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Principles of corporate governance - International Law Office

International Law Office

Company & Commercial - Oman

Principles of corporate governance

March 29 2010

Introduction
Code of Corporate Governance
Board of directors
Recent developments
Further consideration
Comment


Introduction

The definition of 'corporate governance' includes corporate customs, policies, processes and internal by-laws, and laws enacted by the state to regulate the senior management of corporate entities (including directors) and render such persons accountable to shareholders to ensure the transparent operation of companies. In many jurisdictions corporate governance initiatives are voluntarily adopted by corporate entities in the form of non-binding policies which are followed as a matter of good business practice. The failure of a number of multinational corporations in the late 1990s (eg, Enron, World-com and Tyco) prompted regulatory authorities to review existing corporate governance standards. Regulators and governments, criticized by the public and company shareholders for being lax, responded by introducing reforms to corporate governance systems.

Oman, despite having a nascent capital markets system, was quick to introduce a corporate governance code for companies listed on the stock market in 2002. Oman was also quick to recognize that a binding code of corporate governance was crucial for modern, efficient and accountable public companies and to safeguard shareholders' interests.

Code of Corporate Governance

The Code of Corporate Governance for Muscat Securities Market Listed Companies 2002 issued by the Capital Market Authority made significant changes to the way in which publicly listed companies operate. It introduced the concepts of non-executive directors and independent directors and regulated the composition of boards of directors.

The code sets out provisions on:

  • the minimum information which must be given to the board of directors;
  • the frequency of board meetings;
  • the functions, duties and responsibilities of the board of directors;
  • the establishment of an audit committee by the board of directors and the functions it is required to perform; and
  • related-party transactions and the circumstances in which such transactions are permissible, as well as provisions on the approval of such transactions by shareholders.

The code requires companies to prepare a chapter on corporate governance in their annual reports.

In any discussion on corporate governance in Oman the roles of the board of directors and the audit committees of listed companies merit special attention.

Board of directors

The board of directors continues to remain a fundamental part of the corporate structure of a company. In accordance with a company's articles of association, board members must work towards the achievement of the company's objectives and oversee the management of the company. In the performance of its duties, the board must:

  • be independently minded;
  • be free from outside influence;
  • be inquisitive; and
  • have high ethical standards and integrity in both personal and professional dealings.

These standards can be achieved only if the directors are involved in no conflicts of interest in the office and personal matters and have no personal relationships with company executives.

Independent and non-executive directors
According to the code, the board of a listed company must comprise a majority of 'non-executive' directors (ie, directors who are not full-time employees of the company). The code also states that a minimum of one-third of the total strength of the board (a minimum of two persons) should comprise independent directors who themselves (nor any member of their families), have held no senior position, such as that of chief executive officer or general manager. This is to ensure that directors independently and impartially assess the performance of the company's management and the board's decision making. This has become a crucial function of independent and non-executive directors as corporate decision making is becoming increasingly challenging.

All candidates standing for election to the board must satisfy the minimum conditions and possess the qualifications set out in the code and the company's articles of association. In the case of banking companies, the candidates may be required to satisfy other criteria on fit and proper persons, as provided for in the Banking Law. The candidate is subject to the approval of the Central Bank of Oman.

Functions and duties of the board of directors
In order to clarify directors' roles, the code sets out the minimum functions and responsibilities of directors; including responsibility for:

  • approving the business and financial policy of the company for the achievement of its objectives and to maximize value;
  • reviewing and approving the company's financial objectives, plans and actions;
  • approving the internal regulations of the company regarding routine activities and specifying the responsibilities and authorities of the executive management;
  • approving and implementing the disclosure policy of the company and monitoring its compliance with regulatory requirements;
  • approving the delegation of power to the executive management;
  • reviewing the company's performance to evaluate whether the business of the company is properly managed according to the company's objectives and ensuring the company's due compliance with laws and regulations through proper internal control systems;
  • reviewing material transactions with related parties which have not been entered into in the ordinary course of business prior to such transactions being brought before the general meeting of the company for approval;
  • nominating members of the board to subcommittees and specifying their roles, responsibilities and powers;
  • selecting the chief executive officer, general manager and other key executives and specifying their roles, responsibilities and powers;
  • evaluating the functions of subcommittees, chief executive officers and key employees; and
  • approving interim and annual financial statements.

The functions which are of particular relevance in today's challenging business environment are those dealing with the conduct of business and the establishment of companies' financial policy and objectives, plans and actions. The scarcity of capital in the market means that the management of financial policy is of vital importance not only to a company's operation, but also to its survival.

Any failure on the part of the directors to perform their duties, or where they perform such duties negligently, recklessly, fraudulently or imprudently, could result in their being held liable under Article 109 of the Commercial Companies Law, which provides that:

"the Board of Directors shall be liable to the Company, the shareholders and third parties for the damage caused by their acts in violation of the law, which fall beyond the scope of their powers, acts tainted with fraud or negligence in the performance of their duties or by their failure to act as prudent men under certain circumstances."

Minimum information requirements
For directors to perform their duties properly under the code, they need information on the affairs of the company. The code provides a list of the information which must be presented before the directors, with emphasis on the company's financial information. The following financial information must be placed before the directors in order for them to perform their fundamental duty of reviewing and approving the financial objectives, plans and actions of the company:

  • capital and operating budgets, and any updates thereto;
  • quarterly results of the company;
  • material default on financial obligations of, to or by the company; and
  • details of foreign exchange exposure and the measures taken to hedge risks.

Access to the right information at the relevant time is vital for the board of directors to make informed decisions. It is the duty of the company's management that the directors have access to such information. In the event of a default on this duty on the part of the company's management, the board of directors must ensure that appropriate action is taken to redress the failings.

Audit committee
In addition to other committees which the board may establish, the code requires an audit committee to be established comprising at least three board members who are non-executive directors. The majority must be independent. At least one member of the committee must have financial and accounting expertise.

The audit committee's role has become more important within the context of the general corporate governance of companies. The code requires that the committee focus on the financial aspects of the management of the company. The committee must:

  • check for financial fraud, paying particular attention to fictitious and fraudulent portions of the financial statement;
  • ensure the adoption of appropriate accounting policies and principles on fairness in financial statements;
  • oversee the internal audit function, with particular reference to the scope of internal audit plans;
  • review reports by internal auditors and assess the efficacy of internal auditing and auditors' access to relevant documents;
  • oversee financial statements, particularly:
    • annual and quarterly financial statements before their issue;
    • qualifications in the draft financial statements; and
    • accounting principles, particularly:
      • any change in accounting policies, principles and estimates in comparison with the previous year;
      • any adoption of new accounting policies;
      • any departure from international accounting standards; and
      • any non-compliance with disclosure requirements prescribed by the Capital Market Authority; and
  • review risk management policies and investigate the reasons for any default on payment obligations.

The audit committee can:

  • invite to meetings the company's head of finance and head of the internal audit department;
  • seek information from any employee; and
  • seek the advice of outsiders with relevant expertise if necessary.

The role of the audit committee is of particular relevance in today's market with reference to the investigation of financial irregularities within companies, providing for greater accountability of the company's management. The preparation and adoption of comprehensive accounting policies by the audit committee mitigates the risk of financial irregularities within the company.

Recent developments

In March 2009 the Capital Market Authority issued executive regulations through Decision 1/2009. The regulations introduced important additions to the corporate governance regime. Although these mostly relate to companies dealing in securities, some provisions relate to companies listed on the Muscat Securities Market. The regulations require that all entities that carry out activities provided for under the Capital Market Law and the regulations keep documents and registers relating to operations for 10 years and comply with laws and decisions issued by the competent authorities in respect of money laundering.

Pursuant to the regulations, the Capital Market Authority can inspect entities to ensure their due compliance with the provisions of the law and regulations, taking appropriate action where necessary. Such entities are required under the regulations to cooperate with the authority's inspections and must provide any information requested. The regulations require that the authority keep all such information confidential. The authority can impose penalties on companies which fail to comply with the regulations or with any other directive issued pursuant to the Capital Market Law.

Further consideration

While the 2002 code has been beneficial in introducing a sound corporate governance system in Oman, such systems cannot remain static and must evolve. Further consideration may need to be given to:

  • the role of non-executive and executive directors in terms of specific duties, responsibilities and obligations;
  • whether the existing procedure on the election of the board of directors as set out in the code is sufficient, or whether a more rigorous and transparent procedure is needed. The code could expand the existing list of qualifications (eg, technical qualifications) which directors must have to ensure that the board has an appropriate balance of skills, knowledge and experience; and
  • directors' remuneration, which should be sufficient to attract, retain and motivate directors to run companies successfully, but should also be proportionate to their roles. Although the Commercial Companies Law has recently been amended to set the maximum remuneration payable to directors of public joint stock companies, the Capital Market Authority may wish to consider adopting a varied method for determining directors' remuneration to incentivize suitably qualified and experienced persons to stand for election to boards of companies. A popular method of remuneration is to link rewards to corporate and individual performance.

Comment

During the past eight years, the code has played a vital role in the governance of companies listed on the Muscat Securities Market. The code's success can be measured by the fact that there have been no major corporate failures in Oman. Investor confidence in the Muscat Securities Market is further proof that the code works well and continues to provide corporate transparency and confidence. The code is likely to continue to evolve to cater for a diverse range of new corporate governance issues which may arise in the domestic as well as international corporate governance markets.

For further information on this topic please contact Mansoor Jamal Malik or Saqib Jillani at Al Busaidy, Mansoor Jamal & Co by telephone (+968 2481 4466), fax (+968 2481 2256) or email (mansoor.malik@amjoman.com or saqib.jillani@amjoman.com).


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