The independence of Ukraine’s courts and its supervisory boards of directors, a recent phenomenon meant to improve the governance of state-owned enterprises, face persistent question marks.
But they both passed a recent legal test put to them, in the opinion of Valentyn Gvozdiy, one of Kyiv’s most prominent lawyers. Gvovdiy is a managing partner of GOLAW firm and vice president of the Ukrainian National Bar Association.
He is also chairman of the board of Ukrhydroenergo, one of the state’s largest and most successful energy providers. It is in his capacity as board chairman that Gzovdiy accused first deputy ministry of energy, Vitaliy Shubin, of trying to get him to fire Ukrhydroenergo’s general director, Ihor Syrota.
Gvozdiy said that no reason was given on Jan. 28 for seeking the firing of Syrota, whom he called an excellent manager, other than the government wanted its “own person” in the position. If he didn’t do as told, Gvozdiy said, he would be dismissed from the supervisory board of directors on Feb. 4. Gvozdiy refused the request and, hours before the Feb. 4 board meeting, was indeed fired by email.
He challenged the dismissal as illegal in court – and won in a Feb. 12 ruling by the Kyiv Administrative Court.
Shubin, reached for comment, denied Gvozdiy’s allegations. He said he witnesses who back him. He said the government will appeal the court ruling.
“The ministry appeals the court’s decision,” Shubin said in a written response to the Kyiv Post. “This will be confirmed by any lawyer, especially since we have evidence of manipulation with the electronic court system” to select judges that heard the case.
He denied that he threatened to remove Gvozdiy if he did not fire Syrota. “There are four witnesses to the conversation who have not heard the threats,” Shubin responded.
‘Old way’ changing
The Ukrhydrenergo supervisory board of directors consists of seven members, including four independents like Gvozdiy – chosen in a competitive search by a committee of international and national experts – and three “dependent” board directors, handpicked by the government. He earns about $5,000 monthly as chairman.
While Gvozdiy expressed satisfaction that his fight over principle prevailed, he said the conflict shows that the fight over maintaining the independence of supervisory boards is not over.
“As one of the independent members and chairman of the supervisory board, it is my job to ensure that every decision we take is done so openly and transparently and with the proper balance of what is good for the consumer and the country’s security,” Gvozdiy said. “It was wrong for me to be dismissed because I refused to participate in back-room deals that helped neither. With my reinstatement and the court ruling to protect the other independent members of the board, a clear message has been sent: the old way of doing business is changing in Ukraine.”
Ukhrydroenergo’s importance
Ukrhydroenergo is a major power supplier in Ukraine and one of the largest taxpayers to the state budget. It consists of seven hydroelectric power stations and two hydro-accumulating power plants located on the Dnipro and Dniester rivers, including: Kyiv Hydroelectric Power Station and Kyiv Power Plant, Kaniv HPP, Kremenchuk Hydroelectric Power Plant, Medniyn Dneprovskaya HPP, Dnipro hydroelectric power station, Kakhovka Hydroelectric Station, Dniester HPP and Dniester HPSS.
It is the second-largest producer of electricity after nuclear power, he said, and – with rivers as its source — one of the most stable ones. “It’s also green energy,” he said. “It’s unique. Not every country has this type of generation.”
The company is “the main producer of peak power and the main reserve power source in the power grid of Ukraine since it operates power generating equipment with high maneuverability,” according to its official description.
Gvozdiy says the state-owned enterprise has a turnover of more than $200 million a year and is run professionally by Syrota, the general director the Energy Ministry wanted to fire.
Old ways die hard
Traditionally, state-owned enterprises were run at the whim of whoever was in power in government. “State-owned companies were ruled by ministers who could wake up and decide they wanted to dismiss the director of Naftogaz, (the state-owned oil and gas monopoly). Naftogaz couldn’t do anything about it,” Gvozdiy said.
Often the state-owned enterprises were run not for the benefit of the state – or its people – but rather by insiders who controlled it, milking obscene profits while sometimes saddling taxpayers with the losses.
When Ukraine almost went bankrupt in 2014, following the collapse of the Viktor Yanukovych administration because of the EuroMaidan Revolution, the nation’s international creditors and investors decided to change the rules of the game.
Because the largest 10 state-owned companies paid most of the taxes in what is now a roughly $50 billion national budget, the lenders insisted that these enterprises install independent, competent and paid boards of directors to ward off corruption and political influence.
“It is important to protect these properly, to put in proper government and management,” Gvozdiy explained. “Our state for many years didn’t want to make any reform in this sphere. It was big business. It was not right. It was complete political control over the economic situation. It posed great corruption risks and went against market economic principles. State-owned enterprises generated huge income that was just disappearing. This situation couldn’t exist anymore.”
So starting in 2015 and 2016, the process of corporatization and governance by an independent supervisory board – unable to be appointed or fired by government officials – began in such firms as Naftogaz, Ukrposhta, Ukrzalyznytsia and other big state firms, including Ukrhydroenergo.
While appointed by a committee in a transparent, competitive process, supervisory board members can only be fired by a court ruling, Gvozdiy said, not by government whim.
“That is the guarantee for independent directors to act independently,” he said.
Gvozdiy said he worked too hard and cared too much to let a new deputy minister of energy fire him. He said he worked hard to get the academic qualifications for such work. His degrees include: ICA professional postgraduate diploma in governance, risk & compliance – Prof.Pg.Dip (GRC) – Alliance Manchester Business School the University of Manchester (MBS).
But he found it was hard to get hired in Ukraine because “real corporate governance didn’t exist” until a few years ago. The selection committee that hired him included representatives of the International Monetary Fund, European Bank for Reconstruction and Development, World Bank and representatives from G7 nations. He is proud that he and three others beat out 48 applicants.
“Only the best people were selected,” he said. “Nobody contacted me. Nobody called me to the ministry. Nobody gave me any instructions.”
He researched the company after his appointment to the supervisory board. He was elected chairperson on July 22, 2019. The other independent members of the supervisory board include: Steve Walsh, the ex-head of AES Ukraine and current managing director at Traxys S.A.; Nataliya Mykolska, former deputy minister of Economic Development and Trade of Ukraine; and Oleg Terletsky, who has extensive experience in the energy business. The Ukrainian government representatives included Vasyl Shkurakov, deputy minister of finance of Ukraine; first deputy minister of energy Vitaliy Shubin, who formerly worked at DTEK energy company, and another ministry official.
CA Professional Postgraduate Diploma in Governance, Risk and Compliance – Prof.Pg.Dip (GRC) – Alliance Manchester Business School the University of Manchester (MBS)
