Corporate Governance Law for Joint Stock Companies
Corporate governance can be stated as a set of regulations, mechanisms, its process, and relations by which corporations are controlled and operated. It is a system of governance where the interests of various stakeholders involved with the Company is taken care of. It covers every spectrum of management and helps provide the setting up of a framework of a company’s objectives.
The Securities and Commodities Authority (SCA) is a body established by UAE as per Federal Decree Number 4 in 2000. The purpose of the Authority is to monitor and supervise Joint Stock Companies and financial services. Hence, any company with its securities listed in the UAE Financial Market would come under the ambit of SCA’s regulations. The SCA supervises and regulates the following financial service activities:
- Exchange Markets;
- Joint-stock companies;
- Brokerage companies (as Trading Member or as Trading and Clearing Members);
- Financial Analysis and Consultancy Firms;
- Investment Management Firms;
- Investment Funds;
- Investment Fund Administration;
- Promotion and Introduction Activity (for financial products, financial services and funds either foreign or domestic).
This piece shall be articulated as to how Public Joint Stock Companies (PJSC) can conduct their corporate governance matters in regulation with the SCA.
The corporate governance of companies that are established in Dubai has to be compliant with DIFC Law Number 5 of 2018, also known as Companies Law. Since the establishment of Abu Dhabi Global Market (ADGM), Abu Dhabi based companies are required to be in accordance with Companies Regulation and Commercial Licensing Regulation of the ADGM.
The SCA and Securities Market has prepared and made available the form required to be submitted as a Corporate Governance Report for JSCs on their website. It is mandatory that the form is filled and submitted as per Report submission. Article 52(2) of the Resolution Number 7-RM states the contents of the report required as:
- A statement of the details and reasons for any compensations and allowances paid to any member of the Board of Directors and its sub-committees for the financial year;
- A statement of the Company’s directors and the first and second lines according to the Company’s organizational structure, their positions, appointment dates, details of the salaries and bonuses each member was paid, and any compensations they received from the Company and the grounds for such compensations;
- Compensations granted to the Board members and all the members of the Company’s staff including bonuses and any motivational programs relative to the securities issued or guaranteed by the Company.
A new amendment passed this year has further detailed on the requirements in regards to the annual report on corporate governance. The new Resolution Number 3-RM 2020 dictates the details under Article 77 as:
- The names of Board members, chairman, vice-chairman and other persons occupying main jobs in the Company, a brief biography of each member including its qualifications and experience, and the identification of the independent member(s) as well as other positions in the Board or senior management they hold in other companies or institutions.
- Committees and Board members, the authorities and assignments entrusted thereto and activities carried out during the year.
- The number of meetings held by Board and Board Committees as well as names of the attendees.
- The names of the major shareholders who directly or indirectly own more than five percent of the company shares in addition to a brief summary of the changes in the company capital structure.
Report on the risk management framework and internal controls, including the following:
- The applicable corporate governance rules.
- The self-evaluation approach of the Board performance.
- Internal audit procedures and the scope of their full application by the Board.
- Details and reasons for any compensation and allowances received by each Board member and Board committees for the financial year.
- A statement of the company directors and the first and second grades as stated in the organizational structure of the Company and their functions, dates of appointment, details of salaries, bonuses received by each of them separately and any other compensation received from the Company, clarifying the consideration for these compensations.
- Compensation of the Board members and all members of the Company administrative body, including remuneration and any incentive programs related to securities issued or guaranteed by the Company.
Authorities Board Decision Number (33/R) of 2009 states that a license provided by the SCA shall be valid for a period of one year. Although, in the spirit of uniformity, the first license granted shall only be valid until December of the same year. The renewal of the application is an annual process, subject to the virtue of the application.
The 2016 Corporate Governance Rules apply to all listed local public shareholding companies. The Board of Directors shall be held responsible if the Company is found violating the rules. In compliance with Corporate Governance rules of nomination for board membership, Article 40 of Decree Number 7 R.M. states that the Articles of Association shall be the basis of determination for the formation of the Board of directors. What is interesting to note is that the Law mandates for at least 20 percent of the nominated directors to be female. This can be seen as a more diverse outlook being adopted through the amended act.
In late February of this year, a new Resolution Number 3/RM of 2020 was passed by SCA that adopted the C.G. Resolution. It contains a set of new rules and regulations for JSC’s corporate governance and repealed various previous rules that were applicable with the aforementioned Decree Number 7 R/M of 2016. The intention behind these overhauls of various regulations is to ensure further transparency to the stakeholders in regards to the functioning of a company. Companies in the UAE have been given till the end of 2020 to implement the new regulations, and in case of further delay, shall be provided with an extension on a case by case basis.
Article 14 that deals with Board Obligations has been amended to widen the duties of the body of the Board of Directors, as per the C.G. Resolution. Now it covers code of conduct for employees, auditor of the Company, and board members. In a move to ensure transparency, the article further enumerates on regulations to prevent insider trading and the likes. The amendment has illustrated further on the individual duties of the Directors as well, holding them to a higher standard by urging to act in good faith and due care in their duties as a board member. While asking Directors to be mindful of Conflict of Interests, the act also specifies for the rest of the board members to resort to a competent court to invalidate the order of the member in case a member is found breaching any guidelines; and return any benefits gained due to the transaction.
The chairperson has been given extra duties in terms of obtaining approval to trade shares for board members. They are now required to make sure the Directors do not violate trading rules by indulging in sales or purchase of shares in an unethical manner. It is also mandatory to appoint a vice-chairperson as per the amendment, and the chairperson is responsible for ensuring the Board of Directors do so.
Further updates in regards to the amended resolution regarding corporate governance include:
- The obligation to appoint a secretary on the Board of directors. Requirements for filling this position and the functions of the secretary (Article 8).
- The obligation that the majority of board members should be independent, non-executive (Article 9(5)).
- Bringing more clarity to the mechanism through which the interests of new board members are disclosed through the submission of a Declaration of Interest form upon assuming position (Article 11).
- The introduction of proper and fit criteria for board members (Article 18).
- Bringing more clarity to the process through which conflict of interest is handled (Articles 32-38).
- The development of a new approach to management through the (optional) adoption of the dual governance structure. Under this approach, two board committees are formed: an executive committee charged with the direct oversight of the executive management of the Company and a supervisory committee that supervises the work of the Board, the executive committee, and the Company’s management (Articles 53-56).
- Bringing more clarity and detail to the risk management procedures through the (optional) formation of a permanent committee that is in charge of handling risks pursuant to Article 62 and Articles 65-72.
- Bringing more clarity to governance-related disclosures (Articles 74-77).
While in the past it has been noticed that various PJSCs have been taking advantage of a lack of a detailed set of regulations on its conduct with regards to governance and obligations to the stakeholders, this amendment is to ensure that such practices are eradicated in the market. These amended regulations hold current JSCs to a higher level of accountability to the authorities and stakeholders, while simultaneously encouraging more transparency in the workings conducted by the companies, hence reducing the risk of an investor.