Navigating The Complexities Of An IPO
Overview
The Corporate Governance framework as laid out in the Guide complies with the international standards in terms of defining the-
- Responsibilities / duties of the Board of Directors and the executive management team
- Rights of shareholders / stakeholders and their supervision, agency towards achieving the company sustainability.
The updated Guide deals with 100+ amendments. These amendments are spread across various sections / articles and look towards further clarifying / empowering the roles and responsibilities of Board, Audit Committee, other Board Sub Committee’s, management, and the second / third lines. The changes can broadly be attributed to the below areas.
Key Takeaways
1. Guide does not apply to free zone companies (Article 3)
In its current form, the Guide does not apply to free zone companies (including financial free zone companies).
2. Definition of ‘related party’ extended (Article 1)
The definition has been widened significantly to include the following as ‘related parties’:
- Relatives of Board members and executive management
- Parent of the Company
- Owners of 5% or more of the company’s shares or voting rights (majority shareholders)
- Chairman and members of the Boards of parent, subsidiary, sister, or affiliated companies of the company
- Companies where any member of the Board or executive management of the company serves as a Board Member or senior executive
3. Establishment of Policy & Procedures (Article 14)
As part of the amended requirements, the Board commits to (i) establishment of internal policies and guidelines to cover all aspects of the company’s operations and
(ii) adoption of internal procedures, policies, and guidelines for managing corporate affairs, specifying the authorities of executive management.
4. Ensuring existence of a succession plan [Article 59]
The amendments require the Nomination and Reward Committee to ensure the existence of an appropriate and updated plan for the continuation and succession of the work of the company’s senior executives and chairs of the Board of Directors’ committees.
5. Enhanced focus on Corporate Governance [Article 14 & Article 63 (Bis)]
As per the amendments, the Board’s obligations are enhanced to include monitoring of application of corporate governance rules and ensuring continuous updation.
Further, the Board may establish a Governance Committee to implement a governance system and execute the following responsibilities:
- Providing Annual Reports and recommendations to the Board
- Ensuring the company’s compliance with the governance guide issued by the Authority
- Reviewing and updating governance rules according to regulatory requirements and best practices
- Staying informed about the developments and best practices in corporate governance
6. Prohibiting combining key functions / roles (Article 67 and Article 69)
The amendments specifically outline that the Compliance officer’s role as well as the Internal Audit department cannot be combined with any other function / department. This would result in ensuring that these roles / departments remain independent and have a functional reporting to the Audit Committee.
7. Enterprise Risk Management (ERM) (Article 14, Article 61 and Article 67)
The enhanced board responsibilities, mandate all Entities to adopt and implement a Risk Management Framework and recommends that Entities may choose to adopt the COSO Risk Management. Additionally, it also lays emphasis on the Audit Committee’s responsibilities with respect to risk management. The Audit Committee is required to include the following sections in their Annual Report:
- Actions that the Committee has taken or will take to address any deficiencies or weaknesses in the event of any failures in Risk Management
- Comprehensive information about the corrective treatment plan in the event of fundamental deficiencies in Risk Management systems
This will also enable the auditors to express an opinion on the effectiveness of the respective Entity’s Risk Management system.
Furthermore, based on the existing guidelines, Internal Audit is required to independently assess the effectiveness of Risk Management systems.
8. Internal Controls (Article 14, Article 61 and Article 73)
The enhanced Board responsibilities, mandate all Entities to adopt and implement an Internal Control framework and recommends that they may choose to adopt the COSO internal Control framework. The Audit Committee is required to include the following sections in their Annual Report:
- Actions that the Committee has taken or will take to address any deficiencies or weaknesses in the event of any failures in internal control
- Evidence that the Committee reviews all medium- and high-risk reports issued by internal audit to determine whether they arise from major failures or weaknesses in internal control
- Comprehensive information about the corrective treatment plan in the event of fundamental deficiencies in internal control systems
Furthermore, the updates also state that the auditors may express an opinion on the effectiveness of the respective entity’s internal controls systems.
