the company’s operations, and long-term goals and objectives. Remuneration is paid to non-executive directors. Representatives of Samruk-Kazyna JSC in the Board of Directors of Companies are remunerated on the basis of the resolution of the Management Board of Samruk-Kazyna JSC. In accordance with the Corporate Governance Code, the Nomination and Remuneration Committee of the Board of Directors makes proposals on size of remuneration of candidates for non-executive directors.

Meetings of the Nomination and Remuneration Committee of KMG’s Board of Directors discuss issues related to remuneration of members of KMG’s Board of Directors, as necessary. During the reporting period, the Nomination and Remuneration Committee of the Board of Directors has reviewed the results of the performance self-assessment of KMG’s Board of Directors at the end of 2020, which included assessment of the level of remuneration of KMG’s Board of Directors’ members.

According to the Corporate Governance Code, no person may participate in decisions relating to their own remuneration.

For more detailed information on GRI 102-15, 102-30, 102-35,102-36,102-37,102-38,102-39 (risk management, remuneration of the Board of Directors), see KMG’s 2021 Annual Report at KMG website: https://kmg.kz/eng/investoram/reporting-and-financial-result/