Corporate governance is described as the structure by which business organizations are organized and managed. The accepted standards of corporate governance include facilitating the practice of shareholder privileges and impartial treatment of shareholders; acknowledging the needs of other stakeholders; describing corporate conduct that is moral and merged with reliability; describing the positions and tasks of the board of managers; necessitating unbiased admission of material matters to shareholders; and independent verification and safeguarding of the corporation’s financial reporting.
Corporate governance is projected to be a burning matter this year among UAE scheduled corporations, particularly as the AGM term in the UAE is approaching (DLA Piper, 2011). Though the Commercial Governance Code1 (the “Code”) dispensed by the UAE Securities and Commodities Authority had been in power for a long time, corporations were expected to conform to the code before the end of April 2010 (DLA Piper, 2011). Several have taken stages; comprising revising their Memorandum of Association, setting up an assessment team and embracing inner measures before that time, but a number of establishments were forecasting to suggest alterations to their MoA at this year’s AGM. In retort to several remarks and inquiries received by the Securities and commodities authority relating to certain applied features of the execution of the Code, the Ministry of Economy issued the amended Code.
Though the Revised Code does not explicitly provide that it succeeds the Code, we believe that Securities and commodities authority effectively familiarizes with the revised and reaffirmed Code. The New Code elucidates certain provisions of the Code and acquaints with certain fundamental changes (Calder, 2008). The following is an acme of the main variations in the New Code.
Scope
The Encryption used to relate to public joint stock corporations established in the UAE and establishments whose safeties are programmed on the stock exchange as well as their managers (DLA Piper, 2011). Since corporations owned by the resident or centralized governments take the form of public joint stock companies (but are not mandated to be listed on any conversation), it was not clear whether or not such unlisted open joint stock companies were subjected to the requirements of the Code. This has been elucidated in the Revised Code, which makes it clear that it relates just to those corporations whose safeties are listed on a securities market in the UAE. Firms that are solely owned by centralized or local governments are, therefore, exempt from the application of the Revised Code. We recognize that the UAE State Audit Institute is working on creating commercial control rules specific to the UAE government enterprises. In addition, the Revised Code presented an Independence of Directors.
The Revised Code has upheld most of the measures concerning the valuation of the objectivity of directors and elucidated the meaning of Liberated Director with slight material modifications. The Revised Code familiarizes assured objective tests, which will help gauge a director’s impartiality, for example, with reverence to the key notion of substantial fiscal relations, for a deal to be deliberated prime and consequently exclude the director from being deliberated independent, the value of the deal must exceed the lower of 5% of the firm’s paid-up capital or AED 5 million. Additional, a director will not be deliberated independent if the director or his/her minor kids own 10% or more of the share capital of the firm. The principle which made a director who is linked to any of the firm’s main clients or suppliers’ non-independent has been detached.
Though the Code intended the nomination of a compliance officer, the Revised Code now makes the nomination of a Compliance Officer obligatory. It also elucidates that the function can be executed by the chief internal auditor. The Revised Code extra entails that the compliance representative must be an entity rather than a commercial entity (which was permitted under the Code) (DLA Piper, 2011).
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Moreover, the Revised Code eliminates certain misperception by eradicating the prerequisite for the compliance officer to authenticate the financial data used by senior organization for formulating financial statements as this falls under the duties of the auditors.
Application for Meetings and Tenacities by Circulations
While the Code offers that a minimum of two thirds of the directors might call a convention, the Revised Code offers more tractability and allows a minimum of two directors to call a meeting. The Code also agrees to adoption of the pledges of the board in emergencies if a majority of directors agree that there is an emergency, and a resolution by circular should be adopted.
Earlier, unanimous accord of directors was vital. The exception submission must be required for precise provisions and must provide binding reasons vindicating the exception. So, the SCA will not award unmitigated exceptions. There is no signal as to the level of government involvement required, or to the principles that the SCA will contemplate to award such exception (Berleur, et al., 2010). A number of open firms in the UAE have direct or indirect government involvement, and we are optimistic that SCA will elucidate its position in that affection and set out clearer values for granting such exception.
Application and Deadline
Firms are required to accept the provisions of the Revised Code by 30 April 2010. SCA recommended that firms, which have previously revised their MoA in agreement with the Code, are not anticipated to re-amend their MoA to reaffirm the provisions of the Revised Code. They are inherently obligated to implement the Edited Code by reference in their MoA.
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Director’s Fee
The Revised Code elucidates that, though under the Companies Law, the fee of directors shall be a percentage of the net profits. The firm may pay extra fees or monthly salaries as well as refund expenses, as the board may consider applicable, with reverence to any executive if such an executive is an associate of any board or has used significant efforts or provided extra services for the benefit of the company (DLA Piper, 2011). In any case, the pay of a director must not exceed 10% of the net profits after subtracting expenses, depreciation and reserves (Directors, 2009).
External Auditors
Though the Code required that the external auditor is independent and nor accept other consultancy services to the company, the Revised Code explains this prerequisite and sets out examples of the services that an external auditor cannot execute. They comprise, among others, IT consultancy, other accounting services, investment advisory, internal audit subcontracting, and legal services (Association for Financial, 2010).
The Revised Code imposes the duty to take rational steps to verify the independence of the outside auditor, and ensure that the enactment of the auditor’s duties is free from interest. Firms controlled by the Central Bank must harmonize with the Central Bank and their auditors with respect to the audit of such firms.
Appointment of Directors
In line with the spirit of shareholder empowerment, which we have seen in western prerogatives, the Amended Code introduces new requirements and procedures aimed at allowing shareholders to nominate contestants (or themselves) for the appointment of directors at any general assembly (Hellyer, 2010). The firm must issue a notice for appointments in two local papers (one of which to be in Arabic), and the selection period must stay open for at least one month from the publication’s time.
Furthermore, two weeks erstwhile to the date of the general meeting the firm must circulate in the same newspapers the names and details of all applicants scheduled for election. The concrete effect of this alteration is that a firm must certify it issues the first announcement for appointments, in over one and a half months’ time to the date of the general meeting.
Corporate Governance Report
The Revised Code executes on the board of directors the responsibility to make the company governance report available to all shareholders before an adequate time of the date of the general assembly. No precise time has been agreed, but probably it would have to be made available at the same time as the notification of the summit is allotted (Chew & Gillan, 2009).
Administrative Fines
According to DLA Piper (2011), “the code relates to Law No. 4 of 2000” (p. 5). It details the kinds of deeds that can be assumed by SCA. The Code too leaves the sum of the monetary imposing indefinite, to be resolute in line with the law. Hence, the penalty will rely on the exacting conditions of a breach.
As programmed, public joint stock corporations should comply with the requirements of the novel Code ahead of 30 April 2010, since the significance of corporate control in the UAE is extremely valuable. Corporations dependent on the novel Code have begun to assume significant steps to gauge the sovereignty of their managers and the conformity of directors, auditors and boards with the requirements of the new Code (DLA Piper, 2011).
The implementation of the new Code will position corporate control on the summit of the plan in the UAE Market and will get corporations to systematize their supremacy and institute internal control systems that will let the Board and executive control and administer the trade (DLA Piper, 2011). Conformity to the new Code must not, conversely, be seen as a dictatorial instrument. It is not enough to modify the MoA of a corporation to abide by the Code or to institute commissions (Naciri, 2008). The actual problem will be the execution not simply of the recommendations of the novel Code, but of its character.
Corporate Governance for Entities Listed on the UAE Financial Market
Both DFM and ADX and are certified and synchronized by the Securities and Commodities Authority (SCA), while Nasdaq is coordinated by the Dubai Financial Services Authority (Norton Rose, 2011).
A novel corporate governance code was introduced in 2009, which relates to all joint stock corporations and organizations whose securities are programmed on a “market” (Norton Rose, 2011). These corporations were expected to abide by the new code by the end of April 2010. This code is not relevant to public owned establishments; Central Bank synchronized bodies or alien firms.
The new code sets high principles of corporate control and is mainly based on global principles. The SCA has too issued an inclusive template business plan to assist corporations comply with its provisions. In the yearly report to the SCA, every listed corporation must spot areas where it does not abide by the requirements of the code (Kirk, 2010).
According to the Corporate Governance Code, a third of the managers must be sovereign managers, whereas the majority must be non-administrative managers. The places of the managing director and chairman must be occupied by dissimilar persons. In addition, conferences of the board of directors should be held more than once in two months (Norton Rose, 2011). The board should form an audit team and a remuneration and nomination team. Teams must be composed of over three non-executive manages, over two of whom are ought to be sovereign managers and the Chairman of the board should be excluded from the committees (Norton Rose, 2011). At least one affiliate of the audit team should be a specialist in monetary and bookkeeping dealings.
Compliance Officer
The board should select a compliance official. The board should institute a strict internal control structure, the means and measures for risk control, the execution of the code, conformity to local rules and policies, conformity to internal events and plans, and to assess financial data used in outlining financial statements. Every listed corporation must present an annual report on its corporate governance performances to the SCA. This report should contain all information embarked in the SCA-certified form, especially any information on the interior, corporate governance structure, any infringements committed in the course of the financial, a synopsis of the organization of the board of directors together with their heights of compensation and particulars of remuneration of higher executives (Kirk, 2010). The SCA has several alternatives open to it relative to any non-conformity to the requirements of the code. These contain fiscal penalties and deferment of the pertinent company listing of the corporation.
Constant Compliance
Corporations programmed on DFM and ADX are presided over by the Disclosure Resolution which lays down ongoing disclosure necessities and reports responsibilities for such corporations (Norton Rose, 2011). The listed corporation should instantly inform the SCA and the administration of the Market of every crucial development impacting the outlays of its securities. The executives of the Market have the freedom to publish any report concerning such data in the local media or any other suitable press. A listed corporation may, on the other hand, apply to the Market for sanction not to publicize private information, as long as no deals by its managers, concerning this information, are pertinent. Discretely, the SCA Law has express limitations on interior trade (Yocam, 2008).
A listed corporation should also instantly inform the Market and the SCA of any stakeholder whose express or circuitous shareholding is equivalent to or above 5 per cent of the corporation securities. The corporation should comply with this requirement each time the shareholding augments by every 1 per cent above and over the 5 per cent verge (Naciri, 2008).
Disclosure Obligations on Shareholders
Any individual who possess, or jointly with his kids possess, from 5 percent of the holdings of a listed corporation should instantly inform the Market (Naciri, 2008). Any individual who has a percentage equal to, or above 10 per cent of the holdings of a “Subsidiary”, “Parent”, “Affiliate” or “Allied Company” should instantly inform the Market (Norton Rose, 2011). Any individual who possess 10 per cent securities of a listed corporation and desires to obtain 20 percent or other should inform the Market prior, to placing the procurement order for implementation. The chief director of the Market might forbid the acquirement if, in his judgment, the acquirement would discriminate the interests of the public economy (Yocam, 2008).
A financial establishment executing banking trade should acquire certification from the UAE Central Bank, prior to entering into any business which would outcome in it obtaining 5 percent or other of the holdings of any corporation programmed on the Market.
Corporate Governance for UAE Central Bank Synchronized Organizations
The SCA code is not pertinent to Central Bank synchronized organizations. The Central Bank has given compulsory and non-compulsory guidance regarding corporate governance inside synchronized establishments. Through circular 23/00, it presented binding proposals for corporate governance organizations in UAE financial institutions (Norton Rose, 2011). Extra non-binding regulations for directors of financial institutions were presented in the guidelines for bank executives.
The Central Bank Policies
First, central bank policies require a sovereign Chairman who never assumes administrative tasks. Second, they forbid roles of the board of directors connecting with the duties of the general administration. The board can prefer to select an executive team with specified supremacists, but it is ideal that the Chairman is not implicated in directing any such team. Thirdly, the policies require a sovereign CEO chosen by the commission and answering to the commission and the chairman. Fourthly, the policies oblige to make corporate principles handbook, defining powers, tasks and conduct principles. Fourthly, the policies call for higher staff (sector heads, directors, CEO and deputy) to be subject to the authority of the Central Bank and over five years’ experience (Norton Rose, 2011). Subsequently, the policies propose that the Internal Audit section should supervise work roles, areas of conflict, noteworthy losses, and unlawful activities (Norton Rose, 2011). Lastly, the policies advocate that a Credit commission of above 5 members is created, with right for loans in surfeit of the worth of 1.5% of the assets and resources of the bank, payments, and the provisioning of defective credits (Norton Rose, 2011).
Central Bank conventions present extra direction as to the issues which should be presented to commissions for their contemplation. The first is a modification to the association chart and the institution of supplementary, whereby the bank will grip over 5 per cent of the given capital enrollment. The Central Bank has extended ahead of the Central Bank policies by giving the Central Bank guidelines, which offer data pack for managers of synchronized financial bodies in the UAE (Mallin, 2011). These procedures introduce the essential codes of corporate governance, express the anticipated role of the panel, and offer regulation on board selecting, credentials of sovereign directors, performance supervision, and corporate governance organizations (Norton Rose, 2011).
Growth of Corporate Governance in the Public Sector – Abu Dhabi
According to Norton Rose (2011), “the Governance Committee, Emirate of Abu Dhabi was founded to oversee the execution and progress of theories and structures of authority in the civic segment” (p. 4). An ingredient of the committee’s task is to deal with the Abu Dhabi Government civic, service structure, and it is functioning to make reliable and rational public service performances and competencies across the Abu Dhabi administration (Mallin, 2011). This entails expressing public service main principles, guiding ethics, policy structures and standards, to direct managerial and personal expansion all through the Abu Dhabi civic segment (Norton Rose, 2011).
Conclusion
In conclusion, though the Code intended the nomination of a compliance officer, the Revised Code now makes the nomination of a Compliance Officer obligatory. It also elucidates that the function can be executed by the chief internal auditor. The Revised Code elucidates that, though under the Companies Law, the fee of directors shall be a percentage of the net profits. The firm may pay extra fees or monthly salaries as well as refund expenses, as the board may consider applicable, with reverence to any executive if such an executive is an associate of any board or has used significant efforts or provided extra services for the benefit of the company (DLA Piper, 2011).
Both DFM and ADX and are certified and synchronized by the Securities and Commodities Authority (SCA), while Nasdaq is coordinated by the Dubai Financial Services Authority (Norton Rose, 2011). Corporations programmed on DFM and ADX are presided over by the Disclosure Resolution which lays down ongoing disclosure necessities and reports responsibilities for such corporations (Norton Rose, 2011). The listed corporation should instantly inform the SCA and the administration of the Market of every crucial development impacting the outlays of its securities.
A financial establishment executing banking trade should acquire certification from the UAE Central Bank, prior to entering into any business which would outcome in it obtaining 5 percent or other of the holdings of any corporation programmed on the Market. The SCA code is not pertinent to Central Bank synchronized organizations. The Central Bank has given compulsory and non-compulsory guidance regarding corporate governance inside synchronized establishments. Through circular 23/00, it presented binding proposals for corporate governance organizations in UAE financial institutions (Norton Rose, 2011).
Central Bank conventions present extra direction as to the issues which should be presented to commissions for their contemplation. The first is a modification to the association chart and the institution of supplementary, whereby the bank will grip over 5 per cent of the given capital enrollment. The Central Bank has extended ahead of the Central Bank policies by giving the Central Bank guidelines, which offer data pack for managers of synchronized financial bodies in the UAE (Mallin, 2011). These procedures introduce the essential codes of corporate governance, express the anticipated role of the panel, and offer regulation on board selecting, credentials of sovereign directors, performance supervision, and corporate governance organizations (Norton Rose, 2011).
An ingredient of the committee’s task is to deal with the Abu Dhabi Government civic, service structure, and it is functioning to make reliable and rational public service performances and competencies across the Abu Dhabi administration (Mallin, 2011). This entails expressing public service main principles, guiding ethics, policy structures and standards, to direct managerial and personal expansion all through the Abu Dhabi civic segment (Norton Rose, 2011). Firms were required to accept the provisions of the Revised Code by 30 April 2010. SCA recommended that firms, which have previously revised their MoA in agreement with the Code, are not anticipated to re-amend their MoA to reaffirm the provisions of the Revised Code.
References
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Berleur, J., Hercheui, M. & Hilty, L. (2010). What Kind of Information Society? Governance, virtuality, surveillance, sustainability, resilience. Berlin: Springer.
Calder, A. (2008). Corporate governance: a practical guide to the legal frameworks and international codes of practice. London Philadelphia: Kogan Page.
Chew, D. & Gillan, S. (2009). Global corporate governance. New York: Columbia University Press
Directors, T. (2009). The handbook of international corporate governance: a definitive guide. London: Kogan Page.
DLA Piper (2011). Corporate governance in the UAE. Web.
Hellyer, P. (2010). Uae yearbook: annual. New York: Trident Press.
Kirk, M. (2010). Industrialization in the gulf: a socioeconomic revolution. New York: Routledge.
Mallin, C. (2011). Handbook on international corporate governance. Aldershot: Edward Elgar Pub.
Naciri, N. (2008). Corporate governance around the world. New York: Routledge.
Norton Rose (2011). Corporate governance for UAE companies. Web.
Yocam, E. (2008). Corporate governance: a board director’s pocket guide: leadership, diligence, and wisdom. Washington, D.C: Yocam Publishing LLC.