Kazakh mining spat leaves minorities in the cold

The Kazakh miner this week parted company with two independent directors, and a third may soon follow.

Standing up to ENRC's controlling oligarchs may be an impossible task.

In the end, though, it is a reminder of the perennial danger of investing as a minority.

For some, the spat confirms that ENRC has no place on the London market. The company's corporate governance leaves much to be desired, and it is run too much like a private fiefdom of the founders and other Kazakh investors, including the state and Kazakhmys, another London-listed mining company. For some, holders of the 18 percent of ENRC shares that are freely traded do not have enough protection.

Yet while the ENRC row leaves a bitter taste, the company says it complies with the UK's corporate governance standards.

Even after the recent departures, at least half the board has independent credentials. A review set in train by Johannes Sittard, the chairman, will give ENRC an opportunity to mend fences.

Tightening up the rules to weed out companies such as ENRC would also be counter-productive. Other, more attractive companies might be caught. And greater protection for minority investors might create other distortions. After all, this week's events at ENRC reflected the wishes of the majority of shareholders.

The key is that investors should see the likes of ENRC for what they are. ENRC's behaviour and reputation is not cost-free for its largest shareholders: since the start of 2010, the shares have lagged the FTSE All-Share Mining Index by 30 percent.

True, not all investors have a choice.

ENRC's inclusion in the FTSE 100 index means that some funds have to hold the shares. But that is a problem best addressed by revisiting investment mandates and index eligibility, rather than London's listing requirements.

Investors must accept the perennial danger of being stuck in a minority. At the right price, the risk might be worth taking which is another reason to live with the likes of ENRC.

The most effective safeguards are those taken by shareholders who think hard about their investment decisions and take full responsibility for them.

Eurasian Natural Resources Corporation, the Kazakhstan-based mining company, parted company with four of its non-executive directors on June 8. Richard Sykes, the former chief of GlaxoSmithKline, the pharma giant, and Ken Olisa, who also sits on the board of Thomson Reuters, failed to secure support in a shareholder vote.

In a open letter published on June 8, Olisa wrote: "I explained my view that for companies such as ENRC, there are only two, mutually exclusive governance models either the founding shareholders should take a big step back and let the board of ENRC govern the company independently, or they should take a big step forward and play a hands on role in the strategic and operational detail of the business which they created."

— Two other directors, Abdraman Yedilbayev and Eduard Utepov withdrew their names from the June 8 election at the last minute. The Financial Times reported on June 10 that Mehmet Dalman may also leave the board soon.

Johannes Sittard, the ENRC chairman, said the group would undertake "a comprehensive review of its corporate governance." It is a process he said would take three months.

Copyright Reuters, 2011