For some listed companies in the UAE, corporate governance is merely a matter of “ticking boxes” to meet the new rules issued in April.
But for others, complying with the Securities and Commodities Authority’s (SCA) updated resolution on how companies should be run is about more than just avoiding the potential penalties for breaches, which include a fine or referral to public prosecution.
For them, good corporate governance ticks the boxes when it comes to boosting business performance, too.
Corporate governance, the system by which companies are directed and controlled, includes principles such as accountability and transparency, the need for independent non-executive directors, guidelines on audit committees, as well as companies’ remuneration policies.
Although intended to encompass all stakeholders in a business, corporate governance is sometimes seen as being geared primarily towards shareholders, providing detailed information and reassurances about the way companies are run.
But experts point to an increasing awareness in the UAE – in the private and public sectors – that good corporate governance can bring about a boost in productivity, as well as investment.
Ashraf Gamal El Din, the chief executive of Hawkamah, the Institute for Corporate Governance in Dubai, says that the practice is not just about meeting legal obligations.
“Some organisations will take it as a box-ticking exercise,” he said. “So whenever we go to banks and companies we talk about issues of corporate governance, and the value added to the company.”
Hawkamah was set up in 2006, to bridge what was seen as a gap in corporate governance in the region.
Mr Ashraf said there is growing awareness in the UAE that the principles of corporate governance are generally good for business. Such principles include having a strong board that uses key performance indicators to assess the management’s performance, as well as good engagement with employees and having a clear compensation system to keep them motivated.
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“There is considerable evidence that good corporate governance positively affects operational efficiency and profitability,” Mr Ashraf said.
“The awareness is really increasing here in the UAE … And that’s why you have more and more companies adhering, or trying to improve their corporate governance practices.”
He pointed to Abu Dhabi Commercial Bank (ADCB), which in 2009 partnered with Hawkamah to advance corporate governance reform in the region. The bank adopted four key principles in its own approach to corporate governance, which dates back to 2007, namely the clear division of responsibilities, accountability in relationships between stakeholders, transparency and fairness.
ADCB did a study “in which it really measured the impact of the corporate governance restructuring on various issues … on the bottom line, on their reputation,” Mr Ashraf said.
Fause Ersheid, a senior corporate governance analyst and researcher at the Abu Dhabi Centre for Corporate Governance, said that while all listed companies in the UAE comply to the minimum standards, there is a big variation in those that go above and beyond the requirements of the SCA guidelines.
“Many companies just go with what’s required. And that’s what I call ticking the box. If you want one, two and three you’re going to get one, two and three only,” he said. “Are companies failing to tell everything to their shareholders? I doubt it. They are telling exactly what the law requires them to tell.”
The SCA’s resolution on corporate governance applies only to companies listed on the Dubai Financial Market and Abu Dhabi Securities Exchange, with the Nasdaq Dubai having a separate code similar to that in the UK, which is applied on a “comply or explain” – rather than fully mandatory – basis.
The SCA resolution does not apply to foreign companies listed on the two UAE markets, while some parts of it do not apply to banks and financial services companies subject to Central Bank supervision.
Despite that there is a growing awareness of the value of governance principles in other parts of the economy, rather than just among the publicly listed entities to which the codes apply, Mr Ashraf said.
“[Such codes] also serve as useful benchmarks for both state and family-owned businesses, which tend to dominate the economies of the GCC,” he said.
“Even on the government level there is a realisation of the importance of corporate governance, in the area of stakeholder rights and improving service level.”
The history of corporate governance globally also points to how important the principles are for the efficient and responsible running of businesses. And that is partly because of the circumstances in which many regulations were drawn up: the United States Sarbanes-Oxley Act of 2002, for example, was enacted as a reaction to scandals at companies such as Enron and WorldCom.
But could enhanced corporate governance have any damaging impact on a company?
One issue here is how to strike a balance between transparency and disclosing too much about a company’s business model, or making forward-looking statements that could come back and haunt you.
The annual Grant Thornton Corporate Governance Review measures what UK-listed firms say in their annual reports, including their compliance to the UK code and the quality of commentary they make about their businesses.
The latest edition of the review, published in December, found that 73 per cent of the firms studied gave good and detailed insights into their business models, compared with 61 per cent in 2014. Around 41 per cent gave “high quality” forward-looking statements.
Simon Lowe, the chairman of the Grant Thornton Governance Institute in London, and author of the report, described some information disclosed by UK-listed companies as “commercially sensitive”.
“The emphasis of the new strategic reporting requirements is to actually explain what your business model is – how you make the money – so people understand it, and then to talk about your strategy,” Mr Lowe said, in reference to the UK market. “[But that’s] not to say that in the UK directors are at all comfortable about giving away trade secrets.”
The issues around providing forward-looking statements are particularly relevant when it comes to the “pretty litigious” US market where dual listings are concerned, Mr Lowe said.
And so while UAE companies are urged to not view corporate governance as mere compliance because it is good for business, there is another issue to beware of: ticking one too many boxes.