Formation of corporate governance in Ukraine

Formation of corporate governance in Ukraine

01.02.2017 Analytics

According to the State Statistics Service on January 1, 2017 it is registered in Ukraine 15 206 join – stock companies, among them there are 3 122 public companies.

Despite the 25-year anniversary of the Ukrainian state, the national business has only recently started to rethink management system and effective implementation of global corporate governance practices. However, this phenomenon in Ukraine is so young that not everyone understands that the creation of corporations is not identical to the emergence of an effective corporate governance system.

Corporate governance is a system of rules, methods and procedures by which management of the company takes place and the system of relationships between all interested parties of the corporation. The aim of good corporate governance should be the achievement of an optimal balance of interests of all stakeholders: shareholders, management, customers, suppliers, financiers, government and society. Corporate governance covers almost all areas – from the action plans and internal controls to assess the effectiveness of the production and disclosure. The level of perfection of this system shows the investor and community the effectiveness of the company’s prospects, and hence – its capacity in the relevant market. Its same imbalance or incorrect risk assessment lead to inefficient operation of the company or reducing the period of effective activity.

How it was conceived a corporate governance

The history of Ukrainian corporatization can be divided into two periods: the pre-Soviet and post-Soviet. In the largest cities of Ukraine, which was a part of the Russian Empire, at the end of IX-th and in the first decade of the XX-th century operated large and powerful corporate enterprises and a lot of small but efficient companies. By its level of concentration of industrial production, Ukraine took one of the first places in the world. In large enterprises were employing more than 44% of all workers (in the USA – 33%). This situation contributed to the process of monopolization, which began in some sectors of the domestic economy.

Powerful syndicates had huge power plants. For example, one of these syndicates Produhol, which was founded in 1904, was combining the 18 joint-stock companies and controlled 75% of coal production in the Donetsk Basin. But exactly a century ago, well-known events that rocked the then Empire for many years has frozen the history of Ukrainian corporatization. A significant part of the business was liquidated and their property was nationalized. Joint-stock companies with state participation and its tight control preserved only in the sphere of foreign economic activity. The last attempt to form a joint-stock relations in the public sector has been carried out through the issuance of shares of the workforce and the company’s shares, according to the decree of the USSR Council of Ministers “On the issue of businesses and securities organizations the financial credit documents in October 1988.”. Given that this issue was not widespread, in 1992 it was stopped.

Formation of a new history

The recent history of corporate governance began after independence of Ukraine and the adoption of the Law of Ukraine “On Business Associations”. He defined the joint stock companies as an independent form and secured the legal basis for their establishment and functioning. But corporate relations, which were introduced at that time, were very imperfect: deprivation of the rights of “small” shareholders, multiple registers of shareholders and raider attacks. A separate major problem was the corporatization of the privatized enterprises, which was lasting for many years and proved its fairly low efficiency. In 2008, with the adoption of the Law of Ukraine “On Joint Stock Companies”, began a new stage in the history of corporatization of domestic production. This law-making instrument became the result of the struggle, diligence and extraordinary efforts of a wide range of professionals, including international.

The investigation of corporate management system, conducted by KPMG in September 2013 showed that more or less effectively formed corporate governance system actually began to appear even before the adoption of the law – in 2005. And after the adoption of it the number of companies that have begun to use such tools, jumped tenfold. In addition, in 2014 the National Commission on Securities and Stock Market approved a new version of the strategically important document – Principles of Corporate Governance. He not only codified the status and mechanisms of corporate governance provisions, but also summarized the global trends in this area, because it was established on the basis of the OECD Corporate Governance Principles. It is believed that this document summarizes the global vision of the components of effective corporate governance.

However, despite the adoption of a fairly broad regulatory framework, many problems are still to be resolved. Corporate governance in tote remained at a fairly low level. Among the most important issues and challenges for its improvement are the following:

  • a low level of protection of the rights of shareholders,
  • the problem of information disclosure and transparency issues as a whole,
  • solution of problems of corporate governance in state enterprises,
  • the gradual narrowing of the stock market volumes and an increasing reduction in the number of companies that can be listed on the stock exchange by increasing the rigidity of the requirements to these companies,
  • the absence of a mandatory standard fastening position of the Corporate Secretary,
  • inability and unwillingness to take into account the interests of corporate management, and assess the impact of stakeholders (both internal and external)
  • the lack of a balanced risk management system, and still imperfect legislation and government regulation.

The practical implementation of the system

According to the practical implementation of corporate governance, revealing on the situation that prevailed in Ukraine can serve the study of Rating Agency IBI-Rating in March-April 2016 among commercial banks in Ukraine. Research has shown (11 members), that generally increasing in regulatory requirements contributed to the improvement of corporate governance in the banking system. Despite this, not all banks are based on advanced principles of corporate governance, and many banks are performed only mandatory legal requirements in this area, and recommendations and international experience are embodied only by a few partially. It was found that the average level of compliance of banks with international and Ukrainian progressive principles of corporate governance and implementation of the experience of innovation in this field is quite low and indicates a significant risk of the shareholders, investors and stakeholders.

In general, the positive is that the percentage of companies that have successfully implemented the corporate governance system is steadily increasing. Even before the mandatory fixing the position of Corporate Secretary / Director, many companies introduced such a position as the mandatory. The rating agency IBI-Rating in 2016 conducted a study in which it was analized the corporate governance performance of 55 companies whose shares are traded on the international and Ukrainian stock exchanges: 12 companies whose shares are traded on international stock exchanges, and 43 companies whose shares are traded on the Ukrainian stock exchanges. According to the survey it were identified their ratings on the level of corporate governance.

Among the companies whose shares are traded on international markets, in the top five rated were: ASTARTA HOLDING N.V, KERNEL HOLDING S.A., Industrial Milk Company, Ovostar Union, Cadogan Petroleum.

Among the companies whose shares are traded on the Ukrainian platforms, the top five includes: Ukrtelecom, Halnaftohaz, Farmak, Kyivenerho, Centrenerho.

Now the state is lobbying for the adoption of the Law “On corporate governance”, which must reform, and de facto – introduce a system of good corporate governance in all kinds of national enterprises.

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