Make Licenses, Information and Activities of the Companies Transparent and Effective by Government (MN0034)

Status quo or problem addressed by the commitment: Transparency of the state-owned enterprises is regulated by the Law on Company and the Law on Stock Market. However to ensure good corporate governance and transparency for state-owned enterprises, it is necessary that changes be made into the Law on Public and Local Ownership. Otherwise, issues surrounding SOE is still prevalent in Mongolia. - Within the framework of establishing a reporting mechanism for the general public about corporate governance under the objective 2 and 3 of the National Programme for Developing Corporate Governance, which was approved by the Government of Mongolia in 2011, Mongolia produced two national reports on corporate governance. Also, the government made significant efforts to be transparent through its national web portal. - Although the central authority implementing the representation of government ownership is a member of the national council, it was not able to pay significant importance to corporate governance issues due to lack of capacity and its interest. - Newly adopted laws on accounting reflected the introduction of international standards in financial reporting. The financial reporting mechanism was on par with international standards, which is important for attracting investors. - The biggest challenge regarding corporate governance is the conflict of interest in the extractive mining agreements. Although Mongolia established a legal environment to ensure transparency of shareholders by the Board of Directors, the transparency requirement has not been fully met. -The media was not able to work actively on corporate governance and transparency issues as a result of lack of professional capacity on corporate transparency and a proper mechanism for ensuring transparency in company information. - Information about rehabilitation efforts by the mining companies is not transparent, and only a few companies develop social responsibility reports on a voluntary basis. Thus, many companies do not pay significant attention to rehabilitation processes, which require sufficient funds. -Due to a lack of consolidated understanding of government ownership by ministries, there is a visible conflict of interest in the process. Therefore, a system to appoint independent members of the board of directors as well as executive management of stated-owned enterprises, based on the fair selection process, is necessary. -The actual owner of the company is not clear unless it is specified in the income statement. Therefore, it is difficult to identify whether there is a conflict of interest. Thus, it is necessary to establish confirmation database of candidates for the Board of Directors and share the information with relevant organisations. Information about individuals with training certification on corporate governance is already on the Corporate Governance National Portal. It is necessary to integrate the information into the IAAC information database to improve monitoring mechanism. National Council is the representative of the private and public sector and can work with the government organisations for developing a list of potential candidates for independent members of the board of directors by clause 79.2 of Company Law. Main Objective: Improve transparency and reporting mechanisms of state owned enterprises to ensure their independence. Brief Description of commitment (140 character limit): Ensure annual financial and operational reporting by companies, develop a comprehensive database to ensure transparency for social responsibility, create a culture in the company to report and disseminate information about the company and use governance as a promotion, make the selection process of independent members of Board of Directors independent from political involvement, make the information of candidates transparent to the public and enable Board of Directors and Executive Directors to make independent decisions and create a mechanism to take accountability for their decisions and provide performance-based incentives.

13. Transparency of licencing, operational and financial information of state owned companies

Commitment Text:

Ensure annual financial and operational reporting by companies, develop a comprehensive database to ensure transparency for social responsibility, create a culture in the company to report and disseminate information about the company and use governance as a promotion, make the selection process of independent members of Board of Directors independent from political involvement, make the information of candidates transparent to the public and enable Board of Directors and Executive Directors to make independent decisions and create a mechanism to take accountability for their decisions and provide performance-based incentives.

Milestones:

13.1. Establish a comprehensive information system to enable information about corporate governance, activities, and financial reports to be more accessible and transparent.

13.2. Improve the report quality of the State Owned Enterprises to meet international standards.

13.3. Create a comprehensive system to develop and openly report social responsibility reports detailing environmental impact of the operations carried out by companies working in the mining sector.

13.4. Ensure open and transparent reporting of exploitation agreements of the state and public owned enterprises as well as negotiations for a large sum of funding or with conflict of interest.

13.5. Enable regular reporting of activities of the state and public owned enterprises to the public.

13.6. Increase responsible engagement and partnership of the media to ensure transparency at all levels.

13.7. Ensure the announcement for selection of Independent Members of the Board of Directors and Executive Management of State Owned Enterprises are made public. While also creating a mechanism to enable transparency of the information of all candidates and make selection of suitable candidates with the participation of independent players and submit the list to a commission of the relevant company to make the final selection.

13.8. Make information about direct beneficiaries and owners of the state owned enterprises and natural resources transparent and open to the public.

13.9. Ensure Board of Directors of the companies with state ownership can make decisions independently and take responsibility for the decisions that they make. Enable them to work independently from political involvement and introduce performance-based incentives for them.

Responsible institution: Financial Regulatory Commission

Supporting institutions: Central Government Authorities in charge of Budget, Finance, Mining and Environmental issues. National Council for Corporate Governance, MNCCI, Erdenes MGL LLC, National portal site for corporate governance, Genial Association of Journalists, Mongolian Radio and Television of the MNB, Mongolian News Channel

Start date: 30 June 2016

End date: 30 June 2018

Editorial Note: This is a partial version of the commitment text. For the full commitment text please see the Mongolia National Action Plan:

https://www.opengovpartnership.org/wp-content/uploads/2001/01/Mongolia-NAP2-Final-Eng.pdf.

Context and Objectives

There remains a general lack of transparency for state-owned enterprises and companies in Mongolia, including the Board boards of directors and financial reports. For example, Mongolia’s 2016 EITI report found that only seven state-owned enterprises provided information on their boards of directors.[Note125: Mongolia Extractive Industries Transparency Initiative, Mongolia Eleventh EITI Reconciliation Report 2016, November 2017, pg. 116, https://eiti.org/sites/default/files/documents/2016_m_eiti_report_final_english.pdf. The information on board of directors is available in Appendix 24.a, available in Excel format here: http://www.eitimongolia.mn/en/reconciliation-report.] This commitment seeks to enact of number of activities designed to mitigate conflicts of interest and lack of transparency in Mongolia’s state-owned enterprises, particularly in the extractives sector. More specifically, the commitment seeks to encourage Mongolian companies to comply with the Company Law, which regulates relations with respect to the establishment, registration and organization of Mongolian companies, including the boards of directors,[Note126: Mongolia Company Law, available at: http://www.ebrd.com/downloads/legal/securities/mongcomp.pdf.] as well as the Law on Environmental Impact Assessment, which requires the disclosure of environmental impact assessments and rehabilitation reports by mining companies.[Note127: Law of Mongolia on Environmental Impact Assessments, available at: http://admin.theiguides.org/Media/Documents/LawEnvironmentalImpactAssessments.pdf.] Additionally, the commitment calls for improving the reporting quality of state-owned enterprises to meet international standards, increased engagement with the media to ensure transparency, and to ensure that the boards of directors of state-owned companies are able to work independently from political involvement. Though not a specific milestone, the commitment also plans to integrate the information with the Independent Authority Against Corruption (IAAC), the country’s anticorruption agency. The open reporting of social accountability by state-owned enterprises (Milestone 13.3) continues the theme of Commitment 3.3.1.6 from the previous action plan (a starred commitment), which called for publication of information on actions that could be harmful to the environment or to people’s health.

Establishing a database of confirmed candidates for the board of directors and openly disseminating social accountability reports to the public make the commitment relevant to the OGP value of access to information. The milestones include deliverables that are mostly verifiable and measurable, though it is unclear how the government will partner with the media to ensure transparency (Milestone 13.6). The initiative to make direct beneficiaries and owners of state-owned enterprises and natural resources open to the public (Milestone 13.8) is essentially the same objective Commitment 12. Taken together, the activities of this commitment could have a moderate potential impact on access to information in Mongolia.

Completion

While the National Council for Corporate Governance operates the http://www.governance.mn website. However most of the available information pre-dates the implementation period of the second action plan.

According to the 2015 Law on Accounting, state-owned enterprises must comply with the International Financial Reporting Standards (IFRS).[Note128: Ernst & Young, 'Mongolia’s new Accounting and Auditing Laws', https://www.ey.com/Publication/vwLUAssets/ey-mongolia-new-accounting-and-auditing-laws/%24FILE/ey-mongolia-new-accounting-and-auditing-laws.pdf.] While this law has been in force since January 2016, in practice, many enterprises do not comply due to the cost and difficulty of doing so. In December 2016, the Ministry of Finance developed and approved three new accounting and auditing standards to meet the IFRS standard. Ninety accountants from state-owned enterprises attended a three-day training workshop, which introduced these new standards.

The 2011 Company Law requires companies to hold a nomination committee to evaluate the activities of the board of directors.[Note129: Company Law of Mongolia, available here: http://www.wipo.int/edocs/lexdocs/laws/en/mn/mn011en.pdf.] However, according to Transparency International Mongolia, none of the ten largest listed companies disclose having a nomination committee and no company disclosed performing regular board of director evaluations.[Note130: Transparency International Mongolia, Business Integrity Country Agenda Mongolia, 201, pg. 81, http://resource3.sodonvision.com/transparency/file/2018/6/777tu5j5du77p212keb33zd6k/BICA_ENG_FINAL.pdf.] Additionally, there is no evidence of implementation of the specific activities outlined in this commitment regarding board of director transparency. Therefore, the overall level of completion is considered limited at the first year of the action plan.

Next Steps

While this commitment’s overall goal of increasing transparency of state-owned enterprises is laudable, the individual activities encompass too wide a range of issues for one single commitment. Moving forward, the IRM recommends carrying the commitment forward to future action plans, but dividing it into three separate commitments. The first could focus on the financial reporting by state-owned enterprises, including but not limited to environmental impact reports and exploitation agreements. It should also make clear what enforcement mechanisms will be put in place to oblige state-owned enterprises to provide this information.

The second commitment could focus on transparency in corporate social responsibility, including the publication of clean-up and environmental rehabilitation reports and the creation of mechanism for civil society to monitor these efforts. The third commitment could address conflicts of interest by focusing on public disclosure of recruitment processes for positions of ownership on an ongoing basis. This commitment could also involve the creation of a civil society monitoring mechanism given the difficulties of identifying the owners of state-owned companies.

13. Transparency of licensing, operational and financial information of state-owned companies

Commitment Text:

Ensure annual financial and operational reporting by companies, develop a comprehensive database to ensure transparency for social responsibility, create a culture in the company to report and disseminate information about the company and use governance as a promotion, make the selection process of independent members of Board of Directors independent from political involvement, make the information of candidates transparent to the public and enable Board of Directors and Executive Directors to make independent decisions and create a mechanism to take accountability for their decisions and provide performance-based incentives.

Milestones:

13.1. Establish a comprehensive information system to enable information about corporate governance, activities, and financial reports to be more accessible and transparent.

13.2. Improve the report quality of the State Owned Enterprises to meet international standards.

13.3. Create a comprehensive system to develop and openly report social responsibility reports detailing environmental impact of the operations carried out by companies working in the mining sector.

13.4. Ensure open and transparent reporting of exploitation agreements of the state and public owned enterprises as well as negotiations for a large sum of funding or with conflict of interest.

13.5. Enable regular reporting of activities of the state and public owned enterprises to the public.

13.6. Increase responsible engagement and partnership of the media to ensure transparency at all levels.

13.7. Ensure the announcement for selection of Independent Members of the Board of Directors and Executive Management of State Owned Enterprises are made public. While also creating a mechanism to enable transparency of the information of all candidates and make selection of suitable candidates with the participation of independent players and submit the list to a commission of the relevant company to make the final selection.

13.8. Make information about direct beneficiaries and owners of the state owned enterprises and natural resources transparent and open to the public.

13.9. Ensure Board of Directors of the companies with state ownership can make decisions independently and take responsibility for the decisions that they make. Enable them to work independently from political involvement and introduce performance-based incentives for them.

Responsible institution: Financial Regulatory Commission

Supporting institutions: Central Government Authorities in charge of Budget, Finance, Mining and Environmental issues. National Council for Corporate Governance, MNCCI, Erdenes MGL LLC, National portal site for corporate governance, Genial Association of Journalists, Mongolian Radio and Television of the MNB, Mongolian News Channel

Start date: 30 June 2016

End date: 30 June 2018

Editorial Note: This is an abridged version of the commitment text. For the full commitment text from the Mongolian National Action Plan, see: https://www.opengovpartnership.org/wp-content/uploads/2017/05/Mongolia-NAP2-Final-Eng_0.pdf

Commitment Aim

This commitment aimed to mitigate conflicts of interest and a lack of transparency in state-owned enterprises (SOEs), particularly in the extractives sector. The commitment also sought to encourage companies to comply with the Law on Environmental Impact Assessment, which requires the disclosure of environmental impact assessments by mining companies, and calls for improving the reporting quality of SOEs to meet international standards. This includes publishing social responsibility reports and ensuring that boards of directors are able to work free from political interference. In 2016, prior to this commitment, only seven SOEs provided information on their boards of directors. ^[74]

Status

Midterm: Limited

According to the 2015 Law on Accounting, SOEs must comply with the International Financial Reporting Standards (IFRS). [75] While this law has been in force since January 2016, in practice, many enterprises did not comply due to the cost and difficulty of doing so. In December 2016, the Ministry of Finance developed and approved three new accounting and auditing standards to meet the IFRS standard. Ninety accountants from SOEs attended a three-day training workshop, which introduced these new standards (Milestone 13.2).

The 2011 Company Law requires companies to appoint a nomination committee to evaluate the activities of the board of directors. [76] However, according to Transparency International Mongolia, none of the 10 largest listed companies reported having a nomination committee and no company disclosed performing regular board of director evaluations. [77] Additionally, there was no evidence of implementation of the specific activities outlined in this commitment regarding board of director transparency. Therefore, no progress was made towards implementation of Milestone 13.7.

The remaining milestones were also not completed. For more information, please see the IRM 2016-2017 Progress Report. [78]

End of term: Limited

There was no change in the implementation of this commitment during the second year of the action plan. As at the midterm, the majority of milestones had not been implemented. The Ministry of Finance translated the IFRS 2018 into Mongolian to improve the reporting quality of SOEs to meet the IFRS standards (Milestone 13.2). However, the financial reports of the largest SOEs—including Erdenes Mongolia, which manages mining companies—continued to not comply with IFRS standards.

Milestone 13.4 is also included in Commitment 11, and Milestone 13.8 is also included in Commitment 12. The implementation status of these commitments is discussed in those sections.

Did It Open Government?

Access to Information: Marginal

The limited completion of most milestones under this commitment meant that the commitment did not significantly contribute to opening government in this policy area. The selection of independent board members for SOEs continued to be shrouded in secrecy, and was often politically-influenced. Despite a mandate to do so, the Anti-Corruption Authority also did not disclose the outcome of background checks on the potential conflict of interest of board members. The commitment also did not result in the establishment of an information system on the corporate governance and financial reports of SOEs, nor did it result in an increase in the number of mining companies that produced and disseminated social accountability reports.

The commitment did, however, see officials from SOEs participating in training and workshops on financial reporting standards. It is anticipated that this training will improve the quality of financial reports coming from SOEs, and thus resulted in a marginal improvement in access to information.

Carried Forward?

This commitment has been carried forward into Mongolia’s third action plan as Commitment 9: Improve governance of state-owned enterprises.

The commitment aims to to improve the legal framework for strengthening state-owned and public companies governance, establish training for advanced level corporate governance and issues certificates; ensure governance and operational transparency of state-owned and public companies; create a system for conducting independent evaluation on corporate governance; establish a system to select directors and executives with public participation in open and transparent ways; and to create corporate social responsibility, internal audit, and risk-based control systems for state-owned and public corporations.