Thoughts on the Survey on Corporate Governance among Mongolian Listed Companies

7Thoughts on the Survey on Corporate Governance among
Mongolian Listed Companies
Toshio Kikuchi

1. Foreword
The survey by questionnaire on corporate governance among companies listed on theMongolian Stock Exchange was carried out in June 2011. It was a collaborative work between
the Social System Institute of Chuo Gakuin University and a study group of the National
University of Mongolia. The high response rate of companies to the questionnaire, 71%, was theresult perhaps of its being supported by the Financial Regulatory Commission. Based on data
mainly from this survey, I would like to point out and to consider some problems in corporate
governance of listed companies in Mongolia.
2. Types of Listed Companies and Features of the Market
From the survey, we could identify two types of companies, large and small, among listedcompanies. According to data on corporate scale by employees, there are 45 ﬁrms (46.9%) withless than 50 employees and ﬁve ﬁrms (5.2%) with more than 1001 employees, pointing to thecoexistence of two greatly differing corporate scales among listed companies.
In the First Section of the Tokyo Stock Exchange, there are large-scale companies, while inother markets, such as Jasdaq and Mothers, shares of medium or small sized ﬁrms are traded.
The Mongol Stock Exchange combines the characteristics of these two markets into one.
3. Ownership Structure of Listed Companies
We also discovered interesting and important facts from the survey data regarding theowners and ownership structure of listed companies.
(1) There were 78 ﬁrms in which government owned no shares (83.9% of respondents), and amajority of responding firms showed a shift from nationalized firms to private ownership,indicating an advance in privatization of listed companies. The rate of share holdings bygovernment in listed companies in China is declining due to the reform of non-circulatedshares, but in one third of listed companies more than 20% of shares are still held bygovernment. These trends suggest that privatization is advancing among Mongolian listedﬁrms more than among listed ﬁrms in China.
(2) While the companies in which government owned no shares made up the majority ofrespondents, 10% responded that they are nationalized companies in which government
owned most of their shares. Of these, 1 company (1.1%) responded that government owned
71-80% of their shares, and 8 companies (8.6%) responded that government owned more than
81% of their shares. These nationalized firms are large enterprises with ample amounts ofcapital.
(3) As to ownership of the responding companies, firms whose founders or their families

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owned more than 31% of the shares accounted for 50%. This means that about half of listedcompanies are owned by founders or their families, and thus share the characteristics of afamily business.
4. Relations Between Management and Ownership
As to the question whether founders and their families were active in management or not,responses showed that in most ﬁrms the founder or their families participated in and performed
management duties. The likely background to this is that the founder-executives bought
nationalized enterprises with the intention of maintaining and developing them as businesses, notas investments. Alternatively, there might also have been entrepreneurs with creative businessplans who continued to manage their business after founding it. In any case, as the capitalproviders, or shareholders, continue in the role of executives, they can be considered ownermanagers.
5. Problems Regarding the Functions of Shareholders Meetings and Board ofDirectors Meetings(1) Functions of shareholders meetings
The Mongolian Stock Exchange released the following data regarding shareholders
meetings of listed companies.1)

Number of listed companies
Companies that announced
shareholders meetings
Companies that submitted
balance sheets
Companies that distributed
materials of shareholders
meetings

2009358

2010336

166159133151

86Companies that announced shareholders meetings accounted for 166 firms among 358
listed companies in 2009 and 159 among 336 listed companies in 2010, or only 47% of listedcompanies. Companies that submitted balance sheets accounted for 44.8%, below half of total
listed companies, with 133 ﬁrms making submissions in 2009 and 151 in 2010. Companies that
distributed materials of shareholders meetings were extremely rare, with only six ﬁrms doing
so. These data show that shareholders meetings and management are not operating according tostandard procedures in some companies.
(2) Structure of boards of directors
Most of the respondents to the questionnaire reported having nine directors, accounting for
81 ﬁrms (84.4%). 73 ﬁrms (78.5%) reported having non-executive directors and 55 ﬁrms (59.1%)
reported having independent directors. As the number of non-executive directors made up themajority of nine member boards, this structure of board of directors is similar to the model ofThoughts on the Survey on Corporate Governance among Mongolian Listed Companies

9

corporate governance in England and America.
(3) Meetings and management of board of directors
74.5 percent of responding companies answered that they have rules or codes concerninga board of directors, but 24 companies (25.5%) answered that they did not have such rules orcodes. As one fourth of responding companies do not have rules or codes regarding the holding,proceedings and management of boards of directors, their institutionalization is a matter ofimmediate concern.
57 ﬁrms (60.0%) responded that they held board of directors meetings one to four times
a year; the next most frequent response was five to ten times a year, for 29 firms (30.5%).
Considering that the functions of boards of directors are making decisions on policy andmonitoring and supervising execution of decisions, it seems that the board of directors in somecompanies are not functioning adequately, as they only hold meetings one to four times a year.
(4) Problems of compensation to directors
The survey made clear the following: 47 firms (49.5%) paid salaries or compensation todirectors, and 48 firms (50.5%) did not. In the cases where companies paid compensation todirectors, the forms of compensation were 1) shares (30 firms, 62.5%), 2) salary (18 firms,37.5%), 3) bonus (2 ﬁrms, 4.2%), 4) others (10 ﬁrms, 20.8%). The ﬁrst problem with these formsof compensation is that the bonus was the least frequent form. As bonuses are paid out of proﬁts
to the executive, and only two ﬁrms paid executive bonuses, the responses suggest that proﬁts
may not be sufﬁcient to pay a bonus, or executive bonuses are not yet established practice inMongolia. The second problem is that as most compensation to directors was made in the formof shares, the practice of stock options may be widespread in Mongolia. The third problem isthat 48 ﬁrms (50.5%) didn't pay compensation to directors. The following reasons may accountfor this: 1) as there are large numbers of non-executive directors, they might be understood as
an honorary post, 2) among responding companies, large numbers of founders or their families
assumed the position of director, perhaps making the practice of non-compensated directorships
for owner managers widespread. As compensations are considered incentives for the activities ofdirectors, it is necessary to make reforms in this regard.
6. Issues and Prospects—from the viewpoint of corporate governance—(1) Necessity of multiple and different viewpoints
It should be pointed out that as there are two types of ﬁrms listed on the Mongolian Stock
Exchange, medium or small-scale ﬁrms and large-scale ﬁrms, the Mongolian Stock Exchange
consists of markets of different natures.
Markets such as “Jasdaq” or “Mothers” in Japan, the “Board of Founded Enterprise” inChina, and “Nasdaq” in the U.S.A, offer support to emerging ﬁrms, and thus are of a different
character from markets oriented to large-sized enterprises. When two different types ofenterprises coexist in a single market, of course, compound and pluralistic regulations to address
them must be devised. In the case of Mongolia, it’s necessary to take measures to protect
investors, while at the same time they must promote the increase of circulated shares through10social system review Vol. 3

reform of non-circulated shares for large nationalized enterprises. In relation to this, regulations
on the ratio of shareholding by specific large shareholders need to be introduced into listing
requirements.
At the same time, it is necessary to support and take measures to promote the supplyof capital for new emerging concerns. For example, in the case of listing examinations it isimportant to lay stress on business plans for the future rather than short-term proﬁt conditions.
(2) Codiﬁcation of rules and compliance
While it goes without saying that shareholders and board of directors meetings play
important roles as corporate organs, data on actual conditions of shareholder and board of
directors meetings indicate an immediate need to institute rules regarding their holding,proceedings and management. It is important to hold shareholders and board of directors
meetings, to circulate materials, to record proceedings and to manage them, according toinstituted rules.
(3) Deciding and codifying management policy and philosophy
In answer to the question,“Has your company codified its management policy andphilosophy?” 50 firms (54.3%) answered “Yes” and 26 firms (28.3%) answered that “It’sunder consideration.” These responses indicate without a doubt a trend towards independent
management and a will to establish corporate policy on their own after privatization. Likewise,
as to an ethical code, 34% of ﬁrms answered that it has been codiﬁed and 37% of ﬁrms answeredthat it had not been. The fact that a third of responding companies (34%) had already codiﬁed
their ethical codes only a few years since privatization, and, furthermore, that 29.3% had it
under consideration, indicate a corporate posture of seeking to strengthen their self-regulatory
capability through the setting of ethical codes. As to the contents of management policies,philosophies and ethical values, it would be of great interest to learn what philosophies andethical values Mongolian listed companies emphasize, as Asian enterprises.2)
Notes:
1) Mongolian Stock Exchange, Annual report, 2010.p.9.
2) According to“Mongolia in World Competitiveness, 2010”, Economic Policy and Competitiveness ResearchCenter 2011, comparative data on management practices in 15 countries including Korea, Russia, Singapore,Malaysia, Thailand, Bulgaria, et al, show that Mongolia is ranked 13 th in ethical practice, 8th in social
responsibility, and 11th in effectiveness of management supervision. In contrast to these low rankings, it
should be noted that Mongolia ranked relatively high in managerial entrepreneurship, at 3rd place, andinnovative capacity of ﬁrms to generate new products, at 6th.