The art & struggle of Corporate Governance in transit?economies

"Corporate governance will not unfold automatically" - I was delighted to speak on a lively panel of the International Forum?"Corporate Governance on the Silk Road" in Tashkent earlier this month which resulted in some takeaways and residual thoughts I would like to share here with my professional network. And despite advice to keep my posts brief in a way that would get my point across in less than 8 seconds (!!!) I’m breaking this rule being convinced that my audience's attention span is longer than that of a goldfish. So I invite you to bear with me for a bit longer read.

What is my take on the current state of Corporate Governance in transit economies?

In transit economies, state presence in form of SOEs is dominating across all sectors with its accountability and effectiveness of contribution to the economy remaining unclear or ailing. Hence, transparency of corporate structures and operations along with the accountability of executives and the boards to shareholders are key aspects of good corporate governance contributing to the sustainable economic development of any country. It has the potential to drive state agenda across SOEs to (a) improve the business performance of companies and their operational efficiency; (b) promote and facilitate access to capital markets; (c) reduce costs of companies on the acquisition of capital and increase the value of the assets; (d) contribute to the reputation of companies and the countries.

In my opinion, the state must use SOEs as instruments promoting performance, efficiency, growth of value, and the reputation of the country as a whole. The business environment in the transit economies should be developed ensuring competitive relationships that are advantageous to both SOEs and private rivals. The such competition encourages entrepreneurship, performance, and benefits citizens.

The state's role requires a fine balance between two objectives: (1) on one hand reducing the state’s role in the economy; (2) on the other hand, maintaining a strong and clear state position to successfully drive the economic transformation through the political landscape. This can be achieved by concurrently opening the market to private capital entry, promoting equal competition, and improving the corporate performance of SOEs.

In transit economies relations between SOEs and capital markets, owners or lenders remain heavily dependent and excessively rely on state guarantees. Shifting these relations to more equal, professional, and mutually beneficial arrangements requires institutional corporate governance mechanisms. A thoughtful and serious approach to corporate governance of SOEs is needed, in order to lead, enable and encourage competitive growth of the private sector, through which a successful economic transformation to a developed market could be realized.

SOEs pursue not only economic but also social and political state-wide goals. On the one hand, they should contribute to the implementation of important strategic social and political goals. At the same time, they must follow economic laws in order to survive and thrive in a real market economy.

This reconciliation of economic and socio-political goals may require compromises and lead to conflicting or economically unjustified solutions. It is difficult for SOEs to fulfill such dual obligations because it is difficult to fully predict the costs required to achieve the socio-political goals imputed to companies, while the need to finance such socio-political goals is not always recognized by the state.

In addition, due to close ties with the state, SOEs are easily influenced by politicians, so their economic and commercial goals fade into the background, giving way to political goals. Most often, this leads to economic inefficiency, which further hinders the achievement of socio-political goals. Such inefficiencies can become ubiquitous in SOEs, hinder decision making and lead to financial problems. Corporate governance is exactly the mechanism preventing negative or overwhelming state influence over SOEs and helping to balance economic and socio-political objectives.

Can privatization be used as a cure for SOEs’ inefficiencies?

It is a question of a chicken and an egg. For countries in transition, SOEs and associated institutions are the key factors in the process of economic transformation, they are tools for implementing the economic and social policies of the state, so not every state is ready for the complete or immediate privatization of such SOEs.

Privatizing minority shares is possible with the preservation of controlling stakes in the hands of the state. And here major importance is played by the well-laid-out and developed corporate governance which requires that all relevant actors in this process recognize and well understand their roles. Mass privatization creates a lot of owners who are not necessarily active participants in driving the improvement of ownership relations, essential roles, rights, and responsibilities. Most of them wait for the paying out of dividends, which are often worthless in their value.

They also, often, cannot understand the role of agents they have in relation to owners, and they run the companies from short-termism positions, by satisfying their own interests, to the detriment of the long-term company perspective and the economy as a whole. Therefore, SOEs are indispensable, but it is mandatory for them to recruit, train and reward professional managers who can be held to high standards of competency, ethics, and responsibility. By doing so SOEs of transit economies are strong drivers in building the national business environment in a more focused and streamlined way.

Opinions are also often heard that partial or full privatization is the most effective way to reform the corporate governance of SOEs and increase their efficiency. However, there are too many examples proving the opposite. Privatization also causes certain problems and does not always work in practice - there are too many examples from different countries. The question arises: is it privatization or capitulation?

Private capital (especially foreign) does not care about building a macroeconomically sustainable economy of a country, it cares about quick returns. Moreover, this type of investment is not only focused on the short term but also "volatile" - it easily leaves the country once difficulties or risks arise, which makes any emerging market or transit economy vulnerable. This is not conducive to sustainable development but creates wild fluctuations of boom-and-bust cycles. Therefore, the best globally recognized method of solving the mentioned problems of sustainable development is the participation of SOEs in the introduction of modern corporate governance practices.

Is there an appetite for Corporate Governance at SOEs and their shareholders at all?

My short answer is yes. However, experiences from transition countries show that the assumption that an effective system of corporate governance will develop automatically, as a result of ownership transformation, is quite unrealistic. It will not establish itself - it requires bold moves and determined leadership beyond the willingness to apply international best practices, to manage the legal framework and soft law. It requires building a whole new capability within involved parties and new culture along with it.

The next generation is asking: what kind of corporate leadership do you portray? How and where do you lead us? I meet lots of people who understand and support SOEs’ corporate governance aspirations. However, understanding and getting it done are two different paradigms. Therefore, I say Corporate Governance will not establish itself - it requires bold execution steps and determined leadership.

Sometimes I hear that it is all too difficult, that we tried, and it wasn’t working well. I send my words of encouragement to learn from the process even if it isn’t perfect. This journey will not be smooth - you must be willing to be hit, to talk about it openly, and address the core of the challenges on our way.

I enjoyed meeting many devoted professionals and sharing my thoughts on the subject I love. Thank you to Mr. Badriddin Abidov (Obidov) - Deputy Minister of Investment and Foreign Trade of the Republic of Uzbekistan, who delivered a great opening speech. My special thanks go to my fellow panelist: Alexei Evgenev - Managing Partner at Alvarez & Marsal, Adalyat Abdumanapova - ESG expert at IFC - International Finance Corporation, Nodirbek Vakhidov – Managing Partner at KPMG, Regina von Flemming - Independent Non-exec Director, Zafar Khashimov - founding shareholder of Anglesey food (Korzinka.uz), Martin Elling - Non-exec Director & Entrepreneur, Hikmat Abdurahmanov - Co-founder of TEAM university, Farrukh Abdullakhanov - Partner at KPMG, Alexander Picker - Chairman of Ipoteka Bank and others.

Can’t wait to meet you all for the next round of debate.