Implementation of Corporate and Bank Governance Rules and Regulations

Implementation of Corporate and Bank Governance Rules and Regulations

This issue addresses governance pillars or rules issued in the State of Kuwait by the Central Bank of Kuwait as the regulator of banks and also by the Capital Markets Authority as the regulator of the shareholding companies that operate in the securities activity. Inquiries began to be raised about what is the governance and its rules or principles, what is the size of change it would make in companies’ management systems or the behavior of its employees or corporate behavior towards stakeholders and community. This issue addresses all of the foregoing answers.

“The years 2012 and 2013 mark the introduction of corporate governance in the State of Kuwait”, said Hisham Sorour, Managing Partner of Baker Tilly Kuwait which is considered one of the world’s top eight accounting and audit firms.

The Central Bank of Kuwait (“CBK”) issued new instructions regarding governance rules on 26th August 2012 instated of the instructions issued in this regard in May 2004. These rules are applicable to banks. The instructions provide for implementation grace period until July 2013. The new instructions have shed light on 9 pillars as follows:

1. Board of directors
2. Corporate values, conflict of interests and group structure
3. Senior Management
4. Risk management & internal controls
5. Remuneration policies and procedures
6. Disclosures and transparency
7. Complex structure banks
8. Protection of shareholders’ rights

The Ministry of Commerce & Industry also issued companies decree law no. 25/2012 as amended. Article 217 thereof provides that “the competent regulatory authorities shall set forth corporate governance rules for the regulated companies to provide optimal protection and set balance between the interests of the company management and shareholders as well as other stakeholders. It also provides for the perquisite conditions of independent members of board of directors”. Several other articles have addressed the matter related to the composition of board of directors of shareholding companies for sound governance of the company in compliance with the governance rules and the contemporary developments. These rules include but are not limited to the following:

1. Article 214 : Separation between executive management and board of directors
2. Articles 228 & 265 : Determination of the maximum membership positions of boards of directors of shareholding companies headquartered in Kuwait
3. Article 224 : Perquisite qualifications of board members
4. Article 221: Meeting mechanism and approval of minutes
5. Article 145, 219, 240 & 335: Regulation of board of directors removal and re-election

The Capital Markets Authority (“CMA”) issued decision no.25/2013 dated 27 June 2013 regarding the corporate governance rules applicable to the companies regulated by Capital Markets Authority. The decision sets implementation deadline on 31st December 2014. The corporate governance rules are as follows:

It is noted that the term “corporate governance” means sound governance of companies. Corporate governance means the set of standards (principles, rules or pillars) that achieve optimal protection and set balance between the interests of corporate management and shareholders and other stakeholders.

Global origin of corporate governance concept
Attention paid to the corporate governance concept increased over the last period, particularly in the 1990s after the financial and economic crises and collapses in East Asia and Latin America countries as well as the collapse of some major US companies earlier at this century in 2002 such as Enron and WorldCom due to the defective control role of the boards of directors of both companies which have not implemented the approved standards of disclosure and transparency as well as the accounting standards, resulting in non-detection of cases of corruption, fraud and mismanagement.

For protection from such collapses, many countries and international organizations and institutions such as International Monetary Fund and World Bank and Organization of Economic Cooperation and Development and Basel Committee on Banking Supervision set to work and submitted many a lot of and studies and identified the legal rules and frameworks to implement the corporate governance concept.

The corporate governance rules depend on five key principles as follows:

1. Shareholders’ rights
2. Equal treatment of shareholders
3. The role of stakeholders in corporate governance
4. Disclosures and transparency
5. Responsibility of board of directors

What are the real changes of companies bound with implementation of corporate governance rules?
Implementation of corporate governance rules may cause quality progress in terms of company’s management on internal level as well as external level, i.e. towards the stakeholders and the society. The rules take four directions as follows:

Improvement of corporate management organization and efficiency
This includes re-engineering of the organizational structure and the relevant formation of committees or organizational units of the board of directors which would help them perform their supervisory role of the senior management as well as re-engineering of the organizational structure to separate the positions of chairman and chief executive officer. The board of directors shall include two independent members from outside the company together with requirement of specialized human resources according to the competency and integrity standards issued by Capital Markets Authority.

Good professional behavior of supervisory staff and senior management towards the company
To emphasize the importance of professional behavior and ethical values of all staffs in terms of observation of all internal regulations as well as legal and supervisory requirements and equally promote the improvement and appreciation of performance in proportion with the achievement level as well as the governance rules which shall promote internal control or accountability concept.

Corporate values towards stakeholders and legal and supervisory bodies
To promote justice, transparency and fair treatment of all parties including shareholders, investors and stakeholders as well as avoid all improper practices that may result in conflict of interest and subject the company to financial problems.

Corporate social role towards the society
Companies have responsibility towards their society, promoting the feelings of donations and values in companies towards the society, whether activities oriented to the society members or activities beneficial for the everyday life of the society members.

Implementation of corporate governance rules has several positive effects which would directly reflect upon the companies and indirectly on the financial market in the state of Kuwait.

Regarding the direct corporate benefits, companies would have internal immunology as a result of implementation of proper management processes, professional and ethical behavior of staff as well as transparency and application of accountability of positions in view of fulfillment of the company’s objective. This would be reflected on the promotion of the company financial performance and enhancement of the investor trust in the company through its high reputation in Kuwait Stock Exchange Market and other capital markets and this would make the investors interested in acquisition of the company’s shares and even insist on keeping the company’s shares on the short, medium and long terms due to their confidence in the positive returns of the company’s business.

Regarding the indirect impact on the financial market, the company strength would equally be reflected on the strength of Kuwait Stock Exchange Market which would become one of the attractive markets on the local and world levels.

Forecasted cost of implementation of corporate governance rules
In view of understanding the required size of change as a result of compliance with the corporate governance rules, this undoubtedly would require investment in high cost new jobs. Some existing entities would find themselves left with two choices: the first choice is to continue and observe the requirements and the second choice is to transform their legal entities into other entities beyond the supervision of Capital Markets Authority.

In summary, the companies subject or not subject to the implementation of corporate governance rules should positively look at such rules for fundamental implementation rather than formal implementation for show compliance, which would not achieve the contemplated goal of issuance and implementation of such rules.