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Corporate Governance in Ukraine

Category: Corporate Governance

The main (basic) legislative act in the area of corporate governance is the Law of Ukraine «On Business Associations» adopted on September 19, 1991.

However, the Presidential Decree «On the Measures with Regard to Development of Corporate Governance in Joint Stock Companies» signed in March 2002 made a considerable step forward on the way to best corporate governance practice.

The Decree stipulates that it is necessary to recognize further improvement of the legal foundations of corporate governance in joint stock companies, which would ensure:

efficient protection of the rights and lawful interests of shareholders,

improvement of the system of filing, content and structure of the information about activities of joint stock companies,

regulation of relations between the management bodies of a joint stock company with a precise definition of competence of each of them, and

implementation of generally accepted civilized fair norms of business relations in the process of carrying out corporate governance.

Also, the Decree entrusted the Cabinet of Ministers with drafting and submitting for review by the Verkhovna Rada of Ukraine draft laws aimed at regulation of the issues of corporate governance and joint stock companies, and it charged the Stock Market State Commission with ensuring development and implementation of national principles (code) of corporate governance in joint stock companies.

Following the signing of the Presidential Decree a number of further steps has been made to address the tasks set by the President in his Decree, and in particular:

In March 2003, the Cabinet of Ministers adopted the «Program of Development of Corporate Governance In Ukraine in 2002-2005»;

In June 2002, the Securities and Stock Market State Commission issued «Recommendations for Best Practices of Corporate Governance for Joint Stock Companies in Ukraine»;

NBU Governor has issued the «Comprehensive Program for the Development of the Banking System in 20032005». The entire section of the Program is devoted to corporate governance issues, in particular, to improving the soundness of the banking system and ensuring the transparency of its operations;

NBU is studying the best international business practices on corporate governance to identify the possibilities of increasing the role and responsibilities of the Supervisory Councils in Ukrainian banks;

In March and April 2003, two new drafts of the Law «On joint stock companies» have been submitted to Verhovna Rada. One was initiated by a Rada member and the other by the Cabinet of Ministers. These draft Laws are focused on strengthening the legislation requirements on the principles of corporate governance of joint stock companies in Ukraine.

In April 2003, the Verhovna Rada passed in the first reading the changes to the Law on Banks and Banking activity that relate to the internal audit of banks; it proposed to have the internal audit office report directly to the Supervisory Council.

In April 2003, the Association of Ukrainian banks established the «Banking Ethics Committee» which has held its first meeting in April. The goals set by the Committee are aimed to promote the principles of sound business practices and elements of corporate governance in Ukrainian banks.

In his speech to the Verhovna Rada on 15 april 2003, the President Kuchma has once again emphasized that…» Urgent Reform of the corporate governance system must become part and parcel of the policy of economic growth…The crisis of the corporate governance system has

become one of the most acute problems, which impedes economic growth, effective restructuring of companies, development of up-to-date mechanisms of sale of private property, stock market development, attraction of citizens’ savings for investment purposes, increase of investment attractiveness of the Ukrainian economy for both domestic and foreign investors »

Areas that should be strengthen by implementing best international corporate governance practices and principles include the following:

Members of the Supervisory Council should have a broader responsibility for the bank’s operations;

Supervisory Council should be completely independent from the Management Board of the Bank;

Protection of rights of the minority shareholders by representation of at least one member in the Supervisory Council of a bank from the minority shareholder;

Supervisory Council is proposed to receive wider range of authorities and responsibilities on approval of strategic and operational issues of a bank’s activities as well as on risk management issues;

the rights to approve or remove members of Supervisory Council if they do not meet requirements for directing a safe and sound bank; and

Appointment of an external auditor should be the sole competence of the Supervisory Council of a bank.

International best practices for banks

All these initiatives indicate the growing awareness and recognition by the legislators, bank supervision and other regulatory authorities of the importance of the corporate governance issues.

From a banking industry perspective, corporate governance involves the manner in which the business and affairs of individual institutions are governed by their Supervisory boards and Management boards, affecting how banks.

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