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ISSN: 2455-3689
www.ijrtem.com Volume 1 Issue 3 ǁ May. 2016 ǁ PP 12-19
ABSTRACT: Globalization, the rapid development and expansion of the Mongolian economy has made the enhancement of corporate
governance mechanisms in Mongolia’s state-invested companies imperative.
Although Mongolian government has made giant strides in promoting private ownership, a good percentage of listed companies are
still state owned having significant influence on the country’s GDP and total market capitalization. While it is a known fact that
adherence to the basic principles of good corporate governance are essential for economic growth and development, they are not
usually upheld in government owned enterprises.
Transparency, accountability, rule of law and stable investment climate are vital in Mongolia’s quest for economic growth and
transition to free market. Moreover, in today’s internationalized capital markets, only reputable local companies that meet high
environmental, health, safety and corporate governance standards are able to attract foreign capital. This makes it even more of a
necessity than choice for good corporate governance standards to be maintained in all Mongolian companies; state-invested or
privately held.
This paper is an attempt at x-raying the transformative efforts of Mongolian government in promoting economic development and
growth through improved corporate governance in state-invested enterprises in Mongolia.
Key words: Economic development, economic growth, corporate governance, enterprises, Mongolia.
1. Introduction
State invested enterprises are companies or corporations in which the state has stakes either wholly or partially. State
ownership has its merits and demerits. Merits of state ownership are not farfetched; inability of capital markets to provide financing
for large firms to carry out socially beneficial projects, strategic industry argument, national pride, defense argument and
unattractiveness of some sectors to private funding are all justifications for state ownership. Its unintended consequences include the
potential for firm mismanagement, corruption, lax in control, supervisions and content of regulations. The most potent argument
against state ownership arises out of the conflict of interest associated with duality of state’s role as shareholder and corporate
governance regulator.
Private ownership on the other hand implies the absence of state investment in companies. It is a proven harbinger of
efficiency, good corporate governance, profitability and economic growth. It should be noted that good corporate governance practice
fosters economic development through transparency, disclosure equitable treatment of stakeholder and improved investor confidence.
What then is corporate governance? “Corporate governance involves a set of relationships between a company’s
management, its board, its shareholders and other stakeholders” [1] Good corporate governance provides proper incentives for the
boards of companies and management to pursue objectives that are in the best interests of the company and its shareholders and
should facilitate effective monitoring. The International Finance Corporation (IFC), an arm of the World Bank agrees with these
views; “….good corporate governance contributes to sustainable economic development by enhancing the performance of companies
and increasing their access to outside capital” [2]
The organization for economic cooperation and development (OECD) enunciated the linkage between good corporate
practices and economic development in the following statement; “the presence of an effective corporate governance system, within an
individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper
functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently,
thereby underpinning growth” [3]. It is therefore clear that the degree to which companies adhere to fundamental principles of good
corporate governance is an increasingly important element for investment decisions and has implications for economic growth. If
countries are to reap the full benefits of the global capital market, and if they are to attract long-term “patient” capital, corporate
governance mechanisms must be credible, well understood across borders and adhere to internationally accepted principles.
Mongolia’s soviet era economy was dominated by state ownership, wide spread inefficiencies resulting in poor investor
confidence. This is the reason why Mongolian government has placed serious emphasis on privatization to turn the economy around.
This paper highlights the efforts of the government in strengthening corporate governance practices in SIEs through outright sale and
in some cases reduction in state interests.
2. Theoretical Framework
Agency theory and neoclassical economic theory provide a perfect explanation of the CG situation in SIEs. Agency theorists
posit that an agency relationship subsists between shareholders and directors in their respective roles as principals and agents.
According to Jensen and Meckling (1976, p. 308) agency relationship is "a contract under which one or more persons (the principal[s])
engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority
to the agent” [5]. This is the scenario in private enterprises where managers (single agent) are the agents of the shareholders (single
principal).
In SIEs the scenario is different; a dual agency conflict situation exists. SIEs are governed by multiple agents; directors and
elected state officials while voters who elect public officials are regarded as the principals. This multiple agency has been blamed for
the poor performance of SIEs; “Inefficiency of the boards of SIEs arises because the agents (public officials) who have the powers to
appoint board members and issue managerial directives do not always act in the best interest of SIEs, but in the interest of voters who
can vote them out” [6].
Most SIEs were established in Mongolia in the Soviet era to provide key services. They control key sectors such as
agricultural exports, transport and communications, manufacturing and agricultural trade and government exercises immense control
over them appointing directors and issuing directives of a general nature. Furthermore, a good number of the SIEs were not set up to
make profits and as such, profit maximization ought not to be the sole basis for measuring their efficiency. Neo-classical economic
theorists believe that “the failure to measure performance by profitability is regarded as the main cause of the inefficiency of SIEs, as
it deprives them of the incentive to increase gains, cut costs, and operate efficiently” [7]. The need for privatization is therefore
attributable to “the failure of the State, as an owner of enterprises, to motivate the firms to realize competitive business standards” [8].
As a result, neo-classical economic theorists regard privatization as a requirement for achieving a free capitalist market economy and
as the best way to enhance operational efficiency because “the need to increase individual gains or wealth maximization in a free
market results in efficiency and therefore contributes to the general social welfare and economic benefits” [9] For them, the competition
and efficiency arising from privatization is justified on the basis that it leads to the better provision of services at a lower cost and
therefore enhances the enjoyment of socio-economic rights by all.
In the light of the above, move by the Mongolian government to enhance the competitiveness of the national economy
through improved private sector participation is a welcome development.
3. Methodology
This paper is empirical in nature. It is factual; deriving information from both reliable secondary and primary sources. The
paper begins with an introduction explaining the key concepts, highlights the need for good corporate governance and the linkage to
economic growth and development, lays emphasis on government efforts to improve governance situation in Mongolian SIEs, dwells
on the macroeconomic changes in GDP structure of Mongolia overtime and focuses on the challenges ahead.
Table 1 above clearly illustrates how the ownership structure of listed enterprises has changed over time on the MSE. 96% of listed
companies in the early stages of the MSE were state owned, as at March 2015, the picture has changed dramatically.
Fig.1 above illustrates the sharp decline in state ownership of MSE listed companies.
It is easily observable that the change in the ownership structure of Mongolian enterprises brought about massive
improvement in economic performance and unparalleled contributions to GDP growth by the private sector. In terms of GDP
contribution, the private sector accounted for 56% in 1996, 71.8% in 1999, 75% in 2001 and over 80 percent as of today. Table 2
below further illustrates this transformation.
Table 2 above shows that overtime, the structure of Mongolian economy has changed from state-driven to private-sector-
driven.
Fig. 2 below diagrammatically illustrates the change in Mongolia GDP structure from state driven to private- sector-driven.
Table 3 above shows that as state role in the economy declined with increase in private ownership, efficiency and
profitability increased resulting in increased GDP growth rate overtime.
Figure 3 above clearly shows that the current double digit growth rate of the Mongolian economy is attributable to increased
private sector participation in the economy. Private sector participation in the economy increased as a result of government
privatization program.
9. Union of Corporation of traditional medical science, technology, manufacturing, Erchim Corporation, Armono corporation and
Agriculture technique, science, technology, manufacturing will be privatized by closed tender based on intellectual property
valuation and under the condition that it will not be allowed to change current operations. Only scientist and researchers in the
field will be allowed to attend in this tender.
The following laws and agencies are relevant for the regulation and governance of SIEs in Mongolia.
i) Law on Management and Financing of Budgetary Institutions (LMFBI)
ii) Law on State and Local Property (LSLP)
iii) Decree of State Property Committee
iv) Department of State Property Management and Privatization
v) Department of Monitoring, Registration, and Procurement
Hypothesis 1
Poor corporate governance practices in Mongolian SIEs do not result in inefficiency.
Table1: Chi-Square for responses to questions relevant to Ho1
RESPONSE CATEGORY Fo Fe Fo - Fe (Fo - Fe)² (Fo - Fe)²/Fe
Strongly agree 7 45 -38 1444 32.09
Agree 30 45 -15 225 5
Undecided 6 45 -39 1521 33.8
Disagree 17 45 -28 784 17.42
Strongly disagree 165 45 120 14400 320
TOTAL 225 408.31
Source: Author, 2015 survey.
The results above show that the X²cal = 408.31, X²tab = 13.28 at 4 degrees of freedom. X²cal is > X²tab therefore the null
hypothesis Ho1 that Poor corporate governance practices in Mongolian SIEs do not result in inefficiency is rejected and the alternate
hypothesis H1 that Poor corporate governance practices in Mongolian SIEs result in inefficiency is accepted.
Hypothesis 2
Ho2: Increases in private ownership in Mongolian SIEs have not led to improved CG practices.
Source:Author,2015 survey.
The test results show that the X²cal = 507.6, X²tab = 13.28 at 4 degrees of freedom. X²cal is > X²tab therefore the null hypothesis Ho2:
Increases in private ownership in Mongolian SIEs have not led to improved CG practices is rejected and the alternate hypothesis H2:
Increases in private ownership in Mongolian SIEs have led to improved CG practices is accepted.
Hypothesis 3
Ho3: Improved private sector ownership has not contributed to Mongolia’s economic growth.
To test this hypothesis, regression analysis in excel was utilized in analyzing the secondary data shown on table 3: GDP growth rate
and private ownership. The result is presented below;
Test Statistics
X²cal (Chi-Square Calculated) = 507.6
df = 4
α = 1%
X²tab (Chi-Square Tabular, X² 0.01,4) =13.28
Test validity
All Fe are > 5
Min. Fe = 45
Sample size is > 50
Each Class is > 5
Regression Results
Regression Statistics
Multiple R 0.843572
R Square 0.711614
Adjusted R Square 0.675566
Standard Error 0.038097
Decision rule: Accept Ho3 if P-value is > α (the significance level i.e. 1 – confidence level) Reject Ho if P-value is < α
In this case, the P-value of 0.036 is < 0.05, so reject Ho3 and accept H3: Improved private sector ownership has contributed to
Mongolia’s economic growth. Since the regression line explains 71% of the change in GDP, the relationship is significant.
8. CONCLUSION
This paper highlights the efforts of Mongolian government in promoting economic development and growth through improved
corporate governance in state-invested enterprises in Mongolia. Mongolian economy has undergone intense transformation that has
resulted in double digit growth rate. Private sector is the key to economic progress, prosperity and economic development. All three
null hypothesis formulated were rejected and their alternatives accepted.
The paper concludes that poor corporate governance practices in Mongolian SIEs result in inefficiency, Increases in private
ownership in Mongolia have led to improved CG in SIEs and improved private sector ownership has contributed to Mongolia’s
economic growth.
The tempo of government’s reform agenda should be maintained in order to further enhance economic growth and
development through improved corporate governance practices in SIEs.
9. RECOMMENDATIONS
Based on the outcomes of the research, the following recommendations are made;
1. Survey results showed that the problem is not the lack of laws and regulations but rather adherence to existing rules. Hence,
awareness should be created; supervision and strict adherence to rules should be enforced in those enterprises that may not be
fully privatized.
2. Public debate on the corporate governance of SIEs should be encouraged
3. All SIEs should have the required board membership
4. There should be well articulated and clear mission and vision statements for all SIEs
5. Corporate governance committees should be set up a s matter of necessity in all SIEs
6. Government, its agencies and officials should desist from interfering in management of SIEs.
7. The board nomination process for SIEs should be transparent
8. SIE performance should be benchmarked against achievable standards
9. All SIEs should be subjected to strict audit requirements
10. To improve competencies of SIE boards, certification training for board members and induction training should be a vital
requirement.
References
[1] OECD Principles of corporate governance, 2004 ed., Preamble.
[2] About Corporate Governance. Available from http://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_
Corporate_Site/Corporate+Governance (Accessed September 28, 2014)
[3] http://acts.oecd.org/Instruments/ShowInstrumentView.aspx?InstrumentID=151&InstrumentPID=147&Lang=en&Book(
Accessed March 12, 2015)
[4] http://www.worldbank.org/en/country/mongolia/overview(Accessed April 2nd, 2015)
[5] Jensen, M. C., & Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure.
Journal of Financial Economics, 3(4): 305–360.
[6] Jim Brumby & Michael Hyndman, State Owned Enterprise Governance: Focus on Economic Efficiency, in corporate
governance, state owned enterprises and privatization, supra note 15, at 33, 38-41.
[7] Danwood Mzikenge Chirwa, socio-economic rights and privatization of basic services in South Africa: a theoretical
framework, 4 econ. soc. rights rev. 1, 3 (2003).
[8] Saul Estrin, State Ownership, Corporate Governance and Privatization, in corporate governance, state owned enterprises
and privatization 11 (Org. Econ. Cooperation & Dev. ("OECD") ed., 1998).
[9] Gary Becker, the economic approach to human behavior 3-14 (1976); Richard Posner, the problems of jurisprudence 353
(1990).
[10] http://www.tradingeconomics.com/mongolia/gdp-growth-annual(Accessed April 10th, 2015)
[11] OECD Corporate Governance Working Papers No. 14, (2014).
[12] News.mn, quoted on http://mad-intelligence.com/mongolian-government-to-privatize-state-companies/ (Accessed March
12th , 2015)