ollowing Ukraine’s Revolution of Dignity in 2014, the country set up a number of new institutions intended to reduce the country’s endemic corruption challenges. They will soon be joined by the High Anti-Corruption Court, which, after years of delay, was formally inaugurated on September 5.
Yet, while these anti-corruption bodies are necessary, they are not sufficient to root out corruption in Ukraine, including at its many state-owned enterprises (SOEs), which have traditionally served as a key mechanism for large-scale corruption. Ukraine’s anti-corruption architecture has been established to react to and punish instances of corruption—it does not prevent corruption before it begins, nor does it change the systems and networks that allow for and perpetuate corrupt activities.
To achieve this, Ukraine’s anti-corruption institutions must be coupled with broader reforms related to the country’s SOEs.
The recent experience of Agrofond, an SOE under the Ministry of Agriculture and Food that manages agricultural production, availability, and price stability, provides some clues of how to address the prevalent abuse of SOEs for the purposes of corruption. That experience is centered on the adoption of corporate governance reforms like independent and competitive tender processes; improving employee benefits and incentives; creating a strong and independent anti-corruption “ombudsman” inside the SOE; and mandating independent financial audits of the company’s operations.
Prior to 2015, when these reform efforts began, Agrofond was a case study in corruption. The company lost tens of millions of dollars to both embezzlement and mismanagement, and its overall operations became a drain on the Ukrainian state budget and the National Bank of Ukraine, which it borrowed from, thus funneling Ukrainian taxpayer funds into the pockets of crooked individuals. When law enforcement agencies opened criminal cases against the company, these cases were quietly closed in exchange for bribes. There was an entrenched cycle of corruption that benefited and was maintained by various actors at Agrofond, within state agencies, and among external players in the agriculture sector.
However, starting in 2015, the company began to break the cycle of corruption that left it so unprofitable, and over the past four years Agrofond has gone from being a badly-performing SOE that was deeply in debt to a top-100 contributor to the state budget. But Agrofond’s past challenges are not unique among Ukrainian SOEs. The anti-corruption framework implemented at Agrofond provides a template for reform at other SOEs. Its financial turnaround on the basis of corporate governance reform is a roadmap for other SOEs to root out corruption and put themselves, and the Ukrainian state budget, on more sound financial footing.
This anti-corruption framework had several components. To begin, Agrofond relied on an independent and transparent tender to choose its chairman, rather than defaulting to a system of personal patronage and kickbacks to award the job to political allies. Fair competition in hiring, a key prerequisite for improving corporate governance, is far more likely to lead to strong, competent, and independent leaders who will institute and sustain anti-corruption reforms.
Additionally, Agrofond introduced a series of benefits and incentives designed to attract and keep Ukraine’s top talent—without corruption. It established a Key Performance Indicator evaluation and compensation system, as well as new insurance, retirement, and training opportunities, all of which made honest work at the company more attractive, and corruption less appealing. The company also developed a new system for delegating authority, and monitoring that delegation to assure it was efficient, effective, and not abused.
Agrofond adopted an anti-corruption policy that includes an independent anti-corruption ombudsman, whose primary role is to identify and prevent corruption, including by monitoring and improving existing policies and compliance mechanisms. Importantly, this position answers both to Agrofond’s chairman and the Ukrainian Ministry of Agrarian Policy and Food, the company’s shareholder, thus allowing the anti-corruption ombudsman to carry out his or her work without fear of retaliation or undue influence.
The company instituted a series of new requirements across its executive and finance offices that mandate regular reporting on pricing, inventory, and employee performance, increasing transparency of its operations and finances and limiting opportunities for corruption.
Agrofond introduced an external audit to complement its internal audits. The former is carried out by the Ukrainian Internal Audit Service, and can be vulnerable to politicization or manipulation that masks poor corporate governance practices. In short, internal audits alone make corruption easier to hide. A truly independent external audit, especially one conducted by a reputable international auditing firm, should be a requirement for all Ukrainian SOEs.
Despite these successful reform initiatives, however, countering corruption has been a long-term and uphill battle for Agrofond, and it continues to face a series of challenges that also apply to other SOEs.
The first relates to standing up an independent supervisory board, as recommended by the Organization for Economic Co-operation and Development’s own corporate governance guidelines. An independent supervisory board insulates SOEs from political interference by state entities and officials who view SOEs solely as a vehicle for personal enrichment.
State institutions also often abuse their authority to approve the annual financial plans of SOEs. Without approval of these financial plans, SOEs are prevented from carrying out numerous financial and economic activities that are critical to their operations, including making capital investments, spending on advertising or marketing services, and paying for third-party audit services, until the plan is approved. Ukrainian state institutions and officials have regularly exploited their authority over SOE financial plans, delaying them for months or even years—and, at times, quietly requiring a quid pro quo from SOE officials that facilitates or generates new forms of corruption in exchange for this approval. Stopping the misuse of SOE financial plans is a critical part of ensuring proper corporate governance and sustaining anti-corruption progress.
Moreover, the approval of financial plans is directly related to the ability of Ukrainian SOEs to implement an independent, external audit. SOEs cannot hire external auditors unless their financial plans are approved.
While substantially more work needs to be done, Agrofond and a number of other SOEs have developed a framework for rooting out corruption within a critical segment of the Ukrainian economy. The broader application of this corporate governance framework among the country’s SOEs would have important anti-corruption spillover effects throughout Ukrainian society.
Ukraine must address corruption at the source. It must preventively tackle corruption. Institutions like the High Anti-Corruption Court are vital, but stopping corruption before it takes place is far more effective than subsequently punishing it.
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How Ukraine Can Root Out Corruption at State Owned Enterprises
Following Ukraine’s Revolution of Dignity in 2014, the country set up a number of new institutions intended to reduce the country’s endemic corruption challenges. They will soon be joined by the High Anti-Corruption Court, which, after years of delay, was formally inaugurated on September 5.
September 7, 2019
F
ollowing Ukraine’s Revolution of Dignity in 2014, the country set up a number of new institutions intended to reduce the country’s endemic corruption challenges. They will soon be joined by the High Anti-Corruption Court, which, after years of delay, was formally inaugurated on September 5.
Yet, while these anti-corruption bodies are necessary, they are not sufficient to root out corruption in Ukraine, including at its many state-owned enterprises (SOEs), which have traditionally served as a key mechanism for large-scale corruption. Ukraine’s anti-corruption architecture has been established to react to and punish instances of corruption—it does not prevent corruption before it begins, nor does it change the systems and networks that allow for and perpetuate corrupt activities.
To achieve this, Ukraine’s anti-corruption institutions must be coupled with broader reforms related to the country’s SOEs.
The recent experience of Agrofond, an SOE under the Ministry of Agriculture and Food that manages agricultural production, availability, and price stability, provides some clues of how to address the prevalent abuse of SOEs for the purposes of corruption. That experience is centered on the adoption of corporate governance reforms like independent and competitive tender processes; improving employee benefits and incentives; creating a strong and independent anti-corruption “ombudsman” inside the SOE; and mandating independent financial audits of the company’s operations.
Prior to 2015, when these reform efforts began, Agrofond was a case study in corruption. The company lost tens of millions of dollars to both embezzlement and mismanagement, and its overall operations became a drain on the Ukrainian state budget and the National Bank of Ukraine, which it borrowed from, thus funneling Ukrainian taxpayer funds into the pockets of crooked individuals. When law enforcement agencies opened criminal cases against the company, these cases were quietly closed in exchange for bribes. There was an entrenched cycle of corruption that benefited and was maintained by various actors at Agrofond, within state agencies, and among external players in the agriculture sector.
However, starting in 2015, the company began to break the cycle of corruption that left it so unprofitable, and over the past four years Agrofond has gone from being a badly-performing SOE that was deeply in debt to a top-100 contributor to the state budget. But Agrofond’s past challenges are not unique among Ukrainian SOEs. The anti-corruption framework implemented at Agrofond provides a template for reform at other SOEs. Its financial turnaround on the basis of corporate governance reform is a roadmap for other SOEs to root out corruption and put themselves, and the Ukrainian state budget, on more sound financial footing.
This anti-corruption framework had several components. To begin, Agrofond relied on an independent and transparent tender to choose its chairman, rather than defaulting to a system of personal patronage and kickbacks to award the job to political allies. Fair competition in hiring, a key prerequisite for improving corporate governance, is far more likely to lead to strong, competent, and independent leaders who will institute and sustain anti-corruption reforms.
Additionally, Agrofond introduced a series of benefits and incentives designed to attract and keep Ukraine’s top talent—without corruption. It established a Key Performance Indicator evaluation and compensation system, as well as new insurance, retirement, and training opportunities, all of which made honest work at the company more attractive, and corruption less appealing. The company also developed a new system for delegating authority, and monitoring that delegation to assure it was efficient, effective, and not abused.
Agrofond adopted an anti-corruption policy that includes an independent anti-corruption ombudsman, whose primary role is to identify and prevent corruption, including by monitoring and improving existing policies and compliance mechanisms. Importantly, this position answers both to Agrofond’s chairman and the Ukrainian Ministry of Agrarian Policy and Food, the company’s shareholder, thus allowing the anti-corruption ombudsman to carry out his or her work without fear of retaliation or undue influence.
The company instituted a series of new requirements across its executive and finance offices that mandate regular reporting on pricing, inventory, and employee performance, increasing transparency of its operations and finances and limiting opportunities for corruption.
Agrofond introduced an external audit to complement its internal audits. The former is carried out by the Ukrainian Internal Audit Service, and can be vulnerable to politicization or manipulation that masks poor corporate governance practices. In short, internal audits alone make corruption easier to hide. A truly independent external audit, especially one conducted by a reputable international auditing firm, should be a requirement for all Ukrainian SOEs.
Despite these successful reform initiatives, however, countering corruption has been a long-term and uphill battle for Agrofond, and it continues to face a series of challenges that also apply to other SOEs.
The first relates to standing up an independent supervisory board, as recommended by the Organization for Economic Co-operation and Development’s own corporate governance guidelines. An independent supervisory board insulates SOEs from political interference by state entities and officials who view SOEs solely as a vehicle for personal enrichment.
State institutions also often abuse their authority to approve the annual financial plans of SOEs. Without approval of these financial plans, SOEs are prevented from carrying out numerous financial and economic activities that are critical to their operations, including making capital investments, spending on advertising or marketing services, and paying for third-party audit services, until the plan is approved. Ukrainian state institutions and officials have regularly exploited their authority over SOE financial plans, delaying them for months or even years—and, at times, quietly requiring a quid pro quo from SOE officials that facilitates or generates new forms of corruption in exchange for this approval. Stopping the misuse of SOE financial plans is a critical part of ensuring proper corporate governance and sustaining anti-corruption progress.
Moreover, the approval of financial plans is directly related to the ability of Ukrainian SOEs to implement an independent, external audit. SOEs cannot hire external auditors unless their financial plans are approved.
While substantially more work needs to be done, Agrofond and a number of other SOEs have developed a framework for rooting out corruption within a critical segment of the Ukrainian economy. The broader application of this corporate governance framework among the country’s SOEs would have important anti-corruption spillover effects throughout Ukrainian society.
Ukraine must address corruption at the source. It must preventively tackle corruption. Institutions like the High Anti-Corruption Court are vital, but stopping corruption before it takes place is far more effective than subsequently punishing it.
