Governance upgrade a work in progress

UAE regulator is assisting some publicly listed firms to meet new rules on corporate oversight

Many publicly listed companies are still working towards compliance with the UAE's new corporate governance regulations even after the May 1 deadline. The new rules, which were announced three years ago, require the companies to create an internal control system to safeguard shareholder rights, improve transparency and specify the duties of boards of directors.

The rules are enforced by the Emirates Securities and Commodities Authority (SCA), which is working with companies and allowing a grace period to help them comply, said Tarik el Bakri, a partner at Hadef and Partners, a law firm in Abu Dhabi. The guidelines apply to about 150 companies listed on the Abu Dhabi Securities Exchange and the Dubai Financial Market. "As local markets become more sophisticated, counterparties look at each other increasingly as partners," said Simon Copleston, the general counsel and board secretary of the Abu Dhabi Commercial Bank (ADCB).

"They will begin to look at governance and standing as a proxy for how they're run, credibility and whether they will be suitable long-term partners." UAE public companies must now have a board of directors, of which a majority are non-executive members. And one third of the board must be independent. The board will set up two committees: audit; and nomination and remuneration. An external auditor must be independent and cannot accept any work that may affect its judgement or independence. A governance report signed by the company's chairman will be filed with the SCA annually.

Banks were exempted from the governance regulations two weeks before the May 1 deadline, but ADCB decided to fully comply. The bank's executives felt it was the right thing to do, for customers, business partners and the bank itself, Mr Copleston said. "The established wisdom is that companies with better transparency and governance trade at a premium to other companies," he added. "The idea is if we as a bank can encourage governance in borrowers then that should be a good thing for the bank and also the economy in the long run."

ADCB has introduced governance checks as part of its credit reviews, he said. The SCA did not respond to messages seeking comment. How many companies have filed reports saying they are in compliance is also of interest to the Abu Dhabi Centre for Corporate Governance (ADCCG), said Racha Mhanna, a spokeswoman for the centre. Set up in January last year, the centre is part of the Abu Dhabi Chamber of Commerce and Industry and seeks to promote best practices in corporate governance at both public and private companies.

"We were just meeting with them" two weeks ago, she said referring to the SCA. "We were asking them to give us some data on how many companies have complied with the code, how many reports have you received yet. They wouldn't disclose this yet. They are looking into it right now." In the wake of the economic downturn, "all developing countries are under pressure to have strong institutions", Mr el Bakri said.

It is a "process that has occurred in the last 15 to 20 years in Europe and the US". Companies may run into challenges putting these guidelines into practice, he said, because there was a lack of qualified candidates to sit on boards. Also, all documents must be in Arabic and a majority of the management in public companies cannot read or write in the language, Mr el Bakri added. Some companies are not covered by the rules: private joint stock companies and companies and institutions that are wholly owned by the federal or local government.

Also, the SCA may grant waivers for some of the governance rules to companies and institutions in which the government is a participant. Some lawyers said they had heard discussion of a stripped-down version of the regulations being designed for private companies. Even though private companies may not be held to the same standards as public ones, it could make sense to adopt such practices - especially as some private companies grow large enough to turn to the capital markets for funds.

Those firms with governance policies in place are more likely to be considered well-run and, therefore, more credit-worthy, lawyers said. [e-mail]