Essay: Analysis Of Corporate Governance Codes In UAE And UK.

1. Each student should conduct a detailed and critical evaluation of two corporate governance codes. The evaluation should be based on the comparison between the report, the Resolution No.  (7/R.M) of 2016 Concerning Corporate Discipline and Governance Standards of Public Joint Stock Companies (New Governance Rulesin UAE), and one of the international codes of cooperate governance (i.e., USA; UK; Germany; Japan).

2. Each student should analyzeand evaluate the implementation of the Resolution No. (7/R.M)  of  2016 using one of the corporate  governance reports of one listed company on either the Dubai financial market or the Abu Dubai securities market for the year ended 2017.

Corporate Governance Codes Analysis

Globalization is bringing many changes in the way organizations are run around the world. This has caused tremendous changes in the policies, corporate governance, and bylaws in most of the organizations. It has also brought about a competitive environment where the local organizations are being forced to comply with these changes which represent international standards. These changes have been introduced as guidelines by the organizations themselves and also the institutions are given the authority to implement these guidelines. The institutions bestowed the authority ensure that there is full compliance for the organization to remain operational within the jurisdictions.

The Middle East is not being left behind in putting the corporate governance practices into use. Even though the sophistication of these policies varies in independent regions, there has been a tremendous compliance with these guidelines over the past few years. Most of the organizations in the United Arab Emirates are run by a family administration where they have been faced by stiff competition from the foreign direct investment organizations from the countries that do not produce oil. Local companies are being forced to learn the corporate governance systems and implement them in order to stay ahead of the competition.

Corporate governance can be defined as a system of set rules, practices, and process that are used in the control and the directing of a firm. It is concerned with the balancing of interests of all the stakeholders in the organization from the customers, community, government, suppliers, financiers, management and shareholders (Investopedia.com, 2018 n.p). The local corporate governance code to be analyzed in this paper is the resolution number (7/R.M) of 2016 concerning corporate discipline and governance standards of public joint stock companies. This paper is only concerned with the new rules for this corporate governance code.  The international corporate governance code used for this analysis is the UK corporate governance code of 2018. High standards are set by the local corporate governance code in order to meet the international standards (Bainbridge, 2018 n.p). Securities and Commodities Authority set a comprehensive business plan as a template which is supposed to assist in the compliance of any requirement provided by the corporate governance rules in the United Arab Emirates.

There exist new provisions that were introduced under the new corporate governance rules of 2016 that operate locally that were not there before. The local corporate governance provides for insiders register, conflict of interest, confidentiality of information and data, register of related parties, general meetings and assemblies, capital increase, dividends distribution, investors’ relation and also an obligation to the auditor. The corporate governance provides for the formation of a board of directors which is mandated with the running of the company and the assessment of its operations. Board of directors is considered the direct primary stakeholder of the company and has a great influence on corporate governance. The main purpose of the board is to make important decisions that guide the functionality of the organization. Boards are made up of insiders who are independent members that are main shareholders of the company. The rules provide for the correct procedures to be followed in appointing board members and other representatives (Williams, 2018). The corporate governance also provides for the majority of the directors to be United Arab Emirates nationals for the organization to be operational. The chairman of the board is also to be a UAE national. The international corporate governance code provides for the formation of a board of directors just like the local code (Frc.org.uk, 2018 n.p). The UK corporate governance code of 2018, however, does not have a similar rule to the of the UAE corporate governance code regarding the ownership of the company. The UK rules provide for an open chance to start and operate a company which reduces barriers in operations.

Comparison of the UAE and UK Corporate Governance Codes

The leadership of the board of directors is to be done by a chairperson. The chairperson is elected through an election where a winner is determined by the way of cumulative voting. The chairperson is in charge of all the meetings (Amly, 2016 n.p). Matters discussed in the board of directors meeting need to be passed through the chairperson for a signature. The chairperson is also a signatory of the minutes discussed in any board of directors meeting. The corporate governance also prohibits the combination of roles of a general manager and the chairman of the board of directors. This is in-line with the UK corporate governance which prohibits the chief executive officer to chair the board of directors meetings. These two roles are to be held by two different independent individuals (Frc.org.uk, 2018 n.p).  Board of directors has a right to elect one member as the general manager and also form a committee to monitor the operations of a company by themselves. It is the same case with the UK corporate governance code that provides for the board to form a committee constituted by the members of the board to oversee the operations of the company. The UK code, however, prohibits for the chairperson of the board to chair the committee especially when the appointment of their successor is being sought for (Frc.org.uk, 2018 n.p).

There are also the regulations for the candidature as a board member for the local corporate governance code. The rules provide for a position of women’s representative where it sets aside 20% of all membership positions to women while the repealed governance rules provided for only one position to be taken by a female in the board membership. The organization is expected to give reasons in its annual report in-case there lacks the stipulated percentage of women in the board of directors. The new rules also provide for the time the list of board of directors needs to be posted and kept open before the general meetings. It also prohibits for the signing of new members after the time provided for has been elapsed. The details of all the candidates need to be forwarded to Securities and commodities authority and the market (Amly, 2016 n.p). The UK corporate governance provides for male and female positions in the board of directors. The annual report forwarded is supposed to explain how gender balance has been implemented in the board membership and also the senior management (Frc.org.uk, 2018 n.p).

Being a board member, a chairperson or a vice chairperson is not without conditions in the rules of corporate governance for the local corporate governance code. For one to be a member, an individual is not supposed to be a board member in more than five companies. A chairperson or a vice chairperson is also not to be in leadership in more than two boards of directors of different companies. It also prohibits one to be the managing director for more than one company. The conditions go ahead to state that one must have five years of experience in the service being offered by the company in order to become a board member. One must not have a criminal record among other documents that need to be provided before one is appointed. These rules are standard in most nations that practice corporate governance. This is also common in the UK corporate governance code of 2018 which is expected to be implemented by January of the year 2019 (Frc.org.uk, 2018 n.p).

Implementation of UAE Corporate Governance Rules

Board meetings are to be held at least once in every two months translating to six times a year. The meeting is considered legitimate when attended by the majority of the board members. For any resolution to be approved it needs to go through a voting process and passed by the simple majority who are present in the meeting. Use of video call, conference calls, voice over IP among other modern methods of communication is acceptable in holding board meetings (Amly, 2016 n.p). Any member who wishes to participate in the board meeting through the use of modern technology should inform the relevant parties in advance so that all the mechanisms can be set for effective communication. Minutes recorded in these meetings should meet the set standards by the new corporate governance rules. These minutes should be kept safe in case there is a need for future reference of what was discussed in the meeting. The international corporate governance code provides for the use of technology in communication. International rules also require for minutes to be recorded according to the set guidelines and signed at the end of the meeting. The UK corporate governance code also gives guidelines on how board meeting minutes should be recorded and kept safely. The chairman is in charge of the meeting and the signatory of the minutes written at the end of the board meeting (Frc.org.uk, 2018 n.p).

Local corporate governance code requires any registered company to forward its yearly report to the Securities and Commodities Authority. This report is supposed to have addressed the organization’s corporate governance practices throughout the whole year. All information set out in the approval form provided by the Securities and commodity Authority must be included in the report. This information includes the internal governance system of the organization, information on the violations that have taken place within that year and reasons explaining why they happened and measures that have been put in place to avoid future violations. Also included in this report includes a summary of the composition of board members and the senior management alongside the details of their remunerations (Amly, 2016 n.p). The UK corporate governance code also states that every registered company should write an annual report addressing various issues. Among issues addressed include the appointments of the board members, the gender balance in the board membership and senior management and the evaluation of boards’ performance and how they intend to meet the objectives (Frc.org.uk, 2018 n.p).

Corporate governance has become a worldwide issue of importance which has played a vital role in ensuring communities progress socially and that there is economic development. The accountability and efficiency of corporate are gaining popularity as it is increasingly providing employment opportunities and also improving infrastructure (Bainbridge, 2018 n.p). It is clear from the analysis that the new rules regarding the UAE corporate code are in line with international standards. It would be correct therefore to state that any company that is full compliance of the local corporate governance code is operating within the international standards. This section of the paper evaluates the implementation of the resolution number (7 R.M)of  2016 by the Union Properties PJSC company which is a property development company operating in the UAE. The company was started in 1987 as a Union Property Private Limited company and in the year 1993, it floated as a public limited company.

Conclusion

Union Properties Company is among the listed companies which are in full compliance with the Dubai Financial Market and Shari’a Law and guidelines. This company is controlled by a board of 7 directors exclusive of the chairperson and his deputy. Three of these directors resigned in the year 2007 who later denied their resignation to SCA. There was still a court case regarding this issue by the time this report was being prepared. The members of the board of directors are selected from the shareholders where most of them are independent.  Mr. Naser Butti Omair Bin Yousef was elected as the chairman of the board whose role is different from that of the general manager (Dfm.ae, 2018 n.p). The general manager and the board of directors’ chairperson of this company are two different and independent individuals as provided by the code.

The company holds board meetings and record minutes as it is stipulated in the new rules of the local corporate governance code chaired by Mr. Naser (Dfm.ae, 2018 n.p). Modern technology involving communication through video and audio calls may be used in the meeting in case a member is not in a position to avail oneself in the board meeting.

Mrs. Raja Al Mazrouei was the only woman representative in the board of directors of the Union Properties PJSC Company in the year 2017. The company is also in compliance with the provision that requires external auditors. The report indicates that KPMG Company provided external auditing services regarding all operations of the Union Properties company (Dfm.ae, 2018 n.p). This is also in-line with the new rules of the local corporate governance.

The company’s performance relies heavily on good governance as it ensures the smooth running of the company. Bad governance will mean that the company is going contrary to the set standards and that will have implications when it comes to the financial health of the company (Investopedia.com, 2018 n.p). For instance, Volkswagen AG suffered huge losses when rumors emerged that the company had rigged on tests of engine emissions. The present world needs well-governed business enterprises that are well managed in order to attract investment, create employment, and create profits and overall to stay ahead in the competitive global market. There were no irregularities recorded in the year 2017 according to the corporate governance report (Dfm.ae, 2018 n.p). This means that the company was in full compliance of the Dubai Financial Market guidelines and also SCA’s chairman resolution number (7 R.M) of 2016 concerning the standards of institutional discipline and governance of public shareholding companies.

There is an importance in communicating a firm’s corporate governance in influencing community and investor relations. This is enhanced by transparency as a pillar of good corporate governance. A company such as Apple of US, for instance, has an investor relations site where they outline the company’s leadership and governance. It does this by communicating all the necessary information from the top leadership to the lowest managerial role (Bainbridge, 2018 n.p). It also highlights stock ownership guidelines, provides governance documents and charter which contain materials such as by-laws and stock ownership guidelines. This can be a good step if it can be appreciated and practiced by local companies. It may be also practiced by international companies operating locally as a way of being transparent.

Corporate governance is brought about by several factors working together for the better performance of an organization. Among them there exist pillars of the code of best practice of corporate governance that need to be enhanced. Among the pillars are transparency, accountability, fairness, and ethics (Roman, 2017 n.p). The top leadership of the organization plays a great role in seeing that transparency exists within an organization. Here all the organizations' transactions and activities are put to the limelight for all the players to get the necessary information. Accountability calls for each of the workers to be accountable for his activities and actions. This also ensures that funds are utilized for the intended purposes and board remunerations are given for work well done. Fairness ensures that all the different type of owners and involved parties are treated fairly. This will be in terms of opportunities, profits and dividend shares. All the organizations are subject to the law and, therefore, good corporate governance is supposed to comply with the established law (Roman, 2017 n.p). This is where the ethics pillar of corporate governance comes to play so as to avoid conflicts that may arise with authorities or due to interests.

In order to open the UAE market and to embrace globalization, there needs to be a few legal and legislative changes. One necessary change is on ownership of an external company operating within UAE. The current policies require for a company to have an Emirati as a partner or a major shareholder for it to be allowed to operate. This may act as a barrier for foreign investors and therefore needs to change. The other change is the extension of Visa renewal period for certain careers from two and three years to ten years (Williams, 2018 n.p). This will give the foreign investors a sense of security in their future in UAE.

Conclusion

Discussed in this paper includes the definition of a good corporate governance which is described as the set policies and guidelines that ensure the smooth running of an organization within set standards and confines of the law. This paper has also conducted a deep analysis of the local corporate governance code in comparison to the international corporate governance code. This paper has also reviewed Union Properties company listed with the Dubai Financial Market which is in full compliance with the local corporate governance code. Among the issues discussed include the formation of a board of directors in an organization, members’ candidature, the leadership of the board, prohibitions of individual members as well as the leadership, conducting of board meetings and also minutes recording. The corporate governance code provides a guideline to all the above-named activities through the Securities and Commodities Authority. SCA ensures for the compliance of the corporate governance code by the organizations to the letter.

The results of the analysis have been discussed where areas of compliance have been highlighted. The paper also provides a recommendation on how the corporate governance code can be implemented and enhanced in order for the organization to stay ahead in the competitive market. This can be done through the strengthening of the good governance pillars discussed in this paper. This paper also recommends for legislative changes to give more room for the locals to invest as well as foreigners. These changes include the extension of visa renewal period as well as reduction of barriers in starting an organization in the UAE. This will give room for globalization and expand the UAE market which will have many advantages.  

References

Amly, Y. (2016). An Overview of the New Governance Rules in the UAE: Part II | Al Tamimi & Company. Retrieved from https://www.tamimi.com/law-update-articles/an-overview-of-the-new-governance-rules-in-the-uae-part-ii/ n.p

Bainbridge, A. (2018). Corporate Governance for UAE companies. Retrieved from https://www.nortonrosefulbright.com/knowledge/publications/54327/corporate-governance-for-uae-companies n.p

Dfm.ae. (2018). Union Properties PJSC Corporate Governance Report 2017. Retrieved from https://www.dfm.ae/docs/default-source/default-document-library/upp_cgr_e_20179e82e6f7f6026339b0d9ff00009be840.pdf?sfvrsn=0Frc.org.uk. (2018).

The UK Corporate Governance Code. Retrieved from https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF n.p

Investopedia.com. (2018). Corporate Governance. Retrieved from https://www.investopedia.com/terms/c/corporategovernance.asp n.p

Mishra, N. (2017). What are the pillars of a good governance?. Retrieved from https://www.quora.com/What-are-the-pillars-of-a-good-governance n.p

 Roman, A. (2017). The Three Pillars of Corporate Governance | Azeus Convene. Retrieved from https://www.azeusconvene.com/three-pillars-of-corporate-governance n.p

Williams, S. (2018). Corporate governance in the UAE. Retrieved from https://www.icsa.org.uk/knowledge/governance-and-compliance/indepth/tmf/mea/corporate-governance-in-the-uae n.p