H.E. Mr Volodymyr Groysman,
Prime Minister of Ukraine
11th April 2017
Dear Prime Minister,
RE: Increasing the size of the Naftogaz board
The Cabinet of Ministers has decided to increase the Naftogaz supervisory board to seven members. The board currently consists of five members, including three independent members and two state representatives. One new independent board member and one new state representative will be appointed. This is a move in the right direction:
- First, the challenges faced by a company as complex as Naftogaz are better dealt with by a larger, more diverse board. For example, the boards of industry champions such as Statoil and Eni include 10 and 9 members, respectively.
- Second, a larger board allows for better supervision of large companies and efficient organisation of board committees, fully or majority-composed of independent members.
Having said that, it is of utmost importance that the process of searching for appropriate candidates and the nomination process of new board members strictly adheres to the best, most professional and transparent practices. Otherwise, there is a substantial risk of the derailment of Naftogaz reform, which has been hailed as one of the key reforms in Ukraine by the international community. In order to ensure the process of search and nomination is up to the highest standards, we propose the following:
- Extend the application period for candidates up to 60 days, as allowed by the government regulations. The suggested period of 14 days is too short to find appropriate candidates for the position of an independent board member, as evidenced by international and Ukrainian practices.
- Hire a leading, international, reputable executive search company to actively seek out the best talent to complement the existing line-up of world class senior energy executives on the board of Naftogaz. Considering the depth of the challenges the company is still facing, look for complementing the strong line-up of independent directors with increasing diversity from experience, sector, age, ethnicity and gender points of view.
- Remove the requirement for foreign candidates to submit an electronic income declaration according to the new Ukrainian legislation. Foreign candidates are already subject to a variety of rigorous anti-corruption laws in their home countries. Failure to remove this requirement would seriously decrease the pool of prospective candidates, in our view, as this procedure is poorly suited to foreign nationals.
- Supplement the pre-selection commission – which is currently composed of seven government officials – with independent, reputable members. To further raise transparency and openness during the selection process, we would advise to reformat the nomination committee so that independent members would have the decisive influence.
- Fully empower the board, as per plan adopted by the government in 2015, before appointing new board members. This is another step in making the board truly independent and the company resistant to political influence, as is the key goal of the reform in line with the OECD guidelines, which are the ‘gold standard’ of corporate governance.
If these steps are implemented, the larger Naftogaz board will improve corporate governance at one of Ukraine’s most vital state-owned enterprises. Naftogaz has historically been used by politicians and vested interests for their private gain, resulting in billions of dollars in losses to the Ukrainian state, ultimately paid by the taxpayers. The corporate governance reform initiated in 2014 rightly aims to replace the old oversight instruments and should be pursued according to the OECD standards of corporate governance.
The Ukrainian Corporate Governance Academy (UCGA) was established to support efforts to improve corporate governance in Ukraine. The Academy brings together well-respected professionals from key investment banks; consulting, legal, and executive search firms; international financial institutions; as well as select Ukrainian businesses that have paved the way in implementing global standards of corporate governance in the country.
Lenna Koszarny, Member of the Board
Brian Best, Member of the Board
Francis Malige, Member of the Board
Daniel Bilak, Member of the Board
Elena Voloshyna, Member of the Board
Olyana Gordienko, Member of the Board
Jerome Vacher, Member of the Board
Aivaras Abromavičius, Chairman of the Board