Upload
joan-henderson
View
219
Download
0
Tags:
Embed Size (px)
Citation preview
Corporate Governance in Mongolia:
Results from the 2009 Corporate Governance ROSC Assessment
A presentation by Sebastian MolineusWorld Bank Corporate Governance GroupIn Ulaanbataar on May 27, 2010
1. The Definition of and Business Case for Corporate Governance (CG)
2. The World Bank’s CG ROSC Program
3. Key Findings of the CG ROSC for Mongolia
4. Policy Recommendations
2 out of 26
To begin with, it is important that we are all on the same page as to what good corporate governance means
The OECD defines corporate governance as:
• A system by which companies are directed and controlled …
• which involves a set of relationships between:• a company’s management• board of directors• its shareholders and • other stakeholders
• … and which provides the structure through which company objectives are set, attained and monitored.
Simplified definition
3 out of 26
A simple enough definition. But reality is more complex:
Act in
interest
of
Elect &dismiss
Shareholders- The general assembly -
Directors- The board of directors -
Managers / Executives- CEO / mgt. team / ExCom -
Pro
vide
cap
ital
to
Report &answer to
Guide &control
Areaccountable to
Nom Cttee
CIA
AuditCttee
Rem Cttee
Ext.Audit
CRO CCO
RiskCttee
Internal—Corporate—Perspective External—Stakeholder—Perspective
Stakeholders
Reputation Agents
• Accounting firms
• Law firms
• Investment banks
• Credit rating agencies
• Financial analysts
• Financial media
• Research institutes
• Educational institutions
• Corporate governance institutes
• Institutes of directors
Law- & rule makers• Company, Banking,
Securities Laws• Regulations, Listing rules• National CG Codes
Civil society• CSR• HSE
Capital & Financial Markets
• Debt & equity markets• Competitive forces• Market for corporate
control
Intermediaries
Illustration
4 out of 26
Go
od
bo
ard
pra
ctic
es
Ro
bu
st c
on
tro
l str
uct
ure
s
Str
on
g d
iscl
osu
re &
tr
ansp
aren
cy r
egim
e
Pro
tect
ion
of
(min
ori
ty)
shar
eho
lder
rig
hts
The following illustration offers a ‘look & feel’ of the key themes CG touches upon
Robust legal & regulatoryenvironment
Strong enforcement regime
Illustration
5 out of 26
Improves Access to Outside Capital
Improves Valuation and Lowers the Cost of Capital
Builds/Improves the Company’s Reputation
Optimizes Operational and Financial Efficiency• Streamlines business processes, leading to better operating performance & lower capital expenditures
Gompers, Ishii and Metrick, Corporate Governance and Equity Prices, August 2001• Improves the company’s ROCE, with firms in the top cg quartile avg. 33% & in bottom quartile 15%
Credit Lyonnais SA, 2001• Better share price performance, higher profitability, larger dividend payouts & lower risk levels than
peers Lawrence Brown, Georgia State University, Sept. 2003
• Over 10 years, well-governed companies across a wide range of sectors have seen superior valuation multiples of more than 8% over their badly governed peers. Metrick, Ishi and Gompers, Corporate Governance and Equity Prices, August 2001
• One standard-deviation improvement in governance brings an improvement in valuation multiples that ranges from 18% for companies in major OECD markets to 33% in emerging markets.
Clapper and Love, World Bank, 2002
• Global Institutional Investors managing more than 1 trillion of assets state that they will pay a premium for well governed companies. Premiums avg. 30% in Eastern Europe & Africa and 22% in Asia and Latin America
McKinsey Global Investor Opinion Survey on Corporate Governance, 2002
• CG can make/break reputations by creating confidence &goodwill and building/restoring investor trust
The good news: much research and analysis by renown international experts demonstrates that CG adds to the corporate “bottom line”
6 out of 26
And, at the same time, CG can bring important benefits to the government , markets, and economy as a whole
For regulators and supervisors: • A first line of prudential defense• Increased financial stability & reduction to crisis
For markets: • Higher market capitalization and liquidity• Increase in investor confidence and trust• Ability to attract, allocate & monitor investment
For economies: • More “champion” companies that can compete and grow internationally• Higher economic growth
7 out of 26
1. The Definition of and Business Case for Corporate Governance (CG)
2. The World Bank’s CG ROSC Program
3. Key Findings of the CG ROSC for Mongolia
4. Policy Recommendations
8 out of 26
A ROSC consists of a gap-analysis, policy recommendations, and action plan, and aims to help our client countries improve upon their CG frameworks
The CG was identified by G-8 Financial Stability Forum as one of 12 standards of the global financial architecture
Implementation by country
May - July Aug. – Sep. Oct. – May 10
4 – 6 months 1 – 3 months Several years
CG ROSC is voluntary, and is not published w/o client approval
• Step 1: Upon receipt of invitation, team compiled
• Step 2: Local consultants hired to assess CG framework
Country to carry-out recommendations. WBG may be of assistance
• Step 1: Separate request to WBG, incl. IFC and IBRD
• Step 2: WBG assesses need and resources
• Step 3: In follow-up to implementation, a 2nd ROSC may be commissioned to asses progress
Benchmarking and drafting
Feedback and dissemination
Invitation to conduct ROSC
1 2 3 4
Benchmarking vis-à-vis the OECD Principles
• Step 1: Desk review of all laws & regulations
• Step 2: Survey of listed companies
• Step 3: Fact-finding mission to qualify data
• Step 4: Drafting of ROSC report
Final draft report sent to client for comments
• Step 1: Internal peer review process organized
• Step 2: Final draft report sent to client for feedback
• Step 3: Feedback discussed and incorporated
• Step 4: Final report issued in
1 month
The term ROSC is short for a Report on the Observance of Standards and Codes 9 out of 26
The CG ROSC has a global reach, and since 2001, 71 CG ROSC Assessments have been carried-out in 61 countries
In addition, the World Bank’s CG Group has also developed country-level CG Reviews specifically targeting the SOE and banking sectors
10 out of 26
1. The Definition of and Business Case for Corporate Governance (CG)
2. The World Bank’s CG ROSC Program
3. Key Findings of the CG ROSC for Mongolia
4. Policy Recommendations
11 out of 26
A quick prelude to the presentation of key findings
• However, the CG ROSC carries many important lessons for all company types, incl. large non-listed banks, LLCs, and SOEs.
Focus of the CG ROSC: Publicly listed companies
• Recent amendments to laws and regulations may since have been made.
Laws and regulations date up to June 2009
• Note that the data is based on a 2007 FRC survey and WB fact-finding mission in early 2009
• Wide discrepancies in practice, in particular between banks vs. SOEs and companies!
Practice data dates from mid-2007 to early 2009
• In particular the local World Bank and IFC offices, WB Accounting & Auditing ROSC team, and USAID
Carried-out in close cooperation with relevant
stakeholders
12 out of 26
CG needs to be seen within the context of the economic, political, and legal environment, some of which are still in development
Limited number of companies for which CG is a priority - 384 listed COs. (early 2008); however, trading is limited to MSE-20- 16 banks, 137 NBFI plus some large SOEs operating in Mongolia - Most companies are SMEs, in which a tailored approach is called for
N.B.: Ownership highly concentrated, largely in the hands of company insiders and/or the state
Enforcement institutions (BoM, FRC, courts) present, but often do not appear have resources, authority, and/or independence
Capital market presents opportunities & challenges - Low free-float: Associated with insider trading; discourages shareholder involvement- Few institutional investors: Little CG engagement - Levels of disclosure remain low
13 out of 26
Much has already been achieved! However, the CG ROSC shows that a number of important challenges remain, in particular in practice vs theory
Legal & regulatory
reforms
Enforcement capacity
Actual practices
• CG Codes/Regs launched for listed companies, banks, SOEs
• Key laws in place & recently amended; new reforms launched
• A&A, CG ROSCs commissioned
• FRC created in 2006
• MoU between the BoM, FRC and SPC to ensure for financial market stability
• Launch of CG reform projects by USAID and IFC
• Launch of CG Centers and training programs to build capacity among directors
• To close remaining gaps in the legal and regulatory framework, e.g.:
- Ability of shareholders to approve dividends, issue new share issues
• Modernize framework
• Build enforcement capacity/ regulatory “bite”, with real fines
• Independence of regulators should be strengthened
• Boards need to fulfill their primary role of oversight/guidance
• Disclosure must be improved
• Nascent internal control frameworks are built
Today’s Achievements Tomorrow’s Challenges
14 out of 26
This inability of companies to follow good corporate governance at the company level has impacted Mongolia’s CG ROSC Assessment
Fully implemented, 2
Broadly implemented, 4
Partially im-plemented, 19
Not im-ple-
mented, 7
Implementation of the OECD Principles in Mongolia
• The great majority of “high-level” OECD Principles are either “Partially” or “Not Implemented”
• Only 18% are “Fully” or “Broadly Implemented”
Source: World Bank analysis15 out of 26
Diving down a bit further, we find that Mongolian companies have particular difficulties in terms of implementing good board practices
VI.C. Applies high ethical standards
VI.A. Acts with due diligence, care
VI.B. Treat all shareholders fairly
VI.D. The board should fulfill certain key functions
VI.E. Exercise objective judgment
VI.F. Access to information
Implementation of Principle VI on Board Practices
Source: World Bank analysis16 out of 26
Most boards are not fulfilling their role: that of providing managerial oversight and strategic guidance on behalf of all shareholders
Role
Structure
Composition
Remuneration
Training & evaluation
• Boards involved in day-to-day management; no succession plans• Duties (of loyalty and care) defined, but not understood
• In practice, most companies have not formed board committees• Position of CEO and chairman legally separated, yet insiders
continue to dominate board
• MCGC calls on 1/3 of boards to be independent, but definition fails to cover directors who are shareholders
• In practice, few directors thought to be truly independent
• Except for the largest companies, NEDs receive low pay• Executive pay not based on formal evaluation or LT incentives
• Cultural stigma against training• Board self evaluations virtually non-existent
17 out of 26
Moreover, many boards have failed to implement robust control structures
• Little practical guidance offered for companies outside of banking sector,
• Risk governance structures nascent, underfundedRisk management
• Internal control structures organized around a unit and not spread to all staff
• Management letters cite gaps in internal control structures
Internal controls
• MCGC calls for the IA to be independent; yet, IA often reports to the CEO and not board/audit cttee Internal audit
• Conflicts of interest due to the provision of non-audit work
• Quality of peer review process questioned External audit
18 out of 26
And while Mongolia has taken an important step in adapting IFRS and ISA, the level of transparency remains below international standards
V.D. External auditors should be accountable
V.E. Fair & timely dissemination
V.F. Research conflicts of interests
V.A. Disclosure standards
V.C. Independent audit annually
V.B, Standards of accounting & audit
Implementation of Principle V on Disclosure and Transparency
Source: World Bank analysis19 out of 26
Financial and non-financial disclosure in particular remains weak, despite the adoption of IFRS and ISA
• IFRS mandatory for all companies; however, challenges expected in transition process (adapt vs. adopt)
• 2008 A&A ROSC: critical gaps in financial reporting in terms of quality and timeliness
Financial reporting standards
• 2007 FRC report: 78.9% failed to submit their financials to the authorities
• Even fewer are thought to publicly disclose their financial statements, e.g. in their annual report or www
Financial disclosure
• Only 4 – 5 companies prepare and disclose annual reports; most do not have CG sections
• Little to no information on CG, ownership structures, information on board members, remuneration, etc.
Non-financial disclosure
• Conflicts of interest due to the provision of non-audit work
• Quality of peer review process questioned External audit
20 out of 26
And while the legal frameworks contains many good practice provisions protecting minority shareholders, these are often not followed in practice
I.IF. Exercise of ownership rights facilitated
II.A. Basic shareholder rights
II.B. Rights to part in fundamental decisions
II.C. Shareholders GSM rights
II.D. Disproportionate control disclosure
III.B. Prohibit insider trading
III.C. Board/Mgrs. disclose interests
II.E. Control arrangements allowed to function
II.G. Shareholders allowed to consult each other
III.A. All shareholders should be treated equally
Implementation of Principle II and III on Shareholder Rights
Source: World Bank analysis21 out of 26
With a few exceptions, key shareholder rights are in place …
While a number of basic shareholder rights are in place … • Participate and vote in the GMS Art. 35 CL• Basic information rights in place Art. 96 CL• Ability to nominate & elect directors Art. 63 CL• Allowed to vote on non-executive compensation Art. 63, 77 CL• “One share, one vote” exists for common shares Art. 64.2 CL
A few remaining gaps need to be address. • The board and not shareholders approves a rise in authorized capital
or issuance of new shares (potential for dilution) • Whistle-blower procedures absent• The board and not shareholders approve dividends
22 out of 26
The real story: a number of companies fail to respect basic shareholder rights
20002001
20022003
20042005
20062007
0
50
100
150
200
250
300
350
400
450
Companies conducting a GMS and paying dividends
Total no. of listed companies
No. of companies holding a GMS
No of companies paying declared dividends
Source: FRS 2007 Survey23 out of 26
1. The Definition of and Business Case for Corporate Governance (CG)
2. The World Bank’s CG ROSC Program
3. Key Findings of the CG ROSC for Mongolia
4. Policy Recommendations
24 out of 26
Policy Recommendations. The Government of Mongolia might consider to:
1. Make regulatory bodies responsible and hold them accountable for enforcing laws and regulations
2. Restore trust in the capital market by developing a fair process that allows companies to de-listing when they are inactive or fail to comply with the law, and also protects minority shareholders fairly
3. Develop a strategy to improve upon the corporate governance of Mongolia’s SOEs.
4. Modernize the corporate governance framework by amending the company, banking, accounting and auditing, and securities laws, relevant regulations, in particular the listing rules, as well as the MCGC!
5. Build a qualified cadre of directors by supporting the Mongolia Corporate Governance Center and other nascent corporate governance institutions
25 out of 26
But in the end …
… it is up to the private sector to demonstrate its commitment to real reforms!
26 out of 26
Thank you!
For more information, please visit: www.worldbank.org/corporategovernance
Back-up
28 /23