According to the European Bank for Reconstruction and Development (EBRD) 2004 Corporate Governance Sector Assessment Project, corporate governance legislation in Ukraine is in very low compliance with the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. In particular, disclosure rules are inadequate, the duties of boards of directors are unclear, and provisions concerning shareholders rights are insufficient. As stated in the Financial Sector Stability Assessment published by the International Monetary Fund in 2003, the financial and ownership structure of many banks and enterprises is not always transparent, and accounting standards appear to be far from international best practices. However, according to the Corporate Governance in Eurasia report published by the OECD in 2004, efforts have been made to develop a corporate governance framework in Ukraine. To date, nevertheless, the basic legal and institutional framework of corporate governance in Ukraine still requires significant improvements.

General Overview

The extensiveness of corporate governance legislation in Ukraine was last assessed by the European Bank for Reconstruction and Development (EBRD) Corporate Governance Assessment Project in 2004. The EBRD came to the conclusion that corporate governance legislation is in very low compliance with the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. According to the Financial Sector Stability Assessment (FSSA) published by the International Monetary Fund (IMF) in 2003, the financial and ownership structure of many banks and enterprises is not always transparent, and accounting standards appear to be far from international best practices. Furthermore, ownership and management are often in the hands of the same limited number of people. Despite improvements in recent years, the overall framework for creditors' rights and insolvency continues to be weak, and issues remain in corporate ownership, shareholder rights, transparency, and disclosure.

According to the Corporate Governance in Eurasia report published by the OECD in 2004, the legal framework and ownership structures in Ukraine are still evolving. There is a need for the strengthening of minority shareholders' rights, and the harmonization of Ukrainian accounting standards with international standards. The report also recommends strengthening the capacity of regulators and the judiciary, and increasing the governance role of both banks and institutional investors. In its 2003 FSSA report, the IMF further urges Ukraine to increase the powers of supervisory boards and requirements on the qualifications of board members.

Ukraine's Company Law was enacted on September 19, 1991, and provides the basic framework for joint stock company governance. However, according to the U.S. Department of Commerce (DoC) 2007 Doing Business in Ukraine report, the law ensures limited protection for minority shareholders. Since then, efforts have been made to develop a corporate governance framework, and in December 2003 the Ukrainian State Commission on Securities and the Stock Exchange (SSMSC), which is the primary regulator of joint stock companies (JSCs) in Ukraine, issued a set of non-mandatory corporate governance principles. These principles are based largely on the OECD Principles of Corporate Governance (OECD 2004). Furthermore, according to the EBRD 2007 Assessment on Commercial Laws, a new Civil Code and a new Commercial Code entered into force on January 1, 2004, and transparency was improved through the establishment of a Company Register during the same period. Although these codes improved the existing legal framework, they also created some interpretation and application problems. In this regard, the enactment of the new Law on Securities and the Stock Market (Securities Law) on May 12, 2006, improved transparency and access to information of the Ukrainian stock market by providing disclosure information on the issuer as well as main shareholders (Mycyk et al. 2007). As stated in the 2007 EBRD Assessment, the approval on February 14, 2007, of the most recent version of the draft Joint Stock Companies Law is also a step in the right direction, but the draft still needs to be approved by Parliament and signed into law by the president.

According to the United States Agency for International Development (USAID) 2004 Financial Sector Review, there are about 9,000 open joint-stock companies (JSCs) in Ukraine, but only 300 of these companies are listed, and less than a dozen are actively traded. Furthermore, the market is fragmented into 9 stock exchanges, the First Securities Trading System (PFTS) being the largest, with an average of 220 listed companies (p. 44). According to the U.S. DoC 2007 report, the legal and regulatory framework and financial disclosure systems for the securities market continue to lag behind international standards. Although the basic market infrastructure is in place, the legislative basis for capital market operations is weak. As a consequence, investors face low market confidence, high macroeconomic risk, transitional accounting standards, poor company disclosure information, and inadequate protection of minority shareholders' rights. Furthermore, foreign investors continue to express little confidence in the Ukrainian legislative system.

In its 2007 Doing Business report, the World Bank also perceives investor protection as being weak. The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 to 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge a transaction, and better investor protection. Ukraine scores 1.0 in the disclosure index, against a regional average of 4.9 and an OECD average of 6.4. It scores 3.0 in the Director Liability Index, against a regional average of 3.8 and an OECD average of 5.1. It scores 7.0 in the Shareholder Suits Index, against a regional average of 6.3 and an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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According to the Corporate Governance in Eurasia report published by the OECD in 2004, the lack of adequate legislation and enforcement measures constitute a major shortcoming for an effective corporate governance framework and protection of shareholder rights. According to the EBRD 2007 Assessment on Commercial Laws, the EBRD conducted a survey in 2005 to evaluate the institutional environment in Ukraine. The study shows that, although company books are considered generally reliable, Ukraine suffers from a weak institutional framework.

Ukraine's Company Law was enacted on September 19, 1991, and provides the basic framework for joint-stock company governance. However, according to the U.S. Department of Commerce (DoC) 2007 Doing Business in Ukraine report, it ensures limited protection for minority shareholders. Since then, efforts have been made to develop a corporate governance framework. The 2004 OECD report asserts that, in December 2003, the Ukrainian State Commission on Securities and the Stock Exchange (SSMSC), which is the primary regulator of joint stock companies (JSCs) in Ukraine, issued a set of non-mandatory corporate governance principles, based largely on the OECD Principles of Corporate Governance. Furthermore, according to the EBRD 2007 assessment, a new Civil Code and a new Commercial Code entered into force on January 1, 2004, and transparency was improved through the establishment of a Company Register during the same period. Although these codes improved the existing legal framework, they also created some interpretation and application problems. In this regard, Mycyk et al. report in 2007 that the enactment of the new Law on Securities and the Stock Market (Securities Law) on May 12, 2006, improved transparency and access to information of the Ukrainian stock market by providing disclosure information on the issuer as well as main shareholders. As stated in the 2007 EBRD assessment, the approval on February 14, 2007 of the most recent version of the draft Joint Stock Companies Law is also a step in the right direction, but the draft still needs to be approved by the Parliament, and signed into law by the president.

According to the EBRD's 2004 report, Ukraine is on track to further implement international standards of accounting and audit, although most standards rely on corporate practices rather than legislative processes. The OECD's 2004 report discloses that the national accounting standards in Ukraine are considered to be more heavily regulated and leave less scope for choice to companies, in comparison to International Accounting Standards (IAS). Hence there is a need to harmonize Ukrainian accounting standards with international standards.

Principle II: The Rights of Shareholders and Key Ownership Function

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The 2004 OECD report notes that shareholders are entitled to secure ownership, to transfer shares, to share in residual profits, and to participate in certain strategic corporate decisions. Shareholder associations co-exist with institutional investors, which are the most active type of shareholders in Ukraine. However, the Company Law and securities regulation do not establish sufficient provisions for shareholders, in particular minority shareholders, and weak enforcement mechanisms undermine effective shareholder rights. Concerning dividends, the form of payment is not clearly regulated, considerably increasing creditor risk. Furthermore, according to the 2004 EBRD report, Ukrainian legislation does not regulate cross-shareholdings and does not impose restrictions on transactions involving shareholders with a conflict of interest.

In its 2004 report, the OECD recommends enhancing the framework and practices of shareholder rights and equitable treatment. Consistent efforts to improve the existing legislation and enforcement measures are also necessary. According to the IMF's 2003 FSSA report, shareholder rights should also be strengthened by increasing access to corporate information, harmonizing Ukrainian accounting standards with international standards, facilitating shareholder control of management, and reinforcing supervisory boards.

In Ukraine, compliance with the disclosure of major share ownership and voting rights in annual reports is perceived to be quite high, according to the 2004 OECD report. This is in great part explained by "the vigilance of the securities commission, which claims not to accept annual reports lacking such information" (p.46). In this regard, according to the 2007 analysis by Mycyk et al., the enactment of the Securities Law on May 12, 2006, improved the transparency and access to information of the Ukrainian stock market by providing disclosure information on the issuer as well as main shareholders.

Principle III: The Equitable Treatment of Shareholders

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In its 2007 report, the EBRD assesses the results of a survey carried out in 2005 regarding the effectiveness of corporate governance. The study shows that minority shareholders have different means to access company disclosure information. However, such actions are often quite complex and lengthy, due to the weak institutional environment and enforcement measures. Furthermore, the OECD reported in 2004 that insider trading is not restricted in Ukrainian legislation. Therefore, the EBRD 2007 assessment calls for improving the competence and experience of prosecutors and market regulators, as well as the reform of existing legislation and enforcement measures. The 2004 OECD report also recommends enhancing the framework and practices of shareholder rights and equitable treatment.

Principle IV: The Role of Stakeholders in Corporate Governance

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Stakeholders play a limited role in corporate governance, according to the OECD's 2004 report. Furthermore, creditor rights' protection is not adequate, and information is scarce. According to this EBRD report, regulation does not provide for employee stock ownership or profit sharing mechanisms.

Principle V: Disclosure and Transparency

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According to the 2004 OECD report, the regulatory framework of Ukraine sets forth the reporting obligations and modalities for disclosure of major company developments. The Company Law and the securities legislation set the obligations for companies and management boards to disclose financial and non-financial information. According to the EBRD's 2004 report, however, there is no requirement to disclose material information on board members, to prepare and disclose financial and operating data in accordance with IAS, and to be annually audited by an independent auditor. In its 2004 report, the OECD also stresses that these regulations do not require disclosure of related party transactions, and do not apply to closed joint-stock companies. Finally, Ukraine suffers from serious problems with the issuance of timely reports.

In Ukraine, compliance with the disclosure of major share ownership and voting rights in annual reports is perceived to be quite high, according to the 2004 OECD report. This is in great part explained by "the vigilance of the securities commission, which claims not to accept annual reports lacking such information" (p.46). Furthermore, according to a 2007 report by Mycyk et al., the enactment of the Securities Law on May 12, 2006, improved the transparency and access to information of the Ukrainian stock market by providing disclosure information on the issuer as well as main shareholders.

Principle VI: The Responsibilities of the Board

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According to the 2004 OECD report, the Board structure in Ukraine is composed of a Supervisory Board, a Board of Directors, and an Audit Board. In accordance with the law, board members must act in the interest of shareholders. However, Ukrainian legislation does not stipulate any explicit responsibilities of boards in ensuring proper financial reporting. According to the 2004 EBRD report, laws do not ensure the effective monitoring of management by the board, nor do they ensure and the board's accountability to the company and the shareholders. Hence the EBRD recommends that the roles and responsibilities of the supervisory and management boards be strengthened.