Improving Corporate Governance in Ukraine’s State-Owned Enterprises

This blog was originally published on the Center for International Private Enterprise’s (CIPE) Development Blog.

On May 1, 2016, the law, On Introduction of Amendments to Certain Legislative Acts of Ukraine Regarding Protection of Investors’ Rights (No. 289-VIII), came into effect. It introduced a number of new aspects to Ukrainian corporate law including the right to shareholder derivative actions, direct payment of dividends to shareholders, and –perhaps the most relevant to reducing corruption and privatizing state owned enterprises– the establishment of independent directors.

In many developed economies, independent directors serve as a source for ongoing advice for senior management, set the strategic direction for the company, and provide investors (both public and private) confidence that their interests are represented through additional oversight, strategy development, and the scrutiny of major decisions undertaken by management. In state owned enterprises and family owned firms, independent directors serve as additional checks on the company from the perspective of the public or nonvoting family members, respectively, among other functions key to the long-term sustainability of such enterprises.

The new law on independent directors means that Ukraine can transition from a country with a dearth of regulations to one based on Western best practices practically overnight; however, the institutional framework for the development of independent directors remains wholly undeveloped in Ukraine. CIPE partner, Ukrainian Corporate Governance Professional Association (UCGPA), is attempting to fill this information gap before the law takes full effect in summer 2017. In December 2016, UCGPA organized a conference where the role of independent directors was highlighted through the use of several private sector case studies. Directors from a variety of successful Ukrainian companies, including DTEK and Nasha Poshta, spoke about how the development improved corporate governance in each firm. Directors noted that the initial motivation of many firms where they had served as directors was improved access to capital, but that management soon found that there were many additional benefits to having a strong independent board supervising the company, from improved human resource practices to environmental controls.

Improving corporate governance in Ukrainian state-owned enterprises will not only reduce corruption, but also prepare these enterprises for eventual privatization at a higher valuation than may have otherwise been achieved. Furthermore, if certain state-owned enterprises are unable to attract and maintain qualified independent directors it will serve as a signaling device to Ukrainian civil society that there are significant issues within that enterprise that may warrant additional investigation by the state or private civil society organizations. The road to the privatization of Ukrainian state-owned enterprises may not be going as quickly as many had hoped, but improved governance at these enterprises is a strong intermediate step towards the disentanglement of Ukrainian government from private enterprise

Eric Hontz is a Program Officer for Eurasia at CIPE