S.SANASER: GOOD CORPORATE GOVERNANCE ENHANCES PROFITABILITY, EFFICIENCY, AND ACCOUNTABILITY. 

I.Otgonjargal

We spoke with S. Sanaser, an economist, PhD in Business Administration, and governance consultant, about the development of management systems and governance in state-owned companies. He holds a Master of Public Administration from Harvard University and specializes in corporate governance, management, labor economics, and development economics.

GOOD GOVERNANCE IS BASED ON A SYSTEM OF COLLECTIVE MANAGEMENT AND CONTROL

 

It is evident that state-owned companies are operating at a loss compared to private sector companies, both in terms of governance and profitability, with their management and organizational practices falling behind current standards.

In many countries, privately owned companies consistently outperform state-owned enterprises across various indicators, including profitability, service, and productivity. Even in leading countries with parliamentary systems and market-based economies, state-owned companies do not play a dominant role in the economy. This clearly demonstrates that companies and the private sector are the main drivers of an economy based on private property.

In contrast, state-owned companies in our country remain among the top 100 enterprises and occupy a significant portion of the economy, which is a unique situation for us. However, these companies continue to face the highest levels of losses, debt, and low productivity. Key issues include excessive political influence, the lack of professionalism, the frequent appointment of individuals with political connections to management positions, and insufficient transparency in information.

It is a fact that the private sector faces more challenges, operates more efficiently, and bears a heavier load in the socio-economic system than state-owned companies.

On the other hand, statistics show that there are over 150,000 businesses and more than 50,000 self-employed individuals. However, less than 40% of these businesses are operating regularly. Of the remaining 95,000 businesses, 50% are temporarily closed, while the other half are permanently closed.

Why are the operations of both public and private companies so weak?

Are our companies capable of competing in the international market?
Are we introducing products and services that meet market demands? Our export structure reveals a lack of competitiveness. Over 90% of our total exports consist of natural resources. In other words, we rely on selling natural resources rather than on manufacturing or production

Creating something new, introducing it to the market, building a logistics infrastructure, and managing it are complex professional tasks. After all, companies are essentially made up of people: management, experts, and employees. It can be concluded that their leadership, management systems, and professional knowledge must be elevated to an internationally competitive level.

From a business management perspective, the inability to transform our mining resources into finished products highlights a weakness in the management system’s capacity to create new products, raise capital, adapt the company, train human resources, build infrastructure, conduct negotiations, and establish a value chain.

Of course, achieving rapid development takes time for any country. In my view, alongside stable government policies and favorable external factors, if company leaders develop effective strategic plans, clearly define their business direction, and if executive management operates at a professional level, we have a bright future ahead of us.

What is the underlying cause of the poor performance of companies?

It is common for business owners, rather than professional managers, to oversee their companies. However, in the fast-paced global competition, it is increasingly impossible for non-professionals to effectively manage companies and organizations.

The theory and practice of separating ownership from management dates back to the 1930s. To this day, most successful companies adhere to this principle. In essence, it is a system where owners and other stakeholders retain control, guided by a professional management team.

Every organization is influenced by a range of internal and external factors, including economics, politics, international affairs, human resources, technology, and the environment. However, an organization with strong governance, professional management, and effective systems in place can successfully achieve its goals.

As a result, all stakeholders stand to benefit. In other words, we are moving toward a system where not only owners, but also consumers, suppliers, governments, and employees, all gain.

For example, the global pandemic and shifting geopolitical conditions have created significant opportunities for companies with strong governance and professional management.

Many questions arise, such as which institutions provide strategic guidance, which manage day-to-day operations, and who oversees the company. These issues are being explored and developed by academics and business leaders across the country through corporate governance studies.

Corporate governance is a relatively new concept globally. There is no doubt that by deeply understanding this concept, adapting best practices to our specific needs, and putting them into action, we can accelerate the growth of internationally competitive companies. Moreover, corporate governance offers  numerous  advantages  that  foster positive impacts and development in politics, society, the economy, and the environment.

THERE IS A SHORTAGE OF PROFESSIONAL MANAGEMENT TEAMS AND LEADERSHIP IN THE LABOR MARKET

What challenges does corporate governance face in Mongolia?

International organizations and academics unanimously agree that the business environment and corporate governance are not merely company-specific issues; they are major cross-sectoral concerns. These issues are interconnected with a broad range of complex factors, including the legal framework, management, leadership, the environment, society, risk management, finance, auditing, human development, accountability, and integrity.

Let’s consider this: Mongolia has only been part of a new social system and corporate structure for 30 years, which is a relatively short time in the context of social science development. From a human development perspective, this raises the question of whether we have enough skilled management personnel to lead companies in the competitive global market.

It may take at least 10, and possibly 20 to 30 years of study and practical experience to prepare such individuals. The most interesting aspect is that not everyone who aspires to be a leader has the opportunity or the capacity to do so, as both leadership theory and practice demonstrate.

True leaders value a collaborative management system. One of the real challenges we face is the shortage of professional management teams and leaders in the labor market— a gap that is expected to widen in the future.

As businesses grow and markets expand, the demand for ethical, competent leaders and management teams capable of delivering real value will rise. Consequently, the value of these individuals will increase, leading to a more balanced labor market. This, in turn, will drive better performance and efficiency, ultimately having a significant impact on addressing economic and societal challenges.

During our conversation, you brought up an important point: companies need to transition to a shared management system. Could you elaborate on that?

Any decision that depends on a single person is inherently risky. Just as government leadership can become tyrannical when overly centralized, companies too can suffer if they rely solely on one individual’s decisions, as no one is perfect. If the wrong person is in charge, it can be disastrous. Fundamentally, corporate governance is a system of shared management.

There’s a saying that when many people come together, they can accomplish what would be difficult for one person alone. This idea reflects the philosophy behind corporategovernance. In essence, good governance is a model of efficiency achieved through shared management and control. It is a system designed to optimize development and performance by balancing the powers and responsibilities of all parties involved. For those of us accustomed to working and living independently, the real challenge now lies in embracing a more collaborative approach. 

BEING STATE-OWNED DOESN’T MEAN THE GOVERNMENT HOLDS UNLIMITED POWER

The governance of state- owned companies in Mongolia is a pressing issue. Recently, the government announced its intention to take proactive steps to improve this governance. But where should this reform begin?

It’s encouraging that the coalition government is coming together to address this challenging issue with bold action. However, this collective resolve must translate into tangible results, without delay. There has been plenty of talk about reform and change in the past, but the issue of improving state-owned company governance has been under discussion for years without significant progress.

It’s a well-known fact that in most countries, complex issues are slow to resolve due to their ties to significant financial and political interests. As a result, public assets are often squandered in the hands of a few politicians, all in the name of the state. The consequences are severe. This isn’t just a loss of capital, but also a profound erosion of public trust. It becomes a leaky “tank” that undermines people’s chances for a better life. Therefore, it’s essential that we repair these “tanks”, and it’s time to begin reducing their number. So, where should we start with this reform?

To put it bluntly, we must begin by having the courage and resolve to transform state-owned companies into transparent, publicly traded joint-stock companies. This would relieve the government of unnecessary burdens and pave the way for a more efficient and streamlined state. At the same time, we must implement meaningful reforms in the governance and management systems of the remaining state- owned companies.

The world’s first publicly traded company was established in the 1600s, marking the beginning of modern business practices. To move forward, we must adopt the values and standards that have evolved since then. Only then can we speak a “language” that both foreign and domestic investors understand, creating the conditions necessary to attract investment and foster further development.

How can we improve the governance of state-owned companies in the energy sector as part of broader energy reforms, and where should we begin?

The state of corporate governance in state-owned companies is most evident in the energy sector. Corporate governance is a system of management and control, but the bodies responsible for overseeing these companies—the Board of Directors and the Shareholders’ Meeting—are not performing their roles effectively. There are many reasons for this, but a key factor is the way Board members are selected and dismissed. Politicians, of course, play a significant role in this process.

A state-owned company does not mean the state has unlimited power. In other words, the state takes on a role greater than that of a mere shareholder by using its administrative powers to gain an unfair advantage and manipulate the company’s operations to serve its own interests. This negatively impacts the company’s effectiveness. Therefore, when the state is a shareholder, it must have the same rights and responsibilities as any other shareholder.

High-ranking officials from ministries are often automatically appointed to the boards of state-owned companies. How can we enhance the accountability of those representing the state in these positions?

In our country, the person representing the state is typically chosen from government officials. This often leads to decisions driven more by personal interests than by professionalism, which ultimately harms the company. Furthermore, board meetings lack active, practical business discussions, hindering effective decision-making.

In short, the numerous loss-making companies clearly show that individuals who have spent many years in government often struggle to handle the dynamics of business relationships, environments, and strategies. Therefore, we should seek leaders who view the government as a shareholder and can genuinely protect its interests. It’s time to change our approach. 

Another key principle of the labor market is that the value of individuals who work productively increases over time. To attract top professional leaders, board members and executives of well- governed companies receive competitive compensation    and  performance-based incentives. However, in our state-owned companies, board members are offered very low salaries that are not tied to performance, limiting the ability to build a strong pool of talent for professional management teams.

This leads to a weak board of directors, which undermines the strategic management and oversight of the company. Therefore, it is essential to establish a legal framework that effectively coordinates and regulates all aspects of corporate governance.

However, legal and regulatory reforms are only part of the solution. There are also key issues related to the rights and responsibilities of stakeholders, corporate culture, and, perhaps most importantly, ethics and human development.

IN EVERY CLOSED ENVIRONMENT, THE MOST NEGATIVE ISSUES ARE OFTEN HIDDEN, WITH CORRUPTION BEING THE MOST SIGNIFICANT PROBLEM

You defended your doctoral thesis on “Developing Good Corporate Governance in Mongolia.” What were the key conclusions and findings of your research?

From a practical perspective, I set three main objectives. The first was to define what constitutes good corporate governance.

To achieve this, I developed a new “MCG” methodology and model based on optimization principles. This model helps identify which corporate governance data is most relevant at any given time.

Second, we tested this model on Mongolian companies and found that the most critical factor in the near term is the role of the board of directors.

Third, the model examines whether companies with good governance are financially profitable. We compared the audited financial statements of top companies over the past five years with corporate governance indicators, using 14 financial metrics, including solvency, financial stability, profitability, and cash flow.

In summary, good corporate governance has been shown to enhance a company’s profitability, efficiency, and accountability. This clearly demonstrates that effective governance is crucial for achieving the primary goal of any company: profitability. The positive impact of efficient companies on society and the economy is clear. They create jobs, contribute to environmental and social responsibility, and increase tax revenues.

This will positively impact economic growth. Most importantly, it is crucial for us, as it will enhance the business ethics and responsibility of well-governed companies, laying the groundwork for reducing corruption through greater openness and transparency.

So, what is the main issue facing state- owned companies?

In every closed environment, the most negative issues are often hidden, with corruption being the most significant problem. From a financial standpoint, when there is no detailed reporting on expenditures and activities, it creates opportunities for inefficient spending driven by conflicting interests.

This is a widespread issue in our country, with suspicions of powerful individuals exerting influence behind the scenes in state-owned companies. However, if we can implement regular financial and non-financial reporting, ensuring transparency and alignment with good corporate governance practices, these problems can be effectively addressed.

We have scientists, experts, journalists, and professional associations who are ready to make use of timely and transparent information. International best practices show that when this system is implemented effectively, it reduces the potential for vested interests, corruption, and fraud. Over time, this will lead to the improvement of society.

Today, if we can improve the governance of state-owned companies and boldly tackle these complex issues, we will be able to address many social and economic challenges, as demonstrated by countries like Singapore and Romania. Let me emphasize once again that the governance of state- owned companies is not just a corporate issue, but a significant cross-sectoral concern

What actions should be taken at the company management level?

There are three main areas of focus when it comes to managing a company: First, who will lead the company? Second, who will manage day-to-day operations? Third, who will monitor whether these operations align with the company’s objectives?

When you try to control and oversee your own actions, it creates a conflict of interest. This is why humanity has long sought to separate these functions in order to improve both management and accountability. While this approach has proven effective, in our country, there is a tendency to merge these roles at the management level, which diminishes their effectiveness.

For example, as I mentioned earlier, the board of directors, which should be responsible for developing the company’s vision and strategy and overseeing its performance, is not fulfilling this role effectively—and often lacks the opportunity to do so. The management you’re referring to is the executive management team.

We face many challenges, such as the board of directors either becoming too involved in the work of executive management or remaining too detached from it. Executive management, on the other hand, should be handled by a professional business management team. In general, internationally, organizations are better managed by professionals with business management experience.

In our country, there is a tendency to appoint individuals who have spent their entire careers in government, those who have “carried their boss’s bag” or been overly subservient, or those trained in unrelated academic or scientific fields, to important business management roles. In these cases, it becomes nearly impossible for state-owned companies to operate efficiently.

There have been cases where foreign management teams were hired to improve the management of state- owned companies. For example, when establishing the Development Bank, a management team from the Republic of Korea was initially approached. Now, it is being suggested that the Erdenes Tavan Tolgoi company will also be managed by a foreign team. How appropriate is this approach?

Simply changing the executive management will not solve the problem. If the board members responsible for selection and supervision lack the necessary skills, new issues will inevitably arise. Likewise, merely changing the board will not address the root cause of the problem.

If the board of directors is appointed by politicians, the problem will persist. This is a complex issue that requires a comprehensive approach. We can think of it as a reform, and we have the experience to tackle it in a thorough manner. What we need is to develop solutions and policies in collaboration with our experts, specifically tailored to our unique needs.