Current Circumstances of Corporate Governance of Mongolian Joint-stock Companies

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Current Circumstances of Corporate Governance ofMongolian Joint-stock Companies
Sanaser Sodnomdorj*

Mongolia, a country encountering a new development era, feels a strong need to thoroughly
study corporate governance issues particularly corporate ethics, social responsibility, ﬁnance,
Board of Directors, executive management and environmental performance followed byidentifying new development trends of corporate governance.
Companies with multiple owners often encounter governance related issues directly.
Business entities in Mongolia are classified into several basic types including LLC, jointstock company, partnership and cooperative. According to Mongolian legislation, joint-stockcompanies are subject to listing on stock exchange. Currently, 335 joint-stock companies arelisted on Mongolian Stock Exchange, of which 22 are partly owned by the state. According tostatistics of MSE, only 140 companies are regularly releasing their reports; means that thesecompanies are operating active.
A team of Japanese and Mongolian researchers of us conducted a corporate governancesurvey focusing on Mongolia’s joint-stock companies and respective findings are described
below.
Team of researchers conducted a questionnaire survey among 100 active joint-stockcompanies with assistance from D.Dugerjav, Deputy Chair of Financial Regulatory Committee.
The respondent companies represent 71.4% of active companies on the market. The survey wasﬁrst-of-its-kind survey conducted in Mongolia on corporate governance issues.
The survey aimed at analyzing general data and indicators of MSE registered joint-stockcompanies, identifying peculiarities of their Board of Directors, its structure and executive
management schemes followed by deﬁning scope and level of corporate impact on environment
and measures taken to mitigate the impacts.
At the outset of questionnaire, survey team requested all Chairman or members of Board of
Directors or executive managers to personally ﬁll out the questionnaire. Upon checking ﬁlled out
questionnaire, the team found that 83.4% of questionnaires were ﬁlled directly by Chairman or amember or Board of Directors or executive manager greatly reducing the likelihoods of error insurveying (Fig. 1).
Respondent companies mainly operate in the ﬁeld of electric and thermal power production,water supply, mining, real estate development and lease, extractive industry, hotel, transportation,
crop planting, retail and wholesale trading, logistics and warehousing. The survey identified
that majority of companies are operating real estate development & lease and retail & wholesale*Lecturer, Department of Business Administration , School of Economic Studies, , National University ofMongolia

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Fig. 1.

trading; transportation, warehousing, electric and thermal power production, construction andwater supply companies were the runner-ups.
Of companies, 64.9% employ less than 100 staff showing many of them operate in ﬁeld thatis less intensive in terms of human resource.
Since People’s Revolution in 1921, new industrial sectors like light industry and agriculture
have emerged and rapidly developed in Mongolia. Throughout the history since that time,businesses have gone through different types of ownership until the country shifted from
centrally planned economy to market economy in 1990. The survey unveiled that more than 20companies operated before 1990, then later shifted to joint-stock company type as a result ofprivatization. Remaining companies were established and listed at MSE after country’s transition
to market economy. However, 76.5% of companies are operating more than 10 years with listingat MSE prior to 2001 demonstrating that fewer companies have gone public for last decade. On
the other hand, most companies have operated for quite a long time.
Mongolia’s Company Law, which was in effect until recently (amended on 6 October 2011),
requires members of Board of Directors to be 9 of more. Conversely, our survey identified
that 13 companies have 8 or less members in their Board of Directors. 78 companies have theirBoards consisting of non-executive members, of which 67.6% have 5−8 non-executive members.
Dominating structures in the Boards of open companies generally consist of representativesof shareholders, of which one acts as CEO while the remaining members are non-executivemembers.
Survey findings show that control on the control package increase as number of Board
members increase, while percentage of family members is dropping. Company Law requires
at least 9 members; however some companies do not know about the provision and Financial
Regulatory Committee and MSE, the institutions tasked to oversee the enforcement, often fail inensuring the compliance with legal obligations.
An interesting ﬁnding was that percentage of family ownership is either high or almost zero.
57.7% of surveyed companies have independent members in their Board of Directors of which
87.4% have up to 6 independent board members.
24.5% of respondent companies have no by-laws of Board of Directors showing incomplete
formulation of basic documents necessary for good corporate governance and showcasingCurrent Circumstances of Corporate Governance of Mongolian Joint-stock Companies

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inappropriate operation of the Board. 4 companies have had no Board meeting throughout theyear; possibly these companies are managed by not the Board, but by other bodies. 59.6% of all
respondents organize its Board meeting only 1−4 times a year.
Half of Board Members are not paid while remaining half receives salaries and bonuses on
top of dividends. But the amount of their remuneration is relatively low, up to MNT 400000.
83.7% of respondent companies are pure private without any government owned stakeshowing very little discrepancy with national statistics.
In terms of the respondent companies, 70% of them have their control package owned byfamily based businesses. Of 56 companies organizing their Board meeting 1-4 times a year,
have a family based ownership; means that their control package is owned by families. For 30%
companies organizing their Board meeting 5-7 times a year, their control package is owned byfamilies. This clearly demonstrates that the less the family ownership, the more the meeting are.
Of families that own control package of shares, 23% do not participate in executivemanagement, while 40% of the remaining 77% work as a Chairman of Board, 49% work as
CEO and the remaining work as Board members. On two companies, one person works as aBoard Chairman and CEO simultaneously.
48% or half of the companies have not formalized their mission statement while only 32.3%
is in the process of developing their business ethics code.
The team also studied the adverse environmental impacts of respondent companies using 8
indicators including impact on air quality, water quality, soil, land deterioration, noise, vibration,
odor and other. Half of the respondents, even more than half, still fail in mitigating theiradverse impact on the environment. In addition, 21% are not aware of the environment relatedlegislations.
Survey was conducted on identifying current actions to resolve/mitigate the environment
related issues using the following 9 indicators:
1) Environmentally friendly operations
2) Environmentally friendly produce and processing3) Mitigating the use of natural resources
4) Use of natural power (renewable)
5) Use of recyclable materials6) Use of secondary raw materials
7) Energy efﬁciency8) Environment training for the staff
9) Waste management and recycling
75% of the respondent companies were found not paying attention to these aforementioned
indicators for their environmental performance.
The survey shows that the existing government policy does not encourage companies to beenvironmentally friendly and have better environmental performance.
28 companies equal to 30.4% do not spend funds for environment protection andconservation, which is worth mentioning. In other words, 71.7% do not spend at all or allocate
very limited amount for this purpose less than MNT 3 million, which is too low compared totheir revenues.

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social system review Vol. 3Conclusion
The key operation areas of shareholding companies are relative low showing that so many
untapped opportunities exist in Mongolia. Companies differ from each other in terms of size, butboth types of companies have fewer staff.
Many companies violate legislation stating that the number of Board members should be 8or more.
Most of the companies have no by-laws of Board of Directors showing incomplete
formulation of basic documents necessary for good corporate governance and showcasing
inappropriate operation of the Board.
There is no any tangible and virtual role of non-executive and independent directors. The
government policy also does not encourage the companies to run environmentally sound andfriendly operations.
Half of the companies have not formalized their mission statement while only few are in theprocess of developing their business ethics code.
Half of the respondents, even more than half, still fail in mitigating their adverse impact on
the environment. Majority of the respondent companies were found not paying attention to theaforementioned indicators for their environmental performance.
The survey shows that the existing government policy does not encourage companies to beenvironmentally friendly and have better environmental performance.
These conclusions are based on ﬁndings of the survey; however many other activities andsurvey are underway including other surveys, detailed assessments, legal review, information
dissemination on the good corporate governance and creating sound and open stock market etc
targeted on reforms and improvement of corporate governance.