The Concept of Corporate Governance
Corporate governance deals with how companies are operated and managed. It is a continuous and changing process that involves organizing a framework detailing how an organization can be directed and controlled. Effective corporate governance is vital for ensuring a company is steered in a way that safeguards the interests of all stakeholders, including shareholders, employees, customers, and the broader community. Simply put, it describes how companies are governed.
By creatively structuring an organization, risks can be proactively mitigated, a well-defined governance body is important for effective corporate governance. While devising strategies to plan a governance framework, ensuring the company’s objectives are clearly defined and seeking guidance from shareholders regarding their expectations is recommended. With this information, a thorough analysis of each department within the organization can be conducted to determine how a company can be structured to ensure oversight while providing a transparent strategic direction. Corporate Governance identifies who holds power and accountability, and who is responsible for making decisions.
An important principle that applies across all levels from shareholders and board members to senior, mid-level and junior employees is to define ‘who does what by when?’. This simple principle establishes all individual’s roles and responsibilities including timelines for task completion. Outlining these elements in policy or practice manuals will enhance clarity and accountability.
A robust governance framework is required to be in place to avoid ambiguities, especially during modern times. Accountability mechanisms like regular audits and reporting can help prevent mismanagement. Companies must be open and honest about their operations, financial performance, and risks. Clear communication can build trust and confidence among employees and shareholders in the management.
The Separation of Ownership and Control
Corporate governance is the separation between ownership and control. While shareholders own the company, the day-to-day running and control are handled by the board of directors or senior management. This separation brings about a strong corporate governance framework to ensure that the interests of shareholders are protected and that the company is managed responsibly.
Creating a proper framework for the shareholders, directors, and employees is corporate governance in a nutshell. This includes setting up the company’s direction and objectives and determining appropriate strategies to achieve them. These legally compliant to-do manuals and policies provide smooth supervision of the management at various levels.
Directors report to shareholders on the company’s financial position, performance, and other relevant aspects of business operations. Establishing a governance structure that allows directors to review the organization’s performance across various dimensions—such as finance, human resources, legal, etc., will significantly enhance control and ensure oversight with all levels of a company, leading to a more transparent organization.
Corporate Governance Structures
There are different approaches to corporate governance structures. Two common models are:
1. Multi-Tier Structure: Features a supervisory board comprising of non-executive directors who oversee the management board. The management board consists of executive directors responsible for operations. The decision making process is more formalized with clear separation of powers. The supervisory board holds the management board accountable.
2. Unitary Board Structure: This involves a single board with both executive and non-executive directors. Non-executive directors provide independent oversight and ensure the company is managed in the best interests of shareholders. Decision-making is more collaborative with shared responsibility. Non-executive directors hold executive directors accountable.
Corporate governance in the UAE is primarily governed by the Corporate Governance Rules for public joint-stock companies (PJSC) and the Commercial Companies Law for other company types. The Securities and Commodities Authority oversee PJSCs, while the Central Bank regulates financial institutions, and the Department of Economic Development oversees other companies such as Limited Liability Companies. Private JSCs have their own governance rules. The Corporate Social Responsibility Regulation regulates corporate social responsibility reporting and contributions for most UAE companies.
Corporate governance is not just about legal compliance or meeting regulatory requirements. It is about fostering trust and confidence among all stakeholders. Effective corporate governance creates a culture of integrity, transparency, and accountability, which is essential for long-term success.
Written by – Sanjeev Kandathil
