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Corporate Leadership and Strategic Management Programs for Mongolian SOEs. 4 TH ANNUAL CORPORATE GOVERNANCE FORUM Ulaanbaatar, Mongolia by Dr. Demir Yener USAID/EPRC Senior Finance and Corporate Governance Advisor June 13, 2011. Agenda . OECD Principles of Corporate Governance for SOEs

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corporate leadership and strategic management programs for mongolian soes

Corporate Leadership and Strategic Management Programs for Mongolian SOEs

4TH ANNUAL CORPORATE GOVERNANCE FORUM

Ulaanbaatar, Mongolia

by

Dr. Demir Yener

USAID/EPRC Senior Finance and Corporate Governance Advisor

June 13, 2011

agenda
Agenda

OECD Principles of Corporate Governance for SOEs

Best practices in implementing Corporate Governance at Mongolian SOEs and recommendations for reform

Design, development and implementation of Balanced Scorecard strategic management tool for 3 pilot SOEs

Design of CGRI for Mongolian SOEs

International Examples on CG reforms, specifically the KhazanahNasional Experience in Malaysia

Conclusive remarks on lessons learned

CG at Mongolian SOEs

spc pilot program on corporate governance and balanced scorecard implemented by eprc
SPC Pilot Program on Corporate Governance and Balanced Scorecard Implemented by EPRC
  • 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 Mongolian SOEs.
  • Developed a Balanced Scorecard program, which was delivered to 3 pilot companies (CRETG; UBEDN & DMP).
  • 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

CG at Mongolian SOEs

oecd cg guidelines for soes 2005
OECD CG Guidelines for SOEs (2005)
  • Legal and Regulatory Framework:
    • Ensure a level playing field in markets where state owned enterprises and private firms compete
  • State Acting as Owner:
    • The state should be an informed and active owner and establish a clear and consistent ownership policy
  • Equitable Treatment of Shareholders:
    • The state and SOEs should recognize the rights of all shareholders
  • Stakeholders:
    • The state policy should recognize the SOEs responsibilities to all stakeholders
  • Transparency and Disclosure:
    • SOEs should observe high standards of transparency
  • Boards:
    • The SOE boards should have the necessary authority, competence and objectivity to carry out strategic guidance and monitoring of management

CG at Mongolian SOEs

observations regarding soe s
Observations regarding soe’S

CG at Mongolian SOEs

global best practice objectives of soes
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

CG at Mongolian SOEs

legal and regulatory frameworks on state ownership
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

CG at Mongolian SOEs

principles for operations and regulation of soes
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

CG at Mongolian SOEs

responsibilities of spc re soes
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

CG at Mongolian SOEs

business plans of soes
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

CG at Mongolian SOEs

spc soe monitoring unit
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

CG at Mongolian SOEs

effective legal and regulatory framework oecd soe cg guidelines
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

CG at Mongolian SOEs

state acting as an owner oecd cg guidelines
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

CG at Mongolian SOEs

state oversight of soes
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

CG at Mongolian SOEs

state governance of soes
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

CG at Mongolian SOEs

i ensuring an effective legal and regulatory framework for state owned enterprises
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

CG at Mongolian SOEs

ii the state acting as an owner
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

CG at Mongolian SOEs

iii equitable treatment of shareholders
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

CG at Mongolian SOEs

iv relations with stakeholders
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.

CG at Mongolian SOEs

v transparency and disclosure
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

CG at Mongolian SOEs

vi the responsibilities of boards of soes
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 

CG at Mongolian SOEs

development of corporate governance rating index different services and models
Development of Corporate Governance Rating Index: Different Services and Models

CG at Mongolian SOEs

designing the cgri for mongolian soes
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). 

CG at Mongolian SOEs

selecting the specific measurements in the cgri
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;
  • ease at both obtaining and evaluating compliance with the actual measure.

CG at Mongolian SOEs

cgri scores explained
CGRI Scores Explained

CG at Mongolian SOEs

summary of cgri results
Summary of CGRI Results

CG at Mongolian SOEs

survey findings perceptions discussed
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.

CG at Mongolian SOEs

curriculum for cg training for soe directors
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.

CG at Mongolian SOEs

curriculum for cg training for soe directors 2
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.

CG at Mongolian SOEs

slide40

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.

CG at Mongolian SOEs

curriculum for cg training for soe directors 4
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 )

CG at Mongolian SOEs

balanced scorecard program for soes
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.

CG at Mongolian SOEs

overview of performance measurement systems
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

CG at Mongolian SOEs

what is the balanced scorecard
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. 

CG at Mongolian SOEs

eprc balanced scorecard program process
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.

CG at Mongolian SOEs

balanced scorecard the 8 week training program
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 company’s 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.

CG at Mongolian SOEs

balanced scorecard program outcomes
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.

CG at Mongolian SOEs

balanced scorecard program recommendations
Balanced Scorecard Program: Recommendations
  • Hold a BSC training for SOE directors of the Boards
  • Establish BSC SOE Project as a long-term Mongolian Government project:
  • Establish clear objectives and targets for the BSC Project and a timetable for implementation.
  • Finalize development and implementation of the BSC methodology in the initial 3 SOE’s during 2011, with full implementation of the methodology in those companies from 1 January 2012.
  • Perform a formal evaluation of the success or otherwise of the pilot project should follow at the end of 2012 and again in 2013.
  • Link the development and implementation of the BSC methodology in the Mongolian public sector with the implementation of good Corporate Governance.
  • Establish a Mongolian BSC Institute to support the ongoing development and implementation of the BSC methodology in Mongolia.
  • Develop a broader long-term plan for the implementation of the BSC methodology and Corporate Governance across the Mongolian public sector.

CG at Mongolian SOEs

international examples state as owner
International Examples: State as Owner

Main Objective: Professionalization of monitoring units

  • New Zealand
    • Crown Company Monitoring and Advisory Unit
  • UK
    • Shareholder Executive
  • France
    • Government Shareholding Agency
  • Canada
    • Crown Agencies Secretariat
  • Malaysia
    • KhazanahNasional

CG at Mongolian SOEs

khazanah governance framework
Khazanah Governance Framework

CG at Mongolian SOEs

Source: KhazanahNasional: State As Owner: The KazanahNasional Holding Company Experience in Malaysia (May 2010)

khazanah main initiatives
Khazanah Main Initiatives

CG at Mongolian SOEs

khazanah nasional conclusion
KhazanahNasional: Conclusion
  • Effective and good governance is absolutely fundamental.
  • Khazanahcontinues 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

CG at Mongolian SOEs

overall conclusion
Overall conclusion

CG at Mongolian SOEs

conclusion
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 among SOEs. Avg. score was 3.4 out of 5
  • 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 to be submitted to the GoM, 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.

CG at Mongolian SOEs