Even during the pandemic, the Corporate Governance Professional Association tries to be as useful as possible to corporate governance specialists, in particular, members of supervisory boards and all those who are interested in the activities of that collegial body. On September 17, 2020, the Third Director’s Online Conference was held on “Remuneration of members of the Supervisory Board during and after quarantine.”
Those issues cause considerable controversy both among professionals, and in society, investors give them considerable attention. The availability and quality of remuneration policy for board members and senior management are one of the critical issues in assessing the quality of the company’s corporate governance model.
During the discussion, several important and topical issues were raised, namely: who should develop draft remuneration policy for members of supervisory boards; what is the optimal amount of remuneration in public and private companies; whether the remuneration of the members of the Board should have a variable component; if so, on which KPIs it should depend; whether it is appropriate to use the term “KPIs” for non-executive directors at all; whether the remuneration of Board members has changed and should change during the crisis caused by the Covid-19 pandemic.
Answering questions from the moderator of the event, Chairman of the CGPA Management Board, Oleksandr Okuniev, the speakers shared their views and observations. They expressed concern about the possible consequences of the Government’s decisions to determine remuneration for members of supervisory boards of state-owned enterprises in Ukraine. O. Okuniev took on the role of an opponent of the speakers, quoting popular statements in Ukrainian society about the excessive remuneration that is unjustifiably paid to members of the supervisory boards of state-owned enterprises. Here are the most important theses from the speakers:
Jason Brett Pellmar, Head of IFC Regional Office in Ukraine, Belarus, and Moldova, the Chairman of the Nomination Committee, said: “The issue of remuneration of directors is a scorching topic today. It is often used by opponents of corporate governance reform to suspend it. A fair reward is an abstract question. The size depends on the market, on the principles of the market. Remuneration should be sufficient to attract competent people to positions. There should also be a mechanism for evaluating the activities of the supervisory board. We often hear that the company’s corporate governance system is an added value. Therefore, in Ukraine, to determine the value and effectiveness of the work of the supervisory board, it is necessary to compare the results of state-owned enterprises that have a supervisory board (such as “Ukrainian Railway” and Ukrposhta) with those enterprises that do not yet have one. I think the difference will be noticeable. Establishing remuneration to members of the supervisory boards of state-owned enterprises in Ukraine is a complicated political issue. The remuneration committee should not determine the level of remuneration but at the level of the Cabinet of Ministers. The reduction of payments to members of supervisory boards by the decision of the Cabinet of Ministers of Ukraine with a change in terms of contracts unilaterally is a dangerous precedent that raises a lot of questions and risks.”
Sevki Acuner, former Chairman of the EBRD in Ukraine, Chairman of the Supervisory Boards of JSC “Ukrainian railways”, NEC Ukrenergo, noted from the position of the current Chairman of the Supervisory Board of the state-owned enterprise: “1) how much the candidate could earn elsewhere and 2) risk premiums (physical and reputational). These parameters are fundamental, especially for the risks of working in Ukraine.” Regarding the issue of evaluating the activities of supervisory boards as a basis for determining the level of remuneration of their members, the speaker said: “Many evaluation parameters will be subjective, as this is a non-executive position. Vulnerability to political influence is created if compensation is tied annually to the wishes/decisions of politicians. The assessment of teamwork is essential, but the establishment of KPI and the variable component are extremely dangerous. In the world, it is common practice for members of the remuneration committee to determine and propose for approval by the general meeting of shareholders the level of remuneration to members of the supervisory board. In Ukraine, the vision of shareholders, especially in state-owned enterprises, namely the Government and the Ukrainian people, as the owner of enterprises, should still be taken into account. It is also worth considering the opinion of representatives of international financial institutions, on which the development of these enterprises very often depends. “
Andriy Boytsun, PhD, Independent Corporate Governance Consultant, Chairman of the Nomination and Remuneration Committee of the Supervisory Board of PJSC Ukrnafta, a former member of the Strategic Advisory Group on Reform Support (SAGSUR), said: “We are forced to invite foreigners to supervisory boards not because they have a different nationality, but because Ukrainian candidates are lack of practical experience as well as a corresponding reputation. Today it is necessary to address foreigners and offer them the conditions that will interest them, particularly financial conditions. The toxicity of the Ukrainian environment must also be taken into account. For example, people who work on the supervisory board of Deutsche Bahn will not be interested in working on the same conditions on the supervisory board of “Ukrainian railways”, they should be offered better conditions. Another important point is which company is “supervised” by the supervisory board, as the amount of time spent on the job depends on it. If you frequently need to “supervise”, it should be compensated accordingly. I think that today the best paid supervisory boards of Ukraine are the boards of Naftogaz and Ukrainian railways (before quarantine – CGPA note). At the same time, for example, Ukrposhta, an important enterprise with 70,000 employees, has a low asset value. Following Resolution №668 of 04.07.2017 “On approval of the Procedure for determining the terms of payment for services and reimbursement of expenses of members of supervisory boards of state unitary enterprises and companies in the authorized capital of which more than 50 percent of shares (stakes) belong to the state”, with a similar level of responsibility and involvement, members of the Ukrposhta Supervisory Board receive five times less remuneration. It’s not fair. Often, even with decent pay, state-owned companies fail to attract the best candidates to supervisory boards. Work in this direction still remains.”
Yuriy Vitrenko, Chairman of the Supervisory Boards of PJSC Ukrnafta (2019-2020), JSC Ukrgazvydobuvannia (2016); Chairman of the Supervisory Board of Ukroboronprom (2019-2020), said: “It is important to compare the remuneration of members of the Supervisory Board with the quality and market value of the management supervised by the Board, as well as the essence of the work of this member of the Supervisory Board. Members of the Supervisory Board shall not receive more per hour than the Chairman of the Management Board or the CEO. Given that a member of the supervisory board works much less than the Chairman of the board, he should receive 10-20 times less. The problem of Ukrainian state-owned companies is that the salaries of members of the supervisory board are ten times higher than the salaries of management. It is clear that remuneration is associated with certain results; for example if the company’s supervisory board is unable to provide such a basic point as the company’s accountability, then what should it be paid for? In Ukraine, supervisory boards often act as a “screen”, as opposed to transparency and accountability. The supervisory boards of state-owned enterprises should be evaluated by a centralized institution for the management of state property with professionals involved, and not as it is now. There are people in ministries and Government who do not understand corporate governance, management or business. When they manage this process, you should not expect a positive result… »
Regarding the presence of a variable component in the remuneration of the members of the supervisory board, which depends on the company’s results, the speaker noted that “in Ukraine, it is impossible because there will be conflicts of interest and corruption, the members of the supervisory board will help management to manipulate reporting.”
Max Nefyodov, investment banker, First Deputy Minister of Economy (2015-2019) and Head of the State Customs Service (2019-2020) stressed: “The situation in Ukraine is significantly different from the classical view of the economic environment. Unfortunately, the “turbo regime” of constant changes in the Government does not stop, when it is even difficult to remember the names of the current ministers. In this environment, the strategic goals of the supervisory board are transformed into actions to “protect” the company from the majority shareholder (especially in state-owned enterprises). This work accounts for up to 99% of the total work of board members. In these conditions, how to measure the effectiveness of the supervisory board or its individual member to determine the amount of tangible and intangible remuneration? The amount of labor costs, the number of papers written off, meeting attendance, something else? Under such conditions, the stratification in the income of the “average voter” and the minimum wage of a member of the supervisory board transforms the “fair amount of remuneration of a member of the supervisory board” into a metaphysical category. KPIs should be used to evaluate the management board’s work, not members of the supervisory board. Ministries do not currently have the expertise to assess the company’s condition and the work of the supervisory board. “Ukrposhta”, for example, is undergoing a phenomenal transformation of strategic importance, but complaints about queues, service quality and other negative parameters are continually arising, and the work of the supervisory board may receive a negative assessment because of those negative parameters.”
Summing up the event, Oleksandr Okuniev noted that many questions about the activities of supervisory boards in Ukraine, especially during the quarantine period, remain open, as evidenced by the questions of participants during the event. CGPA will continue to hold Directors’ Online Conferences. The next event is planned soon.