When coal production was measured in human lives

Coal mining has a long history in Ukraine. The first coal mines were established back in the late 18th century. Over time, coal mining became a crucial industry, particularly in the Donbas region, which is home to some of Ukraine’s largest coal reserves.

A new control regime

But what do we know about the energy sector of Ukraine, besides the recent dramatic events, caused by the Russo-Ukrainian war?

Ukraine has a diversified energy mix, where the primary fuel has traditionally been coal, in addition to nuclear power and natural gas. In their recently published article "Accounting for a mining company’s transformation in Ukraine", Olga Iermolenko and Anders Hersinger investigate the transformation of the mining business in Ukraine. They have put a special focus on how management accounting and control have changed in the decades before the full-scale war in Ukraine.

The authors acknowledge that the energy sector needs a transition to alternative sources of energy for a more sustainable future. In this study, however, Iermolenko and Hersinger have concentrated on the findings from a study that took place from 2005 to 2017. This research investigated the management accounting control regime in a Ukrainian mining company. To preserve the company’s anonymity, it was named ENCO in this study.

Iermolenko and Hersinger analyze the change from an institutional theory perspective. There is a difference in how you can introduce changes in the control regime for management accounting when it comes to the heritage of the Soviet way of doing things, compared to how the Western liberal market functions.

Coal mining during the Soviet regime vs now

During the Soviet era, coal extraction expanded significantly. During this time, Ukraine became a major coal producer. Until recently, Ukraine was Europe’s third largest coal producer, and the mining industry was one of the country’s largest employers, employing approximately 500,000 people.

During the Soviet period, and in the first years after gaining independence, Ukrainian mining enterprises were funded by the state. They were under the jurisdiction of the Ministry of Coal Mining (which, in 2010, merged with the Ministry of Energy). Nationalized industries existed to provide public service and employment. Thus, they were receiving subsidies from the state to ensure full and fair access to essential coal products for enterprises, households, energy plants, and metallurgical plants. This arrangement also made sure the prices were fair as well.

During Soviet times, there was a saying: ‘Five human lives per one million tons of coal’; which was used to evaluate the mine’s performance

When the war started in East-Ukraine after the Russian annexation of Crimea in 2014, the production of coal had dropped by 30%. After the full-scale invasion in February 2022 the situation has become even more critical as most of the mining enterprises are in Eastern Ukraine. Many of them are either not operational or they are in the possession of invaders.

Western-inspired changes in management

For several decades, Ukraine has been trying to emancipate itself from its Soviet past. Both when it comes to business, culture, and politics. Ukraine has also tried to develop closer ties to the West.

Prior to 2014, the energy and mining sector in Ukraine underwent significant transformations, due to the privatization and modernization of previously state-owned enterprises. Many of the companies that together formed ENCO, were founded in the Soviet era. Therefore, they were owned by the state for more than 50 years. In the early years of Independence (1991) these enterprises had not made any significant investments nor innovations.

In countries that previously were under a socialist regime, management accounting and control differed substantially from how this was done in the Western models. The management accounting control regime was distant and separated from decision-making and planning. It was also separated from actual operations since this was a way for the central government to control and dominate.

After the Soviet Union’s dissolution, the organizations that survived found themselves in a new environment. To transition from a centrally planned economy to a market-oriented one, they gradually began responding to dramatic changes in operating conditions. In Ukraine, transformations in the economy were followed by mass privatization. This severely changed how companies that used to be owned by the government did their accounting.

Before privatization, each mining company of ENCO had its own principles, decided by the director, within frameworks that had been agreed upon by the mining unions. These were accountable to the ministry.

Waste heaps from coal mining in Donbass.

The managers of mining enterprises were highly skilled engineers but not economists. “An engineering ethos” was an important part of fulfilling their public service obligations. This resulted in less focus on financial aspects of management control, like return of investment, for example. Accounting, performance management and measurement had another meaning.

As one of the managers in ENCO that were interviewed put it: “Unfortunately, and this is not a secret, during Soviet times, there was one famous saying: ‘Five human lives per one million tons of coal’; this was one way to evaluate the mine’s performance”.

Thus, human life was devalued in the context of performance measurement. Since five human lives lost per one million tons of coal was acceptable, many of the deadly incidents that were reported could have been avoided by improving safety precautions. The major goal and the very basis of performance evaluation were the extraction of a certain amount of coal, based on the mine’s perceived production capabilities. These goals were not attached to financial goals, sales of coal, or earnings. Thus, miners often celebrated the New Year in October or November, if they reached the established goal ahead of schedule (New Years isn’t celebrated in Ukraine before December). If the mine achieved these goals, its performance was deemed as satisfactory. The amount of coal extracted after the New Year celebration was added to the amount extracted in the following year.

In the new regime, ENCO managers with engineering mindsets were replaced by business-oriented managers, promoting a system of efficiency and profit. According to another interviewee: “The practice of providing products and services at affordable prices and creating jobs, an essential part of the organizational philosophy, was transformed into a new practice in Ukraine”.

Organizations began adopting the principles of corporate social responsibility (CSR) and corporate citizenship: "According to our long-term strategy, we are obliged to be actively involved and to solve different social issues in the regions. The notion of corporate citizenship is new for Ukraine. Therefore, the things ENCO are trying to do are innovative for Ukraine, but common in the West".

Exchange of ideas and friendship

Several issues in the company’s management were related to its Soviet past. ENCO’s top management had the explicit task of modernizing the company according to Western standards. Thus, only candidates considered where one of the following: Either people with a master’s degree or equivalent to this in Economics, Finance, etc. from top-ranked Western universities. Or people with work experience in management consulting or auditing at leading companies. Interviewees reported that the company frequently arranged field trips to other companies and educational programs in Europe, especially in Netherlands, UK, Germany, and France, but also USA and Japan.

Nobody was ready, nobody was asked!

To modernize its business, ENCO established strong ties with Western companies and educational institutions. The new ownership and business philosophy produced changed how they set up their management accounting control regime. This was done because it was felt that it would be necessary for gaining control over the acquired assets. The engineering mindset shifted into a hybrid state, focusing on profit generation and technological and managerial efficiency.

The informal patriarchal bureaucratic controls of the state-owned companies were modified into formalized delegated and output control systems. This was done to improve decision-making and reduce late, incorrect, or personally motivated decisions. Specifically, transformation at ENCO began with formalization of a new management accounting control regime. This meant a new organizational structure, for budgeting and accounting. It also meant implementing a culture of rationalization and a more efficient bureaucracy.

Perception of control

Researchers observed that in 2012, the new management accounting control regime first met considerable skepticism and mistrust. During their early visits to a sub-company, employees criticized the new management accounting control regime because there was no clear definition of responsibilities. Some complained that they had to perform their former functions in addition to new ones. Phrases such as “Nobody was ready, nobody was asked!” and “Why do we need all this?” were heard repeatedly. Some interviewees stressed the outdated work methods and regimes that still existed in the mining company, hindering the opportunity to fully adopt and use the new tools.

During their next visit to the company between 2013 and 2017, they learned that the perception of control had changed slightly. The tensions surrounding automatization and the new management accounting control regime had also decreased. To create a better work environment, managers and invited speakers from the head office began to communicate more about the new regime. An interviewee explained: "It’s quite tough to change the mentality of people and their approach to work. Thus, we conduct seminars to help employees better understand changes and we explain the advantages of the new accounting system and other initiatives".

Miners often celebrated the New Year in October or November

After a series of such seminars and meetings, skepticism and mistrust turned into curiosity among the employees, who then decided to give the new regime a chance. Employees began expressing their opinions publicly, discussing what they saw as problems and what solutions they could offer. Collecting opinions and adjusting plans based on participant feedback was impossible in the Soviet era or before privatization and transformation. According to interviewees, this helped considerably in 2014–2015 when the company lacked ideas and had to quickly respond to new challenges.

The company has been severely hit by the full-scale war since February 2022. However, it has become even more flexible in facing the consequences of the devastation of the infrastructure, surviving black-outs and other disasters caused by the war. But this will be the topic for the next research project.