The Financial Regulatory Authority (the “FRA”) issued a decree with a new set of Corporate Governance Rules (“CGRs”) aiming to unify the CGRs for companies operating in the different sectors of non-banking financial services. Former CGRs (as further outlined below) had been issued by the FRA through various decrees applicable to different types of companies.
On 23 June 2020, the FRA issued Decree No. 100 for the year 2020 (the “Decree”), repealing the previous CGRs issued by virtue of FRA Decrees No. 107 for the year 2016, No. 164 for the year 2018 and No. 61 for the year 2020 (the “Former CGRs”). The Decree introduces CGRs that are applicable to companies operating in the fields of securities, real estate finance and refinance, microfinance, financial leasing, factoring, and consumer finance.
Below are the key highlights of the CGRs.
Constitution and Operation of the Board of Directors (“BoD”)
In terms of the composition of the BoD, the Decree stipulates that the majority of the BoD must be comprised of non-executive members, where at least half of the non-executive members must be independent directors. Further, the Decree stipulates that independent directors of a parent company may not act as independent directors in a subsidiary thereof unless certain conditions are met, a requirement which was not included in the Former CGRs.
The Decree further highlights the main roles of the members of the BoD by stipulating that the chairman of the BoD may not also act as the managing director or chief executive officer of the BoD. Further, the Decree outlines the obligations of the members of the BoD in order to avoid conflicts of interest including, inter alia, the prohibition of granting any loans or financing to any members of the BoD or their second-degree relatives.
The Decree further outlines the committees formed by the BoD including the review committee, the risk committee, and the governance committee (the “Committees”). Unlike the Former CGRs, the Decree exhaustively lists the Committees’ competencies and duties, which must be performed under the supervision of the BoD.
Transparency and Disclosure Requirements
The Decree introduces a new set of disclosure requirements that is more exhaustive than that previously outlined in the Former CGRs, where the Decree introduces a list of material events that affect (i) the company’s activities; and (ii) those dealing with the company, which must be disclosed to the FRA.
In addition, companies are now required to disclose, inter alia, the following (i) the shareholders’ structure (namely shareholders holding more than 5%) and any amendments made thereto within a specified time period; (ii) any amendments to the structure of the BoD or Committees; (iii) financial statements and minutes of general assembly meetings; (iv) related-party transactions; and (v) the structure of their employee stock ownership plans (ESOP), if any.
Internal Supervision and Appointment of the Auditor
According to the Decree, the BoD must now appoint an internal supervisor who is entrusted with ensuring the proper application of the CGRs outlined in the Decree and the company’s adherence to its internal regulations and policies.
Further, the BoD must also appoint an Internal Review Department (“IRD”), the role of which is to create supervisory regulations for the company and to ensure the effectiveness thereof. In addition, the Decree lists the IRD’s obligations and duties which include presenting a quarterly report to the BoD and the review committee regarding the degree of the company’s adherence to the (i) laws and regulations governing the company’s activities; and (ii) the CGRs outlined in the Decree.
With regards to appointing the company’s auditor, the Decree stipulates that companies must appoint an FRA-approved auditor for a maximum period of six years, after which the company must replace the auditor with another one who does not have any professional connections with the previous auditor.
Market Reaction
To date, there has been no reaction from the regulator or any of the market players regarding the Decree.
