UkrGazBank: Corporate Governance Pays Off

Compared to many banks in Ukraine, UkrGazBank recognized early on that corporate governance was a key to improving its performance. When it acted upon this understanding , not only did the bank’s officials take courses on the topic, they hired the expert. John Smyth, who worked with IFC in 2006 on a corporate governance training project, is now an independent non-executive member of the Supervisory Board and Chairman of the Audit Committee of UkrGazBank, and he sat down with EuroWeek to describe how the bank’s strategy has paid off.

How did you cross paths with UkrGasBank?

UkrGasBank was one of the few banks that had been accepted into IFC’s Bank Corporate Governance Program, and I had been brought in as an expert, because one of my core competencies in decades of Irish banking was in corporate governance. UkrGasBank understood that good governance equaled access to cheaper capital and this has underwritten their moves down the line. The Bank established an Audit Committee and a Corporate Governance Committee. UkrGasBank had already appointed Deloitte to audit the financial statements to IFRS standards. IFC’s recommendations helped Ukrgas make reforms to risk management and audit. Many members of the risk management were trained in IFC workshops and as a result the bank strengthened its internal audit service.

Bringing in an expert is one thing; making changes is another. How has UkrGasBank handled the steps necessary to improve its corporate governance?

Very well. I was brought in as an independent member of the Supervisory Board and head of the Audit Committee. 2007 was our first full calendar year, and the committee reviews financial statements monitoring the risk profile within the bank and advises the Supervisory Board. But I’m not the only person focused on these subjects. The other Member is Mr. Sergiy Yaremenko, former long-term Deputy Chairman of the National Bank of Ukraine. Actually he was among those who established the present banking system in Ukraine in early 1990s. We also examine the issue of connected persons through the maintenance of a register of connected persons. We as well focus on risk issues such as the quality of a rapidly increasing loan portfolio. The bank has embraced a lot of change very successfully and very quickly. In Ukraine the idea of transparency and disclosure is still relatively new. Companies have remained tight-lipped about their ownership structures. Ukrgas took significant steps in disclosing beneficial ownership. The controlling shareholders are now identified in the bank’s financial statements, which are available on the bank’s website.

Engaging in those changes requires different skill sets than you found when you got here, though.

That’s natural. However, we were able to work on that. For instance, our external auditor was brought in to handle training for our internal team. It was important, as there was a level of trust on both sides already. Now we can produce our financial statements to IFRS standards, which allowed us to have IFRS figures completed by the end of March. We’ve also tightened central control of the branches as we’ve expanded. It’s put more pressure on the internal auditors, and we have increased our resources to meet the new demands. The skills can also be found when we develop niches that are new for Ukraine. For instance, UkrGasBank completed thefirst securitization in Ukraine. When we implement something new, a technology for instance, we make effective use of the skills we have. The team consisting of business units, risk management and project office evaluates the effectiveness of new technology operating in other financial institutions before making a final decision to proceed.

But does foreign experience always translate well when you try to implement it here?

It is difficult to replicate the better side of what is done in the US and UK. The lengthy background that fosters good corporate governance isn’t there and sometimes it is difficult to get qualifications here. Some of our audit team have achieved ACCA certification, and the system is evolving. This country is very strong in education across a wide spectrum of competencies and I expect it to grow as well. The staff here have good business backgrounds and continuing training from large international firms.

What do foreigners miss when they start looking at Ukraine?

First off, they underestimate the size and potential of the market – from the geography to the size of the market to the people. There’s too much emphasis on the reports of political instability. Business is moving forward in any event, and the politics are getting better as well. International banks have researched the market and as the political environment is more stable further acquisitions of Ukrainian banks are likely to arise in the near future. Acquiring banks will focus on loan quality and we are satisfied with the quality of our diversified loan portfolio as is evidenced by the low level of arrears and the prudent loan loss provision ratio. One thing that I can say that would surprise some is that the information flow has been excellent. I come over from Ireland to Kyiv 8-9 times a year. There’s lots of communication by telephone and e-mail, and teleconferencing when need be. From the corporate secretary passing on information to the willingness of the board to consider my input, there have been no surprises. The contributions that I make are recognized and they’re prepared to take ideas on Board. A focus on adding value for our shareholders is incorporated in our charter, and these measures have worked toward that end. All in all, Ukrgas has made a great leap and outperforms the market by most of the metrics. One can already feel the contribution of corporate governance innovations.

Contact Information

Evgeniy Molchansky

Head of PR department

UkrGasBank

Contact via E-mail