The forthcoming amendment to UAE Federal Law No 8 of 1984, otherwise known as the Commercial Companies Law, is expected to be a positive force in further enhancing the country’s business environment as it will promote a “corporate governance regime”.
Ben Constance, Senior Associate at
Taylor Wessing, said the development of local company law is essential in ensuring general codes of corporate governance are mandatory for all companies – a critical element not only in improving transparency, but also in boosting investor confidence.
“It is a fine balance between over regulating private and family businesses and ensuring adequate shareholder protection measures are in place. Introducing new sets of company law is really the only visible way to ensure general compliance for all forms of corporate entity,” he explained.
While implementation of corporate governance codes may be relatively new in the UAE, the government has shown keen interest in incorporating such standards in the local business scene.
It was in 2007 when the regulator Emirates Securities and Commodities Authority (Esca) first released a Corporate Governance Code. A couple of years later, the code was superseded and amended to become a federal law. Constance said the action proved significant in the UAE’s quest to adopt a corporate-governance-compliant atmosphere in the country.
“[Esca] has [suggested] that the vast majority of publicly listed companies, at least over 80 per cent, have fulfilled their corporate governance obligations in respect of meeting [Esca’s] new rules and standards,” he told Alrroya.com.
Constance added that the Esca rules imposed a number of requirements including a threshold for “independent” directors to be included on the company board, as well as the separate formation of committees to deal with issues such as audit and risk management, and the nomination and remuneration of board members and key executives.
Publicly listed firms are likewise required to provide the regulator with a yearly corporate governance report that deals not only with monitoring ongoing compliance, but also acts as a mechanism to report corporate governance issues to shareholders prior to their annual general meeting.
But the amendment to the existing UAE Commercial Companies Law could offer additional benefits to further push the corporate governance envelope.
In a separate statement published on Taylor Wessing’s website, Constance said the amendment will likely “give rise to a new general code of corporate governance which should, in turn, provide a legislative framework for the adoption of international best practices by UAE-based companies. Such guidelines and laws should significantly assist UAE corporate entities in fulfilling oversight responsibilities for corporate governance practices.”
Financial crisis jolts family businesses
The global crisis of recent years has seen the downfall of some of the GCC’s once formidable family businesses. While non-listed family businesses are not required to implement corporate governance standards, lessons learned from their peers’ decline have become an incentive to incorporating these codes into their operations.
“We have seen a number of significant family businesses consider their internal governance in recent times. In particular, a number of family entities have considered it necessary to engage non-executive independent board members to assist with their general Board level decision making,” Taylor Wessing’s Constance said.
He added that independent board members – otherwise known as non-executive directors who are not part of the executive management team – are extremely beneficial when dealing with issues such as audit and risk management, related party transactions and setting remuneration for key executives.
“Applying these measures in a transparent way promotes external investment and overall confidence in dealing with these entities,” Constance said.
He also mentioned that legal implications of corporate governance non-compliance can be severe depending on which jurisdiction in the UAE a company is dealing with.
“While it is difficult to assess costs by way of lost profit or revenue, we have seen the [Dubai Financial Services Authority], for example, impose multi-million dirham fines as well as prohibit certain individuals from performing managerial roles within the [Dubai International Financial Centre] for extended periods of time,” he said.
Esca has also launched a crackdown on share trading at the director level, which has resulted in significant publicity for some of the larger listed vehicles on different local exchanges.
“So not only has the implementation of a more robust regulatory framework resulted in legal and financial consequences, the costs in terms of an entity’s goodwill in the event the regulator makes their findings public is a severe deterrent for entities to ignore their corporate governance requirements,” he mentioned.
Internal governance should be self-motivated
While legally imposed penalties have done their part in encouraging companies to abide by corporate governance codes, Constance believes that business establishments should be driven to adopt these standards even without any government intervention.
“The real challenge is ensuring companies develop sufficient policies and charters to enable the board and key executives to address issues of corporate governance and ensuring compliance with new laws, as and when they are implemented. Drafting internal committee charters and company policies are processes which companies will need to seek guidance from their external advisors and will necessarily become part of [their] operations in the future,” he said.
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