The representatives of boards of directors of public joint stock companies and legal advisors have unanimously agreed that implementation of the new definition of independent director is in the best interest of the public companies listed on the market and that the standards of the definition is the ideal situation.
They said that adding more independence to the independent directors of public joint stock companies would enhance the confidence of investors and market participants beside upgrading the legislative level of the Omani capital market to higher levels.
The issue was addressed in a debate organized by CMA on the new definition of independent director and related parties stated in the Code of Corporate Governance (CCG) on Sunday 20th January 2013 under the Patronage of HE Sheikh Abdullah Salim Al Salmi, Executive President of CMA and attended by representatives of public joint stock companies and legal advisors at the Businessmen’s Auditorium at CMA building.
The aim of the session was to open dialogue channels between CMA , listed companies and legal advisors to explain CMA’s move and the motives behind the move and the intended objects.
HE Sheikh Abdullah Salim Al Salmi, Executive President of CMA confirmed during the discussion session that there is urgent need to find independent directors who have experience and efficiency who are able to add new ideas and constructive proposal to the performance of companies and who can express their views independently and who will not be influenced by personal interests.
HE said the previous practices in the appointment of director of companies resulted in centralized decision making in general meetings which compromises the authority of the general meeting to hold the directors accountable and limits their interaction with the resolutions presented to the general meeting.
HE explained that the amendments were made within the CMA’s approach to upgrade the level of application of best practices to boost investors’ confidence in the MSM and protect the rights of shareholders. HE confirmed that all are aware that enhancing the extent of independence of directors is the sound and correct situation if we are to build better future for the companies. He said Oman Corporate Governance Centre (OCGC) has organized a number of training programmes for directors and is currently preparing new programmes for the development of directors of public joint stock companies.
Mohammed Taqi Al Jamalani, Vice President, Insurance Operations Regulation and Acting Vice President, Market Operations and Listed Companies gave speech in which he explained the efforts CMA is exerting to apply best international practices of corporate governance due to the significance of corporate governance in directing the path of the company toward more productivity and growth. Thus, CMA must have coped with the new developments in the economic arena on the local and international levels and work continuously to evaluate the regulatory framework to upgrade the corporate governance principles to achieve the required objects the foremost is the protection of shareholders’ rights and interests since the issuance of CCG in 2002 and then the establishment of independent corporate governance department in 2006, Corporate Governance Committee in 2008 and then the establishment of OCGC.
Al Jamalani added that the amendment comes within the method applied by CMA for continuous development and upgrading the level of application of best corporate governance practices to boost investors’ confidence in MSM, protect the rights and interests of shareholders as the constitution of boards of directors and election mechanisms and distribution of roles is the most important issues organized by the principles of corporate governance as they are the backbone of good governance and effective board of directors able to direct the resolutions of the company in the right path and curb conflicts of interests in the transactions with related parties.
Importance of Independent Director
On the recent amendments to the definition of independent director Al Jamalani said’ The new definition of the independent director ensures election of independent directors with adequate degree of independence whereas the new definition defines the cases where independence ceases to cope with the new corporate governance concepts which are more professional and would curb conflicts of interests in the resolutions of the boards of directors of public joint stock companies.”
He explained that constitution of board with third of the directors independent attains more gains such as evading conflicts of interest resulting from joint interests which impacts the resolutions of the company and boost the level of confidence in the performance of the company and in turn enhancing the confidence of investors in MSM. Furthermore, the independent directors actually contribute to adding external dimensions to the general strategy through their skills and knowledge which may not be available within the company such as objectivity and impartiality in discussing company issues.
Al Jamalani concluded his speech by thanking the officers and directors of public joint stock companies for their positive response in the implementation of principles of corporate governance during the past period adding that CMA’s management is endeavoring to continue cooperation with the companies for sound application of the principles and hoped the meeting would enrich the knowledge and sound application.
International Experiences
Ahmed Sulaiman Al Qassabi, Director of Disclosure and Compliance, CMA reviewed the international experience in identifying the cases that add independence. He quoted the Malaysian experience where the independent director shall not be a major shareholder or related to major shareholders and will not be an executive officer of the company or group companies. The Malaysian definition stipulates the director will not be a professional employee of the company during the past 3 years or advisor of the company or group company or major supplier or major client and shall not have contractual relationship with the company.
Al Qassabi reviewed the American version of the definition of independent director who shall not have direct or indirect formal or contractual relationship with the company and shall not be a partner or shareholder of the company or director of a company related to the company. He pointed out to five cased that negate the independence in the American model and then referred to the European model which defines six cases for the independence of the director including not having any controlling holdings in the company.
Al Qassabi pointed out to the new definition set out be CMA which is within the definition in the unified principles of corporate governance for the companies listed in the securities market in the GCC states approved by the Ministerial Committee of the Chairpersons of Securities Regulators on 30th May 2012 and then approved by the Supreme Council of GCC leaders in their last meeting.
Definition Application Mechanism
On the application of the new definition Al Qassabi said the companies shall enforce the definition on the first election of new boards after the issuance of the circular so as third of the directors shall be independent and the current board shall remain unchanged until the end of their terms. He said the boards shall propose experienced and efficient independent directors.
He said after counting the votes they must be arranged in a descending form according to the number of votes and then selection of the candidate who scored the highest votes taking into consideration the seats allocated for independent directors who shall constitute at least third of the directors as per the terms and conditions of directors’ election and the articles of association of the company.
Al Qassabi reviewed the field study conducted by CMA to explore the ability of the companies to comply with the new definition of independent director which included directors of the companies listed in MSM 30 index. The results showed that 22 companies listed in the index fulfill the minimum limit of independent directors while 8 companies out of 30 are not fulfilling the minimum limit of third of the directors.
Discussion
The participant raised a number of questions. Rajab Al Kahthiri asked about the reasons for obligating the companies to apply the new definition without following guidance policy to evaluate the move and then address the inadequacies prior to actual implementation?
CMA explained that implementation of the new definition was obligatory to qualify the companies for the compulsory implementation after the approval of the Supreme Council of the GCC States in its last meeting the unified principles of corporate governance of the companies listed in the securities markets of the GCC States which would be obligatory after two years. Moreover, implementation is flexible without the need for guidance term as the implementation would commence after the end of term of the present board of directors and there are directors whose terms ends after two and half year. The study showed that 32 companies are automatically fulfilling the criteria. As to the eight companies they are required to adjust their situations through searching for independent directors. We assert that implementation of the criteria of independent director is progressing smoothly. CMA explained that other GCC states have already implemented the definition.
Hassan Al Lawati asked about the challenges facing the directors of public joint stock companies in that most of the companies listed on the MSM are associates and the directors are acting in more than a company beside the challenges of selecting experienced and efficient independent directors who can propose effective ideas. How can we overcome this issue according to the new standards for the selection of independent directors?
CMA answered saying that the companies are undoubtedly required to appoint experienced and efficient independent directors. We don’t think the companies would appoint formally independent directors knowing that the director is not independent in fact due to such challenges. The companies must observe their responsibility and think in the interest of the company and how to reach to best administrative practices that reflects in growth and profits.
CMA said that OCGC has commenced two years ago organizing programmes for the training of directors for public joint stock companies and such programmed would continue and OCGC is preparing a plan for compulsory programme for new directors of listed companies to enhance their role in the service of the company objects and plans.