By S.Bold-Erdene
Long used to having the Erdenet Mining Corporation as the country’s only large industry, Mongolia will soon see others coming up, several of them larger than Erdenet. For example, Erdenes Tavan Tolgoi has the largest coal deposit in the world, while its parent company Erdenes MGL owns, on behalf of the state, all the large mineral deposits of Mongolia. In addition, there will be the Development Bank and a growing stock exchange. How will all these large companies that never existed before be managed, and managed well?
Mongolia does not have much experience of managing large organizations in the market economy, and people accept that international experts will have to be invited to do the work in the initial years. However, while this meets the needs of day to day executive management, there is unhappiness over the way members of governing boards are being selected, for it is they who will provide the long-term vision and offer general guidance on the principles behind the company. The government talks about open governance and transparency, but in several cases, things have been done almost in secret.
In order to be internationally competitive, and also viable, Mongolian companies have to be run professionally and transparently. NGOs are campaigning to explain that good corporate governance is the foundation of success and prosperity. This starts with selection of the board, which is regarded as the brain of the company. Previously, there was no concept of independent members on the board of state owned enterprises. Last year the State Property Committee (SPC) decided that 1/3 of every board should consist of non-political and non-state organization individuals. This principle was broadly followed when the boards of Erdenes Tavan Tolgoi and the Development Bank were announced, but not followed in the case of the Erdenes MGL. The board for the stock exchange has more independent members than mandatory.
Right qualifications and credentials
To make sure that only people with the right qualifications and credentials are chosen as independent members of the board of a state owned enterprise, certain criteria have to be observed and the selection process should be open. This has not been done in all cases. Several choices are seen as basically political and independent only in name. There is suspicion that the SPC works with an eye to the interets of those in political power.
This could well affect good corporate governance, as the SPC is the implementing agency of the state, and there is every likelihood that it would push its own agenda even if that is in conflict with the company’s interests, and expect these members to toe its line. It is significant that SPC chairman D.Sugar has told Parliament that Mongolia is not yet ready to practise principles of good corporate governance.
The SPC is troubled that foreign experts willing to work for the Erdenes Tavan Tolgoi executive management team expect an annual compensation of USD200,000-USD300,000. However, the board members will not receive any remuneration. There is no provision at present to pay anything to board members of state owned enterprises though there is talk that independent members would receive a small amount for stationery expenses and for attending board meetings.On the other hand, there is a provision that a certain amount of money will be deducted from this in case a member does not attend a board meeting. The SPC is yet to decide on payment of compensation to board members.
Erdenes Mongol (MGL) is the parent company of Erdenes Tavan Tolgoi and it also represents the state in owning 15 strategic deposits. It is the gest company of Mongolia and its role in the economy is vitally imporant. Yet, the people have never been told who cosntitute its board. Most MPs, too, are not sure if there is an independent member on its board. Three years have passed since its establishment, and the country continues to be kept totally in the dark about all important facts about the company. There is no information on its official website. The company plans to raise money in the international market, but one wonders what investors will make of its secretiveness.
Informed people have told MMJ that Sugar is chairman of the board, and its other members are O.Erdenebulgan, SPC vice chairman; Kh.Kherlen, an SPC departmental director; M. Ariunbayar, a departmental head at MRAM; T.Myagmarsuren, director of state administration in the Ministry of Finance; A.Erdenepurev, director of fuel policy in the Ministry of Mineral Resources and Energy; and L.Munkhbaatar, chairman of the State Registration Office. They all represent the state and all are state officers. There is no independent or international expert in the list, nor is there a mineral sector professional.
The most disputed appointments have been to the board of Erdenes Tavan Tolgoi, the company made responsible for distributing some of its shares free of charge to citizens, selling some others to business entities at a nominated price, and raising capital on the international market by selling some more of the rest. Even with this heavy load, the board has fewer members. It consists of state officials such as Sugar as chairman, and members such as O.Erdenebulgan, SPC vice chairman; D.Enkhbat, director of the environment and natural reserves department in the Ministry of Environment and Tourism; A.Erdenepurev, director of the fuel policy department in the Ministry of Mineral Resources and Energy; J.Ganbat, director of the revenue department in the Ministry of Finance; and B.Enebish, executive director of Erdenes Mongol.
The independent members are D.Dondov, Ph.D., head of the mining engineering association, Pete Bakus of US Morgan Stanley, and J.Batzandan. Sugar is chairman for the second time, while it is also the second time on the board for Erdenebulgan and Erdenepurev. Enkhbat and Dondov are regarded as “youngsters” by experts. Sugar explained Batzandan’s inclusion as representing the civil society. This might have been true once, but Batzandan has admitted to being in the the Democratic Party now and in active politics. He had also been convicted of anti-state offences by preliminary court and was pardoned by the President. His past involvement in the civil movement does not make him acceptable as a representative of civil society.
Need for transparency and competitiveness
The SPC clearly violated Provision 1.4 of the regulation on selection and appointment of independent members, which states that this should be based on principles of transparency and competitiveness. An advertisement inviting people to join should be issued in daily newspapers 21 days before selection is announced and a choice made from among those who express interest. In this case, however, the SPC invited Batzandan to join the board. The probable reason for this is that the SPC wanted to keep the smaller partner in the ruling coalition happy and stop it from making problems for Erdenes Tavan Tolgoi.
While it appears that the main criterion for selection of board members in state owned enterprises is that it should reflect the composition of the coalition government, the board of the stock exchange looks different. Seven out of its nine members are independent. Apparently, Prime Minister S.Batbold insisted on this because of his commitment to professional development of the sector. Its chairman is B.Bold, executive director of Newcom Group, and the members are L.Ganbat, head of the administration department in the SPC, Peter Morrow, advisor of Khan Bank, L.Bolormaa, executive director of BFAS LLC, U.Ganzorig, president of Mongolian Financial Market Association, George Taylor, head of Asia Pacific Regional Capital Market of Morgan Stanley Bank, Stefan Hanzelmann of the German technical coopeation organiation GIZ, N.Tsogt, a lawyer with Bonalex, and O.Sainjargal, a specialist at SPC. Last April, representatives of the Ministry of Finance, the Central Bank and the banks’ association were removed from the board, leaving only Ganbat and Sainjargal as representatives of the state.
Observers have lauded this decision to have independent members in the majority. The Mongolians among them studied abroad and have experience of working in international financial organizations and companies, while the foreigners have direct understanding of Mongolian society and economy. For example, Bold worked for JP Morgan in New York for more than 10 years in its IPO, LBO and M&A sections, provided financial consultation to large international companies and made over 30 successful deals in the US, Europe and Asia. It took courage for the Government to break the mould.
It was decided to keep the management of the Development Bank free of politics to allay fears that it would go the way of many commercial banks because of corruption under poltical pressure. The solution was to give the job to foreign experts and an international bid was announced. According to latest information, a South Korean team has the most chance to be chosen. Some MPs grumbled that the board was appointed and a management team was near being selected even before the law was passed.
The need to stifle the controversy was reflected in selection of the board members. The chairman of the board is Ch.Khashchuluun, chairman of the National Development and Reform Committee and the members are B.Darinchuluun, a departmental director at the Government Secretariat; Kh.Volodya, an SPC departmental director; J.Ganbat, a departmental director in the Ministry of Finance; B.Enebish, executive director of Erdenes MGL; D.Enkhjargal, Mongolbank representative in London; Peter Morrow, Khan Bank advisor; L.Bolormaa, executive director BFAS LLC; and S.Meyanathan, former World Bank representative in Mongolia.
The Development Bank will operate under the central bank and it is expected that a certain percentage of its equity will be owned by international development financial institutions. It will also have to comply with international regulations and codes of transparency. This is the reason why four members of the board are bank executives. Enkhjargal worked as vice president of the central bank, Morrow created the largest commercial bank of Mongolia, Meyanathan worked for the World Bank and is an expert in development, and Bolormaa worked in Deutsche Bank for many years. The general view is that the board will be effective in properly running what is to be something new in Mongolia.