First step for a long trek

24th of 3, 2016

By Tirthankar  Mukherjee

An article in our Mongolian section last month, read together with its updated version in English in the present issue, will give hope to all who look forward to Mongolian State-owned enterprises functioning to their full potential, contributing more to the nation’s GDP, in both absolute and comparative terms. With its vast reach and control over resources in this extraordinarily resources-rich country of ours, Erdenes Mongol stands to gain most from the helpful legal environment parliament has now granted to it. Talk of it attaining the performance level of Temasek in Singapore is somewhat premature – a toddler cannot overnight become a pole vaulter – but successive men in charge of Erdenes Mongol have been right to choose it as a model.

Our economy is in a mess, not all of it our own doing, though there have been wrong decisions, many taken deliberately to serve short-term interests. No country can expect to remain insulated at any time from purely economic as well as politico-economic uncertainties, all the more so when, as at present, the disequilibrium between a producing nation like Mongolia and its main, and often only, buyer remains so glaring. De facto currency devaluation has not worked. Our political leaders must now develop realistic national plans that reflect challenges on the ground. Their implementation can then be given over to industry, the responsibility to be shared equally by SOEs and the private sector, domestic or foreign.

Equally, but, because of historical reasons, expectations are always higher from our SOEs. This is nothing unique to Mongolia, as in large parts of the world state-owned enterprises have been prominent for decades, again for historical reasons. Several have performed well, but in general SOEs are losing their sheen, struggling (and more often than not) failing to meet the private sector’s performance levels, and leaving potential profits unrealised. Conflicting financial and social objectives are only part of the problem; notwithstanding the tough economic times, these enterprises can significantly improve their performance only if they can break the constraints of the public-sector model, marked by partisan and myopic political interference.

This is where the ray of hope now shines in Mongolia. There can be many a slip between adoption of amendments in parliament and their application in the board rooms of SOEs, but it does seem everybody has had enough of inept political control, prompting decisions that have pushed companies’ financial goals beyond reach, and thus suppressed productive and inclusive national growth.

With really independent directors on board, loyal to professional management principles and not taking their cue from the political expediencies that put them there, SOEs should now be able to focus on delivering meaningful results. This is not the same as abandoning all social initiatives that may not be directly linked to financial targets. Social commitment and corporate governance are not mutually exclusive. Autonomous work practices with no political interference, and an intense focus will enable Erdenes Mongol and others to effectively discharge their mandates. It is not just our perception, or our recent experience, but the robust body of theoretical studies on corporate governance has well documented how political interference in decision-making is detrimental to corporate performance.

Maybe it would be wiser to hold our horses until the elections are over. The months before that are unlikely to see any radical change, and though whichever party forms the government will be hard pressed to turn back the clock and reassert Government control, it can find ways to delay or dilute change. Maybe the waiting time can be best utilised by the SOEs to develop the human resources available, so that they have on board members with adequate business management skills and expertise as well as financial and accounting knowledge to have effective oversight.        

Every company should have in place institutional mechanisms, including independent directors to ask the right questions, an audit committee to scrutinize accounting policies and procedures to ensure transparency and fairness, a remuneration committee to decide on the salaries of top management, and a nominations committee to propose new entrants to the board. Good corporate governance aims to guarantee that the company is directed and controlled responsibly, professionally, and transparently, so that it remains successful. Ownership of an enterprise is perhaps not so important as its efficiency and productivity. Ownership may not matter but control does and the new year has brought us the gift of distancing government control from management. Now it is up to us to make best use of this new opening.
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