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|27 March, 2019

A keen eye

James Daniell is a managing director with Alvarez & Marsal Disputes and Investigations in Dubai, with more than 10 years of experience in financial investigations and dispute advisory services. His primary area of concentration is fraud and corruption reviews and asset recovery in the Middle East, Central Asia and other developing markets. He has worked with private and state clients across a range of industries, including banking and finance, industrial products, petrochemicals and professional services.

Website: https://www.alvarezandmarsal.com/insights

The UAE's financial firms face tightened corporate governance from hands-on regulators

* This article was co-authored by Benjamin Dunlap, disputes and investigations manager at Alvarez & Marsal Middle East.

In 2009, the UAE took a significant step forward in adopting international best practices by introducing governance regulations for listed companies.

The provisions included mandatory independent and non-executive board directors, bi-monthly board meetings, the appointment of an audit committee, nomination and remuneration committees, as well as mandatory compliance officers. However, the new regulations lacked clarity in the definition of roles and some top-ranking executives lacked experience and exposure, resulting in gaps that some companies are reluctant to incur the cost of filling.

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It is also apparent that groups that remain under the tight control of one person, or a small number of individuals, have struggled to set up independent risk management mechanisms; and as a result, have continued lacklustre public disclosures and compliance policies.

The main purpose of good corporate governance is to incentivise the board and management to act in the company’s and its shareholders’ best interests by implementing an effective monitoring mechanism.

A corporate governance framework should ideally set defined roles for the board of directors and management as well as empower gatekeepers such as compliance, audit, legal, underwriters, and business functions. It is important for the board to have a proper oversight of management to ensure that corporate strategy and execution adhere to the policies and guidelines set by the company, thus protecting shareholders’ interests.

Middle East regulators are already increasingly using best practices throughout the region and will be required to be more involved on the corporate level. It would be prudent of them to enforce current and future regulations related to corporate governance requirements to protect the interest of the shareholders and investors. Knowing that company failures are normal course of any business, regulators will have to continue to learn from historic gaffes and enforce stricter protocols and procedures. Recently, local regulators have pledged to tighten controls further and take steps to strengthen supervisory oversight for corporates going forward.

It’s important to note that an overly stringent regime for corporate governance can also be counterproductive. Nevertheless, ensuring proper oversight requires certain functions be independent to allow for proper reporting of any weaknesses in corporate governance and for detection of internal policy violations or non-compliance with protocol. For instance, compliance should be independent of management and have unfettered access to the board for reporting purposes. The selection of an auditor must also be independent of management and should be controlled by the board’s audit committee.

Transparency and accountability are a critical component of corporate governance as they ensure that a company’s decision making, and reporting can be checked at any given time by an outside observer. Businesses should hold individuals accountable for corporate governance failings and successes, not just commercial failings and successes.

Organisations need to rethink their governance, and especially their IT architecture, which is often an overlooked function. The IT infrastructure must allow proper board overview of all areas of the company and structure all important corporate information in an easily accessible and user-friendly manner, whilst at the same time maintaining high levels of security.

The efforts of the government and regulators in this area should be applauded. As the governance framework continues to evolve, regulators will need to become more involved with governance on the corporate level. Some ways in which they could do so include stricter enforcement, devotion of more resources to review and patrol company procedures, better and more intensive training, requiring background checks on potential partners and suppliers, mandatory rotation of audit firms (in the US it is four years), and preventing firms from providing consulting services to the companies they audit.

Improving corporate governance standards has been a matter of priority for Middle Eastern policymakers over the past decade. Laws have been strengthened and regulation deepened to prevent further corporate misdeeds. There is little doubt that awareness about the importance of good corporate governance practices is now strong across the GCC, but there now needs to be more effort and investment made in enforcement.

Any opinions expressed here are the authors' own.

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