Formation of corporate governance in Ukraine

According to the State Statistics Service, as of January 1, 2017, there are 15 206 join-stock companies registered in Ukraine, 3 122 of which are the public companies. Although the Ukrainian independence celebrates its 25- year anniversary already, only recently the national business has started to review the governance system and the system of effective implementation of global corporate governance practices. However, in Ukraine, this phenomenon is so young that not everyone understands that the creation of corporations is not the same as the formation of an effective corporate governance system.

Corporate governance is a system of rules, methods, and procedures defining the company’s management and the system of relations between all the interested parties. Achievement of an optimal balance of interests of all stakeholders, viz. shareholders, managers, customers, suppliers, financiers, government, and society, should be the aim of good corporate governance. It covers almost all spheres, i.e. from the action plans and internal management to assessment of the production or disclosure effectiveness. Standards of the system demonstrate the company’s efficiency and prospects and hence its potential in the related market to investors and the public. However, unbalanced system or incorrect risk assessment lead to inefficient operation of the company or reduce a period of its effective operating, prosperity etc.

How did the corporate governance originate?

History of the Ukrainian corporatization divides into two stages, i.e. the pre-Soviet and the post-Soviet periods. Large and highly efficient corporate enterprises and many small but proficient companies operated at the end of XIX in the first decade of XX century in the biggest cities of Ukraine constituting a part of the Russian Empire. By the level of industrial production concentration, Ukraine occupied one of the leading places in the world. Over 44 % of all workers were employed at big enterprises (whereas in the USA – 33 %). This situation contributed to the monopolization process, which had started in some sectors of the domestic economy.

Mighty syndicates had immense production capacities. For example, Produhol, one of such syndicates, founded in 1904, embodied 18 joint-stock companies and controlled 75 % of coal production in the Donetsk Basin. However, precisely a century ago, notorious events that shook the Empire have frozen the history of Ukrainian corporatization for many years. A significant number of
the enterprises was liquidated and their properties were nationalized. Only joint-stock companies experiencing state’s involvement and being under state’s tight control managed to remain at least in the field of foreign economic activities. The last attempt to form a joint-stock relation in the public sector has been carried out by the issuance of shares of the workforce and the company’s shares as it provided for by the decree of the USSR Council of Ministers «On the issue of securities by enterprises and organizations in October 1988». Given that such issue didn’t become widespread, in 1992 it was abolished.

Formation of a new history

The recent history of corporate governance began with Ukraine’s independence and the adoption of the Law of Ukraine «On Business Associations». The Law defined a joint stock company as an independent entity and defined legal basis of its institution and functioning. But corporate relations introduced at those times were utterly imperfect: deprivation of minority shareholders of their
rights, schemes of reorganization from OJSC into CJSC depending on interests of corporate managers, multiple registers of shareholders and raider attacks. Corporatization of the privatized enterprises that lasted for many years and proved to be fairly low efficient was another major issue. In 2008, with the adoption of the Law of Ukraine «On Joint Stock Companies», a new stage in the history of domestic production corporatization has started. This regulatory act became the result of the struggle, diligence and extraordinary efforts of a wide range of professionals, including international ones.

A study of corporate governance system, conducted by KPMG in September 2013 showed that more or less effectively formed corporate governance system actually began to appear even before the law adoption – in 2005. Upon the adoption, a number of companies using such tools raised tenfold. In addition, in 2014 the National Securities and Stock Market Commission approved a new version of the strategically important document, i.e. Principles of Corporate Governance. It has not only systematized the status and mechanisms of corporate governance provisions implementation but also has summarized the global trends in this sphere, as it was constituted on the basis of the OECD Principles of Corporate Governance. It is generally accepted that this document summarizes the global vision of all the components of effective corporate governance.

However, despite the adoption of a fairly broad regulatory framework, many problems are still to be resolved. In general, corporate governance remains at a fairly low level. The most important issues and challenges to be improved include:

• a low level of shareholders’ rights protection,
• the problem of information disclosure and transparency issues on the whole,
• solution of corporate governance problems on state enterprises,
• 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 introduction of stricter requirements to such companies,
• lack of a regulatory act providing for a mandatory position of the Corporate Secretary,
• inability and unwillingness to take into account the interests of corporate governance, and assess the impact of stakeholders (both internal and external ones),
• lack of a balanced risk governance system, and still imperfect legislation and government regulation.

Practical implementation of the system

As far as practical implementation of corporate governance is concerned, the research by the rating agency «IBI-Rating» as of March-April 2016 studying Ukrainian commercial banks can cast light on the situation in Ukraine. It showed (based on 11 study subjects), that generally increase in regulatory requirements contributed to the improvement of corporate governance in the banking system. Despite this, not all banks implement advanced principles of corporate governance, many of them perform only mandatory legal requirements in this sphere, and recommendations and international experience are embodied by few and yet partially. It was found that an average level of banks’ compliance with international and Ukrainian progressive principles of corporate governance and experience of innovation implementation in this field is quite low, what points out to a significant risk for the shareholders, investors, and stakeholders.

In general, the positive is that the percentage of companies that have successfully implemented corporate governance system is steadily increasing. Even before defining the position of Corporate Secretary/Director as a mandatory one, such provision was introduced by many companies. In 2016, the rating agency IBI-Rating analyzed corporate governance showings of 55 companies with shares traded on the international and Ukrainian stock exchanges: 12 companies with shares traded on international stock exchanges, and 43 companies with shares traded on the Ukrainian stock exchanges. Based on the study, companies’ ratings based on the corporate governance level were defined.

Top five rated companies with shares traded on international markets include «Astarta Holding N.V», «Kernel Holding S.A.», «Industrial Milk Company», «Ovostar Union», and «Cadogan Petroleum».

The top five of the companies with shares traded on the Ukrainian platforms consists of «Ukrtelecom», «Concern Halnaftohaz», «Farmak», «Kyivenerho», and «Centrenerho».

At present, the state lobbies the Law «On corporate governance», which is to reform and de facto to introduce a system of good corporate governance at state enterprises of all types. In addition, the adoption in the first reading of two bills concerning the corporate governance reform was an important innovation. The first bill on the squeeze-out and sell-out mechanisms will allow jointstock companies to reduce costs related to the publicity requirements, reduce the reporting volumes, loosen regulation, get more possibilities to protect themselves from raiding and reduce the threat of corporate blackmail. By virtue of the bill, without additional costs for correspondence with the company and opening a securities account the minority shareholders will have the possibility to apply the sell-out procedure, receive a market price for their securities and leave the company as shareholders. The second bill will improve the mechanisms of corporate governance, provide flexibility in structuring the relations of the issuer and the investor, contribute to a safer investment, etc. Each investor will have the assurance that at any time they could leave the business, take their investment and due dividends.