Corporate governance is the buzzword nowadays within the business community in the United Arab Emirates (UAE), thanks to a host of initiatives undertaken by the federal government. The corporate governance movement in the UAE has been growing since 2004, when the Abu Dhabi Securities Market conducted a review of the existing framework and issued a draft code of corporate governance. In 2006, corporate governance received a massive boost when Hawkamah, the Institute for Corporate Governance, was established in the Dubai International Financial Centre (DIFC).

In April last year, the Emirates Securities & Commodities Authority (ESCA) introduced the first-ever binding code of corporate governance targeting public companies, giving those companies a three-year window to comply with the code. The Ministry of Economy followed suit in December when it issued a draft code of corporate governance, this time targeting private joint stock companies (which are a modified version of the English limited liability company).

Most recently, the DIFC launched Mudara, the Institute of Directors, to help educate the next generation of professional directors.

With only two years left for public companies to comply with the ESCA code of corporate governance, corporate compliance activity is bound to intensify over the next few months if companies are to meet the April 2010 deadline. So, what has put corporate governance so high on the agenda in the UAE? The revolution has been inspired by a number of factors:

- Natural evolution – the dynamic and ever-changing business landscape in the UAE and the larger Gulf Co-operation Council (GCC) region pushed the regulators into action to respond to new economic realities.

- Overseas acquisitions – the active acquisitions programme (ranging from English football clubs to aircraft manufacturers and hotel chains in Vegas) embarked upon by various government arms and sovereign funds exposed the UAE to more mature jurisdictions and opened eyes to the benefits of adopting sound corporate governance structures.

- Political support – a young and progressive political leadership which supports positive initiatives.

Features of the UAE model

So, what does the ESCA code actually require? ESCA aims at revolutionising the management styles adopted by the majority of public companies in the UAE in a bid to catch up with the global movement on corporate governance and groom the UAE for integration into international markets.

The code bears many resemblances to the UK combined code. Issues that it seeks to address include:

- balancing boardrooms by requiring the appointment of independent non-executive directors;

- separating the roles of the chairman and chief executive officer;

- introducing board committees such as audit and remuneration committees;

- cultivating a culture of transparency and openness through various tools such as requiring an annual report on corporate governance;

- implementing policies on share-dealing, related-party transactions, corporate social responsibility and communication with shareholders; and

- adopting a code of ethics.

The main difference worth noting between the ESCA code of corporate governance and the combined code is the approach taken by ESCA to compliance. Following implementation of the code in April 2010, UAE public companies will be required to prepare an annual report on their corporate governance activities explaining how they have complied with the code and, where they have failed to do so, how they intend to comply (i.e. 'comply and explain'). This is in sharp contrast with the 'comply or explain' approach taken by the Financial Services Authority which will accept valid explanations given by listed companies for any deviations from the combined code.

Challenges ahead

From a best practice code, to home-grown institutions such as Hawkamah and Mudara, with the backing of the government and the abundance of professional services firms, the UAE seems to have the ingredients to produce a leading corporate governance model for the entire Middle East region.

However, will the corporate governance movement and its supporters prevail? There is no reason why they should not, provided of course that the usual traps and pitfalls are avoided. The main challenges ahead include:

l avoid the 'iron-fist' approach: the use of the 'comply and explain' approach may well pose the greatest challenge to companies and regulators alike. The radical shift from a culture of minimal (and often no) governance to a best practice environment may well deny the UAE model the right to evolve naturally in a way which takes into account the nuances of the business practices and culture in the UAE.

Bearing in mind that, in the UAE, family and state-owned companies dominate the business scene, a UK 'comply or explain' style might have been more accommodating to those companies' needs. A comply or explain model would allow public companies to reach their own blueprint for good corporate governance and would make room for future improvements.

l accelerate company law reforms: enacted in 1984, the UAE's existing commercial companies law lacks depth and sophistication and will not be able to support a leading corporate governance model. The main areas where reform will be required include setting out the parameters for allowing directors to allot new shares and detailing directors' duties.

l learn from regional experience – there is a lot that UAE regulators can learn from the neighbouring Sultanate of Oman given the similarities in culture and business practices. The Sultanate was the first GCC state to produce a detailed code of corporate governance for listed companies in January 2003. Although the business community responded positively to the Omani code, a number of companies were concerned about (a) the difficulty of recruiting independent non-executive directors and (b) allowing outsiders into the boardroom. Other companies chose to de-list to avoid compliance.

The challenges that face UAE public companies include:

- to act fast – the April 2010 deadline set by the ESCA is steadily approaching and those companies that have not yet considered the impact of the code on their existing frameworks will need to assess their position quickly.

- to prepare for the cultural change: Family-owned companies must come to terms with the idea of letting go of some managerial powers to outsiders and be prepared to be questioned by those outsiders.

- to make use of the existing environment: UAE public companies have the luxury of accessing institutes such as the DIFC-based Hawkamah and Mudara and an abundant pool of professional services firms to help them implement their corporate governance plans. A lot of the success of those companies in implementing their corporate governance frameworks will depend on how well they make use of those resources.

- to avoid box-ticking: UAE public companies need to be very careful not to develop a 'tick-the-box' mentality. If this happens, then the whole compliance exercise may prove to be meaningless and the purpose behind introducing a corporate governance framework will be frustrated.

The introduction of good corporate governance will change the face of business in the UAE and will hopefully bring about some long-awaited changes to some of the existing statutes. However, whether the UAE model will succeed will depend on how flexible the regulators are prepared to be and more importantly what UAE companies are willing to get out of it.

Salah Mostafa is an associate at Simmons & Simmons in Dubai.