Practice of CEOs appointment at state-owned enterprises after implementation of corporate governance reform

In previous article published on rates.fm we discussed how corporate governance reform would end political corruption in state-owned enterprises. Today, we will take a closer look at some key state-owned enterprises and state-owned banks to see how exactly the reform influenced the practice of CEOs nomination and appointment.

Please note that in cases described below, we only give the barest details sufficient to demonstrate the nomination and appointment practice in place. We, however, will not assess the performance efficiency or professional level of any CEO. Good corporate governance refers to having in place, and operating based on, established procedures rather than making “politically expedient decisions”.

Further, we definitely do not claim that the only objective of the board should be CEO replacement. However, if SOE board has been happy with a CEO appointed for political reasons, and considered such CEO efficient, then why bother with establishing such an additional tier when the government has been capable of handling such appointments on its own.

State-Owned Enterprises

Naftogaz

Existence of independent board: 2017 to 2021, 2023 – present.

Details of CEO appointment:

• In 2014, CEO was appointed by the government resolution and held this position until 2021 with two extensions of his term of office (resolution No. 161-p dated 20 March 2019 and resolution No. 327-p dated 20 March 2020) by the government resolutions without conducting competitive selection procedure.
• In 2021, new CEO was appointed by the government resolution without conducting competitive selection procedure and held this position until 2022.
• In 2022, current CEO was appointed by the government resolution without conducting competitive selection procedure.

Conclusion: Despite that the national corporate governance reform has started from Naftogaz in 2014, we can state that during said time, including the period when independent board was operating, the CEO has never been selected on the basis of transparent merit-based competitive selection procedure. Just like before the reform, respective decision was made directly by the government (i.e. political actor). This conclusion is not an assessment of CEO or his achievements, only constatation of selection procedure.

Ukrhydroenergo

Existence of independent board: Independent board was appointed on 19.07.2019.

• Current CEO was appointed in 2011 by the resolution of Ministry of Energy.
• On 22.07.2019 (three days after appointment) the board made decision to enter into a new five-year contract with CEO without conducting a competitive selection procedure.

Conclusion: Again, as we can see, appointment of independent board essentially has had no effect on CEO nomination and appointment approach. As might be expected, technically the decision to extend the CEO’s term of office was made by independent board. However, needless to say, three days is not enough for conducting competitive selection procedure or at least understanding the state of affairs in the company. Also, in Ukrhydroenergo case, we have established that CEO has never been selected of the basis of transparent merit-based competitive selection procedure.

Ukrposhta

Existence of independent board: Independent board has operated since December 2018.

Details of CEO appointment:

• Current CEO was appointed in 2016 by government resolution. The important point is that Ukrposhta CEO was selected on the basis of competitive selection procedure, however, such selection was conducted by Nomination Committee established at the Cabinet of Ministers. That committee was composed of government representatives and independent members. 
• In August 2018, by resolution of the Ministry for Infrastructure (this time, without conducting a competitive selection procedure), the CEO’s contract was extended until 2021.
• In 2021, by board resolution, the CEO’s term of office was extended until 2023, and thereafter in 2023, the board again extended the CEO’s term of office - no information on conduct of competitive selection procedure in any of the two instances is available.

Conclusion: In this case, we acknowledge that although initially CEO was nominated by the government, he was selected on the basis of transparent merit-based competitive selection procedure conducted by, among others, independent (not controlled by government) members. On the other hand, appointment of independent board has not guaranteed conduct of competitive selection procedure; more so, the only competitive selection ever was conducted by the government.

Energoatom

Existence of independent board: Independent board has never been appointed despite direct legal requirement which came into effect in 2017.

Details of CEO appointment:

• Since 2017, two acting CEOs were appointed by government resolutions, the first in 2019 by resolution No. 1195-p of the Cabinet of Ministers and the other, in 2020 by resolution No. 361-p of the Cabinet of Ministers (thereafter the latter was appointed as CEO in 2022) – without conducting competitive selection procedure.

Conclusion: In Energoatom case, we observe a different trend: the government, despite direct legal requirement, has never appointed independent board, and as a result retains full control over nomination and appointment of CEO.

State-Owned Banks

Oschadbank

Existence of independent board: Independent board has been operating since 2019.

• CEO appointed in 2014 was appointed by the board (consisting of political appointees who were representatives of the President, Parliament and Government) without conducting competitive selection procedure.
• In 2020, the board appointed a new CEO based on competitive selection procedure.

Ukreximbank

Existence of independent board: Independent board has been operating since 2019.

• CEO appointed in 2014 was appointed by the board (consisting of political appointees who were representatives of the President, Parliament and Government) without conducting competitive selection procedure.
• In 2020, the board appointed a new CEO based on competitive selection procedure.

Conclusion: In each of state-owned banks, appointment of independent board resulted in replacement of long-serving CEO appointed by political decision with new CEO nominated and appointed by independent board on the basis of competitive selection procedure.

CONCLUSIONS

The above demonstrates that the corporate governance reform has changed the nomination and appointment practices at state-owned banks, and CEOs appointed by the government for political reasons were succeeded by CEOs selected by independent boards on the basis of competitive selection procedure.

On the other hand, at state-owned enterprises, newly established independent boards have had practically no say in replacement of CEOs, and new CEOs have been nominated and appointed typically (except at Ukrposhta) by political government decision. The most these boards could do, they merely re-appointed CEOs nominated in that way. In other words, the government still has opportunities for political intervention via CEOs appointments, decision-making at key SOEs as was the case before the reform.

We stress that in this article, we have only reviewed CEOs appointments; if we do a next step and review CEOs removals, we will get even more evidence that opportunities for political interference still exist.

If we look for explanations why change implementation has been more successful at state-owned banks compared to state-owned enterprises, some may claim that the legislation applicable to state-owned banks was, at least at the time, better, and they will be right. However, as demonstrated by Energoatom case, legal requirements alone do not always guarantee that change happens.

If we look deeper, the presence of powerful regulatory authority in banking sector (National Bank of Ukraine) is what makes the difference. NBU reform is considered as one of the most successful reform cases, and the country now has an institutionally capable banking regulator protected from undue political interference.

NBU supervision focuses, among other things, on ensuring that the banks (including state-owned banks) have good corporate governance as a prerequisite for sustainability of the financial system. Hence, in addition to ownership entity (the government), another entity that shapes the corporate governance practices at state-owned banks is the independent regulator that promotes good governance.

Existence of independent regulator has been a factor in practically the only case when CEO of a key state-owned enterprise was appointed by independent board on the basis of competitive selection procedure, i.e. Ukrenergo CEO in 2020.

At the time, the government intended to have Ukrenergo certified as transmission system operator as a precondition for integration into the European electricity market. The organisation performing such certification is the Energy Community Secretariat, an international organisation.

In order to be certified, a company must satisfy certain requirements, such as requirement to be independent, including from the government. So, appointment of Ukrenergo CEO by government resolution would affect adversely the prospects of obtaining the certification sought by Ukraine.

Summarising the above, corporate governance indeed is an essential element for it sets transparent rules for good governance and eliminates undue influence and political interference in SOE. But will legislation implementing such rules alone be sufficient for real change of practices? In other words, what if in order to have effective corporate governance, we need to focus on other reforms, such as public administration reform, judicial reform, having a fully functioning stock market?