Sunday, February 14, 2016

Corporate Governance in Oman

In our Client Alert issued in September 2015, we discussed Oman’s new Code of Corporate Governance (the “New Code”), focusing on only some of the key new rules introduced by the New Code. We also highlighted the four key elements underlying the purpose of the New Code, namely: transparency; accountability; fairness; and responsibility.

As previously mentioned, the New Code applies to all public joint stock companies (SAOGs) listed on the Muscat Securities Market. In this article, we will focus, in more detail, on some other aspects of the New Code.

Protecting the Interests of the Shareholders

One of the main reasons that the New Code was introduced was to protect the interests of shareholders. By underlining an increase in transparency and accountability in a company, the Capital Market Authority (the “CMA”) has managed to force companies to have strict rules regarding the nature of its management. With regard to transparency, the board and executive management members should take every effort to provide the information required by regulating bodies, shareholders, investors, and related parties in a timely and appropriate manner to enable these parties to make decisions and perform their functions properly. Regarding accountability, board members should ensure that they are aware that they are accountable to the shareholders for their decisions and actions.

Moreover, by having mandatory compliance and disclosure requirements, companies will be required to make available (i.e., disclose) strategic information of its operations and finances to its shareholders and potential investors. Significantly, this will enable the shareholders to know details that they need to know with regard to the company whilst also allowing them to hold the directors accountable in cases where the shareholders do not approve certain decisions taken by the directors.

The Increased Clarity on the Definition of Independent Director

Circular 11 of 2002, which was the old code on corporate governance (the “Old Code”), stipulated that a director shall be considered as independent if he or she or any of his or her first degree relatives have not occupied any senior positions in the company within the last two years. Also, he or she should not have had any significant financial transactions with the company, its parent company or any of its subsidiaries.

The rules regarding independent directors in the New Code are more closely aligned with international standards. For example, under the New Code, a director is permitted to hold shares in the company or any of its affiliates, so long as its shareholding is less than 10 percent. Further, the New Code sets out what directors should do in cases where they are no longer considered independent.

The Appointment of Compliance Officers

Before the introduction of the New Code, banks were the only entities that were forced to have compliance officers. The role for a compliance officer in a bank is vital as his role is to investigate and manage the areas of banking regulations and laws, banking policies, and consumer protection. The New Code has made it compulsory for publicly listed companies to have a compliance officer who should be mainly responsible for supervising and managing regulatory compliance issues within the company. This is in line with international standards. This position has always existed, especially in financial services companies. The fact that this has now been introduced in Oman through the New Code shows that the CMA has now taken steps to align Oman with international corporate governance standards.

The Need for a Remuneration Committee and an Independent Consultant

A remuneration committee is generally formed to ensure that remuneration arrangements support the strategic aims of a business, which ultimately enables the recruitment, motivation, and retention of senior executives while also complying with the requirements of the law. The need for a remuneration committee is significant as the company should be able to develop appropriate remuneration and incentive strategies that make it easier to attract proficient executive management members and motivate them through appropriate wages and remuneration.

An independent consultant must be appointed to review the performance of the board of directors. This will help in bringing more accountability since the independent consultant will review every transaction or decision taken by the board.

How the New Code Boosts Investor Confidence and Attracts Foreign Investments to the Local Bourses

The introduction of the New Code has sought to bring the corporate governance rules of publicly listed companies in Oman in line with international standards. Listed companies will now be under more scrutiny and will be held accountable for any error in contravention of the New Code. This should improve investor confidence in Oman.