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ESCA 518

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The law on corporate governance in the UAE changed for listed companies during 2010. Compliance with the new law required major changes to internal policies and processes. From April 30th 2010, all listed companies in the UAE (i.e., ADX and DFM) had to comply with Ministerial Resolution 518 of 2009, unless they are wholly owned by Federal or local governments or are an exempted financial institution regulated by the Central Bank which has issued a separate draft Code.

The challenge is to meet the ESCA requirements in a way that demonstrably adds value to the company.

The level of compliance with 518 by listed companies  still varies: some are near completion but others have  yet more work to do. Compliance with 518 is not optional. ESCA and the other regulatory authorities have signaled that 518 will be enforced in order to raise corporate governance in the UAE to international best standards. Each year, every company subject to 518 must submit a Corporate Governance Report to ESCA. This will self-report breaches, a move which will be reinforced by external auditors who will also report breaches to ESCA. A continuing breach carries the risk of severe penalties.

Companies must adhere to ESCA 518 but in so doing there will be positive benefits in addition to compliance with the law. We have no doubt that strategic application of 518 will result in higher profits due to reduced risk, improved decision-making and a more engaged workforce.

The new law is wide-ranging and covers many aspects of how a listed company is run. Key areas are:

  • Boards: majority to be non-executive directors and 1/3 to be independent; responsible for risk and control who must receive comprehensive and timely information;
  • Nomination & Remuneration Committee of the Board: annual review of company’s remuneration and compensation for directors and staff; determine company’s need for qualified staff at senior management level; annual review of company’s human resources and training policy;
  • Internal control: to be independent and professional;
  • External auditors: auditors have to be properly selected and supervised; they must remain independent. 15 areas of activity restricted or prohibited to external auditors;
  • Delegation of Authority: formal delegation of company authority; written definition of duties and competencies of the board and those delegated to management and items which must have board authority; periodic review of all such delegations;
  • Shareholders’ Rights: Articles of Association to include all necessary provisions to safeguard shareholders rights; clear policy on dividend distribution; companies to be run equitably in interests of shareholders;
  • Code of Conduct required, with supporting policies applying to all directors and employees; environmental and social policies (HSE & CSR policies) are required;
  • Corporate Governance Report: each year the Chairman will sign a Corporate Governance Report submitted to ESCA and shareholders detailing corporate governance.
Penalties are serious. They include:

Warning notice;
Fines;
Suspension.

Majlis has the expertise to guide companies through compliance with 518, satisfying the ESCA requirements and the steps necessary to achieve a satisfactory rating for corporate governance in the annual assessment undertaken by S&P.

For more information please contact the Corporate Governance Department of Majlis Partners