At the turn of the year, we would like to look back at the major events of 2022 in the domain of corporate governance of SOEs and privatisation.

Issue 68, which we sent out last week, offered an overview of (a) key SOE developments in banking, energy, infrastructure, and agriculture, (b) key events in privatisation, and (c) major asset confiscations and seizures.

Issue 69 (below) reviews the developments in the corporate governance of SOEs.

• Top 2022 events in corporate governance legislation

• Top 2022 events in corporate governance of SOEs

Top 2022 events in corporate governance legislation

Legal changes to corporate governance of SOEs in wartime. On 1 April 2022, the Verkhovna Rada adopted Draft Law No. 7176, which gives the ownership entities of state-owned enterprises and banks the right to decide on the location, at which company officers, including supervisory board members, must perform their duties.

Once such a location has been set, supervisory board members must arrive there immediately. However, the law does not indicate a specific period that the term “immediately” implies. Failing to arrive at the specified location immediately can be a ground for early dismissal of supervisory board members.

[In their earlier article, “State-owned companies in wartime: Why the new draft law is harmful, and how to do it right”, SOE Weekly team members Oleksandr Lysenko and Andriy Boytsun explained why the corporate governance provisions of Draft Law No. 7176 have no practical value:

• Most supervisory board members of state-owned enterprises and banks are foreigners. They have never lived in Ukraine and only came here from time to time. It is unclear how in-person meetings of supervisory board members will help SOEs to overcome wartime challenges, and who should guarantee the board members’ safety.
• As a result of the Covid-19 pandemic, both foreign and Ukrainian supervisory board members have largely switched over to on-line meetings. This meeting mode, along with on-line communication, has long been widespread in various areas, such as business, education, medicine, and others. In addition, supervisory board membership is not a full-time job. As a rule, such people also have other engagements.

In essence, the draft law may be used to arbitrarily dismiss SOEs’ supervisory board members and offers loopholes for political meddling. For an overview of earlier attacks on supervisory boards, before the Russian invasion of Ukraine, see an earlier article by SOE Weekly team members Andriy Boytsun and Dmytro Yablonovskyi, “Removing foreigners for SOE supervisory boards: How “nationalism” harms corporate governance of SOEs”.

However, we are not aware of any state ownership entities using the provisions of the above law in practice. Despite the risks described above, the law might have also been aimed at ensuring the continuity of decision-making in SOEs.

Alternative legal initiatives to iron out corporate governance rules in wartime. In an attempt to adapt the corporate governance rules and offer a special legal framework for SOEs and state-owned banks during the martial law, parliament considered Draft Law No. 7319.

The bill was drafted by two SOE Weekly team members, Oleksandr Lysenko and Andriy Boytsun, and submitted by MP Dmytro Natalukha, Chair of the Rada’s Economic Development Committee. The draft law was supported by 220 MPs in the first reading [i.e., it fell short of six votes to get approved – SOE Weekly].

Draft Law No. 7319 proposed the following provisions for SOEs and state-owned banks for the duration of martial law in Ukraine:

• It would allow delegating powers within the exclusive competence of the ownership entity to the supervisory board or CEO, as well as powers within the exclusive competence of the supervisory board to the CEO.
• The draft law specified the requirements for supervisory boards and management to be available for performing their duties:
• It established the right to convene an urgent meeting of the governing bodies of SOEs and state-owned banks within six hours after such meeting is requested by the board chair, CEO, or ownership entity. Supervisory board members would be allowed to attend meetings on-line.
• The draft law also established that the board chair, CEO, or ownership entity’s information requests to the board chair or CEO should be answered within six hours.
• If SOEs and state-owned banks officers break their availability obligations, this may be a ground for their early dismissal without severance payments.

Compared to Draft Law No. 7176, the above provisions would ensure the continuity of decision-making in SOEs in a more appropriate and comprehensive manner.

In addition, Draft Law No. 7319 would simplify the procedure of appointing supervisory board members and CEOs of SOEs in wartime by:

• Allowing the appointment of board members without a nomination procedure (which requires engaging SOE Nomination Committee, established by Cabinet of Ministers Resolutions 777, 142, 143) for a term of up to six months after martial law is lifted and in the following cases only:
• if the supervisory board loses the quorum needed to take their decisions; or
• if the supervisory board asks the ownership entity to appoint a new member to ensure collective suitability of the board.
• Allowing incumbent CEOs’ and supervisory board members’ terms to be extended for up to six months after martial law is lifted;
• Obligating ownership entities to run a transparent and competitive nomination process for company officers who were elected or had their mandates extended in the above manner.

Since 24 February, the nomination processes for SOEs’ supervisory boards had been discontinued. The existing legal framework does not allow the ownership entity to re-appoint incumbent board members at SOEs even if they had been competitively selected and appointed previously. As a result, some SOEs’ boards may have become inquorate, meaning that they cannot make any decisions or delegate their powers.

Note that some of the government’s attempts to resolve the nomination issue are likely to contradict Ukrainian law, e.g.:

• Ukrposhta, where supervisory board members’ terms of office have been extended for as many as four times.
• Naftogaz, where the Cabinet of Ministers has exercised the powers of the supervisory board for more than a year.

Since SOEs’ priorities and goals are almost certain to change in wartime, Draft Law No. 7319 also proposed establishing a requirement for strategically important SOEs to develop a wartime strategy and operate according to that strategy.

Finally, the draft law proposed reverting to peacetime corporate governance rules for SOEs after martial law is lifted.  – SOE Weekly.]

In September, MP Roksolana Pidlasa, Deputy Head of the Economic Development Committee, spoke out in favour of this legal initiative. She said that another draft law introducing the above rules would be submitted and registered soon. [Since December 2022, Pidlasa has served as the Chair of the Rada’s Budget Committee. – SOE Weekly.]

Top 2022 events in corporate governance of SOEs

Naftogaz’s CEO Vitrenko resigned, Chernyshov appointed as new CEO. The Cabinet of Ministers accepted Yuriy Vitrenko’s resignation on 1 November 2022.

According to the media, Vitrenko resigned because of his differences in opinion and tensions with the Prime Minister Denys Shmyhal, particularly about the reform priorities for Naftogaz, the requirement of the Cabinet the company should defer payments on Eurobonds leading to the default of Naftogaz, and gas volumes required for the winter of 2022-2023. [For a brief overview of the default of Naftogaz, see the previous SOE Weekly, Issue 68.]

On 3 November, the Cabinet appointed Oleksiy Chernyshov as replacement. Previously, Chernyshov served as the Minister for Communities and Territories Development. He offered his resignation as minister to the Verkhovna Rada one day before his appointment to Naftogaz, and the Rada accepted that resignation in the morning of 3 November.

For a detailed overview of Chernyshov’s appointment, see an earlier article by two SOE Weekly members, Andriy Boytsun and Oleksandr Lysenko: “Changing the company’s charter to fit the person: How the Cabinet of Ministers changed Naftogaz’s CEO”.

Three legal initiatives launched concerning GTSOU’s corporate governance reform. As of now, there are three versions of Draft Law No. 8068 to amend the corporate governance of the Gas Transmission System Operator of Ukraine (GTSOU).

The first is Draft Law No. 8068 itself, whose only purpose appears to be to transfer the existing supervisory board of the Main Gas Pipelines of Ukraine – Mahistralni Gazoprovody Ukrayiny (MGU) to GTSOU without a proper competitive selection [thus saving the positions of the current supervisory board members. – SOE Weekly.] It was drafted and submitted by MP Oleksiy Kucherenko (Batkivshchyna faction), Anatoliy Kostyukh, Deputy Chair of the Verkhovna Rada’s Committee on Youth and Sports, and MP Yuriy Kamelchuk (both from Sluha Narodu fraction).

An alternative version, Draft Law No. 8068-1, fully complies with the recommendations of the World Bank and the Energy Community Secretariat to introduce proper corporate governance at GTSOU. It was drafted and submitted by Andriy Gerus, Chair of the Rada’s Energy Committee, and Andriy Zhupanin, Chair of the Rada’s Subcommittee for Gas Industry, Gas Transmission, and Gas Supply Policies (both from Sluha Narodu fraction).

[The World Bank has developed a target corporate governance model for GTSOU and proposed specific recommendations on how to implement that model, which was agreed upon by the Energy Community Secretariat. The government incorporated this as an action plan into the Cabinet of Ministers’ Draft Protocol Decision, prepared by the Ministry of the Economy in September 2022. We are not aware of further progress on the implementation of the World Bank’s model and action plan. – SOE Weekly.]

The second alternative version, Draft Law No. 8068-2, also submitted by Kucherenko, looks like another attempt to save the positions for MGU’s current supervisory board members.

[It is remarkable that Kucherenko submitted this draft law as an alternative to his own Draft Law No. 8068, described above.

Note that GTSOU is registered as a limited liability company, not a joint-stock company. GTSOU does have an independent supervisory board, and the law does not require it to have one. In order to meet best corporate governance practices, a supervisory board with a majority of independent members should be established at GTSOU itself. – SOE Weekly.]

In SOE Weekly (Issue 67), we reported that on 4 October, the Energy Community Secretariat wrote a letter to Prime Minister Denys Shmyhal and Minister of Energy Herman Galushchenko, urging the government to immediately implement GTSOU’s corporate governance action plan:

• transfer the ownership of GTSOU from MGU to the Ministry of Energy;
• adopt a new charter for GTSOU, envisaging an independent supervisory board at GTSOU;
• run a competitive selection of supervisory board members for GTSOU;
• have an executive board elected and appointed by GTSOU’s new supervisory board after the latter is established.

[In other words, the Energy Community Secretariat insisted that (a) GTSOU should be owned directly by the government rather than MGU, and (b) the establishment, selection, and appointment of GTSOU’s supervisory board should precede any changes in GTSOU’s management, such as the current CEO selection described below. – SOE Weekly.]

The Secretariat also repeatedly expressed concerns about the cumbersome two-level governance structure of GTSOU and its shareholder, MGU.

To overcome these shortcomings, the Secretariat continuously supports simplifying the existing structure (implying no role for MGU, including its eventual liquidation), while maintaining the highest standards of independence and effective management. It is more important than ever to ensure the swift implementation of GTSOU’s corporate governance action plan, according to the Secretariat’s letter. – SOE Weekly.]

Selection process for GTSOU’s new CEO fraught with irregularities. MGU’s supervisory board announced the launch of a competitive selection for GTSOU’s CEO on 25 November 2022. No further information has been released publicly, including how many candidates applied or when the selection would be completed.

[MGU is the owner of GTSOU, and MGU’s supervisory board acts as the general meeting of GTSOU. It is in that role that the MGU’s supervisory board is running the competitive selection for GTSOU. See also our comment above on why GTSOU should have its own independent supervisory board that should be in charge of selecting appointing management. – SOE Weekly.]

In SOE Weekly (Issue 67), we reported that the candidate list leaked to the media. According to Ekonomichna Pravda’s (EP) sources, 19 candidates were longlisted. The submission deadline was 12 December 2022, suggesting that all applicants were screened, and the longlist was drawn up in less than a week.

The previous CEO of GTSOU, Serhiy Makogon, was dismissed by MGU’s supervisory board on 16 September. Makogon was succeeded by acting CEO Paweł Józef Stańczak. Prior to that, Stańczak worked as GTSOU’s Deputy CEO for Development and Transformation.

[It is unclear why MGU’s supervisory board decided to appoint Stańczak, who was a key member of Makogon’s management team. The board released no official communication on the reasons for Makogon’s dismissal, especially on the eve of the winter heating season. – SOE Weekly].

Makogon said that he became aware of his dismissal when he was on a business trip. He slammed the dismissal as sabotage, aimed at paralysing the work of a strategic company in wartime and the beginning of the autumn-winter period.

Makogon had headed GTSOU since its establishment in 2019.

Later, Makogon criticised the new competitive selection, including the fact that the longlist included no foreign candidates. He said that the selection procedure was for show, and he had no doubt as to who would be shortlisted. Makogon said that many reputable candidates, who were contacted by the executive search company supporting the selection [Odgers Berndtson – SOE Weekly], flatly refused to apply.

Earlier, Makogon said that before his dismissal, MGU wanted to establish an executive board [allegedly aiming at diluting Makogon’s powers without dismissing him – SOE Weekly]. However, now that he has been dismissed, MGU no longer requires any executive board and merely wants to appoint a loyal CEO, Makogon said.

According to media reports, in June, MGU’s supervisory board formally proposed Serhiy Oleksiyenko and Andriy Khomenko as CEO candidates without a competitive selection, but the Cabinet did not approve either.

Energoatom’s corporatisation is approaching. The Verkhovna Rada approved the first reading of Draft Law No. 8067 on the corporatisation of Energoatom.

The bill would establish the legal, economic, and organisational foundations to turn Energoatom from an (uncorporatised) state enterprise to a joint-stock company to improve its efficiency and corporate governance.

In SOE Weekly’s overview of the top 2021 events (Issue 58), we forecasted that Energoatom has every chance to be corporatised in 2022.

Decisions to corporatise Energoatom have been made since 2012, starting at least with the National Action Plan for 2012 on the Implementation of the Programme of Economic Reforms in Ukraine for 2010-2014.

In Issue 41, we wrote that President Volodymyr Zelenskyy signed a Presidential Decree on 28 August 2021 instructing the Cabinet of Ministers to develop and submit a draft law on the transformation of Energoatom by 30 September 2021.

The 2021 IMF Memorandum included a commitment from the Ukrainian authorities to ensure that the law on corporatisation of Energoatom is enacted by end-December 2021. Energoatom would then have to get a supervisory board with a majority of independent members. It would also be required to produce financial accounts per international standards by May 2022 (a new structural benchmark at that time).

PrivatBank’s new supervisory board. On 27 December 2022, the Cabinet of Ministers dismissed PrivatBank’s independent members of the supervisory board and appointed new ones through competitive selection. Below is the profile of the newly appointed independent members:

• Nils Melngailis has many years of experience in management positions in the banking sector, as well as an independent board member of a number of banks and supervisory board chair at Luminor Bank AS, one of the leading banks in the Baltic region based in Estonia;
• Zbigniew Jagiełło headed PKO Bank Poland, which he transformed from a traditional state-owned bank into a fintech, increasing its market value by 40% (from PLN 33.6 billion to PLN 46.5 billion złotys);
• Volodymyr Lytvyn has about 20 years of experience in the banking, SOE, and public sectors, including working as Deputy CEO of Oschadbank when that bank was led by Andriy Pyshny, now Governor of the National Bank of Ukraine;
• Federico Russo has extensive work experience in the banking sector, including working for the UniCredit group, with over 11 years of experience in the Ukrainian market;
• Mihai Ionescu has more than 20 years of experience in management positions in the banking industry, including Deutsche Bank, Credit Suisse Group, and Raiffeisen Bank in Central and Eastern Europe;
• Nadir Aziz Shaikh has 39 years of experience at Citigroup in seven countries, including six years of experience at Citibank Ukraine. Since 2019, he has been an independent supervisory board member of PrivatBank.

[In other words, Nadir Sheikh is the only independent member from the previous supervisory board to be re-appointed. All others – Sharon Easky, Eran Klein, Sebastian Prinz von Schönaich-Carolath, Olga Tomash, and Roman Sulzhyk – were dismissed.

If these board members applied for re-appointment, then it appears that the government was willing to replace them. It is not clear why the government decided to replace almost the entire supervisory board of PrivatBank and how this replacement ensures the bank’s business continuity. The government has not voiced any criticism of the board’s performance earlier.

As we reported in SOE Weekly (Issue 64), PrivatBank made a profit of UAH 35.1 billion in 2021. This made up 82% of the total profits earned by four state-owned banks in 2021 (UAH 42.7 billion). In 2020, the bank earned UAH 24.3 billion, and in 2019, UAH 32.6 billion. In all these years, PrivatBank was Ukraine’s largest and most profitable bank.

PrivatBank paid UAH 28 billion (or 80% of its profits) in dividends for 2021 to the state budget. The bank paid UAH 19.4 billion as dividends for 2020, and UAH 24.5 billion for 2019. The bank has also been actively engaged in numerous litigations against its former owners, the Privat group, in Ukraine and abroad.

Artem Shevalyov, Yuliya Metzger and Serhiy Oleksiyenko appear to remain on PrivatBank’s supervisory board as state representatives. We are not aware of either their dismissal or re-appointment to the new board.

The competitive selection of supervisory board members for three Ukrainian state banks – PrivatBank, Oschadbank, and Ukreximbank – started simultaneously on 11 October 2022, with the application deadline on 11 November 2022. There have not yet been any public updates on the selections for Oschadbank or Ukreximbank. – SOE Weekly.]

Ukrposhta’s supervisory board members were re-appointed four times in a year. On 14 January 2022, the Ministry of the Economy announced a competitive selection of independent members for Ukrposhta’s supervisory board. Boyden is the executive search company supporting the selection. The submission deadline was 14 February 2022.

After Russia invaded Ukraine, the Ministry of Infrastructure extended the powers of five supervisory board members on 12 March 2022 (until 13 June 2022), likely, without legal grounds. On 13 June, their powers were extended again in the same manner until 14 September.

On 26 July 2022, Boyden Ukraine’s Managing Partner Oleksiy Dolgikh wrote on his Facebook page that the Ministry of the Economy re-launched the competitive selection for independent members of Ukrposhta’s supervisory board [some delays took place due to Russia’s invasion – SOE Weekly], and more than 130 candidates applied. Dolhikh added that Boyden would finish its work by 5 August 2022, after which the Nomination Committee would take the lead.

However,  the Ministry of Infrastructure extended the supervisory board’s powers for the third time on 8 September 2022 and for the fourth time on 30 November 2022. The new extension is until 15 March 2023.

[It is unclear why the government does not complete the competitive selection process for Ukrposhta’s supervisory board instead, as required by law. This case also underscores the need for a specific legal framework for corporate governance of SOEs in wartime – see “Alternative legal initiatives to iron out corporate governance rules in wartime” above.

According to the current law, the ownership entity – the Ministry of Infrastructure in Ukrposhta’s case – cannot decide to extend SOEs’ supervisory board members’ terms. A decision on the extension may only be taken when appointing an acting CEO, and only once. – SOE Weekly.]