Nine Pillars of Corporate Governance

Introduction

In 2011, Dubai SME changed the world of corporate governance. A Corporate Governance Code developed specifically for small and medium enterprises (SMEs) was introduced to be the first in its kind. The Code includes the Nine Pillars of governance based on the best governance models of corporate giants. From the very beginning, the reception of the Code was controversial. Some regarded it as a new word in the world of small business and embraced it willingly. Others assured the developers that SMEs were not worth their effort. While it is important to assess the benefits of the Pillars or controversy behind them, the main question the paper aims to answer is whether the Pillars are the most important principles of corporate governance.

Nine Pillars of Corporate Governance: Summary and Explanation

The Corporate Governance Code outlines commendable governing practices. Considering that the companies within the Dubai SME framework demonstrate significant diversity as to their scope, management patterns, development, administration, and other aspects, the practical solutions recommended by the Code are voluntary. In other words, each company is free to choose practices tailored to its mission, goals, and current position.

The Pillars set out in the Code, therefore, are generalized governing patterns formulated so as to cover the following sectors:

  1. Policies and Procedures;
  2. Transparency and Shareholder Relations;
  3. BOD;
  4. Control Environment;
  5. Stakeholder Relations;
  6. Family Governance (Dubai SME n.d.).

The Pillars take root in internationally acknowledged practical solutions and are accommodated to the economy of Dubai. The Pillars are most concisely formulated in the Code by Dubai SME as follows:

  1. Adopt and follow a framework of corporate governance, which outlines the roles of key business participants such as management, partners, the board of directors, and shareholders.
  2. Go through a process of succession planning.
  3. A transparent and open information flow with shareholders should be established.
  4. In order to accompany the company’s development, make an attempt to set up a formal Board of Directors (BOD).
  5. Design the Board of Director’s mandate in order to evaluate the operational performance of the company at the same time with improving the existing business strategies.
  6. Keep up with the accounts in the account book, which is monitored annually by an external professional.
  7. Implement a risk review on a regular basis through the established framework of internal control.
  8. Assess and respect stakeholders’ rights.
  9. Relationships with the business are to be formulated through a specific framework (2011, pp. 9-25).

The Pillars are distributed under each sector to justify the importance of each practice taken separately. Pillars 1 and 2 support Sector A: Policies and Procedures in that they advocate for aligning the roles, rights, and duties of the stakeholders and emphasize the criticality of succession planning within small and medium enterprises. Pillar 3 unfolds the notion of transparency (Sector B) and calls for an open discussion between the BOD and the shareholders. Pillars 4 and 5 further explore the BOD setting within Sector C: as an enterprise matures and expands, a formal BOD facilitates the better organization and increases performance. Pillars 6 and 7 calls for enhancing organizational control (Sector D) by the maintenance of accountable and audited books and timely risk management. Pillar 8 covers Sector E – Stakeholder Relations: it speaks for the necessity to address the stakeholders’ needs and acknowledge their right to take part in the enterprise’s functional process. The final Pillar accounts for family-owned businesses (Sector F), which are plentiful in the Dubai market; it outlines possible institutions that can be formed to turn familial collaboration into an institute.

Analysis

Having a corporate governance framework is usually not mandated in legal terms. That is to say, a business might have a code and be forced to keep to its principles in case they are specified by stock exchange regulations (Cressy, Cumming & Mallin 2012). In general, corporate governance with its codes is regarded as an effective tool for an establishment to position itself, manage and reduce risks, and facilitate more efficient organization (Goergen et al. 2010). In the context of SMEs, corporate governance (and the Pillars) present several controversial points.

The Controversy Behind the Pillars

As stated, corporate governance is usually thought of in terms of larger businesses. Some people argue that SMEs can sustain themselves without adopting a governance code. Indeed, at the moment of Pillars’ inception, only 16% of Dubai-based SMEs were corporate-governed (Parmar 2011). Others maintain that SMEs would greatly benefit from adopting a corporate governance Code – the Pillars’ developers among them. Although the strategy and policy department of Dubai SME was continuously assured they were wasting their efforts, the Code and Pillars designed specifically for small and medium enterprises came into existence eventually.

The rationale for publishing the new principles of governance was that in 2011, SMEs constituted an overwhelming 95% of all functioning establishments in Dubai (Parmar 2011). The Code for SMEs was the first of its kind. Within the first year from the launch, a great number of SMEs has contacted Dubai SME for a consultation in relation to the Code while others were known to have begun implementing the Pillars at once. Such response was deemed favourable, considering that the Pillars have never been mandatory.

Rules-based vs. Principles-based Governance

The debate between the proponents of either rule- or principles-based approach in corporate governance is long-standing. Advocates of the latter state that the principles facilitate faster adaptation to environment changes (Mallin 2015). Because the principles are used as general guidelines, they can apply to all situations and enhance decision-making. Rules, on the other hand, are designed so as not to be misinterpreted as they provide a clear model of action for each particular occasion (Arjoon 2006).

Though there is a happy medium between the two – which is the risks-based approach – the Dubai SME Code is largely a set of principles. This is stipulated by the fact that the Code is voluntary and there is currently no legislation to enforce it. Additionally, the Code is aimed at SMEs wishing to create and sustain a good reputation in the market through open communication with shareholders and addressing their needs.

Benefits of the Pillars

As the case shows, corporate governance as such definitely works for SMEs. Considering that the Nine Pillars are a compilation of the most useful practical solution found by global establishments, they can be a useful guide on governance. Tailor-fit to the needs of SMEs, they present the following benefits.

Corporate governance is the most optimal way for SMEs to position themselves in the market. The corporate reputation is upheld by the Nine Pillars advancing organizational transparency, control, and risk management. The fact that the Code is principle-based makes it easily adaptable to each individual company’s needs. At the same time, in addition to being implementable in a variety of occurrences, the guidelines of governance outlined by the Pillars leave little place for ambiguity; such rule-like formulation moulds the practices into the ethical framework, making the governance effective.

Specifically for SMEs of Dubai, the majority of which is family-run, the Pillars facilitate the institutionalization of family cooperation. Such a business is harder to organize and manage. However, with family businesses’ aim for long-term functioning, a clear-cut set of goals and values suggested by Pillar 9 is a key to the business’s longevity.

Challenges for Implementation

One of the challenges for implementation consists of the voluntariness of the Code’s adoption. As practice shows, SMEs can set corporate governance as a priority inferior to sales and staff training. Additionally, if some practices of the Code are perceived as harmful, the practices can be easily dropped.

Another, more critical challenge concerns the small operation scale of such enterprises. For a SME, some practices (e.g., hiring a non-executive director from other sectors) can be difficult to achieve, especially when an enterprise operates on the micro-level.

Thus, although Dubai SME has made sufficient progress in advocating for corporate governance practices, challenges exist. Still, some ways to overcome them can be drafted as follows.

Are the Pillars the Most Important Principles of Corporate Governance

While it is widely recognised that corporate governance is important for facilitating an efficient organization, the role the Pillars play in the framework is yet to be assessed. When discussing the fundamental Pillars of corporate governance, it is important to mention that they are designed in a manner, which is efficient and understandable for the international community as a whole. Thus, the accessibility of the Pillars is what makes them important aspects of corporate governance since they can be applied at any level.

Apart from that, the Pillars were designed in order to provide a unified framework for regulating and improving the corporate governance system. It is done for supporting the financial stability of the business, achieve sustainable growth, as well as maintain the business’s economic efficiency. Since the Pillars address the most important principles of business operation, a conclusion can be made that they cannot be separated from corporate governance principles (OECD 2015, p. 9).

On the other hand, there is no single and exact model of ‘appropriate’ corporate governance despite the fact that it is based on some common elements. The Pillars are predominantly created on the basis of such common elements in order to account for every business model that exists. For instance, there are no specifications about the structure of the Board of Directors; the ‘board’ term found in the Pillars’ formulation is used to acknowledge the spread practices related to various board structures across companies (OECD 2015, p. 10). Therefore, the Pillars are the most important principles of corporate governance since they account for many models of business structures and are applied in companies of any form and structure.

The notion of ‘Pillars’ itself implies a basis for something to be built on top; thus, despite the fact that they are not all-including, the Pillars are crucial for successfully running a business and, subsequently, establishing stable professional relationships between the stakeholders, including managers, employees, directors, regulators, and shareholders (Gitau 2015, para. 1). Thus, the Pillars are the most important principles of corporate governance since all successful businesses run on trusting and respectful relationships between the primary contributors to the common goal.

To conclude, given the benefits and the principles on which the Pillars were based, they are the most important aspects of corporate governance. The accessibility and the universal implementation of the Pillars make them widely spread in businesses of every level. Furthermore, the Pillars outline the fundamental principles of relationships between the primary business stakeholders and due to the fact that all successful establishments are built on the relationships between main contributors, the Pillars are the most important and useful principles of corporate governance.

Recommendations

Firstly, when no specific legislation exists to enforce the application of a Code, it is, by and large, just another document. The non-complaisance of Codes can lead to scandals such as that with Enron in the U.S., when a fictitiously formulated and non-obligatory Code allowed for massive misrepresentation of earnings (Abdioglu et al. 2015). The SME Code is precise and all-encompassing as it is; legal enforcement would assure the Code is complied to.

Secondly, if mandating the Code is not possible, the SMEs themselves should acknowledge the benefit brought by compliance to the Pillars and make moves towards its adoption. Small operating scale, understandably, limits the enterprises’ opportunities. To implement the Code, SMEs could seek help from accounting consulting firms. Such firms would perform advisory roles and provide consultations on control, risk assessment and management, communication, and appropriate investment prioritization – which roughly summarizes the basic solutions enlisted by the Pillars. Outsourced assistance would demonstrate the benefits of Code-compliance without necessarily enforcing governance by law.

Conclusion

To conclude, the Nine Pillars established by the Code for SME in Dubai is a functional way to govern enterprises and are the most important principles of corporate governance. The Pillars are assembled in a way that accounts for every possible situation and can simultaneously serve as an ethical guide. The adoption of the Code and the Pillars is highly recommended by Dubai SME and is known to have brought advantages to its pioneers. The challenges of implementation are stipulated by the voluntary basis of Code compliance. The most optimal way of implementation would be to prescribe the Code legally. If this is not possible, SMEs can outsource help from consulting firms to assure the principles are accounted for.

References

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