Destruction of corporate governance reform must be stopped

In April 2022, MPs adopted a law that allowed the dismissal of members of the supervisory boards of state-owned enterprises or banks, if they do not immediately appear at the address of the enterprise if necessary.

TI Ukraine urged the President to veto this law, as the mechanism provided by it will only harm the effective activities of the supervisory boards. It can be difficult, dangerous, and sometimes impossible to get to an enterprise during the war, especially for foreigners. Instead, the COVID-19 pandemic has proven that in most cases it is possible to work effectively remotely. However, the law did come into force.

The attack on the work of the supervisory boards was not limited to only this. At the end of April, MPs registered draft law No. 7319, which allegedly proposed to establish safeguards for such unjustified dismissal. However, it will be able to solve the problem only partially. Instead, the document contains new risk initiatives. In particular, it proposes that during the period of martial law, candidates for the positions of members of the supervisory boards be determined not on a competitive basis, but directly by the proposal of the management entity or the chair of the supervisory board.

Moreover, the provisions of the draft law on the waiver of competitive selection are inconsistent with the recent changes introduced by the Cabinet of Ministers through Resolution No.643. The government allowed not to conduct competitive selection of heads, heads of executive bodies and members of the supervisory boards of state-owned enterprises and banks for the period of martial law. However, this rule will not apply to the selection of members of the supervisory boards of a number of large SOEs, such as Naftogaz, Ukrposhta, Boryspil International Airport, and members of the supervisory boards of state-owned banks.

“The waiver of competitive selection will create a space for corruption risks. Candidates for these positions will not be specialists with the necessary experience, record of service, and impeccable business reputation, but less honest persons who will be elected manually. At the same time, the need to appear at the address of the enterprise will limit candidates’ access to positions in supervisory boards, who due to the war may be outside Ukraine or in its safer territories,” explains Khrystyna Zelinska, head of public property management in TI Ukraine.

TI Ukraine urges MPs to finalize draft law No. 7319:

1. Remove the legislation provisions that oblige members of the supervisory boards to perform their duties only at the location of the legal entity.
2. Establish the mandatory competitive selection for members of the supervisory boards of state-owned enterprises at the legislative level.
3. Determine a clear list of powers of the general meeting or the supervisory board that may be delegated to the head of the state enterprise or the executive body of a business entity.

Instead, TI Ukraine advises the Cabinet of Ministers to amend its Resolution No.643, in particular, to cancel the permission not to conduct competitive elections of heads, heads of executive bodies, and members of supervisory boards for the period of martial law.

It was the corporate governance reform that helped improve the financial performance of such state-owned companies as Naftogaz, PrivatBank, and Ukrposhta. Independent supervisory boards and competitive selection of candidates for managerial positions played a crucial role. It is important to preserve and strengthen these effective mechanisms during the war.