Corporate governance reform under threat: Naftogaz CEO fired in violation of procedure

Corporate governance reform under threat: Naftogaz CEO fired in violation of procedure

Naftogaz CEO Andriy Kobolyev was dismissed in violation of procedures. Photo: Naftogaz 

Ukraine

Article by: Kyiv not Kiev

The Ukrainian Government has dismissed the CEO of the largest state-owned energy company Naftogaz, bypassing the Supervisory Board and violating formal procedures.

On April 28, the Ukrainian Government dismissed Naftogaz CEO Andriy Kobolyev, who had held this post for seven years. Kobolyev stated that he learned about the dismissal from the news and will appeal this decision in court.

How exactly did the Cabinet of Ministers circumvent the legal norms? The fact is that the Charter of Naftogaz requires that the Supervisory Board take any appointments or dismissals of the CEO. That is why the Cabinet of Ministers suspended the powers of the Supervisory Board for two days in order to decide on the dismissal of the Chairman of the Management Board – Andriy Kobolyev.

The press office of Naftogaz issued a statement saying that dismissal violates the basic principles of corporate governance of state-owned enterprises. The Cabinet of Ministers explained that decision was motivated by the Company’s poor financial performance in 2020.

Naftogaz Group in 2020 suffered a loss of UAH 19 bn ($685 mn) due to low demand and gas prices; in 2019, the Company received a profit of UAN 2.6 bn ($93 mn). Andriy Kobolyev himself stated that the losses were caused by record low oil and gas prices on the world market, particularly in Europe. Besides, the crisis has affected consumption and the ability of consumers to pay for it.

Kobolyev wrote on his Facebook page that he was not so much worried about the decision to dismiss him as a threat to corporate governance reform. He thinks that Government’s decision sends all the work the Company has done to the dump.

What is corporate governance reform?

In March 2015, the World Bank and the Energy Community Secretariat agreed upon an Action Plan for the reform of the gas sector in Ukraine, which the Government approved. The plan called the reform of corporate governance one of the most crucial decisions to be taken.

In 2016, the Gas Sector Reform Action Plan, including the Company’s corporate governance reform, became part of Ukraine’s commitments under loan agreements with the European Bank for Reconstruction and Development (EBRD). External stakeholders stated that this plan is a necessary step for Ukraine’s integration into the European Union. Successful corporate governance reform could be an essential guarantee of the security of gas supply in Ukraine and Europe.

The key components of corporate governance are:

  • having full and effective governance bodies,
  • a clear division of powers,
  • the functioning of the internal control system,
  • the elimination of political influence
  • the creation of equal with private companies conditions in the market.
Naftogaz became the first state-owned company to introduce the best corporate governance practices. Now its success is being challenged.

The Cabinet of Ministers has appointed Yuriy Vitrenko as a new Chairman of the Board of Naftogaz. He served previously as Acting Minister of Energy.

“The new head of the company is tasked with systematically increasing Ukrainian gas production, as well as assisting in the formation of a full and fair gas market in Ukraine,” stated the press release of the Cabinet of Ministers.

So, who is Yuriy Vitrenko? 

Yuriy Vitrenko Naftogaz

Yuriy Vitrenko. Photo from his Facebook page

Vitrenko previously worked at Naftogaz, in particular, as an adviser to the Chairman of the Board and took part in restructuring international debts. After several layoffs from and returns to Naftogaz, he became the commercial director of Naftogaz and was also responsible for gas lawsuits with Russia.

Vitrenko was a longtime friend of Andriy Kobolyev, but they have become adversaries for the past few years. According to Vitrenko’s statements, the main difference between them is their views on personnel policy and the development of energy production. After 2019, this conflict became public.

The story of the Rada’s attempts to appoint Vitrenko as the Minister of Energy deserves particular attention. The Verkhovna Rada voted for Vitrenko’s candidacy several times, but people’s deputies showed a lack of support each time. The Cabinet of Ministers instead appointed Vitrenko Acting Minister of Energy.

The media was full of speculations about the possible appointment of Vitrenko as Prime Minister of Ukraine. He stated that he had such political ambitions.

Former Servant of the People MP Geo Leros accused Yuriy Vitrenko of candidacy being lobbied by Head of the Office of the President, Andriy Yermak, who allegedly wanted to interfere in negotiations with Gazprom.

Keeping in mind Vitrenko’s disputes with Kobolyev, Vitrenko’s appointment as CEO of Naftogaz seems much of a personal revenge.

What was the reaction of Ukraine’s Western partners

Western partners have already reacted to this event. Western diplomats see the dismissal of the Naftogaz CEO as betrayal and discrediting Western standards. Some say that it may be a try to appoint a new leader who will serve authorities’ personal or political interests.

Also, G7 ambassadors warned against political interference in Naftogaz management.

“G7 ambassadors note the Cabinet of Ministers` decision to dismiss CEO  and Supervisory Board of Naftogaz. Effective management and governance SOEs in Ukraine, free from political interference, is crucial for Ukraine’s competitiveness, prosperity and Ukraine fulfilling its international commitments,” says the statement.

https://twitter.com/G7AmbReformUA/status/1387651059431182336?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1387651059431182336%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.eurointegration.com.ua%2Fnews%2F2021%2F04%2F29%2F7122706%2F

“Respect for corporate governance, transparency, and integrity in energy sector personnel appointments – whether government or state-owned enterprises – is key to maintaining confidence in Ukraine’s commitment to reform,” US State Department spokesperson Ned Price wrote in his Twitter.

Finally, Kobolyev wrote on his Facebook:

“Now the team’s main task is to maintain the dynamics of work that has been established in our country recently and to ensure the development of production, retail business, and other strategic areas of the Group.”

Naftogaz is a strategically important company for Ukraine, which defends Ukrainian energy independence in the fight against Russian Gazprom. Whether we have such independence depends on who makes decisions in Naftogaz. Whether we can count on the support of our partners depends on how decisions regarding Naftogaz are made.

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