Corporate governance reform: first steps of implementation

However, it is necessary to analyze its practical component: what exactly needs to change in the field of corporate governance, what other steps need to be taken, and how this will affect the situation in state-owned companies.

Commenting on the adoption of the law on improving corporate governance of state-owned companies, the G7 ambassadors to Ukraine noted that it would reduce opportunities for corruption, ensure accountability of company executives to supervisory boards elected in accordance with international standards, and ensure that stateowned enterprises operate in accordance with the principles of the Organization for Economic Cooperation and Development (OECD).

As previously noted by Matteo Patrone, EBRD Managing Director for Eastern Europe and the Caucasus, the main goal of implementing OECD standards in Ukraine is to ensure the efficiency and transparency of state-owned companies, which will be an important marker of trust for investors in the future.

Representatives of other international financial institutions, as well as US and EU officials, have repeatedly emphasized the critical importance of reforming corporate governance of stateowned companies in Ukraine in line with the OECD Guidelines.

The authors of the draft law themselves emphasized the need to bring Ukrainian legislation in line with OECD standards in their explanatory note to the draft law. In their opinion the implementation of the relevant changes should “improve the management of state-owned companies while increasing the transparency of their activities.”

At the same time, they paid considerable attention to expanding the powers of supervisory boards, in particular, to formulate strategic development plans, financial and investment plans, appoint and dismiss the CEO of state-owned companies, etc.

Implementation of ESG principles in corporate governance in Ukraine

In accordance with the OECD Recommendation on Corporate Governance Principles (OECD/LEGAL/0413), the Board of Directors (or Supervisory Board) should perform a number of key functions, including: reviewing and directing the corporate strategy, major action plans, annual budgets and business plans; setting performance goals; recruiting, supervising and monitoring the work of key executives, replacing them if necessary, and overseeing succession planning, etc. A full list of these functions is available here. 

Similar functions and powers of supervisory boards for state-owned companies are provided for in the OECD Guidelines on Corporate Governance in State-Owned Enterprises.

Although a significant part of the functions was already implemented in Ukrainian legislation, the principles of the ESG were not fully taken into account in relation to state-owned companies, and a number of important functions remained with the state management bodies.

In particular, the OECD Guidelines on Corporate Governance in State-Owned Enterprises (2015 version) stipulate that supervisory boards of state-owned companies should effectively perform their strategy-setting functions and oversee the activities of their managers, guided by a wide range of powers and goals set by the state.

To this end, supervisory boards should be empowered to appoint and dismiss the head of the executive body (CEO) of a state-owned company and set his or her remuneration.

For a long time, as part of the reform of the corporate governance system of state-owned companies, such powers of supervisory boards were not fully implemented, which led to frequent changes in the management of enterprises in the event of a change of government or the leadership of ministries and departments.

From now on, the national legislation fully implements this key function of the supervisory boards of state-owned companies, which will be majority independent, which will contribute to their stable operation and minimize the influence of political factors.

What will change in this area with the adoption of the new law?

• Strategic and financial planning of state-owned companies

Instead of adopting ownership policies for individual large state-owned companies, the government will now form a Unified State Ownership Policy.

It will regulate the following: the purposes of state-owned enterprises; criteria for the mandatory formation of supervisory boards; privatization plans and guidelines for exercising the rights of the state as an owner; principles for setting goals for business companies; principles of management organization, distribution of functions and powers between the authorized management body and company bodies, etc.

Its integral parts will be: a remuneration policy for managers and members of supervisory companies, which will determine how their salaries will be calculated, and a state dividend policy that will define the principles for setting the amount and payment of dividends to the state budget.

A new instrument is also being introduced – an owner’s letter of expectations, which specifies expectations regarding the financial performance of companies. The relevant document will be approved annually by the authorized body or the general meeting of the state-owned company on the basis of the ownership policy and after consultation with the supervisory board.

The Letter of Expectations will include short- and medium-term performance goals (financial, operational, and non-financial); financial indicators, such as the amount of payments to the state, budget financing, etc. to be agreed with the Ministry of Finance. The maximum thresholds for capital investments will also be determined for the period of martial law.

It is important to note that the approval of strategic, financial and investment plans (albeit subject to partial approval by the Ministry of Finance) is now within the competence of the supervisory boards of state-owned companies, which is in line with the principles of the ESG.

The strategic plan will be taken into account when creating the owner’s letter of expectations as part of bilateral consultations between the authorized management body, the general meeting and the supervisory board.

Subsequently, in accordance with the strategic development plan, state ownership policy and the performance goals set out in the owner’s letter of expectations, the supervisory board of the state-owned company, will approve annual financial plans, as well as annual and medium-term investment plans.

• Functioning of supervisory boards

The new legislation specifies the number of members of the supervisory boards of stateowned companies (not less than five and not more than nine) and a clear term for which they will be appointed – three years, rather than the previously variable term of up to three years. Qualification requirements for members of the supervisory boards of state-owned companies will be approved by the Cabinet of Ministers. Additional requirements may be set for independent members.

The procedure for evaluating the performance and effectiveness of supervisory boards of stateowned companies has also been changed and regulated. The assessment will be carried out at least once every three years in accordance with the procedure established by the Government. The results of the evaluation will be approved by a decision of the authorized management body or the general meeting of the companies.

In addition, for the first time, a number of issues related to internal control in state-owned companies have been formalized at the level of law in accordance with OECD principles. They must establish a comprehensive, adequate and effective internal control system that includes compliance, risk management and internal audit functions. Supervisory boards are responsible for monitoring the functioning of the internal control system.

Next steps

It is important to understand that the adoption of legislative changes is only one step in the corporate governance reform. As mentioned above, its implementation requires the adoption of a number of important bylaws by the Government and the Ministry of Economy.

There are some concerns about the possible overregulation of certain aspects of supervisory boards’ activities, as well as certain discrepancies, in particular in the operation of joint stock companies with 50% or less of the authorized capital owned by the state and companies with more than 50% of the authorized capital owned by the state.

However, it is obvious that in a time of war, Ukraine should provide for certain safeguards that will allow it to maintain control over key aspects of state-owned enterprises in case of emergency. Final conclusions about the effectiveness of the changes introduced and their compliance with the principles of the ESG can be made only after the new corporate governance architecture of state-owned companies is fully formed.

Two issues seem to be key now: prompt adoption of the necessary decisions to complete the reform, as well as close cooperation of all stakeholders in developing them: government agencies, international partners, and members of supervisory boards. 

For the effective implementation of the reform, it is crucial that innovations take into account the practical experience of supervisory boards and an understanding of which processes require priority changes.

For example, at this stage, one of the priorities is to ensure timely financial planning of stateowned companies for 2025. This is due to the fact that the Final and Transitional Provisions of the law explicitly stipulate that the financial, investment and strategic plans of state-owned companies for 2025 must be approved by their supervisory boards in accordance with the newly expanded powers.

At the same time, as noted above, the approval of these documents by supervisory boards should be based on certain financial indicators approved by the Ministry of Finance, which should be included in the owner’s letter of expectations.

At the end of August, the Government approved the procedure for annual approval of proposals for certain financial indicators, which is the first of the bylaws necessary to ensure this process, providing a detailed algorithm for the actions of supervisory boards and management bodies of state-owned companies.

At the same time, in order to ensure that the management bodies of state-owned companies prepare letters of expectations, there is still a need for the Government to urgently develop and approve a state ownership policy and for the Ministry of Economy to approve relevant methodological recommendations.

The Ministry of Economy and the Ministry of Finance, with the involvement of international consultants and the largest state-owned companies, are actively working to prepare these draft bylaws in a timely manner, and their adoption by the Government is expected in the near future.

Currently, Ukrhydroenergo and its Supervisory Board are actively involved in the process of drafting the relevant governmental acts. Another example of the fruitful cooperation between Ukrhydroenergo’s management, supervisory board, the Government and the Ministry of Economy is that the company is the first state-owned company to have its charter brought in line with the new legislation and now fully takes into account the corporate governance reform implemented in the country.

The Supervisory Board of Ukrhydroenergo is ready to share its experience in building a corporate governance system and to assist in implementing the reform, which may become one of the key factors for the development and recovery of Ukraine.

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