Importance Of Corporate Governance And Its Basic Principles: What is Corporate Governance?

This article is written by P.K. Abduraheem, one of the Founders of Gulfvakil, and was originally featured on Legaladviceme.com and Mondaq.com.

This is the first article in a series of articles on corporate governance practices under the best practice principles and the UAE legal system through innovative suggestions of its implementation for your organisation.

Understanding what 'governance' implies:

Governance is relatively a political concept often used in the administration of a state or territory through multiple functionaries. From that sphere, it is a different thing for different people.

However, at its core, it implies a high level of organisational effectiveness in relation to policy formulation and the policies pursued, especially in the conduct of economic policy and its contribution to growth, stability and welfare.

Governance from the business-standpoint:

We look at governance from the business standpoint to effectively contribute to the corporate eco-system. Corporations are established under the principle of the corporate veil with the commercial wisdom of choosing their own mode of governance. Any hint which affects the rights of corporations to administer in the way they wish shall result in the violation of the institutional autonomy of corporations.

Understanding the need for corporate governance:

Despite the aforementioned autonomy, the check and balance are the rules of law and nothing stands above them. Therefore, to protect the interest of multiple stakeholders of corporations, the nation states enact the regulatory framework without transgressing into the decision-making powers of commercial entities.

Defining Corporate Governance:

Corporate Governance is a system by which the companies are directed and controlled, and it provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined by assuring the cordial relationship with stakeholders under the legal arms.

Conceptually, corporate governance is a mixture of strong compliance and adherence to the best practice principles. It is more a strategic tactic for effective management under the principle of transparency, accountability, stability and productivity. Corporate governance is comparatively a new concept in the Middle East, though regulatory frameworks are on place for listed companies in the UAE by the promulgation of Corporate Governance Rules 2016.

Certain private companies have a self-framed management framework. At the grass-root level especially, smaller companies evaluate governance, management, administration and ownership as an interchangeable concept. An effective governance mechanism presents a structured path for infusing better management practices, effective oversight and control mechanism which leads to opportunities for growth, financing, exit strategies and improved performance.

How can I implement a Corporate Governance Framework for my organization?

This requires the right knowledge of local legal frameworks and the best practices in the market. Hire one of our lawyers to assist you in this process. Contact us now at communications@gulfvakil.com.

Read second article: The regulatory framework on corporate governance in the UAE

Read third article: Corporate Governance Regulatory Framework for Non-Listed/ Private Companies in UAE