Most states in Central Eurasia qualify as "high-capture" states. They provide particular advantages to influential firms that are bound by a web of interactions. (Companies bribe the state and in exchange receive a wide range of indirect subsidies). Meanwhile, the institutions essential to improving governance suffer from a lack of funds. To put it simply, in the "kleptocratic" culture of Central Asia and the Caucasus, good corporate governance is in very short supply.

Obviously, this lack of governance worries potential and existing investors. Most have now understood that taking investment decisions on the strength of cheap assets, without regard to transparency or shareholder friendliness, is reckless. On the macro level, the aggregate cost of poor corporate governance is huge and represents a substantial stumbling block on the road to sustainable economic growth.

Capital is desperately needed to revamp entire industrial sectors, but external financing will not flow in unless firms behave better. As a consequence, most companies from the region in dire need of restructuring do not have access to capital. Equally, the capital markets, still very small and illiquid in this part of the world, will not develop unless firms behave.

Corrupt corporate practices come in many different forms. They include: outright theft of assets (asset stripping); concealment of assets from minority shareholders; incorrect reporting of the company's performance; non-transparent financial statements and ownership structures; transfer pricing and the like. Being obsessed with the concentration of ownership, the managers of many local companies do not pay much attention to performance. Therefore, they fail to realize that good corporate governance equals good financial performance.

How can one promote good corporate governance? This is sure to be a difficult and long journey, as improved corporate governance can only result from three different actions:

The improvement of the regulatory and legislative framework
The expansion of institutional capacity to implement and enforce such frameworks
The enhancement of private sector understanding that this serves its interests.
The first two mostly depend on the state authorities. Capture states are victims of vested interests, and are therefore unlikely to move fast. Thus, among the available options, it might be best to start with the private sector (the bottom-up approach). It is often easier to convince the private sector that it is in its own best interest to evolve.

What can be done? Just duplicate private initiatives that are working elsewhere in the region. One such possibility would be to enlarge an ongoing initiative (called the Russian Task Force) of the World Economic Forum. The purpose of this initiative is to convince a group of selected Russian companies to support corporate governance reform and improve their own practices in accordance with international standards. The outcome of this simple project will be a public manifestation of commitment by these enterprises to reform, and their adherence to a chart of improved corporate governance. To achieve tangible and lasting results, this initiative also outlines reliable mechanisms for verifying progress in the culture of compliance and disclosure.

The starting point would be to use international reference benchmarks for Central Eurasia -- such as those being promoted under the guidelines of the OECD Corporate Governance Principles -- as a conceptual framework. The OECD is a recognized authority in the development of corporate governance. This approach has been adopted in OECD countries, such as Greece, Korea and Germany, and is currently being pursued in emerging markets such as Russia and Brazil. For Central Eurasia, corporate governance targets ought to be realistic -- in line with expectations of what can be delivered in a reasonable timeframe. Therefore, it would be essential to start with the easiest, implement a few basic things and then choose how to proceed. I would propose two simple elements as a starting point for Eurasian companies:

Firstly, there is a need to put in place a real dividend policy. Although the payment of dividends is not something that represents a major event for most Western companies, the situation is quite different in emerging economies. In such environments, the declaration and the payment of a dividend are quite a big thing, signaling a commitment to protect and respect minority shareholders rights.

Secondly, there is a need to bring auditing and accounting procedures in line with international standards. By introducing International Accounting Standards (IAS) to consolidated accounts, the level of transparency and disclosure of local companies would increase dramatically. This goes hand-in-hand with the requirement of independent audits by accounting firms on a regular basis.

Once incremental progress has been achieved with these two first steps, other issues can be tackled. Thus, voting rights (based on the "one share, one vote" principle), corporate boards (accountable to shareholders), corporate remuneration policies aligned with the interests of shareholders, operating performance and shareholder returns, and other governance issues will appear progressively on the agenda. In addition, awareness could be developed through the creation of a corporate governance website for the region.

What would improved corporate governance bring? It would allow portfolio and direct investors to answer the two fundamental questions that plague their decisions at the moment: Who controls the assets and who controls the cash flow? An important component of the overall risk would decrease significantly and capital would fly in as a result.

Will it happen? If you look north, it is possible. Some Russian companies such as YUKOS, now seem to realize that good corporate governance equals good financial performance. They are therefore turning over a new leaf in their relations with investors. Couldn't this happen in a Kazakh oil or Uzbek mining company? Bet on it