LEGAL PERSPECTIVE: Comply or Explain, by Dr AbdelGadir Warsama, Legal Counsel

Dr AbdelGadir Warsama, Legal Counsel

Corporate Governance Code is intended to enhance company values and investor rights, wherein proper governance principles are appropriately in place and are rightly applicable. Corporate Governance Code applies to all companies incorporated under the Companies Law. It would be important to mention that the Code supplements The Company Law. However, it does not by all means replace the Company Law but it is rather intended to further the objectives of the Law and to provide necessary help in understanding, complying, monitoring performance and ensuring fair disclosure under the law.

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The Companies Law for example, mandates best practices as the Law includes rules governing The Board of  Directors and shareholders meetings, fiduciary rules and duties, rules for shares, rules for accounting and auditing, liquidation or insolvency … etc.. The Code, also, refers to such mentioned “rules” but it does not repeat or incorporate them all. The Code intends to highlight the main duties that are to be observed and respected to achieve desired top-level corporate governance. Based on this understanding, it would be advisable for companies to be familiar with both The Law, as well as, The Governance Code because they work closely together to achieve the same goals to the benefit of all.

 In certain instances, the Code goes beyond The Company’s Law requirements. As a good example, the Code recommends that the Chairman of the Board and the CEO should not be the same person and about 50% of the Board members should be non-executive directors. Those points are not clearly required by the law but are strong recommendations which should be considered carefully in evaluating the quality of the company’s corporate governance, and which the company should follow unless it has good reasons not to follow and the company to disclose the reasons under the “comply or explain” principle.

The “comply or explain” principle has been adopted by many countries and the flexibility it offers has been welcomed. The idea behind this principle is to avoid imposing rigid rules which exceed the law’s requirements and which may not take account of the company’s specific circumstances such as the size and nature of its business, its shareholders structure, activities, or its exposure to risks and management structure. This approach recognizes that it is not desirable, considering the great diversity of companies, to impose formal and identical rules of organization and operation for all companies.

The Code states many principles of essence and are forming the existing pillars of good governance. Each of the principles include certain directives and all companies should follow them. There is no exception for non-compliance and explanation with regard to the principles and related directives. All companies are expected to apply and “comply” the recommendations stated in the Code, or “explain” why they do not comply, taking into account their specific situation according to the merits of each case.

Based on this, the Code is looking to a combined monitoring system relying on the Board of Directors, the shareholders and official bodies including Ministries, Central Banks, Stock Exchanges, Courts and many professional firms as auditors, lawyers and investment advisors… Ministry of Commerce is, normally, the government body vested with the required authority to administer The Company Law and the Code. The Ministry will actively exercise its monitoring and penalty powers under The Company Law, however, this power will be exercised closely with all other competent government authorities enumerated above.

Needless to say, the joint work of all competent official authorities is crucial to maintain proper framework for corporate governance in the country… Each company, shall endeavor to take the lead in this important corporate race.

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