Ukrainian Code of Cor­po­rate Gov­er­nance: new guid­ance for pri­vate com­pa­nies

Kyiv Post - - BUSINESS -

In the last five years, there has been a revo­lu­tion in cor­po­rate gov­er­nance in Ukraine. Start­ing with es­tab­lish­ment of Su­per­vi­sory boards in state - owned en­ter­prises and end­ing with huge in­ter­est from pri­vate com­pa­nies and all busi­ness own­ers; cor­po­rate gov­er­nance has be­come a trend. Whether it is right or wrong, it is likely to con­tinue. In re­sponse to the mar­ket de­mand; the Na­tional Se­cu­ri­ties and Stock Mar­ket Com­mis­sion has adopted the Core Code of Cor­po­rate Gov­er­nance: Re­quire­ments and Rec­om­men­da­tions (the Code) in­tro­duc­ing in­ter­na­tional stan­dards and best prac­tices in cor­po­rate gov­er­nance for Ukrainian com­pa­nies.

The Code is de­signed in co­op­er­a­tion with the lead­ing in­ter­na­tional and Ukrainian ex­perts from IFC, USAID, Ukrainian Cor­po­rate Gov­er­nance Academy, listed and pri­vate com­pa­nies. Au­thors of the Code made for share­hold­ers, man­age­ment, su­per­vi­sory boards and other stake­hold­ers a prac­ti­cal and re­al­is­tic guide on how to gen­er­ate long-term suc­cess of a busi­ness.

What is cor­po­rate gov­er­nance?

Cor­po­rate gov­er­nance is the mech­a­nism for own­ers to oversee the man­age­ment of com­pany, and by which man­age­ment oversee their day-to-day ac­tiv­i­ties. It is trans­par­ent dis­tri­bu­tion of rights and re­spon­si­bil­i­ties among all of­fi­cers in the com­pany. Cor­po­rate gov­er­nance is the way in­vestors get a fair re­turn on their in­vest­ment, while not be­ing ac­tively in­volved into busi­ness by del­e­gat­ing the power to make de­ci­sions to su­per­vi­sory board (the Board) they trust and by hold­ing the man­age­ment ac­count­able.

Why good cor­po­rate gov­er­nance is im­por­tant?

Well-gov­erned com­pa­nies per­form better in fi­nan­cial terms, be­cause cor­po­rate prac­tices pro­mote long-term devel­op­ment of a com­pany and trust from part­ners and clients. More­over, com­pa­nies with good cor­po­rate gov­er­nance eas­ier at­tract cap­i­tal from out­side in­vestors and credit in­sti­tu­tions.

For share­hold­ers good cor­po­rate gov­er­nance is a con­trol over man­age­ment, fi­nances of the com­pany, and op­por­tu­nity to be less in­volved in day-to-day op­er­a­tions. Man­age­ment ben­e­fits from sound cor­po­rate gov­er­nance, be­cause de­ci­sions are made and deals are ap­proved faster. Man­age­ment also may get nec­es­sary out­side ex­per­tise and com­pe­tent ad­vice. It is all pos­si­ble be­cause of the Board that the Code com­pels to es­tab­lish in a com­pany.

The im­por­tance of good gov­er­nance in­creases with the size of the busi­ness and the num­ber of share­hold­ers.

What does the Code of­fer to pri­vate com­pa­nies?

Al­though the Code has been de­signed pri­mar­ily for public listed com­pa­nies and com­pa­nies plan­ning to un­dergo list­ing, pri­vate com­pa­nies can also ben­e­fit from the Code.

In fam­ily com­pa­nies, im­ple­men­ta­tion of the Code al­lows share­hold­ers to get the ex­per­tise and ex­pe­ri­ence they need, to pre­pare a com­pany for suc­ces­sion. For small and medium com­pa­nies, the Code en­sures man­age­ment has a con­stant in­ter­ac­tion with own­ers about strat­egy and re­sults. Large pri­vate com­pa­nies will gain in­de­pen­dent and crit­i­cal per­spec­tive on busi­ness through es­tab­lish­ing the Board with in­de­pen­dent mem­bers as pro­posed by the Code.

Share­hold­ers’ rights

The Code pro­vides share­hold­ers with toolkit to en­gage with the man­age­ment be­yond the rules of stan­dard by-laws and of em­ploy­ment con­tracts. Com­pa­nies’ share­hold­ers should adopt Share­holder En­gage­ment Pol­icy (the SEP) to make for­mal in­quiries at any time and re­ceive re­sponse, in­for­ma­tion and re­ports without wait­ing for Gen­eral Share­hold­ers Meet­ing.

SEP al­lows share­hold­ers re­tain con­trol over the busi­ness and par­tic­i­pate in any de­ci­sion that fun­da­men­tally af­fects the com­pany or the in­ter­ests of share­hold­ers. It is im­por­tant when some pow­ers are del­e­gated to the Board. The per­for­mance of SEP, of course, should be se­cured by tai­lored char­ters and em­ploy­ment or ser­vice con­tracts for man­age­ment and the Board mem­bers.

Su­per­vi­sory board

The Board has dis­tinct re­spon­si­bil­ity to set the com­pany’s strat­egy and plan its im­ple­men­ta­tion, to su­per­vise the man­age­ment and to re­port to share­hold­ers about re­sults.

The Board should be com­posed of pro­fes­sion­als with di­verse ex­pe­ri­ences. Big de­ci­sions vet­ted and ap­proved by the pro­fes­sional Board pro­vide com­fort to the own­ers and se­nior man­age­ment. Pro­fes­sional Board will con­trib­ute ad­di­tional ex­per­tise to the busi­ness, may un­lock ac­cess to fi­nance or tech­nolo­gies. Ap­point­ment of the right Board mem­bers also may se­cure nec­es­sary gov­ern­ment re­la­tions and pro­tect a com­pany from raider’s ac­tions.

Pri­vate com­pa­nies tend to have ex­ec­u­tive man­age­ment af­fil­i­ated with own­ers lead­ing to bi­ased de­ci­sions. The in­de­pen­dent Board will replace ex­ec­u­tive, where it is ob­jec­tively re­quired and will ap­point in­de­pen­dent com­pe­tent CEO in­stead. The Board through its com­mit­tees also can help oversee the fi­nan­cial side of the op­er­a­tions and ex­ec­u­tives’ re­mu­ner­a­tion.

With good gov­er­nance in place, the Board with in­de­pen­dent mem­bers can look crit­i­cally at the busi­ness; more likely will op­pose risky de­ci­sions of share­hold­ers or of the man­age­ment. The in­de­pen­dent Board will not just rub­ber­stamp the de­ci­sions of man­age­ment : is­sues will be de­bated and the out­come will be better.

The Code em­pha­sizes that pow­ers of share­hold­ers, the Board and man­age­ment should be sep­a­rated prop­erly in the char­ter, by­laws of the Board, and dis­clo­sure poli­cies, which in turn should com­ply with the law.

As mar­ket con­di­tions worsen and eq­uity risks rise, the im­por­tance of cor­po­rate gov­er­nance will rise as well. Im­ple­men­ta­tion of the Code’s rec­om­men­da­tions by pri­vate com­pa­nies will lead to better busi­ness out­comes. The own­ers or man­age­ment can­not be versed in all busi­ness sit­u­a­tions, whereas the Board may give the valu­able in­sights. The Board helps share­hold­ers ex­er­cise and pro­tect gov­er­nance rights, en­sures ac­count­abil­ity of man­age­ment. The ad­van­tages of­fered by the Code, how­ever, will be­come real for pri­vate com­pa­nies only if the Code's rec­om­men­da­tions are prop­erly re­flected in the char­ters and in­ter­nal poli­cies.

+380 44 581 1220 info@go­law.ua

19B In­sty­tut­ska St., Of­fice 29 Ukraine, 01021, Kyiv www.go­law.ua

Max Lebe­dev, Part­ner at GO­LAW, At­tor­ney at law

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