The global financial crises of the late 2000 stirred the alarm of serious governance of the operations of the companies worldwide. In United Arab Emirates, the corporate governance has been regulated by the UAE Commercial Companies Law 1984 (the "Commercial Companies Law") for quite a sometime; however it only applies to companies incorporated in the UAE and not to the foreign companies for the most part. In 2007, the Security and Commodities Authority's ("SCA") issued the Decision No. R/32 of 2007 on Corporate Governance (the "Code") expanding the ambit of application of corporate governance regime to any joint-stock company established in the UAE or any company listed on a securities market licensed in the UAE by the SCA. Currently UAE has two stock exchanges i.e the Abu Dhabi Securities Exchange and the Dubai Financial Market in which the joint stock companies are listed.
The Code went under further revision and amendment by the Minister of Economy issuing the Ministerial Resolution No. 518 of 2009 concerning Governance Rules and Corporate Discipline Standards (the "New Code") on 30 November 2009 which supersedes the older Code. The New Code provides for a comprehensive corporate governance code in the wake of financial downturn reflecting the unremitting efforts of the UAE's government to ensure greater efficiency and monitoring of the UAE capital markets.
What is Corporate Governance?
Corporate governance has been described in many different ways with no one definition that can be called the most correct or decisive one. At the broadest it has to do with who should own and control the company and at the narrowest it regulates the shareholder-directors relationship. The New Code of UAE provides its own definition of Corporate Governance defining it as: " a set of rules, standards and procedures that aim at achieving corporate discipline in the management of the company in accordance with international standards and approaches through determination of responsibilities and duties of members of boards of directors and the executive management of the company, taking into consideration protection of shareholders' and stakeholder' equity"
The definition of corporate governance in the New Code is very wide encompassing aspects from the internal management of the company to the consideration of external issues as well. The New Code not only caters for the rights of the shareholders of the company but also the stakeholder's right making it one of the stronger formulation of corporate governance that live up to the international standards and latest developments in corporate governance regulation.
To whom does the New Code applies and to what extent?
As per Article 2 of the New Code, all companies and institutions whose securities have been listed on a securities market in the UAE and their board members are obligated to comply with the New Code. The New Code may not apply to companies and institutions that are wholly owned by the Federal Government or the local government. It further gives the SCA the discretion to grant exemption from certain provisions to companies which have been subscribed by the government. The New Code does not apply to Private Joint Stock Companies.
Similar to the approach adopted in jurisdictions such as the United States, the compliance with the New Code by the joint stock companies is made mandatory. As per Article 13, the companies should adopt all the necessary changes no later than 30 April 2010. The UAE adopts a strict and authoritarian approach in contrast to UK which adopts a 'comply and explain' approach putting the responsibility squarely on the company. The New Code imposes penalties on breach and non-compliance of any of its provision including warning, suspension of company's security listing and delisting.
Major developments in corporate governance by the New Code
Even though most of the aspects of corporate governance were already regulated by the Commercial Companies Law, the New Code provides for an enhanced and more comprehensive corporate governance rules and discipline standards for the companies. The New Code places emphasis on oversight of the management and functions of the board of directors by appointing more independent members and non-executive directors, forming committees and having external auditor who is neutral and independent to companies activities. Going further than the previous Code, the External auditor is prohibited to perform any technical, administrative or consultation services or any services that may affect its decisions and independence.
The duty of directors has been further enhanced bringing it in line with international standards. The position of Chairman and managing director are now supposed to be held by different individuals similar to the UK corporate governance code on which the Commercial Companies Law was previously silent. The participation of non-executive directors has been increased and as a requirement, the board of any company should at least setup an audit committee and a nomination and remuneration committee. Although not expressly provided, the New Code does not restrict the companies to set up other committees leaving enough room for the companies to exercise their own decision and discretion to maximize efficiency of management as it deems appropriate. Both the audit and nomination and remuneration committee must comprise of not less than three non-executive directors, of whom at least two members shall be independent members and shall be chaired by either independent members. Both committees are entitled to submit written reports to ensure greater transparency of the procedures, results and recommendations that the committee reaches. The New Code further requires a governance report to be published and submitted to the SCA on an annual basis or upon request. The company should also provide the details of violations of the New Code stating their causes as well as proposal of remedy methods for avoidance of such occurrence in future. The companies are therefore under the duty to monitor their own compliance with the governance code and ensure its proper implementation.
Apart from the above the New Code also requires the company to have code of conduct along with other internal policies and principles of the company. It requires the board to establish a precise internal control system to assess risk management and ensure sound implementation of governance rules. It also address the issue of the directors remuneration as per the Commercial Companies law whilst also allowing the company to pay ancillary expenses or fees or monthly salary as fixed by the board to any member that works in any committee or undertakes additional duties beyond his normal duties as the member of the board of directors. Most importantly, the New Code also provides the companies to apply environmental and social policies requiring greater corporate social responsibility.
Conclusion
The New Code breathes the much needed enhanced vigor to the corporate governance code in UAE during the global financial crises. While the implementation of the New Code is mandatory, how effective its provisions are in practical terms can only be told in the passage of time and the recovery of the UAE capital market.
Ms. Shadha Zawawi is our associate in the real estate practice group at The Legal Group and can be contacted on +971 4 4477044. The views expressed in this article do not necessarily constitute the views of Zawya.
© The Legal Group 2011
