THE EVOLUTION OF CORPORATE GOVERNANCE IN THE UAE: A COMPREHENSIVE ANALYSIS

15 March 2024

Ajmal Khan Nadakkal

The United Arab Emirates (UAE) has undergone a remarkable transformation in its approach to corporate governance over the past few decades. This evolution reflects the nation's broader economic diversification efforts, aiming to establish a more transparent, accountable, and efficient corporate sector.

Dubai: As the UAE continues to attract global investors and businesses, the significance of robust corporate governance frameworks has never been more critical. This article delves into the evolution of corporate governance in the UAE, offering insights into its impact on the business landscape.

Corporate governance regulations in the United Arab Emirates (UAE) have undergone significant updates and enhancements in recent years, reflecting the country's commitment to fostering transparency, accountability, and ethical business practices across various corporate entities.

For public joint stock companies (JSCs), Resolution No. 3/RM of 2020, alongside its amendments, serves as the governing framework, replacing the previous Decree No. 7/RM of 2016. These rules comprehensively address board composition, committee structures, director remuneration, and audit requirements, ensuring robust governance standards.

Private JSCs adhere to distinct governance rules outlined in Ministerial Resolution No. 228 of 2015 and Ministerial Resolution No. 539 of 2017. These regulations, aligned with the commercial companies law, emphasize governance controls and corporate discipline standards tailored to the needs of private JSCs.

The introduction of the New Commercial Companies Law (Federal Decree Law No. 32 of 2021) marks a significant milestone, effective from January 2, 2022. This comprehensive legislation replaces the previous commercial companies law and governs various company structures in the UAE. Under this law, corporate governance regulations will be issued by the Ministry of Economy, applying to onshore companies excluding public JSCs, which remain under the supervision of the Emirates Securities and Commodities Authority (ESCA). 

Limited Liability Companies (LLCs) are subject to specific governance provisions outlined in Cabinet Decision No. 77 of 2022, covering aspects such as board member elections, terminations, and related party transactions. Additionally, the CSR Regulation (Ministerial Resolution No. 2 of 2018) establishes a CSR regime promoting corporate social responsibility among UAE businesses. 

Effective oversight and enforcement mechanisms are crucial for upholding governance standards. ESCA supervises public JSCs, while the Central Bank of the UAE oversees banks and financial institutions. Other companies fall under the jurisdiction of the Department of Economic Development in their respective emirates. Various organizations, including the Hawkamah Institute for Corporate Governance, the Abu Dhabi Centre for Corporate Governance, and the GCC Board of Directors Institute, play pivotal roles in promoting good governance practices across public and private UAE companies.

Compliance with corporate governance rules is mandatory for public companies, with ESCA empowered to impose penalties for violations, ranging from written warnings to fines and potential criminal action. While private JSCs also adhere to governance rules, they face less stringent requirements and do not have the same level of disclosure obligations as their public counterparts.

Furthermore, corporate social responsibility is increasingly emphasized, particularly for public JSCs, which are required to develop policies promoting community and environmental engagement. The CSR Regulation has introduced initiatives such as a federal CSR fund, an online platform listing CSR initiatives, and mandatory CSR reporting for businesses within its scope.

These regulatory frameworks and initiatives signify the UAE's commitment to enhancing the business environment, aligning with international standards, and fostering a culture of responsible corporate conduct in the country's diverse corporate landscape.

1.      The Role of Technology and Innovation

The adoption of technology has played a pivotal role in the evolution of corporate governance in the UAE. Blockchain, artificial intelligence (AI), and other digital tools are increasingly being utilized to enhance transparency, streamline compliance processes, and facilitate shareholder engagement. These technological advancements have not only improved governance practices but also positioned the UAE as a leader in corporate governance innovation in the region.

2.     Challenges and Opportunities

Despite significant progress, the UAE's corporate governance landscape faces ongoing challenges, including the need for greater board diversity, enhanced disclosure practices, and the integration of environmental, social, and governance (ESG) criteria into corporate strategies. Addressing these challenges presents opportunities for further development, particularly in aligning corporate governance with global best practices and sustainability goals.

3.     The Impact on the Business Ecosystem

The evolution of corporate governance in the UAE has had a profound impact on the business ecosystem. Improved governance standards have enhanced the UAE's attractiveness as an investment destination, fostering a more stable and resilient economy. Moreover, these practices have encouraged a culture of accountability and transparency, contributing to the long-term sustainability of businesses operating in the region.

ALKETBI TOUCH:

In navigating the complexities of corporate governance in the UAE, companies can greatly benefit from the expertise of ALKETBI. We can assist in preparing all necessary governance documentation, ensuring compliance with the latest regulations and standards. From drafting board charters and policies to advising on ESG integration and shareholder agreements, we provide invaluable support in aligning corporate practices with legal requirements and best practices. Our guidance not only helps companies mitigate risks but also enhances their reputation and competitiveness in the market. If you request further guidance or you have concerns and queries, Let us know!