'Principles' provides basic guidelines for public companies
The State Comission for Securities and the Stock Market presented on June 19 a draft of a document outlining new principles of corporate governance. The document, called simply Principles, is expected to foster more transparency in joint stock companies by suggesting standards and encouraging shareholder activism.
Although Principles doesn’t carry the authority of legislation, it offers guidelines for businesses. The document’s existence is expected to force companies seeking outside investment to adopt more responsible practices.
Viktor Horbatenko, a member of the Special Task Force on Corporate Governance, said that Principles would catalyze investment and improve the country’s image.
“The current laws, adopted in the early 1990s, are already outdated. They allow the violation of shareholders rights without violating the law,” Horbatenko said.
Current business practices and weak legislation have impeded business growth and kept potential investors waiting on the periphery, afraid to make a move.
“The development of the financial sector and the flow of investments have been slowed because of poor corporate governance laws. Increased investment will depend on improving the corporate sector, which should operate on a transparent basis that can be understood by everyone,” he said.
Based on an opinion poll by McKinsey & Company, investors are likely to invest 30 percent more in Western European companies that have effective corporate governance. Of those surveyed, 60 percent would avoid investing altogether in companies with poor governance and 30 percent said they would avoid investing in countries known to have companies with poor governance.
“Experience shows that adopting generally accepted principles of corporate governance – based on integrity, justice, transparency, openness, accountability and responsibility – is an effective way to settle conflicts and maintain balance in the corporate sector,” Horbatenko said. “It is exactly these principles of corporate culture that have laid the foundation for this [Principles].”
The document encourages companies to defend shareholders’ and investors’ rights, treat small and large shareholders equally, disclose information and create supervisory boards. The document defines the terms “independent director,” “corporate secretary” and “conflict of interest,” among others. These are new to Ukraine’s corporate culture.
 |
| The law regulating joint stock companies “allows the violation of shareholders rights without violating the law.” – Viktor Horbatenko, International Finance Corporation. (Photo by Andry Porokhnenko) |
Principles was drafted by the Special Task Force on Corporate Governance, convened in accordance with a memorandum, signed by the United States and Ukraine in April 1998, that supported the development of open, competitive markets.
Among the task force’s members are the State Commission on Securities and the Stock Market, the Antimonopoly Committee, the Justice Ministry, the State Property Fund, USAID, IFC, the World Bank, UEPLAC, Ukrainian law firms and educational institutions.
The committee analyzed more than 40 countries’ corporate governance laws and studied foreign corporations, Horbatenko said.
Principles address specific problems relevant to publicly traded companies and their shareholders. For example, today there are 17 million minority shareholders in Ukraine whose rights are not fully protected. In 2002 the State Commission on Securities and the Stock Market received 5,000 complaints regarding violations of shareholders’ rights, he said.
“Many minority shareholders don’t invest much capital, so major owners don’t respect their rights,” he said.
Dmytro Leonov, director of the Ukrainian Institute on Stock Market Development, said the new document should clear up some conflicts between major and minor shareholders regarding the use of profits.
“Major shareholders want to reinvest profits, but minor shareholders want dividends. Dividends should be divided between shareholders based on the number of shares they own. In practice, that rule is often violated,” Leonov said.
State Commission on Securities and the Stock Market corporate finances governance department head Oleksy Petrashko said that minor shareholders are discriminated against in several ways, and are often viewed as insignificant.
“Some managers think it is acceptable to ignore the interests of minor shareholders,” he said.
One way companies violate the rights of their investors is by making it difficult for them to take part in shareholders’ meetings. Information about dates or locations is withheld, or registration takes place during an impossibly short period of time. Arranging for a shortage of seating is another way to keep unwanted shareholders out, Petrashko said. He added that besides contriving procedural difficulties, companies also victimize minor shareholders by dumping stock.
Petrashko told the story of a shareholder who held 5 percent of the shares in a company. The investor was instructed to pay Hr 1,000 per page to acquire a 32-page report detailing the company’s activities.
It’s not just Ukrainian shareholders who are at risk.
“Sometimes management uses foreign investors’ limited knowledge of local laws to manipulate them,” Petrashko said. “For instance, once a foreign shareholder had to leave a shareholders’ meeting because the translator, who was not a shareholder, was not allowed to participate.”
State Commission on Securities and the Stock Market member Mykola Burmaka said that after public discussion about the document and vetting by the relevant state bodies, a final version of Principles will be released.
Ukrainian companies probably will not accept the Principles at once, he said, and it may take years fully to implement them. However, the country’s most powerful joint stock companies are expected to be the first to follow the document’s guidelines.
“The Principles are designed for the business elite. They’ll be followed first by a few hundred Ukrainian corporations, the county’s base of power. These companies need to attract investments, and that depends on their adhering to principles,” Burmaka said.
“If a company is interested in investments, it will start following the principles tomorrow,” Horbatenko said.
