Corporate Governance update - UAE

Code of corporate governance for the real estate developers

Hawkamah the Institute for Corporate Governance was commissioned by the Real Estate Regulatory Agency (RERA) to develop a Code of Corporate Governance for the Real Estate Developers.

The real estate prices and rentals fell significantly during the recent global financial crises, leading to a large reduction in yields on real estate investment and the correction was more pronounced in Dubai, where prices had risen more sharply. Lack of transparency and disclosure and in essence lack of effective corporate governance framework and practices can be identified as one of the reasons for this sharp decline, which ultimately led to decrease in investor confidence.

While lower real estate prices and rentals are leading to a new equilibrium in the market through increase demand, they are not a substitute for structural reforms and new policy initiatives. What is needed is an upward shift in the demand curve in order to absorb the new supply coming on the market. Effective corporate governance practices are required to maintain the integrity of businesses, financial institutions and markets.

Dubai’s Real Estate Regulatory Agency, the regulator for the Dubai’s real estate industry, has issued a number of laws and policies aiming towards improved transparency and strengthening investors’ confidence in the market. The issuance of this ‘Code of Corporate Governance for Developers’ (the Code) is one of such initiatives.

The objective behind developing this Code for real estate developers is to increase transparency and disclosure, increase professionalism, improve oversight of the company and functioning of the governing body which would lead to strengthening investors’ confidence in the real estate market. UAE’s Ministerial Resolution No. (518) of 2009 concerning governance rules and Corporate Discipline Standards for listed companies was issued in 2010, however, RERA felt the need to issue a CG Code specifically for the Real Estate Developers who are one of the major players in the real estate industry. This Code is the first Code in the world developed and tailored specifically to the dynamics of the real estate industry of UAE.

The Code explains the role of the various governance players in an organization laying emphasis on the role of the board of directors or the governing body in particular, and laying equal emphasis on the fact that shareholders have a role to play in shaping the corporate governance practices and policies of companies in which they invest.

Dubai SME code

SMEs make a significant contribution to the economy of Dubai in terms of their employment, sales and innovation activities. According to Dubai Economic Department, SMEs comprise up to 90% of the businesses in Dubai and are crucial for Dubai’s future economic development. It is for this reason that the Dubai SME, an agency of the Dubai Economic Department, commissioned Hawkamah Institute for Corporate Governance to develop a Corporate Governance Code for SMEs in Dubai.

This Corporate Governance Code is a voluntary framework which provides recommendations to support an enterprise’s corporate governance journey as well as a benchmark of best practices. This approach is particularly apt in Dubai considering that Dubai’s SMEs are far from being homogeneous entities – companies do not only vary in terms of size, maturity, ownership structure, and sponsorship requirements, but also because of the on-shore/off-shore duality in Dubai which allows companies the freedom to set up business in the numerous free zones in the Emirate, each with their own regulatory frameworks.

The Principles laid out in this Code present that best practices and are applicable to all SMEs in Dubai, while bearing in mind that the implementation of these Principles will have to be adapted to the individual circumstances of the companies taking into account their stage of growth and development.

The Code sets out 9 key principles of corporate governance for Dubai SMEs covering the following areas:

- Formalizing corporate governance policies and procedures

- Board of Directors

- Control environment (internal controls, audit and risk management)

- Transparency and Disclosure

- Stakeholder relations

- Family Governance

A parallel Dubai government initiative to this code is Dubai’s SME 100 which aims to identify the top 100 high growth potential SMEs in Dubai and supporting them in their growth through workshops, access to financing, advocacy, etc. Part of the vetting process for the SME 100 companies is the extent that the company is incorporating good corporate governance practices, as defined in the 9 principles above.

UAE federal decree on corporate governance of state-owned and government related entities

The UAE federal government took a significant step in corporate governance of state-owned enterprises when Federal Decree no. (5) of 2011 was issued on July 18th 2011 and the Cabinet Resolution no. (29) of 2011 issued on July 19th 2011 relate, inter alia, to the governance of the board of directors of entities, institutes and corporations owned by the federal government, including those that are non-profit.

The decree lays out framework on the composition of Boards of Directors, the mechanism for selection of its members by the Council of Ministers, and highlights the importance of experience and diversity of skills as part of the board selection process. The Council of Ministers will conduct an annual assessment of board performance in accordance with the performance standards specified by the Cabinet.

The decree prohibits for a board member to be a member in more than four boards and not to serve as president in more than three federal institutions at the same time.

It is not permissible for the members of the boards of nonprofit federal institutions, who regulate or oversee companies with shares listed on the stock markets in the country, to be members of the boards of these listed companies.

The decree obliges the boards of profit and nonprofit federal institutions to form an Audit Committee to monitor risks and safety of the financial statements of the institution, in addition to evaluation of risk management policies, internal control and effective Internal Audit Department and cooperate with the Audit Bureau in accordance with the rules and accounting principles in practice.

The decree also articulates the principles and rules of professional conduct and ethics of public office to be adopted by the federal institutions, especially by the board.

According to the resolution, a special system on disclosure of all matters relating to the establishment of the institution, including the Federal financial position, performance, ownership and governance style of the institution, and submit it to the Council of Ministers, will be prepared.

Corporate governance in Islamic banks and Financial Institutions

Hawkamah recently issued a Policy brief on Corporate Governance for Islamic Banks and Financial Institutions in the Middle East and North Africa (MENA) region in Arabic (available in English as well) http://www.hawkamah.org/files/Islamic%20Finance%20Policy%20Brief%20FINAL%20May%2025%202011.pdf

which highlights the improvements required in the corporate governance frameworks of Islamic Banks and Financial Institutions in MENA taking into consideration International practices and standards developed by various Islamic Finance Standard setting bodies.

The Policy Brief is addressed to policy makers, Islamic banking regulators, banking associations and Islamic banks and Financial Institutions in the MENA region. The publication of this policy brief is the first step towards bridging the corporate governance gap in the Islamic Finance Sector in the MENA region. This policy brief identifies the corporate governance implementation gaps in the Islamic Financial Institutions industry in region and lays out specific recommendations to bridge this gap.

The Policy brief is a by-product of Hawkamah’s Task Force on corporate governance for Islamic Banks and Financial Institutions. The Task Force members consist of experts in the area of corporate governance in Islamic Finance, Islamic Finance standard setting bodies, and IFIs across the MENA region.

To find out more visit www.hawkamah.org


Nick Nadal
Head Hawkamah-Mudara IOD