LEGAL VIEWPOINT: CONCEPT OF “COMPLY OR EXPLAIN” IN CORPORATE GOVERNANCE

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Dr. A bdelGadir WarsamaLEGAL COUNSEL
Asia 728x90

The Corporate Governance Code, is mainly intended to enhance the values of the company, to protect investors and, also to attract foreign investments wherein proper corporate governance principles are in place and applicable.

The Corporate Governance Code applies to all companies incorporated under the Commercial Companies Law and whose shares are listed in the Stock Exchange. However, the Code can at the same time function as a model and reference framework for all other companies including unlisted ones. It would be important to mention that the Code supplements The Company Law. However, it does not by all means replace the Law but it is rather intended to further the objectives of the law and to provide help in understanding, complying, monitoring performance and ensuring fair disclosure under that law.

The Commercial Companies Law, mandates best practices as it includes rules governing meetings of The Board of Directors and shareholders, fiduciary rules and duties, rules for company shares, rules for accounting and auditing, liquidation or insolvency of the companyetc.. The Code, also, includes many of 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 carefully respected to achieve desired top-level corporate governance.

Based on this understanding, it would be advisable for all companies to be familiar with both The Company Law, as well as, The Corporate Governance Code because they both work closely together to achieve the same goals. In certain instances, the Code goes beyond The Law requirements, as example, the Code recommends that the Chairman of the Board of Directors and the CEO of the company should not be the same person and that at least 50% of the Board of Directors 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 role of the corporate governance in the







company, and the company should take unless it has good reasons not to do and 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 requirements of the law and which may not take in account specific circumstances as the size and nature of the business, shareholders structure, activities, or exposure to risks and management structure. This approach recognizes that it is not desirable, to impose formal and identical rules of organization for all companies. 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.

Disclosure and transparency are underlying and major principles for the Corporate Governance Code. Disclosure is crucial and is required to allow outside necessary monitoring to function effectively. 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 of Commerce, Central Banks, Stock Exchanges, Courts and many professional firms as auditors, lawyers and investment advisors… The Ministry of Commerce is, normally, the official government body vested with the required authority to administer The Company Law and the Code. Needless to say, the joint work of all competent official authorities is crucial to maintain proper framework for corporate governance. Each company, therefore, shall endeavor to take the lead in this important corporate race.

SOURCE: Dr AbdelGadir Warsama – Legal Counsel / Africanewsanalysis

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