Ukrainian Code of Corporate Governance: new guidance for private companies

The Code is designed in cooperation with the leading international and Ukrainian experts from IFC, USAID, Ukrainian Corporate Governance Academy, listed and private companies. Authors of the Code made for shareholders, management, supervisory boards and other stakeholders a practical and realistic guide on how to generate long-term success of a business.

What is corporate governance?

Corporate governance is the mechanism for owners to oversee the management of company, and by which management oversee their day-to-day activities. It is transparent distribution of rights and responsibilities among all officers in the company. Corporate governance is the way investors get a fair return on their investment, while not being actively involved into business by delegating the power to make decisions to the supervisory board (the Board) they trust and by holding the management accountable.

Why good corporate governance is important?

Well-governed companies perform better in financial terms, because corporate practices promote long-term development of a company and trust from partners and clients. Moreover, companies with good corporate governance easier attract capital from outside investors and credit institutions.

For shareholders good corporate governance is a control over management, finances of the company, and opportunity to be less involved in day-to-day operations.

Management benefits from sound corporate governance, because decisions are made and deals are approved faster. Management also may get necessary outside expertise and competent advice. It is all possible because of the Board that the Code compels to establish in a company.

The importance of good governance increases with the size of the business and the number of shareholders.

What does the Code offer to private companies?

Although the Code has been designed primarily for public listed companies and companies planning to undergo listing, private companies can also benefit from the Code.

In family companies, implementation of the Code allows shareholders to get the expertise and experience they need, to prepare a company for succession. For small and medium companies, the Code ensures management has a constant interaction with owners about strategy and results. Large private companies will gain independent and critical perspective on business through establishing the Board with independent members as proposed by the Code.

Shareholders’ rights

The Code provides shareholders with toolkit to engage with the management beyond the rules of standard by-laws and of employment contracts. Companies’ shareholders should adopt Shareholder Engagement Policy (the SEP) to make formal inquiries at any time and receive response, information and reports without waiting for General Shareholders Meeting.

SEP allows shareholders retain control over the business and participate in any decision that fundamentally affects the company or the interests of shareholders. It is important when some powers are delegated to the Board. The performance of SEP, of course, should be secured by tailored charters and employment or service contracts for management and the Board members.

Supervisory board

The Board has distinct responsibility to set the company’s strategy and plan its implementation, to supervise the management and to report to shareholders about results.

The Board should be composed of professionals with diverse experiences. Big decisions vetted and approved by the professional Board provide comfort to the owners and senior management. Professional Board will contribute additional expertise to the business, may unlock access to finance or technologies. Appointment of the right Board members also may secure necessary government relations and protect a company from raider’s actions.

Private companies tend to have executive management affiliated with owners leading to biased decisions. The independent Board will replace executive, where it is objectively required and will appoint independent competent CEO instead. The Board through its committees also can help oversee the financial side of the operations and executives’ remuneration.

With good governance in place, the Board with independent members can look critically at the business; more likely will oppose risky decisions of shareholders or of the management. The independent Board will not just rubberstamp the decisions of management : issues will be debated and the outcome will be better.

The Code emphasizes that powers of shareholders, the Board and management should be separated properly in the charter, bylaws of the Board, and disclosure policies, which in turn should comply with the law.

As market conditions worsen and equity risks rise, the importance of corporate governance will rise as well. Implementation of the Code’s recommendations by private companies will lead to better business outcomes. The owners or management cannot be versed in all business situations, whereas the Board may give the valuable insights. The Board helps shareholders exercise and protect governance rights, ensures accountability of management. The advantages offered by the Code, however, will become real for private companies only if the Code’s recommendations are properly reflected in the charters and internal policies.

Max Lebedev – Partner at GOLAW, Attorney at law