Corporate Governance for Joint Stock Companies in UAE

Corporate governance is concerned with holding the balance between economic and social goals and between individuals and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society”, quoted by Sir Adrian Cadbury, Chairman of the Cadbury Schweppes and also the author of the commission report of 1992 on corporate governance.

 

Every entity adopts a set of rules, viable practices, policies and processes to ensure effective management of the company and progressive growth of the business. This set of rules and practices by which a corporation is directed and controlled can be defined as corporate governance. Corporate governance is a way by which the interests of the shareholders and other members of the entity are safeguarded. 

 

The United Arab Emirates (UAE), is one of the most preferred international commercial hubs, encompassing a vast number of private and public conglomerates, which have majorly contributed to the development of this country. In UAE, Federal Law Number 2 of 2015 on Commercial Companies (the Companies Law), is the primary legislation that lays down the key set of provisions regulating various areas of corporate governance. In the year 2016, the chairman of the Securities and Commodities Authority (SCA) of the UAE, has issued the Resolution Number 7 R.M of 2016 on the Corporate Discipline and Governance Standards of Public Joint Stock Companies, in order to:

 

• repeal the UAE Ministerial Resolution on Governance Rules and Corporate Discipline Standards Ministerial Resolution Number 518 of 2009; and
• to comply with the provision of the Companies Law, whereby, it is granted authority to make decisions with respect to the governance of the public joint-stock companies and also issue such rules of governance complementing the provisions specified in the Companies Law with respect to the corporate governance.

 

The corporate rules issued by the SCA in 2016, have now been repealed and overhauled by the virtue of Resolution Number 3 R.M of 2020 concerning the Corporate Governance Guide for Public Joint Stock Companies (the New Corporate Governance Rules). The New Corporate Governance Rules have been framed in a manner incorporating the best international practices and promoting transparency, accountability, fairness, disclosure and responsibility as the main pillars of corporate governance. The New Corporate Governance Rules further define the responsibilities and duties of the members of the board of directors and the executive management in line with international standards. It also contains the rules to ensure that the rights of shareholders and stakeholders are safeguarded. This article shall briefly lay down the key features issued under the New Corporate Governance Rules.

 

Article 3 of the New Corporate Governance Rules stipulates that these rules shall be applicable to only the local public joint-stock companies which are listed on the market, and it further excludes the foreign companies which are listed in the market from being regulated by these rules. The responsibility of ensuring that rules of the corporate governance are implemented vests in the company board. Article 5 of the New Corporate Governance Rules provides that the companies are required to publish the company certificate of incorporation along with their articles of association (AOA) and the memorandum of association (MOA).

 

Highlights of the Rules Pertaining to the Company Board: 

Article 6 to 30 of the New Corporate Governance Rules covers the provisions regulating the Company Board.

 

The company shall be controlled and managed by the board and such board members and the number of members of the board and their term of membership shall be formed and determined as specified in the company’s AOA. The provisions of the New Corporate Governance Rules provide that if the Government holds five (5) per cent of the company’s capital or more, it may appoint its representative to the board of directors in proportion to such a number of board members. The majority of the board members and the chairman of the board shall be UAE nationals. The board members are elected by the general assembly by secretive collective voting. After the board is formed, the board shall then appoint a chairman and a deputy chairman from among its members by secret voting. It is relevant to note that the chairman of the board is not allowed to have the position of the company’s manager or the managing director or any other such executive position in the company. However, the board may still elect from among its members a managing director for carrying out the managerial functions of the company and also further determining their duties and remuneration. The board shall appoint a board secretary, who shall function independent of the company’s management and shall report to the board members directly. The board will elect persons with the below-stated qualifications for the position of board secretary:

 

• Any person who holds a degree in law, administration, finance and accounting or any other such qualifications;
• Such persons shall be competent to assume the role of the board secretary and also preferably have at least three years of experience in corporate governance.

 

Nomination of Board Membership: 

Article 9 lays down the provisions as to the nomination procedure of the board members. It stipulates that the number of board members shall be in proportionate to the percentage and nature of the company’s activity. Further, it states that the board members shall possess a fair balance of skills, competencies, experience, knowledge, diversity and independence. The New Corporate Governance Rules provide that there should be at least twenty (20) cent of female representation among board members. The company is required to give reasons if it fails to attain the above-stated percentage of female representation, further the company is required to disclose the percentage of female representation on the board in its annual governance report. One of the key highlights of the board membership nomination is that as per article 9(5), the majority of board members appointed shall be non-executive and independent members.

 

The Qualifications to be Eligible for Board Membership:

• Five (5) years of experience in the field of the company, wherein, he/she is nominated to obtain board membership;
• Should not have been previously convicted for any offence like a breach of honour, trust or integrity or should have been previously imposed with any criminal penalty unless such person has been rehabilitated;
• Should not have faced judgment or discharge from the board of other joint-stock companies which are listed in the financial market of the year preceding nomination;
• Should have a professional record issued by the competent authorities clear of any kind of administrative penalties.;
• Should not be facing any lawsuits, or have any ongoing investigations on offences related to breach of honesty and integrity;
• Should meet the other terms as stipulated in the Companies Law or the company’s AOA.

 

Further, article 11 states that elected board members are required to disclose to the company any kind of interests and relationships that may have the ability to hinder in performing their duties efficiently, and such declaration of interest shall be noted by the board secretary. The company is required to provide the new board members and the senior executive with an introductory program of the company and its business along with other details which will help them efficiently perform their duties. Such details can include information on the company’s strategy and objectives, its financial activities, and the rights, duties and obligations of the board members and committees. Further, the board shall also give training courses to the members and the board secretary. One of the key responsibilities of the board is to make sure that the shareholder's rights, justice, quality and rights of the shareholders are protected and the board shall be responsible to the company shareholders. The board is entitled to exercise full authority with regards to deciding on activities that are necessary for ensuring the effective strategies are properly implemented for the management of the company, except for the decisions which can be only made by the shareholders of the company as mentioned in the MOA. The company’s board is obligated to discharge a vast range of duties and responsibilities to ensure that company is functioning in line with the laws governing and, in a manner, fulfilling the company’s objectives and strategies, and handle the conflicts of interests that may arise among the board members, senior executive management and shareholders. Likewise, the chairman of the board is required to govern and regulate the board members as the head of the board. The New Corporate Governance Rules also provide the provisions stating the obligations which the board members and non-executive board members are required to perform. The board members are required to strictly adhere to the conventional standards laid down in article 18 of the New Corporate Governance Rules. The convenience standards include having appropriate leadership and competency skills, acting in good faith and always in the best interest of the company, shall take up responsibility for their actions and decisions with regard to the company and shall discharge their duties transparently.

 

The board meetings shall be held four times a year, except if the company’s AOA stipulates otherwise. Further, by the virtue of article 24 of the New Corporate Governance Rules, the members can participate in the board meetings by using modern technology.

 

Some of the other key features of the New Corporate Governance Rules are:

• Confidentiality of Data and Information (article 31): The board is required to ensure that the company’s trade secrets or any other such vital and confidential data is not disclosed or exploited by any person who has access to such information during the course of their work.
• Conflicts of Interests Management (article 32): In case any member of the board or person representing anybody of the board has a conflict of interests with the company’s deal or transactions which is presented to the board for a resolution, is obligated to convey of such conflicting interest to the board and the information conveyed shall be recorded in the minutes. That member shall be further restricted from taking part in the voting on the resolution being passed pertaining to such dealings or transactions.
• Insiders Register (article 33): The company is required to maintain an insider register, which includes all the persons who have access to the internal information of the company before it is published. Further, the transactions carried out by the insiders shall be supervised.
• Dual Governance Structure (articles 54 to 57): This feature is applicable to the companies that opted for a dual governance model to run their company. In the dual governance model, the company can have two types of committees, where the internal committee (control committee) is encompassed by its board members and where the other committee is an executive committee.
• Permanent Committee (article 58): The board can further establish permanent committees like the nomination and remuneration committee, the audit committee, the technology committee and the risk management committee, where each committee plays a vital role and discharges a different kind of functions in providing effective corporate governance.
• Corporate Governance Report (article 77): The company is required to submit an annual report on corporate governance signed by the chairman.
• Corporate Social Responsibility (article 81): The general assembly is required to enforce policies as recommended by the board, which will balance the company’s objectives and those of the community in a manner promoting and upholding the socio-economic conditions of the community

 

Article 82 of the New Corporate Governance Rules lays down the penalties for breaching the provisions of these new rules as:

• A warning shall be made to the company, board members, managers or the auditors;
• Fine shall be imposed, but not beyond the maximum amount of fines as stipulated in the Companies Law;
• Refer the matter to the public prosecution.

 

Thus, this comprehensive piece of rules on corporate governance ensures that the public joint-stock companies carry out their businesses in a streamlined manner and subjects the company’s management to supervision, which in turn promotes the growth of the company and at the same time safeguards the interest of the stakeholders, board members, employees, customers and suppliers. The company’s board assumes greater and wide responsibilities in upholding the rules of corporate governance.