Deadline set for corporate governance compliance

Corporate Governance Code
Board constitution and independent directors
Board committees
Internal controls
Corporate governance report
Code of conduct and compliance
Implementation and penalties
Comment

Corporate Governance Code

In 2007 the UAE Securities and Commodities Authority issued Decision 32/R/2007 concerning a Corporate Governance Code for Joint Stock Companies, thereby introducing a statutory corporate governance regime to the United Arab Emirates. Applicable companies were given three years to adopt the new regime.

In July 2009 the initiative was formalized by Ministerial Resolution 518/2009 Concerning Corporate Governance Rules and Corporate Discipline Standards, which makes corporate governance a mandatory requirement for all companies and institutions whose securities have been listed on a securities market in the United Arab Emirates and for all their boards of directors.

The ambit of this resolution excludes companies and institutions which are wholly owned by the UAE federal government or the local government. In addition, the Securities and Commodities Authority is empowered to grant a waiver from some of its corporate governance obligations to companies in which the government is a stakeholder.

The most noteworthy aspects of the resolution for establishing a new corporate administration regime are as follows:

• board constitution - it sets out guidelines for the composition, education and responsibility of boards of directors, with emphasis on good governance, accountability and individual participation;
• board committees - it stresses the need for board committees - in particular, audit committees and nomination and remuneration committees;
• internal control systems - it introduces a requirement for internal control systems to assess and manage risk;
• corporate governance report - it makes it mandatory for companies to prepare an annual review and a corporate governance report; and
• code of conduct and compliance - it stipulates that companies must approve a code of conduct, along with other internal policies and principles in conformity with the company's objectives, and adhere to applicable laws and regulations.

The Securities and Commodities Authority has been charged with the regulatory function of supervision, control and verification of company compliance.

Board constitution and independent directors

Responsibility for adhering to the principles of corporate governance set out in the resolution lies with the boards of directors, which must have an appropriate balance of executive, non-executive and independent directors. Board composition must be such that at least one-third of the members are independent and a majority of the members are non-executive directors who have technical skills and experience for the benefit of the company.

Specifically, the non-executive directors' duties require that they:

• provide independent opinion on strategic matters;
• give priority to the interests of the company and its shareholders on a conflict of interest;
• participate in the company's audit committee; and
• follow up on the company's performance in order to achieve its objectives.

In addition, the non-executive directors are entrusted with the responsibility of empowering the board of directors and different committees using their skill, experience and varied competences and qualifications.

Board committees

The resolution stipulates that the board of directors must form standing committees which are affiliated with the board.

Although it may be subject to board control, the audit committee must comprise a majority of independent members. The audit committee, entrusted with an exhaustive list of responsibilities, must comprise at least three non-executive directors, of whom at least two members are independent directors.

The role of the nomination and remuneration committee is critical to the effective implementation of corporate governance. The duties of this committee include:

• verification of the ongoing independence of independent board members;
• formulation and review of policies on remuneration, benefits, incentives and salaries to board members, employees and senior executives;
• formulation, supervision of application and annual review of the company's human resources and training policy; and
• organization and follow up of nomination procedures to membership of the board of directors in accordance with applicable laws and regulations.

Internal controls

The resolution introduces internal control systems to be implemented to develop:

• assessment of the company's risk management means and measures;
• application of governance rules;
• verification of compliance by the company and its employees with applicable laws; and
• regulations and resolutions that govern the company's operation, including internal procedures, policies and financial information.

The board of directors is entrusted with the duty of conducting an annual review to ensure efficiency of the company's internal control system in the manner prescribed by the resolution.

Corporate governance report

The resolution further requires companies and institutions to file an annual corporate governance report with the Securities and Commodities Authority. This report must cover all the information and details in the form issued by the authority, and must be signed by the chairman of the board of directors.

In particular, the report must include details relating to:

• requirements and principles of completion of the corporate governance system and their application approach;
• any violations committed during the financial year, reflecting their causes as well as methods of remedy and avoidance of future occurrence; and
• the formation method of the board of directors in terms of member classes, term of membership and means of remuneration fixation, as well as remuneration of the general manager, executive director or chief executive officer of the company.

The resolution requires that this report be made available to all the company's shareholders before the company's general assembly.

Code of conduct and compliance

Companies must approve a code of conduct along with other internal policies and principles in conformity with the company's objectives. The code should adhere to applicable laws and regulations.

In addition, companies must appoint a compliance officer, who is charged with duties of verification of the scope of compliance by the company and its employees with laws, regulations and resolutions.

Implementation and penalties

The resolution sets a deadline of April 30 2010 for companies and institutions whose securities are listed on a UAE securities market to make the necessary changes to adopt these provisions.

Comment

In the last three years the movement towards implementation of a robust corporate governance regime in the United Arab Emirates has been gaining momentum. Other than the position onshore, the Dubai International Financial Centre and the Dubai Financial Service Authority have been proactive in their approach to regulating corporate governance compliance.

In an economy where companies are seeking to perform more efficiently, the recent spate of corporate scandals due to mismanagement reported in the press underscores the need for corporate governance.

The advantages of implementing corporate governance include:

• better management leading to better company performance and results;
• protection of the interests of stakeholders (eg, shareholders, employees and creditors);
• a transparent and organized mechanism to deal with conflicts of interest;
• boosting of shareholder/investor confidence and potential reduction of investment risk; and
• fulfilment of professional and social responsibilities.

The corporate governance system seeks to align companies in the United Arab Emirates with international standards. It aims to protect shareholders' rights and promote their participation as stakeholders.

Although implementation of corporate governance is mandatory for listed companies, these guidelines may be a good starting point for non-listed companies to consider when improving corporate administration.

For further information on this topic please contact Sanam Singh at Taylor Wessing (Middle East) LLP by telephone (+97 14 332 3324), fax (+97 14 332 3325) or email (s.singh@taylorwessing.com).