Naftogaz initiates public discussion on corporate governance principles in Ukrainian state-owned enterprises

Seeking to initiate a discussion among civil society and industry experts, Naftogaz of Ukraine has published a Concept note on the “principles of corporate governance in Ukrainian state-owned enterprises (SOEs)".

Seeking to initiate a discussion among civil society and industry experts, Naftogaz of Ukraine has published a Concept note on the “principles of corporate governance in Ukrainian state-owned enterprises (SOEs)". The proposal is in response to Paragraph 3.3 Section XII of Ukraine’s parliamentary coalition agreement which was concluded on November 21, 2014. This agreement proposes the introduction of modern European standards of corporate governance for Ukrainian public energy companies in 2015-16.

Naftogaz, together with experts from the European Commission, World Bank, the European Investment Bank, the European Bank for Reconstruction and Development, Deloitte (retained in cooperation with the US government), and other professionals, are working earnestly on the development of a modern energy sector to the benefit of both the citizens of Ukraine and our international partners.

This initiative was developed at the request of Naftogaz by Dr. A. Boytsun, an expert on corporate governance and a visiting professor in the Department of Accounting and Finance at the University of Antwerp (Belgium). The Concept was developed in accordance with the recommendations of the Organisation for Economic Co-operation and Development.

The initiative is based on the premise that corporate governance is especially important for companies in Eastern Europe, and even more so for state-owned companies. The document contains recommendations for effective corporate governance in Ukraine, including for "Trunk Gas Pipelines of Ukraine". The text of the Concept can be found here.

Modern principles of corporate governance are designed to prevent actions contrary to stakeholders’ interests despite information asymmetry between management and those not involved in the day-to-day running of the organization. Recommendations proposed for public joint stock company "Trunk Gas Pipelines of Ukraine" are based on the following three principles:

1) Creating incentives for efficient management of SOEs. In order to ensure SOEs are managed in the interests of all stakeholders and for the benefit of their ultimate owners - the people of Ukraine, we need a clear definition of strategic objectives for the board of the company and mechanisms to monitor their implementation. It is important to put in place mechanisms that will prevent abuse of monopoly enterprises and provide equal non-discriminatory terms to other market participants. It is necessary to set reasonable remuneration for board members at the same level as remuneration in positions with a similar amount of responsibility in private companies.
2) Depoliticization of decision making. In order to ensure the operation of Ukrainian public companies for the benefit of the citizens of Ukraine, and not for individual officials or politicians, it is necessary to limit political influence and opaque interference. It is important to introduce clear separation of regulatory functions between the state and independent organizations. A strong and independent board of directors needs to be put in place and monitored by an external reviewer. Independent directors should lead specialized governance committees, in particular the Committee on Appointments and Remuneration, Audit Committee and Ethics Committee.
3) Public scrutiny. SOEs must disclose all relevant information to their ultimate owners - the citizens of Ukraine. In particular, transparent communications must be in an accessible format regarding strategy, financial performance, audits (and relevant fees), corporate governance policies, board remuneration and information about transactions in which there are potential conflicts of interest.

The author of the Concept notes that introduction of modern principles of corporate governance in large SOEs will allow them to increase efficiency, to obtain effective and systematic mechanisms to fight corruption, to significantly improve credibility in society, and to support cooperation with financial institutions such as the International Finance Corporation, European Bank for Reconstruction and Development and European Investment Bank. These steps will, in turn, create a solid foundation for corporate governance reform at the national level and encourage development of Ukrainian capital markets.

Public Relations Department
National Joint-Stock Company «Naftogaz of Ukraine»

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