What to expect from Ukraine's corporate governance reform: Assessment by Ministry of Economy

Ukraine needs significant resources for defense, reconstruction, and development. Assistance from partners to the budget is an important source of these resources, but its volumes are declining, and further involvement is not guaranteed. It is necessary to look for other sources of additional revenue. Raising investments, in particular, in foreign currency, will help improve the situation.

The country still has a lot of state assets that can be privatized to raise funds. If we talk about assets of strategic importance, privatization is not advisable at the moment, but investments are also needed there. How to raise them? The answer is to introduce corporate governance in line with internationally recognized standards. International financial institutions are ready to invest in companies with a clear and understandable governance system. And they are already doing so — I will give examples below.

All the tools are available to make state-owned companies profitable and attractive to investors. In March, the President of Ukraine signed a law that the Ministry of Economy had been working on for years. The law in question is “On Amendments to Certain Legislative Acts of Ukraine on Improving Corporate Governance” (No. 3587-IX), better known as Draft Law No. 5593-d. This is a long-awaited step that will allow us to take corporate reform to a new level — to scale and improve it.

The reform of state property governance in Ukraine has been underway for many years. Several important state-owned companies already have independent supervisory boards and corporate governance principles based on the model of developed countries. What does this mean?

As an example, Ukrposhta (Ukraine's national post - Ed.) is a state-owned company that millions of Ukrainians use the services of. The experience of this interaction is constantly improving, with new services emerging and being digitized. Nowadays, Ukrposhta delivers not only pensions but also medicines to frontline communities.

The economic side of the coin is also successful, Ukrposhta ended 2023 with a net income of UAH 11.9 billion. This is 19% more than in 2022. And UAH 800 million less than in pre-war 2021.

The corporatization of Ukrposhta, i.e. its reorganization into a joint-stock company, was completed in 2017. The Supervisory Board has been working in the company since 2018. The status of a joint-stock company potentially allows selling shares to attract investment. Possible investors in the company include the International Finance Corporation (IFC) and strategic partners from other countries, such as DHL or Amazon. Meanwhile, the European Bank for Reconstruction and Development (EBRD) is already developing an investment project with Ukrposhta.

The EBRD, by the way, has investment projects with a number of strategic state-owned companies, such as Naftogaz (Ukraine's national oil and gas company - Ed.), Ukrzaliznytsia (Ukrainian Railways - Ed.), and Ukrenergo (Ukraine's national power company - Ed.). These companies have had supervisory boards for many years and have corporate governance rules based on best practices.

The general trend is that a company begins to raise more funds from creditors and investors after corporatization. For example, while Ukrenergo had no loans from banks before its corporatization in 2019, in March 2022, the company had more than UAH 11.3 billion of long-term and almost UAH 7.5 billion of short-term loans on its balance sheet to meet its own needs.

The reform is yielding results, and changes in legislation are a required stage in its development. The law creates the basis for systemic reform of state-owned companies. It is envisaged that the Government will formulate and approve a state ownership policy for all state-owned companies, not for each one individually. This policy will clearly define why the state needs certain enterprises and what it expects from them. The owner should set goals in the waiting lists that supervisory boards will be responsible for. They are given all the necessary powers to do so. In particular, they can appoint and supervise the managers of enterprises, approve financial plans, and set remuneration levels within the policy approved by the government.

The law empowers the Cabinet of Ministers to approve the procedure for evaluating the work of supervisory boards. It also authorizes the Cabinet of Ministers to conduct assessments at least once every three years and, if needed, to engage an independent advisor. This will prevent ineffective work.

At the same time, the law provides a clear list of grounds for dismissal of supervisory board members. This should provide an additional guarantee of independence.

Another sensitive issue is the salaries of members of supervisory boards and managers of state-owned companies. The remuneration policy, another regulatory act to be developed by the Government, will determine the approaches to remuneration. Here, lawmakers have stipulated that remuneration should be market-based and be guided by the level of salaries for similar positions in the industry.

Corporate governance is a system and principle of management generally accepted in the civilized world. They define the relationship between the owner, stakeholder groups, and the company’s management bodies. For Ukraine, corporate governance in the public sector is an opportunity to attract even more investments, grants, or loans for the modernization and development of state-owned companies. As the examples of Ukrenergo and Ukrposhta demonstrate.

Finally, I would like to remind you that the adoption of the law is linked to the signing of a loan agreement with the World Bank for USD 1.5 billion, the fulfillment of two indicators of the EU financial support program to receive more than EUR 600 million, and the provision of additional tranches from the IMF. These are resources that the country desperately needs today.