The introduction of corporate governance regimes around the world was a response to high-profile and well published corporate disasters. In the US you had the likes of Tyco, one of the better publicised corporate governance failures. Italy had Parmalat, India had Satyam, and in Australia there was HIH. No country was immune. One of the common components in all of these cases was the existence of a CEO who over time came to believe that he was the company, and the company was his.
Lack of monitoring
Another common feature of these corporate governance failures was a lack of systems to monitor the exercise of power by CEOs and CFOs. Often these CEOs felt they were getting nothing more than what they deserved. They had built up the company and therefore felt they were entitled to take what they wanted. The obligations that the CEO and the company owed to the shareholders were considered of minor import.
Prior to the implementation of corporate governance codes in the UAE, the emirates were just as susceptible to corporate governance problems as the rest of the world. There are three sets of corporate governance rules in the UAE. One code was issued by the Securities and Commodities Authority (SCA) and regulates companies listed on a UAE securities exchange (Ministerial Resolution No. 518 of 2009 Concerning Governance Rules and Corporate Discipline Standards).
The governance rules do not include the Dubai International Financial Centre, which has its own corporate governance regime in relation to companies listed on NASDAQ Dubai. The third corporate governance regime was implemented by the Central Bank of the UAE (note that one of the exceptions to the application of the governance rules is in relation to entities that are regulated by the UAE Central Bank).
Codes have similarities
All these codes have similarities and are ultimately about making sure that no one person has unfettered access to power, and that shareholders have access to relevant information. This information allows shareholders to form a view about how well the company is being managed, and in particular whether there are any benefits to senior management that seem excessive.
This article focuses on the corporate governance regime issued by the SCA. What will be seen is that the corporate governance framework places a very strong emphasis on the obligation of the company to provide detailed information to shareholders. The code also includes requirements that set out the maximum director’s remuneration that is able to be paid. This is an important feature because prior to the introduction of corporate governance codes, there was little control over remuneration and benefits awarded to senior management.
One of the other notable features of the UAE corporate governance framework is a requirement for non-executive directors to be on the board. The UAE code draws a distinction between non-executive directors and independent non-executive directors. The code requires that there be a minimum of three non-executive directors on the nomination and remuneration committee and audit committee. The code also requires that, of the non-executive directors on these committees, two of them be independent non-executive directors.
The code also requires that the chairs of these committees be independent directors. The word “independent” is defined under the rules to include a director, the spouse of a director and a first degree relative that has not been a member of the executive management of the company and director during the last two years and the spouse of a director and a first degree relative who has not had a business relationship with the company that involved a transaction where the value was the lesser of either 5% of the paid up capital, or 5 million dirhams (US$1.36 million).
The provisions relating to independent directors are important because even in the case of non-executive directors who are not involved in the day-to-day management of the company, they may be significant shareholders and therefore able to influence outcomes that are relevant to them and not relevant to smaller, retail shareholders. A true independent non-executive director is able to consider various issues from the point of view of what is in the best interests of all shareholders, not just significant shareholders.
The rules also require the company to implement a system of internal control that enables the company to assess the extent to which the company complies with the governance rules, as well as with applicable laws and regulations. Under the governance rules the company is required to conduct an annual review of the efficiency of the internal control system, and to disclose the outcome of this review to shareholders in its annual corporate governance report.
The company is required to provide an annual corporate governance report to shareholders. The governance rules set out what should be included in the report. Like a number of codes, the UAE code requires the company to set out those situations in which the company has not complied with the governance rules, or has failed to fulfill its obligations under the relevant rules of an exchange. This is important, meaningful information that is intended to provide a realistic portrayal of how a company manages its various obligations.
Consistent with other corporate governance codes, the governance rules also contain provisions covering related party transactions. Under the rules a company may not enter into related party transactions that have a value of 10% or more of the assets of the company, unless the transaction has been approved by the board of directors as well as a general meeting of shareholders.
Listed companies now all publish annual corporate governance reports. The corporate governance report contains important information that enables shareholders and potential shareholders to form an objective view about their investment or potential investment. The implementation of the governance rules is an important step in giving investors confidence in the UAE companies in which they are investing.
Michael Dalby is a senior associate at Al Tamimi & Company
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