Editor’s Update: After this story was published, President Volodymyr Zelensky signed a law that will allow the Cabinet to remove the limits on salaries at government enterprises. The legislation is entitled “On introducing changes to the law of Ukraine regarding the 2020 government budget.”
This week, Swedish economist Anders Aslund quit the supervisory board of state railway giant Ukrzaliznytsia.
He complained that the railroad company didn’t pay, didn’t provide liability insurance and didn’t listen to the board’s suggestions.
He is not the only one who feels this way. More board members at state companies are looking at the door.
The biggest reason is money. In April, the government drastically cut public servants’ salaries. Recently, it sent revised contracts to supervisory board members at state-owned enterprises, which would cut their salaries by more than half.
Several state firms stated this makes them think that the state no longer supports corporate governance reform.
“This cannot go on forever,” said Andrii Boytsun, a reform adviser and supervisory board member at Ukrnafta. “People will start stepping down.”
Salaries are a contentious issue. Supervisory board supporters say that their high paychecks are justified. They warn that the government risks undermining corporate governance reforms that improved Naftogaz and PrivatBank.
The Ukrainian public, along with numerous lawmakers see a different picture. In a year when close to half of Ukrainians will fall into poverty, they see non-executive directors making millions of hryvnias for poorly-defined work with no clear performance indicators.
Ukrainians representing labor are also skeptical that board members are working in the best interest of the Ukrainian government and people.
“The idea of corporate governance reform is good,” said Mykhailo Chaplyga, director of the Labor Union Development Institute. But in practice, the boards “turned not into corporate governance but into an organ of external governance not in the country’s interest.”
Boytsun said that Aslund’s lack of liability insurance is unusual — state firms that he’s aware of provide insurance. Without it, for example, PrivatBank’s board would have had a very bad time.
Generous salaries
The salary issue is more universal.
The president’s office released a statement, saying it values corporate governance reform and wants to attract top professionals to supervisory boards. It blamed the COVID-19 pandemic, saying “the restrictions imposed by law during the pandemic should be of limited duration… nobody is happy with the restrictions on wages and this is understandable. But it was a forced decision.”
Some are skeptical. In his op-ed explaining the reason for his resignation, Aslund quoted President Volodymyr Zelensky’s March speech where he said the following:
“There are questions about the salaries and bonuses of many supervisory board members. We understand that there are laws of the market, we do not suggest paying a ‘minimum’ wage in a populist manner.
“But, excuse me, when over 10 million people live on the poverty line, there can be no such payments to people who, being members of supervisory boards, come to Ukraine two or three times a year. Today, it has actually become more profitable to ‘supervise’ than to work in Ukraine.”
At the start of the year, revelations of supervisory board members’ salaries in the media raised a public outcry, which hurt Zelensky’s approval rating.
People in the corporate governance sphere believe that the salary cuts and unsuccessful attempts to legislate foreigners off state firms’ boards was driven mostly by populism. They warned about pressure from oligarchs who used to make a killing without corporate governance reform.
“In our opinion, this issue concerns all state-owned companies in Ukraine, as corporate reform has not been completed yet,” Naftogaz press service wrote in an email.
The cuts hit foreigners harder than locals, believes Ilya Tkachuk, head of Corporate and M&A at law firm Integrites. “Payment restrictions… have a more distinctive impact on foreigners mainly because, to them, the cost of living in Ukraine appears higher than to locals,” Tkachuk wrote. Foreigners must make 10 times Ukrainian salaries to maintain a work permit.
Volodymyr Fesenko, director at the Penta political studies center, said he doesn’t see any political pressure on corporate governance reform. First, the government cut compensation across the board, not just for state firm directors. Second, he said the government was simply responding to a major issue of public importance.
According to Boytsun, supervisory board members at Ukraine’s biggest state companies make an average of $20,000 per month. People at smaller companies make substantially less, which is not always fair, he noted.
News website Ekonomichna Pravda in February reported that in 2018–2019, head of Ukrzaliznytsia’s board Sevki Acuner made $26,500 per month and PrivatBank’s Yulia Metzger made $23,000. Independent directors at Naftogaz made about $22,000. The journalists based their reporting on public financial declarations.
On the lower end, some members at Ukrzaliznytsia and Ukreximbank made $13,000–$15,000 while members at Ukrposhta, Boryspil and Ukrenergo made $4,000–$5,000.
According to consulting firm Korn Ferry, non-executive chairpeople in Europe made a median of 250,000 euros ($293,000) a year in 2019. Meanwhile, non-executive directors made 70,000 euros ($82,000). This would make their monthly incomes $24,400 and $6,800, respectively, meaning Ukraine is roughly in the same ballpark.
However, when comparing railroads to railroads, Servant of the People lawmaker Pavlo Frolov found that Ukrzaliznytsia’s board’s compensation is 3–4 times higher than that of German rail operator Deutsche Bahn.
Why pay that much?
According to Boytsun and outgoing UkrOboronProm head Aivaras Abromavicius, there are several justifications for paychecks that high.
One is Ukraine’s “toxic environment,” where the air is 20% oxygen and 80% litigation. As an example, hundreds of lawsuits have been filed against PrivatBank and its individual board members by the bank’s previous shareholders. Losing a lawsuit is a blow to one’s reputation.
The other justification is the workload. Boytsun said that board members have to work longer and harder in Ukraine as there is much more to unpack and reforms take a longer time to implement. Abromavicius added that workload only increased during the COVID-19 pandemic, just as the salaries were brought down.
“It’s surprising that during quarantine, there would be such a longterm limit on pay against contractual obligations,” said Abromavicius. “It puts reforms at risk.”
Finally, supervisory board supporters said that paying market-rate salaries is the only way Ukrainian state firms can attract skilled, experienced and creative board members, which would potentially improve the companies’ performance.
Naftogaz’s press office sent the Kyiv Post a statement saying that halving remuneration would make it “very difficult to attract highly qualified and impartial members of the supervisory board… It is of utmost importance that the board has members with the highest integrity.”
Abromavicius said that if that happens, the battle for corporate governance reform will be lost to “populists and swindlers.”
According to Boytsun, slashing salaries will save an average of 54 kopeks per Ukrainian citizen. But returning state companies back to their pre-2014 losses will cost Ukrainian citizens orders of magnitude higher.
Measuring performance
It can be very hard for an average low-paid Ukrainian to swallow board members’ salaries, especially when they work relatively few hours. What makes it worse is the lack of tangible key performance indicators that would show why the board members deserve this money.
The Novoye Vremya magazine reported in February that many state companies lack performance indicators for supervisory boards. The energy and finance ministries had told the journalists that they were still looking for a way to measure boards’ performance. Naftogaz reported that it didn’t have provisions for setting performance indicators and that remuneration didn’t depend on them.
Boytsun said that it’s difficult to measure individual board members’ contribution, as they work collectively, in a complex fashion. It’s not as simple as counting up the proposals they have submitted. He said that the boards’ work can be evident in the improved financial results of several large state firms, including PrivatBank and Naftogaz.
Abromavicius agreed that a board’s work is a “mix of art and science” and warned that boards shouldn’t be judged for something that’s out of their control, such as Ukrzaliznytsia’s tariff policy, which is in the hands of the government. He added that people should look at broader results.
But to many, that’s not good enough.
Even though they support supervisory boards in general, many analysts and lawmakers don’t like how the current ones are set up.
“If remuneration of the head of Ukrzaliznytsia’s supervisory board is four times higher than that of his colleagues at Deutsche Bahn or SNCF Group and, at the same time, the Ukrainian railway operator’s performance is rapidly deteriorating — this is wrong,” said Servant of the People’s Frolov.
He said that Ukrzaliznytsia’s board didn’t denounce corruption in how the government sets tariffs, nor has it threatened to resign if the situation didn’t improve. The high salaries, he believes, make board members more likely to ignore abuses because they don’t want to lose their income.
Boytsun said that a core function of boards is to prevent government meddling, such as the time when Zelensky publicly called up Ukreximbank to demand some changes as part of a publicity stunt. The board can push back and protect depositors.
Naftogaz said that the government as a shareholder “regularly tries to curtail” the board’s current power.
But experts believe that cutting the government out entirely is a mistake. Chaplyga said that the boards already reflect the interest of lobbyists from transnational corporations that compete with Ukrainian companies, as well as politically aligned think tanks. For example, former Shell employees sit on Naftogaz’s supervisory board and Aslund is part of the Atlantic Council.
Fesenko and Frolov say it’s more important for state companies to serve the public interest, not just their management or their bottom line. For example, in many countries, the rail operators or mail carriers don’t turn a profit but are maintained for the public good. Otherwise, “you may as well privatize them,” said Fesenko.
