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Corporate Governance and Strategic Management Programs for Mongolian SOEs


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Title: Corporate Governance and Strategic Management Programs for Mongolian SOEs

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

  • Review the OECD Principles of Corporate
  • 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
  • Conclusive remarks on lessons learned

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
  • Developed a
  • DRAFT CG Code for Mongolian SOEs based on the
    OECD guidelines.
  • DRAFT CG Regulations for SOEs to be implemented
    by SPC

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
  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
  6. The SOE boards should have the necessary
    authority competence and objectivity to carry out
    strategic guidance and monitoring of management

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
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
Observations regarding soeS
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

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

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
  • Department of Monitoring, Registration, and

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
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

Responsibilities of SPC re SOEs
  • SPC primary Government agency for oversight of
  • 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

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

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

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

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
  • The state should let SOE boards exercise their
    responsibilities and respect their independence

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
  • 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

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

Recommendations for improving corporate
governance of mongolian soes
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
  • SOEs ought not have preferential access to
    state-owned banks and private financial
  • Promote public debate on the corporate governance
    of SOEs

II The State Acting as an Owner
  • Rationalize the state owned sector which
    sectors will the government retain state
  • 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

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

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.

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
  • Require large SOEs to be as transparent as listed
    companies. Disclose consolidated reports on state
  • Actively monitor and benchmark SOE performance,
    ensure that SOEs are subject to a robust audit

VI The Responsibilities of Boards of SOEs
  • Clarify and reinforce SOE board mandates and
  • 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 

Improving soe performance
  • Corporate Leadership and Strategic Management
    Programs for SOEs

1- Corporate leadership
  • Corporate Governance Rating Index What Gets
    Measured, Gets Done

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
Categories Used in Designing Mongolian CGRI
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
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). 

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
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.

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
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
(No Transcript)
Discussion of Survey Findings Perceptions
  • 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.

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

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.

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.


Curriculum for CG Training for SOE Directors (3)
  • Learning outcome is to help understand
  • Global best practice knowledge in CG on OECD
  • The role and importance of independent and
    non-executive directors, director selection
  • 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.

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
  • Module 7 Executive Management
  • Module 8 Strategy Formulation and the Role of
    the Board
  • Module 9 Financial Management for Non-Financial
  • Module 10 Risk Management
  • Module 11 Corporate Social Responsibility
  • Module 12 Material Transactions (Related Party
    Transactions, etc ) 

3- improving operational performance
  • Balanced Scorecard Method Strategic Management
    with Metrics

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
  • Break down uncoordinated communication between
  • Better understand and react to customer/client
  • Improve organizational performance by measuring
    what matters
  • Make better decisions using leading performance
  • Help leaders budget time and resources more
  • 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.

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
  • Performance Prism

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. 

What is the Balanced Scorecard?
The Balanced Scorecard Solves Fundamental
Business Issues
The Balanced Scorecard Perspectives
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
  • 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
  • A Reporting Team developed new BSC Reporting
    Framework of BSC performance measures and
    achievements against targets.

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.

Sample Strategy Map for SPC SOEs
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.
Balanced Scorecard Program Recommendations
  1. Hold a BSC training for SOE directors of the
  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
  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

International examplesCorporate governance
reform for soes
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

State As OwnerThe Kazanah Nasional Holding Co.
Experience in Malaysia
  • Source OECD Corporate Governance Reforms at SOEs
    in Asia. 2010.
  • (

Evolution of Khazanah in Malaysia
The Malaysian SOE Transformation Program
Khazanahs Role within the Govt of Malaysia
Reporting Structure of Khazanah
What is Khazanah Nasional Berhad?
Khazanahs Main Mandate Long-Term Nation Building
Khazanahs 5 Pillar Terms Of Engagement Framework
With GLCs
Khazanah Governance Framework
Source Khazanah Nasional State As Owner The
Kazanah Nasional Holding Company Experience in
Malaysia (May 2010)
Khazanah Main Initiatives
Khazanah Nasional Conclusion
  • Effective and good governance is absolutely
  • 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

Overall 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
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