Out-Law Analysis | 06 Oct 2020 | 11:19 am | 2 min. read
Public joint stock companies (PJSCs) established in the United Arab Emirates (UAE) have until the end of 2020 to implement new corporate governance provisions published earlier this year.
The UAE Securities and Commodities Authority (SCA) published an updated corporate governance guide for PJSCs in February 2020, following adoption of the document by the SCA board in December 2019. The rules came into effect on 28 April 2020, but gave companies a grace period to make necessary changes to their structures.
The new guidelines build on, rather than completely reform, corporate governance rules published in 2016. The previous rules established corporate governance principles such as risk management, compliance, management of conflicts of interest and audit.
The revised guidelines are designed to develop an effective legal and regulatory framework to regulate company affairs. They follow international standards and establish accountability, fairness, disclosure, transparency, and responsibility as the main pillars of corporate governance.
The rules identify the obligations and duties of board members and executive management, and aim to protect shareholder and stakeholder rights while achieving corporate sustainability.
The guidance imposes a number of new requirements on PJSCs and they will need to amend their articles of association to reflect these obligations.
Among the requirements is an obligation to appoint a secretary to the board of directors, with the guidance also outlining the secretary’s duties.
The number of board members should be proportional to the volume and nature of the company’s activity. The majority of board members must also be independent, non-executive members.
The guidance stipulates that women must represent a minimum of 20% of the number of board members. Companies will have to disclose the proportion of female board members in annual governance reports, as well as establishing gender diversity policies.
Board members are required to inform the company at least quarterly, or whenever required, of any changes that might create a conflict or potential conflict of interest. The notifications must be made through a company-approved form, which the secretary should review on a quarterly basis to verify its accuracy and completeness.
The guidance also introduces fitness criteria for board members, including requiring them to have at least five years’ experience in the field in which the company operates.
Companies will have the option of adopting a dual governance structure consisting of an executive committee and a supervisory committee.
The new guidelines add detail to risk management processes, with areas covered including internal audits and the role and duties of the risk management officer. More clarity is provided in other areas, such as the required content of the annual corporate governance report which must be approved at a company’s annual general meeting.
The SCA has also introduced a framework for the corporate governance of subsidiary companies. This establishes that the parent company is responsible for governance at all areas of the group, and the parent’s board of directors must approve the group’s corporate governance framework and ensure that any subsidiary’s management sets up an appropriate corporate governance framework.
Companies will also now need to have corporate social responsibility policies and programmes in place.
The SCA can impose a variety of penalties if any of the guidelines’ provisions are breached, including addressing a warning to the company, its board, board members, management or auditors; imposing a financial penalty; or referring the breach for public prosecution.
Companies should examine their articles of association and make any necessary changes before the end of the year in order to be compliant with the new rules. The guidelines apply to PJSCs across sectors.Co-written by Nathalia Elhage