CORPORATE GOVERNANCE MODEL IN UKRAINE AFTER THE GLOBAL FINANCIAL CRISIS
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CORPORATE GOVERNANCE MODEL IN UKRAINE AFTER THE
GLOBAL FINANCIAL CRISIS
Olga NOSOVA
The consequences of global financial crisis are resulting in some financial institutions
bankruptcy, the bailout of banks by national governments, and downturns in stock markets
around the world. The corporate governance analysis of various theories suggests two
main approaches: the definition through the companies’ governance system, and the
determination of the allocation of value added among stockholders. The rest includes the
adoption of the international standards of corporate governance system all over the world.
The article attempts to establish a conceptual framework for the study of corporate
governance by employing the agency theory, the rational choice institutionalism, and
enforcement theory. One group of scientists emphasizes the regulatory role of corporations
and governance system, and defines corporate governance system as the whole set of
regulatory, market stakeholder and internal governance. Another group of scientists
studies the degree to which shareholders influence and share in short- and long-term
corporate value creation, and defines the goal of economic reform in transition and,
largely, its pace.
The purpose of the article is to examine whether there is a corporate governance model
that could minimize the negative effects of conflicts, align of managers’ behavior with
stockholders, and provide stock markets development. The analysis of numerous studies
helps to clarify the basic issues including objectives, interests, methods of achievement,
and benefits of managerial and stockholder conflicts. The corporate sector development
demonstrates the use of mixed model in Ukraine, based partly on the application of the
principals of American, and German models of corporate governance.
The causes of corporate governance conflicts consider in Ukraine. The application of the
economic and legal mechanisms for corporate conflicts elimination is proposed. Specific
policy proposals designed to achieve the goal to separate regulators from company
management and owners. Governance must clearly define the functions and relationships
of the various parties, and separate oversight from operational and financial management.
The public accountant’s objectivity can be introduced in Ukraine through creation of
institutional structures that define and require regulation, records, and audit. In the new
context, auditors will be private contractors serving as regulators, and they will work for
boards of directors. Management is not involved.
The article analyses the measures that have been taken to create an effective corporate
governance model in Ukraine. The international accounting standards application, based
on American and European accounting standards in corporate governance, will be directed
to create mechanism for disclosures and frauds preventing in all companies. The national
accounting agencies foundation in East European countries, including Ukraine will
provide the adoption of international accounting
standards at the country’s level. OLGA NOSOVA*
Email: nosovaov@yahoo.com
*Department of Economics and
Keywords: Corporate governance, corporate conflicts, Finance, Kharkov National University
managers, stockholders, international accounting of Internal Affairs, Ukraine.
standards.
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 20151. Introduction the dependence with the large size of the
country’s stock market. The weak corporate
The global financial and economic crisis in governance leads to higher costs of capital. In
Eastern Europe is resulting in some financial case of better corporate governance there is
institutions bankruptcy, the bailout of banks by higher returns on assets.
national governments, and downturns in stock
markets around the world. The corporate American and Western European corporate
governance analysis of various theories suggests governance systems create sound information
two main approaches: the definition through the and focus executive and managerial attention on
companies’ governance system, and the corporate performance. After the high-profile
determination of the allocation of value added collapse of a number of large corporations in the
among stockholders. The rest includes the past two decades, several of which involved
adoption of the international standards of accounting fraud, there has been a renewed
corporate governance system all over the world. public interest in how modern corporations
practice governance, particularly regarding
Scientists focus their attention to shareholders accounting. The positive features of these
(owners) and stockholders’ interests, models of models implementation to East European
inside and outside board committee, and a countries would reduce the insider effect and
relationship between governance practices, and increase the fairness, transparency,
corporate or organizational performance. Some accountability of value distribution, and raise
authors emphasize the discussed issue which is corporate control in the company. The scientists
related to the interdependence of global propose to learn how to respect shareholders
financial crisis and efficiency of corporate rights and exercise those rights in the
governance system. The basic approaches deal corporation.
with an absence of correlation between
corporate governance and financial crisis, an
effective implementation of existing corporate
governance arrangements and principles. 2. Literature Review
In a broad sense, “corporate governance system” The formation of corporate governance system
refers to the whole set of regulatory, market is the crucial question for all governments in
stakeholder and internal governance. There has transition. The privatization of large and small
been estimated no significant correlation enterprises was typical feature of command
between corporate governance and financial system transformation. The problem of
infrastructure. redistribution of property rights between insiders
and outsiders, and external investors’ access to
The spread of globalization raises the issue for privatized company’s shares is vital item of
good corporate governance performance. It set reforms. The chief goal of current corporate
the number of questions towards global and governance is to eliminate contradictions among
country system of monitoring, accountability shareholders and management.
improvement, and new system establishment.
Good corporate governance is associated with One group of scientists emphasizes the
reduced risk for financial crises. The better regulatory role of corporations and governance
quality of shareholder protection demonstrates system. R. Monks, N. Minow (2011) define
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015corporate governance system as the whole set of stakeholders.” The authors prove content
regulatory, market stakeholder and internal emphasizes the social, legal, political, and
governance. Following this approach scientists ethical responsibilities of a business to both
Z. Bodie, A. Kane, A. Marcus (2011) consider external and internal stakeholder groups, and
that the corporate governance is “the set of rules balance strong coverage of ethics and the
and procedures that ensure that managers do stakeholder model with a new focus on one of
indeed employ the principles of value-based business’ most recent, urgent mandates:
management, to make sure that the key sustainability.
shareholder objective (wealth maximization) is
implemented.” The agency cost approach refers Another group of scientists studies the degree to
to instances when an agent’s behavior has which shareholders influence and share in short-
deviated from principal’s interest. There are and long-term corporate value creation, and
various conflicts of interests that can impact defines the goal of economic reform in transition
manager’s decision making process to act in and, largely, its pace. Shareholder access to such
shareholder’s interests. Management can buy created value is determined by the degree to
other companies to expand power. They can which key corporate “insiders”, especially
manipulate financial figures to optimize bonuses executives and management, can claim a
and stock-price-related options. disproportionate share of corporate value (the
“insider effect).”
M. Ehrhardt and E. Brigham (2011) point out
the interdependence of the sub-prime mortgage L. Bebchuk, A. Cohen & A. Ferrell (2009)
market to the financial and global economic investigate which provisions, among a set of
crisis, and analyze the effect of profit twenty-four governance provisions followed by
maximization mechanism for a firm's value. the Investor Responsibility Research Center
From the financial point of view the authors (IRRC), are correlated with firm value and
point out the basic features of corporate stockholder returns. The authors put forward an
governance that include the set of laws, rules, entrenchment index based on six provisions -
and procedures that influence a company’s four constitutional provisions that prevent a
operations, and the decisions made by its majority of shareholders from having their way
managers. A. Carroll and A. Buchholtz (2009) (staggered boards, limits to shareholder bylaw
give the overview how effective business amendments, supermajority requirements for
decision makers balance, and protect the mergers, and supermajority requirements for
interests of various stakeholders, including charter amendments), and two takeover
investors, employees, the community, and the readiness provisions that boards put in place to
environment - particularly as business recovers be ready for a hostile takeover (poison pills and
from a perilous financial period. They give a golden parachutes). Bebchuk, L., Cohen, A. &
broad definition of corporate governance A. Ferrell find that increases in the level of this
including “…the method by which a firm is index are monotonically associated with
being governed, directed, administered, or economically significant reductions in firm
controlled … is concerned with the relative valuation, as measured by Tobin's Q, and
roles, rights, and accountability of such present suggestive evidence that the entrenching
stakeholder groups as owners, boards of provisions cause lower firm valuation.
directors, managers, employees, and other
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015D. Lacoste, S. Lavigne, E. Rigamonti (2010) Swedish counterparts is limited to 1 % of
consider the relationship between ownership company value.
structure and corporate diversification strategy.
Their research shows an increase in managerial The managers and stockholders interests conflict
ownership, far from leading to alignment, leads is based on the differences of objectives,
to managerial behaviour that goes against the interests, methods of achievement, and benefits.
interests of shareholders and more precisely to Managers are concentrated on personal
unrelated diversification strategies. compensation, their own stability and stability of
employment. They try to minimize their own
The analysis of the publications confirms that risk, to expand their personal power, to receive
the definition, value creation, and stock potential and financial advancement, to compete
distribution create incentives for company between managers, and to separate between
development. It is important to point out the managers personal, professional. Stockholders
basic elements of corporate governance system are oriented on stable return, profit
which include Board of directors, charter maximization, share price appreciation, and
provisions affecting takeovers, compensation company stability. They wish to reduce risk, to
plans, capital structure choices, and internal provide consistency policy of the flow of
accounting control systems. The function of benefits in the firm, to increase share
Board of Directors is directed to provide control appropriation and dividends. In order to
of management. minimize or to avoid the managers and
shareholders interests conflict there is a need to
Profit sharing is considered one of the important create management criteria which effect
formal measure of income increase. The profit stockholders.
share is distributed to managers and employees
which provide incentives to shareholders. In The quality assessment of corporate
case of shares distribution within the company management could be provided from the side of
shareholders get benefits to ensure the company requirements and objectives for work of
development. The forms of stock distribution management institutions of the company,
and stock options could be applied for procedures of decision making or reporting
enhancing of profit increase. In case of using system. The effective corporate management
stock options shareholder can buy stocks in supposes instrument of trust creation. It helps
some day on specified date. Profitability company to get resources for sucessful strategy
increase is the key issue for shareholders. It implementation, to provide a stable long-term
makes it applicable for company workers business development, and reduce risks
interests. Stock value is connected with resouces connected with conflicts of interests or external
belonging to shareholders. The higher rate of threats.
return of the company is, the more it will have a
stock. Empirical studies found that countries
with controlling shareholder systems cause
3. Hypothesis and Research Design
different levels of private benefit extraction. As
instance, Mexican controlling shareholders are The corporate sector development demonstrates
said to expropriate more than a third of the value the use of mixed model in Ukraine, based partly
of the company, while expropriation by their on the principals of American and German
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015models of corporate governance on the causes the appearance of the informal forms of
application. The corporate governance model is relations among companies, banks, and
based on the diverse capital structure in Ukraine. representatives of the state authorities. The
It defines the large variety of shareholders, dissemination of the informal rules for
including state, institutional investors and companies’ behavior results in the disclosures
individual stockholders. The corporate and frauds appearance in corporate sector in
governance structure specifies the distribution of Ukraine. The absence of the long-term corporate
rights and responsibilities among in the control policy summons an ineffective system of
corporation. The board of directors, managers, corporate governance formation. The existence
shareholders and other stockholders take part in of weak-enforcement of company’s law gives an
the elaboration rules and procedures for making opportunity for managers to manipulate the
decisions. Good corporate governance is insider information for personal interests, and as
associated with sustainable company’s value a result of it to gain an additional profit.
creation in a global scale. Where some of which Managers block the access of domestic and
will flow to investors with reduced risk of global foreign investors to companies’ shareholding
financial crises. The better the quality of process. The weak enforcement mechanism in
shareholder protection means the larger the Ukraine enhances the legal use of corporate
country’s stock market. Weak corporate rules, and new laws on bankruptcy and foreign
governance leads to higher costs of capital and investment.
in case of better corporate governance is higher
returns on assets. The motivation mechanism for shareholders
dividends is not created in Ukraine. An absence
The panel data model from 2003 to 2005 on of dividends return mechanism and an
ownership change and privatization for 27 undeveloped stock market do not stimulate
Ukrainian regions, including 24 oblasts, the shareholders and managers interests for profit
Autonomous Republic of Crimea and the two maximization. Managers do not have incentives
cities Kyiv and Sevastopol demonstrates that the to take care for the dispersed shareholders’
pace of privatization in the industrial regions interests. The significant role belongs to
with high urbanization is higher in comparison supervisors who set targets for the risk exposure
to agrarian regions in Ukraine model (Nosova, of public funds, explain any deviations from the
Bartels, 2006). For example, the share of targets, and give a corrective actions plan.
privatized state property is correlated with the
size of the regions, measured by urban An absence of legal mechanism for bank access
population. Wages are estimated higher in to company’s shareholding, weak stock market
regions where more public companies were development, undeveloped financial
privatized. It confirms that the privatization of infrastructure, the lack of transparency, low
public owned companies may have a positive control level of managers are considered the
effect on wages. typical features of modern corporate governance
model in Ukraine. The short-term shareholders’
The definition of value added through the interests predominate in decision making
companies’ governance system and allocation of process for company development. The analysis
value added among stockholders influence value of data of the table 1 depicts that oligarchs have
creation within the company and their the biggest number of majority controlled stocks
disposable. The lack of the formal institutions and the lowest average corporate governance
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015score of any majority group. They control Group’s IPO of Ferrexpo on the main market of
supervisory boards & audit commissions, the London Stock Exchange in June 2007
executive management and corporate remains the largest placement by a Ukrainian
communications professionals. Finance & Credit company.
Table 1: Majority ownership structure of Ukrainian equity market
Ownership Number of majority % majority controlled Average corporate
type controlled stocks of total governance rating
Management 24 21,1 % 6,7
TNC 9 7,9 % 6,4
Other 11 9,6 % 5,5
State 19 16,7 % 4,7
Oligarch 51 44,7 % 4,2
All 114 100 % 5,2
Note: This chat covers the 114 stocks that received corporate governance ratings in this report.
Source: Corporate Governance in Ukraine. Concorde Capital research. USAID, October 2011.
The concentration of ownership in the hands of during the period from 2005 to 2013. There are
financial industrial groups, diffusion of registered 12965 joint stock companies of
ownership among shareholders, the prevalence different ownership forms in 2013 in Ukraine.
of closed joint-stock companies, and the They include 2366 opened joint stock
removal of the company control to management companies, 5433 closed joint stock companies.
are the distinctive features of the corporate There are 3067 joint stock companies which do
governance model in Ukraine. The data from the not conclude the procedure of re-registering the
table 1 show the tendency of predominance of ownership form after adoption the new Joint
closed joint-stock companies in comparison with Stock Companies Law of 2008.
the opened joint-stock companies in Ukraine
Table 2: The dynamics of joint-stock companies in the Ukraine
Types of joint -stock companies 2005 2006 2007 2008 2009 2010 2013
Joint-stock company 35 215 34 942 35 134 35 016 31100 30169 12965
Opened joint -stock company 12 045 12 089 12 171 12 137 10058 9769 2366
Closed joint- stock companies 22 228 22 100 22 255 22 194 20052 20400 5433
Source: Unified state register of enterprises and organizations of Ukraine: Statistical Bulletin. – К.:
State Statistics Committee of Ukraine, 2013.
Corporate governance is the system of behavior managerial and owners functions. They obtain
rules used to direct and control stock company. free access to internal company’s information
The dispersed property disposable model is one and maximize benefits. Managers succeed to set
of the typical forms of corporate governance the inside control over company, manage the
system in Ukraine. Management provides company and withdraw some part of company’s
opportunistic behavior towards shareholders. assets. The contrary of short-term managerial
Managers combine at the simultaneously interests and long-term company’ performance
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015causes the conflict among the insiders and availability or unreliability of relevant data is the
outside company’s owners. It results in the most key question of creation transparency.
destruction of company’s balance structure and
bankruptcy (Nosova, Bartels, 2006). The typical The degree of management autonomy depends
features of corporate governance model in on their role in decision making process, and
Ukraine are the following. manager’s responsibilities within the company.
Better operational performance leads to better
The absence of shares’ income return does not allocation of resources and better management
stimulate shareholders and managers interests to in the company. The good corporate governance
increase profit. Managers do not have incentives would lead to the wealth creation, and results in
to take care for the dispersed shareholders’ profit maximization generated by the company.
interests. The concentration of ownership in the The comparison of managers and shareholders
hands of financial industrial groups, the objectives, interests, benefits could be seen in
prevalence of closed joint-stock companies, and the table 2. Shareholders usually concede most
the removal of the company control to of their control rights to managers.
management, the absence of dividend payments Asymmetrical access to company information
are the characteristics of “insider corporate enforces management to use its monopoly - the
governance model” in Ukraine. The active owner of the company's internal information,
monitoring of executive performance is and manipulate it for getting profit.
Table 3: The comparison of managers and shareholders objectives, interests, benefits
№ Features Managers Stockholders
Stable return, share price
Personal compensation,
1 Objective appreciation, company
stability of employment.
stability
Company stability, personal Profit maximization,
2 Interests
stability. dividends.
3 Benefits Wage. Share price appreciation.
Management focuses its Owners invest part of capital
4 Management decisions activities in one company. in the company. Diversify
Minimize risks. risks.
Control of the company is
Partial control of the company
small, do not take
5 Company control and participation in profit
responsibility for results of
distribution.
management.
Managers act through limiting interests of provided for bonuses optimization and stock-
shareholders. Management can engage in self- price benefits accumulation. The use of shadow
dealing, entering transactions for personal schemes of formation and removal of funds
enrichment. They can purchase other companies from the investment process help to raise
to expand individual power instead of significant funds from the turnover. The
maximization of value of company stock. The managerial property concentration results in the
manipulation of financial indices can be conflict of proprietors’ interests. It leads to
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015property redistribution among various Companies, and the State Securities and Stock
companies’ participants. There is a lack of Market Commission (SSMC). These institutions
enforcement mechanism for boosting efficiency with the authority provide development of the
through management incentives. The Corporate Governance Code. The Civil Code
government influences managers’ and directors’ introduces a rule targeting a conflict of interest
appointment. Empirical surveys of companies transaction between the company and
suggest that chief executives do not have shareholder in 2004. The shareholder does not
stimulus to maximize long-term wealth of the have a right to vote at the general meeting on
company. decisions regarding a transaction or dispute
between the company and shareholder. In the
Uncertainty and high investment risk Commercial Code there are introduced special
demonstrate the choice of western companies to rules governing liability of controlling
list their shares on a stock market with strict shareholders to the company and its creditors. In
corporate governance rules. Decrease and case the company the company enters into a
elimination of managers impact on decision transaction on unfavorable terms through the
making process of shareholders’ are considered fault of its controlling shareholder, such
an important issue in creating good corporate shareholder may be liable for the resulting
governance system. The corporate governance losses. A new the JSC Law (The JSC Law)
structure is divided on three stages: Supervision came into force in October 2008 and fully
Council, general meeting of stockholders, applies starting May 2011. The adoption of the
auditing committee in Ukraine. The corporate JSC Law is a significant step towards the
governance mechanism is based on the election establishment of a comprehensive corporate
and the appointment of all bodies, achieving the governance regime. Joint Stock Companies Act,
managers’ and stockholders’ interests balance, 2008 Chapters VII-X define the feature of
community interests’ satisfaction. The concept corporate governance in Ukraine. Section
of corporate governance is proposed in the “General Meeting of JSC” defines the
Decree “On the Measures to Corporate competence, procedure of general shareholder’s
Governance Development in Joint Stock meeting, voting procedure, etc. The section
Companies” in Ukraine in 2002. The Decree Company’s Executive Body includes the basic
provides on mandatory notification of an principles of the executive body activities.
intention to acquire a majority shareholding, a Evolution from formal supervisory board in
special procedure for a company to enter into Ukraine to a new tool for internal management
contracts that may significantly affect its of the company. JSC Law enhances protection
financial performance, administrative liability of of rights and interests of shareholders, creating
a company’s officers for violation of new impediments to raider attacks, and solving
shareholder rights, and participation of problems and curing irregularities arising in the
shareholders in bankruptcy proceedings. corporate governance area upon implementation
Shareholder rights violations are most frequently of the JSC Law. The Law “On Accounting and
connected with insufficient access to corporate Financial Reporting in Ukraine” (1999)
information by investors. The Decree amended in 2011.The basic principle -
specifically addresses to disclosure and prevalence of substance over form.
transparency issues. The Decree envisages the
establishment of a Coordination Council on Shareholders delegate administrative rights and
Corporate Governance Issues in Joint Stock responsibilities to managers for organizing intra-
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015corporate activity. The ownership concentrates constraints. It leads to the manipulation of
in the closed joint-stock companies. The state companies’ assets through self-enrichment of
retains a controlling stake for most of the large intermediary structures. Poor development of
companies. The transition to the "insider" the stock market limits and prevents the normal
management model is accompanied with a organization of corporate governance system in
concentration of ownership in the hands of Ukraine.
managers. There is an absence of institutional
Table 4: The biggest investors in the Ukraine
№ Investor Mln. USD The investment sphere
1 Maculan International Gmb 260 Production of housing
(Austria)
2 Pepsi Co (USA) 250 Production of soft drinks
3 Country Squire International 220 Construction of hotels
(Canada)
4 Daewoo Monor 150 DAEWOO AUTO-ZAS
6 35 Modernization of cigarette production
BAT Industries Ltd (Great Britain)
7 Tambrans Inc. (USA) 20 Production hygiene
8 Otis Elevator Inc. (USA) 17 The production and maintenance of elevators
Ease of doing business ranking in 2015 ease of doing business in 2014 and 2015
demonstrates that Ukraine gets 96 place with demonstrates the improvement in starting
score 61.52 in comparison with Poland which is business, registering property, and paying taxes
ranked 32 with score 73.56. The data analysis of in Ukraine (Table 5).
Table 5: The ease of doing business in the Ukraine
Rank Doing Business- Doing Business- Change in
2015 Ranks 2014 Ranks Ranks
Ease of doing business 76 69 -7
Dealing with construction permits 70 68 -2
Getting electricity 185 182 -3
Registering property 59 88 29
Getting credit 17 14 -3
Protecting minority investors 109 107 -2
Paying taxes 108 157 49
Trading across borders 43 44 1
Enforcing contracts 70 - 29
Resolving insolvency 142 141 1
Source: Doing Business 2015. Going Beyond Efficiency. Economy Profile 2015. Ukraine. The
International Bank for Reconstruction and Development/ The World Bank.
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015In the “Top – 500 best companies» Ukrainian Ukraine. The typical forms of corporate
companies achieved a total revenue of EUR conflicts combine the reorganization of washing
87.2 million in 2013. Ukraine ranked second in up assets by company, and its property
terms of companies’ revenue growth. alienation to fictitious proprietors. The
stockholders rights violation suggests an
Ukrainian companies included in the rating absence of personal timely information of vote
posted an increase in their revenues, thus registered shares. The lack of company
demonstrating higher growth dynamics transparency causes the additional risks. The
compared to the region as a whole. The average government blocks the decision making process
increase in the income of all included in the Top of additional shares emission. The problem of
500 at year-end companies amounted 3.26%. corporate rights determination, corporate
The Ukrainian energy company DTEK entered governance law adoption, and stable legal
the first time in the Top 10 companies. It had a system formation are the most discussed
125.3% increase in revenue, which moved the questions in the national legislation. The precise
company all the way from 32nd to 7th place. 39 definition of the list of companies and
out of 51 Ukrainian companies included in the transparent auction principals will be directed to
rating posted an increase in their revenues. They correct the unfair results of mass privatization in
demonstrated higher growth dynamics the Ukraine. Investment companies experts
compared to the region as a whole. The average estimate index of mergers and acquisitions
increase in income of all companies included in (M&A) ranged from $3billion to $7.5 billion in
the Top 500 at year-end amounted to 3.26%. 2008-2010 in Ukraine. According to the "Anti-
Raider Union of Entrepreneurs of Ukraine”
The corporatization process is characterized by there are about 40-50 specialized raider groups
excretion of shares of high real value from in the country. The average profit raider is
financial turnover, and poor dividends’ estimated 1000%.
mechanism. There is absence of shareholders’
confidence in future company development. The current corporate governance model should
Management experts hire auditors. One person be based on sufficient conditions of enterprise
(stockholder) combines posts of the company development, internal governance structures
management and membership on the board of formation, and balance of different
directors. This leads to an increase of agency shareholders’ interests. The effective corporate
costs of corporation. All of the above mentioned governance model considers the management
forms are the basis for abuses in the corporate functions division, the independence and
sector, and the excretion of the shares from responsibilities of the Board of Directors,
turnover of securities. defense of shareholders rights and interests.
Transparency and transferability information,
The corporate governance problem includes the high corporate culture in the society leads to the
lack of protection mechanism for stockholders good corporate governance system. The
rights, the insufficient information of stock effectiveness of corporate governance system
company activity, non-fulfillment stockholders depends on the formation of strong
general meeting decisions in the Ukraine. shareholders’ interests in future company’s
Corporate conflicts demonstrate an absence of performance, and will lead to to company’s
administrative and criminal responsibility. The profit maximization and in total benefits of
number of corporate conflicts is still high in the national economy.
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 20154. Conflict of managerial and stockholder management that explains their desire to reduce
interests in Ukraine up to minimum a probability of adverse
The corporate conflict of interest may take place consequences losses due to world market
between the company and its stockholder, conditions change. They are guided via a choice
between the stockholder and the hired of smaller investment horizon of the company’s
management, or between the company’s development. It is dealt with the restriction of
shareholders. The objective basis for conflicts the long-term company’s strategy development
are the contradiction of the definitions of definition. Managers try to decrease a
ownership as the share, determining ownership probability of some inefficient decisions
of the company, and share, defining as implementation. Management activity is
document, settling of stockholder rights. The directed on reduction of probability risk takers
basic problem deals with contradiction of strategy. The following policy is directed to
ownership and management functions of the avoid political, investment, financial, and also
corporation. Passivity of shareholders supposes random factors: uncertainty and unpredictability
an absence of the management motivation in the world financial markets. Managers are not
which is explained by the high capital interested in an effective utilization of the
dispersion among the owners. There is low company’s assets. An absence of personal
investment attractiveness for small investors. managers’ activity stimulus is a favorable basis
The contradiction among the different groups of for agency problems emergence. The
investors, the executive and supervisory board management activity does not aspire to achieve
hampers to improve an efficiency of corporate profit maximization of decision-making process
governance. within the company. Jensen, Mecking (1976)
conduct the analysis of the U.S. and UK
Shareholder interests are served when corporate sector development. They argue that
management is highly motivated to strive for in case of ownership diffusion, as is typical for
higher productivity and better performance. It U.S. and UK corporations, agency problems
results in the company’s value added increment. stem from the conflicts of interests between
Conflicts between management and outside shareholders and managers who own an
shareholders are arisen and resolved constantly insignificant amount of equity in the firm. In
in the company. The managers’ withdrawal of a case of one owner (or a few owners acting
part of company’ resources for own needs is together) the problem of monitor and discipline
considered one of the most important conflicts. management shifts to better company’s
It decreases significantly wealth of the performance under decreasing of information
company. Rydyk (2004) emphasizes, that asymmetries.
«activity of corporation is the catalyst of agency
conflicts. For example, as soon as in structure of The state does not play an important role in
the capital of corporation there is a debt loading company’s monitoring or bank’s reorganization.
then there is an agency conflict between Uncertainty and high investment risk
shareholders and bond’s holders». The demonstrate the choice of western companies to
managers’ activity contains an opportunity of list their shares on a stock market with strict
agency problems emergence. They are corporate governance rules. Legal definition,
connected to a possibility of majority legality observances are considered to form a
unpredictable situations existence. Managers guarantee basis for the property rights
make smaller efforts for the company’s protection, a financial transparency
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015maintenance, stability, and economic The distinctive features of corporate conflicts
development predictability in a society. The are their subjective components. It grounds for
decrease managers ‘ control in the company, their appearance as specific settlement
shareholders’ access to decision making process procedures. The corporate conflicts are the way
relate to an important issue in creating good to secure the operation of the company in the
corporate governance system. interests of all its owners (participants). The aim
of corporate relations is to ensure a balance of
Classification of conflicts by the objectives interests. Different factors may serve ground for
pursued by the attacker is divided on the the corporate conflicts, but for convenience the
following groups: factors in general can be divided into four
1. A controlling share of conflicting investor is groups: appearance of the interest groups of
obtained to form horizontally or vertically owners in the ownership structure of the
integrated holding company; company; related party transactions conducted
2. Consolidation of a large share made for the by the company; presence of the persons aimed
purpose of speculative sale of a controlling at using methods that are traditionally referred
share to a strategic investor; as "raiding" among the owners of the company;
3. Investor takeover to take control of the corporate restructuring or change of control
company - the attack object; structure in the company.
4. The acquisition of a controlling stake to
block a competitor (Osipenko, 2004). The current Ukrainian legislation specifies a
number of legal mechanisms for corporate
According to the criterion of object-conflict is conflicts prevention, and their negative effects
divided into significant minority shareholders, to minimization. In Ukrainian legislation on
the majority shareholder; shareholders against joint stock companies such mechanisms are
management; the conflict between the general summarized in the following: 1) internal
meeting and the board of directors; corporate mechanisms for conflict resolution; 2)
contradiction between management and the contract mechanisms; 3) judicial and non-
workforce when the latter holds a significant judicial (alternative) mechanisms. The first
share. group includes the codes of corporate
governance, the internal conflict of interest
The concept of conflict of interest is defined in policies and specific procedures stipulated by
Ukrainian legislation. It is incorporated into the the Law of Ukraine "On Joint Stock
laws “On the Procedure for Settlement of Companies" (2008). The Principles of Corporate
Collective Labor Disputes (Conflicts)” and “On Governance, approved by the decision No 571
the Procedure for Repayment of Taxpayer of 11.12.2003 of the State Commission for
Liabilities to Budgets and State Target Funds”), Securities and Stock Market are the basis for its
and the State Commission for Securities and development. Prevention of corporate conflicts
Stock Market in its Principles of Corporate is one of the objectives of such code. The code
Governance. In the Ukrainian Principles of defines the internal procedures to identify
Corporate Governance the conflict of interest is corporate conflict, to inform the company about,
defined exactly as "the discrepancy between the and to resolve conflict. The law sets out special
personal interests of an officer or his/her procedures designed to resolve the conflict of
connected persons and the professional duty to interest between shareholders.
act in the best interests of the company."
INTERNATIONAL JOURNAL OF INNOVATION AND BUSINESS STRATEGY
Vol. 03/July 2015The second group explains the difference of the 5. Conclusions
buy-out agreement and shareholders’ agreement The goal of corporate governance is to eliminate
in the Ukrainian legislation. The main cases when stockholders have conflicts of
difference between these agreements is the interest with one another. The application of the
narrow scope of regulation. The buy-out legal mechanisms to prevent corporate conflicts
agreement indicates only the conditions and and to minimize their negative effects will be
mechanisms of the shareholder’s withdrawal directed to align of managers’ behavior with
from the business or of a squeeze-out, stockholders.
determining voluntary or mandatory buy-out, as 1. Adopt the principles of independence,
well as the existence of third parties rights in responsibility, and transparency in corporate
connection with the buy-out. The shareholders’ management, process and records. Transition to
agreement regulates such issues as the a new corporate governance system, inspired by
nomination of candidates for management the principles of FASB, IASB and the Sarbanes-
positions, the procedures for stock disposal and Oxley Act, will force transparency and timely
stock pledge, voting procedures, the procedures reporting of corporate business activities. In
for dispute resolution and responsibility for turn, these practices will enforce independence
infraction of obligations. and accountability in decision making and
strengthen investor confidence.
In fact, in spite of the prohibition of the 2. Separate regulators from company
Supreme Court of Ukraine and the High management and owners. Governance must
Commercial Court of Ukraine, the corporate clearly define the functions and relationships of
relations in the Ukrainian companies are the various parties, and separate oversight from
frequently regulated outside Ukraine. T. operational and financial management.
Bondaryev, M. Malskyy (2008) support 3. The problem of institutional rights
conclusions that the Supreme Commercial Court establishment relates to the crucial problem for
of Ukraine has acted in unusual manner in some investment decisions. Business environment
cases for courts in developed countries. improvement will stimulate institutional
The third group provides mechanisms for development via credibility, transferability of
arbitration within national or foreign shareholders rights, legal mechanisms for
(international) institutions at different levels and preventing corporate conflicts, and minimize
complexity. These include the mediation along their negative effects. Stock market and
with the procedures that are governed by financial institutions development will stimulate
internal conflict resolution policy of the foreign direct investment inflow into the
company. countries.
4. The effective market economy development
The legal mechanism for conflict resolution is influenced by how the industrial policy of the
includes the list of measures to be fulfilled. The government will attract foreign investment into
responsibility of the board provides realization the country. The effectiveness of corporate
of structures for achievement of balance governance system will depend on the formation
between the pressure of accountability and the of strong shareholders’ interests in company’s
requirement of noninterference, development of long-term value creation.
capable institutions for financing, monitoring
and controlling corporate enterprises.
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