Thomas Paoletti participates in the IR Global Guide – International Governance: The Risks You Face as a Global Director
Foreward by Andrew Chilvers
As companies continue to look for opportunities in global markets, directors from diverse jurisdictions are hired to serve on the boards of foreign businesses as well as domestic ones that have operations and assets in other countries.
Enterprises across the world look for directors from other jurisdictions for any number of reasons. Hiring board directors from other countries can help to build investor confidence, for example. Likewise, an enterprise that is headquartered in a different jurisdiction but with a subsidiary in the US or Europe could seek directors to gain expertise and credibility. The director may have valuable international or local geographic expertise regarding business objectives, strategy, operations and risk management.
Nevertheless, serving as a director on the board of a global enterprise can bring major challenges. It’s true that during the past few years corporate governance laws and regulations have started to converge across regions, but there remain critical international differences regarding the responsibilities and liabilities of directors.
With recent data protection legislation across different jurisdictions, companies are now being held to account regarding their use of personal data. Will this result in a more litigious culture for companies and what does this mean for boards?
The UAE is an international hub interconnected with the rest of the world and capable of attracting great investments thanks to the different and various foreign direct investment policy and incentives that have been launched in the past few years. The UAE has not yet adopted a data protection law, but has taken the European GDPR as a case study to draft its own data protection law, which we all hope it will adopt soon. Dubai International Financial Center and Abu Dhabi Global Market have both adopted a data protection framework consistent with the EU and international standards.
Companies participating actively in the globalisation process require to have a physical office, manager, directors and operations in different countries. Clients, customers, employees, and stakeholders around the world now demand greater transparency and ethical behaviour from businesses with which they are engaged.
It becomes, therefore, more stringent for the headquarters to put in place a proper governance policy structure capable of covering all the different aspect of international governance, but at the same time capable of complying with the single legislation of each country the company is operating.
Responsibilities of the board members are not limited to follow the governance policy from the headquarters, but are responsible for proactively informing the company in the event a new rule, regulation or policy that is locally adapted for compliance. Being a qualified Italian lawyer, I have been asked on different occasions to provide a legal opinion on the corporate structure of the company based in the UAE to be in compliance with the Italian law n. 231/2001. Companies in Italy may be held directly liable for crimes of subjective intent committed either in Italy or abroad on behalf or for the benefit of a company by a class of person who is the operational authority and therefore liable on behalf of the company.
With global directors now increasingly in demand, how important is it for boards and directors to understand the different expectations of directors and different cultures of governance?
Firstly, global directors operating in the UAE have to comply with the recently introduced economic substance regulations (ESR, pursuant to the Cabinet of Ministers Resolution No. 31 of 2019,) which set out the requirements for entities to have an economic presence in the UAE. Key elements are:
- to conduct “core income-generating activities” in the UAE
- to manage the company in the UAE, e.g., hold board meetings with a quorum of directors physically present in the UAE
- to have an adequate number of full-time employees, expenses and physical assets in the UAE.
A company falling under the above regulation needs to adopt a proper governance structure as evidence that the company’s decisions are taken locally and not abroad.
The duties and liabilities of the directors and managers of onshore UAE companies are governed principally by the Commercial Companies Law (Law No. 5 of 2015) (“UAE CCL”) and the Civil Code (Law No. 5 of 1985). In addition, the UAE Penal Code (Law No. 3 of 1987) sets out criminal liability that may apply to the actions of directors and managers.
UAE Commercial Companies Law is not applicable to Free Zones, such as DIFC and ADGM, which have adopted their own regulations and guidance. The UAE Penal Code also applies to free zones companies.
The onshore UAE companies regime is based on a civil law legal system which doesn’t recognise the concept of “fiduciary duty” for directors that is typical of a common-law system instead.
But the positive duty to act in the best interest of the company introduced by the UAE Commercial Companies Law in 2015 encompasses similar duties such as the duty to disclose conflict of interest and the duty not to misuse confidential information and makes the two legal frameworks very similar.
In some cases, at first sight, the liability of the directors under the free zones regimes can appear wider than the one of the onshore companies. Directors under UAE CCL regime will be liable to the company for such actions as fraud, abuse of power, breach of any law, memorandum of association or contract, gross error as well as to shareholders and to any third parties for fraudulent actions and any exemption from this liability is void. The free zones companies’ legislation may not contain restrictions on indemnity for directors.
How important is an effective board that follows core principles of international corporate governance? Does this give boards a shield against litigation and other issues such as bankruptcy and bribery?
Working in a global environment requires the adoption of standard corporate governance procedures to be adjusted in the different countries the companies are present in.
Corporate governance is the mechanism by which companies are directed and controlled on behalf of their owners. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
Corporate governance involves shareholders (owners of the business), Board of Directors (who oversee the business) and the Executives (who run the business). There are different models of corporate governance (the Anglo-Saxon model, Continental European/German model, Japanese model), and the structure varies between countries. However, within countries there is a wide variety in practice (e.g. board size, the annual number of board meetings, percentage of women on board, etc.).
While structuring the corporate governance framework, it is wise to account for a company’s specific aspects such as gravity centre (power), equity control (publicly listed, private equity, family business), company complexity, degree of evolution of governance, internationalisation and sector of activity. Conglomerates typically promote the principles of corporate governance of the parent company into all their subsidiaries.
The impact of corporate governance on investors’ perception and on quality decisions is widely recognised. Companies with good corporate governance best practises helps to reduce the risk of exposure of the company and its management to the control of the local authorities and helps to comply with the more stringent new regulations including the anti-money laundering, which is very relevant in the UAE nowadays.
One important pillar of corporate governance is an effective risk management framework. Companies’ risks are identified, assessed, constantly measured and mitigated through risk management plans; a clear responsibility for risk management is assigned within the organisation at different levels (committees, executives, procedures, etc.) and risk reports are periodically discussed at executive and board level.