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CORPORATE GOVERNANCE CODE FOR SMALL AND MEDIUM ENTERPRISES (SMEs) OF UNITED ARAB EMIRATES (UAE)

The objective of the Corporate Governance Code for SMEs is to support and guide internal corporate governance of SME’s in Dubai which will enable the sector to overcome the lack of internal corporate governance know-how on implementation, as well as the unavailability of external qualified specialists in the region. This is a voluntary framework designed to support and guide the corporate governance evolution of Dubai companies.

One size does not fit all, but this Code lays out the general pillars of good corporate governance and sets out a number of steps companies should consider when constituting their corporate governance framework, while bearing in mind that the implementation of good corporate governance is a gradual process.

The whole code has been segregated into six groups which are as follows:

  1. Section A: Corporate Governance Policies and Procedures
  2. Section B: Transparency and Shareholder Relations
  3. Section C: Board of Directors
  4. Section D: Control Environment
  5. Section E: Stakeholder Relation
  6. Section F: Family Governance

Brief explanations of each group along with steps have been laid down here.

SECTION A: CORPORATE GOVERNANCE POLICIES AND PROCEDURES:

Pillar 01: Adopt a formal corporate governance framework outlining the roles of the key bodies such as partners, shareholders, Board of Directors and management.

  • Step 1: Partners’ and shareholders’ rights and obligations should be clearly set out.
  • Step 2: Delegation of authority should be formalized in writing, defining the role of the management and specifying matters reserved for shareholders and the board of directors. This is an essential prerequisite for establishing an effective governance framework.

Pillar 02: Conduct a succession planning process.

  • Step 1: Succession planning is a long-term process, and it should be aligned with the company’s business objectives, growth and potential exit strategies of SME owners.
  • Step 2: Companies should have a rigorous succession planning methodology in place providing for both planned and emergency scenarios.

SECTION B: TRANSPARENCY AND SHAREHOLDER RELATIONS:

Pillar 3: Establish a timely, open and transparent flow of information with shareholders.

  • Step 1: All shareholders should be treated equitably and companies should establish clear lines of communication with their shareholders.
  • Step 2: An effective engagement mechanism to gauge the views of shareholders should be established.

SECTION C: BOARD OF DIRECTORS

                                                                                                

Pillar 04: Endeavor to set up a formal Board of Directors to accompany the growth of the company.

  • Step 1: Smaller companies may wish to set up an “advisory” Board with no formal decision making powers but which offers its expertise and networks to guide and support the business.
  • Step 2: A formal board of directors should be established with formal procedures.
  • Step 3: Companies should consider appointing independent board members.
  • Step 4: New Directors should undergo a tailored induction program.

Pillar 5: Develop a clear mandate for its Board of Directors to oversee the operational performance of the business as well as evaluating and improving business strategies.

  • Step 1: The role of the Board should be defined in clear terms. It should be ensured that it has the resources and receives the information it needs to fulfill that role.
  • Step 2: A professional Board with independent non-executive directors, meeting on a regular basis, should be responsible for monitoring and evaluating management’s performance.
  • Step 3: Boards should undergo regular performance evaluation process and regularly review the composition of the board.
  • Step 4: Large companies should consider separating the roles of the chairman and the chief executive.

SECTION D: CONTROL ENVIRONMENT

Pillar 6: Maintain credible books of accounts, which are annually audited by an external auditor.

  • Step 1: Companies should follow credible accounting practices from day one and utilize a reputable independent accounting firm to prepare a complete set of financial statements including a statement of financial position, comprehensive income, cash flows and changes in equity statement.
  • Step 2: Companies should formally evaluate the effectiveness of the external audit and formulate policies on preserving the independence of the audit function.

Pillar 7: Set up an internal control framework in place and conduct a regular review of risk.

  • Step 1: Companies should establish a formal process for identifying significant business risks and the management should adopt formal control mechanisms.
  • Step 2: More developed companies should set up a specialized board-level committee to monitor the overall control environment of the company.
  • Step 3: Companies should consider establishing an internal audit function.

SECTION E: STAKEHOLDER RELATIONS

Pillar 8: Recognize the needs of stakeholders.

  • Step 1: Policies should be formulated governing the company’s relationship with its stakeholders.
  • Step 2: Targets relating to the management of stakeholder relations should be set and progress against the targets monitored and measured.

SECTION F: FAMILY GOVERNANCE

Pillar 9: Formulate a framework setting out the family’s relationship with the business.

  • Step 1: A family constitution should be formulated setting out the family’s vision and policies regulating the family’s relationship with the company.
  • Step 2: A family governance institution with written procedures should be established to facilitate effective communication and coordination between family members and the company.

Conclusion:

The economy of country grows taking hand in hand with SME sector growth. Therefore, there is dire need of a framework which would serve as a path to adhere to business ethics and business motive simultaneously. In short, this is a try to make the driving force of the country i.e. SME sector, more accountable and more transparent which will enable them to establish robust business process. Achieving a global image is not a one-day job, but this code definitely ensures global image in long term. The code explained over here is just a conspectus of detail code prepared by Corporate Governance Code Team.

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