OECD Guidelines on Corporate Governance for SOEs: Implementation in Ukraine

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Whitney McCarthy
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1 OECD Guidelines on Corporate Governance for SOEs: Implementation in Ukraine D R. A N D R I Y B O Y T S U N S T R A T E G I C A D V I S O R Y G R O U P F O R S U P P O R T I N G U K R A I N I A N R E F O R M S S O E s C O R P O R A T E G O V E R N A N C E C O N F E R E N C E K Y I V, 2 9 S E P T E M B E R

2 Provide capital Report transparently Ownership Shareholders Principal Elect and dismiss Represent and report to Steering and monitoring Supervisory Board Advise and oversee Represent and report to Executive Management Agent

3 Provide capital Report transparently Ownership THE STATE Principal Elect and dismiss Represent and report to Steering and monitoring Supervisory Board Advise and oversee Represent and report to Executive Executive Board Agent

4 Provide capital Report transparently Ownership The people of Ukraine Appoint and dismiss (through Parliament) Represent and answer to CMU ( founder ) and Ministry of Energy ( shareholder ) Nearly no incentives to protect own shareholder interest: Cannot vote with their hands (no actual shares (measurable value) in Naftogaz Cannot vote with their feet (no mechanism to participate in decision-making, e.g., no GSM) Little interpretable information Decision-making politicised: Separation of powers/responsibilities unclear Roles of founder and shareholder conflicting Commercial interest in Naftogaz conflicts with the State s social policy and regulatory functions Intervention in day-to-day management possible Steering and monitoring Elect and dismiss Advise and oversee Supervisory Board Represent and report to Represent and report to De facto, no board: 2014: no actual board All board decisions made by the Ministry (= GSM) Previously, all board members were selected among government officials All board members must act (vote) within the CMU s directives (= no independent decisionmaking) None of board members remunerated for their work Executive Executive Board Poor incentives for top management: Very low compensation, compared to market High responsibility (incl. criminal responsibility) Currently, no liability insurance in Ukraine Little autonomy

5 Framework of reference: OECD standards OECD standards: OECD Principles of Corporate Governance OECD Guidelines on Corporate Governance for SOEs Understandable to outsiders (EU, int l community) Need not reinvent the wheel Are very concrete, when applied (substance over form) External reference Formal requirement (Coalition Agreement) Clear guidelines minimising discretion Minimises the possibility for vested interests to imitate a reform and bend the rules in the favour

6 OECD Guidelines on CG for SOEs Rationale for state ownership The state s role as an owner SOEs in the marketplace The responsibilities of the boards of SOEs

7 Rationales for state ownership The state exercises the ownership of SOEs in the interest of the general public What value to maximise (for society)? Ownership function (shareholder value) Social policy Regulatory Public policy objectives mandated and disclosed Rationale for an individual SOE Clarity for the board/people E.g., energy independence or maximum rertuns? No justification privatise

8 The state s role as an owner Informed and active owner Refrain from intervening in SOEs management Avoid redefining SOE objectives in a nontransparent manner Let SOE boards exercise their responsibilities and respect their independence Centralised ownership entity (if not possible, a co-ordinating body) Complex legal forms Corporate norms different that those commonly accepted Little operational autonomy Appointment Financial plans Dividends Recent Naftogaz situation Can happen in any other SOE or state-owned bank Ministries National Wealth Fund Political insulation Professional management

9 SOEs in the marketplace Level playing field Fair competition Laws and regulations discriminate between SOEs and their market competitors: Entities of private law vs. entities of public law State sector of the economy Appointments Financial plans Dividends Little separation between the state s ownership function and other state functions that may influence the conditions for stateowned enterprises implicit policy objectives subsidies

10 Responsibilities of the boards of SOEs OECD Accountability Strategy Supervising management Composition Equivalent legal responsibilities Committees??? Evaluation??? Audit??? Ukraine No boards Not approved by the board Financial plan approved by Ministry CEOs appointed by Ministries Remunerations set by the state Government officials Diversity? State representatives? Voting instructions State representatives

11 Corporate governance target structure

12 Context: Ukrainian law, two-tier board Clear distinction between the one-tier and two-tier systems in OECD standards Focus on Supervisory Board (not Board of Directors) Independent board members (no non-executive directors) Challenges to implementing corporate governance principles under Ukrainian law Legal transplantation impossible Concept + local lawyers Active legal reforms mode, although competitive among various ministries and donors and not always wellcoordinated State s fear of losing ministerial control over SOEs to private control

13 Challenges Ownership policy Clarity for the ultimate shareholders (the people of Ukraine) Clarity for the Supervisory Board Board composition Must reflect the ownership policy (competent and diverse) Strategy Clarity on strategic objectives Evaluation clarity for ultimate owners/board on: performance indicators and incentives responsibilities (e.g., Naftogaz subsidiaries) Who is accountable?

14 OECD Guidelines on Corporate Governance for SOEs: Implementation in Ukraine D R. A N D R I Y B O Y T S U N S T R A T E G I C A D V I S O R Y G R O U P F O R S U P P O R T I N G U K R A I N I A N R E F O R M S S O E s C O R P O R A T E G O V E R N A N C E C O N F E R E N C E K Y I V, 2 9 S E P T E M B E R

Naftogaz strategy Affordable energy for Ukraine. Andriy Kobolyev, CEO 24 October 2017, Kyiv

Naftogaz strategy Affordable energy for Ukraine Andriy Kobolyev, CEO 24 October 2017, Kyiv Key results during 2014-2017 Relations with Russia: independence from Gazprom s gas supplies, saved US$4 bn, $44