x Abu Dhabi, UAEFriday 19 January 2018

One size does not fit all in the world of corporate governance

None the UAE's current corporate rules regulate them, which puts them at a great disadvantage when they try to compete in the international market.

The 20 biggest companies in the UAE are not listed on stock markets, according to a report Jumana El-Heloueh / Reuters
The 20 biggest companies in the UAE are not listed on stock markets, according to a report Jumana El-Heloueh / Reuters

Although the Commercial Companies Law of 1984 set corporate governance rules for companies incorporated in the UAE, a series of corporate governance codes have been issued in recent years.

In 2007, the Securities and Commodities Authority (SCA) issued the Corporate Governance Code expanding the governance rules and regulations to any company, domestic or foreign, whose shares are listed on UAE stock exchanges.

Two years later, the Minister of Economy issued a resolution (No 518) amending SCA's code and providing a more comprehensive set of corporate governance regulations for publically traded companies in the UAE.

However, the new code explicitly excludes "Companies and institutions that are wholly owned by the Federal Government or a local government" as indicated in Article 2.

Since the code is applicable only to listed companies, unlisted private companies such as family-owned enterprises (FOEs) and state-owned enterprises (SOEs) are not affected by it.

In 2011, Sheikh Khalifa, President of the UAE, and Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, have respectively issued Federal Law No 5 and a decree outlining corporate governance rules and regulations for federal government entities (profit and non-profit).

This is an important step in strengthening the corporate governance practices in the UAE and serving as a role model for all the companies in the country.

However, none of the current governance codes regulates the local SOEs. According to a report produced by the Organisation for Economic Cooperation and Development the bigggest 20 companiesin the UAE are not listed on stock markets and most of them are local SOEs.

The UAE has liberalised its markets and embarked on a number of privatisation programmes, especially after joining the World Trade Organization in 1996. The SOEs are major contributors to the country's GDP and employment. Considering the size and number of SOEs, the challenge of how to enhance corporate governance - and as a result performance - arises.

Recently some SOEs, such as DP World, have started to partially list their shares on local and international stock markets to fund their expansion projects.

For them, raising corporate governance practices to match those of international standards becomes a key enabler.

In the future, as the government starts to tighten the purse strings, SOEs will have to further tap capital markets, where companies with good corporate governance structures receive higher valuations.

According to a survey by McKinsey, about 80 per cent of institutional investors said they would pay a premium for a well-governed company.

SOEs (and more generally unlisted companies) are of special significance to UAE, especially when considering the country's relatively less developed capital markets, where the majority of the large companies are not listed.

According to the Organisation for Economic Cooperation and Development, good corporate governance in unlisted companies can greatly enhance business productivity, economic growth and job creation.

It is true that there are governance codes and laws regulating some important parts of the UAE economy, but not having a governance code for unlisted companies (especially for local SOEs) poses a danger that they will be too slow to voluntarily develop a robust corporate governance structure with negative implications for their long-term success and the health of the economy at large.

In the corporate governance world, one size doesn't fit all.

Even more narrowly, in corporate governance world of unlisted companies, one size doesn't fit all as they come in different sizes, types and forms.

The next stage of corporate governance evolution in the UAE is headed in the direction of unlisted companies.

The Federal Government entities were the first of the unlisted to be regulated through a corporate governance code and decree, but they will not be the last.

Other types of unlisted companies, especially those that make major contribution to GDP, will be regulated in the future.


Ebrahim Hashem is an expert on business strategy and corporate governance based in Abu Dhabi