Corporate governance code for UAE PJSCs

In February 2020, the UAE Securities and Commodities Authority (SCA) introduced new corporate governance rules for Public Joint Stock Companies (PJSCs) listed on the Abu Dhabi Securities Exchange or the Dubai Financial Market. These rules came into effect in April 2020 and replaced the previous ones from 2016. This article looks at the main elements of the new code and which areas of corporate governance PJSCS should address to ensure compliance with current regulations.

What is corporate governance?

Corporate governance is a set of guidelines and procedures that govern how a company is managed and operated. It encompasses the interactions among stakeholders such as shareholders, management, customers, suppliers, government, and the community. The main goal of corporate governance is to maintain a balance between the interests of these stakeholders and ensure the company’s long-term prosperity and sustainability.

Another goal of corporate governance is to ensure compliance with government regulations and laws, contributing to the company’s ethical and responsible conduct.

Good corporate governance provides numerous benefits for Public Joint Stock Companies (PJSCs) in the UAE. It enhances accountability and transparency within the organisation, fostering responsible decision-making and investor confidence. By effectively managing risks and promoting ethical practices, corporate governance contributes to the company’s long-term growth and sustainability. It ensures compliance with regulations, protects shareholder rights, and encourages independent board oversight. Moreover, corporate governance facilitates stakeholder engagement and community involvement, creating a positive and trustworthy corporate image. Ultimately, a strong corporate governance framework helps PJSCs build resilience, attract investment, and work toward achieving sustainable success.

Who oversees corporate governance for UAE PJSCs what is their remit?

The authority responsible for overseeing corporate governance for UAE (United Arab Emirates) PJSCs (Public Joint Stock Companies) is the Securities and Commodities Authority (SCA). The SCA is the regulatory body in the UAE’s financial sector, and it plays a crucial role in regulating and supervising various aspects of the securities and commodities markets in the country.

The main remit of the Securities and Commodities Authority includes:

1. Regulation and Supervision: The SCA is responsible for regulating and supervising all PJSCs listed on UAE stock exchanges, ensuring that they comply with relevant laws, regulations, and best practices in corporate governance.
2. Disclosure and Transparency: The SCA sets rules and guidelines to ensure that listed companies provide accurate and timely information to investors and the public. This helps in maintaining transparency and promoting investor confidence in the financial markets.
3. Corporate Governance Framework: The SCA establishes the corporate governance framework for PJSCs. This framework outlines the roles and responsibilities of the board of directors, shareholders, and management. It also sets standards for auditing, internal controls, and risk management.
4. Enforcement: The SCA has the authority to enforce its regulations and take necessary actions against companies that fail to comply with the prescribed rules and guidelines.
5. Investor Protection: Ensuring investor protection is a crucial part of the SCA’s remit. It strives to create an environment where investors can confidently invest in PJSCs with reasonable assurance of fair treatment and protection of their rights.
6. Market Development: The SCA plays a role in developing the securities market in the UAE by introducing new regulations, products, and initiatives that can attract more investors and enhance market efficiency.

Corporate governance rules for UAE PJSCs

Shareholders and General assembly

The New Rules for Public Joint Stock Companies (PJSCs) in the UAE provide essential protections and regulations concerning the company’s shares. Key points include:

1. All shares must be of the same class, and shareholders must be treated equally.
2. Shareholders have the right to receive profits when distributable and can freely dispose of their shares.
3. Shareholders can review and approve the PJSC’s financial reports.
4. Each shareholder has the right to attend, participate, and vote at general assembly meetings.
5. Shareholders can appoint a proxy to attend meetings on their behalf, with the proxy document duly certified.
6. The PJSC must appoint representatives from law or audit firms certified by the SCA to represent shareholders at general assembly meetings.
7. Proxy representatives cannot represent more than one shareholder if such representation exceeds five percent of the issued share capital of the PJSC.
8. Certain actions of the PJSC require approval from a simple majority of shares represented at the meeting, while critical matters, like amending constitutional documents, need a majority of 75 percent.

The board

The Board of Directors (the ‘Board’) plays a crucial role in managing and overseeing the business of a PJSC. The New Rules impose several obligations on Board members, including acting in the PJSC’s best interests, observing laws and the company’s rules, and avoiding conflicts of interest. Board members must disclose any conflicts of interest and refrain from voting on related matters. The majority of the Board should be non-executive and independent, and the PJSC has the option to implement a dual governance structure with separate supervisory and executive committees to achieve its objectives. The Chairman and most Board members must be UAE nationals.

Board committees

As per the New Rules, the Board of a PJSC must establish two mandatory committees: the nomination and remuneration committee, and the audit committee. Each committee must consist of at least three non-executive Board members, with two of them being independent. An independent Board member will chair each committee.

The nomination and remuneration committee is responsible for formulating policies regarding the remuneration, benefits, and incentives of the Board and employees.

The audit committee’s role is to review the PJSC’s financial and audit policies, working closely with the external auditor to ensure compliance with applicable regulations.

Additionally, the New Rules encourage the creation of two non-mandatory committees: the risk committee and the technology committee. The risk committee is tasked with defining the PJSC’s risk management strategy and overseeing its implementation. On the other hand, the technology committee is responsible for reviewing and approving the company’s technology plans and strategy, ensuring their successful implementation.

Internal audit and compliance

As per the New Rules, every PJSC is required to establish an internal audit system with a dedicated department responsible for its implementation. This department ensures the efficient and effective adherence to the PJSC’s corporate governance rules.

Additionally, each PJSC must designate a compliance officer responsible for overseeing the company’s compliance with relevant laws, regulations, and the company’s constitutional documents. The compliance officer also monitors employee compliance with these rules and regulations.

The auditor

As per the New Rules, every PJSC is obligated to appoint an external auditor who is neutral and independent. The auditor must be registered with the SCA.

The external auditor conducts an audit of the PJSC’s operations, assessing the effectiveness and suitability of its administrative, financial regulations, and internal audit processes. Additionally, the auditor examines the PJSC’s financial statements and verifies the existence of its assets.

If the auditor identifies any instances of non-compliance with applicable laws, they are required to report such findings to the SCA.

Related party transactions

The New Rules impose restrictions on transactions between a PJSC and its related parties, including the chairman, board members, senior executives, employees, and companies in which they hold a significant share. Transactions with related parties that amount to less than five percent of the PJSC’s share capital need prior approval from the Board. For deals exceeding five percent of the share capital, approval from the general assembly is required, and the related party cannot vote on the approval. Such transactions also require a valuation by an SCA-approved valuer, and they must be disclosed to the SCA with confirmation that they are conducted at arm’s length and in the shareholders’ best interest.

Group subsidiaries

In the case of a group of companies, the parent company is responsible for establishing a corporate governance framework for the entire group. This framework should define the relevant authorities and ensure that the prescribed governance practices are effectively implemented and monitored across all companies within the group.

Using a Non-Executive Director

Public Joint Stock Companies in the UAE should strongly consider using a non-executive director for robust corporate governance and Economic Substance Regulation (ESR) compliance. Non-executive directors bring a wealth of expertise, independence, and impartiality to the board, ensuring better decision-making and adherence to ethical standards. They provide valuable oversight, helping to avoid conflicts of interest and enhancing transparency in corporate operations. With ESR regulations mandating adequate economic substance and local presence, an outsourced non-executive director with a physical presence in the UAE can help PJSCs satisfy these requirements effectively. Moreover, non-executive directors often possess a global network of connections and market insights, offering access to potential partnerships and market intelligence.

Conclusion

Good corporate governance is of paramount importance for PJSCs as it lays the foundation for effective and responsible management. Implementing strong corporate governance practices enables PJSCs to achieve professionalism, transparency, and accountability. By gaining stakeholder confidence and trust, effectively managing risks, and making strategic decisions, companies can improve performance, potentially leading to an increase in share price and heightened investor confidence in the PJSC’s future prospects.

How can The Knightsbridge Group help?

The Knightsbridge Group has over 20 years of experience in the domain of corporate structuring and wealth management. We have unparalleled knowledge of business practices and legal requirements in the UAE as well as an international network of contacts and a deep understanding of the needs of modern-day high net worth clients and international businesses.

We can assist your business in implementing effective corporate governance practices. We will ensure your business is legally compliant, board effectiveness is optimised, engagement with shareholders is managed effectively, and robust risk management practices are implemented to foster responsible and sustainable decision-making.

If you need help with this or any other immigration, financial or corporate structuring issue, please don’t hesitate to contact us on info@kbgroup.ae and we will be happy to help.