DFSA to tighten up corporate governance

The regulator of NASDAQ Dubai will further tighten corporate governance rules in its latest effort to align itself with global practices. The move follows regional efforts to strengthen the role of shareholders, independent directors, audit and remuneration committees and other mechanisms aimed at providing "checks and balances" for corporate executives.

The proposed amendments to the 2004 law, which were seen by The National, will be sent to all firms listed on NASDAQ Dubai, one of the country's three stock exchanges, within weeks. They can respond within 90 days. They include the mandatory separation of the roles of chairman and chief executive and the abolition of payment of non-executive directors in share options. The regulator will also demand that companies fill their audit, remuneration and nomination committees with a specific number of non-executive directors. Some exceptions will be made for companies that can demonstrate a valid reason for exemption.

Paul Koster, the chief executive of the Dubai Financial Services Authority (DFSA), said tightening governance rules would backfire without accounting for regional peculiarities such as the large number of small, often family-owned businesses. The DFSA regulates all entities operating through the Dubai International Financial Centre. "Very specific rules are sometimes not helpful and too expensive," said Mr Koster, pointing to the 2002 Sarbanes-Oxley Act, which set new accounting rules for companies listed in the US. Its complexity led many companies to delist.

In a separate move, Hawkamah, the Institute for Corporate Governance based in Dubai, published policy recommendations for regulating the regional banking industry. Bankers said the region must learn from lessons elsewhere. "The banking industry is similar across all regions - [although] the UAE may have a different funding profile," said Simon Copleston, the general counsel at Abu Dhabi Commercial Bank, the third-largest bank by assets in the UAE.

The accumulation of massive amounts of debt by US and European financial institutions and their heavy exposure to securitised products triggered the world's worst economic crisis in nearly 80 years. Addressing corporate governance issues, the recommendations will also help to better assess borrowers' credit profiles, bankers said. "The holy grail is the governing of borrowers," said Mr Copleston, whose bank lent two Saudi conglomerates, the Saad Group and Ahmad Hamad al Gosaibi and Brothers, an overall US$609 million (Dh2.2 billion).

"This issue was brought home with the high-profile borrowers in Saudi Arabia (whose) governance was close to nil. If we had picked that up then we would not have such problems now." Although generally well capitalised, confidence in GCC banks and their lending methods was shaken after the default of the two large Saudi conglomerates. The Hawkamah-OECD recommendations include changing the functions and composition of a board and calling for more independent directors with more authority and more frequent meetings.

"That whole area [of disclosure] is still very weak in the region," said Alissa Koldertsova, a policy analyst in the OECD's corporate affairs division who worked on the brief. Governance experts are also concerned about how banks set remuneration for directors and senior managers. "There is little information on that," said Ms Koldertsova. @Email:[e-mail]