Corporate Governance and Strategic Management Programs for Mongolian SOEs

1
Corporate Governance and Strategic Management
Programs for Mongolian SOEs

• Remarks prepared for the 4th Annual Corporate
  Governance Forum
• June 13, 2011
• by
• Dr. Demir Yener
• USAID/EPRC Senior Finance and Corporate
  Governance Advisor

2
Agenda

• Review the OECD Principles of Corporate
  Governance
• Design of CGRI for Mongolian SOEs
• Best practices in implementing Corporate
  Governance at SOEs and recommendations for reform
• Design, development and implementation of
  Balanced Scorecard strategic management tool for
  3 pilot SOEs
• International Examples on CG reforms,
  specifically the Khazanah Nasional Experience in
  Malaysia
• Conclusive remarks on lessons learned

3
EPRC SPC Joint Program

• In April 2010, EPRC responded to a joint request
  by SPC, the Ministry of Finance and the Ministry
  of Mining and Mineral Resources to design and
  develop a program to assist the GoM in improving
  CG at 73 SOEs.
• Developed a Balanced Scorecard program, which was
  delivered to 3 pilot companies.
• Developed and administered a CGRI.
• Reviewed and commented on SOE corporate
  documentation
• Developed a
• DRAFT CG Code for Mongolian SOEs based on the
  OECD guidelines.
• DRAFT CG Regulations for SOEs to be implemented
  by SPC

4
OECD CG Guidelines for SOEs (2005)

1. Ensure a level playing field in markets where
   state owned enterprises and private firms compete
2. The state should be an informed and active owner
   and establish a clear and consistent ownership
   policy
3. The state and SOEs should recognize the rights of
   all shareholders
4. The state policy should recognize the SOEs
   responsibilities to all stakeholders
5. SOEs should observe high standards of
   transparency
6. The SOE boards should have the necessary
   authority competence and objectivity to carry out
   strategic guidance and monitoring of management

5
World Bank Mongolia ROSC CG Assessment (2009)
Category Assessment
I. Effective CG Framework Partially Implemented
II. Shareholders rights and key ownership functions Partially Implemented
III. Equitable Treatment of Shareholders Broadly Implemented
IV. Role of Stakeholders in Corporate Governance Partially Implemented
V. Disclosure and Transparency Partially Implemented
VI. Responsibilities of the Board Partially Implemented
6
OECD Principles Essential Criteria Applied on ROSC
Assessment Criteria Explanation Range ()
Fully implemented Most of the OECD Principles essential criteria are met 95 gt
Broadly implemented One or more of essential criteria are less than fully implemented 75 94.5
Partially implemented Part of the essential criteria are met 35 75.9
Not implemented Assessment is likely where major shortcoming exist lt 35
Not applicable Assessment is only applicable where an OECD principle does not apply due to structural legal or institutional features. n/a
7
Observations regarding soeS
8
Key Elements in SOE governance

• OECD Guidelines on Corporate Governance of SOEs
• State governance of SOEs
• Effective Legal and Regulatory Framework for SOEs
• State Acting as an Owner
• 2. Corporate governance of SOEs
• Key concepts separation of responsibilities
• Governance-- by the board of directors
• Executive Management-- of day-to-day company
  affairs

9
Global Best Practice Objectives of SOEs

• To be at least as profitable and efficient as
  comparable private sector enterprises
• To use progressive employment practices
• To be socially responsible corporate citizens
• To create sustainable value for the society
•  

10
Legal and Regulatory Frameworks on State Ownership

• Law on Management and Financing of Budgetary
  Institutions (LMFBI)
• Law on State and Local Property (LSLP)
• Decree of State Property Committee
• Department of State Property Management and
  Privatization
• Department of Monitoring, Registration, and
  Procurement

11
Mongolian Laws and Regulations OECD Guidelines on CG of State-owned Enterprises
Law on Management and Financing of Budgetary Institutions Article 22.1 Minister of Finance controls finances of SOEs and SPC controls work performance Chapter 1.B effective Legal and Regulatory Environment Government should strive to simplify and streamline the operations practices and the legal form under which SOEs operate
Law on Management and Financing of Budgetary Institutions Article Article 30.1 The CEO to list all procurements expenses and supplier Chapter 2. B State as an Owner The government should not be involved in the day-to-day management of SOEs and allow them full operational autonomy to achieve their defined objectives
Law on State and Local Property (11.8) SPC is to take off accounts assets, review requests for procurement and make procurement decisions Chapter 2.C State as an Owner The state should let SOE boards exercise their responsibilities and respect their independence.
Law on State and Local Property (18.5) SOE administrative posts and total staff numbers will be set by the SPC Chapter 2. B State as an Owner The government should not be involved in the day-to-day management of SOEs and allow them full operational autonomy to achieve their defined objectives
12
Principles for Operations and Regulation of SOEs

• Operational autonomy to implement policies
  established by their boards of directors
• Competitive conditions comparable to private
  sector enterprises in non-monopoly sectors
• The role of the Government in ownership of SOEs
  separate from Government regulation
• SOEs shall not receive more favorable treatment
  than private sector enterprises

13
Responsibilities of SPC re SOEs

• SPC primary Government agency for oversight of
  SOEs
• Voting shares of SOEs
• Appointment or election of members of BoDs
• Consultation with boards and ministries on annual
  performance targets
• Monitoring implementation of performance targets

14
Business Plans of SOEs

• Targets with respect to
• Production of goods or services
• Product development
• Market development
• Human resource development
• Advancement in use of technology
• Productivity
• Composition of assets and liabilities
• Profitability

15
SPC SOE monitoring unit

• Advise SPC on developing and implementing
  ownership policy with respect to
• Strategic direction of SOEs
• Annual business plans and performance targets
• Proposals to restructure particular SOEs
• Need for management contracts for particular SOEs
• Sale of shares in SOEs to other investors
• Monitor performance of SOEs against targets
• Performance of boards of directors of SOEs
• Conduct inspections of SOEs

16
Effective Legal and Regulatory Framework(OECD
SOE CG Guidelines)

• Governments should strive to simplify and
  streamline the operational practices and the
  legal form under which SOEs operate

17
State Acting as an Owner(OECD CG Guidelines)

• The government should not be involved in the
  day-to-day management of SOEs and allow them full
  operational autonomy to achieve their defined
  objectives
• The state should let SOE boards exercise their
  responsibilities and respect their independence

18
State Oversight of SOEs

• Rules contain many inappropriate elements
  contrary to OECD Principles
• Top down, rigid approach
• Little room for exercise of discretion
• Suggests static versus dynamic business
  environment
• Diffuses accountability among SPC, SPC
  departments, BoD, GB, SB, COPA and ministries
• Impression
• Prevents expeditious actions
• Not reflect understanding of business motivations
• Discourages creative thinking
• Discourages constructive dissent

19
State Governance of SOEs

• Impression
• Discourages leadership
• Discourages ambitious persons from SOEs
• Leaders have to develop their plan, adjust plan,
  not simply implement plan determined by others
• Leaders run to problems, not away
• Excessive liabilitydirect and third party in SOE
  rules--discourages addressing problems

20
Recommendations for improving corporate
governance of mongolian soes
21
I Ensuring an Effective Legal and Regulatory
Framework for State-Owned Enterprises

• Complete the corporatization process and
  harmonize SOEs legal status in the economy.
• Clarify and ensure effective separation between
  the ownership function and regulation.
• Make specific obligations and related costs
  transparent
• SOEs ought not have preferential access to
  state-owned banks and private financial
  institutions
• Promote public debate on the corporate governance
  of SOEs

22
II The State Acting as an Owner

• Rationalize the state owned sector which
  sectors will the government retain state
  ownership?
• Develop and disclose an ownership policy, ensure
  accountability of ownership function
• Ensure visibility, strength and consistency in
  the exercise of the ownership function
• Avoid interference in SOE management
• Develop structured and transparent board
  nomination process for SOE boards

23
III Equitable Treatment of Shareholders

• Reinforce provisions protecting the rights of
  minority shareholders in relevant laws and
  regulations
• Increase the independence of SOE boards and
  improve the transparency of their nomination
  process.
• Reinforce minority shareholders capacity to
  obtain effective redress for the violation of
  their rights.
• Support the development of minority shareholders
  associations

24
IV Relations with Stakeholders

1. Reassess and develop a strategic approach
   relative to stakeholder relations
2. Develop methods to allow and encourage
   stakeholders to exercise their voice. (Develop
   Alternate Dispute Resolution)
3. Encourage SOEs to report on stakeholder relations.

25
V Transparency and Disclosure

• Clarify SOE objectives and make non-commercial
  ones explicit.
• Use state budget to cover the costs of
  non-commercial objectives
• Build up and publish relevant performance
  indicators.
• Require large SOEs to be as transparent as listed
  companies. Disclose consolidated reports on state
  ownership
• Actively monitor and benchmark SOE performance,
  ensure that SOEs are subject to a robust audit
  system

26
VI The Responsibilities of Boards of SOEs

• Clarify and reinforce SOE board mandates and
  functions.
• Ensure that SOE boards are actively engaged in
  shaping the strategy.
• Require SOE boards to have nomination,
  remuneration and governance committees
• Increase competencies of SOE boards by requiring
  certification training for SOE board members,
  including induction training
• Develop performance evaluation for SOE boards 

27
Improving soe performance

• Corporate Leadership and Strategic Management
  Programs for SOEs

28
1- Corporate leadership

• Corporate Governance Rating Index What Gets
  Measured, Gets Done

29
Development of Corporate Governance Rating Index
Different Services and Models
Corporate Governance Rating System Coverage First Report Issued In Categories Variables
The Corporate Library (TCL) 1750 (US) 2000 7 Undisclosed
Intl Shareholder Services CGQ 7,500 (US Intl) 2001 8 61
Governance Metrics International 1,625 (Intl) 2002 7 600
SP Europe US 1998 4 100
Deutsche Bank DJ EuroStoxx 50 2002 5 Undisclosed
Deminor Ratings 300 () 1998 4 300
30
Categories Used in Designing Mongolian CGRI
Categories
1- Effective Legal and Regulatory Environment for CG
2- The State Acting as Owner Shareholders
3- Equitable Treatment of All Shareholders
4- Stakeholders Corporate Citizenship
5- Transparency and Disclosure
6- The Independence of Board of Directors
31
Designing the CGRI for Mongolian SOEs

• The EPRC Project Team designed a CGRI that is a
  stand-alone index measuring the degree to which
  SOEs comply with the OECD Guidelines on Corporate
  Governance of State Owned Enterprises based on
• The OECD Principles of Corporate Governance
• Other international corporate governance
  standards and research
• Mongolian Company Law
• Mongolian Code of Corporate Governance (2007). 

32
Structure and Measurements of the SOE CGRI
Category of Questions Percent Weighting
I.Effective Legal and Regulatory Framework 14 10
II. The State acting as owner 33 10
III. Equitable treatment of shareholders 7 10
IV.Relations with stakeholders 17 10
V. Transparency and Disclosure 41 30
VI. Responsibilities of the Boards 42 30
Total number of measurements (questions) 154 100
33
Selecting the Specific Measurements in the CGRI

• The selection of the specific measurements within
  each category was based upon four considerations
  
• the relevance of each variable to effective
  governance based on internationally-recognized
  best practices of OECD in corporate governance
• actual legal requirements pertaining to corporate
  governance that now exist in Mongolia,
• relevance to the SPCs mission and
• ease at both obtaining and evaluating compliance
  with the actual measure.

34
CGRI Scores Explained
Score Rating Explained
1 (lowest) Disagree Non-Compliant
2 Somewhat disagree Less than Minimum Compliance
3 Neutral Minimally Compliant
4 Somewhat agree Mostly Compliant
5 (Best) Agree Fully compliant
35
Summary of CGRI Results
Company Name I (10) II (10) III (10) IV (10) V (30) VI (30) Total CGRI Score
UB EDNC .31 .35 .41 .28 .86 .88 3.09
DMP .35 .42 .50 .38 .89 .86 3.40
CRETG .22 .34 .39 .36 .82 .35 2.48
MSE .38 .36 .50 .44 1.33 1.10 4.11
MONGOLROSTSVETMET .39 .46 .50 .40 .86 .85 3.45
MONGOL POST .34 .29 .27 .20 .61 1.09 2.81
GOVT SERVCS .34 .32 .50 .42 1.00 1.21 3.80
NATL DISPATCHERS .24 .30 .27 .29 .78 .61 2.49
CEMENT LLC .33 .38 .007 .45 1.03 .69 2.95
ORKHON AZZA .18 .27 .34 .32 1.24 .97 3.32
36
(No Transcript)
37
Discussion of Survey Findings Perceptions
Discussed

• Ensuring Effective Regulatory Framework (Avg
  Freq. of 3.5)
• Minimally compliant to somewhat compliant
  environment. Needs improvements
• State as a shareholder/owner (Avg. Freq. of 1)
• State is largely perceived as inadequate as
  owner, not compliant with rules at all.
• Equitable treatment of shareholders (Avg. Freq.
  of 5)
• Respondents perceive that the State is equitably
  treated by the SOE in full compliance a fair
  argument given the ownership status.
• Relations with stakeholders (Avg. Freq. of 4)
• Perception is that the SOE treats the
  stakeholders in compliance with OECD rules
• Disclosure and transparency (Avg. Freq. of 3)
• The SOEs are minimally compliant with the rules
  of transparency. Needs improvements
• Board of directors responsibilities (Avg. Freq.
  of 3)
• The directors responsibilities are not well
  understood and rules are minimally complied with.
  Needs improvements.

38
2- Corporate governance training for Soe directors

• Understanding Agency Theory and Information
  Asymmetries that cause inefficiencies at the SOEs

39
Curriculum for CG Training for SOE Directors

• Target Audience
• This program is designed for corporate board
  chairpeople, directors, independent directors,
  company secretaries, senior executive officers
  and top management of Mongolian state owned
  companies and state owned enterprises.
• Objective
• The course aims to build the capacity and skills
  of current and future business leaders of state
  owned economic entities in corporate governance.

40
Curriculum for CG Training for SOE Directors (2)

• Course description
• The program will provide the participants with
  specialized knowledge in corporate governance
  issues such as corporate leadership, long-term
  strategy formulation, effectiveness of management
  oversight, increasing effectiveness of the
  working procedures of the board, director and
  executive compensation, legal and regulatory
  frameworks and information disclosure, conflict
  of interest, related party transactions.

41

Curriculum for CG Training for SOE Directors (3)

• Learning outcome is to help understand
• Global best practice knowledge in CG on OECD
  principles
• The role and importance of independent and
  non-executive directors, director selection
  process,
• Agency Problem of separation of the role of CEO
  and the board
• The value of board independence
• Role and responsibilities of the shareholders,
  the board of directors and the executive
  management and other stakeholders in governance.

42
Curriculum for CG Training for SOE Directors (4)

• Module 1 An Introduction to CG Intl and
  Mongolian Environment
• Module 2 Internal Corporate Documentation
• Module 3 State as Shareholder.
• Module 4 The Board of Directors
• Module 5 Role of Corporate Secretary
• Module 6 Organizing and Managing Efficient Board
  Meetings
• Module 7 Executive Management
• Module 8 Strategy Formulation and the Role of
  the Board
• Module 9 Financial Management for Non-Financial
  Directors
• Module 10 Risk Management
• Module 11 Corporate Social Responsibility
• Module 12 Material Transactions (Related Party
  Transactions, etc ) 

43
3- improving operational performance

• Balanced Scorecard Method Strategic Management
  with Metrics

44
Balanced Scorecard Program for SOEs

• The pilot project was intended to demonstrate how
  effectively implemented balanced scorecard
  systems can help an organization in many ways
• Increase focus on strategy and results instead of
  tasks
• Break down uncoordinated communication between
  departments
• Better understand and react to customer/client
  needs
• Improve organizational performance by measuring
  what matters
• Make better decisions using leading performance
  indicators
• Help leaders budget time and resources more
  effectively
• Help leaders and employees prioritize the work
  they do.
• Program was designed to translate high level
  organizational strategy into something that
  employees can understand and act upon in their
  daily operations and activities.

45
Overview of Performance Measurement Systems

• A performance measurement system enables an
  enterprise to plan, measure, and control its
  performance according to a pre-defined strategy.
  In short, it enables a business to achieve
  desired results and to create shareholder value.
• The major performance measurement systems in use
  today are profiled below (in order of global
  adoption) and include
• The Balanced Scorecard
• Activity based costing
• Economic value Added
• Quality Management
• Customer Value Analysis/Customer Relationship
  Management
• Performance Prism

46
What is the Balanced Scorecard?

• The balanced scorecard is a strategic planning
  and management system that is used extensively in
  business and industry, government, and nonprofit
  organizations worldwide.
• The tool is used to align business activities to
  the vision and strategy of the organization,
  improve internal and external communications, and
  monitor organization performance against
  strategic goals. 

47
What is the Balanced Scorecard?
48
The Balanced Scorecard Solves Fundamental
Business Issues
49
The Balanced Scorecard Perspectives
50
EPRC Balanced Scorecard Program Process

• Formed BSC teams from employees drawn from a
  various areas of the organization.
• The Strategic Management Teams lead the process
  by providing policy guidance, define major
  strategic elements, committing resources,
  establishing schedules, and approve scorecard
  work.
• Four Strategic Theme Teams developed strategic
  objectives and strategy maps for each strategic
  theme, as well as identified process improvement
  and other scorecard ideas such as performance
  measures and initiatives.
• A Communications Team developed BSC
  Communications Plan by which all staff and
  stakeholders of the companies will be kept
  informed
• A Reporting Team developed new BSC Reporting
  Framework of BSC performance measures and
  achievements against targets.

51
Balanced Scorecard The 8 Week Training Program

• 1- Introductory training for the company senior
  management (20 sr. Staff from each company)
• 2- Establishment and initial training of the
  companys 7 BSC implementation teams. (50 people)
• 3- Train the Trainer Course (for in-house company
  BSC Champions) (22 people from 3 companies)
• 4- BSC implementation development workshop
• Altogether 8 weeks of contact time.

52
Sample Strategy Map for SPC SOEs
53
Balanced Scorecard Program Outcomes

• Senior managers developed capacity to implement
  the BSC methodology
• Developed a Corporate Strategy document plus
  draft strategic objectives and strategy maps in
  each of their 4 major strategic areas.
• Implementation teams developed BSC performance
  measures and targets associated with the
  achievement of their strategic objectives.
• A group of BSC champions are capable of
  providing leadership in designing and
  implementing the BSC methodology.
• Companies developed a number of performance
  measures and initiatives
• Companies will develop their BSC frameworks by
  June-July 2011
• The companies may require final assistance around
  this time (August 2011).

Concern Participants expressed concern that
their Board members or the SPC may not support
the implementation of the BSC methodology.
54
Balanced Scorecard Program Recommendations

1. Hold a BSC training for SOE directors of the
   Boards
2. Establish BSC SOE Project as a long-term
   Mongolian Government project
3. Establish clear objectives and targets for the
   BSC Project and a timetable for implementation.
4. Finalize development and implementation of the
   BSC methodology in the initial 3 SOEs during
   2011, with full implementation of the methodology
   in those companies from 1 January 2012.
5. Perform a formal evaluation of the success or
   otherwise of the pilot project should follow at
   the end of 2012 and again in 2013.
6. Link the development and implementation of the
   BSC methodology in the Mongolian public sector
   with the implementation of good Corporate
   Governance.
7. Establish a Mongolian BSC Institute to support
   the ongoing development and implementation of the
   BSC methodology in Mongolia.
8. Develop a broader long-term plan for the
   implementation of the BSC methodology and
   Corporate Governance across the Mongolian public
   sector.

55
International examplesCorporate governance
reform for soes
56
International Examples

• Professionalization of monitoring units
• New Zealand
• Crown Company Monitoring and Advisory Unit
• UK
• Shareholder Executive
• France
• Government Shareholding Agency
• Canada
• Crown Agencies Secretariat
• Malaysia
• Kazanah Nasional

57
State As OwnerThe Kazanah Nasional Holding Co.
Experience in Malaysia

• Source OECD Corporate Governance Reforms at SOEs
  in Asia. 2010.
• (www.khazanah.com.my)

58
Evolution of Khazanah in Malaysia
59
The Malaysian SOE Transformation Program
60
Khazanahs Role within the Govt of Malaysia
61
Reporting Structure of Khazanah
62
What is Khazanah Nasional Berhad?
63
Khazanahs Main Mandate Long-Term Nation Building
64
Khazanahs 5 Pillar Terms Of Engagement Framework
With GLCs
65
Khazanah Governance Framework
Source Khazanah Nasional State As Owner The
Kazanah Nasional Holding Company Experience in
Malaysia (May 2010)
66
Khazanah Main Initiatives
67
Khazanah Nasional Conclusion

• Effective and good governance is absolutely
  fundamental.
• Khazanah continues to work within the existing
  governance framework.
• All parties must play their roles and perform
  efficiently and effectively.
• Having a specific program is very important

68
Overall conclusion
69
Conclusion

• EPRC responded to the request by the GoM of
  design and implement the Corporate Leadership and
  Strategic Management Development Program.
• EPRC conducted CGRI survey and received 11
  responses. One was unusable.
• Balanced Scorecard exercises were conducted at
  three pilot SOEs, including Central and Regional
  Electric Transmission Grid UB Electric
  Distribution Co and, Darhan Metallurgical Plant
• These three companies have developed their annual
  strategic plans with performance indicators that
  will be submitted to the GoM on Nov 30th, using
  the BSC tool.
• With the CGRI, SOEs will have a dashboard to
  manage their operations more efficiently, and SPC
  will be able to govern the SOEs more effectively.
• Finally, the exercise will help strengthen CG and
  strategic management by improving transparency
  accountability responsibility and, fair and
  equitable treatment of all stakeholders.
• A set of recommendations for the need for
  sweeping reforms for reorganizing the SOEs is
  provided.