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

5. World Bank Mongolia ROSC CG Assessment (2009)

6. OECD Principles Essential Criteria Applied on ROSC

7. Observations regarding soe’S

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. Corporategovernance 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

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 liability—direct and third party in SOE rules--discourages addressing problems

20. Recommendations for improving corporate governance of mongoliansoes

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 • Reassess and develop a strategic approach relative to stakeholder relations • Develop methods to allow and encourage stakeholders to exercise their voice. (Develop Alternate Dispute Resolution) • 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. Corporate Leadership and Strategic Management Programs for SOEs Improving soe performance

28. Corporate Governance Rating Index: What Gets Measured, Gets Done 1- Corporate leadership

29. Development of Corporate Governance Rating Index: Different Services and Models

30. Categories Used in Designing Mongolian CGRI

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

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 SPC’s mission; and • ease at both obtaining and evaluating compliance with the actual measure.

34. CGRI Scores Explained

35. Summary of CGRI Results

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. Understanding Agency Theory and Information Asymmetries that cause inefficiencies at the SOEs 2- Corporate governance training for Soe directors

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: Int’l 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. Balanced Scorecard Method: Strategic Management with Metrics 3- improving operational performance

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.