Wednesday, May 21, 2014

Amendments to the Code of Corporate Governance

Corporate Governance is the method by which corporations are controlled, specifying how a corporation’s structure for decision-making is to be governed as well as setting out strategies for monitoring performance. Recently, the Capital Market Authority (“CMA”) in Oman circulated a draft Code of Corporate Governance (the “New Code”) which will, if approved, replace the existing Code of Corporate Governance issued by circular 1 of 2003 (together referred to as the “Codes”). Both the Codes set out that the provisions are obligatory on all public joint stock companies listed on the Muscat Stock Market and investment funds taking the form of public joint stock companies. The aim of the New Code, which is in line with the GCC Code of Corporate Governance, is to enhance and expand on the existing principles of corporate governance.

The amendments to the definitions of both ‘independent director’ and ‘related party’ were discussed in a previous article. This article explores further changes to the Code of Corporate Governance.

Directors’ meetings and professional conduct

Article 3 of the New Code has provisions on the composition of a board of directors’ meeting and how the meeting is to be conducted. The additional provisions set out the following:

  1. a meeting of the board will not be legally valid unless at least half of its members are present or represented;
  2. a director may represent no more than one director in a board meeting;
  3. at two meetings per annum the meeting may be held by modern methods of communication; and
  4. the directors may adopt resolutions by circulation as long as the resolution is signed by all members and is included for approval in the agenda of the next board meeting.
These additional provisions ensure that directors’ meetings are conducted in a manner that will enhance corporate governance of a company.

The New Code has also inserted an annexure which details a code of professional conduct of directors. This section deals with the following:
  1. Professionalism of a director;
  2. Due diligence
  3. Integrity;
  4. Conflict of interest;
  5. Compliance with rules and regulations;
  6. Access to information; and
  7. Personal characters.
The above is especially helpful to public joint stock companies since it outlines not only how a director should conduct themselves but also includes an explanation as to why such provision has been inserted.

While the Commercial Companies Law, issued by Royal Decree 4 of 1974 (as amended), specifies that directors are not to have any direct or indirect interest in transactions or contracts concluded in respect of the company, it does not provide detail. Here, the explanation provided for in the New Code’s annexure is particularly useful as it clarifies how directors should conduct themselves. Under the Conflict of Interest section, a director should at all times maintain transparency, avoid conflicts of interest and disclose all contractual interest with the company. This is to avoid a director taking an improper advantage of his position and to maintain ethical standards in the functioning of the business. The annexure goes onto specify other standards by which a director is expected to comply. It includes that a director must not make improper use of information acquired and shall comply with all regulations and directives relating to selling and buying company shares.

In addition, in respect of Compliance with Rules and Regulations, the New Code states that a director should take the necessary measures to ensure compliance with the rules and regulations governing its operations. This is to enable the director to obtain knowledge on the legal and regulatory framework in which the company operates, if he is not aware of it already.

Functions of the chairman

Although the existing Code of Corporate Governance highlighted that the roles of CEO, General Manager and chairman are not to be combined, it does not provide details as to the specific role of the chairman of the board. Article 5 of the New Code lists the functions of the chairman including (but not limited to) the following: to lead the board; to encourage members to obtain accurate and timely information; to draw up an introductory programme for directors about the company business and employees; and to ensure implementation of the resolutions of the directors.

Significantly, if companies are compliant with these provisions to encourage transparency, accountability and liability of managers, it should result in effective overall regulation of companies. The draft of the New Code which was finalised by the Corporate Governance Committee is currently being reviewed by the CMA and is therefore, at the time of writing, neither approved or in force.