Corporate Governance Rules of the UAE Companies

Introduction

The running of a company determines its success, and therefore the topic of corporate governance is important to the parties involved in running of the company. Corporate governance is not only important for the running of the company, but it is also should be considered by the stakeholders of a company, including the public. Corporate governance presupposes such factors as processes, policies, customs, laws, institutions, and other companies. Although these factors are not related to each other, they determine how a company is run and therefore they are a crucial part of the company’s management (Bennett, 2002).

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In particular, these factors determine or dictate the level of accountability that people involved in running of the company should have to all the stakeholders of the company. Accountability of the parties involved in the running of the business implies that all company’s decisions should consider all the stakeholders in their efforts to solve the principal problem of the company. The relationship between different stakeholders within the company determines the success of a company, and therefore corporate governance should consider this relationship. These qualities can be applied to all companies independent of the country and its scope.

In the majority of cases, the term corporate governance is often confused with management, but the two terms are very different (Lawrence, Weber & Post, 2005). Unlike management, corporate governance is concerned with ensuring that people responsible for or charged with the responsibility of directing an organization are also responsible for all their actions.

This implies that corporate leaders should be accountable to all stakeholders, as well as shareholders of the company. In addition, the leaders should be devoted to pursuing of the company’s defined goals according to the set regulations. Good corporate governance therefore requires more than compliance with the government’s regulations and directions, and consequently, it is all about accountability (Trevino & Nelson, 2004). Although there is a slight variation in most corporate governance, most corporations can run a general corporate governance.

In the recent years, the UAE has been under pressure of various governments and corporate leaders calling them to adopt good corporate governance and practices. “In 2006 there were a number of changes in the UAE for corporate governance” (Oxford Business Group, 2010). From this statement, it is obvious that the UAE had not had a convincing system of corporate governance. The statement also implies that the UAE is making positive steps in its corporate governance.

There are common principles that can be applied to all sectors and companies in the UAE, which include private companies listed in the Dubai financial market (DFM), and Abu Dhabi securities (ADX). In addition to these companies, the statement implies that the common regulations are applicable to the UAE financial institutions that are normally regulated by UAE Central Bank. Small and medium enterprises also make a considerable contribution to the growth of the UAE economy, and therefore, the common regulations are applied to this sector. This paper therefore presents a report on corporate governance in the UAE that touches on all sectors of the economy.

SMEs corporate governance

Like in any other country, the SMEs sector contributes a lot to the countries’ economic growth, in particular, the sector comprises of 90% of the total business output in the country and contributes approximately 40% to the countries economic growth (Alan, Motaz, Helen & Norton, 2011). The diversification of business and Dubai economy largely depends on the SMEs sectors, and therefore this is an important sector.

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Secondly, the SMEs sector is a major employer of the UAE citizens and thus, it is required that the sector is formed depending on strict corporate rules. The fact that the SMEs sector is a major contributor to the economy of the country and a major employer of the country’s citizens implies that the sector has greater responsibilities towards the public. Since public is the main stakeholder in this sector, the Dubai SMEs has an effective corporate governance, therefore the UAE SMEs are biased on the public interests.

The UAE corporate governance for the SMEs requires that companies and other sectors involved adopt the set guidelines voluntarily. The governance codes also require that companies view the regulations as recommendations and benchmarks that enhance good practices. The UAE SMEs sectors comprise of various companies that vary in sizes, maturity, ownership structures and management models. Despite all these differences in the UAE’s SMEs sector, the sector operates under a common set of pillars and codes, which generally defines the sectors’ responsibilities and accountabilities.

The major sections of the pillars are policies and procedures, transparency towards the shareholders, risk management and internal audit, family governance and relationships between stakeholders. These pillars are not only applicable to the UAE, but they find their roots from the best international practices. Secondly, the Dubai SMEs sector views these codes as a benchmark or a journey towards what they need to achieve (Chance, 2008). These pillars also lay the guidelines and procedure that the sector needs to apply in order to implement responsible corporate governance.

The shareholders are very important to the growth and development of a company, and therefore effective corporate governance should be biased towards the welfare of the shareholders. The Dubai SMEs sector recognizes that the shareholders are important to the growth of the sector, and therefore it has well defined codes that outline the sector’s responsibilities to the shareholders. To begin with, the rights of the shareholders are important to both the company and the shareholders, and therefore a company’s corporate governance should have a well set or defined rights for the shareholders.

In addition to this, shareholders should be aware of their rights, while the company should strive towards maintaining these rights. The UAE SMEs sector is well aware of these factors and therefore it has well defined rights of shareholders. The SMEs codes require that shareholders of any company should be fully aware of their rights and the rights of other shareholders (Lawrence, Weber & Post, 2005). This requires that the companies should fully define the rights of the shareholders at the time they get involved with the company. The codes also require that the company should have a formal delegation of authorities, which should be put down in writing. The codes put this as a prerequisite for all companies and require the company to have well defined roles for its shareholders, managers and the directors of the company.

The succession process and planning is critical in the growth of the companies, and therefore UAE SMEs put an emphasis on it. A succession plan provides guidelines for change of leadership within a company in a professional manner. The UAE codes of SMEs governance identify the succession process as a long-term process, and therefore the company should have it as part of its objectives. The codes also define strategies for growth and exit of the company’s members. The main objective of having a well laid down succession procedure is to avoid emergencies within the company.

The section on transparency towards the shareholders requires all companies have free flow of information from the senior management towards the company’s shareholders. In addition to the free flow of information, the information should be valid and provided on time. The guidelines also require that a company should have equal treatment to all its shareholders and the company.

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The codes also state that a company should be ready to declare its financial condition to its stakeholders after a specified time interval. For the company to have an effective communication with its shareholders, it should take into consideration the views of all the shareholders without any discrimination. The company should also gauge the validity of the views of different shareholders of the company, and where possible, consider their implementation.

The SMEs codes also have a provision for the company’s directors that generally call for accountability in their activities. In addition to accountability, the codes require that the company’s directors should base their operations on formal procedures and therefore formalize their decision making process. The codes also require that any company should have an independent board of directors that is free from any external or internal influences.

Larger company should also consider a balanced board in terms of skills, experience, and expertise. The codes also require that more developed companies should have professional directors that have no executive powers within the board of governors. The codes also require that a company should have a training program for its new directors to enhance their performance.

The SMEs codes of governance require that all companies should set up a control framework that reviews its risk regularly. Effective internal control within a company is an important requirement for good business. The codes also require the company to have credible and reliable accounting practices from the beginning and that they should consider using the services of external auditors. In addition to this, companies should have fixed accounting practices and any changes should be disclosed in the company’s financial statement. The codes also require that companies should gauge effectiveness of their external audit, as well as the audit process in order to formulate policies that preserve the best practices.

Finally, the SMEs codes have a provision for company’s stakeholders that define the relationship between the company and its different shareholders. Shareholder of a company refers to the company’s customers, suppliers, regulators, creditors, the employees, the company, and the environment. The SMEs corporate governance therefore outlines the relationship between a company and its different shareholders. The Emirates Trans Graphic is an example of a company that considers its stakeholders as an important part of its business.

Corporate governance for companies within the UAE financial market

In the UAE, companies, listed on both the Abu Dhabi securities and Dubai financial market, are regulated and licensed by the UAEs security and commodities authority (SCA). The SCA has the mandate of defining codes of conducts that guide the operation of these companies. The SCA introduced new corporate governance regulations that had to be applied in the running of all joint stock companies in the market in 2009.

The codes, however, are not applicable to government’s institutions and government regulated business. Generally, these rules or codes of conduct call for accountability in the running of the business of the company (Terterov, 2006). The codes also define the relationship between the company and its different shareholders. They also emphasis on the accountability of the company and, where applicable, the company should have regular audits carried out by the external parties. Corporate governance introduced by the SCA also required that all companies should have had complied with the codes by the end of April 2010.

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Unlike other ordinary sets of conducts, corporate governance codes are of high standards and they are more international standards than domestic standards. This implies that the set codes of conducts do not only applied to the UAE, but also to other businesses across the world (Alan, Motaz, Helen & Norton, 2011). The use of international based conducts is of a great importance to the UAE’s business and their operations. To begin with, the companies can compare their conducts with the operations of other companies at the same level. The company can then use the resultant comparison as a basis for improvement.

The use of internationally based codes also helps the UAE companies in determining their place in the global market and economy. The use of internationally based codes also acts as a good motivation for the companies, since they determine where the company needs to be or the level of operation that the companies need to achieve. The code of conducts set by the SCA also requires that the company should identify areas within the code that are not applicable to the company. Identification of such areas is of a great importance to both the SCA and the companies. The identified code serves as a guidelines for improvement by the SCA, while the company benefits from more refined rules and codes of regulation (Campbell, 2005).

According to the SCA, there are major and minor provisions within it’s corporate governance, the major provisions are generally applicable to all companies while the minor provision are applicable to some companies. The codes touch all the company’s stakeholders and therefore they are all inclusive. The provisions also provide the guidelines for running of the company that is important to the company’s directors. Finally, the provisions outline the relationship between the company and the external factors, which include the public and the environment. This provision provides guidelines for the company’s social responsibilities and therefore they touch on the public and the environment.

To begin with, the provision for the company’s management requires that all companies should have one third of their directors as independent directors. This implies that these directors should have no executive powers within the company. The provision also requires that the non-executive directors should be professional managers. The chairperson position, as well as the director’s position are controversial positions in most companies, and the code reorganizes this fact (U.S. Department of Commerce, 2003).

In relation to this, the provision requires that different individuals should occupy the director and the chairperson’s position. The provision also requires that the decisions made at the two important executive positions should be independent and the two executive leaders should have individual decision-making panels. Finally, the provision encourages reconciliation on different decisions made at the two levels of management and that the company should be run on the best resultant practices.

The provision also requires accountability within the listed companies since this is a major step towards their development (Mantysaari, 2009). The company must hold board meetings after every two months. Through these meetings, the company directors are supposed to discuss the best models that should be applied to the running of the company. The directors of the company should also use such meetings to bring new methods and techniques that are competitive to the running of the company. In the relation to the issue of accountability, the provisions also requires that all companies should have a well-established internal audits that work under strict guidelines. The provisions also require that at least one member of the audit committee should be a professional audit officer (Robertson & Paul, 1998).

Accountability is a major issue among most companies, and therefore SCA considers the issue as their responsibility in the attempt to impose accountability within UAE companies. The accountability provision requires that all companies should submit an annual report on its corporate governance (U.S. Department of Commerce, 2003). The provision also requires that the submitted report include all information set and approved in the SCA forms. In particular, the companies are supposed to address their internal governance and issue of compliance and violation. This implies that the companies should identify the areas that are applicable and those that are not applicable within the company.

The next important part within the provision is the relationship between the company and its stakeholders. To begin with, the SCA provisions provide sections that outline the relationship between the company and its employees (Rooks & Dunn, 2009). Although the provision mainly focuses on the senior management and executive staff, it also outlines guidelines and requirements for junior staff. In particular, the provision outlines remuneration of senior management, including the company’s directors and other staff (Page, 1998).

The ongoing compliance

In UAE, companies and businesses listed on DFM and ADX are governed and regulated by the set reporting obligations and disclosure requirements. The compliance also requires that all companies should inform the SCA immediately on any significant changes within their securities. The provisions also require that the board of the company have the corporate rights to publish the companies’ share information in any public media. The provision also gives companies directors the right to publish crucial and confidential information about the company in any public media. In the ongoing compliance, the companies are expected to disclose information of any shareholder who owns more than five percent of the company’s shares. This information should be disclosed to the market and the public.

Shareholders disclosure obligations

This obligation applies to the shareholders who own shares and stocks from different markets within the UAE. The disclosure provide various guidelines that different shareholder within the market should observe. These guidelines are set for the welfare of the shareholders and the welfare of the market. The obligations require that shareholders who own more than five per cent of shares in a particular company should notify the SCA about this.

The obligations also have provisions for persons who own more than ten percent of a company’s shares and the procedures they should follow when purchasing extra shares (Cockburn, 1996). The obligations also outline the guidelines that banks and other financial institutions should comply in their operations. In particular, the obligation requires that banks and financial institutions to obtain operations permits from the central bank of the UAE. The obligation also requires that banks should have an approval of the central bank if they wish to acquire more than five percent in the ownership of a listed company.

Recommendations

Corporate governance within a country should be concerned with rules and regulations that regulate the operations of a company and the UAE corporate governance should run companies within the UAE. Although the companies within the UAE have not reached their level to the best in terms of their management and operations, the companies should maintain the movement in the positive direction. The UAE corporate governance therefore needs to provide guidelines or benchmarks on what these companies need to achieve and, in addition, corporate governance should provide a measure that compares the UAE companies with the international companies.

The UAE corporate governance should contain provisions for companies listed in the Abu Dhabi securities and the Dubai financial market. The SME sector is a major contributor to the growth of the UAE and therefore the corporate governance needs to have sections that regulate the sector. There should also be outline regulations for companies within the UAE financial market that outlines the roles of all stakeholders within the company. The shareholders disclosure obligation should outline regulations for various shareholders within the UAE stock market. Shareholders who own more than five percent in securities of a particular company should disclose their details. The disclosure should also define the powers of a company’s directors in the disclosure of a company’s confidential information.

References

Alan, B., Motaz, K., Helen, P., & Norton, R. (2011). Corporate governance for UAE Bowen, Companies. Web.

Bennett, J. (2002). Multinational Corporation, social responsibility, and conflict. Journal of International Affairs. 55 (2), 394-410.

Campbell, D. (2005). International taxation of low-tax transactions: Low-tax jurisdictions volume 2. California: York Hill.

Chance, D. M. (2008). Essays in derivatives: Risk-transfer tools and topics made easy. New Jersey: John Wiley & Sons.

Cockburn, T. (1996). Disclosure obligation in business relationship. Sidney: Federation.

Lawrence, A., Weber, J., & Post, J. (2005). Business and society: Stakeholders, ethics, public policy. 11th edition. Boston: McGraw-Hill, Irwin.

Mantysaari, P. (2009). The law of corporate finance: General principles and EU law: Funding, exit takeovers. New York. Springer.

Oxford Business Group. (2010). The report: Abu Dhabi 2010. London: Oxford University Press.

Page, S. (1998). Establishing a system of policies and procedures. Mansfield, Ohio: Book Masters.

Robertson, C., & Paul, F (1998). Developing corporate codes of ethics in multinational Firms. Journal of Managerial 10(4), 544-565.

Rooks, L., & Dunn, P. (2009). Business & professional ethics for directors, executives & accountants. London: Centigage.

Terterov, M. (2006). Doing business with the United Arab Emirates. New York: GMB Publishing Ltd.

Trevino, L., & Nelson, K. (2004). Managing business ethics: Straight talk about how to do it right. New York: Wiley and Sons.

U.S. Department of Commerce. (2003). Business ethics. A Manual for managing a responsible business enterprise in emerging market economies. Washington DC: Good Government Program.

William, G. (1994). Inside the boardroom: Governance by directors and trustees. New York: John Wiley & Sons.

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