Ministerial Resolution No. 518 of 2009, Concerning Governance Rules and Corporate Discipline Standards ("R/518") was issued by the UAE Ministry of Economy on 29th October 2009. Although R/518 is silent on the treatment of decision No. R/32 of 2007 on corporate governance codes for joint stock companies and institutional discipline criteria previously issued by the Securities and Commodities Authority (the "SCA") on 09/04/2007, we are of the opinion that R/518 replaces and supersedes the said decision. The provisions of R/518 are applicable to all companies and institutions whose securities are listed on a securities market in the United Arab Emirates1 and their board members. Accordingly, the SCA is charged with the supervision, control and verification of compliance with R/518.
Significant Themes
While R/518 is in its infancy it may be premature to comment on its impact or to attempt a full exposition of those matters it addresses but there are certain themes that are reinforced and it may be beneficial to note those broader initiatives. These themes include: the education of board members; the maximisation of individual participation in board processes; the responsibility of the board in establishing clear rules and practices promoting good governance; and, emphasising the importance of board committees - most notably the audit committee and the nomination and remuneration committee.
Board Accountability
R/518 makes it incumbent upon the board to develop a set of procedural rules for corporate governance and to supervise the application of such rules2. We can expect corporate governance to assume a more prominent role combined with the implementation of an internal control procedure to be verified and monitored by a compliance officer3.
Board Education
The development of knowledge and skills of individual board members is also highlighted as a responsibility of the board4. This theme is complemented by the chairman's responsibility to encourage all board members to actively participate in board decisions, thereby maximising the impact of the skill-set available to the board.
Board Committee Independence and Empowerment
while board committees, by definition, are subject to board control, R/518 specifically notes the requirement for a majority of audit committee members to be independent members of the board and underlines the impact of audit committee recommendations – even in the event the board disapproves of the same. For example, the board must include audit committee recommendations concerning external auditors in the annual corporate governance report, which is sent to the SCA and must be made available to shareholders, and explain any reasons for disapproval of the same5.
The nomination and remuneration committee is another board committee that is charged with a prominent role under R/518. The primary role of this standing committee is to formulate and review policies on salaries, benefits, bonuses, etc. for board members, executives and employees of the company but it is also charged with ongoing responsibility to monitor the independence of independent directors and follow up on the procedures for nomination of board members in line with applicable laws, regulations and R/518 itself6.
Implementation of R/518
The SCA had fixed 30th April 2010 as the cut-off date to implement the provisions of the previous decision No. R/32 of 2007. R/518 is set for the same deadline by which time public joint stock companies need to be in compliance with the said resolution. Public joint stock companies which have not yet complied with any of the corporate governance rules need to do so by 30th April 2010 at the latest.
With respect to public joint stock companies which have already amended their Articles of Association to comply with the decision No. R/32 of 2007, it is uncertain whether or not the SCA will require them to convene another extraordinary general meeting to resolve further amendments to effect compliance with the provisions of R/518. In our opinion, these companies may not need to do so since the SCA had required these public joint stock companies to insert in their amended articles a general clause providing that the Decision No. 32/R of 2007 on Corporate Governance Code for Joint-Stock Companies and Institutional Discipline Criteria and any other decision amending it or replacing it shall be considered an integral part of the amended articles and ancillary to them.
Comment
It can be no coincidence that the directional changes indicated in R/518 follow one of the most tumultuous years global financial markets have experienced. Some commentators have pointed to more robust corporate governance regimes as preventative medicine against further financial shocks; and, there has been no shortage of international media coverage on hot-button issues such as executive compensation and bonus packages. Precisely how the provisions of R/518 will be embraced by listed entities here in the UAE remains to be seen but the core tenets of the resolution, promoting transparency and compliance suggest that the Ministry of Economy is pursuing an appropriate course of accountability and economic efficiency in a move towards a healthier market paradigm.
Footnotes
1 Note: Article 2(c) provides for an exemption to entities wholly owned by the federal or any local government upon request to the Board of Directors of the SCA.
2 Article 3(12).
3 Article 8 suggests rigorous ongoing oversight with details made available to investors, beyond annual notes concerning risk management and disclosure compliance.
4 Article 3(13). We have seen a practical shift towards this goal with the recent proliferation of courses and programs developing the education and awareness of board members.
5 Article 9(6).
6 While we would caution reading too much into the impact of the last twelve to fifteen months, Article 6(1)(b)(5), may suggest an appreciation of the need for flexibility in this area given the current changing landscape in terms of who makes ideal "director material" in today's market.
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