The importance of corporate governance has become even more apparent since 2002 when a series of corporate meltdowns and frauds led to the loss of billions and criminal investigations. Seven of the 12 largest bankruptcies in American history were filed in 2002 alone: Enron, and WorldCom are just two.

Corporate governance therefore is the system by which companies are directed and managed, a system that ensures that objectives of the companies are set and achieved, risks are monitored and assessed and business performance is optimised. Corporate Governance is a series of structures and processes by which corporations are directed and controlled (OECD Principles/ IFC CG DEPART)

Fundamental to any corporate governance structure is establishing the roles of management and the board. There is need for integrity among stakeholders who can influence a company’s overall performance. Mitigating risks of mismanagement by control and accountability and ensuring effective oversight, is integral to responsible and ethical decision-making. The impact of company actions and decisions is increasingly diverse and good governance recognises the legitimate interests of all stakeholders.

The Organization for Economic Cooperation and Development, (OECD), has developed a set of Principals of Corporate Governance with the aim of providing a framework for sound governance. These principles include: rights and treatment of shareholders, roles of stakeholders, disclosure and transparency, and responsibility of the board.

The predominant model of corporate governance is the product of developed economies such as the United States and the United Kingdom. However, in emerging economies, the institutional context makes the enforcement more costly and problematic. With the absence of effective external governance mechanisms, this results in complex conflicts between controlling and minority shareholders. Furthermore, emerging economies typically do not have an effective and predictable rule of law which, in turn, creates a ‘weak governance’ environment. In most cases, they attempt to adopt legal frameworks of developed economies. However, formal institutions such as rules and regulations regarding accounting, information disclosure, securities trading, and their enforcement, are either absent, inefficient, or do not operate.

The corporate governance structures in emerging economies resemble those of developed economies in form but not in substance. Essentially, concentrated ownership is the most viable alternative in this environment. The controlling shareholders are often associated with a family and/or business group. The family business structure is a rational response to the institutional environment confronting firms and as such means that even large and complex firms are often staffed by relatives. While this may solve some problems, it also creates new ones such as parents’ altruism: inability to discipline under-performing adult children who serve in management positions: especially true for countries where the traditional culture places value on family ties.

Finally, in emerging economies, family businesses lack transparency both in board actions and management since they feel no need for public disclosure. As a result, minority shareholders are often kept in the dark as to the actual status of the corporations.

Data

Firm-level data was obtained through a survey (2006) of organizations operating in Dubai, from the membership data base of Dubai Chamber.

Corporate Governance in Joint Stock Companies

Public Joint Stock Companies, (PJSC), were asked whether they have or they comply with any of the stated guidelines covering issues of corporate governance such as disclosure of information, guidelines resolving conflicts of interest, succession planning etc.

The results show that the majority of companies, more than two-thirds (65%), comply with corporate governance guidelines.

The majority of PJSC conduct regular board meetings, but not all. The survey revealed that the majority of PJSC (82%) make decisions at dully summoned board meetings with the construction sector the least compliant. Additionally, only about half of PJSC (56%) regularly assess CEO’s performance: the trade and the tourism sectors (63%) appear the most involved .

As regards compliance with regulations, PJSC surveyed lack the awareness and knowledge of formal procedures and guidelines (e.g., more than 17% answered ‘do not know’). This suggests that the UAE has weak compliance and enforcement but also ineffective rules which in turn might create a weak governance environment.

Corporate Governance in Family Owned Business

The surveyed enterprises revealed that about half (56%) of FOB’s have stated guidelines for corporate governance: trade and tourism (62%) were more likely than manufacturing (49%), to have such guidelines.

Although regulations in the UAE do not require companies to adopt formal corporate governance, about half of FOB’s (52%) have separation of ownership and management guidelines. As regard FOB’s board composition, the survey revealed that the CEO is a member of the board for about seventy percent (71%). Additionally, only two-fifths (41%) of FOB’s have special boards.

Although the majority of FOB’s surveyed involve shareholders in the major strategic decision making (79%), fewer than half (46%) have measures in place to protect minority shareholders’ rights.

The concept of corporate governance is not widely understood in the UAE. There are no pressures upon companies in the UAE to adhere to good corporate governance practices. This may be attributable to the ownership structure of companies and the high proportion of family business in the UAE.

The main challenge for corporate governance in the UAE is for the active role of both government and private sector in raising awareness of corporate governance issues. Corporate governance should be a vehicle for transparency and market growth rather than to be perceived as a costly impediment to growth for companies.