a survey of corporate governance practices in the...

A Survey of Corporate Governance Practices in the

Ukrainian Banking Sector

Compiled and Drafted by KPMG Ukraine

Commissioned and Edited by the International Finance Corporation

Sponsored by the Swiss State Secretariat for Economic Affairs

Kyiv, 2004

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ This publication should not be reproduced in whole or in part without the written permission of the copyright holder. This publication has been prepared as a guidance document and is not intended to be exhaustive. While the utmost care has been taken in the preparation of this publication, it should not be relied upon as a substitute for legal advice or as a basis for formulating business decisions. Any views expressed in this survey are those of the authors and do not necessarily represent the views of 1) the Swiss Government, 2) the World Bank Group, and 3) the International Finance Corporation.

© 2004 International Finance Corporation

2121 Pennsylvania Ave. NW, Washington, DC 20433, United States of America A Member of the World Bank Group

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ TABLE OF CONTENTS I. Introduction ………………………………………………………………………………… 4

1. About the Survey and IFC ……………………………………………………………………………. 4 2. The Banking Sector in Ukraine ……………………………………………………………………… 6

II. Executive Summary …………………………………………………………………… 9

1. Conclusion …………………………………………………………………………………………………….. 10 2. Corporate Governance Indicators ………………………………………………………………. 16

III. Findings of the Survey ……………………………………………………………… 19

1. Awareness of and Commitment to Corporate Governance Practices …………. 19 2. Board Practices …………………………………………………………………………………………….. 29 3. Internal Control …………………………………………………………………………………………….. 43 4. Disclosure and Transparency ……………………………………………………………………….. 49 5. Shareholder and other Stakeholder Rights ………………………………………………….. 57

IV. Annex ……………………………………………………………………………………… 65

1. Characteristics of Surveyed Banks ………………………………………………………………. 65 2. Corporate Governance Indicators ………………………………………………………………. 72 3. Adherence to Basel Committee Corporate Governance Guidelines ……………. 78 4. Corporate Governance in Banking – Legal Framework in Ukraine …………….. 80 5. Promoters of Corporate Governance in Ukraine …………………………………………… 81 6. Banking Sector: Statistical Data ………………………………………………………………….. 82 7. Terminology …………………………………………………………………………………………………… 83

Contacts ………………………………………………………………………………………… 85

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ I. INTRODUCTION 1. ABOUT THE SURVEY AND IFC The Purpose of this Survey The main objectives of this survey are to determine and understand: the extent to which internationally recognized corporate governance best practices

are implemented in the day-to-day activities of Ukrainian banks; whether Ukrainian banks have and use methods to evaluate their client’s corporate

governance practices when providing financial services. Corporate governance discussions and initiatives have increased over the last two years in Ukraine. The State Commission on Securities and Stock Markets recently published its Principles of Corporate Governance for joint-stock companies in Ukraine. Multilateral institutions and international technical assistance providers are pushing the agenda for corporate governance forward. The survey results will shed more light on this issue for the further development of this subject in the banking sector. They will also serve as a basis for a future technical assistance program that should bring value to the Ukrainian banking sector, its institutions, and the regulators, as well as potential investors. Methodology The survey reflects responses from 50 banks from an original sample of 128 banks that were sent a questionnaire. As of April 2004, there were 156 registered and licensed banks in Ukraine. The survey results therefore reflect 32% of the banking sector. The responses involved self-reporting based on a questionnaire developed by IFC, and individual interviews with each of the respondent banks. The responses were not verified using alternate sources or information. Annex 1 lists the characteristics of the surveyed banks. Interviews with government officials, representatives from non-governmental organizations and industry associations provided further insight into the banking sector. IFC would like to thank the Boards of the participating banks and all interview partners for their time, effort and valuable comments. Timeline The survey team commenced its work in February 2004. Banks received the questionnaire in the last week of February and data entry closed on April 21st , 2004. Why Corporate Governance Matters for the Banking Sector Banks are a critical component of any economy. They provide financing for commercial enterprises, basic financial services to a broad segment of the population and access to payment systems. In addition, some banks are expected to make credit and liquidity available in difficult market conditions. The importance of banks to national economies

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________

is underscored by the fact that banking is, almost universally, a regulated industry and that banks have access to government safety nets. Yet, the business of banking has a number of intrinsic risks that may jeopardize the entire financial system of an economy: a) high debt to equity ratios which can make banks vulnerable to losses; b) possible mismatch in maturities between assets and liabilities; c) dependence on the confidence of depositors and the financial markets for securing necessary funds; and d) general opaqueness of the business of banking. It is therefore of crucial importance that banks have strong corporate governance. Corporate governance aims to protect the interests of depositors and to minimize asymmetric information between a bank’s managers, its owners and customers. The common ways to achieve these aims are through deposit insurance schemes, capital adequacy requirements, disclosure requirements (for product, services and financial statements), internal control systems, and prudential supervision. The safety and soundness of the banking system cannot solely rely, however, on the efforts of the regulatory authorities. As Alan Greenspan, the Chairman of the US Federal Reserve Board, once said, “we need to adopt policies that promote private counter-party supervision as the first line of defense for a safe and sound banking system.” 1

Apart from their macroeconomic functions, their regulation and access to government safety nets, banks further differ from other corporations in terms of their relationship with stakeholders other than shareowners, namely depositors and other creditors. The Organization for Economic Co-operation and Development (OECD) therefore uses a wider definition of corporate governance for banks, looking at “a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” The Basel Committee on Banking Supervision’s (BCBS) guidelines in addition strongly emphasize adequate internal controls as a way to foster good corporate governance in banks. In the banking industry, corporate governance therefore involves the manner in which the business and affairs of individual corporations are governed by the state regulator, the bank’s Supervisory Boards and senior management, affecting how banks: Set corporate objectives to generate sustainable economic returns to owners; Run the day-to-day operations of the business; Protect the interests of depositors; Consider the interests of other recognized stakeholders; and Align corporate activities and behaviors with the expectation that banks will operate

in a sound manner and in compliance with applicable laws and regulations. About the International Finance Corporation The International Finance Corporation (IFC) is a member of the World Bank Group. IFC works to reduce poverty and improve people’s lives in emerging economies by enabling and promoting sustainable private sector investment at the frontiers of economic

1 Source: Jonathan Charkham, Guidance for the Directors of Banks, The World Bank, 2003

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development. IFC itself is the world’s largest multilateral investor in emerging markets. Since its founding in 1956, IFC has invested nearly $40 billion of its own capital and syndicated more than $20 billion in some 2,800 companies in 140 countries. Why Corporate Governance Matters for IFC IFC is a leader among multilateral financial institutions in integrating corporate governance considerations into all phases of the investment process. IFC’s long history of practical experience structuring investments, appraising investment opportunities and nominating Supervisory Board members has allowed it to put corporate governance principles into action. A focus on good corporate governance practices in client companies allows IFC to manage risks and add value to its clients. In addition to the benefits to individual client companies, working to improve corporate governance contributes more broadly to IFC’s mission to promote sustainable private sector investment and strengthen capital markets in its countries of operation. IFC and Ukraine Ukraine became a member of IFC in 1994. Since then, IFC has invested close to US$100 million in the Ukrainian private sector and has further contributed to the development of the private sector through its technical assistance work conducted under the auspices of the Private Enterprise Partnership (PEP). PEP works to develop strong, self-sustaining economies in the former Soviet Union that serve all levels of society. Together with its donor partners, PEP assists private companies and governments to 1) attract private direct investment, 2) stimulate the growth of small and medium-sized enterprises, and 3) improve the business enabling environment. 2. THE BANKING SECTOR IN UKRAINE The National Bank of Ukraine (NBU) has a dual function as the country’s central bank as well the regulator of the banking sector. As of April 1, 2004, the National Bank reported 156 registered and licensed banks, most of them in the legal form of joint-stock companies. Only two banks are officially owned by the state: Oschadny bank (the savings bank), and Ukreximbank, traditionally active in foreign trade financing. Unlike Russia, the state owned banks do not dominate the banking sector in terms of total assets or retail market share. This is even more remarkable given the reality of Oschadny’s special status as the only bank in Ukraine with an explicit state guarantee on retail deposits.2 The remaining banks are privately owned. 19 banks have partial foreign ownership while eight are 100% foreign-owned. A few of these foreign banks are among the top twenty largest banks by assets and equity (e.g. Raiffeisenbank, ING Bank). While these banks have certainly stimulated competition and have contributed to the improvement of technology, services and product range, Ukrainian owned banks still control a vast majority of the market. Most banks in Ukraine are universal banks, i.e. offering all banking services and products to corporate and individual clients under one roof.

2 All other banks with retail deposits need to join a private deposit insurance fund.

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Despite the relatively high number of banks, the sector remains small in terms of assets ($20bn, equal to 34% of GDP; in Central European countries this ratio is usually over 60%) and capital (the capital adequacy requirement was increased from 8% to 10% only in March 2004; $7.5mn is the minimum capital base) yet is highly concentrated. The ten largest banks control 54% of the sector’s total assets. As a result, the banking sector is rather weak in providing the financial assistance needed for the real sector, especially small and medium sized enterprises. The banking sector has nevertheless been very resilient to changes. Over the last ten years, the top ten banks have remained relatively unchanged in ownership structure and activities. The particular ownership culture in Ukraine has been largely blamed for this situation as large financial industrial groups and politically influential individuals have been reluctant to loosen control over their banks that too often serve particular interests of these major shareholders. A gradual change in attitude has nevertheless emerged and changes in the ownership landscape are likely in the medium term; the major banks are preparing themselves by revamping their information technology systems and management structures. The Ukrainian banking system is thus characterized by an intricately spun network of interests as well as economic and political relationships among major shareholder groups. Outsiders find it difficult to decipher this web of dependencies and to identify the real driving force behind a bank’s strategy and business decisions. Transparency and the separation of ownership and management, crucial for generating trust and achieving an appropriate balance of accountability between the governing bodies of a corporation, have thus been regularly cited as a key corporate governance concern for the Ukrainian banking sector. Other characteristics of the banking sector include the struggle to secure long-term sources of funds amid the rising demand for long-term financing from clients, the high percentage of lending in foreign currency, a high cost base resulting in low profitability, and a lack of diversification of revenues. Of particular concern is the moderate asset quality of banks, in particular loans to corporations. The recent strong growth rate in assets reflecting an improving economy and increasing public confidence in banks may further deteriorate the asset quality. Shrinking interest margins due to stiffer competition may prompt banks to accept lower quality assets, albeit with higher margins. In addition, banks are venturing into new untested lines of business, such as consumer finance, to diversify revenue streams and secure higher margins. Internal risk management systems and processes in many banks might not be able to cope with these volumes and the banking sector’s general lack of properly trained banking workforce will not help to ease the situation. The low total resources per household (US$1380 per annum), a financially unstable industry sector, weak legal protection of creditor rights, and the prevalence of red tape adds further constraints to the banking sector. The National Bank of Ukraine addressed these shortcomings by presenting a comprehensive banking sector development program to the government in 2003. Although still not formally approved, the National Bank is using this program as its internal roadmap for reforms. In 1998, the National Bank introduced new accounting rules based on International Financial Reporting Standards (IFRS). In 2004, capital

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ adequacy requirements were tightened and new legislation governing mortgages and mortgage-backed securities came into force. Proposals for a credit bureau have been made and the foundation for a pension system put into place. A new law on Anti-Money Laundering helped to remove Ukraine from the blacklist of the Financial Action Task Force on Money Laundering (FATF) in early 2004. The National Bank’s development program foresees further improvements in risk management, transparency of operations, protection of the rights of creditors, depositors and borrowers as well as the general corporate governance of banks.

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II. EXECUTIVE SUMMARY This survey aims to assess the level of corporate governance practices in banks in Ukraine. A total of 52 banks from an original sample of 128 licensed banks participated in the survey. The original sample was compiled by excluding banks with more than 70% foreign ownership, banks in the process of restructuring and bankruptcy, and most banks established as a limited liability company. The 50 banks that were statistically relevant3 represent 32% of all banks, 41% of total capital and 45% of total assets in the banking sector of Ukraine as of April 2004. The surveyed banks gave their views on corporate governance and their adherence to internationally accepted practices and guidelines by filling in a detailed questionnaire. Interviews with top executives from the surveyed banks supplemented the information. The surveyed banks cover all regions of Ukraine and include banks of various size, business focus, ownership and legal structure. The participating banks range in size from 40 to 16,800 employees (50% of the banks have less than 400 employees). 70% of the banks are registered as Open Joint Stock companies (OJSCs), 22% are Closed Joint Stock companies (CJSCs) and 8% are in the form of Limited Liability Companies (LLCs). Within the responding sample, 48% of banks have less than 50 shareholders, while 24% of the banks have more than 500 shareholders. In the majority of surveyed banks, the questionnaires were completed by representatives of top management, such as Chief Executive Officers (CEO) / Heads of the Management Board (46%), other members of the Management Board (24%), or heads of business divisions (20%). Banks that rejected the offer to participate in the survey cited confidentiality issues, a lack of interest in the topic, and a lack of resources to complete the questionnaire as the main reasons for their rejection. Low levels of awareness of corporate governance practices or of the importance of the role of good corporate governance for the Ukrainian banking sector were other reasons for rejection.

3 Two banks missed the cut off date for the questionnaire and were therefore not included in the statistics.

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ KEY FINDINGS

1. Banks are generally aware of corporate governance principles but lack proper motivation or resources to improve their practices beyond minimum legal requirements. Most banks view the status of corporate governance in the Ukrainian banking sector as underdeveloped and would welcome improvements in the legislation.

2. The National Bank of Ukraine and senior banking ‘change leaders’ with significant influence over key stakeholders are the key driving forces for adopting internationally accepted corporate governance principles in the banking sector.

3. Banks struggle to define the proper functional roles of their governing bodies, especially of the Supervisory Board (they either have limited/nominal responsibilities or are too actively involved in day-to-day operations).

4. It is common that certain large shareholders directly appoint members to the Supervisory Boards and Management Boards. These appointees tend to perform their oversight and fiduciary duties on behalf of those shareholders only, and not for the sole benefit of the bank, its entire shareholder base or other stakeholders.

5. Banks in general do not see the need for or feel pressure from key stakeholders to further improve their transparency and disclosure practices.

6. The internal control and internal audit functions are in the early stages of development in the Ukrainian banking sector, and have a number of shortcomings in comparison with international best practice.

7. Banks do not place significant enough weight on corporate governance criteria in their risk assessment of corporate clients.

1. CONCLUSIONS Conclusions drawn from the survey results are given below and are grouped into the following broad areas:

1. Awareness of and Commitment to Corporate Governance Principles; 2. Board Practices; 3. Internal Control; 4. Disclosure and Transparency; and 5. Shareholder and other Stakeholder Rights.

Awareness of and Commitment to Corporate Governance Practices Banks are generally aware of corporate governance principles. The surveyed banks

displayed a solid awareness of the basic concepts of corporate governance (only 4% of banks do not recognize either the Ukrainian Corporate Governance Principles or the Basel Committee on Banking Supervision Governance Principles). However, a number of banks have stated that these recommendations are incorporated into internal procedures and documents mainly for compliance purposes.

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ The main drivers for changes in corporate governance are legal requirements and

the need to improve internal efficiency. The level of sophistication and extent of corporate governance improvements largely depends on the existence of an internal high-level ‘change leader’ with significant influence over key stakeholders. Such a person is usually a large shareholder, the Head of the Supervisory Board or the Head of the Management Board with significant experience in banking and a thorough understanding of corporate governance issues. The efforts of the National Bank of Ukraine to improve corporate governance by incorporating international best practices into regulations play a significant role in motivating Ukrainian banks to change their internal practices and procedures.

Corporate governance responsibilities are not clearly assigned. The responsibility to

maintain effective corporate governance practices are usually assigned to the Head of the Supervisory Board and/or the Head of the Management Board. Only 12% of banks have a Corporate Governance Secretary/Officer and another 18% are planning to introduce such a position in the future. Only two banks have a Supervisory Board committee, which is responsible for promoting corporate governance.

Banks are willing to formalize corporate governance principles internally. While only

14% of the surveyed banks have introduced their own company specific Corporate Governance Code, more than 58% intend to introduce a Code in the near future. More than a quarter of surveyed banks have improved their internal documentation on corporate governance in the past three years, and 68% of banks intend to further improve their documentation in the near future.

Banks do not commit significant resources for corporate governance improvements.

Although 64% of banks consider a lack of experience and knowledge as one of the key barriers to corporate governance improvements in the Ukrainian banking sector, only 46% of banks provide governance training programs for their board members. And, of the 60% which would like to obtain external consultancy services on corporate governance issues, only 14% are prepared to pay for these services in full.

Board Practices Banks are gradually moving towards the separation of roles and responsibilities

between the Supervisory Board and the Management Board. Many banks have formalized the functions and responsibilities of their boards within the past three years through the introduction or amendments of by-laws and internal policies. Banks are also formalizing and improving coordination between Boards through the introduction of standardized and regular reports, and the establishment of Supervisory Board and Management Board secretariats.

There is a trend towards developing the Boards into truly collective bodies of

decision-making and responsibility. Even in closely held banks or in banks where a key shareholder is actively involved in management, the impact of the Supervisory and Management Boards in the decision-making process is increasing.

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The Supervisory Board Banks struggle to define the proper functional role of the Supervisory Board. In

some banks, Supervisory Boards do not actively shape the bank’s strategy, or exist for compliance purposes only. In other banks, Supervisory Boards unduly involve themselves in the bank’s operational and day-to-day activities. In only 58% of surveyed banks is the Supervisory Board responsible for defining the bank’s mission and overall business strategy, and in only 14% of banks does the Supervisory Board challenge information provided by the Management Board. At the same time, in 22% of banks senior management reports to the Supervisory Board on a daily basis. For a few closely held banks, there is in reality almost no difference between meetings of the Supervisory Board and the General Shareholders’ Meeting.

The internal organization of Supervisory Boards barely meets internationally

accepted guidelines. Corporate governance best practices recommend having 25% or at least three independent directors on the board. However, 50% of banks have only 3 or 4 board members in total, and only 30% have one or more independent director. The level of independence or the extent of influence of those directors may be questionable, though. The small size of Supervisory Boards may also explain the absence of specialized board committees: only 18% of the banks have one or more Supervisory Board committee. It is also unclear whether such committees are exclusively subordinated to the Supervisory Board, or have dual subordination to both Boards.

Banks have deficiencies in defining obligations for the disclosure of conflicts of

interest. 78% of banks do not specify in their internal documents that members of the Supervisory Board must disclose conflicts of interest.

Banks generally do not disclose remuneration paid to Supervisory Board members.

Only 10% of banks disclose remuneration of their Supervisory Board members. When such information is being disclosed, it is usually disclosed for each member of the board individually. It should also be noted that 76% of banks do not remunerate their Supervisory Board members at all.

There is a lack of formal performance assessment procedures. Only 2% of banks

have a formalized internal performance evaluation procedure for members of the Supervisory Board. This might be partially explained by the fact that 76% of banks do not directly remunerate their board members for their work. In some cases, selected shareholders directly appoint (and dismiss) board members - a practice that runs against the principle of transparent election processes. Unclear definitions of the roles and responsibilities of the Supervisory Board and its members may also explain this lack of formal evaluation procedures. The Management Board

Most surveyed banks have a formalized process for nominating and electing

Management Board members. In most cases members of Management Boards are nominated either by the majority shareholders, the Chief Executive Officers or by Supervisory Board members and then approved by the Supervisory Board.

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ In general, Management Boards have adequate structures, qualified and

experienced members. Half of the surveyed banks have seven or more members on the Management Board. The average age of executives is 40, and 80% of senior managers have a bachelors or higher degree in economics and administration. One third of senior executives are women.

The Management Boards are responsible for the operational and financial results

and are reasonably involved in operational management. In 98% of banks the Management Board is ultimately responsible for operational results and 62% meet at least once a week to review performance results. The Management Boards also supervise credit risk exposure and compliance (88% and 80%, respectively). In 58% of banks, the Management Boards shape the overall mission and business strategy of the bank, sometimes based on general guidelines from shareholders or Supervisory Boards. Management Boards were usually the first to realize the need for a formalized strategy in order to improve performance, serve as a guide for decision-making and as a tool of communication and performance assessment between the key stakeholders.

There are deficiencies in defining responsibility for the disclosure of conflicts of

interest. 66% of banks do not specify in their internal documents that members of the Management Board must disclose conflicts of interest.

Banks have better performance evaluation systems and compensation procedures

for the Management Board, but are reluctant to disclose remuneration. More than half of the banks link compensation to operational results, and the majority of banks use different means of assessing the performance of executives, including evaluation by the Supervisory Board (60%), feedback by the Chief Executive Officer (60%), direct feedback from shareholders (24%), and through formal performance assessment systems (10%). Only one surveyed bank discloses the remuneration of the Management Board.

Internal Control Almost all banks have an internal control function. However, in most banks internal

control is fragmented and lacks an integrated and comprehensive approach. The control system mainly consists only of the two legally required components – internal audit (84%) and revision commission (70%).

The functional role of internal control is somewhat limited. In most banks the role

of internal control is to ensure the completeness and accuracy of financial information (86%), check compliance with legal norms (90%) and internal documents (80%), and implement risk management procedures (74%). Only in 50% of surveyed banks does the internal control function ensure segregation of duties within the bank, and in only 48% of banks is it used to mitigate conflicts of interest.

Internal auditors lack clear and direct functional reporting lines. Most banks are in

the process of changing the internal auditors’ reporting line from the Management Board or CEO to the Supervisory Board, as was recently required by the regulator. In most cases internal auditors have dual reporting responsibilities – work plans are

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set and modified by both the Supervisory Board and the Management Board and both bodies receive their reports.

Banks pay little attention to the assessment of client corporate governance

practices. While 52% of banks confirm the inclusion of corporate governance principles in their credit risk assessment, these criteria barely scratch the surface of modern governance systems. In most cases, the client’s corporate governance practices and procedures are evaluated from a legal perspective only (for example, to verify power of attorneys).

Banks accept financial transactions with related parties. Almost all banks have

confirmed that financial transactions with major shareholders, members of the Supervisory Board and senior management, as well as with borrowers associated with the above parties, are not prohibited by the banks’ internal procedures and in some cases constitute more than half of the bank’s business. Most banks are in the process of reducing the share of related party transactions by either setting a relative limit on the share of such transactions or a total maximum value of such transactions.

Banks have lax internal policies with regard to communication and approval of

related party transactions. In most cases, banks follow the minimum requirements of approval and communication procedures for related party transactions. The internal control function verifies such transactions in only 60% of the surveyed banks.

Disclosure and Transparency Banks are transitioning to full IFRS. 76% of surveyed banks have already

transitioned their internal accounting to comply with IFRS, and another 2% are planning to do so in the near future. Almost all of these banks make their IFRS reports available to the public, albeit on request only. In most cases the transition to IFRS is completed only within the scope required by National Bank regulations, which does not include all international standards of financial reporting.

The independence of the external auditor does not appear to be an issue in a

national context. The “Big 4” or other international audit companies audit 58% of the surveyed banks. While 56% of banks confirm receiving other services from their external auditor [most often advisory services (34%) and tax consulting services (28%)], fees for such services never exceed the audit fee. The – legally accepted – practice of the selection and the appointment of the external auditor by the boards (either Supervisory Board or Management Board) rather than the shareholders’ meeting raises more questions regarding the independence of the external auditor.

Banks comply with legal requirements for the disclosure of information, but rarely

provide additional information to the wider public. The range of information disclosed by the banks to the wider public is usually limited to the minimum required by law; although it is commendable that banks use multiple channels (publications, internet, information stands in branches, etc.) to distribute their information. Additional information that helps to gain a more holistic view of the banks’ current and future situation is rarely available, at best upon written request

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only. Three quarters of banks have stated that the lack of legal requirements to do so is the main reason for not improving disclosure.

Banks do not disclose material and related party transactions. Only 26% of the

banks disclose information on both related party transactions and transactions involving more than 5% of the bank’s assets by book value. At the same time, 36% of banks disclose neither type of transactions.

Shareholder and other Stakeholder Rights Banks hold annual General Shareholders’ Meetings (GSM) and there is a proper

notification process. All surveyed banks hold their General Shareholders’ Meeting and 64% of banks notify their shareholders more than 45 days in advance. The information sent to shareholders, however, is usually limited to the agenda, time and place of the meeting with supporting documents often available upon written request only.

Banks need to improve the dissemination of the results of the General

Shareholders’ Meeting. Although 98% of banks confirmed that they distribute the results to shareholders, almost one third of banks do so upon request only. In other cases the results are published in the press (34%) or on the bank’s website (30%). 28% of banks distribute the results via regular mail, e-mail, or courier.

Minority shareholders’ appointees are well represented in Supervisory Boards. A

total of 82% of surveyed banks have minority shareholders. In 54% of those banks minority shareholders have exercised their right to propose a representative to the Supervisory Board. In these cases, they have appointed an average of over two Board members, or over 35% of their bank Boards.

Formal mechanisms for the protection of minority shareholders are not sufficiently

in place. Half of the banks provide for equal treatment of shareholders with respect to voting rights, subscription rights and transfer rights. Only 12% of the banks declare that they have internal policies dealing with changes in controlling stakes.

Banks in general do not limit shareholders’ rights on sale of shares. Half of the

surveyed banks have purchased shares from their shareholders in the past, with some banks actively buying out minority shareholders. The shareholders can sell shares to other shareholders (in 76% of banks), to the bank itself (60%), or in over-the-counter trading (56%). More opportunities for shareholders to sell their shares to the bank would be welcome for illiquid shares. Banks would also be well advised to follow more eagerly the concept of fair valuation for the fixing of the sale price.

Banks could do more to protect employees’ interests. 48% of banks indicated that

their employees have representations/trade unions, however, only one quarter of these bodies have been invited to Supervisory Board meetings or Management Board meetings. In 8% of banks, employees have representatives on the Supervisory Board.

Banks, in general, realize their role as socially important institutions. Only 6% of

banks do not engage in any sponsorship/social activities, while others take pride in

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their long-time sponsorship activities and social programs. A significant number of banks have formal or informal policies on supporting social programs, some have an approved budget for such activities. Among the most popular sponsorship activities: supporting cultural events and local or national charity organizations.

2. CORPORATE GOVERNANCE INDICATORS The key factors determining the quality of the banks’ corporate governance practices were combined in order to enable an overall evaluation of the current state of corporate governance practices. The composite corporate governance indicators are calculated as the average of positive answers to key questions in four areas:

Commitment to Corporate Governance; Supervisory Board; Transparency and Disclosure; and Shareholder Rights.

The analysis of the answers presented by the banks revealed that shareholder rights are better addressed than other governance issues. Presumably this is due to the fact that this area is covered more extensively by Ukrainian legislation and that the majority of banks have a small but forceful shareholder base. At the same time, banks need to take voluntary steps in order to address certain governance issues, which are not currently covered by legislation and/or regulation. The areas for improvement include:

Disclosure of related party transactions; Role, organization and structure of the Supervisory Board; Training programs for board members and key staff; and Treatment of minority shareholders.

Corporate governance indicators are also presented separately for the Ukrainian regions covered by the survey. The composite corporate governance indicators by geographic area as well as by existence of foreign shareholders are presented in the table below. Table 1a. Composite Corporate Governance Indicator (CCGI) by Geographic Segments All banks Without foreign ownership With foreign ownership CCGI Number of

respondents CCGI Number of

respondents CCGI Number of

respondents North 59% 28 59% 25 57% 3 Central 56% 6 55% 5 59% 1 West 69% 3 68% 2 71% 1 East 56% 8 56% 7 53% 1 South 52% 5 52% 5 N/A N/A Overall 58% 50 57% 44 59% 6

The survey shows that banks with foreign ownership appear to have slightly better corporate governance practices than banks without any foreign capital. This indicates that foreign shareholders have positively influenced the internal policies and procedures of such banks.

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Contrary to common belief, the Northern Region (with Kyiv) did not fare better than the rest of the country. The first price goes to the Western Region. Furthermore, the survey revealed a certain correlation between the number of shareholders and the quality of corporate governance practices. Banks with more than 500 shareholders have better practices than banks with less than 100 shareholders as seen in Table 1b. Table 1b. Composite Corporate Governance Indicator by Number of Shareholders All banks Number of shareholders

CCGI Number of respondents

0 – 20 56% 15 21 – 100 56% 12 101 – 500 58% 11 501 - more 61% 12 Overall 58% 50

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Chart 1. Overall Corporate Governance Indicators

Transparency and Disclosure

100%

76%

6%

0%

24%

76%

94%

24%

The bank provides information to shareholders andinterested parties on financial statements, operating

results, major shareholders, top management

The bank keeps its accounts in accordance withIFRS

Related party transactions are fully or partiallydisclosed to SB

Related party transactions are disclosed to thegeneral public

Shareholder Rights

96%

98%

14%

100%

4%

2%

86%

0%

The results of the GSM are distributed toshareholders

The GSM does not approve operational plans ofbank

The GSM and not the Supervisory Board elects theexternal auditor

Shareholders are informed and provided alldocuments ahead of the General Shareholders’

Meeting (GSM)

Supervisory Board

18%

12%

30%

30%

82%

88%

70%

70%

The bank has established SB committees

The bank has a corporate secretary, solelydedicated to the position

The bank has independent directors on SB

The SB has established or reviewed the keyelements of risk management policy

Commitment to Corporate Governance (CG)

98%

96%

72%

38%

72%

2%

4%

28%

62%

28%

The bank undertook efforts to improve CGpractices in the past 3 years

The bank plans to improve CG practices in thefuture

The bank has developed or intends to develop aCG code as a separate document

The bank has a training program for its SB or MBmembers

The bank considers CG as a means to improveinternal operations

Yes No or no answer

`

18


III. FINDINGS OF THE SURVEY 1. AWARENESS Of AND COMMITMENT TO CORPORATE GOVERNANCE PRACTICES Awareness and commitment are key criteria when assessing the quality of corporate governance practices at a corporation. Questions related to the general goal of corporate governance, the nature of internal documents and planned measures to improve current practices along with inquiries about a bank’s corporate governance bodies, staff training and disclosure of practices were posed in order to reveal the real level of awareness and commitment. Interviews with representatives from government agencies, banks, analysts and non-governmental agencies active in the financial sector further contributed to the assessment. On the legislative side, the situation is promising as almost all important laws for fostering good corporate governance are in place or being reviewed (as with the general law on joint-stock companies). A major breakthrough has been the publication of the Ukraine Corporate Governance Principles by the State Commission on Securities and Stock Market in December 2003. In the banking sector, the relevant legislation is nearly compliant with all relevant directives of the European Union4. The National Bank of Ukraine’s roadmap for the development of the banking system firmly puts corporate governance at the forefront. While refinements of existing laws and elimination of discrepancies with international best practices may certainly add further value, it is important that the discussion on awareness and commitment to corporate governance is not being limited to conformity with the legislation. The temptation to delegate responsibility for good corporate governance practices to the legislator and the regulator is prevalent among Ukrainian bank management and controlling shareholders. Alan Greenspan’s notion that “private counter-party supervision is the first line of defense for a safe and sound banking system” - and not the public sector - has not yet fully found its way into the board room of many banks. Having said that, appeals to shareholders and bank management for greater commitment will not automatically result in improved practices. Nor will greater legal enforcement. It is necessary to adopt a more holistic view of the current situation of corporate governance in the banking system by investigating the cause for the behavior in a national context and not merely trying to fix the effects. Main Goals of Corporate Governance The majority of banks appreciate the importance of corporate governance in their activities and cite many advantages to be gained from implementing more effective corporate governance practices, such as support to risk management (76%), improvement of internal operational efficiency (72%), improvement of internal controls (68%), conformity with laws and regulations (54%) and an increase in the bank’s capitalization (48%) as seen in Chart 2.

4 Banking Law Scoreboard Paper, UEPLAC, September 2003

19

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ According to the questionnaire results, the contribution to risk management and internal efficiency gains rank higher than the attraction of investments (30%). However, during our interviews it was frequently mentioned that the improvement of relations with current investors and the possibility of attracting external investment in the long-term play an important role in motivating banks to improve their practices and procedures. The extent and role of corporate governance within a bank also largely depends on the existence of an internal high-level ‘change leader’ with significant influence over key stakeholders. Chart 2.

Main Goals of Corporate Governance(multiple choice)

30%

36%

42%

48%

54%

68%

72%

76%

0% 20% 40% 60% 80%

Attract external investments

Improve efficiency of coordination betweenshareholders - SB - MB

Enhance public image

Increase capitalization

Conform to laws and regulations

Improve the internal control system

Improve efficiency of internal operations

Contribute to overall risk management practices

% of Banks

Improving corporate governance in some banks is seen as a first step in launching change and improvement programs throughout the organization, and is usually accompanied by strategy development, organizational changes, and improvements in internal documentation and processes. Adherence to Recognized Corporate Codes/Principles A majority of banks (66%) recognizes the Ukrainian Corporate Governance Principles and/or the Recommendations of the Basel Committee on Banking Supervision (BCBS) (56%) as seen in Chart 3, which indicates a strong awareness and acceptance of these two sets of recommendations and principles. Only 4% of the banks do not follow any recommendations or principles set by nationally or internationally recognized bodies or regulators. A number of banks have stated that international corporate governance recommendations are incorporated into their internal procedures and documents mainly for compliance purposes. Banks admit that their awareness of such codes can be attributed to the efforts of the National Bank of Ukraine to promote corporate governance improvements in the Ukrainian banking sector.

20

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Chart 3.

Adherence to Regional Corporate Code/Principles (multiple choice)

4%

0%

8%

56%

66%

0% 20% 40% 60% 80%

No

The UK Combined Code

The OECD Principles

The Recommendations of the BaselCommittee on Banking Supervision

The Ukrainian Corporate GovernanceCode /Principles

% of Banks

Developing Internal Corporate Governance Codes Although a majority of banks claim to follow some set of recommendations or principles, only 14% have incorporated these principles by adopting their own corporate governance code. The majority of these banks make their codes available to stakeholders. A large group of banks plan to develop a corporate governance code in the future (58%). Chart 4.

Adopted Own Corporate Governance Code

No or no answer 28%

No, but plan to develop

58%

Yes14%

21

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Corporate Governance Documentation Banks usually have a set of separate internal documents regulating corporate governance issues. However, there is a strong tendency to focus on improving and developing only those documents and processes, which are mandatory under regulation, such as the bank Charter or By-laws on the Revision Commission. Despite the fact that 14% of banks stated they have their own corporate governance code or principles, only one bank confirmed to have this code as a separate internal document. Other corporate governance documents deemed essential in international best practice are also seldom adopted, for example By-laws on General Shareholders’ Meeting (28%), a Compliance Manual (6%), or By-laws on Corporate Conflicts (0%). Three quarters of banks do not have any written statement on the conduct of business or on corporate values, which could help foster a specific corporate culture and guide the actions of the Supervisory Board, management and employees (see Chart 5). It should be noted that half of the surveyed banks have undertaken efforts to formalize and separate the functions of the Supervisory Board and the Management Board within the past three years, and a quarter of the banks have undertaken efforts to improve their internal documentation based on corporate governance principles. The majority of banks (68%) plan to further improve their internal documentation in the future. Chart 5.

Corporate Governance Docum entation (m ultiple choice)

0%

20%

0%

2%

2%

2%

6%

6%

8%

16%

20%

20%

28%

66% 82%

88%

92%

96%

100%

0% 20% 40% 60% 80% 100%

None of the above

Other

By-laws on Corporate Conflict

By-laws on Takeovers

Corporate Governance Code/Principles

By-laws on Corporate Officials

By-laws on Audit Committee

Compliance Manual

By-laws on Supervisory Board Committees

By-laws on Information Policy

By-laws on the Conduct of Business

By-laws on D ividend Policy

By-laws on General Meetings of Shareholders

By-laws on Internal Control

By-laws on Revision Commission

Risk Management Manual

By-laws on the Supervisory Board

By-laws on the Management Board

Bank Charter

% of Banks

22


Chart 6.

is noteworthy that in only one half of cases (56%) such changes were implemented

Implemented and Planned Measures to Improve Corporate Governance Practices Almost every bank surveyed undertook measures to improve corporate governance in the past three years with others indicating that some improvements were implemented more than three years ago. The majority of banks focused on improving transparency and disclosure (64%), establishment of internal audit department (56%), and division of responsibilities between the Supervisory Board and the Management Board (50%).

Measures Implemented to Improve Corporate Governance

(multiple choice)

2%

2%

4%

12%

26%

30%

30%

32%

50%

56%

64%

0% 20% 40% 60% 80%

None

Establishment of SB committees

Establishment of corporate governance officerposition

Changes to SB memberships / nomination ofindependent directors

Improvement of internal documentation based onCG principles

Establishment of a SB

Establishment of a MB

Receiving advice/consultancy on corporategovernance issues

Formalization of functions and responsibilities ofSB and MB

Establishment of internal audit

Improvement of disclosure and transparency

% of Banks

Itfor compliance reasons. The majority of banks (70%) undertook such measures in order to improve efficiency of internal operations. In 34% of banks, such changes were either directly required by shareholders or triggered by changes in the shareholder base as seen in the following chart.

23


Reasons for Undertaking Corporate Governance

Improvements (multiple choice)

2%

8%

16%

18%

26%

48%

56%

70%

0% 20% 40% 60% 80%

Change of legal status

Change of ownership / shareholder base

Need to attract external investment

Improvements required by SB

Improvements required by shareholders

Need to improve coordination betweenstakeholders

Legal/regulatory requirements

Need to improve efficiency of internal operations

% of banks

Most banks have a positive attitude towards corporate governance improvements and view such changes as a first step for implementing improvements in other areas of operations. As for the measures planned for improvement of corporate governance practices, the majority of banks (68%) plan to improve their internal documentation according to the Ukrainian Corporate Governance Principles (see Chart 8). 60% of banks are interested in obtaining consultancy services on corporate governance issues and are willing to pay for it either partially (58%) or in full (14%). However, only a small portion of banks are willing to improve disclosure of ownership and to establish internal audit systems (10% and 6% respectively).

24


Measures Planned for Corporate Governance Improvement

(multiple choice)

4%

2%

6%

10%

18%

60%

68%

0% 20% 40% 60% 80% 100%

No particular measures foreseen

Nominate independent directors

Establish an internal audit system

Improve disclosure on ownership

Establish a Corporate Governance Officer position

Obtain consultancy on corporate governanceissues

Improve internal documentation based onUkrainian Corporate Governance Principles

% of banks

Corporate Governance Training Programs Notwithstanding the fact that good corporate governance contributes much towards a banks’ overall success and that good governance starts at the top, 62% of respondents reported that they do not organize any special training programs for members of the Supervisory Board and/or Management Board. It is also interesting to note that 28% of top executive members and management staff receive such trainings while for Supervisory Board members this figure is considerably lower (2%). While many banks do not provide training to their directors and executives, most of the banks encourage them to visit seminars and training programs on corporate governance, which are organized by the NBU, IFC, and other organizations. Among the interviewed executives a significant number showed a high level of awareness and understanding of the issues, and stressed their focus on self-education and knowledge sharing among members of the Supervisory Boards and Management Boards.

25


Corporate Governance Training

2%

28%

8%

62%

0%

20%

40%

60%

80%

Only SB Only MB Both SB andMB

None or noanswer

% o

f B

an

ks

Corporate Governance Bodies Most banks state that corporate governance is important, but few have formally dedicated resources to promote good corporate governance within the organization. Only two banks have a Supervisory Board committee, which is responsible for the promotion of corporate governance; 12% have a Corporate Governance Officer, and another 18% are planning to introduce the position in the future (Chart 10). A number of banks have previously considered introducing a committee or an officer responsible for corporate governance, but decided to postpone such a decision. Some banks mentioned that such a position was deemed unnecessary due to a small shareholder base and the lack of an experienced and qualified candidate. Others have introduced the positions of Supervisory Board and/or Management Board secretaries, which are improving the formalization of processes and procedures and coordinating communication with shareholders and other stakeholders. In most cases, the shareholders or Supervisory Board have placed the responsibility for improving corporate governance on the Chief Executive Officer, Vice President for Strategy or Legal Counsel.

26


Corporate Governance Officer

70%

18%

12%

0% 20% 40% 60% 80%

No or no answer

Planning to introduce

Yes

% of Banks

Current State of Corporate Governance in the Ukrainian Banking Sector and Challenges for Improvement The banks were asked to express their opinions with regard to the general state of corporate governance in the Ukrainian banking sector and the main challenges for improvement. Only 18% of banks ranked existing corporate governance practices as sufficiently developed, while others ranked them as underdeveloped (70%) or poor (12%). Most banks stated that although current practices are far from international standards, they do correspond to the level of requirements placed on banks by their shareholders, customers, senior managers, regulators and the banking community as a whole. Furthermore, corporate governance practices in the Ukrainian banking sector are considered to be far ahead of practices in other industries. The majority of respondents were in favor of gradual improvements in corporate governance supported by relevant changes in banking legislation and overall corporate law. It was stated, that the current structure of the banking industry has not yet stabilized and mergers, consolidations and changes in ownership can be expected. As banks become less captive and broaden their shareholder base, corporate governance practices should improve. Many banks cited lack of experience and knowledge (64%), as well as ineffective banking legislation (54%) and insufficient economic motivation to develop corporate governance practices (34%) as key barriers for improvement. The lack of a broad shareholder base was ranked 4th, which is a reflection of the fact that most banks are owned and controlled by a small number of shareholders. Shareholders and directors are not seen as resisting improvements in corporate governance practices, as only 6% of banks identified a lack of support from owners and Boards as a barrier.

27


ynopsis: Awareness and Commitment to Corporate Governance

anks display a good awareness of corporate governance practices, the relevant codes

he key areas for improvements in awareness and commitment to corporate

Chart 11.

Barriers to Corporate Governance Improvements in the

Ukrainian Banking Sector (multiple choice)

4%

6%

6%

8%

8%

14%

18%

24%

34%

54%

64%

0% 20% 40% 60% 80%

Other

Lack of support from shareholders

Lack of support from Supervisory Board

Internal resistance from key staff

Lack of accountability by management

Lack of efficient internal control system

Lack of financial resources

Lack of a broad shareholder base

Insufficient economic motivation to do so

Ineffective bank legislation in Ukraine

Lack of experience and knowledge

% of Banks

S Band principles, and understand their benefits to the company. Banks could display a stronger commitment to best corporate governance practices. So far, they have reacted to pressures from the regulator instead of progressively acting on their own. Shareholders and other stakeholders, however, need to show more initiative for improving corporate governance as well. They should encourage and support the Supervisory Board and the Management Board in their endeavors. Tgovernance are the need to institutionalize and formalize those principles through internal documents and procedures, training programs for directors, executives and senior management, and dedicated professionals and committees to advance corporate governance. This will help to improve corporate governance practices beyond mere legal requirements.

28


2. BOARD PRACTICES Shareholders entrust the Supervisory Board with the oversight and control of the business, which in turn delegates some of its authority to the Management Board. This section focuses on the pivotal relationship between the two different boards, their responsibilities and accountabilities. The most recent corporate scandals (Parmalat in Italy and Royal Dutch-Shell in the UK/Netherlands) again confirmed that the practices of these governing boards are indeed crucial to the good corporate governance of a corporation. Ukrainian banking regulation prescribes a two-tier board structure with a Supervisory Council (Supervisory Board) and a Board of Directors (Management Board) with mutually exclusive membership. Banks need to establish these bodies regardless of the number of shareholders, unlike the non-banking sector where joint stock companies with less than 50 shareholders are not required to form a Supervisory Board.5 This formal division of functions is welcome even in a Ukrainian banking context where very often the same person / group is simultaneously a major shareholder, a director, and/or a manager. A formal division of functions on paper, however, does not yet automatically translate into corresponding activities, as confirmed by several interviewed participants. Sometimes, the real center of power even lies outside the formally appointed governing bodies. All Ukrainian banks comply with the legal requirement of a two-tier board structure. However, banks often struggle to properly define and separate the authorities, functions and responsibilities of their Boards. In some cases, Boards do not act as collective bodies of decision-making and responsibility; at other times Board members do not fully understand their role and their authority in performing oversight and “fiduciary duties” to the bank and its shareholders as a whole. Functions of the Governing Bodies The Basel Committee on Banking Supervision (BCBS), in line with generally accepted good corporate governance practices, views the Supervisory Board as the governing body that develops a bank’s strategies, takes the lead in establishing the ‘tone at the top’ and approves corporate values for itself, senior management and other employees. It is also the body that sets and enforces clear lines of responsibility and accountability throughout the organization. OECD General Secretary Johnston regards the independence and fiduciary obligations of boards of directors (i.e. Supervisory Boards) as the “number one issue” of corporate governance. Supervisory Boards “should not be in the pocket of management.” The framework of the New Capital Accord6 reinforces the role of the Supervisory Board by stressing the importance of its ability to assess the bank’s risks from a broader perspective and the Supervisory Board’s strategic impact on the institution. Members of the Supervisory Board must therefore meet the same high standards of professional

5 Many banks would actually fall under this exemption as they have far less than 50 shareholders. The current law on joint stock companies emphasis corporations with more than 50 shareholders thereby ignoring the particular ownership structure of the banking sector. 6 Basel II, or the new international capital adequacy regulation for the banking sector introduced by BCBS.

29

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ qualifications as their counterparts on the Management Board. Many Ukrainian bankers, however, associate a seat on the Supervisory Board more with prestige than with responsibility and active stewardship. Unfortunately, the current banking regulation does not specify clearly enough the role and professional qualifications of the Supervisory Board. As evidenced by Charts 12 and 13, banks struggle to define the proper functional role of the Supervisory Board. In some cases the Supervisory Boards appear to view themselves as equal to the ultimate governing body of the company – the General Shareholders’ Meeting. In some banks, Supervisory Boards do not actively shape the banks strategic development, or exist for compliance purposes only. In other banks, Supervisory Boards unduly involve themselves in the bank’s operational and day-to-day activities. Almost a third of the banks do not see a role for the Supervisory Board as a check and balance on the activities of management. On the other hand, the role of the Management Board is usually clearly and properly defined. In 98% of banks the Management Board is ultimately responsible for operational results and 62% meet at least once a week to review performance results and discuss action plans. However, some Management Boards often take upon the responsibilities of the Supervisory Board. For example, in 58% of banks the Management Boards shape the mission and business strategy of the bank together with the Supervisory Board. These findings may be partially explained by the particular shareholding structure of the respondent banks and by the history of Supervisory Board and Management Board developments in Ukraine. Most of the surveyed banks have relatively concentrated ownership with Boards consisting of (or representing) major shareholders. The meetings of the Supervisory Boards thus become almost identical to a General Meeting of Shareholders and roles get confused. There are cases, where major shareholders directly appoint members of both the Supervisory and Management Board, with such appointees performing their oversight and ‘duty of loyalty’ responsibilities to those shareholders only, and not to the bank or to all shareholders. In other cases, major shareholders create a de facto one-tier governing structures, where one of the other governing bodies exist for compliance purposes only (be it the General Meeting of Shareholders, the Supervisory Board or the Management Board). This practice of direct appointment also raises concerns about the need for transparent election and dismissal processes for board members. As Management Boards were actively involved in supervising daily operations, they were usually the first to realize the need for a formalized strategy and improvements in coordination between the key stakeholders. As such, Management Boards members had in effect shared the same responsibilities as members of the Supervisory Board and took initiative in introducing strategic planning and visioning processes.

30


Functions of Major Governing Bodies

(multiple choice)

98%

98%

80%

94%

20%

4%

28%

2%

16%

82%

34%

2%

0%

16%

94%

2%

0%

12%

2%

80%

92%

12%

76%

50%

8%

58%

22%

54%

74%

2%

2%

2%

0%

0%

0%

4%

4%

4%

28%

12%

20%

68%

34%

10%

0%

0% 20% 40% 60% 80% 100%

Approves additional share issuance

Changes bank Charter

Nominates members of SB

Elects and dismisses members of SB

Elects and dismisses the head of MB

Elects and dismisses MB members

Sets the remuneration for members of SB

Sets the remuneration for members of MB

Approves annual budget

Approves annual financial statement

Approves strategic business plan

Approves operational plans of the bank

Approves large financial transactions

Approves external auditor

Approves dividend payments

% of banks GSM SB MB

31


verall, blurred borders of responsibility distort the principle of separation of duties

n the positive side, banks are gradually moving towards the separation of roles and

Chart 13.

Functional Roles of the Supervisory and Management Boards (multiple choice)

8%

70%

0%

58%

14%

66%

32%

20%

86%

18%

86%

98%

42%

96%

58%

52%

28%

62%

80%

16%

88%

18%

0% 20% 40% 60% 80% 100%

Responsible for the operational and financialsoundness of the bank

Serves as check and balance to the day-to-daymanagement

Participates in day-to-day management of thebank

Defines the bank's mission and overall businessstrategy

Responsible to challenge information receivedfrom the MB

Defines authorities and key responsibilities formanagement

Maintains an active and open communicationwith management

Reviews the bank's quantitative and qualitativecredit business thresholds

Approves compensation of senior managementand other key staff members

Monitors the bank's operations for compliance

Approves the external auditor

% of banksSB MB

Oand create unclear lines of accountability throughout the organization. Also, such practices almost always leave minority shareholders out of the governance process. Oresponsibilities between the Supervisory Board and the Management Board. 50% of surveyed banks have formalized the functions and responsibilities of their boards within the past three years through the introduction of or amendments to By-laws and internal policies. Banks are also formalizing and improving coordination between Boards through the introduction of standardized and regular reporting, and the establishment of Supervisory Board and Management Board secretariats.

32

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ There is also a trend towards developing the Boards into truly collective bodies of decision-making and responsibility. Even in closely held banks or in banks where a key shareholder is actively involved in management, the role of the Supervisory and Management Boards in the decision-making process is increasing. Transaction approval limits Another indicator of the role and involvement of the Boards in operations is the size of financial transactions that are subject to approval by the Supervisory Board (see Chart 14). Half of the banks failed to answer this question in the questionnaire, which may indicate a lack of formal approval procedures or delegation of such duties to other governing bodies. Of those banks, which responded to the question, a number of banks have set low thresholds of approvals (in some cases lower than UAH 100,000) or require approval for smaller, material transactions, i.e. below 20% of the banks capital. Chart 14.

Size of Financial Transactions Subject to SB Approval

8%

10%

8%

0%

6%

10%

2%

0% 2% 4% 6% 8% 10% 12%

The value of transaction is over 1% of the Bank'stotal capital

The value of transaction is over 5% of the Bank'stotal capital

The value of transaction is over 10% of theBank's total capital





% of banks

33

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Reporting and communication processes An important success factor for achieving and maintaining good governance structures and practices is a smooth flow of information between the two governing bodies – the Supervisory Board and the Management Board. Chart 15 shows an interesting distribution in the frequency and form of the Management Board’s reporting to the Supervisory Board. A quarterly reporting cycle seems to be the preferred approach in the surveyed banks. At the same time, ad hoc (upon request) reporting also seems to be prevalent, surprisingly. In almost half of the banks the Management Board reports to the Supervisory Board on a daily or weekly basis. Naturally, the longer the duration of the reporting period the more formal the reporting becomes. No comments can be made on the quality of the reporting, as this was not within the scope of the survey. Chart 15.

Frequency of Management Board reporting to Supervisory Board (multiple choice)

16%

22%

4%

0%

0%

0%

2%

16%

2%

10%

10%

8%

6%

12%

6%

16%

4%

2%

12%

18%

2%

10%

8%

18%

0%

0%

4%

20%

6%

16%

2%

10%

0% 5% 10% 15% 20% 25%

Daily

Weekly

Monthly

Quarterly

Semi-annually

Annually

At every SB meeting

On request

% of banks

Written report andmeeting

Written report

Orally - formalmeeting

Orally - informal

34

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 2.1 Supervisory Board Supervisory Board Membership The BCBS requires banks to ensure that “board members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns.” Ukrainian legislation calls for “appropriate professional qualifications” and “impeccable business reputation”. While an appropriate educational background is widespread, more board members with professional experience in the financial services industry are needed (see Table 2). At the same time, it seems that trust and credibility are more important than educational and professional backgrounds. In 38% of banks at least one of the top three shareholders is a member of the Supervisory Board, in 72% of banks members of the Supervisory Boards own shares in the banks, and major shareholders appoint all board members in 64% of banks. The lack of specific banking knowledge at the Supervisory Board level is somewhat compensated for by the fact that 88% of the Supervisory Boards have the right to seek external advice; however, in only 12% of banks do the Supervisory Boards have their own budget for hiring such external consultants. Table 2. OJSC CJSC LLC Overall Average number of SB members 5.63 4.55 3.00 5.18 Average number of SB members attending the last 4 meetings 4.96 4.00 3.00 4.59 Average age of SB members 40.40 34.27 41.00 39.10 Average number of members with bachelor or higher degree in economics

2.69 1.09 2.00 2.28

Average number of members with bachelor or higher degree in law 0.60 0.27 N/A 0.48 Average number of members with bachelor or higher degree in business administration

0.46 0.27 N/A 0.38

Average number of members with bachelor or higher degree in other sciences (e.g. technical)

1.46 0.73 0.75 1.24

Average number of members with professional experience in financial institutions

1.60 1.45 0.75 1.50

Average number of members with professional experience in investment banking

0.34 0.55 0.25 0.38

Average number of members with professional experience in brokerage services

0.06 0.09 0.75 0.12

Average number of members with professional experience in consulting

0.57 0.64 0.75 0.60

Average number of members with other professional experience (e.g. manufacturing, marketing, etc.)

2.60 2.00 1.50 2.38

35

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Composition and Balance The Supervisory Board should aim to represent all shareholders and seek a good balance between executive, non-executive and independent directors. According to international standards and the Ukraine Corporate Governance Principles, the Supervisory Board should be composed of at least 25% independent directors. An independent director, according to the Ukraine Corporate Governance Principles, is a person, who owns less than 5% of shares in the bank, is not related to bank officers, related parties, important customers, clients or contractors, or otherwise related to the bank in a way that might affect the impartiality of his or her judgment. Ukrainian banking legislation forbids members of the Management Board to take a seat on the Supervisory Board and vice versa. However, this does not prevent some Supervisory Board members from being full-time (regular) staff members of the bank. In Ukrainian banks the majority of Supervisory Board members are male and represent majority shareholders. Half of banks have only three (legally required minimum) or four board members in total, and only 30% have one or more independent director. In these 30% of banks, independent directors comprise almost half of the Supervisory Board. In some cases, however, the level of independence of such directors or the extent of their influence on decision-making may be questionable. The question also remains whether banks fully understand the term ‘independence’ or merely consider all small shareholders on the Board as independent by definition (see Table 3). It is typical for Ukrainian shareholders to tightly control the operations of a bank, even in cases when they do not have sufficient understanding of the banking industry. Some banks mentioned that independent directorship could be an appropriate solution in such cases, as qualified independent directors can provide a highly professional check and balance and an objective assessment of a bank’s performance for major shareholders. However, a number of banks have stated that they did not include independent directors on the Supervisory Board simply because they could not find an appropriate candidate to fill such a position, one which would add value in the eyes of the shareholders and the bank. Table 3. OJSC CJSC LLC Overall Average number of SB members 5.63 4.55 3.00 5.18 Number of women in SB 0.77 0.82 0.50 0.76 Number of independent directors in SB 1.14 0.27 N/A 0.86 Number of Non-Ukrainians on SB 0.37 1.00 0.25 0.50 Average number of large shareholders’ appointees 3.31 3.73 2.00 3.30 Average number of minority shareholders’ appointees 1.23 0.27 0.25 0.94 Average number of state/regional authorities’ appointees 0.49 N/A N/A 0.34 Average number of employees’ appointees 0.09 N/A N/A 0.06 Average number of Management Board appointees 0.23 0.09 N/A 0.18

Working Methods Corporate governance best practices foresee regular meetings with well documented and informed board members who have direct access to senior management for additional information as required and do not shy away from seeking outside advice if

36

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ necessary. Board committees focusing on special issues add much to the overall work effectiveness of the Supervisory Board. An audit committee overseeing the bank’s internal and external auditors and addressing control weaknesses, non-compliance issues and other problems identified by the auditors in a timely fashion is considered to be an absolute minimum by international standard. A nomination committee, a remuneration committee and a risk management committee are additional, useful, specialized bodies of the Supervisory Board. The survey reveals that the majority of Supervisory Boards meet frequently throughout the year. In almost half of the banks the Board meets at least once a month. Board meetings usually last one to three hours and the average attendance rate is 89%. In 84% of banks either the summaries of all discussions are documented or full transcripts are taken. This is in line with international best practices. However, in only 14% of banks is the Supervisory Board seen to be responsible for challenging information received from management, in only 18% is it responsible for monitoring compliance, and in only 32% is it responsible for maintaining open communication with management. Supervisory Board committees are virtually absent in the Ukrainian banking sector, with only 18% of banks having one committee or more. Only three banks have audit committees and only one bank has a risk management committee. An independent director heads a Supervisory Board committee in only one bank. It is also unclear whether such committees are exclusively subordinated to the Supervisory Board, or have dual subordination to both Boards. It should be noted that most banks do have certain committees in their structures, such as a credit committee (100%), assets and liabilities committee (96%), tariffs committee (94%), and others. Such committees are usually subordinated to the Management Board or the Chief Executive Officer. Accountability Generally, the Supervisory Board members’ responsibilities are outlined in the banks’ charter documents and by-laws, with 90% of surveyed banks having by-laws on the Supervisory Board. The survey could not evaluate the degree of accountability for Supervisory Board members specified in those internal documents as this was beyond the scope of the survey. The current legislation does not clearly specify their role In 22% of banks members of the Supervisory Board are formally required to disclose conflicts of interest. Only 26% of banks held members of the Supervisory Board responsible for unauthorized disclosure of confidential information, and even fewer banks (14%) for unauthorized disclosure of insider information. A written contract with Supervisory Board members where their obligations and responsibilities are clearly defined (unless the Charter or By-laws are specific enough) is found in only 14% of banks. None of the surveyed banks obtains director liability insurance, a practice that is more popular with American and Western European companies.

37

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Remuneration and Evaluation It is notable that 83% of the banks do not formally compensate board members for their work as seen in Chart 16. This may be partially due to the fact that many board members are majority or significant shareholders in their banks. However, a lack of compensation may reduce a member’s sense of obligation to the bank. Where board members do receive remuneration, it is mainly in the form of a fixed salary. Other forms of official remuneration, such as share options or profit participation, are not popular. More popular are ‘fringe benefits’, like the free use of the bank’s infrastructure (e.g. secretariat, driver, etc.), free accommodation, or beneficial rates for bank transactions. The banks that compensate their directors usually disclose their remuneration or plan to do so in the near future. More than half of them disclose such information on an individual basis. The decision to disclose remuneration is usually connected to the bank’s plan for an initial public share offering or bond issue. Chart 16.

Remuneration of Supervisory Board Members (% of banks)

Other 4%

No remuneration 84%

Annual/ monthly flat rate

12% Remuneration16%

There is a clear lack of formal performance assessment procedures for Supervisory Board members. Only 2% of the banks have a formalized process, while 50% of banks state this is based on individual feedback from shareholders. In 18% of cases evaluations are provided by the Chairman of the Supervisory Board, while in 30% of banks directors evaluate themselves. One tenth of the banks pointed out that there is no need to implement a formal performance assessment process (see Chart 17).

38


Assessment of the Supervisory Board Members Performance (multiple choice)

10%

0%

2%

10%

12%

18%

30%

50%

0% 20% 40% 60%

No assessment necessary

Through a special committee of the SB

Through a formal performance appraisal systemwithin SB

Through feedback from MB


Through individual feedback from the Chairmanof SB

Through self-appraisal

Through individual feedback from shareholders

% of banks

2.2 Management Board Composition of the Management Board An average Management Board consists of seven executives – usually the Chief Executive Officer and the heads of key functional departments. A number of Management Boards are composed of executives, who are responsible for key business lines or strategic business units. A few of the boards have a matrix structure, or may include the heads of large regional branches of the bank. The Management Board members are almost always approved by the Supervisory Board, however the nomination process may differ. When shareholders and the Supervisory Board place the responsibility for the bank’s operations solely on the Chief Executive Officer, they usually allow him or her to nominate the majority of Management Board members. In other cases, board members are nominated by the shareholders or Supervisory Boards. Some Management Boards consist of internally promoted executives, and a change of shareholding structure, Supervisory Board composition or the appointment of a new Chief Executive Officer does not result in personnel changes within the Management Board. As stated previously, there is a common practice whereby Management Board members are nominated and elected directly by major shareholders, with each shareholder group having a representative on the Management Board, as well as on the Supervisory Board. Given current international discussions on granting shareholders more power in the election of top executives, it appears to be an advanced solution – provided all shareholders are involved in the election process and

39

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ all members of the Management Board are qualified for the job. The practices within certain Ukrainian banks, however, often leads to misplaced loyalties and blurred lines of accountability, and changes in priorities for Management Board members – watching over the interests of one group of shareholders takes precedence over functional responsibilities to the bank as a whole. According to Ukrainian banking legislation, members of the Management Board need to adhere to the ‘fit and proper’ test, as determined by their educational and professional backgrounds. Overall, the members of Management Boards seem to be qualified for their positions. It was not within the scope of this survey to analyze whether these qualifications translated into good performance on the part of the management. Table 4. OJSC CJSC LLC Overall Average number of MB members 7.06 5.82 6.75 6.76 Average age of MB members 40.9 36.2 40.0 39.8 Average number of women in MB 1.97 2.45 2.25 2.10 Average number of Non-Ukrainians on MB 0.06 0.18 0.25 0.10 Average number of members with bachelor or higher degree in economics

5.37 4.45 5.25 5.16

Average number of members with bachelor or higher degree in law 0.83 0.64 0.50 0.76 Average number of members with bachelor or higher degree in business administration

0.34 0.09 N/A 0.26

Average number of members with bachelor or higher degree in other fields (e.g. technical, manufacturing)

0.31 0.18 0.25 0.28

According to Table 4, a typical member of the Management Board is male, has a degree in economics, and is 40 years of age. Women are better represented on Management Boards with two female members on average in comparison to Supervisory Boards where there is less than one female member on average. Accountability The majority of banks set out the responsibilities of the members of the Management Board in the banks’ Charter (94%) and By-laws on the Management Board (84%). Only 28% of banks require Management Board members to disclose conflicts of interest. The majority of banks make their Chief Executive Officers and Management Board members responsible for unauthorized disclosure and use of confidential (82%) and insider (56%) information. As already noted with the Supervisory Board, accountability is another area where most banks still have considerable room for improvement. The disclosure of conflicts of interest is a sensitive issue for banks and should be rigorously formalized and enforced. Formalized disclosure and approval of related party transactions internally is scarce, and only 8% of banks disclose such transactions on the part of Management Board members to the public. Most banks stated that their internal procedures and practices in this area are designed to meet the legally required minimum.

40

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Remuneration and Evaluation Banks are less willing to disclose the remuneration of Management Board members in comparison to Supervisory Board remuneration. Only one bank discloses the total sum paid to the entire Management Board. The consensus opinion is that the Ukrainian marketplace is not yet ready for such disclosures. While the majority of executives do not view such information as confidential per se, they feel that such disclosures may hurt the still fragile (but growing) public trust in banks. Some bank executives also mentioned the risk of criminal targeting if information about their personal incomes was made publicly available. A number of respondents stated that the publication of the overall salary expenses of banks could be an appropriate solution at this point in time. Most banks (58%) link the compensation of their Management Board members to the long-term performance of the bank. As with the Supervisory Board, formal assessment procedures for Management Boards are poorly developed. In 60% of banks the Chief Executive Officer provides individual feedback to Management Board members – a form of evaluation that may be biased. However, banks also use other approaches, such as individual feedback from shareholders or a formal appraisal system within the Management Board. Only 4% of banks do not see any need for assessing the performance of their Management Board members (see Chart 18). Chart 18.

Performance Assessment of the MB Members(multiple choice)

4%

4%

8%

10%

22%

24%

34%

60%

60%

0% 20% 40% 60% 80%

No assessment necessary

Through the SB's Appointment andCompensation committee


Through a formal performance appraisalsystem within MB

Through feedback from other members of MB

Through individual feedback from shareholders

Through self-appraisal

Through individual feedback from the ChiefExecutive Officer (CEO)

Through SB

% of banks

41

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Synopsis: Board Practices Overall, the surveyed banks are in compliance with legal and regulatory requirements with regard to governing bodies, and most banks are in the process of improving their Supervisory Board and Management Board practices. Most Management Boards are staffed by qualified and experienced professionals, capable of both providing strategic guidance, and managing day-to-day operations. A significant proportion of the banks, however, do not yet fully understand the specific roles and functions of the Supervisory Board and the Management Board. In many banks there is no clear division of functions between the various governing bodies – either the Supervisory Board and the General Shareholders’ Meeting have overlapping and interchangeable responsibilities, or the Supervisory Board is actively involved in controlling day-to-day operations alongside with the Management Board. It is exactly this lack of clarity in the separation and formalization of duties and responsibilities that is the reason for other shortcomings and deficiencies in board practices of Ukrainian banks – inadequate board structures, weak composition and balance of membership, lack of Supervisory Board committees and independent directors, poor working methods, accountability, performance appraisal and remuneration. In a number of areas improvements are likely to occur gradually depending on the developments in the marketplace, additional regulatory requirements, changes in Ukrainian corporate culture and growth in professional development. A more precise positioning of the Supervisory Board both in the legislation and in the perception of the business community, along with better disclosure of conflicts of interest need to be addressed in the further development of corporate governance practices in the banking sector.

42

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 3. INTERNAL CONTROL The surveyed banks were asked to outline the main features of their internal control system and to describe their internal audit function in more detail. BCBS strongly emphasize an adequate internal control system as a way to foster good corporate governance in banks. It not only disciplines banks in their daily business by ensuring compliance with internal and external regulations, it also helps the Supervisory and Management Board to effectively evaluate the bank’s risks and ultimately its future strategy. The new Basel Accord on Capital Adequacy (Basel II) reinforces the need for a strong and independent internal control system that provides the governing bodies – and especially the Supervisory Board – with timely and accurate data in order for them to perform their necessary oversight and control. Internal Control Processes Almost all banks (92%) have an internal control function, which typically includes internal audit (84%) and a revision commission (70%). A third of the banks also have a transaction verification unit, and a quarter of the banks have a separate internal control unit. Banking law requires banks to have an internal audit department and a revision commission. Interviews revealed that banks view these two control units not as components of an integrated and comprehensive internal control system, but rather as two stand-alone functional units. Chart 19.

Components of Internal Control(multiple choice)

12%

2%

16%

24%

34%

70%

84%

0% 20% 40% 60% 80% 100%

Other

Audit committee

Compliance officer

Internal control unit

Transaction authorization and verification

Revision Commission

Internal audit

% of banks

In most banks the functions of internal control are limited to verifying compliance with regulations (90%) and internal procedures (80%), ensuring completeness and accuracy of financial information (86%), and implementing risk management (74%). In 60% of banks the internal control unit reviews related party transactions, and in

43

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ only half of banks does it mitigate conflicts of interest and monitor separation of duties (Chart 20). In 14% of banks the head of internal control performs other functions, including accounting, back-office management, and coordination of relations with the Supervisory Board. In 8% of banks the head of internal control is also the head of internal audit. Chart 20.

Functions of Internal Control

(multiple choice)

8%

48%

50%

50%

60%

74%

80%

86%

90%

0% 20% 40% 60% 80% 100%

Other

Mitigate conflicts of interest

Ensure asset protection

Observe segregation of duties

Verify related party transactions

Implement risk management

Check compliance with internal documents / By-laws / professional standards

Ensure completeness and accuracy of financialinformation

Check compliance with legal norms andregulations

% of banks

Internal Auditor All banks comply with the regulatory requirement to have an internal auditor, but the internal audit department is usually quite small (one to three people). Most banks are in the process of changing the internal auditors’ reporting line from the Management Board or Chief Executive Officer to the Supervisory Board, as was recently required by regulatory changes. In most cases, internal auditors have dual reporting responsibilities – work-plans are set and modified by both the Supervisory Board and the Management Board and both bodies receive their reports (Chart 21).

44


Chart 21.

Reporting of Internal Audit

(multiple choice)

24%

20%

2%

28%

34%

10%

14%

0%

10%

6%

2%

0%

0%

0%

4%

30%

6%

0%

4%

2%

0% 10% 20% 30% 40%

SB

Chairman of the SB

SB's Audit Committee

MB

CEO

% of banks

Annually

Semiannually

Quarterly

Monthly

As was frequently mentioned during the interviews, internal auditors were hired by the Chief Executive Officers and managers of the bank, work in the bank and receive their salary from the bank. As such, it is difficult to establish their subordination to the Supervisory Board and actual independence from the Chief Executive Officer overnight. Most banks view the internal auditor as an independent appraiser of internal controls and compliance (96%). The majority of the banks also believe that one of its main functions is to verify functional information (62%), while less than half of the banks see its role in advising the management on ways to improve operational efficiency (Chart 22).7 In 10% of banks the internal auditor also performs other functions, including other control functions, budget analysis, and development of internal by-laws and procedures.

7 The Institute of Internal Auditors defines internal audit as a) an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations, and b) an assistant to help an organization accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control, and corporate governance processes.

45


View on the Role of Internal Audit

(multiple choice)

0%

4%

32%

38%

42%

62%

96%

0% 20% 40% 60% 80% 100%

Policeman

Others / please specify

Assistant to management

Support for external auditor

Consultant to improve operational efficiency

Verification of functional information

Independent appraiser of internal controls andcompliance

% of banks

The internal audit function is also in its formative years in the Ukrainian banking sector, and most internal auditors have come to their position from the revision commission or the accounting department. Currently, the attitudes within a bank towards the internal audit function depends mostly on the personal qualities, qualifications and working methods of the head of internal audit. There is a common opinion that internal auditors need to improve their qualifications and to act more as consultants and advisors. As their qualifications, attitudes and experience grows, their roles and the attitudes towards them will change as well. Evaluation of Corporate Clients Most banks have a formalized set of criteria and formalized processes of client evaluation for lending or capital market transactions. As seen in Chart 23, most banks focus on financial soundness, reputation, proper accounting and strategic planning.

46


ownership structures. However, such factors rarely have a marked influence on credit terms.

Chart 23.

Corporate Governance Criteria Used for Client Evaluation(multiple choice)

2%

0%

2%

40%

40%

52%

72%

80%

82%

84%

0% 20% 40% 60% 80% 100%

Other

Audit committee with majority consisting ofindependent directors

Solid structures for protecting minorityshareholders' rights

Clear separation of duties between SB and MB

Adequate corporate governance documents

Adequate composition of the SB and MB

Disclosure of ownership structures

Regular financial reporting

Good reputation

Transparent accounting practices

% of banks

Only half of banks acknowledge that they include a comprehensive set of corporate governance criteria in their formal credit risk assessment process. Most banks, as seen in Chart 23, use fragments of corporate governance criteria. Banks admit that the evaluation of corporate governance practices is usually done from a legal perspective only (for example by verifying signing authority). The opinion in the Ukrainian banking sector is that good corporate governance documents and procedures do not in any way improve credit repayments. Only a small number of banks consider good corporate governance as a factor that reduces the risk of default or non-payment. It should be noted that most banks carry out a significant portion of their transactions with related parties and other affiliated companies and may not consider it worthwhile to evaluate the corporate governance procedures of such clients. Most banks stated that they strive to apply the same criteria and rigor in evaluating ‘inside’ and ‘outside’ clients. At the same time, most banks do consider different corporate governance components in their evaluation procedures, usually during meetings and discussions of the credit committee as additional comments to formal evaluation scores. Banks typically look at the existence of transparent accounting, regular financial reporting, and disclosure of

47


al audit functions are in the early stages of development nd have a number of shortcomings in comparison to international standard practices

banks is defining and separating the roles and responsibilities f the internal control body and internal audit. Banks also need to better define work-

tratively or functionally dependent on e Chief Executive Officer or Management Board, and not the Supervisory Board,

Synopsis: Internal Control The internal control and internaand recommendations. A key problem for mostoplanning, reporting and subordination procedures. The professional development and growth in experience of internal auditors and internal control officers will be critical to the further development of these functions in the Ukrainian banking sector. Ukrainian banks realize the importance of these factors and three quarters of banks provide training to their internal audit and control staff. Current control and audit systems are administhwhich may limit their effectiveness.

48

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 4. DISCLOSURE AND TRANSPARENCY 4.1 Information Disclosure Disclosure, according to the OECD Principles of Corporate Governance, should cover the material matters of the corporation including “major share ownership and voting rights, material foreseeable risks factors, material issues regarding employees and other stakeholders, and governance structures and policies”. Transparency, as a judge once said, is like sunlight it is still the best disinfectant. It enables the financial markets, depositors and other stakeholder to form a fair view of a company’s value and to develop sufficient trust in the quality of the company and its management. Markets must be confident about the integrity of data as well. When markets lose confidence in the integrity of information, the negative effects, particularly for banks, are likely to be severe. Banks that accept deposits and borrowings from the public should address the particular needs for information of the public in an pro-active manner as current legal stipulations are still more geared towards shareholders or regulators and not towards other stakeholders. Sources of Information Banks comply with legal requirements for the disclosure of information, but rarely provide additional qualitative information to the wider public. It is positive, though, that banks often provide this information through multiple channels (publications, internet, information stands in branches, etc.). More specifically, as seen in Chart 24, the banks provide potential investors and the wider public with basic information on the bank’s management, operations, and financial situation through their published annual report (94%), interim quarterly reports (70%), and through Internet sites (76%). Chart 24.

Sources of Information(multiple choice)

42%

62%

70%

76%

94%

0% 20% 40% 60% 80% 100%

Through the National Bankof Ukraine

On request

Quarterly public interimreports

Internet

Public annual report

% of banks

49

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Moreover, the banks take additional steps to make access to information easier for interested parties. The fact that 30% of the surveyed banks have a dedicated officer serving as a point of contact for investor queries, and 44% have a dedicated public relations officer, shows a willingness on the part of banks to become more open to stakeholders and the general public. Banks should use these resources more efficiently by applying a more pro-active information policy rather than the common ‘wait-until-asked’ attitude. Disclosure in the Annual Reports As mentioned, a bank’s annual report remains the key source of information. Its contents generally meet Ukrainian legal requirements, but these are minimal by international standards. The vast majority of annual reports in Ukraine are thus not nearly as detailed and comprehensive as those from OECD countries. However, the banks surveyed are working to improve the content to include more information essential for effective decision-making. Currently, the majority of respondent banks disclose their goals and strategies (84%), their financial status and analysis of financial results (82%), as well as information on major shareholders (66%). Banks are less forthcoming with information on members of the Supervisory Board and Management Board (30%), and only a mere 8% of the banks publicly present information on transactions with related parties in their annual report. At the same time, only a quarter of banks provide the public with information on shares held by members of Supervisory Board and Management Board, while none of the banks present information on remuneration of the members of the Supervisory Board and Management Board in the annual report. It is assumed that the banks, which disclose information on remuneration, do so in other documents. When asked to define reasons for non-disclosure of such information the banks referred to the absence of requirements from banking regulators (66%), the absence of economic value in such a disclosure (26%) and the lack of clearly articulated interest from the users of such information (28%). Most banks do not see an immediate need for a more detailed annual report as they usually have a small number of shareholders who receive regular reports and updates from the Supervisory and Management Boards, have not yet tapped alternative external sources of funds, and have not seen enough demand from customers. On a more informal note, banks revealed the need to stay ‘below the radar screen’ of government agencies (i.e. the tax office) especially when they lack a sufficient political network.

50


Disclosure in the Annual Report (multiple choice)

0%

8%

8%

20%

26%

30%

34%

66%

78%

82%

84%

0% 20% 40% 60% 80% 100%

The amount of remuneration payable to membersof the SB and MB

List of agreements with related persons

Information on relations with other stakeholders

Corporate governance structure and policies

Shares held by members of the SB and MB

Information on members of the SB and MB

Material risk factors, which can have impact onthe bank and risk management system

Information on majority shareholders

Financial status and results of bank operations(according to IFRS)

Analysis of the results of bank operations

Goals and strategies of bank development

% of banks

Disclosure of Additional Information In general, banks are willing to disclose additional information to interested parties, such as potential clients or investors, upon request. However, most banks have never been asked to disclose or provide such information. Such low demand for additional information by stakeholders is the likely reason for low levels of public disclosure (i.e., if banks were flooded by requests for such information, they would make it public simply for efficiency reasons). The additional information, which most Ukrainian banks disclose is capital adequacy figures as well as the external auditor report and opinion. Other information is not as well disclosed. For instance, information on the largest exposures by credit product and/or by industry is still difficult to receive – only 28% of banks disclose this information on request while only 4% of banks disclose it publicly.

51

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ There are similar low rates for information on credit and market risk modeling (14% and 10% of banks, respectively). The lack of such information limits the ability of interested parties, especially investors, to make an overall assessment of a bank’s strategic position and financial health. Chart 26.

Provision of Additional Information to Public (multiple choice)

6%

0%

0%

4%

22%

68%

6%

6%

6%

6%

34%

26%

24%

8%

6%

64%

82%

54%

12%

60%

38%

30%

36%

34%

28%

28%

44%

34%

26%

46%

18%

48%

0% 20% 40% 60% 80% 100%

Bank Charter

By-laws

Corporate Governance Code/Principles

Organizational chart

Biographical info on SB and MB members

Capital adequacy figures

Market risk modeling

Credit risk modeling

Largest exposure by industry

Largest exposure by credit product

Names of shareholders with more than 5% ofshares

Asset quality

Geographic and business line diversification

Accounting and presentation policies

Other foreseeable risks (e.g. legal, reputation,etc.)

External auditor report and opinion

% of banksPublicly On request

52

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Transition to International Financial Reporting Standards (IFRS) Reporting in accordance with IFRS requires further transparency and information disclosure. Ukrainian banks have made significant progress in this regard, as 76% of the surveyed banks already publish their financial statements in accordance with IFRS guidelines. In most cases, the transition to IFRS is completed only within the scope required by regulations of the National Bank, which does not include all international standards. Ownership Ukrainian banks are required to provide a list of their top twenty shareholders to the National Bank of Ukraine, and all banks meet this requirement. 62% of the Ukrainian banks declared that they disclose changes in their ownership structures and 8% of the respondents plan to do so in the near future. More than half of the banks already disclose the names of shareholders owning more than 5% of the bank’s charter capital either publicly or on request. At the same time, 66% of the banks confirmed that the wider public is not aware of the name of their beneficial shareholders, and in 24% of banks not even the Supervisory Board or the National Bank knows the beneficial owners. This implies that information about the ownership structure provided by the banks to interested parties merely meets legal requirements but does not necessarily make the banks more transparent to the public. Chart 27.

Awareness by Interested Parties of the Names of Beneficial Shareholders

(multiple choice)

34%

50%

76%

76%

76%

0% 20% 40% 60% 80% 100%

Wider public

Other shareholders

National Bank of Ukraine

Management Board

Supervisory Board

% of banks

53

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Organizational Chart with Key Staff Information Only 8% of the surveyed banks do not disclose information on key staff. The majority of the banks (72%), however, provide interested parties with an organizational chart only if requested. In addition, 20% of banks disclose such information through their annual reports and 34% publish it on their web site. Chart 28.

Organizational chart indicating key staff can be obtained

(multiple choice)

8%

20%

34%

72%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Not available

Annual report

Bank's Website

Upon request

% of banks

Related Party and Material Transactions More than half of all banks (54%) do not disclose and do not plan to disclose related party transactions or transactions involving more than 5% of the book value of assets to the general public. When such information is disclosed, it is done through annual and quarterly reports and reports to the National Bank of Ukraine. Only one bank publishes such information in the press. Disclosure of related party transactions would help to better assess the quality and independence of a bank and the banking sector in general. 4.2 External Audit of Finances and Operations Selection, Approval and Reporting The lack of a proper understanding of the functions and responsibilities of the key governing bodies is once again demonstrated with the existing procedures in approving, setting compensation and establishing reporting lines of the external auditors. As evidenced by Chart 29 these functions are divided among all three governing bodies, with some banks requiring a consensus decision.

54


Approval, Compensation and Reporting of External Auditor

(multiple choice)

2%

18%

72%

14%

0%

62%

38%

4%

2%

50%

60%

44%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Other

Management Board

Supervisory Board

Shareholders/GSM

% of banksApprovalCompensation Reporting to

Despite the fact that selection and approval procedures may not correspond to international standard practices, most banks do approach the selection of the external auditor with care. One third of all banks have a formal policy of rotating their external auditors every three to five years. In choosing their auditors, most banks place priority on their global and local reputation, experience and specialization in bank audits, and qualifications of key staff. Only 52% of banks listed fees as one of the selection criteria, with none giving it a top priority in decision-making. Only 34% of banks evaluate the auditor’s quality control procedures in the selection process. Independence / Other services The independence of the external auditor does not appear to be an issue in a national context. The “Big 4” or other international audit companies audit 58% of the surveyed banks. While 56% of banks confirm receiving other services from their external auditor [most often – advisory services 34% and tax consulting services (28%)], fees for such services never exceed the audit fee. The legally accepted practice of selection and appointment of the external auditor by the boards (either Supervisory Board or Management Board, as opposed to shareholders) raises questions regarding the independence of the external auditor from an international best practice perspective.

55


External Auditor: Other Services

(multiple choice)

44%

4%

6%

8%

28%

34%

0% 10% 20% 30% 40% 50%

No other services provided

Others

Legal services

Corporate Finance

Tax services

Advisory business services

% of banks

Synopsis: Transparency and Disclosure The vast majority of banks comply with the basic legal and regulatory requirements for disclosure of information. Banks provide the public with general information about their strategic goals, financial status and operational results, as well as major shareholders, but not necessarily the beneficial owners. Most banks are making further steps to improve transparency by publishing their reports in accordance with IFRS and making additional information available upon request. Banks, in general, are ready to disclose additional information about their operations, but do not do so due to the lack of demand and requirements for such data from stakeholders or regulators. A more pro-active approach in distributing more qualitative information would be welcome, especially in light of the new Basel Capital Accord (Basel II). Banks do need to improve their practices of disclosing material and related party transactions. There is a lack of a proper separation of duties in the process of selection and approval of external auditors. It appears that there is excessive involvement of the Supervisory Board and Management Board in this process, as well as in determining compensation, and in receiving and reviewing the reports of external auditors. Such practices increase the risk of insufficient independence of the external auditor. However, this needs to be viewed in the context that in Ukrainian banks the Supervisory Board is often interchangeable with the General Shareholders’ Meeting, and thus large shareholders likely play a more important role in the selection process.

56

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 5. SHAREHOLDER AND OTHER STAKEHOLDER RIGHTS This part of the survey examined the policies and procedures in place to ensure the protection of the rights of the banks’ shareholders, including minority shareholders. The role and influence of other stakeholders is also discussed. 5.1 The General Meetings Distribution of Information The banks use a wide range of communication channels to inform shareholders about the General Shareholders’ Meeting (GSM). The majority of banks (88%) use at least two channels to do so, while 34% use at least three channels. Banks generally choose notices in the press and regular mail as a way to inform shareholders about shareholders’ meetings. Much less frequent, but equally popular, are verbal notifications and announcements on the banks’ websites (in 22% of cases). Chart 31.

Distribution Channels Used to Inform Shareholders of a

General Meeting (multiple choice)

4%

22%

22%

88%

92%

0% 20% 40% 60% 80% 100%

Through branches

Announcement on the bank's Website

Oral information

Notice in the press

Notice sent by mail

% of banks

Virtually all banks report that they furnish their shareholders with full and timely information on the date, location and agenda of the General Shareholders’ Meeting. 90% of banks notify their shareholders about the General Shareholders’ Meeting at least 30 to 45 days in advance. Banks, again, are less pro-active with supplementing supporting documents and information. Most of the banks send their shareholders copies of the Audit Report and the Revision Commission Report and provide additional supporting documents for items on the agenda on request only (see Chart 33). 42% of the banks have never received proposals to amend the agenda of the General Shareholders’ Meeting. The banks that received such proposals predominantly chose the press and regular mail to notify their shareholders of the changes.

57


Information Provided to Shareholders before GSM

(multiple choice)

0%

6%

22%

10%

24%

26%

34%

32%

26%

32%

94%

94%

8%

42%

20%

30%

58%

40%

52%

58%

48%

48%

4%

4%

0% 20% 40% 60% 80% 100%

Others

Supervisory Board report

Guidelines for proxy voting

Analytical studies and press materials

Revision Commission report

Description of major non-financial results ofbank's business activities and development

perspectives

Supporting documents for each item on theagenda

Annual report

External Audit report

Financial information

Time and location of the meeting

Agenda of the meeting

% of banksSent with notice On request

When distributing the results of the General Shareholders’ Meeting among the shareholders one third of the banks use the press and their website. In 18% of banks the results are sent by regular mail and 8% by e-mail. It should be noted that in 60%

58

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ of the banks information on the results of General Shareholders’ Meeting is available upon request only. Functions Performed by the Annual General Meeting In general, shareholders perform the functions as prescribed by Ukrainian legislation. Chart 33 further reveals that in several cases, banks do not clearly distinguish between the functions of shareholders and the Supervisory Boards. Supervisory Boards are often involved in making decisions on issues, which, by legislation, are assigned to the General Shareholders’ Meeting (approve strategic business plan – 58%, approve annual financial statements - 8%, approve dividends – 2%). Chart 33.

Functions of Major Governing Bodies

(multiple choice)

98%

98%

80%

94%

20%

4%

28%

2%

16%

82%

34%

2%

0%

16%

94%

2%

0%

12%

2%

80%

92%

12%

76%

50%

8%

58%

22%

54%

74%

2%

2%

2%

0%

0%

0%

4%

4%

4%

28%

12%

20%

68%

34%

10%

0%

0% 20% 40% 60% 80% 100%

Approves additional share issuance

Changes bank’s Charter

Nominates members of SB

Elects and dismisses members of SB

Elects and dismisses the head of MB

Elects and dismisses MB members

Sets the remuneration for members of SB

Sets the remuneration for members of MB

Approves annual budget

Approves annual financial statements

Approves strategic business plan

Approves operational plans of the bank

Approves large financial transactions

Approves external auditor

Approves dividend payments

% of banks GSM SB MB

59

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 5.2 Mechanisms for Protection of Shareholders The majority of surveyed banks have minority shareholders, however, they usually do not play an active role in the bank. A large number of the minority shareholders never purchased their shares for cash, as shares were often distributed to employees of the organizations that initially established the banks, or were used as a form of savings in the era of hyperinflation in the early 1990s. Share issuance was also used for tax reduction purposes as a form of compensation to employees. In half of the banks, less than 20% of minority shareholders attend the General Shareholders’ Meeting. In only 22% of banks do more than half of minority shareholders attend the annual meetings. According to good corporate governance practices, banks should have a clearly articulated and enforceable policy in place that protects the rights of minority shareholders in special circumstances, such as a change of control. The survey revealed that while 50% of banks ensure equal treatment with respect to voting rights, subscription rights and transfer rights, only 12% of banks provide clear policies with respect to treatment in changes of control. Chart 34.

Shareholder Protection Mechanisms

(multiple choice)

4%

4%

12%

14%

50%

70%

0% 20% 40% 60% 80%

None of the above

Buyout during large financial transactions

Clear policies with respect to treatment inchanges of controlling stake

Buyout during reorganization

Equal treatment with respect to voting rights,subscription rights and transfer rights

Proportional voting

% of banks

According to the survey, banks do provide their shareholders with the right to sell their shares over-the-counter (56%), or to other shareholders (76%), as well as to the bank itself (60%). It should be added that half of the banks entered into repurchase transactions with their shareholders in the last three years, in 12% of these cases the price was set based on the market price of the shares, while 20% of the sales were concluded at a negotiated price. The most common practice is to repurchase the shares at nominal value (64% of the sales), which can hardly described as very (minority) shareholder friendly.

60

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ However, given the reluctance of banks to list their shares on an official stock exchange, banks should promote alternative options for selling shares more actively. Most banks agree that overall minority shareholder rights are not well protected in Ukraine. Banks themselves see little value in having minority shareholders. A number of banks are actively buying out shares of their minority shareholders, and have even established innovative programs to entice minority shareholders to sell. Some banks establish and approve a plan and budget for buying out shares and inform their minority shareholders of such possibilities. In cases when the minority shareholders are (low income) pensioners or employees, some banks offer additional benefits similar to welfare or charity. 5.3 Stakeholder rights An important differentiating factor between the corporate governance of banks and that of non-financial companies is the recognition of other stakeholder rights. Internationally accepted corporate governance guidelines recommend the inclusion of recognized stakeholders in the banks’ business practices: employees, depositors, other debtors and the community. Depositors in particular enjoy a special status. They often provide the bulk of a bank’s capital, exceeding the contribution of shareholders, but have few legal measures to control and influence a bank’s management. Banking regulators around the world recognize this by putting depositor protection at the core of any sector regulatory regime. In Ukraine, a mandatory deposit insurance scheme is in place. Banks that do not have a clean bill of health from the National Bank and an adequate information technology system to manage their client database are excluded from the scheme. Depositors may wish to see more stringent selection criteria, especially from a corporate governance point of view, and stricter direct enforcement rights for the managers of the deposit insurance fund. Another important stakeholder group are employees, often referred to as the intellectual capital of a bank. The surveyed results show that banks often fail to address this stakeholder group – they do not involve them in the oversight of the banks’ activities or foster an active dialogue. In only 8% of banks are employees represented on the Supervisory Board. And, while almost half of banks have an employee trade union or other representation body, they are rarely invited to Management Board or Supervisory Board meetings. In 42% of banks, major customers or clients are represented in the Supervisory Boards. However, these representatives are likely from the same captive industrial or financial group to which the bank belongs. As of April, eleven Ukrainian banks have outstanding bond issues (of which two have a Eurobond issue in the market). It remains to be seen how banks respond to legitimate demands from bondholders for timely information disclosure and prudent conduct of business. Communication with Stakeholders A large number of banks have established various means to communicate with their stakeholders outside the bank. Banks usually have a public relations officer (44%) in charge of communication. Ukrainian banks are not yet broadly employing investor relations officers or engaging themselves in a direct exchange with financial analysts

61

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ as a means to maintain an active dialogue with the investment community and other stakeholders (see Chart 35). Chart 35.

Means of Effective Communication with Stakeholders(multiple choice)

6%

12%

30%

44%

0% 20% 40% 60%

Other

Regular meetings withexternal financial

analysts

Investors RelationsOfficer

Public Relations Officer

% of banks

Community Service/Sponsorship Activities The vast majority of banks (94%) undertake community service sponsorship activities, mainly to support cultural events and local/federal charities, sponsor sports events/ organizations, and support educational institutions. Chart 36.

Community Service/Sponsorship Activities(multiple choice)

6%

20%

44%

50%

60%

60%

0% 20% 40% 60% 80%

None

Others

Supporting educational institutions

Sponsoring sport events or organizations

Supporting local / federal charity organizations

Sponsoring cultural events

% of banks

62

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Generally banks involve themselves in such activities for several reasons - to improve their reputation (78%), to attract new business (62%), or to develop better relations with regional/local authorities (52%). Several banks mentioned their social responsibility and need to maintain an active social position as reasons for undertaking such activities (Chart 37). A significant number of banks have formal or informal policies on supporting social programs, and some have an approved budget for such activities. Chart 37.

Reasons for Undertaking Community Service Activities

(multiple choice)

2%

6%

6%

12%

52%

62%

78%

0% 20% 40% 60% 80% 100%

No need for special contributions

Other

Abide by the Ukrainian Corporate GovernancePrinciples

Fulfill the recommendations set by OECD andBasel Committee for Banking Supervision (BCBS)

Develop a better relationship with regional / localgovernments

Attract new business

Enhance reputation

% of banks

63

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Synopsis: Shareholder and Stakeholder Rights The survey results on shareholder and other stakeholder rights indicate that most banks uphold the legal and regulatory requirements, although there is some overlap and confusion between the functions of the General Shareholders’ Meeting and the Supervisory Board. While the rights of the shareholders and stakeholders are formally protected, the bias is usually in favor of the largest shareholders. The involvement of and communication with minority shareholders and other stakeholders can be improved. There is a need to recognize fully the rights of employees in issues directly connected with strategic development and the workplace. Minority shareholders, employees and other stakeholders should also be more proactive in ensuring the recognition of their rights within organizations. Currently, there is little to no pressure on banks from such stakeholders to improve corporate governance practices. An advanced corporate governance framework can only be reached by establishing appropriate policies and procedures to ensure the reasonable protection of shareholder rights, as well as recognizing that the bank’s interests are better served by acknowledging the interests of stakeholders and accepting that their corporate reputation as a governance leader requires a more progressive stance than mere compliance with legal standards.

64

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ IV. ANNEX 1. CHARACTERISTICS OF SURVEYED BANKS A total of 52 banks from an original sample of 128 gave their views on corporate governance and their adherence to best practices and procedures by filling in the distributed questionnaires. The surveyed banks cover one third of all banks in Ukraine, representing 41% of the banking sector’s total capital and 45% of its total assets. The information obtained through the questionnaire has been supplemented by 44 interviews. A few banks, which submitted the questionnaires, were not available for interviews and two banks, which were interviewed, did not meet the deadline for submitting the questionnaire. The survey statistics are therefore based on a sample of 50 banks. The surveyed banks cover all regions of Ukraine and includes banks of various size, business focus, ownership and legal structure. Regional Breakdown The surveyed banks represent five regions of Ukraine: Central (Dnipropetrovska oblast, Zaporizhska oblast), North (Kyiv and Kyivska oblast, Chernihivska oblast), South (Odeska oblast, Crimea), East (Donetska oblast, Kharkivska oblast), and West (Lvivska oblast, Ivano-Frankivska oblast). The regional distribution was in proportion to the location of banks’ headquarters. A breakdown of banks from each region is shown in the chart below. Chart 38.

Regional Breakdown of Surveyed Banks

North 56%

Central 12%

West 6%

East 16%

South 10%

65


umber of Employees

he participating banks range in size from 40 to 16,800 employees (58% of the banks

Legal Form of the Responding Banks 70% of the surveyed banks are registered as Open Joint Stock companies (OJSCs), 22% are Closed Joint Stock companies (CJSCs) and 8% are in the form of Limited Liability Companies (LLCs). Within the polled sample, 48% of the banks have less than 50 shareholders while 24% of the banks have more than 500 shareholders. Chart 39.

Legal Form of Respondent Banks

Open Joint Stock

companies 70%

Closed Joint Stock

companies 22%

Limited Liability

Companies8%

N Thave less than 500 employees). The chart below represents the sample breakdown by number of employees. About one forth of banks fall into the category of small banks by number of employees – that is less than 200 employees, while another forth of banks can be considered large with 1000 and more employees.

66


Number of Employees

20%

8%

30%

18% 16%

4% 4%

0%

5%

10%

15%

20%

25%

30%

35%

20-99 100-199 200-499 500-999 1000- 1999

2000- 4999

>5000

% o

f b

an

ks

Number of Shareholders The number of shareholders in the surveyed banks varies from 1 to 121,377 (3,268 on average). Almost half of the banks (48%) report to have a small shareholder base (<51) and another 46% belong to the group with a large shareholder base (>101). A small group of banks (6%) has 51 to 100 shareholders. Chart 41.

Number of Shareholders

30%

18%

6%

22%

6%

18%

0%

5%

10%

15%

20%

25%

30%

35%

0-20 21-50 51-100 101-500 501-1000 more than 1000

% o

f b

an

ks

67

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Analysis of the Banks in Terms of Shareholding Size 70% of banks have shareholding packages of less than 2%. A majority of banks have shareholders with a controlling and/or blocking stake. One of the two wholly-owned state banks participated in the survey. No other bank reported state authorities among their top three shareholders. Chart 42.

Banks in Terms of Shareholdings Size

(multiple choice)

18%

10%

34%

44%

28%

70%

60%

70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

75-100 % 50-74,9 % 25-49,9 % 15-24,9 % 10-14,9 % 5 - 9,9 % 2 – 4,9 % less than2%

% o

f b

an

ks

havin

g s

hare

ho

lders

of

cert

ain

po

wer

Status of the Three Largest Shareholders in the Respondent Banks The majority of surveyed banks have Ukrainian companies among their three largest shareholders. In roughly one third of the banks the representative of the major shareholder is on the Supervisory Board, while the second and third largest shareholders are on the Supervisory Board in 26% and 14% of cases respectively. It is also not uncommon to find major shareholders on the Management Board.

68


Status of the Three Major Shareholders in the Respondent Banks

0%

10%

20%

30%

40%

50%

60%

Members of the

Supervisory Board

Members of the

Management Board

Stateauthorities

Ukrainiancompanies

Ukrainianindividuals,

not includingBank's

employees

Foreign companies

Foreignindividuals

1st major shareholder

2nd major shareholder

3rd major shareholder

Listing on Stock Exchanges 12% of the banks are listed on Stock Exchanges and 27% of the banks plan to have an initial public offering of shares (IPO) within the next three years. Chart 44.

Listing on Stock Exchanges

12%

27%

61%

Currently listed

Not listed, but planIPONot listed and do notplan to list

69

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Main Banking Activities – Future Intentions The surveyed banks were asked to rank their priorities for future development (first place assigned to the activity having the highest priority). Corporate lending are the banks’ highest priority for the near future, followed by attracting deposits and consumer lending. Table 5.

Banking Activity Ranking Corporate lending 1 Deposits 2 Retail/Consumer lending 3 Private banking 4/5 Trade Finance 4/5 Housing (mortgage) loans 6 Cash services including Credit cards 7 Others / please specify 8 Proprietary trading in securities 9 Investment banking (advisory) 10 Asset management 11 Brokerage 12 External Funding Preferences Debt is among the most important means of external funding. 74% of banks pointed out that they would like to participate in programs launched by international funds and multilateral agencies, while 40% plan to seek strategic equity investor. Some 24% of the banks are interested in the domestic bond market. Although 27% of the banks declared their desire to launch an IPO in the future, only few of them consider listing shares as a preferred method for raising funds (both with regard to listing on domestic (14%) and foreign (6%) stock markets). Chart 45.

External Funding Preferences

(multiple choice)

6%

10%

14%

20%

24%

40% 74%

0% 20% 40% 60% 80%

Issuing shares on foreign stock markets

Intra-group lending

Issuing shares on domestic stock markets

Foreign bond issuance

Domestic bond issuance

Strategic equity investor

Funds from Multilateral Agencies (e.g. EBRD)

% of banks

70

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Positions of the Respondents 70% of all the persons who participated in completing and reviewing the questionnaire were heads or members of the banks’ Management Board, while the rest were predominantly in high management positions. Chart 46.

Position of the Respondents

(multiple choice)

18%

0%

0%

0%

0%

0%

2%

10%

20%

24%

46%

0% 10% 20% 30% 40% 50%

Other / please specify

Head of Supervisory Board

Member of the Supervisory Board

Independent Director

Chief Financial Officer

Corporate Governance Officer

Corporate Legal Counsel

Shareholder

Division Head (Credit Department / other)

Member of the Management Board

Chief Executive Officer/ Head of ManagementBoard (MB)

% of banks

71

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 2. CORPORATE GOVERNANCE INDICATORS Chart 47. Corporate Governance Indicators for the Southern Region


100%

80%

0%

0%

20%

80%

100%

20%




Related party transactions are fully or partiallydisclosed to the SB


Shareholder Rights

80%

100%

20%

100%

20%

0%

80%

0%




Shareholders are informed and provided alldocuments ahead of the General Shareholders

Meeting (GSM)

Supervisory Board

20%

0%

0%

40%

80%

100%

100%

60%






100%

100%

40%

20%

60%

0%

0%

60%

80%

40%






Yes No or no answer

`

72

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Chart 48. Corporate Governance Indicators for the Northern Region


100%

75%

4%

0%

25%

75%

96%

25%






Shareholder Rights

96%

96%

11%

100%

4%

4%

89%

0%





Meeting (GSM)

Supervisory Board

18%

11%

29%

32%

82%

89%

71%

68%






100%

100%

79%

43%

75%

0%

0%

21%

57%

25%






Yes No or no answer

`

73

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Chart 49. Corporate Governance Indicators for the Central Region


100%

83%

17%

0%

17%

100%

83%

0%






Shareholder Rights

100%

100%

33%

100%

0%

0%

67%

0%





Meeting (GSM)

Supervisory Board

50%

0%

33%

17%

50%

100%

67%

83%






100%

67%

67%

17%

67%

0%

33%

33%

83%

33%






Yes No or no answer

`

74

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Chart 50. Corporate Governance Indicators for the Western Region


100%

67%

0%

0%

33%

67%

100%

33%






Shareholder Rights

100%

100%

33%

100%

0%

0%

67%

0%





Meeting (GSM)

Supervisory Board

0%

67%

67%

67%

100%

33%

33%

33%






100%

100%

67%

67%

100%

0%

0%

33%

33%

0%






Yes No or no answer

`

75

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Chart 51. Corporate Governance Indicators for the Eastern Region


100%

75%

13%

0%

25%

63%

88%

38%






Shareholder Rights

100%

100%

0%

100%

0%

0%

100%

0%





Meeting (GSM)

Supervisory Board

0%

13%

38%

13%

100%

88%

63%

88%






88%

100%

75%

38%

63%

13%

0%

25%

63%

38%






Yes No or no answer

`

76

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Chart 52. Corporate Governance Indicators for Banks with Foreign Shareholding


100%

67%

17%

0%

33%

83%

83%

17%






Shareholder Rights

100%

100%

0%

100%

0%

0%

100%

0%





Meeting (GSM)

Supervisory Board

50%

17%

0%

33%

50%

83%

100%

67%






100%

100%

67%

33%

100%

0%

0%

33%

67%

0%






Yes No or no answer

`

77

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 3. ADHERENCE TO BASEL COMMITTEE CORPORATE GOVERNANCE PRINCIPLES Outlined below are the key conclusions drawn from the banks’ responses regarding the basic corporate governance principles developed by the Basel Committee on Banking Supervision in order to compare the survey results with internationally commonly accepted guidelines for the banking industry. 1. Establishing strategic objectives and a set of corporate values that are

communicated throughout the banking organization. Most banks are only now beginning to realize the need for proper strategic planning and strategic management. Many of the surveyed banks have formally established strategic goals and objectives for the first time in the past three years. While the majority of banks now have formally established strategies, only a small number of them have formalized corporate values or codes of conduct. As well, not all banks clearly communicate their strategic objectives throughout the organization in order to ensure staff awareness at all levels, with communication limited to the interaction between shareholders, the Supervisory Board and the Management Board. 2. Setting and enforcing clear lines of responsibility and accountability

throughout the organization. Banks struggle to define the proper functional roles and responsibilities of different governing bodies, departments and staff members. At the top, there is often a lack of separation of duties between the General Shareholders’ Meeting and the Supervisory Board, or between the Supervisory Board and the Management Board. In some cases the Supervisory Boards appear to view themselves as equal to the General Shareholders’ Meeting. In other cases, Supervisory Boards unduly involve themselves in the banks operational and day-to-day activities. In some banks, Supervisory Boards do not actively shape the bank’s strategic development, or exist for compliance purposes only. With regard to day-to-day operations, the survey revealed many cases where responsibility and reporting lines are numerous or separation of duties is not properly established. In some banks excessive functional, operational and decision-making responsibilities are placed on individual senior or mid-level managers. Interviews further revealed that external, non-staff members sometimes participate in internal key-decision committees (e.g. credit committee). 3. Ensuring that board members are qualified for their positions, have a clear

understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns.

Taking into account the brief history of Ukrainian commercial banking, most Supervisory and Management Boards do consist of qualified and experienced professionals. However, as the functions of the boards are not always clearly and properly defined, boards usually have inadequate structures and not all directors understand their position and role within the bank. In some cases, where board members are appointed directly by large shareholders, they tend to perform their oversight and “duty of loyalty” responsibilities to those shareholders only, and not to the bank or its entire shareholder body.

78

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 4. Ensuring that there is appropriate oversight by senior management. Most banks have Management Boards, which bear the responsibility for the overall financial and operational results of their organizations. In addition to carrying out the overall control over the banks’ operations, senior management is also overly involved in business-line decision-making. Shareholders often place the burden of responsibility for the operational and financial results solely on the Chief Executive Officer, which leads to an excessive centralization of decision-making power within the organization. The BCBS recommends, that even in small banks key management decisions should be made by more than one person. This principle is not always applied in the Ukrainian banking sector. 5. Effectively utilizing the work conducted by internal and external auditors,

in recognition of the important control function they provide. All banks comply with the regulatory requirement of having an internal auditor, but the internal audit department is usually quite small (one to three people). Most banks are in the process of changing the internal auditors’ reporting line from the Management Board or Chief Executive Officer to the Supervisory Board, as required by recent regulatory changes. In reality, most internal auditors have dual reporting responsibilities to both the Supervisory Board and the Management Board. The role of internal auditors in the banks is often limited. It is encouraging, however, that the overall experience and qualifications of internal auditors is increasing rapidly. The Supervisory Boards and/or Management Boards are overly involved in the appointment of the external auditors and decisions regarding their compensation. Despite the fact that selection and approval procedures may not correspond to international standard practices, most banks do approach the selection of the external auditor with due care. However, the independence of the external auditor can be jeopardized by this selection process. It is positive to note that fees for non-audit services never exceed audit fees. 6. Ensuring that compensation approaches are consistent with the bank’s

ethical values, objectives, strategy, and control environment. The majority of banks do not compensate the members of their Supervisory Boards, but do link the compensation of the Management Board to the long-term performance results of the bank. The majority of banks do not have formal appraisal and evaluation procedures for their Supervisory Board and Management Board members, which may create unclear performance expectations and hinder the development of a strong corporate culture. 7. Conducting corporate governance in a transparent manner. Banks comply with legal and regulatory minimum requirements for disclosure of information. However, they are not keen to provide additional information, which is required for effective decision-making by shareholders, external investors and customers. Banks seldom adopt a pro-active information policy: they are usually ready to disclose additional information about their operations only upon request, citing the lack of demand and requirements for such data from stakeholders or regulators. The

79

IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ new Basel Accord will bring a change as banks will be forced to improve their practices of disclosing risk-related information, material and related party transactions. 4. CORPORATE GOVERNANCE IN BANKING – LEGAL FRAMEWORK IN UKRAINE The following list contains the most important laws and regulations that govern banks in Ukraine. Commercial Laws Law on the National Bank of Ukraine (1999, last version as of 03.02.2004) Law on Securities and the Stock Market (1991, last amended version as of 20.11.2003) Law on Companies (1991, last amended version as of 11.12.2003) Law on Banks and Banking Activity (2000, last revised version with amendments as of 20.11.2003) Law on Financial Services and State Regulation of Financial Services Markets (2001, last revised version with amendments as of 06.02.2203) Law on Individuals Deposits Guarantee Fund (2001) Law on Anti-Money Laundering (2002, last amended version as of 06.02.2003) Draft Law “On Joint Stock Companies” # 3059-1 (18.12.2003)

Presidential Decree Presidential Decree#280/02 On Measures for Developing Corporate Governance in Joint Stock Companies

National Bank of Ukraine Resolutions NBU Protocol # 39 Banking Supervision. NBU Supervision Functions (1993) NBU Resolution # 114 On Organization of Internal Audit in Commercial Banks in Ukraine (1998) NBU Resolution # 566 On Organization of Accounting and Reporting in Banks in Ukraine (1998) NBU Resolution # 358 On Methodological Instructions of Internal Audit Standards Application in Banks in Ukraine (1999) NBU Resolution # 275 On Banking Licensing, Written Permit and License for Definite Operations (2001) NBU Resolution #276 On Planning and Conducting Inspections (2001) NBU Instruction #368 On the Procedure of Bank Activity Regulation in Ukraine (2001) NBU Resolution # 369 On Enforcement Measures Taken by the NBU for Breach of Legislation (2001) NBU Resolution #375 On Establishment, Organization and State Registration of Banks, Opening Branches, Representative Offices, and Outlets (2001) NBU Resolution # 563 On Imposition of Administrative Penalties (2001) NBU Resolution # 431 Instruction on Bank Interim (Quarterly) Financial Reporting in Ukraine (2002) NBU Resolution # 50 On Approval of the Internal Audit, Professional Ethics Code in Banks and Changes to the Methodological Instructions of Internal Audit Standards Application in Banks in Ukraine (2003) NBU Resolution # 189 On Financial Monitoring Provided by Banks (2003) NBU Resolution #254 On Organization of Bank Operational Activity in Ukraine (2003) NBU Resolution # 389 On Submitting Audit Reports on Annual Financial Revision Results by Banks to the National Bank of Ukraine (2003) NBU Instruction #518 On Bank Annual Financial Reporting in Ukraine (2003) NBU Instruction # 561 On Fair Price Evaluation of Shares (2003) NBU Resolution #584 On NBU Regulations on the Liquidity of Ukrainian Banks by Refinancing, Deposits and Other Operations (2003) NBU Resolution # 104 On Methodological Guidelines for Bank Inspections and Risk Assessment (2004) Draft NBU Recommendations “On Organization and Functional System of Risk Management in Banks in Ukraine (2004)

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State Commission on Securities and the Stock Market (SSMSC) Resolutions SSMSC Resolution #59 Instruction on Granting Licenses for Share Registrars (1996) SSMSC Resolution #11/1 On Procedure of Submitting Reports by Securities Traders (1997) SSMSC Resolution #18 (1997) SSMSC Resolution #72 On Submitting Regular Information by Open-Joint Stock Companies and Bond Issuers (1998) SSMSC Resolution #5 On Submitting Special Information by Joint Stock Companies and Companies – Bond Issuers (2000) SSMSC Resolution #18 On Registration Procedure of Open Joint-Stock Companies’ Share Emission and Company Bonds (07-01/98) (2001) SSMSC Resolution #60 On Regulating the Activity of Share Registrars (2001) SSMSC Resolution #173 On Establishing System of Information Disclosure on the Stock Market (2001) SSMSC Resolution #167 On Procedure of Closed Joint-Stock Companies Shares Emission Registration (2002) SSMSC Resolution #227 On Submitting Annual Report by Closed Joint Stock Companies to SSMSC (2003) SSMSC Resolution #290 On Presenting Administrative Information on Maintaining Shareholders Registers and Submitting Relevant Documents to SSMSC (2003) Ukraine Corporate Governance Principles (2003) – voluntary adherence

5. PROMOTERS OF CORPORATE GOVERNANCE IN UKRAINE The following, not exhaustive, list includes selected government agencies and non-governmental associations that are actively promoting corporate governance best practices in Ukraine, with special emphasis on the banking sector. Organization Website National Bank of Ukraine www.bank.gov.ua Ministry of Economy and on European Integration - Department on Cooperation with Int’l. Finance Organizations and Financial Markets Department

www.me.gov.ua

Supreme Council of Ukraine – Committee on Finance and Banking Activity www.rada.kiev.ua Securities and Stock Market State Commission www.ssmsc.gov.ua State Commission on Financial Markets Services Regulation www.dfp.gov.ua Supreme Commercial Court of Ukraine www.arbitr.gov.ua State Commission on Regulatory Policy and Entrepreneurship N/A National Depository of Ukraine www.ndu.gov.ua Individual Deposits Guarantee Fund www.fg.org.ua Union of Auditors of Ukraine www.sau-apu.org.ua Association of Ukrainian Banks www.aub.com.ua Kyiv Banks Union www.pravex.kiev.ua Association of Ukrainian Stock Market Participants www.aufru.kiev.ua Professional Association of Registrars and Depositors www.pard.kiev.ua Association of Stock Market Lawyers www.finmarket.info Investors Rights Protection Fund www.finmarket.info Kiev International Stock Market www.kise-ua.com World Bank www.worldbank.org.ua International Finance Corporation – Ukraine Corporate Development Project www2.ifc.org/Ukraine/ucdp European Commission Ukraine – TACIS www.delukr.cec.eu.int European Bank for Reconstruction and Development (EBRD) www.ebrd.com United States Agency for International Development www.usaid.kiev.ua Financial Markets International www.fmi.kiev.ua Transparency International www.transparency.org.ua

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ 6. BANKING SECTOR: STATISTICAL DATA Twenty largest Ukrainian banks by Total Assets and Equity as of 1.1.2004 Bank Total Assets (UAHm) Total Equity (UAHm) 1. Aval 9,929.0 906.8 2. Privatbank 9,842.5 955.9 3. Prominvestbank 7,625.6 1,044.7 4. Oschadny Bank* 5,608.1 235.9 5. Ukrsotsbank 5,157.9 547.2 6. Ukreximbank* 3,876.9 444.7 7. UkrSibbank 3,792.3 242.7 8. Raiffeisenbank Ukraine+ 2,907.5 166.8 9. Nadra Bank 2,889.1 204.0 10. Brokbusinessbank 2,232.9 191.5 11. Finansy Ta Kredit 1,848.6 177.3 12. Pravex Bank 1,655.9 95.8 13. First Ukrainian Int’l. Bank 1,388.2 364.7 14. Kreditprombank 1,305.7 156.9 15. Pivdennyi Bank 1,238.7 122.0 16. ING Bank Ukraine+ 1,188.2 80.9 17. Forum Bank 1,171.5 141.2 18. Kredit Bank (Ukraine)+ 1,168.4 140.0 19. Citibank (Ukraine)+ 1,127.9 123.0 20. Ukrgasbank 1,081.0 106.3

Source: NBU, Fitch Ratings * state owned; + foreign controlled Sovereign Ratings (Long-Term) Moody’s B1 Standard & Poor’s B positive Fitch B+

Key Indicators Population (2003) 49.0 mn GDP (2003, nominal) UAH 263,228 bn GDP per capita UAH 5,372 Real GDP growth (2003) 9.3% Average annual total resources per household (2002) UAH 7296 CPI inflation (y/y Feb 2004) 7.4% Gross domestic savings (2002, % of GDP) 24.0 Gross foreign reserves (2003) UAH 45.15 bn # of open joint stock companies approx. 12.000 # of closed joint stock companies approx. 22,000 # of shareholders 17 – 18 mn # of registered banks (April 2004) 181 # of licensed banks 156 # of licensed open joint stock banks 94 # of licensed closed joint stock banks 37 # of licensed limited liability banks 25 # of licensed banks fully owned by foreigners 8 # of banks under liquidation 21 # of banks listed on the stock exchange 7 # of banks with outstanding domestic bonds 10 # of banks with outstanding int’l. bonds 2

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ Total regulatory capital of banks (April 2004) UAH 14.29 bn Total liabilities of banks (April 2004) UAH 93.82 bn Of which deposits from individuals UAH 36.02 bn (38.4%) Of which deposits from legal non-bank entities UAH 29.46 bn (31.4%) Of which interbank credits and deposits UAH 10.69 bn (11.4%) Total assets of banks (April 2004) UAH 107.50 bn Of which highly liquid UAH 15.48 bn (14.4%) Of which loans UAH 75.78 bn (70.5%) Of which investments in securities UAH 6.77 bn (6.3%) % of loans granted to corporations 78.6% % of loans granted to other banks and NBU 9.2% % of loans granted to natural persons 12.1% % of ‘problem loans’ to total portfolio 3.3%

Source: NBU, Fitch Ratings, IntelliNews, Oxford Analytica, SCSM 1 US$= 5.25 UAH

7. TERMINOLOGY Whenever possible, the survey uses generally (internationally) accepted terms in the corporate governance context. This differs somewhat from the terminology applied in Ukrainian banking law. The following table lists the most common terms and their definition in Ukrainian banking legislation. Affiliated party Any legal entity in which the bank has a major stake

or which has a major stake in the bank

Chairman of the Management Board Equivalent to Chief Executive Officer (CEO)

Financial transactions (for the purpose of Anti-Money-Laundering law)

Financial transactions include the following operations: deposit and withdrawal; money transfer (from account to account); currency exchange; operations with securities and financial assets; loans and credits; insurance operations; granting of financial guarantees; trust management of securities; financial leasing; issuance, operating, distribution of state and other money lotteries; and account opening

Foreign capital bank A bank in which the share of capital belonging to one or more non-resident and exceeds 10%

General Meeting of Participants Equivalent to General Meeting of Shareholders

Insider Trading Insider trading occurs when managers use non-public information collected thanks to their position for their own personal benefits

Insiders 1) Major shareholders; 2) Bank management: a) top management:

members of the supervisory council, members of the management board, chief accountant and his/her deputies b) other managerial bank staff: heads of branches, chief accountants of branches and their deputies, members of the credit committee, heads of bank departments c) internal audit department employees d) revision commission members;

3) Controllers: external auditors; employees of state controlling authorities;

4) Affiliated parties;

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5) Management and controllers of affiliated and interested parties;

6) Interested parties; and 7) Associated parties: siblings, spouse, children of

bank managers, bank controllers or managers of legal entities – major bank shareholders

Interested party A legal entity which has common major shareholders

or management with the bank

Major shareholder Either direct or indirect, individual or joint ownership of 10% or more of the authorized capital or the voting right, acquired (paid-up) shares of the legal entity or the ability to exercise decisive influence over the management or activity of a legal entity irrespective of formal ownership

Management Board (MB) or Board of Directors (BoD)

Equivalent to Management Board

Managers of the bank Chairman, deputies and members of the supervisory council; chairman, deputies and members of the management board; chief accountant, his deputies; heads of branches

National Bank of Ukraine (NBU) Equivalent to Central Bank

Participants of the bank Bank founders, shareholders of a bank, which is a joint-stock company, participants (stockholders) of a bank, which is a limited liability company, and of a cooperative bank

Related persons Related persons are: 1) bank managers; 2) major shareholders; 3) close relatives, spouse, children, parents of any person indicated in clauses 1 and 2 above; 4) the bank’s affiliated persons, managers and holders of major stakes in affiliated persons, and their close relatives

Self-Dealing Self-dealing includes financial transactions (loans, credits, guarantees, etc.) with bank’s related persons

State Bank Register The register kept by the NBU and containing information on the state registration of all banks

Supervisory Council Equivalent to Supervisory Board

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IFC – Ukraine Banking Sector Corporate Governance Survey ____________________________________________________________________________ CONTACTS Motria Onyschuk-Morozov Senior Operations Manager Corporate Governance Central and Eastern Europe Department International Finance Corporation 4, Bohomoltsya Street Kyiv, 01024 Ukraine Patrick Luternauer Project Manager Ukraine Banking Corporate Governance Survey Author/Editor of the Survey Report International Finance Corporation 36/1, Bolshaya Molchanovka Moscow, 121069 Russia Elena Svechnikova Project Analyst International Finance Corporation 4, Bohomoltsya Street Kyiv, 01024 Ukraine Tel.: + 38 044 253 05 39 Fax.: +38 044 490 58 30 E-mail: [email protected] / [email protected]

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