November 3, 2011

Corporate Governance Code launched for Dubai’s SME Sector

The Mohammed Bin Rashid Establishment for SME Development (Dubai SME) has launched a Corporate Governance Code (CGC) for the Small and Medium Enterprise (SME) sector in Dubai which is the first of its kind to be introduced in the region. The voluntary framework is a joint project from Dubai SME and the regional Corporate Governance Institute, Hawkamah, that sets out a series of recommendations for SME governance and is designed to be a benchmark of best practices. The CGC is a welcome framework for the SME Sector which forms the backbone of Dubai’s economy and represents up to 95% of all firms registered within the Emirate.

The Mohammed Bin Rashid Establishment for SME Development (Dubai SME) has launched a Corporate Governance Code (CGC) for the Small and Medium Enterprise (SME) sector in Dubai which is the first of its kind to be introduced in the region. The voluntary framework is a joint project from Dubai SME and the regional Corporate Governance Institute, Hawkamah, that sets out a series of recommendations for SME governance and is designed to be a benchmark of best practices. The CGC is a welcome framework for the SME Sector which forms the backbone of Dubai's economy and represents up to 95% of all firms registered within the Emirate.

An SME is defined as any firm with a turnover of less than AED 250 million and an employment size of less than 250 employees. Keeping in mind the different types of onshore and offshore SMEs that can be established in Dubai which may vary in terms of size, management model, maturity, ownership structure, corporate governance practices and sponsorship requirements, the CGC is laid out in 9 Pillars of international best practice adapted to the Dubai economy and designed to be tailored to an individual SME's specific needs. The Pillars are categorized into the following sections: Corporate Governance Policies and Procedures, Transparency and Shareholder Relations, Board of Directors, Control Environment, Stakeholder Relations and Family Governance. Specifically, the 9 Pillars outlined in the CGC include:

  1. adopting a formal corporate governance framework outlining the roles of the key bodies such as partners, shareholders, board of directors and management – the framework should reflect the SME's values and the expectations of its owners and key stakeholders;
  2. conducting a succession planning process – each SME should have a succession plan that allows the company to develop and facilitate a leadership change in a progressive, planned and non-disruptive manner. This is particularly relevant for growing and family business;
  3. establishing a timely, open and transparent flow of information with shareholders;
  4. endeavoring to set up a formal Board of Directors to accompany the growth of the company – The set up of a board is recognized as the cornerstone of good corporate governance in companies by providing an extra layer of checks and balances and formalizing the decision making process within the company;
  5. developing a clear mandate for the Board of Directors to oversee the operational performance of the business as well as evaluating and improving business strategies - the Board mandate and objectives should mirror the business goals and the Directors individual roles should be clearly identified and understood;
  6. maintaining credible books of accounts, which are audited annually by an external auditor;
  7. setting up an internal control framework and conducting a regular review of risk – having adequate internal control frameworks is recognized as a prerequisite for good business and provides a safeguard for shareholder investment and the company's assets;
  8. recognizing the needs of stakeholders – stakeholders include employees, customers, suppliers, creditors, regulators, the community, the environment and generally any party enjoying relations with the company. There is increasing recognition that managing stakeholder relations and issues can have business benefits; and
  9. formulating a framework setting out the family's relationship with the business – as family owned businesses form a significant part of the SME make up in Dubai, the CGC includes a specific section on corporate governance for family-owned businesses that focuses on the family's relationship and communications with the company.

Under each Pillar, the CGC lays out the practical steps a company should consider taking as it begins the gradual process of implementing corporate governance.

Although the CGC is not compulsory, it is a step forward in the recognition of the importance of corporate governance in supporting the sustainability of businesses and facilitating the transition from small to medium and finally large companies. The CGC forms part of a wider effort by Dubai SME to support the SME sector within the Emirate, address their needs and identify any regulatory barriers to growth.