Corporate governance in the UAE

In the dynamic business landscape of the United Arab Emirates (UAE), corporate governance stands as a fundamental cornerstone of sustainable growth and long-term success.

Corporate governance refers to the system of rules, practices, and processes by which a company is directed, controlled, and operated. It involves the relationships among various stakeholders, including shareholders, management, customers, suppliers, financiers, government, and the community. The primary objective of corporate governance is to balance the interests of these stakeholders while ensuring the company’s long-term success and sustainability.

Why does corporate governance matter?

Corporate governance defines the framework of rules, practices, and principles of an organisation. It also sets the guidelines for decision-making processes, ensuring that businesses operate with integrity, prudence, and compliance. An effective corporate governance structure is essential to build and maintain trust, not only with investors and shareholders but also with customers, employees, and regulatory authorities. By fostering transparency, accountability, and fairness, corporate governance establishes the bedrock for sustainable growth, mitigates risks, and enables businesses to weather challenges with resilience.

What are the key aspects of corporate governance in the UAE?

In the context of the UAE’s business landscape, certain aspects of corporate governance hold particular significance. Key areas that businesses should address include:

1. Board Independence and Composition: Ensuring a diverse and independent board of directors can promote unbiased decision-making and enhance the board’s ability to act in the best interest of the company and its stakeholders.
2. Disclosure and Transparency: Timely and accurate financial reporting, along with transparent disclosure of relevant information, strengthens investor confidence and fosters an environment of trust.
3. Risk Management and Compliance: Implementing robust risk management practices and adhering to relevant regulations and compliance requirements are crucial in safeguarding the company’s reputation and sustainability.
4. Shareholder Rights and Engagement: Respecting and safeguarding shareholder rights while actively engaging with them helps build constructive relationships and ensures alignment with corporate objectives.
5. Ethical Business Conduct: Emphasising ethical behaviour and integrity in all business dealings reinforces the company’s reputation and fosters a culture of trust within the organisation.

Which are the main laws that apply in relation to corporate governance in the UAE?

In the UAE, several laws and regulations govern corporate governance practices. The main ones include:

1. UAE Commercial Companies Law: The UAE Federal Law No. 2 of 2015 (as amended) regulates various aspects of commercial companies, including governance requirements for different types of companies, such as joint-stock companies, limited liability companies (LLCs), and public and private shareholding companies.
2. Corporate Governance Code: The Securities and Commodities Authority (SCA) issued the Corporate Governance Code in 2020, which provides guidelines and best practices for listed companies to enhance transparency, protect shareholders’ rights, and ensure proper board oversight.
3. UAE Companies’ Shareholders’ Agreements: The Federal Law No. 26 of 2020 governs shareholders’ agreements in public and private joint-stock companies, emphasising the protection of shareholders’ rights and disclosure requirements.
4. UAE Federal Law No. 3 of 1987 on Issuance of the Penal Code (Penal Code): The Penal Code addresses various offenses related to corporate governance, including bribery, corruption, fraud, and embezzlement, to uphold ethical standards in business conduct.
5. UAE Central Bank Laws and Regulations: Financial institutions, including banks and insurance companies, are subject to their own corporate governance requirements established by the UAE Central Bank.
6. Dubai International Financial Centre (DIFC) Laws and Regulations: The DIFC operates under its own legal framework, including the Companies Law, the Regulatory Law, and the Market Law, which address corporate governance for entities operating within the DIFC.
7. Abu Dhabi Global Market (ADGM) Laws and Regulations: Similar to the DIFC, the ADGM has its own legal framework, including the Companies Regulations and the Financial Services and Markets Regulations, which govern corporate governance for entities operating within the ADGM.
8. Securities and Commodities Authority (SCA) Regulations: The SCA issues regulations and circulars to regulate securities and commodities markets, ensuring compliance with corporate governance principles by listed companies.
9. Federal Law No. 5 of 1985 Concerning Civil Transactions (Civil Transactions Law): The Civil Transactions Law governs various aspects of commercial transactions, including contracts, obligations, and corporate governance matters.

10. Economic Substance Regulations: The authority responsible for governing Economic Substance Regulations (ESR) in the UAE is the Ministry of Finance (MoF). The Economic Substance Regulations were introduced in the UAE to comply with the requirements of the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU) aimed at preventing harmful tax practices and ensuring tax transparency.

UAE onshore and free zone companies are both subject to the regulations as well as other business entities that engage in any of the broadly defined ‘relevant activities’ below:

• Banking businesses
• Insurance businesses
• Investment fund management businesses
• Lease-financing businesses
• Business headquarters
• Shipping businesses
• Holding companies
• Intellectual property businesses
• Distribution and service centre businesses

11. Ultimate Beneficial Ownership Regulations: Ultimate Beneficial Ownership (UBO) regulations in the UAE are governed by the Ministry of Economy (MOE). The UAE introduced UBO regulations as part of its ongoing efforts to enhance corporate transparency and combat money laundering and terrorist financing.

Under the UBO regulations, certain legal entities operating in the UAE are required to disclose information about their beneficial owners to the relevant authorities. This information is kept in a central registry maintained by the MOE to ensure greater transparency in corporate ownership structures.

12. Anti Money Laundering Law: The authority responsible for governing Anti-Money Laundering (AML) and combating the financing of terrorism (CFT) laws in the UAE is the Financial Intelligence Unit (FIU). The FIU operates under the Central Bank of the UAE and is tasked with receiving, analysing, and disseminating suspicious transaction reports and other relevant information related to money laundering and terrorist financing activities. It plays a crucial role in coordinating efforts to combat financial crimes in the country and ensures compliance with international AML/CFT standards.
13. Corporate Taxation: The United Arab Emirates (UAE) issued the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses on 09 December 2022. This law establishes the legal framework for the introduction and enforcement of a Federal Corporate Tax in the UAE. The Corporate Tax is applicable to corporations and other businesses, and it constitutes a direct tax imposed on their net income. The new tax law is effective for financial years commencing on or after 1 June 2023.

What are the foundational aspects of a strong corporate governance framework?

A strong corporate governance framework encompasses several foundational aspects, each contributing to the overall effectiveness and integrity of the system. Below is a brief outline of these key elements:

1. Clear Corporate Structure and Roles: Define a clear corporate structure with well-defined roles and responsibilities for the board of directors, management, and various committees. This clarity ensures proper oversight, accountability, and decision-making within the organisation.
2. Board of Directors Independence and Competence: Establish an independent board of directors with a diverse set of skills, experiences, and expertise. Independent directors are vital for unbiased decision-making and representing the interests of shareholders.
3. Ethical Code of Conduct: Develop and enforce a robust code of conduct that outlines ethical standards and expectations for all employees, management, and directors. This code should promote integrity, honesty, and responsible behaviour throughout the organisation.
4. Transparency and Disclosure: Implement comprehensive transparency and disclosure policies, ensuring timely and accurate communication of financial and non-financial information to stakeholders. Transparent reporting builds trust and confidence among investors and other stakeholders.
5. Shareholder Rights and Engagement: Protect and respect shareholder rights, enabling shareholders to participate in key decisions, vote on critical matters, and have access to relevant information. Encourage shareholder engagement to align interests and foster a sense of ownership.
6. Executive Compensation and Incentives: Align executive compensation with the long-term performance and sustainability of the company. Use performance-based incentives to motivate management to make decisions that benefit the organisation’s overall health and growth.
7. Risk Management and Internal Controls: Develop and implement a robust risk management system and internal controls to identify, assess, and mitigate risks across the organisation. Effective risk management enhances decision-making and prevents major vulnerabilities.
8. Legal and Regulatory Compliance: Ensure adherence to all applicable laws, regulations, and industry standards. Compliance reduces legal risks and reputational harm, fostering trust with stakeholders and regulatory authorities.
9. Stakeholder Engagement and Corporate Social Responsibility (CSR): Engage with stakeholders to understand their concerns and incorporate their feedback into decision-making processes. Embrace corporate social responsibility initiatives to contribute positively to society and the environment.
10. Long-Term Strategic Planning: Foster a culture of long-term strategic planning and consider the company’s impact on future generations. Balance short-term goals with sustainable growth and value creation.
11. Continual Evaluation and Improvement: Regularly evaluate the effectiveness of the corporate governance framework and make necessary improvements. The governance structure should be adaptive to changing circumstances and evolving best practices.

By addressing these areas in their corporate governance framework, companies can foster a culture of trust, responsibility, and sustainability, benefitting all stakeholders involved.

What are some of the challenges companies face when adapting to the changing corporate governance landscape?

Adapting to the changing corporate governance landscape can present various challenges for entities. Some of the key challenges include:

1. Regulatory Complexity: Corporate governance regulations and requirements often evolve, becoming more complex over time. Entities may struggle to keep up with the changing regulatory landscape, leading to compliance issues and potential legal risks.
2. Global Variability: Companies operating in multiple jurisdictions must navigate different corporate governance standards and regulations across various countries. Harmonising practices while complying with diverse legal requirements can be challenging.
3. Shareholder Activism: As shareholders become more assertive in exercising their rights, entities may face increased pressure to respond to activist demands and address their concerns. Managing these demands while maintaining a long-term strategic focus can be difficult.
4. Increased Disclosure Demands: Stakeholders, including investors and customers, are increasingly seeking greater transparency and disclosure of non-financial information, such as environmental and social performance. Meeting these demands while protecting sensitive information can be complex.
5. Cybersecurity Risks: As governance processes become more digitalised, entities face greater cybersecurity risks, including data breaches and cyber-attacks. Protecting sensitive information and ensuring data privacy become critical challenges.
6. Board Diversity and Skills Gap: Ensuring diverse representation on boards and recruiting directors with the right expertise to address emerging challenges (e.g., technology, sustainability) can be difficult, especially in traditionally homogenous industries.
7. Short-Termism and Quarterly Earnings Pressure: Publicly traded companies may encounter pressure to deliver short-term results to satisfy investors’ expectations. Balancing short-term financial performance with long-term strategic planning can be challenging.
8. Risk Management and ESG Integration: Effectively integrating environmental, social, and governance (ESG) factors into decision-making processes and risk management can be complex, particularly for companies with diverse operations and supply chains.
9. Culture and Ethical Challenges: Instilling a strong ethical culture and encouraging responsible behaviour throughout the organisation can be difficult, particularly in large and geographically dispersed entities.
10. Shareholder Communication: Ensuring effective communication with shareholders and other stakeholders, especially during times of change or crisis, can be challenging and requires a well-defined strategy.
11. Resistance to Change: Resistance from internal stakeholders who may be accustomed to traditional governance practices can hinder the adoption of new governance models or best practices.
12. Resource Constraints: Smaller entities or those facing financial challenges may struggle to allocate sufficient resources to enhance their governance practices.

To overcome these challenges, entities need to prioritise governance as a strategic imperative and be proactive in adapting their practices to meet evolving standards and stakeholder expectations.

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 enhancing its corporate governance. 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.