Chapter 5. Supporting responsible business conduct and the OECD Guidelines for Multinational Enterprises in Ukraine

Responsible business conduct (RBC) is recognised as an important part of the investment climate and is increasingly integrated within public policies aimed at attracting better investment and enhancing sustainable development. RBC-related activities in Ukraine so far have mostly been undertaken by the private sector and civil society. While there is no comprehensive national or sectoral strategy on RBC, the ongoing economic and social reforms that aim to bring Ukraine close to international standards in fields such as human rights or labour relations represent a positive step in shaping and strengthening Ukraine’s policy framework that affects and enables RBC. Ukraine’s adherence to the Declaration, and, in particular, the establishment of a National Contact Point for the OECD Guidelines for Multinational Enterprises, is an opportunity to further promote RBC principles and standards, both within the government and with the wider public, and to further clarify and set out the government’s expectations on RBC.

This chapter reviews Ukraine’s policies for enabling responsible business conduct and the planned institutional arrangements for establishing a National Contact Point for the OECD Guidelines for Multinational Enterprises (Guidelines), a commitment by each country that adheres to the OECD Declaration on International Investment and Multinational Enterprises (Declaration). The Guidelines are one of four instruments of the Declaration.

The Guidelines are a set of government-backed recommendations on responsible business conduct (RBC). Addressed by businesses operating in or from their jurisdictions, the Guidelines set out principles and standards in all major areas related to RBC, including information disclosure, human rights, employment and industrial relations, environment, bribery and corruption, consumer interests, science and technology, competition, and taxation. Their purpose is to ensure that business operations are in harmony with government policies, to strengthen the basis of mutual confidence between businesses and the societies in which they operate, to improve foreign investment climate and to enhance the contribution of the private sector to sustainable development. The Guidelines, together with the UN Guiding Principles on Business and Human Rights (UN Guiding Principles) and core ILO Conventions, are one of the major international instruments on RBC.

A precise definition of a multinational enterprise is not required for the purpose of the Guidelines. These enterprises operate in all sectors of the economy; their ownership may be private, state or mixed; and they comprise all entities within the enterprise, i.e. parent companies and/or local entities. The Guidelines do not aim to introduce differences of treatment between multinational and domestic enterprises – they reflect good practice for all – and accordingly, multinational and domestic enterprises are subject to the same expectations wherever the Guidelines are relevant to both. Adherents wish to encourage the widest possible observance of the Guidelines to the fullest extent possible, including among small- and medium-sized enterprises even while acknowledging that these businesses may not have the same capacities as larger enterprises.

Understanding responsible business conduct

Responsible business conduct is a key element of a healthy business environment – one that attracts quality investment, minimises risks for businesses, ensures stakeholder rights are respected and ultimately leads to broader value creation. Irresponsible business practices erode the overall quality of the investment and business environment; can result in large losses for businesses, environmental degradation, and poor conditions; and, in the most serious of cases, such as the April 2013 collapse of the Rana Plaza factory in Bangladesh, in loss of human life.

All businesses – regardless of their legal status, size, ownership structure or sector – should behave responsibly. As set out in the internationally recognised principles and standards on RBC, such as the Guidelines and the UN Guiding Principles, this entails making a positive contribution to economic, environmental, and social progress of the countries in which they operate, while at the same time avoiding and addressing adverse impacts of business activities. RBC principles and standards emphasise the integration and consideration of environmental and social issues into core business operations. A key element of RBC is risk-based due diligence, a process through which businesses identify, prevent and mitigate actual and potential adverse impacts, and account for how these impacts are addressed. RBC expectations extend to business activities throughout the entire supply chain and linked to business operations, products or services by a business relationship.

Furthermore, while it is the role of business to act responsibly, governments have a primary duty to protect public interest and ensure that stakeholder rights are respected – they have an important role to play in enabling RBC. This entails establishing and enforcing an adequate legal framework that protects the public interest and underpins RBC, while monitoring business performance and compliance with the law. It entails setting and communicating clear expectations on RBC and providing guidance on what those expectations mean; encouraging and engaging industry and stakeholders in collective initiatives and providing recognition and incentives to businesses that exemplify good practice. It also entails ensuring alignment of all policies relevant to RBC, as well as collaboration with foreign governments to establish international policy coherence on RBC. Collaboration on the Guidelines is an example. Finally, it also entails ensuring that RBC principles and standards are observed in the context of the government’s role as an economic actor. Not only is this in the public interest, it also enhances the government’s legitimacy in making recommendations on RBC to businesses. The OECD Policy Framework for Investment and the chapter on enabling RBC is a useful reference for governments for designing and implementing a strong RBC policy framework (OECD, 2015a).

Understanding the OECD Guidelines for Multinational Enterprises

Countries that adhere to the Declaration use the Guidelines for several policy purposes, at both national and international level. The Guidelines provide a comprehensive and clear guidance on the expected behaviours of businesses operating in or from jurisdictions of adherents; help protect public interest and stakeholder rights; and promote a more open, transparent, and better business and investment climate. Because of their breadth and scope, the Guidelines can also be useful for framing and strengthening the links between policy areas that govern business conduct, such as, for example, corporate governance and risk management for environmental and social issues. Therefore, the Guidelines can be used to promote policy coherence and a whole-of-government approach to policies that concern business behaviours.

Furthermore, the Guidelines also contribute to improved accountability in case of issues that can arise from their non-observance. Each country that adheres to the Declaration commits to set up a National Contact Point (NCP) for the Guidelines to further their effectiveness by undertaking promotional activities, handling inquiries, and contributing to the resolution of issues that arise if the Guidelines are not observed by businesses in specific instances. NCPs are expected to operate according to the core criteria of visibility, accessibility, transparency and accountability in order to promote functional equivalence.

Box 5.1. International convergence and coherence on RBC expectations

The consensus built around the 2011 update of the OECD Guidelines for Multinational Enterprises and the unanimous endorsement of the UN Guiding Principles on Business and Human Rights by the UN Human Rights Council has brought about international convergence and coherence on what responsible business conduct entails. The result has been a clearer understanding of the baseline standards for how businesses should understand and address the risks related to the actual and potential impacts of their operations, and how governments should support and promote responsible business practices. This common understanding has contributed to creating a more predictable business environment.

This coherence is echoed in other international standards, including the ISO 26000 Guidance on Social Responsibility, the IFC Performance Standards, and the OECD Recommendation on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence, as well as, increasingly, regional and country strategies. For example, the European Union Corporate Social Responsibility Strategy and the United States National Action Plan on Responsible Business Conduct are based on the Guidelines and the UN Guiding Principles. Many countries are also developing National Action Plans to ensure that the recommendations from governments on responsible business conduct are actually implemented on the ground. Finally, more and more countries are using responsible business conduct principles and standards to frame domestic law. For example, the United States Dodd-Frank Act specifically addresses due diligence for human rights along the minerals supply chain and requires companies to report on whether they source certain minerals (tin, tantalum, tungsten and gold) from conflict areas. Another notable development is the 2015 G7 Leaders’ commitment to support responsible supply chains and improve access to remedy.

NCPs provide one of the few government-based, non-judicial grievance mechanisms with such an effective and broad application. NCPs offer, and with the agreement of the parties involved, facilitate access to consensual and non-adversarial means, such as conciliation or mediation, to resolve issues that arise if the Guidelines are not observed. This problem solving focus of NCPs allows the involved parties to exercise a better level of control over the process of reaching an agreement than more formal processes in which a third unrelated party makes a final binding decision. This can often be a significantly more expeditious and cost saving alternative to more formal procedures, and, in cases where there are no reliable procedures available, can often be the only venue available.

NCPs also have an important promotion and stakeholder engagement function. NCPs are expected to develop and maintain relations with representatives of the business community, worker organisations and other interested parties that are able to contribute to the effective functioning of the Guidelines. NCPs are expected to make the Guidelines known and available by appropriate means, to raise awareness about them and their implementation procedures, including also with prospective investors (outward and inward).

Furthermore governments that adhere to the Declaration have also agreed to help businesses, through a multi-stakeholder process and in co‐operation with the NCPs, identify and respond to risks of adverse impacts associated with particular products, regions, sectors or industries. Guidance on due diligence is currently being developed for the extractives, agriculture, garment and footwear, and financial sectors.

Box 5.2. How responsible agricultural supply chains can contribute to sustainable development

Investing in agriculture is one of the most effective strategies for economic growth and poverty reduction in rural areas. GDP growth originating in agriculture is at least twice as effective in reducing poverty as GDP growth originating outside agriculture (World Bank, 2008). However, agri-business investments can also have adverse social and environmental impacts, particularly in countries with weak governance frameworks. Conflicts between investors and affected stakeholders can lead to social polarisation and political instability, and translate into reputational, operational and, thus, financial risks for investors. For instance, if land tenure rights are not well defined and protected, small land tenure rights holders may enter into unfair contracts with large agri-business investors that have higher bargaining power.

Businesses have a key role to play in ensuring that their operations do not have adverse impacts and benefit local communities and host countries. Their observance of responsible business conduct standards, as outlined in the forthcoming FAO-OECD guidance for responsible agricultural supply chains that aims to aid the implementation of the Guidelines, can ensure that they contribute to sustainable development. The guidance calls on companies to:

Ensure that their operations contribute to food security and nutrition and sustainable and inclusive rural development;
Continuously assess and address the actual and potential impacts of their operations, processes, goods and services over their full life-cycle;
Disclose timely and accurate information related to risk factors and their responses to particular environmental, social and human rights impacts;
Respect human rights and core labour standards and strive to increase employment opportunities;
Establish and maintain an appropriate environmental and social management system and continuously improve their environmental performance; and
Prevent and abstain from any form of corruption and fraudulent practices.

As highlighted in the companion study to this review, the Review of Agricultural Investment Policies of Ukraine, and in addition to the issues discussed throughout this review, the most urgent policy issues to be addressed in order to ensure that agriculture contributes to food security, poverty reduction and economic growth in Ukraine include defining the conditions for removing the moratorium on the sales of agricultural land, while ensuring that it benefits most land tenure rights holders, as well as strengthening the implementation of the environmental legislation, in particular to reduce soil erosion and water pollution (OECD, 2015d).

Ukraine’s National Contact Point

Ukraine, like any country that adheres to the Declaration, has committed to establish a National Contact Point for the Guidelines. According to a plan developed by the authorities in December 2015, the NCP will be established as a dedicated unit within the Ministry of Economic Development and Trade (MEDT). The NCP organisation and operation will be added to MEDT functions through a revision of the Regulation of the Ministry of Economic Development and Trade (Cabinet of Ministers of Ukraine Resolution of 20 August 2014 No. 459), expected to be completed within a month of adherence.1

The NCP will be staffed by two MEDT experts, while the flexibility to add more staff and resources as necessary will be retained in the NCP bylaws. The government has defined key NCP functions as following:

promotion of RBC principles and standards in Ukraine;
development of measures to implement RBC principles and standards;
contribution to the resolution of issues raised within the scope of the Guidelines;
establishment of a dialogue between public authorities, business representatives and relevant parties;
facilitation of cooperation and consultation within government authorities, local authorities, employers, trade unions and business associations, and other non-governmental organisations on RBC issues.

An advisory and oversight board is not envisioned for the NCP at this time, although the option to establish either in the future will be retained in the NCP bylaws. The NCP will liaise with other Ministries and stakeholders as a matter of its regular functioning.

The government has set out an action plan for the first year of NCP functioning. The planned actions include information and promotion activities, including establishment of an NCP website, development of materials in Ukrainian, and quarterly meetings and workshops with stakeholders and relevant government authorities. It also includes an outline of procedures for the submitting specific instances to the NCP.

General policies for promoting responsible business conduct in Ukraine

Awareness of RBC principles and standards is not yet widespread in Ukraine. No comprehensive national strategy or policy has been adopted nor is there a dedicated body or a representative within government responsible for coordinating RBC activities. However, ongoing economic and social reforms that aim to bring Ukraine close to international standards in fields such as human rights or labour relations represent a positive step in shaping and strengthening Ukraine’s policy framework that impacts and enables RBC. Ukraine’s adherence to the Declaration, and, in particular, the establishment of an NCP for the Guidelines, will be an opportunity to further promote RBC principles and standards, both within the government and with the wider public; to further clarify and set out the exact expectations on RBC; and to meet obligations under its existing international agreements, such as the EU‐Ukraine Association Agreement.

RBC-related activities in Ukraine so far have mostly been undertaken by the private sector and civil society. The largest grouping of businesses with interest in RBC is the UN Global Compact Network of Ukraine. Established in 2006, the network currently has 162 active participants, although that number does not solely include businesses; 45% of participants are classified as local NGOs, for example, organisations or associations that deal with thematic issues like environment or youth issues (UN Global Compact, 2015). Another relevant organisation is CSR Ukraine, an association of 38 member companies, which serves as a knowledge hub on RBC and focuses on project implementation, research and analysis. CSR Ukraine is a board member of the UN Global Compact and a local partner of CSR Europe and the World Business Council on Sustainable Development (CSR Ukraine, 2015a). The EU Economic Chamber of Trade, Commerce and Industry advertises a social responsibility initiative, though projects listed under the initiative seem to focus largely on philanthropic efforts (EU Chamber, 2015). The American Chamber of Commerce of Ukraine has also established a CSR Club, which is aimed at sharing and promoting best CSR practices among its members. As reported to the OECD, the Club held its first meeting in October 2015, with planned monthly meetings.

From 2009-11, UN Global Compact and CSR Ukraine spearheaded an initiative to develop a corporate responsibility strategy for Ukraine, under the auspices of the Parliamentary Committee on Industrial Policy and Entrepreneurship. The document was publicly discussed and handed over to the Presidential Administration for endorsement at the end of 2011; however, this initiative has been put on hold (UN Global Compact, 2015).

The government of Ukraine could consider building on these efforts and working with stakeholders to develop a National Action Plan (NAP) on RBC, in line with international good practice and based on the Guidelines. The UN has strongly encouraged all States to develop a NAP as part of the State responsibility to disseminate and implement the UN Guiding Principles. A number of OECD governments, notably the United States, have decided to broaden these efforts and include all RBC issues, based on the Guidelines, in their NAPs. Considering the alignment between the UN Guiding Principles and the Guidelines, this approach is complementary with UN recommendations and efforts. The UN Working Group on Business and Human Rights has set up a dedicated webpage on NAPs to provide easy access to existing plans, as well as key public information and analysis on the various stages of NAP development, implementation and follow up (UN OHCHR, 2015b).

The process of developing a NAP would be a good way for the government to engage with stakeholders and the wider public on a range of issues related to RBC, to promote the Guidelines, as well as policy coherence and alignment on RBC. The NCP, in coordination with relevant government and other stakeholders, could lead the process. The process of developing the NAP would also be a good way for the government to understand and eventually remove barriers that influence RBC uptake by businesses, as well as to facilitate collective initiatives, in the government’s role as a convener, to promote RBC among industry and other stakeholders.

Additionally, the NAP would be a useful mechanism to demonstrate the economic and social reforms the government has undertaken or plans to undertake in areas related to RBC. For example, the NAP could serve to fulfil the commitments made by Ukraine in the EU-Ukraine Association Agreement. Article 422 of the agreement specifically mentions that Ukraine and EU will “promote corporate social responsibility and accountability and encourage responsible business practices,” and cites the Guidelines by name. Furthermore, Chapter 13 of the Agreement on Trade and Sustainable Development includes Articles 291-292, which address effective implementation of internationally recognised labour and environmental standards and agreements; and Article 293, which relates to, in addition to the implementation of core labour standards and decent work, trade favouring sustainable development, facilitating and promoting trade and foreign direct investment in sustainable goods, services and technologies, and facilitating trade in products that contribute to sustainable development and respect corporate social responsibility and accountability principles. The Chapter provides for a monitoring mechanism and strong involvement of civil society in reviewing the contributions of these provisions to sustainable development (EU, 2014a).

The Association Agreement also contains references to corporate governance reforms in Articles 387-388. RBC and corporate governance are intrinsically linked as, on the one hand, RBC impacts the company’s decision-making processes, risk management, disclosure and transparency, and relationships with investors and stakeholders; and, on the other hand, the actual process of undertaking due diligence is closely related to the corporate governance framework and the relationships between company management, board, shareholders and other stakeholders. The Agreement in particular refers to developing corporate governance policy in Ukraine in line with international standards, as well as a gradual approximation to the EU rules and recommendations in this area. The G20/OECD Principles of Corporate Governance, one of the main standards listed in the Association Agreement for these purposes, reflect the expectations set out in the Guidelines, including, among others, the expectation that the corporate governance framework recognises the rights of stakeholders and encourages active co-operation with them; ensures timely and accurate disclosure on all material matters regarding the corporation; and reflects high ethical standards (G20/OECD, 2015).

The government should ensure, as a matter of policy coherence, that corporate governance reforms adequately address, describe and reflect the extent of corporate responsibilities related to environmental and social matters. These expectations should also be integrated in the ongoing state-owned enterprises (SOEs) reforms. As the OECD Policy Framework for Investment recommends, governments should lead by example and model RBC principles and standards in their own practices, i.e. as employers, business partners, through procurement and contracting practices, and in commercial activities. This includes the activities of SOEs.

SOEs control a significant share of the Ukrainian economy; the State is considered the largest employer in Ukraine, employing around 1 million people (Ukraine, 2015a). A recent report by MEDT, which is supervising the SOE reform, highlights that the main challenges for the SOE sector are inefficiency, governance, transparency and accountability (Ukraine, 2014). The 2015 OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOE Guidelines) are used as a framework for SOE reform in Ukraine. SOE Guidelines recommend that the state ownership policy fully recognise SOE responsibilities towards stakeholders and request that SOEs report on their relations with stakeholders, as well as to make clear any expectations the state has in respect of responsible business conduct by SOEs (OECD, 2015b: V). The SOE Guidelines further recommend (and rely on the Board of Directors to executive management) extensive measures to report on foreseeable risks, including in the areas human rights, labour, the environment, and risks related to corruption and taxation.

It is important for the expectations established by the government in this regard to be publicly disclosed and mechanisms for implementation of these expectations to be clearly established. It should be noted that recommendations and requirements for SOEs to integrate RBC in their decision-making and report on these efforts is not solely a development in OECD countries. For example, the People’s Republic of China State-owned Assets Supervision and Administration Commission of the State Council (SASAC), which supervises and manages the state-owned assets of the enterprises under the supervision of the Chinese Central Government, has issued the Guidelines to the State-owned Enterprises Directly under the Central Government on Fulfilling Corporate Social Responsibilities since 2008 (SASAC, 2008).

Finally, there are no public policies in place targeting responsible business conduct in specific sectors. However, in light of the importance of the mining sector in the country, as discussed in Chaper 3, the government should adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas at the same time as the Declaration.

In summary, although general awareness of RBC principles and standards is not yet wide-spread in Ukraine, the government is undertaking extensive economic and social reforms that can have a significant impact on business behaviours and that can be used as an opportunity to enable RBC. Ukraine’s adherence to the Declaration and the establishment of the NCP will be a further opportunity to promote RBC principles and standards, to clarify and set out the government’s expectations on RBC, and to integrate them into the government’s own economic activities.

Policies in specific areas covered by the OECD Guidelines for Multinational Enterprises

In addition to general recommendations on RBC, the Guidelines include specific recommendations to enterprises in the areas of information disclosure, human rights, employment and industrial relations, environment, bribery and corruption, consumer interests, science and technology, competition, and taxation.

Disclosure

Disclosure is an integral part of RBC and corporate governance. Clear and complete corporate information is important to a variety of users, from shareholders to workers, local communities, governments and the society at large. The Guidelines call for timely and accurate disclosure on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. The Guidelines also encourage disclosure in areas where reporting standards are still evolving such as, for example, social, environmental and risk reporting. These expectations align with the expectations set out in the G20/OECD Principles of Corporate Governance as well. Many businesses already provide information on a broader set of topics than financial performance and consider disclosure of non-financial information a method by which they can demonstrate a commitment to socially acceptable practices. Additionally, the process of gathering and thinking through data pieces needed for effective non-financial disclosure is not only relevant for communication and reporting, but also serves as invaluable input for strategic planning, decision-making, and risk management.

Corporate governance requirements, including on disclosure and reporting, are still evolving in Ukraine. Out of 140 examined economies in the World Economic Forum (WEF) 2015/2016 Global Competitiveness Index, Ukraine ranks fairly low in areas related to corporate governance, for example, strength of auditing and reporting standards (124), efficacy of corporate boards (125), protection of minority shareholders’ interests (134), and ethical behaviours of firms (76). These rankings are based on the WEF’s executive opinion survey and the World Bank’s/IFC Doing Business indicators. Ukraine is, however, introducing reforms that impact corporate governance, as already discussed elsewhere in this report. This notably includes the new amendments to the Joint Stock Companies Law No. 272-VIII, as well Law No. 289-VIII On Amendments to Certain Legislative Acts of Ukraine Regarding Protection of Investors’ Rights, which has introduced changes in derivative action rules, corporate governance, interested party transactions and dividend payments (KPMG, 2015).

The existing legislation specifically related to disclosure mainly concerns disclosure of financial information. There are no disclosure requirements related to company anti-bribery programmes. Companies listed on a stock exchange must publish on their website quarterly and annual audited financial information, as well a separate audit report that includes auditor opinion, information on the issuance of securities and on shareholder meetings, as well as on any deals with affiliated parties. The 2011 Law on Accounting and Financial Reporting requires companies to prepare and publish financial statements in accordance with International Financial Reporting Standards (IFRS, 2015).

Another relevant legislation concerns the extractive industry, where subsoil users are expected to disclose information on taxes and royalties paid and on commercial activities related to mining operations in Ukraine – see Chaper 3 for more information. A 2014 Law No. 1701-VII On Amending Certain Legislative Acts Related to Identification of Ultimate Beneficiaries of Legal Entities and Public Officials requires companies to identify their ultimate beneficiaries, including founders, and maintain and update records on this information. This information should be disclosed to the State Register of Legal Entities and Individual Entrepreneurs at the stage of incorporation of a company and updated on a regular basis.

Disclosure requirements for listed companies include stock ownership by executives and board members, as well as their remuneration package. Any significant changes in shareholder structure must also be published. In 2014, the National Securities and Stock Market Commission (NSSMC) adopted new principles of corporate governance, which recommended that companies go beyond disclosure required by Ukrainian law. For example, the principles recommend that listed companies disclose information on issues such as human resources policy or environmental impact. However, as these recommendations are not legal obligations, companies can treat them as examples of good practice put forward by the regulator. The Ukrainian Exchange, main exchange in Ukraine, does not have specific disclosure requirements among conditions for companies to list on the exchange.

Few large Ukrainian companies are actually listed on a stock exchange and many adopt the legal form of a limited liability company, thus, avoiding any disclosure requirements. Some large companies have minimal financial disclosure requirements because they are issuers of international corporate bonds (often issued by Special Purpose entities in off-shore jurisdictions)2 which are not subject to Ukrainian legislation.

A 2015 survey of the largest 500 companies in Central Europe, based on the consolidated company revenues for the prior fiscal year, shows that 90 companies in the region are measuring their environmental, social and economic impacts, with 21 of them based in Ukraine (Deloitte, 2015). Considering the size of the Ukrainian economy, these relatively low numbers indicate that more efforts should be made to encourage companies to be more transparent in general, but also to disclose information on non-financial issues. This could be done by promoting disclosure of information based on the Guidelines disclosure chapter, or through supporting dedicated campaigns and targeted programs, including support for multi-stakeholder initiatives, such as the Global Reporting Initiative or the Integrated Reporting Framework. The government has a leading role to play in these efforts, particularly in terms of clarifying the requirements in this area.

In 2014, the EU issued a Directive (2014/95/EU) for the European Economic Area on disclosure of non-financial and diversity information, amending the 2013 Accounting Directive (2013/34/EU). This is a significant development for corporate governance practice in the EU. The new Directive requires companies of a certain size to disclose in their management reports information on policies, risks and outcomes related to environmental matters, social and employee aspects, respect for human rights, anticorruption and bribery issues, and diversity in their board of directors, aiming to provide investors and other stakeholders with a more comprehensive picture of company performance (EU, 2014b). Article 9 of the Directive states that business could rely on the Guidelines framework to meet these requirements. Ukraine should consider adopting a similar measure as a way to meet its commitments under the corporate governance provisions in the Association Agreement discussed above, which envision a gradual approximation to the EU rules and recommendations in the area of corporate governance, as well as a way of encouraging non-financial disclosure with the business community and promoting the Guidelines.

Human rights

As recognised by the Guidelines and the UN Guiding Principles, states have a primary duty to protect human rights. However, businesses are expected to respect human rights independently of the state ability and/or willingness to fulfil its human rights obligations. Failure either to enforce relevant domestic laws or to implement international human rights obligations, or the fact that the state may act contrary to those laws and obligations, does not diminish obligation of businesses to respect human rights (OECD, 2011a; UN, 2011).

Ukraine has ratified all major instruments on internationally recognised human rights,3 as expressed in the International Bill of Human Rights, consisting of the Universal Declaration of Human Rights and the main instruments through which it has been codified: the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights (UN OHCHR, 2015a). Ukraine has also ratified 69 ILO International Labour Standards (Conventions), including the eight fundamental Conventions (ILO, 2015).

Ukraine has established an office of the Ukrainian Parliament Commissioner for Human Rights in order to ensure observance of constitutional human and citizen rights and freedoms. Article 55 of the Constitution allows citizens to appeal to the Commissioner in case of rights infringements. This provision provides for the basic legal mechanism to protect human and citizen rights (UPCHR, 2011).

Furthermore, the first-ever National Human Rights Strategy (Strategy) in Ukraine was approved on 25 August 2015 by Presidential Decree No. 501/2015 pursuant to Article 102 of the Constitution. The Strategy was developed under the auspices of the Ministries of Justice and Foreign Affairs over a year-long process that involved the government, Ukrainian Parliament Commissioner for Human Rights, civil society, and relevant international organisations (Ukraine, 2015b). The Strategy calls on joint action by all these actors at all stages of development, implementation, monitoring and control of the Strategy to ensure its effective implementation. A relevant initiative in this context is the 2015-17 joint plan by Ukraine and Council of Europe that makes fund available to address human rights, democratic governance, reform of the judiciary, economic crime, constitutional reform and functioning of democratic institutions in Ukraine (Council of Europe, 2015).

The purpose of the Strategy is to improve the observance and enforcement of human rights in Ukraine. The Strategy sets out goals and expected outcomes in 24 strategic areas along the whole spectrum of human rights, including preventing and investigating torture and ill-treatment; preventing and combating discrimination, including ensuring equal rights for women, minorities and indigenous peoples; combating gender-based and domestic violence, human trafficking and slavery; ensuring the right to life, privacy, a fair trial, freedom of expression and access to information; ensuring the right to work and freedom of peaceful assembly and association; supporting human rights in the Donetsk and Luhansk regions; safeguarding the rights of internally displaced persons; ensuring the right to health care and education; and raising awareness of human rights.

The implementation of the Strategy has been tasked to the Cabinet of Ministers. An action plan to implement the Strategy by 2020, to allocate funds for its financing; and to annually report on its implementation was expected to be adopted by the Cabinet in early 2016. A working group, led by the Ministries of Justice and Foreign Affairs, was established in September 2015 to lead these efforts. The working group will be divided into six thematic sub-groups responsible for different areas: personal (civic) rights; political rights; socio-economic and other rights; preventing and countering discrimination, gender equality; right to education and increasing awareness on human rights; and new challenges (DHRP, 2015b).

These developments represent a positive step toward improving the human rights situation in Ukraine. Human rights in the context of business activities are addressed in the Strategy in the section on ensuring the right to work and social security, which aims to create conditions for decent living standards and appropriate social security of citizens. Expected outcomes in this regard include a safe and healthy working environment, guaranteed protection of labour rights, strengthened social responsibility of business and improved conditions for corporate social responsibility. Businesses can nevertheless have an impact on virtually the entire spectrum of internationally recognised human rights, not just labour rights. Ukraine could consider in the action plan for implementing the Strategy the full extent of actual and potential impacts on human rights by businesses. Ukraine could consider adding a dedicated section to the action plan on this matter, particularly considering its future obligations under the Guidelines. The role of the NCP in resolving business and human rights issues should be appropriately highlighted.

Furthermore, special attention to ensuring business respect for human rights in Ukraine’s conflict-affected regions due to an increased risk of gross human rights abuses by businesses in conflict times is warranted. These measures should be considered in addition to State obligations under international criminal law and international humanitarian law in situations of armed conflict. The UN Guiding Principles and the OECD Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones, a complement to the Guidelines, are useful references in this regard. A comprehensive list of useful references can be found in the 2015 overview of key standards that can help business operate responsibly in conflict-affected and fragile environments published by the International Dialogue on Peacebuilding and Statebuilding.

According to the UN Guiding Principle 7, such measures entail engaging with businesses at the earliest stage possible to help them do appropriate due diligence; providing adequate assistance to assess and address the heightened risks of abuses, paying special attention to both gender-based and sexual violence; denying access to public support and services for businesses involved with gross human rights abuses and refusing to cooperate in addressing the situation; and ensuring that current policies, legislation, regulations and enforcement measures are effective in addressing the risk of business involvement in gross human rights abuses. This may include civil, administrative or criminal liability for businesses that commit or contribute to gross human rights abuses. In cases of multinational enterprises, home governments also have a role to play, both in assisting the multinational enterprises, and also the host government. Home governments should foster close cooperation with their development assistance agencies, foreign and trade ministries, and export finance institutions; develop early-warning indicators to catch potential human rights abuses; and attach appropriate consequences to failures by businesses to cooperate in these contexts (UN, 2011: 8-10).

The EIRIS Foundation, a UK charity working in the area of responsible investment, recently catalogued business operations in the Crimea region. The database includes 27 publicly-listed businesses (i.e. with stocks and/or bonds) that are open for business in Crimea, 20 that have closed due to international sanctions, and 25 that have been nationalised since the conflict has started. The European Union (9) and Russia (8), followed by the United States (5), have the largest numbers of open businesses in Crimea (EIRIS Foundation, 2015; CSRWire, 2015).

CSR Ukraine has also made efforts to discuss the most appropriate and effective ways to conduct business during conflict times. Around 60 businesses and NGOs met in June 2015 at an event hosted by CSR Ukraine and Kyiv Mohyla Business School to seek joint solutions. The result of the meeting was a joint set of 33 recommendations, covering corporate governance, human resources practices and social investment (CSR Ukraine, 2015b).

It is worth highlighting that the expectation that businesses will respect human rights does not apply only to businesses that are operating directly in the conflict-affected zones and which may, therefore, have higher risks of causing adverse impacts. These expectations also apply to businesses that may not have a direct presence in the conflict-affected zones, but might cause or contribute to adverse impacts in these zones through their own activities or that may use suppliers that do have a direct presence in these zones. Contributing to an adverse impact should be interpreted as a substantial contribution, meaning an activity that causes, facilitates or incentivises another entity to cause an adverse impact and does not include minor or trivial contributions. Furthermore, under the Guidelines, businesses are expected to seek to prevent or mitigate an adverse impact even when they have not contributed to that impact, but when the impact is nevertheless directly linked to their operations, products or services by a business relationship. The Guidelines invite businesses to, where practicable, encourage their partners to apply RBC principles and standards. The term ’business relationship’ includes relationships with business partners, entities in the supply chain and any other non-State or State entities directly linked to its business operations, products or services.

Employment and industrial relations

Ukraine’s labour market is characterised by an aging population, prevalence of informal employment, and outdated labour legislation. The World Bank projects that the Ukraine’s workforce will shrink by over 15% between 2012 and 2035 if age and gender-specific workforce participation rates stay as they are today (World Bank, 2015a). There is an urgent need to introduce reforms that address the underlying structural and institutional causes that are shaping this labour market profile. This entails increasing labour productivity through improving labour market flexibility, lowering the rates of informal employment, and introducing measures to address unemployment, such as addressing skills mismatch and increasing labour mobility.

According to the Ministry of Social Policy, which has the main responsibility for implementing state labour and employment policies, the current unemployment rate in Ukraine is at 11% (1.8-1.9 million people) (RBC UA, 2015). The numbers related to the size of the informal economy are even more striking. The World Bank estimates that in 2012 informal employment constituted 22.9% of total employment, which translates to 4.6 million people being employed in the informal economy. Recent numbers are likely to be even higher considering that the size of the informal economy in 2013, as reported by MEDT, was 35% of Ukraine’s economy; whereas 2015 estimates are closer to 50%, according to the Ministry of Social Policy. This represents a record high and translates to around 200 billion UAH (USD 9.39 billion) being paid in informal wages (RBC UA, 2015; USUBC, 2015). An oft-cited underlying reason for these practices has been a largely ineffective tax system that incentivises informal employment. Corporate taxes generally amount to 52.9% of profits, with 43.08% going toward unified social security contributions (World Bank, 2014). See the below section on Taxation for more information.

Furthermore, 23.4%, or 879 complaints, of the total complaints received by the Ukrainian Parliament Commissioner for Human Rights in 2013 were related to employment issues, and in particular to the right to formal employment and unemployment benefits. In light of these numbers, the Commissioner has recommended to speed up legislative efforts to address wages and labour relations, and, in particular, to introduce a reduction of the tax burden on the payroll and to strengthen employer liabilities for informal employment (UPCHR, 2014).

Ukraine is currently in the process of introducing major changes to its existing labour legislation. In addition to Ukraine’s Constitution, which defines human and labour rights in general terms, the main legal basis for employer-employee relationship has been the 1972 Labour Code. On 12 November 2015, the Ukrainian Parliament adopted amendments to the Code that explicitly prohibit discrimination based on sexual orientation.4

Considering that the 1972 Labour Code has not undergone any other major amendments since 1972, it can hardly be considered sufficient for Ukraine’s current needs. As such, the Ministry of Social Policy launched a review process in 2014. A draft was developed over the following year in consultation with experts, including the ILO, and presented to the Parliamentary Committee on Social Affairs, which has approved and passed it to the plenary session for discussion as of the writing of this report.

Proposed legislative changes, among others, include increased annual leave; requirements for personal employment contracts rather than collective agreements; measures to protect company proprietary and trade secrets; the ability to monitor employees by video; detailed descriptions of labour relations and acceptable workplace conditions; establishment of tribunal procedures in case of illegal firings; provisions on acceptable practices in case of mergers or divisions of legal entities; clarification related to the right of repatriation in case of postings abroad; inclusion of provisions allowing termination in case of emergencies; and introduction of additional protections for pregnant women, including no probation periods (Today UA, 2015).

The reactions to these proposed changes have been mixed. The largest trade union in Ukraine, the Federation of Trade Unions of Ukraine (FTU), has generally supported the changes, while the smaller independent trade union, the Confederation of Free Trade Unions of Ukraine (KPVU), has been more critical. Notably, KPVU is concerned that new law would expand the rights of the employer too much, for example, by giving the employer the right to determine internal work regulations, which could be used to suppress collective bargaining power. KPVU has also raised concerns about the provisions that would allow monitoring and surveillance of employees (Today UA, 2015). KPVU has advocated that the 1972 Labour Code be modified, rather than completely overhauled. Legal experts, however, have pointed out that the old Code, although indeed more favourable to employees, is only so on paper, as it imposed strong constraints on employers that in fact favour informal employment.

Furthermore, Ukraine also has a specific Law on Trade Unions, Their Rights and Guarantees of Activities. The proposed draft Law No. 2983 On State Registration of Legal Entities, Individual Entrepreneurs and Community Groups, which the Ukrainian Parliament approved at a first hearing in July 2015, would amend the law on trade unions. International trade unions and their local affiliates, notably the KPVU, have expressed strong concerns that the proposed law violates ILO Conventions by introducing strict procedures for registration of trade unions and their associations by public authorities, by weakening their autonomy, and by depriving them of the protection from external interference, including that from public authorities (Industri-all, 2015; Ukraine Solidarity Campaign, 2015).

Ukraine should ensure that changes in labour legislation are in line with internationally recognised principles and standards. Ukraine has been a member state of the ILO since 1954, and as mentioned in the previous section, it has ratified 69 ILO International Labour Standards (Conventions), including the eight fundamental Conventions and the four governance Conventions (ILO, 2015). Particular attention should be paid to adopting measures that would reduce informality of employment, as this would not only bring substantial benefits to Ukraine’s economy, but would also protect workers, increase labour and product market efficiency and productivity.

Finally, the Ministry of Social Policy has also put forth a proposal to reform the current State Employment Service and create a new National Employment Agency in 2016. This reform is aimed at changing the functional responsibilities of the agency to improve labour market flexibility (through, for example, providing services aimed at re-training and re-qualification of job-seekers) and to provide an intermediary platform between job-seekers and employers (RBC UA, 2015). UNDP and ILO have announced that they will provide technical support for this reform by conducting a functional analysis of the employment service, and based on the results, developing a reform plan. Broad support will include facilitating and improving coordination between local authorities and the private sector by providing support for the establishment of Territorial Employment Pacts (TEPs), support for restructuring vocational training, and support for greater policy coherence involving employment policy (UNDP, 2015).

Ukraine could consider making a particular effort to promote the good offices envisioned as part of the mandate of the NCP for the Guidelines as one of the available non-judicial mechanisms for resolving issues related to employment and labour relations. The Guidelines are a useful framework for determining the extent of enterprise responsibilities in this regard. This is not only related to respecting fundamental labour rights, but also includes principles of equality of opportunity and treatment in employment and non‐discrimination; provision of best possible wages, benefits and conditions of work; as well as provision of training with a view to improving skill levels, in co-operation with worker representatives and, where appropriate, relevant governmental authorities.

Environment

The Guidelines call on enterprises to take due account of the need to protect the environment, public health and safety, and generally to conduct their activities in a manner contributing to the wider goal of sustainable development. This entails sound environmental management that aims to control both direct and indirect environmental impacts; establishing and maintaining appropriate environmental management systems; improving environmental performance; being transparent about the environmental impacts and risks, including also reporting and communicating with outside stakeholders; being proactive in avoiding environmental damage; working to improve the level of environmental performance in all parts of their operations, even where this may not be formally required; and training and education of their employees with regard to environmental matters.5

Ukraine ranks 95 out of 178 in the Yale Environmental Performance Index (2014), with an assessed 5.44% positive change in environmental performance compared to 10 years ago. A notable positive change has been in improving air quality at 10.25%. However, environmental performance in agriculture and fisheries has declined considerably compared to 10 years ago, with a respective -22.46% and -10.47% change. Chapter 7 of the companion to this investment policy review, the Review of Agricultural Investment Policies of Ukraine (Agricultural Review), extensively covers major environmental challenges in Ukraine and the existing environmental policy landscape.

As outlined in the Agricultural Review, environmental policy is characterised by a top-down approach and an array of non-streamlined legislation. Ukraine will have to harmonise the environmental policy to the EU standards as part of the obligations under the Association Agreement. Reforms have been started. The main regulatory framework for environmental protection includes:

1991 Law on Environmental Protection, which refers to a number of key principles and contains provisions on the authority and obligations of different governmental bodies, as well as enforcement mechanisms and administrative, civil and criminal responsibility for environmental violations;
1995 Law on Environmental Expertise, which requires environmental impact assessments for all draft proposals with potential negative environmental impacts and introduces the principle of public participation, hearings and comments on laws (OECD, 2011b);
2010 Law on Fundamentals (strategy) of the State Environmental Policy up to 2020, the current guiding document of environmental legislation, covering nearly all aspects of environmental protection. While not superseding the legislation dealing with land, water, and air pollution, the document presents the first attempt to define a coherent environmental strategy (Bigdan, 2013).

Ukraine should consider strengthening environmental protection and responding to the major environmental challenges, particularly soil erosion, agricultural run-off, and low energy efficiency, as outlined in the Agricultural Review. This would entail greater responsibility of the private sector for environmental outcomes; support for environmentally friendly technologies; stronger land tenure rights; and increased consideration of climate change mitigation and adaptation (OECD, 2015d). For example, the private sector could take an active role in designing and implementing industry-wide environmental standards. Foreign investors could help raise environmental standards by introducing advanced technology and supporting technology transfer. Enterprises could also invest in training and education of their employees. Although this recommendation of the Guidelines does not solely apply to environmental matters, environmental matters, especially directly related to human health and safety, are of particular importance.

Finally, as discussed in the section on Disclosure, Ukraine should consider strengthening disclosure requirements and rules, including on environmental and climate change matters. Particularly related to climate change, increased transparency and disclosure would be a concrete contribution to the implementation and the actions outlined in Ukraine’s new climate action plan (Intended Nationally Determined Contribution – INDC), which was submitted in September 2015 to the UN Framework Convention on Climate Change (UNFCCC, 2015). Corporate climate change reporting is relevant for design and implementation of long-term actions aimed at reducing greenhouse gas emissions. A majority of G20 countries have some kind of mandatory corporate reporting scheme in place or in preparation that requires disclosure of some climate change related information. As new OECD research shows, this information can be used for multiple policy purposes, from informing consumer decisions to assessing performance against policy objectives, investment analysis and risk analysis. Companies themselves also use the information to increase awareness of climate related risks and opportunities, streamline processes, reduce costs and improve efficiency and mitigation or reversal of negative climate impacts (OECD, 2015e).

Combating bribery, bribe solicitation and extortion

The Guidelines recognise the important role of the private sector in combating bribery and corruption. Enterprises should not, directly or indirectly, offer, promise, give, or demand a bribe or other undue advantage to obtain or retain business or other improper advantage, and should also resist the solicitation of bribes and extortion.

As discussed earlier in this Report, corruption remains one of the main risks for businesses operating in Ukraine. The country ranked 142 out of 175 in the 2014 Transparency International Corruption Perceptions Index. Corruption is cited as the most problematic factor for doing business in the World Economic Forum 2015/16 Global Competitiveness Index, even above political instability. According to a survey by the American Chamber of Commerce in Ukraine, 97% of members say that the number one issue in Ukraine remains corruption (UT, 2015).

A number of actions have been taken by the Ukrainian government in response to corruption challenges. The Anti-Corruption Strategy of Ukraine was updated for 2014-17 through a consultative process, and, for the first time, adopted as a law. The legislation on the National Anti-Corruption Bureau was passed; the President has appointed the head of the bureau and special investigators have been hired. The National Council for Anti-Corruption Policy has been established and held its first meeting, chaired by the President, in October 2015 (Ukraine, 2015c). In November 2015, the Parliament adopted a legislative package aimed at improving procedures for recovery of misappropriated assets. It includes the Law setting up the National Asset Recovery and Management Agency (Agency). The Ukrainian government benefited from technical assistance from the OECD Anti-corruption Project for Ukraine in drafting the legislation.6 The package also includes amendments to the criminal procedures regarding asset seizures and to the criminal code concerning special third party confiscations. As introduced by the government, this package aimed to improve Ukraine’s track record on asset recovery, which is a cornerstone of anti-corruption policies. However, amendments introduced in the Parliament have limited the Agency’s functions of active management of the seized assets and restrained the provisions on seizure and confiscation as compared to the original draft law (EU, 2015a).

Furthermore, as discussed in Chapter 2, the Business Ombudsman institution was agreed on and businesses are now able to report claims of corruption and unfair practices by Ukraine’s public agencies. Ukraine has also enacted new policies with the aim of creating a more transparent and efficient environment for public procurement as part of its overall efforts to combat corruption. Last but not least, ongoing efforts to reform the public service as described earlier in this Review are key to the success of current anticorruption efforts.

These developments are encouraging and illustrate the willingness on part of the Ukrainian government to acknowledge the problem of widespread corruption and to take practical measures to address it. One area where future reforms could particularly focus on is strengthening the involvement by the private sector in the implementation and monitoring of efforts to promote integrity in the private sector as outlined in the 2014-2017 Anti-Corruption Strategy of Ukraine (OECD, 2015c). This should entail further simplification of business regulations to reduce opportunities for corruption and eliminating corruption schemes affecting business, taking into consideration the particular risk areas that are evident from the cases submitted to the Business Ombudsman. As related to public procurement, it could also entail arranging regular trainings for the private sector and the procuring entities on public procurement procedures and prevention of corruption, at both national and local levels. Ukraine could also consider placing restrictions on participation in public procurement for companies involved in corruption offences. The same could be done for other public resources (OECD, 2015c). Finally, introduction of responsibility of legal persons for corruption, if enforced, can be a powerful incentive for self-regulation by the private sector (OECD, 2015c).

Ukraine could also consider introducing legislation to provide protection to whistle-blowers, as suggested by businesses in the 2015 survey on corruption undertaken by the American Chamber of Commerce of Ukraine. Guidelines include a recommendation for enterprises themselves to introduce safeguards in their own policies to protect bona fide whistle-blowing activities, including protection of employees who, in the absence of timely remedial action or in the face of reasonable risk of negative employment action, report practices that contravene the law to the competent public authorities.

Box 5.3. Promoting integrity in the private sector – anti-corruption strategy of Ukraine

Section 6 of the 2014-17 Anti-Corruption Strategy of Ukraine identifies the main problems related to the private sector as the “merger of business and government”, illicit lobbying of business interests, complicated procedures for business regulations, corruption in control authorities and in the judicial system. The section includes several measures to reduce corruption risks for the private sector, including the following:

Simplification of business regulations and promoting free market competition;
Preventing corruption in public administration and the judiciary, law enforcement and state control bodies;
Debarment of companies involved in corruption offences from the use of public resource such as public procurement, state loans, subsidies, and tax benefits;
Establishing obligations for external and internal auditors to report about corruption offences;
Raising awareness of companies about the law on liability of legal entities for corruption offences and enforcing this law in practice;
Disclosure of beneficiary owners of companies through the Unified state registry of legal entities and individual entrepreneurs;
Establishing the office of business Ombudsman who would represent the interests of business community in the government;
Engaging representatives of business community into development of strategy to promote the implementation of anti-corruption standards in private sector (OECD recommendations on best practices of internal control, ethics and observance of the law and Business principles of Transparency International to combat corruption) and facilitate the development of self-regulation in private sector;
Ensuring access of entrepreneurs to necessary information, in particular about administrative procedures, rights and responsibilities of entrepreneurs;
Running pilot projects on “integrity pacts” in infrastructure projects or other projects entailing significant budget expenses through creating trilateral (government – business – civil society) mechanism of control over planning and implementation of such projects.

Source: OECD (2015c) Anti-Corruption Reforms in Ukraine: Round 3 Monitoring of the Istanbul Anti‐Corruption Action Plan.

Consumer interests

On 2 September 2015, the Ukrainian Cabinet of Ministers approved a regulation “On State Service of Ukraine for Food Safety and Consumer Protection, pursuant to the reforms started in September 2014 On Optimizing the System of Central State Executive Authorities that reorganised and consolidated several state service agencies. The newly established State Food Safety and Consumer Protection Service, which will be directed and coordinated by the Cabinet of Ministers, will focus on food safety, compliance with consumer protection and advertising laws and regulations, sanitary legislation, plant, veterinary and agricultural certifications and issues, as well as market supervision. Regarding consumer protection, the service, among other things, will be able to check consumer protection compliance and impose penalties in case of violations of businesses, as well as to control advertising compliance (Arzinger, 2015).

The Guidelines recommend that enterprises act in accordance with fair business, marketing and advertising practices and take all reasonable steps to ensure the quality and reliability of the goods and services that they provide when dealing with consumers. This includes co-operating fully with public authorities to prevent and combat deceptive marketing practices and to diminish or prevent serious threats to public health and safety or to the environment deriving from the consumption, use or disposal of their goods and services. It also includes supporting efforts to promote consumer education in order to improve the ability of consumers to make informed decisions, better understand the economic, environmental and social impact of those decisions, and support sustainable consumption.

Ukraine could consider supporting and promoting consumer education and information programmes in order to increase the capacity of the civil society to be aware of consumer rights, to monitor government policy, and to promote effective defence of consumer rights. Ukraine could make a particular effort to promote sustainable consumption. This may be an efficient strategy for reaching both economic and environmental objectives, as increased demand for sustainable products would lead to increased supply and investments into sustainable products. One area of particular interest for Ukraine could be organic agriculture in light of the increasing demand for organic products from European countries and from the United States of America (OECD, 2015d).

Science and technology

The chapter on science and technology of the Guidelines aims to promote, within the limits of economic feasibility, competitiveness concerns and other considerations, the diffusion by multinational enterprises of the fruits of research and development activities among the countries where they operate, contributing therefore to the innovative capacities of host countries. Intellectual property rights are of relevance in this regard.

Ukraine’s innovation potential is high. According to the 2015/2016 World Economic Forum Global Competitiveness Report, Ukraine ranks 54 out of 140 economies in overall innovation factors. The quality of primary (45) and higher education (54), in particular math and science (38) contributes to this factor. The country’s capacity for innovation (52), quality of scientific research institutions (43), availability of scientists and engineers (29) shape the overall innovation potential. Education of the workforce and work ethic are least two problematic factors cited for doing business in Ukraine. At the same time, the country ranks fairly low in the factors determining technological readiness (86), in particular in availability of latest technologies (96), firm-level technology absorption (100), and FDI and technology transfer (117). Additionally, the country’s capacity to retain (114) and attract (97) talent is low, although quite improved since the 2014/15 ranking which were, respectively, 132 and 130.

These numbers paint a picture of a highly educated workforce, whose potential is not yet fully tapped due to structural and institutional barriers that prevent Ukraine from realising its full innovative and scientific potential. This can have detrimental effects on the overall productivity and potential of the economy. Perhaps the most urgent policy area for reform that would enable enterprises to positively contribute to Ukraine’s scientific and technological potential is employment and labour. Of particular relevance in this regard is the need to address skills mismatch and mobility in the labour market. The labour market is characterised by sharp shortages of some skilled workers and an excess supply of others. There is a marked education-job mismatch, which, coupled with underinvestment, lack of modernisation in the primary sectors, and outdated corporate governance and management styles, has led to a low aggregate productivity of the economy that is unable to absorb all of its available talent (Aleksynska, 2015).

Ukraine’s focus on bridging this skills gap and involving businesses, including foreign ones, in developing and adjusting training and learning opportunities to the market needs would be a worthwhile effort. The government could consider incentivising firms to provide on-the-job training and learning opportunities, as well as providing apprenticeships, traineeships and internships. The Guidelines call on enterprises to encourage local capacity building and human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees with a view to improving skills levels. Enterprises are encouraged to invest, to the greatest extent practicable, in training and lifelong learning while ensuring equal opportunities to training for women and other vulnerable groups, such as youth, low-skilled people, people with disabilities, migrants, older workers, and indigenous peoples (OECD, 2011a; Aleksynska, 2015).

Furthermore, Ukraine could pursue opportunities for Ukrainian researchers, businesses and innovators to participate in science and technology programmes of other countries. The renewal of the EU-Ukraine agreement on scientific and technological co-operation in March of 2015 is a good example of such an initiative. Under the agreement, Ukrainian entities, including businesses, will be able to fully participate in Horizon 2020, EU’s research and innovation funding programme, on equal terms with EU Member States and other associated countries. The agreement gives Ukraine access to the entire research and innovation value chain, from basic research to close-to-market activities. For example, this agreement will allow Ukraine to be able to host European Research Council grants, as well as to apply for financial support for innovative SMEs (EU, 2015b).

Competition

The goal of competition policy is to promote market conditions in which the nature, quality, and price of goods and services are determined by competitive market forces. This benefits consumers and the economy as a whole, as well as enterprises through allowing them to respond efficiently to consumer demand. The Guidelines recognise the importance of compliance with competition laws and regulations by domestic and foreign businesses.7 Enterprises are expected to carry out their activities in a manner consistent with all applicable laws and regulations and to refrain from entering into or carrying out anti-competitive agreements among competitors. An important aspect of enterprises responsibilities in this regard is co-operation with competition authorities and promotion of awareness and training among employees on the importance of compliance, particularly among senior management.

According to the WEF 2015/16 Global Competitiveness Index, Ukraine has one of the lowest rankings in the world on the effectiveness of anti-monopoly policy – 136 out of 140. The Anti-Monopoly Committee of Ukraine was heavily criticised in 2014 by government officials and business representatives alike for failures to implement competition and consumer protection measures under the 2002 Law On Protection of Economic Competition (US Dept. of State, 2015).

Although the government has fully implemented the OECD recommendation to raise the capacity of the Committee to provide an impartial and effective protection of the rights and legitimate interests of persons taking part in public procurement, business associations interviewed during an OECD on-site visit to Kyiv in November 2014 noted that the Committee has contradictory practices in determining fines for anti-competitive practices (OECD, 2015c). In response to these widely-voiced concerns, the Committee published recommendations on calculating the fines in mid-September 2015 (Sayenko Kharenko, 2015).

Finally, another area that Ukraine may wish to pay greater attention to in terms of competition-distorting behaviours is the reform of SOEs. Of particular relevance in this regard is the 2014 Law No. 1555-VII On State Aid to Business Entities, which will come into force on 2 August 2017. The Law aims to systemise the allocation of state aid to business entities, and in particular, to improve management of the state funds allocated to and to minimise a negative impact of the state aid on the competitiveness of Ukraine’s economy (Ukraine, 2014). As underlined in the Guidelines on Corporate Governance of State-owned Enterprises and the OECD Principles of Regulatory Reform, full administrative separation of responsibilities for ownership and market regulation is a fundamental prerequisite for creating a level playing field for SOEs and private companies and for avoiding distortion of competition. In general, SOEs should not be exempt from the application of general laws and regulations (OECD, 2015b).

Taxation

Ukraine introduced significant tax reforms in 2015 as summarised in Chapter 2 of this report. As related to RBC, tax governance and tax compliance should be treated as important elements of enterprise oversight and broader risk management systems and corporate governance. A comprehensive risk management strategy that includes tax not only allows the enterprise to act as a good corporate citizen but also to effectively manage tax risk, which can serve to avoid major financial, regulatory and reputation risk for an enterprise. The Guidelines call on enterprises to comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate and make timely payments of their tax liabilities.

Corporate boards, in particular, have a role to play. The Guidelines recommend that boards should adopt tax risk management strategies to ensure that the risks associated with taxation are fully identified and evaluated. This entails proactively developing appropriate tax policy principles, as well as establishing internal tax control systems so that management actions are consistent with board views on tax risk. Businesses are also expected to co-operate with tax authorities and provide information that is required by law to ensure an effective and equitable application of the tax laws. This also includes co-operation by multinational enterprises as related to transfer pricing and the arm’s length principle.

Considering the size of the informal economy in Ukraine, the government could consider assessing if taxes and unified social security contributions represent excessive burdens on those in the formal sector relative to the informal sector. As discussed in the section on Employment and Industrial Relations, taxes on enterprises generally amount to 52.9% of profits, with 43.08% going toward single social security contribution (World Bank, 2014). Although this rate is only slightly above European averages, the distribution of the burden between employees and employers is different; employers bear the bulk of these contributions in Ukraine, providing strong incentives to under-report wages and employment (World Bank, 2015b). Ukraine therefore amended its tax code in December 2015 to reduce the single social security contribution (see section on “ongoing tax reforms” in Chapter 2). However, it is too early to assess the impact of this measure as of the writing of this report.

Furthermore, some governments provide incentives to encourage businesses to uptake responsible business practices, including financial incentives such as credits for demonstrated commitment to RBC in government contracting, procurement processes, investment or tax incentives (e.g. to encourage businesses to, for example, invest in low-carbon technologies, or to pursue a social objective). However, such financial incentives, and, in particular tax incentives, need to be considered in the context of the overall tax system and taking into account their full costs and benefits. Such incentives could be an appropriate step once the baseline reforms establishing a functioning and effective tax system have been completed.

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Notes

← 1. In the government’s view, MEDT’s combined experience, breath of responsibilities, and available resources create the appropriate conditions to establish a robust, transparent and easily accessible NCP that is capable of fulfilling all of its functions effectively. The Ministry’s functions are broad and include, among others, implementation of the EU-Ukraine Association Agreement, cooperation with international financial organisations, strategic planning and regulatory policy, public-private partnerships, and trade, investment, and entrepreneurship policy.

← 2. For instance, the international bonds of Metinvest, the largest company in Ukraine, are issued by Metinvest B.V, a Dutch legal entity. See www.metinvestholding.com/en/investors/bonds/ebonds2016.

← 3. Except for the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families.

← 4. Law No. 785-VIII “On amendments to the Labour code regarding harmonizing anti-discriminatory legislation with EU Standards” (12 November 2015).

← 5. See Chapter V of the Guidelines for a full list of measures recommended in this area.

← 6. See also sections 2.4-2.5-2.6 “Sanctions, confiscation, immunities, and statute of limitations” in OECD, 2015 for broader OECD recommendations on this issues.

← 7. The term competition law in the Guidelines is used to refer to laws, including both antitrust and antimonopoly laws, that variously prohibit: a) anti-competitive agreements; b) the abuse of market power or of dominance; c) the acquisition of market power or dominance by means other than efficient performance; or d) the substantial lessening of competition or the significant impeding of effective competition through mergers or acquisitions.