Ukraine improves corporate governance in SOEs


On 8 March 2024, the long-awaited law on improvement of corporate governance in state-owned enterprises (SOEs) (Law) came into force. The Law was developed as part of a general state sector reform with due consideration of international best practices, including the OECD Guidelines for Corporate Governance of SOEs. Its objective is to reduce political pressure on SOEs’ management, mitigate corruption risks and enhance the effectiveness of state companies’ management.

The major changes introduced by the Law in relation to SOEs include the following:

  1. State ownership policy. A new concept of state ownership policy is introduced, which should be approved by the government and will determine the rationale for state ownership of SOEs and the objectives set for them. This policy aims to clearly define the criteria and purpose of retaining state ownership of relevant state assets. Based on this policy, the shareholders should approve annual short- and mid-term financial, operational, and non-financial performance objectives for SOEs, in a form of owner's letters of expectation (this concept, being a novelty in Ukrainian law, requires further clarification in secondary legislation).
  2. State dividends policy. Dividend guidelines will be established in a separate dividend policy based on the needs of each industry and individual SOEs.
  3. Financial planning for strategic SOEs. The Law sets out special requirements for financial planning of natural monopolies and enterprises with target estimated net profits over UAH 50 million. Specifically, the Ministry of Finance is granted authority to approve certain key financial indicators of such SOEs which will be incorporated into their financial, strategic, and investment plans. Such key financial indicators will be included into the owner’s letters of expectation.
  4. Independent members in supervisory boards. The majority of the supervisory board members in SOEs must have the status of independent members. Additional requirements are outlined for determining and verifying the independence of supervisory board members. In particular, a person cannot be considered independent if the remuneration for their role as an independent member constitutes their sole or primary source of income.
  5. New powers of supervisory boards. Supervisory boards will have more authority in exchange for increased responsibility. They will be responsible for approving financial, strategic, and investment plans based on the state ownership policy and owner's letters of expectation, as well as appointing and dismissing heads of SOEs.
  6. Supervisory boards performance assessment. The government must approve the procedure for regularly evaluating supervisory boards’ performance and determining remuneration to ensure greater transparency.
  7. Dismissal of supervisory board members. An exhaustive list of grounds for dismissal is provided for supervisory boards, with termination procedures varying depending on these grounds. This includes non-compliance with qualification requirements or a court determination of breach of fiduciary duties.
  8. Internal control systems changes. Compliance, risk management, and internal audit functions are designated to replace audit committees in SOEs.

Although the Law marks a significant progress toward transparent corporate governance in SOEs, certain provisions may not take immediate effect since they will be deferred during martial law and for 12 months afterwards. For example, during this transition period, any exclusive powers of a supervisory board may be transferred to the shareholder if the fully authorised supervisory board of the SOE is not yet formed. Once the supervisory board is properly formed, it may review any decisions made during this interim period.

Overall, the changes introduced by the Law are widely regarded as long overdue. A lot of important secondary acts are expected to be passed in the near future aimed at implementation and enforcement of the Law.  

For more information please reach out your CMS advisor or our local CMS team of experts: Maria Orlyk, Tetyana Dovgan.

Legislation: Law of Ukraine “On Introduction of Changes to Certain Legislative Acts of Ukraine on Improvement of Corporate Governance”, No. 3587-IX dated 22 February 2024.