CORPORATE GOVERNANCE IN MONGOLIA

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6th Meeting of the Eurasia Corporate Governance Roundtable CORPORATE GOVERNANCE IN MONGOLIA Bailikhuu Dambachultem Advisor, State Property Committee Bekhbat Sodnom Member, Parliament Working Group on Corporate Governance Ramada Plaza, Osmanbey-Sisli, Istanbul Turkey, 15 February 2006

Corporate governance development Difficulties which we face Priorities to advance the corporate governance reform

Corporate governance development (legal environment) 1991 Law on commercial entities 1991 Law on Privatization 1992, 1996 Civil code 1993, 2000 Law on prohibition of Unfair competition 1995, 2ОО1 Securities Law 1999 Company Law 2001 Accounting law 2003 Law on Auditing

Corporate governance development (institutional environment) 1991 Establishment of Mongolian Stock Exchange 1995 Establishment of Securities Commission Since 2000 participation in Roundtable meetings organized by WB & OECD Since 2002 Parliament working group on Corporate governance (renewed in Jan 2006) 2006 Establishment of Financial regulatory committee (Securities market, NBFI, Insurance => commercial banks)

Corporate governance development (capacity building) 2001 Research on current situation of Corporate governance in Mongolia (jointly with EBRD) Since 2005 Training of executive managers at Russian Institute of Directors Various Trainings for students at local universities & colleges (new generation)

Corporate governance development As of Oct 2005 2.1 billion shares of 391 companies are registered with MSE => 1.9 shares of 65 SOE s 399600 people hold 284.8 mln shares of 326 private shareholding companies => 73% or 244,5 mln shares held by 1272 people, which is in fact held by only more than 200 individuals (some people hold shares of several companies) trend they realize the difficulties of managing the companies, - Risk is higher of holding the vast majority => trend selling shares

Corporate governance development In 2005 31.5 per cent or 123 Joint stock companies announced the shareholders meetings 40 companies brought the proceedings of shareholders meetings to MSE Only 9 companies have distributed the dividends in first half of 2005 (in 2004-16 companies)

Difficulties we face Lack of understanding of corporate governance - Traditionally no culture of corporate governance, company; - Lack of capacity to run the company (BoD, Executive management); - BoD consists of representatives of interest groups; - No independent directors; - In most cases - Executive management is part of BoD (even Chairing the BoD); - Poor structure and functioning of BoD (meetings not held, sub-committees not composed, by-laws not exist or violated)

Difficulties we face Lack of understanding of corporate governance - Lack of enforcement of the Law; - Lack of sanction mechanism for violation of law requirements (shareholders meetings, dividends); - Lack of capacity of existing state agencies including MSE, Financial regulatory committee; - Accounting standards are not followed (in most cases don t comply with IAS) - Poor performance of companies

Difficulties we face Minority shareholders rights violated - Only more than 200 individuals control the BoD of majority of shareholding companies; - The shareholders meetings are not held; - Dividends not distributed (Major shareholders benefit of being in BoD) - Lack of information about the company s activities;

Priorities to advance the corporate governance reform Need for revision of existing laws: To introduce sanction mechanisms (when we talk about sanctions, our socialist mentality comes forward the result it creates controversies or affects the opposite parties); Sound protection of minority shareholders rights;

Priorities to advance the corporate governance reform Need for Training: Targeted for Businessmen, Journalists, Judges, Board members, CEO s, general public; To read and understand financial documents for none economists; Information: Needs to be open & transparent, Open for all shareholders, general public

Priorities to advance the corporate governance reform Lack of institutional framework: Need for capacity building of existing state agencies; Need to Introduce none governmental institution to support corporate governance reform Improve the auditing of shareholding companies; Need for establishment of independent rating and reporting agency

Thank you!