Introduction to Corporate Governance

Question:

Discuss about the SEBI Committee on Corporate Governance.

According to Cadbury Committee, 1992 corporate governance can be defined as the system by which companies are controlled and directed. More categorically it is the framework for balancing the interest of various stakeholders such as the management, board of directors and shareholders.

Modern discussions of corporate governance explain the principles raised in three documents released since 1990: The Sarbanes-Oxley Act of 2002 (The US, 2002), the Principles of Corporate Governance (OECD, 1999, 2004 and 2015) and the Cadbury Report (The UK, 1992). The last two principles present the general principles around which businesses are required to operate to enhance good governance.

Abu Dhabi Ship Building’s (“ADSB” Company) is one of the company in UAE that has embraced corporate governance. The company recognizes the following pillars for good corporate governance; transparency, financial control, accountability, and disclosure. The corporate governance principles states the following;

Corporate governance includes a set of relationships between various company stakeholders that is company’s management, its shareholders, its board and other stakeholders. Secondly, corporate governance also provides the framework through which the goals of the company are set and the means of attaining those objectives and performance measurement. (Marc, 2012)

While the conventional definition of corporate governance and acknowledges the existence and importance of ‘other stakeholders’ they still focus on the traditional debate on the relationship between disconnected owners (shareholders) and often self-serving managers. Indeed it has been said, rather ponderously, that corporate governance consists of two elements:

The two basic elements of corporate governance involve; the long-term relationship which has to deal information transfer through communications between management and investors , also ensure incentives for managers as well as dealing with checks and balances. The second element is the transactional relationship which deals with disclosure and authority.

Additionally, Corporate Governance involves the interaction between various participants in shaping corporation’s performance and ensuring a healthy relationship between the owners and the managers in an organization. This is done where the owner compares the individual’s actual performance with the standard performance. (Greg, 2004).

Corporate Governance gives confidence to the financiers of getting a fair return on their investment. Corporate Governance shows clearly the difference between the owners and the managers. In this case, the managers are the deciding authority. In current corporations, the functions of owners and managers should be clearly defined. (Shleifer, Andrei, Robert, & Vishny, 2008).

Corporate Governance Principles

Corporate Governance helps in effective strategic decisions. It outlines the ultimate authority and complete responsibility to the Board of Directors. It also helps in today’s changing market trends as well as enhancing globalization and value addition to the stakeholders. (Reinhard & Tyrell, 1997).

Their basic role is to provide effective and efficient governance over the affairs of the company for the benefits of all stakeholders. In all activities undertaken by the Board, the Directors exercise their sound business judgment in what they reasonably believe to be in the best interests of the company and to comply with relevant laws and regulations as well as best company practices. Directors rely on the ethical concepts of honesty and integrity of the company’s senior executives and its auditors and external advisors so as to discharge their managerial obligations effectively. (Greg, 2004).

The board of ADSB Company has an effective and well-informed system that fully complies with the Code’s requirement of Board composition in terms of the mix of non-executive and independent directors. The Board work in collaboration with the Sub-Committees of the Board with well-defined charters. The Company is governed by the relevant document of articles of association. This document clearly specifies the roles and responsibilities of the board, its members, and the executive. This is guided by strong corporate principles and standards.

The Board comprises of nine directors as provided in the articles of association of the company. These directors are both non-executive and independent. Six of the directors are appointed by the resolution of the executive council of the Emirate of Abu Dhabi. This ensures good corporate governance. The other directors are appointed by the general assembly of the shareholders. However, unfortunately, there is no female director on the company board.

• Uphold the ethical standards of good faith, due diligence and care in the interest of all
• Establish a corporate strategy guide outlining the company objectives, major plans of action, risk management strategy capital plans and annual budgets.
• Monitor the success of the set plans.
• Arrange for remuneration of key executive and board members with the longer-term interests of the company and its shareholders.

Board member nomination and election process to be conducted in a formal and transparent manner.

As a result of an increased push in the UAE in the recent years in many listed companies, there has been a need to promote and adopt corporate governance best practices. On-binding guidelines have been provided to financial institution whereas the mandatory requirements in the UAE have been introduced to the listed companies. (SSRN, 2011).

This article sets out some of the key governance and compliance requirements applying to private sector companies listed on the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM), and to financial institutions regulated by the Central Bank of the UAE (Central Bank). We also touch on public sector corporate governance initiatives.

Corporate Governance at ADSB Company

Audit Committee.
The responsibilities of this committee are defined by the charter of the audit committee. This includes;

• Developing and applying the policy for contracting the External Auditor and make a report to the Board of Directors.
• Follow up and oversee the objectivity and independence and of the External Auditor and to hold discussions
  on the nature, scope, and efficiency of the auditing pursuant to approved audit standards.
• Reviewing the Company’s financial control, internal control and risk management systems
  conducts any changes to accounting policies and practices
• Highlighting matters that are subject to Management’s discretion
• Ensure strict adherence to the accounting criteria set by the Securities and Commodities

Authority Coordinating with the Board of Directors & Executive Management in order to accomplish its tasks and to meet with the External Auditors at least once per annum

Introduction of new corporate regulation (the Corporate Governance Code) was done in in 2009 by the SCA.The regulations apply to all joint stock companies and institutions whose securities are listed on a “Market”. All such companies were required to comply with the Corporate Governance Code by 30 April 2010. The Corporate Governance Code does not apply to Government-owned institutions (at either the Federal or Emirate level); Central Bank regulated entities; or foreign companies. (SEBI, 2003).

The Corporate Governance Code sets high standards of corporate governance and is largely based on international standards. The SCA has also issued a comprehensive template business plan to help companies comply with its requirements. In its annual report to the SCA, any listed company must identify areas where it does not comply with any of the provisions or requirements of the Corporate Governance Code (and any other relevant rules and regulations) and must set out its planned actions to rectify any non-compliance.( Oliver,2013).

The Central Bank has issued binding and non-binding guidance in relation to corporate governance within regulated institutions (Zelenyuk & Zheka, 2009). By circular 23/00, it issued binding recommendations for corporate governance structures in UAE banks (the Central Bank Rules) and additional non-binding guidance for bank directors was issued in its Corporate Governance Guidelines for Bank Directors (the Central Bank Guidelines).

This committee complies with the requirement of the code of governance. It is composed of three Nonexecutives, independent directors, which includes the Director of Human Resources, CEO, CFO and other executives of the Company also attend the meetings as and when required, but are not entitled to vote on the decisions of the Committee. Some of the responsibilities of this committee include; Verifying the independence of Independent Board Members, Formulating and reviewing annually the policies on granting remunerations, benefits, incentives, and salaries to Board Members and employees of the Company.

The Governance Committee, Emirate of Abu Dhabi, was established through Resolution No. 17 of 2010 to supervise the implementation and development of concepts and frameworks of governance in the public sector. Part of the committee’s mandate is to address the Abu Dhabi Government public service system and it is working with external consultants to create consistent and coherent public service practices and capabilities across the Abu Dhabi Government. This includes articulating public service core values, guiding principles, policies frameworks, and standards, to guide organizational and individual development throughout the Abu Dhabi public sector.

Board Composition at ADSB Company

The Securities and Commodities Authority of the United Arab Emirates (SCA) has intervened substantially post the global financial crisis in 2008 to re-establish investors’ confidence in the financial markets and improve corporate governance. The introduction of a myriad of laws, regulations, and directives has kept the legal aspects of corporate governance at the forefront of SCA’s focus. As a result, the MSCI has upgraded the status of the UAE from a frontier market to an emerging market. Further, due largely to the promulgation of the new commercial companies law No. 2 of 2015 (CCL), SCA has been coordinating with the relevant committees of the World Bank prior to the issuance of the new corporate governance rules, which aim to complement the new CCL.( Oliver,2013).

 The Decree No. 7 R.M of 2016 was issued by the chairman of SCA ON 28 April 2016.This new corporate rule replaces the old governance rules issued under the Decree No. 518 of 2009. Introduction of the new rules has strengthened the normative framework for the conduct of public joint stock companies .and established strict penalties for non-compliance. In doing so, SCA is demonstrating that they accept responsibility for maintaining a fair and efficient market as it puts the local and international investors on notice that the UAE stock markets now follow a more current and transparent governance regime. In principle, the Governance Rules are more exhaustive and detailed compared to the repealed rules. The governance rules include a lot of reforms, a number of which have been developed by SCA and the World Bank. This includes the following:

Gender equality is required in order to establish development. Considering that the number of female board members is lesser than males at least a certain mandatory percentage should be set aside for female representation. At least one female board member is required of the board members as per the repealed governance rules guiding public listed companies. However, the new rules require publicly listed companies to ensure female representation on their board of not less than 20% of the total number of board members. As with the repealed governance rules, an explanation is required for companies which do not satisfy this requirement will need to disclose to SCA why such requirement is not satisfied and to report the percentage of female board representation in the annual governance report.(SEBI,2003).

AS Regards to this, the governance rules states that prior to the date of nomination no member should be allowed for nomination if he/she had been dismissed from his/her position as a board member in any publicly listed company for 12 months. (Reinhard & Tyrell, 1997).

Corporate Governance Best Practices in UAE

According to rules for governance, any shareholder can call for an urgent general assembly meeting to discuss urgent matters as long as he/she owns 10% of the issued share capital of public companies. Similarly, there is an exceptional rule which allows shareholders who own 5% of the issued share capital to submit a written request to SCA to include an additional item he/she thinks was left out to the agenda of a shareholders’ meeting, it doesn’t matter whether the invitation to the meeting has already been published or not.

Good corporate governance ensures that long-term goals and plans are put in place and that the proper management and management framework is in place to achieve the said goals and plans. However as this is done, the ethical standards must also be kept into consideration to enhance good company reputation and corporate integrity. For a stronger and balanced economic development, there must be transparency in corporate governance. Additionally, this ensures that all stakeholders’ interests are protected as well as giving them freedom for exercising their rights. Significance of Corporate Governance

1. Leads to corporate success and economic growth.
2. Corporate Governance gives confidence to the financiers of getting a fair return on their investment and as result company can raise capital effectively and efficiently.
3. Reduced capital costs…
4. Increased share price.
5. Waste and risk management and reduced corruption levels.
6. Brand formation and development is properly enhanced via a strong corporate governance.

In conclusion, it is clear that for a company to become more efficient and effective so as to gain and increase market share then it must incorporate proper corporate governance. Not only do corporate governance discuss on legislation and executive compensation but also seeks to raise and strengthen the board systems and standards of corporate management.

As a result of an increased push in the UAE in the recent years in many listed companies, there has been a need to promote and adopt corporate governance best practices. On-binding guidelines have been provided to financial institution whereas the mandatory requirements in the UAE have been introduced to the listed companies.

Attempt to bolster shareholders’ rights, and in particular with respect to economic rights and benefits, the new rules oblige public joint stock companies to deposit cash dividends to those As per the new rules the shareholders should be paid promptly, for example, the rule requiring the registered shareholder to be paid on the tenth day following the date of the general assembly. And also delay the payment should not be more than 30 days.

The relevance of the new rules adopted in the UAE stock market includes;

1) A direct impact on international investors will be more comfortable to invest in the UAE stock market due to the more robust governance requirements; and

2) An indirect impact as it is most likely that the new rules will enhance and upgrade the UAE’s ranking within the World Bank’s ‘doing business’ reports, which will, in turn, enhance inbound investments to the UAE market.

There are other interesting developments and more comprehensive provisions are included in the Governance Rules to complement the new concepts set out in the new CCL. In the future, I recommend that SCA will introduce further rules to safeguard any legal vacuum left by the CCL.

References

Adrian, C. (1992). Report of the Committee on the Financial Aspects of Corporate Finance. London: Gee.

Greg, S. (2004). An Introduction to Corporate Governance in Australia. Sydney: Pearson Education.

Klaus, H. (2011). The German Two-Tie Board (Aufsichtsrat. New York: Gruyter.

Marc, G. (2012). International Corporate Governance. New York: Prentice Hall.

Oliver, W. (2013). Corporate Finance and Corporate Governance. Journal of Finance, 567-591.

Reinhard, S., & Tyrell, M. (1997). Financial Systems, Corporate Finance and Corporate Governance. European Finacial Managment, 333-361.

SEBI. (2003). Report of the SEBI Committee on Corporate Governance. Mumbai: Securities of Indian Committee on Corporate Governace.

Shleifer, Andrei, Robert, & Vishny. (2008). A survey of Corporate Governance. Journal of Finance, 737-783.

SSRN. (2011). The Corporate Government of Iconic Executives. Retrieved from 87 Notre Dame Law Reviews: https://ssrn.com/abstract=2040922

Zelenyuk, V., & Zheka, V. (2009). Corporate Governance and Firm’s Efficiency: The Case of a Transitional Country. Journal of Productivity Analysis, 143-157.