This content is from: Local Insights

Corporate governance

Corporate governance has been defined as the system by which business corporations are directed and controlled. The commonly accepted principles of corporate governance include facilitating the exercise of shareholder rights and equitable treatment of shareholders; recognising the interests of other stakeholders; defining the roles and responsibilities of the board of directors; requiring corporate behaviour that is ethical and infused with integrity; timely and balanced disclosure of material matters to shareholders; and independent verification and safeguarding of the corporation's financial reporting.

In the Middle East, strong economic growth and liquidity have resulted in the strong growth of capital markets and investment generally. However, investors and regulators have also demanded stricter corporate governance standards to better protect shareholder rights, facilitate retention of investment, and attract further investment.

Family-owned companies represent more than 80% of companies in the region. Such family-owned companies generally have weak corporate governance practices. As a result, certain countries in the Middle East have implemented corporate governance codes from as early as 2002.

In the UAE, the Emirates Securities and Commodities Authority (Esca) issued a Corporate Governance Code for joint-stock companies and criteria for institutional discipline on March 9 2007. It should be noted that in addition the Abu Dhabi Securities Market, the Dubai Financial Market and the UAE Ministry of Economy have produced and circulated draft corporate governance guidelines and regulations. The UAE also witnessed the launch of Hawkamah – the Institute for Corporate Governance – in the second quarter of 2006 to address the growing interest of the corporate sector, regulatory agencies and the media in corporate governance.

The Esca has given companies a grace period before enforcing the corporate governance regulations. Seminars were and are given on implementing the regulation. User-friendly forms are provided to ensure understanding of and compliance with its articles.

The provisions of the Esca code include the following. In forming the board of directors, a suitable balance between the numbers of executive, non-executive and independent directors shall be maintained. At least one-third of directors shall be independent directors, while the majority of directors shall be non-executives whose directorship shall not conflict with any of their other interests (Article 3). A meeting of the board of directors shall be valid only with the presence of the majority of the directors. Decisions of the board shall be taken by the majority of those present. The chairman shall have a casting vote in the event of a tie vote (Article 3). If a director has a conflict of interest with respect to any matter to be considered before the board, and the board determines that the matter is significant, then the board decision shall be made to the exclusion of the interested director (Article 3). Director shall exercise their powers and undertake their obligations with due care, diligence and skill, and consider the interests of the company and shareholders (Article 5). The board shall establish rules for the dealings of directors and employees with respect to shares issued by the company, its parent or affiliates (Article 5). Directors must disclose to the company all their positions in other public companies and any other significant obligations (Article 5). The position of the chairman of the board and the company's managing director may not be held by the same person (Article 3).

In addition, shareholders' share-related rights (such as dividend rights, liquidation rights, voting rights, sale of share rights, and information rights) shall be stated in the Articles of Association of the company. The Articles shall contain provisions to ensure shareholders are provided with full and accurate information to enable them to enjoy their rights, and to provide shareholders with the opportunity to participate and vote at general assembly meetings (Article 12). Rules of conduct and other internal policies shall be adopted by the company to fit its objectives and purpose, and to comply with applicable laws and regulations. Directors, managers, employees and internal auditors shall comply with such rules and policies (Article 13).

The board shall submit a Corporate Governance Compliance Report (signed by the chairman) annually to Esca detailing the corporate governance practices of the company (Article 14). Companies are required to comply with the Corporate Governance Code by three years from the date of publication of the Corporate Governance Code in the Official Gazette.

Shahram Safai

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